<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (FEE REQUIRED)
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
--------------------
OR
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
COMMISSION FILE NUMBER 0-25488
THE L.L. KNICKERBOCKER CO., INC.
(Name of Small Business Issuer in its Charter)
CALIFORNIA 33-0230641
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
30055 COMERCIO 92688
Rancho Santa Margarita, CA (Zip Code)
(Address of Principal Executive Offices)
ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 858-3661
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ------------------------
Common Stock, No Par Value NASDAQ
National Market System
Common Stock Purchase Warrants NASDAQ
National Market System
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
NONE
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports) and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
---- ----
The number of shares outstanding of the registrant's Common Stock, as of
November 13, 1996 was 15,107,784.
Transitional Small Business Disclosure Format Yes No X
---- ----
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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TABLE OF CONTENTS
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<TABLE>
<CAPTION>
ITEM PAGE
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<S> <C>
PART I
------
1. FINANCIAL INFORMATION.............................................. 1
A. Condensed Consolidated Income Statements (unaudited) for
the three and nine month periods ended September 30, 1996
and September 30, 1995....................................... 1
B. Condensed Consolidated Balance Sheets at September 30, 1996
(unaudited) and December 31, 1995............................ 2
C. Condensed Consolidated Statements of Cash Flows (unaudited)
for the nine month periods ended September 30, 1996 and
September 30, 1995 .......................................... 4
D. Notes to Condensed Consolidated Financial Statements........... 5
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................................ 9
A. General Business Description................................... 9
B. Results of Operations.......................................... 10
C. Liquidity and Capital Resources................................ 12
PART II
-------
SIGNATURES......................................................... 13
</TABLE>
i
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Sheet 1
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements
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THE L.L. KNICKERBOCKER CO., INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
(unaudited)
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
------------------------------- -------------------------------
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Sales, net of returns $ 8,271,591 $ 4,774,324 18,852,412 $ 9,125,228
Cost of sales 4,676,772 1,731,242 9,971,212 3,858,723
----------- ----------- ----------- -----------
Gross profit 3,594,819 3,043,082 8,881,200 5,266,505
Selling, general and administrative
expenses 3,278,428 1,169,568 6,807,736 2,986,740
----------- ----------- ----------- -----------
Income from operations 316,391 1,873,514 2,073,464 2,279,765
Interest and other income (expense),
net 146,891 62,175 184,427 132,036
----------- ----------- ----------- -----------
Income before provision for income
taxes 463,282 1,935,689 2,257,891 2,411,801
Provision for income taxes 73,934 774,275 792,971 962,211
----------- ----------- ----------- -----------
Net income 389,348 1,161,414 1,464,920 1,449,590
=========== =========== =========== ===========
Net income per share (See
Primary $ 0.02 $ 0.07 $ 0.09 $ 0.11
Fully Diluted $ 0.02 $ 0.07 $ 0.09 $ 0.09
=========== =========== =========== ===========
Weighted average common
shares outstanding:
Primary 17,236,195 16,097,153 16,310,702 13,770,531
=========== =========== =========== ===========
Fully Diluted 17,261,260 16,191,356 16,380,230 13,852,744
=========== =========== =========== ===========
</TABLE>
Page 1
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THE L.L. KNICKERBOCKER CO., INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
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(unaudited) (unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $16,385,153 $ 2,469,750
Accounts receivable 5,986,095 5,456,701
Inventories 6,210,633 413,576
Prepaid expenses & other current assets 2,553,628 1,655,446
Deferred income taxes 1,906,259 394,900
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Total current assets $33,041,768 $10,390,373
Property and equipment, net 3,889,807 226,574
Investments 3,412,152 590,000
Other assets 1,058,792 6,667
Goodwill, net 4,433,895
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$45,603,505 $11,213,614
