-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RCNow1b3ssb9xksShVus4McKBCS5yq7mlol5TryohoosOMIx1a93EigRBju8l881 d6jU7ECzL89rqGkwezkDFA== 0000940180-98-000354.txt : 19980401 0000940180-98-000354.hdr.sgml : 19980401 ACCESSION NUMBER: 0000940180-98-000354 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: KNOLL INC CENTRAL INDEX KEY: 0001011570 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS FURNITURE & FIXTURES [2590] IRS NUMBER: 133873847 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-12907 FILM NUMBER: 98579988 BUSINESS ADDRESS: STREET 1: 1235 WATER ST CITY: EAST GREENVILLE STATE: PA ZIP: 18041 BUSINESS PHONE: 2156797991 MAIL ADDRESS: STREET 1: 1235 WATER STREET CITY: EAST GREENVILLE STATE: PA ZIP: 18041 10-K 1 FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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, 1997 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 No. 001-12907 KNOLL, INC. A Delaware Corporation I.R.S. Employer No. 13-3873847 1235 Water Street East Greenville, PA 18041 Telephone Number (215) 679-7991 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED ------------------- ------------------------------------ Common Stock, par value New York Stock Exchange, Inc. $0.01 per share
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE 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 checkmark 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 the 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. [_] As of March 20, 1998, the aggregate market value of the voting stock held by non-affiliates of the Registrant, based on the closing price of these shares on the New York Stock Exchange, Inc., was $642,512,243. Directors, executive officers and beneficial owners of 5% or more of the Registrant's stock are considered affiliates of the Registrant. As of March 20, 1998, there were 43,404,474 shares of the Registrant's common stock, par value $0.01 per share, outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement for the Annual Shareholders' Meeting to be held on May 19, 1998 are incorporated by reference into Part III of this Form 10-K. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- TABLE OF CONTENTS
ITEM PAGE - ---- ---- Part I 1. Business............................................................... 1 2. Properties............................................................. 7 3. Legal Proceedings...................................................... 7 4. Submission of Matters to a Vote of Security Holders.................... 7 Part II 5. Market for Registrant's Common Equity and Related Stockholder Matters.. 8 6. Selected Financial Data................................................ 8 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................................... 11 8. Financial Statements and Supplementary Data............................ 18 9. Changes in and Disagreements with Accountants on Accounting and Finan- cial Disclosure........................................................ 18 Part III 10. Directors and Executive Officers of the Registrant..................... 19 11. Executive Compensation................................................. 19 12. Security Ownership of Certain Beneficial Owners and Management......... 19 13. Certain Relationships and Related Transactions......................... 19 Part IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........ 20 Signatures................................................................. 22
PART I ITEM 1. BUSINESS GENERAL Knoll, Inc., a Delaware corporation, is the successor by merger to the business and operations of The Knoll Group, Inc. and related entities ("The Knoll Group" or the "Predecessor"), which were acquired on February 29, 1996 (the "Acquisition") from Westinghouse Electric Corporation, currently known as CBS Corporation ("Westinghouse"). The Knoll Group was created by Westinghouse in 1989 and 1990, when it acquired The Shaw-Walker Company, Reff Inc. and Knoll International, Inc. and combined them with its Westinghouse Furniture Systems division. The Acquisition was completed by T.K.G. Acquisition Corp. ("TKG"), a corporation majority-owned by Warburg, Pincus Ventures, L.P. ("Warburg") and whose other stockholders were NationsBanc Investment Corp. and members of Knoll, Inc. management. In the Acquisition, a wholly owned subsidiary of TKG acquired all of the outstanding capital stock of The Knoll Group and was merged, together with The Knoll Group, Inc. into the principal operating company of The Knoll Group, which changed its name in the merger to "Knoll, Inc." On March 14, 1997, Knoll, Inc. was merged into TKG, which changed its name in the merger to "Knoll, Inc." Unless the context requires or specifies otherwise, the terms "Knoll" and the "Company" refer to Knoll, Inc., its subsidiaries and predecessor entities as a combined entity. The Company completed an initial public offering of its common stock during the second quarter of 1997. An aggregate of 9,200,000 shares, including 720,000 shares sold by a selling stockholder, were sold during May and June 1997 at $17.00 per share. The Company is engaged in the design, manufacture and distribution of office furniture products and accessories, focusing on the middle to high-end of the contract furniture market. The Company's principal executive offices are located at 1235 Water Street, East Greenville, Pennsylvania 18041, and its telephone number is (215) 679-7991. Except as otherwise indicated, the market and Company market share data contained in this Form 10-K are based on information from The Business and Institutional Furniture Manufacturer's Association ("BIFMA"), the United States ("U.S.") office furniture trade association. The Company believes that such data are considered within the industry to be the best available and generally are indicative of the Company's relative market share and competitive position. INDUSTRY OVERVIEW The U.S. office furniture market consists of five major product categories: office systems, seating, storage, desks and casegoods and tables. The following table indicates the percentage of sales that each product category contributed to the estimated U.S. office furniture industry in 1997.
U.S. % OF U.S. PRODUCT CATEGORY MARKET SIZE MARKET ---------------- ------------- --------- (in billions) Office systems....................................... $4.1 35.3% Seating.............................................. 2.8 24.6 Storage.............................................. 1.6 13.8 Desks and casegoods.................................. 1.9 16.4 Tables............................................... 0.7 6.5
Office systems consist of movable panels, work surfaces and storage units, electrical distribution, lighting, organizing tools and freestanding components. These modular systems are popular with customers who require flexible space configurations or where many people share open floor space, as is common in modern office 1 buildings. Both seating, ranging from executive desk chairs to task chairs and side chairs, and storage products, such as overhead shelving, file cabinets and desk pedestals (file cabinets that serve to support desks), are sold to users of office systems and also are sold separately to non-systems users. Desks and tables range from classic writing desks in private offices to conference and meeting room tables that can accommodate sophisticated technological demands. The Company believes that fundamental shifts in the nature of corporate organizational structures, technology and work processes are driving growth in the office furniture industry. Companies increasingly use workplace design and furniture purchase decisions as catalysts for organizational and cultural change. Several significant factors that influence this change include: continued corporate reengineering, restructuring and reorganizing; corporate relocations; new office technology and the resulting necessity for improved wire and data management; and heightened sensitivity to concerns about ergonomic standards. In addition, other factors such as white collar employment levels, corporate cash flow and non-residential construction reflect certain macroeconomic conditions which management believes influence industry growth. PRODUCTS The Company offers a broad range of office furniture products and accessories that support the Company's strategy of being a one-stop source for quality office furniture. The Company's five basic product categories are as follows: (i) office systems, comprised mainly of the Reff, Morrison and Equity product lines; (ii) seating, including the Sapper, Bulldog, Parachute and SoHo chairs; (iii) storage solutions and filing cabinets, including the Calibre collection; (iv) desks and casegoods, including bookcases and credenzas; and (v) tables. The Company has a KnollStudio collection that features its signature design classics, including high image side chairs, sofas, desks and tables for both office and home use. The Company also offers its own lines of textiles sold under the KnollTextiles brand, lines of leather products sold under the Spinneybeck name and a line of desk, office and computer accessories under the KnollExtra brand that complement its furniture products and are also sold to other manufacturers or with products manufactured by others. The following is a description of the Company's major product categories and lines: Office Systems The Company offers a complete line of systems products in order to meet the needs of a variety of organizations. Systems may be used for teamwork settings, private offices and open floor plans and are composed of adjustable partitions, work surfaces, storage cabinets and electrical and lighting systems that can be moved, re-configured and re-used within the office. Systems therefore offer a cost effective and flexible alternative to traditional drywall office construction. The Company has focused on this area of the office furniture industry because it is the largest category, typically provides attractive gross margins and often leads to repeat and add-on sales of additional systems, complementary furniture and furniture accessories. Office systems accounted for approximately 68.5% of the Company's sales in 1997, 66.7% of sales in 1996 and 68.2% of sales in 1995. The Company has developed two new office systems product lines, Currents and Dividends, that address new category segments and price points where the Company's current product offerings may be limited and where management believes that demand for quality products has been under-served. These products will be available for sale in the first half of 1998. The Company believes its brand identity, superior design and complementary product offerings give it a competitive advantage in launching new products. Seating The Company believes that the office seating market includes three major segments: the "appearance," "comfort" and "basic" segments. Key customer criteria in seating include superior ergonomics, aesthetics, comfort and quality, all of which the Company believes to be consistent with its strengths and reputation. The Company offers a complete line of seating in the appearance and comfort segments at various price, appearance, comfort and performance levels. The majority of sales in the U.S. seating market are made to the same customers as are the office systems sales. 2 Storage Solutions and Filing Cabinets The Company offers a variety of storage options, as part of its Calibre collection, designed to be integrated with its office systems as well as with its and others' stand-alone furniture. These products consist of stand-alone metal filing, storage and desk products that integrate into and support the Company's systems sales. They also function as free-standing furniture in private offices or open-plan environments. In addition, these products enable the Company to sell products to businesses whose office furniture systems are provided by the Company's competitors. Desks and Casegoods The Company's collections of stand-alone wood furniture items, such as desks, bookshelves and credenzas, are available in a range of designs and price points. These products combine contemporary styling with sophisticated workplace solutions and attract a wide variety of customers, from those conducting large office reconfigurations to small retail purchasers. Tables The Company offers an innovative line of adjustable Interaction tables. Interaction tables are designed to be integrated into the Company's systems lines and to provide customers with ergonomically superior work surfaces. Additionally, these tables are often sold as stand-alone products to non- systems customers. The Company also offers an award winning line of Propeller meeting and conference tables that provide advanced wire management and technology support while offering sufficient flexibility to allow end users to reconfigure a meeting room quickly and easily to accommodate their specific needs. KnollStudio The Company's historically significant KnollStudio collection serves the design-conscious segment of the fine contract furniture market, providing the architect and design community and customers with sophisticated furniture for high-profile office and home uses. KnollStudio provides a marketing umbrella for the full range of the Company's office products and is recognized as the "design engine" of the Company. KnollStudio products, including a wide variety of chairs and sofas, as well as conference, training, side and dining tables, were created by many of this century's most prominent architects and designers, such as Ludwig Mies van der Rohe, Marcel Breuer, Eero Saarinen and Frank Gehry, for prestigious corporate and residential interiors. This line includes complete collections by individual designers as well as distinctive single items. Maya Lin, the internationally-known designer of the National Veterans Memorial in Washington, D.C., recently developed a signature collection of products for the KnollStudio line. The products are targeted for introduction in the second half of 1998, in conjunction with the celebration of the Company's 60th anniversary. Complementary Products The Company offers product lines that complement its primary office systems and seating business, permitting it to sell a complete package of office interiors by supplying many of its own component products. Such products help maintain the Company's unique design image by incorporating elements developed by its own team of designers. KnollExtra. KnollExtra is a rapidly growing line of desk and office accessories, including letter trays, sorters, binder bins, file holders, calendars, desk pads, planters, wastebaskets and bookends. In addition, KnollExtra offers a number of computer accessories and ergonomic office products. KnollTextiles. KnollTextiles offers a wide range of coverings for walls, panels and seating. KnollTextiles was established in 1947 to develop high quality fabrics for Knoll furniture. These products allow the Company to distinguish its product offerings by providing specialty fabric options and flexibility in fabric selection and application. As it does with its furniture lines, the Company uses many independent designers to create its fabrics, which has helped it establish what management believes to be a unique reputation for textile design. Not 3 only are KnollTextiles coverings applied to Knoll furniture, but they are also sold to customers for use on other manufacturers' products, thereby allowing the Company to benefit from its competitors' sales. Leather. Spinneybeck Enterprises, Inc., a wholly owned subsidiary of the Company, supplies quality upholstery leather to the Company, to other furniture manufacturers and to aviation, custom coach and boating manufacturers. European Products Knoll Europe has a broad product offering which allows customers to single- source a complete office environment, including certain products designed specifically for the European market. Knoll Europe's core product categories include: (i) office systems, including the Hannah Desking System and the recently introduced PL1 System, which are targeted to Northern Europe, the Alessandri System, which is targeted to the French market and the SoHo Desking System, which has broad market appeal; (ii) KnollStudio, which serves the image and design-oriented segment of the fine furniture market; (iii) seating, including a comprehensive range of chairs such as Sapper, Bulldog, and Parachute; and (iv) cabinets, which are designed to complement its systems products. The Company also sells its products designed and manufactured in North America to the international operations of its core North American customers. PRODUCT DESIGN AND DEVELOPMENT Knoll's design philosophy is linked to its commitment to working with the world's preeminent designers to develop products that delight and inspire. The Company's collection of classic and current designs includes works by such internationally recognized architects and designers as Ludwig Mies van der Rohe, Marcel Breuer, Eero Saarinen, Harry Bertoia, Massimo Vignelli and Frank Gehry. Today, the Company continues to engage prominent outside architects and designers, such as Maya Lin, to create new products and product enhancements. By combining the creative vision of architects and designers with a corporate commitment to products which address changing business needs, the Company seeks to launch new offerings which achieve recognition in the architect and design community and generate strong demand among corporate customers. Since 1994, under the leadership of Carl G. Magnusson, the Company's Senior Vice President-Design, the Company has won over 20 design awards for its recent product introductions. An important part of the Company's product development capabilities is its responsiveness to customer needs and flexibility to handle customized manufacturing requests. In order to develop products across its product range, the Company works closely with independent designers from a number of industries. By utilizing these long-standing design relationships and listening to customers to analyze their needs, the Company has redesigned or enhanced virtually every product line since 1994 in order to better meet customer preferences. SALES AND DISTRIBUTION Knoll's customers are typically Fortune 1000 companies. The Company employs approximately 320 direct sales representatives, who work closely with its approximately 230 independent dealers in North America to present the Company's products to prospective customers. The sales force, in conjunction with the dealer network, has close relationships with architects, designers and corporate facility managers, who often have a significant influence on product selection for large orders. In addition to coordinating sales efforts with the Company's sales representatives, the Company's dealers generally handle project management, installation and maintenance for the account after the initial product selection and sale. Although many of these dealers also carry products of other manufacturers, none of them acts as a dealer for the Company's principal direct competitors. The Company has not experienced significant turnover in its dealer network except at its own initiation, as the dealer's economic investment in learning all aspects of a particular manufacturer's product offerings and the value of the relationships the dealer forms with the Company and with customers discourage dealers from changing their vendor affiliations. The Company is 4 not dependent on any one of its dealers, the largest of them accounting for less than 5.0% of the Company's North American sales in 1997. No single customer represented more than 3.0% of the Company's North American sales during 1997. However, a number of U.S. government agencies purchase the Company's products through multiple contracts with the General Services Administration ("GSA"). Sales to the GSA aggregated approximately 8.0% in 1997. In Europe, the Company sells its products in largely the same manner as it does in North America, through a direct sales force and a network of dealers, though each major European market has its own distinct characteristics. The European market accounted for approximately 6.9% of the Company's sales in 1997. In the Latin American and Asia-Pacific markets, which accounted for 1.8% of the Company's sales in 1997, the Company uses both dealers and independent licensees. MANUFACTURING AND OPERATIONS The Company operates four manufacturing sites in North America, with plants located in East Greenville, Pennsylvania; Grand Rapids and Muskegon, Michigan; and Toronto, Canada. In addition, the Company has two plants in Italy: one in Foligno and one in Graffignana. All of the Company's plants are registered under ISO 9000, an internationally developed set of quality criteria for manufacturing companies. RAW MATERIALS AND SUPPLIERS The Company's purchasing is centralized in its East Greenville facility. This centralization, in addition to close working relationships formed with its main suppliers, has enabled the Company to focus on achieving purchasing economies and "just-in-time" inventory practices. The Company utilizes steel, lumber, paper, paint, plastics, laminates, particleboard, veneers, glass, fabrics, leathers and upholstery filling material. Management currently maintains no long-term supply contracts and believes that the supply sources for these materials are adequate. The Company does not rely on any sole source suppliers for any of its raw materials, except for certain electrical products. COMPETITION The office furniture market is highly competitive. Office furniture companies compete on the basis of (i) product design, including performance, ergonomic and aesthetic factors, (ii) product quality and durability, (iii) price (primarily in the middle and budget segments), (iv) on-time delivery and (v) service and technical support. In the United States, where the Company had a 6.3% market share and derived approximately 88.5% of its sales in 1997, five companies (including the Company) represent approximately 60.2% of the market. Some of the Company's competitors, especially those in North America, are large and have significantly greater financial, marketing, manufacturing and technical resources than those of the Company. The Company's most significant competitors in its primary markets are Steelcase, Inc., Herman Miller, Inc., Haworth, Inc. and, to a lesser extent, HON Industries, Inc. These competitors have a substantial volume of furniture installed at businesses throughout the country, providing a continual source of demand for further products and enhancements. Moreover, the products of these competitors have strong acceptance in the marketplace. Although the Company believes that it has been able to compete successfully in its markets to date, there can be no assurance that it will be able to continue to do so in the future. The European market is highly fragmented, as the combined sales of the estimated top 50 manufacturers represent less than approximately 60.0% of the market. Based on the most recent publicly available trade information, the Company believes that no single company holds more than a 10.0% share of the European market. PATENTS AND TRADEMARKS The Company has approximately 91 active United States utility patents on various components used in its products and systems and approximately 115 active United States design patents. The Company also has 5 approximately 200 patents in various foreign countries. Knoll(R), The Knoll Group(R), KnollStudio(R), KnollExtra(R), Reff(TM), Bulldog(R), Calibre(R), Equity(R), Parachute(R), Good Design Is Good Business(R), Propeller(R) and SoHo(TM) are trademarks of the Company. The Company considers securing and protecting its intellectual property rights to be important to its business. BACKLOG The Company's backlog of unfilled orders was $141.3 million at December 31, 1997 and $94.1 million at December 31, 1996. The Company expects to fill substantially all outstanding unfilled orders within the next twelve months. The Company manufactures substantially all of its products to order, and its average manufacturing time is approximately five weeks. As a result, backlog is not a significant factor used to predict the Company's long-term business prospects. FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES For information regarding foreign and domestic operations and export sales, refer to Note 23 (Business Segment and Geographical Region Information) of the Notes to the Consolidated Financial Statements beginning on page F-29. ENVIRONMENTAL MATTERS The Company believes that it is substantially in compliance with all applicable laws and regulations for the protection of the environment and the health and safety of its employees based upon existing facts known to management. Compliance with federal, state, local and foreign environmental regulations relating to the discharge of substances into the environment, the disposal of hazardous wastes and other related activities has had and will continue to have an impact on the operations of the Company, but has, since the formation of Knoll in 1990, been accomplished without having a material adverse effect on the operations of the Company. There can be no assurance that such regulations will not change in the future or that the Company will not incur material costs as a result of such regulations. While it is difficult to estimate the timing and ultimate costs to be incurred due to uncertainties about the status of laws, regulations and technology, management presently has no planned expenditures of significant amounts for future environmental compliance. The Company has trained staff responsible for monitoring compliance with environmental, health and safety requirements. The Company's goal is to reduce and, wherever possible, eliminate the creation of hazardous waste in its manufacturing processes. The Company has been identified as a potentially responsible party pursuant to the Comprehensive Environmental Response Compensation and Liability Act ("CERCLA") for remediation costs associated with waste disposal sites previously used by the Company. CERCLA imposes liability without regard to fault or the legality of the disposal. The remediation costs at the CERCLA sites are unknown; however, the Company does not expect its liability to be material. At each of the sites, the Company is one of many potentially responsible parties and expects to have only a small percentage of liability. At some of the sites, the Company expects to qualify as a de minimis or de micromis contributor, eligible for a cash-out settlement. In addition, Westinghouse has agreed to indemnify the Company for certain costs associated with CERCLA liabilities known as of the date of the Acquisition. EMPLOYEES As of February 28, 1998, the Company employed a total of 3,942 people, including 2,594 hourly and 1,348 salaried employees. The Grand Rapids, Michigan plant is the only unionized Company plant within the United States, with the Carpenters and Joiners of America-Local 1615 having a four-year contract expiring August 30, 1998. While management believes that relations with this union are positive, management cannot assure that it will be successful in reaching a new contract. Recently, there was an unsuccessful attempt to unionize employees at the Company's Muskegon, Michigan facility. The Company believes that relations with its employees in Muskegon and throughout North America are good. Nonetheless, it is possible that Company employees may 6 attempt to unionize in the future. Certain workers in the Company's facilities in Italy are represented by unions. The Company has experienced brief work stoppages from time to time at the Company's plants in Italy, certain of which related to national or local issues. Such work stoppages have not materially affected the Company. ITEM 2. PROPERTIES The Company operates over 2,947,000 square feet of facilities, including manufacturing plants, warehouses and sales offices. Of these facilities, the Company owns approximately 2,372,000 square feet and leases approximately 575,000 square feet. The Company's manufacturing plants are located in East Greenville, Pennsylvania; Grand Rapids and Muskegon, Michigan; Toronto, Canada; and Foligno and Graffignana, Italy. The Company's corporate headquarters are located in East Greenville, Pennsylvania, where the Company owns two manufacturing facilities aggregating approximately 547,000 square feet and leases three warehouses aggregating approximately 142,000 square feet. The East Greenville facility is also the distribution center for KnollStudio, KnollExtra and KnollTextiles. The Company owns one approximately 500,000 square foot manufacturing facility in Grand Rapids, Michigan and one approximately 274,000 square foot plant in Muskegon, Michigan. The Company's plants in Toronto, Canada consist of one approximately 375,000 square foot owned building and two leased properties aggregating approximately 230,000 square feet. The Company is in the process of expanding its manufacturing facilities in Muskegon, Michigan and Toronto, Canada by approximately 60,000 square feet and 32,000 square feet, respectively. The Company owns two manufacturing facilities in Italy: an approximately 258,000 square foot building in Foligno, which houses the Knoll Europe headquarters, and an approximately 110,000 square foot building in Graffignana. The Company believes that its plants and other facilities are sufficient for its needs for the foreseeable future. ITEM 3. LEGAL PROCEEDINGS The Company is subject to litigation in the ordinary course of its business. The Company is not a party to any lawsuit or proceeding which, in the opinion of management, based on information presently known, is likely to have a material adverse effect on the Company. The Company, for a number of years, has sold various products to the United States Government under GSA multiple award schedule contracts. The GSA is permitted to audit the Company's compliance with the terms of the GSA contracts. As a result of one such audit, the GSA has asserted refund claims under 1985-88 and 1987-90 contracts between GSA and The Shaw-Walker Company, which has been merged into the Company, for approximately $2.15 million ("Shaw-Walker GSA Claims") and has other contracts under audit review. GSA has referred both of these Shaw-Walker contracts to the Justice Department for consideration of potential civil False Claims Act cases. Under the civil False Claims Act, the Company is potentially liable for treble damages plus penalties of up to $10,000 for each "false" invoice submitted to the Government. The former shareholders of The Shaw-Walker Company have agreed to indemnify the Company for the Shaw-Walker GSA Claims. Based upon information presently known, management disputes the audit results and does not expect resolution of the Shaw-Walker GSA Claims to have a material adverse effect on the Company's consolidated financial statements. Management does not have information which would indicate a substantive basis for a civil False Claims Act case under the contracts. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the three months ended December 31, 1997. 7 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION AND DIVIDEND POLICY The Company's common stock, par value $0.01 per share (the "Common Stock") is traded on the New York Stock Exchange, Inc. ("NYSE"). The Common Stock has been listed on the NYSE since May 9, 1997, the date of the Company's initial public offering. The following table sets forth, for the periods indicated, high and low closing sales prices for the Common Stock as reported by the NYSE.
