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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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No. 001-12907
KNOLL, INC.
A Delaware Corporation I.R.S. Employer No. 13-3873847
1235 Water Street
East Greenville, PA 18041
Telephone Number (215) 679-7991
Securities registered pursuant to section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
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. [ ]
There is no public market for the voting stock of the Registrant.
As of March 30, 2000, there were 23,285,098 shares of the Registrant's
common stock, par value $0.01 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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TABLE OF CONTENTS
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Item Page
- ------ ------
PART I
1. Business....................................................... 2
2. Properties..................................................... 8
3. Legal Proceedings.............................................. 9
4. Submission of Matters to a Vote of Security Holders............ 10
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters.......................................... 11
6. Selected Financial Data........................................ 12
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 13
7A. Quantitative and Qualitative Disclosures about Market Risk..... 19
8. Financial Statements and Supplementary Data.................... 20
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..................................... 20
PART III
10. Directors and Executive Officers of the Registrant............. 21
11. Executive Compensation......................................... 24
12. Security Ownership of Certain Beneficial Owners and
Management................................................... 28
13. Certain Relationships and Related Transactions................. 29
PART IV
14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K..................................................... 32
Signatures.......................................................... 35
PART I
ITEM 1. BUSINESS
General
Knoll, Inc., a Delaware corporation, is engaged in the design, manufacture and
distribution of office furniture products and accessories, focusing on the
middle to high-end of the contract furniture market. The Company's principal
executive offices are located at 1235 Water Street, East Greenville,
Pennsylvania 18041, and its telephone number is (215) 679-7991.
Knoll, Inc. is the successor by merger to the business and operations of The
Knoll Group, Inc. and related entities ("The Knoll Group" or the
"Predecessor"), which were acquired on February 29, 1996 from Westinghouse
Electric Corporation, 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. 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.
On March 23, 1999, the Company received a proposal from Warburg, Pincus
Ventures, L.P. ("Warburg") and certain members of Knoll management regarding a
recapitalization (merger) transaction whereby the Company would acquire all of
the outstanding shares of its common stock not owned by Warburg and certain
members of Knoll management for $25.00 per share. The Board of Directors
appointed a special committee, consisting of independent members of the Board
of Directors, to consider the proposed merger. The special committee retained
legal counsel and an investment banker to assist in evaluating the proposed
merger. The proposed merger consideration was subsequently increased to $28.00
per share. On June 21, 1999, the Board of Directors, at the recommendation of
the special committee, approved the proposed merger at a price of $28.00 per
share. On that same day, Warburg and the Company entered into an agreement
and plan of merger, which was subsequently amended on July 29, 1999. On
October 20, 1999, the merger was approved by the holders of a majority of the
outstanding shares of Knoll common stock at the Company's 1999 annual meeting
of stockholders.
The merger of a newly formed entity, which was organized by Warburg, with and
into Knoll, with Knoll continuing as the surviving corporation, was consummated
on November 4, 1999. As a result of the merger, 17,738,634 shares of common
stock held by the public stockholders of Knoll, other than Warburg and certain
members of Knoll management, immediately prior to the merger were converted
into the right to receive $28.00 per share in cash and were canceled.
Furthermore, the Company's common stock ceased to be listed on the New York
Stock Exchange ("NYSE"), and the registration of the Company's common stock
under the Securities Exchange Act of 1934 (the "Exchange Act") was terminated.
Except as otherwise indicated, the market and Company market share data
contained in this Form 10-K are based on preliminary information received from
The Business and Institutional Furniture Manufacturer's Association ("BIFMA"),
the United States ("U.S.") office furniture trade association. The Company
believes that such data are considered within the industry to be the best
available and generally are indicative of the Company's relative market share
and competitive position.
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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 1999.
U.S. % of U.S.
Product Category Market Size Market
---------------- ------------- ----------
(In Billions)
Office systems.................... $4.3 34.8%
Seating........................... 3.0 24.7
Storage........................... 1.6 12.7
Desks and casegoods............... 2.1 16.9
Tables............................ 0.8 6.4
Office systems consist of movable panels, work surfaces and storage units,
electrical distribution, lighting, organizing tools and freestanding
components. These modular systems are popular with customers who require
flexible space configurations or where many people share open floor space, as
is common in modern office buildings. Both seating, ranging from executive
desk chairs to task chairs and side chairs, and storage products, such as
overhead shelving, file cabinets and desk pedestals (file cabinets that serve
to support desks), are sold to users of office systems and also are sold
separately to non-systems users. Desks and tables range from classic writing
desks in private offices to conference and meeting room tables that can
accommodate sophisticated technological demands.
Management believes that fundamental shifts in the workplace, including the
continued proliferation of technology in the workplace, changes in corporate
organizational structures and work processes and heightened sensitivity to
concerns about ergonomic standards are influencing revenues in the office
furniture industry. Companies increasingly use workplace design and furniture
purchase decisions as catalysts for organizational and cultural change and to
attract and retain talented employees. Several significant factors that
influence these changes include: new office technology and the resulting
necessity for improved wire and data management; continued corporate
reengineering, restructuring and reorganizing; and corporate relocations.
Management also believes that there are certain macroeconomic conditions,
including white-collar employment levels and corporate cash flow, that
influence industry revenues.
Management is aware of many current and potential initiatives by existing
competitors, as well as new entrants, to sell, distribute, market or service
office furniture and related products via the Internet. These initiatives may
compete with existing office furniture companies, such as Knoll, and may
affect the office furniture industry's existing channels of distribution. The
Company is currently developing initiatives in an effort to take advantage of
opportunities presented by the Internet. There can be no assurance that any
of such initiatives will be successful or materially affect the Company's
results of operations or financial condition. Management is currently unable
to predict the extent to which the current or potential Internet initiatives
may affect the demand for the Company's products or the financial condition of
the office furniture industry, although the Company believes that competitive
pressures may increase as a result of these dynamics.
Products
The Company offers a broad range of office furniture products and accessories
that support the Company's strategy of being a one-stop source for high quality
office furniture. The Company's five basic product categories offered in North
America are as follows: (i) office systems, (ii) seating, (iii) storage
solutions and filing cabinets, (iv) desks and casegoods and (v) tables. The
Company also offers specialty products that are sold under the KNOLLSTUDIO,
KNOLLEXTRA, KNOLLTEXTILES and SPINNEYBECK names. KNOLLSTUDIO features the
Company's signature design classics, including high image side chairs, sofas,
desks and tables for both office and home use, while KNOLLEXTRA, KNOLLTEXTILES
and SPINNEYBECK feature products that complement the Company's office system
and seating product categories.
3
The following is a description of the Company's major product categories and
lines:
Office Systems
The Company offers a complete line of office system products, comprised mainly
of the REFF, CURRENTS, MORRISON, EQUITY and DIVIDENDS product lines, in order
to meet the needs of a variety of businesses. Office systems may be used for
teamwork settings, private offices and open floor plans and are comprised of
adjustable partitions, work surfaces, storage cabinets and electrical and
lighting systems that can be moved, re-configured and re-used within the
office. Office systems, therefore, offer a cost effective and flexible
alternative to traditional drywall office construction. The Company has
focused on this area of the office furniture industry because it is the
industry's largest product category, typically provides attractive gross
margins and often leads to repeat and add-on sales of additional office
systems, complementary furniture and furniture accessories. Office systems
accounted for approximately 68.9% of the Company's sales in 1999, 68.4% of
sales in 1998 and 67.2% of sales in 1997.
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. With its SAPPER, BULLDOG, PARACHUTE and SOHO product lines,
the Company has a complete offering of seating in the appearance and comfort
segments at various price, appearance, comfort and performance levels.
Storage Solutions and Filing Cabinets
The Company offers a variety of storage options, as part of its CALIBRE
collection, designed to be integrated with its office systems as well as with
its and others' stand-alone furniture. These products consist of stand-alone
metal filing, storage and desk products that integrate into and support the
Company's office system sales. They also function as freestanding furniture
in private offices or open-plan environments.
Desks and Casegoods
The Company's collections of stand-alone wood desks, bookshelves and credenzas
are available in a range of designs and price points. These products combine
contemporary styling with sophisticated workplace solutions and attract a
wide variety of customers, ranging from those conducting large office
reconfigurations to small retail purchasers.
Tables
The Company offers two product lines in the tables category: INTERACTION
tables and PROPELLER tables. INTERACTION tables are an innovative line of
adjustable tables that are designed to be integrated into the Company's office
system lines and to provide customers with ergonomically superior work
surfaces. These tables are also often sold as stand-alone products to non-
systems customers. The Company's award winning line of PROPELLER meeting and
conference tables provide advanced wire management and technology support while
offering sufficient flexibility to allow end users to reconfigure a meeting
room quickly and easily to accommodate their specific needs.
KNOLLSTUDIO
The Company's historically significant KNOLLSTUDIO collection serves the
design-conscious segment of the fine contract furniture market, providing the
architecture and design community and customers with sophisticated furniture
for high-profile office and home uses. KNOLLSTUDIO provides a marketing
umbrella for the full range of the Company's office products and is recognized
as the "design engine" of the Company. KNOLLSTUDIO products, which include
a wide variety of high image side chairs, sofas, desks and conference,
training, side and dining tables, were created by many of the twentieth
century's most prominent architects and designers, such as
4
Ludwig Mies van der Rohe, Marcel Breuer, Eero Saarinen and Frank Gehry, for
prestigious corporate and residential interiors. In June 1999, the Company
became the exclusive North American distributor of certain design classics of
Fritz Hansen A/S, which are being offered by KNOLLSTUDIO. The KNOLLSTUDIO line
also offers a signature collection of products designed by Maya Lin, the
internationally-known designer of the Vietnam Veterans Memorial in Washington,
D.C. KNOLLSTUDIO includes complete collections by individual designers as well
as distinctive single items.
KNOLLEXTRA
KNOLLEXTRA is a line of desk and office accessories, including letter trays,
sorters, binder bins, file holders, calendars, desk pads, planters,
wastebaskets and bookends. KNOLLEXTRA also offers a number of computer
accessories and ergonomic office products. Not only does this product line
complement the Company's office system products, but it is also sold to
customers for use with other manufacturers' products.
KNOLLTEXTILES
KNOLLTEXTILES offers a wide range of coverings for walls, panels and seating.
KNOLLTEXTILES was established in 1947 to develop high quality fabrics for
Knoll furniture. These products allow the Company to distinguish its product
offerings by providing specialty fabric options and flexibility in fabric
selection and application. As it does with its furniture lines, the Company
uses many independent designers to create its fabrics, which has helped it
establish what management believes to be a unique reputation for textile
design. Not only are KNOLLTEXTILES coverings applied to Knoll furniture, but
they are also sold to customers for use on other manufacturers' products,
thereby allowing the Company to benefit from its competitors' sales.
Leather
Spinneybeck Enterprises, Inc., a wholly-owned subsidiary of the Company,
supplies quality upholstery leather that is used on Knoll furniture and is
sold to customers, including primarily other office furniture manufacturers,
upholsterers, aviation, custom coach and boating manufacturers and the
architecture and design community, for use on their products.
European Products
Much like North America, Knoll Europe has a product offering that allows
customers to single-source a complete office environment, including certain
products designed specifically for the European market. Knoll Europe's core
product categories include: (i) office systems, including the HANNAH DESKING
SYSTEM and the PL1 SYSTEM, which are targeted to Northern Europe, the
ALESSANDRI SYSTEM, which is targeted to the French market, and the SOHO
DESKING SYSTEM; (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, PARACHUTE and SOHO; and (iv) storage
cabinets, which are designed to complement its office system products. The
Company also sells its products designed and manufactured in North America
to the international operations of its core North American customers.
Product Design and Development
Knoll's design philosophy is linked to its commitment to working with some
of the world's preeminent designers to develop products that delight and
inspire. The Company has won numerous design awards and has more than 30
products in the design collection of the Museum of Modern Art. The Company's
collection of classic and current designs includes works by such
internationally recognized architects and designers as Ludwig Mies van der
Rohe, Marcel Breuer, Eero Saarinen, Harry Bertoia, Massimo Vignelli, Frank
Gehry and Maya Lin. Today, the Company continues to engage prominent outside
architects and designers to create new products and product enhancements. By
combining the creative vision of architects and designers with a corporate
commitment to products that address changing business needs, the Company seeks
to launch new offerings that achieve recognition in the architecture and design
community and generate strong demand among corporate customers.
5
An important part of the Company's product development capabilities is its
responsiveness to customer needs and flexibility to handle customized
manufacturing requests. In order to develop products across its product
range, the Company works closely with independent designers from a number of
industries. By utilizing these long-standing design relationships and
listening to customers to analyze their needs, the Company has been able to
redesign and enhance its products in order to better meet customer preferences.
Sales and Distribution
Knoll's customers are typically Fortune 1000 companies. The Company employs
approximately 350 direct sales representatives, who work closely with its
approximately 220 independent dealers in North America to present the Company's
products to prospective customers. The sales force, in conjunction with the
dealer network, has close relationships with architects, designers and
corporate facility managers, who often have a significant influence on product
selection for large orders.
In addition to coordinating sales efforts with the Company's sales
representatives, the Company's dealers generally handle project management,
installation and maintenance for the account after the initial product
selection and sale. Although many of these dealers also carry products of
other manufacturers, none of them acts as a dealer for the Company's principal
direct competitors. The Company has not experienced significant turnover in
its dealer network except at its own initiative. The dealer's economic
investment in learning all aspects of a particular manufacturer's product
offerings and the value of the relationships the dealer forms with the Company
and with customers discourage dealers from changing their vendor affiliations.
The Company is not dependent on any one of its dealers, the largest of which
accounted for less than 5.5% of the Company's North American sales in 1999.
Additionally, no single customer represented more than 2.5% of the Company's
North American sales during 1999. However, a number of U.S. government
agencies purchase the Company's products through multiple contracts with the
General Services Administration ("GSA"). Sales to government entities under
the GSA contracts aggregated approximately 7.7% of consolidated sales in 1999.
In Europe, the Company sells its products in largely the same manner as it
does in North America, through a direct sales force and a network of dealers,
though each major European market has its own distinct characteristics. Knoll
Europe accounted for approximately 5.7% of the Company's sales in 1999. In
the Latin American and Asia-Pacific markets, which accounted for less than
1.0% of the Company's sales in 1999, 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 function in North America is centralized in its East
Greenville facility. This centralization, in addition to close working
relationships formed with its main suppliers, has enabled the Company to focus
on achieving purchasing economies and "just-in-time" inventory practices. The
Company uses steel, lumber, paper, paint, plastics, laminates, particleboard,
veneers, glass, fabrics, leathers and upholstery filling material. The Company
currently does not maintain any long-term supply contracts and believes that
the supply sources for these materials are adequate. The Company does not rely
on any sole source suppliers for any of its raw materials, except for certain
electrical products.
6
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
an estimated 7.5% market share and derived approximately 91.7% of its sales in
1999, five companies (including the Company) represented approximately 61.1% of
the market in 1999.
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 103 active United States utility patents on
various components used in its products and systems and approximately 128
active United States design patents. The Company also has approximately 210
patents in various foreign countries. Knoll(R), KnollStudio(R), KnollExtra(R),
Good Design Is Good Business(R), Bulldog(R), Calibre(R), Currents(R),
Dividends(R), Equity(R), Parachute(R), Propeller(R) and Reff(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 $203.3 million at December 31,
1999 and $159.2 million at December 31, 1998. The Company manufactures
substantially all of its products to order and expects to fill substantially
all outstanding unfilled orders within the next twelve months. As such,
backlog is not a significant factor used to predict the Company's long-term
business prospects.
Foreign and Domestic Operations
For information regarding foreign and domestic operations, refer to Note 20
(Segment and Geographic Region Information) of the Notes to the Consolidated
Financial Statements on page F-23.
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
7
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 to the Company as a whole. At each of the sites, the Company is one
of many potentially responsible parties and expects to have only a small
percentage of liability. At some of the sites, the Company expects to qualify
as a de minimis or de micromis contributor, eligible for a cash-out settlement.
In addition, Westinghouse has agreed to indemnify the Company for certain
costs associated with certain CERCLA liabilities known as of the date of the
acquisition of the Company from Westinghouse.
Employees
As of February 29, 2000, the Company employed a total of 4,378 people,
including 2,961 hourly and 1,417 salaried employees. The Grand Rapids,
Michigan plant is the only unionized plant within the U.S., with the Carpenters
and Joiners of America-Local 1615 having a four-year contract expiring August
26, 2002. Management believes that relations with this union are positive. In
1998, 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 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 3,012,000 square feet of facilities, including
manufacturing plants, warehouses and sales offices. Of these facilities, the
Company owns approximately 2,510,000 square feet and leases approximately
502,000 square feet. The Company's manufacturing plants are located in East
Greenville, Pennsylvania; Grand Rapids and Muskegon, Michigan; Toronto,
Canada; and Foligno and Graffignana, Italy.
The Company's corporate headquarters are located in East Greenville,
Pennsylvania, where the Company owns two manufacturing facilities aggregating
approximately 547,000 square feet and leases three warehouses aggregating
approximately 142,000 square feet. The East Greenville facility is also the
distribution center for KNOLLSTUDIO, KNOLLEXTRA and KNOLLTEXTILES.
The Company owns one approximately 545,000 square foot manufacturing facility
in Grand Rapids, Michigan. In Muskegon, Michigan, the Company owns one
approximately 334,000 square foot plant and leases one approximately 105,000
square foot building for manufacturing. The Company's plants in Toronto,
Canada consist of one approximately 408,000 square foot owned building and two
leased properties aggregating approximately 157,000 square feet. The Company's
owned facilities in East Greenville, Grand Rapids and Muskegon are encumbered
by mortgages securing the Company's indebtedness under its $650.0 million
senior credit agreement.
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.
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ITEM 3. LEGAL PROCEEDINGS
The Company is subject to various claims and litigation in the ordinary course
of its business. The Company is not a party to any lawsuit or proceeding
which, in the opinion of management, based on information presently known, is
likely to have a material adverse effect on the Company.
GSA Claims
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 1985-1988 and 1987-1990 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.
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.
Certain Stockholder Litigation
In March 1999, eight class action complaints (Stark v. Knoll, Inc., et al.,
No. 17049NC; Guido v. Warburg, Pincus & Co., et al., No. 17052NC; Marotta v.
Knoll, Inc., et al., No. 17053NC; Finkelstein v. Knoll, Inc., et al., No.
17055NC; Rausch v. Knoll, Inc., et al., No 17059NC; Hatfield v. Knoll, Inc.,
et al., No. 17068NC; Shervy v. Knoll, Inc., et al., No. 17073NC; Simms v.
Knoll, Inc., et al., No. 17076NC) were filed in the Court of Chancery for the
State of Delaware, New Castle County, relating to the initial merger proposal
of Warburg and certain members of Knoll management contemplating the
acquisition of all of the outstanding shares of common stock not owned by
them at a price of $25.00 per share, which was previously discussed under
"General" in Item 1, "Business." The Stark complaint was voluntarily
dismissed, and the remaining seven complaints were consolidated into a single
class action. The defendants named in the complaints were Knoll, Burton B.
Staniar, John W. Amerman, Robert J. Dolan, Jeffrey A. Harris, Sidney Lapidus,
Kewsong Lee, John L. Vogelstein, John H. Lynch, Warburg, Pincus & Co., Warburg
and E.M. Warburg, Pincus & Co., LLC. The complaints alleged breach of
fiduciary duty on the part of the individual defendants in connection with the
proposed purchase of such shares of common stock and sought a preliminary
injunction, damages and rescission.
Generally, the lawsuits purported to be brought on behalf of the holders of
common stock and alleged substantially similar claims of breach of fiduciary
duty. In general, the plaintiffs alleged that the proposed merger
consideration was unjust and inadequate in that the intrinsic value of the
shares of common stock was allegedly greater than the proposed merger
consideration, in view of the Company's prospects; the proposed merger
consideration included an inadequate premium; and the proposed merger
consideration was designed to cap the market price of the shares of common
stock before the trading price for the shares of common stock could recover
from an alleged temporary downturn in the market. The lawsuits also generally
sought injunctive relief, an injunction of the proposed merger (or, if
consummated, rescission thereof), compensatory and other damages and an award
of attorney's fees and expenses.
