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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO _____________
Commission file number 0-25488
THE L.L. KNICKERBOCKER COMPANY, INC.
(Exact 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 RANCHO
SANTA MARGARITA, CA 92688
(Address of Principal Offices) (Zip Code)
ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 858-3661
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
NONE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
Common Stock, No Par Value
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(title of class)
Common Stock Purchase Warrants*
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(title of class)
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
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Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
The issuer's revenues for the most recent fiscal year were $42,095,000.
The aggregate market value of the voting stock of the Registrant held by non-
affiliates of the Registrant, based upon the closing bid price of the Common
Stock on the NASDAQ National Market System on March 31, 1997 was $61,315,360.
Shares of Common Stock held by each officer and director and by each person who
owns 5% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes. The number of
shares outstanding of the registrant's Common Stock, as of March 31, 1997 was
17,638,356.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
Transitional Small Business disclosure Format (check one): Yes No X
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*The registration of the Common Stock Purchase Warrants was terminated on
January 25, 1997
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TABLE OF CONTENTS
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ITEM PAGE
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PART I
1. BUSINESS.............................................................. 1
A. History....................................................... 1
B. General Business.............................................. 1
2. PROPERTY.............................................................. 13
3. LITIGATION............................................................ 14
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................... 14
PART II
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. 14
6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................................ 15
7. FINANCIAL STATEMENTS.................................................. 18
8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE................................ 19
PART III
9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.................. 19
10. EXECUTIVE COMPENSATION................................................ 21
11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT..................................................... 23
12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................ 24
13. EXHIBITS LIST AND REPORTS ON FORM 8-K................................. 26
SIGNATURES............................................................ __
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PART I
This Annual Report on Form 10-KSB contains forward-looking statements within the
meaning of the Securities Act of 1933, as amended, and the Securities Exchange
Act of 1934, as amended, which involve risks and uncertainties, including, but
not limited to, economic, competitive, governmental and technological factors
affecting the Company's operations, markets, products, services and prices, and
other factors discussed herein. The Company's actual results could differ
materially from those projected in the forward-looking statements as a result of
the factors described in this Report.
ITEM 1. BUSINESS
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HISTORY
The L. L. Knickerbocker Co., Inc. (the "Company" or "LLK") was formed in 1985 by
Louis L. Knickerbocker, Chairman, President, and Chief Executive Officer of the
Company, and Tamara Knickerbocker, the Vice President of the Company, under the
name International Beauty Supply, Ltd., a California corporation ("IBS").
Subsequently, in 1987, LaVie Cosmetics, a California corporation ("LaVie"), was
co-founded by Louis L. Knickerbocker with Michael Elam. In 1989, the
Knickerbockers co-founded another company, MLF Enterprises, a California
corporation ("MLF"), with Mr. Elam and Farrah Fawcett, a director of the
Company. MLF developed replicas of Ms. Fawcett's jewelry collection, which were
sold through the television home shopping industry.
The Knickerbockers next formed Knickerbocker Creations, Ltd., a California
corporation ("Creations"), in 1990 and began developing the products and
celebrity endorsement programs which are now part of the Company. In 1993, due
to Creations' status as a Subchapter S corporation, it was determined that the
operations of Creations and IBS should be consolidated under a single entity in
order to facilitate the contemplated public offering of the Company. However, in
1993, the directors and shareholders of the Company were advised that Creations
would be an unsuitable candidate for a public offering. Therefore, on May 24,
1993, the directors and shareholders of IBS approved an amendment of the
articles of incorporation of the corporation changing the name of the
corporation from "International Beauty Supply, Ltd." to the Company's current
name, "The L. L. Knickerbocker Co., Inc." The Company then consummated an asset
purchase agreement whereby certain operating assets of Creations, including but
not limited to, the marketing and distribution rights to the products and
programs of Creations, were acquired along with certain related
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liabilities. As of the date hereof, all current active contracts of Creations
have been assumed or amended to grant those rights and obligations to the
Company.
The Company completed an initial public offering of common stock and warrants on
January 25, 1995. The Company issued 471,500 units (including 61,500
overallotment units) comprised of two shares of common stock and one common
stock purchase warrant. On August 30, 1995, the Board of Directors approved a
five for one split of the Company's common stock and the increase of the number
of authorized shares of its common stock to 100,000,000.
GENERAL BUSINESS
The Company markets a wide variety of branded consumer items ("Brands"),
including collectibles, costume and fine jewelry, fashion accessories, patented
consumer products and consumables. The Company strives to deliver genuine value
to the consumer through product design and quality, together with a fair price
for the item. The goal is to create and build each Brand to the point where the
Brand can be marketed through a variety of distribution channels.
Much of the manufacturing of non-jewelry items is outsourced. The Company
has developed relationships with a variety of dependable manufacturers that
consistently deliver high-quality products. Jewelry operations are vertically
integrated, and most of the design, stone sourcing, advanced stone cutting, and
jewelry manufacturing is performed by in-house personnel.
LLK also invests in companies whose innovative ideas have potential to make
a significant contribution to LLK's own financial success. These investments
include a 38.3% equity interest in Pure Energy Corporation, which is developing
an alternative fuel, and a 25% equity interest (on a fully diluted basis) in
both Ontro, Inc. (formerly Self Heating Container Corporation of California) and
Intsa-Heat, Inc., which develop self-heating containers for a variety of food
products. There can be no assurance that these investments will prove
successful.
The Company's current consumer Brands have been expanded in 1996 through
acquisitions and now include: Marie Osmond Fine Porcelain Collector Dolls,
Annette Funicello Collectible Bears, The Knickerbocker Collectible Toy Company,
Bob Mackie Legendary Beauties, The Georgetown Collection, The Magic Attic
Catalog, The Magic Attic Press, Barbara Mandrell Costume Jewelry, Nolan Miller
Costume Jewelry, Kenneth Jay Lane Costume Jewelry, Pilar Crespi Costume Jewelry,
Harlyn International Fine Jewelry, Mary McFadden Fashion Accessories, Dennis
Basso Fashion Accessories , Framm Accessories, ECT Ionizer, Fit
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& Firm(TM) by Florence Griffith Joyner, Life Time of Skincare Facial Steamer,
and Anushka Body Contouring Spa System.
The consumer Brands are marketed domestically and internationally through
diverse channels of distribution, including but not limited to, the television
shopping industry, direct response print advertisements, direct mail, catalog
and retail outlets. The Company attempts to diversify its risk profile by use of
a wide variety of branded items, marketing outlets and manufacturing sources. In
addition, the Company looks to these factors for opportunities for synergies
between the firm's various components. Celebrity spokespersons contribute to
many of the marketing efforts. These celebrities are chosen carefully on the
basis of name recognition, communications ability and a personal commitment to
participate in the programs.
During 1996, the Company made multiple acquisitions and alliances that expanded
its consumer Brands and expanded its distribution channels for all Brands. In
addition, the following acquired businesses and alliances may serve to leverage
combined product resources.
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11/95 Acquisition of 49% of the outstanding stock of Grant King
International Co., Ltd., of Bangkok Thailand, a jewelry design and
development company. Consideration consisted of 300,000 warrants
exercisable at $5.50 each.
3/96 Acquisition of 40% of the outstanding common stock of Pure Energy
Corporation, a Delaware Corporation, which is developing a propriety
alternative fuel. Consideration consisted of a commitment to fund up
to $1,000,000 of future development and marketing costs, 200,000
stock options exercisable at $8.50 per share, and 200,000 stock
options exercisable at $12.00.
6/96 Acquisition of 100% of the outstanding stock of Krasner Group, Inc.,
a Delaware corporation ("TKG") with operations involving the
manufacture and marketing of costume jewelry and accessories based in
New York. Consideration included common stock and common stock
purchase warrants granted in installments over a 12-month period
valued at approximately $3.1 million, a contingent amount of
approximately $2.2 million in value of common stock purchase warrants
payable upon the liquidation of the closing inventory of TKG, and a
guarantee to repay TKG's line of credit of approximately $1.8
million.
7/96 Acquisition of certain assets of S.L.S. Trading Co., Ltd., a cutting
and gemstone business, for $150,000 cash and $402,000 in ascribed
value of common stock purchase warrants.
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7/96 Acquisition of 100% of the outstanding common stock of Harlyn
International Company, Ltd., a fine jewelry company with
international distribution, for approximately $2,300,000 in cash.
7/96 Acquisition of the remaining 51% equity interest in Grant King
International Co., Ltd., of Bangkok Thailand, a jewelry design and
development company for $414,000 in forgiveness of indebtedness.
7/96 Merger of the operations of Grant King International Co., Ltd. and
S.L.S. Trading Co., Ltd. into a previously inactive Thai corporation
which was acquired and renamed The L.L. Knickerbocker (Thai)
Company, Ltd.
9/96 Acquisition of 25% of the common stock (on an fully diluted basis) of
both and Insta-Heat, Inc. (owner of patents for self heating
containers) and Self-Heating Container Corporation of California, now
known as Ontro, Inc. (licensed manufacturer of patented self heating
packaging) for a total of $650,000 in cash.
10/96 The Company purchased $2,000,000 of a $5,000,000 private placement of
equity by Pure Energy Corporation, a Delaware Corporation, which is
developing a propriety alternative fuel, and guaranteed a $1,000,000
credit line for PEC. The Company's ownership in Pure Energy upon the
closing of the transaction was approximately 38.3%.
11/96 Acquisition of approximately 82% of the outstanding stock of
Georgetown Collection, Inc., a collectible doll company, and its
wholly owned subsidiary, Magic Attic Press, Inc., a book publishing
company, for $1.7 million in common stock, and agreement to settle
$5.2 million of bank debt.
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The Company's general 5 year growth plan consists of focusing on the following
areas:
To expand the current consumer Brands by introducing new product
categories into the existing Brands.
To expand distribution of the consumer Brands internationally.
To explore additional acquisition opportunities that provide
complementary Brands for the current distribution channels, as well
as, augment distribution channels.
To continue to review new products and prospect the development of new
brands.
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MARKETING STRATEGIES
The Company's marketing strategy is to expand on its expertise in the
development of products and building of Brands utilizing diverse channels of
distribution for these consumer products. In implementing this strategy, the
Company plans to continue its focus on marketing Brands by developing a
product and selling the product to the appropriate level of distribution.
Generally, new Brand programs are conservatively tested prior to any roll out .
THE DIRECT MARKETING INDUSTRY
Direct marketing has five major areas: Television Marketing, Print Media
Advertising, Catalogs, Direct Mail and the Internet.
Television Marketing
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Television Shopping Channels, as well as independent Infomercials, make up
this segment of the distribution. According to "Response TV", a major industry
trade publication, the characteristics of the average Television Shopping
Channel viewers in 1996 were 74% female, 78% Caucasian, 67% married, and 77%
homeowners. The annual household income levels breakdown as follows; 13%-$25,000
to $35,000, 25%-$36,000 to $55,000 and 22% - $56,000 plus. Ninety percent of the
television sales transactions are done by consumer credit card. When asked "Why
buy from television?", 29% of the shoppers said there was a lack of availability
elsewhere, 25% said because of demonstration and testimonial, 19% said for
convenience, and 14% responded as impulse. Seventy-one percent of Television
Shoppers also shop by catalog. Five percent of these same shoppers said they
have shopped by the Internet.
Television Shopping Channels
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According to Response TV, the largest television shopping cable network is
QVC, followed by HSN. Newer home shopping cable networks that have sprung up
include Value Vision , Shop At Home, America's Collectible Network, Global
Shopping Network and The Music Shopping Network. According to Response TV, the
most popular consumer product categories are Jewelry, Exercise Equipment, and
Kitchen Appliances. The shopping networks purchase products from vendors and
generally require the vendors to ship the products to the networks' warehouses
before the network will sell the items on the air. Generally, the format of the
home shopping channels is to present approximately 12 new items per hour. Each
hour can be
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comprised of a special program (i.e. all Marie Osmond Dolls), or a mix of
products (i.e. a gift hour with different kinds of gift items). Special
programs, such as celebrity programs, can be given as much as three straight
hours of prime time. These types of programs must be high-dollar volume programs
to warrant the allocation of this time. The shopping channels then ship customer
orders directly from their warehouses/fulfillment centers.
The Company's expertise in marketing to home shopping channels has been to
identify its key product segments, (i.e. collectibles, environmental systems,
jewelry, and exercise equipment) and build Brand recognition within those
product segments. Wherever possible, the Company will concentrate on products
and upsells (a telemarketer pitch for incoming calls) which lend themselves to
continuity programs (sales items that need to be refilled) and the building of
back end business activities (additional marketing to the customer database).
Infomercials and Direct Response Spot Commercials
Infomercial format is different from the format of live home shopping cable
programs in that the infomercial is filmed, edited and produced rather than
being shown live. Infomercials are generally thirty minutes of programming while
spot commercials can be thirty, sixty or one hundred twenty seconds. The
infomercial business was founded only 12 years ago. As the cost of media rises
in the United States, infomercials are being used increasingly to create brand
awareness and to launch long term relationships with consumers. In addition,
retail support merchandise has become more and more important, as have back-end
marketing avenues. International outlets have also begun to be developed.
The Company plans to continue developing products through their partnership
agreement with Paxson Communications Corporation (AMEX: PXN). Paxson
Communications Corporation operates a media service, InTV. According to Paxson
Communications Corporation, InTV broadcasts in 22 of the top 50 TV markets with
a reach of 16 million cable homes and in 40.5 million broadcast homes. According
to the 1996 Infomercial Source Book, gross annual sales generated by
infomercials were estimated to be $811.0 million in 1996. The Company's policy
for infomercial development is to cautiously test products via the home shopping
cable channels followed by the infomercial running on InTV media stations, and
then to a full media roll out.
Direct Response Print and Mail Advertising
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The Company's direct response print advertising focuses on a narrow product
selection with potentially high dollar volume sales. The Company continues to
market its collectible Brands through this channel of
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distribution. In addition to mainstream publications such as Woman's Day,
McCalls, Women's World and the National Enquirer, the Company advertises in
collectible trade specific niche publications including DOLLS, Doll Craftier,
Doll Reader, Contemporary Dolls, Collectors Mart, Teddy Bear Review and Teddy
Bear & Friends.
The Company manages direct mail programs by utilizing an in-house consumer
data base to test and build new concepts for selected Brands and categories. To
build on the in-house data base the Company rents distinct targeted mailing
lists.
Traditional Retail and Distributors
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The Company markets to a wide variety of traditional retail outlets such as
Disney Stores and other independent gift and collectible retailers, and to the
less traditional catalog retailers and distributors. Currently the Brands have
distribution strategies based on the product being marketed, however, where
possible the distribution channels cross over from Brand to Brand.
CORE BUSINESS
Collectibles
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According to Unity Marketing, an industry trade publication, sales of
collectibles and giftware in the United States are estimated to exceed $6
billion annually, and approximately 11 million households collect giftware
products. The doll segment is believed by Unity Marketing to be approximately
one-fourth of the total collectibles and giftware industry. The Company builds
its collectibles Brands in measured fashion, rather than saturating all
marketing channels immediately, in order to attempt to build the long-term value
of the Brands.
Georgetown Collection, Inc. ("GCI"). The GCI Brand consists of high-quality,
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exclusive-edition porcelain dolls designed and developed by licensed artists
in conjunction with an in-house development team. Manufacturing is outsourced
to factories in China and Southeast Asia. The dolls' retail prices range between
$90 and $145. The principal marketing channel is print media, including direct
mail and space ads in such publications as McCalls and Family Circle, as well as
free standing inserts in newspapers. This Brand was first marketed on QVC in
February 1994. The Company plans to continue to develop distribution of this
Brand through the television shopping channels.
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Magic Attic Club ("Club"), an operating division of GCI, is a catalog
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collection that features a series of 18-inch vinyl dolls, doll clothing and
accessories, all of which are based on the Magic Attic Press' novels. The
books and Club catalogs target girls in the U.S. between the ages of 6 and 12.
The girls in this age group, approximately 12 million in number in 1994,
according to the 1994 United States Census, have generally outgrown most
products offered by mainstream toy companies, and the Company positions this
Brand to appeal to the interest these girls develop in the characters
portrayed in the Magic Attic Press' novels.
Magic Attic Press, a wholly owned subsidiary of GCI, sells a series of 17
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illustrated novels based on four girls and their adventures. The books have
achieved national distribution and have penetrated many of the major book
chains. Each Magic Attic Press book contains a mail-in card to request a
catalog listing products offered by the Magic Attic Club.
The items in the Magic Attic Club catalog do not vary much year to year, which
keeps creative costs low and minimizes inventory difficulties. Repeat
customers are highly profitable due to the minimal marketing costs relating to
obtaining orders, and the lifetime value of a collectible customer is quite
high by catalog industry standards. In 1996, the Club mailed approximately
four million catalogs, which was nearly double the year-earlier total. The
Company expects catalog mailings to continue to grow.
Marie Osmond Fine Porcelain Collector Dolls. This collection consists of more
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than 375 different styles at retail prices ranging from $20 to $600. Marie
Osmond is the celebrity spokesperson and design director for the
collection. The Marie Osmond Doll Collection, celebrating its fifth
anniversary, received four hours of air time on QVC in August 1996 during a
Collectors Day weekend special; sales at the retail level during that
special program surged to more than $5.6 million. The program has generated
revenue for the Company in excess of $28.0 million from its inception in
1990 through December 31, 1996. Revenue from this program for the year
ended December 31, 1996 was approximately $10.0 million.
Annette Funicello Collectible Bears Company. This line consists of more than
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250 different styles of collectible teddy bears. Retail prices range from
$25 to approximately $200. Annette Funicello is the celebrity spokesperson
and design director for the collection. The Brand received two prestigious
industry awards in 1996 for which it was nominated by the collectible trade
publications and voted on by the public. The Annette Funicello Collectible
Bear line has generated over $5.6 million in sales for the Company since
its introduction in 1991. Revenue from this program for the year ended
December 31, 1996 was approximately $3.0 million representing a 460%
increase over 1995.
Bob Mackie, Legendary Beauties. A collection of fashion dolls, designed by
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Bob Mackie (US), Inc., are sold by the Company through direct response
advertising. Retail prices are approximately $300. Bob Mackie is
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the collection's designer and spokesperson , and LLK has licensed use of
the mark "Bob Mackie" in connection with this Brand.
The Knickerbocker Collectible Toy Company. The Knickerbocker name is well
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recognized in the toy and collectible teddy bear industries. The Company began
selling collectible Knickerbocker products in October 1986, and was issued the
trademark "Knickerbocker" for toys, dolls, stuffed animals, plush
animals and marionettes in January, 1996. The collection offers quality
collectible toys through the print advertisement and catalog marketing venues.
LLK Jewelry and Accessories
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LLK has acquired a number of jewelry-related businesses, which have diverse
products, markets and marketing channels. The Company's jewelry operations are
now vertically integrated, with control over stone sourcing and cutting,
design structures, manufacturing and marketing. These capabilities should
enable the Company to enter new jewelry markets quickly, and the Company's
jewelry business is increasing its international presence in the jewelry
industry. According to ResponseTV, the jewelry business represents
approximately 44% of the total business on television shopping.
Costume Jewelry. The Company markets its high-quality, designer costume
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jewelry lines and fashion accessories primarily through QVC. The Company's
competitive position seems to be particularly strong, since the Company's
multiplicity of product lines seem to be unique. LLK has its own jewelry
manufacturing facility in Rhode Island.
The Company's three jewelry programs presently airing on QVC are Nolan Miller,
Kenneth Jay Lane, and Pilar Crespi. The Company also produces two fashion
accessories programs for QVC, Mary McFadden and Dennis Basso, as well as, the
newly introduced Framm fashion accessories.
Fine jewelry. The Company's fine jewelry subsidiary is based in Bangkok,
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Thailand. The fine jewelry manufacturing operation, which was acquired in July
1996, markets gold, diamonds, emeralds and rubies through a sales force whose
primary geographic focus is in Western Europe and South America, as well as
television sales in the United States.
The July 1996 acquisition of S. L. S. Trading Co. Ltd. ("SLS") brought to the
Company SLS's expertise in stone sourcing and advanced cutting techniques for
specialty stones. SLS, which created techniques for enhancing the color of
gemstones, owns certain rights to proprietary technology related to such
techniques and is known particularly for its "Blue Topaz" manufacturing
techniques.
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The Company's fine jewelry sales for calendar year end 1996 were approximately
$11.0 million. The Company plans to broaden its jewelry product line and expand
its jewelry distribution. The Company's jewelry divisions will operate to serve
each other by providing, on the one hand, the specialty stones and, on the other
hand, the jewelry manufacturing and distribution functions.
PATENTED PRODUCTS
Environmental Control Technology ("ECT") Ionizer. This device helps to remove
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potentially harmful particles (including cigarette smoke, bacteria, dust and
pollen) from indoor air. This product, featuring patented technology, was
developed by the Company in conjunction with an environmental systems company,
and is covered by exclusive licensing agreements from QVC, with a remaining term
through February 1998. Since this product was introduced on QVC in March of
1994, the Company has granted QVC worldwide distribution rights for the Ionizer.
The retail price of the product is approximately $88, and James Yehl, an
ionization expert, is the spokesperson. Since its introduction in 1994, this
product has generated revenue for the Company of approximately $5.5 million
through December 31, 1996.
EQUITY INVESTMENTS
The Company's corporate strategy includes searching for investment opportunities
that may offer high returns on invested capital. In 1996, the Company made two
equity investments in companies.
Pure Energy Corporation. The Company holds a 38.3% interest in privately owned
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Pure Energy Corporation ("PEC"). Other shareholders include PEC's founders and
officers, Donaldson, Lufkin & Jenrette ("DLJ"), and private individuals. In
1996, DLJ signed a one-year agreement to act as PEC's exclusive financial
advisor. The advisory agreement called for DLJ to become the beneficial owner of
5% of PEC Class B stock. DLJ has a highly regarded energy group and will assist
PEC in business planning, management recruitment and capital raising.
The Energy Policy Act of 1992 ("EPACT") and the Clean Air Act Amendments of 1990
("CAAA") set forth stringent emission standards and vehicle purchase
requirements for state and federal fleet customers and eventually a broader
segment of the motoring public. EPACT mandates that alternative fueled vehicles
account for 75% of federal and state fleet purchases of light duty vehicles by
the year 2000. States are developing their own responses to CAAA. These
initiatives could have significant benefits for the
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environment, by reducing hydrocarbon and greenhouse emissions; for energy
security, by reducing U.S. dependence on imported oil; and for the economy, by
creating new jobs and reducing the trade deficit.
PEC's stated objective is to design, produce and market alternative motor fuels.
In conjunction with a Princeton University scientist, it has developed a
proprietary alternative motor fuel ("Fuel") that is clean-burning, largely
renewable, potentially cost-competitive with gasoline, and usable in new and
existing flexible-fuel vehicles. A patent on the Fuel is pending, and PEC holds
an exclusive license for worldwide distribution of the Fuel, subject to the
payment of royalties for the patent rights to the Fuel that are held by
Princeton University. PEC is seeking to have its Fuel designated as an
Alternative Fuel under EPACT, while seeking to have the Fuel be compatible with
as many state objectives/standards for clean fuels as practical.
The Fuel is best used in flexible-fuel vehicles that are designed to handle
alcohol fuels. Development and testing of the Fuel was carried out on a 1996
Ford Taurus flexible-fuel vehicle, with consultation from Ford engineers, that
was designed to run E85 (a blend of 85% ethanol and 15% gasoline). The
flexible-fuel vehicle automatically adjusted to run the Fuel, gasoline or any
combination of the two. Existing flexible-fuel vehicles will operate on the Fuel
without modification.
The Fuel has clean emissions characteristics, as it contains essentially no
undesirable olefins, aromatics or sulfur. In tests performed by an EPA-
recognized independent laboratory, the Fuel reduced hydrocarbon emissions by as
much as two-thirds relative to gasoline, and carbon monoxide emissions by nearly
half. Continuing optimization of engine programming and the Fuel might further
reduce emissions.
The Fuel is a blend of ethanol, a hydrocarbon, and other ingredients. With the
exception of the hydrocarbon, the components are derived from renewable biomass,
such as waste paper, agricultural waste or purpose-grown crops, urban/industrial
woodwastes, and, possibly, secondary sewage sludge. The biomass-derived
components may be produced with existing processes, some of which are patented
by others. PEC is assessing a number of technologies to create key components
from cellulosic material, and it has engaged the consulting firm of Booz-Allen &
Hamilton to assist in the process. PEC intends to align itself with or to
develop methods of manufacturing its key components. To that end, PEC is
establishing a pilot production facility.
Blending uses conventional rack-blending techniques for ethanol-containing motor
fuels, and compositions can be formulated for winter/summer blends or to meet
octane requirements. PEC plans to seek other related formulations to address
production economics, local feedstock availability, emissions characteristics,
and regulatory and market imperatives.
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In February 1997, the Company announced that PEC and Arkenol Holdings, L.L.C.
entered into a research and development agreement to produce bio-based chemicals
for alternative motor fuel. Arkenol is a privately held bio-refining company
based in Mission Viejo, California. The agreement specifies a research phase
followed by the design, construction and operation of a pilot plant for PEC by
Arkenol. The two companies have also signed a letter expressing interest in
cooperating in the future in areas relating to the production of PEC's
alternative motor fuel and the manufacture of bio-based chemical ingredients of
the fuel.
In August 1996, PEC entered into an agreement whereby Merrick G. "Rick"
Andlinger will serve as PEC's President and CEO. Mr. Andlinger was previously
with Smith Barney, Inc. as Managing Director in Corporate Finance and Co-head of
a 30-person Global Energy and Power Group. He had earlier been a founding member
of Salomon Brothers' Energy and Chemicals Group and has an M.B.A. from Stanford
University Graduate School of Business and an undergraduate degree from
Princeton.
Other PEC directors are Doug Dunlop (co-founder of PEC and an attorney), Scott
Dunlop (co-founder of PEC and president of a diversified marketing and
consulting company), Louis Knickerbocker (Chairman and CEO of the Company) and
Robert Irwin (a Vice President of DLJ).
In March 1997, the Company engaged a key Washington, D.C. consultant to
represent its interest in Pure Energy Corporation. This consultant, Larry S.
Dewey, has 20 years experience with the Department of Energy and was recently
appointed by that Department to the President's Committee of Advisors on Science
and Technology, a non-government board that makes recommendations to the
administration regarding National Strategy for Energy Research and Development.
Insta-Heat, Inc. and Self-Heating Container Corporation of California (now known
- --------------------------------------------------------------------------------
as Ontro, Inc.) In September 1996, the Company purchased a 25% equity interest
- ---------------
(on a fully diluted basis) in both Ontro, Inc. and Insta-Heat, Inc. Insta-Heat,
Inc. holds the patents to a specialty foods container which automatically heats
the food contents of the container. Pushing a button on the bottom of these 12
and 16 ounce containers starts a chemical reaction, which in less than five
minutes warms the containers' contents to a pre-determined temperature. This
product received the Product of the Year Award at the Invention Convention in
1995. Ontro, Inc. owns the patent rights and manufacturing rights for the Insta-
Heat, Inc. self heating containers.
In addition to its equity investments in Ontro and Insta-Heat, the Company holds
exclusive worldwide rights to market and distribute celebrity-driven products,
developed and produced by the Company pursuant to the Insta-Heat, Inc. patents,
through infomercials, direct response television and television shopping
channels. Terms of the five-year license agreement, with an additional five-year
option, provide that the Company pay
<PAGE>
a royalty on sales, and use its best efforts to identify a celebrity
spokesperson to assist in developing and marketing the Ontro products.
SUMMARY OF REVENUE BY PRODUCT LINE
In 1996, revenue for the Company was $42,095,000. Television shopping channels
accounted for approximately 43% of the Company's revenue in 1996. The remaining
1996 sales were generated through wholesale and retail customers and the
Company's efforts in alternative direct response channels of distribution. The
breakdown per product line for revenue in 1996 is as follows:
Year ended December 31, 1996
<TABLE>
<CAPTION>
Category $000's Percent
-------- ------ -------
<S> <C> <C>
Collectible dolls and bears 25,415 60.4%
Fine Jewelry 10,195 24.2%
Costume Jewelry & Fashion Accessories 5,805 13.8%
Other Consumer Products 680 1.6%
------ ------
Total 42,095 100.0%
====================
</TABLE>
CONSUMER BRANDS UNDER DEVELOPMENT
Barbara Mandrell Jewelry, (Jewelry Brand) The Company will attempt to further
- -------------------------
expand its designer costume jewelry lines with a jewelry Brand designed and
developed by Barbara Mandrell. Ms. Mandrell will also act as spokesperson for
the collection subject to an agreement with a remaining term of six years. The
Company intends to create, design, develop, manufacture and sell this Brand of
high quality costume jewelry through television shopping, direct mail and
retail. A launch with QVC for this Brand is scheduled for Spring 1997.
Anushka cosmetic and skin/body treatment products, (Consumable Brand) The
- --------------------------------------------------
Company's Krasner subsidiary has signed an agreement with Anushka, Inc. for the
production and sale of cosmetic and skin/body treatments. The Company is
expected to market these products through television shopping, infomercials,
direct response and retail channels. A launch with QVC for this Brand is
scheduled for Spring of 1997.
<PAGE>
Facial Steamer Systems, (Patented Brand) The Company holds worldwide
- -----------------------
manufacturing, marketing and distribution rights to these patented, hand-held
devices for facial treatments under an agreement which provides for the payment
of royalties during the remaining two years of the term of the agreement. The
devices emit a moisturizing steam designed to rehydrate the skin and reduce fine
wrinkles. The steamer systems will be sold with, and used in conjunction with
Lifetime of Skincare consumable products. Dr. Nardo Zias, a dermatologist, is
the spokesperson. A launch with QVC is expected for the second quarter of 1997.
Fit & Firm(TM) exercise equipment, (Patented Brand) This licensed equipment has
- ----------------------------------
been developed through a joint venture between the Company and Paxson
Communications which provides for the Company to develop and market this Brand,
and for Paxson Communications to provide advertising expertise to promote sales
of the Brand. The spokesperson is Olympic Gold Medalist Florence Griffith
Joyner. Fit & Firm(TM) is licensed exercise equipment developed by Brainstorm
Product Development ("Brainstorm") and licensed to the Company pursuant to a
licensing agreement which provides for the payment of royalties to Brainstorm
over the term of the agreement, which lasts for one year, with options to extend
the agreement for four additional one-year terms . The equipment is scheduled to
be launched on QVC in the first quarter of 1997.
The Richard Simmons Such an Angel Collection, (Collectible Brand) The Company
- ---------------------------------------------
has an exclusive license agreement to manufacture and distribute the line of
dolls, as well as angel, fairy and dalmatian figurines with Richard Simmons and
Goodtimes Entertainment. The license provides for the payment of royalties
during the 3 1/2 year term of the agreement, and requires specific approvals
from Richard Simmons which have resulted in several design changes and launch
delays. The line is expected to be introduced into the market in the fourth
quarter of 1997.
The Honeymooners Collection, (Collectible Brand) The Company has a license
- ----------------------------
agreement to manufacture and distribute porcelain dolls and figurines depicting
the characters from the original Honeymooners television show. The license
provides for the payment of royalties during the two year term of the agreement.
The Company is currently working with Jackie Gleason's daughter, Geri Chutuk, to
approve the final design. The collection is scheduled to be launched second
quarter of 1997.
Although the Company currently believes that the above listed products can be
developed and produced as commercially viable product line additions, there can
be no assurance that the new products will be introduced or, if introduced, that
they will be successful.
<PAGE>
PRODUCTION PROCEDURES
Contracted Consumer Brands
- --------------------------
Each Brand, outside of the Company's Jewelry, has a Brand Manager who is
responsible for costing and designating the manufacturing source for each
product and for monitoring the quality control of the finished product. The
quality standards are reviewed by the Brand Manager, and products are inspected
by an independent inspection company with a Company representative present on
occasion.
The Company designs the product, locates an appropriate contract manufacturing
facility and prepares samples, which are presented to the customer for approval.
Upon approval of the samples by the customer, the customer issues a purchase
order to the Company for the desired quantity of the product. In some cases the
purchase order is secured by an irrevocable and transferable letter of credit,
and the order is placed with the Company's contract manufacturer for production.
Under certain circumstances the Company manufactures product for sale without an
irrevocable and transferable letter of credit.
Company Owned Consumer Brands and Products
- ------------------------------------------
The Company's costume jewelry is manufactured in its 26,000 square foot facility
in Rhode Island. All of the costume jewelry manufacturing is done against open
purchase orders. The Thailand operation manufactures fine jewelry for a diverse
group of international distributors as well as the television shopping industry.
MATERIAL CONTRACTS
Pure Energy Corporation
- -----------------------
The Company entered into an agreement with Pure Energy Corporation in March 1996
to purchase 40% of the outstanding capital stock of Pure Energy Corporation in
exchange for options to purchase 200,000 shares of the Company's capital stock
for $8.50 per share and 200,000 shares of the Company's capital stock for $12.00
per share, and a funding commitment of the Company to advance up to $1,000,000
million for the development of a proprietary alternative fuel by Pure Energy
Corporation.
<PAGE>
Subsequently, in October 1996, the Company purchased $2,000,000 of a $5,000,000
private placement of equity by Pure Energy Corporation, and guaranteed a
$1,000,000 credit line for PEC. The Company's ownership in Pure Energy upon the
closing of the transaction was approximately 38.3%.
Paxson Communications, Inc.
- ---------------------------
The Company entered into a joint venture with Paxson Communications Corporation
on December 21, 1995. The Company will devote marketing management services to
the joint venture. Initially, the joint venture will develop six individual
products and services for marketing through the home shopping industry. The
joint venture is structured as a general partnership between Paxson
Communications, Inc. and the Company named Paxson/Knickerbocker Media Marketing.
Richard Simmons
- ---------------
On May 1, 1995, the Company entered into a License Agreement with SIM-GT
Licensing Corp. to license the name, likeness and trademarks of Richard Simmons.
The Company has been granted the exclusive license to manufacture and distribute
the line of angel, fairy and dalmatian figurines under development with Richard
Simmons and Goodtimes Entertainment. The license provides for the payment of
royalties to Simmons and Goodtimes Entertainment during its 3 1/2 year term. The
line of porcelain angel dolls is expected to debut in the fourth quarter of
1997.
Bob Mackie (US), Inc.
- ---------------------
The Company entered into a License Agreement with Bob Mackie (US), Inc. on May
1, 1994 with respect to the use of the mark "Bob Mackie." The material terms of
the Agreement provide that Bob Mackie (US), Inc. will develop a group of doll
designs for sale to QVC Cable Television. All articles produced from the designs
are subject to the inspection and approval of Bob Mackie (US), Inc. The
Agreement will expire in July 1997, but it may be renewed by the Company with
notice for an additional twelve months. The agreement provides for the payment
of royalties to Bob Mackie (US), Inc. during the term of the agreement.
QVC Network, Inc.
- -----------------
The Company entered into a License Agreement with QVC Network, Inc. on September
29, 1993 with respect to the marketing, promotion, distribution and sale of the
ECT Clean Room System Ionizers and related products. The material terms of the
Agreement provide that the Company grants to QVC Network, Inc. the exclusive
license, rights and privilege to promote the products worldwide. The initial
term of the
<PAGE>
Agreement was two years after the first QVC broadcast featuring the
products, which was March 4, 1994, and the Agreement automatically and
continuously renews for additional two year terms unless the Company gives
notice of its intent not to renew at least 30 days prior to the end of a term,
or net purchases by QVC Network, Inc. are less than $6.3 million during the
first term, and 110% of the preceding minimum amount during each succeeding
renewal term. The Company is required to provide the services of Jim Yehl as the
spokesperson for the products for a maximum of twelve personal appearances on
QVC Cable Television per year. QVC Network, Inc. has the right, but is not
obligated, to purchase the products from the Company upon issuance of purchase
orders, and, if the Company sells to parties other than QVC Network, Inc., it is
required to pay a commission to QVC Network, Inc. on sales of all the products
sold by the Company to re-sellers and end users.
American Environmental Systems, Inc.
- ------------------------------------
Knickerbocker Creations, Ltd. entered into a Product Development and License
Agreement with American Environmental Systems, Inc. on August 4, 1992 with
respect to the development of the ECT Clean Room System Ionizers and related
products (the "Product Development and License Agreement"). A second agreement
was entered into between the parties on October 22, 1992 with respect to the
licensing of the trademark "ECT" (the "Trademark License Agreement"). The
agreements were assigned to the Company with the consent of American
Environmental Systems, Inc. effective September 28, 1993.
The material terms of the Product Development and License Agreement provide that
the Company pay a development fee to American Environmental Systems, Inc. in
exchange for the license, rights and privilege to manufacture, sell and
distribute the products. The Company is solely responsible for the costs of
manufacturing, distribution, advertising and sales of the products, once they
are developed. American Environmental Systems, Inc. receives royalties on the
proceeds received by the Company from all sales of the products covered by the
Agreement. The Company is entitled to the services of James Yehl as the
spokesperson for the products for a minimum of ten personal appearances on QVC
Cable Television per year. Other than the termination for failure to make
minimum royalty payments or breach of the terms of the Agreement, the Agreement
will remain in force indefinitely.
The material terms of the Trademark License Agreement provide that the Company
pay a royalty on the proceeds received by the Company from all sales of the
products using the trademark "ECT" and which are covered by the Product
Development and License Agreement. The term of the Trademark License Agreement
is the length of time that the Product Development and License Agreement remains
in force.
Cello, Inc.
- -----------
<PAGE>
The Company entered into a License Agreement with Cello, Inc. ("Cello") on May
13, 1994 with respect to the services of Annette Funicello. The material terms
of the Agreement provide that the Company will design, develop and manufacture
collectible teddy bears and dolls, and such other products as the parties shall
agree on, with the approval of Cello. Cello retains all intellectual property
rights to the products, and the Company is solely responsible for the costs of
manufacturing, distribution, advertising and sales. Cello receives royalties on
the proceeds received by the Company from all sales of the products covered by
the Agreement, less credit for returned items. The Company is required to keep
products liability and spokesperson liability insurance to cover the products
and the parties. The Agreement terminates in January 1998, but the Company has
the option to renew the Agreement for an additional three year term.
Marie, Inc.
- -----------
The Company entered into a License Agreement with Marie, Inc. on April 1, 1993
with respect to the services of Marie Osmond. The material terms of the
Agreement provide that the Company will design, develop and manufacture dolls,
and such other products as the parties shall agree on, with the approval of
Marie, Inc. The Company retains all intellectual property rights to the products
unless they contain Marie Osmond's name, and the Company is solely responsible
for the costs of manufacturing, distribution, advertising and sales. Marie, Inc.
is bound to provide the services of Marie Osmond as the spokesperson for the
products, subject to Marie, Inc.'s approval of commentary and production. Marie,
Inc. receives royalties on the proceeds received by the Company from all sales
of the products covered by the Agreement, less credit for returned items. The
Company is required to keep products liability and spokesperson liability
insurance to cover the products and the parties. The Agreement is for a five
year term, and expires on April 1, 1998, except that Marie, Inc. has the right
to terminate the Agreement if it does not receive certain minimum royalties
during any one year, and the Agreement may be renewed by the Company for an
additional five years if Marie, Inc. has received above a certain amount in
royalties during the last year of the initial term. To date the Company has met
all contractual minimum payments.
TRADEMARKS AND LOGOS
The Company has the right to use the trademark names of the
following spokespersons and celebrities currently under contract in connection
with the marketing of the Company's products: Marie Osmond, Annette Funicello,
Bob Mackie, Richard Simmons, Gleason , the Honeymooners Jim Yehl, Nolan Miller,
Mary McFadden, Kenneth Jay Lane, Dennis Basso, Pilar Crespi, Barbara Mandrell,
Anushka, Albert Capraro and Framm. The Company has also been issued trademarks
under the following names:
<PAGE>
Knickerbocker Bears, Knickerbocker Dolls, Knickerbocker Toys, Knickerbocker
Collectibles and Knickerbocker and Knickerbocker Direct. Trademark applications
have been filed for "Adora Belle." The Company also has a marketing and
licensing agreement with QVC to manufacture and sell the Environmental Control
Technology ECT Ionizer. QVC has filed an application for registration of the
name.
COMPETITION
The direct marketing business is highly competitive and many of the Company's
competitors have substantially greater financial and personnel resources than
the Company. The Company believes that its primary competitors in direct
marketing are difficult to distinguish because the Company is involved in five
types of direct marketing: Television Shopping, Infomercials, Print Media
Advertising, Catalogs and Direct Mail. The Company feels, however, that its main
competitors are Danbury Mint, Amcor, National Media, the Vermont Teddy Bear
Company, and JMAM, Inc. The Company also competes with a variety of wholesalers,
retailers and other direct marketers. In addition, obtaining product acceptance
by QVC, HSN and others is very competitive because of the increased exposure,
recent success of the home shopping industry, and increase in the number of
companies vying for spots on the home shopping channels.
EMPLOYEES
The Company employs 520 total employees in the Company's locations as follows:
Employed at the Company's main office in Rancho Santa Margarita, California as
of March 15, 1997, the Company has 45 full time and 4 part time employees. The
45 full time employees are comprised of 4 executives, 12 product development, 4
sales, 10 administrative, 7 customer service and 8 warehouse employees. The 4
part time employees are comprised of 2 warehouse and 2 general office employees.
