-----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, D1HiyHSPfyJQ2VpKEt31vg3qfHKoRJeDWE3FF+73eGgrQvz4xkAdyI1gvgsbaJRl zlV/i/dCc1HjAd+u61x+XQ== 0001011570-02-000006.txt : 20020814 0001011570-02-000006.hdr.sgml : 20020814 20020814175127 ACCESSION NUMBER: 0001011570-02-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-12907 FILM NUMBER: 02737441 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-Q 1 q2nd2002.txt FORM 10-Q FOR QUARTERLY PERIOD ENDED JUNE 30, 2002 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 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 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 [ ] As of August 9, 2002, there were 23,171,029 shares of the Registrant's common stock, par value $0.01 per share, outstanding. KNOLL, INC. TABLE OF CONTENTS FOR FORM 10-Q Item Page - ---- ---- PART I -- FINANCIAL INFORMATION 1. Condensed Consolidated Financial Statements (Unaudited): Condensed Consolidated Balance Sheets at June 30, 2002 and December 31, 2001...................................... 3 Condensed Consolidated Statements of Operations for the three months and six months ended June 30, 2002 and 2001... 4 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2002 and 2001.................... 5 Notes to the Condensed Consolidated Financial Statements..... 6 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................................... 10 3. Quantitative and Qualitative Disclosures about Market Risk....... 14 PART II -- OTHER INFORMATION 2. Changes in Securities and Use of Proceeds........................ 15 6. Exhibits and Reports on Form 8-K................................. 15 Signatures........................................................... 16 Exhibit Index........................................................ 17 2 PART I -- FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements (Unaudited) - ---------------------------------------------------------------- KNOLL, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (Dollars In Thousands, Except Per Share Data)
June 30, 2002 December 31, 2001 ------------- ----------------- ASSETS Current assets: Cash and cash equivalents.......... $ 12,945 $ 32,213 Customer receivables, net.......... 108,694 100,286 Inventories........................ 50,795 60,691 Deferred income taxes.............. 19,351 23,669 Prepaid and other current assets... 8,234 4,436 --------- --------- Total current assets........... 200,019 221,295 Property, plant and equipment.......... 328,324 315,369 Accumulated depreciation............... (155,589) (140,331) --------- --------- Property, plant and equipment, net............... 172,735 175,038 Goodwill............................... 44,017 43,692 Trademarks............................. 187,831 187,831 Deferred financing fees, net........... 4,737 5,582 Other noncurrent assets................ 5,721 5,565 --------- --------- Total Assets................... $ 615,060 $ 639,003 ========= ========= LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Current maturities of long-term debt............................. $ 57,561 $ 62,558 Accounts payable................... 54,080 59,923 Income taxes payable............... 2,703 4,817 Other current liabilities.......... 71,002 89,977 --------- --------- Total current liabilities...... 185,346 217,275 Long-term debt......................... 452,506 484,966 Deferred income taxes.................. 28,842 25,656 Other noncurrent liabilities........... 34,947 33,424 --------- --------- Total liabilities.............. 701,641 761,321 --------- --------- Stockholders' deficit: Common stock, $0.01 par value; 100,000,000 shares authorized; 23,172,029 shares issued and outstanding (net of 34,100 treasury shares) in 2002 and 23,181,829 shares issued and outstanding (net of 24,300 treasury shares) in 2001......... 232 232 Additional paid-in-capital......... 2,837 3,188 Retained deficit................... (76,368) (108,189) Accumulated other comprehensive loss............................. (13,282) (17,549) --------- --------- Total stockholders' deficit.... (86,581) (122,318) --------- --------- Total Liabilities and Stockholders' Deficit........ $ 615,060 $ 639,003 ========= =========
See accompanying notes. 3 KNOLL, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In Thousands)
Three Months Ended Six Months Ended June 30, June 30, ---------------------- ---------------------- 2002 2001 2002 2001 ---------- ---------- ---------- ---------- Sales...................... $202,662 $261,102 $400,469 $514,227 Cost of sales.............. 126,666 155,805 250,341 308,198 -------- -------- -------- -------- Gross profit............... 75,996 105,297 150,128 206,029 Selling, general and administrative expenses.. 42,691 53,237 79,174 103,889 -------- -------- -------- -------- Operating income........... 33,305 52,060 70,954 102,140 Interest expense........... 7,150 10,864 15,273 23,021 Other income (expense), net...................... (1,970) (1,571) 319 (1,615) -------- -------- -------- -------- Income before income tax expense and extraordinary item....... 24,185 39,625 56,000 77,504 Income tax expense......... 9,779 16,135 23,011 31,902 -------- -------- -------- -------- Income before extraordinary item....... 14,406 23,490 32,989 45,602 Extraordinary loss on early extinguishment of debt, net of tax benefit.................. 1,168 -- 1,168 -- -------- -------- -------- -------- Net income................. $ 13,238 $ 23,490 $ 31,821 $ 45,602 ======== ======== ======== ========
