<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, 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 November 9, 1998, there were 42,020,083 shares of the Registrant's
common stock, par value $0.01 per share, outstanding.
<PAGE>
KNOLL, INC.
TABLE OF CONTENTS FOR FORM 10-Q
ITEM PAGE
- ---- ----
PART I -- FINANCIAL INFORMATION
1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets at September 30, 1998
and December 31, 1997........................................ 3
Condensed Consolidated Statements of Operations for the three
months ended September 30, 1998 and 1997 and the nine
months ended September 30, 1998 and 1997..................... 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 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......................... 14
6. Exhibits and Reports on Form 8-K.................................. 14
Signatures............................................................ 15
Exhibit Index......................................................... 16
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, 1998 DECEMBER 31, 1997
------------------ -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................ $ 10,087 $ 10,790
Customer receivables, net................ 127,210 122,851
Inventories.............................. 74,726 68,249
Deferred income taxes.................... 21,457 21,295
Prepaid and other current assets......... 5,176 3,697
-------- --------
Total current assets................ 238,656 226,882
Property, plant and equipment............... 242,193 224,274
Accumulated depreciation.................... (66,181) (43,824)
-------- --------
Property, plant and equipment, net.. 176,012 180,450
Intangible assets........................... 282,679 285,057
Accumulated amortization.................... (20,208) (14,380)
-------- --------
Intangible assets, net.............. 262,471 270,677
Other noncurrent assets..................... 4,176 2,850
-------- --------
Total Assets........................ $681,315 $680,859
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt..... $ -- $ 10,000
Accounts payable......................... 56,940 66,697
Income taxes payable..................... 2,506 6,791
Other current liabilities................ 81,004 77,841
-------- --------
Total current liabilities........... 140,450 161,329
Long-term debt.............................. 146,022 197,029
Postretirement benefits obligation.......... 17,556 16,424
Other noncurrent liabilities................ 22,155 17,788
-------- --------
Total liabilities................... 326,183 392,570
-------- --------
Stockholders' equity:
Common stock, $0.01 par value;
100,000,000 shares authorized;
43,364,783 shares outstanding in 1998
(net of 120,000 treasury shares) and
43,234,943 shares in 1997.............. 434 432
Additional paid-in-capital............... 217,083 214,950
Unearned stock grant compensation........ (782) (993)
Retained earnings........................ 147,752 77,942
Accumulated other comprehensive income... (9,355) (4,042)
-------- --------
Total stockholders' equity.......... 355,132 288,289
-------- --------
Total Liabilities and
Stockholders' Equity............. $681,315 $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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Sales...................... $235,028 $208,402 $702,760 $598,817
Cost of sales.............. 142,006 124,688 424,577 360,953
-------- -------- -------- --------
Gross profit............... 93,022 83,714 278,183 237,864
Selling, general
and administrative
expenses................. 49,065 44,689 150,894 135,324
-------- -------- -------- --------
Operating income........... 43,957 39,025 127,289 102,540
Interest expense........... 3,910 5,407 12,882 20,103
Other income, net.......... 1,837 16 2,931 89
-------- -------- -------- --------
Income before income
tax expense and
extraordinary item....... 41,884 33,634 117,338 82,526
Income tax expense......... 16,947 14,163 47,528 34,461
-------- -------- -------- --------
Income before
extraordinary item....... 24,937 19,471 69,810 48,065
Extraordinary loss on
early extinguishment
of debt, net of taxes.... -- -- -- 5,337
-------- -------- -------- --------
Net income................. $ 24,937 $ 19,471 $ 69,810 $ 42,728
======== ======== ======== ========
Earnings per common
share (Note 4):
Income before
extraordinary item:
Basic............ $ 0.60 $ 0.48 $ 1.68 $ 1.33
======== ======== ======== ========
Diluted.......... $ 0.57 $ 0.45 $ 1.59 $ 1.22
======== ======== ======== ========
Net income:
Basic............ $ 0.60 $ 0.48 $ 1.68 $ 1.18
======== ======== ======== ========
Diluted.......... $ 0.57 $ 0.45 $ 1.59 $ 1.09
======== ======== ======== ========
Weighted average shares
of common stock
outstanding (Note 4):
Basic................. 41,762 40,318 41,555 36,120
