1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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 92630
LAKE FOREST, CALIFORNIA (Zip Code)
(Address of principal executive offices)
ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 595-7900
Indicate by mark whether the issuer: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
The number of shares outstanding of the registrant's Common Stock, as of May 4,
2001 was 46,987,728.
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TABLE OF CONTENTS
ITEM PAGE
- ---- ----
PART I
1. FINANCIAL INFORMATION
A. Condensed Consolidated Statements of Operations (unaudited) for the
three month periods ended March 31, 2001 and March 31, 2000................ 1
B. Condensed Consolidated Statements of Comprehensive Loss (unaudited)
for the three month periods ended March 31, 2001 and
March 31, 2000............................................................. 2
C. Condensed Consolidated Balance Sheets at March 31, 2001
(unaudited) and December 31, 2000.......................................... 3
D. Condensed Consolidated Statements of Cash Flows (unaudited)
for the three month periods ended March 31, 2001 and
March 31, 2000............................................................. 4
E. Notes to Condensed Consolidated Financial Statements......................... 6
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
A. General Business Description................................................. 14
B. Results of Operations........................................................ 14
C. Liquidity and Capital Resources.............................................. 16
PART II
1. LEGAL PROCEEDINGS .............................................................. 19
2. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK..................................................................... 20
6. EXHIBITS AND REPORTS ON FORM 8-K................................................ 20
SIGNATURE....................................................................... 21
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE L.L. KNICKERBOCKER CO., INC.
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three months ended March 31,
-------------------------------
2001 2000
------------ ------------
Sales, net of returns $ 5,359,000 $ 7,194,000
Cost of sales 3,072,000 4,216,000
------------ ------------
Gross profit 2,287,000 2,978,000
Advertising expense 167,000 90,000
Selling expense 909,000 911,000
General and administrative expense 2,063,000 2,946,000
------------ ------------
Operating loss (852,000) (969,000)
Other income, net (65,000) (104,000)
Interest expense 146,000 284,000
------------ ------------
Loss before reorganization items and
income tax expense (933,000) (1,149,000)
Reorganization items 219,000 266,000
------------ ------------
Loss before income tax expense (1,152,000) (1,415,000)
Income tax expense 2,000 6,000
------------ ------------
Net loss $ (1,154,000) $ (1,421,000)
============ ============
Net loss per share:
Basic and diluted $ (0.02) $ (0.03)
============ ============
Shares used in computing net loss per share:
Basic and diluted 46,987,728 45,819,983
============ ============
See accompanying notes to condensed consolidated financial statements.
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THE L.L. KNICKERBOCKER CO., INC.
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(unaudited)
Three months ended
March 31,
---------------------------
2001 2000
------------ ------------
Net loss $(1,154,000) $(1,421,000)
Other comprehensive loss:
Unrealized loss on investment (240,000)
Foreign currency translation adjustments (33,000) (54,000)
----------- -----------
Comprehensive loss $(1,427,000) $(1,475,000)
=========== ===========
See accompanying notes to condensed consolidated financial statements.
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THE L.L. KNICKERBOCKER CO., INC.
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
March 31, December 31,
2001 2000
------------ ------------
ASSETS
Cash and cash equivalents $ 1,259,000 $ 2,488,000
Restricted cash 126,000 135,000
Accounts receivable, net 3,133,000 4,501,000
Inventories 4,325,000 3,614,000
Prepaid expenses and other current assets 967,000 842,000
------------ ------------
Total current assets 9,810,000 11,580,000
Property and equipment, net 2,480,000 2,527,000
Investments 1,662,000 2,048,000
Other assets 846,000 816,000
Goodwill, net of accumulated amortization of
$1,427,000 at March 31, 2001 and $1,374,000
at December 31, 2000 1,118,000 1,171,000
------------ ------------
$ 15,916,000 $ 18,142,000
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Accounts payable $ 4,359,000 $ 4,737,000
Accrued expenses 1,405,000 1,468,000
Notes payable 2,012,000 2,240,000
Commissions and royalties payable 885,000 958,000
Interest payable 363,000 374,000
Current portion of long-term debt 301,000 302,000
Income taxes payable 133,000 133,000
------------ ------------
Total current liabilities not subject
to compromise 9,458,000 10,212,000
Long-term debt not subject to compromise,
less current portion 313,000 358,000
Liabilities subject to compromise under
reorganization proceeding 9,074,000 9,074,000
------------ ------------
Total liabilities 18,845,000 19,644,000
Stockholders' deficit:
Preferred stock - no par value, authorized
shares of 10,000,000, no issued and
outstanding shares - -
Common stock - no par value, authorized
shares of 100,000,000, issued and
outstanding shares - 46,987,728
(2001 and 2000 41,637,000 41,637,000
Additional paid-in capital 6,012,000 6,012,000
Accumulated deficit (45,705,000) (44,551,000)
Accumulated other comprehensive loss (4,873,000) (4,600,000)
------------ ------------
Total stockholders' deficit (2,929,000) (1,502,000)
------------ ------------
$ 15,916,000 $ 18,142,000
============ ============
See accompanying notes to condensed consolidated financial statements.
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THE L.L. KNICKERBOCKER CO., INC.
