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                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
                                   FORM 10-K
 
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
   ACT OF 1934
 
                  For the fiscal year ended December 31, 1997
 
                                      or
 
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
   EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM      TO
 
                         Commission File No. 001-12907
 
                                  KNOLL, INC.
 
        A Delaware Corporation           I.R.S. Employer No. 13-3873847
 
                               1235 Water Street
                           East Greenville, PA 18041
                        Telephone Number (215) 679-7991
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
 


         TITLE OF EACH CLASS          NAME OF EXCHANGE ON WHICH REGISTERED
         -------------------          ------------------------------------
                                   
       Common Stock, par value            New York Stock Exchange, Inc.   
       $0.01 per share                   

 
       SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
 
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
 
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
 
As of March 20, 1998, the aggregate market value of the voting stock held by
non-affiliates of the Registrant, based on the closing price of these shares
on the New York Stock Exchange, Inc., was $642,512,243. Directors, executive
officers and beneficial owners of 5% or more of the Registrant's stock are
considered affiliates of the Registrant.
 
As of March 20, 1998, there were 43,404,474 shares of the Registrant's common
stock, par value $0.01 per share, outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the Registrant's Proxy Statement for the Annual Shareholders'
Meeting to be held on May 19, 1998 are incorporated by reference into Part III
of this Form 10-K.
 
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                               TABLE OF CONTENTS
 



ITEM                                                                        PAGE
- ----                                                                        ----
                                                                         
                                  Part I

 1. Business...............................................................    1
 2. Properties.............................................................    7
 3. Legal Proceedings......................................................    7
 4. Submission of Matters to a Vote of Security Holders....................    7

                                 Part II

 5. Market for Registrant's Common Equity and Related Stockholder Matters..    8
 6. Selected Financial Data................................................    8
 7. Management's Discussion and Analysis of Financial Condition and Results
    of Operations..........................................................   11
 8. Financial Statements and Supplementary Data............................   18
 9. Changes in and Disagreements with Accountants on Accounting and Finan-
    cial Disclosure........................................................   18

                                 Part III

10. Directors and Executive Officers of the Registrant.....................   19
11. Executive Compensation.................................................   19
12. Security Ownership of Certain Beneficial Owners and Management.........   19
13. Certain Relationships and Related Transactions.........................   19

                                 Part IV

14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........   20
Signatures.................................................................   22

 

 
                                    PART I
 
ITEM 1. BUSINESS
 
GENERAL
 
  Knoll, Inc., a Delaware corporation, is the successor by merger to the
business and operations of The Knoll Group, Inc. and related entities ("The
Knoll Group" or the "Predecessor"), which were acquired on February 29, 1996
(the "Acquisition") from Westinghouse Electric Corporation, currently known as
CBS Corporation ("Westinghouse"). The Knoll Group was created by Westinghouse
in 1989 and 1990, when it acquired The Shaw-Walker Company, Reff Inc. and
Knoll International, Inc. and combined them with its Westinghouse Furniture
Systems division.
 
  The Acquisition was completed by T.K.G. Acquisition Corp. ("TKG"), a
corporation majority-owned by Warburg, Pincus Ventures, L.P. ("Warburg") and
whose other stockholders were NationsBanc Investment Corp. and members of
Knoll, Inc. management. In the Acquisition, a wholly owned subsidiary of TKG
acquired all of the outstanding capital stock of The Knoll Group and was
merged, together with The Knoll Group, Inc. into the principal operating
company of The Knoll Group, which changed its name in the merger to "Knoll,
Inc." On March 14, 1997, Knoll, Inc. was merged into TKG, which changed its
name in the merger to "Knoll, Inc." Unless the context requires or specifies
otherwise, the terms "Knoll" and the "Company" refer to Knoll, Inc., its
subsidiaries and predecessor entities as a combined entity.
 
  The Company completed an initial public offering of its common stock during
the second quarter of 1997. An aggregate of 9,200,000 shares, including
720,000 shares sold by a selling stockholder, were sold during May and June
1997 at $17.00 per share.
 
  The Company is engaged in the design, manufacture and distribution of office
furniture products and accessories, focusing on the middle to high-end of the
contract furniture market. The Company's principal executive offices are
located at 1235 Water Street, East Greenville, Pennsylvania 18041, and its
telephone number is (215) 679-7991.
 
  Except as otherwise indicated, the market and Company market share data
contained in this Form 10-K are based on information from The Business and
Institutional Furniture Manufacturer's Association ("BIFMA"), the United
States ("U.S.") office furniture trade association. The Company believes that
such data are considered within the industry to be the best available and
generally are indicative of the Company's relative market share and
competitive position.
 
INDUSTRY OVERVIEW
 
  The U.S. office furniture market consists of five major product categories:
office systems, seating, storage, desks and casegoods and tables. The
following table indicates the percentage of sales that each product category
contributed to the estimated U.S. office furniture industry in 1997.
 


                                                             U.S.      % OF U.S.
   PRODUCT CATEGORY                                       MARKET SIZE   MARKET
   ----------------                                      ------------- ---------
                                                         (in billions)
                                                                 
   Office systems.......................................     $4.1        35.3%
   Seating..............................................      2.8        24.6
   Storage..............................................      1.6        13.8
   Desks and casegoods..................................      1.9        16.4
   Tables...............................................      0.7         6.5

 
  Office systems consist of movable panels, work surfaces and storage units,
electrical distribution, lighting, organizing tools and freestanding
components. These modular systems are popular with customers who require
flexible space configurations or where many people share open floor space, as
is common in modern office
 
                                       1

 
buildings. Both seating, ranging from executive desk chairs to task chairs and
side chairs, and storage products, such as overhead shelving, file cabinets
and desk pedestals (file cabinets that serve to support desks), are sold to
users of office systems and also are sold separately to non-systems users.
Desks and tables range from classic writing desks in private offices to
conference and meeting room tables that can accommodate sophisticated
technological demands.
 
  The Company believes that fundamental shifts in the nature of corporate
organizational structures, technology and work processes are driving growth in
the office furniture industry. Companies increasingly use workplace design and
furniture purchase decisions as catalysts for organizational and cultural
change. Several significant factors that influence this change include:
continued corporate reengineering, restructuring and reorganizing; corporate
relocations; new office technology and the resulting necessity for improved
wire and data management; and heightened sensitivity to concerns about
ergonomic standards. In addition, other factors such as white collar
employment levels, corporate cash flow and non-residential construction
reflect certain macroeconomic conditions which management believes influence
industry growth.
 
PRODUCTS
 
  The Company offers a broad range of office furniture products and
accessories that support the Company's strategy of being a one-stop source for
quality office furniture. The Company's five basic product categories are as
follows: (i) office systems, comprised mainly of the Reff, Morrison and Equity
product lines; (ii) seating, including the Sapper, Bulldog, Parachute and SoHo
chairs; (iii) storage solutions and filing cabinets, including the Calibre
collection; (iv) desks and casegoods, including bookcases and credenzas; and
(v) tables. The Company has a KnollStudio collection that features its
signature design classics, including high image side chairs, sofas, desks and
tables for both office and home use. The Company also offers its own lines of
textiles sold under the KnollTextiles brand, lines of leather products sold
under the Spinneybeck name and a line of desk, office and computer accessories
under the KnollExtra brand that complement its furniture products and are also
sold to other manufacturers or with products manufactured by others.
 
  The following is a description of the Company's major product categories and
lines:
 
 Office Systems
 
  The Company offers a complete line of systems products in order to meet the
needs of a variety of organizations. Systems may be used for teamwork
settings, private offices and open floor plans and are composed of adjustable
partitions, work surfaces, storage cabinets and electrical and lighting
systems that can be moved, re-configured and re-used within the office.
Systems therefore offer a cost effective and flexible alternative to
traditional drywall office construction. The Company has focused on this area
of the office furniture industry because it is the largest category, typically
provides attractive gross margins and often leads to repeat and add-on sales
of additional systems, complementary furniture and furniture accessories.
Office systems accounted for approximately 68.5% of the Company's sales in
1997, 66.7% of sales in 1996 and 68.2% of sales in 1995.
 
  The Company has developed two new office systems product lines, Currents and
Dividends, that address new category segments and price points where the
Company's current product offerings may be limited and where management
believes that demand for quality products has been under-served. These
products will be available for sale in the first half of 1998. The Company
believes its brand identity, superior design and complementary product
offerings give it a competitive advantage in launching new products.
 
 Seating
 
  The Company believes that the office seating market includes three major
segments: the "appearance," "comfort" and "basic" segments. Key customer
criteria in seating include superior ergonomics, aesthetics, comfort and
quality, all of which the Company believes to be consistent with its strengths
and reputation. The Company offers a complete line of seating in the
appearance and comfort segments at various price, appearance, comfort and
performance levels. The majority of sales in the U.S. seating market are made
to the same customers as are the office systems sales.
 
                                       2

 
 Storage Solutions and Filing Cabinets
 
  The Company offers a variety of storage options, as part of its Calibre
collection, designed to be integrated with its office systems as well as with
its and others' stand-alone furniture. These products consist of stand-alone
metal filing, storage and desk products that integrate into and support the
Company's systems sales. They also function as free-standing furniture in
private offices or open-plan environments. In addition, these products enable
the Company to sell products to businesses whose office furniture systems are
provided by the Company's competitors.
 
 Desks and Casegoods
 
  The Company's collections of stand-alone wood furniture items, such as
desks, bookshelves and credenzas, are available in a range of designs and
price points. These products combine contemporary styling with sophisticated
workplace solutions and attract a wide variety of customers, from those
conducting large office reconfigurations to small retail purchasers.
 
 Tables
 
  The Company offers an innovative line of adjustable Interaction tables.
Interaction tables are designed to be integrated into the Company's systems
lines and to provide customers with ergonomically superior work surfaces.
Additionally, these tables are often sold as stand-alone products to non-
systems customers. The Company also offers an award winning line of Propeller
meeting and conference tables that provide advanced wire management and
technology support while offering sufficient flexibility to allow end users to
reconfigure a meeting room quickly and easily to accommodate their specific
needs.
 
 KnollStudio
 
  The Company's historically significant KnollStudio collection serves the
design-conscious segment of the fine contract furniture market, providing the
architect and design community and customers with sophisticated furniture for
high-profile office and home uses. KnollStudio provides a marketing umbrella
for the full range of the Company's office products and is recognized as the
"design engine" of the Company. KnollStudio products, including a wide variety
of chairs and sofas, as well as conference, training, side and dining tables,
were created by many of this century's most prominent architects and
designers, such as Ludwig Mies van der Rohe, Marcel Breuer, Eero Saarinen and
Frank Gehry, for prestigious corporate and residential interiors. This line
includes complete collections by individual designers as well as distinctive
single items.
 
  Maya Lin, the internationally-known designer of the National Veterans
Memorial in Washington, D.C., recently developed a signature collection of
products for the KnollStudio line. The products are targeted for introduction
in the second half of 1998, in conjunction with the celebration of the
Company's 60th anniversary.
 
 Complementary Products
 
  The Company offers product lines that complement its primary office systems
and seating business, permitting it to sell a complete package of office
interiors by supplying many of its own component products. Such products help
maintain the Company's unique design image by incorporating elements developed
by its own team of designers.
 
  KnollExtra. KnollExtra is a rapidly growing line of desk and office
accessories, including letter trays, sorters, binder bins, file holders,
calendars, desk pads, planters, wastebaskets and bookends. In addition,
KnollExtra offers a number of computer accessories and ergonomic office
products.
 
  KnollTextiles. KnollTextiles offers a wide range of coverings for walls,
panels and seating. KnollTextiles was established in 1947 to develop high
quality fabrics for Knoll furniture. These products allow the Company to
distinguish its product offerings by providing specialty fabric options and
flexibility in fabric selection and application. As it does with its furniture
lines, the Company uses many independent designers to create its fabrics,
which has helped it establish what management believes to be a unique
reputation for textile design. Not
 
                                       3

 
only are KnollTextiles coverings applied to Knoll furniture, but they are also
sold to customers for use on other manufacturers' products, thereby allowing
the Company to benefit from its competitors' sales.
 
  Leather. Spinneybeck Enterprises, Inc., a wholly owned subsidiary of the
Company, supplies quality upholstery leather to the Company, to other
furniture manufacturers and to aviation, custom coach and boating
manufacturers.
 
 European Products
 
  Knoll Europe has a broad product offering which allows customers to single-
source a complete office environment, including certain products designed
specifically for the European market. Knoll Europe's core product categories
include: (i) office systems, including the Hannah Desking System and the
recently introduced PL1 System, which are targeted to Northern Europe, the
Alessandri System, which is targeted to the French market and the SoHo Desking
System, which has broad market appeal; (ii) KnollStudio, which serves the
image and design-oriented segment of the fine furniture market; (iii) seating,
including a comprehensive range of chairs such as Sapper, Bulldog, and
Parachute; and (iv) cabinets, which are designed to complement its systems
products. The Company also sells its products designed and manufactured in
North America to the international operations of its core North American
customers.
 
PRODUCT DESIGN AND DEVELOPMENT
 
  Knoll's design philosophy is linked to its commitment to working with the
world's preeminent designers to develop products that delight and inspire. The
Company's collection of classic and current designs includes works by such
internationally recognized architects and designers as Ludwig Mies van der
Rohe, Marcel Breuer, Eero Saarinen, Harry Bertoia, Massimo Vignelli and Frank
Gehry. Today, the Company continues to engage prominent outside architects and
designers, such as Maya Lin, to create new products and product enhancements.
By combining the creative vision of architects and designers with a corporate
commitment to products which address changing business needs, the Company
seeks to launch new offerings which achieve recognition in the architect and
design community and generate strong demand among corporate customers.
 
  Since 1994, under the leadership of Carl G. Magnusson, the Company's Senior
Vice President-Design, the Company has won over 20 design awards for its
recent product introductions. An important part of the Company's product
development capabilities is its responsiveness to customer needs and
flexibility to handle customized manufacturing requests. In order to develop
products across its product range, the Company works closely with independent
designers from a number of industries. By utilizing these long-standing design
relationships and listening to customers to analyze their needs, the Company
has redesigned or enhanced virtually every product line since 1994 in order to
better meet customer preferences.
 
SALES AND DISTRIBUTION
 
  Knoll's customers are typically Fortune 1000 companies. The Company employs
approximately 320 direct sales representatives, who work closely with its
approximately 230 independent dealers in North America to present the
Company's products to prospective customers. The sales force, in conjunction
with the dealer network, has close relationships with architects, designers
and corporate facility managers, who often have a significant influence on
product selection for large orders.
 
  In addition to coordinating sales efforts with the Company's sales
representatives, the Company's dealers generally handle project management,
installation and maintenance for the account after the initial product
selection and sale. Although many of these dealers also carry products of
other manufacturers, none of them acts as a dealer for the Company's principal
direct competitors. The Company has not experienced significant turnover in
its dealer network except at its own initiation, as the dealer's economic
investment in learning all aspects of a particular manufacturer's product
offerings and the value of the relationships the dealer forms with the Company
and with customers discourage dealers from changing their vendor affiliations.
The Company is
 
                                       4

 
not dependent on any one of its dealers, the largest of them accounting for
less than 5.0% of the Company's North American sales in 1997. No single
customer represented more than 3.0% of the Company's North American sales
during 1997. However, a number of U.S. government agencies purchase the
Company's products through multiple contracts with the General Services
Administration ("GSA"). Sales to the GSA aggregated approximately 8.0% in
1997.
 
  In Europe, the Company sells its products in largely the same manner as it
does in North America, through a direct sales force and a network of dealers,
though each major European market has its own distinct characteristics. The
European market accounted for approximately 6.9% of the Company's sales in
1997. In the Latin American and Asia-Pacific markets, which accounted for 1.8%
of the Company's sales in 1997, the Company uses both dealers and independent
licensees.
 
MANUFACTURING AND OPERATIONS
 
  The Company operates four manufacturing sites in North America, with plants
located in East Greenville, Pennsylvania; Grand Rapids and Muskegon, Michigan;
and Toronto, Canada. In addition, the Company has two plants in Italy: one in
Foligno and one in Graffignana. All of the Company's plants are registered
under ISO 9000, an internationally developed set of quality criteria for
manufacturing companies.
 
RAW MATERIALS AND SUPPLIERS
 
  The Company's purchasing is centralized in its East Greenville facility.
This centralization, in addition to close working relationships formed with
its main suppliers, has enabled the Company to focus on achieving purchasing
economies and "just-in-time" inventory practices. The Company utilizes steel,
lumber, paper, paint, plastics, laminates, particleboard, veneers, glass,
fabrics, leathers and upholstery filling material. Management currently
maintains no long-term supply contracts and believes that the supply sources
for these materials are adequate. The Company does not rely on any sole source
suppliers for any of its raw materials, except for certain electrical
products.
 
COMPETITION
 
  The office furniture market is highly competitive. Office furniture
companies compete on the basis of (i) product design, including performance,
ergonomic and aesthetic factors, (ii) product quality and durability, (iii)
price (primarily in the middle and budget segments), (iv) on-time delivery and
(v) service and technical support. In the United States, where the Company had
a 6.3% market share and derived approximately 88.5% of its sales in 1997, five
companies (including the Company) represent approximately 60.2% of the market.
 
  Some of the Company's competitors, especially those in North America, are
large and have significantly greater financial, marketing, manufacturing and
technical resources than those of the Company. The Company's most significant
competitors in its primary markets are Steelcase, Inc., Herman Miller, Inc.,
Haworth, Inc. and, to a lesser extent, HON Industries, Inc. These competitors
have a substantial volume of furniture installed at businesses throughout the
country, providing a continual source of demand for further products and
enhancements. Moreover, the products of these competitors have strong
acceptance in the marketplace. Although the Company believes that it has been
able to compete successfully in its markets to date, there can be no assurance
that it will be able to continue to do so in the future.
 
  The European market is highly fragmented, as the combined sales of the
estimated top 50 manufacturers represent less than approximately 60.0% of the
market. Based on the most recent publicly available trade information, the
Company believes that no single company holds more than a 10.0% share of the
European market.
 
PATENTS AND TRADEMARKS
 
  The Company has approximately 91 active United States utility patents on
various components used in its products and systems and approximately 115
active United States design patents. The Company also has
 
                                       5

 
approximately 200 patents in various foreign countries. Knoll(R), The Knoll
Group(R), KnollStudio(R), KnollExtra(R), Reff(TM), Bulldog(R), Calibre(R),
Equity(R), Parachute(R), Good Design Is Good Business(R), Propeller(R) and
SoHo(TM) are trademarks of the Company. The Company considers securing and
protecting its intellectual property rights to be important to its business.
 
BACKLOG
 
  The Company's backlog of unfilled orders was $141.3 million at December 31,
1997 and $94.1 million at December 31, 1996. The Company expects to fill
substantially all outstanding unfilled orders within the next twelve months.
The Company manufactures substantially all of its products to order, and its
average manufacturing time is approximately five weeks. As a result, backlog
is not a significant factor used to predict the Company's long-term business
prospects.
 
FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
 
  For information regarding foreign and domestic operations and export sales,
refer to Note 23 (Business Segment and Geographical Region Information) of the
Notes to the Consolidated Financial Statements beginning on page F-29.
 
ENVIRONMENTAL MATTERS
 
  The Company believes that it is substantially in compliance with all
applicable laws and regulations for the protection of the environment and the
health and safety of its employees based upon existing facts known to
management. Compliance with federal, state, local and foreign environmental
regulations relating to the discharge of substances into the environment, the
disposal of hazardous wastes and other related activities has had and will
continue to have an impact on the operations of the Company, but has, since
the formation of Knoll in 1990, been accomplished without having a material
adverse effect on the operations of the Company. There can be no assurance
that such regulations will not change in the future or that the Company will
not incur material costs as a result of such regulations. While it is
difficult to estimate the timing and ultimate costs to be incurred due to
uncertainties about the status of laws, regulations and technology, management
presently has no planned expenditures of significant amounts for future
environmental compliance. The Company has trained staff responsible for
monitoring compliance with environmental, health and safety requirements. The
Company's goal is to reduce and, wherever possible, eliminate the creation of
hazardous waste in its manufacturing processes.
 
  The Company has been identified as a potentially responsible party pursuant
to the Comprehensive Environmental Response Compensation and Liability Act
("CERCLA") for remediation costs associated with waste disposal sites
previously used by the Company. CERCLA imposes liability without regard to
fault or the legality of the disposal. The remediation costs at the CERCLA
sites are unknown; however, the Company does not expect its liability to be
material. At each of the sites, the Company is one of many potentially
responsible parties and expects to have only a small percentage of liability.
At some of the sites, the Company expects to qualify as a de minimis or de
micromis contributor, eligible for a cash-out settlement. In addition,
Westinghouse has agreed to indemnify the Company for certain costs associated
with CERCLA liabilities known as of the date of the Acquisition.
 
EMPLOYEES
 
  As of February 28, 1998, the Company employed a total of 3,942 people,
including 2,594 hourly and 1,348 salaried employees. The Grand Rapids,
Michigan plant is the only unionized Company plant within the United States,
with the Carpenters and Joiners of America-Local 1615 having a four-year
contract expiring August 30, 1998. While management believes that relations
with this union are positive, management cannot assure that it will be
successful in reaching a new contract. Recently, there was an unsuccessful
attempt to unionize employees at the Company's Muskegon, Michigan facility.
The Company believes that relations with its employees in Muskegon and
throughout North America are good. Nonetheless, it is possible that Company
employees may
 
                                       6

 
attempt to unionize in the future. Certain workers in the Company's facilities
in Italy are represented by unions. The Company has experienced brief work
stoppages from time to time at the Company's plants in Italy, certain of which
related to national or local issues. Such work stoppages have not materially
affected the Company.
 
ITEM 2. PROPERTIES
 
  The Company operates over 2,947,000 square feet of facilities, including
manufacturing plants, warehouses and sales offices. Of these facilities, the
Company owns approximately 2,372,000 square feet and leases approximately
575,000 square feet. The Company's manufacturing plants are located in East
Greenville, Pennsylvania; Grand Rapids and Muskegon, Michigan; Toronto,
Canada; and Foligno and Graffignana, Italy.
 
  The Company's corporate headquarters are located in East Greenville,
Pennsylvania, where the Company owns two manufacturing facilities aggregating
approximately 547,000 square feet and leases three warehouses aggregating
approximately 142,000 square feet. The East Greenville facility is also the
distribution center for KnollStudio, KnollExtra and KnollTextiles.
 
  The Company owns one approximately 500,000 square foot manufacturing
facility in Grand Rapids, Michigan and one approximately 274,000 square foot
plant in Muskegon, Michigan. The Company's plants in Toronto, Canada consist
of one approximately 375,000 square foot owned building and two leased
properties aggregating approximately 230,000 square feet. The Company is in
the process of expanding its manufacturing facilities in Muskegon, Michigan
and Toronto, Canada by approximately 60,000 square feet and 32,000 square
feet, respectively.
 
  The Company owns two manufacturing facilities in Italy: an approximately
258,000 square foot building in Foligno, which houses the Knoll Europe
headquarters, and an approximately 110,000 square foot building in
Graffignana.
 
  The Company believes that its plants and other facilities are sufficient for
its needs for the foreseeable future.
 
ITEM 3. LEGAL PROCEEDINGS
 
  The Company is subject to litigation in the ordinary course of its business.
The Company is not a party to any lawsuit or proceeding which, in the opinion
of management, based on information presently known, is likely to have a
material adverse effect on the Company.
 