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</TABLE>
Page 2
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THE L.L. KNICKERBOCKER CO., INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- (unaudited)
(unaudited) -------------
<S> <C> <C>
LIABILITIES AND
STOCKHOLDERS' EQUITY
Liabilities :
Accounts payable and accrued
expenses $ 5,773,721 $ 984,805
Commissions and royalties payable 632,556 407,503
Notes payable to Harlyn shareholders 2,224,262
Income taxes payable 784,569 1,066,941
Other current liabilities 268,005 83,917
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Total current liabilities $ 9,683,113 $ 2,543,166
Convertible debentures 15,500,000
Notes payable 2,756,955
Deferred income 104,443 50,854
Deferred income taxes 19,450 19,450
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Total long-term liabilities : $18,380,848 $ 70,304
Stockholders' equity :
Common Stock 9,088,744 6,574,677
Additional paid-in capital 5,443,322 250,000
Retained earnings 3,240,387 1,775,467
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Total stockholders' equity $17,772,453 $ 8,600,144
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$45,836,414 $11,213,614
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</TABLE>
Page 3
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THE L.L. KNICKERBOCKER CO., INC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
1996 1995
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<S> <C> <C>
Cash flows provided by (used in) operating activities :
Net income $ 1,464,920 $ 282,025
Adjustments to reconcile net income
to net cash provided by (used in) operations :
Depreciation and amortization 176,702 15,302
Amortization of deferred revenue (70,001) (38,889)
Reserve for discontinuance of operations (277,705)
Loss on investment 30,000 0
Equity on net loss of investee 84,890
Deferred income taxes 228,929
(Increase) decrease in :
Accounts receivable (98,514) (1,810,584)
Inventories (949,521) 73,573
Other current assets (758,906) (489,919)
Other assets 76,895
Increase (decrease) in :
Accounts payable and accrued expenses (808,992) (13,242)
Commissions payable (73,694) 86,923
Income taxes payable (282,372) (271,742)
Other current liabilities 211,217 (12,500)
----------- -----------
Net cash provided by (used in) operating
activities $(1,046,152) $(2,179,053)
Cash flow used for investing activities :
Purchases of machinery and equipment (306,886) (81,170)
Other assets - (10,000)
Investments on common stock of investees (1,232,042)
Cash paid for acquisitions less cash acquired (714,568)
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Net cash provided by (used in) investing activities $(2,253,496) $ (91,170)
Cash flow provided by (used in) financing activities :
Proceeds from net borrowings on credit line $ 434,410
Proceeds from exercise of common stock
purchase warrants 2,144,364 4,332,152
Repayments on note payable to stockholder (94,132)
Receipt (payment) of royalty commitment (27,723) (15,000)
Deferred offering costs (116,525)
Principal payments on note payable (66,720)
Deferred debt issue costs (769,280)
Proceeds from issuance of convertible debentures 15,500,000
----------- -----------
Net cash provided by (used in) financing activities $17,215,051 $ 4,106,495
----------- -----------
Net increase (decrease) in cash 13,915,403 1,836,272
Cash, beginning of period 2,469,750 106,553
----------- -----------
Cash, end of period $16,385,153 $ 1,942,825
=========== ===========
</TABLE>
Noncash investing and financing activity - The Company received 800,000 shares
of common stock in exchange for performing marketing services. The Company has
recorded an asset for the discounted value of the stock received and a deferred
revenue liability which is amortized to income over the term of the marketing
agreement.
4
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THE L.L. KNICKERBOCKER CO., INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1: As contemplated by the Securities and Exchange Commission under Item
- -------
310(b) of Regulation S-B, the accompanying financial statements and footnotes
have been condensed and therefore do not contain all disclosures required by
generally accepted accounting principles.
NOTE 2: Basis of Presentation:
- -------
The information set forth in these consolidated financial statements is
unaudited except for the December 31, 1995 balance sheet. These statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information, the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
The accompanying consolidated financial statements consolidate the accounts of
Krasner Group, Inc. ("Krasner") which was acquired on June 18, 1996, Harlyn
International, Ltd. which was acquired effective July 1, 1996, and L.L.
