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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, 1996
or
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
Commission File No. 333-02972
KNOLL, INC.
A Delaware Corporation I.R.S. Employer No. 13-3873847
1235 Water Street
East Greenville, Pennsylvania 18041
Telephone Number (215) 679-7991
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
There is no public market for the voting stock of the Registrant.
At March 27, 1997, 2,322,500 shares of the Registrant's common stock, par
value $0.01 per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
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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"), which were acquired on February 29, 1996 (the "Acquisition")
from Westinghouse Electric 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, LLC ("Warburg") and
whose other stockholders are NationsBanc Investment Corp. and members of
Knoll's 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 a Knoll Group subsidiary
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 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 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 1996.
U.S. % OF U.S.
PRODUCT CATEGORY MARKET SIZE MARKET
---------------- ----------- ---------
(IN
BILLIONS)
Office systems...................................... $3.4 34.1%
Seating............................................. 2.6 25.4
Storage............................................. 1.4 14.1
Desks and casegoods................................. 1.6 16.4
Tables.............................................. 0.7 6.6
Office systems consist of movable panels, work surfaces and storage units,
electrical distribution, lighting, organizing tools and freestanding
components. These modular systems are popular with customers who require
flexible space configurations, or where many people share open floor space as
is common in modern office buildings. Both seating, ranging from executive
desk chairs to task chairs and side chairs, and storage products, such as
overhead shelving, file cabinets and desk pedestals (file cabinets that serve
to support desks), are sold to users of office systems and also are sold
separately to non-systems users. Desks and tables range from classic writing
desks in private offices to conference and meeting room tables that can
accommodate sophisticated technological demands.
1
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 and accessories in five
basic categories: (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's KnollStudio collection
features its signature design classics, including high image side chairs,
sofas, desks and tables for both office and home use. The Company also carries
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.
Since 1994, nearly every product line, including each office system, has
been put under the individual management of an experienced product line
manager who carefully considers its market, competitive and strategic
positioning, marketing plan, costs, pricing, gross margin and gross profit
objective. The Company's product line managers have conducted extensive market
studies and, in coordination with the product development team that was
brought under their control, used the results of the studies to re-design
portions of every major product line in an effort to respond to customer needs
and reduce manufacturing costs.
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 which 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.
Seating
The Company believes that the office seating market includes three major
segments: the "appearance," "comfort" and "basic" segments. 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.
Storage Solutions and Filing Cabinets
The Company offers a variety of storage options 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. These products support the Company's strategy of providing its
customers with a one-stop source for office furniture and selling products to
businesses whose office furniture systems are provided by its competitors.
2
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. Casegoods
are part of the Company's strategy of being a one-stop source of quality
office furniture.
Tables
The Company recently has expanded its offerings in the table category of the
market with its 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.
In 1995, the Company introduced 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 furniture contract 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.
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 systems 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.
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 which is
targeted to Northern Europe, the Allesandri System which is targeted to the
French market and the SoHo Desking System, which has broad market appeal; (ii)
KnollStudio, which serves the image- and design-oriented segment of the
3
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 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, since 1994
the Company has redesigned or enhanced virtually every product line in order
to better meet customer preferences.
SALES AND DISTRIBUTION
The Company employs approximately 290 direct sales representatives, who work
closely with its approximately 200 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 on 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 not dependent on any one of its dealers, the largest of them
accounting for less than 5% of the Company's 1996 North American sales. No
customer represents more than 10% of the Company's 1996 North American sales.
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 10% in 1996.
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. In the
Latin American and Asia-Pacific markets, 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. In 1994, all of the Company's plants were
awarded registration to ISO 9000, an internationally developed set of
manufacturing facility quality criteria.
4
RAW MATERIALS AND SUPPLIERS
Based on management's initiatives, the Company has centralized purchasing in
its East Greenville facility and has formed close working relationships with
its main suppliers. This effort focuses 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 (other than certain electrical products).
COMPETITION
The office furniture market is highly competitive. Office furniture
companies compete on the basis of (i) product design, including 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 5.8% market
share and derived approximately 86% of its sales in 1996, five companies
(including the Company) represent approximately 59% of the market.
Many 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 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. 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 accounted for approximately 8% of the Company's sales in
1996. This market is highly fragmented, as the combined sales of the estimated
top 20 manufacturers represent less than 40% of the market. The Company
believes that no single company holds more than a 5% share of the European
market.
PATENTS AND TRADEMARKS
The Company has approximately 87 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 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(TM) 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 $94.1 million at December 31,
1996 and $70.8 million at December 31, 1995. The Company expects to fill 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 exports sales,
refer to Note 21 (Business Segment and Geographical Region Information) of the
Notes to the Consolidated Financial Statements beginning on page F-26.
5
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 ultimate 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 1, 1997, the Company employed a total of 3,550 people,
including 2,266 hourly and 1,284 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. 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's owned
facilities in East Greenville, Grand Rapids and Muskegon are encumbered by
mortgages securing an original aggregate principal amount of $230 million that
were entered into in connection with the Company's existing bank credit
facilities (the "Credit Facilities").
6
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
On October 16, 1996 and March 4, 1997, by written consents of the Company's
majority stockholder in actions taken without a meeting, amendments to and
restatements of the Company's certificate of incorporation were approved and
adopted.
On February 14, 1997, by written consent of the Company's majority
stockholder in an action taken without a meeting, the Knoll, Inc. 1997 Stock
Incentive Plan (the "1997 Stock Plan") was approved and adopted.
7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION AND DIVIDEND POLICY
(a) There is no established public trading market for the Company's common
stock, par value $0.01 per share (the "Common Stock").
(b) At March 27, 1997, there were 39 holders of record of the Company's
Common Stock.
(c) 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 Facilities and indenture
(the "Indenture") relating to the Company's 10 7/8% Senior Subordinated Notes
(the "Notes") restrict 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 restrictions and other factors deemed relevant by the Board of
Directors.
On March 14, 1997, the Company filed a registration statement on Form S-1
with the Securities and Exchange Commission in anticipation of possible public
offerings of Common Stock (the "Offerings"). Application will be made for
listing the Common Stock on the New York Stock Exchange. However, there is no
assurance that an active trading market for the Common Stock will develop or
be sustained.
RECENT SALES OF UNREGISTERED SECURITIES
On February 29, 1996 and October 21, 1996, Warburg, NationsBanc Investment
Corp. and certain members of management purchased an aggregate of 1,002,500
shares of the Common Stock and 1,602,997 shares of Series A 12% Participating
Convertible Preferred Stock, par value $1.00 per share (the "Series A
Preferred Stock"), for an aggregate purchase price of $160.4 million. Such
sales were made in reliance on the exemption from registration pursuant to
Section 4(2) of the Securities Act and Regulation D promulgated thereunder.
For a description of the conversion feature of Series A Preferred Stock, see
Note 11 (Preferred Stock) of the Notes to the Consolidated Financial
Statements appearing on page F-17.
On February 29, 1996, in connection with the Acquisition, the Company sold
$165 million aggregate principal amount of the Notes to NationsBanc Capital
Markets, Inc. at a price of 96.75% of its face value. Such sale was made in
reliance on the exemption from registration pursuant to Section 4(2) of the
Securities Act and Rule 144A and Regulation D promulgated thereunder.
On February 29, 1996 and August 20, 1996, certain members of management were
granted a total of 1,320,000 shares of Common Stock, respectively, pursuant to
the Knoll, Inc. 1996 Stock Incentive Plan (the "1996 Stock Plan", and together
with the 1997 Stock Plan, the "Stock Plans"). These shares vest over periods
determined at their date of grant. These grants were made in reliance on the
exemption from registration pursuant to Section 4(2) of the Securities Act and
Rule 701 promulgated thereunder.
Options to purchase 180,000 shares of Common Stock were granted to certain
employees of the Company on March 7, 1997 pursuant to the 1996 Stock Plan.
These options 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.
Options to purchase 240,000 shares of Common Stock were granted to certain
employees of the Company on March 7, 1997 pursuant to the 1997 Stock Plan.
These options 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.
8
ITEM 6. SELECTED FINANCIAL DATA
The following table presents (i) selected historical consolidated financial
information of the Company's predecessor (the "Predecessor"), as of the dates
and for the periods indicated, (ii) selected historical consolidated financial
information of the Company, as of the date and for the period indicated and
(iii) summary pro forma consolidated financial information of the Company, as
of the dates and 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 and the ten month
period ended December 31, 1996 has been derived from the Predecessor's and the
Company's financial statements, respectively, which have been audited by Ernst
& Young LLP. The historical consolidated financial information for the year
ended December 31, 1992 has been derived from unaudited financial statements
and, in the opinion of management, includes all adjustments (consisting of
normal recurring accruals) necessary for a fair presentation of financial
position and results of operations as of the date and for the period
indicated. 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."
PREDECESSOR THE COMPANY
---------------------------------------------------- ---------------------------------------
PRO FORMA YEAR
TWO MONTHS TEN MONTHS ENDED
YEAR ENDED DECEMBER 31, ENDED ENDED DECEMBER 31,
-------------------------------------- FEBRUARY 29, DECEMBER 31, ------------------
1992 1993 1994 1995 1996 1996 1995(1) 1996(1)
-------- -------- -------- -------- ------------ ------------ -------- --------
(IN THOUSANDS)
INCOME STATEMENT DATA
Total sales............. $576,621 $508,383 $562,869 $620,892 $ 90,232 $561,534 $620,892 $651,766
Cost of sales(2)........ 417,213 376,875 410,104 417,632 59,714 358,841 425,327 419,908
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit............ 159,408 131,508 152,765 203,260 30,518 202,693 195,565 231,858
Provision for
restructuring.......... 26,000 6,165 29,180 -- -- -- -- --
Selling, general and
administrative
expenses(3)............ 165,913 163,015 167,238 138,527 21,256 131,349 142,582 153,388
Westinghouse long-term
incentive
compensation(4)........ -- -- -- -- 47,900 -- -- --
Allocated corporate
expenses(2)(3)......... 5,036 4,899 5,881 9,528 921 -- 4,000 --
-------- -------- -------- -------- -------- -------- -------- --------
Operating income
(loss)................. (37,541) (42,571) (49,534) 55,205 (39,559) 71,344 48,983 78,470
Interest expense........ 3,866 3,301 3,225 1,430 340 32,952 40,945 40,030
Other income (expense),
net.................... (929) 2,082 699 (1,597) (296) 447 (1,597) 151
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before
income taxes,
cumulative effect of
changes in accounting
principles and
extraordinary item..... (42,336) (43,790) (52,060) 52,178 (40,195) 38,839 6,441 38,591
Income tax expense
(benefit).............. (4,795) (3,571) 7,713 22,846 (16,107) 16,844 2,705 16,848
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before
cumulative effect of
changes in accounting
principles and
extraordinary item..... (37,541) (40,219) (59,773) 29,332 (24,088) 21,995 3,736 21,743
Cumulative effect of
changes in accounting
principles............. 11,202 1,118 -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before
extraordinary item..... (48,743) (41,337) (59,773) 29,332 (24,088) 21,995 3,736 21,743
Extraordinary loss on
early extinguishment of
debt, net of taxes..... -- -- -- -- -- 5,159 -- --
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)(5).... $(48,743) $(41,337) $(59,773) $ 29,332 $(24,088) $ 16,836 $ 3,736 $ 21,743
======== ======== ======== ======== ======== ======== ======== ========
9
PREDECESSOR THE COMPANY
------------------------------- ------------
DECEMBER 31,
------------------------------- DECEMBER 31,
1992 1993 1994 1995 1996
------- ------- ------- ------- ------------
(IN THOUSANDS)
BALANCE SHEET DATA (AT PERIOD
END):
Working capital................... $67,063 $41,933 $22,898 $82,698 $64,754
Total assets...................... 726,469 691,043 705,316 656,710 675,712
Total long-term debt, including
current portion.................. 16,623 12,215 12,451 3,538 354,154
Total liabilities................. 186,347 205,104 247,310 176,259 497,908
Stockholders' equity.............. 540,122 485,939 458,006 480,451 177,804
- --------
(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 for the completion of the Acquisition and the
application of the net proceeds of $160,000 from the sale of capital stock
of the Company and borrowings of $260,000 and $165,000 under the Credit
Facilities and the Notes, respectively.
(2) Cost of sales has been increased by (i) $4,158 in pro forma 1995 and $801
in pro forma 1996 to reflect an increase in amortization and depreciation
resulting from the Acquisition, (ii) $450 in pro forma 1995 to reflect the
sale of inventory acquired as part of the Acquisition and (iii) $3,087 in
pro forma 1995 and $552 in pro forma 1996 in order 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.
(3) Selling, general and administrative expenses have been increased by (i)
$2,441 in pro forma 1995 and $369 in pro forma 1996 to reflect the
reclassification of allocated corporate expenses which approximate the
replacement cost to the Company (described above in note 2) and (ii)
$1,614 in pro forma 1995 and $414 in pro forma 1996 to reflect an increase
in amortization and depreciation resulting from the Acquisition.
(4) 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.
(5) The pro forma 1996 income statement data presented does not include the
$5,159 extraordinary loss on early extinguishment of debt, net of taxes.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the Company's historical and pro forma results
of operations and of its liquidity and capital resources should be read in
conjunction with Item 6, "Selected Financial Data" and Item 8, "Financial
Statements and Supplementary Data."
Prior to the Acquisition, the Predecessor's results of domestic operations
were included in the consolidated U.S. federal income tax return of
Westinghouse and the results of the Canadian and European operations were
reported separately in their respective taxing jurisdictions. For the purposes
of this Form 10-K, the income tax expense and other tax-related items included
in the financial statements are presented as if the Predecessor had been a
stand-alone taxpayer.
BACKGROUND
Westinghouse created The Knoll Group by acquiring The Shaw-Walker Company,
Reff Inc. and Knoll International, Inc. in 1989 and 1990 and combining them
with Westinghouse Furniture Systems, a division of Westinghouse. By joining
these four separate companies under the Knoll name, Westinghouse created a
business with a full line of office furnishings, a reputation for high quality
and superior design, and an internationally recognized brand name.
For various reasons, the combined entities did not perform well. The Company
continued to be run as four separate entities, with essentially separate
operations with independent factories and administrative support personnel. In
addition, the Company believes that former management's steps to rationalize
the Company's U.S. dealer network and consolidate its sales forces may have
impaired Knoll's distribution and sales capabilities. A decline in revenues in
the U.S. office furniture industry in 1991, followed in 1992 by Westinghouse's
10
announcement of its intention to sell Knoll, exacerbated the difficult
operating environment within Knoll. As a result, under previous management
from 1991 to 1993, sales and net income deteriorated. In December 1993,
Westinghouse appointed Burton B. Staniar, then Chairman and Chief Executive
Officer of Westinghouse Broadcasting, as Knoll's Chairman and Chief Executive
Officer, and ended its efforts to sell Knoll. Mr. Staniar promptly recruited
John H. Lynch as Vice Chairman, and in 1994 they initiated a major turnaround
and restructuring program which led to significantly improved financial
performance. Management's turnaround efforts had a dramatic impact on the
Company's competitive position and financial performance and positioned the
Company for growth.