  The Company, for a number of years, has sold various products to the United
States Government under GSA multiple award schedule contracts. The GSA is
permitted to audit the Company's compliance with the terms of the GSA
contracts. As a result of one such audit, the GSA has asserted refund claims
under 1985-88 and 1987-90 contracts between GSA and The Shaw-Walker Company,
which has been merged into the Company, for approximately $2.15 million
("Shaw-Walker GSA Claims") and has other contracts under audit review. GSA has
referred both of these Shaw-Walker contracts to the Justice Department for
consideration of potential civil False Claims Act cases. Under the civil False
Claims Act, the Company is potentially liable for treble damages plus
penalties of up to $10,000 for each "false" invoice submitted to the
Government. The former shareholders of The Shaw-Walker Company have agreed to
indemnify the Company for the Shaw-Walker GSA Claims. Based upon information
presently known, management disputes the audit results and does not expect
resolution of the Shaw-Walker GSA Claims to have a material adverse effect on
the Company's consolidated financial statements. Management does not have
information which would indicate a substantive basis for a civil False Claims
Act case under the contracts.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
  No matters were submitted to a vote of security holders during the three
months ended December 31, 1997.
 
                                       7

 
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
 
MARKET INFORMATION AND DIVIDEND POLICY
 
  The Company's common stock, par value $0.01 per share (the "Common Stock")
is traded on the New York Stock Exchange, Inc. ("NYSE"). The Common Stock has
been listed on the NYSE since May 9, 1997, the date of the Company's initial
public offering. The following table sets forth, for the periods indicated,
high and low closing sales prices for the Common Stock as reported by the
NYSE.
 


   1997                                                          HIGH      LOW
   ----                                                        --------- -------
                                                                   
   Second quarter (commencing May 9, 1997).................... $23 3/4   $17 1/4
   Third quarter..............................................  33 15/16  22 7/8
   Fourth quarter.............................................  34 3/16   25 3/8

 
  The closing price of the Company's Common Stock was $41 1/8 on March 20,
1998. As of such date, there were approximately 3,600 holders of record of the
Common Stock.
 
  The Company has not paid a cash dividend on its Common Stock since the
Acquisition, and does not anticipate paying any cash dividends on the Common
Stock in the foreseeable future. The current policy of the Company's Board of
Directors is to retain earnings to finance the operations and expansion of the
Company's business. In addition, the Company's credit agreement and indenture
(the "Indenture") relating to the Company's 10.875% Senior Subordinated Notes
(the "Senior Subordinated Notes") limit the Company's ability to pay dividends
to its stockholders. Any future determination to pay dividends will depend on
the Company's results of operations, financial condition, capital
requirements, contractual limitations and other factors deemed relevant by the
Board of Directors.
 
RECENT SALES OF UNREGISTERED SECURITIES
 
  Options to purchase 10,000 shares of Common Stock were granted to an
employee of the Company on January 5, 1998 pursuant to the Knoll, Inc. 1997
Stock Incentive Plan. These options were granted at an exercise price of
$33.375 and vest over periods determined at their date of grant. Such grants
were made in reliance on the exemption from registration pursuant to Section
4(2) of the Securities Act.
 
ITEM 6. SELECTED FINANCIAL DATA
 
  The following table presents (i) selected historical consolidated financial
information of the Predecessor, as of the dates and for the periods indicated,
(ii) selected historical consolidated financial information of the Company, as
of the dates and for the periods indicated and (iii) summary pro forma
consolidated financial information of the Company, for the periods indicated,
after giving effect to the events described in the notes below. The historical
consolidated financial information for each of the three years in the period
ended December 31, 1995 has been derived from the Predecessor's financial
statements, which have been audited by Price Waterhouse LLP. The historical
consolidated financial information for the two-month period ended February 29,
1996 has been derived from the Predecessor's financial statements which have
been audited by Ernst & Young LLP. The historical consolidated financial
information for the ten-month period ended December 31, 1996 and the year
ended December 31, 1997 has been derived from the Company's financial
statements which have been audited by Ernst & Young LLP. The summary pro forma
information does not purport to represent what the Company's results actually
would have been if such events had occurred at the dates indicated, nor does
such information purport to project the results of the Company for any future
period. The selected financial information should be read in conjunction with
Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Item 8, "Financial Statements and Supplementary
Data."
 
 
                                       8

 


                                        PREDECESSOR                  |                 THE COMPANY
                          -------------------------------------------|---------------------------------------------
                                                                     |                               PRO FORMA
                                                          TWO MONTHS | TEN MONTHS      YEAR         YEAR ENDED
                            YEAR ENDED DECEMBER 31,         ENDED    |   ENDED        ENDED        DECEMBER 31,
                          -----------------------------  FEBRUARY 29,|DECEMBER 31, DECEMBER 31, -------------------
                            1993      1994       1995        1996    |    1996         1997     1996(1)(2) 1997(2)
                          --------  ---------  --------  ------------|------------ ------------ ---------- --------
                                       (IN THOUSANDS)                |    (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                                      |                            
OPERATING DATA                                                       |
Total sales.............  $508,383  $ 562,869  $620,892   $  90,232  |  $561,534     $810,857    $651,766  $810,857
Cost of sales(3)........   376,875    410,104   417,632      59,714  |   358,841      489,962     419,908   489,962
                          --------  ---------  --------   ---------  |  --------     --------    --------  --------
Gross profit............   131,508    152,765   203,260      30,518  |   202,693      320,895     231,858   320,895
Provision for                                                        |
 restructuring..........     6,165     29,180       --          --   |       --           --          --        --
Selling, general and                                                 |
 administrative                                                      |
 expenses(4)............   163,015    167,238   138,527      21,256  |   131,349      183,018     153,388   183,018
Westinghouse long-term                                               |
 incentive                                                           |
 compensation(5)........       --         --        --       47,900  |       --           --          --        --
Allocated corporate                                                  |
 expenses(3)(4).........     4,899      5,881     9,528         921  |       --           --          --        --
                          --------  ---------  --------   ---------  |  --------     --------    --------  --------
Operating income (loss).   (42,571)   (49,534)   55,205     (39,559) |    71,344      137,877      78,470   137,877
Interest expense........     3,301      3,225     1,430         340  |    32,952       25,075      34,359    22,373
Other income (expense),                                              |
 net....................     2,082        699    (1,597)       (296) |       447        1,667         151     1,667
                          --------  ---------  --------   ---------  |  --------     --------    --------  --------
Income (loss) before                                                 |
 income tax expense                                                  |
 (benefit), cumulative                                               |
 effect of changes in                                                |
 accounting principles                                               |
 and extraordinary item.   (43,790)   (52,060)   52,178     (40,195) |    38,839      114,469      44,262   117,171
Income tax expense                                                   |
 (benefit)..............    (3,571)     7,713    22,846     (16,107) |    16,844       48,026      19,094    49,096
                          --------  ---------  --------   ---------  |  --------     --------    --------  --------
Income (loss) before                                                 |
 cumulative effect of                                                |
 changes in accounting                                               |
 principles and                                                      |
 extraordinary item.....   (40,219)   (59,773)   29,332     (24,088) |    21,995       66,443      25,168    68,075
Cumulative effect of                                                 |
 changes in accounting                                               |
 principles.............    (1,118)       --        --          --   |       --           --          --        --
                          --------  ---------  --------   ---------  |  --------     --------    --------  --------
Income (loss) before                                                 |
 extraordinary item.....   (41,337)   (59,773)   29,332     (24,088) |    21,995       66,443      25,168    68,075
Extraordinary loss on                                                |
 early extinguishment of                                             |
 debt, net of taxes(6)..       --         --        --          --   |     5,159        5,337         --        --
                          --------  ---------  --------   ---------  |  --------     --------    --------  --------
Net income (loss)(6)....  $(41,337) $ (59,773) $ 29,332   $ (24,088) |  $ 16,836     $ 61,106    $ 25,168  $ 68,075
                          ========  =========  ========   =========  |  ========     ========    ========  ========
Pro forma income before                                              |
 extraordinary item per                                              |
 share of Common                                                     |
 Stock(7):                                                           |
 Basic..................                                             |  $   0.71     $   1.78    $   0.64  $   1.69
 Diluted................                                             |  $   0.63     $   1.64    $   0.58  $   1.57
Pro forma net income per                                             |
 share of Common                                                     |
 Stock(6)(7):                                                        |
 Basic..................                                             |  $   0.54     $   1.64    $   0.64  $   1.69
 Diluted................                                             |  $   0.48     $   1.51    $   0.58  $   1.57
Pro forma weighted                                                   |
 average shares of                                                   |
 Common Stock(7):                                                    |
 Basic..................                                             |    31,040       37,284      39,520    40,287
 Diluted................                                             |    34,701       40,398      43,181    43,400

 
                                       9

 


                                          PREDECESSOR        |   THE COMPANY
                                   --------------------------|-----------------
                                          DECEMBER 31,       |  DECEMBER 31,
                                   --------------------------|-----------------
                                     1993     1994     1995  |  1996     1997
                                   -------- -------- --------|-------- --------
                                         (IN THOUSANDS)      | (IN THOUSANDS)
                                                 |      
BALANCE SHEET DATA                                           |
Working capital................... $ 41,933 $ 22,898 $ 82,698|$ 64,754 $ 65,553
Total assets......................  691,043  705,316  656,710| 675,712  680,859
Total long-term debt, including                              |
 current portion..................   15,204   12,451    3,538| 354,154  207,029
Total liabilities.................  205,104  247,310  176,259| 497,908  392,570
Stockholders' equity..............  485,939  458,006  480,451| 177,804  288,289

 
- --------
(1) Reflects summary pro forma financial information of the Company derived
    from the financial statements and notes thereto included elsewhere in this
    Form 10-K, adjusted to reflect the completion of the Acquisition, the
    application of the net proceeds of $160,000 from the sale of capital stock
    of the Company and related borrowings of $260,000 and $165,000 under the
    Company's then-existing credit agreement and the Company's Senior
    Subordinated Notes, respectively, as if such events occurred at the
    beginning of the period.
(2) Reflects summary pro forma financial information of the Company derived
    from the financial statements and notes thereto included elsewhere in this
    Form 10-K, adjusted to reflect (i) the completion of the Company's initial
    public offering, (ii) the application of the net proceeds to the Company
    of $133,440 therefrom, together with borrowings of $11,673 under the
    Company's then-existing revolving credit facility, for the redemption of
    800,000 shares of Series A 12.0% Participating Convertible Preferred Stock
    ("Series A Preferred Stock") for an aggregate redemption price of $80,000
    in cash and 11,749,361 shares of Common Stock and for the redemption of an
    aggregate principal amount of $57,750 of the Senior Subordinated Notes for
    a total redemption price of $65,113 (including a redemption premium of
    $5,775 and accrued and unpaid interest thereon of $1,558) and (iii) the
    conversion of the remaining 802,998 shares of Series A Preferred Stock
    into 15,691,558 shares of Common Stock as if such events occurred at the
    beginning of the respective periods.
(3) Pro forma 1996 cost of sales has been increased by (i) $801 to reflect an
    increase in amortization and depreciation resulting from the Acquisition
    and (ii) $552 to reflect the reclassification of a portion of allocated
    corporate expenses. The reclassified allocated corporate expenses
    approximate the replacement cost to the Company for services formerly
    provided by Westinghouse to the Predecessor, including (i) benefit expense
    related to the adoption of various independent benefit plans comparable to
    Westinghouse benefit plans and (ii) the cost of services required to
    replace specific activities formerly provided by Westinghouse to the
    Predecessor, including audit, tax, general ledger, accounts receivable,
    human resources, legal, insurance and data communications.
(4) Pro forma 1996 selling, general and administrative expenses have been
    increased by (i) $369 to reflect the reclassification of allocated
    corporate expenses which approximate the replacement cost to the Company
    (described above in note 3) and (ii) $414 to reflect an increase in
    amortization and depreciation resulting from the Acquisition.
(5) Westinghouse long-term incentive compensation has been eliminated in pro
    forma 1996. Such compensation became payable from Westinghouse, and the
    amounts payable were established, as a result of consummation of the
    Acquisition.
(6) The pro forma 1996 operating data presented does not include the $5,159
    extraordinary loss on early extinguishment of debt, net of taxes. In
    addition, the pro forma operating data for the years ended December 31,
    1996 and 1997 does not include an extraordinary loss of $5,337, net of
    taxes, associated with the early redemption of a portion of the Senior
    Subordinated Notes in connection with the initial public offering.
(7) Because of the redemption and conversion into Common Stock of the Series A
    Preferred Stock upon consummation of the Company's initial public
    offering, historical net income (loss) per share is not presented herein.
    Pro forma income per share amounts are based on the weighted average
    number of shares of Common Stock and potentially dilutive securities
    (nonvested stock grants and employee stock options) outstanding during the
    period, after giving effect to the redemption and conversion into Common
    Stock of the Series A Preferred Stock assuming the redemption and
    conversion had occurred at the beginning of the periods presented. See
    Note 2 to the financial statements included elsewhere in this Form 10-K.
 
                                      10

 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS
 
  The following discussion should be read in conjunction with Item 8,
"Financial Statements and Supplementary Data."
 
OVERVIEW
 
  Knoll, Inc. and its subsidiaries are engaged in the design, manufacture and
sale of office furniture products and accessories, focusing on the middle to
high-end segments of the contract furniture market. The Company was formed on
February 29, 1996 as a result of the acquisition of the office furniture
business unit (The Knoll Group, Inc. and related entities) of Westinghouse.
 
  The Company's current management initiated a turnaround program in 1994 that
has led to significant growth and a dramatic improvement in operating and
financial performance. The turnaround initiatives included:
 
  .  Centralizing administrative functions, simplifying manufacturing
     processes, consolidating purchasing activities and selling and
     consolidating manufacturing facilities.
  .  Focusing on product line management to enhance each product's
     profitability and market potential.
  .  Retraining the Company's sales force to focus on sales growth and
     profitability.
  .  Introducing new products to better respond to customer needs.
  .  Realigning management incentives.
  .  Restructuring and centralizing the European business.
 
  As a result of the implementation of the turnaround program and favorable
industry dynamics, operating performance improved significantly from 1995 to
1997. Sales increased from $620.9 million in 1995 to $810.9 million in 1997.
Gross margins increased from 31.5% in 1995, on a pro forma basis, to 39.6% in
1997. Operating margins increased from 7.9% in 1995, on a pro forma basis, to
17.0% in 1997. The Company's improved operating and financial results allowed
it in 1996 to prepay $72.0 million under its then-existing credit facilities
and refinance such facilities on more favorable terms. In addition, in 1997,
the Company was able to reduce its debt by $147.1 million and enter into a new
credit agreement with more favorable terms.
 
  The Company believes that its recent sales growth exceeded industry growth
as a whole and believes that it is well-positioned for continued growth in
sales and profitability. The Company intends to pursue growth by introducing
new products in the office systems category, where the Company is already a
recognized leader, and in other product categories where the Company's market
share could be increased by leveraging the Company's design expertise and
brand awareness. The Company estimates that its share of the 1997 U.S. office
furniture market was 12.1% for office systems, 2.1% for seating, 2.3% for
storage, 1.2% for desks and casegoods and 1.8% for tables. Such percentages do
not include sales of KnollStudio, KnollExtra, KnollTextiles and Spinneybeck.
The following table describes the estimated 1997 U.S. office furniture market
sales by category.
 


                                                             U.S.      % OF U.S.
   PRODUCT CATEGORY                                       MARKET SIZE   MARKET
   ----------------                                      ------------- ---------
                                                         (IN BILLIONS)
                                                                 
   Office systems.......................................     $4.1        35.3%
   Seating..............................................      2.8        24.6
   Storage..............................................      1.6        13.8
   Desks and casegoods..................................      1.9        16.4
   Tables...............................................      0.7         6.5

 
  In addition, the Company had sales in Canada and Europe of approximately
$93.5 million in 1997. European sales are primarily in the United Kingdom,
Germany, France, Belgium and Italy.
 
 
                                      11


 
RESULTS OF OPERATIONS
 
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO PRO FORMA YEAR ENDED DECEMBER
31, 1996
 
  Total sales. Total sales were $810.9 million for the year ended December 31,
1997, an increase of $159.1 million, or 24.4%, from $651.8 million for the
year ended December 31, 1996. The sales growth resulted from increased volume
across all product categories, with the largest increase coming from the sales
of office systems, which represented approximately 68.5% of the Company's
sales in 1997. Sales levels continued to benefit from continued product
improvements, increased sales and marketing efforts and favorable industry
dynamics.
 
  Gross profit. Gross profit was $320.9 million for the year ended December
31, 1997, increasing $89.0 million, or 38.4%, from gross profit of $231.9
million for the year ended December 31, 1996. Gross profit as a percentage of
sales increased to 39.6% for the year ended December 31, 1997, from 35.6% for
the previous year. These increases were principally due to higher sales
volumes, better pricing in North America and continued cost improvements in
the Company's manufacturing plants.
 
  Selling, general and administrative expenses. Selling, general and
administrative expenses were $183.0 million for the year ended December 31,
1997, increasing $29.6 million, or 19.3%, from $153.4 million for the year
ended December 31, 1996. This increase was primarily due to incremental
employee costs related to higher sales and profit levels in addition to
increased expenses related to new product and technology initiatives. As a
percentage of sales, the Company's selling, general and administrative
expenses decreased to 22.6% for the year ended December 31, 1997 from 23.5%
for the year ended December 31, 1996.
 
  Operating income. Operating income increased $59.4 million, or 75.7%, to
$137.9 million for the year ended December 31, 1997 from $78.5 million for the
year ended December 31, 1996. As a percentage of sales, operating income
increased to 17.0% for the year ended December 31, 1997 from 12.0% for the
same period in 1996. This improvement was driven by higher sales volumes,
improved gross margins and continued cost improvements.
 
  Interest expense. Interest expense was $25.1 million for the year ended
December 31, 1997 compared to $40.0 million for the year ended December 31,
1996. The decrease in interest expense is primarily attributable to the
overall reduction of debt as well as lower interest rates associated with the
refinancing of the Company's previously existing senior credit agreement in
December 1996.
 
  Income tax expense. Income tax expense as a percentage of pre-tax income was
42.0% for the year ended December 31, 1997 compared to 43.7% for the year
ended December 31, 1996. The decrease in the effective tax rate is primarily
attributable to the changing mix of pre-tax income between countries in which
the Company operates with differing effective tax rates and the reduced
effect, in 1997, of non-deductible goodwill amortization.
 
  Extraordinary item. For the year ended December 31, 1997, there was an
extraordinary charge of $5.3 million, net of a tax benefit of $3.5 million,
related to the early redemption of an aggregate principal amount of $57.8
million of the Company's Senior Subordinated Notes. The extraordinary loss
consisted of a $5.7 million premium paid and $3.1 million of unamortized
financing costs written-off in connection with the redemption. The Company
also recorded an extraordinary loss of $5.2 million, net of a tax benefit of
$3.3 million, in 1996 following the refinancing of the Company's previously
existing credit agreement. This extraordinary loss consisted of the write-off
of unamortized financing costs related to the refinanced debt.
 
  Pro forma earnings per share. Pro forma income before extraordinary item per
share for the year ended December 31, 1997 increased 160.3% to $1.64 per share
diluted from $0.63 per share diluted for the year ended December 31, 1996.
 
  Pro forma net income and net income per share as adjusted for the initial
public offering (unaudited supplemental information). Supplemental pro forma
as adjusted net income for the year ended December 31,
 
                                      12

 
1997 was $68.1 million ($1.57 per share diluted), an increase of $42.9 million
($0.99 per share diluted), or 170.2%, compared to $25.2 million ($0.58 per
share diluted) for the year ended December 31, 1996. Supplemental pro forma as
adjusted data reflects the sale of 8,480,000 shares of Common Stock by the
Company in its initial public offering and the application of the net proceeds
therefrom together with related borrowings under the Company's then-existing
revolving credit facility as if such events occurred at the beginning of each
period presented. Consequently, such results include interest savings from the
early redemption of a portion of the Company's Senior Subordinated Notes,
additional interest expense for related borrowings under the Company's then-
existing revolving credit facility and related income tax effects. Pro forma
as adjusted results do not reflect extraordinary losses of $5.3 million and
$5.2 million, net of taxes, incurred in 1997 and 1996, respectively, in
connection with the early redemption of debt.
 
COMPARISON OF PRO FORMA YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER
31, 1995
 
  Total sales. Total sales were $651.8 million for the year ended December 31,
1996, an increase of $30.9 million, or 5.0%, from $620.9 million for the year
ended December 31, 1995. The sales growth resulted from price increases (an
average of 2.4% over 1995) and increased volume across all North American
product categories, and was partially offset by the elimination of certain
lower profit product lines and contracts during 1995. Sales of office systems
grew $27.8 million, or 6.0%, while sales of the Company's specialty products
(KnollStudio, KnollExtra, KnollTextiles and Spinneybeck) and seating grew
$10.4 million, or 10.8%, and $3.1 million, or 5.7%, respectively. This growth
is attributable to product enhancements in all categories as well as continued
growth from new product introductions. The 1996 sales increase of continued
product was $41.3 million (6.8%), as 1995 sales included lower profit
discontinued product sales of $10.4 million.
 
  Gross profit. Gross profit was $231.9 million for the year ended December
31, 1996, an increase of $28.6 million, or 14.1%, from gross profit of $203.3
million for the year ended December 31, 1995. Gross profit as a percentage of
sales increased to 35.6% for the year ended December 31, 1996 from 32.7% for
the previous year. The actual gross margin generated by the Predecessor for
the year ended December 31, 1995 is not comparable to the pro forma gross
margin generated by the Company for the year ended December 31, 1996. Several
factors affect the comparability of these amounts. Approximately $3.1 million
of costs included in 1996 pro forma cost of sales were included in allocated
corporate expenses in the 1995 historical statement of operations. These costs
were related to the adoption of various independent employee benefit plans
comparable to Westinghouse benefit plans. In addition, $4.2 million of
depreciation expense related directly to the Acquisition is included in 1996
pro forma cost of sales. These increased depreciation costs were not incurred
during 1995. However, the above noted factors affecting comparability were
more than offset by improvements in operating results experienced by the
Company. These increases were principally due to the higher sales volumes in
North America, better pricing, discontinuance of unprofitable products,
continued factory operating cost improvements, consolidation of European
operations and other fixed cost reductions.
 
  Selling, general and administrative expenses. Selling, general and
administrative expenses were $153.4 million for the year ended December 31,
1996, up $14.9 million, or 10.8%, from the year ended December 31, 1995.
Actual selling, general and administrative expenses incurred by the
Predecessor for the year ended December 31, 1995 are not comparable to the pro
forma selling, general and administrative expenses incurred by the Company for
the year ended December 31, 1996. Several factors affect the comparability of
these amounts. Approximately $2.5 million of costs were incurred in 1996 to
replace employee benefit plans and other services (audit, tax, general ledger,
accounts receivable, human resources and legal) that were provided by
Westinghouse prior to the Acquisition. These costs were included in allocated
corporate expenses in the 1995 historical statement of operations. In
addition, increased depreciation and amortization costs totaling $1.6 million
resulting from the Acquisition are included in 1996 pro forma selling, general
and administrative expenses. These increased depreciation and amortization
costs were not incurred during 1995. In addition to the above noted factors
affecting comparability, selling, general and administrative expenses
increased by $10.8 million primarily due to increased sales incentive
compensation and employee benefits related to higher sales volumes in North
America and expenses related to new product and technology initiatives,
partially offset by savings resulting from
 
                                      13

 
showroom consolidations in Germany, Italy and Belgium along with the
centralization of administrative functions in Europe. As a percentage of
sales, the Company's selling, general and administrative expenses were 23.6%
for the year ended December 31, 1996 and 22.3% for the year ended December 31,
1995.
 
  Allocated corporate expenses. Allocated corporate expenses of $9.5 million
in 1995 include (i) Westinghouse overhead charges for Westinghouse executive
management and corporate legal, environmental, audit, tax, treasury and other
related services and (ii) incentive compensation payable to Knoll management
under Westinghouse long-term incentive plans. These allocated corporate
expenses, with the exception of incentive compensation, were payable by
Westinghouse and allocated to Knoll primarily based on sales. The 1996 pro
forma results do not include a $47.9 million charge to operations for the 1996
payment of awards to certain members of management of the Company pursuant to
a long-term incentive plan established by Westinghouse. The plan provided for
the payment of awards at the end of a five-year period based on the
achievement of certain performance goals set by Westinghouse's board of
directors. As a result of consummation of the Acquisition, the payment of
awards was accelerated pursuant to the terms of the plan. The Company has not
implemented an incentive plan similar to the Westinghouse plan and does not
expect such compensation to be payable in future periods.
 