Knickerbocker (Thai) Company, Ltd, which includes the operations of Grant King
International,Ltd and S.L.S Trading Co., Ltd, which were acquired effective July
1, 1996. All intercompany transactions have been eliminated.
In the opinion of management, all adjustments, consisting only of normal
recurring accruals, necessary for a fair presentation have been included. The
results of operations for the nine months ended September 30, 1996 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1996. For further information, refer to the financial statements
and notes thereto included in the Company's annual report for the year ended
December 31, 1995.
NOTE 3: Acquisition:
- ------
On June 18, 1996, the Company acquired the business, assets and properties of
Krasner Group, Inc., a Delaware corporation ("TKG") , a manufacturer and
wholesaler of costume jewelry and women's fashion accessories. TKG was acquired
pursuant to an Agreement of Purchase and Sale dated June 18, 1996 (the
"Agreement") by and among TKG, TKG's stockholders: Martin P. Krasner and Ina
Ostrow , as Trustees U/I DTD 2/5/85 FBO Martin P. Krasner, Martin and
Stephanie Krasner, as Trustees U/I DTD June 15, 1970, Joan Glaser, as
Executor of the Estate of Murray Glaser, F. William Graham, Consumer Venture
Partners I, L.P., Donald F. Swanson, as Trustee, Donald F. Swanson
Revocable Trust U/A Dated December 22, 1988, and the Company. Pursuant to
the Agreement, the company acquired from the above named stockholders all of the
capital stock of TKG. Following the acquisition, the Company intends to
operate TKG as a subsidiary of the Company, and TKG shall continue to operate
under its current name in its current line of business.
5
<PAGE>
The consideration for the acquisition consisted of (a) $ 1,375,000 payable in
value of common stock purchase warrants of the Company's Common Stock to the
holders of preferred stock of TKG in equal installments of $ 275,000 payable on
June 18, 1996, September 30, 1996, December 31, 1996, March 31, 1997, and June
30, 1997, (b) $ 358,489 payable on June 18, 1996 in value of common stock
purchase warrants of the Company's Common Stock to the holders of common stock
of TKG, (c) a contingent amount of $330,000 payable in value of common stock
purchase warrants of the Company's Common Stock to the holders of the preferred
stock of TKG upon the future liquidation of the first $300,000 of closing
inventory of TKG, (d) a contingent amount equal to approximately $ 2,000,000
payable quarterly to Martin P. Krasner, as Trustee of the above referenced
trusts, in value of common stock purchase warrants of the Company's Common Stock
upon the future liquidation of the closing inventory of TKG, (e) the guarantee
by the Company of the repayment of TKG's line of credit with its lending
institution, IBJ Shroder Bank & Trust Company, which totalled approximately
$1,800,000 on April 28, 1996; in connection with the guarantee, the Company will
provide a $500,000 deposit to IBJ Schroder for the purpose of collateralizing
the line of credit; such account shall bear interest at market rates and belong
to the Company, (f) the Company will arrange substitute financing of the line of
credit for TKG no later than September 30, 1996, (g) the Company will pay to an
unrelated individual, Jason Workman,, a finders fee in connection with the
acquisition in the amount of $275,000 payable in value of common stock purchase
warrants of the Company's Common Stock payable on June 18, 1996, (h) the Company
will grant to Richard Ogust an aggregate of $308,000 payable in value of common
stock purchase warrants of the registrant's Common Stock to be delivered in
equal instalments on June 18, 1996 and June 18, 1997 in connection with a
liability owed to Richard Ogust by TGK, and (I) the registrant will grant to key
employees of TKG at June 18, 1996 warrants to purchase 20,987 share of the
Common Stock of the Company at the exercise price of $7.75 per share. With
respect to the contingent amounts above, warrants will be issued in the quarter
following inventory liquidation on a basis of $1 in warrant value of the
registrant's Common Stock per $1 in cash received by the registrant from the
liquidation of the closing inventory of TKG. Value in connection with each share
of common stock covered by a warrant means the difference between the average
closing bid price of the Company's Common shares for the five trading days
immediately preceding the date of delivery of the warrant and the exercise price
of the warrant.
