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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No. 001-12907
KNOLL, INC.
A Delaware Corporation I.R.S. Employer No. 13-3873847
1235 Water Street
East Greenville, PA 18041
Telephone Number (215) 679-7991
Securities registered pursuant to section 12(b) of the Act: 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.
As of March 28, 2002, there were 23,174,029 shares of the Registrant's
common stock, par value $0.01 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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TABLE OF CONTENTS
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Item Page
- ------ ------
PART I
1. Business....................................................... 2
2. Properties..................................................... 8
3. Legal Proceedings.............................................. 9
4. Submission of Matters to a Vote of Security Holders............ 9
PART II
5. Market for the Company's Common Equity and Related
Stockholder Matters.......................................... 10
6. Selected Financial Data........................................ 11
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 12
7A. Quantitative and Qualitative Disclosures about Market Risk..... 20
8. Financial Statements and Supplementary Data.................... 22
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..................................... 22
PART III
10. Directors and Executive Officers of the Company................ 23
11. Executive Compensation......................................... 25
12. Security Ownership of Certain Beneficial Owners and
Management................................................... 30
13. Certain Relationships and Related Transactions................. 31
PART IV
14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K..................................................... 34
Signatures.......................................................... 37
PART I
ITEM 1. BUSINESS
General
Knoll, Inc., a Delaware corporation, 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.
Knoll, Inc. is the successor by merger to the business and operations of
The Knoll Group, Inc. and related entities ("The Knoll Group" or the
"Predecessor"), which were acquired on February 29, 1996 from Westinghouse
Electric Corporation, whose successor is Viacom Inc. ("Westinghouse"). 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.
Pursuant to an agreement and plan of merger, the Company consummated a
recapitalization (merger) transaction on November 4, 1999 whereby a newly
formed entity, which was organized by Warburg, Pincus Ventures, L.P.
("Warburg"), was merged with and into Knoll, with Knoll continuing as the
surviving corporation. As a result of the merger, 17,738,634 shares of
common stock held by the public stockholders of Knoll, other than Warburg
and certain members of Knoll management, immediately prior to the merger were
converted into the right to receive $28.00 per share in cash and were canceled.
Furthermore, the Company's common stock ceased to be listed on the New York
Stock Exchange ("NYSE"), and the registration of the Company's securities under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), was
terminated.
Except as otherwise indicated, the market and Company market share data
contained in this Form 10-K are based on preliminary information received from
The Business and Institutional Furniture Manufacturer's Association ("BIFMA"),
the United States ("U.S.") office furniture trade association. The Company
believes that such data are considered within the industry to be the best
available and generally are indicative of the Company's relative market share
and competitive position.
Industry Overview
The U.S. office furniture market consists of five major product categories:
office systems, seating, storage, desks and casegoods and tables. The
following table indicates the percentage of sales that each product category
contributed to the estimated U.S. office furniture industry in 2001.
U.S. % of U.S.
Product Category Category Size Market
---------------- ------------- ----------
(In Billions)
Office systems.................... $3.8 34.4%
Seating........................... 2.7 24.8
Storage........................... 1.5 13.6
Desks and casegoods............... 1.9 17.0
Tables............................ 0.8 7.3
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
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writing desks in private offices to conference and meeting room tables that
can accommodate sophisticated technological demands.
Management believes that there are certain macroeconomic conditions, including
white-collar employment levels, business confidence and corporate cash flow,
that influence industry revenues. Management also believes that fundamental
trends in the workplace, including the continued proliferation of technology
in the workplace, changes in corporate organizational structures and work
processes and heightened sensitivity to concerns about ergonomic standards
influence revenues in the office furniture industry. Companies use workplace
design and furniture purchase decisions as catalysts for organizational and
cultural change and to attract and retain talented employees. Several
significant factors that influence these changes include: new office
technology and the resulting necessity for improved wire and data management;
continued corporate reengineering, restructuring and reorganizing; and
corporate relocations.
In 2001, the office furniture industry experienced its most severe downturn
in the last thirty years. BIFMA estimates that revenues declined 17.4% in
2001 as compared to 2000. A reduction in business confidence, corporate
profitability, corporate spending and white-collar employment levels in
response to an economic recession in the U.S. and a general softening of the
economy in Canada directly affected sales of office furniture. The tragic
events and aftermath of September 11, 2001 exacerbated the economic slowdown
and added to general economic uncertainty. These conditions have and are
expected to continue to negatively impact the office furniture industry in
2002 as well.
Management is aware of initiatives by existing competitors, as well as new
entrants, to sell, distribute or market office furniture and related products
via the Internet. These initiatives may compete with existing office
furniture companies, such as Knoll. Management believes that these initiatives
are not currently affecting the office furniture industry's traditional
channels of distribution and have become less of a factor in 2001. The
Company has developed and continues to develop initiatives in an effort to
take advantage of opportunities presented by the Internet. In 2001, the
Company continued its efforts to link its dealers and customers with the
Company's internal systems. In addition, the Company continued to offer a
limited number of its products for sale via the Internet and upgraded on-line
product information. There can be no assurance that any of such initiatives
will be successful, will be completed in a timely fashion or will materially
affect the Company's results of operations or financial condition. Management
is currently unable to predict the extent to which the current or potential
Internet initiatives may affect the demand for the Company's products or the
financial condition of the office furniture industry.
Products
The Company offers a broad range of office furniture products and accessories
that support the Company's strategy of being a one-stop source for high
quality office furniture. The Company's five basic product categories
offered in North America are as follows: (i) office systems, (ii) seating,
(iii) storage solutions and filing cabinets, (iv) desks and casegoods and
(v) tables. The Company also offers specialty products that are sold under
the KNOLLSTUDIO, KNOLLEXTRA, KNOLLTEXTILES and SPINNEYBECK names. KNOLLSTUDIO
features the Company's signature design classics, including high image side
chairs, sofas, desks and tables for both office and home use, while KNOLLEXTRA,
KNOLLTEXTILES and SPINNEYBECK feature products that complement the Company's
office system and seating product categories.
The following is a description of the Company's major product categories and
lines:
Office Systems
The Company offers a complete line of office system products, comprised mainly
of the REFF, CURRENTS, MORRISON, EQUITY and DIVIDENDS product lines, in order
to meet the needs of a variety of businesses. Office systems may be used for
teamwork settings, private offices and open floor plans and are comprised of
adjustable partitions, work surfaces, storage units and electrical and
lighting systems that can be moved, re-configured and re-used within the
office. Office systems, therefore, offer a cost effective and flexible
alternative to traditional
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drywall office construction. The Company has focused on this area of the
office furniture industry because it is the industry's largest product
category, typically provides attractive gross margins and often leads to
repeat and add-on sales of additional office systems, complementary furniture
and furniture accessories. Office systems accounted for approximately 70.2%
of the Company's sales in 2001, 71.3% of sales in 2000 and 68.9% of sales in
1999. At NeoCon(R) 2001, a contract furniture trade show held annually in
June, the Company introduced its A3 office system, which is expected to be
available for orders in May 2002, as well as enhancements to each of the
Company's existing office system product lines.
Seating
The Company believes that the office seating portion of the office furniture
market includes three major segments: the "appearance," "comfort" and "basic"
segments. Key customer criteria in seating include superior ergonomics,
aesthetics, comfort and quality, all of which the Company believes to be
consistent with its strengths and reputation. With its SAPPER, BULLDOG, RPM,
PARACHUTE and SOHO product lines, the Company has a complete offering of
seating in the appearance and comfort segments at various price, appearance,
comfort and performance levels. At NeoCon(R) 2001, the Company introduced its
mid-priced RPM chair, which began shipping in 2001, and its VISOR stacking
chair, which is expected to begin shipping in 2002. In March 2002, the
Company became the exclusive North American distributor of certain products of
Sedus Stoll AG, including the OPEN UP executive seating product line.
Storage Solutions and Filing Cabinets
The Company offers a variety of storage options, as part of its CALIBRE
collection, designed to be integrated with its office systems as well as with
its and others' stand-alone furniture. These products consist of stand-alone
metal filing, storage and desk products that integrate into and support the
Company's office system sales. They also function as freestanding furniture
in private offices or open-plan environments.
Desks and Casegoods
The Company's collections of stand-alone wood desks, bookshelves and credenzas
are available in a range of designs and price points. These products combine
contemporary styling with sophisticated workplace solutions and attract a
wide variety of customers, ranging from those conducting large office
reconfigurations to small retail purchasers. At NeoCon(R) 2001, the Company
introduced its CRINION COLLECTION, a versatile line of wood casegoods designed
for today's executive. The Company began shipping the CRINION COLLECTION
products in March 2002.
Tables
The Company offers three product lines in the tables category: INTERACTION
tables, PROPELLER tables and UPSTART tables. INTERACTION tables are an
innovative line of adjustable tables that are designed to be integrated into
the Company's office system lines and to provide customers with ergonomically
superior work surfaces. These tables are also often sold as stand-alone
products to non-systems customers. The Company's award winning line of
PROPELLER meeting and conference tables provide advanced wire management and
technology support while offering sufficient flexibility to allow end users to
reconfigure a meeting room quickly and easily to accommodate their specific
needs. UPSTART tables are a line of adjustable, stand-alone tables, offered
in new shapes and surfaces, that support the needs of rapidly growing
organizations.
KNOLLSTUDIO
The Company's historically significant KNOLLSTUDIO collection serves the
design-conscious segment of the fine contract furniture portion of the
market, providing the architecture and design community and customers with
sophisticated furniture for high-profile office and home uses. KNOLLSTUDIO
provides a marketing umbrella for the full range of the Company's office
products. KNOLLSTUDIO includes complete collections by individual designers
as well as distinctive single items. KNOLLSTUDIO products, which include a
wide variety of high image side chairs, sofas, desks and conference, training,
side and dining tables, were created by many of the twentieth century's
4
most prominent architects and designers, such as Ludwig Mies van der Rohe,
Marcel Breuer, Eero Saarinen and Frank O. Gehry, for prestigious corporate and
residential interiors. The KNOLLSTUDIO line also offers a signature collection
of products designed by Maya Lin, the internationally known designer of the
National Veterans Memorial in Washington, D.C.
KNOLLEXTRA
KNOLLEXTRA is a line of desk and office accessories, including letter trays,
sorters, binder bins, file holders, calendars, desk pads, planters,
wastebaskets and bookends. KNOLLEXTRA also offers a number of computer
accessories and ergonomic office products. Not only does this product line
complement the Company's office system products, but it is also sold to
customers for use with other manufacturers' products.
KNOLLTEXTILES
KNOLLTEXTILES offers a wide range of coverings for walls, panels and seating,
including the IMAGO product, which combines the benefit of a hard surface
material with the texture and translucence of a textile. KNOLLTEXTILES was
established in 1947 to develop high quality fabrics for Knoll furniture.
These products allow the Company to distinguish its product offerings by
providing specialty fabric options and flexibility in fabric selection and
application. As it does with its furniture lines, the Company uses many
independent designers to create its fabrics, which has helped it establish
what management believes to be a unique reputation for textile design. Not
only are KNOLLTEXTILES coverings applied to Knoll furniture, but they are also
sold to customers for use on other manufacturers' products, thereby allowing
the Company to benefit from its competitors' sales.
Leather
Spinneybeck Enterprises, Inc., a wholly-owned subsidiary of the Company,
supplies quality upholstery leather that is used on Knoll furniture and is
sold to customers, including primarily other office furniture manufacturers,
upholsterers, aviation, custom coach and boating manufacturers and the
architecture and design community, for use on their products.
European Products
Much like North America, Knoll Europe has a product offering that allows
customers to single-source a complete office environment, including certain
products designed specifically for the European market. Knoll Europe's core
product categories include: (i) office systems, including the HANNAH DESKING
SYSTEM and the PL1 system, which are targeted to Northern Europe, the
ALESSANDRI system, which is targeted to the French market, the KNOLLSCOPE
system and the SOHO DESKING SYSTEM; (ii) KNOLLSTUDIO, which serves the image
and design-oriented segment of the fine furniture portion of the market;
(iii) seating, including a comprehensive range of chairs such as SAPPER,
BULLDOG, PARACHUTE and SOHO; and (iv) storage units, which are designed to
complement its office system products. The Company also sells its products
designed and manufactured in North America to the international operations of
its core North American customers.
Product Design and Development
Knoll's design philosophy is linked to its commitment to working with some of
the world's preeminent designers to develop products that delight and inspire.
The Company has won numerous design awards and has more than 30 products in
the design collection of the Museum of Modern Art. The Company's collection
of classic and current designs includes works by such internationally
recognized architects and designers as Ludwig Mies van der Rohe, Marcel Breuer,
Eero Saarinen, Harry Bertoia, Massimo Vignelli, Frank Gehry and Maya Lin.
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 that address changing business needs, the Company seeks to launch new
offerings that achieve recognition in the architecture and design community
and generate strong demand among corporate customers.
5
An important part of the Company's product development capabilities is its
responsiveness to customer needs and flexibility to handle customized
manufacturing requests. In order to develop products across its product
range, the Company works closely with independent designers from a number of
industries. By utilizing these long-standing design relationships and
listening to customers to analyze their needs, the Company has been able to
redesign and enhance its products in order to better meet customer preferences.
Sales and Distribution
Knoll's customers are typically Fortune 1000 companies. The Company employs
approximately 360 direct sales representatives, who work closely with its
approximately 230 independent dealers in North America to present the Company's
products to prospective customers. The sales force, in conjunction with the
dealer network, has close relationships with architects, designers and
corporate facility managers, who often have a significant influence on product
selection for large orders.
In addition to coordinating sales efforts with the Company's sales
representatives, the Company's dealers generally handle project management,
installation and maintenance for the account after the initial product
selection and sale. Although many of these dealers also carry products of
other manufacturers, none of them acts as a dealer for the Company's principal
direct competitors. The Company has not experienced significant turnover in
its dealer network except at its own initiative. The dealer's economic
investment in learning all aspects of a particular manufacturer's product
offerings and the value of the relationships the dealer forms with the Company
and with customers discourage dealers from changing their vendor affiliations.
The Company is not dependent on any one of its dealers, the largest of which
accounted for less than 6.0% of the Company's North American sales in 2001.
Additionally, no single customer represented more than 1.5% of the Company's
North American sales during 2001. However, a number of U.S. government
agencies purchase the Company's products through multiple contracts with the
General Services Administration ("GSA"). Sales to government entities under
the GSA contracts aggregated approximately 12.0% of consolidated sales in 2001.
In Europe, the Company sells its products in largely the same manner as it
does in North America, through a direct sales force and a network of dealers,
though each major European market has its own distinct characteristics. Knoll
Europe accounted for approximately 6.0% of the Company's sales in 2001. In
the Latin American and Asia-Pacific markets, which accounted for approximately
1.0% of the Company's sales in 2001, the Company uses both dealers and
independent licensees.
Manufacturing and Operations
The Company operates four manufacturing sites in North America, with plants
located in East Greenville, Pennsylvania; Grand Rapids and Muskegon, Michigan;
and Toronto, Canada. In addition, the Company has two plants in Italy: one
in Foligno and one in Graffignana. All of the Company's plants are registered
under ISO 9000, an internationally developed set of quality criteria for
manufacturing companies.
In 2001, the Company continued to implement programs and procedures in its
manufacturing operations intended to improve customer service. As part of
these initiatives, the Company continued its focus on process cycle time,
percentage of orders shipped complete and on-time, order correctness and other
key measures aimed at driving service improvements.
Raw Materials and Suppliers
The Company's purchasing function in North America is centralized in its East
Greenville facility. This centralization, in addition to close working
relationships formed with its main suppliers, has enabled the Company to focus
on achieving purchasing economies and "just-in-time" inventory practices. The
Company uses steel, lumber, paper, paint, plastics, laminates, particleboard,
veneers, glass, fabrics, leathers and upholstery filling material. The
Company currently does not maintain any long-term supply contracts and believes
that the supply sources for these materials are adequate. The Company does not
rely on any sole source suppliers for any of its raw materials, except for
certain electrical products.
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Competition
The office furniture market is highly competitive. Office furniture companies
compete on the basis of (i) product design, including performance, ergonomic
and aesthetic factors, (ii) product quality and durability, (iii) price,
(iv) on-time delivery and (v) service and technical support. The Company
estimates that it had an 8.4% market share in the U.S. office furniture market
in 2001. Five companies (including the Company) represented approximately
71.0% of the U.S. market in 2001.
Some of the Company's competitors, especially those in North America, are
large and have significantly greater financial, marketing, manufacturing and
technical resources than those of the Company. The Company's most significant
competitors in its primary markets are Steelcase, Inc., Herman Miller, Inc.,
Haworth, Inc., Teknion Corporation and, to a lesser extent, HON Industries,
Inc. These competitors have a substantial volume of furniture installed at
businesses throughout the country, providing a continual source of demand for
further products and enhancements. Moreover, the products of these competitors
have strong acceptance in the marketplace. Although the Company believes that
it has been able to compete successfully in its markets to date, there can be
no assurance that it will be able to continue to do so in the future.
The European market is highly fragmented, as the combined sales of the
estimated top 50 manufacturers represent less than approximately 70.0% of the
market. Based on the most recent publicly available trade information, the
Company believes that no single company holds more than a 10.0% share of the
European market.
Patents and Trademarks
The Company has approximately 110 active U.S. utility patents on various
components used in its products and systems and approximately 138 active U.S.
design patents. The Company also has approximately 221 patents in various
foreign countries. Knoll(R), KnollStudio(R), KnollExtra(R), Good Design Is
Good Business(R), A3(TM), Bulldog(R), Calibre(R), Currents(R), Dividends(R),
Equity(R), Imago(TM), KnollScope(R), Parachute(R), Propeller(R), Reff(R),
RPM(R), Upstart(R) and Visor(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 $136.8 million at December 31,
2001 and $170.6 million at December 31, 2000. The Company manufactures
substantially all of its products to order and expects to fill substantially
all outstanding unfilled orders within the next twelve months. As such,
backlog is not a significant factor used to predict the Company's long-term
business prospects.
Foreign and Domestic Operations
For information regarding foreign and domestic operations, refer to Note 21
(Segment and Geographic Region Information) of the Notes to the Consolidated
Financial Statements on page F-26.
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 presently 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 the Company's Predecessor 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 significant 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.
7
The Company has trained staff responsible for monitoring compliance with
environmental, health and safety requirements. The Company's goal is to
reduce and, wherever possible, eliminate the creation of hazardous waste in
its manufacturing processes.
The Company has been identified as a potentially responsible party pursuant
to the Comprehensive Environmental Response Compensation and Liability Act
("CERCLA") for remediation costs associated with waste disposal sites
previously used by the Company. CERCLA imposes liability without regard to
fault or the legality of the disposal. The remediation costs at the CERCLA
sites are unknown; however, the Company does not expect its liability to be
material to the Company as a whole. At each of the sites, the Company is one
of many potentially responsible parties and expects to have only a small
percentage of liability. At some of the sites, the Company expects to qualify
as a de minimis or de micromis contributor, eligible for a cash-out settlement.
In addition, Westinghouse has agreed to indemnify the Company for certain costs
associated with certain CERCLA liabilities known as of the date of the
acquisition of the Company from Westinghouse.
Employees
As of February 28, 2002, the Company employed a total of 3,863 people,
including 2,512 hourly and 1,351 salaried employees. The Grand Rapids,
Michigan plant is the only unionized plant within the U.S., with the Carpenters
and Joiners of America-Local 1615 having a four-year contract that expires on
August 26, 2002. The Company believes that relations with this union are
positive. However, the Company cannot assure that it will be successful in
reaching a new contract when the current contract expires. From time to time,
there have been unsuccessful efforts to unionize at the Company's other North
American locations. There has been recent unionizing activity at the Company's
Muskegon, Michigan location as well as more limited efforts at its other North
American facilities. The Company believes that relations with its employees
throughout North America are good. Nonetheless, it is possible that Company
employees may continue attempts to unionize. The Company's employees in Italy
are represented by unions. The Company has experienced brief work stoppages
from time to time at the Company's plants in Italy, certain of which related
to national or local issues. Such work stoppages have not materially affected
the Company.
ITEM 2. PROPERTIES
The Company operates over 3,012,000 square feet of facilities, including
manufacturing plants, warehouses and sales offices. Of these facilities, the
Company owns approximately 2,510,000 square feet and leases approximately
502,000 square feet. The Company's manufacturing plants are located in East
Greenville, Pennsylvania; Grand Rapids and Muskegon, Michigan; Toronto, Canada;
and Foligno and Graffignana, Italy.
The Company's corporate headquarters are located in East Greenville,
Pennsylvania, where the Company owns two manufacturing facilities aggregating
approximately 547,000 square feet and leases three warehouses aggregating
approximately 142,000 square feet. The East Greenville facility is also the
distribution center for KNOLLSTUDIO, KNOLLEXTRA and KNOLLTEXTILES.
The Company owns one approximately 545,000 square foot manufacturing facility
in Grand Rapids, Michigan. In Muskegon, Michigan, the Company owns one
approximately 334,000 square foot plant and leases one approximately 105,000
square foot building for manufacturing. The Company's plants in Toronto,
Canada consist of one approximately 408,000 square foot owned building and two
leased properties aggregating approximately 157,000 square feet. The Company's
owned facilities in East Greenville, Grand Rapids and Muskegon are encumbered
by mortgages securing the Company's indebtedness under its $650.0 million
senior credit agreement.
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The Company owns two manufacturing facilities in Italy: an approximately
258,000 square foot building in Foligno, which houses the Knoll Europe
headquarters, and an approximately 110,000 square foot building in Graffignana.
