KNOLL INC, 10-K405/A, 1999-09-13

KNOLL INC
10-K405/A, 1999-09-13
MISCELLANEOUS FURNITURE & FIXTURES

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K/A
(AMENDMENT NO. 2)

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934

For the fiscal year ended December 31, 1998

/ / 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

Securities registered pursuant to section 12(b) of the Act:

TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
- --------------------------------------- ------------------------------------

Common Stock, par value $0.01 per share New York Stock Exchange, Inc.

Securities registered pursuant to section 12(g) of the Act: None

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
--- ---

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

As of March 24, 1999, the aggregate market value of the voting stock held by
non-affiliates of the Registrant, based on the closing price of these shares on
the New York Stock Exchange, Inc., was $396,318,744. Directors, executive
officers and beneficial owners of 5% or more of the Registrant's stock are
considered affiliates of the Registrant.

As of March 24, 1999, there were 40,618,778 shares of the Registrant's common
stock, par value $0.01 per share, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

None.

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Knoll, Inc. (the "Company"), in accordance with Rule 12b-15 of the Securities
and Exchange Act of 1934, as amended (the "Exchange Act"), and General
Instruction G(3) to Form 10-K under the Exchange Act, hereby amends and modifies
its Annual Report on Form 10-K for the year ended December 31, 1998 (as amended
by the Company's Form 10-K/A filed on April 30, 1999, the "Original Form 10-K"),
as follows:

(1) Item 6 ("Selected Financial Data") of the Original Form 10-K is amended and
restated in its entirety as filed herein. The revisions include the removal
of tabular pro forma operating data for the years ended December 31, 1996
and 1997 and related footnotes thereto.

(2) Item 7 ("Management's Discussion and Analysis of Financial Condition and
Results of Operations") of the Original Form 10-K is amended and restated
in its entirety as filed herein. The revisions include discussing 1996
results of operations on a historical basis and discussing significant
events (i.e. the acquisition of Knoll from Westinghouse) that materially
affect the comparability of results between the years.

(3) Item 8 ("Financial Statements and Supplementary Data") of the Original Form
10-K is amended and restated in its entirety as filed herein. The revisions
include the removal of tabular pro forma results of operations for the
years ended December 31, 1996 and 1997 from the Consolidated Statements of
Operations as well as the removal of disclosures within the notes to the
financial statements pertaining to such pro forma financial results. As a
result of such changes, which included the deletion of Note 5 as included
in the Original Form 10-K, the Notes to the financial statements have been
renumbered.

(4) Item 14 ("Exhibits, Financial Statement Schedules and Reports on Form 8-K")
of the Original Form 10-K has been amended and restated in its entirety
because such Item references the Company's financial statements and because
the Company's independent auditors have issued a consent related to the
Company's financial statements that is filed as an exhibit to this
Amendment to the Original Form 10-K.

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PART II

ITEM 6. SELECTED FINANCIAL DATA

The following table presents selected consolidated financial information of the
Predecessor, as of the dates and for the periods indicated, and selected
consolidated financial information of the Company, as of the dates and for the
periods indicated. The consolidated financial information of the Predecessor and
the Company has been derived from audited financial statements of the
Predecessor and the Company, respectively. The selected financial information
should be read in conjunction with Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operations," and Item 8, "Financial
Statements and Supplementary Data."

<TABLE>
<CAPTION>
PREDECESSOR | THE COMPANY
------------------------------------ | -----------------------------------
YEAR ENDED TWO MONTHS | TEN MONTHS YEAR ENDED
DECEMBER 31, ENDED | ENDED DECEMBER 31,
--------------------- FEBRUARY 29, | DECEMBER 31, ---------------------
1994 1995 1996 | 1996 1997 1998
-------- ------- --------- | --------- --------- ---------
(IN THOUSANDS) | (IN THOUSANDS, EXCEPT PER
| SHARE DATA)
<S> <C> <C> <C> | <C> <C> <C>
OPERATING DATA |
|
Sales ................................... $ 562,869 $ 620,892 $ 90,232 | $ 561,534 $ 810,857 $948,691
Cost of sales ........................... 410,104 417,632 59,714 | 358,841 489,962 572,756
-------- ------- --------- | --------- --------- ---------
Gross profit ............................ 152,765 203,260 30,518 | 202,693 320,895 375,935
Provision for restructuring ............. 29,180 -- -- | -- -- --
Selling, general and administrative |
expenses ............................. 167,238 138,527 21,256 | 131,349 183,018 204,392
Westinghouse long-term incentive |
compensation ......................... -- -- 47,900 | -- -- --
Allocated corporate expenses ............ 5,881 9,528 921 | -- -- --
-------- ------- --------- | --------- --------- ---------
Operating income (loss) ................. (49,534) 55,205 (39,559) | 71,344 137,877 171,543
Interest expense ........................ 3,225 1,430 340 | 32,952 25,075 16,860
Other income (expense), net ............. 699 (1,597) (296) | 447 1,667 2,732
-------- ------- --------- | --------- --------- ---------
Income (loss) before income tax |
expense (benefit) and |
extraordinary item ................... (52,060) 52,178 (40,195) | 38,839 114,469 157,415
Income tax expense (benefit) ............ 7,713 22,846 (16,107) | 16,844 48,026 64,371
-------- ------- --------- | --------- --------- ---------
Income (loss) before extraordinary item . (59,773) 29,332 (24,088) | 21,995 66,443 93,044
Extraordinary loss on early |
extinguishment of debt, net of taxes . -- -- -- | 5,159 5,337 --
-------- ------- --------- | --------- --------- ---------
Net income (loss) ....................... $(59,773) $29,332 $ (24,088) | $ 16,836 $ 61,106 $ 93,044
======== ======= ========= | ========= ========= =========
|
Earnings per share (1): |
Income before extraordinary item |
per share of Common Stock: |
Basic ........................... | $ 0.71 $ 1.78 $ 2.25
Diluted ......................... | $ 0.63 $ 1.64 $ 2.14
Net income per share of Common Stock: |
Basic ........................... | $ 0.54 $ 1.64 $ 2.25
Diluted ......................... | $ 0.48 $ 1.51 $ 2.14
Weighted average shares of Common Stock (1): |
Basic .............................. | 31,040 37,284 41,271
Diluted ............................ | 34,701 40,398 43,509

