<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

[X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
        ACT OF 1934 for the fiscal year ended December 31, 2000
                                       or
[ ]     TRANSITION REPORT PURSUANT TO 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 CO., INC.
             (Exact name of registrant as specified in its charter)


         CALIFORNIA                                         33-0230641
(State or other jurisdiction of                           (I.R.S. Employer
incorporation or organization)                           Identification No.)

25800 COMMERCENTRE DRIVE
LAKE FOREST, CA                                                 92630
(Address of principal executive offices)                      (Zip Code)


       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 595-7900

           SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
                                      NONE

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                           Common Stock, No Par Value
                                (title of class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not 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-K or any amendment to this
Form 10-K. [ ]

The aggregate market value of the voting stock held by non-affiliates of the
registrant on April 4, 2001 was $2,349,386. 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 April
4, 2001 was 46,987,728.


                       DOCUMENTS INCORPORATED BY REFERENCE

                                      NONE


<PAGE>   2

                                TABLE OF CONTENTS


<TABLE>
<CAPTION>
ITEM                                                                                                    PAGE
----                                                                                                    ----
<S>                                                                                                     <C>
                                                   PART I

1.   BUSINESS .........................................................................................  3
     A.   History .....................................................................................  3
     B.   General Business ............................................................................  3

2.   PROPERTIES ....................................................................................... 11

3.   LEGAL PROCEEDINGS ................................................................................ 11

4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .............................................. 12


                                                   PART II

5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ............................ 13

6.   SELECTED FINANCIAL DATA .......................................................................... 14

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

8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ...................................................... 21

9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ............. 21


                                                  PART III

10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ............................................... 22

11.  EXECUTIVE COMPENSATION ........................................................................... 24

12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ................................... 28

13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ................................................... 29


                                                   PART IV

14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K .................................. 30

SIGNATURES ............................................................................................ 31
</TABLE>


<PAGE>   3

                                     PART I


This Annual Report on Form 10-K 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

GENERAL

The L.L. Knickerbocker Co., Inc. (the "Company" or "Knickerbocker") was formed
in 1985 by Louis L. Knickerbocker, Chairman, President, and Chief Executive
Officer, and Tamara Knickerbocker, the former Executive Vice President, under
the name International Beauty Supply, Ltd., a California corporation (IBS). In
May of 1993, the name of International Beauty Supply, Ltd. was changed to The
L.L. Knickerbocker Co., Inc. and succeeded to the operations, assets and
liabilities of Knickerbocker Creations, Ltd, a California corporation formed in
1990 to operate primarily in the collectible doll and teddy bear industries.

The Company is a designer, manufacturer, importer, marketer, and distributor of
high quality, branded collectibles and collectible toys, specialty giftware
products, fashion jewelry and fine jewelry.

Knickerbocker markets its branded collectible products through diverse
distribution channels including a network of independent gift and collectible
retailers, electronic retailing, direct catalog sales, and an international
distributor base. The Company strives to deliver genuine value to the consumer
through innovative product design and award-winning quality. The Company has
developed relationships with a variety of manufacturers that have consistently
delivered high-quality products. Most of the manufacturing of collectible items
is outsourced to manufacturers in the Far East and Southeast Asia.

Knickerbocker's jewelry operations consist of designing, manufacturing, and
marketing fashion and fine jewelry through electronic retailing, primarily QVC,
and to an international customer base in 37 foreign countries. The fashion
jewelry segment designs, manufactures directly or contracts for the manufacture,
and distributes high quality, designer-branded fashion jewelry. The operations
of the fine jewelry segment are vertically integrated, with most of the design,
stone sourcing, advanced stone cutting, and jewelry manufacturing performed by
in-house personnel and facilities.

Knickerbocker holds passive investments in two unrelated companies, Pure Energy
Corporation, a privately-held corporation and Ontro, Inc., a publicly-traded
corporation.

REORGANIZATION

On August 23, 1999 (the Petition Date), an involuntary petition under Chapter 7
of the United States Bankruptcy Code (the Bankruptcy Code) was filed against
Knickerbocker by three of it's creditors. On December 3, 1999 (the Conversion
Date), Knickerbocker (unconsolidated) filed an election to convert to
reorganization under Chapter 11 of the Bankruptcy Code (Chapter 11).
Knickerbocker continues to conduct normal business operations as a
debtor-in-possession subject to the jurisdiction of the United States Bankruptcy
Court for the Central District of



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California (the Bankruptcy Court). As a debtor-in-possession, Knickerbocker may
not engage in transactions outside the ordinary course of business without
approval, after notice and hearing, of the Bankruptcy Court.

Under Chapter 11, actions to enforce claims against Knickerbocker are stayed if
the claims arose, or are based on events that occurred, on or before the
Petition Date, and such claims cannot be paid or restructured prior to the
conclusion of the proceedings or approval of the Bankruptcy Court. Other
liabilities may arise or be subject to compromise as a result of rejection of
executory contracts, including leases, or the Bankruptcy Court's resolution of
claims for contingencies and other disputed amounts. Substantially all
liabilities as of the Petition Date are intended to be dealt with in accordance
with a plan of reorganization filed by the Company that must be voted upon by
all classes of impaired creditors and approved by the Bankruptcy Court. The
Creditor's Committee has been formed and it reviews non-ordinary course of
business transactions and is participating in the formulation of the plan of
reorganization.

The Company has estimated the amount of prepetition liabilities subject to
settlement under reorganization proceedings; however the Company anticipates
that claims filed with the Bankruptcy Court by the Company's creditors will be
reconciled to the Company's financial records. This reconciliation process
and/or the termination of other contractual obligations and the settlement of
disputed claims may create additional prepetition liabilities. Knickerbocker
continues to accrue, but not pay, interest on secured debt at the contractual
interest rate although principal payments have generally been suspended.

On March 30, 2000, the Company filed a Plan of Reorganization and Disclosure
Statement with the United States Bankruptcy Court, pursuant to which
Knickerbocker would emerge from Chapter 11 bankruptcy proceedings. The
Bankruptcy Court scheduled a hearing on the Disclosure Statement for May 5, 2000
and approved the Disclosure Statement. Although the Disclosure Statement was
approved, the underlying Plan of Reorganization was withdrawn and the Company is
now in the process of formulating and negotiating a revised Plan of
Reorganization. The Plan of Reorganization previously filed was withdrawn by the
Company when it became apparent that the Company could not raise the capital
necessary under the Plan of Reorganization to fulfill the obligation to
unsecured creditors.

COLLECTIBLE DOLLS, FIGURINES, TEDDY BEARS AND COLLECTIBLE TOYS

INDUSTRY OVERVIEW

Collectibles are identified as items manufactured and marketed solely for the
enjoyment of the collector. Collectibles include figurines, dolls, collector
plates, plush and die cast toys, sports/entertainment memorabilia,
cottage/village reproductions and other decorative or limited edition items that
are intended for collecting. Unity Marketing, a collectible industry market
research firm not affiliated with Knickerbocker, estimates that consumer sales
of collectibles in the United States in 1999 totaled $10.4 billion and will
decline annually by 5% and 2% in 2000 and 2001, respectively, and will grow
annually by 2% for the years 2002-2005. Unity Marketing currently estimates that
women between the ages of 35 and 64, with a median age of 51, encompass the
majority of collectors. This group, which we believe constitutes a substantial
portion of our collectors, is projected by the U.S. Census Bureau to grow
approximately 12% from 1998 to 2005. Unity Marketing expects that growth in the
collectibles industry will be driven by the increased number of middle-aged
female collectors and higher spending habits of the baby boom generation.

COLLECTIBLE BRANDS

The Knickerbocker Toy Company. The 77-year-old Knickerbocker name is well
recognized in the toy and collectible teddy bear industries and is the Company's
"house" brand. The Company began selling collectible Knickerbocker teddy bears
in October 1986, and was issued the trademark "Knickerbocker" for toys, dolls,
plush stuffed animals and marionettes in January 1996. The collection offers
quality collectible products that have primarily been marketed to retail outlets
nationwide. The Company intends to extend product categories for the
Knickerbocker brand beyond teddy bears in 2001. The Company also plans to
introduce several new concepts at price points lower than in the past aimed at
penetrating the larger giftware market.



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Marie Osmond Fine Porcelain Collector Dolls. This collection consists of a
diverse collection of more than 420 different styles of porcelain dolls 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 tenth anniversary, is among the top collectible doll
lines marketed on QVC. To continue to generate support for her brand, Marie
Osmond makes scheduled appearances at retail stores throughout the United States
to promote the collection. On occasion, Marie Osmond appears on QVC in the
United Kingdom and in Germany. The Company has also teamed Marie Osmond with
such names as Warner Brother Studios and The Walt Disney Company to market
collectible dolls in the themes of famous television and movie characters.

Magic Attic Club. The Magic Attic Club (MAC) is a series of vinyl dolls, doll
clothing and accessories, all of which are based on imaginative theme books,
marketed primarily through a catalog. The books and Magic Attic Club catalogs
target girls in the U.S. between the ages of 6 and 12. The items in the catalog
do not vary much year to year, which keeps creative costs low and minimizes
inventory difficulties. Repeat customers can be highly profitable. The Company
has determined that the Internet is a viable distribution channel for the Magic
Attic Club and intends to focus resources on building Internet distribution for
Magic Attic Club products. An integral part of the Magic Attic Club's appeal is
a series of 32 illustrated novels based on five girls and their adventures. Each
Magic Attic Club book contains a mail-in card to request a free catalog listing
products offered by the Magic Attic Club.

Somers & Field Collection. The Company has the non-exclusive right to
manufacture and distribute the line of dolls designed by Laura Meisner and Doug
James under the Somers & Field Collection. The collection is vinyl and the
concept is based on "mod" British friends, Willow Somers and Daisy Field, whose
fathers co-own a fashionable department store. Costumes and accessories
highlight fashion trends from the 1960's.

Cotton Trails

The Company is in negotiations to manufacture and distribute a line of giftware
items under the Cotton Trails name. The collection consists of picture frames,
plush animals such as bunny rabbits and teddy bears, and houseware items.

Terri Lee. The Company has an exclusive license to manufacture and distribute
the line of dolls, fashion apparel and accessories with Terri Lee and
Associates. The Terri Lee concept is derived from, and is a reproduction of, the
original 1940's doll. Terri Lee, in the 1940's, was considered among the top toy
dolls of the era. Original molds were used in the reproduction of the doll, and
the clothing and accessories are designed with consideration to original designs
as well as interpretations of those designs.

JEWELRY PRODUCTS

INDUSTRY OVERVIEW

The Jewelry market consists of two major categories: Fine and Fashion. Fine
jewelry is manufactured with precious metals (gold, sterling silver, platinum)
with or without gemstones (precious or semiprecious). Natural and cultured
pearls are also considered fine jewelry. According to the World Gold Council, in
1999 retail sales of gold jewelry grew by almost 12% on a unit basis to 181
million units and by over 7.7% on a dollar basis to $14.7 billion. Fashion
jewelry is manufactured with non-precious metals (often gold plated), with or
without imitation stones and pearls. According to Accessories Magazine, 1999
U.S. retail sales of fashion/bridge jewelry was $5.9 billion, up 13% from 1998.

FASHION JEWELRY AND ACCESSORIES BRANDS

Approximately 32.5% of the Company's revenues come from fashion jewelry sales.
The Company markets these high-quality, designer fashion jewelry lines and
accessories primarily through QVC. Knickerbocker has its own fashion jewelry
manufacturing facility in Central Falls, Rhode Island but outsources, to a
limited extent, certain non-proprietary manufacturing functions to southeast
Asian manufacturers. The Company's fashion jewelry brands are as follows:



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Kenneth Jay Lane: Jewelry's Living Legend - 450 different styles of fashion
jewelry at retail prices ranging from $17 to $198. Kenneth Jay Lane is the
designer and spokesperson for the collection, which celebrated its ninth
anniversary on QVC in 2000.

The Nolan Miller Glamour Collection - 400 different styles of fashion jewelry at
retail prices ranging from $20 to $280. Nolan Miller is the designer and
spokesperson for the collection, which celebrated its eighth anniversary on QVC
in 2000.

The Dennis Basso Boutique - 90 different styles of fashion accessories at retail
prices ranging from $20 to $220. Dennis Basso is the designer and spokesperson
for the collection, which celebrated its seventh anniversary on QVC in 2000.

Phillip Bloch - In 2000, the Company introduced on QVC a line of fashion jewelry
with Hollywood stylist Phillip Bloch as spokesperson.

FINE JEWELRY

The Company's fine jewelry operation manufactures and markets gold and sterling
silver jewelry with diamonds, emeralds, rubies and semi-precious stones through
a sales force with a presence in 37 countries, with a primary geographic focus
in Western Europe and South America. In addition, the Company produces an
assortment of fine jewelry in sterling silver for the television retailer, QVC.

CONSUMER BRANDS DISCONTINUED

In 2000, the Company discontinued the Annette Funicello and Richard Simmons
brands.

MARKETING STRATEGIES

The Company's marketing strategy is to develop products and build brands that
are marketed through diverse channels of distribution. In implementing this
strategy, the Company plans to continue to focus on building brand recognition,
developing new and innovative products, and selling those branded products
through appropriate channels of distribution. Generally, new brand programs are
tested conservatively prior to any roll-out.

The diverse channels of distribution of the branded products include, but are
not limited to, electronic retailing through the television shopping industry,
retail outlets, direct mail, catalogs, Internet, and distributors domestically
and internationally. Each brand has its own distribution strategy based on the
product; however, where possible, the distribution channels cross over from
brand to brand. The wide variety of branded items and distribution channels
provides diversification to the Company's risk profile.

TELEVISION SHOPPING CHANNELS

Television Shopping Channels, as well as independent Infomercials, make up this
segment of the direct marketing industry.

The largest television shopping cable network is QVC. The shopping networks
purchase products from vendors and generally require the vendors to ship the
products to the networks' warehouses before the networks will sell the items on
the air. Generally, the format of the home shopping channels is to present
approximately 12 items per hour. Each hour can be 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, such as jewelry and collectibles, and build
brand recognition within those product segments. Television shopping



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represents approximately 41% of the Company's 2000 Collectible sales and 90% of
2000 Fashion Jewelry and accessories sales. Additionally, sales to QVC accounted
for 44%, 45%, and 25% of the Company's consolidated revenues in 2000, 1999 and
1998, respectively.

TRADITIONAL RETAIL AND INTERNATIONAL DISTRIBUTORS

The Company markets to a wide variety of traditional retail outlets and to the
less traditional catalog retailers and international distributors. In addition,
the Company continues to market to specialty stores and other customers such as
Disney via its own internal sales organization and retail support group.

CATALOGS

The Company markets its Magic Attic Club brand by catalog distribution. The
catalog offers the consumer a chance to see the many accessories available for a
Magic Attic Doll and provides an entertainment element, with imaginative stories
and product displays. These catalogs are mailed primarily to previous buyers,
but are also mailed to prospective customers.

INTERNET COMMERCE

The Company also maintains a corporate and a product web site on the World Wide
Web. The Company uses the Internet to give potential consumers the ability to
see a multiplicity of product and product specials and simultaneously order
without using the traditional marketing routes.

PRODUCTION PROCEDURES

CONTRACTED PRODUCTION

The Collectibles and some of the Jewelry brand managers develop products, locate
an appropriate contract manufacturing facility and prepare samples, which are
presented to the customer for approval. Upon approval of the samples, the
Company issues a purchase order to the manufacturer for the desired quantity of
the product. In some cases, the purchase order is secured by an irrevocable and
transferable letter of credit from the customer. All goods are inspected for
quality by either in-house quality assurance personnel or by an independent
quality assurance resource prior to shipment.

COMPANY-OWNED PRODUCTION

The Company manufactures fashion jewelry at its own 26,000 square-foot-facility
in Rhode Island. Almost all of the fashion jewelry manufacturing is completed
against open purchase orders.

The Thailand jewelry operation manufactures fine jewelry for a diverse group of
international distributors and wholesalers, including the television shopping
industry. The majority of goods are manufactured in the Company's fully
integrated 35,000 square-foot-facility. The Company has moved out of its 3,500
square foot office facility in Bangkok and is currently evaluating whether to
sell or lease out the space and has recorded an impairment charge in 2000.

OPERATIONS STRATEGIES (CONSOLIDATION EFFORTS)

The Company has recognized that acquisitions made in 1996 would be better
managed if those operations were consolidated to maximize efficiency in their
marketing and development strategy. In 1998 the Company embarked on a
restructuring plan that would consolidate or restructure the various operating
subsidiaries into more streamlined and focused marketing and development
divisions.

The Company began its consolidation with the closure of Magic Attic Press's
(MAP) New York Office. The



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Company realized that its future in publishing for the Magic Attic Brand line
would be better served if the book operations were outsourced. In May 1998, the
Company entered into a marketing and distribution agreement with Millbrook
Press, Inc. of Brooklyn, New York. Currently, publishing of the existing series
of books is handled by a third party arrangement enabling the company to realize
cost savings by reducing overhead tied to the MAP division.

In November 1998, the Company decided to restructure its fashion jewelry
manufacturing operations by shifting certain non-proprietary manufacturing
functions to Southeast Asia and to domestic contractors. The Company's
manufacturing facility in Rhode Island has been reorganized to provide product
development and proprietary manufacturing functions.

During the first half of 1999, the Company completed the consolidation of its
Georgetown and Magic Attic Club brands, which were previously headquartered in
Portland, Maine, into the Company's California operations. By completing the
consolidation of production and operations in the U. S., the Company closed its
overseas Trading Office in China and elected to manage overseas production
either factory-direct or through its California sourcing group.

As a result of these consolidation efforts, manpower in the United States over
the last three years has been reduced by approximately 65%. In addition to
streamlining manpower, the Company has reduced other employee-related costs as
well as facilities costs worldwide.

EQUITY INVESTMENTS

Knickerbocker holds passive investments in two unrelated, independent companies,
as follows:

PURE ENERGY CORPORATION

The Company holds an equity interest in Pure Energy Corporation (PEC). Other
shareholders include PEC's founders and officers, Donaldson, Lufkin & Jenrette
(DLJ), an investment banking firm and private individuals.

PEC has developed a cleaner-burning alternative automotive motor fuel designed
in response to the more stringent emission standards and vehicle purchase
requirements of the Energy Policy Act of 1992 (EPACT) and the Clean Air Act
Amendment of 1990 (CAAA). The fuel is planned to be produced regionally,
substantially from renewable biomass, and distributed through existing
infrastructure. Currently produced flexible fuel vehicles (FFVs) can operate on
the fuel. PEC's strategy is to serve fleet customers initially and eventually a
broader segment of the motoring public. PEC has the exclusive worldwide license
from Princeton University to commercialize the fuel.

ONTRO, INC. (FORMERLY SELF-HEATING CONTAINER CORP.)

Knickerbocker holds an equity interest in Ontro, Inc. (Ontro), engaged in the
development of integrated thermal containers. Ontro has the rights to exploit a
unique propriety technology which it has incorporated into a proposed product
line of fully contained self-heating beverage containers designed to heat liquid
contents such as coffee, tea, hot chocolate, soups and baby formula. Ontro
entered into an evaluation agreement with Nestle which allows Nestle an
exclusive period to review Ontro's designs and technology in order to determine
Nestle's interest in acquiring rights for the commercial use of the self-heating
food and beverage containers and to cooperate with Ontro in evaluating certain
commercial uses and markets for the technology and includes an obligation to pay
for one-half of the cost of certain market research studies that are currently
underway.

Due to the development stage nature of Ontro, Inc., the price of the product has
not been established. The product heats the contents of the container only one
time and is not renewable. The container heats the beverage to a temperature of
180 degrees. Ontro, Inc. had no sales during 2000.

During 2000, the Company sold 299,923 shares of Ontro, Inc. for net proceeds of
approximately $660,000.



