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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 June 30, 1997
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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.)
25800 Commercentre Drive 92630
Lake Forest, California (Zip Code)
(Address of Principal Executive Offices)
Issuer's Telephone Number, Including Area Code: (714) 595-7900
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange on
Title of Each Class Which Registered
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Common Stock, No Par Value 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 August
8, 1997 was 18,564,659.
Transitional Small Business Disclosure Format Yes [_] No [X]
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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TABLE OF CONTENTS
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ITEM PAGE
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PART I
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1. FINANCIAL INFORMATION............................................... 1
A. Condensed Consolidated Statements of operations (unaudited)
for the three and six month periods ended June 30, 1997
and June 30, 1996............................................. 1
B. Condensed Consolidated Balance Sheets at June 30, 1997
(unaudited) and December 31, 1996............................. 2
C. Condensed Consolidated Statements of Cash Flows (unaudited)
for the six month periods ended June 30, 1997 and
June 30, 1996................................................. 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
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SIGNATURES................................................................ 13
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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THE L.L. KNICKERBOCKER CO., INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
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<CAPTION>
Three months ended June 30, Six months ended June 30,
1997 1996 1997 1996
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<S> <C> <C> <C> <C>
Sales, net of returns $ 17,609,000 $ 7,422,000 $ 31,050,000 $ 10,581,000
Cost of sales 8,973,000 3,887,000 15,617,000 5,292,000
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Gross profit 8,636,000 3,535,000 15,433,000 5,289,000
Advertising expense 1,942,000 175,000 3,519,000 285,000
Selling, general and administrative expenses 6,786,000 2,088,000 13,055,000 3,243,000
------------ ------------ ------------ ------------
Operating income (loss) (92,000) 1,272,000 (1,141,000) 1,761,000
Equity in loss of investee companies 571,000 - 876,000 -
Other income (expense), net (123,000) (8,000) (236,000) 37,000
Interest expense (See Note 3) 433,000 - 3,526,000 -
------------ ------------ ------------ ------------
Income (Loss) before provision for income taxes and minority
interest (1,219,000) 1,264,000 (5,779,000) 1,798,000
Minority interest (101,000) - (219,000) -
Income tax (benefit) expense (557,000) 506,000 (1,160,000) 719,000
------------ ------------ ------------ ------------
Net income (loss) $ (561,000) $ 758,000 $ (4,400,000) $ 1,079,000
============ ============ ============ ============
Primary net income (loss per share) $ (0.03) $ 0.05 $ (.25) $ 0.07
============ ============ ============ ============
Primary weighted average common and common
equivalent shares outstanding 17,867,818 16,859,566 17,379,133 16,514,166
============ ============ ============ ============
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THE L.L. KNICKERBOCKER CO., INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
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<CAPTION>
June 30, December 31,
1997 1996
ASSETS ------------ ------------
<S> <C> <C>
Cash and cash equivalents $ 1,278,000 $ 6,247,000
Restricted cash - 500,000
Accounts Receivable 10,648,000 13,730,000
Receivable from stockholder/officer 1,377,000 596,000
Inventories 10,455,000 8,474,000
Prepaid expenses and other current assets 6,787,000 5,663,000
Income tax receivable 2,306,000 733,000
Deferred income taxes 1,236,000 1,236,000
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Total current assets 34,087,000 37,179,000
Property and equipment, net 7,327,000 6,111,000
Investments 3,892,000 4,677,000
Deferred income taxes 1,835,000 1,835,000
Other Assets 662,000 1,480,000
Goodwill, net of accumulated amortization of
$625,000 and $310,000 as of June 30, 1997 and
December 31, 1996, respectively 5,943,000 6,290,000
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$ 53,746,000 $ 57,572,000
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LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, December 31,
1997 1996
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Current liabilities:
Accounts payable and accrued expenses $ 9,984,000 $ 11,311,000
Commissions and royalties payable 890,000 828,000
Notes payable 5,498,000 7,008,000
Interest payable 61,000 131,000
Acquisition payable 277,000 1,253,000
