-----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, NF8EUC9V/SP02DAsG1GBR3CJcumNKpamO6cEyiDJsl8A1DAGi/ZzglRrpZSZdYOF ue14cPpMg4XjNKZPpBVIfA== 0001021408-99-000598.txt : 19990402 0001021408-99-000598.hdr.sgml : 19990402 ACCESSION NUMBER: 0001021408-99-000598 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 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-K405 SEC ACT: SEC FILE NUMBER: 001-12907 FILM NUMBER: 99582994 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-K405 1 FORM 10-K405 ================================================================================ 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, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to ________ Commission File No. 001-12907 KNOLL, INC. A Delaware Corporation I.R.S. Employer No. 13-3873847 1235 Water Street East Greenville, PA 18041 Telephone Number (215) 679-7991 Securities registered pursuant to section 12(b) of the Act: Title of each class Name of exchange on which registered --------------------------------------- -------------------------------------- Common Stock, par value $0.01 per share New York Stock Exchange, Inc.
Securities registered pursuant to section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 24, 1999, the aggregate market value of the voting stock held by non-affiliates of the Registrant, based on the closing price of these shares on the New York Stock Exchange, Inc., was $388,818,753. Directors, executive officers and beneficial owners of 5% or more of the Registrant's stock are considered affiliates of the Registrant. As of March 24, 1999, there were 40,618,778 shares of the Registrant's common stock, par value $0.01 per share, outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement for the 1999 Annual Shareholders' Meeting are incorporated by reference into Part III of this Form 10-K. ================================================================================ TABLE OF CONTENTS ----------------- Item Page - ---- ---- PART I 1. Business........................................... 2 2. Properties......................................... 8 3. Legal Proceedings.................................. 8 4. Submission of Matters to a Vote of Security Holders.......................................... 9 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters.............................. 10 6. Selected Financial Data............................ 10 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.... 13 7A. Quantitative and Qualitative Disclosures about Market Risk...................................... 19 8. Financial Statements and Supplementary Data........ 20 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........... 20 PART III 10. Directors and Executive Officers of the Registrant.. 21 11. Executive Compensation.............................. 21 12. Security Ownership of Certain Beneficial Owners and Management.................................... 21 13. Certain Relationships and Related Transactions...... 21 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................... 22 Signatures.................................................. 24 PART I ITEM 1. BUSINESS General Knoll, Inc., a Delaware corporation, is the successor by merger to the business and operations of The Knoll Group, Inc. and related entities ("The Knoll Group" or the "Predecessor"), which were acquired on February 29, 1996 (the "Acquisition") from Westinghouse Electric Corporation, currently known as CBS Corporation ("Westinghouse"). The Knoll Group was created by Westinghouse in 1989 and 1990, when it acquired The Shaw-Walker Company, Reff Inc. and Knoll International, Inc. and combined them with its Westinghouse Furniture Systems division. The Acquisition was completed by T.K.G. Acquisition Corp. ("TKG"), a corporation majority-owned by Warburg, Pincus Ventures, L.P. ("Warburg") and whose other stockholders were NationsBanc Investment Corp. and members of Knoll, Inc. management. In the Acquisition, a wholly owned subsidiary of TKG acquired all of the outstanding capital stock of The Knoll Group and was merged, together with The Knoll Group, into the principal operating company of The Knoll Group, which changed its name in the merger to "Knoll, Inc." On March 14, 1997, Knoll, Inc. was merged into TKG, which changed its name in the merger to "Knoll, Inc." Unless the context requires or specifies otherwise, the terms "Knoll" and the "Company" refer to Knoll, Inc., its subsidiaries and predecessor entities as a combined entity. The Company completed an initial public offering of its common stock during the second quarter of 1997. An aggregate of 9,200,000 shares, including 720,000 shares sold by a selling stockholder, were sold during May and June 1997 at $17.00 per share. The Company is engaged in the design, manufacture and distribution of office furniture products and accessories, focusing on the middle to high-end of the contract furniture market. The Company's principal executive offices are located at 1235 Water Street, East Greenville, Pennsylvania 18041, and its telephone number is (215) 679-7991. Except as otherwise indicated, the market and Company market share data contained in this Form 10-K are based on information from The Business and Institutional Furniture Manufacturer's Association ("BIFMA"), the United States ("U.S.") office furniture trade association. The Company believes that such data are considered within the industry to be the best available and generally are indicative of the Company's relative market share and competitive position. Recent Developments On March 23, 1999, the Company received a proposal from Warburg and certain members of Knoll management to acquire all of the outstanding shares of the Company's common stock owned by public stockholders at a price of $25.00 per share. The Board of Directors has authorized the appointment of a special committee, consisting of independent members of the Board of Directors, to consider the proposal. Consummation of the acquisition would be subject to approval by the Board of Directors and stockholders of Knoll, as well as to the receipt of financing, the execution of a definitive merger agreement and other conditions customary in a transaction of this type. 2 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 1998. U.S. % of U.S. Product Category Market Size Market ---------------- ----------- --------- (in billions) Office systems....................... $4.6 36.9% Seating.............................. 3.0 24.5 Storage.............................. 1.6 12.9 Desks and casegoods.................. 1.9 15.4 Tables............................... 0.8 6.5 Office systems consist of movable panels, work surfaces and storage units, electrical distribution, lighting, organizing tools and freestanding components. These modular systems are popular with customers who require flexible space configurations or where many people share open floor space, as is common in modern office buildings. Both seating, ranging from executive desk chairs to task chairs and side chairs, and storage products, such as overhead shelving, file cabinets and desk pedestals (file cabinets that serve to support desks), are sold to users of office systems and also are sold separately to non-systems users. Desks and tables range from classic writing desks in private offices to conference and meeting room tables that can accommodate sophisticated technological demands. Management believes that fundamental shifts 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 are influencing growth in the office furniture industry. Companies increasingly 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 this change include: new office technology and the resulting necessity for improved wire and data management; continued corporate reengineering, restructuring and reorganizing; and corporate relocations. Management also believes that there are certain macroeconomic conditions, including white-collar employment levels and corporate cash flow, that also influence industry growth. Products The Company offers a broad range of office furniture products and accessories that support the Company's strategy of being a one-stop source for quality office furniture. The Company's five basic product categories 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 cabinets 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 drywall office construction. The Company has focused on this area of the office furniture industry because it is the largest category, typically provides attractive gross margins and often leads to repeat and add-on 3 sales of additional office systems, complementary furniture and furniture accessories. Office systems accounted for approximately 68.4% of the Company's sales in 1998, 67.2% of sales in 1997 and 65.4% of sales in 1996. The Company's Currents and Dividends product lines were added to its office system offerings in 1998. These two new office systems address category segments and price points where the Company's previous product offerings may have been limited and where management believes that demand for quality products has been under-served. The Company believes its brand identity, superior design and complementary product offerings give it a competitive advantage in launching new products. Seating The Company believes that the office seating market includes three major segments: the "appearance," "comfort" and "basic" segments. Key customer criteria in seating include superior ergonomics, aesthetics, comfort and quality, all of which the Company believes to be consistent with its strengths and reputation. With its Sapper, Bulldog, 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. The majority of sales in the U.S. seating market are made to the same customers as are the office system sales. 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 free-standing 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. Tables The Company offers two product lines in the tables category: Interaction tables and Propeller 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. KnollStudio The Company's historically significant KnollStudio collection serves the design- conscious segment of the fine contract furniture 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 and is recognized as the "design engine" of the Company. 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 this century's most prominent architects and designers, such as Ludwig Mies van der Rohe, Marcel Breuer, Eero Saarinen and Frank Gehry, for prestigious corporate and residential interiors. In 1998, the Company introduced a signature collection of products that Maya Lin, the internationally-known designer of the National Veterans Memorial in Washington, D.C., designed for the KnollStudio line. KnollStudio includes complete collections by individual designers as well as distinctive single items. 4 KnollExtra KnollExtra is a rapidly growing line of desk and office accessories, including letter trays, sorters, binder bins, file holders, calendars, desk pads, planters, wastebaskets and bookends. 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. 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, primarily including other office furniture manufacturers, upholsters, 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 broad 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 Allesandri System, which is targeted to the French market, and the SoHo Desking System, which has broad market appeal; (ii) KnollStudio, which serves the image and design-oriented segment of the fine furniture market; (iii) seating, including a comprehensive range of chairs such as Sapper, Bulldog, Parachute and SoHo; and (iv) storage cabinets, 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 and Frank Gehry. Today, the Company continues to engage prominent outside architects and designers, such as Maya Lin, to create new products and product enhancements. By combining the creative vision of architects and designers with a corporate commitment to products 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. 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. 5 Sales and Distribution Knoll's customers are typically Fortune 1000 companies. The Company employs approximately 350 direct sales representatives, who work closely with its approximately 220 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, as the dealer's economic investment in learning all aspects of a particular manufacturer's product offerings and the value of the relationships the dealer forms with the Company and with customers discourage dealers from changing their vendor affiliations. The Company is not dependent on any one of its dealers, the largest of which accounted for less than 5.0% of the Company's North American sales in 1998. Additionally, no single customer represented more than 2.5% of the Company's North American sales during 1998. 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 7.8% in 1998. 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 6.5% of the Company's sales in 1998. In the Latin American and Asia-Pacific markets, which accounted for less than 1.5% of the Company's sales in 1998, the Company uses both dealers and independent licensees. Manufacturing and Operations The Company operates four manufacturing sites in North America, with plants located in East Greenville, Pennsylvania; Grand Rapids and Muskegon, Michigan; and Toronto, Canada. In addition, the Company has two plants in Italy: one in Foligno and one in Graffignana. All of the Company's plants are registered under ISO 9000, an internationally developed set of quality criteria for manufacturing companies. Raw Materials and Suppliers The Company's North America purchasing is centralized in its East Greenville facility. This centralization, in addition to close working relationships formed with its main suppliers, has enabled the Company to focus on achieving purchasing economies and "just-in-time" inventory practices. The Company 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. Competition The office furniture market is highly competitive. Office furniture companies compete on the basis of (i) product design, including performance, ergonomic and aesthetic factors, (ii) product quality and durability, (iii) price (primarily in the middle and budget segments), (iv) on-time delivery and (v) service and technical support. In the United States, where the Company had an estimated 7.1% market share and derived approximately 90.4% of its sales in 1998, five companies (including the Company) represent approximately 59.5% of the market. Some of the Company's competitors, especially those in North America, are large and have significantly greater financial, marketing, manufacturing and technical resources than those of the Company. The Company's most significant competitors in its primary markets are Steelcase, Inc., Herman Miller, Inc., Haworth, Inc. and, to a lesser extent, HON Industries, Inc. These competitors have a substantial volume of furniture installed at businesses throughout the country, providing a continual source of demand for further products and 6 enhancements. Moreover, the products of these competitors have strong acceptance in the marketplace. Although the Company believes that it has been able to compete successfully in its markets to date, there can be no assurance that it will be able to continue to do so in the future. The European market is highly fragmented, as the combined sales of the estimated top 50 manufacturers represent less than approximately 60.0% of the market. Based on the most recent publicly available trade information, the Company believes that no single company holds more than a 10.0% share of the European market. Patents and Trademarks The Company has approximately 95 active United States utility patents on various components used in its products and systems and approximately 125 active United States design patents. The Company also has approximately 200 patents in various foreign countries. Knoll(R), KnollStudio(R), KnollExtra(R), Good Design Is Good Business(R), Bulldog(R), Calibre(R), Currents(TM), Dividends(TM), Equity(R), Parachute(R), Propeller(R), and Reff(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 $159.2 million at December 31, 1998 and $141.3 million at December 31, 1997. 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 23 (Segment and Geographic Region Information) of the Notes to the Consolidated Financial Statements on page F-25. Environmental Matters The Company believes that it is substantially in compliance with all applicable laws and regulations for the protection of the environment and the health and safety of its employees based upon existing facts known to management. Compliance with federal, state, local and foreign environmental regulations relating to the discharge of substances into the environment, the disposal of hazardous wastes and other related activities has had and will continue to have an impact on the operations of the Company, but has, since the formation of Knoll in 1990, been accomplished without having a material adverse effect on the operations of the Company. There can be no assurance that such regulations will not change in the future or that the Company will not incur material costs as a result of such regulations. While it is difficult to estimate the timing and ultimate costs to be incurred due to uncertainties about the status of laws, regulations and technology, management presently has no planned expenditures of significant amounts for future environmental compliance. The Company has trained staff responsible for monitoring compliance with environmental, health and safety requirements. The Company's goal is to reduce and, wherever possible, eliminate the creation of hazardous waste in its manufacturing processes. The Company has been identified as a potentially responsible party pursuant to the Comprehensive Environmental Response Compensation and Liability Act ("CERCLA") for remediation costs associated with waste disposal sites previously used by the Company. CERCLA imposes liability without regard to fault or the legality of the disposal. The remediation costs at the CERCLA sites are unknown; however, the Company does not expect its liability to be material 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 CERCLA liabilities known as of the date of the Acquisition. 7 Employees As of February 28, 1999, the Company employed a total of 4,061 people, including 2,638 hourly and 1,423 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 expiring August 26, 2002. Management believes that relations with this union are positive. In 1998, there was an unsuccessful attempt to unionize employees at the Company's Muskegon, Michigan facility. The Company believes that relations with its employees in Muskegon and throughout North America are good. Nonetheless, it is possible that Company employees may attempt to unionize in the future. Certain workers in the Company's facilities in Italy are represented by unions. The Company has experienced brief work stoppages from time to time at the Company's plants in Italy, certain of which related to national or local issues. Such work stoppages have not materially affected the Company. ITEM 2. PROPERTIES The Company operates over 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 and one approximately 334,000 square foot plant in Muskegon, Michigan. 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 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. The Company, for a number of years, has sold various products to the United States Government under GSA multiple award schedule contracts. The GSA is permitted to audit the Company's compliance with the terms of the GSA contracts. As a result of one such audit, the GSA has asserted refund claims under 1985-88 and 1987-90 contracts between GSA and The Shaw-Walker Company, which has been merged into the Company, for approximately $2.15 million ("Shaw-Walker GSA Claims") and has other contracts under audit review. The former shareholders of The Shaw-Walker Company have agreed to indemnify the Company for the Shaw-Walker GSA Claims. Based upon information presently known, management disputes the audit results and does not expect resolution of the Shaw-Walker GSA Claims to have a material adverse effect on the Company's consolidated financial statements. On or about March 24, 1999, five class action complaints (Stark v. Knoll, Inc., ---------------------- et al. No. 17049NC; Guido V. Warburg, Pincus & Co., et al., No.17052NC; Marotta - ------ --------------------------------------- ------- V. Knoll, Inc., et al., No. 17053NC; Finkelstein V. Knoll, - ----------------------- -------------------- 8 Inc., et al., No. 17055NC; Rausch v. Knoll, Inc., et al., No 17059NC) were filed - ------------- ---------------------------- in the Court of Chancery for the State of Delaware, New Castle County, relating to the proposal (the "Proposal") by Warburg and certain members of Knoll management to purchase all of the outstanding shares of the Company's common stock owned by public stockholders at a price of $25.00 per share, which was previously discussed under "Recent Developments" in Item 1., "Business." The defendants named in the complaints are the Company, Burton B. Staniar, John W. Amerman, Robert J. Dolan, Jeffery A. Harris, Sidney Lapidus, Kewsong Lee, John L. Vogelstein, John H. Lynch, Warburg, Pincus & Co., Warburg, Pincus Ventures, L.P. and E.M. Warburg, Pincus & Co., LLC. The complaints allege breach of fiduciary duty on the part of Warburg and the Company's management in the proposed purchase of such shares of common stock and seek a preliminary injunction, damages and recission. Due to the very early stage of the litigation at this time, and the inherent uncertainties in litigation, the Company is unable to predict what impact, if any, such litigation may have on the Company or the Proposal. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the three months ended December 31, 1998. 9 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market Information and Dividend Policy The Company's common stock, par value $0.01 per share (the "Common Stock") is traded on the New York Stock Exchange, Inc. ("NYSE"). The Common Stock has been listed on the NYSE since May 9, 1997, the date of the Company's initial public offering. The following table sets forth, for the periods indicated, high and low closing sales prices for the Common Stock as reported by the NYSE. High Low --------- --------- 1997 - ---- Second quarter (commencing May 9, 1997).. $23 3/4 $17 1/4 Third quarter............................ 33 15/16 22 7/8 Fourth quarter........................... 34 3/16 25 3/8 1998 - ---- First quarter............................ 42 1/8 29 3/8 Second quarter........................... 40 9/16 27 Third quarter............................ 37 21 7/8 Fourth quarter........................... 30 1/8 19 1/4 The closing price of the Company's Common Stock was $24 1/4 on March 24, 1999. As of such date, there were approximately 4,100 holders of record of the Common Stock. The credit agreement governing the Company's revolving credit facility and the indenture relating to the Company's 10.875% Senior Subordinated Notes due 2006 (the "Senior Subordinated Notes") limit the Company's ability to pay dividends to its stockholders. The Company has not paid any dividends on its common stock, and 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. SELECTED FINANCIAL DATA The following table presents (i) selected historical consolidated financial information of the Predecessor, as of the dates and for the periods indicated, (ii) selected historical consolidated financial information of the Company, as of the dates and for the periods indicated and (iii) summary pro forma consolidated financial information of the Company, for the periods indicated, after giving effect to the events described in the notes below. The historical consolidated financial information of the Predecessor and the Company has been derived from audited financial statements of the Predecessor and the Company, respectively. The summary pro forma information does not purport to represent what the Company's results actually would have been if such events had occurred at the dates indicated, nor does such information purport to project the results of the Company for any future period. The selected financial information should be read in conjunction with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Item 8, "Financial Statements and Supplementary Data." 10