OVERVIEW
Operating performance improved from 1994 to 1996, primarily due to the
turnaround program and the restructuring efforts undertaken by the Company.
Sales increased from $562.9 million in 1994 to $651.8 million in 1996. Gross
margins increased from 27.1% in 1994 to 32.7% in 1995 and, on a pro forma
basis, from 31.5% in 1995 to 35.6% in 1996. Operating income improved by
$104.7 million from a loss of $49.5 million in 1994 to a profit of $55.2
million in 1995; pro forma operating income improved by $29.5 million from
$49.0 million in 1995 to $78.5 million in 1996. Operating margins increased
from (8.8)% in 1994 to 8.9% in 1995 and, on a pro forma basis, from 7.9% in
1995 to 12.0% in 1996. The most significant cost reductions, which improved
operating performance, were in 1995, when the Company eliminated approximately
$25.0 million in variable operating costs and approximately $45.0 million in
fixed operating costs and general expenses. The Company's improved financial
and operating results allowed it in 1996 to prepay $72.0 million under its
Credit Facilities and refinance such facilities on more favorable terms.
Periods prior to the Acquisition are not comparable to periods after the
Acquisition on a non-pro forma basis.
Since 1994, virtually every product line has been modified and improved, and
the lead time required to bring new and enhanced products to the market has
been decreased significantly through the use of computer-aided design
techniques and other process improvements; average lead times between order
entry and delivery of products to customers have been reduced from seven weeks
to five weeks; and on-time shipments, a measure of customer service, improved
to approximately 95% in the fourth quarter of 1996. Management renewed sales
growth by refocusing and retraining the Company's sales force, and instituted
product line profitability measures and management incentive programs.
Finally, management accelerated the development of new and enhanced products
and restructured the European business.
The Company believes that its recent sales growth exceeded industry growth
as a whole. According to BIFMA, U.S. furniture industry shipments have
increased at a compound annual growth rate of 4.3% over the ten-year period
ended December 31, 1996. In addition, BIFMA estimates that the U.S. office
furniture industry will grow approximately 5% in 1997. The Company's sales
increased 10.7% in 1994 and 10.3% in 1995. Sales increases of 5.0% in 1996
were negatively affected by management initiatives undertaken in the
turnaround to increase the profitability of the Company's sales, including (i)
the discontinuation of several products that were sold to customers in 1995
and (ii) an intentional decrease in heavily discounted, lower profit sales to
selected customers. During this transitional period, orders for new products
increased at a faster rate than sales, with 1996 orders of $686.8 million, up
$87.3 million, or 14.6%, over 1995 orders of $599.5 million.
11
The Company believes that it is well-positioned for 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 1996 U.S. office
furniture market was 11.2% for office systems, 2.1% for seating, 2.1% for
storage, 1.2% for desks and casegoods and 1.8% for tables. Such percentages do
not include sales of KnollStudio, KnollExtra, textiles and leather products.
The following table describes the estimated 1996 U.S. office furniture market
sales by category.
U.S. MARKET % OF
PRODUCT CATEGORY SIZE U.S. MARKET
---------------- ------------- -----------
(IN BILLIONS)
Office systems.................................. $3.4 34.1%
Seating......................................... 2.6 25.4
Storage......................................... 1.4 14.1
Desks and casegoods............................. 1.6 16.4
Tables.......................................... 0.7 6.6
In addition, the Company had 1996 sales of approximately $79.5 million in
Canada and Europe. European sales are primarily in the United Kingdom,
Germany, France, Belgium and Italy.
RESULTS OF OPERATIONS
The following table summarizes the Company's results of operations on a pro
forma basis for both 1995 and 1996 and as a percentage of net sales as if the
Acquisition had been consummated at the beginning of each period.
PRO FORMA
---------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1995 1996
------------- ------------
(DOLLARS IN MILLIONS)
Total sales............. $620.9 100.0% $651.8 100.0%
Cost of sales........... 425.3 68.5 419.9 64.4
------ ----- ------ -----
Gross profit............ 195.6 31.5 231.9 35.6
Selling, general and
administrative
expenses............... 142.6 23.0 153.4 23.6
Allocated corporate
expenses............... 4.0 0.6 -- --
------ ----- ------ -----
Operating income........ 49.0 7.9 78.5 12.0
Interest expense........ 41.0 6.6 40.0 6.1
Other income (expense),
net.................... (1.6) (0.3) 0.1 --
------ ----- ------ -----
Income before income
taxes and extraordinary
item................... 6.4 1.0 38.6 5.9
Income tax expense...... 2.7 0.4 16.9 2.6
------ ----- ------ -----
Income before
extraordinary item..... $ 3.7 0.6% $ 21.7 3.3%
====== ===== ====== =====
COMPARISON OF PRO FORMA YEAR ENDED DECEMBER 31, 1996 TO PRO FORMA 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 (10.8%) and $3.1 million (5.7%), respectively. This growth is
attributable to product enhancements in all categories as well as
12
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, increasing $36.3 million, or 18.6%, from gross profit of $195.6
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 31.5% for
the previous year. These increases were principally due to the higher sales
volume 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 (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 executives 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 volume, 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 decreased for the year ended December 31,
1996 from 1995 due to the prepayment of $72.0 million of indebtedness under
the Credit Facilities.
Income tax expense. Income tax expense for the year ended December 31, 1996
was 43.8% of pre-tax income as compared to 42.2% in 1995. The increase in the
effective tax rate is primarily the result of increased earnings for 1996 in
foreign countries with effective tax rates higher than those present in the
United States.
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 previous credit agreement.
COMPARISON OF YEAR ENDED DECEMBER 31, 1995 TO YEAR ENDED DECEMBER 31, 1994
Total sales. Total sales were $620.9 million for the year ended December 31,
1995, an increase of $58.0 million, or 10.3%, from $562.9 million for the year
ended December 31, 1994. Sales growth resulted from price increases (an
average increase of 1.6% over 1994) and increased volume across all major
North American product categories (an average increase of 8.7% over 1994).
Sales of office systems grew $50.7 million, or 15.1%, as sales of the Equity,
Morrison and Reff product lines increased due to product enhancements and
sales incentives at both the dealer and sales division level. Sales from the
Company's specialty products (KnollStudio, KnollExtra, Spinneybeck and
KnollTextiles) and seating products grew $4.9 million and $2.4 million,
respectively, a combined increase of 6.3% over 1994, due in part to continued
growth from new product introductions such as the Propeller table and the
Parachute and SoHo chairs.
Gross profit. Gross profit was $203.3 million for the year ended December
31, 1995, an increase of $50.5 million, or 33.0%, from $152.8 million for the
year ended December 31, 1994. This increase was principally due
13
to the higher sales volume, better pricing, discontinuance of lower profit
product lines, factory operating cost improvements, and cost reductions
realized from closing the Company's Legnano, Italy factory and consolidating
its Muskegon, Michigan operations. As a result, gross profit as a percentage
of sales increased to 32.7% for the year ended December 31, 1995 from 27.1%
for the year ended December 31, 1994.
Restructuring provision. The Company's restructuring provision of $29.2
million for the year ended December 31, 1994 includes costs associated with
the factory closing and consolidation referred to above, lease cancellations,
product discontinuations and employee separation costs associated with
initiatives implemented by management in the turnaround program that commenced
in early 1994.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $138.5 million for the year ended December 31,
1995, representing a decrease of $28.7 million, or 17.2%, from $167.2 million
for the year ended December 31, 1994. This decrease is primarily attributable
to the cost reductions and improved operating efficiencies derived from
consolidating and centralizing human resources, finance, purchasing and
logistics, order entry and customer service, and management information
systems operations at one facility, as well as from reducing marketing and
selling expenses associated with showroom and sales office consolidations and
eliminations. As a percentage of sales, selling, general and administrative
expenses improved to 22.3% for the year ended December 31, 1995 from 29.7% for
the year ended December 31, 1994.
Allocated corporate expenses. Allocated corporate expenses, which include
Westinghouse overhead charges for Westinghouse executive management and
corporate legal, environmental, audit, tax, treasury, and other related
services, were $9.5 million for the year ended December 31, 1995, an increase
of $3.6 million, or 61.0%, from $5.9 million for the year ended December 31,
1994. Allocated corporate expenses for 1995 include approximately $4.0 million
of long-term incentive compensation payable to Knoll executives. These
allocated corporate expenses, which are payable by Westinghouse and "pushed
down" to Knoll from Westinghouse, are allocated primarily based on sales, with
the exception of the incentive compensation, and are not necessarily
indicative of actual or future costs.
Operating income (loss). Operating income increased to $55.2 million for the
year ended December 31, 1995, representing an increase of $104.7 million, as
compared to a loss of $49.5 million for the year ended December 31, 1994. As a
percentage of total sales, operating income (loss) increased to 8.9% for the
year ended December 31, 1995 from (8.8)% for the same period in 1994. This
improvement was driven by higher sales volume, better pricing, cost reductions
and improved operating efficiencies, decreased depreciation and amortization
expense and the restructuring provision charged in 1994 as described above.
Interest expense. Interest expense decreased to $1.4 million for the year
ended December 31, 1995, a decrease of $1.8 million, or 56.3%, as compared to
$3.2 million for the year ended December 31, 1994. This decrease was due
primarily to the reduction of debt in the Company's European subsidiaries.
Other income (expense). The Company incurred other expenses of $1.6 million
for the year ended December 31, 1995, primarily due to the one-time write-off
of certain tooling that was purchased but not used, as compared to $0.7
million in other income for the year ended December 31, 1994.
Income tax expense. Income tax expense of $22.8 million was recorded for the
Company as a stand-alone entity for the year ended December 31, 1995, an
increase of $15.1 million from $7.7 million for the year ended December 31,
1994. The deferred income tax liability increased from $3.3 million at
December 31, 1994 to $11.3 million at December 31, 1995. This increase
resulted in deferred income tax expense of $8.0 million for the year ended
December 31, 1995, an increase of $2.2 million from $5.8 million for the year
ended December 31, 1994. The increase in the deferred income tax liability is
due primarily to the reversal of temporary differences arising from
restructuring charges recorded in 1994 partially offset by temporary
differences arising from certain charges recorded in 1995. The effective tax
rate increased to 43.8% in 1995 from an effective rate of 14.8% in 1994,
reflecting the impact of positive income from operations.
14
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, interest expense associated with borrowings under the Credit
Facilities and the issuance of the Notes, as well as scheduled principal
payments of term loans under the Credit Facilities, significantly increased
interest expense and cash requirements compared to previous years. If the
Offerings are completed as contemplated, the Company will reduce outstanding
indebtedness, which will partly reduce the Company's interest expense.
The Credit Facilities provide for a $100 million term loan and a $130
million revolving credit facility. The term loan is subject to quarterly
amortization of principal commencing on March 31, 1997, in an aggregate amount
of $15 million in 1997, $15 million in 1998, $15 million in 1999, $15 million
in 2000, $20 million in 2001 and $20 million in 2002. Loans made pursuant to
the revolving credit facility may be borrowed, repaid and reborrowed from time
to time until December 17, 2002. Indebtedness under the Credit Facilities
bears interest at a floating rate based, at the Company's option, upon (i)
LIBOR plus 0.875% or (ii) the prime rate. These rates are subject to change
based on the Company's ratio of funded debt to EBITDA. The Credit Facilities
contain restrictive covenants, financial covenants and events of default.
In addition to the Credit Facilities, in connection with the Acquisition the
Company also issued $165 million aggregate principal amount of the Notes. The
Notes are subordinated to all existing and future senior indebtedness of the
Company, including all indebtedness under the Credit Facilities. The Indenture
governing the terms of the 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 Notes may be required to be purchased by the
Company upon a change of control (as defined) and in certain circumstances
with the proceeds of asset sales. The 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% of
their principal amount at maturity, plus accrued interest, on or after March
15, 2004. At any time on or before March 15, 1999 the Company may redeem up to
35% of the original aggregate principal amount of the Notes at a redemption
price of 110% of their principal amount with the net proceeds of a public
equity offering by the Company. If the Offerings are completed as
contemplated, the Company will redeem up to $57.8 million aggregate principal
amount of the Notes with the net proceeds of the Offerings.
The Company's foreign subsidiaries from time to time maintain local credit
facilities to provide credit for overdraft, working capital and other
purposes. The Credit Facilities restrict such indebtedness to $10 million at
any one time. As of December 31, 1996, the Company's total credit available
under such facilities was approximately $9.7 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 $89.5 million for
the ten months ended December 31, 1996, $(54.0) million for the two months
ended February 29, 1996, $51.9 million in 1995 and $(3.8) million in 1994.
Cash provided by operations resulted primarily from net earnings, depreciation
and amortization, as well as increases in accounts payable and other current
liabilities and decreases in inventory.
Cash used in investing activities totaled $15.0 million for the ten months
ended December 31, 1996, $2.3 million for the two months ended February 29,
1996, $19.0 million in 1995 and $19.8 million in 1994 and primarily was
comprised of capital expenditures by the Company. The Company's capital
expenditures totaled $15.3 million for the ten months ended December 31, 1996,
$2.3 million for the two months ended February 29, 1996, $19.3 million in 1995
and $20.2 million in 1994. Capital expenditures have primarily been for new
manufacturing equipment and information systems. The Company expects to
increase its capital expenditures over the next few years as part of its
growth strategy and efforts to provide superior service and products to its
customers. The Company estimates that capital expenditures will be
approximately $30 million in 1997. The Credit Facilities restrict the
Company's capital expenditures to $36 million annually (plus up to $10 million
carried forward from a previous year).
15
Cash provided by (used in) financing activities totaled $(73.2) million for
the ten months ended December 31, 1996, $57.0 million for the two months ended
February 29, 1996 and $(36.8) million and $28.3 million for the years ended
December 31, 1995 and 1994, respectively. The $73.2 million used by the
Company in its financing activities during the ten months ended December 31,
1996 included $72.0 million for the prepayment of indebtedness under the
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, 1996, the Company had five outstanding interest rate collar
agreements with a total notional principal amount of $185 million and maximum
and minimum rates ranging from 7.5% to 7.99% and 5.00% to 5.5%, respectively.
These agreements mature over the next two years. Aggregate maturities of the
total notional principal amount are $70 million in 1998 and $115 million in
1999.
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 Credit Facilities, 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, 1996.
BACKLOG
The Company's backlog of unfilled orders was $94.1 million at December 31,
1996 and $70.8 million at December 31, 1995. The Company expects to fill 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.
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.