Employed at the Company's Krasner Group office in New York, New York as of March
15, 1997, the Company has 7 full time employees. The 7 full time employees are
comprised of 2 executives and 5 general sales and office administrative
employees.
Employed at the Company's Charisma factory in Central Falls, Rhode Island as of
March 15, 1997, the Company has 83 full time employees. The 83 full time
employees are comprised of 2 executives, 16 general sales and office
administrative employees, and 65 factory employees.
<PAGE>
Employed at the Company's Georgetown Collection, Inc. offices in Portland, Maine
as of March 15, 1997, the Company has 103 full time employees. The 103 full time
employees are comprised of 2 executives, 68 general sales and office
administrative employees and 33 warehouse employees.
Employed at the Company's L.L. Knickerbocker Company, Thailand offices in
Bangkok Thailand as of March 15, 1997, the Company has 278 full time employees,
comprised of 7 executives, 47 general sales and office administrative employees,
and 224 factory employees.
ITEM 2. PROPERTY
- ------- --------
As of Mach 27, 1997, the Company had 11 principal facilities where it leased or
owned an aggregate of 219,400 square feet of space. The location, function and
general description of the principal properties owned or leased by the Company
are set forth in the table below:
<TABLE>
<CAPTION>
SQUARE
LOCATION PRINCIPAL FUNCTION FOOTAGE OWNERSHIP
<S> <C> <C> <C>
CORPORATE
---------
Rancho Santa Margarita, CA Corporate headquarters, finance,
purchasing, service division
headquarters 10,000 Leased
COLLECTIBLE DOLLS AND BEARS
---------------------------
Rancho Santa Margarita, CA Product development, marketing,
warehouse 10,000 Leased
Portland, ME Administration, product
development, marketing and
warehousing 45,000 Leased
Portland, ME Administration, product
development, marketing and
warehousing 40,000 Leased
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Exton, PA Product development 2,900 Leased
COSTUME JEWELRY
---------------
New York, NY Administration, product
development and marketing 5,000 Leased
Central Falls, RI Manufacturing 26,000 Leased
Pawtucket, RI Fulfillment and warehousing 12,000 Leased
Pawtucket, RI Fulfillment and warehousing 30,000 Leased
FINE JEWELRY
------------
Bangkok, Thailand Administration, product
development, marketing and
showroom 3,500 Owned
Bangkok, Thailand Manufacturing and administration 35,000 Owned
</TABLE>
- ----------
The Company believes that the properties are in good condition, suitable for its
operations and adequately insured.
ITEM 3. LITIGATION
- ------- ----------
On February 27, 1996 a lawsuit was filed in Orange County Superior Court, Case
No. 759883, naming Louis L. Knickerbocker, Tamara Knickerbocker and the Company
as defendants. The plaintiff, Michael Elam, is a minority stockholder in MLF, a
company in which Mr. Louis Knickerbocker, Chairman, President and Chief
Executive Officer of the Company, and Ms. Farrah Fawcett, a director of the
Company, own an interest. Mr. Elam's lawsuit seeks damages for sums allegedly
owed to him by Mr. Knickerbocker and the Company from the operations of that
company. Counsel for the Company believes that the demand is
<PAGE>
unfounded and that the lawsuit is without merit. The Company has been vigorously
defending the lawsuit, which is currently in the discovery phase. The Company
has tendered a claim for costs of the defense to its Directors' and Officers'
Insurance carrier.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
- ------- -------------------------------------------------
STOCKHOLDER MATTERS
-------------------
STOCK MARKET AND OTHER INFORMATION
The Company's common stock is listed on the NASDAQ National Market System under
the symbol "KNIC" and has been so listed since January 25, 1995. Previous to
such date, there was no public trading market for the Company's equity
securities. In addition, warrants to purchase up to 2,357,500 shares of the
Company's Common Stock were listed on the NASDAQ National Market System under
the symbol "KNICW." On January 25, 1997, the warrants expired. The registration
of the warrants under Section 12(g) of the Securities Exchange Act of 1934, as
amended, was terminated on January 25, 1997 and the listing of such warrants on
NASDAQ National Market System was terminated on January 25, 1997. The terms of
the warrants provide that one warrant plus $1.30 was required to purchase one
additional share of the Company's common stock. The warrants were redeemable at
the Company's option commencing March 15, 1995 upon 30 days notice to the
warrant holders at $0.01 per share if the closing bid price of the Common Stock
averaged in excess of 110% of the then current exercise price of the warrants
for a period of 20 consecutive trading days ending within 15 days of the notice
of redemption.
On March 31, 1997, the Common Stock bid price closed at $6.125 per share. The
closing bid price of the Company's stock on December 31, 1996 was $6.125 per
share. The total volume of shares traded during the
<PAGE>
year ended December 31, 1996 was 23,564,400 shares. As of March 31, 1997, there
were 123 holders of record of the Company's Common Stock.
The following table presents information on the high and low prices per share
for the Company's Common Stock for each fiscal quarter in 1995 and 1996 as
reported by the NASDAQ National Market System. The following quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission, and may
not represent actual transactions.
<TABLE>
<CAPTION>
1995 1996
High $ Low $ High $ Low $
-----------------------------------
<S> <C> <C> <C> <C>
First Quarter 1.18 0.75 9.44 6.38
Second Quarter 1.10 0.73 16.25 7.75
Third Quarter 10.40 1.05 16.25 8.00
Fourth Quarter 9.50 4.50 11.50 5.75
</TABLE>
DIVIDENDS
The Company has never paid any dividends on the Common Stock. The Company
intends to retain earnings and capital for use in its business and does not
expect to pay any dividends within the foreseeable future. Any payment of cash
dividends in the future on the Common Stock will be dependent on the Company's
financial condition, results of operations, current and anticipated cash
requirements, plans for expansion, restrictions, if any, under debt obligations,
as well as other factors that the Board of Directors deems relevant.
TRANSFER AGENT AND REGISTRAR
American Securities Transfer, Inc. of Colorado has been appointed and serves as
transfer agent and registrar of the Company's Common Stock and Warrants.
<PAGE>
ITEM 6. 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-KSB.
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 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 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.,
<PAGE>
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,
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% ownership
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.
The Company canceled plans to market a patented, painless hair removal system,
called "Classy Lady". The Company canceled marketing the painless hair removal
system due to long delays in obtaining FDA approval.
<PAGE>
As a result of the Company's growth in its television shopping business, and the
acquisitions, the Company has scaled back 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.
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1996
---- ----
<S> <C> <C>
Revenue 100.0% 100.0%
Cost of Revenue 48.2% 50.6%
Gross Profit 51.8% 49.4%
Operating Expenses 36.3% 40.3%
Operating Income 15.5% 9.1%
Other Income (Expense) 0.8% -4.5%
Net Income 9.7% 3.3%
</TABLE>
Revenues
Revenues increased 220% from $13,140,000 in 1995 to $42,095,000 in 1996. The
increase in revenues is primarily a result of the acquisitions completed during
the year which expanded the consumer product lines the Company offers. In the
Company's core business, decreases in revenues from sales of ionizers and
marketing services were more than offset by the growth in the Company's doll and
bear business. On a pre-acquisition basis, revenues from the Company's Marie
Osmond Collectible Doll program increased 91.5% from $5,368,000 in 1995 to
$10,280,000 in 1996. Revenues
<PAGE>
from the Company's Annette Funicello Collectible Bear program increased 455%
from $535,000 in 1995 to $2,969,000 in 1996. As a result of the Company's focus
on collectibles and jewelry programs, revenues from the Company's Ionizer
program decreased from $1,972,000 in 1995 to $143,000 in 1996. The Company
scaled back its performance of marketing services with revenues decreasing from
$3,631,000 in 1995 to $460,000 in 1996.
Gross profit
Gross profit increased 205% from $6,813,000 in 1995 to $20,803,000 in 1996 due
primarily to the acquisitions completed during the year and the increase in
volume of the Company's core business. Gross profit, as a percentage of net
revenues, decreased from 51.8% in 1995 to 49.4% in 1996 due primarily to the
range of distribution and the diverse product mix which the Company now
encompasses. The relative high gross profit associated with the Company's retail
and catalog collectibles business combined with the lower gross profit
percentage associated with the Company's jewelry programs brought down the
overall percentage by 2.4%. Gross profit was also impacted in 1996 by the
Company's discontinuance of its marketing services division which generated
relatively high gross profit margins.
Selling, general and administrative expenses
Total selling, general and administrative expenses increased from $4,767,000 in
1995 to $16,953,000 in 1996. The percentage of revenues represented by these
expenses increased from 36.3% in 1995 to 40.3% in 1996. The primary reason for
the increase as a percentage of revenues is due to Company's acquisitions
completed during 1996. The Company's catalog and direct response business, which
increased in 1996 by both acquisitions and internal growth, typically has higher
gross profit margins than the Company's core business but incurs higher selling
costs, primarily advertising costs to print and mail catalogs, mail inserts
and magazine advertisements. The direct response advertising costs are reflected
in selling, general and administrative expenses. 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 employees, office space, and equipment. Also included in
selling, general, and administrative expenses is $310,000 of goodwill
amortization associated with the Company's acquisitions completed during 1996.
Remaining expenses in this category were in proportion to the corresponding
revenues between 1995 and 1996.
<PAGE>
Other income (expense)
Other income (expense) decreased from $106,000 of income in 1995 to an expense
of $1,896,000 in 1996 due primarily to interest and amortization charges
associated with the Company's convertible debenture offering completed on
September 24, 1996. Additionally, the Company reflected a noncash loss of
$629,000 from its equity investments in two start-up companies.
Income Taxes
The Company's income tax expense decreased to $450,000 in 1996 from $883,000 in
1995. The Company's effective tax rate decreased to 24.7% in 1996 form 41.0% in
1995. This decrease stems from foreign sourced income in 1996 which is taxed a
rate lower than income sourced in the U.S. (See Note 13 to Consolidated
Financial Statements).
Net Income
As a result of the foregoing factors, net income increased 8.12% to $1,372,000
in 1996 from $1,269,000 in 1995.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Company had working capital of $15,702,000.
Working capital increased substantially by the acquisitions completed in 1996.
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 $7,847,000 at December
31, 1995 to $16,068,000 at December 31, 1996. The current ratio for the Company
decreased from 4.09 at December 31, 1995 to 1.76 at December 31, 1996. The
decrease in the Company's current ratio is primarily attributed to the
assumption of lines of credit of newly acquired subsidiaries Krasner Group,
Inc., Harlyn International, Ltd., and Georgetown Collection, Inc.
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 accrued interest of the rate of 7% per year, payable quarterly. 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 December 31, 1996,
the Company issued a total of 282,824 shares of its common stock in connection
with the conversion of $1,330,000 of the original principal amount of the
Debentures, plus interest accrued through the conversion date of $175,000.
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 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 year ended
December 31, 1996, a total of $391,000 of non-cash interest expense was recorded
relating to the debentures, including $220,000 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 in
inducement to the Debenture holders to tender the original debentures into New
Debentures, the Company will record a non-cash charge of $1,841,000 in the first
quarter of the Company's fiscal year ending December 31, 1997.
As of March 31, 1997, the Company invested most of the funds raised in the
debentures offering by capitalizing subsidiaries, paying down high interest
debt, investing $2,650,000 in outside companies, and establishing operations in
Thailand.
Cash flow provided by operations was $579,000 due primarily to net income,
depreciation and amortization and a decrease in prepaid expenses, offset by an
increase in accounts receivable.
<PAGE>
On April 15, 1997, unless an extension of time can be negotiated, the Company's
subsidiary, Georgetown Collection, Inc., will be in default under the terms of a
line of credit with an outstanding balance of approximately $4.9 million line of
credit with a financial institution. An extension of time is currently being
negotiated with the financial institution. The Company is currently negotiating
with another financial institution to obtain a replacement line of credit and
believes that it will be successful in its negotiations. In the event a new
credit facility is not obtained, management believes the Company has adequate
assets available which could be utilized to raise sufficient cash to repay the
bank loan.
NEW ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" which requires adoption of the disclosure provisions no later than
years beginning after December 15, 1995 and the adoption of the recognition and
measurement provisions for nonemployee transactions no later than after December
15, 1995. The new standard defines a fair value method of accounting for stock
options and other equity instruments. Under the fair value method, compensation
cost is measured at the grant date based on the fair value of the award and is
recognized over the service period which is usually the vesting period. 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 in its financial statements.
In March 1995, the Financial Accounting Standards Board issued Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to Be Disposed Of". SFAS No. 121 establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles and goodwill
related to those assets to be held and used and long-lived assets and certain
identifiable intangibles to be disposed of.
<PAGE>
The Company adopted SFAS No. 121 in the first interim period of 1996 and such
adoption did not impact its financial position or results of operations.
STATEMENT REGARDING FORWARD LOOKING DISCLOSURE
Certain sections of this report, including "Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contain various forward looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, which represent the Company's expectations or
beliefs concerning future events. The Company cautions that these statements are
further qualified by important factors that could cause actual results to differ
materially from those in the forward looking statements, including without
limitation, those associated with the ability of the Company to continue to
develop and market existing products and products under development, retain
suppliers and accomplish its expansion strategies. In addition, these statements
are further qualified by important factors that could cause actual results to
differ materially from those in the forward looking statements, including
without limitation, decline in demand for the merchandise offered by the
Company, the ability of the Company to obtain adequate merchandise supply and
hire and train employees, the impact of competitive products and pricing,
management's ability to manage the Company's planned expansion, and the effect
of economic conditions.
ITEM 7. FINANCIAL STATEMENTS
- ------- --------------------
The Financial Statements of the Company identified in the Index to Financial
Statements appearing under ITEM 13, EXHIBITS AND REPORTS ON FORM 8-K of this
report are incorporated herein by this reference.
<PAGE>
To the Shareholders and Board of Directors of
The L.L. Knickerbocker Co., Inc.:
We have audited the accompanying consolidated balance sheet of The L.L.
Knickerbocker Co., Inc. and subsidiaries (the Company) as of December 31, 1996,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the two years in the period ended December 31, 1996.
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 audits 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, such consolidated financial statements present fairly, in all
material respects, the financial position of The L.L. Knickerbocker Co., Inc.
and subsidiaries as of December 31, 1996, and the results of their operations
and their cash flows for each of the two years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
April 14, 1997
<PAGE>
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1996
ASSETS
CURRENT ASSETS:
<TABLE>
<CAPTION>
<S> <C>
Cash and cash equivalents $ 6,247,000
Restricted cash (Note 1) 500,000
Accounts receivable, less allowance for doubtful accounts of $1,092,000 13,730,000
Receivable from stockholder (Note 5) 596,000
Inventories (Note 3) 8,474,000
Prepaid expenses and other current assets, including $2,402,000 of prepaid advertising 4,983,000
Deferred income taxes (Note 13) 1,236,000
Income tax receivable (Note 13) 733,000
-----------
Total current assets 36,499,000
PROPERTY AND EQUIPMENT, net (Note 4) 6,791,000
INVESTMENTS (Note 6) 4,677,000
GOODWILL, net of accumulated amortization of $310,000 6,290,000
DEFERRED INCOME TAXES (Note 13) 1,835,000
OTHER ASSETS 1,480,000
-----------
$57,572,000
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable 9,692,000
Accrued Expenses 1,619,000
Notes payable (Note 7) 7,008,000
Acquisition payable 1,253,000
Commissions and royalties payable 828,000
Interest payable 131,000
Current portion of long-term debt 266,000
-----------
Total current liabilities 20,797,000
LONG-TERM LIABILITIES:
Long-term debt, less current portion (Note 11) 371,000
Convertible debentures, net of discount of $2,344,000 (Note 8) 11,826,000
Other long-term liabilities 51,000
-----------
Total long-term liabilities 12,248,000
COMMITMENTS AND CONTINGENCIES (Note 10)
MINORITY INTEREST (Note 1) 264,000
STOCKHOLDERS' EQUITY (Note 9):
Common stock, no par value-authorized 100,000,000 shares,
issued and outstanding, 15,951,724 shares 13,082,000
Additional paid-in capital 8,018,000
Foreign currency translation adjustment 16,000
Retained earnings 3,147,000
-----------
Total stockholder's equity 24,263,000
-----------
$57,572,000
===========
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Net sales $42,095,000 $13,140,000
Cost of sales 21,292,000 6,327,000
----------- -----------
Gross profit 20,803,000 6,813,000
Selling, general and administrative expenses 16,953,000 4,767,000
----------- -----------
Operating income 3,850,000 2,046,000
Equity in loss of investee companies (629,000)
Other income (expense), net (62,000) 133,000
Interest expense (1,205,000) (27,000)
----------- -----------
Income before minority interest in income of subsidiary
and income tax expense (Note 1) 1,954,000 2,152,000
Minority interest in income of subsidiary (Note 1) (132,000) 0
Income tax expense (450,000) (883,000)
----------- -----------
Net income $ 1,372,000 $ 1,269,000
=========== ===========
Primary net earnings per share $ 0.08 $ 0.10
=========== ===========
Primary weighted average common and common equivalent shares
outstanding (Note 1) 16,223,841 13,280,199
=========== ===========
See notes to consolidated financial statements
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Foreign
Additional Retained currency
Common Stock paid-in translation
----------------------
Shares Amount capital earnings adjustment Total
<S> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1995 7,139,285 $ 100,000 $ - $ 506,000 $ - $ 606,000
Net proceeds from issuance
of common stock in initial
public offering (Note 9) 4,715,000 4,008,000 4,008,000
Issuance of stock warrants
(Note 9) 250,000 250,000
Exercise of stock warrants 1,898,000 2,467,000 2,467,000
Net Income 1,269,000 1,269,000
----------------------- -------------- --------------------------------------
BALANCE, December 31, 1995 13,752,285 6,575,000 250,000 1,775,000 8,600,000
Exercise of stock warrants 687,472 1,176,000 1,176,000
Exercise of stock options 885,514 728,000 728,000
Exercise of stock options in connection
with Krasner Group, Inc. purchase 62,090 903,000 (427,000) 476,000
Issuance of common stock pursuant to
Krasner Group, Inc. acquisition (Note 2) 85,162 516,000 516,000
Issuance of common stock in connection
with convertible debentures (Note 8) 282,824 1,505,000 (81,000) 1,424,000
Issuance of stock purchase warrants pursuant to
investment in Pure Energy Corporation (Note 9) 1,875,000 1,875,000
Issuance of stock purchase warrants pursuant to
S.L.S. Trading Co., Ltd. acquisition (Note 2) 405,000 405,000
Issuance of stock purchase warrants pursuant to
Krasner Group, Inc. acquisition (Note 2) 1,674,000 1,674,000
Issuance of common stock pursuant to
Georgetown Collection, Inc. acquisition (Note 2) 196,377 1,679,000 1,679,000
Issuance of stock purchase warrants in connection
with convertible debenture offering (Note 8) 233,000 233,000
Discount on convertible
debenture offering 2,735,000 2,735,000
Tax benefit related to exercise of
stock options (Note 13) 1,354,000 1,354,000
Foreign currency translation gain 16,000 16,000
Net income 1,372,000 1,372,000
----------------------- -------------- --------------------------------------
BALANCE, December 31, 1996 15,951,724 $13,082,000 $ 8,018,000 $3,147,000 $16,000 $24,263,000
======================= ============== ======================================
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
[THIS PAGE BLANK]
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 (Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES: 1996 1995
---------- ----------
<S> <C> <C>
Net income $1,372,000 $1,269,000
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 833,000 41,000
Deferred income taxes (184,000) (341,000)
Amortization of deferred revenue (95,000) (106,000)
Common stock received in lieu of cash (140,000)
Loss on investment 238,000
Equity in loss of investee companies 629,000
Minority interest 132,000
Amortization of debt discount 391,000
Changes in operating accounts, net of
effect of acquisitions:
Accounts receivable, net (3,612,000) (4,302,000)
Receivable from stockholder (335,000) (261,000)
Note receivable 150,000 (150,000)
Income tax receivable 943,000
Inventories 495,000 130,000
Prepaid expenses and other assets 2,709,000 (1,222,000)
Accounts payable and accrued expenses (1,889,000) 241,000
Commissions and royalties payable 121,000 193,000
Income taxes payable (1,330,000) 601,000
Other long term liabilities 11,000
---------- ----------
Net cash provided by (used in) operating activities 579,000 (4,047,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property, plant and equipment (2,018,000) (148,000)
Cash paid for investments (3,329,000)
Cash paid for acquisitions, less cash acquired (2,902,000)
---------- ----------
Net cash used in investing activities (8,249,000) (148,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on line of credit (5,025,000)
Payments on long-term debt (155,000)
Proceeds from exercise of stock options and warrants 2,380,000 2,467,000
Deferred debt issue costs (149,000)
Proceeds from issuance of convertible debentures 14,880,000
Payments on note payable - stockholder (94,000)
Payment of royalty commitment (30,000)
Net proceeds from issuance of stock 4,008,000
Deferred offering costs 207,000
---------- ----------
Net cash provided by financing activities 11,931,000 6,558,000
---------- ----------
EFFECT OF FOREIGN CURRENCY TRANSLATION 16,000
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 4,277,000 2,363,000
CASH AND CASH EQUIVALENTS, beginning of year 2,470,000 107,000
---------- ----------
CASH AND CASH EQUIVALENTS, end of year $6,747,000 $2,470,000
========== ==========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 (Continued)
- --------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION-
<TABLE>
<S> <C> <C>
Cash paid during the year for:
Interest $899,000 $ 27,000
======== ========
Income taxes $499,000 $648,000
======== ========
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITY:
During the year ended December 31, 1996, the Company recorded an increase to
additional paid-in capital of $1,354,000 related to tax benefits associated
with the exercise of non-qualified stock options.
During the year ended December 31, 1996, the Company issued 400,000 warrants in
conjunction with the acquisition of an interest on Pure Energy Corporation. The
warrants have an ascribed value of $1,875,000(Note 6).
During the year ended December 31, 1996, the Company issued 46,971 warrants
with an ascribed value of $233,000 as commission in connection with the
convertible debenture offering (Note 8).
During the year ended December 31, 1996, $1,330,000 of convertible debentures
and $175,000 of accrued interest was converted to common stock (Note 8).
During the year ended December 31, 1996, the Company acquired interests in
certain entities as follows (Note 2):
<TABLE>
<CAPTION>
<S> <C>
Fair value of assets acquired $ 34,553,000
Cash paid to sellers, acquisition payables and
transaction costs 4,239,000
Value of common stock and stock purchase
warrants issued 4,274,000
------------
Liabilities assumed $ 26,040,000
</TABLE>
During the year ended December 31, 1995, the Company received 400,000 shares of
common stock in an unrelated company in exchange for performing marketing
services (Note 6).
During the year ended December 31, 1995, the Company received 40,000 shares of
common stock in an unrelated company in exchange for performing production and
marketing services (Note 6).
During the year ended December 31, 1995, the Company issued 300,000 warrants in
conjunction with the acquisition of 49% of Grant King International Co. Ltd.
The warrants have been ascribed a value of $250,000 (Note 9).
See notes to consolidated financial statements
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Line of Business - The L.L. Knickerbocker Co., Inc. (the Company) is in the
businesses of developing and selling celebrity and non-celebrity products
which include collectible items such as porcelain and vinyl dolls, teddy
bears, figurines, fine and costume jewelry, environmental products, and
other consumer products. The Company's customers include major networks in
the home shopping industry, retail and wholesale distributors, and
consumers. The dolls, bears, and environmental products are manufactured by
independent manufacturing facilities to the Company's specifications. The
fine and costume jewelry is manufactured by The Company. The Company's
distribution includes home shopping channels, catalog mailings, direct
mailings from customer lists, retail stores, wholesale distributors, and the
internet.
Consolidation - The financial statements presented herein include the
accounts of the Company's subsidiaries, as follows: Krasner Group, Inc.,
Harlyn International, Ltd., S.L.S. Trading Co., Ltd., L.L. Knickerbocker
(Thai) Company, Ltd., and Georgetown Collection, Inc. The financial
statements reflect a minority interest associated with Georgetown
Collection, Inc. Intercompany accounts and transactions have been eliminated
in consolidation.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles necessarily requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting periods. Actual results could
differ from these estimates.
Cash and Cash Equivalents - For purposes of the statement of cash flows, the
Company considers all highly liquid instruments with original maturities of
three months or less and with an insignificant interest rate risk to be cash
equivalents.
Restricted Cash - At December 31, 1996 restricted cash represents funds
deposited with a financial institution to serve as collateral for an
outstanding loan balance (Note 7).
Inventories - Inventories consist of finished products and related
packaging, work in process, and raw materials, and are stated at the lower
of cost (first-in, first-out basis) or market.
Prepaid Advertising Costs - The Company capitalizes certain direct-response
advertising costs and amortizes such costs over the period during which
future period revenues are expected to be received from each direct-response
advertising campaign, generally 3 to 12 months. The nature of the direct-
response advertising costs are primarily production costs associated with
infomercials, media costs for print advertising, and catalog printing costs.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 (Continued)
- --------------------------------------------------------------------------------
Property and Equipment - Property and equipment are stated at cost.
Depreciation is being provided on the straight-line method over estimated
useful lives of five to seven years. Depreciation on buildings is being
provided on the straight-line method over an estimated useful life of twenty
years.
Intangible Asset - Excess of cost over net assets acquired (goodwill), which
arose from the acquisition of certain entities (Note 2) is being amortized
on a straight-line method over 10 years. The Company evaluates the
recoverability of its goodwill at each balance sheet date. The
recoverability of goodwill is determined by comparing the carrying value of
the goodwill to the estimated operating income of the related entity on an
undiscounted cash flow basis. Any impairment is recorded at the date of
determination.
In March 1995, the Financial Accounting Standards Board issued Statement No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of (SFAS No. 121). SFAS No. 121 establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles and goodwill related to those assets to be held and used and
long-lived assets and certain identifiable intangibles to be disposed of.
The Company adopted SFAS No. 121 in the first interim period of Fiscal 1996,
and such adoption did not impact its financial position or results of
operations.
Deferred Debt Issuance Costs - Deferred debt issuance costs relate to the
issuance of Convertible Debentures (Note 8). These costs totaled $1,002,000
at December 31, 1996, and are being amortized over the life of the
debentures. The accumulated amortization at December 31, 1996 is $143,000.
Investments in Investees - Investments in the common stock of unconsolidated
entities (Note 6) in which the Company's interest is in excess of 20% are
accounted for using the equity method of accounting.
Fair Value of Financial Instruments - Statement of Financial Accounting
Standards No. 107 (SFAS No. 107), Disclosures About Fair Value of Financial
Instruments, requires management to disclose the estimated fair value of
certain assets and liabilities defined by SFAS No. 107 as financial
instruments. Financial instruments are generally defined by SFAS No. 107 as
cash, evidence of ownership interest in equity, or a contractual obligation
that both conveys to one entity a right to receive cash or other financial
instruments from another entity and imposes on the other entity the
obligation to deliver cash or other financial instruments to the first
entity. At December 31, 1996, management believes that the carrying amount
of cash and cash equivalents, accounts receivable, accounts payable, accrued
expenses and short-term debt approximates fair value because of the short
maturity of these financial instruments.
Revenue Recognition - Revenues from sales of products are recognized when
products are shipped to customers. The Company offers credit to its
customers and performs ongoing credit evaluations of its customers.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 (Continued)
- --------------------------------------------------------------------------------
Income Taxes - The Company accounts for income taxes using Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes, which
requires that the Company recognize deferred tax assets and liabilities
based on the differences between the financial statement carrying amounts
and the tax bases of assets and liabilities, using enacted tax rates in
effect in the years in which the differences are expected to reverse. A
valuation allowance related to deferred tax assets is recorded when it is
more likely than not that some portion or all of the deferred tax asset will
not be realized.
Stock Split - In August 1995, the Company effected a five-for-one split of
its common stock and increased the number of shares authorized to
100,000,000. All share and per share amounts included in the accompanying
financial statements and footnotes have been restated to reflect the stock
split.
Net Income Per Share - Net income per share is computed using the weighted-
average number of shares of common stock and common equivalent shares
outstanding, when dilutive, from stock options and warrants (using the
treasury stock method). Primary and fully diluted earnings per share are
approximately the same.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share, (SFAS No.
128) which is effective for financial statements issued for periods ending
after December 15, 1997. SFAS No. 128 requires the disclosure of basic and
diluted earnings per share. The Company has not assessed what impact SFAS
No. 128 will have on the Company's computation of net income per share.
Stock-Based Compensation - In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 123,
Accounting for Stock Based Compensation. The Company has determined that it
will not change to the fair value method and will continue to use Accounting
Principles Board Opinion No. 25 for measurement and recognition of employee
stock-based transactions. See Note 9 for disclosure of the pro forma effect
on net income and net income per share.
Foreign Currency - The Company's primary functional currency is the U.S.
dollar. Assets and liabilities of the Company denominated in foreign
currencies are translated at the rate of exchange on the balance sheet date.
Revenues and expenses are translated using the average exchange rate for the
periods. Gains and losses on foreign currency transactions are recognized as
incurred.
Reclassifications - Certain amounts previously reported for 1995 have been
reclassified to conform to the 1996 financial statement presentation.
2. ACQUISITIONS
The Company completed a number of acquisitions during 1996. The following
describes the transactions completed during the year ended December 31,
1996. The funds for the acquisitions were obtained primarily from the
proceeds of the convertible debenture offering described in Note 8, and
through the issuance of the Company's common stock and common stock purchase
warrants (Note 9).
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 (Continued)
- --------------------------------------------------------------------------------
Krasner Group, Inc.
-------------------
Effective June 18, 1996, the Company acquired all of the outstanding
capital stock of Krasner Group, Inc. (TKG) which designs, manufactures,
and markets costume jewelry. The aggregate acquisition cost of
$3,205,000 includes the issuance of the Company's common stock valued at
$1,440,000, the issuance of 250,628 stock purchase warrants with an
ascribed value of $1,674,000 and related acquisition costs. As of
December 31, 1996, 85,162 shares of common stock with an intrinsic value
of $516,000 had been issued. The remaining $923,000 in intrinsic value
of common stock is issuable at various dates in 1997 and is included in
the accompanying balance sheet as Acquisition Payable. The purchase
agreement also provides for the issuance of additional shares
(Additional Shares) of common stock or stock purchase warrants with an
intrinsic value equal to 110% of the proceeds from the liquidation of
TKG inventory on hand at the date of acquisition. As of December 31,
1996, $330,000 of intrinsic value of Additional Shares was payable, and
is included in Acquisition Payable. The Company has guaranteed the
intrinsic value of all stock purchase warrants, as defined, for a period
of four successive trading days subsequent to the stock purchase warrant
issuance date.
Grant King International, Ltd.
------------------------------
Effective July 1, 1996, the Company acquired the remaining 51% interest
in Grant King International Co., Ltd. (GKI) that the Company did not
previously own (Note 9), in exchange for the forgiveness of $414,000
owed by GKI to the Company. This transaction increased the Company's
investment to $664,000. The operations and assets of GKI have been
merged with S.L.S Trading Co., Ltd., a subsidiary of the Company.
S.L.S. Trading Co., Ltd.
------------------------
Effective July 1, 1996, the Company acquired certain assets and assumed
certain liabilities of S.L.S. Trading Co., Ltd., which sources gemstones
and develops certain proprietary stone cutting technologies. The
aggregate acquisition cost of $555,000 includes $150,000 cash, the
issuance of 108,000 warrants to purchase common stock of the Company
with an ascribed value of approximately $405,000 and related acquisition
costs.
Harlyn International, Ltd.
--------------------------
Effective July 1, 1996, the Company acquired all of the outstanding
capital stock of Harlyn International, Ltd. (HI) which manufactures and
markets fine jewelry. The aggregate acquisition cost of $2,711,000
includes cash payments to the former shareholder of $2,358,000 and
related acquisition costs. In addition, the Company repaid $234,000 of
HI's bank debt concurrent with consummation of the purchase transaction.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 (Continued)
- --------------------------------------------------------------------------------
Georgetown Collection, Inc.
---------------------------
Effective October 18, 1996, the Company acquired approximately 82% of
the outstanding capital stock of Georgetown Collection, Inc. (GCI) which
markets collectible dolls through direct response mediums. The aggregate
acquisition cost of $3,199,000 includes issuance of 196,377 restricted
shares of the Company's common stock with an intrinsic value of
$1,679,000 at the acquisition date plus related acquisition costs. In
addition, the Company repaid $1,500,000 of GCI's bank debt concurrent
with consummation of the purchase transaction. The purchase agreement
also provides for future consideration in an amount equal to 15% of
GCI's pretax earnings during calendar year 1997 and 4.5% of pretax
earnings in each of calendar years 1998 through 2001. Future contingent
payments, if payable, will be recorded as additional purchase price
consideration and will increase goodwill recorded in conjunction with
this acquisition. The Company has guaranteed the value of the 196,377
restricted shares of the Company's common stock issued in conjunction
with this acquisition to be $1,679,000 at the first anniversary of the
acquisition.
The aggregate purchase price for all the acquisitions has been allocated
to the net assets acquired based on estimated fair market values as
follows:
<TABLE>
<S> <C>
Cash and cash equivalents $ 71,000
Accounts receivable 5,075,000
Inventories 8,556,000
Other current assets 7,123,000
Property and equipment 5,000,000
Intangible and other assets 6,538,000
Deferred income taxes 2,511,000
Liabilities assumed $26,040,000
</TABLE>
Each of the acquisitions was accounted for under the purchase method of
accounting and, accordingly the operating results of each of the
subsidiaries are included in the Company's consolidated financial
statements since the respective acquisition dates. Pro forma unaudited
consolidated operating results for the years ended December 31, 1996 and
1995, assuming all of the above-mentioned acquisitions had occurred at
the beginning of 1996 and 1995, respectively, are summarized below:
<TABLE>
1996 1995
<S> <C> <C>
Pro forma net sales $71,909,000 $63,760,000
Pro forma net loss (3,918,000) (96,000)
Pro forma net loss per share (0.26) (0.01)
</TABLE>
This pro forma financial information is not necessarily indicative of
either the results of operations that would have occurred had the
acquisition been at the beginning of the year presented or future
results of operations of the consolidated companies.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 (Continued)
- --------------------------------------------------------------------------------
3. INVENTORIES
- -- -----------
As of December 31, 1996 inventories consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Finished Goods $7,265,000
Work-in-process 158,000
Raw materials 1,051,000
----------
$8,474,000
==========
</TABLE>
4. PROPERTY AND EQUIPMENT
- -- ----------------------
<TABLE>
<S> <C>
As of December 31, 1996, property
and equipment consist of the following:
Land, buildings and improvements $3,653,000
Computer equipment and software 576,000
Production models, molds, and tools 531,000
Autos 262,000
Office furniture and equipment 1,416,000
Machinery and equipment 1,005,000
----------
Accumulated depreciation 7,443,000
(652,000)
----------
$6,791,000
==========
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 (Continued)
- --------------------------------------------------------------------------------
5. RECEIVABLES FROM OFFICERS/STOCKHOLDERS
Receivables from officers/stockholders bear interest at the prime rate
plus 2.5% and are repayable to the Company upon demand.
6. INVESTMENTS
At December 31, 1996, the Company had the following equity investments:
The Company owns 400,000 and 40,000 shares of Tracker Corporation and
Camelot Corporation, respectively, which were received in exchange for
marketing services provided to these companies. The shares represent an
ownership interest of less than 10% in each of these companies and are
restricted as to the Company's ability to sell them. The aggregate
estimated carrying value of these shares at December 31, 1996 is
$102,000 which approximates fair value.
During 1996 the Company acquired a 38.3% interest in Pure Energy
Corporation (PEC) in exchange for $2 million in cash and the issuance of
stock purchase warrants with an ascribed value of $1,875,000.
Additionally, the Company has agreed to fund up to $1,000,000 of PEC
expenses. Through December 31, 1996 the Company had funded $507,000 of
its commitment.
During 1996 the Company acquired 31.5% of the outstanding shares of
Ontro, Inc. (formerly Self-Heating Container Corporation) and 34% of
Insta-Heat, Inc., two related privately held corporations, for $650,000
in cash. In connection with the acquisition and a related royalty
agreement, the Company will receive exclusive worldwide distribution
rights to market and distribute celebrity-driven products using certain
patents owned by the two corporations.
7. LINE OF CREDIT AND NOTES PAYABLE
The Company has available to use for working capital purposes and to
post letters of credit, a line of credit totaling $1,200,000, of which
$600,000 can be used for working capital purposes. The line of credit
bears interest at the lender's reference rate plus .5%. At December 31,
1996, letters of credit totaling $342,000 and standby letters of credit
totaling $250,000 were outstanding under this line of credit. In order
to utilize the working capital portion of the credit facility, the
Company must maintain various financial convenants, including the
maintenance of minimum liquid assets, maximum total liabilities to
tangible net worth and a minimum current ratio. The Company was not in
compliance with these covenants at December 31, 1996 and therefore may
not utilize the working capital portion of the credit facility.
A Company subsidiary, Georgetown Collection, Inc., has outstanding
borrowings from a financial institution totaling $4,990,000 which bear
interest at the bank's prime rate (8.25% at December 31, 1996) plus 1%.
The outstanding balance is due in full to the bank on April 15, 1997.
The Company is currently in the process of negotiating a new credit
facility, the proceeds from which will be used to repay the outstanding
balance. Management believes they will be successful in securing a new
credit facility. In the event a new credit facility is not obtained,
management believes the Company has adequate assets available which
could be utilized to raise sufficient cash to repay the bank loan.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 (Continued)
- --------------------------------------------------------------------------------
A Company subsidiary, Krasner Group, Inc., has outstanding borrowings
from a financial institution totaling $1,813,000 which bear interest at
the bank's prime rate (8.25% at December 31, 1996) plus 1.625%. The
outstanding balance is to be repaid in September, 1997 and is
collateralized by certain Company assets, including restricted cash.
8. 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 $14,731,000 after deducting costs associated with
issuing the Debentures. The Debentures accrued interest of the rate of 7%
per year, payable quarterly. 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 December 31, 1996, the Company
issued a total of 282,824 shares of its common stock in connection with
the conversion of $1,330,000 of the original principal amount of the
Debentures, plus interest accrued through the conversion date of
$175,000.
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 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 year ended December 31, 1996,
a total of $391,000 of non-cash interest expense was recorded relating to
the Debentures, including $220,000 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 in inducement to
the Debenture holders to tender the original debentures into New
Debentures, the Company will record a non-cash charge of $1,841,000 in
the first quarter of the Company's fiscal year ending December 31, 1997.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 (Continued)
- --------------------------------------------------------------------------------
9. STOCKHOLDERS' EQUITY
Warrants - On November 21, 1995, the Company issued warrants to purchase
200,000 shares of common stock to Shamrock Partners, Ltd., in
consideration of financial and business consulting services to be
provided to the Company. The warrants vest as of the grant date with an
exercise price of $5.00 per share, which was equivalent to the fair
market value of the Company's common stock at the date of grant and are
valid for five years from the date of the grant.
On November 28, 1995, the Company entered into an agreement to issue
warrants to purchase 300,000 shares of common stock to Grant G. King in
consideration of the purchase by the Company of 49% of the issued and
outstanding capital stock of Grant King International Co., Ltd. The
warrants vest as of the grant date with an exercise price of $5.50 per
share, which was equivalent to the fair market value of the Company's
common stock at the date of grant and are valid for five years from the
date of the grant. The warrants have an ascribed value of $250,000,
which have been recorded as an investment and additional paid-in
capital.
On March 13, 1996, the Company entered into an agreement to issue
warrants to purchase 200,000 shares each of common stock to two
individuals in consideration of the purchase by the Company of 40% of
the outstanding capital stock of Pure Energy Corporation. The warrants
vest as of April 30, 1996 with an exercise price of $8.50 per share
(200,000 warrants) and $12.00 per share (200,000 shares). The warrants
are valid through April 30, 2001. The warrants have an ascribed value of
$1,875,000, which have been recorded as an investment and additional
paid-in-capital. As of December 31, 1996 2,500 of the warrants were
exercised.
In conjunction with the acquisitions described in Note 2 the Company
issued stock purchase warrants as part of the consideration paid for
these acquisitions. The following table summarizes the warrants issued:
<TABLE>
<CAPTION>
Exercised as Outstanding
Warrants Exercise of December at December Expiration
Acquisition issued Price 31, 1996 31, 1996 Date
----------- -------- -------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Krasner Group, Inc. 250,628 $ 7.75 62,090 188,538 April 10, 2004
S.L.S. Trading Co., Ltd. 108,000 $ 7.75 - 108,000 April 10, 2004
</TABLE>
<PAGE>
As more fully discussed in Note 2, in conjunction with certain
acquisitions, the Company may be required to issue additional stock
purchase warrants at future dates.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 (Continued)
- --------------------------------------------------------------------------------
Stock Option Plan - The shareholders approved and the Company adopted a
Stock Option Plan on September 27, 1994 which was amended and restated
on June 15, 1995 as the L.L. Knickerbocker Amended and Restated Stock
Option Plan (the Plan). The Plan is administered by a committee
appointed by the Board of Directors and provides that options may be
granted at exercise prices determined by the Board of Directors at its
sole discretion. The Plan is designed as an incentive for employees,
non-employee directors and persons providing services of special
importance to the Company. Unless otherwise specified, the options
expire ten years from the date of grant. The Plan covered an aggregate
of 400,000 shares when granted, which has been increased by the
five-for-one stock split to a total of 2,000,000 shares. In 1996 the
Board of Directors authorized an increase in the number of shares
covered by the Plan to a total of 5,000,000. Non-employee directors of
the Company are automatically granted options to purchase 10,000 shares
of common stock at the fair market value at the date of grant each year
that such person remains a director of the Company.
