<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File No. 001-12907
KNOLL, INC.
A Delaware Corporation I.R.S. Employer No. 13-3873847
1235 Water Street
East Greenville, PA 18041
Telephone Number (215) 679-7991
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
--- ---
As of November 13, 1997, there were 43,220,810 shares of the Registrant's common
stock, par value $0.01 per share, outstanding.
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<TABLE>
<CAPTION>
KNOLL, INC.
INDEX TO FORM 10-Q
Item Page
- ---- ----
<S> <C>
PART I -- FINANCIAL INFORMATION
1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets at September 30, 1997 and December 31, 1996......................................... 3
Condensed Consolidated Statements of Operations for the three months ended September 30, 1997
and September 30, 1996.................................................................................................. 4
Condensed Consolidated Statements of Operations for the nine months ended September 30, 1997,
the seven months ended September 30, 1996 and the two months ended February 29, 1996
(Predecessor)........................................................................................................... 5
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 1997,
the seven months ended September 30, 1996 and the two months ended February 29, 1996
(Predecessor)........................................................................................................... 6
Notes to the Condensed Consolidated Financial Statements................................................................. 7
2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................................... 11
PART II -- OTHER INFORMATION
2. Changes in Securities....................................................................................................... 14
6. Exhibits and Reports on Form 8-K............................................................................................ 14
Signatures...................................................................................................................... 15
Exhibit Index................................................................................................................... 16
</TABLE>
2
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PART I -- FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ----------------------------------------------------------------
KNOLL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
----------------------- ----------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 11,026 $ 8,804
Customer receivables, net....................................... 125,201 111,166
Inventories..................................................... 65,664 57,811
Deferred income taxes........................................... 19,703 17,474
Prepaid and other current assets................................ 3,039 7,424
-------- --------
Total current assets......................................... 224,633 202,679
Property, plant and equipment at cost............................. 207,396 195,483
Accumulated depreciation.......................................... (38,415) (19,265)
-------- --------
Property, plant and equipment, net........................... 168,981 176,218
Intangible assets at cost......................................... 289,025 293,753
Accumulated amortization.......................................... (12,443) (6,813)
-------- --------
Intangible assets, net....................................... 276,582 286,940
Other noncurrent assets........................................... 2,785 9,875
-------- --------
Total Assets................................................. $672,981 $675,712
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt............................ $ -- $ 23,265
Accounts payable................................................ 59,899 50,250
Income taxes payable............................................ 7,206 388
Other current liabilities....................................... 72,447 64,022
-------- --------
Total current liabilities.................................... 139,552 137,925
Long-term debt.................................................... 230,015 330,889
Postretirement benefits obligation................................ 16,517 15,873
Other noncurrent liabilities...................................... 14,995 13,221
-------- --------
Total liabilities............................................ 401,079 497,908
-------- --------
Stockholders' equity:
Preferred stock, $1.00 par value; authorized 10,000,000 shares,
issued and outstanding 1,602,998 shares of Series A 12%
Participating Convertible Preferred Stock in 1996 (liquidation
preference of $160,300)........................................ -- 1,603
Common stock, $0.01 par value; authorized 100,000,000 shares;
issued and outstanding 43,220,810 shares in 1997 and 7,291,308
shares in 1996 (Note 7)....................................... 432 73
Additional paid-in-capital...................................... 214,973 160,147
Unearned stock grant compensation............................... (1,075) (1,387)
Retained earnings............................................... 59,564 16,836
Cumulative foreign currency translation adjustment.............. (1,992) 532
-------- --------
Total stockholders' equity................................... 271,902 177,804
-------- --------
Total Liabilities and Stockholders' Equity................... $672,981 $675,712
======== ========
</TABLE>
See accompanying notes.