See accompanying notes. 4 KNOLL, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In Thousands)
Six Months Ended June 30, ------------------------ 2002 2001 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net income..................................... $ 31,821 $ 45,602 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization............ 15,143 18,348 Extraordinary loss, net of tax benefit... 1,168 -- Other noncash items...................... (501) 2,348 Changes in assets and liabilities: Customer receivables................. (7,822) 11,123 Inventories.......................... 10,457 7,391 Accounts payable..................... (6,437) (9,687) Current and deferred income taxes.... 5,903 2,767 Other current assets and liabilities........................ (20,433) (25,624) Other noncurrent assets and liabilities........................ 760 1,534 -------- --------- Cash provided by operating activities.......... 30,059 53,802 -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures........................... (10,307) (8,144) Proceeds from sale of assets................... 12 57 -------- --------- Cash used in investing activities.............. (10,295) (8,087) -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from revolving credit facilities, net.......................................... 37,500 192,000 Repayment of long-term debt.................... (75,000) (12,500) Premium paid for early extinguishment of debt.. (1,813) -- Payment of dividend............................ -- (220,339) Purchase of common stock....................... (351) (128) -------- --------- Cash used in financing activities.............. (39,664) (40,967) -------- --------- Effect of exchange rate changes on cash and cash equivalents............................. 632 (300) -------- -------- Increase (decrease) in cash and cash equivalents.................................. (19,268) 4,448 Cash and cash equivalents at beginning of period.................................... 32,213 22,339 -------- --------- Cash and cash equivalents at end of period..... $ 12,945 $ 26,787 ======== =========
See accompanying notes. 5 KNOLL, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2002 (Unaudited) 1. Basis of Presentation The accompanying unaudited condensed consolidated financial statements of Knoll, Inc. (the "Company" or "Knoll") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X and therefore do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation in accordance with generally accepted accounting principles are reflected in the condensed consolidated financial statements. The condensed consolidated balance sheet as of December 31, 2001 is derived from the Company's 2001 audited balance sheet. The unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company's annual report on Form 10-K for the year ended December 31, 2001. The results of operations for the three months and six months ended June 30, 2002 are not necessarily indicative of the results to be expected for the full year ending December 31, 2002 or other future periods. 2. Goodwill and Other Intangible Assets 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 should 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. Effective January 1, 2002, the Company assigned an indefinite useful life to its trademarks and discontinued the amortization of both its goodwill and trademarks. The following table sets forth a reconciliation of reported net income to net income adjusted to exclude amortization expense recognized for goodwill and trademarks during the three months and six months ended June 30, 2001:
Three Months Ended Six Months Ended June 30, June 30, ---------------------- ---------------------- 2002 2001 2002 2001 ---------- ---------- ---------- ---------- (In Thousands) Reported net income........ $13,238 $23,490 $31,821 $45,602 Add back: Goodwill amortization, net of tax benefit of $46 and $92, respectively........... -- 276 -- 553 Trademark amortization, net of tax benefit of $547 and $1,094, respectively........... -- 827 -- 1,654 ------- ------- ------- ------- Adjusted net income........ $13,238 $24,593 $31,821 $47,809 ======= ======= ======= =======
6 SFAS 142 requires the Company to perform transitional impairment tests of its trademarks and goodwill as of January 1, 2002, as well as perform impairment tests on an annual basis and whenever events or circumstances occur indicating that the trademarks or goodwill may be impaired. An impairment charge will be recognized for the Company's trademarks when the estimated fair value of the trademarks is less than their carrying amount. An impairment charge will be recognized for the Company's goodwill when the estimated fair value of goodwill of a reporting unit is less than its carrying amount. Fair value represents the amount at which an asset could be bought or sold in a current transaction between willing parties, that is, other than in a forced or liquidation sale. During the first quarter ended March 31, 2002, the Company completed the impairment test of its trademarks as of January 1, 2002. The fair value of the trademarks was estimated by an independent appraiser using a discounted cash flow method. No impairment of the trademarks was determined to exist at January 1, 2002. The Company completed its transitional goodwill impairment test during the second quarter ended