<PAGE>
 
                                                                     EXHIBIT 4.5

NEITHER THESE SECURITIES NOR ANY SECURITIES ISSUABLE UPON THE CONVERSION HEREOF
HAVE BEEN  REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND THE
RULES AND REGULATIONS PROMULGATED THEREUNDER (THE "1933 ACT"), OR THE SECURITIES
LAWS OF ANY STATE.  NEITHER THESE SECURITIES NOR ANY SECURITIES ISSUABLE UPON
THE CONVERSION HEREOF MAY BE OFFERED FOR SALE, SOLD OR OTHERWISE TRANSFERRED
UNLESS THEY ARE REGISTERED UNDER THE 1933 ACT OR THE LAWS OF APPLICABLE STATES
OR SUCH OFFER, SALE OR TRANSFER IS EXEMPT FROM SUCH REGISTRATION.

             7% CONVERTIBLE DEBENTURE DUE              , 2000
                                          -------------
$                                                        [   ], 1996
 -----------                                  -----------
 
Number 
      ------

     FOR VALUE RECEIVED, The L.L. Knickerbocker Company, a California
corporation (the "Company"), hereby promises to pay to                         ,
                                                       ----------------------- 
or registered assigns (the "Holder") on                    , 2000 (the "Maturity
                                        -------------------                     
Date"), the principal amount of                               Dollars
                                ------------------------------       
($         ), and to pay interest on the principal amount hereof, in such
  ---------
amounts, at such times and on such terms and conditions as are specified herein.

ARTICLE 1.  Interest

     The Company shall pay interest on the unpaid principal amount of this
Debenture (this "Debenture") at the rate of Seven Percent (7%) per year, payable
quarterly in arrears until the principal hereof is paid in full or has been
converted.  Interest on this Debenture shall accrue from the most recent date to
which interest has been paid or, if no interest has been paid, from the date of
issuance of this Debenture.  Interest shall be computed on the basis of a 360-
day year of 12 30-day months.  If the Holder shall convert this Debenture during
any quarter, the Company shall pay to the Holder, upon conversion, the pro-rata
portion of accrued interest payable through the conversion date.

ARTICLE 2.  Method of Payment

     This Debenture must be surrendered to the Company in order for the Holder
to receive payment of the principal amount hereof.  The Company shall pay the
principal of and interest on this Debenture in United States dollars.  However,
the Company may pay principal and interest by a check payable in such money.
The Company may draw a check for the payment of interest to the order of the
Holder of this Note and mail it to the Holder's address as shown on the Register
(as defined in Section 7.2 below).  Interest and principal payments shall be
subject to withholding under applicable United States Federal Internal Revenue
Service Regulations.

<PAGE>
 
ARTICLE 3.  Conversion

     SECTION 3.1.  Conversion Privilege

     (a)  The Holder of this Debenture shall have the right, at its option, to
convert it into shares of common stock, no par value per share, of the Company
("Common Stock") at any time which is before the close of business on the
Maturity Date, except as set forth in Section 3.1(c) below.  The number of
shares of Common Stock issuable upon the conversion of this Debenture is
determined by dividing the principal amount hereof to be converted plus all
accrued interest thereon minus any required withholding by the conversion price
in effect on the conversion date (as defined in paragraph (b) of this Section
3.1 below) and rounding the result to the nearest 1/100th of a share.  On
conversion, no payment of or adjustment (other than as provided in the previous
sentence) for accrued interest shall be made whether or not such conversion
occurs before, on or after an interest payment date.

     (b)  The conversion price is Fifteen Percent (15%) off the current market
price of the Common Stock on the conversion date, but may not be less than $5.25
per share nor greater than $12.00 per share.

     (c) Less than all of the principal amount of this Debenture may be
converted into Common Stock if the portion converted is $10,000 or a whole
multiple of $10,000 and the provisions of this Article 3 that apply to the
conversion of all of the Debenture also apply to the conversion of a portion of
it. All accrued interest on this Debenture shall be added to the amount
converted if less than all of the principal amount of this Debenture is
converted and shall be deemed to be paid and discharged thereby. Up to one-third
(1/3) of the Debentures will be convertible on or after Ten (10) days from the
date (the "Registration Date") that the registration statement for the common
shares underlying the Debentures has been declared effective by the Securities
and Exchange Commission (the "SEC"), with an additional one-third (1/3) of the
remaining Debentures becoming convertible on or after 30 and 60 days from the
Registration Date, respectively.

     (d) In the event any Debentures remain outstanding on the second
anniversary of the date hereof, the unconverted portion of such Debentures will
be convertible in the manner set forth in this Section 3.1; however, the
conversion price shall be equal to the current market price on the conversion
date, but in no event less than $5.25 per share nor greater than $12.00 per
share. In the event any of the Debentures remain outstanding on the third
anniversary of the date hereof, the unconverted portion of such Debentures will
be convertible as above except that the conversion price shall be equal to 120%
of the current market price on the conversion date, but in no event less than
$5.25 per share nor greater than $12.00 per share.