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
March 31, March 31,
2001 2000
----------- -----------
Cash flows from operating activities:
Net loss $(1,154,000) $(1,421,000)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 206,000 358,000
Loss (gain) on sale of investments 10,000 (10,000)
Loss on disposition of fixed assets 26,000 -
Amortization of debt discount - 36,000
Changes in operating accounts:
Accounts receivable, net 1,368,000 1,358,000
Inventories (735,000) 473,000
Prepaid expenses and other current assets (111,000) 597,000
Other assets (6,000) 56,000
Accounts payable and accrued expenses (453,000) (969,000)
Commissions and royalties payable (73,000) (240,000)
Operating payables subject to compromise
under reorganization proceeding - 247,000
----------- -----------
Net cash (used in) provided by operating activities (922,000) 485,000
Cash flows from investing activities:
Acquisitions of property and equipment (128,000) (95,000)
Proceeds from sales of investments 123,000 486,000
----------- -----------
Net cash (used in) provided by investing activities (5,000) 391,000
Cash flows from financing activities:
Net (repayments) borrowings on line of credit (228,000) 207,000
Payments on long-term debt (32,000) (17,000)
Borrowings on long-term debt - 6,000
----------- -----------
Net cash (used in) provided by financing activities (260,000) 196,000
Effect of exchange rate changes on cash (42,000) (36,000)
----------- -----------
Net (decrease) increase in cash and cash equivalents (1,229,000) 1,036,000
Cash and cash equivalents, beginning of period 2,488,000 1,510,000
----------- -----------
Cash and cash equivalents, end of period $ 1,259,000 $ 2,546,000
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 164,000 $ 79,000
=========== ===========
Cash paid for income taxes $ 2,000 $ 6,000
=========== ===========
See accompanying notes to condensed consolidated financial statements.
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THE L.L. KNICKERBOCKER CO., INC.
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(unaudited)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITY:
During the three months ended March 31, 2000, $219,000 of convertible debentures
and $22,000 of accrued interest, was converted to common stock.
During the three months ended March 31, 2000, the Company financed the
acquisition of property and equipment through borrowings on long-term debt of
$106,000.
See accompanying notes to condensed consolidated financial statements.
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THE L.L. KNICKERBOCKER CO., INC.
(DEBTOR-IN-POSSESSION)
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.
Reorganization - On August 23, 1999 (the Petition Date), an involuntary petition
under Chapter 7 of the United States Bankruptcy Code (the Bankruptcy Code) was
filed against LLK by three of its creditors. On December 3, 1999 (the Conversion
Date), LLK (unconsolidated) filed an election to convert to reorganization under
Chapter 11 of the Bankruptcy Code (Chapter 11). LLK continues to conduct normal
business operations as a debtor-in-possession subject to the jurisdiction of the
United States Bankruptcy Court for the Central District of California (the
Bankruptcy Court). As a debtor-in-possession, LLK may not engage in transactions
outside the ordinary course of business without approval, after notice and
hearing, of the Bankruptcy Court.
Under Chapter 11, actions to enforce claims against LLK are stayed if the claims
arose, or are based on events that occurred, on or before the Petition Date, and
such claims cannot be paid or restructured prior to the conclusion of the
proceedings or approval of the Bankruptcy Court. In addition, under the
Bankruptcy Code, LLK may elect to assume or reject certain prepetition leases,
employment contracts, service contracts and other unexpired executory
prepetition contracts, all subject to Bankruptcy Court approval. Other
liabilities may arise or be subject to compromise as a result of rejection of
executory contracts or the Bankruptcy Court's resolution of claims for
contingencies and other disputed amounts. Liabilities subject to compromise
(Note 8) in the accompanying consolidated balance sheets represent the Company's
estimate of liabilities as of March 31, 2001 and December 31, 2000, subject to
adjustment in the reorganization process. At March 31, 2001 and December 31,
2000, LLK continued to accrue, but not pay, interest on secured debt at the
contractual interest rate although principal payments were suspended. On January
26, 2001, the Company entered into a forbearance agreement with the Bank and has
begun making principal and interest payments thereunder.
Basis of Reporting - The accompanying consolidated financial statements have
been presented in accordance with the American Institute of Certified Public
Accountants Statement of Position 90-7, "Financial Reporting by Entities Under
The Bankruptcy Code" (SOP 90-7) and have been prepared in conformity with
principles of accounting applicable to a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. The Company's recurring losses from operations, the Chapter 11
filing and circumstances relating to this event, raise substantial doubt about
the Company's ability to continue as a going concern. A plan of reorganization
could materially change the amounts reported in the accompanying consolidated
financial statements, which do not give effect to adjustments to the carrying
values of assets and liabilities that may be necessary as a consequence of a
plan of reorganization. The Company's ability to continue as a going concern is
contingent upon, among other things, its ability to formulate a plan of
reorganization that will be confirmed by the Bankruptcy Court, to achieve
satisfactory levels of profitability and cash flow from operations, and obtain
financing sources to meet future obligations.
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9
The Company filed a Plan of Reorganization and Disclosure Statement with the
Bankruptcy Court on March 30, 2000. The Bankruptcy Court scheduled a hearing on
the Disclosure Statement for May 5, 2000 and approved the Disclosure Statement.