Predecessor | The Company ------------------------------------ | ------------------------------------------------------------ | Pro Forma Year Ended Two Months | Ten Months Year Ended Year Ended December 31, Ended | Ended December 31, December 31, --------------------- February 29, | December 31, ------------------ ------------------------ 1994 1995 1996 | 1996 1997 1998 1996 (1)(2) 1997 (2) ------- -------- ------------- | ----------- --------- -------- ----------- ---------- (In Thousands) | (In Thousands, Except Per Share Data) | Operating Data | Sales.............. $562,869 $620,892 $ 90,232 | $561,534 $810,857 $948,691 $651,766 $810,857 Cost of sales (3).. 410,104 417,632 59,714 | 358,841 489,962 572,756 419,908 489,962 -------- -------- -------- | -------- -------- -------- -------- -------- | Gross profit....... 152,765 203,260 30,518 | 202,693 320,895 375,935 231,858 320,895 | Provision for | restructuring...... 29,180 -- -- | -- -- -- -- -- | Selling, general and | administrative | expenses (4)....... 167,238 138,527 21,256 | 131,349 183,018 204,392 153,388 183,018 Westinghouse | long-term incentive | compensation (5)... -- -- 47,900 | -- -- -- -- -- Allocated corporate | expenses (3) (4)... 5,881 9,528 921 | -- -- -- -- -- -------- -------- -------- | -------- -------- -------- -------- -------- Operating income | (loss)........... (49,534) 55,205 (39,559) | 71,344 137,877 171,543 78,470 137,877 Interest expense.. 3,225 1,430 340 | 32,952 25,075 16,860 34,359 22,373 Other income | (expense), net... 699 (1,597) (296) | 447 1,667 2,732 151 1,667 -------- -------- -------- | -------- -------- -------- -------- -------- | Income (loss) before | income tax expense | (benefit) and | extraordinary item.. (52,060) 52,178 (40,195) | 38,839 114,469 157,415 44,262 117,171 Income tax expense | (benefit)......... 7,713 22,846 (16,107) | 16,844 48,026 64,371 19,094 49,096 -------- -------- -------- | -------- -------- -------- -------- -------- | Income (loss) before | extraordinary item.. (59,773) 29,332 (24,088) | 21,995 66,443 93,044 25,168 68,075 Extraordinary loss on | early extinguishment | of debt, net of | taxes (6)........... -- -- -- | 5,159 5,337 -- -- -- -------- -------- -------- | -------- -------- -------- -------- -------- Net income (loss) (6). $(59,773) $ 29,332 $(24,088) | $ 16,836 $ 61,106 $ 93,044 $ 25,168 $ 68,075 ======== ======== ======== | ======== ======== ======== ======== ======== Earnings per share: | Income before | extraordinary item | per share of Common | Stock (7): | Basic.............. | $ 0.71 $ 1.78 $ 2.25 $ 0.64 $ 1.69 Diluted............ | $ 0.63 $ 1.64 $ 2.14 $ 0.58 $ 1.57 Net income per share of | Common Stock (6)(7): | Basic............. | $ 0.54 $ 1.64 $ 2.25 $ 0.64 $ 1.69 Diluted........... | $ 0.48 $ 1.51 $ 2.14 $ 0.58 $ 1.57 Weighted average shares | of Common Stock (7): | Basic............. | 31,040 37,284 41,271 39,520 40,287 Diluted........... | 34,701 40,398 43,509 43,181 43,400
11
Predecessor | The Company ----------------- | ---------------------------- December 31, | December 31, ----------------- | ---------------------------- 1994 1995 | 1996 1997 1998 -------- ------- | ------- ------- --------- (In Thousands) | (In Thousands) | Balance Sheet Data | | Working capital..................................................... $ 22,898 $ 82,698 | $ 64,754 $ 65,553 $ 95,040 | Total assets........................................................ 705,316 656,710 | 675,712 680,859 714,027 | Total long-term debt, including current portion..................... 12,451 3,538 | 354,154 207,029 169,255 | Total liabilities................................................... 247,310 176,259 | 497,908 392,570 370,177 | Stockholders' equity................................................ 458,006 480,451 | 177,804 288,289 343,850
__________________ (1) Reflects summary pro forma financial information of the Company derived from the financial statements and notes thereto included elsewhere in this Form 10-K, adjusted to reflect the completion of the Acquisition, the application of the net proceeds of $160,000 from the sale of capital stock and related borrowings of $260,000 and $165,000 under the Company's then- existing credit agreement and the Company's Senior Subordinated Notes, respectively, as if such events occurred at the beginning of the period. (2) Reflects summary pro forma financial information of the Company derived from the financial statements and notes thereto included elsewhere in this Form 10-K, adjusted to reflect (i) the completion of the Company's initial public offering, (ii) the application of the net proceeds to the Company of $133,440 therefrom, together with borrowings of $11,673 under the Company's then-existing revolving credit facility, for the redemption of 800,000 shares of Series A 12.0% Participating Convertible Preferred Stock ("Series A Preferred Stock") for an aggregate redemption price of $80,000 in cash and 11,749,361 shares of Common Stock and for the redemption of an aggregate principal amount of $57,750 of the Senior Subordinated Notes for a total redemption price of $65,113 (including a redemption premium of $5,775 and accrued and unpaid interest thereon of $1,558) and (iii) the conversion of the remaining 802,998 shares of Series A Preferred Stock into 15,691,558 shares of Common Stock as if such events occurred at the beginning of the respective periods. (3) Pro forma 1996 cost of sales has been increased by (i) $801 to reflect an increase in amortization and depreciation resulting from the Acquisition and (ii) $552 to reflect the reclassification of a portion of allocated corporate expenses. The reclassified allocated corporate expenses approximate the replacement cost to the Company for services formerly provided by Westinghouse to the Predecessor, including (i) benefit expense related to the adoption of various independent benefit plans comparable to Westinghouse benefit plans and (ii) the cost of services required to replace specific activities formerly provided by Westinghouse to the Predecessor, including audit, tax, general ledger, accounts receivable, human resources, legal, insurance and data communications. (4) Pro forma 1996 selling, general and administrative expenses have been increased by (i) $369 to reflect the reclassification of allocated corporate expenses which approximate the replacement cost to the Company (described above in note 3) and (ii) $414 to reflect an increase in amortization and depreciation resulting from the Acquisition. (5) Westinghouse long-term incentive compensation has been eliminated in pro forma 1996. Such compensation became payable from Westinghouse, and the amounts payable were established, as a result of consummation of the Acquisition. (6) The pro forma 1996 operating data presented does not include the $5,159 extraordinary loss on early extinguishment of debt, net of taxes. In addition, the pro forma operating data for the years ended December 31, 1996 and 1997 does not include an extraordinary loss of $5,337, net of taxes, associated with the early redemption of a portion of the Senior Subordinated Notes in connection with the initial public offering. (7) Because of the redemption and conversion into Common Stock of the Series A Preferred Stock upon consummation of the Company's initial public offering, historical net income per share amounts for the ten months ended December 31, 1996 and year ended December 31, 1997 are not presented herein. Earnings per share amounts for these periods are pro forma as they are based on the weighted average number of shares of Common Stock and potentially dilutive securities (nonvested stock grants and employee stock options) outstanding during the periods, after giving effect to the redemption and conversion into Common Stock of the Series A Preferred Stock assuming the redemption and conversion had occurred at the beginning of the periods presented. See Note 2 to the financial statements included elsewhere in this Form 10-K. 12 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." Knoll, Inc. was formed on February 29, 1996 as a result of the Acquisition of the office furniture business unit (The Knoll Group, Inc. and related entities) of Westinghouse. Knoll, Inc. and its subsidiaries are engaged in the design, manufacture and sale of office furniture products and accessories, focusing on the middle to high-end segments of the contract furniture market. Overview 1998 was a record year for sales and earnings, which led to continued market share gains. Management believes the Company's operating success was driven by progress made with the Company's growth initiatives as well as benefits it continues to receive from strategic actions initiated in 1994 to reorganize business activities and manufacturing processes. The Company made significant progress with its growth strategy in 1998. It introduced two new office system products, Currents and Dividends, to enhance the breadth of its office system offerings and provide what management believes to be a very strong, comprehensive offering of office system products. Additionally, the Company increased the size of its salesforce and geographically expanded into secondary markets. The application of the Company's growth strategy together with favorable industry dynamics had a significant effect on the Company's results of operations and financial position in 1998. The Company anticipates that revenues in the first quarter of 1999 will be down compared to the first quarter of 1998 due principally to a slowdown in industry orders and sales levels. Recent Developments On March 23, 1999, the Company received a proposal from Warburg, Pincus Ventures, L.P. and certain members of Knoll management to acquire all of the outstanding shares of the Company's Common Stock owned by public stockholders at a price of $25.00 per share. The Board of Directors has authorized the appointment of a special committee, consisting of independent members of the Board of Directors, to consider the proposal. Consummation of the acquisition would be subject to approval by the Board of Directors and stockholders of Knoll, as well as to the receipt of financing, the execution of a definitive merger agreement and other conditions customary in a transaction of this type. Results of Operations Sales Over the past two years Knoll has experienced significant growth in sales. 1998 sales were up 17.0% from 1997 to $948.7 million. 1997 sales of $810.9 million were up 24.4%, or $159.1 million, from $651.8 million in sales for 1996. The Company's sales growth has resulted from increased volume, with the largest increase coming from sales of office systems, which management believes to be the largest and fastest growing product category in the industry. BIFMA estimates that U.S. sales of office systems were $4.6 billion, or 36.9% of total industry sales, in 1998. Office systems accounted for 68.4% of the Company's sales in 1998, 67.2% of sales in 1997 and 65.4% of sales in 1996. Gross Profit and Operating Income The Company's gross profit and operating income as a percentage of sales are the highest of the public companies in the industry. Both have continued to benefit from increasing volume and a continued focus on cost control. As a percentage of sales, gross profit was 39.6% for 1998 and 1997 and 35.6%, on a pro forma basis, for 1996 and operating income was 18.1% for 1998, 17.0% for 1997 and 12.0%, on a pro forma basis, for 1996. 13 Although selling, general and administrative expenses increased on a relative dollar basis in 1998 compared to 1997 and in 1997 compared to pro forma 1996, such expenses decreased as a percentage of sales. The increases on a relative dollar basis were due primarily to incremental employee costs related to higher sales, profit and employment levels in 1998 and 1997 as well as increased expenses related to new product and technology initiatives in 1997. The Company's 1998 selling, general and administrative expenses as a percentage of sales decreased to 21.5% for 1998 from 22.6% for 1997 and 23.5%, on a pro forma basis, for 1996. Interest Expense Since the Acquisition, the Company has continued to significantly reduce its debt. During the ten months ended December 31, 1996, the Company prepaid $72.0 million of indebtedness under its then-existing credit facilities. In 1997, the Company redeemed an aggregate principal amount of $57.8 million of its Senior Subordinated Notes and repaid $89.2 million of bank debt. Finally, in 1998, the Company repaid $38.0 million of bank debt, which is lower than the prior two years in part due to the implementation of the share repurchase program. The Company's interest expense was impacted favorably as a result of the continued overall reduction of debt as well as lower interest rates associated with the refinancing of its previously existing senior credit agreement in December 1996. See "Liquidity and Capital Resources" for further discussion of the events discussed above. Income Tax Expense With operations in the U.S., Canada and various countries in Europe, the Company's effective tax rate is directly affected by the mix of pre-tax income and the varying effective tax rates attributable to the countries in which it operates. This changing mix is primarily responsible for the change in the effective tax rate from 43.7% in 1996, on a pro forma basis, to 42.0% in 1997 and 40.9% in 1998. Additionally, the change in the effective tax rate has been impacted by the reduced effect of non-deductible expenses with the increase in pre-tax income. Extraordinary Items In connection with the Company's May 1997 initial public offering, which is discussed below, Knoll executed an early redemption of an aggregate principal amount of $57.8 million of its Senior Subordinated Notes. As a result of this redemption, the Company recorded an extraordinary loss of $5.3 million, net of a tax benefit of $3.5 million, in 1997. Such loss consisted of a $5.7 million premium paid and $3.1 million of unamortized financing costs that were written- off. The Company also recorded an extraordinary loss of $5.2 million, net of a tax benefit of $3.3 million, in 1996 in connection with its strategic move to refinance its previously existing credit agreement on more favorable terms. This extraordinary loss consisted of the write-off of unamortized financing costs related to the refinanced debt. Pro Forma Net Income and Net Income per Share as Adjusted for the Initial Public Offering (Unaudited Supplemental Information) In May 1997, the Company completed an initial public offering, generating net proceeds of $133.4 million from the sale of 8,480,000 shares of Common Stock. The Company used those net proceeds together with $11.7 million borrowed under its then-existing revolving credit facility to redeem 800,000 shares of Series A Preferred Stock for $80.0 million and, as previously discussed, to redeem an aggregate principal amount of $57.8 million of the Senior Subordinated Notes for $65.1 million. If the Company assumes that these events had occurred at the beginning of 1996, net income, on a pro forma as adjusted basis, would have increased 170.2% to $68.1 million ($1.57 per share diluted) for 1997 from $25.2 million ($0.58 per share diluted) for 1996 and historical net income of $93.0 million ($2.14 per share diluted) for 1998 would have grown 36.6% from pro forma as adjusted net income for 1997. 14 Liquidity and Capital Resources The following table highlights certain key cash flow and capital information pertinent to the discussion that follows:
| The Knoll | Group, Inc. | (Predecessor) | ------------- Year Year Ten Months | Two Months Ended Ended Ended | Ended December 31, December 31, December 31, | February 29, 1998 1997 1996 | 1996 ------------ ------------ ------------ | ------------- (In Thousands) | (In Thousands) | Cash provided by (used in) operating activities....... $114,563 $135,262 $ 89,502 | $(54,039) Capital expenditures.................................. 36,390 33,080 15,255 | 2,296 Net repayment of long-term debt, excluding initial | borrowing for the Acquisition........................ 38,000 146,988 72,130 | -- Net proceeds from issuance of stock................... 4,813 133,559 160,400 | -- Purchase of common stock.............................. 38,849 -- -- | --
