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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
or
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
Commission File No. 001-12907
KNOLL, INC.
A Delaware Corporation I.R.S. Employer No. 13-3873847
1235 Water Street
East Greenville, PA 18041
Telephone Number (215) 679-7991
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
------------------- ------------------------------------
Common Stock, par value New York Stock Exchange, Inc.
$0.01 per share
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
As of March 20, 1998, the aggregate market value of the voting stock held by
non-affiliates of the Registrant, based on the closing price of these shares
on the New York Stock Exchange, Inc., was $642,512,243. Directors, executive
officers and beneficial owners of 5% or more of the Registrant's stock are
considered affiliates of the Registrant.
As of March 20, 1998, there were 43,404,474 shares of the Registrant's common
stock, par value $0.01 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Shareholders'
Meeting to be held on May 19, 1998 are incorporated by reference into Part III
of this Form 10-K.
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TABLE OF CONTENTS
ITEM PAGE
- ---- ----
Part I
1. Business............................................................... 1
2. Properties............................................................. 7
3. Legal Proceedings...................................................... 7
4. Submission of Matters to a Vote of Security Holders.................... 7
Part II
5. Market for Registrant's Common Equity and Related Stockholder Matters.. 8
6. Selected Financial Data................................................ 8
7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 11
8. Financial Statements and Supplementary Data............................ 18
9. Changes in and Disagreements with Accountants on Accounting and Finan-
cial Disclosure........................................................ 18
Part III
10. Directors and Executive Officers of the Registrant..................... 19
11. Executive Compensation................................................. 19
12. Security Ownership of Certain Beneficial Owners and Management......... 19
13. Certain Relationships and Related Transactions......................... 19
Part IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........ 20
Signatures................................................................. 22
PART I
ITEM 1. BUSINESS
GENERAL
Knoll, Inc., a Delaware corporation, is the successor by merger to the
business and operations of The Knoll Group, Inc. and related entities ("The
Knoll Group" or the "Predecessor"), which were acquired on February 29, 1996
(the "Acquisition") from Westinghouse Electric Corporation, currently known as
CBS Corporation ("Westinghouse"). The Knoll Group was created by Westinghouse
in 1989 and 1990, when it acquired The Shaw-Walker Company, Reff Inc. and
Knoll International, Inc. and combined them with its Westinghouse Furniture
Systems division.
The Acquisition was completed by T.K.G. Acquisition Corp. ("TKG"), a
corporation majority-owned by Warburg, Pincus Ventures, L.P. ("Warburg") and
whose other stockholders were NationsBanc Investment Corp. and members of
Knoll, Inc. management. In the Acquisition, a wholly owned subsidiary of TKG
acquired all of the outstanding capital stock of The Knoll Group and was
merged, together with The Knoll Group, Inc. into the principal operating
company of The Knoll Group, which changed its name in the merger to "Knoll,
Inc." On March 14, 1997, Knoll, Inc. was merged into TKG, which changed its
name in the merger to "Knoll, Inc." Unless the context requires or specifies
otherwise, the terms "Knoll" and the "Company" refer to Knoll, Inc., its
subsidiaries and predecessor entities as a combined entity.
The Company completed an initial public offering of its common stock during
the second quarter of 1997. An aggregate of 9,200,000 shares, including
720,000 shares sold by a selling stockholder, were sold during May and June
1997 at $17.00 per share.
The Company is engaged in the design, manufacture and distribution of office
furniture products and accessories, focusing on the middle to high-end of the
contract furniture market. The Company's principal executive offices are
located at 1235 Water Street, East Greenville, Pennsylvania 18041, and its
telephone number is (215) 679-7991.
Except as otherwise indicated, the market and Company market share data
contained in this Form 10-K are based on information from The Business and
Institutional Furniture Manufacturer's Association ("BIFMA"), the United
States ("U.S.") office furniture trade association. The Company believes that
such data are considered within the industry to be the best available and
generally are indicative of the Company's relative market share and
competitive position.
INDUSTRY OVERVIEW
The U.S. office furniture market consists of five major product categories:
office systems, seating, storage, desks and casegoods and tables. The
following table indicates the percentage of sales that each product category
contributed to the estimated U.S. office furniture industry in 1997.
U.S. % OF U.S.
PRODUCT CATEGORY MARKET SIZE MARKET
---------------- ------------- ---------
(in billions)
Office systems....................................... $4.1 35.3%
Seating.............................................. 2.8 24.6
Storage.............................................. 1.6 13.8
Desks and casegoods.................................. 1.9 16.4
Tables............................................... 0.7 6.5
Office systems consist of movable panels, work surfaces and storage units,
electrical distribution, lighting, organizing tools and freestanding
components. These modular systems are popular with customers who require
flexible space configurations or where many people share open floor space, as
is common in modern office
1
buildings. Both seating, ranging from executive desk chairs to task chairs and
side chairs, and storage products, such as overhead shelving, file cabinets
and desk pedestals (file cabinets that serve to support desks), are sold to
users of office systems and also are sold separately to non-systems users.
Desks and tables range from classic writing desks in private offices to
conference and meeting room tables that can accommodate sophisticated
technological demands.
The Company believes that fundamental shifts in the nature of corporate
organizational structures, technology and work processes are driving growth in
the office furniture industry. Companies increasingly use workplace design and
furniture purchase decisions as catalysts for organizational and cultural
change. Several significant factors that influence this change include:
continued corporate reengineering, restructuring and reorganizing; corporate
relocations; new office technology and the resulting necessity for improved
wire and data management; and heightened sensitivity to concerns about
ergonomic standards. In addition, other factors such as white collar
employment levels, corporate cash flow and non-residential construction
reflect certain macroeconomic conditions which management believes influence
industry growth.
PRODUCTS
The Company offers a broad range of office furniture products and
accessories that support the Company's strategy of being a one-stop source for
quality office furniture. The Company's five basic product categories are as
follows: (i) office systems, comprised mainly of the Reff, Morrison and Equity
product lines; (ii) seating, including the Sapper, Bulldog, Parachute and SoHo
chairs; (iii) storage solutions and filing cabinets, including the Calibre
collection; (iv) desks and casegoods, including bookcases and credenzas; and
(v) tables. The Company has a KnollStudio collection that features its
signature design classics, including high image side chairs, sofas, desks and
tables for both office and home use. The Company also offers its own lines of
textiles sold under the KnollTextiles brand, lines of leather products sold
under the Spinneybeck name and a line of desk, office and computer accessories
under the KnollExtra brand that complement its furniture products and are also
sold to other manufacturers or with products manufactured by others.
The following is a description of the Company's major product categories and
lines:
Office Systems
The Company offers a complete line of systems products in order to meet the
needs of a variety of organizations. Systems may be used for teamwork
settings, private offices and open floor plans and are composed of adjustable
partitions, work surfaces, storage cabinets and electrical and lighting
systems that can be moved, re-configured and re-used within the office.
Systems therefore offer a cost effective and flexible alternative to
traditional drywall office construction. The Company has focused on this area
of the office furniture industry because it is the largest category, typically
provides attractive gross margins and often leads to repeat and add-on sales
of additional systems, complementary furniture and furniture accessories.
Office systems accounted for approximately 68.5% of the Company's sales in
1997, 66.7% of sales in 1996 and 68.2% of sales in 1995.
The Company has developed two new office systems product lines, Currents and
Dividends, that address new category segments and price points where the
Company's current product offerings may be limited and where management
believes that demand for quality products has been under-served. These
products will be available for sale in the first half of 1998. The Company
believes its brand identity, superior design and complementary product
offerings give it a competitive advantage in launching new products.
Seating
The Company believes that the office seating market includes three major
segments: the "appearance," "comfort" and "basic" segments. Key customer
criteria in seating include superior ergonomics, aesthetics, comfort and
quality, all of which the Company believes to be consistent with its strengths
and reputation. The Company offers a complete line of seating in the
appearance and comfort segments at various price, appearance, comfort and
performance levels. The majority of sales in the U.S. seating market are made
to the same customers as are the office systems sales.
2
Storage Solutions and Filing Cabinets
The Company offers a variety of storage options, as part of its Calibre
collection, designed to be integrated with its office systems as well as with
its and others' stand-alone furniture. These products consist of stand-alone
metal filing, storage and desk products that integrate into and support the
Company's systems sales. They also function as free-standing furniture in
private offices or open-plan environments. In addition, these products enable
the Company to sell products to businesses whose office furniture systems are
provided by the Company's competitors.
Desks and Casegoods
The Company's collections of stand-alone wood furniture items, such as
desks, bookshelves and credenzas, are available in a range of designs and
price points. These products combine contemporary styling with sophisticated
workplace solutions and attract a wide variety of customers, from those
conducting large office reconfigurations to small retail purchasers.
Tables
The Company offers an innovative line of adjustable Interaction tables.
Interaction tables are designed to be integrated into the Company's systems
lines and to provide customers with ergonomically superior work surfaces.
Additionally, these tables are often sold as stand-alone products to non-
systems customers. The Company also offers an award winning line of Propeller
meeting and conference tables that provide advanced wire management and
technology support while offering sufficient flexibility to allow end users to
reconfigure a meeting room quickly and easily to accommodate their specific
needs.
KnollStudio
The Company's historically significant KnollStudio collection serves the
design-conscious segment of the fine contract furniture market, providing the
architect and design community and customers with sophisticated furniture for
high-profile office and home uses. KnollStudio provides a marketing umbrella
for the full range of the Company's office products and is recognized as the
"design engine" of the Company. KnollStudio products, including a wide variety
of chairs and sofas, as well as conference, training, side and dining tables,
were created by many of this century's most prominent architects and
designers, such as Ludwig Mies van der Rohe, Marcel Breuer, Eero Saarinen and
Frank Gehry, for prestigious corporate and residential interiors. This line
includes complete collections by individual designers as well as distinctive
single items.
Maya Lin, the internationally-known designer of the National Veterans
Memorial in Washington, D.C., recently developed a signature collection of
products for the KnollStudio line. The products are targeted for introduction
in the second half of 1998, in conjunction with the celebration of the
Company's 60th anniversary.
Complementary Products
The Company offers product lines that complement its primary office systems
and seating business, permitting it to sell a complete package of office
interiors by supplying many of its own component products. Such products help
maintain the Company's unique design image by incorporating elements developed
by its own team of designers.
KnollExtra. KnollExtra is a rapidly growing line of desk and office
accessories, including letter trays, sorters, binder bins, file holders,
calendars, desk pads, planters, wastebaskets and bookends. In addition,
KnollExtra offers a number of computer accessories and ergonomic office
products.
KnollTextiles. KnollTextiles offers a wide range of coverings for walls,
panels and seating. KnollTextiles was established in 1947 to develop high
quality fabrics for Knoll furniture. These products allow the Company to
distinguish its product offerings by providing specialty fabric options and
flexibility in fabric selection and application. As it does with its furniture
lines, the Company uses many independent designers to create its fabrics,
which has helped it establish what management believes to be a unique
reputation for textile design. Not
3
only are KnollTextiles coverings applied to Knoll furniture, but they are also
sold to customers for use on other manufacturers' products, thereby allowing
the Company to benefit from its competitors' sales.
Leather. Spinneybeck Enterprises, Inc., a wholly owned subsidiary of the
Company, supplies quality upholstery leather to the Company, to other
furniture manufacturers and to aviation, custom coach and boating
manufacturers.
European Products
Knoll Europe has a broad product offering which allows customers to single-
source a complete office environment, including certain products designed
specifically for the European market. Knoll Europe's core product categories
include: (i) office systems, including the Hannah Desking System and the
recently introduced PL1 System, which are targeted to Northern Europe, the
Alessandri System, which is targeted to the French market and the SoHo Desking
System, which has broad market appeal; (ii) KnollStudio, which serves the
image and design-oriented segment of the fine furniture market; (iii) seating,
including a comprehensive range of chairs such as Sapper, Bulldog, and
Parachute; and (iv) cabinets, which are designed to complement its systems
products. The Company also sells its products designed and manufactured in
North America to the international operations of its core North American
customers.
PRODUCT DESIGN AND DEVELOPMENT
Knoll's design philosophy is linked to its commitment to working with the
world's preeminent designers to develop products that delight and inspire. The
Company's collection of classic and current designs includes works by such
internationally recognized architects and designers as Ludwig Mies van der
Rohe, Marcel Breuer, Eero Saarinen, Harry Bertoia, Massimo Vignelli and Frank
Gehry. Today, the Company continues to engage prominent outside architects and
designers, such as Maya Lin, to create new products and product enhancements.
By combining the creative vision of architects and designers with a corporate
commitment to products which address changing business needs, the Company
seeks to launch new offerings which achieve recognition in the architect and
design community and generate strong demand among corporate customers.
Since 1994, under the leadership of Carl G. Magnusson, the Company's Senior
Vice President-Design, the Company has won over 20 design awards for its
recent product introductions. An important part of the Company's product
development capabilities is its responsiveness to customer needs and
flexibility to handle customized manufacturing requests. In order to develop
products across its product range, the Company works closely with independent
designers from a number of industries. By utilizing these long-standing design
relationships and listening to customers to analyze their needs, the Company
has redesigned or enhanced virtually every product line since 1994 in order to
better meet customer preferences.
SALES AND DISTRIBUTION
Knoll's customers are typically Fortune 1000 companies. The Company employs
approximately 320 direct sales representatives, who work closely with its
approximately 230 independent dealers in North America to present the
Company's products to prospective customers. The sales force, in conjunction
with the dealer network, has close relationships with architects, designers
and corporate facility managers, who often have a significant influence on
product selection for large orders.
In addition to coordinating sales efforts with the Company's sales
representatives, the Company's dealers generally handle project management,
installation and maintenance for the account after the initial product
selection and sale. Although many of these dealers also carry products of
other manufacturers, none of them acts as a dealer for the Company's principal
direct competitors. The Company has not experienced significant turnover in
its dealer network except at its own initiation, as the dealer's economic
investment in learning all aspects of a particular manufacturer's product
offerings and the value of the relationships the dealer forms with the Company
and with customers discourage dealers from changing their vendor affiliations.
The Company is
4
not dependent on any one of its dealers, the largest of them accounting for
less than 5.0% of the Company's North American sales in 1997. No single
customer represented more than 3.0% of the Company's North American sales
during 1997. However, a number of U.S. government agencies purchase the
Company's products through multiple contracts with the General Services
Administration ("GSA"). Sales to the GSA aggregated approximately 8.0% in
1997.
In Europe, the Company sells its products in largely the same manner as it
does in North America, through a direct sales force and a network of dealers,
though each major European market has its own distinct characteristics. The
European market accounted for approximately 6.9% of the Company's sales in
1997. In the Latin American and Asia-Pacific markets, which accounted for 1.8%
of the Company's sales in 1997, the Company uses both dealers and independent
licensees.
MANUFACTURING AND OPERATIONS
The Company operates four manufacturing sites in North America, with plants
located in East Greenville, Pennsylvania; Grand Rapids and Muskegon, Michigan;
and Toronto, Canada. In addition, the Company has two plants in Italy: one in
Foligno and one in Graffignana. All of the Company's plants are registered
under ISO 9000, an internationally developed set of quality criteria for
manufacturing companies.
RAW MATERIALS AND SUPPLIERS
The Company's purchasing is centralized in its East Greenville facility.
This centralization, in addition to close working relationships formed with
its main suppliers, has enabled the Company to focus on achieving purchasing
economies and "just-in-time" inventory practices. The Company utilizes steel,
lumber, paper, paint, plastics, laminates, particleboard, veneers, glass,
fabrics, leathers and upholstery filling material. Management currently
maintains no long-term supply contracts and believes that the supply sources
for these materials are adequate. The Company does not rely on any sole source
suppliers for any of its raw materials, except for certain electrical
products.
COMPETITION
The office furniture market is highly competitive. Office furniture
companies compete on the basis of (i) product design, including performance,
ergonomic and aesthetic factors, (ii) product quality and durability, (iii)
price (primarily in the middle and budget segments), (iv) on-time delivery and
(v) service and technical support. In the United States, where the Company had
a 6.3% market share and derived approximately 88.5% of its sales in 1997, five
companies (including the Company) represent approximately 60.2% of the market.
Some of the Company's competitors, especially those in North America, are
large and have significantly greater financial, marketing, manufacturing and
technical resources than those of the Company. The Company's most significant
competitors in its primary markets are Steelcase, Inc., Herman Miller, Inc.,
Haworth, Inc. and, to a lesser extent, HON Industries, Inc. These competitors
have a substantial volume of furniture installed at businesses throughout the
country, providing a continual source of demand for further products and
enhancements. Moreover, the products of these competitors have strong
acceptance in the marketplace. Although the Company believes that it has been
able to compete successfully in its markets to date, there can be no assurance
that it will be able to continue to do so in the future.
The European market is highly fragmented, as the combined sales of the
estimated top 50 manufacturers represent less than approximately 60.0% of the
market. Based on the most recent publicly available trade information, the
Company believes that no single company holds more than a 10.0% share of the
European market.
PATENTS AND TRADEMARKS
The Company has approximately 91 active United States utility patents on
various components used in its products and systems and approximately 115
active United States design patents. The Company also has
5
approximately 200 patents in various foreign countries. Knoll(R), The Knoll
Group(R), KnollStudio(R), KnollExtra(R), Reff(TM), Bulldog(R), Calibre(R),
Equity(R), Parachute(R), Good Design Is Good Business(R), Propeller(R) and
SoHo(TM) are trademarks of the Company. The Company considers securing and
protecting its intellectual property rights to be important to its business.
BACKLOG
The Company's backlog of unfilled orders was $141.3 million at December 31,
1997 and $94.1 million at December 31, 1996. The Company expects to fill
substantially all outstanding unfilled orders within the next twelve months.
The Company manufactures substantially all of its products to order, and its
average manufacturing time is approximately five weeks. As a result, backlog
is not a significant factor used to predict the Company's long-term business
prospects.
FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
For information regarding foreign and domestic operations and export sales,
refer to Note 23 (Business Segment and Geographical Region Information) of the
Notes to the Consolidated Financial Statements beginning on page F-29.
ENVIRONMENTAL MATTERS
The Company believes that it is substantially in compliance with all
applicable laws and regulations for the protection of the environment and the
health and safety of its employees based upon existing facts known to
management. Compliance with federal, state, local and foreign environmental
regulations relating to the discharge of substances into the environment, the
disposal of hazardous wastes and other related activities has had and will
continue to have an impact on the operations of the Company, but has, since
the formation of Knoll in 1990, been accomplished without having a material
adverse effect on the operations of the Company. There can be no assurance
that such regulations will not change in the future or that the Company will
not incur material costs as a result of such regulations. While it is
difficult to estimate the timing and ultimate costs to be incurred due to
uncertainties about the status of laws, regulations and technology, management
presently has no planned expenditures of significant amounts for future
environmental compliance. The Company has trained staff responsible for
monitoring compliance with environmental, health and safety requirements. The
Company's goal is to reduce and, wherever possible, eliminate the creation of
hazardous waste in its manufacturing processes.
The Company has been identified as a potentially responsible party pursuant
to the Comprehensive Environmental Response Compensation and Liability Act
("CERCLA") for remediation costs associated with waste disposal sites
previously used by the Company. CERCLA imposes liability without regard to
fault or the legality of the disposal. The remediation costs at the CERCLA
sites are unknown; however, the Company does not expect its liability to be
material. At each of the sites, the Company is one of many potentially
responsible parties and expects to have only a small percentage of liability.
At some of the sites, the Company expects to qualify as a de minimis or de
micromis contributor, eligible for a cash-out settlement. In addition,
Westinghouse has agreed to indemnify the Company for certain costs associated
with CERCLA liabilities known as of the date of the Acquisition.
EMPLOYEES
As of February 28, 1998, the Company employed a total of 3,942 people,
including 2,594 hourly and 1,348 salaried employees. The Grand Rapids,
Michigan plant is the only unionized Company plant within the United States,
with the Carpenters and Joiners of America-Local 1615 having a four-year
contract expiring August 30, 1998. While management believes that relations
with this union are positive, management cannot assure that it will be
successful in reaching a new contract. Recently, there was an unsuccessful
attempt to unionize employees at the Company's Muskegon, Michigan facility.
The Company believes that relations with its employees in Muskegon and
throughout North America are good. Nonetheless, it is possible that Company
employees may
6
attempt to unionize in the future. Certain workers in the Company's facilities
in Italy are represented by unions. The Company has experienced brief work
stoppages from time to time at the Company's plants in Italy, certain of which
related to national or local issues. Such work stoppages have not materially
affected the Company.
ITEM 2. PROPERTIES
The Company operates over 2,947,000 square feet of facilities, including
manufacturing plants, warehouses and sales offices. Of these facilities, the
Company owns approximately 2,372,000 square feet and leases approximately
575,000 square feet. The Company's manufacturing plants are located in East
Greenville, Pennsylvania; Grand Rapids and Muskegon, Michigan; Toronto,
Canada; and Foligno and Graffignana, Italy.
The Company's corporate headquarters are located in East Greenville,
Pennsylvania, where the Company owns two manufacturing facilities aggregating
approximately 547,000 square feet and leases three warehouses aggregating
approximately 142,000 square feet. The East Greenville facility is also the
distribution center for KnollStudio, KnollExtra and KnollTextiles.