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<PAGE>   9

SUMMARY OF REVENUE BY PRODUCT LINE

In 2000, the Company's revenue was $30,345,000. The revenue by product line in
2000 was as follows:


<TABLE>
<CAPTION>
Category                                           $000's                   Percent
                                                  -------                   -------
<S>                                               <C>                          <C>
Collectible dolls and bears                       $11,782                      38.8%
Fashion jewelry and accessories                     9,857                      32.5%
Fine jewelry                                        8,706                      28.7%
                                                  -------                   -------
Total                                             $30,345                       100%
                                                  =======                   =======
</TABLE>


MATERIAL CONTRACTS

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, for a
minimum of eight personal appearances per year. In June 2000, the Company
entered into new license agreement with Marie, Inc. which expires on December
31, 2002. The Agreement calls for certain minimum royalty payments which may not
be made during 2001 and, if such payments are not made, give Marie, Inc. the
right to terminate the contract. The Company does not expect to meet the minimum
royalty payments in 2001 and, thus, the license agreement with Marie Osmond may
be subject to termination prior to its expiration date.

TRADEMARKS AND LOGOS

The Company has the right to use the trademark names of the following
spokespersons and celebrities currently under contract: Marie Osmond, Nolan
Miller, Kenneth Jay Lane, Dennis Basso and Phillip Bloch. The Company has also
been issued trademarks under the following names: Somers & Field and Magic Attic
Club.

Trademark applications have been filed for: Adorabell, Folkbook Friends,
Greeting Card Treasures, Knickerbocker, Pendant Collection, Pendant Press,
Storybook Bears by Knickerbocker, and Storybook Dolls by Knickerbocker.

COMPETITION

The collectibles and giftware markets are 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
the collectibles and giftware markets are difficult to distinguish because the
Company is involved in five types of distribution: Television Shopping, Print
Media Advertising, Traditional Retail, Catalogs and Internet. The Company feels,
however, that its main competitors are Ashton-Drake, Hamilton Mint, Franklin
Mint, Mattel, Boyds Bears, and JMAM, Inc. The Company also competes with a wide
variety of wholesalers, retailers and



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<PAGE>   10

other direct marketers.

EMPLOYEES

The Company employs a total of 357 employees.

The Company had 38 full-time employees at its main office in Lake Forest,
California as of March 24, 2001, consisting of 2 executives, 8 product
development, 7 sales, 8 administrative, 4 customer service, and 9 warehouse
employees.

The Company has 6 full-time employees at its Krasner Group, Inc. office in New
York, New York as of March 24, 2001, consisting of 2 executives and 4 general
sales and office administrative employees.

The Company has 47 full-time employees at its Charisma Manufacturing Company,
Inc. factory in Central Falls, Rhode Island as of March 24, 2001 consisting of 2
executives, 10 general sales and office administrative and 35 product
development, warehouse and factory employees.

The Company has 266 full-time employees at its L.L. Knickerbocker (Thai) Co.,
Ltd., offices and factory in Bangkok, Thailand as of March 24, 2001. The 266
full-time employees are comprised of 3 executives, 36 general sales and office
administrative and 227 factory/warehouse employees.




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ITEM 2. PROPERTIES

As of March 15, 2001, the Company had eight principal facilities where it leased
or owned an aggregate of 124,500 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
Lake Forest, CA                  Corporate headquarters, finance,
                                 purchasing, service division headquarters                25,000         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                              30,000         Leased


           FINE JEWELRY
Bangkok, Thailand                Showroom and marketing (vacant)                          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. LEGAL PROCEEDINGS

BANKRUPTCY PROCEEDING

On August 23, 1999 (the Petition Date), an involuntary petition under Chapter 7
of the United States Bankruptcy Code (the Bankruptcy Code) was filed against
Knickerbocker by three of it's creditors. On December 3, 1999 (the Conversion
Date), Knickerbocker (unconsolidated) filed an election to convert to
reorganization under Chapter 11 of the Bankruptcy Code (Chapter 11).
Knickerbocker continues to conduct normal business operations as a
debtor-in-possession subject to the jurisdiction of the United States Bankruptcy
Court for the Central District of California (the Bankruptcy Court). As a
debtor-in-possession, Knickerbocker may not engage in transactions outside the
ordinary course of business without approval, after notice and hearing, of the
Bankruptcy Court.

Under Chapter 11, actions to enforce claims against Knickerbocker are stayed if
the claims arose, or are based on events that occurred, on or before the
Petition Date, and such claims cannot be paid or restructured prior to the
conclusion of the proceedings or approval of the Bankruptcy Court. Other
liabilities may arise or be subject to compromise as a result of rejection of
executory contracts, including leases, or the Bankruptcy Court's resolution of
claims for contingencies and other disputed amounts. Substantially all
liabilities as of the Petition Date are intended to be dealt with in accordance
with a plan of reorganization to be filed by the Company that will be voted upon
by all classes of impaired creditors and approved by the Bankruptcy Court. The
Creditors' Committee has



                                       11
<PAGE>   12

been formed and it reviews non-ordinary course of business transactions and is
participating in the formulation of the plan of reorganization.

On March 30, 2000, the Company filed a Plan of Reorganization and Disclosure
Statement with the United States Bankruptcy Court, pursuant to which
Knickerbocker would emerge from Chapter 11 bankruptcy proceedings. The
Bankruptcy Court scheduled a hearing on the Disclosure Statement for May 5, 2000
and approved the Disclosure Statement. Although the Disclosure Statement was
approved, the underlying Plan of Reorganization was withdrawn and the Company is
now in the process of formulating and negotiating a revised Plan of
Reorganization.

LITIGATION

Plaintiff Michael Elam filed an action in Orange County Superior Court (Case No.
759883) on or about February 16, 1996, against Louis L. Knickerbocker, Tamara
Knickerbocker and the Company alleging causes of action including, but not
limited to, conversion, breach of fiduciary duty, debitatus assumpsit,
intentional interference with contract, constructive trust, breach of oral
agreement, specific performance, money had and received, open book account and
spoliation of evidence. The defendants vigorously opposed the lawsuit. The
plaintiff filed a claim in the bankruptcy in the amount of $2,500,000, which was
settled by the Company requiring the Company to transfer 1,189 shares of Pure
Energy Corporation stock with a carrying value of $101,000 to the plaintiff.

The Company brought claims against State Street Bank and Trust Company ("State
Street") in federal district court in Boston, Massachusetts (Civil Action No.
97-12573-NO, U.S. District Court, D. MA) for conversion, breach of contract,
unjust enrichment, a declaratory judgment and violation of Massachusetts General
Laws, c. 93A arising from State Street's wrongful retention of 72,188 shares of
the Company's common stock after the Company's obligations to State Street under
a Settlement Agreement of the prior indebtedness of Georgetown Collection, Inc.,
a subsidiary acquired in 1996, had been paid in full. The stock retained by
State Street had an original value of $617,000. State Street denies liability
and brought a counterclaim against the Company for breach of contract and
specific performance seeking $102,000 in damages, plus attorneys fees and costs.
The Company has settled with State Street Bank in the amount of $85,000 and has
received court approval for such settlement.

Finance Authority of Maine, Coastal Enterprises, Inc, and the Southern Maine
Economic Development District brought claims in federal district court in
Portland, Maine (Civil Action No. 98-2235-8, U.S. District Court, D. Maine) for
breach of contract, indemnification and specific performance arising from the
Company's performance under certain settlement documents following the
acquisition of the subsidiary, Georgetown Collection, Inc., in 1996. The
plaintiffs were seeking an order requiring the Company to purchase 63,030 shares
of the Company's stock previously transferred to plaintiffs for $11.50 per
share, plus interest and attorneys fees. The Company answered and denied
liability on plaintiffs' claims. The Company has settled with Finance Authority
of Maine and Coastal Enterprises in the amounts of $160,000 and $55,000,
respectively, and has received court approval for such settlements. The Southern
Maine Economic Development District matter is stayed and no settlement has been
reached.

The Company is involved in certain other legal and administrative proceedings
and threatened legal and administrative proceedings arising in the normal course
of its business. While the outcome of such proceedings and threatened
proceedings cannot be predicted with certainty, in the opinion of management,
the ultimate resolution of these matters individually or in the aggregate will
not have a material adverse effect on the Company.

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

No matters were submitted to a vote of security holders during the fiscal year
ended December 31, 2000.



                                       12
<PAGE>   13

                                     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 OTC Bulletin Board under the symbol
"KNIC.OB". Prior to the Company's listing on the OTC Bulletin Board, the Company
was listed on the NASDAQ exchange since January 25, 1995. Prior to January 25,
1995, there was no public trading market for the Company's equity securities.

On April 4, 2001, the common stock bid price closed at $.05 per share. The
closing bid price of the Company's stock on December 29, 2000 was $.06 per
share. The total volume of shares traded during the year ended December 31, 2000
was 65,380,000 shares. As of April 4, 2001, there were 162 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 2000 and 1999 as
reported by the OTC Bulletin Board and 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>
                                                  2000                        1999
                                          -------------------         ---------------------
                                          High $        Low $         High $          Low $
                                          ------        -----         ------          -----
<S>                                        <C>           <C>           <C>            <C>
               First Quarter               .33           .09           1.19           .44
               Second Quarter              .23           .08            .59           .19
               Third Quarter               .16           .11            .22           .05
               Fourth Quarter              .16           .05            .11           .05
</TABLE>

DIVIDENDS

The Company has never paid any dividends on its common stock. The Company does
not expect to pay a dividend on its common stock in the 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, the outcome of its Chapter
11 reorganization, 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. The Company's line of credit
agreement prohibits the payment of dividends without the prior written consent
of the lender.

TRANSFER AGENT AND REGISTRAR

Computershare, Inc. has been appointed and serves as transfer agent and
registrar of the Company's common stock.




                                       13
<PAGE>   14


ITEM 6.  SELECTED FINANCIAL DATA

The following table sets forth certain selected financial data regarding the
Company, which is qualified by reference to, and should be read in conjunction
with, the consolidated financial statements and notes thereto (see "Index to
Consolidated Financial Statements" and Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations"). The statement of
operations and balance sheet data presented below has been derived from the
Company's consolidated financial statements. The Company's consolidated
financial statements as of December 31, 2000 and 1999 and for each of the three
years in the period ended December 31, 2000 have been audited by Deloitte &
Touche LLP, the Company's independent auditors, as indicated in their report,
which contains an explanatory paragraph regarding substantial doubt about the
Company's ability to continue as a going concern, included elsewhere herein.


<TABLE>
<CAPTION>
                                                                             YEAR ENDED DECEMBER 31,
                                                   ------------------------------------------------------------------------
                                                     2000            1999            1998             1997            1996
                                                   --------        --------        --------        --------        --------
                                                                    (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                <C>             <C>             <C>             <C>             <C>
STATEMENT OF OPERATIONS DATA:
Net sales                                          $ 30,345        $ 42,165        $ 60,427        $ 68,290        $ 42,095
Cost of sales                                        17,429          25,155          29,383          30,790          21,451
                                                   --------        --------        --------        --------        --------
Gross profit                                         12,916          17,010          31,044          37,500          20,644
Operating expenses                                   15,484          25,426          51,412          39,542          16,794
Write-down of assets                                  2,437
                                                   --------        --------        --------        --------        --------
Operating (loss) income                              (5,005)         (8,416)        (20,368)         (2,042)          3,850
Loss on equity method investments                                                     1,347           1,857             629
Other income (expense)                                  111            (235)             47           3,316             (62)
Interest expense                                        745           1,814           3,658           4,831           1,205
                                                   --------        --------        --------        --------        --------
(Loss) income before reorganization items,
  minority interest, income tax expense and
  extraordinary items                                (5,639)        (10,465)        (25,326)         (5,414)          1,954
Reorganization items                                  1,080             672
                                                   --------        --------        --------        --------        --------
(Loss) income before minority interest,
  income taxes, and extraordinary item               (6,719)        (11,137)        (25,326)         (5,414)          1,954
Minority interest in loss (income)
  of subsidiary                                                                        (274)             10             132
Income tax expense (benefit)                             30              75           3,663          (1,047)            450
                                                   --------        --------        --------        --------        --------
Loss before extraordinary item                       (6,749)        (11,212)        (28,715)         (4,377)          1,372
 Extraordinary item                                   3,355
                                                   --------        --------        --------        --------        --------
Net (loss) income                                  $ (3,394)       $(11,212)       $(28,715)       $ (4,377)       $  1,372
                                                   ========        ========        ========        ========        ========
Basic (loss) income per common share:

Net (loss) income per share before
  extraordinary item                               $   (.14)       $   (.33)       $  (1.46)       $   (.24)       $    .09
Extraordinary item per share                            .07
                                                   --------        --------        --------        --------        --------
Net (loss) income per share, basic                 $   (.07)       $   (.33)       $  (1.46)       $   (.24)       $    .09
                                                   ========        ========        ========        ========        ========
Diluted (loss) income per common share:
Net (loss) income per share
  before extraordinary item                        $   (.14)       $   (.33)       $  (1.46)       $   (.24)       $    .08
Extraordinary item per share                            .07
                                                   --------        --------        --------        --------        --------
Net (loss) income per share, diluted               $   (.07)       $   (.33)       $  (1.46)       $   (.24)       $    .08
                                                   ========        ========        ========        ========        ========
Weighted average shares outstanding, basic           46,697          34,291          19,630          18,052          14,714
Weighted average shares outstanding, diluted         46,697          34,291          19,630          18,052          16,471
</TABLE>



                                       14
<PAGE>   15


<TABLE>
<S>                                                <C>             <C>             <C>             <C>             <C>
BALANCE SHEET DATA:
Working capital (deficit)                          $  1,368        $  4,399        $ (7,785)       $ 12,496        $ 15,702
Total assets                                         18,142          26,586          38,742          50,961          57,572
Long term debt                                        9,432          13,901           3,281          10,116          14,541
Stockholders' equity (deficit)                       (1,502)          2,375           3,268          24,725          24,263
</TABLE>


(1)     The Company's consolidated financial statements include the results of
        operations of Krasner Group, Inc.; S.L.S. Trading Co., Ltd. and Harlyn
        International Co., Ltd.; and Georgetown Collection, Inc. since June 18,
        1996; July 1, 1996; and October 18, 1996, respectively.

(2)     During the year ended December 31, 2000, the Company transferred to
        debenture holders 9,000 shares of Pure Energy Corporation stock in
        settlement of $3,693,000 face amount of the 1997 and 1998 convertible
        debentures plus accrued interest of $464,000. The transaction resulted
        in an extraordinary gain of $3,355,000, as shown in the statement of
        operations for the year ended December 31, 2000.

(3)     The write-down of assets consists of impairment charges related to
        goodwill and property and equipment of $1,255,000 and $1,182,000,
        respectively.

(4)     As of December 31, 2000 and 1999, long term debt includes liabilities
        subject to compromise under reorganization proceedings of $9,074,000 and
        $13,484,000, respectively.



                                       15
<PAGE>   16

ITEM 7. 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-K.

RESULTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                      Year ended December 31,
                                                 ----------------------------------
                                                  2000          1999          1998
                                                 -----         -----         ------
<S>                                              <C>           <C>           <C>
            Net Sales                            100.0%        100.0%        100.0%
            Cost of sales                         57.4%         59.7%         48.6%
            Gross profit                          42.6%         40.3%         51.4%
            Operating expenses                    51.0%         60.3%         78.5%
            Write-down of assets
               and restructuring charges           8.0%                        6.6%
            Operating loss                       (16.4)%       (20.0)%       (33.7)%
            Other (income) expense                 2.0%          4.9%          8.2%
            Net loss                             (11.2)%       (26.6)%       (47.5)%
</TABLE>

Year Ended December 31, 2000 compared to year ended December 31, 1999

Net Sales

Net sales decreased to $30,345,000 for the year ended December 31, 2000 from
$42,165,000 for the year ended December 31, 1999, a decrease of $11,820,000 or
28.0%. The $11,820,000 decrease in net sales was comprised of decreases in sales
of $5,031,000 in mail order and catalog-driven dolls, $7,640,000 in wholesale
collectible sales, and $548,000 in fashion jewelry sales, partially offset by an
increase of $1,399,000 in fine jewelry net sales. The $5,031,000 decrease in
mail order and catalog-driven doll sales was primarily attributable to the sale
of the Georgetown brand of collectibles dolls in October 1999, as well as a
decrease in the number of catalogs mailed to consumers in 2000. The Company's
plan has been to reposition its base of sales to primarily wholesale sales and
to focus on brands the Company believes will generate the highest level of
profit. The $7,640,000 decrease in wholesale collectible sales is comprised of
$4,531,000 related to the discontinuance of two celebrity brands and $3,109,000
in net decreases in sales from its continuing collectible brands. The decrease
in fashion jewelry sales was due primarily to a reduction in orders from the
Company's largest customer in the home shopping industry. The Company continues
to assess the potential of sales expansion of existing products through new
distribution channels, as well as continuing to develop new product categories.

Gross Profit

Gross profit decreased to $12,916,000 for the year ended December 31, 2000 from
$17,010,000 for the year ended December 31, 1999, a decrease of $4,094,000, or
24.1%. As a percentage of net sales, gross profit for the year increased to
42.6% in 2000 from 40.3% in 1999. The general gross margin increases are due to
the Company's focus on marketing higher gross margin products while lowering
sourcing and distribution costs. The Company has lowered distribution costs by
consolidating overhead and reducing headcount in its warehousing and fulfillment
operations.

Advertising expense

Advertising expense decreased to $846,000 for the year ended December 31, 2000
from $2,630,000 for the year ended December 31, 1999, a decrease of $1,784,000,
or 67.8%. The large decrease in advertising expense in 2000 was due primarily to
the Company's sale of its mail order collectible doll brand in October 1999, and
a reduction in catalog printing and mailing costs due to a lower number of
catalogs mailed to consumers in 2000.



                                       16
<PAGE>   17

Included in advertising expense are advertisement printing costs,
catalog-printing costs, media space in magazines, and advertisement creative and
development costs.

Selling expense

Selling expense decreased to $3,858,000 for the year ended December 31, 2000
from $7,219,000 for the year ended December 31, 1999, a decrease of $3,361,000,
or 46.6%. As a percentage of net sales, selling expense decreased to 12.7% in
2000 from 17.1% in 1999. The decrease in selling expense was due primarily to
lower variable royalty expense attributable to lower net sales in 2000 for the
Company's collectible doll and fashion jewelry programs, and a reduction in
fulfillment expenses due to the Company's sale of its mail order collectible
doll brand in October 1999. Selling expense includes royalty expense, commission
expense, trade show expenses, and other sales promotion expenses.

General and administrative expense

General and administrative expense decreased to $10,780,000 for the year ended
December 31, 2000 from $15,577,000 for the year ended December 31, 1999, a
decrease of $4,797,000, or 30.8%. The percentage of net sales represented by
these expenses decreased to 35.5% in 2000 from 36.9% in 1999, due primarily to
aggressive cost cutting and by the impact of a lower sales base in 2000. The
decrease in general and administrative expense was also due to the Company's
consolidation efforts which began in the fourth quarter of 1998, combined with
the Company's continued focus on lowering operating costs.

Impairment losses

Impairment losses of $2,437,000 was recorded during the year ended December 31,
2000 to write-down the Company's assets in its fine jewelry segment. The
$2,437,000 is comprised of write-downs of $1,255,000 and $1,182,000 related to
goodwill and fixed assets, respectively. The Company evaluates the
recoverability of goodwill at each balance sheet date 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.

Other (income) expense

Other income, net increased to $111,000 for the year ended December 31, 2000
from a net expense of $235,000 for the year ended December 31, 1999, a change of
$346,000. Other income in 2000 consists primarily of foreign currency gains from
transactions of the Company's Thailand operations due to fluctuations in the
Thai baht.