     SECTION 3.2.  Conversion Procedure.  To convert this Debenture into Common
Stock, the Holder must (a) complete and sign the Notice of Conversion attached
hereto and (b) surrender the Debenture to the Company.  The date upon which the
Company receives the completed Notice of Conversion (by mail, facsimile or
otherwise) is the conversion date, provided that the Company shall not be
required to deliver a certificate for Common Shares unless and until the Company
receives the Debenture.  Within five business days after receipt of the Notice
of Conversion,

                                      -2-
<PAGE>
 
providing the Company has received the Debenture from the Holder, the Company
shall deliver a certificate for the number of full shares of Common Stock
issuable upon the conversion and a check for any fraction of a share. The person
in whose name the certificate of Common Stock is to be registered shall be
treated as a shareholder of record on and after the conversion date. No payment
or adjustment shall be made for accrued interest on a converted Debenture
whether the conversion date is on, at or after an interest payment date. If one
person converts more than one Debenture at the same time, the number of full
shares issuable upon the conversion shall be based on the total principal amount
of Debentures converted. Upon surrender of a Debenture that is to be converted
in part, the Company shall issue to the Holder a new Debenture equal in
principal amount to the unconverted portion of the Debenture surrendered.

     SECTION 3.3.  Fractional Shares.  The Company shall not issue a fractional
share of Common Stock upon the conversion of this Debenture.  Instead, the
Company shall pay in lieu of any fractional share the cash value thereof at the
then current market price of the Common Stock as determined under Section 3.7
below.

     SECTION 3.4.  Taxes on Conversion.  The Company shall pay any documentary,
stamp or similar issue or transfer tax due on the issue of shares of Common
Stock upon the conversion of this Debenture.  However, the Holder shall pay any
such tax which is due because the shares are issued in a name other than its
name.

     SECTION 3.5.  Company to Reserve Stock.  The Company shall reserve out of
its authorized but unissued Common Stock or Common Stock held in treasury enough
shares of Common Stock to permit the conversion of this Debenture.  All shares
of Common Stock which may be issued upon the conversion hereof shall be fully
paid and nonassessable.

     SECTION 3.6.  Restrictions on Transfer.  This Debenture and the Common
Stock issuable upon the conversion hereof have not been registered under the
Securities Act of 1933 (the "Act") and this Debenture and the Common Stock
issuable upon the conversion of this Debenture may not be offered for sale, sold
or otherwise transferred unless such offer, sale or other transfer is registered
under the Act or such securities or such transfer is exempt from such
registration.

     SECTION 3.7.  Current Market Price.

     (a)  In Sections 3.1 and 3.3, the current market price per share of Common
Stock on any date is the average of the quoted prices of the Common Stock for
five consecutive trading days ending on the trading day before the date in
question.

     (b)  As used in this Section 3.7, the term quoted price shall mean (i) the
closing bid prices thereof on any such trading date, as reported by Bloomberg,
L.P. or (ii) in the event the Common Stock is not reported on such system, the
fair market value of the Common Stock as determined by the Board of Directors of
the Company in its good faith judgment.

     SECTION 3.8.  Mergers, Etc.  If the Company merges or consolidates with
another corporation or sells or transfers all or substantially all of its assets
to another person and the holders of the Common Stock are entitled to receive
stock, securities or property in respect of or

                                      -3-
<PAGE>
 
in exchange for Common Stock, then as a condition of such merger, consolidation,
sale or transfer, the Company and any such successor, purchaser or transferee
shall amend this Debenture to provide that it may thereafter be converted on the
terms and subject to the conditions set forth above into the kind and amount of
stock, securities or property receivable upon such merger, consolidation, sale
or transfer by a holder of the number of shares of Common Stock into which this
Debenture might have been converted immediately before such merger,
consolidation, sale or transfer.

ARTICLE 4.  Mergers

     The Company shall not consolidate or merge into, or transfer all or
substantially all of its assets to, any person, unless such person assumes the
obligations of the Company under this Debenture and immediately after such
transaction no Event of Default exists.  Any reference herein to the Company
shall refer to such surviving or transferee corporation and the obligations of
the Company shall terminate upon such assumption.

ARTICLE 5.  Reports

     The Company will mail to the Holder hereof at its address as shown on the
Register a copy of any annual, quarterly or current report that it files with
the SEC promptly after the filing thereof and a copy of any annual, quarterly or
other report or proxy statement that it gives to its shareholders generally at
the time such report or statement is sent to shareholders.

