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, 2001
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
LAKE FOREST, CALIFORNIA 92630
- ---------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
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 14, 2001 was 47,187,728.
TABLE OF CONTENTS
ITEM PAGE
- ----- -----
PART I
1. FINANCIAL INFORMATION
A. Condensed Consolidated Statements of Operations - Liquidation Basis
(unaudited) for the three month periods ended September 30, 2001
and September 30, 2000........................................................ 1
B. Condensed Consolidated Statements of Operations - Liquidation Basis
(unaudited) for the nine month periods ended September 30, 2001
and September 30, 2000........................................................ 2
C. Condensed Consolidated Statements of Comprehensive Income/Loss -
Liquidation Basis (unaudited) for the three and nine month periods
ended September 30, 2001 and September 30, 2000............................... 3
D. Condensed Consolidated Balance Sheets at September 30, 2001 -
Liquidation Basis (unaudited) and December 31, 2000........................... 4
E. Condensed Consolidated Statements of Cash Flows (unaudited)
for the nine month periods ended September 30, 2001
and September 30, 2000........................................................ 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.................................................. 17
B. Results of Operations......................................................... 18
C. Liquidity and Capital Resources............................................... 21
PART II
1. LEGAL PROCEEDINGS................................................................. 22
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ....................... 24
6. EXHIBITS AND REPORTS ON FORM 8-K.................................................. 25
SIGNATURE......................................................................... 25
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE L.L. KNICKERBOCKER CO., INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (LIQUIDATION BASIS)
THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(unaudited)
2001 2000
----------- -----------
Sales, net of returns $ 8,599,000 $ 6,310,000
Cost of sales 4,875,000 3,820,000
----------- -----------
Gross profit 3,724,000 2,490,000
Advertising expense 68,000 108,000
Selling expense 1,004,000 755,000
General and administrative expense 1,798,000 2,329,000
----------- -----------
Operating loss 854,000 (702,000)
Other income, net 117,000 3,358,000
Interest expense 93,000 167,000
----------- -----------
Income (loss) before reorganization items and
income tax expense (benefit) 878,000 2,489,000
Reorganization items 282,000 220,000
----------- -----------
Income (loss) before income tax expense (benefit) 596,000 2,269,000
Income tax expense (benefit) 2,000
----------- -----------
Net income (loss) $ 596,000 $ 2,267,000
----------- ===========
Adjustment to Liquidation Basis (596,000)
Net Assets at September 30, 2001 $ --
===========
Net income (loss) per share:
Basic $ -- $ 0.05
=========== ===========
Diluted $ -- $ 0.05
=========== ===========
Shares used in computing net income (loss) per share:
Basic 46,987,728 46,987,728
----------- -----------
See accompanying notes to condensed consolidated financial statements.
1
THE L.L. KNICKERBOCKER CO., INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (LIQUIDATION BASIS)
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(unaudited)
2001 2000
----------- -----------
Sales, net of returns $20,616,000 $22,269,000
Cost of sales 11,695,000 12,975,000
----------- -----------
Gross profit 8,921,000 9,294,000
Advertising expense 399,000 356,000
Selling expense 2,704,000 2,694,000
General and administrative expense 5,603,000 7,764,000
----------- -----------
Operating loss 215,000 (1,520,000)
Other income, net 575,000 3,521,000
Interest expense 358,000 599,000
----------- -----------
Income (loss) before reorganization items and
income tax expense 432,000 1,402,000
Reorganization items 808,000 1,198,000
----------- -----------
Income (loss) before income tax expense (376,000) 204,000
Income tax expense 2,000 29,000
----------- -----------
Net income (loss) $ (378,000) $ 175,000
===========
Adjustment to Liquidation Basis 378,000
-----------
Net Assets at September 30, 2001 $ --
===========
Net income (loss) per share:
Basic $ -- $ 0.00
=========== ===========
Diluted $ -- $ 0.00
=========== ===========
Shares used in computing net income (loss) per share:
Basic 46,987,728 46,599,900
=========== ===========
Diluted 46,987,728 46,602,981
=========== ===========
See accompanying notes to condensed consolidated financial statements.
2
THE L.L. KNICKERBOCKER CO., INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/LOSS
(Liquidation Basis)
(unaudited)
Three months ended Nine months ended
September 30, September 30,
--------------------------------- -----------------------------
2001 2000 2001 2000
--------- ----------- ---------- ----------
Net income (loss) $ 596,000 $ 2,267,000 $ (378,000) $ 175,000
Other comprehensive income (loss):
Unrealized loss on investment 385,000
Foreign currency translation adjustments 28,000 (240,000) (318,000) (415,000)
--------- ----------- ---------- ----------
Comprehensive income (loss) $ 624,000 $ 2,027,000 $ (311,000) $ (240,000)
=========== ==========
Adjustment to Liquidation Basis (624,000) 311,000
--------- ----------
Net Assets at September 30, 2001 $ -- $ --
========= ==========
See accompanying notes to condensed consolidated financial statements.
3
THE L.L. KNICKERBOCKER CO., INC.
