<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the quarterly period ended September 30, 1997
-------------------
OR
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (NO FEE REQUIRED)
Commission file number 0-25488
THE L.L. KNICKERBOCKER CO., INC.
(Name of Small Business Issuer in its Charter)
California 33-0230641
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
25800 Commercentre Drive 92630
Lake Forest, California (Zip Code)
(Address of Principal Executive Offices)
Issuer's Telephone Number, Including Area Code: (714) 595-7900
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange on
Title of Each Class Which Registered
-------------------- ------------------------
Common Stock, No Par Value NASDAQ
National Market System
Securities registered under Section 12(g) of the Exchange Act:
None
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports) and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
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The number of shares outstanding of the registrant's Common Stock, as of
November 5, 1997 was 18,564,659.
Transitional Small Business Disclosure Format Yes No X
--- ---
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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TABLE OF CONTENTS
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ITEM PAGE
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1. FINANCIAL INFORMATION....................................................................... 1
A. Condensed Consolidated Statements of operations (unaudited) for the three
and nine month periods ended September 30, 1997 and
September 30, 1996..................................................................... 1
B. Condensed Consolidated Balance Sheets at September 30, 1997
(unaudited) and December 31, 1996...................................................... 2
C. Condensed Consolidated Statements of Cash Flows (unaudited)
for the nine month periods ended September 30, 1997 and September 30, 1996............. 4
D. Notes to Condensed Consolidated Financial Statements................................... 5
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................................................................. 9
A. General Business Description........................................................... 9
B. Results of Operations.................................................................. 10
C. Liquidity and Capital Resources........................................................ 12
PART II
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SIGNATURES.................................................................................. 13
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PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
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THE L.L. KNICKERBOCKER CO., INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
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<CAPTION>
Three months ended September 30, Nine months ended September 30,
1997 1996 1997 1996
--------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Sales, net of returns $14,112,000 $ 8,272,000 $ 45,162,000 $ 18,852,000
Cost of sales 6,648,000 4,677,000 22,265,000 9,971,000
--------------- --------------- ---------------- ---------------
Gross profit 7,464,000 3,595,000 22,897,000 8,881,000
Advertising expense 1,869,000 - 5,388,000 -
Selling, general and administrative
expenses 6,139,000 3,278,000 19,194,000 6,808,000
--------------- --------------- ---------------- ---------------
Operating income (544,000) 316,000 (1,685,000) 2,073,000
Equity in loss of investee companies 468,000 - 1,344,000 -
Other income (expense), net 762,000 147,000 526,000 234,000
Interest expense (See Note 3) 471,000 50,000 3,997,000 50,000
--------------- --------------- ---------------- ---------------
Income (Loss) before provision for
income taxes and minority interest (721,000) 413,000 (6,500,000) 2,257,000
Minority interest - - (219,000) -
Income tax (benefit) expense $ (135,000) $ 74,000 $ (1,295,000) $ 793,000
--------------- --------------- ---------------- ---------------
Net Income (586,000) 339,000 (4,986,000) 1,464,000
=============== =============== ================ ===============
Primary net income (loss per share) $ (0.03) $ 0.02 $ (0.28) $ 0.09
=============== =============== ================ ===============
Primary weighted average common and common
equivalent shares outstanding 18,408,572 17,236,195 17,731,737 16,310,702
=============== =============== ================ ===============
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THE L.L. KNICKERBOCKER CO., INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1997
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<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,553,000 $ 6,247,000
Restricted cash - 500,000
Accounts receivable 12,186,000 13,730,000
Receivable from stockholder/officer 1,389,000 596,000