Interest expense

Interest expense decreased to $745,000 for the year ended December 31, 2000 from
$1,814,000 for the year ended December 31, 1999. The decrease in interest
expense relates primarily to the conversion to common stock of $5,319,000
aggregate face value of the 1998 and 1997 Debentures during 1999, the
discontinuance of interest expense on the remaining debentures subsequent to the
Conversion Date, and to the settlement of a portion of the remaining balance of
debentures in 2000 by using the shares in the Company's Pure Energy Stock as
payment (Note 5). Included in interest expense for the year ended December 31,
2000 is the amortization of debt discount and of debt issuance costs related to
the Company's debenture financings and interest expense on borrowings from
working capital lines of credit and mortgages on buildings owned by the Company.

Reorganization Items

Expenses associated with the Company's Chapter 11 filing amounted to $1,080,000
and $672,000 for the years ended December 31, 2000 and 1999, respectively.
Reorganization items were comprised primarily of professional



                                       17
<PAGE>   18

fees. The Company anticipates that additional reorganization costs will be
incurred throughout the Chapter 11 reorganization.

Extraordinary item

During the year ended December 31, 2000, the Company recognized an extraordinary
gain of $3,355,000 in conjunction with its extinguishment of convertible
debentures with a face value of $3,692,000 and related accrued interest of
$464,000. To satisfy the obligation, the Company transferred 9,000 shares of its
investment in the stock of Pure Energy Corporation with a carrying value of
$801,000 to debenture holders.

Net loss

As a result of the foregoing factors, net loss decreased to $3,394,000 for the
year ended December 31, 2000 from net loss of $11,212,000 for the year ended
December 31, 1999, a decrease in net loss of $7,818,000, or 69.7%.

Year ended December 31, 1999 compared to year ended December 31, 1998

Net Sales

Net sales decreased to $42,165,000 for the year ended December 31, 1999 from
$60,427,000 for the year ended December 31, 1998, a decrease of $18,262,000, or
30.2%. The $18,262,000 decrease in annual net sales was comprised of decreases
of $18,688,000 in net sales from the mail-order and catalog-driven collectible
doll brands and $2,504,000 from the fine jewelry division, partially offset by
increases in net sales of $1,766,000 in the celebrity-driven collectible doll
brands and $1,164,000 from the fashion jewelry division. The $18,688,000
decrease in 1999 mail order and catalog-driven collectible doll sales was
primarily attributed to a substantial reduction in 1999 advertising spending.
Since 1997, the Company substantially reduced its annual mail order and catalog
advertising spending in order to reposition distribution of the Company's
collectible products to traditional and electronic retailers. The decrease in
net sales from the Company's fine jewelry program was primarily attributed to a
decline in orders from the Company's major fine jewelry customer in the home
shopping industry and a decline in orders from international distributors. The
increase in net sales from celebrity-driven collectible doll programs was due
primarily to increased sales to the Company's retail base of customers. The
increase in net sales from the fashion jewelry division was due primarily to
greater demand for designer-driven fashion jewelry through its electronic
retailing distribution. The Company continues to assess the potential of sales
expansion of existing products through new distribution channels, as well as
continuing to develop new product categories.

Gross Profit

Gross profit decreased to $17,010,000 for the year ended December 31, 1999 from
$31,044,000 for the year ended December 31, 1998, a decrease of $14,034,000, or
45.2%. As a percentage of net sales, gross profit for the year decreased to
40.3% in 1999 from 51.4% in 1998. The decrease in the gross profit percentage in
1999 from 1998 was due primarily to a change in the sales mix of products sold
by mail order and catalogs, or direct to the consumer, versus products sold at
wholesale prices through retail distribution and electronic retailing. In 1999,
18.9% of the Company's sales were directly to the consumer through mail order
and catalogs, versus 44.1% in 1998. Mail order and catalog sales, as opposed to
wholesale, business to business sales, generate higher margins to the Company as
the products are sold at retail prices to individual consumers. Therefore, the
Company's gross profit percentage will vary depending on the relationship of
direct response sales to total sales for the Company during the year. The
Company expects to further decrease the mail order and catalog sales in the
future.

Advertising Expense

Advertising expense decreased to $2,630,000 for the year ended December 31, 1999
from $14,196,000 for the year ended December 31, 1998, due primarily to the
Company's planned reduction in its mail



                                       18
<PAGE>   19

order and catalog advertising campaigns. The Company is in the process of
repositioning distribution of its products away from mail order and catalog
distribution which require significant advertising spending to generate sales.
Included in advertising expense are advertisement printing costs, catalog
printing costs, media space in magazines, and advertisement creative and
development costs.

Selling Expense

Selling expense increased to $7,219,000 for the year ended December 31, 1999
from $7,029,000 for the year ended December 31, 1998, an increase of $190,000,
or 2.7%. As a percentage of net sales, selling expense increased from 11.6% in
1998 to 17.1% in 1999. The increase in selling expense is due primarily to
increases in celebrity royalty expense based upon higher sales in 1999 from
celebrity and designer-driven collectible and fashion jewelry products. Selling
expenses include royalty expense, commission expense, trade show expenses, and
other sales promotion expenses.

General and Administrative Expense

General and administrative expense decreased to $15,577,000 for the year ended
December 31, 1999 from $26,196,000 for the year ended December 31, 1998, a
decrease of $10,619,000, or 39.0%. The percentage of revenues represented by
these expenses decreased from 43.4% in 1998 to 36.9% in 1999. The decrease in
general and administrative expenses was due primarily to the consolidation of
operating facilities and overhead in the collectibles division which began in
1998 and concluded in early 1999.

Write-down of goodwill

Write-down of goodwill for the year ended December 31, 1998 relates to an
impairment of goodwill in the Company's fashion jewelry segment. The Company
evaluates the recoverability of goodwill at each balance sheet date 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.

Loss on Equity Method Investments

Loss on equity method investments decreased to $0 for the year ended December
31, 1999 from $1,347,000 for the year ended December 31, 1998. The major
components of the 1998 loss from equity method investments stem from the
Company's 50% interest in Arkenol Asia, LLC and its interest in Pure Energy
Corporation, both development-stage corporations. Under the equity method of
accounting, the Company recorded loss on equity method investments equal to the
investees' net loss multiplied by the Company's ownership percentage. Effective
April 1, 1998, the Company discontinued the application of the equity method to
its investment in Pure Energy Corporation due to a reduction in ownership
interest during 1998. Additionally, during the year ended December 31, 1998, the
Company wrote off its investment in Arkenol Asia LLC due to the inactivity of
the joint venture.

Other (Income) Expense

Other expense, net increased to $235,000 for the year ended December 31, 1999
from a net income, of $47,000 for the year ended December 31, 1998, a change of
$282,000. The primary reason for the change from 1998 to 1999 is that the 1998
comparative amount included a net gain of $769,000 from the sale of a portion of
the Company's interest in Pure Energy Corporation, offset by a decrease in
foreign currency transaction losses related to the Company's Thailand
operations, from $333,000 in 1998 to $79,000 in 1999.

Interest Expense

Interest expense decreased to $1,814,000 for the year ended December 31, 1999
from $3,658,000 for the year ended December 31, 1998, a decrease of $1,844,000,
or 50.4%. The decrease in interest expense was due primarily to the maturity of
$4,600,000 of convertible debentures in January 1999, as well as additional
conversions of $6,119,000 of the 1997 and 1998 convertible debentures during
1999. Additionally, the Company's interest expense was lower due to lower
average borrowings on its line of credit. Included in interest expense for



                                       19
<PAGE>   20

the years ended December 31, 1999 and 1998, are noncash charges of $993,000 and
$2,183,000, respectively, that are classified as interest expense.

Income Tax Expense (Benefit)

Income tax expense decreased to $75,000 for the year ended December 31, 1999
from $3,663,000 for the year ended December 31, 1998, due primarily to a
$3,451,000 valuation allowance on deferred tax assets in 1998, due to recurring
tax losses and uncertain future taxable income. The remaining amount of income
tax expense includes estimated minimum state taxes payable based on factors
other than income and foreign taxes related to Thai operations.

Reorganization Items

Costs associated with the Company's Chapter 11 filing amounted to $672,000 for
the year ended December 31, 1999, which were comprised primarily of professional
fees. The Company anticipates that additional reorganization costs will be
incurred throughout the Chapter 11 reorganization.

Net Loss

As a result of the foregoing factors, net loss decreased to $11,212,000 for the
year ended December 31, 1999 from net loss of $28,715,000 for the year ended
December 31, 1998, a decrease in net loss of $17,503,000.

LIQUIDITY AND CAPITAL RESOURCES

Cash flow generated from operations was $1,049,000 in 2000 compared to cash
generated from operations of $2,224,000 in 1999. The major items impacting cash
flow from operations were the current year net loss, adjusted for decreases of
$1,121,000 and $2,053,000 in inventories and accounts receivable, respectively,
partially offset by a $3,355,000 non-cash gain on sale of investment and
impairment charges of $2,437,000.

Under Chapter 11, actions to enforce certain claims against the Company are
stayed if the claims arose, or are based on, events that occurred on or before
the Petition Date. The ultimate terms of settlement of these claims will be
determined in accordance with a plan of reorganization, which requires the
approval of the impaired prepetition creditors and stockholders and confirmation
by the Bankruptcy Court. Other liabilities may arise or be subject to compromise
as a result of rejection of executory contracts, including leases, or the
Bankruptcy Court's resolution of claims for contingencies and other disputed
amounts. The ultimate resolution of such liabilities, all of which are subject
to compromise, are a part of the plan of reorganization filed with the
Bankruptcy Court on March 30, 2000. Until the plan of reorganization is
confirmed by the Bankruptcy Court, only such payments on prepetition obligations
that are approved by the Bankruptcy Court will be made. There is no assurance
that a plan of reorganization will be approved or confirmed by the Bankruptcy
Court.

Inherent in a successful plan of reorganization is a capital structure that will
enable the Company to generate sufficient cash flow after reorganization to meet
its restructured obligations and current obligations. Accordingly, the rights of
prepetition creditors and the ultimate payment of their claims may be
substantially altered and, in some cases, eliminated under the Bankruptcy Code.
It is not possible at this time to predict the ultimate outcome of the Chapter
11 filing or its effects on the Company's business or on the interest of
creditors or stockholders.

As described in Note 9 to the consolidated financial statements, through July
16, 1999, the Company had a line of credit that encompassed The L.L.
Knickerbocker Co., Inc. (LLK), Georgetown Collection, Inc. (GCI) and Krasner
Group, Inc. (TKG). Certain credit limits were established for each company.
Borrowing availability was determined by an advance rate on eligible accounts
receivable and inventory. At the expiration of the line of credit on July 16,
1999, the Company did not have sufficient funds to pay off the line of credit.
The Company entered into a forbearance agreement with the financial institution
(the Bank) initially extending the general terms of the line of credit until
August 30, 1999 and in the event certain conditions were met, until September
20, 1999. The forbearance agreement limited the Company's use of the credit
facility to total borrowings of $6,250,000. As a



                                       20
<PAGE>   21

result of the Chapter 7 filing, the Bank placed the Company's credit facility on
an offering basis, effectively reserving the right to discontinue funding the
Company at any time. As a result of the Chapter 11 filing, all required
repayments of principal on the notes payable under the line of credit for LLK
and GCI have been suspended, except for certain principal repayments that have
been approved by the Bankruptcy Court. As of April 1, 2001, TKG had no
borrowings outstanding from the Bank.

At December 31, 2000, the Company had $5,069,000 of cash borrowings outstanding
under its line of credit facilities, $2,829,000 of which, representing amounts
borrowed under the LLK and GCI sublimits, is classified as subject to compromise
in the accompanying consolidated financial statements. Borrowings bear interest
at 12.5%. The Company has continued to accrue interest at the contractual rate
on these notes, however interest payments were suspended as of the Conversion
Date through December 31, 2000 on the LLK and GCI borrowings.

The Company's Thai subsidiaries have available lines of credit aggregating
100,000,000 Thai baht (approximately $2,315,000 at December 31, 2000).
Outstanding borrowings of $1,793,000 at December 31, 2000 bear interest at rates
ranging from 3.5% to 8.25%. Restricted cash of $135,000 and $312,000 at December
31, 2000 and 1999, respectively, secured one such line of credit.

In connection with the Chapter 11 filing, the Company filed, and the Bankruptcy
Court approved, a motion for use of cash collateral. Under the terms of this
motion the Company is authorized to use all cash and cash equivalents, which are
the cash collateral of the Bank, to pay ordinary and necessary operating
expenses in an amount equal to 93% of new accounts receivable.

The Company has entered into a forbearance agreement with its Bank which calls
for monthly payments of $50,000 through June of 2001. At June 2001, the Company
will either need to pay the Bank off in full or make a payment of $650,000 to
buy another three month extension until September of 2001. At September 2001,
the Company will need to pay the Bank in full. The Company is taking measures to
obtain a new secured lender to refinance the existing Bank. The Company believes
that its ongoing operating cash flow and proceeds from sale of investments
should enable the Company to meet liquidity requirements until substitute
financing is obtained. However, notwithstanding all of the events and
circumstances described above, there is substantial uncertainty with respect to
the Company's liquidity. The Company's ability to meet its obligations as they
come due and successfully emerge from Chapter 11 is contingent upon, among other
things, its ability to formulate a Plan of Reorganization that will be confirmed
by the Bankruptcy Court, to achieve satisfactory levels of profitability and
cash flow from operations, and obtain financing sources to meet future
obligations.

SEASONALITY AND QUARTERLY RESULTS

The Company's business is subject to seasonal fluctuations. The Magic Attic Club
brand of dolls, which was acquired effective October 18, 1996, has historically
experienced greater sales in the latter portion of the year. Because of the
seasonality of the Company's business, results for any quarter are not
necessarily indicative of the results that may be achieved for the full fiscal
year.

INFLATION

The Company does not believe that inflation has had a material effect on the
results of operations in the recent past. There can be no assurance that the
Company's business will not be affected by inflation in the future.

NEW ACCOUNTING PRONOUNCEMENTS

Recent Accounting Pronouncements - In June 1998, the Financial Accounting
Standards Board (FASB), which establishes accounting and reporting standards,
issued SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. SFAS No. 133 establishes accounting and reporting standards
requiring that every derivative instrument, including certain derivative
instruments embedded in other contracts, be recorded in the balance sheet as
either an asset or liability at its fair value. The statement also requires that
changes in the derivative's fair



                                       21
<PAGE>   22

value be recognized in earnings unless specific hedge accounting criteria are
met. The Company will implement SFAS No. 133 on January 1, 2001 and believes
implementation will not be material to the financial statements.

In March 2000, the FASB issued Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation, an Interpretation of APB Opinion No.
25 (FIN 44) establishes guidance for the accounting for stock option grants or
modifications to existing stock option grants made after June 30, 2000. The
adoption of the provisions of FIN 44 did not have a material effect on the
financial statements.

In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements". SAB
101 provides guidance on applying generally accepted accounting principles to
revenue recognition issues in financial statements. The adoption of SAB 101 did
not have a material effect on the Company's financial position or results of
operations.

FORWARD-LOOKING STATEMENTS

When used in this document, the words "believes," "anticipates," "expects" and
similar expressions are intended to identify in certain circumstances
forward-looking statements. Such statements are subject to a number of risks and
uncertainties that could cause actual results to differ materially from those
projected, including risks related to the dependence on sales to QVC; the
acceptance in the marketplace of new products; the ability to source raw
materials at prices favorable to the Company; currency fluctuations; and other
risks outlined in the Company's previously filed public documents, copies of
which may be obtained without cost from the Company. Given these uncertainties,
prospective investors are cautioned not to place undue reliance on such
statements. The Company also undertakes no obligation to update these
forward-looking statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

To the extent the Company borrows under its credit facilities, the Company would
be exposed to market risk related to changes in interest rates. At December 31,
2000, the Company had $2,598,000 outstanding under the Company's credit
facilities. See Note 2 to the Company's Consolidated Financial Statements for
further discussion of the Company's accounting policies for financial
instruments.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See "Index to Consolidated Financial Statements" for a listing of the
consolidated financial statements submitted as part of this report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

<TABLE>
<CAPTION>
Name                     Age      Position
----                     ---      --------
<S>                     <C>      <C>
Martin Krasner           59       Acting President, Acting Chief Executive Officer and
                                  Consultant to the Board of Directors

Anthony P. Shutts        37       Chief Financial Officer, Secretary and Director

Gary Ruhlen              38       Chief Operating Officer
</TABLE>



                                       22
<PAGE>   23

<TABLE>
<S>                     <C>      <C>
Gerald A. Margolis       70       Director

F. Rene Alvarez          61       Director

Marty Schaeffer          53       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. Martin Krasner, Acting President and Chief Executive Officer and Consultant
to Board of Directors and President and Chief Executive Officer of Krasner
Group, Inc.

Mr. Krasner, 59, is the founder, President and CEO of Krasner Group, Inc., a
wholly-owned subsidiary of The L.L. Knickerbocker Co., Inc. Previously, he was
President of Monet Jewelers, Inc., where he was employed for twenty years. In
1983, Mr. Krasner transferred to Izod, Ltd. (Izod and Monet each were
subsidiaries of General Mills, Inc. at the time), where he was appointed
President of the Izod Lacoste Accessories Division and subsequently President of
the Izod Lacoste Golf and Tennis Division as well. He left Izod in 1985 to start
Krasner Group. Krasner Group, Inc. was acquired in 1996 by The L.L.
Knickerbocker Co., Inc. Mr. Krasner holds a BA degree in Economics (1963) from
Cornell University and an MBA in Business Administrations and Policy (1970) from
Bernard Baruch College. He serves on the Board of Directors of both National
Mother's Day Committee and National Father's Day Committee.

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

Mr. Shutts, 37, was hired as a consultant to the Company on April 1, 1993. Mr.
Shutts became a full-time employee of the Company on July 1996. He is a
certified public accountant with over 13 years experience in public accounting,
most notably with Deloitte & Touche from 1986 to 1991, specializing in emerging
companies. Mr. Shutts holds a Bachelors Degree in Business Administration and a
Master's Degree in Taxation, both from the University of Southern California.
Currently, Mr. Shutts serves as Chief Financial Officer of the Company,
overseeing the financial matters of the Company and performing the general
functions of CFO.

Mr. Gary Ruhlen, Chief Operating Officer

Mr. Ruhlen, 38, was added to the Company management team in April 2000. He has
over 13 years of experience in operations and marketing with both domestic and
international companies, 8 of those years in executive management. Mr. Ruhlen
holds a Master's degree in business administration with a specialization in
finance and marketing and a Bachelor's degree in finance, both from California
State University, Long Beach. Mr. Ruhlen is very familiar with the Company as he
served as the Executive Vice President from 1992 to 1995. Mr. Ruhlen's
responsibilities included most of the operations and financial activities,
including spearheading the Company's initial public offering in January 1995.
Mr. Ruhlen's recent work experience includes working from 1996 to 2000 with
Financial Processing Systems of Santa Ana, California as their Executive Vice
President and General Manager. Financial Processing Systems was in the business
of software development and Internet services. Mr. Ruhlen managed all
operational and sales functions. Prior to his first three years at the Company,
Mr. Ruhlen worked as Marketing Representative at Capital Associates Portfolio
Company in Long Beach and also the Nippondenso Company in Long Beach where he
worked as a Senior Account Manager, managing a Toyota Motor Corporation O.E.M.
account.

Mr. Gerald A. Margolis, Director

Mr. Margolis, 70, 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 the U.C.L.A. School of Law 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 Council from 1962 to 1966.
Mr. Margolis has advised the Company on



                                       23
<PAGE>   24

general corporate matters since its inception in 1985.