Although the Disclosure Statement was approved, the underlying Plan of
Reorganization was withdrawn and the Company is now in the process of
formulating and negotiating a revised Plan of Reorganization. The Plan of
Reorganization previously filed was withdrawn by the Company when it became
apparent that the Company could not raise the capital necessary under the Plan
of Reorganization to fulfill the obligation to unsecured creditors. The Plan of
Reorganization is subject to confirmation by the Bankruptcy Court and the
requisite vote of impaired creditors and stockholders. The Company is also
taking measures to obtain a new secured lender to refinance the existing secured
liabilities. The Company believes that its ongoing operating cash flow and
proceeds from sale of investments should enable the Company to meet liquidity
requirements until substitute financing is obtained. However, notwithstanding
all of the events and circumstances described above, there is substantial
uncertainty with respect to the Company's liquidity. The Company's ability to
meet its obligations as they come due and successfully emerge from Chapter 11 is
contingent upon, among other things, its ability to finalize a Plan of
Reorganization that will ultimately be confirmed by the Bankruptcy Court, to
achieve satisfactory levels of profitability and cash flow from operations, and
obtain financing sources to meet future obligations.
The Company believes it has sufficient resources to cure executory contract
defaults and to pay all claims arising in the "Gap" period between the Petition
Date and the Conversion Date.
Certain subsidiaries were not included in the Chapter 11 filings. Condensed
financial statements of the entity in reorganization are presented herein.
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 three month period ended March 31, 2001 are not
necessarily indicative of the results that may be expected for the year ended
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.
NOTE 2: NET LOSS PER SHARE
The Company computes 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 per share
calculations because their effect is antidilutive.
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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-month periods ended March 31, 2001 and 2000 consisted
primarily of professional fees, partially offset by interest income earned. Cash
paid for reorganization items during the three months ended March 31, 2001 and
2000 amounted to $365,000 and $61,000, respectively, net of interest income.
Pursuant to SOP 90-7, interest expense is reported only to the extent that it
will be paid during the bankruptcy proceeding or that it is probable that it
will be an allowed claim.
NOTE 4: INVENTORIES
At March 31, 2001 and December 31, 2000 inventories, including $477,000 and
$454,000 of fine jewelry samples, respectively, classified as other long-term
assets, consist of the following:
March 31, 2001 December 31, 2000
-------------- -----------------
Finished goods $ 6,380,000 $ 6,030,000
Work-in-progress 565,000 415,000
Raw materials 1,276,000 1,085,000
Inventory reserves (3,419,000) (3,462,000)
----------- -----------
$ 4,802,000 $ 4,068,000
=========== ===========
NOTE 5: INVESTMENTS
During the three months ended March 31, 2001, the Company sold a portion of its
investment in Ontro, Inc. with a carrying value of $145,000 for net proceeds of
$123,000. The sale resulted in a loss to the Company of $10,000, which is
included in other income.
NOTE 6: LINE OF CREDIT AND NOTES PAYABLE
Through July 16, 1999, the Company had available to use for working capital
purposes and to post letters of credit, a line of credit totaling $15,000,000,
subject to certain limits. The line of credit encompassed 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 March 31, 2001, TKG had no borrowings outstanding
on the line of credit. The Company has entered into an additional forbearance
agreement with the bank that calls for $50,000 monthly payments from January
through May 2001. At June 2001, the Company has the option to pay the Bank
$650,000 and extend the due date until September 30, 2001.
At March 31, 2001, the Company had $2,829,000 of cash borrowings outstanding,
representing amounts borrowed under the LLK and GCI sublimits, which is
classified as subject to compromise in the accompanying consolidated financial
statements (Note 8). Borrowings bear interest at the bank's base rate (11.5% at
March 31, 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.
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S.L.S. and Harlyn have available lines of credit aggregating 100,000,000 Thai
baht (approximately $2,230,000 at March 31, 2001). Outstanding borrowings of
$2,012,000 at March 31, 2001 bear interest at rates ranging from 3.5% to 8.25%.
Restricted cash of $126,000 and $135,000 at March 31, 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 accrue interest at the rate of 6%
per annum, payable upon conversion of the related debt. Through March 31, 2001,
the Company issued a total of 20,448,736 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.
Under the terms of the 1998 Debentures the face amount of the Debentures,
aggregating $2,502,000, was due and payable by the Company. During the year
ended December 31, 2000, the Company extinguished 1998 Debentures with a face
amount of $1,650,000 by transferring certain shares in an investment owned by
the Company to the holders.
During the three months ended March 31, 2000, a total of $75,000 of noncash
interest expense was recorded relating to the 1998 Debentures, including $4,000
relating to the additional conversion discount recorded upon conversion (none in
2001).
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 accrue interest at the rate of 6%
per annum, payable upon conversion of the related debt or at debt maturity of
September 7, 2000. Through March 31, 2001, the Company has 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 year ended December 31,
2000, the Company extinguished 1998 Debentures with a face amount of $2,042,000
by transferring certain shares in an investment owned by the Company to the
holders. At March 31, 2001, the remaining face amount of the 1997 Debentures is
classified as subject to compromise in the accompanying consolidated financial
statements (Note 8).
