The L.L. Knickerbocker Co., Inc.

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The L.L. Knickerbocker Co., Inc.

25800 Commercecentre Drive
Lake Forest, California 92630
U.S.A.
(714) 595-7900
Fax: (714) 595-7901
Web site: www.knickerbocker.com

Public Company
Incorporated: 1993
Employees: 598
Sales: $68.3 million (1997)
Stock Exchanges: NASDAQ
Ticker Symbol: KNIC
SICs: 3911 Jewelry, Precious Metal; 3961 Costume Jewelry and Costume Novelties, Except Precious Metal; 3942 Dolls and Stuffed Toys; 2731 Books: Publishing; 6719 Offices of Holding Companies, Not Elsewhere Classified; 5961 Catalog and Mail-Order Houses

L.L. Knickerbocker Co., Inc., is a successful manufacturer and marketer of collectibles and jewelry, two growing markets. After the company went public in 1995, its revenues leaped from $7.8 million to $68 million in two years. In addition, LLK makes equity investments in small companies with proprietary technologies in fields such as alternative fuel. As of December 31, 1997, company founders Louis L. Knickerbocker and his wife Támara Knickerbocker owned approximately 41 percent, or 7.7 million shares, of the company’s outstanding common stock.

Early History

Several companies preceded the formation of the L.L. Knickerbocker Co. In 1985 Louis L. Knickerbocker and his wife Támara Knickerbocker formed a company called International Beauty Supply, Ltd., in California. The company sold a line of cosmetics called Orchid Premium to professional beauty supply houses and later to retail outlets. It began selling collectible Knickerbocker products in October 1986 under the Knickerbocker Toy Company brand. In 1987 Louis L. Knickerbocker and Michael El am co-founded LaVie Cosmetics. It introduced a beauty product called Creme de LaVie for both the I. Magnin and Nordstrom department stores. In October 1988 Creme de LaVie was introduced on the Home Shopping Network with comedienne Phyllis Diller as the product’s spokesperson. Then in 1989 the Knickerbockers co-founded MLF Enterprises, with Elam and actress Farrah Fawcett. MLF developed replicas of Farrah Fawcett’s jewelry collection and market ed them through television home shopping networks.

The Knickerbockers formed Knickerbocker Creations, Ltd., in 1990 and began developing the products and celebrity endorsement programs that later became part of the L.L. Knickerbocker Co. These included the Kenneth Jay Lane High Society Collection of fashion jewelry (introduced in 1991), the Nolan Miller Glamour Collection of fashion jewelry (introduced in 1992), Marie Osmond fine porcelain collector dolls (introduced in 1991), and Annette Funicello collectible bears (introduced in 1992).

The L.L. Knickerbocker Co., Name Adopted, 1993

In 1993 the Knickerbockers began contemplating making an initial public offering of stock, but Knickerbocker Creations was a Subchapter S corporation and unsuitable for a public offering. In order to facilitate a public offering, the name of International Beauty Supply was changed to the L.L. Knickerbocker Co., Inc., on May 24, 1993. The L.L. Knickerbocker Co. then acquired certain assets of Knickerbocker Creations, including the marketing and distribution rights to the products and programs of Knickerbocker Creations.

In 1994, the year prior to L.L. Knickerbocker’s intial public offering, the company reported revenue of $7.8 million, a 50 percent increase over 1993 revenue of $5.2 million.

Initial Public Offering, 1995

L.L. Knickerbocker’s initial public offering was completed on January 25, 1995. The company issued 471,500 units, with each unit consisting of two shares of common stock and one common stock purchase warrant. On August 30, 1995, the company approved a five-for-one common stock split and increased the number of authorized shares of common stock to 100 million. The reason for the split was that in July, the share price rose from around $5 to $52 before falling back to $46.75. The split cut the price to make it more affordable to small investors, while increasing the number of outstanding shares to 12.3 million.