June 30, 2002. An independent appraiser performed the first step of the goodwill impairment test, as prescribed by SFAS 142, to screen for potential impairment. This first step included estimating the fair value of the reporting unit to which the Company's goodwill is attributable and comparing that fair value to the carrying amount of the reporting unit. Fair value was estimated using discounted cash flows and comparable company market multiples. Step one yielded a fair value that exceeded the carrying amount of the reporting unit. As a result, goodwill was considered not impaired as of January 1, 2002, no impairment charge was necessary and the Company was not required to perform the second step of the impairment test prescribed by SFAS 142. The increase in the carrying amount of goodwill from December 31, 2001 to June 30, 2002 was attributable to fluctuations in foreign currency exchange rates. The Company continues to amortize its deferred financing fees over the life of the respective debt. The gross carrying amount and related accumulated amortization of these fees were as follows:
June 30, 2002 December 31, 2001 ------------- ----------------- (In Thousands) Gross carrying amount.......... $ 8,337 $ 8,546 Accumulated amortization....... (3,600) (2,964) ------- ------- Net amount..................... $ 4,737 $ 5,582 ======= =======
The Company recorded expense of $0.4 million in each of the three-month periods ended June 30, 2002 and 2001 and $0.7 million in each of the six-month periods ended June 30, 2002 and 2001 in connection with amortizing its deferred financing fees. This amortization expense was recorded as a component of interest expense. The Company estimates that it will record amortization expense of $0.7 million for the remaining six months of 2002, $1.4 million in each of 2003 and 2004, $1.2 million in 2005 and less than $0.1 million in 2006. 3. Partial Redemption of Senior Subordinated Notes On April 30, 2002, the Company redeemed $50.0 million aggregate principal amount of its 10.875% Senior Subordinated Notes due 2006 ("Senior Subordinated Notes") for a total redemption price of $52.5 million, including a redemption premium of $1.8 million and accrued interest thereon of $0.7 million. The Company funded the redemption with borrowings under its senior revolving credit facility and cash on hand. The Company recorded an extraordinary loss on the early extinguishment of debt of $1.9 million pretax ($1.2 million after-tax), consisting of the $1.8 million premium and the write-off of $0.1 million of unamortized financing fees, during the three months ended June 30, 2002 as a result of the redemption. 7 4. Derivative Instruments In May 2002, the Company entered into two interest rate swap agreements that effectively convert the fixed-rate floor on the Company's interest rate collar agreements to a floating rate of interest. Under these agreements, the Company will receive a fixed rate of interest of 5.12% and pay a variable rate of interest equal to the three-month London Interbank Offered Rate ("LIBOR"), as determined on the last day of each quarterly settlement period, plus 1.35% on an aggregate notional principal amount of $200.0 million. The termination date of the agreements is February 2004. The Company has classified these interest rate swap agreements as risk management instruments not eligible for hedge accounting. The aggregate fair value of the Company's interest rate collar and swap agreements from the Company's perspective as of June 30, 2002 was a net loss of $6.3 million, of which $2.7 million was recorded as a current asset, $6.1 million was recorded as a current liability and $2.9 million was recorded as a noncurrent liability in the Company's unaudited condensed consolidated balance sheet. The aggregate fair value of the Company's interest rate collar agreements from the Company's perspective as of December 31, 2001 was a net loss of $8.4 million, of which $5.9 million was recorded as a current liability and $2.5 million was recorded as a noncurrent liability. The following table sets forth the gains and losses recorded for the Company's interest rate collar and swap agreements and the line items in which such amounts are reflected in the Company's unaudited condensed consolidated statements of operations:
Three Months Ended Six Months Ended June 30, June 30, ---------------------- ---------------------- 2002 2001 2002 2001 ---------- ---------- ---------- ---------- (In Thousands) Interest expense........... $ 1,622 $ -- $3,177 $ -- Other income (expense)..... 53 (85) 2,237 (3,127) ------- ---- ------ ------- Aggregate net loss......... $(1,569) $(85) $ (940) $(3,127) ======= ==== ====== =======
5. Dividend On January 5, 2001, the Company paid a special cash dividend of $9.50 per share of common stock, or $220.3 million in the aggregate, to stockholders of record as of the close of business on December 20, 2000. The Company's Board of Directors had declared this dividend on December 20, 2000. The payment of the dividend was funded with borrowings under the Company's senior revolving credit facility. 6. Inventories
June 30, 2002 December 31, 2001 ------------- ----------------- (In Thousands) Raw materials.................. $27,765 $34,044 Work in process................ 8,196 8,190 Finished goods................. 14,834 18,457 ------- ------- Inventories..................... $50,795 $60,691 ======= =======
