<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-25488
THE L.L. KNICKERBOCKER CO., INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 33-0230641
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
25800 COMMERCENTRE DRIVE 92630
LAKE FOREST, CALIFORNIA (Zip Code)
(Address of principal executive offices)
ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 595-7900
Indicate by mark whether the issuer: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
The number of shares outstanding of the registrant's Common Stock, as of
November 7, 2000 was 47,187,728.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
PART I
<S> <C>
1. FINANCIAL INFORMATION
A. Condensed Consolidated Statements of Operations (unaudited)
for the three month periods ended September 30, 2000
and September 30, 1999 ......................................................... 1
B. Condensed Consolidated Statements of Operations (unaudited)
for the nine month periods ended September 30, 2000
and September 30, 1999 ......................................................... 2
C. Condensed Consolidated Statements of Comprehensive Income/Loss
(unaudited) for the three and nine month periods ended
September 30, 2000 and September 30, 1999 ...................................... 3
D. Condensed Consolidated Balance Sheets at September 30, 2000
(unaudited) and December 31, 1999 .............................................. 4
E. Condensed Consolidated Statements of Cash Flows (unaudited)
for the nine month periods ended September 30, 2000
and September 30, 1999 ......................................................... 5
F. Notes to Condensed Consolidated Financial Statements ........................... 7
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
A. General Business Description ................................................... 16
B. Results of Operations .......................................................... 16
C. Liquidity and Capital Resources ................................................ 20
PART II
1. LEGAL PROCEEDINGS ....................................................................... 22
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................... 24
6. EXHIBITS AND REPORTS ON FORM 8-K ........................................................ 24
SIGNATURE ............................................................................... 24
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE L.L. KNICKERBOCKER CO., INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(unaudited)
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Sales, net of returns $ 6,310,000 $ 9,344,000
Cost of sales 3,820,000 5,354,000
------------ ------------
Gross profit 2,490,000 3,990,000
Advertising expense 108,000 375,000
Selling expense 755,000 1,308,000
General and administrative expense 2,329,000 2,871,000
------------ ------------
Operating loss (702,000) (564,000)
Other income, net 3,358,000 76,000
Interest expense 167,000 366,000
------------ ------------
Income (loss) before reorganization items and
income tax expense (benefit) 2,489,000 (854,000)
Reorganization items 220,000 409,000
------------ ------------
Income (loss) before income tax expense (benefit) 2,269,000 (1,263,000)
Income tax expense (benefit) 2,000 (72,000)
------------ ------------
Net income (loss) $ 2,267,000 $ (1,191,000)
============ ============
Net income (loss) per share:
Basic $ 0.05 $ (0.03)
============ ============
Diluted $ 0.05 $ (0.03)
============ ============
Shares used in computing net income (loss) per share:
Basic 46,987,728 38,145,602
============ ============
Diluted 46,991,399 38,145,602
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
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THE L.L. KNICKERBOCKER CO., INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(unaudited)
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Sales, net of returns $ 22,269,000 $ 32,196,000
Cost of sales 12,975,000 17,501,000
------------ ------------
Gross profit 9,294,000 14,695,000
Advertising expense 356,000 2,423,000
Selling expense 2,694,000 5,060,000
General and administrative expense 7,764,000 10,098,000
------------ ------------
Operating loss (1,520,000) (2,886,000)
Other income, net 3,521,000 243,000
Interest expense 599,000 1,502,000
------------ ------------
Income (loss) before reorganization items and
income tax expense 1,402,000 (4,145,000)
Reorganization items 1,198,000 409,000
------------ ------------
Income (loss) before income tax expense 204,000 (4,554,000)
Income tax expense 29,000 2,000
------------ ------------
Net income (loss) $ 175,000 $ (4,556,000)
============ ============
Net income (loss) per share:
Basic $ 0.00 $ (0.15)
============ ============
Diluted $ 0.00 $ (0.15)
============ ============
Shares used in computing net income (loss) per share:
Basic 46,599,900 31,341,932
============ ============
Diluted 46,602,981 31,341,932
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
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THE L.L. KNICKERBOCKER CO., INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/LOSS
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------------ -------------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income (loss) $ 2,267,000 $(1,191,000) $ 175,000 $(4,556,000)
Other comprehensive income (loss):
Foreign currency translation adjustments (240,000) (541,000) (415,000) (664,000)
----------- ----------- ----------- -----------
Comprehensive income (loss) $ 2,027,000 $(1,732,000) $ (240,000) $(5,220,000)
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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THE L.L. KNICKERBOCKER CO., INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 3,125,000 $ 1,510,000
Restricted cash 280,000 312,000
Accounts receivable, net 3,671,000 6,654,000
Inventories 3,632,000 4,655,000
Prepaid expenses and other current assets 1,203,000 1,578,000
------------ ------------
Total current assets 11,911,000 14,709,000
Property and equipment, net 3,725,000 4,501,000
Investments 2,341,000 3,675,000
Other assets 787,000 758,000
Goodwill, net of accumulated amortization of $2,185,000 at
September 30, 2000 and $1,848,000 at December 31, 1999 2,546,000 2,943,000
------------ ------------
$ 21,310,000 $ 26,586,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 3,330,000 $ 4,244,000