</TABLE>

3
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<TABLE>
<CAPTION>
PREDECESSOR | THE COMPANY
DECEMBER 31, | DECEMBER 31,
------------------- | -----------------------------
1994 1995 | 1996 1997 1998
-------- -------- | -------- -------- --------
(IN THOUSANDS) | (IN THOUSANDS)
<S> <C> <C> | <C> <C> <C>
BALANCE SHEET DATA |
Working capital....................................... $ 22,898 $ 82,698 | $ 64,754 $ 65,553 $ 95,040
Total assets......................................... 705,316 656,710 | 675,712 680,859 714,027
Total long-term debt, including current portion...... 12,451 3,538 | 354,154 207,029 169,255
Total liabilities.................................... 247,310 176,259 | 497,908 392,570 370,177
Stockholders' equity................................. 458,006 480,451 | 177,804 288,289 343,850

</TABLE>

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(1) All Common Stock share and per share amounts for the ten months ended
December 31, 1996 and the year ended December 31, 1997 have been
adjusted, as necessary, to give retroactive effect to the 3.13943-for-1
stock split that resulted from the amendment of the Company's Certificate
of Incorporation on May 6, 1997. In addition, because of the significance
of the redemption and conversion into Common Stock of the Company's
Series A 12% Participating Convertible Preferred Stock ("Series A Preferred
Stock") upon consummation of the Company's initial public offering,
historical net income per share amounts for the ten months ended December
31, 1996 and year ended December 31, 1997 are not presented herein.
Earnings per share amounts for these periods are pro forma as they are
based on the weighted average number of shares of Common Stock and
potentially dilutive securities (nonvested stock grants and employee
stock options) outstanding during the periods, after giving effect to the
redemption and conversion into Common Stock of the Series A Preferred
Stock assuming the redemption and conversion had occurred at the
beginning of the periods presented. See Note 2 to the financial
statements included elsewhere in this Form 10-K/A.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH ITEM 8, "FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA."

Knoll, Inc. was formed on February 29, 1996 as a result of the Acquisition of
the office furniture business unit (The Knoll Group, Inc. and related entities)
of Westinghouse. Knoll, Inc. and its subsidiaries are engaged in the design,
manufacture and sale of office furniture products and accessories, focusing on
the middle to high-end segments of the contract furniture market.

Historical results of operations for 1996 referred to in the discussion below
represent the aggregate of the results of operations of the Predecessor for the
two months ended February 29, 1996 and of the Company for the ten months ended
December 31, 1996. Operating results data that are adjusted to reflect the pro
forma effect of the Acquisition and/or the pro forma effect of the Company's
initial public offering as if such events had occurred at the beginning of 1996
do not purport to be indicative of the actual results that would have occurred,
nor do they purport to be indicative of results that will be achieved in the
future.

OVERVIEW

1998 was a record year for sales and earnings, which led to continued market
share gains. Management believes the Company's operating success was driven by
progress made with the Company's growth initiatives as well as benefits it
continues to receive from strategic actions initiated in 1994 to reorganize
business activities and manufacturing processes.

The Company made significant progress with its growth strategy in 1998. It
introduced two new office system products, CURRENTS and DIVIDENDS, to enhance
the breadth of its office system offerings and provide what management believes
to be a very strong, comprehensive offering of office system products.
Additionally, the Company increased the size of its salesforce and
geographically expanded into secondary markets.

The application of the Company's growth strategy together with favorable
industry dynamics had a significant effect on the Company's results of
operations and financial position in 1998. The Company anticipates that revenues
in the first quarter of 1999 will be down compared to the first quarter of 1998
due principally to a slowdown in industry orders and sales levels.

4
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RECENT DEVELOPMENTS

RESULTS OF OPERATIONS

SALES

Over the past two years, Knoll has experienced significant growth in sales. 1998
sales were up 17.0% from 1997 to $948.7 million. 1997 sales of $810.9 million
were up 24.4%, or $159.1 million, from $651.8 million in sales for 1996. The
Company's sales growth has resulted from increased volume, with the largest
increase coming from sales of office systems, which management believes to be
the largest and fastest growing product category in the industry. BIFMA
estimates that U.S. sales of office systems were $4.6 billion, or 36.9% of total
industry sales, in 1998. Office systems accounted for 68.4% of the Company's
sales in 1998, 67.2% of sales in 1997 and 65.4% of sales in 1996.

GROSS PROFIT AND OPERATING INCOME

The Company's gross profit and operating income as a percentage of sales are the
highest of the public companies in the industry. Both have continued to benefit
from increasing volume and a continued focus on cost control. As a percentage of
sales, gross profit was 39.6% for 1998 and 1997 and 35.8% for 1996 and operating
income was 18.1% for 1998, 17.0% for 1997 and 4.9% for 1996. 1996 operating
income was negatively impacted by $47.9 million of long-term incentive
compensation expense under Westinghouse's long-term incentive plans that became
payable, and for which amounts payable were established, as a result of the
Acquisition. Assuming the Acquisition had occurred at the beginning of 1996,
gross profit and operating income as a percentage of sales would have been 35.6%
and 12.0%, respectively, for 1996. Such results reflect additional depreciation
expense as a result of a step-up in the basis of fixed assets, additional costs
required to replace specific services formerly provided by Westinghouse,
additional amortization expense as a result of goodwill and other intangible
assets and the elimination of the Westinghouse long-term incentive compensation
expense.

Although selling, general and administrative expenses increased on a relative
dollar basis in 1998 compared to 1997 and in 1997 compared to 1996, such
expenses decreased as a percentage of sales. The increases on a relative dollar
basis were due primarily to incremental employee costs related to higher sales,
profit and employment levels in 1998 and 1997 as well as increased expenses
related to new product and technology initiatives in 1997. Additionally, the
increase from 1996 to 1997 is also attributable to 1997 results reflecting a
full year of additional depreciation and amortization that resulted from the
Acquisition and a full year of additional costs required to replace specific
services formerly provided by Westinghouse. The Company's 1998 selling, general
and administrative expenses as a percentage of sales decreased to 21.5% for 1998
from 22.6% for 1997 and 23.4% for 1996.

INTEREST EXPENSE

Since the Acquisition, the Company has continued to significantly reduce its
debt. During the ten months ended December 31, 1996, the Company prepaid $72.0
million of indebtedness under its then-existing credit facilities. In 1997, the
Company redeemed an aggregate principal amount of $57.8 million of its Senior
Subordinated Notes and repaid $89.2 million of bank debt. Finally, in 1998, the
Company repaid $38.0 million of bank debt, which is lower than the prior two
years in part due to the implementation of the share repurchase program. The
Company's interest expense was impacted favorably as a result of the continued
overall reduction of debt as well as lower interest rates associated with the
refinancing of its previously existing senior credit agreement in December 1996.
See "Liquidity and Capital Resources" for further discussion of the events
discussed above.