Inventories 12,519,000 8,474,000
Prepaid expenses and other current assets 10,543,000 5,663,000
Income tax receivable 1,133,000 733,000
Deferred income taxes 1,236,000 1,236,000
------------ ------------
Total current assets 40,559,000 37,179,000
Property and equipment, net 6,369,000 6,111,000
Investments 3,440,000 4,677,000
Deferred income taxes 1,836,000 1,835,000
Other Assets 1,463,000 1,480,000
Goodwill, net of accumulated amortization of
$782,000 and $310,000 as of September 30, 1997
and December 31, 1996, respectively 5,979,000 6,290,000
------------ ------------
$ 59,646,000 $ 57,572,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 10,738,000 $ 11,311,000
Commissions and royalties payable 526,000 828,000
Notes Payable 7,490,000 7,008,000
Interest payable 146,000 131,000
Income taxes payable 461,000 -
Acquisition payable - 1,253,000
Due to stockholder/officer 400,000 -
Current portion of long-term debt - 266,000
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Total current liabilities 19,761,000 20,797,000
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Long-term liabilities:
Long-term debt, less current portion 699,000 371,000
Convertible debentures, net of discounts of $485,000
at September 30, 1997 and $2,344,000 at December 31, 1996 9,815,000 11,826,000
Other long-term liabilities - 51,000
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Total long-term liabilities 10,514,000 12,248,000
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Minority interest 45,000 264,000
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Stockholders' equity:
Common stock 26,608,000 13,082,000
Additional paid-in capital 6,019,000 8,018,000
Retained earnings (deficit) (1,839,000) 3,147,000
Foreign currency translation adjustment (1,462,000) 16,000
------------ ------------
Total stockholders' equity 29,326,000 24,263,000
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59,646,000 57,572,000
============ ============
</TABLE>
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THE L.L. KNICKERBOCKER CO., INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
September 30, September 30,
1997 1996
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<S> <C> <C>
Cash flows provided by operating activities:
Net (loss) income $ (4,986,000) $ 1,465,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,746,000 177,000
Debenture inducement 1,899,000 -
Amortization of deferred revenue - (70,000)
Reserve for discontinuance of operations - (278,000)
Loss on investment - 30,000
Equity in loss of investee companies 1,344,000 85,000
Deferred income taxes (1,000) 229,000
Minority interest (219,000) -
Amortization of debt discount 605,000 -
Changes in operating accounts:
Accounts receivable, net 1,544,000 (99,000)
Receivable from stockholder/officer (793,000) -
Note receivable - -
Income tax receivable (400,000) -
Inventories (4,045,000) (950,000)
Prepaid expenses and other current assets (4,880,000) (759,000)
Other assets 5,000 77,000
Accounts payable and accrued expenses (437,000) (809,000)
Commissions and royalties payable (302,000) (74,000)
Income tax payable 461,000 (282,000)
Other long term liabilities (51,000) 212,000
----------- -----------
Net cash provided by (used in) operations (8,510,000) (1,046,000)
----------- -----------
Cash flows from investing activities:
Acquisitions of property, plant and
equipment (1,991,000) (307,000)
Investments (107,000) (1,946,000)
----------- -----------
Net cash used in investing activities (2,098,000) (2,253,000)
----------- -----------
Cash flows from financing activities:
Net borrowings on line of credit 467,000 434,000
Payments on long-term debt (808,000) -
Borrowings on long-term debt 466,000 -
Proceeds from exercise of common stock purchase
warrants 732,000 2,144,000
Payment of royalty committment - (28,000)
Proceeds from shareholder loan 1,400,000 -
Payments on shareholder loan (1,000,000) -
Proceeds from note payable - (67,000)
Deferred debt issue costs (325,000) (769,000)
Proceeds from issuance of convertible debentures 5,000,000 15,500,000
----------- -----------
Net cash provided by (used in) financing
activities 5,932,000 17,214,000
----------- -----------
Effect of Foreign currency translation (518,000) -
----------- -----------
Net (decrease) increase in cash and cash
equivalents (5,194,000) 13,915,000
Cash and cash equivalents, beginning of period 6,747,000 2,470,000
----------- -----------
Cash and cash equivalents, end of period $ 1,553,000 $16,385,000
=========== ===========
Supplemental cash flow information:
Cash paid for interest $ 782,000 $ 50,000
=========== ===========
Cash paid (refunded) for income taxes $ (946,000) $ 350,000
=========== ===========
</TABLE>
Supplemental Schedule of Noncash Investing and Financing Activity:
During the nine months ended September 30, 1997, $10,770,000 of convertible
debentures and $121,000 of accrued interest was converted to common stock.