Martin Krasner, as president of TKG, signed a 5 year employment contract with
TKG with annual compensation of $225,000 and eligibility to participate in the
stock plan of the registrant and a bonus program to be determined.
The assets acquired by the registrant include the operating lease for the TKG
office in New York City, the operating lease for a manufacturing facility in
Providence, Rhode Island, the fixtures, furnishings, equipment and lease hold
improvements located in the office and manufacturing facilities, the various
trademarks and contracts with celebrities for endorsement of products. All such
assets were used by TKG in the operation of the costume jewelry and fashion
accessory manufacturing and wholesaling business and registrant intends to
continue the use of such assets in the operation of the costume jewelry and
fashion accessory manufacturing and wholesaling business.
The transaction was accounted for under the purchase method. While management is
not aware of any adjustments that would currently be required, the allocation of
the purchase price will be adjusted to the extent that amounts differ from their
estimates in accordance with Statements of Financial Accounting Standards No.
38, "Accounting for Preacquisition Contingencies of Purchased Enterprises". The
results of operations for the 9 months ended September 30, 1996 include the full
three months of Krasner Group, Inc. operations as of June 18, 1996.
6
<PAGE>
NOTE 3: Acquisition (continued):
- ------
On a proforma basis, if the Companies had been combined as of the beginning of
the fiscal year, sales for the nine month period ended September 30, 1996 were
$17,508,381 and net loss after tax was $1,081,372 or $.07 share. On a pro forma
basis, if the Companies had been combined as of the beginning of the fiscal
year, sales for the nine month period ended September 30, 1995 were $16,084,018
and net income after tax was $961,617 or $.07 share. The unaudited proforma
financial information presented above is not necessarily indicative of either
the results of operations that would have occurred had the acquisition been at
the beginning of the periods presented or of future results of operations of the
consolidated companies. The above nine month periods ended September 30, 1996
and 1995 include Krasner Group, Inc.'s activity from January 29, to September
30, or 8 months of activity.
NOTE 4: On September 30, 1996, the Company acquired 100% of the outstanding
- -------
common stock of Harlyn International, Ltd., a costume jewelry manufacturing
company located in Bangkok, Thailand for approximately $2,300,000 in cash. The
terms of the transaction called for a $1,000,000 payment on October 5, 1996 and
a second and final payment of approximately $1,224,000 on November 15, 1996.
The effective date of the transaction was July 1, 1996. On a proforma basis, if
the Companies had been combined as of the beginning of the fiscal year, sales
for the nine month period ended September 30, 1996 were $13,582,458 and net
income after tax was $642,040 or $.04 share. On a pro forma basis, if the
Companies had been combined as of the beginning of the fiscal year, sales for
the nine month period ended September 30, 1995 were $13,358,622 and net income
after tax was $2,105,506 or $.16 share. The unaudited proforma financial
information presented above is not necessarily indicative of either the results
of operations that would have occurred had the acquisition been at the beginning
of the periods presented or of future results of operations of the consolidated
companies. The above nine month periods, due to Harlyn International, Ltd.'s
fiscal year end of June 30, 1996 and 1995, ended September 30, 1996 and 1995
include Harlyn International, Ltd.'s activity from July 1, 1996 to September
30, 1996 and July 1, 1995 to September 30, 1996, or 8 months of activity.