8 7. Comprehensive Income For the three months ended June 30, 2002 and 2001, comprehensive income amounted to $18.2 million and $25.2 million, respectively. Comprehensive income for the six months ended June 30, 2002 and 2001 was $36.1 million and $44.1 million, respectively. Comprehensive income is comprised of net income and foreign currency translation adjustments, which are reflected in accumulated other comprehensive loss in the Company's unaudited condensed consolidated balance sheets, for the periods noted. 8. Recently Issued Accounting Pronouncement In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS 145"). The Company will adopt the provisions of SFAS 145 related to the rescission of FASB Statement No. 4, "Reporting Gains and Losses from Extinguishment of Debt" and the rescission of an amendment of that statement, FASB Statement No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements," effective January 1, 2003. Upon adoption of these provisions, losses that the Company recorded as an extraordinary item in connection with the early extinguishment of debt prior to the date of adoption will be reclassified to be reflected in results of continuing operations. The provisions related to the amendment of FASB Statement No. 13, "Accounting for Leases," are effective for transactions occurring after May 15, 2002. 9 Item 2. Management's Discussion and Analysis of Financial Condition and - ------------------------------------------------------------------------ Results of Operations --------------------- The following discussion should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and notes thereto and in conjunction with the Company's annual report on Form 10-K for the year ended December 31, 2001. Overview During the first six months of 2002, demand for new office furniture remained weak as corporate profits remained under pressure and white-collar employment levels decreased from December 2001 levels. Additionally, pricing within the United States ("U.S.") office furniture industry continued to be extremely competitive. The Business and Institutional Furniture Manufacturer's Association, the U.S. office furniture trade association, estimates U.S. office furniture industry revenues for the first six months of 2002 were down 25.4% compared to the first six months of 2001. The near-term outlook for the U.S. office furniture industry remains bleak. Historically, after a recessionary period the office furniture industry has not experienced growth until several months after corporations demonstrate and sustain improved earnings. The Company continues to aggressively manage its cost structure in light of current economic conditions and uncertainty, but at the same time continues to focus on initiatives that it believes will enable Knoll to be well positioned to meet the needs of its customers as economic conditions improve. Such initiatives include investing in the development of new products and other sales and marketing initiatives designed to gain market share. At NeoCon(R) 2002, a contract furniture trade show held annually in Chicago in June, the Company introduced a number of new products, most notably Life(TM), a high-performance, environmentally friendly work chair. Union Negotiations The Company's employees at its Grand Rapids, Michigan plant are unionized under the Carpenters and Joiners of America-Local 1615. The collective bargaining agreement with this union expires at midnight on August 25, 2002. The Company is currently in the process of negotiating a new agreement with the union. While the Company is hopeful that it will enter into a new collective bargaining agreement with the union, the Company can not assure that it will be successful in negotiating a new agreement on a timely basis or that a work stoppage will not occur at the Company's Grand Rapids plant. There could be a material adverse impact on the Company if a work stoppage would occur for a significant period of time. Critical Accounting Policies Following are critical accounting policies that the Company implemented during 2002. Refer to the Company's annual report on Form 10-K for the year ended December 31, 2001 for discussion of other critical accounting policies that affect the Company's financial statements. Goodwill and Other Intangible Assets In June 2001, the FASB approved SFAS 141 and 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 should 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. Effective January 1, 2002, the Company assigned an indefinite useful life to its trademarks and discontinued the amortization of both its goodwill and trademarks. The Company's results of operations for the three months and six months ended June 30, 2001 included a pretax charge of $1.7 million ($1.1 million after-tax) and $3.4 million ($2.2 million after-tax), respectively, for the amortization of goodwill and trademarks. Excluding these charges, the Company's net income would have been $24.6 million and $47.8 million for the three months and six months ended June 30, 2001, respectively. 