On June 21, 1999, the Company entered into a Memorandum of Understanding with
counsel to the plaintiffs in such stockholder lawsuits. The Memorandum of
Understanding provided for the settlement of such lawsuits based on the payment
of a per share merger consideration of $28.00 and provided that the plaintiffs
petition the court for certification of a class on a "non-opt-out" basis. On
November 3, 1999, the proposed settlement of the litigation, as provided for
in the Memorandum of Understanding, was approved by the Delaware Court of
Chancery.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of stockholders on October 20, 1999. The
Company's stockholders were asked to take the following actions at the meeting:
(1) Consider and vote upon a proposal to approve and adopt the Agreement
and Plan of Merger, dated as of June 21, 1999 (as amended on July 29, 1999)
and the transactions contemplated thereby ("Proposal 1").
(2) Elect nine directors of the Company to serve until the next annual meeting
of stockholders of Knoll or until their successors are elected and
qualified ("Proposal 2").
(3) Ratify the appointment of the firm Ernst & Young LLP as independent
auditors of the Company for the 1999 fiscal year ("Proposal 3").
With respect to Proposal 2, all nine individuals nominated for director were
elected. The nominees and the votes each received are as follows:
Nominee For Withheld
--------------------------- ------------ ------------
Burton B. Staniar.......... 35,145,549 157,820
John H. Lynch.............. 35,145,679 157,690
Andrew B. Cogan............ 35,145,586 157,783
John W. Amerman............ 35,145,679 157,690
Robert J. Dolan............ 35,145,679 157,690
Jeffrey A. Harris.......... 35,145,679 157,690
Sidney Lapidus............. 35,145,549 157,820
Kewsong Lee................ 35,145,679 157,690
Henry B. Schacht........... 35,145,679 157,690
Proposal 1 and Proposal 3 were also approved by affirmative vote of a majority
of shares of common stock present at the annual meeting. Each of these
proposals received the following votes:
Broker
Proposal For Against Abstain Non-Votes
------------------ ------------ ---------- ---------- -----------
Proposal 1........ 29,929,743 11,478 5,324 5,356,824
Proposal 3........ 35,272,677 3,440 27,252 --
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information and Dividend Policy
Since cessation of trading on November 3, 1999, the day before consummation
of the merger, there has been no established trading market for the Company's
common stock, par value $0.01 per share. From May 9, 1997, the date of the
Company's initial public offering, through November 3, 1999, the Company's
common stock was traded on the NYSE. The following table sets forth, for the
periods indicated, high and low closing sales prices for Knoll's common stock
as reported by the NYSE.
High Low
---------- ----------
1998
----
First quarter...................... 42 1/8 29 3/8
Second quarter..................... 40 9/16 27
Third quarter...................... 37 21 7/8
Fourth quarter..................... 30 1/8 19 1/4
1999
----
First quarter...................... 29 15/16 15 1/4
Second quarter..................... 26 3/4 23 3/4
Third quarter...................... 27 1/2 26 3/8
Fourth quarter (through
November 3, 1999)................ 28 27 1/16
As of March 30, 2000, there were 38 holders of record of the Company's common
stock.
The credit agreement governing the Company's credit facilities and the
indenture relating to the Company's 10.875% Senior Subordinated Notes due 2006
(the "Senior Subordinated Notes") contain certain covenants that, among other
things, limit the Company's ability to purchase Knoll stock and pay dividends
to its stockholders. The Company has never paid any dividends on its common
stock, and any future determination to pay dividends will depend on the
Company's results of operations, financial condition, capital requirements,
contractual restrictions and other factors deemed relevant by the Board of
Directors.
Recent Sales of Unregistered Securities
On November 4, 1999, the Company, pursuant to the Knoll, Inc. Retirement
Savings Plan, granted a total of 150,100 shares of Knoll common stock to
substantially all individuals employed by the Company in the U.S. as of such
date. These grants will vest ratably according to years of service, with such
shares being 100% vested at the end of five years of service. The Company
did not receive any consideration for such grants. These grants were exempt
from registration pursuant to Section 4(2) of the Securities Act of 1933 (the
"Securities Act") and Rule 701 promulgated thereunder.
Options to purchase 1,870,500 shares of Knoll common stock were granted to
certain employees of the Company on November 4, 1999 pursuant to the Knoll,
Inc. 1999 Stock Incentive Plan. These options were granted at an exercise
price of $28.00, will vest in installments over four years (30% on November 4,
2000, 20% on each of November 4, 2001 and 2002 and 30% on November 4, 2003) and
may be exercised pursuant to the terms of the related stock option agreements.
The Company did not receive any consideration for such grants. These grants
were exempt from registration under the Securities Act as not involving the
sale of a security.
11
Options to purchase 10,000 shares of Knoll common stock were granted to certain
employees of the Company on March 6, 2000 pursuant to the Knoll, Inc. 1999
Stock Incentive Plan. These options were granted at an exercise price of
$28.00, will vest in installments over four years (30% on March 6, 2001, 20% on
each of March 6, 2002 and 2003 and 30% on March 6, 2004) and may be exercised
pursuant to the terms of the related stock option agreements. The Company did
not receive any consideration for such grants. These grants were exempt from
registration under the Securities Act as not involving the sale of a security.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected consolidated financial information of the
Predecessor as of the dates and for the periods indicated and selected
consolidated financial information of the Company as of the dates and for the
periods indicated. The consolidated financial information of the Predecessor
and the Company has been derived from audited financial statements of the
Predecessor and the Company, respectively. The selected financial information
should be read in conjunction with Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and Item 8,
"Financial Statements and Supplementary Data."
Predecessor | The Company
-------------------------- | ------------------------------------------------------
Two Months | Ten Months
Year Ended Ended | Ended Years Ended December 31,
December 31, February 29, | December 31, ----------------------------------------
1995 1996 | 1996 1997 1998 1999
------------ ------------ | ------------ ------------ ------------ ------------
(In Thousands) | (In Thousands)
|
Operating Data |
Sales................. $620,892 $ 90,232 | $561,534 $810,857 $948,691 $984,511
Cost of sales ........ 417,632 59,714 | 358,841 489,962 572,756 593,442
-------- -------- | -------- -------- -------- --------
Gross profit.......... 203,260 30,518 | 202,693 320,895 375,935 391,069
Selling, general and |
administrative |
expenses............ 138,527 21,256 | 131,349 183,018 204,392 206,919
Westinghouse long- |
term incentive |
compensation........ -- 47,900 | -- -- -- --
Allocated corporate |
expenses............ 9,528 921 | -- -- -- --
-------- -------- | -------- -------- -------- --------
Operating income |
(loss).............. 55,205 (39,559) | 71,344 137,877 171,543 184,150
Interest expense...... 1,430 340 | 32,952 25,075 16,860 21,611
Recapitalization |
expense............. -- -- | -- -- -- 6,356
Other income |
(expense), net...... (1,597) (296) | 447 1,667 2,732 (670)
-------- -------- | -------- -------- -------- --------
Income (loss) before |
income tax expense |
(benefit) and |
extraordinary item.. 52,178 (40,195) | 38,839 114,469 157,415 155,513
Income tax expense |
(benefit)........... 22,846 (16,107) | 16,844 48,026 64,371 66,351
-------- -------- | -------- -------- -------- --------
Income (loss) before |
extraordinary item.. 29,332 (24,088) | 21,995 66,443 93,044 89,162
Extraordinary loss |
on early |
extinguishment of |
debt, net of taxes.. -- -- | 5,159 5,337 -- 10,801
-------- -------- | -------- -------- -------- --------
Net income (loss)..... $ 29,332 $(24,088) | $ 16,836 $ 61,106 $ 93,044 $ 78,361
======== ======== | ======== ======== ======== ========
12
Predecessor | The Company
-------------- | --------------------------------------------------------
| December 31,
December 31, | --------------------------------------------------------
1995 | 1996 1997 1998 1999
-------------- | ------------ ------------ ------------ ------------
(In Thousands) | (In Thousands)
|
Balance Sheet Data |
Working capital.............. $ 82,698 | $ 64,754 $ 65,553 $ 95,040 $104,087
Total assets................. 656,710 | 675,712 680,859 714,027 742,306
Total long-term debt, |
including current portion.. 3,538 | 354,154 207,029 169,255 610,376
Total liabilities............ 176,259 | 497,908 392,570 370,177 836,500
Stockholders' equity |
(deficit).................. 480,451 | 177,804 288,289 343,850 (94,194)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with Item 8, "Financial
Statements and Supplementary Data."
Background
Knoll 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.
On November 4, 1999, pursuant to an Agreement and Plan of Merger dated as of
June 21, 1999 (as amended on July 29, 1999), between Warburg and Knoll, the
Company completed a recapitalization (merger) transaction whereby a newly
formed entity, which was organized by Warburg, was merged with and into Knoll,
with Knoll continuing as the surviving corporation. As a result of the merger,
17,738,634 shares of common stock held by the public stockholders of Knoll,
other than Warburg and certain members of Knoll management, immediately prior
to the merger were converted into the right to receive $28.00 per share in cash
and were canceled. Furthermore, the Company's common stock ceased to be listed
on the NYSE, and the registration of the Company's common stock under the
Exchange Act was terminated.
The merger and related transactions were accounted for as a leveraged
recapitalization. The historical accounting basis of Knoll's assets and
liabilities were retained subsequent to the transactions. See Note 4 to the
consolidated financial statements for further discussion of the merger.
Results of Operations
Sales
Despite nearly a 1.0% decrease in sales in the office furniture industry in
1999 compared to 1998, the Company's sales grew 3.8%, to $984.5 million in
1999. Such growth resulted from increased volume in North America offset in
part by a reduction of volume in Europe. The Company's 1998 sales of $948.7
million were up 17.0%, or $137.8 million, from $810.9 million in sales for
1997 as a result of increased volume company-wide. The increased volume was
primarily attributable to office systems and storage products in 1999 and
office systems and specialty products in 1998. Management believes that office
systems is the largest and fastest growing product category in the industry.
BIFMA estimates that U.S. sales of office systems were $4.3 billion, or 34.8%
of total industry sales, in 1999. Office systems accounted for 68.9% of the
Company's sales in 1999, 68.4% of sales in 1998 and 67.2% of sales in 1997.
13
Gross Profit and Operating Income
The Company's gross profit and operating income as a percentage of sales
continue to be very strong. Both have continued to benefit from increasing
volume and a continued focus on cost control. As a percentage of sales, gross
profit was 39.7% for 1999 and 39.6% for 1998 and 1997 and operating income was
18.7% for 1999, 18.1% for 1998 and 17.0% for 1997. The Company's 1999 gross
profit and operating income were impacted negatively by manufacturing
inefficiencies at the Company's Toronto facility that resulted in part from
implementation issues associated with the transition to a new manufacturing
system.
Although selling, general and administrative expenses increased on a relative
dollar basis in 1999 compared to 1998 and in 1998 compared to 1997, such
expenses decreased as a percentage of sales. The increases on a relative
dollar basis were due primarily to increased expenses related to sales and
technology initiatives in 1999 and incremental employee costs related to higher
sales, profit and employment levels in 1998. The Company's selling, general
and administrative expenses as a percentage of sales decreased to 21.0% for
1999 from 21.5% for 1998 and 22.6% for 1997.
Interest Expense
In 1997, the Company redeemed an aggregate principal amount of $57.8 million of
its Senior Subordinated Notes and repaid $89.2 million of bank debt. Thus, the
Company's 1998 interest expense was impacted favorably compared to 1997 as a
result of the overall reduction of debt. The Company continued to reduce its
bank debt during 1999, paying down $47.0 million through November 3, 1999.
Then, on November 4, 1999, in connection with the merger, the Company incurred
$533.0 million of debt under a new senior credit agreement with higher interest
rates. This significant additional debt negatively impacted the Company's
interest expense for 1999. See "Liquidity and Capital Resources" for further
discussion of the events discussed above.
Recapitalization Expense
The Company incurred $6.4 million of expense relating to the recapitalization
of the Company that occurred upon consummation of the merger.
Income Tax Expense
With operations in the U.S., Canada and various countries in Europe, the
Company's effective tax rate is directly affected by the mix of pretax income
and the varying effective tax rates attributable to the countries in which it
operates. This changing mix is primarily responsible for the decrease in the
effective tax rate from 42.0% in 1997 to 40.9% in 1998. The increase in the
effective tax rate to 42.7% in 1999 was related somewhat to the changing mix
but was due primarily to $5.2 million of recapitalization expense that is not
expected to be deductible for income tax purposes.
Extraordinary Items
In connection with the merger, Knoll refinanced $14.0 million owed under its
senior credit agreement that existed immediately prior to the merger and paid
the holders, as of August 13, 1999, of its Senior Subordinated Notes a fee of
$12.9 million for their consent to certain amendments to the indenture
governing the Senior Subordinated Notes. The amendments allowed the Company
to complete the merger without violating the covenants under the indenture.
The Company accounted for the refinancing of the debt under the then-existing
credit agreement and the modification of debt terms under the indenture for the
Senior Subordinated Notes as extinguishments of debt. Such treatment resulted
in an extraordinary loss of $17.9 million on a pretax basis ($10.8 million on
an after-tax basis) in 1999. This loss consisted of the $12.9 million consent
fee paid to the noteholders and $5.0 million of unamortized financing costs
that were written-off, of which $0.9 million related to the refinanced debt
and $4.1 million related to the Senior Subordinated Notes.
14
In connection with the Company's May 1997 initial public offering, Knoll
executed an early redemption of an aggregate principal amount of $57.8 million
of its Senior Subordinated Notes. As a result of this redemption, the Company
recorded an extraordinary loss of $8.8 million on a pretax basis ($5.3 million
on an after-tax basis) in 1997. Such loss consisted of a $5.7 million premium
paid and $3.1 million of unamortized financing costs that were written-off.
Initial Public Offering
The Company generated net proceeds of $133.4 million from the sale of 8,480,000
shares of Knoll common stock in its 1997 initial public offering. The Company
used those net proceeds together with $11.7 million borrowed under its then-
existing revolving credit facility to redeem 800,000 shares of Series A
Preferred Stock for $80.0 million and, as previously discussed, to redeem an
aggregate principal amount of $57.8 million of the Senior Subordinated Notes
for $65.1 million. If the Company assumes that these events had occurred at
the beginning of 1997, net income, on a pro forma basis, would have been $68.1
million for 1997. Thus, historical net income of $93.0 million for 1998 would
have grown 36.6% from pro forma net income for 1997.
Liquidity and Capital Resources
The following table highlights certain key cash flow and capital information
pertinent to the discussion that follows:
1999 1998 1997
---------- ---------- ----------
(In Thousands)
Cash provided by operating
activities....................... $127,987 $114,563 $ 135,262
Capital expenditures............... 25,095 36,390 33,080
Payment of merger consideration.... 496,682 -- --
Payment of recapitalization costs.. 8,843 -- --
Payment of consent fee............. 12,870 -- --
Purchase of common stock........... 28,703 38,849 --
Net proceeds from issuance of
stock............................ 4,746 4,813 133,559
Redemption of preferred stock...... -- -- (80,000)
Net proceeds from (repayment of)
long-term debt................... 441,250 (37,799) (146,988)
The Company continued to generate strong cash flow from operating activities
in 1999 primarily as a result of its improved earnings before recapitalization
expense and noncash and extraordinary items offset by cash used for working
capital purposes. The Company's cash flow provided by operations has generally
been used to fund capital expenditures, working capital requirements and debt
service, and in 1998 and 1999, it was also used to repurchase shares of common
stock under a share repurchase program.
The Company's capital expenditures are typically for new manufacturing
equipment and information systems. However, in 1998, the Company also
incurred capital expenditures of $3.9 million for the expansion of three U.S.
manufacturing facilities by an aggregate of approximately 139,000 square feet.
The Company estimates that capital expenditures for 2000 will be approximately
$31.0 million.
In connection with the merger consummated on November 4, 1999, the Company
transferred an aggregate of $496.7 million of merger consideration to its
exchange agent for the 17,738,634 shares of common stock that were converted
into the right to receive $28.00 per share and were canceled. In addition,
the Company incurred recapitalization costs totaling $9.1 million, of which
$8.8 million was paid in 1999, and as previously discussed, paid the holders
of its Senior Subordinated Notes an aggregate consent fee of $12.9 million.
In order to finance these transactions, the Company incurred debt of $533.0
million. See below for further discussion of the debt incurred.
15
In September 1998, the Board of Directors approved a share repurchase program
that authorized the repurchase of 3.0 million shares of the Company's common
stock. On February 2, 1999, the Board of Directors approved an increase of
2.0 million shares to the program. The Company purchased a total of 2,894,700
shares of its common stock (1,187,000 shares during the first two months of
1999 and 1,707,700 shares during 1998) for $67.5 million under the program.
As previously discussed, in 1997, the Company completed an initial public
offering that generated net proceeds of $133.4 million from its sale of
8,480,000 shares of common stock. The Company used those net proceeds together
with $11.7 million borrowed under its 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 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 senior bank debt during 1997.
The Company continued to reduce its outstanding senior bank debt up until the
time of the consummation of the merger. The Company repaid $38.0 million of
such debt during 1998 and $47.0 million from January 1, 1999 through
November 3, 1999.
In connection with the consummation of the merger on November 4, 1999, the
Company repaid all of its then-outstanding senior indebtedness, which amounted
to $14.0 million, and incurred debt totaling $533.0 million under a new senior
credit agreement. The new credit agreement provides up to $650.0 million to
(i) fund the merger and related fees and expenses, (ii) refinance all amounts
owing under the Company's senior credit agreement that existed immediately
prior to the merger and (iii) provide for working capital and ongoing general
corporate purposes. The agreement consists of a $325.0 million six-year term
loan facility and a $325.0 million six-year revolving credit facility and
contains restrictive covenants, financial covenants and events of default.
Among other things, the restrictive covenants limit the Company's ability to
incur additional indebtedness, pay dividends, purchase Company stock, make
investments, grant liens and engage in certain other activities.
Borrowings under the new credit agreement bear interest at a floating rate
based, at the Company's option, upon (i) the Eurodollar rate (as defined
therein) plus an applicable percentage that is subject to change based upon the
Company's ratio of funded debt to earnings before income taxes, depreciation,
amortization and other noncash charges ("EBITDA") or (ii) the greater of the
federal funds rate plus 0.5% or the prime rate, plus an applicable percentage
that is subject to change based upon the Company's ratio of funded debt to
EBITDA. The Company is required to make quarterly principal payments under the
term loan facility. Aggregate annual amounts due are as follows: $17.5 million
in 2000, $31.25 million in 2001, $52.5 million in 2002, $63.75 million in 2003,
$81.25 million in 2004 and $75.0 million in 2005. Loans made pursuant to the
revolving credit facility may be borrowed, repaid and reborrowed from time to
time until November 4, 2005. The Company repaid $3.75 million and $27.0
million of borrowings under the term loan facility and revolving credit
facility, respectively, in December 1999. As of December 31, 1999, the Company
had an aggregate of $141.5 million available for borrowing under the revolving
credit facility.
In addition to the credit facilities, the Company had $107.2 million aggregate
principal amount of Senior Subordinated Notes outstanding as of December
31, 1999. The Senior Subordinated Notes are subordinated to all of the
Company's existing and future senior indebtedness, including all indebtedness
under the senior credit agreement. The indenture governing the Senior
Subordinated Notes imposes certain restrictions on the Company and its
subsidiaries, including restrictions on the ability to incur indebtedness, pay
dividends, purchase Company stock, make investments, grant liens and engage in
certain other activities. The Company may be required to purchase the Senior
Subordinated Notes upon a change of control (as defined in the indenture) and
in certain circumstances with the proceeds of asset sales. The Senior
Subordinated Notes are redeemable at the Company's option 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.