The Company believes that its plants and other facilities are sufficient for
its needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to various claims and litigation in the ordinary course
of its business. The Company is not a party to any lawsuit or proceeding
which, in the opinion of management, based on information presently known, is
likely to have a material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of stockholders on December 3, 2001. The
Company's stockholders were asked to take the following actions at the meeting:
(1) Elect nine directors of the Company to serve until the next annual meeting
of stockholders of Knoll or until their successors are elected and
qualified ("Proposal 1").
(2) Ratify the appointment of the firm Ernst & Young LLP as independent
auditors of Knoll for the 2001 fiscal year ("Proposal 2").
With respect to Proposal 1, all nine individuals nominated for director were
elected. The nominees and the votes each received are as follows:
Nominee For Withheld
------------------------ -------------- ----------
Burton B. Staniar....... 22,491,327 --
Andrew B. Cogan......... 22,491,327 --
Kathleen G. Bradley..... 22,491,327 --
Jeffrey A. Harris....... 22,491,327 --
Sidney Lapidus.......... 22,491,327 --
Kewsong Lee............. 22,491,327 --
John H. Lynch........... 22,491,327 --
Lloyd Metz.............. 22,491,327 --
Henry B. Schacht........ 22,491,327 --
Lloyd Metz subsequently resigned as director of Knoll effective January 24,
2002.
Proposal 2 was also approved by affirmative vote of a majority of shares of
common stock present at the annual meeting. Such proposal received 22,491,327
votes FOR and zero votes AGAINST. There were no abstentions.
On March 8, 2002, by written consent of the Company's majority stockholder in
an action taken without a meeting, an amendment to the employment agreement of
Burton B. Staniar was approved. Such approval was obtained in compliance with
Section 280G(b)(5) of the Internal Revenue Code of 1986, as amended.
9
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information and Dividend Policy
There has been no established trading market for the Company's common stock,
par value $0.01 per share since cessation of trading on November 3, 1999, the
day before consummation of the merger. From May 9, 1997, the date of the
Company's initial public offering, through November 3, 1999, the Company's
common stock was traded on the NYSE.
As of March 28, 2002, there were 38 holders of record of the Company's common
stock.
The credit agreement governing the Company's senior credit facilities and
the indenture relating to the Company's 10.875% Senior Subordinated Notes due
2006 (the "Senior Subordinated Notes") contain certain covenants that, among
other things, limit the Company's ability to purchase Knoll stock and pay
dividends to its stockholders. On December 20, 2000, the Company's Board of
Directors declared a special cash dividend of $9.50 per share of common stock
(approximately $220.3 million in the aggregate) payable on January 5, 2001 to
stockholders of record as of the close of business on December 20, 2000. Such
dividend was in compliance with the covenants contained in the aforementioned
debt agreements, as amended. Prior to December 20, 2000, the Company had never
declared any dividends on its common stock. Any future determination to pay
dividends will depend on the Company's results of operations, financial
condition, capital requirements, contractual restrictions and other factors
deemed relevant by the Board of Directors.
Recent Sales of Unregistered Securities
Options to purchase an aggregate of 547,500 shares of Knoll common stock were
granted to certain employees of the Company on February 5, 2002. These options
were granted at an exercise price of $36.00, will vest in installments over
four years (30% on the first vesting date, 20% on each of the second and third
vesting dates and 30% on the fourth vesting date) and may be exercised pursuant
to the terms of the related stock option agreements. The Company did not
receive any consideration for such grants. These grants were exempt from
registration under the Securities Act of 1933, as amended (the "Securities
Act"), as not involving the sale of a security.
10
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected consolidated financial information, as
of the dates and for the periods indicated, that has been derived from audited
financial statements of the Company. 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."
Years Ended December 31,
--------------------------------------------------------------------
1997 1998 1999 2000 2001
------------ ------------ ------------ ------------ ------------
(In Thousands, Except Per Share Data)
Operating Data
Sales....................... $810,857 $948,691 $984,511 $1,163,477 $985,388
Cost of sales............... 489,962 572,756 593,442 682,421 594,446
-------- -------- -------- ---------- --------
Gross profit................ 320,895 375,935 391,069 481,056 390,942
Selling, general and
administrative expenses... 183,018 204,392 206,919 243,885 195,532
Restructuring charge........ -- -- -- -- 1,655
-------- -------- -------- ---------- --------
Operating income............ 137,877 171,543 184,150 237,171 193,755
Interest expense............ 25,075 16,860 21,611 44,437 42,101
Recapitalization expense.... -- -- 6,356 -- --
Other income
(expense), net............ 1,667 2,732 (670) 3,026 (3,670)
-------- -------- -------- ---------- --------
Income before income
tax expense and
extraordinary item........ 114,469 157,415 155,513 195,760 147,984
Income tax expense.......... 48,026 64,371 66,351 79,472 60,794
-------- -------- -------- ---------- --------
Income before
extraordinary item........ 66,443 93,044 89,162 116,288 87,190
Extraordinary loss on
early extinguishment of
debt, net of taxes........ 5,337 -- 10,801 -- --
-------- -------- -------- ---------- --------
Net income.................. $ 61,106 $ 93,044 $ 78,361 $ 116,288 $ 87,190
======== ======== ======== ========== ========
Per Share Data
Cash dividends declared..... $ -- $ -- $ -- $ 9.50 $ --
December 31,
--------------------------------------------------------------------
1997 1998 1999 2000 2001
------------ ------------ ------------ ------------ ------------
(In Thousands)
Balance Sheet Data
Working capital.............. $ 65,553 $ 95,040 $104,087 $ 32,678 $ 4,020
Total assets................. 680,859 714,027 742,306 695,130 639,003
Total long-term debt,
including current portion.. 207,029 169,255 610,376 425,755 547,524
Total liabilities............ 392,570 370,177 836,500 899,505 761,321
Stockholders' equity
(deficit).................. 288,289 343,850 (94,194) (204,375) (122,318)
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with Item 8, "Financial
Statements and Supplementary Data."
Background
On November 4, 1999, pursuant to an Agreement and Plan of Merger dated as of
June 21, 1999 (as amended on July 29, 1999), between Warburg and Knoll, the
Company completed a recapitalization (merger) transaction whereby a newly
formed entity, which was organized by Warburg, was merged with and into Knoll,
with Knoll continuing as the surviving corporation. As a result of the merger,
17,738,634 shares of common stock held by the public stockholders of Knoll,
other than Warburg and certain members of Knoll management, immediately prior
to the merger were converted into the right to receive $28.00 per share in
cash and were canceled. Furthermore, the Company's common stock ceased to be
listed on the NYSE, and the registration of the Company's securities under the
Exchange Act was terminated.
The merger and related transactions were accounted for as a leveraged
recapitalization. The historical accounting bases of Knoll's assets and
liabilities were retained subsequent to the transactions. See Note 3 to the
consolidated financial statements for further discussion of the merger.
2001 Overview
2001 was a very challenging year for the U.S. office furniture industry.
BIFMA estimates that 2001 revenues for the U.S. office furniture industry
declined 17.4% from 2000. This decline is the most severe industry downturn
in the last thirty years. A reduction in business confidence, corporate
profitability, corporate spending and white-collar employment levels in
response to an economic recession in the U.S. and a general softening of the
economy in Canada directly affected sales of office furniture. The economic
slowdown in North America led to a significant reduction in sales volume in
2001 and an extremely competitive pricing environment within the industry.
The tragic events and aftermath of September 11, 2001 exacerbated the economic
slowdown and added to general economic uncertainty.
While the Company continued to aggressively manage its cost structure in light
of economic conditions and uncertainty in 2001, it also continued to focus on
certain initiatives that it believes will enable Knoll to be well positioned
to meet the needs of its customers once economic conditions improve. Such
initiatives include (i) investing in the development of new products and other
sales and marketing initiatives designed to gain market share and (ii) pursuing
and implementing technological initiatives designed to streamline the Company's
order entry process and provide customers with readily accessible product
information tailored specifically to their individual demands.
2002 Outlook
The near-term outlook for the U.S. office furniture industry remains uncertain.
The Company anticipates that its sales in the first quarter of 2002 will be
down compared to the first quarter of 2001. BIFMA forecasts 2002 revenues for
the U.S. office furniture industry will decline 13.0% from 2001. Economic
indicators have recently shown evidence that the U.S. economy has already
started to recover from a recession that began about a year ago. There has
historically been a lag between an upturn in corporate profits following an
economic slowdown and renewed demand for office furniture. Thus, the office
furniture industry is not expected to experience growth until several months
after such an upturn begins.
Critical Accounting Policies
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the U.S. 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 results may differ materially from
such estimates. Management believes that the critical accounting
12
policies that follow are those of its policies that require the most
judgement, estimation and assumption for preparation of the consolidated
financial statements.
Allowance for Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers and dealers to make required
payments. The allowance is determined through an analysis of the aging of
accounts receivable and assessments of risk that are based on historical
trends and an evaluation of the impact of current and projected economic
conditions. If the financial condition of the Company's customers and dealers
were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required.
Inventory
Inventories are valued at the lower of cost or market. Cost is determined
using the first-in, first-out method. The Company writes down to zero value
inventory that is specifically identified as obsolete and inventory for which
there was no activity within one year. Obsolescence may be caused by the
discontinuance of a product line, changes in product material specifications,
replacement products in the marketplace and other competitive influences.
Product Warranty
The Company provides for the estimated cost of product warranties at the time
revenue is recognized. While the Company engages in product quality programs
and processes, its warranty obligation is affected by product failure rates,
material usage and service costs incurred in correcting a product failure.
Cost estimates are based on historical product failure rates and identified
one-time fixes for each specific product category. Should actual costs differ
from original estimates, revisions to the estimated warranty liability would
be required.
Employee Benefits
The Company is partially self-insured for certain employee health benefits.
The Company accrues for employee health benefit obligations based on an
independent actuarial valuation. The actuarial valuation is based upon
historical claims as well as a number of assumptions, including rates of
inflation for medical costs and benefit plan changes. Actual results could be
materially different than the estimates used.
The Company accounts for its defined benefit pension plan obligations and
other postretirement benefit plan obligations in accordance with Statements
of Accounting Standards No. 87, "Employers' Accounting for Pensions," and
No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions," respectively. The defined benefit pension and other postretirement
benefit expenses and liabilities that are recognized in the Company's financial
statements as well as pension funding requirements are based upon actuarial
valuations. The actuarial valuations are dependent upon various assumptions,
including, but not limited to, selected discount rates, expected rates of
return on plan assets, projected salary increases and benefits, expected health
care cost trend rates and withdrawal and mortality rates. The actuarial
assumptions used are reviewed annually. Changes in assumptions as well as
actual experience could potentially have a material impact on the Company's
pension and other postretirement expenses and related funding requirements.
Commitments and Contingencies
The Company establishes reserves for the estimated cost of environmental and
legal contingencies. A significant amount of judgement and use of estimates
is required to quantify the Company's ultimate exposure in these matters. The
Company engages outside experts as it deems necessary or appropriate to assist
in the evaluation of exposure. From time to time, as information becomes
available regarding changes in circumstances for ongoing issues as well as
information regarding emerging issues, management assesses the potential
liability and adjusts its reserve balances accordingly. Revisions to
management's estimates of potential
13
liability as well as actual expenditures related to environmental and legal
contingencies could have a material impact on the Company's results of
operations or financial position.
Income Taxes
The Company accounts for taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"),
which requires that deferred tax assets and liabilities be measured using
enacted tax rates for the effect of future tax consequences attributable to
temporary differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. SFAS 109 also
requires that deferred tax assets be reduced by a valuation allowance if it is
more likely than not that some portion or all of the deferred tax asset will
not be realized. The Company evaluates quarterly the realizability of its
deferred tax assets, and adjusts its valuation allowance accordingly, based
upon future taxable income and ongoing tax planning strategies.
The Company operates within multiple taxing jurisdictions and is subject to
audit in all of these jurisdictions. These audits could result in tax
obligations in excess of amounts previously recorded by the Company.
Interest Rate Collar Agreements
The Company accounts for its interest rate collar agreements in accordance
with Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended ("SFAS 133").
The Company's interest rate collar agreements are classified as risk
management instruments not eligible for hedge accounting. In accordance with
SFAS 133, the Company records the fair value of these agreements on its
balance sheet and recognizes changes in their fair value in earnings in the
period the value of the contract changes. The fair value of the interest rate
collar agreements represents the present value of expected future payments, as
estimated by the counterparties, who are dealers in these instruments, and is
based upon a number of factors, including current interest rates and
expectations of future interest rates. Changes in valuation assumptions and
estimates used by the counterparties could cause a material effect on the
Company's results of operations or financial position.
Results of Operations
Sales
Although 2001 was a challenging year, the Company was able to outperform the
industry. The Company's sales for 2001 declined 15.3% to $985.4 million,
compared to the estimated overall U.S. industry decline of 17.4%. The decrease
in the Company's sales from 2000 to 2001 was primarily a result of decreased
volume attributable to the recession in the U.S. The volume decrease was
spread across all of the Company's product categories, with office systems
accounting for the largest dollar decrease because such category historically
represents the largest component of the Company's sales. The decrease from
2000 to 2001 was also due, to a lesser extent, to competitive pricing pressures
that have been and continue to be experienced in the industry since the start
of the economic slowdown in late 2000.
The challenging times of 2001 followed a record year for the Company. 2000 was
the first year in the history of the Company in which annual sales exceeded
$1.0 billion. 2000 sales of $1,163.5 million were up 18.2%, or $179.0 million,
from $984.5 million in sales for 1999. Such growth resulted primarily from
increased volume in both North America and Europe, which was primarily
attributable to office systems and specialty products. Office systems is the
largest product category in the industry. BIFMA estimates that U.S. sales of
office systems were $3.8 billion, or 34.4% of total industry sales, in 2001.
Office systems accounted for 70.2% of the Company's sales in 2001, 71.3% of
sales in 2000 and 68.9% of sales in 1999.
14
Gross Profit and Operating Income
The Company's gross profit and operating income as a percentage of sales
continue to be the highest among the companies in the U.S. office furniture
industry for which financial results are publicly available. As a percentage
of sales, gross profit was 39.7% for 2001, 41.3% for 2000 and 39.7% for 1999
and operating income was 19.7% for 2001, 20.4% for 2000 and 18.7% for 1999.
In anticipation of lower sales volumes in 2001, the Company took steps intended
to prevent significant deterioration of its profits as a percentage of sales.
Such steps included reducing hourly headcount in North America as dictated by
volume, adopting a restructuring plan to eliminate certain salaried positions
in North America and aggressively managing certain other discretionary and
factory costs. The decreases in gross profit and operating income percentages
from 2000 to 2001 were due primarily to lower sales volume allowing less
absorption of fixed overhead costs in 2001 compared to 2000. The decrease in
the Company's operating income as a percentage of sales was also due, in part,
to a restructuring charge of $1.7 million for severance and other termination
benefits recorded in 2001 in connection with the restructuring plan discussed
above.
In 2000, the Company's gross profit and operating income as a percentage of
sales benefited from increased volume, the Company's continued focus on cost
control and the correction of certain manufacturing inefficiencies at the
Company's Toronto, Canada facility that resulted in part from implementation
issues associated with the transition to a new manufacturing system in 1999.
The Company's 1999 gross profit and operating income were impacted negatively
by the aforementioned manufacturing inefficiencies.
Interest Expense
Despite higher outstanding debt balances in 2001 compared to 2000, the
Company's interest expense decreased $2.3 million. This decrease was a result
of lower interest rates on the Company's variable-rate debt offset by net
settlement payments of $2.1 million incurred under the Company's interest rate
collar agreements during 2001. Interest rates incurred for borrowings under
the Company's senior credit facilities were more favorable in 2001 primarily
as a result of lower short-term borrowing rates in response to actions taken
by the U.S. Federal Reserve to lower the federal funds rate in 2001.
Interest expense increased $22.8 million from 1999 to 2000 primarily as a
result of higher outstanding debt balances during 2000 compared to 1999. In
connection with the merger that was consummated on November 4, 1999, the
Company incurred $533.0 million of debt under a new senior credit agreement
with higher interest rates than those under the credit agreement that it
replaced. Such borrowings significantly increased the Company's level of debt
during the last two months of 1999 and the year 2000. See "Liquidity and
Capital Resources" for further discussion of such senior credit agreement.
Recapitalization Expense
In 1999, the Company incurred $6.4 million of expense relating to the
recapitalization of the Company that occurred upon consummation of the merger.
Other Income (Expense), Net
Other expense for 2001 includes a noncash loss of $7.5 million related to the
Company's interest rate collar agreements. This loss was a result of the
change in the fair value of the agreements during 2001. See Note 12 to the
consolidated financial statements for further discussion.
Income Tax Expense
The mix of pretax income and varying effective tax rates attributable to the
countries in which the Company operates were primarily responsible for the
increase in the effective tax rate from 40.6% in 2000 to 41.1% in 2001. The
decrease in the effective tax rate from 42.7% in 1999 to 40.6% in 2000 was
primarily due to $5.2 million of recapitalization expense that was recorded in
1999 and was not deductible for income tax purposes.
15
The change in the effective rate from 1999 to 2000 was also due, to a lesser
extent, to the mix of pretax income and varying effective tax rates
attributable to the countries in which the Company operates.
Extraordinary Items
In connection with the merger in 1999, Knoll refinanced $14.0 million owed
under its senior credit agreement that existed immediately prior to the
merger and paid the holders, as of August 13, 1999, of its Senior Subordinated
Notes a fee of $12.9 million for their consent to certain amendments to the
indenture governing the Senior Subordinated Notes. The amendments allowed the
Company to complete the merger without violating the covenants under the
indenture. The Company accounted for the refinancing of the debt under the
then-existing credit agreement and the modification of debt terms under the
indenture for the Senior Subordinated Notes as extinguishments of debt. Such
treatment resulted in an extraordinary loss of $17.9 million on a pretax basis
($10.8 million on an after-tax basis) in 1999. This loss consisted of the
$12.9 million consent fee paid to the noteholders and $5.0 million of
unamortized financing costs that were written-off, of which $0.9 million
related to the refinanced debt and $4.1 million related to the Senior
Subordinated Notes.
Liquidity and Capital Resources
The following table highlights certain key cash flow and capital information
pertinent to the discussion that follows:
2001 2000 1999
---------- ---------- ----------
(In Thousands)
Cash provided by operating
activities....................... $134,147 $ 222,711 $127,987
Capital expenditures............... 25,020 24,097 25,095
Purchase of common stock........... 403 322 28,703
Payment of merger consideration.... -- -- 496,682
Payment of recapitalization costs.. -- 230 8,843
Payment of fees to amend debt
agreements....................... -- 682 12,870
Net proceeds from (repayment of)
long-term debt................... 121,750 (184,500) 441,250
Payment of dividend................ 220,339 -- --
2001 cash flow from operating activities was negatively impacted by the
Company's lower earnings before noncash items, which was due primarily to
decreased demand for office furniture and accessories in 2001. The $134.1
million of cash flow provided by operations in 2001 in addition to $153.0
million of net borrowings under the senior revolving credit facility were
used during 2001 to fund $25.0 million of capital expenditures, repay $31.25
million of debt under the term loan facility and fund the payment of a special
cash dividend totaling $220.3 million, or $9.50 per share of common stock.
The Company's capital expenditures are typically for new manufacturing
equipment and information systems. The Company estimates that capital
expenditures for 2002 will be approximately $20.0 million.
On December 20, 2000, the Company declared a special cash dividend of $9.50
per share of common stock payable on January 5, 2001 to stockholders of record
as of the close of business on December 20, 2000. The Company borrowed $221.0
million under the revolving credit facility on January 5, 2001 to fund the
payment of the dividend.
In connection with the merger consummated on November 4, 1999, the Company
transferred an aggregate of $496.7 million of merger consideration to its
exchange agent for the 17,738,634 shares of common stock that were converted
into the right to receive $28.00 per share and were canceled. In addition,
the Company incurred recapitalization costs totaling $9.1 million and, as
previously discussed, paid the holders of its Senior Subordinated Notes an
aggregate consent fee of $12.9 million. In order to finance these
transactions, the Company incurred debt of $533.0 million. See below for
further discussion of the debt incurred.
16
During the first two months of 1999, the Company purchased 1,187,000 shares of
its common stock for $28.7 million, or an average price of $24.16 per share,
under a stock repurchase program that began in September 1998 and was
terminated in connection with the merger.
The Company repaid $47.0 million of its outstanding senior bank debt from
January 1, 1999 through November 3, 1999. On November 4, 1999, in connection
with the consummation of the merger, the Company repaid all of its then-
outstanding senior indebtedness, which amounted to $14.0 million, and incurred
debt totaling $533.0 million under a new senior credit agreement. The new
credit agreement provides up to $650.0 million to (i) fund the merger and
related fees and expenses, (ii) refinance all amounts owing under the Company's
senior credit agreement that existed immediately prior to the merger and
(iii) provide for working capital and ongoing general corporate purposes. The
agreement consists of a $325.0 million six-year term loan facility and a
$325.0 million six-year revolving credit facility and contains restrictive
covenants, financial covenants and events of default. Among other things, the
restrictive covenants limit the Company's ability to incur additional
indebtedness, pay dividends, purchase Company stock, make investments, grant
liens and engage in certain other activities. The credit agreement was
amended on December 20, 2000 in connection with the declaration of the special
cash dividend, which is discussed above.
