<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
--------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-25488
THE L.L. KNICKERBOCKER CO., INC.
(Exact name of registrant as specified 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
Indicate by mark whether the issuer: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
The number of shares outstanding of the registrant's Common Stock, as of April
17, 1998 was 19,077,057.
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TABLE OF CONTENTS
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ITEM PAGE
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PART I
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1. FINANCIAL INFORMATION.............................................. 1
A. Condensed Consolidated Statements of operations (unaudited)
for the three month periods ended March 31, 1998 and
March 31, 1997............................................... 1
B. Condensed Consolidated Balance Sheets at March 31, 1998
(unaudited) and December 31, 1997............................ 2
C. Condensed Consolidated Statements of Cash Flows (unaudited)
for the three month periods ended March 31, 1998 and
March 31, 1997............................................... 4
D. Notes to Condensed Consolidated Financial Statements........... 5
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................... 9
A. General Business Description................................... 9
B. Results of Operations.......................................... 10
C. Liquidity and Capital Resources................................ 12
PART II
-------
SIGNATURES......................................................... 13
<PAGE>
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)
<TABLE>
<CAPTION>
Three months ended March 31,
1998 1997
----------- -----------
<S> <C> <C>
Sales, net of returns $11,482,000 $13,441,000
Cost of sales 4,856,000 6,644,000
----------- -----------
Gross profit 6,626,000 6,797,000
Advertising expense 2,413,000 1,577,000
Selling, general and administrative
expenses 5,771,000 6,269,000
----------- -----------
Operating income (loss) (1,558,000) (1,049,000)
Equity in loss of investee companies 553,000 305,000
Other income (expense), net (Note 8) 2,830,000 (113,000)
Interest expense (Note 3) 581,000 3,093,000
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Income (Loss) before provision for
income taxes and minority interest 138,000 (4,560,000)
Minority interest in loss of subsidiary (133,000) (118,000)
Income tax expense (benefit) 32,000 (603,000)
----------- -----------
Net Income (loss) $ 239,000 $(3,839,000)
=========== ===========
Net income (loss) per share:
Basic $ 0.01 $ (0.23)
=========== ===========
Diluted $ 0.01 $ (0.23)
=========== ===========
Shares used in computing net income
(loss) per share:
Basic 19,053,855 16,933,273
=========== ===========
Diluted 20,696,985 16,933,273
=========== ===========
</TABLE>
<PAGE>
THE L.L. KNICKERBOCKER CO., INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------ -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 683,000 $ 92,000
Restricted cash - 250,000
Accounts receivable 9,589,000 8,021,000
Receivable from stockholder - 1,383,000
Inventories 12,291,000 10,851,000
Prepaid expenses and other current assets 8,790,000 7,486,000
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Total current assets 31,353,000 28,083,000
Property and equipment, net 5,989,000 5,537,000
Notes Receivable 1,800,000 1,800,000
Investments (Note 8) 4,890,000 2,585,000
Deferred income taxes 4,215,000 4,215,000
Other Assets 2,158,000 2,348,000
Goodwill, net of accumulated amortization of
$1,093,000 and $971,000 -
as of March 31, 1998 and December 31, 1997,
respectively 6,409,000 6,393,000
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$56,814,000 $50,961,000
=========== ===========
</TABLE>
<PAGE>
THE L.L. KNICKERBOCKER CO., INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, December 31,
1998 1997
------------- -------------
<S> <C> <C>
Current Liabilities:
Accounts payable and accrued expenses $ 9,388,000 $ 7,838,000
Commissions and royalties payable 356,000 751,000
Notes Payable 5,817,000 3,650,000
Interest payable 282,000 270,000
Income taxes payable 115,000 123,000
Acquisition payable 8,000 8,000
Due to shareholders of Krasner Group, Inc. 900,000 900,000
Loan from stockholder 935,000 248,000
Current portion of long-term debt 376,000 242,000
Other current liabilities -- 125,000
Deferred income taxes 49,000 49,000
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Total current liabilities 18,226,000 14,204,000
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Long-term liabilities:
Long-term debt, less current portion 420,000 661,000
Convertible debentures, net of discounts of $402,000
at March 31, 1998 and $444,000 at December 31, 1997 9,497,000 9,455,000