Mr. F. Rene Alvarez, Jr., Director

Mr. Alvarez, 60, was appointed to the Board of Directors in May 1997. Mr.
Alvarez was the Senior Vice President, Finance of the Pacific Bay Homes
subsidiary of Ford Motor Company from 1995 to 1999. He worked as a member of the
finance staff for Ford Motor Company from 1969 to 1989, as Director of Internal
Audit for the USL Capital subsidiary of Ford Motor Company from 1989 to 1994,
and as Audit Manager, Finance Staff, for Ford Financial Services Group from 1994
to 1995. Mr. Alvarez attained the rank of Captain in the United States Army, and
was awarded the Bronze Star for service in Vietnam. He received a B.S.,
Accounting, from Canisius College in 1962 and a Juris Doctor and LLB from State
University of New York at Buffalo in 1967. Mr. Alvarez is a licensed attorney
and a member of the New York State Bar.

Mr. Marty Schaeffer, Director

Mr. Schaeffer, 54, was appointed to the Board of Directors in September 1999.
Mr. Schaeffer was a Regional Vice President of Circuit City Stores from 1992
until 2000. He worked as store manager for Sears Roebuck & Co. from 1965 to
1979, as Senior Vice President of Triangle Building Centers from 1980 to 1988,
as Senior Vice President of Home Base, Inc. from 1989 to 1990, and as Executive
Vice President of the Company in 1991. He received a B.A. from Lehigh University
in 1968 and an M.B.A. from Rochester Institute of Technology in 1983.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's directors and officers, and persons who own more than 10% of a
registered class of the Company's securities, to file with the Securities and
Exchange Commission ("SEC") initial reports of ownership and reports of changes
in ownership of the Company's common stock and other equity securities.
Officers, directors and greater-than-10% stockholders are required by SEC
regulation to furnish the Company with copies of all Section 16(a) forms they
file.

To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, the Company believes that during the year ended December
31, 2000, its officers, directors, and greater-than-10% stockholders complied
with all Section 16(a) filing requirements, with the exception of: (i) Louis L.
Knickerbocker, whose Form 5 for 1999 for multiple transactions is in the process
of being prepared and filed; (ii) Tamara Knickerbocker, whose Form 5 for
multiple transactions is being prepared and filed; and (iii) Anthony P. Shutts,
whose Form 5 for one transaction is in the process of being prepared and filed.



                                       24
<PAGE>   25

ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth certain information concerning annual, long-term
and other compensation received during the last three completed 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:


                           SUMMARY COMPENSATION TABLE


<TABLE>
<CAPTION>
                                                                                         Long-Term
                                                                                        Compensation
                                                        Annual Compensation              Securities
Name and Principal                     Fiscal        ---------------------------          underlying             All Other
Position                                Year          Salary             Bonus          options/SARs (1)       Compensation (2)
                                       ------        ---------         ---------        ----------------       ----------------
<S>                                    <C>           <C>              <C>                 <C>                    <C>
Louis L. Knickerbocker,                 2000         $ 236,769               N/A
   Chairman and CEO (5)                 1999         $ 304,153               N/A           400,250(1)(3)         $  33,042
                                        1998         $ 300,000         $ 200,000           825,000               $  92,733

Martin Krasner,                         2000         $ 244,785               N/A                                       N/A
  Acting President and CEO              1999         $ 239,649               N/A               N/A               $     200
   and Consultant to                    1998         $ 235,784               N/A               N/A               $     200
   Board of Directors


Anthony P. Shutts                       2000         $ 136,000               N/A               250               $     200
   Chief Financial Officer              1999         $ 130,483               N/A           174,250(4)            $     225
   and Corporate Secretary              1998         $ 130,979         $  72,939           205,000                     N/A

Gary Ruhlen                             2000         $ 116,962               N/A               250               $     117
  Chief Operating Officer               1999               N/A               N/A               N/A                     N/A
                                        1998               N/A               N/A               N/A                     N/A
</TABLE>

(1) Reflected amounts consist of the number of options to purchase the Company's
common stock.

(2) With respect to Mr. Knickerbocker, represents amounts paid as compensation
for personal guarantee and pledge of personal assets as collateral for the
Company's bank line of credit. With respect to all others, represents Company's
obligations to make matching contributions to the Company's 401(k) Plan,
qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended.

(3) Includes options to purchase 425,000 shares of the Company's common stock,
which resulted from the repricing of previously awarded stock options.

(5) Consists of options issued as a result of the repricing of previously
awarded stock options.

(5) Mr. Knickerbocker ceased to be Chairman and Chief Executive Officer as of
September 2000.

COMPENSATION OF DIRECTORS

Directors holding salaried positions with the Company do not receive
compensation for their services as a director. All other directors receive a fee
of $500 per meeting attended and reasonable travel expenses.



                                       25
<PAGE>   26

EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS

In 1996, the Company entered into employment agreements with Louis L.
Knickerbocker, its former Chairman, Chief Executive Officer and President and
Anthony P. Shutts, its Chief Financial Officer and Corporate Secretary. The
respective terms of the employment agreements were five years each. The
agreements were 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 each employment agreement for an additional
five years each upon written notice to the respective employee. Under 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. Mr. Knickerbocker tendered his
resignation as Chairman, Chief Executive Officer, and President in September of
2000 but remained in a sales and product development capacity with the Company
until December 31, 2000.

Except for certain provisions contained in the Company's stock option plans,
there are no compensatory plans or arrangements with respect to any of the Named
Executive Officers which are triggered by, or result from, the resignation,
retirement or other termination of such named executive officer's employment, a
change-in-control of the Company or a change in the named executive officer's
responsibilities following a change-in-control.

During the first year, the employment agreements called for Mr. Knickerbocker to
receive an annual base salary of $300,000 and for Mr. Shutts to receive an
annual base salary of $120,000. In addition to their respective base salaries,
Mr. Knickerbocker, Mr. Krasner and Mr. Shutts were 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 greater of pretax income or operating profits of the Company and were
entitled to receive certain stock options from the Company's stock option plans
previously adopted by the Company. See "Stock Option Plans."

Effective June 23, 2000, the Company entered into an agreement with Martin P.
Krasner as an addendum to his existing employment agreement with Krasner Group,
Inc., a wholly owned subsidiary of the Company. The agreement provides that in
addition to Mr. Krasner's duties as Chief Executive Officer of Krasner Group,
Inc., he will serve as a consultant to the Company's Board of Directors and as
Acting Chief Executive Officer of the Company. It provides that at certain times
Mr. Krasner may elect to become President and Chief Executive Officer of the
Company for a term of three years with no addition to the salary which is paid
by Krasner Group, Inc. The agreement is subject to early termination by the
Company.

STOCK OPTION PLANS

THE L.L. KNICKERBOCKER 1995 AMENDED AND RESTATED 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 1995 Amended and Restated Stock Option Plan (the "Stock Option
Plan"). The Stock Option 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 Stock Option
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
Stock Option Plan covered an aggregate of 400,000 shares when granted, which was
increased by the Company's 1994 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. 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 Company's 1994 five-for-one stock split to a total of
2,000,000 options granted.



                                       26
<PAGE>   27

THE L.L. KNICKERBOCKER STOCK INCENTIVE COMPENSATION PLAN

On March 27, 1997, the Company's Board of Directors adopted the L.L.
Knickerbocker Stock Incentive Compensation Plan (the "ISO Plan"). The ISO Plan
was approved by the vote of the shareholders of the Company in June 1997. The
ISO Plan provides that incentive and nonstatutory options to purchase a total of
5,000,000 shares of common stock may be granted thereunder. The ISO Plan permits
the granting of options intended to qualify as "incentive stock options"
("ISOs") within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended from time to time (the "Code"), the granting of options that do not
so qualify ("NSOs"), and the granting of stock appreciation rights ("SARs"). The
Plan is administered by the Board of Directors, or if the Board so elects, by a
committee appointed by the Board of Directors consisting of not less than 2
members of the Board (the "Administrator"). The Administrator has the power to
determine the employees to be granted options and the number of shares to be
granted to each optionee and to interpret the ISO Plan.

The exercise price of any option is established by the Administrator at the time
of grant. The exercise price of any NSOs or ISOs granted under the Plan may not
be less than 100% of the fair market value of one share of common stock on the
date of grant. The exercise price of any ISO granted to an optionee who owns
stock possessing more than 10% of the voting rights of the Company's outstanding
shares must be at least 110% of the fair market value of the shares subject to
the option on the date of grant. So long as the Company's common stock is traded
on the NASDAQ National Market System, the fair market value of one share of
common stock is the closing bid price on the date of valuation.

The exercise price is payable in full in United States dollars or by certified
check upon the exercise of the option, provided however, that if the applicable
option agreement so provides, or the Administrator, in its sole discretion
otherwise approves thereof, the exercise price may be paid, (i) by the surrender
of shares of the Company's common stock owned by the person exercising the
option and having a fair market value on the date of exercise equal to the
purchase price, or (ii) in any combination of cash and common stock of the
Company, as long as the sum of the cash so paid and the fair market value of the
common stock so surrendered equals the purchase price. Additionally, if the
optionee is granted SARs, either in the stock option agreement or in a separate
agreement, such SARs may be exercised with the exercise of the options to permit
the Company to issue common stock with a fair market value equal to the
difference between the exercise price of one option and the fair market value of
one share of common stock on the date of exercise, multiplied by the total
number of options exercised.

NSOs and ISOs have maximum terms of 10 years. The aggregate fair market value
(determined as of the time the option is granted) of stock for which ISOs are
exercisable for the first time by an optionee during any calendar year may not
exceed $100,000, but the value of stock for which ISOs may be granted to an
Optionee in a given year may exceed $100,000.

In general, if an optionee ceases service to the Company or one or more of its
subsidiary Companies because of death or disability, options shall not be
exercised after the earlier of (i) the term of the option or (ii) twelve months
after the optionee's cessation of service, and such options shall only be
exercisable to the extent vested on the date of cessation of service. If an
optionee is discharged on account of misconduct, all options terminate
immediately and are no longer exercisable. If an optionee ceases service for any
other reason, options shall not be exercised after the earlier of (i) the term
of the option or (ii) three months after the optionee's cessation of service,
and such options shall only be exercisable to the extent vested on the date of
cessation of service. Options are, during the lifetime of the optionee,
exercisable only by him or her and may not be assigned or transferred other than
by will or by the laws of descent and distribution.

The ISO Plan provides that in the event a "Change in Control" of the Company
should occur, then the exercise dates of all options granted pursuant to the ISO
Plan shall automatically accelerate and all options granted pursuant to the ISO
Plan shall become exercisable in full. To the extent the Code would not permit
any ISO to be so accelerated, then such option, immediately upon the occurrence
of such Change in Control shall be treated for all purposes of the Plan as a NSO
and shall be immediately exercisable. A "Change in Control" is defined in the
Plan as a change in control of a nature that would be required to be reported in
response to Item I of Form 8-K required to be filed pursuant to the Securities
Exchange Act of 1934, as amended ("1934 Act"), and includes, without limitation
if: (i) the Company shall sell, transfer, or otherwise dispose of fifty percent
(50%) or more of



                                       27
<PAGE>   28

its assets and properties (calculated on the basis of book value); or (ii) any
"person" (as such term is used in Section 13(d) and 14(d) of the 1934 Act),
other than the Company, is or becomes the "beneficial owner" (as defined in Rule
13d-3 under the 1934 Act), directly or indirectly, of securities of the Company
representing 20% or more of the combined voting power of the Company's then
outstanding securities; or (iii) during the period of two consecutive years
during the term of the ISO Plan, individuals who at the beginning of such period
constitute the Board cease for any reason to constitute at least a majority
thereof, unless the election of each director who was not a director at the
beginning of such period has been approved in advance by directors representing
at least two-thirds of the directors then in office who were directors at the
beginning of the period.

The Board may from time to time, with respect to any shares at the time not
subject to options, suspend or discontinue the ISO Plan or revise or amend it in
any respect whatsoever except that, without the approval of the Company's
shareholders, no such revision or amendment shall increase the number of shares
subject to the ISO Plan or change the classes of persons eligible to receive
options. Options may be granted pursuant to the ISO Plan until the expiration of
the Plan on March 27, 2007.

OPTIONS GRANTED

The following table sets forth information concerning the grant of stock options
during the fiscal year ended December 31, 1999 to each of the Named Executive
Officers.


                        OPTION GRANTS IN LAST FISCAL YEAR


<TABLE>
<CAPTION>
                                            Individual Grants(1)
                               --------------------------------------------------
                                                                                                            Potential Realizable
                                                 Percent of                                                   Value at Assumed
                                                Total Options                                                  Annual Rates of
                                                 Granted to                                                      Stock Price
                                                  Employees         Exercise or                                 Appreciation
                               Options            in Fiscal          Base Price         Expiration            for Option Term(5)
Name                           Granted           Year 1999(2)      (per share)(3)         Date(4)               5%           10%
----                           -------          -------------      --------------       ----------          --------      -------
<S>                             <C>             <C>                  <C>                  <C>               <C>            <C>
Anthony P. Shutts                250                                  $   0.05             2009                $ 71         $211
</TABLE>


(1)     These options were granted pursuant to the Company's ISO Plan.

(2)     In fiscal 2000, 11,500 options were granted to employees pursuant to the
        Company's ISO Plan. This number was used in calculating the percentages
        in the above table.

(3)     All exercise prices are set at 100% of the market value of the Company's
        stock as of the date of grant.

(4)     The options granted as ISO's under the Company's ISO Plan expire on the
        tenth anniversary of the date of grant.

(5)     The dollar amounts under these columns are the result of calculations at
        the 5% and 10% rates required by applicable regulations of the
        Securities and Exchange Commission and, therefore, are not intended to
        forecast possible future appreciation, if any, of the Company's common
        stock price. Actual gains, if any, on stock option exercises depend on
        future performance of the Company's common stock and overall market
        conditions, as well as the optionee's continued employment through the
        vesting period. The amounts reflected in this table may not be achieved.



                                       28
<PAGE>   29

OPTIONS EXERCISED AND FISCAL YEAR-END VALUES

The following table provides information with respect to the exercise of stock
options during the most recently completed fiscal year by the Named Executive
Officers of the Company together with the fiscal year-end value of unexercised
options.

                     AGGREGATED OPTION/SAR EXERCISES IN LAST
                FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES


<TABLE>
<CAPTION>
                                                               Number of securities underlying        Value of unexercised in-the-
                                                                       unexercised                        money options/
                               Shares             Value               options/SARs at                     SARs at fiscal
                           acquired on          realized            fiscal year-end (#)                  year-end ($) (1)
Name                        exercise (#)         ($) (1)      Exercisable        Unexercisable      Exercisable      Unexercisable
----                        ------------         -------      -----------        -------------      -----------      -------------
<S>                             <C>              <C>            <C>                  <C>                <C>               <C>
Anthony P. Shutts                --                --           174,500               250                --                --
</TABLE>

(1)     Market value of the securities underlying the "in-the-money" options at
        exercise date or year-end, as the case may be, minus the exercise price
        of such options.


COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS

The following directors served on the Company's Compensation Committee during
the year ended December 31, 2000: Louis L. Knickerbocker, Gerald A. Margolis,
and F. Rene Alvarez, Jr. Mr. Knickerbocker was the Chairman, Chief Executive
Officer and President of the Company through September of 2000 and Mr. Margolis
and Mr. Alvarez are non-employee directors.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding the beneficial
ownership of the Company's common stock as of April 4, 2001 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
(iv) each person known to the Company to own beneficially more than 5% of the
outstanding shares of common stock:



                                       29
<PAGE>   30


<TABLE>
<CAPTION>
Name and Address of                   Amount and Nature            Percent
Beneficial Owner(1)                of Beneficial Ownership         of Class
--------------------               -----------------------         --------
<S>                                      <C>                         <C>
Anthony P. Shutts                         174,650(2)                   *
Gerald Margolis                           219,500(3)                   *
Martin Krasner                            181,527(6)                   *
F. Rene Alvarez, Jr.                       30,000(4)                   *
Marty Schaeffer                             1,000                      *
Directors and Executive
  Officers as a Group                     606,677(5)
</TABLE>

*       Less than 1.0% of the outstanding common stock as of April 4, 2001.

(1)     The address for all persons listed is c/o The L.L. Knickerbocker Co.,
        Inc., 25800 Commercentre Drive, Lake Forest, CA 92630.

(2)     Includes 174,250 shares issuable upon the exercise of stock options
        exercisable within 60 days of April 4, 2001 under the Company's ISO
        Plan.

(3)     Includes 70,000 shares issuable upon the exercise of stock options
        exercisable within 60 days of April 4, 2001 under the Company's ISO
        Plan.

(4)     Includes 20,000 shares issuable upon the exercise of stock options
        exercisable within 60 days of April 4, 2001 under the Company's ISO
        Plan.

(5)     Includes 263,750 shares issuable upon the exercise of stock options
        exercisable within 60 days of April 4, 2001 under the Company's ISO
        Plan.

(6)     Includes 88,292 shares issuable upon the exercise of stock options
        exercisable within 60 days of April 4, 2001 under the Company's ISO
        Plan.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

TRANSACTIONS WITH MANAGEMENT

From 1995 to 1998, the Company made loans to its Chairman, Chief Executive
Officer, and President, Louis L. Knickerbocker. The largest aggregate amount
outstanding (including accrued but unpaid interest) during fiscal 1998 was
$1,423,600, and $1,088,000 was outstanding as of April 4, 2000. The loans were
evidenced by promissory notes providing for payment of interest at the prime
rate plus 1% per annum, and payments in installments of $200,000 on March 31,
2000 and September 30, 2000 with any unpaid principal and interest due on April
11, 2001. At December 31, 1999, due to the uncertainty of collectibility of the
note, the Company recorded a reserve of $1,088,000 on the outstanding balance.

During the period February to May 1998, Mr. Knickerbocker made short-term loans
to the Company aggregating $2,615,000. These short-term loans were repaid in
June 1998.

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. Each of the foregoing
transactions complied with this resolution.

During 2000, Mr. Knickerbocker conveyed 500 stock options in Pure Energy
Corporation to the Company as a partial payment on the outstanding balance on
the loan due the Company. Mr. Knickerbocker was given $250,000 in credit for the
payment.



                                       30
<PAGE>   31

AFFILIATED AND PREDECESSOR COMPANIES

The L.L. Knickerbocker Co., 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 former Executive 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), co-founded in 1987 by the Knickerbockers. 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.

In 1989, the Knickerbockers co-founded another company, MLF Enterprises, a
California corporation (MLF). MLF developed replicas of the jewelry collection
of Farrah Fawcett, a former director of the Company, 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 that 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 Co., 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 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.

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)(1)  See page 32 for a listing of financial statements submitted as part of
        this report.

(a)(2)  Schedule II - Valuation and Qualifying Accounts appears on page 61 of
        this report. All other schedules have been omitted as they are not
        applicable, not required or the information is included in the
        consolidated financial statements or the notes thereto.

(a)(3)  See Exhibit Index on page 63 of this report.

(b)     Reports on Form 8-K

        There were no reports on Form 8-K filed during the fourth quarter of
        1999.

(c)     See item 14(a)(2) above.




                                       31
<PAGE>   32

                                   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 Co., Inc.
                                           (Registrant)


Date: April 14, 2001 By:                    /S/   Anthony P. Shutts
                                            -----------------------------------
                                            Anthony P. Shutts
                                            Chief Financial 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
---------                                                         -----                                       ----
<S>                                             <C>                                                          <C>
  /S/ Anthony P. Shutts                         Chief Financial Officer, Secretary                      April 14, 2001
----------------------------------------        and Director
      Anthony P. Shutts                         (Principal Financial and Accounting Officer)


  /S/  Gerald A. Margolis                       Director                                                 April 14, 2001
----------------------------------------
       Gerald A. Margolis


  /S/  F. Rene Alvarez, Jr.                     Director                                                 April 14, 2001
----------------------------------------
       F. Rene Alvarez, Jr.