Option activity under the plan is as follows:
<PAGE>
<TABLE>
<CAPTION>
STOCK OPTION
---------------------
NUMBER OF PRICE
SHARES PER SHARE
--------- ---------
<S> <C> <C>
Outstanding, January 1, 1995 --
Granted 2,000,000 $ 0.75
Exercised --
Canceled --
--------- ---------
Outstanding, December 31, 1995 2,000,000 0.75
Granted 273,309 5.75-8.00
Exercised (885,514) 0.75-7.75
Canceled (32,500) 0.75
--------- ----------
Outstanding, December 31, 1996 1,355,295 $0.75-8.00
</TABLE>
The following is a summary of the weighted average exercise prices for activity
during the year ended December 31, 1996:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
Beginning Outstanding 2,000,000 $ 0.75
Options Granted (Price = Fair Value) 273,309 7.65
Options Exercised (885,514) 0.82
Options Cancelled (32,500) 0.75
--------- --------
Ending Outstanding 1,355,295 $ 2.10
Exercisable as of December 31, 1996 652,040 $ 2.92
</TABLE>
Additional information regarding options outstanding as of December 31, 1996 is
as follows:
<PAGE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
WEIGHTED AVG.
REMAINING WEIGHTED AVG. WEIGHTED AVG.
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
--------------- ----------- ------------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
$ 0.75 1,091,250 8 years $0.75 402,500 $0.75
$5.75 - $8.00 264,045 9 years $7.65 249,540 $6.41
</TABLE>
At December 31, 1996, 2,759,191 shares were available for future grants under
the Option plan, respectively.
ADDITIONAL STOCK PLAN INFORMATION
As discussed in Note 1, the company continues to account for its stock-based
awards using the intrisic value method in accordance with Accounting Principles
Board Opinion No.25, Accounting for Stock Issued to Employees and its related
interpretations. Accordingly, no compensation expense has been recognized in the
financial statements for employee stock arrangements.
Statement of Financial Accounting Standards No. 123 Accounting for Stock-Based
Compensation, (SFAS 123) requires the disclosure of pro forma net income and
earnings per share had the Company adopted the fair value method as of the
beginning of fiscal 1995. Under SFAS 123, the fair value of stock-based awards
to employees is calculated through the use of option pricing models, even though
such models were developed to estimate the fair value of freely tradable fully
transferable options without vesting
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 (Continued)
- --------------------------------------------------------------------------------
restrictions, which significantly differ from the Company's stock
options awards. These models also require subjective assumptions,
including future stock price volatility and expected time to exercise,
which greatly affect the calculated values. The Company's calculations
were made using the Black-Scholes option pricing model with the
following weighted average assumptions: expected life, 10 years; stock
volatility, 85% in 1996 and 65% 1995; risk free interest rates, 6.5% in
1996 and 6.5% in 1995; and no dividends during the expected term. The
Company's calculations are based on a multiple option valuation approach
and forfeitures are recognized as they occur. If the computed fair
values of the 1995 and 1996 awards had been amortized to expense over
the vesting period of the awards, pro forma net income would have been
$891,000 ($.07 per share) in 1995 and $335,000 ($.02 per share) in 1996.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 (Continued)
- --------------------------------------------------------------------------------
10. COMMITMENTS AND CONTINGENCIES
Leases - The Company is committed under operating lease agreements for
facilities and equipment. The facility leases contain provisions for
annual rental increases based on the consumer price index.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 (Continued)
- --------------------------------------------------------------------------------
Minimum annual rental commitments under operating leases are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1997 $ 874,000
1998 511,000
1999 436,000
2000 385,000
2001 329,000
Thereafter 1,811,000
----------
$4,346,000
==========
</TABLE>
Rent expense for the years ended December 31, 1996 and 1995 was $650,000
and $86,000, respectively.
Contractual Arrangements - The Company has contractual arrangements with
several celebrities and other third parties, including Marie Osmond,
Annette Funicello and Bob Mackie. Under the terms of these contracts,
the celebrities agree to act as spokesperson for their respective
products, promote the product, approve the design and make a minimum
number of public appearances. The Company is obligated to manufacture a
safe product approved by the celebrity, hold the celebrity harmless from
liability, maintain specified levels of liability and rental insurance
and pay royalties ranging from 5% to 10% of net wholesale and retail
sales. Each contract has a termination clause in the event certain
minimum annual sales are not attained (ranging from $50,000 to
$500,000). In certain instances, the celebrity or other third party has
the right to terminate the contract if the minimum sales level is not
attained for any single year. The contracts run from 18 months to 5
years and contain audit clauses, with penalties for errors or omissions.
Letters of Credit - The Company finances certain collectible program
purchases and other product utilizing irrevocable, transferable letters
of credit. These letters of credit are issued to the Company by its
major customer's bank, with the Company as the beneficiary. The Company
then transfers a portion of the letter of credit to the Company's
supplier to secure payment of the purchase. The Company and the supplier
draw down the letter of credit when the supplier ships the product
directly to the Company's customer. At December 31, 1996, there was
approximately $700,000 amounts outstanding (drawn down) under these
letters of credit agreements.
Employment Contracts - The Company has entered into six employment
agreements with Company officers with five-year terms. The agreements
call for aggregate annual compensation of $965,000 and a discretionary
bonus of up to 10% of income before income taxes.
Litigation - The Company is subject to litigation in the normal course
of business, none of which management believes is material to the
financial statements at December 31, 1996.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 (Continued)
- --------------------------------------------------------------------------------
11. LONG-TERM DEBT
A Company subsidiary, HARLYN INTERNATIONAL, LTD. financed the purchase
of their facility with a mortgage bearing an annual interest rate of
14%. Payments on the mortgage are as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ended December 31,
1997 $266,000
1998 371,000
--------
Total long term debt $637,000
========
</TABLE>
12. SIGNIFICANT CONCENTRATIONS
Customer Concentration - During the years ended December 31, 1996 and
1995, the Company conducted business with one customer whose aggregate
sales volume comprised approximately 43% and 60% of the Company's
revenues, respectively. A reduction in sales to this customer could
adversely impact the financial condition and operations of the Company.
Merchandise Risk - The Company's success is largely dependent on its
ability to provide to its customers merchandise that satisfies consumer
tastes and demand. Any inability to provide appropriate merchandise in
sufficient quantities and in a timely manner could have a material
adverse effect on the Company's business, operating results, and
financial condition.
13. INCOME TAXES
<TABLE>
<CAPTION>
INCOME TAXES
Provision for income taxes consists of: 1996 1995
<S> <C> <C>
Current federal and state income taxes $227,000 $1,224,000
Current foreign taxes 408,000 -
Deferred federal and state income taxes (185,000) (341,000)
------------ ------------
Provision for income taxes $ 450,000 $ 883,000
============ ============
</TABLE>
A reconciliation of the statutory federal rate and the provision for income
taxes is as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Federal tax at statutory rate $684,000 $753,000
State taxes (8,000) 130,000
Goodwill Amortization 59,000
Residual U.S. tax on foreign earnings (313,000)
Other 28,000
------------ ------------
$450,000 $883,000
============ ============
</TABLE>
Significant components of the Company's deferred tax liabilities and assets
for federal and state income taxes consists of the following:
<TABLE>
<CAPTION>
December 31, 1996
<S> <C>
Deferred tax assets
Bad debt reserve $ 447,000
Accruals 112,000
Uniform Capitalization 118,000
Other Reserves 1,355,000
Returns and allowances 303,000
Pre-acquisition net operating loss carryforward 1,933,000
Other 30,000
----------
Total deferred tax assets 4,298,000
Deferred tax liabilities
Difference between book and tax basis of fixed assets $ (97,000)
Prepaids (875,000)
State income taxes (255,000)
-----------
Total deferred tax liabilities (1,227,000)
-----------
$ 3,071,000
===========
</TABLE>
The company has not provided any residual U.S. tax on approximately $1,384,000
of a portion of the Company's foreign subsidiaries' undistributed earnings as
the Company intends to indefinately reinvest such earnings.
The Company recorded a credit to equity of $1,354,000 as a result of the tax
benefit from the exercise of stock options. Since the Company does not have
sufficient taxable income or carry back potential to utilize the deductions
generated from the exercise of the options, approximately $3,157,000 of
deductions has not been recorded in the accompanying financial statements. As
these losses are utilized in future years, the tax benefit will be recorded to
equity.
The Company has an approximate $4,800,000 loss carryforward related to
Georgetown and Krasner which can be used to reduce future taxable income.
Sections 382 and 383 of the Internal Revenue Code of 1986 place certain
limitations on the use of these acquired losses. A maximum of $320,000 of the
net operating loss carryforward can be utilized annually in 1997 and subsequent
years. Any net operating loss not utilized will begin expiring in 2010.
14. DOMESTIC AND THAILAND OPERATIONS
A summary of domestic and Thailand operations is as follows:
<TABLE>
<CAPTION>
Years ended December 31
---------------------------
1996 1995
---- ----
<S> <C> <C>
Net sales to unaffiliated customers:
Domestic $32,858,000 $13,140,000
Thailand 9,237,000 0
----------- -----------
Consolidated $42,095,000 $13,140,000
=========== ===========
Operating Income:
Domestic $ 1,135,000 $ 2,046,000
Thailand 2,715,000 0
----------- -----------
Consolidated $ 3,850,000 $ 2,046,000
=========== ===========
Identifiable Assets:
Domestic $40,883,000 $11,214,000
Thailand 16,689,000 0
----------- -----------
Consolidated $57,572,000 $11,214,000
=========== ===========
</TABLE>
(1) Operating income is net sales less cost of goods sold and operating
expenses.
(2) Identifiable assets are those assets of the Company that are located in, or
related to operations in, each geographic area.
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------- ---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
In January 1996, the Company changed its auditing firm from Singer, Lewak,
Greenbaum & Goldstein to Deloitte & Touche LLP. A report on Form 8-K was filed
concerning the change of accountants.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
- ------- -------------------------------------------------------------
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
-------------------------------------------------
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
----------------------------------------------------------------------------
<S> <C> <C>
Louis L. Knickerbocker 54 Chief Executive Officer,
President and Chairman of the Board
Peggy Vicioso 35 Executive Vice President and
Secretary
Tamara Knickerbocker 33 Vice President
Anthony P. Shutts 33 Chief Financial Officer
and Director
Farrah Fawcett 50 Director
Gerald A. Margolis 67 Director
William R. Black 44 Director
Lowell W. Paxson 62 Director
</TABLE>
All directors hold office until the next meeting of the shareholders of the
Company and until their successors are qualified and elected. Executive officers
of the Company are appointed by the Board of Directors and serve at the
discretion of the Board. All executive officers devote full time to the Company.
Mr. Louis L. Knickerbocker, Chief Executive Officer, President, and Chairman
Mr. Knickerbocker, 54, is the founder and Chairman, President, and Chief
Executive Officer of the Company. He received an AA degree in 1964 from Santa
Monica College with a major in medicine and a minor in economics.
From 1965 through 1974 Mr. Knickerbocker worked as a salesman and sales
supervisor at M. Cooper & Son, purchased and sold several liquor stores, and
acquired and sold a total of seven restaurants, four of which comprised a chain
of Mexican restaurants. Between 1974 and 1985, he acted as a private investor
and businessman, investing in real estate and purchasing and selling small
businesses.
<PAGE>
Mr. Knickerbocker and his wife, Tamara, Vice President of the Company, formed
the Company as International Beauty Supply in 1985, co-founded LaVie Cosmetics
with Michael Elam and comedienne, Phyllis Diller in 1987, co-founded another
company, MLF Enterprises, in 1989 with Michael Elam and Farrah Fawcett and, in
1990, the Knickerbockers formed Knickerbocker Creations, Ltd. and began
developing the celebrity driven products which are now part of The L. L.
Knickerbocker Co., Inc.
Ms. Peggy Vicioso, Executive Vice President and Secretary
Ms. Vicioso, 35, joined the Company in December of 1993. She assumed the
position of Executive Vice President in May 1995 Ms. Vicioso was elected
Secretary of the Company in June 1995. Ms. Vicioso graduated in 1981 from Brooks
College in California with an Associate of Arts degree in Merchandising. In
addition, she has a 12 year background in international trade, product
development, marketing, and sales. From 1983 through 1987, Ms. Vicioso served as
Operation Manager for Ocean Pacific Images, a licensee of Ocean Pacific
Sportswear. From 1987 through 1993, she worked on the senior merchandising team
and ultimately served as Vice President of Merchandising for Pacific Outlook
Sportswear, the largest licensee of Ocean Pacific Sportswear.
Ms. Vicioso was instrumental in launching the Company's direct response print
campaigns and infomercial projects in 1995. She continues to develop
departmental strategy and staffing requirements to manage the Company's growth.
Ms. Tamara Knickerbocker, Vice President
Mrs. Knickerbocker, 33, has been with the Company as Vice President since its
inception. She has over 8 years experience in the field of marketing. In 1985,
Mrs. Knickerbocker helped to form the Company as International Beauty Supply,
and thereafter LaVie Cosmetics, MLF Enterprises and Knickerbocker Creations,
Ltd. Since 1985, she has worked to develop and market products and programs for
the home shopping industry. Her focus has mainly been the creation and
development of the products, and she has emphasized collectibles.
Mrs. Knickerbocker is currently managing all aspects of the Marie Osmond Doll
Collection program, including product and program development, production,
marketing and sales. In addition, she also oversees the other collectible
programs, including the collectable bears. She has had primary responsibility
for the profitability and diversity of the collectible lines and is currently
coordinating expansion in these programs.
Mr. Anthony P. Shutts, C.P.A., Chief Financial Officer, Director
Mr. Anthony P. Shutts, 33, was hired as a consultant to the Company on April 1,
1993 and became Chief Financial Officer of the Company on June 30, 1993. Mr.
Shutts became a full time employee of the Company on April 1, 1996. He is a
certified public accountant with over 10 years experience in public accounting,
specializing in emerging companies. Mr. Shutts holds a masters degree in
taxation from the University of Southern California. Currently, Mr. Shutts
serves as Chief Financial Officer of the Company, overseeing the financial
records preparation and reporting, and performing the general functions of CFO.
Mr. Shutts has provided services relating to auditing, compilation and review of
companies in the manufacturing, high technology, real estate, retail, health
care, financial and entertainment industries. In addition to financial statement
preparation, Mr. Shutts has provided services relating to income tax planning
and preparation, business valuation, financial and operational planning,
budgeting and personal financial planning.
Mr. Shutts has also provided consulting services relating to economic analysis
and feasibility studies on real estate projects, debt and equity restructuring,
software installation and implementation, office automation and temporary or
part time controllership services.
From 1993 to 1996, Mr. Shutts has maintained a private accountancy and financial
consulting practice. Prior to his private practice, he worked as Business
Manager with Breslauer, Jacobson, Rutman & Sherman from 1992 to 1993
<PAGE>
and with Allen, Haight & Schurawel as a Senior Accountant from 1991 to 1992. Mr.
Shutts worked with Deloitte & Touche as a Senior Consultant from 1986 to 1991.
Ms. Farrah Fawcett, Director
Ms. Fawcett, 50, was appointed to the Board of Directors in June 1994. She is a
well known celebrity actress and has been the president and a director of
Tolivar Productions, Inc., an acting services firm since 1978. Ms. Fawcett has
participated in the development and marketing of products with MLF Enterprises
(a company she co-founded with Louis L. Knickerbocker and Michael Elam in 1989),
and with Knickerbocker Creations, Ltd. in 1991 to 1993.
Mr. Gerald A. Margolis, Director
Mr. Margolis, 67, was appointed to the Board of Directors in June 1994, and
served as Secretary of the Company from June 1994 until June 1995. He graduated
from U.C.L.A. Law School in 1954 and has been a licensed attorney in private
practice and a member of the California State Bar since 1955. Mr. Margolis was a
City Council member of the Culver City Counsel from 1962 to 1966. Mr. Margolis
has advised the Company on general corporate matters since its inception in
1985.
Mr. William R. Black, Director
Mr. Black, 44, was appointed to the Board of Directors in November 1995. He
received a BSBA in Marketing from the University of Denver in 1978, an MBA from
the University of Denver in 1981 and a Juris Doctor from Western State
University College of Law in 1987. Mr. Black is a licensed attorney and a member
of the California State Bar, the Federal District Courts for the Central and
Northern Districts of California and the Ninth Circuit Court of Appeals.
Mr. Black worked as an Area Manager for Deere & Company from 1979 through 1984,
Director of Analysis for Management Resource Services Company from 1984 through
1985, and Senior Vice President of Geneva Corporation from 1985 through 1990. He
maintains a private law practice and is currently General Counsel of Sunclipse,
Inc. in Buena Park, California, General Counsel and Director of Pyraponic
Industries, Inc. in San Diego, California, Special Counsel for North America for
Amcor, Ltd. in Melbourne Australia, General Counsel, Secretary and Director of
Anle Paper Co., Inc. in Chicago, Illinois, General Counsel, Secretary and
Director of Mann-Craft Container Corporation in Elmhurst, Illinois, Director of
Raymark Container, Inc. in Atlanta, Georgia, Director General of Amcor de
Mexico, S.A. de C.V. in Guadalajara, Jalisco Mexico, and Director General of
Kent H. Landsberg Co. de Mexico, S.A. de C.V in Tijuana, Baja California Mexico.
Mr. Lowell W. Paxson, Director
Mr. Paxson, 62, was appointed to the Board of Directors in June 1996. He has
been the Chairman of the Board and Chief Executive Officer of Paxson
Communications Corporations, Inc. since that company's inception in 1991. Mr.
Paxson was the President of Home Shopping Network, Inc. from 1985 to 1990.
Presently, the Company is involved in a joint venture with Paxson Communications
Corporation, Inc. to develop and promote products through the home shopping
industry and other marketing venues. Mr. Paxson resigned from the Board of
Directors of the Company on January 1, 1997.
ITEM 10. EXECUTIVE COMPENSATION
- -------- ----------------------
The following table sets forth certain information concerning annual, long term
and other compensation received during the last three fiscal years and to be
received by (i) the Chief Executive Officer of the Company, and (ii) the
Company's four most highly compensated executive officers whose annual salary
and bonus compensation exceeded $100,000:
<PAGE>
<TABLE>
<CAPTION>
Annual Compensation
Name and Principal Fiscal ---------------------- Long Term All Other
Position Year Salary Bonus Compensation Compensation(1)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Louis L. Knickerbocker, 1996 $300,000 N/A N/A N/A
CEO 1995 $175,000 $ 175,000 N/A 500,000
1994 $175,000 N/A N/A N/A
Peggy Vicioso 1996 $100,000 N/A N/A 9,750
Executive Vice President 1995 $ 53,173 $ 35,000 N/A 151,250
1994 $ 40,000 $ 13,000 N/A N/A
Tamara Knickerbocker 1996 $ 80,000 N/A N/A 12,362
Vice President 1995 $ 75,000 N/A N/A N/A
1994 $ 50,000 N/A N/A N/A
Anthony Shutts 1996 $110,000 N/A N/A N/A
CFO 1995 $ 63,046 N/A N/A 50,000
1994 $ 42,500 N/A N/A N/A
</TABLE>
- ----------
(1) All Other Compensation consists of stock options granted under the
Company's Stock Option Plan to each of the Named Executive Officers.
Reflected amounts consist of the number of options to purchase the
Company's common stock.
DIRECTORS FEES
Directors receive a fee of $500 per meeting attended and reasonable travel
expenses.
EMPLOYMENT AGREEMENTS
The Company entered into employment agreements with Louis L. Knickerbocker, its
President, Anthony P. Shutts, its CFO, Peggy Vicioso, its Executive Vice
President, Tamara Knickerbocker, its Vice President, and Grant King, President
of L. L. Knickerbocker (Thai) Co., Inc. on July 1, 1996. On June 18, 1996, the
Company entered into an employment agreement with Martin Krasner, President of
Krasner Group Inc. The respective terms of the employment agreements are five
years each. The agreements are subject to early termination by the Company under
certain conditions, including breach of the agreement, fraud by the employee,
and/or breach of fiduciary duty owed to the Company by the employee. The Company
has the right to extend the terms of the employment agreements for an additional
five years each upon written notice to the employees. Under terms of the
agreements, each of the employees agrees to devote his or her full time and
effort to the business affairs of the Company and to use his or her best efforts
to promote the best interests of the Company.
During the first year, the employment agreements called for Louis L.
Knickerbocker to receive an annual base salary of $300,000, for Anthony Shutts
to receive an annual base salary of $120,000, for Peggy Vicioso to receive an
annual base salary of $100,000, for Tamara Knickerbocker to receive an annual
base salary of $80,000, for Grant King to receive an annual base salary of
$140,000, and for Marin Krasner to receive an annual base salary of $225,000. In
addition to their respective base salaries, Mr. Knickerbocker, Mr. Shutts, Ms.
Vicioso and Mrs. Knickerbocker are eligible to receive an annual bonus in an
amount to be determined by a compensation committee and ratified by the Board of
Directors out of a Management Bonus Fund up to a maximum of 10% of the operating
profits of the Company and are entitled to receive certain stock options from
the Stock Option Plan previously adopted by the Company. See "Stock Option
Plan."
STOCK OPTION PLAN
<PAGE>
The shareholders approved and the Company adopted a Stock Option Plan on
September 27, 1994 which was amended and restated on June 15, 1995 as the L. L.
Knickerbocker 1995 Amended and Restated Stock Option Plan (the "Plan"). The Plan
is administered by a committee appointed by the Board of Directors and provides
that options may be granted at exercise prices determined by the Board of
Directors in its sole discretion. The Plan is designed as an incentive for
employees, non-employee directors and persons providing services of special
importance to the Company. Unless otherwise specified, the options expire ten
years from the date of grant. The Plan covered an aggregate of 400,000 shares
when granted, which was increased by the five-for-one stock split to a total of
2,000,000 shares. As of the date of this report, 400,000 pre-split options have
been granted pursuant to the Plan, which has been increased by the five-for-one
stock split to a total of 2,000,000 options granted.
Options Granted
The following table discloses the individual grants of options to purchase
securities of the Company to each of the Named Executive Officers, for the most
recent fiscal year.
Options/SAR Grants During the Fiscal Year Ended December 31, 1996
<TABLE>
<CAPTION>
Number of % of Total Market value
Securities Options/SARs of Securities
Underlying Granted to Underlying
Options/SARs Employees Exercise or Options/SARs
Granted in Fiscal Base Price Grant date Expiration
Name (#)(1) Year (2) ($/Share) ($/Share)(3) Date(4)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Peggy Vicioso 9,750 14.21% $7.75 (2) $7.75(3) 2006
Tamara Knickerbocker 8,272 12.06% $7.75 (2) $7.75(3) 2006
Tamara Knickerbocker 2,853 4.16% $8.00 (2) $8.00(3) 2006
Tamara Knickerbocker 1,237 1.80% $5.75 (2) $5.75(3) 2006
</TABLE>
- ----------
(1) All grants consist of stock options granted pursuant to the Company's Stock
Option Plan.
(2) In fiscal 1996, 68,603 options were granted pursuant to the Company's Stock
Option Plan. This number was used in calculating the percentage in the
above table.
(3) Market value based on the average trading price of the Company's common
stock on the grant date.
(4) The Options granted under the Company's Stock Option Plan expire on the
tenth anniversary of the date of grant.
Aggregate Options Exercised. There were an aggregate of 350,000 options
exercised by the Named Executive Officers during the fiscal year ended December
31, 1996.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -------- --------------------------------------------------------------
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of December 31, 1996 by (i) each
director of the Company, (ii) the CEO of the Company and the four most highly
compensated executive officers of the Company whose annual salary and bonus
compensation exceeded $100,000, (iii) all directors and executive officers as a
group, and (iii) each person known to the Company to own beneficially more than
5% of the outstanding shares of Common Stock:
<PAGE>
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Percent
Beneficial Owner (1) Ownership of Class
- -------------------------------------------------------------------------------
<S> <C> <C>
Louis L. Knickerbocker and Tamara
Knickerbocker, Husband and Wife as
Community Property 7,489,285 42.5%(2)
Peggy Vicioso 59,750
Anthony P. Shutts 400
Farrah Fawcett 315,000
Gerald Margolis 210,000
William R. Black 40,000
Lowell W. Paxson 3,000
Directors and Executive Officers
as a Group 583,150(3) 3.3%(3)
</TABLE>
- ----------
(1) The address for all persons listed is 30055 Comercio, Rancho Santa
Margarita, California 92688
(2) Percentage is based on the 7,139,285 shares currently held of record plus
options issued by the Company to Mr. Knickerbocker that enables Mr.
Knickerbocker to currently acquire 350,000 shares of the Company's common
stock.
(3) Beneficial ownership of the Directors and Executive Officers as a group is
based on 138,400 shares currently held of record plus options issued by the
Company to Directors and Executive Officers to currently acquire 444,750
shares of the Company's common stock and does not include shares
beneficially owned by Mr. and Mrs. Knickerbocker.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------- ----------------------------------------------
RELATED PARTY TRANSACTION
The Company leases office and warehouse space at 30055 Comercio, Rancho Santa
Margarita, California 92688. The building space allocation is 1,500 square feet
of office space and 8,500 square feet of warehouse space. Up until September 30,
1994 the facilities were subleased from K and E Marketing, Ltd., a corporation
co-owned by Louis L. Knickerbocker, a principal of the Company, and Michael
Elam, a former spokesperson for the Company, at a rate of $8,065 per month
(since January 1, 1994) plus its proportionate share of taxes, maintenance and
property insurance. Several related companies occupied the facilities and the
rental payment was based on the Company's pro-rated share of the space. On
October 1, 1994, the lease was amended to assign the leasehold to the Company.
On February 15, 1995, the Company signed a new 3 year lease agreement for the
premises at a rate of $7,755 per month, which includes taxes, maintenance, and
property insurance. The previous lease had expired on January 31, 1995. The
related companies no longer occupy the facilities or pay rent to the Company.
LOAN TO SHAREHOLDER
During 1996, the Company made a loan to its president, Louis L. Knickerbocker,
in the principal amount of $485,000 and a loan to Grant King, former owner of
Grand King International Cop., Ltd. in the amount of $111,000. Both loans was
evidenced by a promissory note from Mr. Knickerbocker to the Company providing
for payment of interest at the prime rate plus 2 1/2% per annum due and payable
on demand.
<PAGE>
Pursuant to a resolution of the Board of Directors of the Company, passed on
September 27, 1994, any ongoing and future transactions between the Company and
its officers, directors, employees, and affiliates, that are outside the scope
of the Company's employment relationship with such persons will be on terms no
less favorable to the Company than can be obtained from unaffiliated parties.
Any such transactions are subject to the approval of a majority of the
disinterested members of the Board of Directors.
AFFILIATED AND PREDECESSOR COMPANIES
The L. L. Knickerbocker Company, Inc. (the "Company") was formed by Louis L.
Knickerbocker, Chairman, President, and Chief Executive Officer of the Company,
and Tamara Knickerbocker, his wife and the Vice President of the Company, under
the name International Beauty Supply, Ltd., a California corporation ("IBS") in
1985. IBS developed a line of cosmetics called "Orchid Premium" that was
initially marketed to professional beauty supply houses and subsequently
expanded to retail stores.
The Knickerbockers next venture was LaVie Cosmetics, a California corporation
("LaVie"), that the Knickerbockers co-founded with Michael Elam, a spokesperson
for the Company, and comedienne, Phyllis Diller, in 1987. LaVie introduced a
product named Creme de LaVie in both the I. Magnin and Nordstrom department
stores. In October 1988 Creme de LaVie was introduced on The Home Shopping
Network in Tampa, Florida with Mr. Elam and Ms. Diller live on the air.
In 1989 the Knickerbockers co-founded another company, MLF Enterprises, a
California corporation ("MLF") with Mr. Elam and Farrah Fawcett, a director of
the Company. MLF developed replicas of Ms. Fawcett's jewelry collection, which
were sold through the television home shopping industry.
The Knickerbockers next formed Knickerbocker Creations, Ltd., a California
corporation ("Creations") in 1990 and began developing the products and
celebrity endorsement programs which are now part of the Company.
In 1993 the directors and shareholders of Creations and IBS determined to effect
an initial public offering in order to finance the continued growth of the
different companies. It was determined that the operations of Creations and IBS
should be consolidated under a single entity in order to facilitate the
contemplated public offering. However, because Creations had been switched from
a "C" corporation to a subchapter "S" corporation in 1990, the directors and
shareholders of the Company were advised that Creations would be an unsuitable
candidate for a public offering.
On May 24, 1993, the directors and shareholders of IBS approved an amendment of
the articles of incorporation of the corporation changing the name of the
corporation from "International Beauty Supply, Ltd." to the Company's current
name, "The L. L. Knickerbocker Company, Inc." The Company's name was chosen to
maximize the retention of the goodwill in the home shopping industry associated
with the name "Knickerbocker" by virtue of Creations' business. The Company then
consummated an asset purchase agreement whereby the operating assets of
Creations, including but not limited to the marketing and distribution rights to
the products and programs of Creations, were acquired along with certain
liabilities. As of the date hereof, all current active contracts of Creations
have been assumed or amended to grant those rights and obligations to the
Company.
In connection with the initial public offering of the Company's common stock
completed January 25, 1995, the Directors and shareholders of the Company
approved as of June 15, 1994 a 1990.5 for 1 stock split of its outstanding
common stock, and as of September 27, 1994 a .714 for 1 reverse stock split of
its outstanding common stock.
CONFLICTS OF INTEREST
Mr. Knickerbocker has a current interest in LaVie Cosmetics ("LaVie"), MLF
Enterprises ("MLF"), and Knickerbocker Creations, Ltd. ("Creations"). Each of
these companies has previously developed and marketed
<PAGE>
products which are in direct competition with the Company's products. The
Company has acquired the trademark rights and the license to market the products
of LaVie, and has acquired certain operating assets and the operations of
Creations. Both LaVie and Creations are currently inactive, but have not been
dissolved.
Mr. Knickerbocker and Ms. Farrah Fawcett, a director of the Company, both have a
current interest in MLF, which previously developed and marketed a line of
jewelry products directly competitive to certain products that the Company may
be marketing now or in the future. The operations of MLF have been discontinued
and it is inactive, however MLF has not been dissolved.
Because Mr. Knickerbocker is an officer and director of the Company, and because
Ms. Fawcett is a director of the Company, their respective continuing interests
in LaVie, Creations, and MLF pose potential conflicts of interest, should such
corporations become active again in the future, and should they sell or market
products which are competitive with the Company's products, or should the
Company negotiate or enter into any significant transaction or agreements with
those companies, then a conflict of interest will exist. The Company has
received assurances that none of the corporations or individuals named herein
have any intention to compete with the Company or enter into any transactions or
agreements which would present a conflict of interest. There can be no
assurance, however, that such a conflict will not develop.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
- -------- --------------------------------
<TABLE>
<CAPTION>
(a) EXHIBITS
Exhibit
Number Description
- -------------------------------------------------------------------------------------------------------
<C> <S>
3.1 Articles of Incorporation of International Beauty Supply, Ltd. ("IBS") dated July 11, 1985.(1)
3.2 Amendment to Articles of Incorporation of IBS dated May 24, 1993.(1)
3.3 Certificate of Amendment to Articles of Incorporation of The L. L. Knickerbocker Company Inc.
(the "Company") dated June 20, 1994.(1)
3.4 Certificate of Amendment to Articles of Incorporation of the Company dated September 27,
1994.(1)
3.5 Bylaws of the Company.(2)
4.1 Qualified Stock Option Plan adopted by the Company on September 27, 1994 along with form of
Stock Option Agreement.(3)
4.2 Form of Warrant Agreement.(3)
4.3 Form of Representative's Warrant issued to W.B. McKee Securities, Inc. upon consummation of the
Company's offering on January 25, 1995.(3)
4.4 Form of Common Stock Purchase Warrant issued to Shoreline Pacific, the Institutional Finance
Division of Financial West Group. (6)
4.5 Form of 7% Convertible Debenture.(6)
10.1 Employment Agreement, dated July 1, 1996, between the Company and Louis L. Knickerbocker.(9)
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10.2 Employment Agreement, dated July 1, 1996, between the Company and Tamara Knickerbocker.(9)
10.3 Employment Agreement, dated July 1, 1996, between the Company and Peggy Vicioso.(9)
10.4 Employment Agreement, dated July 1, 1996, between the Company and Anthony P. Shutts.(9)
10.5 Product Development and License Agreement between American Environmental Systems, Inc. ("AES")
and Knickerbocker Creations, Ltd. ("Creations") dated August 4, 1992 re development of a
--
portable room ionizer.(3)
10.6 Trademark License Agreement between AES and Creations dated October 22, 1992 re the licensing
--
of the trademark EpE to Knickerbocker.(3)
10.7 Assignment of AES Product Development and License Agreement
and AES Trademark License Agreement from Creations to the
Company dated January 15, 1993, with Acceptance of Assignment
by the Company and Consent to Assignment by AES.(3)
10.8 Agreement between QVC Network, Inc. ("QVC") and the Company dated September 29, 1993 re sales
--
of EpE Clean Room ionizers.(3)
10.9 Agreement between Marie, Inc. and the Company dated April 1, 1993 re the services of Bob Mackie
--
in the design, production, and sale of products and licensing to the Company of the use of Bob
Mackie's name in conjunction with the Company's products.(3)
10.10 Agreement between Bob Mackie (US), Inc. and the Company dated May 1, 1994 re the services of
--
Bob Mackie in the design, production and sale of products and licensing to the Company of the
use of Bob Mackie's name in conjunction with the Company's products.(3)
10.11 Agreement between Cello, Inc. and the Company dated May 13, 1994 re services of Annette
--
Funicello in the design, development, manufacture and the sale of products, with Acceptance by
Annette Funicello and Cancellation of Prior Agreement dated October 30, 1991 between Cello,
Inc. and Creations.(3)
10.12 Agreement between the Company and The Tracker Corporation of
America dated March 15, 1995 re the development of marketing
--
campaigns for the Tracker products.(4)
10.13 Lease Agreement between the Company and Koll Management for 30055 Comercio, Santa Margarita, CA
dated February 15, 1995.(2)
10.14 Letter of Agreement between the Company, Michael Elam, and Jim Hann dated June 22, 1993 re the
--
sale of EpE Clean Room System Ionizers.(2)
10.15 Letter of Agreement between the Company, Dr. Michael Elam, and Louis Sabatasso dated June 23,
1993 re the sale of EpE Clean Room System Ionizers.(2)
--
10.16 Joint Venture Agreement between the Company and Paxson Communications Corporation, dated
December 21, 1995 re the formation of the joint venture corporation to be known as
--
IN/LLK Media Marketing.(5)
10.17 Agreement between the joint venture partnership of the Company and Paxson Communications
Corporation, and Agia Akal Singh Khalsa, dated January 22, 1996 re the development and
--
marketing of numerology services through infomercials, print media, radio, the home
shopping industry and the worldwide web. (5)
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10.18 Agreement between the Company and Grant King International Co., Ltd.,
dated November 28, 1995 re the acquisition of 49% of the issued and
--
outstanding stock of Grant King International Co., Ltd. (5)
10.19 Agreement between the Company and Grant King Design Co., Ltd., dated November 27, 1995 re the
--
distribution of the jewelry products of Grant King Design Co., Ltd. (5)
10.20 Agreement of Purchase and Sale of the Capital Stock of Pure
Energy Corporation between the Company and Pure Energy
Corporation, dated February 7, 1996 re the acquisition of 40%
of the issued and outstanding capital stock of Pure Energy
Corporation. (5)
10.21 Letter of intent between Pure Energy Corporation and Biofine, Inc., dated March 3, 1996 re
--
the licensing of the patents of Biofine, Inc. (5)
10.22 License Agreement between the Company and SIM-GT Licensing Corp., dated May 1, 1995 re the
--
licensing of the name, likeness and trademarks of Richard Simmons. (5)
10.23 Agreement between the Company and Timphaven Productions, Inc., dated July 24, 1995 re the
--
distribution of videos, cassettes and instructional materials. (5)
10.24 Agreement of Purchase and Sale of the Capital Stock of Krasner Group, Inc., dated June 15,
1996 re the acquisition of 100% of the issued and outstanding capital stock of Krasner Group,
--
Inc. (7)
10.25 Stock Purchase Agreement dated September 30, 1996, by and among Harlyn Products, Inc., Harlyn
International Company, Ltd. and the Company.(6)
10.26 First Amendment to Stock Purchase Agreement dated October 15, 1996, by and among Harlyn
Products, Inc., Harlyn International Company, Ltd. and the Company.(6)
10.27 Second Amendment to Stock Purchase Agreement dated November 7, 1996, by and among Harlyn
Products, Inc., Harlyn International Company, Ltd. and the Company.(6)
10.28 Agreement of Purchase and Sale of the Capital Stock of Self
Heating Container, Inc., dated September 17, 1996 by and
between Self Heating Container Corporation of California and
the Company(10)
10.29 Agreement of Purchase and Sale of the Capital Stock of Insta-Heat,
Inc., dated September 17, 1996, by and between Insta-Heat, Inc. and the
Company(10)
10.30 Agreement of Purchase and Sale of the Capital Stock of
Georgetown Collection, Inc., dated November 20, 1996, By and
between Consumer Venture Partners I, L.P., Vermont Capital
Venture Fund, North Atlantic Venture Fund, Merchant Partners
and the Company.(8)
10.31 Form of Private Securities Subscription Agreement.(6)
10.32 Form of Registration Rights Agreement.(6)
21.1 Subsidiaries of Registrant.(10)
</TABLE>
<PAGE>
<TABLE>
<C> <S>
23.0 Consent of Deloitte & Touche LLP, independent auditors. (10)
27.0 Financial Data Schedule (10)
- ----------------------------------
</TABLE>
<TABLE>
<C><S>
(1)Filed as part of Exhibit 3.1 to The L. L. Knickerbocker Company, Inc. Form SB-2 Registration Statement
No. 33-85230-LA as filed with the Securities and Exchange Commission on or about October 13, 1994.
(2)Filed as an exhibit to the L. L. Knickerbocker Company, Inc. Annual Report on Form 10-KSB filed with the
Securities and Exchange Commission on or about March 29, 1995.
(3)Filed as an Exhibit to The L. L. Knickerbocker Company, Inc. Form SB-2 Registration Statement No.
33-85230-LA as filed with the Securities and Exchange Commission on or about October 13, 1994.
(4)Filed as Exhibit to The L. L. Knickerbocker Company, Inc. report on Form 8-K filed with the Securities
and Exchange Commission on or about March 21, 1995.
(5)Filed as an exhibit to The L. L. Knickerbocker Company, Inc. Annual Report on Form 10-KSB filed with the
Securities and Exchange Commission on or about April 15, 1996.
(6)Filed as an Exhibit to The L. L. Knickerbocker Company, Inc. Form 10-QSB/A as filed with the Securities
& Exchange Commission on or about November 27, 1996.
(7)Filed as Exhibit to The L. L. Knickerbocker Company, Inc. report on Form 8-K filed with the Securities
and Exchange Commission on or about July 3, 1996.
(8)Filed as Exhibit to The L. L. Knickerbocker Company, Inc. report on Form 8-K filed with the Securities
and Exchange Commission on or about December 5, 1996.
(9)Filed as Exhibit to the L. L. Knickerbocker Company, Inc. Annual Report on Form 10-KSB filed with the
Securities and Exchange Commission on or about April 15, 1997.
(10)Filed Herewith.
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
The L.L. Knickerbocker Company, Inc.
------------------------------------
(Registrant)
Date: August 1, 1997 By: /s/ Louis L. Knickerbocker
--------------------------
Louis L. Knickerbocker
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------------------------------------------------------------------------------
<C> <S> <C>
/s/ Louis L. Knickerbocker Chief Executive Officer, 8/1/97
- ----------------------------- President and Chairman
Louis L. Knickerbocker
/s/ Anthony P. Shutts Chief Financial Officer 8/1/97
- ----------------------------- and Director
Anthony P. Shutts
/s/ Peggy Vicioso Executive Vice President 8/1/97
- ----------------------------- and Secretary
Peggy Vicioso
/s/ Farrah Fawcett Director 8/1/97
- -----------------------------
Farrah Fawcett
/s/ Gerald A. Margolis Director 8/1/97
- -----------------------------
Gerald A. Margolis
/s/ William R. Black Director 8/1/97
- -----------------------------
William R. Black
/s/ F. Rene Alvarez, Jr.
- ----------------------------- Director 8/1/97
F. Rene Alvarez, Jr.
</TABLE>
<PAGE>
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into at Rancho Santa
Margarita, California, effective as of July l, 1996, between the L. L.
Knickerbocker Co., Inc., a California corporation ("Employer") and Louis L.
Knickerbocker ("Employee"), with reference to the following:
a. Employee is presently an employee of Employer and has valuable
experience and unique skills in the business currently conducted by
Employer.
b. Employer desires to retain the exclusive services of Employee and
Employee desires to be employed by Employer for the term of this
Agreement.