NOTE 5: On March 13, 1996, the Company entered into an agreement to
- --------
acquire 40% of the outstanding common stock of Pure Energy Corporation, a
privately held corporation. Under the terms of the agreement, the company's
Chief Executive Officer will assume the post of Chairman and Chief Executive
Officer of Pure Energy Corporation. The Company will receive the 40% interest in
exchange for its commitment to fund up to $1,000,000 of further development and
marketing costs associated with Pure Energy Corporation's product and by issuing
in April 1996 400,000 stock options exercisable in the following manner, 200,000
exercisable at $8.50 per share and 200,000 at $12.00 per share. The Company
shall account for the performance of the investment on the funding commitment on
the equity method of accounting. The Company, in October of 1996, participated
in a $5,000,000 private placement of equity in Pure Energy Corporation and
invested $2,000,000 for additional equity.
NOTE 5: The Company capitalizes certain direct-response advertising costs and
- -------
amortizes such costs over a four month period beginning on the date the
advertisement airs. The four month period approximates the period during which
future period revenues are expected to be received from each direct-response
advertising campaign. The nature of the direct-response advertising costs are
primarily advertising and design costs associated with print advertisements.
7
<PAGE>
NOTE 6: On February 7, 1996, the Company acquired 49% of Grant King
- --------
International Co., Ltd. located in Bangkok, Thailand. The Company acquired the
interest in Grant King International, Co. Ltd. by issuing 300,000 warrants
exercisable at $5.50 per share. The Company has recorded an asset in the amount
of $250,000 representing the ascribed value of the Company's investment in Grant
King International, Co. Ltd. Additionally, on June 21, 1996, the Company
acquired the remaining 51% interest in Grant King International, Ltd. for
$414,000 in cash.
On June 21, 1996, the Company entered into an agreement to acquired certain
assets of S.L.S Trading Co., Ltd for $650,000 paid with $150,000 in cash and
$500,000 in stock warrants. The effective date of the transaction is July 1,
1996.
In August of 1996, the Company merged the operations of both Grant King
International Co., Ltd. and S.L.S Trading Co., Ltd into a Thai corporation named
The L.L. Knickerbocker (Thai) Company, Ltd. The corporation was inactive prior
to the date of the merging of the above operations.
NOTE 7: In October 1995, the Financial Accounting Standards Board issued
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Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation", which will be effective for the Company beginning
January 1, 1996. SFAS No. 123 requires expanded disclosures of stock-based
compensation arrangements with employees and encourages (but does not require)
compensation cost to be measured based on the fair value of the equity
instrument awarded. Companies are permitted, however, to continue to apply APB
Opinion No. 25, which recognizes compensation cost based on the intrinsic value
of the equity instrument awarded. The Company will continue to apply APB
Opinion No. 25 to its stock based compensation awards to employees and will
disclose the required pro forma effect on net income and earnings per share.
NOTE 8: On September 24, 1996, the Company completed a private placement of
- -------
$15,500,000 of convertible debt resulting in net proceeds to the Company of
$14,880,000. The convertible debt bears interest at the rate of 7% per annum and
interest quarterly in arrears on any unpaid or unconverted debt. To the extent
not previously converted, the convertible debt is due in February 2000, and must
be repaid in cash. Prior to the second anniversary of issuance, holders of the
convertible debt may convert their convertible debt to common stock of the
Company based upon a 15% discount of the price of the Company's common stock for
five consecutive trading days immediately prior to the date of conversion. The
conversion price cannot exceed $12.50 per share nor fall below $5.25 per share.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The following discussion should be read in conjunction with the financial
statements and the notes thereto appearing elsewhere in this Form 10-QSB.
GENERAL
The Company's core business is to develop a diverse line of consumer products,
contract for the manufacture of those products to the Company's specifications,
and market those products to customers. The Company's strength and history has
been its strategy in marketing to the home shopping industry by identifying the
industry's key product segments (i.e. collectibles, environmental systems,
jewelry, health and beauty) and building Brand recognition within those product
segments. The Company brings a celebrity or spokesperson to enhance the appeal
of the product. Using this strategy, the Company was the first to bring
celebrities to the home shopping industry. The Company's celebrity programs have
included products endorsed by Marie Osmond, Annette Funicello, Bob Mackie,
Farrah Fawcett, Angie Dickinson, Richard Simmons, Phyllis Diller, Joan Collins,
and Rue McClanahan. The Company plans to expand celebrity programs introducing
new key product segments.