Borrowings under the new credit agreement bear interest at a floating rate
based, at the Company's option, upon (i) the Eurodollar rate (as defined
therein) plus an applicable percentage that is subject to change based upon
the Company's ratio of funded debt to earnings before income taxes,
depreciation, amortization and other noncash charges ("EBITDA") or (ii) the
greater of the federal funds rate plus 0.5% or the prime rate, plus an
applicable percentage that is subject to change based upon the Company's ratio
of funded debt to EBITDA. The Company is required to make quarterly principal
payments under the term loan facility. Aggregate annual amounts due are as
follows: $52.5 million in 2002, $63.75 million in 2003, $81.25 million in
2004 and $75.0 million in 2005. Loans made pursuant to the revolving credit
facility may be borrowed, repaid and reborrowed from time to time until
November 4, 2005. The Company repaid $31.25 million of borrowings under the
term loan facility and borrowed net proceeds of $153.0 million under the
revolving credit facility in 2001, repaid $17.5 million and $167.0 million of
borrowings under the term loan facility and revolving credit facility,
respectively, in 2000 and repaid $3.75 million and $27.0 million of borrowings
under the term loan facility and revolving credit facility, respectively, in
December 1999.
The senior credit agreement provides for a letter of credit subfacility that
allows for the issuance of up to $25.0 million in letters of credit. The
amount available for borrowing under the revolving credit facility is reduced
by the total outstanding letters of credit. As of December 31, 2001, the
Company had an aggregate of $3.8 million of letters of credit outstanding and
$154.2 million available for borrowing under the revolving credit facility.
In addition to the credit facilities, the Company has $107.2 million aggregate
principal amount of Senior Subordinated Notes outstanding. The Senior
Subordinated Notes are subordinated to all of the Company's existing and
future senior indebtedness, including all indebtedness under the senior credit
agreement. The indenture governing the Senior Subordinated Notes imposes
certain restrictions on the Company and its subsidiaries, including
restrictions on the ability to incur indebtedness, pay dividends, purchase
Company stock, make investments, grant liens and engage in certain other
activities. The Company may be required to purchase the Senior Subordinated
Notes upon a change of control (as defined in the indenture) and in certain
circumstances with the proceeds of asset sales. The Senior Subordinated Notes
are redeemable, in whole or in part, at the Company's option at 105.438% of
their principal amount through March 14, 2002, and thereafter at an annually
declining premium over par until March 15, 2004, when they are redeemable at
par. On March 27, 2002, the Company notified the holders of the Senior
Subordinated Notes that it will redeem $50.0 million aggregate principal amount
of the Senior Subordinated Notes on April 30, 2002 at 103.625% of principal
amount, plus accrued interest. The Company intends to fund such redemption
with borrowings under its senior revolving credit facility.
17
The Company's foreign subsidiaries maintain local credit facilities to
provide credit for overdraft, working capital and other purposes. As of
December 31, 2001, total credit available under such facilities was
approximately $8.4 million, or the foreign currency equivalent, and there were
no outstanding borrowings under the facilities. The Company believes that it
is currently in compliance with all terms of its indebtedness.
In addition to the contractual cash obligations under the Company's debt
agreements, as described above, the Company has commitments under its interest
rate collar agreements and operating leases for certain machinery and
equipment as well as manufacturing, warehousing, showroom and other facilities
used in its operations. See Item 7A, "Quantitative and Qualitative Disclosures
about Market Risk" for further discussion of the Company's interest rate
collar agreements. Future minimum lease payments required under those
operating leases that have an initial or remaining noncancelable lease term in
excess of one year are as follows: $7.6 million in 2002, $6.7 million in 2003,
$4.2 million in 2004, $3.1 million in 2005, $2.1 million in 2006 and
$5.3 million thereafter.
The Company continues to have significant liquidity requirements. In addition
to working capital needs and the need to fund capital expenditures to support
the Company's sales and marketing initiatives, the Company has significant
cash requirements for debt service. The Company believes that existing cash
balances and internally generated cash flows, together with borrowings
available under its revolving credit facilities, will be sufficient to fund
normal working capital needs, capital spending requirements and debt service
requirements for at least the next twelve months.
Accounting Pronouncements Pending Adoption as of December 31, 2001
In June 2001, the Financial Accounting Standards Board ("FASB") approved
Statements of Financial Accounting Standards No. 141, "Business Combinations"
("SFAS 141"), and No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142").
SFAS 141 requires that all business combinations be accounted for using the
purchase method and requires that intangible assets that meet certain criteria
be recognized apart from goodwill. SFAS 142 prescribes that goodwill and
intangible assets with indefinite useful lives should no longer be amortized
to earnings, but instead should be reviewed for impairment on at least an
annual basis. Intangible assets with finite lives will continue to be
amortized over their estimated useful lives.
The Company adopted SFAS 141 and SFAS 142 on January 1, 2002. The adoption of
these statements did not result in any changes to the classification of the
Company's goodwill and other intangible assets as they are presented at
December 31, 2001. The Company assigned an indefinite useful life to its
trademarks effective January 1, 2002. Application of the nonamortization
provisions of SFAS 142, as they relate to the Company's goodwill and
trademarks, is expected to result in an increase in income before taxes of
approximately $6.8 million in 2002.
The Company will perform impairment tests of its trademarks and goodwill as of
January 1, 2002. Knoll has not yet determined what the effect of these tests
will be on the earnings and financial position of the Company. The impairment
test of the trademarks will be completed during the first quarter ended
March 31, 2002. The Company expects to perform the first step of a two-step
goodwill impairment test, as prescribed in SFAS 142, during the second quarter
ended June 30, 2002. The first step of the goodwill impairment test is a
screen for potential impairment, while the second step measures the amount of
the impairment, if any. Any impairment loss resulting from these transitional
impairment tests will be reflected as the cumulative effect of a change in
accounting principle in the Company's interim financial statements for the
first quarter of 2002, regardless of the interim period in which the
measurement of the loss is completed.
Inflation
There was no significant impact on Knoll's operations as a result of inflation
during the three years ended December 31, 2001.
18
Environmental Matters
The past and present business operations of the Company and the past and
present ownership and operation of manufacturing plants on real property by
the Company are subject to extensive and changing federal, state, local and
foreign environmental laws and regulations. As a result, the Company is
involved from time to time in administrative and judicial proceedings and
inquiries relating to environmental matters. The Company cannot predict what
environmental legislation or regulations will be enacted in the future, how
existing or future laws or regulations will be administered or interpreted
or what environmental conditions may be found to exist. Compliance with more
stringent laws or regulations, or stricter interpretation of existing laws,
may require additional expenditures by the Company, some of which may be
material. The Company has been identified as a potentially responsible party
pursuant to CERCLA for remediation costs associated with waste disposal sites
previously used by the Company. The remediation costs at these CERCLA sites
are unknown, but the Company does not expect any liability it may have under
CERCLA to be material, based on the information presently known to the Company.
In addition, Westinghouse has agreed to indemnify the Company for certain costs
associated with CERCLA liabilities known as of the date of the acquisition of
the Company from Westinghouse.
Statement Regarding Forward-Looking Disclosure
Certain portions of this Form 10-K, including "Management's Discussion and
Analysis of Financial Condition and Results of Operations," contain various
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act that represent the Company's
expectations or beliefs concerning future events. Forward-looking statements
relate to future operations, strategies, financial results or other
developments and are not based on historical information. In particular,
statements using verbs such as "anticipates," "believes," "estimates,"
"expects" or words of similar meaning generally involve forward-looking
statements. Although the Company believes the expectations reflected in these
forward-looking statements are based upon reasonable assumptions, no assurance
can be given that Knoll will attain these expectations or that any deviations
will not be material. Readers of this Form 10-K are cautioned not to unduly
rely on any forward-looking statements.
The Company cautions that its forward-looking statements are further qualified
by important factors that could cause actual results to differ materially from
those in the forward-looking statements. Such factors include, without
limitation, the impact and duration of the economic downturn in the North
American economy generally and in the high-technology industry; continuation
or further deterioration of depressed industry revenues driven by a variety of
macroeconomic factors, including white-collar employment levels, business
confidence and corporate profitability and cash flows, as well as by a variety
of industry factors such as corporate reengineering and restructuring,
technology demands, ergonomic, health and safety concerns and corporate
relocations; the negative effects of the tragic events and aftermath of
September 11, 2001 upon the economy as a whole and the office furniture
industry; competitive pricing within the contract office furniture industry;
the Company's indebtedness, which requires the Company to meet certain
financial covenants and requires a significant portion of the Company's cash
flow from operations to be dedicated to debt service, making such cash flow
unavailable for other purposes, and which could limit the Company's
flexibility in reacting to changes in its industry or economic conditions
generally; the highly competitive nature of the market in which the Company
competes, including the introduction of new products, pricing changes by the
Company's competitors and growth rates of the office systems category; risks
associated with the Company's marketing and sales strategies, including the
risk that the Company's introduction of new products will not achieve the same
degree of success achieved historically by the Company's products; the
Company's dependence on key personnel; the ability of the Company to
successfully negotiate a new collective bargaining agreement with its unionized
employees; the ability of the Company to maintain its relationships with its
dealers; the Company's reliance on its patents and other intellectual
property; environmental laws and regulations, including those that may be
enacted in the future, that affect the ownership and operation of the
Company's manufacturing plants; risks relating to potential labor disruptions;
risks associated with conducting business via the Internet and the Company's
ability to react appropriately and in a timely fashion to changing
technologies and business models; and fluctuations in foreign currency
exchange rates. Except as otherwise required by the federal securities laws,
the Company disclaims any obligation or undertaking to disseminate any updates
or revisions to any forward-looking statement
19
contained in this Form 10-K to reflect any change in its expectations with
regard thereto or any change in events, conditions or circumstances on which
any such statement is based.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During the normal course of business, the Company is routinely subjected to
market risk associated with interest rate movements and foreign currency
exchange rate movements. Interest rate risk arises from the Company's debt
obligations and related interest rate collar agreements. Foreign currency
exchange rate risk arises from the Company's foreign operations and purchases
of inventory from foreign suppliers.
Interest Rate Risk
The Company has both fixed and variable rate debt obligations for other than
trading purposes that are denominated in U.S. dollars. Changes in interest
rates have different impacts on the fixed and variable-rate portions of the
debt. A change in interest rates impacts the interest incurred and cash paid
on the variable-rate debt but does not impact the interest incurred or cash
paid on the fixed rate debt.
The Company uses interest rate collar agreements for other than trading
purposes in order to manage its exposure to fluctuations in interest rates on
its variable-rate debt. Such agreements effectively set agreed-upon maximum
and minimum rates on a notional principal amount and utilize the three-month
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 quarterly and do not represent the amount of exposure to credit loss.
Fluctuations in LIBOR impact both the net financial instrument position and
the amount of cash to be paid or received, if any.
The following table summarizes the Company's market risks associated with its
debt obligations and interest rate collar agreements as of December 31, 2001.
For debt obligations, the table presents principal cash flows and related
weighted average interest rates by year of maturity. Variable interest rates
presented for variable-rate debt represent the weighted average interest rates
on the Company's credit facility borrowings as of December 31, 2001. For
interest rate caps and floors, the table presents the notional amounts and
related weighted average interest rates by year of maturity.
2002 2003 2004 2005 2006 Thereafter Total Fair Value
-------- -------- -------- -------- -------- ---------- ---------- ----------
(Dollars in Thousands)
Rate Sensitive Liabilities
Long-term Debt:
Fixed Rate............. $ 58 $ 62 $ 65 $ 69 $107,324 $446 $108,024 $102,704
Average Interest
Rate............. 10.83% 10.83% 10.84% 10.84% 10.84% 4.11%
Variable Rate.......... $62,500 $63,750 $ 81,250 $232,000 -- -- $439,500 $439,500
Average Interest
Rate............. 2.89% 2.89% 2.89% 2.89% -- --
Rate Sensitive Derivative
Financial Instruments
Interest Rate Caps:
Notional Amount........ -- -- $200,000 -- -- -- $200,000 $ 87
Strike Rate............ -- -- 10.00% -- -- --
Interest Rate Floors:
Notional Amount........ -- -- $200,000 -- -- -- $200,000 $ (8,521)
Strike Rate............ -- -- 5.12% -- -- --
At December 31, 2000, the Company had total debt outstanding of $425.8 million,
of which $317.8 million was variable-rate debt. The increase in the variable-
rate debt from December 31, 2000 to December 31, 2001 is related to net
borrowings of $153.0 million under the senior revolving credit facility, which
includes borrowings to fund the payment of a special cash dividend totaling
$220.3 million on January 5, 2001, offset by the repayment of $31.25 million
of debt under the term loan facility.
20
As previously discussed in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the Company notified the
holders of its Senior Subordinated Notes that it will redeem $50.0 million
aggregate principal amount of the outstanding Senior Subordinated Notes on
April 30, 2002 at 103.625% of principal amount, plus accrued interest. The
Company intends to fund such redemption with borrowings under its senior
revolving credit facility. Consequently, the Company will replace fixed-rate
debt with variable-rate debt, thereby increasing its market risk exposure
related to changes in interest rates.
At December 31, 2000, the Company had three interest rate collar agreements
outstanding with an aggregate notional principal amount of $135.0 million,
related weighted average maximum and minimum rates of 10.00% and 5.64%,
respectively, and a termination date of February 2003. In February 2001, the
Company negotiated modifications to these agreements that increased the
aggregate notional principal amount to $200.0 million, decreased the weighted
average minimum rate to 5.12% and extended the termination date to February
2004. The aggregate fair value of these interest rate collar agreements from
the Company's perspective as of December 31, 2001 was ($8.4 million), of which
$5.9 million was recorded as a current liability and $2.5 million was recorded
as a noncurrent liability in the Company's consolidated balance sheet as of
December 31, 2001. During 2001, the Company recognized an aggregate net loss
related to these agreements of $9.6 million, of which $2.1 million was
recorded as interest expense and $7.5 million was recorded as a component of
other expense in the Company's consolidated statement of operations. The
aggregate fair value of the interest rate collar agreements outstanding at
December 31, 2000 was not material. The Company was not required to make
nor was it entitled to receive any payments as a result of its use of interest
rate collar agreements during 2000 and 1999.
The Company will continue to review its exposure to interest rate fluctuations
and evaluate whether it should manage such exposure through derivative
transactions.
Foreign Currency Exchange Rate Risk
The Company manufactures its products in the U.S., Canada and Italy and sells
its products in those markets as well as in other European countries. The
Company's foreign sales and certain expenses are transacted in foreign
currencies. The production costs, profit margins and competitive position of
the Company are affected by the strength of the currencies in countries where
it manufactures or purchases goods relative to the strength of the currencies
in countries where its products are sold. Additionally, as the Company's
reporting currency is the U.S. dollar, the financial position of the Company
is affected by the strength of the currencies in countries where the Company
has operations relative to the strength of the U.S. dollar. The principal
foreign currencies in which the Company conducts business are the Canadian
dollar and the Italian lira, which has been replaced by the Euro effective
January 1, 2002. Approximately 8.8% of the Company's revenues in 2001 and
2000, 25.4% of the Company's expenses in 2001 and 24.7% of the Company's
expenses in 2000 were denominated in currencies other than the U.S. dollar.
Foreign currency exchange rate fluctuations did not have a material impact on
the financial results of the Company during 2001 and 2000.
The Company generally does not hedge its foreign currency exposure. However,
from time to time, the Company enters into foreign currency forward exchange
contracts and foreign currency option contracts for other than trading purposes
in order to manage its exposure to foreign exchange rates associated with
purchases of inventory from foreign suppliers. The terms of these contracts
are generally less than a year. Changes in the fair value of such contracts
are reported in earnings in the period the value of the contract changes. The
net gain or loss upon settlement is recorded as an adjustment to cost of sales,
while the remaining change in fair value is recorded as a component of other
income (expense). The Company did not have any foreign currency forward
exchange or option contracts outstanding at December 31, 2001. The aggregate
net gain related to the Company's foreign currency forward exchange contracts
was not material for 2001. The contract amounts and fair value of the
contracts outstanding at December 31, 2000 as well as the amounts of gains and
losses recorded during 2000 and 1999 were not material.
21
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.
22
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The table below sets forth the names, ages and titles of the persons who were
directors and executive officers of the Company as of March 28, 2002.
Name Age Position
------------------------ ----- --------------------------------------
Burton B. Staniar....... 60 Chairman of the Board
Andrew B. Cogan......... 39 Chief Executive Officer, Knoll, Inc.,
and Director
Kathleen G. Bradley..... 52 President and Chief Executive Officer,
Knoll North America, and Director
Arthur C. Graves........ 55 Senior Vice President--Sales and
Distribution
Stephen A. Grover....... 49 Senior Vice President--Operations
Carl G. Magnusson....... 62 Senior Vice President--Design
Barry L. McCabe......... 55 Senior Vice President, Treasurer and
Controller
Andrew C. McGregor...... 52 Chief Marketing and Development Officer
Patrick A. Milberger.... 45 Senior Vice President, General Counsel
and Secretary
S. David Wolfe.......... 44 Vice President--Human Resources
Jeffrey A. Harris....... 46 Director
Sidney Lapidus.......... 64 Director
Kewsong Lee............. 36 Director
John H. Lynch........... 49 Director
Henry B. Schacht........ 67 Director
Burton B. Staniar was appointed Chairman of the Board of the Company in
December 1993. Mr. Staniar served as Chief Executive Officer of the Company
from December 1993 to January 1997. Prior to that time, Mr. Staniar 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 Company and Church and Dwight Co.,
Inc. Mr. Staniar is also a director of Church and Dwight Co., Inc. and
Journal Register Company.
Andrew B. Cogan has been a director of the Company since February 1996. Mr.
Cogan was appointed Chief Executive Officer of Knoll, Inc. effective April 2001
after having served as Chief Operating Officer since December 1999, Executive
Vice President--Marketing and Product Development since August 1998 and Senior
Vice President since May 1994. Mr. Cogan held several positions in the design
and marketing group since joining the Company in 1989.
Kathleen G. Bradley has been a director of the Company since November 1999.
Ms. Bradley was appointed President and Chief Executive Officer of Knoll North
America effective April 2001. She was appointed to this position after having
served as President of the Company since December 1999, Executive Vice
President--Sales, Distribution and Customer Service since August 1998, Senior
Vice President since 1996, Divisional Vice President for Knoll's southeast
division since 1988 and regional manager for the Company's Atlanta region since
1983. She began her career with Knoll in 1979.
Arthur C. Graves was appointed Senior Vice President--Sales and Distribution in
October 1999, after serving as Divisional Vice President for Knoll's western
division since 1990. Mr. Graves began his career at Knoll in March 1989 as a
regional sales manager for the Company's San Francisco region.
Stephen A. Grover joined Knoll as Senior Vice President--Operations in May
1999. Prior to such time, Mr. Grover spent 18 years at General Electric
Company, where he held a variety of management positions, the last being
Global Manager of Magnetic Resonance Manufacturing for GE Medical Systems.
23
Carl G. Magnusson, a Canadian citizen, 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.
Barry L. McCabe was promoted to Senior Vice President, Treasurer and Controller
in January 2000, after serving as Vice President, Treasurer and Controller
since January 1995. Mr. McCabe joined the Company in August 1990 as
Controller. Mr. McCabe worked with a number of Westinghouse business units
after joining Westinghouse in 1974. Prior to such time, Mr. McCabe worked with
the public accounting firm of Deloitte Haskins & Sells.
Andrew C. McGregor joined the Company in June 2000 as Chief Marketing and
Development Officer. Prior to joining the Company, Mr. McGregor spent over 24
years at Herman Miller, Inc., where he held a variety of management and
executive positions.
Patrick A. Milberger was promoted to Senior Vice President, General Counsel
and Secretary in January 2000, after serving as Vice President, General Counsel
and Secretary. Mr. Milberger joined the Company as Vice President and General
Counsel in April 1994. Prior to joining the Company, Mr. Milberger served as
an Assistant General Counsel and in a number of other positions in the
Westinghouse Law Department, which he joined in 1986. Prior to such time, Mr.
Milberger was in private practice at Buchanan Ingersoll, P.C.
S. David Wolfe was promoted to Vice President--Human Resources in October 2000.
Mr. Wolfe joined the Company in May 2000 as Process Improvement Manager. Prior
to joining the Company, he spent seven years at General Electric Company, where
he held a variety of management positions, the last being Manager of
Installation Services for GE Medical Systems. Prior to that time, he held
management positions at Solvay America, Inc. and Atofina Chemicals, Inc.
Jeffrey A. Harris, a director of the Company since February 1996, is a Senior
Managing Director of Warburg Pincus LLC, where he has been employed since 1983.
Mr. Harris is also a director of Industri-Matematik International Corp.,
ECsoft Group plc and Spinnaker Exploration Company.
Sidney Lapidus, a director of the Company since February 1996, is a Managing
Director and Senior Advisor of Warburg Pincus LLC, where he has been employed
since 1967. Mr. Lapidus is a director of Lennar Corporation, Information
Holdings, Inc. and Radio Unica Communications Corp.
Kewsong Lee, a director of the Company since February 1996, is a Managing
Director of Warburg Pincus LLC, where he has been employed since 1992. Mr. Lee
is a director of Arch Capital Group Ltd. and Eagle Family Foods Holdings, Inc.
John H. Lynch, a director of the Company since 1994, is Chief Executive Officer
of The Lynch Group, a management consulting firm he founded. Mr. Lynch
resigned as Chief Executive Officer of the Company effective March 31, 2001.
Mr. Lynch joined the Company as Vice Chairman of the Board in May 1994. He
was subsequently elected President of the Company and in January 1997 was
elected Chief Executive Officer. From 1990 to 1994, prior to joining the
Company, Mr. Lynch was a partner in BGI, a management firm. During that time,
Mr. Lynch led the restructuring of the Westinghouse Broadcasting television
and radio stations. From 1988 to 1990, Mr. Lynch was an associate dean at the
Harvard Business School. Mr. Lynch is a director of Citizens National Bank of
New Hampshire.