5
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INCOME TAX EXPENSE

With operations in the U.S., Canada and various countries in Europe, the
Company's effective tax rate is directly affected by the mix of pre-tax income
and the varying effective tax rates attributable to the countries in which it
operates. This changing mix is primarily responsible for the change in the
effective tax rate from (54.4)% in 1996 to 42.0% in 1997 and 40.9% in 1998.
Additionally, the change in the effective tax rate has been impacted by the
reduced effect of non-deductible expenses with the increase in pre-tax income.
Assuming the Acquisition had occurred at the beginning of 1996, the Company's
effective tax rate would have been 43.7% in 1996.

EXTRAORDINARY ITEMS

In connection with the Company's May 1997 initial public offering, which is
discussed below, Knoll executed an early redemption of an aggregate principal
amount of $57.8 million of its Senior Subordinated Notes. As a result of this
redemption, the Company recorded an extraordinary loss of $5.3 million, net of a
tax benefit of $3.5 million, in 1997. Such loss consisted of a $5.7 million
premium paid and $3.1 million of unamortized financing costs that were
written-off.

The Company also recorded an extraordinary loss of $5.2 million, net of a tax
benefit of $3.3 million, in 1996 in connection with its strategic move to
refinance its previously existing credit agreement on more favorable terms. This
extraordinary loss consisted of the write-off of unamortized financing costs
related to the refinanced debt.

INITIAL PUBLIC OFFERING

In May 1997, the Company completed an initial public offering, generating net
proceeds of $133.4 million from the sale of 8,480,000 shares of Common Stock.
The Company used those net proceeds together with $11.7 million borrowed under
its then-existing revolving credit facility to redeem 800,000 shares of Series A
Preferred Stock for $80.0 million and, as previously discussed, to redeem an
aggregate principal amount of $57.8 million of the Senior Subordinated Notes for
$65.1 million. If the Company assumes that these events as well as the
Acquisition had occurred at the beginning of 1996, net income, on a pro forma
basis, would have increased 170.2% to $68.1 million ($1.57 per share diluted)
for 1997 from $25.2 million ($0.58 per share diluted) for 1996 and historical
net income of $93.0 million ($2.14 per share diluted) for 1998 would have grown
36.6% from pro forma net income for 1997.

LIQUIDITY AND CAPITAL RESOURCES

The following table highlights certain key cash flow and capital information
pertinent to the discussion that follows:

The Company continued to generate strong cash flow from operating activities in
1998 primarily as a result of its improved earnings before noncash items. The
Company's cash flow from operating activities for 1998 was lower than that
generated for 1997 as a result of increased working capital that was partially
due to increased volume and new product introductions. Free cash flow has
generally been used to fund capital expenditures, working capital requirements
and debt service, and, in 1998, the cash flow was also used to implement a share
repurchase program.

6
<PAGE>

The Company's capital expenditures for 1998 were primarily for new manufacturing
equipment, additions to existing plants and information systems. The plant
additions consisted of the expansion of three U.S. plants by an aggregate of
approximately 139,000 square feet. The Company estimates that capital
expenditures for 1999 will be approximately $35.0 million.

In September 1998, the Board of Directors approved a share repurchase program
that authorized the repurchase of 3.0 million shares of the Company's Common
Stock. On February 2, 1999, the Board of Directors approved an increase of 2.0
million shares to the program. During 1998, the Company repurchased 1,707,700
shares of Common Stock for $38.8 million. As of March 24, 1999, the Company
purchased a total of 2,894,700 shares for $67.5 million under the program.

During the ten months ended December 31, 1996, the Acquisition from Westinghouse
had a significant impact on the Company's investing and financing activities.
The necessary capital to fund the Acquisition was obtained from the issuance of
stock for $160.0 million and debt of $425.0 million, of which $165.0 million was
from the issuance of the Senior Subordinated Notes and $260.0 million was from
senior credit facilities. The senior credit facilities were subsequently
refinanced, in December 1996, on more favorable terms. The Company was able to
prepay $72.0 million of indebtedness under its credit facilities that existed in
1996.

As previously discussed, in May 1997, the Company completed an initial public
offering that generated net proceeds of $133.4 million from its sale of
8,480,000 shares of Common Stock. The Company used those net proceeds together
with $11.7 million borrowed under its then-existing revolving credit facility to
redeem 800,000 shares of Series A Preferred Stock for $80.0 million and to
redeem an aggregate principal amount of $57.8 million of the Senior Subordinated
Notes for $65.1 million (including a redemption premium of $5.7 million and
accrued and unpaid interest thereon of $1.6 million). In addition to the
redemption of a portion of the Senior Subordinated Notes, the Company repaid
$89.2 million of bank debt during 1997.

On August 8, 1997, the Company entered into a new senior credit agreement that
modified certain terms of the agreement that it entered into in December 1996.
The new agreement provides for a $275.0 million revolving credit facility that
matures in August 2002. Borrowings under the new agreement bear interest at a
floating rate based, at the Company's option, upon (i) the Eurodollar rate (as
defined therein) plus an applicable percentage which is subject to change based
on the Company's ratio of funded debt to EBITDA or (ii) the greater of the
federal funds rate plus 0.5% or the prime rate. The new credit agreement
contains restrictive covenants, financial covenants and events of default. Among
other things, the restrictive covenants limit the Company's ability to incur
additional indebtedness, pay dividends, purchase Company stock, make
investments, grant liens and engage in certain other activities. During 1998,
the Company continued to reduce its outstanding indebtedness under this credit
facility, as it repaid $38.0 million. As of December 31, 1998, the Company had
an aggregate of $212.6 million available for borrowing under the revolving
credit facility.

In addition to the revolving credit facility, the Company had $107.2 million
aggregate principal amount of Senior Subordinated Notes outstanding as of
December 31, 1998. The Senior Subordinated Notes are subordinated to all of the
Company's existing and future senior indebtedness, including all indebtedness
under the revolving credit facility. The indenture governing the terms of the
Senior Subordinated Notes imposes certain restrictions on the Company and its
subsidiaries, including restrictions on the ability to incur indebtedness, pay
dividends, purchase Company stock, make investments, grant liens and engage in
certain other activities. The Company may be required to purchase the Senior
Subordinated Notes upon a change of control (as defined in the indenture) and in
certain circumstances with the proceeds of asset sales. The Senior Subordinated
Notes are redeemable at the Company's option at any time after March 15, 2001,
initially at 105.438% of their principal amount at maturity, plus accrued
interest, declining to 100.0% of their principal amount at maturity, plus
accrued interest, on or after March 15, 2004.