16
The Company's foreign subsidiaries maintain local credit facilities to provide
credit for overdraft, working capital and other purposes. As of December 31,
1999, total credit available under such facilities was approximately $10.1
million, and there were no outstanding borrowings under the facilities. The
Company believes that it is currently in compliance with all terms of its
indebtedness.
The Company continues to have significant liquidity requirements. In addition
to working capital needs and the need to fund capital expenditures to support
the Company's growth initiatives, the Company has significant cash requirements
for debt service. The Company believes that existing cash balances and
internally generated cash flows, together with borrowings available under the
revolving credit facility of its credit agreement, will be sufficient to fund
normal working capital needs, capital spending requirements and debt service
requirements 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, 1999.
Backlog
The Company's backlog of unfilled orders was $203.3 million at December 31,
1999 and $159.2 million at December 31, 1998. The Company manufactures
substantially all of its products to order and expects to fill substantially
all outstanding unfilled orders within the next twelve months. As such,
backlog is not a significant factor used to predict the Company's long-term
business prospects.
Impact of Year 2000
In 1997, the Company initiated a strategic project to replace and enhance its
manufacturing and business systems (software and hardware) in North America
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 reduce fixed costs. In connection with
this project, the Company addressed the issue of year 2000 compliance of its
information systems and embedded chips in equipment, in both North America and
Europe, as well as the year 2000 readiness of its vendors, dealers and other
third parties. In late 1999, the Company completed the installation of the new
system and completed its efforts to remedy problems related to embedded chips
that were determined not to be year 2000 compliant. Through December 31, 1999,
the Company incurred expenditures of approximately $35.0 million ($25.4 million
expense and $9.6 million capital) related to the project.
The Company has not experienced any significant disruptions in mission critical
information technology and non-information technology systems and believes that
its systems have thus far responded successfully to the year 2000 date change.
The Company is not aware of any material problems resulting from year 2000
issues, either with its internal systems or the systems or products of its
vendors, dealers and other third parties. The Company intends to continue to
monitor its mission critical information systems throughout the year 2000 and
address any significant latent year 2000 issues that may arise. If the Company
or its vendors, dealers and other third parties are unable to successfully
address significant latent year 2000 issues that may arise, a material adverse
effect on the Company's operations could result. At this time, the Company is
not aware of any such issues.
Environmental Matters
The past and present business operations of the Company and the past and
present ownership and operation of manufacturing plants on real property by
the Company are subject to extensive and changing federal, state, local and
foreign environmental laws and regulations. As a result, the Company is
involved from time to time in administrative and judicial proceedings and
inquiries relating to environmental matters. The Company cannot predict what
environmental legislation or regulations will be enacted in the future, how
existing or future laws or regulations will be administered or interpreted or
what environmental conditions may be found to exist.
17
Compliance with more stringent laws or regulations, or stricter interpretation
of existing laws, may require additional expenditures by the Company, some of
which may be material. The Company has been identified as a potentially
responsible party pursuant to CERCLA for remediation costs associated with
waste disposal sites previously used by the Company. The remediation costs at
these CERCLA sites are unknown, but the Company does not expect any liability
it may have under CERCLA to be material, based on the information presently
known to the Company. In addition, Westinghouse has agreed to indemnify the
Company for certain costs associated with CERCLA liabilities known as of the
date of the acquisition of the Company from Westinghouse.
Statement Regarding Forward-Looking Disclosure
Certain portions of this Form 10-K, including "Management's Discussion and
Analysis of Financial Condition and Results of Operations," contain various
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act that represent the Company's
expectations or beliefs concerning future events. Forward-looking statements
relate to future operations, strategies, financial results or other
developments and are not based on historical information. In particular,
statements using verbs such as "anticipates," "believes," "estimates,"
"expects" or words of similar meaning generally involve forward-looking
statements. Although the Company believes the expectations reflected in
these forward-looking statements are based upon reasonable assumptions, no
assurance can be given that Knoll will attain these expectations or that any
deviations will not be material. Readers of this Form 10-K are cautioned not
to unduly rely on any forward-looking statements.
The Company cautions that its forward-looking statements are further qualified
by important factors that could cause actual results to differ materially from
those in the forward-looking statements. Such factors include, without
limitation, the highly competitive nature of the market in which the Company
competes, including the introduction of new products, pricing changes by the
Company's competitors and growth rates of the office systems category; risks
associated with the Company's 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 significant portion of the Company's cash flow
from operations to be dedicated to debt service, making such cash flow
unavailable for other purposes, and which could limit the Company's flexibility
in reacting to changes in its industry or economic conditions generally;
possible risks relating to latent year 2000 issues that may arise, which could
impair the Company's operations if not resolved successfully or on time; 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; risks
associated with conducting business via the Internet; and fluctuations in
industry revenues driven by a variety of macroeconomic factors, including
white-collar employment levels and corporate cash flows, as well as by a
variety of industry factors such as corporate reengineering and restructuring,
technology demands, ergonomic, health and safety concerns and corporate
relocations. Except as otherwise required by the federal securities laws, the
Company disclaims any obligation or undertaking to disseminate any updates or
revisions to any forward-looking statement contained in this Form 10-K to
reflect any change in its expectations with regard thereto or any change in
events, conditions or circumstances on which any such statement is based.
18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During the normal course of business, the Company is routinely subjected to
market risk associated with interest rate movements and foreign currency
exchange rate movements. Interest rate risk arises from the Company's debt
obligations and related interest rate collar agreements. Foreign currency
exchange rate risk arises from the Company's foreign operations and purchases
of inventory from foreign suppliers.
Interest Rate Risk
The Company has both fixed and variable rate debt obligations for other than
trading purposes that are denominated in U.S. dollars. Changes in interest
rates have different impacts on the fixed and variable rate portions of the
debt. A change in interest rates impacts the interest incurred and cash paid
on the variable rate debt but does not impact the interest incurred or cash
paid on the fixed rate debt.
Debt Obligations
At December 31, 1999, the Company had total debt of $610.4 million, of which
$502.3 million was variable rate debt. This is significantly higher than
outstanding debt of $169.3 million, of which $61.0 million was variable rate
debt, at December 31, 1998. The increase resulted from additional debt
incurred under new senior credit facilities in connection with the November 4,
1999 merger. See "Liquidity and Capital Resources" under Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" for
further discussion of the debt incurred in connection with the merger.
The following tables summarize the Company's market risks associated with its
debt obligations as of December 31, 1999. The table presents principal cash
flows and average interest rates by year of maturity. Variable interest rates
presented for variable rate debt represent the weighted average interest rates
on the Company's credit facility borrowings as of December 31, 1999.
2000 2001 2002 2003 2004 Thereafter Total Fair Value
-------- -------- -------- -------- -------- ---------- ---------- ----------
(Dollars in Thousands)
Rate Sensitive Liabilities
Long-term Debt:
Fixed Rate............. -- -- $ 70 $ 87 $ 87 $107,882 $108,126 $107,989
Average Interest
Rate............. 10.80% 10.80% 10.84% 10.84% 10.84% 10.85%
Variable Rate.......... $17,500 $31,250 $52,500 $63,750 $81,250 $256,000 $502,250 $502,250
Average Interest
Rate............. 7.55% 7.55% 7.55% 7.55% 7.55% 7.55%
Interest Rate Collar Agreements
The Company uses interest rate collar agreements for other than trading
purposes in order to manage its exposure to fluctuations in interest rates on
its variable rate debt. Such agreements effectively set agreed-upon maximum
and minimum rates on a notional principal amount and utilize the 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. Fluctuations in
LIBOR impact both the net financial instrument position and the amount of cash
to be paid or received, if any.
The Company did not have any interest rate collar agreements outstanding at
December 31, 1999. The aggregate notional principal amount of the Company's
interest rate collar agreements outstanding at December 31, 1998 was $115.0
million and the related weighted average maximum and minimum rates were 7.97%
and 5.05%, respectively. Such agreements expired in April 1999. During the
years ended December 31, 1999 and 1998, the Company was not required to make
nor was it entitled to receive any payments as a result of these hedging
activities.
In January 2000, the Company entered into three interest rate collar agreements
that have an aggregate notional principal amount of $135.0 million and weighted
average maximum and minimum rates of 10.00% and 5.64%, respectively. These
agreements will expire in February 2003.
19
The Company will continue to review its exposure to interest rate fluctuations
and evaluate whether it should manage such exposure through hedging
transactions.
Foreign Currency Exchange Rate Risk
The Company manufactures its products in the United States, Canada and Italy
and sells its products in those markets as well as in other European countries.
The Company's foreign sales and certain expenses are transacted in foreign
currencies. The production costs, profit margins and competitive position of
the Company are affected by the strength of the currencies in countries where
it manufactures or purchases goods relative to the strength of the currencies
in countries where its products are sold. Additionally, as the Company's
reporting currency is the U.S. dollar, the financial position of the Company
is affected by the strength of the currencies in countries where the Company
has operations relative to the strength of the U.S. dollar. The principal
foreign currencies in which the Company conducts business are the Canadian
dollar and the Italian lira. Approximately 8.3% of the Company's revenues and
26.5% of the Company's expenses in 1999 and 9.6% of the Company's revenues and
27.3% of the Company's expenses in 1998 were denominated in currencies other
than the U.S. dollar. Foreign currency exchange rate fluctuations did not have
a material impact on the financial results of the Company during 1999 and 1998.
The Company generally does not hedge its foreign currency exposure. However,
from time to time, the Company enters into foreign currency forward exchange
contracts to manage its exposure to foreign exchange rates associated with
purchases of inventory from foreign suppliers. The terms of these contracts
are generally less than a year. Material gains and losses on these contracts
are recognized in income in the period the value of the contract changes. The
contract amounts outstanding at December 31, 1999 and 1998 as well as the
amount of gains and losses recorded during 1999 and 1998 were not material.
Additionally, the Company does not anticipate any material adverse effect on
its results of operations or financial position relating to these foreign
currency forward exchange contracts.
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.
20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The table below sets forth the names, ages and titles of the persons who were
directors and executive officers of the Company as of March 30, 2000.
Name Age Position
------------------------ ----- --------------------------------------
Burton B. Staniar....... 58 Chairman of the Board
John H. Lynch........... 46 Chief Executive Officer and Director
Kathleen G. Bradley..... 50 President and Director
Andrew B. Cogan......... 37 Chief Operating Officer and Director
Barbara E. Ellixson..... 46 Senior Vice President--Human Resources
Arthur C. Graves........ 53 Senior Vice President--Sales and
Distribution
Stephen A. Grover....... 47 Senior Vice President--Operations
Carl G. Magnusson....... 60 Senior Vice President--Design
Barry L. McCabe......... 53 Senior Vice President, Treasurer and
Controller
Patrick A. Milberger.... 43 Senior Vice President, General Counsel
and Secretary
Douglas J. Purdom....... 41 Senior Vice President and Chief
Financial Officer
Jeffrey A. Harris....... 44 Director
Sidney Lapidus.......... 62 Director
Kewsong Lee............. 34 Director
Lloyd Metz.............. 31 Director
Henry B. Schacht........ 65 Director
Burton B. Staniar was appointed Chairman of the Board of the Company in
December 1993. Mr. Staniar served as Chief Executive Officer of the Company
from December 1993 to January 1997. Prior to that time, Mr. Staniar held a
number of assignments at Westinghouse, including President of Group W Cable
and Chairman and Chief Executive Officer of Westinghouse Broadcasting. Prior
to joining Westinghouse in 1980, he held a number of marketing and general
management positions at Colgate Palmolive and Church and Dwight Co., Inc.
Mr. Staniar is also a director of Church and Dwight Co., Inc.
John H. Lynch joined the Company as Vice Chairman of the Board in May 1994.
Mr. Lynch was subsequently elected President of the Company and in January 1997
was elected Chief Executive Officer. From 1990 to 1994, prior to joining the
Company, Mr. Lynch was a partner in BGI, a management firm. During that time,
Mr. Lynch led the restructuring of the Westinghouse Broadcasting television and
radio stations. From 1988 to 1990, Mr. Lynch was an associate dean at the
Harvard Business School.
Kathleen G. Bradley has been a director of the Company since November 1999.
She was named President of the Company in December 1999, after serving as
Executive Vice President--Sales, Distribution and Customer Service since August
1998, Senior Vice President since 1996 and Divisional Vice President for
Knoll's southeast division since 1988. Prior to that time, Ms. Bradley was
regional manager for the Company's Atlanta region, a position to which she was
promoted in 1983. She began her career with Knoll in 1979.
Andrew B. Cogan has been a director of the Company since February 1996. He was
named Chief Operating Officer in December 1999, after serving as Executive Vice
President--Marketing and Product Development since August 1998 and Senior Vice
President since May 1994. Mr. Cogan has held several positions in the design
and marketing group since joining the Company in 1989.
21
Barbara E. Ellixson was promoted to her current position as Senior Vice
President--Human Resources in January 2000, after serving as Vice President--
Human Resources since August 1994 and Manager of Human Resources for the
Company's East Greenville site. Ms. Ellixson began her career with
Westinghouse in 1971 and has held a variety of human resources positions in
several different Westinghouse business units.
Arthur C. Graves was appointed Senior Vice President--Sales and Distribution in
October 1999, after serving as Divisional Vice President for Knoll's western
division since 1990. Mr. Graves began his career at Knoll in March 1989 as a
regional sales manager for the Company's San Francisco region.
Stephen A. Grover joined Knoll as Senior Vice President--Operations in May
1999. Prior to such time, Mr. Grover spent 18 years at General Electric
Company, where he held a variety of management positions, the last being
Global Manager of Magnetic Resonance Manufacturing for GE Medical Systems.
Carl G. Magnusson, a Canadian citizen, has held the position of Senior Vice
President--Design since February 1993. Mr. Magnusson has been involved in
design, product development, quality and communications since joining the
Company in 1976.
Barry L. McCabe was promoted to Senior Vice President, Treasurer and Controller
in January 2000, after serving as Vice President, Treasurer and Controller
since January 1995. Mr. McCabe joined the Company in August 1990 as
Controller. Mr. McCabe worked with a number of Westinghouse business units
after joining Westinghouse in 1974 in the Auditing Department.
Patrick A. Milberger was promoted to Senior Vice President, General Counsel
and Secretary in January 2000, after serving as Vice President, General Counsel
and Secretary. Mr. Milberger joined the Company as Vice President and General
Counsel in April 1994. Prior to joining the Company, Mr. Milberger served as
an Assistant General Counsel and in a number of other positions in the
Westinghouse Law Department, which he joined in 1986. Prior to such time,
Mr. Milberger was in private practice at Buchanan Ingersoll, P.C.
Douglas J. Purdom joined the Company as Senior Vice President and Chief
Financial Officer in August 1996. Prior to that time, Mr. Purdom served as
Vice President and Chief Financial Officer of Magma Copper Company, an
Arizona-based copper mining company, since 1992, and as Corporate Controller
of that company from 1989 to 1991. Mr. Purdom has advised the Company that
he intends to resign effective August 31, 2000.
Jeffrey A. Harris, a director of the Company since February 1996, has been a
General Partner of Warburg, Pincus & Co. ("Warburg, Pincus") and a Member
and Managing Director of E.M. Warburg, Pincus & Co., LLC ("E.M. Warburg") and
its predecessors since 1988, where he has been employed since 1983. Mr. Harris
is a director of Industri-Matematik International Corp., ECsoft Group plc,
Spinnaker Exploration, Inc. and several privately held companies.
Sidney Lapidus, a director of the Company since February 1996, has been a
General Partner of Warburg, Pincus and a Member and Managing Director of
E.M. Warburg and its predecessors since January 1982, where he has been
employed since 1967. Mr. Lapidus is a director of Lennar Corporation,
Caribiner International, Inc., Grubb & Ellis Company, Information Holdings,
Inc., Four Media Company, Radio Unica Communications Corp. and several
privately held companies.
Kewsong Lee, a director of the Company since February 1996, has been a
General Partner of Warburg, Pincus and a Member and Managing Director of
E.M. Warburg and its predecessors since January 1997, where he has been
employed since 1992. Mr. Lee is a director of RenaissanceRe Holdings Ltd.,
Eagle Family Food Holdings, Inc. and several privately held companies.
Lloyd Metz, a director of the Company since November 1999, has been a Vice
President of Warburg, Pincus Ventures, LLC, an affiliate of Warburg, since
January 2000. Mr. Metz was an associate at Warburg, Pincus Ventures, LLC
from July 1998 to January 2000 and an investment banker at Morgan Stanley
Dean Witter from August 1996 to July 1998. From 1994 to 1996, Mr. Metz
attended Harvard Business School.
22
Henry B. Schacht, a director of the Company since December 1998, has been
a General Partner of Warburg, Pincus and a Member and Managing Director of
E.M. Warburg since January 2000 and is Chairman designate of the newly
announced spin-off of Lucent Technologies ("Lucent"). Mr. Schacht served as a
Director and Senior Advisor of E.M. Warburg from March 1999 to January 2000.
Prior thereto, Mr. Schacht served as Chairman of the Board of Lucent from
February 1996 to February 1998 and as Chief Executive Officer of Lucent from
February 1996 to October 1997. Prior thereto, Mr. Schacht served as Chairman
of the Board (1995-1997) and Chief Executive Officer (1973-1994) of Cummins
Engine Company, Inc. Mr. Schacht is also a director and senior advisor of
Lucent and a director of The Chase Manhattan Corporation and The Chase
Manhattan Bank, N.A., Aluminum Company of America (Alcoa), Cummins Engine
Company, Inc., Johnson & Johnson Corp. and The New York Times Co.
Except for Mr. Magnusson, all directors and executive officers of Knoll are
citizens of the United States.
Section 16(a) Beneficial Ownership Reporting Compliance
Under the Exchange Act, the Company's directors and executive officers, and
any persons holding more than 10% of the outstanding shares of common stock
are required to report their initial ownership of common stock and any
subsequent changes in that ownership to the Securities and Exchange Commission
(the "Commission"). Specific due dates for these reports have been established
by the Commission, and the Company is required to disclose any failure by such
persons to file these reports in a timely manner during the 1999 fiscal year.
Based solely upon the Company's review of copies of such reports furnished to
it, except as set forth herein, the Company believes that during the 1999
fiscal year its executive officers and directors and the holders of more than
10% of the outstanding shares of common stock complied with all reporting
requirements of Section 16(a) under the Exchange Act. The Statement of Changes
in Beneficial Ownership on Form 4 for September 1999 that was filed on
October 8, 1999 for Mr. Lynch inadvertently omitted several sales transactions
for an aggregate of 30,000 shares that were held by a family trust. The sales
were reported on an amended Form 4 filed on November 10, 1999.
23
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth, for the years ended December 31, 1999, 1998
and 1997, individual compensation information for the Chief Executive Officer
of the Company and each of the four other most highly compensated executive
officers of the Company during 1999 (the "Named Executive Officers").
Long-Term
Annual Compensation Compensation Awards
---------------------------------- ------------------------
Other All
Annual Restricted Securities Other
Compen- Stock Underlying Compen-
Name and Principal Position Year Salary Bonus sation (1) Awards (2) Options (3) sation (4)
- --------------------------- ------ ---------- ---------- ---------- ----------- ----------- ----------
Burton B. Staniar.......... 1999 $400,008 $450,000 $ -- -- 150,000 $7,299
Chairman of the Board 1998 399,996 900,000 -- -- -- 8,019
1997 399,996 750,000 -- -- -- 8,979
John H. Lynch.............. 1999 400,008 450,000 -- -- 300,000 7,299
Chief Executive Officer 1998 399,996 900,000 -- -- -- 8,019
1997 399,996 750,000 -- -- -- 8,979
Kathleen G. Bradley........ 1999 254,174 400,000 64,239 -- 200,000 7,299
President 1998 222,502 400,000 -- -- -- 8,019
1997 199,992 300,000 -- -- 188,365 8,424
Andrew B. Cogan............ 1999 254,174 400,000 -- -- 200,000 99
Chief Operating Officer 1998 222,502 400,000 -- -- -- 99
1997 199,992 300,000 -- -- 35,000 99
Douglas J. Purdom.......... 1999 210,000 160,000 -- -- 40,000 7,299
Senior Vice President 1998 209,167 200,000 -- -- -- 8,019
and Chief Financial 1997 200,004 200,000 -- -- -- 8,979
Officer
___________________________
(1) With respect to Ms. Bradley, the indicated amount represents expenses
related to her relocation to the Company's headquarters in
East Greenville, Pennsylvania.