The Company continued to generate strong cash flow from operating activities in 1998 primarily as a result of its improved earnings before noncash items. The Company's cash flow from operating activities for 1998 was lower than that generated for 1997 as a result of increased working capital that was partially due to increased volume and new product introductions. Free cash flow has generally been used to fund capital expenditures, working capital requirements and debt service, and, in 1998, the cash flow was also used to implement a share repurchase program. The Company's capital expenditures for 1998 were primarily for new manufacturing equipment, additions to existing plants and information systems. The plant additions consisted of the expansion of three U.S. plants by an aggregate of approximately 139,000 square feet. The Company estimates that capital expenditures for 1999 will be approximately $35.0 million. In September 1998, the Board of Directors approved a share repurchase program that authorized the repurchase of 3.0 million shares of the Company's Common Stock. On February 2, 1999, the Board of Directors approved an increase of 2.0 million shares to the program. During 1998, the Company repurchased 1,707,700 shares of Common Stock for $38.8 million. As of March 24, 1999, the Company purchased a total of 2,894,700 shares for $67.5 million under the program. During the ten months ended December 31, 1996, the Acquisition from Westinghouse had a significant impact on the Company's investing and financing activities. The necessary capital to fund the Acquisition was obtained from the issuance of stock for $160.0 million and debt of $425.0 million, of which $165.0 million was from the issuance of the Senior Subordinated Notes and $260.0 million was from senior credit facilities. The senior credit facilities were subsequently refinanced, in December 1996, on more favorable terms. The Company was able to prepay $72.0 million of indebtedness under its credit facilities that existed in 1996. As previously discussed, in May 1997, the Company completed an initial public offering that generated net proceeds of $133.4 million from its sale of 8,480,000 shares of Common Stock. The Company used those net proceeds together with $11.7 million borrowed under its then-existing revolving credit facility to redeem 800,000 shares of Series A Preferred Stock for $80.0 million and to redeem an aggregate principal amount of $57.8 million of the Senior Subordinated Notes for $65.1 million (including a redemption premium of $5.7 million and accrued and unpaid interest thereon of $1.6 million). In addition to the redemption of a portion of the Senior Subordinated Notes, the Company repaid $89.2 million of bank debt during 1997. On August 8, 1997, the Company entered into a new senior credit agreement that modified certain terms of the agreement that it entered into in December 1996. The new agreement provides for a $275.0 million revolving credit facility that matures in August 2002. Borrowings under the new agreement bear interest at a floating rate based, at the Company's option, upon (i) the Eurodollar rate (as defined therein) plus an applicable percentage which is subject to change based on the Company's ratio of funded debt to EBITDA or (ii) the greater of the 15 federal funds rate plus 0.5% or the prime rate. The new credit agreement contains restrictive covenants, financial covenants and events of default. Among other things, the restrictive covenants limit the Company's ability to incur additional indebtedness, pay dividends, purchase Company stock, make investments, grant liens and engage in certain other activities. During 1998, the Company continued to reduce its outstanding indebtedness under this credit facility, as it repaid $38.0 million. As of December 31, 1998, the Company had an aggregate of $212.6 million available for borrowing under the revolving credit facility. In addition to the revolving credit facility, the Company had $107.2 million aggregate principal amount of Senior Subordinated Notes outstanding as of December 31, 1998. The Senior Subordinated Notes are subordinated to all of the Company's existing and future senior indebtedness, including all indebtedness under the revolving credit facility. The indenture governing the terms of the Senior Subordinated Notes imposes certain restrictions on the Company and its subsidiaries, including restrictions on 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 at the Company's option at any time after March 15, 2001, initially at 105.438% of their principal amount at maturity, plus accrued interest, declining to 100.0% of their principal amount at maturity, plus accrued interest, on or after March 15, 2004. The Company's foreign subsidiaries maintain local credit facilities to provide credit for overdraft, working capital and other purposes. As of December 31, 1998, total credit available under such facilities was approximately $12.2 million, of which none had been utilized. The Company believes that it is currently in compliance with all terms of its indebtedness. 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 growth initiatives, the Company has cash requirements for debt service. The Company believes that existing cash balances and cash flow from operating activities, together with borrowings available under the revolving credit facility, will be sufficient to fund working capital needs, capital spending requirements and debt service requirements for at least the next 12 months. If the transaction discussed in "Recent Developments" is consummated, the Company will incur significant additional debt under new financing arrangements. Management believes that the Company's cash flows would be sufficient to service such additional debt as well as continue to fund working capital needs and capital expenditures. Inflation There was no significant impact on Knoll's operations as a result of inflation during the three years ended December 31, 1998. Backlog The Company's backlog of unfilled orders was $159.2 million at December 31, 1998 and $141.3 million at December 31, 1997. 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. Impact of Year 2000 The Company has certain existing computer programs that were written using two digits rather than four to define the applicable year. As a result, those computer programs have time-sensitive software that may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in similar normal business activities. The Company also has manufacturing equipment that contains embedded chips that may recognize a date using "00" as the year 1900 rather than the year 2000, which may result in a temporary inability to use such equipment in the Company's manufacturing processes. 16 In 1997, the Company initiated a strategic project to replace and enhance its existing manufacturing and business systems (software and hardware) in North America with a new fully integrated system intended to enhance its order entry response time and accuracy, improve manufacturing processes, reduce delivery times, improve shipping accuracy and reduce fixed costs. While the decision to embark on this project was business related, the new software that the Company will implement has been represented by the vendor to be year 2000 compliant. Therefore, the year 2000 issue is not expected to pose significant operational problems for the Company's computer systems. However, if the new software is not implemented on a timely basis or fails to be fully year 2000 compliant, the year 2000 issue could have a material impact on the operations of the Company. The Company is evaluating the information systems currently being used by its European operations and other European year 2000 issues. Based upon information presently known, the Company does not expect its European year 2000 issues to have a material adverse effect upon its operations. In North America, the Company has installed and is utilizing the financial applications of the new system at all of its sites and has installed and is utilizing the new manufacturing application at one of four sites. In addition, the Company is in the process of inventorying its manufacturing equipment to identify equipment that contains embedded chips. The Company anticipates that it will install all of the system applications and remedy the problems related to embedded chips that are determined not to be year 2000 compliant, through replacement or other satisfactory measures, by the third quarter of 1999. If the Company successfully implements the new system and addresses issues associated with noncompliant embedded chips by the third quarter of 1999, the year 2000 issues associated with its information systems and manufacturing equipment would not be expected to have a material adverse effect on the Company's operations. In the event the Company is unable to complete the implementation of the project on a timely basis, the Company's ability to take customer orders, manufacture and deliver product, invoice customers and collect payments may be impaired. The Company can not reasonably estimate at this time the amount of lost revenue or additional expenses that might be expected in this scenario. Failure to implement the project on a timely basis could have a material adverse effect on the Company. The Company currently does not have a contingency plan in place. However, the Company continually evaluates the status of completion and whether or not a contingency plan is or may be necessary. The Company would tailor any contingency plan to address the issue in question and attempt to minimize the impact upon the Company's operations and customers. The Company estimates that the total project cost will be approximately $31.5 million, approximately 72% expense and 28% capital. Through December 31, 1998, the Company has incurred expenditures of approximately $24.0 million ($17.0 million expense and $7.0 million capital) related to the project. The project is being funded with cash flows from operations. The estimated cost of the project has not constrained the Company's information systems budget or materially affected other necessary information systems activities. The costs and completion date of the project are based on the best estimates of management, which were derived utilizing numerous assumptions of future events, including the continued availability of certain technical and consulting resources. There can be no guarantee that these estimates are accurate. Actual results could differ materially from those anticipated and, therefore, could have a material adverse effect on the Company's operations. As the year 2000 issue is a global concern, the Company's operations could be materially adversely affected by circumstances beyond its control. Disruptions in the economy generally resulting from year 2000 issues could materially adversely affect the Company. Additionally, the year 2000 readiness of the Company's vendors, dealers and other third parties (such as utility companies, the U.S. government and customers) on which it relies could impact the Company's operations. Although the Company's systems do not interface directly with third parties, the inability of these other parties to complete their year 2000 initiatives in a timely manner could have a material adverse effect on the Company. The Company has no means of ensuring that its vendors, dealers and other third parties will be year 2000 compliant in a timely manner. The Company is actively working to determine the year 2000 readiness of these 17 parties and to determine the actions, if any, that would be necessary to minimize any potential adverse impact on the Company. The Company is formally communicating with vendors, dealers and certain other third parties through questionnaires and on-site visits. For those vendors that the Company deems to be at risk of not being adequately prepared for the year 2000, the Company has or will seek alternate sources for procuring product or supplies, build inventories or develop an appropriate contingency plan. To date, the Company is not aware of any third-party year 2000 issue that is expected to materially adversely impact the Company's operations. 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. Statement Regarding Forward-Looking Disclosure Certain portions of this Form 10-K, including "Management's Discussion and Analysis of Financial Condition and Results of Operations," contain various forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which represent the Company's expectations or beliefs concerning future events. 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. 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 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 growth strategy, including the risk that the Company's introduction of new products will not achieve the same degree of success achieved historically by the Company's products; implementation of the Company's information systems project, which could impair the Company's operations if not implemented successfully or on time; the Company's dependence on key personnel; the ability of the Company to maintain its relationships with its dealers; the Company's indebtedness, which requires a portion of the Company's cash flow from operations to be dedicated to debt service, making such cash flow unavailable for other purposes, and which could limit the Company's flexibility in reacting to changes in its industry or economic conditions generally; the Company's reliance on its patents and other intellectual property; environmental laws and regulations, including those that may be enacted in the future, that affect the ownership and operation of the Company's manufacturing plants; risks relating to potential labor disruptions; fluctuations in foreign currency exchange rates; possible risks relating to year 2000 issues; and fluctuations in industry revenues driven by a variety of macroeconomic factors, including white-collar employment levels and corporate 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. 18 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. Interest Rate Risk As of December 31, 1998, 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 London Interbank Offered Rate ("LIBOR") as a floating rate reference. The notional amounts are utilized to measure the amount of interest to be paid or received and do not represent the amount of exposure to credit loss. Fluctuations in LIBOR impact both the net financial instrument position and the amount of cash to be paid or received, if any. During the year ended December 31, 1998, the Company was not required to make nor was it entitled to receive any payments as a result of these hedging activities. The Company will continue to review its exposure to interest rate fluctuations and evaluate whether it should manage such exposure through hedging transactions. The following table summarizes the Company's market risks associated with its debt obligations and interest rate collar agreements as of December 31, 1998. For debt obligations, the table presents principal cash flows and 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 revolving credit facility borrowings as of December 31, 1998. For interest rate caps and floors, the table presents the notional amounts and related interest rates by year of maturity. The forward rates presented for the caps and floors are the average forward rates for the term of each contract.
(Dollars in Thousands) 1999 2000 2001 2002 2003 Thereafter Total Fair Value ------- ------ ------ ------ ------- ---------- ------- ---------- Rate Sensitive Liabilities Long-term Debt: Fixed Rate............... -- -- -- $ 81 $ 100 $108,074 $108,255 $120,394 Average Interest Rate............... 10.79% 10.79% 10.79% 10.79% 10.80% 10.80% Variable Rate............ $ 10,000 -- -- $51,000 -- -- $ 61,000 $ 61,000 Average Interest Rate............... 5.76% 5.76% 5.76% 5.76% -- -- Rate Sensitive Derivative Financial Instruments Interest Rate Caps: Notional Amount........... $115,000 -- -- -- -- -- $115,000 -- Strike Rate............... 7.97% -- -- -- -- -- Forward Rate.............. 5.06% -- -- -- -- -- Interest Rate Floors: Notional Amount........... $115,000 -- -- -- -- -- $115,000 -- Strike Rate............... 5.05% -- -- -- -- -- Forward Rate.............. 5.06% -- -- -- -- --
Foreign Currency Exchange Rate Risk The Company manufactures its products in the United States, 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 19 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. For the year ended December 31, 1998, approximately 9.6% of the Company's revenues and 27.3% of the Company's expenses 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 1998. The Company generally does not hedge its foreign currency exposure. However, from time to time, the Company enters into foreign currency forward exchange 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. Material gains and losses on these contracts are recognized in income in the period the value of the contract changes. The contract amounts outstanding at December 31, 1998 as well as the amount of gains and losses recorded during the year ended December 31, 1998 are not material. Additionally, the Company does not anticipate any material adverse effect on its results of operations or financial position relating to these foreign currency forward exchange contracts. 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. 20 KNOLL, INC. TABLE OF CONTENTS FOR THE FINANCIAL STATEMENTS
Page ------ Report of Independent Auditors.......................................................................... F-2 Consolidated Balance Sheets at December 31, 1998 and 1997............................................... F-3 Consolidated Statements of Operations for the Years Ended December 31, 1998 and 1997, the Ten Months Ended December 31, 1996 and the Two Months Ended February 29, 1996 (Predecessor)....................... F-4 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998 and 1997, the Ten Months Ended December 31, 1996 and the Two Months Ended February 29, 1996 (Predecessor)....................... F-5 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1998 and 1997, the Ten Months Ended December 31, 1996 and the Two Months Ended February 29, 1996 (Predecessor).. 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, 1998 and 1997 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the years ended December 31, 1998 and 1997 and the ten-month period ended December 31, 1996 (post-acquisition periods), and the consolidated statements of operations, changes in stockholders' equity and cash flows of The Knoll Group, Inc. (Predecessor) for the two-month period ended February 29, 1996 (pre-acquisition period). Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Knoll, Inc. at December 31, 1998 and 1997 and the consolidated results of its operations and its cash flows for the post-acquisition periods in conformity with generally accepted accounting principles. Further, in our opinion, the aforementioned Predecessor consolidated financial statements present fairly, in all material respects, the consolidated results of operations and cash flows of The Knoll Group, Inc. for the pre-acquisition period in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Philadelphia, Pennsylvania January 29, 1999 except for Note 20, as to which the date is February 10, 1999, and Notes 21 and 25, as to which the date is March 24, 1999 F-2 KNOLL, INC. CONSOLIDATED BALANCE SHEETS (Dollars In Thousands, Except Per Share Data)
December 31, ------------------------- 1998 1997 -------- -------- ASSETS Current assets: Cash and cash equivalents.................................................. $ 17,465 $ 10,790 Customer receivables, net.................................................. 137,956 122,851 Inventories................................................................ 77,113 68,249 Deferred income taxes...................................................... 21,067 21,295 Prepaid and other current assets........................................... 9,842 3,697 -------- -------- Total current assets................................................... 263,443 226,882 Property, plant and equipment, net........................................... 186,167 180,450 Intangible assets, net....................................................... 260,043 270,677 Other noncurrent assets...................................................... 4,374 2,850 -------- -------- Total Assets........................................................... $714,027 $680,859 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt....................................... $ 10,000 $ 10,000 Accounts payable........................................................... 59,551 66,697 Income taxes payable....................................................... 7,096 6,791 Other current liabilities.................................................. 91,756 77,841 -------- -------- Total current liabilities.............................................. 168,403 161,329 Long-term debt............................................................... 159,255 197,029 Deferred income taxes........................................................ 10,678 5,301 Postretirement benefits other than pension................................... 18,450 16,424 Other noncurrent liabilities................................................. 13,391 12,487 -------- -------- Total liabilities...................................................... 370,177 392,570 -------- -------- Stockholders' equity: Common stock, $0.01 par value; authorized 100,000,000 shares; 41,799,499 shares issued and outstanding (net of 1,707,700 treasury shares) in 1998; 43,234,943 shares issued and outstanding in 1997................... 418 432 Additional paid-in-capital................................................ 181,792 214,950 Unearned stock grant compensation......................................... (712) (993) Retained earnings......................................................... 170,986 77,942 Accumulated other comprehensive income.................................... (8,634) (4,042) -------- -------- Total stockholders' equity............................................. 343,850 288,289 -------- -------- Total Liabilities and Stockholders' Equity............................. $714,027 $680,859 ======== ========
See accompanying notes to the consolidated financial statements. F-3 KNOLL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands, Except Per Share Data)
