<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, 1998
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 August 10, 1998, there were 43,465,771 shares of the Registrant's common
stock, par value $0.01 per share, outstanding.
<PAGE>
KNOLL, INC.
TABLE OF CONTENTS FOR FORM 10-Q
<TABLE>
<CAPTION>
ITEM PAGE
- ---- ----
<S> <C>
PART I -- FINANCIAL INFORMATION
1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets at June 30, 1998 and December 31, 1997................ 3
Condensed Consolidated Statements of Operations for the three months ended June 30, 1998
and 1997 and the six months ended June 30, 1998 and 1997................................. 4
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 1998
and 1997................................................................................. 5
Notes to the Condensed Consolidated Financial Statements.................................... 6
2. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 10
PART II -- OTHER INFORMATION
2. Changes in Securities and Use of Proceeds..................................................... 13
4. Submission of Matters to a Vote of Security Holders........................................... 13
5. Other Information............................................................................. 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>
JUNE 30, 1998 DECEMBER 31, 1997
----------------------- ----------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 8,713 $ 10,790
Customer receivables, net........................................... 132,602 122,851
Inventories......................................................... 73,711 68,249
Deferred income taxes............................................... 21,110 21,295
Prepaid and other current assets.................................... 4,655 3,697
-------- --------
Total current assets.......................................... 240,791 226,882
Property, plant and equipment......................................... 236,653 224,274
Accumulated depreciation.............................................. (58,897) (43,824)
-------- --------
Property, plant and equipment, net............................ 177,756 180,450
Intangible assets..................................................... 283,478 285,057
Accumulated amortization.............................................. (18,285) (14,380)
-------- --------
Intangible assets, net........................................ 265,193 270,677
Other noncurrent assets............................................... 4,211 2,850
-------- --------
Total Assets.................................................. $687,951 $680,859
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt................................ $ -- $ 10,000
Accounts payable.................................................... 66,536 66,697
Income taxes payable................................................ 3,265 6,791
Other current liabilities........................................... 72,975 77,841
-------- --------
Total current liabilities..................................... 142,776 161,329
Long-term debt........................................................ 168,017 197,029
Postretirement benefits obligation.................................... 17,189 16,424
Other noncurrent liabilities.......................................... 24,299 17,788
-------- --------
Total liabilities............................................. 352,281 392,570
-------- --------
Stockholders' equity:
Common stock, $0.01 par value; authorized 100,000,000 shares;
issued and outstanding 43,453,213 shares in 1998 and 43,234,943
shares in 1997.................................................... 435 432
Additional paid-in-capital.......................................... 219,554 214,950
Unearned stock grant compensation................................... (851) (993)
Retained earnings................................................... 122,815 77,942
Accumulated other comprehensive income.............................. (6,283) (4,042)
-------- --------
Total stockholders' equity.................................... 335,670 288,289
-------- --------
Total Liabilities and Stockholders' Equity.................... $687,951 $680,859
======== ========
</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 ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- --------------------------------
1998 1997 1998 1997
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Sales............................................ $246,957 $212,582 $467,732 $390,415
Cost of sales.................................... 149,119 126,406 282,571 236,265
-------- -------- -------- --------
Gross profit..................................... 97,838 86,176 185,161 154,150
Selling, general and administrative expenses..... 52,556 50,577 101,829 90,635
-------- -------- -------- --------
Operating income................................. 45,282 35,599 83,332 63,515
Interest expense................................. 4,389 6,954 8,972 14,696
Other income, net................................ 1,512 147 1,094 73
-------- -------- -------- --------
Income before income tax expense and
extraordinary item.............................. 42,405 28,792 75,454 48,892
Income tax expense............................... 17,342 11,836 30,581 20,298
-------- -------- -------- --------
Income before extraordinary item................. 25,063 16,956 44,873 28,594
Extraordinary loss on early extinguishment of
debt, net of taxes.............................. -- 5,337 -- 5,337
-------- -------- -------- --------
Net income....................................... $ 25,063 $ 11,619 $ 44,873 $ 23,257
======== ======== ======== ========
Earnings per common share (1998 historical, 1997