Deferred gain 1,642,000 1,642,000
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Total long-term liabilities 11,559,000 11,758,000
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Minority interest 141,000 274,000
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Stockholders' equity:
Common stock 27,357,000 27,282,000
Additional paid-in capital 3,904,000 3,904,000
Retained earnings (deficit) (991,000) (1,230,000)
Foreign currency translation adjustment (3,382,000) (5,231,000)
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Total stockholders' equity 26,888,000 24,725,000
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$ 56,814,000 $ 50,961,000
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</TABLE>
<PAGE>
THE L.L. KNICKERBOCKER CO., INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Cash flows provided by operating activities: March 31, March 31,
1998 1997
------------- -------------
<S> <C> <C>
Net income (loss) $ 239,000 $ (3,839,000)
Adjustments to reconcile net income (loss) to net cash
used in operating
activities:
Depreciation and amortization 616,000 503,000
Debenture inducement -- 1,899,000
Gain on sale of investment - P.E.C. (2,846,000) --
Equity in loss of investee companies 553,000 305,000
Loss on disposition of fixed assets 18,000 --
Minority interest (133,000) (118,000)
Amortization of debt discount 42,000 589,000
Changes in operating accounts: -- --
Accounts receivable, net (1,568,000) 2,928,000
Receivable from stockholder/officer 1,383,000 (412,000)
Income tax receivable -- (645,000)
Inventories (1,440,000) (1,242,000)
Prepaid expenses and other current assets (1,316,000) (2,161,000)
Other assets 74,000 (22,000)
Accounts payable and accrued expenses 1,437,000 (2,103,000)
Commissions and royalties payable (395,000) (241,000)
Income tax payable (8,000) 41,000
Other long term liabilities -- (51,000)
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Net cash used in operations (3,344,000) (4,569,000)
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Cash flows from investing activities:
Acquisitions of property and equipment (273,000) (231,000)
Proceeds from sales of property and equipment 21,000 --
Investments -- (8,000)
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Net cash used in investing activities (252,000) (239,000)
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Cash flows from financing activities:
Net borrowings on line of credit 2,167,000 (182,000)
Payments on long-term debt (74,000) 83,000
Borrowings on long-term debt 52,000 --
Proceeds from exercise of common stock purchase warrants/options 75,000 346,000
Proceeds from shareholder loan 2,100,000 --
Payments on shareholder loan (1,413,000) --
------------- -------------
Net cash provided by financing activities 2,907,000 247,000
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Effect of Foreign currency translation 1,030,000 65,000
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Net increase (decrease) in cash and cash equivalents 341,000 (4,496,000)
Cash and cash equivalents, beginning of period 342,000 6,247,000
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Cash and cash equivalents, end of period $ 683,000 $ 1,751,000
============= =============
</TABLE>
Supplemental Schedule of Noncash Investing and Financing Activity:
During the three months ended March 31, 1997, $5,388,000 of convertible
debentures and $71,000 of accrued interest was converted to common stock.
During the three months ended March 31, 1997, the Company issued 90,614 shares
of common stock in payment of $601,000 of acquisition payable.
<PAGE>
<TABLE>
<S> <C> <C>
Cash paid for interest $ 218,000 $ 387,000
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Cash paid (refunded) for income taxes $ 32,000 $ --
=========== ===========
</TABLE>
THE L.L. KNICKERBOCKER CO., INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Note 1: Basis of Presentation:
The information set forth in these consolidated financial statements is
unaudited except for the December 31, 1997 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 month period ended March 31, 1998 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1998. For further information, refer to the financial statements
and notes thereto included in the Company's annual report for the year ended
December 31, 1997.
Certain prior period balances have been reclassified to conform with current
presentation.
Note 2: Net Income Per Share:
Earnings per common share (EPS) data were computed as follows:
Options and warrants to purchase 480,143 and 3,059,162 shares of common stock
were outstanding as of March 31, 1998 and 1997, respectively, but were not
included in the computation of diluted EPS because the options' exercise price
was greater than the average market price of the common shares.