  /S/  Marty Schaeffer                          Director                                                 April 14, 2001
----------------------------------------
       Marty Schaeffer
</TABLE>



                                       32
<PAGE>   33


                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



<TABLE>
<CAPTION>
                                                                                        PAGE
                                                                                        ----
<S>                                                                                     <C>
Independent Auditors' Report                                                             34

Consolidated Balance Sheets as of December 31, 2000 and 1999                             35

Consolidated Statements of Operations for the Years Ended
   December 31, 2000, 1999 and 1998                                                      36

Consolidated Statements of Comprehensive Income/Loss for the
   Years Ended December 31, 2000, 1999 and 1998                                          37

Consolidated Statements of Stockholders' Equity (Deficit) for the
   Years Ended December 31, 2000, 1999 and 1998                                          38

Consolidated Statements of Cash Flows for the
   Years Ended December 31, 2000, 1999 and 1998                                          39

Notes to Consolidated Financial Statements                                               41
</TABLE>




                                       33
<PAGE>   34

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
  The L.L. Knickerbocker Co., Inc.:

We have audited the accompanying consolidated balance sheets of The L.L.
Knickerbocker Co., Inc. (debtor-in-possession) and subsidiaries (the Company) as
of December 31, 2000 and 1999, and the related consolidated statements of
operations, comprehensive income (loss), stockholders' equity (deficit) and cash
flows for each of the three years in the period ended December 31, 2000. Our
audits also included the financial statement schedule listed in the Index at
Item 14 (a)(2). These financial statements and financial statement schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial statement schedule based
on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our 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, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly, in all material respects, the information set forth
therein.

As discussed in Note 1, the Company has filed for reorganization under Chapter
11 of the United States Bankruptcy Code. The accompanying consolidated financial
statements do not purport to reflect or provide for the consequences of the
bankruptcy proceeding. In particular, such financial statements do not purport
to show (a) as to assets, their realizable value on a liquidation basis or their
availability to satisfy liabilities; (b) as to prepetition liabilities, the
amounts that may be allowed for claims or contingencies, or the status and
priority thereof; (c) as to stockholder accounts, the effect of any changes that
may be made in the capitalization of the Company; or (d) as to operations, the
effect of any changes that may be made in the Company's business.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1, the
uncertainties inherent in the bankruptcy process and the Company's recurring
losses from operations raise substantial doubt about its ability to continue as
a going concern. The Company is currently operating its business as a
debtor-in-possession under the jurisdiction of the Bankruptcy Court, and
continuation of the Company as a going concern is contingent upon, among other
things, its ability to (1) finalize a plan of reorganization that will
ultimately be confirmed by the Bankruptcy Court, (2) achieve satisfactory levels
of profitability and cash flow from operations, and (3) obtain financing sources
to meet future obligations. Management's plans concerning these matters are also
discussed in Note 1. The financial statements do not include adjustments that
might result from the outcome of these uncertainties.

/s/ DELOITTE & TOUCHE LLP

April 12, 2001
Costa Mesa, California




                                       34
<PAGE>   35

THE L.L. KNICKERBOCKER CO., INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)

CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2000 AND 1999


<TABLE>
<CAPTION>
                                                                                 2000                     1999
                                                                             ------------             ------------
<S>                                                                          <C>                      <C>
ASSETS
CURRENT ASSETS:

Cash and cash equivalents                                                    $  2,488,000             $  1,510,000
Restricted cash                                                                   135,000                  312,000
Accounts receivable, less allowance for
  doubtful accounts of $589,000 (2000)
   and $2,486,000 (1999)                                                        4,501,000                6,654,000
Inventories, net                                                                3,614,000                4,655,000
Prepaid expenses and other current assets                                         842,000                1,578,000
                                                                             ------------             ------------
            Total current assets                                               11,580,000               14,709,000

PROPERTY AND EQUIPMENT, net                                                     2,527,000                4,501,000
INVESTMENTS                                                                     2,048,000                3,675,000
GOODWILL, net of accumulated amortization
  of $1,374,000 (2000) and $1,848,000 (1999)                                    1,171,000                2,943,000
OTHER ASSETS                                                                      816,000                  758,000
                                                                             ------------             ------------
                                                                             $ 18,142,000             $ 26,586,000
                                                                             ============             ============
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES NOT SUBJECT TO COMPROMISE:

Accounts payable                                                             $  4,737,000             $  4,244,000
Accrued expenses                                                                1,468,000                1,473,000
Notes payable                                                                   2,240,000                2,563,000
Commissions and royalties payable                                                 958,000                1,577,000
Interest payable                                                                  374,000                  113,000
Current portion of long-term debt                                                 302,000                  176,000
Income taxes payable                                                              133,000                  164,000
                                                                             ------------             ------------
            Total current liabilities not subject to compromise                10,212,000               10,310,000

LONG-TERM DEBT NOT SUBJECT TO COMPROMISE, less current portion                    358,000                  417,000
LIABILITIES SUBJECT TO COMPROMISE UNDER REORGANIZATION PROCEEDING               9,074,000               13,484,000
                                                                             ------------             ------------
            Total liabilities                                                  19,644,000               24,211,000


COMMITMENTS AND CONTINGENCIES (Note 13)

STOCKHOLDERS' EQUITY (DEFICIT):

Preferred Stock, no par value, authorized shares - 10,000,000;
   none issued and outstanding                                                         --                       --
Common stock, no par value, authorized shares-100,000,000;
   issued and outstanding shares - 46,987,728 (2000)
   and 43,727,354 (1999)                                                       41,637,000               41,397,000
Additional paid-in capital                                                      6,012,000                6,012,000
Accumulated deficit                                                           (44,551,000)             (41,157,000)
Accumulated other comprehensive loss                                           (4,600,000)              (3,877,000)
                                                                             ------------             ------------
            Total stockholders' equity (deficit)                               (1,502,000)               2,375,000
                                                                             ------------             ------------
                                                                             $ 18,142,000             $ 26,586,000
                                                                             ============             ============
</TABLE>



See Independent Auditor's Report and Notes to Consolidated Financial Statements




                                       35
<PAGE>   36
THE L.L. KNICKERBOCKER CO., INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998


<TABLE>
<CAPTION>
                                                               2000                1999                1998
                                                           ------------        ------------        ------------
<S>                                                        <C>                 <C>                 <C>
Net sales                                                  $ 30,345,000        $ 42,165,000        $ 60,427,000
Cost of sales                                                17,429,000          25,155,000          29,383,000
                                                           ------------        ------------        ------------

Gross profit                                                 12,916,000          17,010,000          31,044,000

Advertising expense                                             846,000           2,630,000          14,196,000
Selling expense                                               3,858,000           7,219,000           7,029,000
General and administrative expense                           10,780,000          15,577,000          26,196,000
Write-down of goodwill                                        1,255,000                               1,000,000
Write-down of property and equipment                          1,182,000
Restructuring charge                                                 --                  --           2,991,000
                                                           ------------        ------------        ------------

Operating loss                                               (5,005,000)         (8,416,000)        (20,368,000)

Loss on equity method investments                                    --                  --           1,347,000
Other income (expense), net                                     111,000            (235,000)             47,000
Interest expense                                                745,000           1,814,000           3,658,000
                                                           ------------        ------------        ------------
Loss before reorganization items, minority interest,
  income tax expense, and extraordinary item                 (5,639,000)        (10,465,000)        (25,326,000)
Reorganization items                                          1,080,000             672,000                  --
                                                           ------------        ------------        ------------
Loss before minority interest,  income tax
  expense and extraordinary item                             (6,719,000)        (11,137,000)        (25,326,000)
Minority interest in income of subsidiary                            --                  --            (274,000)
Income tax expense                                               30,000              75,000           3,663,000
                                                           ------------        ------------        ------------

Loss before extraordinary item                               (6,749,000)        (11,212,000)        (28,715,000)

Extraordinary gain on extinguishment of debt                  3,355,000
                                                           ------------        ------------        ------------
Net loss                                                   $ (3,394,000)       $(11,212,000)       $(28,715,000)
                                                           ============        ============        ============

Basic and diluted (loss) income per common share:
  Loss before extraordinary item                           $      (0.14)       $      (0.33)       $      (1.46)
  Extraordinary item                                       $       0.07
                                                           ------------        ------------        ------------
  Net loss                                                 $      (0.07)       $      (0.33)       $      (1.46)
                                                           ============        ============        ============

Weighted-average common shares used in
  computing net loss per share:
  Basic and diluted                                          46,697,387          34,290,701          19,630,175
                                                           ============        ============        ============
</TABLE>


See Independent Auditor's Report and Notes to Consolidated Financial Statements




                                       36
<PAGE>   37

THE L.L. KNICKERBOCKER CO., INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998


<TABLE>
<CAPTION>
                                                    2000                 1999                1998
                                                 ------------        ------------        ------------
<S>                                              <C>                 <C>                 <C>
Net Loss                                         $ (3,394,000)       $(11,212,000)       $(28,715,000)

Other comprehensive income (loss):

  Unrealized loss on investment                  $   (145,000)       $         --        $         --
  Foreign currency translation adjustments           (578,000)           (221,000)          1,575,000
                                                 ------------        ------------        ------------
Comprehensive loss                               $ (4,117,000)       $(11,433,000)       $(27,140,000)
                                                 ============        ============        ============
</TABLE>



See Independent Auditors' Report and Notes to Consolidated Financial Statements




                                       37
<PAGE>   38
THE L.L. KNICKERBOCKER CO., INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998



<TABLE>
<CAPTION>
                                                                                                      Accumulated
                                                Common Stock             Additional                      other
                                            -------------------------      paid-in     Accumulated   comprehensive
                                             Shares         Amount         capital        deficit     income (loss)     Total
                                            ----------   ------------   ------------   ------------  --------------  ------------
<S>                                         <C>          <C>            <C>            <C>            <C>            <C>
BALANCE, December 31, 1997                  18,754,693   $ 27,282,000   $  3,904,000   ($ 1,230,000)  ($ 5,231,000)  $ 24,725,000
Cashless exercise of stock options              72,364             --             --             --             --             --
Cancelation of shares received in
  payment of receivable from shareholder      (200,000)      (150,000)            --             --             --       (150,000)
Issuance of stock options to nonemployee            --            --           5,000             --             --          5,000
Issuance of common stock in
  connection with Krasner Group, Inc.
  acquisition                                  394,389        620,000             --             --             --        620,000
Issuance of common stock in
 connection with Georgetown Collection,
 Inc.acquisition                               250,000        258,000             --             --             --        258,000
Issuance of common stock in connection
 with convertible debentures                 1,387,863      2,747,000       (268,000)            --             --      2,479,000
Issuance of stock purchase warrants in
  connection with convertible debentures            --             --        228,000             --             --        228,000
Discount on convertible
 debenture offering                                 --             --      1,170,000             --             --      1,170,000
Increase as a result of Ontro, Inc.'s
 sale of stock, net of income taxes                 --             --      1,073,000             --             --      1,073,000
Foreign currency translation gain                                                                        1,575,000      1,575,000
Net loss                                            --             --             --    (28,715,000)                   (28,715,000)
                                            ----------   ------------   ------------   ------------   ------------   ------------

BALANCE, December 31, 1998                  20,659,309     30,757,000      6,112,000    (29,945,000)    (3,656,000)     3,268,000
Issuance of common stock in connection
 with Krasner Group, Inc. acquisition          441,007        220,000             --             --             --        220,000
Issuance of common stock in connection
 with Georgetown Collection, Inc.
 acquisition                                   157,996         89,000             --             --             --         89,000
Issuance of common stock in connection
 with convertible debentures                22,469,042     10,331,000       (100,000)            --             --     10,231,000
Foreign currency translation loss                                                                         (221,000)      (221,000)
Net loss                                            --             --             --    (11,212,000)                  (11,212,000)
                                            ----------   ------------   ------------   ------------   ------------   ------------

BALANCE, December 31, 1999                  43,727,354     41,397,000      6,012,000    (41,157,000)    (3,877,000)     2,375,000
Issuance of common stock in
 connection with convertible debentures      3,260,374        240,000             --             --             --        240,000
Unrealized loss on investment                       --             --             --             --       (145,000)      (145,000)
Foreign currency translation loss                   --             --             --             --       (578,000)      (578,000)
Net loss                                            --             --             --     (3,394,000)            --     (3,394,000)
                                            ----------   ------------   ------------   ------------   ------------   ------------
BALANCE, December 31, 2000                  46,987,728   $ 41,637,000   $  6,012,000   ($44,551,000)  ($ 4,600,000)  ($ 1,502,000)
                                            ==========   ============   ============   ============   ============   ============
</TABLE>

See Independent Auditors' Report and Notes to Consolidated Financial Statements





                                       38
<PAGE>   39

THE L.L. KNICKERBOCKER CO., INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998


<TABLE>
<CAPTION>
                                                                 2000            1999           1998
                                                              ------------   ------------   ------------
<S>                                                           <C>            <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                                                      $ (3,394,000)  $(11,212,000)  $(28,715,000)
Adjustments to reconcile net loss to net cash
  provided by (used in) operating activities:
  Depreciation and amortization                                  1,386,000      1,875,000      3,056,000
  Expense related to issuance of stock options,
      warrants and common stock                                         --             --        491,000
  Deferred income taxes                                                 --             --      3,451,000
  Gain on sale of equipment                                         12,000             --             --
  Extraordinary gain on extinguishment of debt                  (3,355,000)            --             --
  Write-down of property and equipment                           1,182,000             --             --
  Gain on sale of investment                                        15,000        (31,000)      (769,000)
  Loss on equity method investments                                     --             --      1,347,000
  Loss on disposition of fixed assets                                   --        232,000        290,000
  Restructuring charge                                                  --             --      2,342,000
  Write-down of goodwill                                         1,255,000             --      1,000,000
  Minority interest                                                     --             --       (274,000)
  Amortization of debt discount                                     60,000        541,000      1,005,000
  Provision for loss on accounts receivable                        100,000      1,785,000      2,341,000
  Provision for loss on stockholder receivable                          --      1,088,000             --

Changes in operating accounts:
  Accounts receivable                                            2,053,000        (74,000)    (2,685,000)
  Inventories                                                    1,121,000      6,047,000       (384,000)
  Prepaid expenses and other current assets                        736,000      1,167,000      4,741,000
  Other assets                                                    (198,000)       177,000        634,000
  Accounts payable and accrued expenses                            832,000     (5,699,000)     5,032,000
  Commissions and royalties payable                               (619,000)       209,000        617,000
  Income taxes payable                                             (31,000)      (115,000)       156,000
  Due to former shareholders of Krasner Group, Inc.                               (60,000)            --
  Operating payables subject to compromise under
      Reorganization Proceeding                                   (106,000)     6,294,000             --
                                                              ------------   ------------   ------------
     Net cash provided by (used in) operating activities         1,049,000      2,224,000     (6,324,000)

CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property, plant and equipment                     (791,000)      (750,000)    (1,429,000)
Proceeds from sales of property and equipment                      144,000         96,000         21,000
Receivable from stockholder                                             --        (16,000)       161,000
Proceeds from sales of investment                                  666,000         55,000        818,000
Advances to investees                                                   --             --       (564,000)
                                                              ------------   ------------   ------------
     Net cash provided by (used in) investing activities            19,000       (615,000)      (993,000)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) on line of credit                       (373,000)        12,000        674,000
(Increase) decrease in restricted cash                             177,000         (2,000)       (60,000)
Payments on long-term debt                                        (103,000)      (173,000)      (347,000)
Proceeds from borrowings on long-term debt                         177,000             --         45,000
Deferred debt issue costs                                               --             --       (427,000)
Proceeds from issuance of convertible debentures                        --             --      7,000,000
Net (payments) borrowings on stockholder loan                           --             --       (248,000)
                                                              ------------   ------------   ------------
     Net cash (used in) provided by financing activities          (122,000)      (163,000)     6,637,000

EFFECT OF EXCHANGE RATE CHANGES ON CASH                             32,000       (135,000)       787,000
                                                              ------------   ------------   ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS                          978,000      1,311,000        107,000

CASH AND CASH EQUIVALENTS, beginning of year                     1,510,000        199,000         92,000
                                                              ------------   ------------   ------------

CASH AND CASH EQUIVALENTS, end of year                        $  2,488,000   $  1,510,000   $    199,000
                                                              ============   ============   ============
</TABLE>


See Independent Auditors' Report and Notes to Consolidated Financial Statements




                                       39
<PAGE>   40

THE L.L. KNICKERBOCKER CO., INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (CONTINUED)


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION-


<TABLE>
<CAPTION>
                                        2000             1999             1998
                                     ----------       ----------       ----------
<S>                                  <C>              <C>              <C>
Cash paid during the year for:
  Interest                           $  313,000       $  707,000       $1,218,000
                                     ==========       ==========       ==========
  Income taxes                       $   60,000       $  157,000       $   56,000
                                     ==========       ==========       ==========
</TABLE>


SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITY:

During the year ended December 31, 2000, the Company transferred shares of its
investment in Pure Energy Corporation, with a carrying value of $801,000 at the
time of transfer, to holders of convertible debentures in settlement of
$3,692,000 principal amount of convertible debentures plus accrued interest of
$464,000. The remaining amount of $459,000 due the holders of convertible
debentures is included in liabilities subject to compromise.

During the year ended December 31, 2000 and 1999, $219,000 and $9,850,000 of
convertible debentures and $21,000 and $406,000 of accrued interest,
respectively, was converted to common stock.

During the year ended December 31, 2000, the Company financed the acquisition of
property and equipment through borrowings on long-term debt of $51,000.

During the year ended December 31, 1999, the Company issued 441,007 shares of
common stock to satisfy obligations of $220,000 due former shareholders of
Krasner Group, Inc.

During the year ended December 30, 1999, the Company issued 157,996 shares of
common stock in payment of liability owed to former Georgetown Collection, Inc.
shareholders.



See Independent Auditors' Report and Notes to Consolidated Financial Statements


                                       40
<PAGE>   41

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998


1. REORGANIZATION AND BASIS OF REPORTING

Description of Business - The L.L. Knickerbocker Co., Inc. (LLK) (debtor-in
possession) and subsidiaries (collectively, the Company) is in the business of
developing and selling celebrity and non-celebrity products which include
collectible items such as porcelain and vinyl dolls, teddy bears, figurines,
fine and costume jewelry, and other consumer products. The Company's customers
include major networks in the home shopping industry, retail and wholesale
distributors, and consumers. The dolls, bears and figurines are manufactured by
independent manufacturing facilities to the Company's specifications. The fine
and costume jewelry is manufactured by the Company and by independent
manufacturing facilities. The Company's distribution includes home shopping
channels, catalog mailings, direct mailings from customer lists, retail stores,
wholesale distributors, and the Internet.

On August 23, 1999 (the Petition Date), an involuntary petition under Chapter 7
of the United States Bankruptcy Code (the Bankruptcy Code) was filed against LLK
by three of its creditors. On December 3, 1999 (the Conversion Date), LLK
(unconsolidated) filed an election to convert to reorganization under Chapter 11
of the Bankruptcy Code (Chapter 11). LLK continues to conduct normal business
operations as a debtor-in-possession subject to the jurisdiction of the United
States Bankruptcy Court for the Central District of California (the Bankruptcy
Court). As a debtor-in-possession, LLK may not engage in transactions outside
the ordinary course of business without approval, after notice and hearing, of
the Bankruptcy Court.

Under Chapter 11, actions to enforce claims against LLK are stayed if the claims
arose, or are based on events that occurred, on or before the Petition Date, and
such claims cannot be paid or restructured prior to the conclusion of the
proceedings or approval of the Bankruptcy Court. In addition, under the
Bankruptcy Code, LLK may elect to assume or reject certain prepetition leases,
employment contracts, service contracts and other unexpired executory
prepetition contracts, all subject to Bankruptcy Court approval. Other
liabilities may arise or be subject to compromise as a result of rejection of
executory contracts or the Bankruptcy Court's resolution of claims for
contingencies and other disputed amounts. Liabilities subject to compromise
(Note 11) in the accompanying consolidated balance sheet represent the Company's
estimate of liabilities as of December 31, 2000, subject to adjustment in the
reorganization process. At December 31, 2000, LLK continued to accrue, but not
pay, interest on secured debt at the contractual interest rate although
principal payments were suspended. On January 26, 2001, the Company entered into
a forbearance agreement and has begun making principal and interest payments
thereunder.