16
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Set forth below are the names, ages and positions of the directors and
executive officers of the Company:
NAME AGE POSITION
---- --- --------
Burton B. Staniar................... 55 Chairman of the Board
John H. Lynch....................... 44 Vice Chairman of the Board, President
and Chief Executive Officer
Wolfgang Billstein.................. 48 Managing Director--Knoll Europe
Kathleen G. Bradley................. 47 Senior Vice President--Sales,
Distribution and Customer Service
Andrew B. Cogan..................... 34 Senior Vice President--Marketing and
Product Development and Director
Carl G. Magnusson................... 57 Senior Vice President--Design
Senior Vice President and Chief
Douglas J. Purdom................... 38 Financial Officer
Barbara E. Ellixson................. 43 Vice President--Human Resources
Vice President, Controller and
Barry L. McCabe..................... 50 Treasurer
Vice President, General Counsel and
Patrick A. Milberger................ 40 Secretary
Jeffrey A. Harris................... 41 Director
Sidney Lapidus...................... 59 Director
Kewsong Lee......................... 31 Director
John L. Vogelstein.................. 62 Director
Burton B. Staniar was appointed Chairman of the Board of the Company in
December 1993 to effect the restructuring of the Company and restore it to
profitability. Mr. Staniar served as Chief Executive Officer of the Company
from December 1993 to January 1997. Prior to that time, Mr. Staniar had held a
number of assignments at Westinghouse, including President of Group W Cable
and Chairman and Chief Executive Officer of Westinghouse Broadcasting. Prior
to joining Westinghouse in 1980, he held a number of marketing and general
management positions at Colgate Palmolive and Church and Dwight Co., Inc.
John H. Lynch joined the Company as President and Vice Chairman of the Board
in April 1994 and was elected Chief Executive Officer in January 1997. Prior
to joining the Company, Mr. Lynch was a partner in BGI, a consulting company,
and an associate dean at the Harvard Business School. Mr. Lynch is a director
of Renaissance Cosmetics, Inc.
Wolfgang Billstein was recruited in November 1994 to lead the restructuring
of the Company's European operations as Managing Director--Knoll Europe. A
German citizen, Mr. Billstein previously worked in Europe for the Procter &
Gamble Company and Benckiser GmbH, a consumer products company.
Kathleen G. Bradley was named Senior Vice President--Sales, Distribution and
Customer Service in January 1996, after serving as Divisional Vice President
for Knoll's southeast region since 1988. Prior to that time, Ms. Bradley was
regional manager for the Company's Atlanta territory, a position to which she
was promoted in 1983. She began her career with Knoll in 1979.
Andrew B. Cogan has been a director of the Company since February 1996. He
has held the position of Senior Vice President--Marketing and Product
Development since May 1994. Mr. Cogan has held several positions in the design
and marketing group since joining the Company in 1989.
Carl G. Magnusson has held the position of Senior Vice President--Design
since February 1993. Mr. Magnusson has been involved in design, product
development, quality and communications since joining the Company in 1976.
17
Douglas J. Purdom joined the Company as Senior Vice President and Chief
Financial Officer in August 1996. Prior to that time, Mr. Purdom served as
Vice President and Chief Financial Officer of Magma Copper Company since 1992,
and as Corporate Controller of that company from 1989 to 1991.
Barbara E. Ellixson was promoted to her current position as Vice President--
Human Resources in August 1994, after serving as Manager of Human Resources
for the Company's East Greenville site. Ms. Ellixson began her career with
Westinghouse in 1971 and has held a variety of human resources positions in
several different business units.
Barry L. McCabe joined the Company in August 1990 as Controller. Mr. McCabe
worked with a number of Westinghouse business units after joining Westinghouse
in 1974 in the Auditing Department.
Patrick A. Milberger joined the Company as Vice President and General
Counsel in April 1994. Prior to joining the Company, Mr. Milberger was an
Assistant General Counsel at Westinghouse and was in private practice at
Buchanan Ingersoll, P.C.
Jeffrey A. Harris, a director of the Company since February 1996, has been a
General Partner of Warburg, Pincus & Co. and a Member and Managing Director of
E.M. Warburg, Pincus & Co., LLC and its predecessors since 1988, where he has
been employed since 1983. Mr. Harris is a director of Newfield Exploration
Company, Comcast UK Cable Partners Limited, Industri-Matematik International
Corp., ECsoft Group plc and several privately held companies.
Sidney Lapidus, a director of the Company since February 1996, has been a
General Partner of Warburg, Pincus & Co. and a Member and Managing Director of
E.M. Warburg, Pincus & Co., LLC and its predecessors since January 1982, where
he has been employed since 1967. Mr. Lapidus is currently a director of
Pacific Greystone Corporation, Caribiner International, Inc., Grubb and Ellis
Company and Panavision Inc., as well as several privately held companies.
Kewsong Lee, a director of the Company since February 1996, has been a
General Partner of Warburg, Pincus & Co. and a Member and Managing Director of
E.M. Warburg, Pincus & Co., LLC and its predecessors since January 1997. From
January 1995 to January 1997, Mr. Lee was Vice President of Warburg, Pincus
Ventures, Inc. From 1992 to 1995, Mr. Lee was an associate at E.M. Warburg,
Pincus & Co., Inc. and prior to that had been a consultant at McKinsey &
Company, Inc. since 1990. Mr. Lee is currently a director of RenaissanceRe
Holdings Ltd. and several privately held companies.
John L. Vogelstein has been a director of the Company since February 1996.
Mr. Vogelstein is a General Partner of Warburg, Pincus & Co., and a Member,
Vice Chairman and President of E. M. Warburg, Pincus & Co., LLC, where he has
been employed since 1967. Mr. Vogelstein is currently a director of ADVO Inc.,
Aegis Group p1c., Golden Books Family Entertainment, Inc., LCI International,
Inc., Mattel, Inc., Value Health, Inc., Vanstar Corporation and several
privately held companies.
The employment agreements of Messrs. Staniar and Lynch provide that the
Company will nominate them to the board of directors during the term of their
employment pursuant to their employment agreements. In addition, the Company's
Stockholders Agreement, dated February 29, 1996, entitles Warburg to designate
between one and four directors depending on its percentage ownership of the
Company's outstanding shares of Common Stock or Series A Preferred Stock. If
the Offerings are completed as contemplated, Warburg will own more than 50% of
the Common Stock of the Company and will therefore be entitled pursuant to the
Stockholders Agreement to nominate four members of the Board of Directors of
the Company.
18
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth, for the years ended December 31, 1996 and
December 31, 1995, individual compensation information for the Chief Executive
Officer of the Company and each of the four other most highly compensated
executive officers of the Company who were serving as executive officers at
December 31, 1996 (the "named executive officers").
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
------------ ------------
RESTRICTED
NAME AND PRINCIPAL STOCK ALL OTHER
POSITION YEAR SALARY($) BONUS($) AWARDS($)(1) COMPENSATION($)(2)
------------------ ---- --------- -------- ------------ ------------------
Burton B. Staniar....... 1996 410,830 600,000 30,000 5,595
Chairman of the Board 1995 465,000 350,000 -- 4,500
John H. Lynch........... 1996 393,330 600,000 30,000 9,449
Vice Chairman of the 1995 360,000 360,000 -- 6,075
Board,
President and Chief
Executive Officer
Andrew B. Cogan......... 1996 197,930 250,000 12,000 --
Senior Vice President-- 1995 187,620 187,000 -- --
Marketing
and Product Development
Kathleen G. Bradley..... 1996 197,050 250,000 6,000 4,328
Senior Vice President-- 1995 163,668 256,740 -- 4,755
Sales,
Distribution and
Customer Service
Wolfgang Billstein...... 1996 396,000 572,836 -- --
Managing Director-- 1995 360,000 653,100 -- --
Knoll Europe
- --------
(1) On February 29, 1996, Messrs. Staniar, Lynch and Cogan and Ms. Bradley
were granted 300,000, 300,000, 120,000 and 60,000 shares of restricted
stock, respectively. Holders of shares of restricted stock will not be
entitled to receive dividends until such shares vest and become
unrestricted. As of March 1, 1997, 40% of the grants of restricted stock
to each of Messrs. Staniar, Lynch and Cogan had vested and an additional
20% will vest on each of the next three anniversaries thereof. As to Ms.
Bradley, 20% of the grants of restricted stock vested on March 1, 1997 and
an additional 20% will vest on each of the next four anniversaries
thereof. The value of the shares listed above is based on the fair value
thereof on the date of grant, based on the price of the shares of Common
Stock sold in conjunction with the Acquisition.
(2) Amounts in this column represent the Company's matching contributions to
the Knoll, Inc. Retirement Savings Plan.
PENSION PLANS
Retirement benefits are provided to employees through two pension plans.
Prior to the purchase of the Company from Westinghouse, benefits were provided
under The Knoll Group Pension Plan which was retained by Westinghouse (the
"Westinghouse Pension Plan"). Effective March 1, 1996, the Company established
the Knoll, Inc. Pension Plan (the "Company Pension Plan"). The Westinghouse
Pension Plan provides eligible employees with retirement benefits based on a
career average compensation formula. The formula for computing normal
retirement benefits under this plan is 1.45% of career compensation divided by
twelve. Once a participant accumulates 5 years of vesting service, he or she
can take early retirement anytime after reaching age 55. Accrued normal
retirement benefit is reduced 6% per year prior to normal retirement age. The
minimum benefit earned for any year of participation in the plan is $300 ($25
per month), prorated for the partial years worked during the first and last
years of employment. The estimated annual benefits payable upon normal
retirement under this plan for each of the named executive officers is as
follows: Staniar ($0); Lynch ($4,712); Bradley ($24,648); and Cogan ($16,500).
Mr. Billstein has never participated in the Westinghouse Pension Plan.
19
The terms of the Company Pension Plan are the same as those of the
Westinghouse Pension Plan. The estimated annual benefits payable upon normal
retirement under this plan for each of the named executive officers is as
follows: Staniar ($1,812); Lynch ($1,812); Bradley ($1,812); and Cogan
($1,812). Mr. Billstein never participated in the Company Pension Plan.
Messrs. Staniar, Lynch, and Cogan and Ms. Bradley also participated in the
Westinghouse Executive Pension Program (the "Westinghouse Excess Plan")
through the first two months of fiscal 1996, which provides for benefits not
payable by the Westinghouse Pension Plan because of limitations imposed by the
Internal Revenue Code of 1986, as amended (the "Code"). The benefit formula
for this plan is average total compensation and years of eligibility service
multiplied by 1.47% minus amounts payable under the Westinghouse Pension Plan.
The estimated annual benefits payable under this plan upon normal retirement
for each of the named executive officers is as follows: Staniar ($263,000);
Lynch ($13,972); Bradley ($5,820); and Cogan ($14,089). Mr. Billstein has
never participated in the Westinghouse Excess Plan.
Remuneration covered by the Westinghouse Pension Plan, the Company Pension
Plan and the Westinghouse Excess Plan primarily includes salary and bonus, as
set forth in the Summary Compensation Table. Under the Westinghouse Pension
Plan, the Company Pension Plan and the Westinghouse Excess Plan, Messrs.
Staniar, Lynch, and Cogan and Ms. Bradley have the following years of credited
service, as of December 31, 1996: 0.00/0.84/15.44, 1.75/0.84/1.75,
7.14/0.84/5.498 and 16.64/0.84/5.498 years, respectively.
DIRECTOR COMPENSATION
Directors do not receive compensation for service on the Company's Board of
Directors but are reimbursed for certain expenses in connection with
attendance at Board and committee meetings.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Burton B. Staniar,
the Company's Chairman of the Board, John H. Lynch, the Company's Vice
Chairman, Chief Executive Officer and President, and Andrew B. Cogan, the
Company's Senior Vice President--Marketing and Product Development, for a term
expiring on the first anniversary of the Acquisition closing, subject to
automatic one-year extensions unless either party gives 60 days notice not to
renew. The agreements with Messrs. Staniar and Lynch provide for a base salary
of $400,000, with a service bonus of 25% of base salary at the end of each
calendar year, and an annual bonus of up to 125% of base salary based on the
attainment of targets set by the Board of Directors. The agreement with Mr.
Cogan provides for a base salary of $200,000 and an annual bonus of up to 100%
of base salary based on the attainment of targets set by the Board of
Directors. The agreements may be terminated at any time by the Company, but if
so terminated without "cause," or if the Company fails to renew the
agreements, the Company must pay the employee 125% of one year's base salary
(100% of base salary in the case of Mr. Cogan). The agreements also contain
non-compete and non-solicitation (during the term of the agreement and for one
year thereafter) and confidentiality provisions.
In addition, the Company has entered into a Consulting Agreement, dated as
of December 1, 1996, with Mr. Wolfgang Billstein. Pursuant to this agreement,
Mr. Billstein receives a monthly fee of 52,249 Deutsche Marks, and contingent
incentives based on the positive operating profit of Knoll Europe (subject to
certain conditions) and Knoll Europe's order volume. The agreement terminates
on November 30, 1997 but is automatically renewed for two one-year periods
unless either party elects not to renew. Knoll has the right to terminate this
agreement upon three months notice and payment of 313,494 Deutsche Marks plus
a portion of Mr. Billstein's incentive compensation.
STOCK INCENTIVE PLANS
Under the 1996 Stock Plan, 1,500,000 shares of the Common Stock were
reserved for issuance pursuant to grants of restricted shares or options to
purchase shares to officers, key employees, directors and consultants of
20
Knoll and its subsidiaries selected for participation in the 1996 Stock Plan.
The Company has issued all 1,500,000 shares of restricted shares and options
to acquire shares pursuant to the 1996 Stock Plan. On February 14, 1997 Knoll
adopted the 1997 Stock Plan. The 1997 Stock Plan contains terms substantially
similar to the 1996 Stock Plan, except that pursuant to the 1997 Stock Plan
(i) an aggregate of only 400,000 shares of the Common Stock are reserved for
issuance thereunder, (ii) discounted options may be granted, (iii) options may
be repriced and (iv) the Board of Directors has greater flexibility to amend
the 1997 Stock Plan. The Company has issued 240,000 options to acquire shares
pursuant to the 1997 Stock Plan. The Stock Plans are intended as an incentive
to encourage stock ownership by such individuals in order to increase their
proprietary interest in Knoll's success and to encourage them to remain in the
employ of Knoll.
The Stock Plans provide for the grant of restricted shares ("Restricted
Stock"), non-qualified stock options ("NQSOs") and incentive stock options as
defined in Section 422 of the Code ("ISOs").
The Stock Plans are administered by a Committee of at least two directors,
appointed by the Board of Directors of Knoll (the "Committee"). The Committee
determines the eligible individuals who are to receive shares of Restricted
Stock, the number of shares to be granted, the terms of the restrictions and
period of time that the restrictions will be effective. The Committee will
also determine the eligible individuals who are to receive options and the
terms of each option grant, including (i) the option prices of shares subject
to options, (ii) the dates on which options become exercisable and (iii) the
expiration date of each option. The Committee has the power to accelerate the
exercisability of outstanding options and to reprice any option at any time.