Due to stockholder/officer 1,000,000 -
Current portion of long-term debt 308,000 266,000
Other current liabilities 367,000
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Total current liabilities 18,385,000 20,797,000
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Long-term liabilities:
Long-term debt, less current portion 179,000 371,000
Convertible debentures, net of discount of
$2,344,000 as of December 31, 1996 7,895,000 11,826,000
Other long-term liabilities 51,000
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Total long-term liabilities 8,074,000 12,248,000
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Minority interest 45,000 264,000
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Stockholders' equity:
Common stock 23,472,000 13,082,000
Additional paid-in capital 5,142,000 8,018,000
Retained earnings (deficit) (1,253,000) 3,147,000
Foreign currency translation adjustment (119,000) 16,000
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Total stockholders' equity 27,242,000 24,263,000
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$ 53,746,000 $ 57,572,000
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</TABLE>
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THE L.L. KNICKERBOCKER CO., INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
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<CAPTION>
June 30, June 30,
Cash flows provided by operating activities: 1997 1996
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<S> <C> <C>
Net (loss) income $ (4,400,000) $ 1,079,000
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 1,168,000 83,000
Debenture inducement 1,899,000 -
Amortization of deferred revenue - 33,000
Reserve for discontinuance of operations - (61,000)
Equity in loss of investee companies 876,000 -
Minority interest (219,000) -
Amortization of debt discount 589,000 -
Changes in operating accounts:
Accounts receivable, net 3,082,000 (1,564,000)
Receivable from stockholder/officer (781,000) -
Note receivable - -
Income tax receivable (1,573,000) -
Inventories (1,981,000) (206,000)
Prepaid expenses and other current assets (1,124,000) -
Other assets 171,000 (726,000)
Accounts payable and accrued expenses (920,000) 732,000
Commissions and royalties payable 62,000 405,000
Income tax payable - 17,000
Other long term liabilities (51,000) -
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Net cash provided by (used in) operations (3,202,000) (208,000)
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Cash flows from investing activities:
Acquisitions of property, plant and equipment (1,947,000) (58,000)
Investments (91,000) -
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Net cash used in investing activities (2,038,000) (58,000)
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Cash flows from financing activities:
Net payments on line of credit (1,510,000) -
Payments on long-term debt (150,000) -
Proceeds from exercise of common stock purchase warrants 478,000 1,599,000
Payment of royalty committement - (28,000)
Proceeds from shareholder loan 1,000,000 -
Proceeds from note payable 33,000
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Net cash provided by (used in) financing activities (182,000) 1,604,000
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Effect of Foreign currency translation (47,000) -
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Net (decrease) increase in cash and cash equivalents (5,469,000) 1,338,000
Cash and cash equivalents, beginning of period 6,747,000 2,470,000
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Cash and cash equivalents, end of period $ 1,278,000 $ 3,808,000
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</TABLE>
Supplemental Schedule of Noncash Investing and Financing Activity:
During the six months ended June 30, 1997, $8,173,000 of convertible
debentures and $110,000 of accrued interest was converted to common stock.
During the six months ended June 30, 1997, the Company issued 156,106
shares of common stock in payment of $976,000 of acquisition payable.
During the six months ended June 30, 1997, the Company paid $789,000
for interest.
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THE L.L. KNICKERBOCKER CO., INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1: Basis of Presentation:
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. The information set forth in these consolidated
financial statements is unaudited except for the December 31, 1996 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, 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, and Georgetown Collection, Inc. which was acquired effective October
18, 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 three and six month periods ended June 30, 1997
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1997. For further information, refer to the financial
statements and notes thereto included in the Company's annual report for the
year ended December 31, 1996.
Certain prior period balances have been reclassified to conform with current
presentation.