ARTICLE 6.  Defaults and Remedies

     SECTION 6.1.  Events of Default.  An "Event of Default" occurs if (a) the
Company does not make the payment of the principal of this Debenture when the
same becomes due and payable at maturity, upon redemption or otherwise, (b) the
Company does not make a payment of interest when such interest becomes due and
payable and such default continues for a period of 5 days thereafter, (c) the
Company fails to issue shares of Common Stock upon conversion, (d) the Company
fails to comply with any of its other agreements in this Debenture and such
failure continues for the period and after the notice specified below, (e) the
Company pursuant to or within the meaning of any Bankruptcy Law (as hereinafter
defined): (i) commences a voluntary case; (ii) consents to the entry of an order
for relief against it in an involuntary case; (iii) consents to the appointment
of a Custodian (as hereinafter defined) of it or for all or substantially all of
its property; (iv) makes a general assignment for the benefit of its creditors;
or (v) a court of competent jurisdiction enters an order or decree under any
Bankruptcy Law that: (A) is for relief against the Company in an involuntary
case; (B) appoints a Custodian of the Company or for all or substantially all of
its property or (C) orders the liquidation of the Company, and the order or
decree remains unstayed and in effect for 60 days.  As used in this Section 6.1,
the term "Bankruptcy Law" means Title 11 of the United States Code or any
similar federal or state law for the relief of debtors.  The term "Custodian"
means any receiver, trustee, assignee, liquidator or similar official under any
Bankruptcy Law.  A default under clause (d) above is not an Event of Default
until the holders of at least 25% of the aggregate principal amount of the
Debentures notify the Company of such default and the Company does not cure it
within 5 days after the

                                      -4-
<PAGE>
 
receipt of such notice, which must specify the default, demand that it be
remedied and state that it is a "Notice of Default."

     SECTION 6.2.  Acceleration.  If an Event of Default occurs and is
continuing, the Holder hereof by notice to the Company, may declare the
principal of and accrued interest on this Debenture to be due and payable.  Upon
such declaration, the principal and interest hereof shall be due and payable
immediately.

ARTICLE 7.  Registered Debentures

     SECTION 7.1.  Series.  This Debenture is one of a numbered series of
Debentures having an aggregate principal amount of not more than $15,500,000
which are identical except as to the principal amount and date of issuance
thereof and as to any restriction on the transfer thereof in order to comply
with the Securities Act of 1933 and the regulations of the Securities and
Exchange Commission promulgated thereunder.  Such Debentures are referred to
herein collectively as the "Debentures".  The Debentures shall be issued in
whole multiples of $10,000.

     SECTION 7.2.  Record Ownership.  The Company shall maintain a register of
the holders of the Debentures (the "Register") showing their names and addresses
and the serial numbers and principal amounts of Debentures issued to or
transferred of record by them from time to time.  The Register may be maintained
in electronic, magnetic or other computerized form.  The Company may treat the
person named as the Holder of this Debenture in the Register as the sole owner
of this Debenture.  The Holder of this Debenture is the person exclusively
entitled to receive payments of interest on this Debenture, receive
notifications with respect to this Debenture, convert it into Common Stock and
otherwise exercise all of the rights and powers as the absolute owner hereof.

     SECTION 7.3.  Registration of Transfer.  Transfers of this Debenture may be
registered on the books of the Company maintained for such purpose pursuant to
Section 7.2 above (i.e., the Register).  Transfers shall be registered when this
Debenture is presented to the Company with a request to register the transfer
hereof and the Debenture is duly endorsed by the appropriate person, reasonable
assurances are given that the endorsements are genuine and effective, and the
Company has received evidence satisfactory to it that such transfer is rightful
and in compliance with all applicable laws, including tax laws and state and
federal securities laws.  When this Debenture is presented for transfer and duly
transferred hereunder, it shall be cancelled and a new Debenture showing the
name of the transferee as the record holder thereof shall be issued in lieu
hereof.  When this Debenture is presented to the Company with a reasonable
request to exchange it for an equal principal amount of Debentures of other
denominations, the Company shall make such exchange and shall cancel this
Debenture and issue in lieu thereof Debentures having a total principal amount
equal to this Debenture in the denominations requested by the Holder.  The
Company may charge a reasonable fee for any registration of transfer or exchange
other than one occasioned by a notice of redemption or the conversion hereof.

     SECTION 7.4.  Worn and Lost Debentures.  If this Debenture becomes worn,
defaced or mutilated but is still substantially intact and recognizable, the
Company or its agent may issue a new Debenture in lieu hereof upon its
surrender.  Where the Holder of this Debenture claims that

                                      -5-
<PAGE>
 
the Debenture has been lost, destroyed or wrongfully taken, the Company shall
issue a new Debenture in place of the original Debenture if the Holder so
requests by written notice to the Company actually received by the Company
before it is notified that the Debenture has been acquired by a bona fide
purchaser and the Holder has delivered to the Company an indemnity bond in such
amount and issued by such surety as the Company deems satisfactory together with
an affidavit of the Holder setting forth the facts concerning such loss,
destruction or wrongful taking and such other information in such form with such
proof or verification as the Company may request.

