SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
AMENDMENT NUMBER 1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
November 20, 1996
-------------------------------------------
Date of Report (Date of earliest event reported)
THE L.L. KNICKERBOCKER CO., INC.
---------------------------------------------
(Exact Name of Registrant as Specified in Charter)
California 0-25488 33-0230641
- ------------------------------- ------------------------ ----------------------
(State or Other Jurisdiction (Commission File Number) (I.R.S. Employer
of Incorporation) Identification Number)
30055 Comercio, Rancho Santa Margarita, California 92688
- -------------------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (714) 858-3661
N/A
- --------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
------------------------------------
On November 20, 1996, the registrant acquired approximately 80% of the issued
and outstanding capital stock of Georgetown Collection, Inc., a developer and
marketer of proprietary, highly differentiated products distributed via direct
response. The Company currently consists of two businesses, Georgetown
Collection and Magic Attic Club, both specializing in high quality dolls.
Georgetown Collection specializes in selling porcelain collectible dolls to
adult women. The Magic Attic Club is a rapidly growing direct marketer of vinyl
play dolls, books and accessories for girls. The capital stock of Georgetown
Collection, Inc. ("Georgetown") was acquired pursuant to an Agreement of
Purchase and Sale dated November 20, 1996 by and among the sellers, New
Enterprise Associates, IV, L.P., Consumer Ventures Partners I, L.P., Vermont
Capital Venture Fund, North Atlantic Venture Fund, and Merchant Partners and the
registrant, as buyer. Pursuant to the Agreement of Purchase and Sale, the
registrant acquired from the above named stockholders 100% of the outstanding
preferred stock of Georgetown, which represents approximately 80% of the total
outstanding capital stock. Additionally, the registrant acquired 9.90% of the
outstanding common stock of Georgetown from Consumer Venture Partners I, L.P..
Following the acquisition, the registrant intends to carry on Georgetown's
business under that name.
The consideration for the acquisition consisted of (a) $1,675,000 payable in
restricted common stock of the registrant to the holders of the preferred stock
of Georgetown (b) A contingent payment in an amount equal to 15% of Georgetown's
earnings before taxes during the calendar year ended December 31, 1997 and 4.5%
during the calendar years ended December 31, 1998-2001 to the preferred
stockholders of Georgetown, and (c) $4,011.18 payable in common stock of the
registrant to Consumer Venture Partners I, L.P. for 9.90% of the common stock.
In an settlement agreement with certain secured creditors of Georgetown, the
registrant, as part of the acquisition process, paid down $1,500,000 on certain
secured debt of Georgetown. Further to the settlement agreement, the registrant
has agreed to refinance the remaining secured debt within ninety days from the
date of the Agreement of Purchase and Sale. Additionally, the registrant
provided a short-term loan to Georgetown in the amount of $2,000,000 to cover
immediate product and catalog mailing costs.
The assets acquired include the operating leases for two office/warehouse
facilities in Portland, Maine, the furniture, fixtures, equipment, and leasehold
improvements located in the offices/warehouses, proprietary software, various
trademarks and contracts. All such assets were used by Georgetown in the
operation of the doll businesses and the registrant intends to continue the use
of such assets in the operation of the doll direct response business.
The transaction will be accounted for as a purchase.
Neither registrant nor any affiliate thereof had any preexisting relationship
with the sellers.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
------------------------------------------------------------------
(a) Financial Statements of Business Acquired:
-----------------------------------------
GEORGETOWN COLLECTION, INC.
FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 30, 1995 AND DECEMBER 31, 1994
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
The Board of Directors
Georgetown Collection, Inc.
We have audited the accompanying balance sheets of Georgetown Collection, Inc.
as of December 30, 1995 and December 31, 1994, respectively, and the related
statements of operations, changes in stockholders' equity and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Georgetown Collection, Inc. as
of December 30, 1995 and December 31, 1994, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
Portland, Maine
April 2, 1996, except for Note 12,
as to which the date is November 20, 1996
GEORGETOWN COLLECTION, INC.
BALANCE SHEETS
DECEMBER 30, 1995 AND DECEMBER 31, 1994
-----
ASSETS
(NOTE 5)
1995 1994
----------- -----------
Current assets:
Cash and cash equivalents $ 45,392 $ 442,906
Accounts receivable, net of allowance for
doubtful accounts of $454,713 and $360,728
in 1995 and 1994, respectively 6,294,174 4,064,405
Inventories (Note 3) 3,032,645 1,256,242
Prepaid promotion costs (Note 4) 4,926,048 3,985,078
Prepaid royalties (Note 10) 60,596 35,382
Other 770,181 336,035
----------- -----------
Total current assets 15,129,036 10,120,048
----------- -----------
Property and equipment:
Furniture and equipment 1,461,075 619,890
Computer equipment 378,176 113,931
Leasehold improvements 44,765 12,315
Capital leases (Note 6) 306,485 236,388
----------- -----------
2,190,501 982,524
----------- -----------
Accumulated depreciation and amortization (544,230) (298,546)
----------- -----------
Total property and equipment 1,646,271 683,978
----------- -----------
Other assets:
Prepaid promotion costs (Note 4) 69,576 28,356
Capitalized computer software, net 181,635
Deposits 29,872 19,356
Notes receivable 26,557 27,654
----------- -----------
Total other assets 307,640 75,366
----------- -----------
Total assets $17,082,947 $10,879,392
=========== ===========
The accompanying notes are an integral part
of these financial statements.