The purchase price of the shares subject to options will be fixed by the
Committee, in its discretion, at the time options are granted, provided that
in no event shall the per share purchase price of an option granted under the
1996 Stock Plan or any ISO granted under the 1997 Stock Plan be less than the
Fair Market Value Per Share (as defined in the Stock Plans) on the date of
grant.
Optionees and holders of Restricted Stock will have no voting, dividend, or
other rights as stockholders prior to the lapse of all restrictions or the
receipt of unrestricted shares upon the exercise of options. The exercise
price for options may be paid in cash or, at the discretion of the Committee,
satisfied by tendering shares having a value equal to the exercise price. The
number of shares covered by options will be appropriately adjusted in the
event of any stock split, merger, recapitalization or similar corporate event.
No adjustments will be made upon conversion of the Company's Series A
Preferred Stock.
The Board of Directors of Knoll may at any time terminate either or both of
the Stock Plans or from time to time make such modifications or amendments to
the Stock Plans as it may deem advisable; provided that, with respect to the
1997 Stock Plan, the Board may not, without the approval of the Knoll
stockholders, (i) increase the maximum number of shares of Common Stock for
which options may be granted under the Stock Plans, (ii) expand the class of
employees eligible to participate therein, (iii) reduce the minimum purchase
price at which options may be granted under the Stock Plans, (iv) extend the
maximum term of options, or (v) extend the term of the 1997 Stock Plan.
Options and Restricted Stock granted under the Stock Plans will be evidenced
by written agreements between the recipient and Knoll. Subject to limitations
set forth in the Stock Plans, the terms of option and Restricted Stock
agreements will be determined by the Committee, and need not be uniform among
recipients.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company currently does not have a Compensation Committee. During the
fiscal year ended December 31, 1996 the compensation of Messrs. Staniar, Lynch
and Cogan was determined pursuant to employment agreements which each of them
has with the Company. The incentive portion of the compensation of each of
Messrs. Staniar and Lynch was determined by Messrs. Lapidus, Harris, and Lee
and confirmed by the entire Board of Directors, including Messrs. Staniar and
Lynch. For the fiscal year ended December 31, 1996 the incentive compensation
of Mr. Cogan and the compensation for all other executive officers was
determined by Messrs. Staniar and Lynch.
21
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the ownership of the Common Stock and Series
A Prefered Stock of the Company as of March 27, 1997, of (i) each person known
by the Company to own beneficially more than 5% of the outstanding shares of
Common Stock or Series A Preferred Stock, (ii) each director and named
executive officer of the Company and (iii) all current directors and executive
officers of the Company as a group.
NUMBER OF SHARES OF
NAME AND ADDRESS OF SERIES A PREFERRED NUMBER OF SHARES OF % OF EACH CLASS
BENEFICIAL OWNER STOCK (1) COMMON STOCK (1) OUTSTANDING
------------------- ------------------- ------------------- ---------------
Warburg, Pincus
Ventures, LLC (2)....... 1,469,081 918,750 91.6%/65.1%
466 Lexington Avenue
New York, NY 10017
Burton B. Staniar....... 20,507 132,825 1.3/9.4
John H. Lynch........... 20,507 132,825 1.3/9.4
Wolfgang Billstein...... 320 200 */*
Kathleen G. Bradley..... 640 12,400 */*
Andrew B. Cogan......... 3,998 50,500 */3.6
John L. Vogelstein (3).. 1,469,081 918,750 91.6/65.1
Sidney Lapidus (3)...... 1,469,081 918,750 91.6/65.1
Jeffrey A. Harris (3)... 1,469,081 918,750 91.6/65.1
Kewsong Lee (3)......... 1,469,081 918,750 91.6/65.1
All executive officers
and directors as a
group (14 persons)..... 1,520,969 1,269,200 94.8%/89.9%
- --------
* Less than 1%.
(1) Except as otherwise indicated, the persons in this table have sole voting
and investment power with respect to all shares of Common Stock and Series
A Preferred Stock of the Company shown as beneficially owned by them,
subject to community property laws where applicable and subject to the
information contained in the footnotes to this table.
(2) The sole general partner of Warburg is Warburg, Pincus & Co., a New York
general partnership ("WP"). E.M. Warburg, Pincus & Co., LLC, a New York
limited liability company ("EMW LLC"), manages Warburg. The members of EMW
LLC are substantially the same as the partners of WP. Lionel I. Pincus is
the managing partner of WP and the managing member of EMW LLC and may be
deemed to control both WP and EMW LLC. WP has a 15% interest in the
profits of Warburg as the general partner. Jeffrey A. Harris, Sidney
Lapidus, Kewsong Lee and John L. Vogelstein, directors of the Company, are
Managing Directors and members of EMW LLC and general partners of WP. As
such, Messrs. Harris, Lapidus, Lee and Vogelstein may be deemed to have an
indirect pecuniary interest (within the meaning of Rule l6a-1 under the
Securities Exchange Act of 1934) in an indeterminate portion of the shares
beneficially owned by Warburg. See Note 3 below.
(3) All of the shares indicated as owned by Messrs. Harris, Lapidus, Lee and
Vogelstein are owned directly by Warburg and are included because of the
affiliation of such persons with Warburg. Messrs. Harris, Lapidus, Lee and
Vogelstein disclaim "beneficial ownership" of these shares within the
meaning of Rule 13d-3 under the Securities Exchange Act of 1934. See Note
2 above.
22
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
THE ACQUISITION
On February 29, 1996, pursuant to the Stock Purchase Agreement, the Company
acquired all of the outstanding capital stock of the companies that constitute
the Knoll business for an aggregate purchase price of $579,801,000. The
Company was formed by Warburg, NationsBanc Investment Corp. and certain
members of the Company's management to consummate the Acquisition. The
Acquisition and related fees and expenses were financed through a $260 million
term loan, issuance of the Notes and with a $160.4 million equity contribution
by Warburg, NationsBanc Investment Corp. and senior management of the Company.
Of the $160.4 million of Company capital stock sold in connection with the
Acquisition (plus shares sold on October 21, 1996), certain members of the
Company's management (including the named executive officers) purchased $5.4
million, NationsBanc Investment Corp. purchased $8 million and Warburg
purchased $147 million. The equity consisted of 1,002,500 shares of common
stock, sold for $100,250, and 1,602,997 shares of Series A Preferred Stock,
sold for $160.3 million.
STOCKHOLDERS AGREEMENT
In connection with the acquisition of the Company in 1996, Warburg Pincus
Ventures, L.P., NationsBanc Investment Corp. and certain senior members of
management (each a "Holder" and collectively, the "Holders") and the Company
entered into a Stockholders Agreement (the "Stockholders Agreement"), dated as
of February 29, 1996, which governs certain matters related to corporate
governance and registration of shares of Common Stock and Series A Preferred
Stock ("Registrable Securities") held by such Holders (other than shares
acquired pursuant to the Stock Plans). The following description of the
Stockholders Agreement is qualified in its entirety by reference to the
Stockholders Agreement (Common Stock and Preferred Stock), which is filed as
an exhibit to this Form 10-K.
Pursuant to the Stockholders Agreement, Warburg is entitled to request on up
to two occasions that the Company file a registration statement under the
Securities Act covering the sale of at least $25 million of shares of Common
Stock or Series A Preferred Stock, subject to certain conditions. If officers
or directors of the Company holding other securities of the Company request
inclusion of their securities in any such registration, or if holders of
securities of the Company other than Registrable Securities who are entitled,
by contract with the Company or otherwise, to have securities included in such
a registration (the "Other Stockholders"), request such inclusion, the Holders
shall offer to include the securities of such officers, directors and Other
Stockholders in any underwriting involved in such registration, provided,
among other conditions, that the underwriter representative of any such
offering has the right, subject to certain conditions, to limit the number of
Registrable Securities included in the registration. The Company may defer the
registration for 120 days if it believes that it would be seriously
detrimental to the Company for such registration statement to be filed.
The Stockholders Agreement further provides that, if the Company proposes to
register any of its securities (other than registrations related solely to
employee benefit plans or pursuant to Rule 145 or on a form which does not
permit secondary sales or does not include substantially the same information
as would be required to be included in a registration statement covering the
sale of Registrable Securities), either for its own account or for the account
of other security holders, holders of Registrable Securities may require the
Company to include all or a portion of their Registrable Securities in the
registration and in any underwriting involved therein, provided, among other
conditions, that the underwriter representative of any such offering has the
right, subject to certain conditions, to limit the number of Registrable
Securities included in the registration. In addition, after the Company
becomes qualified to use Form S-3, the holders of Registrable Securities will
have the right to request an unlimited number of registrations on Form S-3 to
register at least $5 million of such shares, subject to certain conditions,
provided that the Company will not be required to effect such a registration
within 180 days of the effective date of the most recent registration pursuant
to this provision.
In general, all fees, costs and expenses of such registrations (other than
underwriting discounts and selling commissions applicable to sales of the
Registrable Securities and all fees and disbursements of counsel for the
23
Holders) will be borne by the Company. The registration rights described above
apply to 1,002,500 shares of Common Stock and 1,602,997 shares of Series A
Preferred Stock held by the Holders.
The Stockholders Agreement provides that the original Board of Directors of
the Company was to be composed of Messrs. Staniar, Lynch, Vogelstein, Lapidus,
Harris and Lee. Pursuant to the Stockholders Agreement, the stockholders who
are a party thereto have agreed to vote their shares of Common Stock for four
directors nominated by Warburg if Warburg owns 50% or more of the Company's
outstanding shares of Common Stock and Series A Preferred Stock, three
directors if it owns 25% or more, two directors if it owns 15% or more and one
director if it owns 5% or more.
ISSUANCE OF RESTRICTED SHARES OF COMMON STOCK
In connection with the issuance of 1,320,000 restricted shares of Common
Stock pursuant to the Company's 1996 Stock Plan established in connection with
the Acquisition, Warburg and the Company also entered into separate
Stockholders Agreements with all of the Company's executive officers and other
members of the Company's management. Pursuant to these agreements, members of
management agreed not to transfer their shares except (i) to members of their
immediate families and other related or controlled entities, (ii) to Warburg
or an affiliate thereof or (iii) after a public offering of Common Stock, upon
30 days prior written notice to the Board of Directors. The restrictions on
transfer terminate after a public offering of Common Stock when Warburg owns
less than 10% of the outstanding shares of Common Stock and less than 10% of
the outstanding shares of Series A Preferred Stock. In addition, pursuant to
these agreements, the Company agreed that, if the Company determined to
register any shares of Common Stock for its own account or for the account of
security holders, the Company would include in such registration all of the
vested shares of Common Stock received by management pursuant to the 1996
Stock Plan. In addition, after the Company qualifies for Form S-3, management
may request unlimited registrations of at least $5,000,000 of securities on
Form S-3, provided that the Company is not required to effect a registration
pursuant to this provision within 180 days of the effective date of the most
recent registration pursuant to this provision.
Pursuant to the 1996 Stock Incentive Plan, the Company also entered into
Restricted Share Agreements with each recipient of restricted shares of Common
Stock, including each of the Company's executive officers. Pursuant to these
agreements, Burton Staniar received 300,000 restricted shares, John Lynch
received 300,000 restricted shares, Andrew Cogan received 120,000 restricted
shares and Kathleen Bradley received 60,000 restricted shares. The agreements
were dated February 29, 1996 and the shares vested at a rate of 20% per year,
commencing on the date of grant (in the case of Messrs. Staniar, Lynch and
Cogan) or on the first anniversary of the date of grant. The agreements
provide that upon the voluntary termination of employment for reasons other
than death, disability or retirement at age 65, or if the grantee's employment
was terminated without cause, the nonvested restricted shares were to be
immediately forfeited to the Company. Upon termination with cause, the
agreements provide (i) in the case of Messrs. Staniar and Lynch, for the
immediate forfeiture of all restricted shares, regardless of whether vested
prior to termination, and (ii) that the Company may repurchase the shares of
Common Stock at $0.10 per share.
OTHER
During 1996, the Company paid $137,337 to Emanuela Frattini Magnusson for
design services and product royalties, the bulk of which was payable pursuant
to the terms of a July 1993 Design Development Agreement between Emanuela
Frattini and the Company pertaining to the Company's Propeller product line.
Emanuela Frattini Magnusson is the wife of Carl G. Magnusson, the Company's
Senior Vice President--Design.
24
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 Index to 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 beginning on page S-1 of
this Form 10-K preceding the exhibits. 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
NO. DESCRIPTION
------- -----------
3.1 --Amended and Restated Certificate of Incorporation of the Company.
3.2 --Certificate of Ownership and Merger Merging Knoll, Inc. With And
Into T.K.G. Acquisition Corp.
3.3 --Restated By-Laws of the Company.
4.1 --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 and
Trust Company, as trustee, relating to $165,000,000 principal amount
of 10 7/8% Senior Subordinated Notes due 2006, including form of
Initial Global Note. (Incorporated herein by reference to Exhibit 4.1
to the Company's Registration Statement on Form S-4, Registration No.
333-2972.)
4.2 --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
7/8% Senior Subordinated Notes due 2006, including form of Initial
Global Note. (Incorporated herein by reference to Exhibit 4.2 to the
Company's Registration Statement on Form S-4, Registration No. 333-
2972.)
4.3 --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 7/8% Senior Subordinated Notes due 2006,
including form of Initial Global Note.
4.4 --Credit Agreement, dated as of February 29, 1996, by and among T.K.G.
Acquisition Sub, Inc., the Guarantors (as defined therein),
NationsBank, N.A., Chemical Bank and other lending institutions.
(Incorporated herein by reference to Exhibit 4.3 to the Company's
Registration Statement on Form S-4, Registration No. 333-2972.)
4.5 --Security Agreement dated February 29, 1996, by and among T.K.G.
Acquisition Sub, Inc., the Guarantors (as defined therein), Knoll
North America, Inc., The Knoll Group, Inc., and NationsBank, N.A. and
other lending institutions. (Incorporated herein by reference to
Exhibit 4.4 to the Company's Registration Statement on Form S-4,
Registration No. 333-2972.)
25
EXHIBIT
NO. DESCRIPTION
------- -----------
4.6 --Registration Rights Agreement, dated as of February 29, 1996, by and
among T.K.G. Acquisition Sub, Inc., The Knoll Group, Inc., Knoll
North America, Inc., the Guarantors (as defined therein) and
NationsBanc Capital Markets, Inc., as initial purchaser.
(Incorporated herein by reference to Exhibit 4.5 to the Company's
Registration Statement on Form S-4, Registration No. 333-2972.)
10.1 --Stock Purchase Agreement, dated as of December 20, 1995, by and
between Westinghouse and TKG. (Incorporated herein by reference to
Exhibit 10.1 to the Company's Registration Statement on Form S-4,
Registration No. 333-2972.)