10 SFAS 142 requires the Company to perform transitional impairment tests of its trademarks and goodwill as of January 1, 2002, as well as perform impairment tests on an annual basis and whenever events or circumstances occur indicating that the trademarks or goodwill may be impaired. An impairment charge will be recognized for the Company's trademarks when the estimated fair value of the trademarks is less than their carrying amount. An impairment charge will be recognized for the Company's goodwill when the estimated fair value of goodwill of a reporting unit is less than its carrying amount. Fair value represents the amount at which an asset could be bought or sold in a current transaction between willing parties, that is, other than in a forced or liquidation sale. During the first quarter ended March 31, 2002, the Company completed the impairment test of its trademarks as of January 1, 2002. The fair value of the trademarks was estimated by an independent appraiser using a discounted cash flow method. No impairment of the trademarks was determined to exist at January 1, 2002. The Company completed its transitional goodwill impairment test during the second quarter ended June 30, 2002. An independent appraiser performed the first step of the goodwill impairment test, as prescribed by SFAS 142, to screen for potential impairment. This first step included estimating the fair value of the reporting unit to which the Company's goodwill is attributable and comparing that fair value to the carrying amount of the reporting unit. Fair value was estimated using discounted cash flows and comparable company market multiples. Step one yielded a fair value that exceeded the carrying amount of the reporting unit. As a result, goodwill was considered not impaired as of January 1, 2002, no impairment charge was necessary and the Company was not required to perform the second step of the impairment test prescribed by SFAS 142. Interest Rate Swap Agreements The Company accounts for its interest rate swap 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 swap 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 swap agreements represents the present value of expected future payments, as estimated by the counterparty, who is a dealer 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 counterparty could cause a material effect on the Company's results of operations or financial position. Results of Operations Comparison of Second Quarter and Six Months Ended June 30, 2002 to Second Quarter and Six Months Ended June 30, 2001 Sales. Sales for the second quarter of 2002 were $202.7 million, a decrease of 22.4%, or $58.4 million, from sales of $261.1 million for the second quarter of 2001. Sales for the six months ended June 30, 2002 were $400.5 million, a decrease of 22.1%, or $113.7 million, from sales of $514.2 million for the same period of 2001. The Company's sales in the second quarter and six months of 2002 were down primarily as a result of decreased volume attributable to the sluggishness in the U.S. economy. The decreases in the Company's sales for the second quarter and six months of 2002 were also due, to a lesser extent, to lower net sales prices for the Company's products resulting from extremely competitive pricing pressures that have been and continue to be experienced in the industry in connection with current economic conditions. Gross Profit and Operating Income. Throughout 2001 and the first six months of 2002, the Company took steps intended to prevent significant deterioration of profits as a percentage of sales in anticipation of lower sales volumes. Such steps included reducing hourly headcount in North America as dictated by volume, adopting a restructuring plan in September 2001 to eliminate certain salaried positions in North America and aggressively managing certain other discretionary and factory costs. These initiatives helped mitigate the deterioration of the Company's profits as a percentage of sales in the second quarter and six months ended June 30, 2002. As a percentage of sales, gross profit was 37.5% for the second quarter and six months ended June 30, 2002, 40.3% for the second quarter of 2001 and 40.1% for the six months ended June 30, 2001. Operating income as a percentage of sales was 16.4% and 17.7% for the second quarter and six months ended June 30, 2002, respectively, and 19.9% for both the second quarter and six months ended June 30, 2001. Excluding the goodwill and trademark 11 amortization expense of $1.7 million and $3.4 million recorded in the second quarter and six months of 2001, respectively, the Company's operating income as a percentage of sales was 20.6% and 20.5%, respectively. The decreases in the gross profit and operating income percentages from 2001 to 2002 were due primarily to the lower sales volume allowing less absorption of fixed overhead costs in the second quarter and six months ended June 30, 2002 compared to the same periods of 2001 as well as lower net sales prices for the Company's products in 2002 resulting from competitive pricing within the industry. The decreases in the Company's operating income as a percentage of sales from 2001 to 2002 were also due, in part, to an estimated contingency loss of $1.5 million recorded in the second quarter of 2002 as a result of a bankruptcy filing by a third party that processed payment of the Company's freight bills. The Company's steel suppliers recently started to implement price increases primarily in response to the imposition of tariffs by the U.S. government on some imported steel products. While there was no appreciable impact of steel price increases on the Company's results of operations for the first six months of 2002, the Company expects its steel costs to increase in the second half of 2002. The Company is currently