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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the fiscal year ended December 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO 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 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
LAKE FOREST, CA 92630
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 595-7900
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, No Par Value
(title of class)
Indicate by check mark whether the registrant (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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not 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-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant on April 4, 2000 was $9,379,755. 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 April
4, 2000 was 46,987,728.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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TABLE OF CONTENTS
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ITEM PAGE
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PART I
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1. BUSINESS............................................................................. 3
A. History..................................................................... 3
B. General Business............................................................ 3
2. PROPERTIES........................................................................... 11
3. LEGAL PROCEEDINGS.................................................................... 11
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................. 12
PART II
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS................ 13
6. SELECTED FINANCIAL DATA.............................................................. 14
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................................ 15
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................................... 21
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............................................. 21
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................................. 22
11. EXECUTIVE COMPENSATION.............................................................. 24
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...................... 28
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................................... 29
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K...................... 30
SIGNATURES...................................................................... 31
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PART I
This Annual Report on Form 10-K 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
GENERAL
The L.L. Knickerbocker Co., Inc. (the "Company" or "Knickerbocker") was formed
in 1985 by Louis L. Knickerbocker, Chairman, President, and Chief Executive
Officer, and Tamara Knickerbocker, the former Executive Vice President, under
the name International Beauty Supply, Ltd., a California corporation (IBS). In
May of 1993, the name of International Beauty Supply, Ltd. was changed to The
L.L. Knickerbocker Co., Inc. and succeeded to the operations, assets and
liabilities of Knickerbocker Creations, Ltd, a California corporation formed in
1990 to operate primarily in the collectible doll and teddy bear industries.
The Company is a designer, manufacturer, importer, marketer, and distributor of
high quality, branded collectibles and collectible toys, specialty giftware
products, fashion jewelry and fine jewelry.
Knickerbocker markets its branded collectible products through diverse
distribution channels including a growing network of independent gift and
collectible retailers, electronic retailing, direct catalog sales, and an
international distributor base. The Company strives to deliver genuine value to
the consumer through innovative product design and award-winning quality. The
Company has developed relationships with a variety of manufacturers that have
consistently delivered high-quality products. Most of the manufacturing of
collectible items is outsourced to manufacturers in the Far East and Southeast
Asia.
Knickerbocker's jewelry operations consists of designing, manufacturing, and
marketing fashion and fine jewelry through electronic retailing, primarily QVC,
and to an international customer base in 37 foreign countries. The Company has
launched a comprehensive Internet site, Gemopolis.com, to market its products
directly to customers through the Internet. The operations of the jewelry
segments are vertically integrated, and most of the design, stone sourcing,
advanced stone cutting, and jewelry manufacturing is performed by in-house
personnel and facilities.
Knickerbocker holds passive investments in two unrelated companies, Pure Energy
Corporation, a privately-held corporation and Ontro, Inc., a publicly-traded
corporation.
REORGANIZATION
On August 23, 1999 (the Petition Date), an involuntary petition under Chapter 7
of the United States Bankruptcy Code (the Bankruptcy Code) was filed against
Knickerbocker by three of it's creditors. On December 3, 1999 (the Conversion
Date), Knickerbocker (unconsolidated) filed an election to convert to
reorganization under Chapter 11 of the Bankruptcy Code (Chapter 11).
Knickerbocker continues to conduct normal business operations as a
debtor-in-possession subject to the jurisdiction of the United States Bankruptcy
Court for the Central District of
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California (the Bankruptcy Court). As a debtor-in-possession, Knickerbocker may
not engage in transactions outside the ordinary course of business without
approval, after notice and hearing, of the Bankruptcy Court.
Under Chapter 11, actions to enforce claims against Knickerbocker are stayed if
the claims arose, or are based on events that occurred, on or before the
Petition Date, and such claims cannot be paid or restructured prior to the
conclusion of the proceedings or approval of the Bankruptcy Court. Other
liabilities may arise or be subject to compromise as a result of rejection of
executory contracts, including leases, or the Bankruptcy Court's resolution of
claims for contingencies and other disputed amounts. Substantially all
liabilities as of the Petition Date are intended to be dealt with in accordance
with a plan of reorganization to be filed by the Company that will be voted upon
by all classes of impaired creditors and approved by the Bankruptcy Court. The
Creditor's Committee has been formed and it reviews non-ordinary course of
business transactions and is participating in the formulation of the plan of
reorganization.
The Company has estimated the amount of prepetition liabilities subject to
settlement under reorganization proceedings; however the Company anticipates
that claims filed with the Bankruptcy Court by the Company's creditors will be
reconciled to the Company's financial records. This reconciliation process
and/or the termination of other contractual obligations and the settlement of
disputed claims may create additional prepetition liabilities. Knickerbocker
continues to accrue, but not pay, interest on secured debt at the contractual
interest rate although principal payments have generally been suspended.
On March 30, 2000, the Company filed a Plan of Reorganization and Disclosure
Statement with the United States Bankruptcy Court, pursuant to which
Knickerbocker would emerge from Chapter 11 bankruptcy proceedings. The
Bankruptcy Court scheduled a hearing on the Disclosure Statement for May 5,
2000.
COLLECTIBLE DOLLS, FIGURINES, TEDDY BEARS AND COLLECTIBLE TOYS
INDUSTRY OVERVIEW
Collectibles are identified as any item that is manufactured and marketed solely
for the enjoyment of the collector. Collectibles include figurines, dolls,
collector plates, plush and die cast toys, sports/entertainment memorabilia,
cottage/village reproductions and other decorative or limited edition items that
are intended for collecting. Unity Marketing, a collectible industry market
research firm not affiliated with Knickerbocker, estimates that consumer sales
of collectibles in the United States in 1998 totaled $10.7 billion and has grown
at a compound annual rate of 10% for the past five years. Unity Marketing
currently estimates that women between the ages of 35 and 64, with a median age
of 51, encompass the majority of collectors. This group, which we believe
constitutes a substantial portion of our collectors, is projected by the U.S.
Census Bureau to grow approximately 12% from 1998 to 2005. Unity Marketing
expects that growth in the collectibles industry will be driven by the increased
number of middle-aged female collectors and higher spending habits of the baby
boom generation.
COLLECTIBLE BRANDS
The Knickerbocker Toy Company. The 77-year-old Knickerbocker name is well
recognized in the toy and collectible teddy bear industries and is the Company's
"house" brand. The Company began selling collectible Knickerbocker teddy bears
in October 1986, and was issued the trademark "Knickerbocker" for toys, dolls,
plush stuffed animals and marionettes in January 1996. The collection offers
quality collectible products that have primarily been marketed to retail outlets
nationwide. The Company intends to extend product categories for the
Knickerbocker brand beyond teddy bears in 2000.
Marie Osmond Fine Porcelain Collector Dolls. This collection consists of a
diverse collection of more than 420 different styles of porcelain dolls 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 eighth anniversary, is among the top collectible
doll lines marketed on QVC. To continue to generate support for her brand, Marie
Osmond makes scheduled appearances at retail stores throughout the United States
to promote the collection. On occasion, Marie Osmond appears on QVC in the
United Kingdom and in Germany.
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Magic Attic Club. The Magic Attic Club (MAC) is a series of vinyl dolls, doll
clothing and accessories, all of which are based on imaginative theme books,
marketed primarily through a catalog. The books and Magic Attic Club catalogs
target girls in the U.S. between the ages of 6 and 12. The items in the catalog
do not vary much year to year, which keeps creative costs low and minimizes
inventory difficulties. Repeat customers can be highly profitable. The Company
has determined that the Internet is a viable distribution channel for the Magic
Attic Club and intends to focus resources on building Internet distribution for
Magic Attic Club products. An integral part of the Magic Attic Club's appeal is
a series of 32 illustrated novels based on five girls and their adventures. Each
Magic Attic Club book contains a mail-in card to request a free catalog listing
products offered by the Magic Attic Club.
Richard Simmons Collectibles. In 1998 the Company launched a new line of dolls
and resin figurines with Richard Simmons. The largest line, Collection of the
Masters by Richard Simmons, debuted at the 1998 International Toy Fair in New
York and began to be mass-marketed, predominately at retail, in October of 1998.
Richard Simmons also successfully debuted his new line on QVC late in 1998.
Somers & Field Collection. The Company has an exclusive license agreement to
manufacture and distribute the line of dolls designed by Laura Meisner and Doug
James under the Somers & Field Collection. The collection is vinyl and the
concept is based on "mod" British friends, Willow Somers and Daisy Field whose
fathers co-own a fashionable department store. Costumes and accessories
highlight fashion trends from the 1960's.
Terri Lee. The Company has an exclusive license to manufacture and distribute
the line of dolls, fashion apparel and accessories with Terri Lee and
Associates. The Terri Lee concept is derived from, and is a reproduction of, the
original 1940's doll. Terri Lee, in 1940's, was considered among the top toy
dolls of the era. Original molds were used in the reproduction of the doll and
the clothing and accessories will be designed with consideration to original
designs as well as interpretations of those designs.
JEWELRY PRODUCTS
INDUSTRY OVERVIEW
The Jewelry market consists of two major categories: Fine and Fashion. Fine
jewelry is manufactured with precious metals (gold, sterling silver, platinum)
with or without gemstones (precious or semiprecious). Natural and cultured
pearls are also considered fine jewelry. According to the World Gold Council, in
1998 retail sales of gold jewelry grew by almost 10% on a unit basis to 162
million units and by over 8% on a dollar basis to $13.7 billion. According to
Accessories Magazine, sterling silver jewelry retail sales increased
approximately 15% in 1997 to $2.4 billion. Fashion jewelry is manufactured with
non-precious metals (often gold plated), with or without imitation stones and
pearls, and is the largest category of the women's accessories market with
sales, according to Accessories Magazine, in the United States estimated at $2.6
billion dollars.
FASHION JEWELRY AND ACCESSORIES BRAND
Approximately 58% of the Company's jewelry revenues come from fashion jewelry
sales. The Company markets these high-quality, designer fashion jewelry lines
and accessories primarily through QVC. Knickerbocker has its own fashion jewelry
manufacturing facility in Central Falls, Rhode Island but outsources, to a
limited extent, certain non-proprietary manufacturing functions to southeast
Asian manufacturers. The Company's fashion jewelry brands are as follows:
Kenneth Jay Lane: Jewelry's Living Legend -450 different styles of fashion
jewelry at retail prices ranging from $17 to $198. Kenneth Jay Lane is the
designer and spokesperson for the collection, which celebrated its eighth
anniversary on QVC in 1999.
The Nolan Miller Glamour Collection - 400 different styles of fashion jewelry at
retail prices ranging from $20 to $280. Nolan Miller is the designer and
spokesperson for the collection, which celebrated its seventh anniversary on QVC
in 1999.
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The Dennis Basso Boutique - 90 different styles of fashion accessories at retail
prices ranging from $20 to $220. Dennis Basso is the designer and spokesperson
for the collection, which celebrated its sixth anniversary on QVC in 1999.
Phillip Bloch - The Company has signed an agreement with Hollywood stylist
Phillip Bloch for a line of fashion jewelry, which is expected to appear on QVC
in the summer of 2000.
FINE JEWELRY BRAND
The Company's fine jewelry operation manufactures and markets gold, diamonds,
emeralds, rubies and other semi-precious stones through a sales force with a
presence in 37 countries, with a primary geographic focus in Western Europe and
South America. With expertise in stone sourcing and advanced cutting techniques
of specialty stones, the Company also generates revenue by supplying other
jewelry manufacturers with loose cut stones. The Company is recognized for
creating proprietary technology that enhances the color of gemstones and is
known in particular for its Blue Topaz stones which are exported all over the
world. In addition, the Company produces an assortment of fine jewelry in both
sterling silver and gold for the television retailer, QVC, and other worldwide
recognized television shopping companies such as TVSN Australia and QVC England.
The Company has developed an Internet site, Gemopolis.com, to offer customer
service and product information to its worldwide customer base.
CONSUMER BRANDS DISCONTINUED
After a review of the Company's brand focus it was determined that it would be
in its best interest to discontinue the product development, manufacturing and
marketing of those programs not meeting certain sales expectations and re-focus
the brand selections on those that better suited the Company's current core
products. In 1999, the Company discontinued the Georgetown, Birmingham Bear,
Candy Spelling's Fantasy Dolls, Universal Studio's Edith Head Collection, and
Bob Mackie Legendary Beauties brands. The Company entered into an agreement to
discontinue marketing the Annette Funicello brand as of March 31, 2000. The
Company also discontinued the Anushka line of skin care products in early 2000.
Additionally, the Company is currently in litigation with Richard Simmons, Inc.
to determine whether it will continue to market the Richard Simmons brand of
collectibles.
MARKETING STRATEGIES
The Company's marketing strategy is to develop products and build brands that
are marketed through diverse channels of distribution. In implementing this
strategy, the Company plans to continue to focus on building brand recognition,
developing new and innovative products, and selling those branded products
through appropriate channels of distribution. Generally, new brand programs are
tested conservatively prior to any roll-out.
The diverse channels of distribution of the branded products includes, but are
not limited to, electronic retailing through the television shopping industry,
retail outlets, direct mail, catalogs, Internet, and distributors domestically
and internationally. Each brand has its own distribution strategy based on the
product; however, where possible, the distribution channels cross over from
brand to brand. The wide variety of branded items and distribution channels
provides diversification to the Company's risk profile.
TELEVISION SHOPPING CHANNELS
Television Shopping Channels, as well as independent Infomercials, make up this
segment of the direct marketing industry.
The largest television shopping cable network is QVC. The shopping networks
purchase products from vendors and generally require the vendors to ship the
products to the networks' warehouses before the networks will sell the items on
the air. Generally, the format of the home shopping channels is to present
approximately 12 items per hour. Each hour can be 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
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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, such as jewelry and collectibles, and build
brand recognition within those product segments. Television shopping represents
approximately 40% of the Company's 1999 Collectible sales and 55% of 1999
Jewelry sales. Additionally, sales to QVC accounted for 45%, 25% and 29% of the
Company's consolidated revenues in 1999, 1998 and 1997, respectively.
INTERNET COMMERCE
The Company also maintains a corporate and a product web site on the World Wide
Web. The Company uses the Internet to give potential consumers the ability to
see a multiplicity of product and product specials and simultaneously order
without using the traditional marketing routes.
TRADITIONAL RETAIL AND INTERNATIONAL DISTRIBUTORS
The Company markets to a wide variety of traditional retail outlets and to the
less traditional catalog retailers and international distributors. The Company
expanded its outside sales representative force domestically in 1998 and
currently covers the entire United States with defined sales territories. In
addition, the Company continues to market to specialty stores and other
customers such as Disney via its own internal sales organization and retail
support group. International distributors make up another portion of the
Company's collectible sales primarily marketing in the United Kingdom, Germany,
and other Benelux countries.
CATALOGS
The Company markets its Magic Attic Club brand by catalog distribution. The
catalog offers the consumer a chance to see the many accessories available for a
Magic Attic Doll and provides an entertainment element, with imaginative stories
and product displays. These catalogs are mailed primarily to repeat buyers, but
are also mailed to prospective customers who would like to see the multiple
product offerings available.
PRODUCTION PROCEDURES
CONTRACTED PRODUCTION
The Collectibles and some of the Jewelry brand managers develop products, locate
an appropriate contract manufacturing facility and prepare samples, which are
presented to the customer for approval. Upon approval of the samples, the
Company issues a purchase order to the manufacturer for the desired quantity of
the product. In some cases, the purchase order is secured by an irrevocable and
transferable letter of credit from the customer. All goods are inspected for
quality by either in-house quality assurance personnel or by an independent
quality assurance resource prior to shipment.
COMPANY-OWNED PRODUCTION
The Company manufactures fashion jewelry at its own 26,000 square-foot-facility
in Rhode Island. Almost all of the fashion jewelry manufacturing is completed
against open purchase orders.
The Thailand jewelry operation manufactures fine jewelry for a diverse group of
international distributors and wholesalers, including the television shopping
industry. The majority of goods are manufactured in the Company's fully
integrated 35,000 square-foot-facility. The Company's 3,500-square-foot showroom
and the design and development divisions are located in the jewelry district of
Bangkok, making it convenient for customers to visit the showroom, inspect the
product lines and develop future programs with the Company's skilled design
team.
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OPERATIONS STRATEGIES (CONSOLIDATION EFFORTS)
The company has recognized that acquisitions made in 1996 would be better
managed if those operations were consolidated to maximize efficiency in its
marketing and development strategy. In 1998 the Company embarked on a
restructuring plan that would consolidate or restructure the various operating
subsidiaries into more streamlined and focused marketing and development
divisions.
The Company began its consolidation with the closure of Magic Attic Press's
(MAP) New York Office. The Company realized that its future in publishing for
the Magic Attic Brand line would be better served if the book operations were
outsourced. In May 1998, the Company entered into a marketing and distribution
agreement with Millbrook Press, Inc. of Brooklyn, New York. Any future
publishing of the existing series of books will be handled by third party
arrangement enabling the company to realize cost savings by reducing overhead
tied to the MAP division.
In November 1998, the Company decided to restructure its fashion jewelry
manufacturing operations by shifting certain non-proprietary manufacturing
functions to Southeast Asia and to domestic contractors. The Company's
manufacturing facility in Rhode Island has been reorganized to provide product
development and proprietary manufacturing functions.
During the first half of 1999, the Company completed the consolidation of its
Georgetown and Magic Attic Club brands, which were previously headquartered in
Portland, Maine, into the Company's California operations. By completing the
consolidation of production and operations in the U.S., the Company recently
closed its overseas Trading Office in China and has elected to manage overseas
production either factory-direct or through its California sourcing group.
As a result of these consolidation efforts, manpower in the United States over
the last two years has been reduced by approximately 60%. In addition to
streamlining manpower the Company has reduced other employee-related costs as
well as facilities costs worldwide.
EQUITY INVESTMENTS
Knickerbocker holds passive investments in two unrelated, independent companies,
as follows:
PURE ENERGY CORPORATION
The Company holds an equity interest in Pure Energy Corporation (PEC). Other
shareholders include PEC's founders and officers, Donaldson, Lufkin & Jenrette
(DLJ), an investment banking firm and private individuals.
PEC has developed a cleaner-burning alternative automotive motor fuel designed
in response to the more stringent emission standards and vehicle purchase
requirements of the Energy Policy Act of 1992 (EPACT) and the Clean Air Act
Amendment of 1990 (CAAA). The fuel is planned to be produced regionally,
substantially from renewable biomass, and distributed through existing
infrastructure. Currently produced flexible fuel vehicles (FFVs) can operate on
the fuel. PEC's strategy is to serve fleet customers initially and eventually a
broader segment of the motoring public. PEC has the exclusive worldwide license
from Princeton University to commercialize the fuel.
ONTRO, INC. (FORMERLY SELF-HEATING CONTAINER CORP.)
Knickerbocker holds an equity interest in Ontro, Inc. (Ontro), engaged in the
development of integrated thermal containers. Ontro has the rights to exploit a
unique propriety technology which it has incorporated into a proposed product
line of fully contained self-heating beverage containers designed to heat liquid
contents such as coffee, tea, hot chocolate, soups and baby formula. Ontro
entered into an evaluation agreement with Nestle which allows Nestle an
exclusive period to review Ontro's designs and technology in order to determine
Nestle's interest in acquiring rights for the commercial use of the self-heating
food and beverage containers and to cooperate with Ontro in evaluating certain
commercial uses and markets for the technology and includes an obligation to pay
for
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one-half of the cost of certain market research studies that are currently
underway.