During the nine months ended September 30, 1997, The Company issued 203,063
shares of common stock in payment of $976,000 of acquisition payable.
<PAGE>
THE L.L. KNICKERBOCKER CO., INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Note 1: Basis of Presentation:
As contemplated by the Securities and Exchange Commission under Item 310(b) of
Regulation S-B, the accompanying financial statements and footnotes have been
condensed and therefore do not contain all disclosures required by generally
accepted accounting principles. The information set forth in these consolidated
financial statements is unaudited except for the December 31, 1996 balance
sheet. These statements have been prepared in accordance with generally
accepted accounting principles for interim financial information, the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
The accompanying consolidated financial statements consolidate the accounts of
Krasner Group, Inc. ("Krasner") which was acquired on June 18, 1996, Harlyn
International, Ltd. which was acquired effective July 1, 1996, L.L.
Knickerbocker (Thai) Company, Ltd, which includes the operations of Grant King
International,Ltd and S.L.S Trading Co., Ltd, which were acquired effective July
1, 1996, and Georgetown Collection, Inc. which was acquired effective October
18, 1996. All intercompany transactions have been eliminated.
In the opinion of management, all adjustments, consisting only of normal
recurring accruals, necessary for a fair presentation have been included. The
results of operations for the three and nine month periods ended September 30,
1997 are not necessarily indicative of the results that may be expected for the
year ended December 31, 1997. For further information, refer to the financial
statements and notes thereto included in the Company's annual report for the
year ended December 31, 1996.
Certain prior period balances have been reclassified to conform with current
presentation.
Note 2: Net Income Per Share:
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share (SFAS 128) which is
effective for financial statements issued for periods ending after December 15,
1997. SFAS 128 requires the disclosure of basic and diluted earnings per share.
For the three and nine months ended September 30, 1997, the amount reported as
net loss per share is not materially different from that which would have been
reported for basic and diluted loss per share in accordance with SFAS 128.
Note 3: Convertible Debentures:
In September 1997, the Company issued Convertible Debentures (the Debentures)
with a face value of $5,000,000 in a private placement to an institutional
investor. This private placement yielded net proceeds to the Company totaling
$4,675,000 after deducting costs associated with issuing the Debentures. The
Debentures accrue interest at the rate of 6% per annum, payable quarterly in
arrears on any unpaid or unconverted debt. Interest is payable in either cash or
common stock of the Company at the option of the Company. The Debentures are
convertible at the option of the holder into shares of the Company's common
stock at a graduated discounted price ranging from 97% to 90% of an average of
the 7 lowest trading days of the 30 consecutive trading days prior to
conversion. The discounted price of 90% applies if the investor does not
convert prior to the two year anniversary of the closing date. Through
September 30, 1997, the Company had not issued any common shares in connection
with the transaction.
The conversion of the notes at a maximum of 90% 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
<PAGE>
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 nine months ended September 30, 1997, a total of $ 19,000
of non-cash interest expense was recorded relating to the Debentures.
In September 1996, the Company issued Convertible Debentures (the Debentures)
with a face value of $15,500,000 in a private placement to institutional
investors. This private placement yielded net proceeds to the Company totaling
$14,730,000 after deducting costs associated with issuing the Debentures. The
Debentures accrue interest at the rate of 7% per annum, payable quarterly in
arrears on any unpaid or unconverted debt. The Debentures were convertible at
the option of the holder into shares of the Company's common stock at a price
equal to 85% of the closing price of the Company's common stock at the date of
conversion, subject to a minimum and maximum conversion price of $5.25 and
$12.00 per share, at any time through the second anniversary of the original
date of issuance. Through September 30, 1997, the Company issued a total of
1,791,730 shares of its common stock in connection with the conversion of
$12,099,500 of the original principal amount of the Debentures, plus interest
accrued through the conversion dates.
The conversion of the notes at 85% of the closing price of the Company's common
stock resulted in the Debentures being issued at a discount (the conversion
discount). The conversion discount is being recognized by the Company as non-
cash interest expense over the term of the Debentures with a 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 nine months
ended September 30, 1997, a total of $ 2,648,000 of non-cash interest expense
was recorded relating to the Debentures, including $ 591,000 relating to the
additional conversion discount recorded upon conversion.
