<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 June 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. 333-02972
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 August 5, 1997, there were 43,212,227 shares of the Registrant's common
stock, par value $0.01 per share, outstanding.
<PAGE>
KNOLL, INC.
INDEX TO FORM 10-Q
ITEM PAGE
- ---- ----
PART I -- FINANCIAL INFORMATION
1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets at June 30, 1997
and December 31, 1996..................................... 3
Condensed Consolidated Statements of Operations for the
three months ended June 30, 1997 and June 30, 1996........ 4
Condensed Consolidated Statements of Operations for the
six months ended June 30, 1997, the four months ended
June 30, 1996 and the two months ended February 29, 1996
(Predecessor)............................................. 5
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 1997, the four months
ended June 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
4. Submission of Matters to a Vote of Security Holders........... 14
5. Other Information............................................. 14
6. Exhibits and Reports on Form 8-K.............................. 15
Signatures........................................................ 16
Exhibit Index..................................................... 17
2
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ----------------------------------------------------------------
KNOLL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE DATA)
JUNE 30, 1997 DECEMBER 31, 1996
-------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents............. $ 10,873 $ 8,804
Customer receivables, net............. 125,320 111,166
Inventories........................... 62,339 57,811
Deferred income taxes................. 19,101 17,474
Prepaid and other current assets...... 767 7,424
-------- --------
Total current assets............... 218,400 202,679
Property, plant and equipment at cost... 200,565 195,483
Accumulated depreciation................ (32,152) (19,265)
-------- --------
Property, plant and equipment, net. 168,413 176,218
Intangible assets at cost............... 289,350 293,753
Accumulated amortization................ (10,465) (6,813)
-------- --------
Intangible assets, net............. 278,885 286,940
Other noncurrent assets................. 3,924 9,875
-------- --------
Total Assets....................... $669,622 $675,712
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt.. $ 12,500 $ 23,265
Accounts payable...................... 57,382 50,250
Income taxes payable.................. 3,256 388
Other current liabilities............. 66,488 64,022
-------- --------
Total current liabilities.......... 139,626 137,925
Long-term debt.......................... 245,547 330,889
Postretirement benefits obligation...... 16,193 15,873
Other noncurrent liabilities............ 15,302 13,221
-------- --------
Total liabilities.................. 416,668 497,908
-------- --------
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 43,212,227
shares in 1997 and 7,291,308 shares
in 1996.............................. 432 73
Additional paid-in-capital............ 214,954 160,147
Unearned stock grant compensation..... (1,146) (1,387)
Retained earnings..................... 40,093 16,836
Cumulative foreign currency
translation adjustment............... (1,379) 532
-------- --------
Total stockholders' equity......... 252,954 177,804
-------- --------
Total Liabilities and
Stockholders' Equity.............. $669,622 $675,712
======== ========
See accompanying notes.
3
<PAGE>
KNOLL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, 1997 JUNE 30, 1996
------------- -------------
Sales........................ $212,582 $166,520
Cost of sales................ 126,406 107,946
-------- --------
Gross profit................. 86,176 58,574
Selling, general and
administrative expenses..... 50,577 36,142
-------- --------
Operating income............. 35,599 22,432
Interest expense............. 6,954 10,350
Other income, net............ 147 389
-------- --------
Income before income tax
expense and extraordinary
item........................ 28,792 12,471
Income tax expense........... 11,836 4,944
-------- --------
Income before extraordinary
item........................ 16,956 7,527
Extraordinary loss on early
extinguishment of debt, net
of taxes (Note 5)........... 5,337 --
-------- --------
Net income................... $ 11,619 $ 7,527
======== ========
Pro forma earnings per share of
common stock (Note 6):
Income before extraordinary
item....................... $ 0.43 $ 0.22
Extraordinary loss on early
extinguishment of debt,
net of taxes............... (0.14) --
-------- --------
Net income.................. $ 0.29 $ 0.22
======== ========
Pro forma weighted average
shares of common stock
outstanding (Note 6)....... 39,684 34,782
======== ========
Supplemental pro forma as
adjusted data (Note 8):
Pro forma net income........ $ 17,707 $ 8,390
======== ========
Pro forma net income per
share of common stock...... $ 0.41 $ 0.19
======== ========
Pro forma weighted average
shares of common stock
outstanding................ 43,338 43,262
======== ========
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 | THE KNOLL GROUP, INC.