Henry B. Schacht, a director of the Company since December 1998, is on leave
of absence from his position as a Managing Director of Warburg Pincus LLC,
which he joined in March 1999, and is currently serving as Chairman of Lucent
Technologies, Inc. ("Lucent"). Mr. Schacht returned to Lucent in October 2000
as Chairman and Chief Executive Officer (until January 2002), after serving as
Chairman of Avaya Inc., a spin-off of Lucent, in October 2000. Prior to
joining Warburg Pincus LLC, Mr. Schacht served as Chairman of the Board of
Lucent from April 1996 to February 1998, Chief Executive Officer of Lucent
from February 1996 to October 1997 and Chairman of the Board (1977-1995) and
Chief Executive Officer (1973-1994) of Cummins
24
Engine Company, Inc. Mr. Schacht is also a director of Agere Systems Inc.,
Avaya Inc., Aluminum Company of America (Alcoa), Johnson & Johnson Corp. and
The New York Times Company.
Except for Mr. Magnusson, all directors and executive officers of Knoll are
citizens of the U.S.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth, for the years ended December 31, 2001, 2000
and 1999, 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 in such capacities as of December 31,
2001 as well as the Former Chief Executive Officer of the Company who resigned
effective March 31, 2001 (the "Named Executive Officers").
Long-Term
Compensation
Annual Compensation Awards
---------------------------------- ------------
Other All
Annual Securities Other
Compen- Underlying Compen-
Name and Principal Position Year Salary Bonus sation (1) Options (2) sation (3)
--------------------------- ------ ---------- ---------- ---------- ------------ ----------
Burton B. Staniar.......... 2001 $200,004 $ 625,000 $ 5,320 -- $5,199
Chairman of the Board 2000 200,004 625,000 6,570 -- 9,180
1999 400,008 450,000 6,570 177,420 7,299
Andrew B. Cogan............ 2001 391,673 750,000 14,640 100,000 99
Chief Executive Officer, 2000 300,000 905,000 12,035 -- 99
Knoll, Inc. 1999 254,174 400,000 9,375 236,560 99
Kathleen G. Bradley........ 2001 391,673 750,000 23,040 100,000 5,199
President and Chief 2000 300,000 1,800,000 7,382 -- 9,180
Executive Officer, 1999 254,174 400,000 73,594 236,560 7,299
Knoll North America
Andrew C. McGregor......... 2001 250,032 300,000 66,646 -- 5,199
Chief Marketing and 2000 144,089 400,000 268,713 141,936 50
Development Officer 1999 -- -- -- -- --
Arthur C. Graves........... 2001 208,016 300,000 8,645 -- 5,199
Senior Vice President-- 2000 200,683 600,000 6,166 -- 9,180
Sales and Distribution 1999 139,704 100,000 113,624 59,140 7,299
John H. Lynch.............. 2001 100,002 -- 2,253 -- 4,105
Former Chief Executive 2000 400,008 1,450,000 6,730 -- 9,180
Officer 1999 400,008 450,000 6,730 354,840 7,299
___________________________
(1) $64,239 of the amount indicated in 1999 for Ms. Bradley and
$54,215 of the amount indicated in 1999 for Mr. Graves represents
expenses related to their relocation to the Company's headquarters
in East Greenville, Pennsylvania. The indicated amount for 1999
for Mr. Graves also includes sales commissions of $53,376. With
respect to Mr. McGregor, $58,011 of the amount indicated for 2001
and $15,510 of the amount indicated for 2000 represents expenses
related to his relocation to the Company's offices in New York,
New York. The indicated amount for 2000 for Mr. McGregor also
includes a one-time signing bonus of $250,000. All other
amounts represent benefit dollars allocated to the Named Executive
Officers pursuant to terms of the Company's employee benefit plans
in addition to compensation for vacation days that were sold in the
case of Messrs. Staniar and Cogan and Ms. Bradley ($800 in 2001 and
$1,600 in each of 2000 and 1999 for Mr.
25
Staniar; $8,400 in 2001, $7,000 in 2000 and $5,040 in 1999 for
Mr. Cogan; and $16,800 in 2001, $2,200 in 2000 and $3,000 in 1999
for Ms. Bradley).
(2) Represents the aggregate number of shares of common stock subject
to options granted to the Named Executive Officers. The amounts
presented for 2000 and 1999 reflect adjustments made to outstanding
options in February 2001 in response to an equity restructuring.
The Company's Stock Option Committee of the Board of Directors
approved certain adjustments, as permitted by antidilution
provisions under the Company's stock incentive plans, to the then
outstanding options in response to dilution created by the special
cash dividend paid on January 5, 2001. See Note 19 (Stock Plans)
of the Notes to the Consolidated Financial Statements beginning on
page F-22 for further discussion of such adjustments.
(3) Amounts in this column represent the Company's matching
contributions to the Knoll, Inc. Retirement Savings Plan and the
payment by the Company of premiums in respect of term life
insurance.
Stock Option Grants Table
The following table sets forth information concerning individual grants of
options to purchase common stock made to the Named Executive Officers during
2001.
Number of % of Total Per
Securities Options Per Share
Underlying Granted to Share Grant Date
Options Employees Exercise Expiration Present
Name Granted (1) in 2001 Price Date Value (2)
----------------------- ----------- ---------- ---------- ------------ -----------
Burton B. Staniar...... -- -- % $ -- N/A $ --
Andrew B. Cogan........ 100,000 50.0 34.50 02/06/2111 10.36
Kathleen G. Bradley.... 100,000 50.0 34.50 02/06/2111 10.36
Andrew C. McGregor..... -- -- -- N/A --
Arthur C. Graves....... -- -- -- N/A --
John H. Lynch.......... -- -- -- N/A --
_______________________
(1) Options were granted to Mr. Cogan and Ms. Bradley on February 6,
2001. Such options will vest in installments as follows: 30% on
February 6, 2002, 20% on each of February 6, 2003 and 2004 and
30% on February 6, 2005.
(2) The per share grant date present value was estimated using a
minimum value method, which does not consider volatility of the
Company's stock. Such method was deemed appropriate as the
Company's common stock was not publicly traded at the date of
grant. The present value of the options under the minimum value
method was calculated using a grant date fair value of $34.50 per
share of Knoll common stock, which was based upon an independent
appraisal, as well as the following assumptions: risk-free
interest rate of 5.1%, dividend yield of zero and an expected
life of 7 years.
26
Aggregate Stock Option Exercise Table
The following table sets forth information regarding the exercise of options
by the Named Executive Officers during 2001. The table also shows the number
and value of unexercised options that were held by the Named Executive Officers
on December 31, 2001. The values of unexercised options are based on an
independent appraised fair value of $36.00 per share of Knoll common stock on
December 31, 2001.
Number of Securities
Number of Underlying Value of Unexercised
Shares Unexercised Options In-the-Money
Acquired on Value Exercisable / Options Exercisable
Name Exercise Realized Unexercisable (1) / Unexercisable (1)
----------------------- ----------- ---------- -------------------- ----------------------
Burton B. Staniar...... N/A N/A 88,710 / 88,710 $1,093,794 / 1,093,794
Andrew B. Cogan........ N/A N/A 151,396 / 226,562 1,759,978 / 1,683,824
Kathleen G. Bradley.... N/A N/A 296,516 / 262,842 5,474,049 / 2,612,374
Andrew C. McGregor..... N/A N/A 42,581 / 99,355 525,024 / 1,225,047
Arthur C. Graves....... N/A N/A 29,570 / 29,570 364,598 / 364,598
John H. Lynch.......... N/A N/A 177,420 / 177,420 2,187,589 / 2,187,589
_______________________
(1) Reflects the February 2001 adjustments to outstanding options by
the Company's Stock Option Committee of the Board of Directors in
response to dilution created by the special cash dividend paid on
January 5, 2001. See Note 19 (Stock Plans) of the Notes to the
Consolidated Financial Statements beginning on page F-22 for
further discussion of such adjustments.
Pension Plans
The Knoll, Inc. Pension Plan (the "Company 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 1.55% of career compensation divided by twelve. Once a participant
accumulates five 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. As of
December 31, 2001, the estimated annual benefits payable upon normal retirement
under the Company Pension Plan was as follows: Mr. Staniar ($14,648); Mr. Cogan
($14,648); Ms. Bradley ($14,648); Mr. McGregor ($5,270); Mr. Graves ($14,648);
and Mr. Lynch ($14,648).
Remuneration covered by the Company Pension Plan primarily includes salary and
bonus, as set forth in the "Summary Compensation Table." As of December 31,
2001, each of Messrs. Staniar, Cogan and Graves and Ms. Bradley had 5.83 years
of credited service, Mr. McGregor had 1.57 years of credited service and
Mr. Lynch had 5.08 years of credited service.
Director Compensation
During 2001, the Company's directors did not receive compensation for service
on the Board of Directors but were reimbursed for certain expenses in
connection with attendance at Board and committee meetings.
27
Employment Arrangements
The Company entered into employment agreements with Messrs. Staniar, Cogan and
Lynch for terms that expired on March 1, 1999 and were each renewed annually
pursuant to automatic one-year extensions. The employment agreements of
Messrs. Staniar, Cogan and Lynch have since been amended and restated (in the
case of Mr. Staniar), superseded (in the case of Mr. Cogan) and terminated (in
the case of Mr. Lynch).
The employment agreement with Mr. Staniar, as amended and restated on
January 1, 2000 and amended on March 25, 2002, provides for a base salary of
$250,000 subject to annual review and a target bonus of 100% of base salary
based upon the attainment of goals set by the Board of Directors. The
employment agreement for Mr. Staniar will continue to renew automatically each
January 1, unless either party gives 60 days notice not to renew. Mr.
Staniar's agreement may be terminated at any time by the Company, but if so
terminated without "cause," or if the Company fails to renew the agreement,
the Company must pay him 100% of his then current base salary. The agreement
also contains non-compete, non-solicitation (during the term of the agreement
and for one year thereafter) and confidentiality provisions.
In connection with Mr. Lynch's decision to resign his position as Chief
Executive Officer of the Company effective March 31, 2001, the Company and Mr.
Lynch entered into an agreement on March 23, 2001 pursuant to which Mr. Lynch's
employment agreement was terminated by mutual consent as of 11:59 p.m. on
March 31, 2001 without the payment of termination compensation. Mr. Lynch
continues to serve as a member of the Company's Board of Directors.
The Company entered into employment agreements with Mr. Cogan and Ms. Bradley
on March 23, 2001. Mr. Cogan's agreement replaced and superseded his agreement
referenced above. These agreements each commenced on April 1, 2001. Each
provides for a base salary of $400,000 subject to annual review and a target
annual bonus of 100% of base salary based upon the attainment of goals set by
the Board of Directors. The employment agreements for Mr. Cogan and Ms.
Bradley will continue to renew automatically each April 1 unless either party
gives 60 days notice of his, her or its intention not to renew. The agreements
may be terminated by the Company at any time, but if so terminated without
"cause," or if the Company fails to renew the agreements, the Company must pay
the employee termination compensation. In the case of Mr. Cogan, the
termination compensation is 200% of his then current base salary plus the
average of the annual bonuses paid to him for the last two completed fiscal
years preceding the fiscal year of termination. In the case of Ms. Bradley,
the termination compensation is 100% of her then current base salary plus the
average of the annual bonuses paid to her for the last two completed fiscal
years preceding the fiscal year of termination. The agreements also contain
non-compete, non-solicitation (during the term of the agreement and for two
years thereafter for Mr. Cogan and during the term of the agreement and for
one year thereafter for Ms. Bradley) and confidentiality provisions.
The Company entered into a letter of agreement, dated June 6, 2000, with Mr.
McGregor. This agreement sets forth the one-time signing bonus, initial
starting salary, target bonus for the year 2000 and stock options granted to
Mr. McGregor. This agreement provides that if Mr. McGregor is terminated by
the Company without "cause," he will receive $250,000 as severance in complete
satisfaction of any and all claims against Knoll. For 2002, Mr. McGregor's
base salary is $250,032, and his target bonus amount is $250,000, based upon
the attainment of certain goals set by the Company. This bonus is subject to
certain conditions, including approval of the Company's Board of Directors.
In 1999, Mr. Graves was promoted to Senior Vice President--Sales and
Distribution. For 2002, Mr. Graves' base salary is $208,016, and his target
bonus amount is $250,000, based upon the attainment of certain goals set by
the Company. This bonus is subject to certain conditions, including approval
of the Company's Board of Directors.
28
The Named Executive Officers and the Company have entered into certain stock
option agreements that contain provisions regarding change in control of the
Company. The agreements provide that upon a Change in Control, as defined
therein, 100% of the options, to the extent not previously exercised, shall
become fully vested and exercisable.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the Board of Directors was comprised of Messrs.
Harris, Lapidus and Lynch from November 4, 1999 until May 7, 2001 and Messrs.
Harris, Lapidus, Lynch and Cogan and Ms. Bradley on and after May 7, 2001.
Mr. Cogan abstained from actions of the Compensation Committee regarding the
2001 incentive compensation for himself, and Ms. Bradley abstained from actions
regarding the 2001 incentive compensation for herself.
Options are granted under the Company's stock incentive plans at the
discretion of the Stock Option Committee of the Board of Directors. This
committee was comprised of Messrs. Harris, Lapidus and Lynch from November 4,
1999 until May 7, 2001 and Messrs. Harris, Lapidus, Lynch and Cogan and Ms.
Bradley on and after May 7, 2001. On February 6, 2001, the Stock Option
Committee granted 100,000 options to each of Mr. Cogan and Ms. Bradley.
Except for Messrs. Staniar, Cogan and Lynch and Ms. Bradley, no member of the
Board of Directors is or has been an officer or employee of the Company.
During the year ended December 31, 2001, no executive officer of the Company
served on the board of directors or compensation committee of any entity
(other than the Company) whose executive officers were a director or member of
the compensation committee of Knoll.
29
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's common stock, as of March 28, 2002, by (i) each
person known by the Company to own beneficially more than 5% of the
outstanding common stock, (ii) each of the Company's directors, (iii) each of
the Named Executive Officers of the Company, and (iv) all directors and
executive officers of the Company, as a group (15 persons). Except as set
forth in the table and Notes 4, 7 and 8 to the table, the business address of
each person is 1235 Water Street, East Greenville, PA 18041. As described in
the notes to the table, voting and/or dispositive power with respect to
certain common stock is shared by the named individuals or entities. In these
cases, such shares are shown as beneficially owned by each of those sharing
voting and/or dispositive power.
Number of Shares of
Beneficial Owner (1) Common Stock (2) Percentage
---------------------------------- ------------------- --------------
Warburg, Pincus & Co. (3)
466 Lexington Avenue
New York, New York 10017...... 20,981,956 90.5%
Burton B. Staniar................. 753,949 3.2
Andrew B. Cogan................... 376,518 1.6
Kathleen G. Bradley............... 446,424 1.9
Andrew C. McGregor................ 42,581 *
Arthur C. Graves.................. 57,826 *
John H. Lynch (4)................. 633,864 2.7
Jeffrey A. Harris (5) (7)......... 20,981,956 90.5
Sidney Lapidus (5) (7)............ 20,981,956 90.5
Kewsong Lee (5) (7)............... 20,981,956 90.5
Henry B. Schacht (5) (6) (8)...... 21,005,612 90.6
All directors and executive
officers as a group
(15 persons).................... 23,627,418 97.3
__________________________
* Less than 1%.
(1) Percentages are calculated pursuant to Rule 13d-3 under the
Exchange Act. Percentage calculations assume, for each person and
group, that all shares that may be acquired by such person or group
pursuant to options currently exercisable or that become
exercisable within 60 days following March 28, 2002 are outstanding
for the purpose of computing the percentage of common stock owned
by such person or group. However, those unissued shares of common
stock described above are not deemed to be outstanding for
calculating the percentage of common stock owned by any other
person. Except as otherwise indicated, the persons in this table
have sole voting and investment power with respect to all shares
of common stock 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. The number
of shares outstanding for these purposes as of March 28, 2002 was
23,174,029 shares of common stock.
(2) Excludes options to purchase 138,710; 296,562; 149,355; 79,570;
177,420; 5,914; 288,280 and 1,410,550 shares of common stock held
by Messrs. Staniar, Cogan, McGregor, Graves, Lynch and Schacht,
Ms. Bradley and all directors and executive officers as a group,
respectively, that will not vest within 60 days of March 28, 2002.
30
(3) Warburg directly owns 20,709,922 shares of common stock and
Warburg, Pincus & Co. ("Warburg, Pincus") directly owns an
additional 272,034 shares. The sole general partner of Warburg is
Warburg, Pincus. Warburg Pincus LLC manages Warburg. The members
of Warburg Pincus LLC are substantially the same as the partners of
Warburg, Pincus. Lionel I. Pincus is the managing partner of
Warburg, Pincus and the managing member of Warburg Pincus LLC and
may be deemed to control both Warburg, Pincus and Warburg Pincus
LLC. Jeffrey A. Harris, Sidney Lapidus, Kewsong Lee and Henry B.
Schacht (who is currently on unpaid leave from Warburg Pincus LLC),
directors of the Company, are Senior Managing Director (in the
case of Mr. Harris), Managing Director and Senior Advisor (in the
case of Mr. Lapidus) and Managing Directors (in the case of Messrs.
Lee and Schacht) of Warburg Pincus LLC and general partners of
Warburg, Pincus. As such, Messrs. Harris, Lapidus, Lee and Schacht
may be deemed to have an indirect pecuniary interest (within the
meaning of Rule 16a-1 under the Exchange Act) in an indeterminate
portion of the shares beneficially owned by Warburg and Warburg,
Pincus. See Note 5 below.
(4) The business address of Mr. Lynch is 889 Elm Street, Manchester,
New Hampshire 03101.
(5) 20,709,922 and 272,034 of the shares indicated as owned by Messrs.
Harris, Lapidus, Lee and Schacht are owned directly by Warburg and
Warburg, Pincus, respectively, and are included because of the
affiliation of such persons with Warburg and Warburg, Pincus.
Messrs. Harris, Lapidus, Lee and Schacht disclaim "beneficial
ownership" of these shares within the meaning of Rule 13d-3 under
the Exchange Act. See Note 3 above.
(6) Includes 23,656 shares of common stock underlying stock options
granted to Mr. Schacht on December 2, 1998, as adjusted in
February 2001, in connection with his appointment as a director of
the Company.
(7) The business address of each of Messrs. Harris, Lapidus and Lee is
466 Lexington Avenue, New York, New York 10017.
(8) The business address of Mr. Schacht is 600 Mountain Avenue,
Murray Hill, New Jersey 07974.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Stockholders Agreement
On November 4, 1999, Warburg and four senior members of management (each a
"Holder" and collectively, the "Holders") and the Company entered into an
Amended and Restated Stockholders Agreement (the "Stockholders Agreement")
which governs certain matters related to corporate governance and registration
of shares of common stock ("Registrable Securities") held by such Holders
(other than shares acquired pursuant to the Company's stock incentive plans).
Pursuant to the Stockholders Agreement, Warburg is entitled to request at any
time that the Company file a registration statement under the Securities Act
covering the sale of shares of common stock with an aggregate public offering
price of at least $25 million, 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 or other securities included in the registration. The
Company may defer the registration for 120 days if it believes
31
that it would be seriously detrimental to the Company and its stockholders 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 such shares with an aggregate price to the public of more than $5
million, 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. The Company may
defer the registration for 120 days if it believes that it would be seriously
detrimental to the Company and its stockholders for such registration statement
to be filed.
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
Holders will be borne by the Company.
The Stockholders Agreement provides that the Board of Directors of the Company
shall initially be comprised of Messrs. Staniar, Cogan, Harris, Lapidus, Lee,
Lynch, Metz and Schacht, and Ms. Bradley. Pursuant to the Stockholders
Agreement, Warburg and the other stockholders who are a party thereto (who
hold in the aggregate a majority of the outstanding shares of common stock)
have agreed to nominate and use their best efforts to have elected that
number of persons designated by Warburg as shall constitute a majority of the
Board (or, at Warburg's irrevocable election, as shall constitute one director
less than a majority of the Board).
Stockholders Agreement (Common Stock Under Stock Incentive Plans)
In connection with the issuance of 4,144,030 restricted shares of common stock
pursuant to the Company's 1996 stock incentive plan, Warburg and the Company
also entered into a separate Stockholders Agreement with all of the Company's
then executive officers and other members of the Company's management. This
Stockholders Agreement was amended and restated as of November 4, 1999.
Pursuant to this agreement, persons deemed to be "insiders" within the
meaning of Section 16 of the Exchange Act have 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
an initial public offering, upon 30 days prior written notice to the Board of
Directors. The restrictions on transfer will terminate after an initial
public offering when Warburg owns less than 10% of the outstanding shares of
common stock. In addition, pursuant to this agreement, 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 certain vested shares of common stock received by
management pursuant to the 1996 stock incentive plan, subject to certain
limited exceptions. In addition, management may request unlimited
registrations of at least $5 million 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. The Company may defer the registration for 120 days if it
believes that it would be seriously detrimental to the Company and its
stockholders for such registration statement to be filed.
Substantially all individuals who were granted options under the Company's
stock incentive plans have also agreed to be bound by the terms of the
Stockholders Agreement (Common Stock Under Stock Incentive Plans).
32
Other
During the year ended December 31, 2001, the Company paid approximately
$395,000 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.
33
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of the report:
(1) CONSOLIDATED FINANCIAL STATEMENTS
The Consolidated Financial Statements of the Company are listed in
the Table of Contents for the Financial Statements beginning on page
F-1 of this Form 10-K.
