<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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No. 001-12907
KNOLL, INC.
A Delaware Corporation I.R.S. Employer No. 13-3873847
1235 Water Street
East Greenville, PA 18041
Telephone Number (215)679-7991
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 9, 1999, there were 40,741,299 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 June 30, 1999
and December 31, 1998..................................... 3
Condensed Consolidated Statements of Operations for the
three months ended June 30, 1999 and 1998 and the six
months ended June 30, 1999 and 1998....................... 4
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 1999 and 1998................... 5
Notes to the Condensed Consolidated Financial Statements.... 6
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 9
3. Quantitative and Qualitative Disclosures about Market Risk...... 12
PART II -- OTHER INFORMATION
1. Legal Proceedings............................................... 13
2. Changes in Securities and Use of Proceeds....................... 13
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>
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......... $ 15,849 $ 17,465
Customer receivables, net.......... 135,563 137,956
Inventories........................ 79,409 77,113
Deferred income taxes.............. 19,507 21,067
Prepaid and other current assets... 14,742 9,842
-------- --------
Total current assets........... 265,070 263,443
Property, plant and equipment.......... 266,983 257,970
Accumulated depreciation............... (85,346) (71,803)
-------- --------
Property, plant and
equipment, net............... 181,637 186,167
Intangible assets...................... 282,306 282,197
Accumulated amortization............... (26,100) (22,154)
-------- --------
Intangible assets, net......... 256,206 260,043
Other noncurrent assets................ 4,458 4,374
-------- --------
Total Assets................... $707,371 $714,027
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term
debt............................. $ - $ 10,000
Accounts payable................... 58,715 59,551
Income taxes payable............... 1,231 7,096
Other current liabilities.......... 78,774 91,756
-------- --------
Total current liabilities...... 138,720 168,403
Long-term debt......................... 164,158 159,255
Postretirement benefits other than
pension.............................. 19,039 18,450
Other noncurrent liabilities........... 27,979 24,069
-------- --------
Total liabilities.............. 349,896 370,177
-------- --------
Stockholders' equity:
Common stock, $0.01 par value;
100,000,000 shares authorized;
40,659,751 shares issued and
outstanding (net of 2,894,700
treasury shares) in 1999 and
41,799,499 shares issued and
outstanding (net of 1,707,700
treasury shares) in 1998......... 407 418
Additional paid-in-capital......... 154,080 181,792
Unearned stock grant compensation.. (573) (712)
Retained earnings.................. 211,184 170,986
Accumulated other comprehensive
income........................... (7,623) (8,634)
-------- --------
Total stockholders' equity..... 357,475 343,850
-------- --------
Total Liabilities and
Stockholders' Equity......... $707,371 $714,027
======== ========
</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,
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Sales.................... $253,726 $246,957 $462,936 $467,732
Cost of sales............ 151,528 149,119 279,191 282,571
-------- -------- -------- --------
Gross profit............. 102,198 97,838 183,745 185,161
Selling, general and
administrative
expenses............... 55,902 52,556 101,315 101,829
-------- -------- -------- --------
Operating income......... 46,296 45,282 82,430 83,332
Interest expense......... 4,157 4,389 8,379 8,972
Recapitalization
expense................ 3,000 -- 3,000 --
Other income (expense),
net.................... (539) 1,512 (937) 1,094
-------- -------- -------- --------
Income before income
tax expense............ 38,600 42,405 70,114 75,454
Income tax expense....... 16,796 17,342 29,916 30,581
-------- -------- -------- --------
Net income............... $ 21,804 $ 25,063 $ 40,198 $ 44,873
======== ======== ======== ========
Earnings per share of
common stock:
Basic.............. $ 0.55 $ 0.60 $ 1.02 $ 1.08
Diluted............ $ 0.53 $ 0.57 $ 0.98 $ 1.02
Weighted average shares
of common stock
outstanding:
Basic.............. 39,572 41,718 39,563 41,451
Diluted............ 40,934 43,930 41,080 43,896
</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,
------------------------
1999 1998
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................... $ 40,198 $ 44,873