1997 HIGH LOW ---- --------- ------- Second quarter (commencing May 9, 1997).................... $23 3/4 $17 1/4 Third quarter.............................................. 33 15/16 22 7/8 Fourth quarter............................................. 34 3/16 25 3/8
The closing price of the Company's Common Stock was $41 1/8 on March 20, 1998. As of such date, there were approximately 3,600 holders of record of the Common Stock. The Company has not paid a cash dividend on its Common Stock since the Acquisition, and does not anticipate paying any cash dividends on the Common Stock in the foreseeable future. The current policy of the Company's Board of Directors is to retain earnings to finance the operations and expansion of the Company's business. In addition, the Company's credit agreement and indenture (the "Indenture") relating to the Company's 10.875% Senior Subordinated Notes (the "Senior Subordinated Notes") limit the Company's ability to pay dividends to its stockholders. Any future determination to pay dividends will depend on the Company's results of operations, financial condition, capital requirements, contractual limitations and other factors deemed relevant by the Board of Directors. RECENT SALES OF UNREGISTERED SECURITIES Options to purchase 10,000 shares of Common Stock were granted to an employee of the Company on January 5, 1998 pursuant to the Knoll, Inc. 1997 Stock Incentive Plan. These options were granted at an exercise price of $33.375 and vest over periods determined at their date of grant. Such grants were made in reliance on the exemption from registration pursuant to Section 4(2) of the Securities Act. ITEM 6. SELECTED FINANCIAL DATA The following table presents (i) selected historical consolidated financial information of the Predecessor, as of the dates and for the periods indicated, (ii) selected historical consolidated financial information of the Company, as of the dates and for the periods indicated and (iii) summary pro forma consolidated financial information of the Company, for the periods indicated, after giving effect to the events described in the notes below. The historical consolidated financial information for each of the three years in the period ended December 31, 1995 has been derived from the Predecessor's financial statements, which have been audited by Price Waterhouse LLP. The historical consolidated financial information for the two-month period ended February 29, 1996 has been derived from the Predecessor's financial statements which have been audited by Ernst & Young LLP. The historical consolidated financial information for the ten-month period ended December 31, 1996 and the year ended December 31, 1997 has been derived from the Company's financial statements which have been audited by Ernst & Young LLP. The summary pro forma information does not purport to represent what the Company's results actually would have been if such events had occurred at the dates indicated, nor does such information purport to project the results of the Company for any future period. The selected financial information should be read in conjunction with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Item 8, "Financial Statements and Supplementary Data." 8
PREDECESSOR | THE COMPANY -------------------------------------------|--------------------------------------------- | PRO FORMA TWO MONTHS | TEN MONTHS YEAR YEAR ENDED YEAR ENDED DECEMBER 31, ENDED | ENDED ENDED DECEMBER 31, ----------------------------- FEBRUARY 29,|DECEMBER 31, DECEMBER 31, ------------------- 1993 1994 1995 1996 | 1996 1997 1996(1)(2) 1997(2) -------- --------- -------- ------------|------------ ------------ ---------- -------- (IN THOUSANDS) | (IN THOUSANDS, EXCEPT PER SHARE DATA) | OPERATING DATA | Total sales............. $508,383 $ 562,869 $620,892 $ 90,232 | $561,534 $810,857 $651,766 $810,857 Cost of sales(3)........ 376,875 410,104 417,632 59,714 | 358,841 489,962 419,908 489,962 -------- --------- -------- --------- | -------- -------- -------- -------- Gross profit............ 131,508 152,765 203,260 30,518 | 202,693 320,895 231,858 320,895 Provision for | restructuring.......... 6,165 29,180 -- -- | -- -- -- -- Selling, general and | administrative | expenses(4)............ 163,015 167,238 138,527 21,256 | 131,349 183,018 153,388 183,018 Westinghouse long-term | incentive | compensation(5)........ -- -- -- 47,900 | -- -- -- -- Allocated corporate | expenses(3)(4)......... 4,899 5,881 9,528 921 | -- -- -- -- -------- --------- -------- --------- | -------- -------- -------- -------- Operating income (loss). (42,571) (49,534) 55,205 (39,559) | 71,344 137,877 78,470 137,877 Interest expense........ 3,301 3,225 1,430 340 | 32,952 25,075 34,359 22,373 Other income (expense), | net.................... 2,082 699 (1,597) (296) | 447 1,667 151 1,667 -------- --------- -------- --------- | -------- -------- -------- -------- Income (loss) before | income tax expense | (benefit), cumulative | effect of changes in | accounting principles | and extraordinary item. (43,790) (52,060) 52,178 (40,195) | 38,839 114,469 44,262 117,171 Income tax expense | (benefit).............. (3,571) 7,713 22,846 (16,107) | 16,844 48,026 19,094 49,096 -------- --------- -------- --------- | -------- -------- -------- -------- Income (loss) before | cumulative effect of | changes in accounting | principles and | extraordinary item..... (40,219) (59,773) 29,332 (24,088) | 21,995 66,443 25,168 68,075 Cumulative effect of | changes in accounting | principles............. (1,118) -- -- -- | -- -- -- -- -------- --------- -------- --------- | -------- -------- -------- -------- Income (loss) before | extraordinary item..... (41,337) (59,773) 29,332 (24,088) | 21,995 66,443 25,168 68,075 Extraordinary loss on | early extinguishment of | debt, net of taxes(6).. -- -- -- -- | 5,159 5,337 -- -- -------- --------- -------- --------- | -------- -------- -------- -------- Net income (loss)(6).... $(41,337) $ (59,773) $ 29,332 $ (24,088) | $ 16,836 $ 61,106 $ 25,168 $ 68,075 ======== ========= ======== ========= | ======== ======== ======== ======== Pro forma income before | extraordinary item per | share of Common | Stock(7): | Basic.................. | $ 0.71 $ 1.78 $ 0.64 $ 1.69 Diluted................ | $ 0.63 $ 1.64 $ 0.58 $ 1.57 Pro forma net income per | share of Common | Stock(6)(7): | Basic.................. | $ 0.54 $ 1.64 $ 0.64 $ 1.69 Diluted................ | $ 0.48 $ 1.51 $ 0.58 $ 1.57 Pro forma weighted | average shares of | Common Stock(7): | Basic.................. | 31,040 37,284 39,520 40,287 Diluted................ | 34,701 40,398 43,181 43,400
9
PREDECESSOR | THE COMPANY --------------------------|----------------- DECEMBER 31, | DECEMBER 31, --------------------------|----------------- 1993 1994 1995 | 1996 1997 -------- -------- --------|-------- -------- (IN THOUSANDS) | (IN THOUSANDS) | BALANCE SHEET DATA | Working capital................... $ 41,933 $ 22,898 $ 82,698|$ 64,754 $ 65,553 Total assets...................... 691,043 705,316 656,710| 675,712 680,859 Total long-term debt, including | current portion.................. 15,204 12,451 3,538| 354,154 207,029 Total liabilities................. 205,104 247,310 176,259| 497,908 392,570 Stockholders' equity.............. 485,939 458,006 480,451| 177,804 288,289
- -------- (1) Reflects summary pro forma financial information of the Company derived from the financial statements and notes thereto included elsewhere in this Form 10-K, adjusted to reflect the completion of the Acquisition, the application of the net proceeds of $160,000 from the sale of capital stock of the Company and related borrowings of $260,000 and $165,000 under the Company's then-existing credit agreement and the Company's Senior Subordinated Notes, respectively, as if such events occurred at the beginning of the period. (2) Reflects summary pro forma financial information of the Company derived from the financial statements and notes thereto included elsewhere in this Form 10-K, adjusted to reflect (i) the completion of the Company's initial public offering, (ii) the application of the net proceeds to the Company of $133,440 therefrom, together with borrowings of $11,673 under the Company's then-existing revolving credit facility, for the redemption of 800,000 shares of Series A 12.0% Participating Convertible Preferred Stock ("Series A Preferred Stock") for an aggregate redemption price of $80,000 in cash and 11,749,361 shares of Common Stock and for the redemption of an aggregate principal amount of $57,750 of the Senior Subordinated Notes for a total redemption price of $65,113 (including a redemption premium of $5,775 and accrued and unpaid interest thereon of $1,558) and (iii) the conversion of the remaining 802,998 shares of Series A Preferred Stock into 15,691,558 shares of Common Stock as if such events occurred at the beginning of the respective periods. (3) Pro forma 1996 cost of sales has been increased by (i) $801 to reflect an increase in amortization and depreciation resulting from the Acquisition and (ii) $552 to reflect the reclassification of a portion of allocated corporate expenses. The reclassified allocated corporate expenses approximate the replacement cost to the Company for services formerly provided by Westinghouse to the Predecessor, including (i) benefit expense related to the adoption of various independent benefit plans comparable to Westinghouse benefit plans and (ii) the cost of services required to replace specific activities formerly provided by Westinghouse to the Predecessor, including audit, tax, general ledger, accounts receivable, human resources, legal, insurance and data communications. (4) Pro forma 1996 selling, general and administrative expenses have been increased by (i) $369 to reflect the reclassification of allocated corporate expenses which approximate the replacement cost to the Company (described above in note 3) and (ii) $414 to reflect an increase in amortization and depreciation resulting from the Acquisition. (5) Westinghouse long-term incentive compensation has been eliminated in pro forma 1996. Such compensation became payable from Westinghouse, and the amounts payable were established, as a result of consummation of the Acquisition. (6) The pro forma 1996 operating data presented does not include the $5,159 extraordinary loss on early extinguishment of debt, net of taxes. In addition, the pro forma operating data for the years ended December 31, 1996 and 1997 does not include an extraordinary loss of $5,337, net of taxes, associated with the early redemption of a portion of the Senior Subordinated Notes in connection with the initial public offering. (7) Because of the redemption and conversion into Common Stock of the Series A Preferred Stock upon consummation of the Company's initial public offering, historical net income (loss) per share is not presented herein. Pro forma income per share amounts are based on the weighted average number of shares of Common Stock and potentially dilutive securities (nonvested stock grants and employee stock options) outstanding during the period, after giving effect to the redemption and conversion into Common Stock of the Series A Preferred Stock assuming the redemption and conversion had occurred at the beginning of the periods presented. See Note 2 to the financial statements included elsewhere in this Form 10-K. 10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with Item 8, "Financial Statements and Supplementary Data." OVERVIEW Knoll, Inc. and its subsidiaries are engaged in the design, manufacture and sale of office furniture products and accessories, focusing on the middle to high-end segments of the contract furniture market. The Company was formed on February 29, 1996 as a result of the acquisition of the office furniture business unit (The Knoll Group, Inc. and related entities) of Westinghouse. The Company's current management initiated a turnaround program in 1994 that has led to significant growth and a dramatic improvement in operating and financial performance. The turnaround initiatives included: . Centralizing administrative functions, simplifying manufacturing processes, consolidating purchasing activities and selling and consolidating manufacturing facilities. . Focusing on product line management to enhance each product's profitability and market potential. . Retraining the Company's sales force to focus on sales growth and profitability. . Introducing new products to better respond to customer needs. . Realigning management incentives. . Restructuring and centralizing the European business. As a result of the implementation of the turnaround program and favorable industry dynamics, operating performance improved significantly from 1995 to 1997. Sales increased from $620.9 million in 1995 to $810.9 million in 1997. Gross margins increased from 31.5% in 1995, on a pro forma basis, to 39.6% in 1997. Operating margins increased from 7.9% in 1995, on a pro forma basis, to 17.0% in 1997. The Company's improved operating and financial results allowed it in 1996 to prepay $72.0 million under its then-existing credit facilities and refinance such facilities on more favorable terms. In addition, in 1997, the Company was able to reduce its debt by $147.1 million and enter into a new credit agreement with more favorable terms. The Company believes that its recent sales growth exceeded industry growth as a whole and believes that it is well-positioned for continued growth in sales and profitability. The Company intends to pursue growth by introducing new products in the office systems category, where the Company is already a recognized leader, and in other product categories where the Company's market share could be increased by leveraging the Company's design expertise and brand awareness. The Company estimates that its share of the 1997 U.S. office furniture market was 12.1% for office systems, 2.1% for seating, 2.3% for storage, 1.2% for desks and casegoods and 1.8% for tables. Such percentages do not include sales of KnollStudio, KnollExtra, KnollTextiles and Spinneybeck. The following table describes the estimated 1997 U.S. office furniture market sales by category.
U.S. % OF U.S. PRODUCT CATEGORY MARKET SIZE MARKET ---------------- ------------- --------- (IN BILLIONS) Office systems....................................... $4.1 35.3% Seating.............................................. 2.8 24.6 Storage.............................................. 1.6 13.8 Desks and casegoods.................................. 1.9 16.4 Tables............................................... 0.7 6.5
In addition, the Company had sales in Canada and Europe of approximately $93.5 million in 1997. European sales are primarily in the United Kingdom, Germany, France, Belgium and Italy. 11 RESULTS OF OPERATIONS COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO PRO FORMA YEAR ENDED DECEMBER 31, 1996 Total sales. Total sales were $810.9 million for the year ended December 31, 1997, an increase of $159.1 million, or 24.4%, from $651.8 million for the year ended December 31, 1996. The sales growth resulted from increased volume across all product categories, with the largest increase coming from the sales of office systems, which represented approximately 68.5% of the Company's sales in 1997. Sales levels continued to benefit from continued product improvements, increased sales and marketing efforts and favorable industry dynamics. Gross profit. Gross profit was $320.9 million for the year ended December 31, 1997, increasing $89.0 million, or 38.4%, from gross profit of $231.9 million for the year ended December 31, 1996. Gross profit as a percentage of sales increased to 39.6% for the year ended December 31, 1997, from 35.6% for the previous year. These increases were principally due to higher sales volumes, better pricing in North America and continued cost improvements in the Company's manufacturing plants. Selling, general and administrative expenses. Selling, general and administrative expenses were $183.0 million for the year ended December 31, 1997, increasing $29.6 million, or 19.3%, from $153.4 million for the year ended December 31, 1996. This increase was primarily due to incremental employee costs related to higher sales and profit levels in addition to increased expenses related to new product and technology initiatives. As a percentage of sales, the Company's selling, general and administrative expenses decreased to 22.6% for the year ended December 31, 1997 from 23.5% for the year ended December 31, 1996. Operating income. Operating income increased $59.4 million, or 75.7%, to $137.9 million for the year ended December 31, 1997 from $78.5 million for the year ended December 31, 1996. As a percentage of sales, operating income increased to 17.0% for the year ended December 31, 1997 from 12.0% for the same period in 1996. This improvement was driven by higher sales volumes, improved gross margins and continued cost improvements. Interest expense. Interest expense was $25.1 million for the year ended December 31, 1997 compared to $40.0 million for the year ended December 31, 1996. The decrease in interest expense is primarily attributable to the overall reduction of debt as well as lower interest rates associated with the refinancing of the Company's previously existing senior credit agreement in December 1996. Income tax expense. Income tax expense as a percentage of pre-tax income was 42.0% for the year ended December 31, 1997 compared to 43.7% for the year ended December 31, 1996. The decrease in the effective tax rate is primarily attributable to the changing mix of pre-tax income between countries in which the Company operates with differing effective tax rates and the reduced effect, in 1997, of non-deductible goodwill amortization. Extraordinary item. For the year ended December 31, 1997, there was an extraordinary charge of $5.3 million, net of a tax benefit of $3.5 million, related to the early redemption of an aggregate principal amount of $57.8 million of the Company's Senior Subordinated Notes. The extraordinary loss consisted of a $5.7 million premium paid and $3.1 million of unamortized financing costs written-off in connection with the redemption. The Company also recorded an extraordinary loss of $5.2 million, net of a tax benefit of $3.3 million, in 1996 following the refinancing of the Company's previously existing credit agreement. This extraordinary loss consisted of the write-off of unamortized financing costs related to the refinanced debt. Pro forma earnings per share. Pro forma income before extraordinary item per share for the year ended December 31, 1997 increased 160.3% to $1.64 per share diluted from $0.63 per share diluted for the year ended December 31, 1996. Pro forma net income and net income per share as adjusted for the initial public offering (unaudited supplemental information). Supplemental pro forma as adjusted net income for the year ended December 31, 12 1997 was $68.1 million ($1.57 per share diluted), an increase of $42.9 million ($0.99 per share diluted), or 170.2%, compared to $25.2 million ($0.58 per share diluted) for the year ended December 31, 1996. Supplemental pro forma as adjusted data reflects the sale of 8,480,000 shares of Common Stock by the Company in its initial public offering and the application of the net proceeds therefrom together with related borrowings under the Company's then-existing revolving credit facility as if such events occurred at the beginning of each period presented. Consequently, such results include interest savings from the early redemption of a portion of the Company's Senior Subordinated Notes, additional interest expense for related borrowings under the Company's then- existing revolving credit facility and related income tax effects. Pro forma as adjusted results do not reflect extraordinary losses of $5.3 million and $5.2 million, net of taxes, incurred in 1997 and 1996, respectively, in connection with the early redemption of debt. COMPARISON OF PRO FORMA YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995 Total sales. Total sales were $651.8 million for the year ended December 31, 1996, an increase of $30.9 million, or 5.0%, from $620.9 million for the year ended December 31, 1995. The sales growth resulted from price increases (an average of 2.4% over 1995) and increased volume across all North American product categories, and was partially offset by the elimination of certain lower profit product lines and contracts during 1995. Sales of office systems grew $27.8 million, or 6.0%, while sales of the Company's specialty products (KnollStudio, KnollExtra, KnollTextiles and Spinneybeck) and seating grew $10.4 million, or 10.8%, and $3.1 million, or 5.7%, respectively. This growth is attributable to product enhancements in all categories as well as continued growth from new product introductions. The 1996 sales increase of continued product was $41.3 million (6.8%), as 1995 sales included lower profit discontinued product sales of $10.4 million. Gross profit. Gross profit was $231.9 million for the year ended December 31, 1996, an increase of $28.6 million, or 14.1%, from gross profit of $203.3 million for the year ended December 31, 1995. Gross profit as a percentage of sales increased to 35.6% for the year ended December 31, 1996 from 32.7% for the previous year. The actual gross margin generated by the Predecessor for the year ended December 31, 1995 is not comparable to the pro forma gross margin generated by the Company for the year ended December 31, 1996. Several factors affect the comparability of these amounts. Approximately $3.1 million of costs included in 1996 pro forma cost of sales were included in allocated corporate expenses in the 1995 historical statement of operations. These costs were related to the adoption of various independent employee benefit plans comparable to Westinghouse benefit plans. In addition, $4.2 million of depreciation expense related directly to the Acquisition is included in 1996 pro forma cost of sales. These increased depreciation costs were not incurred during 1995. However, the above noted factors affecting comparability were more than offset by improvements in operating results experienced by the Company. These increases were principally due to the higher sales volumes in North America, better pricing, discontinuance of unprofitable products, continued factory operating cost improvements, consolidation of European operations and other fixed cost reductions. Selling, general and administrative expenses. Selling, general and administrative expenses were $153.4 million for the year ended December 31, 1996, up $14.9 million, or 10.8%, from the year ended December 31, 1995. Actual selling, general and administrative expenses incurred by the Predecessor for the year ended December 31, 1995 are not comparable to the pro forma selling, general and administrative expenses incurred by the Company for the year ended December 31, 1996. Several factors affect the comparability of these amounts. Approximately $2.5 million of costs were incurred in 1996 to replace employee benefit plans and other services (audit, tax, general ledger, accounts receivable, human resources and legal) that were provided by Westinghouse prior to the Acquisition. These costs were included in allocated corporate expenses in the 1995 historical statement of operations. In addition, increased depreciation and amortization costs totaling $1.6 million resulting from the Acquisition are included in 1996 pro forma selling, general and administrative expenses. These increased depreciation and amortization costs were not incurred during 1995. In addition to the above noted factors affecting comparability, selling, general and administrative expenses increased by $10.8 million primarily due to increased sales incentive compensation and employee benefits related to higher sales volumes in North America and expenses related to new product and technology initiatives, partially offset by savings resulting from 13 showroom consolidations in Germany, Italy and Belgium along with the centralization of administrative functions in Europe. As a percentage of sales, the Company's selling, general and administrative expenses were 23.6% for the year ended December 31, 1996 and 22.3% for the year ended December 31, 1995. Allocated corporate expenses. Allocated corporate expenses of $9.5 million in 1995 include (i) Westinghouse overhead charges for Westinghouse executive management and corporate legal, environmental, audit, tax, treasury and other related services and (ii) incentive compensation payable to Knoll management under Westinghouse long-term incentive plans. These allocated corporate expenses, with the exception of incentive compensation, were payable by Westinghouse and allocated to Knoll primarily based on sales. The 1996 pro forma results do not include a $47.9 million charge to operations for the 1996 payment of awards to certain members of management of the Company pursuant to a long-term incentive plan established by Westinghouse. The plan provided for the payment of awards at the end of a five-year period based on the achievement of certain performance goals set by Westinghouse's board of directors. As a result of consummation of the Acquisition, the payment of awards was accelerated pursuant to the terms of the plan. The Company has not implemented an incentive plan similar to the Westinghouse plan and does not expect such compensation to be payable in future periods. Operating income. Operating income increased to $78.5 million for the year ended December 31, 1996 from $55.2 million for the year ended December 31, 1995. As a percentage of sales, operating income increased to 12.0% for the year ended December 31, 1996 from 8.9% for the same period in 1995. As noted above, these improvements were driven by higher sales volumes, better pricing, discontinuance of lower profit product lines, factory cost improvements and efficiencies gained from consolidation and centralization of administrative functions. Interest expense. Interest expense increased $38.6 million to $40.0 million for the year ended December 31, 1996. This increase is attributable to the debt incurred by the Company in connection with the Acquisition. This debt consisted of $165.0 million of the Company's Senior Subordinated Notes and $260.0 million of borrowings under the Company's then-existing credit facilities. Income tax expense. Income tax expense for the years ended December 31, 1996 and 1995 was 43.8% of pre-tax income. Extraordinary item. For the year ended December 31, 1996, there was an extraordinary charge of $5.2 million, net of a tax benefit of $3.3 million, relating to the write-off of unamortized financing costs following the refinancing of the Company's previously existing credit agreement. COMPARISON OF PRO FORMA YEAR ENDED DECEMBER 31, 1996 TO PRO FORMA YEAR ENDED DECEMBER 31, 1995 Because the Company was formed as a result of the Acquisition on February 29, 1996, the following discussion refers to the pro forma results of operations for the years ended December 31, 1996 and 1995 as presented in Note 3 to the Consolidated Financial Statements in Item 8 of this Form 10-K. Total sales. Total sales were $651.8 million for the year ended December 31, 1996, an increase of $30.9 million, or 5.0%, from $620.9 million for the year ended December 31, 1995. The sales growth resulted from price increases (an average of 2.4% over 1995) and increased volume across all North American product categories, and was partially offset by the elimination of certain lower profit product lines and contracts during 1995. Sales of office systems grew $27.8 million, or 6.0%, while sales of the Company's specialty products (KnollStudio, KnollExtra, KnollTextiles and Spinneybeck) and seating grew $10.4 million, or 10.8%, and $3.1 million or, 5.7%, respectively. This growth is attributable to product enhancements in all categories as well as continued growth from new product introductions. The 1996 sales increase of continued product was $41.3 million, or 6.8%, as 1995 sales included lower profit discontinued product sales of $10.4 million. Gross profit. Gross profit was $231.9 million for the year ended December 31, 1996, an increase of $36.3 million, or 18.6%, from gross profit of $195.6 million for the year ended December 31, 1995. Gross profit as a 14 percentage of sales increased to 35.6% for the year ended December 31, 1996 from 31.5% for the previous year. These increases were principally due to the higher sales volumes in North America, better pricing, discontinuance of unprofitable products, continued factory operating cost improvements, consolidation of European operations and other fixed cost reductions. Selling, general and administrative expenses. Selling, general and administrative expenses were $153.4 million for the year ended December 31, 1996, up $10.8 million, or 7.6%, from the year ended December 31, 1995. The increase was primarily due to increased sales incentive compensation and employee benefits related to higher sales volumes in North America and expenses related to new product and technology initiatives, partially offset by savings resulting from showroom consolidations in Germany, Italy and Belgium along with the centralization of administrative functions in Europe. As a percentage of sales, the Company's selling, general and administrative expenses were 23.6% for the year ended December 31, 1996 and 23.0% for the year ended December 31, 1995. Allocated corporate expenses. Allocated corporate expenses of $4.0 million in 1995 represents incentive compensation payable to Knoll management under Westinghouse long-term incentive plans. Operating income. Operating income increased to $78.5 million for the year ended December 31, 1996 from $49.0 million for the year ended December 31, 1995. As a percentage of sales, operating income increased to 12.0% for the year ended December 31, 1996 from 7.9% for the same period in 1995. As noted above, these improvements were driven by higher sales volumes, better pricing, discontinuance of lower profit product lines, factory cost improvements and efficiencies gained from consolidation and centralization of administrative functions. LIQUIDITY AND CAPITAL RESOURCES The Company's free cash flow has historically been used to fund capital expenditures, working capital requirements and debt service. Following the Acquisition on February 29, 1996, the Company's interest expense and cash requirements significantly increased as a direct result of interest associated with borrowings under the Company's credit facilities and the Senior Subordinated Notes, as well as scheduled principal payments of previously existing term loans under the Company's previously existing credit facilities. In May 1997, the Company completed an initial public offering, generating net proceeds to the Company of $133.4 million from its sale of 8,480,000 shares of Common Stock. The Company used the net proceeds together with borrowings of $11.7 million under the Company's then-existing revolving credit facility to redeem 800,000 shares of Series A Preferred Stock for $80.0 million and to redeem an aggregate principal amount of $57.8 million of the Company's Senior Subordinated Notes for $65.1 million (including a redemption premium of $5.7 million and accrued and unpaid interest thereon of $1.6 million). In addition to the redemption of a portion of the Senior Subordinated Notes, the Company repaid $89.2 million of bank debt during the year ended December 31, 1997. On August 8, 1997, the Company entered into a new agreement that modified certain terms of its then-existing senior credit agreement. The credit agreement previously provided for a $100.0 million term loan with scheduled principal payments through December 2002 and a $130.0 million revolving credit facility that matured in December 2002. The new agreement provides for a $275.0 million revolving credit facility that matures in August 2002. Borrowings under the new agreement bear interest at a floating rate based, at the Company's option, upon (i) the Eurodollar rate (as defined therein) plus an applicable percentage which is subject to change based on the Company's ratio of funded debt to EBITDA or (ii) the greater of the federal funds rate plus 0.5% or the prime rate. The new credit agreement contains restrictive covenants, financial covenants and events of default. Among other things, the restrictive covenants limit the Company's ability to incur additional indebtedness, pay dividends, make investments, grant liens and engage in certain other activities. As of December 31, 1997, the Company had an aggregate of $174.6 million available for borrowing under its revolving credit facility. 