Due to the development stage nature of Ontro, Inc., the price of the product has
not been established. The product heats the contents of the container only one
time and is not renewable. The container heats the beverage to a temperature of
180 degrees. Ontro, Inc. had no sales during 1999.
In March 2000, the Company sold 228,600 shares of Ontro, Inc. for net proceeds
of approximately $486,000.
SUMMARY OF REVENUE BY PRODUCT LINE
In 1999, the Company's revenue was $42,165,000. The revenue by product line in
1999 is as follows:
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Category $000's Percent
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Collectible dolls and bears $ 24,355 57.8%
Fashion jewelry and accessories 10,405 24.7%
Fine jewelry 7,405 17.5%
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Total $ 42,165 100%
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MATERIAL CONTRACTS
RICHARD SIMMONS
On February 1, 1999, the Company entered into a License Agreement with Richard
Simmons, Inc. 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 collectibles endorsed by Richard Simmons. The contract is currently
in litigation to determine if the Company will continue to market the Richard
Simmons brand of collectibles.
CELLO, INC.
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. The initial term of the
Agreement terminated in January 1998, and the Agreement automatically renewed
for an additional term through January 2001. The Company, in 1999, amended the
Agreement to discontinue marketing Annette Funicello products as of March 31,
2000.
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, for a
minimum of eight personal appearances per year. The Agreement is for a five-year
term, and expired on April 1, 1998. The Company has exercised its option for the
renewal of the Agreement for an additional term through April 2003. The Company
is currently facing a challenge by
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Marie, Inc. to terminate the contract. The Company is vigorously defending its
position and desires to honor the contract through maturity of the contract. To
the extent the Company is not successful in defending its position and the
contract is terminated there could be a material adverse impact on the Company's
future results of operations.
RG INTERNATIONAL, LIMITED
On March 7, 2000, the Company entered into a sourcing agreement with RG
International, Limited (RG), whereby RG will act as the Company's exclusive
sourcing agent for collectibles brands in the Middle East and Asia, excluding
Thailand. The term of the RG agreement ends on the fourth anniversary of the
effective date of the agreement. The duties performed by RG include overseeing
the manufacture of the Company's products, performing quality and compliance
inspections, and coordination with the U.S. headquarters on all facets of
production. RG will receive a percentage fee based upon the cost of items
sourced through RG during the contract period. The agreement with RG also
provides a royalty payment on any product concepts RG provides to the Company
over the course of the agreement. The agreement is subject to approval by the
Bankruptcy Court.
TRADEMARKS AND LOGOS
The Company has the right to use the trademark names of the following
spokespersons and celebrities currently under contract: Marie Osmond, Richard
Simmons, Nolan Miller, Kenneth Jay Lane, Dennis Basso and Phillip Bloch. The
Company has also been issued trademarks under the following names: Somers &
Field and Magic Attic Club.
Trademark applications have been filed for: Adorabell, Beauty Bug Ball,
Collection of the Masters, Folkbook Friends, Greeting Card Treasures, KL,
Knickerbocker, Pendant Collection, Pendant Press, Storybook Bears by
Knickerbocker, Storybook Dolls by Knickerbocker, Teddy Tales by Annette
Funicello and Webbie Debbie.
COMPETITION
The collectibles 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 the
collectibles market are difficult to distinguish because the Company is involved
in five types of distribution: Television Shopping, Print Media Advertising,
Traditional Retail, Catalogs and Internet. The Company feels, however, that its
main competitors are Ashton-Drake, Hamilton Mint, Franklin Mint, Mattel, the
Boyds Bears, and JMAM, Inc. The Company also competes with a wide variety of
wholesalers, retailers and other direct marketers.
EMPLOYEES
The Company employs a total of 503 employees.
The Company had 58 full-time employees at its main office in Lake Forest,
California as of March 24, 2000, consisting of 3 executives, 6 product
development, 7 sales, 11 administrative, 13 customer service, 1 marketing and 17
warehouse employees.
The Company has 6 full-time employees at its Krasner Group, Inc. office in New
York, New York as of March 24, 2000, consisting of 2 executives and 4 general
sales and office administrative employees.
The Company has 47 full-time employees at its Charisma Manufacturing Company,
Inc. factory in Central Falls, Rhode Island as of March 24, 2000 consisting of 2
executives, 10 general sales and office administrative and 35 product
development, warehouse and factory employees.
The Company has 388 full-time employees at its L.L. Knickerbocker (Thai) Co.,
Ltd., offices and factory in Bangkok, Thailand as of March 24, 2000. The 388
full-time employees are comprised of 5 executives, 63 general sales and office
administrative and 320 factory/warehouse employees.
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ITEM 2. PROPERTIES
As of March 15, 2000, the Company had eight principal facilities where it leased
or owned an aggregate of 150,500 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
- -------- ------------------ ------- ---------
CORPORATE
<S> <C> <C> <C>
Lake Forest, CA Corporate headquarters, finance,
purchasing, service division
headquarters 51,000 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 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. LEGAL PROCEEDINGS
BANKRUPTCY PROCEEDING
On August 23, 1999 (the Petition Date), an involuntary petition under Chapter 7
of the United States Bankruptcy Code (the Bankruptcy Code) was filed against
Knickerbocker by three of it's creditors. On December 3, 1999 (the Conversion
Date), Knickerbocker (unconsolidated) filed an election to convert to
reorganization under Chapter 11 of the Bankruptcy Code (Chapter 11).
Knickerbocker continues to conduct normal business operations as a
debtor-in-possession subject to the jurisdiction of the United States Bankruptcy
Court for the Central District of California (the Bankruptcy Court). As a
debtor-in-possession, Knickerbocker may not engage in transactions outside the
ordinary course of business without approval, after notice and hearing, of the
Bankruptcy Court.
Under Chapter 11, actions to enforce claims against Knickerbocker are stayed if
the claims arose, or are based on events that occurred, on or before the
Petition Date, and such claims cannot be paid or restructured prior to the
conclusion of the proceedings or approval of the Bankruptcy Court. Other
liabilities may arise or be subject to compromise as a result of rejection of
executory contracts, including leases, or the Bankruptcy Court's resolution of
claims for contingencies and other disputed amounts. Substantially all
liabilities as of the Petition Date are intended to be dealt with in accordance
with a plan of reorganization to be filed by the Company that will be voted upon
by all classes of impaired creditors and approved by the Bankruptcy Court. The
Creditor's Committee has
11
<PAGE> 12
been formed and it reviews non-ordinary course of business transactions and is
participating in the formulation of the plan of reorganization.
On March 30, 2000, the Company filed a Plan of Reorganization and Disclosure
Statement with the United States Bankruptcy Court, pursuant to which
Knickerbocker would emerge from Chapter 11 bankruptcy proceedings. The
Bankruptcy Court scheduled a hearing on the Disclosure Statement for May 5,
2000.
LITIGATION
Plaintiff Michael Elam filed an action in Orange County Superior Court (Case No.
759883) on or about February 16, 1996, against Louis L. Knickerbocker, Tamara
Knickerbocker and the Company alleging causes of action for conversion, breach
of fiduciary duty, fraud, debitatus assumpsit, intentional interference with
contract, constructive trust, breach of oral agreement, specific performance,
money had and received, open book account and spoliation of evidence. The
plaintiff is seeking money damages and/or shares of stock of the Company ranging
between $500,000 and $35,000,000 as a result of prior business affiliations with
Mr. Knickerbocker, alleging that the Company is liable as a
successor-in-interest for the debts of Mr. Knickerbocker's prior companies, and
that Mr. Knickerbocker was obligated to allow the plaintiff to participate in
the Company when it was created. The defendants vigorously opposed the lawsuit.
A motion for summary judgment filed in August 1998 eliminated those causes of
action claiming an interest in the company's predecessor, Knickerbocker
Creations, Ltd. The case was set for trial on May 24, 1999. The Company entered
into an agreement with the plaintiff to settle the litigation in exchange for
shares of Pure Energy Corporation held by the Company with a carrying value of
$168,000. The Company has been unable to deliver the settlement amount due to
the bankruptcy proceeding. It is not certain how many, if any, shares in Pure
Energy Corporation the Company will be able to deliver in connection with the
settlement. The action is stayed pending the bankruptcy proceeding.
The Company brought claims against State Street Bank and Trust Company ("State
Street") in federal district court in Boston, Massachusetts (Civil Action No.
97-12573-NO, U.S. District Court, D. MA) for conversion, breach of contract,
unjust enrichment, a declaratory judgment and violation of Massachusetts General
Laws, c. 93A arising from State Street's wrongful retention of 72,188 shares of
the Company's common stock after the Company's obligations to State Street under
a Settlement Agreement of the prior indebtedness of Georgetown Collection, Inc.,
a subsidiary acquired in 1996, had been paid in full. The stock retained by
State Street had an original value of $617,000. State Street denies liability
and brought a counterclaim against the Company for breach of contract and
specific performance seeking $102,000 in damages, plus attorneys fees and costs.
Prior to the bankruptcy proceeding, the Company was in negotiations with State
Street Bank to settle the above matter. The action is stayed pending the
bankruptcy proceeding.
Finance Authority of Maine, Coastal Enterprises, Inc, and the Southern Maine
Economic Development District brought claims in federal district court in
Portland, Maine (Civil Action No.98-2235-8, U.S. District Court, D. Maine) for
breach of contract, indemnification and specific performance arising from the
Company's performance under certain settlement documents following the
acquisition of the subsidiary, Georgetown Collection, Inc., in 1996. The
plaintiffs are seeking an order requiring the Company to purchase 63,030 shares
of the Company's stock previously transferred to plaintiffs for $11.50 per
share, plus interest and attorneys fees. The Company answered and denied
liability on plaintiffs' claims. The plaintiffs moved for summary judgment, and
the motion is currently under advisement. The action is stayed pending the
bankruptcy proceeding.
The Company is involved in certain other legal and administrative proceedings
and threatened legal and administrative proceedings arising in the normal course
of its business. While the outcome of such proceedings and threatened
proceedings cannot be predicted with certainty, in the opinion of management,
the ultimate resolution of these matters individually or in the aggregate will
not have a material adverse effect on the Company.
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, 1999.
12
<PAGE> 13
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 OTC Bulletin Board under the symbol
"KNIC.OB". Prior to the Company's listing on the OTC Bulletin Board, the Company
was listed on the NASDAQ exchange since January 25, 1995. Previous to January
25, 1995, there was no public trading market for the Company's equity
securities.
On April 4, 2000, the common stock bid price closed at $.23 per share. The
closing bid price of the Company's stock on December 31, 1999 was $.07 per
share. The total volume of shares traded during the year ended December 31, 1999
was 134,510,100 shares. As of April 4, 2000, there were 162 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 1999 and 1998 as
reported by the OTC Bulletin Board and 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>
1999 1998
High $ Low $ High $ Low $
------ ----- ------ -----
<S> <C> <C> <C> <C>
First Quarter 1.19 .44 8.13 4.63
Second Quarter .59 .19 5.60 2.38
Third Quarter .22 .05 4.75 1.00
Fourth Quarter .11 .05 1.50 .44
</TABLE>
DIVIDENDS
The Company has never paid any dividends on its 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. The
Company's line of credit agreement prohibits the payment of dividends without
the prior written consent of the lender.
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.
13
<PAGE> 14
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data regarding the
Company, which is qualified by reference to, and should be read in conjunction
with, the consolidated financial statements and notes thereto (see "Index to
Consolidated Financial Statements" and Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations"). The statement of
operations and balance sheet data presented below has been derived from the
Company's consolidated financial statements. The Company's consolidated
financial statements as of December 31, 1999 and 1998 and for each of the three
years in the period ended December 31, 1999 have been audited by Deloitte &
Touche LLP, the Company's independent auditors, as indicated in their report,
which contains an explanatory paragraph regarding substantial doubt about the
Company's ability to continue as a going concern, included elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales $ 42,165 $ 60,427 $ 68,290 $ 42,095 $ 13,140
Cost of sales 25,155 29,383 30,790 21,451 6,327
-------- -------- -------- -------- --------
Gross profit 17,010 31,044 37,500 20,644 6,813
Operating expenses 25,426 51,412 39,542 16,794 4,767
-------- -------- -------- -------- --------
Operating (loss) income (8,416) (20,368) (2,042) 3,850 2,046
Loss on equity method investments 1,347 1,857 629
Other expense (income) 235 (47) (3,316) 62 (133)
Interest expense 1,814 3,658 4,831 1,205 27
Reorganization items 672
-------- -------- -------- -------- --------
Income (loss) before income taxes (11,137) (25,326) (5,414) 1,954 2,152
Minority interest in (loss) income of (274) 10 132
subsidiary
Income tax expense (benefit) 75 3,663 (1,047) 450 883
-------- -------- -------- -------- --------
Net (loss) income $(11,212) $(28,715) $ (4,377) $ 1,372 $ 1,269
======== ======== ======== ======== ========
Net (loss) income per share, diluted $ (.33) $ (1.46) $ (.24) $ .09 $ .10
======== ======== ======== ======== ========
Weighted average shares outstanding, 34,291 19,630 18,052 16,471 13,280
diluted
BALANCE SHEET DATA:
Working capital (deficit) $ 4,399 $ (7,785) $ 12,496 $ 15,702 $ 7,847
Total assets 26,586 38,742 50,961 57,572 11,214
Total debt 10,346 18,769 14,008 19,471
Stockholders' equity 2,375 3,268 24,725 24,263 8,600
</TABLE>
(1) The Company's consolidated financial statements include the results of
operations of Krasner Group, Inc.; S.L.S. Trading Co., Ltd. and Harlyn
International Co., Ltd.; and Georgetown Collection, Inc. since June 18,
1996; July 1, 1996; and October 18, 1996, respectively.
(2) Per share amounts and shares outstanding have been adjusted to reflect a
five-for-one stock split effected in August 1995.
14
<PAGE> 15
ITEM 7. 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-K.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0%
Cost of sales 59.7% 48.6% 45.1%
Gross profit 40.3% 51.4% 54.9%
Operating expenses 60.3% 85.1% 57.9%
Operating loss (20.0)% (33.7)% (3.0)%
Other (income) expense 4.9% 8.2% (4.9)%
Net loss (26.6)% (47.5)% (6.4)%
</TABLE>
Year ended December 31, 1999 compared to year ended December 31, 1998
- ---------------------------------------------------------------------
Net Sales
Net sales decreased to $42,165,000 for the year ended December 31, 1999 from
$60,427,000 for the year ended December 31, 1998, a decrease of $18,262,000, or
30.2%. The $18,262,000 decrease in annual net sales was comprised of decreases
of $18,688,000 in net sales from the mail-order and catalog-driven collectible
doll brands and $2,504,000 from the fine jewelry division, partially offset by
increases in net sales of $1,766,000 in the celebrity-driven collectible doll
brands and $1,164,000 from the fashion jewelry division. The $18,688,000
decrease in 1999 mail order and catalog-driven collectible doll sales was
primarily attributed to a substantial reduction in 1999 advertising spending.
Since 1997, the Company substantially reduced its annual mail order and catalog
advertising spending in order to reposition distribution of the Company's
collectible products to traditional and electronic retailers. The decrease in
net sales from the Company's fine jewelry program was primarily attributed to a
decline in orders from the Company's major fine jewelry customer in the home
shopping industry and a decline in orders from international distributors. The
increase in net sales from celebrity-driven collectible doll programs was due
primarily to increased sales to the Company's retail base of customers. The
increase in net sales from the fashion jewelry division was due primarily to
greater demand for designer-driven fashion jewelry through its electronic
retailing distribution. The Company continues to assess the potential of sales
expansion of existing products through new distribution channels, as well as
continuing to develop new product categories.
Gross Profit
Gross profit decreased to $17,010,000 for the year ended December 31, 1999 from
$31,044,000 for the year ended December 31, 1998, a decrease of $14,034,000, or
45.2%. As a percentage of net sales, gross profit for the year decreased to
40.3% in 1999 from 51.4% in 1998. The decrease in the gross profit percentage in
1999 from 1998 was due primarily to a change in the sales mix of products sold
by mail order and catalogs, or direct to the consumer, versus products sold at
wholesale prices through retail distribution and electronic retailing. In 1999,
18.9% of the Company's sales were directly to the consumer through mail order
and catalogs, versus 44.1% in 1998. Mail order and catalog 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. Therefore, the
Company's gross profit percentage will vary depending on the relationship of
direct response sales to total sales for the Company during the year. The
Company expects to further decrease the mail order and catalog sales in the
future.
Advertising Expense
Advertising expense decreased to $2,630,000 for the year ended December 31, 1999
from $14,196,000 for the
15
<PAGE> 16
year ended December 31, 1998, due primarily to the Company's planned reduction
in its mail order and catalog advertising campaigns. The Company is in the
process of repositioning distribution of its products away from mail order and
catalog distribution which require significant advertising spending to generate
sales. Included in advertising expense are advertisement printing costs, catalog
printing costs, media space in magazines, and advertisement creative and
development costs.
Selling Expense
Selling expense increased to $7,219,000 for the year ended December 31, 1999
from $7,029,000 for the year ended December 31, 1998, an increase of $190,000,
or 2.7%. As a percentage of net sales, selling expense increased from 11.6% in
1998 to 17.1% in 1999. The increase in selling expense is due primarily to
increases in celebrity royalty expense based upon higher sales in 1999 from
celebrity and designer-driven collectible and fashion jewelry products. Selling
expenses include royalty expense, commission expense, trade show expenses, and
other sales promotion expenses.
General and Administrative Expense
General and administrative expense decreased to $15,577,000 for the year ended
December 31, 1999 from $27,196,000 for the year ended December 31, 1998, a
decrease of $11,619,000, or 42.7%. The percentage of revenues represented by
these expenses decreased from 45.0% in 1998 to 36.9% in 1999. The decrease in
general and administrative expenses was due primarily to the consolidation of
operating facilities and overhead in the collectibles division which began in
1998 and concluded in early 1999.
Loss on Equity Method Investments
Loss on equity method investments decreased to $0 for the year ended December
31, 1999 from $1,347,000 for the year ended December 31, 1998. The major
components of the 1998 loss from equity method investments stem from the
Company's 50% interest in Arkenol Asia, LLC and its interest in Pure Energy
Corporation, both development-stage corporations. Under the equity method of
accounting, the Company recorded loss on equity method investments equal to the
investees' net loss multiplied by the Company's ownership percentage. Effective
April 1, 1998, the Company discontinued the application of the equity method to
its investment in Pure Energy Corporation due to a reduction in ownership
interest during 1998. Additionally, during the year ended December 31, 1998, the
Company wrote off its investment in Arkenol Asia LLC due to the inactivity of
the joint venture.
Other (Income) Expense
Other expense increased to $235,000 for the year ended December 31, 1999 from
income of $47,000 for the year ended December 31, 1998, a change of $282,000.
The primary reason for the change from 1998 to 1999 is that the 1998 comparative
amount included a net gain of $769,000 from the sale of a portion of the
Company's interest in Pure Energy Corporation, offset by a decrease in foreign
currency transaction losses related to the Company's Thailand operations, from
$333,000 in 1998 to $79,000 in 1999.
Interest Expense
Interest expense decreased to $1,814,000 for the year ended December 31, 1999
from $3,658,000 for the year ended December 31, 1998, a decrease of $1,844,000,
or 50.4%. The decrease in interest expense was due primarily to the maturity of
$4,600,000 of convertible debentures in January 1999, as well as additional
conversions of $6,119,000 of the 1997 and 1998 convertible debentures during
1999. Additionally, the Company's interest expense was lower due to lower
average borrowings on its line of credit. Included in interest expense for the
years ended December 31, 1999 and 1998, are noncash charges of $993,000 and
$2,183,000, respectively, that are classified as interest expense.
