UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2005

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. 333-118901

KNOLL, INC.

A Delaware Corporation I.R.S. Employer No. 13-3873847

1235 Water Street

East Greenville, PA 18041

Telephone Number (215) 679-7991

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.)    Yes  ¨    No  x

As of August 5, 2005, there were 51,986,689 shares of the Registrant’s common stock, par value $0.01 per share, outstanding.

KNOLL, INC.

TABLE OF CONTENTS FOR FORM 10-Q

Item		Page
	PART I — FINANCIAL INFORMATION
1.	Condensed Consolidated Financial Statements:
	Condensed Consolidated Balance Sheets at June 30, 2005 and December 31, 2004	3
	Condensed Consolidated Statements of Operations for the three months and six months ended June 30, 2005 and 2004	4
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2005 and 2004	5
	Notes to the Condensed Consolidated Financial Statements	6
2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
3.	Quantitative and Qualitative Disclosures about Market Risk	18
4.	Controls and Procedures	19
	PART II — OTHER INFORMATION
1.	Legal Proceedings	20
2.	Unregistered Sales of Equity Securities and Use of Proceeds	20
5.	Other Information	20
6.	Exhibits	20
Signatures		21
Exhibits		22

PART I — FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

KNOLL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars In Thousands, Except Per Share Data)

	June 30, 2005			December 31, 2004
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	11,573		$	9,052
Customer receivables, net		94,091			92,452
Inventories		55,017			49,586
Deferred income taxes		11,042			12,240
Prepaid and other current assets		15,306			9,886
Total current assets		187,029			173,216
Property, plant and equipment, net		144,945			150,992
Goodwill		45,065			45,408
Intangible assets, net		191,660			191,974
Other non-trade receivables		4,790			5,465
Other noncurrent assets		2,690			3,176
Total Assets	$	576,179		$	570,231
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Current maturities of long-term debt	$	100		$	108
Accounts payable		55,408			45,613
Income taxes payable		5,956			4,246
Other current liabilities		48,498			57,737
Total current liabilities		109,962			107,704
Long-term debt		355,695			392,750
Deferred income taxes		47,699			46,823
Postretirement benefits other than pension		24,052			23,513
Pension liability		8,925			7,597
International retirement obligation		5,329			5,771
Other noncurrent liabilities		7,542			7,418
Total liabilities		559,204			591,576
Stockholders’ equity (deficit):
Common stock, $0.01 par value; 200,000,000 shares authorized; 51,493,506 issued and outstanding (net of 123,900 treasury shares) in 2005 and 49,475,364 shares issued and outstanding (net of 118,600 treasury shares) in 2004		515			495
Additional paid-in-capital		71,221			45,275
Unearned stock grant compensation		(21,833	)		(23,833	)
Accumulated deficit		(42,757	)		(55,925	)
Accumulated other comprehensive income		9,829			12,643
Total stockholders’ equity (deficit)		16,975			(21,345	)
Total Liabilities and Stockholders’ Equity (Deficit)	$	576,179		$	570,231

See accompanying notes.

3

KNOLL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Dollars In Thousands, Except Per Share Data)

	Three Months Ended June 30,				Six Months Ended June 30,
	2005		2004		2005		2004
Net sales	$	197,726	$	178,821	$	376,855	$	332,145
Cost of goods sold		129,539		116,647		250,579		222,910
Gross profit		68,187		62,174		126,276		109,235
Selling, general and administrative expenses		44,092		44,149		85,162		79,697
Operating income		24,095		18,025		41,114		29,538
Interest expense		6,000		4,635		12,087		8,367
Other income, net		338		1,329		852		2,747
Income before income tax expense		18,433		14,719		29,879		23,918
Income tax expense		7,065		5,920		11,660		9,893
Net income	$	11,368	$	8,799	$	18,219	$	14,025
Net earnings per share:
Basic	$	.22	$	.19	$	.36	$	.30
Diluted	$	.22	$	.18	$	.35	$	.29
Dividends per share	$	.05	$	—	$	.10	$	—
Weighted-average shares of common stock outstanding:
Basic		50,673,087		46,300,508		50,283,034		46,302,036
Diluted		52,374,156		47,966,190		52,141,719		48,118,485

See accompanying notes.

4

KNOLL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars In Thousands)

	Six Months Ended June 30,
	2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	18,219		$	14,025
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation		9,569			10,692
Amortization of intangible assets		315			941
Foreign currency loss		(257	)		(2,016	)
Tax benefit from exercise of stock options		5,666			—
Amortization of stock grants		2,000			—
Unrealized loss on foreign exchange currency contract		(84	)		(312	)
Other non-cash items		113			(833	)
Changes in assets and liabilities:
Customer receivables		(2,683	)		2,804
Inventories		(6,125	)		(6,846	)
Accounts payable		10,258			1,021
Current and deferred income taxes		1,114			9,030
Other current assets		(992	)		(1,240	)
Other current liabilities		(11,161	)		(6,034	)
Other noncurrent assets and liabilities		5,984			3,310
Cash provided by operating activities		31,936			24,542
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures		(5,076	)		(3,376	)
Proceeds from disposal of property, plant, and equipment		15			—
Cash used in investing activities		(5,061	)		(3,376	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving credit facilities, net		—			19,750
Repayment of long-term debt		(37,000	)		(37,500	)
Deferred Financing Fees		—			(1,522	)
Payment of dividends		(5,051	)		—
Net proceeds from issuance of common stock		18,790			—
Purchase of common stock		(92	)		(130	)
Cash used in financing activities		(23,353	)		(19,402	)
Effect of exchange rate changes on cash and cash equivalents		(1,001	)		(9	)
Increase in cash and cash equivalents		2,521			1,755
Cash and cash equivalents at beginning of period		9,052			11,517
Cash and cash equivalents at end of period	$	11,573		$	13,272

See accompanying notes.