The sudden dramatic rise in L.L. Knickerbocker’s stock price caused officials at the Securities and Exchange Commission (SEC) and NASDAQ to contact the company to see what it was telling investors. The stock began to rise when an influential broker, Rafi Khan, became interested in the company and introduced Knickerbocker to money managers who began taking big stakes in the company. Daily trading jumped from 20,000 shares to 113,000 shares. Short sellers who borrowed the stock expecting it to fall were caught by surprise. When their lenders became nervous and demanded payment, the short sellers had to purchase the stock at a higher price. The situation, known as a classic short squeeze, caused the stock price to rise even higher. For 1995, LLK reported revenue of $13.1 million.

Acquisitions, 1996

In June 1996 L.L. Knickerbocker acquired Krasner Group, Inc., for $3.2 million in stock and stock purchase warrants. Krasner designed, manufactured, and marketed costume, or fashion, jewelry. In July LLK acquired three companies specializing in fine jewelry: Grant King International, Ltd.; S.L.S. Trading Co., Ltd.; and Harlyn International Ltd. Grant King was merged with S.L.S. Trading, which sourced gemstones and developed proprietary stone cutting technologies. Harlyn was a manufacturer and marketer of fine jewelry. These companies were organized into LLK’s Jewelry Division.

In October L.L. Knickerbocker expanded its presence in the collectible market by acquiring an 82 percent interest for $3.2 million in the Georgetown Collection, Inc. Georgetown marketed collectible dolls via direct response catalogs, advertisements, and mail. The acquisition included the Magic Attic Club line of quality vinyl dolls. The Georgetown Collection’s main offices were located in Portland, Maine.

During 1996 LLK also made equity investments in two companies with emerging proprietary technologies, Pure Energy Corporation and Ontro, Inc. This was the start of LLK’s Investment Division.

Consolidation, 1997

For 1997, revenues increased 62 percent to $68.3 million, as compared to $42.1 million in 1996. Gross profit increased 82 percent to $37.5 million. However, due to costs associated with consolidating the companies acquired in 1996, LLK reported an operating loss of $2.0 million in 1997.

In June 1997 LLK moved to a new corporate headquarters with 50,000 square feet, enough space to accommodate the company’s anticipated growth. In Thailand, the company opened a new 3,500-square-foot jewelry showroom. It was also completing its first silver manufacturing plant there.

The Collectibles Division

The company is organized into three divisions: Collectibles, Jewelry, and Investments. The Collectible Division creates precious bears, dolls, and other collectible items, with most of the production being outsourced. In 1997 collectibles accounted for approximately two-thirds of LLK’s total revenue. The company began selling collectible toys and teddy bears in October 1986 under the Knickerbocker Toy Company brand, even before the company was called the L.L. Knickerbocker Co. In 1991 it introduced Marie Osmond fine porcelain collector dolls, with singer Marie Osmond acting as the celebrity spokesperson and design director for the collection, which grew to include more than 420 different styles of dolls that sold at retail for $20 to $600. Marie Osmond once sold out $2 million worth of a limited line of her designer dolls in only 13 minutes of air time on the QVC home shopping network.

In 1992 the Collectible Division introduced Annette Funicello collectible bears, with actress Annette Funicello as the celebrity image and design director for the collection. With retail prices ranging from $25 to $200, the collection grew to include more than 325 different styles of collectible teddy bears.

Much of LLK’s success in the collectible market was due to its ability to target selected niches. While the largest population for collectibles was the 35-64 year old age group, LLK introduced the Magic Attic Club in 1996 for that age group’s children and grandchildren. This line of fine quality vinyl dolls was suitable both for play, which appealed to girls aged 6-11, and for collecting, which appealed to their parents. With vinyl collectibles one of the fastest-growing categories in collectibles, Magic Attic was the second largest catalog retailer in this category, behind the Pleasant Company, a privately held Wisconsin firm with nearly $300 million in annual catalog sales.

Complementing the Magic Attic Club catalog operation was the Magic Attic Press, which published a popular children’s book series. In May 1998, the company closed the Magic Attic Press editorial office in New York as part of a consolidation and strategic alliance with Millbrook Press, Inc., which would take over the ongoing production, marketing, sales, and distribution of the Magic Attic Press line. Management, creative, and editorial functions were shifted to the company’s Portland, Maine, office.