3
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KNOLL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------- ------------------
<S> <C> <C>
Sales............................................................. $208,402 $167,184
Cost of sales..................................................... 124,688 106,138
-------- --------
Gross profit...................................................... 83,714 61,046
Selling, general and administrative expenses...................... 44,689 38,266
-------- --------
Operating income.................................................. 39,025 22,780
Interest expense.................................................. 5,407 9,653
Other income, net................................................. 16 322
-------- --------
Income before income tax expense.................................. 33,634 13,449
Income tax expense................................................ 14,163 5,764
-------- --------
Net income........................................................ $ 19,471 $ 7,685
======== ========
Net income per share of common stock.............................. $ 0.45
========
Weighted average shares of common stock outstanding............... 43,587
========
Pro forma net income per share of common stock (Note 7)........... $ 0.22
========
Pro forma weighted average shares of common stock outstanding
(Note 7 )........................................................ 34,782
========
Supplemental pro forma as adjusted data (Note 9):
Pro forma net income............................................ $ 8,542
========
Pro forma net income per share of common stock.................. $ 0.20
========
Pro forma weighted average shares of common stock outstanding... 43,262
========
</TABLE>
See accompanying notes.
4
<PAGE>
KNOLL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SUPPLEMENTAL |
PRO FORMA DATA |
NINE MONTHS NINE MONTHS SEVEN MONTHS |THE KNOLL GROUP, INC.
ENDED ENDED ENDED | (PREDECESSOR)
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, | TWO MONTHS ENDED
1997 1996 1996 | FEBRUARY 29, 1996
----------------- ------------------ ---------------- |----------------------
(Note 8) |
<S> <C> <C> <C> | <C>
Sales................................... $598,817 $472,016 $381,784 | $ 90,232
|
Cost of sales........................... 360,953 307,694 246,627 | 59,714
-------- -------- -------- | --------
|
Gross profit............................ 237,864 164,322 135,157 | 30,518
|
Selling, general and administrative |
expenses............................... 135,324 107,446 85,407 | 21,256
|
Westinghouse long-term incentive |
compensation........................... -- -- -- | 47,900
|
Allocated corporate expenses............ -- -- -- | 921
-------- -------- -------- | --------
|
Operating income (loss)................. 102,540 56,876 49,750 | (39,559)
|
Interest expense........................ 20,103 30,683 23,605 | 340
|
Other income (expense), net............. 89 366 662 | (296)
-------- -------- -------- | --------
|
Income (loss) before income |
tax expense (benefit) and extraordinary |
item................................... 82,526 26,559 26,807 | (40,195)
|
Income tax expense (benefit)............ 34,461 11,150 11,146 | (16,107)
-------- -------- -------- | --------
|
Income (loss) before extraordinary item. 48,065 15,409 15,661 | (24,088)
|
Extraordinary loss on early |
extinguishment of debt, net of taxes... 5,337 -- -- | --
-------- -------- -------- | --------
|
Net income (loss)....................... $ 42,728 $ 15,409 $ 15,661 | $(24,088)
======== ======== ======== | ========
|
Pro forma income per share of common |
stock (Note 7): |
Income before extraordinary item....... $ 1.22 $ 0.44 $ 0.45 |
Extraordinary loss on early |
extinguishment of debt, net of taxes.. (0.14) -- -- |
-------- -------- -------- |
Net income............................. $ 1.08 $ 0.44 $ 0.45 |
======== ======== ======== |
Pro forma weighted average shares of |
common stock outstanding (Note 7)...... 39,382 34,782 34,782 |
======== ======== ======== |
|
Supplemental pro forma as adjusted data |
(Note 9): |
|
Pro forma net income................... $ 49,697 $ 17,978 |
======== ======== |
Pro forma net income per share of |
common stock.......................... $ 1.15 $ 0.41 |
======== ======== |
Pro forma weighted average shares of |
common stock outstanding.............. 43,396 43,262 |
======== ======== |
</TABLE>
See accompanying notes.
5
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KNOLL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS SEVEN MONTHS | THE KNOLL GROUP, INC.