  Operating income. Operating income increased to $78.5 million for the year
ended December 31, 1996 from $55.2 million for the year ended December 31,
1995. As a percentage of sales, operating income increased to 12.0% for the
year ended December 31, 1996 from 8.9% for the same period in 1995. As noted
above, these improvements were driven by higher sales volumes, better pricing,
discontinuance of lower profit product lines, factory cost improvements and
efficiencies gained from consolidation and centralization of administrative
functions.
 
  Interest expense. Interest expense increased $38.6 million to $40.0 million
for the year ended December 31, 1996. This increase is attributable to the
debt incurred by the Company in connection with the Acquisition. This debt
consisted of $165.0 million of the Company's Senior Subordinated Notes and
$260.0 million of borrowings under the Company's then-existing credit
facilities.
 
  Income tax expense. Income tax expense for the years ended December 31, 1996
and 1995 was 43.8% of pre-tax income.
 
  Extraordinary item. For the year ended December 31, 1996, there was an
extraordinary charge of $5.2 million, net of a tax benefit of $3.3 million,
relating to the write-off of unamortized financing costs following the
refinancing of the Company's previously existing credit agreement.
 
COMPARISON OF PRO FORMA YEAR ENDED DECEMBER 31, 1996 TO PRO FORMA YEAR ENDED
DECEMBER 31, 1995
 
  Because the Company was formed as a result of the Acquisition on February
29, 1996, the following discussion refers to the pro forma results of
operations for the years ended December 31, 1996 and 1995 as presented in Note
3 to the Consolidated Financial Statements in Item 8 of this Form 10-K.
 
  Total sales. Total sales were $651.8 million for the year ended December 31,
1996, an increase of $30.9 million, or 5.0%, from $620.9 million for the year
ended December 31, 1995. The sales growth resulted from price increases (an
average of 2.4% over 1995) and increased volume across all North American
product categories, and was partially offset by the elimination of certain
lower profit product lines and contracts during 1995. Sales of office systems
grew $27.8 million, or 6.0%, while sales of the Company's specialty products
(KnollStudio, KnollExtra, KnollTextiles and Spinneybeck) and seating grew
$10.4 million, or 10.8%, and $3.1 million or, 5.7%, respectively. This growth
is attributable to product enhancements in all categories as well as continued
growth from new product introductions. The 1996 sales increase of continued
product was $41.3 million, or 6.8%, as 1995 sales included lower profit
discontinued product sales of $10.4 million.
 
  Gross profit. Gross profit was $231.9 million for the year ended December
31, 1996, an increase of $36.3 million, or 18.6%, from gross profit of $195.6
million for the year ended December 31, 1995. Gross profit as a
 
                                      14

 
percentage of sales increased to 35.6% for the year ended December 31, 1996
from 31.5% for the previous year. These increases were principally due to the
higher sales volumes in North America, better pricing, discontinuance of
unprofitable products, continued factory operating cost improvements,
consolidation of European operations and other fixed cost reductions.
 
  Selling, general and administrative expenses. Selling, general and
administrative expenses were $153.4 million for the year ended December 31,
1996, up $10.8 million, or 7.6%, from the year ended December 31, 1995. The
increase was primarily due to increased sales incentive compensation and
employee benefits related to higher sales volumes in North America and
expenses related to new product and technology initiatives, partially offset
by savings resulting from showroom consolidations in Germany, Italy and
Belgium along with the centralization of administrative functions in Europe.
As a percentage of sales, the Company's selling, general and administrative
expenses were 23.6% for the year ended December 31, 1996 and 23.0% for the
year ended December 31, 1995.
 
  Allocated corporate expenses. Allocated corporate expenses of $4.0 million
in 1995 represents incentive compensation payable to Knoll management under
Westinghouse long-term incentive plans.
 
  Operating income. Operating income increased to $78.5 million for the year
ended December 31, 1996 from $49.0 million for the year ended December 31,
1995. As a percentage of sales, operating income increased to 12.0% for the
year ended December 31, 1996 from 7.9% for the same period in 1995. As noted
above, these improvements were driven by higher sales volumes, better pricing,
discontinuance of lower profit product lines, factory cost improvements and
efficiencies gained from consolidation and centralization of administrative
functions.
 
LIQUIDITY AND CAPITAL RESOURCES
 
  The Company's free cash flow has historically been used to fund capital
expenditures, working capital requirements and debt service. Following the
Acquisition on February 29, 1996, the Company's interest expense and cash
requirements significantly increased as a direct result of interest associated
with borrowings under the Company's credit facilities and the Senior
Subordinated Notes, as well as scheduled principal payments of previously
existing term loans under the Company's previously existing credit facilities.
 
  In May 1997, the Company completed an initial public offering, generating
net proceeds to the Company of $133.4 million from its sale of 8,480,000
shares of Common Stock. The Company used the net proceeds together with
borrowings of $11.7 million under the Company's then-existing revolving credit
facility to redeem 800,000 shares of Series A Preferred Stock for $80.0
million and to redeem an aggregate principal amount of $57.8 million of the
Company's Senior Subordinated Notes for $65.1 million (including a redemption
premium of $5.7 million and accrued and unpaid interest thereon of $1.6
million). In addition to the redemption of a portion of the Senior
Subordinated Notes, the Company repaid $89.2 million of bank debt during the
year ended December 31, 1997.
 
  On August 8, 1997, the Company entered into a new agreement that modified
certain terms of its then-existing senior credit agreement. The credit
agreement previously provided for a $100.0 million term loan with scheduled
principal payments through December 2002 and a $130.0 million revolving credit
facility that matured in December 2002. The new agreement provides for a
$275.0 million revolving credit facility that matures in August 2002.
Borrowings under the new agreement bear interest at a floating rate based, at
the Company's option, upon (i) the Eurodollar rate (as defined therein) plus
an applicable percentage which is subject to change based on the Company's
ratio of funded debt to EBITDA or (ii) the greater of the federal funds rate
plus 0.5% or the prime rate. The new credit agreement contains restrictive
covenants, financial covenants and events of default. Among other things, the
restrictive covenants limit the Company's ability to incur additional
indebtedness, pay dividends, make investments, grant liens and engage in
certain other activities. As of December 31, 1997, the Company had an
aggregate of $174.6 million available for borrowing under its revolving credit
facility.
 
                                      15

 
  In addition to the revolving credit facility, the Company had outstanding as
of December 31, 1997, $107.2 million aggregate principal amount of its Senior
Subordinated Notes, which were issued in connection with the Acquisition in
the original aggregate principal amount of $165.0 million. The Senior
Subordinated Notes are subordinated to all existing and future senior
indebtedness of the Company, including all indebtedness under the revolving
credit facility. The Indenture governing the terms of the Senior Subordinated
Notes imposes certain restrictions on the Company and its subsidiaries,
including restrictions on its ability to incur indebtedness, pay dividends,
make investments, grant liens and engage in certain other activities. The
Senior Subordinated Notes may be required to be purchased by the Company upon
a change of control (as defined in the Indenture) and in certain circumstances
with the proceeds of asset sales. The Senior Subordinated Notes are redeemable
at the option of the Company at any time after March 15, 2001, initially at
105.438% of their principal amount at maturity, plus accrued interest,
declining to 100.0% of their principal amount at maturity, plus accrued
interest, on or after March 15, 2004.
 
  The Company's foreign subsidiaries maintain local credit facilities to
provide credit for overdraft, working capital and other purposes. As of
December 31, 1997, the Company's total credit available under such facilities
was approximately $11.9 million, of which none had been utilized. The Company
believes that it is currently in compliance with all terms of its indebtedness
and that it has been in such compliance since the Acquisition.
 
  Cash provided by (used in) operating activities totaled $135.3 million in
1997, $89.5 million for the ten months ended December 31, 1996, $(54.0)
million for the two months ended February 29, 1996 and $51.9 million in 1995.
Cash provided by operations resulted primarily from earnings before
depreciation, amortization and extraordinary losses on the early
extinguishment of debt, as well as positive cash flow from working capital for
the year ended December 31, 1997 and the ten months ended December 31, 1996.
 
  Cash used in investing activities totaled $32.9 million in 1997 and was
primarily comprised of capital expenditures. Cash used in investing activities
totaled $594.8 million for the ten months ended December 31, 1996 and was
primarily comprised of the acquisition of the Company from Westinghouse
($579.8 million) and capital expenditures. Cash used in investing activities
totaled $2.3 million for the two months ended February 29, 1996 and $19.0
million in 1995 and was primarily comprised of capital expenditures by the
Company. Capital expenditures totaled $ 33.1 million in 1997, $15.3 million
for the ten months ended December 31, 1996, $2.3 million for the two months
ended February 29, 1996 and $19.3 million in 1995. Capital expenditures have
primarily been for new manufacturing equipment and information systems. The
Company estimates that capital expenditures will be approximately $35.0
million in 1998.
 
  Cash provided by (used in) financing activities totaled $(99.2) million for
the year ended December 31, 1997, $511.8 million for the ten months ended
December 31, 1996, $57.0 million for the two months ended February 29, 1996
and $(36.8) million for the year ended December 31, 1995. The $99.2 million
used by the Company during 1997 includes $80.0 million for the redemption of
800,000 shares of Series A Preferred Stock, $63.5 million for the redemption
of $57.8 million of the Company's Senior Subordinated Notes (including an
early redemption premium of $5.7 million) and $89.2 million for the repayment
of bank debt primarily offset by net proceeds of $133.4 million to the Company
from its initial public offering. The $511.8 million provided by the Company
in its financing activities during the ten months ended December 31, 1996
included $425.0 million for the issuance of debt and $160.0 million for the
issuance of stock in connection with the acquisition of the Company from
Westinghouse, partially offset by $72.0 million used by the Company for the
prepayment of indebtedness under the Company's then-existing credit
facilities.
 
  The Company uses interest rate collar agreements in order to manage its
exposure to fluctuations in interest rates on its floating rate debt. At
December 31, 1997, the Company had four outstanding interest rate collar
agreements with a total notional principal amount of $150.0 million and
maximum and minimum rates ranging from 7.5% to 7.99% and 5.0% to 5.5%,
respectively. These agreements mature over the next two years. Aggregate
maturities of the total notional principal amount are $35.0 million in 1998
and $115.0 million in 1999. During the year ended December 31, 1997, the
Company was not required to make nor was it entitled to receive any payments
as a result of these hedging activities.
 
                                      16

 
  The past and present business operations of the Company and the past and
present ownership and operation of manufacturing plants on real property by
the Company are subject to extensive and changing federal, state, local and
foreign environmental laws and regulations. As a result, the Company is
involved from time to time in administrative and judicial proceedings and
inquiries relating to environmental matters. The Company cannot predict what
environmental legislation or regulations will be enacted in the future, how
existing or future laws or regulations will be administered or interpreted or
what environmental conditions may be found to exist. Compliance with more
stringent laws or regulations, or stricter interpretation of existing laws,
may require additional expenditures by the Company, some of which may be
material. The Company has been identified as a potentially responsible party
pursuant to CERCLA for remediation costs associated with waste disposal sites
previously used by the Company. The remediation costs at these CERCLA sites
are unknown, but the Company does not expect any liability it may have under
CERCLA to be material, based on the information presently known to the
Company. In addition, Westinghouse has agreed to indemnify the Company for
certain costs associated with CERCLA liabilities known as of the date of the
Acquisition.
 
  The Company continues to have significant liquidity requirements. In
addition to working capital needs and capital expenditures, the Company has
cash requirements for debt service. The Company believes that existing cash
balances and cash flow from operating activities, together with borrowings
available under the revolving credit facility, will be sufficient to fund
working capital needs, capital spending requirements and debt service
requirements of the Company for at least the next 12 months.
 
INFLATION
 
  There was no significant impact on Knoll's operations as a result of
inflation during the three years ended December 31, 1997.
 
BACKLOG
 
  The Company's backlog of unfilled orders was $141.3 million at December 31,
1997 and $94.1 million at December 31, 1996. The Company expects to fill
substantially all outstanding unfilled orders within the next twelve months.
The Company manufactures substantially all of its products to order, and its
average manufacturing time is approximately five weeks. As a result, backlog
is not a significant factor used to predict the Company's long-term business
prospects.
 
FOREIGN OPERATIONS
 
  The Company's foreign sales and certain expenses are transacted in foreign
currencies. For the years ended December 31, 1997 and 1996, approximately
11.5% and 12.0%, respectively, of the Company's revenues and 25.8% and 24.0%,
respectively, of the Company's expenses were denominated in currencies other
than U.S. dollars. The principal foreign currencies in which the Company
conducts business are the Canadian dollar and the Italian Lira. The production
costs, profit margins and competitive position of the Company are affected by
the strength of the currencies in countries where it manufactures or purchases
goods relative to the strength of the currencies in countries where its
products are sold. The Company reviews from time to time its foreign currency
exposure and evaluates whether it should enter into hedging transactions. The
Company generally does not hedge its foreign currency exposure and may
determine not to do so in the future. Exchange rate fluctuations did not have
a material impact on the financial results of the Company during 1997 or 1996.
 
IMPACT OF YEAR 2000
 
  The Company has certain existing computer programs that were written using
two digits rather than four to define the applicable year. As a result, those
computer programs have time-sensitive software that may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
 
  In 1997, the Company initiated a strategic project to replace and enhance
its existing manufacturing and business systems technology with a new fully
integrated system intended to enhance its order entry response time and
accuracy, improve manufacturing processes, reduce delivery times, improve
shipping accuracy and
 
                                      17

 
reduce fixed costs. While the decision to embark on this project was business
related, the new software that the Company will implement has been represented
by the vendor to be year 2000 compliant. Therefore, the year 2000 issue is not
expected to pose significant operational problems for the Company's computer
systems. However, if the new software is not implemented on a timely basis or
fails to be fully year 2000 compliant, the year 2000 issue could have a
material adverse impact on the operations of the Company.
 
  The Company is and will continue utilizing both internal and external
resources to replace and test the new software for overall effectiveness and
year 2000 compliance. The Company anticipates completing the project during
the first half of 1999. The total cost of the project is estimated to be
approximately $26.0 million and is being funded through operating cash flows.
To date, the Company has incurred expenditures of approximately $12.6 million
($9.8 million expense and $2.8 million capital), related to the project.
 
  The Company has initiated formal communications with all of its significant
suppliers to determine the extent to which the Company is vulnerable to the
suppliers' failure to remediate their own year 2000 issues. However, there can
be no guarantee that the systems of other companies on which the Company
relies will be converted timely and would not have a material adverse effect
on the Company's operations.
 
  The costs and completion date of the project are based on the best estimates
of management, which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources and other
factors. There can be no guarantee that these estimates are accurate. Actual
results could differ materially from those anticipated and, therefore, could
have a material adverse effect on the Company's operations.
 
STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE
 
  Certain portions of this Form 10-K, including "Management's Discussion and
Analysis of Financial Condition and Results of Operations," contain various
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended, which represent the Company's expectations or beliefs
concerning future events. The Company cautions that these statements are
further qualified by important factors that could cause actual results to
differ materially from those in the forward-looking statements, including,
without limitation, the highly competitive nature of the market in which the
Company competes, including the introduction of new products or pricing
changes by the Company's competitors; risks associated with the Company's
growth strategy, including the risk that the Company's introduction of new
products will not achieve the same degree of success achieved historically by
the Company's products; the Company's indebtedness, which requires a
substantial portion of the Company's cash flow from operations to be dedicated
to debt service, making such cash flow unavailable for other purposes, and
which could limit the Company's flexibility in reacting to changes in its
industry or economic conditions generally; the Company's dependence on key
personnel; the ability of the Company to maintain its relationships with its
dealers; the Company's reliance on its patents and other intellectual
property; environmental laws and regulations, including those that may be
enacted in the future, that affect the ownership and operation of the
Company's manufacturing plants; risks relating to potential labor disruptions;
fluctuations in foreign currency exchange rates; and fluctuations in industry
revenues driven by a variety of macroeconomic factors, including white collar
employment levels, corporate cash flows, and non-residential commercial
construction, as well as by a variety of industry factors such as corporate
reengineering and restructuring, technology demands, ergonomic, health and
safety concerns and corporate relocations.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
  The consolidated financial statements of the Company and supplementary data
are filed under this Item, beginning on page F-1 of this Form 10-K.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE
  None.
 
                                      18

 
                                  KNOLL, INC.
 
                 TABLE OF CONTENTS FOR THE FINANCIAL STATEMENTS
 

                                                                        
                                                                           PAGE
                                                                           ----
Reports of Independent Auditors...........................................  F-2
Consolidated Balance Sheets at December 31, 1997 and 1996.................  F-4
Consolidated Statements of Operations for the Year Ended December 31,
 1997, the Ten Months Ended December 31, 1996, the Two Months Ended
 February 29, 1996 (Predecessor) and the Year Ended December 31, 1995
 (Predecessor)............................................................  F-5
Consolidated Statements of Cash Flows for the Year Ended December 31,
 1997, the Ten Months Ended December 31, 1996, the Two Months Ended
 February 29, 1996 (Predecessor) and the Year Ended December 31, 1995
 (Predecessor)............................................................  F-6
Consolidated Statements of Changes in Stockholders' Equity for the Year
 Ended December 31, 1997, the Ten Months Ended December 31, 1996, the Two
 Months Ended February 29, 1996 (Predecessor) and the Year Ended December
 31, 1995 (Predecessor)...................................................  F-7
Notes to the Consolidated Financial Statements............................  F-8
Financial Statement Schedule II--Valuation and Qualifying Accounts........  S-1

 
                                      F-1

 
                        REPORT OF INDEPENDENT AUDITORS
 
Board of Directors and Stockholders
Knoll, Inc.
 
  We have audited the accompanying consolidated balance sheets of Knoll, Inc.
as of December 31, 1997 and 1996 and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for the year ended
December 31, 1997 and the ten-month period ended December 31, 1996 (post-
acquisition periods), and the consolidated statements of operations, changes
in stockholders' equity and cash flows of The Knoll Group, Inc. (Predecessor)
for the two-month period ended February 29, 1996 (pre-acquisition period). Our
audits also included the financial statement schedule (as it pertains to 1997
and 1996) as listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
  In our opinion, the 1997 and 1996 consolidated financial statements referred
to above present fairly, in all material respects, the consolidated financial
position of Knoll, Inc. at December 31, 1997 and 1996, and the consolidated
results of its operations and its cash flows for the post-acquisition periods
in conformity with generally accepted accounting principles. Further, in our
opinion, the aforementioned Predecessor consolidated financial statements
present fairly, in all material respects, the consolidated results of
operations and cash flows of The Knoll Group, Inc. for the pre-acquisition
period in conformity with generally accepted accounting principles. Also, in
our opinion, the related financial statement schedule, when considered in
relation to the basic 1997 and 1996 financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
 
                                          /s/ Ernst & Young LLP
 
Philadelphia, Pennsylvania
January 30, 1998
 
                                      F-2

 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors and Stockholders
of Knoll, Inc.
 
  In our opinion, the consolidated financial statements listed in the Table of
Contents on page F-1 present fairly, in all material respects, the results of
operations of The Knoll Group, Inc., an organizational unit of Westinghouse
Electric Corporation, currently known as CBS Corporation (Westinghouse), and
its cash flows and changes in stockholders' equity for the year ended December
31, 1995, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of Westinghouse's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance that the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
 
  The Knoll Group, Inc. was a business unit of Westinghouse for the year ended
December 31, 1995 and, as disclosed in Note 6 to the accompanying financial
statements, engaged in various transactions and relationships with other
Westinghouse entities.
 
/s/ Price Waterhouse LLP
 
Pittsburgh, Pennsylvania
January 15, 1996
 
                                      F-3

 
                                  KNOLL, INC.
 
                          CONSOLIDATED BALANCE SHEETS
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 


                                                              DECEMBER 31,
                                                            ------------------
                                                              1997      1996
                                                            --------  --------
                                                                
ASSETS
Current assets:
  Cash and cash equivalents................................ $ 10,790  $  8,804
  Customer receivables, net................................  122,851   111,166
  Inventories..............................................   68,249    57,811
  Deferred income taxes....................................   21,295    17,474
  Prepaid and other current assets.........................    3,697     7,424
                                                            --------  --------
    Total current assets...................................  226,882   202,679
Property, plant and equipment, net.........................  180,450   176,218
Intangible assets, net.....................................  270,677   286,940
Other noncurrent assets....................................    2,850     9,875
                                                            --------  --------
    Total Assets........................................... $680,859  $675,712
                                                            ========  ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Current maturities of long-term debt..................... $ 10,000  $ 23,265
  Accounts payable.........................................   66,697    50,250
  Income taxes payable.....................................    6,791       388
  Other current liabilities................................   77,841    64,022
                                                            --------  --------
    Total current liabilities..............................  161,329   137,925
Long-term debt.............................................  197,029   330,889
Deferred income taxes......................................    5,301     1,931
Postretirement benefits obligation.........................   16,424    15,873
Other noncurrent liabilities...............................   12,487    11,290
                                                            --------  --------
    Total liabilities......................................  392,570   497,908
                                                            --------  --------
Stockholders' equity:
  Preferred stock, $1.00 par value; authorized 10,000,000
   shares; issued and outstanding 1,602,998 shares in 1996
   (liquidation preference of $160,300)....................      --      1,603
  Common stock, $0.01 par value; authorized 100,000,000
   shares; issued and outstanding 43,234,943 shares in 1997
   and 7,291,308 shares in 1996 (Note 2)...................      432        73
  Additional paid-in-capital...............................  214,950   160,147
  Unearned stock grant compensation........................     (993)   (1,387)
  Retained earnings........................................   77,942    16,836
  Cumulative foreign currency translation adjustment.......   (4,042)      532
                                                            --------  --------
    Total stockholders' equity.............................  288,289   177,804
                                                            --------  --------
    Total Liabilities and Stockholders' Equity............. $680,859  $675,712
                                                            ========  ========

 
        See accompanying notes to the consolidated financial statements.
 
