-----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, LdLg/4ClK7xlNS+lgxmWNg1+09mhX5kiXU97egUj81W4xyEVG7qXc75g9m4NV7wN PT4eveeI9HD5DkPL4tntVQ== 0001011570-02-000002.txt : 20020415 0001011570-02-000002.hdr.sgml : 20020415 ACCESSION NUMBER: 0001011570-02-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020401 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: 1934 Act SEC FILE NUMBER: 001-12907 FILM NUMBER: 02598126 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 k2001.txt FORM 10-K FOR PERIOD ENDED 12/31/2001 =============================================================================== 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, 2001 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: None 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 [ ] There is no public market for the voting stock of the Registrant. As of March 28, 2002, there were 23,174,029 shares of the Registrant's common stock, par value $0.01 per share, outstanding. DOCUMENTS INCORPORATED BY REFERENCE None. =============================================================================== TABLE OF CONTENTS ----------------- Item Page - ------ ------ PART I 1. Business....................................................... 2 2. Properties..................................................... 8 3. Legal Proceedings.............................................. 9 4. Submission of Matters to a Vote of Security Holders............ 9 PART II 5. Market for the Company's Common Equity and Related Stockholder Matters.......................................... 10 6. Selected Financial Data........................................ 11 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 12 7A. Quantitative and Qualitative Disclosures about Market Risk..... 20 8. Financial Statements and Supplementary Data.................... 22 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................................... 22 PART III 10. Directors and Executive Officers of the Company................ 23 11. Executive Compensation......................................... 25 12. Security Ownership of Certain Beneficial Owners and Management................................................... 30 13. Certain Relationships and Related Transactions................. 31 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..................................................... 34 Signatures.......................................................... 37 PART I ITEM 1. BUSINESS General Knoll, Inc., a Delaware corporation, 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. Knoll, Inc. 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 from Westinghouse Electric Corporation, whose successor is Viacom Inc. ("Westinghouse"). 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. Pursuant to an agreement and plan of merger, the Company consummated a recapitalization (merger) transaction on November 4, 1999 whereby a newly formed entity, which was organized by Warburg, Pincus Ventures, L.P. ("Warburg"), was merged with and into Knoll, with Knoll continuing as the surviving corporation. As a result of the merger, 17,738,634 shares of common stock held by the public stockholders of Knoll, other than Warburg and certain members of Knoll management, immediately prior to the merger were converted into the right to receive $28.00 per share in cash and were canceled. Furthermore, the Company's common stock ceased to be listed on the New York Stock Exchange ("NYSE"), and the registration of the Company's securities under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), was terminated. Except as otherwise indicated, the market and Company market share data contained in this Form 10-K are based on preliminary information received 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 2001. U.S. % of U.S. Product Category Category Size Market ---------------- ------------- ---------- (In Billions) Office systems.................... $3.8 34.4% Seating........................... 2.7 24.8 Storage........................... 1.5 13.6 Desks and casegoods............... 1.9 17.0 Tables............................ 0.8 7.3 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 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 2 writing desks in private offices to conference and meeting room tables that can accommodate sophisticated technological demands. Management believes that there are certain macroeconomic conditions, including white-collar employment levels, business confidence and corporate cash flow, that influence industry revenues. Management also believes that fundamental trends in the workplace, including the continued proliferation of technology in the workplace, changes in corporate organizational structures and work processes and heightened sensitivity to concerns about ergonomic standards influence revenues in the office furniture industry. Companies use workplace design and furniture purchase decisions as catalysts for organizational and cultural change and to attract and retain talented employees. Several significant factors that influence these changes include: new office technology and the resulting necessity for improved wire and data management; continued corporate reengineering, restructuring and reorganizing; and corporate relocations. In 2001, the office furniture industry experienced its most severe downturn in the last thirty years. BIFMA estimates that revenues declined 17.4% in 2001 as compared to 2000. A reduction in business confidence, corporate profitability, corporate spending and white-collar employment levels in response to an economic recession in the U.S. and a general softening of the economy in Canada directly affected sales of office furniture. The tragic events and aftermath of September 11, 2001 exacerbated the economic slowdown and added to general economic uncertainty. These conditions have and are expected to continue to negatively impact the office furniture industry in 2002 as well. Management is aware of initiatives by existing competitors, as well as new entrants, to sell, distribute or market office furniture and related products via the Internet. These initiatives may compete with existing office furniture companies, such as Knoll. Management believes that these initiatives are not currently affecting the office furniture industry's traditional channels of distribution and have become less of a factor in 2001. The Company has developed and continues to develop initiatives in an effort to take advantage of opportunities presented by the Internet. In 2001, the Company continued its efforts to link its dealers and customers with the Company's internal systems. In addition, the Company continued to offer a limited number of its products for sale via the Internet and upgraded on-line product information. There can be no assurance that any of such initiatives will be successful, will be completed in a timely fashion or will materially affect the Company's results of operations or financial condition. Management is currently unable to predict the extent to which the current or potential Internet initiatives may affect the demand for the Company's products or the financial condition of the office furniture industry. 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 high quality office furniture. The Company's five basic product categories offered in North America are as follows: (i) office systems, (ii) seating, (iii) storage solutions and filing cabinets, (iv) desks and casegoods and (v) tables. The Company also offers specialty products that are sold under the KNOLLSTUDIO, KNOLLEXTRA, KNOLLTEXTILES and SPINNEYBECK names. KNOLLSTUDIO features the Company's signature design classics, including high image side chairs, sofas, desks and tables for both office and home use, while KNOLLEXTRA, KNOLLTEXTILES and SPINNEYBECK feature products that complement the Company's office system and seating product categories. The following is a description of the Company's major product categories and lines: Office Systems The Company offers a complete line of office system products, comprised mainly of the REFF, CURRENTS, MORRISON, EQUITY and DIVIDENDS product lines, in order to meet the needs of a variety of businesses. Office systems may be used for teamwork settings, private offices and open floor plans and are comprised of adjustable partitions, work surfaces, storage units and electrical and lighting systems that can be moved, re-configured and re-used within the office. Office systems, therefore, offer a cost effective and flexible alternative to traditional 3 drywall office construction. The Company has focused on this area of the office furniture industry because it is the industry's largest product category, typically provides attractive gross margins and often leads to repeat and add-on sales of additional office systems, complementary furniture and furniture accessories. Office systems accounted for approximately 70.2% of the Company's sales in 2001, 71.3% of sales in 2000 and 68.9% of sales in 1999. At NeoCon(R) 2001, a contract furniture trade show held annually in June, the Company introduced its A3 office system, which is expected to be available for orders in May 2002, as well as enhancements to each of the Company's existing office system product lines. Seating The Company believes that the office seating portion of the office furniture 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. With its SAPPER, BULLDOG, RPM, PARACHUTE and SOHO product lines, the Company has a complete offering of seating in the appearance and comfort segments at various price, appearance, comfort and performance levels. At NeoCon(R) 2001, the Company introduced its mid-priced RPM chair, which began shipping in 2001, and its VISOR stacking chair, which is expected to begin shipping in 2002. In March 2002, the Company became the exclusive North American distributor of certain products of Sedus Stoll AG, including the OPEN UP executive seating product line. 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 office system sales. They also function as freestanding furniture in private offices or open-plan environments. Desks and Casegoods The Company's collections of stand-alone wood 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, ranging from those conducting large office reconfigurations to small retail purchasers. At NeoCon(R) 2001, the Company introduced its CRINION COLLECTION, a versatile line of wood casegoods designed for today's executive. The Company began shipping the CRINION COLLECTION products in March 2002. Tables The Company offers three product lines in the tables category: INTERACTION tables, PROPELLER tables and UPSTART tables. INTERACTION tables are an innovative line of adjustable tables that are designed to be integrated into the Company's office system lines and to provide customers with ergonomically superior work surfaces. These tables are also often sold as stand-alone products to non-systems customers. The Company's award winning line of PROPELLER meeting and conference tables 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. UPSTART tables are a line of adjustable, stand-alone tables, offered in new shapes and surfaces, that support the needs of rapidly growing organizations. KNOLLSTUDIO The Company's historically significant KNOLLSTUDIO collection serves the design-conscious segment of the fine contract furniture portion of the market, providing the architecture 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. KNOLLSTUDIO includes complete collections by individual designers as well as distinctive single items. KNOLLSTUDIO products, which include a wide variety of high image side chairs, sofas, desks and conference, training, side and dining tables, were created by many of the twentieth century's 4 most prominent architects and designers, such as Ludwig Mies van der Rohe, Marcel Breuer, Eero Saarinen and Frank O. Gehry, for prestigious corporate and residential interiors. The KNOLLSTUDIO line also offers a signature collection of products designed by Maya Lin, the internationally known designer of the National Veterans Memorial in Washington, D.C. KNOLLEXTRA KNOLLEXTRA is a line of desk and office accessories, including letter trays, sorters, binder bins, file holders, calendars, desk pads, planters, wastebaskets and bookends. KNOLLEXTRA also offers a number of computer accessories and ergonomic office products. Not only does this product line complement the Company's office system products, but it is also sold to customers for use with other manufacturers' products. KNOLLTEXTILES KNOLLTEXTILES offers a wide range of coverings for walls, panels and seating, including the IMAGO product, which combines the benefit of a hard surface material with the texture and translucence of a textile. 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 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 that is used on Knoll furniture and is sold to customers, including primarily other office furniture manufacturers, upholsterers, aviation, custom coach and boating manufacturers and the architecture and design community, for use on their products. European Products Much like North America, Knoll Europe has a product offering that 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 PL1 system, which are targeted to Northern Europe, the ALESSANDRI system, which is targeted to the French market, the KNOLLSCOPE system and the SOHO DESKING SYSTEM; (ii) KNOLLSTUDIO, which serves the image and design-oriented segment of the fine furniture portion of the market; (iii) seating, including a comprehensive range of chairs such as SAPPER, BULLDOG, PARACHUTE and SOHO; and (iv) storage units, which are designed to complement its office system 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 some of the world's preeminent designers to develop products that delight and inspire. The Company has won numerous design awards and has more than 30 products in the design collection of the Museum of Modern Art. 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, Frank Gehry and Maya Lin. Today, the Company continues to engage prominent outside architects and designers to create new products and product enhancements. By combining the creative vision of architects and designers with a corporate commitment to products that address changing business needs, the Company seeks to launch new offerings that achieve recognition in the architecture and design community and generate strong demand among corporate customers. 5 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 been able to redesign and enhance its products in order to better meet customer preferences. Sales and Distribution Knoll's customers are typically Fortune 1000 companies. The Company employs approximately 360 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 initiative. 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 not dependent on any one of its dealers, the largest of which accounted for less than 6.0% of the Company's North American sales in 2001. Additionally, no single customer represented more than 1.5% of the Company's North American sales during 2001. However, a number of U.S. government agencies purchase the Company's products through multiple contracts with the General Services Administration ("GSA"). Sales to government entities under the GSA contracts aggregated approximately 12.0% of consolidated sales in 2001. 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. Knoll Europe accounted for approximately 6.0% of the Company's sales in 2001. In the Latin American and Asia-Pacific markets, which accounted for approximately 1.0% of the Company's sales in 2001, 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. In 2001, the Company continued to implement programs and procedures in its manufacturing operations intended to improve customer service. As part of these initiatives, the Company continued its focus on process cycle time, percentage of orders shipped complete and on-time, order correctness and other key measures aimed at driving service improvements. Raw Materials and Suppliers The Company's purchasing function in North America 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 uses steel, lumber, paper, paint, plastics, laminates, particleboard, veneers, glass, fabrics, leathers and upholstery filling material. The Company currently does not maintain any 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. 6 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, (iv) on-time delivery and (v) service and technical support. The Company estimates that it had an 8.4% market share in the U.S. office furniture market in 2001. Five companies (including the Company) represented approximately 71.0% of the U.S. market in 2001. 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., Teknion Corporation 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 70.0% 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 110 active U.S. utility patents on various components used in its products and systems and approximately 138 active U.S. design patents. The Company also has approximately 221 patents in various foreign countries. Knoll(R), KnollStudio(R), KnollExtra(R), Good Design Is Good Business(R), A3(TM), Bulldog(R), Calibre(R), Currents(R), Dividends(R), Equity(R), Imago(TM), KnollScope(R), Parachute(R), Propeller(R), Reff(R), RPM(R), Upstart(R) and Visor(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 $136.8 million at December 31, 2001 and $170.6 million at December 31, 2000. The Company manufactures substantially all of its products to order and expects to fill substantially all outstanding unfilled orders within the next twelve months. As such, backlog is not a significant factor used to predict the Company's long-term business prospects. Foreign and Domestic Operations For information regarding foreign and domestic operations, refer to Note 21 (Segment and Geographic Region Information) of the Notes to the Consolidated Financial Statements on page F-26. 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 presently 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 the Company's Predecessor 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 significant 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. 7 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 to the Company as a whole. 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 certain CERCLA liabilities known as of the date of the acquisition of the Company from Westinghouse. Employees As of February 28, 2002, the Company employed a total of 3,863 people, including 2,512 hourly and 1,351 salaried employees. The Grand Rapids, Michigan plant is the only unionized plant within the U.S., with the Carpenters and Joiners of America-Local 1615 having a four-year contract that expires on August 26, 2002. The Company believes that relations with this union are positive. However, the Company cannot assure that it will be successful in reaching a new contract when the current contract expires. From time to time, there have been unsuccessful efforts to unionize at the Company's other North American locations. There has been recent unionizing activity at the Company's Muskegon, Michigan location as well as more limited efforts at its other North American facilities. The Company believes that relations with its employees throughout North America are good. Nonetheless, it is possible that Company employees may continue attempts to unionize. The Company's employees 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 3,012,000 square feet of facilities, including manufacturing plants, warehouses and sales offices. Of these facilities, the Company owns approximately 2,510,000 square feet and leases approximately 502,000 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 545,000 square foot manufacturing facility in Grand Rapids, Michigan. In Muskegon, Michigan, the Company owns one approximately 334,000 square foot plant and leases one approximately 105,000 square foot building for manufacturing. The Company's plants in Toronto, Canada consist of one approximately 408,000 square foot owned building and two leased properties aggregating approximately 157,000 square feet. The Company's owned facilities in East Greenville, Grand Rapids and Muskegon are encumbered by mortgages securing the Company's indebtedness under its $650.0 million senior credit agreement. 8 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 various claims and 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held its annual meeting of stockholders on December 3, 2001. The Company's stockholders were asked to take the following actions at the meeting: (1) Elect nine directors of the Company to serve until the next annual meeting of stockholders of Knoll or until their successors are elected and qualified ("Proposal 1"). (2) Ratify the appointment of the firm Ernst & Young LLP as independent auditors of Knoll for the 2001 fiscal year ("Proposal 2"). With respect to Proposal 1, all nine individuals nominated for director were elected. The nominees and the votes each received are as follows: Nominee For Withheld ------------------------ -------------- ---------- Burton B. Staniar....... 22,491,327 -- Andrew B. Cogan......... 22,491,327 -- Kathleen G. Bradley..... 22,491,327 -- Jeffrey A. Harris....... 22,491,327 -- Sidney Lapidus.......... 22,491,327 -- Kewsong Lee............. 22,491,327 -- John H. Lynch........... 22,491,327 -- Lloyd Metz.............. 22,491,327 -- Henry B. Schacht........ 22,491,327 -- Lloyd Metz subsequently resigned as director of Knoll effective January 24, 2002. Proposal 2 was also approved by affirmative vote of a majority of shares of common stock present at the annual meeting. Such proposal received 22,491,327 votes FOR and zero votes AGAINST. There were no abstentions. On March 8, 2002, by written consent of the Company's majority stockholder in an action taken without a meeting, an amendment to the employment agreement of Burton B. Staniar was approved. Such approval was obtained in compliance with Section 280G(b)(5) of the Internal Revenue Code of 1986, as amended. 9 PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market Information and Dividend Policy There has been no established trading market for the Company's common stock, par value $0.01 per share since cessation of trading on November 3, 1999, the day before consummation of the merger. From May 9, 1997, the date of the Company's initial public offering, through November 3, 1999, the Company's common stock was traded on the NYSE. As of March 28, 2002, there were 38 holders of record of the Company's common stock. The credit agreement governing the Company's senior credit facilities and the indenture relating to the Company's 10.875% Senior Subordinated Notes due 2006 (the "Senior Subordinated Notes") contain certain covenants that, among other things, limit the Company's ability to purchase Knoll stock and pay dividends to its stockholders. On December 20, 2000, the Company's Board of Directors declared a special cash dividend of $9.50 per share of common stock (approximately $220.3 million in the aggregate) payable on January 5, 2001 to stockholders of record as of the close of business on December 20, 2000. Such dividend was in compliance with the covenants contained in the aforementioned debt agreements, as amended. Prior to December 20, 2000, the Company had never declared any dividends on its common stock. Any future determination to pay dividends will depend on the Company's results of operations, financial condition, capital requirements, contractual restrictions and other factors deemed relevant by the Board of Directors. Recent Sales of Unregistered Securities Options to purchase an aggregate of 547,500 shares of Knoll common stock were granted to certain employees of the Company on February 5, 2002. These options were granted at an exercise price of $36.00, will vest in installments over four years (30% on the first vesting date, 20% on each of the second and third vesting dates and 30% on the fourth vesting date) and may be exercised pursuant to the terms of the related stock option agreements. The Company did not receive any consideration for such grants. These grants were exempt from registration under the Securities Act of 1933, as amended (the "Securities Act"), as not involving the sale of a security. 10 ITEM 6. SELECTED FINANCIAL DATA The following table presents selected consolidated financial information, as of the dates and for the periods indicated, that has been derived from audited financial statements of the Company. 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."