pro forma) (Note 4):
Income before extraordinary item:
Basic....................................... $ 0.60 $ 0.46 $ 1.08 $ 0.84
======== ======== ======== ========
Diluted..................................... $ 0.57 $ 0.43 $ 1.02 $ 0.77
======== ======== ======== ========
Net income:
Basic....................................... $ 0.60 $ 0.32 $ 1.08 $ 0.68
======== ======== ======== ========
Diluted..................................... $ 0.57 $ 0.29 $ 1.02 $ 0.63
======== ======== ======== ========
Weighted average shares of common stock
outstanding (1998 historical, 1997 pro forma)
(Note 4):
Basic......................................... 41,718 36,638 41,451 33,987
======== ======== ======== ========
Diluted....................................... 43,930 39,621 43,896 37,180
======== ======== ======== ========
Supplemental pro forma data (Note 5):
Pro forma net income........................... $ 17,703 $ 30,226
======== ========
Pro forma net income per common share:
Basic....................................... $ 0.44 $ 0.75
======== ========
Diluted..................................... $ 0.41 $ 0.70
======== ========
Pro forma weighted average shares of common
stock outstanding (Note 4):
Basic....................................... 40,293 40,041
======== ========
Diluted..................................... 43,276 43,234
======== ========
</TABLE>
See accompanying notes.
4
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KNOLL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------------------
1998 1997
------------------- -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................................... $ 44,873 $ 23,257
Adjustments to reconcile net income to cash provided by operating
activities:
Depreciation and amortization......................................... 19,177 17,317
Extraordinary loss.................................................... -- 8,838
Other................................................................. (696) 1,063
Changes in assets and liabilities:
Customer receivables.............................................. (10,240) (15,151)
Inventories....................................................... (5,741) (5,109)
Accounts payable.................................................. 180 7,653
Current and deferred income taxes................................. 547 7,072
Other current assets and liabilities.............................. (5,719) 6,414
Other noncurrent assets and liabilities........................... 4,219 6,264
-------- --------
Cash provided by operating activities.................................... 46,600 57,618
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment............................... (13,417) (7,686)
Proceeds from sale of assets............................................. 9 127
-------- --------
Cash used in investing activities........................................ (13,408) (7,559)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of revolving credit facility, net.............................. (39,000) (28,000)
Repayment of long-term debt.............................................. -- (67,988)
Premium paid for early extinguishment of debt............................ -- (5,775)
Net proceeds from issuance of stock...................................... 3,844 134,656
Redemption of preferred stock............................................ -- (80,000)
-------- --------
Cash used in financing activities........................................ (35,156) (47,107)
-------- --------
Effect of exchange rate changes on cash and cash equivalents............. (113) (883)
-------- --------
Increase (decrease) in cash and cash equivalents......................... (2,077) 2,069
Cash and cash equivalents at beginning of period......................... 10,790 8,804
-------- --------
Cash and cash equivalents at end of period............................... $ 8,713 $ 10,873
======== ========
</TABLE>
See accompanying notes.
5
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KNOLL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Knoll,
Inc. (the "Company") 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, 1997 is derived from the Company's 1997 audited
financial statements. The unaudited 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, 1997. The results of operations for the
six months ended June 30, 1998 are not necessarily indicative of the results to
be expected for the full year ending December 31, 1998.
2. INVENTORIES
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
------------- -----------------
(In Thousands)
<S> <C> <C>
Raw materials............................ $43,527 $39,978
Work in process.......................... 9,376 9,673
Finished goods........................... 20,808 18,598
------- -------
Inventories.............................. $73,711 $68,249
======= =======
</TABLE>
3. 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. In connection with the initial public offering, a portion of
the Company's Series A 12% Participating Convertible Preferred Stock ("Series A
Preferred Stock") was redeemed, and the remaining shares of Series A Preferred
Stock were converted into common stock.
The net proceeds to the Company from the initial public offering amounted to
$133.4 million after deducting related expenses. The net proceeds, together with
borrowings of $11.7 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 a portion of the 10.875% Senior Subordinated Notes
resulted in an extraordinary loss of $5.3 million, net of taxes. On a per share
basis, this extraordinary loss amounted to $0.14 basic and diluted for the three
months ended June 30, 1997 and $0.16 basic and $0.14 diluted for the six months
ended June 30, 1997.