                                      F-4

 
                                  KNOLL, INC.
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (IN THOUSANDS, EXCEPT PER SHARE DATE)
 


                                       (UNAUDITED)                |      THE KNOLL GROUP, INC.
                                       SUPPLEMENTAL               |         (PREDECESSOR)
                                        PRO FORMA                 |   -------------------------
                              YEAR         DATA      TEN MONTHS   |    TWO MONTHS      YEAR
                             ENDED      YEAR ENDED     ENDED      |      ENDED         ENDED
                          DECEMBER 31, DECEMBER 31, DECEMBER 31,  |   FEBRUARY 29,  DECEMBER 31,
                              1997         1996         1996      |      1996          1995
                          ------------ ------------ ------------  |   ------------ ------------
                                         (NOTE 3)                 |
                                                      |              
Sales to customers......    $810,857     $651,766     $561,534    |   $ 89,933     $610,723
Sales to related                                                  |      
 parties................         --           --           --     |        299       10,169
                            --------     --------     --------    |    --------     --------
Total sales.............     810,857      651,766      561,534    |     90,232      620,892
Cost of sales to                                                  |
 customers..............     489,962      419,908      358,841    |     59,514      410,615
Cost of sales to related                                          |      
 parties................         --           --           --     |        200        7,017
                            --------     --------     --------    |    --------     --------
Gross profit............     320,895      231,858      202,693    |     30,518      203,260
Selling, general and                                              |      
 administrative                                                   |
 expenses...............     183,018      153,388      131,349    |     21,256      138,527
Westinghouse long-term                                            |      
 incentive compensation.         --           --           --     |     47,900          --
Allocated corporate                                               |
 expenses...............         --           --           --     |        921        9,528
                            --------     --------     --------    |   --------     --------
Operating income (loss).     137,877       78,470       71,344    |    (39,559)      55,205
Interest expense........      25,075       40,030       32,952    |        340        1,430
Other income (expense),                                           |
 net....................       1,667          151          447    |       (296)      (1,597)
                            --------     --------     --------    |    --------     --------
Income (loss) before                                              |
 income tax expense                                               |
 (benefit) and                                                    |
 extraordinary item.....     114,469       38,591       38,839    |    (40,195)      52,178
Income tax expense                                                |
 (benefit)..............      48,026       16,848       16,844    |    (16,107)      22,846
                            --------     --------     --------    |    --------     --------
Income (loss) before                                              |
 extraordinary item.....      66,443       21,743       21,995    |    (24,088)      29,332
Extraordinary loss on                                             |
 early extinguishment                                             |
 of debt, net of taxes..       5,337        5,159        5,159    |       --           --
                            --------     --------     --------    |    --------     --------
Net income (loss).......    $ 61,106     $ 16,584     $ 16,836    |   $(24,088)    $ 29,332
                            ========     ========     ========    |    ========     ========
Pro forma earnings per                                            |
 share (Note 2):                                                  |
  Income before                                                   |
   extraordinary item:                                            |
    Basic...............    $   1.78     $   0.70     $   0.71    |
    Diluted.............    $   1.64     $   0.63     $   0.63    |
  Net income:                                                     |
    Basic...............    $   1.64     $   0.53     $   0.54    |
    Diluted.............    $   1.51     $   0.48     $   0.48    |
Pro forma weighted                                                |
 average shares of                                                |
 common stock (Note 2):                                           |
    Basic...............      37,284       31,040       31,040    |
    Diluted.............      40,398       34,701       34,701    |
                                                                  |
Supplemental pro forma                                            |
 as adjusted data                                                 |
 (Unaudited) (Note 5):                                            |
  Pro forma net income..    $ 68,075     $ 25,168                 |
  Pro forma net income                                            |
   per share of common                                            |
   stock (Note 2):                                                |
    Basic...............    $   1.69     $   0.64                 |
    Diluted.............    $   1.57     $   0.58                 |
  Pro forma weighted                                              |
   average shares of                                              |
   common stock (Note                                             |
   2):                                                            |
    Basic...............      40,287       39,520                 |      
    Diluted.............      43,400       43,181                 |
                                        
 
        See accompanying notes to the consolidated financial statements.
 
                                      F-5

 
                                  KNOLL, INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
 


                                                                                                     |    THE KNOLL GROUP, INC.
                                                                                                     |        (PREDECESSOR)
                                                                                                     |  -------------------------
                                                                              YEAR      TEN MONTHS   |   TWO MONTHS      YEAR
                                                                             ENDED        ENDED      |     ENDED        ENDED
                                                                          DECEMBER 31, DECEMBER 31,  |  FEBRUARY 29, DECEMBER 31,
                                                                              1997         1996      |      1996         1995
                                                                          ------------ ------------  |  ------------ ------------
                                                                                            |           
CASH FLOWS FROM OPERATING ACTIVITIES                                                                 |                           
Net income (loss)........................................................   $ 61,106    $  16,836    |  $(24,088)    $ 29,332
Noncash items included in income:                                                                    |
  Depreciation...........................................................     25,082       19,251    |     3,150       19,006
  Amortization of intangible assets......................................      8,041        7,881    |     1,167        6,993
  Loss on disposal of assets.............................................        986           87    |       --           --
  Extraordinary loss.....................................................      8,838        8,542    |       --           --
  Foreign currency transaction loss (gain)...............................     (1,140)         354    |       --           --
  Earned stock grant compensation........................................        394           36    |       --           --
Changes in assets and liabilities:                                                                   |   
  Customer receivables...................................................    (12,176)      (5,110)   |     8,798       (5,850)
  Inventories............................................................    (11,381)       1,416    |       671          (76)
  Accounts payable.......................................................     18,052       15,870    |   (15,292)      (7,005)
  Current and deferred income taxes......................................     15,896       (3,961)   |   (16,627)      13,185
  Other current assets...................................................      1,674          747    |     2,283          453
  Other current liabilities..............................................     12,849       18,372    |    (7,190)     (23,177)
  Other noncurrent assets and liabilities................................      7,041        9,181    |    (6,911)      19,003
                                                                            --------    ---------    |   --------    --------
Cash provided by (used in) operating activities..........................    135,262       89,502    |   (54,039)      51,864
                                                                            --------    ---------    |  --------     --------
CASH FLOWS FROM INVESTING ACTIVITIES                                                                 |   
Acquisition of the Company from Westinghouse.............................        --      (579,801)   |       --           --
Capital expenditures.....................................................    (33,080)     (15,255)   |    (2,296)     (19,334)
Proceeds from sale of assets.............................................        164          218    |       --           316
                                                                            --------    ---------    |  --------     --------
Cash used in investing activities........................................    (32,916)    (594,838)   |    (2,296)     (19,018)
                                                                            --------    ---------    |  --------     --------
CASH FLOWS FROM FINANCING ACTIVITIES                                                                 |
Repayment of short-term debt, net........................................        --        (1,483)   |    (3,805)     (20,961)
Proceeds from (repayment of) revolving credit facility, net..............    (79,000)      88,000    |       --           --
Proceeds from long-term debt.............................................        --       525,000    |       --           --
Repayment of long-term debt..............................................    (67,988)    (260,130)   |       --        (8,913)
Premium paid for early extinguishment of debt............................     (5,775)         --     |       --           --
Proceeds from issuance of stock, net of stock issuance costs.............    133,559      160,400    |       --           --
Redemption of preferred stock............................................    (80,000)         --     |       --           --
Net receipts from (payments to) parent company...........................        --           --     |    60,848       (6,900)
                                                                            --------    ---------    |  --------     --------
Cash provided by (used in) financing activities..........................    (99,204)     511,787    |    57,043      (36,774)
                                                                            --------    ---------    |  --------     --------
Effect of exchange rate changes on cash and cash equivalents.............     (1,156)          18    |        58           13
                                                                            --------    ---------    |  --------     --------
Increase (decrease) in cash and cash equivalents.........................      1,986        6,469    |       766       (3,915)
Cash and cash equivalents at beginning of period.........................      8,804        2,335    |     1,569        5,484
                                                                            --------    ---------    |  --------     --------
Cash and cash equivalents at end of period...............................   $ 10,790    $   8,804    |  $  2,335     $  1,569
                                                                            ========    =========    |  ========     ========

 
        See accompanying notes to the consolidated financial statements.
 
                                      F-6

 
                                  KNOLL, INC.
 
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                             (DOLLARS IN THOUSANDS)


                                                                                                     |    THE KNOLL GROUP, INC.
                                                                                                     |        (PREDECESSOR)
                                                                                                     |  -------------------------
                                                                              YEAR      TEN MONTHS   |   TWO MONTHS      YEAR
                                                                             ENDED        ENDED      |     ENDED        ENDED
                                                                          DECEMBER 31, DECEMBER 31,  |  FEBRUARY 29, DECEMBER 31,
                                                                              1997         1996      |      1996         1995
                                                                          ------------ ------------  | ------------- ------------
                                                                                            |           
PREFERRED STOCK                                                                                      |
Balance at beginning of period (1,602,998 shares in 1997 and                                         |   
 1,599,000 shares in 1996)...............................................  $   1,603    $   1,599    |  $     --      $     --
Shares issued for consideration (3,998 shares)...........................        --             4    |        --            --
Shares redeemed (800,000 shares).........................................       (800)         --     |        --            --
Shares converted into common stock                                                                   |   
 (802,998 shares)........................................................       (803)         --     |        --            --
                                                                           ---------    ---------    |   ---------    ---------
Balance at end of period.................................................        --         1,603    |      --           --
                                                                           ---------    ---------    |   ---------    ---------
COMMON STOCK                                                                                         |   
Balance at beginning of period (7,291,308 shares in 1997 and 3,139,430                               |   
 shares in 1996).........................................................         73           31    |      --           --
Shares issued for consideration (8,502,716 shares).......................         85          --     |      --           --
Redemption of preferred stock (11,749,361 shares)........................        117          --     |      --           --
Conversion of preferred stock (15,691,558 shares)........................        157          --     |      --           --
Shares issued under the stock incentive plan (4,144,030 shares)..........        --            42    |      --           --
                                                                           ---------    ---------    |   ---------    ---------
Balance at end of period.................................................        432           73    |      --           --
                                                                           ---------    ---------    |   ---------    ---------
ADDITIONAL PAID-IN-CAPITAL                                                                           |   
Balance at beginning of period...........................................    160,147      158,370    |      --           --
Shares issued for consideration..........................................    133,474          396    |      --           --
Redemption of preferred stock............................................    (79,317)         --     |      --           --
Conversion of preferred stock............................................        646          --     |      --           --
Shares issued under the stock incentive plan.............................        --         1,381    |      --           --
                                                                           ---------    ---------    |  ---------    ---------
Balance at end of period.................................................    214,950      160,147    |      --           --
                                                                           ---------    ---------    |  ---------    ---------
UNEARNED STOCK GRANT COMPENSATION                                                                    |   
Balance at beginning of period...........................................     (1,387)         --     |      --           --
Shares issued under the stock incentive plan.............................        --        (1,423)   |      --           --
Earned stock grant compensation..........................................        394           36    |      --           --
                                                                           ---------    ---------    |  ---------    ---------
Balance at end of period.................................................       (993)      (1,387)   |      --           --
                                                                           ---------    ---------    |  ---------    ---------
RETAINED EARNINGS                                                                                    |   
Balance at beginning of period...........................................     16,836          --     |      --           --
Net income...............................................................     61,106       16,836    |      --           --
                                                                           ---------    ---------    | ---------    ---------
Balance at end of period.................................................     77,942       16,836    |      --           --
                                                                           ---------    ---------    | ---------    ---------
PARENT COMPANY INVESTMENT                                                                            |   
Balance at beginning of period...........................................        --           --     |   503,317      480,885
Net income (loss)........................................................        --           --     |   (24,088)      29,332
Capital expenditures.....................................................        --           --     |     2,296       19,334
Proceeds from sale of assets.............................................        --           --     |       --          (316)
Net interunit transactions...............................................        --           --     |    58,552      (25,918)
                                                                           ---------    ---------    | ---------    ---------
Balance at end of period.................................................        --           --     |   540,077      503,317
                                                                           ---------    ---------    | ---------    ---------
CUMULATIVE FOREIGN CURRENCY TRANSLATION ADJUSTMENT                                                   |   
Balance at beginning of period...........................................        532          --     |   (22,866)     (22,879)
Translation adjustment...................................................     (4,574)         532    |        58           13
                                                                           ---------    ---------    | ---------    ---------
Balance at end of period.................................................     (4,042)         532    |   (22,808)     (22,866)
                                                                           ---------    ---------    | ---------    ---------
TOTAL STOCKHOLDERS' EQUITY...............................................  $ 288,289    $ 177,804    | $ 517,269    $ 480,451
                                                                           =========    =========    | =========    =========

 
        See accompanying notes to the consolidated financial statements.
 
                                      F-7

 
                                  KNOLL, INC.
 
                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
1. ORGANIZATION AND BASIS OF PRESENTATION
 
  Knoll, Inc. and its subsidiaries (the "Company" or "Knoll") are engaged in
  the design, manufacture, and sale of office furniture products and
  accessories, focusing on the middle to high-end segments of the contract
  furniture market. The Company has operations in the United States ("U.S."),
  Canada and Europe and sells its products primarily through its direct sales
  representatives and independent dealers.
 
  The Company was formed on February 29, 1996 as a result of the acquisition
  of the office furniture business unit (The Knoll Group, Inc. and related
  entities) of Westinghouse Electric Corporation, currently known as CBS
  Corporation ("Westinghouse"). See Note 3 for further discussion of the
  acquisition.
 
  The accompanying consolidated financial statements present the financial
  position of the Company as of December 31, 1997 and 1996, the results of
  operations, cash flows and changes in stockholders' equity of the Company
  for the year ended December 31, 1997 and the ten-month period ended
  December 31, 1996 and the results of operations, cash flows and changes in
  stockholders' equity of The Knoll Group, Inc. and related entities (the
  "Predecessor") for the two-month period ended February 29, 1996 and the
  year ended December 31, 1995. In addition, unaudited supplemental pro forma
  results of operations data of the Company has been provided for the years
  ended December 31, 1997 and 1996. Such data is provided solely for
  additional analysis and is not intended to be a presentation in accordance
  with generally accepted accounting principles (see Note 5).
 
  Since the Predecessor was a business unit of Westinghouse, the accompanying
  financial statements of the Predecessor include estimates for certain
  expenses incurred by the parent on its behalf. These expenses generally
  include, but are not limited to, officer and employee salaries, rent,
  depreciation, accounting and legal services, other selling, general and
  administrative expenses and other such expenses.
 
  The results of the Predecessor's domestic operations were included in the
  consolidated U.S. federal income tax return of Westinghouse, while the
  results of its operations in Canada and Europe were reported separately to
  their respective taxing jurisdictions. The income tax information in the
  accompanying financial statements of the Predecessor is presented as if the
  Predecessor had not been included in the consolidated tax returns of
  Westinghouse or other affiliates (i.e. on a stand-alone basis). The
  recognition and measurement of income tax expense required certain
  assumptions, allocations and significant estimates that management believes
  are reasonable to measure the tax consequences as if the Predecessor were a
  stand-alone taxpayer.
 
  The operating results of the European subsidiaries are reported and
  included in the consolidated financial statements on a one-month lag to
  allow for the timely presentation of consolidated information. The effect
  of this presentation is not material to the financial statements.
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  Principles of Consolidation
 
  The consolidated financial statements of the Company include the accounts
  of Knoll, Inc. and its wholly owned subsidiaries. Intercompany transactions
  and balances have been eliminated in consolidation.
 
  The consolidated financial statements of the Predecessor include the
  accounts of The Knoll Group, Inc. and related entities after elimination of
  intercompany transactions except for those with other units of Westinghouse
  as described in Note 6.
 
  Cash and Cash Equivalents
 
  Cash and cash equivalents includes cash on hand and investments with
  original maturities of three months or less.
 
 
                                      F-8

 
                                  KNOLL, INC.
 
          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  Inventories
 
  Inventories are stated at the lower of cost or market. Cost is determined
  using the first-in, first-out method.
 
  Property, Plant, Equipment and Depreciation
 
  Property, plant and equipment are recorded at cost. Depreciation of plant
  and equipment is computed using the straight-line method over the estimated
  useful lives of the assets. The useful lives are as follows: 45 years for
  buildings and 3 to 12 years for machinery and equipment.
 
  Intangible Assets
 
  Intangible assets consist of goodwill, trademarks and deferred financing
  fees. Goodwill is recorded at the amount by which cost exceeds the net
  assets of acquired businesses, and all other intangible assets are recorded
  at cost. Goodwill and trademarks are amortized under the straight-line
  method over 40 years, while deferred financing fees are amortized over the
  life of the respective debt.
 
  Management reviews the carrying value of goodwill and other intangibles on
  an ongoing basis. When factors indicate that an intangible asset may be
  impaired, management uses an estimate of the undiscounted future cash flows
  over the remaining life of the asset in measuring whether the intangible
  asset is recoverable. If such an analysis indicates that impairment has in
  fact occurred, the book value of the intangible asset is written down to
  its estimated fair value.
 
  Revenue Recognition
 
  Sales are recognized as products are shipped and services are rendered.
 
  Income Taxes
 
  Deferred tax assets and liabilities are recognized for the future tax
  consequences attributable to temporary differences between the financial
  statement carrying amounts of existing assets and liabilities and their
  respective tax bases and are measured using enacted tax rates expected to
  apply to taxable income in the years in which the temporary differences are
  expected to reverse.
 
  As discussed in Note 1, the U.S. operations of the Predecessor for the
  first two months of 1996 and for the year ended December 31, 1995 were
  included in a consolidated U.S. income tax return of Westinghouse and its
  subsidiaries. Income taxes are provided in the accompanying financial
  statements as if the Predecessor had filed a separate tax return.
 
  Foreign Currency Translation
 
  Results of foreign operations are translated into U.S. dollars using
  average exchange rates during the period, while assets and liabilities are
  translated into U.S. dollars using current rates. The resulting translation
  adjustments are accumulated as a separate component of stockholders'
  equity.
 
  Transaction gains and losses resulting from exchange rate changes on
  transactions denominated in currencies other than those of the foreign
  subsidiaries are included in income in the year in which the change occurs.
 
  Stock-Based Compensation
 
  Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
  Based Compensation" ("SFAS 123"), encourages entities to record
  compensation expense for stock-based employee compensation plans at fair
  value but provides the option of measuring compensation expense using the
 
                                      F-9

 
                                  KNOLL, INC.
 
          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  intrinsic value method prescribed in Accounting Principles Board Opinion
  No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). The Company
  has elected to account for stock-based compensation in accordance with APB
  25. Pro form results of operations as if SFAS 123 had been used to account
  for stock-based compensation plans are presented in Note 20.
 
  Share and Per Share Amounts
 
  In 1997, the Financial Accounting Standards Board ("FASB") issued Statement
  of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
  128"). SFAS 128 replaced the calculation of primary and fully diluted
  earnings per share with basic and diluted earnings per share. Unlike
  primary earnings per share, basic earnings per share excludes the dilutive
  effects of options, warrants and convertible securities. Diluted earnings
  per share is very similar to the previously reported fully diluted earnings
  per share. Earnings per share amounts for all periods have been presented
  and, where appropriate, restated to conform to the requirements of SFAS
  128. In addition, all numbers of shares of common stock and per share
  amounts for 1996 have been adjusted to give retroactive effect to the
  3.13943-for-1 stock split as discussed in Note 13.
 
  Because of the significance of the redemption and conversion into common
  stock of the outstanding Series A 12% Participating Convertible Preferred
  Stock ("Series A Preferred Stock") as discussed in Note 13, historical net
  income (loss) per share is not presented herein. Pro forma net income per
  share amounts are based on the weighted average number of shares of common
  stock and potentially dilutive securities (employee stock options and
  nonvested restricted stock grants) outstanding during the period, after
  giving effect to the redemption and conversion into common stock of the
  Series A Preferred Stock assuming such redemption and conversion had
  occurred at the beginning of the periods presented. Pursuant to Securities
  and Exchange Commission Staff Accounting Bulletin No. 98, all common stock
  and options to purchase common stock issued for nominal consideration prior
  to the initial public offering (see Note 4) have been reflected as
  outstanding as of the beginning of each period presented.
 
  Use of Estimates
 
  The preparation of the consolidated financial statements in conformity with
  generally accepted accounting principles requires management to make
  estimates and assumptions that affect the reported amounts of certain
  assets, liabilities, revenues and expenses and the disclosure of certain
  contingent assets and liabilities. Actual future results may differ from
  such estimates.
 
  Reclassifications
 
  Certain amounts for 1996 in the accompanying consolidated financial
  statements have been reclassified to conform with the 1997 classifications.
 
3. ACQUISITION
 
  On December 20, 1995, Westinghouse entered into a Stock Purchase Agreement
  (the "Agreement") with T.K.G. Acquisition Corp. ("TKG"), a subsidiary of
  Warburg, Pincus Ventures, L.P. Under the terms of the Agreement, TKG
  acquired all of the outstanding capital stock of The Knoll Group, Inc. and
  related entities on February 29, 1996 through its wholly owned subsidiary
  T.K.G. Acquisition Sub, Inc. Immediately following this transaction, T.K.G.
  Acquisition Sub, Inc. and The Knoll Group, Inc. merged with and into Knoll
  North America, Inc., the principal U.S. operating company of The Knoll
  Group, Inc. Knoll North America, Inc. changed its name to Knoll, Inc. at
  the time of the merger. On March 14, 1997, Knoll, Inc. merged with and into
  TKG. TKG then changed its name to Knoll, Inc.
 
                                     F-10

 
                                  KNOLL, INC.
 
          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The cost of the acquisition was $579,801,000. TKG funded the acquisition
  through proceeds of $160,000,000 received from the sale of TKG capital
  stock, $165,000,000 received from an offering of 10.875% Senior
  Subordinated Notes due 2006 (the "Senior Subordinated Notes") and
  $260,000,000 in borrowings under senior bank credit facilities. T.K.G.
  Acquisition Sub, Inc. executed the offering of the Senior Subordinated
  Notes and borrowings under the credit facilities. As such, upon the
  acquisition and subsequent mergers, the Senior Subordinated Notes and
  credit facility borrowings became obligations of Knoll, Inc.
 
  The acquisition was accounted for using the purchase method of accounting.
  Accordingly, the purchase price has been allocated to the assets acquired
  and liabilities assumed based upon fair market value at the date of
  acquisition. The excess of the consideration paid over the estimated fair
  value of the net assets acquired, totaling $66,850,000, has been recorded
  as goodwill and is being amortized on a straight-line basis over 40 years.
  The purchase price allocation is summarized as follows (in thousands):
 

                                                                    
      Net working capital............................................. $101,446
      Property, plant and equipment...................................  180,074
      Goodwill........................................................   66,850
      Other intangible assets.........................................  239,557
      Other noncurrent liabilities, net...............................   (8,126)
                                                                       --------
                                                                       $579,801
                                                                       ========

 
  The following table sets forth unaudited pro forma consolidated results of
  operations assuming that the acquisition had taken place at the beginning
  of the years presented:
 


                                                       YEAR ENDED DECEMBER 31,
                                                       -----------------------
                                                          1996        1995
                                                       ----------- -----------
                                                           (IN THOUSANDS)
                                                             
      Sales...........................................  $651,766     $620,892
      Cost of sales...................................   419,908      425,327
                                                        --------     --------
      Gross profit....................................   231,858      195,565
      Selling, general and administrative expenses....   153,388      142,582
      Allocated corporate expenses....................       --         4,000
                                                        --------     --------
      Operating income................................    78,470       48,983
      Interest expense................................    40,030       40,945
      Other income (expense), net.....................       151       (1,597)
                                                        --------     --------
      Income before income taxes and extraordinary                    
       item...........................................    38,591        6,441
      Income taxes....................................    16,848        2,705
                                                        --------     --------
      Income before extraordinary item................    21,743        3,736
      Extraordinary loss on early extinguishment of                   
       debt, net of taxes.............................     5,159          --
                                                        --------     --------
      Net income......................................  $ 16,584     $  3,736
                                                        ========     ========

 
  These pro forma results of operations have been prepared for comparative
  purposes only and include certain adjustments, such as additional
  depreciation expense as a result of a step-up in the basis of fixed assets,
  additional selling, general and administrative costs for services
  previously provided by Westinghouse, additional amortization expense as a
  result of goodwill and other intangible assets, increased interest expense
  as a result of the debt assumed to finance the acquisition, elimination of
  incentive compensation under Westinghouse's long-term incentive plans that
  became payable, and for which amounts payable
 
                                     F-11

 
                                  KNOLL, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  were established, as a result of the acquisition, and related income tax
  effects. Such results do not purport to be indicative of the actual results
  which would have occurred had the acquisition been consummated at the
  beginning of each year presented, nor do they purport to be indicative of
  results that will be achieved in the future.
 
4. INITIAL PUBLIC OFFERING
 
  The Company completed an initial public offering (the "IPO") during the
  second quarter of 1997. An aggregate of 9,200,000 shares, including 720,000
  shares sold by a selling stockholder, were sold during May and June 1997 at
  $17.00 per share. The net proceeds to the Company amounted to $133,440,000
  after deducting related expenses. The net proceeds, together with
  borrowings of $11,673,000 under the Company's then-existing revolving
  credit facility, were used (i) to redeem 800,000 shares of the Series A
  Preferred Stock for $80,000,000 and (ii) to redeem an aggregate principal
  amount of $57,750,000 of the Company's Senior Subordinated Notes for a
  total redemption price of $65,113,000, including a redemption premium of
  $5,775,000 and accrued and unpaid interest thereon of $1,588,000.
 