The Company's foreign subsidiaries maintain local credit facilities to provide
credit for overdraft, working capital and other purposes. As of December 31,
1998, total credit available under such facilities was approximately $12.2
million, of which none had been utilized. The Company believes that it is
currently in compliance with all terms of its indebtedness.

7
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The Company continues to have significant liquidity requirements. In addition
to working capital needs and the need to fund capital expenditures to support
the Company's growth initiatives, the Company has cash requirements for debt
service. The Company believes that existing cash balances and cash flow from
operating activities, together with borrowings available under the revolving
credit facility, will be sufficient to fund working capital needs, capital
spending requirements and debt service requirements for at least the next
twelve months. If the transaction discussed in "Recent Developments" is
consummated, the Company will incur significant additional debt under new
financing arrangements. Management believes that the Company's cash flows
would be sufficient to service such additional debt as well as continue to
fund working capital needs and capital expenditures.

INFLATION

There was no significant impact on Knoll's operations as a result of inflation
during the three years ended December 31, 1998.

BACKLOG

The Company's backlog of unfilled orders was $159.2 million at December 31, 1998
and $141.3 million at December 31, 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.

IMPACT OF YEAR 2000

The Company has certain existing computer programs that were written using two
digits rather than four to define the applicable year. As a result, those
computer programs have time-sensitive software that may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities. The Company also has manufacturing
equipment that contains embedded chips that may recognize a date using "00" as
the year 1900 rather than the year 2000, which may result in a temporary
inability to use such equipment in the Company's manufacturing processes.

In 1997, the Company initiated a strategic project to replace and enhance its
existing manufacturing and business systems (software and hardware) in North
America with a new fully integrated system intended to enhance its order entry
response time and accuracy, improve manufacturing processes, reduce delivery
times, improve shipping accuracy and reduce fixed costs. While the decision to
embark on this project was business related, the new software that the Company
will implement has been represented by the vendor to be year 2000 compliant.
Therefore, the year 2000 issue is not expected to pose significant operational
problems for the Company's computer systems. However, if the new software is not
implemented on a timely basis or fails to be fully year 2000 compliant, the year
2000 issue could have a material impact on the operations of the Company.

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 it
will install all of the system applications and remedy the problems related to
embedded chips that are determined not to be year 2000 compliant, through
replacement or other satisfactory measures, by the third quarter of 1999. If the
Company successfully implements the new system and addresses issues associated
with noncompliant embedded chips by 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.

8
<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 $31.5
million, approximately 72% expense and 28% capital. Through December 31, 1998,
the Company has incurred expenditures of approximately $24.0 million ($17.0
million expense and $7.0 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. 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.

ENVIRONMENTAL MATTERS

The past and present business operations of the Company and the past and present
ownership and operation of manufacturing plants on real property by the Company
are subject to extensive and changing federal, state, local and foreign
environmental laws and regulations. As a result, the Company is involved from
time to time in administrative and judicial proceedings and inquiries relating
to environmental matters. The Company cannot predict what environmental
legislation or regulations will be enacted in the future, how existing or future
laws or regulations will be administered or interpreted or what environmental
conditions may be found to exist. Compliance with more stringent laws or
regulations, or stricter interpretation of existing laws, may require additional
expenditures by the Company, some of which may be material. The Company has been
identified as a potentially responsible party pursuant to CERCLA for remediation
costs associated with waste disposal sites previously used by the Company. The
remediation costs at these CERCLA sites are unknown, but the Company does not
expect any liability it may have under CERCLA to be material, based on the
information presently known to the Company. In addition, Westinghouse has agreed
to indemnify the Company for certain costs associated with CERCLA liabilities
known as of the date of the Acquisition.

9
<PAGE>

STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE

Certain portions of this Form 10-K, 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 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements of the Company and supplementary data are
filed under this Item beginning on page F-1 of this Amendment to the Original
Form 10-K.

10
<PAGE>

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) Documents filed as part of the report:

(1) CONSOLIDATED FINANCIAL STATEMENTS

The Consolidated Financial Statements of the Company are listed in the
Table of Contents for the Financial Statements beginning on page F-1
of this Amendment to the Original Form 10-K.

(2) FINANCIAL STATEMENT SCHEDULES

Financial Statement Schedule II-Valuation and Qualifying Accounts is
filed with this Amendment to the Original Form 10-K on page S-1. All
other schedules for which provision is made in the applicable
regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and therefore have
been omitted.

(3) EXHIBITS

EXHIBIT
NUMBER DESCRIPTION
---------- --------------------------------------------------------

<S> <C>
3.1*** Amended and Restated Certificate of Incorporation of the
Company.

3.2*** Amended and Restated By-Laws of the Company.

10.1* Stock Purchase Agreement, dated as of December 20, 1995,
by and between Westinghouse and TKG.

10.2* Knoll, Inc. 1996 Stock Incentive Plan (formerly called
the TKG Stock Incentive Plan).

10.3* Indenture, dated as of February 29, 1996, by and among
the Company, T.K.G. Acquisition Corp., T.K.G.
Acquisition Sub, Inc., The Knoll Group, Inc., Knoll
North America, Inc., Spinneybeck Enterprises, Inc. and
Knoll Overseas, Inc., as guarantors, and IBJ Schroder
Bank & Trust Company, as trustee, relating to
$165,000,000 principal amount of 10.875% Senior
Subordinated Notes due 2006, including form of Initial
Global Note.

10.4* Supplemental Indenture, dated as of February 29, 1996,
by and among the Company, as successor to T.K.G.
Acquisition Sub, Inc., the Guarantors (as defined
therein), and IBJ Schroder Bank & Trust Company, as
trustee, relating to $165,000,000 principal amount of
10.875% Senior Subordinated Notes due 2006, including
form of Initial Global Note.

10.5** Supplemental Indenture No. 2, dated as of March 14,
1997, by and among the Company, the Guarantors (as
defined therein), and IBJ Schroder Bank & Trust Company,
as trustee, relating to $165,000,000 principal amount of
10.875% Senior Subordinated Notes due 2006, including
form of Initial Global Note.

10.6**** Credit Agreement, dated as of August 8, 1997, by and
among the Company, NationsBank, N.A., as Administrative
Agent, The Chase Manhattan Bank, as Documentation Agent
and other lending institutions.