| The Knoll (Unaudited) | Group, Inc. Supplemental | (Predecessor) Year Year Pro Forma Data Ten Months | ------------- Ended Ended Year Ended Ended | Two Months December 31, December 31, December 31, December 31, | Ended February 29, 1998 1997 1996 1996 | 1996 -------- -------- --------- -------- | -------- | (Note 3) | Sales................................... $948,691 $810,857 $651,766 $561,534 | $ 90,232 Cost of sales........................... 572,756 489,962 419,908 358,841 | 59,714 -------- -------- -------- -------- | -------- Gross profit............................ 375,935 320,895 231,858 202,693 | 30,518 Selling, general and administrative | expenses............................... 204,392 183,018 153,388 131,349 | 21,256 Westinghouse long-term incentive | compensation........................... -- -- -- -- | 47,900 Allocated corporate expenses............ -- -- -- -- | 921 -------- -------- -------- -------- | -------- Operating income (loss)................. 171,543 137,877 78,470 71,344 | (39,559) Interest expense........................ 16,860 25,075 40,030 32,952 | 340 Other income (expense), net............. 2,732 1,667 151 447 | (296) -------- -------- -------- -------- | -------- Income (loss) before income tax expense | (benefit) and extraordinary item...... 157,415 114,469 38,591 38,839 | (40,195) Income tax expense (benefit)............ 64,371 48,026 16,848 16,844 | (16,107) -------- -------- -------- -------- | -------- Income (loss) before | extraordinary item..................... 93,044 66,443 21,743 21,995 | (24,088) Extraordinary loss on early | extinguishment of debt, net of taxes... -- 5,337 5,159 5,159 | -- -------- -------- -------- -------- | -------- Net income (loss)....................... $ 93,044 $ 61,106 $ 16,584 $ 16,836 | $(24,088) ======== ======== ======== ======== | ======== Earnings per share (Note 2): | Income before extraordinary item: | Basic................................. $ 2.25 $ 1.78 $ 0.70 $ 0.71 | Diluted............................... $ 2.14 $ 1.64 $ 0.63 $ 0.63 | Net income: | Basic................................. $ 2.25 $ 1.64 $ 0.53 $ 0.54 | Diluted............................... $ 2.14 $ 1.51 $ 0.48 $ 0.48 | Weighted average shares of common stock | (Note 2): | Basic................................. 41,271 37,284 31,040 31,040 | Diluted............................... 43,509 40,398 34,701 34,701 | | | Supplemental pro forma as adjusted data | (Unaudited) (Note 5): | Pro forma net income.................. $ 68,075 $ 25,168 | Pro forma net income per share of | common stock (Note 2): | Basic.............................. $ 1.69 $ 0.64 | Diluted............................ $ 1.57 $ 0.58 | Pro forma weighted average shares of | common stock (Note 2): | Basic.............................. 40,287 39,520 | Diluted............................ 43,400 43,181 |
See accompanying notes to the consolidated financial statements. F-4 KNOLL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands)
| The Knoll | Group, Inc. | (Predecessor) | ------------- Year Year Ten Months | Two Months Ended Ended Ended | Ended December 31, December 31, December 31, | February 29, 1998 1997 1996 | 1996 -------- -------- --------- | -------- CASH FLOWS FROM OPERATING ACTIVITIES | | Net income (loss)........................................ $ 93,044 $ 61,106 $ 16,836 | $(24,088) Noncash items included in income: | Depreciation............................................ 28,686 25,082 19,251 | 3,150 Amortization of intangible assets....................... 7,816 8,041 7,881 | 1,167 Extraordinary loss...................................... -- 8,838 8,542 | -- Other noncash items..................................... (1,636) 240 477 | -- Changes in assets and liabilities: | Customer receivables.................................... (15,184) (12,176) (5,110) | 8,798 Inventories............................................. (9,061) (11,381) 1,416 | 671 Accounts payable........................................ (6,452) 18,052 15,870 | (15,292) Current and deferred income taxes....................... 591 15,896 (3,961) | (16,627) Other current assets.................................... (237) 1,674 747 | 2,283 Other current liabilities............................... 13,547 12,849 18,372 | (7,190) Other noncurrent assets and liabilities................. 3,449 7,041 9,181 | (6,911) -------- -------- --------- | -------- Cash provided by (used in) operating activities.......... 114,563 135,262 89,502 | (54,039) -------- -------- --------- | -------- | CASH FLOWS FROM INVESTING ACTIVITIES | Acquisition of the Company from Westinghouse............. -- -- (579,801) | -- Capital expenditures..................................... (36,390) (33,080) (15,255) | (2,296) Proceeds from sale of assets............................. 152 164 218 | -- -------- -------- --------- | -------- Cash used in investing activities........................ (36,238) (32,916) (594,838) | (2,296) -------- -------- --------- | -------- | CASH FLOWS FROM FINANCING ACTIVITIES | Repayment of short-term debt, net........................ -- -- (1,483) | (3,805) Proceeds from (repayment of) revolving credit facility, | net..................................................... (38,000) (79,000) 88,000 | -- Proceeds from long-term debt............................. 201 -- 525,000 | -- Repayment of long-term debt.............................. -- (67,988) (260,130) | -- Premium paid for early extinguishment of debt............ -- (5,775) -- | -- Net proceeds from issuance of stock...................... 4,813 133,559 160,400 | -- Redemption of preferred stock............................ -- (80,000) -- | -- Purchase of common stock................................. (38,849) -- -- | -- Net receipts from parent company......................... -- -- -- | 60,848 -------- -------- --------- | -------- Cash provided by (used in) financing activities.......... (71,835) (99,204) 511,787 | 57,043 -------- -------- --------- | -------- | Effect of exchange rate changes on cash and cash | equivalents............................................. 185 (1,156) 18 | 58 -------- -------- --------- | -------- | Increase in cash and cash equivalents.................... 6,675 1,986 6,469 | 766 | Cash and cash equivalents at beginning of period......... 10,790 8,804 2,335 | 1,569 -------- -------- --------- | -------- | Cash and cash equivalents at end of period............... $ 17,465 $ 10,790 $ 8,804 | $ 2,335 ======== ======== ========= | ========
See accompanying notes to the consolidated financial statements. F-5 KNOLL, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Dollars In Thousands)
Unearned Stock Accumulated Other Total Preferred Common Additional Grant Retained Parent Company Comprehensive Stockholders' Stock Stock Paid-in-Capital Compensation Earnings Investment Income Equity --------- ------- --------------- -------------- -------- -------------- ------------------ -------------- The Knoll Group, Inc. (Predecessor) Balance at December 31, 1995......... $ - $ - $ - $ - $ - $ 503,317 $ (22,866) $480,451 -------- Net loss...... - - - - - (24,088) - (24,088) Foreign currency translation adjustment... - - - - - - 58 58 -------- Comprehensive loss........ (24,030) -------- Capital expenditures. - - - - - 2,296 - 2,296 Net interunit transactions.. - - - - - 58,552 - 58,552 ------ ---- -------- ------- -------- --------- --------- -------- Balance at February 29, 1996..... $ - $ - $ - $ - $ - $ 540,077 $ (22,808) $517,269 ====== ==== ======== ======= ======== ========= ========= ======== - ---------------------------------------------------------------------------------------------------------------------------------- Balance at March 1, 1996 (shares: 1,599,000 preferred and 3,139,430 common)..... $1,599 $ 31 $158,370 $ - $ - $ - $ - 160,000 -------- Net income... - - - - 16,836 $ - $ - $ 16,836 Foreign currency translation adjustment... - - - - - - 532 532 -------- Comprehensive income..... 17,368 -------- Shares issued for consideration (shares: 3,998 preferred, 7,848 common)...... 4 - 396 - - - - 400 Shares issued under stock incentive plan (4,144,030 shares)...... - 42 1,381 (1,423) - - - - Earned stock grant compensation. - - - 36 - - - 36 ------ ---- -------- ------- -------- --------- --------- -------- Balance at December 31, 1996......... 1,603 73 160,147 (1,387) 16,836 - 532 177,804 -------- Net income.... - - - - 61,106 - - 61,106 Foreign currency translation adjustment... - - - - - - (4,574) (4,574) -------- Comprehensive income..... 56,532 -------- Shares issued for consideration (8,502,716 shares)...... - 85 133,474 - - - - 133,559 800,000 preferred shares redeemed for $80,000 and 11,749,361 common shares)...... (800) 117 (79,317) - - - - (80,000) 802,998 preferred shares converted into 15,691,558 common shares. (803) 157 646 - - - - - Earned stock grant compensation. - - - 394 - - - 394 ------ ---- -------- ------- -------- --------- --------- -------- Balance at December 31, 1997...... - $432 214,950 (993) 77,942 - (4,042) 288,289 -------- Net income..... - - - - 93,044 - - 93,044 Foreign currency translation adjustment.... - - - - - - (4,592) (4,592) -------- Comprehensive income..... 88,452 -------- Shares issued for consideration: Exercise of stock options, including tax benefit of $864 (196,647 shares)...... - 2 4,020 - - - - 4,022 Other (75,609 shares)...... - 1 1,654 - - - - 1,655 Purchase of common stock (1,707,700 shares)....... - (17) (38,832) - - - - (38,849) Earned stock grant compensation.. - - - 281 - - - 281 ------ ---- -------- ------- -------- --------- --------- -------- Balance at December 31, 1998 (41,799,499 shares)....... $ - $418 $181,792 $ (712) $170,986 $ - $ (8,634) $343,850 ====== ==== ======== ======= ======== ========= ========= ========
See accompanying notes to the consolidated financial statements. F-6 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND BASIS OF PRESENTATION Knoll, Inc. and its subsidiaries (the "Company" or "Knoll") are engaged in the design, manufacture and sale of office furniture products and accessories, focusing on the middle to high-end segments of the contract furniture market. The Company has operations in the United States ("U.S."), Canada and Europe and sells its products primarily through its direct sales representatives and independent dealers. The Company was formed on February 29, 1996 as a result of the acquisition of the office furniture business unit (The Knoll Group, Inc. and related entities) of Westinghouse Electric Corporation, currently known as CBS Corporation ("Westinghouse"). See Note 3 for further discussion of the acquisition. The accompanying consolidated financial statements present the financial position of the Company as of December 31, 1998 and 1997, the results of operations, cash flows and changes in stockholders' equity of the Company for the years ended December 31, 1998 and 1997 and the ten-month period ended December 31, 1996 and the results of operations, cash flows and changes in stockholders' equity of The Knoll Group, Inc. and related entities (the "Predecessor") for the two-month period ended February 29, 1996. In addition, unaudited supplemental pro forma results of operations data of the Company has been provided for the years ended December 31, 1997 and 1996. Such data is provided solely for additional analysis and is not intended to be a presentation in accordance with generally accepted accounting principles (see Note 5). Since the Predecessor was a business unit of Westinghouse, the accompanying financial statements of the Predecessor include estimates for certain expenses incurred by Westinghouse on its behalf. These expenses generally include, but are not limited to, officer and employee salaries, rent, depreciation, accounting and legal services, other selling, general and administrative expenses and other such expenses. The operating results of the European subsidiaries are reported and included in the consolidated financial statements on a one-month lag to allow for the timely presentation of consolidated information. The effect of this presentation is not material to the financial statements. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements of the Company include the accounts of Knoll, Inc. and its wholly owned subsidiaries. Intercompany transactions and balances have been eliminated in consolidation. The consolidated financial statements of the Predecessor include the accounts of The Knoll Group, Inc. and related entities after elimination of intercompany transactions except for those with other units of Westinghouse. Cash and Cash Equivalents Cash and cash equivalents includes cash on hand and investments with original maturities of three months or less. Inventories Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. F-7 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued) Property, Plant, Equipment and Depreciation Property, plant and equipment are recorded at cost. Depreciation of plant and equipment is computed using the straight-line method over the estimated useful lives of the assets. The useful lives are as follows: 45 years for buildings and 3 to 12 years for machinery and equipment. Intangible Assets Intangible assets consist of goodwill, trademarks and deferred financing fees. Goodwill is recorded at the amount by which cost exceeds the net assets of acquired businesses, and all other intangible assets are recorded at cost. Goodwill and trademarks are amortized under the straight-line method over 40 years, while deferred financing fees are amortized over the life of the respective debt. Management reviews the carrying value of goodwill and other intangibles on an ongoing basis. When factors indicate that an intangible asset may be impaired, management uses an estimate of the undiscounted future cash flows over the remaining life of the asset in measuring whether the intangible asset is recoverable. If such an analysis indicates that impairment has in fact occurred, the book value of the intangible asset is written down to its estimated fair value. Revenue Recognition Sales are recognized as products are shipped and services are rendered. Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to reverse. Income taxes are provided in the accompanying financial statements of the Predecessor as if the Predecessor had filed a separate tax return. Foreign Currency Translation Results of foreign operations are translated into U.S. dollars using average exchange rates during the period, while assets and liabilities are translated into U.S. dollars using 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 income. 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 20. F-8 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued) Share and Per Share Amounts Because of the significance of the redemption and conversion into common stock of the outstanding Series A 12% Participating Convertible Preferred Stock ("Series A Preferred Stock") as discussed in Note 4, historical earnings per share amounts for the year ended December 31, 1997 and the ten months ended December 31, 1996 are not presented herein. Earnings per share amounts reported for these periods are pro forma as they are based on the weighted average number of shares of common stock and potentially dilutive securities (employee stock options and nonvested restricted stock grants) outstanding during the periods, after giving effect to the redemption and conversion into common stock of the Series A Preferred Stock assuming such redemption and conversion had occurred at the beginning of the periods. In addition, pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 98, all common stock and options to purchase common stock issued for nominal consideration prior to the initial public offering (see Note 4) have been reflected as outstanding as of the beginning of each of these periods. All numbers of shares of common stock and per share amounts for 1997 and 1996 have been adjusted, as necessary, to give retroactive effect to the 3.13943- for-1 stock split that occurred on May 6, 1997. Use of Estimates The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of certain assets, liabilities, revenues and expenses and the disclosure of certain contingent assets and liabilities. Actual future results may differ from such estimates. Recently Issued Accounting Pronouncement In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed for or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 is effective for the Company beginning on January 1, 1999. It requires the capitalization of certain costs incurred after the date of adoption in connection with developing or obtaining software for internal use. The Company currently expenses such costs as incurred. The Company believes that the adoption of SOP 98-1 will not have a material impact on the Company's future earnings or financial position. Reclassifications Certain amounts for 1997 and 1996 in the accompanying consolidated financial statements have been reclassified to conform to the 1998 classifications. 3. ACQUISITION On December 20, 1995, Westinghouse entered into a Stock Purchase Agreement (the "Agreement") with T.K.G. Acquisition Corp. ("TKG"), a subsidiary of Warburg, Pincus Ventures, L.P. Under the terms of the Agreement, TKG acquired all of the outstanding capital stock of The Knoll Group, Inc. and related entities on February 29, 1996 through its wholly owned subsidiary T.K.G. Acquisition Sub, Inc. Immediately following this transaction, T.K.G. Acquisition Sub, Inc. and The Knoll Group, Inc. merged with and into Knoll North America, Inc., the principal U.S. operating company of The Knoll Group, Inc. Knoll North America, Inc. changed its name to Knoll, Inc. at the time of the merger. On March 14, 1997, Knoll, Inc. merged with and into TKG. TKG then changed its name to Knoll, Inc. F-9 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued) The cost of the acquisition was $579,801,000. TKG funded the acquisition through proceeds of $160,000,000 received from the sale of TKG capital stock, $165,000,000 received from an offering of 10.875% Senior Subordinated Notes due 2006 (the "Senior Subordinated Notes") and $260,000,000 in borrowings under senior bank credit facilities. T.K.G. Acquisition Sub, Inc. executed the offering of the Senior Subordinated Notes and borrowings under the credit facilities. As such, upon the acquisition and subsequent mergers, the Senior Subordinated Notes and credit facility borrowings became obligations of Knoll, Inc. The acquisition was accounted for using the purchase method of accounting. Accordingly, the purchase price has been allocated to the assets acquired and liabilities assumed based upon fair market value at the date of acquisition. The excess of the consideration paid over the estimated fair value of the net assets acquired, totaling $66,850,000, has been recorded as goodwill and is being amortized on a straight-line basis over 40 years. Supplemental pro forma results of operations for the year ended December 31, 1996 have been presented for comparative purposes only. Such results include certain adjustments, such as additional depreciation expense as a result of a step-up in the basis of fixed assets, additional selling, general and administrative costs for services previously provided by Westinghouse, additional amortization expense as a result of goodwill and other intangible assets, increased interest expense as a result of the debt assumed to finance the acquisition, elimination of incentive compensation under Westinghouse's long-term incentive plans that became payable, and for which amounts payable were established, as a result of the acquisition, and related income tax effects. Such results do not purport to be indicative of the actual results that would have occurred had the acquisition been consummated at the beginning of 1996, nor do they purport to be indicative of results that will be achieved in the future. 4. INITIAL PUBLIC OFFERING The Company completed an initial public offering (the "IPO") during the second quarter of 1997. An aggregate of 9,200,000 shares, including 720,000 shares sold by a selling stockholder, were sold during May and June 1997 at $17.00 per share. The net proceeds to the Company amounted to $133,440,000 after deducting related expenses. The net proceeds, together with borrowings of $11,673,000 under the Company's then-existing revolving credit facility, were used (i) to redeem 800,000 shares of Series A Preferred Stock and (ii) to redeem an aggregate principal amount of $57,750,000 of the Company's Senior Subordinated Notes for a total redemption price of $65,113,000, including a redemption premium of $5,775,000 and accrued and unpaid interest thereon of $1,588,000. The 800,000 shares of Series A Preferred Stock were redeemed for $80,000,000 and 11,749,361 shares of common stock. Additionally, in connection with the IPO, another 802,998 shares of Series A Preferred Stock were converted into 15,691,558 shares of common stock. 5. SUPPLEMENTAL PRO FORMA AS ADJUSTED DATA (Unaudited) The supplemental pro forma as adjusted data is included for purposes of additional analysis. It presents results of operations assuming that the IPO and the application of the net proceeds to the Company therefrom together with related borrowings under the Company's then-existing revolving credit facility occurred at the beginning of the respective periods. Such pro forma as adjusted data does not reflect extraordinary losses of $5,337,000 and $5,159,000, net of taxes, incurred in 1997 and 1996, respectively, in connection with the early redemption of debt (see Note 12). The supplemental pro forma as adjusted weighted average shares of common stock outstanding reflect the issuance of the Company's common stock F-10 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued) in the IPO and the redemption and conversion into common stock of the Series A Preferred Stock (see Note 4) as of the beginning of each period presented. The supplemental pro forma as adjusted data reflects interest savings from the redemption of an aggregate principal amount of $57,750,000 of the Company's Senior Subordinated Notes, additional interest expense incurred on $11,673,000 in related borrowings under the Company's then-existing revolving credit facility and related income tax effects. Interest expense (including the amortization of deferred financing fees) has been decreased by $2,702,000 and $5,671,000 for the years ended December 31, 1997 and 1996, respectively. Interest adjustments are based on the actual interest rate of 10.875% for the Senior Subordinated Notes and a weighted average interest rate of 6.6% in 1997 and 8.25% in 1996 for the then-existing revolving credit facility. The weighted average interest rates approximate the actual interest rates for the period January 1, 1997 to May 8, 1997, the period preceding the IPO, and the ten-month period ended December 31, 1996, respectively, for the Company's average outstanding borrowings under the then-existing senior credit facilities. Income tax expense has been increased by $1,070,000 and $2,246,000 for the years ended December 31, 1997 and 1996, respectively, to reflect the assumed income tax effects of the interest expense adjustments. The supplemental pro forma as adjusted information does not purport to represent what the Company's results actually would have been if the aforementioned events had occurred at the beginning of each period presented, nor does such information purport to project the results of the Company for any future periods. The unaudited supplemental pro forma as adjusted financial information is based upon assumptions that the Company believes are reasonable. 