2
LIABILITIES AND STOCKHOLDERS' EQUITY
1995 1994
------------ ------------
Current liabilities:
Book overdraft $ 662,382
Notes payable to bank (Note 5) 3,712,361 $ 1,576,614
Current portion of capital lease obligations (Note 6) 116,920 76,400
Accounts payable 4,568,225 2,714,584
Accounts payable - letter of credit, merchandise 2,230,223 1,272,306
Accrued payroll 74,202 97,989
Accrued expenses 441,769 185,617
Accrued royalties (Note 10) 189,689 88,691
Customer deposits 398,878 246,196
------------ ------------
Total current liabilities 12,394,649 6,258,397
------------ ------------
Capital lease obligations, net of current portion (Note 6) 150,653 53,018
Commitments (Note 10)
Stockholders' equity (Notes 7 and 8):
Series A redeemable preferred stock, $.01 par value, 850,000 shares
authorized (liquidation preference of $850,000) 8,500 8,500
Series B redeemable preferred stock, $.01 par value, 1,917,047
shares authorized (liquidation preference of $2,913,821) 19,094 19,094
Series C redeemable preferred stock, $.01 par value, 2,013,171
shares authorized (liquidation preference of $3,002,383) 19,370 19,370
Series D redeemable preferred stock, $.01 par value, 250,000 shares
authorized (liquidation preference of $500,000) 2,500 2,500
Common stock, $.01 par value, 8,000,000 shares authorized 11,910 9,502
Additional paid-in capital 7,343,060 7,209,579
Accumulated deficit (2,866,392) (2,700,171)
Treasury stock, 39,655 shares at cost (397) (397)
----------- ------------
Total stockholders' equity 4,537,645 4,567,977
----------- ------------
Total liabilities and stockholders' equity $17,082,947 $ 10,879,392
=========== ============
GEORGETOWN COLLECTION, INC.
STATEMENTS OF OPERATIONS
for the years ended December 30, 1995 and December 31, 1994
----
1995 1994
------------ ------------
Net sales $ 30,247,930 $ 18,808,638
Cost of goods sold 9,360,600 5,883,485
------------ ------------
Gross profit 20,887,330 12,925,153
Operating expenses:
Selling 16,492,765 8,435,605
Product development 884,650 630,412
General and administrative 3,475,337 2,558,397
------------ ------------
Total operating expenses 20,852,752 11,624,414
------------ ------------
Total operating income 34,578 1,300,739
Interest expense (217,946) (114,710)
Other income 20,147 22,193
------------ ------------
(Loss) income before income taxes (163,221) 1,208,222
Income tax expense (Note 9) 3,000 --
------------ ------------
Net (loss) income $ (166,221) $ 1,208,222
============ ============
The accompanying notes are an integral part
of these financial statements.
3
GEORGETOWN COLLECTION, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended December 30, 1995 and December 31, 1994
-----
Convertible and Redeemable Preferred Stock (Note 7)
-----------------------------------------------------------------------------------------------
Series A Series B Series C Series D
--------------------- --------------------- --------------------- --------------------
Shares Amount Shares Amount Shares Amount Shares Amount
---------- -------- --------- -------- ---------- --------- -------- --------
Balance at December 31, 1993 850,000 $ 8,500 1,909,450 $ 19,094 1,937,021 $ 19,370
Issuance of preferred stock, net
of costs 250,000 $ 2,500
Exercise of common stock options
Net income
---------- -------- --------- -------- --------- --------- ------- --------
Balance at December 31, 1994 850,000 $ 8,500 1,909,450 $ 19,094 1,937,021 $ 19,370 250,000 2,500
Exercise of common stock options
Exercise of warrants to purchase
common stock
Net loss
---------- -------- --------- -------- --------- --------- ------- --------
Balance at December 31, 1995 850,000 $ 8,500 1,909,450 $ 19,094 1,937,021 $ 19,370 250,000 $ 2,500
========== ======== ========= ======== ========= ========= ======= ========
Total
Common Stock Additional Stock-
------------------------ Paid-in Accumulated Treasury holders'
Shares Amount Capital Deficit Stock Equity
----------- ---------- ----------- ------------ ----------- ----------
Balance at December 31, 1993 868,938 $ 8,690 $ 6,697,111 $ (3,908,393) $ (397) $2,843,975
Issuance of preferred stock, net
of costs 497,500 500,000
Exericse of common stock options 81,250 812 14,968 15,780
Net income 1,208,222 1,208,222
----------- ---------- ----------- ------------ ----------- ----------
Balance at December 31, 1994 950,188 9,502 7,209,579 (2,700,171) (397) 4,567,977
Exercise of common stock options 151,750 1,517 30,350 31,867
Exercise of warrants to purchase
common stock 89,050 891 103,131 104,022
Net loss (166,221) (166,221)
----------- ---------- ----------- ------------ ----------- ----------
Balance at December 31, 1995 1,190,988 $ 11,910 $ 7,343,060 $ (2,866,392) $ (397) $4,537,645
=========== ========== =========== ============ =========== ==========
The accompanying notes are an integral part
of these financial statements.