5

KNOLL, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2005

NOTE 1: BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of Knoll, Inc. (the “Company”) have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The consolidated balance sheet of the Company, as of December 31, 2004, was derived from the Company’s audited consolidated balance sheet as of that date. All other consolidated financial statements contained herein are unaudited and reflect all adjustments which are, in the opinion of management, necessary to summarize fairly the financial position of the Company and the results of the Company’s operations and cash flows for the periods presented. All of these adjustments are of normal recurring nature. All intercompany balances and transactions have been eliminated in consolidation. These consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2004.

NOTE 2: NEW ACCOUNTING PRONOUNCEMENTS

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs” (“SFAS 151”). This statement amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing”, to clarify accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). SFAS 151 requires that those items be recognized as current-period charges. In addition, this statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities, however, in periods of abnormally high production, the amount of fixed overhead allocated to products is decreased so that inventories are not measured above cost. The provisions of SFAS 151 are effective for inventory costs incurred in fiscal years beginning after June 15, 2005. As such, the Company is required to adopt these provisions on January 1, 2006 and is currently evaluating the impact of SFAS 151 on the consolidated financial statements.

In December 2004, the FASB issued a revision of SFAS No. 123, “Share-Based Payment” (“SFAS 123(R)”), which supersedes SFAS No. 123 and APB Opinion No. 25. This statement focuses primarily on transactions in which an entity obtains employee services in exchange for share-based payments. The pro forma disclosure previously permitted under SFAS No. 123 will no longer be an alternative to financial statement recognition. Under SFAS 123(R), a public entity generally is required to measure the cost of employee services received in exchange for the award of an equity instrument based on the grant-date fair value of the award, with such cost recognized over the applicable vesting period. In addition, SFAS 123(R) requires an entity to provide certain disclosures in order to assist in understanding the nature of share-based payment transactions and the effects of those transactions on the financial statements. The provisions of SFAS 123(R) were initially required to be applied as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. In April of 2005 the SEC announced that it would provide for a phased-in implementation process requiring the Company to be in compliance with provisions no later than the beginning of the first fiscal year beginning after June 15, 2005. As such, the Company is required to adopt the provisions of SFAS 123(R) by January 1, 2006. Under SFAS No. 123(R), the Company must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at the date of adoption. The permitted transition methods include either retrospective or modified prospective adoption. Under the retrospective option, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The modified prospective method requires that compensation expense be recorded for all unvested stock options at the beginning of the first quarter of adoption of SFAS No. 123(R), while the retrospective method would record compensation expense for all unvested stock options beginning with the first period presented. The Company is currently evaluating the requirements of SFAS 123(R) and expects that adoption of SFAS No. 123(R) may have a material impact on the Company’s consolidated financial position and results of operations. Since the Company has not yet determined the method of adoption or its effect, it has not determined whether the adoption will result in amounts that are similar to the current pro forma disclosures under SFAS No. 123.

6

KNOLL, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 3: INVENTORIES

Inventories, net consist of:

	June 30, 2005		December 31, 2004
	(in thousands)
Raw Materials	$	27,348	$	23,427
Work-in-Process		5,828		6,129
Finished Goods		21,841		20,030
	$	55,017	$	49,586

Inventory reserves for obsolescence and other estimated losses were $6,223 and $6,347 at June 30, 2005 and December 31, 2004, respectively.

NOTE 4: INCOME TAXES

The Company’s income tax provision consists of federal, state and foreign income taxes. The tax provisions for the three months and six months ended June 30, 2005 and 2004 were based on the estimated effective tax rates applicable for the full years ending December 31, 2005 and 2004, after giving effect to items specifically related to the interim periods. The Company’s effective tax rate was 38% and 40% for the three months ended June 30, 2005 and 2004, respectively and 39% and 41% for the six months ended June 30, 2005 and 2004, respectively. The Company’s effective tax rate for the three months and six months ended June 30, 2004 is higher than federal, state and foreign statutory rates as a result of losses realized in certain non-U.S. jurisdictions for which no tax benefits have been recognized. The Company’s non-U.S. operations are expected to approximate breakeven in 2005 and the related taxes are not expected to significantly impact the effective tax rate.

In the fourth quarter of 2004, the United States Congress passed The American Jobs Creation Act of 2004 (the Act), which introduced a new tax deduction for computing taxable profits from the sale of products manufactured in the United States and a special one-time dividends received deduction on the repatriation of certain foreign earnings upon meeting certain criteria. The Act provides for a deduction of 85% of foreign earnings that are repatriated. The deduction is available through December 31, 2005. On July 27, 2005, the Company formalized a plan to repatriate $45 million of foreign earnings from its Canadian operations. The repatriation will take place in two installments over the second half of the 2005 calendar year. The Company expects to repatriate $20 million during the third quarter of 2005 and $25 million during the fourth quarter of 2005. The estimated tax impact of these transactions is expected to result in additional tax expense of $3.6 million which will be recorded in the third quarter of 2005.