During the three months ended March 31, 2000, a total of $47,000 of noncash
interest expense was recorded relating to the 1997 Debentures.
NOTE 8: LIABILITIES SUBJECT TO COMPROMISE
Liabilities subject to compromise consist of the following at March 31, 2001 and
December 31, 2000:
March 31, 2001 December 31, 2000
-------------- -----------------
Secured liabilities - notes payable
to bank (Note 6) $2,829,000 $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
---------- ----------
$9,074,000 $9,074,000
========== ==========
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A plan of reorganization, if ultimately approved by the Company's impaired
prepetition creditors and stockholders and confirmed by the Bankruptcy Court,
may materially change the amounts and terms of these prepetition liabilities.
Such amounts were estimated as of March 31, 2001 and December 31, 2000, and the
Company anticipates that claims filed with the Bankruptcy Court by the Company's
creditors will require reconciliation to the Company's financial records. The
additional liability arising from the finalization of the reconciliation
process, if any, is not yet subject to reasonable estimation, and accordingly,
no provision has been recorded for these possible claims. The termination of
other contractual obligations and the settlement of disputed claims may create
additional prepetition liabilities. Such amounts, if any, will be recognized in
the consolidated balance sheet as they are identified and become subject to
reasonable estimation.
NOTE 9: CONTINGENCIES
The Company is a defendant in cases arising within the normal course of
business. Based on information currently available, it is the opinion of
management, based upon the advice of counsel, that the ultimate resolution
of pending legal proceedings should not have a material adverse effect on the
Company's consolidated financial statements. However, based on future
developments and as additional information becomes known, it is possible that
the ultimate resolution of such matters could have a material adverse effect
on the Company's results of operations in a particular future period. The
litigation settled at December 31, 2000 is subject to bankruptcy court approval.
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 months ended and as of
March 31, 2001 and 2000.
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2001 2000
------------ ------------
Net sales
Collectible and toy brands $ 2,257,000 $ 2,683,000
Fashion jewelry brands 1,328,000 2,422,000
Fine jewelry 1,774,000 2,089,000
Corporate - -
------------ ------------
Consolidated $ 5,359,000 $ 7,194,000
Operating (loss) income
Collectible and toy brands $ (510,000) $ (613,000)
Fashion jewelry brands (323,000) 120,000
Fine jewelry 129,000 (18,000)
Corporate (148,000) (458,000)
------------ ------------
Consolidated $ (852,000) $ (969,000)
Interest expense
Collectible and toy brands $ - $ -
Fashion jewelry brands - -
Fine jewelry - -
Corporate 146,000 284,000
------------ ------------
Consolidated $ 146,000 $ 284,000
Depreciation and amortization
Collectible and toy brands $ 48,000 $ 74,000
Fashion jewelry brands 140,000 135,000
Fine jewelry 18,000 149,000
Corporate - -
------------ ------------
Consolidated $ 206,000 $ 358,000
Capital expenditures
Collectible and toy brands $ - $ 22,000
Fashion jewelry brands 80,000 73,000
Fine jewelry 48,000 106,000
Corporate - -
------------ ------------
Consolidated $ 128,000 $ 201,000
Total assets
Collectible and toy brands $ 4,976,000 $ 7,196,000
Fashion jewelry brands 2,015,000 2,493,000
Fine jewelry 6,146,000 8,771,000
Corporate 2,779,000 6,026,000
------------ ------------
Consolidated $ 15,916,000 $ 24,486,000
Geographic areas
Sales to external customers:
United States $ 3,585,000 $ 5,105,000
Thailand 1,774,000 2,089,000
------------ ------------
Consolidated $ 5,359,000 $ 7,194,000
Long-lived assets:
United States $ 2,194,000 $ 2,550,000
Thailand 1,404,000 4,741,000
------------ ------------
Consolidated $ 3,598,000 $ 7,291,000
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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 Sheet
(unconsolidated)
March 31, 2001 December 31, 2000
-------------- -----------------
ASSETS:
Cash and cash equivalents $ 827,000 $ 1,005,000
Accounts receivable, net of allowance 510,000 1,134,000
Inventories 2,166,000 1,811,000
Prepaid expenses and other current assets 886,000 726,000
------------ ------------
Total current assets 4,389,000 4,676,000
Investment in subsidiaries 2,150,000 2,346,000
Receivable from subsidiaries 874,000 1,260,000
Property and equipment, net 481,000 555,000
Investments 1,662,000 2,048,000
Other assets 104,000 99,000
------------ ------------
Total assets $ 9,660,000 $ 10,984,000
============ ============
LIABILITIES:
Accounts payable $ 2,233,000 $ 2,216,000
Other accrued expenses 1,281,000 1,196,000
------------ ------------
Total current liabilities not subject
to compromise 3,514,000 3,412,000
Liabilities subject to compromise
under reorganization proceeding 9,074,000 9,074,000
STOCKHOLDERS' DEFICIT
Common stock 41,637,000 41,637,000
Additional paid-in capital 6,012,000 6,012,000
Accumulated deficit (45,704,000) (44,551,000)
Accumulated other comprehensive loss (4,873,000) (4,600,000)
------------ ------------
Total stockholders' deficit (2,928,000) (1,502,000)
------------ ------------
Total liabilities and stockholders' deficit $ 9,660,000 $ 10,984,000
============ ============
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The L.L. Knickerbocker Co., Inc.