<PAGE>
<TABLE>
<CAPTION>
1998 1997
---------------------------------------- ------------------------------------------
Per-Share Per-Share
Income Shares Amount Income Shares Amount
---------------------------------------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Income (Loss) $ 239,000 $ (3,839,000)
Basic EPS
Income (loss) available to
common shareholders 239,000 19,053,855 $ 0.01 $ (3,839,000) 16,933,273 $ (0.23)
======= ========
Effect of Dilutive Securities
Options and Warrants 773,198
Convertible debentures $ 45,000 869,932
------------------------- ----------------------------
Diluted EPS
Income (loss) available to common
stockholders and assumed conversions $ 284,000 20,696,985 $ 0.01 $ (3,839,000) 16,933,273 $ (0.23)
======= ========
</TABLE>
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 upon conversion
of the related debt or at debt maturity of September 7, 2000. 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
March 31, 1998, 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
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 three months ended March 31, 1998, a total of $42,000 of non-cash
interest expense was recorded relating to the Debentures.
In September 1996, the Company issued Convertible Debentures (the 1996
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
1996 Debentures. The 1996 Debentures accrue interest at the rate of 7% per
annum, payable quarterly in arrears on any unpaid or unconverted debt. The 1996
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 March 31, 1998,
the Company issued a total of 1,903,174 shares of its common stock in connection
with the conversion of $12,499,000 of the original principal amount of the 1996
Debentures, plus interest accrued through the conversion dates.
<PAGE>
The conversion of the notes at 85% of the closing price of the Company's common
stock resulted in the 1996 Debentures being issued at a discount (the conversion
discount). The conversion discount was being recognized by the Company as non-
cash interest expense over the term of the 1996 Debentures with a corresponding
increase to the original principal amount of the Debentures. Upon conversion of
the 1996 Debentures any portion of the conversion discount not previously
recognized was recorded as interest expense on the conversion date.
In January 1997, the Company reached agreement with the 1996 Debenture holders
to tender all outstanding 1996 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 restructuring charge of $1,899,000
in the first quarter of 1997.
Note 4: Bank Financing
The Company has available to use for working capital purposes and to post
letters of credit, a line of credit totaling $20,000,000, subject to certain
limits. The line of credit encompasses the L.L. Knickerbocker Co., Inc.(LLK),
Georgetown Collection, Inc. (GCI) and Krasner Group, Inc.(TKG) and expires in
July 1999. Certain credit limits are established for each company. The credit
limits are $4,000,000 for LLK, $13,000,000 for GCI and $3,000,000 for TKG.
Borrowing availability is determined by an advance rate on eligible accounts
receivable and inventory. The line of credit includes sublimits for letters of
credit and bankers acceptances aggregating $13,000,000, $4,000,000 and
$3,000,000 for GCI, LLK and TKG, respectively. Borrowings bear interest at the
bank's base rate (8.5% at March 31, 1998) plus 2% for GCI and TKG borrowings and
plus 1% for LLK borrowings or, at the Company's option, an adjusted LIBOR rate.
In addition, the Company is charged an Unused Line fee of .25% of the unused
portion of the revolving loans.
At March 31, 1998, the Company had $5,501,000 of cash borrowings outstanding
and outstanding letters of credit totaling $100,000. Available borrowings under
the line of credit aggregated $7,059,000 at March 31, 1998. Borrowings are
collateralized by substantially all assets of the Company. The line of credit
agreement contains, among other things, restrictive financial covenants which
require the Company to maintain certain leverage and current ratios (computed
annually and quarterly), an interest coverage ratio (computed annually) and to
achieve certain levels of annual income. The agreement also limits GCI annual
capital expenditures and prohibits the payment of dividends. At March 31, 1998,
the Company was in compliance with these covenants or had received a waiver from
the bank for certain covenant violations.
S.L.S. and Harlyn have available lines of credit aggregating 72,000,000 Thai
baht (approximately $1,532,000 at March 31, 1998). Outstanding borrowings bear
interest at rates ranging from 15% to 18.75%.
Note 5: Changes in Accounting Principles
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No 130, "Reporting Comprehensive Income". This statement requires that
all items recognized under accounting standards as components of comprehensive
earnings be reported in an annual financial statement that is displayed with the
same prominence as other annual financial statements. This statement also
requires that an entity classify items of other comprehensive earnings by their
nature in an annual financial statement. For example, other comprehensive
earnings may include foreign currency translation adjustments and unrealized
gains and losses on marketable securities classified as available-for-sale.
Annual financial statements for prior periods will be reclassified, as required.