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization.......... 17,649 19,177
Other noncash items.................... 1,298 (696)
Changes in assets and liabilities:
Customer receivables............... 1,453 (10,240)
Inventories........................ (2,887) (5,741)
Accounts payable................... (1,594) 180
Current and deferred income taxes.. (4,664) 547
Other current assets and
liabilities...................... (13,500) (5,719)
Other noncurrent assets and
liabilities...................... 2,952 4,219
-------- --------
Cash provided by operating activities........ 40,905 46,600
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment... (9,320) (13,417)
Proceeds from sale of assets................. 91 9
-------- --------
Cash used in investing activities............ (9,229) (13,408)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of revolving credit facility, net.. (5,000) (39,000)
Net proceeds from issuance of stock.......... 946 3,844
Purchase of common stock..................... (28,675) --
-------- --------
Cash used in financing activities............ (32,729) (35,156)
-------- --------
Effect of exchange rate changes on cash
and cash equivalents....................... (563) (113)
-------- --------
Decrease in cash and cash equivalents........ (1,616) (2,077)
Cash and cash equivalents at beginning of
period..................................... 17,465 10,790
-------- --------
Cash and cash equivalents at end of period... $ 15,849 $ 8,713
======== ========
</TABLE>
See accompanying notes.
5
<PAGE>
KNOLL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
Knoll, Inc. (the "Company" or "Knoll") 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. The condensed consolidated
balance sheet as of December 31, 1998 is derived from the Company's 1998
audited balance sheet. 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, 1998. The results
of operations for the three and six months ended June 30, 1999 are not
necessarily indicative of the results to be expected for the full year ending
December 31, 1999.
2. Pending Acquisition of Shares Owned by Public Stockholders
On March 23, 1999, the Company received a proposal from Warburg, Pincus
Ventures, L.P. ("Warburg") and certain members of Knoll management
(collectively, the "Continuing Stockholders") regarding a recapitalization
(merger) transaction whereby the Company would acquire all of the outstanding
shares of its common stock not owned by the Continuing Stockholders for $25.00
per share. The Board of Directors appointed a special committee, consisting
of independent members of the Board of Directors, to consider the proposed
merger. The special committee retained legal counsel and an investment banker
to assist in evaluating the proposed merger. The Continuing Stockholders
subsequently increased the proposed merger consideration to $28.00 per share.
On June 21, 1999, the Board of Directors, at the recommendation of the special
committee, approved the proposed merger at a price of $28.00 per share.
Pursuant to an Agreement and Plan of Merger dated as of June 21, 1999 (as
amended on July 29, 1999), between Warburg and Knoll, a newly formed entity
to be organized by Warburg would merge with and into Knoll, and the public
stockholders of Knoll would receive $28.00 per share in cash for the
approximately 17.7 million shares owned by them, representing approximately
40% of the shares outstanding. Consummation of the merger is subject to,
among other things, (i) approval at the Company's 1999 annual meeting by the
holders of at least a majority of the outstanding Knoll common stock, (ii)
receipt of financing for the transaction, as provided in the merger agreement,
and (iii) receipt of consents to the merger from the holders of a majority of
Knoll's outstanding 10.875% Senior Subordinated Notes due 2006 (the "Senior
Subordinated Notes"). The merger is expected to be completed in October 1999.
During the three months ended June 30, 1999, the Company incurred $3.0 million
of expense relating to the recapitalization of the Company that will occur if
the merger is consummated. This expense is not expected to be deductible for
income tax purposes.
Warburg, on behalf of Knoll, has entered into a commitment letter with Bank of
America, N.A., The Chase Manhattan Bank and Merrill Lynch & Co. to arrange for
a credit facility providing for up to $650.0 million. The proceeds will be
used to (i) fund the merger and related fees and expenses, (ii) refinance all
amounts owing under Knoll's existing senior credit agreement and (iii) provide
for working capital and ongoing general corporate purposes.