(2) On February 29, 1996, Messrs. Staniar, Lynch and Cogan and Ms. Bradley
were granted 941,829, 941,829, 376,731 and 188,365 shares of vested and
unvested restricted stock, respectively. On August 20, 1996, Mr. Purdom
was granted 282,548 shares of unvested restricted stock. Holders of
shares of restricted stock are not entitled to receive dividends until
such shares vest and become unrestricted. As of March 30, 2000, 100% of
the shares granted to each of Messrs. Staniar, Lynch and Cogan had
vested; 80% of the shares granted to Ms. Bradley had vested and an
additional 20% will vest on March 1, 2001; and 60% of the shares granted
to Mr. Purdom had vested and an additional 20% will vest on August 20,
2000. Mr. Purdom has advised the Company that he intends to resign
effective August 31, 2000. At December 31, 1999, Messrs. Staniar,
Lynch, Cogan and Purdom and Ms. Bradley held 94,183, 94,183, 75,347,
113,021 and 75,346 shares of unvested restricted stock, respectively,
having values of $1,198,950, $1,198,950, $959,167, $1,438,757 and
$959,155, respectively. These values were based on an estimated fair
value of $12.73 per share of Knoll common stock. Such fair value was
based on an independent appraisal and reflects a discount for the lack
of marketability of the common stock as a private company and the
controlling interest by Warburg.
(3) Represents the aggregate number of shares of common stock subject to
options granted to the Named Executive Officers.
(4) Amounts in this column represent the Company's matching contributions to
the Knoll, Inc. Retirement Savings Plan and the payment by the Company
of premiums in respect of term life insurance.
24
Stock Option Grants Table
The following table sets forth information concerning individual grants of
options to purchase common stock made to Named Executive Officers during 1999.
Number of % of Total
Securities Options Per Share
Underlying Granted to Per Share Grant Date
Options Employees Exercise Expiration Present
Name Granted (1) in 1999 Price Date Value (2)
----------------------- ----------- ---------- --------- ---------- ----------
Burton B. Staniar...... 150,000 6.5% $28.00 11/04/09 $ -0-
John H. Lynch.......... 300,000 13.0 28.00 11/04/09 -0-
Kathleen G. Bradley.... 200,000 8.7 28.00 11/04/09 -0-
Andrew B. Cogan........ 200,000 8.7 28.00 11/04/09 -0-
Douglas J. Purdom...... 40,000 1.7 28.00 11/04/09 -0-
_______________________
(1) Options were granted to each of the Named Executive Officers on
November 4, 1999. Such options will vest in installments as
follows: 30% on November 4, 2000, 20% on each of November 4, 2001
and 2002 and 30% on November 4, 2003.
(2) The per share grant date present value was estimated using a
minimum value method, which does not consider volatility of the
Company's stock. Such method was deemed appropriate as the
Company's common stock was not publicly traded at the date of
grant. The present value of the options under the minimum value
method was calculated using a grant date fair value of $10.92 per
share of Knoll common stock, which was based upon an independent
appraisal, as well as the following assumptions: risk-free
interest rate of 6.5%, dividend yield of zero and an expected life
of 7 years.
Aggregate Stock Option Exercise Table
The following table sets forth information regarding the exercise of options by
the Named Executive Officers during 1999. The table also shows the number and
value of unexercised options that were held by the Named Executive Officers on
December 31, 1999. As of December 31, 1999, based on an independent appraised
fair value of $12.73 per share of Knoll common stock, none of the options held
by the Named Executive Officers were in the money.
Number of Securities
Number of Underlying Value of Unexercised
Shares Unexercised Options In-the-Money
Acquired on Value Exercisable / Options Exercisable
Name Exercise Realized Unexercisable / Unexercisable
----------------------- ----------- ---------- -------------------- --------------------
Burton B. Staniar...... N/A N/A -0- / 150,000 $ -0- / -0-
John H. Lynch.......... N/A N/A -0- / 300,000 -0- / -0-
Kathleen G. Bradley.... N/A N/A 75,346 / 313,019 -0- / -0-
Andrew B. Cogan........ N/A N/A 14,000 / 221,000 -0- / -0-
Douglas J. Purdom...... N/A N/A -0- / 40,000 -0- / -0-
25
Pension Plans
The Knoll, Inc. Pension Plan (the "Company Pension Plan") provides eligible
employees with retirement benefits based on a career average compensation
formula. The formula for computing normal retirement benefits under this
plan is 1.55% of career compensation divided by twelve. Once a participant
accumulates five years of vesting service, he or she can take early retirement
anytime after reaching age 55. Accrued normal retirement benefit is reduced
6% per year prior to normal retirement age. The minimum benefit earned for
any year of participation in the plan is $300 ($25 per month), prorated for the
partial years worked during the first and last years of employment. As of
December 31, 1999, the estimated annual benefits payable upon normal retirement
under the Company Pension Plan for each of the Named Executive Officers was as
follows: Mr. Staniar ($9,378); Mr. Lynch ($9,378); Ms. Bradley ($9,378);
Mr. Cogan ($9,378); and Mr. Purdom ($8,581).
Remuneration covered by the Company Pension Plan primarily includes salary and
bonus, as set forth in the Summary Compensation Table. As of December 31,
1999, each of Messrs. Staniar, Lynch and Cogan and Ms. Bradley had 3.83 years
of credited service and Mr. Purdom had 3.36 years of credited service.
Director Compensation
From May 9, 1997 through November 3, 1999, the period during which the
Company's common stock was publicly registered and traded, the Company had two
directors, John W. Amerman and Robert J. Dolan, who were not employees or
officers of the Company or Warburg. Such directors were paid a fee of $1,000
for each board meeting attended and were reimbursed for certain expenses
incurred in connection with their attendance at board and committee meetings.
Other than with respect to reimbursement of expenses, directors who are
employees or officers of the Company or Warburg do not receive additional
compensation for services as a director.
During 1999, the Company's Board of Directors appointed a Special Committee,
consisting of Messrs. Amerman and Dolan, to determine the advisability and
fairness to the Company's stockholders of the merger proposal. In lieu of the
standard fee paid to directors for serving on a committee of the Board of
Directors, each of the members of the Special Committee was paid a one-time
fee of $75,000 for serving on the Special Committee. In addition, the Company
paid all of the fees and expenses of the Special Committee's financial and
legal advisors and reimbursed the members of the Special Committee for all of
their out-of-pocket travel expenses and other expenses incurred in connection
with each member's service on the Special Committee. The Board of Directors
determined that the Company shall, in consideration of the service of the
members of the Special Committee thereon, indemnify and hold harmless each
member of the Special Committee against any and all liabilities and expenses
(including without limitation reasonable legal fees and expenses) arising in
connection with such service, to the fullest extent permitted by the Company's
certificate of incorporation and bylaws, as currently in effect.
Each of the members of the Special Committee, Messrs. Amerman and Dolan,
became a director of the Company in May 1997, when the Company completed its
initial public offering and listed its stock on the NYSE, which requires listed
companies to have at least two independent directors. On May 10, 1997, each
was granted options to purchase 25,000 shares of Knoll common stock at $17.00
per share (the price to the public in Knoll's initial public offering) under
Knoll's 1997 stock incentive plan. The option agreements provided that 20%
would vest immediately upon grant and an additional 20% would vest on May 10 of
each of the following four years. Under the 1997 stock incentive plan, the
Company's stock option committee has discretionary authority to accelerate the
vesting of options granted under the plan.
Prior to consummation of the merger in 1999, Messrs. Amerman and Dolan informed
the Company that they did not wish to continue to serve as directors of Knoll
following completion of the merger, since Knoll would no longer be a public
company and the principal reason for their election to the Board of Directors
would cease to exist. Messrs. Amerman and Dolan also informed the Company that
they did not believe it would be appropriate for them to participate in any
future increase or decrease in the value of Knoll common stock following the
completion of the merger, and that, to be treated similarly to the public
holders other than Warburg and certain
26
members of Knoll management, they wished to have their options terminate upon
the completion of the merger and to receive cash in the amount of the excess of
the merger consideration per share over the per share exercise price of the
options. Accordingly, the Company's Stock Option Committee accelerated the
vesting of 10,000 unvested options held by each of Messrs. Amerman and Dolan,
and the Company paid each of them $275,000 immediately upon completion of
the merger.
Employment Agreements
The Company has entered into employment agreements with Burton B. Staniar, the
Company's Chairman of the Board, John H. Lynch, the Company's Chief Executive
Officer, and Andrew B. Cogan, the Company's Chief Operating Officer, for terms
which expired on March 1, 1999 and were each renewed pursuant to automatic one-
year extensions. The agreements with Messrs. Staniar and Lynch provide for a
base salary of $400,000, with a service bonus of 25% of base salary at the end
of each calendar year, and a target annual bonus of up to 125% of base salary
based on the attainment of targets set by the Board of Directors. The
agreement with Mr. Cogan was amended as of December 4, 1999 to provide for a
base salary of $300,000. Mr. Cogan's agreement also provides for a target
annual bonus of up to 100% of base salary based on the attainment of goals and
objectives set by the Board of Directors. At the request of Mr. Staniar, his
employment agreement was amended and restated as of January 1, 2000 to reduce
each of his base salary and time commitment by 50%. The employment agreements
of Messrs. Staniar, Lynch and Cogan will continue to renew automatically each
January 1, March 1 and March 1, respectively, unless either party gives 60 days
notice not to renew. The agreements may be terminated at any time by the
Company, but if so terminated without "cause," or if the Company fails to renew
the agreements, the Company must pay the employee 125% of one year's base
salary (100% of base salary in the case of Mr. Cogan). The agreements also
contain non-compete, non-solicitation (during the term of the agreement and
for one year thereafter) and confidentiality provisions.
In addition, the Company has entered into a Letter Agreement, dated August 13,
1996, with Douglas J. Purdom. This agreement sets forth the initial starting
salary, target bonus and stock grants to Mr. Purdom. Mr. Purdom's agreement
provides that upon a "change of control" of the Company during the term of the
agreement, following which Mr. Purdom is terminated for reasons unrelated to
his performance, Mr. Purdom shall receive one year of base salary as severance
in satisfaction of any claims he may have against the Company. For purposes
of Mr. Purdom's agreement, "change of control" means the sale of all or
substantially all of the stock or assets of the Company to a party unrelated
with Warburg and shall not mean the public offering of the stock of the Company
or any related entity.
Compensation Committee Interlocks and Insider Participation
During the year ended December 31, 1999, the base compensation of Messrs.
Staniar, Lynch, Cogan and Purdom was determined pursuant to employment
agreements between such officers and the Company. See "Employment
Agreements." Except as otherwise described herein, the 1999 compensation of
each of Messrs. Staniar, Lynch, Cogan, Purdom and Ms. Bradley was determined by
the Compensation Committee of the Board of Directors, which was comprised of
Messrs. Amerman, Harris and Lapidus from January 1, 1999 until November 4, 1999
and was comprised of Messrs. Harris, Lapidus and Lynch on and after November 4,
1999. Mr. Lynch abstained from actions regarding the 1999 incentive
compensation of Messrs. Staniar and Lynch.
The Compensation Committee and the Stock Option Committee of the Board of
Directors were formed on July 22, 1997, shortly after the completion of the
Company's initial public offering in May of 1997. At that time, the Board of
Directors adopted a charter for each committee and named Messrs. Amerman and
Dolan as the Stock Option Committee members. Prior to July 22, 1997, all
grants of common stock and options under the Company's 1996 and 1997 stock
incentive plans were made at the discretion of a Stock Plan Committee of the
Board of Directors comprised of Burton B. Staniar and Jeffrey A. Harris.
On September 9, 1999, the Stock Option Committee was reconstituted in light of
the proposed merger transaction to have Messrs. Staniar, Lynch, Cogan, Harris,
Lapidus, Lee and Schacht as its members. On November 4, 1999, the Board of
Directors reconstituted the Stock Option Committee by appointing Messrs.
Harris, Lapidus and Lynch as its members. On November 4, 1999, the Stock
Option Committee made grants of 1,870,500 options to employees of the
27
Company, including grants to Messrs. Staniar, Lynch, Cogan and Purdom and Ms.
Bradley. Except for Messrs. Staniar, Lynch and Cogan and Ms. Bradley, no
member of the Board of Directors is or has been an officer or employee of the
Company.
During the year ended December 31, 1999, no executive officer of the Company
served on any board of directors or compensation committee of any entity
(other than the Company) with which any member of the Board of Directors is
affiliated.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's common stock, as of March 30, 2000, by (i) each
person known by the Company to own beneficially more than 5% of the outstanding
common stock, (ii) each of the Company's directors, (iii) each of the Named
Executive Officers of the Company, and (iv) all directors and executive
officers of the Company, as a group (16 persons). Except as set forth in the
table, the business address of each person is 1235 Water Street, East
Greenville, PA 18041. The information set forth in the table and the notes
thereto is based solely upon information provided to the Company directly by
such stockholders. As described in the notes to the table, voting and/or
dispositive power with respect to certain common stock is shared by the named
individuals or entities. In these cases, such shares are shown as beneficially
owned by each of those sharing voting and/or dispositive power.
Number of Shares of
Beneficial Owner (1) Common Stock (2) Percentage
---------------------------------- ------------------- --------------
Warburg, Pincus & Co. (3)
466 Lexington Avenue
New York, New York 10017...... 20,981,956 91.8%
Burton B. Staniar................. 665,239 2.9
John H. Lynch .................... 456,444 2.0
Kathleen G. Bradley............... 150,692 *
Andrew B. Cogan................... 209,122 *
Douglas J. Purdom................. 80,491 *
Jeffrey A. Harris (4)............. 20,981,956 91.8
Sidney Lapidus (4)................ 20,981,956 91.8
Kewsong Lee (4)................... 20,981,956 91.8
Lloyd Metz........................ -- --
Henry B. Schacht (4) (5).......... 20,991,956 91.8
All directors and executive
officers as a group
(16 persons).................... 22,678,063 98.5
__________________________
* Less than 1%.
(1) Percentages are calculated pursuant to Rule 13d-3 under the
Exchange Act. Percentage calculations assume, for each person and
group, that all restricted shares that vest within 60 days
following March 30, 2000 and all shares that may be acquired by
such person or group pursuant to options currently exercisable or
that become exercisable within 60 days following March 30, 2000 are
outstanding for the purpose of computing the percentage of common
stock owned by such person or group. However, those unvested and
unissued shares of common stock described above are not deemed to
be outstanding for calculating the percentage of common stock owned
by any other person. Except as otherwise indicated, the persons in
this table have sole voting and investment power with respect to
all shares of common stock shown as beneficially owned by them,
subject to community
28
property laws where applicable and subject to the information
contained in the footnotes to this table. The number of shares
outstanding for these purposes as of March 30, 2000 consists of
22,861,247 shares of common stock (excluding 423,851 restricted
shares that have not yet vested).
(2) Excludes 37,673, 113,021 and 221,338 restricted shares of common
stock for Ms. Bradley, Mr. Purdom and all directors and executive
officers as a group, respectively, which will not vest within 60
days of March 30, 2000, as well as options to purchase 150,000,
300,000, 221,000, 40,000, 15,000, 275,346 and 1,355,346 shares of
common stock held by Messrs. Staniar, Lynch, Cogan, Purdom, and
Schacht, Ms. Bradley and all directors and executive officers as
a group, respectively, which will not vest within 60 days of
March 30, 2000.
(3) Warburg directly owns 20,709,922 shares of common stock and Warburg,
Pincus directly owns an additional 272,034 shares. The sole general
partner of Warburg is Warburg, Pincus. E.M. Warburg manages
Warburg. The members of E.M. Warburg are substantially the same as
the partners of Warburg, Pincus. Lionel I. Pincus is the managing
partner of Warburg, Pincus and the managing member of E.M. Warburg
and may be deemed to control both Warburg, Pincus and E.M. Warburg.
Warburg, Pincus has a 15% interest in the profits of Warburg as the
general partner. Jeffrey A. Harris, Sidney Lapidus, Kewsong Lee and
Henry B. Schacht, directors of the Company, are Managing Directors
and members of E.M. Warburg and general partners of Warburg, Pincus.
As such, Messrs. Harris, Lapidus Lee and Schacht may be deemed to
have an indirect pecuniary interest (within the meaning of Rule
16a-1 under the Exchange Act) in an indeterminate portion of the
shares beneficially owned by Warburg. See Note 4 below.
(4) 20,709,922 and 272,034 of the shares indicated as owned by Messrs.
Harris, Lapidus, Lee and Schacht are owned directly by Warburg and
Warburg, Pincus, respectively, and are included because of the
affiliation of such persons with Warburg and Warburg, Pincus.
Messrs. Harris, Lapidus, Lee and Schacht disclaim "beneficial
ownership" of these shares within the meaning of Rule 13d-3 under
the Exchange Act. See Note 3 above.
(5) Includes 10,000 shares of common stock underlying stock options
granted to Mr. Schacht on December 2, 1998 in connection with his
appointment as a director of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Stockholders Agreement
Warburg and 4 senior members of management (each a "Holder" and collectively,
the "Holders") and the Company are parties to an Amended and Restated
Stockholders Agreement (the "Stockholders Agreement"), dated as of November 4,
1999, which governs certain matters related to corporate governance and
registration of shares of common stock ("Registrable Securities") held by such
Holders (other than shares acquired pursuant to the Company's stock incentive
plans).
Pursuant to the Stockholders Agreement, Warburg is entitled to request at any
time that the Company file a registration statement under the Securities Act
covering the sale of at least $25 million of shares of common stock, subject to
certain conditions. If officers or directors of the Company holding other
securities of the Company request inclusion of their securities in any such
registration, or if holders of securities of the Company other than Registrable
Securities who are entitled, by contract with the Company or otherwise, to
have securities included in such a registration (the "Other Stockholders"),
request such inclusion, the Holders shall offer to include the securities of
such officers, directors and Other Stockholders in any underwriting involved
in such registration, provided, among other conditions, that the underwriter
representative of any such offering has the right, subject to certain
conditions, to limit the number of Registrable Securities included in the
registration. The Company may defer the registration for 120 days if it
believes that it would be seriously detrimental to the Company for such
registration statement to be filed.
29
The Stockholders Agreement further provides that, if the Company proposes
to register any of its securities (other than registrations related solely to
employee benefit plans or pursuant to Rule 145 or on a form which does
not permit secondary sales or does not include substantially the same
information as would be required to be included in a registration statement
covering the sale of Registrable Securities), either for its own account or for
the account of other security holders, holders of Registrable Securities may
require the Company to include all or a portion of their Registrable
Securities in the registration and in any underwriting involved therein,
provided, among other conditions, that the underwriter representative of any
such offering has the right, subject to certain conditions, to limit the number
of Registrable Securities included in the registration. In addition, after the
Company becomes qualified to use Form S-3, the holders of Registrable
Securities will have the right to request an unlimited number of registrations
on Form S-3 to register at least $5 million of such shares, subject to certain
conditions, provided that the Company will not be required to effect such a
registration within 180 days of the effective date of the most recent
registration pursuant to this provision. During 1999, certain members of the
Company's management exercised their right under the Stockholders Agreement to
register 1,384,858 shares of common stock in order to sell prior to the merger
up to such number of shares either pursuant to such registration or under Rule
144 under the Securities Act. These members of the Company's management
exercised such right because they were not entitled to receive the merger
consideration pursuant to the terms of the Amended and Restated Agreement and
Plan of Merger by and between Warburg and Knoll, dated as of July 29, 1999.