SIX MONTHS SIX MONTHS FOUR MONTHS | (PREDECESSOR)
ENDED ENDED ENDED | TWO MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1996 | FEBRUARY 29, 1996
-------------- -------------------------- -------------- | -----------------------
(Note 7) |
|
<S> <C> <C> <C> | <C>
Sales...................... $390,415 $304,832 $214,600 | $ 90,232
|
Cost of sales.............. 236,265 201,556 140,489 | 59,714
-------- -------- -------- | --------
|
Gross profit............... 154,150 103,276 74,111 | 30,518
|
Selling, general and |
administrative expenses... 90,635 69,180 47,141 | 21,256
|
Westinghouse long-term |
incentive compensation.... -- -- -- | 47,900
|
Allocated corporate |
expenses.................. -- -- -- | 921
-------- -------- -------- | --------
|
Operating income (loss).... 63,515 34,096 26,970 | (39,559)
|
Interest expense........... 14,696 21,030 13,952 | 340
|
Other income (expense), net 73 44 340 | (296)
-------- -------- -------- | --------
|
Income (loss) before income |
tax expense (benefit) and |
extraordinary item........ 48,892 13,110 13,358 | (40,195)
|
Income tax expense |
(benefit)................. 20,298 5,386 5,382 | (16,107)
-------- -------- -------- | --------
|
Income (loss) before |
extraordinary item........ 28,594 7,724 7,976 | (24,088)
|
Extraordinary loss on |
early extinguishment of |
debt, net of taxes........ 5,337 -- -- | --
-------- -------- -------- | --------
|
Net income (loss).......... $ 23,257 $ 7,724 $ 7,976 | $(24,088)
======== ======== ======== | ========
|
Pro forma earnings per |
shares of common stock (Note 6): |
Income before |
extraordinary item....... $ 0.76 $ 0.22 $ 0.23 |
Extraordinary loss on |
early extinguishment of |
debt, net of taxes....... (0.14) -- -- |
-------- -------- -------- |
Net income................ $ 0.62 $ 0.22 $ 0.23 |
======== ======== ======== |
Pro forma weighted average |
shares of common stock |
outstanding (Note 6)...... 37,246 34,782 34,782 |
======== ======== ======== |
|
|
Supplemental pro forma as |
adjusted data (Note 8): |
Pro forma net income...... $ 30,236 $ 9,450 |
======== ======== |
Pro forma net income per |
share of common stock.... $ 0.70 $ 0.22 |
======== ======== |
Pro forma weighted |
average shares of common |
stock outstanding........ 43,300 43,262 |
======== ======== |
</TABLE>
See accompanying notes.
5
<PAGE>
KNOLL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
| THE KNOLL GROUP, INC.