On August 13, 1999, the Company entered into an agreement with the holder of a
majority of its Senior Subordinated Notes. Under the agreement, the majority
holder consented to the merger, and the Company agreed to pay such holder (and
other holders of the Senior Subordinated Notes who also consent), promptly
after completion of the merger, $120 per $1,000 principal amount of the Senior
Subordinated Notes owned by the holder.
6
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Eight class action complaints relating to the initial announcement of the
proposed merger were filed in March 1999. One complaint was voluntarily
dismissed and the seven remaining complaints were consolidated into a single
action. On June 21, 1999, the Company entered into a Memorandum of
Understanding with counsel to the plaintiffs in the lawsuits. The Memorandum
of Understanding provides for the settlement of such lawsuits based on the
payment of a per share merger consideration of $28.00 and is subject to,
among other things, completion of definitive documentation relating to the
settlement, court approval and consummation of the merger. The Company
believes that the settlement, if completed as provided for in the Memorandum
of Understanding, will not have a material adverse effect on the Company.
3. Inventories
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
(In Thousands)
<S> <C> <C>
Raw materials................. $39,948 $42,625
Work in process............... 12,835 11,827
Finished goods................ 26,626 22,661
------- -------
Inventories................... $79,409 $77,113
======= =======
</TABLE>
4. Earnings Per Share
The following table sets forth a reconciliation of the numerators and
denominators of the basic and diluted earnings per share computations (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Weighted
Net Income Average Shares Per Share
(Numerator) (Denominator) Amount
----------- --------------- ---------
<S> <C> <C> <C>
Three Months Ended June 30, 1999:
Basic earnings per share........... $21,804 39,572 $0.55
=====
Effect of dilutive potential
common shares:
Stock options............... -- 313
Nonvested restricted
stock grants.............. -- 1,049
------- ------
Diluted earnings per share......... $21,804 40,934 $0.53
======= ====== =====
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
======= ====== =====
Six Months Ended June 30, 1999:
Basic earnings per share........... $40,198 39,563 $1.02
=====
Effect of dilutive potential
common shares:
Stock options................ -- 279
Nonvested restricted
stock grants............... -- 1,238
------- ------
Diluted earnings per share......... $40,198 41,080 $0.98
======= ====== =====
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
======= ====== =====
</TABLE>
7
<PAGE>
Options to purchase 823,000 shares of common stock that were outstanding as
of June 30, 1999 were not included in the calculation of diluted earnings per
share for the three months ended June 30, 1999. These options, in addition to
options to purchase 1,093,000 shares of common stock that were outstanding as
of March 31, 1999, were not included in the calculation of diluted earnings
per share for the six months ended June 30, 1999. Such options were excluded
from the calculations because their exercise prices exceeded the average
market price of the common stock for the appropriate period and, therefore,
their effect on earnings per share would have been antidilutive.
5. Share Repurchase Program
During the six months ended June 30, 1999, the Company purchased 1,187,000
shares of its common stock for $28.7 million, or an average price of $24.16
per share. Since the inception of the share repurchase program in September
1998, the Company has purchased 2,894,700 shares of its common stock for
$67.5 million, or an average price of $23.33 per share.
6. Comprehensive Income
For the three months ended June 30, 1999 and 1998, total comprehensive income
amounted to $22.7 million and $22.8 million, respectively. Total comprehensive
income for the six months ended June 30, 1999 and 1998 was $41.2 million and
$42.6 million, respectively.
8
<PAGE>
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, 1998.
Results of Operations
Comparison of Second Quarter and Six Months Ended June 30, 1999 to Second
Quarter and Six Months Ended June 30, 1998
Sales. Sales for the second quarter of 1999 were $253.7 million, an increase
of 2.7%, or $6.7 million, from second quarter 1998 sales of $247.0 million.