ENDED ENDED | (PREDECESSOR)
SEPTEMBER 30, SEPTEMBER 30, | TWO MONTHS ENDED
1997 1996 | FEBRUARY 29, 1996
------------------- ------------------- |-----------------------
<S> <C> <C> |<C>
CASH FLOWS FROM OPERATING ACTIVITIES |
Net income (loss)..................................... $ 42,728 $ 15,661 | $(24,088)
Adjustments to reconcile net income (loss) to net |
cash provided by (used in) operating activities: |
Depreciation and amortization...................... 25,593 19,941 | 4,317
Extraordinary loss................................. 8,838 -- | --
Other.............................................. 1,337 -- | --
Changes in assets and liabilities: |
Customer receivables............................. (15,439) 5,970 | 8,798
Inventories...................................... (8,666) 1,822 | 671
Accounts payable................................. 11,823 12,445 | (15,292)
Current and deferred income taxes................ 12,996 (14,685) | (16,627)
Other current assets and liabilities............. 9,995 12,114 | (4,907)
Other noncurrent assets and liabilities.......... 5,427 14,740 | (6,911)
-------- --------- | --------
Cash provided by (used in) operating activities....... 94,632 68,008 | (54,039)
-------- --------- | --------
|
CASH FLOWS FROM INVESTING ACTIVITIES |
Acquisition of the Company from Westinghouse.......... -- (579,801) | --
Purchases of property, plant and equipment............ (15,122) (6,773) | (2,296)
Proceeds from sale of assets.......................... 176 -- | --
-------- --------- | --------
Cash used in investing activities..................... (14,946) (586,574) | (2,296)
-------- --------- | --------
|
CASH FLOWS FROM FINANCING ACTIVITIES |
Repayment of short-term debt, net..................... -- (1,476) | (3,805)
Repayment of revolving credit facility, net........... (56,000) -- | --
Proceeds from long-term debt.......................... -- 425,000 | --
Repayment of long-term debt........................... (67,988) (45,592) | --
Premium paid for early extinguishment of debt......... (5,775) -- | --
Proceeds from issuance of stock, net of stock |
issuance costs....................................... 133,582 160,000 | --
Redemption of preferred stock......................... (80,000) -- | --
Net receipts from parent company...................... -- -- | 60,848
-------- --------- | --------
Cash provided by (used in) financing activities....... (76,181) 537,932 | 57,043
-------- --------- | --------
|
Effect of exchange rate changes on cash and cash |
equivalents.......................................... (1,283) 28 | 58
-------- --------- | --------
Increase in cash and cash equivalents................. 2,222 19,394 | 766
|
Cash and cash equivalents at beginning of period...... 8,804 2,335 | 1,569
-------- --------- | --------
|
Cash and cash equivalents at end of period............ $ 11,026 $ 21,729 | $ 2,335
======== ========= | ========
</TABLE>
See accompanying notes.
6
<PAGE>
KNOLL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Knoll,
Inc. (the Company) and The Knoll Group, Inc. (the Predecessor) have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X and therefore do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation are reflected
in the condensed consolidated financial statements. Supplemental pro forma data
is provided solely for additional analysis and is not intended to be a
presentation in accordance with generally accepted accounting principles. The
condensed consolidated balance sheet as of December 31, 1996 and the condensed
consolidated statement of operations and condensed consolidated statement of
cash flows for the two months ended February 29, 1996 are derived from audited
financial statements. The condensed consolidated financial statements and notes
thereto should be read in conjunction with the consolidated financial statements
and notes thereto contained in the Company's annual report on Form 10-K for the
year ended December 31, 1996. The results of operations for the three and nine
months ended September 30, 1997 are not necessarily indicative of the results to
be expected for the full year ending December 31, 1997.
2. ACQUISITION OF KNOLL
On December 20, 1995, Westinghouse Electric Corporation (Westinghouse) entered
into a Stock Purchase Agreement (the Agreement) with T.K.G. Acquisition Corp.
(TKG), a subsidiary of Warburg, Pincus Ventures, L.P. Under the terms of the
Agreement, TKG acquired all of the outstanding capital stock of The Knoll Group,
Inc. and related entities on February 29, 1996 through its wholly owned
subsidiary T.K.G. Acquisition Sub, Inc. Immediately following this transaction,
T.K.G. Acquisition Sub, Inc. and The Knoll Group, Inc. merged with and into
Knoll North America, Inc., the principal United States operating company of The
Knoll Group, Inc. Knoll North America, Inc. changed its name to Knoll, Inc. at
the time of the merger. On March 14, 1997, Knoll, Inc. merged with and into
TKG. TKG then changed its name to Knoll, Inc.