Years Ended December 31, -------------------------------------------------------------------- 1997 1998 1999 2000 2001 ------------ ------------ ------------ ------------ ------------ (In Thousands, Except Per Share Data) Operating Data Sales....................... $810,857 $948,691 $984,511 $1,163,477 $985,388 Cost of sales............... 489,962 572,756 593,442 682,421 594,446 -------- -------- -------- ---------- -------- Gross profit................ 320,895 375,935 391,069 481,056 390,942 Selling, general and administrative expenses... 183,018 204,392 206,919 243,885 195,532 Restructuring charge........ -- -- -- -- 1,655 -------- -------- -------- ---------- -------- Operating income............ 137,877 171,543 184,150 237,171 193,755 Interest expense............ 25,075 16,860 21,611 44,437 42,101 Recapitalization expense.... -- -- 6,356 -- -- Other income (expense), net............ 1,667 2,732 (670) 3,026 (3,670) -------- -------- -------- ---------- -------- Income before income tax expense and extraordinary item........ 114,469 157,415 155,513 195,760 147,984 Income tax expense.......... 48,026 64,371 66,351 79,472 60,794 -------- -------- -------- ---------- -------- Income before extraordinary item........ 66,443 93,044 89,162 116,288 87,190 Extraordinary loss on early extinguishment of debt, net of taxes........ 5,337 -- 10,801 -- -- -------- -------- -------- ---------- -------- Net income.................. $ 61,106 $ 93,044 $ 78,361 $ 116,288 $ 87,190 ======== ======== ======== ========== ======== Per Share Data Cash dividends declared..... $ -- $ -- $ -- $ 9.50 $ --
December 31, -------------------------------------------------------------------- 1997 1998 1999 2000 2001 ------------ ------------ ------------ ------------ ------------ (In Thousands) Balance Sheet Data Working capital.............. $ 65,553 $ 95,040 $104,087 $ 32,678 $ 4,020 Total assets................. 680,859 714,027 742,306 695,130 639,003 Total long-term debt, including current portion.. 207,029 169,255 610,376 425,755 547,524 Total liabilities............ 392,570 370,177 836,500 899,505 761,321 Stockholders' equity (deficit).................. 288,289 343,850 (94,194) (204,375) (122,318)
11 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." Background On November 4, 1999, pursuant to an Agreement and Plan of Merger dated as of June 21, 1999 (as amended on July 29, 1999), between Warburg and Knoll, the Company completed a recapitalization (merger) transaction whereby a newly formed entity, which was organized by Warburg, was merged with and into Knoll, with Knoll continuing as the surviving corporation. As a result of the merger, 17,738,634 shares of common stock held by the public stockholders of Knoll, other than Warburg and certain members of Knoll management, immediately prior to the merger were converted into the right to receive $28.00 per share in cash and were canceled. Furthermore, the Company's common stock ceased to be listed on the NYSE, and the registration of the Company's securities under the Exchange Act was terminated. The merger and related transactions were accounted for as a leveraged recapitalization. The historical accounting bases of Knoll's assets and liabilities were retained subsequent to the transactions. See Note 3 to the consolidated financial statements for further discussion of the merger. 2001 Overview 2001 was a very challenging year for the U.S. office furniture industry. BIFMA estimates that 2001 revenues for the U.S. office furniture industry declined 17.4% from 2000. This decline is the most severe industry downturn in the last thirty years. A reduction in business confidence, corporate profitability, corporate spending and white-collar employment levels in response to an economic recession in the U.S. and a general softening of the economy in Canada directly affected sales of office furniture. The economic slowdown in North America led to a significant reduction in sales volume in 2001 and an extremely competitive pricing environment within the industry. The tragic events and aftermath of September 11, 2001 exacerbated the economic slowdown and added to general economic uncertainty. While the Company continued to aggressively manage its cost structure in light of economic conditions and uncertainty in 2001, it also continued to focus on certain initiatives that it believes will enable Knoll to be well positioned to meet the needs of its customers once economic conditions improve. Such initiatives include (i) investing in the development of new products and other sales and marketing initiatives designed to gain market share and (ii) pursuing and implementing technological initiatives designed to streamline the Company's order entry process and provide customers with readily accessible product information tailored specifically to their individual demands. 2002 Outlook The near-term outlook for the U.S. office furniture industry remains uncertain. The Company anticipates that its sales in the first quarter of 2002 will be down compared to the first quarter of 2001. BIFMA forecasts 2002 revenues for the U.S. office furniture industry will decline 13.0% from 2001. Economic indicators have recently shown evidence that the U.S. economy has already started to recover from a recession that began about a year ago. There has historically been a lag between an upturn in corporate profits following an economic slowdown and renewed demand for office furniture. Thus, the office furniture industry is not expected to experience growth until several months after such an upturn begins. Critical Accounting Policies The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the U.S. 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 results may differ materially from such estimates. Management believes that the critical accounting 12 policies that follow are those of its policies that require the most judgement, estimation and assumption for preparation of the consolidated financial statements. Allowance for Doubtful Accounts The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers and dealers to make required payments. The allowance is determined through an analysis of the aging of accounts receivable and assessments of risk that are based on historical trends and an evaluation of the impact of current and projected economic conditions. If the financial condition of the Company's customers and dealers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Inventory Inventories are valued at the lower of cost or market. Cost is determined using the first-in, first-out method. The Company writes down to zero value inventory that is specifically identified as obsolete and inventory for which there was no activity within one year. Obsolescence may be caused by the discontinuance of a product line, changes in product material specifications, replacement products in the marketplace and other competitive influences. Product Warranty The Company provides for the estimated cost of product warranties at the time revenue is recognized. While the Company engages in product quality programs and processes, its warranty obligation is affected by product failure rates, material usage and service costs incurred in correcting a product failure. Cost estimates are based on historical product failure rates and identified one-time fixes for each specific product category. Should actual costs differ from original estimates, revisions to the estimated warranty liability would be required. Employee Benefits The Company is partially self-insured for certain employee health benefits. The Company accrues for employee health benefit obligations based on an independent actuarial valuation. The actuarial valuation is based upon historical claims as well as a number of assumptions, including rates of inflation for medical costs and benefit plan changes. Actual results could be materially different than the estimates used. The Company accounts for its defined benefit pension plan obligations and other postretirement benefit plan obligations in accordance with Statements of Accounting Standards No. 87, "Employers' Accounting for Pensions," and No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," respectively. The defined benefit pension and other postretirement benefit expenses and liabilities that are recognized in the Company's financial statements as well as pension funding requirements are based upon actuarial valuations. The actuarial valuations are dependent upon various assumptions, including, but not limited to, selected discount rates, expected rates of return on plan assets, projected salary increases and benefits, expected health care cost trend rates and withdrawal and mortality rates. The actuarial assumptions used are reviewed annually. Changes in assumptions as well as actual experience could potentially have a material impact on the Company's pension and other postretirement expenses and related funding requirements. Commitments and Contingencies The Company establishes reserves for the estimated cost of environmental and legal contingencies. A significant amount of judgement and use of estimates is required to quantify the Company's ultimate exposure in these matters. The Company engages outside experts as it deems necessary or appropriate to assist in the evaluation of exposure. From time to time, as information becomes available regarding changes in circumstances for ongoing issues as well as information regarding emerging issues, management assesses the potential liability and adjusts its reserve balances accordingly. Revisions to management's estimates of potential 13 liability as well as actual expenditures related to environmental and legal contingencies could have a material impact on the Company's results of operations or financial position. Income Taxes The Company accounts for taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), which requires that deferred tax assets and liabilities be measured using enacted tax rates for the effect of future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. SFAS 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized. The Company evaluates quarterly the realizability of its deferred tax assets, and adjusts its valuation allowance accordingly, based upon future taxable income and ongoing tax planning strategies. The Company operates within multiple taxing jurisdictions and is subject to audit in all of these jurisdictions. These audits could result in tax obligations in excess of amounts previously recorded by the Company. Interest Rate Collar Agreements The Company accounts for its interest rate collar agreements in accordance with Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended ("SFAS 133"). The Company's interest rate collar agreements are classified as risk management instruments not eligible for hedge accounting. In accordance with SFAS 133, the Company records the fair value of these agreements on its balance sheet and recognizes changes in their fair value in earnings in the period the value of the contract changes. The fair value of the interest rate collar agreements represents the present value of expected future payments, as estimated by the counterparties, who are dealers in these instruments, and is based upon a number of factors, including current interest rates and expectations of future interest rates. Changes in valuation assumptions and estimates used by the counterparties could cause a material effect on the Company's results of operations or financial position. Results of Operations Sales Although 2001 was a challenging year, the Company was able to outperform the industry. The Company's sales for 2001 declined 15.3% to $985.4 million, compared to the estimated overall U.S. industry decline of 17.4%. The decrease in the Company's sales from 2000 to 2001 was primarily a result of decreased volume attributable to the recession in the U.S. The volume decrease was spread across all of the Company's product categories, with office systems accounting for the largest dollar decrease because such category historically represents the largest component of the Company's sales. The decrease from 2000 to 2001 was also due, to a lesser extent, to competitive pricing pressures that have been and continue to be experienced in the industry since the start of the economic slowdown in late 2000. The challenging times of 2001 followed a record year for the Company. 2000 was the first year in the history of the Company in which annual sales exceeded $1.0 billion. 2000 sales of $1,163.5 million were up 18.2%, or $179.0 million, from $984.5 million in sales for 1999. Such growth resulted primarily from increased volume in both North America and Europe, which was primarily attributable to office systems and specialty products. Office systems is the largest product category in the industry. BIFMA estimates that U.S. sales of office systems were $3.8 billion, or 34.4% of total industry sales, in 2001. Office systems accounted for 70.2% of the Company's sales in 2001, 71.3% of sales in 2000 and 68.9% of sales in 1999. 14 Gross Profit and Operating Income The Company's gross profit and operating income as a percentage of sales continue to be the highest among the companies in the U.S. office furniture industry for which financial results are publicly available. As a percentage of sales, gross profit was 39.7% for 2001, 41.3% for 2000 and 39.7% for 1999 and operating income was 19.7% for 2001, 20.4% for 2000 and 18.7% for 1999. In anticipation of lower sales volumes in 2001, the Company took steps intended to prevent significant deterioration of its profits as a percentage of sales. Such steps included reducing hourly headcount in North America as dictated by volume, adopting a restructuring plan to eliminate certain salaried positions in North America and aggressively managing certain other discretionary and factory costs. The decreases in gross profit and operating income percentages from 2000 to 2001 were due primarily to lower sales volume allowing less absorption of fixed overhead costs in 2001 compared to 2000. The decrease in the Company's operating income as a percentage of sales was also due, in part, to a restructuring charge of $1.7 million for severance and other termination benefits recorded in 2001 in connection with the restructuring plan discussed above. In 2000, the Company's gross profit and operating income as a percentage of sales benefited from increased volume, the Company's continued focus on cost control and the correction of certain manufacturing inefficiencies at the Company's Toronto, Canada facility that resulted in part from implementation issues associated with the transition to a new manufacturing system in 1999. The Company's 1999 gross profit and operating income were impacted negatively by the aforementioned manufacturing inefficiencies. Interest Expense Despite higher outstanding debt balances in 2001 compared to 2000, the Company's interest expense decreased $2.3 million. This decrease was a result of lower interest rates on the Company's variable-rate debt offset by net settlement payments of $2.1 million incurred under the Company's interest rate collar agreements during 2001. Interest rates incurred for borrowings under the Company's senior credit facilities were more favorable in 2001 primarily as a result of lower short-term borrowing rates in response to actions taken by the U.S. Federal Reserve to lower the federal funds rate in 2001. Interest expense increased $22.8 million from 1999 to 2000 primarily as a result of higher outstanding debt balances during 2000 compared to 1999. In connection with the merger that was consummated on November 4, 1999, the Company incurred $533.0 million of debt under a new senior credit agreement with higher interest rates than those under the credit agreement that it replaced. Such borrowings significantly increased the Company's level of debt during the last two months of 1999 and the year 2000. See "Liquidity and Capital Resources" for further discussion of such senior credit agreement. Recapitalization Expense In 1999, the Company incurred $6.4 million of expense relating to the recapitalization of the Company that occurred upon consummation of the merger. Other Income (Expense), Net Other expense for 2001 includes a noncash loss of $7.5 million related to the Company's interest rate collar agreements. This loss was a result of the change in the fair value of the agreements during 2001. See Note 12 to the consolidated financial statements for further discussion. Income Tax Expense The mix of pretax income and varying effective tax rates attributable to the countries in which the Company operates were primarily responsible for the increase in the effective tax rate from 40.6% in 2000 to 41.1% in 2001. The decrease in the effective tax rate from 42.7% in 1999 to 40.6% in 2000 was primarily due to $5.2 million of recapitalization expense that was recorded in 1999 and was not deductible for income tax purposes. 15 The change in the effective rate from 1999 to 2000 was also due, to a lesser extent, to the mix of pretax income and varying effective tax rates attributable to the countries in which the Company operates. Extraordinary Items In connection with the merger in 1999, Knoll refinanced $14.0 million owed under its senior credit agreement that existed immediately prior to the merger and paid the holders, as of August 13, 1999, of its Senior Subordinated Notes a fee of $12.9 million for their consent to certain amendments to the indenture governing the Senior Subordinated Notes. The amendments allowed the Company to complete the merger without violating the covenants under the indenture. The Company accounted for the refinancing of the debt under the then-existing credit agreement and the modification of debt terms under the indenture for the Senior Subordinated Notes as extinguishments of debt. Such treatment resulted in an extraordinary loss of $17.9 million on a pretax basis ($10.8 million on an after-tax basis) in 1999. This loss consisted of the $12.9 million consent fee paid to the noteholders and $5.0 million of unamortized financing costs that were written-off, of which $0.9 million related to the refinanced debt and $4.1 million related to the Senior Subordinated Notes. Liquidity and Capital Resources The following table highlights certain key cash flow and capital information pertinent to the discussion that follows:
2001 2000 1999 ---------- ---------- ---------- (In Thousands) Cash provided by operating activities....................... $134,147 $ 222,711 $127,987 Capital expenditures............... 25,020 24,097 25,095 Purchase of common stock........... 403 322 28,703 Payment of merger consideration.... -- -- 496,682 Payment of recapitalization costs.. -- 230 8,843 Payment of fees to amend debt agreements....................... -- 682 12,870 Net proceeds from (repayment of) long-term debt................... 121,750 (184,500) 441,250 Payment of dividend................ 220,339 -- --
2001 cash flow from operating activities was negatively impacted by the Company's lower earnings before noncash items, which was due primarily to decreased demand for office furniture and accessories in 2001. The $134.1 million of cash flow provided by operations in 2001 in addition to $153.0 million of net borrowings under the senior revolving credit facility were used during 2001 to fund $25.0 million of capital expenditures, repay $31.25 million of debt under the term loan facility and fund the payment of a special cash dividend totaling $220.3 million, or $9.50 per share of common stock. The Company's capital expenditures are typically for new manufacturing equipment and information systems. The Company estimates that capital expenditures for 2002 will be approximately $20.0 million. On December 20, 2000, the Company declared a special cash dividend of $9.50 per share of common stock payable on January 5, 2001 to stockholders of record as of the close of business on December 20, 2000. The Company borrowed $221.0 million under the revolving credit facility on January 5, 2001 to fund the payment of the dividend. In connection with the merger consummated on November 4, 1999, the Company transferred an aggregate of $496.7 million of merger consideration to its exchange agent for the 17,738,634 shares of common stock that were converted into the right to receive $28.00 per share and were canceled. In addition, the Company incurred recapitalization costs totaling $9.1 million and, as previously discussed, paid the holders of its Senior Subordinated Notes an aggregate consent fee of $12.9 million. In order to finance these transactions, the Company incurred debt of $533.0 million. See below for further discussion of the debt incurred. 16 During the first two months of 1999, the Company purchased 1,187,000 shares of its common stock for $28.7 million, or an average price of $24.16 per share, under a stock repurchase program that began in September 1998 and was terminated in connection with the merger. The Company repaid $47.0 million of its outstanding senior bank debt from January 1, 1999 through November 3, 1999. On November 4, 1999, in connection with the consummation of the merger, the Company repaid all of its then- outstanding senior indebtedness, which amounted to $14.0 million, and incurred debt totaling $533.0 million under a new senior credit agreement. The new credit agreement provides up to $650.0 million to (i) fund the merger and related fees and expenses, (ii) refinance all amounts owing under the Company's senior credit agreement that existed immediately prior to the merger and (iii) provide for working capital and ongoing general corporate purposes. The agreement consists of a $325.0 million six-year term loan facility and a $325.0 million six-year revolving credit facility and 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, purchase Company stock, make investments, grant liens and engage in certain other activities. The credit agreement was amended on December 20, 2000 in connection with the declaration of the special cash dividend, which is discussed above. Borrowings under the new credit 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 that is subject to change based upon the Company's ratio of funded debt to earnings before income taxes, depreciation, amortization and other noncash charges ("EBITDA") or (ii) the greater of the federal funds rate plus 0.5% or the prime rate, plus an applicable percentage that is subject to change based upon the Company's ratio of funded debt to EBITDA. The Company is required to make quarterly principal payments under the term loan facility. Aggregate annual amounts due are as follows: $52.5 million in 2002, $63.75 million in 2003, $81.25 million in 2004 and $75.0 million in 2005. Loans made pursuant to the revolving credit facility may be borrowed, repaid and reborrowed from time to time until November 4, 2005. The Company repaid $31.25 million of borrowings under the term loan facility and borrowed net proceeds of $153.0 million under the revolving credit facility in 2001, repaid $17.5 million and $167.0 million of borrowings under the term loan facility and revolving credit facility, respectively, in 2000 and repaid $3.75 million and $27.0 million of borrowings under the term loan facility and revolving credit facility, respectively, in December 1999. The senior credit agreement provides for a letter of credit subfacility that allows for the issuance of up to $25.0 million in letters of credit. The amount available for borrowing under the revolving credit facility is reduced by the total outstanding letters of credit. As of December 31, 2001, the Company had an aggregate of $3.8 million of letters of credit outstanding and $154.2 million available for borrowing under the revolving credit facility. In addition to the credit facilities, the Company has $107.2 million aggregate principal amount of Senior Subordinated Notes outstanding. The Senior Subordinated Notes are subordinated to all of the Company's existing and future senior indebtedness, including all indebtedness under the senior credit agreement. The indenture governing the Senior Subordinated Notes imposes certain restrictions on the Company and its subsidiaries, including restrictions on the ability to incur indebtedness, pay dividends, purchase Company stock, make investments, grant liens and engage in certain other activities. The Company may be required to purchase the Senior Subordinated Notes 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, in whole or in part, at the Company's option at 105.438% of their principal amount through March 14, 2002, and thereafter at an annually declining premium over par until March 15, 2004, when they are redeemable at par. On March 27, 2002, the Company notified the holders of the Senior Subordinated Notes that it will redeem $50.0 million aggregate principal amount of the Senior Subordinated Notes on April 30, 2002 at 103.625% of principal amount, plus accrued interest. The Company intends to fund such redemption with borrowings under its senior revolving credit facility. 17 The Company's foreign subsidiaries maintain local credit facilities to provide credit for overdraft, working capital and other purposes. As of December 31, 2001, total credit available under such facilities was approximately $8.4 million, or the foreign currency equivalent, and there were no outstanding borrowings under the facilities. The Company believes that it is currently in compliance with all terms of its indebtedness. In addition to the contractual cash obligations under the Company's debt agreements, as described above, the Company has commitments under its interest rate collar agreements and operating leases for certain machinery and equipment as well as manufacturing, warehousing, showroom and other facilities used in its operations. See Item 7A, "Quantitative and Qualitative Disclosures about Market Risk" for further discussion of the Company's interest rate collar agreements. Future minimum lease payments required under those operating leases that have an initial or remaining noncancelable lease term in excess of one year are as follows: $7.6 million in 2002, $6.7 million in 2003, $4.2 million in 2004, $3.1 million in 2005, $2.1 million in 2006 and $5.3 million thereafter. The Company continues to have significant liquidity requirements. In addition to working capital needs and the need to fund capital expenditures to support the Company's sales and marketing initiatives, the Company has significant cash requirements for debt service. The Company believes that existing cash balances and internally generated cash flows, together with borrowings available under its revolving credit facilities, will be sufficient to fund normal working capital needs, capital spending requirements and debt service requirements for at least the next twelve months. Accounting Pronouncements Pending Adoption as of December 31, 2001 In June 2001, the Financial Accounting Standards Board ("FASB") approved Statements of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141"), and No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires that all business combinations be accounted for using the purchase method and requires that intangible assets that meet certain criteria be recognized apart from goodwill. SFAS 142 prescribes that goodwill and intangible assets with indefinite useful lives should no longer be amortized to earnings, but instead should be reviewed for impairment on at least an annual basis. Intangible assets with finite lives will continue to be amortized over their estimated useful lives. The Company adopted SFAS 141 and SFAS 142 on January 1, 2002. The adoption of these statements did not result in any changes to the classification of the Company's goodwill and other intangible assets as they are presented at December 31, 2001. The Company assigned an indefinite useful life to its trademarks effective January 1, 2002. Application of the nonamortization provisions of SFAS 142, as they relate to the Company's goodwill and trademarks, is expected to result in an increase in income before taxes of approximately $6.8 million in 2002. The Company will perform impairment tests of its trademarks and goodwill as of January 1, 2002. Knoll has not yet determined what the effect of these tests will be on the earnings and financial position of the Company. The impairment test of the trademarks will be completed during the first quarter ended March 31, 2002. The Company expects to perform the first step of a two-step goodwill impairment test, as prescribed in SFAS 142, during the second quarter ended June 30, 2002. The first step of the goodwill impairment test is a screen for potential impairment, while the second step measures the amount of the impairment, if any. Any impairment loss resulting from these transitional impairment tests will be reflected as the cumulative effect of a change in accounting principle in the Company's interim financial statements for the first quarter of 2002, regardless of the interim period in which the measurement of the loss is completed. Inflation There was no significant impact on Knoll's operations as a result of inflation during the three years ended December 31, 2001. 18 Environmental Matters 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 of the Company from Westinghouse. 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 and Section 21E of the Exchange Act that represent the Company's expectations or beliefs concerning future events. Forward-looking statements relate to future operations, strategies, financial results or other developments and are not based on historical information. In particular, statements using verbs such as "anticipates," "believes," "estimates," "expects" or words of similar meaning generally involve forward-looking statements. Although the Company believes the expectations reflected in these forward-looking statements are based upon reasonable assumptions, no assurance can be given that Knoll will attain these expectations or that any deviations will not be material. Readers of this Form 10-K are cautioned not to unduly rely on any forward-looking statements. The Company cautions that its forward-looking statements are further qualified by important factors that could cause actual results to differ materially from those in the forward-looking statements. Such factors include, without limitation, the impact and duration of the economic downturn in the North American economy generally and in the high-technology industry; continuation or further deterioration of depressed industry revenues driven by a variety of macroeconomic factors, including white-collar employment levels, business confidence and corporate profitability and cash flows, 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; the negative effects of the tragic events and aftermath of September 11, 2001 upon the economy as a whole and the office furniture industry; competitive pricing within the contract office furniture industry; the Company's indebtedness, which requires the Company to meet certain financial covenants and requires a significant 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 highly competitive nature of the market in which the Company competes, including the introduction of new products, pricing changes by the Company's competitors and growth rates of the office systems category; risks associated with the Company's marketing and sales strategies, 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 dependence on key personnel; the ability of the Company to successfully negotiate a new collective bargaining agreement with its unionized employees; 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; risks associated with conducting business via the Internet and the Company's ability to react appropriately and in a timely fashion to changing technologies and business models; and fluctuations in foreign currency exchange rates. Except as otherwise required by the federal securities laws, the Company disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement 19 contained in this Form 10-K to reflect any change in its expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK During the normal course of business, the Company is routinely subjected to market risk associated with interest rate movements and foreign currency exchange rate movements. Interest rate risk arises from the Company's debt obligations and related interest rate collar agreements. Foreign currency exchange rate risk arises from the Company's foreign operations and purchases of inventory from foreign suppliers. Interest Rate Risk The Company has both fixed and variable rate debt obligations for other than trading purposes that are denominated in U.S. dollars. Changes in interest rates have different impacts on the fixed and variable-rate portions of the debt. A change in interest rates impacts the interest incurred and cash paid on the variable-rate debt but does not impact the interest incurred or cash paid on the fixed rate debt. The Company uses interest rate collar agreements for other than trading purposes in order to manage its exposure to fluctuations in interest rates on its variable-rate debt. Such agreements effectively set agreed-upon maximum and minimum rates on a notional principal amount and utilize the three-month 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 quarterly and do not represent the amount of exposure to credit loss. Fluctuations in LIBOR impact both the net financial instrument position and the amount of cash to be paid or received, if any. The following table summarizes the Company's market risks associated with its debt obligations and interest rate collar agreements as of December 31, 2001. For debt obligations, the table presents principal cash flows and related weighted average interest rates by year of maturity. Variable interest rates presented for variable-rate debt represent the weighted average interest rates on the Company's credit facility borrowings as of December 31, 2001. For interest rate caps and floors, the table presents the notional amounts and related weighted average interest rates by year of maturity.