Income Tax Expense (Benefit)
Income tax expense decreased to $75,000 for the year ended December 31, 1999
from $3,663,000 for the year
16
<PAGE> 17
ended December 31, 1998, due primarily to a $3,451,000 valuation allowance on
deferred tax assets in 1998, due to recurring tax losses and uncertain future
taxable income. The remaining amount of income tax expense includes estimated
minimum state taxes payable based on factors other than income and foreign taxes
related to Thai operations.
Reorganization Items
Costs associated with the Company's Chapter 11 filing amounted to $672,000 for
the year ended December 31, 1999, which were comprised primarily of professional
fees. The Company anticipates that additional reorganization costs will be
incurred throughout the Chapter 11 reorganization.
Net Loss
As a result of the foregoing factors, net loss decreased to $11,212,000 for the
year ended December 31, 1999 from net loss of $28,715,000 for the year ended
December 31, 1998, a decrease in net loss of $17,503,000
Year ended December 31, 1998 compared to year ended December 31, 1997
- ---------------------------------------------------------------------
Net Sales
Net sales decreased to $60,427,000 for the year ended December 31, 1998 from
$68,290,000 for the year ended December 31, 1997, a decrease of $7,863,000, or
11.5%. The $7,863,000 decrease in annual net sales was comprised of decreases of
$7,986,000 in the Company's non-celebrity, direct response and catalog-driven
collectible doll programs and $2,466,000 in the Company's fashion jewelry
program, offset by increases in net sales of $1,838,000 in the Company's
celebrity-driven collectible doll program and $751,000 in the Company's fine
jewelry program. The decrease in non-celebrity collectible doll revenues was
primarily attributed to lower than expected response from the Company's catalog
mailings and direct response advertisement campaigns, combined with a planned
reduction from 1997 in direct response advertising spending in the second half
of 1998. The decrease in net sales from the Company's fashion jewelry program
was primarily attributed to lower dollar amount orders from the Company's major
customer in the home shopping industry, the primary distribution channel for the
Company's fashion jewelry. The increase in net sales from celebrity-driven
collectible doll programs is due primarily to increased sales from the Company's
retail base of customers, an area the Company focused on in the second half of
1998. The increase in fine jewelry sales related to an expanded customer base
established by the Company in 1998. The Company continues to assess the
potential of sales expansion of existing products through new distribution
channels, as well as continuing to develop new product categories.
Gross Profit
Gross profit decreased to $31,044,000 for the year ended December 31, 1998 from
$37,500,000 for the year ended December 31, 1997, a decrease of $6,456,000, or
17.2%. As a percentage of net sales, gross profit for the year decreased to
51.4% in 1998 from 54.9% in 1997. The decrease in the gross profit percentage in
1998 from 1997 is due primarily to a change in the sales mix of products sold
directly to the consumer, versus products sold by the Company at wholesale
prices. In 1998, 44.1% of the Company's sales were directly to the consumer
through catalogs and print advertisements, referred to as direct response sales,
versus 50.7% in 1997. 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. Therefore, the Company's gross
profit percentage will vary depending on the relationship of direct response
sales to total sales for the Company during the year. Correspondingly, should
the majority of the Company's sales come from fine and costume jewelry sales in
any year, 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 $14,196,000 for the year ended December 31,
1998 from $10,926,000 for the year ended December 31, 1997, due primarily to the
Company's expansion of its direct response advertising
17
<PAGE> 18
campaigns among more collectible brands in 1998 and its attempt, in early 1998,
to aggressively prospect for new customers for its Georgetown Collection
non-celebrity collectible doll brand. Additionally, the Company incurred higher
advertising costs in 1998 related to the expansion of its retail distribution
channel for the Company's products and the write off of approximately $1,643,000
of prepaid advertising and related costs in connection with the revised
marketing strategy for the Company's Georgetown and Magic Attic Club brands.
Included in advertising expense are advertisement printing costs, catalog
printing costs, media space in magazines, and advertisement creative and
development costs.
Selling Expense
Selling expense increased to $7,029,000 for the year ended December 31, 1998
from $6,488,000 for the year ended December 31, 1997, an increase of $541,000,
or 8.3%. As a percentage of net sales, selling expense increased from 9.5% in
1997 to 11.6% in 1998. The increase in selling expense is due primarily to
increases in trade show and commission expenses related to the Company's
expansion of its products into the retail distribution channel, offset by lower
variable royalty expense attributable to lower revenues in 1998. Selling
expenses include royalty expense, commission expense, trade show expenses, and
other sales promotion expenses.
General and Administrative Expense
General and administrative expense increased to $27,196,000 for the year ended
December 31, 1998 from $22,128,000 for the year ended December 31, 1997, an
increase of $5,068,000, or 22.9%. The percentage of revenues represented by
these expenses increased from 32.4% in 1997 to 45.0% in 1998. The increase in
general and administrative expenses as a percentage of revenues resulted
primarily from the 11.5% decrease in the revenue base in 1998 from 1997. The
increase in general and administrative expenses was due in part to higher
personnel costs due to the addition of members of management, and higher
operating costs associated with the Company's new headquarters in California and
jewelry facility in Thailand. Included in general and administrative expense in
1998 is approximately $2 million of legal costs incurred in connection with
various legal proceedings, of which approximately $1.4 million was incurred in
the fourth quarter.
Also included in general and administrative expense in the fourth quarter of
1998 is a $1 million goodwill impairment charge. This charge is the result of
the Company's review of the carrying value of goodwill related to the 1996
acquisition of Krasner Group, Inc. Based upon projected undiscounted cash flows
of Krasner Group, Inc. over the remaining goodwill amortization period, the
Company determined that goodwill aggregating approximately $1 million would not
be recoverable.
Restructuring Charge
In the fourth quarter of 1998, the Company recorded a restructuring charge of
$2,991,000, related to the consolidation of Georgetown Collection and Magic
Attic Club lines (collectively GCI) into the Company's California facility and
outsourcing of fulfillment and order processing for these brands. The
restructuring charge includes $2,342,000 for write-downs of certain long-lived
assets, including goodwill; $500,000 for lease termination payments, net of
estimated sub-lease income; and $149,000 for employee severance and termination
benefits. The write-down of long-lived assets includes the write-down to
estimated fair value of tangible assets to be disposed of ($909,000) and
elimination of goodwill associated with the GCI acquisition ($1,433,000) due to
nonrecoverability based upon projected undiscounted cash flows over the
remaining amortization period.
Loss on Equity Method Investments
Loss on equity method investments decreased to $1,347,000 for the year ended
December 31, 1998 from $1,857,000 for the year ended December 31, 1997. The
major components of the 1998 loss from equity method investments stem from the
Company's 50% interest in Arkenol Asia, LLC and its interest in Pure Energy
Corporation, both development-stage corporations. Under the equity method of
accounting, the Company recorded loss on equity method investments equal to the
investees' net loss multiplied by the Company's ownership percentage. Effective
April 1, 1998, the Company discontinued the application of the equity method to
its investment in Pure Energy Corporation due to a reduction in ownership
interest during 1998. Additionally, during
18
<PAGE> 19
the year ended December 31, 1998, the Company wrote off its investment in
Arkenol Asia LLC due to the inactivity of the joint venture.
Other (Income) Expense
Other income decreased to $47,000 for the year ended December 31, 1998 from
income of $3,316,000 for the year ended December 31, 1997, a change of
$3,269,000. The primary reason for the substantial change from 1997 to 1998 is
that the 1997 comparative amount included $1,280,000 of foreign currency gains
from transactions of the Company's Thailand operations, compared to foreign
currency transaction losses of $333,000 in 1998, due to fluctuations in the Thai
baht. Included in other income in 1997 is a net gain of $1,710,000 from the sale
of a portion of the Company's interest in Pure Energy Corporation, compared to
1998 net gain on sales of Pure Energy stock of $769,000.
Interest Expense
Interest expense decreased to $3,658,000 for the year ended December 31, 1998
from $4,831,000 for the year ended December 31, 1997, a decrease of $1,173,000,
or 24.3%. The decrease occurred primarily as a result of a $1,899,000 noncash
restructuring charge and noncash conversion discounts incurred in 1997
associated with the Company's 1996 convertible debenture offering, offset by
increased interest charges from the issuance of convertible debentures totaling
$5,000,000 and $7,000,000 in September 1997 and June 1998, respectively.
Included in interest expense for the years ended December 31, 1998 and 1997, are
noncash charges of $2,183,000 and $3,099,000, respectively, that are classified
as interest expense. The remaining balance of interest expense includes interest
on borrowings from working capital lines of credit, mortgages on buildings owned
by the Company, and interest paid in cash on the remaining balance of the
September 1996 convertible debentures.
Income Tax Expense (Benefit)
Income tax expense (benefit) changed from an income tax benefit of $1,047,000 in
1997 to income tax expense of $3,663,000 in 1998. The 1998 expense includes
$3,451,000 to increase the valuation allowance for deferred tax assets due to
recurring tax losses and uncertain future taxable income. The remaining amount
of income tax expense includes estimated minimum state taxes payable based on
factors other than income and foreign taxes related to profitable Thai
operations.
Net Loss
As a result of the foregoing factors, net loss increased to $28,715,000 for the
year ended December 31, 1998 from net loss of $4,377,000 for the year ended
December 31, 1997, an increase in net loss of $24,338,000.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow generated from operations was $2,224,000 in 1999 compared to cash used
in operations of $6,324,000 in 1998. The $8,548,000 increase in cash flow from
operations was due primarily to the decrease in net loss for the year ended
December 31, 1999, offset by certain noncash items included in operating loss
such as depreciation and amortization, amortization of debt discount associated
with convertible debenture financings, a restructuring charge in 1998, and a
goodwill impairment charge in 1998. The cash items impacting cash flow from
operations were a $6,047,000 decrease in the Company's inventories, offset by a
$2,370,000 decrease in accounts payable and accrued expenses, net of $4,454,000
reclassified to liabilities subject to compromise under reorganization
proceeding.
Under Chapter 11, actions to enforce certain claims against the Company are
stayed if the claims arose, or are based on, events that occurred on or before
the Petition Date. The ultimate terms of settlement of these claims will be
determined in accordance with a plan of reorganization, which requires the
approval of the impaired prepetition creditors and stockholders and confirmation
by the Bankruptcy Court. Other liabilities may arise or be subject to compromise
as a result of rejection of executory contracts, including leases, or the
Bankruptcy Court's
19
<PAGE> 20
resolution of claims for contingencies and other disputed amounts. The ultimate
resolution of such liabilities, all of which are subject to compromise, are a
part of the plan of reorganization filed with the Bankruptcy Court on March 30,
2000. Until the plan of reorganization is confirmed by the Bankruptcy Court,
only such payments on prepetition obligations that are approved by the
Bankruptcy Court will be made. There is no assurance that a plan of
reorganization will be approved or confirmed by the Bankruptcy Court.
Inherent in a successful plan of reorganization is a capital structure that will
enable the Company to generate sufficient cash flow after reorganization to meet
its restructured obligations and current obligation. Accordingly, the rights of
prepetition creditors and the ultimate payment of their claims may be
substantially altered and, in some cases, eliminated under the Bankruptcy Code.
It is not possible at this time to predict the ultimate outcome of the Chapter
11 filing or its effects on the Company's business or on the interest of
creditors or stockholders.
As described in Note 9 to the consolidated financial statements, through July
16, 1999, the Company had a line of credit that encompassed The L.L.
Knickerbocker Co., Inc. (LLK), Georgetown Collection, Inc. (GCI) and Krasner
Group, Inc. (TKG). Certain credit limits were established for each company.
Borrowing availability was determined by an advance rate on eligible accounts
receivable and inventory. At the expiration of the line of credit on July 16,
1999, the Company did not have sufficient funds to pay off the line of credit.
The Company entered into a forbearance agreement with the financial institution
(the Bank) initially extending the general terms of the line of credit until
August 30, 1999 and in the event certain conditions were met, until September
20, 1999. The forbearance agreement limited the Company's use of the credit
facility to total borrowings of $6,250,000. As a result of the Chapter 7 filing,
the Bank placed the Company's credit facility on an offering basis, effectively
reserving the right to discontinue funding the Company at any time. As a result
of the Chapter 11 filing, all required repayments of principal on the notes
payable under the line of credit for LLK and GCI have been suspended, except for
certain principal repayments that have been approved by the Bankruptcy Court.
The Bank continues to lend funds on an offering basis to TKG.
At December 31, 1999, the Company had $3,548,000 of cash borrowings outstanding,
$2,879,000 of which, representing amounts borrowed under the LLK and GCI
sublimits, is classified as subject to compromise in the accompanying
consolidated financial statements. Borrowings bear interest at the bank's base
rate (8.5% at December 31, 1999) plus 3%. The Company has continued to accrue
interest at the contractual rate on these notes, however interest payments were
suspended as of the Conversion Date on the LLK and GCI borrowings.
The Company's Thai subsidiaries have available lines of credit aggregating
76,000,000 Thai baht (approximately $2,014,000 at December 31, 1999).
Outstanding borrowings of $1,894,000 at December 31, 1999 bear interest at rates
ranging from 3.5% to 9.25%. Restricted cash of $312,000 and $310,000 at December
31, 1999 and 1998, respectively, secured one such line of credit.
In connection with the Chapter 11 filing, the Company filed, and the Bankruptcy
Court approved, a motion for use of cash collateral. Under the terms of this
motion the Company is authorized to use all cash and cash equivalents, which are
the cash collateral of the Bank, to pay ordinary and necessary operating
expenses in an amount equal to 93% of new accounts receivable.
The Company filed a Plan of Reorganization and Disclosure Statement with the
Bankruptcy Court on March 30, 2000. The Plan of Reorganization is subject to
confirmation by the Bankruptcy Court. The terms of the Plan of Reorganization
include a short-term extension on the line of credit with the Bank until
November 30, 2000. The Company is also taking measures to obtain a new secured
lender to refinance the existing secured liabilities. The Company believes that
its ongoing operating cash flow and proceeds from sale of investments should
enable the Company to meet liquidity requirements until substitute financing is
obtained. However, notwithstanding all of the events and circumstances described
above, there is substantial uncertainty with respect to the Company's liquidity.
The Company's ability to meet its obligations as they come due and successfully
emerge from Chapter 11 is contingent upon, among other things, its ability to
formulate a Plan of Reorganization that will be confirmed by the Bankruptcy
Court, to achieve satisfactory levels of profitability and cash flow from
operations, and obtain financing sources to meet future obligations.
20
<PAGE> 21
SEASONALITY AND QUARTERLY RESULTS
The Company's business is subject to seasonal fluctuations. The Magic Attic Club
brand of dolls, 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.
INFLATION
The Company does not believe that inflation has had a material effect on the
results of operations in the recent past. There can be no assurance that the
Company's business will not be affected by inflation in the future.
YEAR 2000 READINESS DISCLOSURE
As described in the Form 10-K for the year ended December 31, 1998, the Company
had developed plans to address the possible exposures related to the impact on
its computer systems of the Year 2000. Since entering the Year 2000, the Company
has not experienced any major disruptions to its business nor is it aware of any
significant Year 2000-related disruptions impacting its customers and suppliers.
Furthermore, the Company did not experience any material impact on inventories
at calendar year end. The Company will continue to monitor its critical systems
over the next several months but does not anticipate any significant impacts due
to Year 2000 exposures from its internal systems as well as from the activities
of its suppliers and customers.
Costs incurred to achieve Year 2000 readiness, which included contractor costs
to modify existing systems and costs of internal resources dedicated to
achieving Year 2000 compliance, were charged to expense as incurred and were not
material in 1999.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Financial Instruments and Hedging Activities," which establishes standards for
accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
SFAS No. 133 is effective in the first quarter of the year ending December 31,
2001. The Company is currently analyzing the effect of this standard and does
not expect it to have a material effect on the Company's consolidated financial
position, results of operations or cash flows.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See "Index to Consolidated Financial Statements" for a listing of the
consolidated financial statements submitted as part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
21
<PAGE> 22
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Louis L. Knickerbocker 59 Chief Executive Officer, President and
Chairman of the Board
Anthony P. Shutts 36 Chief Financial Officer, Secretary and Director
Gerald A. Margolis 70 Director
F. Rene Alvarez 61 Director
Marty Schaeffer 53 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, 59, is the co-founder of the Company. Mr. Knickerbocker has
been Chairman, President, and Chief Executive Officer of the Company since
founding the Company in 1985. From 1965 through 1974, Mr. Knickerbocker acquired
and sold a total of seven restaurants, four of which comprised a chain of
Mexican restaurants. Mr. Knickerbocker has been a salesman and sales supervisor
at M. Cooper & Son, and purchased and sold several liquor stores. Between 1974
and 1985, he acted as a private investor and businessman, investing in real
estate and purchasing and selling small businesses. Mr. Knickerbocker is married
to Tamara Knickerbocker, the former Executive Vice President of the Company.
MR. ANTHONY P. SHUTTS, C.P.A., CHIEF FINANCIAL OFFICER, SECRETARY, AND DIRECTOR
Mr. Shutts, 36, 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. Mr. Shutts has been
a director of the Company since June 1994. He is a certified public accountant
with over 12 years experience in public accounting, most notably with Deloitte &
Touche from 1986 to 1991, specializing in emerging companies. Mr. Shutts holds a
Bachelors Degree in Business Administration and a Master's Degree in Taxation,
both from the University of Southern California. Currently, Mr. Shutts serves as
Chief Financial Officer of the Company, overseeing the financial matters of the
Company and performing the general functions of CFO.
MR. GERALD A. MARGOLIS, DIRECTOR
Mr. Margolis, 70, 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 the U.C.L.A. School of Law 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 Council from 1962 to 1966.
Mr. Margolis has advised the Company on general corporate matters since its
inception in 1985.
22
<PAGE> 23
MR. F. RENE ALVAREZ, JR., DIRECTOR
Mr. Alvarez, 60, was appointed to the Board of Directors in May 1997. Mr.
Alvarez was the Senior Vice President, Finance of the Pacific Bay Homes
subsidiary of Ford Motor Company from 1995 to 1999. He worked as a member of the
finance staff for Ford Motor Company from 1969 to 1989, as Director of Internal
Audit for the USL Capital subsidiary of Ford Motor Company from 1989 to 1994,
and as Audit Manager, Finance Staff, for Ford Financial Services Group from 1994
to 1995. Mr. Alvarez attained the rank of Captain in the United States Army, and
was awarded the Bronze Star for service in Vietnam. He received a B.S.,
Accounting, from Canisius College in 1962 and a Juris Doctor and LLB from State
University of New York at Buffalo in 1967. Mr. Alvarez is a licensed attorney
and a member of the New York State Bar.
MR. MARTY SCHAEFFER, DIRECTOR
Mr. Schaeffer, 53, was appointed to the Board of Directors in September 1999.
Mr. Schaeffer has been the Assistant Vice President of Circuit City Stores since
1992. He worked as store manager for Sears Roebuck & Co. from 1965 to 1979, as
Senior Vice President of Triangle Building Centers from 1980 to 1988, as Senior
Vice President of Home Base, Inc. from 1989 to 1990, and as Executive Vice
President of the Company in 1991. He received a B.A. from Lehigh University in
1968 and an M.B.A. from Rochester Institute of Technology in 1983.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's directors and officers, and persons who own more than 10% of a
registered class of the Company's securities, to file with the Securities and
Exchange Commission ("SEC") initial reports of ownership and reports of changes
in ownership of the Company's common stock and other equity securities.