10.7** Employment Agreement, dated as of February 29, 1996,
between T.K.G. Acquisition Corp. and Burton B. Staniar.

10.8** Employment Agreement, dated as of February 29, 1996,
between T.K.G. Acquisition Corp. and John H. Lynch.

10.9** Employment Agreement, dated as of February 29, 1996,
between T.K.G. Acquisition Corp. and Andrew B. Cogan.

10.10*** Amendment to Employment Agreement, dated as of April 30,
1997, between the Company and Andrew B. Cogan.

</TABLE>

11
<PAGE>

EXHIBIT
NUMBER DESCRIPTION
---------- --------------------------------------------------------

<S> <C>
10.11+ Amendment #2 to Employment Agreement, dated as of August
1, 1998, between the Company and Andrew B. Cogan.

10.12** Stockholders Agreement (Common Stock and Preferred
Stock), dated as of February 29, 1996, among T.K.G.
Acquisition Corp., Warburg, Pincus Ventures, L.P., and
the signatories thereto.

10.13** Form of Stockholders Agreement (Restricted Shares),
dated as of February 29, 1996, among T.K.G. Acquisition
Corp., Warburg, Pincus Ventures, L.P., and the
signatories thereto.

10.14*** Form of Agreement, dated as of April 15, 1997, by and
among the Company, Warburg, Pincus Ventures, L.P.,
NationsBanc Investment Corp. and the Investors (as
defined therein).

10.15+ Voting Agreement, dated as of September 11, 1998, by and
among the Company, Warburg, Pincus Ventures, L.P. and
Warburg, Pincus & Co.

10.16***** Amended and Restated Knoll, Inc. 1997 Stock Incentive
Plan.

10.17+ Letter Agreement between the Company and Douglas J.
Purdom, dated August 13, 1996.

21** Subsidiaries of the Registrant.

23 Consent of Independent Auditors.

27+ Financial Data Schedule.

</TABLE>

(b) Current Reports on Form 8-K:

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.

On December 9, 1998, the Company filed a report on Form 8-K dated December
3, 1998. In that Form 8-K under Item 5 -- Other Events, the Company
reported its press release regarding the election of a new director to the
Company's Board of Directors.

- ----------

+ Previously filed with the Original Form 10-K.

* Incorporated by reference to the Company's Registration Statement on Form
S-4 (File No. 333-2972), which was declared effective by the Commission
on June 12, 1996.

** Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996.

*** Incorporated by reference to the Company's Registration Statement on Form
S-1 (File No. 333-23399), which was declared effective by the Commission
on May 9, 1997.

**** Incorporated by reference to the Company's Registration Statement on Form
S-1 (File No. 333-36407), which was filed on September 25, 1997 and
subsequently withdrawn.

***** Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.

12
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Amendment No. 2 on Form
10-K/A to be signed on its behalf by the undersigned, thereunto duly
authorized, on this 13th day of September 1999.

KNOLL, INC.

By: /s/ BURTON B. STANIAR
---------------------------
Burton B. Staniar
Chairman of the Board

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Amendment No. 2 on Form 10-K/A report on Form 10-K has been signed by the
following persons on behalf of the Registrant and in the capacities and on
the date indicated.

/s/ BURTON B. STANIAR Chairman of the Board September 13, 1999
- --------------------------
Burton B. Staniar

/s/ JOHN H. LYNCH President, Chief Executive September 13, 1999
- -------------------------- Officer and Director
John H. Lynch (Principal Executive Officer)

/s/ DOUGLAS J. PURDOM Chief Financial Officer September 13, 1999
- -------------------------- (Principal Financial Officer)
Douglas J. Purdom

/s/ BARRY L. MCCABE Controller September 13, 1999
- -------------------------- (Principal Accounting Officer)
Barry L. McCabe

Director
- --------------------------
John W. Amerman

/s/ ANDREW B. COGAN Director September 13, 1999
- --------------------------
Andrew B. Cogan

/s/ ROBERT J. DOLAN Director September 13, 1999
- --------------------------
Robert J. Dolan

/s/ JEFFREY A. HARRIS Director September 13, 1999
- --------------------------
Jeffrey A. Harris

/s/ SIDNEY LAPIDUS Director September 13, 1999
- --------------------------
Sidney Lapidus

/s/ KEWSONG LEE Director September 13, 1999
- --------------------------
Kewsong Lee

/s/ HENRY B. SCHACHT Director September 13, 1999
- --------------------------
Henry B. Schacht

</TABLE>

13
<PAGE>

KNOLL, INC.
TABLE OF CONTENTS FOR THE FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Auditors............................................................................. F-2
Consolidated Balance Sheets at December 31, 1998 and 1997.................................................. F-3
Consolidated Statements of Operations for the Years Ended December 31, 1998 and 1997, the Ten Months Ended
December 31, 1996 and the Two Months Ended February 29, 1996 (Predecessor)............................... F-4
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998 and 1997, the Ten Months Ended
December 31, 1996 and the Two Months Ended February 29, 1996 (Predecessor)............................... F-5
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1998 and 1997,
the Ten Months Ended December 31, 1996 and the Two Months Ended February 29, 1996 (Predecessor).......... F-6
Notes to the Consolidated Financial Statements............................................................. F-7
Financial Statement Schedule II--Valuation and Qualifying Accounts......................................... S-1
</TABLE>

F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS

Board of Directors and Stockholders
Knoll, Inc.

We have audited the accompanying consolidated balance sheets of Knoll, Inc.
as of December 31, 1998 and 1997 and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for the years ended
December 31, 1998 and 1997 and the ten-month period ended December 31, 1996
(post-acquisition periods), and the consolidated statements of operations,
changes in stockholders' equity and cash flows of The Knoll Group, Inc.
(Predecessor) for the two-month period ended February 29, 1996 (pre-acquisition
period). Our audits also included the financial statement schedule listed in the
Index at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Knoll, Inc. at December 31, 1998 and 1997 and the consolidated results of its
operations and its cash flows for the post-acquisition periods in conformity
with generally accepted accounting principles. Further, in our opinion, the
aforementioned Predecessor consolidated financial statements present fairly, in
all material respects, the consolidated results of operations and cash flows of
The Knoll Group, Inc. for the pre-acquisition period in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.

/S/ ERNST & YOUNG LLP

Philadelphia, Pennsylvania
January 29, 1999 except for Note 19, as
to which the date is February 10, 1999,
and Notes 20 and 24, as to which the
date is March 24, 1999

F-2
<PAGE>

KNOLL, INC.