6
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4. SHARES AND PER SHARE DATA
All shares and per share data for the three months and six months ended June 30,
1997 have been adjusted to give retroactive effect to the 3.13943-for-1 stock
split that occurred on May 6, 1997.
Because of the significance of the redemption and conversion into common stock
of the Series A Preferred Stock in connection with the Company's initial public
offering, historical earnings per share amounts are not presented for the three
and six months ended June 30, 1997. Pro forma earnings per share amounts are
based on the weighted average number of shares of common stock and potentially
dilutive securities (stock options and nonvested restricted stock grants)
outstanding during the periods, after giving effect to the redemption and
conversion into common stock of the Series A Preferred Stock assuming such
redemption and conversion had occurred at the beginning of the periods.
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 98,
all common stock and options to purchase common stock issued for nominal
consideration prior to the initial public offering have been reflected as
outstanding as of the beginning of the respective periods.
As of December 31, 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" (SFAS 128). SFAS 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. As such, pro forma earnings per share amounts for
the three and six months ended June 30, 1997 have been restated to conform to
the requirements of SFAS 128.
5. SUPPLEMENTAL PRO FORMA DATA
The supplemental pro forma 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 the periods.
Such supplemental pro forma 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 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 as of the beginning
of the periods presented.
The supplemental pro forma 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 $11.7 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 $1.2 million for the three months
ended June 30, 1997 and has been decreased by $2.7 million for the six months
ended June 30, 1997. These 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% for the then-existing revolving credit facility.
The weighted average interest rate approximates the actual interest rate on the
Company's average outstanding borrowings under its then-existing revolving
credit facility during the respective periods. Income tax expense has been
increased by $490,000 for the three months ended June 30, 1997 and $1.1 million
for the six months ended June 30, 1997 to reflect the assumed income tax effects
of the interest expense adjustments.
The supplemental pro forma 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 the periods, nor does such information purport to
project the results of the Company for any future periods. The supplemental pro
forma financial information is based upon assumptions that the Company believes
are reasonable.
7
<PAGE>
6. EARNINGS PER SHARE
The following table sets forth a reconciliation of the numerators and
denominators of the basic and diluted earnings per share computations for income
before extraordinary item (in thousands, except per share amounts):
<TABLE>
<CAPTION>
INCOME BEFORE
EXTRAORDINARY WEIGHTED
ITEM AVERAGE SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------------ ------------------- ---------------
<S> <C> <C> <C>
THREE MONTHS ENDED JUNE 30, 1998:
Basic earnings per share.................................. $25,063 41,718 $0.60
=====
Effect of dilutive potential common shares:
Stock options........................................... -- 524
Nonvested restricted stock grants....................... -- 1,688
------- ------
Diluted earnings per share................................ $25,063 43,930 $0.57
======= ====== =====
THREE MONTHS ENDED JUNE 30, 1997:
Basic pro forma earnings per share........................ $16,956 36,638 $0.46
=====
Effect of dilutive potential common shares:
Stock options........................................... -- 176
Nonvested restricted stock grants....................... -- 2,807
------- ------
Diluted pro forma earnings per share...................... $16,956 39,621 $0.43
======= ====== =====
SIX MONTHS ENDED JUNE 30, 1998:
Basic earnings per share.................................. $44,873 41,451 $1.08
=====
Effect of dilutive potential common shares:
Stock options........................................... -- 566
Nonvested restricted stock grants....................... -- 1,879
------- ------
Diluted earnings per share................................ $44,873 43,896 $1.02
======= ====== =====
SIX MONTHS ENDED JUNE 30, 1997:
Basic pro forma earnings per share........................ $28,594 33,987 $0.84
=====
Effect of dilutive potential common shares:
Stock options........................................... -- 88
Nonvested restricted stock grants....................... -- 3,105
------- ------
Diluted pro forma earnings per share...................... $28,594 37,180 $0.77
======= ====== =====
</TABLE>
7. COMPREHENSIVE INCOME
For the three months ended June 30, 1998 and 1997, total comprehensive income
amounted to $22.8 million and $11.7 million, respectively. Total comprehensive
income for the six months ended June 30, 1998 and 1997 was $42.6 million and
$21.3 million, respectively.
8. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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"). SFAS 133 establishes standards for
accounting for derivatives and reporting derivative transactions and hedged
items. It requires entities to record all derivative instruments on the balance
sheet at fair value and prescribes the methods of accounting for the changes in
the fair value of derivatives. The Company is required to adopt SFAS 133 in the
year ended December 31, 2000. Based upon current derivative usage, the Company
does not expect the adoption of SFAS 133 to have a material impact on its future
earnings or financial position.
8
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9. RECLASSIFICATIONS
Certain amounts for 1997 in the accompanying unaudited condensed consolidated
financial statements have been reclassified to conform to the 1998
classifications.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
- -------------
The following discussion should be read in conjunction with the accompanying
unaudited condensed consolidated financial statements and notes thereto and in
conjunction with the Company's annual report on Form 10-K for the year ended
December 31, 1997.
RESULTS OF OPERATIONS
COMPARISON OF SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 1998 TO SECOND
QUARTER AND SIX MONTHS ENDED JUNE 30, 1997
Sales. Sales for the second quarter of 1998 were $247.0 million, an increase of
$34.4 million, or 16.2%, from sales of $212.6 million for the second quarter of
1997. Sales for the first six months of 1998 were $467.7 million, an increase
of $77.3 million, or 19.8%, from sales of $390.4 million for the first six
months of 1997. Sales levels continued to benefit from successful sales and
marketing efforts and continued growth of the office furniture industry.
Gross Profit. Gross profit was $97.8 million for the second quarter of 1998, an
increase of $11.6 million, or 13.5%, from gross profit of $86.2 million for the
second quarter of 1997. For the six months ended June 30, 1998, gross profit
was $185.2 million, an increase of $31.0 million, or 20.1%, from gross profit of
$154.2 million for the same period in 1997. Gross profit as a percentage of
sales was 39.6% for the second quarter and six months ended June 30, 1998
compared to 40.5% and 39.5% for the second quarter and six months ended June 30,
1997, respectively.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $52.6 million for the second quarter of 1998 and
$101.8 million for the six months ended June 30, 1998 compared to $50.6 million
for the second quarter of 1997 and $90.6 million for the six months ended June
30, 1997. These increases were primarily due to incremental employee costs
related to higher sales and profit levels. As a percentage of sales, the
Company's selling, general and administrative expenses decreased to 21.3% for
the second quarter of 1998 from 23.8% for the second quarter of 1997 and
decreased to 21.8% for the first six months of 1998 from 23.2% for the same
period in 1997.
Operating Income. Operating income was $45.3 million for the second quarter of
1998, an increase of $9.7 million, or 27.2%, from $35.6 million for the second
quarter of 1997. For the six months ended June 30, 1998, operating income was
$83.3 million, an increase of $19.8 million, or 31.2% from operating income of
$63.5 million for the first six months of 1997. These improvements were driven
by higher sales volumes and a continued focus on cost management.
Interest Expense. Interest expense was $4.4 million for the second quarter of
1998 and $9.0 million for the six months ended June 30, 1998 compared to $7.0
million and $14.7 million for the second quarter and six months ended June 30,
1997, respectively. The decreases in interest expense are primarily
attributable to the overall reduction of debt. The Company has repaid $90.0
million of debt since June 30, 1997. Additionally, the Company repaid $96.0
million of debt during the six months ended June 30, 1997, including an
aggregate principal amount of $57.8 million of the Company's 10.875% Senior
Subordinated Notes redeemed in June 1997 with proceeds from its initial public
offering.
Income Tax Expense. Income tax expense as a percentage of pre-tax income was
40.9% for the second quarter of 1998 and 40.5% for the six months ended June 30,
1998 compared to 41.1% and 41.5% for the second quarter and six months ended
June 30, 1997, respectively. The 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.