The Company owns one approximately 500,000 square foot manufacturing
facility in Grand Rapids, Michigan and one approximately 274,000 square foot
plant in Muskegon, Michigan. The Company's plants in Toronto, Canada consist
of one approximately 375,000 square foot owned building and two leased
properties aggregating approximately 230,000 square feet. The Company is in
the process of expanding its manufacturing facilities in Muskegon, Michigan
and Toronto, Canada by approximately 60,000 square feet and 32,000 square
feet, respectively.
The Company owns two manufacturing facilities in Italy: an approximately
258,000 square foot building in Foligno, which houses the Knoll Europe
headquarters, and an approximately 110,000 square foot building in
Graffignana.
The Company believes that its plants and other facilities are sufficient for
its needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to litigation in the ordinary course of its business.
The Company is not a party to any lawsuit or proceeding which, in the opinion
of management, based on information presently known, is likely to have a
material adverse effect on the Company.
The Company, for a number of years, has sold various products to the United
States Government under GSA multiple award schedule contracts. The GSA is
permitted to audit the Company's compliance with the terms of the GSA
contracts. As a result of one such audit, the GSA has asserted refund claims
under 1985-88 and 1987-90 contracts between GSA and The Shaw-Walker Company,
which has been merged into the Company, for approximately $2.15 million
("Shaw-Walker GSA Claims") and has other contracts under audit review. GSA has
referred both of these Shaw-Walker contracts to the Justice Department for
consideration of potential civil False Claims Act cases. Under the civil False
Claims Act, the Company is potentially liable for treble damages plus
penalties of up to $10,000 for each "false" invoice submitted to the
Government. The former shareholders of The Shaw-Walker Company have agreed to
indemnify the Company for the Shaw-Walker GSA Claims. Based upon information
presently known, management disputes the audit results and does not expect
resolution of the Shaw-Walker GSA Claims to have a material adverse effect on
the Company's consolidated financial statements. Management does not have
information which would indicate a substantive basis for a civil False Claims
Act case under the contracts.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the three
months ended December 31, 1997.
7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION AND DIVIDEND POLICY
The Company's common stock, par value $0.01 per share (the "Common Stock")
is traded on the New York Stock Exchange, Inc. ("NYSE"). The Common Stock has
been listed on the NYSE since May 9, 1997, the date of the Company's initial
public offering. The following table sets forth, for the periods indicated,
high and low closing sales prices for the Common Stock as reported by the
NYSE.
1997 HIGH LOW
---- --------- -------
Second quarter (commencing May 9, 1997).................... $23 3/4 $17 1/4
Third quarter.............................................. 33 15/16 22 7/8
Fourth quarter............................................. 34 3/16 25 3/8
The closing price of the Company's Common Stock was $41 1/8 on March 20,
1998. As of such date, there were approximately 3,600 holders of record of the
Common Stock.
The Company has not paid a cash dividend on its Common Stock since the
Acquisition, and does not anticipate paying any cash dividends on the Common
Stock in the foreseeable future. The current policy of the Company's Board of
Directors is to retain earnings to finance the operations and expansion of the
Company's business. In addition, the Company's credit agreement and indenture
(the "Indenture") relating to the Company's 10.875% Senior Subordinated Notes
(the "Senior Subordinated Notes") limit the Company's ability to pay dividends
to its stockholders. Any future determination to pay dividends will depend on
the Company's results of operations, financial condition, capital
requirements, contractual limitations and other factors deemed relevant by the
Board of Directors.
RECENT SALES OF UNREGISTERED SECURITIES
Options to purchase 10,000 shares of Common Stock were granted to an
employee of the Company on January 5, 1998 pursuant to the Knoll, Inc. 1997
Stock Incentive Plan. These options were granted at an exercise price of
$33.375 and vest over periods determined at their date of grant. Such grants
were made in reliance on the exemption from registration pursuant to Section
4(2) of the Securities Act.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents (i) selected historical consolidated financial
information of the Predecessor, as of the dates and for the periods indicated,
(ii) selected historical consolidated financial information of the Company, as
of the dates and for the periods indicated and (iii) summary pro forma
consolidated financial information of the Company, for the periods indicated,
after giving effect to the events described in the notes below. The historical
consolidated financial information for each of the three years in the period
ended December 31, 1995 has been derived from the Predecessor's financial
statements, which have been audited by Price Waterhouse LLP. The historical
consolidated financial information for the two-month period ended February 29,
1996 has been derived from the Predecessor's financial statements which have
been audited by Ernst & Young LLP. The historical consolidated financial
information for the ten-month period ended December 31, 1996 and the year
ended December 31, 1997 has been derived from the Company's financial
statements which have been audited by Ernst & Young LLP. The summary pro forma
information does not purport to represent what the Company's results actually
would have been if such events had occurred at the dates indicated, nor does
such information purport to project the results of the Company for any future
period. The selected financial information should be read in conjunction with
Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Item 8, "Financial Statements and Supplementary
Data."
8
PREDECESSOR | THE COMPANY
-------------------------------------------|---------------------------------------------
| PRO FORMA
TWO MONTHS | TEN MONTHS YEAR YEAR ENDED
YEAR ENDED DECEMBER 31, ENDED | ENDED ENDED DECEMBER 31,
----------------------------- FEBRUARY 29,|DECEMBER 31, DECEMBER 31, -------------------
1993 1994 1995 1996 | 1996 1997 1996(1)(2) 1997(2)
-------- --------- -------- ------------|------------ ------------ ---------- --------
(IN THOUSANDS) | (IN THOUSANDS, EXCEPT PER SHARE DATA)
|
OPERATING DATA |
Total sales............. $508,383 $ 562,869 $620,892 $ 90,232 | $561,534 $810,857 $651,766 $810,857
Cost of sales(3)........ 376,875 410,104 417,632 59,714 | 358,841 489,962 419,908 489,962
-------- --------- -------- --------- | -------- -------- -------- --------
Gross profit............ 131,508 152,765 203,260 30,518 | 202,693 320,895 231,858 320,895
Provision for |
restructuring.......... 6,165 29,180 -- -- | -- -- -- --
Selling, general and |
administrative |
expenses(4)............ 163,015 167,238 138,527 21,256 | 131,349 183,018 153,388 183,018
Westinghouse long-term |
incentive |
compensation(5)........ -- -- -- 47,900 | -- -- -- --
Allocated corporate |
expenses(3)(4)......... 4,899 5,881 9,528 921 | -- -- -- --
-------- --------- -------- --------- | -------- -------- -------- --------
Operating income (loss). (42,571) (49,534) 55,205 (39,559) | 71,344 137,877 78,470 137,877
Interest expense........ 3,301 3,225 1,430 340 | 32,952 25,075 34,359 22,373
Other income (expense), |
net.................... 2,082 699 (1,597) (296) | 447 1,667 151 1,667
-------- --------- -------- --------- | -------- -------- -------- --------
Income (loss) before |
income tax expense |
(benefit), cumulative |
effect of changes in |
accounting principles |
and extraordinary item. (43,790) (52,060) 52,178 (40,195) | 38,839 114,469 44,262 117,171
Income tax expense |
(benefit).............. (3,571) 7,713 22,846 (16,107) | 16,844 48,026 19,094 49,096
-------- --------- -------- --------- | -------- -------- -------- --------
Income (loss) before |
cumulative effect of |
changes in accounting |
principles and |
extraordinary item..... (40,219) (59,773) 29,332 (24,088) | 21,995 66,443 25,168 68,075
Cumulative effect of |
changes in accounting |
principles............. (1,118) -- -- -- | -- -- -- --
-------- --------- -------- --------- | -------- -------- -------- --------
Income (loss) before |
extraordinary item..... (41,337) (59,773) 29,332 (24,088) | 21,995 66,443 25,168 68,075
Extraordinary loss on |
early extinguishment of |
debt, net of taxes(6).. -- -- -- -- | 5,159 5,337 -- --
-------- --------- -------- --------- | -------- -------- -------- --------
Net income (loss)(6).... $(41,337) $ (59,773) $ 29,332 $ (24,088) | $ 16,836 $ 61,106 $ 25,168 $ 68,075
======== ========= ======== ========= | ======== ======== ======== ========
Pro forma income before |
extraordinary item per |
share of Common |
Stock(7): |
Basic.................. | $ 0.71 $ 1.78 $ 0.64 $ 1.69
Diluted................ | $ 0.63 $ 1.64 $ 0.58 $ 1.57
Pro forma net income per |
share of Common |
Stock(6)(7): |
Basic.................. | $ 0.54 $ 1.64 $ 0.64 $ 1.69
Diluted................ | $ 0.48 $ 1.51 $ 0.58 $ 1.57
Pro forma weighted |
average shares of |
Common Stock(7): |
Basic.................. | 31,040 37,284 39,520 40,287
Diluted................ | 34,701 40,398 43,181 43,400
9
PREDECESSOR | THE COMPANY
--------------------------|-----------------
DECEMBER 31, | DECEMBER 31,
--------------------------|-----------------
1993 1994 1995 | 1996 1997
-------- -------- --------|-------- --------
(IN THOUSANDS) | (IN THOUSANDS)
|
BALANCE SHEET DATA |
Working capital................... $ 41,933 $ 22,898 $ 82,698|$ 64,754 $ 65,553
Total assets...................... 691,043 705,316 656,710| 675,712 680,859
Total long-term debt, including |
current portion.................. 15,204 12,451 3,538| 354,154 207,029
Total liabilities................. 205,104 247,310 176,259| 497,908 392,570
Stockholders' equity.............. 485,939 458,006 480,451| 177,804 288,289
- --------
(1) Reflects summary pro forma financial information of the Company derived
from the financial statements and notes thereto included elsewhere in this
Form 10-K, adjusted to reflect the completion of the Acquisition, the
application of the net proceeds of $160,000 from the sale of capital stock
of the Company and related borrowings of $260,000 and $165,000 under the
Company's then-existing credit agreement and the Company's Senior
Subordinated Notes, respectively, as if such events occurred at the
beginning of the period.
(2) Reflects summary pro forma financial information of the Company derived
from the financial statements and notes thereto included elsewhere in this
Form 10-K, adjusted to reflect (i) the completion of the Company's initial
public offering, (ii) the application of the net proceeds to the Company
of $133,440 therefrom, together with borrowings of $11,673 under the
Company's then-existing revolving credit facility, for the redemption of
800,000 shares of Series A 12.0% Participating Convertible Preferred Stock
("Series A Preferred Stock") for an aggregate redemption price of $80,000
in cash and 11,749,361 shares of Common Stock and for the redemption of an
aggregate principal amount of $57,750 of the Senior Subordinated Notes for
a total redemption price of $65,113 (including a redemption premium of
$5,775 and accrued and unpaid interest thereon of $1,558) and (iii) the
conversion of the remaining 802,998 shares of Series A Preferred Stock
into 15,691,558 shares of Common Stock as if such events occurred at the
beginning of the respective periods.
(3) Pro forma 1996 cost of sales has been increased by (i) $801 to reflect an
increase in amortization and depreciation resulting from the Acquisition
and (ii) $552 to reflect the reclassification of a portion of allocated
corporate expenses. The reclassified allocated corporate expenses
approximate the replacement cost to the Company for services formerly
provided by Westinghouse to the Predecessor, including (i) benefit expense
related to the adoption of various independent benefit plans comparable to
Westinghouse benefit plans and (ii) the cost of services required to
replace specific activities formerly provided by Westinghouse to the
Predecessor, including audit, tax, general ledger, accounts receivable,
human resources, legal, insurance and data communications.
(4) Pro forma 1996 selling, general and administrative expenses have been
increased by (i) $369 to reflect the reclassification of allocated
corporate expenses which approximate the replacement cost to the Company
(described above in note 3) and (ii) $414 to reflect an increase in
amortization and depreciation resulting from the Acquisition.
(5) Westinghouse long-term incentive compensation has been eliminated in pro
forma 1996. Such compensation became payable from Westinghouse, and the
amounts payable were established, as a result of consummation of the
Acquisition.
(6) The pro forma 1996 operating data presented does not include the $5,159
extraordinary loss on early extinguishment of debt, net of taxes. In
addition, the pro forma operating data for the years ended December 31,
1996 and 1997 does not include an extraordinary loss of $5,337, net of
taxes, associated with the early redemption of a portion of the Senior
Subordinated Notes in connection with the initial public offering.
(7) Because of the redemption and conversion into Common Stock of the Series A
Preferred Stock upon consummation of the Company's initial public
offering, historical net income (loss) per share is not presented herein.
Pro forma income per share amounts are based on the weighted average
number of shares of Common Stock and potentially dilutive securities
(nonvested stock grants and employee stock options) outstanding during the
period, after giving effect to the redemption and conversion into Common
Stock of the Series A Preferred Stock assuming the redemption and
conversion had occurred at the beginning of the periods presented. See
Note 2 to the financial statements included elsewhere in this Form 10-K.
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with Item 8,
"Financial Statements and Supplementary Data."
OVERVIEW
Knoll, Inc. and its subsidiaries are engaged in the design, manufacture and
sale of office furniture products and accessories, focusing on the middle to
high-end segments of the contract furniture market. The Company was formed on
February 29, 1996 as a result of the acquisition of the office furniture
business unit (The Knoll Group, Inc. and related entities) of Westinghouse.
The Company's current management initiated a turnaround program in 1994 that
has led to significant growth and a dramatic improvement in operating and
financial performance. The turnaround initiatives included:
. Centralizing administrative functions, simplifying manufacturing
processes, consolidating purchasing activities and selling and
consolidating manufacturing facilities.
. Focusing on product line management to enhance each product's
profitability and market potential.
. Retraining the Company's sales force to focus on sales growth and
profitability.
. Introducing new products to better respond to customer needs.
. Realigning management incentives.
. Restructuring and centralizing the European business.
As a result of the implementation of the turnaround program and favorable
industry dynamics, operating performance improved significantly from 1995 to
1997. Sales increased from $620.9 million in 1995 to $810.9 million in 1997.
Gross margins increased from 31.5% in 1995, on a pro forma basis, to 39.6% in
1997. Operating margins increased from 7.9% in 1995, on a pro forma basis, to
17.0% in 1997. The Company's improved operating and financial results allowed
it in 1996 to prepay $72.0 million under its then-existing credit facilities
and refinance such facilities on more favorable terms. In addition, in 1997,
the Company was able to reduce its debt by $147.1 million and enter into a new
credit agreement with more favorable terms.
The Company believes that its recent sales growth exceeded industry growth
as a whole and believes that it is well-positioned for continued growth in
sales and profitability. The Company intends to pursue growth by introducing
new products in the office systems category, where the Company is already a
recognized leader, and in other product categories where the Company's market
share could be increased by leveraging the Company's design expertise and
brand awareness. The Company estimates that its share of the 1997 U.S. office
furniture market was 12.1% for office systems, 2.1% for seating, 2.3% for
storage, 1.2% for desks and casegoods and 1.8% for tables. Such percentages do
not include sales of KnollStudio, KnollExtra, KnollTextiles and Spinneybeck.
The following table describes the estimated 1997 U.S. office furniture market
sales by category.
U.S. % OF U.S.
PRODUCT CATEGORY MARKET SIZE MARKET
---------------- ------------- ---------
(IN BILLIONS)
Office systems....................................... $4.1 35.3%
Seating.............................................. 2.8 24.6
Storage.............................................. 1.6 13.8
Desks and casegoods.................................. 1.9 16.4
Tables............................................... 0.7 6.5
In addition, the Company had sales in Canada and Europe of approximately
$93.5 million in 1997. European sales are primarily in the United Kingdom,
Germany, France, Belgium and Italy.
11
RESULTS OF OPERATIONS
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO PRO FORMA YEAR ENDED DECEMBER
31, 1996
Total sales. Total sales were $810.9 million for the year ended December 31,
1997, an increase of $159.1 million, or 24.4%, from $651.8 million for the
year ended December 31, 1996. The sales growth resulted from increased volume
across all product categories, with the largest increase coming from the sales
of office systems, which represented approximately 68.5% of the Company's
sales in 1997. Sales levels continued to benefit from continued product
improvements, increased sales and marketing efforts and favorable industry
dynamics.
Gross profit. Gross profit was $320.9 million for the year ended December
31, 1997, increasing $89.0 million, or 38.4%, from gross profit of $231.9
million for the year ended December 31, 1996. Gross profit as a percentage of
sales increased to 39.6% for the year ended December 31, 1997, from 35.6% for
the previous year. These increases were principally due to higher sales
volumes, better pricing in North America and continued cost improvements in
the Company's manufacturing plants.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $183.0 million for the year ended December 31,
1997, increasing $29.6 million, or 19.3%, from $153.4 million for the year
ended December 31, 1996. This increase was primarily due to incremental
employee costs related to higher sales and profit levels in addition to
increased expenses related to new product and technology initiatives. As a
percentage of sales, the Company's selling, general and administrative
expenses decreased to 22.6% for the year ended December 31, 1997 from 23.5%
for the year ended December 31, 1996.
Operating income. Operating income increased $59.4 million, or 75.7%, to
$137.9 million for the year ended December 31, 1997 from $78.5 million for the
year ended December 31, 1996. As a percentage of sales, operating income
increased to 17.0% for the year ended December 31, 1997 from 12.0% for the
same period in 1996. This improvement was driven by higher sales volumes,
improved gross margins and continued cost improvements.
Interest expense. Interest expense was $25.1 million for the year ended
December 31, 1997 compared to $40.0 million for the year ended December 31,
1996. The decrease in interest expense is primarily attributable to the
overall reduction of debt as well as lower interest rates associated with the
refinancing of the Company's previously existing senior credit agreement in
December 1996.
Income tax expense. Income tax expense as a percentage of pre-tax income was
42.0% for the year ended December 31, 1997 compared to 43.7% for the year
ended December 31, 1996. The decrease in the effective tax rate is primarily
attributable to the changing mix of pre-tax income between countries in which
the Company operates with differing effective tax rates and the reduced
effect, in 1997, of non-deductible goodwill amortization.
Extraordinary item. For the year ended December 31, 1997, there was an
extraordinary charge of $5.3 million, net of a tax benefit of $3.5 million,
related to the early redemption of an aggregate principal amount of $57.8
million of the Company's Senior Subordinated Notes. The extraordinary loss
consisted of a $5.7 million premium paid and $3.1 million of unamortized
financing costs written-off in connection with the redemption. The Company
also recorded an extraordinary loss of $5.2 million, net of a tax benefit of
$3.3 million, in 1996 following the refinancing of the Company's previously
existing credit agreement. This extraordinary loss consisted of the write-off
of unamortized financing costs related to the refinanced debt.
Pro forma earnings per share. Pro forma income before extraordinary item per
share for the year ended December 31, 1997 increased 160.3% to $1.64 per share
diluted from $0.63 per share diluted for the year ended December 31, 1996.
Pro forma net income and net income per share as adjusted for the initial
public offering (unaudited supplemental information). Supplemental pro forma
as adjusted net income for the year ended December 31,
12
1997 was $68.1 million ($1.57 per share diluted), an increase of $42.9 million
($0.99 per share diluted), or 170.2%, compared to $25.2 million ($0.58 per
share diluted) for the year ended December 31, 1996. Supplemental pro forma as
adjusted data reflects the sale of 8,480,000 shares of Common Stock by the
Company in its initial public offering and the application of the net proceeds
therefrom together with related borrowings under the Company's then-existing
revolving credit facility as if such events occurred at the beginning of each
period presented. Consequently, such results include interest savings from the
early redemption of a portion of the Company's Senior Subordinated Notes,
additional interest expense for related borrowings under the Company's then-
existing revolving credit facility and related income tax effects. Pro forma
as adjusted results do not reflect extraordinary losses of $5.3 million and
$5.2 million, net of taxes, incurred in 1997 and 1996, respectively, in
connection with the early redemption of debt.
COMPARISON OF PRO FORMA YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER
31, 1995
Total sales. Total sales were $651.8 million for the year ended December 31,
1996, an increase of $30.9 million, or 5.0%, from $620.9 million for the year
ended December 31, 1995. The sales growth resulted from price increases (an
average of 2.4% over 1995) and increased volume across all North American
product categories, and was partially offset by the elimination of certain
lower profit product lines and contracts during 1995. Sales of office systems
grew $27.8 million, or 6.0%, while sales of the Company's specialty products
(KnollStudio, KnollExtra, KnollTextiles and Spinneybeck) and seating grew
$10.4 million, or 10.8%, and $3.1 million, or 5.7%, respectively. This growth
is attributable to product enhancements in all categories as well as continued
growth from new product introductions. The 1996 sales increase of continued
product was $41.3 million (6.8%), as 1995 sales included lower profit
discontinued product sales of $10.4 million.
Gross profit. Gross profit was $231.9 million for the year ended December
31, 1996, an increase of $28.6 million, or 14.1%, from gross profit of $203.3
million for the year ended December 31, 1995. Gross profit as a percentage of
sales increased to 35.6% for the year ended December 31, 1996 from 32.7% for
the previous year. The actual gross margin generated by the Predecessor for
the year ended December 31, 1995 is not comparable to the pro forma gross
margin generated by the Company for the year ended December 31, 1996. Several
factors affect the comparability of these amounts. Approximately $3.1 million
of costs included in 1996 pro forma cost of sales were included in allocated
corporate expenses in the 1995 historical statement of operations. These costs
were related to the adoption of various independent employee benefit plans
comparable to Westinghouse benefit plans. In addition, $4.2 million of
depreciation expense related directly to the Acquisition is included in 1996
pro forma cost of sales. These increased depreciation costs were not incurred
during 1995. However, the above noted factors affecting comparability were
more than offset by improvements in operating results experienced by the
Company. These increases were principally due to the higher sales volumes in
North America, better pricing, discontinuance of unprofitable products,
continued factory operating cost improvements, consolidation of European
operations and other fixed cost reductions.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $153.4 million for the year ended December 31,
1996, up $14.9 million, or 10.8%, from the year ended December 31, 1995.