Accrued expenses 1,211,000 1,473,000
Notes payable 2,573,000 2,563,000
Commissions and royalties payable 1,270,000 1,577,000
Interest payable 288,000 113,000
Income taxes payable 134,000 164,000
Current portion of long-term debt 282,000 176,000
------------ ------------
Total current liabilities 9,088,000 10,310,000
Long-term debt, less current portion 419,000 417,000
Liabilities subject to compromise under
reorganization proceeding 9,427,000 13,484,000
------------ ------------
Total liabilities 18,934,000 24,211,000
Stockholders' equity:
Preferred stock -- --
Common stock 41,638,000 41,397,000
Additional paid-in capital 6,012,000 6,012,000
Accumulated deficit (40,982,000) (41,157,000)
Accumulated other comprehensive loss (4,292,000) (3,877,000)
------------ ------------
Total stockholders' equity 2,376,000 2,375,000
------------ ------------
$ 21,310,000 $ 26,586,000
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 7
THE L.L. KNICKERBOCKER CO., INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(unaudited)
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 175,000 $(4,556,000)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 1,062,000 978,000
Gain on disposition of investments (3,360,000) --
Loss (gain) on disposition of fixed assets 8,000 (2,000)
Amortization of debt discount 60,000 505,000
Property impairment charge 400,000 --
Changes in operating accounts:
Accounts receivable, net 2,983,000 (1,424,000)
Inventories 924,000 3,032,000
Prepaid expenses and other current assets 375,000 1,019,000
Other assets 10,000 153,000
Accounts payable and accrued expenses (918,000) 53,000
Commissions and royalties payable (307,000) 512,000
Income taxes payable (30,000) (142,000)
Due to former shareholders of Krasner Group, Inc. -- (60,000)
Operating payables subject to compromise
under reorganization proceeding 247,000 --
----------- -----------
Net cash provided by operating activities 1,629,000 68,000
Cash flows from investing activities:
Acquisitions of property and equipment (588,000) (514,000)
Proceeds from sales of property and equipment 28,000 89,000
Proceeds from sales of investments 538,000 --
Receivable from stockholder -- (18,000)
----------- -----------
Net cash used in investing activities (22,000) (443,000)
Cash flows from financing activities:
Net (repayments) borrowings on line of credit (40,000) 690,000
Payments on long-term debt (75,000) (154,000)
Borrowings on long-term debt 183,000 --
----------- -----------
Net cash provided by financing activities 68,000 536,000
Effect of exchange rate changes on cash (60,000) (245,000)
----------- -----------
Net increase (decrease) in cash and cash equivalents 1,615,000 (84,000)
Cash and cash equivalents, beginning of period 1,510,000 199,000
----------- -----------
Cash and cash equivalents, end of period $ 3,125,000 $ 115,000
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 185,000 $ 529,000
=========== ===========
Cash paid for income taxes $ 59,000 $ 56,000
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 8
THE L.L. KNICKERBOCKER CO., INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(unaudited)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITY:
During the nine months ended September 30, 2000, the Company exchanged a portion
of its investment in Pure Energy Corporation with a carrying value of $801,000
in settlement of $3,692,000 principal amount of convertible debentures plus
accrued interest of $464,000.
During the nine months ended September 30, 2000 and 1999, $219,000 and
$9,850,000 of convertible debentures and $22,000 and $406,000 of accrued
interest, respectively, was converted to common stock.
During the nine months ended September 30, 2000, the Company financed the
acquisition of property and equipment through borrowings on long-term debt of
$51,000.
During the nine months ended September 30, 1999, the Company issued 441,007
shares of common stock in payment of $220,000 of liability to former
shareholders of Krasner Group, Inc.
During the nine months ended September 30, 1999, the Company issued 157,996
shares of common stock in payment of liability owed to former Georgetown
Collection, Inc. shareholders.
See accompanying notes to condensed consolidated financial statements.
6
<PAGE> 9
THE L.L. KNICKERBOCKER CO., INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 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 marketing branded products which include collectible and toy
dolls and teddy bears, fine and fashion jewelry, and other consumer products.
The Company's customers include the leading network in the home shopping
industry, retail stores, wholesale distributors, and consumers. The collectible
and toy products are manufactured by independent manufacturing facilities to the
Company's specifications. The fine and fashion 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.
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 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 8) in the accompanying consolidated balance sheet represent the Company's
estimate of liabilities as of September 30, 2000 and 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 Company filed a Plan of Reorganization (the Plan) and Disclosure Statement
with the Bankruptcy Court in March 2000, which was amended in June 2000. The
Plan contemplates the sale of certain assets to provide the cash that along with
funds generated by the Company's business will allow the Company to fund the
Plan. The Company is also taking measures to obtain a new secured lender to
refinance the existing secured liabilities. The Plan is dependent on the
successful sale of certain assets and resolution of certain contingencies
detailed in the disclosure statement filed with the Bankruptcy Court in June
2000. Adoption of the Plan requires approval of all impaired classes of
creditors and affirmation by the Bankruptcy Court. There can be no assurance
that the Plan will be confirmed in its present form, and the Company is
exploring various alternatives that could ultimately result in a revision to the
Plan.
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, its ability to achieve
7
<PAGE> 10
satisfactory levels of profitability and cash flow from operations, and its
ability to 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.