In general, all fees, costs and expenses of such registrations (other than
underwriting discounts and selling commissions applicable to sales of the
Registrable Securities) and all fees and disbursements of counsel for the
Holders will be borne by the Company.
The Stockholders Agreement provides that the Board of Directors of the Company
shall initially be comprised of Messrs. Staniar, Lynch, Cogan, Lapidus, Harris,
Lee, Metz and Schacht, and Ms. Bradley. Pursuant to the Stockholders
Agreement, Warburg and the other stockholders who are a party thereto (who hold
in the aggregate a majority of the outstanding shares of common stock) have
agreed to nominate and use their best efforts to have elected (i) that number
of persons designated by Warburg as shall constitute a majority of the Board
(or, at Warburg's irrevocable election, as shall constitute one director less
than a majority of the Board), (ii) four directors nominated by Warburg if
Warburg owns 25% or more of the Company's outstanding shares of common stock,
(iii) three directors if it owns 15% or more and (iv) two directors if it owns
5% or more.
Issuance of Restricted Shares of Common Stock
In connection with the issuance of 4,144,030 restricted shares of common stock
pursuant to the Company's 1996 stock incentive plan, Warburg and the Company
also entered into a separate Stockholders Agreement with all of the Company's
executive officers and other members of the Company's management. This
Stockholders Agreement was amended and restated as of November 4, 1999.
Pursuant to these agreements, persons deemed to be "insiders" within the
meaning of Section 16 of the Exchange Act have agreed not to transfer their
shares except (i) to members of their immediate families and other related or
controlled entities, (ii) to Warburg or an affiliate thereof or (iii) after an
initial public offering, upon 30 days prior written notice to the Board of
Directors. The restrictions on transfer will terminate when Warburg owns less
than 10% of the outstanding shares of common stock. In addition, pursuant to
these agreements, the Company agreed that, if the Company determined to
register any shares of common stock for its own account or for the account of
security holders, the Company would include in such registration certain vested
shares of common stock received by management pursuant to the 1996 stock
incentive plan, subject to certain limited exceptions. In addition, management
may request unlimited registrations of at least $5,000,000 of securities on
Form S-3, provided that the Company is not required to effect a registration
pursuant to this provision within 180 days of the effective date of the most
recent registration pursuant to this provision.
Pursuant to the 1996 stock incentive plan, the Company also entered into
Restricted Share Agreements with each recipient of restricted shares of common
stock, including each of the Company's executive officers. Pursuant to these
agreements, Mr. Staniar received 941,829 restricted shares, Mr. Lynch received
941,829 restricted shares, Ms. Bradley received 188,365 restricted shares,
Mr. Cogan received 376,731 restricted shares and Mr. Purdom received 282,548
restricted shares. The agreements for each recipient other than Mr. Purdom
were dated
30
February 29, 1996, and Mr. Purdom's agreement was dated August 20, 1996. The
agreements were amended and restated as of March 6, 2000, except for the
agreements with Messrs. Staniar and Lynch. The amended and restated agreements
provide that upon the voluntary termination of employment for reasons other
than death, disability or retirement at age 65, or (except in the case of
Messrs. Staniar and Lynch) if the grantee's employment was terminated without
cause, the nonvested restricted shares (except for shares that were vested
prior to the merger) are to be immediately forfeited to the Company. With
respect to Messrs. Staniar, Lynch and Cogan, 100% of the shares granted have
vested. With respect to Ms. Bradley, 80% of the shares granted have vested
and the remaining unvested shares will vest on March 1, 2001. With respect to
Mr. Purdom, 60% of the shares granted have vested and an additional 20% will
vest on August 20, 2000. Mr. Purdom has advised the Company that he intends to
resign effective August 31, 2000.
Other
During the year ended December 31, 1999, the Company paid approximately
$323,000 to Emanuela Frattini Magnusson for design services and product
royalties, the bulk of which was payable pursuant to the terms of a July
1993 Design Development Agreement between Emanuela Frattini and the Company
pertaining to the Company's PROPELLER product line. Emanuela Frattini
Magnusson is the wife of Carl G. Magnusson, the Company's Senior Vice
President--Design.
31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of the report:
(1) CONSOLIDATED FINANCIAL STATEMENTS
The Consolidated Financial Statements of the Company are listed in the
Table of Contents for the Financial Statements beginning on page F-1
of this Form 10-K.
(2) FINANCIAL STATEMENT SCHEDULES
Financial Statement Schedule II--Valuation and Qualifying Accounts is
filed with this Form 10-K on page S-1 of this Form 10-K. All other
schedules for which provision is made in the applicable regulation of
the Commission are not required under the related instructions or are
inapplicable and therefore have been omitted.
(3) EXHIBITS
Exhibit
Number Description
--------- ---------------------------------------------------------------------------
2+++ Amended and Restated Agreement and Plan of Merger by and between
Warburg, Pincus Ventures, L.P. and Knoll, Inc., dated as of July 29, 1999.
3.1*** Amended and Restated Certificate of Incorporation of the Company.
3.2*** Amended and Restated By-Laws of the Company.
10.1* Stock Purchase Agreement, dated as of December 20, 1995, by and between
Westinghouse and T.K.G. Acquisition Corp.
10.2++++ Credit Agreement, dated as of October 20, 1999, by and among the
Company, the Guarantors (as defined therein), the Lenders (as defined
therein), Bank of America, N.A., as Administrative Agent, the Chase
Manhattan Bank, as Syndication Agent, and Merrill Lynch & Co., Merrill
Lynch, Pierce, Fenner & Smith Incorporated, as Documentation Agent.
10.3* 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++ Letter Agreement between Oak Hill Securities Fund, L.P. and the
Company, dated August 13, 1999.
10.7+ Supplemental Indenture No. 3, dated as of November 4, 1999, by and
among the Company, the Guarantors (as defined therein), and The Bank
of New York, as trustee, relating to the Company's 10.875% Senior
Subordinated Notes due 2006.
32
Exhibit
Number Description
--------- ---------------------------------------------------------------------------
10.8 Amended and Restated Employment Agreement, dated as of January 1, 2000,
between the Company and Burton B. Staniar.
10.9** Employment Agreement, dated as of February 29, 1996, between T.K.G.
Acquisition Corp. and John H. Lynch.
10.10** Employment Agreement, dated as of February 29, 1996, between T.K.G.
Acquisition Corp. and Andrew B. Cogan.
10.11*** Amendment to Employment Agreement, dated as of April 30, 1997, between
the Company and Andrew B. Cogan.
10.12**** Amendment #2 to Employment Agreement, dated as of August 1, 1998,
between the Company and Andrew B. Cogan.
10.13 Amendment #3 to Employment Agreement, dated as of December 4, 1999,
between the Company and Andrew B. Cogan.
10.14**** Letter Agreement between the Company and Douglas J. Purdom, dated
August 13, 1996.
10.15 Amended and Restated Stockholders Agreement, dated as of November 4, 1999,
among the Company, Warburg, Pincus Ventures, L.P., and the signatories
thereto.
10.16 Amended and Restated Stockholders Agreement (Common Stock Under Stock
Incentive Plans), dated as of November 4, 1999, among the Company,
Warburg, Pincus Ventures, L.P., and the signatories thereto.
10.17 Amended and Restated Knoll, Inc. 1996 Stock Incentive Plan.
10.18 Amended and Restated Knoll, Inc. 1997 Stock Incentive Plan.
10.19 Knoll, Inc. 1999 Stock Incentive Plan.
10.20 Form of Non-Qualified Stock Option Agreement Under the Knoll, Inc.
1999 Stock Incentive Plan, entered into by the Company and certain
executive officers.
10.21*** 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.
27 Financial Data Schedule
(b) Current Reports on Form 8-K:
On October 22, 1999, the Company filed a report on Form 8-K dated October
20, 1999. In that Form 8-K under Item 5 -- Other Events, the Company
reported that (i) it entered into a credit agreement between the Company,
each of the Company's domestic subsidiaries as guarantors, certain lenders
identified therein (the "Lenders"), Bank of America, N.A., as
Administrative Agent, The Chase Manhattan Bank, as Syndication Agent, and
Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated,
as Documentation Agent and (ii) the stockholders approved the then-pending
merger transaction in which the Company's public stockholders would receive
$28.00 in cash for each share of Knoll common stock owned by them. The
credit agreement dated October 20, 1999 was included as an exhibit to the
Form 8-K.
On November 5, 1999, the Company filed a report on Form 8-K dated
November 4, 1999. In that Form 8-K under Item 5 -- Other Events, the
Company reported the following: (i) its November 4, 1999 press release
that announced the closing of the merger of a newly formed entity with and
into the Company, whereby all of the common stock held by the Company's
public stockholders was converted into the right to receive $28.00 per
share in cash, (ii) its November 3, 1999 press release that announced the
Delaware Chancery Court had approved the settlement of litigation
challenging the merger, (iii) as a result of the merger, the Company's
common stock was being delisted from the NYSE and the Company would
promptly file to deregister its common stock under the Exchange Act and
(iv) it was refiling the credit agreement dated as of October 20,
33
1999, between the Company, each of the Company's domestic subsidiaries,
certain lenders identified therein (the "Lenders"), Bank of America, N.A.,
as Administrative Agent, The Chase Manhattan Bank, as Syndication Agent,
and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, as Documentation Agent. The aforementioned press releases
and credit agreement were included as exhibits to the Form 8-K.
On December 12, 1999, the Company filed a report on Form 8-K dated
December 2, 1999. In that Form 8-K under Item 5 -- Other Events, the
Company reported its December 2, 1999 press release regarding the promotion
of Andrew B. Cogan to chief operating officer and Kathleen G. Bradley to
president.
- -----------------------------------------
* Incorporated by reference to the Company's Registration Statement on
Form S-4 (File No. 333-2972), which was declared effective by the
Commission on June 12, 1996.
** Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996.
*** Incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 333-23399), which was declared effective by the
Commission on May 9, 1997.
**** Incorporated by reference to the Company's Annual Report on Form 10-K,
and the amendments thereto, for the year ended December 31, 1998.
+ Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1999.
++ Incorporated by reference to the Company's Amendment No. 1 to Schedule
13E-3, which was filed with the Commission on September 10, 1999.
+++ Incorporated by reference to the Company's Definitive Proxy Statement
on Schedule 14A, which was filed with the Commission on September 30,
1999.
++++ Incorporated by reference to the Company's Form 8-K dated November 4,
1999, which was filed with the Commission on November 5, 1999.
34
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 2000.
KNOLL, INC.
By: /s/ Burton B. Staniar
-----------------------
Burton B. Staniar
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report on Form 10-K has been signed by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
/s/ Burton B. Staniar Chairman of the Board March 30, 2000
- ---------------------------
Burton B. Staniar
/s/ John H. Lynch Chief Executive Officer March 30, 2000
- --------------------------- and Director
John H. Lynch (Principal Executive Officer)
/s/ Kathleen G. Bradley President and Director March 30, 2000
- ---------------------------
Kathleen G. Bradley
/s/ Andrew B. Cogan Chief Operating Officer March 30, 2000
- --------------------------- and Director
Andrew B. Cogan
/s/ Douglas J. Purdom Chief Financial Officer March 30, 2000
- --------------------------- (Principal Financial Officer)
Douglas J. Purdom
/s/ Barry L. McCabe Controller March 30, 2000
- --------------------------- (Principal Accounting Officer)
Barry L. McCabe
/s/ Jeffrey A. Harris Director March 30, 2000
- ---------------------------
Jeffrey A. Harris
/s/ Sidney Lapidus Director March 30, 2000
- ---------------------------
Sidney Lapidus
/s/ Kewsong Lee Director March 30, 2000
- ---------------------------
Kewsong Lee
/s/ Lloyd Metz Director March 30, 2000
- ---------------------------
Lloyd Metz
/s/ Henry B. Schacht Director March 30, 2000
- ---------------------------
Henry B. Schacht
35
KNOLL, INC.
TABLE OF CONTENTS FOR THE FINANCIAL STATEMENTS
Page
------
Report of Independent Auditors........................................ F-2
Consolidated Balance Sheets at December 31, 1999 and 1998............. F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997................................... F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997................................... F-5
Consolidated Statements of Changes in Stockholders' Equity
(Deficit) for the Years Ended December 31, 1999, 1998 and 1997..... F-6
Notes to the Consolidated Financial Statements........................ F-7
Financial Statement Schedule II--Valuation and Qualifying Accounts.... S-1
F-1
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Knoll, Inc.
We have audited the accompanying consolidated balance sheets of Knoll, Inc.
as of December 31, 1999 and 1998, and the related consolidated statements of
operations, changes in stockholders' equity (deficit), and cash flows for each
of the three years in the period ended December 31, 1999. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Knoll, Inc. at
December 31, 1999 and 1998, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December
31, 1999, in conformity with accounting principles generally accepted in the
United States. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
February 1, 2000
F-2
KNOLL, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(Dollars In Thousands, Except Per Share Data)
1999 1998
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents......................... $ 10,785 $ 17,465
Restricted cash (Note 4).......................... 7,776 --
Customer receivables, net......................... 167,767 137,956
Inventories....................................... 82,738 77,113
Deferred income taxes............................. 22,440 21,067
Prepaid and other current assets.................. 7,720 9,842
-------- --------
Total current assets.......................... 299,226 263,443
Property, plant and equipment, net................ 184,641 186,167
Intangible assets, net............................ 254,957 260,043
Other noncurrent assets........................... 3,482 4,374
-------- --------
Total Assets.................................. $742,306 $714,027
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt.............. $ 17,500 $ 10,000
Accounts payable.................................. 72,914 59,551
Income taxes payable.............................. 3,483 7,096
Other current liabilities......................... 101,242 91,756
-------- --------
Total current liabilities..................... 195,139 168,403
Long-term debt.................................... 592,876 159,255
Deferred income taxes............................. 18,956 10,678
Postretirement benefits other than pension........ 18,426 18,450
Other noncurrent liabilities...................... 11,103 13,391
-------- --------
Total liabilities............................. 836,500 370,177
-------- --------
Stockholders' equity (deficit):
Common stock, $0.01 par value; authorized
100,000,000 shares; 23,289,898 shares issued
and outstanding (net of 1,000 treasury
shares) in 1999 and 41,799,499 shares issued
and outstanding (net of 1,707,700 treasury
shares) in 1998................................. 233 418
Additional paid-in-capital........................ 4,173 181,792
Unearned stock grant compensation................. (433) (712)
Retained earnings (deficit)....................... (91,328) 170,986
Accumulated other comprehensive income............ (6,839) (8,634)
-------- --------
Total stockholders' equity (deficit).......... (94,194) 343,850
-------- --------
Total Liabilities and Stockholders'
Equity (Deficit)............................ $742,306 $714,027
======== ========
See accompanying notes to the consolidated financial statements.
F-3
KNOLL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(In Thousands)
1999 1998 1997
---------- ---------- ----------
Sales..................................... $984,511 $948,691 $810,857
Cost of sales............................. 593,442 572,756 489,962
-------- -------- --------
Gross profit.............................. 391,069 375,935 320,895
Selling, general and administrative
expenses................................ 206,919 204,392 183,018
-------- -------- --------
Operating income.......................... 184,150 171,543 137,877
Interest expense.......................... 21,611 16,860 25,075
Recapitalization expense (Note 4)......... 6,356 -- --
Other income (expense), net............... (670) 2,732 1,667
-------- -------- --------
Income before income tax expense and
extraordinary item...................... 155,513 157,415 114,469
Income tax expense........................ 66,351 64,371 48,026
-------- -------- --------
Income before extraordinary item.......... 89,162 93,044 66,443
Extraordinary loss on early
extinguishment of debt, net of
taxes (Note 10)......................... 10,801 -- 5,337
-------- -------- --------
Net income................................ $ 78,361 $ 93,044 $ 61,106
======== ======== ========
See accompanying notes to the consolidated financial statements.
F-4
KNOLL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(In Thousands)
1999 1998 1997
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................ $ 78,361 $ 93,044 $ 61,106
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation........................ 25,135 28,686 25,082
Amortization of intangible assets... 7,873 7,816 8,041
Recapitalization expense............ 6,356 -- --
Extraordinary loss, net of taxes.... 10,801 -- 5,337
Other noncash items................. 7,748 (1,636) 240
Changes in assets and liabilities:
Customer receivables............ (31,134) (15,184) (12,176)
Inventories..................... (6,364) (9,061) (11,381)
Accounts payable................ 13,848 (6,452) 18,052
Current and deferred income
taxes......................... 13,715 591 19,397
Other current assets............ (166) (237) 1,674
Other current liabilities....... 2,038 13,547 12,849
Other noncurrent assets and
liabilities................... (224) 3,449 7,041
--------- -------- --------
Cash provided by operating activities..... 127,987 114,563 135,262
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures...................... (25,095) (36,390) (33,080)
Proceeds from sale of assets.............. 114 152 164
--------- -------- --------
Cash used in investing activities......... (24,981) (36,238) (32,916)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from (repayment of) revolving
credit facility, net.................... 120,000 (38,000) (79,000)
Proceeds from long-term debt.............. 325,000 201 --
Repayment of long-term debt............... (3,750) -- (67,988)
Payment of debt issuance costs............ (7,864) -- --
Payment of consent fee on Senior
Subordinated Notes...................... (12,870) -- --
Premium paid for early extinguishment
of debt................................. -- -- (5,775)
Net proceeds from issuance of stock....... 4,746 4,813 133,559
Redemption of preferred stock............. -- -- (80,000)
Purchase of common stock.................. (28,703) (38,849) --
Payment of merger consideration........... (496,682) -- --
Payment of recapitalization costs......... (8,843) -- --
--------- -------- --------
Cash used in financing activities......... (108,966) (71,835) (99,204)
--------- -------- --------
Effect of exchange rate changes on cash
and cash equivalents.................... (720) 185 (1,156)
--------- -------- --------
Increase (decrease) in cash and cash
equivalents............................. (6,680) 6,675 1,986
Cash and cash equivalents at beginning
of period............................... 17,465 10,790 8,804
--------- -------- --------
Cash and cash equivalents at end
of period............................... $ 10,785 $ 17,465 $ 10,790
========= ======== ========
See accompanying notes to the consolidated financial statements.
F-5
KNOLL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(Dollars In Thousands)
Unearned Accumulated Total
Additional Stock Retained Other Stockholders'
Preferred Common Paid-In Grant Earnings Comprehensive Equity
Stock Stock Capital Compensation (Deficit) Income (Deficit)
--------- ------ ---------- ------------ ---------- -------------- -------------
Balance at December 31,
1996 (shares:
1,602,998 preferred
and 7,291,308 common)... $1,603 $ 73 $ 160,147 $(1,387) $ 16,836 $ 532 $ 177,804
Net income................ -- -- -- -- 61,106 -- 61,106
Foreign currency
translation adjustment.. -- -- -- -- -- (4,574) (4,574)
---------
Comprehensive income...... 56,532
---------
Shares issued for
consideration
(8,502,716 shares)...... -- 85 133,474 -- -- -- 133,559
800,000 preferred shares
redeemed for $80,000
and 11,749,361
common shares........... (800) 117 (79,317) -- -- -- (80,000)
802,998 preferred
shares converted into
15,691,558 common
shares.................. (803) 157 646 -- -- -- --
Earned stock grant
compensation............ -- -- -- 394 -- -- 394
------ ----- --------- ------- --------- ------- ---------
Balance at December 31,
1997.................... -- 432 214,950 (993) 77,942 (4,042) 288,289
---------
Net income................ -- -- -- -- 93,044 -- 93,044
Foreign currency
translation adjustment.. -- -- -- -- -- (4,592) (4,592)
---------
Comprehensive income...... 88,452
---------
Shares issued for
consideration:
Exercise of stock
options, including
tax benefit of $864
(196,647 shares).... -- 2 4,020 -- -- -- 4,022
Other (75,609 shares). -- 1 1,654 -- -- -- 1,655
Purchase of common stock
(1,707,700 shares)...... -- (17) (38,832) -- -- -- (38,849)
Earned stock grant
compensation............ -- -- -- 281 -- -- 281
------ ----- --------- ------- --------- ------- ---------
Balance at December 31,
1998.................... -- 418 181,792 (712) 170,986 (8,634) 343,850
---------
Net income................ -- -- -- -- 78,361 -- 78,361
Foreign currency
translation adjustment.. -- -- -- -- -- 1,795 1,795
---------
Comprehensive income...... 80,156
---------
Shares issued for
consideration:
Exercise of stock
options, including
tax benefit of $674
(244,798 shares).... -- 2 4,572 -- -- -- 4,574
Other (40,972 shares). -- -- 846 -- -- -- 846
Shares contributed to
the 401(k) Plan
(150,100 shares)........ -- 2 4,201 -- -- -- 4,203
Purchase of common stock
(1,188,000 shares)...... -- (12) (28,691) -- -- -- (28,703)
Shares forfeited under
stock incentive plan
(18,837 shares)......... -- -- -- 1 -- -- 1
Merger consideration
for shares canceled
(17,738,634 shares)..... -- (177) (155,830) -- (340,675) -- (496,682)
Recapitalization costs.... -- -- (2,717) -- -- -- (2,717)
Earned stock grant
compensation............ -- -- -- 278 -- -- 278
------ ----- --------- ------- --------- ------- ---------
Balance at December 31,
1999 (23,289,898
shares)................. $ -- $ 233 $ 4,173 $ (433) $ (91,328) $(6,839) $ (94,194)
====== ===== ========= ======= ========= ======= =========
See accompanying notes to the consolidated financial statements.