In December 2004, the FASB issued Staff Position No. 109-1, “Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004” (“FSP 109-1”). FSP 109-1 clarifies that the benefit of the manufacturer’s tax deduction provided by the new tax law constitutes a special deduction and not a change in tax rate.

7

KNOLL, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 5: DERIVATIVE FINANCIAL INSTRUMENTS

In October 2004, as required by the Company’s new credit facility, the Company entered into an interest rate swap agreement and an interest rate cap agreement for purposes of managing its risk in market interest rate fluctuations. These agreements hedge interest rate risk on a notional amount of approximately $212.5 million of the Company’s borrowings under the credit facility. Under the interest rate swap agreement, the Company pays a fixed rate of interest of 3.010% and receives a variable rate of interest equal to three-month LIBOR, as determined on the last day of each quarterly settlement period on an aggregated notional principal amount of $50.0 million. Changes in the fair value of interest rate swap agreement are recorded in the period the value of the contract changes. The net amount paid or received upon quarterly settlements is recorded as an adjustment to interest expense, while the change in fair value is recorded as a component of accumulated other comprehensive income in the equity section of the balance sheet. The interest rate cap agreement sets a maximum interest rate on a notional amount and utilizes LIBOR as a variable-rate reference. Under the new cap agreement, the Company paid a premium of $425 thousand for a cap rate of 4.250% on $162.5 million of the Company’s borrowing under the new credit facility. Because the interest rate cap did not offset the change in cash flows related to the interest payments on the debt, the interest rate cap agreement is considered ineffective and the change in fair value of the contract is reported in earnings in the period the value of the contract changes as a component of other income (expense). Both the interest rate swap agreement and the interest rate cap agreement mature on September 30, 2006.

The aggregate fair market value of the interest rate swap and cap agreements as of June 30, 2005 was $684 thousand and is included in other non-current assets in the Company’s consolidated balance sheet as of June 30, 2005. For the three month period ended June 30, 2005, the Company recognized an aggregate net loss related to the agreements of $474 thousand, of which $10 thousand was recorded as interest income, $310 thousand was recorded as a loss component of other income in the Company’s consolidated statement of operations, and $174 thousand pre-tax was recorded as a loss in other comprehensive income. For the three month period ended June 30, 2004, the Company recognized no benefit or loss related to the agreements.

For the six month period ended June 30, 2005, the Company recognized an aggregate net benefit related to the agreements of $112 thousand, of which $47 thousand was recorded as interest expense, $116 thousand was recorded as a loss component of other income in the Company’s consolidated statement of operations, and $275 thousand pre-tax was recorded as other comprehensive income. The aggregate fair market value of the interest rate agreements as of December 31, 2004 was $526 thousand, all of which was included in other non-current assets in the Company’s consolidated balance sheet as of December 31, 2004. The Company’s interest rate collar agreements expired in February 2004. For the six month period ended June 30, 2004, the Company recognized an aggregate net loss related to the agreements of $3 thousand, of which $847 thousand was recorded as interest expense and $844 thousand was recorded as a component of other income in the Company’s consolidated statement of operations.

The Company will continue to review its exposure to interest rate fluctuations and evaluate whether it should manage such exposure through derivative transactions.

Foreign Currency Contracts

From time to time, the Company enters into foreign currency forward exchange contracts and foreign currency option contracts to manage its exposure to foreign exchange rates associated with short-term operating receivables of a Canadian subsidiary that are payable by the U.S. operations. The terms of these contracts are generally less than a year. Changes in the fair value of such contracts are reported in earnings in the period the value of the contract changes. The net gain or loss upon settlement and the remaining change in fair value is record as a component of other income (expense).

8

KNOLL, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

As of June 30, 2005, the Company had no outstanding foreign currency contracts. The aggregate fair market value of the foreign currency option contract outstanding at December 31, 2004 was $(87) thousand all of which was included in prepaid and other current assets in the Company’s consolidated balance sheet. For the three month period ended June 30, 2005, the Company recognized no gain or loss related to the agreements. For the three month period ended June 30, 2004, the Company recognized a net gain of $203 thousand. For the six month period ended June 30, 2005, the Company recognized a net gain of $85 thousand related to an agreement settled during the period. For the six month period ended June 30, 2004 the Company recognized a net gain of $303 thousand.

NOTE 6: DIVIDENDS

On June 30, 2005 and March 30, 2005, the Company paid a $.05 per share cash dividend to stockholders of record on June 15, 2005 and March 16, 2005, respectively, resulting in aggregate dividends of $5.1 million (approximately, $2.5 million per declaration).

On August 2, 2005, the Company’s board of directors declared a $.05 per share cash dividend payable on September 30, 2005 to stockholders of record on September 15, 2005.

NOTE 7: CONTINGENT LIABILITIES AND COMMITMENTS

The Company is currently involved in matters of litigation, including environmental contingencies, arising in the ordinary course of business. The Company accrues for such matters when expenditures are probable and reasonably estimable. Based upon information presently known management is of the opinion that such litigation, either individually or in the aggregate, will not have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows.