Officers, directors and greater-than-10% stockholders are required by SEC
regulation to furnish the Company with copies of all Section 16(a) forms they
file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, the Company believes that during the year ended December
31, 1999, its officers, directors, and greater-than-10% stockholders complied
with all Section 16(a) filing requirements, with the exception of: (i) Louis L.
Knickerbocker, whose Form 5 for 1999 for multiple transactions is in the process
of being prepared and filed; (ii) Tamara Knickerbocker, whose Form 5 for
multiple transactions is being prepared and filed; and (iii) Anthony P. Shutts,
whose Form 5 for one transaction is in the process of being prepared and filed.
23
<PAGE> 24
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information concerning annual, long-term
and other compensation received during the last three completed 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:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
------------------- ------------
Securities
Name and Principal Fiscal underlying All Other
Position Year Salary Bonus options/SARs(1) Compensation(2)
- -------------------------- -------- -------- -------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Louis L. Knickerbocker, 1999 $304,153 N/A 400,250 $ 33,042
Chairman 1998 $300,000 N/A 825,000(3) $ 92,733
1997 $300,000 $200,000 500,000 N/A
Martin Krasner, 1999 $239,649 N/A N/A $ 200
Acting President and 1998 $235,784 N/A N/A $ 200
Chief Executive Officer 1997 $235,293 N/A N/A N/A
Anthony P. Shutts 1999 $130,483 N/A 250 $ 200
Chief Financial Officer 1998 $130,979 N/A 174,250(4) $ 225
and Corporate Secretary 1997 $120,000 $ 72,939 205,000 N/A
Tamara Knickerbocker(6) 1999 $116,962 N/A 250 $ 117
Executive Vice President 1998 $118,462 N/A 112,604(5) $ 175
1997 $ 80,000 N/A 2,216 N/A
</TABLE>
(1) Reflected amounts consist of the number of options to purchase the Company's
common stock.
(2) With respect to Mr. Knickerbocker, represents amounts paid as compensation
for personal guarantee and pledge of personal assets as collateral for the
Company's bank line of credit. With respect to all others, represents Company's
obligations to make matching contributions to the Company's 401(K) Plan,
qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended.
(3) Includes options to purchase 425,000 shares of the Company's common stock,
which resulted from the repricing of previously awarded stock options.
(4) Consists of options issued as a result of the repricing of previously
awarded stock options.
(5) Includes options to purchase 39,578 shares of the Company's common stock,
which resulted from the repricing of previously awarded stock options.
(6) Tamara Knickerbocker's employment with the Company ended on December 31,
1999.
COMPENSATION OF DIRECTORS
Directors holding salaried positions with the Company do not receive
compensation for their services as a director. All other directors receive a fee
of $500 per meeting attended and reasonable travel expenses.
24
<PAGE> 25
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
In 1996, the Company entered into employment agreements with Louis L.
Knickerbocker, its Chairman, Chief Executive Officer and President and Anthony
P. Shutts, its Chief Financial Officer and Corporate Secretary. 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 each employment agreement for an additional five years each upon
written notice to the respective employee. Under 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.
Except for certain provisions contained in the Company's stock option plans,
there are no compensatory plans or arrangements with respect to any of the Named
Executive Officers which are triggered by, or result from, the resignation,
retirement or other termination of such named executive officer's employment, a
change-in-control of the Company or a change in the named executive officer's
responsibilities following a change-in-control.
During the first year, the employment agreements called for Mr. Knickerbocker to
receive an annual base salary of $300,000 and for Mr. Shutts to receive an
annual base salary of $120,000. In addition to their respective base salaries,
Mr. Knickerbocker and Mr. Shutts 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 greater
of pretax income or operating profits of the Company and are entitled to receive
certain stock options from the Company's stock option plans previously adopted
by the Company. See "Stock Option Plans."
STOCK OPTION PLANS
THE L.L. KNICKERBOCKER 1995 AMENDED AND RESTATED 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 1995 Amended and Restated Stock Option Plan (the "Stock Option
Plan"). The Stock Option 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 Stock Option
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
Stock Option Plan covered an aggregate of 400,000 shares when granted, which was
increased by the Company's 1994 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 Company's 1994
five-for-one stock split to a total of 2,000,000 options granted.
THE L.L. KNICKERBOCKER STOCK INCENTIVE COMPENSATION PLAN
On March 27, 1997, the Company's Board of Directors adopted the L.L.
Knickerbocker Stock Incentive Compensation Plan (the "ISO Plan"). The ISO Plan
was approved by the vote of the shareholders of the Company in June 1997. The
ISO Plan provides that incentive and nonstatutory options to purchase a total of
5,000,000 shares of common stock may be granted thereunder. The ISO Plan permits
the granting of options intended to qualify as "incentive stock options"
("ISOs") within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended from time to time (the "Code"), the granting of options that do not
so qualify ("NSOs"), and the granting of stock appreciation rights ("SARs"). The
Plan is administered by the Board of Directors, or if the Board so elects, by a
committee appointed by the Board of Directors consisting of not less than 2
members of the Board (the "Administrator"). The Administrator has the power to
determine the employees to be granted options and the number of shares to be
granted to each optionee and to interpret the ISO Plan.
The exercise price of any option is established by the Administrator at the time
of grant. The exercise price of
25
<PAGE> 26
any NSOs or ISOs granted under the Plan may not be less than 100% of the fair
market value of one share of common stock on the date of grant. The exercise
price of any ISO granted to an optionee who owns stock possessing more than 10%
of the voting rights of the Company's outstanding shares must be at least 110%
of the fair market value of the shares subject to the option on the date of
grant. So long as the Company's common stock is traded on the NASDAQ National
Market System, the fair market value of one share of common stock is the closing
bid price on the date of valuation.
The exercise price is payable in full in United States dollars or by certified
check upon the exercise of the option, provided however, that if the applicable
option agreement so provides, or the Administrator, in its sole discretion
otherwise approves thereof, the exercise price may be paid, (i) by the surrender
of shares of the Company's common stock owned by the person exercising the
option and having a fair market value on the date of exercise equal to the
purchase price, or (ii) in any combination of cash and common stock of the
Company, as long as the sum of the cash so paid and the fair market value of the
common stock so surrendered equals the purchase price. Additionally, if the
optionee is granted SARs, either in the stock option agreement or in a separate
agreement, such SARs may be exercised with the exercise of the options to permit
the Company to issue common stock with a fair market value equal to the
difference between the exercise price of one option and the fair market value of
one share of common stock on the date of exercise, multiplied by the total
number of options exercised.
NSOs and ISOs have maximum terms of 10 years. The aggregate fair market value
(determined as of the time the option is granted) of stock for which ISOs are
exercisable for the first time by an optionee during any calendar year may not
exceed $100,000, but the value of stock for which ISOs may be granted to an
Optionee in a given year may exceed $100,000.
In general, if an optionee ceases service to the Company or one or more of its
subsidiary Companies because of death or disability, options shall not be
exercised after the earlier of (i) the term of the option or (ii) twelve months
after the optionee's cessation of service, and such options shall only be
exercisable to the extent vested on the date of cessation of service. If an
optionee is discharged on account of misconduct, all options terminate
immediately and are no longer exercisable. If an optionee ceases service for any
other reason, options shall not be exercised after the earlier of (i) the term
of the option or (ii) three months after the optionee's cessation of service,
and such options shall only be exercisable to the extent vested on the date of
cessation of service. Options are, during the lifetime of the optionee,
exercisable only by him or her and may not be assigned or transferred other than
by will or by the laws of descent and distribution.
The ISO Plan provides that in the event a "Change in Control" of the Company
should occur, then the exercise dates of all options granted pursuant to the ISO
Plan shall automatically accelerate and all options granted pursuant to the ISO
Plan shall become exercisable in full. To the extent the Code would not permit
any ISO to be so accelerated, then such option, immediately upon the occurrence
of such Change in Control shall be treated for all purposes of the Plan as a NSO
and shall be immediately exercisable. A "Change in Control" is defined in the
Plan as a change in control of a nature that would be required to be reported in
response to Item I of Form 8-K required to be filed pursuant to the Securities
Exchange Act of 1934, as amended ("1934 Act"), and includes, without limitation
if: (i) the Company shall sell, transfer, or otherwise dispose of fifty percent
(50%) or more of its assets and properties (calculated on the basis of book
value); or (ii) any "person" (as such term is used in Section 13(d) and 14(d) of
the 1934 Act), other than the Company, is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the 1934 Act), directly or indirectly, of securities
of the Company representing 20% or more of the combined voting power of the
Company's then outstanding securities; or (iii) during the period of two
consecutive years during the term of the ISO Plan, individuals who at the
beginning of such period constitute the Board cease for any reason to constitute
at least a majority thereof, unless the election of each director who was not a
director at the beginning of such period has been approved in advance by
directors representing at least two-thirds of the directors then in office who
were directors at the beginning of the period.
The Board may from time to time, with respect to any shares at the time not
subject to options, suspend or discontinue the ISO Plan or revise or amend it in
any respect whatsoever except that, without the approval of the Company's
shareholders, no such revision or amendment shall increase the number of shares
subject to the ISO Plan or change the classes of persons eligible to receive
options. Options may be granted pursuant to the ISO Plan until the expiration of
the Plan on March 27, 2007.
26
<PAGE> 27
OPTIONS GRANTED
The following table sets forth information concerning the grant of stock options
during the fiscal year ended December 31, 1999 to each of the Named Executive
Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants(1)
--------------------------------------------------
Percent of
Total Options Potential Realizable
Granted to Value at Assumed
Employees Exercise or Annual Rates of
Options in Fiscal Base Price Expiration Stock Price Appreciation
Name Granted Year 1999(2) (per share)(3) Date(4) for Option Term(5)
- ---- ------- ------------ -------------- ---------- -------------------------
5% 10%
-- ---
<S> <C> <C> <C> <C> <C> <C>
Louis L. Knickerbocker 400,250 97.68% $0.64 2009 $ 161,098 $ 408,253
Anthony P. Shutts 250 0.06% $0.05 2009 $ 71 $ 211
Tamara Knickerbocker 250 0.06% $0.25 2009 $ 39 $ 100
</TABLE>
(1) These options were granted pursuant to the Company's ISO Plan.
(2) In fiscal 1999, 409,750 options were granted to employees pursuant to
the Company's ISO Plan. This number was used in calculating the
percentages in the above table.
(3) All exercise prices are set at 100% of the market value of the Company's
stock as of the date of grant, except (i) in the case of Louis L.
Knickerbocker, whose options were granted at 110% of the market value of
the Company's stock on the date of grant.
(4) The options granted as ISO's under the Company's ISO Plan expire on the
tenth anniversary of the date of grant.
(5) The dollar amounts under these columns are the result of calculations at
the 5% and 10% rates required by applicable regulations of the
Securities and Exchange Commission and, therefore, are not intended to
forecast possible future appreciation, if any, of the Company's common
stock price. Actual gains, if any, on stock option exercises depend on
future performance of the Company's common stock and overall market
conditions, as well as the optionee's continued employment through the
vesting period. The amounts reflected in this table may not be achieved.
OPTIONS EXERCISED AND FISCAL YEAR-END VALUES
The following table provides information with respect to the exercise of stock
options during the most recently completed fiscal year by the Named Executive
Officers of the Company together with the fiscal year-end value of unexercised
options.
27
<PAGE> 28
AGGREGATED OPTION/SAR EXERCISES IN LAST
Fiscal Year and Fiscal Year-End Option/SAR Values
<TABLE>
<CAPTION>
Number of securities
underlying unexercised Value of unexercised in-the
options/SARs at fiscal year-end money options/SARs at fiscal
(#) year-end ($)(1)
Shares
acquired on Value realized
Name exercise(#) ($)(1) Exercisable Unexercisable Exercisable Unexercisable
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Louis L. Knickerbocker - $ - 1,225,000 250 $ - $ -
Anthony P. Shutts - - 174,250 250 - -
Tamara Knickerbocker - - 112,604 250 - -
</TABLE>
(1) Market value of the securities underlying the "in-the-money" options at
exercise date or year-end, as the case may be, minus the exercise price of
such options.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
The following directors served on the Company's Compensation Committee during
the year ended December 31, 1999: Louis L. Knickerbocker, Gerald A. Margolis,
and F. Rene Alvarez, Jr. Mr. Knickerbocker is the Chairman, Chief Executive
Officer and President of the Company and Mr. Margolis and Mr. Alvarez are
non-employee directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's common stock as of April 4, 2000 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
(iv) each person known to the Company to own beneficially more than 5% of the
outstanding shares of common stock:
<TABLE>
<CAPTION>
Name and Address of Amount and Nature Percent
Beneficial Owner (1) of Beneficial Ownership of Class
- -------------------- ----------------------- --------
<S> <C> <C>
Louis L. Knickerbocker 4,222,393(2) 8.7%
Tamara Knickerbocker 3,047,393(3) 6.3%
Anthony P. Shutts 174,650(4) *
Gerald Margolis 219,500(5) *
F. Rene Alvarez, Jr 30,000(6) *
Marty Schaeffer 1,000
Directors and Executive Officers
as a Group 7,694,786(8) 15.9%
</TABLE>
- --------------------------------------------------------------------------------
* Less than 1.0% of the outstanding common stock as of April 4, 2000.
(1) The address for all persons listed is c/o The L.L. Knickerbocker Co.,
Inc., 25800 Commercentre Drive, Lake Forest, CA 92630.
(2) Includes 1,225,000 shares issuable upon the exercise of stock options
exercisable within 60 days of April
28
<PAGE> 29
4, 2000 under the Company's ISO Plan. Excludes 3,047,393 shares
beneficially owned by Tamara Knickerbocker.
(3) Excludes 4,222,393 shares beneficially owned by Louis L. Knickerbocker.
Tamara Knickerbocker's employment with the Company ended on December 31,
1999, and stock options outstanding as of that date were cancelled as of
March 30, 2000.
(4) Includes 174,250 shares issuable upon the exercise of stock options
exercisable within 60 days of April 4, 2000 under the Company's ISO
Plan.
(5) Includes 70,000 shares issuable upon the exercise of stock options
exercisable within 60 days of April 4, 2000 under the Company's ISO
Plan.
(6) Includes 20,000 shares issuable upon the exercise of stock options
exercisable within 60 days of April 4, 2000 under the Company's ISO
Plan.
(8) Includes 1,488,750 shares issuable upon the exercise of stock options
exercisable within 60 days of April 4, 2000 under the Company's ISO
Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH MANAGEMENT
From 1995 to 1998, the Company made loans to its Chairman, Chief Executive
Officer, and President, Louis L. Knickerbocker. The largest aggregate amount
outstanding (including accrued but unpaid interest) during fiscal 1998 was
$1,423,600, and $1,088,000 was outstanding as of April 4, 2000. The loans were
evidenced by promissory notes providing for payment of interest at the prime
rate plus 1% per annum, and payments in installments of $200,000 on March 31,
2000 and September 30, 2000 with any unpaid principal and interest due on April
11, 2001. At December 31, 1999, due to the uncertainty of collectibility of the
note, the Company recorded a reserve of $1,088,000 on the outstanding balance.
During the period February to May 1998, Mr. Knickerbocker made short-term loans
to the Company aggregating $2,615,000. These short-term loans were repaid in
June 1998.
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. Each of the foregoing
transactions complied with this resolution.
AFFILIATED AND PREDECESSOR COMPANIES
The L.L. Knickerbocker Co., 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 former Executive 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), co-founded in 1987 by the Knickerbockers. 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.
In 1989, the Knickerbockers co-founded another company, MLF Enterprises, a
California corporation (MLF). MLF developed replicas of the jewelry collection
of Farrah Fawcett, a former director of the Company, which were sold through the
television home shopping industry.
The Knickerbockers next formed Knickerbocker Creations, Ltd., a California
corporation (Creations) in 1990 and
29
<PAGE> 30
began developing the products and celebrity endorsement programs that 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 Co., 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 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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) See page 32 for a listing of financial statements submitted as part of
this report.
(a)(2) Schedule II - Valuation and Qualifying Accounts appears on page 62 of
this report. All other schedules have been omitted as they are not
applicable, not required or the information is included in the
consolidated financial statements or the notes thereto.
(a)(3) See Exhibit Index on page 63 of this report.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the fourth quarter of
1999.
(c) See item 14(a)(2) above.
30
<PAGE> 31
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 Co., Inc.
--------------------------------------
(Registrant)
Date: April 14, 2000 By: /S/ Louis L. Knickerbocker
-----------------------------------
Louis L. Knickerbocker
Chairman
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
- --------- ----- ----
<S> <C> <C>
/S/ Louis L. Knickerbocker Chairman April 14, 2000
- ---------------------------------------- (Principal Executive Officer)
Louis L. Knickerbocker
/S/ Anthony P. Shutts Chief Financial Officer, Secretary April 14, 2000
- ---------------------------------------- and Director
Anthony P. Shutts (Principal Financial and Accounting Officer)
/S/ Gerald A. Margolis Director April 14, 2000
- ----------------------------------------
Gerald A. Margolis
/S/ F. Rene Alvarez, Jr. Director April 14, 2000
- ----------------------------------------
F. Rene Alvarez, Jr.
/S/ Marty Schaeffer Director April 14, 2000
- ----------------------------------------
Marty Schaeffer
</TABLE>
31
<PAGE> 32
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Independent Auditors' Report 33
Consolidated Balance Sheets as of December 31, 1999 and 1998 34
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997 35
Consolidated Statements of Comprehensive Income/Loss for the
Years Ended December 31, 1999, 1998 and 1997 36
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1999, 1998 and 1997 37
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1999, 1998 and 1997 38
Notes to Consolidated Financial Statements 40
32
<PAGE> 33
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
The L.L. Knickerbocker Co., Inc.:
We have audited the accompanying consolidated balance sheets of The L.L.
Knickerbocker Co., Inc. (debtor-in-possession) and subsidiaries (the Company) as
of December 31, 1999 and 1998, and the related consolidated statements of
operations, comprehensive income/loss, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1999. Our audits also
included the financial statement schedule listed in the Index at Item 14(a)(2).
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly, in all material respects, the information set forth
therein.
As discussed in Note 1, the Company has filed for reorganization under Chapter
11 of the United States Bankruptcy Code. The accompanying consolidated financial
statements do not purport to reflect or provide for the consequences of the
bankruptcy proceeding. In particular, such financial statements do not purport
to show (a) as to assets, their realizable value on a liquidation basis or their
availability to satisfy liabilities; (b) as to prepetition liabilities, the
amounts that may be allowed for claims or contingencies, or the status and
priority thereof; (c) as to stockholder accounts, the effect of any changes that
may be made in the capitalization of the Company; or (d) as to operations, the
effect of any changes that may be made in the Company's business.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1, the
uncertainties inherent in the bankruptcy process and the Company's recurring
losses from operations raise substantial doubt about its ability to continue as
a going concern. The Company is currently operating its business as a
debtor-in-possession under the jurisdiction of the Bankruptcy Court, and
continuation of the Company as a going concern is contingent upon, among other
things, its ability to (1) finalize a plan of reorganization that will
ultimately be confirmed by the Bankruptcy Court, (2) achieve satisfactory levels
of profitability and cash flow from operations, and (3) obtain financing sources
to meet future obligations. Management's plans concerning these matters are also
discussed in Note 1. The financial statements do not include adjustments that
might result from the outcome of these uncertainties.