CONSOLIDATED STATEMENTS OF NET ASSETS (Liquidation Basis)
(unaudited)
September 30, December 31,
2001 2000
------------- ------------
ASSETS
Cash and cash equivalents $ 942,000 $ 1,510,000
Restricted cash 127,000 312,000
Accounts receivable, net 4,747,000 6,654,000
Inventories 3,027,000 4,655,000
Prepaid expenses and other current assets 790,000 1,578,000
----------- -----------
Total current assets 9,633,000 14,709,000
Property and equipment, net 2,383,000 4,501,000
Investments 776,000 3,675,000
Other assets 823,000 758,000
Goodwill, net of accumulated amortization of $1,533,000 at
September 30, 2000 and $1,374,000 at December 31, 2000 1,011,000 2,943,000
----------- -----------
$14,626,000 $26,586,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 3,504,000 $ 4,244,000
Accrued expenses 1,040,000 1,473,000
Notes payable 1,997,000 2,563,000
Commissions and royalties payable 961,000 1,577,000
Interest payable 395,000 113,000
Income taxes payable 133,000 164,000
Current portion of long-term debt 322,000 176,000
----------- -----------
Total current liabilities 8,352,000 10,310,000
Long-term debt, less current portion 236,000 417,000
Liabilities subject to compromise under
reorganization proceeding 7,851,000 13,484,000
----------- -----------
Total liabilities 16,439,000 24,211,000
Stockholders' equity:
Preferred stock -- --
Common stock 41,637,000 41,397,000
Additional paid-in capital 6,012,000 6,012,000
Accumulated deficit (44,929,000) (41,157,000)
Accumulated other comprehensive loss (4,533,000) (3,877,000)
----------- -----------
Total stockholders' equity before adjustment to liquidation value (1,813,000) 2,375,000
----------- -----------
$14,626,000 $26,586,000
=========== ===========
NET ASSETS IN LIQUIDATION $ --
===========
See accompanying notes to condensed consolidated financial statements.
4
THE L.L. KNICKERBOCKER CO., INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(unaudited)
2001 2000
----------- -----------
Cash flows from operating activities:
Net income (loss) $ (378,000) $ 175,000
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 628,000 1,062,000
Gain on disposition of investments (325,000) $(3,360,000)
Loss (gain) on disposition of fixed assets 26,000 8,000
Amortization of debt discount 60,000
Property impairment charge 400,000
Changes in operating accounts:
Accounts receivable, net (246,000) $ 2,983,000
Inventories 569,000 924,000
Prepaid expenses and other current assets 52,000 375,000
Other assets 11,000 10,000
Accounts payable and accrued expenses (523,000) (918,000)
Commissions and royalties payable 3,000 (307,000)
Income taxes payable (30,000)
Due to former shareholders of Krasner Group, Inc. -- --
Operating payables subject to compromise
under reorganization proceeding 247,000
----------- -----------
Net cash provided by operating activities (183,000) 1,629,000
Cash flows from investing activities:
Acquisitions of property and equipment (334,000) (588,000)
Proceeds from sales of property and equipment 28,000
Proceeds from sales of investments 625,000 538,000
Receivable from stockholder -- --
----------- -----------
Net cash used in investing activities 291,000 (22,000)
Cash flows from financing activities:
Net (repayments) borrowings on line of credit $(1,466,000) (40,000)
Payments on long-term debt (91,000) (75,000)
Borrowings on long-term debt 183,000
----------- -----------
Net cash provided by financing activities (1,557,000) 68,000
Effect of exchange rate changes on cash (97,000) (60,000)
----------- -----------
Net increase (decrease) in cash and cash equivalents (1,546,000) 1,615,000
Cash and cash equivalents, beginning of period 2,488,000 1,510,000
----------- -----------
Cash and cash equivalents, end of period (Before
Adjustment to Liquidation Basis) $ 942,000 $ 3,125,000
===========
Adjustment to Liquidation Basis (942,000)
===========
Cash at end of period on Liquidation Basis --
===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 224,000 $ 185,000
=========== ===========
Cash paid for income taxes $ 1,600 $ 59,000
=========== ===========
See accompanying notes to condensed consolidated financial statements.
5
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, 2001, the Company transferred shares
of its investment in Pure Energy Corporation, with a carrying value of $299,000
at the time of transfer, in settlement of trade accounts payable of $1,117,000.
During the nine months ended September 30, 2000, $219,000 of convertible
debentures and $22,000 of accrued interest 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.
See accompanying notes to condensed consolidated financial statements.
6
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
business 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.
Liquidation of Assets - On October 9, 2001, substantially all the Company's
assets were sold in Bankruptcy Court. Under the terms of the sale of the
Company's assets in Bankruptcy Court, substantially all the Company's assets
were sold and liabilities were either assumed by the purchaser or compromised in
Bankruptcy. As consideration for the Company's assets, the purchaser has agreed
to pay the Company's general unsecured creditors of the Company a compromised
amount over several years. The Company's common shareholders will not receive
money from the sale of assets and, because there are no remaining assets in the
Company, will not receive any type of dividend distribution.