3. INVENTORIES
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
-------------------- --------------------
(In Thousands)
<S> <C> <C>
Raw materials..................................... $37,784 $34,147
Work in process................................... 9,035 7,508
Finished goods.................................... 18,845 16,156
------- -------
Inventories....................................... $65,664 $57,811
======= =======
</TABLE>
7
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4. CAPITAL STRUCTURE
On May 6, 1997, the Company's Certificate of Incorporation was amended to
increase the number of authorized shares of common stock from 24,000,000 to
100,000,000, increase the number of authorized shares of preferred stock from
3,000,000 to 10,000,000 and effect a 3.13943-for-1 split of the Company's common
stock. Fractional shares resulting from the common stock split were settled in
cash.
In connection with the initial public offering of the Company's common stock
discussed in Note 5, 800,000 shares of Series A 12% Participating Convertible
Preferred Stock (Series A Preferred Stock) were redeemed for $80.0 million and
11,749,361 shares of common stock, and the remaining 802,998 shares of Series A
Preferred Stock were converted into 15,691,558 shares of common stock.
On June 27, 1997, the Company filed a Registration Statement on Form S-8 with
the Securities and Exchange Commission to register an aggregate of 2,055,772
shares of its common stock issuable to participants under the Knoll, Inc.
Employee Stock Purchase Plan (Stock Purchase Plan) (300,000 shares), the Knoll,
Inc. 1997 Stock Incentive Plan (1,255,772 shares) and The Knoll Retirement
Savings Plan (500,000 shares).
The Stock Purchase Plan commenced on August 1, 1997. It provides 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. During the third
quarter of 1997, the Company issued 8,583 shares of common stock at $25.63 per
share under the Stock Purchase Plan.
5. INITIAL PUBLIC OFFERING
The Company completed an initial public offering of its common stock during the
second quarter of 1997. An aggregate of 9,200,000 shares, including 720,000
shares sold by a selling stockholder, were sold during May and June 1997 at
$17.00 per share. The net proceeds to the Company amounted to $133.5 million
after deducting related expenses. The net proceeds, together with borrowings of
$11.6 million under the Company's then-existing revolving credit facility, were
used (i) to redeem a portion of the Series A Preferred Stock for $80.0 million
and (ii) to redeem an aggregate principal amount of $57.8 million of the
Company's 10.875% Senior Subordinated Notes for a total redemption price of
$65.1 million, including a redemption premium of $5.7 million and accrued and
unpaid interest thereon of $1.6 million. The redemption premium of $5.7 million
and the write-off of unamortized financing costs of $3.1 million associated with
the early redemption of the 10.875% Senior Subordinated Notes resulted in an
extraordinary loss of $5.3 million, net of taxes.
6. CREDIT AGREEMENT
On August 8, 1997, the Company entered into a new agreement that modified
certain terms of its then-existing senior credit agreement. The credit
agreement previously provided for a $100.0 million term loan with scheduled
principal payments through December 2002 and a $130.0 million revolving credit
facility that matured in December 2002. The new agreement provides for a $275.0
million revolving credit facility that matures in August 2002. At the time this
change became effective, $90.0 million of indebtedness outstanding under the
term loan and $50.0 million under the revolving loan became revolving borrowings
under the new agreement. The new agreement includes a $10.0 million sub-limit
for swing line loans and a $140.0 million sub-limit for competitive bid loans.
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 in the
agreement) plus an applicable percentage which is subject to change based on the
Company's ratio of funded debt to EBITDA or (ii) the greater of the federal
funds rate plus 0.5% or the prime rate.
7. SHARES AND PER SHARE DATA
All shares and per share data have been adjusted to give retroactive effect to
the 3.13943-for-1 stock split that occurred on May 6, 1997, as discussed in Note
4.
8
<PAGE>
Because of the significance of the redemption and conversion into common stock
of the Series A Preferred Stock (see Note 4) in connection with the initial
public offering, historical income per share is not presented for the noted
periods. Pro forma income per share amounts are based on the weighted average
number of shares of common stock and common stock equivalents (employee stock
options) outstanding during the period, after giving effect to the redemption
and conversion into common stock of the Series A Preferred Stock assuming such
redemption and conversion had occurred at the beginning of each period
presented. Pursuant to Securities and Exchange Commission Staff Accounting
Bulletin No. 83, all common stock and options to purchase common stock issued at
prices below the initial public offering price per share during the twelve month
period immediately preceding the initial filing date of the Company's
registration statement for the offering have been included as outstanding for
all periods presented (using the treasury stock method at the initial public
offering price).