6. RELATED PARTY TRANSACTIONS OF THE PREDECESSOR The Predecessor purchased products from and sold products to other Westinghouse operations. Additionally, Westinghouse provided certain services to the Predecessor, some of which the Predecessor purchased and some of which Westinghouse charged directly to the Predecessor. Services that the Predecessor purchased from Westinghouse included telecommunications, printing and productivity and quality consulting. Other services provided by Westinghouse for which the Predecessor was charged directly included information systems support; certain accounting functions, such as transaction processing; legal, environmental affairs and human resources consulting and compliance support; and liability, property and workers' compensation insurance programs administration. The cost of all services provided by Westinghouse, whether they were purchased by the Predecessor or charged directly to the Predecessor by Westinghouse, are included in the Predecessor's results of operations for the two months ended February 29, 1996. Westinghouse did not charge its business units for the carrying costs related to its investment in such units (i.e. parent company investment). Therefore, the Predecessor's results of operations for the two months ended February 29, 1996 do not include any allocated interest charges from Westinghouse. Certain members of management of the Predecessor were participants in a long- term incentive compensation plan established by Westinghouse. The plan provided for the payment of awards at the end of a five-year period based on the achievement of certain performance goals set by Westinghouse's Board of Directors. As a result of the consummation of the acquisition discussed in Note 3, the payment of awards was accelerated pursuant to the terms of the plan, resulting in a charge to operations of $47,900,000 for the two months ended February 29, 1996. F-11 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued) 7. CUSTOMER RECEIVABLES Customer receivables are presented net of an allowance for doubtful accounts of $5,057,000 and $5,461,000 at December 31, 1998 and 1997, respectively. Management performs ongoing credit evaluations of its customers and generally does not require collateral. As of December 31, 1998 and 1997, the U.S. government represented approximately 11.4% and 13.8%, respectively, of gross customer receivables. 8. INVENTORIES December 31, ------------------------------ 1998 1997 -------- -------- (In Thousands) Raw materials.................... $42,625 $37,868 Work in process.................. 11,827 9,638 Finished goods................... 22,661 20,743 ------- ------- Inventories...................... $77,113 $68,249 ======= ======= 9. PROPERTY, PLANT AND EQUIPMENT December 31, ------------------------------- 1998 1997 -------- -------- (In Thousands) Land and buildings............... $ 67,303 $ 62,249 Machinery and equipment.......... 169,261 139,592 Construction in progress......... 21,406 22,433 -------- -------- Property, plant and equipment.... 257,970 224,274 Accumulated depreciation......... (71,803) (43,824) -------- -------- Property, plant and equipment, net $186,167 $180,450 ======== ======== 10. INTANGIBLE ASSETS December 31, ------------------------------- 1998 1997 -------- -------- (In Thousands) Goodwill........................ $ 53,943 $ 56,803 Trademarks...................... 219,900 219,900 Deferred financing fees......... 8,354 8,354 -------- -------- Intangible assets............... 282,197 285,057 Accumulated amortization........ (22,154) (14,380) -------- -------- Intangible assets, net.......... $260,043 $270,677 ======== ======== F-12 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued) 11. OTHER CURRENT LIABILITIES
December 31, ------------------------------ 1998 1997 -------- -------- (In Thousands) Accrued employee compensation........................................... $51,593 $39,414 Accrued product warranty................................................ 10,407 10,871 Other................................................................... 29,756 27,556 ------- ------- Other current liabilities............................................... $91,756 $77,841 ======= =======
12. INDEBTEDNESS The Company's long-term debt is summarized as follows:
December 31, ------------------------------ 1998 1997 ------- ------- (In Thousands) 10.875% Senior Subordinated Notes due 2006.............................. $107,250 $107,250 Revolving loans, variable rate (5.675% - 5.875% at December 31, 1998 and 6.25% - 6.40% at December 31, 1997), due 2002........................................... 61,000 99,000 Other................................................................... 1,005 779 -------- -------- 169,255 207,029 Less current maturities................................................. (10,000) (10,000) -------- -------- Long-term debt.......................................................... $159,255 $197,029 ======== ========
Senior Subordinated Notes The Company assumed the obligations under the 10.875% Senior Subordinated Notes due 2006 as a direct result of the acquisition and merger that occurred on February 29, 1996 (see Note 3). The Senior Subordinated Notes are unsecured and are guaranteed by each existing and future wholly owned domestic subsidiary of Knoll, Inc. However, if the Company is unable to satisfy all or any portion of its obligations with respect to the Senior Subordinated Notes, it is unlikely that the guarantors will be able to pay all or any portion of such unsatisfied obligations. During June 1997, the Company used proceeds from its IPO to repurchase an aggregate principal amount of $57,750,000 of the Senior Subordinated Notes for a total redemption price of $65,113,000, including a redemption premium of $5,775,000 and accrued and unpaid interest thereon of $1,588,000. The Company wrote off unamortized financing costs of $3,063,000 related to the portion of the Senior Subordinated Notes that was redeemed. The early redemption premium and write-off of unamortized financing costs resulted in an extraordinary loss of $8,838,000 on a pre-tax basis ($5,337,000 on an after-tax basis) for the year ended December 31, 1997. The Senior Subordinated Notes outstanding at December 31, 1998 may not be redeemed at the Company's option prior to March 15, 2001. At such date, the Senior Subordinated Notes are redeemable, in whole or in part, at 105.438% of principal amount, and thereafter at an annually declining premium over par until March 15, 2004 when they are redeemable at par. There are no sinking fund requirements related to the Senior Subordinated Notes. F-13 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued) 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. Under the indenture, the amount available to pay dividends and redeem stock was $102,055,000 as of December 31, 1998. The Company was in compliance with the terms of the indenture at December 31, 1998. Term and Revolving Loans On December 17, 1996, the Company entered into a $230,000,000 senior credit agreement, consisting of a $100,000,000 term loan and a $130,000,000 revolving credit facility, that replaced its then existing senior credit agreement. The refinancing resulted in an extraordinary charge of $8,542,000 on a pre-tax basis ($5,159,000 on an after-tax basis) to operations for the ten months ended December 31, 1996. This extraordinary charge consisted of the write-off of unamortized financing costs related to the refinanced debt. On August 8, 1997, the Company entered into a new agreement that modified certain terms of the December 17, 1996 credit agreement. The new agreement provides for a $275,000,000 revolving credit facility that matures in August 2002. At the time this change became effective, $90,000,000 of indebtedness outstanding under the previously existing term loan and $50,000,000 under the previously existing revolving credit facility became revolving borrowings under the new agreement. The new senior credit agreement contains a letter of credit subfacility that allows for the issuance of up to $20,000,000 in letters of credit, a competitive bid loan subfacility that provides for the issuance of up to $140,000,000 in competitive bid loans and a swing line loan subfacility that allows for the issuance of up to $10,000,000 in swing line loans. The amount available for borrowing under the revolving credit facility is reduced by the total outstanding letters of credit, competitive bid loans and swing line loans. Under the terms of the existing credit agreement, the Company may use the revolving credit facility for working capital and general purposes. Borrowings bear interest at a floating rate based at the Company's option, upon (i) the Eurodollar rate (as defined in the agreement) plus an applicable percentage that is subject to change based on the Company's ratio of funded debt to EBITDA or (ii) the greater of the federal funds rate plus 0.5% or the prime rate. The credit agreement subjects the Company to various affirmative and negative covenants. Among other things, the covenants limit the Company's ability to incur additional indebtedness, declare or pay dividends and purchase Company stock and require the Company to maintain certain financial ratios with respect to funded debt leverage. Under the credit agreement, the amount available to pay dividends and redeem stock was $86,212,000 as of December 31, 1998. The Company was in compliance with the credit agreement covenants at December 31, 1998. At December 31, 1998, the Company had outstanding credit facility borrowings totaling $61,000,000, of which $10,000,000 has been classified as current, and total letters of credit of approximately $1,417,000. There were no borrowings under the letters of credit. The Company pays a commitment fee ranging from 0.125% to 0.25%, depending on the Company's leverage ratio, on the unused portion of the revolving credit facility. In addition, a letter of credit fee ranging from 0.325% to 0.75%, depending on the Company's leverage ratio, is required to be paid on the amount available to be drawn under letters of credit. As of December 31, 1998, the commitment and letter of credit fees applicable to the Company were 0.125% and 0.325%, respectively. F-14 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued) 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, 1998, total credit available under such agreements was approximately $12,247,000 or the European equivalent. There is currently no expiration date on these agreements. The interest rate on borrowings is variable and is based on the monetary market rate that is linked to each country's prime rate. As of December 31, 1998, the Company did not have any outstanding borrowings under the European credit facilities. Interest Paid For the years ended December 31, 1998 and 1997, the Company made interest payments totaling $15,943,000 and $25,505,000, respectively. Total interest paid for the ten months ended December 31, 1996 was $25,775,000. Maturities Aggregate maturities of the Company's indebtedness are as follows (in thousands): 1999............................. $ 10,000 2000............................. -- 2001............................. -- 2002............................. 51,081 2003............................. 100 Thereafter....................... 108,074 -------- $169,255 ======== 13. 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 as a result of the redemption and conversion discussed in Note 4 and 317,002 shares remain eligible to be issued. Subject to existing 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. 14. DERIVATIVE FINANCIAL INSTRUMENTS 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. The net amount paid or received on the agreements is recognized as an adjustment to interest expense. The aggregate notional principal amount of the Company's interest rate collar agreements outstanding at December 31, 1998 and 1997 was $115,000,000 and $150,000,000, respectively, and the related weighted average maximum and minimum rates were 7.97% and 5.05%, respectively, at December 31, 1998 and F-15 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued) 7.86% and 5.16%, respectively, at December 31, 1997. The agreements outstanding at December 31, 1998 mature in April 1999. The counterparties to the interest rate collar agreements are major financial institutions. During the years ended December 31, 1998 and 1997 and the ten months ended December 31, 1996, the Company was not required to make nor was it entitled to receive any payments as a result of these hedging activities. From time to time, the Company also enters into foreign currency forward exchange 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. Material gains and losses on these contracts are recognized in income in the period the value of the contract changes. The contract amounts outstanding at December 31, 1998 and 1997 as well as the amounts of gains and losses recorded during the years ended December 31, 1998 and 1997 were not material. The Company had not entered into any foreign currency forward exchange contracts during the ten months ended December 31, 1996. 15. 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. 16. FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair values of each class of financial instruments: Cash and Cash Equivalents, Accounts Receivable 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 $181,394,000 at December 31, 1998 and $220,435,000 at December 31, 1997 while the carrying amounts were $169,255,000 and $207,029,000, respectively. Interest Rate Collar Agreements The fair value of the Company's interest rate collar agreements, as estimated by dealers, was not material as of December 31, 1998 and 1997. 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, 1998 and 1997. F-16 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued) 17. EARNINGS PER SHARE The following table sets forth a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for income before extraordinary item. Earnings per share amounts for the year ended December 31, 1997 and the ten months ended December 31, 1996 are pro forma. See Note 2 for a description of the pro forma basis of presentation.
Income Before Extraordinary Weighted Average Item Shares Per Share (Numerator) (Denominator) Amount ------------- ---------------- --------- (In Thousands, Except Per Share Amounts) Year Ended December 31, 1998 Basic earnings per share................................... $93,044 41,271 $2.25 ===== Effect of dilutive potential common shares: Employee stock options................................... -- 476 Nonvested restricted stock grants........................ -- 1,762 ------- ------ Diluted earnings per share................................. $93,044 43,509 $2.14 ======= ====== ===== Year Ended December 31, 1997 Basic pro forma earnings per share......................... $66,443 37,284 $1.78 ===== Effect of dilutive potential common shares: Employee stock options................................... -- 235 Nonvested restricted stock grants........................ -- 2,879 ------- ------ Diluted pro forma earnings per share....................... $66,443 40,398 $1.64 ======= ====== ===== Ten Months Ended December 31, 1996 Basic pro forma earnings per share......................... $21,995 31,040 $0.71 ===== Dilutive effect of nonvested restricted stock grants....... -- 3,661 ------- ------ Diluted pro forma earnings per share....................... $21,995 34,701 $0.63 ======= ====== =====
As discussed in Note 12, the Company recognized an extraordinary loss on early extinguishment of debt of $5,337,000, net of taxes, in 1997 and $5,159,000, net of taxes, in 1996. On a per share basis, these extraordinary losses amounted to $0.14 basic and $0.13 diluted in 1997 and $0.17 basic and $0.15 diluted in 1996. F-17 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued) 18. INCOME TAXES Income (loss) before income taxes and extraordinary item consists of the following:
| The Knoll | Group, Inc. | (Predecessor) | ------------ Year Year Ten Months | Two Months Ended Ended Ended | Ended December 31, December 31, December 31, | February 29, 1998 1997 1996 | 1996 ------------ ------------ ----------- | ------------ (In Thousands) | (In Thousands) | U.S. operations............................. $142,483 $ 82,851 $23,381 | $(39,105) Foreign operations.......................... 14,932 31,618 15,458 | (1,090) -------- -------- ------- | -------- $157,415 $114,469 $38,839 | $(40,195) ======== ======== ======= | ========
Income tax expense (benefit), excluding extraordinary items, is comprised of the following:
| The Knoll | Group, Inc. | (Predecessor) | ------------- Year Year Ten Months | Two Months Ended Ended Ended | Ended December 31, December 31, December 31, | February 29, 1998 1997 1996 | 1996 ----------- ----------- ----------- | ------------ (In Thousands) | (In Thousands) | Current: | Federal................................... $42,364 $21,585 $10,909 | $(13,801) State..................................... 9,456 5,980 2,953 | (1,814) Foreign................................... 5,414 11,295 661 | 28 ------- ------- ------- | -------- Total current........................... 57,234 38,860 14,523 | (15,587) ------- ------- ------- | -------- Deferred: | Federal................................... 4,423 6,258 (2,850) | (460) State..................................... 1,113 708 (612) | (60) Foreign................................... 1,601 2,200 5,783 | -- ------- ------- ------- | -------- Total deferred.......................... 7,137 9,166 2,321 | (520) ------- ------- ------- | -------- Income tax expense (benefit)................ $64,371 $48,026 $16,844 | $(16,107) ======= ======= ======= | ========
Income taxes paid by the Company for the years ended December 31, 1998 and 1997 totaled $61,404,000 and $24,026,000, respectively. For the ten months ended December 31, 1996, income taxes paid by the Company amounted to $13,137,000. The recognition and measurement of the income tax benefit for the Predecessor required certain assumptions, allocations and significant estimates in order to measure the tax consequences as if the Predecessor were a stand-alone taxpayer. F-18 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued) The following table sets forth the tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities:
December 31, -------------------------- 1998 1997 -------- -------- (In Thousands) Deferred tax assets: Accounts receivable, principally due to allowance for doubtful accounts............................................................. $ 1,624 $ 1,634 Inventories........................................................... 2,640 3,153 Net operating loss carryforwards...................................... 19,045 21,359 Obligation for postretirement benefits other than pension............. 7,591 7,039 Accrued liabilities and other items................................... 20,915 20,493 -------- -------- Gross deferred tax assets............................................... 51,815 53,678 Valuation allowance..................................................... (22,528) (25,172) -------- -------- Net deferred tax assets................................................. 29,287 28,506 -------- -------- Deferred tax liabilities: Intangibles, principally due to differences in amortization........... 11,260 7,303 Plant and equipment, principally due to differences in depreciation and assigned values.................................................. 7,411 5,011 Other items........................................................... 227 198 -------- -------- Gross deferred tax liabilities.......................................... 18,898 12,512 -------- -------- Net deferred tax asset.................................................. $ 10,389 $ 15,994 ======== ========
As of December 31, 1998, the Company had net operating loss carryforwards totaling approximately $49,959,000 in various foreign tax jurisdictions, of which $17,658,000 generally expire through 2000 and $32,301,000 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 pre-acquisition net operating loss carryforwards, due to losses incurred in these tax jurisdictions in previous years. At December 31, 1996, the Company had recorded a valuation allowance of $33,161,000. For the years ended December 31, 1998 and 1997 and the ten months ended December 31, 1996, tax benefits recognized through reductions of the valuation allowance for pre-acquisition net operating loss carryforwards had the effect of reducing goodwill by $1,457,000, $4,524,000 and $4,246,000, respectively. If additional tax benefits are recognized in the future through further reduction of the valuation allowance, such benefits will generally reduce goodwill. F-19 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:
| The Knoll | Group, Inc. | (Predecessor) | ------------- Year Year Ten Months | Two Months Ended Ended Ended | Ended December 31, December 31, December 31, | February 29, 1998 1997 1996 | 1996 ----------- ----------- ----------- | ------------ | Federal statutory tax rate...................... 35.0% 35.0% 35.0% | (35.0%) Increase (decrease) in the tax rate resulting | from: | State taxes, net of federal effect.......... 4.4 3.8 3.9 | (4.5) Higher income tax rates of other countries.. 1.2 2.4 3.2 | (0.2) Non-deductible goodwill amortization........ 0.2 0.3 1.0 | 1.1 Other....................................... 0.1 0.5 0.3 | (1.4) ---- ---- ---- | ----- Effective tax rate.............................. 40.9% 42.0% 43.4% | (40.0%) ==== ==== ==== | =====
The Company has not made provision for U.S. federal and state income taxes as of December 31, 1998 on approximately $35,522,000 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. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the various foreign countries. Determination of the amount of the unrecognized deferred tax liability is not practicable. 19. LEASES The Company has commitments under operating leases for certain machinery and equipment and facilities used in its operations. Total rental expense for the years ended December 31, 1998 and 1997 and the ten months ended December 31, 1996 was $9,256,000, $8,902,000 and $7,787,000, respectively. Future minimum rental payments required under those operating leases that have an initial or remaining noncancelable lease term in excess of one year are as follows (in thousands): 1999............................................ $ 7,442 2000............................................ 6,470 2001............................................ 5,569 2002............................................ 4,803 2003............................................ 3,532 Subsequent years................................ 3,653 ------- Total minimum rental payments................... $31,469 ======= F-20 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued) 20. STOCK PLANS In connection with the acquisition discussed in Note 3, the Company established the Knoll, Inc. 1996 Stock Incentive Plan (the "1996 Stock Plan"). Under the 1996 Stock Plan, awards denominated or payable in shares or options to purchase shares of the Company's common stock may be granted to officers and other key employees of the Company. A combined maximum of 4,709,126 shares or options to purchase shares were authorized for issuance under the 1996 Stock Plan. Options that are granted have a contractual life of ten years. A Stock Plan Committee of the Company's Board of Directors has sole discretion concerning administration of the 1996 Stock Plan, including selection of individuals to receive awards, types of awards, the terms and conditions of the awards and the time at which awards will be granted. The Knoll, Inc. 1997 Stock Incentive Plan (the "1997 Stock Plan") was established on February 14, 1997. The terms of the 1997 Stock Plan are essentially the same as those of the 1996 Stock Plan, except pursuant to the 1997 Stock Plan, discounted options may be granted, options may be repriced, the Board of Directors has greater flexibility to amend the 1997 Plan and, as of December 31, 1998, a combined maximum of 2,255,772 shares or options to purchase shares were authorized for issuance under the plan. During the ten months ended December 31, 1996, the Company granted 4,144,030 restricted common shares, with a weighted average fair market value of $0.34 per share, to key employees. The fair market value of the shares on the date of grant has been recorded as unearned stock grant compensation and is presented as a separate component of stockholders' equity. Compensation expense is recognized ratably over the vesting period. As of December 31, 1998, a total of 2,486,404 restricted shares have vested. The remaining 1,657,626 restricted shares will vest as follows: 640,432 shares in 1999, 640,433 shares in 2000 and 376,761 shares in 2001. The following table summarizes the Company's stock option activity:
Year Ended December 31, 1998 Year Ended December 31, 1997 ----------------------------- ----------------------------- Weighted Weighted Number of Average Number of Average Options Exercise Price Options Exercise Price --------- -------------- --------- -------------- Outstanding at beginning of year............. 2,142,158 $20.73 -- $ -- Granted...................................... 50,000 28.21 2,173,552 20.66 Exercised.................................... (196,647) 16.06 -- -- Forfeited.................................... (30,000) 28.50 (31,394) 15.93 --------- --------- Outstanding at end of year................... 1,965,511 21.27 2,142,158 20.73 ========= ========= Exercisable at end of year................... 240,789 24.33 10,000 17.00 ========= ========= Available for future grants.................. 658,710 678,710 ========= =========
On February 10, 1999, the Board of Directors authorized an additional 1,000,000 shares or options to purchase shares, subject to stockholder approval, for issuance under the 1997 Stock Plan. Also on such date, the Company granted an additional 270,000 options with an exercise price of $21.25 per share. Options were granted at an exercise price equal to the market price on the date of grant. F-21 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued) The following table summarizes information regarding stock options outstanding and exercisable at December 31, 1998:
Options Outstanding Options Exercisable ------------------------------------------------ ---------------------------- Weighted Average Weighted Weighted Number of Remaining Average Number of Average Range of Exercise Prices Options Contractual Life Exercise Price Options Exercise Price ------------------------ ---------- ---------------- -------------- --------- -------------- $15.93 - $17.00 1,142,511 8.19 years $15.98 82,789 $16.19 $24.88 - $33.38 823,000 8.88 28.62 158,000 28.59 --------- ------- $15.93 - $33.38 1,965,511 8.48 21.27 240,789 24.33 ========= =======
The Company also has a qualified, noncompensatory employee stock purchase plan, which provides all employees the ability to purchase common stock of the Company at a price equal to 15.0% below the lower of the market price at (i) the beginning of each quarterly offering period or (ii) the end of each quarterly offering period. Purchases under the plan are limited to 10.0% of an employee's eligible gross pay, up to $25,000. The Company has reserved 300,000 shares of its common stock for issuance under its employee stock purchase plan. During the year ended December 31, 1998, the Company issued 75,609 shares at a weighted average price of $21.89 under this plan. From August 1, 1997, the date the employee stock purchase plan commenced, through December 31, 1997, the Company issued 22,716 shares at a weighted average price of $26.71. As discussed in Note 2, the Company continues to account for its stock-based compensation plans in accordance with APB 25. Accordingly, no compensation cost has been recognized for the Company's stock options or stock purchase 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 and pro forma net income per share would have been as follows (in thousands, except per share amounts):
Year Ended Year Ended December 31, December 31, 1998 1997 ----------- ------------ Pro forma net income.............................. $89,804 $59,731 Pro forma net income per share of common stock: Basic......................................... 2.18 1.60 Diluted....................................... 2.06 1.48
The weighted average fair value of options granted in 1998 and 1997 was $13.68 and $10.13 per share, respectively, and the weighted average fair value of stock purchase rights granted under the employee stock purchase plan was $4.84 and $5.31 per share in 1998 and 1997, respectively. The fair value of the options and stock purchase rights was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 5.75% in 1998 and 6.0% in 1997, dividend yield of 0.0% in 1998 and 1997, expected volatility of the market price of the common stock of 35.0% in 1998 and 1997 and weighted average expected lives of 7 years for the options and 3 months for the stock purchase rights in 1998 and 1997. The estimated fair value of the options was amortized to expense over the vesting period of the options for purposes of determining pro forma net income and pro forma net income per share. 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. F-22 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued) 21. 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. As such, the program now allows for the repurchase of up to 5,000,000 shares of the Company's common stock. Common shares may be purchased in the open market or through negotiated transactions at the discretion of Company management, depending on ongoing assessments of capital needs and prevailing market conditions. During 1998, the Company purchased 1,707,700 shares for $38,849,000, or an average price of $22.75 per share. As of March 24, 1999, the Company purchased a total of 2,894,700 shares for $67,524,000 under the program. The repurchased shares are held in treasury. 22. 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. 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 ------------------------- ----------------------------- 1998 1997 1998 1997 ---------- ----------- ------------- ------------- (In Thousands) (In Thousands) Change in benefit obligation: Benefit obligation at January 1......................... $ 8,078 $ 3,953 $ 18,149 $ 17,157 Service cost............................................ 5,396 4,893 595 560 Interest cost........................................... 615 207 1,294 1,224 Participant contributions............................... 252 276 -- -- Amendment............................................... 451 -- -- -- Actuarial loss (gain)................................... 3,214 (1,160) 1,302 592 Benefits paid........................................... (109) (91) (493) (1,384) ------- ------- -------- -------- Benefit obligation at December 31....................... 17,897 8,078 20,847 18,149 ------- ------- -------- -------- Change in plan assets: Fair value of plan assets at January 1.................. 3,721 30 -- -- Actual return on plan assets............................ 241 55 -- -- Employer contributions.................................. 4,536 3,451 493 1,384 Participant contributions............................... 252 276 -- -- Benefits paid........................................... (109) (91) (493) (1,384) ------- ------- -------- -------- Fair value of plan assets at December 31................ 8,641 3,721 -- -- ------- ------- -------- -------- Funded status........................................... (9,256) (4,357) (20,847) (18,149) Unrecognized net loss (gain)............................ 2,156 (1,160) 1,677 375 Unrecognized prior service cost......................... 416 -- -- -- ------- ------- -------- -------- Accrued benefit cost.................................... $(6,684) $(5,517) $(19,170) $(17,774) ======= ======= ======== ========
F-23 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued) Significant assumptions as of December 31 that were used in accounting for the pension and other postretirement benefits plans are as follows:
Pension Benefits Other Benefits -------------------- -------------------- 1998 1997 1998 1997 -------- --------- -------- -------- Discount rate..................................... 6.75% 7.25% 6.75% 7.25% Expected return on plan assets.................... 8.50 8.50 -- -- 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 ------------------------------------------ --------------------------------------- Year Year Ten Months Year Year Ten Months Ended Ended Ended Ended Ended Ended December 31, December 31, December 31, December 31, December 31, December 31, 1998 1997 1996 1998 1997 1996 ----------- ----------- ----------- ----------- ----------- ----------- (In Thousands) (In Thousands) Service cost ............... $5,396 $4,893 $3,953 $ 595 $ 560 $ 440 Interest cost............... 615 207 -- 1,294 1,224 1,000 Expected return on plan assets..................... (321) (55) -- -- -- -- Amortization of prior service costs.............. 35 -- -- -- -- -- Recognized actuarial gain... (22) -- -- -- -- -- ------ ------ ------ ------ ------ ------ Net periodic benefit cost... $5,703 $5,045 $3,953 $1,889 $1,784 $1,440 ====== ====== ====== ====== ====== ======
For purposes of measuring the benefit obligation and the net periodic benefit cost as of and for the year ended December 31, 1998, respectively, associated with the Company's other postretirement benefits plans, a 7.50% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1998. The rate was then assumed to decrease 1.00% per year to 5.50% in 2000 and remain at that level thereafter. Increasing the assumed health care cost trend rate by 1.00% in each year would increase the benefit obligation as of December 31, 1998 by $2,415,000 and increase the net periodic benefit cost for the year ended December 31, 1998 by $258,000. Decreasing the assumed health care cost trend rate by 1.00% in each year would decrease the benefit obligation as of December 31, 1998 by $2,073,000 and decrease the net periodic benefit cost for the year ended December 31, 1998 by $217,000. Prior to March 1, 1996, the Predecessor sponsored a defined benefit pension plan and other postretirement benefits plan for all eligible U.S. nonunion employees. As a result of the sale of the Predecessor by Westinghouse, as discussed in Note 3, benefits earned through February 29, 1996 under the pension plan were frozen and participants were fully vested in their benefits. The pension plan was subsequently merged into a Westinghouse pension plan. Furthermore, the Company assumed the liability related to the Predecessor's other postretirement benefits plan. For the two months ended February 29, 1996, the Predecessor incurred an aggregate of $441,000 of pension and other postretirement benefits expense. Employees of the Canadian and United Kingdom (U.K.) operations participate in defined contribution plans. The Company's expense related to these plans for the years ended December 31, 1998 and 1997 and the ten months ended December 31, 1996 was $842,000, $1,121,000 and $632,000, respectively. F-24 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued) The Company also sponsors a retirement savings plan (i.e. 401(k) plan) for all U.S. nonunion employees and U.S. hourly union employees. Under this plan, participants may defer a portion of their earnings up to the annual contribution limits established by the Internal Revenue Service. The Company matches 40.0% of 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 also provides for additional employer matching based on the achievement of certain profitability goals. The Company's common stock is offered as an investment option under the 401(k) plan. Although the stock is typically purchased on the open market, the Company has reserved 500,000 shares of its common stock for issuance under its 401(k) plan. The Company's total expense under this plan was $5,472,000 and $5,180,000 for the years ended December 31, 1998 and 1997, respectively, and $2,957,000 for the ten months ended December 31, 1996. The Predecessor administered a similar retirement savings plan and incurred related expense totaling $406,000 for the two months ended February 29, 1996. 23. 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 conducts manufacturing and sales operations 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) Year Ended December 31, 1998 Sales to customers.................................. $857,711 $29,361 $61,619 $948,691 Operating income.................................... 158,880 9,915 2,748 171,543 Property, plant and equipment, net.................. 146,488 27,754 11,925 186,167 Year Ended December 31, 1997 Sales to customers.................................. 717,326 37,674 55,857 810,857 Operating income.................................... 108,002 24,497 5,378 137,877 Property, plant and equipment, net.................. 145,215 23,829 11,406 180,450 Ten Months Ended December 31, 1996 Sales to customers.................................. 493,653 24,456 43,425 561,534 Operating income.................................... 54,381 10,681 6,282 71,344 Property, plant and equipment, net.................. 141,725 21,882 12,611 176,218
F-25 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued) 24. QUARTERLY RESULTS OF OPERATIONS (Unaudited) The following table sets forth unaudited summary information on a quarterly basis for the Company for the years ended December 31, 1998 and 1997.
First Second Third Fourth Quarter Quarter Quarter Quarter ----------- ----------- ----------- ----------- (In Thousands, Except Per Share Data) 1998 Net sales............................................ $220,775 $246,957 $235,028 $245,931 Gross profit......................................... 87,323 97,838 93,022 97,752 Net income........................................... 19,810 25,063 24,937 23,234 Earnings per share of common stock: Basic............................................. 0.48 0.60 0.60 0.57 Diluted........................................... 0.45 0.57 0.57 0.55 1997 Net sales............................................ 177,833 212,582 208,402 212,040 Gross profit......................................... 67,974 86,176 83,714 83,031 Income before extraordinary item..................... 11,638 16,956 19,471 18,378 Net income........................................... 11,638 11,619 19,471 18,378 Income before extraordinary item per share of common stock: Basic............................................. 0.37 0.46 0.48 0.45 Diluted........................................... 0.34 0.43 0.45 0.42
Income before extraordinary item per share amounts reported for the first and second quarters of 1997 are pro forma as they are adjusted to reflect the redemption and conversion into common stock of the Series A Preferred Stock as of the beginning of the respective periods (see Note 2). The Company recorded an extraordinary loss of $8,838,000 pre-tax ($5,337,000 after-tax) during the second quarter of 1997. This loss consisted of the write-off of unamortized deferred financing fees and the premium paid in connection with the early redemption of a portion of the Company's Senior Subordinated Notes. 25. SUBSEQUENT EVENTS On March 23, 1999, the Company received a proposal from Warburg, Pincus Ventures, L.P. and certain members of Knoll management to acquire all of the outstanding shares of the Company's common stock owned by public stockholders at a price of $25.00 per share. The Board of Directors has authorized the appointment of a special committee, consisting of independent members of the Board of Directors, to consider the proposal. Consummation of the acquisition would be subject to approval by the Board of Directors and stockholders of Knoll, as well as to the receipt of financing, the execution of a definitive merger agreement and other conditions customary in a transaction of this type. Five class action complaints relating to the proposal were filed on or about March 24, 1999. The Company is among the defendants. The Company is unable to predict what impact, if any, such litigation may have on the Company or the proposed transaction. The financial statements do not reflect any effects of the litigation or the proposed transaction. F-26 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued) 26. FINANCIAL INFORMATION FOR GUARANTORS OF THE COMPANY'S DEBT As discussed in Note 12, the Company's Senior Subordinated Notes are guaranteed by all existing and future directly or indirectly wholly owned domestic subsidiaries of the Company (the "Guarantors"). The Guarantors are Knoll Overseas, Inc., a holding company for the entities that conduct the Company's European business, and Spinneybeck Enterprises, Inc., which directly and through a Canadian subsidiary operates the Company's leather business. These Guarantors will irrevocably and unconditionally, fully, jointly and severally, guarantee the performance and payment when due, of all obligations under the Senior Subordinated Notes, limited to the largest amount that would not render such Guarantors' obligations under the guarantees subject to avoidance under any applicable federal or state fraudulent conveyance or similar law. The condensed consolidating information that follows presents: . Condensed consolidating financial information as of December 31, 1998 and 1997 and for the years ended December 31, 1998 and 1997, ten months ended December 31, 1996 and two months ended February 29, 1996 of (a) Knoll, Inc. (as the Issuer), (b) the Guarantors, (c) the combined non-Guarantors, (d) elimination entries and (e) the Company on a consolidated basis. . The Issuer and the Guarantors are shown with their investments in their subsidiaries accounted for on the equity method. The condensed consolidating financial information should be read in connection with the consolidated financial statements of the Company. Separate financial statements of the Guarantors are not presented because management has determined that separate financial statements are not material. The Guarantors are fully, jointly, severally and unconditionally liable under the guarantees. Certain amounts for 1997 and 1996 in the condensed consolidating information have been reclassified to conform to the 1998 classifications. F-27 KNOLL, INC. BALANCE SHEET DECEMBER 31, 1998 (In Thousands)
