<PAGE>
 
                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                                  FORM 10-KSB/A

                [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                    OF THE SECURITIES EXCHANGE ACT OF 1934
                   For the fiscal year ended December 31, 1996

                                       OR

                [_] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
                    OF THE SECURITIES EXCHANGE ACT OF 1934
          FOR THE TRANSITION PERIOD FROM ___________ TO _____________

                         Commission file number 0-25488

                      THE L.L. KNICKERBOCKER COMPANY, INC.
              (Exact name of Small Business Issuer in its Charter)

         CALIFORNIA                                         33-0230641
  (State or Other Jurisdiction of                       (I.R.S. Employer
  Incorporation or Organization)                       Identification No.)

     30055 COMERCIO RANCHO 
     SANTA MARGARITA, CA                                      92688
(Address of Principal Offices)                              (Zip Code)

         ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 858-3661

         SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:

                                      NONE

         SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:

                           Common Stock, No Par Value
                           -------------------------- 
                               (title of class)

                         Common Stock Purchase Warrants*
                         ------------------------------- 
                                (title of class)

Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 
                                                             ---   ---

Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]

The issuer's revenues for the most recent fiscal year were $42,095,000.

The aggregate market value of the voting stock of the Registrant held by non-
affiliates of the Registrant, based upon the closing bid price of the Common
Stock on the NASDAQ National Market System on March 31, 1997 was $61,315,360.
Shares of Common Stock held by each officer and director and by each person who
owns 5% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes. The number of
shares outstanding of the registrant's Common Stock, as of March 31, 1997 was
17,638,356.

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      NONE

Transitional Small Business disclosure Format (check one): Yes     No X
                                                              ---    ---
----------
*The registration of the Common Stock Purchase Warrants was terminated on
January 25, 1997
<PAGE>
 
                             TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM                                                                        PAGE
--------------------------------------------------------------------------------
<S>                                                                         <C>
                                     PART I

1.   BUSINESS..............................................................   1
         A.  History.......................................................   1
         B.  General Business..............................................   1

2.   PROPERTY..............................................................  13

3.   LITIGATION............................................................  14

4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................  14

                                     PART II

5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.  14

6.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS................................  15

7.   FINANCIAL STATEMENTS..................................................  18

8.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
        ACCOUNTING AND FINANCIAL DISCLOSURE................................  19

                                    PART III

9.   DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
        COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT..................  19

10.  EXECUTIVE COMPENSATION................................................  21

11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
        AND MANAGEMENT.....................................................  23

12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................  24

13.  EXHIBITS LIST AND REPORTS ON FORM 8-K.................................  26

     SIGNATURES............................................................  __
</TABLE>
<PAGE>
 
                                     PART I

This Annual Report on Form 10-KSB contains forward-looking statements within the
meaning of the Securities Act of 1933, as amended, and the Securities Exchange
Act of 1934, as amended, which involve risks and uncertainties, including, but
not limited to, economic, competitive, governmental and technological factors
affecting the Company's operations, markets, products, services and prices, and
other factors discussed herein. The Company's actual results could differ
materially from those projected in the forward-looking statements as a result of
the factors described in this Report.


ITEM 1.  BUSINESS
-------  --------

HISTORY

The L. L. Knickerbocker Co., Inc. (the "Company" or "LLK") was formed in 1985 by
Louis L. Knickerbocker, Chairman, President, and Chief Executive Officer of the
Company, and Tamara Knickerbocker, the Vice President of the Company, under the
name International Beauty Supply, Ltd., a California corporation ("IBS").
Subsequently, in 1987, LaVie Cosmetics, a California corporation ("LaVie"), was
co-founded by Louis L. Knickerbocker with Michael Elam. In 1989, the
Knickerbockers co-founded another company, MLF Enterprises, a California
corporation ("MLF"), with Mr. Elam and Farrah Fawcett, a director of the
Company. MLF developed replicas of Ms. Fawcett's jewelry collection, which were
sold through the television home shopping industry.

The Knickerbockers next formed Knickerbocker Creations, Ltd., a California
corporation ("Creations"), in 1990 and began developing the products and
celebrity endorsement programs which are now part of the Company. In 1993, due
to Creations' status as a Subchapter S corporation, it was determined that the
operations of Creations and IBS should be consolidated under a single entity in
order to facilitate the contemplated public offering of the Company. However, in
1993, the directors and shareholders of the Company were advised that Creations
would be an unsuitable candidate for a public offering. Therefore, on May 24,
1993, the directors and shareholders of IBS approved an amendment of the
articles of incorporation of the corporation changing the name of the
corporation from "International Beauty Supply, Ltd." to the Company's current
name, "The L. L. Knickerbocker Co., Inc." The Company then consummated an asset
purchase agreement whereby certain operating assets of Creations, including but
not limited to, the marketing and distribution rights to the products and
programs of Creations, were acquired along with certain related
<PAGE>
 
liabilities. As of the date hereof, all current active contracts of Creations
have been assumed or amended to grant those rights and obligations to the
Company.

The Company completed an initial public offering of common stock and warrants on
January 25, 1995. The Company issued 471,500 units (including 61,500
overallotment units) comprised of two shares of common stock and one common
stock purchase warrant. On August 30, 1995, the Board of Directors approved a
five for one split of the Company's common stock and the increase of the number
of authorized shares of its common stock to 100,000,000.

GENERAL BUSINESS

The Company markets a wide variety of branded consumer items ("Brands"),
including collectibles, costume and fine jewelry, fashion accessories, patented
consumer products and consumables. The Company strives to deliver genuine value
to the consumer through product design and quality, together with a fair price
for the item. The goal is to create and build each Brand to the point where the
Brand can be marketed through a variety of distribution channels.

Much of the manufacturing of non-jewelry items is outsourced. The Company
has developed relationships with a variety of dependable manufacturers that
consistently deliver high-quality products. Jewelry operations are vertically
integrated, and most of the design, stone sourcing, advanced stone cutting, and
jewelry manufacturing is performed by in-house personnel.

LLK also invests in companies whose innovative ideas have potential to make
a significant contribution to LLK's own financial success. These investments
include a 38.3% equity interest in Pure Energy Corporation, which is developing
an alternative fuel, and a 25% equity interest (on a fully diluted basis) in
both Ontro, Inc. (formerly Self Heating Container Corporation of California) and
Intsa-Heat, Inc., which develop self-heating containers for a variety of food
products. There can be no assurance that these investments will prove 
successful.

The Company's current consumer Brands have been expanded in 1996 through
acquisitions and now include: Marie Osmond Fine Porcelain Collector Dolls,
Annette Funicello Collectible Bears, The Knickerbocker Collectible Toy Company,
Bob Mackie Legendary Beauties, The Georgetown Collection, The Magic Attic
Catalog, The Magic Attic Press, Barbara Mandrell Costume Jewelry, Nolan Miller
Costume Jewelry, Kenneth Jay Lane Costume Jewelry, Pilar Crespi Costume Jewelry,
Harlyn International Fine Jewelry, Mary McFadden Fashion Accessories, Dennis
Basso Fashion Accessories , Framm Accessories, ECT Ionizer, Fit 
<PAGE>
 
& Firm(TM) by Florence Griffith Joyner, Life Time of Skincare Facial Steamer, 
and Anushka Body Contouring Spa System.

The consumer Brands are marketed domestically and internationally through
diverse channels of distribution, including but not limited to, the television
shopping industry, direct response print advertisements, direct mail, catalog
and retail outlets. The Company attempts to diversify its risk profile by use of
a wide variety of branded items, marketing outlets and manufacturing sources. In
addition, the Company looks to these factors for opportunities for synergies
between the firm's various components. Celebrity spokespersons contribute to
many of the marketing efforts. These celebrities are chosen carefully on the
basis of name recognition, communications ability and a personal commitment to
participate in the programs.

During 1996, the Company made multiple acquisitions and alliances that expanded
its consumer Brands and expanded its distribution channels for all Brands. In
addition, the following acquired businesses and alliances may serve to leverage
combined product resources.

<TABLE>
<C>        <S>                                       
11/95      Acquisition of 49% of the outstanding stock of Grant King
           International Co., Ltd., of Bangkok Thailand, a jewelry design and
           development company. Consideration consisted of 300,000 warrants
           exercisable at $5.50 each.

3/96       Acquisition of 40% of the outstanding common stock of Pure Energy
           Corporation, a Delaware Corporation, which is developing a propriety
           alternative fuel. Consideration consisted of a commitment to fund up
           to $1,000,000 of future development and marketing costs, 200,000
           stock options exercisable at $8.50 per share, and 200,000 stock
           options exercisable at $12.00.

6/96       Acquisition of 100% of the outstanding stock of Krasner Group, Inc.,
           a Delaware corporation ("TKG") with operations involving the
           manufacture and marketing of costume jewelry and accessories based in
           New York. Consideration included common stock and common stock
           purchase warrants granted in installments over a 12-month period
           valued at approximately $3.1 million, a contingent amount of 
           approximately $2.2 million in value of common stock purchase warrants
           payable upon the liquidation of the closing inventory of TKG, and a
           guarantee to repay TKG's line of credit of approximately $1.8
           million.

7/96       Acquisition of certain assets of S.L.S. Trading Co., Ltd., a cutting
           and gemstone business, for $150,000 cash and $402,000 in ascribed
           value of common stock purchase warrants.
</TABLE>
<PAGE>
 
<TABLE>
<C>        <S>
7/96       Acquisition of 100% of the outstanding common stock of Harlyn
           International Company, Ltd., a fine jewelry company with
           international distribution, for approximately $2,300,000 in cash.

7/96       Acquisition of the remaining 51% equity interest in Grant King
           International Co., Ltd., of Bangkok Thailand, a jewelry design and
           development company for $414,000 in forgiveness of indebtedness.

7/96       Merger of the operations of Grant King International Co., Ltd. and 
           S.L.S. Trading Co., Ltd. into a previously inactive Thai corporation 
           which was acquired and renamed The L.L. Knickerbocker (Thai) 
           Company, Ltd.

9/96       Acquisition of 25% of the common stock (on an fully diluted basis) of
           both and Insta-Heat, Inc. (owner of patents for self heating 
           containers) and Self-Heating Container Corporation of California, now
           known as Ontro, Inc. (licensed manufacturer of patented self heating 
           packaging) for a total of $650,000 in cash.

10/96      The Company purchased $2,000,000 of a $5,000,000 private placement of
           equity by Pure Energy Corporation, a Delaware Corporation, which is
           developing a propriety alternative fuel, and guaranteed a $1,000,000
           credit line for PEC. The Company's ownership in Pure Energy upon the
           closing of the transaction was approximately 38.3%.

11/96      Acquisition of approximately 82% of the outstanding stock of
           Georgetown Collection, Inc., a collectible doll company, and its
           wholly owned subsidiary, Magic Attic Press, Inc., a book publishing
           company, for $1.7 million in common stock, and agreement to settle
           $5.2 million of bank debt.
</TABLE>

The Company's general 5 year growth plan consists of focusing on the following
areas:

         To expand the current consumer Brands by introducing new product
           categories into the existing Brands.

         To expand distribution of the consumer Brands internationally.

         To explore additional acquisition opportunities that provide
           complementary Brands for the current distribution channels, as well 
           as, augment distribution channels.

         To continue to review new products and prospect the development of new
           brands.
<PAGE>
 
MARKETING STRATEGIES

The Company's marketing strategy is to expand on its expertise in the
development of products and building of Brands utilizing diverse channels of
distribution for these consumer products. In implementing this strategy, the
Company plans to continue its focus on marketing Brands by developing a
product and selling the product to the appropriate level of distribution.
Generally, new Brand programs are conservatively tested prior to any roll out .

THE DIRECT MARKETING INDUSTRY

Direct marketing has five major areas: Television Marketing, Print Media
Advertising, Catalogs, Direct Mail and the Internet.

Television Marketing
--------------------

Television Shopping Channels, as well as independent Infomercials, make up
this segment of the distribution. According to "Response TV", a major industry 
trade publication, the characteristics of the average Television Shopping 
Channel viewers in 1996 were 74% female, 78% Caucasian, 67% married, and 77% 
homeowners. The annual household income levels breakdown as follows; 13%-$25,000
to $35,000, 25%-$36,000 to $55,000 and 22% - $56,000 plus. Ninety percent of the
television sales transactions are done by consumer credit card. When asked "Why 
buy from television?", 29% of the shoppers said there was a lack of availability
elsewhere, 25% said because of demonstration and testimonial, 19% said for
convenience, and 14% responded as impulse. Seventy-one percent of Television
Shoppers also shop by catalog. Five percent of these same shoppers said they
have shopped by the Internet.

Television Shopping Channels
----------------------------

According to Response TV, the largest television shopping cable network is 
QVC, followed by HSN. Newer home shopping cable networks that have sprung up
include Value Vision , Shop At Home, America's Collectible Network, Global
Shopping Network and The Music Shopping Network. According to Response TV, the
most popular consumer product categories are Jewelry, Exercise Equipment, and
Kitchen Appliances. The shopping networks purchase products from vendors and
generally require the vendors to ship the products to the networks' warehouses
before the network will sell the items on the air. Generally, the format of the
home shopping channels is to present approximately 12 new items per hour. Each
hour can be
<PAGE>
 
comprised of a special program (i.e. all Marie Osmond Dolls), or a mix of 
products (i.e. a gift hour with different kinds of gift items). Special
programs, such as celebrity programs, can be given as much as three straight
hours of prime time. These types of programs must be high-dollar volume programs
to warrant the allocation of this time. The shopping channels then ship customer
orders directly from their warehouses/fulfillment centers.

The Company's expertise in marketing to home shopping channels has been to
identify its key product segments, (i.e. collectibles, environmental systems,
jewelry, and exercise equipment) and build Brand recognition within those
product segments. Wherever possible, the Company will concentrate on products
and upsells (a telemarketer pitch for incoming calls) which lend themselves to
continuity programs (sales items that need to be refilled) and the building of
back end business activities (additional marketing to the customer database).

Infomercials and Direct Response Spot Commercials

Infomercial format is different from the format of live home shopping cable
programs in that the infomercial is filmed, edited and produced rather than
being shown live. Infomercials are generally thirty minutes of programming while
spot commercials can be thirty, sixty or one hundred twenty seconds. The
infomercial business was founded only 12 years ago. As the cost of media rises
in the United States, infomercials are being used increasingly to create brand
awareness and to launch long term relationships with consumers. In addition,
retail support merchandise has become more and more important, as have back-end
marketing avenues. International outlets have also begun to be developed.

The Company plans to continue developing products through their partnership 
agreement with Paxson Communications Corporation (AMEX: PXN). Paxson
Communications Corporation operates a media service, InTV. According to Paxson
Communications Corporation, InTV broadcasts in 22 of the top 50 TV markets with
a reach of 16 million cable homes and in 40.5 million broadcast homes. According
to the 1996 Infomercial Source Book, gross annual sales generated by
infomercials were estimated to be $811.0 million in 1996. The Company's policy
for infomercial development is to cautiously test products via the home shopping
cable channels followed by the infomercial running on InTV media stations, and
then to a full media roll out.

Direct Response Print and Mail Advertising
------------------------------------------

The Company's direct response print advertising focuses on a narrow product
selection with potentially high dollar volume sales. The Company continues to
market its collectible Brands through this channel of 
<PAGE>
 
distribution. In addition to mainstream publications such as Woman's Day, 
McCalls, Women's World and the National Enquirer, the Company advertises in 
collectible trade specific niche publications including DOLLS, Doll Craftier, 
Doll Reader, Contemporary Dolls, Collectors Mart, Teddy Bear Review and Teddy 
Bear & Friends.

The Company manages direct mail programs by utilizing an in-house consumer
data base to test and build new concepts for selected Brands and categories. To
build on the in-house data base the Company rents distinct targeted mailing
lists.

Traditional Retail and Distributors
-----------------------------------

The Company markets to a wide variety of traditional retail outlets such as
Disney Stores and other independent gift and collectible retailers, and to the
less traditional catalog retailers and distributors. Currently the Brands have
distribution strategies based on the product being marketed, however, where
possible the distribution channels cross over from Brand to Brand.


CORE BUSINESS

Collectibles
------------

According to Unity Marketing, an industry trade publication, sales of
collectibles and giftware in the United States are estimated to exceed $6
billion annually, and approximately 11 million households collect giftware
products. The doll segment is believed by Unity Marketing to be approximately
one-fourth of the total collectibles and giftware industry. The Company builds
its collectibles Brands in measured fashion, rather than saturating all
marketing channels immediately, in order to attempt to build the long-term value
of the Brands.

Georgetown Collection, Inc. ("GCI"). The GCI Brand consists of high-quality, 
---------------------------
exclusive-edition porcelain dolls designed and developed by licensed  artists 
in conjunction with an in-house development team. Manufacturing is outsourced 
to factories in China and Southeast Asia. The dolls' retail prices range between
$90 and $145. The principal marketing channel is print media, including direct 
mail and space ads in such publications as McCalls and Family Circle, as well as
free standing inserts in newspapers. This Brand was first marketed on QVC in 
February 1994. The Company plans to continue to develop distribution of this 
Brand through the television shopping channels.
<PAGE>
 
  Magic Attic Club ("Club"), an operating division of GCI, is a catalog
  --------------------------
  collection that features a series of 18-inch vinyl dolls, doll clothing and
  accessories, all of which are based on the Magic Attic Press' novels. The
  books and Club catalogs target girls in the U.S. between the ages of 6 and 12.
  The girls in this age group, approximately 12 million in number in 1994,
  according to the 1994 United States Census, have generally outgrown most
  products offered by mainstream toy companies, and the Company positions this
  Brand to appeal to the interest these girls develop in the characters
  portrayed in the Magic Attic Press' novels.