In January 1997, the Company reached agreement with the Debenture holders to
tender all outstanding Debentures to the Company in exchange for new convertible
Debentures (the New Debentures). Under the terms of the agreement, New
Debentures were issued with a face value of 117.5% of the face value of the
tendered Debentures. The New Debentures bear interest at 7% per year, payable
quarterly. The New Debentures are convertible at the option of the holder into
shares of the Company's common stock at $8.00 per share. The New Debentures
must be converted by January 1999. As a result of the 17.5% premium given as an
inducement to the Debenture holders to tender the original debentures into New
Debentures, the Company recorded a non-cash charge of $1,899,000 in the first
quarter of 1997.
Note 4: Bank Financing
On July 2, 1997, the Company entered into a financing agreement with BankBoston,
N.A., to provide a $20,000,000 line of credit, having a term of two years. The
loan encompasses The L.L. Knickerbocker Co., Inc., Georgetown Collection, Inc.
and Krasner Group, Inc. Certain credit limits are established for each company.
The credit limits are $4,000,000 for The L.L. Knickerbocker Co., Inc.,
$13,000,000 for Georgetown Collection, Inc. and $3,000,000 for Krasner Group,
Inc. Cash borrowings bear interest at either an Adjusted LIBOR Rate or Base
Rate. The Adjusted LIBOR Rate is the listed LIBOR rate divided by the
difference of 1.00 and the published Reserve Percentage (as published by the
Board of Governors of the Federal Reserve System). The Base Rate is the greater
of the rate of interest as announced by BankBoston, N.A. as its Base Rate and
the Federal Funds Effective Rate plus 1/2 of 1% per annum. The Company has the
right to convert the borrowings to either the Adjusted LIBOR Rate or Base Rate.
In addition, the Company is charged an Unused Line fee of .25% of the unused
portion of the Revolving Loans. The Financing Agreement is collateralized by
a lien on generally all assets of the Company. Loan availability is determined
by an advance rate on eligible accounts receivable and inventory. The Financing
Agreement includes certain restrictive covenants, some which are computed
quarterly and others which are computed annually. As of September 30, 1997, the
Company was in compliance with all terms of the Financing Agreement. As of
September 30, 1997, the Company had borrowings of $7,401,000 and letters of
credit of $272,000 outstanding with total credit available of approximately
$3,292,000.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion includes the operations of the L.L. Knickerbocker Co.,
Inc. and subsidiaries for each of the periods discussed.
Results of operations
Three months ended September 30, 1997 and 1996
Net Sales
Net sales increased to $14,112,000 for the three months ended September 30, 1997
from $8,272,000 for the three months ended September 30, 1996, an increase of
$5,840,000, or 70.6%. Of the $5,840,000 increase, $5,884,000 was attributable
to net sales generated by Georgetown Collection, Inc. which was acquired in the
fourth quarter of 1996, thus not yet included in the comparative base of
September 30,1996, followed by increases of $1,800,000 in collectible doll and
bear sales and $306,000 in costume jewelry sales, offset by a decrease in fine
jewelry sales of $2,062,000. The increases in collectible doll and bear and
costume jewelry sales of $2,106,000 were primarily attributable to increased
airtime on one of the Company's home shopping channel customers, QVC, and the
expansion of the Company's retail distribution channel. The decrease of
$2,062,000 in fine jewelry sales related primarily to a temporary softening of
demand internationally for fine jewelry and the strike by UPS.
Gross Profit
Gross profit increased to $7,464,000 for the three months ended September 30,
1997 from $3,595,000 for the three months ended September 30, 1996, an increase
of $3,869,000 or 107.6%. As a percentage of net sales, gross profit increased
to 52.8% in 1997 from 43.4% in 1996. The improvement in gross profit as a
percentage of net sales was primarily attributable to the acquisition of
Georgetown Collection, Inc. in the fourth quarter of 1996, thus not included in
the comparative base for the current quarter. The net sales generated by
Georgetown Collection, Inc., through catalogs, print advertisements and direct
mail aimed at consumers, result in higher gross margins than the Company's
historical margins. The majority of the overall net sales from the Company,
outside of the portion contributed by Georgetown Collection, come from wholesale
sales which typically carry lower gross margins than do retail sales.