Actual selling, general and administrative expenses incurred by the
Predecessor for the year ended December 31, 1995 are not comparable to the pro
forma selling, general and administrative expenses incurred by the Company for
the year ended December 31, 1996. Several factors affect the comparability of
these amounts. Approximately $2.5 million of costs were incurred in 1996 to
replace employee benefit plans and other services (audit, tax, general ledger,
accounts receivable, human resources and legal) that were provided by
Westinghouse prior to the Acquisition. These costs were included in allocated
corporate expenses in the 1995 historical statement of operations. In
addition, increased depreciation and amortization costs totaling $1.6 million
resulting from the Acquisition are included in 1996 pro forma selling, general
and administrative expenses. These increased depreciation and amortization
costs were not incurred during 1995. In addition to the above noted factors
affecting comparability, selling, general and administrative expenses
increased by $10.8 million primarily due to increased sales incentive
compensation and employee benefits related to higher sales volumes in North
America and expenses related to new product and technology initiatives,
partially offset by savings resulting from
13
showroom consolidations in Germany, Italy and Belgium along with the
centralization of administrative functions in Europe. As a percentage of
sales, the Company's selling, general and administrative expenses were 23.6%
for the year ended December 31, 1996 and 22.3% for the year ended December 31,
1995.
Allocated corporate expenses. Allocated corporate expenses of $9.5 million
in 1995 include (i) Westinghouse overhead charges for Westinghouse executive
management and corporate legal, environmental, audit, tax, treasury and other
related services and (ii) incentive compensation payable to Knoll management
under Westinghouse long-term incentive plans. These allocated corporate
expenses, with the exception of incentive compensation, were payable by
Westinghouse and allocated to Knoll primarily based on sales. The 1996 pro
forma results do not include a $47.9 million charge to operations for the 1996
payment of awards to certain members of management of the Company pursuant to
a long-term incentive plan established by Westinghouse. The plan provided for
the payment of awards at the end of a five-year period based on the
achievement of certain performance goals set by Westinghouse's board of
directors. As a result of consummation of the Acquisition, the payment of
awards was accelerated pursuant to the terms of the plan. The Company has not
implemented an incentive plan similar to the Westinghouse plan and does not
expect such compensation to be payable in future periods.
Operating income. Operating income increased to $78.5 million for the year
ended December 31, 1996 from $55.2 million for the year ended December 31,
1995. As a percentage of sales, operating income increased to 12.0% for the
year ended December 31, 1996 from 8.9% for the same period in 1995. As noted
above, these improvements were driven by higher sales volumes, better pricing,
discontinuance of lower profit product lines, factory cost improvements and
efficiencies gained from consolidation and centralization of administrative
functions.
Interest expense. Interest expense increased $38.6 million to $40.0 million
for the year ended December 31, 1996. This increase is attributable to the
debt incurred by the Company in connection with the Acquisition. This debt
consisted of $165.0 million of the Company's Senior Subordinated Notes and
$260.0 million of borrowings under the Company's then-existing credit
facilities.
Income tax expense. Income tax expense for the years ended December 31, 1996
and 1995 was 43.8% of pre-tax income.
Extraordinary item. For the year ended December 31, 1996, there was an
extraordinary charge of $5.2 million, net of a tax benefit of $3.3 million,
relating to the write-off of unamortized financing costs following the
refinancing of the Company's previously existing credit agreement.
COMPARISON OF PRO FORMA YEAR ENDED DECEMBER 31, 1996 TO PRO FORMA YEAR ENDED
DECEMBER 31, 1995
Because the Company was formed as a result of the Acquisition on February
29, 1996, the following discussion refers to the pro forma results of
operations for the years ended December 31, 1996 and 1995 as presented in Note
3 to the Consolidated Financial Statements in Item 8 of this Form 10-K.
Total sales. Total sales were $651.8 million for the year ended December 31,
1996, an increase of $30.9 million, or 5.0%, from $620.9 million for the year
ended December 31, 1995. The sales growth resulted from price increases (an
average of 2.4% over 1995) and increased volume across all North American
product categories, and was partially offset by the elimination of certain
lower profit product lines and contracts during 1995. Sales of office systems
grew $27.8 million, or 6.0%, while sales of the Company's specialty products
(KnollStudio, KnollExtra, KnollTextiles and Spinneybeck) and seating grew
$10.4 million, or 10.8%, and $3.1 million or, 5.7%, respectively. This growth
is attributable to product enhancements in all categories as well as continued
growth from new product introductions. The 1996 sales increase of continued
product was $41.3 million, or 6.8%, as 1995 sales included lower profit
discontinued product sales of $10.4 million.
Gross profit. Gross profit was $231.9 million for the year ended December
31, 1996, an increase of $36.3 million, or 18.6%, from gross profit of $195.6
million for the year ended December 31, 1995. Gross profit as a
14
percentage of sales increased to 35.6% for the year ended December 31, 1996
from 31.5% for the previous year. These increases were principally due to the
higher sales volumes in North America, better pricing, discontinuance of
unprofitable products, continued factory operating cost improvements,
consolidation of European operations and other fixed cost reductions.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $153.4 million for the year ended December 31,
1996, up $10.8 million, or 7.6%, from the year ended December 31, 1995. The
increase was primarily due to increased sales incentive compensation and
employee benefits related to higher sales volumes in North America and
expenses related to new product and technology initiatives, partially offset
by savings resulting from showroom consolidations in Germany, Italy and
Belgium along with the centralization of administrative functions in Europe.
As a percentage of sales, the Company's selling, general and administrative
expenses were 23.6% for the year ended December 31, 1996 and 23.0% for the
year ended December 31, 1995.
Allocated corporate expenses. Allocated corporate expenses of $4.0 million
in 1995 represents incentive compensation payable to Knoll management under
Westinghouse long-term incentive plans.
Operating income. Operating income increased to $78.5 million for the year
ended December 31, 1996 from $49.0 million for the year ended December 31,
1995. As a percentage of sales, operating income increased to 12.0% for the
year ended December 31, 1996 from 7.9% for the same period in 1995. As noted
above, these improvements were driven by higher sales volumes, better pricing,
discontinuance of lower profit product lines, factory cost improvements and
efficiencies gained from consolidation and centralization of administrative
functions.
LIQUIDITY AND CAPITAL RESOURCES
The Company's free cash flow has historically been used to fund capital
expenditures, working capital requirements and debt service. Following the
Acquisition on February 29, 1996, the Company's interest expense and cash
requirements significantly increased as a direct result of interest associated
with borrowings under the Company's credit facilities and the Senior
Subordinated Notes, as well as scheduled principal payments of previously
existing term loans under the Company's previously existing credit facilities.
In May 1997, the Company completed an initial public offering, generating
net proceeds to the Company of $133.4 million from its sale of 8,480,000
shares of Common Stock. The Company used the net proceeds together with
borrowings of $11.7 million under the Company's then-existing revolving credit
facility to redeem 800,000 shares of Series A Preferred Stock for $80.0
million and to redeem an aggregate principal amount of $57.8 million of the
Company's Senior Subordinated Notes for $65.1 million (including a redemption
premium of $5.7 million and accrued and unpaid interest thereon of $1.6
million). In addition to the redemption of a portion of the Senior
Subordinated Notes, the Company repaid $89.2 million of bank debt during the
year ended December 31, 1997.
On August 8, 1997, the Company entered into a new agreement that modified
certain terms of its then-existing senior credit agreement. The credit
agreement previously provided for a $100.0 million term loan with scheduled
principal payments through December 2002 and a $130.0 million revolving credit
facility that matured in December 2002. The new agreement provides for a
$275.0 million revolving credit facility that matures in August 2002.
Borrowings under the new agreement bear interest at a floating rate based, at
the Company's option, upon (i) the Eurodollar rate (as defined therein) plus
an applicable percentage which is subject to change based on the Company's
ratio of funded debt to EBITDA or (ii) the greater of the federal funds rate
plus 0.5% or the prime rate. The new credit agreement contains restrictive
covenants, financial covenants and events of default. Among other things, the
restrictive covenants limit the Company's ability to incur additional
indebtedness, pay dividends, make investments, grant liens and engage in
certain other activities. As of December 31, 1997, the Company had an
aggregate of $174.6 million available for borrowing under its revolving credit
facility.
15
In addition to the revolving credit facility, the Company had outstanding as
of December 31, 1997, $107.2 million aggregate principal amount of its Senior
Subordinated Notes, which were issued in connection with the Acquisition in
the original aggregate principal amount of $165.0 million. The Senior
Subordinated Notes are subordinated to all existing and future senior
indebtedness of the Company, including all indebtedness under the revolving
credit facility. The Indenture governing the terms of the Senior Subordinated
Notes imposes certain restrictions on the Company and its subsidiaries,
including restrictions on its ability to incur indebtedness, pay dividends,
make investments, grant liens and engage in certain other activities. The
Senior Subordinated Notes may be required to be purchased by the Company upon
a change of control (as defined in the Indenture) and in certain circumstances
with the proceeds of asset sales. The Senior Subordinated Notes are redeemable
at the option of the Company at any time after March 15, 2001, initially at
105.438% of their principal amount at maturity, plus accrued interest,
declining to 100.0% of their principal amount at maturity, plus accrued
interest, on or after March 15, 2004.
The Company's foreign subsidiaries maintain local credit facilities to
provide credit for overdraft, working capital and other purposes. As of
December 31, 1997, the Company's total credit available under such facilities
was approximately $11.9 million, of which none had been utilized. The Company
believes that it is currently in compliance with all terms of its indebtedness
and that it has been in such compliance since the Acquisition.
Cash provided by (used in) operating activities totaled $135.3 million in
1997, $89.5 million for the ten months ended December 31, 1996, $(54.0)
million for the two months ended February 29, 1996 and $51.9 million in 1995.
Cash provided by operations resulted primarily from earnings before
depreciation, amortization and extraordinary losses on the early
extinguishment of debt, as well as positive cash flow from working capital for
the year ended December 31, 1997 and the ten months ended December 31, 1996.
Cash used in investing activities totaled $32.9 million in 1997 and was
primarily comprised of capital expenditures. Cash used in investing activities
totaled $594.8 million for the ten months ended December 31, 1996 and was
primarily comprised of the acquisition of the Company from Westinghouse
($579.8 million) and capital expenditures. Cash used in investing activities
totaled $2.3 million for the two months ended February 29, 1996 and $19.0
million in 1995 and was primarily comprised of capital expenditures by the
Company. Capital expenditures totaled $ 33.1 million in 1997, $15.3 million
for the ten months ended December 31, 1996, $2.3 million for the two months
ended February 29, 1996 and $19.3 million in 1995. Capital expenditures have
primarily been for new manufacturing equipment and information systems. The
Company estimates that capital expenditures will be approximately $35.0
million in 1998.
Cash provided by (used in) financing activities totaled $(99.2) million for
the year ended December 31, 1997, $511.8 million for the ten months ended
December 31, 1996, $57.0 million for the two months ended February 29, 1996
and $(36.8) million for the year ended December 31, 1995. The $99.2 million
used by the Company during 1997 includes $80.0 million for the redemption of
800,000 shares of Series A Preferred Stock, $63.5 million for the redemption
of $57.8 million of the Company's Senior Subordinated Notes (including an
early redemption premium of $5.7 million) and $89.2 million for the repayment
of bank debt primarily offset by net proceeds of $133.4 million to the Company
from its initial public offering. The $511.8 million provided by the Company
in its financing activities during the ten months ended December 31, 1996
included $425.0 million for the issuance of debt and $160.0 million for the
issuance of stock in connection with the acquisition of the Company from
Westinghouse, partially offset by $72.0 million used by the Company for the
prepayment of indebtedness under the Company's then-existing credit
facilities.
The Company uses interest rate collar agreements in order to manage its
exposure to fluctuations in interest rates on its floating rate debt. At
December 31, 1997, the Company had four outstanding interest rate collar
agreements with a total notional principal amount of $150.0 million and
maximum and minimum rates ranging from 7.5% to 7.99% and 5.0% to 5.5%,
respectively. These agreements mature over the next two years. Aggregate
maturities of the total notional principal amount are $35.0 million in 1998
and $115.0 million in 1999. During the year ended December 31, 1997, the
Company was not required to make nor was it entitled to receive any payments
as a result of these hedging activities.
16
The past and present business operations of the Company and the past and
present ownership and operation of manufacturing plants on real property by
the Company are subject to extensive and changing federal, state, local and
foreign environmental laws and regulations. As a result, the Company is
involved from time to time in administrative and judicial proceedings and
inquiries relating to environmental matters. The Company cannot predict what
environmental legislation or regulations will be enacted in the future, how
existing or future laws or regulations will be administered or interpreted or
what environmental conditions may be found to exist. Compliance with more
stringent laws or regulations, or stricter interpretation of existing laws,
may require additional expenditures by the Company, some of which may be
material. The Company has been identified as a potentially responsible party
pursuant to CERCLA for remediation costs associated with waste disposal sites
previously used by the Company. The remediation costs at these CERCLA sites
are unknown, but the Company does not expect any liability it may have under
CERCLA to be material, based on the information presently known to the
Company. In addition, Westinghouse has agreed to indemnify the Company for
certain costs associated with CERCLA liabilities known as of the date of the
Acquisition.
The Company continues to have significant liquidity requirements. In
addition to working capital needs and capital expenditures, the Company has
cash requirements for debt service. The Company believes that existing cash
balances and cash flow from operating activities, together with borrowings
available under the revolving credit facility, will be sufficient to fund
working capital needs, capital spending requirements and debt service
requirements of the Company for at least the next 12 months.
INFLATION
There was no significant impact on Knoll's operations as a result of
inflation during the three years ended December 31, 1997.
BACKLOG
The Company's backlog of unfilled orders was $141.3 million at December 31,
1997 and $94.1 million at December 31, 1996. The Company expects to fill
substantially all outstanding unfilled orders within the next twelve months.
The Company manufactures substantially all of its products to order, and its
average manufacturing time is approximately five weeks. As a result, backlog
is not a significant factor used to predict the Company's long-term business
prospects.
FOREIGN OPERATIONS
The Company's foreign sales and certain expenses are transacted in foreign
currencies. For the years ended December 31, 1997 and 1996, approximately
11.5% and 12.0%, respectively, of the Company's revenues and 25.8% and 24.0%,
respectively, of the Company's expenses were denominated in currencies other
than U.S. dollars. The principal foreign currencies in which the Company
conducts business are the Canadian dollar and the Italian Lira. The production
costs, profit margins and competitive position of the Company are affected by
the strength of the currencies in countries where it manufactures or purchases
goods relative to the strength of the currencies in countries where its
products are sold. The Company reviews from time to time its foreign currency
exposure and evaluates whether it should enter into hedging transactions. The
Company generally does not hedge its foreign currency exposure and may
determine not to do so in the future. Exchange rate fluctuations did not have
a material impact on the financial results of the Company during 1997 or 1996.
IMPACT OF YEAR 2000
The Company has certain existing computer programs that were written using
two digits rather than four to define the applicable year. As a result, those
computer programs have time-sensitive software that may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
In 1997, the Company initiated a strategic project to replace and enhance
its existing manufacturing and business systems technology with a new fully
integrated system intended to enhance its order entry response time and
accuracy, improve manufacturing processes, reduce delivery times, improve
shipping accuracy and
17
reduce fixed costs. While the decision to embark on this project was business
related, the new software that the Company will implement has been represented
by the vendor to be year 2000 compliant. Therefore, the year 2000 issue is not
expected to pose significant operational problems for the Company's computer
systems. However, if the new software is not implemented on a timely basis or
fails to be fully year 2000 compliant, the year 2000 issue could have a
material adverse impact on the operations of the Company.
The Company is and will continue utilizing both internal and external
resources to replace and test the new software for overall effectiveness and
year 2000 compliance. The Company anticipates completing the project during
the first half of 1999. The total cost of the project is estimated to be
approximately $26.0 million and is being funded through operating cash flows.
To date, the Company has incurred expenditures of approximately $12.6 million
($9.8 million expense and $2.8 million capital), related to the project.
The Company has initiated formal communications with all of its significant
suppliers to determine the extent to which the Company is vulnerable to the
suppliers' failure to remediate their own year 2000 issues. However, there can
be no guarantee that the systems of other companies on which the Company
relies will be converted timely and would not have a material adverse effect
on the Company's operations.
The costs and completion date of the project are based on the best estimates
of management, which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources and other
factors. There can be no guarantee that these estimates are accurate. Actual
results could differ materially from those anticipated and, therefore, could
have a material adverse effect on the Company's operations.
STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE
Certain portions of this Form 10-K, including "Management's Discussion and
Analysis of Financial Condition and Results of Operations," contain various
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended, which represent the Company's expectations or beliefs
concerning future events. The Company cautions that these statements are
further qualified by important factors that could cause actual results to
differ materially from those in the forward-looking statements, including,
without limitation, the highly competitive nature of the market in which the
Company competes, including the introduction of new products or pricing
changes by the Company's competitors; risks associated with the Company's
growth strategy, including the risk that the Company's introduction of new
products will not achieve the same degree of success achieved historically by
the Company's products; the Company's indebtedness, which requires a
substantial portion of the Company's cash flow from operations to be dedicated
to debt service, making such cash flow unavailable for other purposes, and
which could limit the Company's flexibility in reacting to changes in its
industry or economic conditions generally; the Company's dependence on key
personnel; the ability of the Company to maintain its relationships with its
dealers; the Company's reliance on its patents and other intellectual
property; environmental laws and regulations, including those that may be
enacted in the future, that affect the ownership and operation of the
Company's manufacturing plants; risks relating to potential labor disruptions;
fluctuations in foreign currency exchange rates; and fluctuations in industry
revenues driven by a variety of macroeconomic factors, including white collar
employment levels, corporate cash flows, and non-residential commercial
construction, as well as by a variety of industry factors such as corporate
reengineering and restructuring, technology demands, ergonomic, health and
safety concerns and corporate relocations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and supplementary data
are filed under this Item, beginning on page F-1 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
18
KNOLL, INC.
TABLE OF CONTENTS FOR THE FINANCIAL STATEMENTS
PAGE
----
Reports of Independent Auditors........................................... F-2
Consolidated Balance Sheets at December 31, 1997 and 1996................. F-4
Consolidated Statements of Operations for the Year Ended December 31,
1997, the Ten Months Ended December 31, 1996, the Two Months Ended
February 29, 1996 (Predecessor) and the Year Ended December 31, 1995
(Predecessor)............................................................ F-5
Consolidated Statements of Cash Flows for the Year Ended December 31,
1997, the Ten Months Ended December 31, 1996, the Two Months Ended
February 29, 1996 (Predecessor) and the Year Ended December 31, 1995
(Predecessor)............................................................ F-6
Consolidated Statements of Changes in Stockholders' Equity for the Year
Ended December 31, 1997, the Ten Months Ended December 31, 1996, the Two
Months Ended February 29, 1996 (Predecessor) and the Year Ended December
31, 1995 (Predecessor)................................................... F-7
Notes to the Consolidated Financial Statements............................ F-8
Financial Statement Schedule II--Valuation and Qualifying Accounts........ S-1
F-1
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Knoll, Inc.
We have audited the accompanying consolidated balance sheets of Knoll, Inc.
as of December 31, 1997 and 1996 and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for the year ended
December 31, 1997 and the ten-month period ended December 31, 1996 (post-
acquisition periods), and the consolidated statements of operations, changes
in stockholders' equity and cash flows of The Knoll Group, Inc. (Predecessor)
for the two-month period ended February 29, 1996 (pre-acquisition period). Our
audits also included the financial statement schedule (as it pertains to 1997
and 1996) as listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the 1997 and 1996 consolidated financial statements referred
to above present fairly, in all material respects, the consolidated financial
position of Knoll, Inc. at December 31, 1997 and 1996, and the consolidated
results of its operations and its cash flows for the post-acquisition periods
in conformity with generally accepted accounting principles. Further, in our
opinion, the aforementioned Predecessor consolidated financial statements
present fairly, in all material respects, the consolidated results of
operations and cash flows of The Knoll Group, Inc. for the pre-acquisition
period in conformity with generally accepted accounting principles. Also, in
our opinion, the related financial statement schedule, when considered in
relation to the basic 1997 and 1996 financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
January 30, 1998
F-2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Knoll, Inc.
In our opinion, the consolidated financial statements listed in the Table of
Contents on page F-1 present fairly, in all material respects, the results of
operations of The Knoll Group, Inc., an organizational unit of Westinghouse
Electric Corporation, currently known as CBS Corporation (Westinghouse), and
its cash flows and changes in stockholders' equity for the year ended December
31, 1995, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of Westinghouse's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance that the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
The Knoll Group, Inc. was a business unit of Westinghouse for the year ended
December 31, 1995 and, as disclosed in Note 6 to the accompanying financial
statements, engaged in various transactions and relationships with other
Westinghouse entities.