The Company offers a warranty for all of its products. The specific terms and conditions of those warranties vary depending upon the product sold. The Company estimates the costs that may be incurred under its warranties and records a liability in the amount of such costs at the time product revenue is recognized. Factors that affect the Company’s liability include historical product-failure experience and estimated repair costs for identified matters for each specific product category. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. Adjustments to recorded reserves for pre-existing warranties are not material for each period presented.

	Six Months Ended
	June 30, 2005			June 30, 2004
	(in thousands)
Balance at beginning of period	$	5,019		$	5,647
Provision for warranty claims		3,069			2,691
Warranty claims paid		(3,239	)		(3,320	)
Balance at end of period	$	4,849		$	5,018

9

KNOLL, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The Company is currently involved in various agreements in which it guarantees a percentage of the contract value between certain clients and a financing company. Under the terms of the agreements, the Company is liable for the guaranteed amount upon nonpayment by the client. As of June 30, 2005, the arrangements have expiration dates that range from 2005 to 2008 and the Company has recorded a liability of $535,000, which is the maximum potential liability under these guarantees. No recourse provisions or collateral exists which would allow the Company to recover amounts paid.

NOTE 8: PENSIONS

The Company has adopted the disclosure requirements of SFAS No. 132 (revised 2003), Employers’ Disclosures about Pensions and Other Postretirement Benefits. The following table presents the interim disclosure requirements of components of the Company’s net periodic cost (benefit) related to its defined benefit pension plans for the three months and six months ended June 30, 2005 and 2004, respectively:

	Pension Benefits						Other Benefits
	Three months ended						Three months ended
	June 30, 2005			June 30, 2004			June 30, 2005			June 30, 2004
	(in thousands)
Service cost	$	2,157		$	2,248		$	219		$	218
Interest cost		1,310			1,138			466			405
Expected return on plan assets		(1,225	)		(1,042	)		—			—
Amortization of prior service cost		19			19			(56	)		(56	)
Recognized actuarial loss		45			89			108			67
Net periodic benefit cost	$	2,306		$	2,452		$	737		$	634
	Pension Benefits						Other Benefits
	Six months ended						Six months ended
	June 30, 2005			June 30, 2004			June 30, 2005			June 30, 2004
	(in thousands)
Service cost	$	4,314		$	4,496		$	438		$	436
Interest cost		2,620			2,276			932			810
Expected return on plan assets		(2,450	)		(2,084	)		—			—
Amortization of prior service cost		38			38			(112	)		(112	)
Recognized actuarial loss		90			178			216			134
Net periodic benefit cost	$	4,612		$	4,904		$	1,474		$	1,268

NOTE 9: STOCK PLANS

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. No stock-based employee compensation cost related to the three stock incentive plans is reflected in net income, as all options granted under those plans had an exercise price equal to the fair value of the underlying common stock on the date of grant.

10

KNOLL, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table illustrates the effect on net income if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation.

	Three months ended						Six months ended
	June 30, 2005			June 30, 2004			June 30, 2005			June 30, 2004
	(in thousands, except per share data)
Net income-as reported	$	11,368		$	8,799		$	18,219		$	14,025
Add:
Earned stock grant compensation		1,000			—			2,000			—
Other stock-based compensation (income)		67			12			(47	)		265
Deduct:
Total stock-based employee compensation determined under the fair value based method		(1,606	)		(271	)		(3,128	)		(710	)
As adjusted net income	$	10,829		$	8,540		$	17,044		$	13,580
Earnings per share:
Basic-as reported	$	.22		$	.19		$	.36		$	.30
Diluted-as reported	$	.22		$	.18		$	.35		$	.29
Basic-as adjusted	$	.21		$	.18		$	.34		$	.29
Diluted-as adjusted	$	.21		$	.18		$	.33		$	.28

NOTE 10: OTHER COMPREHENSIVE INCOME

Comprehensive income (loss) consists of net earnings, foreign currency translation adjustments, minimum pension liability, and unrealized gains (losses) on derivatives. Comprehensive income was approximately $8.8 million and $6.5 million for the three months ended June 30, 2005 and June 30, 2004, respectively. For the six months ended June 30, 2005 and June 30, 2004, comprehensive income totaled $15.4 million and $11.2 million, respectively. The following presents the components of “Accumulated Other Comprehensive Income (Loss)” for the period indicated.

Six months ended: June 30, 2005	Beginning Balance			Before- Tax Amount			Tax Benefit (Expense)			Net-of- Tax Amount			Ending Balance
Minimum pension liability	$	(7	)	$	—		$	—		$	—		$	(7	)
Foreign currency translation adjustment		12,500			(2,979	)		—			(2,979	)		9,521
Unrealized gain (loss) on derivative		150			275			(110	)		165			315
Accumulated other comprehensive income (loss), net of tax	$	12,643		$	(2,704	)	$	(110	)	$	(2,814	)	$	9,829

11

KNOLL, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 11: COMMON STOCK AND EARNINGS PER SHARE

Basic earnings per share excludes the dilutive effect of common shares that could potentially be issued, due to the exercise of stock options, and is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted earnings per share include the effect of shares and potential shares issued under the stock incentive plans.