/s/ DELOITTE & TOUCHE LLP
April 12, 2000
Costa Mesa, California
33
<PAGE> 34
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,510,000 $ 199,000
Restricted cash (Notes 2 and 9) 312,000 310,000
Accounts receivable, less allowance for doubtful accounts of $2,486,000 (1999)
and $1,127,000 (1998) 6,654,000 8,365,000
Inventories (Note 5) 4,655,000 10,989,000
Prepaid expenses and other current assets, including $31,000 (1999)
and $1,188,000 (1998) of prepaid advertising 1,578,000 2,745,000
Notes receivable (Note 8) - 1,800,000
------------ ------------
Total current assets 14,709,000 24,408,000
PROPERTY AND EQUIPMENT, net (Note 6) 4,501,000 4,970,000
RECEIVABLE FROM STOCKHOLDER, net (Note 7) - 1,072,000
INVESTMENTS (Note 8) 3,675,000 3,541,000
GOODWILL, net of accumulated amortization of $1,848,000 (1999) and $1,395,000 (1998) 2,943,000 3,409,000
OTHER ASSETS 758,000 1,342,000
------------ ------------
$ 26,586,000 $ 38,742,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,244,000 $ 9,461,000
Accrued expenses 1,473,000 3,080,000
Notes payable (Note 9) 2,563,000 4,324,000
Commissions and royalties payable 1,577,000 1,368,000
Interest payable 113,000 595,000
Current portion of long-term debt (Note 14) 176,000 215,000
Income taxes payable 164,000 279,000
Due to former shareholders of Krasner Group, Inc. (Note 3) - 280,000
Deferred gain (Note 8) - 1,642,000
Convertible debentures, net of discount of $491,000 (Note 10) - 10,949,000
------------ ------------
Total current liabilities 10,310,000 32,193,000
LONG-TERM DEBT, less current portion (Note 14) 417,000 541,000
CONVERTIBLE DEBENTURES, net of discount of $110,000 (Note 10) - 2,740,000
LIABILITIES SUBJECT TO COMPROMISE UNDER REORGANIZATION PROCEEDING (Note 11) 13,484,000
------------ ------------
Total liabilities 24,211,000 35,474,000
COMMITMENTS AND CONTINGENCIES (Notes 9, 11 and 13)
STOCKHOLDERS' EQUITY (Note 12):
Preferred Stock, no par value, authorized shares - 10,000,000;
none issued and outstanding -
Common stock, no par value, authorized shares - 100,000,000;
issued and outstanding shares - 43,727,354 (1999) and 20,659,309 (1998), stated at 41,397,000 30,757,000
Additional paid-in capital 6,012,000 6,112,000
Accumulated deficit (41,157,000) (29,945,000)
Accumulated other comprehensive loss (3,877,000) (3,656,000)
------------ ------------
Total stockholders' equity 2,375,000 3,268,000
------------ ------------
$ 26,586,000 $ 38,742,000
============ ============
</TABLE>
See Independent Auditors' Report and Notes to Consolidated Financial Statements
34
<PAGE> 35
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ 42,165,000 $ 60,427,000 $ 68,290,000
Cost of sales 25,155,000 29,383,000 30,790,000
------------ ------------ ------------
Gross profit 17,010,000 31,044,000 37,500,000
Advertising expense 2,630,000 14,196,000 10,926,000
Selling expense 7,219,000 7,029,000 6,488,000
General and administrative expense 15,577,000 27,196,000 22,128,000
Restructuring charge (Note 4) - 2,991,000 -
------------ ------------ ------------
Operating loss (8,416,000) (20,368,000) (2,042,000)
Loss on equity method investments - 1,347,000 1,857,000
Other expense (income), net 235,000 (47,000) (3,316,000)
Interest expense (Notes 9 and 10) 1,814,000 3,658,000 4,831,000
------------ ------------ ------------
Loss before reorganization items, minority interest
and income tax expense (benefit) (10,465,000) (25,326,000) (5,414,000)
Reorganization items 672,000 - -
------------ ------------ ------------
Loss before minority interest and
income tax expense (benefit) (11,137,000) (25,326,000) (5,414,000)
Minority interest in income (loss) of subsidiary (Note 2) - (274,000) 10,000
Income tax expense (benefit) 75,000 3,663,000 (1,047,000)
------------ ------------ ------------
Net loss $(11,212,000) $(28,715,000) $ (4,377,000)
============ ============ ============
Net loss per share:
Basic $ (0.33) $ (1.46) $ (0.24)
============ ============ ============
Diluted $ (0.33) $ (1.46) $ (0.24)
============ ============ ============
Shares used in computing net loss per share:
Basic 34,290,701 19,630,175 18,052,081
============ ============ ============
Diluted 34,290,701 19,630,175 18,052,081
============ ============ ============
</TABLE>
See Independent Auditors' Report and Notes to Consolidated Financial Statements
35
<PAGE> 36
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/LOSS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net Loss $(11,212,000) $(28,715,000) $ (4,377,000)
Other comprehensive income (loss):
Foreign currency translation adjustments (221,000) 1,575,000 (5,247,000)
------------ ------------ ------------
Comprehensive loss $(11,433,000) $(27,140,000) $ (9,624,000)
============ ============ ============
</TABLE>
See Independent Auditors' Report and Notes to Consolidated Financial Statements
36
<PAGE> 37
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Retained
Additional earnings
Common Stock paid-in (Accumulated
Shares Amount capital deficit)
<S> <C> <C> <C> <C>
BALANCE, January 1, 1997 15,951,724 $ 13,082,000 $ 8,018,000 $ 3,147,000
Exercise of stock options 431,250 513,000
Exercise of stock warrants 317,237 280,000
Issuance of common stock in connection with
Krasner Group, Inc. acquisition (Note 3) 243,606 1,253,000
Issuance of common stock in connection
with convertible debentures (Note 10) 1,620,350 11,262,000
Exchange of stock warrants for
common stock (Notes 3 and 12) 190,526 892,000 (892,000)
Cancellation of stock warrants in connection
with sale of partial interest in
Pure Energy Corporation (Note 8) (1,874,000)
Issuance of stock purchase warrants in connection with
convertible debenture offering (Note 10) 434,000
Discount on convertible debenture offering (Note 10) (1,782,000)
Foreign currency translation loss
Net loss (4,377,000)
-----------------------------------------------------------------------
BALANCE, December 31, 1997 18,754,693 27,282,000 3,904,000 (1,230,000)
Cashless exercise of stock options 72,364 -
Cancelation of shares received in payment
of receivable from shareholder (200,000) (150,000)
Issuance of stock options to nonemployee 5,000
Issuance of common stock in connection with
Krasner Group, Inc. acquisition (Note 3) 394,389 620,000
Issuance of common stock in connection with
Georgetown Collection, Inc. acquisition (Note 3) 250,000 258,000
Issuance of common stock in connection with
convertible debentures (Note 10) 1,387,863 2,747,000 (268,000)
Issuance of stock purchase warrants in connection with
convertible debentures (Note 10) 228,000
Discount on convertible
debenture offering (Note 10) 1,170,000
Increase as a result of Ontro, Inc.'s sale
of stock, net of income taxes (Note 8) 1,073,000
Foreign currency translation gain (28,715,000)
Net loss
-----------------------------------------------------------------------
BALANCE, December 31, 1998 20,659,309 30,757,000 6,112,000 (29,945,000)
Issuance of common stock in connection with
Krasner Group, Inc. acquisition (Note 3) 441,007 220,000
Issuance of common stock in connection with
Georgetown Collection, Inc. acquisition (Note 3) 157,996 89,000
Issuance of common stock in connection with
convertible debentures (Note 10) 22,469,042 10,331,000 (100,000)
Foreign currency translation loss
Net loss (11,212,000)
------------------------------------------------------------------------
BALANCE, December 31, 1999 43,727,354 $ 41,397,000 $ 6,012,000 $ (41,157,000)
========================================================================
<CAPTION>
Accumulated
other
comprehensive
income (loss) Total
BALANCE, January 1, 1997 $ 16,000 $ 24,263,000
Exercise of stock options 513,000
Exercise of stock warrants 280,000
Issuance of common stock in connection with
Krasner Group, Inc. acquisition (Note 3) 1,253,000
Issuance of common stock in connection
with convertible debentures (Note 10) 11,262,000
Exchange of stock warrants for
common stock (Notes 3 and 12) --
Cancellation of stock warrants in connection
with sale of partial interest in
Pure Energy Corporation (Note 8) (1,874,000)
Issuance of stock purchase warrants in connection with
convertible debenture offering (Note 10) 434,000
Discount on convertible debenture offering (Note 10) (1,782,000)
Foreign currency translation loss (5,247,000) (5,247,000)
Net loss (4,377,000)
-----------------------------------
BALANCE, December 31, 1997 (5,231,000) 24,725,000
Cashless exercise of stock options --
Cancelation of shares received in payment
of receivable from shareholder (150,000)
Issuance of stock options to nonemployee 5,000
Issuance of common stock in connection with
Krasner Group, Inc. acquisition (Note 3) 620,000
Issuance of common stock in connection with
Georgetown Collection, Inc. acquisition (Note 3) 258,000
Issuance of common stock in connection with
convertible debentures (Note 10) 2,479,000
Issuance of stock purchase warrants in connection with
convertible debentures (Note 10) 228,000
Discount on convertible
debenture offering (Note 10) 1,170,000
Increase as a result of Ontro, Inc.'s sale
of stock, net of income taxes (Note 8) 1,073,000
Foreign currency translation gain 1,575,000 1,575,000
Net loss (28,715,000)
----------------------------------
BALANCE, December 31, 1998 (3,656,000) 3,268,000
Issuance of common stock in connection with
Krasner Group, Inc. acquisition (Note 3) 220,000
Issuance of common stock in connection with
Georgetown Collection, Inc. acquisition (Note 3) 89,000
Issuance of common stock in connection with
convertible debentures (Note 10) 10,231,000
Foreign currency translation loss (221,000) (221,000)
Net loss (11,212,000)
-----------------------------------
BALANCE, December 31, 1999 $ (3,877,000) $ 2,375,000
===================================
</TABLE>
See Independent Auditors' Report and Notes to Consolidated Financial Statements
37
<PAGE> 38
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net loss $(11,212,000) $(28,715,000) $ (4,377,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,875,000 3,056,000 2,727,000
Expense related to issuance of stock options, warrants and common stock - 491,000 -
Debenture inducement - - 1,899,000
Deferred income taxes - 3,451,000 (1,095,000)
Loss on investment - - 78,000
Gain on sale of investment (31,000) (769,000) (1,710,000)
Loss on equity method investments - 1,347,000 1,857,000
Loss on disposition of joint venture - - 302,000
Loss on disposition of fixed assets 232,000 290,000 -
Restructuring charge - 2,342,000 -
Goodwill impairment - 1,000,000 -
Minority interest - (274,000) 10,000
Amortization of debt discount 541,000 1,005,000 644,000
Provision for loss on accounts receivable 1,785,000 2,341,000 1,710,000
Provision for loss on stockholder receivable 1,088,000 - -
Changes in operating accounts:
Accounts receivable (74,000) (2,685,000) 3,999,000
Income tax receivable - - 733,000
Inventories 6,047,000 (384,000) (2,377,000)
Prepaid expenses and other current assets 1,167,000 4,741,000 (1,823,000)
Other assets 177,000 634,000 (1,068,000)
Accounts payable and accrued expenses (5,699,000) 5,032,000 (3,116,000)
Commissions and royalties payable 209,000 617,000 (77,000)
Income taxes payable (115,000) 156,000 123,000
Due to former shareholders of Krasner Group, Inc. (60,000) - -
Other long-term liabilities - - (51,000)
Operating payables subject to compromise under Reorganization Proceeding 6,294,000 - -
------------ ------------ ------------
Net cash provided by (used in) operating activities 2,224,000 (6,324,000) (1,612,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property, plant and equipment (750,000) (1,429,000) (2,778,000)
Proceeds from sales of property and equipment 96,000 21,000 -
Receivable from stockholder (16,000) 161,000 (787,000)
Proceeds from sales of investment 55,000 818,000 -
Investments/advances to investees - (564,000) (965,000)
------------ ------------ ------------
Net cash used in investing activities (615,000) (993,000) (4,530,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) on line of credit 12,000 674,000 (3,358,000)
(Increase) decrease in restricted cash (2,000) (60,000) 250,000
Payments on long-term debt (173,000) (347,000) (226,000)
Proceeds from borrowings on long-term debt - 45,000 831,000
Proceeds from exercise of stock options and warrants - - 793,000
Deferred debt issue costs - (427,000) (365,000)
Proceeds from issuance of convertible debentures - 7,000,000 5,000,000
Net (payments) borrowings on stockholder loan - (248,000) 248,000
------------ ------------ ------------
Net cash (used in) provided by financing activities (163,000) 6,637,000 3,173,000
EFFECT OF EXCHANGE RATE CHANGES ON CASH (135,000) 787,000 (3,186,000)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,311,000 107,000 (6,155,000)
CASH AND CASH EQUIVALENTS, beginning of year 199,000 92,000 6,247,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 1,510,000 $ 199,000 $ 92,000
============ ============ ============
</TABLE>
See Independent Auditors' Report and Notes to Consolidated Financial Statements
38
<PAGE> 39
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION-
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash paid (refunded) during the year for:
Interest $ 707,000 $ 1,218,000 $ 1,643,000
=========== =========== ===========
Income taxes $ 157,000 $ 56,000 $ (806,000)
=========== =========== ===========
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITY:
During the years ended December 31, 1999, 1998 and 1997, the Company issued
441,007, 394,389 and 243,606 shares of common stock in payment of
$220,000, $620,000 and $1,253,000, respectively, of liability to former
Krasner shareholders (Note 3).
During the years ended December 31, 1999, 1998 and 1997, $9,919,000,
$2,610,000, and $11,169,000 of convertible debentures and $412,000,
$137,000, and $93,000 of accrued interest, respectively, were converted
to common stock (Note 10).
During the year ended December 31, 1999, the Company issued 157,996 shares of
common stock in payment of liability owed to former Georgetown
Collection, Inc. shareholders (Note 3).
During the year ended December 31, 1998, the Company acquired property and
equipment under capital lease obligations totaling $91,000.
During the year ended December 31, 1998, the Company cancelled 200,000 shares
of previously issued common stock in settlement of $150,000 receivable
from stockholder.
During the year ended December 31, 1998, the Company recorded a $1,788,000
increase to investments in connection with the initial public offering
of Ontro, Inc. (Note 8).
During the year ended December 31, 1997, the Company sold a portion of its
investment in Pure Energy Corporation with a carrying value of $164,000
in exchange for 397,500 common stock purchase warrants with an ascribed
value of $1,874,000, resulting in a gain of $1,710,000. Also during the
year ended December 31, 1997, the Company recorded a deferred gain of
$1,642,000 in connection with the sale of a portion of its Pure Energy
Corporation investment with a carrying value of $158,000 in exchange for
a note receivable of $1,800,000. During the year ended December 31,
1999, the note receivable and deferred gain were reversed upon failure
to collect the note receivable (Note 8).
During the year ended December 31, 1997 the Company issued 150,000 warrants
with an ascribed value of $434,000 as debt issuance cost in connection
with a convertible debenture offering (Note 10).
See Independent Auditors' Report and Notes to Consolidated Financial Statements
39
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. REORGANIZATION AND BASIS OF REPORTING
Description of Business - The L.L. Knickerbocker Co., Inc. (LLK)
(debtor-in-possession) and subsidiaries (collectively, 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, 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 figurines are
manufactured by independent manufacturing facilities to the Company's
specifications. The fine and costume jewelry is manufactured by the Company and
by independent manufacturing facilities. The Company's distribution includes
home shopping channels, catalog mailings, direct mailings from customer lists,
retail stores, wholesale distributors, and the Internet.
On August 23, 1999 (the Petition Date), an involuntary petition under Chapter 7
of the United States Bankruptcy Code (the Bankruptcy Code) was filed against LLK
by three of its creditors. On December 3, 1999 (the Conversion Date), LLK
(unconsolidated) filed an election to convert to reorganization under Chapter 11
of the Bankruptcy Code (Chapter 11). LLK continues to conduct normal business
operations as a debtor-in-possession subject to the jurisdiction of the United
States Bankruptcy Court for the Central District of California (the Bankruptcy
Court). As a debtor-in-possession, LLK may not engage in transactions outside
the ordinary course of business without approval, after notice and hearing, of
the Bankruptcy Court.
Under Chapter 11, actions to enforce claims against LLK are stayed if the claims
arose, or are based on events that occurred, on or before the Petition Date, and
such claims cannot be paid or restructured prior to the conclusion of the
proceedings or approval of the Bankruptcy Court. In addition, under the
Bankruptcy Code, LLK may elect to assume or reject certain prepetition leases,
employment contracts, service contracts and other unexpired executory
prepetition contracts, all subject to Bankruptcy Court approval. Other
liabilities may arise or be subject to compromise as a result of rejection of
executory contracts or the Bankruptcy Court's resolution of claims for
contingencies and other disputed amounts. Liabilities subject to compromise
(Note 11) in the accompanying consolidated balance sheet represent the Company's
estimate of liabilities as of December 31, 1999, subject to adjustment in the
reorganization process. LLK continues to accrue, but not pay, interest on
secured debt at the contractual interest rate although principal payments have
generally been suspended.
The accompanying consolidated financial statements have been prepared in
conformity with principles of accounting applicable to a going concern, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. The Company's recurring losses from operations,
the Chapter 11 filing and circumstances relating to this event, raise
substantial doubt about the Company's ability to continue as a going concern. A
plan of reorganization could materially change the amounts reported in the
accompanying consolidated financial statements, which do not give effect to
adjustments to the carrying values of assets and liabilities that may be
necessary as a consequence of a plan of reorganization. The Company's ability to
continue as a going concern is contingent upon, among other things, its ability
to formulate a plan of reorganization that will be confirmed by the Bankruptcy
Court, to achieve satisfactory levels of profitability and cash flow from
operations, and obtain financing sources to meet future obligations.
The Company filed a Plan of Reorganization and Disclosure Statement with the
Bankruptcy Court on March 30, 2000. The Plan of Reorganization is subject to
confirmation by the Bankruptcy Court. The terms of the Plan of Reorganization
include a short-term extension on the line of credit with the Bank until
November 30, 2000. The Company is also taking measures to obtain a new secured
lender to refinance the existing secured liabilities. The Company believes that
its ongoing operating cash flow and proceeds from sale of investments should
enable the Company to meet liquidity requirements until substitute financing is
obtained. However, notwithstanding all of the events and circumstances described
above, there is substantial uncertainty with respect to the Company's liquidity.
The Company's ability to meet its obligations as they come due and successfully
emerge from Chapter 11 is contingent upon, among other things, its ability to
finalize a Plan of Reorganization that will ultimately be confirmed by the
Bankruptcy Court, to achieve satisfactory levels of profitability and cash flow
from operations, and obtain financing sources to meet future obligations.
The Company believes it has sufficient resources to cure executory contract
defaults and to pay all claims arising in the "Gap" period between the Petition
Date and the Conversion Date.
40
<PAGE> 41
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The financial statements presented herein include
the accounts of The L.L. Knickerbocker Co., Inc.; its wholly-owned subsidiaries,
Krasner Group, Inc.; Harlyn International Co., Ltd.; S.L.S. Trading Co., Ltd.;
L.L. Knickerbocker (Thai) Co., Ltd., and its majority-owned subsidiary
Georgetown Collection, Inc. (collectively, the Company). Intercompany accounts
and transactions have been eliminated in consolidation.
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 - Restricted cash represents funds deposited with a financial
institution to serve as collateral for a line of credit (Note 9).
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 is primarily production costs associated with media
costs for print advertising, and catalog printing costs.
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.