In consideration of the foregoing and the commitments made herein, Employer
and Employee agree as follows:
1. Employment. During the term of this Agreement, Employee shall be employed
by Employer and shall render such services to, and perform such duties on behalf
of, Employer and shall exercise such authority as the Board of Directors of
Employer shall from time to time provide. The nature and scope of Employee's
responsibilities and duties shall generally be consistent with in character with
those performed by Employee immediately prior to the date hereof for Employer,
or those performed by persons holding the position of President and CEO of
similarly sized companies in similar industries in the United States of America.
Employee agrees to apply her best skill, efforts and knowledge and to devote
such time, energies and attention to the business of Employer as shall be
necessary to perform her responsibilities and duties hereunder.
2. Salary. Employee shall begin this employment under this Agreement
at a base salary of $300,000 per year (the "Base Salary") Such amount shalt be
paid periodically in accordance with the normal payroll procedures of Employer
in effect from time to time during the term of this Agreement. The Base Salary
provided above shall be adjusted incrementally on January 1 in the years 1997,
1998, 1999, 2000 and 2001 to reflect any increase in the cost of living. The
positive adjustment shall be in the same proportion as the proportional
differences between the Consumer Price Index for Urban Wage Earners and Clerical
Workers, all items (Los Angeles - Long Beach - Anaheim statistical area)
published by the United States Department of Labor, Bureau of Labor Statistics
(the "CPI") in effect on January 1, 1997, and on each of the adjustment dates,
1
<PAGE>
respectively, when compared to the base index in effect on January 1, 1996 for
the initial adjustment, and for each subsequent adjustment, the index in effect
on January 1 of such year shall be compared to the index in effect on January 1
of the previous year. Under no circumstances will there be a negative
adjustment to the Employee's Base Salary as a result of cost of living changes.
Should said Bureau discontinue the publication of the CPI, publish the same less
frequently, or alter the same in some other manner, then Employer may adopt a
substitute procedure which reasonably reflects and monitors consumer prices.
3. Management Bonus. In addition to the Base Salary, Employee shall be
entitled to participate in the current Management Bonus Plan in effect from time
as determined by the Board of Directors of Employer and the Compensation
Committee as appointed by the Board. The Bonus payable to Employee, if any,
shall be paid out of a Management Bonus Fund equal to 10% of the profits before
taxes of Employer based upon the audited financial statements of Employer. The
Compensation Committee shall make recommendations to the Board of Directors for
the payment to Employee of such sums out of the Management Bonus Fund as the
Board shall, in its sole discretion, determine or approve, and such sums will be
payable to Employee, in cash, for each fiscal year during the term of this
Agreement, including fiscal years 1997, 1998, 1999, 2000 and 2001; as well as
any fiscal years falling within any extension of this Agreement. In order to
determine the amount of the Management Bonus Fund, a calculation will be made
from the audited fiscal year and financial statements within 45 days of the
availability of such audited statements. If, upon such calculation, it is
determined that sufficient funds exist for the payment of bonus amounts under
the Management Bonus Plan, the Board of Directors shall determine such amounts
as shall be paid to all participants under the Management Bonus Plan, and such
amounts shall be paid within 60 days of the availability the audited fiscal year
and financial statements.
4. Stock Options. In addition to the Salary and Management Fee provided for
hereunder, Employee shall be entitled to receive Stock Options for the purchase
of shares of the Common Stock of Employer during the term of this Agreement as
determined by the Board of Directors of Employer and the Compensation Committee
as appointed by the Board. The Stock Options will be provided pursuant to the
terms of a separate qualified stock option plan adopted by Employer.
5. Benefits. Employee shall be entitled to participate in all medical,
dental, state disability insurance, and related welfare benefit plans as well as
any qualified profit
2
<PAGE>
sharing and other qualified employee benefit plans generally applicable to
employees of Employer, subject in each case to all applicable provisions of the
plans.
6. Additional Benefits and Perquisites. Employee shall be entitled to 15 days
of paid vacation per year in addition to all normal public holidays available to
all of Employer's employees.
7. Term. The term of this Agreement and the employment of Employee hereunder
shall begin as of July l, 1996 and shall continue until (i) June 30, 2001, (ii)
the end of the Extension Option period if exercised by Employer (as defined
below) or (iii) the earlier termination of Employee at the election of either
Employer for Cause (as defined below) or Employee for other than Good Reason (as
defined below).
Employer shall have a one-time right to extend this agreement for a period of
five additional years from July l, 2001 upon written notice to employee not
later than six months prior to the expiration of the term of this Agreement (the
"Extension Option"). During the term of the Extension Option, the terms and
conditions of this Agreement shall remain in full force and effect.
In the event of termination of Employee's employment by Employer for Cause
(as defined below) or by Employee for any reason other than Good Reason (as
defined below) Employee shall have no further rights to payments or benefits
under this Agreement. For the purpose of this Agreement, Cause for termination
shall exist whenever (i) Employee has been convicted of a felony, (ii) Employee
has engaged in gross misconduct or a dereliction of her duties, (iii) Employee
is otherwise in breach of any of the material provisions of this Agreement, or
(iv) Employee is unable to discharge her duties as a result of death or physical
or mental disability. Good Reason for termination by Employee shall exist
whenever (i) a voluntary or involuntary petition under the Bankruptcy Code has
been filed by or against Employer or Employer is otherwise insolvent, or (ii)
Employer is in breach of any of the material provisions of this Agreement.
8. Trade Secrets and Confidential Information. The following provisions
further set forth Employee's obligations to safeguard Trade Secrets and
Confidential Information of Employer obtained in the course and scope of her
employment with Employer, whether or not during the term of this Agreement.
8.1. The term "Trade Secret" is defined as the whole or any portion or
phrase of any scientific or technical or business information particular to
Employer, including, but not limited to, any design,
3
<PAGE>
process, procedure, business procedure or system, formula, improvement, or
invention that (1) derives independent economic value, actual or potential,
from not being generally known to the public or to other persons who can
obtain economic value from its disclosure or use, and (2) is the subject of
Employer's reasonable efforts to maintain its secrecy. In addition to
information belonging to Employer, information furnished to Employer by other
parties can be a Trade Secret. Employee acknowledges and accepts the
obligation to apply the definition of Trade Secrets in this Agreement to
information coming to Employee's attention, and to safeguard such information
from further disclosure except to perform her duties hereunder.
8.2. The term "Confidential Information" is defined as all items, materials
and information (whether or not reduced to writing and whether or not
patentable or copyrightable) which belong to Employer and which reflect,
consist of or refer to:
(a) The names of those customers and vendors of Employer which are not
generally known in the industry;
(b) Information compiled, collected or developed by Employer reflecting
identities and characteristics of any customers of Employer or customer
representatives including product or service preferences or requirements, cost
or price information for goods or services offered or sold, credit terms and
credit performance, actual or likely order cycles, the nature of supplies
delivered or services performed, and research or development plans or
activities;
(c) Information compiled, collected, or developed by Employer reflecting
identities and characteristics of any vendors or suppliers of Employer or
vendor or supplier representatives, including cost or price information for
goods or services offered or purchased, credit terms and credit performance,
product quality and reliability, delivery terms, and prior, current or future
research or development plans or activities;
(d) The prices, discounts, selling techniques and distribution methods used
by Employer;
(e) Personal and private information about any of Employer's employees,
employees of any customer or
4
<PAGE>
supplier, or any artist or spokesperson; or,
(f) Business plans, strategies, goals or objectives of Employer;
(g) Any other confidential or proprietary information obtained directly
or indirectly while performing Employee's duties on behalf of Employer.
8.3. The term "Confidential Information" includes information which may
also be a Trade Secret, but does not include anything described above
which is now generally known by parties other than Employer, its
affiliates and employees, or become generally known, through no act or
failure to act of Employee.
8.4. Employee agrees to hold all such Confidential Information in
confidence and to not disclose Confidential Information to any person not
employed by Employer.
8.5. Employee will, immediately upon the termination of this Agreement,
surrender to Employer any and all business records and materials which may
have been received from Employer during the term of this Agreement, or
which pertain to Employer's business, and all copies thereof, however made
or obtained.
8.6. Employee acknowledges that the foregoing provisions of this
Paragraph 8 are necessary to protect Employer's Trade Secrets and
Confidential Information.
9. Ownership of Programs and Documents. All work product produced by
Employee in performing Services for Employer, including without limitation,
designs, programs, product lines, program descriptions of any type, reports and
business records shall be and shall remain the property of Employer. Employee
agrees to execute such documents, including assignment of copyrights, as may be
provided from time to time by counsel for Employer in order to perfect
Employer's rights in such work product.
10. Place of Employment. During the term of this Agreement , Employer
shall maintain its principal executive offices in the County of Orange, and the
Employee's place of employment shall remain in the County of Orange, subject to
reasonable business travel. The parties hereto may amend the provisions of this
section by mutual agreement.
11. Withholding Taxes. A11 payments by Employer to Employee hereunder
shall be subject to reduction in the amount of
5
<PAGE>
any withholding taxes.
12. Conflicts of Interest. During the term of this Agreement, Employee
will not, directly or indirectly, either for herself or for any other person,
partnership, corporation or company participate in any enterprise operating
where Employer conducts its business or sells its products or services which
involves the business in which Employer is engaged at any time during Employee's
employment including, but not limited to, the marketing, sale, distribution,
processing or manufacturing of products within the same industries as Employer's
products. Employee acknowledges that this covenant is reasonable with respect to
its duration, geographical area and scope.
In performing her obligations for Employer, Employee shall act in the best
interest of, and with complete loyalty to, Employer and shall not exercise her
duties or responsibilities in her own self-interest, at the expense of the best
interest of Employer.
13. General Provisions
13.1. Complete Agreement. This Agreement embodies the complete
agreement and understanding among the parties and supersedes and preempts
any prior understandings, agreements or representations by or among the
parties, written or oral, which may have related to the subject matter
hereof in any way.
13.2. Governing Law. This Agreement shall be governed by, construed and
enforced in accordance with the internal laws of the State of California.
13.3. Waiver of Breach. Any waiver by either party of a breach of the
terms and conditions of this Agreement shall not be considered as a waiver
of any subsequent breach of the same or any other term and condition
hereof.
13.4. Amendment and Waivers. Any provision of this Agreement may be
amended or waived only with the prior written consent of the Employer and
Employee.
13.5. Assignment. This Agreement is intended to bind and inure to the
benefit of and be enforceable by the parties hereto, and their respective
successors and assigns, except that any purported assignment by Employee
of any of her rights or obligations hereunder shall be void.
6
<PAGE>
13.6. Severability. In event that any provision or any part of any
provision of this Agreement is held to be illegal, invalid or
unenforceable, such illegality, invalidity or unenforceability shall not
affect the validity or enforceability of any other provision or part
hereof.
SIGNATURES APPEAR ON THE FOLLOWING PAGE
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date first above mentioned.
_________________________________
Louis L. Knickerbocker
The L. L. Knickerbocker Co., Inc.
By:______________________________
Title: __________________________
Attest: _________________________
7
<PAGE>
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into at Rancho Santa
Margarita, California, effective as of July l, 1996, between the L. L.
Knickerbocker Co., Inc., a California corporation ("Employer") and Tamara
Knickerbocker ("Employee"), with reference to the following:
a. Employee is presently an employee of Employer and has valuable
experience and unique skills in the business currently conducted by
Employer.
b. Employer desires to retain the exclusive services of Employee and
Employee desires to be employed by Employer for the term of this
Agreement.
In consideration of the foregoing and the commitments made herein, Employer
and Employee agree as follows:
1. Employment. During the term of this Agreement, Employee shall be employed
by Employer and shall render such services to, and perform such duties on behalf
of, Employer and shall exercise such authority as the Board of Directors of
Employer shall from time to time provide. The nature and scope of Employee's
responsibilities and duties shall generally be consistent with in character with
those performed by Employee immediately prior to the date hereof for Employer,
or those performed by persons holding the position of Vice President of
similarly sized companies in similar industries in the United States of America.
Employee agrees to apply her best skill, efforts and knowledge and to devote
such time, energies and attention to the business of Employer as shall be
necessary to perform her responsibilities and duties hereunder.
2. Salary. Employee shall begin this employment under this Agreement
at a base salary of $80,000 per year (the "Base Salary") Such amount shalt be
paid periodically in accordance with the normal payroll procedures of Employer
in effect from time to time during the term of this Agreement. The Base Salary
provided above shall be adjusted incrementally on January 1 in the years 1997,
1998, 1999, 2000 and 2001 to reflect any increase in the cost of living. The
positive adjustment shall be in the same proportion as the proportional
differences between the Consumer Price Index for Urban Wage Earners and Clerical
Workers, all items (Los Angeles - Long Beach - Anaheim statistical area)
published by the United States Department of Labor, Bureau of Labor Statistics
(the "CPI") in effect on January 1, 1997, and on each of the adjustment dates,
1
<PAGE>
respectively, when compared to the base index in effect on January 1, 1996 for
the initial adjustment, and for each subsequent adjustment, the index in effect
on January 1 of such year shall be compared to the index in effect on January 1
of the previous year. Under no circumstances will there be a negative
adjustment to the Employee's Base Salary as a result of cost of living changes.
Should said Bureau discontinue the publication of the CPI, publish the same less
frequently, or alter the same in some other manner, then Employer may adopt a
substitute procedure which reasonably reflects and monitors consumer prices.
3. Management Bonus. In addition to the Base Salary, Employee shall be
entitled to participate in the current Management Bonus Plan in effect from time
as determined by the Board of Directors of Employer and the Compensation
Committee as appointed by the Board. The Bonus payable to Employee, if any,
shall be paid out of a Management Bonus Fund equal to 10% of the profits before
taxes of Employer based upon the audited financial statements of Employer. The
Compensation Committee shall make recommendations to the Board of Directors for
the payment to Employee of such sums out of the Management Bonus Fund as the
Board shall, in its sole discretion, determine or approve, and such sums will be
payable to Employee, in cash, for each fiscal year during the term of this
Agreement, including fiscal years 1997, 1998, 1999, 2000 and 2001; as well as
any fiscal years falling within any extension of this Agreement. In order to
determine the amount of the Management Bonus Fund, a calculation will be made
from the audited fiscal year and financial statements within 45 days of the
availability of such audited statements. If, upon such calculation, it is
determined that sufficient funds exist for the payment of bonus amounts under
the Management Bonus Plan, the Board of Directors shall determine such amounts
as shall be paid to all participants under the Management Bonus Plan, and such
amounts shall be paid within 60 days of the availability the audited fiscal year
and financial statements.
4. Stock Options. In addition to the Salary and Management Fee provided for
hereunder, Employee shall be entitled to receive Stock Options for the purchase
of shares of the Common Stock of Employer during the term of this Agreement as
determined by the Board of Directors of Employer and the Compensation Committee
as appointed by the Board. The Stock Options will be provided pursuant to the
terms of a separate qualified stock option plan adopted by Employer.
5. Benefits. Employee shall be entitled to participate in all medical,
dental, state disability insurance, and related welfare benefit plans as well as
any qualified profit
2
<PAGE>
sharing and other qualified employee benefit plans generally applicable to
employees of Employer, subject in each case to all applicable provisions of the
plans.
6. Additional Benefits and Perquisites. Employee shall be entitled to 15 days
of paid vacation per year in addition to all normal public holidays available to
all of Employer's employees.
7. Term. The term of this Agreement and the employment of Employee hereunder
shall begin as of July l, 1996 and shall continue until (i) June 30, 2001, (ii)
the end of the Extension Option period if exercised by Employer (as defined
below) or (iii) the earlier termination of Employee at the election of either
Employer for Cause (as defined below) or Employee for other than Good Reason (as
defined below).
Employer shall have a one-time right to extend this agreement for a period of
five additional years from July l, 2001 upon written notice to employee not
later than six months prior to the expiration of the term of this Agreement (the
"Extension Option"). During the term of the Extension Option, the terms and
conditions of this Agreement shall remain in full force and effect.
In the event of termination of Employee's employment by Employer for Cause
(as defined below) or by Employee for any reason other than Good Reason (as
defined below) Employee shall have no further rights to payments or benefits
under this Agreement. For the purpose of this Agreement, Cause for termination
shall exist whenever (i) Employee has been convicted of a felony, (ii) Employee
has engaged in gross misconduct or a dereliction of her duties, (iii) Employee
is otherwise in breach of any of the material provisions of this Agreement, or
(iv) Employee is unable to discharge her duties as a result of death or physical
or mental disability. Good Reason for termination by Employee shall exist
whenever (i) a voluntary or involuntary petition under the Bankruptcy Code has
been filed by or against Employer or Employer is otherwise insolvent, or (ii)
Employer is in breach of any of the material provisions of this Agreement.
8. Trade Secrets and Confidential Information. The following provisions
further set forth Employee's obligations to safeguard Trade Secrets and
Confidential Information of Employer obtained in the course and scope of her
employment with Employer, whether or not during the term of this Agreement.
8.1. The term "Trade Secret" is defined as the whole or any portion or
phrase of any scientific or technical or business information particular to
Employer, including, but not limited to, any design,
3
<PAGE>
process, procedure, business procedure or system, formula, improvement, or
invention that (1) derives independent economic value, actual or potential,
from not being generally known to the public or to other persons who can
obtain economic value from its disclosure or use, and (2) is the subject of
Employer's reasonable efforts to maintain its secrecy. In addition to
information belonging to Employer, information furnished to Employer by other
parties can be a Trade Secret. Employee acknowledges and accepts the
obligation to apply the definition of Trade Secrets in this Agreement to
information coming to Employee's attention, and to safeguard such information
from further disclosure except to perform her duties hereunder.
8.2. The term "Confidential Information" is defined as all items, materials
and information (whether or not reduced to writing and whether or not
patentable or copyrightable) which belong to Employer and which reflect,
consist of or refer to:
(a) The names of those customers and vendors of Employer which are not
generally known in the industry;
(b) Information compiled, collected or developed by Employer reflecting
identities and characteristics of any customers of Employer or customer
representatives including product or service preferences or requirements, cost
or price information for goods or services offered or sold, credit terms and
credit performance, actual or likely order cycles, the nature of supplies
delivered or services performed, and research or development plans or
activities;
(c) Information compiled, collected, or developed by Employer reflecting
identities and characteristics of any vendors or suppliers of Employer or
vendor or supplier representatives, including cost or price information for
goods or services offered or purchased, credit terms and credit performance,
product quality and reliability, delivery terms, and prior, current or future
research or development plans or activities;
(d) The prices, discounts, selling techniques and distribution methods used
by Employer;
(e) Personal and private information about any of Employer's employees,
employees of any customer or
4
<PAGE>
supplier, or any artist or spokesperson; or,
(f) Business plans, strategies, goals or objectives of Employer;
(g) Any other confidential or proprietary information obtained directly
or indirectly while performing Employee's duties on behalf of Employer.
8.3. The term "Confidential Information" includes information which may
also be a Trade Secret, but does not include anything described above
which is now generally known by parties other than Employer, its
affiliates and employees, or become generally known, through no act or
failure to act of Employee.
8.4. Employee agrees to hold all such Confidential Information in
confidence and to not disclose Confidential Information to any person not
employed by Employer.
8.5. Employee will, immediately upon the termination of this Agreement,
surrender to Employer any and all business records and materials which may
have been received from Employer during the term of this Agreement, or
which pertain to Employer's business, and all copies thereof, however made
or obtained.
8.6. Employee acknowledges that the foregoing provisions of this
Paragraph 8 are necessary to protect Employer's Trade Secrets and
Confidential Information.
9. Ownership of Programs and Documents. All work product produced by
Employee in performing Services for Employer, including without limitation,
designs, programs, product lines, program descriptions of any type, reports and
business records shall be and shall remain the property of Employer. Employee
agrees to execute such documents, including assignment of copyrights, as may be
provided from time to time by counsel for Employer in order to perfect
Employer's rights in such work product.
10. Place of Employment. During the term of this Agreement , Employer
shall maintain its principal executive offices in the County of Orange, and the
Employee's place of employment shall remain in the County of Orange, subject to
reasonable business travel. The parties hereto may amend the provisions of this
section by mutual agreement.
11. Withholding Taxes. A11 payments by Employer to Employee hereunder
shall be subject to reduction in the amount of
5
<PAGE>
any withholding taxes.
12. Conflicts of Interest. During the term of this Agreement, Employee
will not, directly or indirectly, either for herself or for any other person,
partnership, corporation or company participate in any enterprise operating
where Employer conducts its business or sells its products or services which
involves the business in which Employer is engaged at any time during Employee's
employment including, but not limited to, the marketing, sale, distribution,
processing or manufacturing of products within the same industries as Employer's
products. Employee acknowledges that this covenant is reasonable with respect to
its duration, geographical area and scope.
In performing her obligations for Employer, Employee shall act in the best
interest of, and with complete loyalty to, Employer and shall not exercise her
duties or responsibilities in her own self-interest, at the expense of the best
interest of Employer.
13. General Provisions
13.1. Complete Agreement. This Agreement embodies the complete
agreement and understanding among the parties and supersedes and preempts
any prior understandings, agreements or representations by or among the
parties, written or oral, which may have related to the subject matter
hereof in any way.
13.2. Governing Law. This Agreement shall be governed by, construed and
enforced in accordance with the internal laws of the State of California.
13.3. Waiver of Breach. Any waiver by either party of a breach of the
terms and conditions of this Agreement shall not be considered as a waiver
of any subsequent breach of the same or any other term and condition
hereof.
13.4. Amendment and Waivers. Any provision of this Agreement may be
amended or waived only with the prior written consent of the Employer and
Employee.
13.5. Assignment. This Agreement is intended to bind and inure to the
benefit of and be enforceable by the parties hereto, and their respective
successors and assigns, except that any purported assignment by Employee
of any of her rights or obligations hereunder shall be void.
6
<PAGE>
13.6. Severability. In event that any provision or any part of any
provision of this Agreement is held to be illegal, invalid or
unenforceable, such illegality, invalidity or unenforceability shall not
affect the validity or enforceability of any other provision or part
hereof.
SIGNATURES APPEAR ON THE FOLLOWING PAGE
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date first above mentioned.
_________________________________
Tamara Knickerbocker
The L. L. Knickerbocker Co., Inc.
By:______________________________
Title: __________________________
Attest: _________________________
7
<PAGE>
EXHIBIT 10.3
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into at Rancho Santa
Margarita, California, effective as of July l, 1996, between the L. L.
Knickerbocker Co., Inc., a California corporation ("Employer") and Peggy
Vicioso ("Employee"), with reference to the following:
a. Employee is presently an employee of Employer and has valuable
experience and unique skills in the business currently conducted by
Employer.
b. Employer desires to retain the exclusive services of Employee and
Employee desires to be employed by Employer for the term of this
Agreement.
In consideration of the foregoing and the commitments made herein, Employer
and Employee agree as follows:
1. Employment. During the term of this Agreement, Employee shall be employed
by Employer and shall render such services to, and perform such duties on behalf
of, Employer and shall exercise such authority as the Board of Directors of
Employer shall from time to time provide. The nature and scope of Employee's
responsibilities and duties shall generally be consistent with in character with
those performed by Employee immediately prior to the date hereof for Employer,
or those performed by persons holding the position of Executive Vice President
of similarly sized companies in similar industries in the United States of
America. Employee agrees to apply her best skill, efforts and knowledge and to
devote such time, energies and attention to the business of Employer as shall be
necessary to perform her responsibilities and duties hereunder.
2. Salary. Employee shall begin this employment under this Agreement
at a base salary of $100,000 per year (the "Base Salary") Such amount shalt be
paid periodically in accordance with the normal payroll procedures of Employer
in effect from time to time during the term of this Agreement. The Base Salary
provided above shall be adjusted incrementally on January 1 in the years 1997,
1998, 1999, 2000 and 2001 to reflect any increase in the cost of living. The
positive adjustment shall be in the same proportion as the proportional
differences between the Consumer Price Index for Urban Wage Earners and Clerical
Workers, all items (Los Angeles - Long Beach - Anaheim statistical area)
published by the United States Department of Labor, Bureau of Labor Statistics
(the "CPI") in effect on January 1, 1997, and on each of the adjustment dates,
1
<PAGE>
respectively, when compared to the base index in effect on January 1, 1996 for
the initial adjustment, and for each subsequent adjustment, the index in effect
on January 1 of such year shall be compared to the index in effect on January 1
of the previous year. Under no circumstances will there be a negative
adjustment to the Employee's Base Salary as a result of cost of living changes.
Should said Bureau discontinue the publication of the CPI, publish the same less
frequently, or alter the same in some other manner, then Employer may adopt a
substitute procedure which reasonably reflects and monitors consumer prices.
3. Management Bonus. In addition to the Base Salary, Employee shall be
entitled to participate in the current Management Bonus Plan in effect from time
as determined by the Board of Directors of Employer and the Compensation
Committee as appointed by the Board. The Bonus payable to Employee, if any,
shall be paid out of a Management Bonus Fund equal to 10% of the profits before
taxes of Employer based upon the audited financial statements of Employer. The
Compensation Committee shall make recommendations to the Board of Directors for
the payment to Employee of such sums out of the Management Bonus Fund as the
Board shall, in its sole discretion, determine or approve, and such sums will be
payable to Employee, in cash, for each fiscal year during the term of this
Agreement, including fiscal years 1997, 1998, 1999, 2000 and 2001; as well as
any fiscal years falling within any extension of this Agreement. In order to
determine the amount of the Management Bonus Fund, a calculation will be made
from the audited fiscal year and financial statements within 45 days of the
availability of such audited statements. If, upon such calculation, it is
determined that sufficient funds exist for the payment of bonus amounts under
the Management Bonus Plan, the Board of Directors shall determine such amounts
as shall be paid to all participants under the Management Bonus Plan, and such
amounts shall be paid within 60 days of the availability the audited fiscal year
and financial statements.
4. Stock Options. In addition to the Salary and Management Fee provided for
hereunder, Employee shall be entitled to receive Stock Options for the purchase
of shares of the Common Stock of Employer during the term of this Agreement as
determined by the Board of Directors of Employer and the Compensation Committee
as appointed by the Board. The Stock Options will be provided pursuant to the
terms of a separate qualified stock option plan adopted by Employer.
5. Benefits. Employee shall be entitled to participate in all medical,
dental, state disability insurance, and related welfare benefit plans as well as
any qualified profit
2
<PAGE>
sharing and other qualified employee benefit plans generally applicable to
employees of Employer, subject in each case to all applicable provisions of the
plans.
6. Additional Benefits and Perquisites. Employee shall be entitled to 15 days
of paid vacation per year in addition to all normal public holidays available to
all of Employer's employees.
7. Term. The term of this Agreement and the employment of Employee hereunder
shall begin as of July l, 1996 and shall continue until (i) June 30, 2001, (ii)
the end of the Extension Option period if exercised by Employer (as defined
below) or (iii) the earlier termination of Employee at the election of either
Employer for Cause (as defined below) or Employee for other than Good Reason (as
defined below).
Employer shall have a one-time right to extend this agreement for a period of
five additional years from July l, 2001 upon written notice to employee not
later than six months prior to the expiration of the term of this Agreement (the
"Extension Option"). During the term of the Extension Option, the terms and
conditions of this Agreement shall remain in full force and effect.
In the event of termination of Employee's employment by Employer for Cause
(as defined below) or by Employee for any reason other than Good Reason (as
defined below) Employee shall have no further rights to payments or benefits
under this Agreement. For the purpose of this Agreement, Cause for termination
shall exist whenever (i) Employee has been convicted of a felony, (ii) Employee
has engaged in gross misconduct or a dereliction of her duties, (iii) Employee
is otherwise in breach of any of the material provisions of this Agreement, or
(iv) Employee is unable to discharge her duties as a result of death or physical
or mental disability. Good Reason for termination by Employee shall exist
whenever (i) a voluntary or involuntary petition under the Bankruptcy Code has
been filed by or against Employer or Employer is otherwise insolvent, or (ii)
Employer is in breach of any of the material provisions of this Agreement.
8. Trade Secrets and Confidential Information. The following provisions
further set forth Employee's obligations to safeguard Trade Secrets and
Confidential Information of Employer obtained in the course and scope of her
employment with Employer, whether or not during the term of this Agreement.
8.1. The term "Trade Secret" is defined as the whole or any portion or
phrase of any scientific or technical or business information particular to
Employer, including, but not limited to, any design,
3
<PAGE>
process, procedure, business procedure or system, formula, improvement, or
invention that (1) derives independent economic value, actual or potential,
from not being generally known to the public or to other persons who can
obtain economic value from its disclosure or use, and (2) is the subject of
Employer's reasonable efforts to maintain its secrecy. In addition to
information belonging to Employer, information furnished to Employer by other
parties can be a Trade Secret. Employee acknowledges and accepts the
obligation to apply the definition of Trade Secrets in this Agreement to
information coming to Employee's attention, and to safeguard such information
from further disclosure except to perform her duties hereunder.
8.2. The term "Confidential Information" is defined as all items, materials
and information (whether or not reduced to writing and whether or not
patentable or copyrightable) which belong to Employer and which reflect,
consist of or refer to:
(a) The names of those customers and vendors of Employer which are not
generally known in the industry;
(b) Information compiled, collected or developed by Employer reflecting
identities and characteristics of any customers of Employer or customer
representatives including product or service preferences or requirements, cost
or price information for goods or services offered or sold, credit terms and
credit performance, actual or likely order cycles, the nature of supplies
delivered or services performed, and research or development plans or
activities;
(c) Information compiled, collected, or developed by Employer reflecting
identities and characteristics of any vendors or suppliers of Employer or
vendor or supplier representatives, including cost or price information for
goods or services offered or purchased, credit terms and credit performance,
product quality and reliability, delivery terms, and prior, current or future
research or development plans or activities;
(d) The prices, discounts, selling techniques and distribution methods used
by Employer;
(e) Personal and private information about any of Employer's employees,
employees of any customer or
4
<PAGE>
supplier, or any artist or spokesperson; or,
(f) Business plans, strategies, goals or objectives of Employer;
(g) Any other confidential or proprietary information obtained directly
or indirectly while performing Employee's duties on behalf of Employer.
8.3. The term "Confidential Information" includes information which may
also be a Trade Secret, but does not include anything described above
which is now generally known by parties other than Employer, its
affiliates and employees, or become generally known, through no act or
failure to act of Employee.
8.4. Employee agrees to hold all such Confidential Information in
confidence and to not disclose Confidential Information to any person not
employed by Employer.
8.5. Employee will, immediately upon the termination of this Agreement,
surrender to Employer any and all business records and materials which may
have been received from Employer during the term of this Agreement, or
which pertain to Employer's business, and all copies thereof, however made
or obtained.
8.6. Employee acknowledges that the foregoing provisions of this
Paragraph 8 are necessary to protect Employer's Trade Secrets and
Confidential Information.
9. Ownership of Programs and Documents. All work product produced by
Employee in performing Services for Employer, including without limitation,
designs, programs, product lines, program descriptions of any type, reports and
business records shall be and shall remain the property of Employer. Employee
agrees to execute such documents, including assignment of copyrights, as may be
provided from time to time by counsel for Employer in order to perfect
Employer's rights in such work product.
10. Place of Employment. During the term of this Agreement , Employer
shall maintain its principal executive offices in the County of Orange, and the
Employee's place of employment shall remain in the County of Orange, subject to
reasonable business travel. The parties hereto may amend the provisions of this
section by mutual agreement.
11. Withholding Taxes. A11 payments by Employer to Employee hereunder
shall be subject to reduction in the amount of
5
<PAGE>
any withholding taxes.
12. Conflicts of Interest. During the term of this Agreement, Employee
will not, directly or indirectly, either for herself or for any other person,
partnership, corporation or company participate in any enterprise operating
where Employer conducts its business or sells its products or services which
involves the business in which Employer is engaged at any time during Employee's
employment including, but not limited to, the marketing, sale, distribution,
processing or manufacturing of products within the same industries as Employer's
products. Employee acknowledges that this covenant is reasonable with respect to
its duration, geographical area and scope.
In performing her obligations for Employer, Employee shall act in the best
interest of, and with complete loyalty to, Employer and shall not exercise her
duties or responsibilities in her own self-interest, at the expense of the best
interest of Employer.
13. General Provisions
13.1. Complete Agreement. This Agreement embodies the complete
agreement and understanding among the parties and supersedes and preempts
any prior understandings, agreements or representations by or among the
parties, written or oral, which may have related to the subject matter
hereof in any way.
13.2. Governing Law. This Agreement shall be governed by, construed and
enforced in accordance with the internal laws of the State of California.
13.3. Waiver of Breach. Any waiver by either party of a breach of the
terms and conditions of this Agreement shall not be considered as a waiver
of any subsequent breach of the same or any other term and condition
hereof.
13.4. Amendment and Waivers. Any provision of this Agreement may be
amended or waived only with the prior written consent of the Employer and
Employee.
13.5. Assignment. This Agreement is intended to bind and inure to the
benefit of and be enforceable by the parties hereto, and their respective
successors and assigns, except that any purported assignment by Employee
of any of her rights or obligations hereunder shall be void.
6
<PAGE>
13.6. Severability. In event that any provision or any part of any
provision of this Agreement is held to be illegal, invalid or
unenforceable, such illegality, invalidity or unenforceability shall not
affect the validity or enforceability of any other provision or part
hereof.
SIGNATURES APPEAR ON THE FOLLOWING PAGE
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date first above mentioned.
_________________________________
Peggy Vicioso
The L. L. Knickerbocker Co., Inc.
By:______________________________
Title: __________________________
Attest: _________________________
7
<PAGE>
EXHIBIT 10.4
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into at Rancho Santa
Margarita, California, effective as of July l, 1996, between the L. L.
Knickerbocker Co., Inc., a California corporation ("Employer") and Anthony P.
Shutts ("Employee"), with reference to the following:
a. Employee is presently an employee of Employer and has valuable
experience and unique skills in the business currently conducted by
Employer.
b. Employer desires to retain the exclusive services of Employee and
Employee desires to be employed by Employer for the term of this
Agreement.
In consideration of the foregoing and the commitments made herein, Employer
and Employee agree as follows:
1. Employment. During the term of this Agreement, Employee shall be employed
by Employer and shall render such services to, and perform such duties on behalf
of, Employer and shall exercise such authority as the Board of Directors of
Employer shall from time to time provide. The nature and scope of Employee's
responsibilities and duties shall generally be consistent with in character with
those performed by Employee immediately prior to the date hereof for Employer,
or those performed by persons holding the position of Chief Financial Officer of
similarly sized companies in similar industries in the United States of America.
Employee agrees to apply her best skill, efforts and knowledge and to devote
such time, energies and attention to the business of Employer as shall be
necessary to perform her responsibilities and duties hereunder.
2. Salary. Employee shall begin this employment under this Agreement
at a base salary of $120,000 per year (the "Base Salary") Such amount shalt be
paid periodically in accordance with the normal payroll procedures of Employer
in effect from time to time during the term of this Agreement. The Base Salary
provided above shall be adjusted incrementally on January 1 in the years 1997,
1998, 1999, 2000 and 2001 to reflect any increase in the cost of living. The
positive adjustment shall be in the same proportion as the proportional
differences between the Consumer Price Index for Urban Wage Earners and Clerical
Workers, all items (Los Angeles - Long Beach - Anaheim statistical area)
published by the United States Department of Labor, Bureau of Labor Statistics
(the "CPI") in effect on January 1, 1997, and on each of the adjustment dates,
1
<PAGE>
respectively, when compared to the base index in effect on January 1, 1996 for
the initial adjustment, and for each subsequent adjustment, the index in effect
on January 1 of such year shall be compared to the index in effect on January 1
of the previous year. Under no circumstances will there be a negative
adjustment to the Employee's Base Salary as a result of cost of living changes.
Should said Bureau discontinue the publication of the CPI, publish the same less
frequently, or alter the same in some other manner, then Employer may adopt a
substitute procedure which reasonably reflects and monitors consumer prices.
3. Management Bonus. In addition to the Base Salary, Employee shall be
entitled to participate in the current Management Bonus Plan in effect from time
as determined by the Board of Directors of Employer and the Compensation
Committee as appointed by the Board. The Bonus payable to Employee, if any,
shall be paid out of a Management Bonus Fund equal to 10% of the profits before
taxes of Employer based upon the audited financial statements of Employer. The
Compensation Committee shall make recommendations to the Board of Directors for
the payment to Employee of such sums out of the Management Bonus Fund as the
Board shall, in its sole discretion, determine or approve, and such sums will be
payable to Employee, in cash, for each fiscal year during the term of this
Agreement, including fiscal years 1997, 1998, 1999, 2000 and 2001; as well as
any fiscal years falling within any extension of this Agreement. In order to
determine the amount of the Management Bonus Fund, a calculation will be made
from the audited fiscal year and financial statements within 45 days of the
availability of such audited statements. If, upon such calculation, it is
determined that sufficient funds exist for the payment of bonus amounts under
the Management Bonus Plan, the Board of Directors shall determine such amounts
as shall be paid to all participants under the Management Bonus Plan, and such
amounts shall be paid within 60 days of the availability the audited fiscal year
and financial statements.
4. Stock Options. In addition to the Salary and Management Fee provided for
hereunder, Employee shall be entitled to receive Stock Options for the purchase
of shares of the Common Stock of Employer during the term of this Agreement as
determined by the Board of Directors of Employer and the Compensation Committee
as appointed by the Board. The Stock Options will be provided pursuant to the
terms of a separate qualified stock option plan adopted by Employer.
5. Benefits. Employee shall be entitled to participate in all medical,
dental, state disability insurance, and related welfare benefit plans as well as
any qualified profit
2
<PAGE>
sharing and other qualified employee benefit plans generally applicable to
employees of Employer, subject in each case to all applicable provisions of the
plans.
6. Additional Benefits and Perquisites. Employee shall be entitled to 15 days
of paid vacation per year in addition to all normal public holidays available to
all of Employer's employees.
7. Term. The term of this Agreement and the employment of Employee hereunder
shall begin as of July l, 1996 and shall continue until (i) June 30, 2001, (ii)
the end of the Extension Option period if exercised by Employer (as defined
below) or (iii) the earlier termination of Employee at the election of either
Employer for Cause (as defined below) or Employee for other than Good Reason (as
defined below).
Employer shall have a one-time right to extend this agreement for a period of
five additional years from July l, 2001 upon written notice to employee not
later than six months prior to the expiration of the term of this Agreement (the
"Extension Option"). During the term of the Extension Option, the terms and
conditions of this Agreement shall remain in full force and effect.
In the event of termination of Employee's employment by Employer for Cause
(as defined below) or by Employee for any reason other than Good Reason (as
defined below) Employee shall have no further rights to payments or benefits
under this Agreement. For the purpose of this Agreement, Cause for termination
shall exist whenever (i) Employee has been convicted of a felony, (ii) Employee
has engaged in gross misconduct or a dereliction of her duties, (iii) Employee
is otherwise in breach of any of the material provisions of this Agreement, or
(iv) Employee is unable to discharge her duties as a result of death or physical
or mental disability. Good Reason for termination by Employee shall exist
whenever (i) a voluntary or involuntary petition under the Bankruptcy Code has
been filed by or against Employer or Employer is otherwise insolvent, or (ii)
Employer is in breach of any of the material provisions of this Agreement.
8. Trade Secrets and Confidential Information. The following provisions
further set forth Employee's obligations to safeguard Trade Secrets and
Confidential Information of Employer obtained in the course and scope of her
employment with Employer, whether or not during the term of this Agreement.
8.1. The term "Trade Secret" is defined as the whole or any portion or
phrase of any scientific or technical or business information particular to
Employer, including, but not limited to, any design,
3
<PAGE>
process, procedure, business procedure or system, formula, improvement, or
invention that (1) derives independent economic value, actual or potential,
from not being generally known to the public or to other persons who can
obtain economic value from its disclosure or use, and (2) is the subject of
Employer's reasonable efforts to maintain its secrecy. In addition to
information belonging to Employer, information furnished to Employer by other
parties can be a Trade Secret. Employee acknowledges and accepts the
obligation to apply the definition of Trade Secrets in this Agreement to
information coming to Employee's attention, and to safeguard such information
from further disclosure except to perform her duties hereunder.
8.2. The term "Confidential Information" is defined as all items, materials
and information (whether or not reduced to writing and whether or not
patentable or copyrightable) which belong to Employer and which reflect,
consist of or refer to:
(a) The names of those customers and vendors of Employer which are not
generally known in the industry;
(b) Information compiled, collected or developed by Employer reflecting
identities and characteristics of any customers of Employer or customer
representatives including product or service preferences or requirements, cost
or price information for goods or services offered or sold, credit terms and
credit performance, actual or likely order cycles, the nature of supplies
delivered or services performed, and research or development plans or
activities;
(c) Information compiled, collected, or developed by Employer reflecting
identities and characteristics of any vendors or suppliers of Employer or
vendor or supplier representatives, including cost or price information for
goods or services offered or purchased, credit terms and credit performance,
product quality and reliability, delivery terms, and prior, current or future
research or development plans or activities;
(d) The prices, discounts, selling techniques and distribution methods used
by Employer;
(e) Personal and private information about any of Employer's employees,
employees of any customer or
4
<PAGE>
supplier, or any artist or spokesperson; or,
(f) Business plans, strategies, goals or objectives of Employer;
(g) Any other confidential or proprietary information obtained directly
or indirectly while performing Employee's duties on behalf of Employer.