(2) FINANCIAL STATEMENT SCHEDULES
Financial Statement Schedule II-Valuation and Qualifying Accounts is
filed with this Form 10-K on page S-1 of this Form 10-K. All other
schedules for which provision is made in the applicable regulation of
the Commission are not required under the related instructions or are
inapplicable and therefore have been omitted.
(3) EXHIBITS
Exhibit
Number Description
---------- ---------------------------------------------------------------------------
2++ Amended and Restated Agreement and Plan of Merger by and between Warburg,
Pincus Ventures, L.P. and Knoll, Inc., dated as of July 29, 1999.
3.1*** Amended and Restated Certificate of Incorporation of the Company.
3.2*** Amended and Restated By-Laws of the Company.
10.1* Stock Purchase Agreement, dated as of December 20, 1995, by and between
Westinghouse and T.K.G. Acquisition Corp.
10.2+++ Credit Agreement, dated as of October 20, 1999, by and among the Company,
the Guarantors (as defined therein), the Lenders (as defined therein),
Bank of America, N.A., as Administrative Agent, the Chase Manhattan Bank,
as Syndication Agent, and Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated, as Documentation Agent.
10.3+++++ First Amendment to Credit Agreement, dated as of December 20, 2000, by and
among the Company, the Guarantors (as defined therein), the Lenders (as
defined therein) party thereto, and Bank of America, N.A., as
Administrative Agent.
10.4* Indenture, dated as of February 29, 1996, by and among the Company, T.K.G.
Acquisition Corp., T.K.G. Acquisition Sub, Inc., The Knoll Group, Inc.,
Knoll North America, Inc., Spinneybeck Enterprises, Inc. and Knoll
Overseas, Inc., as guarantors, and IBJ Schroder Bank & Trust Company, as
trustee, relating to $165,000,000 principal amount of 10.875% Senior
Subordinated Notes due 2006, including form of Initial Global Note.
10.5* Supplemental Indenture, dated as of February 29, 1996, by and among the
Company, as successor to T.K.G. Acquisition Sub, Inc., the Guarantors (as
defined therein), and IBJ Schroder Bank & Trust Company, as trustee,
relating to $165,000,000 principal amount of 10.875% Senior Subordinated
Notes due 2006, including form of Initial Global Note.
10.6** Supplemental Indenture No. 2, dated as of March 14, 1997, by and among the
Company, the Guarantors (as defined therein), and IBJ Schroder Bank &
Trust Company, as trustee, relating to $165,000,000 principal amount of
10.875% Senior Subordinated Notes due 2006, including form of Initial
Global Note.
10.7+ Letter Agreement between Oak Hill Securities Fund, L.P. and the Company,
dated August 13, 1999.
34
Exhibit
Number Description
---------- ---------------------------------------------------------------------------
10.8***** Supplemental Indenture No. 3, dated as of November 4, 1999, by and among
the Company, the Guarantors (as defined therein), and The Bank of New York,
as trustee, relating to the Company's 10.875% Senior Subordinated Notes
due 2006.
10.9++++ Amended and Restated Employment Agreement, dated as of January 1, 2000,
between the Company and Burton B. Staniar.
10.10 Amendment to Employment Agreement, dated as of March 25, 2002, between the
Company and Burton B. Staniar.
10.11+++++ Employment Agreement, dated as of March 23, 2001, between the Company and
Andrew B. Cogan.
10.12+++++ Employment Agreement, dated as of March 23, 2001, between the Company and
Kathleen G. Bradley.
10.13 Letter Agreement, dated as of June 6, 2000, between the Company and
Andrew C. McGregor.
10.14** Employment Agreement, dated as of February 29, 1996, between T.K.G.
Acquisition Corp. and John H. Lynch.
10.15+++++ Letter Agreement, dated as of March 23, 2001, between the Company and
John H. Lynch.
10.16++++ Amended and Restated Stockholders Agreement, dated as of November 4, 1999,
among the Company, Warburg, Pincus Ventures, L.P., and the signatories
thereto.
10.17++++ Amended and Restated Stockholders Agreement (Common Stock Under Stock
Incentive Plans), dated as of November 4, 1999, among the Company,
Warburg, Pincus Ventures, L.P., and the signatories thereto.
10.18++++ Amended and Restated Knoll, Inc. 1996 Stock Incentive Plan.
10.19++++ Amended and Restated Knoll, Inc. 1997 Stock Incentive Plan.
10.20++++ Knoll, Inc. 1999 Stock Incentive Plan.
10.21++++++ Form of Non-Qualified Stock Option Agreement under the Knoll, Inc. 1996
Stock Incentive Plan, entered into by the Company and certain executive
officers.
10.22++++++ Form of Non-Qualified Stock Option Agreement under the Knoll, Inc. 1997
Stock Incentive Plan, entered into by the Company and certain executive
officers.
10.23++++ Form of Non-Qualified Stock Option Agreement under the Knoll, Inc. 1999
Stock Incentive Plan, entered into by the Company and certain executive
officers.
21** Subsidiaries of the Registrant.
(b) Current Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the three months
ended December 31, 2001.
35
__________________________________________
* Incorporated by reference to the Company's Registration Statement on
Form S-4 (File No. 333-2972), which was declared effective by the
Commission on June 12, 1996.
** Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996.
*** Incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 333-23399), which was declared effective by the
Commission on May 9, 1997.
**** Incorporated by reference to the Company's Annual Report on Form 10-K,
and the amendments thereto, for the year ended December 31, 1998.
***** Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1999.
+ Incorporated by reference to the Company's Amendment No. 1 to
Schedule 13E-3, which was filed with the Commission on September 10,
1999.
++ Incorporated by reference to the Company's Definitive Proxy Statement
on Schedule 14A, which was filed with the Commission on September 30,
1999.
+++ Incorporated by reference to the Company's Form 8-K dated November 4,
1999, which was filed with the Commission on November 5, 1999.
++++ Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1999.
+++++ Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 2000.
++++++ See Exhibit 10.23. Exhibit is substantially identical to
Exhibit 10.23.
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized, on this
29th day of March 2002.
KNOLL, INC.
By: /s/ Burton B. Staniar
-----------------------
Burton B. Staniar
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report on Form 10-K has been signed by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
/s/ Burton B. Staniar Chairman of the Board March 29, 2002
- --------------------------
Burton B. Staniar
/s/ Andrew B. Cogan Chief Executive Officer, March 29, 2002
- -------------------------- Knoll, Inc. and Director
Andrew B. Cogan (Principal Executive Officer)
/s/ Kathleen G. Bradley President and Chief Executive March 29, 2002
- -------------------------- Officer, Knoll North America
Kathleen G. Bradley and Director
/s/ Barry L. McCabe Controller March 29, 2002
- -------------------------- (Principal Accounting Officer)
Barry L. McCabe
/s/ Jeffrey A. Harris Director March 29, 2002
- --------------------------
Jeffrey A. Harris
/s/ Sidney Lapidus Director March 29, 2002
- --------------------------
Sidney Lapidus
/s/ Kewsong Lee Director March 29, 2002
- --------------------------
Kewsong Lee
/s/ John H. Lynch Director March 29, 2002
- --------------------------
John H. Lynch
/s/ Henry B. Schacht Director March 29, 2002
- --------------------------
Henry B. Schacht
37
KNOLL, INC.
TABLE OF CONTENTS FOR THE FINANCIAL STATEMENTS
Page
------
Report of Independent Auditors........................................ F-2
Consolidated Balance Sheets at December 31, 2001 and 2000............. F-3
Consolidated Statements of Operations for the Years Ended
December 31, 2001, 2000 and 1999.................................... F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001, 2000 and 1999.................................... F-5
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
for the Years Ended December 31, 2001, 2000 and 1999................ F-6
Notes to the Consolidated Financial Statements........................ F-7
Financial Statement Schedule II--Valuation and Qualifying Accounts.... S-1
F-1
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Knoll, Inc.
We have audited the accompanying consolidated balance sheets of Knoll, Inc. as
of December 31, 2001 and 2000, and the related consolidated statements of
operations, changes in stockholders' equity (deficit), and cash flows for each
of the three years in the period ended December 31, 2001. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Knoll, Inc. at
December 31, 2001 and 2000, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
2001, in conformity with accounting principles generally accepted in the
United States. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
As explained in Note 2 to the consolidated financial statements, effective
January 1, 2001, the Company changed its method of accounting for derivatives.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
January 31, 2002, except for the
third paragraph of Note 9, as to
which the date is March 27, 2002
F-2
KNOLL, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
(Dollars In Thousands, Except Per Share Data)
2001 2000
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents........................ $ 32,213 $ 22,339
Customer receivables, net........................ 100,286 132,183
Inventories...................................... 60,691 79,203
Deferred income taxes............................ 23,669 22,236
Prepaid and other current assets................. 4,436 7,421
--------- ---------
Total current assets......................... 221,295 263,382
Property, plant and equipment, net............... 175,038 179,629
Intangible assets, net........................... 237,105 245,879
Other noncurrent assets.......................... 5,565 6,240
--------- ---------
Total Assets................................. $ 639,003 $ 695,130
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current maturities of long-term debt............. $ 62,558 $ 31,250
Accounts payable................................. 59,923 85,795
Income taxes payable............................. 4,817 5,668
Other current liabilities........................ 89,977 107,991
--------- ---------
Total current liabilities.................... 217,275 230,704
Dividend payable (Note 10)....................... -- 220,339
Long-term debt................................... 484,966 394,505
Deferred income taxes............................ 25,656 24,675
Postretirement benefits other than pension....... 19,612 18,016
Other noncurrent liabilities..................... 13,812 11,266
--------- ---------
Total liabilities............................ 761,321 899,505
--------- ---------
Stockholders' deficit:
Common stock, $0.01 par value; authorized
100,000,000 shares; 23,181,829 shares issued
and outstanding (net of 24,300 treasury
shares) in 2001 and 23,193,629 shares issued
and outstanding (net of 12,500 treasury
shares) in 2000................................ 232 232
Additional paid-in-capital....................... 3,188 3,591
Unearned stock grant compensation................ -- (2)
Retained deficit................................. (108,189) (195,379)
Accumulated other comprehensive loss............. (17,549) (12,817)
--------- ---------
Total stockholders' deficit.................. (122,318) (204,375)
--------- ---------
Total Liabilities and Stockholders' Deficit.. $ 639,003 $ 695,130
========= =========
See accompanying notes to the consolidated financial statements.
F-3
KNOLL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(In Thousands)
2001 2000 1999
------------ ------------ ------------
Sales.............................. $985,388 $1,163,477 $984,511
Cost of sales...................... 594,446 682,421 593,442
-------- ---------- --------
Gross profit....................... 390,942 481,056 391,069
Selling, general and
administrative expenses.......... 195,532 243,885 206,919
Restructuring charge (Note 15)..... 1,655 -- --
-------- ---------- --------
Operating income................... 193,755 237,171 184,150
Interest expense................... 42,101 44,437 21,611
Recapitalization expense (Note 3).. -- -- 6,356
Other income (expense), net........ (3,670) 3,026 (670)
-------- ---------- --------
Income before income tax expense
and extraordinary item........... 147,984 195,760 155,513
Income tax expense................. 60,794 79,472 66,351
-------- ---------- --------
Income before extraordinary item... 87,190 116,288 89,162
Extraordinary loss on early
extinguishment of debt, net
of taxes (Note 9)................ -- -- 10,801
-------- ---------- --------
Net income......................... $ 87,190 $ 116,288 $ 78,361
======== ========== ========
See accompanying notes to the consolidated financial statements.
F-4
KNOLL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(In Thousands)
2001 2000 1999
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................... $ 87,190 $ 116,288 $ 78,361
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation....................... 27,735 25,843 25,135
Amortization of intangible assets.. 8,228 8,106 7,873
Recapitalization expense........... -- -- 6,356
Extraordinary loss, net of taxes... -- -- 10,801
Other noncash items................ 5,302 351 7,748
Changes in assets and liabilities:
Customer receivables........... 32,019 33,033 (31,134)
Inventories.................... 18,150 1,958 (6,364)
Accounts payable............... (25,766) 14,197 13,848
Current and deferred income
taxes........................ 757 10,339 13,715
Other current assets........... 993 (2,028) (166)
Other current liabilities...... (22,780) 15,646 2,038
Other noncurrent assets and
liabilities.................. 2,319 (1,022) (224)
--------- --------- ---------
Cash provided by operating activities.... 134,147 222,711 127,987
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures..................... (25,020) (24,097) (25,095)
Proceeds from sale of assets............. 71 139 114
--------- --------- ---------
Cash used in investing activities........ (24,949) (23,958) (24,981)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from (repayment of) revolving
credit facility, net................... 153,000 (167,000) 120,000
Proceeds from long-term debt............. -- -- 325,000
Repayment of long-term debt.............. (31,250) (17,500) (3,750)
Payment of debt issuance costs........... -- -- (7,864)
Payment of fees to amend debt
agreements............................. -- (682) (12,870)
Payment of dividend...................... (220,339) -- --
Net proceeds from issuance of stock...... -- -- 4,746
Purchase of common stock................. (403) (322) (28,703)
Payment of merger consideration.......... -- -- (496,682)
Payment of recapitalization costs........ -- (230) (8,843)
--------- --------- ---------
Cash used in financing activities........ (98,992) (185,734) (108,966)
--------- --------- ---------
Effect of exchange rate changes on cash
and cash equivalents................... (332) (1,465) (720)
--------- --------- ---------
Increase (decrease) in cash and cash
equivalents............................ 9,874 11,554 (6,680)
Cash and cash equivalents at beginning
of year................................ 22,339 10,785 17,465
--------- --------- ---------
Cash and cash equivalents at end
of year................................ $ 32,213 $ 22,339 $ 10,785
========= ========= =========
See accompanying notes to the consolidated financial statements.
F-5
KNOLL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(Dollars In Thousands)
Unearned Accumulated Total
Additional Stock Retained Other Stockholders'
Common Paid-In- Grant Earnings Comprehensive Equity
Stock Capital Compensation (Deficit) Loss (Deficit)
------ ---------- ------------ ---------- -------------- -------------
Balance at December 31, 1998
(41,799,499 shares)........... $ 418 $ 181,792 $(712) $ 170,986 $ (8,634) $ 343,850
---------
Net income...................... -- -- -- 78,361 -- 78,361
Foreign currency
translation adjustment........ -- -- -- -- 1,795 1,795
---------
Comprehensive income............ 80,156
---------
Shares issued for consideration:
Exercise of stock options,
including tax benefit of
$674 (244,798 shares)....... 2 4,572 -- -- -- 4,574
Other (40,972 shares)......... -- 846 -- -- -- 846
Shares contributed to the
401(k) Plan (150,100 shares).. 2 4,201 -- -- -- 4,203
Purchase of common stock
(1,188,000 shares)............ (12) (28,691) -- -- -- (28,703)
Shares forfeited under
stock incentive plan
(18,837 shares)............... -- -- 1 -- -- 1
Merger consideration for shares
canceled (17,738,634 shares).. (177) (155,830) -- (340,675) -- (496,682)
Recapitalization costs.......... -- (2,717) -- -- -- (2,717)
Earned stock grant
compensation.................. -- -- 278 -- -- 278
----- --------- ----- --------- -------- ---------
Balance at December 31, 1999.... 233 4,173 (433) (91,328) (6,839) (94,194)
---------
Net income...................... -- -- -- 116,288 -- 116,288
Foreign currency
translation adjustment........ -- -- -- -- (5,978) (5,978)
---------
Comprehensive income............ 110,310
---------
Purchase of common stock
(11,500 shares)............... -- (322) -- -- -- (322)
Shares forfeited under
stock incentive plan
(84,769 shares)............... (1) (260) 261 -- -- --
Cash dividend ($9.50 per share). -- -- -- (220,339) -- (220,339)
Earned stock grant
compensation.................. -- -- 170 -- -- 170
----- --------- ----- --------- -------- ---------
Balance at December 31, 2000.... 232 3,591 (2) (195,379) (12,817) (204,375)
---------
Net income...................... -- -- -- 87,190 -- 87,190
Foreign currency
translation adjustment........ -- -- -- -- (4,732) (4,732)
---------
Comprehensive income............ 82,458
---------
Purchase of common stock
(11,800 shares)............... -- (403) -- -- -- (403)
Earned stock grant
compensation.................. -- -- 2 -- -- 2
----- --------- ----- --------- -------- ---------
Balance at December 31, 2001
(23,181,829 shares)........... $ 232 $ 3,188 $ -- $(108,189) $(17,549) $(122,318)
===== ========= ===== ========= ======== =========
See accompanying notes to the consolidated financial statements.
F-6
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
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.
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 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.
Cash and Cash Equivalents
Cash and cash equivalents includes cash on hand and investments with
maturities of three months or less at the date of purchase.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
Property, Plant, Equipment and Depreciation
Property, plant and equipment are recorded at cost. Depreciation is
computed using the straight-line method over the estimated useful lives
of the assets. The useful lives are as follows: 45 years for buildings
and 3 to 12 years for machinery and equipment.
Intangible Assets
Intangible assets consist of goodwill, trademarks and deferred financing
fees. Goodwill is recorded at the amount by which cost exceeds the net
assets of acquired businesses, and all other intangible assets are
recorded at cost. Goodwill and trademarks are amortized under the
straight-line method over 40 years, while deferred financing fees are
amortized over the life of the respective debt.
Management reviews the carrying value of goodwill and other intangibles
on an ongoing basis. When factors indicate that an intangible asset may
be impaired, management uses an estimate of the undiscounted future cash
flows over the remaining life of the asset in measuring whether the
intangible asset is recoverable. If such an analysis indicates that
impairment has in fact occurred, the book value of the intangible asset
is written down to its estimated fair value.
Revenue Recognition
Revenue from the sale of products is recognized upon transfer of title to
the customer, which usually occurs at the time of shipment.
F-7
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Shipping and Handling
Amounts billed to customers for shipping and handling of products are
classified as sales in the consolidated statements of operations. Costs
incurred by the Company for shipping and handling are classified as
cost of sales.
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.
Derivative Financial Instruments
The Company adopted Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as
amended ("SFAS 133"), on January 1, 2001. The adoption of SFAS 133 did
not have a material effect on the earnings or financial position of the
Company.
On the date a derivative instrument is entered into, the Company
designates the derivative as (i) a fair value hedge, (ii) a cash flow
hedge, (iii) a hedge of a net investment in a foreign operation or
(iv) a risk management instrument not eligible for hedge accounting. The
Company recognizes all derivatives on the balance sheet at fair value.
All derivatives in which the Company was engaged as of January 1, 2001
and December 31, 2001 and during the year then ended were classified as
risk management instruments not eligible for hedge accounting. Changes
in the fair value of derivatives classified as risk management instruments
not eligible for hedge accounting are reported in earnings in the period
the value of the contract changes.
Foreign Currency Translation
Results of foreign operations are translated into U.S. dollars using
average exchange rates during the period, while assets and liabilities are
translated into U.S. dollars using exchange rates in effect at the balance
sheet date. The resulting translation adjustments are recorded in, and
are the only component of, accumulated other comprehensive loss.
Transaction gains and losses resulting from exchange rate changes on
transactions denominated in currencies other than the functional currency
are included in income in the year in which the change occurs.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), encourages entities to record
compensation expense for stock-based employee compensation plans at fair
value but provides the option of measuring compensation expense using the
intrinsic value method prescribed in Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). The
Company accounts for stock-based compensation in accordance with APB 25.
Pro forma results of operations as if SFAS 123 had been used to account
for stock-based compensation plans are presented in Note 19.
F-8
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Use of Estimates
The preparation of the consolidated financial statements in conformity
with accounting principles generally accepted in the U.S. 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 results
may differ from such estimates.
Reclassifications
Certain amounts for 2000 in the notes to the consolidated financial
statements have been reclassified to conform to the 2001 presentation.
Accounting Pronouncements Pending Adoption as of December 31, 2001
In June 2001, the Financial Accounting Standards Board ("FASB") approved
Statements of Financial Accounting Standards No. 141, "Business
Combinations" ("SFAS 141"), and No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). SFAS 141 requires that all business combinations
be accounted for using the purchase method and requires that intangible
assets that meet certain criteria be recognized apart from goodwill.
SFAS 142 prescribes that goodwill and intangible assets with indefinite
useful lives should no longer be amortized to earnings, but instead
should be reviewed for impairment on at least an annual basis. Intangible
assets with finite lives will continue to be amortized over their
estimated useful lives.
The Company adopted SFAS 141 and SFAS 142 on January 1, 2002. The
adoption of these statements did not result in any changes to the
classification of the Company's goodwill and other intangible assets as
they are presented at December 31, 2001. The Company assigned an
indefinite useful life to its trademarks effective January 1, 2002.
Application of the nonamortization provisions of SFAS 142, as they relate
to the Company's goodwill and trademarks, is expected to result in an
increase in income before taxes of approximately $6,781,000 in 2002.
The Company will perform impairment tests of its trademarks and goodwill
as of January 1, 2002. Knoll has not yet determined what the effect of
these tests will be on the earnings and financial position of the Company.
The impairment test of the trademarks will be completed during the first
quarter ended March 31, 2002. The Company expects to perform the first
step of a two-step goodwill impairment test, as prescribed in SFAS 142,
during the second quarter ended June 30, 2002. The first step of the
goodwill impairment test is a screen for potential impairment, while the
second step measures the amount of the impairment, if any. Any impairment
loss resulting from these transitional impairment tests will be reflected
as the cumulative effect of a change in accounting principle in the
Company's interim financial statements for the first quarter of 2002,
regardless of the interim period in which the measurement of the loss is
completed.