Sales for the six months ended June 30, 1999 were $462.9 million, a decrease
of 1.0%, or $4.8 million, from sales of $467.7 million for the same period of
1998. This decrease is primarily due to the impact on the Company from the
slowdown in industry sales levels during the first six months of 1999.
Gross Profit and Operating Income. As a percentage of sales, gross profit
increased to 40.3% for the second quarter of 1999 from 39.6% for the second
quarter of 1998 and increased to 39.7% for the six months ended June 30, 1999
from 39.6% for the same period of 1998. The increases in gross margin were
principally due to higher sales volume in the second quarter of 1999, product
mix and a reduction in depreciation expense due to certain assets being fully
depreciated in the first quarter of 1999. Operating income as a percentage
of sales was 18.2% for the second quarter of 1999 compared to 18.3% for the
second quarter of 1998 and was 17.8% for the six months ended June 30, 1999
and 1998.
Selling, general and administrative expenses were $55.9 million for the second
quarter of 1999 compared to $52.6 million for the second quarter of 1998.
This increase is primarily due to increased expenses related to sales and
marketing and certain strategic projects in the second quarter of 1999.
Selling, general and administrative expenses for the six months ended June 30,
1999 were $101.3 million compared to $101.8 million for the same period of
1998. This decrease is primarily due to lower employee costs related to
reduced sales and profit levels in the first quarter of 1999 offset by the
second quarter increase discussed above. As a percentage of sales, the
Company's selling, general and administrative expenses increased to 22.0% for
the second quarter of 1999 from 21.3% for the second quarter of 1998 and
increased to 21.9% for the six months ended June 30, 1999 from 21.8% for the
same period of 1998.
Interest Expense. The Company's interest expense was $4.2 million for the
second quarter of 1999 and $8.4 million for the six months ended June 30, 1999
compared to $4.4 million for the second quarter of 1998 and $9.0 million for
the six months ended June 30, 1998. The decreases in interest expense are
principally due to lower outstanding debt balances during the second quarter
and six months of 1999 compared to the second quarter and six months of 1998.
Recapitalization Expense. As discussed in Note 2 to the unaudited condensed
consolidated financial statements, pursuant to a merger agreement entered into
by the Company, a newly formed entity to be organized by Warburg would merge
with and into Knoll, and the public stockholders of Knoll would receive $28.00
per share in cash for the shares owned by them. During the second quarter of
1999, the Company incurred $3.0 million of expense relating to the
recapitalization of the Company that will occur if the merger is consummated.
Income Tax Expense. The Company's effective tax rate for the second quarter
and six months ended June 30, 1999 was 43.5% and 42.7%, respectively, compared
to 40.9% and 40.5% for the second quarter and six months ended June 30, 1998,
respectively. The increases in the Company's effective tax rate for the
quarterly and six-month periods are primarily due to the recapitalization
expense, which is not expected to be deductible for income tax purposes. The
changes in the effective tax rate for the second quarter and six months have
also been impacted by the mix of the Company's pretax income and the varying
effective tax rates attributable to the countries in which it operates.
9
<PAGE>
Earnings Per Share. The Company's diluted earnings per share for the second
quarter of 1999 were $0.53, a decrease of 7.0% from diluted earnings per share
of $0.57 for the second quarter of 1998. Diluted earnings per share for the
six months ended June 30, 1999 were $0.98, a decrease of 3.9% from diluted
earnings per share of $1.02 for the same period of 1998. The recapitalization
expense discussed above negatively impacted 1999 diluted earnings per share
by $0.08 for the second quarter of 1999 and $0.07 for the six months ended
June 30, 1999. Excluding the impact of the recapitalization expense, earnings
per share were $0.61 for the second quarter of 1999, an increase of 7.0% over
the second quarter of 1998, and $1.05 for the six months ended June 30, 1999,
an increase of 2.9% over the same period of 1998. Earnings per share for the
second quarter and six months ended June 30, 1999 benefited from the reduced
number of common shares outstanding that resulted from the repurchase of
shares of common stock by the Company under its share repurchase program that
was implemented in September 1998.