/s/ Price Waterhouse LLP
Pittsburgh, Pennsylvania
January 15, 1996
F-3
KNOLL, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31,
------------------
1997 1996
-------- --------
ASSETS
Current assets:
Cash and cash equivalents................................ $ 10,790 $ 8,804
Customer receivables, net................................ 122,851 111,166
Inventories.............................................. 68,249 57,811
Deferred income taxes.................................... 21,295 17,474
Prepaid and other current assets......................... 3,697 7,424
-------- --------
Total current assets................................... 226,882 202,679
Property, plant and equipment, net......................... 180,450 176,218
Intangible assets, net..................................... 270,677 286,940
Other noncurrent assets.................................... 2,850 9,875
-------- --------
Total Assets........................................... $680,859 $675,712
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt..................... $ 10,000 $ 23,265
Accounts payable......................................... 66,697 50,250
Income taxes payable..................................... 6,791 388
Other current liabilities................................ 77,841 64,022
-------- --------
Total current liabilities.............................. 161,329 137,925
Long-term debt............................................. 197,029 330,889
Deferred income taxes...................................... 5,301 1,931
Postretirement benefits obligation......................... 16,424 15,873
Other noncurrent liabilities............................... 12,487 11,290
-------- --------
Total liabilities...................................... 392,570 497,908
-------- --------
Stockholders' equity:
Preferred stock, $1.00 par value; authorized 10,000,000
shares; issued and outstanding 1,602,998 shares in 1996
(liquidation preference of $160,300).................... -- 1,603
Common stock, $0.01 par value; authorized 100,000,000
shares; issued and outstanding 43,234,943 shares in 1997
and 7,291,308 shares in 1996 (Note 2)................... 432 73
Additional paid-in-capital............................... 214,950 160,147
Unearned stock grant compensation........................ (993) (1,387)
Retained earnings........................................ 77,942 16,836
Cumulative foreign currency translation adjustment....... (4,042) 532
-------- --------
Total stockholders' equity............................. 288,289 177,804
-------- --------
Total Liabilities and Stockholders' Equity............. $680,859 $675,712
======== ========
See accompanying notes to the consolidated financial statements.
F-4
KNOLL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATE)
(UNAUDITED) | THE KNOLL GROUP, INC.
SUPPLEMENTAL | (PREDECESSOR)
PRO FORMA | -------------------------
YEAR DATA TEN MONTHS | TWO MONTHS YEAR
ENDED YEAR ENDED ENDED | ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, | FEBRUARY 29, DECEMBER 31,
1997 1996 1996 | 1996 1995
------------ ------------ ------------ | ------------ ------------
(NOTE 3) |
|
Sales to customers...... $810,857 $651,766 $561,534 | $ 89,933 $610,723
Sales to related |
parties................ -- -- -- | 299 10,169
-------- -------- -------- | -------- --------
Total sales............. 810,857 651,766 561,534 | 90,232 620,892
Cost of sales to |
customers.............. 489,962 419,908 358,841 | 59,514 410,615
Cost of sales to related |
parties................ -- -- -- | 200 7,017
-------- -------- -------- | -------- --------
Gross profit............ 320,895 231,858 202,693 | 30,518 203,260
Selling, general and |
administrative |
expenses............... 183,018 153,388 131,349 | 21,256 138,527
Westinghouse long-term |
incentive compensation. -- -- -- | 47,900 --
Allocated corporate |
expenses............... -- -- -- | 921 9,528
-------- -------- -------- | -------- --------
Operating income (loss). 137,877 78,470 71,344 | (39,559) 55,205
Interest expense........ 25,075 40,030 32,952 | 340 1,430
Other income (expense), |
net.................... 1,667 151 447 | (296) (1,597)
-------- -------- -------- | -------- --------
Income (loss) before |
income tax expense |
(benefit) and |
extraordinary item..... 114,469 38,591 38,839 | (40,195) 52,178
Income tax expense |
(benefit).............. 48,026 16,848 16,844 | (16,107) 22,846
-------- -------- -------- | -------- --------
Income (loss) before |
extraordinary item..... 66,443 21,743 21,995 | (24,088) 29,332
Extraordinary loss on |
early extinguishment |
of debt, net of taxes.. 5,337 5,159 5,159 | -- --
-------- -------- -------- | -------- --------
Net income (loss)....... $ 61,106 $ 16,584 $ 16,836 | $(24,088) $ 29,332
======== ======== ======== | ======== ========
Pro forma earnings per |
share (Note 2): |
Income before |
extraordinary item: |
Basic............... $ 1.78 $ 0.70 $ 0.71 |
Diluted............. $ 1.64 $ 0.63 $ 0.63 |
Net income: |
Basic............... $ 1.64 $ 0.53 $ 0.54 |
Diluted............. $ 1.51 $ 0.48 $ 0.48 |
Pro forma weighted |
average shares of |
common stock (Note 2): |
Basic............... 37,284 31,040 31,040 |
Diluted............. 40,398 34,701 34,701 |
|
Supplemental pro forma |
as adjusted data |
(Unaudited) (Note 5): |
Pro forma net income.. $ 68,075 $ 25,168 |
Pro forma net income |
per share of common |
stock (Note 2): |
Basic............... $ 1.69 $ 0.64 |
Diluted............. $ 1.57 $ 0.58 |
Pro forma weighted |
average shares of |
common stock (Note |
2): |
Basic............... 40,287 39,520 |
Diluted............. 43,400 43,181 |
See accompanying notes to the consolidated financial statements.
F-5
KNOLL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
| THE KNOLL GROUP, INC.
| (PREDECESSOR)
| -------------------------
YEAR TEN MONTHS | TWO MONTHS YEAR
ENDED ENDED | ENDED ENDED
DECEMBER 31, DECEMBER 31, | FEBRUARY 29, DECEMBER 31,
1997 1996 | 1996 1995
------------ ------------ | ------------ ------------
|
CASH FLOWS FROM OPERATING ACTIVITIES |
Net income (loss)........................................................ $ 61,106 $ 16,836 | $(24,088) $ 29,332
Noncash items included in income: |
Depreciation........................................................... 25,082 19,251 | 3,150 19,006
Amortization of intangible assets...................................... 8,041 7,881 | 1,167 6,993
Loss on disposal of assets............................................. 986 87 | -- --
Extraordinary loss..................................................... 8,838 8,542 | -- --
Foreign currency transaction loss (gain)............................... (1,140) 354 | -- --
Earned stock grant compensation........................................ 394 36 | -- --
Changes in assets and liabilities: |
Customer receivables................................................... (12,176) (5,110) | 8,798 (5,850)
Inventories............................................................ (11,381) 1,416 | 671 (76)
Accounts payable....................................................... 18,052 15,870 | (15,292) (7,005)
Current and deferred income taxes...................................... 15,896 (3,961) | (16,627) 13,185
Other current assets................................................... 1,674 747 | 2,283 453
Other current liabilities.............................................. 12,849 18,372 | (7,190) (23,177)
Other noncurrent assets and liabilities................................ 7,041 9,181 | (6,911) 19,003
-------- --------- | -------- --------
Cash provided by (used in) operating activities.......................... 135,262 89,502 | (54,039) 51,864
-------- --------- | -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES |
Acquisition of the Company from Westinghouse............................. -- (579,801) | -- --
Capital expenditures..................................................... (33,080) (15,255) | (2,296) (19,334)
Proceeds from sale of assets............................................. 164 218 | -- 316
-------- --------- | -------- --------
Cash used in investing activities........................................ (32,916) (594,838) | (2,296) (19,018)
-------- --------- | -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES |
Repayment of short-term debt, net........................................ -- (1,483) | (3,805) (20,961)
Proceeds from (repayment of) revolving credit facility, net.............. (79,000) 88,000 | -- --
Proceeds from long-term debt............................................. -- 525,000 | -- --
Repayment of long-term debt.............................................. (67,988) (260,130) | -- (8,913)
Premium paid for early extinguishment of debt............................ (5,775) -- | -- --
Proceeds from issuance of stock, net of stock issuance costs............. 133,559 160,400 | -- --
Redemption of preferred stock............................................ (80,000) -- | -- --
Net receipts from (payments to) parent company........................... -- -- | 60,848 (6,900)
-------- --------- | -------- --------
Cash provided by (used in) financing activities.......................... (99,204) 511,787 | 57,043 (36,774)
-------- --------- | -------- --------
Effect of exchange rate changes on cash and cash equivalents............. (1,156) 18 | 58 13
-------- --------- | -------- --------
Increase (decrease) in cash and cash equivalents......................... 1,986 6,469 | 766 (3,915)
Cash and cash equivalents at beginning of period......................... 8,804 2,335 | 1,569 5,484
-------- --------- | -------- --------
Cash and cash equivalents at end of period............................... $ 10,790 $ 8,804 | $ 2,335 $ 1,569
======== ========= | ======== ========
See accompanying notes to the consolidated financial statements.
F-6
KNOLL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
| THE KNOLL GROUP, INC.
| (PREDECESSOR)
| -------------------------
YEAR TEN MONTHS | TWO MONTHS YEAR
ENDED ENDED | ENDED ENDED
DECEMBER 31, DECEMBER 31, | FEBRUARY 29, DECEMBER 31,
1997 1996 | 1996 1995
------------ ------------ | ------------- ------------
|
PREFERRED STOCK |
Balance at beginning of period (1,602,998 shares in 1997 and |
1,599,000 shares in 1996)............................................... $ 1,603 $ 1,599 | $ -- $ --
Shares issued for consideration (3,998 shares)........................... -- 4 | -- --
Shares redeemed (800,000 shares)......................................... (800) -- | -- --
Shares converted into common stock |
(802,998 shares)........................................................ (803) -- | -- --
--------- --------- | --------- ---------
Balance at end of period................................................. -- 1,603 | -- --
--------- --------- | --------- ---------
COMMON STOCK |
Balance at beginning of period (7,291,308 shares in 1997 and 3,139,430 |
shares in 1996)......................................................... 73 31 | -- --
Shares issued for consideration (8,502,716 shares)....................... 85 -- | -- --
Redemption of preferred stock (11,749,361 shares)........................ 117 -- | -- --
Conversion of preferred stock (15,691,558 shares)........................ 157 -- | -- --
Shares issued under the stock incentive plan (4,144,030 shares).......... -- 42 | -- --
--------- --------- | --------- ---------
Balance at end of period................................................. 432 73 | -- --
--------- --------- | --------- ---------
ADDITIONAL PAID-IN-CAPITAL |
Balance at beginning of period........................................... 160,147 158,370 | -- --
Shares issued for consideration.......................................... 133,474 396 | -- --
Redemption of preferred stock............................................ (79,317) -- | -- --
Conversion of preferred stock............................................ 646 -- | -- --
Shares issued under the stock incentive plan............................. -- 1,381 | -- --
--------- --------- | --------- ---------
Balance at end of period................................................. 214,950 160,147 | -- --
--------- --------- | --------- ---------
UNEARNED STOCK GRANT COMPENSATION |
Balance at beginning of period........................................... (1,387) -- | -- --
Shares issued under the stock incentive plan............................. -- (1,423) | -- --
Earned stock grant compensation.......................................... 394 36 | -- --
--------- --------- | --------- ---------
Balance at end of period................................................. (993) (1,387) | -- --
--------- --------- | --------- ---------
RETAINED EARNINGS |
Balance at beginning of period........................................... 16,836 -- | -- --
Net income............................................................... 61,106 16,836 | -- --
--------- --------- | --------- ---------
Balance at end of period................................................. 77,942 16,836 | -- --
--------- --------- | --------- ---------
PARENT COMPANY INVESTMENT |
Balance at beginning of period........................................... -- -- | 503,317 480,885
Net income (loss)........................................................ -- -- | (24,088) 29,332
Capital expenditures..................................................... -- -- | 2,296 19,334
Proceeds from sale of assets............................................. -- -- | -- (316)
Net interunit transactions............................................... -- -- | 58,552 (25,918)
--------- --------- | --------- ---------
Balance at end of period................................................. -- -- | 540,077 503,317
--------- --------- | --------- ---------
CUMULATIVE FOREIGN CURRENCY TRANSLATION ADJUSTMENT |
Balance at beginning of period........................................... 532 -- | (22,866) (22,879)
Translation adjustment................................................... (4,574) 532 | 58 13
--------- --------- | --------- ---------
Balance at end of period................................................. (4,042) 532 | (22,808) (22,866)
--------- --------- | --------- ---------
TOTAL STOCKHOLDERS' EQUITY............................................... $ 288,289 $ 177,804 | $ 517,269 $ 480,451
========= ========= | ========= =========
See accompanying notes to the consolidated financial statements.
F-7
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Knoll, Inc. and its subsidiaries (the "Company" or "Knoll") are engaged in
the design, manufacture, and sale of office furniture products and
accessories, focusing on the middle to high-end segments of the contract
furniture market. The Company has operations in the United States ("U.S."),
Canada and Europe and sells its products primarily through its direct sales
representatives and independent dealers.
The Company was formed on February 29, 1996 as a result of the acquisition
of the office furniture business unit (The Knoll Group, Inc. and related
entities) of Westinghouse Electric Corporation, currently known as CBS
Corporation ("Westinghouse"). See Note 3 for further discussion of the
acquisition.
The accompanying consolidated financial statements present the financial
position of the Company as of December 31, 1997 and 1996, the results of
operations, cash flows and changes in stockholders' equity of the Company
for the year ended December 31, 1997 and the ten-month period ended
December 31, 1996 and the results of operations, cash flows and changes in
stockholders' equity of The Knoll Group, Inc. and related entities (the
"Predecessor") for the two-month period ended February 29, 1996 and the
year ended December 31, 1995. In addition, unaudited supplemental pro forma
results of operations data of the Company has been provided for the years
ended December 31, 1997 and 1996. Such data is provided solely for
additional analysis and is not intended to be a presentation in accordance
with generally accepted accounting principles (see Note 5).
Since the Predecessor was a business unit of Westinghouse, the accompanying
financial statements of the Predecessor include estimates for certain
expenses incurred by the parent on its behalf. These expenses generally
include, but are not limited to, officer and employee salaries, rent,
depreciation, accounting and legal services, other selling, general and
administrative expenses and other such expenses.
The results of the Predecessor's domestic operations were included in the
consolidated U.S. federal income tax return of Westinghouse, while the
results of its operations in Canada and Europe were reported separately to
their respective taxing jurisdictions. The income tax information in the
accompanying financial statements of the Predecessor is presented as if the
Predecessor had not been included in the consolidated tax returns of
Westinghouse or other affiliates (i.e. on a stand-alone basis). The
recognition and measurement of income tax expense required certain
assumptions, allocations and significant estimates that management believes
are reasonable to measure the tax consequences as if the Predecessor were a
stand-alone taxpayer.
The operating results of the European subsidiaries are reported and
included in the consolidated financial statements on a one-month lag to
allow for the timely presentation of consolidated information. The effect
of this presentation is not material to the financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements of the Company include the accounts
of Knoll, Inc. and its wholly owned subsidiaries. Intercompany transactions
and balances have been eliminated in consolidation.
The consolidated financial statements of the Predecessor include the
accounts of The Knoll Group, Inc. and related entities after elimination of
intercompany transactions except for those with other units of Westinghouse
as described in Note 6.
Cash and Cash Equivalents
Cash and cash equivalents includes cash on hand and investments with
original maturities of three months or less.
F-8
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
Property, Plant, Equipment and Depreciation
Property, plant and equipment are recorded at cost. Depreciation of plant
and equipment is computed using the straight-line method over the estimated
useful lives of the assets. The useful lives are as follows: 45 years for
buildings and 3 to 12 years for machinery and equipment.
Intangible Assets
Intangible assets consist of goodwill, trademarks and deferred financing
fees. Goodwill is recorded at the amount by which cost exceeds the net
assets of acquired businesses, and all other intangible assets are recorded
at cost. Goodwill and trademarks are amortized under the straight-line
method over 40 years, while deferred financing fees are amortized over the
life of the respective debt.
Management reviews the carrying value of goodwill and other intangibles on
an ongoing basis. When factors indicate that an intangible asset may be
impaired, management uses an estimate of the undiscounted future cash flows
over the remaining life of the asset in measuring whether the intangible
asset is recoverable. If such an analysis indicates that impairment has in
fact occurred, the book value of the intangible asset is written down to
its estimated fair value.
Revenue Recognition
Sales are recognized as products are shipped and services are rendered.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and are measured using enacted tax rates expected to
apply to taxable income in the years in which the temporary differences are
expected to reverse.
As discussed in Note 1, the U.S. operations of the Predecessor for the
first two months of 1996 and for the year ended December 31, 1995 were
included in a consolidated U.S. income tax return of Westinghouse and its
subsidiaries. Income taxes are provided in the accompanying financial
statements as if the Predecessor had filed a separate tax return.
Foreign Currency Translation
Results of foreign operations are translated into U.S. dollars using
average exchange rates during the period, while assets and liabilities are
translated into U.S. dollars using current rates. The resulting translation
adjustments are accumulated as a separate component of stockholders'
equity.
Transaction gains and losses resulting from exchange rate changes on
transactions denominated in currencies other than those of the foreign
subsidiaries are included in income in the year in which the change occurs.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS 123"), encourages entities to record
compensation expense for stock-based employee compensation plans at fair
value but provides the option of measuring compensation expense using the
F-9
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
intrinsic value method prescribed in Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). The Company
has elected to account for stock-based compensation in accordance with APB
25. Pro form results of operations as if SFAS 123 had been used to account
for stock-based compensation plans are presented in Note 20.
Share and Per Share Amounts
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
128"). SFAS 128 replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes the dilutive
effects of options, warrants and convertible securities. Diluted earnings
per share is very similar to the previously reported fully diluted earnings
per share. Earnings per share amounts for all periods have been presented
and, where appropriate, restated to conform to the requirements of SFAS
128. In addition, all numbers of shares of common stock and per share
amounts for 1996 have been adjusted to give retroactive effect to the
3.13943-for-1 stock split as discussed in Note 13.
Because of the significance of the redemption and conversion into common
stock of the outstanding Series A 12% Participating Convertible Preferred
Stock ("Series A Preferred Stock") as discussed in Note 13, historical net
income (loss) per share is not presented herein. Pro forma net income per
share amounts are based on the weighted average number of shares of common
stock and potentially dilutive securities (employee stock options and
nonvested restricted stock grants) outstanding during the period, after
giving effect to the redemption and conversion into common stock of the
Series A Preferred Stock assuming such redemption and conversion had
occurred at the beginning of the periods presented. Pursuant to Securities
and Exchange Commission Staff Accounting Bulletin No. 98, all common stock
and options to purchase common stock issued for nominal consideration prior
to the initial public offering (see Note 4) have been reflected as
outstanding as of the beginning of each period presented.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of certain
assets, liabilities, revenues and expenses and the disclosure of certain
contingent assets and liabilities. Actual future results may differ from
such estimates.
Reclassifications
Certain amounts for 1996 in the accompanying consolidated financial
statements have been reclassified to conform with the 1997 classifications.
3. ACQUISITION
On December 20, 1995, Westinghouse entered into a Stock Purchase Agreement
(the "Agreement") with T.K.G. Acquisition Corp. ("TKG"), a subsidiary of
Warburg, Pincus Ventures, L.P. Under the terms of the Agreement, TKG
acquired all of the outstanding capital stock of The Knoll Group, Inc. and
related entities on February 29, 1996 through its wholly owned subsidiary
T.K.G. Acquisition Sub, Inc. Immediately following this transaction, T.K.G.
Acquisition Sub, Inc. and The Knoll Group, Inc. merged with and into Knoll
North America, Inc., the principal U.S. operating company of The Knoll
Group, Inc. Knoll North America, Inc. changed its name to Knoll, Inc. at
the time of the merger. On March 14, 1997, Knoll, Inc. merged with and into
TKG. TKG then changed its name to Knoll, Inc.
F-10
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The cost of the acquisition was $579,801,000. TKG funded the acquisition
through proceeds of $160,000,000 received from the sale of TKG capital
stock, $165,000,000 received from an offering of 10.875% Senior
Subordinated Notes due 2006 (the "Senior Subordinated Notes") and
$260,000,000 in borrowings under senior bank credit facilities. T.K.G.
Acquisition Sub, Inc. executed the offering of the Senior Subordinated
Notes and borrowings under the credit facilities. As such, upon the
acquisition and subsequent mergers, the Senior Subordinated Notes and
credit facility borrowings became obligations of Knoll, Inc.
The acquisition was accounted for using the purchase method of accounting.
Accordingly, the purchase price has been allocated to the assets acquired
and liabilities assumed based upon fair market value at the date of
acquisition. The excess of the consideration paid over the estimated fair
value of the net assets acquired, totaling $66,850,000, has been recorded
as goodwill and is being amortized on a straight-line basis over 40 years.
The purchase price allocation is summarized as follows (in thousands):
Net working capital............................................. $101,446
Property, plant and equipment................................... 180,074
Goodwill........................................................ 66,850
Other intangible assets......................................... 239,557
Other noncurrent liabilities, net............................... (8,126)
--------
$579,801
========
The following table sets forth unaudited pro forma consolidated results of
operations assuming that the acquisition had taken place at the beginning
of the years presented:
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995
----------- -----------
(IN THOUSANDS)
Sales........................................... $651,766 $620,892
Cost of sales................................... 419,908 425,327
-------- --------
Gross profit.................................... 231,858 195,565
Selling, general and administrative expenses.... 153,388 142,582
Allocated corporate expenses.................... -- 4,000
-------- --------
Operating income................................ 78,470 48,983
Interest expense................................ 40,030 40,945
Other income (expense), net..................... 151 (1,597)
-------- --------
Income before income taxes and extraordinary
item........................................... 38,591 6,441
Income taxes.................................... 16,848 2,705
-------- --------
Income before extraordinary item................ 21,743 3,736
Extraordinary loss on early extinguishment of
debt, net of taxes............................. 5,159 --
-------- --------
Net income...................................... $ 16,584 $ 3,736
======== ========
These pro forma results of operations have been prepared for comparative
purposes only and include certain adjustments, such as additional
depreciation expense as a result of a step-up in the basis of fixed assets,
additional selling, general and administrative costs for services
previously provided by Westinghouse, additional amortization expense as a
result of goodwill and other intangible assets, increased interest expense
as a result of the debt assumed to finance the acquisition, elimination of
incentive compensation under Westinghouse's long-term incentive plans that
became payable, and for which amounts payable
F-11
KNOLL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
were established, as a result of the acquisition, and related income tax
effects. Such results do not purport to be indicative of the actual results
which would have occurred had the acquisition been consummated at the
beginning of each year presented, nor do they purport to be indicative of
results that will be achieved in the future.