Investments - Investments in the common stock of unconsolidated entities (Note
8) in which the Company's interest is in excess of 20% and in which the Company
has an ability to exercise significant influence over the investee company, are
accounted for using the equity method of accounting. The Company accounts for
its investment in Ontro, Inc. (Note 8) as available-for-sale securities in
accordance with Statement of Financial Accounting Standards (SFAS) No. 115
"Accounting for Certain Investments in Debt and Equity Securities".
Intangible Asset - Excess of cost over net assets acquired (goodwill), which
arose from the acquisition of certain entities (Note 3) is being amortized on a
straight-line basis over 10 years. The Company evaluates the recoverability of
goodwill at each balance sheet date 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. During the year ended December 31, 1998, the Company recorded an
aggregate impairment charge of $2,433,000 (Notes 3 and 4). Based on its most
recent analysis, the Company believes no impairment exists at December 31, 1999.
Long-Lived Assets - The Company accounts for the impairment and disposition of
long-lived assets in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." In
accordance with SFAS No. 121, long-lived assets are reviewed for events or
changes in circumstances, which indicate that their carrying value may not be
recoverable. During the year ended December 31, 1998, the Company recorded an
impairment charge of $2,342,000 (Note 4) related to long-lived assets. Based on
its most recent analysis, the Company believes no impairment exists at December
31, 1999.
Deferred Debt Issuance Costs - Deferred debt issuance costs which are included
in other assets, relate to the issuance of Convertible Debentures (Note 10).
These costs totaled $1,801,000 at December 31, 1999 and 1998, and are being
amortized over the estimated life of the debentures. The related accumulated
amortization at December 31, 1999 and 1998, is $1,741,000 and $1,539,000,
respectively. Upon conversion of the Convertible Debentures, any portion of the
deferred debt issuance costs not previously amortized is recorded as a decrease
to additional paid-in capital on the conversion date.
Revenue Recognition - Revenues from sales of products are recognized when
merchandise is shipped to customers. The Company offers credit to its customers
and performs ongoing credit evaluations of its customers.
Reorganization Items - Professional fees and expenditures directly related to
the Chapter 11 filing are classified as reorganization items and are expensed as
incurred. Reorganization items for the year ended December 31, 1999
41
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (CONTINUED)
consisted primarily of professional fees. Cash paid for reorganization items
during the year ended December 31, 1999 amounted to $638,000.
Income Taxes - The Company accounts for income taxes using SFAS 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.
Net Loss Per Share - The Company computes loss per share pursuant to SFAS No.
128, "Earnings Per Share," which requires the dual presentation of basic and
diluted earnings per share. Shares issuable upon the exercise of common stock
warrants and options and shares issuable upon the conversion of convertible
debentures have been excluded from the per share calculations because their
effect is antidilutive.
Stock-Based Compensation - The Company accounts for stock-based employee
compensation arrangements in accordance with the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25), and complies with the disclosure provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation." Under APB 25, compensation cost is recognized
over the vesting period based on the difference, if any, on the date of grant
between the fair value of the Company's stock and the amount an employee must
pay to acquire the stock. See Note 12 for the pro forma disclosures required by
SFAS No. 123.
Reclassifications - Certain amounts previously reported have been reclassified
to conform to the 1999 financial statement presentation.
Foreign Currency - The Company's primary functional currency is the U.S. dollar,
while the functional currency of the Company's Thailand subsidiaries is the Thai
baht. Assets and liabilities 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 period. Translation gains and
losses are included in other comprehensive income in the accompanying financial
statements. Gains and losses on foreign currency transactions are recognized as
incurred (Note 15).
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.
Fair Value of Financial Instruments - 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, 1999, 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. Management also believes the carrying amount of long-term
debt approximates fair value as the underlying interest rates approximate market
rates.
New Accounting Pronouncements - SFAS No. 133, "Accounting for Derivative
Financial Instruments and Hedging Activities," was issued in June 1998, and
establishes standards for accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133 is effective in the first quarter of the year
ending December 31, 2001. The Company is currently analyzing the effect of this
standard and does not expect it to have a material effect on the Company's
consolidated financial position, results of operations or cash flows.
Condensed Financial Statements - In accordance with AICPA Statement of Position
90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy
Code" (SOP 90-7), the debtor entity, LLK, is required to present condensed
financial statements for the period beginning August 24, 1999 through December
31, 1999 (Note 22).
42
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (CONTINUED)
3. 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 10, and through the
issuance of the Company's common stock and common stock purchase warrants (Note
12).
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 $4,435,000 included the
issuance of 1,164,164 shares of the Company's common stock valued at $2,609,000,
the issuance of 250,628 stock purchase warrants with an ascribed value of
$1,674,000 (determined utilizing the Black-Scholes option-pricing model) and
related acquisition costs. During 1999, the Company paid $60,000 cash in final
settlement of amounts due to former shareholders of Krasner Group, Inc. The
acquisition was accounted for as a purchase and resulted in the recording of
goodwill aggregating $3,339,000 which is being amortized over 10 years. During
the year ended December 31, 1997, the Company exchanged 70,000 unexercised stock
purchase warrants with an intrinsic value of $240,000 for 50,526 shares of the
Company's common stock.
At December 31, 1998, the Company reviewed the carrying value of goodwill and
determined that based upon projected undiscounted cash flows of TKG over the
remaining amortization period, goodwill aggregating $1,000,000 would not be
recoverable. Consequently, in December 1998, the Company recorded an impairment
of TKG goodwill of $1,000,000 in the accompanying financial statements.
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
12), 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., (S.L.S.) 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 (determined utilizing the Black-Scholes option-pricing
model) and related acquisition costs. During the year ended December 31, 1997,
the Company exchanged 108,000 unexercised stock purchase warrants with an
intrinsic value of $402,000 for 80,000 shares of the Company's common stock.
Harlyn International Co., Ltd.
Effective July 1, 1996, the Company acquired all of the outstanding capital
stock of Harlyn International Co., Ltd. (Harlyn), 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 Harlyn's bank debt, concurrent with
consummation of the purchase transaction.
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
43
<PAGE> 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (CONTINUED)
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 based on pretax earnings, if
payable, will be recorded as additional purchase price consideration and will
increase goodwill recorded in conjunction with this acquisition. As of December
31, 1998, the Company recorded an increase to goodwill of $8,000 pursuant to
contingent payments. The Company 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. In accordance with
this guarantee an additional 32,735 shares of the Company's common stock were
issuable at December 31, 1997. During 1998, due to a further decrease in the
fair market value of the Company's common stock the Company issued 250,000
shares of its common stock in connection with this guarantee, and an additional
157,996 shares were issuable as of December 31, 1998. The additional 157,996
shares were issued during 1999. As a result of the increase in shares to be
issued, the Company recorded $347,000 as other expense in 1998, representing the
fair value of the incremental shares at date of issuance.
During 1998, the Company acquired for $10,000 cash, 232,335 additional shares of
GCI capital stock from a minority shareholder, which increased the Company's
ownership to 87%.
During 1999, the Company completed the consolidation of GCI into the Company's
California facility. In connection with this consolidation, the Company
purchased, at book value, certain assets and assumed certain liabilities of the
Georgetown and Magic Attic Club brands effective January 1, 1999 and May 15,
1999, respectively. The consideration for the net assets purchased was the
forgiveness of loans made to GCI by LLK aggregating $4,819,000.
Effective October 29, 1999, the Company sold the inventory, trademarks and
certain other assets related to the Georgetown brand of collectible dolls for an
aggregate sale price of $1.2 million. Net proceeds to the Company after
deducting costs associated with the transaction were approximately $1.1 million,
$192,000 of which is included in prepaid expenses and other current assets at
December 31, 1999. The sale resulted in a net gain to the Company of
approximately $182,000, which is included in other income.
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.
4. RESTRUCTURING CHARGE
In the fourth quarter of 1998, the Company recorded a restructuring charge of
$2,991,000, related to the consolidation of GCI into the Company's California
facility and the outsourcing of fulfillment for these brands. This charge
includes $2,342,000 for write-downs of certain long-lived assets, including
goodwill; $500,000 for lease termination payments, net of estimated sub-lease
income; and $149,000 for employee severance and termination benefits. The work
force reductions anticipated under this plan, 13 and 31 of which occurred in
1999 and 1998, respectively, totaled 44 positions in general sales and office
administrative functions and warehouse-related areas. The write-down of
long-lived assets, resulting from the restructuring of GCI operations, includes
the write-down to estimated fair value of fixed assets to be disposed of
($909,000) and elimination of goodwill associated with the GCI acquisition
($1,433,000) due to its nonrecoverability based upon GCI's projected
undiscounted cash flows over the remaining amortization period. During the years
ended December 31, 1999 and 1998, $68,000 and $81,000, respectively, of the
severance and termination benefits were paid. The remaining liability of
$329,000 for lease termination costs, is included in liabilities subject to
compromise at December 31, 1999.
5. INVENTORIES
At December 31, 1999 and 1998, inventories, including $533,000 and $246,000,
respectively, classified as other long-term assets consist of the following:
44
<PAGE> 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (CONTINUED)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Finished goods $ 7,471,000 $ 11,710,000
Work-in-process 494,000 663,000
Raw materials 1,303,000 1,532,000
Inventory reserves (4,080,000) (2,670,000)
------------ ------------
$ 5,188,000 $ 11,235,000
============ ============
</TABLE>
6. PROPERTY AND EQUIPMENT
At December 31, 1999 and 1998, property and equipment consist of the following:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Land, buildings and improvements $ 2,942,000 $ 2,994,000
Computer equipment and software 994,000 726,000
Production models, molds and tools 1,835,000 1,487,000
Autos 71,000 217,000
Office furniture and equipment 578,000 929,000
Machinery and equipment 757,000 807,000
----------- -----------
7,177,000 7,160,000
Accumulated depreciation (2,676,000) (2,190,000)
----------- -----------
$ 4,501,000 $ 4,970,000
=========== ===========
</TABLE>
7. RECEIVABLE FROM STOCKHOLDER
Receivable from stockholder (aggregating $1,088,000 at December 31, 1999) bears
interest at the prime rate plus 1% and is payable in installments of $200,000 on
March 31, 2000 and September 30, 2000 with any unpaid principal and interest due
on April 11, 2001. At December 31, 1999, due to the uncertainty of
collectibility of the note, the Company recorded a reserve of $1,088,000 on the
outstanding balance.
8. INVESTMENTS
At December 31, 1999, the Company had the following equity investments:
The Company owns 1,000 shares of Camelot Corporation (Camelot), which were
received in exchange for marketing services provided to Camelot. The shares
represent an ownership interest of less than 10% and are restricted as to the
Company's ability to sell them. During 1999, the Company determined that the
shares of Camelot had suffered a permanent diminution in value and the $4,000
carrying value of the shares was reduced to $0. The related $4,000 loss is
included in other expense.
During 1995, the Company acquired 400,000 shares of Tracker Corporation
(Tracker) in exchange for marketing services provided to Tracker. During 1999,
the Company sold the Tracker shares with a carrying value of $20,000 for net
proceeds of $55,000. The resulting gain of $35,000 is included in other income.
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 (determined utilizing the
Black-Scholes option-pricing model). Additionally, the Company agreed to fund up
to $1,000,000 of PEC expenses. Through December 31, 1997 the Company had
fulfilled its funding commitment and funded a total of $507,000, which increased
the Company's investment to $4,382,000. Effective April 1, 1998, the Company
discontinued the application of the equity method of accounting to its
investment in Pure Energy Corporation due to the Company's lack of significant
45
<PAGE> 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (CONTINUED)
influence over the operations of PEC. PEC shares are not publicly traded and the
Company's carrying value is therefore stated at original cost less equity method
losses accumulated through March 31, 1998. As of December 31, 1999, the Company
believes that there has been no permanent diminution in value of the PEC shares.
During the year ended December 31, 1997, the Company sold a portion of its
investment in PEC with a carrying value of $164,000 in exchange for 397,500
previously issued Company common stock purchase warrants with an ascribed value
of $1,874,000 (determined utilizing the Black-Scholes option-pricing model). The
sale resulted in a gain to the Company of $1,710,000, which is included in other
income. Also during the year ended December 31, 1997, the Company recorded a
deferred gain of $1,642,000 in connection with the sale of a portion of its
investment in PEC with a carrying value of $158,000 in exchange for a note
receivable of $1,800,000. The note receivable was collateralized by the
underlying securities sold and accrued interest at 7.5% per annum. The note
receivable and accrued interest were due and payable on December 30, 1999. As of
December 31, 1999, the note was not repaid and the Company reinstated the
$158,000 carrying value of the underlying collateral as an investment and wrote
off the note receivable and related deferred gain.
In September 1998, the Company sold a portion of its investment in Pure Energy
Corporation with a carrying value of $49,000 for net cash proceeds of $818,000.
The sale resulted in a gain to the Company of $769,000, which is included in
other income.
In September 1996, the Company purchased an equity interest in Ontro, Inc.
(Ontro). The purchase price consisted of $650,000 in cash for 858,673 common
shares. The investment provided the Company with a 27.8% common equity interest
in Ontro. In May 1998, Ontro successfully completed an initial public offering
whereby Ontro received approximately $15 million and issued 3,400,000 shares of
its common stock. As a result of the sale of previously unissued shares to the
public, the Company's ownership interest in Ontro was reduced to 13.2% and the
Company increased the balance of its investment in Ontro to reflect the enhanced
value of the Company's equity interest in Ontro. The net increase of $1,073,000
was recorded as a capital transaction, resulting in an increase to the Company's
additional paid-in capital account after giving effect to deferred taxes of
$715,000. The Company was restricted, until May 1999, from selling its Ontro
shares, which had a fair market value at December 31, 1999 of approximately
$1,932,000, which approximated its carrying value (see Note 21).
During 1997 the Company entered into a joint venture, Arkenol Asia, Inc., a
Delaware corporation owned 50% by LLK and 50% by Arkenol Holdings, LLC. The
joint venture acquired an exclusive license to exploit Arkenol Holdings
technology and related intellectual property to produce ethanol and other
chemicals for sale and consumption in Thailand, Cambodia, Burma, Vietnam, Laos,
India, China and Japan, and non-exclusive licenses for Indonesia and California.
As of December 31, 1998, the joint venture was inactive and the Company reduced
its investment to $0.
9. LINE OF CREDIT AND NOTES PAYABLE
Through July 16, 1999, the Company had available to use for working capital
purposes and to post letters of credit, a line of credit totaling $15,000,000,
subject to certain limits. The line of credit encompassed The L.L. Knickerbocker
Co., Inc. (LLK), Georgetown Collection, Inc. (GCI) and Krasner Group, Inc.
(TKG). Certain credit limits were established for each company. Borrowing
availability was determined by an advance rate on eligible accounts receivable
and inventory. At the expiration of the line of credit on July 16, 1999, the
Company did not have sufficient funds to pay off the line of credit. The Company
entered into a forbearance agreement with the financial institution initially
extending the general terms of the line of credit until August 30, 1999 and in
the event certain conditions were met, until September 20, 1999. The forbearance
agreement limited the Company's use of the credit facility to total borrowings
of $6,250,000. As a result of the Chapter 7 filing described in Note 1, the
financial institution placed the Company's credit facility on an offering basis,
effectively reserving the right to discontinue funding the Company at any time.
As a result of the Chapter 11 filing (Note 1), all required repayments of
principal on the notes payable under the line of credit for LLK and GCI have
been suspended, except for certain principal repayments that have been approved
by the Bankruptcy Court. The financial institution continues to lend funds on an
offering basis to TKG.
At December 31, 1999, the Company had $3,548,000 of cash borrowings outstanding,
$2,879,000 of which, representing amounts borrowed under the LLK and GCI
sublimits, is classified as subject to compromise in the accompanying
consolidated financial statements (Note 11). Borrowings bear interest at the
bank's base rate (8.5% at
46
<PAGE> 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (CONTINUED)
December 31, 1999) plus 3%. The Company has continued to accrue interest at the
contractual rate on these notes, however interest payments were suspended as of
the Conversion Date on the LLK and GCI borrowings.
S.L.S. and Harlyn have available lines of credit aggregating 76,000,000 Thai
baht (approximately $2,014,000 at December 31, 1999). Outstanding borrowings of
$1,894,000 at December 31, 1999 bear interest at rates ranging from 3.5% to
9.25%. Restricted cash of $312,000 and $310,000 at December 31, 1999 and 1998,
respectively, secured one such line of credit.
10. CONVERTIBLE DEBENTURES
1998 Debentures - In June 1998, the Company issued Convertible Debentures (the
1998 Debentures) with a face value of $7,000,000 in a private placement to
institutional investors. This private placement yielded net proceeds to the
Company totaling $6,573,000 after deducting costs associated with issuing the
1998 Debentures. The 1998 Debentures accrue interest at the rate of 6% per
annum, payable upon conversion of the related debt. The 1998 Debentures are
convertible at the option of the holder into shares of the Company's common
stock at the lower of $4.02 or 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
December 31, 1999, the Company issued a total of 17,188,362 shares of its common
stock in connection with the conversion of $4,279,000 of the principal amount of
the Debentures, plus interest accrued through the conversion date of $216,000.
The 1998 Debentures were subject to an agreement whereby after approval by the
shareholders of the Company of the issuance of the 1998 Debentures and the
creation of a class of Preferred Stock of the Company, the 1998 Debentures would
be exchanged for shares of newly created Preferred Stock of the Company, the
terms of which would be substantially similar to that of the 1998 Debentures.
However, the 1998 Debenture Holders chose not to exchange the 1998 Debentures
for Preferred Stock, citing a "material adverse effect," which was the decline
in the price of the Company's common stock. Under the terms of the related
agreements the 1998 Debentures matured on December 28, 1998. The Company was
unable to repay the 1998 Debenture Holders as of December 31, 1998 and 1999 and
is in default of the 1998 Debenture Agreement. Under the terms of the 1998
Debentures the face amount of the Debentures, aggregating $2,721,000, is due and
payable by the Company. At December 31, 1999, the face amount of the 1998
Debentures, net of discount of $59,000, is classified as subject to compromise
in the accompanying consolidated financial statements (Note 11).
The conversion of the securities at a maximum of 90% of the closing price of the
Company's common stock resulted in the 1998 Debentures being issued at a
discount (the conversion discount). The Company is recognizing the conversion
discount as non-cash interest expense over the estimated term of the 1998
Debentures (two years) with a corresponding increase to the original principal
amount of the 1998 Debentures. Upon conversion of the 1998 Debentures any
portion of the conversion discount not previously recognized is recorded as
interest expense on the conversion date. In connection with the issuance of the
1998 Debentures, the Company issued to the investors warrants to purchase
261,194 shares of common stock. The warrants vest as of the grant date with an
exercise price of $4.72 per share, which was equivalent to 135% of 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 $470,000 (determined utilizing the Black-Scholes option-pricing model), which
was recorded as debt discount (the warrant discount) and additional paid-in
capital. The Company recognized the warrant discount as noncash interest expense
over the approximate seven-month term of the securities in 1998. During the
years ended December 31, 1999 and 1998, a total of $670,000 and $1,324,000,
respectively, of noncash interest expense was recorded relating to the 1998
Debentures, including $240,000 and $12,000, respectively, relating to the
additional conversion discount recorded upon conversion and $470,000 related to
the warrant discount in 1998.
1997 Debentures - In September 1997, the Company issued Convertible Debentures
(the 1997 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
1997 Debentures. The 1997 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. The 1997 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
47
<PAGE> 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (CONTINUED)
convert prior to the two-year anniversary of the closing date. As of December
31, 1999, the Company issued a total of 6,044,393 shares of its common stock in
connection with the conversion of $3,350,000 of the principal amount of the 1997
Debentures, plus interest accrued through the conversion date of $218,000. At
December 31, 1999, the face amount of the 1997 Debentures, aggregating
$1,650,000, is classified as subject to compromise in the accompanying
consolidated financial statements (Note 11).