5. SUPPLEMENTAL PRO FORMA AS ADJUSTED DATA (UNAUDITED)
 
  The supplemental pro forma as adjusted data is included for purposes of
  additional analysis. It presents results of operations assuming that the
  IPO and the application of the net proceeds to the Company therefrom
  together with related borrowings under the Company's then-existing
  revolving credit facility occurred at the beginning of the respective
  periods. Such pro forma as adjusted data does not reflect extraordinary
  losses of $5,337,000 and $5,159,000, net of taxes, incurred in 1997 and
  1996, respectively, in connection with the early redemption of debt (see
  Note 12). The supplemental pro forma as adjusted weighted average shares of
  common stock outstanding reflect the issuance of the Company's common stock
  in the IPO and the redemption and conversion into common stock of the
  Series A Preferred Stock (see Note 13) as of the beginning of each period
  presented.
 
  The supplemental pro forma as adjusted data reflects interest savings from
  the redemption of an aggregate principal amount of $57,750,000 of the
  Company's Senior Subordinated Notes, additional interest expense incurred
  on $11,673,000 in related borrowings under the Company's then-existing
  revolving credit facility and related income tax effects. Interest expense
  (including the amortization of deferred financing fees) has been decreased
  by $2,702,000 and $5,671,000 for the years ended December 31, 1997 and
  1996, respectively. Interest adjustments are based on the actual interest
  rate of 10.875% for the Senior Subordinated Notes and a weighted average
  interest rate of 6.6% in 1997 and 8.25% in 1996 for the then-existing
  revolving credit facility. The weighted average interest rates approximate
  the actual interest rates for the period January 1, 1997 to May 8, 1997,
  the period preceding the IPO, and the ten-month period ended December 31,
  1996, respectively, for the Company's average outstanding borrowings under
  the then-existing senior credit facilities. Income tax expense has been
  increased by $1,070,000 and $2,246,000 for the years ended December 31,
  1997 and 1996, respectively, to reflect the assumed income tax effects of
  the interest expense adjustments.
 
  The supplemental pro forma as adjusted information does not purport to
  represent what the Company's results actually would have been if the
  aforementioned events had occurred at the beginning of each period
  presented, nor does such information purport to project the results of the
  Company for any future periods. The unaudited supplemental pro forma as
  adjusted financial information is based upon assumptions that the Company
  believes are reasonable.
 
                                     F-12

 
                                  KNOLL, INC.
 
          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
6. RELATED PARTY TRANSACTIONS OF THE PREDECESSOR
 
  The Predecessor purchased products from and sold products to other
  Westinghouse operations. The Predecessor also purchased certain services
  from Westinghouse, including liability, property and workers' compensation
  insurance. These transactions are discussed in further detail below.
 
  Intercompany Purchases
 
  The Predecessor purchased products and services from other Westinghouse
  operations. For intercompany purchases in the U.S., the Predecessor used
  the central clearinghouse arrangement through which intercompany
  transactions were settled at the transfer date. Accounts payable were
  established for purchases from units of Westinghouse that did not
  participate in the central clearinghouse arrangement.
 
  Intercompany Sales
 
  The Predecessor sold products to various Westinghouse operations. These
  transactions were settled immediately through the central clearinghouse or
  the internal customer was invoiced and an intercompany receivable was
  established.
 
  Corporate Services
 
  The Predecessor used, and was charged directly for, certain services that
  Westinghouse provided to its business units. These services generally
  included information systems support, certain accounting functions such as
  transaction processing, legal, environmental affairs and human resources
  consulting and compliance support.
 
  Westinghouse centrally developed, negotiated and administered the
  Predecessor's insurance programs. The insurance included broad all-risk
  coverage for real and personal property and third-party liability coverage,
  employer's liability coverage, automobile liability, general and product
  liability and other standard liability coverage. The Predecessor also
  maintained a program of self-insurance for workers' compensation in the
  U.S. through Westinghouse. Westinghouse charged its business units for all
  of the centrally administered insurance programs based in part on claims
  history.
 
  All of the charges for the corporate services described above are included
  in the costs of the Predecessor's operations in the consolidated statements
  of operations. Such charges were based on costs that directly related to
  the Predecessor or on a pro rata portion of Westinghouse's total costs for
  the services provided. These costs were allocated to the Predecessor on a
  basis that management believes is reasonable. However, management believes
  that it is possible that the costs of these transactions may differ from
  those that would result from transactions among unrelated parties. For the
  two-month period ended February 29, 1996 and the year ended December 31,
  1995, charges related to corporate services totaled $510,000 and
  $3,304,000, respectively.
 
  The Predecessor also purchased other Westinghouse internally-provided
  services as necessary including telecommunications, printing, productivity
  and quality consulting and other services.
 
  Allocated Corporate Expenses
 
  Westinghouse allocated a certain portion of its corporate expenses to its
  business units. These allocated costs include Westinghouse executive
  management and corporate overhead, corporate legal, environmental, audit,
  treasury and tax services, pension charges related to corporate functions
  and other corporate support and executive costs. For the year ended
  December 31, 1995, allocated corporate expenses also include $4,000,000 of
  incentive compensation payable to the Predecessor's management under
  Westinghouse long-term incentive plans.
 
                                     F-13

 
                                  KNOLL, INC.
 
          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  These corporate expenses were allocated primarily based on sales with the
  exception of the incentive compensation allocation. This methodology of
  allocating corporate expenses to business units is reasonable and
  consistent, but such allocations are not necessarily indicative of actual
  costs. On an annual basis, it was not practical for Westinghouse management
  to estimate the level of expenses that might have been incurred had the
  Predecessor operated as a separate stand-alone entity.
 
  Westinghouse did not charge its business units for the carrying costs
  related to its investment in such units (i.e. parent company investment).
  Therefore, the Predecessor's results of operations for each of the periods
  presented do not include any allocated interest charges from Westinghouse.
 
  Westinghouse Long-Term Incentive Compensation
 
  Certain members of management of the Predecessor were participants in a
  long-term incentive compensation plan established by Westinghouse. The plan
  provided for the payment of awards at the end of a five-year period based
  on the achievement of certain performance goals set by Westinghouse's Board
  of Directors. As a result of the consummation of the acquisition discussed
  in Note 3, the payment of awards was accelerated pursuant to the terms of
  the plan, resulting in a charge to operations of $47,900,000 for the two
  months ended February 29, 1996.
 
  Parent Company Investment
 
  Since the Predecessor was an operating unit of Westinghouse and was not a
  distinct legal entity, there were no customary equity and capital accounts
  recorded on the consolidated balance sheet. Instead, parent company
  investment was maintained by the Predecessor and Westinghouse to account
  for interunit transactions described above.
 
7. CUSTOMER RECEIVABLES
 
  Customer receivables are presented net of an allowance for doubtful
  accounts of $5,461,000 and $5,713,000 at December 31, 1997 and 1996,
  respectively. Management performs ongoing credit evaluations of its
  customers and generally does not require collateral. As of December 31,
  1997 and 1996, the U.S. government represented approximately 13.8% and
  17.3%, respectively, of gross customer receivables.
 
                                     F-14

 
                                  KNOLL, INC.
 
          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
8. INVENTORIES
 


                                                                  DECEMBER 31,
                                                                 ---------------
                                                                  1997    1996
                                                                 ------- -------
                                                                 (IN THOUSANDS)
                                                                   
      Raw materials............................................. $39,978 $34,147
      Work in process...........................................   9,673   7,508
      Finished goods............................................  18,598  16,156
                                                                 ------- -------
      Inventories............................................... $68,249 $57,811
                                                                 ======= =======

 
9. PROPERTY, PLANT AND EQUIPMENT
 


                                                               DECEMBER 31,
                                                             ------------------
                                                               1997      1996
                                                             --------  --------
                                                              (IN THOUSANDS)
                                                                 
      Land and buildings.................................... $ 62,249  $ 61,844
      Machinery and equipment...............................  139,592   122,573
      Construction in progress..............................   22,433    11,066
                                                             --------  --------
      Property, plant and equipment at cost.................  224,274   195,483
      Accumulated depreciation..............................  (43,824)  (19,265)
                                                             --------  --------
      Property, plant and equipment, net.................... $180,450  $176,218
                                                             ========  ========

 
10. INTANGIBLE ASSETS
 


                                                               DECEMBER 31,
                                                             ------------------
                                                               1997      1996
                                                             --------  --------
                                                              (IN THOUSANDS)
                                                                 
      Goodwill.............................................. $ 56,803  $ 62,627
      Trademarks............................................  219,900   219,900
      Deferred financing fees...............................    8,354    11,226
                                                             --------  --------
      Intangible asset at cost..............................  285,057   293,753
      Accumulated amortization..............................  (14,380)   (6,813)
                                                             --------  --------
      Intangible assets, net................................ $270,677  $286,940
                                                             ========  ========

 
11. OTHER CURRENT LIABILITIES
 


                                                                 DECEMBER 31,
                                                                ---------------
                                                                 1997    1996
                                                                ------- -------
                                                                (IN THOUSANDS)
                                                                  
      Accrued employee compensation............................ $39,414 $28,282
      Accrued product warranty.................................  10,871   7,173
      Other....................................................  27,556  28,567
                                                                ------- -------
      Other current liabilities................................ $77,841 $64,022
                                                                ======= =======

 
                                      F-15

 
                                  KNOLL, INC.
 
          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
12. INDEBTEDNESS
 
  The Company's long-term debt is summarized as follows:
 


                                                              DECEMBER 31,
                                                            ------------------
                                                              1997      1996
                                                            --------  --------
                                                             (IN THOUSANDS)
                                                                
   10.875% Senior Subordinated Notes, due 2006............. $107,250  $165,000
   Term loans, variable rate (6.515% at December 31, 1996)
    due through 2002.......................................      --    100,000
   Revolving loans, variable rate (6.25%-6.40% at December
    31, 1997 and 6.515% at December 31, 1996) due 2002.....   99,000    88,000
   Other...................................................      779     1,154
                                                            --------  --------
                                                             207,029   354,154
   Less current maturities.................................  (10,000)  (23,265)
                                                            --------  --------
   Long-term debt.......................................... $197,029  $330,889
                                                            ========  ========

 
  Senior Subordinated Notes
 
  The Company assumed the obligations under the 10.875% Senior Subordinated
  Notes due 2006 as a direct result of the acquisition and merger that
  occurred on February 29, 1996 (see Note 3). The Senior Subordinated Notes
  are unsecured and are guaranteed by each existing and future wholly owned
  domestic subsidiary of Knoll, Inc. However, if the Company is unable to
  satisfy all or any portion of its obligations with respect to the Senior
  Subordinated Notes, it is unlikely that the guarantors will be able to pay
  all or any portion of such unsatisfied obligations.
 
  During June 1997, the Company used proceeds from its IPO to repurchase an
  aggregate principal amount of $57,750,000 of the Senior Subordinated Notes
  for a total redemption price of $65,113,000, including a redemption premium
  of $5,775,000 and accrued and unpaid interest thereon of $1,588,000. The
  Company wrote off unamortized financing costs of $3,063,000 related to the
  portion of the Senior Subordinated Notes that was redeemed. The early
  redemption premium and write-off of unamortized financing costs resulted in
  an extraordinary loss of $8,838,000 on a pre-tax basis ($5,337,000 on an
  after-tax basis) for the year ended December 31, 1997.
 
  The Senior Subordinated Notes outstanding at December 31, 1997 may not be
  redeemed at the Company's option prior to March 15, 2001. At such date, the
  Senior Subordinated Notes are redeemable at 105.438% of principal amount,
  and thereafter at an annually declining premium over par until March 15,
  2004 when they are redeemable at par. There are no sinking fund
  requirements related to the Senior Subordinated Notes.
 
  The indenture for the Senior Subordinated Notes limits the payment of
  dividends and incurrence of indebtedness and includes certain other
  restrictions and limitations that are customary with subordinated
  indebtedness of this type. The Company was in compliance with the terms of
  the indenture at December 31, 1997.
 
  Term and Revolving Loans
 
  On December 17, 1996, the Company entered into a $230,000,000 credit
  agreement with a group of financial institutions that provided for a term
  loan facility and a revolving credit facility. The proceeds of
 
                                     F-16

 
                                  KNOLL, INC.
 
          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  the facilities were used to refinance the Company's debt under the
  previously existing senior bank credit facilities that was assumed as a
  result of the acquisition (see Note 3) and for working capital and general
  corporate purposes. The refinancing resulted in an extraordinary charge of
  $8,542,000 on a pre-tax basis ($5,159,000 on an after-tax basis) to
  operations for the ten months ended December 31, 1996. This extraordinary
  charge consisted of the write-off of unamortized financing costs related to
  the refinanced debt.
 
  On August 8, 1997, the Company entered into a new agreement that modified
  certain terms of the December 17, 1996 credit agreement. The credit
  agreement previously provided for a $100,000,000 term loan with scheduled
  principal payments through December 2002 and a $130,000,000 revolving
  credit facility that matured in December 2002. The new agreement provides
  for a $275,000,000 revolving credit facility that matures in August 2002.
  At the time this change became effective, $90,000,000 of indebtedness
  outstanding under the previously existing term loan and $50,000,000 under
  the previously existing revolving loan became revolving borrowings under
  the new agreement.
 
  The new senior credit agreement contains a letter of credit subfacility
  that allows for the issuance of up to $20,000,000 in letters of credit, a
  competitive bid loan subfacility that provides for the issuance of up to
  $140,000,000 in competitive bid loans and a swing line loan subfacility
  that allows for the issuance of up to $10,000,000 in swing line loans. The
  amount available for borrowing under the revolving credit facility is
  reduced by the total outstanding letters of credit, competitive bid loans
  and swing line loans.
 
  Under the terms of the existing credit agreement, the Company may use the
  revolving credit facility for working capital and general purposes.
  Borrowings bear interest at a floating rate based at the Company's option,
  upon (i) the Eurodollar rate (as defined in the agreement) plus an
  applicable percentage that is subject to change based on the Company's
  ratio of funded debt to EBITDA or (ii) the greater of the federal funds
  rate plus 0.5% or the prime rate.
 
  The credit agreement subjects the Company to various affirmative and
  negative covenants. Among other things, the covenants limit the Company's
  ability to incur additional indebtedness and declare or pay dividends and
  require the Company to maintain certain financial ratios with respect to
  funded debt leverage. The Company was in compliance with such covenants at
  December 31, 1997.
 
  At December 31, 1997, the Company had outstanding credit facility
  borrowings totaling $99,000,000, of which $10,000,000 has been classified
  as current, and total letters of credit of approximately $1,417,000. There
  were no borrowings under the letters of credit. The Company pays a
  commitment fee ranging from 0.125% to 0.25%, depending on the Company's
  leverage ratio, on the unused portion of the revolving credit facility. In
  addition, a letter of credit fee ranging from 0.325% to 0.75%, depending on
  the Company's leverage ratio, is required to be paid on the amount
  available to be drawn under letters of credit.
 
  The Company also has several revolving credit agreements with various
  European financial institutions. As of December 31, 1997, total credit
  available under such agreements was approximately $11,881,000 or the
  European equivalent. There is currently no expiration date on these
  agreements. The interest rate on borrowings is variable and is based on the
  monetary market rate which is linked to each country's prime rate. As of
  December 31, 1997, the Company did not have any outstanding borrowings
  under the European credit facilities.
 
  Interest Paid
 
  For the year ended December 31, 1997 and the ten months ended December 31,
  1996, the Company made interest payments totaling $25,505,000 and
  $25,775,000, respectively.
 
                                     F-17

 
                                  KNOLL, INC.
 
          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  Maturities
 
  Aggregate maturities of the Company's indebtedness are as follows (in
  thousands):
 

                                                                     
      1998............................................................. $ 10,000
      1999.............................................................      --
      2000.............................................................      --
      2001.............................................................      --
      2002.............................................................   89,078
      Thereafter.......................................................  107,951
                                                                        --------
                                                                        $207,029
                                                                        ========

 
13. CAPITAL STRUCTURE
 
  On May 6, 1997, the Company's Certificate of Incorporation was amended to
  increase the number of authorized shares of common stock from 24,000,000 to
  100,000,000, increase the number of authorized shares of preferred stock
  from 3,000,000 to 10,000,000 and effect a 3.13943-for-1 split of the
  Company's common stock. Of the 10,000,000 shares of preferred stock
  authorized to be issued, 1,920,000 shares are designated as Series A 12%
  Participating Convertible Preferred Stock.
 
  In connection with the Company's IPO, 800,000 shares of Series A Preferred
  Stock were redeemed for $80,000,000 and 11,749,361 shares of common stock,
  and 802,998 shares of Series A Preferred Stock were converted into
  15,691,558 shares of common stock. Fractional shares resulting from both
  the conversion of Series A Preferred Stock into common stock and the common
  stock split were settled in cash.
 
  Prior to the redemption and conversion of the Series A Preferred Stock,
  dividends on the Series A Preferred Stock were fully cumulative, accrued on
  a quarterly basis at a rate of $12.00 per annum, and were payable only at
  the discretion of the Board of Directors. As of December 31, 1996, the
  aggregate and per share amounts of cumulative dividends in arrears were
  $16.6 million and $10.36, respectively. Upon the redemption and conversion
  into common stock of the Series A Preferred Stock, the holders of the then-
  outstanding Series A Preferred Stock lost their right to all dividends,
  including dividends in arrears.
 
  The shares of Series A Preferred Stock that were redeemed and converted
  were retired and canceled and may not be reissued. As such, only 317,002
  shares remain eligible for issuance. If these eligible shares of Series A
  Preferred Stock are issued, they will not be convertible into common stock
  and no dividends may be declared or accrue on them. Future holders of
  Series A Preferred Stock will not be granted the benefit of any sinking
  fund. Upon involuntary liquidation, holders would be entitled to receive
  $100.00 for each share of Series A Preferred Stock. Each holder would be
  entitled to vote on matters generally submitted to the stockholders of the
  Company and certain matters on which a majority vote of holders of the
  Series A Preferred Stock is required by the Company's Certificate of
  Incorporation. The number of votes per share of Series A Preferred Stock
  would be approximately 19.54 votes.
 
14. DERIVATIVE FINANCIAL INSTRUMENTS
 
  The Company uses interest rate collar agreements for other than trading
  purposes to manage its exposure to fluctuations in interest rates on its
  floating rate debt. Such agreements effectively set agreed-upon maximum and
  minimum rates on a notional principal amount and utilize the London
  Interbank Offered Rate (LIBOR) as a floating rate reference. The notional
  amounts are utilized to measure the amount of interest to be paid or
  received and do not represent the amount of exposure to credit loss. These
  interest rate collar agreements provide that, at specified intervals, when
  the floating rate is less than the minimum rate, the Company will
 
                                     F-18

 
                                  KNOLL, INC.
 
          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  pay the counterparty the differential computed on the notional principal
  amount, and when the floating rate exceeds the maximum rate, the
  counterparty will pay the Company the differential computed on the notional
  principal amount. The net amount paid or received on the interest rate
  collar agreements is recognized as an adjustment to interest expense.
  During the year ended December 31, 1997 and ten months ended December 31,
  1996, the Company was not required to make nor was it entitled to receive
  any payments as a result of these hedging activities.
 
  The Company had four outstanding interest rate collar agreements at
  December 31, 1997 and five outstanding interest rate collar agreements at
  December 31, 1996 with maximum and minimum rates ranging from 7.50% to
  7.99% and 5.00% to 5.50%, respectively. The notional principal amount of
  these agreements totaled $150,000,000 and $185,000,000 at December 31, 1997
  and 1996, respectively. The agreements outstanding as of December 31, 1997
  mature over the next two years. Aggregate maturities of the total notional
  principal amount are as follows: $35,000,000 in 1998 and $115,000,000 in
  1999.
 
  The counterparties to the interest rate collar agreements are major
  financial institutions. The Company continually monitors its positions and
  the credit ratings of the counterparties and does not anticipate
  nonperformance by them. The Company has not been required to provide nor
  has it received any collateral related to its hedging activities.
 
15. CONTINGENT LIABILITIES AND COMMITMENTS
 
  There are various claims and lawsuits pending against the Company, all of
  which management believes, based upon information presently known, either
  to be without merit or subject to adequate defenses. The resolution of
  these claims and lawsuits is not expected to have a material adverse effect
  on the Company.
 
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
 
  The following methods and assumptions were used to estimate the fair values
  of each class of financial instruments:
 
  Cash and Cash Equivalents, Accounts Receivable, Accounts Payable and Short-
  Term Debt
 
  The fair values of these financial instruments approximate their carrying
  amounts due to their immediate or short-term periods to maturity.
 
  Long-Term Debt
 
  The fair values of the variable rate long-term debt instruments approximate
  their carrying amounts. The fair value of other long-term debt was
  estimated using quoted market values or discounted cash flow analyses based
  on current incremental borrowing rates for similar types of borrowing
  arrangements. The fair value of the Company's long-term debt, including the
  current portion, is approximately $220,435,000 at December 31, 1997 and
  $371,892,000 at December 31, 1996 while the carrying amounts are
  $207,029,000 and $354,154,000, respectively.
 
  Interest Rate Collar Agreements
 
  The fair value of the Company's interest rate collar agreements, as
  estimated by dealers, is not material.
 
                                     F-19

 
                                  KNOLL, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
17. EARNINGS PER SHARE
 
  The following table sets forth a reconciliation of the numerators and
  denominators of the basic and diluted pro forma earnings per share
  computations for income before extraordinary item. See Note 2 for a
  description of the pro forma basis of presentation.
 


                                           INCOME BEFORE   WEIGHTED
                                           EXTRAORDINARY    AVERAGE
                                               ITEM         SHARES     PER SHARE
                                            (NUMERATOR)  (DENOMINATOR)  AMOUNT
                                           ------------- ------------- ---------
                                              (IN THOUSANDS, EXCEPT PER SHARE
                                                         AMOUNTS)
                                                              
     YEAR ENDED DECEMBER 31, 1997:
     Basic pro forma earnings per share..     $66,443       37,284       $1.78
                                                                         =====
     Effect of dilutive potential common
      shares:
       Employee stock options............         --           235
       Nonvested restricted stock grants.         --         2,879
                                              -------       ------
     Diluted pro forma earnings per
      share..............................     $66,443       40,398       $1.64
                                              =======       ======       =====
     TEN MONTHS ENDED DECEMBER 31, 1996:
     Basic pro forma earnings per share..     $21,995       31,040       $0.71
                                                                         =====
     Dilutive effect of nonvested
      restricted stock grants............         --         3,661
                                              -------       ------
     Diluted pro forma earnings per
      share..............................     $21,995       34,701       $0.63
                                              =======       ======       =====

 
  As discussed in Note 12, the Company recognized an extraordinary loss on
  early extinguishment of debt of $5,337,000, net of taxes, in 1997 and
  $5,159,000, net of taxes, in 1996. On a per share basis, these
  extraordinary losses amounted to $0.14 basic and $0.13 diluted in 1997 and
  $0.17 basic and $0.15 diluted in 1996.
 
18. INCOME TAXES
 
  Income (loss) before income taxes and extraordinary item consists of the
  following:
 


                                                                                                   |  THE KNOLL GROUP, INC.
                                                                                                   |      (PREDECESSOR)
                                                                                                   |-------------------------
                                                                                        TEN MONTHS | TWO MONTHS
                                                                           YEAR ENDED     ENDED    |   ENDED      YEAR ENDED
                                                                          DECEMBER 31, DECEMBER 31,|FEBRUARY 29, DECEMBER 31,
                                                                              1997         1996    |    1996         1995
                                                                          ------------ ------------|------------ ------------
                                                                               (IN THOUSANDS)      |     (IN THOUSANDS)
                                                                                          |          
     U.S. operations.....................................................   $ 82,851     $23,381   |  $(39,105)    $46,908
     Foreign operations..................................................     31,618      15,458   |    (1,090)      5,270
                                                                            --------     -------   |  --------     -------
                                                                            $114,469     $38,839   |  $(40,195)    $52,178
                                                                            ========     =======   |  ========     =======

 
                                     F-20

 
                                  KNOLL, INC.
 