Debtor-In-Possession
Condensed Statements of Operations
(unconsolidated)
Three months ended Three months ended
March 31, 2001 March 31, 2000
------------------ -----------------
Net sales $ 2,257,000 $ 2,683,000
Cost of sales 1,264,000 1,570,000
----------- -----------
Gross profit 993,000 1,113,000
Advertising expense 166,000 57,000
Selling expense 582,000 548,000
General and administrative expense 903,000 1,580,000
Equity in (income) loss of subsidiaries 162,000 (118,000)
----------- -----------
Operating loss (820,000) (954,000)
Other (income) expense 8,000 (10,000)
Interest expense 105,000 208,000
Reorganization items 219,000 266,000
Income tax expense 2,000 3,000
----------- -----------
Net loss $(1,154,000) $(1,421,000)
=========== ===========
The L.L. Knickerbocker Co., Inc.
Notes to Condensed Financial Statements
As of March 31, 2001 and December 31, 2000 and for the three months
ended March 31, 2001 and 2000
(unconsolidated)
1. BASIS OF PRESENTATION
Generally Accepted Accounting Principles (GAAP) requires that certain entities
that meet specific criteria be consolidated with LLK including its wholly-owned
and majority-owned subsidiaries (non-debtors). For purposes of this presentation
LLK accounts for all subsidiaries using the equity method of accounting.
All entities that LLK would normally consolidate for GAAP purposes are being
accounted for under the equity method of accounting. The equity method of
accounting consists of recording an original investment in an investee as the
amount originally contributed. Subsequently this balance is
increased/(decreased) for LLK's share of the investee's income/(losses) and
increased for additional contributions and decreased for distributions received
from the investee. LLK's share of the investee's income/(loss) is recognized as
"Equity in (income) loss of subsidiaries" on the statement of operations.
In management's opinion, with the exception of those matters discussed above,
the financial statements of LLK contain all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly the unconsolidated
financial position of LLK as of March 31, 2001 and December 31, 2000, and the
unconsolidated results of its operations for the three-month periods ended March
31, 2001 and 2000.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company is in the businesses of developing and marketing branded collectible
and toy products, fine and fashion jewelry, and other consumer products. The
following discussion explains material changes in the results of operations of
The L.L. Knickerbocker Co., Inc. (LLK) and subsidiaries for each of the periods
discussed and significant developments affecting financial condition since the
end of fiscal 1999.
CHAPTER 11 REORGANIZATION
On August 23, 1999 (the Petition Date), an involuntary petition under Chapter 7
of the United States Bankruptcy Code (the Bankruptcy Code) was filed against LLK
by three of its creditors. On December 3, 1999 (the Conversion Date), LLK
(unconsolidated) filed an election to convert to reorganization under Chapter 11
of the Bankruptcy Code (Chapter 11). LLK continues to conduct normal business
operations as a debtor-in-possession subject to the jurisdiction of the United
States Bankruptcy Court for the Central District of California (the Bankruptcy
Court). As a debtor-in-possession, LLK may not engage in transactions outside
the ordinary course of business without approval, after notice and hearing, of
the Bankruptcy Court.
Under Chapter 11, actions to enforce claims against LLK are stayed if the claims
arose, or are based on events that occurred, on or before the Petition Date, and
such claims cannot be paid or restructured prior to the conclusion of the
proceedings or approval of the Bankruptcy Court. Other liabilities may arise or
be subject to compromise as a result of rejection of executory contracts,
including leases, or the Bankruptcy Court's resolution of claims for
contingencies and other disputed amounts. Substantially all liabilities as of
the Petition Date are intended to be dealt with in accordance with a plan of
reorganization filed by the Company that must be voted upon by all classes of
impaired creditors and approved by the Bankruptcy Court. The Creditor's
Committee has been formed and it reviews transactions outside the ordinary
course of business and is participating in the formulation of the plan of
reorganization.
The Company has estimated the amount of prepetition liabilities subject to
settlement under reorganization proceedings; however the Company anticipates
that claims filed with the Bankruptcy Court by the Company's creditors will be
reconciled to the Company's financial records. This reconciliation process
and/or the termination of other contractual obligations and the settlement of
disputed claims may create additional prepetition liabilities.
On March 30, 2000, the Company filed a Plan of Reorganization and Disclosure
Statement with the United States Bankruptcy Court, pursuant to which LLK would
emerge from Chapter 11 bankruptcy proceedings. The Bankruptcy Court scheduled a
hearing on the Disclosure Statement for May 5, 2000 and approved the Disclosure
Statement. Although the Disclosure Statement was approved, the underlying Plan
of Reorganization was withdrawn and the Company is now in the process of
formulating and negotiating a revised Plan of Reorganization. The Plan of
Reorganization previously filed was withdrawn by the Company when it became
apparent that the Company could not raise the capital necessary under the Plan
of Reorganization to fulfill the obligation to unsecured creditors.