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 continued 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 sheets represent the Company's
estimate of liabilities as of September 30, 2001 and December 31, 2000, subject
to adjustment in the reorganization process. On January 26, 2001, the Company
entered into a forbearance agreement with the bank and has begun making
principal and interest payments thereunder. The forbearance agreement with bank
expired on September 30, 2001. On October 9, 2001, the bank was paid off upon
the sale of assets in Bankruptcy Court.
On July 12, 2001, the Company signed a letter of intent ("LOI") with Brian
Blosil to sell substantially all of the assets of the Company in exchange for
the assumption of certain debts. The bankruptcy process requires that, in order
to maximize the value of the estate for creditors, the Company entertain overbid
offers. Accordingly, a hearing was scheduled for July 31, 2001 to approve
overbid procedures and a topping fee in connection with a proposed sale of
substantially all of the company's assets to Mr. Blosil (the "Motion"). In
consideration for the purchase of Knickerbocker's assets, the purchaser was to
assume
7
approximately $4 million of Knickerbocker's debts and liabilities and
issue to the pre-petition unsecured creditors of Knickerbocker redeemable
preferred units with an aggregate redemption value of approximately $3 million.
The Motion asked the Bankruptcy Court to approve procedures related to the sale
of Knickerbocker's assets including the following: (1) the purchase price of
competing bids must be at least $6 million in cash plus a topping fee of 3%, (2)
competing bidders must provide to Knickerbocker a deposit of $1 million, (3)
Brian Blosil would have the opportunity to match any competing bid and (4) if
Brian Blosil does not match any competing bid, the assets would be sold to the
competing bidder and the 3% topping fee would be paid to Brian Blosil as
compensation for his costs and expenses. If the overbidding procedures were to
be approved and no substantial overbid for Knickerbocker's assets was to be
received, it was unlikely that the shareholders of Knickerbocker will receive
any proceeds from the sale of assets.
At the hearing, the Court approved the Motion as modified in open court. As a
result, there was a hearing on the sale of substantially all of the Company's
assets and to consider overbids on September 4, 2001 at 9:30 A.M. The overbid
procedures include funding a $480,000 deposit by August 29, 2001, an initial
overbid of at least $6,180,000, and subsequent overbids in additional $300,000
increments.
There were no overbids at the hearing on September 4, 2001 and, as a result, the
sale of the Company's assets to Brian Blosil was approved by the Bankruptcy
Court. The sale of assets to Brian Blosil closed on October 9, 2001. To formally
conclude the bankruptcy process, the Company has filed a Plan of Liquidation
with the Bankruptcy Court.
Financial Information For The Quarter Ended September 30, 2001 Was Not Reviewed
By Independent Accountants - The financial information for the quarter ended
September 30, 2001 contained herein was not reviewed by an independent CPA firm.
The Company's accountants, Deloitte and Touche, resigned as accountants to the
Company on November 7, 2001, prior to the filing of this document. Their
resignation was not based upon any disagreements or disputes with management,
but rather because the Company had sold all of its assets and it was not
economically feasible to continue their engagement.
Basis of Reporting - On October 9, 2001, substantially all the Company's assets
were sold in Bankruptcy Court. As a result of the sale of assets on October 9,
2001, the Company adopted the liquidation basis of accounting at September 30,
2001. Accordingly, at September 30, 2001, assets were adjusted to estimated net
realizable value and liabilities were adjusted to estimated settlement amounts.
Under the terms of the sale of the Company's assets in Bankruptcy Court,
substantially all the Company's assets were sold and liabilites were assumed by
the purchaser or compromised in Bankruptcy. Therefore, both assets and
liabilities were shown to have a zero value, as they no longer remain with the
Company. The Company has filed a Plan of Liquidation under Chapter 11 to
conclude the Bankruptcy process.
The information set forth in these condensed consolidated financial statements
is unaudited except for the December 31, 2000 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., S.L.S. Trading Co., Ltd.,
and L.L. Knickerbocker (Thai) Co., Ltd., and its majority-owned subsidiary
Georgetown Collection, Inc. (collectively the Company). 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, 2001 are not
necessarily indicative of the results that may be expected for the year ended
8
December 31, 2001. 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, 2000.
New Accounting Pronouncements - In June 1998, the Financial Accounting Standards
Board (FASB), which establishes accounting and reporting standards, issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No.
133 establishes accounting and reporting standards requiring that every
derivative instrument, including certain derivative instruments embedded in
other contracts, be recorded in the balance sheet as either an asset or
liability at its fair value. The statement also requires that changes in the
derivative's fair value be recognized in earnings unless specific hedge
accounting criteria are met. The Company implemented SFAS No. 133 on January 1,
2001, which implementation was not material to the financial statements.
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that
all business combinations be accounted for under the purchase method only and
that certain acquired intangible assets in a business combination be recognized
as assets apart from goodwill. SFAS No. 142 requires that ratable amortization
of goodwill be replaced with periodic tests of the goodwill's impairment and
that intangible assets other than goodwill be amortized over their useful lives.