F-9
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. RECAPITALIZATION (MERGER)
Pursuant to an Agreement and Plan of Merger dated as of June 21, 1999
(as amended on July 29, 1999), the Company consummated a recapitalization
(merger) transaction on November 4, 1999 whereby a newly formed entity,
which was organized by Warburg, Pincus Ventures, L.P. ("Warburg"), was
merged with and into Knoll, with Knoll continuing as the surviving
corporation. As a result of the merger, 17,738,634 shares of common
stock held by the public stockholders of Knoll immediately prior to the
merger were converted into the right to receive $28.00 per share in cash
and were canceled. Furthermore, the Company's common stock ceased to be
listed on the New York Stock Exchange, and the registration of the
Company's securities under the Securities Exchange Act of 1934 was
terminated.
In connection with the merger, the Company entered into an agreement on
August 13, 1999 with the holder of a majority of its 10.875% Senior
Subordinated Notes due 2006 ("Senior Subordinated Notes"). Under the
agreement, the majority holder consented to the merger and the related
transactions, and the Company agreed to pay such holder (and other holders
of the Senior Subordinated Notes who also consented), promptly after
completion of the merger, $120 per $1,000 principal amount of the Senior
Subordinated Notes owned by the holder. All other holders also provided
their consent. See Note 9 for further discussion of this transaction.
The merger and related transactions were accounted for as a leveraged
recapitalization. The historical accounting bases of Knoll's assets and
liabilities were retained subsequent to the transactions. In connection
with the merger and related transactions, the Company incurred
recapitalization costs and financing costs of $9,073,000 and $20,734,000,
respectively. Of the recapitalization costs, $6,356,000 was expensed and
$2,717,000, which represents investor direct acquisition costs, was
recorded as a reduction of additional paid-in-capital. Of the financing
costs, $7,864,000 was capitalized as deferred financing fees and the
remaining $12,870,000, which represents the total consent fee related to
the Senior Subordinated Notes, was recorded as a component of the
extraordinary loss on early extinguishment of debt. The Company funded
the merger and related fees and expenses with borrowings under a new
senior credit agreement that was entered into in connection with the
merger. See Note 9 for further discussion of such credit agreement and
the extraordinary loss noted above.
4. CUSTOMER RECEIVABLES
Customer receivables are presented net of an allowance for doubtful
accounts of $7,450,000 and $6,682,000 at December 31, 2001 and 2000,
respectively. Management performs ongoing credit evaluations of its
customers and generally does not require collateral. As of December 31,
2001 and 2000, the U.S. government represented approximately 21.2% and
13.7%, respectively, of gross customer receivables.
F-10
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INVENTORIES
2001 2000
---------- ----------
(In Thousands)
Raw materials............................... $34,044 $47,236
Work in process............................. 8,190 10,923
Finished goods.............................. 18,457 21,044
------- -------
Inventories................................. $60,691 $79,203
======= =======
6. PROPERTY, PLANT AND EQUIPMENT
2001 2000
---------- ----------
(In Thousands)
Land and buildings.......................... $ 73,274 $ 70,740
Machinery and equipment..................... 227,365 213,180
Construction in progress.................... 14,730 14,908
--------- ---------
Property, plant and equipment............... 315,369 298,828
Accumulated depreciation.................... (140,331) (119,199)
--------- ---------
Property, plant and equipment, net.......... $ 175,038 $ 179,629
========= =========
7. INTANGIBLE ASSETS
2001 2000
---------- ----------
(In Thousands)
Goodwill.................................... $ 51,663 $ 52,278
Trademarks.................................. 219,900 219,900
Deferred financing fees..................... 8,546 8,546
-------- --------
Intangible assets........................... 280,109 280,724
Accumulated amortization.................... (43,004) (34,845)
-------- --------
Intangible assets, net...................... $237,105 $245,879
======== ========
8. OTHER CURRENT LIABILITIES
2001 2000
---------- ----------
(In Thousands)
Accrued employee compensation............... $41,145 $ 62,215
Accrued product warranty.................... 8,113 9,748
Other....................................... 40,719 36,028
------- --------
Other current liabilities................... $89,977 $107,991
======= ========
F-11
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INDEBTEDNESS
The Company's long-term debt is summarized as follows:
2001 2000
---------- ----------
(In Thousands)
10.875% Senior Subordinated Notes due 2006.. $107,250 $107,250
Term loans, variable rate (2.815% at
December 31, 2001 and 7.355% at
December 31, 2000), due through 2005...... 272,500 303,750
Revolving loans, variable rate (2.925% -
4.75% at December 31, 2001 and 7.355% -
9.5% at December 31, 2000), due 2005...... 167,000 14,000
Other....................................... 774 755
-------- --------
547,524 425,755
Less current maturities..................... (62,558) (31,250)
-------- --------
Long-term debt.............................. $484,966 $394,505
======== ========
Senior Subordinated Notes
The Senior Subordinated Notes are unsecured and are guaranteed by each
existing and future wholly owned domestic subsidiary of Knoll, Inc.
However, if the Company is unable to satisfy all or any portion of its
obligations with respect to the Senior Subordinated Notes, it is unlikely
that the guarantors will be able to pay all or any portion of such
unsatisfied obligations.
There are no sinking fund requirements related to the Senior Subordinated
Notes. The Senior Subordinated Notes outstanding at December 31, 2001
are redeemable, in whole or in part, at 105.438% of principal amount
through March 14, 2002, and thereafter at an annually declining premium
over par until March 15, 2004 when they are redeemable at par. On
March 27, 2002, the Company notified the holders of the Senior
Subordinated Notes that it will redeem $50,000,000 aggregate principal
amount of the Senior Subordinated Notes on April 30, 2002 at 103.625% of
principal amount. The Company intends to fund such redemption with
borrowings under its senior revolving credit facility. Therefore, the
entire principal amount of Senior Subordinated Notes outstanding as of
December 31, 2001 is classified as a noncurrent liability in the Company's
consolidated balance sheet. The Company expects to record a loss on the
early extinguishment of debt of approximately $1,940,000 pretax during
the three months ended June 30, 2002 as a result of the redemption.
The indenture for the Senior Subordinated Notes limits the incurrence of
indebtedness, payment of dividends and purchase of Company stock and
includes certain other restrictions and limitations that are customary
with subordinated indebtedness of this type. The Company believes that
it was in compliance with the terms of the indenture at December 31, 2001.
As discussed in Note 3, the Company entered into an agreement with the
holder of a majority of its Senior Subordinated Notes on August 13, 1999.
Under the agreement, (i) the holder consented to certain amendments to the
indenture governing the Senior Subordinated Notes, thus allowing the
Company to complete the merger without violating the covenants under the
indenture, and (ii) the Company agreed to pay such holder (and other
holders of the Senior Subordinated Notes who also consented), promptly
after completion of the merger, $120 per $1,000 principal amount of the
Senior Subordinated Notes owned by the holder. The Company subsequently
obtained consents from all other holders as of August 13, 1999 through a
consent solicitation process. Upon completion of the merger, the Company
paid the holders an aggregate consent fee of $12,870,000.
F-12
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Due to the significance of the consent fee, the Company accounted for
the modification of the debt terms under the indenture as an
extinguishment of debt. Such treatment resulted in an extraordinary loss
of $17,001,000 on a pretax basis ($10,244,000 on an after-tax basis),
which consisted of the write-off of $4,131,000 of unamortized financing
fees related to the Senior Subordinated Notes and the consent fee of
$12,870,000 that was paid to the holders.
Term and Revolving Loans
In connection with the merger, the Company entered into a $650,000,000
senior credit agreement consisting of a $325,000,000 six-year term loan
facility and a $325,000,000 six-year revolving credit facility, to
(i) fund the merger and related fees and expenses (including consent fees
related to the Company's Senior Subordinated Notes), (ii) refinance
$14,000,000 owed under the Company's senior credit agreement that existed
immediately prior to the merger and (iii) provide for working capital and
ongoing general corporate purposes. The refinancing resulted in an
extraordinary loss of $925,000 on a pretax basis ($557,000 on an after-tax
basis), which consisted of the write-off of unamortized financing fees
related to the refinanced debt. The credit agreement was amended on
December 20, 2000 in connection with the declaration of a special cash
dividend, which is discussed in Note 10.
The senior credit agreement contains a letter of credit subfacility that
allows for the issuance of up to $25,000,000 in letters of credit and a
swing line loan subfacility that allows for the issuance of up to
$10,000,000 in swing line loans. The amount available for borrowing
under the revolving credit facility is reduced by the total outstanding
letters of credit and swing line loans. At December 31, 2001, the
Company had an aggregate of $3,757,000 of letters of credit outstanding,
borrowings of $167,000,000 under the revolving credit facility, of which
$10,000,000 has been classified as current, and $154,243,000 available
for borrowing under the revolving credit facility.
The Company pays a commitment fee ranging from 0.175% to 0.50%, depending
on the Company's leverage ratio, on the unused portion of the revolving
credit facility. In addition, the Company is required to pay a letter of
credit fee ranging from 0.625% to 1.625%, depending on the Company's ratio
of funded debt to earnings before income taxes, depreciation, amortization
and other noncash charges ("EBITDA"), and an issuing lender fee equal to
0.25% on the amount available to be drawn under letters of credit. As of
December 31, 2001, the commitment and letter of credit fees applicable to
the Company were 0.25% and 0.875%, respectively.
Borrowings under the agreement bear interest at a floating rate based, at
the Company's option, upon (i) the Eurodollar rate (as defined therein)
plus an applicable percentage that is subject to change based upon the
Company's ratio of funded debt to EBITDA or (ii) the greater of the
federal funds rate plus 0.5% or the prime rate, plus an applicable
percentage that is subject to change based upon the Company's ratio of
funded debt to EBITDA. The Company is required to make quarterly
principal payments under the term loan facility through September 2005.
The revolving credit facility allows the Company to borrow, repay and
reborrow funds from time to time until November 4, 2005.
The agreement is secured by substantially all of the Company's present
and future domestic assets, 100% of the capital stock of the Company's
present and future domestic subsidiaries and 65% of the capital stock of
the Company's present and future foreign subsidiaries. Additionally,
all borrowings are jointly and severally, unconditionally guaranteed by
the Company's existing and future 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.
F-13
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The credit agreement subjects the Company to various affirmative and
negative covenants. Among other things, the covenants limit the Company's
ability to incur additional indebtedness, declare or pay dividends and
purchase Company stock; require the Company to maintain certain financial
ratios with respect to funded debt leverage and interest coverage; and
require the Company to maintain interest rate protection agreements in a
notional amount of at least $135,000,000 for at least three years. The
Company believes that it was in compliance with the credit agreement
covenants at December 31, 2001. See Note 12 for further discussion of
interest rate protection agreements.
The Company also has several revolving credit agreements with various
European financial institutions. These credit agreements are to provide
credit primarily for overdraft and working capital purposes. As of
December 31, 2001, total credit available under such agreements was
approximately $8,427,000 or the foreign currency equivalent. There is
currently no expiration date on these agreements. The interest rate on
borrowings is variable and is based on the monetary market rate that is
linked to each country's prime rate. As of December 31, 2001, the
Company did not have any outstanding borrowings under the European credit
facilities.
Interest Paid
During 2001, 2000 and 1999, the Company made interest payments totaling
$38,878,000, $44,407,000 and $18,110,000, respectively.
Maturities
Aggregate principal maturities of the Company's indebtedness as of
December 31, 2001 are as follows (in thousands):
2002................................ $ 62,558
2003................................ 63,812
2004................................ 81,315
2005................................ 232,069
2006................................ 107,324
Subsequent years.................... 446
--------
$547,524
========
10. DIVIDEND
On December 20, 2000, the Company's Board of Directors declared a
special cash dividend of $9.50 per share of common stock payable on
January 5, 2001 to stockholders of record as of the close of business on
December 20, 2000. The payment of the dividend on January 5, 2001 was
funded with borrowings under the Company's senior revolving credit
facility. As such, the aggregate dividend payable of $220,339,000 is
classified as a noncurrent liability in the Company's consolidated
balance sheet as of December 31, 2000.
F-14
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. PREFERRED STOCK
The Company's Certificate of Incorporation authorizes the issuance of
10,000,000 shares of preferred stock with a par value of $1.00 per
share. 1,920,000 of these shares are designated as Series A 12%
Participating Convertible Preferred Stock, of which 1,602,998 shares
have been retired and canceled and 317,002 shares remain eligible to be
issued. Subject to applicable laws, the Board of Directors is authorized
to provide for the issuance of preferred shares in one or more series, for
such consideration and with designations, powers, preferences and
relative, participating, optional or other special rights and the
qualifications, limitations or restrictions thereof, as shall be
determined by the Board of Directors.
12. DERIVATIVE FINANCIAL INSTRUMENTS
Interest Rate Collar Agreements
The Company uses interest rate collar agreements to manage its exposure
to fluctuations in interest rates on its variable-rate debt. Such
agreements effectively set agreed-upon maximum and minimum rates on a
notional principal amount and utilize the London Interbank Offered Rate
("LIBOR") as a variable-rate reference. Changes in the fair value of
interest rate collar agreements are reported in earnings in the period
the value of the contract changes. The net amount paid or received upon
quarterly settlements is recorded as an adjustment to interest expense,
while the remaining change in fair value is recorded as a component of
other income (expense).
At December 31, 2000, the Company had three interest rate collar
agreements outstanding with an aggregate notional principal amount of
$135,000,000, related weighted average maximum and minimum rates of
10.00% and 5.64%, respectively, and a termination date of February 2003.
In February 2001, the Company negotiated modifications to these agreements
that increased the aggregate notional principal amount to $200,000,000,
decreased the weighted average minimum rate to 5.12% and extended the
termination date to February 2004. The aggregate fair value of these
interest rate collar agreements from the Company's perspective as of
December 31, 2001 was ($8,434,000), of which $5,901,000 was recorded as a
current liability and $2,533,000 was recorded as a noncurrent liability in
the Company's consolidated balance sheet as of December 31, 2001. During
2001, the Company recognized an aggregate net loss related to these
agreements of $9,599,000, of which $2,068,000 was recorded as interest
expense and $7,531,000 was recorded as a component of other expense in
the Company's consolidated statement of operations. The aggregate fair
value of the interest rate collar agreements outstanding at December 31,
2000 was not material. The Company was not required to make nor was it
entitled to receive any payments as a result of its use of interest
rate collar agreements during 2000 and 1999.
Foreign Currency Contracts
From time to time, the Company enters into foreign currency forward
exchange contracts and foreign currency option contracts to manage its
exposure to foreign exchange rates associated with purchases of inventory
from foreign suppliers. The terms of these contracts are generally less
than a year. Changes in the fair value of such contracts are reported in
earnings in the period the value of the contract changes. The net gain or
loss upon settlement is recorded as an adjustment to cost of sales, while
the remaining change in fair value is recorded as a component of other
income (expense).
F-15
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company did not have any foreign currency forward exchange or option
contracts outstanding at December 31, 2001. The aggregate net gain
related to the Company's foreign currency forward exchange contracts was
not material for 2001. The contract amounts and fair value of the
contracts outstanding at December 31, 2000 as well as the amounts of
gains and losses recorded during 2000 and 1999 were not material.
13. CONTINGENT LIABILITIES AND COMMITMENTS
The Company is subject to various claims and litigation in the ordinary
course of its business. The Company is not a party to any lawsuit or
proceeding which, in the opinion of management, based on information
presently known, is likely to have a material adverse effect on the
Company.
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 and Accounts Payable
The fair values of these financial instruments approximate their carrying
amounts due to their immediate or short-term periods to maturity.
Long-Term Debt
The fair values of the variable-rate long-term debt instruments
approximate their carrying amounts. The fair value of other long-term
debt was estimated using quoted market values or discounted cash flow
analyses based on current incremental borrowing rates for similar types
of borrowing arrangements. The fair value of the Company's long-term
debt, including the current portion, was approximately $542,204,000 at
December 31, 2001 and $423,265,000 at December 31, 2000, while the
carrying amounts were $547,524,000 and $425,755,000, respectively.
Letters of Credit
The Company had outstanding letters of credit totaling $3,757,000 and
$3,057,000 at December 31, 2001 and 2000, respectively. Historically,
no claims have been made against letters of credit under which the
Company was liable, and the Company does not expect any future claims
against these financial instruments. Therefore, the Company believes
that the fair value of the letters of credit is zero.
Interest Rate Collar Agreements
The carrying value and fair value of the Company's interest rate collar
agreements, as estimated by dealers, were ($8,434,000) from the Company's
perspective at December 31, 2001 and were not material as of December 31,
2000.
Foreign Currency Forward Exchange Contracts
The fair value of the Company's foreign currency forward exchange
contracts, as determined by quoted market prices, was not material as of
December 31, 2000.
F-16
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. RESTRUCTURING
In September 2001, the Company adopted a restructuring plan to eliminate
certain salaried positions in its workforce in North America. In
connection with the restructuring plan, the Company recorded a
restructuring charge of $1,655,000 for severance and other termination
benefits. The Company's consolidated balance sheet as of December 31,
2001 includes a current liability of $918,000 for those benefits not
yet paid out.
16. INCOME TAXES
Income before income tax expense and extraordinary item consists of the
following:
2001 2000 1999
---------- ---------- ----------
(In Thousands)
U.S. operations................. $135,447 $180,398 $151,350
Foreign operations.............. 12,537 15,362 4,163
-------- -------- --------
$147,984 $195,760 $155,513
======== ======== ========
Income tax expense, excluding extraordinary items, is comprised of the
following:
2001 2000 1999
---------- ---------- ----------
(In Thousands)
Current:
Federal..................... $45,595 $55,334 $46,651
State....................... 9,909 12,449 10,198
Foreign..................... 5,488 4,324 2,206
------- ------- -------
Total current........... 60,992 72,107 59,055
------- ------- -------
Deferred:
Federal..................... (667) 4,097 6,385
State....................... (89) 976 1,256
Foreign..................... 558 2,292 (345)
------- ------- -------
Total deferred.......... (198) 7,365 7,296
------- ------- -------
Income tax expense.............. $60,794 $79,472 $66,351
======= ======= =======
Income taxes paid by the Company during 2001, 2000 and 1999 totaled
$59,901,000, $68,290,000 and $52,285,000, respectively.
F-17
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the tax effects of temporary differences
that give rise to the deferred tax assets and liabilities:
2001 2000
---------- ----------
(In Thousands)
Deferred tax assets:
Accounts receivable, principally due
to allowance for doubtful accounts.... $ 2,688 $ 2,355
Inventories............................. 2,818 2,924
Net operating loss carryforwards........ 10,938 9,753
Obligation for postretirement benefits
other than pension.................... 8,274 7,835
Accrued liabilities and other items..... 22,413 18,467
-------- --------
Gross deferred tax assets........... 47,131 41,334
Valuation allowance..................... (12,271) (11,594)
-------- --------
Net deferred tax assets............. 34,860 29,740
-------- --------
Deferred tax liabilities:
Intangibles, principally due to
differences in amortization........... 23,083 19,210
Plant and equipment, principally due
to differences in depreciation and
assigned values....................... 13,764 12,969
-------- --------
Gross deferred tax liabilities...... 36,847 32,179
-------- --------
Net deferred tax liability.................. $ (1,987) $ (2,439)
======== ========
As of December 31, 2001, the Company had net operating loss carryforwards
totaling approximately $27,785,000 in various foreign tax jurisdictions,
of which $301,000 expire in 2005 and $27,484,000 may be carried forward
for an unlimited time.
The Company has recorded a valuation allowance for net deferred tax
assets in foreign tax jurisdictions, primarily related to net operating
loss carryforwards that existed as of February 29, 1996, the date the
Company was formed, due to losses incurred in these tax jurisdictions
prior to such date. At December 31, 1999, the valuation allowance was
$16,137,000. The decrease in the valuation allowance from 1999 to 2000
resulted primarily from the expiration and utilization of net operating
loss carryforwards in the foreign tax jurisdictions.
For 2001, 2000 and 1999, tax benefits recognized through reductions of
the valuation allowance for net operating loss carryforwards that existed
as of February 29, 1996 had the effect of reducing goodwill by $160,000,
$1,403,000 and $430,000, respectively. If additional tax benefits are
recognized in the future through further reduction of the valuation
allowance, such benefits will generally reduce goodwill.
F-18
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth a reconciliation of the statutory federal
income tax rate to the effective income tax rate:
2001 2000 1999
-------- -------- --------
Federal statutory tax rate............ 35.0% 35.0% 35.0%
Increase in the tax rate
resulting from:
State taxes, net of
federal effect................ 4.6 4.6 4.9
Nondeductible recapitalization
expense....................... -- -- 1.2
Higher income tax rates of
other countries............... 0.6 0.5 1.3
Nondeductible goodwill
amortization.................. 0.2 0.2 0.3
Other........................... 0.7 0.3 --
---- ---- ----
Effective tax rate.................... 41.1% 40.6% 42.7%
==== ==== ====
The Company has not made provisions for U.S. federal and state income
taxes as of December 31, 2001 on $53,511,000 of foreign earnings that are
expected to be reinvested indefinitely. Upon distribution of those
earnings in the form of dividends or otherwise, the Company would be
subject to U.S. federal and state 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.