15 In addition to the revolving credit facility, the Company had outstanding as of December 31, 1997, $107.2 million aggregate principal amount of its Senior Subordinated Notes, which were issued in connection with the Acquisition in the original aggregate principal amount of $165.0 million. The Senior Subordinated Notes are subordinated to all existing and future senior indebtedness of the Company, including all indebtedness under the revolving credit facility. The Indenture governing the terms of the Senior Subordinated Notes imposes certain restrictions on the Company and its subsidiaries, including restrictions on its ability to incur indebtedness, pay dividends, make investments, grant liens and engage in certain other activities. The Senior Subordinated Notes may be required to be purchased by the Company upon a change of control (as defined in the Indenture) and in certain circumstances with the proceeds of asset sales. The Senior Subordinated Notes are redeemable at the option of the Company at any time after March 15, 2001, initially at 105.438% of their principal amount at maturity, plus accrued interest, declining to 100.0% of their principal amount at maturity, plus accrued interest, on or after March 15, 2004. The Company's foreign subsidiaries maintain local credit facilities to provide credit for overdraft, working capital and other purposes. As of December 31, 1997, the Company's total credit available under such facilities was approximately $11.9 million, of which none had been utilized. The Company believes that it is currently in compliance with all terms of its indebtedness and that it has been in such compliance since the Acquisition. Cash provided by (used in) operating activities totaled $135.3 million in 1997, $89.5 million for the ten months ended December 31, 1996, $(54.0) million for the two months ended February 29, 1996 and $51.9 million in 1995. Cash provided by operations resulted primarily from earnings before depreciation, amortization and extraordinary losses on the early extinguishment of debt, as well as positive cash flow from working capital for the year ended December 31, 1997 and the ten months ended December 31, 1996. Cash used in investing activities totaled $32.9 million in 1997 and was primarily comprised of capital expenditures. Cash used in investing activities totaled $594.8 million for the ten months ended December 31, 1996 and was primarily comprised of the acquisition of the Company from Westinghouse ($579.8 million) and capital expenditures. Cash used in investing activities totaled $2.3 million for the two months ended February 29, 1996 and $19.0 million in 1995 and was primarily comprised of capital expenditures by the Company. Capital expenditures totaled $ 33.1 million in 1997, $15.3 million for the ten months ended December 31, 1996, $2.3 million for the two months ended February 29, 1996 and $19.3 million in 1995. Capital expenditures have primarily been for new manufacturing equipment and information systems. The Company estimates that capital expenditures will be approximately $35.0 million in 1998. Cash provided by (used in) financing activities totaled $(99.2) million for the year ended December 31, 1997, $511.8 million for the ten months ended December 31, 1996, $57.0 million for the two months ended February 29, 1996 and $(36.8) million for the year ended December 31, 1995. The $99.2 million used by the Company during 1997 includes $80.0 million for the redemption of 800,000 shares of Series A Preferred Stock, $63.5 million for the redemption of $57.8 million of the Company's Senior Subordinated Notes (including an early redemption premium of $5.7 million) and $89.2 million for the repayment of bank debt primarily offset by net proceeds of $133.4 million to the Company from its initial public offering. The $511.8 million provided by the Company in its financing activities during the ten months ended December 31, 1996 included $425.0 million for the issuance of debt and $160.0 million for the issuance of stock in connection with the acquisition of the Company from Westinghouse, partially offset by $72.0 million used by the Company for the prepayment of indebtedness under the Company's then-existing credit facilities. The Company uses interest rate collar agreements in order to manage its exposure to fluctuations in interest rates on its floating rate debt. At December 31, 1997, the Company had four outstanding interest rate collar agreements with a total notional principal amount of $150.0 million and maximum and minimum rates ranging from 7.5% to 7.99% and 5.0% to 5.5%, respectively. These agreements mature over the next two years. Aggregate maturities of the total notional principal amount are $35.0 million in 1998 and $115.0 million in 1999. During the year ended December 31, 1997, the Company was not required to make nor was it entitled to receive any payments as a result of these hedging activities. 16 The past and present business operations of the Company and the past and present ownership and operation of manufacturing plants on real property by the Company are subject to extensive and changing federal, state, local and foreign environmental laws and regulations. As a result, the Company is involved from time to time in administrative and judicial proceedings and inquiries relating to environmental matters. The Company cannot predict what environmental legislation or regulations will be enacted in the future, how existing or future laws or regulations will be administered or interpreted or what environmental conditions may be found to exist. Compliance with more stringent laws or regulations, or stricter interpretation of existing laws, may require additional expenditures by the Company, some of which may be material. The Company has been identified as a potentially responsible party pursuant to CERCLA for remediation costs associated with waste disposal sites previously used by the Company. The remediation costs at these CERCLA sites are unknown, but the Company does not expect any liability it may have under CERCLA to be material, based on the information presently known to the Company. In addition, Westinghouse has agreed to indemnify the Company for certain costs associated with CERCLA liabilities known as of the date of the Acquisition. The Company continues to have significant liquidity requirements. In addition to working capital needs and capital expenditures, the Company has cash requirements for debt service. The Company believes that existing cash balances and cash flow from operating activities, together with borrowings available under the revolving credit facility, will be sufficient to fund working capital needs, capital spending requirements and debt service requirements of the Company for at least the next 12 months. INFLATION There was no significant impact on Knoll's operations as a result of inflation during the three years ended December 31, 1997. BACKLOG The Company's backlog of unfilled orders was $141.3 million at December 31, 1997 and $94.1 million at December 31, 1996. The Company expects to fill substantially all outstanding unfilled orders within the next twelve months. The Company manufactures substantially all of its products to order, and its average manufacturing time is approximately five weeks. As a result, backlog is not a significant factor used to predict the Company's long-term business prospects. FOREIGN OPERATIONS The Company's foreign sales and certain expenses are transacted in foreign currencies. For the years ended December 31, 1997 and 1996, approximately 11.5% and 12.0%, respectively, of the Company's revenues and 25.8% and 24.0%, respectively, of the Company's expenses were denominated in currencies other than U.S. dollars. The principal foreign currencies in which the Company conducts business are the Canadian dollar and the Italian Lira. The production costs, profit margins and competitive position of the Company are affected by the strength of the currencies in countries where it manufactures or purchases goods relative to the strength of the currencies in countries where its products are sold. The Company reviews from time to time its foreign currency exposure and evaluates whether it should enter into hedging transactions. The Company generally does not hedge its foreign currency exposure and may determine not to do so in the future. Exchange rate fluctuations did not have a material impact on the financial results of the Company during 1997 or 1996. IMPACT OF YEAR 2000 The Company has certain existing computer programs that were written using two digits rather than four to define the applicable year. As a result, those computer programs have time-sensitive software that may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. In 1997, the Company initiated a strategic project to replace and enhance its existing manufacturing and business systems technology with a new fully integrated system intended to enhance its order entry response time and accuracy, improve manufacturing processes, reduce delivery times, improve shipping accuracy and 17 reduce fixed costs. While the decision to embark on this project was business related, the new software that the Company will implement has been represented by the vendor to be year 2000 compliant. Therefore, the year 2000 issue is not expected to pose significant operational problems for the Company's computer systems. However, if the new software is not implemented on a timely basis or fails to be fully year 2000 compliant, the year 2000 issue could have a material adverse impact on the operations of the Company. The Company is and will continue utilizing both internal and external resources to replace and test the new software for overall effectiveness and year 2000 compliance. The Company anticipates completing the project during the first half of 1999. The total cost of the project is estimated to be approximately $26.0 million and is being funded through operating cash flows. To date, the Company has incurred expenditures of approximately $12.6 million ($9.8 million expense and $2.8 million capital), related to the project. The Company has initiated formal communications with all of its significant suppliers to determine the extent to which the Company is vulnerable to the suppliers' failure to remediate their own year 2000 issues. However, there can be no guarantee that the systems of other companies on which the Company relies will be converted timely and would not have a material adverse effect on the Company's operations. The costs and completion date of the project are based on the best estimates of management, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources and other factors. There can be no guarantee that these estimates are accurate. Actual results could differ materially from those anticipated and, therefore, could have a material adverse effect on the Company's operations. STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE Certain portions of this Form 10-K, including "Management's Discussion and Analysis of Financial Condition and Results of Operations," contain various forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which represent the Company's expectations or beliefs concerning future events. The Company cautions that these statements are further qualified by important factors that could cause actual results to differ materially from those in the forward-looking statements, including, without limitation, the highly competitive nature of the market in which the Company competes, including the introduction of new products or pricing changes by the Company's competitors; risks associated with the Company's growth strategy, including the risk that the Company's introduction of new products will not achieve the same degree of success achieved historically by the Company's products; the Company's indebtedness, which requires a substantial portion of the Company's cash flow from operations to be dedicated to debt service, making such cash flow unavailable for other purposes, and which could limit the Company's flexibility in reacting to changes in its industry or economic conditions generally; the Company's dependence on key personnel; the ability of the Company to maintain its relationships with its dealers; the Company's reliance on its patents and other intellectual property; environmental laws and regulations, including those that may be enacted in the future, that affect the ownership and operation of the Company's manufacturing plants; risks relating to potential labor disruptions; fluctuations in foreign currency exchange rates; and fluctuations in industry revenues driven by a variety of macroeconomic factors, including white collar employment levels, corporate cash flows, and non-residential commercial construction, as well as by a variety of industry factors such as corporate reengineering and restructuring, technology demands, ergonomic, health and safety concerns and corporate relocations. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of the Company and supplementary data are filed under this Item, beginning on page F-1 of this Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 18 KNOLL, INC. TABLE OF CONTENTS FOR THE FINANCIAL STATEMENTS PAGE ---- Reports of Independent Auditors........................................... F-2 Consolidated Balance Sheets at December 31, 1997 and 1996................. F-4 Consolidated Statements of Operations for the Year Ended December 31, 1997, the Ten Months Ended December 31, 1996, the Two Months Ended February 29, 1996 (Predecessor) and the Year Ended December 31, 1995 (Predecessor)............................................................ F-5 Consolidated Statements of Cash Flows for the Year Ended December 31, 1997, the Ten Months Ended December 31, 1996, the Two Months Ended February 29, 1996 (Predecessor) and the Year Ended December 31, 1995 (Predecessor)............................................................ F-6 Consolidated Statements of Changes in Stockholders' Equity for the Year Ended December 31, 1997, the Ten Months Ended December 31, 1996, the Two Months Ended February 29, 1996 (Predecessor) and the Year Ended December 31, 1995 (Predecessor)................................................... F-7 Notes to the Consolidated Financial Statements............................ F-8 Financial Statement Schedule II--Valuation and Qualifying Accounts........ S-1
F-1 REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders Knoll, Inc. We have audited the accompanying consolidated balance sheets of Knoll, Inc. as of December 31, 1997 and 1996 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the year ended December 31, 1997 and the ten-month period ended December 31, 1996 (post- acquisition periods), and the consolidated statements of operations, changes in stockholders' equity and cash flows of The Knoll Group, Inc. (Predecessor) for the two-month period ended February 29, 1996 (pre-acquisition period). Our audits also included the financial statement schedule (as it pertains to 1997 and 1996) as listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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, the 1997 and 1996 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Knoll, Inc. at December 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for the post-acquisition periods in conformity with generally accepted accounting principles. Further, in our opinion, the aforementioned Predecessor consolidated financial statements present fairly, in all material respects, the consolidated results of operations and cash flows of The Knoll Group, Inc. for the pre-acquisition period in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic 1997 and 1996 financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Philadelphia, Pennsylvania January 30, 1998 F-2 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Knoll, Inc. In our opinion, the consolidated financial statements listed in the Table of Contents on page F-1 present fairly, in all material respects, the results of operations of The Knoll Group, Inc., an organizational unit of Westinghouse Electric Corporation, currently known as CBS Corporation (Westinghouse), and its cash flows and changes in stockholders' equity for the year ended December 31, 1995, in conformity with generally accepted accounting principles. These financial statements are the responsibility of Westinghouse's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance that 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. The Knoll Group, Inc. was a business unit of Westinghouse for the year ended December 31, 1995 and, as disclosed in Note 6 to the accompanying financial statements, engaged in various transactions and relationships with other Westinghouse entities. /s/ Price Waterhouse LLP Pittsburgh, Pennsylvania January 15, 1996 F-3 KNOLL, INC. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, ------------------ 1997 1996 -------- -------- ASSETS Current assets: Cash and cash equivalents................................ $ 10,790 $ 8,804 Customer receivables, net................................ 122,851 111,166 Inventories.............................................. 68,249 57,811 Deferred income taxes.................................... 21,295 17,474 Prepaid and other current assets......................... 3,697 7,424 -------- -------- Total current assets................................... 226,882 202,679 Property, plant and equipment, net......................... 180,450 176,218 Intangible assets, net..................................... 270,677 286,940 Other noncurrent assets.................................... 2,850 9,875 -------- -------- Total Assets........................................... $680,859 $675,712 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt..................... $ 10,000 $ 23,265 Accounts payable......................................... 66,697 50,250 Income taxes payable..................................... 6,791 388 Other current liabilities................................ 77,841 64,022 -------- -------- Total current liabilities.............................. 161,329 137,925 Long-term debt............................................. 197,029 330,889 Deferred income taxes...................................... 5,301 1,931 Postretirement benefits obligation......................... 16,424 15,873 Other noncurrent liabilities............................... 12,487 11,290 -------- -------- Total liabilities...................................... 392,570 497,908 -------- -------- Stockholders' equity: Preferred stock, $1.00 par value; authorized 10,000,000 shares; issued and outstanding 1,602,998 shares in 1996 (liquidation preference of $160,300).................... -- 1,603 Common stock, $0.01 par value; authorized 100,000,000 shares; issued and outstanding 43,234,943 shares in 1997 and 7,291,308 shares in 1996 (Note 2)................... 432 73 Additional paid-in-capital............................... 214,950 160,147 Unearned stock grant compensation........................ (993) (1,387) Retained earnings........................................ 77,942 16,836 Cumulative foreign currency translation adjustment....... (4,042) 532 -------- -------- Total stockholders' equity............................. 288,289 177,804 -------- -------- Total Liabilities and Stockholders' Equity............. $680,859 $675,712 ======== ========
See accompanying notes to the consolidated financial statements. F-4 KNOLL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATE)
(UNAUDITED) | THE KNOLL GROUP, INC. SUPPLEMENTAL | (PREDECESSOR) PRO FORMA | ------------------------- YEAR DATA TEN MONTHS | TWO MONTHS YEAR ENDED YEAR ENDED ENDED | ENDED ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, | FEBRUARY 29, DECEMBER 31, 1997 1996 1996 | 1996 1995 ------------ ------------ ------------ | ------------ ------------ (NOTE 3) | | Sales to customers...... $810,857 $651,766 $561,534 | $ 89,933 $610,723 Sales to related | parties................ -- -- -- | 299 10,169 -------- -------- -------- | -------- -------- Total sales............. 810,857 651,766 561,534 | 90,232 620,892 Cost of sales to | customers.............. 489,962 419,908 358,841 | 59,514 410,615 Cost of sales to related | parties................ -- -- -- | 200 7,017 -------- -------- -------- | -------- -------- Gross profit............ 320,895 231,858 202,693 | 30,518 203,260 Selling, general and | administrative | expenses............... 183,018 153,388 131,349 | 21,256 138,527 Westinghouse long-term | incentive compensation. -- -- -- | 47,900 -- Allocated corporate | expenses............... -- -- -- | 921 9,528 -------- -------- -------- | -------- -------- Operating income (loss). 137,877 78,470 71,344 | (39,559) 55,205 Interest expense........ 25,075 40,030 32,952 | 340 1,430 Other income (expense), | net.................... 1,667 151 447 | (296) (1,597) -------- -------- -------- | -------- -------- Income (loss) before | income tax expense | (benefit) and | extraordinary item..... 114,469 38,591 38,839 | (40,195) 52,178 Income tax expense | (benefit).............. 48,026 16,848 16,844 | (16,107) 22,846 -------- -------- -------- | -------- -------- Income (loss) before | extraordinary item..... 66,443 21,743 21,995 | (24,088) 29,332 Extraordinary loss on | early extinguishment | of debt, net of taxes.. 5,337 5,159 5,159 | -- -- -------- -------- -------- | -------- -------- Net income (loss)....... $ 61,106 $ 16,584 $ 16,836 | $(24,088) $ 29,332 ======== ======== ======== | ======== ======== Pro forma earnings per | share (Note 2): | Income before | extraordinary item: | Basic............... $ 1.78 $ 0.70 $ 0.71 | Diluted............. $ 1.64 $ 0.63 $ 0.63 | Net income: | Basic............... $ 1.64 $ 0.53 $ 0.54 | Diluted............. $ 1.51 $ 0.48 $ 0.48 | Pro forma weighted | average shares of | common stock (Note 2): | Basic............... 37,284 31,040 31,040 | Diluted............. 40,398 34,701 34,701 | | Supplemental pro forma | as adjusted data | (Unaudited) (Note 5): | Pro forma net income.. $ 68,075 $ 25,168 | Pro forma net income | per share of common | stock (Note 2): | Basic............... $ 1.69 $ 0.64 | Diluted............. $ 1.57 $ 0.58 | Pro forma weighted | average shares of | common stock (Note | 2): | Basic............... 40,287 39,520 | Diluted............. 43,400 43,181 |
See accompanying notes to the consolidated financial statements. F-5 KNOLL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
| THE KNOLL GROUP, INC. | (PREDECESSOR) | ------------------------- YEAR TEN MONTHS | TWO MONTHS YEAR ENDED ENDED | ENDED ENDED DECEMBER 31, DECEMBER 31, | FEBRUARY 29, DECEMBER 31, 1997 1996 | 1996 1995 ------------ ------------ | ------------ ------------ | CASH FLOWS FROM OPERATING ACTIVITIES | Net income (loss)........................................................ $ 61,106 $ 16,836 | $(24,088) $ 29,332 Noncash items included in income: | Depreciation........................................................... 25,082 19,251 | 3,150 19,006 Amortization of intangible assets...................................... 8,041 7,881 | 1,167 6,993 Loss on disposal of assets............................................. 986 87 | -- -- Extraordinary loss..................................................... 8,838 8,542 | -- -- Foreign currency transaction loss (gain)............................... (1,140) 354 | -- -- Earned stock grant compensation........................................ 394 36 | -- -- Changes in assets and liabilities: | Customer receivables................................................... (12,176) (5,110) | 8,798 (5,850) Inventories............................................................ (11,381) 1,416 | 671 (76) Accounts payable....................................................... 18,052 15,870 | (15,292) (7,005) Current and deferred income taxes...................................... 15,896 (3,961) | (16,627) 13,185 Other current assets................................................... 1,674 747 | 2,283 453 Other current liabilities.............................................. 12,849 18,372 | (7,190) (23,177) Other noncurrent assets and liabilities................................ 7,041 9,181 | (6,911) 19,003 -------- --------- | -------- -------- Cash provided by (used in) operating activities.......................... 135,262 89,502 | (54,039) 51,864 -------- --------- | -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES | Acquisition of the Company from Westinghouse............................. -- (579,801) | -- -- Capital expenditures..................................................... (33,080) (15,255) | (2,296) (19,334) Proceeds from sale of assets............................................. 164 218 | -- 316 -------- --------- | -------- -------- Cash used in investing activities........................................ (32,916) (594,838) | (2,296) (19,018) -------- --------- | -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES | Repayment of short-term debt, net........................................ -- (1,483) | (3,805) (20,961) Proceeds from (repayment of) revolving credit facility, net.............. (79,000) 88,000 | -- -- Proceeds from long-term debt............................................. -- 525,000 | -- -- Repayment of long-term debt.............................................. (67,988) (260,130) | -- (8,913) Premium paid for early extinguishment of debt............................ (5,775) -- | -- -- Proceeds from issuance of stock, net of stock issuance costs............. 133,559 160,400 | -- -- Redemption of preferred stock............................................ (80,000) -- | -- -- Net receipts from (payments to) parent company........................... -- -- | 60,848 (6,900) -------- --------- | -------- -------- Cash provided by (used in) financing activities.......................... (99,204) 511,787 | 57,043 (36,774) -------- --------- | -------- -------- Effect of exchange rate changes on cash and cash equivalents............. (1,156) 18 | 58 13 -------- --------- | -------- -------- Increase (decrease) in cash and cash equivalents......................... 1,986 6,469 | 766 (3,915) Cash and cash equivalents at beginning of period......................... 8,804 2,335 | 1,569 5,484 -------- --------- | -------- -------- Cash and cash equivalents at end of period............................... $ 10,790 $ 8,804 | $ 2,335 $ 1,569 ======== ========= | ======== ========
See accompanying notes to the consolidated financial statements. F-6 KNOLL, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS)
| THE KNOLL GROUP, INC. | (PREDECESSOR) | ------------------------- YEAR TEN MONTHS | TWO MONTHS YEAR ENDED ENDED | ENDED ENDED DECEMBER 31, DECEMBER 31, | FEBRUARY 29, DECEMBER 31, 1997 1996 | 1996 1995 ------------ ------------ | ------------- ------------ | PREFERRED STOCK | Balance at beginning of period (1,602,998 shares in 1997 and | 1,599,000 shares in 1996)............................................... $ 1,603 $ 1,599 | $ -- $ -- Shares issued for consideration (3,998 shares)........................... -- 4 | -- -- Shares redeemed (800,000 shares)......................................... (800) -- | -- -- Shares converted into common stock | (802,998 shares)........................................................ (803) -- | -- -- --------- --------- | --------- --------- Balance at end of period................................................. -- 1,603 | -- -- --------- --------- | --------- --------- COMMON STOCK | Balance at beginning of period (7,291,308 shares in 1997 and 3,139,430 | shares in 1996)......................................................... 73 31 | -- -- Shares issued for consideration (8,502,716 shares)....................... 85 -- | -- -- Redemption of preferred stock (11,749,361 shares)........................ 117 -- | -- -- Conversion of preferred stock (15,691,558 shares)........................ 157 -- | -- -- Shares issued under the stock incentive plan (4,144,030 shares).......... -- 42 | -- -- --------- --------- | --------- --------- Balance at end of period................................................. 432 73 | -- -- --------- --------- | --------- --------- ADDITIONAL PAID-IN-CAPITAL | Balance at beginning of period........................................... 160,147 158,370 | -- -- Shares issued for consideration.......................................... 133,474 396 | -- -- Redemption of preferred stock............................................ (79,317) -- | -- -- Conversion of preferred stock............................................ 646 -- | -- -- Shares issued under the stock incentive plan............................. -- 1,381 | -- -- --------- --------- | --------- --------- Balance at end of period................................................. 214,950 160,147 | -- -- --------- --------- | --------- --------- UNEARNED STOCK GRANT COMPENSATION | Balance at beginning of period........................................... (1,387) -- | -- -- Shares issued under the stock incentive plan............................. -- (1,423) | -- -- Earned stock grant compensation.......................................... 394 36 | -- -- --------- --------- | --------- --------- Balance at end of period................................................. (993) (1,387) | -- -- --------- --------- | --------- --------- RETAINED EARNINGS | Balance at beginning of period........................................... 16,836 -- | -- -- Net income............................................................... 61,106 16,836 | -- -- --------- --------- | --------- --------- Balance at end of period................................................. 77,942 16,836 | -- -- --------- --------- | --------- --------- PARENT COMPANY INVESTMENT | Balance at beginning of period........................................... -- -- | 503,317 480,885 Net income (loss)........................................................ -- -- | (24,088) 29,332 Capital expenditures..................................................... -- -- | 2,296 19,334 Proceeds from sale of assets............................................. -- -- | -- (316) Net interunit transactions............................................... -- -- | 58,552 (25,918) --------- --------- | --------- --------- Balance at end of period................................................. -- -- | 540,077 503,317 --------- --------- | --------- --------- CUMULATIVE FOREIGN CURRENCY TRANSLATION ADJUSTMENT | Balance at beginning of period........................................... 532 -- | (22,866) (22,879) Translation adjustment................................................... (4,574) 532 | 58 13 --------- --------- | --------- --------- Balance at end of period................................................. (4,042) 532 | (22,808) (22,866) --------- --------- | --------- --------- TOTAL STOCKHOLDERS' EQUITY............................................... $ 288,289 $ 177,804 | $ 517,269 $ 480,451 ========= ========= | ========= =========