	Three months ended		Six months ended
	June 30, 2005	June 30, 2004	June 30, 2005	June 30, 2004
Weighted average shares of common stock outstanding-basic	50,673	46,301	50,283	46,302
Potentially dilutive shares resulting from stock plans	1,701	1,665	1,859	1,816
Weighted average common shares-diluted	52,374	47,966	52,142	48,118
Antidilutive options not included in the weighted average	50	2,793	50	4,341

Common stock activity for the six months ended June 30, 2005 and 2004, included the repurchase of approximately 5,300 shares for $92 thousand and 7,600 shares for $130 thousand, respectively. For the six months ended June 30, 2005 common stock activity also included the issuance of 2,023,548 shares for $20.3 million under the Company’s stock based compensation plan.

NOTE 12: RECLASSIFICATIONS

Certain reclassifications have been made to the prior year balance sheet to conform to the current year presentation.

12

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s discussion and analysis of financial condition and results of operations provides an account of the Company’s financial performance and financial condition that should be read in conjunction with the accompanying unaudited condensed consolidated financial statements.

Overview

This quarter continued to show signs of industry growth and the Business and Institutional Furniture Manufacturer’s Association (“BIFMA”) most recent forecast report estimates industry shipments to grow by 12.4% for the year of 2005. This is an increase from the 11.3% shipment growth projection of BIFMA published in May 2005. The second quarter also marked our fifth consecutive quarter of year over year sales growth. In addition our backlog, shipments, operating profits, net income, and earnings per share have all increased by double digit percentages over the second quarter of 2004. In June, we were awarded the prestigious Russel Wright Award for the Marketing of Modernism. In addition we received four Best of NeoCon^® awards for our innovative designs and the Office Furniture Dealers Alliance Choice Award for quality of our office systems and our seating, storage and specialty offerings.

In the second quarter of 2005 sales were up 10.6%, operating income increased 33.9% and net income increased 29.5% from the same period a year ago. We continued to see growth across all product categories. Sales volumes continued to increase consistent with the improving overall market condition we are experiencing. Large project activity also continued to gain momentum as we are seeing the number of large dollar orders and projects increase. Increased corporate profitability, growing service sector employment and increased absorption of office space are driving demand for our products. Our Autostrada systems package gained significant traction and our specialty business sales also continued to grow with the new leather and textile introductions and expanded retail and consumer distribution.

Inflation pressures continued to negatively affect our earnings. For the quarter we incurred $5.2 million in commodity and transportation inflation. Deterioration of the U.S. dollar relative to the Canadian dollar also caused us to incur $1.3 million in foreign exchange losses. These inflation costs and foreign exchange losses were partially offset by approximately $3.8 million of price realization, and another $2.0 million of global sourcing and results of our continuous improvement effort. Even with the inflationary pressures and the deterioration of the U.S. dollar relative to the Canadian dollar, we have been able to sustain significant growth in operating profits and net income as compared to the second quarter ended 2004. Our gross margin was relatively flat decreasing 30 basis points from 34.8% in the second quarter of 2004. We expect transportation and oil related commodity inflationary pressures to continue. We plan to continue our efforts to offset inflation.

Critical Accounting Policies

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires us to make estimates and assumptions that affect the reported amounts of certain assets, liabilities, revenues and expenses and the disclosure of certain contingent assets and liabilities. Actual results may differ from such estimates. On an ongoing basis we review our accounting policies and procedures. A more detailed review of our critical accounting policies is contained in the company’s 10-K report for the year ended December 31, 2004. During the first and second quarters of 2005, there have been no material changes in our accounting policies and procedures.

13

Results of Operations

Comparison of the Three Months and Six Months Ended June 30, 2005 and 2004

	Three Months Ended						Six Months Ended
	June 30, 2005			June 30, 2004			June 30, 2005			June 30, 2004
Consolidated Statement of Operations Data:
Net Sales	$	197,726		$	178,821		$	376,855		$	332,145
Gross Profit		68,187			62,174			126,276			109,235
Operating Income		24,095			18,025			41,114			29,538
Interest Expense		6,000			4,635			12,087			8,367
Other Income, net		338			1,329			852			2,747
Income Tax Expense		7,065			5,920			11,660			9,893
Net Income	$	11,368		$	8,799		$	18,219		$	14,025
Statistical and Other Data:
Sales Growth (Decline) from Comparable Prior Year		10.6	%		1.0	%		13.5	%		(2.8	)%
Gross Profit Margin		34.5	%		34.8	%		33.5	%		32.9	%
Backlog	$	131,234		$	116,206		$	131,234		$	116,206

Sales

Sales for the second quarter of 2005 were $197.7 million, an increase of $18.9 million, or 10.6%, from sales of $178.8 million for the second quarter of 2004. Sales for the six months ended June 30, 2005 were $376.9 million, an increase of $44.7 million, or 13.5% from sales of $332.1 million for the same period in the prior year.

The increase in sales for the three months and six months ended June 30, 2005 was spread across all product categories with price realization contributing $3.7 million for the quarter and $5.7 million for the six months.

At June 30, 2005, sales backlog was $131.2 million, an increase of $15.0 million, or 12.9%, from sales backlog of $116.2 million as of June 30, 2004. Backlog is not a significant factor used to predict the Company’s long-term business prospects.