  Magic Attic Press, a wholly owned subsidiary of GCI, sells a series of 17
  ------------------
  illustrated novels based on four girls and their adventures. The books have
  achieved national distribution and have penetrated many of the major book
  chains. Each Magic Attic Press book contains a mail-in card to request a
  catalog listing products offered by the Magic Attic Club.

  The items in the Magic Attic Club catalog do not vary much year to year, which
  keeps creative costs low and minimizes inventory difficulties. Repeat
  customers are highly profitable due to the minimal marketing costs relating to
  obtaining orders, and the lifetime value of a collectible customer is quite
  high by catalog industry standards. In 1996, the Club mailed approximately
  four million catalogs, which was nearly double the year-earlier total. The
  Company expects catalog mailings to continue to grow.

Marie Osmond Fine Porcelain Collector Dolls. This collection consists of more 
--------------------------------------------
     than 375 different styles at retail prices ranging from $20 to $600. Marie
     Osmond is the celebrity spokesperson and design director for the
     collection. The Marie Osmond Doll Collection, celebrating its fifth
     anniversary, received four hours of air time on QVC in August 1996 during a
     Collectors Day weekend special; sales at the retail level during that
     special program surged to more than $5.6 million. The program has generated
     revenue for the Company in excess of $28.0 million from its inception in
     1990 through December 31, 1996. Revenue from this program for the year
     ended December 31, 1996 was approximately $10.0 million.

Annette Funicello Collectible Bears Company. This line consists of more than
--------------------------------------------
     250 different styles of collectible teddy bears. Retail prices range from
     $25 to approximately $200. Annette Funicello is the celebrity spokesperson
     and design director for the collection. The Brand received two prestigious
     industry awards in 1996 for which it was nominated by the collectible trade
     publications and voted on by the public. The Annette Funicello Collectible
     Bear line has generated over $5.6 million in sales for the Company since
     its introduction in 1991. Revenue from this program for the year ended
     December 31, 1996 was approximately $3.0 million representing a 460%
     increase over 1995.

     Bob Mackie, Legendary Beauties. A collection of fashion dolls, designed by 
     -------------------------------
     Bob Mackie (US), Inc., are sold by the Company through direct response
     advertising. Retail prices are approximately $300. Bob Mackie is
<PAGE>
 
     the collection's designer and spokesperson , and LLK has licensed use of 
     the mark "Bob Mackie" in connection with this Brand.

The Knickerbocker Collectible Toy Company. The Knickerbocker name is well  
------------------------------------------
recognized in the toy and collectible teddy bear industries. The Company began
selling collectible Knickerbocker products in October 1986, and was issued the
trademark "Knickerbocker" for toys, dolls, stuffed animals, plush
animals and marionettes in January, 1996. The collection offers quality
collectible toys through the print advertisement and catalog marketing venues.

  LLK Jewelry and Accessories
  ---------------------------   

  LLK has acquired a number of jewelry-related businesses, which have diverse
  products, markets and marketing channels. The Company's jewelry operations are
  now vertically integrated, with control over stone sourcing and cutting,
  design structures, manufacturing and marketing. These capabilities should
  enable the Company to enter new jewelry markets quickly, and the Company's
  jewelry business is increasing its international presence in the jewelry
  industry. According to ResponseTV, the jewelry business represents
  approximately 44% of the total business on television shopping.

  Costume Jewelry. The Company markets its high-quality, designer costume
  ----------------
  jewelry lines and fashion accessories primarily through QVC. The Company's
  competitive position seems to be particularly strong, since the Company's
  multiplicity of product lines seem to be unique. LLK has its own jewelry
  manufacturing facility in Rhode Island.

  The Company's three jewelry programs presently airing on QVC are Nolan Miller,
  Kenneth Jay Lane, and Pilar Crespi. The Company also produces two fashion
  accessories programs for QVC, Mary McFadden and Dennis Basso, as well as, the
  newly introduced Framm fashion accessories.

  Fine jewelry. The Company's fine jewelry subsidiary is based in Bangkok,
  -------------
  Thailand. The fine jewelry manufacturing operation, which was acquired in July
  1996, markets gold, diamonds, emeralds and rubies through a sales force whose
  primary geographic focus is in Western Europe and South America, as well as
  television sales in the United States.

  The July 1996 acquisition of S. L. S. Trading Co. Ltd. ("SLS") brought to the
  Company SLS's expertise in stone sourcing and advanced cutting techniques for
  specialty stones. SLS, which created techniques for enhancing the color of
  gemstones, owns certain rights to proprietary technology related to such
  techniques and is known particularly for its "Blue Topaz" manufacturing
  techniques.
<PAGE>
 
The Company's fine jewelry sales for calendar year end 1996 were approximately
$11.0 million. The Company plans to broaden its jewelry product line and expand
its jewelry distribution. The Company's jewelry divisions will operate to serve
each other by providing, on the one hand, the specialty stones and, on the other
hand, the jewelry manufacturing and distribution functions.


PATENTED PRODUCTS

Environmental Control Technology ("ECT") Ionizer. This device helps to remove
-------------------------------------------------
potentially harmful particles (including cigarette smoke, bacteria, dust and
pollen) from indoor air. This product, featuring patented technology, was
developed by the Company in conjunction with an environmental systems company,
and is covered by exclusive licensing agreements from QVC, with a remaining term
through February 1998. Since this product was introduced on QVC in March of
1994, the Company has granted QVC worldwide distribution rights for the Ionizer.
The retail price of the product is approximately $88, and James Yehl, an
ionization expert, is the spokesperson. Since its introduction in 1994, this
product has generated revenue for the Company of approximately $5.5 million
through December 31, 1996.

EQUITY INVESTMENTS

The Company's corporate strategy includes searching for investment opportunities
that may offer high returns on invested capital. In 1996, the Company made two
equity investments in companies.

Pure Energy Corporation. The Company holds a 38.3% interest in privately owned
------------------------
Pure Energy Corporation ("PEC"). Other shareholders include PEC's founders and
officers, Donaldson, Lufkin & Jenrette ("DLJ"), and private individuals. In
1996, DLJ signed a one-year agreement to act as PEC's exclusive financial
advisor. The advisory agreement called for DLJ to become the beneficial owner of
5% of PEC Class B stock. DLJ has a highly regarded energy group and will assist
PEC in business planning, management recruitment and capital raising.

The Energy Policy Act of 1992 ("EPACT") and the Clean Air Act Amendments of 1990
("CAAA") set forth stringent emission standards and vehicle purchase
requirements for state and federal fleet customers and eventually a broader
segment of the motoring public. EPACT mandates that alternative fueled vehicles
account for 75% of federal and state fleet purchases of light duty vehicles by
the year 2000. States are developing their own responses to CAAA. These
initiatives could have significant benefits for the 
<PAGE>
 
environment, by reducing hydrocarbon and greenhouse emissions; for energy
security, by reducing U.S. dependence on imported oil; and for the economy, by
creating new jobs and reducing the trade deficit.

PEC's stated objective is to design, produce and market alternative motor fuels.
In conjunction with a Princeton University scientist, it has developed a
proprietary alternative motor fuel ("Fuel") that is clean-burning, largely
renewable, potentially cost-competitive with gasoline, and usable in new and
existing flexible-fuel vehicles. A patent on the Fuel is pending, and PEC holds
an exclusive license for worldwide distribution of the Fuel, subject to the
payment of royalties for the patent rights to the Fuel that are held by
Princeton University. PEC is seeking to have its Fuel designated as an
Alternative Fuel under EPACT, while seeking to have the Fuel be compatible with
as many state objectives/standards for clean fuels as practical.

The Fuel is best used in flexible-fuel vehicles that are designed to handle
alcohol fuels. Development and testing of the Fuel was carried out on a 1996
Ford Taurus flexible-fuel vehicle, with consultation from Ford engineers, that
was designed to run E85 (a blend of 85% ethanol and 15% gasoline). The
flexible-fuel vehicle automatically adjusted to run the Fuel, gasoline or any
combination of the two. Existing flexible-fuel vehicles will operate on the Fuel
without modification.

The Fuel has clean emissions characteristics, as it contains essentially no
undesirable olefins, aromatics or sulfur. In tests performed by an EPA-
recognized independent laboratory, the Fuel reduced hydrocarbon emissions by as
much as two-thirds relative to gasoline, and carbon monoxide emissions by nearly
half. Continuing optimization of engine programming and the Fuel might further
reduce emissions.

The Fuel is a blend of ethanol, a hydrocarbon, and other ingredients. With the
exception of the hydrocarbon, the components are derived from renewable biomass,
such as waste paper, agricultural waste or purpose-grown crops, urban/industrial
woodwastes, and, possibly, secondary sewage sludge. The biomass-derived
components may be produced with existing processes, some of which are patented
by others. PEC is assessing a number of technologies to create key components
from cellulosic material, and it has engaged the consulting firm of Booz-Allen &
Hamilton to assist in the process. PEC intends to align itself with or to
develop methods of manufacturing its key components. To that end, PEC is
establishing a pilot production facility.

Blending uses conventional rack-blending techniques for ethanol-containing motor
fuels, and compositions can be formulated for winter/summer blends or to meet
octane requirements. PEC plans to seek other related formulations to address
production economics, local feedstock availability, emissions characteristics,
and regulatory and market imperatives.
<PAGE>
 
In February 1997, the Company announced that PEC and Arkenol Holdings, L.L.C.
entered into a research and development agreement to produce bio-based chemicals
for alternative motor fuel. Arkenol is a privately held bio-refining company
based in Mission Viejo, California. The agreement specifies a research phase
followed by the design, construction and operation of a pilot plant for PEC by
Arkenol. The two companies have also signed a letter expressing interest in
cooperating in the future in areas relating to the production of PEC's
alternative motor fuel and the manufacture of bio-based chemical ingredients of
the fuel.

In August 1996, PEC entered into an agreement whereby Merrick G. "Rick"
Andlinger will serve as PEC's President and CEO. Mr. Andlinger was previously
with Smith Barney, Inc. as Managing Director in Corporate Finance and Co-head of
a 30-person Global Energy and Power Group. He had earlier been a founding member
of Salomon Brothers' Energy and Chemicals Group and has an M.B.A. from Stanford
University Graduate School of Business and an undergraduate degree from
Princeton.

Other PEC directors are Doug Dunlop (co-founder of PEC and an attorney), Scott
Dunlop (co-founder of PEC and president of a diversified marketing and
consulting company), Louis Knickerbocker (Chairman and CEO of the Company) and
Robert Irwin (a Vice President of DLJ).

In March 1997, the Company engaged a key Washington, D.C. consultant to
represent its interest in Pure Energy Corporation. This consultant, Larry S.
Dewey, has 20 years experience with the Department of Energy and was recently
appointed by that Department to the President's Committee of Advisors on Science
and Technology, a non-government board that makes recommendations to the
administration regarding National Strategy for Energy Research and Development.

Insta-Heat, Inc. and Self-Heating Container Corporation of California (now known
--------------------------------------------------------------------------------
as Ontro, Inc.) In September 1996, the Company purchased a 25% equity interest
---------------
(on a fully diluted basis) in both Ontro, Inc. and Insta-Heat, Inc. Insta-Heat,
Inc. holds the patents to a specialty foods container which automatically heats
the food contents of the container. Pushing a button on the bottom of these 12
and 16 ounce containers starts a chemical reaction, which in less than five
minutes warms the containers' contents to a pre-determined temperature. This
product received the Product of the Year Award at the Invention Convention in
1995. Ontro, Inc. owns the patent rights and manufacturing rights for the Insta-
Heat, Inc. self heating containers.

In addition to its equity investments in Ontro and Insta-Heat, the Company holds
exclusive worldwide rights to market and distribute celebrity-driven products,
developed and produced by the Company pursuant to the Insta-Heat, Inc. patents,
through infomercials, direct response television and television shopping
channels. Terms of the five-year license agreement, with an additional five-year
option, provide that the Company pay 
<PAGE>
 
a royalty on sales, and use its best efforts to identify a celebrity
spokesperson to assist in developing and marketing the Ontro products.


SUMMARY OF REVENUE BY PRODUCT LINE

In 1996, revenue for the Company was $42,095,000. Television shopping channels
accounted for approximately 43% of the Company's revenue in 1996. The remaining
1996 sales were generated through wholesale and retail customers and the
Company's efforts in alternative direct response channels of distribution. The
breakdown per product line for revenue in 1996 is as follows:

Year ended December 31, 1996

<TABLE>
<CAPTION>
        Category                              $000's        Percent
        --------                              ------        -------
   <S>                                        <C>           <C>
   Collectible dolls and bears                25,415         60.4%
   Fine Jewelry                               10,195         24.2%
   Costume Jewelry & Fashion Accessories       5,805         13.8%
   Other Consumer Products                       680          1.6%
                                              ------        ------
   Total                                      42,095        100.0%
                                              ====================
</TABLE>

CONSUMER BRANDS UNDER DEVELOPMENT

Barbara Mandrell Jewelry, (Jewelry Brand) The Company will attempt to further
-------------------------
expand its designer costume jewelry lines with a jewelry Brand designed and
developed by Barbara Mandrell. Ms. Mandrell will also act as spokesperson for
the collection subject to an agreement with a remaining term of six years. The
Company intends to create, design, develop, manufacture and sell this Brand of
high quality costume jewelry through television shopping, direct mail and
retail. A launch with QVC for this Brand is scheduled for Spring 1997.

Anushka cosmetic and skin/body treatment products, (Consumable Brand) The
--------------------------------------------------
Company's Krasner subsidiary has signed an agreement with Anushka, Inc. for the
production and sale of cosmetic and skin/body treatments. The Company is
expected to market these products through television shopping, infomercials,
direct response and retail channels. A launch with QVC for this Brand is
scheduled for Spring of 1997.
<PAGE>
 
Facial Steamer Systems, (Patented Brand) The Company holds worldwide
-----------------------
manufacturing, marketing and distribution rights to these patented, hand-held
devices for facial treatments under an agreement which provides for the payment
of royalties during the remaining two years of the term of the agreement. The
devices emit a moisturizing steam designed to rehydrate the skin and reduce fine
wrinkles. The steamer systems will be sold with, and used in conjunction with
Lifetime of Skincare consumable products. Dr. Nardo Zias, a dermatologist, is
the spokesperson. A launch with QVC is expected for the second quarter of 1997.

Fit & Firm(TM) exercise equipment, (Patented Brand) This licensed equipment has
----------------------------------
been developed through a joint venture between the Company and Paxson
Communications which provides for the Company to develop and market this Brand,
and for Paxson Communications to provide advertising expertise to promote sales
of the Brand. The spokesperson is Olympic Gold Medalist Florence Griffith
Joyner. Fit & Firm(TM) is licensed exercise equipment developed by Brainstorm
Product Development ("Brainstorm") and licensed to the Company pursuant to a
licensing agreement which provides for the payment of royalties to Brainstorm
over the term of the agreement, which lasts for one year, with options to extend
the agreement for four additional one-year terms . The equipment is scheduled to
be launched on QVC in the first quarter of 1997.

The Richard Simmons Such an Angel Collection, (Collectible Brand) The Company
---------------------------------------------
has an exclusive license agreement to manufacture and distribute the line of
dolls, as well as angel, fairy and dalmatian figurines with Richard Simmons and
Goodtimes Entertainment. The license provides for the payment of royalties
during the 3 1/2 year term of the agreement, and requires specific approvals
from Richard Simmons which have resulted in several design changes and launch
delays. The line is expected to be introduced into the market in the fourth
quarter of 1997.

The Honeymooners Collection, (Collectible Brand) The Company has a license
----------------------------
agreement to manufacture and distribute porcelain dolls and figurines depicting
the characters from the original Honeymooners television show. The license
provides for the payment of royalties during the two year term of the agreement.
The Company is currently working with Jackie Gleason's daughter, Geri Chutuk, to
approve the final design. The collection is scheduled to be launched second
quarter of 1997.

Although the Company currently believes that the above listed products can be
developed and produced as commercially viable product line additions, there can
be no assurance that the new products will be introduced or, if introduced, that
they will be successful.
<PAGE>
 
PRODUCTION PROCEDURES

Contracted Consumer Brands
--------------------------

Each Brand, outside of the Company's Jewelry, has a Brand Manager who is
responsible for costing and designating the manufacturing source for each
product and for monitoring the quality control of the finished product. The
quality standards are reviewed by the Brand Manager, and products are inspected
by an independent inspection company with a Company representative present on
occasion.

The Company designs the product, locates an appropriate contract manufacturing
facility and prepares samples, which are presented to the customer for approval.
Upon approval of the samples by the customer, the customer issues a purchase
order to the Company for the desired quantity of the product. In some cases the
purchase order is secured by an irrevocable and transferable letter of credit,
and the order is placed with the Company's contract manufacturer for production.
Under certain circumstances the Company manufactures product for sale without an
irrevocable and transferable letter of credit.

Company Owned Consumer Brands and Products
------------------------------------------

The Company's costume jewelry is manufactured in its 26,000 square foot facility
in Rhode Island. All of the costume jewelry manufacturing is done against open
purchase orders. The Thailand operation manufactures fine jewelry for a diverse
group of international distributors as well as the television shopping industry.


MATERIAL CONTRACTS

Pure Energy Corporation
-----------------------

The Company entered into an agreement with Pure Energy Corporation in March 1996
to purchase 40% of the outstanding capital stock of Pure Energy Corporation in
exchange for options to purchase 200,000 shares of the Company's capital stock
for $8.50 per share and 200,000 shares of the Company's capital stock for $12.00
per share, and a funding commitment of the Company to advance up to $1,000,000
million for the development of a proprietary alternative fuel by Pure Energy
Corporation.
<PAGE>
 
Subsequently, in October 1996, the Company purchased $2,000,000 of a $5,000,000
private placement of equity by Pure Energy Corporation, and guaranteed a
$1,000,000 credit line for PEC. The Company's ownership in Pure Energy upon the
closing of the transaction was approximately 38.3%.