Company Perspectives:

The LL Knickerbocker Co., Inc. is a diverse international company that brings investors and the products and investments they treasure together via three strategic divisions: Collectibles, Jewelry and Investments.

Strategic alliances were also formed with Eastman Kodak Co. to co-develop and co-promote collectibles for the Marie Osmond line, and with Universal Studios for the Edith Head line. Edith Head was a legendary costume designer who won eight Academy Awards for her designs. In 1997 and 1998 L.L. Knickerbocker launched Kodak Moments by Marie Osmond, Universal Studios Glamour Collection, the Disney Art Classic Collection, and the Richard Simmons Masters Collection. They were expected to be strong brands for the company and to generate significant revenues. Other celebrities associated with LLK collectibles included designer Bob Mackie and Candy Spelling. Three years of development work were typically required for newly introduced collections.

LLK’s collectibles were marketed through a variety of distribution channels, including direct response; television shopping sales through networks such as QVC; international distributors; and wholesale sales to retailers via trade shows. LLK was QVC’s top-selling collectible vendor.

At the 1998 American International Toy Fair, LLK collectibles received 13 design award nominations. Since 1992 the company had received 51 nominations resulting in 16 awards. The Toy Fair provided LLK with an opportunity to meet new retailers, who accounted for one-third of all of LLK’s orders there.

The Jewelry Division

L.L. Knickerbocker’s Jewelry Division consists of two categories: fine jewelry and fashion, or costume, jewelry. Fine jewelry is manufactured with precious metals, such as gold, sterling silver, or platinum, with or without gemstones. Fashion, or costume, jewelry, is made with non-precious metals and may be gold-plated.

By the late 1990s L.L. Knickerbocker’s fashion jewelry operation was vertically integrated. It exercised control over stone sourcing and cutting, design structures, manufacturing, and marketing. Most of LLK’s fashion jewelry lines were managed and produced by its Rhode Island-based subsidiary, the Krasner Group, Inc., which it acquired in 1996.

One of the company’s leading fashion lines was the Kenneth Jay Lane brand, which was introduced in 1991. It grew to include 450 different styles of fashion jewelry that sold at retail from $17 to $198. Kenneth Jay Lane is the designer and spokesperson for the collection. In April 1997, several of Mr. Lane’s original pieces were sold at Sotheby’s Jacqueline Kennedy Onassis auction. The Kenneth Jay Lane Star Brooch and matching earrings sold at the auction for $19,550. In the days immediately following the auction, the Krasner Group supplied nearly 10,000 reproductions of the brooch to QVC, which sold them for $98 each, generating nearly $1 million in sales.

Other celebrities associated with LLK’s fashion jewelry included Barbara Mandrell, Pilar Crespi, Wendy Cell, and Nolan Miller. The Nolan Miller Glamour Collection was started in 1992 and grew to include 400 different styles of fashion jewelry priced from $20 to $280 retail. Nolan Miller was the designer and spokesperson for the collection. Several lines of fashion accessories were also marketed with celebrities including Anushka, Albert Capraro, Mary McFadden, and Dennis Basso.

Fashion jewelry accounted for approximately 60 percent of LLK’s jewelry sales. Fashion jewelry and accessories were marketed primarily through television retailers such as QVC Network, Home Shopping Network, and TVSN Australia. Fine jewelry accounted for the other 40 percent of LLK’s jewelry sales, which were sold mainly in Western Europe and South America through an international distribution network. LLK’s fine jewelry was manufactured and marketed by three companies based in Thailand: The L.L. Knickerbocker (Thai) Co., Ltd.; Harlyn International Co., Ltd.; and S.L.S. Trading Co., Ltd. In 1997 combined jewelry sales accounted for 32.1 percent of L.L. Knickerbocker’s revenues.