SIX MONTHS FOUR MONTHS | (PREDECESSOR)
ENDED ENDED | TWO MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1996 | FEBRUARY 29, 1996
-------------- -------------- | -----------------------
<S> <C> <C> | <C>
|
CASH FLOWS FROM OPERATING |
ACTIVITIES |
Net income (loss).......... $ 23,257 $ 7,976 | $(24,088)
Adjustments to reconcile |
net income (loss) to net |
cash provided by (used |
in) operating activities: |
Depreciation and |
amortization............ 17,317 11,536 | 4,317
Extraordinary loss....... 8,838 -- | --
Other.................... 1,063 -- | --
Changes in assets and |
liabilities: |
Customer receivables.... (15,151) (5,704) | 8,798
Inventories............. (5,109) 471 | 671
Accounts payable........ 7,653 7,700 | (15,292)
Current and deferred |
income taxes........... 7,072 (14,032) | (16,627)
Other current assets |
and liabilities........ 6,414 14,555 | (4,907)
Other noncurrent assets |
and liabilities........ 6,264 10,105 | (6,911)
-------- --------- | --------
Cash provided by (used in) |
operating activities...... 57,618 32,607 | (54,039)
-------- --------- | --------
CASH FLOWS FROM INVESTING |
ACTIVITIES |
Acquisition of the Company |
from Westinghouse......... -- (579,801) | --
Purchases of property, |
plant and equipment....... (7,686) (3,885) | (2,296)
Proceeds from sale of |
assets.................... 127 -- | --
-------- --------- | --------
Cash used in investing |
activities................ (7,559) (583,686) | (2,296)
-------- --------- | --------
CASH FLOWS FROM FINANCING |
ACTIVITIES |
Repayment of short-term |
debt, net................. -- (2,349) | (3,805)
Repayment of revolving |
credit facility, net...... (26,000) -- | --
Proceeds from long-term |
debt...................... -- 425,000 | --
Repayment of long-term |
debt...................... (69,988) (14,266) | --
Premium paid for early |
extinguishment of debt.... (5,775) -- | --
Proceeds from issuance of |
stock, net of stock |
issuance costs............ 134,656 160,000 | --
Redemption of preferred |
stock..................... (80,000) -- | --
Net receipts from parent |
company................... -- -- | 60,848
-------- --------- | --------
Cash provided by (used in) |
financing activities...... (47,107) 568,385 | 57,043
-------- --------- | --------
Effect of exchange rate |
changes on cash and cash |
equivalents............... (883) 347 | 58
-------- --------- | --------
Increase in cash and cash |
equivalents............... 2,069 17,653 | 766
|
Cash and cash equivalents |
at beginning of period.... 8,804 2,335 | 1,569
-------- --------- | --------
Cash and cash equivalents |
at end of period.......... $ 10,873 $ 19,988 | $ 2,335
======== ========= | ========
</TABLE>
See accompanying notes.
6
<PAGE>
KNOLL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 six
months ended June 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
JUNE 30, 1997 DECEMBER 31, 1996
------------- -----------------
(In Thousands)
Raw materials.... $37,290 $34,147
Work in process.. 8,364 7,508
Finished goods... 16,685 16,156
------- -------
Inventories...... $62,339 $57,811
======= =======
7
<PAGE>
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. 1997
Employee 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).
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 $134.0 million
after deducting related expenses. The net proceeds, together with borrowings of
$11.1 million under the Company's revolving credit facilities, have been 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 along with 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. WEIGHTED AVERAGE SHARES AND PER SHARE DATA
All weighted average 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.
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 earnings per share is not presented herein. Pro
forma earnings 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
<PAGE>
7. SUPPLEMENTAL PRO FORMA RESULTS OF OPERATIONS
The supplemental pro forma results of operations data for the six months ended
June 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.
8. 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 credit facilities 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.
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 $11.1
million in related borrowings under the Company's credit facilities and related
income tax effects. Interest expense (including the amortization of deferred
financing fees) has been decreased by $1.2 million and $1.4 million for the
three months ended June 30, 1997 and 1996, respectively, and has been decreased
by $2.7 million and $2.9 million for the six months ended June 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 credit facilities. The weighted
average interest rates approximate actual interest expense on the Company's
average outstanding borrowings under the credit facilities during the respective
periods. Income tax expense has been increased by $493,000 and $566,000 for the
three months ended June 30, 1997 and 1996, respectively, and has been increased
by $1.1 million for the six
9
<PAGE>
months ended June 30, 1997 and 1996 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 June 30, 1997 and 1996, the unaudited actual results for the six
months ended June 30, 1997 and the unaudited supplemental pro forma results for
the six months ended June 30, 1996. The unaudited supplemental pro forma
results of operations data for the six months ended June 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 six months ended June 30, 1997 and pro
forma results for the six months ended June 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 SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 1997 TO SECOND
QUARTER AND PRO FORMA SIX MONTHS ENDED JUNE 30, 1996
Sales. Sales for the second quarter of 1997 were $212.6 million, an increase of
$46.1 million, or 27.7%, above sales of $166.5 million for the second quarter of
1996. Sales for the first six months of 1997 were $390.4 million, an increase
of $85.6 million, or 28.1%, above sales of $304.8 million for the same period in
1996. This growth resulted from increased sales across all product categories.
A significant portion of the sales growth was attributable to sales of office
systems, which grew $36.4 million, or 28.9%, for the second quarter and $69.1
million, or 30.3%, for the six months. Sales levels continue to benefit from
product improvements, increased sales and marketing efforts and favorable
industry dynamics.