The conversion of the notes at a maximum of 90% of the closing price of the
Company's common stock resulted in the 1997 Debentures being issued at a
discount (the conversion discount). The conversion discount is being recognized
by the Company as noncash interest expense over the estimated term of the 1997
Debentures (two years) with a corresponding increase to the original principal
amount of the 1997 Debentures. Upon conversion of the 1997 Debentures, any
portion of the conversion discount not previously recognized is recorded as
interest expense on the conversion date. During the years ended December 31,
1999, 1998 and 1997, a total of $317,000, $786,000 and $188,000, respectively,
of noncash interest expense was recorded relating to the 1997 Debentures,
including $38,000 and $143,000 in 1999 and 1998, respectively, relating to the
additional conversion discount recorded upon conversion (none in 1997).
In August 1998, the Company entered into an agreement with the 1997 Debenture
holders whereby the Company had the right, until September 1, 1998, to purchase
up to $3,000,000 of the principal amount of the 1997 Debentures, adjusted for
conversions through September 1, 1998, for a purchase price in cash of 110% of
face value. In connection with the agreement the Company issued warrants to the
Debenture holders to purchase an aggregate of 213,132 shares of common stock.
The warrants have an aggregate ascribed value of $228,000 (determined utilizing
the Black-Scholes option-pricing model), which was recorded as other expense in
the third quarter of 1998. The Company did not purchase any of the debentures
under the agreement.
1996 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 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.
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 were convertible at the option of the holder into
shares of the Company's common stock at $8.00 per share. The New Debentures
matured on January 31, 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 recorded a noncash charge of $1,899,000 in the first
quarter of 1997.
Through December 31, 1998, the Company issued a total of 1,940,674 shares of its
common stock in connection with the conversion of $12,799,000 of the original
principal amount of the 1996 Debentures, plus interest accrued through the
conversion date of $268,000. During 1999, the Company issued 586,650 shares of
its common stock in connection with the conversion of the remaining $4,600,000
principal amount of the New Debentures, plus interest accrued through January
31, 1999 of $93,000.
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 years ended
December 31, 1999, 1998 and 1997, a total of $6,000, $73,000, and $644,000,
respectively, of noncash interest expense was recorded relating to the
Debentures, including $537,000 in 1997, relating to the additional conversion
discount recorded upon conversion.
48
<PAGE> 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (CONTINUED)
11. LIABILITIES SUBJECT TO COMPROMISE
Liabilities subject to compromise consist of the following as of December 31,
1999:
<TABLE>
<CAPTION>
<S> <C>
Secured liabilities - notes payable to bank (Note 9) $ 2,879,000
Unsecured liabilities:
Accounts payable, trade 4,454,000
Commissions and royalties payable 797,000
Convertible debentures (Note 10) 4,311,000
Other payables and accrued expenses 1,043,000
-----------
$13,484,000
===========
</TABLE>
A plan of reorganization if ultimately approved by the Company's impaired
prepetition creditors and stockholders and confirmed by the Bankruptcy Court may
materially change the amounts and terms of these prepetition liabilities. Such
amounts are estimated as of December 31, 1999, and the company anticipates that
claims filed with the Bankruptcy Court by the Company's creditors will require
reconciliation to the Company's financial records. The additional liability
arising from this reconciliation process, if any, is not subject to reasonable
estimation, and accordingly, no provision has been recorded for these possible
claims. The termination of other contractual obligations and the settlement of
disputed claims may create additional prepetition liabilities. Such amounts, if
any, will be recognized in the consolidated balance sheet as they are identified
and become subject to reasonable estimation.
12. 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
vested 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. As of December
31, 1999, none of the warrants had been exercised.
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 vested 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 (determined utilizing the Black-Scholes option-pricing model), which
was recorded as an investment and additional paid-in capital. During the year
ended December 31, 1997, the Company exchanged the 300,000 unexercised warrants
for 60,000 shares of the Company's common stock.
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 vested 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 was recorded as an investment and additional
paid-in-capital. As of December 31, 1997, 2,500 of the warrants were exercised.
During the year ended December 31, 1997, the remaining 397,500 warrants were
canceled in connection with the sale of a portion of the Company's investment in
PEC (Note 8).
During the years ended December 31, 1997 and 1996, the Company issued 150,000
and 46,971 warrants as commission in connection with the 1997 and 1996
convertible debenture offerings, respectively (Note 10). The 1997 warrants
vested as of the grant date with an exercise price of $5.60, which was
equivalent to the fair market value of the Company's common stock at the date of
grant and are valid for three years from the date of grant. The 1996
49
<PAGE> 50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (CONTINUED)
warrants vested as of the grant date with an exercise price of $11.87, 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 grant. The 1997 and 1996
warrants have an ascribed value, determined utilizing the Black-Scholes
option-pricing model, of $434,000 and $233,000, respectively, which was recorded
as deferred debt issue costs and additional paid-in capital. As of December 31,
1999, none of the warrants had been exercised.
In conjunction with the acquisitions described in Note 3 the Company issued
stock purchase warrants as part of the consideration paid for these
acquisitions. The following table summarizes the warrants issued:
<TABLE>
<CAPTION>
Outstanding
Warrants at December Exercise Expiration
Acquisition issued Exercised Canceled 31,1999 Price Date
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Krasner Group, Inc. 250,628 62,090 70,000 118,538 $ 7.75 April 10, 2004
S.L.S. Trading Co., Ltd. 108,000 - 108,000 - $ 7.75 April 10, 2004
</TABLE>
During 1997, 70,000 and 108,000 warrants issued in conjunction with the TKG and
S.L.S. acquisitions, respectively, were exchanged for shares of the Company's
common stock (Note 3). There were no warrants exercised during 1997, 1998, or
1999.
During the year ended December 31, 1998, the Company issued 261,194 warrants in
connection with the issuance of the 1998 Debentures (Note 10). The warrants vest
as of the grant date with an exercise price of $4.72 per share, which was
equivalent to 135% of 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 grant. As of
December 31, 1999, none of the warrants had been exercised.
During the year ended December 31, 1998, the Company issued 213,132 warrants in
connection with a repurchase agreement with the 1997 Debenture holders. The
warrants vest as of the grant date with an exercise price of $3.00 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 grant. As of
December 31, 1999, none of the warrants had been exercised.
The L.L. Knickerbocker 1995 Amended and Restated 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 2,000,000 shares
when granted. 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.
The L.L. Knickerbocker Stock Incentive Compensation Plan - On March 27, 1997,
the Company's Board of Directors adopted the L.L. Knickerbocker Stock Incentive
Compensation Plan (the ISO Plan). The ISO Plan provides that incentive and
nonstatutory options to purchase a total of 5,000,000 shares of common stock may
be granted thereunder. The ISO Plan permits the granting of options intended to
qualify as "incentive stock options" (ISO's), the granting of options that do
not so qualify (NSO's), and the granting of stock appreciation rights (SAR's).
The exercise price of any option is established by the Administrator, who is
appointed by the Board of Directors, at the time of grant. The exercise price of
any NSO's or ISO's granted under the Plan may not be less than 100% of the fair
market value of one share of common stock on the date of grant. The exercise
price of any ISO granted to an optionee who owns stock possessing more than 10%
of the voting rights of the Company's outstanding shares must be at least 110%
of the fair market value of the shares subject to the option on the date of
grant. Options granted under the ISO Plan have a maximum term of 10 years.
50
<PAGE> 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (CONTINUED)
The Board may from time to time, with respect to any shares at the time not
subject to options, suspend or discontinue the ISO Plan or revise or amend it in
any respect whatsoever except that, without the approval of the Company's
shareholders, no such revision or amendment shall increase the number of shares
subject to the ISO Plan or change the classes of persons eligible to receive
options. Options may be granted pursuant to the ISO Plan until the expiration of
the Plan on March 27, 2007.
Option activity under the plans is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF PRICE PER
SHARES SHARE
---------- ----------
<S> <C> <C>
Outstanding, January 1, 1997 1,355,295 $ 2.10
Granted 1,315,617 4.81
Exercised (431,250) 1.21
Canceled (250) 7.75
----------
Outstanding, December 31, 1997 2,239,412 3.86
Granted 2,423,814 1.29
Exercised (72,398) 4.62
Canceled (1,594,143) 4.85
----------
Outstanding, December 31, 1998 2,996,685 1.49
Granted 409,250 0.61
Canceled (587,232) 0.78
----------
Outstanding, December 31, 1999 2,818,703 $ 1.51
==========
</TABLE>
During 1998, as an incentive to employees, key officers and directors, 1,593,643
options were canceled and exchanged for 1,471,456 options at an exercise price
of $.64 (120% of fair market value at the date of grant). At December 31, 1999,
1998 and 1997, 2,391,703, 2,215,785, and 1,692,545 options were exercisable at a
weighted average exercise price of $1.67, $1.78, and $4.33, respectively. The
weighted average fair value of options granted during 1999, 1998 and 1997, was
$.52, $.74, and $3.29, respectively.
Additional information regarding options outstanding as of December 31, 1999 is
as follows:
<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>
$0.05-$1.00 2,419,040 8.36 years $ 0.67 1,992,040 $ 0.67
$3.00-$10.00 399,663 7.49 years $ 6.65 399,663 $ 6.65
--------------------------------------------------------------------------
2,818,703 8.23 years $ 1.51 2,391,703 $ 1.67
</TABLE>
At December 31, 1999, 5,792,135 shares were available for future grants under
the Option plans.
51
<PAGE> 52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (CONTINUED)
The fair value of each option grant was estimated as of the grant date using the
Black-Scholes option-pricing model for the years ended December 31, 1999, 1998
and 1997 assuming risk-free interest rates of 6.0%, 5.5% and 5.5%, respectively,
volatility of 112%, 73% and 68%, respectively, zero dividend yield, and expected
lives of 10 years for all periods. Forfeitures are recognized as they occur. If
compensation expense was determined based on the fair value method as prescribed
by SFAS 123, beginning with grants in the year ended December 31, 1996, the
Company's net loss and net loss per share would have been reduced to the
approximate pro forma amounts indicated below for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Actual net loss $ (11,212,000) $ (28,715,000) $ (4,377,000)
Pro forma net loss $ (11,589,000) $ (29,662,000) (6,657,000)
Actual net loss per share:
Basic and diluted $ (0.33) $ (1.46) $ (0.24)
Pro forma net loss per share:
Basic and diluted $ (0.34) $ (1.51) $ (0.37)
</TABLE>
13. 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 and require the Company to pay real estate taxes and certain
other expenses. Subject to the approval of the Bankruptcy Court, the Company can
reject executory contracts, including leases, under the relevant provisions of
the Bankruptcy Code. Rejection of a lease gives the lessor the right to assert a
prepetition claim against the Company. However, the amount of the claim may be
limited by the Bankruptcy Court. The analysis of lease commitments which follows
has not been adjusted to reflect possible future lease rejections.
Minimum annual rental commitments under operating leases are as follows:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C> <C>
2000 $ 745,000
2001 664,000
2002 619,000
2003 393,000
2004 379,000
Thereafter 947,000
-----------
$3,747,000
===========
</TABLE>
Rent expense, including real estate taxes and insurance, for the years ended
December 31, 1999, 1998 and 1997 was $686,000, $1,153,000, and $578,000,
respectively.
Contractual Arrangements - The Company has contractual arrangements with several
celebrities and other third parties, including Marie Osmond, Annette Funicello
and Richard Simmons. 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
insurance and pay royalties based on a percentage 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 $600,000). 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 generally run from 18 months to 5 years and contain audit clauses,
with penalties for errors or omissions. The Company is currently facing a
challenge by one of its celebrity spokespersons to terminate the contract. The
Company is vigorously defending its position and desires to honor the contract
through maturity of the contract. To the extent the Company is not successful in
defending its position and the contract is terminated there could be a material
adverse impact on the Company's future results of operations.
52
<PAGE> 53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (CONTINUED)
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.
Employment Contracts - The Company has entered into four employment agreements
with Company officers with five-year terms. The agreements call for aggregate
annual compensation of $769,000 and a discretionary bonus of up to 10% of
operating income.
Litigation - Plaintiff Michael Elam filed an action in Orange County Superior
Court (Case No. 759883) on or about February 16, 1996, against Louis L.
Knickerbocker, Tamara Knickerbocker and the Company alleging causes of action
for conversion, breach of fiduciary duty, fraud, debitatus assumpsit,
intentional interference with contract, constructive trust, breach of oral
agreement, specific performance, money had and received, open book account and
spoliation of evidence. The plaintiff is seeking money damages and/or shares of
stock of the Company ranging between $500,000 and $35,000,000 as a result of
prior business affiliations with Mr. Knickerbocker, alleging that the Company is
liable as a successor-in-interest for the debts of Mr. Knickerbocker's prior
companies, and that Mr. Knickerbocker was obligated to allow the plaintiff to
participate in the Company when it was created. The defendants vigorously
opposed the lawsuit. A motion for summary judgment filed in August 1998
eliminated those causes of action claiming an interest in the company's
predecessor, Knickerbocker Creations, Ltd. The case was set for trial on May 24,
1999. The Company entered into an agreement with the plaintiff to settle the
litigation in exchange for shares of Pure Energy Corporation held by the Company
with a carrying value of $168,000. This amount is included in liabilities
subject to compromise at December 31, 1999. The Company has been unable to
deliver the settlement amount due to the bankruptcy proceeding. It is not
certain how many, if any, shares in Pure Energy Corporation the Company will be
able to deliver in connection with the settlement. The action is stayed pending
the bankruptcy proceeding.
The Company brought claims against State Street Bank and Trust Company ("State
Street") in federal district court in Boston, Massachusetts (Civil Action No.
97-12573-NO, U.S. District Court, D. MA) for conversion, breach of contract,
unjust enrichment, a declaratory judgment and violation of Massachusetts General
Laws, c. 93A arising from State Street's wrongful retention of 72,188 shares of
the Company's common stock after the Company's obligations to State Street under
a Settlement Agreement of the prior indebtedness of Georgetown Collection, Inc.,
a subsidiary acquired in 1996, had been paid in full. The stock retained by
State Street had an original value of $617,000. State Street denies liability
and brought a counterclaim against the Company for breach of contract and
specific performance seeking $102,000 in damages, plus attorneys fees and costs.
Prior to the bankruptcy proceeding, the Company was in negotiations with State
Street Bank to settle the above matter. The action is stayed pending the
bankruptcy proceeding.
Finance Authority of Maine, Coastal Enterprises, Inc, and the Southern Maine
Economic Development District brought claims in federal district court in
Portland, Maine (Civil Action No.98-2235-8, U.S. District Court, D. Maine) for
breach of contract, indemnification and specific performance arising from the
Company's performance under certain settlement documents following the
acquisition of the subsidiary, Georgetown Collection, Inc., in 1996. The
plaintiffs are seeking an order requiring the Company to purchase 63,030 shares
of the Company's stock previously transferred to plaintiffs for $11.50 per
share, plus interest and attorneys fees. The Company answered and denied
liability on plaintiffs' claims. The plaintiffs moved for summary judgment, and
the motion is currently under advisement. The action is stayed pending the
bankruptcy proceeding.
A former shareholder of GCI alleges that the Company is liable for a $750,000
note payable to the former shareholder. No accrual for potential loss related to
this note has been recorded as of December 31, 1999, as the Company believes
that the note payable was settled in connection with the acquisition of GCI and
that the Company is not liable for this amount.
The Company is involved in certain other legal and administrative proceedings
and threatened legal and administrative proceedings arising in the normal course
of its business. While the outcome of such proceedings and threatened
proceedings cannot be predicted with certainty, in the opinion of management,
the ultimate resolution of these matters individually or in the aggregate will
not have a material adverse effect on the Company.
53
<PAGE> 54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (CONTINUED)
14. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt at December 31, 1999 and 1998 consists of:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Building mortgage, interest at 11.0% per annum,
payable in monthly installments of $7,000, including
interest, collateralized by real estate $ 370,000 $ 423,000
Building mortgage, interest at 14.75% per annum,
payable in monthly installments of $17,000 including
interest, collateralized by real estate, repaid in 1999 - 75,000
Equipment leases, interest ranging from 4.0% to
24.9% per annum, payable in aggregate monthly
installments of $9,000, including interest, collateralized
by equipment 223,000 258,000
--------- ---------
593,000 756,000
Less current portion (176,000) (215,000)
--------- ---------
--------- ---------
$ 417,000 $ 541,000
========= =========
</TABLE>
Principal payments on long-term debt and capital lease obligations at December
31, 1999 are due approximately as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ending December 31:
2000 $ 176,000
2001 93,000
2002 75,000
2003 52,000
2004 55,000
Thereafter 142,000
----------
$ 593,000
==========
</TABLE>
15. SIGNIFICANT CONCENTRATIONS AND RISKS
Customer Concentration - During the years ended December 31, 1999, 1998 and
1997, the Company conducted business with one customer whose aggregate net sales
volume comprised approximately 45%, 25%, and 29% 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.
Foreign Currency - Approximately 17% of the Company's revenues are derived from
subsidiaries operating in Thailand. In an attempt to reduce economic risks
associated with devaluations of the Thai baht, the Company's Thailand
subsidiaries require their customers to remit payment in U.S. dollars. Included
in other income for the years ended December 31, 1999, 1998 and 1997 is $79,000,
$(333,000) and $1,094,000, respectively, in transaction gains (losses)
associated with this strategy.
54
<PAGE> 55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (CONTINUED)
16. INCOME TAXES
The provision (benefit) for income taxes consists of the following for the years
ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Current federal and state income taxes $ 40,000 $ 99,000 $ 37,000
Current foreign taxes 35,000 113,000 11,000
Deferred federal and state income taxes (2,701,000) (9,137,000) (3,282,000)
Change in valuation allowance, federal and
state income taxes 2,701,000 12,588,000 2,187,000
------------ ------------ ------------
Provision (benefit) for income taxes $ 75,000 $ 3,663,000 $ (1,047,000)
============ ============ ============
</TABLE>
A reconciliation of the statutory federal rate and the provision (benefit) for
income taxes is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Federal tax at statutory rate $ (3,898,000) $ (8,864,000) $ (1,895,000)
State taxes 26,000 505,000 (28,000)
Goodwill amortization 91,000 524,000 125,000
Foreign tax rate differential 1,049,000 (140,000) (883,000)
Valuation allowance 2,377,000 10,520,000 325,000
Non-deductible interest on
convertible debentures 348,000 764,000 1,219,000
Other 82,000 354,000 90,000
------------ ------------ ------------
$ 75,000 $ 3,663,000 $ (1,047,000)
============ ============ ============
</TABLE>
55
<PAGE> 56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities at
December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Deferred tax assets
Bad debt reserve $ 993,000 $ 277,000
Difference between book and tax basis of fixed assets
and goodwill 881,000 1,312,000
Uniform capitalization -- 185,000
Inventory reserves 1,402,000 1,160,000
Returns and allowances 253,000 635,000
Pre-acquisition net operating loss carryforward 2,370,000 2,370,000
Post-acquisition net operating loss carryforward 10,356,000 7,719,000
Difference between book and tax basis of investments 1,007,000 1,108,000
State income taxes 55,000 44,000
Other 159,000 188,000
Valuation allowance (17,476,000) (14,775,000)
------------ ------------
Total deferred tax assets -- 223,000
Deferred tax liabilities
Prepaids $ -- $ (223,000)
------------ ------------
$ -- $ --
============ ============
</TABLE>
The Company has provided a full valuation allowance on the net deferred tax
asset at December 31, 1999 and 1998 due to the uncertainty regarding its
realization.