The Company has expanded from marketing its products through its core, home
shopping business to include direct response marketing channels such as print
media advertising, infomercials, direct mail campaigns, and the internet. The
Company has also developed product distribution through retail stores and retail
catalog accounts.
The Company is actively involved in the development of an alternative fuel
through its 38% ownership of the Pure Energy Corporation. Pure Energy
Corporation is in the process of developing a proprietary alternative fuel that
would produce the lowest possible emissions at the lowest cost to the public.
The Company, through its joint venture with Paxson Communications Corporation,
is currently developing infomercials for several new products and services. The
Company believes that the joint venture will provide synergistic opportunities
for strategic growth.
The Company cancelled plans to market a patented, painless hair removal system,
called "Classy Lady". The Company cancelled marketing the painless hair removal
system due to long delays in obtaining FDA approval.
As a result of the Company's growth in its core, home shopping business, the
Company has scaled back its marketing consulting services to outside companies.
The Company, on June 18, 1996, acquired 100% of the outstanding common stock of
Krasner Group, Inc., a costume jewelry manufacturer and wholesaler. The
acquisition of Krasner Group, Inc. will allow the Company to penetrate the large
jewelry market in the home shopping industry.
Effective July 1, 1996, the Company acquired the remaining interest in Grant
King International, Ltd, a jewelry design and development company located in
Bangkok, Thailand. The Company also acquired the operations of S.L.S. Trading
Company, a stone cutting and wholesaling company, also located in Bangkok,
Thailand. S.L.S. Trading Company is known for its famous "Blue Topaz" semi-
precious stones. The integration of the U.S. and Thailand jewelry operations is
expected to give the Company an advantage in the lucrative home shopping jewelry
market, although no assurance can be given in this regard. In August of 1996,
the operations of Grant King International, Ltd. and S.L.S Trading Co., Ltd were
merged into a new 100% owned Thai corporation named The L.L. Knickerbocker
(Thai) Company, Ltd. The results of operations for the quarter ended September
30, 1996 include three months of activity of the L.L. Knickerbocker (Thai)
Company, Ltd.
9
<PAGE>
Effective July 1, 1996, the Company acquired 100% of the outstanding common
stock of Harlyn International, Ltd, a Thailand-based manufacturer and wholesaler
of fine jewelry. The purchase price for Harlyn International, Ltd. was
approximately $2,300,000 in cash, all of which was paid on November 14, 1996.
Haryln International has an established base of international customers. The
Company expects to utilize the manufacturing abilities of Harlyn International,
Ltd to help establish the Company in the significant jewelry category within the
home shopping industry.
The Company, on September 18, 1996, acquired 25% of the common stock of both
Self-Heating Container Corporation and Insta-Heat, Inc., a related corporation.
The Company will receive distribution rights for a product that self-heats
canned liquids and meals on demand by pressing a button.
On October 10, 1996, the Company signed a letter of intent to acquire
simultaneously 100% of the common stock of Georgetown Collection, Inc. and Magic
Attic Press, Inc., marketers of collectible dolls, books, and accessories
through catalogs. The acquisition will allow the Company to expand its
distribution channels to include catalog.
The intent of the Company in signing the above agreements is to identify and
introduce new, marketable products while expanding the Company's distribution
network.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of
revenues represented by items included in the Company's Statements of
Operations.
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
---------------------------------- --------------------------------
1996 1995 1996 1995
---------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0%
Cost of revenue 56.5 36.3 52.3 42.3
Gross profit 43.4 63.7 47.1 57.7
Operating expenses 39.6 24.5 36.1 32.7
Operating income 3.8 39.2 11.0 25.0
Interest/other income 1.7 1.3 0.9 1.4
Net Income 4.7 24.3 7.7 15.9
</TABLE>
THE FOLLOWING COMPARISONS ARE FOR THE QUARTERS ENDED SEPTEMBER 30, 1996 AND
SEPTEMBER 30, 1995.