F-6
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
Knoll, Inc. and its subsidiaries (the "Company" or "Knoll") are engaged
in the design, manufacture and sale of office furniture products and
accessories, focusing on the middle to high-end segments of the contract
furniture market. The Company has operations in the United States
("U.S."), Canada and Europe and sells its products primarily through its
direct sales representatives and independent dealers.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements of the Company include the
accounts of Knoll, Inc. and its wholly owned subsidiaries. Intercompany
transactions and balances have been eliminated in consolidation.
The results of the European subsidiaries are reported and included in the
consolidated financial statements on a one-month lag to allow for the
timely presentation of consolidated information. The effect of this
presentation is not material to the financial statements.
Cash and Cash Equivalents
Cash and cash equivalents includes cash on hand and investments with
maturities of three months or less at the date of purchase.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
Property, Plant, Equipment and Depreciation
Property, plant and equipment are recorded at cost. Depreciation 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.
F-7
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
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.
Foreign Currency Translation
Results of foreign operations are translated into U.S. dollars using
average exchange rates during the period, while assets and liabilities are
translated into U.S. dollars using exchange rates in effect at the balance
sheet date. The resulting translation adjustments are recorded in, and
are the only component of, accumulated other comprehensive income.
Transaction gains and losses resulting from exchange rate changes on
transactions denominated in currencies other than the functional currency
are included in income in the year in which the change occurs.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), encourages entities to record
compensation expense for stock-based employee compensation plans at
fair value but provides the option of measuring compensation expense
using the intrinsic value method prescribed in Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"). The Company accounts for stock-based compensation in
accordance with APB 25. Pro forma results of operations as if SFAS 123
had been used to account for stock-based compensation plans are
presented in Note 18.
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 1998 and 1997 in the accompanying consolidated
financial statements have been reclassified to conform to the 1999
presentation.
Accounting Pronouncement Pending Adoption
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133), as
amended, which is required to be adopted in fiscal years beginning after
June 15, 2000. Because of the Company's limited use of derivatives,
management does not anticipate that the adoption of SFAS 133 will have
a significant effect on earnings or the financial position of the Company.
F-8
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
3. 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 Series A 12% Participating Convertible Preferred Stock
("Series A Preferred Stock") and (ii) to redeem an aggregate principal
amount of $57,750,000 of the Company's 10.875% Senior Subordinated
Notes due 2006 (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 800,000 shares
of Series A Preferred Stock were redeemed for $80,000,000 and 11,749,361
shares of common stock. Additionally, in connection with the IPO, another
802,998 shares of Series A Preferred Stock were converted into 15,691,558
shares of common stock.
4. RECAPITALIZATION (MERGER)
On March 23, 1999, the Company received a proposal from Warburg,
Pincus Ventures, L.P. ("Warburg") and certain members of Knoll management
regarding a recapitalization (merger) transaction whereby the Company
would acquire all of the outstanding shares of its common stock not owned
by Warburg and certain members of Knoll management for $25.00 per share.
The Board of Directors appointed a special committee, consisting of
independent members of the Board of Directors, to consider the proposed
merger. The special committee retained legal counsel and an investment
banker to assist in evaluating the proposed merger. The proposed merger
consideration was subsequently increased to $28.00 per share. On June 21,
1999, the Board of Directors, at the recommendation of the special
committee, approved the proposed merger at a price of $28.00 per share.
On that same day, Warburg and the Company entered into an agreement and
plan of merger, which was subsequently amended on July 29, 1999. On
October 20, 1999, the merger was approved by the holders of a majority of
the outstanding shares of Knoll common stock at the Company's 1999 annual
meeting of stockholders.
On August 13, 1999, the Company entered into an agreement with the holder
of a majority of its Senior Subordinated Notes. Under the agreement, the
majority holder consented to the merger and the related transactions, and
the Company agreed to pay such holder (and other holders of the Senior
Subordinated Notes who also consent), promptly after completion of the
merger, $120 per $1,000 principal amount of the Senior Subordinated Notes
owned by the holder. All other holders also provided their consent. See
Note 10 for further discussion of this transaction.
Eight class action complaints relating to the initial announcement of the
proposed merger were filed in March 1999. One complaint was voluntarily
dismissed and the seven remaining complaints were consolidated into a
single action. On June 21, 1999, the Company entered into a Memorandum
of Understanding with counsel to the plaintiffs in the lawsuits. The
Memorandum of Understanding provided for the settlement of such lawsuits
based on the payment of a per share merger consideration of $28.00. On
November 3, 1999, the proposed settlement of the litigation, as provided
for in the Memorandum of Understanding, was approved by the Delaware Court
of Chancery.
The merger of a newly formed entity, which was organized by Warburg,
with and into Knoll, with Knoll continuing as the surviving corporation,
was consummated on November 4, 1999. As a result of the merger,
17,738,634 shares of common stock held by the public stockholders of
Knoll immediately prior to
F-9
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
the merger were converted into the right to receive $28.00 per share in
cash and were canceled. Furthermore, the Company's common stock ceased
to be listed on the New York Stock Exchange, and the registration of the
Company's common stock under the Securities Exchange Act was terminated.
The Company's consolidated balance sheet as of December 31, 1999 includes
restricted cash and a current liability of $7,776,000 related to merger
consideration held by the Company's exchange agent for canceled shares of
Knoll common stock that were not yet presented to the exchange agent.
The merger and related transactions were accounted for as a leveraged
recapitalization. The historical accounting basis of Knoll's assets and
liabilities were retained subsequent to the transactions. In connection
with the merger and related transactions, the Company incurred
recapitalization costs and financing costs of $9,073,000 and $20,734,000,
respectively. Of the recapitalization costs, $6,356,000 was expensed and
$2,717,000, which represents investor direct acquisition costs, was
recorded as a reduction of additional paid-in-capital. Of the financing
costs, $7,864,000 was capitalized as deferred financing fees and the
remaining $12,870,000, which is the total consent fee related to the
Senior Subordinated Notes, was recorded as a component of the
extraordinary loss on early extinguishment of debt. The Company funded
the merger and related fees and expenses with borrowings under a new
senior credit agreement that was entered into in connection with the
merger. See Note 10 for further discussion of the new credit agreement
and the extraordinary loss noted above.
5. CUSTOMER RECEIVABLES
Customer receivables are presented net of an allowance for doubtful
accounts of $6,783,000 and $5,057,000 at December 31, 1999 and 1998,
respectively. Management performs ongoing credit evaluations of its
customers and generally does not require collateral. As of December 31,
1999 and 1998, the U.S. government represented approximately 8.9% and
11.4%, respectively, of gross customer receivables.
6. INVENTORIES
1999 1998
---------- ----------
(In Thousands)
Raw materials............................... $49,795 $42,625
Work in process............................. 10,313 11,827
Finished goods.............................. 22,630 22,661
------- -------
Inventories................................. $82,738 $77,113
======= =======
7. PROPERTY, PLANT AND EQUIPMENT
1999 1998
---------- ----------
(In Thousands)
Land and buildings.......................... $ 71,002 $ 67,303
Machinery and equipment..................... 193,000 169,261
Construction in progress.................... 15,970 21,406
-------- --------
Property, plant and equipment............... 279,972 257,970
Accumulated depreciation.................... (95,331) (71,803)
-------- --------
Property, plant and equipment, net.......... $184,641 $186,167
======== ========
F-10
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
8. INTANGIBLE ASSETS
1999 1998
---------- ----------
(In Thousands)
Goodwill.................................... $ 53,966 $ 53,943
Trademarks.................................. 219,900 219,900
Deferred financing fees..................... 7,864 8,354
-------- --------
Intangible assets........................... 281,730 282,197
Accumulated amortization.................... (26,773) (22,154)
-------- --------
Intangible assets, net...................... $254,957 $260,043
======== ========
9. OTHER CURRENT LIABILITIES
1999 1998
---------- ----------
(In Thousands)
Accrued employee compensation............... $ 45,684 $ 51,593
Accrued product warranty.................... 9,925 10,407
Other....................................... 45,633 29,756
-------- --------
Other current liabilities................... $101,242 $ 91,756
======== ========
10. INDEBTEDNESS
The Company's long-term debt is summarized as follows:
1999 1998
---------- ----------
(In Thousands)
10.875% Senior Subordinated Notes due 2006.. $107,250 $107,250
Term loans, variable rate (7.545% at
December 31,1999), due through 2005....... 321,250 --
Revolving loans, variable rate (7.545% at
December 31, 1999), due 2005.............. 181,000 --
Revolving loans, variable rate (5.675% -
5.875% at December 31, 1998), due 2002.... -- 61,000
Other....................................... 876 1,005
-------- --------
610,376 169,255
Less current maturities..................... (17,500) (10,000)
-------- --------
Long-term debt.............................. $592,876 $159,255
======== ========
Senior Subordinated Notes
The Company assumed the obligations under the Senior Subordinated Notes
on February 29, 1996. At such time, the total principal amount
outstanding was $165,000,000. 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 pretax basis ($5,337,000 on an after-tax basis) during
1997.
F-11
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
As discussed in Note 4, the Company entered into an agreement with the
holder of a majority of its Senior Subordinated Notes on August 13, 1999.
Under the agreement, (i) the holder consented to certain amendments to the
indenture governing the Senior Subordinated Notes, thus allowing the
Company to complete the merger without violating the covenants under the
indenture, and (ii) the Company agreed to pay such holder (and other
holders of the Senior Subordinated Notes who also consent), promptly after
completion of the merger, $120 per $1,000 principal amount of the Senior
Subordinated Notes owned by the holder. The Company subsequently obtained
consents from all other holders as of August 13, 1999 through a consent
solicitation process. Upon completion of the merger, the Company paid the
holders an aggregate consent fee of $12,870,000.
Due to the significance of the consent fee, the Company accounted for the
modification of the debt terms under the indenture as an extinguishment of
debt. Such treatment resulted in an extraordinary loss of $17,001,000 on
a pretax basis ($10,244,000 on an after-tax basis), which consisted of the
write-off of $4,131,000 of unamortized financing fees related to the
Senior Subordinated Notes and the consent fee of $12,870,000 that was paid
to the holders.
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.
The Senior Subordinated Notes outstanding at December 31, 1999 may not be
redeemed at the Company's option prior to March 15, 2001. At such date,
the Senior Subordinated Notes are redeemable, in whole or in part, 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 incurrence of
indebtedness, payment of dividends and purchase of Company stock and
includes certain other restrictions and limitations that are customary
with subordinated indebtedness of this type. The Company believes that it
was in compliance with the terms of the indenture at December 31, 1999.
Term and Revolving Loans
In connection with the merger, the Company entered into a $650,000,000
senior credit agreement, consisting of a $325,000,000 six-year term loan
facility and a $325,000,000 six-year revolving credit facility, to (i)
fund the merger and related fees and expenses (including consent fees
related to the Company's Senior Subordinated Notes), (ii) refinance
$14,000,000 owed under the Company's senior credit agreement that existed
immediately prior to the merger and (iii) provide for working capital and
ongoing general corporate purposes. The refinancing resulted in an
extraordinary loss of $925,000 on a pretax basis ($557,000 on an after-
tax basis), which consisted of the write-off of unamortized financing fees
related to the refinanced debt.
The new senior credit agreement contains a letter of credit subfacility
that allows for the issuance of up to $25,000,000 in letters of credit and
a swing line loan subfacility that allows for the issuance of up to
$10,000,000 in swing line loans. The amount available for borrowing
under the revolving credit facility is reduced by the total outstanding
letters of credit and swing line loans. At December 31, 1999, the
Company had letters of credit totaling $2,517,000, under which there
were no borrowings.
F-12
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
The Company pays a commitment fee ranging from 0.175% to 0.50%, depending
on the Company's leverage ratio, on the unused portion of the revolving
credit facility. In addition, a letter of credit fee ranging from
0.625% to 1.625%, depending on the Company's leverage ratio, is required
to be paid on the amount available to be drawn under letters of credit.
As of December 31, 1999, the commitment and letter of credit fees
applicable to the Company were 0.375% and 1.375%, respectively.
Borrowings under the agreement bear interest at a floating rate based, at
the Company's option, upon (i) the Eurodollar rate (as defined therein)
plus an applicable percentage that is subject to change based upon the
Company's ratio of funded debt to earnings before income taxes,
depreciation, amortization and other noncash charges ("EBITDA") or (ii)
the greater of the federal funds rate plus 0.5% or the prime rate, plus
an applicable percentage that is subject to change based upon the
Company's ratio of funded debt to EBITDA. The Company is required to
make quarterly principal payments under the term loan facility through
September 2005. The revolving credit facility allows the Company to
borrow, repay and reborrow funds from time to time until November 4, 2005.
The agreement is secured by substantially all of the Company's present
and future domestic assets, 100% of the capital stock of the Company's
present and future domestic subsidiaries and 65% of the capital stock of
the Company's present and future foreign subsidiaries. Additionally, all
borrowings are jointly and severally, unconditionally guaranteed by the
Company's existing and future domestic subsidiaries. However, if the
Company is unable to satisfy all or any portion of its obligations with
respect to the credit agreement, it is unlikely that the guarantors will
be able to pay all or any portion of such unsatisfied obligations.
The credit agreement subjects the Company to various affirmative and
negative covenants. Among other things, the covenants limit the Company's
ability to incur additional indebtedness, declare or pay dividends and
purchase Company stock; require the Company to maintain certain financial
ratios with respect to funded debt leverage and interest coverage; and
require the Company to enter into interest rate protection agreements in
a notional amount of at least $135,000,000 within 90 days subsequent to
November 4, 1999 and maintain such agreements for at least three years
from the date they are purchased. The Company believes that it was in
compliance with the credit agreement covenants at December 31, 1999.
The Company also has several revolving credit agreements with various
European financial institutions. These credit agreements are to provide
credit primarily for overdraft and working capital purposes. As of
December 31, 1999, total credit available under such agreements was
approximately $10,127,000 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 that is linked to
each country's prime rate. As of December 31, 1999, the Company did not
have any outstanding borrowings under the European credit facilities.
Interest Paid
During 1999, 1998 and 1997, the Company made interest payments totaling
$18,110,000, $15,943,000 and $25,505,000, respectively.
F-13
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
Maturities
Aggregate principal maturities of the Company's indebtedness are as
follows (in thousands):
2000................................ $ 17,500
2001................................ 31,250
2002................................ 52,570
2003................................ 63,837
2004................................ 81,337
Thereafter.......................... 363,882
--------
$610,376
========
11. PREFERRED STOCK
The Company's Certificate of Incorporation authorizes the issuance of
10,000,000 shares of preferred stock with a par value of $1.00 per share.
1,920,000 of these shares are designated as Series A Preferred Stock, of
which 1,602,998 shares have been retired and canceled as a result of the
redemption and conversion discussed in Note 3, and 317,002 shares remain
eligible to be issued. Subject to existing laws, the Board of Directors
is authorized to provide for the issuance of preferred shares in one or
more series, for such consideration and with designations, powers,
preferences and relative, participating, optional or other special rights
and the qualifications, limitations or restrictions thereof, as shall be
determined by the Board of Directors.
12. DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses interest rate collar agreements to manage its exposure
to fluctuations in interest rates on its variable rate debt. Such
agreements effectively set agreed-upon maximum and minimum rates on a
notional principal amount and utilize the London Interbank Offered Rate
("LIBOR") as a variable rate reference. Thus, the agreements hedge the
LIBOR component of the Eurodollar interest rate on the Company's variable
rate debt. The net amount paid or received on the agreements is
recognized as an adjustment to interest expense.
The Company did not have any interest rate collar agreements outstanding
at December 31, 1999. The aggregate notional principal amount of the
Company's interest rate collar agreements outstanding at December 31, 1998
was $115,000,000, and the related weighted average maximum and minimum
rates were 7.97% and 5.05%, respectively. In January 2000, the Company
entered into three interest rate collar agreements, which will terminate
in February 2003, that have an aggregate notional principal amount of
$135,000,000 and weighted average maximum and minimum rates of 10.00% and
5.64%, respectively. The counterparties to the interest rate collar
agreements are major financial institutions. During 1999, 1998 and 1997,
the Company was not required to make nor was it entitled to receive any
payments as a result of these hedging activities.
From time to time, the Company enters into foreign currency forward
exchange contracts to manage its exposure to foreign exchange rates
associated with purchases of inventory from foreign suppliers. The terms
of these contracts are generally less than a year. Material gains and
losses on these contracts are recognized in income in the period the
value of the contract changes. The contract amounts outstanding at
December 31, 1999 and 1998 as well as the amounts of gains and losses
recorded during 1999, 1998 and 1997 were not material.
F-14
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
13. CONTINGENT LIABILITIES AND COMMITMENTS
The Company is subject to various claims and litigation in the ordinary
course of its business. The Company is not a party to any lawsuit or
proceeding which, in the opinion of management, based on information
presently known, is likely to have a material adverse effect on the
Company.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
values of each class of financial instruments:
Cash and Cash Equivalents, Accounts Receivable and Accounts Payable
The fair values of these financial instruments approximate their carrying
amounts due to their immediate or short-term periods to maturity.
Long-Term Debt
The fair values of the variable rate long-term debt instruments
approximate their carrying amounts. The fair value of other long-term
debt was estimated using quoted market values or discounted cash flow
analyses based on current incremental borrowing rates for similar types
of borrowing arrangements. The fair value of the Company's long-term
debt, including the current portion, was approximately $610,239,000 at
December 31, 1999 and $181,394,000 at December 31, 1998 while the
carrying amounts were $610,376,000 and $169,255,000, respectively.
Interest Rate Collar Agreements
The fair value of the Company's interest rate collar agreements, as
estimated by dealers, was not material as of December 31, 1998.
Foreign Currency Forward Exchange Contracts
The fair value of the Company's foreign currency forward exchange
contracts, as determined by quoted market prices, was not material as of
December 31, 1999 and 1998.
15. INCOME TAXES
Income before income tax expense and extraordinary item consists of the
following:
1999 1998 1997
---------- ---------- ----------
(In Thousands)
U.S. operations................. $151,350 $142,483 $ 82,851
Foreign operations.............. 4,163 14,932 31,618
-------- -------- --------
$155,513 $157,415 $114,469
======== ======== ========
F-15
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
Income tax expense, excluding extraordinary items, is comprised of the
following:
1999 1998 1997
---------- ---------- ----------
(In Thousands)
Current:
Federal..................... $46,651 $42,364 $21,585
State....................... 10,198 9,456 5,980
Foreign..................... 2,206 5,414 11,295
------- ------- -------
Total current........... 59,055 57,234 38,860
------- ------- -------
Deferred:
Federal..................... 6,385 4,423 6,258
State....................... 1,256 1,113 708
Foreign..................... (345) 1,601 2,200
------- ------- -------
Total deferred.......... 7,296 7,137 9,166
------- ------- -------
Income tax expense.............. $66,351 $64,371 $48,026
======= ======= =======
Income taxes paid by the Company during 1999, 1998 and 1997 totaled
$52,285,000, $61,404,000 and $24,026,000, respectively.