SFAS No. 141 is effective for all business combinations accounted for by the
purchase method for which the date of acquisition is after June 30, 2001. The
provisions of SFAS No. 142 will be effective for fiscal years beginning after
December 15, 2001, and will thus be adopted by the Company, as required, in
fiscal year 2002. The impact of SFAS No. 141 and SFAS No. 142 on the Company's
financial statements has not yet been determined
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 and shares issuable upon
the conversion of convertible debentures have been excluded from the three and
nine month periods ended September 30, 2000 per share calculations because their
effect is antidilutive. The following table summarizes the computation of
earnings per share for the three and nine month periods ended September 30,
2001:
9
Three months ended Nine months ended
September 30, 2001 September 30, 2001
------------------ ------------------
Net income $ 596,000 $ (378,000)
===========
Adjustment to Liquidation Value (596,000)
-----------
$ --
===========
Weighted average number of common shares:
Basic 46,987,728 46,987,728
Effect of dilutive securities:
Stock options & convertible securities
----------- -----------
Diluted 46,987,728 46,987,728
Net income per share:
Basic $ -- $ (0.01)
Effect of dilutive securities:
Stock options & convertible securities -- --
----------- -----------
Diluted $ -- $ (0.01)
=========== ===========
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, 2001 and 2000 consisted
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, partially offset by interest income earned. Cash
paid for reorganization items during the three and nine month periods ended
September 30, 2001 amounted to $455,000 and $754,000, respectively.
NOTE 4: INVENTORIES
At September 30, 2001 and December 31, 2000 inventories, including $471,000 and
$533,000, respectively, classified as other long-term assets, consist of the
following:
September 30, 2001 December 31, 2000
------------------ -----------------
Finished goods $ 4,970,000 $2,568,000
Work-in-progress 519,000 415,000
Raw materials 1,323,000 1,085,000
----------
Inventory reserves (3,314,000) $4,068,000
----------- ==========
$ 3,498,000 $8,136,000
Adjustment to ==========
Liquidation Value (3,498,000)
-----------
--
-----------
NOTE 5: INVESTMENTS
During the nine months ended September 30, 2001, the Company transferred shares
of its investment in Pure Energy Corporation, with a carrying value of $299,000
at the time of transfer, in settlement of trade
10
accounts payable of $1,117,000. The transaction resulted in a gain to the
Company of $818,000, which is included in other income, net.
During the nine months ended September 30, 2001, the Company sold its investment
in Ontro, Inc. with a carrying value of $731,000, net of unrealized loss on
investment of $385,000, for net proceeds of $623,000. The sale resulted in a
loss to the Company of $493,000, which is included in other income, net. During
the nine months ended September 30, 2000, the Company sold a portion of its
investment in Ontro, Inc. with a carrying value of $476,000, and original cost
of $173,000, for net proceeds of $486,000. The sale resulted in a gain to the
Company of $10,000, which is included in other income, net.
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 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 and GCI have
been suspended, except for certain principal repayments that have been approved
by the Bankruptcy Court. As of June 30, 2001, TKG had no borrowings outstanding
on the line of credit. The Company entered into an additional forbearance
agreement with the bank that called for $50,000 monthly payments from January
through May 2001. At June 15, 2001, the Company had the option to pay the Bank
$650,000 and extend the due date until September 30, 2001. The Company made the
January to May 2001 payments and the June 15, 2001 payment to the bank and at
September 30, 2001, the Company is required to repay the loan.
At September 30, 2001, the Company had $2,181,000 of cash borrowings
outstanding, representing amounts borrowed under the LLK sublimit, which is
classified as subject to compromise in the accompanying consolidated financial
statements (Note 8). Borrowings bear interest at the bank's base rate (11.5% at
June 30, 2001) plus 4%. The Company has continued to accrue interest at the
contractual rate on these notes and in January 2001 began making the $50,000
payments on the line of credit and at September 30, 2001, the Company is require
to repay the loan. The Company received an additional extension of time until
October 8, 2001 and the bank loan was repaid through the sale of its assets.
The Company's Thai subsidiaries have available lines of credit aggregating
125,000,000 Thai baht (approximately $2,750,000 at September 30, 2001).
Outstanding borrowings of $2,103,000 at September 30, 2001 bear interest at
rates ranging from 3.5% to 8.25%. Restricted cash of $127,000 and $135,000 at
September 30, 2001 and December 31, 2000, 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
11
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 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, 2001
and December 31, 2000:
September 30, 2001 December 31, 2000
------------------ -----------------
Secured liabilities - notes payable to bank (Note 6) $ 1,606,000 $ 2,829,000
Unsecured liabilities:
Accounts payable, trade 4,402,000 4,402,000
Commissions and royalties payable 464,000 464,000
Convertible debentures (Note 7) 459,000 459,000
Other payables and accrued expenses 920,000 920,000
------------- ------------
$ 7,851,000 $ 9,074,000
============
Adjustment to Liquidation Value (7,851,000)
-------------
--
=============
Liabilities subject to compromise are stated at their liquidation value since
such liabilities were settled as part of the sale of assets consummated on
October 9, 2001 which was approved by the Bankruptcy Court.