The consolidated financial statements have been presented on the basis that the
Company will continue as a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The
Company's recurring losses from operations, the Chapter 11 filing and
circumstances relating to this event, raise substantial doubt about the
Company's ability to continue as a going concern. A plan of reorganization, if
approved, could materially change the amounts reported in the accompanying
consolidated financial statements, which do not give effect to adjustments to
the carrying values of assets and liabilities that may be necessary as a
consequence of a plan of reorganization. The Company's ability to continue as a
going concern is contingent upon, among other things, its ability to finalize a
plan of reorganization that will be confirmed by the Bankruptcy Court, its
ability to achieve
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satisfactory levels of profitability and cash flow from operations, and its
ability to obtain financing sources to meet future obligations.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
NET SALES
Net sales decreased to $5,359,000 for the three months ended March 31, 2001 from
$7,194,000 for the three months ended March 31, 2000, a decrease of $1,835,000
or 25.5%. The $1,835,000 decrease in net sales was comprised of decreases in net
sales of $426,000 in wholesale collectible sales, $1,094,000 in fashion jewelry
sales, and $315,000 in fine jewelry net sales. The decrease in wholesale
collectible sales was due primarily to the discontinuance of two
celebrity-driven collectible lines in 2000. The decreases in fashion and fine
jewelry sales were due primarily to the timing of shipments to certain
customers. In certain circumstances, large orders to customers, particularly
those to home shopping networks, may move from one quarter to another causing
large comparative differences between comparable quarters. The Company continues
to assess the potential of sales expansion of existing products through new
distribution channels, as well as continuing to develop new product categories.
GROSS PROFIT
Gross profit decreased to $2,287,000 for the three months ended March 31, 2001
from $2,978,000 for the three months ended March 31, 2000, a decrease of
$691,000, or 23.2%. As a percentage of net sales, gross profit for the quarter
increased to 42.7% in 2001 from 41.4% in 2000. The increase in the gross profit
percentage in 2001 from 2000 was due primarily to a combination of lowering
distribution costs and marketing products that meet certain minimum gross
margins.
ADVERTISING EXPENSE
Advertising expense increased to $167,000 for the three months ended March 31,
2001 from $90,000 for the three months ended March 31, 2000, an increase of
$77,000, or 85.6%. The increase in advertising expense was due primarily to
catalog mailing costs incurred in connection with the Company's remaining direct
response brand, the Magic Attic Club. In the comparable 2001 quarter, there were
catalog mailing costs, while in the comparable 2000 quarter, there were no such
costs. Included in advertising expense are advertisement printing costs,
catalog-printing costs, media space in magazines, and advertisement creative and
development costs.
SELLING EXPENSE
Selling expense decreased to $909,000 for the three months ended March 31, 2001
from $911,000 for the three months ended March 31, 2000, a decrease of $2,000,
or .2%. As a percentage of net sales, selling expense increased from 12.7% in
2000 to 17.0% in 2001. The increase in selling expense as a percentage of net
sales was due primarily to a higher variable royalty expense attributable to
higher net sales in 2001 for the Company's collectible doll program and higher
trade show expenses. Selling expense includes royalty expense, commission
expense, trade show expenses, and other sales promotion expenses.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense decreased to $2,063,000 for the three months
ended March 31, 2001 from $2,946,000 for the three months ended March 31, 2000,
a decrease of $883,000, or 30.0%. The percentage of net sales represented by
these expenses decreased from 41.0% in 2000 to 38.5% in 2001. The dollar
decrease in general and administrative expenses was due primarily to the
Company's aggressive cost
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cutting efforts and continuous focus on reducing overhead in its operations.
Included in the comparable 2000 period was a reserve for legal settlement which
increased comparable 2000 general and administrative expenses.
OTHER INCOME
Other income decreased to $65,000 for the three months ended March 31, 2001 from
$104,000 for the three months ended March 31, 2000, a decrease of $39,000. Other
income 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 $146,000 for the three months ended March 31, 2001
from $284,000 for the three months ended March 31, 2000, a decrease of $138,000,
or 48.6%. The decrease in interest expense relates primarily to the
extinguishment of $3,692,000 of convertible debentures in 2000 and to lower
average borrowings outstanding on the Company's lines of credit. Included in
interest expense for the three months ended March 31, 2000, is noncash interest
related to convertible debentures of $122,000. The remaining balance of interest
expense includes interest on borrowings from working capital lines of credit and
mortgages on buildings owned by the Company.
REORGANIZATION ITEMS
Costs associated with the Company's Chapter 11 filing amounted to $219,000 and
$266,000 for the three months ended March 31, 2001 and 2000, respectively, which
were comprised primarily of professional fees, net of interest income. The
Company anticipates that additional reorganization costs will be incurred
throughout the Chapter 11 reorganization.
OPERATING (LOSS) INCOME BY SEGMENT
Operating loss for the collectibles and giftware segment decreased to $510,000
for the three months ended March 31, 2001 from $613,000 for the three months
ended March 31, 2000, a decrease of $103,000. Operating loss for the fashion
jewelry segment increased to $323,000 for the three months ended March 31, 2001
from operating income of $120,000 for the three months ended March 31, 2000, a
decrease in operating performance of $443,000. Operating income for the fine
jewelry segment increased to $129,000 for the three months ended March 31, 2001
from operating loss of $18,000 for the three months ended March 31, 2000, an
increase in operating performance of $147,000. Operating results for each of the
three segments are impacted by the changes in sales, gross margin, and expenses
as outlined in the above discussion.