The following table sets forth the tax effects of temporary differences
that give rise to the deferred tax assets and liabilities:
1999 1998
---------- ----------
(In Thousands)
Deferred tax assets:
Accounts receivable, principally due
to allowance for doubtful accounts.... $ 2,327 $ 1,624
Inventories............................. 3,030 2,640
Net operating loss carryforwards........ 13,432 19,045
Obligation for postretirement benefits
other than pension.................... 7,787 7,591
Accrued liabilities and other items..... 19,541 20,915
-------- --------
Gross deferred tax assets........... 46,117 51,815
Valuation allowance..................... (16,137) (22,528)
-------- --------
Net deferred tax assets............. 29,980 29,287
-------- --------
Deferred tax liabilities:
Intangibles, principally due to
differences in amortization........... 15,249 11,260
Plant and equipment, principally due
to differences in depreciation and
assigned values....................... 11,155 7,411
Other items............................. 92 227
-------- --------
Gross deferred tax liabilities...... 26,496 18,898
-------- --------
Net deferred tax assets..................... $ 3,484 $ 10,389
======== ========
As of December 31, 1999, the Company had net operating loss carryforwards
totaling approximately $34,448,000 in various foreign tax jurisdictions,
of which $5,215,000 expire in 2000 and $29,233,000 may be carried forward
for an unlimited time.
F-16
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
The Company has recorded a valuation allowance for net deferred tax assets
in foreign tax jurisdictions, primarily related to net operating loss
carryforwards that existed as of February 29, 1996, the date the Company
was formed, due to losses incurred in these tax jurisdictions prior to
such date. At December 31, 1997, the valuation allowance was $25,172,000.
The decrease in the valuation allowance from 1997 to 1998 and from 1998
to 1999 resulted primarily from the expiration and utilization of net
operating loss carryforwards in the foreign tax jurisdictions.
For 1999, 1998 and 1997, tax benefits recognized through reductions of
the valuation allowance for net operating loss carryforwards that existed
as of February 29, 1996 had the effect of reducing goodwill by $430,000,
$1,457,000 and $4,524,000, respectively. If additional tax benefits are
recognized in the future through further reduction of the valuation
allowance, such benefits will generally reduce goodwill.
The following table sets forth a reconciliation of the statutory federal
income tax rate to the effective income tax rate:
1999 1998 1997
-------- -------- --------
Federal statutory tax rate............ 35.0% 35.0% 35.0%
Increase in the tax rate
resulting from:
State taxes, net of
federal effect................ 4.9 4.4 3.8
Nondeductible recapitalization
expense....................... 1.2 -- --
Higher income tax rates of
other countries............... 1.3 1.2 2.4
Nondeductible goodwill
amortization.................. 0.3 0.2 0.3
Other........................... -- 0.1 0.5
---- ---- ----
Effective tax rate.................... 42.7% 40.9% 42.0%
==== ==== ====
The Company has not made provisions for U.S. federal and state income
taxes as of December 31, 1999 on $38,017,000 of foreign earnings that
are expected to be reinvested indefinitely. Upon distribution of those
earnings in the form of dividends or otherwise, the Company would be
subject to U.S. federal and state income taxes (subject to an adjustment
for foreign tax credits) and withholding taxes payable to the various
foreign countries. Determination of the amount of the unrecognized
deferred tax liability is not practicable.
16. LEASES
The Company has commitments under operating leases for certain
machinery and equipment and facilities used in its operations. Total
rental expense for 1999, 1998 and 1997 was $9,626,000, $9,256,000 and
$8,902,000, 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):
2000................................ $ 7,339
2001................................ 6,923
2002................................ 6,068
2003................................ 3,905
2004................................ 1,738
Subsequent years.................... 2,530
-------
Total minimum rental payments....... $28,503
=======
F-17
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
17. PENSION AND OTHER POSTRETIREMENT BENEFITS
The Company has two domestic defined benefit pension plans and two plans
providing for other postretirement benefits, including medical and life
insurance coverage. One of the pension plans and one of the other
postretirement benefits plans cover eligible U.S. nonunion employees
while the other pension plan and other postretirement benefits plan cover
eligible U.S. union employees.
The following table sets forth a reconciliation of the benefit obligation,
plan assets and accrued benefit cost related to the pension and other
postretirement benefits provided by the Company:
Pension Benefits Other Benefits
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(In Thousands) (In Thousands)
Change in benefit obligation:
Benefit obligation at January 1.... $17,897 $ 8,078 $ 18,778 $ 16,080
Service cost....................... 6,826 5,396 582 595
Interest cost...................... 1,204 615 1,256 1,294
Participant contributions.......... 225 252 -- --
Amendment.......................... -- 451 4 --
Actuarial loss (gain).............. (1,781) 3,214 180 1,302
Benefits paid...................... (121) (109) (1,297) (493)
------- ------- -------- --------
Benefit obligation at December 31.. 24,250 17,897 19,503 18,778
------- ------- -------- --------
Change in plan assets:
Fair value of plan assets at
January 1........................ 8,641 3,721 -- --
Actual return on plan assets....... 336 241 -- --
Employer contributions............. 5,385 4,536 1,297 493
Participant contributions.......... 225 252 -- --
Benefits paid...................... (121) (109) (1,297) (493)
------- ------- -------- --------
Fair value of plan assets at
December 31...................... 14,466 8,641 -- --
------- ------- -------- --------
Funded status...................... (9,784) (9,256) (19,503) (18,778)
Unrecognized net loss (gain)....... 756 2,156 (118) (392)
Unrecognized prior service cost.... 381 416 4 --
------- ------- -------- --------
Accrued benefit cost............... $(8,647) $(6,684) $(19,617) $(19,170)
======= ======= ======== ========
Significant assumptions as of December 31 that were used in accounting
for the pension and other postretirement benefits plans are as follows:
Pension Benefits Other Benefits
------------------ ------------------
1999 1998 1999 1998
-------- -------- -------- --------
Discount rate...................... 7.25% 6.75% 7.25% 6.75%
Expected return on plan assets..... 8.50 8.50 -- --
Rate of compensation increase...... 4.50 4.50 4.50 4.50
F-18
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
The following table sets forth the components of the net periodic benefit
cost for the Company's pension and other postretirement benefits plans:
Pension Benefits Other Benefits
---------------------------- ----------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
(In Thousands) (In Thousands)
Service cost............ $6,826 $5,396 $4,893 $ 582 $ 595 $ 560
Interest cost........... 1,204 615 207 1,256 1,294 1,224
Expected return on
plan assets........... (744) (321) (55) -- -- --
Amortization of prior
service cost.......... 35 35 -- -- -- --
Recognized actuarial
loss (gain)........... 27 (22) -- (94) -- --
------ ------ ------ ------ ------ ------
Net periodic benefit
cost.................. $7,348 $5,703 $5,045 $1,744 $1,889 $1,784
====== ====== ====== ====== ====== ======
For purposes of measuring the benefit obligation and the net periodic
benefit cost as of and for the year ended December 31, 1999, respectively,
associated with the Company's other postretirement benefits plans, a 6.5%
annual rate of increase in the per capita cost of covered health care
benefits was assumed for 1999. The rate was then assumed to decrease to
5.5% in 2000 and remain at that level thereafter. Increasing the assumed
health care cost trend rate by 1.0% in each year would increase the
benefit obligation as of December 31, 1999 by $1,704,000 and increase the
aggregate of the service and interest cost components of net periodic
benefit cost for 1999 by $207,000. Decreasing the assumed health care
cost trend rate by 1.0% in each year would decrease the benefit obligation
as of December 31, 1999 by $1,544,000 and decrease the aggregate of the
service and interest cost components of net periodic benefit cost for 1999
by $180,000.
Employees of the Canadian, Belgium and United Kingdom operations
participate in defined contribution pension plans sponsored by the
Company. The Company's expense related to these plans for 1999, 1998
and 1997 was $679,000, $842,000 and $1,121,000, respectively.
The Company also sponsors a retirement savings plan (i.e. 401(k) plan) for
all U.S. employees. Under this plan, participants may defer a portion of
their earnings up to the annual contribution limits established by the
Internal Revenue Service. The Company matches 40.0% of participant
contributions on up to the first 6.0% of compensation for nonunion
employees and matches 50.0% of participant contributions on up to the
first 6.0% of compensation for union employees. For participants who
are nonunion employees, the plan provides for additional employer
matching based on the achievement of certain profitability goals.
Furthermore, effective November 4, 1999, the plan provides that the
Company may also make discretionary contributions of Knoll common stock
to participant accounts on behalf of all actively employed U.S.
participants. However, upon retiring or leaving the Company, participants
must sell vested shares of Knoll common stock back to the Company, and any
shares that are not vested at such time are forfeited by the participant
and held by the plan. Participants generally vest their interest in
Company contributions ratably according to years of service, with such
contributions being 100% vested at the end of five years of service. The
Company's total expense under the 401(k) plan was $9,466,000, $5,472,000
and $5,180,000 for 1999, 1998 and 1997, respectively.
F-19
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
The Company's common stock was offered as an investment option under the
401(k) plan from May 9, 1997 through November 3, 1999, the period during
which Knoll's common stock was publicly traded. The plan purchased shares
of Knoll common stock on the open market. In connection with the merger,
which is discussed in Note 4, all 71,174 shares of Knoll common stock held
in the 401(k) plan immediately prior to the merger were converted into the
right to receive $28.00 per share in cash and were canceled.
18. STOCK PLANS
Stock Incentive Plans
The Company sponsors three stock incentive plans under which awards
denominated or payable in shares or options to purchase shares of Knoll
common stock may be granted to officers, certain other key employees,
directors and consultants of the Company. A combined maximum of 9,264,898
shares or options to purchase shares are authorized for issuance under
the plans. A Stock Plan Committee of the Company's Board of Directors has
sole discretion concerning administration of the plans, including
selection of individuals to receive awards, types of awards, the terms and
conditions of the awards and the time at which awards will be granted.
Options that are granted have a maximum contractual life of ten years.
During 1996, the Company granted 4,144,030 restricted common shares, with
a weighted-average fair value of $0.34 per share, to key employees. The
Company recorded the fair value of the shares on the date of grant as
unearned stock grant compensation, which is a separate component of
stockholders' equity (deficit), and is recognizing compensation expense
ratably over the vesting period. As of December 31, 1999, a total of
998,357 restricted shares were not vested. Such shares will vest as
follows: 631,015 shares in 2000 and 367,342 shares in 2001.
The following table summarizes the Company's stock option activity:
1999 1998 1997
----------------------- ----------------------- -----------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Options Price Options Price Options Price
----------- ---------- ----------- ---------- ----------- ----------
Outstanding at
beginning of year... 1,965,511 $21.27 2,142,158 $20.73 -- $ --
Granted............... 2,305,500 26.74 50,000 28.21 2,173,552 20.66
Exercised............. (244,798) 15.93 (196,647) 16.06 -- --
Forfeited............. (269,875) 17.28 (30,000) 28.50 (31,394) 15.93
Canceled ............. (50,000) 17.00 -- -- -- --
--------- --------- ---------
Outstanding at end
of year............. 3,706,338 25.37 1,965,511 21.27 2,142,158 20.73
========= ========= =========
Exercisable at end
of year............. 396,427 26.17 240,789 24.33 10,000 17.00
========= ========= =========
Available for
future grants....... 991,922 658,710 678,710
========= ========= =========
F-20
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
Options that were granted generally vest in installments over either a
four or five-year period, beginning one year from the date of grant.
The following table summarizes information regarding stock options
outstanding and exercisable at December 31, 1999:
Options Outstanding Options Exercisable
-------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of of Contractual Exercise of Exercise
Exercise Prices Options Life Price Options Price
----------------- ----------- ------------- ---------- ----------- ----------
$15.93 - $21.25 972,838 7.93 years $17.68 75,427 $15.93
$24.19 - $26.75 95,000 9.31 25.95 11,000 26.58
$28.00 - $33.13 2,638,500 9.27 28.19 310,000 28.65
--------- -------
$15.93 - $33.13 3,706,338 8.92 25.37 396,427 26.17
========= =======
Employee Stock Purchase Plan
From August 1, 1997 through November 3, 1999, the Company sponsored an
employee stock purchase plan that provided all employees the ability to
purchase common stock of the Company at a price equal to 15.0% below the
lower of the market price at (i) the beginning of each quarterly offering
period or (ii) the end of each quarterly offering period. Purchases under
the plan were limited to 10.0% of an employee's eligible gross pay, up to
$25,000 per year. During 1999, 1998 and 1997, the Company issued
40,972, 75,609 and 22,716 shares, respectively, at a weighted average per
share price of $20.66, $21.89 and $26.71, respectively.
Other Stock-Based Compensation Plans
On November 4, 1999, the Company established The Knoll Stock Ownership
Award Plan, under which it may grant notional stock units to substantially
all individuals employed by the Company in Canada as of the effective date
of the plan. Participants generally vest their interest in notional stock
units ratably according to years of service, with such units being 100%
vested at the end of five years of service. On November 4, 1999, the
Company granted a total of 54,900 notional stock units, with an estimated
fair value of $28.00 per unit, to eligible employees. Compensation
expense is recognized based on the estimated fair value of notional stock
units and vesting provisions. During 1999, the Company incurred $992,000
of compensation expense related to 35,460 vested units.
As discussed in Note 17, the Company may contribute shares of Knoll
common stock into participant 401(k) plan accounts at its discretion.
Subsequent to the merger, the Company contributed 150,100 shares into
the 401(k) plan for substantially all individuals employed by the Company
in the U.S. as of November 4, 1999. In connection with this award, the
Company recognized $4,203,000 of compensation expense, which was based
on a value of $28.00 per share. During December 1999, the Company
repurchased 1,000 of the contributed common shares from the 401(k) plan at
a weighted average price per share of $28.00. Such shares are held in
treasury.
F-21
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
Pro Forma Disclosures
As discussed in Note 2, the Company accounts for its stock-based
compensation plans in accordance with APB 25. Accordingly, no
compensation cost has been recognized for the Company's stock options
or stock purchase rights granted in connection with the employee stock
purchase plan. If the Company had recognized compensation cost based
upon the fair value of the stock options and stock purchase rights at the
date of grant as prescribed by SFAS 123, the Company's pro forma net
income would have been $75,476,000, $89,804,000 and $59,731,000 for 1999,
1998 and 1997, respectively.
For purposes of calculating pro forma net income, the weighted average
per share fair value and exercise price of options whose exercise price
equals the market price of a share of Knoll common stock on the date of
grant were $10.15 and $21.30, respectively, for 1999 grants, $13.68 and
$28.21, respectively, for 1998 grants and $10.13 and $20.66, respectively,
for 1997 grants, and the weighted average per share fair value and
exercise price of options whose exercise price exceeds the estimated fair
value of a share of Knoll common stock on the date of grant were zero and
$28.00, respectively, for 1999 grants. Additionally, the weighted average
fair value of stock purchase rights granted under the employee stock
purchase plan was $3.76, $4.84 and $5.31 per share in 1999, 1998 and 1997,
respectively.
The fair value of the options and stock purchase rights was estimated at
the date of grant using (i) a Black-Scholes option pricing model for
grants made prior to March 24, 1999, the date the merger proposal, which
is discussed in Note 4, was first announced and (ii) a minimum value
method for grants made on or subsequent to March 24, 1999. The
following assumptions were used for the Black-Scholes model: risk-free
interest rate of 6.5% in 1999, 5.75% in 1998 and 6.0% in 1997; dividend
yield of zero in 1999, 1998 and 1997; expected volatility of the market
price of the common stock of 35.0% in 1999, 1998 and 1997; and
weighted average expected lives of 7 years for the options and 3 months
for the stock purchase rights in 1999, 1998 and 1997. Under the minimum
value method, the Company used the same assumptions as those noted above
for the Black-Scholes model for 1999 with the exception that volatility
was not considered under the minimum value method. The estimated fair
value of the options was amortized to expense over the vesting period of
the options for purposes of determining pro forma net income. The effects
of applying SFAS 123 for purposes of providing pro forma disclosures are
not likely to be representative of the effects on reported net income in
future years.
19. STOCK REPURCHASE PROGRAM
In September 1998, the Board of Directors approved a share repurchase
program that authorized the repurchase of up to 3,000,000 shares of the
Company's common stock. The Board of Directors subsequently approved an
increase of 2,000,000 shares to the program on February 2, 1999. During
1999, the Company purchased 1,187,000 shares of its common stock for
$28,675,000, or an average price of $24.16 per share. During 1998, the
Company purchased 1,707,700 shares for $38,849,000, or an average price
of $22.75 per share. Total shares purchased under the program were
2,894,700 for $67,524,000, or an average price of $23.33 per share.
Common shares were purchased in the open market and were then held in
treasury. All shares that were held in treasury immediately prior to the
merger, which is discussed in Note 4, were canceled and retired in
connection with the merger.
F-22
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
20. SEGMENT AND GEOGRAPHIC REGION INFORMATION
The Company operates exclusively in the business of design, manufacture
and sale of office furniture products and accessories. In addition to
its principal manufacturing operations and markets in North America, the
Company has manufacturing operations and markets in Europe.
The Company's sales to customers, operating income and net property,
plant and equipment are summarized by geographic areas below. Sales to
customers are attributed to the geographic areas based on the point of
sale.
United
States Canada Europe Consolidated
---------- ---------- ---------- ------------
(In Thousands)
1999
Sales to customers.... $902,554 $26,028 $55,929 $984,511
Operating income...... 178,631 4,574 945 184,150
Property, plant and
equipment, net...... 142,326 31,663 10,652 184,641
1998
Sales to customers.... 857,711 29,361 61,619 948,691
Operating income...... 158,880 9,915 2,748 171,543
Property, plant and
equipment, net...... 146,488 27,754 11,925 186,167
1997
Sales to customers.... 717,326 37,674 55,857 810,857
Operating income...... 108,002 24,497 5,378 137,877
Property, plant and
equipment, net...... 145,215 23,829 11,406 180,450
21. QUARTERLY RESULTS OF OPERATIONS (Unaudited)
The following table sets forth unaudited summary information on a
quarterly basis for the Company for 1999 and 1998.
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
(In Thousands)
1999
Sales.................... $209,210 $253,726 $247,543 $274,032
Gross profit............. 81,547 102,198 96,585 110,739
Income before
extraordinary item..... 18,394 21,804 25,013 23,951
Net income............... 18,394 21,804 25,013 13,150
1998
Sales.................... 220,775 246,957 235,028 245,931
Gross profit............. 87,323 97,838 93,022 97,752
Net income............... 19,810 25,063 24,937 23,234
F-23
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
In connection with the merger and related transactions discussed in
Note 4, the Company recorded recapitalization expense totaling $3,000,000,
$541,000 and $2,815,000 in the second, third and fourth quarter,
respectively, of 1999 and an extraordinary loss of $17,926,000 pretax
($10,801,000 after-tax) in the fourth quarter of 1999. The extraordinary
loss consisted of the write-off of unamortized deferred financing fees and
the consent fee paid to the holders of the Senior Subordinated Notes.
22. FINANCIAL INFORMATION FOR GUARANTORS OF THE COMPANY'S DEBT
As discussed in Note 10, certain debt of the Company is guaranteed by
all existing and future directly or indirectly wholly owned domestic
subsidiaries of the Company (the "Guarantors"). The Guarantors are
Knoll Overseas, Inc., a holding company for the entities that conduct the
Company's European business, and Spinneybeck Enterprises, Inc., which
directly and through a Canadian subsidiary operates the Company's
leather business.