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, 2001.
12
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 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, 2001 and 2000.
Three months ended Nine months ended
September 30, September 30,
2001 2000 2001 2000
---------- ---------- ----------- -----------
Net sales
Collectible and toy brands $3,574,000 $1,881,000 $ 7,340,000 $ 8,117,000
Fashion jewelry brands 2,709,000 2,413,000 7,098,000 7,932,000
Fine jewelry 2,316,000 2,016,000 6,178,000 6,220,000
Corporate -- -- -- --
---------- ---------- ----------- -----------
Consolidated $8,599,000 $6,310,000 $20,616,000 $22,269,000
Operating income (loss)
Collectible and toy brands $ 103,000 $ (578,000) $ (971,000) $(1,185,000)
Fashion jewelry brands 502,000 163,000 822,000 715,000
Fine jewelry 381,000 (90,000) 792,000 (218,000)
Corporate (132,000) (197,000) (428,000) (832,000)
---------- ---------- ----------- -----------
Consolidated $ 854,000 $ (702,000) $ 215,000 $(1,520,000)
Interest expense
Collectible and toy brands $ -- $ -- $ -- $ --
Fashion jewelry brands -- -- -- --
Fine jewelry -- -- -- --
Corporate 103,000 167,000 368,000 599,000
---------- ---------- ----------- -----------
Consolidated $ 103,000 $167,000 $ 368,000 $ 599,000
Depreciation and amortization
Collectible and toy brands $ 89,000 $66,000 $137,000 $ 213,000
Fashion jewelry brands 295,000 135,000 435,000 403,000
Fine jewelry 38,000 144,000 56,000 446,000
Corporate -- -- -- --
---------- ---------- ----------- -----------
Consolidated $ 422,000 $ 345,000 $ 628,000 $ 1,062,000
Capital expenditures
Collectible and toy brands $ -- $ 4,000 $ -- $ 34,000
Fashion jewelry brands 87,000 128,000 261,000 317,000
Fine jewelry 7,000 43,000 67,000 288,000
Corporate -- -- -- --
---------- ---------- ----------- -----------
Consolidated $ 94,000 $ 175,000 $ 328,000 $ 639,000
13
Three months ended Nine months ended
September 30, September 30,
---------------------------------- ----------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Total assets
Collectible and toy brands $ 4,026,000 $ 5,759,000 $ 4,026,000 $ 5,759,000
Fashion jewelry brands 2,499,000 3,144,000 2,499,000 3,144,000
Fine jewelry 6,314,000 7,520,000 6,314,000 7,520,000
Corporate 1,787,000 4,887,000 1,787,000 4,887,000
----------- ----------- ----------- -----------
Consolidated $14,626,000 $21,310,000 $14,626,000 $21,310,000
Geographic areas
Sales to external customers:
United States $ 6,283,000 $ 4,294,000 $14,438,000 $16,049,000
Thailand 2,316,000 2,016,000 6,178,000 6,220,000
----------- ----------- ----------- -----------
Consolidated $ 8,599,000 $ 6,310,000 $20,616,000 22,269,000
Long-lived assets:
United States $ 2,414,000 $ 2,438,000 $ 2,414,000 $ 2,438,000
Thailand 1,064,000 3,833,000 1,064,000 3,833,000
----------- ----------- ----------- -----------
Consolidated $ 3,478,000 $ 6,271,000 $ 3,478,000 $ 6,271,000
14
NOTE 11: CONDENSED FINANCIAL STATEMENTS FOR THE DEBTOR ENTITY
The following are condensed unconsolidated financial statements for LLK:
The L.L. Knickerbocker Co., Inc.
Condensed Balance Sheets
(unconsolidated)
September 30, 2001 December 31, 2000
------------------ -----------------
ASSETS:
Cash and cash equivalents $ 252,000 $ 1,005,000
Accounts receivable, net of allowance 1,405,000 1,134,000
Inventories 1,176,000 1,811,000
Prepaid expenses and other current assets 705,000 726,000
------------ -----------
Total current assets 3,538,000 4,676,000
Investment in subsidiaries 3,984,000 2,346,000
Receivable from subsidiaries -- 1,260,000
Property and equipment, net 397,000 555,000
Investments 776,000 2,048,000
Other assets 90,000 99,000
------------ -----------
Total assets $ 8,785,000 $10,984,000
============ ===========
LIABILITIES:
Accounts payable $ 1,033,000 $ 2,216,000
Other accrued expenses 1,714,000 1,196,000
------------ -----------
Total current liabilities 2,747,000 3,412,000
Liabilities subject to compromise
under reorganization proceeding 7,851,000 9,074,000
STOCKHOLDERS' EQUITY:
Common stock 41,637,000 41,637,000
Additional paid-in capital 6,012,000 6,012,000
Accumulated deficit (44,929,000) (44,551,000)
Accumulated other comprehensive loss (4,533,000) (4,600,000)
------------ -----------
Total stockholders' equity (1,813,000) (1,502,000)
------------ -----------
Total liabilities and stockholders' equity $ 8,785,000 $10,984,000
============ ===========
15
The L.L. Knickerbocker Co., Inc.