ARTICLE 8.  Notices

 

     Except as otherwise provided in this Debenture, any notice which is
required or convenient under the terms of this Debenture shall be duly given if
it is in writing and (a) delivered in person (b) mailed by first class mail,
postage prepaid, or (c) sent by private overnight mail service (such as Federal
Express) and directed to the Holder of the Debenture at its address as it
appears on the Register or if to the Company to its principal executive offices.
Such notice shall be effective, when personally delivered, upon receipt, when so
sent by first class mail, four business days after deposit with the United
States Postal Service, or when so sent by private overnight mail service, the
next business day after deposit.

ARTICLE 9.  Time

     Where this Debenture authorizes or requires the payment of money or the
performance of a condition or obligation on a Saturday or Sunday or a public
holiday, or authorizes or requires the payment of money or the performance of a
condition or obligation within, before or after a period of time computed from a
certain date, and such period of time ends on a Saturday or a Sunday or a public
holiday, such payment may be made or condition or obligation performed on the
next succeeding business day, and if the period ends at a specified hour, such
payment may be made or condition performed, at or before the same hour of such
next succeeding business day, with the same force and effect as if made or
performed in accordance with the terms of this Debenture.  Where time is
extended by virtue of the provisions of this Article 9, such extended time shall
not be included in the computation of interest.

ARTICLE 10.  Waivers

     The holders of a majority in principal amount of the Debentures may waive a
default or rescind the declaration of an Event of Default and its consequences
except for a default in the payment of principal of or interest on any
Debenture.

ARTICLE 11.  Rules of Construction

     In this Debenture, unless the context otherwise requires, words in the
singular number include the plural, and in the plural include the singular, and
words of the masculine gender include the feminine and the neuter, and when the
sense so indicates, words of the neuter gender may refer to any gender.  The
numbers and titles of sections contained in this Debenture are

                                      -6-
<PAGE>
 
inserted for convenience of reference only, and they neither form a part of this
Debenture nor are they to be used in the construction or interpretation hereof.
Wherever, in this Debenture, a determination of the Company is required or
allowed, such determination shall be made by a majority of the Board of
Directors of the Company and if it is made in good faith, it shall be conclusive
and binding upon the Company and the Holder of this Debenture.

ARTICLE 12.  Governing Law

     The validity, terms, performance and enforcement of this Debenture shall be
governed and construed by the provisions hereof and in accordance with the laws
of the State of New York applicable to agreements that are negotiated, executed,
delivered and performed solely in the State of New York.

     IN WITNESS WHEREOF, the Company has duly executed this Debenture as of the
date first written above.

                         THE L.L. KNICKERBOCKER COMPANY

                         By
                           ------------------------------------
                         Name
                             ----------------------------------
                         Title
                              ---------------------------------

                                      -7-
<PAGE>
 
                              NOTICE OF CONVERSION

         [To be completed and signed only upon conversion of Debenture]

                                        

The undersigned, the Holder of this Debenture, hereby irrevocably elects to
exercise the right to convert it into common stock, par value $       per share,
                                                               ------   
of The L.L. Knickerbocker Company as follows:

<TABLE> 
<S>                        <C> 
[Complete if less than     ____________________ Dollars ($_________)*____
all of principal amount    ($10,000 or integral multiples of $10,000)
is to be converted]
[Signature must be         _______________________________________________
guaranteed if registered    (Name of Holder of shares if different than
holder of stock differs     registered Holder of Debenture)
from registered Holder of
Debenture)
                           ________________________________________________
                           (Address of Holder if different than address of
                           registered Holder of Debenture)

                           ________________________________________________
                           (Social Security or EIN of Holder of shares if
                           different than Holder of Debenture)
</TABLE> 

     *If the principal amount of the Debenture to be converted is less than the
     entire principal amount thereof, a new Debenture for the balance of the
     principal amount shall be returned to the Holder of the Debenture.

Date:________________  Sign:_____________________________________
                            (Signature must conform in all respects
                            to name of Holder shown on face of this
                            Debenture)

Signature Guaranteed:

                                      -8-
<PAGE>
 
                               Assignment of Note

     The undersigned hereby sell(s) and assign(s) and transfer(s) unto
                                                                      

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

          (name, address and SSN or EIN of assignee)

                                                   Dollars ($       )
---------------------------------------------------          ------- ---

(principal amount of Debenture, $10,000 or integral multiples of $10,000)

of principal amount of this Debenture together with all accrued interest hereon.

Date:               Sign:
     --------            ------------------------------------------

                         (Signature must conform in all respects to

                         name of Holder shown on face of Debenture)

Signature Guaranteed:

                                      -9-