Basis of Reporting - 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 information set forth in these condensed consolidated financial statements
is unaudited except for the December 31, 1999 balance sheet. These statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information, the instructions to Form 10-Q and Rule 10-01
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
The accompanying condensed consolidated financial statements include the
accounts of The L.L. Knickerbocker Co., Inc.; its wholly-owned subsidiaries
Krasner Group, Inc., Harlyn International Co., Ltd., L.L. Knickerbocker (Thai)
Co., Ltd., and S.L.S. Trading Co., Ltd., and its majority-owned subsidiary
Georgetown Collection, Inc. All intercompany accounts and transactions have been
eliminated.
In the opinion of management, all adjustments, consisting only of normal
recurring accruals, necessary for a fair presentation have been included. The
results of operations for the nine month period ended September 30, 2000 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2000. For further information, refer to the financial statements
and notes thereto included in the Company's annual report on Form 10-K for the
year ended December 31, 1999.
The accompanying consolidated financial statements have been presented in
accordance with AICPA Statement of Position 90-7, "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code" (SOP 90-7).
Certain prior period balances have been reclassified to conform with current
presentation.
NOTE 2: EARNINGS PER SHARE
The Company computes income (loss) per share pursuant to Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (SFAS 128), which requires
the dual presentation of basic and diluted earning per share. Shares issuable
upon the exercise of common stock warrants and options have been included from
the three and nine month periods ended September 30, 1999 per share
calculations. The following table summarizes the computation of earnings per
share for the three and nine month periods ended September 30, 2000:
8
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<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, 2000 September 30, 2000
------------------ ------------------
<S> <C> <C>
Net income $ 2,267,000 $ 175,000
=========== ===========
Weighted average number of common shares:
Basic 46,987,728 46,599,900
Effect of dilutive securities:
Stock options 3,671 3,081
Convertible debentures -- --
----------- -----------
Diluted 46,991,399 46,602,981
Net income per share:
Basic $ 0.05 $ 0.00
Effect of dilutive securities:
Stock options -- --
Convertible debentures -- --
----------- -----------
Diluted $ 0.05 $ 0.00
</TABLE>
NOTE 3: 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 three and nine months ended September 30, 2000 and 1999 consisted
primarily of professional fees and, in the case of the nine months ended
September 30, 2000, a $400,000 property impairment charge recorded in the
quarter ended June 30, 2000, related to a building in Thailand owned by the
Company. Cash paid for reorganization items during the three and nine months
periods ended September 30, 2000 amounted to $243,000 and $332,000,
respectively.
NOTE 4: INVENTORIES
At September 30, 2000 and December 31, 1999 inventories, including $632,000 and
$533,000, respectively, classified as other long-term assets, consist of the
following:
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------- -----------------
<S> <C> <C>
Finished goods $ 5,936,000 $ 7,471,000
Work-in-progress 440,000 494,000
Raw materials 1,054,000 1,303,000
Inventory reserves (3,166,000) (4,080,000)
----------- -----------
$ 4,264,000 $ 5,188,000
=========== ===========
</TABLE>
NOTE 5: INVESTMENTS
During the nine months ended September 30, 2000, the Company sold a portion of
its investment in Ontro, Inc. with a carrying value of $532,000, and original
cost of $193,000, for net proceeds of $538,000. The sale resulted in a gain to
the Company of $6,000, which is included in other income.
9
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During the three months ended September 30, 2000, the Company transferred
ownership of a portion of its investment in Pure Energy Corporation to the
holders of convertible debentures (Note 7) in exchange for settlement of
$3,692,000 principal amount of convertible debentures plus accrued interest of
$464,000. This transaction resulted in a gain to the Company of $3,355,000,
which is included in other income.
NOTE 6: 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. 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. 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, TKG and GCI have been suspended, except for certain
principal repayments that have been approved by the Bankruptcy Court.
At September 30, 2000, the Company had $3,276,000 of cash borrowings
outstanding, $2,829,000 of which represents amounts borrowed under the LLK and
GCI sublimits, which is classified as subject to compromise in the accompanying
consolidated financial statements (Note 8). Borrowings bear interest at the
bank's base rate (9.5% at September 30, 2000) 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 96,000,000 Thai
baht (approximately $2,219,000 at September 30, 2000). Outstanding borrowings of
$2,126,000 at September 30, 2000 bear interest at rates ranging from 3.5% to
9.0%. Restricted cash of $280,000 and $312,000 at September 30, 2000 and
December 31, 1999, respectively, secured one such line of credit.
NOTE 7: 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. The 1998 Debentures accrued interest at the rate of 6%
per annum through the Conversion Date, payable upon conversion of the related
debt to common stock. Through September 30, 2000, the Company issued a total of
17,429,408 shares of its common stock in connection with the conversion of
$4,498,000 of the principal amount of the Debentures, plus interest accrued
through the conversion date of $238,000.
During the three months ended September 30, 2000, the Company entered into a
settlement agreement with the 1998 Debenture Holders whereby the Company
transferred ownership of a portion of its investment in Pure Energy Corporation
to the Debenture Holders in settlement of a portion of the principal amount of
the 1998 Debentures plus accrued interest. At September 30, 2000, the remaining
face amount of the 1998 Debentures is classified as subject to compromise in the
accompanying consolidated financial statements (Note 8).