10.2 --Knoll, Inc. 1996 Stock Incentive Plan. (Incorporated herein by
reference to Exhibit 10.2 to the Company's Registration Statement on
Form S-4, Registration No. 333-2972.)
10.3 --Employment Agreement, dated as of February 29, 1996, between T.K.G.
Acquisition Corp. and Burton B. Staniar.
10.4 --Employment Agreement, dated as of February 29, 1996, between T.K.G.
Acquisition Corp. and John H. Lynch.
10.5 --Employment Agreement dated as of February 29, 1996, between T.K.G.
Acquisition Corp. and Andrew B. Cogan.
10.6 --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.
10.7 --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.
10.8 --Knoll, Inc. 1997 Stock Incentive Plan.
10.9 --Consulting Agreement, dated as of December 1, 1996, between Wolfgang
Billstein and Knoll, Inc.
21 --Subsidiaries of the Registrant.
27 --Financial Data Schedule.
(b) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the last quarter of
the year ended December 31, 1996.
26
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, THIS
28TH DAY OF MARCH, 1997.
KNOLL, INC.
/s/ Burton B. Staniar
By:__________________________________
BURTON B. STANIAR
CHAIRMAN OF THE BOARD
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THIS REPORT ON FORM 10-K HAS BEEN SIGNED BY THE
FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATE(S) INDICATED.
/s/ Burton B. Staniar Chairman of the March 28, 1997
- ------------------------------------- Board
BURTON B. STANIAR
/s/ John H. Lynch President, Chief March 28, 1997
- ------------------------------------- Executive Officer
JOHN H. LYNCH and Director
(Principal
Executive Officer)
/s/ Douglas J. Purdom Chief Financial March 28, 1997
- ------------------------------------- Officer (Principal
DOUGLAS J. PURDOM Financial Officer)
/s/ Barry L. McCabe Controller March 28, 1997
- ------------------------------------- (Principal
BARRY L. MCCABE Accounting Officer)
/s/ Andrew B. Cogan Director March 28, 1997
- -------------------------------------
ANDREW B. COGAN
/s/ Jeffrey A. Harris Director March 28, 1997
- -------------------------------------
JEFFREY A. HARRIS
/s/ Sidney Lapidus Director March 28, 1997
- -------------------------------------
SIDNEY LAPIDUS
/s/ Kewsong Lee Director March 28, 1997
- -------------------------------------
KEWSONG LEE
/s/ John L. Vogelstein Director March 28, 1997
- -------------------------------------
JOHN L. VOGELSTEIN
27
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT.
No annual report or proxy material has been sent to security holders of the
Company.
28
KNOLL, INC.
INDEX TO FINANCIAL STATEMENTS
HISTORICAL PAGE
----
Reports of Independent Auditors........................................... F-2
Consolidated Balance Sheets at December 31, 1996 and 1995 (Predecessor)... F-4
Consolidated Statements of Operations for the Ten Months Ended December
31, 1996, the Two Months Ended February 29, 1996 (Predecessor) and the
Years Ended December 31, 1995 and 1994 (Predecessor)..................... F-5
Consolidated Statements of Cash Flows for the Ten Months Ended December
31, 1996, the Two Months Ended February 29, 1996 (Predecessor) and the
Years Ended December 31, 1995 and 1994 (Predecessor)..................... F-6
Consolidated Statements of Changes in Stockholders' Equity for the Ten
Months Ended December 31, 1996, the Two Months Ended February 29, 1996
(Predecessor) and the Years Ended December 31, 1995 and 1994
(Predecessor)............................................................ F-7
Notes to the Consolidated Financial Statements............................ F-8
F-1
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Knoll, Inc.
We have audited the accompanying consolidated balance sheet of Knoll, Inc.
as of December 31, 1996 and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for the ten month period ended
December 31, 1996 (post-acquisition period), 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 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 1996 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Knoll, Inc. at December 31, 1996, and the consolidated results of its
operations and its cash flows for the post-acquisition period 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
1996 financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
March 14, 1997
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 Index
appearing under Item 14(a)(1) and (2) present fairly, in all material
respects, the financial position of The Knoll Group, Inc., an organizational
unit of Westinghouse Electric Corporation (Westinghouse), at December 31,
1995, and the results of their operations, cash flows and changes in
stockholders' equity for each of the two years in the period 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 audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above. We have not audited the consolidated financial
statements of The Knoll Group, Inc. for any period subsequent to December 31,
1995.
The Knoll Group, Inc. is a business unit of Westinghouse for each of the two
years ended December 31, 1995 and, as disclosed in Note 4 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
THE KNOLL GROUP, INC.
(PREDECESSOR)
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ---------------------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents................. $ 8,804 $ 1,569
Customer receivables, net................. 111,166 114,592
Inventories............................... 57,811 59,643
Deferred income taxes..................... 17,474 18,273
Prepaid and other current assets.......... 7,424 8,465
-------- --------
Total current assets.................... 202,679 202,542
Property, plant, and equipment.............. 176,218 164,633
Intangible assets........................... 286,940 240,772
Prepaid pension cost........................ -- 45,161
Other noncurrent assets..................... 9,875 3,602
-------- --------
Total Assets............................ $675,712 $656,710
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt........................... $ -- $ 1,496
Current maturities of long-term debt...... 23,265 3,287
Accounts payable--trade................... 50,250 45,850
Accounts payable--related parties......... -- 413
Income taxes payable...................... 388 13,973
Accrued restructuring costs............... 1,979 10,868
Other current liabilities................. 62,043 43,957
-------- --------
Total current liabilities............... 137,925 119,844
Long-term debt.............................. 330,889 251
Deferred income taxes....................... 1,931 29,574
Postretirement benefits obligation.......... 15,873 20,593
Other noncurrent liabilities................ 11,290 5,997
-------- --------
Total liabilities....................... 497,908 176,259
-------- --------
Stockholders' equity:
Preferred stock; $1.00 par value;
authorized 3,000,000 shares, issued and
outstanding 1,602,997 shares of Series A
12% Participating Convertible Preferred
Stock (liquidation preference of
$160,299,700)............................ 1,603 --
Common stock, $.01 par value; authorized
24,000,000 shares; issued and outstanding
2,322,500 shares......................... 23 --
Additional paid-in-capital................ 158,906 --
Unearned stock grant compensation......... (96) --
Retained earnings......................... 16,836 --
Parent company investment................. -- 503,317
Cumulative foreign currency translation
adjustment............................... 532 (22,866)
-------- --------
Total stockholders' equity.............. 177,804 480,451
-------- --------
Total Liabilities and Stockholders'
Equity................................. $675,712 $656,710
======== ========
See accompanying notes to the consolidated financial statements.
F-4
KNOLL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THE KNOLL
GROUP, INC.
(PREDECESSOR) THE KNOLL GROUP, INC.
TEN MONTHS TWO MONTHS (PREDECESSOR)
ENDED ENDED YEAR ENDED DECEMBER 31,
DECEMBER 31, FEBRUARY 29, ------------------------
1996 1996 1995 1994
------------ ------------- ----------- -----------
(IN THOUSANDS)
Sales to customers........ $561,534 $ 89,933 $ 610,723 $ 562,598
Sales to related parties.. -- 299 10,169 271
-------- -------- ----------- -----------
Total sales............... 561,534 90,232 620,892 562,869
Cost of sales to
customers................ 358,841 59,514 410,615 409,909
Cost of sales to related
parties.................. -- 200 7,017 195
-------- -------- ----------- -----------
Gross profit.............. 202,693 30,518 203,260 152,765
Provision for
restructuring............ -- -- -- 29,180
Selling, general, and
administrative expenses.. 131,349 21,256 138,527 167,238
Westinghouse long-term
incentive compensation... -- 47,900 -- --
Allocated corporate
expenses................. -- 921 9,528 5,881
-------- -------- ----------- -----------
Operating income (loss)... 71,344 (39,559) 55,205 (49,534)
Interest expense.......... 32,952 340 1,430 3,225
Other income (expense),
net...................... 447 (296) (1,597) 699
-------- -------- ----------- -----------
Income (loss) before
income taxes and
extraordinary item....... 38,839 (40,195) 52,178 (52,060)
Income tax expense
(benefit)................ 16,844 (16,107) 22,846 7,713
-------- -------- ----------- -----------
Income (loss) before
extraordinary item....... 21,995 (24,088) 29,332 (59,773)
Extraordinary loss on
early extinguishment of
debt, net of taxes....... 5,159 -- -- --
-------- -------- ----------- -----------
Net income (loss)......... $ 16,836 $(24,088) $ 29,332 $ (59,773)
======== ======== =========== ===========
See accompanying notes to the consolidated financial statements.
F-5
KNOLL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THE KNOLL
GROUP, INC.
(PREDECESSOR) THE KNOLL GROUP, INC.
TEN MONTHS TWO MONTHS (PREDECESSOR)
ENDED ENDED YEAR ENDED DECEMBER 31,
DECEMBER 31, FEBRUARY 29, -------------------------
1996 1996 1995 1994
------------ ------------- ----------- ------------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income (loss)........ $ 16,836 $ (24,088) $ 29,332 $ (59,773)
Noncash items included in
income:
Depreciation........... 19,251 3,150 19,006 21,478
Amortization of
intangible assets..... 7,881 1,167 6,993 7,006
Loss on disposal of
assets................ 87 -- -- --
Extraordinary loss..... 8,542 -- -- --
Noncash restructuring
charges............... -- -- -- 9,367
Foreign currency
transaction loss...... 354 -- -- --
Changes in assets and
liabilities:
Customer receivables... (5,110) 8,798 (5,850) (11,269)
Inventories............ 1,416 671 (76) (9,619)
Accounts payable....... 15,870 (15,292) (7,005) 18,533
Current and deferred
income taxes.......... (3,961) (16,627) 13,185 2,186
Other current assets... 747 2,283 453 (1,186)
Other current
liabilities........... 18,372 (7,190) (23,177) 16,951
Other noncurrent assets
and liabilities....... 9,217 (6,911) 19,003 2,542
--------- --------- ----------- ------------
Cash provided by (used
in) operating
activities.............. 89,502 (54,039) 51,864 (3,784)
--------- --------- ----------- ------------
CASH FLOWS FROM INVESTING
ACTIVITIES
Capital expenditures..... (15,255) (2,296) (19,334) (20,157)
Proceeds from sale of
assets.................. 218 -- 316 332
--------- --------- ----------- ------------
Cash used in investing
activities.............. (15,037) (2,296) (19,018) (19,825)
--------- --------- ----------- ------------
CASH FLOWS FROM FINANCING
ACTIVITIES
Repayment of short-term
debt, net............... (1,483) (3,805) (20,961) (2,758)
Proceeds from long-term
debt.................... 190,000 -- -- --
Repayment of long-term
debt.................... (262,130) -- (8,913) (2,753)
Additional equity
contribution............ 400 -- -- --
Net receipts from
(payments to) parent
company................. -- 60,848 (6,900) 33,836
--------- --------- ----------- ------------
Cash provided by (used
in) financing
activities.............. (73,213) 57,043 (36,774) 28,325
--------- --------- ----------- ------------
Effect of exchange rate
changes on cash and cash
equivalents............. 18 58 13 (1,996)
--------- --------- ----------- ------------
Increase (decrease) in
cash and cash
equivalents............. 1,270 766 (3,915) 2,720
Cash and cash equivalents
at beginning of period.. 7,534 1,569 5,484 2,764
--------- --------- ----------- ------------
Cash and cash equivalents
at end of period........ $ 8,804 $ 2,335 $ 1,569 $ 5,484
========= ========= =========== ============
See accompanying notes to the consolidated financial statements.
F-6
KNOLL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THE KNOLL
GROUP, INC.
(PREDECESSOR) THE KNOLL GROUP, INC.
TEN MONTHS TWO MONTHS (PREDECESSOR)
ENDED ENDED YEAR ENDED DECEMBER 31,
DECEMBER 31, FEBRUARY 29, ------------------------
1996 1996 1995 1994
------------ ------------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
PREFERRED STOCK
Balance at beginning of
period
(1,599,000 shares)....... $ 1,599 $ -- $ -- $ --
Shares issued (3,997
shares).................. 4 -- -- --
--------- --------- ----------- -----------
Balance at end of period.. 1,603 -- -- --
--------- --------- ----------- -----------
COMMON STOCK
Balance at beginning of
period
(1,000,000 shares)....... 10 -- -- --
Shares issued under the
Stock Incentive Plan
(1,320,000 shares)....... 13 -- -- --
--------- --------- ----------- -----------
Balance at end of period.. 23 -- -- --
--------- --------- ----------- -----------
ADDITIONAL PAID-IN-CAPITAL
Balance at beginning of
period................... 158,391 -- -- --
Shares issued............. 396 -- -- --
Shares issued under the
Stock Incentive Plan..... 119 -- -- --
--------- --------- ----------- -----------
Balance at end of period.. 158,906 -- -- --
--------- --------- ----------- -----------
UNEARNED STOCK GRANT
COMPENSATION
Balance at beginning of
period................... -- -- -- --
Shares issued under the
Stock Incentive Plan..... (132) -- -- --
Earned stock grant
compensation............. 36 -- -- --
--------- --------- ----------- -----------
Balance at end of period.. (96) -- -- --
--------- --------- ----------- -----------
RETAINED EARNINGS
Balance at beginning of
period................... -- -- -- --
Net income................ 16,836 -- -- --
--------- --------- ----------- -----------
Balance at end of period.. 16,836 -- -- --
--------- --------- ----------- -----------
PARENT COMPANY INVESTMENT
Balance at beginning of
period................... -- 503,317 480,885 506,822
Net income (loss)......... -- (24,088) 29,332 (59,773)
Capital expenditures...... -- 2,296 19,334 20,157
Proceeds from asset
sales.................... -- -- (316) (332)
Net interunit
transactions............. -- 58,552 (25,918) 14,011
--------- --------- ----------- -----------
Balance at end of period.. -- 540,077 503,317 480,885
--------- --------- ----------- -----------
CUMULATIVE FOREIGN
CURRENCY TRANSLATION
ADJUSTMENT
Balance at beginning of
period................... -- (22,866) (22,879) (20,883)
Translation adjustment.... 532 58 13 (1,996)
--------- --------- ----------- -----------
Balance at end of period.. 532 (22,808) (22,866) (22,879)
--------- --------- ----------- -----------
TOTAL STOCKHOLDERS'
EQUITY................... $ 177,804 $ 517,269 $ 480,451 $ 458,006
========= ========= =========== ===========
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 (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, 1996 and of the Predecessor as
of December 31, 1995, the results of operations, cash flows, and changes in
stockholders' equity of the Company for the ten month period ended December
31, 1996, and the results of operations, cash flows, and changes in
stockholders' equity of the Predecessor for the two month period ended
February 29, 1996 and the years ended December 31, 1995 and 1994.
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 United States 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 and deferred income taxes
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 and balances except for those with other units of
Westinghouse as described in Note 4.