======== ======== ======== ========
Diluted............... 43,864 43,550 43,887 39,326
======== ======== ======== ========
Supplemental pro forma
data (Note 5):
Pro forma net income.. $ 49,697
========
Pro forma net income
per common share
(Note 4):
Basic............ $ 1.24
========
Diluted.......... $ 1.15
========
Pro forma weighted
average shares of
common stock
outstanding (Note 4):
Basic............ 40,134
========
Diluted.......... 43,340
========
</TABLE>
See accompanying notes
4
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KNOLL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income....................................... $ 69,810 $ 42,728
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization............... 28,648 25,593
Extraordinary loss.......................... -- 8,838
Other....................................... (2,211) 1,337
Changes in assets and liabilities:
Customer receivables..................... (4,478) (15,439)
Inventories.............................. (6,993) (8,666)
Accounts payable......................... (8,245) 11,823
Current and deferred income taxes........ 1,002 12,996
Other current assets and liabilities..... 347 9,995
Other noncurrent assets and liabilities.. 1,413 5,427
-------- --------
Cash provided by operating activities............ 79,293 94,632
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment....... (20,206) (15,122)
Proceeds from sale of assets..................... 22 176
-------- --------
Cash used in investing activities................ (20,184) (14,946)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of revolving credit facility, net...... (61,000) (56,000)
Repayment of long-term debt...................... -- (67,988)
Premium paid for early extinguishment of debt.... -- (5,775)
Net proceeds from issuance of stock.............. 4,399 133,582
Purchase of common stock......................... (3,127) --
Redemption of preferred stock.................... -- (80,000)
-------- --------
Cash used in financing activities................ (59,728) (76,181)
-------- --------
Effect of exchange rate changes on cash and
cash equivalents............................... (84) (1,283)
-------- --------
Increase (decrease) in cash and cash
equivalents.................................... (703) 2,222
Cash and cash equivalents at beginning
of period...................................... 10,790 8,804
-------- --------
Cash and cash equivalents at end of period....... $ 10,087 $ 11,026
======== ========
</TABLE>
See accompanying notes.
5
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KNOLL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 nine months ended
September 30, 1998 are not necessarily indicative of the results to be
expected for the full year ending December 31, 1998.
2. INVENTORIES
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
(In Thousands)
<S> <C> <C>
Raw materials............... $40,742 $37,868
Work in process............. 10,657 9,638
Finished goods.............. 23,327 20,743
------- -------
Inventories................. $74,726 $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 $0.15 basic and $0.13 diluted for the nine months ended September 30, 1997.
6
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4. SHARES AND PER SHARE DATA
All shares and per share data for the nine months ended September 30, 1997 are
pro forma. Historical earnings per share amounts are not presented for this
period 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. 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 nine months ended September 30, 1997, 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
period. 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 1997.
All shares and per share data for the nine months ended September 30, 1997 have
been adjusted to give retroactive effect to the 3.13943-for-1 stock split that
occurred on May 6, 1997.
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 nine months ended September 30, 1997 have been restated to
conform to the requirements of SFAS 128.
5. SUPPLEMENTAL PRO FORMA DATA
The supplemental pro forma data for the nine months ended September 30, 1997 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 period. 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 1997.
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 $2.7
million for the nine months ended September 30, 1997. This interest
adjustment is 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 for the period January 1, 1997 to May 8,
1997, the period preceding the Company's initial public offering, for the
Company's average outstanding borrowings under its then-existing revolving
credit facility. Income tax expense has been increased by $1.1 million for
the nine months ended September 30, 1997 to reflect the assumed income tax
effects of the interest expense adjustment.