4
GEORGETOWN COLLECTION, INC.
STATEMENTS OF CASH FLOWS
for the years ended December 30, 1995 and December 31, 1994
----
1995 1994
------------ ------------
Cash flows from operating activities:
Net(loss) income $ (166,221) $ 1,208,222
Adjustments to reconcile net income to net cash used by operating
activities:
Depreciation and amortization 247,406 147,750
Loss on disposal of property and equipment 295 17,446
Change in operating assets and liabilities:
Accounts receivable (2,229,769) (1,184,491)
Inventories (1,776,403) 13,344
Prepaid promotion costs (982,190) (2,233,665)
Prepaid royalties and other (459,360) (129,216)
Accounts payable, accrued payroll, accrued royalties and
accrued expenses 3,144,921 1,615,308
Customer deposits 152,682 49,471
------------ ------------
Net cash used by operating activities (2,068,639) (495,831)
------------ ------------
Cash flows from investing activities:
Proceeds from sale of property and equipment 150
Purchases of property and equipment (984,596) (329,287)
(Increase) decrease in deposits (10,516) 1,383
Decrease in notes receivable 1,097 9,000
Increase in capitalized software, net (181,635)
------------ ------------
Net cash used by investing activities (1,175,500) (318,904)
------------ ------------
Cash flows from financing activities:
Net increase in note payable to bank 2,135,747 943,661
Proceeds from exercise of stock options and warrants 135,889
Proceeds from issuance of Series D Preferred stock 500,000
Payments on capital lease obligations (87,393) (113,097)
Increase (decrease) in book overdraft 662,382 (72,923)
------------ ------------
Net cash provided by financing activities 2,846,625 1,257,641
------------ ------------
Net (decrease) increase in cash (397,514) 442,906
Cash at beginning of year 442,906 --
------------ ------------
Cash at end of year $ 45,392 $ 442,906
============ ============
Continued
5
GEORGETOWN COLLECTION, INC.
STATEMENTS OF CASH FLOWS, Continued
for the years ended December 30, 1995 and December 31, 1994
----
1995 1994
--------- ---------
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 175,061 $ 114,710
========= =========
Supplemental disclosure of noncash investing and financing activities:
During 1995 and 1994, capital lease obligations of $225,548 and $19,349,
respectively, were incurred when the Company entered into leases for new
equipment.
During 1994, in connection with the exercise of certain stock options,
81,250 shares of common stock were issued in exchange for notes receivable
of $15,780.
The accompanying notes are an integral part
of the financial statements.
6
GEORGETOWN COLLECTION, INC.
NOTES TO FINANCIAL STATEMENTS
----
1. NATURE OF BUSINESS
------------------
Georgetown Collection, Inc. (the Company) was incorporated in 1987 under the
laws of the State of Delaware. The Company is engaged in the direct marketing
and sales of collectible and vinyl dolls and books, primarily to individual
customers in the United States. The Company also generates sales in certain
foreign markets and contracts for the manufacture of its dolls from several
manufacturers in the Far East.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
------------------------------------------
Fiscal Year
-----------
The Company's fiscal year ends on the last Saturday in the calendar year.
The financial statements include the accounts of the Company as of December
30, 1995 for Fiscal 1995 (52 weeks), and December 31, 1994, for Fiscal 1994
(53 weeks).
Use Of Estimates
----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid debt instruments with maturities of
three months or less, when purchased, to be cash equivalents.
Revenue Recognition
-------------------
Revenue is recognized on sales of products at the time of shipment; customer
payments are principally on the installment basis over five to six months.
Advance payments from customers are received with the sales order for
certain programs and are deferred until the product is shipped.
Promotion Costs
---------------
Direct mail production costs and direct-response advertising costs are
capitalized and amortized over the expected period of future benefits.