8. SUPPLEMENTAL PRO FORMA RESULTS OF OPERATIONS
The supplemental pro forma results of operations data for the nine months ended
September 30, 1996 is presented for purposes of additional analysis. It
presents financial information assuming that the acquisition of the Predecessor
from Westinghouse had taken place on January 1, 1996. Such pro forma results
reflect the following adjustments: (i) Cost of sales and selling, general and
administrative expenses have been increased by $552,000 and $369,000,
respectively, to reflect the reclassification of allocated corporate expenses
from Westinghouse. The reclassified allocated corporate expenses approximate
the replacement cost to the Company for services formerly provided by
Westinghouse to the Predecessor, including (a) benefit expense related to the
adoption of various independent benefit plans comparable to Westinghouse benefit
plans and (b) the cost of services required to replace specific activities
formerly provided by Westinghouse to the Predecessor, including audit, tax,
general ledger, accounts receivable, human resources, legal, insurance and data
communications. (ii) Cost of sales has been increased by $801,000 to reflect
increased depreciation resulting from the acquisition of the Predecessor from
Westinghouse. (iii) Selling, general and administrative expenses have been
increased by $414,000 to reflect increased depreciation and amortization
resulting from the acquisition. (iv) The Westinghouse long-term incentive
compensation of $47.9 million for the two months ended February 29, 1996 has
been eliminated on a pro forma basis due to the amounts becoming payable, and
for which the amounts payable were established and subsequently paid by
Westinghouse, as a result of consummation of the acquisition. (v) Interest
expense (including the amortization of deferred financing fees) has been
increased by $6.7 million assuming the acquisition had been completed on January
1, 1996. Interest expense assumes a weighted average interest rate of 9.2%,
which approximates the actual interest rate on the date of the acquisition on
$424.1 million in average outstanding borrowings and amortization of deferred
financing charges. If interest rates changed 1/8%, the pro forma adjustment for
interest costs would have changed by approximately $88,000. (vi) Income tax
expense has been increased by $16.1 million to reflect the assumed tax rate
applied to the pro forma income.
The supplemental pro forma data does not purport to represent what the Company's
results actually would have been if such events had occurred on January 1, 1996,
nor does such information purport to project the results of the Company for any
future periods. The unaudited pro forma financial information is based upon
assumptions that the Company believes are reasonable.
9. SUPPLEMENTAL PRO FORMA AS ADJUSTED DATA
The supplemental pro forma as adjusted data is included for purposes of
additional analysis. It presents results of operations assuming that the
initial public offering of the Company's common stock and the application of the
net proceeds to the Company therefrom together with related borrowings under the
Company's then-existing revolving credit facility occurred at the beginning of
each period. Such pro forma as adjusted data does not reflect the 1997
extraordinary loss of $5.3 million, net of taxes, incurred as a result of the
early redemption of a portion of the Company's 10.875% Senior Subordinated
Notes. The supplemental pro forma as adjusted weighted average shares
of common stock outstanding reflect the initial public offering of the Company's
common stock and the redemption and conversion into common stock of the Series A
Preferred Stock (see Note 4) as of the beginning of each period presented.
9
<PAGE>
The supplemental pro forma as adjusted data reflects interest savings from the
redemption of an aggregate principal amount of $57.8 million of the Company's
10.875% Senior Subordinated Notes, additional interest expense incurred on $11.6
million in related borrowings under the Company's then-existing revolving credit
facility and related income tax effects. Interest expense (including the
amortization of deferred financing fees) has been decreased by $1.4 million for
the three months ended September 30, 1996 and has been decreased by $2.7 million
and $4.3 million for the nine months ended September 30, 1997 and 1996,
respectively. Interest adjustments are based on the actual interest rate of
10.875% for the Senior Subordinated Notes and a weighted average interest rate
of 6.6% in 1997 and 8.25% in 1996 for the then-existing revolving credit
facility. The weighted average interest rates approximate the actual interest
rates for the period January 1, 1997 to May 8, 1997, the period preceding the
initial public offering, and the ten month period ended December 31, 1996,
respectively, for the Company's average outstanding borrowings under the then-
existing senior credit facilities. Income tax expense has been increased by
$561,000 for the three months ended September 30, 1996 and has been increased by
$1.1 million and $1.7 million for the nine months ended September 30, 1997 and
1996, respectively, to reflect the assumed income tax effects of the interest
expense adjustments.