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 1997, 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. EARNIGNS 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 WEIGHTED
EXTRAORDINARY AVERAGE
ITEM SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------- ------------- ---------
<S> <C> <C> <C>
THREE MONTHS ENDED SEPTEMBER 30, 1998:
Basic earnings per share................ $24,937 41,762 $0.60
=====
Effect of dilutive potential
common shares:
Stock options...................... -- 439
Nonvested restricted stock grants.. -- 1,663
------- ------
Diluted earnings per share.............. $24,937 43,864 $0.57
======= ====== =====
THREE MONTHS ENDED SEPTEMBER 30, 1997:
Basic earnings per share................ $19,471 40,318 $0.48
=====
Effect of dilutive potential
common shares:
Stock options...................... -- 375
Nonvested restricted stock grants.. -- 2,857
------- ------
Diluted earnings per share.............. $19,471 43,550 $0.45
======= ====== =====
NINE MONTHS ENDED SEPTEMBER 30, 1998:
Basic earnings per share................ $69,810 41,555 $1.68
=====
Effect of dilutive potential
common shares:
Stock options...................... -- 525
Nonvested restricted stock grants.. -- 1,807
------- ------
Diluted earnings per share.............. $69,810 43,887 $1.59
======= ====== =====
NINE MONTHS ENDED SEPTEMBER 30, 1997:
Basic pro forma earnings per share...... $48,065 36,120 $1.33
=====
Effect of dilutive potential
common shares:
Stock options...................... -- 184
Nonvested restricted stock grants.. -- 3,022
------- ------
Diluted pro forma earnings per share.... $48,065 39,326 $1.22
======= ====== =====
</TABLE>
7. SHARE REPURCHASE PROGRAM
In September 1998, the Board of Directors approved a share repurchase program
that authorized the repurchase of up to 3.0 million shares of the Company's
common stock. Common shares may be purchased in the open market or through
negotiated transactions at the discretion of Company management, depending on
ongoing assessments of capital needs and prevailing market conditions.
The Company purchased 120,000 shares through September 30, 1998 for
approximately $3.1 million, or an average price of $26.06 per share. As of
October 20, 1998, a total of 1,187,300 shares were purchased for approximately
$24.9 million, or an average price of $21.00.
8. COMPREHENSIVE INCOME
For the three months ended September 30, 1998 and 1997, total comprehensive
income amounted to $21.9 million and $18.9 million, respectively. Total
comprehensive income for the nine months ended September 30, 1998 and 1997 was
$64.5 million and $40.2 million, respectively.
8
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9. RECLASSIFICATIONS
Certain amounts for 1997 in the accompanying unaudited condensed consolidated
financial statements and notes thereto have been reclassified to conform to
the 1998 classifications.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OEPRATIONS
---------------------
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 THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1998 TO THIRD
QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1997
Sales. Sales for the third quarter of 1998 were $235.0 million, an increase
of $26.6 million, or 12.8%, from sales of $208.4 million for the third quarter
of 1997. Sales for the nine months ended September 30, 1998 were $702.8
million, an increase of $104.0 million, or 17.4%, from sales of $598.8 million
for the nine months ended September 30, 1997. Sales during these periods
benefited from increased volume related to continued successful sales and
marketing efforts and continued growth of the office furniture industry.
Gross Profit. Gross profit was $93.0 million for the third quarter of 1998,
an increase of $9.3 million, or 11.1%, from gross profit of $83.7 million for
the third quarter of 1997. For the nine months ended September 30, 1998,
gross profit was $278.2 million, an increase of $40.3 million, or 16.9%, from
gross profit of $237.9 million for the comparable period in 1997. Gross
profit as a percentage of sales was 39.6% for both the third quarter and nine
months ended September 30, 1998 compared to 40.2% and 39.7% for the third
quarter and nine months ended September 30, 1997, respectively. Gross profit
as a percentage of sales for the nine months has remained flat year over year
as a result of investments in the infrastructure of the Company to accommodate
higher volume levels.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $49.1 million for the third quarter of 1998 and
$150.9 million for the nine months ended September 30, 1998 compared to $44.7
million for the third quarter of 1997 and $135.3 million for the nine months
ended September 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
20.9% for the third quarter of 1998 from 21.4% for the third quarter of 1997
and decreased to 21.5% for the nine months ended September 30, 1998 from 22.6%
for the comparable period in 1997.