Therefore, the Company's gross profit percentage will vary depending on the
volume of catalog, print advertisement, and direct response sales in any
particular quarter. Correspondingly, should the majority of the Company's
sales come from fine and costume jewelry sales in any quarter, the gross profit
percentage of the Company will be lower due to lower historical margins
associated with jewelry production and sales.
Advertising expense
Advertising expense increased to $1,869,000 for the three months ended September
30, 1997 from $594,000 for the three months ended September 30, 1996 due
primarily to the Company's expansion of its direct response business through its
acquisition of Georgetown Collection, Inc. Included in advertising expense are
advertisement printing costs, catalog printing costs, media space in magazines,
infomercial costs, and advertisement development costs.
<PAGE>
Selling, general and administrative expenses
Total selling, general and administrative expenses increased to $6,139,000 for
the three months ended September 30, 1997 from $3,278,000 for the three months
ended September 30, 1996, an increase of $2,861,000, or 87.3%. The percentage
of revenues represented by these expenses increased from 39.6% in 1996 to 43.5%
in 1997. Of the $2,861,000 increase, $2,722,000 represents the selling,
general, and administrative expenses of Georgetown Collection, Inc., which are
not included in the comparative base in the current quarter. The remaining
increase of $139,000 relates primarily to higher personnel costs, increased
amortization expense related to acquisitions completed since the second quarter
of 1996, and higher operating costs associated with the Company's new
headquarters in California and its jewelry facility in Thailand.
Other income (expense)
Other income (expense) increased to $762,000 for the three months ended
September 30, 1997 from $147,000 for the three months ended September 30, 1996,
an increase of $615,000, or 418.4%. The increase relates primarily to foreign
currency gains realized by Thailand-based subsidiaries as a result of
international sales.
Interest income (expense)
Interest expense increased to $471,000 for the three months ended September 30,
1997 from $50,000 for the three months ended September 30, 1996, an increase of
$421,000, or 842%. The increase occurred primarily as a result of lines of
credit assumed in the acquisitions of subsidiaries completed in 1996 and the
completion of the $5,000,000 convertible debenture financing on September 8,
1997.
Net Income
As a result of the foregoing factors, net loss increased to $586,000 for the
three months ended September 30, 1997 from net income of $339,000 for the three
months ended September 30, 1996, a change of $925,000.
Nine Months ended September 30, 1997 and 1996
Net Sales
Net sales increased to $45,162,000 for the nine months ended September 30, 1997
from $18,852,000 for the nine months ended September 30, 1996, an increase of
$26,310,000, or 139.6%. Of the $26,310,000 increase, $18,188,000 was
attributable to net sales generated by Georgetown Collection, Inc. which was
acquired in the fourth quarter of 1996, thus not yet included in the comparative
base of September 30, 1996. Of the remaining increase of $8,122,000, $6,800,000
was attributable to the inclusion of a full nine months of costume and fine
jewelry activity through the Company's acquisitions of Krasner Group, Inc. and
Harlyn International in 1996. The remaining increase of $1,322,000 is due to
increases in collectible doll and bear sales primarily attributable to the
expansion of the Company's retail distribution channel.
Gross Profit
Gross profit increased to $22,897,000 for the nine months ended September 30,
1997 from $8,881,000 for the nine months ended September 30, 1996, an increase
of $14,016,000, or 157.8%. As a percentage of net sales, gross profit increased
to 50.7% in 1997 from 47.1% in 1996. The improvement of 3.6% in gross profit as
a percentage of net sales was primarily attributable to the acquisition of
Georgetown Collection, Inc. in the fourth quarter of 1996, thus not included in
the comparative base for the current quarter. The net sales generated by
Georgetown Collection, Inc., through catalogs, print advertisements and direct
mail aimed at consumers, result in higher gross margins than the Company's
historical margins. The majority of the overall net sales from the Company,
outside of the portion contributed by Georgetown Collection,
<PAGE>
come from wholesale sales which typically carry lower gross margins than do
retail sales. Therefore, the Company's gross profit percentage will vary
depending on the volume of catalog, print advertisement, and direct response
sales in any particular quarter. Correspondingly, should the majority of the
Company's sales come from fine and costume jewelry sales in any quarter, the
gross profit percentage of the Company will be lower due to lower historical
margins associated with jewelry production and sales.