4. INITIAL PUBLIC OFFERING
The Company completed an initial public offering (the "IPO") during the
second quarter of 1997. An aggregate of 9,200,000 shares, including 720,000
shares sold by a selling stockholder, were sold during May and June 1997 at
$17.00 per share. The net proceeds to the Company amounted to $133,440,000
after deducting related expenses. The net proceeds, together with
borrowings of $11,673,000 under the Company's then-existing revolving
credit facility, were used (i) to redeem 800,000 shares of the Series A
Preferred Stock for $80,000,000 and (ii) to redeem an aggregate principal
amount of $57,750,000 of the Company's Senior Subordinated Notes for a
total redemption price of $65,113,000, including a redemption premium of
$5,775,000 and accrued and unpaid interest thereon of $1,588,000.
5. SUPPLEMENTAL PRO FORMA AS ADJUSTED DATA (UNAUDITED)
The supplemental pro forma as adjusted data is included for purposes of
additional analysis. It presents results of operations assuming that the
IPO and the application of the net proceeds to the Company therefrom
together with related borrowings under the Company's then-existing
revolving credit facility occurred at the beginning of the respective
periods. Such pro forma as adjusted data does not reflect extraordinary
losses of $5,337,000 and $5,159,000, net of taxes, incurred in 1997 and
1996, respectively, in connection with the early redemption of debt (see
Note 12). The supplemental pro forma as adjusted weighted average shares of
common stock outstanding reflect the issuance of the Company's common stock
in the IPO and the redemption and conversion into common stock of the
Series A Preferred Stock (see Note 13) as of the beginning of each period
presented.
The supplemental pro forma as adjusted data reflects interest savings from
the redemption of an aggregate principal amount of $57,750,000 of the
Company's Senior Subordinated Notes, additional interest expense incurred
on $11,673,000 in related borrowings under the Company's then-existing
revolving credit facility and related income tax effects. Interest expense
(including the amortization of deferred financing fees) has been decreased
by $2,702,000 and $5,671,000 for the years ended December 31, 1997 and
1996, respectively. Interest adjustments are based on the actual interest
rate of 10.875% for the Senior Subordinated Notes and a weighted average
interest rate of 6.6% in 1997 and 8.25% in 1996 for the then-existing
revolving credit facility. The weighted average interest rates approximate
the actual interest rates for the period January 1, 1997 to May 8, 1997,
the period preceding the IPO, and the ten-month period ended December 31,
1996, respectively, for the Company's average outstanding borrowings under
the then-existing senior credit facilities. Income tax expense has been
increased by $1,070,000 and $2,246,000 for the years ended December 31,
1997 and 1996, respectively, to reflect the assumed income tax effects of
the interest expense adjustments.
The supplemental pro forma as adjusted information does not purport to
represent what the Company's results actually would have been if the
aforementioned events had occurred at the beginning of each period
presented, nor does such information purport to project the results of the
Company for any future periods. The unaudited supplemental pro forma as
adjusted financial information is based upon assumptions that the Company
believes are reasonable.
F-12
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. RELATED PARTY TRANSACTIONS OF THE PREDECESSOR
The Predecessor purchased products from and sold products to other
Westinghouse operations. The Predecessor also purchased certain services
from Westinghouse, including liability, property and workers' compensation
insurance. These transactions are discussed in further detail below.
Intercompany Purchases
The Predecessor purchased products and services from other Westinghouse
operations. For intercompany purchases in the U.S., the Predecessor used
the central clearinghouse arrangement through which intercompany
transactions were settled at the transfer date. Accounts payable were
established for purchases from units of Westinghouse that did not
participate in the central clearinghouse arrangement.
Intercompany Sales
The Predecessor sold products to various Westinghouse operations. These
transactions were settled immediately through the central clearinghouse or
the internal customer was invoiced and an intercompany receivable was
established.
Corporate Services
The Predecessor used, and was charged directly for, certain services that
Westinghouse provided to its business units. These services generally
included information systems support, certain accounting functions such as
transaction processing, legal, environmental affairs and human resources
consulting and compliance support.
Westinghouse centrally developed, negotiated and administered the
Predecessor's insurance programs. The insurance included broad all-risk
coverage for real and personal property and third-party liability coverage,
employer's liability coverage, automobile liability, general and product
liability and other standard liability coverage. The Predecessor also
maintained a program of self-insurance for workers' compensation in the
U.S. through Westinghouse. Westinghouse charged its business units for all
of the centrally administered insurance programs based in part on claims
history.
All of the charges for the corporate services described above are included
in the costs of the Predecessor's operations in the consolidated statements
of operations. Such charges were based on costs that directly related to
the Predecessor or on a pro rata portion of Westinghouse's total costs for
the services provided. These costs were allocated to the Predecessor on a
basis that management believes is reasonable. However, management believes
that it is possible that the costs of these transactions may differ from
those that would result from transactions among unrelated parties. For the
two-month period ended February 29, 1996 and the year ended December 31,
1995, charges related to corporate services totaled $510,000 and
$3,304,000, respectively.
The Predecessor also purchased other Westinghouse internally-provided
services as necessary including telecommunications, printing, productivity
and quality consulting and other services.
Allocated Corporate Expenses
Westinghouse allocated a certain portion of its corporate expenses to its
business units. These allocated costs include Westinghouse executive
management and corporate overhead, corporate legal, environmental, audit,
treasury and tax services, pension charges related to corporate functions
and other corporate support and executive costs. For the year ended
December 31, 1995, allocated corporate expenses also include $4,000,000 of
incentive compensation payable to the Predecessor's management under
Westinghouse long-term incentive plans.
F-13
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
These corporate expenses were allocated primarily based on sales with the
exception of the incentive compensation allocation. This methodology of
allocating corporate expenses to business units is reasonable and
consistent, but such allocations are not necessarily indicative of actual
costs. On an annual basis, it was not practical for Westinghouse management
to estimate the level of expenses that might have been incurred had the
Predecessor operated as a separate stand-alone entity.
Westinghouse did not charge its business units for the carrying costs
related to its investment in such units (i.e. parent company investment).
Therefore, the Predecessor's results of operations for each of the periods
presented do not include any allocated interest charges from Westinghouse.
Westinghouse Long-Term Incentive Compensation
Certain members of management of the Predecessor were participants in a
long-term incentive compensation plan established by Westinghouse. The plan
provided for the payment of awards at the end of a five-year period based
on the achievement of certain performance goals set by Westinghouse's Board
of Directors. As a result of the consummation of the acquisition discussed
in Note 3, the payment of awards was accelerated pursuant to the terms of
the plan, resulting in a charge to operations of $47,900,000 for the two
months ended February 29, 1996.
Parent Company Investment
Since the Predecessor was an operating unit of Westinghouse and was not a
distinct legal entity, there were no customary equity and capital accounts
recorded on the consolidated balance sheet. Instead, parent company
investment was maintained by the Predecessor and Westinghouse to account
for interunit transactions described above.
7. CUSTOMER RECEIVABLES
Customer receivables are presented net of an allowance for doubtful
accounts of $5,461,000 and $5,713,000 at December 31, 1997 and 1996,
respectively. Management performs ongoing credit evaluations of its
customers and generally does not require collateral. As of December 31,
1997 and 1996, the U.S. government represented approximately 13.8% and
17.3%, respectively, of gross customer receivables.
F-14
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. INVENTORIES
DECEMBER 31,
---------------
1997 1996
------- -------
(IN THOUSANDS)
Raw materials............................................. $39,978 $34,147
Work in process........................................... 9,673 7,508
Finished goods............................................ 18,598 16,156
------- -------
Inventories............................................... $68,249 $57,811
======= =======
9. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31,
------------------
1997 1996
-------- --------
(IN THOUSANDS)
Land and buildings.................................... $ 62,249 $ 61,844
Machinery and equipment............................... 139,592 122,573
Construction in progress.............................. 22,433 11,066
-------- --------
Property, plant and equipment at cost................. 224,274 195,483
Accumulated depreciation.............................. (43,824) (19,265)
-------- --------
Property, plant and equipment, net.................... $180,450 $176,218
======== ========
10. INTANGIBLE ASSETS
DECEMBER 31,
------------------
1997 1996
-------- --------
(IN THOUSANDS)
Goodwill.............................................. $ 56,803 $ 62,627
Trademarks............................................ 219,900 219,900
Deferred financing fees............................... 8,354 11,226
-------- --------
Intangible asset at cost.............................. 285,057 293,753
Accumulated amortization.............................. (14,380) (6,813)
-------- --------
Intangible assets, net................................ $270,677 $286,940
======== ========
11. OTHER CURRENT LIABILITIES
DECEMBER 31,
---------------
1997 1996
------- -------
(IN THOUSANDS)
Accrued employee compensation............................ $39,414 $28,282
Accrued product warranty................................. 10,871 7,173
Other.................................................... 27,556 28,567
------- -------
Other current liabilities................................ $77,841 $64,022
======= =======
F-15
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. INDEBTEDNESS
The Company's long-term debt is summarized as follows:
DECEMBER 31,
------------------
1997 1996
-------- --------
(IN THOUSANDS)
10.875% Senior Subordinated Notes, due 2006............. $107,250 $165,000
Term loans, variable rate (6.515% at December 31, 1996)
due through 2002....................................... -- 100,000
Revolving loans, variable rate (6.25%-6.40% at December
31, 1997 and 6.515% at December 31, 1996) due 2002..... 99,000 88,000
Other................................................... 779 1,154
-------- --------
207,029 354,154
Less current maturities................................. (10,000) (23,265)
-------- --------
Long-term debt.......................................... $197,029 $330,889
======== ========
Senior Subordinated Notes
The Company assumed the obligations under the 10.875% Senior Subordinated
Notes due 2006 as a direct result of the acquisition and merger that
occurred on February 29, 1996 (see Note 3). The Senior Subordinated Notes
are unsecured and are guaranteed by each existing and future wholly owned
domestic subsidiary of Knoll, Inc. However, if the Company is unable to
satisfy all or any portion of its obligations with respect to the Senior
Subordinated Notes, it is unlikely that the guarantors will be able to pay
all or any portion of such unsatisfied obligations.
During June 1997, the Company used proceeds from its IPO to repurchase an
aggregate principal amount of $57,750,000 of the Senior Subordinated Notes
for a total redemption price of $65,113,000, including a redemption premium
of $5,775,000 and accrued and unpaid interest thereon of $1,588,000. The
Company wrote off unamortized financing costs of $3,063,000 related to the
portion of the Senior Subordinated Notes that was redeemed. The early
redemption premium and write-off of unamortized financing costs resulted in
an extraordinary loss of $8,838,000 on a pre-tax basis ($5,337,000 on an
after-tax basis) for the year ended December 31, 1997.
The Senior Subordinated Notes outstanding at December 31, 1997 may not be
redeemed at the Company's option prior to March 15, 2001. At such date, the
Senior Subordinated Notes are redeemable at 105.438% of principal amount,
and thereafter at an annually declining premium over par until March 15,
2004 when they are redeemable at par. There are no sinking fund
requirements related to the Senior Subordinated Notes.
The indenture for the Senior Subordinated Notes limits the payment of
dividends and incurrence of indebtedness and includes certain other
restrictions and limitations that are customary with subordinated
indebtedness of this type. The Company was in compliance with the terms of
the indenture at December 31, 1997.
Term and Revolving Loans
On December 17, 1996, the Company entered into a $230,000,000 credit
agreement with a group of financial institutions that provided for a term
loan facility and a revolving credit facility. The proceeds of
F-16
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the facilities were used to refinance the Company's debt under the
previously existing senior bank credit facilities that was assumed as a
result of the acquisition (see Note 3) and for working capital and general
corporate purposes. The refinancing resulted in an extraordinary charge of
$8,542,000 on a pre-tax basis ($5,159,000 on an after-tax basis) to
operations for the ten months ended December 31, 1996. This extraordinary
charge consisted of the write-off of unamortized financing costs related to
the refinanced debt.
On August 8, 1997, the Company entered into a new agreement that modified
certain terms of the December 17, 1996 credit agreement. The credit
agreement previously provided for a $100,000,000 term loan with scheduled
principal payments through December 2002 and a $130,000,000 revolving
credit facility that matured in December 2002. The new agreement provides
for a $275,000,000 revolving credit facility that matures in August 2002.
At the time this change became effective, $90,000,000 of indebtedness
outstanding under the previously existing term loan and $50,000,000 under
the previously existing revolving loan became revolving borrowings under
the new agreement.
The new senior credit agreement contains a letter of credit subfacility
that allows for the issuance of up to $20,000,000 in letters of credit, a
competitive bid loan subfacility that provides for the issuance of up to
$140,000,000 in competitive bid loans and a swing line loan subfacility
that allows for the issuance of up to $10,000,000 in swing line loans. The
amount available for borrowing under the revolving credit facility is
reduced by the total outstanding letters of credit, competitive bid loans
and swing line loans.
Under the terms of the existing credit agreement, the Company may use the
revolving credit facility for working capital and general purposes.
Borrowings bear interest at a floating rate based at the Company's option,
upon (i) the Eurodollar rate (as defined in the agreement) plus an
applicable percentage that is subject to change based on the Company's
ratio of funded debt to EBITDA or (ii) the greater of the federal funds
rate plus 0.5% or the prime rate.
The credit agreement subjects the Company to various affirmative and
negative covenants. Among other things, the covenants limit the Company's
ability to incur additional indebtedness and declare or pay dividends and
require the Company to maintain certain financial ratios with respect to
funded debt leverage. The Company was in compliance with such covenants at
December 31, 1997.
At December 31, 1997, the Company had outstanding credit facility
borrowings totaling $99,000,000, of which $10,000,000 has been classified
as current, and total letters of credit of approximately $1,417,000. There
were no borrowings under the letters of credit. The Company pays a
commitment fee ranging from 0.125% to 0.25%, depending on the Company's
leverage ratio, on the unused portion of the revolving credit facility. In
addition, a letter of credit fee ranging from 0.325% to 0.75%, depending on
the Company's leverage ratio, is required to be paid on the amount
available to be drawn under letters of credit.
The Company also has several revolving credit agreements with various
European financial institutions. As of December 31, 1997, total credit
available under such agreements was approximately $11,881,000 or the
European equivalent. There is currently no expiration date on these
agreements. The interest rate on borrowings is variable and is based on the
monetary market rate which is linked to each country's prime rate. As of
December 31, 1997, the Company did not have any outstanding borrowings
under the European credit facilities.
Interest Paid
For the year ended December 31, 1997 and the ten months ended December 31,
1996, the Company made interest payments totaling $25,505,000 and
$25,775,000, respectively.
F-17
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Maturities
Aggregate maturities of the Company's indebtedness are as follows (in
thousands):
1998............................................................. $ 10,000
1999............................................................. --
2000............................................................. --
2001............................................................. --
2002............................................................. 89,078
Thereafter....................................................... 107,951
--------
$207,029
========
13. CAPITAL STRUCTURE
On May 6, 1997, the Company's Certificate of Incorporation was amended to
increase the number of authorized shares of common stock from 24,000,000 to
100,000,000, increase the number of authorized shares of preferred stock
from 3,000,000 to 10,000,000 and effect a 3.13943-for-1 split of the
Company's common stock. Of the 10,000,000 shares of preferred stock
authorized to be issued, 1,920,000 shares are designated as Series A 12%
Participating Convertible Preferred Stock.
In connection with the Company's IPO, 800,000 shares of Series A Preferred
Stock were redeemed for $80,000,000 and 11,749,361 shares of common stock,
and 802,998 shares of Series A Preferred Stock were converted into
15,691,558 shares of common stock. Fractional shares resulting from both
the conversion of Series A Preferred Stock into common stock and the common
stock split were settled in cash.
Prior to the redemption and conversion of the Series A Preferred Stock,
dividends on the Series A Preferred Stock were fully cumulative, accrued on
a quarterly basis at a rate of $12.00 per annum, and were payable only at
the discretion of the Board of Directors. As of December 31, 1996, the
aggregate and per share amounts of cumulative dividends in arrears were
$16.6 million and $10.36, respectively. Upon the redemption and conversion
into common stock of the Series A Preferred Stock, the holders of the then-
outstanding Series A Preferred Stock lost their right to all dividends,
including dividends in arrears.
The shares of Series A Preferred Stock that were redeemed and converted
were retired and canceled and may not be reissued. As such, only 317,002
shares remain eligible for issuance. If these eligible shares of Series A
Preferred Stock are issued, they will not be convertible into common stock
and no dividends may be declared or accrue on them. Future holders of
Series A Preferred Stock will not be granted the benefit of any sinking
fund. Upon involuntary liquidation, holders would be entitled to receive
$100.00 for each share of Series A Preferred Stock. Each holder would be
entitled to vote on matters generally submitted to the stockholders of the
Company and certain matters on which a majority vote of holders of the
Series A Preferred Stock is required by the Company's Certificate of
Incorporation. The number of votes per share of Series A Preferred Stock
would be approximately 19.54 votes.
14. DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses interest rate collar agreements for other than trading
purposes to manage its exposure to fluctuations in interest rates on its
floating rate debt. Such agreements effectively set agreed-upon maximum and
minimum rates on a notional principal amount and utilize the London
Interbank Offered Rate (LIBOR) as a floating rate reference. The notional
amounts are utilized to measure the amount of interest to be paid or
received and do not represent the amount of exposure to credit loss. These
interest rate collar agreements provide that, at specified intervals, when
the floating rate is less than the minimum rate, the Company will
F-18
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
pay the counterparty the differential computed on the notional principal
amount, and when the floating rate exceeds the maximum rate, the
counterparty will pay the Company the differential computed on the notional
principal amount. The net amount paid or received on the interest rate
collar agreements is recognized as an adjustment to interest expense.
During the year ended December 31, 1997 and ten months ended December 31,
1996, the Company was not required to make nor was it entitled to receive
any payments as a result of these hedging activities.
The Company had four outstanding interest rate collar agreements at
December 31, 1997 and five outstanding interest rate collar agreements at
December 31, 1996 with maximum and minimum rates ranging from 7.50% to
7.99% and 5.00% to 5.50%, respectively. The notional principal amount of
these agreements totaled $150,000,000 and $185,000,000 at December 31, 1997
and 1996, respectively. The agreements outstanding as of December 31, 1997
mature over the next two years. Aggregate maturities of the total notional
principal amount are as follows: $35,000,000 in 1998 and $115,000,000 in
1999.
The counterparties to the interest rate collar agreements are major
financial institutions. The Company continually monitors its positions and
the credit ratings of the counterparties and does not anticipate
nonperformance by them. The Company has not been required to provide nor
has it received any collateral related to its hedging activities.
15. CONTINGENT LIABILITIES AND COMMITMENTS
There are various claims and lawsuits pending against the Company, all of
which management believes, based upon information presently known, either
to be without merit or subject to adequate defenses. The resolution of
these claims and lawsuits is not expected to have a material adverse effect
on the Company.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair values
of each class of financial instruments:
Cash and Cash Equivalents, Accounts Receivable, Accounts Payable and Short-
Term Debt
The fair values of these financial instruments approximate their carrying
amounts due to their immediate or short-term periods to maturity.
Long-Term Debt
The fair values of the variable rate long-term debt instruments approximate
their carrying amounts. The fair value of other long-term debt was
estimated using quoted market values or discounted cash flow analyses based
on current incremental borrowing rates for similar types of borrowing
arrangements. The fair value of the Company's long-term debt, including the
current portion, is approximately $220,435,000 at December 31, 1997 and
$371,892,000 at December 31, 1996 while the carrying amounts are
$207,029,000 and $354,154,000, respectively.
Interest Rate Collar Agreements
The fair value of the Company's interest rate collar agreements, as
estimated by dealers, is not material.
F-19
KNOLL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
17. EARNINGS PER SHARE
The following table sets forth a reconciliation of the numerators and
denominators of the basic and diluted pro forma earnings per share
computations for income before extraordinary item. See Note 2 for a
description of the pro forma basis of presentation.
INCOME BEFORE WEIGHTED
EXTRAORDINARY AVERAGE
ITEM SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------- ------------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
YEAR ENDED DECEMBER 31, 1997:
Basic pro forma earnings per share.. $66,443 37,284 $1.78
=====
Effect of dilutive potential common
shares:
Employee stock options............ -- 235
Nonvested restricted stock grants. -- 2,879
------- ------
Diluted pro forma earnings per
share.............................. $66,443 40,398 $1.64
======= ====== =====
TEN MONTHS ENDED DECEMBER 31, 1996:
Basic pro forma earnings per share.. $21,995 31,040 $0.71
=====
Dilutive effect of nonvested
restricted stock grants............ -- 3,661
------- ------
Diluted pro forma earnings per
share.............................. $21,995 34,701 $0.63
======= ====== =====
As discussed in Note 12, the Company recognized an extraordinary loss on
early extinguishment of debt of $5,337,000, net of taxes, in 1997 and
$5,159,000, net of taxes, in 1996. On a per share basis, these
extraordinary losses amounted to $0.14 basic and $0.13 diluted in 1997 and
$0.17 basic and $0.15 diluted in 1996.