The Company's total comprehensive income (loss) is as follows:
<PAGE>
<TABLE>
<CAPTION>
March 31, 1998 March 31, 1997
<S> <C> <C>
Net income (loss) $ 239,000 $ (3,839,000)
Foreign currency translation gain (loss) 1,849,000 65,000
------------- -------------
Total Comprehensive income (loss) $ 2,088,000 $ (3,774,000)
</TABLE>
Note 6: Goodwill
As of January 1, 1998, the Company determined that, due to operating experience
of Krasner Group, Inc. and Georgetown Collection, Inc. since the acquisition of
these entities, the estimated useful life of goodwill associated with the
acquisitions should be increased to 20 years. The effect of this change was an
increase in net income of $66,000 or $.003 per share, for the three months ended
March 31, 1998.
Note 7: Inventories
As of March 31, 1998 and December 31, 1997 inventories consisted of the
following:
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
<S> <C> <C>
Finished goods $10,962,000 $ 8,968,000
Work-in-progress 166,000 342,000
Raw materials 1,163,000 1,541,000
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$12,291,000 $10,851,000
</TABLE>
Note 8: Gain on sale of investment
On March 17, 1998, the Company completed a $3,000,000 transaction whereby it
sold 2% of Pure Energy Corporation in exchange for 6% interest in Phoenix
Environmental, Ltd. a development-stage corporation. The Company received
34,700 shares of Phoenix Environmental, Ltd. in exchange for 1,364 shares of
Pure Energy Corporation. No cash was exchanged in the transaction. The
transaction resulted in a gain to the Company of $2,847,000. Phoenix
Environmental, Ltd. has developed a patented, proprietary technology that
converts steel mill by-products and other steel-based waste streams into a
marketable industrial product.
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 March 31, 1998 and 1997
Net Sales
Net sales decreased to $11,482,000 for the three months ended March 31, 1998
from $13,441,000 for the three months ended March 31, 1997, a decrease of
$1,959,000, or 14.6%. Of the $1,959,000 decrease, $1,524,000 was attributable
to decreases in net sales from the Company's jewelry division and $435,000 from
the Company's collectible products division. The decrease in net sales from the
jewelry division is made up of a $1,175,000 decrease in fashion jewelry and
accessories sales and a $349,000 decrease in fine jewelry sales. The decrease
in both fine and fashion jewelry sales is primarily attributable to decreased
<PAGE>
programming time in the first quarter of 1998 over 1997 on the home shopping
channels, major distribution channels for both fine and fashion jewelry and
accessories. Also impacting the decrease in fine jewelry sales was the economic
situation in Asia, where the Company brokers and sells semi-precious stones.
The decrease in sales of collectible products was primarily attributable to
decreased airtime in the first quarter of 1998 on home shopping channels for the
Company's celebrity driven products. The decrease in airtime on the home
shopping channels was attributed to higher than expected levels of inventory
built-up in 1997 with the Company's major customers in the home shopping
industry.
GROSS PROFIT
Gross profit decreased to $6,626,000 for the three months ended March 31, 1998
from $6,797,000 for the three months ended March 31,1997, a decrease of $171,000
or 2.5%. As a percentage of net sales, gross profit increased to 57.7% in 1998
from 50.6% in 1997. The increase in gross profit percentage in 1998 over 1997
is due to the majority of the Company's sales mix , or 53.0%, coming from
collectible products sold via direct response. Direct response sales are sales
from catalog mailings and print advertisements ran by the Company. Direct
response sales, as opposed to wholesale, business to business sales, generate
higher margins to the Company as the products are sold at retail prices to
individual consumers. The remaining net sales from the Company, outside of the
portion contributed by direct response sales, come from wholesale sales. The
Company's gross profit percentage will vary depending on the volume of 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 $2,413,000 for the three months ended March 31,
1998 from $1,577,000 for the three months ended March 31, 1997 due primarily to
the expansion of advertising costs among more collectible brands in 1998 over
1997. The Company in 1998 is expanding the number of products marketed through
the direct response marketing channel. 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 decreased to $5,771,000 for
the three months ended March 31, 1998 from $6,269,000 for the three months ended
March 31, 1997, a decrease of $498,000 or 7.9%. The percentage of revenues
represented by these expenses increased from 46.6% in 1997 to 50.3% in 1998,
primarily due to the decrease in revenues of $1,959,000 from the comparative
quarter in 1997. The decrease in selling, general and administrative expenses
is primarily attributable to the Company's focus on reducing its fixed, general
and administrative costs of its collectible products division in the form of
payroll reductions and aggressive consolidation of facilities, combined with
improvements in operational efficiencies over the comparative 1997 quarter.