8.3. The term "Confidential Information" includes information which may
also be a Trade Secret, but does not include anything described above
which is now generally known by parties other than Employer, its
affiliates and employees, or become generally known, through no act or
failure to act of Employee.
8.4. Employee agrees to hold all such Confidential Information in
confidence and to not disclose Confidential Information to any person not
employed by Employer.
8.5. Employee will, immediately upon the termination of this Agreement,
surrender to Employer any and all business records and materials which may
have been received from Employer during the term of this Agreement, or
which pertain to Employer's business, and all copies thereof, however made
or obtained.
8.6. Employee acknowledges that the foregoing provisions of this
Paragraph 8 are necessary to protect Employer's Trade Secrets and
Confidential Information.
9. Ownership of Programs and Documents. All work product produced by
Employee in performing Services for Employer, including without limitation,
designs, programs, product lines, program descriptions of any type, reports and
business records shall be and shall remain the property of Employer. Employee
agrees to execute such documents, including assignment of copyrights, as may be
provided from time to time by counsel for Employer in order to perfect
Employer's rights in such work product.
10. Place of Employment. During the term of this Agreement , Employer
shall maintain its principal executive offices in the County of Orange, and the
Employee's place of employment shall remain in the County of Orange, subject to
reasonable business travel. The parties hereto may amend the provisions of this
section by mutual agreement.
11. Withholding Taxes. A11 payments by Employer to Employee hereunder
shall be subject to reduction in the amount of
5
<PAGE>
any withholding taxes.
12. Conflicts of Interest. During the term of this Agreement, Employee
will not, directly or indirectly, either for herself or for any other person,
partnership, corporation or company participate in any enterprise operating
where Employer conducts its business or sells its products or services which
involves the business in which Employer is engaged at any time during Employee's
employment including, but not limited to, the marketing, sale, distribution,
processing or manufacturing of products within the same industries as Employer's
products. Employee acknowledges that this covenant is reasonable with respect to
its duration, geographical area and scope.
In performing her obligations for Employer, Employee shall act in the best
interest of, and with complete loyalty to, Employer and shall not exercise her
duties or responsibilities in her own self-interest, at the expense of the best
interest of Employer.
13. General Provisions
13.1. Complete Agreement. This Agreement embodies the complete
agreement and understanding among the parties and supersedes and preempts
any prior understandings, agreements or representations by or among the
parties, written or oral, which may have related to the subject matter
hereof in any way.
13.2. Governing Law. This Agreement shall be governed by, construed and
enforced in accordance with the internal laws of the State of California.
13.3. Waiver of Breach. Any waiver by either party of a breach of the
terms and conditions of this Agreement shall not be considered as a waiver
of any subsequent breach of the same or any other term and condition
hereof.
13.4. Amendment and Waivers. Any provision of this Agreement may be
amended or waived only with the prior written consent of the Employer and
Employee.
13.5. Assignment. This Agreement is intended to bind and inure to the
benefit of and be enforceable by the parties hereto, and their respective
successors and assigns, except that any purported assignment by Employee
of any of her rights or obligations hereunder shall be void.
6
<PAGE>
13.6. Severability. In event that any provision or any part of any
provision of this Agreement is held to be illegal, invalid or
unenforceable, such illegality, invalidity or unenforceability shall not
affect the validity or enforceability of any other provision or part
hereof.
SIGNATURES APPEAR ON THE FOLLOWING PAGE
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date first above mentioned.
_________________________________
Anthony P. Shutts
The L. L. Knickerbocker Co., Inc.
By:______________________________
Title: __________________________
Attest: _________________________
7
<PAGE>
AGREEMENT OF PURCHASE AND SALE
OF THE CAPITAL STOCK OF
SELF HEATING CONTAINER
CORPORATION OF CALIFORNIA,
A California corporation
as ISSUER
BY
THE L. L. KNICKERBOCKER CO., INC.
A California corporation,
as BUYER;
DATED September ___, 1996
<PAGE>
EXHIBIT 10.28
AGREEMENT OF PURCHASE AND SALE
OF THE CAPITAL STOCK OF
SELF HEATING CONTAINER
CORPORATION OF CALIFORNIA,
A California corporation
BY
THE L. L. KNICKERBOCKER CO., INC.
a California corporation
<TABLE>
<CAPTION>
Tab Description
- --- -----------
<S> <C>
1 Agreement of Purchase and Sale
2 Exhibit A: Stockholder Record
3 Exhibit B: Letter of Intent dated July 12, 1996
4 Exhibit C: Form of Warrant
5 Exhibit D: Escrow Agreement
6 Exhibit E: Obligations of SHC to issue stock
7 Exhibit F: Financial Statement of Issuers
8 Exhibit G: Financial Statement of Buyer
</TABLE>
<PAGE>
TABLE OF CONTENTS
<TABLE>
<C> <S> <C>
RECITALS.................................................................. 1
1. SUBJECT MATTER OF AND CONSIDERATION FOR SALE......................... 1
--------------------------------------------
1.1 Transfer of Shares............................................. 1
------------------
1.2 Consideration for Shares....................................... 2
------------------------
2. PAYMENT OF CONSIDERATION............................................ 2
-------------------------
2.1 Definitions.................................................... 2
-----------
2.2 Payments to SHC................................................ 3
---------------
2.3 Escrow for Delivery of Shares.................................. 3
-----------------------------
3. CLOSING AND CLOSING DATE............................................. 3
------------------------
3.1 Time and Place................................................. 4
--------------
3.2 At the Closing................................................. 4
--------------
4. REPRESENTATIONS AND WARRANTIES OF SHC................................ 4
-------------------------------------
4.1 Validity of Agreement, etc. ................................... 4
---------------------------
4.2 Ownership of Issuer............................................ 4
--------------------
4.3 Corporate Organization......................................... 5
----------------------
4.4 Capitalization of the Issuer................................... 5
-----------------------------
4.5 Subsidiaries and Affiliates.................................... 5
----------------------------
4.6 Financial Condition Of Issuer.................................. 5
-----------------------------
4.7 Taxes.......................................................... 5
-----
4.8 Absence of Certain Changes..................................... 6
--------------------------
4.9 Title to Properties; Encumbrances.............................. 7
---------------------------------
4.10 Patents, Copyrights, Inventions, Trade Secrets, Etc. .......... 7
----------------------------------------------------
4.11 Compliance with Law............................................ 7
-------------------
4.12 Undisclosed Liabilities........................................ 8
-----------------------
4.13 Corporate Records.............................................. 9
-----------------
4.14 Material Misstatements or Omissions............................ 9
-----------------------------------
4.15 Litigation..................................................... 9
----------
4.16 Permits and Other Operating Rights............................. 9
----------------------------------
4.17 Business Generally............................................. 9
------------------
4.18 Distribution Agreement......................................... 10
----------------------
4.19 Nature of Representations and Warranties....................... 10
----------------------------------------
5. BUYER'S REPRESENTATIONS AND WARRANTIES............................... 10
--------------------------------------
5.1 Validity of Agreement, etc. ................................... 10
---------------------------
5.2 Corporate Organization......................................... 10
----------------------
5.3 Capitalization of the Buyer.................................... 10
---------------------------
</TABLE>
i
<PAGE>
<TABLE>
<S> <C> <C>
5.4 Subsidiaries and Affiliates.................................... 11
---------------------------
5.5 Financial Condition Of Buyer................................... 11
----------------------------
5.6 Taxes.......................................................... 11
-----
5.7 Absence of Certain Changes..................................... 11
--------------------------
5.8 Title to Properties; Encumbrances.............................. 13
---------------------------------
5.9 Patents, Copyrights, Inventions, Trade Secrets, Etc. .......... 13
----------------------------------------------------
5.10 Compliance with Law............................................ 13
-------------------
5.11 Undisclosed Liabilities........................................ 14
-----------------------
5.12 Corporate Records.............................................. 14
-----------------
5.13 Material Misstatements or Omissions............................ 14
-----------------------------------
5.14 Litigation..................................................... 15
----------
5.15 Permits and Other Operating Rights............................. 15
----------------------------------
5.16 Business Generally............................................. 15
------------------
5.17 Experience..................................................... 15
----------
5.18 Investment..................................................... 15
----------
5.19 Rule 144....................................................... 16
--------
5.20 No Public Market............................................... 16
----------------
5.21 Access to Data................................................. 16
--------------
5.22 Effectiveness of Buyers' Registration Statement................ 16
-----------------------------------------------
5.23 Buyer's Compliance with Securities Exchange Act of 1934........ 16
-------------------------------------------------------
5.24 Distribution Agreement......................................... 16
----------------------
5.25 Nature of Representations and Warranties....................... 17
----------------------------------------
6. ISSUER'S PRE-CLOSING COVENANTS AND AGREEMENTS........................ 17
---------------------------------------------
6.1 Best Efforts................................................... 17
------------
6.1.1 Regular Course of Business............................. 17
--------------------------
6.1.2 Amendments............................................. 17
----------
6.1.3 Capital Changes; Dividends; Redemptions; Dilution...... 17
-------------------------------------------------
6.1.4 Subsidiaries........................................... 18
------------
6.1.5 Organization........................................... 18
------------
6.1.6 Certain Changes........................................ 18
---------------
6.1.7 Access................................................. 19
------
6.1.8 Obligation to Update Disclosure Schedules.............. 19
-----------------------------------------
7. BUYER'S PRE-CLOSING COVENANTS AND AGREEMENTS......................... 19
--------------------------------------------
7.1 Access......................................................... 19
------
7.2 Obligation to Update Disclosure Schedules...................... 19
-----------------------------------------
7.3 Effectiveness of Registration Statement........................ 19
---------------------------------------
8. CONDITIONS PRECEDENT TO CLOSING...................................... 20
-------------------------------
8.1 Conditions Precedent to Obligations of Buyer................... 20
--------------------------------------------
8.1.1 Correctness of Representations and Warranties.......... 20
---------------------------------------------
8.1.2 Performance of Covenants and Agreements................ 20
---------------------------------------
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C> <C>
8.1.3 Corporate Records...................................... 20
-----------------
8.1.4 Corporate Approval..................................... 20
------------------
8.1.5 Appointment of Officers and Directors.................. 20
-------------------------------------
8.1.6 No Government Proceeding or Litigation................. 20
--------------------------------------
8.1.7 Material Change........................................ 20
---------------
8.1.8 Officers' Certificate.................................. 21
---------------------
8.1.9 Opinions of Counsel.................................... 21
-------------------
8.2 Conditions Precedent to Obligations of Issuer.................. 21
---------------------------------------------
8.2.1 Correctness of Representations and Warranties.......... 22
---------------------------------------------
8.2.2 Performance of Covenants and Agreements................ 22
---------------------------------------
8.2.3 Corporate Records...................................... 22
-----------------
8.2.4 Corporate Approval..................................... 22
------------------
8.2.5 No Government Proceeding or Litigation................. 22
--------------------------------------
8.2.6 Material Change........................................ 22
---------------
8.2.7 Officers' Certificate.................................. 22
---------------------
8.2.8 Opinion of Counsel..................................... 22
------------------
8.2.9 Effectiveness of Buyers' Registration Statement........ 24
-----------------------------------------------
8.2.10 Buyer's Compliance with Securities Exchange Act of 1934 24
-------------------------------------------------------
8.2.11 NASDAQ Listing Effective............................... 24
------------------------
8.2.12 Receipt of Proceeds.................................... 24
-------------------
8.2.13 Exemption for Issuance and Immediate Sale of Warrants.. 24
-----------------------------------------------------
9. INDEMNIFICATION...................................................... 24
---------------
9.1 Indemnification by Issuer...................................... 24
-------------------------
9.2 Indemnification by Buyer....................................... 25
------------------------
9.3 Notice and Opportunity to Defend............................... 25
--------------------------------
9.4 Indemnification Not a Waiver................................... 25
----------------------------
10. RELATED MATTERS...................................................... 25
---------------
10.1 Confidentiality............................................... 25
---------------
10.2 Notices....................................................... 26
-------
10.3 Arbitration................................................... 27
-----------
10.4 Recovery of Fees and Costs.................................... 27
--------------------------
10.5 Entire Agreement.............................................. 27
----------------
10.6 Section Headings.............................................. 27
----------------
10.7 Severability.................................................. 28
------------
10.8 Counterparts.................................................. 28
------------
10.9 Further Assurances............................................ 28
------------------
10.10 Waiver of Compliance.......................................... 28
--------------------
10.11 Assignment.................................................... 28
----------
10.12 Publicity..................................................... 28
---------
10.13 Governing Law Venue........................................... 29
-------------------
10.14 Third Parties................................................. 29
-------------
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C> <C>
10.15 Construction................................................. 29
------------
10.15.1 No Strict Construction............................. 29
----------------------
10.15.2 Independent Significance........................... 29
------------------------
</TABLE>
iv
<PAGE>
AGREEMENT OF PURCHASE AND SALE
------------------------------
THIS AGREEMENT OF PURCHASE AND SALE ("Agreement") is made and entered into
effective as of September __, 1996, by and among The L. L. Knickerbocker Co.,
Inc., a California corporation ( "LLK" or "Buyer"), and Self Heating Container
Corporation of California, a California corporation ("SHC" or the "Issuer").
RECITALS
--------
A. The stockholders appearing in the schedule attached hereto as Exhibit
"A" (collectively the "Stockholders") own of record _______ common shares of the
Issuer in the amounts appearing in Exhibit A. The shares owned of record by the
Stockholders represent all of the issued and outstanding stock of the Issuer;
B. Insta-Heat, Inc., a California corporation ("IHI") an affiliate of
SHC, owns certain patents which have been licensed to SHC;
C. LLK desires to acquire ________ shares of the capital stock of SHC,
representing 25% of the outstanding stock in the Issuer (the "Shares");
D. LLK and the Issuer intend to enter into an exclusive distribution
agreement granting LLK certain rights to distribute products produced pursuant
to the patents held by IHI and licensed to SHC;
E. LLK and the Issuers entered into a letter of intent on July 12, 1996
regarding the subject matter of this Agreement. This letter of intent is
attached hereto as Exhibit "B."
F. LLK desires to issue certain warrants to purchase free trading
registered common stock of LLK to the Issuer or its designee in exchange for and
as consideration for the purchase of the Shares.
G. The facts recited as Paragraphs A - F, inclusive, are expressly made a
part hereof and incorporated herein for all purposes as covenants to this
agreement and are binding upon the parties hereto as covenants.
NOW THEREFORE, in consideration of the foregoing recitals and the mutual
promises, agreements, representations and warranties herein contained, the
parties hereto agree as follows:
1. SUBJECT MATTER OF AND CONSIDERATION FOR SALE.
--------------------------------------------
1.1 Transfer of Shares. Upon the terms and subject to all of the
------------------
conditions contained herein and upon the performance by each of the parties
hereto of their obligations hereunder, the Issuer hereby agrees to issue,
sell, assign, transfer and deliver the Shares to Buyer, on and as of the
<PAGE>
Closing Date (as hereinafter defined), by delivering to Buyer at the Closing
certificates representing the Shares, duly issued by the Issuer.
1.2 Consideration for Shares. As consideration for Buyer's purchase of
------------------------
the Shares and upon and subject to all of the terms and conditions herein and
upon the performance by each of the parties hereto of their obligations
hereunder, Buyer agrees to pay to the Issuer, in the manner described in
Sections 2.1, 2.2, and 2.3, an aggregate purchase price for the Shares of Six
Hundred Thousand Dollars ($600,000.00) ("Purchase Price").
2. PAYMENT OF CONSIDERATION.
-------------------------
The Purchase Price shall be paid as follows:
2.1 Definitions. For purposes of this Agreement, the following terms
-----------
shall have the following respective meanings:
(a) "Warrants" means options or warrants, in the form annexed hereto as
Exhibit C, which grant the holder the immediate right to purchase shares of
Buyer's common stock, which Warrants will be exercisable for a period of five
(5) years after the respective date of grant. Any shares issued upon the
exercise of such Warrants will, upon delivery, be registered and freely
tradeable and shall remain so throughout the period that the Warrants are
exercisable.
(b) "Value," in connection with each share of common stock covered by a
Warrant, means the difference between (I) the average of the closing bid and ask
price of Buyer's common shares for the five (5) trading days immediately
preceding the date of delivery of the Warrant and (ii) the exercise (or strike)
price of the Warrant.
(c) The number of Warrants granted pursuant to Section 1.2 shall be
subject to adjustment (the "Adjustment") in accordance with the following
provisions:
(i) The number of Warrants granted on each occasion shall be divided
by four (4), and it shall be assumed for the purposes of Section 1.2 that each
such amount of Warrants is sold at the mean trading price on each of the four
(4) successive trading dates immediately following the delivery of such
Warrants. The gross amount which would be received upon such assumed sales is
referred to herein as the "Realizable Amount."
(ii) If the Realizable Amount for each assumed sale is at least equal
to the Value which SHC is entitled, there shall be no Adjustment. If, and to
the extent the Realizable Amount is less than said Value, such difference (the
"Deficiency") shall be made up by LLK's delivery to SHC of additional Warrants
with a Value equal to such Deficiency (the "Make-up Warrants"). The Make-up
Warrants shall be delivered to SHC within one (1) week of the Closing Date.
<PAGE>
(iii) Notwithstanding the foregoing, if in fact SHC or its designee
shall have traded the stock issued upon exercise of the Warrants on any of such
four (4) immediately succeeding trading dates and shall have realized more than
the "Realizable Amount" for one or more of such day(s) as determined under
(c)(I) above, then the actual amount realized by such Issuer shall be used as
the "Realizable Amount" in calculating the amount of "Make-up Warrants" to be
issued to such Issuer pursuant to this paragraph.
2.2 Payments to SHC. At the Closing, Buyer shall deliver to SHC Warrants
---------------
with a Value equal to Six Hundred Thousand Dollars ($600,000.00) in full payment
of the amount of the Purchase Price. The Buyer at its option may, in lieu of
Warrants, deliver registered and freely tradeable common stock of the Buyer with
a value equal to the Purchase Price.
2.3 Escrow for Delivery of Shares. Pursuant to this Agreement, the
-----------------------------
parties shall enter into an escrow arrangement ("Escrow") with the escrow
department of a mutually approved bank. The Escrow shall be pursuant to an
escrow agreement ("Escrow Agreement") substantially in the form attached hereto
as Exhibit D. On or before the Closing Date, SHC shall deliver to the
designated escrow officer ("Escrow Agent") Share Certificates representing
________ shares of restricted common stock of SHC registered in the name of
LLK, and LLK shall deliver to the Escrow Agent Warrants to purchase shares of
free trading common stock of LLK, with a Value equal to the Purchase Price.
Buyer or its nominees shall direct or introduce one or more unrelated third
parties interested in purchasing the Warrants to the Issuer and/or the Escrow
Agent. The Issuer shall accept any offer to purchase the Warrants provided: (I)
the purchaser demonstrates an unconditional ability to perform; (ii) the
purchaser agrees to participate in the Escrow Agreement in connection with the
delivery of the purchase price for the Warrants to the Escrow Agent and the
delivery of the Warrants by the Escrow Agent to the purchaser; (iii)
consummation of the transaction contemplated in the offer will upon closing
result in delivery to the Issuer of an amount of cash equal to the Purchase
price; and (iv) the Issuer is not required to incur any additional unreimbursed
cost expense or risk in connection therewith. The Share certificates of SHC
shall be held by the Escrow Agent and shall be released to the Buyer only when
the Escrow Agent is in a position to deliver to SHC: (I) Six Hundred Thousand
Dollars ($600,000.00) in consideration for the delivery by Escrow Agent to the
third party purchaser of Warrant Certificates with appropriate assignment forms
duly executed by SHC with Medallion signature guarantees in accordance with any
agreement to sell the Warrants entered into by and between SHC and the third
party purchaser in accordance with the terms of the Escrow Agreement; and (ii)
the Conditions Precedent to the Obligations of SHC described in Section 8.2
herein are satisfied or waived by SHC prior to the Closing Date. Neither SHC
nor LLK shall have any rights as shareholders in connection with Shares or
Warrants delivered to the Escrow Agent until the Warrants are delivered to SHC
and the Shares are delivered to LLK.
3. CLOSING AND CLOSING DATE
------------------------
<PAGE>
3.1 Time and Place. Subject to the provisions of Section 8 hereof,
--------------
the Closing ("Closing") of the transactions contemplated by this Agreement shall
take place at the offices of counsel to SHC at 10:00 A.M. on ______________,
1996 ("Closing" or "Closing Date"), or at such later date, time and place as may
be hereafter agreed upon in writing by the parties.
3.2 At the Closing.
--------------
(a) SHC shall have delivered to the Escrow Agent: (I) certificates
representing _____ shares of restricted common stock of the Issuer; (ii) the
opinion of counsel and officers' certificate referenced in Section 8.1 herein;
and (iii) such other documents as LLK may reasonably request to carry out the
purposes of this agreement; and
(b) LLK shall have delivered to the Escrow Agent (I) Warrants with a
Value of Six Hundred Thousand Dollars ($600,000.00); (ii) the opinion of
counsel and officers' certificate referenced in Section 8.2 herein; and (iii)
such other documents as SHC may reasonably request to carry out the purposes of
this Agreement.
4. REPRESENTATIONS AND WARRANTIES OF SHC.
-------------------------------------
SHC represents and warrants the following, the truth and accuracy of each
of which shall constitute a condition precedent to the obligations of Buyer
hereunder:
4.1 Validity of Agreement, etc. This Agreement is, or will be at the
--------------------------
Closing, valid and binding upon Issuer and is, or will be at the Closing,
enforceable in accordance with its respective terms, except as enforceability
may be limited by bankruptcy, insolvency, reorganization, or other laws
affecting generally the enforcement of creditors' rights and except to the
extent that courts may award money damages rather than specific performance of
contractual provisions.
Neither the execution and delivery of this Agreement by the Issuer nor the
consummation of the transactions contemplated hereby, nor any action of the
Issuer contemplated by this Agreement, will violate any provision of the
Articles of Incorporation or By-Laws of the Issuer, nor will such actions
violate or be in conflict with or constitute a default (or an event which, with
notice or lapse of time or both, would constitute a default) under, or result in
the termination of, or accelerate the performance required by, or cause the
acceleration of the maturity of, any debt or obligation pursuant to, or result
in the creation or imposition of any security interest, lien, or other
encumbrance upon any property or assets of the Issuer under any agreement or
commitment to which the Issuer is a party, or by which the Issuer is bound, or
to which the property of the Issuer is subject, or violate any statute or law or
any judgment, decree, order, regulation, or rule of any court or governmental
authority.
4.2 Ownership of Issuer. The Stockholders are the sole owners of record
--------------------
of all of the issued and outstanding shares of the Issuer's capital stock.
Except as set forth in Exhibit E, there are no outstanding subscriptions,
options, rights, warrants, convertible securities, or other
<PAGE>
agreements, commitments, or rights obligating the Issuer to issue any shares of
stock to any person or firm, nor obligating the Stockholders, or any of them, to
transfer any shares to any person or firm.
4.3 Corporate Organization. The Issuer is a corporation duly organized,
----------------------
validly existing, and in good standing under the laws of the State of California
and qualified to do business in the State of California and has full corporate
power and authority to carry on its business as it is now being conducted and to
own the properties and assets it now owns; is not, and the nature of Issuer's
activities do not require it to be, qualified to do business as a foreign
corporation in any other jurisdiction. The copies of the Certificate of
Incorporation and By-Laws of the Issuer previously delivered to Buyer are
complete and correct copies of such instruments as presently in effect.
4.4 Capitalization of the Issuer. As of the date of this Agreement, the
-----------------------------
authorized capital stock of the Issuer consists of ___________ shares of common
stock; of which _____________ shares of common stock are issued and
outstanding. All issued and outstanding shares of common stock of the Issuer
are validly issued, fully paid, and nonassessable; there are no preemptive
rights applicable to any common stock of the Issuer, and all outstanding
securities of the Issuer have been offered, sold, and delivered by the Issuer in
compliance with all applicable federal and state laws.
4.5 Subsidiaries and Affiliates. The Issuer has no subsidiaries nor
----------------------------
any equity interest in any other corporation, partnership, or business.
4.6 Financial Condition Of Issuer. Exhibit F contains true, complete,
------------------------------- -
and correct copies of the Issuer's Statements of Financial Condition ("Balance
Sheet") as of ________________ ("Balance Sheet Date") and its statements of
income and Statement of Cash Flows for the _____________ months ended
______________, are hereinafter collectively referred to as the "Issuer's
Financial Statements." The Issuer's Financial Statements are: (i)
statements prepared from the books and records of the Issuer by its independent
certified public accountants; (ii) prepared substantially in accordance with the
same accounting methods, practices, and principles utilized in connection with
the preparation of prior financial statements issued by the Issuer; (iii) set
forth fairly and completely the financial position and the results of operations
of the Issuer at the relevant dates thereof and for the period(s) covered
thereby; (iv) contain and reflect all necessary material adjustments for a fair
and complete presentation of the Issuer's financial position and the results of
operations for the period covered by the Issuer's Financial Statements; (v)
reflect all material liabilities, realized or unrealized, contingent or not
contingent, to which the Issuer is liable, except for liabilities and
obligations incurred in the ordinary course of business consistent with past
practice since the Balance Sheet Date; and (vi) the reserves reflected in the
Issuer's Financial Statements are in the opinion of management adequate,
appropriate and reasonable.
4.7 Taxes. The Issuer has duly filed when due all tax reports and
-----
returns required to be filed and has duly paid all taxes, assessments,
penalties, interest, and other charges due or claimed to be due from it by
federal, state, local, or foreign taxing authorities (including, without
<PAGE>
limitation, those due in respect of the properties, income, franchises,
licenses, sales, or payrolls of the Issuer), and Issuer shall have no further
liability for any such tax, assessment, penalty, or interest.
4.8 Absence of Certain Changes. Except as and to the extent set forth in
--------------------------
the Issuer's Financial Statements or notes thereto, or in a written disclosure
schedule delivered to either party prior to Closing ("Disclosure Schedule"),
since the Balance Sheet Date the Issuer has not:
(a) Suffered any material adverse change in, or the occurrence of any
events which, individually or in the aggregate have had a material adverse
effect on its working capital, financial condition, assets, liabilities
(absolute, accrued, contingent or otherwise), reserves, business, or operations;
(b) Incurred any liabilities or obligations (absolute, accrued, contingent,
or otherwise), except items incurred in the ordinary course of business and
consistent with past practice, or increased, or experienced any material change
in any assumptions underlying or methods of calculating any bad debt,
contingency, or other reserves;
(c) Paid, discharged, or satisfied any material claim, liability, or
obligation (absolute, accrued, contingent, or otherwise) other than the payment,
discharge, or satisfaction in the ordinary course of business and consistent
with past practice;
(d) Permitted or allowed any of its material property or assets (real,
personal, or mixed, tangible or intangible) to be subjected to any mortgage,
pledge, lien, security interest, encumbrance, restriction, or charge of any
kind, except for liens for current taxes not yet due;
(e) Sold, transferred, or otherwise disposed of any of its material
properties or assets (real, personal, or mixed, tangible or intangible), except
in the ordinary course of business and consistent with past practice;
(f) Disposed of or permitted to lapse any rights to the use of any patent,
trademark, trade name, or copyright, or disposed of or disclosed to any person,
any trade secret, formula, process, or know-how not theretofore a matter of
public knowledge;
(g) Granted any increase in the compensation of officers or employees
(including any such increase pursuant to any bonus, pension, profit-sharing, or
other plan or commitment) or any material increase in the compensation payable
or to become payable to any officer or employee from the day following the
Balance Sheet Date through the Closing Date, and no such increase is required by
agreement or understanding except for employee salary increases in the ordinary
course of business and in accordance with past practice;
(h) Paid, loaned, or advanced any amount to, or sold, transferred, or
leased any properties or assets (real, personal, or mixed, tangible or
intangible) to, or entered into any agreement or
<PAGE>
arrangement with, any of its officers or directors or any affiliate, family
member, or associate of any of its officers or directors;
(i) Suffered any loss, damage, destruction, or other casualty materially
and adversely affecting any of the properties, assets, or business of the Issuer
(whether or not covered by insurance);
(j) Borrowed or agreed to borrow any material amount of funds or incurred
or assumed or become subject to, whether directly or by way of guarantee or
otherwise, any material obligation or liability, except obligations and
liabilities incurred in the ordinary course of business and consistent with past
practice;
(k) Licensed, sold, transferred, pledged, modified, disclosed, disposed
of, or permitted to lapse any rights to the use of the name of the Issuer or any
fictitious firm name used by the Issuer;
(l) Entered into any transaction with the Stockholders, or any of them,
their relatives, related trusts or related business entities;
(m) Entered into any other transaction, contract, or commitment other than
in the ordinary course of business; and
(n) Agreed, whether in writing or otherwise, to take any action described
in this section.
4.9 Title to Properties; Encumbrances. The Issuer has good, valid, and
---------------------------------
marketable title to all the properties and assets which each purports to own
(real, personal, and mixed, tangible and intangible), including without
limitation, all the properties and assets reflected in the Balance Sheet except
for property sold since the Balance Sheet Date in the ordinary course of
business and consistent with past practice.
4.10 Patents, Copyrights, Inventions, Trade Secrets, Etc. The Issuer has
---------------------------------------------------
good and valid title to, or otherwise possesses adequate and exclusive rights to
use, all patents, copyrights, inventions, trade secrets, and other proprietary
information necessary to permit the Issuer to conduct its business in the same
manner as its business has been conducted prior to the date hereof.
4.11 Compliance with Law. The operations of the Issuer have been
-------------------
conducted in substantial accordance with all applicable laws, regulations, and
other requirements of all national governmental authorities and of all states,
municipalities, and other political subdivisions and agencies thereof having
jurisdiction over the Issuer, including but not limited to, all laws,
regulations, and requirements relating to antitrust, environmental protection
and conservation, pollution, equal employment and anti-discrimination acts,
consumer protection, currency exchange, health, occupational safety, pension,
securities, and trading-with-the-enemy matters. The Issuer has not received any
notification of any asserted present or past failure by the Issuer to comply
with such laws, rules, or regulations.
<PAGE>
The Issuer has filed when due all reports required to be filed with any
governmental, regulatory, or administrative agency and has obtained all permits,
licenses, certificates, registrations, qualifications, and other authorizations
which are required to be obtained by the Issuer under federal, state, and local
laws relating to pollution or protection of the environment, including laws
relating to emissions, discharges, releases, or threatened releases of
pollutants, contaminants, or hazardous or toxic materials or wastes into ambient
air, surface water, ground water, or land, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport, or handling of pollutants, contaminants or hazardous or toxic
materials or wastes. The Issuer is in substantial compliance with all terms and
conditions of the required permits, licenses, and authorizations and is also in
substantial compliance with all other limitations, restrictions, conditions,
standards, prohibitions, requirements, obligations, schedules, and timetables
contained in those laws relating to pollution or protection of the environment
or contained in any regulation, code, plan, order, decree, judgment, notice, or
demand letter issued, entered, promulgated, or approved thereunder. Except as
set forth in the Disclosure Schedule, the Issuer has not engaged in any
activities that could cause any material violation of any federal, state, or
local laws, ordinances, rules, or regulations relating to air or water
pollution, toxic waste, or other environmental protection or relating to
occupational health or safety or Hazardous Materials (as defined below)
applicable to its properties, assets, the real estate which it now occupies, or
any real estate which it has previously occupied. The Issuer has no material
liability, contingent or otherwise, with respect to the contamination with toxic
waste or Hazardous Materials of premises it now occupies or has previously
occupied, which contamination occurred during a time that such premises were
occupied by a previous tenant, whether the contamination occurred from the
activities conducted by the previous tenant, from contamination flow from other
properties, or otherwise. As used herein, the term "Hazardous Materials" shall
mean any explosives, radioactive materials, hazardous wastes (including, without
limitation, asbestos and asbestos containing materials), hazardous or toxic
substances, or related materials defined in the Comprehensive Environmental
Response, Compensation and Liability Act of 1980 as amended (42 U.S.C. (S)9601),
et. seq.), the Hazardous Materials Transportation Act as amended (49 U.S.C.
(S)1801, et. seq.), the Resource Conservation and Recovery Act of 1976 as
amended (42 U.S.C. (S)6901, et. seq.), and in the regulations adopted and
publications promulgated pursuant thereto, or any other federal, state, or local
environmental laws, ordinances, rules, or regulations.
The Issuer is not aware of, nor has the Issuer received notice of, any
past, present, or future events, conditions, circumstances, activities,
practices, incidents, actions, or plans which may interfere with or prevent
continued compliance, or which may give rise to any common law or legal
liability, or otherwise form the basis of any claim, action, suit, proceeding,
hearing, or investigation based on or related to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport, or handling, or the
emission, discharge, release, or threatened release into the environment of any
pollutant, contaminant, or hazardous or toxic material or waste.
4.12 Undisclosed Liabilities. The Issuer is not obligated for, nor are any
-----------------------
of the Issuer's assets subject to, any liabilities (whether absolute, accrued,
or contingent and whether due or to become due) other than liabilities arising
in the ordinary course of business since the Balance Sheet Date.
<PAGE>
4.13 Corporate Records. Except as set forth in the Disclosure Schedule,
-----------------
the corporate minute books of the Issuer contain a complete and accurate record
of all actions taken or required to be taken by the Board of Directors and
shareholders of the Issuer, and the stock transfer records, books of account,
financial records, and correspondence of the Issuer has been kept in the usual
course of business and are complete insofar as they relate to the business of
the Issuer from inception to the date of this Agreement and will be complete
insofar as they relate to the business of the Issuer from the inception of each
to the Closing Date. The financial books and records of the Issuer have been
maintained consistently and, to the best of the Issuer's knowledge, in
accordance with sound business practices.
4.14 Material Misstatements or Omissions. No representations or warranties
-----------------------------------
by the Issuer contained in this Agreement or in any document, statement, or
certificate furnished or to be furnished to Buyer in connection with the
transactions contemplated hereby, contain, or will contain on the Closing Date,
any statement of a material fact known to be untrue, or omit, or will omit on
the Closing Date, any material known fact necessary to make the statements of
fact contained therein not misleading.
4.15 Litigation. There are no actions, suits, or proceedings pending or
----------
threatened involving the Issuer or affecting its business, nor are there any
claims of third parties made or threatened against the Issuer.
The Issuer is not subject to any judgment, order, or decree entered in any
lawsuit or proceeding which may have an adverse effect on its business practices
or on its ability to acquire any property or conduct its business in any area.
No consent of any person is necessary to the consummation of the
transactions contemplated hereby, including, without limitation, consents from
parties to loans, contracts, leases, or other agreements and consents from
governmental agencies, whether federal, state, or local.
4.16 Permits and Other Operating Rights. The Issuer has received the
----------------------------------
consent of all third persons required to permit it to operate its business in
the manner in which it presently is being conducted and possesses all necessary
permits and other authorizations from third persons, including without
limitation, federal, foreign, state, and local governmental authorities
presently required by applicable provisions of law, including statutes,
regulations, and existing judicial decisions, and by the property and contract
rights of third persons, the absence of which would have a material adverse
effect upon the business or properties of the Issuer.
4.17 Business Generally. There have been no events or transactions or
------------------
information which has come to the attention of the Issuer which, as they relate
directly to the business and assets of the Issuer, could reasonably be expected
to have a material adverse effect on the profitability of the business and
operations of the Issuer.
<PAGE>
4.18 Distribution Agreement. The Issuer hereby agrees to enter into a
----------------------
Distribution Agreement substantially on the terms set forth in the Letter of
Intent appearing in Exhibit "B."
4.19 Nature of Representations and Warranties All representations and
----------------------------------------
warranties made by the Issuer in Sections 4.6 through 4.12 herein are made to
the best of its knowledge, without any independent duty to investigate.
5. BUYER'S REPRESENTATIONS AND WARRANTIES.
---------------------------------------
The Buyer represents and warrants the following, the truth and accuracy of
each of which shall constitute a condition precedent to the obligations of the
Issuer hereunder:
5.1 Validity of Agreement, etc. This Agreement is, or will be at the
--------------------------
Closing, valid and binding upon Buyer and is, or will be at the Closing,
enforceable in accordance with its respective terms, except as enforceability
may be limited by bankruptcy, insolvency, reorganization, or other laws
affecting generally the enforcement of creditors' rights and except to the
extent that courts may award money damages rather than specific performance of
contractual provisions.
Neither the execution and delivery of this Agreement by Buyer nor the
consummation of the transactions contemplated hereby, nor any action of the
Buyer contemplated by this Agreement, will violate any provision of the Articles
of Incorporation or By-Laws of the Buyer, nor will such actions violate or be in
conflict with, or constitute a default (or an event which, with notice or lapse
of time or both, would constitute a default) under, or result in the termination
of, or accelerate the performance required by, or cause the acceleration of the
maturity of any debt or obligation pursuant to, or result in the creation or
imposition of any security interest, lien, or other encumbrance upon any
property or assets of the Buyer under any agreement or commitment to which the
Buyer is a party or by which the Buyer is bound, or to which the property of the
Buyer is subject, or violate any statute or law or any judgment, decree, order,
regulation, or rule of any court or governmental authority.
5.2 Corporate Organization. The Buyer is a corporation duly organized,
----------------------
validly existing and in good standing under the laws of the State of California
and qualified to do business in the State of California and has full corporate
power and authority to carry on its business as it is now being conducted and to
own the properties and assets it now owns; is not, and the nature of Buyer's
activities do not require it to be, qualified to do business as a foreign
corporation in any other jurisdiction. The copies of the Certificate of
Incorporation and By-Laws of the Buyer previously delivered to the Issuer are
complete and correct copies of such instruments as presently in effect.
5.3 Capitalization of the Buyer. As of the date of this Agreement, the
---------------------------
authorized
<PAGE>
capital stock of the Buyer consists of 100,000,000 shares of common stock; of
which 13,752,285 shares of common stock are issued and outstanding. All issued
and outstanding shares of common stock of the Buyer are validly issued, fully
paid, and nonassessable; there are no preemptive rights applicable to any
securities of the Buyer, and all outstanding securities of the Buyer have been
offered, sold, and delivered by the Buyer in compliance with all applicable
federal and state laws.
5.4 Subsidiaries and Affiliates. Except as set forth in the schedule
----------------------------
previously delivered to the Issuer by the Buyer (the "Buyer's Disclosure
Schedule") the Buyer has no subsidiaries nor any equity interest in any other
corporation, partnership, or business.
5.5 Financial Condition Of Buyer. Exhibit G contains a true, complete,
----------------------------
and correct copy of the Buyer's Annual Report on Form 10-KSB as filed with the
United States Securities and Exchange Commission (the "SEC") including Buyer's
Statements of Financial Condition ("Balance Sheet") as of December 31, 1995
("Balance Sheet Date") and its statements of income and Statement of Cash Flows
for the twelve months ended December 31, 1995, hereinafter collectively
referred to as the "Buyer's Financial Statements." The Buyer's Financial
Statements are: (i) statements prepared from the books and records of the
Buyer and audited by its independent certified public accountants; (ii) prepared
substantially in accordance with the same accounting methods, practices, and
principles utilized in connection with the preparation of the last three annual
prior financial statements issued by the Buyer; (iii) set forth fairly and
completely the financial position and the results of operations of the Buyer at
the relevant dates thereof and for the period covered thereby, (iv) contains and
reflects all necessary material adjustments for a fair and complete presentation
of the Buyer's financial position and the results of operations for the periods
covered by the Buyer's Financial Statement; (v) contain and reflect all
material liabilities, realized or unrealized, contingent or not contingent, to
which the Buyer is liable, except for liabilities and obligations incurred in
the ordinary course of business consistent with past practice since the balance
sheet date; and (vi) the reserves reflected in the Buyer's Financial Statement
are in the opinion of management adequate, appropriate, and reasonable.
5.6 Taxes. The Buyer has duly filed when due all tax reports and returns
-----
required to be filed and has duly paid all taxes, assessments, penalties,
interest, and other charges due or claimed to be due from it by federal, state,
local, or foreign taxing authorities (including, without limitation, those due
in respect of the properties, income, franchises, licenses, sales or payrolls of
the Buyer), and Buyer shall have no further liability for any such tax,
assessment, penalty, or interest.