Revenues
Third quarter revenues increased 73% from $4,774,324 in 1995 to $8,271,591 in
1996. The increase in revenues was due primarily to an increase in jewelry sales
as a result of the acquisitions of the Company's subsidiaries, Krasner Group,
Inc. and L.L. Knickerbocker (Thai) Company, Ltd. Revenues from the sales of
costume jewelry increased to $3,303,925 in 1996 from 0 in 1995. Revenues from
the sales of fine jewelry increased to $2,312,254 in 1996 from 0 in 1995.
Revenues from the Marie Osmond collectible doll line decreased to $1,191,367 in
1996 from $$2,006,273 in 1995. Revenues from the Annette Funicello collectible
bear line increased to $192,973 in 1996 from $163,696 in 1995.
10
<PAGE>
Gross profit
Gross profit increased 18% from $3,043,082 in 1995 to $3,594,819 in 1996 due
primarily to the increase in revenues due to the acquisitions of Krasner Group,
Inc. and L.L. Knickerbocker (Thai) Company, Ltd. Additionally, the Company's
core business which includes the Marie Osmond collectible doll program and
Annette Funcello collectible bear programs also contributed to the Company's
gross profit. As a percentage of revenues, gross profit decreased to 43.6% in
the third quarter of 1996 from 63.7% in the third quarter of 1995. Gross profit
in 1996, although greater in amount than 1995, was negatively impacted by
several shipments that were pushed from the third quarter of 1996 into the
fourth quarter. The reason for the delay in shipments was primarily flooding
and adverse weather in southeast Asia. The decrease, as a percentage of
revenues, in gross profit was related primarily to the discontinuance of the
Media Production services in 1996. Media Production services historically
generated larger profit margins due to the service nature of the revenues. The
Company discontinued Media Production services in 1996 due to the human resource
demands and cash collection problems.
Selling, general and administrative expenses
Total selling, general and administrative expenses increased from $1,169,568 in
1995 to $3,278,428 in 1996. The percentage of revenues represented by these
expenses increased from 24.5% in 1995 to 38.6% in 1996. The primary reason for
the increase as a percentage of revenues is due to Company's acquisitions of
jewelry companies whose overhead is typically higher than what the Company, on a
stand alone basis, traditionally reported. The Company's overall selling,
general, and administrative expenses have increased due to the Company's focus
on expanding its infrastructure to accommodate anticipated future growth by
adding employees, office space, and equipment. Remaining expenses in this
category were in proportion to the corresponding revenues between 1995 and 1996.
Other income (expense)
Other income (expense) increased from $62,175 in 1995 to $146,891 in 1996 as a
result of an increase in interest income from the Company's increased cash
reserves.
Net Income
As a result of the foregoing factors, net income decreased 66% to $389,348 for
the three month period ended September 30, 1996 from net income of $1,161,414
for the three month period ended September 30, 1995.
THE FOLLOWING COMPARISONS ARE FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND
SEPTEMBER 30, 1995.
Revenues
Revenues increased 107% from $9,125,228 in 1995 to $18,852,412 in 1996. The
increase in revenues is due primarily to the increase in the Marie Osmond
collectible doll program and the Annette Funicello collectible bear program.
Revenues from the Marie Osmond collectible doll line have increased from
$4,198,066 in 1995 to $8,331,333 in 1996. Revenues from the Annette Funcello
collectible bear line have increased from $411,066 in 1995 to $1,321,299 in
1996. Additionally, year to date 1996 revenues have increased due to the
jewelry revenues recognized through the acquisitions of the Company's
subsidiaries, Krasner Group, Inc. and L.L. Knickerbocker (Thai) Company, Ltd.