Revenue Recognition
Sales are recognized as products are shipped and services are rendered.
F-8
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Cash and Cash Equivalents
Cash and cash equivalents includes cash on hand and investments with
original maturities of three months or less.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) 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, patents and 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 patents 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.
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 years ended December 31, 1995 and 1994
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.
F-9
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Stock-Based Compensation
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," encourages entities to record compensation
expense for stock-based employee compensation plans at fair value but
provides the option of measuring compensation expense using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," the former standard. The
Company has elected to account for stock-based compensation under the
former standard. Accordingly, compensation expense for restricted stock
awards and stock options is measured as the excess, if any, of the quoted
market price of the Company's stock at the date of the grant over the
amount an employee must pay to acquire the stock. For those entities which
choose to measure compensation expense under the former standard, SFAS No.
123 requires supplemental disclosure to show the effects on operations as
if the new measurement criteria had been used. If the new measurement
criteria under SFAS No. 123 had been adopted, the Company's results of
operations would not differ from those reflected in the historical
financial statements.
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 in the accompanying financial statements of the Predecessor
have been reclassified to conform with the Company's 1996 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.
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, and $260,000,000 in borrowings under senior
bank credit facilities. T.K.G. Acquisition Sub, Inc. executed the offering
of the senior notes and borrowings under the credit facilities. As such,
upon the acquisition and subsequent merger, the senior 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
F-10
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 which
became payable, and for which amounts payable were established, as a result
of the acquisition, and related income tax effects. Such results do not
purport to be indicative of the actual results 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
obtained in the future.
4. 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.
F-11
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Cash and Cash Equivalents
The Predecessor utilized Westinghouse's centralized cash management
services in North America. Accounts receivable were collected and cash was
invested at a central location. Additionally, disbursements were funded
centrally on demand. As a result, the Predecessor maintained a low cash
balance on its books, and received charges and credits against the parent
company's investment for cash used and collected through a central
clearinghouse arrangement.
Intercompany Purchases and Payables
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 to related parties at December 31, 1995 represents
balances payable for purchases from units of Westinghouse that do not
participate in the central clearinghouse arrangement.
Intercompany Sales and Receivables
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
United States through Westinghouse. Westinghouse charged its business units
for all of the centrally administered insurance programs based in part on
claims history. Specific liabilities for general and product liability,
automobile liability and workers' compensation claims are presented in the
Predecessor's consolidated financial statements.
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 which 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 years ended December 31,
1995 and 1994, charges related to corporate services above totaled
$510,000, $3,304,000, and $4,172,000, respectively.
The Predecessor also purchased other Westinghouse internally-provided
services as necessary including telecommunications, printing, productivity
and quality consulting, and other services.
F-12
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 executives under
Westinghouse long-term incentive plans.
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 (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 key executives of the Predecessor were participants in a long-term
incentive compensation plan established by Westinghouse. The plan provided
for 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.
5. CUSTOMER RECEIVABLES
Customer receivables are presented net of an allowance for doubtful
accounts of $5,713,000 and $5,782,000 at December 31, 1996 and 1995,
respectively. Management performs ongoing credit evaluations of its
customers and generally does not require collateral. As of December 31,
1996 and 1995, the U.S. government represented approximately 17.3% and
16.4%, respectively, of gross customer receivables.
F-13
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. INVENTORIES
THE KNOLL GROUP,
INC. (PREDECESSOR)
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------------
(IN THOUSANDS)
Raw materials............................. $34,147 $34,857
Work in process........................... 7,508 9,829
Finished goods............................ 16,156 14,957
------- -------
Inventories............................... $57,811 $59,643
======= =======
7. PROPERTY, PLANT AND EQUIPMENT
THE KNOLL GROUP,
INC. (PREDECESSOR)
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------------
(IN THOUSANDS)
Land and buildings........................ $ 61,844 $ 100,197
Machinery and equipment................... 122,573 180,057
Construction in progress.................. 11,066 10,473
-------- ---------
Property, plant and equipment, at cost.... 195,483 290,727
Accumulated depreciation.................. (19,265) (126,094)
-------- ---------
Property, plant and equipment, net........ $176,218 $ 164,633
======== =========
8. INTANGIBLE ASSETS
THE KNOLL GROUP,
INC. (PREDECESSOR)
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------------
(IN THOUSANDS)
Goodwill.................................. $ 62,627 $277,833
Patents and trademarks.................... 219,900 623
Deferred financing fees................... 11,226 --
-------- --------
293,753 278,456
Accumulated amortization.................. (6,813) (37,684)
-------- --------
Intangible assets, net.................... $286,940 $240,772
======== ========
9. OTHER CURRENT LIABILITIES
THE KNOLL GROUP,
INC. (PREDECESSOR)
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------------
(IN THOUSANDS)
Accrued employee compensation............. $27,881 $19,486
Accrued product warranty.................. 7,173 6,763
Other..................................... 26,989 17,708
------- -------
Other current liabilities................. $62,043 $43,957
======= =======
F-14
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. INDEBTEDNESS
The Company did not have any short-term borrowings outstanding as of
December 31, 1996. As of December 31, 1995, the Predecessor had outstanding
short-term European bank loans totaling $1,496,000. The composite and
weighted average interest rates on these borrowings was 11.00% and 10.356%,
respectively.
The Company's and the Predecessor's long-term debt is summarized as
follows:
THE KNOLL GROUP, INC.
(PREDECESSOR)
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ---------------------
(IN THOUSANDS)
10.875% Senior subordinated notes, due
2006.................................... $165,000 $ --
Term loans, variable rate (6.515% at
December 31, 1996) due through 2002..... 100,000 --
Revolving loans, variable rate (6.515% at
December 31, 1996) due 2002............. 88,000 --
7.00% Urban Redevelopment Authority
Grant, due 1996......................... -- 2,055
Other.................................... 1,154 1,483
-------- ------
354,154 3,538
Less current maturities.................. (23,265) (3,287)
-------- ------
Long-term debt........................... $330,889 $ 251
======== ======
Senior Subordinated Notes
The Company assumed the obligations under the 10.875% senior subordinated
notes as a direct result of the acquisition and merger which occurred on
February 29, 1996, as discussed in Note 3. The 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 notes, it is unlikely that the
guarantors will be able to pay all or any portion of such unsatisfied
obligations. There are no sinking fund requirements related to these notes,
and they are not redeemable at the Company's option prior to March 15,
2001. At such date, the 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. Notwithstanding the
foregoing, at any time on or before March 15, 1999, the Company may, under
certain conditions, redeem up to 35% of the original aggregate principal
amount of the notes at a redemption price of 110% of principal amount plus
interest with net proceeds from a public equity offering made by the
Company. The indenture 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.
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 provides for a six
year term loan facility in the aggregate principal amount of $100,000,000
and a six year revolving credit facility in an aggregate amount of up to
$130,000,000. In addition, the revolving credit facility contains a letter
of credit subfacility which allows for the issuance of
F-15
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
up to $20,000,000 in letters of credit. The amount available for borrowing
under the revolving credit facility is reduced by the total outstanding
letters of credit. This credit agreement expires in December 2002.
The proceeds of 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, as discussed in 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.
Borrowings under the existing credit agreement bear interest at rates based
on a bank base rate or the Eurodollar rate adjusted by a certain percentage
which depends on the Company's leverage ratio, as defined by the agreement.
The Company is required to make quarterly principal payments on the term
loans through December 2002, commencing on March 31, 1997. All loans under
the agreement are secured by substantially all of the Company's assets,
100% of the capital stock of the Company's domestic operations, and 65% of
the capital stock of the Company's foreign operations. All borrowings are
also unconditionally guaranteed by the Company's existing and future wholly
owned domestic subsidiaries. However, if the Company is unable to satisfy
all or any portion of its obligations with respect to the credit agreement,
it is unlikely that the guarantors will be able to pay all or any portion
of such unsatisfied obligations.
The credit agreement subjects the Company to various affirmative and
negative covenants. Among other things, the covenants limit the Company's
ability to incur additional indebtedness, declare or pay dividends, and
make capital expenditures; require the Company to maintain certain
financial ratios with respect to interest coverage and funded debt
leverage; and require the Company to maintain interest rate protection
agreements in a notional amount of at least 40% of the outstanding
principal amount. See note 12 for further discussion of interest rate
protection agreements.
At December 31, 1996, the Company had outstanding borrowings totaling
$88,000,000, of which $8,000,000 has been classified as current, and total
letters of credit of approximately $1,406,000, under the revolving credit
facility. There were no borrowings under the letters of credit. The Company
pays a commitment fee ranging from 0.175% to 0.375%, 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 0.50% to 1.50%,
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 a revolving credit agreement with various European
financial institutions that allows for borrowings up to an aggregate amount
of $9,685,000 or the European equivalent. There is currently no expiration
date on this agreement. The interest rate on borrowings varies by bank. The
majority of the banks involved assess a fixed rate ranging from 6.0% to
11.0%, while others charge a floating rate equal to the monetary market
rate plus 0.6% to 1.1%. Any borrowings would be collateralized by certain
real property and receivables of the Company's European operations. As of
December 31, 1996, the Company did not have any outstanding borrowings
under this European credit facility.
Interest Paid
For the ten months ended December 31, 1996, the Company made interest
payments totaling $25,775,000.
F-16
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Maturities
Aggregate maturities of the Company's indebtedness are as follows (in
thousands):
1997............................................................. $ 23,265
1998............................................................. 15,000
1999............................................................. 15,000
2000............................................................. 15,000
2001............................................................. 20,000
Thereafter....................................................... 265,889
--------
$354,154
========
11. PREFERRED STOCK
Dividends on the Series A 12% Participating Convertible Preferred Stock are
fully cumulative, accrue on a quarterly basis at a rate of $12 per annum,
and are payable only at the discretion of the Board of Directors. Upon
conversion, the holders of the outstanding Series A Preferred Stock lose
their right to any dividends, including dividends in arrears. As of
December 31, 1996, the aggregate and per share amounts of cumulative
dividends in arrears were $16.6 million and $10.36, respectively. Each
share of Series A Preferred Stock is convertible into a certain number of
shares of the Company's common stock based on the fair market equity value
of the Company at the time of conversion. Only the holder or holders of a
majority of the outstanding Series A Preferred Stock can cause all or a
portion of such stock to be converted. The Company may not redeem any of
the Series A Preferred Stock at its option. Holders are not granted the
benefit of any sinking fund. Upon involuntary liquidation, holders are
entitled to receive $100 per share plus any unpaid dividends. For each
share of Series A Preferred Stock, the holder is entitled to one thousand
votes 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 Articles of Incorporation.
12. 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 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 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.
At December 31, 1996, the Company had five outstanding interest rate collar
agreements with a total notional principal amount of $185,000,000 and
maximum and minimum rates ranging from 7.50% to 7.99% and 5.00% to 5.50%,
respectively. These agreements mature over the next two years. Aggregate
maturities of the total notional principal amount are as follows:
$70,000,000 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.
F-17
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. 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.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair values
of each class of financial instruments:
Cash and Cash Equivalents, Accounts Receivable, 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 $371,892,000 at December 31, 1996 while
the carrying amount is $354,154,000. The fair value of the Predecessor's
long-term debt, including the current portion, approximates its carrying
amount at December 31, 1995.
Interest Rate Collar Agreements
The fair value of the Company's interest rate collar agreements
approximates cost as of December 31, 1996.
15.INCOME TAXES
Income (loss) before income taxes and extraordinary item consists of the
following:
THE KNOLL
GROUP, INC.
(PREDECESSOR) THE KNOLL GROUP, INC.
TEN MONTHS TWO MONTHS (PREDECESSOR)
ENDED ENDED YEAR ENDED DECEMBER 31,
DECEMBER 31, FEBRUARY 29, ------------------------
1996 1996 1995 1994
------------ ------------- ----------- ------------
(IN THOUSANDS)
U.S. operations......... $23,381 $(39,105) $ 46,908 $ 7,729
Foreign operations...... 15,458 (1,090) 5,270 (59,789)
------- -------- ----------- ------------
$38,839 $(40,195) $ 52,178 $ (52,060)
======= ======== =========== ============
F-18
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) THE KNOLL GROUP, INC.
TEN MONTHS TWO MONTHS (PREDECESSOR)
ENDED ENDED YEAR ENDED DECEMBER 31,
DECEMBER 31, FEBRUARY 29, -----------------------
1996 1996 1995 1994
------------ ------------- ------------ -----------
(IN THOUSANDS)
Current:
Federal............... $10,909 $(13,801) $ 11,130 $ --
State................. 2,953 (1,814) 3,687 1,920
Foreign............... 661 28 -- --
------- -------- ------------ -----------
Total current....... 14,523 (15,587) 14,817 1,920
------- -------- ------------ -----------
Deferred:
Federal............... (2,850) (460) 7,795 5,704
State................. (612) (60) 234 89
Foreign............... 5,783 -- -- --
------- -------- ------------ -----------
Total deferred...... 2,321 (520) 8,029 5,793
------- -------- ------------ -----------
Income tax expense
(benefit).............. $16,844 $(16,107) $ 22,846 $ 7,713
======= ======== ============ ===========
Income taxes paid by the Company for the ten months ended December 31, 1996
totaled $13,137,000.
The following table sets forth the tax effects of temporary differences
that give rise to significant portions of the deferred tax assets and
liabilities:
THE KNOLL GROUP,
INC. (PREDECESSOR)
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------------
(IN THOUSANDS)
Deferred tax assets:
Accounts receivable, principally due to
allowance for doubtful accounts....... $ 1,659 $ 1,753
Inventories............................ 2,603 4,856
Net operating loss carryforwards....... 28,253 37,339
Accrued restructuring costs............ 966 3,367
Postretirement benefit obligation...... 6,880 8,925
Accrued liabilities and other items.... 20,669 9,344
-------- --------
Gross deferred tax assets................ 61,030 65,584
Valuation allowance...................... (33,161) (37,990)
-------- --------
Net deferred tax assets.................. 27,869 27,594
-------- --------
Deferred tax liabilities:
Intangibles, principally due to
differences in amortization........... 3,338 --
Plant and equipment, principally due to
differences in depreciation and
assigned values....................... 1,930 22,369
Prepaid pension cost................... -- 16,526
-------- --------
Gross deferred tax liabilities........... 5,268 38,895
-------- --------
Net deferred tax asset (liability)....... $ 22,601 $(11,301)
======== ========
F-19
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As discussed in Notes 1 and 2, the recognition and measurement of income
tax expense and deferred taxes 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.
As of December 31, 1996, the Company has pre-acquisition net operating loss
carryforwards totaling approximately $76,000,000 in various foreign tax
jurisdictions which generally expire between 1997 and 2001 or may be
carried forward for an unlimited time.
At February 29, 1996 and December 31, 1994 and 1993, the Predecessor had
recorded a valuation allowance of $38,446,000, $43,066,000, and
$24,881,000, respectively.