Direct-response advertising consists primarily of magazine advertisements
that include order coupons for the Company's products. The capitalized costs
of advertising associated with doll collector magazines are amortized over a
three-month period beginning the month of the mailing if the product is
available or in the first month the product is available. All other direct
mail advertising is amortized over a six-month period following the
publication of the advertisement.
Continued
7
GEORGETOWN COLLECTION, INC.
NOTES TO FINANCIAL STATEMENTS
----
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued:
------------------------------------------
Promotion Costs, Continued
---------------
The Company also capitalizes inventory product development and creative
costs which are amortized over a twelve month period following the date
the product is first shipped.
Inventories
-----------
Inventories are carried at the lower of cost or market. Cost is determined
using the first-in, first-out method. The Company periodically evaluates
its products based on current marketing plans and, if required, adjusts the
carrying value to estimated net realizable value.
Property and Equipment
----------------------
Property and equipment is stated at cost. Depreciation is computed on the
straight-line method over the estimated useful lives of the assets, ranging
from three to seven years, or the lease terms in the case of capital leases.
Capitalized Computer Software
-----------------------------
Capitalized computer software costs consist of costs of internally developed
software based on a project by project analysis. All costs are amortized on
a straight line basis over a period of five years.
Reclassifications
-----------------
Certain reclassifications have been made to the 1994 financial statements
to conform to the 1995 financial statement presentation.
3. INVENTORIES:
-----------
Inventories consisted of the following at December 30, 1995 and December 31,
1994:
1995 1994
------------ ------------
Finished goods $ 3,123,149 $ 1,406,461
Rework inventory 252,152 107,138
Materials 152,186 51,580
------------ ------------
3,527,487 1,565,179
Less reserve for obsolescence 494,842 308,937
------------ ------------
$ 3,032,645 $ 1,256,242
============ ============
Continued
8
GEORGETOWN COLLECTION, INC.
NOTES TO FINANCIAL STATEMENTS
-----
4. PREPAID PROMOTION COSTS:
-----------------------
Prepaid promotion costs consisted of the following at December 30, 1995 and
December 31, 1994:
1995 1994
---------- ----------
Prepaid media advertising $3,688,563 $3,362,460
Prepaid creative services 503,759 397,675
Prepaid product development 803,302 253,299
---------- ----------
4,995,624 4,013,434
Less non-current amounts 69,576 28,356
---------- ----------
Net current prepaid promotion costs $4,926,048 $3,985,078
========== ==========
Promotion expense, for 1995 and 1994 was approximately $10,710,000 and
$5,825,000, respectively.
During 1995 and 1994, the Company refined its method of capitalization of
certain media advertising, which resulted in approximately $268,000 of
capitalized costs written off in fiscal 1995, and approximately $199,000 of
costs deferred in fiscal 1994 and expensed in fiscal 1995.
5. NOTES PAYABLE TO BANK:
---------------------
Notes payable represent bank borrowings outstanding under a revolving
finance accommodation. Outstanding borrowings at December 30, 1995 of
$3,170,145 are based on levels of eligible accounts receivable and inventory
with a ceiling of $7,500,000, bearing interest at the bank's prime rate plus
.25% (8.75% at December 31, 1995). The Company had additional borrowing
capacity up to $1,000,000 under the accommodation for capital equipment
purchases, with $542,216 outstanding at December 30, 1995. The additional
facility bears interest at the bank's prime rate plus .75% (9.25% at
December 31, 1995). Amounts due under these agreements are collateralized by
all corporate assets. Availability on the revolving finance accommodation
and the additional capital equipment facility was approximately $2,234,000
at December 30, 1995.
Continued
9
GEORGETOWN COLLECTION, INC.
NOTES TO FINANCIAL STATEMENTS
-----
5. NOTES PAYABLE TO BANK, Continued:
---------------------
The revolving finance accommodation expires on January 31, 1997, and
contains numerous restrictive covenants, including those related to
debt/equity ratio, working capital, net worth and debt service. At December
31, 1995, the Company was in violation of certain covenants and received a
forbearance from the lender through August 15, 1996. As a result, the debt
has been classified as a current liability. Under terms of the forbearance
agreement, certain restrictive covenants have also been reset and the
revolving finance accommodation will be reduced to $5,000,000 from August
16, 1996 through October 31, 1996, and to $2,500,000 thereafter, until
expiration on January 31, 1997. In addition, the capital equipment term
accommodation will be frozen at levels existing at April 30, 1996, and the
interest rate on all outstanding borrowings will be at the bank's prime rate
plus 1%. Under the agreement, the bank will permit additional borrowings
over and above the revolving finance accommodation of $1,250,000 through
June 14, 1996, and $2,000,000 thereafter until August 15, 1996. (See also
Note 12)
6. LEASES:
------
The Company leases its office and warehouse facility under an operating
lease which expires in 1997, with an option for extending the lease for an
additional period of five years. Rent expense for 1995 and 1994 was
approximately $232,000 and $201,000, respectively. The Company has also
entered into various capital leases for certain equipment.