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Gross profit
Gross profit increased 69% from $5,266,505 in 1995 to $8,881,200 in 1996 due
primarily to the growth in revenues from the Marie Osmond collectible doll
program, Annette Funicello collectible bear program, and the addition of jewelry
programs. Gross profit also increased from direct response revenues where
products are sold at retail prices, as opposed to wholesale prices to the home
shopping industry. The overall gross profit percentage of the Company decreased
slightly due to the lower gross profit associated with the lower margins
associated with jewelry sales. The Company has also discontinued its Media
Production division which, although achieved high margins to the Company,
brought on collection issues. As a result of the foregoing, the overall gross
profit percentage of the Company decreased from 57.7% in 1995 to 47.1% in 1996.
Selling, general and administrative expenses
Total selling, general and administrative expenses increased from $2,986,740 in
1995 to $6,807,736 in 1996. The percentage of sales represented by these
expenses increased from 32.7% to 36.1%. The primary reason for the increase as a
percentage of sales is due to the Company's acquisitions of its subsidiaries
Krasner Group, Inc. and L.L. Knickerbocker (Thai) Company, Ltd. Additionally,
the Company has increased the number of employees and has increased its overall
overhead in anticipation of expected future growth. Remaining expenses in this
category were in proportion to the corresponding revenues between 1995 and 1996.
Other income (expense)
Other income (expense) increased from $132,036 in 1995 to $184,427 in 1996 as a
result of an increase in interest income due to the Company's cash balances.
Net Income
As a result of the foregoing factors, net income increased 1% to $1,464,920 for
the nine month period ended September 30, 1996 from net income of $1,449,590 for
the nine month period ended September 30, 1995.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1996, the Company had working capital of $21,626,035.
Working capital increased substantially by the issuance of convertible
debentures of $15,500,000 which resulted in $14,880,000 in net proceeds to the
Company. The unsecured debt requires quarterly interest payments in cash based
upon an annual interest rate of 7%. The debt matures in four years, at which
time any convertible debt then outstanding is to be repaid by the Company in
cash. All conversions into common stock before the second anniversary of
issuance are at a 15% discount to the then-present price of the Company's common
stock at the time of conversion. The Company intends to use the proceeds from
the debenture offering to make acquisitions of companies and to finance existing
subsidiaries.
Cash flow used in operations was $1,046,152 due to the increase in inventory and
other current assets associated with the acquisitions of Krasner Group, Inc,
Harlyn International, Ltd., and L.L. Knickerbocker (Thai) Company, Ltd. The
Company's cash flow also decreased due to the payments made to decrease accounts
payable. The Company's liquidity increased due to the influx of capital from the
exercise of stock options and warrants and due to the increase in profits
experienced during the first nine months of 1996. The combination of the above
factors resulted in an overall increase in working capital from $7,847,207 at
December 31, 1995 to $21,626,035 at September 30, 1996. The current ratio for
the Company decreased from 4.09 at December 31, 1995 to 2.28 at September 30,
1996. The decrease in the Company's current ratio is primarily attributed to
the assumption of lines of credit of Krasner Group, Inc., Haryln International,
Ltd., and L.L. Knickerbocker (Thai) Company, Ltd.
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The Company currently has approximately 307,500 warrants remaining to be
exercised associated with the overallotment of shares in connection with the
initial public offering. The infusion of cash from the initial public offering
and the subsequent exercise of the common stock warrants has improved the
liquidity of the Company considerably. Additionally, the Company has outstanding
1,296,000 options to acquire common stock held by various celebrities,
spokespersons, consultants, and officers and directors of the Company
exercisable at $.75 per share. The Company expects to receive additional funds
from the exercise of these shares. The above exercise of warrants and options
should contribute to the liquidity and working capital of the Company.
PART II. OTHER INFORMATION
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
THE L.L. KNICKERBOCKER CO., INC.
Date: November 18, 1996 By: \s\ Anthony P. Shutts
-----------------------------
Anthony P. Shutts
Chief Financial Officer
Signing on behalf of the registrant and as
principal financial and accounting officer.
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