Liquidity and Capital Resources
During the six months ended June 30, 1999, the Company generated cash flow
from operations of $40.9 million. Cash provided by operations resulted
primarily from earnings before depreciation and amortization offset by cash
used for working capital purposes. This cash flow was applied to the funding
of $9.3 million in capital expenditures, the repayment of $5.0 million under
the Company's revolving credit facility and the repurchase, during the first
two months of 1999, of 1,187,000 shares of the Company's common stock for
$28.7 million.
As of June 30, 1999, the Company's ratio of debt to total capitalization was
31.5%, and the Company had an aggregate of $226.5 million available for
borrowing under its U.S. and European revolving credit facilities. The
Company believes that existing cash balances and internally generated cash
flows, together with borrowings available under the revolving credit facility,
will be sufficient to fund normal working capital needs, capital spending
requirements and debt service requirements for at least 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,
pay dividends and purchase Company stock as well as require the Company to
maintain certain financial ratios.
If the merger discussed above is consummated, the Company would incur
significant additional debt under new financing arrangements. Warburg, on
behalf of Knoll, has entered into a commitment letter with Bank of America,
N.A., The Chase Manhattan Bank and Merrill Lynch & Co. to arrange for a credit
facility providing for up to $650.0 million. The proceeds will be used to
(i) fund the merger and related fees and expenses, (ii) refinance all amounts
owing under Knoll's existing senior credit agreement and (iii) provide for
working capital and ongoing general corporate purposes. The credit facility
will consist of up to a $325.0 million six-year term loan facility and up to a
$325.0 million six-year revolving credit facility and will bear interest at a
LIBOR-based rate. The commitment letter contemplates that the lenders shall
have a security interest in all of the capital stock of each of the Company's
domestic subsidiaries and 65% of the capital stock of each foreign subsidiary
of the Company, as well as all other present and future domestic assets and
properties of the Company. Additionally, the commitment letter contemplates
that the credit facility will be guaranteed by all of the Company's domestic
subsidiaries.
The commitment is subject to the satisfaction of conditions customary for
loans of this type, including the condition that there be no material adverse
change in (i) the market for syndicated credit facilities which could
materially impair the syndication of the credit facility or (ii) the business,
operations or financial condition of the Company. The commitment is further
subject to the settlement, to the lenders' satisfaction, of the stockholder
litigation relating to the merger.
Management believes that the Company's cash flows from operations would be
sufficient to service the additional debt as well as continue to fund normal
working capital needs and capital expenditures.
Backlog
The Company's backlog of unfilled orders was $172.3 million at June 30, 1999
and $143.5 million at June 30, 1998. The Company manufactures substantially
all of its products to order and expects to fill substantially all outstanding
unfilled orders within the next twelve months. As such, backlog is not a
significant factor used to predict the Company's long-term business prospects.
10
<PAGE>
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. Additionally, the Company has
completed an evaluation of the information systems currently being used by its
European operations and other potential European year 2000 issues and is
taking actions to address the year 2000 issues that have been identified.
Based upon information presently known, the Company does not expect its
European year 2000 issues to have a material adverse effect upon its results
of 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 three of four sites. In
addition, the Company has completed an inventory of its manufacturing
equipment to identify equipment that contains embedded chips and is taking
actions to address issues related to embedded chips that the Company has
determined may not be year 2000 compliant. The Company anticipates that all
of the system applications will be installed and in use and problems related
to embedded chips that are not year 2000 compliant will be remedied, through
replacement or other satisfactory measures, during the third quarter of 1999.
If the Company successfully implements the new system and addresses issues
associated with noncompliant embedded chips during the third quarter of 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. The Company has experienced and expects to continue to
experience operational issues related to the project implementation. The
Company has been developing and will continue to develop and implement plans
to address these issues as they arise.