OTHER INCOME (EXPENSE)
Other income (expense) increased to $2,830,000 for the three months ended March
31, 1998 from $(113,000) for the three months ended March 31, 1997, an increase
of $2,943,000. The increase relates primarily to a $2,847,000 gain recognized
from the sale of a portion of the Company's investment in Pure Energy
Corporation. The Company received, as consideration for the interest in Pure
Energy Corporation transferred, an interest in Phoenix Environmental, Ltd., a
development-stage corporation which has developed a patented, proprietary
technology that converts steel mill by-products and other steel-based waste
streams into a marketable industrial product.
<PAGE>
INTEREST INCOME (EXPENSE)
Interest expense decreased to $581,000 for the three months ended March 31, 1998
from $3,093,000 for the three months ended March 31, 1997, a decrease of
$2,512,000, or 81.2%. Of the decrease in interest expense of $2,512,000 in 1998,
$2,490,000 relates to a combination of a restructuring charge and conversion
discounts which occurred in the first quarter of 1997 associated with the
Company's 1996 debenture offering. The remaining decrease of $22,000 of interest
expense related primarily to reductions in the Company's net bank borrowings in
1998.
NET INCOME
As a result of the foregoing factors, net income increased to $239,000 for the
three months ended March 31, 1998 from a net loss of $3,839,000 for the three
months ended March 31, 1997, a change of $4,078,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations from internally generated cash flow,
short-term borrowings and equity financings. As of March 31, 1998, the Company
had working capital of $13,127,000, versus working capital of $15,883,000 at
March 31, 1997.
Through the first quarter of 1998, the Company has continued to invest most of
its available funds generated from operations and raised in its 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 March 31, 1998, the principal balance outstanding on the
New Debentures was $4,900,000.
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. The Company is in the process of expanding distribution
and product categories and is limited in its ability to borrow on the
$20,000,000 credit facility based upon current levels of inventory and
receivables. As a result of the limitations on the usage of the $20,000,000
credit facility, the Company has looked to outside financing to supplement the
credit facility. The Company is currently in the process of supplementing the
credit facility with private financing.
Cash flow used in operations was $3,344,000 due to the increases in inventory,
prepaid expenses, and accounts receivable during the three months ended March
31, 1998. Cash flows used in investing activities was $252,000 for the three
months ended March 31, 1998, primarily related to upgrades of computer
equipment. Cash flows provided by financing activities was $2,907,000 in 1998
due primarily to borrowings both the $20,000,000 credit facility. The current
ratio for the Company decreased from 1.98 at December 31, 1997 to 1.84 at March
31, 1998.
<PAGE>
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.
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: May 13, 1998 By: \S\Anthony P. Shutts
Anthony P. Shutts
Chief Financial Officer
Signing on behalf of the registrant and as
principal financial and accounting officer.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> MAR-31-1998 MAR-31-1997
<CASH> 683,000 2,251,000
<SECURITIES> 0 0
<RECEIVABLES> 9,589,000 10,802,000
<ALLOWANCES> 0 0
<INVENTORY> 12,291,000 9,716,000
<CURRENT-ASSETS> 31,353,000 7,144,000
<PP&E> 5,989,000 6,733,000
<DEPRECIATION> 0 457,000
<TOTAL-ASSETS> 56,814,000 53,746,000
<CURRENT-LIABILITIES> 18,226,000 17,652,000
<BONDS> 11,139,000 10,681,000
0 0
0 0
<COMMON> 27,357,000 19,489,000
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 56,814,000 53,746,000
<SALES> 11,482,000 13,441,000
<TOTAL-REVENUES> 11,482,000 13,441,000
<CGS> 4,856,000 6,644,000
<TOTAL-COSTS> 6,626,000 6,269,000
<OTHER-EXPENSES> 553,000 1,577,000
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 581,000 3,093,000
<INCOME-PRETAX> (138,000) (4,560,000)
<INCOME-TAX> 32,000 (603,000)
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 239,000 (3,839,000)
<EPS-PRIMARY> .01 (.23)
<EPS-DILUTED> .01 (.23)
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