The supplemental pro forma as adjusted information does not purport to represent
what the Company's results actually would have been if the aforementioned events
had occurred at the beginning of each period presented, nor does such
information purport to project the results of the Company for any future
periods. The unaudited pro forma as adjusted financial information is based
upon assumptions that the Company believes are reasonable.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
- -------------
GENERAL
Knoll, Inc. (the Company) was formed as a result of the acquisition of the
office furniture business unit (The Knoll Group, Inc. and related entities) of
Westinghouse Electric Corporation (Westinghouse) on February 29, 1996. This
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" has been prepared using the unaudited actual results for the three
months ended September 30, 1997 and 1996, the unaudited actual results for the
nine months ended September 30, 1997 and the unaudited supplemental pro forma
results for the nine months ended September 30, 1996. The unaudited
supplemental pro forma results of operations data for the nine months ended
September 30, 1996 gives effect to the acquisition of The Knoll Group, Inc. and
related entities from Westinghouse as if the acquisition occurred on January 1,
1996. This presentation provides information about the impact of the
acquisition by showing how it might have affected historical financial
statements if the acquisition had been consummated at such earlier time.
Management believes that a comparison between actual results for the nine months
ended September 30, 1997 and pro forma results for the nine months ended
September 30, 1996 is more meaningful than a comparison between actual results
for both periods due to the significance of the acquisition.
The following discussion should be read in conjunction with the accompanying
condensed consolidated financial statements and notes thereto.
RESULTS OF OPERATIONS
COMPARISON OF THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1997 TO THIRD
QUARTER AND PRO FORMA NINE MONTHS ENDED SEPTEMBER 30, 1996
Sales. Sales for the third quarter of 1997 were $208.4 million, an increase of
$41.2 million, or 24.6%, from sales of $167.2 million for the third quarter of
1996. Sales for the first nine months of 1997 were $598.8 million, an increase
of $126.8 million, or 26.9%, from sales of $472.0 million for the same period in
1996. Sales levels continue to benefit from product improvements, increased
sales and marketing efforts and favorable industry dynamics.
Gross Profit. Gross profit was $83.7 million for the third quarter of 1997, an
increase of $22.7 million, or 37.2%, from gross profit of $61.0 million for the
third quarter of 1996. For the nine months ended September 30, 1997, gross
profit was $237.9 million, an increase of $73.6 million, or 44.8%, from gross
profit of $164.3 million for the same period in 1996. Gross profit as a
percentage of sales increased to 40.2% for the third quarter of 1997 from 36.5%
for the third quarter of 1996 and increased to 39.7% for the nine months ended
September 30, 1997 from 34.8% for the same period in 1996. These increases were
principally due to higher sales volume, better pricing in North America and
continued worldwide factory operating cost improvements.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $44.7 million for the third quarter of 1997 and
$135.3 million for the nine months ended September 30, 1997 compared to $38.3
million for the third quarter of 1996 and $107.4 million for the nine months
ended September 30, 1996. These quarter and nine month increases of $6.4
million and $27.9 million, respectively, are primarily due to increased employee
costs related to higher sales and profit levels in addition to increased
expenses related to new product and technology initiatives. As a percentage of
sales, the Company's selling, general and administrative expenses decreased to
21.4% for the third quarter of 1997 from 22.9% for the third quarter of 1996 and
decreased to 22.6% for the nine months ended September 30, 1997 from 22.8% for
the same period in 1996.
Operating Income. Operating income increased to $39.0 million for the third
quarter of 1997, an increase of $16.2 million, or 71.1%, from $22.8 million for
the third quarter of 1996. For the nine months ended September 30, 1997,
operating income increased to $102.5 million, an increase of $45.6 million, or
80.1%, from $56.9 million for the same period in 1996. As noted above, these
improvements were driven by higher sales volume, better pricing in North
America, and factory cost improvements as well as continuing efficiencies gained
from consolidation and centralization of administrative functions.