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 on a timely basis, 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 $32.7
million, of which approximately 70.0% will be expensed and 30.0% will be
capitalized. Through June 30, 1999, the Company incurred expenditures of
approximately $29.2 million ($20.6 million expense and $8.6 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 those of 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 help minimize any
potential adverse impact
11
<PAGE>
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 attempt to 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 its forward-looking statements are further qualified
by important factors that could cause actual results to differ materially from
those in the forward-looking statements. Such factors include, without
limitation, the pendency of the merger, the highly competitive nature of the
market in which the Company competes, including the introduction of new
products, pricing changes by the Company's competitors and growth rates of the
office systems category; risks associated with the Company's growth strategy,
including the risk that the Company's introduction of new products will not
achieve the same degree of success achieved historically by the Company's
products; 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 dependence on key personnel; the ability of the Company to
maintain its relationships with its dealers; the Company's indebtedness, which
requires a 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 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;
possible risks relating to year 2000 issues; and fluctuations in industry
revenues driven by a variety of macroeconomic factors, including white-collar
employment levels and corporate cash flows, as well as by a variety of
industry factors such as corporate reengineering and restructuring, technology
demands, ergonomic, health and safety concerns and corporate relocations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
- -------------------------------------------------------------------
During the normal course of business, the Company is routinely subjected to
market risk associated with interest rate movements and foreign currency
exchange rate movements. Interest rate risk arises from the Company's debt
obligations and, prior to April 1999, from interest rate collar agreements.
Foreign currency exchange rate risk arises from the Company's foreign
operations and purchases of inventory from foreign suppliers.
At December 31, 1998, the Company had outstanding interest rate collar
agreements with an aggregate notional principal amount of $115.0 million.
Such agreements expired in April 1999. As such, as of June 30, 1999, the
Company is no longer subjected to interest rate risk from interest rate collar
agreements. There have been no other changes in the types of market risk to
which the Company is exposed as disclosed in the Company's annual report on
Form 10-K for the year ended December 31, 1998.
With the exception of the Company's variable rate debt obligation, there has
been no material change in the carrying amounts or fair values of the Company's
financial instruments that were disclosed in the Company's annual report on
Form 10-K for the year ended December 31, 1998. Regarding the variable rate
debt, the Company had $56.0 million of such debt outstanding at June 30, 1999,
which is a decrease of $5.0 million from December 31, 1998. The fair value of
this debt continues to approximate its carrying amount.
12
<PAGE>
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
In March 1999, eight class action complaints (Stark v. Knoll, Inc., et al.,
No. 17049NC; Guido v. Warburg, Pincus & Co., et al., No. 17052NC; Marotta v.
Knoll, Inc., et al., No. 17053NC; Finkelstein v. Knoll, Inc., et al., No.
17055NC; Rausch v. Knoll, Inc., et al., No 17059NC; Hatfield v. Knoll, Inc.,
et al., No. 17068NC; Shervy v. Knoll, Inc., et al., No. 17073NC; Simms v.
Knoll, Inc., et al., No. 17076NC) were filed in the Court of Chancery for the
State of Delaware, New Castle County, relating to the initial merger proposal
of the Continuing Stockholders contemplating the acquisition of all of the
outstanding shares of common stock not owned by them at a price of $25.00 per
share, which was previously discussed in Note 2 to the unaudited condensed
consolidated financial statements. The Stark complaint was voluntarily
dismissed, and the remaining seven complaints were consolidated into a single
class action. The defendants named in the complaints are the Company,
Burton B. Staniar, John W. Amerman, Robert J. Dolan, Jeffrey A. Harris, Sidney
Lapidus, Kewsong Lee, John L. Vogelstein, John H. Lynch, Warburg, Pincus & Co.,
Warburg and E.M. Warburg, Pincus & Co., LLC. The complaints alleged breach of
fiduciary duty on the part of the individual defendants in connection with the
proposed purchase of such shares of common stock and sought a preliminary
injunction, damages and rescission.