The accompanying consolidated financial statements have been presented in
accordance with the American Institute of Certified Public Accountants Statement
of Position 90-7, "Financial Reporting by Entities Under The Bankruptcy Code"
(SOP-90-7) and have been prepared in conformity with principles of accounting
applicable to a going concern, which contemplates the realization of assets and
the satisfaction of liabilities in the normal course of business. The Company's
recurring losses from operations, the Chapter 11 filing and circumstances
relating to this event, raise substantial doubt about the Company's ability to
continue as a going concern. A plan of reorganization could materially change
the amounts reported in the accompanying consolidated financial statements,
which do not give effect to adjustments to the carrying values of assets and
liabilities that may be necessary as a consequence of a plan of reorganization.
The Company's ability to continue as a going concern is contingent upon, among
other things, its ability to formulate a plan of reorganization that will be
confirmed by the Bankruptcy Court, to achieve satisfactory levels of
profitability and cash flow from operations, and obtain financing sources to
meet future obligations.

The Company filed a Plan of Reorganization and Disclosure Statement with the
Bankruptcy Court on March 30, 2000. The Bankruptcy Court scheduled a hearing on
the Disclosure Statement for May 5, 2000 and approved the Disclosure Statement.
Although the Disclosure Statement was approved, the underlying Plan of
Reorganization was withdrawn and the Company is now in the process of
formulating and negotiating a revised Plan of Reorganization. The Plan of
Reorganization previously filed was withdrawn by the Company when it became
apparent that the Company could not raise the capital necessary under the Plan
of Reorganization to fulfill the obligation to unsecured creditors. The Plan of
Reorganization is subject to confirmation by the Bankruptcy Court and the
requisite vote of impaired creditors and stockholders. The Company is also
taking measures to obtain a new secured lender to refinance the existing secured
liabilities. The Company believes that its ongoing operating cash flow and
proceeds from sale of investments should enable the Company to meet liquidity
requirements until substitute financing is obtained. However, notwithstanding
all of the events and circumstances described above, there is substantial
uncertainty with respect to the Company's liquidity. The Company's ability to
meet its obligations as they come due and successfully emerge from Chapter 11 is
contingent upon, among other things, its ability to finalize a Plan of
Reorganization that will ultimately be confirmed by



                                       41
<PAGE>   42

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (CONTINUED)


the Bankruptcy Court, to achieve satisfactory levels of profitability and cash
flow from operations, and obtain financing sources to meet future obligations.

The Company believes it has sufficient resources to cure executory contract
defaults and to pay all claims arising in the "Gap" period between the Petition
Date and the Conversion Date.

Certain subsidiaries were not included in the Chapter 11 filings. Condensed
financial statements of the entity in reorganization are presented herein.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Reclassifications - Certain amounts previously reported have been reclassified
to conform to the 2000 financial statement presentation.

Principles of Consolidation - The financial statements presented herein include
the accounts of The L.L. Knickerbocker Co., Inc.; its wholly-owned subsidiaries,
Krasner Group, Inc.; Harlyn International Co., Ltd.; S.L.S. Trading Co., Ltd.;
L.L. Knickerbocker (Thai) Co., Ltd., and its majority-owned subsidiary
Georgetown Collection, Inc. (collectively, the Company). Intercompany accounts
and transactions have been eliminated in consolidation.

Basis of Presentation - The accompanying financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America.

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 - Restricted cash represents funds deposited with a financial
institution to serve as collateral for a line of credit.

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 is primarily production costs associated with media
costs for print advertising, and catalog printing costs.

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.

Investments - Investments in the common stock of unconsolidated entities (Note
8) in which the investee's stock value is not readily determinable is accounted
for using the cost method of accounting. The Company accounts for its investment
in Ontro, Inc. (Note 8) as available-for-sale securities in accordance with
Statement of Financial Accounting Standards (SFAS) No. 115 "Accounting for
Certain Investments in Debt and Equity Securities".

Long-Lived Assets - The Company accounts for the impairment and disposition of
long-lived assets in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." In
accordance with SFAS No. 121, long-lived assets are reviewed for events or
changes in circumstances, which indicate that their carrying value may not be
recoverable. Pursuant to SFAS No. 121 and concurrent with the Company's
development of a Plan of Reorganization, the Company has determined that the
estimated future undiscounted cash flows were below the carrying value of
long-lived assets in the fine jewelry segment. Accordingly, during the year
ended December 31, 2000, the Company wrote down a total of $2,437,000 in
long-lived assets, of which $1,255,000 and $1,182,000 related to goodwill and
fixed assets, respectively. The estimated future cash flows were based upon the
expected course of action pursuant to the Plan of Reorganization. During the
year ended December 31, 1998, the Company recorded an aggregate impairment
charge related to long-lived assets of $2,433,000 ($1,433,000 relates to


                                       42
<PAGE>   43

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (CONTINUED)


Georgetown Collection, Inc. (Note 4) and $1,000,000 relates to Krasner Group,
Inc.), of which $1,524,000 and $909,000 related to goodwill and fixed assets,
respectively.

Intangible Asset - Excess of cost over net assets acquired (goodwill), which
arose from the acquisition of certain entities is being amortized on a
straight-line basis over 10 years.

Deferred Debt Issuance Costs - Deferred debt issuance costs which are included
in other assets, relate to the issuance of Convertible Debentures (Note 10).
These costs were fully amortized at December 31, 2000 ($60,000, net of
$1,741,000 of accumulated amortization, at December 31, 1999). Upon conversion
of the Convertible Debentures, any portion of the deferred debt issuance costs
not previously amortized was recorded as a decrease to additional paid-in
capital on the conversion date.

Revenue Recognition - Revenues from sales of products are recognized when
merchandise is shipped to customers. The Company offers credit to its customers
and performs ongoing credit evaluations of its customers.

Reorganization Items - Professional fees and expenditures directly related to
the Chapter 11 filing are classified as reorganization items and are expensed as
incurred. Reorganization items for the years ended December 31, 2000 and 1999
consisted primarily of professional fees, partially offset by interest income
earned. Cash paid for reorganization items during the year ended December 31,
2000 and 1999 amounted to $561,000 and $638,000, respectively, net of interest
income.

Pursuant to SOP 90-7, interest expense is reported only to the extent that it
will be paid during the bankruptcy proceeding or that it is probable that it
will be an allowed claim.

Income Taxes - The Company accounts for income taxes using SFAS 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.

Net Loss Per Share - The Company computes loss per share pursuant to SFAS No.
128, "Earnings Per Share," which requires the dual presentation of basic and
diluted earnings per share. Shares issuable upon the exercise of common stock
warrants and options and shares issuable upon the conversion of convertible
debentures have been excluded from the per share calculations because their
effect is antidilutive.

Stock-Based Compensation - The Company accounts for stock-based employee
compensation arrangements in accordance with the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25), and complies with the disclosure provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation." Under APB 25, compensation cost is recognized
over the vesting period based on the difference, if any, on the date of grant
between the fair value of the Company's stock and the amount an employee must
pay to acquire the stock. See Note 12 for the pro forma disclosures required by
SFAS No. 123.

Foreign Currency - The Company's primary functional currency is the U.S. dollar,
while the functional currency of the Company's Thailand subsidiaries is the Thai
baht. Assets and liabilities 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 period. Translation gains and
losses are included in other comprehensive income in the accompanying financial
statements. Gains and losses on foreign currency transactions are recognized as
incurred (Note 15).

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.

Fair Value of Financial Instruments - 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



                                       43
<PAGE>   44

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (CONTINUED)


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, 2000, 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. Management also believes the carrying amount of long-term
debt approximates fair value as the underlying interest rates approximate market
rates.

Recent Accounting Pronouncements - In June 1998, the Financial Accounting
Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which establishes accounting and reporting
standards requiring that every derivative instrument, including certain
derivative instruments embedded in other contracts, be recorded in the balance
sheet as either an asset or liability at its fair value. The statement also
requires that changes in the derivative's fair value be recognized in earnings
unless specific hedge accounting criteria are met. The Company will implement
SFAS No. 133 on January 1, 2001 and believes the implementation will not have a
material effect on the financial statements.

In March 2000, the FASB issued Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation, an Interpretation of APB Opinion No.
25 (FIN 44) establishes guidance for the accounting for stock option grants or
modifications to existing stock option grants made after June 30, 2000. The
adoption of the provisions of FIN 44 did not have a material effect on the
financial statements.

In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB
101 provides guidance on applying generally accepted accounting principles to
revenue recognition issues in financial statements. The adoption of SAB 101 did
not have a material effect on the Company's financial position or results of
operations.

Condensed Financial Statements - In accordance with SOP 90-7, the debtor entity,
LLK, is required to present condensed financial statements for the year ended
December 31, 2000 (Note 20).

3. ACQUISITION

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
based on pretax earnings, if payable, will be recorded as additional purchase
price consideration and will increase goodwill recorded in conjunction with this
acquisition. As of December 31, 1998, the Company recorded an increase to
goodwill of $8,000 pursuant to contingent payments. The Company 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. In accordance with this guarantee an additional 32,735 shares
of the Company's common stock were issuable at December 31, 1997. During 1998,
due to a further decrease in the fair market value of the Company's common stock
the Company issued 250,000 shares of its common stock in connection with this
guarantee, and an additional 157,996 shares were issuable as of December 31,
1998. The additional 157,996 shares were issued during 1999. As a result of the
increase in shares to be issued, the Company recorded $347,000 as other expense
in 1998, representing the fair value of the incremental shares at date of
issuance.

During 1998, the Company acquired for $10,000 cash, 232,335 additional shares of
GCI capital stock from a minority shareholder, which increased the Company's
ownership to 87%.

During 1999, the Company completed the consolidation of GCI into the Company's
California facility. In connection with this consolidation, the Company
purchased, at book value, certain assets and assumed certain liabilities of the
Georgetown and Magic Attic Club brands effective January 1, 1999 and May 15,
1999, respectively. The consideration for the net assets purchased was the
forgiveness of loans made to GCI by LLK aggregating $4,819,000.



                                       44
<PAGE>   45

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (CONTINUED)


Effective October 29, 1999, the Company sold the inventory, trademarks and
certain other assets related to the Georgetown brand of collectible dolls for an
aggregate sale price of $1.2 million. Net proceeds to the Company after
deducting costs associated with the transaction were approximately $1.1 million,
$192,000 of which was included in prepaid expenses and other current assets at
December 31, 1999. The sale resulted in a net gain to the Company of
approximately $182,000, which was included in other income in 1999.

4. RESTRUCTURING CHARGE

In the fourth quarter of 1998, the Company recorded a restructuring charge of
$2,991,000, related to the consolidation of GCI into the Company's California
facility and the outsourcing of fulfillment for these brands. This charge
includes $2,342,000 for write-downs of certain long-lived assets, including
goodwill; $500,000 for lease termination payments, net of estimated sub-lease
income; and $149,000 for employee severance and termination benefits. The work
force reductions anticipated under this plan, 13 and 31 of which occurred in
1999 and 1998, respectively, totaled 44 positions in general sales and office
administrative functions and warehouse-related areas. The write-down of
long-lived assets, resulting from the restructuring of GCI operations, includes
the write-down to estimated fair value of fixed assets to be disposed of
($909,000) and elimination of goodwill associated with the GCI acquisition
($1,433,000) due to its nonrecoverability based upon GCI's projected
undiscounted cash flows over the remaining amortization period. During the years
ended December 31, 1999 and 1998, $68,000 and $81,000, respectively, of the
severance and termination benefits were paid. The remaining liability for lease
termination costs, is included in liabilities subject to compromise at December
31, 2000.

5. INVENTORIES

At December 31, 2000 and 1999, inventories, including $454,000 and $533,000 of
fine jewelry samples, respectively, classified as other long-term assets consist
of the following:


<TABLE>
<CAPTION>
                                                         2000               1999
                                                     -----------        -----------
<S>                                                  <C>                <C>
    Finished goods                                   $ 6,030,000        $ 7,471,000
    Work-in-process                                      415,000            494,000
    Raw materials                                      1,085,000          1,303,000
    Reserves for excess and obsolete inventory        (3,462,000)        (4,080,000)
                                                     -----------        -----------
                                                     $ 4,068,000        $ 5,188,000
                                                     ===========        ===========
</TABLE>

6. PROPERTY AND EQUIPMENT

        At December 31, 2000 and 1999, property and equipment consist of the
following:


<TABLE>
<CAPTION>
                                                  2000               1999
                                              -----------        -----------
<S>                                           <C>                <C>
     Land, buildings and improvements         $ 1,043,000        $ 2,942,000
     Computer equipment and software            1,039,000            994,000
     Production models, molds and tools         1,463,000          1,835,000
     Autos                                         30,000             71,000
     Office furniture and equipment               525,000            578,000
     Machinery and equipment                      668,000            757,000
                                              -----------        -----------
                                                4,768,000          7,177,000
    Accumulated depreciation                   (2,241,000)        (2,676,000)
                                              -----------        -----------
                                              $ 2,527,000        $ 4,501,000
                                              ===========        ===========
</TABLE>



                                       45
<PAGE>   46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (CONTINUED)


7. RECEIVABLE FROM STOCKHOLDER

Receivable from stockholder (aggregating $838,000 and $1,088,000 at December 31,
2000 and 1999, respectively) bears interest at the prime rate plus 1% and is
payable in installments of $200,000 on March 31, 2000 and September 30, 2000
with any unpaid principal and interest due on April 11, 2001. At December 31,
1999, due to the uncertainty of collectibility of the note, the Company recorded
a reserve of $1,088,000 on the outstanding balance. The stockholder did not make
any cash payments during 2000 but transferred to the Company 500 options to
acquire Pure Energy Corporation stock. The Company agreed to reduce the
principal balance of the receivable by $250,000 pending court approval. The
value ascribed to the options to acquire Pure Energy Corporation stock was
determined to be immaterial and, consequently, no amounts are recorded in the
accompanying financial statements for the options.

8. INVESTMENTS

At December 31, 2000 and 1999, the Company had the following equity investments:

The Company owns 1,000 shares of Camelot Corporation (Camelot), which were
received in exchange for marketing services provided to Camelot. The shares
represent an ownership interest of less than 10% and are restricted as to the
Company's ability to sell them. During 1999, the Company determined that the
shares of Camelot had suffered a permanent diminution in value and the $4,000
carrying value of the shares was reduced to $0.

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 (determined utilizing the
Black-Scholes option-pricing model). Additionally, the Company agreed to fund up
to $1,000,000 of PEC expenses. Through December 31, 1997 the Company had
fulfilled its funding commitment and funded a total of $507,000, which increased
the Company's investment to $4,382,000. Effective April 1, 1998, the Company
discontinued the application of the equity method of accounting to its
investment in Pure Energy Corporation due to the Company's lack of significant
influence over the operations of PEC. PEC shares are not publicly traded and the
Company's carrying value is therefore stated at original cost less equity method
losses accumulated through March 31, 1998. As of December 31, 2000, the Company
believes that there has been no permanent diminution in value of the PEC shares.

During the year ended December 31, 1997, the Company recorded a deferred gain of
$1,642,000 in connection with the sale of a portion of its investment in PEC
with a carrying value of $158,000 in exchange for a note receivable of
$1,800,000. The note receivable was collateralized by the underlying securities
sold and accrued interest at 7.5% per annum. The note receivable and accrued
interest were due and payable on December 30, 1999. As of December 31, 1999, the
note was not repaid, and the Company reinstated the $158,000 carrying value of
the underlying collateral as an investment and wrote off the note receivable and
related deferred gain.

In September 1998, the Company sold a portion of its investment in Pure Energy
Corporation with a carrying value of $49,000 for net cash proceeds of $818,000.
The sale resulted in a gain to the Company of $769,000, which is included in
other income.

During 2000, the Company transferred shares of its investment in Pure Energy
Corporation, with a carrying value of $801,000 at the time of transfer, to
holders of convertible debentures in settlement of $3,692,000 principal amount
of convertible debentures plus accrued interest of $464,000. The transaction
resulted in a gain of $3,355,000 which is reflected in the Statement of
Operations as an extraordinary item for the year ended December 31, 2000.

In September 1996, the Company purchased an equity interest in Ontro, Inc.
(Ontro). The purchase price consisted of $650,000 in cash for 858,673 common
shares. The investment provided the Company with a 27.8% common equity interest
in Ontro. In May 1998, Ontro successfully completed an initial public offering
whereby Ontro received approximately $15 million and issued 3,400,000 shares of
its common stock. As a result of the sale of previously unissued shares to the
public, the Company's ownership interest in Ontro was reduced to 13.2% and the
Company increased the balance of its investment in Ontro to reflect the enhanced
value of the Company's equity interest in Ontro. The net increase of $1,073,000
was recorded as a capital transaction, resulting in an increase to the Company's
additional paid-in capital account after giving effect to deferred taxes of
$715,000. The Company was restricted, until May 1999, from selling its Ontro
shares, which had a fair market value at December 31, 1999 of approximately


                                       46
<PAGE>   47

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (CONTINUED)


$1,932,000, which approximated its carrying value. The Company sold 299,923
shares of its Ontro stock during 2000 resulting in a realized loss of $4,000
included in other income for the year ended December 31, 2000.

During 2000, the Company recorded an unrealized loss on investment of $145,000
related to its Ontro shares, due to a decline in market value of Ontro shares to
$824,000 at December 31, 2000.

9. LINE OF CREDIT AND NOTES PAYABLE

Through July 16, 1999, the Company had available to use for working capital
purposes and to post letters of credit, a line of credit totaling $15,000,000,
subject to certain limits. The line of credit encompassed LLK, GCI, and Krasner
Group, Inc. (TKG). Certain credit limits were established for each company.
Borrowing availability was determined by an advance rate on eligible accounts
receivable and inventory. At the expiration of the line of credit on July 16,
1999, the Company did not have sufficient funds to pay off the line of credit.
The Company entered into a forbearance agreement with the financial institution
initially extending the general terms of the line of credit until August 30,
1999 and in the event certain conditions were met, until September 20, 1999. The
forbearance agreement limited the Company's use of the credit facility to total
borrowings of $6,250,000. As a result of the Chapter 7 filing described in Note
1, the financial institution placed the Company's credit facility on an offering
basis, effectively reserving the right to discontinue funding the Company at any
time. As a result of the Chapter 11 filing (Note 1), all required repayments of
principal on the notes payable under the line of credit for LLK and GCI have
been suspended, except for certain principal repayments that have been approved
by the Bankruptcy Court. As of April 1, 2001, TKG has paid off the balance of
their portion of the line of credit debt of $447,000. The Company has entered
into an additional forbearance agreement with the Bank that calls for $50,000
monthly payments from January through May of 2001. At June 2001, the Company has
the option to pay the Bank $650,000 and extend the due date until September 30,
2001.

At December 31, 2000, the Company had $3,276,000 of cash borrowings outstanding,
$2,829,000 of which, representing amounts borrowed under the LLK and GCI
sublimits, is classified as subject to compromise in the accompanying
consolidated financial statements (Note 11). Borrowings bear interest at the
bank's base rate (8.5% at December 31, 2000) plus 4%. The Company has continued
to accrue interest at the contractual rate on these notes and in January of 2001
began making the $50,000 payments on the line of credit.

S.L.S. and Harlyn have available lines of credit aggregating 100,000,000 Thai
baht (approximately $2,315,000 at December 31, 2000). Outstanding borrowings of
$1,793,000 at December 31, 2000 bear interest at rates ranging from 3.5% to
8.25%. Restricted cash of $135,000 and $312,000 at December 31, 2000 and 1999,
respectively, secured one such line of credit.