Operating Income. Operating income was $44.0 million for the third quarter of
1998, an increase of $5.0 million, or 12.8%, from $39.0 million for the third
quarter of 1997. For the nine months ended September 30, 1998, operating
income was $127.3 million, an increase of $24.8 million, or 24.2%, from
operating income of $102.5 million for the nine months ended September 30,
1997. These improvements were driven by higher sales volumes and a continued
focus on cost management.
Interest Expense. Interest expense was $3.9 million for the third quarter of
1998 and $12.9 million for the nine months ended September 30, 1998 compared
to $5.4 million and $20.1 million for the third quarter and nine months ended
September 30, 1997, respectively. The decreases in interest expense are
primarily attributable to the overall reduction of debt. The Company has
repaid $84.0 million of debt since September 30, 1997. Additionally, the
Company repaid $124.0 million of debt during the nine months ended September
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
40.5% for both the third quarter and nine months ended September 30, 1998
compared to 42.1% and 41.8% for the third quarter and nine months ended
September 30, 1997, respectively. The differences are primarily attributable
to the changing mix of pre-tax income between countries in which the Company
operates with differing effective tax rates and the reduced effect, in 1998,
of nondeductible goodwill amortization.
Extraordinary Item. For the nine months ended September 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
10
<PAGE>
million premium paid and $3.1 million of unamortized financing costs
written-off in connection with the redemption.
Pro Forma Net Income and Net Income Per Share as Adjusted for the Initial
Public Offering. Net income for the nine months ended September 30, 1998 was
$69.8 million ($1.59 per share diluted), an increase of $20.1 million ($0.44
per share), or 40.4%, from supplemental pro forma net income of $49.7 million
($1.15 per share diluted) for the comparable 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 1997.
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 nine months ended September 30, 1998, the Company generated cash
flow from operations of $79.3 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 $4.4
million received from the issuance of stock under the Company's employee stock
plans, was applied to the repayment of $61.0 million of debt, the funding of
$20.2 million in capital expenditures and the purchase of 120,000 shares of
the Company's common stock for $3.1 million.
As of September 30, 1998, the Company's ratio of debt to total capitalization
was 29.1%, and the Company had an aggregate of $246.2 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
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 $141.5 million at September 30,
1998 and $114.5 million at September 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 READINESS DISCLOSURE
The Company continues to implement its strategic project to replace and
enhance its existing manufacturing and business information systems (software
and hardware) in North America with a new fully integrated system, which the
Company believes to be year 2000 compliant. The Company is evaluating the
information systems currently being used by its European operations and other
European year 2000 issues. Based upon information presently known, the Company
does not expect its European year 2000 issues to have a material adverse effect
upon its operations.
In North America, the Company has installed and is utilizing the financial
applications of the new system at all of its sites and has installed and is
utilizing the new manufacturing application at one of four sites. In
addition, the Company is in the process of inventorying its manufacturing
equipment to identify equipment that contains embedded chips. The Company
anticipates that all of the system applications will be installed and in use
and all embedded chips that are determined not to be year 2000 compliant will
be replaced by mid-1999. If the Company successfully implements the new
system and replaces noncompliant embedded chips by mid-1999, the year 2000
issues associated with its information systems and manufacturing equipment
would not be expected to have a material adverse effect on the Company's
operations.
11
<PAGE>
In the event the Company is unable to complete the implementation of the
project on a timely basis, the Company's ability to take customer orders,
manufacture and deliver product, invoice customers and collect payments may be
impaired. The Company can not reasonably estimate at this time the amount of
lost revenue or additional expenses that might be expected in this scenario.