17. LEASES
The Company has commitments under operating leases for certain machinery
and equipment as well as manufacturing, warehousing, showroom and other
facilities used in its operations. Some of the leases contain renewal
provisions and generally require the Company to pay certain operating
expenses, including utilities, insurance and taxes, which are subject to
escalation. Total rental expense for 2001, 2000 and 1999 was $10,729,000,
$10,505,000 and $9,626,000, respectively. Future minimum rental payments
required under those operating leases that have an initial or remaining
noncancelable lease term in excess of one year are as follows (in
thousands):
2002................................ $ 7,640
2003................................ 6,736
2004................................ 4,204
2005................................ 3,080
2006................................ 2,119
Subsequent years.................... 5,299
-------
Total minimum rental payments....... $29,078
=======
F-19
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. PENSION AND OTHER POSTRETIREMENT BENEFITS
The Company has two domestic defined benefit pension plans and two
plans providing for other postretirement benefits, including medical and
life insurance coverage. One of the pension plans and one of the other
postretirement benefits plans cover eligible U.S. nonunion employees
while the other pension plan and other postretirement benefits plan
cover eligible U.S. union employees. On January 1, 2002, the Company
implemented an amendment to its other postretirement benefits plan
covering U.S. nonunion employees to cap the amount of medical benefits
provided to future retirees. The impact of this amendment was reflected
in the measurement of the related benefit obligation as of December 31,
2001.
The following table sets forth a reconciliation of the benefit obligation,
plan assets and accrued benefit cost related to the pension and other
postretirement benefits provided by the Company:
Pension Benefits Other Benefits
---------------------- ----------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
(In Thousands)
Change in benefit obligation:
Benefit obligation at January 1.... $ 33,533 $24,250 $ 20,627 $ 19,503
Service cost....................... 7,344 6,830 789 693
Interest cost...................... 2,433 1,754 1,463 1,393
Participant contributions.......... 282 264 -- --
Plan amendment..................... -- -- (3,129) --
Actuarial loss..................... 1,123 654 2,226 917
Benefits paid...................... (312) (219) (1,094) (1,879)
-------- ------- -------- --------
Benefit obligation at December 31.. 44,403 33,533 20,882 20,627
-------- ------- -------- --------
Change in plan assets:
Fair value of plan assets at
January 1........................ 25,503 14,466 -- --
Actual return on plan assets....... (2,330) 1,595 -- --
Employer contributions............. 7,802 9,397 1,094 1,879
Participant contributions.......... 282 264 -- --
Benefits paid...................... (312) (219) (1,094) (1,879)
-------- ------- -------- --------
Fair value of plan assets at
December 31...................... 30,945 25,503 -- --
-------- ------- -------- --------
Funded status...................... (13,458) (8,030) (20,882) (20,627)
Unrecognized net loss.............. 6,745 1,082 3,166 887
Unrecognized prior service cost
(benefit)........................ 312 347 (3,126) 4
-------- ------- -------- --------
Accrued benefit cost............... $ (6,401) $(6,601) $(20,842) $(19,736)
======== ======= ======== ========
At December 31, 2000, one of the Company's pension plans had an
accumulated benefit obligation in excess of plan assets. The accumulated
benefit obligation applicable to such plan was $21,800,000 and the fair
value of the related plan assets was $20,774,000. The accrued benefit
cost recorded with respect to this plan was $5,209,000.
F-20
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant assumptions that were used in accounting for the pension and
other postretirement benefits plans as of December 31 are as follows:
Pension Benefits Other Benefits
------------------ ------------------
2001 2000 2001 2000
-------- -------- -------- --------
Discount rate...................... 7.25% 7.25% 7.25% 7.25%
Expected return on plan assets..... 8.50 8.50 N/A N/A
Rate of compensation increase...... 4.50 4.50 4.50 4.50
The following table sets forth the components of the net periodic benefit
cost for the Company's pension and other postretirement benefits plans:
Pension Benefits Other Benefits
---------------------------- ----------------------------
2001 2000 1999 2001 2000 1999
-------- -------- -------- -------- -------- --------
(In Thousands)
Service cost............ $ 7,344 $ 6,830 $6,826 $ 789 $ 693 $ 582
Interest cost........... 2,433 1,754 1,204 1,463 1,393 1,256
Expected return on
plan assets........... (2,210) (1,267) (744) -- -- --
Amortization of prior
service cost.......... 35 34 35 1 -- --
Recognized actuarial
loss (gain)........... -- -- 27 (53) (88) (94)
------- ------ ------ ------ ------ ------
Net periodic benefit
cost.................. $ 7,602 $ 7,351 $7,348 $2,200 $1,998 $1,744
======= ====== ====== ====== ====== ======
For purposes of measuring the benefit obligation and the net periodic
benefit cost as of and for the year ended December 31, 2001, respectively,
associated with the Company's other postretirement benefits plans, a 12.0%
annual rate of increase in the per capita cost of covered health care
benefits was assumed for 2001. The rate was then assumed to decrease 1.0%
per year to an ultimate rate of 5.0% for 2008 and thereafter. Increasing
the assumed health care cost trend rate by 1.0% in each year would
increase the benefit obligation as of December 31, 2001 by $1,483,000 and
increase the aggregate of the service and interest cost components of net
periodic benefit cost for 2001 by $258,000. Decreasing the assumed health
care cost trend rate by 1.0% in each year would decrease the benefit
obligation as of December 31, 2001 by $1,562,000 and decrease the
aggregate of the service and interest cost components of net periodic
benefit cost for 2001 by $241,000.
Employees of the Canadian, Belgium and United Kingdom operations
participate in defined contribution pension plans sponsored by the
Company. The Company's expense related to these plans for 2001, 2000 and
1999 was $704,000, $854,000 and $679,000, respectively.
The Company also sponsors a retirement savings plan (i.e. 401(k) plan)
for all U.S. employees. Under this plan, participants may defer a
portion of their earnings up to the annual contribution limits established
by the Internal Revenue Service. The Company matches 40.0% of participant
contributions on up to the first 6.0% of compensation for nonunion
employees and matches 50.0% of participant contributions on up to the
first 6.0% of compensation for union employees. For participants who are
nonunion employees, the plan provides for additional employer matching
based on the achievement of certain profitability goals. Furthermore,
effective November 4, 1999, the plan provides that the Company may also
make discretionary contributions of Knoll common stock to participant
accounts on behalf of all actively employed U.S. participants. However,
upon retiring or leaving the Company, participants must sell vested shares
of Knoll
F-21
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
common stock back to the plan, and any shares that are not vested at such
time are forfeited by the participant and held by the plan. Participants
generally vest their interest in Company contributions ratably according
to years of service, with such contributions being 100% vested at the end
of five years of service. The Company's total expense under the 401(k)
plan was $3,460,000, $6,603,000 and $9,466,000 for 2001, 2000 and 1999,
respectively.
The Company's common stock was offered as an investment option under the
401(k) plan from May 9, 1997 through November 3, 1999, the period during
which Knoll's common stock was publicly traded. During such time, the
plan purchased shares of Knoll common stock on the open market. In
connection with the merger, which is discussed in Note 3, all 71,174
shares of Knoll common stock held in the 401(k) plan immediately prior to
the merger were converted into the right to receive $28.00 per share in
cash and were canceled.
19. STOCK PLANS
Stock Incentive Plans
The Company sponsors three stock incentive plans under which awards
denominated or payable in shares or options to purchase shares of Knoll
common stock may be granted to officers, certain other key employees,
directors and consultants of the Company. As of December 31, 2001, a
combined maximum of 10,139,219 shares or options to purchase shares
were authorized for issuance under the plans. A Stock Option Committee
of the Company's Board of Directors ("Stock Option Committee") has sole
discretion concerning administration of the plans, 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. Options that
are granted have a maximum contractual life of ten years.
During 1996, the Company granted 4,144,030 restricted common shares, with
a weighted-average fair value of $0.34 per share, to key employees. The
Company recorded the fair value of the shares on the date of grant as
unearned stock grant compensation, which is a separate component of
stockholders' equity (deficit), and recognized compensation expense
ratably over the vesting period. During 2000 and 1999, 84,769 and 18,837
nonvested restricted shares, respectively, were forfeited by employees
that terminated employment. As of December 31, 2001, all restricted
shares were vested.
F-22
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the Company's stock option activity in
the years indicated:
2001 2000 1999
----------------------- ----------------------- -----------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Options Price Options Price Options Price
----------- ---------- ----------- ---------- ----------- ----------
Outstanding at
beginning of year... 3,706,445 $25.51 3,706,338 $25.37 1,965,511 $21.27
February 2001
adjustment to
outstanding......... 677,523 N/A -- N/A -- N/A
Granted............... 200,000 34.50 180,000 28.00 2,305,500 26.74
Exercised............. -- -- -- -- (244,798) 15.93
Forfeited............. (108,234) 23.44 (179,893) 25.22 (269,875) 17.28
Canceled ............. -- -- -- -- (50,000) 17.00
--------- --------- ---------
Outstanding at end
of year............. 4,475,734 22.10 3,706,445 25.51 3,706,338 25.37
========= ========= =========
Exercisable at end
of year............. 2,500,364 21.40 1,327,359 25.56 396,427 26.17
========= ========= =========
Available for
future grants....... 1,181,616 1,076,584 991,922
========= ========= =========
Options were granted with an exercise price that equals the market price
of a share of Knoll common stock on the date of grant, while the Company's
stock was publicly traded, or the estimated fair value of a share of
Knoll common stock on the date of grant, subsequent to the November 4,
1999 merger. Options that were granted generally vest in installments
over either a four or five-year period, beginning one year from the date
of grant.
In February 2001, the Stock Option Committee approved certain adjustments
to the outstanding options as well as the number of options available for
grant under the stock incentive plans in response to dilution created by
the special cash dividend paid on January 5, 2001 (see Note 10). The
adjustments included increasing the number of shares under option from
3,706,445 to 4,383,968, lowering the range of exercise prices from
$15.93 - $33.13 to $13.47 - $28.01 and increasing the number of options
available for future grants as of the time of adjustment from 1,076,584
to 1,273,382. These adjustments consequently increased the aggregate
number of shares or options to purchase shares that are authorized for
issuance under the stock incentive plans from 9,264,898 to 10,139,219.
All vesting and term provisions of each award remained unchanged. No
compensation expense was recognized in connection with these adjustments
since (i) the adjustments were executed in response to an equity
restructuring and (ii) the modifications to the awards did not increase
the aggregate intrinsic value of each award and did not reduce the per
share ratio of the exercise price to the market value.
F-23
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information regarding stock options
outstanding and exercisable at December 31, 2001:
Options Outstanding Options Exercisable
-------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of of Contractual Exercise of Exercise
Exercise Prices Options Life Price Options Price
----------------- ----------- ------------- ---------- ----------- ----------
$13.47 - $17.97 1,089,879 5.90 years $14.93 648,373 $14.45
$20.45 - $22.62 83,978 6.17 21.75 57,952 22.06
$23.67 - $24.10 3,072,307 7.22 23.79 1,770,383 23.83
$28.01 - $34.50 229,570 8.68 33.66 23,656 28.01
--------- ---------
$13.47 - $34.50 4,475,734 6.95 22.10 2,500,364 21.40
========= =========
In February 2002, the Stock Option Committee granted an additional
547,500 options with an exercise price of $36.00 per share.
Employee Stock Purchase Plan
From August 1, 1997 through November 3, 1999, the Company sponsored an
employee stock purchase plan that provided all employees the ability to
purchase common stock of the Company at a price equal to 15.0% below the
lower of the market price at (i) the beginning of each quarterly offering
period or (ii) the end of each quarterly offering period. Purchases
under the plan were limited to 10.0% of an employee's eligible gross pay,
up to $25,000 per year. During 1999, the Company issued 40,972 shares at
a weighted average per share price of $20.66.
Other Stock-Based Compensation Plans
On November 4, 1999, the Company established The Knoll Stock Ownership
Award Plan, under which it may grant notional stock units to substantially
all individuals employed by the Company in Canada as of the effective date
of the plan. Participants vest their interest in notional stock units
ratably according to years of service, with such units being 100% vested
at the end of five years of service. On November 4, 1999, the Company
granted a total of 54,900 notional stock units, with an estimated fair
value of $28.00 per unit, to eligible employees. In January 2001, the
number of notional units outstanding was adjusted, in accordance with the
plan provisions, in response to the special cash dividend that was paid
(see Note 10). Compensation expense is recognized based on the estimated
fair value of notional stock units and vesting provisions. Total
compensation expense incurred in connection with this award was $248,000
for 2001, $723,000 for 2000 and $992,000 for 1999. Units forfeited
totaled 1,135; 2,140; and 370 for 2001, 2000 and 1999, respectively. As
of December 31, 2001, approximately 60,643 notional units were
outstanding, of which approximately 51,231 units were vested.
As discussed in Note 18, the Company may contribute shares of Knoll
common stock into participant 401(k) plan accounts at its discretion.
Subsequent to the merger, the Company contributed 150,100 shares into the
401(k) plan for substantially all individuals employed by the Company in
the U.S. as of November 4, 1999. In connection with this award, the
Company recognized $4,203,000 of compensation expense, which was based on
a value of $28.00 per share. During 2001, 2000 and 1999, the Company
repurchased 11,800; 9,500; and 1,000 of the contributed common shares,
respectively, from the 401(k) plan at a weighted average price per share
of $34.20 during 2001 and $28.00 during 2000 and 1999. Such shares are
held in treasury.
F-24
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pro Forma Disclosures
As discussed in Note 2, the Company accounts for its stock-based
compensation plans in accordance with APB 25. Accordingly, no
compensation cost has been recognized for the Company's stock options or
stock purchase rights granted in connection with the employee stock
purchase plan. If the Company had recognized compensation cost based
upon the fair value of the stock options and stock purchase rights at the
date of grant as prescribed by SFAS 123, the Company's pro forma net
income would have been $82,950,000, $108,680,000 and $75,476,000 for 2001,
2000 and 1999, respectively.
For purposes of calculating pro forma net income, the weighted average
per share fair value of options was $10.36 for 2001 grants, $9.28 for
2000 grants and $10.22 for 1999 grants. Additionally, the weighted
average fair value of stock purchase rights granted under the employee
stock purchase plan was $3.76 per share in 1999.
The fair value of the options and stock purchase rights was estimated at
the date of grant using (i) a Black-Scholes option pricing model for
grants made prior to March 24, 1999, the date the merger, which is
discussed in Note 3, was first announced and (ii) a minimum value method
for grants made on or subsequent to March 24, 1999. The following
assumptions were used for the Black-Scholes model in 1999: risk-free
interest rate of 6.5%, dividend yield of zero, expected volatility of the
market price of the common stock of 35.0% and weighted average expected
lives of 7 years for the options and 3 months for the stock purchase
rights. Under the minimum value method, the Company used the following
assumptions: risk-free interest rate of 5.1% in 2001, 5.75% in 2000 and
6.5% in 1999; dividend yield of zero in 2001, 2000 and 1999; and weighted
average expected lives of 7 years in 2001, 2000 and 1999. Volatility
was not considered under the minimum value method. The estimated fair
value of the options was amortized to expense over the vesting period of
the options for purposes of determining pro forma net income. The effects
of applying SFAS 123 for purposes of providing pro forma disclosures are
not likely to be representative of the effects on reported net income in
future years.
20. STOCK REPURCHASE PROGRAM
In September 1998, the Board of Directors approved a share repurchase
program that authorized the repurchase of up to 3,000,000 shares of the
Company's common stock. The Board of Directors subsequently approved an
increase of 2,000,000 shares to the program on February 2, 1999. During
1999, the Company purchased 1,187,000 shares of its common stock for
$28,675,000, or an average price of $24.16 per share. Total shares
purchased under the program were 2,894,700 for $67,524,000, or an average
price of $23.33 per share. Common shares were purchased in the open
market and were then held in treasury. In connection with the merger,
which is discussed in Note 3, all shares that were held in treasury
immediately prior to the merger were canceled and retired, and the share
repurchase program thereby came to an end.
F-25
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
21. SEGMENT AND GEOGRAPHIC REGION INFORMATION
The Company operates exclusively in the business of design, manufacture
and sale of office furniture products and accessories. In addition to
its principal manufacturing operations and markets in North America, the
Company has manufacturing operations and markets in Europe.
The Company's sales to customers, operating income and net property,
plant and equipment are summarized by geographic areas below. Sales to
customers are attributed to the geographic areas based on the point of
sale.
United
States Canada Europe Consolidated
---------- ---------- ---------- ------------
(In Thousands)
2001
Sales to customers.... $ 899,042 $26,807 $59,539 $ 985,388
Operating income...... 184,790 7,077 1,888 193,755
Property, plant and
equipment, net...... 137,200 27,115 10,723 175,038
2000
Sales to customers.... 1,060,894 32,191 70,392 1,163,477
Operating income...... 223,931 10,848 2,392 237,171
Property, plant and
equipment, net...... 140,046 29,707 9,876 179,629
1999
Sales to customers.... 902,554 26,028 55,929 984,511
Operating income...... 178,631 4,574 945 184,150
Property, plant and
equipment, net...... 142,326 31,663 10,652 184,641
A number of U.S. government agencies purchase the Company's products
through multiple contracts with the General Services Administration
("GSA"). Sales to government entities under the GSA contracts aggregated
more than 10.0% of the Company's consolidated sales in 2001. Sales under
GSA contracts amounted to $118,552,000 in 2001, $114,639,000 in 2000
and $72,774,000 in 1999.
F-26
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
22. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth unaudited summary information on a
quarterly basis for the Company for 2001 and 2000.
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
(In Thousands)
2001
Sales.................... $253,125 $261,102 $250,293 $220,868
Gross profit............. 100,732 105,297 100,157 84,756
Net income............... 22,112 23,490 22,365 19,223
2000
Sales.................... 268,834 315,374 295,357 283,912
Gross profit............. 108,183 132,437 122,282 118,154
Net income............... 24,166 35,918 32,491 23,713
In connection with the adoption of the restructuring plan discussed in
Note 15, the Company recorded a restructuring charge of $2,155,000 in
the third quarter of 2001. The Company subsequently reversed $500,000 of
this charge in the fourth quarter of 2001 as a result of a change in the
number of salaried positions to be eliminated according to the plan.
23. FINANCIAL INFORMATION FOR GUARANTORS OF THE COMPANY'S DEBT
As discussed in Note 9, 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.
These Guarantors will irrevocably and unconditionally, fully, jointly
and severally, guarantee the performance and payment when due, of all
obligations under the Senior Subordinated Notes and senior credit
agreement outstanding as of December 31, 2001, limited to the largest
amount that would not render such Guarantors' obligations under the
guarantees subject to avoidance under any applicable federal or state
fraudulent conveyance or similar law.
The condensed consolidating information that follows presents:
- Condensed consolidating financial information as of December 31, 2001
and 2000 and for the years ended December 31, 2001, 2000 and 1999 of
(a) Knoll, Inc. (as the Issuer), (b) the Guarantors, (c) the combined
non-Guarantors, (d) elimination entries and (e) the Company on a
consolidated basis.
- The Issuer and the Guarantors are shown with their investments in
their subsidiaries accounted for on the equity method.
The condensed consolidating financial information should be read in
connection with the consolidated financial statements of the Company.
Separate financial statements of the Guarantors are not presented
because the Guarantors are fully, jointly, severally and unconditionally
liable under the guarantees.
F-27
KNOLL, INC.
BALANCE SHEET
DECEMBER 31, 2001
(In Thousands)
Guarantors
------------------------
Spinneybeck Knoll
Knoll, Enterprises, Overseas, Non-
Inc. Inc. Inc. Guarantors Eliminations Total
---------- ------------ --------- ----------- ------------ -----------
ASSETS
Current assets:
Cash and cash equivalents... $ 128 $ 1,631 $ -- $ 30,454 $ -- $ 32,213
Customer receivables, net... 84,915 2,573 -- 12,798 -- 100,286
Accounts receivable--
related parties........... 2,521 69 1,013 39,132 (42,735) --
Inventories................. 39,683 8,592 -- 12,416 -- 60,691
Deferred income taxes....... 23,189 -- -- 480 -- 23,669
Prepaid and other current
assets.................... 2,978 (45) 4 1,499 -- 4,436
--------- ------- ------- -------- --------- ---------
Total current assets.. 153,414 12,820 1,017 96,779 (42,735) 221,295
Property, plant and
equipment, net................ 136,912 288 -- 37,838 -- 175,038
Intangible assets, net.......... 237,909 -- -- (804) -- 237,105
Equity investments.............. 136,800 1,059 17,348 -- (155,207) --
Other noncurrent assets......... 5,160 (3) 97 311 -- 5,565
--------- ------- ------- -------- --------- ---------
Total Assets.......... $ 670,195 $14,164 $18,462 $134,124 $(197,942) $ 639,003
========= ======= ======= ======== ========= =========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Current maturities of
long-term debt............ $ 62,500 $ -- $ -- $ 58 $ -- $ 62,558
Accounts payable--trade..... 46,481 359 -- 13,083 -- 59,923
Accounts payable--related
parties................... 38,116 1,016 991 2,612 (42,735) --
Income taxes payable........ 1,214 558 4 3,041 -- 4,817
Other current liabilities... 77,377 1,000 1,649 9,951 -- 89,977
--------- ------- ------- -------- --------- ---------
Total current
liabilities......... 225,688 2,933 2,644 28,745 (42,735) 217,275
Long-term debt.................. 484,250 -- -- 716 -- 484,966
Deferred income taxes........... 23,509 -- -- 2,147 -- 25,656
Postretirement benefits
other than pension............ 19,612 -- -- -- -- 19,612
Other noncurrent
liabilities................... 7,587 -- -- 6,225 -- 13,812
--------- ------- ------- -------- --------- ---------
Total liabilities..... 760,646 2,933 2,644 37,833 (42,735) 761,321
--------- ------- ------- -------- --------- ---------
Stockholders' equity (deficit):
Common stock................ 232 -- -- -- -- 232
Additional paid-in-capital.. 17,506 (11,998) 12,896 60,329 (75,545) 3,188
Retained earnings (deficit). (108,189) 23,229 2,922 53,511 (79,662) (108,189)
Accumulated other
comprehensive loss........ -- -- -- (17,549) -- (17,549)
--------- ------- ------- -------- --------- ---------
Total stockholders'
equity (deficit).... (90,451) 11,231 15,818 96,291 (155,207) (122,318)
--------- ------- ------- -------- --------- ---------
Total Liabilities
and Stockholders'
Equity (Deficit).... $ 670,195 $14,164 $18,462 $134,124 $(197,942) $ 639,003
========= ======= ======= ======== ========= =========
F-28
KNOLL, INC.