NET LOSS
As a result of the foregoing factors, net loss decreased to $1,154,000 for the
three months ended March 31, 2001 from net loss of $1,421,000 for the three
months ended March 31, 2000, a decrease in net loss of $267,000.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow used in operations was $922,000 for the three months ended March 31,
2001 compared to cash provided from in operations of $485,000 in the comparable
2000 period. The $1,407,000 decrease in cash flow from operations was due
primarily to increases in inventory purchases and prepaid expenses, increased
payments on accounts payable and commissions, partially offset by lower net
losses.
Under Chapter 11, actions to enforce certain claims against the Company are
stayed if the claims arose, or are based on, events that occurred on or before
the Petition Date. The ultimate terms of settlement of these claims will be
determined in accordance with a plan of reorganization, which requires the
approval of the impaired prepetition creditors and stockholders and confirmation
by the Bankruptcy Court. Other liabilities may arise or be subject to compromise
as a result of rejection of executory contracts, including leases, or the
Bankruptcy Court's resolution of claims for contingencies and other disputed
amounts. The ultimate resolution of such liabilities, all of which are subject
to compromise, are a part of the plan of reorganization filed with the
Bankruptcy Court on March 30, 2000. On March 30, 2000, the Company filed a Plan
of Reorganization and Disclosure Statement with the United States Bankruptcy
Court, pursuant to which Knickerbocker would emerge from Chapter 11 bankruptcy
proceedings. The Bankruptcy Court scheduled a hearing on the Disclosure
Statement for May 5, 2000 and approved the Disclosure Statement. Although the
Disclosure Statement was approved, the underlying Plan of Reorganization was
withdrawn and the Company is now in the process of formulating and negotiating a
revised Plan of Reorganization. Until the
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plan of reorganization is confirmed by the Bankruptcy Court, only such payments
on prepetition obligations that are approved by the Bankruptcy Court will be
made. There is no assurance that a plan of reorganization will be approved or
confirmed by the Bankruptcy Court.
Inherent in a successful plan of reorganization is a capital structure that will
enable the Company to generate sufficient cash flow after reorganization to meet
its restructured obligations and current obligation. Accordingly, the rights of
prepetition creditors and the ultimate payment of their claims may be
substantially altered and, in some cases, eliminated under the Bankruptcy Code.
It is not possible at this time to predict the ultimate outcome of the Chapter
11 filing or its effects on the Company's business or on the interest of
creditors or stockholders.
As described in Note 6 to the consolidated financial statements, through July
16, 1999, the Company had a line of credit that encompassed The L.L.
Knickerbocker Co., Inc. (LLK), Georgetown Collection, Inc. (GCI) and Krasner
Group, Inc. (TKG). Certain credit limits were established for each company.
Borrowing availability was determined by an advance rate on eligible accounts
receivable and inventory. At the expiration of the line of credit on July 16,
1999, the Company did not have sufficient funds to pay off the line of credit.
The Company entered into a forbearance agreement with the financial institution
(the Bank) initially extending the general terms of the line of credit until
August 30, 1999 and in the event certain conditions were met, until September
20, 1999. The forbearance agreement limited the Company's use of the credit
facility to total borrowings of $6,250,000. As a result of the Chapter 7 filing,
the Bank placed the Company's credit facility on an offering basis, effectively
reserving the right to discontinue funding the Company at any time. As a result
of the Chapter 11 filing, all required repayments of principal on the notes
payable under the line of credit for LLK and GCI were suspended, except for
certain principal repayments that have been approved by the Bankruptcy Court. As
of March 31, 2001, TKG had no borrowings outstanding from the Bank. The Company
has entered into an additional forbearance agreement with the Bank that calls
for $50,000 monthly payments from January through May of 2001. At June 2001, the
Company has the option to pay the Bank $650,000 and extend the due date until
September 30, 2001.
At March 31, 2001, the Company had $2,829,000 of cash borrowings outstanding,
representing amounts borrowed under the LLK and GCI sublimits, which is
classified as subject to compromise in the accompanying consolidated financial
statements. Borrowings bear interest at the bank's base rate (11.5% at March 31,
2001) plus 4%. The Company has continued to accrue interest at the contractual
rate on these notes.
The Company's Thai subsidiaries have available lines of credit aggregating
100,000,000 Thai baht (approximately $2,230,000 at March 31, 2001). Outstanding
borrowings of $2,012,000 at March 31, 2001 bear interest at rates ranging from
3.5% to 8.25%. Restricted cash of $126,000 and $135,000 at March 31, 2001 and
December 31, 2000, respectively, secured one such line of credit.
In connection with the Chapter 11 filing, the Company filed, and the Bankruptcy
Court approved, a motion for use of cash collateral. Under the terms of this
motion the Company is authorized to use all cash and cash equivalents, which are
the cash collateral of the Bank, to pay ordinary and necessary operating
expenses in an amount equal to 93% of new accounts receivable.