Gross profit. Gross profit was $86.2 million for the second quarter of 1997, an
increase of $27.6 million, or 47.1%, above gross profit of $58.6 million for the
second quarter of 1996. For the six months ended June 30, 1997, gross profit
was $154.2 million, an increase of $50.9 million, or 49.3%, above gross profit
of $103.3 million for the same period in 1996. Gross profit as a percentage of
sales increased to 40.5% for the second quarter of 1997 from 35.2% for the
second quarter of 1996 and increased to 39.5% for the six months ended June 30,
1997 from 33.9% 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 $50.6 million for the second quarter of 1997 and
$90.6 million for the six months ended June 30, 1997 compared to $36.1 million
for the second quarter of 1996 and $69.2 million for the six months ended June
30, 1996. These quarter and six month increases of $14.5 million and $21.4
million, respectively, are due primarily 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 increased to 23.8% for the second
quarter of 1997 from 21.7% for the second quarter of 1996 and increased to 23.2%
for the six months ended June 30, 1997 from 22.7% for the same period in 1996.
Operating income. Operating income increased to $35.6 million for the second
quarter of 1997, an increase of $13.2 million, or 58.9%, from operating income
of $22.4 million in the second quarter of 1996. For the six months ended June
30, 1997, operating income increased to $63.5 million, an increase of $29.4
million, or 86.2%, from operating income of $34.1 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 $7.0 million for the second quarter of
1997 and $14.7 million for the six months ended June 30, 1997 compared to $10.4
million and $21.0 million for the second quarter and the six months ended June
30, 1996, respectively. The decreases in interest expense are attributable to
the overall reduction in debt in addition to lower interest rates associated
with the Company's credit agreement which was refinanced in December of 1996.
Income tax expense. Income tax expense was 41.1% of pre-tax income for the
second quarter of 1997 and 41.5% for the six months ended June 30, 1997 compared
to 39.6% and 41.1% for the second quarter and six months ended June 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.
Pro forma earnings per share of common stock. Income before extraordinary item
for the second quarter of 1997 was $0.43 per share, an increase of 95.5% over
the $0.22 per share earned for the second quarter of 1996. Income before
extraordinary item per share for the six months ended June 30, 1997 increased
245.5% to $0.76 per share from $0.22 per share for the six months ended June 30,
1996.
Supplemental pro forma as adjusted net income and earnings per share.
Supplemental pro forma as adjusted net income for the quarter ended June 30,
1997 was $17.7 million or $0.41 per share, an increase of $9.3 million ($0.22
per share), or 110.7%, compared to $8.4 million or $0.19 per share for the same
period of 1996. Pro forma as adjusted net income for the six months ended June
30, 1997 increased $20.7 million ($0.48 per share), or 217.9%, to $30.2 million
or $0.70 per share compared to $9.5 million or $0.22 per share for the same
period of 1996. Supplemental pro forma as adjusted results of operations
reflect 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 credit facilities 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 credit facilities and related income tax
effects. Pro forma as adjusted results do not, however, reflect 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 six months ended June 30, 1997, the Company generated cash flows from
operations of $57.6 million. Cash provided by operations resulted primarily
from earnings net of depreciation, amortization and the extraordinary loss on
early extinguishment of debt.
The Company's investing activities used $7.7 million during the first six 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 $134.0 million to the
Company from its sale of 8,480,000 shares. The Company used the net proceeds,
together with borrowings under the Company's credit facilities, 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 to the repayment of a portion of the
Company's 10.875% Senior Subordinated Notes, the Company repaid $38.2 million of
bank debt during the six months ended June 30, 1997.