During the nine months ended September 30, 2000 and 1999, a total of $59,000 and
$592,000, respectively, of noncash interest expense was recorded relating to the
1998 Debentures, including $4,000 and $238,000, respectively, relating to the
additional conversion discount recorded upon conversion.
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. The 1997 Debentures accrued interest at the rate of
6% per annum through the Conversion Date, payable upon conversion of the related
debt to common stock or at debt maturity of September 7, 2000. As of September
30, 2000, the
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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.
During the three months ended September 30, 2000, the Company entered into a
settlement agreement with the 1997 Debenture Holders whereby the Company
transferred ownership of a portion of its investment in Pure Energy Corporation
to the Debenture Holders in settlement of a portion of the principal amount of
the 1997 Debentures plus accrued interest. At September 30, 2000, the remaining
face amount of the 1997 Debentures is classified as subject to compromise in the
accompanying consolidated financial statements (Note 8).
During the nine months ended September 30, 2000 and 1999, a total of $61,000 and
$270,000, respectively, of noncash interest expense was recorded relating to the
1997 Debentures, including $38,000 in the three months ended September 30, 1999
relating to the additional conversion discount recorded upon conversion (none in
2000).
NOTE 8: LIABILITIES SUBJECT TO COMPROMISE
Liabilities subject to compromise consist of the following at September 30, 2000
and December 31, 1999:
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------- -----------------
<S> <C> <C>
Secured liabilities - notes payable to bank (Note 6) $ 2,829,000 $ 2,879,000
Unsecured liabilities:
Accounts payable, trade 4,401,000 4,454,000
Commissions and royalties payable 797,000 797,000
Convertible debentures (Note 7) 460,000 4,311,000
Other payables and accrued expenses 940,000 1,043,000
----------- -----------
$ 9,427,000 $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 were estimated as of September 30, 2000 and 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.
NOTE 9: LITIGATION
During the nine months ended September 30, 2000, the Company reserved for the
estimated cost to settle certain litigation. The amount is included in
liabilities subject to compromise at September 30, 2000.
NOTE 10: 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 and toy brands, (2) fashion jewelry brands and (3) fine jewelry. The
collectible and toy 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 leading network
in the home shopping industry. The fine jewelry segment encompasses jewelry
manufactured by the Company with precious metals. Corporate
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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. The following table details the
Company's financial performance by operating segment for the three and nine
months ended September 30, 2000 and 1999.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales
Collectible and toy brands $ 1,881,000 $ 5,021,000 $ 8,117,000 $ 17,735,000
Fashion jewelry brands 2,413,000 2,617,000 7,932,000 8,584,000
Fine jewelry 2,016,000 1,706,000 6,220,000 5,877,000
Corporate -- -- -- --
------------ ------------ ------------ ------------
Consolidated $ 6,310,000 $ 9,344,000 $ 22,269,000 $ 32,196,000
Operating income (loss)
Collectible and toy brands $ (578,000) $ (239,000) $ (1,185,000) $ (2,247,000)
Fashion jewelry brands 163,000 158,000 715,000 915,000
Fine jewelry (90,000) (160,000) (218,000) (468,000)
Corporate (197,000) (323,000) (832,000) (1,086,000)
------------ ------------ ------------ ------------
Consolidated $ (702,000) $ (564,000) $ (1,520,000) $ (2,886,000)
Interest expense
Collectible and toy brands $ -- $ -- $ -- $ --
Fashion jewelry brands -- -- -- --
Fine jewelry -- -- -- --
Corporate 167,000 366,000 599,000 1,502,000
------------ ------------ ------------ ------------
Consolidated $ 167,000 $ 366,000 $ 599,000 $ 1,502,000
Depreciation and amortization
Collectible and toy brands $ 66,000 $ 90,000 $ 213,000 $ 269,000
Fashion jewelry brands 135,000 112,000 403,000 335,000
Fine jewelry 144,000 122,000 446,000 374,000
Corporate -- -- -- --
------------ ------------ ------------ ------------
Consolidated $ 345,000 $ 324,000 $ 1,062,000 $ 978,000
Capital expenditures
Collectible and toy brands $ 4,000 $ 34,000 $ 34,000 $ 61,000
Fashion jewelry brands 128,000 66,000 317,000 199,000
Fine jewelry 43,000 127,000 288,000 253,000
Corporate -- -- -- --
------------ ------------ ------------ ------------
Consolidated $ 175,000 $ 227,000 $ 639,000 $ 513,000
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Total assets
Collectible and toy brands $ 5,759,000 $11,956,000 $ 5,759,000 $11,956,000
Fashion jewelry brands 3,144,000 3,344,000 3,144,000 3,344,000
Fine jewelry 7,520,000 10,041,000 7,520,000 10,041,000
Corporate 4,887,000 9,436,000 4,887,000 9,436,000
----------- ----------- ----------- -----------
Consolidated $21,310,000 $34,777,000 $21,310,000 $34,777,000
Geographic areas
Sales to external customers:
United States $ 4,294,000 $ 7,639,000 $16,049,000 $26,417,000
Thailand 2,016,000 1,705,000 6,220,000 5,779,000
----------- ----------- ----------- -----------
Consolidated $ 6,310,000 $ 9,344,000 $22,269,000 $32,196,000
Long-lived assets:
United States $ 2,438,000 $ 3,020,000 $ 2,438,000 $ 3,020,000
Thailand 3,833,000 4,475,000 3,833,000 4,475,000
----------- ----------- ----------- -----------
Consolidated $ 6,271,000 $ 7,495,000 $ 6,271,000 $ 7,495,000
</TABLE>
13
<PAGE> 16
The L.L. Knickerbocker Co., Inc.