For the ten months ended December 31, 1996, tax benefits recognized through
reductions of the valuation allowance had the effect of reducing goodwill
by $4,246,000. 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 THE KNOLL
GROUP, INC. GROUP, INC.
(PREDECESSOR) (PREDECESSOR)
TEN MONTHS TWO MONTHS YEAR ENDED
ENDED ENDED DECEMBER 31,
DECEMBER 31, FEBRUARY 29, ---------------
1996 1996 1995 1994
------------ ------------- ------ -------
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........... 3.9 (4.5) 4.9 2.5
Higher effective income
taxes of other countries,
net of change in
valuation allowance...... 3.2 (0.2) (1.4) 41.8
Non-deductible goodwill
amortization............. 1.0 1.1 4.7 4.7
Other..................... 0.3 (1.4) 0.6 0.8
---- ----- ------ -------
Effective tax rate.......... 43.4% (40.0%) 43.8% 14.8%
==== ===== ====== =======
At December 31, 1996, the Company has not made provision for U.S. federal
and state income taxes on approximately $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.
F-20
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
16. RESTRUCTURING
In 1994, the Predecessor adopted a $61,345,000 restructuring program that
included the separation of approximately 500 employees, the closing of
various facilities, and the exiting of several product lines. The total
cost of this program was offset by accruals previously established for
actions that were deferred and subsequently included in this program,
resulting in a net charge to operations in 1994 of $29,180,000. A summary
of the program's costs is shown below.
FACILITY
EMPLOYEE CLOSURE AND
SEPARATION ASSET RATIONALIZATION
COSTS WRITEDOWN COSTS TOTAL
---------- --------- --------------- -------
(IN THOUSANDS)
North America................ $10,559 $19,104 $ 7,982 $37,645
Europe....................... 7,526 9,264 6,910 23,700
------- ------- ------- -------
Total.................... $18,085 $28,368 $14,892 $61,345
======= ======= ======= =======
At December 31, 1995, the restructuring actions were essentially complete.
The remaining accrued costs totaling $10,868,000 at December 31, 1995
consist primarily of employee separation costs, lease costs related to
properties that are no longer being utilized, and product guarantees. The
remaining accrued costs of $1,979,000 at December 31, 1996 consist of
employee separation costs and product guarantees. The Company expects to
pay the remaining accrued restructuring costs during 1997.
17. LEASES
The Company has commitments under operating leases for certain machinery
and equipment and facilities used in its operations. Total rental expense
for the ten months ended December 31, 1996 was $7,787,000. 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):
1997............................................................. $ 5,270
1998............................................................. 4,731
1999............................................................. 3,550
2000............................................................. 2,390
2001............................................................. 1,907
Subsequent years................................................. 3,241
-------
Total minimum rental payments.................................... $21,089
=======
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 and
$10,917,000 for the years ended December 31, 1995 and 1994, respectively.
18. STOCK INCENTIVE PLANS
In connection with the acquisition discussed in Note 3, the Company
established the Knoll, Inc. 1996 Stock Incentive Plan (the 1996 Plan).
Under the 1996 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 1,500,000
shares or options may be granted under the 1996 Plan. A Stock Plan
Committee of the Company's Board of Directors has sole discretion
concerning administration of the 1996 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 Plan at its discretion at any time.
F-21
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For the ten months ended December 31, 1996, the Company granted 1,320,000
restricted common shares, with a fair market value of $.10 per share, to
key employees. Of such amount, 720,000 of these restricted common shares
vest ratably over five years beginning on the grant date, while the other
600,000 shares vest over five years commencing one year subsequent to the
grant date. 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. No options were granted during
the ten month period ended December 31, 1996. The remaining 180,000 shares
available under the 1996 Plan were granted in the form of options on March
7, 1997.
The Knoll, Inc. 1997 Stock Incentive Plan (the 1997 Plan) was established
on February 14, 1997. The terms of the 1997 Plan are essentially the same
as those of the 1996 Plan, except that pursuant to the 1997 Plan an
aggregate of only 400,000 shares of common stock are reserved for issuance
thereunder, discounted options may be granted, options may be repriced and
the Board of Directors has greater flexibility to amend the 1997 Plan. On
March 7, 1997, the Company granted 240,000 options to purchase shares under
the 1997 Plan.
19. 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 Company's net periodic pension cost, which consists entirely of service
cost, for the ten months ended December 31, 1996 was $3,953,000.
The funded status of the Company's pension plans is as follows:
DECEMBER 31,
1996
--------------
(IN THOUSANDS)
Actuarial present value of benefit obligation:
Vested.................................................. $(2,784)
Nonvested............................................... (273)
-------
Accumulated benefit obligation.......................... (3,057)
Additional obligation for projected compensation
increases on accumulated years of service.............. (896)
-------
Projected benefit obligation.............................. (3,953)
Plan assets at fair value................................. 30
-------
Plan assets less than projected benefit obligation and
accrued pension cost..................................... $(3,923)
=======
F-22
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The projected benefit obligation was measured using a discount rate of
7.25%. The assumed rate of compensation increase was 4.5%.
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
ENDED YEAR ENDED DECEMBER 31,
FEBRUARY 29, -------------------------
1996 1995 1994
------------ ------------ -----------
(IN THOUSANDS)
Service cost..................... $ 522 $ 2,278 $ 2,955
Interest cost on projected
benefit obligation.............. 933 5,212 5,016
Amortization of unrecognized
prior service cost.............. 68 385 385
Amortization of unrecognized net
loss............................ 197 -- 468
------ ------------ -----------
1,720 7,875 8,824
Return on plan assets............ (1,543) (8,993) (8,846)
------ ------------ -----------
Net periodic pension cost
(income)........................ $ 177 $ (1,118) $ (22)
====== ============ ===========
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 following table sets forth the funded status of The Knoll Group Pension
Plan:
DECEMBER 31,
1995
--------------
(IN THOUSANDS)
Actuarial present value of benefit obligation:
Vested.................................................. $ (68,081)
Nonvested............................................... (3,363)
---------
Accumulated benefit obligation.......................... (71,444)
Additional obligation for projected compensation
increases on accumulated years of service.............. (12,491)
---------
Projected benefit obligation.............................. (83,935)
Plan assets at fair value................................. 95,940
---------
Plan assets in excess of projected benefit obligation..... 12,005
Unrecognized prior service cost........................... 4,458
Unrecognized net loss..................................... 28,698
---------
Prepaid pension cost...................................... $ 45,161
=========
F-23
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The projected benefit obligation was measured using a discount rate of
6.75%. The assumed rate of compensation increase was 4.0%. As of December
31, 1995, plan assets consisted primarily of listed stocks, fixed income
securities, and real estate investments.
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 purposes of these financial statements, the Predecessor's participation
in the plans sponsored by Westinghouse is accounted for as though such
plans were multiemployer plans. For multiemployer plans, employers are
required to recognize total contributions for the period as net pension
expense. For the two months ended February 29, 1996 and the years ended
December 31, 1995 and 1994, the Predecessor's contributions to Westinghouse
for these defined benefit pension plans totaled $212,000, $1,076,000, and
$1,223,000, 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 ten months ended December 31, 1996 was $607,000. The
Predecessor's expense for the two months ended February 29, 1996 and years
ended December 31, 1995, and 1994 totaled $114,000; $398,000; 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 pretax earnings up to the annual contribution limit
established by the Internal Revenue Service. The Company matches 40% of
employee contributions on up to 6% of employee compensation. The plan also
provides for additional employer matching based on the achievement of
certain profitability goals. The Company's total expense under this plan
was $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; $2,675,000; and $1,592,000 for the two months ended
February 29, 1996 and the years ended December 31, 1995 and 1994,
respectively.
20. 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:
TEN MONTHS
ENDED
DECEMBER 31,
1996
--------------
(IN THOUSANDS)
Service cost............................................... $ 440
Interest cost on projected benefit obligation.............. 1,000
------
Net periodic postretirement benefit cost................... $1,440
======
F-24
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,
1996
--------------
(IN THOUSANDS)
Accumulated postretirement benefit obligation:
Retirees................................................. $ (7,329)
Fully eligible active participants....................... (1,593)
Other active participants................................ (8,235)
--------
Total accumulated postretirement benefit obligation........ (17,157)
Unrecognized net gain...................................... (217)
--------
Accrued postretirement benefit cost........................ $(17,374)
========
The accumulated postretirement benefit obligation was measured using the
following assumptions: discount rate of 7.25%, rate of compensation
increase of 4.5%, and health care cost trend rate of 9.5% in 1996,
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 by approximately $1,450,000 and increase the aggregate
of the service and interest cost by approximately $151,000.
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 DECEMBER 31,
FEBRUARY 29, ------------------------
1996 1995 1994
------------ ----------- -----------
(IN THOUSANDS)
Service cost....................... $103 $ 449 $ 556
Interest cost on projected benefit
obligation........................ 207 1,509 1,509
Amortization of unrecognized prior
service cost...................... (56) (12) --
Amortization of unrecognized net
(gain) loss....................... 10 (25) 18
---- ----------- -----------
Net periodic postretirement benefit
cost.............................. $264 $ 1,921 $ 2,083
==== =========== ===========
The Predecessor's liability related to the postretirement medical and life
insurance benefits which it provided to U.S. retired nonunion employees is
as follows:
DECEMBER 31,
1995
--------------
(IN THOUSANDS)
Accumulated postretirement benefit obligation:
Retirees................................................. $ (7,581)
Fully eligible active participants....................... (1,680)
Other active participants................................ (8,480)
---------
Total accumulated postretirement benefit obligation........ (17,741)
Unrecognized prior service cost............................ (4,155)
Unrecognized net loss...................................... 1,303
---------
Accrued postretirement benefit cost........................ $ (20,593)
=========
F-25
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The accumulated postretirement benefit obligation was measured using the
following assumptions: discount rate of 7.25%, rate of compensation
increase of 4.0%, and health care cost trend rate of 11.5% in 1995,
decreasing by 0.5% per year to 7.0% in 2004, and remaining at that level
thereafter.
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. For purposes of these financial statements,
the Predecessor's participation in this postretirement benefit arrangement
is accounted for as though it was a multiemployer postretirement benefit
plan. For multiemployer plans, employers are required to recognize total
contributions for the period as net periodic postretirement benefit
expense. The Predecessor's contributions for the postretirement benefit
arrangements sponsored by Westinghouse totaled $82,500 for the two months
ended February 29, 1996, $151,000 for the year ended December 31, 1995 and
$122,000 for the year ended December 31, 1994.
21. 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:
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 profit.......... $ 54,381 $10,681 $ 6,282 -- $ 71,344
======== ======= ======= ========= ========
Identifiable assets....... $648,868 $52,690 $39,725 $ (65,571) $675,712
======== ======= ======= ========= ========
F-26
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 profit........ $(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 profit........ $ 54,043 $ 483 $ 679 -- $ 55,205
======== ======= ======== ======== =========
Identifiable assets..... $455,784 $98,953 $ 72,265 $(32,698) $ 594,304
======== ======= ======== ========
General corporate
assets................. 62,406
Total assets............ $ 656,710
=========
YEAR ENDED UNITED
DECEMBER 31, 1994 STATES CANADA EUROPE ELIMINATIONS TOTALS
----------------- -------- ------- -------- ------------ ---------
(IN THOUSANDS)
Sales to customers...... $471,662 $30,294 $ 60,642 $ -- $ 562,598
Sales to related par-
ties................... 271 -- -- 271
Sales between geographic
areas.................. 20,994 43,541 2,445 (66,980) --
-------- ------- -------- -------- ---------
Net sales............... $492,927 $73,835 $ 63,087 $(66,980) $ 562,869
======== ======= ======== ======== =========
Operating profit........ $(11,378) $(7,292) $(30,864) -- $ (49,534)
======== ======= ======== ======== =========
Operating profit without
restructuring.......... $ 7,134 $(7,292) $(20,196) -- $ (20,354)
======== ======= ======== ======== =========
For the two months ended February 29, 1996 and the years ended December 31,
1995 and 1994, allocated corporate expenses from Westinghouse were prorated
to the geographic segments based on sales. In addition, general corporate
assets at December 31, 1995 include cash and cash equivalents, prepaid
pension assets, and current and deferred tax assets that were maintained by
Westinghouse.
The Predecessor typically derived more than 10% 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 and $56,142,000 for the years ended December 31, 1995 and 1994,
F-27
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
respectively. The Company's total sales to the U.S. federal government were
$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.
22. 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.
PREDECESSOR THE COMPANY
----------- -------------------------------------
TWO MONTHS ONE MONTH
ENDED ENDED SECOND THIRD FOURTH
FEBRUARY 29 MARCH 31 QUARTER QUARTER QUARTER
----------- --------- -------- --------- --------
(DOLLARS IN THOUSANDS)
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 ex-
traordinary item......... (24,088) 449 7,527 7,685 6,334
Net income (loss)......... (24,088) 449 7,527 7,685 1,175
PREDECESSOR
----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
1995
Net sales................. $147,410 $159,352 $155,055 $159,075
Gross profit.............. 42,919 50,279 54,829 55,233
Net income................ 1,216 5,945 12,174 9,997
Results for 1996 and 1995 have been restated to reflect the
reclassification of certain expenses, principally product development, from
cost of sales to selling, general and administrative expenses as compared
to previously reported results.
During the quarter ended December 31, 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.
23. SUBSEQUENT EVENT
On March 14, 1997, the Company filed a registration statement on Form S-1
with the Securities and Exchange Commission in anticipation of possible
public offerings of common stock. If the public offerings are completed,
the net proceeds will be used to reacquire a portion of Series A Preferred
Stock, to redeem up to $57.8 million of the 10.875% senior subordinated
notes, to repay indebtedness under the Company's term and revolving loans,
and to fund general working capital needs or retire additional debt.
24. FINANCIAL INFORMATION FOR GUARANTORS OF THE COMPANY'S DEBT
As discussed in Note 10, certain debt of the Company is guaranteed by all
existing and future directly or indirectly wholly owned domestic
subsidiaries of the Company (the "Guarantors"). The Guarantors are Knoll
Overseas, Inc., a holding company for the entities that conduct the
Company's European business, and Spinneybeck Enterprises, Inc., which
directly and through a Canadian subsidiary operates the Company's leather
business.
F-28
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
These Guarantors will irrevocably and unconditionally, jointly and
severally, guarantee the performance and payment in full when due of all
obligations under the 10.875% Senior Subordinated Notes and credit
agreement outstanding as of December 31, 1996, limited to the largest
amount that would not render such Guarantor's 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 financial statements as of December 31, 1996 and 1995, and for
the ten months ended December 31, 1996, two months ended February 29,
1996, and the years ended December 31, 1995 and 1994 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
wholly owned subsidiaries accounted for on the equity method.
The condensed consolidating financial statements should be read in
connection with the consolidated financial statements of the Company.