See accompanying notes to the consolidated financial statements. F-7 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND BASIS OF PRESENTATION Knoll, Inc. and its subsidiaries (the "Company" or "Knoll") are engaged in the design, manufacture, and sale of office furniture products and accessories, focusing on the middle to high-end segments of the contract furniture market. The Company has operations in the United States ("U.S."), Canada and Europe and sells its products primarily through its direct sales representatives and independent dealers. The Company was formed on February 29, 1996 as a result of the acquisition of the office furniture business unit (The Knoll Group, Inc. and related entities) of Westinghouse Electric Corporation, currently known as CBS Corporation ("Westinghouse"). See Note 3 for further discussion of the acquisition. The accompanying consolidated financial statements present the financial position of the Company as of December 31, 1997 and 1996, the results of operations, cash flows and changes in stockholders' equity of the Company for the year ended December 31, 1997 and the ten-month period ended December 31, 1996 and the results of operations, cash flows and changes in stockholders' equity of The Knoll Group, Inc. and related entities (the "Predecessor") for the two-month period ended February 29, 1996 and the year ended December 31, 1995. In addition, unaudited supplemental pro forma results of operations data of the Company has been provided for the years ended December 31, 1997 and 1996. Such data is provided solely for additional analysis and is not intended to be a presentation in accordance with generally accepted accounting principles (see Note 5). Since the Predecessor was a business unit of Westinghouse, the accompanying financial statements of the Predecessor include estimates for certain expenses incurred by the parent on its behalf. These expenses generally include, but are not limited to, officer and employee salaries, rent, depreciation, accounting and legal services, other selling, general and administrative expenses and other such expenses. The results of the Predecessor's domestic operations were included in the consolidated U.S. federal income tax return of Westinghouse, while the results of its operations in Canada and Europe were reported separately to their respective taxing jurisdictions. The income tax information in the accompanying financial statements of the Predecessor is presented as if the Predecessor had not been included in the consolidated tax returns of Westinghouse or other affiliates (i.e. on a stand-alone basis). The recognition and measurement of income tax expense required certain assumptions, allocations and significant estimates that management believes are reasonable to measure the tax consequences as if the Predecessor were a stand-alone taxpayer. The operating results of the European subsidiaries are reported and included in the consolidated financial statements on a one-month lag to allow for the timely presentation of consolidated information. The effect of this presentation is not material to the financial statements. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements of the Company include the accounts of Knoll, Inc. and its wholly owned subsidiaries. Intercompany transactions and balances have been eliminated in consolidation. The consolidated financial statements of the Predecessor include the accounts of The Knoll Group, Inc. and related entities after elimination of intercompany transactions except for those with other units of Westinghouse as described in Note 6. Cash and Cash Equivalents Cash and cash equivalents includes cash on hand and investments with original maturities of three months or less. F-8 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Inventories Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. Property, Plant, Equipment and Depreciation Property, plant and equipment are recorded at cost. Depreciation of plant and equipment is computed using the straight-line method over the estimated useful lives of the assets. The useful lives are as follows: 45 years for buildings and 3 to 12 years for machinery and equipment. Intangible Assets Intangible assets consist of goodwill, trademarks and deferred financing fees. Goodwill is recorded at the amount by which cost exceeds the net assets of acquired businesses, and all other intangible assets are recorded at cost. Goodwill and trademarks are amortized under the straight-line method over 40 years, while deferred financing fees are amortized over the life of the respective debt. Management reviews the carrying value of goodwill and other intangibles on an ongoing basis. When factors indicate that an intangible asset may be impaired, management uses an estimate of the undiscounted future cash flows over the remaining life of the asset in measuring whether the intangible asset is recoverable. If such an analysis indicates that impairment has in fact occurred, the book value of the intangible asset is written down to its estimated fair value. Revenue Recognition Sales are recognized as products are shipped and services are rendered. Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to reverse. As discussed in Note 1, the U.S. operations of the Predecessor for the first two months of 1996 and for the year ended December 31, 1995 were included in a consolidated U.S. income tax return of Westinghouse and its subsidiaries. Income taxes are provided in the accompanying financial statements as if the Predecessor had filed a separate tax return. Foreign Currency Translation Results of foreign operations are translated into U.S. dollars using average exchange rates during the period, while assets and liabilities are translated into U.S. dollars using current rates. The resulting translation adjustments are accumulated as a separate component of stockholders' equity. Transaction gains and losses resulting from exchange rate changes on transactions denominated in currencies other than those of the foreign subsidiaries are included in income in the year in which the change occurs. Stock-Based Compensation Statement of Financial Accounting Standards No. 123, "Accounting for Stock- Based Compensation" ("SFAS 123"), encourages entities to record compensation expense for stock-based employee compensation plans at fair value but provides the option of measuring compensation expense using the F-9 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). The Company has elected to account for stock-based compensation in accordance with APB 25. Pro form results of operations as if SFAS 123 had been used to account for stock-based compensation plans are presented in Note 20. Share and Per Share Amounts In 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes the dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. Earnings per share amounts for all periods have been presented and, where appropriate, restated to conform to the requirements of SFAS 128. In addition, all numbers of shares of common stock and per share amounts for 1996 have been adjusted to give retroactive effect to the 3.13943-for-1 stock split as discussed in Note 13. Because of the significance of the redemption and conversion into common stock of the outstanding Series A 12% Participating Convertible Preferred Stock ("Series A Preferred Stock") as discussed in Note 13, historical net income (loss) per share is not presented herein. Pro forma net income per share amounts are based on the weighted average number of shares of common stock and potentially dilutive securities (employee stock options and nonvested restricted stock grants) outstanding during the period, after giving effect to the redemption and conversion into common stock of the Series A Preferred Stock assuming such redemption and conversion had occurred at the beginning of the periods presented. Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 98, all common stock and options to purchase common stock issued for nominal consideration prior to the initial public offering (see Note 4) have been reflected as outstanding as of the beginning of each period presented. Use of Estimates The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of certain assets, liabilities, revenues and expenses and the disclosure of certain contingent assets and liabilities. Actual future results may differ from such estimates. Reclassifications Certain amounts for 1996 in the accompanying consolidated financial statements have been reclassified to conform with the 1997 classifications. 3. ACQUISITION On December 20, 1995, Westinghouse entered into a Stock Purchase Agreement (the "Agreement") with T.K.G. Acquisition Corp. ("TKG"), a subsidiary of Warburg, Pincus Ventures, L.P. Under the terms of the Agreement, TKG acquired all of the outstanding capital stock of The Knoll Group, Inc. and related entities on February 29, 1996 through its wholly owned subsidiary T.K.G. Acquisition Sub, Inc. Immediately following this transaction, T.K.G. Acquisition Sub, Inc. and The Knoll Group, Inc. merged with and into Knoll North America, Inc., the principal U.S. operating company of The Knoll Group, Inc. Knoll North America, Inc. changed its name to Knoll, Inc. at the time of the merger. On March 14, 1997, Knoll, Inc. merged with and into TKG. TKG then changed its name to Knoll, Inc. F-10 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The cost of the acquisition was $579,801,000. TKG funded the acquisition through proceeds of $160,000,000 received from the sale of TKG capital stock, $165,000,000 received from an offering of 10.875% Senior Subordinated Notes due 2006 (the "Senior Subordinated Notes") and $260,000,000 in borrowings under senior bank credit facilities. T.K.G. Acquisition Sub, Inc. executed the offering of the Senior Subordinated Notes and borrowings under the credit facilities. As such, upon the acquisition and subsequent mergers, the Senior Subordinated Notes and credit facility borrowings became obligations of Knoll, Inc. The acquisition was accounted for using the purchase method of accounting. Accordingly, the purchase price has been allocated to the assets acquired and liabilities assumed based upon fair market value at the date of acquisition. The excess of the consideration paid over the estimated fair value of the net assets acquired, totaling $66,850,000, has been recorded as goodwill and is being amortized on a straight-line basis over 40 years. The purchase price allocation is summarized as follows (in thousands): Net working capital............................................. $101,446 Property, plant and equipment................................... 180,074 Goodwill........................................................ 66,850 Other intangible assets......................................... 239,557 Other noncurrent liabilities, net............................... (8,126) -------- $579,801 ========
The following table sets forth unaudited pro forma consolidated results of operations assuming that the acquisition had taken place at the beginning of the years presented:
YEAR ENDED DECEMBER 31, ----------------------- 1996 1995 ----------- ----------- (IN THOUSANDS) Sales........................................... $651,766 $620,892 Cost of sales................................... 419,908 425,327 -------- -------- Gross profit.................................... 231,858 195,565 Selling, general and administrative expenses.... 153,388 142,582 Allocated corporate expenses.................... -- 4,000 -------- -------- Operating income................................ 78,470 48,983 Interest expense................................ 40,030 40,945 Other income (expense), net..................... 151 (1,597) -------- -------- Income before income taxes and extraordinary item........................................... 38,591 6,441 Income taxes.................................... 16,848 2,705 -------- -------- Income before extraordinary item................ 21,743 3,736 Extraordinary loss on early extinguishment of debt, net of taxes............................. 5,159 -- -------- -------- Net income...................................... $ 16,584 $ 3,736 ======== ========
These pro forma results of operations have been prepared for comparative purposes only and include certain adjustments, such as additional depreciation expense as a result of a step-up in the basis of fixed assets, additional selling, general and administrative costs for services previously provided by Westinghouse, additional amortization expense as a result of goodwill and other intangible assets, increased interest expense as a result of the debt assumed to finance the acquisition, elimination of incentive compensation under Westinghouse's long-term incentive plans that became payable, and for which amounts payable F-11 KNOLL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) were established, as a result of the acquisition, and related income tax effects. Such results do not purport to be indicative of the actual results which would have occurred had the acquisition been consummated at the beginning of each year presented, nor do they purport to be indicative of results that will be achieved in the future. 4. INITIAL PUBLIC OFFERING The Company completed an initial public offering (the "IPO") during the second quarter of 1997. An aggregate of 9,200,000 shares, including 720,000 shares sold by a selling stockholder, were sold during May and June 1997 at $17.00 per share. The net proceeds to the Company amounted to $133,440,000 after deducting related expenses. The net proceeds, together with borrowings of $11,673,000 under the Company's then-existing revolving credit facility, were used (i) to redeem 800,000 shares of the Series A Preferred Stock for $80,000,000 and (ii) to redeem an aggregate principal amount of $57,750,000 of the Company's Senior Subordinated Notes for a total redemption price of $65,113,000, including a redemption premium of $5,775,000 and accrued and unpaid interest thereon of $1,588,000. 5. SUPPLEMENTAL PRO FORMA AS ADJUSTED DATA (UNAUDITED) The supplemental pro forma as adjusted data is included for purposes of additional analysis. It presents results of operations assuming that the IPO and the application of the net proceeds to the Company therefrom together with related borrowings under the Company's then-existing revolving credit facility occurred at the beginning of the respective periods. Such pro forma as adjusted data does not reflect extraordinary losses of $5,337,000 and $5,159,000, net of taxes, incurred in 1997 and 1996, respectively, in connection with the early redemption of debt (see Note 12). The supplemental pro forma as adjusted weighted average shares of common stock outstanding reflect the issuance of the Company's common stock in the IPO and the redemption and conversion into common stock of the Series A Preferred Stock (see Note 13) as of the beginning of each period presented. The supplemental pro forma as adjusted data reflects interest savings from the redemption of an aggregate principal amount of $57,750,000 of the Company's Senior Subordinated Notes, additional interest expense incurred on $11,673,000 in related borrowings under the Company's then-existing revolving credit facility and related income tax effects. Interest expense (including the amortization of deferred financing fees) has been decreased by $2,702,000 and $5,671,000 for the years ended December 31, 1997 and 1996, respectively. Interest adjustments are based on the actual interest rate of 10.875% for the Senior Subordinated Notes and a weighted average interest rate of 6.6% in 1997 and 8.25% in 1996 for the then-existing revolving credit facility. The weighted average interest rates approximate the actual interest rates for the period January 1, 1997 to May 8, 1997, the period preceding the IPO, and the ten-month period ended December 31, 1996, respectively, for the Company's average outstanding borrowings under the then-existing senior credit facilities. Income tax expense has been increased by $1,070,000 and $2,246,000 for the years ended December 31, 1997 and 1996, respectively, to reflect the assumed income tax effects of the interest expense adjustments. The supplemental pro forma as adjusted information does not purport to represent what the Company's results actually would have been if the aforementioned events had occurred at the beginning of each period presented, nor does such information purport to project the results of the Company for any future periods. The unaudited supplemental pro forma as adjusted financial information is based upon assumptions that the Company believes are reasonable. F-12 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 6. RELATED PARTY TRANSACTIONS OF THE PREDECESSOR The Predecessor purchased products from and sold products to other Westinghouse operations. The Predecessor also purchased certain services from Westinghouse, including liability, property and workers' compensation insurance. These transactions are discussed in further detail below. Intercompany Purchases The Predecessor purchased products and services from other Westinghouse operations. For intercompany purchases in the U.S., the Predecessor used the central clearinghouse arrangement through which intercompany transactions were settled at the transfer date. Accounts payable were established for purchases from units of Westinghouse that did not participate in the central clearinghouse arrangement. Intercompany Sales The Predecessor sold products to various Westinghouse operations. These transactions were settled immediately through the central clearinghouse or the internal customer was invoiced and an intercompany receivable was established. Corporate Services The Predecessor used, and was charged directly for, certain services that Westinghouse provided to its business units. These services generally included information systems support, certain accounting functions such as transaction processing, legal, environmental affairs and human resources consulting and compliance support. Westinghouse centrally developed, negotiated and administered the Predecessor's insurance programs. The insurance included broad all-risk coverage for real and personal property and third-party liability coverage, employer's liability coverage, automobile liability, general and product liability and other standard liability coverage. The Predecessor also maintained a program of self-insurance for workers' compensation in the U.S. through Westinghouse. Westinghouse charged its business units for all of the centrally administered insurance programs based in part on claims history. All of the charges for the corporate services described above are included in the costs of the Predecessor's operations in the consolidated statements of operations. Such charges were based on costs that directly related to the Predecessor or on a pro rata portion of Westinghouse's total costs for the services provided. These costs were allocated to the Predecessor on a basis that management believes is reasonable. However, management believes that it is possible that the costs of these transactions may differ from those that would result from transactions among unrelated parties. For the two-month period ended February 29, 1996 and the year ended December 31, 1995, charges related to corporate services totaled $510,000 and $3,304,000, respectively. The Predecessor also purchased other Westinghouse internally-provided services as necessary including telecommunications, printing, productivity and quality consulting and other services. Allocated Corporate Expenses Westinghouse allocated a certain portion of its corporate expenses to its business units. These allocated costs include Westinghouse executive management and corporate overhead, corporate legal, environmental, audit, treasury and tax services, pension charges related to corporate functions and other corporate support and executive costs. For the year ended December 31, 1995, allocated corporate expenses also include $4,000,000 of incentive compensation payable to the Predecessor's management under Westinghouse long-term incentive plans. F-13 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) These corporate expenses were allocated primarily based on sales with the exception of the incentive compensation allocation. This methodology of allocating corporate expenses to business units is reasonable and consistent, but such allocations are not necessarily indicative of actual costs. On an annual basis, it was not practical for Westinghouse management to estimate the level of expenses that might have been incurred had the Predecessor operated as a separate stand-alone entity. Westinghouse did not charge its business units for the carrying costs related to its investment in such units (i.e. parent company investment). Therefore, the Predecessor's results of operations for each of the periods presented do not include any allocated interest charges from Westinghouse. Westinghouse Long-Term Incentive Compensation Certain members of management of the Predecessor were participants in a long-term incentive compensation plan established by Westinghouse. The plan provided for the payment of awards at the end of a five-year period based on the achievement of certain performance goals set by Westinghouse's Board of Directors. As a result of the consummation of the acquisition discussed in Note 3, the payment of awards was accelerated pursuant to the terms of the plan, resulting in a charge to operations of $47,900,000 for the two months ended February 29, 1996. Parent Company Investment Since the Predecessor was an operating unit of Westinghouse and was not a distinct legal entity, there were no customary equity and capital accounts recorded on the consolidated balance sheet. Instead, parent company investment was maintained by the Predecessor and Westinghouse to account for interunit transactions described above. 7. CUSTOMER RECEIVABLES Customer receivables are presented net of an allowance for doubtful accounts of $5,461,000 and $5,713,000 at December 31, 1997 and 1996, respectively. Management performs ongoing credit evaluations of its customers and generally does not require collateral. As of December 31, 1997 and 1996, the U.S. government represented approximately 13.8% and 17.3%, respectively, of gross customer receivables. F-14 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 8. INVENTORIES
DECEMBER 31, --------------- 1997 1996 ------- ------- (IN THOUSANDS) Raw materials............................................. $39,978 $34,147 Work in process........................................... 9,673 7,508 Finished goods............................................ 18,598 16,156 ------- ------- Inventories............................................... $68,249 $57,811 ======= =======
9. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31, ------------------ 1997 1996 -------- -------- (IN THOUSANDS) Land and buildings.................................... $ 62,249 $ 61,844 Machinery and equipment............................... 139,592 122,573 Construction in progress.............................. 22,433 11,066 -------- -------- Property, plant and equipment at cost................. 224,274 195,483 Accumulated depreciation.............................. (43,824) (19,265) -------- -------- Property, plant and equipment, net.................... $180,450 $176,218 ======== ========
10. INTANGIBLE ASSETS
DECEMBER 31, ------------------ 1997 1996 -------- -------- (IN THOUSANDS) Goodwill.............................................. $ 56,803 $ 62,627 Trademarks............................................ 219,900 219,900 Deferred financing fees............................... 8,354 11,226 -------- -------- Intangible asset at cost.............................. 285,057 293,753 Accumulated amortization.............................. (14,380) (6,813) -------- -------- Intangible assets, net................................ $270,677 $286,940 ======== ========
11. OTHER CURRENT LIABILITIES
DECEMBER 31, --------------- 1997 1996 ------- ------- (IN THOUSANDS) Accrued employee compensation............................ $39,414 $28,282 Accrued product warranty................................. 10,871 7,173 Other.................................................... 27,556 28,567 ------- ------- Other current liabilities................................ $77,841 $64,022 ======= =======
F-15 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 12. INDEBTEDNESS The Company's long-term debt is summarized as follows:
DECEMBER 31, ------------------ 1997 1996 -------- -------- (IN THOUSANDS) 10.875% Senior Subordinated Notes, due 2006............. $107,250 $165,000 Term loans, variable rate (6.515% at December 31, 1996) due through 2002....................................... -- 100,000 Revolving loans, variable rate (6.25%-6.40% at December 31, 1997 and 6.515% at December 31, 1996) due 2002..... 99,000 88,000 Other................................................... 779 1,154 -------- -------- 207,029 354,154 Less current maturities................................. (10,000) (23,265) -------- -------- Long-term debt.......................................... $197,029 $330,889 ======== ========
Senior Subordinated Notes The Company assumed the obligations under the 10.875% Senior Subordinated Notes due 2006 as a direct result of the acquisition and merger that occurred on February 29, 1996 (see Note 3). The Senior Subordinated Notes are unsecured and are guaranteed by each existing and future wholly owned domestic subsidiary of Knoll, Inc. However, if the Company is unable to satisfy all or any portion of its obligations with respect to the Senior Subordinated Notes, it is unlikely that the guarantors will be able to pay all or any portion of such unsatisfied obligations. During June 1997, the Company used proceeds from its IPO to repurchase an aggregate principal amount of $57,750,000 of the Senior Subordinated Notes for a total redemption price of $65,113,000, including a redemption premium of $5,775,000 and accrued and unpaid interest thereon of $1,588,000. The Company wrote off unamortized financing costs of $3,063,000 related to the portion of the Senior Subordinated Notes that was redeemed. The early redemption premium and write-off of unamortized financing costs resulted in an extraordinary loss of $8,838,000 on a pre-tax basis ($5,337,000 on an after-tax basis) for the year ended December 31, 1997. The Senior Subordinated Notes outstanding at December 31, 1997 may not be redeemed at the Company's option prior to March 15, 2001. At such date, the Senior Subordinated Notes are redeemable at 105.438% of principal amount, and thereafter at an annually declining premium over par until March 15, 2004 when they are redeemable at par. There are no sinking fund requirements related to the Senior Subordinated Notes. The indenture for the Senior Subordinated Notes limits the payment of dividends and incurrence of indebtedness and includes certain other restrictions and limitations that are customary with subordinated indebtedness of this type. The Company was in compliance with the terms of the indenture at December 31, 1997. Term and Revolving Loans On December 17, 1996, the Company entered into a $230,000,000 credit agreement with a group of financial institutions that provided for a term loan facility and a revolving credit facility. The proceeds of F-16 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) the facilities were used to refinance the Company's debt under the previously existing senior bank credit facilities that was assumed as a result of the acquisition (see Note 3) and for working capital and general corporate purposes. The refinancing resulted in an extraordinary charge of $8,542,000 on a pre-tax basis ($5,159,000 on an after-tax basis) to operations for the ten months ended December 31, 1996. This extraordinary charge consisted of the write-off of unamortized financing costs related to the refinanced debt. On August 8, 1997, the Company entered into a new agreement that modified certain terms of the December 17, 1996 credit agreement. The credit agreement previously provided for a $100,000,000 term loan with scheduled principal payments through December 2002 and a $130,000,000 revolving credit facility that matured in December 2002. The new agreement provides for a $275,000,000 revolving credit facility that matures in August 2002. At the time this change became effective, $90,000,000 of indebtedness outstanding under the previously existing term loan and $50,000,000 under the previously existing revolving loan became revolving borrowings under the new agreement. The new senior credit agreement contains a letter of credit subfacility that allows for the issuance of up to $20,000,000 in letters of credit, a competitive bid loan subfacility that provides for the issuance of up to $140,000,000 in competitive bid loans and a swing line loan subfacility that allows for the issuance of up to $10,000,000 in swing line loans. The amount available for borrowing under the revolving credit facility is reduced by the total outstanding letters of credit, competitive bid loans and swing line loans. Under the terms of the existing credit agreement, the Company may use the revolving credit facility for working capital and general purposes. Borrowings bear interest at a floating rate based at the Company's option, upon (i) the Eurodollar rate (as defined in the agreement) plus an applicable percentage that is subject to change based on the Company's ratio of funded debt to EBITDA or (ii) the greater of the federal funds rate plus 0.5% or the prime rate. The credit agreement subjects the Company to various affirmative and negative covenants. Among other things, the covenants limit the Company's ability to incur additional indebtedness and declare or pay dividends and require the Company to maintain certain financial ratios with respect to funded debt leverage. The Company was in compliance with such covenants at December 31, 1997. At December 31, 1997, the Company had outstanding credit facility borrowings totaling $99,000,000, of which $10,000,000 has been classified as current, and total letters of credit of approximately $1,417,000. There were no borrowings under the letters of credit. The Company pays a commitment fee ranging from 0.125% to 0.25%, depending on the Company's leverage ratio, on the unused portion of the revolving credit facility. In addition, a letter of credit fee ranging from 0.325% to 0.75%, depending on the Company's leverage ratio, is required to be paid on the amount available to be drawn under letters of credit. The Company also has several revolving credit agreements with various European financial institutions. As of December 31, 1997, total credit available under such agreements was approximately $11,881,000 or the European equivalent. There is currently no expiration date on these agreements. The interest rate on borrowings is variable and is based on the monetary market rate which is linked to each country's prime rate. As of December 31, 1997, the Company did not have any outstanding borrowings under the European credit facilities. Interest Paid For the year ended December 31, 1997 and the ten months ended December 31, 1996, the Company made interest payments totaling $25,505,000 and $25,775,000, respectively. F-17 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Maturities Aggregate maturities of the Company's indebtedness are as follows (in thousands): 1998............................................................. $ 10,000 1999............................................................. -- 2000............................................................. -- 2001............................................................. -- 2002............................................................. 89,078 Thereafter....................................................... 107,951 -------- $207,029 ========
13. CAPITAL STRUCTURE On May 6, 1997, the Company's Certificate of Incorporation was amended to increase the number of authorized shares of common stock from 24,000,000 to 100,000,000, increase the number of authorized shares of preferred stock from 3,000,000 to 10,000,000 and effect a 3.13943-for-1 split of the Company's common stock. Of the 10,000,000 shares of preferred stock authorized to be issued, 1,920,000 shares are designated as Series A 12% Participating Convertible Preferred Stock. In connection with the Company's IPO, 800,000 shares of Series A Preferred Stock were redeemed for $80,000,000 and 11,749,361 shares of common stock, and 802,998 shares of Series A Preferred Stock were converted into 15,691,558 shares of common stock. Fractional shares resulting from both the conversion of Series A Preferred Stock into common stock and the common stock split were settled in cash. Prior to the redemption and conversion of the Series A Preferred Stock, dividends on the Series A Preferred Stock were fully cumulative, accrued on a quarterly basis at a rate of $12.00 per annum, and were payable only at the discretion of the Board of Directors. As of December 31, 1996, the aggregate and per share amounts of cumulative dividends in arrears were $16.6 million and $10.36, respectively. Upon the redemption and conversion into common stock of the Series A Preferred Stock, the holders of the then- outstanding Series A Preferred Stock lost their right to all dividends, including dividends in arrears. The shares of Series A Preferred Stock that were redeemed and converted were retired and canceled and may not be reissued. As such, only 317,002 shares remain eligible for issuance. If these eligible shares of Series A Preferred Stock are issued, they will not be convertible into common stock and no dividends may be declared or accrue on them. Future holders of Series A Preferred Stock will not be granted the benefit of any sinking fund. Upon involuntary liquidation, holders would be entitled to receive $100.00 for each share of Series A Preferred Stock. Each holder would be entitled to vote on matters generally submitted to the stockholders of the Company and certain matters on which a majority vote of holders of the Series A Preferred Stock is required by the Company's Certificate of Incorporation. The number of votes per share of Series A Preferred Stock would be approximately 19.54 votes. 14. DERIVATIVE FINANCIAL INSTRUMENTS The Company uses interest rate collar agreements for other than trading purposes to manage its exposure to fluctuations in interest rates on its floating rate debt. Such agreements effectively set agreed-upon maximum and minimum rates on a notional principal amount and utilize the London Interbank Offered Rate (LIBOR) as a floating rate reference. The notional amounts are utilized to measure the amount of interest to be paid or received and do not represent the amount of exposure to credit loss. These interest rate collar agreements provide that, at specified intervals, when the floating rate is less than the minimum rate, the Company will F-18 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) pay the counterparty the differential computed on the notional principal amount, and when the floating rate exceeds the maximum rate, the counterparty will pay the Company the differential computed on the notional principal amount. The net amount paid or received on the interest rate collar agreements is recognized as an adjustment to interest expense. During the year ended December 31, 1997 and ten months ended December 31, 1996, the Company was not required to make nor was it entitled to receive any payments as a result of these hedging activities. The Company had four outstanding interest rate collar agreements at December 31, 1997 and five outstanding interest rate collar agreements at December 31, 1996 with maximum and minimum rates ranging from 7.50% to 7.99% and 5.00% to 5.50%, respectively. The notional principal amount of these agreements totaled $150,000,000 and $185,000,000 at December 31, 1997 and 1996, respectively. The agreements outstanding as of December 31, 1997 mature over the next two years. Aggregate maturities of the total notional principal amount are as follows: $35,000,000 in 1998 and $115,000,000 in 1999. The counterparties to the interest rate collar agreements are major financial institutions. The Company continually monitors its positions and the credit ratings of the counterparties and does not anticipate nonperformance by them. The Company has not been required to provide nor has it received any collateral related to its hedging activities. 15. CONTINGENT LIABILITIES AND COMMITMENTS There are various claims and lawsuits pending against the Company, all of which management believes, based upon information presently known, either to be without merit or subject to adequate defenses. The resolution of these claims and lawsuits is not expected to have a material adverse effect on the Company. 16. FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair values of each class of financial instruments: Cash and Cash Equivalents, Accounts Receivable, Accounts Payable and Short- Term Debt The fair values of these financial instruments approximate their carrying amounts due to their immediate or short-term periods to maturity. Long-Term Debt The fair values of the variable rate long-term debt instruments approximate their carrying amounts. The fair value of other long-term debt was estimated using quoted market values or discounted cash flow analyses based on current incremental borrowing rates for similar types of borrowing arrangements. The fair value of the Company's long-term debt, including the current portion, is approximately $220,435,000 at December 31, 1997 and $371,892,000 at December 31, 1996 while the carrying amounts are $207,029,000 and $354,154,000, respectively. Interest Rate Collar Agreements The fair value of the Company's interest rate collar agreements, as estimated by dealers, is not material. F-19 KNOLL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 17. EARNINGS PER SHARE The following table sets forth a reconciliation of the numerators and denominators of the basic and diluted pro forma earnings per share computations for income before extraordinary item. See Note 2 for a description of the pro forma basis of presentation.