5.7 Absence of Certain Changes. Except as and to the extent set forth in
--------------------------
the Buyer's Financial Statements or notes thereto or in the Buyer's Disclosure
Schedule, since the Balance Sheet Date, Buyer has not:
(a) Suffered any material adverse change in, or the occurrence of any
events which, individually or in the aggregate, have had a material adverse
effect on, its working capital, financial condition, assets, liabilities
(absolute, accrued, contingent or otherwise), reserves, or business operations;
<PAGE>
(b) Incurred any material liabilities or obligations (absolute, accrued,
contingent or otherwise), except items incurred in the ordinary course of
business and consistent with past practice, or increased or experienced any
material change in any assumptions underlying or methods of calculating any bad
debt, contingency, or other reserves;
(c) Paid, discharged, or satisfied any material claim, liability, or
obligation (absolute, accrued, contingent, or otherwise) other than the payment,
discharge, or satisfaction in the ordinary course of business and consistent
with past practice;
(d) Permitted or allowed any of its material property or assets (real,
personal, or mixed, tangible or intangible) to be subjected to any mortgage,
pledge, lien, security interest, encumbrance, restriction, or charge of any
kind, except for liens for current taxes not yet due;
(e) Sold, transferred, or otherwise disposed of any of its material
properties or assets (real, personal, or mixed, tangible or intangible), except
in the ordinary course of business and consistent with past practice;
(f) Disposed of or permitted to lapse any rights to the use of any material
patent, trademark, trade name, or copyright, or disposed of or disclosed to any
person any trade secret, formula, process, or know-how not theretofore a matter
of public knowledge;
(g) Granted any increase in the compensation of officers or employees
(including any such increase pursuant to any bonus, pension, profit-sharing, or
other plan or commitment) or any material increase in the compensation payable
or to become payable to any officer or employee from the day following the
Balance Sheet Date through the Closing Date, and no such increase is required by
agreement or understanding except for employee salary increases in the ordinary
course of business and in accordance with past practice;
(h) Paid, loaned, or advanced any amount to, or sold, transferred, or
leased any properties or assets (real, personal, or mixed, tangible or
intangible) to, or entered into any agreement or arrangement with, any of its
officers or directors or any affiliate, family member, or associate of any of
its officers or directors;
(i) Suffered any loss, damage, destruction, or other casualty materially
and adversely affecting any of the properties, assets, or business of the Buyer
(whether or not covered by insurance);
(j) Borrowed or agreed to borrow any material amount of funds or incurred
or assumed or become subject to, whether directly or by way of guarantee or
otherwise, any material obligation or liability, except obligations and
liabilities incurred in the ordinary course of business and consistent with past
practice;
(k) Licensed, sold, transferred, pledged, modified, disclosed, disposed
of, or permitted
<PAGE>
to lapse any rights to the use of the name of the Issuer or any fictitious firm
name used by the Buyer;
(l) Entered into any other transaction, contract, or commitment other than
in the ordinary course of business; and
(m) Agreed, whether in writing or otherwise, to take any action described
in this section.
5.8 Title to Properties; Encumbrances. The Buyer has good, valid, and
---------------------------------
marketable title to all the properties and assets which it purports to own
(real, personal, and mixed, tangible and intangible), including without
limitation, all the properties and assets reflected in the Balance Sheet except
for property sold since the Balance Sheet Date in the ordinary course of
business and consistent with past practice.
5.9 Patents, Copyrights, Inventions, Trade Secrets, Etc. The Buyer has
---------------------------------------------------
good and valid title to or otherwise possesses adequate and exclusive rights to
use, all patents, copyrights, inventions, trade secrets, and other proprietary
information necessary to permit the Buyer to conduct its business in the same
manner as its business has been conducted prior to the date hereof.
5.10 Compliance with Law. The operations of the Buyer have been conducted
-------------------
in substantial accordance with all applicable laws, regulations, and other
requirements of all national governmental authorities, and of all states,
municipalities, and other political subdivisions and agencies thereof, having
jurisdiction over the Buyer, including, but not limited to, all laws,
regulations, and requirements relating to antitrust, environmental protection
and conservation, pollution, equal employment and anti-discrimination acts,
consumer protection, currency exchange, health, occupational safety, pension,
securities, and trading-with-the-enemy matters. The Buyer has not received any
notification of any asserted present or past failure by the Buyer to comply with
such laws, rules, or regulations.
The Buyer has filed when due all reports required to be filed with any
governmental, regulatory, or administrative agency and has obtained all permits,
licenses, certificates, registrations, qualifications, and other authorizations
which are required to be obtained by the Buyer under federal, state, and local
laws relating to pollution or protection of the environment, including laws
relating to emissions, discharges, releases, or threatened releases of
pollutants, contaminants, or hazardous or toxic materials or wastes into ambient
air, surface water, ground water, or land, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport, or handling of pollutants, contaminants or hazardous or toxic
materials or wastes. The Buyer is in substantial compliance with all terms and
conditions of the required permits, licenses, and authorizations, and is also in
substantial compliance with all other limitations, restrictions, conditions,
standards, prohibitions, requirements, obligations, schedules, and timetables
contained in those laws relating to pollution or protection of the environment
or contained in any regulation, code, plan, order, decree, judgment, notice, or
demand letter issued, entered, promulgated, or approved thereunder. Except as
set forth in the Buyer's Disclosure Schedule, the Buyer has not
<PAGE>
engaged in any activities that could cause any material violation of any
federal, state, or local laws, ordinances, rules, or regulations relating to air
or water pollution, toxic waste, or other environmental protection or relating
to occupational health or safety or Hazardous Materials (as defined below)
applicable to its properties, assets, the real estate which it now occupies nor,
or any real estate which it has previously occupied. The Buyer has no material
liability, contingent or otherwise, with respect to the contamination with toxic
waste or Hazardous Materials of premises it now occupies or has previously
occupied, which contamination occurred during a time that such premises were
occupied by a previous tenant, whether the contamination occurred from the
activities conducted by the previous tenant, from contamination flow from other
properties, or otherwise. As used herein, the term "Hazardous Materials" shall
mean any explosives, radioactive materials, hazardous wastes (including, without
limitation, asbestos and asbestos containing materials), hazardous or toxic
substances, or related materials defined in the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended (42 U.S.C.
(S)9601), et. seq.), the Hazardous Materials Transportation Act, as amended (49
U.S.C. (S)1801, et. seq.), the Resource Conservation and Recovery Act of 1976,
as amended (42 U.S.C. (S)6901, et. seq.), and in the regulations adopted and
publications promulgated pursuant thereto, or any other federal, state, or local
environmental laws, ordinances, rules, or regulations.
The Buyer is not aware of, nor has the Buyer received notice of, any past,
present, or future events, conditions, circumstances, activities, practices,
incidents, actions, or plans which may interfere with or prevent continued
compliance, or which may give rise to any common law or legal liability, or
otherwise form the basis of any claim, action, suit, proceeding, hearing, or
investigation, based on or related to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport, or handling, or the emission,
discharge, release, or threatened release into the environment, of any
pollutant, contaminant, or hazardous or toxic material or waste.
5.11 Undisclosed Liabilities. The Buyer is not obligated for, nor are any
-----------------------
of the Buyer's assets subject to, any liabilities (whether absolute, accrued or
contingent and whether due or to become due) other than liabilities arising in
the ordinary course of business since the Balance Sheet Date, none of which
liabilities individually or in the aggregate is materially adverse when
comparing the condition of the Buyer as of the Balance Sheet Date with the date
of this Agreement.
5.12 Corporate Records. Except as set forth in the Buyer's Disclosure
-----------------
Schedule, the corporate minute books of the Buyer contain a complete and
accurate record of all actions taken or required to be taken by the Board of
Directors and shareholders of the Buyer, and the stock transfer records, books
of account, financial records, and correspondence of the Buyer have been kept in
the usual course of business and are complete insofar as they relate to the
business of the Buyer from the inception of each to the date of this Agreement,
and will be complete insofar as they relate to the business of the Buyer from
the inception of each to the Closing Date. The financial books and records of
the Buyer have been maintained consistently and, to the best of the Buyer's
knowledge, in accordance with sound business practices.
5.13 Material Misstatements or Omissions. No representations or
-----------------------------------
warranties by the
<PAGE>
Buyer contained in this Agreement or in any document, statement, or certificate
furnished or to be furnished to the Issuer in connection with the transactions
contemplated hereby, contain, or will contain on the Closing Date, any statement
of a material fact known to be untrue, or omit, or will omit on the Closing
Date, any material known fact necessary to make the statements of fact contained
therein not misleading.
5.14 Litigation. Except as set forth in the Buyer's Disclosure Schedule,
----------
there are no actions, suits, or proceedings pending or threatened involving the
Buyer or affecting its business, nor are there any claims of third parties made
or threatened against the Buyer.
The Buyer is not subject to any judgment, order, or decree entered in any
lawsuit or proceeding which may have an adverse effect on its business practices
of either, or on the ability of either it to acquire any property or conduct its
business in any area.
No consent of any person is necessary to the consummation of the
transactions contemplated hereby, including, without limitation, consents from
parties to loans, contracts, leases, or other agreements and consents from
governmental agencies, whether federal, state, or local.
5.15 Permits and Other Operating Rights. The Buyer has received the
----------------------------------
consent of all third persons required to permit each it to operate its business
in the manner in which it presently is being conducted, and possesses all
necessary permits and other authorizations from third persons, including without
limitation, federal, foreign, state, and local governmental authorities,
presently required by applicable provisions of law, including statutes,
regulations, and existing judicial decisions, and by the property and contract
rights of third persons, the absence of which would have a material adverse
effect upon the business or properties of the Buyer.
5.16 Business Generally. There have been no events or transactions, or
------------------
information which has come to the attention of the Buyer which, as they relate
directly to the business and assets of the Buyer, could reasonably be expected
to have a material adverse effect on the profitability of the business and
operations of the Buyer.
5.17 Experience. Buyer is an accredited investor as defined by Rule 501(a)
----------
of the Securities Act of 1933 ("Securities Act") and has a net worth in excess
of five million dollars ($5,000,000), and has substantial experience in
evaluating and investing in private placement transactions of securities in
companies similar to the Issuer so that it is capable of evaluating the merits
and risks of its investment in the Issuer and has the capacity to protect its
own interests.
5.18 Investment. Buyer is acquiring the Shares for investment for its own
----------
account, not as a nominee or agent, and not with the view to, or for resale in
connection with, any distribution thereof. It understands that the Shares have
not been and will not be registered under the Securities Act by reason of
specific exemptions from the registration provisions of the Securities Act and
California law, the availability of which depends upon, among other things, the
bona fide nature of
<PAGE>
the investment intent and the accuracy of such Buyer's representations as
expressed herein and in the Subscription Agreement.
5.19 Rule 144. Buyer acknowledges that the Shares must be held
--------
indefinitely unless subsequently registered under the Securities Act and
applicable state law, or unless an exemption from such registration is
available. Buyer is aware of the provisions of Rule 144 promulgated under the
Securities Act which permit limited resale of shares purchased in a private
placement subject to the satisfaction of certain conditions, including among
other things, the existence of a public market for the Shares, the availability
of certain current public information about the Issuer, the resale occurring not
less than two years after a party has purchased and paid for the security to be
sold, the sale being effected through a "broker's transaction" or in
transactions directly with a "market maker," and the number of shares being sold
during any three-month period not exceeding specific limitations.
5.20 No Public Market. Buyer understands that no public market now exists
----------------
for any of the securities issued by the Issuer and that the Issuer has made no
assurances that a public market will ever exist for the Shares.
5.21 Access to Data. Buyer has had an opportunity to discuss the Issuer's
--------------
business, management, and financial affairs with the Issuer's management and has
had the opportunity to review the Issuer's facilities, business plan, and 1995
and 1996 year-end financial statements. It has also had an opportunity to ask
questions of officers of the Issuer, which questions were answered to its
satisfaction. It understands that such discussions, as well as any written
information issued by the Issuer, including the business plan, were intended to
describe certain aspects of the Issuer's business and prospects but were not a
thorough or exhaustive description.
5.22 Effectiveness of Buyers' Registration Statement. The Registration
-----------------------------------------------
Statement filed with the SEC covering the Warrants and the underlying common
stock of the Buyer is, or will be at the Closing Date, effective under the
Securities Act of 1933 (Securities Act), California and all other applicable
states' laws, and no stop order suspending the use of the prospectus therein or
suspending the effectiveness of the Registration statement has been issued and
no proceedings for that purpose have been instituted or are pending, or
threatened. The Registration Statement and prospectus comply as to form with
the requirements of the Securities Act and do not contain any untrue statement
of material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein not misleading.
5.23 Buyer's Compliance with Securities Exchange Act of 1934. The Buyer
-------------------------------------------------------
has filed all reports required by the Securities and Exchange Act of 1934 (1934
Act) within the periods required by the 1934 Act and complied with its
obligations under the 1934 Act, and none of such reports or filings contain any
untrue statement of material fact or omit to state any material fact required to
be stated therein or necessary in order to make the statements therein not
misleading.
<PAGE>
5.24 Distribution Agreement. The Buyer hereby agrees to enter into a
----------------------
Distribution Agreement substantially on the terms set forth in the Letter of
Intent appearing in Exhibit "B."
5.25 Nature of Representations and Warranties. All representations and
----------------------------------------
warranties made by the Buyer in Sections 5.5 through 5.11 are made to the best
of its knowledge, without any independent duty to investigate.
6. ISSUER'S PRE-CLOSING COVENANTS AND AGREEMENTS
---------------------------------------------
The Issuer hereby affords Buyer the following affirmative and negative
covenants, thereby agreeing to do or not to do, as the case may be, the
following, the fulfillment of each of which (except for those covenants which
survive or are required to be performed subsequent to the Closing) shall
constitute a condition precedent to the obligations of Buyer hereunder:
6.1 Best Efforts. Pending the Closing and except as disclosed in the
------------
Disclosure Schedule or otherwise expressly consented to or approved by Buyer in
writing, the Issuer hereby covenants and agrees that it will use its best
efforts in order that:
6.1.1 Regular Course of Business. The Issuer will carry on its
--------------------------
business diligently and substantially in the same manner as heretofore
conducted. The Issuer shall not engage in any transaction or activity, enter
into any agreement, or make any commitment, except in the ordinary course of
business and consistent with past practice.
6.1.2 Amendments. No change or amendment shall be made in the Articles
----------
of Incorporation or Bylaws of the Issuer.
6.1.3 Capital Changes; Dividends; Redemptions; Dilution. The Issuer
-------------------------------------------------
will not, except as disclosed in the Disclosure Schedule, before the Closing,
issue or sell any shares of capital stock or other securities, acquire directly
or indirectly by redemption or otherwise, any such capital stock, reclassify or
split up any such capital stock, declare or pay any dividends thereon in cash,
securities, or other property, or make any other distribution with respect
thereto, or grant or enter into any options, warrants, calls, or commitments of
any kind with respect thereto.
Following the Closing and prior to an initial public offering referred to
herein, the Issuer will not issue or sell any shares of capital stock or other
securities, reclassify or split-up any such capital stock, or grant or enter
into any options, warrants, calls or commitments of any kind with respect
thereto that will have the effect of diluting the 25% ownership of the Buyer
without approval of 100% of the issued and outstanding capital stock, provided
however, (i) that the Issuer may approve an initial public offering of the
capital stock of the Issuer upon resolution of the board of directors and
shareholders, passed in accordance with the by-laws of the Issuer, (ii) that the
Issuer may cause such shares of capital stock or other securities to be issued
or granted as are necessary to effectuate
<PAGE>
the initial public offering, and (iii) that, following the initial public
offering, the Issuer may take any and all actions with respect to its capital
stock in accordance with the respective by-laws of such Issuer.
6.1.4 Subsidiaries. The Issuer will not organize any new subsidiary,
------------
acquire any capital stock or other equity securities of any corporation, or
acquire any equity or ownership interest in any business.
6.1.5 Organization. The Issuer shall use its best efforts to preserve
------------
its corporate existence and business organization intact and to preserve its
relationships with licensors, suppliers, distributors, customers and others
having business relations with it.
6.1.6 Certain Changes. The Issuer will not:
---------------
(a) Borrow or agree to borrow any funds or incur, or assume or become
subject to, whether directly or by way of guarantee or otherwise, any material
obligation or liability (absolute or contingent), except obligations and
liabilities incurred in the ordinary course of business and consistent with past
practice;
(b) Pay, discharge or satisfy any material claim, liability, or obligation
(absolute, accrued, contingent, or otherwise), other than the payment,
discharge, or satisfaction in the ordinary course of business and consistent
with past practice of liabilities or obligations reflected or reserved against
in the Balance Sheet or incurred in the ordinary course of business and
consistent with past practice since the date of the Balance Sheet;
(c) Prepay any material obligation having a fixed maturity of more than
ninety (90) days from the date such obligation was issued or incurred;
(d) Permit or allow any of its material property or assets (real, personal,
or mixed, tangible or intangible) to be subjected to any mortgage, pledge, lien,
or encumbrance;
(e) Write down the value of any material inventory or write off as
uncollectible any notes or accounts receivable, except for immaterial write-
downs and write-offs in the ordinary course of business and consistent with past
practice;
(f) Cancel any material debts or waive any claims or rights of substantial
value or sell, transfer, or otherwise dispose of any of its properties or
assets, except in the ordinary course of business and consistent with past
practice;
(g) Dispose of or permit to lapse any rights to the use of any patent,
trademark, trade name, or copyright, or dispose of or disclose to any person any
trade secret, formula, process, or know-how not theretofore a matter of public
knowledge;
<PAGE>
(h) Pay, loan, or advance any amount to, or sell, transfer, or lease any
properties or assets to, or enter into any agreement or arrangement with, any of
its officers or directors or any affiliate of any of its officers or directors;
(i) Grant or extend any power of attorney; act as guarantor, surety,
consigner, endorser, co-maker, indemnitor, or otherwise in respect of the
obligation of any person, corporation, partnership, joint venture, association,
organization, or other entity; or
(j) Agree, whether in writing or otherwise, to do any of the foregoing.
6.1.7 Access. The Issuer shall provide Buyer, Buyer's attorneys,
------
accountants, and other representatives full and complete access to all financial
statements, business plans, and other information which can be reasonably
provided to Buyer relating to the securities to be sold to the Buyer pursuant
hereto.
6.1.8 Obligation to Update Disclosure Schedules. The Issuer shall
-----------------------------------------
promptly disclose to the Buyer in writing any facts or circumstances arising
after the date hereof that would have been required to be reflected on any of
the exhibits if such facts or circumstances had existed as of the date hereof.
No disclosure made by the Issuer pursuant to this Section 6.1.8 shall be deemed
to supplement or amend any of the Disclosure Schedules for purposes of
determining the accuracy of any of the representations and warranties of the
Issuer set forth herein or for purposes of determining compliance with any of
the conditions set forth herein.
7. BUYER'S PRE-CLOSING COVENANTS AND AGREEMENTS
--------------------------------------------
The Buyer hereby affords the Issuer the following affirmative and negative
covenants, thereby agreeing to do or not to do, as the case may be, the
following, the fulfillment of each of which (except for those covenants which
survive or are required to be performed subsequent to the Closing) shall
constitute a condition precedent to the obligations of the Issuer hereunder:
7.1 Access. The Buyer shall provide Issuer, Issuer' attorneys,
------
accountants, and other representatives full and complete access to all 10-Ks,
10-Qs, and Exchange Act reports and filings and Registration Statements relating
to the securities to be provided to the Issuer pursuant hereto.
7.2 Obligation to Update Disclosure Schedules. The Buyer shall promptly
-----------------------------------------
disclose to the Issuer in writing any facts or circumstances arising after the
date hereof that would have been required to be reflected on any of the exhibits
if such facts or circumstances had existed as of the date hereof. No disclosure
made by the Buyer pursuant to this Section 7.2 shall be deemed to supplement or
amend any of the Disclosure Schedules for purposes of determining the accuracy
of any of the representations and warranties of the Buyer set forth herein or
for purposes of determining compliance with any of the conditions set forth
herein.
<PAGE>
7.3 Effectiveness of Registration Statement. Buyer shall maintain the
---------------------------------------
effectiveness of the Registration Statement and any prospectus contained therein
for the securities to be issued to the Issuer pursuant to this agreement with
the SEC, the California Department of Corporations and all other applicable
states' securities administrators, and said Registration Statement will not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein not misleading. At all times, said Registration Statement and
prospectus will also conform with the requirements of the Securities Act and
contain all statements required to be stated therein in accordance with the
Securities Act.
8. CONDITIONS PRECEDENT TO CLOSING.
-------------------------------
8.1 Conditions Precedent to Obligations of Buyer. The Closing shall not
--------------------------------------------
take place unless all of the following conditions have been fulfilled before or
are fulfilled at the Closing (any of which may be waived by Buyer in whole or in
part):
8.1.1 Correctness of Representations and Warranties. There shall be no
---------------------------------------------
representation or warranty of the Issuer contained in this Agreement or in any
exhibit attached hereto which is untrue or inaccurate to any material extent.
8.1.2 Performance of Covenants and Agreements. There shall be no
---------------------------------------
covenant or agreement of the Issuer contained in this Agreement and required to
be performed before the Closing which has been breached to any material extent.
8.1.3 Corporate Records. The Issuer shall have made available for
-----------------
inspection to the Buyer the stock book, stock ledger, minute books of the
Issuer, and those contracts and agreements described in this Agreement.
8.1.4 Corporate Approval. The execution and delivery of this Agreement
------------------
by Buyer, and the performance of its covenants and obligations under it,
including the issuance of Warrants, shall have been duly authorized by all
necessary corporation action, and Issuer shall have received copies of all
resolutions pertaining to that authorization, certified by the secretary of the
Issuer.
8.1.5 Appointment of Officers and Directors. The Issuer shall have
-------------------------------------
delivered to Buyer written resolutions for the Issuer, certified by its
secretary, appointing Mr. Louis L. Knickerbocker as a Director of the Issuer and
authorizing the execution and delivery of this agreement, and the performance of
its covenants and obligations.
8.1.6 No Government Proceeding or Litigation. No suit, action,
--------------------------------------
investigation, inquiry, or other proceeding by any governmental body or other
person or legal or administrative proceeding shall have been instituted or
threatened which (a) questions the validity or legality of the
transactions contemplated hereby, (b) in the sole and exclusive judgment of
Buyer materially impairs the Issuer's ability to exercise control over or manage
the business and affairs of the Issuer after the Closing, or (c) in the sole and
exclusive judgment of Buyer might have a material adverse effect on the business
or financial condition of the Issuer.
<PAGE>
8.1.7 Material Change. From the date of the Balance Sheet to the
---------------
Closing Date, the Issuer shall not have suffered any material adverse change in
its business, financial condition, working capital, assets, liabilities
(absolute, accrued, contingent or otherwise), reserves, or operations.
8.1.8 Officers' Certificate. The Issuer shall have delivered to Buyer
---------------------
a certificate, signed by the President and the Secretary of the Issuer and dated
as of the closing Date, to the effect that (i) the representations and
warranties of the Issuer set forth in this Agreement were true and correct in
all material respects on the date of this Agreement and are true and correct in
all material respects on the date of this Agreement and are true and correct in
all material respects on the Closing date as though such representations and
warranties were made as of the Closing Date, and (ii) the Issuer has duly
complied with and performed, in all material respects, all agreements,
covenants, and obligations required by this Agreement to be complied with or
performed by the Issuer on or before the Closing Date.
8.1.9 Opinions of Counsel. The Issuer shall have delivered to the
-------------------
Buyer a written opinion of its counsel, dated as of the Closing Date, in form
and substance satisfactory to Buyer and its counsel, to the effect that:
(a) Issuer is a corporation duly organized, validly existing, and in
good standing under the laws of the State of California and has all requisite
corporate power to perform its obligations under this Agreement;
(b) All corporate proceedings required by law or by the provisions of
this Agreement to be taken by Issuer on or before the Closing Date in connection
with the execution and delivery of this Agreement and the consummation of the
transactions contemplated by this Agreement have been duly and validly taken;
(c) Issuer has the corporate power and authority to sell the common
stock of the Issuer for the consideration set forth herein;
(d) Every consent, approval, authorization, or order of any court or
governmental agency or body that is required for the consummation by Issuer of
the transactions contemplated by this Agreement has been obtained and will be in
effect on the Closing Date;
(e) The consummation of the transaction contemplated by this Agreement
does not violate or contravene any of the provisions of any charter, bylaw, or
resolution of Issuer or of any indenture, agreement, judgment, or order to which
Issuer is a party or by which Issuer is bound. In rendering its opinion, counsel
for Issuer may rely on certificates of governmental authorities and on opinions
of associate counsel.
<PAGE>
8.2 Conditions Precedent to Obligations of Issuer. The Closing shall
---------------------------------------------
not take place unless all of the following conditions have been fulfilled
before, or are fulfilled at the Closing (any of which may be waived by the
Issuer in whole or in part):
8.2.1 Correctness of Representations and Warranties. There shall be
---------------------------------------------
no representation or warranty of the Buyer contained in this Agreement or in any
exhibit attached hereto which is untrue or inaccurate to any material extent.
8.2.2 Performance of Covenants and Agreements. There shall be no
---------------------------------------
covenant or agreement of the Buyer contained in this Agreement and required to
be performed before the Closing which has been breached to any material extent.
8.2.3 Corporate Records. The Buyer shall have made available for
-----------------
inspection to the Issuer the stock book, stock ledger, minute books, transfer
agent's records, and those contracts and agreements described in this Agreement.
8.2.4 Corporate Approval. The execution and delivery of this Agreement
------------------
by Buyer, and the performance of its covenants and obligations under it,
including the issuance of Warrants, shall have been duly authorized by all
necessary corporate action, and Issuer shall have received copies of all
resolutions pertaining to that authorization, certified by the Secretary of the
Buyer.
8.2.5 No Government Proceeding or Litigation. No suit, action,
--------------------------------------
investigation, inquiry, or other proceeding by any governmental body or other
person or legal or administrative proceeding shall have been instituted or
threatened which (a) questions the validity or legality of the transactions
contemplated hereby, (b) in the sole and exclusive judgment of the Issuer
materially impairs the Buyer's ability to exercise control over or manage the
business and affairs of the Buyer after the Closing, or (c) in the sole and
exclusive judgment of the Issuer might have a material adverse effect on the
business or financial condition of the Buyer.
8.2.6 Material Change. From the Balance Sheet Date to the Closing
---------------
Date, the Buyer shall not have suffered any material adverse change in its
business, financial condition, working capital, assets, liabilities (absolute,
accrued, contingent or otherwise), reserves, or operations.
8.2.7 Officers' Certificate. The Buyer shall have delivered to the
---------------------
Issuer a certificate, signed by the President and the Secretary of the Buyer and
dated as of the Closing Date, to the effect that (i) the representations and
warranties of the Buyer set forth in this Agreement were true and correct in all
material respects on the date of this Agreement and are true and correct in all
material respects on the Closing Date as though such representations and
warranties were made as of the Closing Date, and (ii) the Buyer has duly
complied with and performed, in all material respects, all agreements,
covenants, and obligations required by this Agreement to be complied with or
performed by the Buyer on or before the Closing Date.
<PAGE>
8.2.8 Opinion of Counsel. The Buyer shall have delivered to the Issuer
------------------
a written opinion of its counsel, dated as of the Closing Date, in form and
substance satisfactory to Issuer and its counsel, to the effect that:
(a) Buyer is a corporation duly organized, validly existing, and in
good standing under the laws of the State of California and has all requisite
corporate power to perform its obligations under this Agreement;
(b) All corporate proceedings required by law or by the provisions of
this Agreement to be taken by Buyer on or before the Closing Date in connection
with the execution and delivery of this Agreement and the consummation of the
transactions contemplated by this Agreement have been duly and validly taken;
(c) Buyer has the corporate power and authority to sell the Warrants
and/or common stock of the Buyer for the consideration set forth herein;
(d) Every consent, approval, authorization, or order of any court or
governmental agency or body that is required for the consummation by Buyer of
the transactions contemplated by this Agreement has been obtained and will be in
effect on the Closing Date;
(e) The Warrants of Buyer to be delivered at the Closing have been
duly executed and, when delivered as provided in this Agreement, will constitute
a legal, valid, and binding obligation of Buyer, enforceable in accordance with
its terms except as limited by bankruptcy laws, insolvency laws, and other
similar laws affecting the rights of creditors generally;
(f) The offer and sale of the Warrants to the Issuer and the immediate
sale and transfer thereof by the Escrow Agent or any other party shall be
registered and qualified or shall be exempt from registration under applicable
federal, California, and all applicable state laws.
(g) The Registration Statement filed with the SEC, the State of
California, and all applicable states for the common stock of the buyer
underlying the Warrants is, or will be at the Closing Date, effective under the
Securities Act, applicable California and all other applicable state laws, and
no stop order suspending the use of the prospectus therein or suspending the
effectiveness of the Registration Statement has been issued and no proceedings
for that purpose have been instituted or are pending or threatened. The
Registration Statement and prospectus comply as to form with the requirements of
the Securities Act and do not contain any untrue statement of material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein not misleading.
(h) Buyer has filed all reports required by the Exchange Act within
the periods required by the Exchange Act and complied with its obligations under
the Exchange Act, and none of its Exchange Act reports or filings contain any
untrue statement of material fact or omit to state any material fact required to
be stated therein or necessary in order to make the statements therein not
misleading.
<PAGE>
(i) The consummation of the transaction contemplated by this Agreement
does not violate or contravene any of the provisions of any charter, bylaw, or
resolution of Buyer or of any indenture, agreement, judgment, or order to which
Buyer is a party or by which Buyer is bound. In rendering its opinion, counsel
for Buyer may rely on certificates of governmental authorities and on opinions
of associate counsel.
8.2.9 Effectiveness of Buyers' Registration Statement. The
-----------------------------------------------
Registration Statement filed with the SEC for the Warrants and the common stock
of the Buyer underlying the Warrants is, or will be as of the Closing Date,
effective under the Securities Act, California and all other applicable states'
laws, and no stop order suspending the use of the prospectus therein or
suspending the effectiveness of the Registration Statement has been issued and
no proceedings for that purpose have been instituted or are pending or
threatened. The Registration Statement and prospectus comply as to form with
the requirements of the Securities Act and do not contain any untrue statement
of material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein not misleading.
8.2.10 Buyer's Compliance with Securities Exchange Act of 1934. Buyer
-------------------------------------------------------
has filed all reports required by the Exchange Act within the periods required
by the Exchange Act and complied with its obligations under the Exchange Act,
and none of its Exchange Act reports or filings contain any untrue statement of
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein not misleading.
8.2.11 NASDAQ Listing Effective. The Buyer's common stock underlying
------------------------
the Warrants shall be actively traded on the NASDAQ National Market System, and
no procedures for the delisting of such common stock shall be instituted, or be
pending or threatened.
8.2.12 Receipt of Proceeds. The Six Hundred Thousand Dollars
-------------------
($600,000.00) in proceeds from the sale of the Warrants by the Escrow Agent
pursuant to the Escrow Agreement shall be received without restriction by the
Escrow Agent.
8.2.13 Exemption for Issuance and Immediate Sale of Warrants. The
-----------------------------------------------------
issuance of the Warrants to the Buyer pursuant to this Agreement shall be
registered and qualified or shall be exempt from applicable federal and
California law, and the immediate transfer of the Warrants by Escrow Agent on
behalf of the Issuer or its nominee shall also be exempt from requirements of
registration or qualification of such securities pursuant to all applicable
United States and State law.
9. INDEMNIFICATION
---------------
9.1 Indemnification by Issuer. The Issuer shall hold harmless and
-------------------------
indemnify Buyer and each of Buyer's past, present, and future directors,
officers, shareholders, employees, attorneys, agents, and other affiliates from
and against any loss, liability, damage, or expense, including without
<PAGE>
limitation reasonable attorney fees, that is directly or indirectly suffered or
incurred at any time by Buyer or any of such directors, officers, shareholders,
employees, attorneys, agents or other affiliates and that arises directly or
indirectly out of or by virtue of, or is directly or indirectly connected with,
the breach or inaccuracy of any of the representations and warranties of the
Issuer or the failure of the Issuer to perform any of its covenants or
obligations contained in this Agreement (including the Disclosure Schedules) or
in any instrument or other document delivered hereunder or in connection
herewith.
9.2 Indemnification by Buyer. Buyer shall hold harmless and indemnify the
------------------------
Issuer and each of Issuer's past, present and future directors, officers,
shareholders, employees, attorneys, agents and other affiliates of the Issuer
from and against any loss, liability, damage, or expense, including without
limitation reasonable attorney fees, that is directly or indirectly suffered or
incurred at any time by the Issuer or any of such directors, officers,
shareholders, employees, attorneys, agents or other affiliates and that arises
directly or indirectly out of or by virtue of, or is directly or indirectly
connected with, the breach or inaccuracy of any of the representations and
warranties of Buyer or the failure of Buyer to perform any of its covenants or
obligations contained in this Agreement, including the Buyer's Disclosure
Schedule, or in any instrument or other document delivered hereunder or in
connection herewith.
9.3 Notice and Opportunity to Defend. If any legal proceeding is
--------------------------------
initiated, or any claim or demand is made, against any person with respect to
which such person (the "Indemnified Party") may make a claim against any party
hereto (the "Indemnifying Party") pursuant to this Section 9, then the
Indemnified Party shall give prompt written notice of such legal proceeding,
claim, or demand to the Indemnifying Party. The Indemnifying Party shall, at
its own expense and with its own counsel, defend or settle such legal
proceeding, claim or demand; provided, however, that: (i) the Indemnifying Party
shall keep the Indemnified Party informed of all material developments and
events relating to such legal proceeding, claim or demand; (ii) the Indemnified
Party shall have the right to participate, at its own expense, in the defense of
such legal proceeding, claim or demand and shall cooperate as reasonably
requested by the Indemnifying Party in the defense thereof; and (iii) the
Indemnifying Party shall not settle such legal proceeding, claim or demand
without the prior written consent of the Indemnified Party, which consent shall
not be unreasonably withheld.
9.4 Indemnification Not a Waiver. A person's right to indemnification
----------------------------
pursuant to this Section 9 shall not be deemed to be such person's exclusive
remedy in connection with or arising from the breach or inaccuracy of any of the
representations and warranties of the Indemnifying Party or the failure of the
Indemnifying Party to perform any of its covenants or obligations contained in
this Agreement (including the Disclosure Schedules) or in any instrument or
other document delivered hereunder or in connection herewith; and the exercise
by any person of his right to demand and receive such indemnification shall not
be deemed to prejudice, or to operate as a waiver of, any remedy to which such
person may be entitled at law or equity.
<PAGE>
10. RELATED MATTERS.
---------------
10.1 Confidentiality. Each party hereto will hold and will cause its
---------------
consultants and advisors to hold in strict confidence prior to the Closing Date,
unless compelled to disclose by judicial or administrative process or, in the
opinion of its counsel by other requirements of law, all documents and
information concerning the other party furnished it by such other party or its
representatives in connection with the transactions contemplated by this
Agreement (except to the extent that such information can be shown to have been:
(i) previously known by the party to which it was furnished; (ii) in the public
domain through no fault of the party to which it was furnished; or (iii) later
lawfully acquired from other sources by the party to which it was furnished),
and each party will not release or disclose such information to any other
person, except its auditors, attorneys, financial advisors, bankers, and other
consultants and advisors in connection with this Agreement.
10.2 Notices. All notices, requests, demands, claims, and other
-------
communications hereunder shall be in writing and shall be deemed to have been
duly given (i) if personally delivered, (ii) if mailed, five (5) business days
after having been sent by registered or certified mail, return receipt
requested, postage prepaid, addressed to the intended recipient as set forth
below, (iii) if given by telex or telecopier, once such notice or other
communication is transmitted to the telex or telecopier number specified below
and the appropriate answer back or telephonic confirmation is received, provided
that such notice or other communication is promptly thereafter mailed in
accordance with the provisions of clause (ii) above, or (iv) if sent through an
overnight delivery service in circumstances to which such service guarantees
next day delivery, the day following being so sent:
If to Buyer:
Louis L. Knickerbocker
The L. L. Knickerbocker Co., Inc.
30055 Comercio
Rancho Santa Margarita, CA 92688
Facsimile (714) 858-0339
Copy to:
William R. Black, Esq.
29 Summitcrest
Dove Canyon, California 92679
Facsimile (714) 888-7700
If to the Issuer:
James Scudder
Self-Heating Container Corporation of America
12675 Danielson Court, Suite 401
Poway, California 92064
Facsimile (619) 486-7204
<PAGE>
Copy to:
Fisher Thurber LLP
4225 Executive Square, Suite 1600
La Jolla, California 92037-1483
Facsimile (619) 535-1616
Any party may give any notice, request, demand, claim, or other
communication hereunder using any other means (including ordinary mail or
electronic mail), but no such notice, request, demand, claim or other
communication shall be deemed to have been duly given unless and until it
actually is received by the individual for whom it is intended. Any party may
change the address to which notices, requests, demands, claims and other
communications hereunder are to be delivered by giving the other parties notice
in the manner herein set forth.
10.3 Arbitration. The parties hereby agree to submit all controversies,
-----------
claims and matters of difference arising as a result of this Agreement and the
transactions contemplated hereby to arbitration through Judicial Arbitration and
Mediation Services ("JAMS") according to the rules and practices of JAMS
governing commercial arbitration from time to time in force. Such arbitration
shall be conducted in San Diego County, California. This submission and
agreement to arbitrate shall be specifically enforceable. The parties agree to
abide by all awards rendered in such proceedings. Such awards shall be final and
binding on all parties to the extent, and in the manner, provided by California
statute. Such awards shall not be subject to appeal. All such awards may be
filed with the Clerk of the San Diego County Superior Court as a basis of
judgment and of the issuance of execution for its collection and, at the
election of the party making such filing, with the clerk of one or more other
courts, state or federal, having jurisdiction over the party against whom such
an award is rendered or the property of said party.
10.4 Recovery of Fees and Costs. If any arbitration proceeding is brought
--------------------------
for the enforcement of this Agreement or because of an alleged dispute, breach,
default or misrepresentation in connection with any of the provisions of this
Agreement or documents executed and delivered pursuant hereto, the successful or
prevailing party or parties shall be entitled to recover reasonable attorneys'
and experts' fees and other costs incurred in that proceeding, in addition to
any other relief to which it or they may be entitled.
10.5 Entire Agreement. This Agreement represents the entire agreement of
----------------
the parties hereto with respect to the subject matter hereof, superseding all
prior agreements, understandings, discussions, negotiations, representations,
and commitments of any kind. This Agreement may not be amended or supplemented,
nor may any rights hereunder be waived, except in a writing signed by each of
the parties affected thereby.
<PAGE>
10.6 Section Headings. The section headings in this Agreement are included
----------------
for convenience only and are not a part of this Agreement and shall not be used
in construing it.
10.7 Severability. In the event that any provision or any part of any
------------
provision of this Agreement is held to be illegal, invalid, or unenforceable in
any jurisdiction, as to such jurisdiction such illegality, invalidity, or
unenforceability shall not affect the validity or enforceability of any other
provision or part hereof. Any such illegality, invalidity, or unenforceability
shall not invalidate or render unenforceable such provision in any other
jurisdiction. To the extent permitted by law, the parties hereby waive any
provision of law that renders any provision illegal, invalid, or unenforceable
in any respect. In addition, in the event of any such illegality, invalidity
or unenforceability, the parties agree that it is their intention and agreement
that such provision which is held or determined to be illegal, invalid, or
unenforceable as written in any jurisdiction, shall nonetheless be in force and
binding to the fullest extent permitted by the law of the jurisdiction as though
such provision had been written in such a manner and to such an extent as to be
enforceable under the circumstances.
10.8 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
10.9 Further Assurances. Each party hereto shall execute and deliver such
------------------
instruments and take such other actions as the other party or parties, as the
case may be, may reasonably require in order to carry out the intent of this
Agreement.
10.10 Waiver of Compliance. Any failure of the Issuer on the one hand,
--------------------
or the Buyer on the other, to comply with any obligation, agreement, or
condition herein may be expressly waived in writing by the party having the
right to insist upon performance of such obligation, agreement, or condition;
but such waiver or failure to insist upon strict compliance with such
obligation, agreement, or condition shall not operate as a waiver of, or
estoppel with respect to, any subsequent or other failure.
10.11 Assignment. This Agreement and all of the provisions hereof shall
----------
be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns, but neither this Agreement nor any
of the rights, interests, or obligations hereunder shall be assigned by any of
the parties hereto without the prior written consent of the other parties,
except by operation of law.
10.12 Publicity. Neither the Issuer nor the Buyer shall make or issue, or
---------
cause to be made or issued, any announcement or written statement concerning
this Agreement or the transactions contemplated hereby for dissemination to the
general public prior to the Closing Date without the prior consent of the other
party, which shall not be unreasonably withheld. This
<PAGE>
provision shall not apply, however, to any announcements made after the Closing
Date, or to any announcement or written statement required to be made by law or
the regulations of any federal or state governmental agency or any stock
exchange, except that the party required to make such announcement shall,
whenever practicable, consult with the other party concerning the timing and
content of such announcement before such announcement is made.
10.13 Governing Law Venue. This Agreement and the legal relations among
-------------------
the parties hereto shall be governed by and construed in accordance with the
laws of the State of California, and the venue for any actions or claims in
connection herewith shall be San Diego County, California.
10.14 Third Parties. Except as specifically set forth or referred to
-------------
herein, nothing herein expressed or implied is intended or shall be construed to
confer upon or give to any person or corporation other than the parties hereto
and their successors or assigns, any rights or remedies under or by reason of
this Agreement.
10.15 Construction:
------------
10.15.1 No Strict Construction. The language used in this Agreement will
----------------------
be deemed to be the language chosen by the parties hereto to express their
mutual intent, and no rule of strict construction shall be applied against
either party. Whenever required by the context, any gender shall include any
other gender, the singular shall include the plural, and the plural shall
include the singular. The words "herein", "hereof", "hereunder", and words of
similar import, shall refer to the Agreement as a whole and not to a particular
section.
10.15.2 Independent Significance. The parties hereto intend that each
------------------------
representation, warranty, and covenant contained herein shall have independent
significance. If any party has breached any representation, warranty, or
covenant contained herein in any respect, the fact that there exists another
representation, warranty, or covenant relating to the same subject matter
(regardless of the relative levels of specificity) that the party has not
breached, shall not detract from or mitigate the fact that the party is in
breach of the first representation, warranty, or covenant.