Paxson Communications, Inc.
---------------------------

The Company entered into a joint venture with Paxson Communications Corporation
on December 21, 1995. The Company will devote marketing management services to
the joint venture. Initially, the joint venture will develop six individual
products and services for marketing through the home shopping industry. The
joint venture is structured as a general partnership between Paxson
Communications, Inc. and the Company named Paxson/Knickerbocker Media Marketing.

Richard Simmons
---------------

On May 1, 1995, the Company entered into a License Agreement with SIM-GT
Licensing Corp. to license the name, likeness and trademarks of Richard Simmons.
The Company has been granted the exclusive license to manufacture and distribute
the line of angel, fairy and dalmatian figurines under development with Richard
Simmons and Goodtimes Entertainment. The license provides for the payment of
royalties to Simmons and Goodtimes Entertainment during its 3 1/2 year term. The
line of porcelain angel dolls is expected to debut in the fourth quarter of
1997.

Bob Mackie (US), Inc.
---------------------

The Company entered into a License Agreement with Bob Mackie (US), Inc. on May
1, 1994 with respect to the use of the mark "Bob Mackie." The material terms of
the Agreement provide that Bob Mackie (US), Inc. will develop a group of doll
designs for sale to QVC Cable Television. All articles produced from the designs
are subject to the inspection and approval of Bob Mackie (US), Inc. The
Agreement will expire in July 1997, but it may be renewed by the Company with
notice for an additional twelve months. The agreement provides for the payment
of royalties to Bob Mackie (US), Inc. during the term of the agreement.

QVC Network, Inc.
-----------------

The Company entered into a License Agreement with QVC Network, Inc. on September
29, 1993 with respect to the marketing, promotion, distribution and sale of the
ECT Clean Room System Ionizers and related products. The material terms of the
Agreement provide that the Company grants to QVC Network, Inc. the exclusive
license, rights and privilege to promote the products worldwide. The initial
term of the 
<PAGE>
 
Agreement was two years after the first QVC broadcast featuring the
products, which was March 4, 1994, and the Agreement automatically and
continuously renews for additional two year terms unless the Company gives
notice of its intent not to renew at least 30 days prior to the end of a term,
or net purchases by QVC Network, Inc. are less than $6.3 million during the
first term, and 110% of the preceding minimum amount during each succeeding
renewal term. The Company is required to provide the services of Jim Yehl as the
spokesperson for the products for a maximum of twelve personal appearances on
QVC Cable Television per year. QVC Network, Inc. has the right, but is not
obligated, to purchase the products from the Company upon issuance of purchase
orders, and, if the Company sells to parties other than QVC Network, Inc., it is
required to pay a commission to QVC Network, Inc. on sales of all the products
sold by the Company to re-sellers and end users.

American Environmental Systems, Inc.
------------------------------------

Knickerbocker Creations, Ltd. entered into a Product Development and License
Agreement with American Environmental Systems, Inc. on August 4, 1992 with
respect to the development of the ECT Clean Room System Ionizers and related
products (the "Product Development and License Agreement"). A second agreement
was entered into between the parties on October 22, 1992 with respect to the
licensing of the trademark "ECT" (the "Trademark License Agreement"). The
agreements were assigned to the Company with the consent of American
Environmental Systems, Inc. effective September 28, 1993.

The material terms of the Product Development and License Agreement provide that
the Company pay a development fee to American Environmental Systems, Inc. in
exchange for the license, rights and privilege to manufacture, sell and
distribute the products. The Company is solely responsible for the costs of
manufacturing, distribution, advertising and sales of the products, once they
are developed. American Environmental Systems, Inc. receives royalties on the
proceeds received by the Company from all sales of the products covered by the
Agreement. The Company is entitled to the services of James Yehl as the
spokesperson for the products for a minimum of ten personal appearances on QVC
Cable Television per year. Other than the termination for failure to make
minimum royalty payments or breach of the terms of the Agreement, the Agreement
will remain in force indefinitely.

The material terms of the Trademark License Agreement provide that the Company
pay a royalty on the proceeds received by the Company from all sales of the
products using the trademark "ECT" and which are covered by the Product
Development and License Agreement. The term of the Trademark License Agreement
is the length of time that the Product Development and License Agreement remains
in force.

Cello, Inc.
-----------
<PAGE>
 
The Company entered into a License Agreement with Cello, Inc. ("Cello") on May
13, 1994 with respect to the services of Annette Funicello. The material terms
of the Agreement provide that the Company will design, develop and manufacture
collectible teddy bears and dolls, and such other products as the parties shall
agree on, with the approval of Cello. Cello retains all intellectual property
rights to the products, and the Company is solely responsible for the costs of
manufacturing, distribution, advertising and sales. Cello receives royalties on
the proceeds received by the Company from all sales of the products covered by
the Agreement, less credit for returned items. The Company is required to keep
products liability and spokesperson liability insurance to cover the products
and the parties. The Agreement terminates in January 1998, but the Company has
the option to renew the Agreement for an additional three year term.

Marie, Inc.
-----------

The Company entered into a License Agreement with Marie, Inc. on April 1, 1993
with respect to the services of Marie Osmond. The material terms of the
Agreement provide that the Company will design, develop and manufacture dolls,
and such other products as the parties shall agree on, with the approval of
Marie, Inc. The Company retains all intellectual property rights to the products
unless they contain Marie Osmond's name, and the Company is solely responsible
for the costs of manufacturing, distribution, advertising and sales. Marie, Inc.
is bound to provide the services of Marie Osmond as the spokesperson for the
products, subject to Marie, Inc.'s approval of commentary and production. Marie,
Inc. receives royalties on the proceeds received by the Company from all sales
of the products covered by the Agreement, less credit for returned items. The
Company is required to keep products liability and spokesperson liability
insurance to cover the products and the parties. The Agreement is for a five
year term, and expires on April 1, 1998, except that Marie, Inc. has the right
to terminate the Agreement if it does not receive certain minimum royalties
during any one year, and the Agreement may be renewed by the Company for an
additional five years if Marie, Inc. has received above a certain amount in
royalties during the last year of the initial term. To date the Company has met
all contractual minimum payments.


TRADEMARKS AND LOGOS

The Company has the right to use the trademark names of the
following spokespersons and celebrities currently under contract in connection
with the marketing of the Company's products: Marie Osmond, Annette Funicello,
Bob Mackie, Richard Simmons, Gleason , the Honeymooners Jim Yehl, Nolan Miller,
Mary McFadden, Kenneth Jay Lane, Dennis Basso, Pilar Crespi, Barbara Mandrell,
Anushka, Albert Capraro and Framm. The Company has also been issued trademarks
under the following names: 
<PAGE>
 
Knickerbocker Bears, Knickerbocker Dolls, Knickerbocker Toys, Knickerbocker
Collectibles and Knickerbocker and Knickerbocker Direct. Trademark applications
have been filed for "Adora Belle." The Company also has a marketing and
licensing agreement with QVC to manufacture and sell the Environmental Control
Technology ECT Ionizer. QVC has filed an application for registration of the
name.


COMPETITION

The direct marketing business is highly competitive and many of the Company's
competitors have substantially greater financial and personnel resources than
the Company. The Company believes that its primary competitors in direct
marketing are difficult to distinguish because the Company is involved in five
types of direct marketing: Television Shopping, Infomercials, Print Media
Advertising, Catalogs and Direct Mail. The Company feels, however, that its main
competitors are Danbury Mint, Amcor, National Media, the Vermont Teddy Bear
Company, and JMAM, Inc. The Company also competes with a variety of wholesalers,
retailers and other direct marketers. In addition, obtaining product acceptance
by QVC, HSN and others is very competitive because of the increased exposure,
recent success of the home shopping industry, and increase in the number of
companies vying for spots on the home shopping channels.


EMPLOYEES

The Company employs 520 total employees in the Company's locations as follows:

Employed at the Company's main office in Rancho Santa Margarita, California as
of March 15, 1997, the Company has 45 full time and 4 part time employees. The
45 full time employees are comprised of 4 executives, 12 product development, 4
sales, 10 administrative, 7 customer service and 8 warehouse employees. The 4
part time employees are comprised of 2 warehouse and 2 general office employees.

Employed at the Company's Krasner Group office in New York, New York as of March
15, 1997, the Company has 7 full time employees. The 7 full time employees are
comprised of 2 executives and 5 general sales and office administrative
employees.

Employed at the Company's Charisma factory in Central Falls, Rhode Island as of
March 15, 1997, the Company has 83 full time employees. The 83 full time
employees are comprised of 2 executives, 16 general sales and office
administrative employees, and 65 factory employees.
<PAGE>
 
Employed at the Company's Georgetown Collection, Inc. offices in Portland, Maine
as of March 15, 1997, the Company has 103 full time employees. The 103 full time
employees are comprised of 2 executives, 68 general sales and office
administrative employees and 33 warehouse employees.

Employed at the Company's L.L. Knickerbocker Company, Thailand offices in
Bangkok Thailand as of March 15, 1997, the Company has 278 full time employees,
comprised of 7 executives, 47 general sales and office administrative employees,
and 224 factory employees.


ITEM 2.  PROPERTY
-------  --------

As of Mach 27, 1997, the Company had 11 principal facilities where it leased or
owned an aggregate of 219,400 square feet of space. The location, function and
general description of the principal properties owned or leased by the Company
are set forth in the table below:
<TABLE>
<CAPTION>
                                                                       SQUARE
LOCATION                            PRINCIPAL FUNCTION                 FOOTAGE          OWNERSHIP
<S>                                 <C>                                <C>              <C>
     CORPORATE
     ---------

Rancho Santa Margarita, CA          Corporate headquarters, finance,
                                    purchasing, service division
                                    headquarters                       10,000           Leased
     COLLECTIBLE DOLLS AND BEARS
     ---------------------------

Rancho Santa Margarita, CA          Product development, marketing,
                                    warehouse                          10,000           Leased

Portland, ME                        Administration, product
                                    development, marketing and
                                    warehousing                        45,000           Leased

Portland, ME                        Administration, product
                                    development, marketing and
                                    warehousing                        40,000           Leased
</TABLE>
<PAGE>
 
<TABLE>
<CAPTION>
<S>                                 <C>                                <C>              <C>
Exton, PA                           Product development                 2,900           Leased

     COSTUME JEWELRY
     ---------------

New York, NY                        Administration, product
                                    development and marketing           5,000           Leased

Central Falls, RI                   Manufacturing                      26,000           Leased

Pawtucket, RI                       Fulfillment and warehousing        12,000           Leased

Pawtucket, RI                       Fulfillment and warehousing        30,000           Leased

     FINE JEWELRY
     ------------

Bangkok, Thailand                   Administration, product
                                    development, marketing and
                                    showroom                            3,500          Owned

Bangkok, Thailand                   Manufacturing and administration   35,000          Owned
</TABLE>
----------
The Company believes that the properties are in good condition, suitable for its
operations and adequately insured.


ITEM 3.  LITIGATION
-------  ----------

On February 27, 1996 a lawsuit was filed in Orange County Superior Court, Case
No. 759883, naming Louis L. Knickerbocker, Tamara Knickerbocker and the Company
as defendants. The plaintiff, Michael Elam, is a minority stockholder in MLF, a
company in which Mr. Louis Knickerbocker, Chairman, President and Chief
Executive Officer of the Company, and Ms. Farrah Fawcett, a director of the
Company, own an interest. Mr. Elam's lawsuit seeks damages for sums allegedly
owed to him by Mr. Knickerbocker and the Company from the operations of that
company. Counsel for the Company believes that the demand is 
<PAGE>
 
unfounded and that the lawsuit is without merit. The Company has been vigorously
defending the lawsuit, which is currently in the discovery phase. The Company
has tendered a claim for costs of the defense to its Directors' and Officers'
Insurance carrier.


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 
------------------------------------------------------------ 
No matters were submitted to a vote of security holders during the fourth 
quarter of the fiscal year ended December 31, 1996.


                                     PART II


ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
-------  -------------------------------------------------
         STOCKHOLDER MATTERS
         -------------------


STOCK MARKET AND OTHER INFORMATION

The Company's common stock is listed on the NASDAQ National Market System under
the symbol "KNIC" and has been so listed since January 25, 1995. Previous to
such date, there was no public trading market for the Company's equity
securities. In addition, warrants to purchase up to 2,357,500 shares of the
Company's Common Stock were listed on the NASDAQ National Market System under
the symbol "KNICW." On January 25, 1997, the warrants expired. The registration
of the warrants under Section 12(g) of the Securities Exchange Act of 1934, as
amended, was terminated on January 25, 1997 and the listing of such warrants on
NASDAQ National Market System was terminated on January 25, 1997. The terms of
the warrants provide that one warrant plus $1.30 was required to purchase one
additional share of the Company's common stock. The warrants were redeemable at
the Company's option commencing March 15, 1995 upon 30 days notice to the
warrant holders at $0.01 per share if the closing bid price of the Common Stock
averaged in excess of 110% of the then current exercise price of the warrants
for a period of 20 consecutive trading days ending within 15 days of the notice
of redemption.

On March 31, 1997, the Common Stock bid price closed at $6.125 per share. The
closing bid price of the Company's stock on December 31, 1996 was $6.125 per
share. The total volume of shares traded during the 
<PAGE>
 
year ended December 31, 1996 was 23,564,400 shares. As of March 31, 1997, there
were 123 holders of record of the Company's Common Stock.

The following table presents information on the high and low prices per share
for the Company's Common Stock for each fiscal quarter in 1995 and 1996 as
reported by the NASDAQ National Market System. The following quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission, and may
not represent actual transactions.

<TABLE>
<CAPTION>
                           1995                1996
                      High $   Low $      High $    Low $
                      -----------------------------------
    <S>               <C>      <C>        <C>       <C>   
    First Quarter       1.18   0.75        9.44     6.38
    Second Quarter      1.10   0.73       16.25     7.75
    Third Quarter      10.40   1.05       16.25     8.00
    Fourth Quarter      9.50   4.50       11.50     5.75
</TABLE>
                                         
                                        
DIVIDENDS

The Company has never paid any dividends on the Common Stock. The Company
intends to retain earnings and capital for use in its business and does not
expect to pay any dividends within the foreseeable future. Any payment of cash
dividends in the future on the Common Stock will be dependent on the Company's
financial condition, results of operations, current and anticipated cash
requirements, plans for expansion, restrictions, if any, under debt obligations,
as well as other factors that the Board of Directors deems relevant.

TRANSFER AGENT AND REGISTRAR

American Securities Transfer, Inc. of Colorado has been appointed and serves as
transfer agent and registrar of the Company's Common Stock and Warrants.


<PAGE>
 
ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------  -------------------------------------------------
         CONDITION AND RESULTS OF OPERATIONS
         -----------------------------------

The following discussion should be read in conjunction with the financial
statements and the notes thereto appearing elsewhere in this Form 10-KSB.

GENERAL

The Company markets a wide variety of branded consumer products, including
collectibles, costume and fine jewelry, fashion accessories, patented products
and consumables. The Company markets these brands through a variety of channels,
including television shopping channels, infomercials, print media, direct mail,
retail stores and internet marketing campaigns. The Company's core collectible
business is to develop a diverse line of consumer products, contract for the
manufacture of those products to the Company's specifications, and market those
products to customers. The Company's strength and history has been its strategy
in marketing to the home shopping industry by identifying the industry's key
product segments (i.e. collectibles, environmental systems, jewelry, health and
beauty) and building Brand recognition within those product segments. The
Company brings a celebrity or spokesperson to enhance the appeal of the product.
Using this strategy, the Company was the first to bring celebrities to the home
shopping industry. The Company's celebrity programs include products endorsed by
Marie Osmond, Annette Funicello, Bob Mackie, Nolan Miller, Kenneth Jay Lane, and
Barbara Mandrell. The Company plans to expand celebrity programs introducing new
key product segments.

The Company has expanded from marketing its products through television shopping
channels to include direct response marketing channels such as print media
advertising, infomercials, direct mail campaigns, and the internet. The Company
has also developed product distribution through retail stores and retail catalog
accounts.

During 1996, the Company expanded its stable of brand names and increased its
distribution of products by making several strategic acquisitions, as follows:
Effective June 18, 1996, the Company acquired all of the outstanding capital
stock of Krasner Group, Inc., a marketer and manufacturer of celebrity-driven
costume jewelry located in New York; effective July 1, 1996, the Company
acquired certain assets and assumed certain liabilities of S.L.S Trading Co.,
Ltd, a jewelry stone sourcing and cutting operation that holds proprietary stone
cutting techniques, located in Bangkok, Thailand; effective, July 1, 1996, the
Company acquired the remaining 51% interest in Grant King International Co.,
<PAGE>
 
Ltd, that the Company did not previously own. Grant King International Co., Ltd.
is a jewelry design operation, located in Bangkok, Thailand; effective July 1,
1996, the Company acquired all of the common stock of Harlyn International,
Ltd., a fine jewelry manufacturing operation, located in Bangkok, Thailand; and,
effective October 18, 1996, the Company acquired approximately 82% of the
capital stock of Georgetown Collection, Inc., a marketer of collectible dolls,
located in Portland, Maine.

As a result of the acquisitions, the Company has substantially changed the size,
scope, and nature of its business. Prior to the acquisitions, the Company
marketed primarily collectible dolls and bears over television shopping
channels. At that time, the Company was characterized by a relatively small
revenue base, one major customer, and one primary means of distribution. As a
result of the acquisitions, the Company now has a wide distribution base,
diverse product lines, and has increased its revenue base five-fold. Management
believes that the Company's significantly more diversified product and revenue
base increases the overall health of the Company and has reduced its exposure to
demand fluctuations in any one product area or distribution channel.