Condensed Statements of Operations
(unconsolidated)
Three months Nine months
ended ended Year to date
September 30, September 30, September 30,
2001 2001 2000
------------- ------------- -------------
Net sales $3,574,000 $ 7,340,000 $ 8,117,000
Cost of sales 2,307,000 4,581,000 4,636,000
---------- ----------- -----------
Gross profit 1,267,000 2,759,000 3,481,000
Advertising expense 65,000 386,000 298,000
Selling expense 549,000 1,483,000 1,558,000
General and administrative expense 682,000 2,289,000 3,641,000
Equity in income of subsidiaries (950,000) (1,716,000) (23,000)
---------- ----------- -----------
Operating loss 921,000 317,000 (1,993,000)
Other income 16,000 360,000 3,368,000
Interest expense 58,000 245,000 398,000
Reorganization items 282,000 808,000 799,000
Income tax expense -- 2,000 3,000
---------- ----------- -----------
Net income (loss) $ 597,000 $ (378,000) $ 175,000
========== =========== ===========
The L.L. Knickerbocker Co., Inc.
Notes to Condensed Financial Statements
September 30, 2001
(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, 2001 and
December 31, 2000, and the unconsolidated results of its operations for the
three and nine months ended September 30, 2001. The unconsolidated financial
statements of LLK are presented herein without the adjustment to liquidation
value from the sale of assets discussed earlier in this filing.
16
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 2000.
CHAPTER 11 LIQUIDATION
On October 9, 2001, substantially all the Company's assets were sold in
Bankruptcy Court. Under the terms of the sale of the Company's assets in
Bankruptcy Court, substantially all the Company's assets were sold and
liabilities were either assumed by the purchaser or compromised in Bankruptcy.
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 continued 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 sheets represent the Company's
estimate of liabilities as of September 30, 2001 and December 31, 2000, subject
to adjustment in the reorganization process. On January 26, 2001, the Company
entered into a forbearance agreement with the bank and has begun making
principal and interest payments thereunder. The forbearance agreement with bank
expired on September 30, 2001. On October 9, 2001, the bank was paid off upon
the sale of assets in Bankruptcy Court.
On July 12, 2001, the Company signed a letter of intent ("LOI") with Brian
Blosil to sell substantially all of the assets of the Company in exchange for
the assumption of certain debts. The bankruptcy process requires that, in order
to maximize the value of the estate for creditors, the Company entertain overbid
offers. Accordingly, a hearing was scheduled for July 31, 2001 to approve
overbid procedures and a topping fee in connection with a proposed sale of
substantially all of the company's assets to Mr. Blosil (the "Motion"). In
consideration for the purchase of Knickerbocker's assets, the purchaser was to
assume approximately $4 million of Knickerbocker's debts and liabilities and
issue to the pre-petition unsecured creditors of Knickerbocker redeemable
preferred units with an aggregate redemption value of approximately $3 million.
The Motion asked the Bankruptcy Court to approve procedures related to the sale
of Knickerbocker's assets including the following: (1) the purchase price of
competing bids must be at least $6 million in cash plus a topping fee of 3%, (2)
competing bidders must provide to Knickerbocker a deposit of $1 million, (3)
Brian Blosil would have the opportunity to match any competing bid and (4) if
Brian Blosil does not match any competing bid, the assets would be sold to the
competing bidder and the 3% topping fee would be paid to Brian Blosil as
compensation for his costs and expenses. If the overbidding procedures were to
be approved and no substantial overbid for Knickerbocker's assets was to be
received, it was unlikely that the shareholders of Knickerbocker will receive
any proceeds from the sale of assets.
17
At the hearing, the Court approved the Motion as modified in open court. As a
result, there was a hearing on the sale of substantially all of the Company's
assets and to consider overbids on September 4, 2001 at 9:30 A.M. The overbid
procedures include funding a $480,000 deposit by August 29, 2001, an initial
overbid of at least $6,180,000, and subsequent overbids in additional $300,000
increments.
There were no overbids at the hearing on September 4, 2001 and, as a result, the
sale of the Company's assets to Brian Blosil was approved by the Bankruptcy
Court. The sale of assets to Brian Blosil closed on October 9, 2001. To formally
conclude the bankruptcy process, the Company has filed a Plan of Liquidation
with the Bankruptcy Court.
As a result of the sale of assets on October 9, 2001, the Company adopted the
liquidation basis of accounting at September 30, 2001. Accordingly, at September
30, 2001, assets were adjusted to estimated net realizable value and liabilities
were adjusted to estimated settlement amounts. Under the terms of the sale of
the Company's assets in Bankruptcy Court, substantially all the Company's assets
were sold and liabilites were either assumed by the purchaser or compromised in
Bankruptcy. Therefore, both assets and liabilities were shown to have a zero
value, since they no longer remain with the Company. The Company has filed a
Plan of Liquidation under Chapter 11 to conclude the Bankruptcy process.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
NET SALES
Net sales increased to $8,599,000 for the three months ended September 30, 2000
from $6,310,000 for the three months ended September 30, 2000, an increase of
$2,289,000 or 36.27%. The $2,289,000 increase in net sales was comprised of
increases in sales of $1,693,000 in collectible dolls, $300,000 in fine jewelry
sales, and $296,000 in fashion jewelry and accessories sales.