Advertising expense
Advertising expense increased to $5,388,000 for the nine months ended September
30, 1997 from $1,058,000 for the nine months ended September 30, 1996, an
increase of $4,330,000, or 409.2%. The increase is due primarily to the
Company's expansion of its direct response business through its acquisition of
Georgetown Collection, Inc. Included in advertising expense are advertisement
printing costs, catalog printing costs, media space in magazines, infomercial
costs, and advertisement development costs.
Selling, general and administrative expenses
Total selling, general and administrative expenses increased to $19,194,000 for
the nine months ended September 30, 1997 from $6,808,000 for the nine months
ended September 30, 1996, an increase of $12,386,000, or 181.9%. The percentage
of revenues represented by these expenses increased from 36.1% in 1996 to 42.5%
in 1997. Of the $12,386,000 increase, $8,836,000 represents the selling,
general, and administrative expenses of Georgetown Collection, Inc., which are
not included in the 1996 comparative base for the current quarter. The
remaining increase of $3,550,000 relates primarily to higher selling costs,
higher personnel costs, increased amortization expense related to acquisitions
completed since the second quarter of 1996, higher legal and public relations
costs and higher operating costs associated with the Company's new headquarters
in California and its jewelry facility in Thailand. In addition, the Company
has incurred higher travel and lodging costs due to its expansion of operations
into southeast Asia. The Company also incurs general and administrative
expenses in connection with overseeing its investment in Pure Energy
Corporation.
Other income (expense)
Other income (expense) increased to $526,000 for the nine months ended September
30, 1997 from $234,000 for the nine months ended September 30, 1996, an increase
of $292,000, or 124.7%. The increase relates primarily to net gains realized
by Thailand-based subsidiaries in foreign currency exchanges as a result of
international sales.
Interest income (expense)
Interest expense increased to $3,997,000 for the nine months ended September 30,
1997 from $50,000 for the nine months ended September 30, 1996, an increase of
$3,947,000. The increase of $3,947,000 occurred primarily as a result of
charges associated with its convertible debenture financings which occurred in
September of 1996 and 1997. The noncash conversion discounts ranging from 3% to
15% on conversions into common stock are charged as interest expense. The total
conversion discount in the first quarter of 1997 totaled $591,000.
Additionally, the Company has taken a charge of $1,899,000 representing the
accretion of the principal balance which resulted from the restructuring in
February of 1997 of the convertible debentures. Also impacting interest expense
in 1997 are the acquisitions completed in 1996 which employ bank lines of
credit.
Net Income
As a result of the foregoing factors, net loss increased to $4,986,000 for the
nine months ended September 30, 1997 from net income of $1,464,000 for the nine
months ended September 30, 1996, a decrease of $6,450,000.
<PAGE>
Liquidity and Capital Resources
The Company has financed its operations from internally generated cash flow,
short-term borrowings and equity financings. As of September 30, 1997 the
Company had working capital of $20,798,000. Working capital has increased
substantially by both the issuance of two rounds of convertible debentures of
$20,500,000, which resulted in $19,550,000 in net proceeds to the Company in
1996 and 1997 and the acquisitions completed in 1996.
Through the second quarter of 1997, the Company has continued to invest most of
the funds generated from operations and raised in the convertible debenture
financing by capitalizing subsidiaries and developing new product categories.