Future minimum payments due under leases at December 30, 1995 are as
follows:
Capital Operating
Leases Leases
-------- ---------
1996 $124,475 $376,300
1997 76,529 396,300
1998 74,148 36,300
1999 14,126
-------- --------
Total minimum lease payments 289,278 $808,900
========
Less amount representing interest (at
rates ranging from 4.1% to 16.7%) 21,705
--------
Present value of minimum capital lease
payments 267,573
Less current portion of obligations
under capital leases 116,920
--------
Obligations under capital leases, net
of current portion $150,653
========
The net book value of equipment under capital leases at December 30, 1995,
is approximately $184,000.
10
GEORGETOWN COLLECTION, INC.
NOTES TO FINANCIAL STATEMENTS
-----
7. CAPITAL STOCK:
-------------
Each share of Series A, Series B, Series C, and Series D cumulative
convertible preferred stock may be converted into one share of common stock
at the option of the stockholder; however, conversion is required upon an
issuance of common stock totalling $7,500,000 at $4.50 per share. The
conversion rate is subject to change in certain events, including reduction
in the event of the Company's failure to redeem the preferred stock as
described hereunder. At December 30, 1995, 4,946,471 shares of common stock
were reserved for conversion.
The preferred shares are entitled to vote and receive dividends in
proportion to the number of common shares into which they are convertible.
The Series A stock accumulates dividends at $.08 per share annually, Series
B and C stock accumulates dividends at $.13 per share annually, and Series D
accumulates dividends at $.16 per share annually. Dividends accumulated at
December 30, 1995 were $3,702,416. The dividends are payable only upon
declaration, mandatory conversion, liquidation, or stock redemption and are
forfeited upon voluntary conversion. Cash dividends paid per share on
preferred stock must be equal to the cash dividend declared for the common
stock during any fiscal year. Upon liquidation, the Series A, B, C, and D
preferred stocks are entitled to $1, $1.526, $1.55, and $2 per share,
respectively; ($7,266,204 in the aggregate) plus any unpaid dividends.
Certain actions concerning creation of junior stock, dissolution of the
corporation, changes in by-laws and equity transactions require approval of
at least two-thirds of the preferred stockholders.
The Company is required to redeem the Series A, Series B, Series C, and
Series D convertible preferred stocks on July 1, 1997 at $1, $1.526, $1.55,
and $2 per share, respectively ($7,266,204 in the aggregate), and to pay all
unpaid dividends. Any reacquired shares must be canceled.
In connection with loans made to the Company by investors, the Company
issued common stock warrants. At December 31, 1995, outstanding warrants of
261,020 issued during 1991 are exercisable at $1.55 per share and expire on
June 30, 1996.
8. STOCK OPTION PLAN:
-----------------
The Company has a stock option plan available to all employees and
directors, which will be in effect through July 14, 1998. The plan provides
for 600,000 shares of common stock to be made available for options. All
options expire 10 years from the date of grant or upon termination of
employment.
Continued
11
GEORGETOWN COLLECTION, INC.
NOTES TO FINANCIAL STATEMENTS
-----
8. STOCK OPTION PLAN, Continued:
-----------------
Options outstanding and exercisable under the plan are as follows:
Price Per
Number Share
--------- -------------
Balance at December 25, 1993 514,000 $ .10 to .20
Granted - 1994 165,000 $ .25 to .30
Terminated - 1994 (68,750)
Exercised - 1994 (81,250) $ .153 to .20
--------
Balance at December 31, 1994 529,000 $ .10 to .35
--------
Granted - 1995 58,000 $ .30
Terminated - 1995 (53,500) $ .20
Exercised - 1995 (151,750) $ .20
--------
Balance at December 30, 1995 381,750 $ .20 to .30
========
At December 30, 1995, 166,500 options are exercisable.
9. INCOME TAXES:
------------
Income tax expense consists of the following:
1995 1994
-------- -------------
Current tax expense
Federal $ - $ -
State 3,000 -
-------- -------------
Deferred tax expense
Federal - -
State - -
-------- -------------
$ 3,000 $ -
======== =============
Continued
12
GEORGETOWN COLLECTION, INC.