BALANCE SHEET
DECEMBER 31, 2000
(In Thousands)
Guarantors
------------------------
Spinneybeck Knoll
Knoll, Enterprises, Overseas, Non-
Inc. Inc. Inc. Guarantors Eliminations Total
---------- ------------ --------- ----------- ------------ -----------
ASSETS
Current assets:
Cash and cash equivalents... $ 104 $ 598 $ -- $ 21,637 $ -- $ 22,339
Customer receivables, net... 102,365 2,153 -- 27,665 -- 132,183
Accounts receivable--
related parties........... 8,092 118 1,446 38,309 (47,965) --
Inventories................. 55,281 6,981 -- 16,941 -- 79,203
Deferred income taxes....... 21,277 -- -- 959 -- 22,236
Prepaid and other current
assets.................... 3,583 706 14 3,118 -- 7,421
--------- ------- ------- -------- --------- ---------
Total current assets.. 190,702 10,556 1,460 108,629 (47,965) 263,382
Property, plant and
equipment, net................ 139,694 352 -- 39,583 -- 179,629
Intangible assets, net.......... 246,155 -- -- (276) -- 245,879
Equity investments.............. 124,416 987 17,096 -- (142,499) --
Other noncurrent assets......... 5,717 -- 97 426 -- 6,240
--------- ------- ------- -------- --------- ---------
Total Assets.......... $ 706,684 $11,895 $18,653 $148,362 $(190,464) $ 695,130
========= ======= ======= ======== ========= =========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Current maturities of
long-term debt............ $ 31,250 $ -- $ -- $ -- $ -- $ 31,250
Accounts payable--trade..... 64,902 922 -- 19,971 -- 85,795
Accounts payable--related
parties................... 37,549 760 1,695 7,961 (47,965) --
Income taxes payable........ 927 412 7 4,322 -- 5,668
Other current liabilities... 92,338 1,487 1,740 12,426 -- 107,991
--------- ------- ------- -------- --------- ---------
Total current
liabilities......... 226,966 3,581 3,442 44,680 (47,965) 230,704
Dividend payable................ 220,339 -- -- -- -- 220,339
Long-term debt.................. 393,750 -- -- 755 -- 394,505
Deferred income taxes........... 22,353 -- -- 2,322 -- 24,675
Postretirement benefits
other than pension............ 18,016 -- -- -- -- 18,016
Other noncurrent
liabilities................... 5,048 -- -- 6,218 -- 11,266
--------- ------- ------- -------- --------- ---------
Total liabilities..... 886,472 3,581 3,442 53,975 (47,965) 899,505
--------- ------- ------- -------- --------- ---------
Stockholders' equity (deficit):
Common stock................ 232 -- -- -- -- 232
Additional paid-in-capital.. 15,361 (9,413) 12,896 60,292 (75,545) 3,591
Unearned stock grant
compensation.............. (2) -- -- -- -- (2)
Retained earnings (deficit). (195,379) 17,727 2,315 46,912 (66,954) (195,379)
Accumulated other
comprehensive loss........ -- -- -- (12,817) -- (12,817)
--------- ------- ------- -------- --------- ---------
Total stockholders'
equity (deficit).... (179,788) 8,314 15,211 94,387 (142,499) (204,375)
--------- ------- ------- -------- --------- ---------
Total Liabilities
and Stockholders'
Equity (Deficit).... $ 706,684 $11,895 $18,653 $148,362 $(190,464) $ 695,130
========= ======= ======= ======== ========= =========
F-29
KNOLL, INC.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001
(In Thousands)
Guarantors
------------------------
Spinneybeck Knoll
Knoll, Enterprises, Overseas, Non-
Inc. Inc. Inc. Guarantors Eliminations Total
---------- ------------ --------- ----------- ------------ -----------
Sales to customers.............. $870,427 $28,615 $ -- $ 86,346 $ -- $985,388
Sales to related parties........ 24,572 3,356 1,171 117,575 (146,674) --
-------- ------- ------ -------- --------- --------
Total sales..................... 894,999 31,971 1,171 203,921 (146,674) 985,388
Cost of sales to customers...... 548,055 11,304 428 64,700 (30,041) 594,446
Cost of sales to related
parties....................... 14,284 3,356 -- 98,993 (116,633) --
-------- ------- ------ -------- --------- --------
Gross profit.................... 332,660 17,311 743 40,228 -- 390,942
Selling, general and
administrative expenses....... 155,667 8,424 178 31,263 -- 195,532
Restructuring charge............ 1,655 -- -- -- -- 1,655
-------- ------- ------ -------- --------- --------
Operating income................ 175,338 8,887 565 8,965 -- 193,755
Interest expense................ 41,985 -- -- 116 -- 42,101
Other income (expense), net..... (7,356) -- (2) 3,688 -- (3,670)
Income from equity investments.. 12,384 72 252 -- (12,708) --
-------- ------- ------ -------- --------- --------
Income before income tax
expense....................... 138,381 8,959 815 12,537 (12,708) 147,984
Income tax expense.............. 51,191 3,457 208 5,938 -- 60,794
-------- ------- ------ -------- --------- --------
Net income...................... $ 87,190 $ 5,502 $ 607 $ 6,599 $ (12,708) $ 87,190
======== ======= ====== ======== ========= ========
F-30
KNOLL, INC.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000
(In Thousands)
Guarantors
------------------------
Spinneybeck Knoll
Knoll, Enterprises, Overseas, Non-
Inc. Inc. Inc. Guarantors Eliminations Total
---------- ------------ --------- ----------- ------------ -----------
Sales to customers.............. $1,034,115 $26,779 $ -- $102,583 $ -- $1,163,477
Sales to related parties........ 31,457 4,098 1,088 127,568 (164,211) --
---------- ------- ------ -------- --------- ----------
Total sales..................... 1,065,572 30,877 1,088 230,151 (164,211) 1,163,477
Cost of sales to customers...... 631,000 10,368 573 77,731 (37,251) 682,421
Cost of sales to related
parties....................... 17,783 4,098 -- 105,079 (126,960) --
---------- ------- ------ -------- --------- ----------
Gross profit.................... 416,789 16,411 515 47,341 -- 481,056
Selling, general and
administrative expenses....... 200,409 8,838 537 34,101 -- 243,885
---------- ------- ------ -------- --------- ----------
Operating income (loss)......... 216,380 7,573 (22) 13,240 -- 237,171
Interest expense................ 44,365 -- -- 72 -- 44,437
Other income (expense), net..... 1,148 -- (316) 2,194 -- 3,026
Income from equity investments.. 13,086 209 911 -- (14,206) --
---------- ------- ------ -------- --------- ----------
Income before income tax
expense (benefit)............. 186,249 7,782 573 15,362 (14,206) 195,760
Income tax expense (benefit).... 69,961 3,144 (100) 6,467 -- 79,472
---------- ------- ------ -------- --------- ----------
Net income...................... $ 116,288 $ 4,638 $ 673 $ 8,895 $ (14,206) $ 116,288
========== ======= ====== ======== ========= ==========
F-31
KNOLL, INC.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
(In Thousands)
Guarantors
------------------------
Spinneybeck Knoll
Knoll, Enterprises, Overseas, Non-
Inc. Inc. Inc. Guarantors Eliminations Total
---------- ------------ --------- ----------- ------------ -----------
Sales to customers.............. $880,677 $21,877 $ -- $ 81,957 $ -- $984,511
Sales to related parties........ 24,558 3,702 1,219 127,651 (157,130) --
-------- ------- ------- -------- --------- --------
Total sales..................... 905,235 25,579 1,219 209,608 (157,130) 984,511
Cost of sales to customers...... 551,894 8,347 803 62,049 (29,651) 593,442
Cost of sales to related
parties....................... 13,883 3,702 -- 109,894 (127,479) --
-------- ------- ------- -------- --------- --------
Gross profit.................... 339,458 13,530 416 37,665 -- 391,069
Selling, general and
administrative expenses....... 165,601 6,844 2,328 32,146 -- 206,919
-------- ------- ------- -------- --------- --------
Operating income (loss)......... 173,857 6,686 (1,912) 5,519 -- 184,150
Interest expense................ 21,519 -- -- 92 -- 21,611
Recapitalization expense........ 6,356 -- -- -- -- 6,356
Other income (expense), net..... 594 -- -- (1,264) -- (670)
Income from equity investments.. 4,621 112 253 -- (4,986) --
-------- ------- ------- -------- --------- --------
Income (loss) before income
tax expense (benefit) and
extraordinary item............ 151,197 6,798 (1,659) 4,163 (4,986) 155,513
Income tax expense (benefit).... 62,035 2,782 (134) 1,668 -- 66,351
-------- ------- ------- -------- --------- --------
Income (loss) before
extraordinary item............ 89,162 4,016 (1,525) 2,495 (4,986) 89,162
Extraordinary loss on early
extinguishment of debt, net
of taxes...................... 10,801 -- -- -- -- 10,801
-------- ------- ------- -------- --------- --------
Net income (loss)............... $ 78,361 $ 4,016 $(1,525) $ 2,495 $ (4,986) $ 78,361
======== ======= ======= ======== ========= ========
F-32
KNOLL, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2001
(In Thousands)
Guarantors
------------------------
Spinneybeck Knoll
Knoll, Enterprises, Overseas, Non-
Inc. Inc. Inc. Guarantors Eliminations Total
---------- ------------ --------- ----------- ------------ -----------
CASH PROVIDED BY OPERATING
ACTIVITIES $ 120,148 $1,074 $ -- $12,925 $ -- $ 134,147
CASH FLOWS FROM INVESTING
ACTIVITIES
Capital expenditures............ (21,172) (41) -- (3,807) -- (25,020)
Proceeds from sale of assets.... 40 -- -- 31 -- 71
--------- ------ ---- ------- ---- ---------
Cash used in investing
activities.................... (21,132) (41) -- (3,776) -- (24,949)
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds from revolving
credit facility, net.......... 153,000 -- -- -- -- 153,000
Repayment of long-term debt..... (31,250) -- -- -- -- (31,250)
Payment of dividend............. (220,339) -- -- -- -- (220,339)
Purchase of common stock........ (403) -- -- -- -- (403)
--------- ------ ---- ------- ---- ---------
Cash used in financing
activities.................... (98,992) -- -- -- -- (98,992)
Effect of exchange rate changes
on cash and cash equivalents.. -- -- -- (332) -- (332)
--------- ------ ---- ------- ---- ---------
Increase in cash and
cash equivalents.............. 24 1,033 -- 8,817 -- 9,874
Cash and cash equivalents
at beginning of year.......... 104 598 -- 21,637 -- 22,339
--------- ------ ---- ------- ---- ---------
Cash and cash equivalents
at end of year................ $ 128 $1,631 $ -- $30,454 $ -- $ 32,213
========= ====== ==== ======= ==== =========
F-33
KNOLL, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2000
(In Thousands)
Guarantors
------------------------
Spinneybeck Knoll
Knoll, Enterprises, Overseas, Non-
Inc. Inc. Inc. Guarantors Eliminations Total
---------- ------------ --------- ----------- ------------ -----------
CASH PROVIDED BY OPERATING
ACTIVITIES $ 205,309 $ 164 $ -- $17,238 $ -- $ 222,711
CASH FLOWS FROM INVESTING
ACTIVITIES
Capital expenditures............ (20,041) (228) -- (3,828) -- (24,097)
Proceeds from sale of assets.... 21 -- -- 118 -- 139
--------- ----- ---- ------- ---- ---------
Cash used in investing
activities.................... (20,020) (228) -- (3,710) -- (23,958)
CASH FLOWS FROM FINANCING
ACTIVITIES
Repayment of revolving
credit facility, net.......... (167,000) -- -- -- -- (167,000)
Repayment of long-term debt..... (17,500) -- -- -- -- (17,500)
Payment of fees to amend
debt agreements............... (682) -- -- -- -- (682)
Purchase of common stock........ (322) -- -- -- -- (322)
Payment of recapitalization
costs......................... (230) -- -- -- -- (230)
--------- ----- ---- ------- ---- ---------
Cash used in financing
activities.................... (185,734) -- -- -- -- (185,734)
Effect of exchange rate changes
on cash and cash equivalents.. -- -- -- (1,465) -- (1,465)
--------- ----- ---- ------- ---- ---------
Increase (decrease) in cash
and cash equivalents.......... (445) (64) -- 12,063 -- 11,554
Cash and cash equivalents
at beginning of year.......... 549 662 -- 9,574 -- 10,785
--------- ----- ---- ------- ---- ---------
Cash and cash equivalents
at end of year................ $ 104 $ 598 $ -- $21,637 $ -- $ 22,339
========= ===== ==== ======= ==== =========
F-34
KNOLL, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1999
(In Thousands)
Guarantors
------------------------
Spinneybeck Knoll
Knoll, Enterprises, Overseas, Non-
Inc. Inc. Inc. Guarantors Eliminations Total
---------- ------------ --------- ----------- ------------ -----------
CASH PROVIDED BY OPERATING
ACTIVITIES $ 124,858 $141 $ -- $ 2,988 $ -- $ 127,987
CASH FLOWS FROM INVESTING
ACTIVITIES
Capital expenditures............ (18,906) (40) -- (6,208) 59 (25,095)
Proceeds from sale of assets.... 60 -- -- 113 (59) 114
--------- ---- ---- ------- ---- ---------
Cash used in investing
activities.................... (18,846) (40) -- (6,095) -- (24,981)
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds from revolving
credit facility, net.......... 120,000 -- -- -- -- 120,000
Proceeds from long-term debt.... 325,000 -- -- -- -- 325,000
Repayment of long-term debt..... (3,750) -- -- -- -- (3,750)
Payment of debt issuance costs.. (7,864) -- -- -- -- (7,864)
Payment of fees to amend
debt agreements............... (12,870) -- -- -- -- (12,870)
Net proceeds from issuance
of stock...................... 4,746 -- -- -- -- 4,746
Purchase of common stock........ (28,703) -- -- -- -- (28,703)
Payment of merger
consideration................. (496,682) -- -- -- -- (496,682)
Payment of recapitalization
costs......................... (8,843) -- -- -- -- (8,843)
--------- ---- ---- ------- ---- ---------
Cash used in financing
activities.................... (108,966) -- -- -- -- (108,966)
Effect of exchange rate changes
on cash and cash equivalents.. -- -- -- (720) -- (720)
--------- ---- ---- ------- ---- ---------
Increase (decrease) in cash
and cash equivalents.......... (2,954) 101 -- (3,827) -- (6,680)
Cash and cash equivalents
at beginning of year.......... 3,503 561 -- 13,401 -- 17,465
--------- ---- ---- ------- ---- ---------
Cash and cash equivalents
at end of year................ $ 549 $662 $ -- $ 9,574 $ -- $ 10,785
========= ==== ==== ======= ==== =========
F-35
SCHEDULE II
KNOLL, INC.
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
Column A Column B Column C Column D Column E
- --------------------------------------- ------------ ------------ -------------- ------------
Additions
Balance at Charged to Balance
Beginning Costs and at End
Description of Year Expenses Deductions (1) of Year
- --------------------------------------- ------------ ------------ -------------- ------------
Valuation Accounts Deducted in the
Consolidated Balance Sheet from the
Assets to which They Apply:
Year Ended December 31, 2001:
Allowance for doubtful accounts.... $6,682 $3,096 $2,328 $7,450
Year Ended December 31, 2000:
Allowance for doubtful accounts.... 6,783 1,565 1,666 6,682
Year Ended December 31, 1999:
Allowance for doubtful accounts.... 5,057 2,513 787 6,783
____________________
(1) Uncollectible accounts written off and foreign currency translation.
S-1
EXHIBIT INDEX
Exhibit
Number Description Page
- ---------- --------------------------------------------------------------------------- ------
2++ Amended and Restated Agreement and Plan of Merger by and between Warburg,
Pincus Ventures, L.P. and Knoll, Inc., dated as of July 29, 1999.
3.1*** Amended and Restated Certificate of Incorporation of the Company.
3.2*** Amended and Restated By-Laws of the Company.
10.1* Stock Purchase Agreement, dated as of December 20, 1995, by and between
Westinghouse and T.K.G. Acquisition Corp.
10.2+++ Credit Agreement, dated as of October 20, 1999, by and among the Company,
the Guarantors (as defined therein), the Lenders (as defined therein),
Bank of America, N.A., as Administrative Agent, the Chase Manhattan Bank,
as Syndication Agent, and Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated, as Documentation Agent.
10.3+++++ First Amendment to Credit Agreement, dated as of December 20, 2000, by and
among the Company, the Guarantors (as defined therein), the Lenders (as
defined therein) party thereto, and Bank of America, N.A., as
Administrative Agent.
10.4* Indenture, dated as of February 29, 1996, by and among the Company, T.K.G.
Acquisition Corp., T.K.G. Acquisition Sub, Inc., The Knoll Group, Inc.,
Knoll North America, Inc., Spinneybeck Enterprises, Inc. and Knoll
Overseas, Inc., as guarantors, and IBJ Schroder Bank & Trust Company, as
trustee, relating to $165,000,000 principal amount of 10.875% Senior
Subordinated Notes due 2006, including form of Initial Global Note.
10.5* Supplemental Indenture, dated as of February 29, 1996, by and among the
Company, as successor to T.K.G. Acquisition Sub, Inc., the Guarantors (as
defined therein), and IBJ Schroder Bank & Trust Company, as trustee,
relating to $165,000,000 principal amount of 10.875% Senior Subordinated
Notes due 2006, including form of Initial Global Note.
10.6** Supplemental Indenture No. 2, dated as of March 14, 1997, by and among the
Company, the Guarantors (as defined therein), and IBJ Schroder Bank &
Trust Company, as trustee, relating to $165,000,000 principal amount of
10.875% Senior Subordinated Notes due 2006, including form of Initial
Global Note.
10.7+ Letter Agreement between Oak Hill Securities Fund, L.P. and the Company,
dated August 13, 1999.
10.8***** Supplemental Indenture No. 3, dated as of November 4, 1999, by and among
the Company, the Guarantors (as defined therein), and The Bank of New York,
as trustee, relating to the Company's 10.875% Senior Subordinated Notes
due 2006.
10.9++++ Amended and Restated Employment Agreement, dated as of January 1, 2000,
between the Company and Burton B. Staniar.
10.10 Amendment to Employment Agreement, dated as of March 25, 2002, between the
Company and Burton B. Staniar.
10.11+++++ Employment Agreement, dated as of March 23, 2001, between the Company and
Andrew B. Cogan.
10.12+++++ Employment Agreement, dated as of March 23, 2001, between the Company and
Kathleen G. Bradley.
10.13 Letter Agreement, dated as of June 6, 2000, between the Company and
Andrew C. McGregor.
10.14** Employment Agreement, dated as of February 29, 1996, between T.K.G.
Acquisition Corp. and John H. Lynch.
Exhibit
Number Description Page
- ---------- --------------------------------------------------------------------------- ------
10.15+++++ Letter Agreement, dated as of March 23, 2001, between the Company and
John H. Lynch.
10.16++++ Amended and Restated Stockholders Agreement, dated as of November 4, 1999,
among the Company, Warburg, Pincus Ventures, L.P., and the signatories
thereto.
10.17++++ Amended and Restated Stockholders Agreement (Common Stock Under Stock
Incentive Plans), dated as of November 4, 1999, among the Company,
Warburg, Pincus Ventures, L.P., and the signatories thereto.
10.18++++ Amended and Restated Knoll, Inc. 1996 Stock Incentive Plan.
10.19++++ Amended and Restated Knoll, Inc. 1997 Stock Incentive Plan.
10.20++++ Knoll, Inc. 1999 Stock Incentive Plan.
10.21++++++ Form of Non-Qualified Stock Option Agreement under the Knoll, Inc. 1996
Stock Incentive Plan, entered into by the Company and certain executive
officers.
10.22++++++ Form of Non-Qualified Stock Option Agreement under the Knoll, Inc. 1997
Stock Incentive Plan, entered into by the Company and certain executive
officers.
10.23++++ Form of Non-Qualified Stock Option Agreement under the Knoll, Inc. 1999
Stock Incentive Plan, entered into by the Company and certain executive
officers.
21** Subsidiaries of the Registrant.
__________________________________________
* Incorporated by reference to the Company's Registration Statement on
Form S-4 (File No. 333-2972), which was declared effective by the
Commission on June 12, 1996.
** Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996.
*** Incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 333-23399), which was declared effective by the
Commission on May 9, 1997.
**** Incorporated by reference to the Company's Annual Report on Form 10-K,
and the amendments thereto, for the year ended December 31, 1998.
***** Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1999.
+ Incorporated by reference to the Company's Amendment No. 1 to
Schedule 13E-3, which was filed with the Commission on September 10,
1999.
++ Incorporated by reference to the Company's Definitive Proxy Statement
on Schedule 14A, which was filed with the Commission on September 30,
1999.
+++ Incorporated by reference to the Company's Form 8-K dated November 4,
1999, which was filed with the Commission on November 5, 1999.
++++ Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1999.
+++++ Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 2000.
++++++ See Exhibit 10.23. Exhibit is substantially identical to
Exhibit 10.23.