Extraordinary Item. For the three months and six months ended June 30, 1997,
there was an extraordinary charge of $5.3 million, net of a tax benefit of $3.5
million, related to the early redemption of an aggregate principal amount of
$57.8 million of the Company's 10.875% Senior Subordinated Notes. The
extraordinary loss consisted of a $5.7 million premium paid and $3.1 million of
unamortized financing costs written-off in connection with the redemption.
10
<PAGE>
Pro Forma Net Income and Net Income Per Share as Adjusted for the Initial Public
Offering. Net income for the second quarter of 1998 was $25.1 million ($0.57
per share diluted), an increase of $7.4 million ($0.16 per share), or 41.8%,
from supplemental pro forma net income of $17.7 million ($0.41 per share
diluted) for the second quarter of 1997. Net income for the six months ended
June 30, 1998 was $44.9 million ($1.02 per share diluted), an increase of $14.7
million ($0.32 per share), or 48.7%, from supplemental pro forma net income of
$30.2 million ($0.70 per share diluted) for the same period of 1997.
Supplemental pro forma 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 the periods 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. Supplemental pro forma 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 Company's 10.875% Senior Subordinated Notes.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 1998, the Company generated cash flow from
operations of $46.6 million. Cash provided by operations resulted primarily
from earnings before depreciation and amortization offset by cash used for
working capital purposes. This cash flow, in addition to $3.8 million received
from the issuance of stock under the Company's employee stock plans, was applied
to the repayment of $39.0 million of debt and the funding of $13.4 million in
capital expenditures.
As of June 30, 1998, the Company had an aggregate of $224.1 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 certain
covenants that, among other things, limit the Company's ability to incur
additional indebtedness and pay dividends as well as require the maintenance of
certain financial ratios.
BACKLOG
The Company's backlog of unfilled orders was $143.5 million at June 30, 1998 and
$111.2 million at June 30, 1997. 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.
YEAR 2000
The Company continues to implement its strategic project to replace and enhance
its existing manufacturing and business technology with a new fully integrated
system, which the Company believes to be year 2000 compliant. The Company
anticipates completing the project during the first half of 1999 and estimates
that the total project cost will be approximately $26.0 million. The Company
has incurred expenditures of approximately $15.7 million ($12.4 million expense
and $3.3 million capital) related to the project to date.
The costs and completion date of the project are based on the best estimates of
management, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources and other factors.
There can be no guarantee that these estimates are accurate. Actual results
could differ materially from those anticipated and, therefore, could have a
material adverse effect on the Company's operations. In addition, there can be
no guarantee that the systems of other companies on which the Company relies
will be year 2000 compliant on a timely basis and would not have a material
adverse effect on the Company's operations.
11
<PAGE>
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. 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. 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; implementation of the Company's information systems
project, which could impair the Company's operations if not implemented
successfully or on time; 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.
12
<PAGE>
PART II -- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
- --------------------------------------------------
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 limit 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
- ------------------------------------------------------------
The Company held its Annual Meeting of Stockholders on May 19, 1998 (the "Annual
Meeting"). The Company's stockholders were asked to take the following actions
at the meeting:
(1) Elect nine directors of the Company to serve until the Company's 1999 Annual
Meeting of Stockholders or until their successors shall be elected (the
"Board Proposal").
(2) Approve an amendment to the Knoll, Inc. 1997 Stock Incentive Plan (the
"Incentive Plan Proposal"), increasing the number of authorized shares
available thereunder by 1,000,000 shares.
(3) Approve the Knoll, Inc. Employee Stock Purchase Plan (the "Stock Purchase
Plan Proposal").
(4) Ratify the appointment of the firm Ernst & Young LLP to serve as the
Company's independent auditors for the 1998 fiscal year until the Company's
1999 annual meeting of stockholders (the "Auditors Proposal").