Guarantors -------------------------- Spinneybeck Knoll Enterprises, Overseas, Non- Knoll, Inc. Inc. Inc. Guarantors Eliminations Total ------------ ------------ ------------- ----------- ------------- ------------ ASSETS Current assets: Cash and cash equivalents............ $ 3,503 $ 561 $ -- $ 13,401 $ -- $ 17,465 Customer receivables, net............ 115,823 1,698 -- 20,435 -- 137,956 Accounts receivable--related parties. 13,954 40 3,568 40,061 (57,623) -- Inventories.......................... 53,146 8,270 -- 15,697 -- 77,113 Deferred income taxes................ 20,169 -- -- 898 -- 21,067 Prepaid and other current assets..... 2,132 14 4 7,692 -- 9,842 -------- ------- ------- -------- --------- -------- Total current assets............. 208,727 10,583 3,572 98,184 (57,623) 263,443 Property, plant and equipment, net..... 146,275 213 -- 39,679 -- 186,167 Intangible assets, net................. 258,604 -- -- 1,439 -- 260,043 Equity investments..................... 106,709 666 15,932 -- (123,307) -- Other noncurrent assets................ 2,046 9 97 2,222 -- 4,374 -------- ------- ------- -------- --------- -------- Total Assets..................... $722,361 $11,471 $19,601 $141,524 $(180,930) $714,027 ======== ======= ======= ======== ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long- term debt.......................... $ 10,000 $ -- $ -- $ -- $ -- $ 10,000 Accounts payable--trade.............. 37,446 415 -- 21,690 -- 59,551 Accounts payable--related parties............................ 39,826 235 2,526 15,036 (57,623) -- Income taxes payable................. 5,872 637 35 552 -- 7,096 Other current liabilities............ 81,100 838 1,061 8,757 -- 91,756 -------- ------- ------- -------- --------- -------- Total current liabilities........ 174,244 2,125 3,622 46,035 (57,623) 168,403 Long-term debt......................... 158,250 -- -- 1,005 -- 159,255 Deferred income taxes.................. 8,531 -- -- 2,147 -- 10,678 Postretirement benefits other than pension............................... 18,450 -- -- -- -- 18,450 Other noncurrent liabilities........... 8,049 -- -- 5,342 -- 13,391 -------- ------- ------- -------- --------- -------- Total liabilities................ 367,524 2,125 3,622 54,529 (57,623) 370,177 -------- ------- ------- -------- --------- -------- Stockholders' equity: Common stock......................... 418 -- -- -- -- 418 Additional paid-in-capital........... 184,145 273 12,812 60,107 (75,545) 181,792 Unearned stock grant compensation....................... (712) -- -- -- -- (712) Retained earnings.................... 170,986 9,073 3,167 35,522 (47,762) 170,986 Accumulated other comprehensive income............... -- -- -- (8,634) -- (8,634) -------- ------- ------- -------- --------- -------- Total stockholders' equity....... 354,837 9,346 15,979 86,995 (123,307) 343,850 -------- ------- ------- -------- --------- -------- Total Liabilities and Stockholders' Equity............ $722,361 $11,471 $19,601 $141,524 $(180,930) $714,027 ======== ======= ======= ======== ========= ========
F-28 KNOLL, INC. BALANCE SHEET DECEMBER 31, 1997 (In Thousands)
Guarantors ------------------------------ Spinneybeck Enterprises, Knoll Non- Knoll, Inc. Inc. Overseas, Inc. Guarantors Eliminations Total ------------ ------------- -------------- ------------- ------------- ------------ ASSETS Current assets: Cash and cash equivalents............ $ 1,052 $ 291 $ -- $ 9,447 $ -- $ 10,790 Customer receivables, net............ 97,364 1,629 -- 23,858 -- 122,851 Accounts receivable--related parties. 2,380 35 2,257 41,427 (46,099) -- Inventories.......................... 46,665 7,443 -- 14,141 -- 68,249 Deferred income taxes................ 20,323 -- -- 972 -- 21,295 Prepaid and other current assets..... 2,258 (2) 4 1,437 -- 3,697 -------- ------- ------- -------- --------- -------- Total current assets............. 170,042 9,396 2,261 91,282 (46,099) 226,882 Property, plant and equipment, net..... 144,923 292 -- 35,235 -- 180,450 Intangible assets, net................. 267,231 -- -- 3,446 -- 270,677 Equity investments..................... 95,308 567 14,947 -- (110,822) -- Other noncurrent assets................ 731 9 97 2,013 -- 2,850 -------- ------- ------- -------- --------- -------- Total Assets..................... $678,235 $10,264 $17,305 $131,976 $(156,921) $680,859 ======== ======= ======= ======== ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long- term debt.......................... $ 10,000 $ -- $ -- $ -- $ -- $ 10,000 Accounts payable--trade.............. 46,709 482 -- 19,506 -- 66,697 Accounts payable--related parties............................ 41,290 137 (10) 4,682 (46,099) -- Income taxes payable................. (2,046) 223 (69) 8,683 -- 6,791 Other current liabilities............ 67,291 678 1,886 7,986 -- 77,841 -------- ------- ------- -------- --------- -------- Total current liabilities........ 163,244 1,520 1,807 40,857 (46,099) 161,329 Long-term debt......................... 196,250 -- -- 779 -- 197,029 Deferred income taxes.................. 3,149 -- -- 2,152 -- 5,301 Postretirement benefits other than pension............................... 16,424 -- -- -- -- 16,424 Other noncurrent liabilities........... 7,803 -- -- 4,684 -- 12,487 -------- ------- ------- -------- --------- -------- Total liabilities................ 386,870 1,520 1,807 48,472 (46,099) 392,570 Stockholders' equity: Common stock......................... 432 -- -- -- -- 432 Additional paid-in-capital........... 213,984 3,535 12,897 60,079 (75,545) 214,950 Unearned stock grant compensation....................... (993) -- -- -- -- (993) Retained earnings.................... 77,942 5,209 2,601 27,467 (35,277) 77,942 Accumulated other comprehensive income............... -- -- -- (4,042) -- (4,042) -------- ------- ------- -------- --------- -------- Total stockholders' equity....... 291,365 8,744 15,498 83,504 (110,822) 288,289 -------- ------- ------- -------- --------- -------- Total Liabilities and Stockholders' Equity........................... $678,235 $10,264 $17,305 $131,976 $(156,921) $680,859 ======== ======= ======= ======== ========= ========
F-29 KNOLL, INC. STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1998 (In Thousands)
Guarantors ---------------------------- Spinneybeck Enterprises, Knoll Non- Knoll, Inc. Inc. Overseas, Inc. Guarantors Eliminations Total ----------- ------------ -------------- ----------- ------------- ----------- Sales to customers...................... $835,209 $22,502 $ -- $ 90,980 $ -- $948,691 Sales to related parties................ 24,652 3,531 1,244 124,816 (154,243) -- -------- ------- ------ -------- --------- -------- Total sales............................. 859,861 26,033 1,244 215,796 (154,243) 948,691 Cost of sales to customers.............. 526,437 9,114 813 64,478 (28,086) 572,756 Cost of sales to related parties........ 14,578 3,531 -- 108,048 (126,157) -- -------- ------- ------ -------- --------- -------- Gross profit............................ 318,846 13,388 431 43,270 -- 375,935 Selling, general and administrative expenses............................... 165,976 6,938 871 30,607 -- 204,392 -------- ------- ------ -------- --------- -------- Operating income (loss)................. 152,870 6,450 (440) 12,663 -- 171,543 Interest expense........................ 16,809 -- -- 51 -- 16,860 Other income, net....................... 412 -- -- 2,320 -- 2,732 Income from equity investments.......... 11,401 99 985 -- (12,485) -- -------- ------- ------ -------- --------- -------- Income before income tax expense........ 147,874 6,549 545 14,932 (12,485) 157,415 Income tax expense (benefit)............ 54,830 2,685 (21) 6,877 -- 64,371 -------- ------- ------ -------- --------- -------- Net income.............................. $ 93,044 $ 3,864 $ 566 $ 8,055 $ (12,485) $ 93,044 ======== ======= ====== ======== ========= ========
F-30 KNOLL, INC. STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1997 (In Thousands)
Guarantors ---------------------------- Spinneybeck Enterprises, Knoll Non- Knoll, Inc. Inc. Overseas, Inc. Guarantors Eliminations Total ------------ ------------ -------------- ----------- -------------- ----------- Sales to customers...................... $698,392 $18,934 $ -- $ 93,531 $ -- $810,857 Sales to related parties................ 22,545 3,507 1,192 103,412 (130,656) -- -------- ------- ------- -------- --------- -------- Total sales............................. 720,937 22,441 1,192 196,943 (130,656) 810,857 Cost of sales to customers.............. 450,099 7,707 703 67,902 (36,449) 489,962 Cost of sales to related parties........ 14,530 3,507 -- 76,170 (94,207) -- -------- ------- ------- -------- --------- -------- Gross profit............................ 256,308 11,227 489 52,871 -- 320,895 Selling, general and administrative expenses............................... 151,907 6,287 1,828 22,996 -- 183,018 -------- ------- ------- -------- --------- -------- Operating income (loss)................. 104,401 4,940 (1,339) 29,875 -- 137,877 Interest expense........................ 24,960 -- -- 115 -- 25,075 Other income (expense), net............. (190) -- (1) 1,858 -- 1,667 Income from equity investments.......... 19,837 117 2,158 -- (22,112) -- -------- ------- ------- -------- --------- -------- Income before income tax expense (benefit) and extraordinary item....... 99,088 5,057 818 31,618 (22,112) 114,469 Income tax expense (benefit)............ 32,645 2,051 (15) 13,345 -- 48,026 -------- ------- ------- -------- --------- -------- Income before extraordinary item........ 66,443 3,006 833 18,273 (22,112) 66,443 Extraordinary loss on early extinguishment of debt, net of 5,337 -- -- -- -- 5,337 taxes.................................. -------- ------- ------- -------- --------- -------- Net income.............................. $ 61,106 $ 3,006 $ 833 $ 18,273 $ (22,112) $ 61,106 ======== ======= ======= ======== ========= ========
F-31 KNOLL, INC. STATEMENT OF OPERATIONS TEN MONTHS ENDED DECEMBER 31, 1996 (In Thousands)
Guarantors ---------------------------- Spinneybeck Enterprises, Knoll Non- Knoll, Inc. Inc. Overseas, Inc. Guarantors Eliminations Total ----------- ------------- -------------- ------------ ------------- ----------- Sales to customers...................... $480,857 $12,796 $ -- $ 67,881 $ -- $561,534 Sales to related parties................ 13,227 2,210 -- 62,580 (78,017) -- -------- ------- ------- -------- -------- -------- Total sales............................. 494,084 15,006 -- 130,461 (78,017) 561,534 Cost of sales to customers.............. 323,607 6,109 521 50,293 (21,689) 358,841 Cost of sales to related parties........ 8,902 1,054 -- 46,372 (56,328) -- -------- ------- ------- -------- -------- -------- Gross profit (loss)..................... 161,575 7,843 (521) 33,796 -- 202,693 Selling, general and administrative expenses............................... 108,713 4,342 1,461 16,833 -- 131,349 -------- ------- ------- -------- -------- -------- Operating income (loss)................. 52,862 3,501 (1,982) 16,963 -- 71,344 Interest expense........................ 32,706 -- -- 246 -- 32,952 Other income (expense), net............. 757 (4) 953 (1,259) -- 447 Income from equity investments.......... 10,319 77 2,769 -- (13,165) -- -------- ------- ------- -------- -------- -------- Income before income tax expense (benefit) and extraordinary item....... 31,232 3,574 1,740 15,458 (13,165) 38,839 Income tax expense (benefit)............ 9,237 1,371 (28) 6,264 -- 16,844 -------- ------- ------- -------- -------- -------- Income before extraordinary item........ 21,995 2,203 1,768 9,194 (13,165) 21,995 Extraordinary loss on early extinguishment of debt, net of 5,159 -- -- -- -- 5,159 taxes.................................. -------- ------- ------- -------- -------- -------- Net income.............................. $ 16,836 $ 2,203 $ 1,768 $ 9,194 $(13,165) $ 16,836 ======== ======= ======= ======== ======== ========
F-32 KNOLL, INC. STATEMENT OF OPERATIONS TWO MONTHS ENDED FEBRUARY 29, 1996 (In Thousands)
Guarantors ------------------------------ Spinneybeck Enterprises, Knoll Non- Knoll, Inc. Inc. Overseas, Inc. Guarantors Eliminations Total ------------ ------------ -------------- ------------ ------------- ------------ Sales to customers.................... $ 76,471 $2,095 $ -- $11,666 $ -- $ 90,232 Sales to related parties.............. 1,318 330 -- 6,935 (8,583) -- -------- ------ ----- ------- ------- -------- Total sales........................... 77,789 2,425 -- 18,601 (8,583) 90,232 Cost of sales to customers............ 50,580 931 111 9,041 (949) 59,714 Cost of sales to related parties...... 883 149 -- 6,602 (7,634) -- -------- ------ ----- ------- ------- -------- Gross profit (loss)................... 26,326 1,345 (111) 2,958 -- 30,518 Selling, general and administrative expenses............................. 16,800 725 224 3,507 -- 21,256 Westinghouse long-term incentive compensation......................... 47,900 -- -- -- -- 47,900 Allocated corporate expenses.......... 921 -- -- -- -- 921 -------- ------ ----- ------- ------- -------- Operating income (loss)............... (39,295) 620 (335) (549) -- (39,559) Interest expense...................... -- -- -- 340 -- 340 Other income (expense), net........... (265) -- 170 (201) -- (296) Income (loss) from equity investments.......................... (218) 23 (493) -- 688 -- -------- ------ ----- ------- ------- -------- Income (loss) before income tax expense (benefit)................ (39,778) 643 (658) (1,090) 688 (40,195) Income tax expense (benefit).......... (16,338) 259 (56) 28 -- (16,107) -------- ------ ----- ------- ------- -------- Net income (loss)..................... $(23,440) $ 384 $(602) $(1,118) $ 688 $(24,088) ======== ====== ===== ======= ======= ========
F-33 KNOLL, INC. STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 1998 (In Thousands)
Guarantors ------------------------------ Spinneybeck Knoll Enterprises, Overseas, Non- Knoll, Inc. Inc. Inc. Guarantors Eliminations Total ------------ ------------- ------------ ------------ ------------ ------------ CASH PROVIDED BY OPERATING ACTIVITIES................ $101,588 $285 $ -- $12,690 $ -- $114,563 CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures................... (27,170) (15) -- (9,205) -- (36,390) Proceeds from sale of assets........... 69 -- -- 83 -- 152 -------- ---- -------- ------- -------- -------- Cash used in investing activities...... (27,101) (15) -- (9,122) -- (36,238) CASH FLOWS FROM FINANCING ACTIVITIES Repayment of revolving credit facility, net......................... (38,000) -- -- -- -- (38,000) Proceeds from long-term debt........... -- -- -- 201 -- 201 Net proceeds from issuance of stock.... 4,813 -- -- -- -- 4,813 Purchase of common stock............... (38,849) -- -- -- -- (38,849) -------- ---- -------- ------- -------- -------- Cash provided by (used in) financing activities................ (72,036) -- -- 201 -- (71,835) Effect of exchange rate changes on cash and cash equivalents............. -- -- -- 185 -- 185 -------- ---- -------- ------- -------- -------- Increase in cash and cash equivalents.. 2,451 270 -- 3,954 -- 6,675 Cash and cash equivalents at beginning of year..................... 1,052 291 -- 9,447 -- 10,790 -------- ---- -------- ------- -------- -------- Cash and cash equivalents at end of year.................................. $ 3,503 $561 $ -- $13,401 $ -- $ 17,465 ======== ==== ======== ======= ======== ========
F-34 KNOLL, INC. STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 1997 (In Thousands)
Guarantors ------------------------------ Spinneybeck Knoll Enterprises, Overseas, Non- Knoll, Inc. Inc. Inc. Guarantors Eliminations Total ------------ ------------- ------------ ------------ ------------- ------------ CASH PROVIDED BY OPERATING ACTIVITIES................ $124,109 $ 2,546 $ -- $ 8,607 $ -- $135,262 CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures................... (26,740) (22) -- (6,347) 29 (33,080) Proceeds from sale of assets........... 108 -- -- 85 (29) 164 Payments received on intercompany loans 2,500 -- -- -- (2,500) -- -------- ------- --------- ------- ------- -------- Cash used in investing activities...... (24,132) (22) -- (6,262) (2,500) (32,916) CASH FLOWS FROM FINANCING ACTIVITIES Repayment of revolving credit facility, net......................... (79,000) -- -- -- -- (79,000) Repayment of long-term debt, net....... (67,750) -- -- (238) -- (67,988) Repayment of intercompany loans........ -- (2,500) -- -- 2,500 -- Premium paid for early extinguishment of debt............................... (5,775) -- -- -- -- (5,775) Net proceeds from issuance of stock.... 133,559 -- -- -- -- 133,559 Redemption of preferred stock.......... (80,000) -- -- -- -- (80,000) -------- ------- --------- ------- ------- -------- Cash used in financing activities...... (98,966) (2,500) -- (238) 2,500 (99,204) Effect of exchange rate changes on -- -- -- (1,156) -- (1,156) cash and cash equivalents............. -------- ------- --------- ------- ------- -------- Increase in cash and cash equivalents.. 1,011 24 -- 951 -- 1,986 Cash and cash equivalents at 41 267 -- 8,496 -- 8,804 beginning of year..................... -------- ------- --------- ------- ------- -------- Cash and cash equivalents at end of year.................................. $ 1,052 $ 291 $ -- $ 9,447 $ -- $ 10,790 ======== ======= ========= ======= ======= ========
F-35 KNOLL, INC. STATEMENT OF CASH FLOWS TEN MONTHS ENDED DECEMBER 31, 1996 (In Thousands)
Guarantors ------------------------------ Spinneybeck Knoll Enterprises, Overseas, Non- Knoll, Inc. Inc. Inc. Guarantors Eliminations Total ------------- ------------- ------------ ------------ ------------ ------------- CASH PROVIDED BY OPERATING ACTIVITIES................ $ 78,889 $ 399 $ -- $10,214 $ -- $ 89,502 CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of the Company from Westinghouse........................ (579,801) -- -- -- -- (579,801) Capital expenditures................... (12,531) (134) -- (2,590) -- (15,255) Proceeds from sale of assets........... 43 -- -- 175 -- 218 --------- ----- --------- ------- -------- --------- Cash used in investing activities...... (592,289) (134) -- (2,415) -- (594,838) CASH FLOWS FROM FINANCING ACTIVITIES Repayment of short-term debt, net...... -- -- -- (1,483) -- (1,483) Proceeds from revolving credit facility, net......................... 88,000 -- -- -- -- 88,000 Proceeds from (repayment of) long-term debt, net............................. 265,000 -- -- (130) -- 264,870 Net proceeds from issuance of stock.... 160,400 -- -- -- -- 160,400 Net receipts from (payments to) parent company........................ (120) -- -- 120 -- -- --------- ----- --------- ------- -------- --------- Cash provided by (used in) financing activities............................ 513,280 -- -- (1,493) -- 511,787 Effect of exchange rate changes on cash and cash equivalents............. -- -- -- 18 -- 18 --------- ----- --------- ------- -------- --------- Increase (decrease) in cash and cash equivalents........................... (120) 265 -- 6,324 -- 6,469 Cash and cash equivalents at beginning of period................... 161 2 -- 2,172 -- 2,335 --------- ----- --------- ------- -------- --------- Cash and cash equivalents at end of period................................ $ 41 $ 267 $ -- $ 8,496 $ -- $ 8,804 ========= ===== ========= ======= ======== =========
F-36 KNOLL, INC. STATEMENT OF CASH FLOWS TWO MONTHS ENDED FEBRUARY 29, 1996 (IN THOUSANDS)
Guarantors ----------------------------- Spinneybeck Enterprises, Knoll Non- Knoll, Inc. Inc. Overseas, Inc. Guarantors Eliminations Total ------------- ------------- -------------- ------------- ------------- ------------- CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES............. $(53,215) $ 1,267 $ 651 $ 17,139 $(19,881) $(54,039) CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures.................. (2,022) (28) -- (246) -- (2,296) -------- ------- -------- -------- --------- -------- Cash used in investing activities..... (2,022) (28) -- (246) -- (2,296) CASH FLOWS FROM FINANCING ACTIVITIES Repayment of short-term debt, net..... (2,055) -- -- (1,750) -- (3,805) Net receipts from (payments to) parent company....................... 57,635 (1,419) (651) (14,598) 19,881 60,848 -------- ------- -------- -------- --------- -------- Cash provided by (used in) financing activities................. 55,580 (1,419) (651) (16,348) 19,881 57,043 Effect of exchange rate changes on cash and cash equivalents............ -- -- -- 58 -- 58 -------- ------- -------- -------- --------- -------- Increase (decrease) in cash and cash equivalents..................... 343 (180) -- 603 -- 766 Cash and cash equivalents at beginning of period.................. (182) 182 -- 1,569 -- 1,569 -------- ------- -------- -------- --------- -------- Cash and cash equivalents at end of period............................... $ 161 $ 2 $ -- $ 2,172 $ -- $ 2,335 ======== ======= ======== ======== ========= ========
F-37 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E - ----------------------------------------------------- -------------- -------------- -------------- -------------- Additions Balance at Charged to Beginning Costs and Balance at Description of Period Expenses Deductions (1) End of Period - ----------------------------------------------------- -------------- -------------- -------------- -------------- (In Thousands) Valuation Accounts Deducted in the Consolidated Balance Sheet from the Assets to which They Apply: Year Ended December 31, 1998: Allowance for doubtful accounts $5,461 $1,313 $1,717 $5,057 Year Ended December 31, 1997: Allowance for doubtful accounts 5,713 1,943 2,195 5,461 Ten Months Ended December 31, 1996: Allowance for doubtful accounts 5,838 2,098 2,223 5,713 Two Months Ended February 29, 1996: Allowance for doubtful accounts 5,790 159 210 5,739