2002 2003 2004 2005 2006 Thereafter Total Fair Value -------- -------- -------- -------- -------- ---------- ---------- ---------- (Dollars in Thousands) Rate Sensitive Liabilities Long-term Debt: Fixed Rate............. $ 58 $ 62 $ 65 $ 69 $107,324 $446 $108,024 $102,704 Average Interest Rate............. 10.83% 10.83% 10.84% 10.84% 10.84% 4.11% Variable Rate.......... $62,500 $63,750 $ 81,250 $232,000 -- -- $439,500 $439,500 Average Interest Rate............. 2.89% 2.89% 2.89% 2.89% -- -- Rate Sensitive Derivative Financial Instruments Interest Rate Caps: Notional Amount........ -- -- $200,000 -- -- -- $200,000 $ 87 Strike Rate............ -- -- 10.00% -- -- -- Interest Rate Floors: Notional Amount........ -- -- $200,000 -- -- -- $200,000 $ (8,521) Strike Rate............ -- -- 5.12% -- -- --
At December 31, 2000, the Company had total debt outstanding of $425.8 million, of which $317.8 million was variable-rate debt. The increase in the variable- rate debt from December 31, 2000 to December 31, 2001 is related to net borrowings of $153.0 million under the senior revolving credit facility, which includes borrowings to fund the payment of a special cash dividend totaling $220.3 million on January 5, 2001, offset by the repayment of $31.25 million of debt under the term loan facility. 20 As previously discussed in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Company notified the holders of its Senior Subordinated Notes that it will redeem $50.0 million aggregate principal amount of the outstanding Senior Subordinated Notes on April 30, 2002 at 103.625% of principal amount, plus accrued interest. The Company intends to fund such redemption with borrowings under its senior revolving credit facility. Consequently, the Company will replace fixed-rate debt with variable-rate debt, thereby increasing its market risk exposure related to changes in interest rates. At December 31, 2000, the Company had three interest rate collar agreements outstanding with an aggregate notional principal amount of $135.0 million, related weighted average maximum and minimum rates of 10.00% and 5.64%, respectively, and a termination date of February 2003. In February 2001, the Company negotiated modifications to these agreements that increased the aggregate notional principal amount to $200.0 million, decreased the weighted average minimum rate to 5.12% and extended the termination date to February 2004. The aggregate fair value of these interest rate collar agreements from the Company's perspective as of December 31, 2001 was ($8.4 million), of which $5.9 million was recorded as a current liability and $2.5 million was recorded as a noncurrent liability in the Company's consolidated balance sheet as of December 31, 2001. During 2001, the Company recognized an aggregate net loss related to these agreements of $9.6 million, of which $2.1 million was recorded as interest expense and $7.5 million was recorded as a component of other expense in the Company's consolidated statement of operations. The aggregate fair value of the interest rate collar agreements outstanding at December 31, 2000 was not material. The Company was not required to make nor was it entitled to receive any payments as a result of its use of interest rate collar agreements during 2000 and 1999. The Company will continue to review its exposure to interest rate fluctuations and evaluate whether it should manage such exposure through derivative transactions. Foreign Currency Exchange Rate Risk The Company manufactures its products in the U.S., Canada and Italy and sells its products in those markets as well as in other European countries. The Company's foreign sales and certain expenses are transacted in foreign currencies. 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. Additionally, as the Company's reporting currency is the U.S. dollar, the financial position of the Company is affected by the strength of the currencies in countries where the Company has operations relative to the strength of the U.S. dollar. The principal foreign currencies in which the Company conducts business are the Canadian dollar and the Italian lira, which has been replaced by the Euro effective January 1, 2002. Approximately 8.8% of the Company's revenues in 2001 and 2000, 25.4% of the Company's expenses in 2001 and 24.7% of the Company's expenses in 2000 were denominated in currencies other than the U.S. dollar. Foreign currency exchange rate fluctuations did not have a material impact on the financial results of the Company during 2001 and 2000. The Company generally does not hedge its foreign currency exposure. However, from time to time, the Company enters into foreign currency forward exchange contracts and foreign currency option contracts for other than trading purposes in order to manage its exposure to foreign exchange rates associated with purchases of inventory from foreign suppliers. The terms of these contracts are generally less than a year. Changes in the fair value of such contracts are reported in earnings in the period the value of the contract changes. The net gain or loss upon settlement is recorded as an adjustment to cost of sales, while the remaining change in fair value is recorded as a component of other income (expense). The Company did not have any foreign currency forward exchange or option contracts outstanding at December 31, 2001. The aggregate net gain related to the Company's foreign currency forward exchange contracts was not material for 2001. The contract amounts and fair value of the contracts outstanding at December 31, 2000 as well as the amounts of gains and losses recorded during 2000 and 1999 were not material. 21 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. 22 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The table below sets forth the names, ages and titles of the persons who were directors and executive officers of the Company as of March 28, 2002.
Name Age Position ------------------------ ----- -------------------------------------- Burton B. Staniar....... 60 Chairman of the Board Andrew B. Cogan......... 39 Chief Executive Officer, Knoll, Inc., and Director Kathleen G. Bradley..... 52 President and Chief Executive Officer, Knoll North America, and Director Arthur C. Graves........ 55 Senior Vice President--Sales and Distribution Stephen A. Grover....... 49 Senior Vice President--Operations Carl G. Magnusson....... 62 Senior Vice President--Design Barry L. McCabe......... 55 Senior Vice President, Treasurer and Controller Andrew C. McGregor...... 52 Chief Marketing and Development Officer Patrick A. Milberger.... 45 Senior Vice President, General Counsel and Secretary S. David Wolfe.......... 44 Vice President--Human Resources Jeffrey A. Harris....... 46 Director Sidney Lapidus.......... 64 Director Kewsong Lee............. 36 Director John H. Lynch........... 49 Director Henry B. Schacht........ 67 Director
Burton B. Staniar was appointed Chairman of the Board of the Company in December 1993. Mr. Staniar served as Chief Executive Officer of the Company from December 1993 to January 1997. Prior to that time, Mr. Staniar held a number of assignments at Westinghouse, including President of Group W Cable and Chairman and Chief Executive Officer of Westinghouse Broadcasting. Prior to joining Westinghouse in 1980, he held a number of marketing and general management positions at Colgate-Palmolive Company and Church and Dwight Co., Inc. Mr. Staniar is also a director of Church and Dwight Co., Inc. and Journal Register Company. Andrew B. Cogan has been a director of the Company since February 1996. Mr. Cogan was appointed Chief Executive Officer of Knoll, Inc. effective April 2001 after having served as Chief Operating Officer since December 1999, Executive Vice President--Marketing and Product Development since August 1998 and Senior Vice President since May 1994. Mr. Cogan held several positions in the design and marketing group since joining the Company in 1989. Kathleen G. Bradley has been a director of the Company since November 1999. Ms. Bradley was appointed President and Chief Executive Officer of Knoll North America effective April 2001. She was appointed to this position after having served as President of the Company since December 1999, Executive Vice President--Sales, Distribution and Customer Service since August 1998, Senior Vice President since 1996, Divisional Vice President for Knoll's southeast division since 1988 and regional manager for the Company's Atlanta region since 1983. She began her career with Knoll in 1979. Arthur C. Graves was appointed Senior Vice President--Sales and Distribution in October 1999, after serving as Divisional Vice President for Knoll's western division since 1990. Mr. Graves began his career at Knoll in March 1989 as a regional sales manager for the Company's San Francisco region. Stephen A. Grover joined Knoll as Senior Vice President--Operations in May 1999. Prior to such time, Mr. Grover spent 18 years at General Electric Company, where he held a variety of management positions, the last being Global Manager of Magnetic Resonance Manufacturing for GE Medical Systems. 23 Carl G. Magnusson, a Canadian citizen, has held the position of Senior Vice President--Design since February 1993. Mr. Magnusson has been involved in design, product development, quality and communications since joining the Company in 1976. Barry L. McCabe was promoted to Senior Vice President, Treasurer and Controller in January 2000, after serving as Vice President, Treasurer and Controller since January 1995. Mr. McCabe joined the Company in August 1990 as Controller. Mr. McCabe worked with a number of Westinghouse business units after joining Westinghouse in 1974. Prior to such time, Mr. McCabe worked with the public accounting firm of Deloitte Haskins & Sells. Andrew C. McGregor joined the Company in June 2000 as Chief Marketing and Development Officer. Prior to joining the Company, Mr. McGregor spent over 24 years at Herman Miller, Inc., where he held a variety of management and executive positions. Patrick A. Milberger was promoted to Senior Vice President, General Counsel and Secretary in January 2000, after serving as Vice President, General Counsel and Secretary. Mr. Milberger joined the Company as Vice President and General Counsel in April 1994. Prior to joining the Company, Mr. Milberger served as an Assistant General Counsel and in a number of other positions in the Westinghouse Law Department, which he joined in 1986. Prior to such time, Mr. Milberger was in private practice at Buchanan Ingersoll, P.C. S. David Wolfe was promoted to Vice President--Human Resources in October 2000. Mr. Wolfe joined the Company in May 2000 as Process Improvement Manager. Prior to joining the Company, he spent seven years at General Electric Company, where he held a variety of management positions, the last being Manager of Installation Services for GE Medical Systems. Prior to that time, he held management positions at Solvay America, Inc. and Atofina Chemicals, Inc. Jeffrey A. Harris, a director of the Company since February 1996, is a Senior Managing Director of Warburg Pincus LLC, where he has been employed since 1983. Mr. Harris is also a director of Industri-Matematik International Corp., ECsoft Group plc and Spinnaker Exploration Company. Sidney Lapidus, a director of the Company since February 1996, is a Managing Director and Senior Advisor of Warburg Pincus LLC, where he has been employed since 1967. Mr. Lapidus is a director of Lennar Corporation, Information Holdings, Inc. and Radio Unica Communications Corp. Kewsong Lee, a director of the Company since February 1996, is a Managing Director of Warburg Pincus LLC, where he has been employed since 1992. Mr. Lee is a director of Arch Capital Group Ltd. and Eagle Family Foods Holdings, Inc. John H. Lynch, a director of the Company since 1994, is Chief Executive Officer of The Lynch Group, a management consulting firm he founded. Mr. Lynch resigned as Chief Executive Officer of the Company effective March 31, 2001. Mr. Lynch joined the Company as Vice Chairman of the Board in May 1994. He was subsequently elected President of the Company and in January 1997 was elected Chief Executive Officer. From 1990 to 1994, prior to joining the Company, Mr. Lynch was a partner in BGI, a management firm. During that time, Mr. Lynch led the restructuring of the Westinghouse Broadcasting television and radio stations. From 1988 to 1990, Mr. Lynch was an associate dean at the Harvard Business School. Mr. Lynch is a director of Citizens National Bank of New Hampshire. Henry B. Schacht, a director of the Company since December 1998, is on leave of absence from his position as a Managing Director of Warburg Pincus LLC, which he joined in March 1999, and is currently serving as Chairman of Lucent Technologies, Inc. ("Lucent"). Mr. Schacht returned to Lucent in October 2000 as Chairman and Chief Executive Officer (until January 2002), after serving as Chairman of Avaya Inc., a spin-off of Lucent, in October 2000. Prior to joining Warburg Pincus LLC, Mr. Schacht served as Chairman of the Board of Lucent from April 1996 to February 1998, Chief Executive Officer of Lucent from February 1996 to October 1997 and Chairman of the Board (1977-1995) and Chief Executive Officer (1973-1994) of Cummins 24 Engine Company, Inc. Mr. Schacht is also a director of Agere Systems Inc., Avaya Inc., Aluminum Company of America (Alcoa), Johnson & Johnson Corp. and The New York Times Company. Except for Mr. Magnusson, all directors and executive officers of Knoll are citizens of the U.S. ITEM 11. EXECUTIVE COMPENSATION Summary Compensation Table The following table sets forth, for the years ended December 31, 2001, 2000 and 1999, individual compensation information for the Chief Executive Officer of the Company and each of the four other most highly compensated executive officers of the Company who were serving in such capacities as of December 31, 2001 as well as the Former Chief Executive Officer of the Company who resigned effective March 31, 2001 (the "Named Executive Officers").
Long-Term Compensation Annual Compensation Awards ---------------------------------- ------------ Other All Annual Securities Other Compen- Underlying Compen- Name and Principal Position Year Salary Bonus sation (1) Options (2) sation (3) --------------------------- ------ ---------- ---------- ---------- ------------ ---------- Burton B. Staniar.......... 2001 $200,004 $ 625,000 $ 5,320 -- $5,199 Chairman of the Board 2000 200,004 625,000 6,570 -- 9,180 1999 400,008 450,000 6,570 177,420 7,299 Andrew B. Cogan............ 2001 391,673 750,000 14,640 100,000 99 Chief Executive Officer, 2000 300,000 905,000 12,035 -- 99 Knoll, Inc. 1999 254,174 400,000 9,375 236,560 99 Kathleen G. Bradley........ 2001 391,673 750,000 23,040 100,000 5,199 President and Chief 2000 300,000 1,800,000 7,382 -- 9,180 Executive Officer, 1999 254,174 400,000 73,594 236,560 7,299 Knoll North America Andrew C. McGregor......... 2001 250,032 300,000 66,646 -- 5,199 Chief Marketing and 2000 144,089 400,000 268,713 141,936 50 Development Officer 1999 -- -- -- -- -- Arthur C. Graves........... 2001 208,016 300,000 8,645 -- 5,199 Senior Vice President-- 2000 200,683 600,000 6,166 -- 9,180 Sales and Distribution 1999 139,704 100,000 113,624 59,140 7,299 John H. Lynch.............. 2001 100,002 -- 2,253 -- 4,105 Former Chief Executive 2000 400,008 1,450,000 6,730 -- 9,180 Officer 1999 400,008 450,000 6,730 354,840 7,299
___________________________ (1) $64,239 of the amount indicated in 1999 for Ms. Bradley and $54,215 of the amount indicated in 1999 for Mr. Graves represents expenses related to their relocation to the Company's headquarters in East Greenville, Pennsylvania. The indicated amount for 1999 for Mr. Graves also includes sales commissions of $53,376. With respect to Mr. McGregor, $58,011 of the amount indicated for 2001 and $15,510 of the amount indicated for 2000 represents expenses related to his relocation to the Company's offices in New York, New York. The indicated amount for 2000 for Mr. McGregor also includes a one-time signing bonus of $250,000. All other amounts represent benefit dollars allocated to the Named Executive Officers pursuant to terms of the Company's employee benefit plans in addition to compensation for vacation days that were sold in the case of Messrs. Staniar and Cogan and Ms. Bradley ($800 in 2001 and $1,600 in each of 2000 and 1999 for Mr. 25 Staniar; $8,400 in 2001, $7,000 in 2000 and $5,040 in 1999 for Mr. Cogan; and $16,800 in 2001, $2,200 in 2000 and $3,000 in 1999 for Ms. Bradley). (2) Represents the aggregate number of shares of common stock subject to options granted to the Named Executive Officers. The amounts presented for 2000 and 1999 reflect adjustments made to outstanding options in February 2001 in response to an equity restructuring. The Company's Stock Option Committee of the Board of Directors approved certain adjustments, as permitted by antidilution provisions under the Company's stock incentive plans, to the then outstanding options in response to dilution created by the special cash dividend paid on January 5, 2001. See Note 19 (Stock Plans) of the Notes to the Consolidated Financial Statements beginning on page F-22 for further discussion of such adjustments. (3) Amounts in this column represent the Company's matching contributions to the Knoll, Inc. Retirement Savings Plan and the payment by the Company of premiums in respect of term life insurance. Stock Option Grants Table The following table sets forth information concerning individual grants of options to purchase common stock made to the Named Executive Officers during 2001.
Number of % of Total Per Securities Options Per Share Underlying Granted to Share Grant Date Options Employees Exercise Expiration Present Name Granted (1) in 2001 Price Date Value (2) ----------------------- ----------- ---------- ---------- ------------ ----------- Burton B. Staniar...... -- -- % $ -- N/A $ -- Andrew B. Cogan........ 100,000 50.0 34.50 02/06/2111 10.36 Kathleen G. Bradley.... 100,000 50.0 34.50 02/06/2111 10.36 Andrew C. McGregor..... -- -- -- N/A -- Arthur C. Graves....... -- -- -- N/A -- John H. Lynch.......... -- -- -- N/A --
_______________________ (1) Options were granted to Mr. Cogan and Ms. Bradley on February 6, 2001. Such options will vest in installments as follows: 30% on February 6, 2002, 20% on each of February 6, 2003 and 2004 and 30% on February 6, 2005. (2) The per share grant date present value was estimated using a minimum value method, which does not consider volatility of the Company's stock. Such method was deemed appropriate as the Company's common stock was not publicly traded at the date of grant. The present value of the options under the minimum value method was calculated using a grant date fair value of $34.50 per share of Knoll common stock, which was based upon an independent appraisal, as well as the following assumptions: risk-free interest rate of 5.1%, dividend yield of zero and an expected life of 7 years. 26 Aggregate Stock Option Exercise Table The following table sets forth information regarding the exercise of options by the Named Executive Officers during 2001. The table also shows the number and value of unexercised options that were held by the Named Executive Officers on December 31, 2001. The values of unexercised options are based on an independent appraised fair value of $36.00 per share of Knoll common stock on December 31, 2001.