IN WITNESS WHEREOF, the parties have duly executed Agreement as of the first
date above mentioned.
THE L. L. KNICKERBOCKER CO., INC.
By: ___________________________________ Date:______________________
Louis Knickerbocker, President
<PAGE>
SELF HEATING CONTAINER CORPORATION OF CALIFORNIA.
By: __________________________________ Date:______________________
James Scudder, President
<PAGE>
Exhibit "A"
STOCKHOLDER RECORD
<PAGE>
Exhibit "B"
LETTER OF INTENT
<PAGE>
Exhibit "C"
FORM OF WARRANT
<PAGE>
Exhibit "D"
ESCROW AGREEMENT
<PAGE>
Exhibit "E"
OBLIGATIONS OF SHC TO ISSUE STOCK
<PAGE>
Exhibit "F"
FINANCIAL STATEMENTS OF SHC
<PAGE>
Exhibit "G"
FINANCIAL STATEMENTS OF LLK
<PAGE>
EXHIBIT 10.29
AGREEMENT OF PURCHASE AND SALE
OF THE CAPITAL STOCK OF
INSTA-HEAT, INC.,
A California corporation
as ISSUER
BY
THE L. L. KNICKERBOCKER CO., INC.
a California corporation
as BUYER;
DATED September__, 1996
<PAGE>
AGREEMENT OF PURCHASE AND SALE
OF THE CAPITAL STOCK OF
INSTA-HEAT, INC.,
A California corporation
BY
THE L.L. KNICKERBOCKER CO., INC.
a California corporation
<TABLE>
<CAPTION>
Tab Description
- --- -----------
<C> <S>
1 Agreement of Purchase and Sale
2 Exhibit A: Stockholder Record
3 Exhibit B: Letter of Intent dated July 12, 1996
4 Exhibit C: Form of Warrant
5 Exhibit D: Escrow Agreement
6 Exhibit E: Obligations of IHI to issue stock
7. Exhibit F: Financial Statement of Issuers
8 Exhibit G: Financial Statement of Buyer
</TABLE>
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
RECITALS...................................................................... 1
1. SUBJECT MATTER OF AND CONSIDERATION FOR SALE............................. 1
--------------------------------------------
1.1 Transfer of Shares................................................. 1
------------------
1.2 Consideration for Shares........................................... 2
------------------------
2. PAYMENT OF CONSIDERATION................................................ 2
-------------------------
2.1 Definitions........................................................ 2
-----------
2.2 Payments to IHI.................................................... 3
---------------
2.3 Escrow for Delivery of Shares...................................... 3
-----------------------------
3. CLOSING AND CLOSING DATE................................................. 4
------------------------
3.1 Time and Place..................................................... 4
--------------
3.2 At the Closing..................................................... 4
--------------
4. REPRESENTATIONS AND WARRANTIES OF IHI.................................... 4
-------------------------------------
4.1 Validity of Agreement, etc......................................... 4
--------------------------
4.2 Ownership of Issuer............................................... 5
--------------------
4.3 Corporate Organization............................................. 5
----------------------
4.4 Capitalization of the Issuer...................................... 5
-----------------------------
4.5 Subsidiaries and Affiliates....................................... 5
----------------------------
4.6 Financial Condition Of Issuer..................................... 5
------------------------------
4.7 Taxes.............................................................. 6
-----
4.8 Absence of Certain Changes......................................... 6
--------------------------
4.9 Title to Properties; Encumbrances.................................. 7
---------------------------------
4.10 Patents, Copyrights, Inventions, Trade Secrets, Etc................ 7
---------------------------------------------------
4.11 Compliance with Law................................................ 7
-------------------
4.12 Undisclosed Liabilities............................................ 9
-----------------------
4.13 Corporate Records.................................................. 9
-----------------
4.14 Material Misstatements or Omissions................................ 9
-----------------------------------
4.15 Litigation......................................................... 9
----------
4.16 Permits and Other Operating Rights................................. 9
----------------------------------
4.17 Business Generally................................................. 10
------------------
4.18 Distribution Agreement............................................. 10
----------------------
4.19 Nature of Representations and Warranties........................... 10
----------------------------------------
5. BUYER'S REPRESENTATIONS AND WARRANTIES................................... 10
--------------------------------------
5.1 Validity of Agreement, etc......................................... 10
--------------------------
5.2 Corporate Organization............................................. 10
----------------------
5.3 Capitalization of the Buyer........................................ 11
---------------------------
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
5.4 Subsidiaries and Affiliates....................................... 11
----------------------------
5.5 Financial Condition Of Buyer....................................... 11
----------------------------
5.6 Taxes.............................................................. 11
-----
5.7 Absence of Certain Changes......................................... 11
--------------------------
5.8 Title to Properties; Encumbrances.................................. 13
---------------------------------
5.9 Patents, Copyrights, Inventions, Trade Secrets, Etc................ 13
---------------------------------------------------
5.10 Compliance with Law................................................ 13
-------------------
5.11 Undisclosed Liabilities............................................ 14
-----------------------
5.12 Corporate Records.................................................. 14
-----------------
5.13 Material Misstatements or Omissions................................ 15
-----------------------------------
5.14 Litigation......................................................... 15
----------
5.15 Permits and Other Operating Rights................................. 15
----------------------------------
5.16 Business Generally................................................. 15
------------------
5.17 Experience......................................................... 15
----------
5.18 Investment......................................................... 15
----------
5.19 Rule 144........................................................... 16
--------
5.20 No Public Market................................................... 16
----------------
5.21 Access to Data..................................................... 16
--------------
5.22 Effectiveness of Buyers' Registration Statement.................... 16
-----------------------------------------------
5.23 Buyer's Compliance with Securities Exchange Act of 1934............ 16
-------------------------------------------------------
5.24 Distribution Agreement............................................. 17
----------------------
5.25 Nature of Representations and Warranties........................... 17
----------------------------------------
6. ISSUER'S PRE-CLOSING COVENANTS AND AGREEMENTS............................. 17
---------------------------------------------
6.1 Best Efforts....................................................... 17
------------
6.1.1 Regular Course of Business.................................. 17
--------------------------
6.1.2 Amendments................................................. 17
----------
6.1.3 Capital Changes; Dividends; Redemptions; Dilution.......... 17
-------------------------------------------------
6.1.4 Subsidiaries............................................... 17
------------
6.1.5 Organization............................................... 18
------------
6.1.6 Certain Changes............................................ 18
---------------
6.1.7 Access..................................................... 19
------
6.1.8 Obligation to Update Disclosure Schedules.................. 19
-----------------------------------------
7. BUYER'S PRE-CLOSING COVENANTS AND AGREEMENTS.............................. 19
--------------------------------------------
7.1 Access.............................................................. 19
------
7.2 Obligation to Update Disclosure Schedules........................... 19
-----------------------------------------
7.3 Effectiveness of Registration Statement............................. 19
---------------------------------------
8. CONDITIONS PRECEDENT TO CLOSING........................................... 20
-------------------------------
8.1 Conditions Precedent to Obligations of Buyer........................ 20
--------------------------------------------
8.1.1 Correctness of Representations and Warranties............... 20
---------------------------------------------
8.1.2 Performance of Covenants and Agreements..................... 20
---------------------------------------
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
8.1.3 Corporate Records......................................... 20
-----------------
8.1.4 Corporate Approval........................................ 20
------------------
8.1.5 Appointment of Officers and Directors..................... 20
-------------------------------------
8.1.6 No Government Proceeding or Litigation.................... 20
--------------------------------------
8.1.7 Material Change........................................... 20
---------------
8.1.8 Officers' Certificate..................................... 20
---------------------
8.1.9 Opinions of Counsel....................................... 21
-------------------
8.2 Conditions Precedent to Obligations of Issuer..................... 21
---------------------------------------------
8.2.1 Correctness of Representations and Warranties............. 21
---------------------------------------------
8.2.2 Performance of Covenants and Agreements................... 22
---------------------------------------
8.2.3 Corporate Records......................................... 22
-----------------
8.2.4 Corporate Approval........................................ 22
------------------
8.2.5 No Government Proceeding or Litigation.................... 22
--------------------------------------
8.2.6 Material Change........................................... 22
---------------
8.2.7 Officers' Certificate..................................... 22
---------------------
8.2.8 Opinion of Counsel........................................ 22
------------------
8.2.9 Effectiveness of Buyers' Registration Statement........... 24
-----------------------------------------------
8.2.10 Buyer's Compliance with Securities Exchange Act of 1934... 24
-------------------------------------------------------
8.2.11 NASDAQ Listing Effective.................................. 24
------------------------
8.2.12 Receipt of Proceeds........................................ 24
-------------------
8.2.13 Exemption for Issuance and Immediate Sale of Warrants..... 24
9. INDEMNIFICATION................................................... 24
---------------
9.1 Indemnification by Issuer................................... 24
-------------------------
9.2 Indemnification by Buyer.................................... 25
------------------------
9.3 Notice and Opportunity to Defend............................ 25
--------------------------------
9.4 Indemnification Not a Waiver................................ 25
---------------------------
10. RELATED MATTERS................................................... 25
---------------
10.1 Confidentiality............................................ 25
---------------
10.2 Notices.................................................... 26
-------
10.3 Arbitration................................................ 27
-----------
10.4 Recovery of Fees and Costs................................. 27
--------------------------
10.5 Entire Agreement........................................... 27
----------------
10.6 Section Headings........................................... 27
----------------
10.7 Severability............................................... 27
------------
10.8 Counterparts............................................... 28
------------
10.9 Further Assurances......................................... 28
------------------
10.10 Waiver of Compliance....................................... 28
--------------------
10.11 Assignment................................................. 28
----------
10.12 Publicity.................................................. 28
---------
10.13 Governing Law Venue........................................ 28
-------------------
10.14 Third Parties.............................................. 29
-------------
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
10.15 Construction......................................................... 29
------------
10.15.1 No Strict Construction..................................... 29
----------------------
10.15.2 Independent Significance................................... 29
------------------------
</TABLE>
iv
<PAGE>
AGREEMENT OF PURCHASE AND SALE
------------------------------
THIS AGREEMENT OF PURCHASE AND SALE ("Agreement") is made and entered into
effective as of September __, 1996, by and among The L. L. Knickerbocker Co.,
Inc., a California corporation ( "LLK" or "Buyer"), and Insta-Heat, Inc., a
California corporation ("IHI" or the "Issuer").
RECITALS
--------
A. The stockholders appearing in the schedule attached hereto as Exhibit
"A" (collectively the "Stockholders") own of record _______ common shares of the
Issuer in the amounts appearing in Exhibit A. The shares owned of record by the
Stockholders represent all of the issued and outstanding stock of the Issuer;
B. IHI owns certain patents which have been licensed to Self Heating
Container Corporation of California, a California coporation ('SHC") an
affiliate of IHI;
C. LLK desires to acquire ________ shares of the capital stock of IHI,
representing 25% of the outstanding stock in the Issuer (the "Shares");
D. LLK and the Issuer intend to enter into an exclusive distribution
agreement granting LLK certain rights to distribute products produced pursuant
to the patents held by IHI and licensed to SHC;
E. LLK and the Issuers entered into a letter of intent on July 12, 1996
regarding the subject matter of this Agreement. This letter of intent is
attached hereto as Exhibit "B."
F. LLK desires to issue certain warrants to purchase free trading
registered common stock of LLK to the Issuer or its designee in exchange for and
as consideration for the purchase of the Shares.
G. The facts recited as Paragraphs A - F, inclusive, are expressly made a
part hereof and incorporated herein for all purposes as covenants to this
agreement and are binding upon the parties hereto as covenants.
NOW THEREFORE, in consideration of the foregoing recitals and the mutual
promises, agreements, representations and warranties herein contained, the
parties hereto agree as follows:
1. SUBJECT MATTER OF AND CONSIDERATION FOR SALE.
--------------------------------------------
1.1 Transfer of Shares. Upon the terms and subject to all of the
------------------
conditions contained herein and upon the performance by each of the parties
hereto of their obligations hereunder, the Issuer hereby agrees to issue,
sell, assign, transfer and deliver the Shares to Buyer, on and as of the
<PAGE>
Closing Date (as hereinafter defined), by delivering to Buyer at the Closing
certificates representing the Shares, duly issued by the Issuer.
1.2 Consideration for Shares. As consideration for Buyer's purchase of
------------------------
the Shares and upon and subject to all of the terms and conditions herein and
upon the performance by each of the parties hereto of their obligations
hereunder, Buyer agrees to pay to the Issuer, in the manner described in
Sections 2.1, 2.2, and 2.3, an aggregate purchase price for the Shares of Fifty
Thousand Dollars ($50,000.00) ("Purchase Price").
2. PAYMENT OF CONSIDERATION.
-------------------------
The Purchase Price shall be paid as follows:
2.1 Definitions. For purposes of this Agreement, the following terms
-----------
shall have the following respective meanings:
(a) "Warrants" means options or warrants, in the form annexed hereto as
Exhibit C, which grant the holder the immediate right to purchase shares of
Buyer's common stock, which Warrants will be exercisable for a period of five
(5) years after the respective date of grant. Any shares issued upon the
exercise of such Warrants will, upon delivery, be registered and freely
tradeable and shall remain so throughout the period that the Warrants are
exercisable.
(b) "Value," in connection with each share of common stock covered by a
Warrant, means the difference between (i) the average of the closing bid and ask
price of Buyer's common shares for the five (5) trading days immediately
preceding the date of delivery of the Warrant and (ii) the exercise (or strike)
price of the Warrant.
(c) The number of Warrants granted pursuant to Section 1.2 shall be
subject to adjustment (the "Adjustment") in accordance with the following
provisions:
(i) The number of Warrants granted on each occasion shall be divided
by four (4), and it shall be assumed for the purposes of Section 1.2 that each
such amount of Warrants is sold at the mean trading price on each of the four
(4) successive trading dates immediately following the delivery of such
Warrants. The gross amount which would be received upon such assumed sales is
referred to herein as the "Realizable Amount."
(ii) If the Realizable Amount for each assumed sale is at least equal
to the Value which IHI is entitled, there shall be no Adjustment. If, and to
the extent the Realizable Amount is less than said Value, such difference (the
"Deficiency") shall be made up by LLK's delivery to IHI of additional Warrants
with a Value equal to such Deficiency (the "Make-up Warrants"). The Make-up
Warrants shall be delivered to IHI within one (1) week of the Closing Date.
<PAGE>
(iii) Notwithstanding the foregoing, if in fact IHI or its designee
shall have traded the stock issued upon exercise of the Warrants on any of such
four (4) immediately succeeding trading dates and shall have realized more than
the "Realizable Amount" for one or more of such day(s) as determined under
(c)(I) above, then the actual amount realized by such Issuer shall be used as
the "Realizable Amount" in calculating the amount of "Make-up Warrants" to be
issued to such Issuer pursuant to this paragraph.
2.2 Payments to IHI. At the Closing, Buyer shall deliver to IHI Warrants
---------------
with a Value equal to Fifty Thousand Dollars ($50,000.00) in full payment of the
amount of the Purchase Price. The Buyer at its option may, in lieu of Warrants,
deliver registered and freely tradeable common stock of the Buyer with a value
equal to the Purchase Price.
2.3 Escrow for Delivery of Shares. Pursuant to this Agreement, the
-----------------------------
parties shall enter into an escrow arrangement ("Escrow") with the escrow
department of a mutually approved bank. The Escrow shall be pursuant to an
escrow agreement ("Escrow Agreement") substantially in the form attached hereto
as Exhibit D. On or before the Closing Date, IHI shall deliver to the
designated escrow officer ("Escrow Agent") Share Certificates representing
________ shares of restricted common stock of IHI registered in the name of
LLK, and LLK shall deliver to the Escrow Agent Warrants to purchase shares of
free trading common stock of LLK, with a Value equal to the Purchase Price.
Buyer or its nominees shall direct or introduce one or more unrelated third
parties interested in purchasing the Warrants to the Issuer and/or the Escrow
Agent. The Issuer shall accept any offer to purchase the Warrants provided: (i)
the purchaser demonstrates an unconditional ability to perform; (ii) the
purchaser agrees to participate in the Escrow Agreement in connection with the
delivery of the purchase price for the Warrants to the Escrow Agent and the
delivery of the Warrants by the Escrow Agent to the purchaser; (iii)
consummation of the transaction contemplated in the offer will upon closing
result in delivery to the Issuer of an amount of cash equal to the Purchase
price; and (iv) the Issuer is not required to incur any additional unreimbursed
cost expense or risk in connection therewith. The Share certificates of IHI
shall be held by the Escrow Agent and shall be released to the Buyer only when
the Escrow Agent is in a position to deliver to IHI: (I) Fifty Thousand
Dollars ($50,000.00) in consideration for the delivery by Escrow Agent to the
third party purchaser of Warrant Certificates with appropriate assignment forms
duly executed by IHI with Medallion signature guarantees in accordance with any
agreement to sell the Warrants entered into by and between IHI and the third
party purchaser in accordance with the terms of the Escrow Agreement; and (ii)
the Conditions Precedent to the Obligations of IHI described in Section 8.2
herein are satisfied or waived by IHI prior to the Closing Date. Neither IHI
nor LLK shall have any rights as shareholders in connection with Shares or
Warrants delivered to the Escrow Agent until the Warrants are delivered to IHI
and the Shares are delivered to LLK.
<PAGE>
3. CLOSING AND CLOSING DATE
------------------------
3.1 Time and Place. Subject to the provisions of Section 8 hereof, the
--------------
Closing ("Closing") of the transactions contemplated by this Agreement shall
take place at the offices of counsel to IHI at 10:00 A.M. on ______________,
1996 ("Closing" or "Closing Date"), or at such later date, time and place as may
be hereafter agreed upon in writing by the parties.
3.2 At the Closing.
--------------
(a) IHI shall have delivered to the Escrow Agent: (I) certificates
representing _____ shares of restricted common stock of the Issuer; (ii) the
opinion of counsel and officers' certificate referenced in Section 8.1 herein;
and (iii) such other documents as LLK may reasonably request to carry out the
purposes of this agreement; and
(b) LLK shall have delivered to the Escrow Agent (I) Warrants with a
Value of Fifty Thousand Dollars ($50,000.00); (ii) the opinion of counsel and
officers' certificate referenced in Section 8.2 herein; and (iii) such other
documents as IHI may reasonably request to carry out the purposes of this
Agreement.
4. REPRESENTATIONS AND WARRANTIES OF IHI.
-------------------------------------
IHI represents and warrants the following, the truth and accuracy of each
of which shall constitute a condition precedent to the obligations of Buyer
hereunder:
4.1 Validity of Agreement, etc. This Agreement is, or will be at the
--------------------------
Closing, valid and binding upon Issuer and is, or will be at the Closing,
enforceable in accordance with its respective terms, except as enforceability
may be limited by bankruptcy, insolvency, reorganization, or other laws
affecting generally the enforcement of creditors' rights and except to the
extent that courts may award money damages rather than specific performance of
contractual provisions.
Neither the execution and delivery of this Agreement by the Issuer nor the
consummation of the transactions contemplated hereby, nor any action of the
Issuer contemplated by this Agreement, will violate any provision of the
Articles of Incorporation or By-Laws of the Issuer, nor will such actions
violate or be in conflict with or constitute a default (or an event which, with
notice or lapse of time or both, would constitute a default) under, or result in
the termination of, or accelerate the performance required by, or cause the
acceleration of the maturity of, any debt or obligation pursuant to, or result
in the creation or imposition of any security interest, lien, or other
encumbrance upon any property or assets of the Issuer under any agreement or
commitment to which the Issuer is a party, or by which the Issuer is bound, or
to which the property of the Issuer is subject, or violate any statute or law or
any judgment, decree, order, regulation, or rule of any court or governmental
authority.
<PAGE>
4.2 Ownership of Issuer. The Stockholders are the sole owners of record
--------------------
of all of the issued and outstanding shares of the Issuer's capital stock.
Except as set forth in Exhibit E, there are no outstanding subscriptions,
options, rights, warrants, convertible securities, or other agreements,
commitments, or rights obligating the Issuer to issue any shares of stock to any
person or firm, nor obligating the Stockholders, or any of them, to transfer any
shares to any person or firm.
4.3 Corporate Organization. The Issuer is a corporation duly organized,
----------------------
validly existing, and in good standing under the laws of the State of California
and qualified to do business in the State of California and has full corporate
power and authority to carry on its business as it is now being conducted and to
own the properties and assets it now owns; is not, and the nature of Issuer's
activities do not require it to be, qualified to do business as a foreign
corporation in any other jurisdiction. The copies of the Certificate of
Incorporation and By-Laws of the Issuer previously delivered to Buyer are
complete and correct copies of such instruments as presently in effect.
4.4 Capitalization of the Issuer. As of the date of this Agreement, the
-----------------------------
authorized capital stock of the Issuer consists of ___________ shares of common
stock; of which _____________ shares of common stock are issued and
outstanding. All issued and outstanding shares of common stock of the Issuer
are validly issued, fully paid, and nonassessable; there are no preemptive
rights applicable to any common stock of the Issuer, and all outstanding
securities of the Issuer have been offered, sold, and delivered by the Issuer in
compliance with all applicable federal and state laws.
4.5 Subsidiaries and Affiliates. The Issuer has no subsidiaries nor
----------------------------
any equity interest in any other corporation, partnership, or business.
4.6 Financial Condition Of Issuer. Exhibit F contains true, complete,
------------------------------- -
and correct copies of the Issuer's Statements of Financial Condition ("Balance
Sheet") as of ________________ ("Balance Sheet Date") and its statements of
income and Statement of Cash Flows for the _____________ months ended
______________, are hereinafter collectively referred to as the "Issuer's
Financial Statements." The Issuer's Financial Statements are: (i)
statements prepared from the books and records of the Issuer by its independent
certified public accountants; (ii) prepared substantially in accordance with the
same accounting methods, practices, and principles utilized in connection with
the preparation of prior financial statements issued by the Issuer; (iii) set
forth fairly and completely the financial position and the results of operations
of the Issuer at the relevant dates thereof and for the period(s) covered
thereby; (iv) contain and reflect all necessary material adjustments for a fair
and complete presentation of the Issuer's financial position and the results of
operations for the period covered by the Issuer's Financial Statements; (v)
reflect all material liabilities, realized or unrealized, contingent or not
contingent, to which the Issuer is liable, except for liabilities and
obligations incurred in the ordinary course of business consistent with past
practice since the Balance Sheet Date; and (vi) the reserves reflected in the
Issuer's Financial Statements are in the opinion of management adequate,
appropriate and reasonable.
<PAGE>
4.7 Taxes. The Issuer has duly filed when due all tax reports and
-----
returns required to be filed and has duly paid all taxes, assessments,
penalties, interest, and other charges due or claimed to be due from it by
federal, state, local, or foreign taxing authorities (including, without
limitation, those due in respect of the properties, income, franchises,
licenses, sales, or payrolls of the Issuer), and Issuer shall have no further
liability for any such tax, assessment, penalty, or interest.
4.8 Absence of Certain Changes. Except as and to the extent set forth in
--------------------------
the Issuer's Financial Statements or notes thereto, or in a written disclosure
schedule delivered to either party prior to Closing ("Disclosure Schedule"),
since the Balance Sheet Date the Issuer has not:
(a) Suffered any material adverse change in, or the occurrence of any
events which, individually or in the aggregate have had a material adverse
effect on its working capital, financial condition, assets, liabilities
(absolute, accrued, contingent or otherwise), reserves, business, or operations;
(b) Incurred any liabilities or obligations (absolute, accrued, contingent,
or otherwise), except items incurred in the ordinary course of business and
consistent with past practice, or increased, or experienced any material change
in any assumptions underlying or methods of calculating any bad debt,
contingency, or other reserves;
(c) Paid, discharged, or satisfied any material claim, liability, or
obligation (absolute, accrued, contingent, or otherwise) other than the payment,
discharge, or satisfaction in the ordinary course of business and consistent
with past practice;
(d) Permitted or allowed any of its material property or assets (real,
personal, or mixed, tangible or intangible) to be subjected to any mortgage,
pledge, lien, security interest, encumbrance, restriction, or charge of any
kind, except for liens for current taxes not yet due;
(e) Sold, transferred, or otherwise disposed of any of its material
properties or assets (real, personal, or mixed, tangible or intangible), except
in the ordinary course of business and consistent with past practice;
(f) Disposed of or permitted to lapse any rights to the use of any patent,
trademark, trade name, or copyright, or disposed of or disclosed to any person,
any trade secret, formula, process, or know-how not theretofore a matter of
public knowledge;
(g) Granted any increase in the compensation of officers or employees
(including any such increase pursuant to any bonus, pension, profit-sharing, or
other plan or commitment) or any material increase in the compensation payable
or to become payable to any officer or employee from the day following the
Balance Sheet Date through the Closing Date, and no such increase is required by
agreement or understanding except for employee salary increases in the ordinary
course of business and in accordance with past practice;
<PAGE>
(h) Paid, loaned, or advanced any amount to, or sold, transferred, or
leased any properties or assets (real, personal, or mixed, tangible or
intangible) to, or entered into any agreement or arrangement with, any of its
officers or directors or any affiliate, family member, or associate of any of
its officers or directors;
(i) Suffered any loss, damage, destruction, or other casualty materially
and adversely affecting any of the properties, assets, or business of the Issuer
(whether or not covered by insurance);
(j) Borrowed or agreed to borrow any material amount of funds or incurred
or assumed or become subject to, whether directly or by way of guarantee or
otherwise, any material obligation or liability, except obligations and
liabilities incurred in the ordinary course of business and consistent with past
practice;
(k) Licensed, sold, transferred, pledged, modified, disclosed, disposed
of, or permitted to lapse any rights to the use of the name of the Issuer or any
fictitious firm name used by the Issuer;
(l) Entered into any transaction with the Stockholders, or any of them,
their relatives, related trusts or related business entities;
(m) Entered into any other transaction, contract, or commitment other than
in the ordinary course of business; and
(n) Agreed, whether in writing or otherwise, to take any action described
in this section.
4.9 Title to Properties; Encumbrances. The Issuer has good, valid, and
---------------------------------
marketable title to all the properties and assets which each purports to own
(real, personal, and mixed, tangible and intangible), including without
limitation, all the properties and assets reflected in the Balance Sheet except
for property sold since the Balance Sheet Date in the ordinary course of
business and consistent with past practice.
4.10 Patents, Copyrights, Inventions, Trade Secrets, Etc. The Issuer has
---------------------------------------------------
good and valid title to, or otherwise possesses adequate and exclusive rights to
use, all patents, copyrights, inventions, trade secrets, and other proprietary
information necessary to permit the Issuer to conduct its business in the same
manner as its business has been conducted prior to the date hereof.
4.11 Compliance with Law. The operations of the Issuer have been
-------------------
conducted in substantial accordance with all applicable laws, regulations, and
other requirements of all national governmental authorities and of all states,
municipalities, and other political subdivisions and agencies thereof having
jurisdiction over the Issuer, including but not limited to, all laws,
regulations, and requirements relating to antitrust, environmental protection
and conservation, pollution, equal employment and anti-discrimination acts,
consumer protection, currency exchange, health, occupational safety, pension,
securities, and trading-with-the-enemy matters. The Issuer has
<PAGE>
not received any notification of any asserted present or past failure by the
Issuer to comply with such laws, rules, or regulations.
The Issuer has filed when due all reports required to be filed with any
governmental, regulatory, or administrative agency and has obtained all permits,
licenses, certificates, registrations, qualifications, and other authorizations
which are required to be obtained by the Issuer under federal, state, and local
laws relating to pollution or protection of the environment, including laws
relating to emissions, discharges, releases, or threatened releases of
pollutants, contaminants, or hazardous or toxic materials or wastes into ambient
air, surface water, ground water, or land, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport, or handling of pollutants, contaminants or hazardous or toxic
materials or wastes. The Issuer is in substantial compliance with all terms and
conditions of the required permits, licenses, and authorizations and is also in
substantial compliance with all other limitations, restrictions, conditions,
standards, prohibitions, requirements, obligations, schedules, and timetables
contained in those laws relating to pollution or protection of the environment
or contained in any regulation, code, plan, order, decree, judgment, notice, or
demand letter issued, entered, promulgated, or approved thereunder. Except as
set forth in the Disclosure Schedule, the Issuer has not engaged in any
activities that could cause any material violation of any federal, state, or
local laws, ordinances, rules, or regulations relating to air or water
pollution, toxic waste, or other environmental protection or relating to
occupational health or safety or Hazardous Materials (as defined below)
applicable to its properties, assets, the real estate which it now occupies, or
any real estate which it has previously occupied. The Issuer has no material
liability, contingent or otherwise, with respect to the contamination with toxic
waste or Hazardous Materials of premises it now occupies or has previously
occupied, which contamination occurred during a time that such premises were
occupied by a previous tenant, whether the contamination occurred from the
activities conducted by the previous tenant, from contamination flow from other
properties, or otherwise. As used herein, the term "Hazardous Materials" shall
mean any explosives, radioactive materials, hazardous wastes (including, without
limitation, asbestos and asbestos containing materials), hazardous or toxic
substances, or related materials defined in the Comprehensive Environmental
Response, Compensation and Liability Act of 1980 as amended (42 U.S.C. (S)9601),
et. seq.), the Hazardous Materials Transportation Act as amended (49 U.S.C.
(S)1801, et. seq.), the Resource Conservation and Recovery Act of 1976 as
amended (42 U.S.C. (S)6901, et. seq.), and in the regulations adopted and
publications promulgated pursuant thereto, or any other federal, state, or local
environmental laws, ordinances, rules, or regulations.
The Issuer is not aware of, nor has the Issuer received notice of, any
past, present, or future events, conditions, circumstances, activities,
practices, incidents, actions, or plans which may interfere with or prevent
continued compliance, or which may give rise to any common law or legal
liability, or otherwise form the basis of any claim, action, suit, proceeding,
hearing, or investigation based on or related to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport, or handling, or the
emission, discharge, release, or threatened release into the environment
of any pollutant, contaminant, or hazardous or toxic material or waste.
<PAGE>
4.12 Undisclosed Liabilities. The Issuer is not obligated for, nor are any
-----------------------
of the Issuer's assets subject to, any liabilities (whether absolute, accrued,
or contingent and whether due or to become due) other than liabilities arising
in the ordinary course of business since the Balance Sheet Date.
4.13 Corporate Records. Except as set forth in the Disclosure Schedule,
-----------------
the corporate minute books of the Issuer contain a complete and accurate record
of all actions taken or required to be taken by the Board of Directors and
shareholders of the Issuer, and the stock transfer records, books of account,
financial records, and correspondence of the Issuer has been kept in the usual
course of business and are complete insofar as they relate to the business of
the Issuer from inception to the date of this Agreement and will be complete
insofar as they relate to the business of the Issuer from the inception of each
to the Closing Date. The financial books and records of the Issuer have been
maintained consistently and, to the best of the Issuer's knowledge, in
accordance with sound business practices.
4.14 Material Misstatements or Omissions. No representations or warranties
-----------------------------------
by the Issuer contained in this Agreement or in any document, statement, or
certificate furnished or to be furnished to Buyer in connection with the
transactions contemplated hereby, contain, or will contain on the Closing Date,
any statement of a material fact known to be untrue, or omit, or will omit on
the Closing Date, any material known fact necessary to make the statements of
fact contained therein not misleading.
4.15 Litigation. There are no actions, suits, or proceedings pending or
----------
threatened involving the Issuer or affecting its business, nor are there any
claims of third parties made or threatened against the Issuer.
The Issuer is not subject to any judgment, order, or decree entered in any
lawsuit or proceeding which may have an adverse effect on its business practices
or on its ability to acquire any property or conduct its business in any area.
No consent of any person is necessary to the consummation of the
transactions contemplated hereby, including, without limitation, consents from
parties to loans, contracts, leases, or other agreements and consents from
governmental agencies, whether federal, state, or local.
4.16 Permits and Other Operating Rights. The Issuer has received the
----------------------------------
consent of all third persons required to permit it to operate its business in
the manner in which it presently is being conducted and possesses all necessary
permits and other authorizations from third persons, including without
limitation, federal, foreign, state, and local governmental authorities
presently required by applicable provisions of law, including statutes,
regulations, and existing judicial decisions, and by the property and contract
rights of third persons, the absence of which would have a material adverse
effect upon the business or properties of the Issuer.
<PAGE>
4.17 Business Generally. There have been no events or transactions or
------------------
information which has come to the attention of the Issuer which, as they relate
directly to the business and assets of the Issuer, could reasonably be expected
to have a material adverse effect on the profitability of the business and
operations of the Issuer.
4.18 Distribution Agreement. The Issuer hereby agrees to enter into a
----------------------
Distribution Agreement substantially on the terms set forth in the Letter of
Intent appearing in Exhibit "B."
4.19 Nature of Representations and Warranties All representations and
----------------------------------------
warranties made by the Issuer in Sections 4.6 through 4.12 herein are made to
the best of its knowledge, without any independent duty to investigate.
5. BUYER'S REPRESENTATIONS AND WARRANTIES.
---------------------------------------
The Buyer represents and warrants the following, the truth and accuracy of
each of which shall constitute a condition precedent to the obligations of the
Issuer hereunder:
5.1 Validity of Agreement, etc. This Agreement is, or will be at the
--------------------------
Closing, valid and binding upon Buyer and is, or will be at the Closing,
enforceable in accordance with its respective terms, except as enforceability
may be limited by bankruptcy, insolvency, reorganization, or other laws
affecting generally the enforcement of creditors' rights and except to the
extent that courts may award money damages rather than specific performance of
contractual provisions.
Neither the execution and delivery of this Agreement by Buyer nor the
consummation of the transactions contemplated hereby, nor any action of the
Buyer contemplated by this Agreement, will violate any provision of the Articles
of Incorporation or By-Laws of the Buyer, nor will such actions violate or be in
conflict with, or constitute a default (or an event which, with notice or lapse
of time or both, would constitute a default) under, or result in the termination
of, or accelerate the performance required by, or cause the acceleration of the
maturity of any debt or obligation pursuant to, or result in the creation or
imposition of any security interest, lien, or other encumbrance upon any
property or assets of the Buyer under any agreement or commitment to which the
Buyer is a party or by which the Buyer is bound, or to which the property of the
Buyer is subject, or violate any statute or law or any judgment, decree, order,
regulation, or rule of any court or governmental authority.
5.2 Corporate Organization. The Buyer is a corporation duly organized,
----------------------
validly existing and in good standing under the laws of the State of California
and qualified to do business in the State of California and has full corporate
power and authority to carry on its business as it is now being conducted and to
own the properties and assets it now owns; is not, and the nature of Buyer's
activities do not require it to be, qualified to do business as a foreign
corporation in any other jurisdiction. The copies of the Certificate of
Incorporation and By-Laws of the Buyer previously delivered to the Issuer are
complete and correct copies of such instruments as presently in effect.
<PAGE>
5.3 Capitalization of the Buyer. As of the date of this Agreement, the
---------------------------
authorized capital stock of the Buyer consists of 100,000,000 shares of common
stock; of which 13,752,285 shares of common stock are issued and outstanding.
All issued and outstanding shares of common stock of the Buyer are validly
issued, fully paid, and nonassessable; there are no preemptive rights applicable
to any securities of the Buyer, and all outstanding securities of the Buyer have
been offered, sold, and delivered by the Buyer in compliance with all applicable
federal and state laws.
5.4 Subsidiaries and Affiliates. Except as set forth in the schedule
----------------------------
previously delivered to the Issuer by the Buyer (the "Buyer's Disclosure
Schedule") the Buyer has no subsidiaries nor any equity interest in any other
corporation, partnership, or business.
5.5 Financial Condition Of Buyer. Exhibit G contains a true, complete,
----------------------------
and correct copy of the Buyer's Annual Report on Form 10-KSB as filed with the
United States Securities and Exchange Commission (the "SEC") including Buyer's
Statements of Financial Condition ("Balance Sheet") as of December 31, 1995
("Balance Sheet Date") and its statements of income and Statement of Cash Flows
for the twelve months ended December 31, 1995, hereinafter collectively
referred to as the "Buyer's Financial Statements." The Buyer's Financial
Statements are: (i) statements prepared from the books and records of the
Buyer and audited by its independent certified public accountants; (ii) prepared
substantially in accordance with the same accounting methods, practices, and
principles utilized in connection with the preparation of the last three annual
prior financial statements issued by the Buyer; (iii) set forth fairly and
completely the financial position and the results of operations of the Buyer at
the relevant dates thereof and for the period covered thereby, (iv) contains and
reflects all necessary material adjustments for a fair and complete presentation
of the Buyer's financial position and the results of operations for the periods
covered by the Buyer's Financial Statement; (v) contain and reflect all
material liabilities, realized or unrealized, contingent or not contingent, to
which the Buyer is liable, except for liabilities and obligations incurred in
the ordinary course of business consistent with past practice since the balance
sheet date; and (vi) the reserves reflected in the Buyer's Financial Statement
are in the opinion of management adequate, appropriate, and reasonable.
5.6 Taxes. The Buyer has duly filed when due all tax reports and returns
-----
required to be filed and has duly paid all taxes, assessments, penalties,
interest, and other charges due or claimed to be due from it by federal, state,
local, or foreign taxing authorities (including, without limitation, those due
in respect of the properties, income, franchises, licenses, sales or payrolls of
the Buyer), and Buyer shall have no further liability for any such tax,
assessment, penalty, or interest.
5.7 Absence of Certain Changes. Except as and to the extent set forth in
--------------------------
the Buyer's Financial Statements or notes thereto or in the Buyer's Disclosure
Schedule, since the Balance Sheet Date, Buyer has not:
<PAGE>
(a) Suffered any material adverse change in, or the occurrence of any
events which, individually or in the aggregate, have had a material adverse
effect on, its working capital, financial condition, assets, liabilities
(absolute, accrued, contingent or otherwise), reserves, or business operations;
(b) Incurred any material liabilities or obligations (absolute, accrued,
contingent or otherwise), except items incurred in the ordinary course of
business and consistent with past practice, or increased or experienced any
material change in any assumptions underlying or methods of calculating any bad
debt, contingency, or other reserves;
(c) Paid, discharged, or satisfied any material claim, liability, or
obligation (absolute, accrued, contingent, or otherwise) other than the payment,
discharge, or satisfaction in the ordinary course of business and consistent
with past practice;
(d) Permitted or allowed any of its material property or assets (real,
personal, or mixed, tangible or intangible) to be subjected to any mortgage,
pledge, lien, security interest, encumbrance, restriction, or charge of any
kind, except for liens for current taxes not yet due;
(e) Sold, transferred, or otherwise disposed of any of its material
properties or assets (real, personal, or mixed, tangible or intangible), except
in the ordinary course of business and consistent with past practice;
(f) Disposed of or permitted to lapse any rights to the use of any material
patent, trademark, trade name, or copyright, or disposed of or disclosed to any
person any trade secret, formula, process, or know-how not theretofore a matter
of public knowledge;
(g) Granted any increase in the compensation of officers or employees
(including any such increase pursuant to any bonus, pension, profit-sharing, or
other plan or commitment) or any material increase in the compensation payable
or to become payable to any officer or employee from the day following the
Balance Sheet Date through the Closing Date, and no such increase is required by
agreement or understanding except for employee salary increases in the ordinary
course of business and in accordance with past practice;
(h) Paid, loaned, or advanced any amount to, or sold, transferred, or
leased any properties or assets (real, personal, or mixed, tangible or
intangible) to, or entered into any agreement or arrangement with, any of its
officers or directors or any affiliate, family member, or associate of any of
its officers or directors;
(i) Suffered any loss, damage, destruction, or other casualty materially
and adversely affecting any of the properties, assets, or business of the Buyer
(whether or not covered by insurance);
<PAGE>
(j) Borrowed or agreed to borrow any material amount of funds or incurred
or assumed or become subject to, whether directly or by way of guarantee or
otherwise, any material obligation or liability, except obligations and
liabilities incurred in the ordinary course of business and consistent with past
practice;
(k) Licensed, sold, transferred, pledged, modified, disclosed, disposed
of, or permitted to lapse any rights to the use of the name of the Issuer or any
fictitious firm name used by the Buyer;
(l) Entered into any other transaction, contract, or commitment other than
in the ordinary course of business; and
(m) Agreed, whether in writing or otherwise, to take any action described
in this section.
5.8 Title to Properties; Encumbrances. The Buyer has good, valid, and
---------------------------------
marketable title to all the properties and assets which it purports to own
(real, personal, and mixed, tangible and intangible), including without
limitation, all the properties and assets reflected in the Balance Sheet except
for property sold since the Balance Sheet Date in the ordinary course of
business and consistent with past practice.
5.9 Patents, Copyrights, Inventions, Trade Secrets, Etc. The Buyer has
---------------------------------------------------
good and valid title to or otherwise possesses adequate and exclusive rights to
use, all patents, copyrights, inventions, trade secrets, and other proprietary
information necessary to permit the Buyer to conduct its business in the same
manner as its business has been conducted prior to the date hereof.