11
<PAGE>
Interest Expense. Interest expense was $5.4 million for the third quarter of
1997 and $20.1 million for the nine months ended September 30, 1997 compared to
$9.7 million and $30.7 million for the third quarter and the nine months ended
September 30, 1996, respectively. The decreases in interest expense are
primarily attributable to the overall reduction in debt and to lower interest
rates associated with the Company's senior credit agreement, which was
refinanced in December 1996.
Income Tax Expense. Income tax expense as a percentage of pre-tax income was
42.1% for the third quarter and 41.8% for the nine months ended September 30,
1997 compared to 42.9% and 42.0% for the third quarter and nine months ended
September 30, 1996, respectively. These differences are primarily attributable
to the changing quarterly mix of pre-tax income between countries in which the
Company operates with differing effective tax rates.
Income per share of common stock. Net income for the third quarter of 1997 was
$0.45 per share, an increase of 104.5% over the pro forma $0.22 per share earned
for the third quarter of 1996. Pro forma income before extraordinary item per
share for the nine months ended September 30, 1997 increased 177.3% to $1.22 per
share from $0.44 per share for the nine months ended September 30, 1996.
Supplemental pro forma as adjusted net income and net income per share. Net
income for the third quarter of 1997 was $19.5 million ($0.45 per share), an
increase of $11.0 million ($0.25 per share), or 129.4%, compared to supplemental
pro forma as adjusted net income of $8.5 million ($0.20 per share) for the third
quarter of 1996. Supplemental pro forma as adjusted net income for the nine
months ended September 30, 1997 was $49.7 million ($1.15 per share), an increase
of $31.7 million ($0.74 per share), or 176.1%, compared to $18.0 million ($0.41
per share) for the same period of 1996. Supplemental pro forma as adjusted data
reflects the sale of 8,480,000 shares of common stock by the Company in its
initial public offering and the application of the net proceeds therefrom
together with related borrowings under the Company's then-existing revolving
credit facility as if such events occurred at the beginning of each period
presented. Consequently, such results include interest savings from the early
redemption of a portion of the Company's 10.875% Senior Subordinated Notes,
additional interest expense for related borrowings under the Company's then-
existing revolving credit facility and related income tax effects. Pro forma as
adjusted results exclude the 1997 extraordinary loss of $5.3 million, net of
taxes, incurred in connection with the early redemption of a portion of the
10.875% Senior Subordinated Notes.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 1997, the Company generated cash
flows from operations of $94.6 million. Cash provided by operations resulted
primarily from earnings before depreciation, amortization and the extraordinary
loss on early extinguishment of debt as well as positive cash flow from working
capital.
The Company spent $15.1 million during the first nine months of 1997 for capital
expenditures.
During the second quarter of 1997, the Company completed an initial public
offering of its common stock, generating net proceeds of $133.5 million to the
Company from its sale of 8,480,000 shares. The Company used the net proceeds,
together with borrowings of $11.6 million under the Company's then-existing
revolving credit facility, to redeem 800,000 shares of Series A 12%
Participating Convertible Preferred Stock for $80.0 million and to redeem an
aggregate principal amount of $57.8 million of the Company's 10.875% Senior
Subordinated Notes for $65.1 million, which includes a redemption premium of
$5.7 million and accrued and unpaid interest thereon of $1.6 million. In
addition, the Company repaid $66.2 million of bank debt during the nine months
ended September 30, 1997.
On August 8, 1997, the Company entered into a new agreement that modified
certain terms of its then-existing senior credit agreement. The credit
agreement previously provided for a $100.0 million term loan with scheduled
principal payments through December 2002 and a $130.0 million revolving credit
facility that matured in December 2002. The new agreement provides for a $275.0
million revolving credit facility that matures in August 2002. As of September
30, 1997, the Company had an aggregate of $163.2 million available for borrowing
under its U.S. and European revolving credit facilities. The Company believes
that internally generated cash flows together with borrowings under its
revolving credit facilities will be sufficient to meet its cash needs for the
next twelve months. The Company's debt instruments contain covenants that, among
other things, restrict the Company's ability to incur additional indebtedness
and pay dividends as well as require the maintenance of certain financial
ratios.