10. CONVERTIBLE DEBENTURES

1998 Debentures - In June 1998, the Company issued Convertible Debentures (the
1998 Debentures) with a face value of $7,000,000 in a private placement to
institutional investors. This private placement yielded net proceeds to the
Company totaling $6,573,000 after deducting costs associated with issuing the
1998 Debentures. The 1998 Debentures accrue interest at the rate of 6% per
annum, payable upon conversion of the related debt. The 1998 Debentures are
convertible at the option of the holder into shares of the Company's common
stock at the lower of $4.02 or a graduated discounted price ranging from 97% to
90% of an average of the 7 lowest trading days of the 30 consecutive trading
days prior to conversion. The discounted price of 90% applies if the investor
does not convert prior to the two-year anniversary of the closing date. Through
December 31, 2000, the Company issued a total of 20,448,736 shares of its common
stock in connection with the conversion of $4,498,000 of the principal amount of
the Debentures, plus interest accrued through the conversion date of $238,000.

The 1998 Debentures were subject to an agreement whereby after approval by the
shareholders of the Company of the issuance of the 1998 Debentures and the
creation of a class of Preferred Stock of the Company, the 1998 Debentures would
be exchanged for shares of newly created Preferred Stock of the Company, the
terms of which would be substantially similar to that of the 1998 Debentures.
However, the 1998 Debenture Holders chose not to exchange the 1998 Debentures
for Preferred Stock, citing a "material adverse effect," which was the decline
in the price of the Company's common stock. Under the terms of the related
agreements the 1998 Debentures matured on December 28, 1998. The Company was
unable to repay the 1998 Debenture Holders as of December 31, 2000 and was in
default of the 1998 Debenture Agreement. Under the terms of the 1998 Debentures
the face amount of the Debentures,



                                       47
<PAGE>   48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (CONTINUED)


aggregating $2,502,000, was due and payable by the Company. At December 31, 2000
and 1999, the face amount of the 1998 Debentures is classified as liabilities
subject to compromise under reorganization proceedings in the accompanying
consolidated financial statements (Note 11) after giving effect to the
extinguishments as discussed below.

The conversion of the securities at a maximum of 90% of the closing price of the
Company's common stock resulted in the 1998 Debentures being issued at a
discount (the conversion discount). The Company is recognizing the conversion
discount as noncash interest expense over the estimated term of the 1998
Debentures (two years) with a corresponding increase to the original principal
amount of the 1998 Debentures. Upon conversion of the 1998 Debentures any
portion of the conversion discount not previously recognized is recorded as
interest expense on the conversion date. In connection with the issuance of the
1998 Debentures, the Company issued to the investors warrants to purchase
261,194 shares of common stock. The warrants vest as of the grant date with an
exercise price of $4.72 per share, which was equivalent to 135% of 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 $470,000 (determined utilizing the Black-Scholes option-pricing model), which
was recorded as debt discount (the warrant discount) and additional paid-in
capital. The Company recognized the warrant discount as noncash interest expense
over the approximate seven-month term of the securities in 1998. During the
years ended December 31, 2000, 1999, and 1998, a total of $60,000, $670,000, and
$2,183,000, respectively, of noncash interest expense was recorded relating to
the 1998 Debentures.

1997 Debentures - In September 1997, the Company issued Convertible Debentures
(the 1997 Debentures) with a face value of $5,000,000 in a private placement to
an institutional investor. This private placement yielded net proceeds to the
Company totaling $4,675,000, after deducting costs associated with issuing the
1997 Debentures. The 1997 Debentures accrue interest at the rate of 6% per
annum, payable upon conversion of the related debt or at debt maturity of
September 7, 2000. The 1997 Debentures are convertible at the option of the
holder into shares of the Company's common stock at a graduated discounted price
ranging from 97% to 90% of an average of the 7 lowest trading days of the 30
consecutive trading days prior to conversion. The discounted price of 90%
applies if the investor does not convert prior to the two-year anniversary of
the closing date. As of December 31, 2000, the Company issued a total of
6,044,393 shares of its common stock in connection with the conversion of
$3,350,000 of the principal amount of the 1997 Debentures, plus interest accrued
through the conversion date of $218,000. At December 31, 2000, the face amount
of the 1997 Debentures, aggregating $1,650,000, is classified as subject to
compromise in the accompanying consolidated financial statements (Note 11) after
giving effect to the extinguishments as discussed below.

The conversion of the notes at a maximum of 90% of the closing price of the
Company's common stock resulted in the 1997 Debentures being issued at a
discount (the conversion discount). The conversion discount is being recognized
by the Company as noncash interest expense over the estimated term of the 1997
Debentures (two years) with a corresponding increase to the original principal
amount of the 1997 Debentures. Upon conversion of the 1997 Debentures, any
portion of the conversion discount not previously recognized is recorded as
interest expense on the conversion date. During the years ended December 31,
2000, 1999 and 1998, a total of $60,439, $317,000 and $786,000, respectively, of
noncash interest expense was recorded relating to the 1997 Debentures, including
$38,000 in 1999 relating to the additional conversion discount recorded upon
conversion.

In August 1998, the Company entered into an agreement with the 1997 Debenture
holders whereby the Company had the right, until September 1, 1998, to purchase
up to $3,000,000 of the principal amount of the 1997 Debentures, adjusted for
conversions through September 1, 1998, for a purchase price in cash of 110% of
face value. In connection with the agreement the Company issued warrants to the
Debenture holders to purchase an aggregate of 213,132 shares of common stock.
The warrants have an aggregate ascribed value of $228,000 (determined utilizing
the Black-Scholes option-pricing model), which was recorded as other expense in
the third quarter of 1998. The Company did not purchase any of the debentures
under the agreement.

Extinguishment of 1997 and 1998 Debentures - During the year ended December 31,
2000, the Company transferred to debenture holders 9,000 shares of Pure Energy
Corporation stock in settlement of $3,693,000 face amount of the 1997 and 1998
convertible debentures, plus accrued interest of $464,000. At December 31, 2000,
the aggregate remaining balance due the holders of the 1997 and 1998 Debentures
was $459,000. The transaction resulted in an extraordinary gain of $3,355,000,
as shown in the statement of operations for the year ended December 31, 2000.



                                       48
<PAGE>   49

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (CONTINUED)


1996 Debentures - In September 1996, the Company issued Convertible Debentures
(the 1996 Debentures) with a face value of $15,500,000 in a private placement to
institutional investors.

Through December 31, 1998, the Company issued a total of 1,940,674 shares of its
common stock in connection with the conversion of $12,799,000 of the original
principal amount of the 1996 Debentures, plus interest accrued through the
conversion date of $268,000. During 1999, the Company issued 586,650 shares of
its common stock in connection with the conversion of the remaining $4,600,000
principal amount of the New Debentures, plus interest accrued through January
31, 1999 of $93,000.

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 was recognized by the Company as noncash
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 years ended
December 31, 1999 and 1998, a total of $6,000 and $73,000, respectively, of
noncash interest expense was recorded relating to the Debentures.

11. LIABILITIES SUBJECT TO COMPROMISE

Liabilities subject to compromise consist of the following as of December 31,
2000 and 1999:


<TABLE>
<CAPTION>
                                                                   2000              1999
                                                               -----------       -----------
<S>                                                            <C>               <C>
    Secured liabilities - notes payable to bank (Note 9)       $ 2,829,000       $ 2,879,000

    Unsecured liabilities:
         Accounts payable, trade                                 4,402,000         4,454,000
         Commissions and royalties payable                         464,000           797,000
         Convertible debentures (Note 10)                          459,000         4,311,000
         Other payables and accrued expenses                       920,000         1,043,000
                                                               -----------       -----------
                                                               $ 9,074,000       $13,484,000
                                                               ===========       ===========
</TABLE>

A plan of reorganization if ultimately approved by the Company's impaired
prepetition creditors and stockholders and confirmed by the Bankruptcy Court may
materially change the amounts and terms of these prepetition liabilities. Such
amounts are estimated as of December 31, 2000, and the company anticipates that
claims filed with the Bankruptcy Court by the Company's creditors will require
reconciliation to the Company's financial records. The additional liability
arising from the finalization of the reconciliation process, if any, is not yet
subject to reasonable estimation, and accordingly, no provision has been
recorded for these possible claims. The termination of other contractual
obligations and the settlement of disputed claims may create additional
prepetition liabilities. Such amounts, if any, will be recognized in the
consolidated balance sheet as they are identified and become subject to
reasonable estimation.

During 2000, the liabilities subject to compromise were decreased due to the
extinguishments of convertible debentures, payments made to cure executory
contracts, and other miscellaneous court approved payments.

As of December 31, 2000 and 1999, the secured liabilities are classified as
liabilities subject to compromise, pending the secured creditor's perfection of
UCC filing requirements. Subsequent to December 31, 2000, the secured creditor
perfected its security interest and, consequently, subsequent to December 31,
2000, the liabilities were no longer subject to compromise.

12. STOCKHOLDERS' EQUITY

During the year ended December 31, 1996, the Company issued 46,971 warrants as
commission in connection with the 1996 convertible debenture offering (Note 10).
The warrants vested as of the grant date with an exercise price of $11.87, 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 grant. The warrants
have an ascribed value, determined utilizing the Black-Scholes



                                       49
<PAGE>   50

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (CONTINUED)


option-pricing model of $233,000 which was recorded as deferred debt issue costs
and additional paid-in capital. As of December 31, 2000, none of the warrants
had been exercised.

In conjunction with an acquisition, the Company issued stock purchase warrants
as part of the consideration paid. The following table summarizes the warrants
issued and outstanding:


<TABLE>
<CAPTION>
                                                                             Outstanding
                            Warrants                                         at December        Exercise         Expiration
Acquisition                  issued          Exercised         Canceled        31, 2000           Price             Date
-------------------         ---------        ---------         --------      ------------       ---------       --------------
<S>                         <C>               <C>              <C>             <C>              <C>                  <C>
Krasner Group, Inc.          250,628           62,090           70,000          118,538          $   7.75       April 10, 2004
</TABLE>

There were no warrants exercised during 1998, 1999, or 2000.

During the year ended December 31, 1998, the Company issued 261,194 warrants in
connection with the issuance of the 1998 Debentures (Note 10). The warrants vest
as of the grant date with an exercise price of $4.72 per share, which was
equivalent to 135% of 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 grant. As of
December 31, 2000, none of the warrants had been exercised.

During the year ended December 31, 1998, the Company issued 213,132 warrants in
connection with a repurchase agreement with the 1997 Debenture holders. The
warrants vest as of the grant date with an exercise price of $3.00 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 grant. As of
December 31, 2000, none of the warrants had been exercised.

The L.L. Knickerbocker 1995 Amended and Restated 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 2,000,000 shares
when granted. 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.

The L.L. Knickerbocker Stock Incentive Compensation Plan - On March 27, 1997,
the Company's Board of Directors adopted the L.L. Knickerbocker Stock Incentive
Compensation Plan (the ISO Plan). The ISO Plan provides that incentive and
nonstatutory options to purchase a total of 5,000,000 shares of common stock may
be granted thereunder. The ISO Plan permits the granting of options intended to
qualify as "incentive stock options" (ISO's), the granting of options that do
not so qualify (NSO's), and the granting of stock appreciation rights (SAR's).

The exercise price of any option is established by the Administrator, who is
appointed by the Board of Directors, at the time of grant. The exercise price of
any NSO's or ISO's granted under the Plan may not be less than 100% of the fair
market value of one share of common stock on the date of grant. The exercise
price of any ISO granted to an optionee, who owns stock possessing more than 10%
of the voting rights of the Company's outstanding shares, must be at least 110%
of the fair market value of the shares subject to the option on the date of
grant. Options granted under the ISO Plan have a maximum term of 10 years.

The Board may from time to time, with respect to any shares at the time not
subject to options, suspend or discontinue the ISO Plan or revise or amend it in
any respect whatsoever except that, without the approval of the Company's
shareholders, no such revision or amendment shall increase the number of shares
subject to the ISO Plan or change the classes of persons eligible to receive
options. Options may be granted pursuant to the ISO Plan until the expiration of
the Plan on March 27, 2007.



                                       50
<PAGE>   51

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (CONTINUED)


Option activity under the plans is as follows:


<TABLE>
<CAPTION>
                                                             WEIGHTED-
                                                              AVERAGE
                                        NUMBER OF            PRICE PER
                                         SHARES                SHARE
                                       ----------           ----------
<S>                                     <C>                 <C>
Outstanding, January 1, 1998            2,239,412           $     3.86
Granted                                 2,423,814                 1.29
Exercised                                 (72,398)                4.62
Canceled                               (1,594,143)                4.85
                                      -----------

Outstanding, December 31, 1998          2,996,685           $     1.49
Granted                                   409,250                 0.61
Canceled                                 (587,232)                0.78
                                      -----------

Outstanding, December 31, 1999          2,818,703           $     1.51
Granted                                    11,500                 0.11
Canceled                                 (199,852)                0.64
                                      -----------

Outstanding, December 31, 2000          2,630,351           $     1.57
                                      ===========
</TABLE>


At December 31, 2000, 1999 and 1998, 2,618,851, 2,391,703, and 2,215,785 options
were exercisable at a weighted average exercise price of $1.58, $1.67, and
$1.78, respectively.

Additional information regarding options outstanding as of December 31, 2000 is
as follows:


<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>
$0.05-$1.00               2,230,688               7.31 years           $     0.67              2,219,188             $   0.67
$3.00-$10.00                399,663               6.49 years           $     6.65                399,663             $   6.65
                          ---------               ----------           ----------              ---------             --------
                          2,630,351               7.19 years           $     1.57              2,618,851             $   1.58
</TABLE>

At December 31, 2000, 5,980,487 shares were available for future grants under
the Option plans.

The fair value of each option grant was estimated as of the grant date using the
Black-Scholes option-pricing model for the years ended December 31, 2000, 1999
and 1998 assuming risk-free interest rates of 5.5%, 6.0% and 5.5%, respectively,
volatility of 92%, 112% and 73%, respectively, zero dividend yield, and expected
lives of 10 years for all periods. Forfeitures are recognized as they occur. If
compensation expense was determined based on the fair value method as prescribed
by SFAS 123, beginning with grants in the year ended December 31, 1996, the
Company's net loss and net loss per share would have been reduced to the
approximate pro forma amounts indicated below for the years ended December 31:



                                       51
<PAGE>   52

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (CONTINUED)



<TABLE>
<CAPTION>
                                           2000                     1999                    1998
                                      --------------          --------------          --------------
<S>                                   <C>                     <C>                     <C>
Actual net loss                       $   (3,394,000)         $  (11,212,000)         $  (28,715,000)
Pro forma net loss                    $   (3,460,000)         $  (11,589,000)         $  (29,662,000)
Actual net loss per share:
  Basic and diluted                   $        (0.07)         $        (0.33)         $        (1.46)
Pro forma net loss per share:
  Basic and diluted                   $        (0.07)         $        (0.34)         $        (1.51)
</TABLE>


13. 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 and require the Company to pay real estate taxes and certain
other expenses. Subject to the approval of the Bankruptcy Court, the Company can
reject executory contracts, including leases, under the relevant provisions of
the Bankruptcy Code. Rejection of a lease gives the lessor the right to assert a
prepetition claim against the Company. However, the amount of the claim may be
limited by the Bankruptcy Court. The analysis of lease commitments which follows
has not been adjusted to reflect possible future lease rejections.

Minimum annual rental commitments under operating leases are as follows:


<TABLE>
<CAPTION>
            Year ending December 31:
<S>                                        <C>
            2001                           $  488,000
            2002                              420,000
            2003                              187,000
            2004                              172,000
            2005                              172,000
            Thereafter                        290,000
                                           ----------
                                           $1,729,000
                                           ==========
</TABLE>

Rent expense, including real estate taxes and insurance, for the years ended
December 31, 2000, 1999 and 1998 was $643,000, $686,000, and $1,153,000,
respectively.

Contractual Arrangements - The Company has contractual arrangements with several
celebrities and other third parties. Under the terms of these contracts, the
celebrities and third parties 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 insurance and pay royalties based on a percentage
of net wholesale and retail sales. Each contract has a termination clause in the
event certain minimum annual sales are not met. In certain instances, the
celebrity or other third party has the right to terminate the contract if the
minimum sales level is not attained or minimum royalties are not paid for any
single year. The contracts generally 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.

Employment Contracts - The Company has entered into two employment agreements
with Company officers with three to five-year terms. The agreements call for
aggregate annual compensation of $381,000 and discretionary bonuses of up to 10%
of operating income.

Litigation - Plaintiff Michael Elam filed an action in Orange County Superior
Court (Case No. 759883) on or about February 16, 1996, against Louis L.
Knickerbocker, Tamara Knickerbocker and the Company alleging causes of action
for conversion, breach of fiduciary duty, fraud, debitatus assumpsit,
intentional interference with contract, constructive



                                       52
<PAGE>   53

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (CONTINUED)


trust, breach of oral agreement, specific performance, money had and received,
open book account and spoliation of evidence. The plaintiff was seeking money
damages and/or shares of stock of the Company ranging between $500,000 and
$35,000,000 as a result of prior business affiliations with Mr. Knickerbocker,
alleging that the Company was liable as a successor-in-interest for the debts of
Mr. Knickerbocker's prior companies, and that Mr. Knickerbocker was obligated to
allow the plaintiff to participate in the Company when it was created. The
defendants vigorously opposed the lawsuit. A motion for summary judgment filed
in August 1998 eliminated those causes of action claiming an interest in the
company's predecessor, Knickerbocker Creations, Ltd. The case was set for trial
on May 24, 1999. The plaintiff ultimately filed a claim in the bankruptcy for
$2,500,000. The Company entered into an agreement with the plaintiff to settle
the litigation in exchange for shares of Pure Energy Corporation held by the
Company with a carrying value of $101,000. The settlement amounts are accrued in
the accompanying financial statements as a liability subject to compromise under
the reorganization proceeding.

The Company brought claims against State Street Bank and Trust Company ("State
Street") in federal district court in Boston, Massachusetts (Civil Action No.
97-12573-NO, U.S. District Court, D. MA) for conversion, breach of contract,
unjust enrichment, a declaratory judgment and violation of Massachusetts General
Laws, c. 93A arising from State Street's wrongful retention of 72,188 shares of
the Company's common stock after the Company's obligations to State Street under
a Settlement Agreement of the prior indebtedness of Georgetown Collection, Inc.,
a subsidiary acquired in 1996, had been paid in full. The stock retained by
State Street had an original value of $617,000. State Street denies liability
and brought a counterclaim against the Company for breach of contract and
specific performance seeking $102,000 in damages, plus attorneys fees and costs.
Prior to the bankruptcy proceeding, the Company was in negotiations with State
Street to settle the above matter. The Company has settled with State Street and
is liable in the amount of $85,000. The Company has received court approval for
such settlement. The settlement amounts are accrued in the accompanying
financial statements as a liability subject to compromise under the
reorganization proceeding.

Finance Authority of Maine, Coastal Enterprises, Inc, and the Southern Maine
Economic Development District brought claims in federal district court in
Portland, Maine (Civil Action No.98-2235-8, U.S. District Court, D. Maine) for
breach of contract, indemnification and specific performance arising from the
Company's performance under certain settlement documents following the
acquisition of the subsidiary, Georgetown Collection, Inc., in 1996. The
plaintiffs are seeking an order requiring the Company to purchase 63,030 shares
of the Company's stock previously transferred to plaintiffs for $11.50 per
share, plus interest and attorneys fees. The Company answered and denied
liability on plaintiffs' claims. The plaintiffs moved for summary judgment. Due
to the bankruptcy proceeding, all actions were stayed. The Company has settled
with Finance Authority of Maine and Coastal Enterprises in the amounts of
$160,000 and $55,000, respectively, and has received court approval for such
settlements. The Southern Maine Economic Development District matter is stayed
and no settlement has been reached. The settlement amounts are accrued in the
accompanying financial statements as a liability subject to compromise under the
reorganization proceeding.