As of June 30, 1997, the Company had an aggregate of $78.6 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 which,
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 $111.2 million at June 30, 1997 and
$82.8 million at June 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 high
level of 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; 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; 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
- ------------------------------
RESTRICTIONS ON DIVIDENDS
The credit agreement governing the Company's term and revolving loans 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
On April 15, 1997, prior to the initial public offering, the Company and its
stockholders entered into an agreement in connection with the Company's initial
public offering and the related redemption and conversion into common stock of
the Company's Series A 12% Participating Convertible Preferred Stock (Series A
Preferred Stock). Pursuant to such agreement, the stockholders authorized the
filing of an amendment to the Company's Certificate of Incorporation to make
changes relating to the implementation of such redemption and conversion.
On May 6, 1997, prior to the initial public offering, by written consent of the
Company's majority stockholder in an action taken without a meeting, in lieu of
the Company's 1997 annual meeting of stockholders, the following matters were
resolved:
(i) Amendments to and restatements of the Company's Certificate of
Incorporation and By-Laws were approved and adopted. The amendment to the
Company's Certificate of Incorporation made certain changes relating to
the implementation of the redemption and conversion into common stock of
the Series A Preferred Stock, increased the Company's authorized capital
stock to 100,000,000 shares of common stock and 10,000,000 shares of
preferred stock and effected a 3.13943-for-1 split of the Company's common
stock.
(ii) The following individuals were elected to continue to serve as directors
of the Company: Burton B. Staniar, John H. Lynch, Andrew B. Cogan, Jeffrey
A. Harris, Sidney Lapidus, Kewsong Lee and John L. Vogelstein.
(iii) Ernst & Young LLP was approved to continue to serve as the Company's
independent accountants for 1997.
ITEM 5. OTHER INFORMATION
- --------------------------
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. See Note 5 to the Condensed Consolidated Financial Statements
included in Part I, Item 1.
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. 1997
Employee Stock Purchase Plan, the Knoll, Inc. 1997 Stock Incentive Plan and The
Knoll Retirement Savings Plan.
14
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
a. Exhibits:
3.1* Amended and Restated Certificate of Incorporation of the Company.
3.2* Restated By-Laws of the Company.
10.1* 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).
10.2* Amendment to Employment Agreement, dated as of
April 30, 1997, between the Company and Andrew B.
Cogan.
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 June 30, 1997.
_____________________
* Incorporated by reference to the Company's registration statement on Form S-1
(Registration No. 333-23399), which was declared effective by the Commission
on May 9, 1997.
15
<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: August 5, 1997 By: /s/ Burton B. Staniar
---------------------
BURTON B. STANIAR
Chairman of the Board
Date: August 5, 1997 By: /s/ Douglas J. Purdom
----------------------
DOUGLAS J. PURDOM
Senior Vice President and
Chief Financial Officer
16
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1* Amended and Restated Certificate of Incorporation
of the Company.
3.2* Restated By-Laws of the Company.
10.1* 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).
10.2* Amendment to Employment Agreement, dated as of
April 30, 1997, between the Company and Andrew B.
Cogan.
27 Financial Data Schedule.
_____________________
* Incorporated by reference to the Company's registration statement on Form S-1
(Registration No. 333-23399), which was declared effective by the Commission
on May 9, 1997.
17
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<PAGE>
<ARTICLE> 5
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KNOLL, INC.
EXHIBIT 27
FINANCIAL DATA SCHEDULE
(UNAUDITED)
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 10,873
<SECURITIES> 0
<RECEIVABLES> 125,320
<ALLOWANCES> 0
<INVENTORY> 62,339
<CURRENT-ASSETS> 218,400
<PP&E> 200,565
<DEPRECIATION> 32,152
<TOTAL-ASSETS> 669,622
<CURRENT-LIABILITIES> 139,626
<BONDS> 245,547
0
0
<COMMON> 432
<OTHER-SE> 252,522
<TOTAL-LIABILITY-AND-EQUITY> 669,622
<SALES> 390,415
<TOTAL-REVENUES> 390,415
<CGS> 236,265
<TOTAL-COSTS> 236,265
<OTHER-EXPENSES> 90,635
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,696
<INCOME-PRETAX> 48,892
<INCOME-TAX> 20,298
<INCOME-CONTINUING> 28,594
<DISCONTINUED> 0
<EXTRAORDINARY> (5,337)
<CHANGES> 0
<NET-INCOME> 23,257
<EPS-PRIMARY> 0.62
<EPS-DILUTED> 0
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