____________________ (1) Uncollectible accounts written off and foreign currency translation. S-1 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is hereby incorporated by reference to the section entitled "Directors and Executive Officers of the Company" and the subsection "Section 16(a) Beneficial Ownership Reporting Compliance" under the section entitled "Board of Directors and Board Committees" in the Company's Proxy Statement for its 1999 Annual Shareholders' Meeting (the "Proxy Statement"). The Proxy Statement shall be filed with the Securities and Exchange Commission within 120 days of the end of the Company's latest fiscal year. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is hereby incorporated by reference to the section entitled "Executive Officer and Director Compensation" and the subsection "Performance Graph" under the section entitled "Board of Directors and Board Committees" in the Company's Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is hereby incorporated by reference to the section entitled "Security Ownership of Certain Beneficial Owners, Management and Directors" in the Company's Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is hereby incorporated by reference to the section entitled "Certain Transactions" in the Company's Proxy Statement. 21 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as part of the report: (1) CONSOLIDATED FINANCIAL STATEMENTS The Consolidated Financial Statements of the Company are listed in the Table of Contents for the Financial Statements beginning on page F-1 of this Form 10-K. (2) FINANCIAL STATEMENT SCHEDULES Financial Statement Schedule II-Valuation and Qualifying Accounts is filed with this Form 10-K on page S-1 of this Form 10-K. All other schedules for which provision is made in the applicable regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. (3) EXHIBITS Exhibit Number Description -------- ------------------------------------------------------------ 3.1*** Amended and Restated Certificate of Incorporation of the Company. 3.2*** Amended and Restated By-Laws of the Company. 10.1* Stock Purchase Agreement, dated as of December 20, 1995, by and between Westinghouse and TKG. 10.2* Knoll, Inc. 1996 Stock Incentive Plan (formerly called the TKG Stock Incentive Plan). 10.3* Indenture, dated as of February 29, 1996, by and among the Company, T.K.G. Acquisition Corp., T.K.G. Acquisition Sub, Inc., The Knoll Group, Inc., Knoll North America, Inc., Spinneybeck Enterprises, Inc. and Knoll Overseas, Inc., as guarantors, and IBJ Schroder Bank & Trust Company, as trustee, relating to $165,000,000 principal amount of 10.875% Senior Subordinated Notes due 2006, including form of Initial Global Note. 10.4* Supplemental Indenture, dated as of February 29, 1996, by and among the Company, as successor to T.K.G. Acquisition Sub, Inc., the Guarantors (as defined therein), and IBJ Schroder Bank & Trust Company, as Trustee, relating to $165,000,000 principal amount of 10.875% Senior Subordinated Notes due 2006, including form of initial Global Note. 10.5** Supplemental Indenture No. 2, dated as of March 14, 1997, by and among the Company, the Guarantors (as defined therein), and IBJ Schroder Bank & Trust Company, as trustee, relating to $165,000,000 principal amount of 10.875% Senior Subordinated Notes due 2006, including form of Initial Global Note. 10.6**** Credit Agreement, dated as of August 8, 1997, by and among the Company, NationsBank, N.A., as Administrative Agent, The Chase Manhattan Bank, as Documentation Agent and other lending institutions. 10.7** Employment Agreement, dated as of February 29, 1996, between T.K.G. Acquisition Corp. and Burton B. Staniar. 10.8** Employment Agreement, dated as of February 29, 1996, between T.K.G. Acquisition Corp. and John H. Lynch. 10.9** Employment Agreement, dated as of February 29, 1996, between T.K.G. Acquisition Corp. and Andrew B. Cogan. 10.10*** Amendment to Employment Agreement, dated as of April 30, 1997, between the Company and Andrew B. Cogan. 22 Exhibit Number Description ------- -------------------------------------------------------- 10.11 Amendment #2 to Employment Agreement, dated as of August 1, 1998, between the Company and Andrew B. Cogan. 10.12** Stockholders Agreement (Common Stock and Preferred Stock), dated as of February 29, 1996, among T.K.G. Acquisition Corp., Warburg, Pincus Ventures, L.P., and the signatories thereto. 10.13** Form of Stockholders Agreement (Restricted Shares), dated as of February 29, 1996, among T.K.G. Acquisition Corp., Warburg, Pincus Ventures, L.P., and the signatories thereto. 10.14*** Form of Agreement, dated as of April 15, 1997, by and among the Company, Warburg, Pincus Ventures, L.P., NationsBanc Investment Corp. and the Investors (as defined therein). 10.15 Voting Agreement, dated as of September 11, 1998, by and among the Company, Warburg, Pincus Ventures, L.P. and Warburg, Pincus & Co. 10.16***** Amended and Restated Knoll, Inc. 1997 Stock Incentive. 21** Subsidiaries of the Registrant. 23 Consent of Independent Auditors. 27 Financial Data Schedule. (b) Current Reports on Form 8-K: On October 1, 1998, the Company filed a report on Form 8-K dated September 3, 1998. In that Form 8-K under Item 5 -- Other Events, the Company reported its press release regarding the Board of Directors' approval of a share repurchase program that allows the Company to repurchase up to 3.0 million shares of its common stock. On December 9, 1998, the Company filed a report on Form 8-K dated December 3, 1998. In that Form 8-K under Item 5 -- Other Events, the Company reported its press release regarding the election of a new director to the Company's Board of Directors. - ------------------------------------ * Incorporated by reference to the Company's Registration Statement on Form S-4 (File No. 333-2972), which was declared effective by the Commission on June 12, 1996. ** Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. *** Incorporated by reference to the Company's Registration Statement on Form S-1 (File No. 333-23399), which was declared effective by the Commission on May 9, 1997. **** Incorporated by reference to the Company's Registration Statement on Form S-1 (File No. 333-36407), which was filed on September 25, 1997 and subsequently withdrawn. ***** Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1997. 23 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 31st day of March 1999. 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 31, 1999 - ------------------------------ Burton B. Staniar /s/ John H. Lynch President, Chief Executive March 31, 1999 - ------------------------------ Officer and Director John H. Lynch (Principal Executive Officer) /s/ Douglas J. Purdom Chief Financial Officer March 31, 1999 - ------------------------------ (Principal Financial Officer) Douglas J. Purdom /s/ Barry L. McCabe Controller March 31, 1999 - ------------------------------ (Principal Accounting Officer) Barry L. McCabe /s/ John W. Amerman Director March 31, 1999 - ------------------------------ John W. Amerman /s/ Andrew B. Cogan Director March 31, 1999 - ------------------------------ Andrew B. Cogan /s/ Robert J. Dolan Director March 31, 1999 - ------------------------------ Robert J. Dolan /s/ Jeffrey A. Harris Director March 31, 1999 - ------------------------------ Jeffrey A. Harris /s/ Sidney Lapidus Director March 31, 1999 - ------------------------------ Sidney Lapidus /s/ Kewsong Lee Director March 31, 1999 - ------------------------------ Kewsong Lee /s/ Henry B. Schacht Director March 31, 1999 - ------------------------------ Henry B. Schacht 24 EXHIBIT INDEX -------------
Exhibit Number Description Page - ----------- ------------------------------------------------------------------------------------------------ ------------ 3.1*** Amended and Restated Certificate of Incorporation of the Company. 3.2*** Amended and Restated By-Laws of the Company. 10.1* Stock Purchase Agreement, dated as of December 20, 1995, by and between Westinghouse and TKG. 10.2* Knoll, Inc. 1996 Stock Incentive Plan (formerly called the TKG Stock Incentive Plan). 10.3* Indenture, dated as of February 29, 1996, by and among the Company, T.K.G. Acquisition Corp., T.K.G. Acquisition Sub, Inc., The Knoll Group, Inc., Knoll North America, Inc., Spinneybeck Enterprises, Inc. and Knoll Overseas, Inc., as guarantors, and IBJ Schroder Bank & Trust Company, as trustee, relating to $165,000,000 principal amount of 10.875% Senior Subordinated Notes due 2006, including form of Initial Global Note. 10.4* Supplemental Indenture, dated as of February 29, 1996, by and among the Company, as successor to T.K.G. Acquisition Sub, Inc., the Guarantors (as defined therein), and IBJ Schroder Bank & Trust Company, as trustee, relating to $165,000,000 principal amount of 10.875% Senior Subordinated Notes due 2006, including form of initial Global Note. 10.5** Supplemental Indenture No. 2, dated as of March 14, 1997, by and among the Company, the Guarantors (as defined therein), and IBJ Schroder Bank & Trust Company, as trustee, relating to $165,000,000 principal amount of 10.875% Senior Subordinated Notes due 2006, including form of Initial Global Note. 10.6**** Credit Agreement, dated as of August 8, 1997, by and among the Company, NationsBank, N.A., as Administrative Agent, The Chase Manhattan Bank, as Documentation Agent and other lending institutions. 10.7** Employment Agreement, dated as of February 29, 1996, between T.K.G. Acquisition Corp. and Burton B. Staniar. 10.8** Employment Agreement, dated as of February 29, 1996, between T.K.G. Acquisition Corp. and John H. Lynch. 10.9** Employment Agreement, dated as of February 29, 1996, between T.K.G. Acquisition Corp. and Andrew B. Cogan. 10.10*** Amendment to Employment Agreement, dated as of April 30, 1997, between the Company and Andrew B. Cogan. 10.11 Amendment #2 to Employment Agreement, dated as of August 1, 1998, between the Company and Andrew B. Cogan. 10.12** Stockholders Agreement (Common Stock and Preferred Stock), dated as of February 29, 1996, among T.K.G. Acquisition Corp., Warburg, Pincus Ventures, L.P., and the signatories thereto. 10.13** Form of Stockholders Agreement (Restricted Shares), dated as of February 29, 1996, among T.K.G. Acquisition Corp., Warburg, Pincus Ventures, L.P., and the signatories thereto. 10.14*** Form of Agreement, dated as of April 15, 1997, by and among the Company, Warburg, Pincus Ventures, L.P., NationsBanc Investment Corp. and the Investors (as defined therein). 10.15 Voting Agreement, dated as of September 11, 1998, by and among the Company, Warburg, Pincus Ventures, L.P. and Warburg, Pincus & Co. 10.16***** Amended and Restated Knoll, Inc. 1997 Stock Incentive.
Exhibit Number Description Page - ---------- ------------------------------------------------------------------------------------------------ ------------ 21** Subsidiaries of the Registrant. 23 Consent of Independent Auditors. 27 Financial Data Schedule.
- ----------------------- * Incorporated by reference to the Company's Registration Statement on Form S-4 (File No. 333-2972), which was declared effective by the Commission on June 12, 1996. ** Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. *** Incorporated by reference to the Company's Registration Statement on Form S-1 (File No. 333-23399), which was declared effective by the Commission on May 9, 1997. **** Incorporated by reference to the Company's Registration Statement on Form S-1 (File No. 333-36407), which was filed on September 25, 1997 and subsequently withdrawn. ***** Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1997. EX-10.11 2 AMENDMENT # 2 TO EMPLOYMENT AGREEMENT EXHIBIT 10.11 AMENDMENT #2 TO EMPLOYMENT AGREEMENT WHEREAS, Knoll, Inc. (formerly TKG Acquisition Corp.) (the "Company") and Andrew B. Cogan (the "Employee") have entered into an Employment Agreement, dated as of February 29, 1996, as amended on April 30, 1997, (the "Employment Agreement"); and WHEREAS, pursuant to resolutions of the Compensation Committee of the Company's board of directors and the Company's full board of directors, the Company and the Employee have agreed to amend the Employment Agreement. NOW, THEREFORE, effective as of the date written below, the Employment Agreement is amended as follows: 1. Employee is promoted to the position of Executive Vice President -Marketing and Product Development. 2. Employee's base salary is increased to $250,000 per year. IN WITNESS WHEREOF, the parties have executed this Amendment as of this 1st day of August 1998. KNOLL, INC. By: /s/ John H. Lynch ------------------------- /s/ Andrew B. Cogan ------------------------- Andrew B. Cogan EX-10.15 3 VOTING AGREEMENT, DATED AS OF 09-11-1998 EXHIBIT 10.15 VOTING AGREEMENT VOTING AGREEMENT dated September 11, 1998, by and among Knoll, Inc., a Delaware corporation (the "Company"); Warburg, Pincus Ventures, L.P., a Delaware ------- limited partnership ("Ventures"); and Warburg, Pincus & Co., a New York general -------- partnership ("Warburg"). Certain terms used in this Agreement are defined in ------- Section 1 below. WHEREAS, Ventures and the other Warburg Holders currently hold less than 49.9% of the issued and outstanding common stock, par value $.01 per share, of the Company (the "Common Stock"), which is the only Voting Stock now ------------ outstanding; and WHEREAS, the Company has announced that it has authorized the purchase, from time to time, of up to 3,000,000 shares of Common Stock (the "Announced --------- Repurchase"), which purchases could have the effect of increasing the percentage - ---------- of the Common Stock owned by Ventures and the other Warburg Holders to over 49.9% of the shares of Common Stock issued and outstanding; and WHEREAS, the parties hereto desire that, whether or not all or any portion of the Announced Repurchase is consummated, Ventures and the other Warburg Holders not exercise voting power with respect to Common Stock currently held by them that exceeds 49.9% of the Total Voting Power; NOW, THEREFORE, intending to be legally bound, and in consideration of the mutual covenants herein contained, the parties hereto hereby agree as follows: 1. Certain Definitions. As used in this Agreement, the following words ------------------- shall have the following meanings: (a) "Proposal" shall mean any matter as to which a Vote is taken. -------- (b) "Specified Share Limitation Number" shall mean, with respect to the --------------------------------- Vote on any Proposal, the difference between (x) 49.9% of the Total Voting Power and (y) the number of Votes cast or given by the Warburg Holders other than Ventures. (c) "Specified Shares" shall mean the 20,709,922 shares of Common Stock ---------------- owned by Ventures as of the date of this Agreement. (d) "Total Voting Power" shall mean, with respect to any Proposal, the ------------------ total number of Votes that may be Voted on such Proposal. (e) "Vote" shall mean a vote of the shares of Voting Stock at a meeting of ---- the stockholders of the Company (or one or more classes thereof), or a written consent procedure in respect of Voting Stock in lieu of a vote at a meeting of the stockholders of the Company (or one or more classes thereof). "Vote" shall ---- also mean a vote cast or written consent given in respect of a share of Voting Stock. Correlative terms shall have meanings consistent with the foregoing. (f) "Voting Stock" shall mean, with respect to any Proposal, the shares of ------------ capital stock of the Company that have Voting rights with respect to such Proposal. (g) "Warburg Holders" shall mean Ventures and any affiliate of Ventures, --------------- including, without limitation, Warburg and each of its partners. As used herein, "affiliate" shall have the meaning given to it by Rule 12b-2 under the --------- Securities Exchange Act of 1934, as amended. 2. Voting by Ventures. The parties hereto agree that, in any Vote for ------------------ which the record date or effectiveness date falls during the term of this Agreement, the number of Votes cast or given by Ventures in respect of the Specified Shares shall be limited to the Specified Shares Limitation Number. Votes by Ventures of any Specified Shares in excess of the Specified Shares Limitation Number shall (notwithstanding the manner in which such excess Specified Shares shall have been Voted) be recorded as Votes for or against the Proposal, or in abstention, in the same proportions as shares of Voting Stock held by holders other than the Warburg Holders are Voted for or against the Proposal, or in abstention. 3. Cooperation. The parties hereto agree to use their respective best ----------- efforts to provide information to each other and to take such other steps as may be reasonably necessary or appropriate to effectuate the provisions of this Agreement. 4. Term. This Agreement shall continue in full force and effect for a ---- period of six months from the date hereof, and shall continue in full force and effect thereafter until such time as Ventures shall deliver to the Company a written notice of termination stating that the Specified Shares constitute less than 49.9% of the Common Stock then outstanding. 5. Transfer Rights Unaffected. Nothing in this Agreement shall affect -------------------------- the right of any Warburg Holder to transfer any shares of Voting Stock to any person, including to any other Warburg Holder. -2- 6. Notices. All notices or other communications under this Agreement ------- shall be in writing and shall be given (and shall be deemed to have been duly given upon receipt) by delivery in person, by facsimile or by registered or certified mail, postage prepaid, return receipt requested, addressed as follows (or such other address for a party as shall be specified in a notice given in accordance with this Section 6): If to the Company: Knoll, Inc. 1235 Water Street East Greenville, PA Attention: Patrick A. Milberger Facsimile: 215-679-1013 If to Ventures or Warburg: Warburg, Pincus Ventures, L.P. and Warburg, Pincus & Co. 466 Lexington Avenue New York, NY 10017 Attention: Jeffrey A. Harris Facsimile No.: 212-984-0077 7. Entire Agreement. This Agreement constitutes the entire agreement ---------------- among the parties with respect to the subject matter hereof and supersedes all prior agreements and understandings among the parties with respect thereto. No addition to or modification of any provision of this Agreement shall be binding upon any party hereto unless made in writing and signed by all parties hereto. 8. Specific Performance. The parties hereto agree that irreparable -------------------- damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with its specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof in any Delaware Court, this being in addition to any other remedy to which they are entitled at law or in equity. 9. Governing Law. This Agreement shall be governed by and construed in ------------- accordance with the laws of the State of Delaware, without regard to its rules of conflict of laws. 10. Headings. Headings of the Sections of this Agreement are for the -------- convenience of the parties only, and shall be given no substantive or interpretive effect whatsoever. -3- 11. Counterparts. This Agreement may be executed by the parties hereto in ------------ separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute one and the same instrument. Each counterpart may consist of a number of copies hereof each signed by less than all, but together signed by all of the parties hereto. IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed by their respective officers thereunto duly authorized as of the date first written above. KNOLL, INC. By /s/ Douglas J. Purdom -------------------------------------- Name: Douglas J. Purdom Title: Senior Vice President & Chief Financial Officer WARBURG, PINCUS VENTURES, L.P. By: Warburg, Pincus & Co. Its: General Partner By /s/ Jeffrey A. Harris -------------------------------------- Name: Jeffrey A. Harris Title: Managing Director WARBURG, PINCUS & CO. By /s/ Jeffrey A. Harris -------------------------------------- Name: Jeffrey A. Harris Title: Managing Director -4- EX-23 4 CONSENT OF INDEPENT AUDITORS EXHIBIT 23 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-30277) pertaining to the (i) Knoll Retirement Savings Plan, (ii) Knoll, Inc. 1997 Employee Stock Purchase Plan, and (iii) Knoll, Inc. 1997 Stock Incentive Plan and in the Registration Statement (Form S-8 No. 333-49117) pertaining to the Knoll, Inc. 1997 Stock Incentive Plan, of our report dated January 29, 1999 (except for Note 20, as to which the date is February 10, 1999, and Notes 21 and 25, as to which the date is March 24, 1999), with respect to the consolidated financial statements and schedule of Knoll, Inc. included in the Annual Report on Form 10-K for the year ended December 31, 1998. /s/ Ernst & Young LLP Philadelphia, Pennsylvania March 26, 1999 EX-27 5 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 17,465 0 143,013 5,057 77,113 263,443 257,970 71,803 714,027 168,403 159,255 0 0 418 343,432 714,027 948,691 948,691 572,756 572,756 204,392 0 16,860 157,415 64,371 93,044 0 0 0 93,044 2.25 2.14
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