CONSOLIDATED BALANCE SHEETS

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
<S> <C> <C>
1998 1997
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 17,465 $ 10,790
Customer receivables, net............................................................... 137,956 122,851
Inventories............................................................................. 77,113 68,249
Deferred income taxes................................................................... 21,067 21,295
Prepaid and other current assets........................................................ 9,842 3,697
---------- ----------
Total current assets.................................................................. 263,443 226,882
Property, plant and equipment, net........................................................ 186,167 180,450
Intangible assets, net.................................................................... 260,043 270,677
Other noncurrent assets................................................................... 4,374 2,850
---------- ----------
Total Assets.......................................................................... $ 714,027 $ 680,859
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt.................................................... $ 10,000 $ 10,000
Accounts payable........................................................................ 59,551 66,697
Income taxes payable.................................................................... 7,096 6,791
Other current liabilities............................................................... 91,756 77,841
---------- ----------
Total current liabilities............................................................. 168,403 161,329
Long-term debt............................................................................ 159,255 197,029
Deferred income taxes..................................................................... 10,678 5,301
Postretirement benefits other than pension................................................ 18,450 16,424
Other noncurrent liabilities.............................................................. 13,391 12,487
---------- ----------
Total liabilities..................................................................... 370,177 392,570
---------- ----------
Stockholders' equity:
Common stock, $0.01 par value; authorized 100,000,000 shares; 41,799,499 shares issued
and outstanding (net of 1,707,700 treasury shares) in 1998; 43,234,943 shares issued
and outstanding in 1997............................................................... 418 432
Additional paid-in-capital.............................................................. 181,792 214,950
Unearned stock grant compensation....................................................... (712) (993)
Retained earnings....................................................................... 170,986 77,942
Accumulated other comprehensive income.................................................. (8,634) (4,042)
---------- ----------
Total stockholders' equity............................................................ 343,850 288,289
---------- ----------
Total Liabilities and Stockholders' Equity............................................ $ 714,027 $ 680,859
---------- ----------
---------- ----------
</TABLE>

See accompanying notes to the consolidated financial statements.

F-3
<PAGE>

KNOLL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
| THE KNOLL
| GROUP, INC.
| (PREDECESSOR)
| ------------
YEAR YEAR TEN MONTHS | TWO MONTHS
ENDED ENDED ENDED | ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, | FEBRUARY 29,
1998 1997 1996 | 1996
------------ ------------ ------------ | ------------
<S> <C> <C> <C> | <C>
Sales...................................................... $ 948,691 $ 810,857 $ 561,534 | $ 90,232
Cost of sales.............................................. 572,756 489,962 358,841 | 59,714
----------- ----------- ----------- | -----------
Gross profit............................................... 375,935 320,895 202,693 | 30,518
Selling, general and administrative expenses............... 204,392 183,018 131,349 | 21,256
Westinghouse long-term incentive compensation.............. -- -- -- | 47,900
Allocated corporate expenses............................... -- -- -- | 921
----------- ----------- ----------- | -----------
Operating income (loss).................................... 171,543 137,877 71,344 | (39,559)
Interest expense........................................... 16,860 25,075 32,952 | 340
Other income (expense), net................................ 2,732 1,667 447 | (296)
----------- ----------- ----------- | -----------
Income (loss) before income tax expense (benefit) and |
extraordinary item....................................... 157,415 114,469 38,839 | (40,195)
Income tax expense (benefit)............................... 64,371 48,026 16,844 | (16,107)
----------- ----------- ----------- | -----------
Income (loss) before extraordinary item.................... 93,044 66,443 21,995 | (24,088)
Extraordinary loss on early extinguishment of |
debt, net of taxes....................................... -- 5,337 5,159 | --
----------- ----------- ----------- | -----------
Net income (loss).......................................... $ 93,044 $ 61,106 $ 16,836 | $ (24,088)
----------- ----------- ----------- | -----------
----------- ----------- ----------- | -----------
|
Earnings per share (Note 2): |
Income before extraordinary item: |
Basic.................................................. $ 2.25 $ 1.78 $ 0.71 |
Diluted................................................ $ 2.14 $ 1.64 $ 0.63 |
Net income: |
Basic.................................................. $ 2.25 $ 1.64 $ 0.54 |
Diluted................................................ $ 2.14 $ 1.51 $ 0.48 |
Weighted average shares of common stock (Note 2): |
Basic.................................................. 41,271 37,284 31,040 |
Diluted................................................ 43,509 40,398 34,701 |
</TABLE>

See accompanying notes to the consolidated financial statements.

F-4
<PAGE>

KNOLL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

<TABLE>
<CAPTION>
| THE KNOLL
| GROUP, INC.
| (PREDECESSOR)
| ------------
YEAR YEAR TEN MONTHS | TWO MONTHS
ENDED ENDED ENDED | ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, | FEBRUARY 29,
1998 1997 1996 | 1996
------------ ------------ ------------ | ------------
<S> <C> <C> <C> | <C>
CASH FLOWS FROM OPERATING ACTIVITIES |
Net income (loss)................................ $ 93,044 $ 61,106 $ 16,836 | $ (24,088)
Noncash items included in income: |
Depreciation................................... 28,686 25,082 19,251 | 3,150
Amortization of intangible assets.............. 7,816 8,041 7,881 | 1,167
Extraordinary loss............................. -- 8,838 8,542 | --
Other noncash items............................ (1,636) 240 477 | --
Changes in assets and liabilities: |
Customer receivables........................... (15,184) (12,176) (5,110) | 8,798
Inventories.................................... (9,061) (11,381) 1,416 | 671
Accounts payable............................... (6,452) 18,052 15,870 | (15,292)
Current and deferred income taxes.............. 591 15,896 (3,961) | (16,627)
Other current assets........................... (237) 1,674 747 | 2,283
Other current liabilities...................... 13,547 12,849 18,372 | (7,190)
Other noncurrent assets and liabilities........ 3,449 7,041 9,181 | (6,911)
----------- ----------- ----------- | -----------
Cash provided by (used in) operating |
activities..................................... 114,563 135,262 89,502 | (54,039)
----------- ----------- ----------- | -----------
|
CASH FLOWS FROM INVESTING ACTIVITIES |
Acquisition of the Company from Westinghouse..... -- -- (579,801) | --
Capital expenditures............................. (36,390) (33,080) (15,255) | (2,296)
Proceeds from sale of assets..................... 152 164 218 | --
----------- ----------- ----------- | -----------
Cash used in investing activities................ (36,238) (32,916) (594,838) | (2,296)
----------- ----------- ----------- | -----------
|
CASH FLOWS FROM FINANCING ACTIVITIES |
Repayment of short-term debt, net................ -- -- (1,483) | (3,805)
Proceeds from (repayment of) revolving credit |
facility, net.................................. (38,000) (79,000) 88,000 | --
Proceeds from long-term debt..................... 201 -- 525,000 | --
Repayment of long-term debt...................... -- (67,988) (260,130) | --
Premium paid for early extinguishment of debt.... -- (5,775) -- | --
Net proceeds from issuance of stock.............. 4,813 133,559 160,400 | --
Redemption of preferred stock.................... -- (80,000) -- | --
Purchase of common stock......................... (38,849) -- -- | --
Net receipts from parent company................. -- -- -- | 60,848
----------- ----------- ----------- | -----------
Cash provided by (used in) financing |
activities..................................... (71,835) (99,204) 511,787 | 57,043
----------- ----------- ----------- | -----------
Effect of exchange rate changes on cash and cash |
equivalents.................................... 185 (1,156) 18 | 58
----------- ----------- ----------- | -----------
Increase in cash and cash equivalents............ 6,675 1,986 6,469 | 766
Cash and cash equivalents at beginning of |
period......................................... 10,790 8,804 2,335 | 1,569
----------- ----------- ----------- | -----------
Cash and cash equivalents at end of period....... $ 17,465 $ 10,790 $ 8,804 | $ 2,335
----------- ----------- ----------- | -----------
----------- ----------- ----------- | -----------
</TABLE>