The increases in sales in the collectible doll and fashion jewelry and
accessories were due to the timing of shipments to the Company's large home
shopping network customer. The increase in fine jewelry sales was due to
increased orders from the Company's international customers. 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 increased to $3,724,000 for the three months ended September 30,
2001 from $2,490,000 for the three months ended September 30, 2000, an increase
of $1,234,000, or 37.0%. As a percentage of net sales, gross profit for the
quarter increased to 43.3% in 2001 from 39.5% in 2000. The increase in gross
profit percentage in 2001 from 2000 was due primarily to a change in the sales
mix in 2001 that resulted in the sales of higher margin products in 2001.
ADVERTISING EXPENSE
Advertising expense decreased to $68,000 for the three months ended September
30, 2001 from $108,000 for the three months ended September 30, 2000, a decrease
of $40,000, or 37.0%. The decrease in advertising expense was due primarily to
the Company's efforts to control costs. Included in advertising expense are
advertisement printing costs, catalog-printing costs, media space in magazines,
and advertisement creative and development costs.
SELLING EXPENSE
18
Selling expense increased to $1,004,000 for the three months ended September 30,
2001 from $755,000 for the three months ended September 30, 2000, an increase of
$249,000, or 33.0%. As a percentage of net sales, selling expense decreased from
12.0% in 2000 to 11.7% in 2001. The increase in overall selling expense dollars
was due primarily to higher variable royalty expense attributable to higher net
sales in 2001 for the Company's collectible doll and fashion jewelry and
accessories programs. 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 $1,798,000 for the three months
ended September 30, 2001 from $2,329,000 for the three months ended September
30, 2000, a decrease of $531,000, or 22.8%. The percentage of net sales
represented by these expenses decreased from 36.9% in 2000 to 20.9% in 2001 due
primarily to a lower sales base in 2000 and cost cutting efforts in 2001. 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 decreased to $117,000 for the three months ended September 30, 2001
from $3,358,000 for the three months ended September 30, 2000, a change of
$3,241,000. 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 2001 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 $93,000 for the three months ended September 30,
2001 from $167,000 for the three months ended September 30, 2000. The decrease
in interest expense relates primarily to lower outstanding borrowings on the
Company's bank debt in 2001. The 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 $282,000
and $220,000 for the three months ended September 30, 2001 and 2000,
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 before adjustment to
liquidation basis decreased to $596,000 for the three months ended September 30,
2001 from $2,267,000 for the three months ended September 30, 2000, a decrease
of $1,671,000.
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
NET SALES
Net sales decreased to $20,616,000 for the nine months ended September 30, 2001
from $22,269,000 for the nine months ended September 30, 2000, a decrease of
$1,653,000 or 7.4%. The $1,653,000 decrease in net sales was comprised of
decreases in sales of $834,000 in fashion jewelry and accessories, $777,000 in
19
collectible dolls, and $42,000 in fine jewelry. The decrease in collectible
sales is comprised of a decrease of $1,076,000 related to the discontinuance of
two celebrity doll brands in 2000, partially offset by a 299,000 increase in
sales from its continuing collectible doll brands. The decrease in fashion
jewelry sales was due primarily to the timing of large 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 $8,921,000 for the nine months ended September 30,
2001 from $9,294,000 for the nine months ended September 30, 2000, a decrease of
$373,000, or 4.0%. As a percentage of net sales, gross profit for the nine
months increased to 43.3% in 2001 from 41.7% in 2000. The increase in gross
profit percentage in 2001 from 2000 was due primarily to a change in the sales
mix in 2001 that resulted in the sales of higher margin products in 2001.
ADVERTISING EXPENSE
Advertising expense decreased to $399,000 for the nine months ended September
30, 2001 from $356,000 for the nine months ended September 30, 2000, an increase
of $43,000, or 12.1%. Included in advertising expense are ad printing costs,
catalog printing costs, media space in magazines and advertisement creative and
development costs.
SELLING EXPENSE
Selling expense increased to $2,704,000 for the nine months ended September 30,
2001 from $2,694,000 for the nine months ended September 30, 2000, a decrease of
$10,000, or .4%. As a percentage of net sales, selling expense increased from
12.1% in 2000 to 13.1% in 2001. The increase in selling expense was due
primarily to higher variable royalty expense attributable to higher net sales in
2001 for the Company's celebrity collectible doll program. 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 $5,603,000 for the nine months
ended September 30, 2001 from $7,764,000 for the nine months ended September 30,
2000, a decrease of $2,161,000, or 27.8%. The percentage of net sales
represented by these expenses decreased from 34.9% in 2000 to 27.2% in 2001, due
primarily to lower overhead costs in 2001. 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 decreased to $575,000 for the nine months ended September 30, 2001
from $3,521,000 for the nine months ended September 30, 2000, a change of
$2,946,000. 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 2001 consists
primarily of activity from the sale of the Company's investment in Ontro, Inc.
and foreign currency gains from transactions of the Company's Thailand
operations due to fluctuations in the Thai baht.