Gross Profit and Operating Income

Gross profit for the second quarter of 2005 was $68.2 million, an increase of $6.0 million or 9.7%, from gross profit of $62.2 million for second quarter of 2004. Gross profit for the six months ended June 30, 2005 was $126.3 million, an increase of $17.1 million or 15.7%, from gross profit of $109.2 million for the same period in the prior year. Operating income for the second quarter of 2005 was $24.1 million, an increase of $6.1 million or 33.9%, from operating income of $18.0 million for the second quarter of 2004. Operating income for the six months ended June 30, 2005 was $41.1 million, an increase of $11.6 million or 39.3%, from operating income of $29.5 million for the same period in 2004. As a percentage of sales, gross profit decreased from 34.8% for the second quarter of 2004 to 34.5% for the second quarter of 2005. Operating income as a percentage of sales increased from 10.1% in the second quarter of 2004 to 12.2% over the same period of 2005. For the six months ended June 30, gross profit as a percentage of sales increased from 32.9% in 2004 to 33.5% in 2005. Operating income as a percentage of sales increased from 8.9% in 2004 to 10.9% in 2005.

The increase in gross profit for the quarter and the six months year-to-date resulted from better absorption of overhead on incremental volume by approximately $8.2 million and $20.6 million, respectively. Gross profit also benefited from improved pricing by approximately $3.7 and $5.7 million, respectively, and $2.0 and $5.2 million, respectively, of cost savings realized from ongoing global sourcing initiatives and continuous improvement programs. Offsetting these cost savings were $5.2 million of commodity and transportation inflation for the quarter and $10.7 year-to-date as well as $1.7 million of unfavorable exchange rate impact in the quarter and $3.4 million year-to-date.

14

Selling, general and administrative expense for the second quarter 2005 was $44.1 million or 22.3% of sales compared to $44.1 million, or 24.7% of sales for the second quarter 2004. Operating expense for the six months ended June 30, 2005 was $85.2 million or 22.6% of sales compared to $79.7 million or 24.0% of sales for the same period in 2004. The increase in operating expenses for the six months ended June 30, 2005 resulted from $1.4 million increased sales compensation as a result of our higher sales and strong profit performance. Increased employee costs of approximately $2.0 million, increased costs of approximately $1.2 million relating to the Company’s trademarks and to the launch of the Knoll Space Program, and the costs of operating as a public company of approximately $1.3 million also negatively impacted operating expenses. Operating expenses in 2004 were also increased as a result of higher product development costs of $1.5 million tied to the 2004 Neocon introduction of Autostrada and to costs associated with our seating product line.

Interest Expense

Interest expense for the quarter and six months ended June 30, 2005 was $6.0 million and $12.1 million, an increase of $1.4 million and $3.7 million, respectively, from the same periods in 2004. The increase in interest expense is largely due to increasing interest rates. The new credit facility entered into on September 30, 2004 bears interest at higher rates than the prior facility. The weighted average rate for the second quarter of 2005 was approximately 6.0%. The weighted average rate for the same period of 2004 was approximately 2.0%.

Other Income (Expense), net

Other income for the second quarter of 2005 was $0.3 million comprised primarily of the change in fair value of the interest rate swap and cap agreements and the foreign exchange transaction gains and losses. Other income for the second quarter of 2004 was $1.3 million comprised primarily of a foreign exchange transaction gain. Other income for the six months ended June 30, 2005 was $0.9 million comprised primarily of a $0.5 million gain on foreign exchange transactions. Other income for the six months ended June 30, 2004 was $2.7 million comprised primarily of a $1.9 million gain on foreign exchange transactions and a $0.8 million unrealized gain from the change in fair value of the interest rate swap and cap agreements.

Income Tax Expense

The mix of pretax income and the varying effective tax rates in the countries in which we operate directly affects our consolidated effective tax rate. Our mix of pretax income was primarily responsible for the net decrease in the effective tax rate from 40.2% in the first quarter of 2004 to 38.3% for the same period in 2005. The effective tax rate for the six months ended June 30, 2005 was 39.0% and 41.4% for the same period in 2004. Non U.S. tax losses for which a tax benefit was not recorded increased the 2004 effective tax rate by approximately 2% over the anticipated statutory rate.

Liquidity and Capital Resources

The following table highlights certain key cash flows and capital information pertinent to the discussion that follows:

	Six Months Ended
	June 30, 2005		June 30, 2004
	(in thousands)
Cash provided by operating activities	$	31,936	$	24,542
Capital expenditures		5,076		3,376
Net cash used in investing activities		5,061		3,376
Purchase of common stock		92		130
Net repayment of debt		37,000		17,750
Payment of dividends		5,051		—
Net proceeds from issuance of stock		18,790		—
Net cash used for financing activities		23,353		19,402

15

Historically cash generated by operating activities has been used to fund working capital, capital expenditures and scheduled payments of principal and debt service. Our capital expenditures are typically for new product tooling and manufacturing equipment. These capital expenditures support new products and continuous improvements in our manufacturing processes.

Operating cash flows were $31.9 million and $24.5 million the six month period ended June 30, 2005 and 2004. The increase in operating cash flow in 2005 was largely the result of the year-over-year improvement in net earnings plus non-cash amortizations of stock grants of $2.0 million with the remainder primarily due to changes in working capital.