The Company also has a strategy that includes searching for investment
opportunities that appear to offer attractive returns on invested capital. The
Company made two such investments in 1996. The Company owns a 38.3% ownership 
interest in the Pure Energy Corporation. Pure Energy Corporation is in the
process of developing a proprietary alternative fuel that would produce the
lowest possible emissions at the lowest cost to the public. The Company, on
September 18, 1996, acquired 25%, on a fully diluted basis, of the common stock
of both Ontro, Inc. (formerly Self-Heating Container Corporation ) and Insta-
Heat, Inc. a related corporation. In connection with the Ontro, Inc. and Insta-
Heat, Inc. investments, the Company will receive distribution rights for a
product that self-heats canned liquids and meals on demand by pressing a button.

The Company also has a joint venture with Paxson Communications Corporation and
is currently developing infomercials for several new products and services. The
Company believes that the joint venture will provide synergistic opportunities
for strategic growth. To date, the joint venture has generated only minimal
sales and profit.

The Company canceled plans to market a patented, painless hair removal system,
called "Classy Lady". The Company canceled marketing the painless hair removal
system due to long delays in obtaining FDA approval.
<PAGE>
 
As a result of the Company's growth in its television shopping business, and the
acquisitions, the Company has scaled back its marketing consulting services to
outside companies.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, the percentage of
revenues represented by items included in the Company's Statements of
Operations.

<TABLE>
<CAPTION>
                                                Year Ended December 31,
                                                1995               1996
                                                ----               ----
    <S>                                        <C>                <C> 
    Revenue                                    100.0%             100.0%
    Cost of Revenue                             48.2%              50.6%
    Gross Profit                                51.8%              49.4%
    Operating Expenses                          36.3%              40.3%
    Operating Income                            15.5%               9.1%
    Other Income (Expense)                       0.8%              -4.5%
    Net Income                                   9.7%               3.3%
</TABLE>

Revenues

Revenues increased 220% from $13,140,000 in 1995 to $42,095,000 in 1996. The
increase in revenues is primarily a result of the acquisitions completed during
the year which expanded the consumer product lines the Company offers. In the
Company's core business, decreases in revenues from sales of ionizers and
marketing services were more than offset by the growth in the Company's doll and
bear business. On a pre-acquisition basis, revenues from the Company's Marie
Osmond Collectible Doll program increased 91.5% from $5,368,000 in 1995 to
$10,280,000 in 1996. Revenues

<PAGE>
 
from the Company's Annette Funicello Collectible Bear program increased 455%
from $535,000 in 1995 to $2,969,000 in 1996. As a result of the Company's focus
on collectibles and jewelry programs, revenues from the Company's Ionizer
program decreased from $1,972,000 in 1995 to $143,000 in 1996. The Company
scaled back its performance of marketing services with revenues decreasing from
$3,631,000 in 1995 to $460,000 in 1996.

Gross profit

Gross profit increased 205% from $6,813,000 in 1995 to $20,803,000 in 1996 due
primarily to the acquisitions completed during the year and the increase in
volume of the Company's core business. Gross profit, as a percentage of net
revenues, decreased from 51.8% in 1995 to 49.4% in 1996 due primarily to the
range of distribution and the diverse product mix which the Company now
encompasses. The relative high gross profit associated with the Company's retail
and catalog collectibles business combined with the lower gross profit
percentage associated with the Company's jewelry programs brought down the
overall percentage by 2.4%. Gross profit was also impacted in 1996 by the
Company's discontinuance of its marketing services division which generated
relatively high gross profit margins.

Selling, general and administrative expenses

Total selling, general and administrative expenses increased from $4,767,000 in
1995 to $16,953,000 in 1996. The percentage of revenues represented by these
expenses increased from 36.3% in 1995 to 40.3% in 1996. The primary reason for
the increase as a percentage of revenues is due to Company's acquisitions
completed during 1996. The Company's catalog and direct response business, which
increased in 1996 by both acquisitions and internal growth, typically has higher
gross profit margins than the Company's core business but incurs higher selling
costs, primarily advertising costs to print and mail catalogs, mail inserts
and magazine advertisements. The direct response advertising costs are reflected
in selling, general and administrative expenses. Additionally, the Company's
overall selling, general, and administrative expenses have increased due to the
Company's focus on expanding its infrastructure to accommodate anticipated
future growth by adding employees, office space, and equipment. Also included in
selling, general, and administrative expenses is $310,000 of goodwill
amortization associated with the Company's acquisitions completed during 1996.
Remaining expenses in this category were in proportion to the corresponding
revenues between 1995 and 1996.
<PAGE>
 
Other income (expense)

Other income (expense) decreased from $106,000 of income in 1995 to an expense
of $1,896,000 in 1996 due primarily to interest and amortization charges
associated with the Company's convertible debenture offering completed on
September 24, 1996. Additionally, the Company reflected a noncash loss of
$629,000 from its equity investments in two start-up companies.

Income Taxes

The Company's income tax expense decreased to $450,000 in 1996 from $883,000 in 
1995. The Company's effective tax rate decreased to 24.7% in 1996 form 41.0% in 
1995. This decrease stems from foreign sourced income in 1996 which is taxed a 
rate lower than income sourced in the U.S. (See Note 13 to Consolidated 
Financial Statements).

Net Income

As a result of the foregoing factors, net income increased 8.12% to $1,372,000
in 1996 from $1,269,000 in 1995.


LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 1996, the Company had working capital of $15,702,000.
Working capital increased substantially by the acquisitions completed in 1996.
The Company's liquidity increased due to the influx of capital from the exercise
of stock options and warrants and due to the increase in profits experienced
during the first nine months of 1996. The combination of the above factors
resulted in an overall increase in working capital from $7,847,000 at December
31, 1995 to $16,068,000 at December 31, 1996. The current ratio for the Company
decreased from 4.09 at December 31, 1995 to 1.76 at December 31, 1996. The
decrease in the Company's current ratio is primarily attributed to the
assumption of lines of credit of newly acquired subsidiaries Krasner Group,
Inc., Harlyn International, Ltd., and Georgetown Collection, Inc.

In September, 1996 the Company issued Convertible Debentures (the Debentures) 
with a face value of $15,500,000 in a private placement to institutional 
investors. This private placement yielded net proceeds to the Company totaling 
$14,730,000 after deducting costs associated with issuing the Debentures. The 
Debentures accrued interest of the rate of 7% per year, payable quarterly. The 
Debentures were convertible at the option of the holder into shares of the 
Company's common stock at a price equal to 85% of the closing price of the 
Company's common stock at the date of conversion, subject to a minimum and 
maximum conversion price of $5.25 and $12.00 per share, at any time through the 
second anniversary of the original date of issuance. Through December 31, 1996, 
the Company issued a total of 282,824 shares of its common stock in connection 
with the conversion of $1,330,000 of the original principal amount of the 
Debentures, plus interest accrued through the conversion date of $175,000.

The conversion of the notes at 85% of the closing price of the Company's common 
stock resulted in the Debentures being issued at a discount (the conversion 
discount). The conversion discount is being recognized by the Company as 
non-cash interest expense over the term of the Debentures with a corresponding 
increase to the original principal amount of the Debentures. Upon conversion of 
the debentures any portion of the conversion discount not previously recognized 
is recorded as interest expense on the conversion date. During the year ended 
December 31, 1996, a total of $391,000 of non-cash interest expense was recorded
relating to the debentures, including $220,000 relating to the additional 
conversion discount recorded upon conversion.

In January 1997, the Company reached agreement with the debenture holders to
tender all outstanding Debentures to the Company in exchange for new convertible
Debentures (the New Debentures). Under the terms of the agreement, New
Debentures were issued with a face value of 117.5% of the face value of the
tendered debentures. The New Debentures bear interest at 7% per year, payable
quarterly. The New Debentures are convertible at the option of the holder into
shares of the Company's common stock at $8.00 per share. The New Debentures must
be converted by January 1999. As a result of the 17.5% premium given as in
inducement to the Debenture holders to tender the original debentures into New
Debentures, the Company will record a non-cash charge of $1,841,000 in the first
quarter of the Company's fiscal year ending December 31, 1997.

As of March 31, 1997, the Company invested most of the funds raised in the 
debentures offering by capitalizing subsidiaries, paying down high interest 
debt, investing $2,650,000 in outside companies, and establishing operations in 
Thailand.

Cash flow provided by operations was $579,000 due primarily to net income, 
depreciation and amortization and a decrease in prepaid expenses, offset by an 
increase in accounts receivable.



<PAGE>
 
On April 15, 1997, unless an extension of time can be negotiated, the Company's
subsidiary, Georgetown Collection, Inc., will be in default under the terms of a
line of credit with an outstanding balance of approximately $4.9 million line of
credit with a financial institution. An extension of time is currently being
negotiated with the financial institution. The Company is currently negotiating
with another financial institution to obtain a replacement line of credit and
believes that it will be successful in its negotiations. In the event a new
credit facility is not obtained, management believes the Company has adequate
assets available which could be utilized to raise sufficient cash to repay the
bank loan.

NEW ACCOUNTING PRONOUNCEMENTS

In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" which requires adoption of the disclosure provisions no later than
years beginning after December 15, 1995 and the adoption of the recognition and
measurement provisions for nonemployee transactions no later than after December
15, 1995. The new standard defines a fair value method of accounting for stock
options and other equity instruments. Under the fair value method, compensation
cost is measured at the grant date based on the fair value of the award and is
recognized over the service period which is usually the vesting period. The
Company will continue to apply APB Opinion No. 25 to its stock-based
compensation awards to employees and will disclose the required pro forma effect
on net income and earnings per share in its financial statements.

In March 1995, the Financial Accounting Standards Board issued Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to Be Disposed Of". SFAS No. 121 establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles and goodwill
related to those assets to be held and used and long-lived assets and certain
identifiable intangibles to be disposed of. 
<PAGE>
 
The Company adopted SFAS No. 121 in the first interim period of 1996 and such
adoption did not impact its financial position or results of operations.

STATEMENT REGARDING FORWARD LOOKING DISCLOSURE

Certain sections of this report, including "Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contain various forward looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, which represent the Company's expectations or
beliefs concerning future events. The Company cautions that these statements are
further qualified by important factors that could cause actual results to differ
materially from those in the forward looking statements, including without
limitation, those associated with the ability of the Company to continue to
develop and market existing products and products under development, retain
suppliers and accomplish its expansion strategies. In addition, these statements
are further qualified by important factors that could cause actual results to
differ materially from those in the forward looking statements, including
without limitation, decline in demand for the merchandise offered by the
Company, the ability of the Company to obtain adequate merchandise supply and
hire and train employees, the impact of competitive products and pricing,
management's ability to manage the Company's planned expansion, and the effect
of economic conditions.


ITEM 7.  FINANCIAL STATEMENTS
-------  --------------------

The Financial Statements of the Company identified in the Index to Financial
Statements appearing under ITEM 13, EXHIBITS AND REPORTS ON FORM 8-K of this
report are incorporated herein by this reference.


<PAGE>
 
To the Shareholders and Board of Directors of
  The L.L. Knickerbocker Co., Inc.:


We have audited the accompanying consolidated balance sheet of The L.L.
Knickerbocker Co., Inc. and subsidiaries (the Company) as of December 31, 1996,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the two years in the period ended December 31, 1996. 
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 audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of The L.L. Knickerbocker Co., Inc.
and subsidiaries as of December 31, 1996, and the results of their operations
and their cash flows for each of the two years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.



/s/ DELOITTE & TOUCHE LLP

Costa Mesa, California
April 14, 1997
<PAGE> 

CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1996
 
ASSETS

CURRENT ASSETS:
<TABLE> 
<CAPTION> 
<S>                                                                                               <C> 
Cash and cash equivalents                                                                          $ 6,247,000
Restricted cash (Note 1)                                                                               500,000 
Accounts receivable, less allowance for doubtful accounts of $1,092,000                             13,730,000
Receivable from stockholder (Note 5)                                                                   596,000
Inventories (Note 3)                                                                                 8,474,000
Prepaid expenses and other current assets, including $2,402,000 of prepaid advertising               4,983,000
Deferred income taxes (Note 13)                                                                      1,236,000
Income tax receivable (Note 13)                                                                        733,000
                                                                                                   -----------
    Total current assets                                                                            36,499,000
PROPERTY AND EQUIPMENT, net (Note 4)                                                                 6,791,000
INVESTMENTS (Note 6)                                                                                 4,677,000
GOODWILL, net of accumulated amortization of $310,000                                                6,290,000
DEFERRED INCOME TAXES (Note 13)                                                                      1,835,000 
OTHER ASSETS                                                                                         1,480,000
                                                                                                   -----------
                                                                                                   $57,572,000
                                                                                                   =========== 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
CURRENT LIABILITIES:           
Accounts payable                                                                                     9,692,000
Accrued Expenses                                                                                     1,619,000
Notes payable (Note 7)                                                                               7,008,000
Acquisition payable                                                                                  1,253,000
Commissions and royalties payable                                                                      828,000
Interest payable                                                                                       131,000
Current portion of long-term debt                                                                      266,000
                                                                                                   -----------
    Total current liabilities                                                                       20,797,000

LONG-TERM LIABILITIES:
Long-term debt, less current portion (Note 11)                                                         371,000
Convertible debentures, net of discount of $2,344,000 (Note 8)                                      11,826,000
Other long-term liabilities                                                                             51,000
                                                                                                   -----------
    Total long-term liabilities                                                                     12,248,000

COMMITMENTS AND CONTINGENCIES (Note 10)                                                                       
MINORITY INTEREST (Note 1)                                                                             264,000
STOCKHOLDERS' EQUITY (Note 9):
Common stock, no par value-authorized 100,000,000 shares,
 issued and outstanding, 15,951,724 shares                                                          13,082,000
Additional paid-in capital                                                                           8,018,000
Foreign currency translation adjustment                                                                 16,000
Retained earnings                                                                                    3,147,000
                                                                                                   -----------
   Total stockholder's equity                                                                       24,263,000
                                                                                                   -----------
                                                                                                   $57,572,000
                                                                                                   ===========
See Notes to Consolidated Financial Statements
</TABLE> 
<PAGE>
 
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
--------------------------------------------------------------------------------

<TABLE> 
<CAPTION> 

                                                                                1996           1995
                                                                            -----------     -----------
<S>                                                                         <C>             <C> 
Net sales                                                                   $42,095,000     $13,140,000
Cost of sales                                                                21,292,000       6,327,000
                                                                            -----------     -----------
Gross profit                                                                 20,803,000       6,813,000
Selling, general and administrative expenses                                 16,953,000       4,767,000
                                                                            -----------     -----------
Operating income                                                              3,850,000       2,046,000
Equity in loss of investee companies                                           (629,000)         
Other income (expense), net                                                     (62,000)        133,000
Interest expense                                                             (1,205,000)        (27,000)
                                                                            -----------     -----------
Income before minority interest in income of subsidiary
  and income tax expense (Note 1)                                             1,954,000       2,152,000
Minority interest in income of subsidiary (Note 1)                             (132,000)              0
Income tax expense                                                             (450,000)       (883,000)
                                                                            -----------     -----------
Net income                                                                  $ 1,372,000     $ 1,269,000
                                                                            ===========     ===========
Primary net earnings per share                                              $      0.08     $      0.10
                                                                            ===========     ===========

Primary weighted average common and common equivalent shares
  outstanding (Note 1)                                                       16,223,841      13,280,199
                                                                            ===========     ===========

See notes to consolidated financial statements
</TABLE> 






<PAGE>
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                                            Foreign
                                                                             Additional    Retained         currency
                                                        Common Stock           paid-in                    translation
                                                   ----------------------
                                                    Shares        Amount       capital      earnings       adjustment     Total

<S>                                               <C>          <C>           <C>          <C>             <C>         <C>
BALANCE, January 1, 1995                           7,139,285   $  100,000    $        -   $  506,000      $        -  $   606,000

Net proceeds from issuance
 of common stock in initial
 public offering (Note 9)                          4,715,000    4,008,000                                               4,008,000

Issuance of stock warrants
 (Note 9)                                                                       250,000                                   250,000

Exercise of stock warrants                         1,898,000    2,467,000                                               2,467,000

Net Income                                                                                 1,269,000                    1,269,000
                                                  -----------------------  --------------  --------------------------------------

BALANCE, December 31, 1995                        13,752,285    6,575,000       250,000    1,775,000                    8,600,000

Exercise of stock warrants                           687,472    1,176,000                                               1,176,000

Exercise of stock options                            885,514      728,000                                                 728,000

Exercise of stock options in connection
 with Krasner Group, Inc. purchase                    62,090      903,000      (427,000)                                  476,000

Issuance of common stock pursuant to
 Krasner Group, Inc. acquisition (Note 2)             85,162      516,000                                                 516,000

Issuance of common stock in connection
 with convertible debentures (Note 8)                282,824    1,505,000       (81,000)                                1,424,000

Issuance of stock purchase warrants pursuant to
 investment in Pure Energy Corporation (Note 9)                               1,875,000                                 1,875,000

Issuance of stock purchase warrants pursuant to
 S.L.S. Trading Co., Ltd. acquisition (Note 2)                                  405,000                                   405,000

Issuance of stock purchase warrants pursuant to
 Krasner Group, Inc. acquisition (Note 2)                                     1,674,000                                 1,674,000

Issuance of common stock pursuant to
 Georgetown Collection, Inc. acquisition (Note 2)    196,377    1,679,000                                               1,679,000

Issuance of stock purchase warrants in connection
 with convertible debenture offering (Note 8)                                   233,000                                   233,000

Discount on convertible
 debenture offering                                                           2,735,000                                 2,735,000

Tax benefit related to exercise of
 stock options (Note 13)                                                      1,354,000                                 1,354,000

Foreign currency translation gain                                                                      16,000              16,000

Net income                                                                                 1,372,000                    1,372,000
                                                  -----------------------  --------------  --------------------------------------

BALANCE, December 31, 1996                        15,951,724  $13,082,000  $  8,018,000   $3,147,000  $16,000         $24,263,000
                                                  =======================  ==============  ======================================
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
 
                               [THIS PAGE BLANK]
<PAGE>
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 (Continued)
--------------------------------------------------------------------------------
<TABLE> 
<CAPTION> 