          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  Income tax expense (benefit), excluding extraordinary items, is comprised
  of the following:
 


                                                                                                   |  THE KNOLL GROUP, INC.
                                                                                                   |      (PREDECESSOR)
                                                                                                   |-------------------------
                                                                              YEAR      TEN MONTHS | TWO MONTHS     YEAR
                                                                             ENDED        ENDED    |   ENDED        ENDED
                                                                          DECEMBER 31, DECEMBER 31,|FEBRUARY 29, DECEMBER 31,
                                                                              1997         1996    |    1996         1995
                                                                          ------------ ------------|------------ ------------
                                                                               (IN THOUSANDS)      |     (IN THOUSANDS)
                                                                                          |          
Current                                                                                            |
  Federal................................................................   $21,585      $10,909   |  $(13,801)    $11,130
  State..................................................................     5,980        2,953   |    (1,814)      3,687
  Foreign................................................................    11,295          661   |        28         --
                                                                            -------      -------   |  --------     -------
    Total current........................................................    38,860       14,523   |   (15,587)     14,817
                                                                            -------      -------   |  --------     -------
Deferred:                                                                                          |
  Federal................................................................     6,258       (2,850)  |      (460)      7,795
  State..................................................................       708         (612)  |       (60)        234
  Foreign................................................................     2,200        5,783   |       --          --
                                                                            -------      -------   |  --------     -------
    Total deferred.......................................................     9,166        2,321   |      (520)      8,029
                                                                            -------      -------   |  --------     -------
Income tax expense (benefit).............................................   $48,026      $16,844   |  $(16,107)    $22,846
                                                                            =======      =======   |  ========     =======

 
  Income taxes paid by the Company for the year ended December 31, 1997 and
  the ten months ended December 31, 1996 totaled $24,026,000 and $13,137,000,
  respectively.
 
  As discussed in Notes 1 and 2 the recognition and measurement of income tax
  expense (benefit) for the Predecessor required certain assumptions,
  allocations and significant estimates in order to measure the tax
  consequences as if the Predecessor were a stand-alone taxpayer.
 
  The following table sets forth the tax effects of temporary differences
  that give rise to significant portions of the deferred tax assets and
  liabilities:
 


                                                              DECEMBER 31,
                                                            ------------------
                                                              1997      1996
                                                            --------  --------
                                                             (IN THOUSANDS)
                                                                
Deferred tax assets:
  Accounts receivable, principally due to allowance for
   doubtful accounts....................................... $  1,634  $  1,659
  Inventories..............................................    3,153     2,603
  Net operating loss carryforwards.........................   21,359    28,253
  Postretirement benefit obligation........................    7,039     6,880
  Accrued liabilities and other items......................   20,493    21,635
                                                            --------  --------
Gross deferred tax assets..................................   53,678    61,030
Valuation allowance........................................  (25,172)  (33,161)
                                                            --------  --------
Net deferred tax assets....................................   28,506    27,869
                                                            --------  --------
Deferred tax liabilities:
  Intangibles, principally due to differences in
   amortization............................................    7,303     3,338
  Plant and equipment, principally due to differences in
   depreciation and assigned values........................    5,011     1,930
  Other items..............................................      198       --
                                                            --------  --------
Gross deferred tax liabilities.............................   12,512     5,268
                                                            --------  --------
Net deferred tax asset..................................... $ 15,994  $ 22,601
                                                            ========  ========

 
 
                                     F-21

 
                                  KNOLL, INC.
 
          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  As of December 31, 1997, the Company has pre-acquisition net operating loss
  carryforwards totaling approximately $57,206,000 in various foreign tax
  jurisdictions which generally expire between 1998 and 2001 or may be
  carried forward for an unlimited time.
 
  The Company has recorded a valuation allowance for net deferred tax assets
  in foreign tax jurisdictions, primarily related to pre-acquisition net
  operating loss carryforwards, due to the significant losses incurred by the
  Predecessor in these tax jurisdictions in previous years.
 
  At February 29, 1996 and December 31, 1995, the Predecessor had recorded a
  valuation allowance of $38,446,000 and $37,990,000, respectively.
 
  For the year ended December 31, 1997 and the ten months ended December 31,
  1996, tax benefits recognized through reductions of the valuation allowance
  had the effect of reducing goodwill by $4,524,000 and $4,246,000,
  respectively. If additional tax benefits are recognized in the future
  through further reduction of the valuation allowance, such benefits will
  reduce goodwill.
 
  The following table sets forth a reconciliation of the statutory federal
  income tax rate to the effective income tax rate:
 


                                                                                                   |  THE KNOLL GROUP, INC.
                                                                                                   |      (PREDECESSOR)
                                                                                                   |-------------------------
                                                                              YEAR      TEN MONTHS | TWO MONTHS      YEAR
                                                                             ENDED        ENDED    |   ENDED        ENDED
                                                                          DECEMBER 31, DECEMBER 31,|FEBRUARY 29, DECEMBER 31,
                                                                              1997         1996    |    1996         1995
                                                                          ------------ ------------|------------ ------------
                                                                                          |          
      Federal statutory tax rate.........................................     35.0%        35.0%   |   (35.0%)       35.0%
      Increase (decrease) in the tax rate resulting from:                                          |
        State taxes, net of federal effect...............................      3.8          3.9    |    (4.5)         4.9
        Higher effective income taxes of other countries ................      2.4          3.2    |    (0.2)        (1.4)
        Non-deductible goodwill amortization.............................      0.3          1.0    |     1.1          4.7
        Other............................................................      0.5          0.3    |    (1.4)         0.6
                                                                              ----         ----    |   -----         ----
      Effective tax rate.................................................     42.0%        43.4%   |   (40.0%)       43.8%
                                                                              ====         ====    |   =====         ====

 
  The Company has not made provision for U.S. federal and state income taxes
  as of December 31, 1997 and 1996 on approximately $27,467,000 and
  $9,194,000 of foreign earnings which are expected to be reinvested
  indefinitely. Upon distribution of those earnings in the form of dividends
  or otherwise, the Company would be subject to U.S. income taxes (subject to
  an adjustment for foreign tax credits) and withholding taxes payable to the
  various foreign countries. Determination of the amount of the unrecognized
  deferred tax liability is not practicable.
 
19. LEASES
 
  The Company has commitments under operating leases for certain machinery
  and equipment and facilities used in its operations. Total rental expense
  for the year ended December 31, 1997 and the ten months ended
 
                                     F-22

 
                                  KNOLL, INC.
 
          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  December 31, 1996 was $8,902,000 and $7,787,000, respectively. Future
  minimum rental payments required under those operating leases that have an
  initial or remaining noncancelable lease term in excess of one year are as
  follows (in thousands):
 

                                                                     
      1998............................................................. $ 5,786
      1999.............................................................   4,677
      2000.............................................................   2,970
      2001.............................................................   2,119
      2002.............................................................   1,824
      Subsequent years.................................................   2,018
                                                                        -------
      Total minimum rental payments.................................... $19,394
                                                                        =======

 
  The Predecessor also had operating leases for certain machinery and
  equipment and facilities. Total rental expense charged to operations was
  $1,668,000 for the two months ended February 29, 1996 and $10,149,000 for
  the year ended December 31, 1995.
 
20. STOCK PLANS
 
  In connection with the acquisition discussed in Note 3, the Company
  established the Knoll, Inc. 1996 Stock Incentive Plan (the "1996 Stock
  Plan"). Under the 1996 Stock Plan, awards denominated or payable in shares
  or options to purchase shares of the Company's common stock may be granted
  to officers and other key employees of the Company. A combined maximum of
  4,709,126 shares or options to purchase shares may be granted under the
  1996 Stock Plan. Options that are granted have a contractual life of ten
  years. A Stock Plan Committee of the Company's Board of Directors has sole
  discretion concerning administration of the 1996 Stock Plan, including
  selection of individuals to receive awards, types of awards, the terms and
  conditions of the awards and the time at which awards will be granted. The
  Board of Directors may terminate the 1996 Stock Plan at its discretion at
  any time.
 
  During the ten months ended December 31, 1996, the Company granted
  4,144,030 restricted common shares, with a weighted average fair market
  value of $0.34 per share, to key employees. Of such amount, 1,883,641 of
  the restricted shares vest ratably over the five years subsequent to the
  grant date while the other 2,260,389 restricted shares were scheduled to
  vest 20.0% on the grant date and 80.0% ratably over the four years
  subsequent to the grant date. In October 1997, the vesting of 565,098 of
  the 2,260,389 restricted shares was accelerated. As a result of this
  acceleration, 1,469,252 of the 2,260,389 restricted shares were vested as
  of December 31, 1997 while the remaining 791,137 shares will vest in equal
  installments on each of March 1, 1998, 1999 and 2000. As of December 31,
  1997, a total of 1,845,972 restricted shares have vested. The fair market
  value of the shares on the date of the grant has been recorded as unearned
  stock grant compensation and is presented as a separate component of
  stockholders' equity. Compensation expense is recognized ratably over the
  vesting period. The remaining 565,096 shares available under the 1996 Stock
  Plan were granted in the form of options during 1997.
 
  The Knoll, Inc. 1997 Stock Incentive Plan (the "1997 Stock Plan") was
  established on February 14, 1997. The terms of the 1997 Stock Plan are
  essentially the same as those of the 1996 Stock Plan, except pursuant to
  the 1997 Stock Plan, an aggregate of 2,255,772 shares of common stock are
  reserved for issuance thereunder (subject, in the case of 1,000,000 shares,
  to stockholder approval), discounted options may be granted, options may be
  repriced, and the Board of Directors has greater flexibility to amend the
  1997 Plan. As of December 31, 1997, there were 1,577,062 options
  outstanding pursuant to the 1997 Stock Plan (subject, in the case of
  options to purchase 330,000 shares, to stockholder approval).
 
                                     F-23

 
                                  KNOLL, INC.
 
          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The following table summarizes the Company's stock option activity:
 


                                                                     YEAR ENDED
                                                                    DECEMBER 31,
                                                                        1997
                                                                    ------------
                                                                 
     Outstanding at beginning of year..............................        --
     Granted.......................................................  2,173,552
     Exercised.....................................................        --
     Forfeited.....................................................    (31,394)
                                                                     ---------
     Outstanding at end of year....................................  2,142,158
                                                                     =========
     Exercisable at end of year....................................     10,000
                                                                     =========
     Available for future grants...................................    678,710
                                                                     =========

 
  The exercise price per share for those options exercisable at December 31,
  1997 is $17.00 and for those options forfeited during 1997 is $15.93.
 
  Stock options outstanding at December 31, 1997 are summarized as follows:
 


                                                WEIGHTED
                           NUMBER OF            AVERAGE               WEIGHTED
        RANGE OF            OPTIONS            REMAINING              AVERAGE
     EXERCISE PRICES      OUTSTANDING       CONTRACTUAL LIFE       EXERCISE PRICE
     ---------------      -----------       ----------------       --------------
                                                          
     $15.93 - $17.00       1,337,158              9.19                 $15.97
     $28.50 - $33.13         805,000              9.83                  28.64
                           ---------
                           2,142,158              9.43                 $20.73
                           =========

 
  The Company also has a qualified, noncompensatory employee stock purchase
  plan, which provides all employees the ability to purchase common stock of
  the Company at a price equal to 15.0% below the lower of the market price
  at (i) the beginning of each quarterly offering period or (ii) the end of
  each quarterly offering period. Purchases under the plan are limited to
  10.0% of an employee's eligible gross pay, up to $25,000. The Company has
  reserved 300,000 shares of its common stock for issuance under its employee
  stock purchase plan. From August 1, 1997, the date the employee stock
  purchase plan commenced, through December 31, 1997, the Company issued
  22,716 shares at a weighted average exercise price of $26.71 under this
  plan.
 
  As discussed in Note 2, the Company continues to account for its stock-
  based compensation plans in accordance with APB 25. Accordingly, no
  compensation cost has been recognized for the Company's stock options or
  stock purchase plan. If the Company had recognized compensation cost based
  upon the fair value of the stock options and stock issued under the
  employee stock purchase plan at the date of grant as prescribed by SFAS
  123, the Company's pro forma net income and pro forma net income per share
  would have been as follows (in thousands, except per share amounts):
 


                                                                     YEAR ENDED
                                                                    DECEMBER 31,
                                                                        1997
                                                                    ------------
                                                                 
     Pro forma net income..........................................   $59,731
     Pro forma net income per share of common stock:
       Basic.......................................................      1.60
       Diluted.....................................................      1.48

 
                                     F-24

 
                                  KNOLL, INC.
 
          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The fair value of the options was estimated at the date of grant using a
  Black-Scholes option pricing model with the following assumptions: risk-
  free interest rate of 6.0%, dividend yield of 0.0%, expected volatility of
  the market price of the common stock of 35.0% and a weighted average
  expected life of the options of 7 years. The estimated fair value of the
  options was amortized to expense over the vesting period of the options for
  purposes of determining pro forma net income and pro forma net income per
  share. Pro forma results of operations are not likely to be representative
  of the effects on reported or pro forma results of operations for future
  years.
 
21. PENSION PLANS
 
  On March 1, 1996, the Company established two defined benefit pension
  plans: The Knoll Pension Plan and The Knoll Pension Plan for Bargaining
  Unit Employees. The first plan covers all eligible U.S. employees who are
  not members of a collective bargaining unit (i.e. union), while the second
  plan pertains to all U.S. employees who are covered by a collective
  bargaining agreement. Benefits for these plans are based primarily on years
  of credited service, annual compensation for each year of participation,
  and age when payments begin. In order to accrue benefits under The Knoll
  Pension Plan for Bargaining Unit Employees, participants are required to
  make certain contributions to the plan. The Company makes contributions to
  both plans as determined by an actuarial funding method. This funding
  policy is consistent with the minimum funding requirements set forth by the
  Employee Retirement Income Security Act of 1974, as amended, and other
  governmental laws and regulations.
 
  The following table sets forth the net periodic pension cost for the
  Company's pension plans:
 


                                                           YEAR      TEN MONTHS
                                                          ENDED        ENDED
                                                       DECEMBER 31, DECEMBER 31,
                                                           1997         1996
                                                       ------------ ------------
                                                            (IN THOUSANDS)
                                                              
   Service cost.......................................    $4,893       $3,953
   Interest cost on projected benefit obligation......       207          --
                                                          ------       ------
                                                           5,100        3,953
   Return on plan assets..............................       (55)         --
                                                          ------       ------
   Net periodic pension cost..........................    $5,045       $3,953
                                                          ======       ======

 
  The return on plan assets for the year ended December 31, 1997 was
  determined based on a weighted-average expected long-term rate of return on
  plan assets of 8.5%.
 
                                     F-25

 
                                  KNOLL, INC.
 
          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The funded status of the Company's pension plans is as follows:
 


                                                               DECEMBER 31,
                                                              ----------------
                                                               1997     1996
                                                              -------  -------
                                                              (IN THOUSANDS)
                                                                 
      Actuarial present value of benefit obligation:
        Vested............................................... $(4,619) $(2,784)
        Nonvested............................................  (1,341)    (273)
                                                              -------  -------
        Accumulated benefit obligation.......................  (5,960)  (3,057)
        Additional obligation for projected compensation
         increases on accumulated years of service...........  (2,118)    (896)
                                                              -------  -------
      Projected benefit obligation...........................  (8,078)  (3,953)
      Plan assets at fair value..............................   3,809       30
                                                              -------  -------
      Plan assets less than projected benefit obligation.....  (4,269)  (3,923)
      Unrecognized net gain..................................  (1,248)     --
                                                              -------  -------
      Accrued pension cost................................... $(5,517) $(3,923)
                                                              =======  =======

 
  The projected benefit obligation as of December 31, 1997 and 1996 was
  measured using a discount rate of 7.25% and rate of compensation increase
  of 4.5%. As of December 31, 1997, plan assets consisted primarily of mutual
  funds.
 
  Prior to March 1, 1996, the Predecessor sponsored a defined benefit pension
  plan, The Knoll Group Pension Plan, for all eligible U.S. nonunion
  employees. The plan provisions were substantially the same as the current
  pension plan for nonunion employees offered by Knoll, Inc. As a result of
  the sale of the Predecessor by Westinghouse, benefits earned through
  February 29, 1996 under The Knoll Group Pension Plan were frozen and
  participants were fully vested in their benefits. The plan was subsequently
  merged into a Westinghouse pension plan.
 
  The following table sets forth the Predecessor's net periodic pension cost
  (income) for The Knoll Group Pension Plan:
 


                                                        TWO MONTHS      YEAR
                                                          ENDED        ENDED
                                                       FEBRUARY 29, DECEMBER 31,
                                                           1996         1995
                                                       ------------ ------------
                                                            (IN THOUSANDS)
                                                              
      Service cost...................................     $  522      $ 2,278
      Interest cost on projected benefit obligation..        933        5,212
      Amortization of unrecognized prior service
       cost..........................................         68          385
      Amortization of unrecognized net loss..........        197          --
                                                          ------      -------
                                                           1,720        7,875
      Return on plan assets..........................     (1,543)      (8,993)
                                                          ------      -------
      Net periodic pension cost (income).............     $  177      $(1,118)
                                                          ======      =======

 
  The return on plan assets was determined based on a weighted-average
  expected long-term rate of return on plan assets of 9.75% for each period
  presented.
 
  The Predecessor also participated in two single-employer defined benefit
  pension plans sponsored by Westinghouse. These plans covered all U.S. union
  employees of the Predecessor, certain domestic Westinghouse employees and
  certain domestic executives of the Predecessor and Westinghouse. For the
  two
 
                                     F-26

 
                                  KNOLL, INC.
 
          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  months ended February 29, 1996 and the year ended December 31, 1995, the
  Predecessor's contributions to Westinghouse for these defined benefit
  pension plans totaled $212,000 and $1,076,000, respectively.
 
  Employees of the Canadian and United Kingdom (U.K.) operations participate
  in defined contribution plans. The Company's expense related to the
  Canadian plan for the year ended December 31, 1997 and ten months ended
  December 31, 1996 was $955,000 ad $607,000, respectively. The Predecessor's
  expense for the two months ended February 29, 1996 and year ended December
  31, 1995 totaled $114,000 and $398,000, respectively. Expense for the U.K.
  plan during each of the four aforementioned periods was not significant.
 
  The Company also sponsors a retirement savings plan, which is an employee
  savings plan that qualifies as a deferred salary arrangement under Section
  401(k) of the Internal Revenue Code, for all U.S. nonunion employees and
  U.S. hourly union employees. Under this plan, participants may defer a
  portion of their earnings up to the annual contribution limits established
  by the Internal Revenue Service. The Company matches 40.0% of employee
  contributions on up to the first 6.0% of employee compensation. The plan
  also provides for additional employer matching based on the achievement of
  certain profitability goals. The Company's common stock is offered as an
  investment option under the 401(k) plan. Although the stock is typically
  purchased on the open market, the Company has reserved 500,000 shares of
  its common stock for issuance under its 401(k) plan. The Company's total
  expense under this plan was $5,180,000 for the year ended December 31, 1997
  and $2,957,000 for the ten months ended December 31, 1996. The Predecessor
  administered a similar retirement savings plan and incurred related expense
  totaling $406,000 and $2,675,000 for the two months ended February 29, 1996
  and the year ended December 31, 1995, respectively.
 
22. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
 
  The Company provides postretirement medical and life insurance coverage for
  certain retired U.S. nonunion and union employees and their eligible
  dependents. The amount of benefits provided to retired nonunion employees
  varies according to the age of the retiree as of a predetermined date,
  while benefits provided to retired union employees are based on annual
  compensation. The Company does not currently fund its obligation related to
  postretirement medical and life insurance benefits.
 
  Net periodic postretirement benefit cost for the Company includes the
  following components:
 


                                   YEAR      TEN MONTHS
                                  ENDED        ENDED
                               DECEMBER 31, DECEMBER 31,
                                   1997         1996
                               ------------ ------------
                                    (IN THOUSANDS)
                                      
      Service cost............    $  560       $  440
      Interest cost on
       projected benefit
       obligation.............     1,224        1,000
                                  ------       ------
      Net periodic
       postretirement benefit
       cost...................    $1,784       $1,440
                                  ======       ======

 
                                     F-27

 
                                  KNOLL, INC.
 
          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The Company's liability related to the postretirement medical and life
  insurance benefits is as follows:
 


                                                               DECEMBER 31,
                                                             ------------------
                                                               1997      1996
                                                             --------  --------
                                                              (IN THOUSANDS)
                                                                 
      Accumulated postretirement benefit obligation:
        Retirees...........................................  $ (7,183) $ (7,329)
        Fully eligible active participants.................    (1,974)   (1,593)
        Other active participants..........................    (8,992)   (8,235)
                                                             --------  --------
      Total accumulated postretirement benefit obligation..   (18,149)  (17,157)
      Unrecognized net loss (gain).........................       375      (217)
                                                             --------  --------
      Accrued postretirement benefit cost..................  $(17,774) $(17,374)
                                                             ========  ========

 
  The accumulated postretirement benefit obligation as of December 31, 1997
  and 1996 was measured using a discount rate of 7.25% and rate of
  compensation increase of 4.5%. The health care cost trend rate was assumed
  to be 8.5% in 1997, decreasing by 1.0% per year to 5.5% in 2000, and
  remaining at that level thereafter. Increasing the assumed health care cost
  trend rate by one percentage point in each year would increase the
  accumulated postretirement benefit obligation as of December 31, 1997 by
  approximately $2,570,000 and increase the aggregate of the service and
  interest cost for the year ended December 31, 1997 by approximately
  $236,000.
 
  The Predecessor provided postretirement medical and life insurance benefits
  to U.S. retired nonunion employees. The current postretirement medical and
  life insurance benefits which the Company provides to retired nonunion
  employees remain essentially unchanged from those which the Predecessor had
  provided.
 
  Net periodic postretirement benefit cost incurred by the Predecessor
  includes the following:
 


                                                   TWO MONTHS
                                                     ENDED      YEAR ENDED
                                                  FEBRUARY 29, DECEMBER 31,
                                                      1996         1995
                                                  ------------ ------------
                                                         (IN THOUSANDS)
                                                                   
      Service cost...............................     $103        $  449
      Interest cost on projected benefit
       obligation................................      207         1,509
      Amortization of unrecognized prior service
       cost......................................      (56)          (12)
      Amortization of unrecognized net loss
       (gain)....................................       10           (25)
                                                      ----        ------
      Net periodic postretirement benefit cost...     $264        $1,921
                                                      ====        ======

 
  The Predecessor also participated in a single-employer postretirement
  benefit arrangement maintained by Westinghouse. Westinghouse provided
  medical and life insurance benefits to all retired U.S. union employees and
  certain Westinghouse employees. The Predecessor's contributions for the
  postretirement benefit arrangements sponsored by Westinghouse totaled
  $82,500 for the two months ended February 29, 1996 and $151,000 for the
  year ended December 31, 1995.
 
 
                                     F-28

 
                                  KNOLL, INC.
 