NOTES TO FINANCIAL STATEMENTS
-----
9. INCOME TAXES:
------------
A reconciliation of the differences between income tax expense at
statutory rates and the effective rate is as follows:
1995 1994
----------- -----------
Tax expense benefit on income at
statutory rates $ (65,000) $ 483,000
Alternative minimum tax 3,000 -
Change in valuation allowance 95,000 (483,000)
Other (30,000) -
----------- -----------
Total tax expense $ 3,000 $ -
=========== ===========
Deferred taxes result principally from temporary differences in the amounts
recorded for advertising costs, and certain reserves for financial statement
and tax reporting purposes. The Company has fully reserved the tax benefit
of net deductible temporary differences and net operating loss carryforwards
(NOL) due to the uncertainty of realization. The components of deferred
taxes at December 31, 1995 and 1994 are as follows:
1995 1994
----------- -----------
Deferred tax assets $ 646,000 $ 390,000
Deferred tax liabilities (1,661,000) (1,419,000)
NOL Carryforwards 2,002,000 2,111,000
----------- -----------
Net deferred tax assets 987,000 1,082,000
Valuation allowance (987,000) (1,082,000)
----------- -----------
Total tax expense $ - $ -
=========== ===========
At December 31, 1995, the Company has approximately $5,200,000 of tax NOL
carryforwards with various expiration dates between 2002 and 2008. The net
operating losses may be subject to limitations under Internal Revenue Code
Section 382, which limits the annual use of such NOL carryforwards in the
case of changes in the Company's stock ownership greater than 50% in any
three year period. Should such an ownership change occur, utilization of
remaining NOL carryforwards will be subject to an annual limitation based on
a percentage (approximately 5.75% at December 30, 1995) of the fair market
value of the Company immediately prior to the change.
Continued
13
GEORGETOWN COLLECTION, INC.
NOTES TO FINANCIAL STATEMENTS
-----
10. COMMITMENTS:
-----------
At December 30, 1995, the Company had unused letters of credit totalling
$881,782.
Sales of the Company's products are subject to various licensing and
copyright agreements requiring royalty payments ranging from 1 to 3 percent
of sales. The Company paid $533,094 and $384,337 for royalty fees in 1995
and 1994, respectively.
11. BENEFIT PLAN:
------------
In 1994 the Company established a retirement plan (the Plan) which is a
defined contribution plan under Section 401(k) of the Internal Revenue Code
and covers substantially all employees who have met certain service
requirements. The Plan allows participants to contribute an amount not to
exceed 19% of their compensation for the contribution period as defined.
The Company will contribute on behalf of the participants an amount equal
to 50% of the participants' contribution up to a maximum of the first 2% of
employee contributions. The Company's contribution to the Plan amounted to
approximately $15,000 and $12,000 in 1995 and 1994, respectively.
12. SUBSEQUENT EVENT:
----------------
In 1995, the Company began operation of a direct mail line of business,
which, subsequent to year end, has been discontinued. The operation
incurred a net loss in 1995 approximated as follows:
Net sales $ 451,000
Cost of goods sold 145,000
----------
Gross profit 306,000
Operating expenses 1,094,000
----------
Operating loss $ (788,000)
==========
On October 19, 1996, L.L. Knickerbocker, Inc. (Knickerbocker), a publicly
traded company, acquired 100% of the outstanding preferred stock and 9.9%
of the outstanding common stock of the Company. The consideration paid to
the selling shareholders consists of (a) $1,679,011 payable in common
stock of Knickerbocker, and (b) contingent payments in an amount equal to
15% of the Company's earnings before taxes during the calendar year ending
December 31, 1997, and 4.5% per year thereafter through December 31, 2001.
In addition, Knickerbocker paid $1,500,000 to the Company's bank under its
forbearance agreement (see Note 5) and also agreed to refinance the
remaining obligation to the bank within 90 days. In addition,
Knickerbocker provided a short-term loan to the Company of $2,000,000 to
cover certain operating expenses. The acquisition will be accounted under
the purchase method of accounting by Knickerbocker.