CASH FLOWS FROM OPERATING ACTIVITIES:                            1996          1995
                                                              ----------    ----------
<S>                                                           <C>           <C> 
Net income                                                    $1,372,000    $1,269,000
Adjustments to reconcile net income to net cash provided 
  by (used in) operating activities:
 Depreciation and amortization                                   833,000        41,000
 Deferred income taxes                                          (184,000)     (341,000)
 Amortization of deferred revenue                                (95,000)     (106,000)
 Common stock received in lieu of cash                                        (140,000)
 Loss on investment                                              238,000
 Equity in loss of investee companies                            629,000
 Minority interest                                               132,000
 Amortization of debt discount                                   391,000
 Changes in operating accounts, net of
   effect of acquisitions:
  Accounts receivable, net                                    (3,612,000)   (4,302,000)
  Receivable from stockholder                                   (335,000)     (261,000)
  Note receivable                                                150,000      (150,000)
  Income tax receivable                                          943,000
  Inventories                                                    495,000       130,000
  Prepaid expenses and other assets                            2,709,000    (1,222,000)
  Accounts payable and accrued expenses                       (1,889,000)      241,000
  Commissions and royalties payable                              121,000       193,000
  Income taxes payable                                        (1,330,000)      601,000
Other long term liabilities                                       11,000
                                                              ----------    ---------- 

  Net cash provided by (used in) operating activities            579,000    (4,047,000)

CASH FLOWS FROM INVESTING ACTIVITIES:
 Acquisitions of property, plant and equipment                (2,018,000)     (148,000)
 Cash paid for investments                                    (3,329,000)
 Cash paid for acquisitions, less cash acquired               (2,902,000)
                                                              ----------    ----------
   Net cash used in investing activities                      (8,249,000)     (148,000)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on line of credit                                (5,025,000)
Payments on long-term debt                                      (155,000)
Proceeds from exercise of stock options and warrants           2,380,000     2,467,000
Deferred debt issue costs                                       (149,000)
Proceeds from issuance of convertible debentures              14,880,000
Payments on note payable - stockholder                                         (94,000)
Payment of royalty commitment                                                  (30,000)
Net proceeds from issuance of stock                                          4,008,000
Deferred offering costs                                                        207,000
                                                              ----------    ---------- 

  Net cash provided by financing activities                   11,931,000     6,558,000
                                                              ----------    ---------- 
EFFECT OF FOREIGN CURRENCY TRANSLATION                            16,000
                                                              ----------    ---------- 
NET INCREASE IN CASH AND CASH EQUIVALENTS                      4,277,000     2,363,000

CASH AND CASH EQUIVALENTS, beginning of year                   2,470,000       107,000
                                                              ----------    ----------

CASH AND CASH EQUIVALENTS, end of year                        $6,747,000    $2,470,000
                                                              ==========    ========== 
</TABLE> 

See notes to consolidated financial statements.
<PAGE>
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 (Continued)
--------------------------------------------------------------------------------

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION-

<TABLE> 
<S>                                                  <C>       <C> 
Cash paid during the year for:
  Interest                                           $899,000  $ 27,000
                                                     ========  ========  
  Income taxes                                       $499,000  $648,000  
                                                     ========  ========  
</TABLE> 

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITY:
During the year ended December 31, 1996, the Company recorded an increase to 
 additional paid-in capital of $1,354,000 related to tax benefits associated
 with the exercise of non-qualified stock options.
During the year ended December 31, 1996, the Company issued 400,000 warrants in 
 conjunction with the acquisition of an interest on Pure Energy Corporation. The
 warrants have an ascribed value of $1,875,000(Note 6).
During the year ended December 31, 1996, the Company issued 46,971 warrants 
 with an ascribed value of $233,000 as commission in connection with the
 convertible debenture offering (Note 8).
During the year ended December 31, 1996, $1,330,000 of convertible debentures
 and $175,000 of accrued interest was converted to common stock (Note 8).
During the year ended December 31, 1996, the Company acquired interests in 
 certain entities as follows (Note 2):

<TABLE> 
<CAPTION> 
<S>                                              <C> 
Fair value of assets acquired                    $ 34,553,000
Cash paid to sellers, acquisition payables and
 transaction costs                                  4,239,000
Value of common stock and stock purchase
 warrants issued                                    4,274,000
                                                 ------------
Liabilities assumed                              $ 26,040,000    
</TABLE> 

During the year ended December 31, 1995, the Company received 400,000 shares of 
 common stock in an unrelated company in exchange for performing marketing 
 services (Note 6).
During the year ended December 31, 1995, the Company received 40,000 shares of 
 common stock in an unrelated company in exchange for performing production and 
 marketing services (Note 6).
During the year ended December 31, 1995, the Company issued 300,000 warrants in
 conjunction with the acquisition of 49% of Grant King International Co. Ltd.
 The warrants have been ascribed a value of $250,000 (Note 9).





See notes to consolidated financial statements

<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
--------------------------------------------------------------------------------

1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    Line of Business - The L.L. Knickerbocker Co., Inc. (the Company) is in the
    businesses 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, environmental products, 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 environmental products are manufactured by
    independent manufacturing facilities to the Company's specifications. The
    fine and costume jewelry is manufactured by The Company. The Company's
    distribution includes home shopping channels, catalog mailings, direct
    mailings from customer lists, retail stores, wholesale distributors, and the
    internet.

    Consolidation - The financial statements presented herein include the
    accounts of the Company's subsidiaries, as follows: Krasner Group, Inc.,
    Harlyn International, Ltd., S.L.S. Trading Co., Ltd., L.L. Knickerbocker
    (Thai) Company, Ltd., and Georgetown Collection, Inc. The financial
    statements reflect a minority interest associated with Georgetown
    Collection, Inc. Intercompany accounts and transactions have been eliminated
    in consolidation.

    Use of Estimates - The preparation of financial statements in conformity
    with generally accepted accounting principles necessarily 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 periods. Actual results could
    differ from these estimates.

    Cash and Cash Equivalents - For purposes of the statement of cash flows, the
    Company considers all highly liquid instruments with original maturities of
    three months or less and with an insignificant interest rate risk to be cash
    equivalents.

    Restricted Cash - At December 31, 1996 restricted cash represents funds
    deposited with a financial institution to serve as collateral for an
    outstanding loan balance (Note 7).

    Inventories - Inventories consist of finished products and related
    packaging, work in process, and raw materials, and are stated at the lower
    of cost (first-in, first-out basis) or market.

    Prepaid Advertising Costs - The Company capitalizes certain direct-response
    advertising costs and amortizes such costs over the period during which
    future period revenues are expected to be received from each direct-response
    advertising campaign, generally 3 to 12 months. The nature of the direct-
    response advertising costs are primarily production costs associated with
    infomercials, media costs for print advertising, and catalog printing costs.
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 (Continued)
--------------------------------------------------------------------------------

    Property and Equipment - Property and equipment are stated at cost.
    Depreciation is being provided on the straight-line method over estimated
    useful lives of five to seven years. Depreciation on buildings is being
    provided on the straight-line method over an estimated useful life of twenty
    years.

    Intangible Asset - Excess of cost over net assets acquired (goodwill), which
    arose from the acquisition of certain entities (Note 2) is being amortized
    on a straight-line method over 10 years. The Company evaluates the
    recoverability of its goodwill at each balance sheet date. The
    recoverability of goodwill is determined by comparing the carrying value of
    the goodwill to the estimated operating income of the related entity on an
    undiscounted cash flow basis. Any impairment is recorded at the date of
    determination.

    In March 1995, the Financial Accounting Standards Board issued Statement No.
    121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
    Assets to be Disposed Of (SFAS No. 121). SFAS No. 121 establishes accounting
    standards for the impairment of long-lived assets, certain identifiable
    intangibles and goodwill related to those assets to be held and used and
    long-lived assets and certain identifiable intangibles to be disposed of.
    The Company adopted SFAS No. 121 in the first interim period of Fiscal 1996,
    and such adoption did not impact its financial position or results of
    operations.

    Deferred Debt Issuance Costs - Deferred debt issuance costs relate to the
    issuance of Convertible Debentures (Note 8). These costs totaled $1,002,000
    at December 31, 1996, and are being amortized over the life of the
    debentures. The accumulated amortization at December 31, 1996 is $143,000.

    Investments in Investees - Investments in the common stock of unconsolidated
    entities (Note 6) in which the Company's interest is in excess of 20% are
    accounted for using the equity method of accounting.

    Fair Value of Financial Instruments - Statement of Financial Accounting
    Standards No. 107 (SFAS No. 107), Disclosures About Fair Value of Financial
    Instruments, requires management to disclose the estimated fair value of
    certain assets and liabilities defined by SFAS No. 107 as financial
    instruments. Financial instruments are generally defined by SFAS No. 107 as
    cash, evidence of ownership interest in equity, or a contractual obligation
    that both conveys to one entity a right to receive cash or other financial
    instruments from another entity and imposes on the other entity the
    obligation to deliver cash or other financial instruments to the first
    entity. At December 31, 1996, management believes that the carrying amount
    of cash and cash equivalents, accounts receivable, accounts payable, accrued
    expenses and short-term debt approximates fair value because of the short
    maturity of these financial instruments.

    Revenue Recognition - Revenues from sales of products are recognized when
    products are shipped to customers. The Company offers credit to its
    customers and performs ongoing credit evaluations of its customers.
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 (Continued)
--------------------------------------------------------------------------------


    Income Taxes - The Company accounts for income taxes using Statement of
    Financial Accounting Standards No. 109, Accounting for Income Taxes, which
    requires that the Company recognize deferred tax assets and liabilities
    based on the differences between the financial statement carrying amounts
    and the tax bases of assets and liabilities, using enacted tax rates in
    effect in the years in which the differences are expected to reverse. A
    valuation allowance related to deferred tax assets is recorded when it is
    more likely than not that some portion or all of the deferred tax asset will
    not be realized.

    Stock Split - In August 1995, the Company effected a five-for-one split of
    its common stock and increased the number of shares authorized to
    100,000,000. All share and per share amounts included in the accompanying
    financial statements and footnotes have been restated to reflect the stock
    split.

    Net Income Per Share - Net income per share is computed using the weighted-
    average number of shares of common stock and common equivalent shares
    outstanding, when dilutive, from stock options and warrants (using the
    treasury stock method). Primary and fully diluted earnings per share are
    approximately the same.

    In February 1997, the Financial Accounting Standards Board issued Statement
    of Financial Accounting Standards No. 128, Earnings Per Share, (SFAS No.
    128) which is effective for financial statements issued for periods ending
    after December 15, 1997. SFAS No. 128 requires the disclosure of basic and
    diluted earnings per share. The Company has not assessed what impact SFAS
    No. 128 will have on the Company's computation of net income per share.

    Stock-Based Compensation - In October 1995, the Financial Accounting
    Standards Board issued Statement of Financial Accounting Standards No. 123,
    Accounting for Stock Based Compensation. The Company has determined that it
    will not change to the fair value method and will continue to use Accounting
    Principles Board Opinion No. 25 for measurement and recognition of employee
    stock-based transactions. See Note 9 for disclosure of the pro forma effect
    on net income and net income per share.

    Foreign Currency - The Company's primary functional currency is the U.S.
    dollar. Assets and liabilities of the Company denominated in foreign
    currencies are translated at the rate of exchange on the balance sheet date.
    Revenues and expenses are translated using the average exchange rate for the
    periods. Gains and losses on foreign currency transactions are recognized as
    incurred.

    Reclassifications - Certain amounts previously reported for 1995 have been
    reclassified to conform to the 1996 financial statement presentation.

2.  ACQUISITIONS

    The Company completed a number of acquisitions during 1996. The following
    describes the transactions completed during the year ended December 31,
    1996. The funds for the acquisitions were obtained primarily from the
    proceeds of the convertible debenture offering described in Note 8, and
    through the issuance of the Company's common stock and common stock purchase
    warrants (Note 9).
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 (Continued)
--------------------------------------------------------------------------------


        Krasner Group, Inc.
        -------------------

        Effective June 18, 1996, the Company acquired all of the outstanding
        capital stock of Krasner Group, Inc. (TKG) which designs, manufactures,
        and markets costume jewelry. The aggregate acquisition cost of
        $3,205,000 includes the issuance of the Company's common stock valued at
        $1,440,000, the issuance of 250,628 stock purchase warrants with an
        ascribed value of $1,674,000 and related acquisition costs. As of
        December 31, 1996, 85,162 shares of common stock with an intrinsic value
        of $516,000 had been issued. The remaining $923,000 in intrinsic value
        of common stock is issuable at various dates in 1997 and is included in
        the accompanying balance sheet as Acquisition Payable. The purchase
        agreement also provides for the issuance of additional shares
        (Additional Shares) of common stock or stock purchase warrants with an
        intrinsic value equal to 110% of the proceeds from the liquidation of
        TKG inventory on hand at the date of acquisition. As of December 31,
        1996, $330,000 of intrinsic value of Additional Shares was payable, and
        is included in Acquisition Payable. The Company has guaranteed the
        intrinsic value of all stock purchase warrants, as defined, for a period
        of four successive trading days subsequent to the stock purchase warrant
        issuance date.

        Grant King International, Ltd.
        ------------------------------

        Effective July 1, 1996, the Company acquired the remaining 51% interest
        in Grant King International Co., Ltd. (GKI) that the Company did not
        previously own (Note 9), in exchange for the forgiveness of $414,000
        owed by GKI to the Company. This transaction increased the Company's
        investment to $664,000. The operations and assets of GKI have been
        merged with S.L.S Trading Co., Ltd., a subsidiary of the Company.

        S.L.S. Trading Co., Ltd.
        ------------------------

        Effective July 1, 1996, the Company acquired certain assets and assumed
        certain liabilities of S.L.S. Trading Co., Ltd., which sources gemstones
        and develops certain proprietary stone cutting technologies. The
        aggregate acquisition cost of $555,000 includes $150,000 cash, the
        issuance of 108,000 warrants to purchase common stock of the Company
        with an ascribed value of approximately $405,000 and related acquisition
        costs.

        Harlyn International, Ltd.
        --------------------------

        Effective July 1, 1996, the Company acquired all of the outstanding
        capital stock of Harlyn International, Ltd. (HI) which manufactures and
        markets fine jewelry. The aggregate acquisition cost of $2,711,000
        includes cash payments to the former shareholder of $2,358,000 and
        related acquisition costs. In addition, the Company repaid $234,000 of
        HI's bank debt concurrent with consummation of the purchase transaction.
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 (Continued)
--------------------------------------------------------------------------------


        Georgetown Collection, Inc.
        ---------------------------

        Effective October 18, 1996, the Company acquired approximately 82% of
        the outstanding capital stock of Georgetown Collection, Inc. (GCI) which
        markets collectible dolls through direct response mediums. The aggregate
        acquisition cost of $3,199,000 includes issuance of 196,377 restricted
        shares of the Company's common stock with an intrinsic value of
        $1,679,000 at the acquisition date plus related acquisition costs. In
        addition, the Company repaid $1,500,000 of GCI's bank debt concurrent
        with consummation of the purchase transaction. The purchase agreement
        also provides for future consideration in an amount equal to 15% of
        GCI's pretax earnings during calendar year 1997 and 4.5% of pretax
        earnings in each of calendar years 1998 through 2001. Future contingent
        payments, if payable, will be recorded as additional purchase price
        consideration and will increase goodwill recorded in conjunction with
        this acquisition. The Company has guaranteed the value of the 196,377
        restricted shares of the Company's common stock issued in conjunction
        with this acquisition to be $1,679,000 at the first anniversary of the
        acquisition.

        The aggregate purchase price for all the acquisitions has been allocated
        to the net assets acquired based on estimated fair market values as
        follows:
        
<TABLE>
        <S>                                       <C>
        Cash and cash equivalents                 $    71,000
        Accounts receivable                         5,075,000
        Inventories                                 8,556,000
        Other current assets                        7,123,000
        Property and equipment                      5,000,000
        Intangible and other assets                 6,538,000
        Deferred income taxes                       2,511,000
        Liabilities assumed                       $26,040,000
</TABLE>

        Each of the acquisitions was accounted for under the purchase method of
        accounting and, accordingly the operating results of each of the
        subsidiaries are included in the Company's consolidated financial
        statements since the respective acquisition dates. Pro forma unaudited
        consolidated operating results for the years ended December 31, 1996 and
        1995, assuming all of the above-mentioned acquisitions had occurred at
        the beginning of 1996 and 1995, respectively, are summarized below:
        
<TABLE>
                                               1996              1995
        <S>                              <C>               <C>
        Pro forma net sales                 $71,909,000       $63,760,000
        Pro forma net loss                   (3,918,000)          (96,000)
        Pro forma net loss per share              (0.26)            (0.01)
</TABLE>

        This pro forma financial information is not necessarily indicative of
        either the results of operations that would have occurred had the
        acquisition been at the beginning of the year presented or future
        results of operations of the consolidated companies.
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 (Continued)
--------------------------------------------------------------------------------


3.   INVENTORIES
--   -----------

     As of December 31, 1996 inventories consist of the following:
<TABLE> 
<CAPTION> 
     <S>                           <C>  
     Finished Goods                $7,265,000
     Work-in-process                  158,000
     Raw materials                  1,051,000
                                   ----------
                                   $8,474,000
                                   ==========
</TABLE> 

4.   PROPERTY AND EQUIPMENT
--   ----------------------

<TABLE>
     <S>                                                  <C>
     As of December 31, 1996, property 
       and equipment consist of the following:
     Land, buildings and improvements                     $3,653,000
     Computer equipment and software                         576,000
     Production models, molds, and tools                     531,000
     Autos                                                   262,000
     Office furniture and equipment                        1,416,000
     Machinery and equipment                               1,005,000
                                                          ----------
     Accumulated depreciation                              7,443,000
                                                            (652,000)
                                                          ----------
                                                          $6,791,000
                                                          ==========
</TABLE>
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 (Continued)
--------------------------------------------------------------------------------


5.      RECEIVABLES FROM OFFICERS/STOCKHOLDERS

        Receivables from officers/stockholders bear interest at the prime rate
        plus 2.5% and are repayable to the Company upon demand.