NOTE 2: Net income per share:
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share (SFAS 128) which is
effective for financial statements issued for periods ending after December 15,
1997. SFAS 128 requires the disclosure of basic and diluted earnings per share.
For the three and six months ended June 30, 1997, the amount reported as net
loss per share is not materially different from that which would have been
reported for basic and diluted loss per share in accordance with SFAS 128.
NOTE 3: Convertible debentures:
In September 1996, the Company issued Convertible Debentures (the Debentures)
with a face value of $15,500,000 in a private placement to institutional
investors. This private placement yielded net proceeds to the Company totaling
$14,730,000 after deducting costs associated with issuing the Debentures. The
Debentures accrue interest at the rate of 7% per annum, payable quarterly in
arrears on any unpaid or unconverted debt. The Debentures were convertible at
the option of the holder into shares of the Company's common stock at a price
equal to 85% of the closing price of the Company's common stock at the date of
conversion, subject to a minimum and maximum conversion price of $5.25 and
$12.00 per share, at any time through the second anniversary of the original
date of issuance. Through June 30, 1997, the Company issued a total of
1,464,084 shares of its common stock in connection with the conversion of
$9,503,000 of the original principal amount of the Debentures, plus interest
accrued through the conversion dates.
The conversion of the notes at 85% of the closing price of the Company's common
stock resulted in the Debentures being issued at a discount (the conversion
discount). The conversion discount is being recognized by the Company as non-
cash interest expense over the term of the Debentures with a
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corresponding increase to the original principal amount of the Debentures. Upon
conversion of the Debentures any portion of the conversion discount not
previously recognized is recorded as interest expense on the conversion date.
During the six months ended June 30, 1997, a total of $ 2,648,000 of non-cash
interest expense was recorded relating to the Debentures, including $ 591,000
relating to the additional conversion discount recorded upon conversion.
In January 1997, the Company reached agreement with the Debenture holders to
tender all outstanding Debentures to the Company in exchange for new convertible
Debentures (the New Debentures). Under the terms of the agreement, New
Debentures were issued with a face value of 117.5% of the face value of the
tendered Debentures. The New Debentures bear interest at 7% per year, payable
quarterly. The New Debentures are convertible at the option of the holder into
shares of the Company's common stock at $8.00 per share. The New Debentures
must be converted by January 1999. As a result of the 17.5% premium given as an
inducement to the Debenture holders to tender the original debentures into New
Debentures, the Company recorded a non-cash charge of $1,899,000 in the first
quarter of 1997.
NOTE 4: Bank financing
On July 14, 1997, the Company obtained a line of credit with BankBoston totaling
$20,000,000. The line of credit will replace approximately $4,800,000 in
existing bank debt and provide working capital for the Company. Terms of the
line call for borrowings to the extent of availability determined by levels of
accounts receivable and inventory.
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 markets a wide variety of branded consumer products, including
collectibles, costume and fine jewelry, fashion accessories, patented products
and consumables. The Company markets these brands through a variety of channels,
including television shopping channels, infomercials, print media, direct mail,
retail stores and internet marketing campaigns. The Company's core collectible
business is developing diverse lines of consumer products, contracting for the
manufacture of those products to the Company's specifications, and marketing
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 partners with 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
include products endorsed by Marie Osmond, Annette Funicello, Bob Mackie, Nolan
Miller, Kenneth Jay Lane, and Barbara Mandrell. The Company plans to expand
celebrity programs introducing new key product segments.
The Company has expanded from marketing its products through television shopping
channels 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.