Condensed Balance Sheets
(unconsolidated)
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 1,209,000 $ 1,292,000
Accounts receivable, net of allowance 768,000 3,501,000
Inventories 2,077,000 2,066,000
Prepaid expenses and other current assets 1,009,000 1,230,000
------------ ------------
Total current assets 5,063,000 8,089,000
Investment in subsidiaries 5,289,000 5,664,000
Receivable from subsidiaries 1,235,000 1,309,000
Property and equipment, net 601,000 720,000
Investments 2,341,000 3,675,000
Other assets 95,000 146,000
------------ ------------
Total assets $ 14,624,000 $ 19,603,000
============ ============
LIABILITIES:
Accounts payable $ 1,105,000 $ 1,713,000
Other accrued expenses 1,716,000 2,031,000
------------ ------------
Total current liabilities 2,821,000 3,744,000
Liabilities subject to compromise
under reorganization proceeding 9,427,000 13,484,000
STOCKHOLDERS' EQUITY:
Common stock 41,638,000 41,397,000
Additional paid-in capital 6,012,000 6,012,000
Accumulated deficit (40,982,000) (41,157,000)
Accumulated other comprehensive loss (4,292,000) (3,877,000)
------------ ------------
Total stockholders' equity 2,376,000 2,375,000
------------ ------------
Total liabilities and stockholders' equity $ 14,624,000 $ 19,603,000
============ ============
</TABLE>
14
<PAGE> 17
The L.L. Knickerbocker Co., Inc.
Condensed Statements of Operations
(unconsolidated)
<TABLE>
<CAPTION>
Three months Nine months
ended ended Year to date
September 30, September 30, September 30,
2000 2000 1999 *
----------- ----------- -----------
<S> <C> <C> <C>
Net sales $ 1,881,000 $ 8,117,000 $ 2,350,000
Cost of sales 1,158,000 4,636,000 1,415,000
----------- ----------- -----------
Gross profit 723,000 3,481,000 935,000
Advertising expense 94,000 298,000 159,000
Selling expense 447,000 1,558,000 350,000
General and administrative expense 957,000 3,641,000 576,000
Equity in income of subsidiaries (22,000) (23,000) --
----------- ----------- -----------
Operating loss (753,000) (1,993,000) (150,000)
Other income 3,358,000 3,368,000 10,000
Interest expense 117,000 398,000 107,000
Reorganization items 221,000 799,000 232,000
Income tax expense -- 3,000 --
----------- ----------- -----------
Net income (loss) $ 2,267,000 $ 175,000 $ (479,000)
=========== =========== ===========
</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 September 30, 1999.
The L.L. Knickerbocker Co., Inc.
Notes to Condensed Financial Statements
September 30, 2000
(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 and decreased for distributions received
from the investee. LLK's share of the investee's income/(loss) is recognized as
"Equity in income of subsidiaries" on the statements of operations.
In management's opinion, with the exception of those matters discussed above,
the unconsolidated 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 September 30, 2000 and
December 31, 1999, and the unconsolidated results of its operations for the
three and nine months ended September 30, 2000.
15
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company is in the businesses of developing and marketing branded collectible
and toy products, fine and fashion jewelry, and other consumer products. The
following discussion explains material changes in the results of operations of
The L.L. Knickerbocker Co., Inc. (LLK) and subsidiaries for each of the periods
discussed and significant developments affecting financial condition since the
end of fiscal 1999.
CHAPTER 11 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 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.
The consolidated financial statements have been presented on the basis that the
Company will continue as 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, if
approved, 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 finalize a
plan of reorganization that will be confirmed by the Bankruptcy Court, its
ability to achieve satisfactory levels of profitability and cash flow from
operations, and its ability to obtain financing sources to meet future
obligations.
The Company filed a Plan of Reorganization and Disclosure Statement with the
Bankruptcy Court in March 2000, which was amended in June 2000. The Plan of
Reorganization is subject to confirmation by the Bankruptcy Court. 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
NET SALES
Net sales decreased to $6,310,000 for the three months ended September 30, 2000
from $9,344,000 for the three months ended September 30, 1999, a decrease of
$3,034,000 or 32.5%. The $3,034,000 decrease in net sales was comprised of
decreases in sales of $1,215,000 in mail order and catalog-driven dolls,
$1,759,000 in wholesale collectible sales, $204,000 in fashion jewelry sales,
partially offset by an increase of $144,000 in fine jewelry net sales. The
comparative decrease in mail order and catalog doll sales was primarily
attributable to the sale of the Georgetown brand of collectibles dolls in
October 1999. The Company's plan has been to reposition its base of sales to
primarily wholesale sales and to focus its attention on brands the Company
believes will generate the highest level of profits. The $1,759,000 decrease in
wholesale collectible sales is comprised of $1,116,000 related to the
discontinuance of two
16
<PAGE> 19
celebrity brands and $643,000 in net decreases in sales from its continuing
collectible brands. The decrease in fashion jewelry sales was due primarily to a
reduction in orders from the Company's largest customer in the home shopping
industry. 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 $2,490,000 for the three months ended September 30,
2000 from $3,990,000 for the three months ended September 30, 1999, a decrease
of $1,550,000, or 37.6%. As a percentage of net sales, gross profit for the
quarter decreased to 39.5% in 2000 from 42.7% in 1999. The decrease in the gross
profit percentage in 2000 from 1999 was due primarily to a change in the mix of
products sold at higher margins directly to the consumer via mail order and
catalogs, versus products sold at wholesale prices through retail distribution.