6.      INVESTMENTS

        At December 31, 1996, the Company had the following equity investments:

        The Company owns 400,000 and 40,000 shares of Tracker Corporation and
        Camelot Corporation, respectively, which were received in exchange for
        marketing services provided to these companies. The shares represent an
        ownership interest of less than 10% in each of these companies and are
        restricted as to the Company's ability to sell them. The aggregate
        estimated carrying value of these shares at December 31, 1996 is
        $102,000 which approximates fair value.

        During 1996 the Company acquired a 38.3% interest in Pure Energy
        Corporation (PEC) in exchange for $2 million in cash and the issuance of
        stock purchase warrants with an ascribed value of $1,875,000.
        Additionally, the Company has agreed to fund up to $1,000,000 of PEC
        expenses. Through December 31, 1996 the Company had funded $507,000 of
        its commitment.

        During 1996 the Company acquired 31.5% of the outstanding shares of
        Ontro, Inc. (formerly Self-Heating Container Corporation) and 34% of
        Insta-Heat, Inc., two related privately held corporations, for $650,000
        in cash. In connection with the acquisition and a related royalty
        agreement, the Company will receive exclusive worldwide distribution
        rights to market and distribute celebrity-driven products using certain
        patents owned by the two corporations.

7.      LINE OF CREDIT AND NOTES PAYABLE

        The Company has available to use for working capital purposes and to
        post letters of credit, a line of credit totaling $1,200,000, of which
        $600,000 can be used for working capital purposes. The line of credit
        bears interest at the lender's reference rate plus .5%. At December 31,
        1996, letters of credit totaling $342,000 and standby letters of credit
        totaling $250,000 were outstanding under this line of credit. In order
        to utilize the working capital portion of the credit facility, the
        Company must maintain various financial convenants, including the
        maintenance of minimum liquid assets, maximum total liabilities to
        tangible net worth and a minimum current ratio. The Company was not in
        compliance with these covenants at December 31, 1996 and therefore may
        not utilize the working capital portion of the credit facility.

        A Company subsidiary, Georgetown Collection, Inc., has outstanding
        borrowings from a financial institution totaling $4,990,000 which bear
        interest at the bank's prime rate (8.25% at December 31, 1996) plus 1%.
        The outstanding balance is due in full to the bank on April 15, 1997.
        The Company is currently in the process of negotiating a new credit
        facility, the proceeds from which will be used to repay the outstanding
        balance. Management believes they will be successful in securing a new
        credit facility. In the event a new credit facility is not obtained,
        management believes the Company has adequate assets available which
        could be utilized to raise sufficient cash to repay the bank loan.
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 (Continued)
--------------------------------------------------------------------------------


       A Company subsidiary, Krasner Group, Inc., has outstanding borrowings
       from a financial institution totaling $1,813,000 which bear interest at
       the bank's prime rate (8.25% at December 31, 1996) plus 1.625%. The
       outstanding balance is to be repaid in September, 1997 and is
       collateralized by certain Company assets, including restricted cash.

8.     CONVERTIBLE DEBENTURES

       In September, 1996 the Company issued Convertible Debentures (the
       Debentures) with a face value of $15,500,000 in a private placement to
       institutional investors. This private placement yielded net proceeds to
       the Company totaling $14,731,000 after deducting costs associated with
       issuing the Debentures. The Debentures accrued interest of the rate of 7%
       per year, payable quarterly. The Debentures were convertible at the
       option of the holder into shares of the Company's common stock at a price
       equal to 85% of the closing price of the Company's common stock at the
       date of conversion, subject to a minimum and maximum conversion price of
       $5.25 and $12.00 per share, at any time through the second anniversary of
       the original date of issuance. Through December 31, 1996, the Company
       issued a total of 282,824 shares of its common stock in connection with
       the conversion of $1,330,000 of the original principal amount of the
       Debentures, plus interest accrued through the conversion date of
       $175,000.

       The conversion of the notes at 85% of the closing price of the Company's
       common stock resulted in the Debentures being issued at a discount (the
       conversion discount). The conversion discount is being recognized by the
       Company as non-cash interest expense over the term of the Debentures with
       a corresponding increase to the original principal amount of the
       Debentures. Upon conversion of the Debentures any portion of the
       conversion discount not previously recognized is recorded as interest
       expense on the conversion date. During the year ended December 31, 1996,
       a total of $391,000 of non-cash interest expense was recorded relating to
       the Debentures, including $220,000 relating to the additional conversion
       discount recorded upon conversion.

       In January 1997, the Company reached agreement with the debenture
       holders to tender all outstanding Debentures to the Company in exchange
       for new convertible Debentures (the New Debentures). Under the terms of
       the agreement, New Debentures were issued with a face value of 117.5% of
       the face value of the tendered debentures. The New Debentures bear
       interest at 7% per year, payable quarterly. The New Debentures are
       convertible at the option of the holder into shares of the Company's
       common stock at $8.00 per share. The New Debentures must be converted by
       January 1999. As a result of the 17.5% premium given as in inducement to
       the Debenture holders to tender the original debentures into New
       Debentures, the Company will record a non-cash charge of $1,841,000 in
       the first quarter of the Company's fiscal year ending December 31, 1997.
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 (Continued)
--------------------------------------------------------------------------------


9.      STOCKHOLDERS' EQUITY

        Warrants - On November 21, 1995, the Company issued warrants to purchase
        200,000 shares of common stock to Shamrock Partners, Ltd., in
        consideration of financial and business consulting services to be
        provided to the Company. The warrants vest as of the grant date with an
        exercise price of $5.00 per share, which was equivalent to the fair
        market value of the Company's common stock at the date of grant and are
        valid for five years from the date of the grant.

        On November 28, 1995, the Company entered into an agreement to issue
        warrants to purchase 300,000 shares of common stock to Grant G. King in
        consideration of the purchase by the Company of 49% of the issued and
        outstanding capital stock of Grant King International Co., Ltd. The
        warrants vest as of the grant date with an exercise price of $5.50 per
        share, which was equivalent to the fair market value of the Company's
        common stock at the date of grant and are valid for five years from the
        date of the grant. The warrants have an ascribed value of $250,000,
        which have been recorded as an investment and additional paid-in
        capital.

        On March 13, 1996, the Company entered into an agreement to issue
        warrants to purchase 200,000 shares each of common stock to two 
        individuals in consideration of the purchase by the Company of 40% of
        the outstanding capital stock of Pure Energy Corporation. The warrants
        vest as of April 30, 1996 with an exercise price of $8.50 per share
        (200,000 warrants) and $12.00 per share (200,000 shares). The warrants
        are valid through April 30, 2001. The warrants have an ascribed value of
        $1,875,000, which have been recorded as an investment and additional
        paid-in-capital. As of December 31, 1996 2,500 of the warrants were
        exercised.

        In conjunction with the acquisitions described in Note 2 the Company
        issued stock purchase warrants as part of the consideration paid for
        these acquisitions. The following table summarizes the warrants issued:

<TABLE>
<CAPTION>
                                                      Exercised as  Outstanding
                                   Warrants Exercise  of December   at December     Expiration
        Acquisition                 issued   Price      31, 1996     31, 1996          Date
        -----------                -------- --------  ------------  -----------     ----------
        <S>                        <C>      <C>       <C>           <C>           <C> 
        Krasner Group, Inc.        250,628  $  7.75     62,090       188,538      April 10, 2004      
        S.L.S. Trading Co., Ltd.   108,000  $  7.75        -         108,000      April 10, 2004        

</TABLE>
<PAGE>
 
        As more fully discussed in Note 2, in conjunction with certain
        acquisitions, the Company may be required to issue additional stock
        purchase warrants at future dates.
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 (Continued)
--------------------------------------------------------------------------------


        Stock Option Plan - The shareholders approved and the Company adopted a
        Stock Option Plan on September 27, 1994 which was amended and restated
        on June 15, 1995 as the L.L. Knickerbocker Amended and Restated Stock
        Option Plan (the Plan). The Plan is administered by a committee
        appointed by the Board of Directors and provides that options may be
        granted at exercise prices determined by the Board of Directors at its
        sole discretion. The Plan is designed as an incentive for employees,
        non-employee directors and persons providing services of special
        importance to the Company. Unless otherwise specified, the options
        expire ten years from the date of grant. The Plan covered an aggregate
        of 400,000 shares when granted, which has been increased by the
        five-for-one stock split to a total of 2,000,000 shares. In 1996 the 
        Board of Directors authorized an increase in the number of shares 
        covered by the Plan to a total of 5,000,000. Non-employee directors of
        the Company are automatically granted options to purchase 10,000 shares
        of common stock at the fair market value at the date of grant each year
        that such person remains a director of the Company.

        Option activity under the plan is as follows:
<PAGE>
 
<TABLE>
<CAPTION>
                                                                           STOCK OPTION
                                                                       ---------------------
                                                                       NUMBER OF      PRICE
                                                                        SHARES     PER SHARE
                                                                       ---------   ---------
<S>                                                                    <C>            <C>
Outstanding, January 1, 1995                                                  --
Granted                                                                2,000,000   $    0.75 
Exercised                                                                     -- 
Canceled                                                                      --
                                                                       ---------   ---------
Outstanding, December 31, 1995                                         2,000,000        0.75

Granted                                                                  273,309   5.75-8.00 
Exercised                                                               (885,514)  0.75-7.75
Canceled                                                                 (32,500)       0.75
                                                                       ---------  ----------
Outstanding, December 31, 1996                                         1,355,295  $0.75-8.00

</TABLE>

The following is a summary of the weighted average exercise prices for activity
during the year ended December 31, 1996:

<TABLE>
<CAPTION>
                                                                                       WEIGHTED 
                                                                                   AVERAGE EXERCISE
                                                                         SHARES          PRICE 
                                                                       ---------       --------                                   
<S>                                                                    <C>             <C>
Beginning Outstanding                                                  2,000,000       $   0.75
    Options Granted (Price = Fair Value)                                 273,309           7.65
    Options Exercised                                                   (885,514)          0.82 
    Options Cancelled                                                    (32,500)          0.75
                                                                       ---------       --------
Ending Outstanding                                                     1,355,295       $   2.10 
Exercisable as of December 31, 1996                                      652,040       $   2.92

</TABLE>

Additional information regarding options outstanding as of December 31, 1996 is
as follows:

<PAGE>
 
<TABLE>
<CAPTION>

                                               OPTIONS OUTSTANDING              OPTIONS EXERCISABLE
                                         WEIGHTED AVG.
                                           REMAINING      WEIGHTED AVG.                   WEIGHTED AVG.
      RANGE OF             NUMBER         CONTRACTUAL       EXERCISE         NUMBER         EXERCISE
  EXERCISE PRICES       OUTSTANDING          LIFE             PRICE        EXERCISABLE       PRICE
  ---------------       -----------      -------------    -------------    -----------    ------------         
  <S>                   <C>              <C>              <C>              <C>            <C> 
   $        0.75         1,091,250          8 years          $0.75            402,500         $0.75
   $5.75 - $8.00           264,045          9 years          $7.65            249,540         $6.41

</TABLE> 

At December 31, 1996, 2,759,191 shares were available for future grants under
the Option plan, respectively.

ADDITIONAL STOCK PLAN INFORMATION

As discussed in Note 1, the company continues to account for its stock-based
awards using the intrisic value method in accordance with Accounting Principles
Board Opinion No.25, Accounting for Stock Issued to Employees and its related
interpretations. Accordingly, no compensation expense has been recognized in the
financial statements for employee stock arrangements.

Statement of Financial Accounting Standards No. 123 Accounting for Stock-Based
Compensation, (SFAS 123) requires the disclosure of pro forma net income and
earnings per share had the Company adopted the fair value method as of the
beginning of fiscal 1995. Under SFAS 123, the fair value of stock-based awards
to employees is calculated through the use of option pricing models, even though
such models were developed to estimate the fair value of freely tradable fully
transferable options without vesting


<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 (Continued)
--------------------------------------------------------------------------------


        restrictions, which significantly differ from the Company's stock
        options awards. These models also require subjective assumptions,
        including future stock price volatility and expected time to exercise,
        which greatly affect the calculated values. The Company's calculations
        were made using the Black-Scholes option pricing model with the
        following weighted average assumptions: expected life, 10 years; stock
        volatility, 85% in 1996 and 65% 1995; risk free interest rates, 6.5% in
        1996 and 6.5% in 1995; and no dividends during the expected term. The
        Company's calculations are based on a multiple option valuation approach
        and forfeitures are recognized as they occur. If the computed fair
        values of the 1995 and 1996 awards had been amortized to expense over
        the vesting period of the awards, pro forma net income would have been
        $891,000 ($.07 per share) in 1995 and $335,000 ($.02 per share) in 1996.

<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 (Continued)
--------------------------------------------------------------------------------

10.     COMMITMENTS AND CONTINGENCIES

        Leases - The Company is committed under operating lease agreements for
        facilities and equipment. The facility leases contain provisions for
        annual rental increases based on the consumer price index.

<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 (Continued)
--------------------------------------------------------------------------------


        Minimum annual rental commitments under operating leases are as follows:

<TABLE>
        <S>                                                    <C>   
        Year ending December 31:
           1997                                                $  874,000
           1998                                                   511,000
           1999                                                   436,000
           2000                                                   385,000
           2001                                                   329,000
           Thereafter                                           1,811,000
                                                               ----------
                                                               $4,346,000
                                                               ==========
</TABLE>

        Rent expense for the years ended December 31, 1996 and 1995 was $650,000
        and $86,000, respectively.

        Contractual Arrangements - The Company has contractual arrangements with
        several celebrities and other third parties, including Marie Osmond,
        Annette Funicello and Bob Mackie. Under the terms of these contracts,
        the celebrities agree to act as spokesperson for their respective
        products, promote the product, approve the design and make a minimum
        number of public appearances. The Company is obligated to manufacture a
        safe product approved by the celebrity, hold the celebrity harmless from
        liability, maintain specified levels of liability and rental insurance
        and pay royalties ranging from 5% to 10% of net wholesale and retail
        sales. Each contract has a termination clause in the event certain
        minimum annual sales are not attained (ranging from $50,000 to
        $500,000). In certain instances, the celebrity or other third party has
        the right to terminate the contract if the minimum sales level is not
        attained for any single year. The contracts run from 18 months to 5
        years and contain audit clauses, with penalties for errors or omissions.

        Letters of Credit - The Company finances certain collectible program
        purchases and other product utilizing irrevocable, transferable letters
        of credit. These letters of credit are issued to the Company by its
        major customer's bank, with the Company as the beneficiary. The Company
        then transfers a portion of the letter of credit to the Company's
        supplier to secure payment of the purchase. The Company and the supplier
        draw down the letter of credit when the supplier ships the product
        directly to the Company's customer. At December 31, 1996, there was
        approximately $700,000 amounts outstanding (drawn down) under these
        letters of credit agreements.

        Employment Contracts - The Company has entered into six employment
        agreements with Company officers with five-year terms. The agreements
        call for aggregate annual compensation of $965,000 and a discretionary
        bonus of up to 10% of income before income taxes.

        Litigation - The Company is subject to litigation in the normal course
        of business, none of which management believes is material to the
        financial statements at December 31, 1996.
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 (Continued)
--------------------------------------------------------------------------------

11.     LONG-TERM DEBT

        A Company subsidiary, HARLYN INTERNATIONAL, LTD. financed the purchase 
        of their facility with a mortgage bearing an annual interest rate of 
        14%. Payments on the mortgage are as follows:
<TABLE> 
<CAPTION> 
        <S>                          <C> 
        Year ended December 31,
        1997                         $266,000
        1998                          371,000
                                     --------
        Total long term debt         $637,000
                                     ========     
</TABLE> 
12.     SIGNIFICANT CONCENTRATIONS

        Customer Concentration - During the years ended December 31, 1996 and 
        1995, the Company conducted business with one customer whose aggregate
        sales volume comprised approximately 43% and 60% of the Company's
        revenues, respectively. A reduction in sales to this customer could
        adversely impact the financial condition and operations of the Company.

        Merchandise Risk - The Company's success is largely dependent on its
        ability to provide to its customers merchandise that satisfies consumer
        tastes and demand. Any inability to provide appropriate merchandise in
        sufficient quantities and in a timely manner could have a material
        adverse effect on the Company's business, operating results, and
        financial condition.

13.     INCOME TAXES
<TABLE> 
<CAPTION> 
INCOME TAXES

Provision for income taxes consists of:                                1996            1995
<S>                                                                    <C>             <C>  
Current federal and state income taxes                                  $227,000       $1,224,000
Current foreign taxes                                                    408,000              -
Deferred federal and state income taxes                                 (185,000)        (341,000)
                                                                       ------------   ------------         
Provision for income taxes                                             $ 450,000      $   883,000
                                                                       ============   ============
</TABLE> 
A reconciliation of the statutory federal rate and the provision for income
taxes is as follows:

<TABLE> 
<CAPTION> 
                                                                        1996            1995
<S>                                                                    <C>            <C>  
Federal tax at statutory rate                                          $684,000       $753,000
State taxes                                                              (8,000)       130,000
Goodwill Amortization                                                    59,000   
Residual U.S. tax on foreign earnings                                  (313,000)
Other                                                                    28,000
                                                                       ------------   ------------         
                                                                       $450,000       $883,000
                                                                       ============   ============
</TABLE> 

Significant components of the Company's deferred tax liabilities and assets 
for federal and state income taxes consists of the following:
<TABLE> 
<CAPTION> 
                                                                        December 31, 1996
<S>                                                                     <C>
Deferred tax assets
 Bad debt reserve                                                       $  447,000
 Accruals                                                                  112,000
 Uniform Capitalization                                                    118,000
 Other Reserves                                                          1,355,000
 Returns and allowances                                                    303,000
 Pre-acquisition net operating loss carryforward                         1,933,000
 Other                                                                      30,000
                                                                        ----------
Total deferred tax assets                                                4,298,000


Deferred tax liabilities
 Difference between book and tax basis of fixed assets                  $  (97,000)
 Prepaids                                                                 (875,000)
 State income taxes                                                       (255,000)
                                                                       -----------
Total deferred tax liabilities                                          (1,227,000)
                                                                       -----------
                                                                       $ 3,071,000
                                                                       ===========
</TABLE> 

The company has not provided any residual U.S. tax on approximately $1,384,000
of a portion of the Company's foreign subsidiaries' undistributed earnings as
the Company intends to indefinately reinvest such earnings.