INCOME BEFORE WEIGHTED EXTRAORDINARY AVERAGE ITEM SHARES PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ------------- ------------- --------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) YEAR ENDED DECEMBER 31, 1997: Basic pro forma earnings per share.. $66,443 37,284 $1.78 ===== Effect of dilutive potential common shares: Employee stock options............ -- 235 Nonvested restricted stock grants. -- 2,879 ------- ------ Diluted pro forma earnings per share.............................. $66,443 40,398 $1.64 ======= ====== ===== TEN MONTHS ENDED DECEMBER 31, 1996: Basic pro forma earnings per share.. $21,995 31,040 $0.71 ===== Dilutive effect of nonvested restricted stock grants............ -- 3,661 ------- ------ Diluted pro forma earnings per share.............................. $21,995 34,701 $0.63 ======= ====== =====
As discussed in Note 12, the Company recognized an extraordinary loss on early extinguishment of debt of $5,337,000, net of taxes, in 1997 and $5,159,000, net of taxes, in 1996. On a per share basis, these extraordinary losses amounted to $0.14 basic and $0.13 diluted in 1997 and $0.17 basic and $0.15 diluted in 1996. 18. INCOME TAXES Income (loss) before income taxes and extraordinary item consists of the following:
| THE KNOLL GROUP, INC. | (PREDECESSOR) |------------------------- TEN MONTHS | TWO MONTHS YEAR ENDED ENDED | ENDED YEAR ENDED DECEMBER 31, DECEMBER 31,|FEBRUARY 29, DECEMBER 31, 1997 1996 | 1996 1995 ------------ ------------|------------ ------------ (IN THOUSANDS) | (IN THOUSANDS) | U.S. operations..................................................... $ 82,851 $23,381 | $(39,105) $46,908 Foreign operations.................................................. 31,618 15,458 | (1,090) 5,270 -------- ------- | -------- ------- $114,469 $38,839 | $(40,195) $52,178 ======== ======= | ======== =======
F-20 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Income tax expense (benefit), excluding extraordinary items, is comprised of the following:
| THE KNOLL GROUP, INC. | (PREDECESSOR) |------------------------- YEAR TEN MONTHS | TWO MONTHS YEAR ENDED ENDED | ENDED ENDED DECEMBER 31, DECEMBER 31,|FEBRUARY 29, DECEMBER 31, 1997 1996 | 1996 1995 ------------ ------------|------------ ------------ (IN THOUSANDS) | (IN THOUSANDS) | Current | Federal................................................................ $21,585 $10,909 | $(13,801) $11,130 State.................................................................. 5,980 2,953 | (1,814) 3,687 Foreign................................................................ 11,295 661 | 28 -- ------- ------- | -------- ------- Total current........................................................ 38,860 14,523 | (15,587) 14,817 ------- ------- | -------- ------- Deferred: | Federal................................................................ 6,258 (2,850) | (460) 7,795 State.................................................................. 708 (612) | (60) 234 Foreign................................................................ 2,200 5,783 | -- -- ------- ------- | -------- ------- Total deferred....................................................... 9,166 2,321 | (520) 8,029 ------- ------- | -------- ------- Income tax expense (benefit)............................................. $48,026 $16,844 | $(16,107) $22,846 ======= ======= | ======== =======
Income taxes paid by the Company for the year ended December 31, 1997 and the ten months ended December 31, 1996 totaled $24,026,000 and $13,137,000, respectively. As discussed in Notes 1 and 2 the recognition and measurement of income tax expense (benefit) for the Predecessor required certain assumptions, allocations and significant estimates in order to measure the tax consequences as if the Predecessor were a stand-alone taxpayer. The following table sets forth the tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities:
DECEMBER 31, ------------------ 1997 1996 -------- -------- (IN THOUSANDS) Deferred tax assets: Accounts receivable, principally due to allowance for doubtful accounts....................................... $ 1,634 $ 1,659 Inventories.............................................. 3,153 2,603 Net operating loss carryforwards......................... 21,359 28,253 Postretirement benefit obligation........................ 7,039 6,880 Accrued liabilities and other items...................... 20,493 21,635 -------- -------- Gross deferred tax assets.................................. 53,678 61,030 Valuation allowance........................................ (25,172) (33,161) -------- -------- Net deferred tax assets.................................... 28,506 27,869 -------- -------- Deferred tax liabilities: Intangibles, principally due to differences in amortization............................................ 7,303 3,338 Plant and equipment, principally due to differences in depreciation and assigned values........................ 5,011 1,930 Other items.............................................. 198 -- -------- -------- Gross deferred tax liabilities............................. 12,512 5,268 -------- -------- Net deferred tax asset..................................... $ 15,994 $ 22,601 ======== ========
F-21 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) As of December 31, 1997, the Company has pre-acquisition net operating loss carryforwards totaling approximately $57,206,000 in various foreign tax jurisdictions which generally expire between 1998 and 2001 or may be carried forward for an unlimited time. The Company has recorded a valuation allowance for net deferred tax assets in foreign tax jurisdictions, primarily related to pre-acquisition net operating loss carryforwards, due to the significant losses incurred by the Predecessor in these tax jurisdictions in previous years. At February 29, 1996 and December 31, 1995, the Predecessor had recorded a valuation allowance of $38,446,000 and $37,990,000, respectively. For the year ended December 31, 1997 and the ten months ended December 31, 1996, tax benefits recognized through reductions of the valuation allowance had the effect of reducing goodwill by $4,524,000 and $4,246,000, respectively. If additional tax benefits are recognized in the future through further reduction of the valuation allowance, such benefits will reduce goodwill. The following table sets forth a reconciliation of the statutory federal income tax rate to the effective income tax rate:
| THE KNOLL GROUP, INC. | (PREDECESSOR) |------------------------- YEAR TEN MONTHS | TWO MONTHS YEAR ENDED ENDED | ENDED ENDED DECEMBER 31, DECEMBER 31,|FEBRUARY 29, DECEMBER 31, 1997 1996 | 1996 1995 ------------ ------------|------------ ------------ | Federal statutory tax rate......................................... 35.0% 35.0% | (35.0%) 35.0% Increase (decrease) in the tax rate resulting from: | State taxes, net of federal effect............................... 3.8 3.9 | (4.5) 4.9 Higher effective income taxes of other countries ................ 2.4 3.2 | (0.2) (1.4) Non-deductible goodwill amortization............................. 0.3 1.0 | 1.1 4.7 Other............................................................ 0.5 0.3 | (1.4) 0.6 ---- ---- | ----- ---- Effective tax rate................................................. 42.0% 43.4% | (40.0%) 43.8% ==== ==== | ===== ====
The Company has not made provision for U.S. federal and state income taxes as of December 31, 1997 and 1996 on approximately $27,467,000 and $9,194,000 of foreign earnings which are expected to be reinvested indefinitely. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the various foreign countries. Determination of the amount of the unrecognized deferred tax liability is not practicable. 19. LEASES The Company has commitments under operating leases for certain machinery and equipment and facilities used in its operations. Total rental expense for the year ended December 31, 1997 and the ten months ended F-22 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) December 31, 1996 was $8,902,000 and $7,787,000, respectively. Future minimum rental payments required under those operating leases that have an initial or remaining noncancelable lease term in excess of one year are as follows (in thousands): 1998............................................................. $ 5,786 1999............................................................. 4,677 2000............................................................. 2,970 2001............................................................. 2,119 2002............................................................. 1,824 Subsequent years................................................. 2,018 ------- Total minimum rental payments.................................... $19,394 =======
The Predecessor also had operating leases for certain machinery and equipment and facilities. Total rental expense charged to operations was $1,668,000 for the two months ended February 29, 1996 and $10,149,000 for the year ended December 31, 1995. 20. STOCK PLANS In connection with the acquisition discussed in Note 3, the Company established the Knoll, Inc. 1996 Stock Incentive Plan (the "1996 Stock Plan"). Under the 1996 Stock Plan, awards denominated or payable in shares or options to purchase shares of the Company's common stock may be granted to officers and other key employees of the Company. A combined maximum of 4,709,126 shares or options to purchase shares may be granted under the 1996 Stock Plan. Options that are granted have a contractual life of ten years. A Stock Plan Committee of the Company's Board of Directors has sole discretion concerning administration of the 1996 Stock Plan, including selection of individuals to receive awards, types of awards, the terms and conditions of the awards and the time at which awards will be granted. The Board of Directors may terminate the 1996 Stock Plan at its discretion at any time. During the ten months ended December 31, 1996, the Company granted 4,144,030 restricted common shares, with a weighted average fair market value of $0.34 per share, to key employees. Of such amount, 1,883,641 of the restricted shares vest ratably over the five years subsequent to the grant date while the other 2,260,389 restricted shares were scheduled to vest 20.0% on the grant date and 80.0% ratably over the four years subsequent to the grant date. In October 1997, the vesting of 565,098 of the 2,260,389 restricted shares was accelerated. As a result of this acceleration, 1,469,252 of the 2,260,389 restricted shares were vested as of December 31, 1997 while the remaining 791,137 shares will vest in equal installments on each of March 1, 1998, 1999 and 2000. As of December 31, 1997, a total of 1,845,972 restricted shares have vested. The fair market value of the shares on the date of the grant has been recorded as unearned stock grant compensation and is presented as a separate component of stockholders' equity. Compensation expense is recognized ratably over the vesting period. The remaining 565,096 shares available under the 1996 Stock Plan were granted in the form of options during 1997. The Knoll, Inc. 1997 Stock Incentive Plan (the "1997 Stock Plan") was established on February 14, 1997. The terms of the 1997 Stock Plan are essentially the same as those of the 1996 Stock Plan, except pursuant to the 1997 Stock Plan, an aggregate of 2,255,772 shares of common stock are reserved for issuance thereunder (subject, in the case of 1,000,000 shares, to stockholder approval), discounted options may be granted, options may be repriced, and the Board of Directors has greater flexibility to amend the 1997 Plan. As of December 31, 1997, there were 1,577,062 options outstanding pursuant to the 1997 Stock Plan (subject, in the case of options to purchase 330,000 shares, to stockholder approval). F-23 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The following table summarizes the Company's stock option activity:
YEAR ENDED DECEMBER 31, 1997 ------------ Outstanding at beginning of year.............................. -- Granted....................................................... 2,173,552 Exercised..................................................... -- Forfeited..................................................... (31,394) --------- Outstanding at end of year.................................... 2,142,158 ========= Exercisable at end of year.................................... 10,000 ========= Available for future grants................................... 678,710 =========
The exercise price per share for those options exercisable at December 31, 1997 is $17.00 and for those options forfeited during 1997 is $15.93. Stock options outstanding at December 31, 1997 are summarized as follows:
WEIGHTED NUMBER OF AVERAGE WEIGHTED RANGE OF OPTIONS REMAINING AVERAGE EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE --------------- ----------- ---------------- -------------- $15.93 - $17.00 1,337,158 9.19 $15.97 $28.50 - $33.13 805,000 9.83 28.64 --------- 2,142,158 9.43 $20.73 =========
The Company also has a qualified, noncompensatory employee stock purchase plan, which provides all employees the ability to purchase common stock of the Company at a price equal to 15.0% below the lower of the market price at (i) the beginning of each quarterly offering period or (ii) the end of each quarterly offering period. Purchases under the plan are limited to 10.0% of an employee's eligible gross pay, up to $25,000. The Company has reserved 300,000 shares of its common stock for issuance under its employee stock purchase plan. From August 1, 1997, the date the employee stock purchase plan commenced, through December 31, 1997, the Company issued 22,716 shares at a weighted average exercise price of $26.71 under this plan. As discussed in Note 2, the Company continues to account for its stock- based compensation plans in accordance with APB 25. Accordingly, no compensation cost has been recognized for the Company's stock options or stock purchase plan. If the Company had recognized compensation cost based upon the fair value of the stock options and stock issued under the employee stock purchase plan at the date of grant as prescribed by SFAS 123, the Company's pro forma net income and pro forma net income per share would have been as follows (in thousands, except per share amounts):
YEAR ENDED DECEMBER 31, 1997 ------------ Pro forma net income.......................................... $59,731 Pro forma net income per share of common stock: Basic....................................................... 1.60 Diluted..................................................... 1.48
F-24 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The fair value of the options was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions: risk- free interest rate of 6.0%, dividend yield of 0.0%, expected volatility of the market price of the common stock of 35.0% and a weighted average expected life of the options of 7 years. The estimated fair value of the options was amortized to expense over the vesting period of the options for purposes of determining pro forma net income and pro forma net income per share. Pro forma results of operations are not likely to be representative of the effects on reported or pro forma results of operations for future years. 21. PENSION PLANS On March 1, 1996, the Company established two defined benefit pension plans: The Knoll Pension Plan and The Knoll Pension Plan for Bargaining Unit Employees. The first plan covers all eligible U.S. employees who are not members of a collective bargaining unit (i.e. union), while the second plan pertains to all U.S. employees who are covered by a collective bargaining agreement. Benefits for these plans are based primarily on years of credited service, annual compensation for each year of participation, and age when payments begin. In order to accrue benefits under The Knoll Pension Plan for Bargaining Unit Employees, participants are required to make certain contributions to the plan. The Company makes contributions to both plans as determined by an actuarial funding method. This funding policy is consistent with the minimum funding requirements set forth by the Employee Retirement Income Security Act of 1974, as amended, and other governmental laws and regulations. The following table sets forth the net periodic pension cost for the Company's pension plans:
YEAR TEN MONTHS ENDED ENDED DECEMBER 31, DECEMBER 31, 1997 1996 ------------ ------------ (IN THOUSANDS) Service cost....................................... $4,893 $3,953 Interest cost on projected benefit obligation...... 207 -- ------ ------ 5,100 3,953 Return on plan assets.............................. (55) -- ------ ------ Net periodic pension cost.......................... $5,045 $3,953 ====== ======
The return on plan assets for the year ended December 31, 1997 was determined based on a weighted-average expected long-term rate of return on plan assets of 8.5%. F-25 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The funded status of the Company's pension plans is as follows:
DECEMBER 31, ---------------- 1997 1996 ------- ------- (IN THOUSANDS) Actuarial present value of benefit obligation: Vested............................................... $(4,619) $(2,784) Nonvested............................................ (1,341) (273) ------- ------- Accumulated benefit obligation....................... (5,960) (3,057) Additional obligation for projected compensation increases on accumulated years of service........... (2,118) (896) ------- ------- Projected benefit obligation........................... (8,078) (3,953) Plan assets at fair value.............................. 3,809 30 ------- ------- Plan assets less than projected benefit obligation..... (4,269) (3,923) Unrecognized net gain.................................. (1,248) -- ------- ------- Accrued pension cost................................... $(5,517) $(3,923) ======= =======
The projected benefit obligation as of December 31, 1997 and 1996 was measured using a discount rate of 7.25% and rate of compensation increase of 4.5%. As of December 31, 1997, plan assets consisted primarily of mutual funds. Prior to March 1, 1996, the Predecessor sponsored a defined benefit pension plan, The Knoll Group Pension Plan, for all eligible U.S. nonunion employees. The plan provisions were substantially the same as the current pension plan for nonunion employees offered by Knoll, Inc. As a result of the sale of the Predecessor by Westinghouse, benefits earned through February 29, 1996 under The Knoll Group Pension Plan were frozen and participants were fully vested in their benefits. The plan was subsequently merged into a Westinghouse pension plan. The following table sets forth the Predecessor's net periodic pension cost (income) for The Knoll Group Pension Plan:
TWO MONTHS YEAR ENDED ENDED FEBRUARY 29, DECEMBER 31, 1996 1995 ------------ ------------ (IN THOUSANDS) Service cost................................... $ 522 $ 2,278 Interest cost on projected benefit obligation.. 933 5,212 Amortization of unrecognized prior service cost.......................................... 68 385 Amortization of unrecognized net loss.......... 197 -- ------ ------- 1,720 7,875 Return on plan assets.......................... (1,543) (8,993) ------ ------- Net periodic pension cost (income)............. $ 177 $(1,118) ====== =======
The return on plan assets was determined based on a weighted-average expected long-term rate of return on plan assets of 9.75% for each period presented. The Predecessor also participated in two single-employer defined benefit pension plans sponsored by Westinghouse. These plans covered all U.S. union employees of the Predecessor, certain domestic Westinghouse employees and certain domestic executives of the Predecessor and Westinghouse. For the two F-26 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) months ended February 29, 1996 and the year ended December 31, 1995, the Predecessor's contributions to Westinghouse for these defined benefit pension plans totaled $212,000 and $1,076,000, respectively. Employees of the Canadian and United Kingdom (U.K.) operations participate in defined contribution plans. The Company's expense related to the Canadian plan for the year ended December 31, 1997 and ten months ended December 31, 1996 was $955,000 ad $607,000, respectively. The Predecessor's expense for the two months ended February 29, 1996 and year ended December 31, 1995 totaled $114,000 and $398,000, respectively. Expense for the U.K. plan during each of the four aforementioned periods was not significant. The Company also sponsors a retirement savings plan, which is an employee savings plan that qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code, for all U.S. nonunion employees and U.S. hourly union employees. Under this plan, participants may defer a portion of their earnings up to the annual contribution limits established by the Internal Revenue Service. The Company matches 40.0% of employee contributions on up to the first 6.0% of employee compensation. The plan also provides for additional employer matching based on the achievement of certain profitability goals. The Company's common stock is offered as an investment option under the 401(k) plan. Although the stock is typically purchased on the open market, the Company has reserved 500,000 shares of its common stock for issuance under its 401(k) plan. The Company's total expense under this plan was $5,180,000 for the year ended December 31, 1997 and $2,957,000 for the ten months ended December 31, 1996. The Predecessor administered a similar retirement savings plan and incurred related expense totaling $406,000 and $2,675,000 for the two months ended February 29, 1996 and the year ended December 31, 1995, respectively. 22. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Company provides postretirement medical and life insurance coverage for certain retired U.S. nonunion and union employees and their eligible dependents. The amount of benefits provided to retired nonunion employees varies according to the age of the retiree as of a predetermined date, while benefits provided to retired union employees are based on annual compensation. The Company does not currently fund its obligation related to postretirement medical and life insurance benefits. Net periodic postretirement benefit cost for the Company includes the following components:
YEAR TEN MONTHS ENDED ENDED DECEMBER 31, DECEMBER 31, 1997 1996 ------------ ------------ (IN THOUSANDS) Service cost............ $ 560 $ 440 Interest cost on projected benefit obligation............. 1,224 1,000 ------ ------ Net periodic postretirement benefit cost................... $1,784 $1,440 ====== ======
F-27 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Company's liability related to the postretirement medical and life insurance benefits is as follows:
DECEMBER 31, ------------------ 1997 1996 -------- -------- (IN THOUSANDS) Accumulated postretirement benefit obligation: Retirees........................................... $ (7,183) $ (7,329) Fully eligible active participants................. (1,974) (1,593) Other active participants.......................... (8,992) (8,235) -------- -------- Total accumulated postretirement benefit obligation.. (18,149) (17,157) Unrecognized net loss (gain)......................... 375 (217) -------- -------- Accrued postretirement benefit cost.................. $(17,774) $(17,374) ======== ========
The accumulated postretirement benefit obligation as of December 31, 1997 and 1996 was measured using a discount rate of 7.25% and rate of compensation increase of 4.5%. The health care cost trend rate was assumed to be 8.5% in 1997, decreasing by 1.0% per year to 5.5% in 2000, and remaining at that level thereafter. Increasing the assumed health care cost trend rate by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1997 by approximately $2,570,000 and increase the aggregate of the service and interest cost for the year ended December 31, 1997 by approximately $236,000. The Predecessor provided postretirement medical and life insurance benefits to U.S. retired nonunion employees. The current postretirement medical and life insurance benefits which the Company provides to retired nonunion employees remain essentially unchanged from those which the Predecessor had provided. Net periodic postretirement benefit cost incurred by the Predecessor includes the following:
TWO MONTHS ENDED YEAR ENDED FEBRUARY 29, DECEMBER 31, 1996 1995 ------------ ------------ (IN THOUSANDS) Service cost............................... $103 $ 449 Interest cost on projected benefit obligation................................ 207 1,509 Amortization of unrecognized prior service cost...................................... (56) (12) Amortization of unrecognized net loss (gain).................................... 10 (25) ---- ------ Net periodic postretirement benefit cost... $264 $1,921 ==== ======
The Predecessor also participated in a single-employer postretirement benefit arrangement maintained by Westinghouse. Westinghouse provided medical and life insurance benefits to all retired U.S. union employees and certain Westinghouse employees. The Predecessor's contributions for the postretirement benefit arrangements sponsored by Westinghouse totaled $82,500 for the two months ended February 29, 1996 and $151,000 for the year ended December 31, 1995. F-28 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 23. BUSINESS SEGMENT AND GEOGRAPHICAL REGION INFORMATION The Company conducts business predominantly in the office furniture industry through its operations in the United States, Canada and Europe. Summarized financial information regarding the Company's operations in these geographic areas is presented below:
YEAR ENDED UNITED DECEMBER 31, 1997 STATES CANADA EUROPE ELIMINATIONS TOTALS ----------------- -------- -------- ------- ------------ -------- (IN THOUSANDS) Sales to customers....... $717,326 $ 37,674 $55,857 $ -- $810,857 Sales between geographic areas................... 24,402 102,783 2,228 (129,413) -- -------- -------- ------- --------- -------- Net sales................ $741,728 $140,457 $58,085 $(129,413) $810,857 ======== ======== ======= ========= ======== Operating income......... $108,002 $ 24,497 $ 5,378 -- $137,877 ======== ======== ======= ========= ======== Identifiable assets...... $655,385 $ 50,701 $41,439 $ (66,666) $680,859 ======== ======== ======= ========= ======== TEN MONTHS ENDED UNITED DECEMBER 31, 1996 STATES CANADA EUROPE ELIMINATIONS TOTALS ----------------- -------- -------- ------- ------------ -------- (IN THOUSANDS) Sales to customers....... $493,653 $ 24,456 $43,425 $ -- $561,534 Sales between geographic areas................... 13,637 60,866 1,714 (76,217) -- -------- -------- ------- --------- -------- Net sales................ $507,290 $ 85,322 $45,139 $ (76,217) $561,534 ======== ======== ======= ========= ======== Operating income......... $ 54,381 $ 10,681 $ 6,282 -- $ 71,344 ======== ======== ======= ========= ======== Identifiable assets...... $648,868 $ 52,690 $39,725 $ (65,571) $675,712 ======== ======== ======= ========= ======== The Predecessor also operated primarily in the office furniture industry in the United States, Canada and Europe. Summarized financial data regarding the Predecessor's operations according to geographic area is as follows: TWO MONTHS ENDED UNITED FEBRUARY 29, 1996 STATES CANADA EUROPE ELIMINATIONS TOTALS ----------------- -------- -------- ------- ------------ -------- (IN THOUSANDS) Sales to customers....... $ 78,267 $ 4,415 $ 7,251 $ -- $ 89,933 Sales to related parties. 299 -- -- -- 299 Sales between geographic areas................... 1,377 6,708 227 (8,312) -- -------- -------- ------- --------- -------- Net sales................ $ 79,943 $ 11,123 $ 7,478 $ (8,312) $ 90,232 ======== ======== ======= ========= ======== Operating income (loss).. $(39,010) $ (734) $ 185 -- $(39,559) ======== ======== ======= ========= ======== YEAR ENDED UNITED DECEMBER 31, 1995 STATES CANADA EUROPE ELIMINATIONS TOTALS ----------------- -------- -------- ------- ------------ -------- (IN THOUSANDS) Sales to customers....... $517,314 $ 31,132 $62,277 $ -- $610,723 Sales to related parties. 10,169 -- -- -- 10,169 Sales between geographic areas................... 17,349 61,262 1,882 (80,493) -- -------- -------- ------- --------- -------- Net sales................ $544,832 $ 92,394 $64,159 $ (80,493) $620,892 ======== ======== ======= ========= ======== Operating income......... $ 54,043 $ 483 $ 679 -- $ 55,205 ======== ======== ======= ========= ========
For the two months ended February 29, 1996 and the year ended December 31, 1995, allocated corporate expenses from Westinghouse were prorated to the geographic segments based on sales. F-29 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Predecessor typically derived more than 10.0% of net sales from the U.S. federal government. The Predecessor's sales to the U.S. federal government totaled $9,925,000 for the two months ended February 29, 1996 and $58,090,000 for the year ended December 31, 1995. The Company's total sales to the U.S. federal government were $62,672,000 for the year ended December 31, 1997 and $51,046,000 for the ten months ended December 31, 1996. Neither the Company nor the Predecessor engaged in export sales from the U.S. to unaffiliated customers in foreign countries. Sales between geographic areas are made at a transfer price that includes an appropriate mark-up. 24. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following table sets forth summary information on a quarterly basis for the Company and the Predecessor for the respective periods presented below. See Note 2 regarding the presentation of per share amounts.