In 2000, 6% of the Company's sales were directly to the consumer through
catalogs and print advertisements versus 16.1% in 1999. In the future, the
Company does not expect mail order and catalog sales to have a significant
impact on gross margins.
ADVERTISING EXPENSE
Advertising expense decreased to $108,000 for the three months ended September
30, 2000 from $375,000 for the three months ended September 30, 1999, a decrease
of $267,000, or 71.2%. The large decrease in advertising expense was due
primarily to the sale in October 1999 of the Georgetown brand of collectible
dolls, which were sold primarily through mail order. 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 decreased to $755,000 for the three months ended September 30,
2000 from $1,308,000 for the three months ended September 30, 1999, a decrease
of $553,000, or 42.3%. As a percentage of net sales, selling expense decreased
from 14.0% in 1999 to 12.0% in 2000. The decrease in selling expense was due
primarily to lower variable royalty expense attributable to lower net sales in
2000 for the Company's collectible doll and fashion jewelry programs, and a
comparative reduction in fulfillment expenses due to the Company's sale of its
mail order collectible doll brand in October 1999. Selling expense includes
royalty expense, commission expense, trade show expenses, and other sales
promotion expenses.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense decreased to $2,329,000 for the three months
ended September 30, 2000 from $2,871,000 for the three months ended September
30, 1999, a decrease of $542,000, or 18.9%. The percentage of net sales
represented by these expenses increased from 30.7% in 1999 to 36.9% in 2000 due
primarily to a lower sales base in 2000. The dollar decrease in general and
administrative expense was due primarily to the Company's aggressive
consolidation efforts which began in the fourth quarter of 1998 combined with
the Company's continued focus on lowering operating costs.
OTHER (INCOME) EXPENSE
Other income increased to $3,358,000 for the three months ended September 30,
2000 from $76,000 for the three months ended September 30, 1999, a change of
$3,282,000. Included in other income for the three months ended September 30,
2000 is a $3,355,000 gain on disposition of a portion of the Company's
investment in Pure Energy Corporation (Note 5). Other income in 1999 consists
primarily of foreign currency gains from transactions of the Company's Thailand
operations due to fluctuations in the Thai Baht.
17
<PAGE> 20
INTEREST EXPENSE
Interest expense decreased to $167,000 for the three months ended September 30,
2000 from $366,000 for the three months ended September 30, 1999. The decrease
in interest expense relates primarily to the conversion to common stock of
$5,319,000 aggregate face value of the 1998 and 1997 Debentures during 1999, and
to the discontinuance of face value interest accrual on the remaining debentures
subsequent to the Conversion Date. Included in interest expense for the three
months ended September 30, 2000 and 1999, is noncash interest related to
convertible debentures of $17,000 and $180,000, respectively. Noncash interest
in 2000 relates to amortization of debt issuance costs. The remaining balance of
interest expense includes interest on borrowings from working capital lines of
credit and mortgages on buildings owned by the Company.
REORGANIZATION ITEMS
Expenses associated with the Company's Chapter 11 filing amounted to $220,000
and $409,000 for the three months ended September 30, 2000 and 1999,
respectively. Reorganization items were comprised primarily of legal and
professional fees. The Company anticipates that additional reorganization costs
will be incurred throughout the Chapter 11 reorganization.
NET INCOME (LOSS)
As a result of the foregoing factors, net income increased to $2,267,000 for the
three months ended September 30, 2000 from net loss of $1,191,000 for the three
months ended September 30, 1999, an increase in net income of $3,458,000.
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
NET SALES
Net sales decreased to $22,269,000 for the nine months ended September 30, 2000
from $32,196,000 for the nine months ended September 30, 1999, a decrease of
$9,927,000 or 30.8%. The $9,927,000 decrease in net sales was comprised of
decreases in sales of $4,706,000 in mail order and catalog-driven dolls,
$5,008,000 in wholesale collectible sales, and $652,000 in fashion jewelry
sales, partially offset by an increase of $439,000 in fine jewelry net sales.
The $4,706,000 comparative decrease in mail order and catalog doll sales was
primarily attributable to the sale of the Georgetown brand of collectibles dolls
in October 1999, as well as a decrease in the number of catalogs mailed to
consumers in 2000. The Company's plan has been to reposition its base of sales
to primarily wholesale sales and to focus on brands the Company believes will
generate the highest level of profit. The $5,008,000 decrease in wholesale
collectible sales is comprised of $3,833,000 related to the discontinuance of
two celebrity brands and $1,176,000 in net decreases in sales from its
continuing collectible brands. The decrease in fashion jewelry sales was due
primarily to a reduction in orders from the Company's largest customer in the
home shopping industry. 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 $9,294,000 for the nine months ended September 30,
2000 from $14,695,000 for the nine months ended September 30, 1999, a decrease
of $5,401,000, or 36.8%. As a percentage of net sales, gross profit for the nine
months decreased to 41.7% in 2000 from 45.6% in 1999. The decrease in the gross
profit percentage in 2000 from 1999 was due primarily to a change in the mix of
products sold at higher margins directly to the consumer via mail order and
catalogs, versus products sold at wholesale prices through retail distribution.