INTEREST EXPENSE
Interest expense decreased to $358,000 for the nine months ended September 30,
2001 from $599,000 for the nine months ended September 30, 2000. The remaining
balance of interest expense includes interest on borrowings from working capital
lines of credit and mortgages on buildings owned by the Company.
20
REORGANIZATION ITEMS
Expenses associated with the Company's Chapter 11 filing amounted to $808,000
and $1,198,000 for the nine months ended September 30, 2001 and 2000,
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 decreased to $378,000 for the
nine months ended September 30, 2001 from net income of $175,000 for the nine
months ended September 30, 2000, a difference of $553,000.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow used in operations was $183,000 for the nine months ended September
30, 2001 compared to $1,629,000 provided by operations in the comparable 2000
period. The $1,812,000 decrease in cash flow from operations was due primarily
to a $3,229,000 change in accounts receivable, partially offset by a $3,035,000
difference in gains from sales of investments, the net loss incurred in 2001, a
property noncash impairment charge in 2000, lower depreciation in 2001, and
large changes in levels of accounts payable and accrued expenses.
On October 9, 2001, substantially all the Company's assets were sold in
Bankruptcy Court. Under the terms of the sale of the Company's assets in
Bankruptcy Court, substantially all the Company's assets were sold and
liabilities were either assumed by the purchaser or compromised in Bankruptcy.
As consideration for the Company's assets, the purchaser has agreed to pay the
Company's general unsecured creditors of the Company a compromised amount over
several years. The Company's common shareholders will not receive money from the
sale of assets and, because there are no remaining assets in the Company, will
not receive any type of dividend distribution.
As a result of the sale of the Company's assets on October 9, 2001, the Company
will have no capital resources beyond the date of the sale.
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
21
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.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements". SAB 101summarizes 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 October 9, 2001, substantially all the Company's assets were sold in
Bankruptcy Court. Under the terms of the sale of the Company's assets in
Bankruptcy Court, substantially all the Company's assets were sold and
liabilities were either assumed by the purchaser or compromised in Bankruptcy.
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 continued 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.
22
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 sheets represent the Company's
estimate of liabilities as of September 30, 2001 and December 31, 2000, subject
to adjustment in the reorganization process. On January 26, 2001, the Company
entered into a forbearance agreement with the bank and has begun making
principal and interest payments thereunder. The forbearance agreement with bank
expired on September 30, 2001. On October 9, 2001, the bank was paid off upon
the sale of assets in Bankruptcy Court.
On July 12, 2001, the Company signed a letter of intent ("LOI") with Brian
Blosil to sell substantially all of the assets of the Company in exchange for
the assumption of certain debts. The bankruptcy process requires that, in order
to maximize the value of the estate for creditors, the Company entertain overbid
offers. Accordingly, a hearing was scheduled for July 31, 2001 to approve
overbid procedures and a topping fee in connection with a proposed sale of
substantially all of the company's assets to Mr. Blosil (the "Motion"). In
consideration for the purchase of Knickerbocker's assets, the purchaser was to
assume approximately $4 million of Knickerbocker's debts and liabilities and
issue to the pre-petition unsecured creditors of Knickerbocker redeemable
preferred units with an aggregate redemption value of approximately $3 million.
The Motion asked the Bankruptcy Court to approve procedures related to the sale
of Knickerbocker's assets including the following: (1) the purchase price of
competing bids must be at least $6 million in cash plus a topping fee of 3%, (2)
competing bidders must provide to Knickerbocker a deposit of $1 million, (3)
Brian Blosil would have the opportunity to match any competing bid and (4) if
Brian Blosil does not match any competing bid, the assets would be sold to the
competing bidder and the 3% topping fee would be paid to Brian Blosil as
compensation for his costs and expenses. If the overbidding procedures were to
be approved and no substantial overbid for Knickerbocker's assets was to be
received, it was unlikely that the shareholders of Knickerbocker will receive
any proceeds from the sale of assets.
At the hearing, the Court approved the Motion as modified in open court. As a
result, there was a hearing on the sale of substantially all of the Company's
assets and to consider overbids on September 4, 2001 at 9:30 A.M. The overbid
procedures include funding a $480,000 deposit by August 29, 2001, an initial
overbid of at least $6,180,000, and subsequent overbids in additional $300,000
increments.
There were no overbids at the hearing on September 4, 2001 and, as a result, the
sale of the Company's assets to Brian Blosil was approved by the Bankruptcy
Court. The sale of assets to Brian Blosil closed on October 9, 2001. To formally
conclude the bankruptcy process, the Company has filed a Plan of Liquidation
with the Bankruptcy Court.
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
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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,
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.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 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, 2001 By: /S/Anthony P. Shutts
--------------------------------
Anthony P. Shutts
Chief Financial Officer
(Principal financial and accounting officer)
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