With respect to the Board Proposal, all nine individuals nominated for director
were elected. The nominees and the votes each received are as follows:
<TABLE>
<CAPTION>
FOR WITHHELD
-------------- --------------
<S> <C> <C>
Burton B. Staniar 37,022,159 246,989
John H. Lynch 37,022,177 246,971
Andrew B. Cogan 37,021,531 247,617
John W. Amerman 37,022,159 246,989
Robert J. Dolan 37,022,159 246,989
Jeffrey A. Harris 37,022,159 246,989
Sidney Lapidus 37,022,159 246,989
Kewsong Lee 37,021,659 247,489
John L. Vogelstein 33,875,137 3,394,011
</TABLE>
The Incentive Plan Proposal, Stock Purchase Plan Proposal, and Auditors Proposal
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:
<TABLE>
<CAPTION>
FOR AGAINST WITHHELD
----------- ------------ ------------
<S> <C> <C> <C>
Incentive Plan Proposal 31,399,586 5,854,207 15,355
Stock Purchase Plan Proposal 37,161,398 93,514 14,236
Auditors Proposal 37,255,152 2,430 11,566
</TABLE>
13
<PAGE>
ITEM 5. OTHER INFORMATION
- --------------------------
UNION AGREEMENT
The Company has reached an agreement with the Carpenters and Joiners of America-
Local 1615 regarding a new four-year collective bargaining contract covering
hourly employees at the Company's Grand Rapids, Michigan plant, its only
unionized facility in the United States. The existing four-year contract
expires on August 30, 1998. The differences between the terms of the agreement
and the terms of the existing contract will not have a material affect on the
Company's results of operations. The agreement has been ratified by union
membership but is subject to the execution of a definitive contract, which is
expected to be signed prior to August 30, 1998. The new contract would commence
on August 31, 1998 and expire on or about August 31, 2002.
PROXY NOTICE DEADLINE
Pursuant to recent amendments to the rules relating to proxy statements under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
stockholders of the Company are hereby notified that any stockholder proposal
not included in the Company's proxy materials for its 1999 Annual Meeting of
Stockholders in accordance with Rule 14a-8 under the Exchange Act will be
considered untimely for the purposes of Rules 14a-4 and 14a-5 under the Exchange
Act if notice thereof is received by the Company after February 28, 1999.
Management proxies will be authorized to exercise discretionary voting authority
with respect to any stockholder proposal not included in the Company's proxy
materials for the 1999 Annual Meeting of Stockholders unless (i) the Company
receives notice of such proposal by February 28, 1999 and (ii) the conditions
set forth in Rule 14a-4(c)(2)(i)-(iii) under the Exchange Act are met.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
a. Exhibits:
10* Amended and Restated Knoll, Inc. 1997 Stock Incentive Plan.
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, 1998.
_____________________________
* Incorporated by reference to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997.
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: August 13, 1998 By: /s/ Burton B. Staniar
----------------------
BURTON B. STANIAR
Chairman of the Board
Date: August 13, 1998 By: /s/ Douglas J. Purdom
----------------------
DOUGLAS J. PURDOM
Senior Vice President and
Chief Financial Officer
15
<PAGE>
EXHIBIT INDEX
-------------
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
10* Amended and Restated Knoll, Inc. 1997 Stock Incentive Plan.
27 Financial Data Schedule.
_____________________________
* Incorporated by reference to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997.
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
KNOLL, INC.
FINANCIAL DATA SCHEDULE
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 8,713
<SECURITIES> 0
<RECEIVABLES> 132,602
<ALLOWANCES> 0
<INVENTORY> 73,711
<CURRENT-ASSETS> 240,791
<PP&E> 236,653
<DEPRECIATION> 58,897
<TOTAL-ASSETS> 687,951
<CURRENT-LIABILITIES> 142,776
<BONDS> 168,017
0
0
<COMMON> 435
<OTHER-SE> 335,235
<TOTAL-LIABILITY-AND-EQUITY> 687,951
<SALES> 467,732
<TOTAL-REVENUES> 467,732
<CGS> 282,571
<TOTAL-COSTS> 282,571
<OTHER-EXPENSES> 101,829
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,972
<INCOME-PRETAX> 75,454
<INCOME-TAX> 30,581
<INCOME-CONTINUING> 44,873
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 44,873
<EPS-PRIMARY> 1.08
<EPS-DILUTED> 1.02
</TABLE>