Number of Securities Number of Underlying Value of Unexercised Shares Unexercised Options In-the-Money Acquired on Value Exercisable / Options Exercisable Name Exercise Realized Unexercisable (1) / Unexercisable (1) ----------------------- ----------- ---------- -------------------- ---------------------- Burton B. Staniar...... N/A N/A 88,710 / 88,710 $1,093,794 / 1,093,794 Andrew B. Cogan........ N/A N/A 151,396 / 226,562 1,759,978 / 1,683,824 Kathleen G. Bradley.... N/A N/A 296,516 / 262,842 5,474,049 / 2,612,374 Andrew C. McGregor..... N/A N/A 42,581 / 99,355 525,024 / 1,225,047 Arthur C. Graves....... N/A N/A 29,570 / 29,570 364,598 / 364,598 John H. Lynch.......... N/A N/A 177,420 / 177,420 2,187,589 / 2,187,589
_______________________ (1) Reflects the February 2001 adjustments to outstanding options by the Company's Stock Option Committee of the Board of Directors in response to dilution created by the special cash dividend paid on January 5, 2001. See Note 19 (Stock Plans) of the Notes to the Consolidated Financial Statements beginning on page F-22 for further discussion of such adjustments. Pension Plans The Knoll, Inc. Pension Plan (the "Company Pension Plan") provides eligible employees with retirement benefits based on a career average compensation formula. The formula for computing normal retirement benefits under this plan is 1.55% of career compensation divided by twelve. Once a participant accumulates five years of vesting service, he or she can take early retirement anytime after reaching age 55. Accrued normal retirement benefit is reduced 6% per year prior to normal retirement age. The minimum benefit earned for any year of participation in the plan is $300 ($25 per month), prorated for the partial years worked during the first and last years of employment. As of December 31, 2001, the estimated annual benefits payable upon normal retirement under the Company Pension Plan was as follows: Mr. Staniar ($14,648); Mr. Cogan ($14,648); Ms. Bradley ($14,648); Mr. McGregor ($5,270); Mr. Graves ($14,648); and Mr. Lynch ($14,648). Remuneration covered by the Company Pension Plan primarily includes salary and bonus, as set forth in the "Summary Compensation Table." As of December 31, 2001, each of Messrs. Staniar, Cogan and Graves and Ms. Bradley had 5.83 years of credited service, Mr. McGregor had 1.57 years of credited service and Mr. Lynch had 5.08 years of credited service. Director Compensation During 2001, the Company's directors did not receive compensation for service on the Board of Directors but were reimbursed for certain expenses in connection with attendance at Board and committee meetings. 27 Employment Arrangements The Company entered into employment agreements with Messrs. Staniar, Cogan and Lynch for terms that expired on March 1, 1999 and were each renewed annually pursuant to automatic one-year extensions. The employment agreements of Messrs. Staniar, Cogan and Lynch have since been amended and restated (in the case of Mr. Staniar), superseded (in the case of Mr. Cogan) and terminated (in the case of Mr. Lynch). The employment agreement with Mr. Staniar, as amended and restated on January 1, 2000 and amended on March 25, 2002, provides for a base salary of $250,000 subject to annual review and a target bonus of 100% of base salary based upon the attainment of goals set by the Board of Directors. The employment agreement for Mr. Staniar will continue to renew automatically each January 1, unless either party gives 60 days notice not to renew. Mr. Staniar's agreement may be terminated at any time by the Company, but if so terminated without "cause," or if the Company fails to renew the agreement, the Company must pay him 100% of his then current base salary. The agreement also contains non-compete, non-solicitation (during the term of the agreement and for one year thereafter) and confidentiality provisions. In connection with Mr. Lynch's decision to resign his position as Chief Executive Officer of the Company effective March 31, 2001, the Company and Mr. Lynch entered into an agreement on March 23, 2001 pursuant to which Mr. Lynch's employment agreement was terminated by mutual consent as of 11:59 p.m. on March 31, 2001 without the payment of termination compensation. Mr. Lynch continues to serve as a member of the Company's Board of Directors. The Company entered into employment agreements with Mr. Cogan and Ms. Bradley on March 23, 2001. Mr. Cogan's agreement replaced and superseded his agreement referenced above. These agreements each commenced on April 1, 2001. Each provides for a base salary of $400,000 subject to annual review and a target annual bonus of 100% of base salary based upon the attainment of goals set by the Board of Directors. The employment agreements for Mr. Cogan and Ms. Bradley will continue to renew automatically each April 1 unless either party gives 60 days notice of his, her or its intention not to renew. The agreements may be terminated by the Company at any time, but if so terminated without "cause," or if the Company fails to renew the agreements, the Company must pay the employee termination compensation. In the case of Mr. Cogan, the termination compensation is 200% of his then current base salary plus the average of the annual bonuses paid to him for the last two completed fiscal years preceding the fiscal year of termination. In the case of Ms. Bradley, the termination compensation is 100% of her then current base salary plus the average of the annual bonuses paid to her for the last two completed fiscal years preceding the fiscal year of termination. The agreements also contain non-compete, non-solicitation (during the term of the agreement and for two years thereafter for Mr. Cogan and during the term of the agreement and for one year thereafter for Ms. Bradley) and confidentiality provisions. The Company entered into a letter of agreement, dated June 6, 2000, with Mr. McGregor. This agreement sets forth the one-time signing bonus, initial starting salary, target bonus for the year 2000 and stock options granted to Mr. McGregor. This agreement provides that if Mr. McGregor is terminated by the Company without "cause," he will receive $250,000 as severance in complete satisfaction of any and all claims against Knoll. For 2002, Mr. McGregor's base salary is $250,032, and his target bonus amount is $250,000, based upon the attainment of certain goals set by the Company. This bonus is subject to certain conditions, including approval of the Company's Board of Directors. In 1999, Mr. Graves was promoted to Senior Vice President--Sales and Distribution. For 2002, Mr. Graves' base salary is $208,016, and his target bonus amount is $250,000, based upon the attainment of certain goals set by the Company. This bonus is subject to certain conditions, including approval of the Company's Board of Directors. 28 The Named Executive Officers and the Company have entered into certain stock option agreements that contain provisions regarding change in control of the Company. The agreements provide that upon a Change in Control, as defined therein, 100% of the options, to the extent not previously exercised, shall become fully vested and exercisable. Compensation Committee Interlocks and Insider Participation The Compensation Committee of the Board of Directors was comprised of Messrs. Harris, Lapidus and Lynch from November 4, 1999 until May 7, 2001 and Messrs. Harris, Lapidus, Lynch and Cogan and Ms. Bradley on and after May 7, 2001. Mr. Cogan abstained from actions of the Compensation Committee regarding the 2001 incentive compensation for himself, and Ms. Bradley abstained from actions regarding the 2001 incentive compensation for herself. Options are granted under the Company's stock incentive plans at the discretion of the Stock Option Committee of the Board of Directors. This committee was comprised of Messrs. Harris, Lapidus and Lynch from November 4, 1999 until May 7, 2001 and Messrs. Harris, Lapidus, Lynch and Cogan and Ms. Bradley on and after May 7, 2001. On February 6, 2001, the Stock Option Committee granted 100,000 options to each of Mr. Cogan and Ms. Bradley. Except for Messrs. Staniar, Cogan and Lynch and Ms. Bradley, no member of the Board of Directors is or has been an officer or employee of the Company. During the year ended December 31, 2001, no executive officer of the Company served on the board of directors or compensation committee of any entity (other than the Company) whose executive officers were a director or member of the compensation committee of Knoll. 29 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the beneficial ownership of the Company's common stock, as of March 28, 2002, by (i) each person known by the Company to own beneficially more than 5% of the outstanding common stock, (ii) each of the Company's directors, (iii) each of the Named Executive Officers of the Company, and (iv) all directors and executive officers of the Company, as a group (15 persons). Except as set forth in the table and Notes 4, 7 and 8 to the table, the business address of each person is 1235 Water Street, East Greenville, PA 18041. As described in the notes to the table, voting and/or dispositive power with respect to certain common stock is shared by the named individuals or entities. In these cases, such shares are shown as beneficially owned by each of those sharing voting and/or dispositive power.
Number of Shares of Beneficial Owner (1) Common Stock (2) Percentage ---------------------------------- ------------------- -------------- Warburg, Pincus & Co. (3) 466 Lexington Avenue New York, New York 10017...... 20,981,956 90.5% Burton B. Staniar................. 753,949 3.2 Andrew B. Cogan................... 376,518 1.6 Kathleen G. Bradley............... 446,424 1.9 Andrew C. McGregor................ 42,581 * Arthur C. Graves.................. 57,826 * John H. Lynch (4)................. 633,864 2.7 Jeffrey A. Harris (5) (7)......... 20,981,956 90.5 Sidney Lapidus (5) (7)............ 20,981,956 90.5 Kewsong Lee (5) (7)............... 20,981,956 90.5 Henry B. Schacht (5) (6) (8)...... 21,005,612 90.6 All directors and executive officers as a group (15 persons).................... 23,627,418 97.3
__________________________ * Less than 1%. (1) Percentages are calculated pursuant to Rule 13d-3 under the Exchange Act. Percentage calculations assume, for each person and group, that all shares that may be acquired by such person or group pursuant to options currently exercisable or that become exercisable within 60 days following March 28, 2002 are outstanding for the purpose of computing the percentage of common stock owned by such person or group. However, those unissued shares of common stock described above are not deemed to be outstanding for calculating the percentage of common stock owned by any other person. Except as otherwise indicated, the persons in this table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them, subject to community property laws where applicable and subject to the information contained in the footnotes to this table. The number of shares outstanding for these purposes as of March 28, 2002 was 23,174,029 shares of common stock. (2) Excludes options to purchase 138,710; 296,562; 149,355; 79,570; 177,420; 5,914; 288,280 and 1,410,550 shares of common stock held by Messrs. Staniar, Cogan, McGregor, Graves, Lynch and Schacht, Ms. Bradley and all directors and executive officers as a group, respectively, that will not vest within 60 days of March 28, 2002. 30 (3) Warburg directly owns 20,709,922 shares of common stock and Warburg, Pincus & Co. ("Warburg, Pincus") directly owns an additional 272,034 shares. The sole general partner of Warburg is Warburg, Pincus. Warburg Pincus LLC manages Warburg. The members of Warburg Pincus LLC are substantially the same as the partners of Warburg, Pincus. Lionel I. Pincus is the managing partner of Warburg, Pincus and the managing member of Warburg Pincus LLC and may be deemed to control both Warburg, Pincus and Warburg Pincus LLC. Jeffrey A. Harris, Sidney Lapidus, Kewsong Lee and Henry B. Schacht (who is currently on unpaid leave from Warburg Pincus LLC), directors of the Company, are Senior Managing Director (in the case of Mr. Harris), Managing Director and Senior Advisor (in the case of Mr. Lapidus) and Managing Directors (in the case of Messrs. Lee and Schacht) of Warburg Pincus LLC and general partners of Warburg, Pincus. As such, Messrs. Harris, Lapidus, Lee and Schacht may be deemed to have an indirect pecuniary interest (within the meaning of Rule 16a-1 under the Exchange Act) in an indeterminate portion of the shares beneficially owned by Warburg and Warburg, Pincus. See Note 5 below. (4) The business address of Mr. Lynch is 889 Elm Street, Manchester, New Hampshire 03101. (5) 20,709,922 and 272,034 of the shares indicated as owned by Messrs. Harris, Lapidus, Lee and Schacht are owned directly by Warburg and Warburg, Pincus, respectively, and are included because of the affiliation of such persons with Warburg and Warburg, Pincus. Messrs. Harris, Lapidus, Lee and Schacht disclaim "beneficial ownership" of these shares within the meaning of Rule 13d-3 under the Exchange Act. See Note 3 above. (6) Includes 23,656 shares of common stock underlying stock options granted to Mr. Schacht on December 2, 1998, as adjusted in February 2001, in connection with his appointment as a director of the Company. (7) The business address of each of Messrs. Harris, Lapidus and Lee is 466 Lexington Avenue, New York, New York 10017. (8) The business address of Mr. Schacht is 600 Mountain Avenue, Murray Hill, New Jersey 07974. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Stockholders Agreement On November 4, 1999, Warburg and four senior members of management (each a "Holder" and collectively, the "Holders") and the Company entered into an Amended and Restated Stockholders Agreement (the "Stockholders Agreement") which governs certain matters related to corporate governance and registration of shares of common stock ("Registrable Securities") held by such Holders (other than shares acquired pursuant to the Company's stock incentive plans). Pursuant to the Stockholders Agreement, Warburg is entitled to request at any time that the Company file a registration statement under the Securities Act covering the sale of shares of common stock with an aggregate public offering price of at least $25 million, subject to certain conditions. If officers or directors of the Company holding other securities of the Company request inclusion of their securities in any such registration, or if holders of securities of the Company other than Registrable Securities who are entitled, by contract with the Company or otherwise, to have securities included in such a registration (the "Other Stockholders"), request such inclusion, the Holders shall offer to include the securities of such officers, directors and Other Stockholders in any underwriting involved in such registration, provided, among other conditions, that the underwriter representative of any such offering has the right, subject to certain conditions, to limit the number of Registrable Securities or other securities included in the registration. The Company may defer the registration for 120 days if it believes 31 that it would be seriously detrimental to the Company and its stockholders for such registration statement to be filed. The Stockholders Agreement further provides that, if the Company proposes to register any of its securities (other than registrations related solely to employee benefit plans or pursuant to Rule 145 or on a form which does not permit secondary sales or does not include substantially the same information as would be required to be included in a registration statement covering the sale of Registrable Securities), either for its own account or for the account of other security holders, holders of Registrable Securities may require the Company to include all or a portion of their Registrable Securities in the registration and in any underwriting involved therein, provided, among other conditions, that the underwriter representative of any such offering has the right, subject to certain conditions, to limit the number of Registrable Securities included in the registration. In addition, after the Company becomes qualified to use Form S-3, the holders of Registrable Securities will have the right to request an unlimited number of registrations on Form S-3 to register such shares with an aggregate price to the public of more than $5 million, subject to certain conditions, provided that the Company will not be required to effect such a registration within 180 days of the effective date of the most recent registration pursuant to this provision. The Company may defer the registration for 120 days if it believes that it would be seriously detrimental to the Company and its stockholders for such registration statement to be filed. In general, all fees, costs and expenses of such registrations (other than underwriting discounts and selling commissions applicable to sales of the Registrable Securities) and all fees and disbursements of counsel for the Holders will be borne by the Company. The Stockholders Agreement provides that the Board of Directors of the Company shall initially be comprised of Messrs. Staniar, Cogan, Harris, Lapidus, Lee, Lynch, Metz and Schacht, and Ms. Bradley. Pursuant to the Stockholders Agreement, Warburg and the other stockholders who are a party thereto (who hold in the aggregate a majority of the outstanding shares of common stock) have agreed to nominate and use their best efforts to have elected that number of persons designated by Warburg as shall constitute a majority of the Board (or, at Warburg's irrevocable election, as shall constitute one director less than a majority of the Board). Stockholders Agreement (Common Stock Under Stock Incentive Plans) In connection with the issuance of 4,144,030 restricted shares of common stock pursuant to the Company's 1996 stock incentive plan, Warburg and the Company also entered into a separate Stockholders Agreement with all of the Company's then executive officers and other members of the Company's management. This Stockholders Agreement was amended and restated as of November 4, 1999. Pursuant to this agreement, persons deemed to be "insiders" within the meaning of Section 16 of the Exchange Act have agreed not to transfer their shares except (i) to members of their immediate families and other related or controlled entities, (ii) to Warburg or an affiliate thereof or (iii) after an initial public offering, upon 30 days prior written notice to the Board of Directors. The restrictions on transfer will terminate after an initial public offering when Warburg owns less than 10% of the outstanding shares of common stock. In addition, pursuant to this agreement, the Company agreed that, if the Company determined to register any shares of common stock for its own account or for the account of security holders, the Company would include in such registration certain vested shares of common stock received by management pursuant to the 1996 stock incentive plan, subject to certain limited exceptions. In addition, management may request unlimited registrations of at least $5 million of securities on Form S-3, provided that the Company is not required to effect a registration pursuant to this provision within 180 days of the effective date of the most recent registration pursuant to this provision. The Company may defer the registration for 120 days if it believes that it would be seriously detrimental to the Company and its stockholders for such registration statement to be filed. Substantially all individuals who were granted options under the Company's stock incentive plans have also agreed to be bound by the terms of the Stockholders Agreement (Common Stock Under Stock Incentive Plans). 32 Other During the year ended December 31, 2001, the Company paid approximately $395,000 to Emanuela Frattini Magnusson for design services and product royalties, the bulk of which was payable pursuant to the terms of a July 1993 Design Development Agreement between Emanuela Frattini and the Company pertaining to the Company's PROPELLER product line. Emanuela Frattini Magnusson is the wife of Carl G. Magnusson, the Company's Senior Vice President--Design. 33 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 Commission are not required under the related instructions or are inapplicable and therefore have been omitted. (3) EXHIBITS
Exhibit Number Description ---------- --------------------------------------------------------------------------- 2++ Amended and Restated Agreement and Plan of Merger by and between Warburg, Pincus Ventures, L.P. and Knoll, Inc., dated as of July 29, 1999. 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 T.K.G. Acquisition Corp. 10.2+++ Credit Agreement, dated as of October 20, 1999, by and among the Company, the Guarantors (as defined therein), the Lenders (as defined therein), Bank of America, N.A., as Administrative Agent, the Chase Manhattan Bank, as Syndication Agent, and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Documentation Agent. 10.3+++++ First Amendment to Credit Agreement, dated as of December 20, 2000, by and among the Company, the Guarantors (as defined therein), the Lenders (as defined therein) party thereto, and Bank of America, N.A., as Administrative Agent. 10.4* 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. 10.5* 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. 10.6** 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. 10.7+ Letter Agreement between Oak Hill Securities Fund, L.P. and the Company, dated August 13, 1999.
34
Exhibit Number Description ---------- --------------------------------------------------------------------------- 10.8***** Supplemental Indenture No. 3, dated as of November 4, 1999, by and among the Company, the Guarantors (as defined therein), and The Bank of New York, as trustee, relating to the Company's 10.875% Senior Subordinated Notes due 2006. 10.9++++ Amended and Restated Employment Agreement, dated as of January 1, 2000, between the Company and Burton B. Staniar. 10.10 Amendment to Employment Agreement, dated as of March 25, 2002, between the Company and Burton B. Staniar. 10.11+++++ Employment Agreement, dated as of March 23, 2001, between the Company and Andrew B. Cogan. 10.12+++++ Employment Agreement, dated as of March 23, 2001, between the Company and Kathleen G. Bradley. 10.13 Letter Agreement, dated as of June 6, 2000, between the Company and Andrew C. McGregor. 10.14** Employment Agreement, dated as of February 29, 1996, between T.K.G. Acquisition Corp. and John H. Lynch. 10.15+++++ Letter Agreement, dated as of March 23, 2001, between the Company and John H. Lynch. 10.16++++ Amended and Restated Stockholders Agreement, dated as of November 4, 1999, among the Company, Warburg, Pincus Ventures, L.P., and the signatories thereto. 10.17++++ Amended and Restated Stockholders Agreement (Common Stock Under Stock Incentive Plans), dated as of November 4, 1999, among the Company, Warburg, Pincus Ventures, L.P., and the signatories thereto. 10.18++++ Amended and Restated Knoll, Inc. 1996 Stock Incentive Plan. 10.19++++ Amended and Restated Knoll, Inc. 1997 Stock Incentive Plan. 10.20++++ Knoll, Inc. 1999 Stock Incentive Plan. 10.21++++++ Form of Non-Qualified Stock Option Agreement under the Knoll, Inc. 1996 Stock Incentive Plan, entered into by the Company and certain executive officers. 10.22++++++ Form of Non-Qualified Stock Option Agreement under the Knoll, Inc. 1997 Stock Incentive Plan, entered into by the Company and certain executive officers. 10.23++++ Form of Non-Qualified Stock Option Agreement under the Knoll, Inc. 1999 Stock Incentive Plan, entered into by the Company and certain executive officers. 21** Subsidiaries of the Registrant.