During 1996, the Company expanded its stable of brand names and increased its
distribution of products by making several strategic acquisitions, as follows:
Effective June 18, 1996, the Company acquired all of the outstanding capital
stock of Krasner Group, Inc., a marketer and manufacturer of celebrity-driven
costume jewelry located in New York; effective July 1, 1996, the Company
acquired certain assets and assumed certain liabilities of S.L.S Trading Co.,
Ltd, a jewelry stone sourcing and cutting operation that holds proprietary stone
cutting techniques, located in Bangkok, Thailand; effective, July 1, 1996, the
Company acquired the remaining 51% interest in Grant King International Co.,
Ltd, that the Company did not previously own. Grant King International Co.,
Ltd. is a jewelry design operation, located in Bangkok, Thailand; effective
July 1, 1996, the Company acquired all of the common stock of Harlyn
International,
<PAGE>
Ltd., a fine jewelry manufacturing operation, located in Bangkok, Thailand; and,
effective October 18, 1996, the Company acquired approximately 82% of the
capital stock of Georgetown Collection, Inc., a marketer of collectible dolls,
located in Portland, Maine.
As a result of the acquisitions, the Company has substantially changed the size,
scope, and nature of its business. Prior to the acquisitions, the Company
marketed primarily collectible dolls and bears over television shopping
channels. At that time, the Company was characterized by a relatively small
revenue base, one major customer, and one primary means of distribution. As a
result of the acquisitions, the Company now has a wide distribution base,
diverse product lines, and has increased its revenue base five-fold. Management
believes that the Company's significantly more diversified product and revenue
base increases the overall health of the Company and has reduced its exposure to
demand fluctuations in any one product area or distribution channel.
The Company also has a strategy that includes searching for investment
opportunities that appear to offer attractive returns on invested capital. The
Company made two such investments in 1996. The Company owns a 38.3% interest in
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, on September 18, 1996,
acquired 25%, on a fully diluted basis, of the common stock of both Ontro, Inc.
(formerly Self-Heating Container Corporation ) and Insta-Heat, Inc. a related
corporation. In connection with the Ontro, Inc. and Insta-Heat, Inc.
investments, the Company will receive distribution rights for a product that
self-heats canned liquids and meals on demand by pressing a button.
The Company also has a joint venture with Paxson Communications Corporation and
is currently developing infomercials for several new products and services. The
Company believes that the joint venture will provide synergistic opportunities
for strategic growth. To date, the joint venture has generated only minimal
sales and profit.
As a result of the Company's growth in its television shopping business, and the
acquisitions, the Company has phased out its marketing consulting services to
outside companies.
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.
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<CAPTION>
Three months ended Six months ended
June 30, June 30,
1997 1996 1997 1996
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<S> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0%
Cost of revenue 51.0% 52.4% 50.3% 50.0%
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Gross profit 49.0% 47.6% 49.7% 50.0%
Operating expenses 49.6% 30.5% 53.4% 33.4%
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Operating income -0.6% 17.1% -3.7% 16.6%
Interest expense/Other expense 2.6% 6.9% 10.5% 6.4%
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Net income (Loss) -3.2% 10.2% -14.2% 10.2%
</TABLE>
The following comparisons are for the quarters ended June 30, 1997 and June 30,
1996.
Revenues
Second quarter revenues increased 137% from $7,422,000 in 1996 to $17,609,000 in
1997. The increase in revenues was due primarily to an increase in jewelry and
doll sales as a result of the acquisitions completed in the second half of 1996.
Revenues in the second quarter of 1997 include revenues from costume jewelry,
fine jewelry, fashion accessories and additional doll lines that were either
partially included or not part of the Company's product lines in the second
quarter of 1996. Revenues from costume jewelry and fashion accessories were
$3,412,000 in 1997 versus $1,107,000 in 1996. Revenues from fine jewelry were
$2,658,000 in 1997 versus $295,000 in 1996. Additional doll lines acquired
through acquisitions contributed $6,412,000 to revenues in 1997. Revenues from
the Marie Osmond collectible doll line
<PAGE>
decreased to $2,173,000 in 1997 from $5,595,000 in 1996. Revenues from the
Annette Funicello collectible bear line increased to $1,341,000 in 1997 from
$603,000 in 1996.
Gross profit
Gross profit increased 142% from $3,535,000 in 1996 to $8,636,000 in 1997 due
primarily to the increase in revenues from the acquisitions completed in 1996.