unable to reasonably quantify the amount of such increase and the effect on its results of operations for the second half of 2002. Interest Expense. The Company's interest expense for the second quarter and six months ended June 30, 2002 decreased $3.7 million and $7.7 million, respectively, compared to that of the same periods of 2001. Such decreases were primarily a result of lower outstanding debt balances as well as significantly lower interest rates on the Company's variable-rate debt during the second quarter and six months of 2002 compared to the same periods of 2001 partially offset by net settlement payments of $1.6 million and $3.2 million incurred under the Company's interest rate collar agreements during the second quarter and six months of 2002, respectively. Interest rates incurred for borrowings under the Company's senior credit facilities during the second quarter and six months of 2002 were more favorable primarily as a result of continued lower short-term borrowing rates. The Company's interest expense for the second quarter and six months of 2002 was also impacted favorably, to a lesser extent, by the redemption of a portion of the Company's Senior Subordinated Notes on April 30, 2002. See below for further discussion of the redemption. Other Income (Expense), Net. Other income (expense) included noncash gains related to the Company's interest rate collar and swap agreements of $0.1 million and $2.2 million for the second quarter and six months ended June 30, 2002, respectively. For the second quarter and six months ended June 30, 2001, other income (expense) included noncash losses of $0.1 million and $3.1 million, respectively, related to the Company's interest rate collar agreements. These noncash items were a result of the change in the fair value of the interest rate collar and swap agreements during the periods noted. See Note 4 to the unaudited condensed consolidated financial statements for further discussion. Income Tax Expense. The Company's effective tax rate is directly affected by changes in consolidated pretax income and the mix of pretax income and varying effective tax rates attributable to the countries in which it operates. The mix of pretax income was primarily responsible for the change in the effective tax rate to 40.4% for the second quarter of 2002 from 40.7% for the second quarter of 2001 and to 41.1% for the six months ended June 30, 2002 from 41.2% for the same period of 2001. Extraordinary Item. On April 30, 2002, the Company redeemed $50.0 million aggregate principal amount of its Senior Subordinated Notes for a total redemption price of $52.5 million, including a redemption premium of $1.8 million and accrued interest thereon of $0.7 million. The Company recorded an extraordinary loss on the early extinguishment of debt of $1.9 million pretax ($1.2 million after-tax), consisting of the $1.8 million premium and the write-off of $0.1 million of unamortized financing fees, during the second quarter of 2002 as a result of the redemption. Liquidity and Capital Resources During the six months ended June 30, 2002, the Company generated cash flow from operations of $30.1 million. Cash provided by operations resulted primarily from earnings before noncash and extraordinary items offset by cash used for working capital purposes. A substantial portion of cash used for working capital purposes related to the payment, in the first quarter of 2002, of December 31, 2001 accruals of employee costs associated with year 2001 performance. 12 The cash flow provided by operations in addition to $37.5 million of net borrowings under the senior revolving credit facility and a portion of the December 31, 2001 cash balance were used during the six months of 2002 to fund capital expenditures of $10.3 million, repay $25.0 million of debt under the term loan facility and fund the redemption of a portion of the Company's Senior Subordinated Notes. The Company redeemed $50.0 million aggregate principal amount of its Senior Subordinated Notes for a total redemption price of $52.5 million, including a redemption premium of $1.8 million and accrued interest thereon of $0.7 million, on April 30, 2002. The Company's debt instruments contain certain covenants that, among other things, limit the Company's ability to incur additional indebtedness, pay dividends and purchase Company stock as well as require the Company to maintain certain financial ratios. As of June 30, 2002, the Company had an aggregate of $125.4 million available for borrowing under its U.S. and European revolving credit facilities. 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. Statement Regarding Forward-Looking Disclosure Certain portions of this Form 10-Q, including "Management's Discussion and Analysis of Financial Condition and Results of Operations," contain various forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, 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-Q 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 sluggishness 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 ability of the Company to successfully negotiate a new collective bargaining agreement with its unionized employees prior to the expiration of the currently existing agreement at midnight on August 25, 2002; 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 timely introduction of new products, pricing changes by the Company's competitors and growth rates of the office systems category; increases in raw material prices, such as steel; 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 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; 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 contained in this Form 10-Q 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. 