See accompanying notes to the consolidated financial statements.

F-5
<PAGE>

KNOLL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
UNEARNED STOCK
PREFERRED COMMON ADDITIONAL GRANT RETAINED
STOCK STOCK PAID-IN-CAPITAL COMPENSATION EARNINGS
----------- ----------- -------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
THE KNOLL GROUP, INC. (PREDECESSOR)
Balance at December 31, 1995........................ $ -- $ -- $ -- $ -- $ --
Net loss............................................ -- -- -- -- --
Foreign currency translation adjustment............. -- -- -- -- --
Comprehensive loss................................
Capital expenditures................................ -- -- -- -- --
Net interunit transactions.......................... -- -- -- -- --
----------- ----- -------------- ------- -----------
Balance at February 29, 1996........................ $ -- $ -- $ -- $ -- $ --
----------- ----- -------------- ------- -----------
----------- ----- -------------- ------- -----------

<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at March 1, 1996 (shares: 1,599,000
preferred and 3,139,430 common)................... $ 1,599 $ 31 $ 158,370 $ -- $ --
Net income.......................................... -- -- -- -- 16,836
Foreign currency translation adjustment............. -- -- -- -- --
Comprehensive income..............................
Shares issued for consideration (shares: 3,998
preferred, 7,848 common).......................... 4 -- 396 -- --
Shares issued under stock incentive plan (4,144,030
shares)........................................... -- 42 1,381 (1,423) --
Earned stock grant compensation..................... -- -- -- 36 --
----------- ----- -------------- ------- -----------
Balance at December 31, 1996........................ 1,603 73 160,147 (1,387) 16,836
Net income.......................................... -- -- -- -- 61,106
Foreign currency translation adjustment............. -- -- -- -- --
Comprehensive income..............................
Shares issued for consideration (8,502,716
shares)........................................... -- 85 133,474 -- --
800,000 preferred shares redeemed for $80,000 and
11,749,361 common shares.......................... (800) 117 (79,317) -- --
802,998 preferred shares converted into 15,691,558
common shares..................................... (803) 157 646 -- --
Earned stock grant compensation..................... -- -- -- 394 --
----------- ----- -------------- ------- -----------
Balance at December 31, 1997........................ -- 432 214,950 (993) 77,942
Net income.......................................... -- -- -- -- 93,044
Foreign currency translation adjustment............. -- -- -- -- --
Comprehensive income..............................
Shares issued for consideration:
Exercise of stock options, including tax benefit
of $864 (196,647 shares)........................ -- 2 4,020 -- --
Other (75,609 shares)............................. -- 1 1,654 -- --
Purchase of common stock (1,707,700 shares)....... -- (17) (38,832) -- --
Earned stock grant compensation..................... -- -- -- 281 --
----------- ----- -------------- ------- -----------
Balance at December 31, 1998 (41,799,499 shares).... $ -- $ 418 $ 181,792 $ (712) $ 170,986
----------- ----- -------------- ------- -----------
----------- ----- -------------- ------- -----------

<CAPTION>
ACCUMULATED OTHER TOTAL
PARENT COMPANY COMPREHENSIVE STOCKHOLDERS'
INVESTMENT INCOME EQUITY
--------------- ------------------ -------------
<S> <C> <C> <C>
THE KNOLL GROUP, INC. (PREDECESSOR)
Balance at December 31, 1995........................ $ 503,317 $ (22,866) $ 480,451
-------------
Net loss............................................ (24,088) -- (24,088)
Foreign currency translation adjustment............. -- 58 58
-------------
Comprehensive loss................................ (24,030)
-------------
Capital expenditures................................ 2,296 -- 2,296
Net interunit transactions.......................... 58,552 -- 58,552
--------------- -------- -------------
Balance at February 29, 1996........................ $ 540,077 $ (22,808) $ 517,269
--------------- -------- -------------
--------------- -------- -------------
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at March 1, 1996 (shares: 1,599,000
preferred and 3,139,430 common)................... $ -- $ -- $ 160,000
-------------
Net income.......................................... -- -- 16,836
Foreign currency translation adjustment............. -- 532 532
-------------
Comprehensive income.............................. 17,368
-------------
Shares issued for consideration (shares: 3,998
preferred, 7,848 common).......................... -- -- 400
Shares issued under stock incentive plan (4,144,030
shares)........................................... -- -- --
Earned stock grant compensation..................... -- -- 36
--------------- -------- -------------
Balance at December 31, 1996........................ -- 532 177,804
-------------
Net income.......................................... -- -- 61,106
Foreign currency translation adjustment............. -- (4,574) (4,574)
-------------
Comprehensive income.............................. 56,532
-------------
Shares issued for consideration (8,502,716
shares)........................................... -- -- 133,559
800,000 preferred shares redeemed for $80,000 and
11,749,361 common shares.......................... -- -- (80,000)
802,998 preferred shares converted into 15,691,558
common shares..................................... -- -- --
Earned stock grant compensation..................... -- -- 394
--------------- -------- -------------
Balance at December 31, 1997........................ -- (4,042) 288,289
-------------
Net income.......................................... -- -- 93,044
Foreign currency translation adjustment............. -- (4,592) (4,592)
-------------
Comprehensive income.............................. 88,452
-------------
Shares issued for consideration:
Exercise of stock options, including tax benefit
of $864 (196,647 shares)........................ -- -- 4,022
Other (75,609 shares)............................. -- -- 1,655
Purchase of common stock (1,707,700 shares)....... -- -- (38,849)
Earned stock grant compensation..................... -- -- 281
--------------- -------- -------------
Balance at December 31, 1998 (41,799,499 shares).... $ -- $ (8,634) $ 343,850
--------------- -------- -------------
--------------- -------- -------------
</TABLE>

See accompanying notes to the consolidated financial statements.