At December 31, 1999, the Company has approximately $24,630,000 and $6,280,000
of federal and state net operating loss carryforwards, respectively.
Additionally, the Company has an approximate $4,395,000 loss carryforward
related to GCI and TKG that 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 $490,000 of the
net operating loss carryforward can be utilized annually in 1999 and subsequent
years. Any net operating loss not utilized will begin expiring in 2010.
Since the Company does not have sufficient taxable income or carry back
potential to utilize the deductions generated from the exercise of stock
options, approximately $5,890,000 of deductions have not been recorded in the
accompanying financial statements. As these losses are utilized in future years,
the tax benefit will be recorded to equity.
17. BUSINESS SEGMENT INFORMATION
The Company is engaged primarily in the design, manufacture and marketing of
branded collectibles and jewelry. The Company has three reportable segments: (1)
collectible brands, (2) fashion jewelry brands and (3) fine jewelry. The
collectible brands segment encompasses collectible dolls, toys, teddy bears and
figurines. The fashion jewelry brands encompass items manufactured by the
Company from non-precious metals, for sale primarily to the home shopping
industry. The fine jewelry segment encompasses jewelry manufactured by the
Company with precious metals. Corporate activities including financing
transactions are reflected in the tables below as "Corporate". The Company
evaluates performance based on profit or loss from operations. The operating
segments are managed separately because each segment requires different
marketing strategies.
56
<PAGE> 57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (CONTINUED)
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net sales
Collectible brands $ 24,355,000 $ 39,424,000 $ 46,311,000
Fashion jewelry brands 10,405,000 9,241,000 11,707,000
Fine jewelry 7,405,000 11,762,000 10,272,000
Corporate -- -- --
------------ ------------ ------------
Consolidated $ 42,165,000 $ 60,427,000 $ 68,290,000
Operating (loss) income
Collectible brands $ (4,104,000) $(14,708,000) $ (2,271,000)
Fashion jewelry brands 819,000 (2,638,000) 416,000
Fine jewelry (3,045,000) 294,000 986,000
Corporate (2,086,000) (3,316,000) (1,173,000)
------------ ------------ ------------
Consolidated $ (8,416,000) $(20,368,000) $ (2,042,000)
Interest expense
Collectible brands $ -- $ -- $ --
Fashion jewelry brands -- -- --
Fine jewelry -- -- --
Corporate 1,814,000 3,658,000 4,831,000
------------ ------------ ------------
Consolidated $ 1,814,000 $ 3,658,000 $ 4,831,000
Depreciation and amortization
Collectible brands $ 430,000 $ 1,706,000 $ 1,490,000
Fashion jewelry brands 859,000 868,000 691,000
Fine jewelry 586,000 482,000 546,000
Corporate -- -- --
------------ ------------ ------------
Consolidated $ 1,875,000 $ 3,056,000 $ 2,727,000
Capital expenditures
Collectible brands $ 80,000 $ 456,000 $ 1,307,000
Fashion jewelry brands 264,000 413,000 581,000
Fine jewelry 406,000 651,000 890,000
Corporate -- -- --
------------ ------------ ------------
Consolidated $ 750,000 $ 1,520,000 $ 2,778,000
Total assets
Collectible brands $ 8,955,000 $ 15,702,000 $ 23,130,000
Fashion jewelry brands 3,045,000 2,787,000 3,948,000
Fine jewelry 7,968,000 10,431,000 7,507,000
Corporate 6,618,000 9,822,000 16,376,000
------------ ------------ ------------
Consolidated $ 26,586,000 $ 38,742,000 $ 50,961,000
Geographic areas
Sales to external customers:
United States $ 34,858,000 $ 50,616,000 $ 59,230,000
Thailand 7,307,000 9,811,000 9,060,000
------------ ------------ ------------
Consolidated $ 42,165,000 $ 60,427,000 $ 68,290,000
</TABLE>
57
<PAGE> 58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (CONTINUED)
18. EARNINGS PER SHARE
Earnings per common share (EPS) data were computed as follows:
<TABLE>
<CAPTION>
1999: Income (Loss) Shares Per-Share Amount
- ----- ------------- ------ ----------------
<S> <C> <C> <C>
Net Loss $(11,212,000)
============
Basic EPS:
Loss available to common shareholders $(11,212,000) 34,290,701 $ (0.33)
===========
Effect of Dilutive Securities -- --
----------------------------
Diluted EPS:
Loss available to common stockholders and assumed conversions $(11,212,000) 34,290,701 $ (0.33)
===========================================
1998:
- -----
Net Loss $(28,715,000)
============
Basic EPS:
Loss available to common shareholders $(28,715,000) 19,630,175 $ (1.46)
===========================================
Effect of Dilutive Securities -- --
-----------------------------
Diluted EPS:
Loss available to common stockholders and assumed conversions $(28,715,000) 19,630,175 $ (1.46)
==========================================
1997:
- -----
Net Loss $ (4,377,000)
============
Basic EPS:
Loss available to common shareholders $ (4,377,000) 18,052,081 $ (0.24)
===========
Effect of Dilutive Securities -- --
-----------------------------
Diluted EPS:
Loss available to common stockholders and assumed conversions $ (4,377,000) 18,052,081 $ (0.24)
==========================================
</TABLE>
19. EMPLOYEE BENEFIT PLAN
The Company maintains a defined contribution plan (401(K) Plan) covering all
U.S. employees of the Company who meet eligibility requirements. Matching
Company contributions are made based upon a minimum of 2% of participant
contributions. During the years ended December 31, 1999, 1998 and 1997, the
Company made contributions of $3,000, $5,000 and $37,000, respectively.
58
<PAGE> 59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (CONTINUED)
20. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Year ended December 31, 1999:
Net sales $ 9,485,000 $ 13,367,000 $ 9,344,000 $ 9,969,000
Gross profit 4,717,000 5,988,000 3,990,000 2,315,000
Net loss (2,277,000) (1,088,000) (1,191,000) (6,656,000)
Net loss per share, diluted $ (0.09) $ (0.04) $ (0.03) $ (0.15)
Year ended December 31, 1998:
Net sales $ 11,482,000 $ 13,434,000 $ 15,769,000 $ 19,742,000
Gross profit 6,626,000 6,946,000 8,064,000 9,408,000
Net loss (2,576,000) (2,680,000) (1,690,000) (21,769,000)
Net loss per share, diluted $ (0.14) $ (0.14) $ (0.09) $ (1.06)
</TABLE>
Fourth Quarter Adjustments
1999 - Net loss for the fourth quarter of 1999 includes a $1,823,000 adjustment
for estimated excess inventory quantities and obsolescence of inventory related
to discontinued product lines. Also included in the fourth quarter of 1999 is a
charge of $1,088,000 related to a reserve on a receivable from stockholder (Note
7).
During the fourth quarter of 1999, the Company sold its Georgetown brand of
collectible dolls (Note 3). As a result of this sale the Company recorded a
$473,000 increase to the allowance for doubtful accounts receivable due from
Georgetown brand customers.
1998 - Net loss for the fourth quarter of 1998 includes a $2,991,000
restructuring charge related to the consolidation of GCI into the Company's
California facility (Note 4). In connection with the revised marketing strategy
for the Company's Georgetown and Magic Attic Club brands, in the fourth quarter
of 1998, the Company recorded an approximate $1,643,000 charge to write down
prepaid advertising and related costs.
Based on management's year-end evaluation of the carrying value of intangible
assets, an impairment charge of $1,000,000 was recorded in the fourth quarter of
1998 to reduce the carrying value of goodwill related to the TKG acquisition to
management's estimate of fair value (Note 3).
The fourth quarter of 1998 also includes an $840,000 adjustment for estimated
excess inventory quantities and obsolescence of inventory and production models
related to discontinued product lines. Also included in the fourth quarter of
1998 is approximately $1,446,000 of expense related to litigation and other
legal matters (Note 13).
At December 31, 1998, the Company wrote off $712,000 of unamortized debt
discount and deferred debt issuance costs related to the 1998 Debentures, due to
the maturity of the debentures prior to exchange of the debentures to preferred
stock. This amount is included in interest expense for the year ended December
31, 1998.
The Company also recorded in the fourth quarter of 1998, a $4,683,000 adjustment
to increase its valuation allowance for net deferred tax assets due to recurring
tax losses (Note 16).
21. SUBSEQUENT EVENT
Subsequent to December 31, 1999, the Company issued 3,260,374 shares of its
common stock in connection with the conversion of $219,000 of the principal
amount of the 1998 Debentures, plus interest accrued through the conversion
date.
In March 2000, the Company sold 228,600 shares of Ontro, Inc. (Note 8) for net
proceeds of approximately $486,000.
59
<PAGE> 60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (CONTINUED)
22. CONDENSED FINANCIAL STATEMENTS FOR THE DEBTOR ENTITY
The following are condensed unconsolidated financial statements for LLK:
The L.L. Knickerbocker Co., Inc.
Condensed Balance Sheet
as of December 31, 1999
(unconsolidated)
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Cash and cash equivalents $ 1,292,000
Accounts receivable, net of allowance 3,501,000
Inventories 2,066,000
Prepaid expenses and other current assets 1,230,000
------------
Total current assets 8,089,000
Investment in subsidiaries 5,664,000
Receivable from subsidiaries 1,309,000
Property and equipment, net 720,000
Investments 3,675,000
Other assets 146,000
------------
Total assets $ 19,603,000
============
LIABILITIES:
Accounts payable $ 1,713,000
Other accrued expenses 2,031,000
------------
Total current liabilities 3,744,000
Liabilities subject to compromise
under reorganization proceeding 13,484,000
STOCKHOLDERS' EQUITY
Common stock 41,397,000
Additional paid-in capital 6,012,000
Accumulated deficit (41,157,000)
Accumulated other comprehensive loss (3,877,000)
------------
Total stockholders' equity 2,375,000
------------
Total liabilities and stockholders' equity $ 19,603,000
============
</TABLE>
60
<PAGE> 61
The L.L. Knickerbocker Co., Inc.
Condensed Statement of Operations
(unconsolidated)
<TABLE>
<CAPTION>
Year to Date *
---------------
<S> <C>
Net sales $ 8,970,000
Cost of sales 6,216,000
--------------
Gross profit 2,754,000
Advertising expense 338,000
Selling expense 1,550,000
General and administrative expense 3,674,000
Equity in loss of subsidiaries 3,096,000
--------------
Operating loss (5,904,000)
Other expense 37,000
Interest expense 331,000
Reorganization items 495,000
--------------
Net loss $ (6,767,000)
==============
</TABLE>
* An involuntary petition under Chapter 7 was filed against the debtor on August
23, 1999. These year-to-date figures represent amounts from August 24, 1999
through December 31, 1999.
The L.L. Knickerbocker Co., Inc.
Notes to Condensed Financial Statements
December 31, 1999
(unconsolidated)
1. BASIS OF PRESENTATION
Generally Accepted Accounting Principles (GAAP) requires that certain entities
that meet specific criteria be consolidated with LLK including its wholly-owned
and majority-owned subsidiaries (non-debtors). For purposes of this presentation
LLK accounts for all subsidiaries using the equity method of accounting.
All entities that LLK would normally consolidate for GAAP purposes are being
accounted for under the equity method of accounting. The equity method of
accounting consists of recording an original investment in an investee as the
amount originally contributed. Subsequently this balance is
increased/(decreased) for LLK's share of the investee's income/(losses) and
increased for additional contributions a d decreased for distributions received
from the investee. LLK's share of the investee's income/(loss) is recognized as
"Equity in loss of subsidiaries" on the statement of operations.
In management's opinion, with the exception of those matters discussed above,
the financial statements of LLK contain all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly the unconsolidated
financial position of LLK as of December 31, 1999, and the unconsolidated
results of its operations for the period from August 24, 1999 through December
31, 1999.
61
<PAGE> 62
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Balance at Additions Balance at
beginning charged to end of
of period expense Deductions period
------------------------------------------------------ --------------
<S> <C> <C> <C> <C>
For the year ended December 31, 1997:
Allowance for doubtful accounts $ 1,092,000 $ 1,710,000 $ (2,133,000) $ 669,000
============== ============== ============== ==============
Inventory reserve $ 2,805,000 $ 1,633,000 $ (2,289,000) $ 2,149,000
============== ============== ============== ==============
For the year ended December 31, 1998:
Allowance for doubtful accounts $ 669,000 $ 2,341,000 $ (1,883,000) $ 1,127,000
============== ============== ============== ==============
Inventory reserve $ 2,149,000 $ 2,347,000 $ (1,826,000) $ 2,670,000
============== ============== ============== ==============
For the year ended December 31, 1999:
Allowance for doubtful accounts $ 1,127,000 $ 1,785,000 $ (426,000) $ 2,486,000
============== ============== ============== ==============
Inventory reserve
$ 2,670,000 $ 2,456,000 $ (1,046,000) $ 4,080,000
============== ============== ============== ==============
</TABLE>
62
<PAGE> 63
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
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)
3.6 Certificate of Amendment to Articles of Incorporation of the Company
dated March 15, 1999 (13)
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.(10)
10.2* Employment Agreement, dated July 1, 1996, between the Company and Tamara
Knickerbocker.(10)
10.3* Employment Agreement, dated July 1, 1996, between the Company and
Anthony P. Shutts.(10)
10.5 Agreement between Marie, Inc. and the Company dated April 1, 1993 re the
services of Marie Osmond in the design, production, and sale of products
and licensing to the Company of the use of Marie Osmond's name in
conjunction with the Company's products.(3)
10.6 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)
10.7 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)
10.8 Lease Agreement between the Company and Security Capital Industrial
Trust for 25800 Commercentre Drive, Lake Forest, CA dated February 15,
1995.(2)
10.9 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)
10.10 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)
63
<PAGE> 64
10.11 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)
10.12 Letter of intent between Pure Energy Corporation and Biofine, Inc.,
dated March 3, 1996 re the licensing of the patents of Biofine, Inc. (5)
10.13 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)
10.15 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,. (7)
10.16 Stock Purchase Agreement dated September 30, 1996, by and among Harlyn
Products, Inc., Harlyn International Co., Ltd. and the Company.(6)
10.17 First Amendment to Stock Purchase Agreement dated October 15, 1996, by
and among Harlyn Products, Inc., Harlyn International Company, Ltd. and
the Company.(6)
10.18 Second Amendment to Stock Purchase Agreement dated November 7, 1996, by
and among Harlyn Products, Inc., Harlyn International Company, Ltd. and
the Company.(6)
10.19 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)
10.20 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)
10.21 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)
10.22 Form of Private Securities Subscription Agreement.(6)
10.23 Form of Registration Rights Agreement.(6)
21.1 Subsidiaries of Registrant.(11)
23.1 Consent of Deloitte & Touche LLP, independent auditors. (13)
27.0 Financial Data Schedule (13)
- --------------------------------
(1) Filed as part of Exhibit 3.1 to The L. L. Knickerbocker Co., 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 Co., 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 Co., 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 Co., 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 Co., 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 Co., 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 Co., 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 Co., Inc. report on Form 8-K
filed with the Securities and Exchange Commission on or about December
5, 1996.
64
<PAGE> 65
(9) Filed as an exhibit to The L. L. Knickerbocker Co., Inc. Annual Report
on Form 10-KSB filed with the Securities and Exchange Commission on or
about April 15, 1997.
(10) Filed as an exhibit to The L. L. Knickerbocker Co., Inc. Amended Annual
Report on Form 10-KSB/A filed with the Securities and Exchange
Commission on or about August 15, 1997.
(11) Filed as an exhibit to The L.L. Knickerbocker Co., Inc. Annual Report on
Form 10-KSB filed with the Securities and Exchange Commission on or
about March 31, 1998.
(12) Filed as an exhibit to The L.L. Knickerbocker Co., Inc. Annual Report on
Form 10-K filed with the Securities and Exchange Commission on or about
April 15, 1999.
(13) Filed herewith.
* These exhibits represent management contracts or compensatory plan
arrangements.
65
<PAGE> 1
EXHIBIT 3.6
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
THE L.L. KNICKERBOCKER CO., INC.
LOUIS L. KNICKERBOCKER and WILLIAM R. BLACK certify that:
1. They are the duly elected and acting Chairman of the Board and
Secretary, respectively, of THE L.L. KNICKERBOCKER CO., INC., a California
corporation (the "Corporation").
2. Article IV of the Articles of Incorporation of this Corporation is
amended to read as follows:
"This corporation is authorized to issue two classes of stock,
to be designated, respectively, "Common Stock" and "Preferred Stock."
The total number of shares which the corporation is authorized to issue
is One Hundred Ten Million (110,000,000) shares. One Hundred Million
(100,000,000) shares shall be Common Stock and Ten Million (10,000,000)
shares shall be Preferred Stock.
The Preferred Stock may be issued from time to time in one or
more series as the board of directors (the "Board of Directors") of this
corporation may determine. The Board of Directors is authorized to
determine and alter the rights, preferences, privileges and restrictions
granted to or imposed upon any wholly unissued series of Preferred
Stock, and to fix the number of shares of any series of Preferred Stock
and the designation of any such series of Preferred Stock. The Board of
Directors, within the limits and restrictions stated in any resolution
or resolutions of the Board of Directors originally fixing the number of
shares constituting any series, may increase or decrease (but not below
the number of shares of such series then outstanding) the number of
shares of any series subsequent to the issue of shares of that series.
In case the number of shares of any series shall be so decreased, the
shares constituting such decrease shall resume the status that they had
prior to the adoption of the resolution originally fixing the number of
shares of such series."
3. The amendment herein set forth has been duly approved by the Board of
Directors of this Corporation.
<PAGE> 2
4. The amendment herein set forth has been duly approved by the required
vote of the shareholders of this Corporation in accordance with Section 902 of
the California Corporation Code. The Corporation has only one class of shares
and the total number of outstanding shares entitled to vote with respect to the
amendment was 19,994,126. The number of shares voting in favor of the amendment
equaled or exceeded the vote required. The percentage vote required was more
than 50%.
Each of the undersigned declares under penalty of perjury under the laws
of the State of California that the matters set forth in this Certificate are
true and correct of his own knowledge.
Dated: March 15, 1999
/s/ Louis L. Knickerbocker
-----------------------------------
Louis L. Knickerbocker,
Chairman of the Board
/s/ William R. Black
-----------------------------------
William R. Black, Secretary
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-1146 of The L.L. Knickerbocker Co. Inc. on Form S-8 and in Registration
Statements No. 333-15185, No. 333-37101 and No. 333-59169 on Form S-3 of our
report, which contains an explanatory paragraph regarding substantial doubt
about the Company's ability to continue as a going concern, dated April 12,
2000, appearing in the Annual Report on Form 10-K of The L.L. Knickerbocker Co.,
Inc. for the year ended December 31, 1999.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
April 12, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,822,000
<SECURITIES> 0
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<PP&E> 4,501,000
<DEPRECIATION> (2,676,000)
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<CURRENT-LIABILITIES> 10,310,000
<BONDS> 0
0
0
<COMMON> 41,397,000
<OTHER-SE> (39,022,000)
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<CGS> 25,155,000
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<OTHER-EXPENSES> 235,000
<LOSS-PROVISION> 1,785,000
<INTEREST-EXPENSE> 1,814,000
<INCOME-PRETAX> (11,137,000)
<INCOME-TAX> 75,000
<INCOME-CONTINUING> (11,212,000)
<DISCONTINUED> 0
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<NET-INCOME> (11,212,000)
<EPS-BASIC> (0.33)
<EPS-DILUTED> (0.33)
</TABLE>