In the Company's core celebrity driven collectibles business, the decrease in
gross profit generated from the Marie Osmond collectible doll line was more than
offset by the increase in gross profit generated from the growth in the Annette
Funicello collectible bear line. As a percentage of revenues, gross profit
increased to 49.0% in the second quarter of 1997 from 47.6% in the second
quarter of 1996. Gross profit, as a percentage, is impacted by the amount of
revenues generated from the Company's direct response doll business, which
consists of retail sales to consumers, thereby generating higher gross margins.
Alternatively, gross profit will be lower if the percentage of the Company's
wholesale jewelry and collectible doll business surpasses the direct response
business.
Advertising expense
Advertising expense increased from $175,000 in 1996 to $1,942,000 in 1997 due
primarily to the Company's expansion of its direct response business and through
its acquisition of Georgetown Collection, Inc., which markets its products
primarily through direct response channels. Included in advertising expense are
advertisement printing costs, catalog printing costs, media space in magazines,
infomercial costs, and advertisement development costs.
Selling, general and administrative expenses
Total selling, general and administrative expenses increased from $2,088,000 in
1996 to $6,786,000 in 1997. The percentage of revenues represented by these
expenses increased from 28% in 1996 to 39% in 1997. The primary reason for the
increase is due to the jewelry manufacturing operations purchased in 1996 which,
due to the nature of manufacturing, typically carry higher overhead than the
Company's core collectible doll business. Additionally, the Company has added
professionals in the areas of management, development, computer systems and
marketing which increase the overall overhead of the Company. Remaining expenses
in this category were in proportion to the corresponding revenues between 1997
and 1996.
Other income (expense)
Other income (expense) increased $115,000 to $(123,000) in 1997 from $(8,000) in
1996 primarily as a result of the acquisitions completed in 1996.
Interest income (expense)
Interest expense increased in 1997 to $433,000 from zero in 1996 primarily as a
result of lines of credit assumed in the acquisitions of subsidiaries completed
in 1996 and due to interest expense incurred on the remaining balance of
convertible debentures.
Net Income
As a result of the foregoing factors, net income decreased from $758,000 in 1996
to a net loss of $561,000 in 1997.
<PAGE>
The following comparisons are for the six months ended June 30, 1997 and June
30, 1996.
Revenues
Revenues increased 194% from $10,581,000 in 1996 to $31,050,000 in 1997. The
increase in revenues was due primarily to an increase in jewelry and collectible
doll sales as a result of the acquisitions completed in the second half of 1996
which expanded the consumer product lines and distribution channels of the
Company. Revenues in the second quarter of 1997 include revenues from costume
jewelry, fine jewelry, fashion accessories and additional doll lines that were
either partially included or not part of the Company's product lines in the
second quarter of 1996. Revenues from costume jewelry and fashion accessories
were $6,248,000 in 1997 versus $1,107,000 in 1996. Revenues from fine jewelry
were $6,141,000 in 1997 versus $295,000 in 1996. Additional doll lines acquired
through acquisitions contributed $12,304,000 to revenues in 1997. Revenues from
the Marie Osmond collectible doll line decreased to $2,754,000 in 1997 from
$7,169,000 in 1996. Revenues from the Annette Funicello collectible bear line
increased to $1,341,000 in 1997 from $1,137,000 in 1996.
Gross profit
Gross profit increased 192% from $5,289,000 in 1996 to $15,433,000 in 1997 due
primarily to the increase in revenues from the acquisitions completed in 1996.
In the Company's core celebrity driven collectibles business, the decrease in
gross profit generated from the Marie Osmond collectible doll line was partially
offset by the increase in gross profit generated from the growth in the Annette
Funicello collectible bear line and increases in the Company's jewelry business.
As a percentage of revenues, gross profit remained at approximately 50% through
the second quarter of 1997 from the same percentage in 1996. Gross profit, as a
percentage, is positively impacted by the amount of revenues generated from the
Company's direct response doll business, which consists of retail sales to
consumers, thereby generating higher gross margins. Alternatively, gross profit
will be lower if the percentage of the Company's wholesale jewelry and
collectible doll business surpasses the direct response business.