THE COMPANY ----------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 Net sales............................... $177,833 $212,582 $208,402 $212,040 Gross profit............................ 67,974 86,176 83,714 83,031 Income before extraordinary item........ 11,638 16,956 19,471 18,378 Net income.............................. 11,638 11,619 19,471 18,378 Pro forma income before extraordinary item per share of common stock: Basic................................. 0.37 0.46 Diluted............................... 0.34 0.43 Income before extraordinary item per share of common stock: Basic................................. 0.48 0.45 Diluted............................... 0.45 0.42
PREDECESSOR | THE COMPANY ----------- | ----------------------------------- TWO MONTHS | ONE MONTH ENDED | ENDED SECOND THIRD FOURTH FEBRUARY 29 | MARCH 31 QUARTER QUARTER QUARTER ----------- | --------- -------- --------- -------- (IN | THOUSANDS) | (IN THOUSANDS, EXCEPT PER SHARE DATA) | 1996 | Net sales................. $ 90,232 | $ 48,080 $166,520 $ 167,184 $179,750 Gross profit.............. 30,518 | 15,537 58,574 61,046 67,536 Income (loss) before | extraordinary item....... (24,088) | 449 7,527 7,685 6,334 Net income (loss)......... (24,088) | 449 7,527 7,685 1,175 Pro forma income before | extraordinary item per | share of common stock: | Basic................... | 0.01 0.24 0.25 0.21 Diluted................. | 0.01 0.22 0.22 0.18
Earnings per share amounts for 1996 and the first three quarters of 1997 have been restated to comply with SFAS 128. F-30 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Company recorded an extraordinary loss of $8,838,000 pre-tax ($5,337,000 after-tax) during the second quarter of 1997. This loss consisted of the write-off of unamortized deferred financing fees and the premium paid in connection with the early redemption of a portion of the Company's Senior Subordinated Notes. During the fourth quarter of 1996, the Company recorded a loss on the early extinguishment of debt amounting to $8,542,000 pre-tax ($5,159,000 after-tax). The loss consisted of the write- off of unamortized deferred financing fees in connection with the refinancing of the Company's credit agreement. 25. FINANCIAL INFORMATION FOR GUARANTORS OF THE COMPANY'S DEBT As discussed in Note 12, the Company's Senior Subordinated Notes are guaranteed by all existing and future directly or indirectly wholly owned domestic subsidiaries of the Company (the "Guarantors"). The Guarantors are Knoll Overseas, Inc., a holding company for the entities that conduct the Company's European business, and Spinneybeck Enterprises, Inc., which directly and through a Canadian subsidiary operates the Company's leather business. These Guarantors will irrevocably and unconditionally, fully, jointly and severally, guarantee the performance and payment when due, of all obligations under the Senior Subordinated Notes, limited to the largest amount that would not render such Guarantors' obligations under the guarantees subject to avoidance under any applicable federal or state fraudulent conveyance or similar law. The condensed consolidating information which follows presents: . Condensed consolidating financial information as of December 31, 1997 and 1996 and for the year ended December 31, 1997, ten months ended December 31, 1996, two months ended February 29, 1996 and year ended December 31, 1995 of (a) Knoll, Inc. (as the Issuer), (b) the Guarantors, (c) the combined non-Guarantors, (d) elimination entries and (e) the Company on a consolidated basis. . The Issuer and the Guarantors are shown with their investments in their subsidiaries accounted for on the equity method. The condensed consolidating financial information should be read in connection with the consolidated financial statements of the Company. Separate financial statements of the Guarantors are not presented because management has determined that separate financial statements are not material. The Guarantors are fully, jointly, severally and unconditionally liable under the guarantees. Certain amounts for 1996 in the condensed consolidating information have been reclassified to conform with the 1997 classifications. F-31 KNOLL, INC. BALANCE SHEET DECEMBER 31, 1997 (IN THOUSANDS)
GUARANTORS --------------------------- SPINNEYBECK ENTERPRISES, KNOLL NON- KNOLL, INC. INC. OVERSEAS, INC. GUARANTORS ELIMINATIONS TOTAL ----------- ------------ -------------- ---------- ------------ -------- ASSETS Current assets: Cash and cash equivalents.......... $ 1,052 $ 291 $ -- $ 9,447 $ -- $ 10,790 Customer receivables, net.................. 97,364 1,629 -- 23,858 -- 122,851 Accounts receivable-- related parties...... 2,380 35 2,257 41,427 (46,099) -- Inventories........... 46,665 7,443 -- 14,141 -- 68,249 Deferred income taxes................ 20,323 -- -- 972 -- 21,295 Prepaid and other current assets....... 2,258 (2) 4 1,437 -- 3,697 -------- ------- ------- -------- --------- -------- Total current assets.... 170,042 9,396 2,261 91,282 (46,099) 226,882 Property, plant and equipment, net......... 144,923 292 -- 35,235 -- 180,450 Intangible assets, net.. 267,231 -- -- 3,446 -- 270,677 Equity investments...... 95,308 567 14,947 -- (110,822) -- Other noncurrent assets................. 731 9 97 2,013 -- 2,850 -------- ------- ------- -------- --------- -------- Total assets............ $678,235 $10,264 $17,305 $131,976 $(156,921) $680,859 ======== ======= ======= ======== ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt....... $ 10,000 $ -- $ -- $ -- $ -- $ 10,000 Accounts payable-- trade................ 46,709 482 -- 19,506 -- 66,697 Accounts payable-- related parties...... 41,290 137 (10) 4,682 (46,099) -- Income taxes payable.. (2,046) 223 (69) 8,683 -- 6,791 Other current liabilities.......... 67,291 678 1,886 7,986 -- 77,841 -------- ------- ------- -------- --------- -------- Total current liabilities............ 163,244 1,520 1,807 40,857 (46,099) 161,329 Long-term debt.......... 196,250 -- -- 779 -- 197,029 Deferred income taxes... 3,149 -- -- 2,152 -- 5,301 Postretirement benefits obligation............. 16,424 -- -- -- -- 16,424 Other noncurrent liabilities............ 7,803 -- -- 4,684 -- 12,487 -------- ------- ------- -------- --------- -------- Total liabilities....... 386,870 1,520 1,807 48,472 (46,099) 392,570 Stockholders' equity: Common stock.......... 432 -- -- -- -- 432 Additional paid-in- capital.............. 213,984 3,535 12,897 60,079 (75,545) 214,950 Unearned stock grant compensation......... (993) -- -- -- -- (993) Retained earnings..... 77,942 5,209 2,601 27,467 (35,277) 77,942 Cumulative foreign currency translation adjustment........... -- -- -- (4,042) -- (4,042) -------- ------- ------- -------- --------- -------- Total stockholders' equity................. 291,365 8,744 15,498 83,504 (110,822) 288,289 -------- ------- ------- -------- --------- -------- Total liabilities and stockholders' equity... $678,235 $10,264 $17,305 $131,976 $(156,921) $680,859 ======== ======= ======= ======== ========= ========
F-32 KNOLL, INC. BALANCE SHEET DECEMBER 31, 1996 (IN THOUSANDS)
GUARANTORS --------------------------- SPINNEYBECK ENTERPRISES, KNOLL NON- KNOLL, INC. INC. OVERSEAS, INC. GUARANTORS ELIMINATIONS TOTAL ----------- ------------ -------------- ---------- ------------ -------- ASSETS Current assets: Cash and cash equivalents.......... $ 41 $ 267 $ -- $ 8,496 $ -- $ 8,804 Customer receivables, net.................. 85,959 1,398 -- 23,809 -- 111,166 Accounts receivable-- related parties...... 2,174 72 418 18,136 (20,800) -- Inventories........... 39,951 6,747 -- 11,113 -- 57,811 Deferred income taxes................ 17,079 -- -- 395 -- 17,474 Prepaid and other current assets....... 7,595 (22) (1,004) 855 -- 7,424 -------- ------ ------- -------- --------- -------- Total current assets.... 152,799 8,462 (586) 62,804 (20,800) 202,679 Property, plant, and equipment, net......... 141,357 368 -- 34,493 -- 176,218 Intangible assets, net.. 278,389 -- -- 8,551 -- 286,940 Equity investments...... 75,571 550 12,789 -- (88,910) -- Other noncurrent assets................. 9,976 13 97 2,289 (2,500) 9,875 -------- ------ ------- -------- --------- -------- Total assets............ $658,092 $9,393 $12,300 $108,137 $(112,210) $675,712 ======== ====== ======= ======== ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt....... $ 23,000 $ -- $ -- $ 265 $ -- $ 23,265 Accounts payable-- trade................ 34,076 350 -- 15,824 -- 50,250 Accounts payable-- related parties...... 17,717 -- (5,169) 8,252 (20,800) -- Income taxes payable.. 11 19 (1) 359 -- 388 Other current liabilities.......... 56,247 288 1,668 5,819 -- 64,022 -------- ------ ------- -------- --------- -------- Total current liabilities............ 131,051 657 (3,502) 30,519 (20,800) 137,925 Long-term debt.......... 330,000 2,500 -- 889 (2,500) 330,889 Deferred income taxes... -- -- -- 1,931 -- 1,931 Postretirement benefits obligation............. 15,873 -- -- -- -- 15,873 Other noncurrent liabilities............ 6,391 -- -- 4,899 -- 11,290 -------- ------ ------- -------- --------- -------- Total liabilities....... 483,315 3,157 (3,502) 38,238 (23,300) 497,908 Stockholders' equity: Preferred stock....... 1,603 -- -- -- -- 1,603 Common stock.......... 73 -- -- -- -- 73 Additional paid-in- capital.............. 157,652 4,033 14,034 60,173 (75,745) 160,147 Unearned stock grant compensation......... (1,387) -- -- -- -- (1,387) Retained earnings..... 16,836 2,203 1,768 9,194 (13,165) 16,836 Cumulative foreign currency translation adjustment........... -- -- -- 532 -- 532 -------- ------ ------- -------- --------- -------- Total stockholders' equity................. 174,777 6,236 15,802 69,899 (88,910) 177,804 -------- ------ ------- -------- --------- -------- Total liabilities and stockholders' equity... $658,092 $9,393 $12,300 $108,137 $(112,210) $675,712 ======== ====== ======= ======== ========= ========
F-33 KNOLL, INC. STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
GUARANTORS --------------------------- SPINNEYBECK KNOLL, ENTERPRISES, KNOLL NON- INC. INC. OVERSEAS, INC. GUARANTORS ELIMINATIONS TOTAL -------- ------------ -------------- ---------- ------------ -------- Sales to customers...... $698,392 $18,934 $ -- $ 93,531 $ -- $810,857 Sales to related parties................ 22,545 3,507 1,192 103,412 (130,656) -- -------- ------- ------ -------- --------- -------- Total sales............. 720,937 22,441 1,192 196,943 (130,656) 810,857 Cost of sales to customers.............. 450,099 7,707 703 67,902 (36,449) 489,962 Cost of sales to related parties................ 14,530 3,507 -- 76,170 (94,207) -- -------- ------- ------ -------- --------- -------- Gross profit............ 256,308 11,227 489 52,871 -- 320,895 Selling, general, and administrative expenses............... 151,907 6,287 1,828 22,996 -- 183,018 -------- ------- ------ -------- --------- -------- Operating income (loss)................. 104,401 4,940 (1,339) 29,875 -- 137,877 Interest expense........ 24,960 -- -- 115 -- 25,075 Other income (expense), net.................... (190) -- (1) 1,858 -- 1,667 Income from equity investments............ 19,837 117 2,158 -- (22,112) -- -------- ------- ------ -------- --------- -------- Income before income taxes and extraordinary item................... 99,088 5,057 818 31,618 (22,112) 114,469 Income tax expense (benefit).............. 32,645 2,051 (15) 13,345 -- 48,026 -------- ------- ------ -------- --------- -------- Income before extraordinary item..... 66,443 3,006 833 18,273 (22,112) 66,443 Extraordinary loss on early extinguishment of debt, net of taxes..... 5,337 -- -- -- -- 5,337 -------- ------- ------ -------- --------- -------- Net income.............. $ 61,106 $ 3,006 $ 833 $ 18,273 $ (22,112) $ 61,106 ======== ======= ====== ======== ========= ========
F-34 KNOLL, INC. STATEMENT OF OPERATIONS TEN MONTHS ENDED DECEMBER 31, 1996 (IN THOUSANDS)
GUARANTORS --------------------------- SPINNEYBECK ENTERPRISES, KNOLL NON- KNOLL, INC. INC. OVERSEAS, INC. GUARANTORS ELIMINATIONS TOTAL ----------- ------------ -------------- ---------- ------------ -------- Sales to customers...... $480,857 $12,796 $ -- $ 67,881 $ -- $561,534 Sales to related parties................ 13,227 2,210 -- 62,580 (78,017) -- -------- ------- ------- -------- -------- -------- Total sales............. 494,084 15,006 -- 130,461 (78,017) 561,534 Cost of sales to customers.............. 323,607 6,109 521 50,293 (21,689) 358,841 Cost of sales to related parties................ 8,902 1,054 -- 46,372 (56,328) -- -------- ------- ------- -------- -------- -------- Gross profit (loss) .... 161,575 7,843 (521) 33,796 -- 202,693 Selling, general, and administrative expenses............... 108,713 4,342 1,461 16,833 -- 131,349 -------- ------- ------- -------- -------- -------- Operating income (loss)................. 52,862 3,501 (1,982) 16,963 -- 71,344 Interest expense........ 32,706 -- -- 246 -- 32,952 Other income (expense), net.................... 757 (4) 953 (1,259) -- 447 Income from equity investments............ 10,319 77 2,769 -- (13,165) -- -------- ------- ------- -------- -------- -------- Income before income taxes and extraordinary item................... 31,232 3,574 1,740 15,458 (13,165) 38,839 Income tax expense (benefit).............. 9,237 1,371 (28) 6,264 -- 16,844 -------- ------- ------- -------- -------- -------- Income before extraordinary item..... 21,995 2,203 1,768 9,194 (13,165) 21,995 Extraordinary loss on early extinguishment of debt, net of taxes..... 5,159 -- -- -- -- 5,159 -------- ------- ------- -------- -------- -------- Net income.............. $ 16,836 $ 2,203 $ 1,768 $ 9,194 $(13,165) $ 16,836 ======== ======= ======= ======== ======== ========
F-35 KNOLL, INC. STATEMENT OF OPERATIONS TWO MONTHS ENDED FEBRUARY 29, 1996 (IN THOUSANDS)
GUARANTORS --------------------------- SPINNEYBECK ENTERPRISES, KNOLL NON- KNOLL, INC. INC. OVERSEAS, INC. GUARANTORS ELIMINATIONS TOTAL ----------- ------------ -------------- ---------- ------------ -------- Sales to customers...... $ 76,172 $2,095 $ -- $11,666 $ -- $ 89,933 Sales to related parties................ 1,617 330 -- 6,935 (8,583) 299 -------- ------ ----- ------- ------- -------- Total sales............. 77,789 2,425 -- 18,601 (8,583) 90,232 Cost of sales to customers.............. 50,380 931 111 9,041 (949) 59,514 Cost of sales to related parties................ 1,083 149 -- 6,602 (7,634) 200 -------- ------ ----- ------- ------- -------- Gross profit (loss)..... 26,326 1,345 (111) 2,958 -- 30,518 Selling, general, and administrative expenses............... 16,800 725 224 3,507 -- 21,256 Westinghouse long-term incentive compensation. 47,900 -- -- -- -- 47,900 Allocated corporate expenses............... 921 -- -- -- -- 921 -------- ------ ----- ------- ------- -------- Operating income (loss)................. (39,295) 620 (335) (549) -- (39,559) Interest expense........ -- -- -- 340 -- 340 Other income (expense), net.................... (265) -- 170 (201) -- (296) Income (loss) from equity investments..... (218) 23 (493) -- 688 -- -------- ------ ----- ------- ------- -------- Income (loss) before income taxes........... (39,778) 643 (658) (1,090) 688 (40,195) Income tax expense (ben- efit).................. (16,338) 259 (56) 28 -- (16,107) -------- ------ ----- ------- ------- -------- Net income (loss)....... $(23,440) $ 384 $(602) $(1,118) $ 688 $(24,088) ======== ====== ===== ======= ======= ========
F-36 KNOLL, INC. STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1995 (IN THOUSANDS)
GUARANTORS --------------------------- SPINNEYBECK ENTERPRISES, KNOLL NON- KNOLL, INC. INC. OVERSEAS, INC. GUARANTORS ELIMINATIONS TOTAL ----------- ------------ -------------- ---------- ------------ -------- Sales to customers...... $500,892 $14,090 $ -- $ 93,409 $ 2,332 $610,723 Sales to related parties................ 12,411 2,332 -- 60,309 (64,883) 10,169 -------- ------- ------- -------- -------- -------- Total sales............. 513,303 16,422 -- 153,718 (62,551) 620,892 Cost of sales to customers.............. 342,202 5,501 831 84,544 (22,463) 410,615 Cost of sales to related parties................ 8,564 2,472 373 35,696 (40,088) 7,017 -------- ------- ------- -------- -------- -------- Gross profit (loss)..... 162,537 8,449 (1,204) 33,478 -- 203,260 Selling, general, and administrative expenses............... 104,388 4,894 1,749 27,496 -- 138,527 Allocated corporate expenses............... 9,528 -- -- -- -- 9,528 -------- ------- ------- -------- -------- -------- Operating income (loss)................. 48,621 3,555 (2,953) 5,982 -- 55,205 Interest expense........ 282 -- -- 1,148 -- 1,430 Other income (expense), net.................... (2,101) -- 68 436 -- (1,597) Income (loss) from equity investments..... 211 -- (166) -- (45) -- -------- ------- ------- -------- -------- -------- Income (loss) before income taxes........... 46,449 3,555 (3,051) 5,270 (45) 52,178 Income tax expense (ben- efit).................. 22,553 1,476 (1,183) -- -- 22,846 -------- ------- ------- -------- -------- -------- Net income (loss)....... $ 23,896 $ 2,079 $(1,868) $ 5,270 $ (45) $ 29,332 ======== ======= ======= ======== ======== ========
F-37 KNOLL, INC. STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
GUARANTORS -------------------------------- SPINNEYBECK KNOLL NON- KNOLL, INC. ENTERPRISES, INC. OVERSEAS, INC. GUARANTORS ELIMINATIONS TOTAL ----------- ----------------- -------------- ---------- ------------ -------- CASH PROVIDED BY OPERATING ACTIVITIES... $124,109 $ 2,546 $ -- $ 8,607 $ -- $135,262 CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures.... (26,740) (22) -- (6,347) 29 (33,080) Proceeds from sale of assets................. 108 -- -- 85 (29) 164 Payments received on intercompany loans..... 2,500 -- -- -- (2,500) -- -------- ------- ----- ------- ------- -------- Cash used in investing activities............. (24,132) (22) -- (6,262) (2,500) (32,916) CASH FLOWS FROM FINANCING ACTIVITIES Repayment of revolving credit facility, net... (79,000) -- -- -- -- (79,000) Repayment of long-term debt................... (67,750) -- -- (238) -- (67,988) Repayment of intercompany loans..... -- (2,500) -- -- 2,500 -- Premium paid for early extinguishment of debt................... (5,775) -- -- -- -- (5,775) Proceeds from issuance of stock, net of stock issuance costs......... 133,559 -- -- -- -- 133,559 Redemption of preferred stock.................. (80,000) -- -- -- -- (80,000) -------- ------- ----- ------- ------- -------- Cash used in financing activities............. (98,966) (2,500) -- (238) 2,500 (99,204) Effect of exchange rate changes on cash and cash equivalents....... -- -- -- (1,156) -- (1,156) -------- ------- ----- ------- ------- -------- Increase in cash and cash equivalents....... 1,011 24 -- 951 -- 1,986 Cash and cash equivalents at beginning of year...... 41 267 -- 8,496 -- 8,804 -------- ------- ----- ------- ------- -------- Cash and cash equivalents at end of year................... $ 1,052 $ 291 $ -- $ 9,447 $ -- $ 10,790 ======== ======= ===== ======= ======= ========