18. INCOME TAXES
Income (loss) before income taxes and extraordinary item consists of the
following:
| THE KNOLL GROUP, INC.
| (PREDECESSOR)
|-------------------------
TEN MONTHS | TWO MONTHS
YEAR ENDED ENDED | ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,|FEBRUARY 29, DECEMBER 31,
1997 1996 | 1996 1995
------------ ------------|------------ ------------
(IN THOUSANDS) | (IN THOUSANDS)
|
U.S. operations..................................................... $ 82,851 $23,381 | $(39,105) $46,908
Foreign operations.................................................. 31,618 15,458 | (1,090) 5,270
-------- ------- | -------- -------
$114,469 $38,839 | $(40,195) $52,178
======== ======= | ======== =======
F-20
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income tax expense (benefit), excluding extraordinary items, is comprised
of the following:
| THE KNOLL GROUP, INC.
| (PREDECESSOR)
|-------------------------
YEAR TEN MONTHS | TWO MONTHS YEAR
ENDED ENDED | ENDED ENDED
DECEMBER 31, DECEMBER 31,|FEBRUARY 29, DECEMBER 31,
1997 1996 | 1996 1995
------------ ------------|------------ ------------
(IN THOUSANDS) | (IN THOUSANDS)
|
Current |
Federal................................................................ $21,585 $10,909 | $(13,801) $11,130
State.................................................................. 5,980 2,953 | (1,814) 3,687
Foreign................................................................ 11,295 661 | 28 --
------- ------- | -------- -------
Total current........................................................ 38,860 14,523 | (15,587) 14,817
------- ------- | -------- -------
Deferred: |
Federal................................................................ 6,258 (2,850) | (460) 7,795
State.................................................................. 708 (612) | (60) 234
Foreign................................................................ 2,200 5,783 | -- --
------- ------- | -------- -------
Total deferred....................................................... 9,166 2,321 | (520) 8,029
------- ------- | -------- -------
Income tax expense (benefit)............................................. $48,026 $16,844 | $(16,107) $22,846
======= ======= | ======== =======
Income taxes paid by the Company for the year ended December 31, 1997 and
the ten months ended December 31, 1996 totaled $24,026,000 and $13,137,000,
respectively.
As discussed in Notes 1 and 2 the recognition and measurement of income tax
expense (benefit) for the Predecessor required certain assumptions,
allocations and significant estimates in order to measure the tax
consequences as if the Predecessor were a stand-alone taxpayer.
The following table sets forth the tax effects of temporary differences
that give rise to significant portions of the deferred tax assets and
liabilities:
DECEMBER 31,
------------------
1997 1996
-------- --------
(IN THOUSANDS)
Deferred tax assets:
Accounts receivable, principally due to allowance for
doubtful accounts....................................... $ 1,634 $ 1,659
Inventories.............................................. 3,153 2,603
Net operating loss carryforwards......................... 21,359 28,253
Postretirement benefit obligation........................ 7,039 6,880
Accrued liabilities and other items...................... 20,493 21,635
-------- --------
Gross deferred tax assets.................................. 53,678 61,030
Valuation allowance........................................ (25,172) (33,161)
-------- --------
Net deferred tax assets.................................... 28,506 27,869
-------- --------
Deferred tax liabilities:
Intangibles, principally due to differences in
amortization............................................ 7,303 3,338
Plant and equipment, principally due to differences in
depreciation and assigned values........................ 5,011 1,930
Other items.............................................. 198 --
-------- --------
Gross deferred tax liabilities............................. 12,512 5,268
-------- --------
Net deferred tax asset..................................... $ 15,994 $ 22,601
======== ========
F-21
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As of December 31, 1997, the Company has pre-acquisition net operating loss
carryforwards totaling approximately $57,206,000 in various foreign tax
jurisdictions which generally expire between 1998 and 2001 or may be
carried forward for an unlimited time.
The Company has recorded a valuation allowance for net deferred tax assets
in foreign tax jurisdictions, primarily related to pre-acquisition net
operating loss carryforwards, due to the significant losses incurred by the
Predecessor in these tax jurisdictions in previous years.
At February 29, 1996 and December 31, 1995, the Predecessor had recorded a
valuation allowance of $38,446,000 and $37,990,000, respectively.
For the year ended December 31, 1997 and the ten months ended December 31,
1996, tax benefits recognized through reductions of the valuation allowance
had the effect of reducing goodwill by $4,524,000 and $4,246,000,
respectively. If additional tax benefits are recognized in the future
through further reduction of the valuation allowance, such benefits will
reduce goodwill.
The following table sets forth a reconciliation of the statutory federal
income tax rate to the effective income tax rate:
| THE KNOLL GROUP, INC.
| (PREDECESSOR)
|-------------------------
YEAR TEN MONTHS | TWO MONTHS YEAR
ENDED ENDED | ENDED ENDED
DECEMBER 31, DECEMBER 31,|FEBRUARY 29, DECEMBER 31,
1997 1996 | 1996 1995
------------ ------------|------------ ------------
|
Federal statutory tax rate......................................... 35.0% 35.0% | (35.0%) 35.0%
Increase (decrease) in the tax rate resulting from: |
State taxes, net of federal effect............................... 3.8 3.9 | (4.5) 4.9
Higher effective income taxes of other countries ................ 2.4 3.2 | (0.2) (1.4)
Non-deductible goodwill amortization............................. 0.3 1.0 | 1.1 4.7
Other............................................................ 0.5 0.3 | (1.4) 0.6
---- ---- | ----- ----
Effective tax rate................................................. 42.0% 43.4% | (40.0%) 43.8%
==== ==== | ===== ====
The Company has not made provision for U.S. federal and state income taxes
as of December 31, 1997 and 1996 on approximately $27,467,000 and
$9,194,000 of foreign earnings which are expected to be reinvested
indefinitely. Upon distribution of those earnings in the form of dividends
or otherwise, the Company would be subject to U.S. income taxes (subject to
an adjustment for foreign tax credits) and withholding taxes payable to the
various foreign countries. Determination of the amount of the unrecognized
deferred tax liability is not practicable.
19. LEASES
The Company has commitments under operating leases for certain machinery
and equipment and facilities used in its operations. Total rental expense
for the year ended December 31, 1997 and the ten months ended
F-22
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
December 31, 1996 was $8,902,000 and $7,787,000, respectively. Future
minimum rental payments required under those operating leases that have an
initial or remaining noncancelable lease term in excess of one year are as
follows (in thousands):
1998............................................................. $ 5,786
1999............................................................. 4,677
2000............................................................. 2,970
2001............................................................. 2,119
2002............................................................. 1,824
Subsequent years................................................. 2,018
-------
Total minimum rental payments.................................... $19,394
=======
The Predecessor also had operating leases for certain machinery and
equipment and facilities. Total rental expense charged to operations was
$1,668,000 for the two months ended February 29, 1996 and $10,149,000 for
the year ended December 31, 1995.
20. STOCK PLANS
In connection with the acquisition discussed in Note 3, the Company
established the Knoll, Inc. 1996 Stock Incentive Plan (the "1996 Stock
Plan"). Under the 1996 Stock Plan, awards denominated or payable in shares
or options to purchase shares of the Company's common stock may be granted
to officers and other key employees of the Company. A combined maximum of
4,709,126 shares or options to purchase shares may be granted under the
1996 Stock Plan. Options that are granted have a contractual life of ten
years. A Stock Plan Committee of the Company's Board of Directors has sole
discretion concerning administration of the 1996 Stock Plan, including
selection of individuals to receive awards, types of awards, the terms and
conditions of the awards and the time at which awards will be granted. The
Board of Directors may terminate the 1996 Stock Plan at its discretion at
any time.
During the ten months ended December 31, 1996, the Company granted
4,144,030 restricted common shares, with a weighted average fair market
value of $0.34 per share, to key employees. Of such amount, 1,883,641 of
the restricted shares vest ratably over the five years subsequent to the
grant date while the other 2,260,389 restricted shares were scheduled to
vest 20.0% on the grant date and 80.0% ratably over the four years
subsequent to the grant date. In October 1997, the vesting of 565,098 of
the 2,260,389 restricted shares was accelerated. As a result of this
acceleration, 1,469,252 of the 2,260,389 restricted shares were vested as
of December 31, 1997 while the remaining 791,137 shares will vest in equal
installments on each of March 1, 1998, 1999 and 2000. As of December 31,
1997, a total of 1,845,972 restricted shares have vested. The fair market
value of the shares on the date of the grant has been recorded as unearned
stock grant compensation and is presented as a separate component of
stockholders' equity. Compensation expense is recognized ratably over the
vesting period. The remaining 565,096 shares available under the 1996 Stock
Plan were granted in the form of options during 1997.
The Knoll, Inc. 1997 Stock Incentive Plan (the "1997 Stock Plan") was
established on February 14, 1997. The terms of the 1997 Stock Plan are
essentially the same as those of the 1996 Stock Plan, except pursuant to
the 1997 Stock Plan, an aggregate of 2,255,772 shares of common stock are
reserved for issuance thereunder (subject, in the case of 1,000,000 shares,
to stockholder approval), discounted options may be granted, options may be
repriced, and the Board of Directors has greater flexibility to amend the
1997 Plan. As of December 31, 1997, there were 1,577,062 options
outstanding pursuant to the 1997 Stock Plan (subject, in the case of
options to purchase 330,000 shares, to stockholder approval).
F-23
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes the Company's stock option activity:
YEAR ENDED
DECEMBER 31,
1997
------------
Outstanding at beginning of year.............................. --
Granted....................................................... 2,173,552
Exercised..................................................... --
Forfeited..................................................... (31,394)
---------
Outstanding at end of year.................................... 2,142,158
=========
Exercisable at end of year.................................... 10,000
=========
Available for future grants................................... 678,710
=========
The exercise price per share for those options exercisable at December 31,
1997 is $17.00 and for those options forfeited during 1997 is $15.93.
Stock options outstanding at December 31, 1997 are summarized as follows:
WEIGHTED
NUMBER OF AVERAGE WEIGHTED
RANGE OF OPTIONS REMAINING AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE
--------------- ----------- ---------------- --------------
$15.93 - $17.00 1,337,158 9.19 $15.97
$28.50 - $33.13 805,000 9.83 28.64
---------
2,142,158 9.43 $20.73
=========
The Company also has a qualified, noncompensatory employee stock purchase
plan, which provides all employees the ability to purchase common stock of
the Company at a price equal to 15.0% below the lower of the market price
at (i) the beginning of each quarterly offering period or (ii) the end of
each quarterly offering period. Purchases under the plan are limited to
10.0% of an employee's eligible gross pay, up to $25,000. The Company has
reserved 300,000 shares of its common stock for issuance under its employee
stock purchase plan. From August 1, 1997, the date the employee stock
purchase plan commenced, through December 31, 1997, the Company issued
22,716 shares at a weighted average exercise price of $26.71 under this
plan.
As discussed in Note 2, the Company continues to account for its stock-
based compensation plans in accordance with APB 25. Accordingly, no
compensation cost has been recognized for the Company's stock options or
stock purchase plan. If the Company had recognized compensation cost based
upon the fair value of the stock options and stock issued under the
employee stock purchase plan at the date of grant as prescribed by SFAS
123, the Company's pro forma net income and pro forma net income per share
would have been as follows (in thousands, except per share amounts):
YEAR ENDED
DECEMBER 31,
1997
------------
Pro forma net income.......................................... $59,731
Pro forma net income per share of common stock:
Basic....................................................... 1.60
Diluted..................................................... 1.48
F-24
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The fair value of the options was estimated at the date of grant using a
Black-Scholes option pricing model with the following assumptions: risk-
free interest rate of 6.0%, dividend yield of 0.0%, expected volatility of
the market price of the common stock of 35.0% and a weighted average
expected life of the options of 7 years. The estimated fair value of the
options was amortized to expense over the vesting period of the options for
purposes of determining pro forma net income and pro forma net income per
share. Pro forma results of operations are not likely to be representative
of the effects on reported or pro forma results of operations for future
years.
21. PENSION PLANS
On March 1, 1996, the Company established two defined benefit pension
plans: The Knoll Pension Plan and The Knoll Pension Plan for Bargaining
Unit Employees. The first plan covers all eligible U.S. employees who are
not members of a collective bargaining unit (i.e. union), while the second
plan pertains to all U.S. employees who are covered by a collective
bargaining agreement. Benefits for these plans are based primarily on years
of credited service, annual compensation for each year of participation,
and age when payments begin. In order to accrue benefits under The Knoll
Pension Plan for Bargaining Unit Employees, participants are required to
make certain contributions to the plan. The Company makes contributions to
both plans as determined by an actuarial funding method. This funding
policy is consistent with the minimum funding requirements set forth by the
Employee Retirement Income Security Act of 1974, as amended, and other
governmental laws and regulations.
The following table sets forth the net periodic pension cost for the
Company's pension plans:
YEAR TEN MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
(IN THOUSANDS)
Service cost....................................... $4,893 $3,953
Interest cost on projected benefit obligation...... 207 --
------ ------
5,100 3,953
Return on plan assets.............................. (55) --
------ ------
Net periodic pension cost.......................... $5,045 $3,953
====== ======
The return on plan assets for the year ended December 31, 1997 was
determined based on a weighted-average expected long-term rate of return on
plan assets of 8.5%.
F-25
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The funded status of the Company's pension plans is as follows:
DECEMBER 31,
----------------
1997 1996
------- -------
(IN THOUSANDS)
Actuarial present value of benefit obligation:
Vested............................................... $(4,619) $(2,784)
Nonvested............................................ (1,341) (273)
------- -------
Accumulated benefit obligation....................... (5,960) (3,057)
Additional obligation for projected compensation
increases on accumulated years of service........... (2,118) (896)
------- -------
Projected benefit obligation........................... (8,078) (3,953)
Plan assets at fair value.............................. 3,809 30
------- -------
Plan assets less than projected benefit obligation..... (4,269) (3,923)
Unrecognized net gain.................................. (1,248) --
------- -------
Accrued pension cost................................... $(5,517) $(3,923)
======= =======
The projected benefit obligation as of December 31, 1997 and 1996 was
measured using a discount rate of 7.25% and rate of compensation increase
of 4.5%. As of December 31, 1997, plan assets consisted primarily of mutual
funds.
Prior to March 1, 1996, the Predecessor sponsored a defined benefit pension
plan, The Knoll Group Pension Plan, for all eligible U.S. nonunion
employees. The plan provisions were substantially the same as the current
pension plan for nonunion employees offered by Knoll, Inc. As a result of
the sale of the Predecessor by Westinghouse, benefits earned through
February 29, 1996 under The Knoll Group Pension Plan were frozen and
participants were fully vested in their benefits. The plan was subsequently
merged into a Westinghouse pension plan.
The following table sets forth the Predecessor's net periodic pension cost
(income) for The Knoll Group Pension Plan:
TWO MONTHS YEAR
ENDED ENDED
FEBRUARY 29, DECEMBER 31,
1996 1995
------------ ------------
(IN THOUSANDS)
Service cost................................... $ 522 $ 2,278
Interest cost on projected benefit obligation.. 933 5,212
Amortization of unrecognized prior service
cost.......................................... 68 385
Amortization of unrecognized net loss.......... 197 --
------ -------
1,720 7,875
Return on plan assets.......................... (1,543) (8,993)
------ -------
Net periodic pension cost (income)............. $ 177 $(1,118)
====== =======
The return on plan assets was determined based on a weighted-average
expected long-term rate of return on plan assets of 9.75% for each period
presented.
The Predecessor also participated in two single-employer defined benefit
pension plans sponsored by Westinghouse. These plans covered all U.S. union
employees of the Predecessor, certain domestic Westinghouse employees and
certain domestic executives of the Predecessor and Westinghouse. For the
two
F-26
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
months ended February 29, 1996 and the year ended December 31, 1995, the
Predecessor's contributions to Westinghouse for these defined benefit
pension plans totaled $212,000 and $1,076,000, respectively.
Employees of the Canadian and United Kingdom (U.K.) operations participate
in defined contribution plans. The Company's expense related to the
Canadian plan for the year ended December 31, 1997 and ten months ended
December 31, 1996 was $955,000 ad $607,000, respectively. The Predecessor's
expense for the two months ended February 29, 1996 and year ended December
31, 1995 totaled $114,000 and $398,000, respectively. Expense for the U.K.
plan during each of the four aforementioned periods was not significant.
The Company also sponsors a retirement savings plan, which is an employee
savings plan that qualifies as a deferred salary arrangement under Section
401(k) of the Internal Revenue Code, for all U.S. nonunion employees and
U.S. hourly union employees. Under this plan, participants may defer a
portion of their earnings up to the annual contribution limits established
by the Internal Revenue Service. The Company matches 40.0% of employee
contributions on up to the first 6.0% of employee compensation. The plan
also provides for additional employer matching based on the achievement of
certain profitability goals. The Company's common stock is offered as an
investment option under the 401(k) plan. Although the stock is typically
purchased on the open market, the Company has reserved 500,000 shares of
its common stock for issuance under its 401(k) plan. The Company's total
expense under this plan was $5,180,000 for the year ended December 31, 1997
and $2,957,000 for the ten months ended December 31, 1996. The Predecessor
administered a similar retirement savings plan and incurred related expense
totaling $406,000 and $2,675,000 for the two months ended February 29, 1996
and the year ended December 31, 1995, respectively.
22. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides postretirement medical and life insurance coverage for
certain retired U.S. nonunion and union employees and their eligible
dependents. The amount of benefits provided to retired nonunion employees
varies according to the age of the retiree as of a predetermined date,
while benefits provided to retired union employees are based on annual
compensation. The Company does not currently fund its obligation related to
postretirement medical and life insurance benefits.
Net periodic postretirement benefit cost for the Company includes the
following components:
YEAR TEN MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
(IN THOUSANDS)
Service cost............ $ 560 $ 440
Interest cost on
projected benefit
obligation............. 1,224 1,000
------ ------
Net periodic
postretirement benefit
cost................... $1,784 $1,440
====== ======
F-27
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company's liability related to the postretirement medical and life
insurance benefits is as follows:
DECEMBER 31,
------------------
1997 1996
-------- --------
(IN THOUSANDS)
Accumulated postretirement benefit obligation:
Retirees........................................... $ (7,183) $ (7,329)
Fully eligible active participants................. (1,974) (1,593)
Other active participants.......................... (8,992) (8,235)
-------- --------
Total accumulated postretirement benefit obligation.. (18,149) (17,157)
Unrecognized net loss (gain)......................... 375 (217)
-------- --------
Accrued postretirement benefit cost.................. $(17,774) $(17,374)
======== ========
The accumulated postretirement benefit obligation as of December 31, 1997
and 1996 was measured using a discount rate of 7.25% and rate of
compensation increase of 4.5%. The health care cost trend rate was assumed
to be 8.5% in 1997, decreasing by 1.0% per year to 5.5% in 2000, and
remaining at that level thereafter. Increasing the assumed health care cost
trend rate by one percentage point in each year would increase the
accumulated postretirement benefit obligation as of December 31, 1997 by
approximately $2,570,000 and increase the aggregate of the service and
interest cost for the year ended December 31, 1997 by approximately
$236,000.
The Predecessor provided postretirement medical and life insurance benefits
to U.S. retired nonunion employees. The current postretirement medical and
life insurance benefits which the Company provides to retired nonunion
employees remain essentially unchanged from those which the Predecessor had
provided.
Net periodic postretirement benefit cost incurred by the Predecessor
includes the following:
TWO MONTHS
ENDED YEAR ENDED
FEBRUARY 29, DECEMBER 31,
1996 1995
------------ ------------
(IN THOUSANDS)
Service cost............................... $103 $ 449
Interest cost on projected benefit
obligation................................ 207 1,509
Amortization of unrecognized prior service
cost...................................... (56) (12)
Amortization of unrecognized net loss
(gain).................................... 10 (25)
---- ------
Net periodic postretirement benefit cost... $264 $1,921
==== ======
The Predecessor also participated in a single-employer postretirement
benefit arrangement maintained by Westinghouse. Westinghouse provided
medical and life insurance benefits to all retired U.S. union employees and
certain Westinghouse employees. The Predecessor's contributions for the
postretirement benefit arrangements sponsored by Westinghouse totaled
$82,500 for the two months ended February 29, 1996 and $151,000 for the
year ended December 31, 1995.
F-28
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
23. BUSINESS SEGMENT AND GEOGRAPHICAL REGION INFORMATION
The Company conducts business predominantly in the office furniture
industry through its operations in the United States, Canada and Europe.