          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
23. BUSINESS SEGMENT AND GEOGRAPHICAL REGION INFORMATION
 
  The Company conducts business predominantly in the office furniture
  industry through its operations in the United States, Canada and Europe.
  Summarized financial information regarding the Company's operations in
  these geographic areas is presented below:
 


          YEAR ENDED          UNITED
       DECEMBER 31, 1997      STATES    CANADA   EUROPE  ELIMINATIONS  TOTALS
       -----------------     --------  --------  ------- ------------ --------
                                             (IN THOUSANDS)
                                                       
   Sales to customers....... $717,326  $ 37,674  $55,857  $     --    $810,857
   Sales between geographic
    areas...................   24,402   102,783    2,228   (129,413)       --
                             --------  --------  -------  ---------   --------
   Net sales................ $741,728  $140,457  $58,085  $(129,413)  $810,857
                             ========  ========  =======  =========   ========
   Operating income......... $108,002  $ 24,497  $ 5,378        --    $137,877
                             ========  ========  =======  =========   ========
   Identifiable assets...... $655,385  $ 50,701  $41,439  $ (66,666)  $680,859
                             ========  ========  =======  =========   ========

       TEN MONTHS ENDED       UNITED
       DECEMBER 31, 1996      STATES    CANADA   EUROPE  ELIMINATIONS  TOTALS
       -----------------     --------  --------  ------- ------------ --------
                                             (IN THOUSANDS)
                                                       
   Sales to customers....... $493,653  $ 24,456  $43,425  $     --    $561,534
   Sales between geographic
    areas...................   13,637    60,866    1,714    (76,217)       --
                             --------  --------  -------  ---------   --------
   Net sales................ $507,290  $ 85,322  $45,139  $ (76,217)  $561,534
                             ========  ========  =======  =========   ========
   Operating income......... $ 54,381  $ 10,681  $ 6,282        --    $ 71,344
                             ========  ========  =======  =========   ========
   Identifiable assets...... $648,868  $ 52,690  $39,725  $ (65,571)  $675,712
                             ========  ========  =======  =========   ========
 
  The Predecessor also operated primarily in the office furniture industry in
  the United States, Canada and Europe. Summarized financial data regarding
  the Predecessor's operations according to geographic area is as follows:
 

       TWO MONTHS ENDED       UNITED
       FEBRUARY 29, 1996      STATES    CANADA   EUROPE  ELIMINATIONS  TOTALS
       -----------------     --------  --------  ------- ------------ --------
                                             (IN THOUSANDS)
                                                       
   Sales to customers....... $ 78,267  $  4,415  $ 7,251  $     --    $ 89,933
   Sales to related parties.      299       --       --         --         299
   Sales between geographic
    areas...................    1,377     6,708      227     (8,312)        --
                             --------  --------  -------  ---------   --------
   Net sales................ $ 79,943  $ 11,123  $ 7,478  $  (8,312)  $ 90,232
                             ========  ========  =======  =========   ========
   Operating income (loss).. $(39,010) $   (734) $   185        --    $(39,559)
                             ========  ========  =======  =========   ========

          YEAR ENDED          UNITED
       DECEMBER 31, 1995      STATES    CANADA   EUROPE  ELIMINATIONS  TOTALS
       -----------------     --------  --------  ------- ------------ --------
                                             (IN THOUSANDS)
                                                       
   Sales to customers....... $517,314  $ 31,132  $62,277  $     --    $610,723
   Sales to related parties.   10,169       --       --         --      10,169
   Sales between geographic
    areas...................   17,349    61,262    1,882    (80,493)       --
                             --------  --------  -------  ---------   --------
   Net sales................ $544,832  $ 92,394  $64,159  $ (80,493)  $620,892
                             ========  ========  =======  =========   ========
   Operating income......... $ 54,043  $    483  $   679        --    $ 55,205
                             ========  ========  =======  =========   ========

 
  For the two months ended February 29, 1996 and the year ended December 31,
  1995, allocated corporate expenses from Westinghouse were prorated to the
  geographic segments based on sales.
 
                                     F-29

 
                                  KNOLL, INC.
 
          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The Predecessor typically derived more than 10.0% of net sales from the
  U.S. federal government. The Predecessor's sales to the U.S. federal
  government totaled $9,925,000 for the two months ended February 29, 1996
  and $58,090,000 for the year ended December 31, 1995. The Company's total
  sales to the U.S. federal government were $62,672,000 for the year ended
  December 31, 1997 and $51,046,000 for the ten months ended December 31,
  1996. Neither the Company nor the Predecessor engaged in export sales from
  the U.S. to unaffiliated customers in foreign countries.
 
  Sales between geographic areas are made at a transfer price that includes
  an appropriate mark-up.
 
24. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
 
  The following table sets forth summary information on a quarterly basis for
  the Company and the Predecessor for the respective periods presented below.
  See Note 2 regarding the presentation of per share amounts.


                                                        THE COMPANY
                                            -----------------------------------
                                             FIRST    SECOND   THIRD    FOURTH
                                            QUARTER  QUARTER  QUARTER  QUARTER
                                            -------- -------- -------- --------
                                              (IN THOUSANDS, EXCEPT PER SHARE
                                                           DATA)
                                                           
  1997
   Net sales............................... $177,833 $212,582 $208,402 $212,040
   Gross profit............................   67,974   86,176   83,714   83,031
   Income before extraordinary item........   11,638   16,956   19,471   18,378
   Net income..............................   11,638   11,619   19,471   18,378
   Pro forma income before extraordinary
    item per share of common stock:
     Basic.................................     0.37     0.46
     Diluted...............................     0.34     0.43
   Income before extraordinary item per
    share of common stock:
     Basic.................................                       0.48     0.45
     Diluted...............................                       0.45     0.42


 

                              PREDECESSOR  |              THE COMPANY
                              -----------  | -----------------------------------
                              TWO MONTHS   |  ONE MONTH
                                 ENDED     |    ENDED    SECOND    THIRD    FOURTH
                              FEBRUARY 29  |  MARCH 31  QUARTER   QUARTER  QUARTER
                              -----------  | --------- -------- --------- --------
                                  (IN      |
                              THOUSANDS)   | (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                     |                     
  1996                                     |
   Net sales.................  $ 90,232    | $ 48,080  $166,520 $ 167,184 $179,750
   Gross profit..............    30,518    |   15,537    58,574    61,046   67,536
   Income (loss) before                    |
    extraordinary item.......   (24,088)   |    449     7,527     7,685    6,334
   Net income (loss).........   (24,088)   |    449     7,527     7,685    1,175
   Pro forma income before                 |
    extraordinary item per                 |
    share of common stock:                 |
     Basic...................              |   0.01      0.24      0.25     0.21
     Diluted.................              |   0.01      0.22      0.22     0.18

 
  Earnings per share amounts for 1996 and the first three quarters of 1997
  have been restated to comply with SFAS 128.
 
                                     F-30

 
                                  KNOLL, INC.
 
          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The Company recorded an extraordinary loss of $8,838,000 pre-tax
  ($5,337,000 after-tax) during the second quarter of 1997. This loss
  consisted of the write-off of unamortized deferred financing fees and the
  premium paid in connection with the early redemption of a portion of the
  Company's Senior Subordinated Notes. During the fourth quarter of 1996, the
  Company recorded a loss on the early extinguishment of debt amounting to
  $8,542,000 pre-tax ($5,159,000 after-tax). The loss consisted of the write-
  off of unamortized deferred financing fees in connection with the
  refinancing of the Company's credit agreement.
 
25. FINANCIAL INFORMATION FOR GUARANTORS OF THE COMPANY'S DEBT
 
  As discussed in Note 12, the Company's Senior Subordinated Notes are
  guaranteed by all existing and future directly or indirectly wholly owned
  domestic subsidiaries of the Company (the "Guarantors"). The Guarantors are
  Knoll Overseas, Inc., a holding company for the entities that conduct the
  Company's European business, and Spinneybeck Enterprises, Inc., which
  directly and through a Canadian subsidiary operates the Company's leather
  business.
 
  These Guarantors will irrevocably and unconditionally, fully, jointly and
  severally, guarantee the performance and payment when due, of all
  obligations under the Senior Subordinated Notes, limited to the largest
  amount that would not render such Guarantors' obligations under the
  guarantees subject to avoidance under any applicable federal or state
  fraudulent conveyance or similar law.
 
  The condensed consolidating information which follows presents:
 
  .  Condensed consolidating financial information as of December 31, 1997
     and 1996 and for the year ended December 31, 1997, ten months ended
     December 31, 1996, two months ended February 29, 1996 and year ended
     December 31, 1995 of (a) Knoll, Inc. (as the Issuer), (b) the
     Guarantors, (c) the combined non-Guarantors, (d) elimination entries and
     (e) the Company on a consolidated basis.
 
  .  The Issuer and the Guarantors are shown with their investments in their
     subsidiaries accounted for on the equity method.
 
  The condensed consolidating financial information should be read in
  connection with the consolidated financial statements of the Company.
  Separate financial statements of the Guarantors are not presented because
  management has determined that separate financial statements are not
  material. The Guarantors are fully, jointly, severally and unconditionally
  liable under the guarantees.
 
  Certain amounts for 1996 in the condensed consolidating information have
  been reclassified to conform with the 1997 classifications.
 
                                     F-31

 
                                  KNOLL, INC.
 
                                 BALANCE SHEET
                               DECEMBER 31, 1997
                                 (IN THOUSANDS)
 


                                              GUARANTORS
                                      ---------------------------
                                      SPINNEYBECK
                                      ENTERPRISES,     KNOLL         NON-
                          KNOLL, INC.     INC.     OVERSEAS, INC. GUARANTORS ELIMINATIONS  TOTAL
                          ----------- ------------ -------------- ---------- ------------ --------
                                                                        
ASSETS
Current assets:
  Cash and cash
   equivalents..........   $  1,052     $   291       $   --       $  9,447   $     --    $ 10,790
  Customer receivables,
   net..................     97,364       1,629           --         23,858         --     122,851
  Accounts receivable--
   related parties......      2,380          35         2,257        41,427     (46,099)       --
  Inventories...........     46,665       7,443           --         14,141         --      68,249
  Deferred income
   taxes................     20,323         --            --            972         --      21,295
  Prepaid and other
   current assets.......      2,258          (2)            4         1,437         --       3,697
                           --------     -------       -------      --------   ---------   --------
Total current assets....    170,042       9,396         2,261        91,282     (46,099)   226,882
Property, plant and
 equipment, net.........    144,923         292           --         35,235         --     180,450
Intangible assets, net..    267,231         --            --          3,446         --     270,677
Equity investments......     95,308         567        14,947           --     (110,822)       --
Other noncurrent
 assets.................        731           9            97         2,013         --       2,850
                           --------     -------       -------      --------   ---------   --------
Total assets............   $678,235     $10,264       $17,305      $131,976   $(156,921)  $680,859
                           ========     =======       =======      ========   =========   ========
LIABILITIES AND
 STOCKHOLDERS' EQUITY
Current liabilities:
  Current maturities of
   long-term debt.......   $ 10,000     $   --        $   --       $    --    $     --    $ 10,000
  Accounts payable--
   trade................     46,709         482           --         19,506         --      66,697
  Accounts payable--
   related parties......     41,290         137           (10)        4,682     (46,099)       --
  Income taxes payable..     (2,046)        223           (69)        8,683         --       6,791
  Other current
   liabilities..........     67,291         678         1,886         7,986         --      77,841
                           --------     -------       -------      --------   ---------   --------
Total current
 liabilities............    163,244       1,520         1,807        40,857     (46,099)   161,329
Long-term debt..........    196,250         --            --            779         --     197,029
Deferred income taxes...      3,149         --            --          2,152         --       5,301
Postretirement benefits
 obligation.............     16,424         --            --            --          --      16,424
Other noncurrent
 liabilities............      7,803         --            --          4,684         --      12,487
                           --------     -------       -------      --------   ---------   --------
Total liabilities.......    386,870       1,520         1,807        48,472     (46,099)   392,570
Stockholders' equity:
  Common stock..........        432         --            --            --          --         432
  Additional paid-in-
   capital..............    213,984       3,535        12,897        60,079     (75,545)   214,950
  Unearned stock grant
   compensation.........       (993)        --            --            --          --        (993)
  Retained earnings.....     77,942       5,209         2,601        27,467     (35,277)    77,942
  Cumulative foreign
   currency translation
   adjustment...........        --          --            --         (4,042)        --      (4,042)
                           --------     -------       -------      --------   ---------   --------
Total stockholders'
 equity.................    291,365       8,744        15,498        83,504    (110,822)   288,289
                           --------     -------       -------      --------   ---------   --------
Total liabilities and
 stockholders' equity...   $678,235     $10,264       $17,305      $131,976   $(156,921)  $680,859
                           ========     =======       =======      ========   =========   ========

 
                                      F-32

 
                                  KNOLL, INC.
 
                                 BALANCE SHEET
                               DECEMBER 31, 1996
                                 (IN THOUSANDS)
 


                                              GUARANTORS
                                      ---------------------------
                                      SPINNEYBECK
                                      ENTERPRISES,     KNOLL         NON-
                          KNOLL, INC.     INC.     OVERSEAS, INC. GUARANTORS ELIMINATIONS  TOTAL
                          ----------- ------------ -------------- ---------- ------------ --------
                                                                        
ASSETS
Current assets:
  Cash and cash
   equivalents..........   $     41      $  267       $   --       $  8,496   $     --    $  8,804
  Customer receivables,
   net..................     85,959       1,398           --         23,809         --     111,166
  Accounts receivable--
   related parties......      2,174          72           418        18,136     (20,800)       --
  Inventories...........     39,951       6,747           --         11,113         --      57,811
  Deferred income
   taxes................     17,079         --            --            395         --      17,474
  Prepaid and other
   current assets.......      7,595         (22)       (1,004)          855         --       7,424
                           --------      ------       -------      --------   ---------   --------
Total current assets....    152,799       8,462          (586)       62,804     (20,800)   202,679
Property, plant, and
 equipment, net.........    141,357         368           --         34,493         --     176,218
Intangible assets, net..    278,389         --            --          8,551         --     286,940
Equity investments......     75,571         550        12,789           --      (88,910)       --
Other noncurrent
 assets.................      9,976          13            97         2,289      (2,500)     9,875
                           --------      ------       -------      --------   ---------   --------
Total assets............   $658,092      $9,393       $12,300      $108,137   $(112,210)  $675,712
                           ========      ======       =======      ========   =========   ========
LIABILITIES AND
 STOCKHOLDERS' EQUITY
Current liabilities:
  Current maturities of
   long-term debt.......   $ 23,000      $  --        $   --       $    265   $     --    $ 23,265
  Accounts payable--
   trade................     34,076         350           --         15,824         --      50,250
  Accounts payable--
   related parties......     17,717         --         (5,169)        8,252     (20,800)       --
  Income taxes payable..         11          19            (1)          359         --         388
  Other current
   liabilities..........     56,247         288         1,668         5,819         --      64,022
                           --------      ------       -------      --------   ---------   --------
Total current
 liabilities............    131,051         657        (3,502)       30,519     (20,800)   137,925
Long-term debt..........    330,000       2,500           --            889      (2,500)   330,889
Deferred income taxes...        --          --            --          1,931         --       1,931
Postretirement benefits
 obligation.............     15,873         --            --            --          --      15,873
Other noncurrent
 liabilities............      6,391         --            --          4,899         --      11,290
                           --------      ------       -------      --------   ---------   --------
Total liabilities.......    483,315       3,157        (3,502)       38,238     (23,300)   497,908
Stockholders' equity:
  Preferred stock.......      1,603         --            --            --          --       1,603
  Common stock..........         73         --            --            --          --          73
  Additional paid-in-
   capital..............    157,652       4,033        14,034        60,173     (75,745)   160,147
  Unearned stock grant
   compensation.........     (1,387)        --            --            --          --      (1,387)
  Retained earnings.....     16,836       2,203         1,768         9,194     (13,165)    16,836
  Cumulative foreign
   currency translation
   adjustment...........        --          --            --            532         --         532
                           --------      ------       -------      --------   ---------   --------
Total stockholders'
 equity.................    174,777       6,236        15,802        69,899     (88,910)   177,804
                           --------      ------       -------      --------   ---------   --------
Total liabilities and
 stockholders' equity...   $658,092      $9,393       $12,300      $108,137   $(112,210)  $675,712
                           ========      ======       =======      ========   =========   ========

 
                                      F-33

 
                                  KNOLL, INC.
 
                            STATEMENT OF OPERATIONS
                          YEAR ENDED DECEMBER 31, 1997
                                 (IN THOUSANDS)
 


                                            GUARANTORS
                                    ---------------------------
                                    SPINNEYBECK
                           KNOLL,   ENTERPRISES,     KNOLL         NON-
                            INC.        INC.     OVERSEAS, INC. GUARANTORS ELIMINATIONS  TOTAL
                          --------  ------------ -------------- ---------- ------------ --------
                                                                      
Sales to customers......  $698,392    $18,934        $  --       $ 93,531   $     --    $810,857
Sales to related
 parties................    22,545      3,507         1,192       103,412    (130,656)       --
                          --------    -------        ------      --------   ---------   --------
Total sales.............   720,937     22,441         1,192       196,943    (130,656)   810,857
Cost of sales to
 customers..............   450,099      7,707           703        67,902     (36,449)   489,962
Cost of sales to related
 parties................    14,530      3,507           --         76,170     (94,207)       --
                          --------    -------        ------      --------   ---------   --------
Gross profit............   256,308     11,227           489        52,871         --     320,895
Selling, general, and
 administrative
 expenses...............   151,907      6,287         1,828        22,996         --     183,018
                          --------    -------        ------      --------   ---------   --------
Operating income
 (loss).................   104,401      4,940        (1,339)       29,875         --     137,877
Interest expense........    24,960        --            --            115         --      25,075
Other income (expense),
 net....................      (190)       --             (1)        1,858         --       1,667
Income from equity
 investments............    19,837        117         2,158           --      (22,112)       --
                          --------    -------        ------      --------   ---------   --------
Income before income
 taxes and extraordinary
 item...................    99,088      5,057           818        31,618     (22,112)   114,469
Income tax expense
 (benefit)..............    32,645      2,051           (15)       13,345         --      48,026
                          --------    -------        ------      --------   ---------   --------
Income before
 extraordinary item.....    66,443      3,006           833        18,273     (22,112)    66,443
Extraordinary loss on
 early extinguishment of
 debt, net of taxes.....     5,337        --            --            --          --       5,337
                          --------    -------        ------      --------   ---------   --------
Net income..............  $ 61,106    $ 3,006        $  833      $ 18,273   $ (22,112)  $ 61,106
                          ========    =======        ======      ========   =========   ========

 
                                      F-34

 
                                  KNOLL, INC.
 
                            STATEMENT OF OPERATIONS
                       TEN MONTHS ENDED DECEMBER 31, 1996
                                 (IN THOUSANDS)
 


                                              GUARANTORS
                                      ---------------------------
                                      SPINNEYBECK
                                      ENTERPRISES,     KNOLL         NON-
                          KNOLL, INC.     INC.     OVERSEAS, INC. GUARANTORS ELIMINATIONS  TOTAL
                          ----------- ------------ -------------- ---------- ------------ --------
                                                                        
Sales to customers......   $480,857     $12,796       $   --       $ 67,881    $    --    $561,534
Sales to related
 parties................     13,227       2,210           --         62,580     (78,017)       --
                           --------     -------       -------      --------    --------   --------
Total sales.............    494,084      15,006           --        130,461     (78,017)   561,534
Cost of sales to
 customers..............    323,607       6,109           521        50,293     (21,689)   358,841
Cost of sales to related
 parties................      8,902       1,054           --         46,372     (56,328)       --
                           --------     -------       -------      --------    --------   --------
Gross profit (loss) ....    161,575       7,843          (521)       33,796         --     202,693
Selling, general, and
 administrative
 expenses...............    108,713       4,342         1,461        16,833         --     131,349
                           --------     -------       -------      --------    --------   --------
Operating income
 (loss).................     52,862       3,501        (1,982)       16,963         --      71,344
Interest expense........     32,706         --            --            246         --      32,952
Other income (expense),
 net....................        757          (4)          953        (1,259)        --         447
Income from equity
 investments............     10,319          77         2,769           --      (13,165)       --
                           --------     -------       -------      --------    --------   --------
Income before income
 taxes and extraordinary
 item...................     31,232       3,574         1,740        15,458     (13,165)    38,839
Income tax expense
 (benefit)..............      9,237       1,371           (28)        6,264         --      16,844
                           --------     -------       -------      --------    --------   --------
Income before
 extraordinary item.....     21,995       2,203         1,768         9,194     (13,165)    21,995
Extraordinary loss on
 early extinguishment of
 debt, net of taxes.....      5,159         --            --            --          --       5,159
                           --------     -------       -------      --------    --------   --------
Net income..............   $ 16,836     $ 2,203       $ 1,768      $  9,194    $(13,165)  $ 16,836
                           ========     =======       =======      ========    ========   ========

 
                                      F-35

 
                                  KNOLL, INC.
 
                            STATEMENT OF OPERATIONS
                       TWO MONTHS ENDED FEBRUARY 29, 1996
                                 (IN THOUSANDS)
 


                                              GUARANTORS
                                      ---------------------------
                                      SPINNEYBECK
                                      ENTERPRISES,     KNOLL         NON-
                          KNOLL, INC.     INC.     OVERSEAS, INC. GUARANTORS ELIMINATIONS  TOTAL
                          ----------- ------------ -------------- ---------- ------------ --------
                                                                        
Sales to customers......   $ 76,172      $2,095        $ --        $11,666     $   --     $ 89,933
Sales to related
 parties................      1,617         330          --          6,935      (8,583)        299
                           --------      ------        -----       -------     -------    --------
Total sales.............     77,789       2,425          --         18,601      (8,583)     90,232
Cost of sales to
 customers..............     50,380         931          111         9,041        (949)     59,514
Cost of sales to related
 parties................      1,083         149          --          6,602      (7,634)        200
                           --------      ------        -----       -------     -------    --------
Gross profit (loss).....     26,326       1,345         (111)        2,958         --       30,518
Selling, general, and
 administrative
 expenses...............     16,800         725          224         3,507         --       21,256
Westinghouse long-term
 incentive compensation.     47,900         --           --            --          --       47,900
Allocated corporate
 expenses...............        921         --           --            --          --          921
                           --------      ------        -----       -------     -------    --------
Operating income
 (loss).................    (39,295)        620         (335)         (549)        --      (39,559)
Interest expense........        --          --           --            340         --          340
Other income (expense),
 net....................       (265)        --           170          (201)        --         (296)
Income (loss) from
 equity investments.....       (218)         23         (493)          --          688         --
                           --------      ------        -----       -------     -------    --------
Income (loss) before
 income taxes...........    (39,778)        643         (658)       (1,090)        688     (40,195)
Income tax expense (ben-
 efit)..................    (16,338)        259          (56)           28         --      (16,107)
                           --------      ------        -----       -------     -------    --------
Net income (loss).......   $(23,440)     $  384        $(602)      $(1,118)    $   688    $(24,088)
                           ========      ======        =====       =======     =======    ========

 
                                      F-36

 
                                  KNOLL, INC.
 
                            STATEMENT OF OPERATIONS
                          YEAR ENDED DECEMBER 31, 1995
                                 (IN THOUSANDS)
 


                                              GUARANTORS
                                      ---------------------------
                                      SPINNEYBECK
                                      ENTERPRISES,     KNOLL         NON-
                          KNOLL, INC.     INC.     OVERSEAS, INC. GUARANTORS ELIMINATIONS  TOTAL
                          ----------- ------------ -------------- ---------- ------------ --------
                                                                        
Sales to customers......   $500,892     $14,090       $   --       $ 93,409    $  2,332   $610,723
Sales to related
 parties................     12,411       2,332           --         60,309     (64,883)    10,169
                           --------     -------       -------      --------    --------   --------
Total sales.............    513,303      16,422           --        153,718     (62,551)   620,892
Cost of sales to
 customers..............    342,202       5,501           831        84,544     (22,463)   410,615
Cost of sales to related
 parties................      8,564       2,472           373        35,696     (40,088)     7,017
                           --------     -------       -------      --------    --------   --------
Gross profit (loss).....    162,537       8,449        (1,204)       33,478         --     203,260
Selling, general, and
 administrative
 expenses...............    104,388       4,894         1,749        27,496         --     138,527
Allocated corporate
 expenses...............      9,528         --            --            --          --       9,528
                           --------     -------       -------      --------    --------   --------
Operating income
 (loss).................     48,621       3,555        (2,953)        5,982         --      55,205
Interest expense........        282         --            --          1,148         --       1,430
Other income (expense),
 net....................     (2,101)        --             68           436         --      (1,597)
Income (loss) from
 equity investments.....        211         --           (166)          --          (45)       --
                           --------     -------       -------      --------    --------   --------
Income (loss) before
 income taxes...........     46,449       3,555        (3,051)        5,270         (45)    52,178
Income tax expense (ben-
 efit)..................     22,553       1,476        (1,183)          --          --      22,846
                           --------     -------       -------      --------    --------   --------
Net income (loss).......   $ 23,896     $ 2,079       $(1,868)     $  5,270    $    (45)  $ 29,332
                           ========     =======       =======      ========    ========   ========

 
                                      F-37

 
                                  KNOLL, INC.
 