F-38 KNOLL, INC. STATEMENT OF CASH FLOWS TEN MONTHS ENDED DECEMBER 31, 1996 (IN THOUSANDS)
GUARANTORS --------------------------- SPINNEYBECK ENTERPRISES, KNOLL NON- KNOLL, INC. INC. OVERSEAS, INC. GUARANTORS ELIMINATIONS TOTAL ----------- ------------ -------------- ---------- ------------ --------- CASH PROVIDED BY OPERATING ACTIVITIES... $ 78,889 $ 399 $ -- $10,214 $ -- $ 89,502 CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of the company from Westinghouse........... (579,801) -- -- -- -- (579,801) Capital expenditures.... (12,531) (134) -- (2,590) -- (15,255) Proceeds from sale of assets................. 43 -- -- 175 -- 218 --------- ----- ----- ------- ----- --------- Cash used in investing activities............. (592,289) (134) -- (2,415) -- (594,838) CASH FLOWS FROM FINANCING ACTIVITIES Repayment of short-term debt, net.............. -- -- -- (1,483) -- (1,483) Proceeds from revolving credit facility, net... 88,000 -- -- -- -- 88,000 Repayment of long-term debt, net.............. 265,000 -- -- (130) -- 264,870 Issuance of stock....... 160,400 -- -- -- -- 160,400 Net receipts from (payments to) parent company................ (120) -- -- 120 -- -- --------- ----- ----- ------- ----- --------- Cash provided by (used in) financing activities............. 513,280 -- -- (1,493) -- 511,787 Effect of exchange rate changes on cash and cash equivalents....... -- -- -- 18 -- 18 --------- ----- ----- ------- ----- --------- Increase (decrease) in cash and cash equivalents............ (120) 265 -- 6,324 -- 6,469 Cash and cash equivalents at beginning of period.... 161 2 -- 2,172 -- 2,335 --------- ----- ----- ------- ----- --------- Cash and cash equivalents at end of period................. $ 41 $ 267 $ -- $ 8,496 $ -- $ 8,804 ========= ===== ===== ======= ===== =========
F-39 KNOLL, INC. STATEMENT OF CASH FLOWS TWO MONTHS ENDED FEBRUARY 29, 1996 (IN THOUSANDS)
GUARANTORS -------------------------------- SPINNEYBECK KNOLL NON- KNOLL, INC. ENTERPRISES, INC. OVERSEAS, INC. GUARANTORS ELIMINATIONS TOTAL ----------- ----------------- -------------- ---------- ------------ -------- CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES............. $(53,215) $ 1,267 $ 651 $ 17,139 $(19,881) $(54,039) CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures.... (2,022) (28) -- (246) -- (2,296) -------- ------- ----- -------- -------- -------- Cash used in investing activities............. (2,022) (28) -- (246) -- (2,296) CASH FLOWS FROM FINANCING ACTIVITIES Repayment of short-term debt, net.............. (2,055) -- -- (1,750) -- (3,805) Net receipts from (payments to) parent company................ 57,635 (1,419) (651) (14,598) 19,881 60,848 -------- ------- ----- -------- -------- -------- Cash provided by (used in) financing activities............. 55,580 (1,419) (651) (16,348) 19,881 57,043 Effect of exchange rate changes on cash and cash equivalents....... -- -- -- 58 -- 58 -------- ------- ----- -------- -------- -------- Increase (decrease) in cash and cash equivalents............ 343 (180) -- 603 -- 766 Cash and cash equivalents at beginning of period.... (182) 182 -- 1,569 -- 1,569 -------- ------- ----- -------- -------- -------- Cash and cash equivalents at end of period.......... $ 161 $ 2 $ -- $ 2,172 $ -- $ 2,335 ======== ======= ===== ======== ======== ========
F-40 KNOLL, INC. STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 1995 (IN THOUSANDS)
GUARANTORS -------------------------------- SPINNEYBECK KNOLL NON- KNOLL, INC. ENTERPRISES, INC. OVERSEAS, INC. GUARANTORS ELIMINATIONS TOTAL ----------- ----------------- -------------- ---------- ------------ -------- CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES............. $ 50,270 $ 6,203 $(4,017) $(9,992) $ 9,400 $ 51,864 CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures.... (14,871) -- -- (4,463) -- (19,334) Proceeds from sale of assets................. 42 -- -- 274 -- 316 Net payments to equity investments............ (186) -- -- -- 186 -- -------- ------- ------- ------- ------- -------- Cash used in investing activities............. (15,015) -- -- (4,189) 186 (19,018) CASH FLOWS FROM FINANCING ACTIVITIES Repayment of short-term debt, net.............. -- -- -- (20,961) -- (20,961) Repayment of long-term debt................... (6,646) -- -- (2,267) -- (8,913) Net receipts from (payments to) parent company................ (28,791) (6,021) 4,017 33,481 (9,586) (6,900) -------- ------- ------- ------- ------- -------- Cash provided by (used in) financing activities............. (35,437) (6,021) 4,017 10,253 (9,586) (36,774) Effect of exchange rate changes on cash and cash equivalents............ -- -- -- 13 -- 13 -------- ------- ------- ------- ------- -------- Increase (decrease) in cash and cash equivalents....... (182) 182 -- (3,915) -- (3,915) Cash and cash equivalents at beginning of year...... -- -- -- 5,484 -- 5,484 -------- ------- ------- ------- ------- -------- Cash and cash equivalents at end of year................ $ (182) $ 182 $ -- $ 1,569 $ -- $ 1,569 ======== ======= ======= ======= ======= ========
F-41 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - ---------------------------- ---------- ---------- ------------- ------------- ADDITIONS BALANCE AT CHARGED TO BEGINNING COSTS AND BALANCE AT DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS(1) END OF PERIOD - ---------------------------- ---------- ---------- ------------- ------------- (IN THOUSANDS) VALUATION ACCOUNTS DEDUCTED IN THE CONSOLIDATED BALANCE SHEET FROM THE ASSETS TO WHICH THEY APPLY: YEAR ENDED DECEMBER 31, 1997: Allowance for doubtful accounts................. $5,713 $1,943 $2,195 $5,461 TEN MONTHS ENDED DECEMBER 31, 1996: Allowance for doubtful accounts................. 5,838 2,098 2,223 5,713 TWO MONTHS ENDED FEBRUARY 29, 1996: Allowance for doubtful accounts................. 5,790 159 210 5,739 YEAR ENDED DECEMBER 31, 1995: Allowance for doubtful accounts................. 4,700 2,720 1,630 5,790
- -------- (1) Uncollectible accounts written off and foreign currency translation. S-1 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is hereby incorporated by reference to the section entitled "Directors and Executive Officers of the Company" and the subsection "Section 16(a) Beneficial Ownership Reporting Compliance" under the section entitled "Board of Directors; Board Committees" in the Company's Proxy Statement for its Annual Shareholders' Meeting to be held on May 19, 1998 (the "Proxy Statement"). The Proxy Statement shall be filed with the Securities and Exchange Commission within 120 days of the end of the Company's latest fiscal year. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is hereby incorporated by reference to the section entitled "Executive Officer and Director Compensation" and the subsection "Performance Graph" under the section entitled "Board of Directors; Board Committees" in the Company's Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is hereby incorporated by reference to the section entitled "Security Ownership of Certain Beneficial Owners, Management and Directors" in the Company's Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is hereby incorporated by reference to the section entitled "Certain Transactions" in the Company's Proxy Statement. 19 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)Documents filed as part of the report: (1) CONSOLIDATED FINANCIAL STATEMENTS The Consolidated Financial Statements of the Company are listed in the Table of Contents for the Financial Statements beginning on page F-1 of this Form 10-K. (2) FINANCIAL STATEMENT SCHEDULES Financial Statement Schedule II-Valuation and Qualifying Accounts is filed with this Form 10-K on page S-1 of this Form 10-K. All other schedules for which provision is made in the applicable regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. (3) EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------- ----------- 3.1*** Amended and Restated Certificate of Incorporation of the Company. 3.2*** Amended and Restated By-Laws of the Company. 10.1* Stock Purchase Agreement, dated as of December 20, 1995, by and between Westinghouse and TKG. 10.2* Knoll, Inc. 1996 Stock Incentive Plan (formerly called the TKG Stock Incentive Plan). 10.3* Indenture, dated as of February 29, 1996, by and among the Company, T.K.G. Acquisition Corp., T.K.G. Acquisition Sub, Inc., The Knoll Group, Inc., Knoll North America, Inc., Spinneybeck Enterprises, Inc. and Knoll Overseas, Inc., as guarantors, and IBJ Schroder Bank & Trust Company, as trustee, relating to $165,000,000 principal amount of 10.875% Senior Subordinated Notes due 2006, including form of Initial Global Note. 10.4* Supplemental Indenture, dated as of February 29, 1996, by and among the Company, as successor to T.K.G. Acquisition Sub, Inc., the Guarantors (as defined therein), and IBJ Schroder Bank & Trust Company, as trustee, relating to $165,000,000 principal amount of 10.875% Senior Subordinated Notes due 2006, including form of Initial Global Note. 10.5** Supplemental Indenture No. 2, dated as of March 14, 1997, by and among the Company, the Guarantors (as defined therein), and IBJ Schroder Bank & Trust Company, as trustee, relating to $165,000,000 principal amount of 10.875% Senior Subordinated Notes due 2006, including form of Initial Global Note. 10.6**** Credit Agreement, dated as of August 8, 1997, by and among the Company, NationsBank, N.A., as Administrative Agent, The Chase Manhattan Bank, as Documentation Agent and other lending institutions. 10.7** Employment Agreement, dated as of February 29, 1996, between T.K.G. Acquisition Corp. and Burton B. Staniar. 10.8** Employment Agreement, dated as of February 29, 1996, between T.K.G. Acquisition Corp. and John H. Lynch. 10.9** Employment Agreement, dated as of February 29, 1996, between T.K.G. Acquisition Corp. and Andrew B. Cogan.
20
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.10*** Amendment to Employment Agreement, dated as of April 30, 1997, between the Company and Andrew B. Cogan. 10.11** Stockholders Agreement (Common Stock and Preferred Stock), dated as of February 29, 1996, among T.K.G. Acquisition Corp., Warburg, Pincus Ventures, L.P., and the signatories thereto. 10.12** Form of Stockholders Agreement (Restricted Shares), dated as of February 29, 1996, among T.K.G. Acquisition Corp., Warburg, Pincus Ventures, L.P., and the signatories thereto. 10.13 Amended and Restated Knoll, Inc. 1997 Stock Incentive Plan (subject to stockholder approval). 10.14** Consulting Agreement, dated as of December 1, 1996, between Wolfgang Billstein and Knoll, Inc. 10.15 Amendment No. 1 to December 1, 1996 Consulting Agreement between Wolfgang Billstein and Knoll, Inc. 10.16*** Form of Agreement, dated as of April 15, 1997, by and among the Company, Warburg, Pincus Ventures, L.P., NationsBanc Investment Corp. and the Investors (as defined therein). 21** Subsidiaries of the Registrant. 23.1 Consent of Independent Auditors for Ernst & Young LLP. 23.2 Consent of Independent Accountants for Price Waterhouse LLP. 27.1 Financial Data Schedule for the Year Ended December 31, 1997. 27.2 Restated Financial Data Schedule for the Three Months Ended March 31, 1997, the Six Months Ended June 30, 1997 and the Nine Months Ended September 30, 1997. 27.3 Restated Financial Data Schedule for the One Month Ended March 31, 1996, the Four Months Ended June 30, 1996, the Seven Months Ended September 30, 1996 and the Ten Months Ended December 31, 1996.
(b)Current Reports on Form 8-K: The Company did not file any reports on Form 8-K during the three months ended December 31, 1997. - -------- * Incorporated by reference to the Company's Registration Statement on Form S-4 (File No. 333-2972), which was declared effective by the Commission on June 12, 1996. ** Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. *** Incorporated by reference to the Company's Registration Statement on Form S-1 (File No. 333-23399), which was declared effective by the Commission on May 9, 1997. **** Incorporated by reference to the Company's Registration Statement on Form S-1 (File No. 333-36407), which was filed on September 25, 1997 and subsequently withdrawn. 21 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, on this 30th day of March 1998. KNOLL, INC. /s/ Burton B. Staniar By: _________________________________ BURTON B. STANIAR Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report on Form 10-K has been signed by the following persons on behalf of the Registrant and in the capacities and on the date indicated. /s/ Burton B. Staniar Chairman of the Board March 30, 1998 - ----------------------------- BURTON B. STANIAR /s/ John H. Lynch President, Chief March 30, 1998 - ----------------------------- Executive Officer and JOHN H. LYNCH Director (Principal Executive Officer) /s/ Douglas J. Purdom Chief Financial Officer March 30, 1998 - ----------------------------- (Principal Financial DOUGLAS J. PURDOM Officer) /s/ Barry L. McCabe Controller March 30, 1998 - ----------------------------- (Principal Accounting Officer) BARRY L. MCCABE /s/ John W. Amerman Director March 30, 1998 - ----------------------------- JOHN W. AMERMAN /s/ Andrew B. Cogan Director March 30, 1998 - ----------------------------- ANDREW B. COGAN /s/ Robert J. Dolan Director March 30, 1998 - ----------------------------- ROBERT J. DOLAN /s/ Jeffrey A. Harris Director March 30, 1998 - ----------------------------- JEFFREY A. HARRIS /s/ Sidney Lapidus Director March 30, 1998 - ----------------------------- SIDNEY LAPIDUS /s/ Kewsong Lee Director March 30, 1998 - ----------------------------- KEWSONG LEE /s/ John L. Vogelstein Director March 30, 1998 - ----------------------------- JOHN L. VOGELSTEIN 22 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION PAGE ------- ----------- ---- 3.1*** Amended and Restated Certificate of Incorporation of the Company. 3.2*** Amended and Restated By-Laws of the Company. 10.1* Stock Purchase Agreement, dated as of December 20, 1995, by and between Westinghouse and TKG. 10.2* Knoll, Inc. 1996 Stock Incentive Plan (formerly called the TKG Stock Incentive Plan). 10.3* Indenture, dated as of February 29, 1996, by and among the Company, T.K.G. Acquisition Corp., T.K.G. Acquisition Sub, Inc., The Knoll Group, Inc., Knoll North America, Inc., Spinneybeck Enterprises, Inc. and Knoll Overseas, Inc., as guarantors, and IBJ Schroder Bank & Trust Company, as trustee, relating to $165,000,000 principal amount of 10.875% Senior Subordinated Notes due 2006, including form of Initial Global Note. 10.4* Supplemental Indenture, dated as of February 29, 1996, by and among the Company, as successor to T.K.G. Acquisition Sub, Inc., the Guarantors (as defined therein), and IBJ Schroder Bank & Trust Company, as trustee, relating to $165,000,000 principal amount of 10.875% Senior Subordinated Notes due 2006, including form of Initial Global Note. 10.5** Supplemental Indenture No. 2, dated as of March 14, 1997, by and among the Company, the Guarantors (as defined therein), and IBJ Schroder Bank & Trust Company, as trustee, relating to $165,000,000 principal amount of 10.875% Senior Subordinated Notes due 2006, including form of Initial Global Note. 10.6**** Credit Agreement, dated as of August 8, 1997, by and among the Company, NationsBank, N.A., as Administrative Agent, The Chase Manhattan Bank, as Documentation Agent and other lending institutions. 10.7** Employment Agreement, dated as of February 29, 1996, between T.K.G. Acquisition Corp. and Burton B. Staniar. 10.8** Employment Agreement, dated as of February 29, 1996, between T.K.G. Acquisition Corp. and John H. Lynch. 10.9** Employment Agreement, dated as of February 29, 1996, between T.K.G. Acquisition Corp. and Andrew B. Cogan. 10.10*** Amendment to Employment Agreement, dated as of April 30, 1997, between the Company and Andrew B. Cogan. 10.11** Stockholders Agreement (Common Stock and Preferred Stock), dated as of February 29, 1996, among T.K.G. Acquisition Corp., Warburg, Pincus Ventures, L.P., and the signatories thereto. 10.12** Form of Stockholders Agreement (Restricted Shares), dated as of February 29, 1996, among T.K.G. Acquisition Corp., Warburg, Pincus Ventures, L.P., and the signatories thereto. 10.13 Amended and Restated Knoll, Inc. 1997 Stock Incentive Plan (subject to stockholder approval). 10.14** Consulting Agreement, dated as of December 1, 1996, between Wolfgang Billstein and Knoll, Inc. 10.15 Amendment No. 1 to December 1, 1996 Consulting Agreement between Wolfgang Billstein and Knoll, Inc. 10.16*** Form of Agreement, dated as of April 15, 1997, by and among the Company, Warburg, Pincus Ventures, L.P., NationsBanc Investment Corp. and the Investors (as defined therein). 21** Subsidiaries of the Registrant.
EXHIBIT NUMBER DESCRIPTION PAGE ------- ----------- ---- 23.1 Consent of Independent Auditors for Ernst & Young LLP. 23.2 Consent of Independent Accountants for Price Waterhouse LLP. 27.1 Financial Data Schedule for the Year Ended December 31, 1997. 27.2 Restated Financial Data Schedule for the Three Months Ended March 31, 1997, the Six Months Ended June 30, 1997 and the Nine Months Ended September 30, 1997. 27.3 Restated Financial Data Schedule for the One Month Ended March 31, 1996, the Four Months Ended June 30, 1996, the Seven Months Ended September 30, 1996 and the Ten Months Ended December 31, 1996.