Advertising expense
Advertising expense increased from $285,000 in 1996 to $3,519,000 in 1997 due
primarily to the Company's expansion of its direct response business and through
its acquisition of Georgetown Collection, Inc., which markets its products
primarily through direct response channels. Included in advertising expense are
advertisement printing costs, catalog printing costs, media space in magazines,
infomercial costs, and advertisement development costs.
Selling, general and administrative expenses
Total selling, general and administrative expenses increased from $3,243,000 in
1996 to $13,055,000 in 1997. The percentage of revenues represented by these
expenses increased from 30.6% in 1996 to 42% in 1997. The primary reason for
the increase is due to the jewelry manufacturing operations purchased in 1996
which, due to the nature of manufacturing, typically carry higher overhead than
the Company's core collectible doll business. The Company's catalog doll
program impact general and administrative expenses in that such business has a
seasonality effect in which a greater percentage of the business is transacted
in the fourth quarter. The seasonality of the business causes fixed expenses to
remain steady while revenues and profits are weighted heavily in the fourth
quarter. Additionally, the Company has added professionals in the areas of
management, development, computer systems and marketing which increase the
overall overhead of the Company. Additionally, 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 office space and equipment. Remaining expenses in this category were in
proportion to the corresponding revenues between 1997 and 1996.
Other income (expense)
Other income (expense) decreased to $(236,000) in 1997 from $37,000 in 1996
primarily as a result of the acquisitions completed in 1996.
<PAGE>
Interest income (expense)
Interest expense increased in 1997 primarily as a result of charges associated
with the convertible debenture financing which occurred in September of 1996.
The noncash 15% conversion discount on conversions into common stock is charged
as interest expense. The total conversion discount in the first quarter of 1997
totaled $591,000. Additionally, the Company has taken a charge of $1,899,000
representing the accretion of the principal balance which resulted from the
restructuring in February of 1997 of the convertible debentures. Also, cash
interest expense increased due to the acquisitions completed in 1996 which
employ bank lines of credit and coupon interest paid on the remaining balance of
convertible debentures.
Net Income
As a result of the foregoing factors, net income decreased from $1,079,000 in
1996 to a net loss of $4,400,000 in 1997.
Liquidity and Capital Resources
As of June 30, 1997 the Company had working capital of $16,010,000. Working
capital has increased substantially by both the issuance of convertible
debentures of $15,500,000, which resulted in $14,880,000 in net proceeds to the
Company and the acquisitions completed in 1996.
Through the second quarter of 1997, the Company has continued to invest most of
the funds generated from operations and raised in the convertible debenture
financing by capitalizing subsidiaries and paying down high interest bearing
debt.
In February 1997, the Company restructured its convertible debentures which had
an unconverted balance of $10,850,000 prior to restructuring. The Company
reached an agreement with the Debenture holders to tender all of the outstanding
Debentures to the Company in exchange for new convertible Debentures (the "New
Debentures"). Under the terms of the agreement, the New Debentures were issued
with a face value of 117.5% of the unconverted balance of the tendered
debentures. The New Debentures are convertible into common stock at the option
of the holder at a fixed price of $8.00 per share. The New Debentures must be
converted by January 1999. As a result of the 17.5% premium given as an
inducement to the Debenture holders to tender the original debentures into New
Debentures, the Company recorded a noncash charge of $1,899,000 in the first
quarter of 1997. As of July 31, 1997, the principal balance outstanding on
the New Debentures was $6,855,500.
The Company has obtained a $20,000,000 line of credit with BankBoston which will
replace existing bank lines of credit and be used for working capital purposes.
The line contains terms which are standard to asset-based lending arrangements.