                            STATEMENT OF CASH FLOWS
                          YEAR ENDED DECEMBER 31, 1997
                                 (IN THOUSANDS)
 


                                                GUARANTORS
                                     --------------------------------
                                        SPINNEYBECK        KNOLL         NON-
                         KNOLL, INC. ENTERPRISES, INC. OVERSEAS, INC. GUARANTORS ELIMINATIONS  TOTAL
                         ----------- ----------------- -------------- ---------- ------------ --------
                                                                            
CASH PROVIDED BY
 OPERATING ACTIVITIES...  $124,109        $ 2,546          $ --        $ 8,607     $   --     $135,262
CASH FLOWS FROM
 INVESTING ACTIVITIES
Capital expenditures....   (26,740)           (22)           --         (6,347)         29     (33,080)
Proceeds from sale of
 assets.................       108            --             --             85         (29)        164
Payments received on
 intercompany loans.....     2,500            --             --            --       (2,500)        --
                          --------        -------          -----       -------     -------    --------
Cash used in investing
 activities.............   (24,132)           (22)           --         (6,262)     (2,500)    (32,916)
CASH FLOWS FROM
 FINANCING ACTIVITIES
Repayment of revolving
 credit facility, net...   (79,000)           --             --            --          --      (79,000)
Repayment of long-term
 debt...................   (67,750)           --             --           (238)        --      (67,988)
Repayment of
 intercompany loans.....       --          (2,500)           --            --        2,500         --
Premium paid for early
 extinguishment of
 debt...................    (5,775)           --             --            --          --       (5,775)
Proceeds from issuance
 of stock, net of stock
 issuance costs.........   133,559            --             --            --          --      133,559
Redemption of preferred
 stock..................   (80,000)           --             --            --          --      (80,000)
                          --------        -------          -----       -------     -------    --------
Cash used in financing
 activities.............   (98,966)        (2,500)           --           (238)      2,500     (99,204)
Effect of exchange rate
 changes on cash and
 cash equivalents.......       --             --             --         (1,156)        --       (1,156)
                          --------        -------          -----       -------     -------    --------
Increase in cash and
 cash equivalents.......     1,011             24            --            951         --        1,986
Cash and cash
 equivalents at
 beginning of year......        41            267            --          8,496         --        8,804
                          --------        -------          -----       -------     -------    --------
Cash and cash
 equivalents at end of
 year...................  $  1,052        $   291          $ --        $ 9,447     $   --     $ 10,790
                          ========        =======          =====       =======     =======    ========

 
                                      F-38

 
                                  KNOLL, INC.
 
                            STATEMENT OF CASH FLOWS
                       TEN MONTHS ENDED DECEMBER 31, 1996
                                 (IN THOUSANDS)
 


                                             GUARANTORS
                                     ---------------------------
                                     SPINNEYBECK
                                     ENTERPRISES,     KNOLL         NON-
                         KNOLL, INC.     INC.     OVERSEAS, INC. GUARANTORS ELIMINATIONS   TOTAL
                         ----------- ------------ -------------- ---------- ------------ ---------
                                                                       
CASH PROVIDED BY
 OPERATING ACTIVITIES...  $  78,889     $ 399         $ --        $10,214      $ --      $  89,502
CASH FLOWS FROM
 INVESTING ACTIVITIES
Acquisition of the
 company from
 Westinghouse...........   (579,801)      --            --            --         --       (579,801)
Capital expenditures....    (12,531)     (134)          --         (2,590)       --        (15,255)
Proceeds from sale of
 assets.................         43       --            --            175        --            218
                          ---------     -----         -----       -------      -----     ---------
Cash used in investing
 activities.............   (592,289)     (134)          --         (2,415)       --       (594,838)
CASH FLOWS FROM
 FINANCING ACTIVITIES
Repayment of short-term
 debt, net..............        --        --            --         (1,483)       --         (1,483)
Proceeds from revolving
 credit facility, net...     88,000       --            --            --         --         88,000
Repayment of long-term
 debt, net..............    265,000       --            --           (130)       --        264,870
Issuance of stock.......    160,400       --            --            --         --        160,400
Net receipts from
 (payments to) parent
 company................       (120)      --            --            120        --            --
                          ---------     -----         -----       -------      -----     ---------
Cash provided by (used
 in) financing
 activities.............    513,280       --            --         (1,493)       --        511,787
Effect of exchange rate
 changes on cash and
 cash equivalents.......        --        --            --             18        --             18
                          ---------     -----         -----       -------      -----     ---------
Increase (decrease) in
 cash and cash
 equivalents............       (120)      265           --          6,324        --          6,469
Cash and cash
 equivalents at
 beginning of period....        161         2           --          2,172        --          2,335
                          ---------     -----         -----       -------      -----     ---------
Cash and cash
 equivalents at end of
 period.................  $      41     $ 267         $ --        $ 8,496      $ --      $   8,804
                          =========     =====         =====       =======      =====     =========

 
                                      F-39

 
                                  KNOLL, INC.
 
                            STATEMENT OF CASH FLOWS
                       TWO MONTHS ENDED FEBRUARY 29, 1996
                                 (IN THOUSANDS)
 


                                                GUARANTORS
                                     --------------------------------
                                        SPINNEYBECK        KNOLL         NON-
                         KNOLL, INC. ENTERPRISES, INC. OVERSEAS, INC. GUARANTORS ELIMINATIONS  TOTAL
                         ----------- ----------------- -------------- ---------- ------------ --------
                                                                            
CASH PROVIDED BY (USED
 IN) OPERATING
 ACTIVITIES.............  $(53,215)       $ 1,267          $ 651       $ 17,139    $(19,881)  $(54,039)
CASH FLOWS FROM
 INVESTING ACTIVITIES
Capital expenditures....    (2,022)           (28)           --            (246)        --      (2,296)
                          --------        -------          -----       --------    --------   --------
Cash used in investing
 activities.............    (2,022)           (28)           --            (246)        --      (2,296)
CASH FLOWS FROM
 FINANCING ACTIVITIES
Repayment of short-term
 debt, net..............    (2,055)           --             --          (1,750)        --      (3,805)
Net receipts from
 (payments to) parent
 company................    57,635         (1,419)          (651)       (14,598)     19,881     60,848
                          --------        -------          -----       --------    --------   --------
Cash provided by (used
 in) financing
 activities.............    55,580         (1,419)          (651)       (16,348)     19,881     57,043
Effect of exchange rate
 changes on cash and
 cash equivalents.......       --             --             --              58         --          58
                          --------        -------          -----       --------    --------   --------
Increase (decrease) in
 cash and cash
 equivalents............       343           (180)           --             603         --         766
Cash and cash
 equivalents at
 beginning of period....      (182)           182            --           1,569         --       1,569
                          --------        -------          -----       --------    --------   --------
Cash and cash
 equivalents at
 end of period..........  $    161        $     2          $ --        $  2,172    $    --    $  2,335
                          ========        =======          =====       ========    ========   ========

 
                                      F-40

 
                                  KNOLL, INC.
 
                            STATEMENT OF CASH FLOWS
                          YEAR ENDED DECEMBER 31, 1995
                                 (IN THOUSANDS)
 


                                                GUARANTORS
                                     --------------------------------
                                        SPINNEYBECK        KNOLL         NON-
                         KNOLL, INC. ENTERPRISES, INC. OVERSEAS, INC. GUARANTORS ELIMINATIONS  TOTAL
                         ----------- ----------------- -------------- ---------- ------------ --------
                                                                            
CASH PROVIDED BY (USED
 IN) OPERATING
 ACTIVITIES.............  $ 50,270        $ 6,203         $(4,017)     $(9,992)    $ 9,400    $ 51,864
CASH FLOWS FROM
 INVESTING ACTIVITIES
Capital expenditures....   (14,871)           --              --        (4,463)        --      (19,334)
Proceeds from sale of
 assets.................        42            --              --           274         --          316
Net payments to equity
 investments............      (186)           --              --           --          186         --
                          --------        -------         -------      -------     -------    --------
Cash used in investing
 activities.............   (15,015)           --              --        (4,189)        186     (19,018)
CASH FLOWS FROM
 FINANCING ACTIVITIES
Repayment of short-term
 debt, net..............       --             --              --       (20,961)        --      (20,961)
Repayment of long-term
 debt...................    (6,646)           --              --        (2,267)        --       (8,913)
Net receipts from
 (payments to) parent
 company................   (28,791)        (6,021)          4,017       33,481      (9,586)     (6,900)
                          --------        -------         -------      -------     -------    --------
Cash provided by (used
 in) financing
 activities.............   (35,437)        (6,021)          4,017       10,253      (9,586)    (36,774)
Effect of exchange rate
 changes
 on cash and cash
 equivalents............       --             --              --            13         --           13
                          --------        -------         -------      -------     -------    --------
Increase (decrease) in
 cash and
 cash equivalents.......      (182)           182             --        (3,915)        --       (3,915)
Cash and cash
 equivalents at
 beginning of year......       --             --              --         5,484         --        5,484
                          --------        -------         -------      -------     -------    --------
Cash and cash
 equivalents at end
 of year................  $   (182)       $   182         $   --       $ 1,569     $   --     $  1,569
                          ========        =======         =======      =======     =======    ========

 
                                      F-41

 
                                                                     SCHEDULE II
 
                       VALUATION AND QUALIFYING ACCOUNTS
 


          COLUMN A             COLUMN B   COLUMN C    COLUMN D      COLUMN E
- ----------------------------  ---------- ---------- ------------- -------------
                                         ADDITIONS
                              BALANCE AT CHARGED TO
                              BEGINNING  COSTS AND                 BALANCE AT
        DESCRIPTION           OF PERIOD   EXPENSES  DEDUCTIONS(1) END OF PERIOD
- ----------------------------  ---------- ---------- ------------- -------------
                                               (IN THOUSANDS)
                                                      
VALUATION ACCOUNTS DEDUCTED
 IN THE CONSOLIDATED BALANCE
 SHEET FROM THE ASSETS TO
 WHICH THEY APPLY:
YEAR ENDED DECEMBER 31,
 1997:
  Allowance for doubtful
   accounts.................    $5,713     $1,943      $2,195        $5,461
TEN MONTHS ENDED DECEMBER
 31, 1996:
  Allowance for doubtful
   accounts.................     5,838      2,098       2,223         5,713
TWO MONTHS ENDED FEBRUARY
 29, 1996:
  Allowance for doubtful
   accounts.................     5,790        159         210         5,739
YEAR ENDED DECEMBER 31,
 1995:
  Allowance for doubtful
   accounts.................     4,700      2,720       1,630         5,790


 
- --------
(1) Uncollectible accounts written off and foreign currency translation.
 
                                      S-1

 
                                   PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
  The information required by this item is hereby incorporated by reference to
the section entitled "Directors and Executive Officers of the Company" and the
subsection "Section 16(a) Beneficial Ownership Reporting Compliance" under the
section entitled "Board of Directors; Board Committees" in the Company's Proxy
Statement for its Annual Shareholders' Meeting to be held on May 19, 1998 (the
"Proxy Statement"). The Proxy Statement shall be filed with the Securities and
Exchange Commission within 120 days of the end of the Company's latest fiscal
year.
 
ITEM 11. EXECUTIVE COMPENSATION
 
  The information required by this item is hereby incorporated by reference to
the section entitled "Executive Officer and Director Compensation" and the
subsection "Performance Graph" under the section entitled "Board of Directors;
Board Committees" in the Company's Proxy Statement.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
  The information required by this item is hereby incorporated by reference to
the section entitled "Security Ownership of Certain Beneficial Owners,
Management and Directors" in the Company's Proxy Statement.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
  The information required by this item is hereby incorporated by reference to
the section entitled "Certain Transactions" in the Company's Proxy Statement.
 
                                      19

 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
 
(a)Documents filed as part of the report:
 
  (1) CONSOLIDATED FINANCIAL STATEMENTS
 
    The Consolidated Financial Statements of the Company are listed in the
  Table of Contents for the Financial Statements beginning on page F-1 of
  this Form 10-K.
 
  (2) FINANCIAL STATEMENT SCHEDULES
 
    Financial Statement Schedule II-Valuation and Qualifying Accounts is
  filed with this Form 10-K on page S-1 of this Form 10-K. All other
  schedules for which provision is made in the applicable regulation of the
  Securities and Exchange Commission are not required under the related
  instructions or are inapplicable and therefore have been omitted.
 
  (3) EXHIBITS
 


     EXHIBIT
     NUMBER                              DESCRIPTION
     -------                             -----------
           
      3.1***  Amended and Restated Certificate of Incorporation of the Company.
      3.2***  Amended and Restated By-Laws of the Company.
     10.1*    Stock Purchase Agreement, dated as of December 20, 1995, by and
              between Westinghouse and TKG.
     10.2*    Knoll, Inc. 1996 Stock Incentive Plan (formerly called the TKG
              Stock Incentive Plan).
     10.3*    Indenture, dated as of February 29, 1996, by and among the
              Company, T.K.G. Acquisition Corp., T.K.G. Acquisition Sub, Inc.,
              The Knoll Group, Inc., Knoll North America, Inc., Spinneybeck
              Enterprises, Inc. and Knoll Overseas, Inc., as guarantors, and
              IBJ Schroder Bank & Trust Company, as trustee, relating to
              $165,000,000 principal amount of 10.875% Senior Subordinated
              Notes due 2006, including form of Initial Global Note.
     10.4*    Supplemental Indenture, dated as of February 29, 1996, by and
              among the Company, as successor to T.K.G. Acquisition Sub, Inc.,
              the Guarantors (as defined therein), and IBJ Schroder Bank &
              Trust Company, as trustee, relating to $165,000,000 principal
              amount of 10.875% Senior Subordinated Notes due 2006, including
              form of Initial Global Note.
     10.5**   Supplemental Indenture No. 2, dated as of March 14, 1997, by and
              among the Company, the Guarantors (as defined therein), and IBJ
              Schroder Bank & Trust Company, as trustee, relating to
              $165,000,000 principal amount of 10.875% Senior Subordinated
              Notes due 2006, including form of Initial Global Note.
     10.6**** Credit Agreement, dated as of August 8, 1997, by and among the
              Company, NationsBank, N.A., as Administrative Agent, The Chase
              Manhattan Bank, as Documentation Agent and other lending
              institutions.
     10.7**   Employment Agreement, dated as of February 29, 1996, between
              T.K.G. Acquisition Corp. and Burton B. Staniar.
     10.8**   Employment Agreement, dated as of February 29, 1996, between
              T.K.G. Acquisition Corp. and John H. Lynch.
     10.9**   Employment Agreement, dated as of February 29, 1996, between
              T.K.G. Acquisition Corp. and Andrew B. Cogan.

 
 
                                      20

 


     EXHIBIT
     NUMBER                              DESCRIPTION
     -------                             -----------
           
     10.10*** Amendment to Employment Agreement, dated as of April 30, 1997,
              between the Company and Andrew B. Cogan.
     10.11**  Stockholders Agreement (Common Stock and Preferred Stock), dated
              as of February 29, 1996, among T.K.G. Acquisition Corp., Warburg,
              Pincus Ventures, L.P., and the signatories thereto.
     10.12**  Form of Stockholders Agreement (Restricted Shares), dated as of
              February 29, 1996, among T.K.G. Acquisition Corp., Warburg,
              Pincus Ventures, L.P., and the signatories thereto.
     10.13    Amended and Restated Knoll, Inc. 1997 Stock Incentive Plan
              (subject to stockholder approval).
     10.14**  Consulting Agreement, dated as of December 1, 1996, between
              Wolfgang Billstein and Knoll, Inc.
     10.15    Amendment No. 1 to December 1, 1996 Consulting Agreement between
              Wolfgang Billstein and Knoll, Inc.
     10.16*** Form of Agreement, dated as of April 15, 1997, by and among the
              Company, Warburg, Pincus Ventures, L.P., NationsBanc Investment
              Corp. and the Investors (as defined therein).
     21**     Subsidiaries of the Registrant.
     23.1     Consent of Independent Auditors for Ernst & Young LLP.
     23.2     Consent of Independent Accountants for Price Waterhouse LLP.
     27.1     Financial Data Schedule for the Year Ended December 31, 1997.
     27.2     Restated Financial Data Schedule for the Three Months Ended March
              31, 1997, the Six Months Ended June 30, 1997 and the Nine Months
              Ended September 30, 1997.
     27.3     Restated Financial Data Schedule for the One Month Ended March
              31, 1996, the Four Months Ended June 30, 1996, the Seven Months
              Ended September 30, 1996 and the Ten Months Ended December 31,
              1996.

 
(b)Current Reports on Form 8-K:
 
  The Company did not file any reports on Form 8-K during the three months
ended December 31, 1997.
 
- --------
   * Incorporated by reference to the Company's Registration Statement on Form
     S-4 (File No. 333-2972), which was declared effective by the Commission
     on June 12, 1996.
  ** Incorporated by reference to the Company's Annual Report on Form 10-K for
     the year ended December 31, 1996.
 *** Incorporated by reference to the Company's Registration Statement on Form
     S-1 (File No. 333-23399), which was declared effective by the Commission
     on May 9, 1997.
**** Incorporated by reference to the Company's Registration Statement on Form
     S-1 (File No. 333-36407), which was filed on September 25, 1997 and
     subsequently withdrawn.
 
                                      21

 
                                  SIGNATURES
 
  Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report on Form 10-K
to be signed on its behalf by the undersigned, thereunto duly authorized, on
this 30th day of March 1998.
 
                                          KNOLL, INC.
 
                                                  /s/ Burton B. Staniar
                                          By: _________________________________
                                                    BURTON B. STANIAR
                                                  Chairman of the Board
 
  Pursuant to the requirements of the Securities Exchange Act of 1934, this
report on Form 10-K has been signed by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
 
    /s/ Burton B. Staniar      Chairman of the Board      March 30, 1998
- -----------------------------
      BURTON B. STANIAR

      /s/ John H. Lynch        President, Chief           March 30, 1998
- -----------------------------  Executive  Officer and
        JOHN H. LYNCH          Director
                              (Principal Executive Officer)
 
    /s/ Douglas J. Purdom      Chief Financial Officer    March 30, 1998
- ----------------------------- (Principal Financial
      DOUGLAS J. PURDOM        Officer)
 
     /s/ Barry L. McCabe       Controller                 March 30, 1998
- ----------------------------- (Principal Accounting Officer)
       BARRY L. MCCABE
 
     /s/ John W. Amerman       Director                   March 30, 1998
- -----------------------------
       JOHN W. AMERMAN

     /s/ Andrew B. Cogan       Director                   March 30, 1998
- -----------------------------
       ANDREW B. COGAN

     /s/ Robert J. Dolan       Director                   March 30, 1998
- -----------------------------
       ROBERT J. DOLAN

    /s/ Jeffrey A. Harris      Director                   March 30, 1998
- -----------------------------
      JEFFREY A. HARRIS

     /s/ Sidney Lapidus        Director                   March 30, 1998
- -----------------------------
       SIDNEY LAPIDUS

       /s/ Kewsong Lee         Director                   March 30, 1998
- -----------------------------
         KEWSONG LEE

   /s/ John L. Vogelstein      Director                   March 30, 1998
- -----------------------------
     JOHN L. VOGELSTEIN
                               
 
                                      22

 
                                 EXHIBIT INDEX
 


 EXHIBIT
  NUMBER                            DESCRIPTION                            PAGE
 -------                            -----------                            ----
                                                                     
  3.1***  Amended and Restated Certificate of Incorporation of the
          Company.
  3.2***  Amended and Restated By-Laws of the Company.
 10.1*    Stock Purchase Agreement, dated as of December 20, 1995, by
          and between Westinghouse and TKG.
 10.2*    Knoll, Inc. 1996 Stock Incentive Plan (formerly called the TKG
          Stock Incentive Plan).
 10.3*    Indenture, dated as of February 29, 1996, by and among the
          Company, T.K.G. Acquisition Corp., T.K.G. Acquisition Sub,
          Inc., The Knoll Group, Inc., Knoll North America, Inc.,
          Spinneybeck Enterprises, Inc. and Knoll Overseas, Inc., as
          guarantors, and IBJ Schroder Bank & Trust Company, as trustee,
          relating to $165,000,000 principal amount of 10.875% Senior
          Subordinated Notes due 2006, including form of Initial Global
          Note.
 10.4*    Supplemental Indenture, dated as of February 29, 1996, by and
          among the Company, as successor to T.K.G. Acquisition Sub,
          Inc., the Guarantors (as defined therein), and IBJ Schroder
          Bank & Trust Company, as trustee, relating to $165,000,000
          principal amount of 10.875% Senior Subordinated Notes due
          2006, including form of Initial Global Note.
 10.5**   Supplemental Indenture No. 2, dated as of March 14, 1997, by
          and among the Company, the Guarantors (as defined therein),
          and IBJ Schroder Bank & Trust Company, as trustee, relating to
          $165,000,000 principal amount of 10.875% Senior Subordinated
          Notes due 2006, including form of Initial Global Note.
 10.6**** Credit Agreement, dated as of August 8, 1997, by and among the
          Company, NationsBank, N.A., as Administrative Agent, The Chase
          Manhattan Bank, as Documentation Agent and other lending
          institutions.
 10.7**   Employment Agreement, dated as of February 29, 1996, between
          T.K.G. Acquisition Corp. and Burton B. Staniar.
 10.8**   Employment Agreement, dated as of February 29, 1996, between
          T.K.G. Acquisition Corp. and John H. Lynch.
 10.9**   Employment Agreement, dated as of February 29, 1996, between
          T.K.G. Acquisition Corp. and Andrew B. Cogan.
 10.10*** Amendment to Employment Agreement, dated as of April 30, 1997,
          between the Company and Andrew B. Cogan.
 10.11**  Stockholders Agreement (Common Stock and Preferred Stock),
          dated as of February 29, 1996, among T.K.G. Acquisition Corp.,
          Warburg, Pincus Ventures, L.P., and the signatories thereto.
 10.12**  Form of Stockholders Agreement (Restricted Shares), dated as
          of February 29, 1996, among T.K.G. Acquisition Corp., Warburg,
          Pincus Ventures, L.P., and the signatories thereto.
 10.13    Amended and Restated Knoll, Inc. 1997 Stock Incentive Plan
          (subject to stockholder approval).
 10.14**  Consulting Agreement, dated as of December 1, 1996, between
          Wolfgang Billstein and Knoll, Inc.
 10.15    Amendment No. 1 to December 1, 1996 Consulting Agreement
          between Wolfgang Billstein and Knoll, Inc.
 10.16*** Form of Agreement, dated as of April 15, 1997, by and among
          the Company, Warburg, Pincus Ventures, L.P., NationsBanc
          Investment Corp. and the Investors (as defined therein).
 21**     Subsidiaries of the Registrant.


 


 EXHIBIT
 NUMBER                            DESCRIPTION                             PAGE
 -------                           -----------                             ----
                                                                     
 23.1    Consent of Independent Auditors for Ernst & Young LLP.
 23.2    Consent of Independent Accountants for Price Waterhouse LLP.
 27.1    Financial Data Schedule for the Year Ended December 31, 1997.
 27.2    Restated Financial Data Schedule for the Three Months Ended
         March 31, 1997, the Six Months Ended June 30, 1997 and the Nine
         Months Ended September 30, 1997.
 27.3    Restated Financial Data Schedule for the One Month Ended March
         31, 1996, the Four Months Ended June 30, 1996, the Seven Months
         Ended September 30, 1996 and the Ten Months Ended December 31,
         1996.

 
- --------
   * Incorporated by reference to the Company's Registration Statement on Form
     S-4 (File No. 333-2972), which was declared effective by the Commission
     on June 12, 1996.
  ** Incorporated by reference to the Company's Annual Report on Form 10-K for
     the year ended December 31, 1996.
 *** Incorporated by reference to the Company's Registration Statement on Form
     S-1 (File No. 333-23399), which was declared effective by the Commission
     on May 9, 1997.
**** Incorporated by reference to the Company's Registration Statement on Form
     S-1 (File No. 333-36407), which was filed on September 25, 1997 and
     subsequently withdrawn.