5.10 Compliance with Law. The operations of the Buyer have been conducted
-------------------
in substantial accordance with all applicable laws, regulations, and other
requirements of all national governmental authorities, and of all states,
municipalities, and other political subdivisions and agencies thereof, having
jurisdiction over the Buyer, including, but not limited to, all laws,
regulations, and requirements relating to antitrust, environmental protection
and conservation, pollution, equal employment and anti-discrimination acts,
consumer protection, currency exchange, health, occupational safety, pension,
securities, and trading-with-the-enemy matters. The Buyer has not received any
notification of any asserted present or past failure by the Buyer to comply with
such laws, rules, or regulations.
The Buyer has filed when due all reports required to be filed with any
governmental, regulatory, or administrative agency and has obtained all permits,
licenses, certificates, registrations, qualifications, and other authorizations
which are required to be obtained by the Buyer under federal, state, and local
laws relating to pollution or protection of the environment, including laws
relating to emissions, discharges, releases, or threatened releases of
pollutants, contaminants, or hazardous or toxic materials or wastes into ambient
air, surface water, ground water, or land, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport, or handling of pollutants, contaminants or hazardous or toxic
materials or wastes. The Buyer is in substantial compliance with all terms and
conditions of the required permits, licenses, and
<PAGE>
authorizations, and is also in substantial compliance with all other
limitations, restrictions, conditions, standards, prohibitions, requirements,
obligations, schedules, and timetables contained in those laws relating to
pollution or protection of the environment or contained in any regulation, code,
plan, order, decree, judgment, notice, or demand letter issued, entered,
promulgated, or approved thereunder. Except as set forth in the Buyer's
Disclosure Schedule, the Buyer has not engaged in any activities that could
cause any material violation of any federal, state, or local laws, ordinances,
rules, or regulations relating to air or water pollution, toxic waste, or other
environmental protection or relating to occupational health or safety or
Hazardous Materials (as defined below) applicable to its properties, assets, the
real estate which it now occupies nor, or any real estate which it has
previously occupied. The Buyer has no material liability, contingent or
otherwise, with respect to the contamination with toxic waste or Hazardous
Materials of premises it now occupies or has previously occupied, which
contamination occurred during a time that such premises were occupied by a
previous tenant, whether the contamination occurred from the activities
conducted by the previous tenant, from contamination flow from other properties,
or otherwise. As used herein, the term "Hazardous Materials" shall mean any
explosives, radioactive materials, hazardous wastes (including, without
limitation, asbestos and asbestos containing materials), hazardous or toxic
substances, or related materials defined in the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended (42 U.S.C.
(S)9601), et. seq.), the Hazardous Materials Transportation Act, as amended (49
U.S.C. (S)1801, et. seq.), the Resource Conservation and Recovery Act of 1976,
as amended (42 U.S.C. (S)6901, et. seq.), and in the regulations adopted and
publications promulgated pursuant thereto, or any other federal, state, or local
environmental laws, ordinances, rules, or regulations.
The Buyer is not aware of, nor has the Buyer received notice of, any past,
present, or future events, conditions, circumstances, activities, practices,
incidents, actions, or plans which may interfere with or prevent continued
compliance, or which may give rise to any common law or legal liability, or
otherwise form the basis of any claim, action, suit, proceeding, hearing, or
investigation, based on or related to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport, or handling, or the emission,
discharge, release, or threatened release into the environment, of any
pollutant, contaminant, or hazardous or toxic material or waste.
5.11 Undisclosed Liabilities. The Buyer is not obligated for, nor are any
-----------------------
of the Buyer's assets subject to, any liabilities (whether absolute, accrued or
contingent and whether due or to become due) other than liabilities arising in
the ordinary course of business since the Balance Sheet Date, none of which
liabilities individually or in the aggregate is materially adverse when
comparing the condition of the Buyer as of the Balance Sheet Date with the date
of this Agreement.
5.12 Corporate Records. Except as set forth in the Buyer's Disclosure
-----------------
Schedule, the corporate minute books of the Buyer contain a complete and
accurate record of all actions taken or required to be taken by the Board of
Directors and shareholders of the Buyer, and the stock transfer records, books
of account, financial records, and correspondence of the Buyer have been kept in
the usual course of business and are complete insofar as they relate to the
<PAGE>
business of the Buyer from the inception of each to the date of this Agreement,
and will be complete insofar as they relate to the business of the Buyer from
the inception of each to the Closing Date. The financial books and records of
the Buyer have been maintained consistently and, to the best of the Buyer's
knowledge, in accordance with sound business practices.
5.13 Material Misstatements or Omissions. No representations or warranties
-----------------------------------
by the Buyer contained in this Agreement or in any document, statement, or
certificate furnished or to be furnished to the Issuer in connection with the
transactions contemplated hereby, contain, or will contain on the Closing Date,
any statement of a material fact known to be untrue, or omit, or will omit on
the Closing Date, any material known fact necessary to make the statements of
fact contained therein not misleading.
5.14 Litigation. Except as set forth in the Buyer's Disclosure Schedule,
----------
there are no actions, suits, or proceedings pending or threatened involving the
Buyer or affecting its business, nor are there any claims of third parties made
or threatened against the Buyer.
The Buyer is not subject to any judgment, order, or decree entered in any
lawsuit or proceeding which may have an adverse effect on its business practices
of either, or on the ability of either it to acquire any property or conduct its
business in any area.
No consent of any person is necessary to the consummation of the
transactions contemplated hereby, including, without limitation, consents from
parties to loans, contracts, leases, or other agreements and consents from
governmental agencies, whether federal, state, or local.
5.15 Permits and Other Operating Rights. The Buyer has received the
----------------------------------
consent of all third persons required to permit each it to operate its business
in the manner in which it presently is being conducted, and possesses all
necessary permits and other authorizations from third persons, including without
limitation, federal, foreign, state, and local governmental authorities,
presently required by applicable provisions of law, including statutes,
regulations, and existing judicial decisions, and by the property and contract
rights of third persons, the absence of which would have a material adverse
effect upon the business or properties of the Buyer.
5.16 Business Generally. There have been no events or transactions, or
------------------
information which has come to the attention of the Buyer which, as they relate
directly to the business and assets of the Buyer, could reasonably be expected
to have a material adverse effect on the profitability of the business and
operations of the Buyer.
5.17 Experience. Buyer is an accredited investor as defined by Rule 501(a)
----------
of the Securities Act of 1933 ("Securities Act") and has a net worth in excess
of five million dollars ($5,000,000), and has substantial experience in
evaluating and investing in private placement transactions of securities in
companies similar to the Issuer so that it is capable of evaluating the merits
and risks of its investment in the Issuer and has the capacity to protect its
own interests.
5.18 Investment. Buyer is acquiring the Shares for investment for its own
----------
account, not
<PAGE>
as a nominee or agent, and not with the view to, or for resale in connection
with, any distribution thereof. It understands that the Shares have not been and
will not be registered under the Securities Act by reason of specific exemptions
from the registration provisions of the Securities Act and California law, the
availability of which depends upon, among other things, the bona fide nature of
the investment intent and the accuracy of such Buyer's representations as
expressed herein and in the Subscription Agreement.
5.19 Rule 144. Buyer acknowledges that the Shares must be held
--------
indefinitely unless subsequently registered under the Securities Act and
applicable state law, or unless an exemption from such registration is
available. Buyer is aware of the provisions of Rule 144 promulgated under the
Securities Act which permit limited resale of shares purchased in a private
placement subject to the satisfaction of certain conditions, including among
other things, the existence of a public market for the Shares, the availability
of certain current public information about the Issuer, the resale occurring not
less than two years after a party has purchased and paid for the security to be
sold, the sale being effected through a "broker's transaction" or in
transactions directly with a "market maker," and the number of shares being sold
during any three-month period not exceeding specific limitations.
5.20 No Public Market. Buyer understands that no public market now exists
----------------
for any of the securities issued by the Issuer and that the Issuer has made no
assurances that a public market will ever exist for the Shares.
5.21 Access to Data. Buyer has had an opportunity to discuss the Issuer's
--------------
business, management, and financial affairs with the Issuer's management and has
had the opportunity to review the Issuer's facilities, business plan, and 1995
and 1996 year-end financial statements. It has also had an opportunity to ask
questions of officers of the Issuer, which questions were answered to its
satisfaction. It understands that such discussions, as well as any written
information issued by the Issuer, including the business plan, were intended to
describe certain aspects of the Issuer's business and prospects but were not a
thorough or exhaustive description.
5.22 Effectiveness of Buyers' Registration Statement. The Registration
-----------------------------------------------
Statement filed with the SEC covering the Warrants and the underlying common
stock of the Buyer is, or will be at the Closing Date, effective under the
Securities Act of 1933 (Securities Act), California and all other applicable
states' laws, and no stop order suspending the use of the prospectus therein or
suspending the effectiveness of the Registration statement has been issued and
no proceedings for that purpose have been instituted or are pending, or
threatened. The Registration Statement and prospectus comply as to form with
the requirements of the Securities Act and do not contain any untrue statement
of material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein not misleading.
5.23 Buyer's Compliance with Securities Exchange Act of 1934. The Buyer
-------------------------------------------------------
has filed all reports required by the Securities and Exchange Act of 1934 (1934
Act) within the periods required by the 1934 Act and complied with its
obligations under the 1934 Act, and none of such
<PAGE>
reports or filings contain any untrue statement of material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein not misleading.
5.24 Distribution Agreement. The Buyer hereby agrees to enter into a
----------------------
Distribution Agreement substantially on the terms set forth in the Letter of
Intent appearing in Exhibit "B."
5.25 Nature of Representations and Warranties. All representations and
----------------------------------------
warranties made by the Buyer in Sections 5.5 through 5.11 are made to the best
of its knowledge, without any independent duty to investigate.
6. ISSUER'S PRE-CLOSING COVENANTS AND AGREEMENTS
---------------------------------------------
The Issuer hereby affords Buyer the following affirmative and negative
covenants, thereby agreeing to do or not to do, as the case may be, the
following, the fulfillment of each of which (except for those covenants which
survive or are required to be performed subsequent to the Closing) shall
constitute a condition precedent to the obligations of Buyer hereunder:
6.1 Best Efforts. Pending the Closing and except as disclosed in the
------------
Disclosure Schedule or otherwise expressly consented to or approved by Buyer in
writing, the Issuer hereby covenants and agrees that it will use its best
efforts in order that:
6.1.1 Regular Course of Business. The Issuer will carry on its
--------------------------
business diligently and substantially in the same manner as heretofore
conducted. The Issuer shall not engage in any transaction or activity, enter
into any agreement, or make any commitment, except in the ordinary course of
business and consistent with past practice.
6.1.2 Amendments. No change or amendment shall be made in the Articles
----------
of Incorporation or Bylaws of the Issuer.
6.1.3 Capital Changes; Dividends; Redemptions; Dilution. The Issuer
-------------------------------------------------
will not, except as disclosed in the Disclosure Schedule, before the Closing,
issue or sell any shares of capital stock or other securities, acquire directly
or indirectly by redemption or otherwise, any such capital stock, reclassify or
split up any such capital stock, declare or pay any dividends thereon in cash,
securities, or other property, or make any other distribution with respect
thereto, or grant or enter into any options, warrants, calls, or commitments of
any kind with respect thereto.
Following the Closing, the Issuer will not issue or sell any shares of
capital stock or other securities, reclassify or split-up any such capital
stock, or grant or enter into any options, warrants, calls or commitments of any
kind with respect thereto that will have the effect of diluting the 25%
ownership of the Buyer without approval of 100% of the issued and outstanding
capital stock.
6.1.4 Subsidiaries. The Issuer will not organize any new subsidiary,
------------
acquire any capital stock or other equity securities of any corporation, or
acquire any equity or ownership interest in any business.
<PAGE>
6.1.5 Organization. The Issuer shall use its best efforts to preserve
------------
its corporate existence and business organization intact and to preserve its
relationships with licensors, suppliers, distributors, customers and others
having business relations with it.
6.1.6 Certain Changes. The Issuer will not:
---------------
(a) Borrow or agree to borrow any funds or incur, or assume or become
subject to, whether directly or by way of guarantee or otherwise, any material
obligation or liability (absolute or contingent), except obligations and
liabilities incurred in the ordinary course of business and consistent with past
practice;
(b) Pay, discharge or satisfy any material claim, liability, or obligation
(absolute, accrued, contingent, or otherwise), other than the payment,
discharge, or satisfaction in the ordinary course of business and consistent
with past practice of liabilities or obligations reflected or reserved against
in the Balance Sheet or incurred in the ordinary course of business and
consistent with past practice since the date of the Balance Sheet;
(c) Prepay any material obligation having a fixed maturity of more than
ninety (90) days from the date such obligation was issued or incurred;
(d) Permit or allow any of its material property or assets (real, personal,
or mixed, tangible or intangible) to be subjected to any mortgage, pledge, lien,
or encumbrance;
(e) Write down the value of any material inventory or write off as
uncollectible any notes or accounts receivable, except for immaterial write-
downs and write-offs in the ordinary course of business and consistent with past
practice;
(f) Cancel any material debts or waive any claims or rights of substantial
value or sell, transfer, or otherwise dispose of any of its properties or
assets, except in the ordinary course of business and consistent with past
practice;
(g) Dispose of or permit to lapse any rights to the use of any patent,
trademark, trade name, or copyright, or dispose of or disclose to any person any
trade secret, formula, process, or know-how not theretofore a matter of public
knowledge;
(h) Pay, loan, or advance any amount to, or sell, transfer, or lease any
properties or assets to, or enter into any agreement or arrangement with, any of
its officers or directors or any affiliate of any of its officers or directors;
(i) Grant or extend any power of attorney; act as guarantor, surety,
consigner, endorser, co-maker, indemnitor, or otherwise in respect of the
obligation of any person, corporation,
<PAGE>
partnership, joint venture, association, organization, or other entity; or
(j) Agree, whether in writing or otherwise, to do any of the foregoing.
6.1.7 Access. The Issuer shall provide Buyer, Buyer's attorneys,
------
accountants, and other representatives full and complete access to all financial
statements, business plans, and other information which can be reasonably
provided to Buyer relating to the securities to be sold to the Buyer pursuant
hereto.
6.1.8 Obligation to Update Disclosure Schedules. The Issuer shall
-----------------------------------------
promptly disclose to the Buyer in writing any facts or circumstances arising
after the date hereof that would have been required to be reflected on any of
the exhibits if such facts or circumstances had existed as of the date hereof.
No disclosure made by the Issuer pursuant to this Section 6.1.8 shall be deemed
to supplement or amend any of the Disclosure Schedules for purposes of
determining the accuracy of any of the representations and warranties of the
Issuer set forth herein or for purposes of determining compliance with any of
the conditions set forth herein.
7. BUYER'S PRE-CLOSING COVENANTS AND AGREEMENTS
--------------------------------------------
The Buyer hereby affords the Issuer the following affirmative and negative
covenants, thereby agreeing to do or not to do, as the case may be, the
following, the fulfillment of each of which (except for those covenants which
survive or are required to be performed subsequent to the Closing) shall
constitute a condition precedent to the obligations of the Issuer hereunder:
7.1 Access. The Buyer shall provide Issuer, Issuer' attorneys,
------
accountants, and other representatives full and complete access to all 10-Ks,
10-Qs, and Exchange Act reports and filings and Registration Statements relating
to the securities to be provided to the Issuer pursuant hereto.
7.2 Obligation to Update Disclosure Schedules. The Buyer shall promptly
-----------------------------------------
disclose to the Issuer in writing any facts or circumstances arising after the
date hereof that would have been required to be reflected on any of the exhibits
if such facts or circumstances had existed as of the date hereof. No disclosure
made by the Buyer pursuant to this Section 7.2 shall be deemed to supplement or
amend any of the Disclosure Schedules for purposes of determining the accuracy
of any of the representations and warranties of the Buyer set forth herein or
for purposes of determining compliance with any of the conditions set forth
herein.
7.3 Effectiveness of Registration Statement. Buyer shall maintain the
---------------------------------------
effectiveness of the Registration Statement and any prospectus contained therein
for the securities to be issued to the Issuer pursuant to this agreement with
the SEC, the California Department of Corporations and all other applicable
states' securities administrators, and said Registration Statement will not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein not misleading. At all times, said Registration
<PAGE>
Statement and prospectus will also conform with the requirements of the
Securities Act and contain all statements required to be stated therein in
accordance with the Securities Act.
8. CONDITIONS PRECEDENT TO CLOSING.
-------------------------------
8.1 Conditions Precedent to Obligations of Buyer. The Closing shall not
--------------------------------------------
take place unless all of the following conditions have been fulfilled before or
are fulfilled at the Closing (any of which may be waived by Buyer in whole or in
part):
8.1.1 Correctness of Representations and Warranties. There shall be no
---------------------------------------------
representation or warranty of the Issuer contained in this Agreement or in any
exhibit attached hereto which is untrue or inaccurate to any material extent.
8.1.2 Performance of Covenants and Agreements. There shall be no
---------------------------------------
covenant or agreement of the Issuer contained in this Agreement and required to
be performed before the Closing which has been breached to any material extent.
8.1.3 Corporate Records. The Issuer shall have made available for
-----------------
inspection to the Buyer the stock book, stock ledger, minute books of the
Issuer, and those contracts and agreements described in this Agreement.
8.1.4 Corporate Approval. The execution and delivery of this Agreement
------------------
by Buyer, and the performance of its covenants and obligations under it,
including the issuance of Warrants, shall have been duly authorized by all
necessary corporation action, and Issuer shall have received copies of all
resolutions pertaining to that authorization, certified by the secretary of the
Issuer.
8.1.5 Appointment of Officers and Directors. The Issuer shall have
-------------------------------------
delivered to Buyer written resolutions for the Issuer, certified by its
secretary, appointing Mr. Louis L. Knickerbocker as a Director of the Issuer and
authorizing the execution and delivery of this agreement, and the performance of
its covenants and obligations.
8.1.6 No Government Proceeding or Litigation. No suit, action,
--------------------------------------
investigation, inquiry, or other proceeding by any governmental body or other
person or legal or administrative proceeding shall have been instituted or
threatened which (a) questions the validity or legality of the transactions
contemplated hereby, (b) in the sole and exclusive judgment of Buyer materially
impairs the Issuer's ability to exercise control over or manage the business and
affairs of the Issuer after the Closing, or (c) in the sole and exclusive
judgment of Buyer might have a material adverse effect on the business or
financial condition of the Issuer.
8.1.7 Material Change. From the date of the Balance Sheet to the
---------------
Closing Date, the Issuer shall not have suffered any material adverse change in
its business, financial condition, working capital, assets, liabilities
(absolute, accrued, contingent or otherwise), reserves, or operations.
<PAGE>
8.1.8 Officers' Certificate. The Issuer shall have delivered to Buyer
---------------------
a certificate, signed by the President and the Secretary of the Issuer and dated
as of the closing Date, to the effect that (i) the representations and
warranties of the Issuer set forth in this Agreement were true and correct in
all material respects on the date of this Agreement and are true and correct in
all material respects on the date of this Agreement and are true and correct in
all material respects on the Closing date as though such representations and
warranties were made as of the Closing Date, and (ii) the Issuer has duly
complied with and performed, in all material respects, all agreements,
covenants, and obligations required by this Agreement to be complied with or
performed by the Issuer on or before the Closing Date.
8.1.9 Opinions of Counsel. The Issuer shall have delivered to the
-------------------
Buyer a written opinion of its counsel, dated as of the Closing Date, in form
and substance satisfactory to Buyer and its counsel, to the effect that:
(a) Issuer is a corporation duly organized, validly existing, and in
good standing under the laws of the State of California and has all requisite
corporate power to perform its obligations under this Agreement;
(b) All corporate proceedings required by law or by the provisions
of this Agreement to be taken by Issuer on or before the Closing Date in
connection with the execution and delivery of this Agreement and the
consummation of the transactions contemplated by this Agreement have been duly
and validly taken;
(c) Issuer has the corporate power and authority to sell the common
stock of the Issuer for the consideration set forth herein;
(d) Every consent, approval, authorization, or order of any court or
governmental agency or body that is required for the consummation by Issuer of
the transactions contemplated by this Agreement has been obtained and will be in
effect on the Closing Date;
(e) The consummation of the transaction contemplated by this
Agreement does not violate or contravene any of the provisions of any charter,
bylaw, or resolution of Issuer or of any indenture, agreement, judgment, or
order to which Issuer is a party or by which Issuer is bound. In rendering its
opinion, counsel for Issuer may rely on certificates of governmental authorities
and on opinions of associate counsel.
8.2 Conditions Precedent to Obligations of Issuer. The Closing shall not
---------------------------------------------
take place unless all of the following conditions have been fulfilled before, or
are fulfilled at the Closing (any of which may be waived by the Issuer in whole
or in part):
8.2.1 Correctness of Representations and Warranties. There shall be
---------------------------------------------
no representation or warranty of the Buyer contained in this Agreement or in any
exhibit attached hereto which is untrue or inaccurate to any material extent.
<PAGE>
8.2.2 Performance of Covenants and Agreements. There shall be no
---------------------------------------
covenant or agreement of the Buyer contained in this Agreement and required to
be performed before the Closing which has been breached to any material extent.
8.2.3 Corporate Records. The Buyer shall have made available for
-----------------
inspection to the Issuer the stock book, stock ledger, minute books, transfer
agent's records, and those contracts and agreements described in this Agreement.
8.2.4 Corporate Approval. The execution and delivery of this Agreement
------------------
by Buyer, and the performance of its covenants and obligations under it,
including the issuance of Warrants, shall have been duly authorized by all
necessary corporate action, and Issuer shall have received copies of all
resolutions pertaining to that authorization, certified by the Secretary of the
Buyer.
8.2.5 No Government Proceeding or Litigation. No suit, action,
--------------------------------------
investigation, inquiry, or other proceeding by any governmental body or other
person or legal or administrative proceeding shall have been instituted or
threatened which (a) questions the validity or legality of the transactions
contemplated hereby, (b) in the sole and exclusive judgment of the Issuer
materially impairs the Buyer's ability to exercise control over or manage the
business and affairs of the Buyer after the Closing, or (c) in the sole and
exclusive judgment of the Issuer might have a material adverse effect on the
business or financial condition of the Buyer.
8.2.6 Material Change. From the Balance Sheet Date to the Closing
---------------
Date, the Buyer shall not have suffered any material adverse change in its
business, financial condition, working capital, assets, liabilities (absolute,
accrued, contingent or otherwise), reserves, or operations.
8.2.7 Officers' Certificate. The Buyer shall have delivered to the
---------------------
Issuer a certificate, signed by the President and the Secretary of the Buyer and
dated as of the Closing Date, to the effect that (i) the representations and
warranties of the Buyer set forth in this Agreement were true and correct in all
material respects on the date of this Agreement and are true and correct in all
material respects on the Closing Date as though such representations and
warranties were made as of the Closing Date, and (ii) the Buyer has duly
complied with and performed, in all material respects, all agreements,
covenants, and obligations required by this Agreement to be complied with or
performed by the Buyer on or before the Closing Date.
8.2.8 Opinion of Counsel. The Buyer shall have delivered to the Issuer
------------------
a written opinion of its counsel, dated as of the Closing Date, in form and
substance satisfactory to Issuer and its counsel, to the effect that:
(a) Buyer is a corporation duly organized, validly existing, and in
good standing under the laws of the State of California and has all requisite
corporate power to perform its obligations under this Agreement;
<PAGE>
(b) All corporate proceedings required by law or by the provisions of
this Agreement to be taken by Buyer on or before the Closing Date in connection
with the execution and delivery of this Agreement and the consummation of the
transactions contemplated by this Agreement have been duly and validly taken;
(c) Buyer has the corporate power and authority to sell the Warrants
and/or common stock of the Buyer for the consideration set forth herein;
(d) Every consent, approval, authorization, or order of any court or
governmental agency or body that is required for the consummation by Buyer of
the transactions contemplated by this Agreement has been obtained and will be in
effect on the Closing Date;
(e) The Warrants of Buyer to be delivered at the Closing have been
duly executed and, when delivered as provided in this Agreement, will constitute
a legal, valid, and binding obligation of Buyer, enforceable in accordance with
its terms except as limited by bankruptcy laws, insolvency laws, and other
similar laws affecting the rights of creditors generally;
(f) The offer and sale of the Warrants to the Issuer and the immediate
sale and transfer thereof by the Escrow Agent or any other party shall be
registered and qualified or shall be exempt from registration under applicable
federal, California, and all applicable state laws.
(g) The Registration Statement filed with the SEC, the State of
California, and all applicable states for the common stock of the buyer
underlying the Warrants is, or will be at the Closing Date, effective under the
Securities Act, applicable California and all other applicable state laws, and
no stop order suspending the use of the prospectus therein or suspending the
effectiveness of the Registration Statement has been issued and no proceedings
for that purpose have been instituted or are pending or threatened. The
Registration Statement and prospectus comply as to form with the requirements of
the Securities Act and do not contain any untrue statement of material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein not misleading.
(h) Buyer has filed all reports required by the Exchange Act within
the periods required by the Exchange Act and complied with its obligations under
the Exchange Act, and none of its Exchange Act reports or filings contain any
untrue statement of material fact or omit to state any material fact required to
be stated therein or necessary in order to make the statements therein not
misleading.
(i) The consummation of the transaction contemplated by this Agreement
does not violate or contravene any of the provisions of any charter, bylaw, or
resolution of Buyer or of any indenture, agreement, judgment, or order to which
Buyer is a party or by which Buyer is bound. In rendering its opinion, counsel
for Buyer may rely on certificates of governmental authorities and on opinions
of associate counsel.
<PAGE>
8.2.9 Effectiveness of Buyers' Registration Statement. The
-----------------------------------------------
Registration Statement filed with the SEC for the Warrants and the common stock
of the Buyer underlying the Warrants is, or will be as of the Closing Date,
effective under the Securities Act, California and all other applicable states'
laws, and no stop order suspending the use of the prospectus therein or
suspending the effectiveness of the Registration Statement has been issued and
no proceedings for that purpose have been instituted or are pending or
threatened. The Registration Statement and prospectus comply as to form with
the requirements of the Securities Act and do not contain any untrue statement
of material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein not misleading.
8.2.10 Buyer's Compliance with Securities Exchange Act of 1934. Buyer
-------------------------------------------------------
has filed all reports required by the Exchange Act within the periods required
by the Exchange Act and complied with its obligations under the Exchange Act,
and none of its Exchange Act reports or filings contain any untrue statement of
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein not misleading.
8.2.11 NASDAQ Listing Effective. The Buyer's common stock underlying
------------------------
the Warrants shall be actively traded on the NASDAQ National Market System, and
no procedures for the delisting of such common stock shall be instituted, or be
pending or threatened.
8.2.12 Receipt of Proceeds. The Six Hundred Thousand Dollars
-------------------
($600,000.00) in proceeds from the sale of the Warrants by the Escrow Agent
pursuant to the Escrow Agreement shall be received without restriction by the
Escrow Agent.
8.2.13 Exemption for Issuance and Immediate Sale of Warrants. The
-----------------------------------------------------
issuance of the Warrants to the Buyer pursuant to this Agreement shall be
registered and qualified or shall be exempt from applicable federal and
California law, and the immediate transfer of the Warrants by Escrow Agent on
behalf of the Issuer or its nominee shall also be exempt from requirements of
registration or qualification of such securities pursuant to all applicable
United States and State law.
9. INDEMNIFICATION
---------------
9.1 Indemnification by Issuer. The Issuer shall hold harmless and
-------------------------
indemnify Buyer and each of Buyer's past, present, and future directors,
officers, shareholders, employees, attorneys, agents, and other affiliates from
and against any loss, liability, damage, or expense, including without
limitation reasonable attorney fees, that is directly or indirectly suffered or
incurred at any time by Buyer or any of such directors, officers, shareholders,
employees, attorneys, agents or other affiliates and that arises directly or
indirectly out of or by virtue of, or is directly or indirectly connected with,
the breach or inaccuracy of any of the representations and warranties of the
Issuer or the failure of the Issuer to perform any of its covenants or
obligations contained in this Agreement (including the Disclosure Schedules) or
in any instrument or other document delivered hereunder or in connection
herewith.
<PAGE>
9.2 Indemnification by Buyer. Buyer shall hold harmless and indemnify the
------------------------
Issuer and each of Issuer's past, present and future directors, officers,
shareholders, employees, attorneys, agents and other affiliates of the Issuer
from and against any loss, liability, damage, or expense, including without
limitation reasonable attorney fees, that is directly or indirectly suffered or
incurred at any time by the Issuer or any of such directors, officers,
shareholders, employees, attorneys, agents or other affiliates and that arises
directly or indirectly out of or by virtue of, or is directly or indirectly
connected with, the breach or inaccuracy of any of the representations and
warranties of Buyer or the failure of Buyer to perform any of its covenants or
obligations contained in this Agreement, including the Buyer's Disclosure
Schedule, or in any instrument or other document delivered hereunder or in
connection herewith.
9.3 Notice and Opportunity to Defend. If any legal proceeding is
--------------------------------
initiated, or any claim or demand is made, against any person with respect to
which such person (the "Indemnified Party") may make a claim against any party
hereto (the "Indemnifying Party") pursuant to this Section 9, then the
Indemnified Party shall give prompt written notice of such legal proceeding,
claim, or demand to the Indemnifying Party. The Indemnifying Party shall, at
its own expense and with its own counsel, defend or settle such legal
proceeding, claim or demand; provided, however, that: (i) the Indemnifying Party
shall keep the Indemnified Party informed of all material developments and
events relating to such legal proceeding, claim or demand; (ii) the Indemnified
Party shall have the right to participate, at its own expense, in the defense of
such legal proceeding, claim or demand and shall cooperate as reasonably
requested by the Indemnifying Party in the defense thereof; and (iii) the
Indemnifying Party shall not settle such legal proceeding, claim or demand
without the prior written consent of the Indemnified Party, which consent shall
not be unreasonably withheld.
9.4 Indemnification Not a Waiver. A person's right to indemnification
----------------------------
pursuant to this Section 9 shall not be deemed to be such person's exclusive
remedy in connection with or arising from the breach or inaccuracy of any of the
representations and warranties of the Indemnifying Party or the failure of the
Indemnifying Party to perform any of its covenants or obligations contained in
this Agreement (including the Disclosure Schedules) or in any instrument or
other document delivered hereunder or in connection herewith; and the exercise
by any person of his right to demand and receive such indemnification shall not
be deemed to prejudice, or to operate as a waiver of, any remedy to which such
person may be entitled at law or equity.
10. RELATED MATTERS.
---------------
10.1 Confidentiality. Each party hereto will hold and will cause its
---------------
consultants and advisors to hold in strict confidence prior to the Closing Date,
unless compelled to disclose by judicial or administrative process or, in the
opinion of its counsel by other requirements of law, all documents and
information concerning the other party furnished it by such other party or its
representatives in connection with the transactions contemplated by this
Agreement (except to the extent that such information can be shown to have been:
(i) previously known by the party to which it was furnished; (ii) in the public
domain through no fault of the party to which it was furnished;
<PAGE>
or (iii) later lawfully acquired from other sources by the party to which it was
furnished), and each party will not release or disclose such information to any
other person, except its auditors, attorneys, financial advisors, bankers, and
other consultants and advisors in connection with this Agreement.
10.2 Notices. All notices, requests, demands, claims, and other
-------
communications hereunder shall be in writing and shall be deemed to have been
duly given (i) if personally delivered, (ii) if mailed, five (5) business days
after having been sent by registered or certified mail, return receipt
requested, postage prepaid, addressed to the intended recipient as set forth
below, (iii) if given by telex or telecopier, once such notice or other
communication is transmitted to the telex or telecopier number specified below
and the appropriate answer back or telephonic confirmation is received, provided
that such notice or other communication is promptly thereafter mailed in
accordance with the provisions of clause (ii) above, or (iv) if sent through an
overnight delivery service in circumstances to which such service guarantees
next day delivery, the day following being so sent:
If to Buyer:
Louis L. Knickerbocker
The L. L. Knickerbocker Co., Inc.
30055 Comercio
Rancho Santa Margarita, CA 92688
Facsimile (714) 858-0339
Copy to:
William R. Black, Esq.
29 Summitcrest
Dove Canyon, California 92679
Facsimile (714) 888-7700
If to the Issuer:
James Scudder
Self-Heating Container Corporation of America
12675 Danielson Court, Suite 401
Poway, California 92064
Facsimile (619) 486-7204
Copy to:
Fisher Thurber LLP
4225 Executive Square, Suite 1600
La Jolla, California 92037-1483
Facsimile (619) 535-1616
<PAGE>
Any party may give any notice, request, demand, claim, or other
communication hereunder using any other means (including ordinary mail or
electronic mail), but no such notice, request, demand, claim or other
communication shall be deemed to have been duly given unless and until it
actually is received by the individual for whom it is intended. Any party may
change the address to which notices, requests, demands, claims and other
communications hereunder are to be delivered by giving the other parties notice
in the manner herein set forth.
10.3 Arbitration. The parties hereby agree to submit all
-----------
controversies, claims and matters of difference arising as a result of this
Agreement and the transactions contemplated hereby to arbitration through
Judicial Arbitration and Mediation Services ("JAMS") according to the rules and
practices of JAMS governing commercial arbitration from time to time in force.
Such arbitration shall be conducted in San Diego County, California. This
submission and agreement to arbitrate shall be specifically enforceable. The
parties agree to abide by all awards rendered in such proceedings. Such awards
shall be final and binding on all parties to the extent, and in the manner,
provided by California statute. Such awards shall not be subject to appeal. All
such awards may be filed with the Clerk of the San Diego County Superior Court
as a basis of judgment and of the issuance of execution for its collection and,
at the election of the party making such filing, with the clerk of one or more
other courts, state or federal, having jurisdiction over the party against whom
such an award is rendered or the property of said party.
10.4 Recovery of Fees and Costs. If any arbitration proceeding is brought
--------------------------
for the enforcement of this Agreement or because of an alleged dispute, breach,
default or misrepresentation in connection with any of the provisions of this
Agreement or documents executed and delivered pursuant hereto, the successful or
prevailing party or parties shall be entitled to recover reasonable attorneys'
and experts' fees and other costs incurred in that proceeding, in addition to
any other relief to which it or they may be entitled.
10.5 Entire Agreement. This Agreement represents the entire agreement of
----------------
the parties hereto with respect to the subject matter hereof, superseding all
prior agreements, understandings, discussions, negotiations, representations,
and commitments of any kind. This Agreement may not be amended or supplemented,
nor may any rights hereunder be waived, except in a writing signed by each of
the parties affected thereby.
10.6 Section Headings. The section headings in this Agreement are included
----------------
for convenience only and are not a part of this Agreement and shall not be used
in construing it.
10.7 Severability. In the event that any provision or any part of any
------------
provision of this Agreement is held to be illegal, invalid, or unenforceable in
any jurisdiction, as to such jurisdiction such illegality, invalidity, or
unenforceability shall not affect the validity or enforceability of any other
provision or part hereof. Any such illegality, invalidity, or unenforceability
shall not invalidate or render unenforceable such provision in any other
jurisdiction. To the extent permitted by law, the
<PAGE>
parties hereby waive any provision of law that renders any provision illegal,
invalid, or unenforceable in any respect. In addition, in the event of any such
illegality, invalidity or unenforceability, the parties agree that it is their
intention and agreement that such provision which is held or determined to be
illegal, invalid, or unenforceable as written in any jurisdiction, shall
nonetheless be in force and binding to the fullest extent permitted by the law
of the jurisdiction as though such provision had been written in such a manner
and to such an extent as to be enforceable under the circumstances.
10.8 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
10.9 Further Assurances. Each party hereto shall execute and deliver such
------------------
instruments and take such other actions as the other party or parties, as the
case may be, may reasonably require in order to carry out the intent of this
Agreement.
10.10 Waiver of Compliance. Any failure of the Issuer on the one hand,
--------------------
or the Buyer on the other, to comply with any obligation, agreement, or
condition herein may be expressly waived in writing by the party having the
right to insist upon performance of such obligation, agreement, or condition;
but such waiver or failure to insist upon strict compliance with such
obligation, agreement, or condition shall not operate as a waiver of, or
estoppel with respect to, any subsequent or other failure.
10.11 Assignment. This Agreement and all of the provisions hereof
----------
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns, but neither this Agreement nor any
of the rights, interests, or obligations hereunder shall be assigned by any of
the parties hereto without the prior written consent of the other parties,
except by operation of law.
10.12 Publicity. Neither the Issuer nor the Buyer shall make or issue,
---------
or cause to be made or issued, any announcement or written statement concerning
this Agreement or the transactions contemplated hereby for dissemination to the
general public prior to the Closing Date without the prior consent of the other
party, which shall not be unreasonably withheld. This provision shall not apply,
however, to any announcements made after the Closing Date, or to any
announcement or written statement required to be made by law or the regulations
of any federal or state governmental agency or any stock exchange, except that
the party required to make such announcement shall, whenever practicable,
consult with the other party concerning the timing and content of such
announcement before such announcement is made.
10.13 Governing Law Venue. This Agreement and the legal relations
-------------------
among the parties hereto shall be governed by and construed in accordance with
the laws of the State of California, and the venue for any actions or claims in
connection herewith shall be San Diego County, California.
<PAGE>
10.14 Third Parties. Except as specifically set forth or referred to
-------------
herein, nothing herein expressed or implied is intended or shall be construed to
confer upon or give to any person or corporation other than the parties hereto
and their successors or assigns, any rights or remedies under or by reason of
this Agreement.
10.15 Construction:
------------
10.15.1 No Strict Construction. The language used in this Agreement will
----------------------
be deemed to be the language chosen by the parties hereto to express their
mutual intent, and no rule of strict construction shall be applied against
either party. Whenever required by the context, any gender shall include any
other gender, the singular shall include the plural, and the plural shall
include the singular. The words "herein", "hereof", "hereunder", and words of
similar import, shall refer to the Agreement as a whole and not to a particular
section.
10.15.2 Independent Significance. The parties hereto intend that each
------------------------
representation, warranty, and covenant contained herein shall have independent
significance. If any party has breached any representation, warranty, or
covenant contained herein in any respect, the fact that there exists another
representation, warranty, or covenant relating to the same subject matter
(regardless of the relative levels of specificity) that the party has not
breached, shall not detract from or mitigate the fact that the party is in
breach of the first representation, warranty, or covenant.
IN WITNESS WHEREOF, the parties have duly executed Agreement as of the first
date above mentioned.
THE L. L. KNICKERBOCKER CO., INC.
By: ___________________________________ Date:______________________
Louis Knickerbocker, President
INSTA-HEAT, INC.
By: __________________________________ Date:______________________
James Scudder, President
<PAGE>
Exhibit "A"
STOCKHOLDER RECORD
<PAGE>
Exhibit "B"
LETTER OF INTENT
<PAGE>
Exhibit "C"
FORM OF WARRANT
<PAGE>
Exhibit "D"
ESCROW AGREEMENT
<PAGE>
Exhibit "E"
OBLIGATIONS OF IHI TO ISSUE STOCK
<PAGE>
Exhibit "F"
FINANCIAL STATEMENTS OF IHI
<PAGE>
Exhibit "G"
FINANCIAL STATEMENTS OF LLK
<PAGE>
EXHIBIT 21.1
THE L.L. KNICKERBOCKER CO., INC. SUBSIDIARIES
KRASNER GROUP, INC.
(Subsidiary of The L.L. Knickerbocker Co., Inc.)
GEORGETOWN COLLECTION, INC.
(Subsidiary of The L.L. Knickerbocker Co., Inc.)
THE L.L. KNICKERBOCKER (THAILAND) CO., LTD.
(Subsidiary of The L.L. Knickerbocker Co., Inc.)
TCJC, INC.
(Subsidiary of Krasner Group, Inc.)
CHARISMA MANUFACTURING CO., INC.
(Subsidiary of Krasner Group, Inc.)
DERMASCIENCE LABORATORIES, INC.
(Subsidiary of Krasner Group, Inc.)
KGI FASHIONS, INC.
(Subsidiary of Krasner Group, Inc.)
MAGIC ATTIC PRESS
(Subsidiary of Georgetown Collection, Inc.)
HARLYN INTERNATIONAL COMPANY, LTD.
(Subsidiary of The L.L. Knickerbocker (Thailand) Co., Inc.)
S.L.S. TRADING CO., LTD.
(Subsidiary of The L.L. Knickerbocker Co., Inc.)
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-1146 of The L.L. Knickerbocker Company, Inc. on Form S-8 and in Registration
Statement No. 333-15185 on Form S-3 of our report, dated April 14, 1997,
appearing in the Annual Report on Form 10-KSB of The L.L. Knickerbocker Company,
Inc. for the year ended December 31, 1996.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
April 14, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 6,247,000
<SECURITIES> 0
<RECEIVABLES> 14,822,000
<ALLOWANCES> 1,092,000
<INVENTORY> 4,983,000
<CURRENT-ASSETS> 36,499,000
<PP&E> 6,792,000
<DEPRECIATION> 833,000
<TOTAL-ASSETS> 57,572,000
<CURRENT-LIABILITIES> 20,797,000
<BONDS> 0
0
0
<COMMON> 13,082,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 57,572,000
<SALES> 42,095,000
<TOTAL-REVENUES> 42,095,000
<CGS> 21,292,000
<TOTAL-COSTS> 16,953,000
<OTHER-EXPENSES> 691,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,205,000
<INCOME-PRETAX> 1,822,000
<INCOME-TAX> 450,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,372,000
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