As indicated above, the Company has entered into a forbearance agreement with
its Bank, which calls for monthly payments of $50,000 through June of 2001. At
June 2001, the Company will either need to pay the Bank in full or make a
payment of $650,000 to buy another three month extension until September of
2001. At September 2001, the Company will need to pay the Bank in full. The
Company is taking measures to obtain a new secured lender to refinance the
existing Bank. The Company believes that its ongoing operating cash flow and
proceeds from sale of investments should enable the Company to meet liquidity
requirements until substitute financing is obtained. However, notwithstanding
all of the events and circumstances described above, there is substantial
uncertainty with respect to the Company's liquidity. The Company's ability to
meet its obligations as they come due and successfully emerge from Chapter 11
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is contingent upon, among other things, its ability to formulate a Plan of
Reorganization that will be confirmed by the Bankruptcy Court, to achieve
satisfactory levels of profitability and cash flow from operations, and obtain
financing sources to meet future obligations.
SEASONALITY AND QUARTERLY RESULTS
The Company's business is subject to seasonal fluctuations. The Magic Attic Club
brand of dolls, which was acquired effective October 18, 1996, has historically
experienced greater sales in the latter portion of the year. Because of the
seasonality of the Company's business, results for any quarter are not
necessarily indicative of the results that may be achieved for the full fiscal
year.
INFLATION
The Company does not believe that inflation has had a material effect on the
results of operations in the recent past. There can be no assurance that the
Company's business will not be affected by inflation in the future.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB), 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.
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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
BANKRUPTCY PROCEEDING
On August 23, 1999 (the Petition Date), an involuntary petition under Chapter 7
of the United States Bankruptcy Code (the Bankruptcy Code) was filed against
Knickerbocker by three of it's creditors. On December 3, 1999 (the Conversion
Date), Knickerbocker (unconsolidated) filed an election to convert to
reorganization under Chapter 11 of the Bankruptcy Code (Chapter 11).
Knickerbocker continues to conduct normal business operations as a
debtor-in-possession subject to the jurisdiction of the United States Bankruptcy
Court for the Central District of California (the Bankruptcy Court). As a
debtor-in-possession, Knickerbocker may not engage in transactions outside the
ordinary course of business without approval, after notice and hearing, of the
Bankruptcy Court.
Under Chapter 11, actions to enforce claims against Knickerbocker are stayed if
the claims arose, or are based on events that occurred, on or before the
Petition Date, and such claims cannot be paid or restructured prior to the
conclusion of the proceedings or approval of the Bankruptcy Court. Other
liabilities may arise or be subject to compromise as a result of rejection of
executory contracts, including leases, or the Bankruptcy Court's resolution of
claims for contingencies and other disputed amounts. Substantially all
liabilities as of the Petition Date are intended to be dealt with in accordance
with a plan of reorganization to be filed by the Company that will be voted upon
by all classes of impaired creditors and approved by the Bankruptcy Court. The
Creditors' Committee has been formed and it reviews non-ordinary course of
business transactions and is participating in the formulation of the plan of
reorganization.
On March 30, 2000, the Company filed a Plan of Reorganization and Disclosure
Statement with the United States Bankruptcy Court, pursuant to which
Knickerbocker would emerge from Chapter 11 bankruptcy proceedings. The
Bankruptcy Court scheduled a hearing on the Disclosure Statement for May 5, 2000
and approved the Disclosure Statement. Although the Disclosure Statement was
approved, the underlying Plan of Reorganization was withdrawn and the Company is
now in the process of formulating and negotiating a revised Plan of
Reorganization.
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 including, but not
limited to, conversion, breach of fiduciary duty, 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 defendants vigorously opposed the lawsuit. The
plaintiff filed a claim in the bankruptcy in the amount of $2,500,000, which was
settled by the Company during 2000 requiring the Company to transfer 1,189
shares of its investment in Pure Energy Corporation stock with a carrying value
of $101,000 to the plaintiff.
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
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damages, plus attorneys fees and costs. During 2000, the Company settled with
State Street Bank in the amount of $85,000 and has received court approval for
such settlement.
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 were 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 Company has settled with Finance Authority
of Maine and Coastal Enterprises in the amounts of $160,000 and $55,000,
respectively, and has received court approval for such settlements. The Southern
Maine Economic Development District matter is stayed and no settlement has been
reached.
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
2000 and in the three month period ended March 31, 2001 due to the fact that the
exchange rate remained relatively constant throughout the period. Under the
current circumstances, the Company believes that the foreign currency market
risk is not material. The Company actively monitors its foreign exchange
exposure and evaluates possible strategies to reduce its risk. Should
circumstances change, the Company intends to implement appropriate strategies at
such time that it determines that the benefits outweigh the associated costs.
There can be no assurance that management's efforts to reduce foreign exchange
exposure will be successful.
Interest Rates - To the extent the Company borrows under its credit facilities,
the Company would be exposed to market risk related to changes in interest
rates. At March 31, 2001, the Company had $4,841,000 outstanding under the
Company's credit facilities, including $2,829,000 which is classified as subject
to compromise.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None.
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the quarter for which this
report is filed.
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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: May 15, 2001 By: /S/Anthony P. Shutts
---------------------------------------------
Anthony P. Shutts
Chief Financial Officer
(Principal financial and accounting officer)
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