14
(b) Pro Forma Financial Information:
-------------------------------
THE L.L. KNICKERBOCKER CO., INC. (THE "COMPANY") AND
GEORGETOWN COLLECTION, INC. ("GCI")
HISTORICAL AND PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED)
Pro Forma
Acquisition Pro Forma
Company GCI Adjustments Note Condensed
Historical Historical Incr. (Decr.) Reference Consolidated
-------------------------------------------------------------------------
Revenues $ 18,852,412 $ 20,694,000 $ 39,546,412
Cost of goods sold 9,971,212 6,610,000 16,581,212
---------------------------------------------- ---------------
Gross Margin 8,881,200 14,084,000 - 22,965,200
Selling, general
and administrative expenses 6,807,736 16,096,000 36,656 6 22,940,372
---------------------------------------------- ---------------
Income (loss) from operations 2,073,464 (2,012,000) (36,656) 24,808
Other Income/ (expense) 184,427 (469,000) 194,178 7 (90,395)
---------------------------------------------- ---------------
Income (loss) before minority interest
in income (loss) of subsidiary and
provision for income taxes 2,257,891 (2,481,000) 157,522 (65,587)
Minority interest in income (loss)
of subsidiary (464,006) 10 (464,006)
---------------------------------------------- ----------------
Income (loss) before provision for
income taxes 2,257,891 (2,481,000) (307,174) (530,283)
Provision benefit for income taxes 792,971 (978,570) (185,599)
---------------------------------------------- ----------------
Net Income (loss) $ 1,464,920 $ (2,481,000) $ 671,396 $ (344,684)
============================================== ===============
Earnings per share $ 0.09 ($0.02)
============================================== ===============
Weighted average common and common
equivalent shares outstanding 16,310,702 216,647 8 14,738,342
(1,789,007) 9
============================================== ===============
THE L.L. KNICKERBOCKER CO., INC. (THE "COMPANY") AND
GEORGETOWN COLLECTION, INC. ("GCI")
HISTORICAL AND PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
TWELVE MONTHS ENDED DECEMBER 31, 1995 (UNAUDITED)
Pro Forma
Acquisition Pro Forma
Company GCI Adjustments Note Condensed
Historical Historical Incr. (Decr.) Reference Consolidated
------------------------------------------------------------------------
Revenues $ 13,140,346 $ 30,247,930 $ 43,388,276
Cost of goods sold 6,327,322 9,360,600 15,687,922
--------------------------------------------- ---------------
Gross Margin 6,813,024 20,887,330 - 27,700,354
Selling, general
and administrative expenses 4,767,170 20,852,752 48,875 6 25,668,797
--------------------------------------------- ---------------
Income from operations 2,045,854 34,578 (48,875) 2,031,557
Other Income/ (expense) 105,879 (197,799) 258,904 7 166,984
--------------------------------------------- ---------------
Income (loss) before minority interest
in income (loss) of subsidiary and
provision for income taxes 2,151,733 (163,221) 210,029 2,198,541
Minority interest in income (loss)
of subsidiary 9,362 10 9,362
--------------------------------------------- ---------------
Income (loss) before provision for
income taxes 2,151,733 (163,221) 200,667 2,189,179
Provision for income taxes 883,213 3,000 11,350 11 897,563
--------------------------------------------- ---------------
Net Income (loss) $ 1,268,520 $ (166,221) $ 189,317 $ 1,291,616
============================================= ===============
Earnings per share $ 0.10 $ 0.10
============================================= ===============
Weighted average common and common
equivalent shares outstanding 13,280,199 216,647 8 13,496,846
============================================= ===============
THE L.L. KNICKERBOCKER CO., INC. (THE "COMPANY") AND
GEORGETOWN COLLECTION, INC. ("GCI")
HISTORICAL AND PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1996 (UNAUDITED)
Pro Forma
Acquisition Pro Forma
Company GCI Adjustments Note Condensed
Historical Historical Incr. (Decr.) Reference Consolidated
--------------------------------------------------------------------------
Assets
- ------
Current assets
Cash and cash equivalents $ 16,385,153 $ (68,000) $(1,500,000) 2 $ 14,817,153
Accounts receivable 5,986,095 5,238,000 11,224,095
Inventories 6,210,633 4,608,000 (943,620) 12 9,875,013
Prepaid expenses & other current
assets 2,553,628 6,212,000 (752,581) 12 8,013,047
Deferred income taxes 1,906,259 - 1,906,259
----------------------------------------------- ----------------
Total current assets 33,041,768 15,990,000 (3,196,201) 45,835,567
Property and equipment, net 3,889,807 1,950,000 (417,829) 12 5,421,978
Investments 3,412,152 - 3,412,152
Other assets 1,058,792 160,000 (1,000) 12 1,217,792
Goodwill, net 4,433,895 - 488,751 5 4,922,646
----------------------------------------------- ----------------
Total assets 45,836,414 18,100,000 (3,126,279) 60,810,135
============================================== ===============
Liabilities
- -----------
Current liabilities
Accounts payable & accrued expenses 5,773,721 6,932,000 172,000 12 12,877,721
Commissions and royalties payable 632,556 121,000 753,556
Notes payable to Harlyn shareholders 2,224,262 - 2,224,262
Current portion of long-term
commitments - 136,000 136,000
Income taxes payable 784,569 - 784,569
Other current liabilities 268,005 - 268,005
----------------------------------------------- ----------------
Total current liabilities 9,683,113 7,189,000 172,000 12,044,113
Long-term liabilities
Convertible debentures 15,500,000 15,500,000
Notes payable 2,756,955 8,852,000 (1,500,000) 2 8,392,350
(1,716,605) 3
Deferred income 104,443 - 104,443
Deferred income taxes 19,450 - 19,450
----------------------------------------------- ----------------
Total liabilities 28,063,961 16,041,000 (3,044,605) 41,060,356
----------------------------------------------- ----------------
Minority interest - - 298,315 1 298,315
----------------------------------------------- ----------------
Stockholders' Equity
Common stock 9,088,744 7,404,000 (7,404,000) 1 10,767,755
1,679,011 4
Additional paid-in capital 5,443,322 - 5,443,322
Retained earnings (accumulated
deficit) 3,240,387 (5,345,000) 5,345,000 1 3,240,387
----------------------------------------------- ----------------
Total stockholders' equity 17,772,453 2,059,000 (379,989) 19,451,464
----------------------------------------------- ----------------
Total liabilities and stockholders'
equity $ 45,836,414 $ 18,100,000 $(3,126,279) $ 60,810,135
============================================== ===============
THE L.L. KNICKERBOCKER CO., INC.