12
<PAGE>
BACKLOG
The Company's backlog of unfilled orders was $114.5 million at September 30,
1997 and $92.5 million at September 30, 1996. The Company expects to fill
substantially all outstanding unfilled orders within the next twelve months.
The Company manufactures substantially all of its products to order, and its
average manufacturing lead time is approximately five weeks. As a result,
backlog is not a significant factor used to predict the Company's long-term
business prospects.
STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE
Certain portions of this Form 10-Q, including "Management's Discussion and
Analysis of Financial Condition and Results of Operations," contain various
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, which represent the Company's expectations or beliefs concerning
future events. The Company cautions that these statements are further qualified
by important factors that could cause actual results to differ materially from
those in the forward-looking statements, including, without limitation, the
highly competitive nature of the market in which the Company competes, including
the introduction of new products or pricing changes by the Company's
competitors; risks associated with the Company's growth strategy, including the
risk that the Company's introduction of new products will not achieve the same
degree of success achieved historically by the Company's products; the Company's
indebtedness, which requires a substantial portion of the Company's cash flow
from operations to be dedicated to debt service, making such cash flow
unavailable for other purposes, and which could limit the Company's flexibility
in reacting to changes in its industry or economic conditions generally; the
Company's dependence on key personnel; the ability of the Company to maintain
its relationships with its dealers; the Company's reliance on its patents and
other intellectual property; environmental laws and regulations, including those
that may be enacted in the future, that affect the ownership and operation of
the Company's manufacturing plants; risks relating to potential labor
disruptions: fluctuations in foreign currency exchange rates; and fluctuations
in industry revenues driven by a variety of macroeconomic factors, including
white collar employment levels, corporate cash flows, and non-residential
commercial construction, as well as by a variety of industry factors such as
corporate reengineering and restructuring, technology demands, ergonomic, health
and safety concerns and corporate relocations.
13
<PAGE>
PART II -- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
- ------------------------------
SALES OF UNREGISTERED SECURITIES
Options to purchase 25,000 and 315,000 shares of common stock were granted to
certain employees of the Company on October 22, 1997 and October 29, 1997,
respectively, pursuant to the Knoll, Inc. 1997 Stock Incentive Plan. These
options were issued at an exercise price of $33.125 per share and $28.50 per
share, respectively, and vest over periods determined at their date of grant.
Such grants were made in reliance on the exemption from registration pursuant to
Section 4(2) of the Securities Act.
RESTRICTIONS ON DIVIDENDS
The credit agreement governing the Company's revolving credit facility and the
indenture relating to the Company's 10.875% Senior Subordinated Notes restrict
the Company's ability to pay dividends to its stockholders. In addition, the
current policy of the Company's Board of Directors is to retain earnings to
finance the operations and expansion of the Company's business. 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
a. Exhibits:
10* Credit Agreement, dated as of August 8, 1997, by and among the Company,
NationsBank, N.A., as Administrative Agent, The Chase Manhattan Bank,
as Documentation Agent and other lending institutions.
27 Financial Data Schedule.
b. Current Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the three months
ended September 30, 1997.
- ---------------
* Incorporated by reference to the Company's Registration Statement No. 333-
36407 on Form S-1, which was filed on September 25, 1997 and subsequently
withdrawn.
14
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KNOLL, INC.
Date: November 13, 1997 By: /s/ Burton B. Staniar
---------------------
BURTON B. STANIAR
Chairman of the Board
Date: November 13, 1997 By: /s/ Douglas J. Purdom
----------------------
DOUGLAS J. PURDOM
Senior Vice President and
Chief Financial Officer
15
<PAGE>
EXHIBIT INDEX
-------------
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10* Credit Agreement, dated as of August 8, 1997, by and among the Company,
NationsBank, N.A., as Administrative Agent, The Chase Manhattan Bank,
as Documentation Agent and other lending institutions.
27 Financial Data Schedule.
- ---------------
* Incorporated by reference to the Company's Registration Statement No. 333-
36407 on Form S-1, which was filed on September 25, 1997 and subsequently
withdrawn.
16
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