For the six month period ended June 30, 2005, we used available cash, including the $31.9 million of net cash from operations and $18.8 million of proceeds from the issuance of common stock to fund $5.1 million in capital expenditures, repay $37.0 million of existing debt, and fund dividend payments to shareholders totaling $5.1 million. For the six month period ended June 30, 2004 we used available cash, including the $24.5 million of net cash from operations and $19.8 million of net borrowings under our then-existing revolving credit facility, to fund $3.4 million of capital expenditures, repay $37.5 million of debt and pay $1.5 million of premiums for the early extinguishment of debt.

Cash used in investing activities was $5.1 million for the six month period ended June 30, 2005 and $3.4 million for the same period in 2004. Fluctuations in cash used in investing activities are primarily attributable to the levels of capital expenditures. We estimate that our capital expenditures in 2005 will be approximately $12.0 million.

We continue to have significant liquidity requirements. In addition to the cash requirements for debt service, we have commitments under our operating leases for certain machinery and equipment as well as manufacturing, warehousing, showroom and other facilities used in our operations.

We are currently in compliance with all of the covenants and conditions under our credit facility. We believe that existing cash balances and internally generated cash flows, together with borrowings available under our new revolving credit facility, will be sufficient to fund normal working capital needs, capital spending requirements, debt service requirements and dividend payments for at least the next twelve months. In addition, we believe that we will have adequate funds available to meet long-term cash requirements and that we will be able to comply with the covenants under the credit agreement. Future principal debt payments may be paid out of cash flows from operations or from future refinancing of our debt or equity issuances. However, our ability to make scheduled payments of principal, to pay interest on or to refinance our indebtedness, to satisfy our other debt obligations and to pay dividends to stockholders will depend upon our future operating performance, which will be affected by general economic, financial, competitive, legislative, regulatory, business and other factors beyond our control.

Environmental Matters

Our past and present business operations and the past and present ownership and operation of manufacturing plants on real property are subject to extensive and changing federal, state, local and foreign environmental laws and regulations, including those relating to discharges to air, water and land, the handling and disposal of solid and hazardous waste and the cleanup of properties affected by hazardous substances. As a result, we are involved from time to time in administrative and judicial proceedings and inquiries relating to environmental matters and could become subject to fines or penalties related thereto. We 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 us, some of which may be material. We have been identified as a potentially responsible party pursuant to CERCLA for remediation costs associated with waste disposal sites that we previously used. The remediation costs and our allocated share at some of these CERCLA sites are unknown. We may also be subject to claims for personal injury or contribution relating to CERCLA sites. We reserve amounts for such matters when expenditures are probable and reasonably estimable. Based upon information presently known management is of the opinion that such litigation, either individually or in the aggregate, will not have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows.

16

Off-Balance Sheet Arrangements

We do not currently have, nor have we ever had, any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. As a result, we are not materially exposed to any financing, liquidity, market or credit risk that could have arisen if we had engaged in these relationships.

Section 404 of the Sarbanes-Oxley Act of 2002

Beginning in late 2004, we began a process to document and evaluate our internal controls over financial reporting in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations, which require annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our independent auditors addressing these assessments in 2005. In this regard, management has dedicated internal resources, engaged outside consultants and adopted a detailed work plan to (i) assess and document the adequacy of internal controls over financial reporting, (ii) take steps to improve control processes, where appropriate, (iii) validate through testing that controls are functioning as documented and (iv) implement a continuous reporting and improvement process for internal control over financial reporting. Our efforts to commence compliance with Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations regarding our assessment of our internal controls over financial reporting have resulted, and are likely to continue to result, in increased expenses. Management and our audit committee have given our compliance with Section 404 the highest priority. We cannot be certain that these measures will ensure that we implement and maintain adequate controls over our financial processes and reporting in the future. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. If we fail to correct any issues in the design or operating effectiveness of internal controls over financial reporting or fail to prevent fraud, current and potential shareholders could lose confidence in our financial reporting, which could harm our business and the trading price of our common stock.

Forward-looking Statements

This Form 10-Q contains forward-looking statements, principally in the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” Statements and financial discussion and analysis contained in this Form 10-Q that are not historical facts are forward-looking statements. These statements discuss goals, intentions and expectations as to future trends, plans, events, results of operations or financial condition, or state other information relating to us, based on our current beliefs as well as assumptions made by us and information currently available to us. Forward-looking statements generally will be accompanied by words such as “anticipate”, “believe”, “could”, “estimate”, “expect”, “forecast”, “intend”, “may”, “possible”, “potential”, “predict”, “project”, or other similar words, phrases or expressions. Although we believe these forward-looking statements are reasonable, they are based upon a number of assumptions concerning future conditions, any or all of which may ultimately prove to be inaccurate. Important factors that could cause actual results to differ materially from the forward-looking statements include, without limitation: changes in raw material prices and availability; the risks described on the previous pages; changes in the financial stability of our clients resulting in decreased corporate spending and service sector employment; changes in relationships with clients; the mix of products sold and of clients purchasing our products; the success of new technology initiatives; changes in business strategies and decisions; competition from our competitors; our ability to recruit and retain an experienced management team; restrictions on government spending resulting in fewer sales to one of our largest customers; restrictions in our credit agreement on spending; our ability to protect our patents, copyrights and trademarks; our reliance on furniture dealers to produce sales; claims of third parties arising from allegations of patent, copyright and trademark infringements; violations of environment laws and regulations; potential labor disruptions; adequacy of our insurance policies; the availability of future capital; and currency rate fluctuations. The factors identified above are believed to be important factors (but not necessarily all of the important factors) that could cause actual results to differ materially from those expressed in any forward-looking statement. Unpredictable or unknown factors could also have material adverse effects on us. All forward-looking statements included in this Form 10-Q are expressly qualified in their entirety by the foregoing cautionary statements. Except as required under the Federal securities laws and rules regulations of the SEC, we undertake no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events, or otherwise.