The Company recorded a credit to equity of $1,354,000 as a result of the tax
benefit from the exercise of stock options. Since the Company does not have
sufficient taxable income or carry back potential to utilize the deductions
generated from the exercise of the options, approximately $3,157,000 of
deductions has not been recorded in the accompanying financial statements. As
these losses are utilized in future years, the tax benefit will be recorded to
equity.

The Company has an approximate $4,800,000 loss carryforward related to
Georgetown and Krasner which can be used to reduce future taxable income.
Sections 382 and 383 of the Internal Revenue Code of 1986 place certain
limitations on the use of these acquired losses. A maximum of $320,000 of the
net operating loss carryforward can be utilized annually in 1997 and subsequent
years. Any net operating loss not utilized will begin expiring in 2010.

14.     DOMESTIC AND THAILAND OPERATIONS

A summary of domestic and Thailand operations is as follows:
<TABLE> 
<CAPTION> 
                                                                         Years ended December 31
                                                                       ---------------------------
                                                                           1996            1995
                                                                           ----            ----
<S>                                                                    <C>             <C>  
Net sales to unaffiliated customers:
Domestic                                                               $32,858,000     $13,140,000
Thailand                                                                 9,237,000               0
                                                                       -----------     -----------
  Consolidated                                                         $42,095,000     $13,140,000
                                                                       ===========     ===========

Operating Income:
Domestic                                                               $ 1,135,000     $ 2,046,000
Thailand                                                                 2,715,000               0
                                                                       -----------     -----------
  Consolidated                                                         $ 3,850,000     $ 2,046,000
                                                                       ===========     ===========
Identifiable Assets:
Domestic                                                               $40,883,000     $11,214,000
Thailand                                                                16,689,000               0
                                                                       -----------     -----------
  Consolidated                                                         $57,572,000     $11,214,000
                                                                       ===========     ===========
</TABLE> 
(1) Operating income is net sales less cost of goods sold and operating 
    expenses.
(2) Identifiable assets are those assets of the Company that are located in, or 
    related to operations in, each geographic area.
<PAGE>
 

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 
-------  --------------------------------------------------------------- 
         FINANCIAL DISCLOSURE
         --------------------

     In January 1996, the Company changed its auditing firm from Singer, Lewak,
Greenbaum & Goldstein to Deloitte & Touche LLP. A report on Form 8-K was filed
concerning the change of accountants.


                                    PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; 
-------  ------------------------------------------------------------- 
         COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
         -------------------------------------------------

The directors and executive officers of the Company are as follows:

<TABLE>
<CAPTION>
               Name                 Age               Position
    ----------------------------------------------------------------------------
    <S>                             <C>    <C>
    Louis L. Knickerbocker          54     Chief Executive Officer,
                                           President and Chairman of the Board

    Peggy Vicioso                   35     Executive Vice President and
                                           Secretary

    Tamara Knickerbocker            33     Vice President

    Anthony P. Shutts               33     Chief Financial Officer
                                           and Director

    Farrah Fawcett                  50     Director

    Gerald A. Margolis              67     Director

    William R. Black                44     Director
    Lowell W. Paxson                62     Director
</TABLE>

All directors hold office until the next meeting of the shareholders of the
Company and until their successors are qualified and elected. Executive officers
of the Company are appointed by the Board of Directors and serve at the
discretion of the Board. All executive officers devote full time to the Company.

Mr. Louis L. Knickerbocker, Chief Executive Officer, President, and Chairman

Mr. Knickerbocker, 54, is the founder and Chairman, President, and Chief
Executive Officer of the Company. He received an AA degree in 1964 from Santa
Monica College with a major in medicine and a minor in economics.

From 1965 through 1974 Mr. Knickerbocker worked as a salesman and sales
supervisor at M. Cooper & Son, purchased and sold several liquor stores, and
acquired and sold a total of seven restaurants, four of which comprised a chain
of Mexican restaurants. Between 1974 and 1985, he acted as a private investor
and businessman, investing in real estate and purchasing and selling small
businesses.
<PAGE>
 
Mr. Knickerbocker and his wife, Tamara, Vice President of the Company, formed
the Company as International Beauty Supply in 1985, co-founded LaVie Cosmetics
with Michael Elam and comedienne, Phyllis Diller in 1987, co-founded another
company, MLF Enterprises, in 1989 with Michael Elam and Farrah Fawcett and, in
1990, the Knickerbockers formed Knickerbocker Creations, Ltd. and began
developing the celebrity driven products which are now part of The L. L.
Knickerbocker Co., Inc.

Ms. Peggy Vicioso, Executive Vice President and Secretary

Ms. Vicioso, 35, joined the Company in December of 1993. She assumed the
position of Executive Vice President in May 1995 Ms. Vicioso was elected
Secretary of the Company in June 1995. Ms. Vicioso graduated in 1981 from Brooks
College in California with an Associate of Arts degree in Merchandising. In
addition, she has a 12 year background in international trade, product
development, marketing, and sales. From 1983 through 1987, Ms. Vicioso served as
Operation Manager for Ocean Pacific Images, a licensee of Ocean Pacific
Sportswear. From 1987 through 1993, she worked on the senior merchandising team
and ultimately served as Vice President of Merchandising for Pacific Outlook
Sportswear, the largest licensee of Ocean Pacific Sportswear.

Ms. Vicioso was instrumental in launching the Company's direct response print
campaigns and infomercial projects in 1995. She continues to develop
departmental strategy and staffing requirements to manage the Company's growth.

Ms. Tamara Knickerbocker, Vice President

Mrs. Knickerbocker, 33, has been with the Company as Vice President since its
inception. She has over 8 years experience in the field of marketing. In 1985,
Mrs. Knickerbocker helped to form the Company as International Beauty Supply,
and thereafter LaVie Cosmetics, MLF Enterprises and Knickerbocker Creations,
Ltd. Since 1985, she has worked to develop and market products and programs for
the home shopping industry. Her focus has mainly been the creation and
development of the products, and she has emphasized collectibles.

Mrs. Knickerbocker is currently managing all aspects of the Marie Osmond Doll
Collection program, including product and program development, production,
marketing and sales. In addition, she also oversees the other collectible
programs, including the collectable bears. She has had primary responsibility
for the profitability and diversity of the collectible lines and is currently
coordinating expansion in these programs.

Mr. Anthony P. Shutts, C.P.A., Chief Financial Officer, Director

Mr. Anthony P. Shutts, 33, was hired as a consultant to the Company on April 1,
1993 and became Chief Financial Officer of the Company on June 30, 1993. Mr.
Shutts became a full time employee of the Company on April 1, 1996. He is a
certified public accountant with over 10 years experience in public accounting,
specializing in emerging companies. Mr. Shutts holds a masters degree in
taxation from the University of Southern California. Currently, Mr. Shutts
serves as Chief Financial Officer of the Company, overseeing the financial
records preparation and reporting, and performing the general functions of CFO.

Mr. Shutts has provided services relating to auditing, compilation and review of
companies in the manufacturing, high technology, real estate, retail, health
care, financial and entertainment industries. In addition to financial statement
preparation, Mr. Shutts has provided services relating to income tax planning
and preparation, business valuation, financial and operational planning,
budgeting and personal financial planning.

Mr. Shutts has also provided consulting services relating to economic analysis
and feasibility studies on real estate projects, debt and equity restructuring,
software installation and implementation, office automation and temporary or
part time controllership services.

From 1993 to 1996, Mr. Shutts has maintained a private accountancy and financial
consulting practice. Prior to his private practice, he worked as Business
Manager with Breslauer, Jacobson, Rutman & Sherman from 1992 to 1993 
<PAGE>
 
and with Allen, Haight & Schurawel as a Senior Accountant from 1991 to 1992. Mr.
Shutts worked with Deloitte & Touche as a Senior Consultant from 1986 to 1991.

Ms. Farrah Fawcett, Director

Ms. Fawcett, 50, was appointed to the Board of Directors in June 1994. She is a
well known celebrity actress and has been the president and a director of
Tolivar Productions, Inc., an acting services firm since 1978. Ms. Fawcett has
participated in the development and marketing of products with MLF Enterprises
(a company she co-founded with Louis L. Knickerbocker and Michael Elam in 1989),
and with Knickerbocker Creations, Ltd. in 1991 to 1993.

Mr. Gerald A. Margolis, Director

Mr. Margolis, 67, was appointed to the Board of Directors in June 1994, and
served as Secretary of the Company from June 1994 until June 1995. He graduated
from U.C.L.A. Law School in 1954 and has been a licensed attorney in private
practice and a member of the California State Bar since 1955. Mr. Margolis was a
City Council member of the Culver City Counsel from 1962 to 1966. Mr. Margolis
has advised the Company on general corporate matters since its inception in 
1985.

Mr. William R.  Black, Director

Mr. Black, 44, was appointed to the Board of Directors in November 1995. He
received a BSBA in Marketing from the University of Denver in 1978, an MBA from
the University of Denver in 1981 and a Juris Doctor from Western State
University College of Law in 1987. Mr. Black is a licensed attorney and a member
of the California State Bar, the Federal District Courts for the Central and
Northern Districts of California and the Ninth Circuit Court of Appeals.

Mr. Black worked as an Area Manager for Deere & Company from 1979 through 1984,
Director of Analysis for Management Resource Services Company from 1984 through
1985, and Senior Vice President of Geneva Corporation from 1985 through 1990. He
maintains a private law practice and is currently General Counsel of Sunclipse,
Inc. in Buena Park, California, General Counsel and Director of Pyraponic
Industries, Inc. in San Diego, California, Special Counsel for North America for
Amcor, Ltd. in Melbourne Australia, General Counsel, Secretary and Director of
Anle Paper Co., Inc. in Chicago, Illinois, General Counsel, Secretary and
Director of Mann-Craft Container Corporation in Elmhurst, Illinois, Director of
Raymark Container, Inc. in Atlanta, Georgia, Director General of Amcor de
Mexico, S.A. de C.V. in Guadalajara, Jalisco Mexico, and Director General of
Kent H. Landsberg Co. de Mexico, S.A. de C.V in Tijuana, Baja California Mexico.

Mr. Lowell W. Paxson, Director

Mr. Paxson, 62, was appointed to the Board of Directors in June 1996. He has
been the Chairman of the Board and Chief Executive Officer of Paxson
Communications Corporations, Inc. since that company's inception in 1991. Mr.
Paxson was the President of Home Shopping Network, Inc. from 1985 to 1990.
Presently, the Company is involved in a joint venture with Paxson Communications
Corporation, Inc. to develop and promote products through the home shopping
industry and other marketing venues. Mr. Paxson resigned from the Board of
Directors of the Company on January 1, 1997.


ITEM 10.          EXECUTIVE COMPENSATION
--------          ----------------------

The following table sets forth certain information concerning annual, long term
and other compensation received during the last three fiscal years and to be
received by (i) the Chief Executive Officer of the Company, and (ii) the
Company's four most highly compensated executive officers whose annual salary
and bonus compensation exceeded $100,000:
<PAGE>
 
<TABLE>
<CAPTION>

                                        Annual Compensation       
 Name and Principal          Fiscal    ----------------------     Long Term       All Other
     Position                 Year      Salary       Bonus       Compensation    Compensation(1)
------------------------------------------------------------------------------------------------
<S>                          <C>       <C>         <C>           <C>             <C> 

 Louis L. Knickerbocker,      1996     $300,000       N/A           N/A              N/A
   CEO                        1995     $175,000    $ 175,000        N/A            500,000
                              1994     $175,000       N/A           N/A              N/A
                                                                                
Peggy Vicioso                 1996     $100,000       N/A           N/A              9,750
   Executive Vice President   1995     $ 53,173    $ 35,000         N/A            151,250
                              1994     $ 40,000    $ 13,000         N/A              N/A
                                                                                
Tamara Knickerbocker          1996     $ 80,000       N/A           N/A             12,362
   Vice President             1995     $ 75,000       N/A           N/A              N/A
                              1994     $ 50,000       N/A           N/A              N/A
                                                                                
Anthony Shutts                1996     $110,000       N/A           N/A              N/A
   CFO                        1995     $ 63,046       N/A           N/A             50,000
                              1994     $ 42,500       N/A           N/A              N/A
</TABLE>
----------
(1)  All Other Compensation consists of stock options granted under the
     Company's Stock Option Plan to each of the Named Executive Officers.
     Reflected amounts consist of the number of options to purchase the
     Company's common stock.

DIRECTORS FEES

Directors receive a fee of $500 per meeting attended and reasonable travel
expenses.

EMPLOYMENT AGREEMENTS 

The Company entered into employment agreements with Louis L. Knickerbocker, its
President, Anthony P. Shutts, its CFO, Peggy Vicioso, its Executive Vice
President, Tamara Knickerbocker, its Vice President, and Grant King, President
of L. L. Knickerbocker (Thai) Co., Inc. on July 1, 1996. On June 18, 1996, the
Company entered into an employment agreement with Martin Krasner, President of
Krasner Group Inc. The respective terms of the employment agreements are five
years each. The agreements are subject to early termination by the Company under
certain conditions, including breach of the agreement, fraud by the employee,
and/or breach of fiduciary duty owed to the Company by the employee. The Company
has the right to extend the terms of the employment agreements for an additional
five years each upon written notice to the employees. Under terms of the
agreements, each of the employees agrees to devote his or her full time and
effort to the business affairs of the Company and to use his or her best efforts
to promote the best interests of the Company.

During the first year, the employment agreements called for Louis L.
Knickerbocker to receive an annual base salary of $300,000, for Anthony Shutts
to receive an annual base salary of $120,000, for Peggy Vicioso to receive an
annual base salary of $100,000, for Tamara Knickerbocker to receive an annual
base salary of $80,000, for Grant King to receive an annual base salary of
$140,000, and for Marin Krasner to receive an annual base salary of $225,000. In
addition to their respective base salaries, Mr. Knickerbocker, Mr. Shutts, Ms.
Vicioso and Mrs. Knickerbocker are eligible to receive an annual bonus in an
amount to be determined by a compensation committee and ratified by the Board of
Directors out of a Management Bonus Fund up to a maximum of 10% of the operating
profits of the Company and are entitled to receive certain stock options from
the Stock Option Plan previously adopted by the Company. See "Stock Option
Plan."

STOCK OPTION PLAN
<PAGE>
 
The shareholders approved and the Company adopted a Stock Option Plan on
September 27, 1994 which was amended and restated on June 15, 1995 as the L. L.
Knickerbocker 1995 Amended and Restated Stock Option Plan (the "Plan"). The Plan
is administered by a committee appointed by the Board of Directors and provides
that options may be granted at exercise prices determined by the Board of
Directors in its sole discretion. The Plan is designed as an incentive for
employees, non-employee directors and persons providing services of special
importance to the Company. Unless otherwise specified, the options expire ten
years from the date of grant. The Plan covered an aggregate of 400,000 shares
when granted, which was increased by the five-for-one stock split to a total of
2,000,000 shares. As of the date of this report, 400,000 pre-split options have
been granted pursuant to the Plan, which has been increased by the five-for-one
stock split to a total of 2,000,000 options granted.

Options Granted

The following table discloses the individual grants of options to purchase
securities of the Company to each of the Named Executive Officers, for the most
recent fiscal year.

Options/SAR Grants During the Fiscal Year Ended December 31, 1996

<TABLE>
<CAPTION>
                        Number of     % of Total              Market value
                       Securities    Options/SARs             of Securities
                       Underlying     Granted to              Underlying
                       Options/SARs   Employees   Exercise or Options/SARs
                         Granted      in Fiscal   Base Price  Grant date    Expiration
         Name             (#)(1)       Year (2)   ($/Share)   ($/Share)(3)    Date(4)
--------------------------------------------------------------------------------------
<S>                    <C>           <C>          <C>         <C>           <C>
Peggy Vicioso             9,750        14.21%     $7.75 (2)     $7.75(3)      2006
Tamara Knickerbocker      8,272        12.06%     $7.75 (2)     $7.75(3)      2006
Tamara Knickerbocker      2,853         4.16%     $8.00 (2)     $8.00(3)      2006
Tamara Knickerbocker      1,237         1.80%     $5.75 (2)     $5.75(3)      2006
</TABLE>
----------
(1) All grants consist of stock options granted pursuant to the Company's Stock
    Option Plan. 
(2) In fiscal 1996, 68,603 options were granted pursuant to the Company's Stock
    Option Plan. This number was used in calculating the percentage in the 
    above table. 
(3) Market value based on the average trading price of the Company's common 
    stock on the grant date. 
(4) The Options granted under the Company's Stock Option Plan expire on the
    tenth anniversary of the date of grant.

Aggregate Options Exercised. There were an aggregate of 350,000 options
exercised by the Named Executive Officers during the fiscal year ended December
31, 1996.


ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------  --------------------------------------------------------------

PRINCIPAL SHAREHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of December 31, 1996 by (i) each
director of the Company, (ii) the CEO of the Company and the four most highly
compensated executive officers of the Company whose annual salary and bonus
compensation exceeded $100,000, (iii) all directors and executive officers as a
group, and (iii) each person known to the Company to own beneficially more than
5% of the outstanding shares of Common Stock:
<PAGE>
 
<TABLE> 
<CAPTION> 
Name and Address of                   Amount and Nature of            Percent
Beneficial Owner (1)                      Ownership                   of Class
-------------------------------------------------------------------------------
<S>                                   <C>                             <C>    
Louis L. Knickerbocker and Tamara
 Knickerbocker, Husband and Wife as
 Community Property                        7,489,285                   42.5%(2)
Peggy Vicioso                                 59,750
Anthony P. Shutts                                400
Farrah Fawcett                               315,000
Gerald Margolis                              210,000
William R. Black                              40,000
Lowell W. Paxson                               3,000
Directors and Executive Officers
 as a Group                                  583,150(3)                 3.3%(3)
</TABLE>
----------
(1) The address for all persons listed is 30055 Comercio, Rancho Santa 
    Margarita, California 92688

(2) Percentage is based on the 7,139,285 shares currently held of record plus 
    options issued by the Company to Mr. Knickerbocker that enables Mr.
    Knickerbocker to currently acquire 350,000 shares of the Company's common
    stock.

(3) Beneficial ownership of the Directors and Executive Officers as a group is
    based on 138,400 shares currently held of record plus options issued by the
    Company to Directors and Executive Officers to currently acquire 444,750
    shares of the Company's common stock and does not include shares 
    beneficially owned by Mr. and Mrs. Knickerbocker.


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
-------- ----------------------------------------------

RELATED PARTY TRANSACTION

The Company leases office and warehouse space at 30055 Comercio, Rancho Santa
Margarita, California 92688. The building space allocation is 1,500 square feet
of office space and 8,500 square feet of warehouse space. Up until September 30,
1994 the facilities were subleased from K and E Marketing, Ltd., a corporation
co-owned by Louis L. Knickerbocker, a principal of the Company, and Michael
Elam, a former spokesperson for the Company, at a rate of $8,065 per month
(since January 1, 1994) plus its proportionate share of taxes, maintenance and
property insurance. Several related companies occupied the facilities and the
rental payment was based on the Company's pro-rated share of the space. On
October 1, 1994, the lease was amended to assign the leasehold to the Company.
On February 15, 1995, the Company signed a new 3 year lease agreement for the
premises at a rate of $7,755 per month, which includes taxes, maintenance, and
property insurance. The previous lease had expired on January 31, 1995. The
related companies no longer occupy the facilities or pay rent to the Company.


LOAN TO SHAREHOLDER

During 1996, the Company made a loan to its president, Louis L. Knickerbocker,
in the principal amount of $485,000 and a loan to Grant King, former owner of 
Grand King International Cop., Ltd. in the amount of $111,000. Both loans was
evidenced by a promissory note from Mr. Knickerbocker to the Company providing
for payment of interest at the prime rate plus 2 1/2% per annum due and payable
on demand.

<PAGE>
 
Pursuant to a resolution of the Board of Directors of the Company, passed on
September 27, 1994, any ongoing and future transactions between the Company and
its officers, directors, employees, and affiliates, that are outside the scope
of the Company's employment relationship with such persons will be on terms no
less favorable to the Company than can be obtained from unaffiliated parties.
Any such transactions are subject to the approval of a majority of the
disinterested members of the Board of Directors.


AFFILIATED AND PREDECESSOR COMPANIES

The L. L. Knickerbocker Company, Inc. (the "Company") was formed by Louis L.
Knickerbocker, Chairman, President, and Chief Executive Officer of the Company,
and Tamara Knickerbocker, his wife and the Vice President of the Company, under
the name International Beauty Supply, Ltd., a California corporation ("IBS") in
1985. IBS developed a line of cosmetics called "Orchid Premium" that was
initially marketed to professional beauty supply houses and subsequently
expanded to retail stores.

The Knickerbockers next venture was LaVie Cosmetics, a California corporation
("LaVie"), that the Knickerbockers co-founded with Michael Elam, a spokesperson
for the Company, and comedienne, Phyllis Diller, in 1987. LaVie introduced a
product named Creme de LaVie in both the I. Magnin and Nordstrom department
stores. In October 1988 Creme de LaVie was introduced on The Home Shopping
Network in Tampa, Florida with Mr. Elam and Ms. Diller live on the air.

In 1989 the Knickerbockers co-founded another company, MLF Enterprises, a
California corporation ("MLF") with Mr. Elam and Farrah Fawcett, a director of
the Company. MLF developed replicas of Ms. Fawcett's jewelry collection, which
were sold through the television home shopping industry.

The Knickerbockers next formed Knickerbocker Creations, Ltd., a California
corporation ("Creations") in 1990 and began developing the products and
celebrity endorsement programs which are now part of the Company.

In 1993 the directors and shareholders of Creations and IBS determined to effect
an initial public offering in order to finance the continued growth of the
different companies. It was determined that the operations of Creations and IBS
should be consolidated under a single entity in order to facilitate the
contemplated public offering. However, because Creations had been switched from
a "C" corporation to a subchapter "S" corporation in 1990, the directors and
shareholders of the Company were advised that Creations would be an unsuitable
candidate for a public offering.

On May 24, 1993, the directors and shareholders of IBS approved an amendment of
the articles of incorporation of the corporation changing the name of the
corporation from "International Beauty Supply, Ltd." to the Company's current
name, "The L. L. Knickerbocker Company, Inc." The Company's name was chosen to
maximize the retention of the goodwill in the home shopping industry associated
with the name "Knickerbocker" by virtue of Creations' business. The Company then
consummated an asset purchase agreement whereby the operating assets of
Creations, including but not limited to the marketing and distribution rights to
the products and programs of Creations, were acquired along with certain
liabilities. As of the date hereof, all current active contracts of Creations
have been assumed or amended to grant those rights and obligations to the
Company.

In connection with the initial public offering of the Company's common stock
completed January 25, 1995, the Directors and shareholders of the Company
approved as of June 15, 1994 a 1990.5 for 1 stock split of its outstanding
common stock, and as of September 27, 1994 a .714 for 1 reverse stock split of
its outstanding common stock.


CONFLICTS OF INTEREST

Mr. Knickerbocker has a current interest in LaVie Cosmetics ("LaVie"), MLF 
Enterprises ("MLF"), and Knickerbocker Creations, Ltd. ("Creations").  Each of 
these companies has previously developed and marketed 
<PAGE>
 
products which are in direct competition with the Company's products. The
Company has acquired the trademark rights and the license to market the products
of LaVie, and has acquired certain operating assets and the operations of
Creations. Both LaVie and Creations are currently inactive, but have not been
dissolved.

Mr. Knickerbocker and Ms. Farrah Fawcett, a director of the Company, both have a
current interest in MLF, which previously developed and marketed a line of
jewelry products directly competitive to certain products that the Company may
be marketing now or in the future. The operations of MLF have been discontinued
and it is inactive, however MLF has not been dissolved.

Because Mr. Knickerbocker is an officer and director of the Company, and because
Ms. Fawcett is a director of the Company, their respective continuing interests
in LaVie, Creations, and MLF pose potential conflicts of interest, should such
corporations become active again in the future, and should they sell or market
products which are competitive with the Company's products, or should the
Company negotiate or enter into any significant transaction or agreements with
those companies, then a conflict of interest will exist. The Company has
received assurances that none of the corporations or individuals named herein
have any intention to compete with the Company or enter into any transactions or
agreements which would present a conflict of interest. There can be no
assurance, however, that such a conflict will not develop.


ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
-------- --------------------------------

<TABLE>
<CAPTION>
(a)      EXHIBITS
Exhibit
Number            Description
-------------------------------------------------------------------------------------------------------
<C>      <S>   
3.1      Articles of Incorporation of International Beauty Supply, Ltd. ("IBS") dated July 11, 1985.(1)

3.2      Amendment to Articles of Incorporation of IBS dated May 24, 1993.(1)

3.3      Certificate of Amendment to Articles of Incorporation of The L. L. Knickerbocker Company Inc.
         (the "Company") dated June 20, 1994.(1)

3.4      Certificate of Amendment to Articles of Incorporation of the Company dated September 27,
         1994.(1)

3.5      Bylaws of the Company.(2)

4.1      Qualified Stock Option Plan adopted by the Company on September 27, 1994 along with form of
         Stock Option Agreement.(3)

4.2      Form of Warrant Agreement.(3)

4.3      Form of Representative's Warrant issued to W.B. McKee Securities, Inc. upon consummation of the
         Company's offering on January 25, 1995.(3)

4.4      Form of Common Stock Purchase Warrant issued to Shoreline Pacific, the Institutional Finance
         Division of Financial West Group. (6)

4.5      Form of 7% Convertible Debenture.(6)

10.1     Employment Agreement, dated July 1, 1996, between the Company and Louis L. Knickerbocker.(9)
</TABLE>
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10.2     Employment Agreement, dated July 1, 1996, between the Company and Tamara Knickerbocker.(9)

10.3     Employment Agreement, dated July 1, 1996, between the Company and Peggy Vicioso.(9)

10.4     Employment Agreement, dated July 1, 1996, between the Company and Anthony P.  Shutts.(9)

10.5     Product Development and License Agreement between American Environmental Systems, Inc. ("AES")
         and Knickerbocker Creations, Ltd. ("Creations") dated August 4, 1992 re development of a
                                                                              --
         portable room ionizer.(3)

10.6     Trademark License Agreement between AES and Creations dated October 22, 1992 re the licensing
                                                                                      --
         of the trademark EpE to Knickerbocker.(3)

10.7     Assignment of AES Product Development and License Agreement
         and AES Trademark License Agreement from Creations to the
         Company dated January 15, 1993, with Acceptance of Assignment
         by the Company and Consent to Assignment by AES.(3)

10.8     Agreement between QVC Network, Inc. ("QVC") and the Company dated September 29, 1993 re sales
                                                                                              --
         of EpE Clean Room ionizers.(3)

10.9     Agreement between Marie, Inc. and the Company dated April 1, 1993 re the services of Bob Mackie
                                                                           --
         in the design, production, and sale of products and licensing to the Company of the use of Bob
         Mackie's name in conjunction with the Company's products.(3)

10.10    Agreement between Bob Mackie (US), Inc. and the Company dated May 1, 1994 re the services of
                                                                                   --
         Bob Mackie in the design, production and sale of products and licensing to the Company of the
         use of Bob Mackie's name in conjunction with the Company's products.(3)

10.11    Agreement between Cello, Inc. and the Company dated May 13, 1994 re services of Annette
                                                                          --
         Funicello in the design, development, manufacture and the sale of products, with Acceptance by
         Annette Funicello and Cancellation of Prior Agreement dated October 30, 1991 between Cello,
         Inc. and Creations.(3)

10.12    Agreement between the Company and The Tracker Corporation of
         America dated March 15, 1995 re the development of marketing
                                      --
         campaigns for the Tracker products.(4)

10.13    Lease Agreement between the Company and Koll Management for 30055 Comercio, Santa Margarita, CA
         dated February 15, 1995.(2)

10.14    Letter of Agreement between the Company, Michael Elam, and Jim Hann dated June 22, 1993 re the
                                                                                                 --
         sale of EpE Clean Room System Ionizers.(2)

10.15    Letter of Agreement between the Company, Dr. Michael Elam, and Louis Sabatasso dated June 23,
         1993 re the sale of EpE Clean Room System Ionizers.(2)
              --

10.16    Joint Venture Agreement between the Company and Paxson Communications Corporation, dated 
         December 21, 1995 re the formation of the joint venture corporation to be known as
                           --
         IN/LLK Media Marketing.(5)

10.17    Agreement between the joint venture partnership of the Company and Paxson Communications 
         Corporation, and Agia Akal Singh Khalsa, dated January 22, 1996 re the development and
                                                                         --
         marketing of numerology services through infomercials, print media, radio, the home 
         shopping industry and the worldwide web. (5)
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<C>      <S>   
10.18    Agreement between the Company and Grant King International Co., Ltd.,
         dated November 28, 1995 re the acquisition of 49% of the issued and
                                 --
         outstanding stock of Grant King International Co., Ltd. (5)

10.19    Agreement between the Company and Grant King Design Co., Ltd., dated November 27, 1995 re the
                                                                                                --
         distribution of the jewelry products of Grant King Design Co., Ltd. (5)

10.20    Agreement of Purchase and Sale of the Capital Stock of Pure
         Energy Corporation between the Company and Pure Energy
         Corporation, dated February 7, 1996 re the acquisition of 40%
         of the issued and outstanding capital stock of Pure Energy
         Corporation. (5)

10.21    Letter of intent between Pure Energy Corporation and Biofine, Inc., dated March 3,  1996  re
                                                                                                   --
         the licensing of the patents of Biofine, Inc. (5)

10.22    License Agreement  between the Company and SIM-GT Licensing Corp., dated May 1, 1995  re the
                                                                                               --
         licensing of the name, likeness and trademarks of Richard Simmons. (5)

10.23    Agreement  between the Company and Timphaven Productions, Inc., dated July 24, 1995  re the
                                                                                              --
         distribution of videos, cassettes and instructional materials. (5)

10.24    Agreement of Purchase and Sale of the Capital Stock of Krasner Group, Inc., dated June 15,
         1996  re the acquisition of 100% of the issued and outstanding capital stock of Krasner Group,
               --
         Inc. (7)

10.25    Stock Purchase Agreement dated September 30, 1996, by and among Harlyn Products, Inc., Harlyn
         International Company, Ltd. and the Company.(6)

10.26    First Amendment to Stock Purchase Agreement dated October 15, 1996, by and among Harlyn
         Products, Inc., Harlyn International Company, Ltd. and the Company.(6)

10.27    Second Amendment to Stock Purchase Agreement dated November 7, 1996, by and among Harlyn
         Products, Inc., Harlyn International Company, Ltd. and the Company.(6)

10.28    Agreement of Purchase and Sale of the Capital Stock of Self
         Heating Container, Inc., dated September 17, 1996 by and
         between Self Heating Container Corporation of California and
         the Company(10)

10.29    Agreement of Purchase and Sale of the Capital Stock of Insta-Heat,
         Inc., dated September 17, 1996, by and between Insta-Heat, Inc. and the
         Company(10)

10.30    Agreement of Purchase and Sale of the Capital Stock of
         Georgetown Collection, Inc., dated November 20, 1996, By and
         between Consumer Venture Partners I, L.P., Vermont Capital
         Venture Fund, North Atlantic Venture Fund, Merchant Partners
         and the Company.(8)

10.31    Form of Private Securities Subscription Agreement.(6)

10.32    Form of Registration Rights Agreement.(6)

21.1     Subsidiaries of Registrant.(10)
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<PAGE>
 
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<C>      <S>   
23.0     Consent of Deloitte & Touche LLP, independent auditors. (10)
27.0     Financial Data Schedule (10)
----------------------------------
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<TABLE> 
<C><S> 
(1)Filed as part of Exhibit 3.1 to The L. L. Knickerbocker Company, Inc. Form SB-2 Registration Statement
   No. 33-85230-LA as filed with the Securities and Exchange Commission on or about October 13, 1994.

(2)Filed as an exhibit to the L. L. Knickerbocker Company, Inc. Annual Report on Form 10-KSB filed with the
   Securities and Exchange Commission on or about March 29, 1995.

(3)Filed as an Exhibit to The L. L. Knickerbocker Company, Inc. Form SB-2 Registration Statement No.
   33-85230-LA as filed with the Securities and Exchange Commission on or about October 13, 1994.

(4)Filed as Exhibit to The L. L. Knickerbocker Company, Inc. report on Form 8-K filed with the Securities
   and Exchange Commission on or about March 21, 1995.

(5)Filed as an exhibit to The L. L. Knickerbocker Company, Inc. Annual Report on Form 10-KSB filed with the
   Securities and Exchange Commission on or about April 15, 1996.

(6)Filed as an Exhibit to The L. L. Knickerbocker Company, Inc. Form 10-QSB/A as filed with the Securities
   & Exchange Commission on or about November 27, 1996.

(7)Filed as Exhibit to The L. L. Knickerbocker Company, Inc. report on Form 8-K filed with the Securities
   and Exchange Commission on or about July 3, 1996.

(8)Filed as Exhibit to The L. L. Knickerbocker Company, Inc. report on Form 8-K filed with the Securities
   and Exchange Commission on or about December 5, 1996.

(9)Filed as Exhibit to the L. L. Knickerbocker Company, Inc. Annual Report on Form 10-KSB filed with the
   Securities and Exchange Commission on or about April 15, 1997.

(10)Filed Herewith.
</TABLE> 
<PAGE>
 
                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.


                                   The L.L. Knickerbocker Company, Inc.
                                   ------------------------------------
                                   (Registrant)

Date: August 1, 1997               By: /s/ Louis L. Knickerbocker
                                       --------------------------
                                       Louis L. Knickerbocker
                                       Chief Executive Officer



Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.


<TABLE>
<CAPTION>
Signature                       Title                             Date
--------------------------------------------------------------------------------
<C>                             <S>                               <C> 

/s/ Louis L. Knickerbocker      Chief Executive Officer,          8/1/97
-----------------------------   President and Chairman
Louis L. Knickerbocker 


/s/ Anthony P. Shutts           Chief Financial Officer           8/1/97
-----------------------------   and Director       
Anthony P. Shutts               


/s/ Peggy Vicioso               Executive Vice President          8/1/97
-----------------------------   and Secretary
Peggy Vicioso 


/s/ Farrah Fawcett              Director                          8/1/97
-----------------------------
Farrah Fawcett


/s/ Gerald A. Margolis          Director                          8/1/97
-----------------------------
Gerald A. Margolis


/s/ William R. Black            Director                          8/1/97
-----------------------------
William R. Black


/s/ F. Rene Alvarez, Jr.
-----------------------------   Director                          8/1/97
F. Rene Alvarez, Jr.

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