Summarized financial information regarding the Company's operations in
these geographic areas is presented below:
YEAR ENDED UNITED
DECEMBER 31, 1997 STATES CANADA EUROPE ELIMINATIONS TOTALS
----------------- -------- -------- ------- ------------ --------
(IN THOUSANDS)
Sales to customers....... $717,326 $ 37,674 $55,857 $ -- $810,857
Sales between geographic
areas................... 24,402 102,783 2,228 (129,413) --
-------- -------- ------- --------- --------
Net sales................ $741,728 $140,457 $58,085 $(129,413) $810,857
======== ======== ======= ========= ========
Operating income......... $108,002 $ 24,497 $ 5,378 -- $137,877
======== ======== ======= ========= ========
Identifiable assets...... $655,385 $ 50,701 $41,439 $ (66,666) $680,859
======== ======== ======= ========= ========
TEN MONTHS ENDED UNITED
DECEMBER 31, 1996 STATES CANADA EUROPE ELIMINATIONS TOTALS
----------------- -------- -------- ------- ------------ --------
(IN THOUSANDS)
Sales to customers....... $493,653 $ 24,456 $43,425 $ -- $561,534
Sales between geographic
areas................... 13,637 60,866 1,714 (76,217) --
-------- -------- ------- --------- --------
Net sales................ $507,290 $ 85,322 $45,139 $ (76,217) $561,534
======== ======== ======= ========= ========
Operating income......... $ 54,381 $ 10,681 $ 6,282 -- $ 71,344
======== ======== ======= ========= ========
Identifiable assets...... $648,868 $ 52,690 $39,725 $ (65,571) $675,712
======== ======== ======= ========= ========
The Predecessor also operated primarily in the office furniture industry in
the United States, Canada and Europe. Summarized financial data regarding
the Predecessor's operations according to geographic area is as follows:
TWO MONTHS ENDED UNITED
FEBRUARY 29, 1996 STATES CANADA EUROPE ELIMINATIONS TOTALS
----------------- -------- -------- ------- ------------ --------
(IN THOUSANDS)
Sales to customers....... $ 78,267 $ 4,415 $ 7,251 $ -- $ 89,933
Sales to related parties. 299 -- -- -- 299
Sales between geographic
areas................... 1,377 6,708 227 (8,312) --
-------- -------- ------- --------- --------
Net sales................ $ 79,943 $ 11,123 $ 7,478 $ (8,312) $ 90,232
======== ======== ======= ========= ========
Operating income (loss).. $(39,010) $ (734) $ 185 -- $(39,559)
======== ======== ======= ========= ========
YEAR ENDED UNITED
DECEMBER 31, 1995 STATES CANADA EUROPE ELIMINATIONS TOTALS
----------------- -------- -------- ------- ------------ --------
(IN THOUSANDS)
Sales to customers....... $517,314 $ 31,132 $62,277 $ -- $610,723
Sales to related parties. 10,169 -- -- -- 10,169
Sales between geographic
areas................... 17,349 61,262 1,882 (80,493) --
-------- -------- ------- --------- --------
Net sales................ $544,832 $ 92,394 $64,159 $ (80,493) $620,892
======== ======== ======= ========= ========
Operating income......... $ 54,043 $ 483 $ 679 -- $ 55,205
======== ======== ======= ========= ========
For the two months ended February 29, 1996 and the year ended December 31,
1995, allocated corporate expenses from Westinghouse were prorated to the
geographic segments based on sales.
F-29
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Predecessor typically derived more than 10.0% of net sales from the
U.S. federal government. The Predecessor's sales to the U.S. federal
government totaled $9,925,000 for the two months ended February 29, 1996
and $58,090,000 for the year ended December 31, 1995. The Company's total
sales to the U.S. federal government were $62,672,000 for the year ended
December 31, 1997 and $51,046,000 for the ten months ended December 31,
1996. Neither the Company nor the Predecessor engaged in export sales from
the U.S. to unaffiliated customers in foreign countries.
Sales between geographic areas are made at a transfer price that includes
an appropriate mark-up.
24. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth summary information on a quarterly basis for
the Company and the Predecessor for the respective periods presented below.
See Note 2 regarding the presentation of per share amounts.
THE COMPANY
-----------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
1997
Net sales............................... $177,833 $212,582 $208,402 $212,040
Gross profit............................ 67,974 86,176 83,714 83,031
Income before extraordinary item........ 11,638 16,956 19,471 18,378
Net income.............................. 11,638 11,619 19,471 18,378
Pro forma income before extraordinary
item per share of common stock:
Basic................................. 0.37 0.46
Diluted............................... 0.34 0.43
Income before extraordinary item per
share of common stock:
Basic................................. 0.48 0.45
Diluted............................... 0.45 0.42
PREDECESSOR | THE COMPANY
----------- | -----------------------------------
TWO MONTHS | ONE MONTH
ENDED | ENDED SECOND THIRD FOURTH
FEBRUARY 29 | MARCH 31 QUARTER QUARTER QUARTER
----------- | --------- -------- --------- --------
(IN |
THOUSANDS) | (IN THOUSANDS, EXCEPT PER SHARE DATA)
|
1996 |
Net sales................. $ 90,232 | $ 48,080 $166,520 $ 167,184 $179,750
Gross profit.............. 30,518 | 15,537 58,574 61,046 67,536
Income (loss) before |
extraordinary item....... (24,088) | 449 7,527 7,685 6,334
Net income (loss)......... (24,088) | 449 7,527 7,685 1,175
Pro forma income before |
extraordinary item per |
share of common stock: |
Basic................... | 0.01 0.24 0.25 0.21
Diluted................. | 0.01 0.22 0.22 0.18
Earnings per share amounts for 1996 and the first three quarters of 1997
have been restated to comply with SFAS 128.
F-30
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company recorded an extraordinary loss of $8,838,000 pre-tax
($5,337,000 after-tax) during the second quarter of 1997. This loss
consisted of the write-off of unamortized deferred financing fees and the
premium paid in connection with the early redemption of a portion of the
Company's Senior Subordinated Notes. During the fourth quarter of 1996, the
Company recorded a loss on the early extinguishment of debt amounting to
$8,542,000 pre-tax ($5,159,000 after-tax). The loss consisted of the write-
off of unamortized deferred financing fees in connection with the
refinancing of the Company's credit agreement.
25. FINANCIAL INFORMATION FOR GUARANTORS OF THE COMPANY'S DEBT
As discussed in Note 12, the Company's Senior Subordinated Notes are
guaranteed by all existing and future directly or indirectly wholly owned
domestic subsidiaries of the Company (the "Guarantors"). The Guarantors are
Knoll Overseas, Inc., a holding company for the entities that conduct the
Company's European business, and Spinneybeck Enterprises, Inc., which
directly and through a Canadian subsidiary operates the Company's leather
business.
These Guarantors will irrevocably and unconditionally, fully, jointly and
severally, guarantee the performance and payment when due, of all
obligations under the Senior Subordinated Notes, limited to the largest
amount that would not render such Guarantors' obligations under the
guarantees subject to avoidance under any applicable federal or state
fraudulent conveyance or similar law.
The condensed consolidating information which follows presents:
. Condensed consolidating financial information as of December 31, 1997
and 1996 and for the year ended December 31, 1997, ten months ended
December 31, 1996, two months ended February 29, 1996 and year ended
December 31, 1995 of (a) Knoll, Inc. (as the Issuer), (b) the
Guarantors, (c) the combined non-Guarantors, (d) elimination entries and
(e) the Company on a consolidated basis.
. The Issuer and the Guarantors are shown with their investments in their
subsidiaries accounted for on the equity method.
The condensed consolidating financial information should be read in
connection with the consolidated financial statements of the Company.
Separate financial statements of the Guarantors are not presented because
management has determined that separate financial statements are not
material. The Guarantors are fully, jointly, severally and unconditionally
liable under the guarantees.
Certain amounts for 1996 in the condensed consolidating information have
been reclassified to conform with the 1997 classifications.
F-31
KNOLL, INC.
BALANCE SHEET
DECEMBER 31, 1997
(IN THOUSANDS)
GUARANTORS
---------------------------
SPINNEYBECK
ENTERPRISES, KNOLL NON-
KNOLL, INC. INC. OVERSEAS, INC. GUARANTORS ELIMINATIONS TOTAL
----------- ------------ -------------- ---------- ------------ --------
ASSETS
Current assets:
Cash and cash
equivalents.......... $ 1,052 $ 291 $ -- $ 9,447 $ -- $ 10,790
Customer receivables,
net.................. 97,364 1,629 -- 23,858 -- 122,851
Accounts receivable--
related parties...... 2,380 35 2,257 41,427 (46,099) --
Inventories........... 46,665 7,443 -- 14,141 -- 68,249
Deferred income
taxes................ 20,323 -- -- 972 -- 21,295
Prepaid and other
current assets....... 2,258 (2) 4 1,437 -- 3,697
-------- ------- ------- -------- --------- --------
Total current assets.... 170,042 9,396 2,261 91,282 (46,099) 226,882
Property, plant and
equipment, net......... 144,923 292 -- 35,235 -- 180,450
Intangible assets, net.. 267,231 -- -- 3,446 -- 270,677
Equity investments...... 95,308 567 14,947 -- (110,822) --
Other noncurrent
assets................. 731 9 97 2,013 -- 2,850
-------- ------- ------- -------- --------- --------
Total assets............ $678,235 $10,264 $17,305 $131,976 $(156,921) $680,859
======== ======= ======= ======== ========= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of
long-term debt....... $ 10,000 $ -- $ -- $ -- $ -- $ 10,000
Accounts payable--
trade................ 46,709 482 -- 19,506 -- 66,697
Accounts payable--
related parties...... 41,290 137 (10) 4,682 (46,099) --
Income taxes payable.. (2,046) 223 (69) 8,683 -- 6,791
Other current
liabilities.......... 67,291 678 1,886 7,986 -- 77,841
-------- ------- ------- -------- --------- --------
Total current
liabilities............ 163,244 1,520 1,807 40,857 (46,099) 161,329
Long-term debt.......... 196,250 -- -- 779 -- 197,029
Deferred income taxes... 3,149 -- -- 2,152 -- 5,301
Postretirement benefits
obligation............. 16,424 -- -- -- -- 16,424
Other noncurrent
liabilities............ 7,803 -- -- 4,684 -- 12,487
-------- ------- ------- -------- --------- --------
Total liabilities....... 386,870 1,520 1,807 48,472 (46,099) 392,570
Stockholders' equity:
Common stock.......... 432 -- -- -- -- 432
Additional paid-in-
capital.............. 213,984 3,535 12,897 60,079 (75,545) 214,950
Unearned stock grant
compensation......... (993) -- -- -- -- (993)
Retained earnings..... 77,942 5,209 2,601 27,467 (35,277) 77,942
Cumulative foreign
currency translation
adjustment........... -- -- -- (4,042) -- (4,042)
-------- ------- ------- -------- --------- --------
Total stockholders'
equity................. 291,365 8,744 15,498 83,504 (110,822) 288,289
-------- ------- ------- -------- --------- --------
Total liabilities and
stockholders' equity... $678,235 $10,264 $17,305 $131,976 $(156,921) $680,859
======== ======= ======= ======== ========= ========
F-32
KNOLL, INC.
BALANCE SHEET
DECEMBER 31, 1996
(IN THOUSANDS)
GUARANTORS
---------------------------
SPINNEYBECK
ENTERPRISES, KNOLL NON-
KNOLL, INC. INC. OVERSEAS, INC. GUARANTORS ELIMINATIONS TOTAL
----------- ------------ -------------- ---------- ------------ --------
ASSETS
Current assets:
Cash and cash
equivalents.......... $ 41 $ 267 $ -- $ 8,496 $ -- $ 8,804
Customer receivables,
net.................. 85,959 1,398 -- 23,809 -- 111,166
Accounts receivable--
related parties...... 2,174 72 418 18,136 (20,800) --
Inventories........... 39,951 6,747 -- 11,113 -- 57,811
Deferred income
taxes................ 17,079 -- -- 395 -- 17,474
Prepaid and other
current assets....... 7,595 (22) (1,004) 855 -- 7,424
-------- ------ ------- -------- --------- --------
Total current assets.... 152,799 8,462 (586) 62,804 (20,800) 202,679
Property, plant, and
equipment, net......... 141,357 368 -- 34,493 -- 176,218
Intangible assets, net.. 278,389 -- -- 8,551 -- 286,940
Equity investments...... 75,571 550 12,789 -- (88,910) --
Other noncurrent
assets................. 9,976 13 97 2,289 (2,500) 9,875
-------- ------ ------- -------- --------- --------
Total assets............ $658,092 $9,393 $12,300 $108,137 $(112,210) $675,712
======== ====== ======= ======== ========= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of
long-term debt....... $ 23,000 $ -- $ -- $ 265 $ -- $ 23,265
Accounts payable--
trade................ 34,076 350 -- 15,824 -- 50,250
Accounts payable--
related parties...... 17,717 -- (5,169) 8,252 (20,800) --
Income taxes payable.. 11 19 (1) 359 -- 388
Other current
liabilities.......... 56,247 288 1,668 5,819 -- 64,022
-------- ------ ------- -------- --------- --------
Total current
liabilities............ 131,051 657 (3,502) 30,519 (20,800) 137,925
Long-term debt.......... 330,000 2,500 -- 889 (2,500) 330,889
Deferred income taxes... -- -- -- 1,931 -- 1,931
Postretirement benefits
obligation............. 15,873 -- -- -- -- 15,873
Other noncurrent
liabilities............ 6,391 -- -- 4,899 -- 11,290
-------- ------ ------- -------- --------- --------
Total liabilities....... 483,315 3,157 (3,502) 38,238 (23,300) 497,908
Stockholders' equity:
Preferred stock....... 1,603 -- -- -- -- 1,603
Common stock.......... 73 -- -- -- -- 73
Additional paid-in-
capital.............. 157,652 4,033 14,034 60,173 (75,745) 160,147
Unearned stock grant
compensation......... (1,387) -- -- -- -- (1,387)
Retained earnings..... 16,836 2,203 1,768 9,194 (13,165) 16,836
Cumulative foreign
currency translation
adjustment........... -- -- -- 532 -- 532
-------- ------ ------- -------- --------- --------
Total stockholders'
equity................. 174,777 6,236 15,802 69,899 (88,910) 177,804
-------- ------ ------- -------- --------- --------
Total liabilities and
stockholders' equity... $658,092 $9,393 $12,300 $108,137 $(112,210) $675,712
======== ====== ======= ======== ========= ========
F-33
KNOLL, INC.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
GUARANTORS
---------------------------
SPINNEYBECK
KNOLL, ENTERPRISES, KNOLL NON-
INC. INC. OVERSEAS, INC. GUARANTORS ELIMINATIONS TOTAL
-------- ------------ -------------- ---------- ------------ --------
Sales to customers...... $698,392 $18,934 $ -- $ 93,531 $ -- $810,857
Sales to related
parties................ 22,545 3,507 1,192 103,412 (130,656) --
-------- ------- ------ -------- --------- --------
Total sales............. 720,937 22,441 1,192 196,943 (130,656) 810,857
Cost of sales to
customers.............. 450,099 7,707 703 67,902 (36,449) 489,962
Cost of sales to related
parties................ 14,530 3,507 -- 76,170 (94,207) --
-------- ------- ------ -------- --------- --------
Gross profit............ 256,308 11,227 489 52,871 -- 320,895
Selling, general, and
administrative
expenses............... 151,907 6,287 1,828 22,996 -- 183,018
-------- ------- ------ -------- --------- --------
Operating income
(loss)................. 104,401 4,940 (1,339) 29,875 -- 137,877
Interest expense........ 24,960 -- -- 115 -- 25,075
Other income (expense),
net.................... (190) -- (1) 1,858 -- 1,667
Income from equity
investments............ 19,837 117 2,158 -- (22,112) --
-------- ------- ------ -------- --------- --------
Income before income
taxes and extraordinary
item................... 99,088 5,057 818 31,618 (22,112) 114,469
Income tax expense
(benefit).............. 32,645 2,051 (15) 13,345 -- 48,026
-------- ------- ------ -------- --------- --------
Income before
extraordinary item..... 66,443 3,006 833 18,273 (22,112) 66,443
Extraordinary loss on
early extinguishment of
debt, net of taxes..... 5,337 -- -- -- -- 5,337
-------- ------- ------ -------- --------- --------
Net income.............. $ 61,106 $ 3,006 $ 833 $ 18,273 $ (22,112) $ 61,106
======== ======= ====== ======== ========= ========
F-34
KNOLL, INC.
STATEMENT OF OPERATIONS
TEN MONTHS ENDED DECEMBER 31, 1996
(IN THOUSANDS)
GUARANTORS
---------------------------
SPINNEYBECK
ENTERPRISES, KNOLL NON-
KNOLL, INC. INC. OVERSEAS, INC. GUARANTORS ELIMINATIONS TOTAL
----------- ------------ -------------- ---------- ------------ --------
Sales to customers...... $480,857 $12,796 $ -- $ 67,881 $ -- $561,534
Sales to related
parties................ 13,227 2,210 -- 62,580 (78,017) --
-------- ------- ------- -------- -------- --------
Total sales............. 494,084 15,006 -- 130,461 (78,017) 561,534
Cost of sales to
customers.............. 323,607 6,109 521 50,293 (21,689) 358,841
Cost of sales to related
parties................ 8,902 1,054 -- 46,372 (56,328) --
-------- ------- ------- -------- -------- --------
Gross profit (loss) .... 161,575 7,843 (521) 33,796 -- 202,693
Selling, general, and
administrative
expenses............... 108,713 4,342 1,461 16,833 -- 131,349
-------- ------- ------- -------- -------- --------
Operating income
(loss)................. 52,862 3,501 (1,982) 16,963 -- 71,344
Interest expense........ 32,706 -- -- 246 -- 32,952
Other income (expense),
net.................... 757 (4) 953 (1,259) -- 447
Income from equity
investments............ 10,319 77 2,769 -- (13,165) --
-------- ------- ------- -------- -------- --------
Income before income
taxes and extraordinary
item................... 31,232 3,574 1,740 15,458 (13,165) 38,839
Income tax expense
(benefit).............. 9,237 1,371 (28) 6,264 -- 16,844
-------- ------- ------- -------- -------- --------
Income before
extraordinary item..... 21,995 2,203 1,768 9,194 (13,165) 21,995
Extraordinary loss on
early extinguishment of
debt, net of taxes..... 5,159 -- -- -- -- 5,159
-------- ------- ------- -------- -------- --------
Net income.............. $ 16,836 $ 2,203 $ 1,768 $ 9,194 $(13,165) $ 16,836
======== ======= ======= ======== ======== ========
F-35
KNOLL, INC.
STATEMENT OF OPERATIONS
TWO MONTHS ENDED FEBRUARY 29, 1996
(IN THOUSANDS)
GUARANTORS
---------------------------
SPINNEYBECK
ENTERPRISES, KNOLL NON-
KNOLL, INC. INC. OVERSEAS, INC. GUARANTORS ELIMINATIONS TOTAL
----------- ------------ -------------- ---------- ------------ --------
Sales to customers...... $ 76,172 $2,095 $ -- $11,666 $ -- $ 89,933
Sales to related
parties................ 1,617 330 -- 6,935 (8,583) 299
-------- ------ ----- ------- ------- --------
Total sales............. 77,789 2,425 -- 18,601 (8,583) 90,232
Cost of sales to
customers.............. 50,380 931 111 9,041 (949) 59,514
Cost of sales to related
parties................ 1,083 149 -- 6,602 (7,634) 200
-------- ------ ----- ------- ------- --------
Gross profit (loss)..... 26,326 1,345 (111) 2,958 -- 30,518
Selling, general, and
administrative
expenses............... 16,800 725 224 3,507 -- 21,256
Westinghouse long-term
incentive compensation. 47,900 -- -- -- -- 47,900
Allocated corporate
expenses............... 921 -- -- -- -- 921
-------- ------ ----- ------- ------- --------
Operating income
(loss)................. (39,295) 620 (335) (549) -- (39,559)
Interest expense........ -- -- -- 340 -- 340
Other income (expense),
net.................... (265) -- 170 (201) -- (296)
Income (loss) from
equity investments..... (218) 23 (493) -- 688 --
-------- ------ ----- ------- ------- --------
Income (loss) before
income taxes........... (39,778) 643 (658) (1,090) 688 (40,195)
Income tax expense (ben-
efit).................. (16,338) 259 (56) 28 -- (16,107)
-------- ------ ----- ------- ------- --------
Net income (loss)....... $(23,440) $ 384 $(602) $(1,118) $ 688 $(24,088)
======== ====== ===== ======= ======= ========
F-36
KNOLL, INC.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
GUARANTORS
---------------------------
SPINNEYBECK
ENTERPRISES, KNOLL NON-
KNOLL, INC. INC. OVERSEAS, INC. GUARANTORS ELIMINATIONS TOTAL
----------- ------------ -------------- ---------- ------------ --------
Sales to customers...... $500,892 $14,090 $ -- $ 93,409 $ 2,332 $610,723
Sales to related
parties................ 12,411 2,332 -- 60,309 (64,883) 10,169
-------- ------- ------- -------- -------- --------
Total sales............. 513,303 16,422 -- 153,718 (62,551) 620,892
Cost of sales to
customers.............. 342,202 5,501 831 84,544 (22,463) 410,615
Cost of sales to related
parties................ 8,564 2,472 373 35,696 (40,088) 7,017
-------- ------- ------- -------- -------- --------
Gross profit (loss)..... 162,537 8,449 (1,204) 33,478 -- 203,260
Selling, general, and
administrative
expenses............... 104,388 4,894 1,749 27,496 -- 138,527
Allocated corporate
expenses............... 9,528 -- -- -- -- 9,528
-------- ------- ------- -------- -------- --------
Operating income
(loss)................. 48,621 3,555 (2,953) 5,982 -- 55,205
Interest expense........ 282 -- -- 1,148 -- 1,430
Other income (expense),
net.................... (2,101) -- 68 436 -- (1,597)
Income (loss) from
equity investments..... 211 -- (166) -- (45) --
-------- ------- ------- -------- -------- --------
Income (loss) before
income taxes........... 46,449 3,555 (3,051) 5,270 (45) 52,178
Income tax expense (ben-
efit).................. 22,553 1,476 (1,183) -- -- 22,846
-------- ------- ------- -------- -------- --------
Net income (loss)....... $ 23,896 $ 2,079 $(1,868) $ 5,270 $ (45) $ 29,332
======== ======= ======= ======== ======== ========
F-37
KNOLL, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
GUARANTORS
--------------------------------
SPINNEYBECK KNOLL NON-
KNOLL, INC. ENTERPRISES, INC. OVERSEAS, INC. GUARANTORS ELIMINATIONS TOTAL
----------- ----------------- -------------- ---------- ------------ --------
CASH PROVIDED BY
OPERATING ACTIVITIES... $124,109 $ 2,546 $ -- $ 8,607 $ -- $135,262
CASH FLOWS FROM
INVESTING ACTIVITIES
Capital expenditures.... (26,740) (22) -- (6,347) 29 (33,080)
Proceeds from sale of
assets................. 108 -- -- 85 (29) 164
Payments received on
intercompany loans..... 2,500 -- -- -- (2,500) --
-------- ------- ----- ------- ------- --------
Cash used in investing
activities............. (24,132) (22) -- (6,262) (2,500) (32,916)
CASH FLOWS FROM
FINANCING ACTIVITIES
Repayment of revolving
credit facility, net... (79,000) -- -- -- -- (79,000)
Repayment of long-term
debt................... (67,750) -- -- (238) -- (67,988)
Repayment of
intercompany loans..... -- (2,500) -- -- 2,500 --
Premium paid for early
extinguishment of
debt................... (5,775) -- -- -- -- (5,775)
Proceeds from issuance
of stock, net of stock
issuance costs......... 133,559 -- -- -- -- 133,559
Redemption of preferred
stock.................. (80,000) -- -- -- -- (80,000)
-------- ------- ----- ------- ------- --------
Cash used in financing
activities............. (98,966) (2,500) -- (238) 2,500 (99,204)
Effect of exchange rate
changes on cash and
cash equivalents....... -- -- -- (1,156) -- (1,156)
-------- ------- ----- ------- ------- --------
Increase in cash and
cash equivalents....... 1,011 24 -- 951 -- 1,986
Cash and cash
equivalents at
beginning of year...... 41 267 -- 8,496 -- 8,804
-------- ------- ----- ------- ------- --------
Cash and cash
equivalents at end of
year................... $ 1,052 $ 291 $ -- $ 9,447 $ -- $ 10,790
======== ======= ===== ======= ======= ========
F-38
KNOLL, INC.