13 Item 3. 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 and swap agreements. Foreign currency exchange rate risk arises from the Company's foreign operations and purchases of inventory from foreign suppliers. There have been no material changes in the Company's financial instruments or its exposure to market risk since December 31, 2001 except as described below. The Company's fixed-rate debt was $58.1 million at June 30, 2002, a decrease of $50.0 million from December 31, 2001, while its variable-rate debt was $452.0 million at June 30, 2002, an increase of $12.5 million from December 31, 2001. The Company's fixed-rate debt decreased as a result of the redemption of $50.0 million aggregate principal amount of its Senior Subordinated Notes on April 30, 2002. The increase in variable-rate debt is related to net borrowings of $37.5 million under the senior revolving credit facility to partially fund the redemption of a portion of the Senior Subordinated Notes offset by the repayment of $25.0 million under the term loan facility. In May 2002, the Company entered into two interest rate swap agreements that effectively convert the fixed-rate floor on the Company's interest rate collar agreements to a floating rate of interest. Under these agreements, the Company will receive a fixed rate of interest of 5.12% and pay a variable rate of interest equal to the three-month LIBOR, as determined on the last day of each quarterly settlement period, plus 1.35% on an aggregate notional principal amount of $200.0 million. The termination date of the agreements is February 2004. The aggregate fair value of the Company's interest rate collar and swap agreements from the Company's perspective as of June 30, 2002 was a net loss of $6.3 million, of which $2.7 million was recorded as a current asset, $6.1 million was recorded as a current liability and $2.9 million was recorded as a noncurrent liability in the Company's unaudited condensed consolidated balance sheet. The aggregate fair value of the Company's interest rate collar agreements from the Company's perspective as of December 31, 2001 was a net loss of $8.4 million, of which $5.9 million was recorded as a current liability and $2.5 million was recorded as a noncurrent liability. The following table sets forth the gains and losses recorded for the Company's interest rate collar and swap agreements and the line items in which such amounts are reflected in the Company's unaudited condensed consolidated statements of operations:
Three Months Ended Six Months Ended June 30, June 30, ---------------------- ---------------------- 2002 2001 2002 2001 ---------- ---------- ---------- ---------- (In Thousands) Interest expense........... $ 1,622 $ -- $3,177 $ -- Other income (expense)..... 53 (85) 2,237 (3,127) ------- ---- ------ ------- Aggregate net loss......... $(1,569) $(85) $ (940) $(3,127) ======= ==== ====== =======
14 PART II -- OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds - -------------------------------------------------- Restrictions on Dividends The credit agreement governing the Company's senior credit facilities and the indenture relating to the Company's 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), which was paid 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. Item 6. Exhibits and Reports on Form 8-K - ----------------------------------------- a. Exhibits: 99.1 Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes- Oxley Act of 2002. 99.2 Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes- Oxley Act of 2002. b. Current Reports on Form 8-K: The Company did not file any reports on Form 8-K during the three months ended June 30, 2002. 15 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. KNOLL, INC. Date: August 14, 2002 By: /s/ Andrew B. Cogan ------------------------------- Andrew B. Cogan Chief Executive Officer Date: August 14, 2002 By: /s/ Barry L. McCabe ------------------------------- Barry L. McCabe Senior Vice President and Chief Financial Officer 16 EXHIBIT INDEX ------------- Exhibit Number Description Page - --------- ----------------------------------------------------- -------- 99.1 Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 17 EX-99 3 exhibit99-1.txt EXHIBIT 99.1 -- CEO CERTIFICATION Exhibit 99.1 KNOLL, INC. CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Knoll, Inc. (the "Company") on Form 10-Q for the period ended June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Andrew B. Cogan, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Andrew B. Cogan -------------------------- Andrew B. Cogan Chief Executive Officer August 14, 2002 EX-99 4 exhibit99-2.txt EXHIBIT 99.2 -- CFO CERTIFICATION Exhibit 99.2 KNOLL, INC. CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Knoll, Inc. (the "Company") on Form 10-Q for the period ended June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Barry L. McCabe, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Barry L. McCabe ---------------------------- Barry L. McCabe Senior Vice President and Chief Financial Officer August 14, 2002 -----END PRIVACY-ENHANCED MESSAGE-----