In 2000, 5.0% of the Company's sales were directly to the consumer
18
<PAGE> 21
through catalogs and print advertisements versus 18.0% in 1999. In the future,
the Company does not expect mail order and catalog sales to have a significant
impact on gross margins.
ADVERTISING EXPENSE
Advertising expense decreased to $356,000 for the nine months ended September
30, 2000 from $2,423,000 for the nine months ended September 30, 1999, a
decrease of $2,067,000, or 85.3%. The large decrease in advertising expense in
2000 was due primarily to the Company's sale of its mail order collectible doll
brand in October 1999, and a reduction in catalogs mailed to consumers in 2000.
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 decreased to $2,694,000 for the nine months ended September 30,
2000 from $5,060,000 for the nine months ended September 30, 1999, a decrease of
$2,366,000, or 46.8%. As a percentage of net sales, selling expense decreased
from 15.7% in 1999 to 12.1% in 2000. The decrease in selling expense was due
primarily to lower variable royalty expense attributable to lower net sales in
2000 for the Company's collectible doll and fashion jewelry programs, and a
reduction in fulfillment expenses due to the Company's sale of its mail order
collectible doll brand in October 1999. Selling expense includes royalty
expense, commission expense, trade show expenses, and other sales promotion
expenses.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense decreased to $7,764,000 for the nine months
ended September 30, 2000 from $10,098,000 for the nine months ended September
30, 1999, a decrease of $2,334,000, or 23.1%. The percentage of net sales
represented by these expenses increased from 31.4% in 1999 to 34.9% in 2000, due
primarily to a lower sales base in 2000. The dollar decrease in general and
administrative expense was due primarily to the Company's aggressive
consolidation efforts which began in the fourth quarter of 1998 combined with
the Company's continued focus on lowering operating costs.
OTHER (INCOME) EXPENSE
Other income increased to $3,521,000 for the nine months ended September 30,
2000 from $243,000 for the nine months ended September 30, 1999, a change of
$3,278,000. Included in other income for the three months ended September 30,
2000 is a $3,355,000 gain on disposition of a portion of the Company's
investment in Pure Energy Corporation (Note 5). Other income in 1999 consists
primarily of foreign currency gains from transactions of the Company's Thailand
operations due to fluctuations in the Thai baht.
INTEREST EXPENSE
Interest expense decreased to $599,000 for the nine months ended September 30,
2000 from $1,502,000 for the nine months ended September 30, 1999. The decrease
in interest expense relates primarily to the conversion to common stock of
$5,319,000 aggregate face value of the 1998 and 1997 Debentures during 1999, and
to the discontinuance of face value interest accrual on the remaining debentures
subsequent to the Conversion Date Included in interest expense for the three
months ended September 30, 2000 and 1999, is noncash interest related to
convertible debentures of $120,000 and $868,000, respectively. Noncash interest
in 2000 relates to amortization of debt discount and of debt issuance costs. The
remaining balance of interest expense includes interest on borrowings from
working capital lines of credit and mortgages on buildings owned by the Company.
19
<PAGE> 22
REORGANIZATION ITEMS
Expenses associated with the Company's Chapter 11 filing amounted to $1,198,000
and $409,000 for the nine months ended September 30, 2000 and 1999,
respectively. Reorganization items were comprised primarily of professional fees
and a $400,000 property impairment charge recorded in the three months ended
June 30, 2000, related to a building in Thailand owned by the Company. The
Company anticipates that additional reorganization costs will be incurred
throughout the Chapter 11 reorganization.
NET INCOME (LOSS)
As a result of the foregoing factors, net income increased to $175,000 for the
nine months ended September 30, 2000 from net loss of $4,556,000 for the nine
months ended September 30, 1999, an increase in net income of $4,731,000.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow generated from operations was $1,629,000 for the nine months ended
September 30, 2000 compared to $68,000 in the comparable 1999 period. The
$1,561,000 increase in cash flow from operations was due primarily to the
$1,655,000 decrease in net loss, net of noncash expenses during the nine months
ended September 30, 2000 compared to the nine months ended September 30, 1999.
The cash items impacting cash flow from operations were a $2,983,000 decrease in
accounts receivable and a $924,000 decrease in inventories, offset by a $918,000
decrease in accounts payable and accrued expenses.
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 resolution of claims for contingencies and other disputed
amounts. The ultimate resolution of such liabilities, all of which are subject
to compromise, is a part of the plan of reorganization filed with the Bankruptcy
Court on March 30, 2000, and amended in June 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 obligations. 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 6 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), which 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, TKG and GCI have been suspended, except for certain
principal repayments that have been approved by the Bankruptcy Court.
20
<PAGE> 23
At September 30, 2000, the Company had $3,276,000 of cash borrowings
outstanding, $2,829,000 of which represents amounts borrowed under the LLK and
GCI sublimits, which is classified as subject to compromise in the accompanying
consolidated financial statements. Borrowings bear interest at the bank's base
rate (9.5% at September 30, 2000) 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
96,000,000 Thai baht (approximately $2,219,000 at September 30, 2000).