17

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

During the normal course of business, the Company is routinely subjected to market risk associated with interest rate movements and foreign currency exchange rate movements. Interest rate risk arises from the Company’s debt obligations and related interest rate cap and swap agreements. Foreign currency exchange rate risk arises from its non-U.S. operations and purchases of inventory from foreign suppliers.

The Company has risk in its exposure to certain material and transportation costs. The Company’s largest raw material costs are for steel and plastics. Steel is the primary raw material used in the manufacture of the Company’s products. The prices of plastic are sensitive to the cost of oil, which is used in the manufacture of plastics, and have increased significantly in recent months. We estimate that materials costs for steel and plastic will increase by $12.5 million by the end of 2005. Transportation costs are expected to increase by approximately $3.3 million in 2005. The Company is currently working to offset these price changes in raw materials and transportation through our global sourcing initiatives, cost improvements and price increases to our products.

Interest Rate Risk

The Company has both fixed and variable rate debt obligations 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 swap and cap agreements for other than trading purposes in order to manage its exposure to fluctuations in interest rates on the Company’s variable-rate debt. Such agreements effectively convert $212.5 million of the Company’s variable-rate debt to a fixed-rate basis, utilizing the three-month London Interbank Offered Rate, or LIBOR, as a floating rate reference. Fluctuations in LIBOR affect both the Company’s net financial instrument position and the amount of cash to be paid or received by it, if any, under these agreements.

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 Company’s production costs, profit margins and competitive position 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 the Company’s products are sold. Additionally, as the Company reports currency in the U.S. dollar, our financial position is affected by the strength of the currencies in countries where it 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 Euro. Approximately 12.2% of the Company’s revenues for the first half of 2005 and 10.8% in the same period for 2004, and 35.6% of its cost of goods sold for the first half of 2005 and 32.1% for the same period in 2004, were denominated in currencies other than the U.S. dollar. Foreign currency exchange rate fluctuations resulted in a $0.5 million gain for the second quarter of 2005, and a $1.9 million gain for the same period in 2004.

From time to time, the Company enters into foreign currency forward exchange contracts and foreign currency option contracts for other than trading purposes in order to manage its exposure to foreign exchange rates associated with short-term operating receivables of a Canadian subsidiary that are payable by the Company’s U.S. operations. The terms of these contracts are generally less than a year. Changes in the fair value of such contracts are reported in earnings in the period the value of the contract changes.

On April 12, 2005, the Company entered into a foreign currency option contract with a notional amount of $65,000,000 CAD to hedge its exposure to fluctuations in the Canadian dollar. This contract expired June 30, 2005. No gain or loss was recognized in settlement of this contract.

18

ITEM 4. CONTROLS AND PROCEDURES

With the participation of management, the Company’s Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) as of June 30, 2005, have concluded that, as of such date, the Company’s disclosure controls and procedures were adequate and effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission’s rules and forms.

There were no changes in our internal controls over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

19

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND THE USE OF PROCEEDS

Repurchases of Equity Securities

The following is a summary of share repurchase activity during the period from April 1, 2005 through June 30, 2005.

All shares repurchased were in accordance with Company’s 401(k) retirement savings plan. The plan provides that the Company make discretionary contributions of common stock to participant accounts on behalf of all actively employed U.S. participants. Upon retirement, death, or termination of employment, participants must sell vested shares of common stock back to the plan or the Company, and any shares that are not vested at such time are forfeited by the participant and held by the plan.

Period	Total Number of Shares Purchased (a)	Average Price Paid per Share (b)
April 1, 2005 –April 30, 2005	400	16.74
May 1, 2005 – May 31, 2005	100	17.37
June 1, 2005 –June 30, 2005	700	17.20

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

Exhibit Number	Description
31.1	Sarbanes-Oxley Act of 2002, Section 302 Certification for Chief Executive Officer.
31.2	Sarbanes-Oxley Act of 2002, Section 302 Certification for Chief Financial Officer.
32.1	Sarbanes-Oxley Act of 2002, Section 906 Certification for Chief Executive Officer.
32.2	Sarbanes-Oxley Act of 2002, Section 906 Certification for Chief Financial Officer.

20

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

KNOLL, INC.

Date: August 12, 2005
By:	/s/ Andrew B. Cogan
	Andrew B. Cogan
	Chief Executive Officer, Knoll, Inc. and Director
Date: August 12, 2005
By:	/s/ Barry L. McCabe
	Barry L. McCabe
	Chief Financial Officer

21