Separate financial statements of the Guarantors are not presented because
the Guarantors are jointly, severally and unconditionally liable under the
guarantees, and the Company believes the condensed consolidating financial
statements presented are more meaningful in understanding the financial
position of the Guarantors.
F-29
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.. 85,959 1,398 -- 23,809 -- 111,166
Inventories........... 39,951 6,747 -- 11,113 -- 57,811
Deferred income
taxes................ 17,079 -- -- 395 -- 17,474
Prepaid and other
current assets....... 9,769 50 (586) 2,817 (4,626) 7,424
-------- ------ ------- ------- -------- --------
Total current assets.... 152,799 8,462 (586) 46,630 (4,626) 202,679
Property, plant, and
equipment.............. 141,357 368 -- 34,493 -- 176,218
Intangible assets....... 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 $91,963 $(96,036) $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...... 1,543 -- (5,169) 8,252 (4,626) --
Income taxes payable.. 11 19 (1) 359 -- 388
Accrued restructuring
costs................ 1,598 -- -- 381 -- 1,979
Other current
liabilities.......... 54,649 288 1,668 5,438 -- 62,043
-------- ------ ------- ------- -------- --------
Total current
liabilities............ 114,877 657 (3,502) 30,519 (4,626) 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....... 467,141 3,157 (3,502) 38,238 (7,126) 497,908
Stockholders' equity:
Preferred stock....... 1,603 -- -- -- -- 1,603
Common stock.......... 23 -- -- -- -- 23
Additional paid-in-
capital.............. 172,585 4,033 14,034 43,999 (75,745) 158,906
Unearned stock grant
compensation......... (96) -- -- -- -- (96)
Retained earnings..... 16,836 2,203 1,768 9,194 (13,165) 16,836
Cumulative foreign
currency translation
adjustment........... -- -- -- 532 -- 532
-------- ------ ------- ------- -------- --------
Total stockholders'
equity................. 190,951 6,236 15,802 53,725 (88,910) 177,804
-------- ------ ------- ------- -------- --------
Total liabilities and
stockholders' equity... $658,092 $9,393 $12,300 $91,963 $(96,036) $675,712
======== ====== ======= ======= ======== ========
F-30
KNOLL, INC.
BALANCE SHEET
DECEMBER 31, 1995
(IN THOUSANDS)
GUARANTORS
---------------------------
SPINNEYBECK
ENTERPRISES, KNOLL NON-
KNOLL, INC. INC. OVERSEAS, INC. GUARANTORS ELIMINATIONS TOTAL
----------- ------------ -------------- ---------- ------------ --------
ASSETS
Current assets:
Cash and cash
equivalents.......... $ (182) $ 182 $ -- $ 1,569 $ -- $ 1,569
Customer receivables.. 88,656 1,173 135 24,628 -- 114,592
Inventories........... 38,570 6,436 -- 14,637 -- 59,643
Deferred income
taxes................ 17,024 528 411 310 -- 18,273
Prepaid and other
current assets....... 2,093 6 4,554 26,377 (24,565) 8,465
-------- ------- ------- -------- -------- --------
Total current assets.... 146,161 8,325 5,100 67,521 (24,565) 202,542
Property, plant, and
equipment.............. 121,144 310 -- 43,179 -- 164,633
Intangible assets....... 160,072 4,430 626 75,644 -- 240,772
Prepaid pension cost.... 45,161 -- -- -- -- 45,161
Equity investments...... 32,050 2,140 26,152 -- (60,342) --
Other noncurrent
assets................. 2,568 30 97 3,151 (2,244) 3,602
-------- ------- ------- -------- -------- --------
Total assets............ $507,156 $15,235 $31,975 $189,495 $(87,151) $656,710
======== ======= ======= ======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt....... $ -- $ -- $ -- $ 1,496 $ -- $ 1,496
Current maturities of
long-term debt....... 2,055 -- -- 1,232 -- 3,287
Accounts payable--
trade................ 27,534 910 123 17,283 -- 45,850
Accounts payable--
related parties...... 633 117 -- 6,591 (6,928) 413
Income taxes payable.. 13,760 984 (771) -- -- 13,973
Accrued restructuring
costs................ 5,893 -- -- 4,975 -- 10,868
Other current
liabilities.......... 36,726 861 1,778 4,592 -- 43,957
-------- ------- ------- -------- -------- --------
Total current
liabilities............ 86,601 2,872 1,130 36,169 (6,928) 119,844
Long-term debt.......... -- -- -- 251 -- 251
Deferred income taxes... 27,566 (56) 56 2,008 -- 29,574
Postretirement benefits
obligation............. 20,593 -- -- -- -- 20,593
Other noncurrent
liabilities............ 2,256 -- -- 3,741 -- 5,997
-------- ------- ------- -------- -------- --------
Total liabilities....... 137,016 2,816 1,186 42,169 (6,928) 176,259
Stockholders' equity:
Parent company
investment........... 370,140 12,419 30,789 170,192 (80,223) 503,317
Cumulative foreign
currency translation
adjustment........... -- -- -- (22,866) -- (22,866)
-------- ------- ------- -------- -------- --------
Total stockholders'
equity................. 370,140 12,419 30,789 147,326 (80,223) 480,451
-------- ------- ------- -------- -------- --------
Total liabilities and
stockholders' equity... $507,156 $15,235 $31,975 $189,495 $(87,151) $656,710
======== ======= ======= ======== ======== ========
F-31
KNOLL, INC.
STATEMENT OF OPERATIONS
TEN MONTHS ENDED DECEMBER 31, 1996
(IN THOUSANDS)
GUARANTORS
---------------------------
SPINNEYBECK
ENTERPRISES, KNOLL NON-
KNOLL, INC. INC. OVERSEAS, INC. GUARANTORS ELIMINATIONS TOTAL
----------- ------------ -------------- ---------- ------------ --------
Sales to customers...... $480,857 $12,796 $ -- $67,881 $ -- $561,534
Sales to related
parties................ 13,227 2,210 -- 62,580 (78,017) --
-------- ------- ------ ------- --------- --------
Total sales............. 494,084 15,006 -- 130,461 (78,017) 561,534
Cost of sales to
customers.............. 323,607 6,109 521 50,293 (21,689) 358,841
Cost of sales to related
parties................ 8,902 1,054 -- 46,372 (56,328) --
-------- ------- ------ ------- --------- --------
Gross profit............ 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 (loss) from
equity investments..... 10,319 77 2,769 -- (13,165) --
-------- ------- ------ ------- --------- --------
Income (loss) 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 (loss) 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 (loss)....... $ 16,836 $ 2,203 $1,768 $ 9,194 $ (13,165) $ 16,836
======== ======= ====== ======= ========= ========
F-32
KNOLL, INC.
STATEMENT OF OPERATIONS
TWO MONTHS ENDED FEBRUARY 29, 1996
(IN THOUSANDS)
GUARANTORS
---------------------------
SPINNEYBECK
ENTERPRISES, KNOLL NON-
KNOLL, INC. INC. OVERSEAS, INC. GUARANTORS ELIMINATIONS TOTAL
----------- ------------ -------------- ---------- ------------ --------
Sales to customers...... $ 76,172 $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............ 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)
Other income (expense),
net.................... (265) -- 170 (201) -- (296)
Income (loss) from
equity investments..... (218) 23 (493) -- 688 --
Interest expense........ -- -- -- 340 -- 340
-------- ------ ----- ------- ------- --------
Income (loss) before
income taxes........... (39,778) 643 (658) (1,090) 688 (40,195)
Income tax expense
(benefit).............. (16,338) 259 (56) 28 -- (16,107)
-------- ------ ----- ------- ------- --------
Net income (loss)....... $(23,440) $ 384 $(602) $(1,118) $ 688 $(24,088)
======== ====== ===== ======= ======= ========
F-33
KNOLL, INC.
STATEMENT OF 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............ 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-34
KNOLL, INC.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS)
GUARANTORS
---------------------------
SPINNEYBECK
ENTERPRISES, KNOLL NON-
KNOLL, INC. INC. OVERSEAS, INC. GUARANTORS ELIMINATIONS TOTAL
----------- ------------ -------------- ---------- ------------ ---------
Sales to customers...... $ 453,792 $15,123 $ (1) $ 90,936 $ 2,748 $ 562,598
Sales to related
parties................ 7,035 2,766 -- 43,775 (53,305) 271
--------- ------- -------- --------- ------- ---------
Total sales............. 460,827 17,889 (1) 134,711 (50,557) 562,869
Cost of sales to
customers.............. 324,051 7,497 412 87,937 (9,988) 409,909
Cost of sales to related
parties................ 5,065 2,915 314 32,470 (40,569) 195
--------- ------- -------- --------- ------- ---------
Gross profit............ 131,711 7,477 (727) 14,304 -- 152,765
Provision for
restructuring.......... -- -- -- 29,180 -- 29,180
Selling, general, and
administrative
expenses............... 118,188 6,215 (489) 43,324 -- 167,238
Allocated corporate
expenses............... 5,881 -- -- -- -- 5,881
--------- ------- -------- --------- ------- ---------
Operating income
(loss)................. 7,642 1,262 (238) (58,200) -- (49,534)
Interest expense........ 626 -- -- 2,599 -- 3,225
Other income (expense),
net.................... (300) -- (11) 1,010 -- 699
Income (loss) from
equity investments..... (19,724) -- (20,103) -- 39,827 --
--------- ------- -------- --------- ------- ---------
Income (loss) before
income taxes........... (13,008) 1,262 (20,352) (59,789) 39,827 (52,060)
Income tax expense
(benefit).............. 7,079 639 (5) -- -- 7,713
--------- ------- -------- --------- ------- ---------
Net income (loss)....... $ (20,087) $ 623 $(20,347) $ (59,789) $39,827 $ (59,773)
========= ======= ======== ========= ======= =========
F-35
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
Capital expenditures.... $(12,531) $ (134) $ -- $ (2,590) $ -- $(15,255)
Proceeds from sale of
assets................. 43 -- -- 175 -- 218
-------- ------ ----- -------- ----- --------
Cash used in investing
activities............. (12,488) (134) -- (2,415) -- (15,037)
CASH FLOWS FROM
FINANCING ACTIVITIES
Repayment of short-term
debt, net.............. -- -- -- (1,483) -- (1,483)
Repayment of long-term
debt, net.............. (72,000) -- -- (130) -- (72,130)
Additional equity
contribution........... 400 -- -- -- -- 400
Net receipts from
(payments to) parent
company................ (120) -- -- 120 -- --
-------- ------ ----- -------- ----- --------
Cash used in financing
activities............. (71,720) -- -- (1,493) -- (73,213)
Effect of exchange rate
changes on cash and
cash equivalents....... -- -- -- 18 -- 18
-------- ------ ----- -------- ----- --------
Increase (decrease) in
cash and cash
equivalents............ (5,319) 265 -- 6,324 -- 1,270
Cash and cash
equivalents at
beginning of period.... 5,360 2 -- 2,172 -- 7,534
-------- ------ ----- -------- ----- --------
Cash and cash
equivalents at end of
period................. $ 41 $ 267 $ -- $ 8,496 $ -- $ 8,804
======== ====== ===== ======== ===== ========
F-36
KNOLL, INC.
STATEMENT OF CASH FLOWS
TWO MONTHS ENDED FEBRUARY 29, 1996
(IN THOUSANDS)
GUARANTORS
---------------------------
SPINNEYBECK
ENTERPRISES, KNOLL NON-
KNOLL, INC. INC. OVERSEAS, INC. GUARANTORS ELIMINATIONS TOTAL
----------- ------------ -------------- ---------- ------------ ---------
CASH PROVIDED BY (USED
IN) OPERATING
ACTIVITIES............. $ (53,218) $ 1,267 $ 651 $ 17,142 $ (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............ 340 (180) -- 606 -- 766
Cash and cash
equivalents at
beginning of period.... (182) 182 -- 1,569 -- 1,569
--------- ------- ----- -------- --------- ---------
Cash and cash
equivalents at end of
period................. $ 158 $ 2 $ -- $ 2,175 $ -- $ 2,335
========= ======= ===== ======== ========= =========
F-37
KNOLL, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
GUARANTORS
---------------------------
SPINNEYBECK
ENTERPRISES, KNOLL NON-
KNOLL, INC. 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 receipts from
(payments to) equity
investments............ (186) -- -- -- 186 --
-------- ------- -------- -------- ------- --------
Cash provided by (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-38
KNOLL, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS)
GUARANTORS
---------------------------
SPINNEYBECK
ENTERPRISES, KNOLL NON-
KNOLL, INC. INC. OVERSEAS, INC. GUARANTORS ELIMINATIONS TOTAL
----------- ------------ -------------- ---------- ------------ --------
CASH PROVIDED BY (USED
IN) OPERATING
ACTIVITIES............. $ 23,756 $ 887 $(1,725) $(30,368) $ 3,666 $ (3,784)
CASH FLOWS FROM
INVESTING ACTIVITIES
Capital expenditures.... (12,935) (72) -- (7,150) -- (20,157)
Proceeds from sale of
assets................. 189 -- -- 143 -- 332
Net receipts from
(payments to) equity
investments............ (1,429) 738 (1,488) -- 2,179 --
-------- ------- ------- -------- ------- --------
Cash provided by (used
in) investing
activities............. (14,175) 666 (1,488) (7,007) 2,179 (19,825)
CASH FLOWS FROM
FINANCING ACTIVITIES
Repayment of short-term
debt, net.............. -- -- -- (2,758) -- (2,758)
Repayment of long-term
debt................... (263) -- -- (2,490) -- (2,753)
Net receipts from
(payments to) parent
company................ (11,080) (1,553) 3,147 49,167 (5,845) 33,836
-------- ------- ------- -------- ------- --------
Cash provided by (used
in) financing
activities............. (11,343) (1,553) 3,147 43,919 (5,845) 28,325
Effect of exchange rate
changes on cash and
cash equivalents....... -- -- -- (1,996) -- (1,996)
-------- ------- ------- -------- ------- --------
Increase (decrease) in
cash and cash
equivalents............ (1,762) -- (66) 4,548 -- 2,720
Cash and cash
equivalents at
beginning of year...... 1,762 -- 66 936 -- 2,764
-------- ------- ------- -------- ------- --------
Cash and cash
equivalents at end of
year................... $ -- $ -- $ -- $ 5,484 $ -- $ 5,484
======== ======= ======= ======== ======= ========
F-39
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- --------
ADDITIONS
BALANCE CHARGED TO BALANCE
AT BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS(1) OF PERIOD
----------- ------------ ---------- ------------- ---------
(IN THOUSANDS)
VALUATION ACCOUNTS DEDUCTED IN
THE CONSOLIDATED BALANCE
SHEET FROM THE ASSETS TO
WHICH THEY APPLY:
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
Year Ended December 31, 1994:
Allowance for doubtful
accounts.................... 2,162 3,636 1,098 4,700
- --------
(1) Uncollectible accounts written off.
S-1