These Guarantors will irrevocably and unconditionally, fully, jointly and
severally, guarantee the performance and payment when due, of all
obligations under the Senior Subordinated Notes and senior credit
agreement outstanding as of December 31, 1999, limited to the largest
amount that would not render such Guarantors' obligations under the
guarantees subject to avoidance under any applicable federal or state
fraudulent conveyance or similar law.
The condensed consolidating information that follows presents:
-- Condensed consolidating financial information as of December 31, 1999
and 1998 and for the years ended December 31, 1999, 1998 and 1997 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.
F-24
KNOLL, INC.
BALANCE SHEET
DECEMBER 31, 1999
(In Thousands)
Guarantors
------------------------
Spinneybeck Knoll
Knoll, Enterprises, Overseas, Non-
Inc. Inc. Inc. Guarantors Eliminations Total
---------- ------------ --------- ----------- ------------ -----------
ASSETS
Current assets:
Cash and cash equivalents... $ 549 $ 662 $ -- $ 9,574 $ -- $ 10,785
Restricted cash............. 7,776 -- -- -- -- 7,776
Customer receivables, net... 140,867 1,952 -- 24,948 -- 167,767
Accounts receivable--
related parties........... 9,545 99 4,360 37,665 (51,669) --
Inventories................. 54,351 9,123 -- 19,264 -- 82,738
Deferred income taxes....... 20,727 -- -- 1,713 -- 22,440
Prepaid and other current
assets.................... 1,887 (10) 5 5,838 -- 7,720
-------- ------- ------- -------- --------- --------
Total current assets.. 235,702 11,826 4,365 99,002 (51,669) 299,226
Property, plant and
equipment, net................ 142,143 183 -- 42,315 -- 184,641
Intangible assets, net.......... 253,584 -- -- 1,373 -- 254,957
Equity investments.............. 111,330 778 16,185 -- (128,293) --
Other noncurrent assets......... 1,705 2 97 1,678 -- 3,482
-------- ------- ------- -------- --------- --------
Total Assets.......... $744,464 $12,789 $20,647 $144,368 $(179,962) $742,306
======== ======= ======= ======== ========= ========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Current maturities of
long-term debt............ $ 17,500 $ -- $ -- $ -- $ -- $ 17,500
Accounts payable--trade..... 50,203 765 -- 21,946 -- 72,914
Accounts payable--related
parties................... 37,169 496 3,980 10,024 (51,669) --
Income taxes payable........ 1,786 964 37 696 -- 3,483
Other current liabilities... 87,016 1,037 2,092 11,097 -- 101,242
-------- ------- ------- -------- --------- --------
Total current
liabilities......... 193,674 3,262 6,109 43,763 (51,669) 195,139
Long-term debt.................. 592,000 -- -- 876 -- 592,876
Deferred income taxes........... 16,730 -- -- 2,226 -- 18,956
Postretirement benefits
other than pension............ 18,426 -- -- -- -- 18,426
Other noncurrent
liabilities................... 5,045 -- -- 6,058 -- 11,103
-------- ------- ------- -------- --------- --------
Total liabilities..... 825,875 3,262 6,109 52,923 (51,669) 836,500
-------- ------- ------- -------- --------- --------
Stockholders' equity (deficit):
Common stock................ 233 -- -- -- -- 233
Additional paid-in-capital.. 10,117 (3,562) 12,896 60,267 (75,545) 4,173
Unearned stock grant
compensation.............. (433) -- -- -- -- (433)
Retained earnings (deficit). (91,328) 13,089 1,642 38,017 (52,748) (91,328)
Accumulated other
comprehensive income...... -- -- -- (6,839) -- (6,839)
-------- ------- ------- -------- --------- --------
Total stockholders'
equity (deficit).... (81,411) 9,527 14,538 91,445 (128,293) (94,194)
-------- ------- ------- -------- --------- --------
Total Liabilities
and Stockholders'
Equity (Deficit).... $744,464 $12,789 $20,647 $144,368 $(179,962) $742,306
======== ======= ======= ======== ========= ========
F-25
KNOLL, INC.
BALANCE SHEET
DECEMBER 31, 1998
(In Thousands)
Guarantors
------------------------
Spinneybeck Knoll
Knoll, Enterprises, Overseas, Non-
Inc. Inc. Inc. Guarantors Eliminations Total
---------- ------------ --------- ----------- ------------ -----------
ASSETS
Current assets:
Cash and cash equivalents... $ 3,503 $ 561 $ -- $ 13,401 $ -- $ 17,465
Customer receivables, net... 115,823 1,698 -- 20,435 -- 137,956
Accounts receivable--
related parties........... 13,954 40 3,568 40,061 (57,623) --
Inventories................. 53,146 8,270 -- 15,697 -- 77,113
Deferred income taxes....... 20,169 -- -- 898 -- 21,067
Prepaid and other current
assets.................... 2,132 14 4 7,692 -- 9,842
-------- ------- ------- -------- --------- --------
Total current assets.. 208,727 10,583 3,572 98,184 (57,623) 263,443
Property, plant and
equipment, net................ 146,275 213 -- 39,679 -- 186,167
Intangible assets, net.......... 258,604 -- -- 1,439 -- 260,043
Equity investments.............. 106,709 666 15,932 -- (123,307) --
Other noncurrent assets......... 2,046 9 97 2,222 -- 4,374
-------- ------- ------- -------- --------- --------
Total Assets.......... $722,361 $11,471 $19,601 $141,524 $(180,930) $714,027
======== ======= ======= ======== ========= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of
long-term debt............ $ 10,000 $ -- $ -- $ -- $ -- $ 10,000
Accounts payable--trade..... 37,446 415 -- 21,690 -- 59,551
Accounts payable--related
parties................... 39,826 235 2,526 15,036 (57,623) --
Income taxes payable........ 5,872 637 35 552 -- 7,096
Other current liabilities... 81,100 838 1,061 8,757 -- 91,756
-------- ------- ------- -------- --------- --------
Total current
liabilities......... 174,244 2,125 3,622 46,035 (57,623) 168,403
Long-term debt.................. 158,250 -- -- 1,005 -- 159,255
Deferred income taxes........... 8,531 -- -- 2,147 -- 10,678
Postretirement benefits
other than pension............ 18,450 -- -- -- -- 18,450
Other noncurrent
liabilities................... 8,049 -- -- 5,342 -- 13,391
-------- ------- ------- -------- --------- --------
Total liabilities..... 367,524 2,125 3,622 54,529 (57,623) 370,177
-------- ------- ------- -------- --------- --------
Stockholders' equity:
Common stock................ 418 -- -- -- -- 418
Additional paid-in-capital.. 184,145 273 12,812 60,107 (75,545) 181,792
Unearned stock grant
compensation.............. (712) -- -- -- -- (712)
Retained earnings........... 170,986 9,073 3,167 35,522 (47,762) 170,986
Accumulated other
comprehensive income...... -- -- -- (8,634) -- (8,634)
-------- ------- ------- -------- --------- --------
Total stockholders'
equity.............. 354,837 9,346 15,979 86,995 (123,307) 343,850
-------- ------- ------- -------- --------- --------
Total Liabilities
and Stockholders'
Equity.............. $722,361 $11,471 $19,601 $141,524 $(180,930) $714,027
======== ======= ======= ======== ========= ========
F-26
KNOLL, INC.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
(In Thousands)
Guarantors
------------------------
Spinneybeck Knoll
Knoll, Enterprises, Overseas, Non-
Inc. Inc. Inc. Guarantors Eliminations Total
---------- ------------ --------- ----------- ------------ -----------
Sales to customers.............. $880,677 $21,877 $ -- $ 81,957 $ -- $984,511
Sales to related parties........ 24,558 3,702 1,219 127,651 (157,130) --
-------- ------- ------- -------- --------- --------
Total sales..................... 905,235 25,579 1,219 209,608 (157,130) 984,511
Cost of sales to customers...... 551,894 8,347 803 62,049 (29,651) 593,442
Cost of sales to related
parties....................... 13,883 3,702 -- 109,894 (127,479) --
-------- ------- ------- -------- --------- --------
Gross profit.................... 339,458 13,530 416 37,665 -- 391,069
Selling, general and
administrative expenses....... 165,601 6,844 2,328 32,146 -- 206,919
-------- ------- ------- -------- --------- --------
Operating income (loss)......... 173,857 6,686 (1,912) 5,519 -- 184,150
Interest expense................ 21,519 -- -- 92 -- 21,611
Recapitalization expense........ 6,356 -- -- -- -- 6,356
Other income (expense), net..... 594 -- -- (1,264) -- (670)
Income from equity investments.. 4,621 112 253 -- (4,986) --
-------- ------- ------- -------- --------- --------
Income before income tax
expense (benefit) and
extraordinary item............ 151,197 6,798 (1,659) 4,163 (4,986) 155,513
Income tax expense (benefit).... 62,035 2,782 (134) 1,668 -- 66,351
-------- ------- ------- -------- --------- --------
Income before extraordinary
item.......................... 89,162 4,016 (1,525) 2,495 (4,986) 89,162
Extraordinary loss on early
extinguishment of debt, net
of taxes...................... 10,801 -- -- -- -- 10,801
-------- ------- ------- -------- --------- --------
Net income...................... $ 78,361 $ 4,016 $(1,525) $ 2,495 $ (4,986) $ 78,361
======== ======= ======= ======== ========= ========
F-27
KNOLL, INC.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(In Thousands)
Guarantors
------------------------
Spinneybeck Knoll
Knoll, Enterprises, Overseas, Non-
Inc. Inc. Inc. Guarantors Eliminations Total
---------- ------------ --------- ----------- ------------ -----------
Sales to customers.............. $835,209 $22,502 $ -- $ 90,980 $ -- $948,691
Sales to related parties........ 24,652 3,531 1,244 124,816 (154,243) --
-------- ------- ------ -------- --------- --------
Total sales..................... 859,861 26,033 1,244 215,796 (154,243) 948,691
Cost of sales to customers...... 526,437 9,114 813 64,478 (28,086) 572,756
Cost of sales to related
parties....................... 14,578 3,531 -- 108,048 (126,157) --
-------- ------- ------ -------- --------- --------
Gross profit.................... 318,846 13,388 431 43,270 -- 375,935
Selling, general and
administrative expenses....... 165,976 6,938 871 30,607 -- 204,392
-------- ------- ------ -------- --------- --------
Operating income (loss)......... 152,870 6,450 (440) 12,663 -- 171,543
Interest expense................ 16,809 -- -- 51 -- 16,860
Other income, net............... 412 -- -- 2,320 -- 2,732
Income from equity investments.. 11,401 99 985 -- (12,485) --
-------- ------- ------ -------- --------- --------
Income before income tax
expense....................... 147,874 6,549 545 14,932 (12,485) 157,415
Income tax expense (benefit).... 54,830 2,685 (21) 6,877 -- 64,371
-------- ------- ------ -------- --------- --------
Net income...................... $ 93,044 $ 3,864 $ 566 $ 8,055 $ (12,485) $ 93,044
======== ======= ====== ======== ========= ========
F-28
KNOLL, INC.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(In Thousands)
Guarantors
------------------------
Spinneybeck Knoll
Knoll, Enterprises, Overseas, Non-
Inc. Inc. 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 tax
expense (benefit) 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-29
KNOLL, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1999
(In Thousands)
Guarantors
------------------------
Spinneybeck Knoll
Knoll, Enterprises, Overseas, Non-
Inc. Inc. Inc. Guarantors Eliminations Total
---------- ------------ --------- ----------- ------------ -----------
CASH PROVIDED BY OPERATING
ACTIVITIES $ 124,858 $141 $ -- $ 2,988 $ -- $ 127,987
CASH FLOWS FROM INVESTING
ACTIVITIES
Capital expenditures............ (18,906) (40) -- (6,208) 59 (25,095)
Proceeds from sale of assets.... 60 -- -- 113 (59) 114
--------- ---- ---- ------- ---- ---------
Cash used in investing
activities.................... (18,846) (40) -- (6,095) -- (24,981)
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds from revolving
credit facility, net.......... 120,000 -- -- -- -- 120,000
Proceeds from long-term debt.... 325,000 -- -- -- -- 325,000
Repayment of long-term debt..... (3,750) -- -- -- -- (3,750)
Payment of debt issuance costs.. (7,864) -- -- -- -- (7,864)
Payment of consent fee on
Senior Subordinated Notes..... (12,870) -- -- -- -- (12,870)
Net proceeds from issuance
of stock...................... 4,746 -- -- -- -- 4,746
Purchase of common stock........ (28,703) -- -- -- -- (28,703)
Payment of merger
consideration................. (496,682) -- -- -- -- (496,682)
Payment of recapitalization
costs......................... (8,843) -- -- -- -- (8,843)
--------- ---- ---- ------- ---- ---------
Cash used in financing
activities.................... (108,966) -- -- -- -- (108,966)
Effect of exchange rate changes
on cash and cash equivalents.. -- -- -- (720) -- (720)
--------- ---- ---- ------- ---- ---------
Increase (decrease) in cash
and cash equivalents.......... (2,954) 101 -- (3,827) -- (6,680)
Cash and cash equivalents
at beginning of year.......... 3,503 561 -- 13,401 -- 17,465
--------- ---- ---- ------- ---- ---------
Cash and cash equivalents
at end of year................ $ 549 $662 $ -- $ 9,574 $ -- $ 10,785
========= ==== ==== ======= ==== =========
F-30
KNOLL, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998
(In Thousands)
Guarantors
------------------------
Spinneybeck Knoll
Knoll, Enterprises, Overseas, Non-
Inc. Inc. Inc. Guarantors Eliminations Total
---------- ------------ --------- ----------- ------------ -----------
CASH PROVIDED BY OPERATING
ACTIVITIES $101,588 $285 $ -- $12,690 $ -- $114,563
CASH FLOWS FROM INVESTING
ACTIVITIES
Capital expenditures............ (27,170) (15) -- (9,205) -- (36,390)
Proceeds from sale of assets.... 69 -- -- 83 -- 152
-------- ---- ---- ------- ---- --------
Cash used in investing
activities.................... (27,101) (15) -- (9,122) -- (36,238)
CASH FLOWS FROM FINANCING
ACTIVITIES
Repayment of revolving
credit facility, net.......... (38,000) -- -- -- -- (38,000)
Proceeds from long-term debt.... -- -- -- 201 -- 201
Net proceeds from issuance
of stock...................... 4,813 -- -- -- -- 4,813
Purchase of common stock........ (38,849) -- -- -- -- (38,849)
-------- ---- ---- ------- ---- --------
Cash provided by (used in)
financing activities.......... (72,036) -- -- 201 -- (71,835)
Effect of exchange rate changes
on cash and cash equivalents.. -- -- -- 185 -- 185
-------- ---- ---- ------- ---- --------
Increase in cash and cash
equivalents................... 2,451 270 -- 3,954 -- 6,675
Cash and cash equivalents
at beginning of year.......... 1,052 291 -- 9,447 -- 10,790
-------- ---- ---- ------- ---- --------
Cash and cash equivalents
at end of year................ $ 3,503 $561 $ -- $13,401 $ -- $ 17,465
======== ==== ==== ======= ==== ========
F-31
KNOLL, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
(In Thousands)
Guarantors
------------------------
Spinneybeck Knoll
Knoll, Enterprises, Overseas, Non-
Inc. Inc. 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)
Net proceeds from issuance
of stock...................... 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-32
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
- --------------------------------------- ------------ ------------ -------------- ------------
Additions
Balance at Charged to Balance
Beginning Costs and at End
Description of Period Expenses Deductions (1) of Period
- --------------------------------------- ------------ ------------ -------------- ------------
(In Thousands)
Valuation Accounts Deducted in the
Consolidated Balance Sheet from the
Assets to which They Apply:
Year Ended December 31, 1999:
Allowance for doubtful accounts.... $5,057 $2,513 $ 787 $6,783
Year Ended December 31, 1998:
Allowance for doubtful accounts.... 5,461 1,313 1,717 5,057
Year Ended December 31, 1997:
Allowance for doubtful accounts.... 5,713 1,943 2,195 5,461
____________________
(1) Uncollectible accounts written off and foreign currency translation.
S-1
EXHIBIT INDEX
Exhibit
Number Description Page
- --------- --------------------------------------------------------------------------- ------
2+++ Amended and Restated Agreement and Plan of Merger by and between
Warburg, Pincus Ventures, L.P. and Knoll, Inc., dated as of July 29, 1999.
3.1*** Amended and Restated Certificate of Incorporation of the Company.
3.2*** Amended and Restated By-Laws of the Company.
10.1* Stock Purchase Agreement, dated as of December 20, 1995, by and between
Westinghouse and T.K.G. Acquisition Corp.
10.2++++ Credit Agreement, dated as of October 20, 1999, by and among the
Company, the Guarantors (as defined therein), the Lenders (as defined
therein), Bank of America, N.A., as Administrative Agent, the Chase
Manhattan Bank, as Syndication Agent, and Merrill Lynch & Co., Merrill
Lynch, Pierce, Fenner & Smith Incorporated, as Documentation Agent.
10.3* 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++ Letter Agreement between Oak Hill Securities Fund, L.P. and the
Company, dated August 13, 1999.
10.7+ Supplemental Indenture No. 3, dated as of November 4, 1999, by and
among the Company, the Guarantors (as defined therein), and The Bank
of New York, as trustee, relating to the Company's 10.875% Senior
Subordinated Notes due 2006.
10.8 Amended and Restated Employment Agreement, dated as of January 1, 2000,
between the Company and Burton B. Staniar.
10.9** Employment Agreement, dated as of February 29, 1996, between T.K.G.
Acquisition Corp. and John H. Lynch.
10.10** Employment Agreement, dated as of February 29, 1996, between T.K.G.
Acquisition Corp. and Andrew B. Cogan.
10.11*** Amendment to Employment Agreement, dated as of April 30, 1997, between
the Company and Andrew B. Cogan.
10.12**** Amendment #2 to Employment Agreement, dated as of August 1, 1998,
between the Company and Andrew B. Cogan.
10.13 Amendment #3 to Employment Agreement, dated as of December 4, 1999,
between the Company and Andrew B. Cogan.
10.14**** Letter Agreement between the Company and Douglas J. Purdom, dated
August 13, 1996.
Exhibit
Number Description Page
- --------- --------------------------------------------------------------------------- ------
10.15 Amended and Restated Stockholders Agreement, dated as of November 4, 1999,
among the Company, Warburg, Pincus Ventures, L.P., and the signatories
thereto.
10.16 Amended and Restated Stockholders Agreement (Common Stock Under Stock
Incentive Plans), dated as of November 4, 1999, among the Company,
Warburg, Pincus Ventures, L.P., and the signatories thereto.
10.17 Amended and Restated Knoll, Inc. 1996 Stock Incentive Plan.
10.18 Amended and Restated Knoll, Inc. 1997 Stock Incentive Plan.
10.19 Knoll, Inc. 1999 Stock Incentive Plan.
10.20 Form of Non-Qualified Stock Option Agreement Under the Knoll, Inc.
1999 Stock Incentive Plan, entered into by the Company and certain
executive officers.
10.21*** 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.
27 Financial Data Schedule.
- -----------------------------------------
* Incorporated by reference to the Company's Registration Statement on
Form S-4 (File No. 333-2972), which was declared effective by the
Commission on June 12, 1996.
** Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996.
*** Incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 333-23399), which was declared effective by the
Commission on May 9, 1997.
**** Incorporated by reference to the Company's Annual Report on Form 10-K,
and the amendments thereto, for the year ended December 31, 1998.
+ Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1999.
++ Incorporated by reference to the Company's Amendment No. 1 to Schedule
13E-3, which was filed with the Commission on September 10, 1999.
+++ Incorporated by reference to the Company's Definitive Proxy Statement
on Schedule 14A, which was filed with the Commission on September 30,
1999.
++++ Incorporated by reference to the Company's Form 8-K dated November 4,
1999, which was filed with the Commission on November 5, 1999.