Cash flow used in operations was $3,202,000 due to the increase in inventory
and prepaids associated with the acquisitions of Georgetown Collection, Inc.,
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 and other accrued expenses. The combination of the
above factors resulted in a decrease in working capital from $16,382,000 at
December 31, 1996 to $15,702,000 at June 30, 1997. The current ratio for the
Company increased from 1.79 at December 31, 1996 to 1.85 at June 30, 1997. The
increase in the Company's current ratio is primarily attributed to the
assumption of lines of credit of Georgetown Collection, Inc.,Krasner Group,
Inc., Haryln International, Ltd., and L.L. Knickerbocker (Thai) Company, Ltd
offset by increases in accounts receivable and other current assets.
Seasonality and Quarterly Results
The Company's business is subject to seasonal fluctuations. Georgetown
Collection, Inc., which was acquired effective October 18, 1996, has
historically experienced greater sales in the latter portion of the year.
Because of the seasonality of the Company's business, results for any quarter
are not necessarily indicative of the results that may be achieved for the full
fiscal year.
<PAGE>
PART II. OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders.
On June 19, 1997, the Company held its Annual Meeting of Shareholders. The
meeting involved the election of Directors of the Company, ratification of
Deloitte and Touche as independent public accountants, and ratification of
Incentive Stock Compensation Plan. With respect to the election of directors,
Mr. F. Rene Alvarez was newly elected to the Board, Louis L. Knickerbocker,
Anthony P. Shutts, Farrah Fawcett, Gerald A. Margolis, and William R. Black were
re-elected to the Board, and Mr. Lowell W. Paxson resigned from the Board. A
brief description of each matter voted on and number of shares cast is as
follows:
<TABLE>
<CAPTION>
1.) Election of Directors: For Withhold Against Not Voted
<S> <C> <C> <C> <C>
Louis L. Knickerbocker 15,177,673 204,322
Anthony P. Shutts 15,159,941 222,054
Farrah Fawcett 14,896,623 485,372
Gerald A. Margolis 15,169,273 212,722
William R. Black 15,171,741 210,254
F. Rene Alvarez 15,169,241 212,754
2.) Ratification of Appointment
of Independent Public
Accountants:
Appointment of Deloitte
and Touche, LLP 15,317,729 18,868 45,398
3.) Ratification of Incentive Stock
Compensation Plan 8,759,242 694,125 5,928,628
</TABLE>
<PAGE>
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: August 11, 1997 By: /s/Anthony P. Shutts
Anthony P. Shutts
Chief Financial Officer
Signing on behalf of the registrant and as
principal financial and accounting officer.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> APR-01-1997 JAN-01-1997
<PERIOD-END> JUN-30-1997 JUN-30-1997
<CASH> 1,278,000 1,278,000
<SECURITIES> 0 0
<RECEIVABLES> 10,648,000 10,648,000
<ALLOWANCES> 0 0
<INVENTORY> 10,455,000 10,455,000
<CURRENT-ASSETS> 34,087,000 34,087,000
<PP&E> 7,327,000 7,327,000
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 53,746,000 53,746,000
<CURRENT-LIABILITIES> 18,385,000 18,385,000
<BONDS> 8,074,000 8,074,000
0 0
0 0
<COMMON> 23,472,000 23,472,000
<OTHER-SE> 3,770,000 3,770,000
<TOTAL-LIABILITY-AND-EQUITY> 53,746,000 53,746,000
<SALES> 17,609,000 31,050,000
<TOTAL-REVENUES> 17,609,000 31,050,000
<CGS> 8,973,000 15,617,000
<TOTAL-COSTS> 17,701,000 32,191,000
<OTHER-EXPENSES> 694,000 1,112,000
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 433,000 3,526,000
<INCOME-PRETAX> (1,118,000) (5,560,000)
<INCOME-TAX> (557,000) (1,160,000)
<INCOME-CONTINUING> (561,000) (4,400,000)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (561,000) (4,400,000)
<EPS-PRIMARY> (.03) (.25)
<EPS-DILUTED> 0 0
</TABLE>