Outstanding borrowings of $2,126,000 at September 30, 2000 bear interest at
rates ranging from 3.5% to 9.0%. Restricted cash of $280,000 and $312,000 at
September 30, 2000 and December 31,1999, 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 (the Plan) and Disclosure Statement
with the Bankruptcy Court in March 2000, which was amended in June 2000. The
Plan contemplates the sale of certain assets to provide the cash that along with
funds generated by the Company's business will allow the Company to fund the
Plan. The Company is also taking measures to obtain a new secured lender to
refinance the existing secured liabilities. The Plan is dependent on the
successful sale of certain assets and resolution of certain contingencies
detailed in the disclosure statement filed with the Bankruptcy Court in
September 2000. Adoption of the Plan requires approval of all impaired classes
of creditors and affirmation by the Bankruptcy Court. There can be no assurance
that the Plan will be confirmed in its present form, and the Company is
exploring various alternatives that could ultimately result in a revision to the
Plan.
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, its ability to achieve satisfactory levels of
profitability and cash flow from operations, and its ability to obtain financing
sources to meet future obligations.
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.
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
21
<PAGE> 24
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.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements". SAB 101 summarizes certain of the SEC staff's views in applying
generally accepted accounting principles to selected revenue recognition issues
in financial statements. Implementation of SAB 101, which was delayed by the
issuance of SAB 101A on March 27, 2000 and SAB 101B on June 26, 2000, is
required by the fourth quarter of 2000. The Company does not expect the
application of SAB 101 to have a material impact on its consolidated financial
statements.
In March 2000, the FASB issued FASB Interpretation No. 44 (FIN 44), "Accounting
for Certain Transactions Involving Stock Compensation." The Company will be
required to adopt FIN 44 effective July 1, 2000 with respect to certain
provisions applicable to new awards, exchanges of awards in a business
combination, modifications to outstanding awards, and changes in grantee status
that occur on or after that date. FIN 44 addresses practice issues related to
the application of Accounting Practice Bulletin Opinion No. 25, "Accounting for
Stock Issued to Employees." The Company does not expect the application of FIN
44 to have a material impact on its consolidated financial position or results
of operations.
FORWARD-LOOKING STATEMENTS
When used in this document, the words "believes," "anticipates," "expects" and
similar expressions are intended to identify in certain circumstances
forward-looking statements. Such statements are subject to a number of risks and
uncertainties that could cause actual results to differ materially from those
projected, including risks related to the dependence on sales to QVC; the
acceptance in the marketplace of new products; the ability to source raw
materials at prices favorable to the Company; currency fluctuations; and other
risks outlined in the Company's previously filed public documents, copies of
which may be obtained without cost from the Company. Given these uncertainties,
prospective investors are cautioned not to place undue reliance on such
statements. The Company also undertakes no obligation to update these
forward-looking statements.
PART II. OTHER INFORMATION
ITEM 1. 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 LLK
by three of it's 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. 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
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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.
On June 7, 2000, the Company filed an Amended Plan of Reorganization and
Disclosure Statement with the United States Bankruptcy Court. The Bankruptcy
Court scheduled a hearing on the Disclosure Statement for August 11, 2000 that
resulted in a conformation date set for December 8, 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
$101,000. In the bankruptcy, the Company asserted that the settlement was
fraudulent conveyance. The fraudulent conveyance action was thereafter settled
pending court approval.
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 Company has settled with State
Street Bank pending court approval.
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 has settled with Finance Authority of Maine,
and Coastal Enterprises pending court approval.
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,
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the ultimate resolution of these matters individually or in the aggregate will
not have a material adverse effect on the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to a variety of risks, including foreign currency
fluctuations and changes in interest rates affecting the cost of its bank debt.
Foreign Currency - The Company has subsidiary operations in Thailand, and
accordingly, the Company is exposed to transaction gains and losses that could
result from changes in foreign currency exchange rates. The Company uses the
local currency (Thai baht) as the functional currency for its Thai subsidiaries.
Translation adjustments resulting from the process of translating foreign
currency financial statements into U.S. dollars were not significant in fiscal
1999 and in the nine month period ended September 30, 2000 due to the fact that
the exchange rate remained relatively constant throughout the period. Under the
current circumstances, the Company believes that the foreign currency market
risk is not material. The Company actively monitors its foreign exchange
exposure and evaluates possible strategies to reduce its risk. Should
circumstances change, the Company intends to implement appropriate strategies at
such time that it determines that the benefits outweigh the associated costs.
There can be no assurance that management's efforts to reduce foreign exchange
exposure will be successful.
Interest Rates - The Company's bank line of credit bears interest based on the
lending bank's prime rate. The interest rate on the balance of $3.3 million
outstanding at September 30, 2000 was 12.5%. The Company believes that if
interest rates were to increase by as much as 10%, the impact on the Company's
financial statements would not be material.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.0 Financial Data Schedule
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the quarter for which
this report is filed.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE L.L. KNICKERBOCKER CO., INC.
Date: November 14, 2000 By: /s/Anthony P. Shutts
-----------------------------------
Anthony P. Shutts
Chief Financial Officer
(Principal financial and accounting officer)
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