(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, 2001. 35 __________________________________________ * 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 Annual Report on Form 10-K, and the amendments thereto, for the year ended December 31, 1998. ***** Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999. + Incorporated by reference to the Company's Amendment No. 1 to Schedule 13E-3, which was filed with the Commission on September 10, 1999. ++ Incorporated by reference to the Company's Definitive Proxy Statement on Schedule 14A, which was filed with the Commission on September 30, 1999. +++ Incorporated by reference to the Company's Form 8-K dated November 4, 1999, which was filed with the Commission on November 5, 1999. ++++ Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1999. +++++ Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2000. ++++++ See Exhibit 10.23. Exhibit is substantially identical to Exhibit 10.23. 36 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 29th day of March 2002. KNOLL, INC. By: /s/ Burton B. Staniar ----------------------- 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 29, 2002 - -------------------------- Burton B. Staniar /s/ Andrew B. Cogan Chief Executive Officer, March 29, 2002 - -------------------------- Knoll, Inc. and Director Andrew B. Cogan (Principal Executive Officer) /s/ Kathleen G. Bradley President and Chief Executive March 29, 2002 - -------------------------- Officer, Knoll North America Kathleen G. Bradley and Director /s/ Barry L. McCabe Controller March 29, 2002 - -------------------------- (Principal Accounting Officer) Barry L. McCabe /s/ Jeffrey A. Harris Director March 29, 2002 - -------------------------- Jeffrey A. Harris /s/ Sidney Lapidus Director March 29, 2002 - -------------------------- Sidney Lapidus /s/ Kewsong Lee Director March 29, 2002 - -------------------------- Kewsong Lee /s/ John H. Lynch Director March 29, 2002 - -------------------------- John H. Lynch /s/ Henry B. Schacht Director March 29, 2002 - -------------------------- Henry B. Schacht 37 KNOLL, INC. TABLE OF CONTENTS FOR THE FINANCIAL STATEMENTS Page ------ Report of Independent Auditors........................................ F-2 Consolidated Balance Sheets at December 31, 2001 and 2000............. F-3 Consolidated Statements of Operations for the Years Ended December 31, 2001, 2000 and 1999.................................... F-4 Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999.................................... F-5 Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the Years Ended December 31, 2001, 2000 and 1999................ F-6 Notes to the Consolidated Financial Statements........................ F-7 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, 2001 and 2000, and the related consolidated statements of operations, changes in stockholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 2001. Our audits also included the financial statement schedule 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 auditing standards generally accepted in the United States. 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Knoll, Inc. at December 31, 2001 and 2000, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As explained in Note 2 to the consolidated financial statements, effective January 1, 2001, the Company changed its method of accounting for derivatives. /s/ Ernst & Young LLP Philadelphia, Pennsylvania January 31, 2002, except for the third paragraph of Note 9, as to which the date is March 27, 2002 F-2 KNOLL, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2001 AND 2000 (Dollars In Thousands, Except Per Share Data)
2001 2000 ---------- ---------- ASSETS Current assets: Cash and cash equivalents........................ $ 32,213 $ 22,339 Customer receivables, net........................ 100,286 132,183 Inventories...................................... 60,691 79,203 Deferred income taxes............................ 23,669 22,236 Prepaid and other current assets................. 4,436 7,421 --------- --------- Total current assets......................... 221,295 263,382 Property, plant and equipment, net............... 175,038 179,629 Intangible assets, net........................... 237,105 245,879 Other noncurrent assets.......................... 5,565 6,240 --------- --------- Total Assets................................. $ 639,003 $ 695,130 ========= ========= LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Current maturities of long-term debt............. $ 62,558 $ 31,250 Accounts payable................................. 59,923 85,795 Income taxes payable............................. 4,817 5,668 Other current liabilities........................ 89,977 107,991 --------- --------- Total current liabilities.................... 217,275 230,704 Dividend payable (Note 10)....................... -- 220,339 Long-term debt................................... 484,966 394,505 Deferred income taxes............................ 25,656 24,675 Postretirement benefits other than pension....... 19,612 18,016 Other noncurrent liabilities..................... 13,812 11,266 --------- --------- Total liabilities............................ 761,321 899,505 --------- --------- Stockholders' deficit: Common stock, $0.01 par value; authorized 100,000,000 shares; 23,181,829 shares issued and outstanding (net of 24,300 treasury shares) in 2001 and 23,193,629 shares issued and outstanding (net of 12,500 treasury shares) in 2000................................ 232 232 Additional paid-in-capital....................... 3,188 3,591 Unearned stock grant compensation................ -- (2) Retained deficit................................. (108,189) (195,379) Accumulated other comprehensive loss............. (17,549) (12,817) --------- --------- Total stockholders' deficit.................. (122,318) (204,375) --------- --------- Total Liabilities and Stockholders' Deficit.. $ 639,003 $ 695,130 ========= =========
See accompanying notes to the consolidated financial statements. F-3 KNOLL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (In Thousands)
2001 2000 1999 ------------ ------------ ------------ Sales.............................. $985,388 $1,163,477 $984,511 Cost of sales...................... 594,446 682,421 593,442 -------- ---------- -------- Gross profit....................... 390,942 481,056 391,069 Selling, general and administrative expenses.......... 195,532 243,885 206,919 Restructuring charge (Note 15)..... 1,655 -- -- -------- ---------- -------- Operating income................... 193,755 237,171 184,150 Interest expense................... 42,101 44,437 21,611 Recapitalization expense (Note 3).. -- -- 6,356 Other income (expense), net........ (3,670) 3,026 (670) -------- ---------- -------- Income before income tax expense and extraordinary item........... 147,984 195,760 155,513 Income tax expense................. 60,794 79,472 66,351 -------- ---------- -------- Income before extraordinary item... 87,190 116,288 89,162 Extraordinary loss on early extinguishment of debt, net of taxes (Note 9)................ -- -- 10,801 -------- ---------- -------- Net income......................... $ 87,190 $ 116,288 $ 78,361 ======== ========== ========
See accompanying notes to the consolidated financial statements. F-4 KNOLL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (In Thousands)
2001 2000 1999 ---------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net income............................... $ 87,190 $ 116,288 $ 78,361 Adjustments to reconcile net income to cash provided by operating activities: Depreciation....................... 27,735 25,843 25,135 Amortization of intangible assets.. 8,228 8,106 7,873 Recapitalization expense........... -- -- 6,356 Extraordinary loss, net of taxes... -- -- 10,801 Other noncash items................ 5,302 351 7,748 Changes in assets and liabilities: Customer receivables........... 32,019 33,033 (31,134) Inventories.................... 18,150 1,958 (6,364) Accounts payable............... (25,766) 14,197 13,848 Current and deferred income taxes........................ 757 10,339 13,715 Other current assets........... 993 (2,028) (166) Other current liabilities...... (22,780) 15,646 2,038 Other noncurrent assets and liabilities.................. 2,319 (1,022) (224) --------- --------- --------- Cash provided by operating activities.... 134,147 222,711 127,987 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures..................... (25,020) (24,097) (25,095) Proceeds from sale of assets............. 71 139 114 --------- --------- --------- Cash used in investing activities........ (24,949) (23,958) (24,981) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from (repayment of) revolving credit facility, net................... 153,000 (167,000) 120,000 Proceeds from long-term debt............. -- -- 325,000 Repayment of long-term debt.............. (31,250) (17,500) (3,750) Payment of debt issuance costs........... -- -- (7,864) Payment of fees to amend debt agreements............................. -- (682) (12,870) Payment of dividend...................... (220,339) -- -- Net proceeds from issuance of stock...... -- -- 4,746 Purchase of common stock................. (403) (322) (28,703) Payment of merger consideration.......... -- -- (496,682) Payment of recapitalization costs........ -- (230) (8,843) --------- --------- --------- Cash used in financing activities........ (98,992) (185,734) (108,966) --------- --------- --------- Effect of exchange rate changes on cash and cash equivalents................... (332) (1,465) (720) --------- --------- --------- Increase (decrease) in cash and cash equivalents............................ 9,874 11,554 (6,680) Cash and cash equivalents at beginning of year................................ 22,339 10,785 17,465 --------- --------- --------- Cash and cash equivalents at end of year................................ $ 32,213 $ 22,339 $ 10,785 ========= ========= =========
See accompanying notes to the consolidated financial statements. F-5 KNOLL, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Dollars In Thousands)
Unearned Accumulated Total Additional Stock Retained Other Stockholders' Common Paid-In- Grant Earnings Comprehensive Equity Stock Capital Compensation (Deficit) Loss (Deficit) ------ ---------- ------------ ---------- -------------- ------------- Balance at December 31, 1998 (41,799,499 shares)........... $ 418 $ 181,792 $(712) $ 170,986 $ (8,634) $ 343,850 --------- Net income...................... -- -- -- 78,361 -- 78,361 Foreign currency translation adjustment........ -- -- -- -- 1,795 1,795 --------- Comprehensive income............ 80,156 --------- Shares issued for consideration: Exercise of stock options, including tax benefit of $674 (244,798 shares)....... 2 4,572 -- -- -- 4,574 Other (40,972 shares)......... -- 846 -- -- -- 846 Shares contributed to the 401(k) Plan (150,100 shares).. 2 4,201 -- -- -- 4,203 Purchase of common stock (1,188,000 shares)............ (12) (28,691) -- -- -- (28,703) Shares forfeited under stock incentive plan (18,837 shares)............... -- -- 1 -- -- 1 Merger consideration for shares canceled (17,738,634 shares).. (177) (155,830) -- (340,675) -- (496,682) Recapitalization costs.......... -- (2,717) -- -- -- (2,717) Earned stock grant compensation.................. -- -- 278 -- -- 278 ----- --------- ----- --------- -------- --------- Balance at December 31, 1999.... 233 4,173 (433) (91,328) (6,839) (94,194) --------- Net income...................... -- -- -- 116,288 -- 116,288 Foreign currency translation adjustment........ -- -- -- -- (5,978) (5,978) --------- Comprehensive income............ 110,310 --------- Purchase of common stock (11,500 shares)............... -- (322) -- -- -- (322) Shares forfeited under stock incentive plan (84,769 shares)............... (1) (260) 261 -- -- -- Cash dividend ($9.50 per share). -- -- -- (220,339) -- (220,339) Earned stock grant compensation.................. -- -- 170 -- -- 170 ----- --------- ----- --------- -------- --------- Balance at December 31, 2000.... 232 3,591 (2) (195,379) (12,817) (204,375) --------- Net income...................... -- -- -- 87,190 -- 87,190 Foreign currency translation adjustment........ -- -- -- -- (4,732) (4,732) --------- Comprehensive income............ 82,458 --------- Purchase of common stock (11,800 shares)............... -- (403) -- -- -- (403) Earned stock grant compensation.................. -- -- 2 -- -- 2 ----- --------- ----- --------- -------- --------- Balance at December 31, 2001 (23,181,829 shares)........... $ 232 $ 3,188 $ -- $(108,189) $(17,549) $(122,318) ===== ========= ===== ========= ======== =========
See accompanying notes to the consolidated financial statements. F-6 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS 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. 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 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. Cash and Cash Equivalents Cash and cash equivalents includes cash on hand and investments with maturities of three months or less at the date of purchase. 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 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 Revenue from the sale of products is recognized upon transfer of title to the customer, which usually occurs at the time of shipment. F-7 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Shipping and Handling Amounts billed to customers for shipping and handling of products are classified as sales in the consolidated statements of operations. Costs incurred by the Company for shipping and handling are classified as cost of sales. 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. Derivative Financial Instruments The Company adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended ("SFAS 133"), on January 1, 2001. The adoption of SFAS 133 did not have a material effect on the earnings or financial position of the Company. On the date a derivative instrument is entered into, the Company designates the derivative as (i) a fair value hedge, (ii) a cash flow hedge, (iii) a hedge of a net investment in a foreign operation or (iv) a risk management instrument not eligible for hedge accounting. The Company recognizes all derivatives on the balance sheet at fair value. All derivatives in which the Company was engaged as of January 1, 2001 and December 31, 2001 and during the year then ended were classified as risk management instruments not eligible for hedge accounting. Changes in the fair value of derivatives classified as risk management instruments not eligible for hedge accounting are reported in earnings in the period the value of the contract changes. 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 exchange rates in effect at the balance sheet date. The resulting translation adjustments are recorded in, and are the only component of, accumulated other comprehensive loss. Transaction gains and losses resulting from exchange rate changes on transactions denominated in currencies other than the functional currency 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 intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). The Company accounts for stock-based compensation in accordance with APB 25. Pro forma results of operations as if SFAS 123 had been used to account for stock-based compensation plans are presented in Note 19. F-8 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Use of Estimates The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the U.S. 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 results may differ from such estimates. Reclassifications Certain amounts for 2000 in the notes to the consolidated financial statements have been reclassified to conform to the 2001 presentation. Accounting Pronouncements Pending Adoption as of December 31, 2001 In June 2001, the Financial Accounting Standards Board ("FASB") approved Statements of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141"), and No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires that all business combinations be accounted for using the purchase method and requires that intangible assets that meet certain criteria be recognized apart from goodwill. SFAS 142 prescribes that goodwill and intangible assets with indefinite useful lives should no longer be amortized to earnings, but instead should be reviewed for impairment on at least an annual basis. Intangible assets with finite lives will continue to be amortized over their estimated useful lives. The Company adopted SFAS 141 and SFAS 142 on January 1, 2002. The adoption of these statements did not result in any changes to the classification of the Company's goodwill and other intangible assets as they are presented at December 31, 2001. The Company assigned an indefinite useful life to its trademarks effective January 1, 2002. Application of the nonamortization provisions of SFAS 142, as they relate to the Company's goodwill and trademarks, is expected to result in an increase in income before taxes of approximately $6,781,000 in 2002. The Company will perform impairment tests of its trademarks and goodwill as of January 1, 2002. Knoll has not yet determined what the effect of these tests will be on the earnings and financial position of the Company. The impairment test of the trademarks will be completed during the first quarter ended March 31, 2002. The Company expects to perform the first step of a two-step goodwill impairment test, as prescribed in SFAS 142, during the second quarter ended June 30, 2002. The first step of the goodwill impairment test is a screen for potential impairment, while the second step measures the amount of the impairment, if any. Any impairment loss resulting from these transitional impairment tests will be reflected as the cumulative effect of a change in accounting principle in the Company's interim financial statements for the first quarter of 2002, regardless of the interim period in which the measurement of the loss is completed. F-9 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3. RECAPITALIZATION (MERGER) Pursuant to an Agreement and Plan of Merger dated as of June 21, 1999 (as amended on July 29, 1999), the Company consummated a recapitalization (merger) transaction on November 4, 1999 whereby a newly formed entity, which was organized by Warburg, Pincus Ventures, L.P. ("Warburg"), was merged with and into Knoll, with Knoll continuing as the surviving corporation. As a result of the merger, 17,738,634 shares of common stock held by the public stockholders of Knoll immediately prior to the merger were converted into the right to receive $28.00 per share in cash and were canceled. Furthermore, the Company's common stock ceased to be listed on the New York Stock Exchange, and the registration of the Company's securities under the Securities Exchange Act of 1934 was terminated. In connection with the merger, the Company entered into an agreement on August 13, 1999 with the holder of a majority of its 10.875% Senior Subordinated Notes due 2006 ("Senior Subordinated Notes"). Under the agreement, the majority holder consented to the merger and the related transactions, and the Company agreed to pay such holder (and other holders of the Senior Subordinated Notes who also consented), promptly after completion of the merger, $120 per $1,000 principal amount of the Senior Subordinated Notes owned by the holder. All other holders also provided their consent. See Note 9 for further discussion of this transaction. The merger and related transactions were accounted for as a leveraged recapitalization. The historical accounting bases of Knoll's assets and liabilities were retained subsequent to the transactions. In connection with the merger and related transactions, the Company incurred recapitalization costs and financing costs of $9,073,000 and $20,734,000, respectively. Of the recapitalization costs, $6,356,000 was expensed and $2,717,000, which represents investor direct acquisition costs, was recorded as a reduction of additional paid-in-capital. Of the financing costs, $7,864,000 was capitalized as deferred financing fees and the remaining $12,870,000, which represents the total consent fee related to the Senior Subordinated Notes, was recorded as a component of the extraordinary loss on early extinguishment of debt. The Company funded the merger and related fees and expenses with borrowings under a new senior credit agreement that was entered into in connection with the merger. See Note 9 for further discussion of such credit agreement and the extraordinary loss noted above. 4. CUSTOMER RECEIVABLES Customer receivables are presented net of an allowance for doubtful accounts of $7,450,000 and $6,682,000 at December 31, 2001 and 2000, respectively. Management performs ongoing credit evaluations of its customers and generally does not require collateral. As of December 31, 2001 and 2000, the U.S. government represented approximately 21.2% and 13.7%, respectively, of gross customer receivables. F-10 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. INVENTORIES
2001 2000 ---------- ---------- (In Thousands) Raw materials............................... $34,044 $47,236 Work in process............................. 8,190 10,923 Finished goods.............................. 18,457 21,044 ------- ------- Inventories................................. $60,691 $79,203 ======= =======
6. PROPERTY, PLANT AND EQUIPMENT
2001 2000 ---------- ---------- (In Thousands) Land and buildings.......................... $ 73,274 $ 70,740 Machinery and equipment..................... 227,365 213,180 Construction in progress.................... 14,730 14,908 --------- --------- Property, plant and equipment............... 315,369 298,828 Accumulated depreciation.................... (140,331) (119,199) --------- --------- Property, plant and equipment, net.......... $ 175,038 $ 179,629 ========= =========
7. INTANGIBLE ASSETS
2001 2000 ---------- ---------- (In Thousands) Goodwill.................................... $ 51,663 $ 52,278 Trademarks.................................. 219,900 219,900 Deferred financing fees..................... 8,546 8,546 -------- -------- Intangible assets........................... 280,109 280,724 Accumulated amortization.................... (43,004) (34,845) -------- -------- Intangible assets, net...................... $237,105 $245,879 ======== ========
8. OTHER CURRENT LIABILITIES
2001 2000 ---------- ---------- (In Thousands) Accrued employee compensation............... $41,145 $ 62,215 Accrued product warranty.................... 8,113 9,748 Other....................................... 40,719 36,028 ------- -------- Other current liabilities................... $89,977 $107,991 ======= ========
F-11 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 9. INDEBTEDNESS The Company's long-term debt is summarized as follows:
2001 2000 ---------- ---------- (In Thousands) 10.875% Senior Subordinated Notes due 2006.. $107,250 $107,250 Term loans, variable rate (2.815% at December 31, 2001 and 7.355% at December 31, 2000), due through 2005...... 272,500 303,750 Revolving loans, variable rate (2.925% - 4.75% at December 31, 2001 and 7.355% - 9.5% at December 31, 2000), due 2005...... 167,000 14,000 Other....................................... 774 755 -------- -------- 547,524 425,755 Less current maturities..................... (62,558) (31,250) -------- -------- Long-term debt.............................. $484,966 $394,505 ======== ========
Senior Subordinated Notes 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. There are no sinking fund requirements related to the Senior Subordinated Notes. The Senior Subordinated Notes outstanding at December 31, 2001 are redeemable, in whole or in part, at 105.438% of principal amount through March 14, 2002, and thereafter at an annually declining premium over par until March 15, 2004 when they are redeemable at par. On March 27, 2002, the Company notified the holders of the Senior Subordinated Notes that it will redeem $50,000,000 aggregate principal amount of the Senior Subordinated Notes on April 30, 2002 at 103.625% of principal amount. The Company intends to fund such redemption with borrowings under its senior revolving credit facility. Therefore, the entire principal amount of Senior Subordinated Notes outstanding as of December 31, 2001 is classified as a noncurrent liability in the Company's consolidated balance sheet. The Company expects to record a loss on the early extinguishment of debt of approximately $1,940,000 pretax during the three months ended June 30, 2002 as a result of the redemption. The indenture for the Senior Subordinated Notes limits the incurrence of indebtedness, payment of dividends and purchase of Company stock and includes certain other restrictions and limitations that are customary with subordinated indebtedness of this type. The Company believes that it was in compliance with the terms of the indenture at December 31, 2001. As discussed in Note 3, the Company entered into an agreement with the holder of a majority of its Senior Subordinated Notes on August 13, 1999. Under the agreement, (i) the holder consented to certain amendments to the indenture governing the Senior Subordinated Notes, thus allowing the Company to complete the merger without violating the covenants under the indenture, and (ii) the Company agreed to pay such holder (and other holders of the Senior Subordinated Notes who also consented), promptly after completion of the merger, $120 per $1,000 principal amount of the Senior Subordinated Notes owned by the holder. The Company subsequently obtained consents from all other holders as of August 13, 1999 through a consent solicitation process. Upon completion of the merger, the Company paid the holders an aggregate consent fee of $12,870,000. F-12 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Due to the significance of the consent fee, the Company accounted for the modification of the debt terms under the indenture as an extinguishment of debt. Such treatment resulted in an extraordinary loss of $17,001,000 on a pretax basis ($10,244,000 on an after-tax basis), which consisted of the write-off of $4,131,000 of unamortized financing fees related to the Senior Subordinated Notes and the consent fee of $12,870,000 that was paid to the holders. Term and Revolving Loans In connection with the merger, the Company entered into a $650,000,000 senior credit agreement consisting of a $325,000,000 six-year term loan facility and a $325,000,000 six-year revolving credit facility, to (i) fund the merger and related fees and expenses (including consent fees related to the Company's Senior Subordinated Notes), (ii) refinance $14,000,000 owed under the Company's senior credit agreement that existed immediately prior to the merger and (iii) provide for working capital and ongoing general corporate purposes. The refinancing resulted in an extraordinary loss of $925,000 on a pretax basis ($557,000 on an after-tax basis), which consisted of the write-off of unamortized financing fees related to the refinanced debt. The credit agreement was amended on December 20, 2000 in connection with the declaration of a special cash dividend, which is discussed in Note 10. The senior credit agreement contains a letter of credit subfacility that allows for the issuance of up to $25,000,000 in letters of credit 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 and swing line loans. At December 31, 2001, the Company had an aggregate of $3,757,000 of letters of credit outstanding, borrowings of $167,000,000 under the revolving credit facility, of which $10,000,000 has been classified as current, and $154,243,000 available for borrowing under the revolving credit facility. The Company pays a commitment fee ranging from 0.175% to 0.50%, depending on the Company's leverage ratio, on the unused portion of the revolving credit facility. In addition, the Company is required to pay a letter of credit fee ranging from 0.625% to 1.625%, depending on the Company's ratio of funded debt to earnings before income taxes, depreciation, amortization and other noncash charges ("EBITDA"), and an issuing lender fee equal to 0.25% on the amount available to be drawn under letters of credit. As of December 31, 2001, the commitment and letter of credit fees applicable to the Company were 0.25% and 0.875%, respectively. Borrowings under the 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 that is subject to change based upon 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, plus an applicable percentage that is subject to change based upon the Company's ratio of funded debt to EBITDA. The Company is required to make quarterly principal payments under the term loan facility through September 2005. The revolving credit facility allows the Company to borrow, repay and reborrow funds from time to time until November 4, 2005. The agreement is secured by substantially all of the Company's present and future domestic assets, 100% of the capital stock of the Company's present and future domestic subsidiaries and 65% of the capital stock of the Company's present and future foreign subsidiaries. Additionally, all borrowings are jointly and severally, unconditionally guaranteed by the Company's existing and future domestic subsidiaries. However, if the Company is unable to satisfy all or any portion of its obligations with respect to the credit agreement, it is unlikely that the guarantors will be able to pay all or any portion of such unsatisfied obligations. F-13 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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, declare or pay dividends and purchase Company stock; require the Company to maintain certain financial ratios with respect to funded debt leverage and interest coverage; and require the Company to maintain interest rate protection agreements in a notional amount of at least $135,000,000 for at least three years. The Company believes that it was in compliance with the credit agreement covenants at December 31, 2001. See Note 12 for further discussion of interest rate protection agreements. The Company also has several revolving credit agreements with various European financial institutions. These credit agreements are to provide credit primarily for overdraft and working capital purposes. As of December 31, 2001, total credit available under such agreements was approximately $8,427,000 or the foreign currency 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 that is linked to each country's prime rate. As of December 31, 2001, the Company did not have any outstanding borrowings under the European credit facilities. Interest Paid During 2001, 2000 and 1999, the Company made interest payments totaling $38,878,000, $44,407,000 and $18,110,000, respectively. Maturities Aggregate principal maturities of the Company's indebtedness as of December 31, 2001 are as follows (in thousands): 2002................................ $ 62,558 2003................................ 63,812 2004................................ 81,315 2005................................ 232,069 2006................................ 107,324 Subsequent years.................... 446 -------- $547,524 ======== 10. DIVIDEND On December 20, 2000, the Company's Board of Directors declared a special cash dividend of $9.50 per share of common stock payable on January 5, 2001 to stockholders of record as of the close of business on December 20, 2000. The payment of the dividend on January 5, 2001 was funded with borrowings under the Company's senior revolving credit facility. As such, the aggregate dividend payable of $220,339,000 is classified as a noncurrent liability in the Company's consolidated balance sheet as of December 31, 2000. F-14 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 11. PREFERRED STOCK The Company's Certificate of Incorporation authorizes the issuance of 10,000,000 shares of preferred stock with a par value of $1.00 per share. 1,920,000 of these shares are designated as Series A 12% Participating Convertible Preferred Stock, of which 1,602,998 shares have been retired and canceled and 317,002 shares remain eligible to be issued. Subject to applicable laws, the Board of Directors is authorized to provide for the issuance of preferred shares in one or more series, for such consideration and with designations, powers, preferences and relative, participating, optional or other special rights and the qualifications, limitations or restrictions thereof, as shall be determined by the Board of Directors. 12. DERIVATIVE FINANCIAL INSTRUMENTS Interest Rate Collar Agreements The Company uses interest rate collar agreements to manage its exposure to fluctuations in interest rates on its variable-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 variable-rate reference. Changes in the fair value of interest rate collar agreements are reported in earnings in the period the value of the contract changes. The net amount paid or received upon quarterly settlements is recorded as an adjustment to interest expense, while the remaining change in fair value is recorded as a component of other income (expense). At December 31, 2000, the Company had three interest rate collar agreements outstanding with an aggregate notional principal amount of $135,000,000, related weighted average maximum and minimum rates of 10.00% and 5.64%, respectively, and a termination date of February 2003. In February 2001, the Company negotiated modifications to these agreements that increased the aggregate notional principal amount to $200,000,000, decreased the weighted average minimum rate to 5.12% and extended the termination date to February 2004. The aggregate fair value of these interest rate collar agreements from the Company's perspective as of December 31, 2001 was ($8,434,000), of which $5,901,000 was recorded as a current liability and $2,533,000 was recorded as a noncurrent liability in the Company's consolidated balance sheet as of December 31, 2001. During 2001, the Company recognized an aggregate net loss related to these agreements of $9,599,000, of which $2,068,000 was recorded as interest expense and $7,531,000 was recorded as a component of other expense in the Company's consolidated statement of operations. The aggregate fair value of the interest rate collar agreements outstanding at December 31, 2000 was not material. The Company was not required to make nor was it entitled to receive any payments as a result of its use of interest rate collar agreements during 2000 and 1999. Foreign Currency Contracts From time to time, the Company enters into foreign currency forward exchange contracts and foreign currency option contracts to manage its exposure to foreign exchange rates associated with purchases of inventory from foreign suppliers. The terms of these contracts are generally less than a year. Changes in the fair value of such contracts are reported in earnings in the period the value of the contract changes. The net gain or loss upon settlement is recorded as an adjustment to cost of sales, while the remaining change in fair value is recorded as a component of other income (expense). F-15 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company did not have any foreign currency forward exchange or option contracts outstanding at December 31, 2001. The aggregate net gain related to the Company's foreign currency forward exchange contracts was not material for 2001. The contract amounts and fair value of the contracts outstanding at December 31, 2000 as well as the amounts of gains and losses recorded during 2000 and 1999 were not material. 13. CONTINGENT LIABILITIES AND COMMITMENTS The Company is subject to various claims and 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. 14. 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 and Accounts Payable 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, was approximately $542,204,000 at December 31, 2001 and $423,265,000 at December 31, 2000, while the carrying amounts were $547,524,000 and $425,755,000, respectively. Letters of Credit The Company had outstanding letters of credit totaling $3,757,000 and $3,057,000 at December 31, 2001 and 2000, respectively. Historically, no claims have been made against letters of credit under which the Company was liable, and the Company does not expect any future claims against these financial instruments. Therefore, the Company believes that the fair value of the letters of credit is zero. Interest Rate Collar Agreements The carrying value and fair value of the Company's interest rate collar agreements, as estimated by dealers, were ($8,434,000) from the Company's perspective at December 31, 2001 and were not material as of December 31, 2000. Foreign Currency Forward Exchange Contracts The fair value of the Company's foreign currency forward exchange contracts, as determined by quoted market prices, was not material as of December 31, 2000. F-16 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 15. RESTRUCTURING In September 2001, the Company adopted a restructuring plan to eliminate certain salaried positions in its workforce in North America. In connection with the restructuring plan, the Company recorded a restructuring charge of $1,655,000 for severance and other termination benefits. The Company's consolidated balance sheet as of December 31, 2001 includes a current liability of $918,000 for those benefits not yet paid out. 16. INCOME TAXES Income before income tax expense and extraordinary item consists of the following:
2001 2000 1999 ---------- ---------- ---------- (In Thousands) U.S. operations................. $135,447 $180,398 $151,350 Foreign operations.............. 12,537 15,362 4,163 -------- -------- -------- $147,984 $195,760 $155,513 ======== ======== ========
Income tax expense, excluding extraordinary items, is comprised of the following:
2001 2000 1999 ---------- ---------- ---------- (In Thousands) Current: Federal..................... $45,595 $55,334 $46,651 State....................... 9,909 12,449 10,198 Foreign..................... 5,488 4,324 2,206 ------- ------- ------- Total current........... 60,992 72,107 59,055 ------- ------- ------- Deferred: Federal..................... (667) 4,097 6,385 State....................... (89) 976 1,256 Foreign..................... 558 2,292 (345) ------- ------- ------- Total deferred.......... (198) 7,365 7,296 ------- ------- ------- Income tax expense.............. $60,794 $79,472 $66,351 ======= ======= =======
Income taxes paid by the Company during 2001, 2000 and 1999 totaled $59,901,000, $68,290,000 and $52,285,000, respectively. F-17 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table sets forth the tax effects of temporary differences that give rise to the deferred tax assets and liabilities:
2001 2000 ---------- ---------- (In Thousands) Deferred tax assets: Accounts receivable, principally due to allowance for doubtful accounts.... $ 2,688 $ 2,355 Inventories............................. 2,818 2,924 Net operating loss carryforwards........ 10,938 9,753 Obligation for postretirement benefits other than pension.................... 8,274 7,835 Accrued liabilities and other items..... 22,413 18,467 -------- -------- Gross deferred tax assets........... 47,131 41,334 Valuation allowance..................... (12,271) (11,594) -------- -------- Net deferred tax assets............. 34,860 29,740 -------- -------- Deferred tax liabilities: Intangibles, principally due to differences in amortization........... 23,083 19,210 Plant and equipment, principally due to differences in depreciation and assigned values....................... 13,764 12,969 -------- -------- Gross deferred tax liabilities...... 36,847 32,179 -------- -------- Net deferred tax liability.................. $ (1,987) $ (2,439) ======== ========
As of December 31, 2001, the Company had net operating loss carryforwards totaling approximately $27,785,000 in various foreign tax jurisdictions, of which $301,000 expire in 2005 and $27,484,000 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 net operating loss carryforwards that existed as of February 29, 1996, the date the Company was formed, due to losses incurred in these tax jurisdictions prior to such date. At December 31, 1999, the valuation allowance was $16,137,000. The decrease in the valuation allowance from 1999 to 2000 resulted primarily from the expiration and utilization of net operating loss carryforwards in the foreign tax jurisdictions. For 2001, 2000 and 1999, tax benefits recognized through reductions of the valuation allowance for net operating loss carryforwards that existed as of February 29, 1996 had the effect of reducing goodwill by $160,000, $1,403,000 and $430,000, respectively. If additional tax benefits are recognized in the future through further reduction of the valuation allowance, such benefits will generally reduce goodwill. F-18 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table sets forth a reconciliation of the statutory federal income tax rate to the effective income tax rate:
2001 2000 1999 -------- -------- -------- Federal statutory tax rate............ 35.0% 35.0% 35.0% Increase in the tax rate resulting from: State taxes, net of federal effect................ 4.6 4.6 4.9 Nondeductible recapitalization expense....................... -- -- 1.2 Higher income tax rates of other countries............... 0.6 0.5 1.3 Nondeductible goodwill amortization.................. 0.2 0.2 0.3 Other........................... 0.7 0.3 -- ---- ---- ---- Effective tax rate.................... 41.1% 40.6% 42.7% ==== ==== ====
The Company has not made provisions for U.S. federal and state income taxes as of December 31, 2001 on $53,511,000 of foreign earnings that 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. federal and state 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. 17. LEASES The Company has commitments under operating leases for certain machinery and equipment as well as manufacturing, warehousing, showroom and other facilities used in its operations. Some of the leases contain renewal provisions and generally require the Company to pay certain operating expenses, including utilities, insurance and taxes, which are subject to escalation. Total rental expense for 2001, 2000 and 1999 was $10,729,000, $10,505,000 and $9,626,000, 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): 2002................................ $ 7,640 2003................................ 6,736 2004................................ 4,204 2005................................ 3,080 2006................................ 2,119 Subsequent years.................... 5,299 ------- Total minimum rental payments....... $29,078 ======= F-19 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 18. PENSION AND OTHER POSTRETIREMENT BENEFITS The Company has two domestic defined benefit pension plans and two plans providing for other postretirement benefits, including medical and life insurance coverage. One of the pension plans and one of the other postretirement benefits plans cover eligible U.S. nonunion employees while the other pension plan and other postretirement benefits plan cover eligible U.S. union employees. On January 1, 2002, the Company implemented an amendment to its other postretirement benefits plan covering U.S. nonunion employees to cap the amount of medical benefits provided to future retirees. The impact of this amendment was reflected in the measurement of the related benefit obligation as of December 31, 2001. The following table sets forth a reconciliation of the benefit obligation, plan assets and accrued benefit cost related to the pension and other postretirement benefits provided by the Company:
Pension Benefits Other Benefits ---------------------- ---------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ---------- (In Thousands) Change in benefit obligation: Benefit obligation at January 1.... $ 33,533 $24,250 $ 20,627 $ 19,503 Service cost....................... 7,344 6,830 789 693 Interest cost...................... 2,433 1,754 1,463 1,393 Participant contributions.......... 282 264 -- -- Plan amendment..................... -- -- (3,129) -- Actuarial loss..................... 1,123 654 2,226 917 Benefits paid...................... (312) (219) (1,094) (1,879) -------- ------- -------- -------- Benefit obligation at December 31.. 44,403 33,533 20,882 20,627 -------- ------- -------- -------- Change in plan assets: Fair value of plan assets at January 1........................ 25,503 14,466 -- -- Actual return on plan assets....... (2,330) 1,595 -- -- Employer contributions............. 7,802 9,397 1,094 1,879 Participant contributions.......... 282 264 -- -- Benefits paid...................... (312) (219) (1,094) (1,879) -------- ------- -------- -------- Fair value of plan assets at December 31...................... 30,945 25,503 -- -- -------- ------- -------- -------- Funded status...................... (13,458) (8,030) (20,882) (20,627) Unrecognized net loss.............. 6,745 1,082 3,166 887 Unrecognized prior service cost (benefit)........................ 312 347 (3,126) 4 -------- ------- -------- -------- Accrued benefit cost............... $ (6,401) $(6,601) $(20,842) $(19,736) ======== ======= ======== ========
At December 31, 2000, one of the Company's pension plans had an accumulated benefit obligation in excess of plan assets. The accumulated benefit obligation applicable to such plan was $21,800,000 and the fair value of the related plan assets was $20,774,000. The accrued benefit cost recorded with respect to this plan was $5,209,000. F-20 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Significant assumptions that were used in accounting for the pension and other postretirement benefits plans as of December 31 are as follows:
Pension Benefits Other Benefits ------------------ ------------------ 2001 2000 2001 2000 -------- -------- -------- -------- Discount rate...................... 7.25% 7.25% 7.25% 7.25% Expected return on plan assets..... 8.50 8.50 N/A N/A Rate of compensation increase...... 4.50 4.50 4.50 4.50