Generally, the lawsuits purport to be brought on behalf of the holders of
common stock and allege substantially similar claims of breach of fiduciary
duty. In general, the plaintiffs allege that the merger consideration is
unjust and inadequate in that the intrinsic value of the shares of common
stock is allegedly greater than the proposed merger consideration, in view of
the Company's prospects; the proposed merger consideration includes an
inadequate premium; and the proposed merger consideration is designed to cap
the market price of the shares of common stock before the trading price for
the shares of common stock could recover from an alleged temporary downturn in
the market. The lawsuits also generally seek injunctive relief, an injunction
of the proposed merger (or, if it is consummated, rescission thereof),
compensatory and other damages and an award of attorney's fees and expenses.
On June 21, 1999, the Company entered into a Memorandum of Understanding with
counsel to the plaintiffs in such stockholder lawsuits. The Memorandum of
Understanding provides for the settlement of such lawsuits based on the
payment of a per share merger consideration of $28.00 and is subject to,
among other things, completion of definitive documentation relating to the
settlement, court approval and consummation of the merger. Additionally, the
Memorandum of Understanding provides that the plaintiffs will petition the
court for certification of a class on a "non-opt-out" basis. The Company
believes that the settlement, if completed as provided for in the Memorandum
of Understanding, will not have a material adverse effect on the Company.
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 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.
13
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
a. Exhibits:
2* Amended and Restated Agreement and Plan of Merger by and
between Warburg, Pincus Ventures, L.P. and Knoll, Inc., dated
as of July 29, 1999.
10** Memorandum of Understanding among counsel to the plaintiffs and
counsel to the defendants in the various class action lawsuits
instituted by certain stockholders of the Company dated June 21,
1999.
27 Financial Data Schedule.
b. Current Reports on Form 8-K:
On June 22, 1999, the Company filed a report on Form 8-K dated June 21,
1999. In that Form 8-K under Item 5 -- Other Events, the Company reported
that (i) it entered into an Agreement and Plan of Merger providing for the
acquisition of all shares of the Company's common stock not owned by Warburg
and members of the Company's management at a price of $28.00 per share,
(ii) it received a commitment from Bank of America Corporation, The Chase
Manhattan Corp. and Merrill Lynch & Co. to provide, subject to certain
conditions, the financing necessary to complete the transaction and (iii)
it entered into a Memorandum of Understanding with counsel to the
plaintiffs in the stockholder lawsuits arising from the initial
announcement of the proposed merger. The Agreement and Plan of Merger,
the Memorandum of Understanding and the Company's related press release
dated and issued June 21, 1999 were included as exhibits to the Form 8-K.
- ------------------------------------------------------------------------------
* Incorporated by reference to the Company's Preliminary Proxy Statement on
Schedule 14A, which was filed with the Securities and Exchange Commission
on July 30, 1999.
** Incorporated by reference to the Company's Form 8-K dated June 21, 1999,
which was filed with the Securities and Exchange Commission on June 22,
1999.
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, 1999 By: /s/ Burton B. Staniar
--------------------------
Burton B. Staniar
Chairman of the Board
Date: August 13, 1999 By: /s/ Douglas J. Purdom
-------------------------
Douglas J. Purdom
Senior Vice President and
Chief Financial Officer
15
<PAGE>
EXHIBIT INDEX
-------------
Exhibit
Number Description
- ------- -----------
2* Amended and Restated Agreement and Plan of Merger by and between
Warburg, Pincus Ventures, L.P. and Knoll, Inc., dated as of
July 29, 1999.
10** Memorandum of Understanding among counsel to the plaintiffs and
counsel to the defendants in the various class action lawsuits
instituted by certain stockholders of the Company, dated June 21,
1999.
27 Financial Data Schedule.
- ------------------------------------------------------------------------------
* Incorporated by reference to the Company's Preliminary Proxy Statement on
Schedule 14A, which was filed with the Securities and Exchange Commission
on July 30, 1999.
** Incorporated by reference to the Company's Form 8-K dated June 21, 1999,
which was filed with the Securities and Exchange Commission on June 22,
1999.
16
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