For 1998 LLK planned to complete the integration and consolidation of its recently established Thailand operations. In its first full year of operation, the L.L. Knickerbocker (Thai) Co., Ltd. produced gross sales of $10.3 million and operating profits of $1.2 million in 1997. The Thai subsidiary marketed and manufactured gold, diamonds, emeralds, rubies, and other semi-precious stones worldwide, with its main focus on Western Europe and South America. Its jewelry was produced in a company-owned, 30,000-square-foot manufacturing facility which contained a showroom as well as a design and development division.

The Investment Division

The Investment Division was formed to acquire companies with emerging proprietary technologies. By the end of 1997, LLK was involved with three such investments, in each case providing expertise to help the company reach its potential. As of early 1998, none had yet begun to tap their full market potential.

In 1996 LLK made equity investments in two private companies, Pure Energy Corporation (PEC) and Ontro, Inc. PEC had developed patented alternative fuel and was awaiting U.S. Dept. of Energy certification. A U.S. patent on the fuel was issued in December 1997. PEC held the exclusive, worldwide license from Princeton University to commercialize a cleaner burning alternative fuel consisting of a blend of ethanol, natural gas liquids, and co-solvents derived from renewable resources. LLK held a 30 percent equity interest in PEC.

Ontro Inc., which developed a patented self-heating container for packaging food and beverages, filed for its initial public offering in 1997. Its container design won the 1995 Product of the Year Award at the Invention Convention, and in July 1997 the U.S. Patent Office issued a new patent covering 25 aspects of the container design. In May 1998 the Ontro, Inc., IPO was completed. Some 3.4 million units were sold at $5.50 per unit. Each unit consisted of one share of common stock and one three-year redeemable common stock purchase warrant to purchase one share of common stock at $8.25 per share. Prior to the public offering, L.L. Knickerbocker had a 28 percent equity interest in Ontro, which became a 13 percent interest after the IPO. According to statements made by Louis Knickerbocker at the company’s annual meeting in May 1998, “Our $650,000 investment in Ontro 18 short months ago is valued today at more than $5 million.” With respect to PEC, he said, “Our $2.4 million investment in Pure Energy Cor poration a little more than 24 months ago is valued today at more than $50 million.”

L.L. Knickerbocker’s third investment venture was with Arkenol Holdings, LLC. In August 1997 LLK teamed with Arkenol Holdings to form a joint venture partnership called Arkenol Asia, Inc. Each company had a half interest in the joint venture, which was formed to use Arkenol’s technology to manufacture and sell chemicals, biomass solids, and liquid fuels in selected Asian countries. In December 1997, the joint venture signed a memorandum of understanding with the People’s Republic of China (PRC) for the construction of China’s first biorefinery. The agreement was expected to lead to the construction of as many as 100 biorefineries over the next 10 to 15 years in China.

At the company’s May 1998 annual meeting Louis Knickerbocker announced a new investment. The company traded two percent of its holdings in PEC for a 6.7 percent stake in Phoenix Environmental Ltd. valued at $40 million. Phoenix had a patented, proprietary technology that converted steel mill by-products and other steel-based waste streams into a marketable industrial product.

Positioned for Growth, 1998

In early 1998 LLK introduced cost-saving measures. During the first quarter of 1998 LLK consolidated its global distribution and warehousing operations as well as some U.S. manufacturing operations. The company expected to realize annualized savings of $1 million from these moves. For the future, the company was focused on increasing its sales and marketing efforts for its many branded products.

In the three short years since it went public, L.L. Knickerbocker grew from $7.8 million in sales to $68 million in sales, and its assets increased from $2 million to more than $60 million. The five acquisitions it made in 1996 were turned around from $8 million in losses to $1.5 million in profit in 1997. While lamenting that the company’s stock price was undervalued, Louis Knickerbocker emphasized to shareholders that the company was positioned for substantial growth.

Principal Subsidiaries

Georgetown Collection, Inc.; Magic Attic Inc.; Krasner Group, Inc.; TCJC, Inc.; Charisma Manufacturing Co., Inc.; The L.L. Knickerbocker (Thai) Co., Inc.; Harlyn International Co., Inc.; S.L.S. Trading Co., Ltd.