The following table sets forth the components of the net periodic benefit cost for the Company's pension and other postretirement benefits plans:
Pension Benefits Other Benefits ---------------------------- ---------------------------- 2001 2000 1999 2001 2000 1999 -------- -------- -------- -------- -------- -------- (In Thousands) Service cost............ $ 7,344 $ 6,830 $6,826 $ 789 $ 693 $ 582 Interest cost........... 2,433 1,754 1,204 1,463 1,393 1,256 Expected return on plan assets........... (2,210) (1,267) (744) -- -- -- Amortization of prior service cost.......... 35 34 35 1 -- -- Recognized actuarial loss (gain)........... -- -- 27 (53) (88) (94) ------- ------ ------ ------ ------ ------ Net periodic benefit cost.................. $ 7,602 $ 7,351 $7,348 $2,200 $1,998 $1,744 ======= ====== ====== ====== ====== ======
For purposes of measuring the benefit obligation and the net periodic benefit cost as of and for the year ended December 31, 2001, respectively, associated with the Company's other postretirement benefits plans, a 12.0% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2001. The rate was then assumed to decrease 1.0% per year to an ultimate rate of 5.0% for 2008 and thereafter. Increasing the assumed health care cost trend rate by 1.0% in each year would increase the benefit obligation as of December 31, 2001 by $1,483,000 and increase the aggregate of the service and interest cost components of net periodic benefit cost for 2001 by $258,000. Decreasing the assumed health care cost trend rate by 1.0% in each year would decrease the benefit obligation as of December 31, 2001 by $1,562,000 and decrease the aggregate of the service and interest cost components of net periodic benefit cost for 2001 by $241,000. Employees of the Canadian, Belgium and United Kingdom operations participate in defined contribution pension plans sponsored by the Company. The Company's expense related to these plans for 2001, 2000 and 1999 was $704,000, $854,000 and $679,000, respectively. The Company also sponsors a retirement savings plan (i.e. 401(k) plan) for all U.S. 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 participant contributions on up to the first 6.0% of compensation for nonunion employees and matches 50.0% of participant contributions on up to the first 6.0% of compensation for union employees. For participants who are nonunion employees, the plan provides for additional employer matching based on the achievement of certain profitability goals. Furthermore, effective November 4, 1999, the plan provides that the Company may also make discretionary contributions of Knoll common stock to participant accounts on behalf of all actively employed U.S. participants. However, upon retiring or leaving the Company, participants must sell vested shares of Knoll F-21 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) common stock back to the plan, and any shares that are not vested at such time are forfeited by the participant and held by the plan. Participants generally vest their interest in Company contributions ratably according to years of service, with such contributions being 100% vested at the end of five years of service. The Company's total expense under the 401(k) plan was $3,460,000, $6,603,000 and $9,466,000 for 2001, 2000 and 1999, respectively. The Company's common stock was offered as an investment option under the 401(k) plan from May 9, 1997 through November 3, 1999, the period during which Knoll's common stock was publicly traded. During such time, the plan purchased shares of Knoll common stock on the open market. In connection with the merger, which is discussed in Note 3, all 71,174 shares of Knoll common stock held in the 401(k) plan immediately prior to the merger were converted into the right to receive $28.00 per share in cash and were canceled. 19. STOCK PLANS Stock Incentive Plans The Company sponsors three stock incentive plans under which awards denominated or payable in shares or options to purchase shares of Knoll common stock may be granted to officers, certain other key employees, directors and consultants of the Company. As of December 31, 2001, a combined maximum of 10,139,219 shares or options to purchase shares were authorized for issuance under the plans. A Stock Option Committee of the Company's Board of Directors ("Stock Option Committee") has sole discretion concerning administration of the plans, 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. Options that are granted have a maximum contractual life of ten years. During 1996, the Company granted 4,144,030 restricted common shares, with a weighted-average fair value of $0.34 per share, to key employees. The Company recorded the fair value of the shares on the date of grant as unearned stock grant compensation, which is a separate component of stockholders' equity (deficit), and recognized compensation expense ratably over the vesting period. During 2000 and 1999, 84,769 and 18,837 nonvested restricted shares, respectively, were forfeited by employees that terminated employment. As of December 31, 2001, all restricted shares were vested. F-22 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table summarizes the Company's stock option activity in the years indicated:
2001 2000 1999 ----------------------- ----------------------- ----------------------- Weighted Weighted Weighted Number Average Number Average Number Average of Exercise of Exercise of Exercise Options Price Options Price Options Price ----------- ---------- ----------- ---------- ----------- ---------- Outstanding at beginning of year... 3,706,445 $25.51 3,706,338 $25.37 1,965,511 $21.27 February 2001 adjustment to outstanding......... 677,523 N/A -- N/A -- N/A Granted............... 200,000 34.50 180,000 28.00 2,305,500 26.74 Exercised............. -- -- -- -- (244,798) 15.93 Forfeited............. (108,234) 23.44 (179,893) 25.22 (269,875) 17.28 Canceled ............. -- -- -- -- (50,000) 17.00 --------- --------- --------- Outstanding at end of year............. 4,475,734 22.10 3,706,445 25.51 3,706,338 25.37 ========= ========= ========= Exercisable at end of year............. 2,500,364 21.40 1,327,359 25.56 396,427 26.17 ========= ========= ========= Available for future grants....... 1,181,616 1,076,584 991,922 ========= ========= =========
Options were granted with an exercise price that equals the market price of a share of Knoll common stock on the date of grant, while the Company's stock was publicly traded, or the estimated fair value of a share of Knoll common stock on the date of grant, subsequent to the November 4, 1999 merger. Options that were granted generally vest in installments over either a four or five-year period, beginning one year from the date of grant. In February 2001, the Stock Option Committee approved certain adjustments to the outstanding options as well as the number of options available for grant under the stock incentive plans in response to dilution created by the special cash dividend paid on January 5, 2001 (see Note 10). The adjustments included increasing the number of shares under option from 3,706,445 to 4,383,968, lowering the range of exercise prices from $15.93 - $33.13 to $13.47 - $28.01 and increasing the number of options available for future grants as of the time of adjustment from 1,076,584 to 1,273,382. These adjustments consequently increased the aggregate number of shares or options to purchase shares that are authorized for issuance under the stock incentive plans from 9,264,898 to 10,139,219. All vesting and term provisions of each award remained unchanged. No compensation expense was recognized in connection with these adjustments since (i) the adjustments were executed in response to an equity restructuring and (ii) the modifications to the awards did not increase the aggregate intrinsic value of each award and did not reduce the per share ratio of the exercise price to the market value. F-23 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table summarizes information regarding stock options outstanding and exercisable at December 31, 2001:
Options Outstanding Options Exercisable -------------------------------------- ----------------------- Weighted Average Weighted Weighted Number Remaining Average Number Average Range of of Contractual Exercise of Exercise Exercise Prices Options Life Price Options Price ----------------- ----------- ------------- ---------- ----------- ---------- $13.47 - $17.97 1,089,879 5.90 years $14.93 648,373 $14.45 $20.45 - $22.62 83,978 6.17 21.75 57,952 22.06 $23.67 - $24.10 3,072,307 7.22 23.79 1,770,383 23.83 $28.01 - $34.50 229,570 8.68 33.66 23,656 28.01 --------- --------- $13.47 - $34.50 4,475,734 6.95 22.10 2,500,364 21.40 ========= =========
In February 2002, the Stock Option Committee granted an additional 547,500 options with an exercise price of $36.00 per share. Employee Stock Purchase Plan From August 1, 1997 through November 3, 1999, the Company sponsored an employee stock purchase plan that provided 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 were limited to 10.0% of an employee's eligible gross pay, up to $25,000 per year. During 1999, the Company issued 40,972 shares at a weighted average per share price of $20.66. Other Stock-Based Compensation Plans On November 4, 1999, the Company established The Knoll Stock Ownership Award Plan, under which it may grant notional stock units to substantially all individuals employed by the Company in Canada as of the effective date of the plan. Participants vest their interest in notional stock units ratably according to years of service, with such units being 100% vested at the end of five years of service. On November 4, 1999, the Company granted a total of 54,900 notional stock units, with an estimated fair value of $28.00 per unit, to eligible employees. In January 2001, the number of notional units outstanding was adjusted, in accordance with the plan provisions, in response to the special cash dividend that was paid (see Note 10). Compensation expense is recognized based on the estimated fair value of notional stock units and vesting provisions. Total compensation expense incurred in connection with this award was $248,000 for 2001, $723,000 for 2000 and $992,000 for 1999. Units forfeited totaled 1,135; 2,140; and 370 for 2001, 2000 and 1999, respectively. As of December 31, 2001, approximately 60,643 notional units were outstanding, of which approximately 51,231 units were vested. As discussed in Note 18, the Company may contribute shares of Knoll common stock into participant 401(k) plan accounts at its discretion. Subsequent to the merger, the Company contributed 150,100 shares into the 401(k) plan for substantially all individuals employed by the Company in the U.S. as of November 4, 1999. In connection with this award, the Company recognized $4,203,000 of compensation expense, which was based on a value of $28.00 per share. During 2001, 2000 and 1999, the Company repurchased 11,800; 9,500; and 1,000 of the contributed common shares, respectively, from the 401(k) plan at a weighted average price per share of $34.20 during 2001 and $28.00 during 2000 and 1999. Such shares are held in treasury. F-24 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Pro Forma Disclosures As discussed in Note 2, the Company accounts 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 rights granted in connection with the employee stock purchase plan. If the Company had recognized compensation cost based upon the fair value of the stock options and stock purchase rights at the date of grant as prescribed by SFAS 123, the Company's pro forma net income would have been $82,950,000, $108,680,000 and $75,476,000 for 2001, 2000 and 1999, respectively. For purposes of calculating pro forma net income, the weighted average per share fair value of options was $10.36 for 2001 grants, $9.28 for 2000 grants and $10.22 for 1999 grants. Additionally, the weighted average fair value of stock purchase rights granted under the employee stock purchase plan was $3.76 per share in 1999. The fair value of the options and stock purchase rights was estimated at the date of grant using (i) a Black-Scholes option pricing model for grants made prior to March 24, 1999, the date the merger, which is discussed in Note 3, was first announced and (ii) a minimum value method for grants made on or subsequent to March 24, 1999. The following assumptions were used for the Black-Scholes model in 1999: risk-free interest rate of 6.5%, dividend yield of zero, expected volatility of the market price of the common stock of 35.0% and weighted average expected lives of 7 years for the options and 3 months for the stock purchase rights. Under the minimum value method, the Company used the following assumptions: risk-free interest rate of 5.1% in 2001, 5.75% in 2000 and 6.5% in 1999; dividend yield of zero in 2001, 2000 and 1999; and weighted average expected lives of 7 years in 2001, 2000 and 1999. Volatility was not considered under the minimum value method. 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. The effects of applying SFAS 123 for purposes of providing pro forma disclosures are not likely to be representative of the effects on reported net income in future years. 20. STOCK REPURCHASE PROGRAM In September 1998, the Board of Directors approved a share repurchase program that authorized the repurchase of up to 3,000,000 shares of the Company's common stock. The Board of Directors subsequently approved an increase of 2,000,000 shares to the program on February 2, 1999. During 1999, the Company purchased 1,187,000 shares of its common stock for $28,675,000, or an average price of $24.16 per share. Total shares purchased under the program were 2,894,700 for $67,524,000, or an average price of $23.33 per share. Common shares were purchased in the open market and were then held in treasury. In connection with the merger, which is discussed in Note 3, all shares that were held in treasury immediately prior to the merger were canceled and retired, and the share repurchase program thereby came to an end. F-25 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 21. SEGMENT AND GEOGRAPHIC REGION INFORMATION The Company operates exclusively in the business of design, manufacture and sale of office furniture products and accessories. In addition to its principal manufacturing operations and markets in North America, the Company has manufacturing operations and markets in Europe. The Company's sales to customers, operating income and net property, plant and equipment are summarized by geographic areas below. Sales to customers are attributed to the geographic areas based on the point of sale.
United States Canada Europe Consolidated ---------- ---------- ---------- ------------ (In Thousands) 2001 Sales to customers.... $ 899,042 $26,807 $59,539 $ 985,388 Operating income...... 184,790 7,077 1,888 193,755 Property, plant and equipment, net...... 137,200 27,115 10,723 175,038 2000 Sales to customers.... 1,060,894 32,191 70,392 1,163,477 Operating income...... 223,931 10,848 2,392 237,171 Property, plant and equipment, net...... 140,046 29,707 9,876 179,629 1999 Sales to customers.... 902,554 26,028 55,929 984,511 Operating income...... 178,631 4,574 945 184,150 Property, plant and equipment, net...... 142,326 31,663 10,652 184,641
A number of U.S. government agencies purchase the Company's products through multiple contracts with the General Services Administration ("GSA"). Sales to government entities under the GSA contracts aggregated more than 10.0% of the Company's consolidated sales in 2001. Sales under GSA contracts amounted to $118,552,000 in 2001, $114,639,000 in 2000 and $72,774,000 in 1999. F-26 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 22. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following table sets forth unaudited summary information on a quarterly basis for the Company for 2001 and 2000.
First Second Third Fourth Quarter Quarter Quarter Quarter ----------- ----------- ----------- ----------- (In Thousands) 2001 Sales.................... $253,125 $261,102 $250,293 $220,868 Gross profit............. 100,732 105,297 100,157 84,756 Net income............... 22,112 23,490 22,365 19,223 2000 Sales.................... 268,834 315,374 295,357 283,912 Gross profit............. 108,183 132,437 122,282 118,154 Net income............... 24,166 35,918 32,491 23,713
In connection with the adoption of the restructuring plan discussed in Note 15, the Company recorded a restructuring charge of $2,155,000 in the third quarter of 2001. The Company subsequently reversed $500,000 of this charge in the fourth quarter of 2001 as a result of a change in the number of salaried positions to be eliminated according to the plan. 23. FINANCIAL INFORMATION FOR GUARANTORS OF THE COMPANY'S DEBT As discussed in Note 9, certain debt of the Company is 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 and senior credit agreement outstanding as of December 31, 2001, 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 that follows presents: - Condensed consolidating financial information as of December 31, 2001 and 2000 and for the years ended December 31, 2001, 2000 and 1999 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 the Guarantors are fully, jointly, severally and unconditionally liable under the guarantees. F-27 KNOLL, INC. BALANCE SHEET DECEMBER 31, 2001 (In Thousands)
Guarantors ------------------------ Spinneybeck Knoll Knoll, Enterprises, Overseas, Non- Inc. Inc. Inc. Guarantors Eliminations Total ---------- ------------ --------- ----------- ------------ ----------- ASSETS Current assets: Cash and cash equivalents... $ 128 $ 1,631 $ -- $ 30,454 $ -- $ 32,213 Customer receivables, net... 84,915 2,573 -- 12,798 -- 100,286 Accounts receivable-- related parties........... 2,521 69 1,013 39,132 (42,735) -- Inventories................. 39,683 8,592 -- 12,416 -- 60,691 Deferred income taxes....... 23,189 -- -- 480 -- 23,669 Prepaid and other current assets.................... 2,978 (45) 4 1,499 -- 4,436 --------- ------- ------- -------- --------- --------- Total current assets.. 153,414 12,820 1,017 96,779 (42,735) 221,295 Property, plant and equipment, net................ 136,912 288 -- 37,838 -- 175,038 Intangible assets, net.......... 237,909 -- -- (804) -- 237,105 Equity investments.............. 136,800 1,059 17,348 -- (155,207) -- Other noncurrent assets......... 5,160 (3) 97 311 -- 5,565 --------- ------- ------- -------- --------- --------- Total Assets.......... $ 670,195 $14,164 $18,462 $134,124 $(197,942) $ 639,003 ========= ======= ======= ======== ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Current maturities of long-term debt............ $ 62,500 $ -- $ -- $ 58 $ -- $ 62,558 Accounts payable--trade..... 46,481 359 -- 13,083 -- 59,923 Accounts payable--related parties................... 38,116 1,016 991 2,612 (42,735) -- Income taxes payable........ 1,214 558 4 3,041 -- 4,817 Other current liabilities... 77,377 1,000 1,649 9,951 -- 89,977 --------- ------- ------- -------- --------- --------- Total current liabilities......... 225,688 2,933 2,644 28,745 (42,735) 217,275 Long-term debt.................. 484,250 -- -- 716 -- 484,966 Deferred income taxes........... 23,509 -- -- 2,147 -- 25,656 Postretirement benefits other than pension............ 19,612 -- -- -- -- 19,612 Other noncurrent liabilities................... 7,587 -- -- 6,225 -- 13,812 --------- ------- ------- -------- --------- --------- Total liabilities..... 760,646 2,933 2,644 37,833 (42,735) 761,321 --------- ------- ------- -------- --------- --------- Stockholders' equity (deficit): Common stock................ 232 -- -- -- -- 232 Additional paid-in-capital.. 17,506 (11,998) 12,896 60,329 (75,545) 3,188 Retained earnings (deficit). (108,189) 23,229 2,922 53,511 (79,662) (108,189) Accumulated other comprehensive loss........ -- -- -- (17,549) -- (17,549) --------- ------- ------- -------- --------- --------- Total stockholders' equity (deficit).... (90,451) 11,231 15,818 96,291 (155,207) (122,318) --------- ------- ------- -------- --------- --------- Total Liabilities and Stockholders' Equity (Deficit).... $ 670,195 $14,164 $18,462 $134,124 $(197,942) $ 639,003 ========= ======= ======= ======== ========= =========
F-28 KNOLL, INC. BALANCE SHEET DECEMBER 31, 2000 (In Thousands)
Guarantors ------------------------ Spinneybeck Knoll Knoll, Enterprises, Overseas, Non- Inc. Inc. Inc. Guarantors Eliminations Total ---------- ------------ --------- ----------- ------------ ----------- ASSETS Current assets: Cash and cash equivalents... $ 104 $ 598 $ -- $ 21,637 $ -- $ 22,339 Customer receivables, net... 102,365 2,153 -- 27,665 -- 132,183 Accounts receivable-- related parties........... 8,092 118 1,446 38,309 (47,965) -- Inventories................. 55,281 6,981 -- 16,941 -- 79,203 Deferred income taxes....... 21,277 -- -- 959 -- 22,236 Prepaid and other current assets.................... 3,583 706 14 3,118 -- 7,421 --------- ------- ------- -------- --------- --------- Total current assets.. 190,702 10,556 1,460 108,629 (47,965) 263,382 Property, plant and equipment, net................ 139,694 352 -- 39,583 -- 179,629 Intangible assets, net.......... 246,155 -- -- (276) -- 245,879 Equity investments.............. 124,416 987 17,096 -- (142,499) -- Other noncurrent assets......... 5,717 -- 97 426 -- 6,240 --------- ------- ------- -------- --------- --------- Total Assets.......... $ 706,684 $11,895 $18,653 $148,362 $(190,464) $ 695,130 ========= ======= ======= ======== ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Current maturities of long-term debt............ $ 31,250 $ -- $ -- $ -- $ -- $ 31,250 Accounts payable--trade..... 64,902 922 -- 19,971 -- 85,795 Accounts payable--related parties................... 37,549 760 1,695 7,961 (47,965) -- Income taxes payable........ 927 412 7 4,322 -- 5,668 Other current liabilities... 92,338 1,487 1,740 12,426 -- 107,991 --------- ------- ------- -------- --------- --------- Total current liabilities......... 226,966 3,581 3,442 44,680 (47,965) 230,704 Dividend payable................ 220,339 -- -- -- -- 220,339 Long-term debt.................. 393,750 -- -- 755 -- 394,505 Deferred income taxes........... 22,353 -- -- 2,322 -- 24,675 Postretirement benefits other than pension............ 18,016 -- -- -- -- 18,016 Other noncurrent liabilities................... 5,048 -- -- 6,218 -- 11,266 --------- ------- ------- -------- --------- --------- Total liabilities..... 886,472 3,581 3,442 53,975 (47,965) 899,505 --------- ------- ------- -------- --------- --------- Stockholders' equity (deficit): Common stock................ 232 -- -- -- -- 232 Additional paid-in-capital.. 15,361 (9,413) 12,896 60,292 (75,545) 3,591 Unearned stock grant compensation.............. (2) -- -- -- -- (2) Retained earnings (deficit). (195,379) 17,727 2,315 46,912 (66,954) (195,379) Accumulated other comprehensive loss........ -- -- -- (12,817) -- (12,817) --------- ------- ------- -------- --------- --------- Total stockholders' equity (deficit).... (179,788) 8,314 15,211 94,387 (142,499) (204,375) --------- ------- ------- -------- --------- --------- Total Liabilities and Stockholders' Equity (Deficit).... $ 706,684 $11,895 $18,653 $148,362 $(190,464) $ 695,130 ========= ======= ======= ======== ========= =========