Failure to implement the project on a timely basis could have a material
adverse effect on the Company.
The Company currently does not have a contingency plan in place. However, the
Company continually evaluates the status of completion and whether or not a
contingency plan is or may be necessary. The Company would tailor any
contingency plan to address the issue in question and attempt to minimize the
impact upon the Company's operations and customers.
The Company estimates that the total project cost will be approximately $28.0
million, approximately 67% expense and 33% capital. Through September 30,
1998, the Company has incurred expenditures of approximately $19.0 million
($14.2 million expense and $4.8 million capital) related to the project. The
project is being funded with cash flows from operations. The estimated cost
of the project has not constrained the Company's information systems budget or
materially affected other necessary information systems activities.
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 technical and
consulting resources. 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.
As the year 2000 issue is a global concern, the Company's operations could be
materially adversely affected by circumstances beyond its control.
Disruptions in the economy generally resulting from year 2000 issues could
materially adversely affect the Company. Additionally, the year 2000
readiness of the Company's vendors, dealers and other third parties (such as
utility companies, the U.S. government and customers) on which it relies could
impact the Company's operations. Although the Company's systems do not
interface directly with third parties, the inability of these other parties to
complete their year 2000 initiatives in a timely manner could have a material
adverse effect on the Company.
The Company has no means of ensuring that its vendors, dealers and other third
parties will be year 2000 compliant in a timely manner. However, the Company
is actively working to determine the year 2000 readiness of these parties and
to determine the actions, if any, that would be necessary to minimize any
potential adverse impact on the Company. The Company is formally
communicating with vendors, dealers and certain other third parties through
questionnaires and on-site visits. For those vendors that the Company deems
to be at risk of not being adequately prepared for the year 2000, the Company
has or will seek alternate sources for procuring product or supplies, build
inventories or develop an appropriate contingency plan. To date, the Company
is not aware of any third-party year 2000 issue that is expected to materially
adversely impact the Company's operations.
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
12
<PAGE>
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 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. The Company has
not paid any dividends on its common stock, and any future determination to
pay dividends will depend on the Company's results of operations, financial
condition, capital requirements, contractual restrictions and other factors
deemed relevant by the Board of Directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
a. Exhibits:
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, 1998. However, on October 1, 1998, the Company filed a
report on Form 8-K dated September 3, 1998. In that Form 8-K under
Item 5 -- Other Events, the Company reported its press release regarding
the Board of Directors' approval of a share repurchase program that allows
the Company to repurchase up to 3.0 million shares of its common stock.
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, 1998 By: /s/ Burton B. Staniar
------------------------
BURTON B. STANIAR
Chairman of the Board
Date: November 13, 1998 By: /s/ Douglas J. Purdom
------------------------
DOUGLAS J. PURDOM
Senior Vice President and
Chief Financial Officer
15
<PAGE>
EXHIBIT INDEX
-------------
EXHIBIT
NUMBER DESCRIPTION
- --------- -----------
27 Financial Data Schedule
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
KNOLL, INC.
FINANCIAL DATA SCHEDULE
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 10,087
<SECURITIES> 0
<RECEIVABLES> 127,210
<ALLOWANCES> 0
<INVENTORY> 74,726
<CURRENT-ASSETS> 238,656
<PP&E> 242,193
<DEPRECIATION> 66,181
<TOTAL-ASSETS> 681,315
<CURRENT-LIABILITIES> 140,450
<BONDS> 146,022
0
0
<COMMON> 434
<OTHER-SE> 354,698
<TOTAL-LIABILITY-AND-EQUITY> 681,315
<SALES> 702,760
<TOTAL-REVENUES> 702,760
<CGS> 424,577
<TOTAL-COSTS> 424,577
<OTHER-EXPENSES> 150,894
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,882
<INCOME-PRETAX> 117,338
<INCOME-TAX> 47,528
<INCOME-CONTINUING> 69,810
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 69,810
<EPS-PRIMARY> 1.68
<EPS-DILUTED> 1.59
</TABLE>