NOTES TO HISTORICAL AND PRO FORMA UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The preceding statements set forth pro forma financial data of the Company for
the nine months ended September 30, 1996, the year ended December 31, 1995 and
the balance sheet as of September 30, 1996. The pro forma condensed consolidated
statements of operations for the nine months ended September 30, 1996 and the
year ended December 31, 1995 give pro forma effect to the Acquisition, related
purchase accounting adjustments and to certain other adjustments as if the
Acquisition and related transactions had occurred on January 1, 1995. The pro
forma condensed consolidated balance sheet data as of September 30, 1996 gives
pro forma effect to the Acquisition and related transactions as if they had been
consummated on September 30, 1996. The adjustments relating to the Acquisition
and related transactions are described in the notes hereto. The pro forma
adjustments are based upon available information and certain assumptions that
the Company believes are reasonable.
The pro forma financial data does not necessarily reflect the results of
operations or the financial position of the Company which actually would have
resulted had the Acquisition been consummated as of the date or for the period
indicated, and the pro forma financial data excludes the nonrecurring effects of
certain purchase adjustments which will be reflected in financial statements
prepared in accordance with generally accepted accounting principles. The pro
forma adjustments are based on management's preliminary assumptions regarding
purchase accounting adjustments. The actual allocation of the purchase price
will be adjusted in accordance with Statement of Financial Accounting Standards
No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises,"
to the extent that actual amounts differ from management's estimates.
The pro forma financial data should be read in conjunction with the consolidated
financial statements of the Company and the notes thereto.
(1) To eliminate the historical equity accounts of Georgetown Collection, Inc.
as required by Purchase accounting rules. The L.L. Knickerbocker Co., Inc.
purchased 80% of Georgetown Collection, Inc.
(2) To record cash payment in partial settlement of a liability owed to a
creditor of Georgetown Collection, Inc.
(3) To record, as part of the acquisition, the partial writedown of notes
payable owed to creditors of Georgetown Collection, Inc.
(4) To record the fair value of The L.L. Knickerbocker Co., Inc. common stock
issued in connection with the acquisition.
(5) To record Goodwill in connection with the acquisition of Georgetown
Collection, Inc.
(6) To record amortization of Goodwill recorded in connection with the
acquisition of Georgetown Collection, Inc.
(7) To reduce interest expense due to the paydown and partial writedown of
notes payable.
(8) To reflect The L.L. Knickerbocker Co., Inc. shares issued for the
acquisition.
(9) To remove common stock equivalents from total weighted average shares due
to consolidated net loss.
(10) To record minority income (loss). The L.L. Knickerbocker Co., Inc.
purchased 80% of Georgetown Collection, Inc.
(11) To adjust the income tax benefit assuming an effective income tax rate of
34%.
(12) To adjust certain assets and liabilities to their net realizable value
pursuant to purchase accounting rules brought on by the acquisition of
Georgetown Collection, Inc. by The L.L. Knickerbocker Co., Inc.
(c) Exhibits:
--------
Included as part of this Form 8-K are the exhibits listed on the Exhibit
Index appearing on page 5.
SIGNATURES
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.
Date: February 3, 1997
THE L.L. KNICKERBOCKER CO., INC.,
a California corporation
By: /s/Anthony P. Shutts
------------------------
Anthony P. Shutts
Chief Financial Officer
EXHIBIT INDEX
-------------
Exhibit No. Item
- ----------- ----
2.1 Agreement of Purchase and Sale dated as of
November 20, 1996 by and among the Registrant,
Merchant Partners, Limited Partnership, New
Enterprise Associates IV, Limited Partnership,
Consumer Venture Partners I, L.P., North
Atlantic Venture Fund, L.P. and The Vermont
Venture Capital Fund, L.P.
- ---------------
(1) Filed as an exhibit to The L.L. Knickerbocker Co., Inc. form 8-K as filed
with the Securities and Exchange Commission on December 5, 1996.