F-29 KNOLL, INC. STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 2001 (In Thousands)
Guarantors ------------------------ Spinneybeck Knoll Knoll, Enterprises, Overseas, Non- Inc. Inc. Inc. Guarantors Eliminations Total ---------- ------------ --------- ----------- ------------ ----------- Sales to customers.............. $870,427 $28,615 $ -- $ 86,346 $ -- $985,388 Sales to related parties........ 24,572 3,356 1,171 117,575 (146,674) -- -------- ------- ------ -------- --------- -------- Total sales..................... 894,999 31,971 1,171 203,921 (146,674) 985,388 Cost of sales to customers...... 548,055 11,304 428 64,700 (30,041) 594,446 Cost of sales to related parties....................... 14,284 3,356 -- 98,993 (116,633) -- -------- ------- ------ -------- --------- -------- Gross profit.................... 332,660 17,311 743 40,228 -- 390,942 Selling, general and administrative expenses....... 155,667 8,424 178 31,263 -- 195,532 Restructuring charge............ 1,655 -- -- -- -- 1,655 -------- ------- ------ -------- --------- -------- Operating income................ 175,338 8,887 565 8,965 -- 193,755 Interest expense................ 41,985 -- -- 116 -- 42,101 Other income (expense), net..... (7,356) -- (2) 3,688 -- (3,670) Income from equity investments.. 12,384 72 252 -- (12,708) -- -------- ------- ------ -------- --------- -------- Income before income tax expense....................... 138,381 8,959 815 12,537 (12,708) 147,984 Income tax expense.............. 51,191 3,457 208 5,938 -- 60,794 -------- ------- ------ -------- --------- -------- Net income...................... $ 87,190 $ 5,502 $ 607 $ 6,599 $ (12,708) $ 87,190 ======== ======= ====== ======== ========= ========
F-30 KNOLL, INC. STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 2000 (In Thousands)
Guarantors ------------------------ Spinneybeck Knoll Knoll, Enterprises, Overseas, Non- Inc. Inc. Inc. Guarantors Eliminations Total ---------- ------------ --------- ----------- ------------ ----------- Sales to customers.............. $1,034,115 $26,779 $ -- $102,583 $ -- $1,163,477 Sales to related parties........ 31,457 4,098 1,088 127,568 (164,211) -- ---------- ------- ------ -------- --------- ---------- Total sales..................... 1,065,572 30,877 1,088 230,151 (164,211) 1,163,477 Cost of sales to customers...... 631,000 10,368 573 77,731 (37,251) 682,421 Cost of sales to related parties....................... 17,783 4,098 -- 105,079 (126,960) -- ---------- ------- ------ -------- --------- ---------- Gross profit.................... 416,789 16,411 515 47,341 -- 481,056 Selling, general and administrative expenses....... 200,409 8,838 537 34,101 -- 243,885 ---------- ------- ------ -------- --------- ---------- Operating income (loss)......... 216,380 7,573 (22) 13,240 -- 237,171 Interest expense................ 44,365 -- -- 72 -- 44,437 Other income (expense), net..... 1,148 -- (316) 2,194 -- 3,026 Income from equity investments.. 13,086 209 911 -- (14,206) -- ---------- ------- ------ -------- --------- ---------- Income before income tax expense (benefit)............. 186,249 7,782 573 15,362 (14,206) 195,760 Income tax expense (benefit).... 69,961 3,144 (100) 6,467 -- 79,472 ---------- ------- ------ -------- --------- ---------- Net income...................... $ 116,288 $ 4,638 $ 673 $ 8,895 $ (14,206) $ 116,288 ========== ======= ====== ======== ========= ==========
F-31 KNOLL, INC. STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1999 (In Thousands)
Guarantors ------------------------ Spinneybeck Knoll Knoll, Enterprises, Overseas, Non- Inc. Inc. Inc. Guarantors Eliminations Total ---------- ------------ --------- ----------- ------------ ----------- Sales to customers.............. $880,677 $21,877 $ -- $ 81,957 $ -- $984,511 Sales to related parties........ 24,558 3,702 1,219 127,651 (157,130) -- -------- ------- ------- -------- --------- -------- Total sales..................... 905,235 25,579 1,219 209,608 (157,130) 984,511 Cost of sales to customers...... 551,894 8,347 803 62,049 (29,651) 593,442 Cost of sales to related parties....................... 13,883 3,702 -- 109,894 (127,479) -- -------- ------- ------- -------- --------- -------- Gross profit.................... 339,458 13,530 416 37,665 -- 391,069 Selling, general and administrative expenses....... 165,601 6,844 2,328 32,146 -- 206,919 -------- ------- ------- -------- --------- -------- Operating income (loss)......... 173,857 6,686 (1,912) 5,519 -- 184,150 Interest expense................ 21,519 -- -- 92 -- 21,611 Recapitalization expense........ 6,356 -- -- -- -- 6,356 Other income (expense), net..... 594 -- -- (1,264) -- (670) Income from equity investments.. 4,621 112 253 -- (4,986) -- -------- ------- ------- -------- --------- -------- Income (loss) before income tax expense (benefit) and extraordinary item............ 151,197 6,798 (1,659) 4,163 (4,986) 155,513 Income tax expense (benefit).... 62,035 2,782 (134) 1,668 -- 66,351 -------- ------- ------- -------- --------- -------- Income (loss) before extraordinary item............ 89,162 4,016 (1,525) 2,495 (4,986) 89,162 Extraordinary loss on early extinguishment of debt, net of taxes...................... 10,801 -- -- -- -- 10,801 -------- ------- ------- -------- --------- -------- Net income (loss)............... $ 78,361 $ 4,016 $(1,525) $ 2,495 $ (4,986) $ 78,361 ======== ======= ======= ======== ========= ========
F-32 KNOLL, INC. STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 2001 (In Thousands)
Guarantors ------------------------ Spinneybeck Knoll Knoll, Enterprises, Overseas, Non- Inc. Inc. Inc. Guarantors Eliminations Total ---------- ------------ --------- ----------- ------------ ----------- CASH PROVIDED BY OPERATING ACTIVITIES $ 120,148 $1,074 $ -- $12,925 $ -- $ 134,147 CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures............ (21,172) (41) -- (3,807) -- (25,020) Proceeds from sale of assets.... 40 -- -- 31 -- 71 --------- ------ ---- ------- ---- --------- Cash used in investing activities.................... (21,132) (41) -- (3,776) -- (24,949) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from revolving credit facility, net.......... 153,000 -- -- -- -- 153,000 Repayment of long-term debt..... (31,250) -- -- -- -- (31,250) Payment of dividend............. (220,339) -- -- -- -- (220,339) Purchase of common stock........ (403) -- -- -- -- (403) --------- ------ ---- ------- ---- --------- Cash used in financing activities.................... (98,992) -- -- -- -- (98,992) Effect of exchange rate changes on cash and cash equivalents.. -- -- -- (332) -- (332) --------- ------ ---- ------- ---- --------- Increase in cash and cash equivalents.............. 24 1,033 -- 8,817 -- 9,874 Cash and cash equivalents at beginning of year.......... 104 598 -- 21,637 -- 22,339 --------- ------ ---- ------- ---- --------- Cash and cash equivalents at end of year................ $ 128 $1,631 $ -- $30,454 $ -- $ 32,213 ========= ====== ==== ======= ==== =========
F-33 KNOLL, INC. STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 2000 (In Thousands)
Guarantors ------------------------ Spinneybeck Knoll Knoll, Enterprises, Overseas, Non- Inc. Inc. Inc. Guarantors Eliminations Total ---------- ------------ --------- ----------- ------------ ----------- CASH PROVIDED BY OPERATING ACTIVITIES $ 205,309 $ 164 $ -- $17,238 $ -- $ 222,711 CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures............ (20,041) (228) -- (3,828) -- (24,097) Proceeds from sale of assets.... 21 -- -- 118 -- 139 --------- ----- ---- ------- ---- --------- Cash used in investing activities.................... (20,020) (228) -- (3,710) -- (23,958) CASH FLOWS FROM FINANCING ACTIVITIES Repayment of revolving credit facility, net.......... (167,000) -- -- -- -- (167,000) Repayment of long-term debt..... (17,500) -- -- -- -- (17,500) Payment of fees to amend debt agreements............... (682) -- -- -- -- (682) Purchase of common stock........ (322) -- -- -- -- (322) Payment of recapitalization costs......................... (230) -- -- -- -- (230) --------- ----- ---- ------- ---- --------- Cash used in financing activities.................... (185,734) -- -- -- -- (185,734) Effect of exchange rate changes on cash and cash equivalents.. -- -- -- (1,465) -- (1,465) --------- ----- ---- ------- ---- --------- Increase (decrease) in cash and cash equivalents.......... (445) (64) -- 12,063 -- 11,554 Cash and cash equivalents at beginning of year.......... 549 662 -- 9,574 -- 10,785 --------- ----- ---- ------- ---- --------- Cash and cash equivalents at end of year................ $ 104 $ 598 $ -- $21,637 $ -- $ 22,339 ========= ===== ==== ======= ==== =========
F-34 KNOLL, INC. STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 1999 (In Thousands)
Guarantors ------------------------ Spinneybeck Knoll Knoll, Enterprises, Overseas, Non- Inc. Inc. Inc. Guarantors Eliminations Total ---------- ------------ --------- ----------- ------------ ----------- CASH PROVIDED BY OPERATING ACTIVITIES $ 124,858 $141 $ -- $ 2,988 $ -- $ 127,987 CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures............ (18,906) (40) -- (6,208) 59 (25,095) Proceeds from sale of assets.... 60 -- -- 113 (59) 114 --------- ---- ---- ------- ---- --------- Cash used in investing activities.................... (18,846) (40) -- (6,095) -- (24,981) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from revolving credit facility, net.......... 120,000 -- -- -- -- 120,000 Proceeds from long-term debt.... 325,000 -- -- -- -- 325,000 Repayment of long-term debt..... (3,750) -- -- -- -- (3,750) Payment of debt issuance costs.. (7,864) -- -- -- -- (7,864) Payment of fees to amend debt agreements............... (12,870) -- -- -- -- (12,870) Net proceeds from issuance of stock...................... 4,746 -- -- -- -- 4,746 Purchase of common stock........ (28,703) -- -- -- -- (28,703) Payment of merger consideration................. (496,682) -- -- -- -- (496,682) Payment of recapitalization costs......................... (8,843) -- -- -- -- (8,843) --------- ---- ---- ------- ---- --------- Cash used in financing activities.................... (108,966) -- -- -- -- (108,966) Effect of exchange rate changes on cash and cash equivalents.. -- -- -- (720) -- (720) --------- ---- ---- ------- ---- --------- Increase (decrease) in cash and cash equivalents.......... (2,954) 101 -- (3,827) -- (6,680) Cash and cash equivalents at beginning of year.......... 3,503 561 -- 13,401 -- 17,465 --------- ---- ---- ------- ---- --------- Cash and cash equivalents at end of year................ $ 549 $662 $ -- $ 9,574 $ -- $ 10,785 ========= ==== ==== ======= ==== =========
F-35 SCHEDULE II KNOLL, INC. VALUATION AND QUALIFYING ACCOUNTS (In Thousands)
Column A Column B Column C Column D Column E - --------------------------------------- ------------ ------------ -------------- ------------ Additions Balance at Charged to Balance Beginning Costs and at End Description of Year Expenses Deductions (1) of Year - --------------------------------------- ------------ ------------ -------------- ------------ Valuation Accounts Deducted in the Consolidated Balance Sheet from the Assets to which They Apply: Year Ended December 31, 2001: Allowance for doubtful accounts.... $6,682 $3,096 $2,328 $7,450 Year Ended December 31, 2000: Allowance for doubtful accounts.... 6,783 1,565 1,666 6,682 Year Ended December 31, 1999: Allowance for doubtful accounts.... 5,057 2,513 787 6,783
____________________ (1) Uncollectible accounts written off and foreign currency translation. S-1 EXHIBIT INDEX
Exhibit Number Description Page - ---------- --------------------------------------------------------------------------- ------ 2++ Amended and Restated Agreement and Plan of Merger by and between Warburg, Pincus Ventures, L.P. and Knoll, Inc., dated as of July 29, 1999. 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 T.K.G. Acquisition Corp. 10.2+++ Credit Agreement, dated as of October 20, 1999, by and among the Company, the Guarantors (as defined therein), the Lenders (as defined therein), Bank of America, N.A., as Administrative Agent, the Chase Manhattan Bank, as Syndication Agent, and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Documentation Agent. 10.3+++++ First Amendment to Credit Agreement, dated as of December 20, 2000, by and among the Company, the Guarantors (as defined therein), the Lenders (as defined therein) party thereto, and Bank of America, N.A., as Administrative Agent. 10.4* 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. 10.5* 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. 10.6** 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. 10.7+ Letter Agreement between Oak Hill Securities Fund, L.P. and the Company, dated August 13, 1999. 10.8***** Supplemental Indenture No. 3, dated as of November 4, 1999, by and among the Company, the Guarantors (as defined therein), and The Bank of New York, as trustee, relating to the Company's 10.875% Senior Subordinated Notes due 2006. 10.9++++ Amended and Restated Employment Agreement, dated as of January 1, 2000, between the Company and Burton B. Staniar. 10.10 Amendment to Employment Agreement, dated as of March 25, 2002, between the Company and Burton B. Staniar. 10.11+++++ Employment Agreement, dated as of March 23, 2001, between the Company and Andrew B. Cogan. 10.12+++++ Employment Agreement, dated as of March 23, 2001, between the Company and Kathleen G. Bradley. 10.13 Letter Agreement, dated as of June 6, 2000, between the Company and Andrew C. McGregor. 10.14** Employment Agreement, dated as of February 29, 1996, between T.K.G. Acquisition Corp. and John H. Lynch.
Exhibit Number Description Page - ---------- --------------------------------------------------------------------------- ------ 10.15+++++ Letter Agreement, dated as of March 23, 2001, between the Company and John H. Lynch. 10.16++++ Amended and Restated Stockholders Agreement, dated as of November 4, 1999, among the Company, Warburg, Pincus Ventures, L.P., and the signatories thereto. 10.17++++ Amended and Restated Stockholders Agreement (Common Stock Under Stock Incentive Plans), dated as of November 4, 1999, among the Company, Warburg, Pincus Ventures, L.P., and the signatories thereto. 10.18++++ Amended and Restated Knoll, Inc. 1996 Stock Incentive Plan. 10.19++++ Amended and Restated Knoll, Inc. 1997 Stock Incentive Plan. 10.20++++ Knoll, Inc. 1999 Stock Incentive Plan. 10.21++++++ Form of Non-Qualified Stock Option Agreement under the Knoll, Inc. 1996 Stock Incentive Plan, entered into by the Company and certain executive officers. 10.22++++++ Form of Non-Qualified Stock Option Agreement under the Knoll, Inc. 1997 Stock Incentive Plan, entered into by the Company and certain executive officers. 10.23++++ Form of Non-Qualified Stock Option Agreement under the Knoll, Inc. 1999 Stock Incentive Plan, entered into by the Company and certain executive officers. 21** Subsidiaries of the Registrant.
__________________________________________ * 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 Annual Report on Form 10-K, and the amendments thereto, for the year ended December 31, 1998. ***** Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999. + Incorporated by reference to the Company's Amendment No. 1 to Schedule 13E-3, which was filed with the Commission on September 10, 1999. ++ Incorporated by reference to the Company's Definitive Proxy Statement on Schedule 14A, which was filed with the Commission on September 30, 1999. +++ Incorporated by reference to the Company's Form 8-K dated November 4, 1999, which was filed with the Commission on November 5, 1999. ++++ Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1999. +++++ Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2000. ++++++ See Exhibit 10.23. Exhibit is substantially identical to Exhibit 10.23. EX-10.10 3 exhibit1.txt BURTON B. STANIAR AMENDMENT TO EMPLOYMENT AGREEMENT Exhibit 10.10 Amendment to Employment Agreement -------------------- This Amendment (the "2002 Amendment") is entered into as of this 25th day of March, 2002 by and between Knoll, Inc. (the "Company") and Burton B. Staniar ("Executive") as follows: WHEREAS, Executive and Company desire to amend that certain February 29, 1996 Employment Agreement which was amended and restated as of January 1, 2000 (the "Employment Agreement"); NOW, THEREFORE, in exchange for consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: 1. Section 3.01(a) is amended to change the "Base Salary" from $200,000 to $250,000. 2. Section 3.01(c) is deleted in its entirety. Executive shall no longer be entitled to a "Service Bonus". 3. Section 3.01(d) is amended to change the target bonus from "125% of Executive's Base Salary" to "100% of Executive's Base Salary" as of January 1, 2002. 4. Section 5.04 is amended to change "125% of the Executive's then current Base Salary" to "100% of the Executive's then current Base Salary". 5. The effective date of this 2002 Amendment is January 1, 2002. 6. Except as specifically set forth in this 2002 Amendment, the Employment Agreement shall remain unchanged. 7. This 2002 Amendment may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. IN WITNESS WHEREOF, each of the parties hereto has duly executed this 2002 Amendment as of the date first above written. KNOLL, INC. /s/ Burton B. Staniar By: /s/ Barry L. McCabe - -------------------------- ------------------------- Burton B. Staniar Name: Barry L. McCabe ----------------------- Its: Senior Vice President ------------------------ EX-10.13 4 exhibit2.txt ANDREW C. MCGREGOR LETTER AGREEMENT Exhibit 10.13 [LETTERHEAD OF KNOLL, INC.] June 6, 2000 Mr. Andrew C. McGregor 293 S. Lakeshore Drive Holland, MI 49424 Dear Andy: I am pleased to extend to you an offer of employment as the Chief Marketing & Development Officer for Knoll, Inc. In this capacity, you will work with Kass, John and me together with the other members of the Company's senior management team to chart the strategic direction and manage Knoll day-to-day to maximize our long-term prospects. Upon your acceptance of this offer, you will devote your entire working time and best efforts to this position during the term of your employment. This position will be located at the Company's office in New York. You will receive a one-time signing bonus of $250,000 payable in 15 days after you commence work at Knoll; provided however, that you will repay the signing bonus if you voluntarily leave the employ of Knoll in the next 12 months. Your annual salary will be $250,000 paid on a bi-monthly basis. You will be eligible to participate in the Knoll Annual Incentive Program. Under the current program, you will have a target bonus opportunity to earn 100% of your base salary for performance during the balance of 2000. Payout under this program is based on achieving Company and individual objectives. Your bonus will be pro-rated for 2000. This incentive program would be outlined in a separate letter to you upon your acceptance of this offer. Subject to the approval of the Knoll, Inc. Board of Directors, you will receive 120,000 stock options in Knoll, Inc. common stock at an exercise price of $28.00 per share. These options will vest over the next four anniversaries of your grant date as follows: 30% on the first anniversary; 20% on the second anniversary; 20% on the third anniversary; and 30% on the fourth anniversary. This grant will also be subject to the terms of the 1999 Stock Incentive Plan and the execution by you of the standard stock option agreement prepared by Knoll's general counsel. Andrew C. McGregor June 6, 2000 Page 2 You will be eligible for Knoll's existing benefit package, including medical and dental insurance, life insurance, 401K, and pension plan. You will qualify for three vacation weeks per year and will be entitled to Knoll's relocation plan to assist you with your move to New York (copy attached). You represent and warrant that your execution of this letter and working for Knoll will not cause you to be in violation of any agreement with any party or any policy of your former employer and that no such agreement or policy will adversely affect your ability to perform your job at Knoll. This offer is contingent upon verification of information you have provided and the completion of a pre-employment examination, which will include drug screening. You will also be required to sign Knoll's intellectual property agreement, a copy of which is attached. This offer will remain open until June 6, 2000. If you are terminated by Knoll at any time without "Cause" (as hereinafter defined), you will receive the sum of $250,000 as severance in complete satisfaction of any and all claims you have against Knoll upon your execution of a general release prepared by Knoll's general counsel; provided however, that you will not receive any severance payment whatsoever and will have no claim against Knoll if you voluntarily leave Knoll or if you are terminated for "Cause". For purposes of this letter, "Cause" means: (i) your failure (except where due to a disability), neglect, or refusal to perform your duties which failure, neglect, or refusal shall not have been corrected by you within 30 days of receipt by you of written notice from Knoll of such failure, neglect, or refusal; (ii) your engaging in conduct that has the effect of injuring the reputation or business of Knoll or its affiliates in any material respect, (iii) any continued or repeated absence from work, unless such absence is (a) approved or excused by Knoll or (b) is the result of your illness, disability or incapability; (iv) your use of illegal drugs or repeated drunkenness; (v) conviction for the commission of a felony; or (vi) the commission by you of an act of fraud or embezzlement against Knoll or any of its employees, customers, or suppliers. This agreement and your at-will employment will be subject to and governed by the internal laws of the state of New York, without regard for the principles of conflicts of laws. This agreement sets forth the entire understanding and agreement of the parties hereto with respect to the terms of your employment Andrew C. McGregor June 6, 2000 Page 3 and supercedes any and all prior written and oral discussions, understandings, and agreements. The parties each irrevocably consent to jurisdiction in the state and federal courts sitting in the state of New York. Andy, I am very enthusiastic about the prospect of you joining us at Knoll. We know that you will make a significant contribution. Very truly yours, /s/ Andrew B. Cogan Andrew B. Cogan Chief Operating Officer cc: Kass Bradley John Lynch Accepted /s/ Andrew C. McGregor ---------------------------- Andrew C. McGregor -----END PRIVACY-ENHANCED MESSAGE-----