STATEMENT OF CASH FLOWS
TEN MONTHS ENDED DECEMBER 31, 1996
(IN THOUSANDS)
GUARANTORS
---------------------------
SPINNEYBECK
ENTERPRISES, KNOLL NON-
KNOLL, INC. INC. OVERSEAS, INC. GUARANTORS ELIMINATIONS TOTAL
----------- ------------ -------------- ---------- ------------ ---------
CASH PROVIDED BY
OPERATING ACTIVITIES... $ 78,889 $ 399 $ -- $10,214 $ -- $ 89,502
CASH FLOWS FROM
INVESTING ACTIVITIES
Acquisition of the
company from
Westinghouse........... (579,801) -- -- -- -- (579,801)
Capital expenditures.... (12,531) (134) -- (2,590) -- (15,255)
Proceeds from sale of
assets................. 43 -- -- 175 -- 218
--------- ----- ----- ------- ----- ---------
Cash used in investing
activities............. (592,289) (134) -- (2,415) -- (594,838)
CASH FLOWS FROM
FINANCING ACTIVITIES
Repayment of short-term
debt, net.............. -- -- -- (1,483) -- (1,483)
Proceeds from revolving
credit facility, net... 88,000 -- -- -- -- 88,000
Repayment of long-term
debt, net.............. 265,000 -- -- (130) -- 264,870
Issuance of stock....... 160,400 -- -- -- -- 160,400
Net receipts from
(payments to) parent
company................ (120) -- -- 120 -- --
--------- ----- ----- ------- ----- ---------
Cash provided by (used
in) financing
activities............. 513,280 -- -- (1,493) -- 511,787
Effect of exchange rate
changes on cash and
cash equivalents....... -- -- -- 18 -- 18
--------- ----- ----- ------- ----- ---------
Increase (decrease) in
cash and cash
equivalents............ (120) 265 -- 6,324 -- 6,469
Cash and cash
equivalents at
beginning of period.... 161 2 -- 2,172 -- 2,335
--------- ----- ----- ------- ----- ---------
Cash and cash
equivalents at end of
period................. $ 41 $ 267 $ -- $ 8,496 $ -- $ 8,804
========= ===== ===== ======= ===== =========
F-39
KNOLL, INC.
STATEMENT OF CASH FLOWS
TWO MONTHS ENDED FEBRUARY 29, 1996
(IN THOUSANDS)
GUARANTORS
--------------------------------
SPINNEYBECK KNOLL NON-
KNOLL, INC. ENTERPRISES, INC. OVERSEAS, INC. GUARANTORS ELIMINATIONS TOTAL
----------- ----------------- -------------- ---------- ------------ --------
CASH PROVIDED BY (USED
IN) OPERATING
ACTIVITIES............. $(53,215) $ 1,267 $ 651 $ 17,139 $(19,881) $(54,039)
CASH FLOWS FROM
INVESTING ACTIVITIES
Capital expenditures.... (2,022) (28) -- (246) -- (2,296)
-------- ------- ----- -------- -------- --------
Cash used in investing
activities............. (2,022) (28) -- (246) -- (2,296)
CASH FLOWS FROM
FINANCING ACTIVITIES
Repayment of short-term
debt, net.............. (2,055) -- -- (1,750) -- (3,805)
Net receipts from
(payments to) parent
company................ 57,635 (1,419) (651) (14,598) 19,881 60,848
-------- ------- ----- -------- -------- --------
Cash provided by (used
in) financing
activities............. 55,580 (1,419) (651) (16,348) 19,881 57,043
Effect of exchange rate
changes on cash and
cash equivalents....... -- -- -- 58 -- 58
-------- ------- ----- -------- -------- --------
Increase (decrease) in
cash and cash
equivalents............ 343 (180) -- 603 -- 766
Cash and cash
equivalents at
beginning of period.... (182) 182 -- 1,569 -- 1,569
-------- ------- ----- -------- -------- --------
Cash and cash
equivalents at
end of period.......... $ 161 $ 2 $ -- $ 2,172 $ -- $ 2,335
======== ======= ===== ======== ======== ========
F-40
KNOLL, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
GUARANTORS
--------------------------------
SPINNEYBECK KNOLL NON-
KNOLL, INC. ENTERPRISES, INC. OVERSEAS, INC. GUARANTORS ELIMINATIONS TOTAL
----------- ----------------- -------------- ---------- ------------ --------
CASH PROVIDED BY (USED
IN) OPERATING
ACTIVITIES............. $ 50,270 $ 6,203 $(4,017) $(9,992) $ 9,400 $ 51,864
CASH FLOWS FROM
INVESTING ACTIVITIES
Capital expenditures.... (14,871) -- -- (4,463) -- (19,334)
Proceeds from sale of
assets................. 42 -- -- 274 -- 316
Net payments to equity
investments............ (186) -- -- -- 186 --
-------- ------- ------- ------- ------- --------
Cash used in investing
activities............. (15,015) -- -- (4,189) 186 (19,018)
CASH FLOWS FROM
FINANCING ACTIVITIES
Repayment of short-term
debt, net.............. -- -- -- (20,961) -- (20,961)
Repayment of long-term
debt................... (6,646) -- -- (2,267) -- (8,913)
Net receipts from
(payments to) parent
company................ (28,791) (6,021) 4,017 33,481 (9,586) (6,900)
-------- ------- ------- ------- ------- --------
Cash provided by (used
in) financing
activities............. (35,437) (6,021) 4,017 10,253 (9,586) (36,774)
Effect of exchange rate
changes
on cash and cash
equivalents............ -- -- -- 13 -- 13
-------- ------- ------- ------- ------- --------
Increase (decrease) in
cash and
cash equivalents....... (182) 182 -- (3,915) -- (3,915)
Cash and cash
equivalents at
beginning of year...... -- -- -- 5,484 -- 5,484
-------- ------- ------- ------- ------- --------
Cash and cash
equivalents at end
of year................ $ (182) $ 182 $ -- $ 1,569 $ -- $ 1,569
======== ======= ======= ======= ======= ========
F-41
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ---------------------------- ---------- ---------- ------------- -------------
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING COSTS AND BALANCE AT
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS(1) END OF PERIOD
- ---------------------------- ---------- ---------- ------------- -------------
(IN THOUSANDS)
VALUATION ACCOUNTS DEDUCTED
IN THE CONSOLIDATED BALANCE
SHEET FROM THE ASSETS TO
WHICH THEY APPLY:
YEAR ENDED DECEMBER 31,
1997:
Allowance for doubtful
accounts................. $5,713 $1,943 $2,195 $5,461
TEN MONTHS ENDED DECEMBER
31, 1996:
Allowance for doubtful
accounts................. 5,838 2,098 2,223 5,713
TWO MONTHS ENDED FEBRUARY
29, 1996:
Allowance for doubtful
accounts................. 5,790 159 210 5,739
YEAR ENDED DECEMBER 31,
1995:
Allowance for doubtful
accounts................. 4,700 2,720 1,630 5,790
- --------
(1) Uncollectible accounts written off and foreign currency translation.
S-1
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is hereby incorporated by reference to
the section entitled "Directors and Executive Officers of the Company" and the
subsection "Section 16(a) Beneficial Ownership Reporting Compliance" under the
section entitled "Board of Directors; Board Committees" in the Company's Proxy
Statement for its Annual Shareholders' Meeting to be held on May 19, 1998 (the
"Proxy Statement"). The Proxy Statement shall be filed with the Securities and
Exchange Commission within 120 days of the end of the Company's latest fiscal
year.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is hereby incorporated by reference to
the section entitled "Executive Officer and Director Compensation" and the
subsection "Performance Graph" under the section entitled "Board of Directors;
Board Committees" in the Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is hereby incorporated by reference to
the section entitled "Security Ownership of Certain Beneficial Owners,
Management and Directors" in the Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is hereby incorporated by reference to
the section entitled "Certain Transactions" in the Company's Proxy Statement.
19
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)Documents filed as part of the report:
(1) CONSOLIDATED FINANCIAL STATEMENTS
The Consolidated Financial Statements of the Company are listed in the
Table of Contents for the Financial Statements beginning on page F-1 of
this Form 10-K.
(2) FINANCIAL STATEMENT SCHEDULES
Financial Statement Schedule II-Valuation and Qualifying Accounts is
filed with this Form 10-K on page S-1 of this Form 10-K. All other
schedules for which provision is made in the applicable regulation of the
Securities and Exchange Commission are not required under the related
instructions or are inapplicable and therefore have been omitted.
(3) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1*** Amended and Restated Certificate of Incorporation of the Company.
3.2*** Amended and Restated By-Laws of the Company.
10.1* Stock Purchase Agreement, dated as of December 20, 1995, by and
between Westinghouse and TKG.
10.2* Knoll, Inc. 1996 Stock Incentive Plan (formerly called the TKG
Stock Incentive Plan).
10.3* Indenture, dated as of February 29, 1996, by and among the
Company, T.K.G. Acquisition Corp., T.K.G. Acquisition Sub, Inc.,
The Knoll Group, Inc., Knoll North America, Inc., Spinneybeck
Enterprises, Inc. and Knoll Overseas, Inc., as guarantors, and
IBJ Schroder Bank & Trust Company, as trustee, relating to
$165,000,000 principal amount of 10.875% Senior Subordinated
Notes due 2006, including form of Initial Global Note.
10.4* Supplemental Indenture, dated as of February 29, 1996, by and
among the Company, as successor to T.K.G. Acquisition Sub, Inc.,
the Guarantors (as defined therein), and IBJ Schroder Bank &
Trust Company, as trustee, relating to $165,000,000 principal
amount of 10.875% Senior Subordinated Notes due 2006, including
form of Initial Global Note.
10.5** Supplemental Indenture No. 2, dated as of March 14, 1997, by and
among the Company, the Guarantors (as defined therein), and IBJ
Schroder Bank & Trust Company, as trustee, relating to
$165,000,000 principal amount of 10.875% Senior Subordinated
Notes due 2006, including form of Initial Global Note.
10.6**** Credit Agreement, dated as of August 8, 1997, by and among the
Company, NationsBank, N.A., as Administrative Agent, The Chase
Manhattan Bank, as Documentation Agent and other lending
institutions.
10.7** Employment Agreement, dated as of February 29, 1996, between
T.K.G. Acquisition Corp. and Burton B. Staniar.
10.8** Employment Agreement, dated as of February 29, 1996, between
T.K.G. Acquisition Corp. and John H. Lynch.
10.9** Employment Agreement, dated as of February 29, 1996, between
T.K.G. Acquisition Corp. and Andrew B. Cogan.
20
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.10*** Amendment to Employment Agreement, dated as of April 30, 1997,
between the Company and Andrew B. Cogan.
10.11** Stockholders Agreement (Common Stock and Preferred Stock), dated
as of February 29, 1996, among T.K.G. Acquisition Corp., Warburg,
Pincus Ventures, L.P., and the signatories thereto.
10.12** Form of Stockholders Agreement (Restricted Shares), dated as of
February 29, 1996, among T.K.G. Acquisition Corp., Warburg,
Pincus Ventures, L.P., and the signatories thereto.
10.13 Amended and Restated Knoll, Inc. 1997 Stock Incentive Plan
(subject to stockholder approval).
10.14** Consulting Agreement, dated as of December 1, 1996, between
Wolfgang Billstein and Knoll, Inc.
10.15 Amendment No. 1 to December 1, 1996 Consulting Agreement between
Wolfgang Billstein and Knoll, Inc.
10.16*** Form of Agreement, dated as of April 15, 1997, by and among the
Company, Warburg, Pincus Ventures, L.P., NationsBanc Investment
Corp. and the Investors (as defined therein).
21** Subsidiaries of the Registrant.
23.1 Consent of Independent Auditors for Ernst & Young LLP.
23.2 Consent of Independent Accountants for Price Waterhouse LLP.
27.1 Financial Data Schedule for the Year Ended December 31, 1997.
27.2 Restated Financial Data Schedule for the Three Months Ended March
31, 1997, the Six Months Ended June 30, 1997 and the Nine Months
Ended September 30, 1997.
27.3 Restated Financial Data Schedule for the One Month Ended March
31, 1996, the Four Months Ended June 30, 1996, the Seven Months
Ended September 30, 1996 and the Ten Months Ended December 31,
1996.
(b)Current Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the three months
ended December 31, 1997.
- --------
* Incorporated by reference to the Company's Registration Statement on Form
S-4 (File No. 333-2972), which was declared effective by the Commission
on June 12, 1996.
** Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996.
*** Incorporated by reference to the Company's Registration Statement on Form
S-1 (File No. 333-23399), which was declared effective by the Commission
on May 9, 1997.
**** Incorporated by reference to the Company's Registration Statement on Form
S-1 (File No. 333-36407), which was filed on September 25, 1997 and
subsequently withdrawn.
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report on Form 10-K
to be signed on its behalf by the undersigned, thereunto duly authorized, on
this 30th day of March 1998.
KNOLL, INC.
/s/ Burton B. Staniar
By: _________________________________
BURTON B. STANIAR
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report on Form 10-K has been signed by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
/s/ Burton B. Staniar Chairman of the Board March 30, 1998
- -----------------------------
BURTON B. STANIAR
/s/ John H. Lynch President, Chief March 30, 1998
- ----------------------------- Executive Officer and
JOHN H. LYNCH Director
(Principal Executive Officer)
/s/ Douglas J. Purdom Chief Financial Officer March 30, 1998
- ----------------------------- (Principal Financial
DOUGLAS J. PURDOM Officer)
/s/ Barry L. McCabe Controller March 30, 1998
- ----------------------------- (Principal Accounting Officer)
BARRY L. MCCABE
/s/ John W. Amerman Director March 30, 1998
- -----------------------------
JOHN W. AMERMAN
/s/ Andrew B. Cogan Director March 30, 1998
- -----------------------------
ANDREW B. COGAN
/s/ Robert J. Dolan Director March 30, 1998
- -----------------------------
ROBERT J. DOLAN
/s/ Jeffrey A. Harris Director March 30, 1998
- -----------------------------
JEFFREY A. HARRIS
/s/ Sidney Lapidus Director March 30, 1998
- -----------------------------
SIDNEY LAPIDUS
/s/ Kewsong Lee Director March 30, 1998
- -----------------------------
KEWSONG LEE
/s/ John L. Vogelstein Director March 30, 1998
- -----------------------------
JOHN L. VOGELSTEIN
22
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
3.1*** Amended and Restated Certificate of Incorporation of the
Company.
3.2*** Amended and Restated By-Laws of the Company.
10.1* Stock Purchase Agreement, dated as of December 20, 1995, by
and between Westinghouse and TKG.
10.2* Knoll, Inc. 1996 Stock Incentive Plan (formerly called the TKG
Stock Incentive Plan).
10.3* Indenture, dated as of February 29, 1996, by and among the
Company, T.K.G. Acquisition Corp., T.K.G. Acquisition Sub,
Inc., The Knoll Group, Inc., Knoll North America, Inc.,
Spinneybeck Enterprises, Inc. and Knoll Overseas, Inc., as
guarantors, and IBJ Schroder Bank & Trust Company, as trustee,
relating to $165,000,000 principal amount of 10.875% Senior
Subordinated Notes due 2006, including form of Initial Global
Note.
10.4* Supplemental Indenture, dated as of February 29, 1996, by and
among the Company, as successor to T.K.G. Acquisition Sub,
Inc., the Guarantors (as defined therein), and IBJ Schroder
Bank & Trust Company, as trustee, relating to $165,000,000
principal amount of 10.875% Senior Subordinated Notes due
2006, including form of Initial Global Note.
10.5** Supplemental Indenture No. 2, dated as of March 14, 1997, by
and among the Company, the Guarantors (as defined therein),
and IBJ Schroder Bank & Trust Company, as trustee, relating to
$165,000,000 principal amount of 10.875% Senior Subordinated
Notes due 2006, including form of Initial Global Note.
10.6**** Credit Agreement, dated as of August 8, 1997, by and among the
Company, NationsBank, N.A., as Administrative Agent, The Chase
Manhattan Bank, as Documentation Agent and other lending
institutions.
10.7** Employment Agreement, dated as of February 29, 1996, between
T.K.G. Acquisition Corp. and Burton B. Staniar.
10.8** Employment Agreement, dated as of February 29, 1996, between
T.K.G. Acquisition Corp. and John H. Lynch.
10.9** Employment Agreement, dated as of February 29, 1996, between
T.K.G. Acquisition Corp. and Andrew B. Cogan.
10.10*** Amendment to Employment Agreement, dated as of April 30, 1997,
between the Company and Andrew B. Cogan.
10.11** Stockholders Agreement (Common Stock and Preferred Stock),
dated as of February 29, 1996, among T.K.G. Acquisition Corp.,
Warburg, Pincus Ventures, L.P., and the signatories thereto.
10.12** Form of Stockholders Agreement (Restricted Shares), dated as
of February 29, 1996, among T.K.G. Acquisition Corp., Warburg,
Pincus Ventures, L.P., and the signatories thereto.
10.13 Amended and Restated Knoll, Inc. 1997 Stock Incentive Plan
(subject to stockholder approval).
10.14** Consulting Agreement, dated as of December 1, 1996, between
Wolfgang Billstein and Knoll, Inc.
10.15 Amendment No. 1 to December 1, 1996 Consulting Agreement
between Wolfgang Billstein and Knoll, Inc.
10.16*** Form of Agreement, dated as of April 15, 1997, by and among
the Company, Warburg, Pincus Ventures, L.P., NationsBanc
Investment Corp. and the Investors (as defined therein).
21** Subsidiaries of the Registrant.
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
23.1 Consent of Independent Auditors for Ernst & Young LLP.
23.2 Consent of Independent Accountants for Price Waterhouse LLP.
27.1 Financial Data Schedule for the Year Ended December 31, 1997.
27.2 Restated Financial Data Schedule for the Three Months Ended
March 31, 1997, the Six Months Ended June 30, 1997 and the Nine
Months Ended September 30, 1997.
27.3 Restated Financial Data Schedule for the One Month Ended March
31, 1996, the Four Months Ended June 30, 1996, the Seven Months
Ended September 30, 1996 and the Ten Months Ended December 31,
1996.
- --------
* Incorporated by reference to the Company's Registration Statement on Form
S-4 (File No. 333-2972), which was declared effective by the Commission
on June 12, 1996.
** Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996.
*** Incorporated by reference to the Company's Registration Statement on Form
S-1 (File No. 333-23399), which was declared effective by the Commission
on May 9, 1997.
**** Incorporated by reference to the Company's Registration Statement on Form
S-1 (File No. 333-36407), which was filed on September 25, 1997 and
subsequently withdrawn.