In February 1997, the Company restructured its convertible debentures which had
an unconverted balance of $10,850,000 prior to restructuring. The Company
reached an agreement with the Debenture holders to tender all of the outstanding
Debentures to the Company in exchange for new convertible Debentures (the "New
Debentures"). Under the terms of the agreement, the New Debentures were issued
with a face value of 117.5% of the unconverted balance of the tendered
debentures. The New Debentures are convertible into common stock at the option
of the holder at a fixed price of $8.00 per share. The New Debentures must be
converted by January 1999. As a result of the 17.5% premium given as an
inducement to the Debenture holders to tender the original debentures into New
Debentures, the Company recorded a noncash charge of $1,899,000 in the first
quarter of 1997. As of September 30, 1997, the principal balance outstanding on
the New Debentures was $5,299,000.
The Company has obtained a $20,000,000 line of credit with BankBoston which
replaced existing bank lines of credit to be used for working capital purposes.
The line contains terms and restrictions which are standard to asset-based
lending arrangements.
Cash flow used in operations was $8,510,000 due to the increase in inventory
and prepaids associated with the acquisitions of Georgetown Collection, Inc.,
Krasner Group, Inc., Harlyn International, Ltd., and L.L. Knickerbocker (Thai)
Company, Ltd. The Company's cash flow also decreased due to the payments made
to decrease accounts payable and other accrued expenses. Working capital
increased from $16,382,000 at December 31, 1996 to $20,798,000 at September 30,
1997. The current ratio for the Company increased from 1.79 at December 31,
1996 to 2.05 at September 30, 1997. The increase in the Company's current ratio
is primarily attributed to the capital raised from the convertible debenture
offering completed in 1997 and by increases in accounts receivable and other
current assets.
Seasonality and Quarterly Results
The Company's business is subject to seasonal fluctuations. Georgetown
Collection, Inc., which was acquired effective October 18, 1996, has
historically experienced greater sales in the latter portion of the year.
Because of the seasonality of the Company's business, results for any quarter
are not necessarily indicative of the results that may be achieved for the full
fiscal year.
Forward-Looking Statements
When used in this document, the words "believes", "anticipates", "expects" and
similar expressions are intended to identify in certain circumstances forward-
looking statements. Such statements are subject to a number of risks and
uncertainties that could cause actual results to differ materially from those
projected, including risks related to the dependence on sales to QVC the
acceptance in the marketplace of new products; the ability to source raw
materials at prices favorable to the Company; currency fluctuations; and other
risks outlined in the Company's previously filed public documents, copies of
which may be obtained without cost from the Company. Given these uncertainties,
prospective investors are cautioned not to place undue reliance on such
statements. The Company also undertakes no obligation to update these forward-
looking statements.
<PAGE>
PART II. OTHER INFORMATION
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
THE L.L. KNICKERBOCKER CO., INC.
Date: November 7, 1997 By: /s/Anthony P. Shutts
Anthony P. Shutts
Chief Financial Officer
Signing on behalf of the registrant and
as principal financial and accounting
officer.
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<PAGE>
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<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> JUL-01-1997 JAN-01-1997
<PERIOD-END> SEP-30-1997 SEP-30-1997
<CASH> 1,553,000 1,553,000
<SECURITIES> 0 0
<RECEIVABLES> 12,186,000 12,186,000
<ALLOWANCES> 0 0
<INVENTORY> 12,519,000 12,519,000
<CURRENT-ASSETS> 40,559,000 40,559,000
<PP&E> 6,369,000 6,369,000
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 59,646,000 59,646,000
<CURRENT-LIABILITIES> 19,761,000 19,761,000
<BONDS> 9,815,000 9,815,000
0 0
0 0
<COMMON> 26,608,000 26,608,000
<OTHER-SE> 2,718,000 2,718,000
<TOTAL-LIABILITY-AND-EQUITY> 59,646,000 59,646,000
<SALES> 14,112,000 45,162,000
<TOTAL-REVENUES> 14,112,000 45,162,000
<CGS> 6,648,000 22,265,000
<TOTAL-COSTS> 8,008,000 24,582,000
<OTHER-EXPENSES> 468,000 1,344,000
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 471,000 3,997,000
<INCOME-PRETAX> (721,000) (6,500,000)
<INCOME-TAX> (135,000) (1,295,000)
<INCOME-CONTINUING> (586,000) (4,986,000)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (586,000) (4,986,000)
<EPS-PRIMARY> (.03) (.28)
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