The Company is involved in certain other legal and administrative proceedings
and threatened legal and administrative proceedings arising in the normal course
of its business. While the outcome of such proceedings and threatened
proceedings cannot be predicted with certainty, in the opinion of management,
the ultimate resolution of these matters individually or in the aggregate will
not have a material adverse effect on the Company.



                                       53
<PAGE>   54

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (CONTINUED)


14. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS

Long-term debt at December 31, 2000 and 1999 consists of:


<TABLE>
<CAPTION>
                                                                       2000                1999
                                                                     ---------          ---------
<S>                                                                  <C>                <C>
Building mortgage, interest at 11.0% per annum,
  payable in monthly installments of $7,000, including
  interest, collateralized by real estate                            $ 274,000          $ 370,000

Equipment loan, interest at 7.75% per annum,
  payable in monthly installments of $6,000 including
  interest, collateralized by real estate                              165,000

Automobile leases, interest at 12% per annum,
  payable in monthly installments of $600 including
  interest, collateralized by the automobiles                           19,000

Equipment leases, interest ranging from 4.0% to 24.9%
  per annum, payable in aggregate monthly installments
  of $9,000, including interest, collateralized by equipment         $ 202,000            223,000
                                                                     ---------          ---------
                                                                       660,000            593,000
Less current portion                                                  (302,000)          (176,000)
                                                                     ---------          ---------
                                                                     $ 358,000          $ 417,000
                                                                     =========          =========
</TABLE>

Principal payments on long-term debt and capital lease obligations at December
31, 2000 are due approximately as follows:


<TABLE>
<CAPTION>
            Year ending December 31:
<S>                                       <C>
            2001                           $302,000
            2002                            143,000
            2003                             86,000
            2004                             45,000
            2005                             44,000
            Thereafter                       40,000
                                           --------
                                           $660,000
                                           ========
</TABLE>


15. SIGNIFICANT CONCENTRATIONS AND RISKS

Customer Concentration - During the years ended December 31, 2000, 1999 and
1998, the Company conducted business with one customer whose aggregate net sales
volume comprised approximately 44%, 45%, and 25% 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.

Foreign Currency - Approximately 17% of the Company's revenues are derived from
subsidiaries operating in Thailand. In an attempt to reduce economic risks
associated with devaluations of the Thai baht, the Company's Thailand
subsidiaries require their customers to remit payment in U.S. dollars. Included
in other income for the years



                                       54
<PAGE>   55

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (CONTINUED)


ended December 31, 2000, 1999 and 1998 is $283,000, $79,000 and $(333,000),
respectively, in transaction gains (losses) associated with this strategy.

16. INCOME TAXES

The provision for income taxes consists of the following for the years ended
December 31:


<TABLE>
<CAPTION>
                                                        2000                  1999                  1998
                                                   ------------          ------------          ------------
<S>                                                <C>                   <C>                   <C>
Current federal and state income taxes             $     30,000          $     40,000          $     99,000
Current foreign taxes                                                          35,000               113,000
Deferred federal and state income taxes                 112,000            (2,701,000)           (9,137,000)
Change in valuation allowance, federal and
   state income taxes                                  (112,000)            2,701,000            12,588,000
                                                   ------------          ------------          ------------
Provision for income taxes                         $     30,000          $     75,000          $  3,663,000
                                                   ============          ============          ============
</TABLE>

A reconciliation of the statutory federal rate and the provision for income
taxes is as follows:


<TABLE>
<CAPTION>
                                           2000                  1999                  1998
                                      ------------          ------------          ------------
<S>                                   <C>                   <C>                   <C>
Federal tax at statutory rate         $ (1,178,000)         $ (3,898,000)         $ (8,864,000)
State taxes                                 20,000                26,000               505,000
Goodwill amortization                       74,000                91,000               524,000
Foreign NOL - no benefit                 1,053,000             1,049,000
Foreign tax rate differential                                                         (140,000)
Valuation allowance                          8,000             2,377,000            10,520,000
Non-deductible interest on
     convertible debentures                 42,000               348,000               764,000
Other                                       11,000                82,000               354,000
                                      ------------          ------------          ------------
                                      $     30,000          $     75,000          $  3,663,000
                                      ============          ============          ============
</TABLE>




                                       55
<PAGE>   56

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (CONTINUED)


Significant components of the Company's deferred tax assets and liabilities at
December 31 are as follows:


<TABLE>
<CAPTION>
                                                                        2000                  1999
                                                                   ------------          ------------
<S>                                                                <C>                   <C>
Deferred tax assets
     Bad debt reserve                                              $    781,000          $    993,000
     Difference between book and tax basis of
        fixed assets and goodwill                                       689,000               881,000
     Uniform capitalization
     Inventory reserves                                                 846,000             1,402,000
     Returns and allowances                                             299,000               253,000
     Pre-acquisition net operating loss carryforward                    876,000             2,370,000
     Post-acquisition net operating loss carryforward                13,009,000            10,356,000
     Difference between book and tax basis of investments               755,000             1,007,000
     State income taxes                                                  11,000                55,000
     Other                                                               98,000               159,000
     Valuation allowance                                            (17,364,000)          (17,476,000)
                                                                   ------------          ------------

Net deferred tax assets                                            $         --          $         --
                                                                   ============          ============
</TABLE>


The Company has provided a full valuation allowance on the deferred tax asset at
December 31, 2000 and 1999 due to the uncertainty regarding its realization.

At December 31, 2000, the Company has approximately $28,394,000 and $6,546,000
of federal and state net operating loss carryforwards, respectively. Sections
382 and 383 of the Internal Revenue Code of 1986 place certain limitations on
the use of these acquired losses. Any net operating loss not utilized will begin
expiring in 2010.

Since the Company does not have sufficient taxable income or carry back
potential to utilize the deductions generated from the exercise of stock
options, approximately $5,889,000 of deductions have not been recorded in the
accompanying financial statements. As these losses are utilized in future years,
the tax benefit will be recorded to equity.

17. BUSINESS SEGMENT INFORMATION

The Company is engaged primarily in the design, manufacture and marketing of
branded collectibles and jewelry. The Company has three reportable segments: (1)
collectible brands, (2) fashion jewelry brands and (3) fine jewelry. The
collectible brands segment encompasses collectible dolls, toys, teddy bears and
figurines. The fashion jewelry brands encompass items manufactured by the
Company from non-precious metals, for sale primarily to the home shopping
industry. The fine jewelry segment encompasses jewelry manufactured by the
Company with precious metals. Corporate activities including financing
transactions are reflected in the tables below as "Corporate". The Company
evaluates performance based on profit or loss from operations. The operating
segments are managed separately because each segment requires different
marketing strategies.




                                       56
<PAGE>   57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (CONTINUED)


<TABLE>
<CAPTION>
                                          2000                  1999                  1998
                                      ------------          ------------          ------------
<S>                                   <C>                   <C>                   <C>
Net sales

  Collectible brands                  $ 11,782,000          $ 24,355,000          $ 39,424,000
  Fashion jewelry brands                 9,857,000            10,405,000             9,241,000
  Fine jewelry                           8,706,000             7,405,000            11,762,000
  Corporate                                     --                    --                    --
                                      ------------          ------------          ------------
  Consolidated                        $ 30,345,000          $ 42,165,000          $ 60,427,000

Operating income (loss)
  Collectible brands                  $ (1,434,000)         $ (4,104,000)         $(14,708,000)
  Fashion jewelry brands                   468,000               819,000            (2,638,000)
  Fine jewelry                          (3,067,000)           (3,045,000)              294,000
  Corporate                               (972,000)           (2,086,000)           (3,316,000)
                                      ------------          ------------          ------------
  Consolidated                        $ (5,005,000)         $ (8,416,000)         $(20,368,000)

Interest expense
  Collectible brands                  $         --          $         --          $         --
  Fashion jewelry brands                        --                    --                    --
  Fine jewelry                                  --                    --                    --
  Corporate                                745,000             1,814,000             3,658,000
                                      ------------          ------------          ------------
  Consolidated                        $    745,000          $  1,814,000          $  3,658,000

Depreciation and amortization
  Collectible brands                  $    262,000          $    430,000          $  1,706,000
  Fashion jewelry brands                   548,000               859,000               868,000
  Fine jewelry                             427,000               586,000               482,000
  Corporate                                149,000                    --                    --
                                      ------------          ------------          ------------
  Consolidated                        $  1,386,000          $  1,875,000          $  3,056,000

Capital expenditures
  Collectible brands                  $     37,000          $     80,000          $    456,000
  Fashion jewelry brands                   399,000               264,000               413,000
  Fine jewelry                             355,000               406,000               560,000
  Corporate                                     --                    --                    --
                                      ------------          ------------          ------------
  Consolidated                        $    791,000          $    750,000          $  1,429,000

Total assets
  Collectible brands                  $  5,330,000          $  8,955,000          $ 15,702,000
  Fashion jewelry brands                 3,605,000             3,045,000             2,787,000
  Fine jewelry                           5,990,000             7,968,000            10,431,000
  Corporate                              3,217,000             6,618,000             9,822,000
                                      ------------          ------------          ------------
  Consolidated                        $ 18,142,000          $ 26,586,000          $ 38,742,000

Geographic areas
  Sales to external customers:
    United States                     $ 21,639,000          $ 34,858,000          $ 50,616,000
    Thailand                             8,706,000             7,307,000             9,811,000
                                      ------------          ------------          ------------
    Consolidated                      $ 30,345,000          $ 42,165,000          $ 60,427,000

  Long-lived assets:
    United States                        2,329,000             2,643,000             3,272,000
    Thailand                             1,369,000             4,801,000             5,107,000
                                      ------------          ------------          ------------
    Consolidated                      $  3,698,000          $  7,444,000          $  8,379,000
</TABLE>



                                       57
<PAGE>   58

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (CONTINUED)


18. EMPLOYEE BENEFIT PLAN

The Company maintains a defined contribution plan (401(K) Plan) covering all
U.S. employees of the Company who meet eligibility requirements. Matching
Company contributions are made based upon a minimum of 2% of participant
contributions. During the years ended December 31, 2000, 1999 and 1998, the
Company made contributions of $1,600, $3,000 and $5,000, respectively.

19. QUARTERLY FINANCIAL DATA (UNAUDITED)


<TABLE>
<CAPTION>
                                                   First                Second              Third              Fourth
                                                  Quarter              Quarter             Quarter             Quarter
                                                ------------        ------------        ------------        ------------
<S>                                             <C>                 <C>                 <C>                 <C>
Year ended December 31, 2000:
     Net sales                                  $  7,194,000        $  8,765,000        $  6,310,000        $  8,076,000
     Gross profit                                  2,978,000           3,826,000           2,490,000           3,622,000
     Net income (loss)                            (1,421,000)           (671,000)          2,267,000          (3,569,000)
     Net income (loss) per share, diluted       $      (0.03)       $      (0.01)       $       0.05        $      (0.08)

Year ended December 31, 1999:
     Net sales                                  $  9,485,000        $ 13,367,000        $  9,344,000        $  9,969,000
     Gross profit                                  4,717,000           5,988,000           3,990,000           2,315,000
     Net loss                                     (2,277,000)         (1,088,000)         (1,191,000)         (6,656,000)
     Net loss per share, diluted                $      (0.09)       $      (0.04)       $      (0.03)       $      (0.15)
</TABLE>


Fourth Quarter Adjustments

2000 - Net loss for the fourth quarter of 2000 includes a $2,437,000 impairment
loss related to the Company's Thailand-based fine jewelry operations. The
$2,437,000 impairment loss is comprised of write-downs of $1,255,000 and
$1,182,000 related to goodwill and fixed assets, respectively.

1999 - Net loss for the fourth quarter of 1999 includes a $1,823,000 adjustment
for estimated excess inventory quantities and obsolescence of inventory related
to discontinued product lines. Also included in the fourth quarter of 1999 is a
charge of $1,088,000 related to a reserve on a receivable from stockholder (Note
7).

During the fourth quarter of 1999, the Company sold its Georgetown brand of
collectible dolls (Note 3). As a result of this sale the Company recorded a
$473,000 increase to the allowance for doubtful accounts receivable due from
Georgetown brand customers.



                                       58
<PAGE>   59

20. CONDENSED FINANCIAL STATEMENTS FOR THE DEBTOR ENTITY

The following are condensed unconsolidated financial statements for LLK:


                        The L.L. Knickerbocker Co., Inc.
                             Condensed Balance Sheet
                             as of December 31, 2000

                                (unconsolidated)



<TABLE>
<S>                                                           <C>
   ASSETS:

       Cash and cash equivalents                               $  1,005,000
       Accounts receivable, net of allowance                      1,134,000
       Inventories                                                1,811,000
       Prepaid expenses and other current assets                    726,000
                                                               ------------
             Total current assets                                 4,676,000
       Investment in subsidiaries                                 2,346,000
       Receivable from subsidiaries                               1,260,000
       Property and equipment, net                                  555,000
       Investments                                                2,048,000
       Other assets                                                  99,000
                                                               ------------
             Total assets                                      $ 10,984,000
                                                               ============

   LIABILITIES:
       Accounts payable                                        $  2,216,000
       Other accrued expenses                                     1,196,000
                                                               ------------
             Total current liabilities                            3,412,000
       Liabilities subject to compromise
          under reorganization proceeding                         9,074,000

   STOCKHOLDERS' DEFICIT
       Common stock                                              41,637,000
       Additional paid-in capital                                 6,012,000
       Accumulated deficit                                      (44,551,000)
       Accumulated other comprehensive loss                      (4,600,000)
                                                               ------------
             Total stockholders' deficit                         (1,502,000)
                                                               ------------
             Total liabilities and stockholders' deficit       $ 10,984,000
                                                               ============
</TABLE>



                                       59
<PAGE>   60
                        The L.L. Knickerbocker Co., Inc.
                        Condensed Statement of Operations

                                (unconsolidated)



<TABLE>
<CAPTION>
                                                          Year to Date*
                                                          -------------
<S>                                                        <C>
    Net sales                                              $ 11,782,000
    Cost of sales                                             6,803,000
                                                           ------------
    Gross profit                                              4,979,000
    Advertising expense                                         764,000
    Selling expense                                           2,024,000
    General and administrative expense                        4,598,000
    Equity in loss of subsidiaries                           (2,756,000)
                                                           ------------
    Operating loss                                           (5,163,000)
    Interest expense                                            503,000
                                                           ------------
    Loss before reorganization items,
      income tax expense and
      extraordinary item                                     (5,666,000)
    Reorganization items                                      1,080,000
                                                           ------------
    Loss before income tax expense and
      extraordinary item                                     (6,746,000)
    Income tax expense                                            3,000
                                                           ------------
    Loss before extraordinary item                           (6,749,000)
    Extraordinary item                                        3,355,000
                                                           ------------
    Net loss                                               $ (3,394,000)
                                                           ============
</TABLE>


*   An involuntary petition under Chapter 7 was filed against the debtor on
    August 23, 1999. These year-to-date figures represent amounts from
    August 24, 1999 through December 31, 1999.




                                       60
<PAGE>   61

                        The L.L. Knickerbocker Co., Inc.
                     Notes to Condensed Financial Statements
                                December 31, 2000
                                (unconsolidated)


1. BASIS OF PRESENTATION

Generally Accepted Accounting Principles (GAAP) requires that certain entities
that meet specific criteria be consolidated with LLK including its wholly-owned
and majority-owned subsidiaries (non-debtors). For purposes of this presentation
LLK accounts for all subsidiaries using the equity method of accounting.

All entities that LLK would normally consolidate for GAAP purposes are being
accounted for under the equity method of accounting. The equity method of
accounting consists of recording an original investment in an investee as the
amount originally contributed. Subsequently this balance is
increased/(decreased) for LLK's share of the investee's income/(losses) and
increased for additional contributions a d decreased for distributions received
from the investee. LLK's share of the investee's income/(loss) is recognized as
"Equity in loss of subsidiaries" on the statement of operations.

In management's opinion, with the exception of those matters discussed above,
the financial statements of LLK contain all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly the unconsolidated
financial position of LLK as of December 31, 2000.




                                       61
<PAGE>   62


SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998


<TABLE>
<CAPTION>
                                            Balance at         Additions
                                            beginning of        charged                          Balance at end
                                              period           to expense       Deductions          of period
                                            -----------       -----------       -----------      --------------
<S>                                         <C>               <C>               <C>                <C>
For the year ended December 31, 1998:
   Allowance for doubtful accounts          $   669,000       $ 2,341,000       $(1,883,000)       $ 1,127,000
                                            ===========       ===========       ===========        ===========
   Inventory reserve                        $ 2,149,000       $ 2,347,000       $(1,826,000)       $ 2,670,000
                                            ===========       ===========       ===========        ===========
For the year ended December 31, 1999:
   Allowance for doubtful accounts          $ 1,127,000       $ 1,785,000       $  (426,000)       $ 2,486,000
                                            ===========       ===========       ===========        ===========
   Inventory reserve                        $ 2,670,000       $ 2,456,000       $(1,046,000)       $ 4,080,000
                                            ===========       ===========       ===========        ===========
For year ended December 31, 2000:
   Allowance for doubtful accounts          $ 2,486,000       $   100,000       $(1,997,000)       $   589,000
                                            ===========       ===========       ===========        ===========
   Inventory reserve                        $ 4,080,000       $   593,000       $(1,211,000)       $ 3,462,000
                                            ===========       ===========       ===========        ===========
</TABLE>



                                       62
<PAGE>   63

                                  EXHIBIT INDEX


<TABLE>
<CAPTION>
Exhibit
Number                         Description
-------                        -----------
<S>            <C>
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)

3.6            Certificate of Amendment to Articles of Incorporation of the
               Company dated March 15, 1999. Previously filed.

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.(10)

10.2*          Employment Agreement, dated July 1, 1996, between the Company and
               Tamara Knickerbocker.(10)

10.3*          Employment Agreement, dated July 1, 1996, between the Company and
               Anthony P. Shutts.(10)

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

10.6           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)

10.7           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)

10.8           Lease Agreement between the Company and Security Capital
               Industrial Trust for 25800 Commercentre Drive, Lake Forest, CA
               dated February 15, 1995.(2)

10.9           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)

10.10          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)
</TABLE>
<PAGE>   64


<TABLE>
<S>            <C>
10.11          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)

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

10.13          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)

10.15          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,.(7)

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

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

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

10.19          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)

10.20          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)

10.21          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)

10.22          Form of Private Securities Subscription Agreement.(6)

10.23          Form of Registration Rights Agreement.(6)

21.1           Subsidiaries of Registrant.(11)

23.1           Consent of Deloitte & Touche LLP, independent auditors.
</TABLE>


------------------------

(1)     Filed as part of Exhibit 3.1 to The L. L. Knickerbocker Co., 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 Co., 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 Co., 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 Co., 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 Co., 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 Co., 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 Co., 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 Co., Inc. report on Form 8-K
        filed with the Securities and Exchange Commission on or about December
        5, 1996.


<PAGE>   65

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

(10)    Filed as an exhibit to The L. L. Knickerbocker Co., Inc. Amended Annual
        Report on Form 10-KSB/A filed with the Securities and Exchange
        Commission on or about August 15, 1997.

(11)    Filed as an exhibit to The L.L. Knickerbocker Co., Inc. Annual Report on
        Form 10-KSB filed with the Securities and Exchange Commission on or
        about March 31, 1998.

(12)    Filed as an exhibit to The L.L. Knickerbocker Co., Inc. Annual Report on
        Form 10-K filed with the Securities and Exchange Commission on or about
        April 15, 1999.

*       These exhibits represent management contracts or compensatory plan
        arrangements.