- -------- * Incorporated by reference to the Company's Registration Statement on Form S-4 (File No. 333-2972), which was declared effective by the Commission on June 12, 1996. ** Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. *** Incorporated by reference to the Company's Registration Statement on Form S-1 (File No. 333-23399), which was declared effective by the Commission on May 9, 1997. **** Incorporated by reference to the Company's Registration Statement on Form S-1 (File No. 333-36407), which was filed on September 25, 1997 and subsequently withdrawn. EX-10.13 2 AMENDED AND RESTATED 1997 STOCK INCENTIVE PLAN EXHIBIT 10.13 KNOLL, INC. 1997 STOCK INCENTIVE PLAN (AMENDED AND RESTATED AS OF OCTOBER 22, 1997) ARTICLE I PURPOSE ------- The Knoll, Inc. 1997 Stock Incentive Plan (Amended and Restated as of October 22, 1997) (the "Plan") is intended as an incentive to encourage stock ownership by officers, certain other key employees, directors and consultants of Knoll, Inc. (the "Company") in order to increase their proprietary interest in the Company's success and to encourage them to remain in the employ of the Company. The term "Company," when used in the Plan or a related Restricted Share agreement or option agreement with reference to eligibility and employment, shall include the Company and its subsidiaries. The word "subsidiary," when used in the Plan, shall mean any subsidiary of the Company within the meaning of Section 424(f) of the Internal Revenue Code of 1986, as amended (the "Code"). It is intended that certain options granted under this Plan will qualify as "incentive stock options" under Section 422 of the Code. ARTICLE II ADMINISTRATION -------------- The Plan shall be administered by a Committee (the "Committee") appointed by the Board of Directors of the Company (the "Board") and shall consist of not less than two members, each of whom shall be a "Non-Employee Director" within the meaning of the rules promulgated under Section 16(b) and an "outside director" within the meaning of Section 162(m) of the Code. Subject to the provisions of the Plan, the Committee shall have sole authority, in its absolute discretion: (a) to determine which individuals shall be granted shares of restricted stock ("Restricted Shares") and which shall be granted options; (b) to make grants of Restricted Shares, incentive stock options and nonqualified options to acquire Common Stock; (c) to determine the times when Restricted Shares and options shall be granted and the number of shares to be granted or optioned; (d) to determine the option price of the shares subject to each option; (e) to determine the nature of any rights and restrictions to be imposed on Restricted Shares granted under the Plan; (f) to determine the time or times when each option becomes exercisable, the duration of the exercise period and any other restrictions on the exercise of options issued hereunder; (g) to determine the time or times at which options shall be repriced and the terms and conditions of such repriced options; (h) to prescribe the form or forms of agreements for Restricted Shares granted under the Plan and the form or forms of the option agreements for options granted under the Plan (which forms shall be consistent with the terms of the Plan but need not be identical); (i) to adopt, amend and rescind such rules and regulations as, in its opinion, may be advisable in the administration of the Plan; and (j) to construe and interpret the Plan, the rules and regulations, the Restricted Share agreements and the option agreements under the Plan and to make all other determinations deemed necessary or advisable for the administration of the Plan. All decisions, determinations and interpretations of the Committee shall be final and binding on all grantees and optionees. ARTICLE III STOCK ----- The stock to be granted or optioned under the Plan shall be shares of authorized but unissued Common Stock of the Company, par value $.01 per share, or previously issued shares of Common Stock reacquired by the Company (the "Stock"). Under the Plan, the total number of shares of Stock which may be granted or purchased pursuant to options granted hereunder shall not exceed, in the aggregate, 2,255,772 shares, except as such number of shares shall be adjusted in accordance with the provisions of ARTICLE XII hereof. The number of shares of Stock available for issuance or grant of options under the Plan shall be decreased by the sum of (i) the number of Restricted Shares which are granted and then outstanding, (ii) the number of shares with respect to which options have been issued and are then outstanding and (iii) the number of shares issued upon exercise of options. In the event that any Restricted Shares are forfeited or that any outstanding option under the Plan for any reason expires, is terminated or is canceled without exercise prior to the end of the period during which options may be granted, the Restricted Shares so forfeited and the shares of Stock called for by the unexercised portion of such option shall again be available for grant or issuance under the Plan. ARTICLE IV ELIGIBILITY OF PARTICIPANTS --------------------------- Subject to ARTICLE IX in the case of incentive stock options, officers and other key employees of the Company shall be eligible to receive Restricted Shares and options under the Plan. In addition, Restricted Shares and options which are not incentive stock options may be granted to directors, consultants (including 2 employees of consultants) or other key persons who the Committee determines shall receive options under the Plan. Notwithstanding anything to the contrary herein, the maximum number of shares of Stock with respect to which options may be granted to any individual in any one year shall not exceed the maximum number of shares of Stock available for issue hereunder, as such number may change from time to time. ARTICLE V FAIR MARKET VALUE ----------------- "Fair Market Value Per Share" means, as of any date when the Stock is quoted on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") National Market System ("NMS") or listed on one or more national securities exchanges, the closing price reported on NASDAQ-NMS or the principal national securities exchange on which such Stock is listed and traded on the date of determination. If the Stock is not quoted on NASDAQ-NMS or listed on an exchange, or representative quotes are not otherwise available, the Fair Market Value Per Share shall mean the amount determined by the Board in good faith to be the fair market value per share of Stock. ARTICLE VI TERMS AND CONDITIONS OF RESTRICTED SHARES ----------------------------------------- Restricted Shares will become unrestricted and vest only in accordance with a vesting period set by the Committee with respect to each grant of Restricted Shares (the "Restriction Period"). The Committee may provide in the Restricted Share Agreement for acceleration of the Restriction Period and accelerated vesting upon termination of the grantee's employment by reason of death or disability, or by the Company without Cause, or upon any other event for which the Committee determines, in its discretion, that such acceleration is appropriate. With respect to each grant of Restricted Shares, "Cause" shall have the meaning given such term in a grantee's Restricted Share Agreement. During the Restriction Period, Restricted Shares shall constitute issued and outstanding shares of Stock for all corporate purposes but unless and until such Restricted Shares shall have become vested (i.e., the date at which such shares shall not be subject to forfeiture) (a) the Company shall retain custody of the stock certificate or certificates representing such shares, (b) the Company will retain custody of all dividends and distributions ("Retained Distributions") made or declared 3 thereon (and such Retained Distributions shall be subject to the same restrictions, terms and vesting and other conditions as are applicable to the Restricted Shares) until such time, if ever, as the Restricted Shares with respect to which such Retained Distributions shall have been made, paid or declared shall have become vested, and such Retained Distributions shall not bear interest or be segregated in a separate account; provided, however, that in the event such retained dividends or distributions are taxable to the grantee in the year of payment, notwithstanding their failure to have become vested by the date of payment, the Company shall arrange for the release to the grantee of such part of the retained dividends or distributions as are sufficient to cover the taxes payable by the grantee with respect thereto; (c) the grantee of such Restricted Shares shall not be entitled to vote such shares, and (d) except as otherwise permitted by the Stockholders Agreement, the grantee of such Restricted Shares may not, whether voluntarily or involuntarily, sell, assign, transfer, pledge, exchange, encumber or dispose of the Restricted Shares or any Retained Distributions thereon or his interest in any of them (it being understood that, except to the extent so permitted, any sale, assignment, transfer, pledge, exchange, or disposition (i) before the shares shall have become vested shall be null and void and of no effect and (ii) after the shares shall have become vested shall only be as permitted under the terms of the Stockholders Agreement). Any Restricted Shares which have not vested as of, or by reason of, a grantee's termination of employment shall be immediately forfeited to the Company and the grantee and any permitted transferee shall have no further rights in respect of such forfeited shares. With respect to Restricted Shares which have become vested pursuant to the provisions of the Restricted Share Agreement, the Company shall promptly deliver the Stock certificate or certificates representing such shares to the grantee, registered in the name of the grantee. The Company may endorse such legends on such certificates as may be required by law or under the terms of this Agreement, the Restricted Share Agreement or the Stockholders Agreement. ARTICLE VII OPTION EXERCISE PRICE --------------------- The option price per share of Stock for each option shall be set by the Committee at the time of grant, subject to the ability of the Committee to reprice options pursuant to ARTICLE VIII; provided, however, that the option price per share of Stock for incentive stock options, subject to ARTICLE IX, shall not be less than the Fair Market Value Per Share at the time the option was granted. 4 ARTICLE VIII EXERCISE AND TERMS OF OPTIONS ----------------------------- The Committee shall determine the dates after which options may be exercised, in whole or in part. If an option is exercisable in installments, installments or portions thereof which are exercisable and not exercised shall remain exercisable. Any other provision of the Plan to the contrary notwithstanding, but subject to ARTICLE IX in the case of incentive stock options, no option shall be exercised after the date ten years from the date of grant of such option (the "Termination Date"). Options shall become exercisable only in accordance with the exercise schedule set forth in the option agreement entered into with respect to each grant of options (the "Option Agreement"). The Committee may provide in the Option Agreement for acceleration of exercisability upon termination of the optionee's employment by reason of death, disability, or by the Company without Cause, or upon any other event for which the Committee determines, in its discretion, that such acceleration is appropriate. With respect to each grant of options, "Cause" shall have the meaning given such term in the optionee's Option Agreement. Notwithstanding the foregoing provisions of this ARTICLE VIII or the terms of any option agreement, the Committee may in its sole discretion (i) accelerate the exercisability of any option granted hereunder and (ii) reprice any option to a lower exercise price. Any such acceleration shall not affect the terms and conditions of any such option other than with respect to exercisability. ARTICLE IX SPECIAL PROVISIONS APPLICABLE TO INCENTIVE STOCK OPTIONS ONLY ------------------------------- To the extent the aggregate Fair Market Value Per Share (determined as of the time the option is granted in accordance with Article V) with respect to which any options granted hereunder which are intended to be incentive stock options may be exercisable for the first time by the optionee in any calendar year (under this Plan or any other stock option plan of the Company or any parent or subsidiary thereof) exceeds $100,000, such options shall not be considered incentive stock options but rather shall be nonqualified options. 5 No incentive stock option may be granted to an individual who, at the time the option is granted, owns directly, or indirectly within the meaning of Section 424(d) of the Code, stock possessing more than 10 percent of the total combined voting power of all classes of stock of the Company or of any parent or subsidiary thereof, unless such option (i) has an option price of at least 110 percent of the Fair Market Value Per Share on the date of the grant of such option; and (ii) cannot be exercised more than five years after the date it is granted. Each optionee who receives an incentive stock option must agree to notify the Company in writing immediately after the optionee makes a disqualifying disposition of any Stock acquired pursuant to the exercise of an incentive stock option. A disqualifying disposition is any disposition (including any sale) of such Stock made within the period which is (a) two years after the date the optionee was granted the incentive stock option or (b) one year after the date the optionee acquired Stock by exercising the incentive stock option. ARTICLE X PAYMENT FOR SHARES ------------------ Payment for shares of Stock purchased under an option granted hereunder shall be made in full upon exercise of the option, by certified or bank cashier's check payable to the order of the Company or by any other means acceptable to the Company. The Committee, in its discretion, may allow an optionee to pay such exercise price by having the Company withhold shares of Stock being purchased having an aggregate Fair Market Value Per Share equal to the amount of such exercise price. ARTICLE XI NON-TRANSFERABILITY OF OPTION RIGHTS ------------------------------------ No option shall be transferable except by will or the laws of descent and distribution. During the lifetime of the optionee, the option shall be exercisable only by him. The Committee may, however, in its sole discretion, allow for transfer of options which are not incentive stock options to other persons or entities, subject to such conditions or limitations as it may establish. ARTICLE XII ADJUSTMENT FOR RECAPITALIZATION, MERGER, ETC. --------------------------------------------- 6 The aggregate number of shares of Stock which may be granted or purchased pursuant to options granted hereunder, the number of shares of Stock which may be subject to options granted to any one person in any one year, the number of shares of Stock covered by each outstanding option and the price per share thereof in each such option shall be appropriately adjusted for any increase or decrease in the number of outstanding shares of stock resulting from a stock split or other subdivision or consolidation of shares of Stock or for other capital adjustments or payments of stock dividends or distributions or other increases or decreases in the outstanding shares of Stock without receipt of consideration by the Company. No adjustments shall be made upon any conversion of the Company's Series A Preferred Stock. Any adjustment shall be conclusively determined by the Committee. In the event of any change in the outstanding shares of Stock by reason of any recapitalization, merger, consolidation, spin-off, combination or exchange of shares or other corporate change, or any distributions to common shareholders other than cash dividends, the Committee shall make such substitution or adjustment, if any, as it deems to be equitable, as to the number or kind of shares of Stock or other securities issued or reserved for issuance pursuant to the Plan, the number or kind of shares of Stock which may be subject to options granted to any one person in any one year, and the number or kind of shares of Stock or other securities covered by outstanding options, and the option price thereof. In instances where another corporation or other business entity is being acquired by the Company, and the Company has assumed outstanding employee option grants and/or the obligation to make future or potential grants under a prior existing plan of the acquired entity, similar adjustments are permitted at the discretion of the Committee. The Committee shall notify optionees of any intended sale of all or substantially all of the Company's assets within a reasonable time prior to such sale. The foregoing adjustments and the manner of application of the foregoing provisions shall be determined by the Committee in its sole discretion. Any such adjustment may provide for the elimination of any fractional share which might otherwise become subject to an option. ARTICLE XIII NO OBLIGATION TO EXERCISE OPTION -------------------------------- The granting of an option shall impose no obligation on the recipient to exercise such option. 7 ARTICLE XIV USE OF PROCEEDS --------------- The proceeds received from the sale of Stock pursuant to the Plan shall be used for general corporate purposes. ARTICLE XV RIGHTS AS A STOCKHOLDER ----------------------- An optionee or a transferee of an option shall have no rights as a stockholder with respect to any share covered by his option until he shall have become the holder of record of such share, and he shall not be entitled to any dividends or distributions or other rights in respect of such share for which the record date is prior to the date on which he shall have become the holder of record thereof. Notwithstanding anything herein to the contrary, the Committee, in its sole discretion, may restrict the transferability of all or any number of shares issued under the Plan upon the exercise of an option by legending the stock certificate as it deems appropriate. ARTICLE XVI EMPLOYMENT RIGHTS ----------------- Nothing in the Plan or in any agreement related to options or Restricted Shares granted hereunder shall confer on any optionee or grantee any right to continue in the employ of the Company or any of its subsidiaries, or to be evidence of any agreement or understanding, express or implied, that the Company or any if its subsidiaries will employ the optionee or grantee in any particular position or at any particular rate of remuneration, or for any particular period of time, or to interfere in any way with the right of the Company or any of its subsidiaries to terminate the optionee's employment at any time. ARTICLE XVII COMPLIANCE WITH THE LAW ----------------------- The Company is relieved from any liability for the nonissuance or non- transfer or any delay in issuance or transfer of any shares of Stock subject to options under the Plan which results from the inability of the Company to obtain or any delay in obtaining from any regulatory body having jurisdiction, all requisite authority to issue or transfer shares of Stock of the 8 Company either upon exercise of the options under the Plan or shares of Stock issued as a result of such exercise, if counsel for the Company deems such authority necessary for lawful issuance or transfer of any such shares. Appropriate legends may be placed on the stock certificates evidencing shares issued upon exercise of options to reflect such transfer restrictions. Each option granted under the Plan is subject to the requirement that if at any time the Committee determines, in its discretion, that the listing, registration or qualification of shares of Stock issuable upon exercise of options is required by any securities exchange or under any state or Federal law, or that the consent or approval of any governmental regulatory body is necessary or desirable as a condition of, or in connection with, the grant of options or the issuance of shares of Stock, no shares of Stock shall be issued, in whole or in part, unless such listing, registration, qualification, consent or approval has been effected or obtained free of any conditions or with such conditions as are acceptable to the Committee. ARTICLE XVIII CANCELLATION OF OPTIONS ----------------------- The Committee, in its discretion, may, with the consent of any optionee, cancel any outstanding option hereunder. ARTICLE XIX EFFECTIVE DATE AND EXPIRATION DATE OF PLAN ------------------------------------------ The Plan is effective as of February 14, 1997, the date of adoption of the Plan by the Company's Board, subject to approval by the stockholders of the Company in a manner which complies with Section 422(b)(1) of the Code and the Treasury Regulations thereunder. The expiration date of the Plan, after which no option may be granted hereunder, shall be February 13, 2007. ARTICLE XX AMENDMENT OR DISCONTINUANCE OF PLAN ----------------------------------- The Board may, without the consent of the Company's stockholders or optionees under the Plan, at any time terminate the Plan entirely and at any time or from time to time amend or modify the Plan, provided that no such action shall adversely affect Restricted Shares or options theretofore granted hereunder without the grantee's or optionee's consent. 9 ARTICLE XXI REPURCHASE OF OPTIONS --------------------- In granting options hereunder, the Committee may in its discretion, and on terms it considers appropriate, require an optionee, or the executors or administrators of an optionee's estate, to sell back to the Company such options in the event such optionee's employment with the Company is terminated. ARTICLE XXII MISCELLANEOUS ------------- (a) Grants of options and Restricted Shares shall be evidenced by agreements (which need not be identical) in such forms as the Committee may from time to time approve. Such agreements shall conform to the terms and conditions of the Plan and may provide that the grant of any Restricted Share or option under the Plan and Stock acquired upon the exercise of options shall also be subject to such other conditions (whether or not applicable to any other grantee or optionee) as the Committee determines appropriate, including, without limitation, provisions to assist the Optionee in financing the purchase of Stock through the exercise of options, provisions for the forfeiture of, or restrictions on, resale or other disposition of shares under the Plan, provisions giving the Company the right to repurchase shares acquired under the Plan in the event the participant elects to dispose of such shares, and provisions to comply with Federal and state securities laws and Federal and state income tax withholding requirements. (b) At such time that the delivery of shares of Stock to a grantee or optionee becomes subject to tax withholding requirements, the Company may require that the grantee or optionee pay to the Company such amount as the Company deems necessary to satisfy its obligation to withhold Federal, state or local income or other taxes. The Committee, in its discretion, may allow the grantee or optionee to pay such amount by having the Company withhold shares of Stock which would otherwise be delivered to such grantee or optionee having an aggregate fair market value equal to such amount. (c) If the Committee shall find that any person to whom any amount is payable under the Plan is unable to care for his affairs because of illness or accident, or is a minor, or has died, 10 then any payment due to such person or his estate (unless a prior claim therefor has been made by a duly appointed legal representative) may, if the Committee so directs the Company, be paid to his spouse, child, relative, an institution maintaining or having custody of such person, or any other person deemed by the Committee to be a proper recipient on behalf of such person otherwise entitled to payment. Any such payment shall be a complete discharge of the liability of the Committee and the Company therefor. (d) No member of the Committee shall be personally liable by reason of any contract or other instrument executed by such member or on his behalf in his capacity as a member of the Committee nor for any mistake of judgment made in good faith, and the Company shall indemnify and hold harmless each member of the Committee and each other employee, officer or director of the Company to whom any duty or power relating to the administration or interpretation of the Plan may be allocated or delegated, against any cost or expense (including counsel fees) or liability (including any sum paid in settlement of a claim) arising out of any act or omission to act in connection with the Plan unless arising out of such person's own fraud or bad faith; provided, however, that approval of the Company's Board shall be required for the payment of any amount in settlement of a claim against any such person. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company's Certificate of Incorporation or By-Laws, as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless. (e) The Plan shall be governed by and construed in accordance with the internal laws of the State of New York without reference to the principles of conflicts of law thereof. (f) No provision of the Plan shall require the Company, for the purpose of satisfying any obligations under the Plan, to purchase assets or place any assets in a trust or other entity to which contributions are made or otherwise to segregate any assets, nor shall the Company maintain separate bank accounts, books, records or other evidence of the existence of a segregated or separately maintained or administered fund for such purposes. Optionees shall have no rights under the Plan other than as unsecured general creditors of the Company, except that insofar as they may have become entitled to payment of additional compensation by performance of services, they shall have the same rights as other employees under general law. 11 (g) Each member of the Committee and each member of the Company's Board shall be fully justified in relying, acting or failing to act, and shall not be liable for having so relied, acted or failed to act in good faith, upon any report made by the independent public accountant of the Company and upon any other information furnished in connection with the Plan by any person or persons other than such member. (h) Except as otherwise specifically provided in the relevant plan document, no payment under the Plan shall be taken into account in determining any benefits under any pension, retirement, profit-sharing, group insurance or other benefit plan of the Company. (i) The expenses of administering the Plan shall be borne by the Company. (j) Masculine pronouns and other words of masculine gender shall refer to both men and women. * * * As adopted by the Board of Directors of TKG Acquisition Corp. as of February 14, 1997 and amended by the Board of Directors of Knoll, Inc. as of May 6, 1997 and amended and restated as of October 22, 1997. 12 EX-10.15 3 AMENDMENT #1 TO CONSULTING AGREEMENT EXHIBIT 10.15 AMENDMENT NO. 1 TO DECEMBER 1, 1996 CONSULTING AGREEMENT This Agreement, once it is signed by both parties, shall act as Amendment No.1 ("Amendment") to that certain December 1, 1996 Consulting Agreement between Knoll, Inc. and Wolfgang Billstein ("1996 Consulting Agreement") and shall be effective as of December 1, 1997. All defined terms not otherwise defined herein shall have the meanings assigned to them in the 1996 Consulting Agreement. The parties agree as follows: 1. The definitions of the terms "OP Incentive" and "Orders Incentive" are amended and restated for the period December 1, 1997 to November 30, 1998 ("Fiscal 1998") as follows: For Fiscal 1998, in addition to the Monthly Fee, Consultant shall receive a contingent incentive in U.S. Dollars equal to 6% of the positive operating profit of Knoll Europe on Knoll's U.S. Dollar internal financial statements for Knoll Europe for Fiscal 1998, provided that such operating profit is at least $3 Million ("OP Incentive"). If operating profit for Knoll Europe is less than $3 Million for Fiscal 1998, the OP Incentive shall be zero. Notwithstanding anything to the contrary, the OP Incentive shall not exceed the sum of $300,000. For example: (a) If operating profit for Knoll Europe for Fiscal 1998 is $2.9 Million, the OP Incentive shall be zero. (b) If operating profit for Knoll Europe for Fiscal 1998 is $3.0 Million, the OP Incentive shall be $180,000. (c) If operating profit for Knoll Europe for Fiscal 1998 is $5.0 Million, the OP Incentive shall be $300,000. For Fiscal 1998, in addition to the Monthly Fee and the OP Incentive, Consultant shall receive a contingent incentive in U.S. Dollars equal to 4% of the incremental "Orders" (as defined by this Agreement and Knoll's internal accounting policies, practices and procedures) volume in excess of $60 Million for Fiscal 1998 for Knoll Europe on Knoll's U.S. Dollar financial statements, provided that Knoll Europe's operating profit for Fiscal 1998 is at least $3 Million ("Orders Incentive"). If Knoll Europe's operating profit for Fiscal 1998 is less that $3 Million, the Orders Incentive shall be zero. There is no maximum payout or limit on the amount of the Orders Incentive. For example: (a) If operating profit for Knoll Europe for Fiscal 1998 is $2.9 Million and Orders for Fiscal 1998 are $65 Million, the Orders Incentive shall be zero. (b) If operating profit for Knoll Europe for Fiscal 1998 is equal to or greater than $3.0 Million and Orders for Fiscal 1998 are $65 Million, the Orders Incentive shall be $200,000 ($65 Million less $60 Million = $5 Million X 4% = $200,000). (c) If the facts are the same as section (b) above except that Orders for Fiscal 1998 are $70 Million, the Orders Incentive shall be $400,000 ($70 Million less $60 Million = $10 Million X 4% = $400,000). 2. Payment of the Orders Incentive and OP Incentive for Fiscal 1998, if appropriate hereunder, would be paid to Consultant on or before February 28, 1999. 3. For Fiscal 1998, the "Additional Termination Payment" shall be defined as the sum of the OP Incentive and the Orders Incentive determined in accordance with this Amendment multiplied by a fraction having as its numerator the number of months actually worked by Consultant between December 1, 1997 and November 30, 1998 before notice of termination is given to Consultant, and having as its denominator the number twelve (12). 4. Except as specifically set forth in this Amendment, the terms and conditions of the 1996 Consulting Agreement shall remain unchanged, including, but not limited to, those portions of the Compensation Sections which have not been specifically amended hereby. INTENDING TO BE LEGALLY BOUND: KNOLL, INC. WOLFGANG BILLSTEIN BY: /s/ John H. Lynch /s/ Wolfgang Billstein -------------------------- ----------------------------- Its: President and CEO Dec 1997 ------------------------- EX-23.1 4 CONSENT OF ERNST & YOUNG LLP EXHIBIT 23.1 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-30277) pertaining to the (i) Knoll Retirement Savings Plan, (ii) Knoll, Inc. 1997 Employee Stock Purchase Plan, and (iii) Knoll, Inc. 1997 Stock Incentive Plan of our report dated January 30, 1998, with respect to the consolidated financial statements and schedule of Knoll, Inc. included in the Annual Report on Form 10-K for the year ended December 31, 1997. /s/ Ernst & Young LLP Philadelphia, Pennsylvania March 26, 1998 EX-23.2 5 CONSENT OF PRICE WATERHOUSE LLP EXHIBIT 23.2 Consent of Independent Accountants We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-30277) of Knoll, Inc. of our report dated January 15, 1996, appearing on page F-3 of this Form 10-K. /s/ Price Waterhouse LLP Pittsburgh, Pennsylvania March 26, 1998 EX-27.1 6 FINANCIAL DATA SCHEDULE FOR YEAR ENDED 12/31/1997
5 KNOLL, INC. FINANCIAL DATA SCHEDULE 1,000 YEAR DEC-31-1997 DEC-31-1997 10,790 0 128,312 5,461 68,249 226,882 224,274 43,824 680,859 161,329 197,029 0 0 432 287,857 680,859 810,857 810,857 489,962 489,962 183,018 0 25,075 114,469 48,026 66,443 0 (5,337) 0 61,106 1.64 1.51
EX-27.2 7 RESTATED FINANCIAL DATA SCHEDULE 3-MO. ENDED 3/31/97
5 KNOLL, INC. RESTATED FINANCIAL DATA SCHEDULE 1,000 3-MOS 6-MOS 9-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 MAR-31-1997 JUN-30-1997 SEP-30-1997 11,064 10,873 11,026 0 0 0 105,478 125,320 125,201 0 0 0 61,033 62,339 65,664 201,499 218,400 224,633 196,726 200,565 207,396 25,826 32,152 38,415 662,034 669,622 672,981 128,783 139,626 139,552 315,796 245,547 230,015 0 0 0 1,603 0 0 73 432 432 185,698 252,522 271,470 662,034 669,622 672,981 177,833 390,415 598,817 177,833 390,415 598,817 109,859 236,265 360,953 109,859 236,265 360,953 40,058 90,635 135,324 0 0 0 7,742 14,696 20,103 20,100 48,892 82,526 8,462 20,298 36,461 11,638 28,594 48,065 0 0 0 0 (5,337) (5,337) 0 0 0 11,638 23,257 42,728 0.37 0.68 1.18 0.34 0.63 1.09
EX-27.3 8 RESTATED FINANCIAL DATA SCHEDULE 1-MO. ENDED 3/31/96
5 KNOLL, INC. RESTATED FINANCIAL DATA SCHEDULE 1,000 1-MO 4-MOS 7-MOS 10-MOS DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996 MAR-31-1996 JUN-30-1996 SEP-30-1996 DEC-31-1996 11,287 19,988 21,729 8,804 0 0 0 0 109,477 111,497 99,823 116,879 0 0 0 5,713 56,766 57,070 55,502 57,811 186,725 200,659 188,728 202,679 192,147 193,138 192,067 195,483 2,125 8,057 14,487 19,265 190,022 708,184 690,598 675,712 85,789 110,918 115,292 137,925 420,008 400,234 366,882 330,889 0 0 0 0 1,599 1,599 1,603 1,603 73 73 73 73 159,156 166,651 174,664 176,128 694,780 708,184 690,598 675,712 48,080 214,600 381,784 561,534 48,080 214,600 381,784 561,534 30,964 142,964 250,952 358,841 30,964 142,964 250,952 358,841 9,825 44,326 81,082 131,349 0 0 0 0 3,602 13,952 23,605 32,952 887 13,358 26,807 38,839 438 5,382 11,146 16,844 449 7,976 15,661 21,995 0 0 0 0 0 0 0 (5,159) 0 0 0 0 449 7,976 15,661 16,836 0.01 0.26 0.50 0.54 0.01 0.23 0.45 0.48
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