F-6
<PAGE>

KNOLL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND BASIS OF PRESENTATION

Knoll, Inc. and its subsidiaries (the "Company" or "Knoll") are engaged in
the design, manufacture and sale of office furniture products and accessories,
focusing on the middle to high-end segments of the contract furniture market.
The Company has operations in the United States ("U.S."), Canada and Europe and
sells its products primarily through its direct sales representatives and
independent dealers.

The Company was formed on February 29, 1996 as a result of the acquisition
of the office furniture business unit (The Knoll Group, Inc. and related
entities) of Westinghouse Electric Corporation, currently known as CBS
Corporation ("Westinghouse"). See Note 3 for further discussion of the
acquisition.

The accompanying consolidated financial statements present the financial
position of the Company as of December 31, 1998 and 1997, the results of
operations, cash flows and changes in stockholders' equity of the Company for
the years ended December 31, 1998 and 1997 and the ten-month period ended
December 31, 1996 and the results of operations, cash flows and changes in
stockholders' equity of The Knoll Group, Inc. and related entities (the
"Predecessor") for the two-month period ended February 29, 1996.

Since the Predecessor was a business unit of Westinghouse, the accompanying
financial statements of the Predecessor include estimates for certain expenses
incurred by Westinghouse on its behalf. These expenses generally include, but
are not limited to, officer and employee salaries, rent, depreciation,
accounting and legal services, other selling, general and administrative
expenses and other such expenses.

The operating results of the European subsidiaries are reported and included
in the consolidated financial statements on a one-month lag to allow for the
timely presentation of consolidated information. The effect of this presentation
is not material to the financial statements.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements of the Company include the accounts of
Knoll, Inc. and its wholly owned subsidiaries. Intercompany transactions and
balances have been eliminated in consolidation.

The consolidated financial statements of the Predecessor include the
accounts of The Knoll Group, Inc. and related entities after elimination of
intercompany transactions except for those with other units of Westinghouse.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents includes cash on hand and investments with
original maturities of three months or less.

INVENTORIES

Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.

F-7
<PAGE>

KNOLL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

PROPERTY, PLANT, EQUIPMENT AND DEPRECIATION

Property, plant and equipment are recorded at cost. Depreciation of plant
and equipment is computed using the straight-line method over the estimated
useful lives of the assets. The useful lives are as follows: 45 years for
buildings and 3 to 12 years for machinery and equipment.

INTANGIBLE ASSETS

Intangible assets consist of goodwill, trademarks and deferred financing
fees. Goodwill is recorded at the amount by which cost exceeds the net assets of
acquired businesses, and all other intangible assets are recorded at cost.
Goodwill and trademarks are amortized under the straight-line method over 40
years, while deferred financing fees are amortized over the life of the
respective debt.

Management reviews the carrying value of goodwill and other intangibles on
an ongoing basis. When factors indicate that an intangible asset may be
impaired, management uses an estimate of the undiscounted future cash flows over
the remaining life of the asset in measuring whether the intangible asset is
recoverable. If such an analysis indicates that impairment has in fact occurred,
the book value of the intangible asset is written down to its estimated fair
value.

REVENUE RECOGNITION

Sales are recognized as products are shipped and services are rendered.

INCOME TAXES

Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and are measured using enacted tax rates expected to apply
to taxable income in the years in which the temporary differences are expected
to reverse. Income taxes are provided in the accompanying financial statements
of the Predecessor as if the Predecessor had filed a separate tax return.

FOREIGN CURRENCY TRANSLATION

Results of foreign operations are translated into U.S. dollars using average
exchange rates during the period, while assets and liabilities are translated
into U.S. dollars using exchange rates in effect at the balance sheet date. The
resulting translation adjustments are recorded in, and are the only component
of, accumulated other comprehensive income.

Transaction gains and losses resulting from exchange rate changes on
transactions denominated in currencies other than the functional currency are
included in income in the year in which the change occurs.

STOCK-BASED COMPENSATION

Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), encourages entities to record
compensation expense for stock-based employee compensation plans at fair value
but provides the option of measuring compensation expense using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). The Company accounts for
stock-based compensation in accordance with APB 25. Pro forma results of
operations as if SFAS 123 had been used to account for stock-based compensation
plans are presented in Note 19.

F-8
<PAGE>

KNOLL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

SHARE AND PER SHARE AMOUNTS

Because of the significance of the redemption and conversion into common
stock of the outstanding Series A 12% Participating Convertible Preferred Stock
("Series A Preferred Stock") as discussed in Note 4, historical earnings per
share amounts for the year ended December 31, 1997 and the ten months ended
December 31, 1996 are not presented herein. Earnings per share amounts reported
for these periods are pro forma as they are based on the weighted average number
of shares of common stock and potentially dilutive securities (employee 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. In addition, 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 (see Note 4) have been reflected as outstanding as of the
beginning of each of these periods.

All numbers of shares of common stock and per share amounts for 1997 and
1996 have been adjusted, as necessary, to give retroactive effect to the
3.13943-for-1 stock split that occurred on May 6, 1997.

USE OF ESTIMATES

The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of certain assets, liabilities,
revenues and expenses and the disclosure of certain contingent assets and
liabilities. Actual future results may differ from such estimates.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT

In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed for or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 is effective
for the Company beginning on January 1, 1999. It requires the capitalization of
certain costs incurred after the date of adoption in connection with developing
or obtaining software for internal use. The Company currently expenses such
costs as incurred. The Company believes that the adoption of SOP 98-1 will not
have a material impact on the Company's future earnings or financial position.

RECLASSIFICATIONS

Certain amounts for 1997 and 1996 in the accompanying consolidated financial
statements have been reclassified to conform to the 1998 classifications.

3. ACQUISITION

On December 20, 1995, Westinghouse entered into a Stock Purchase Agreement
(the "Agreement") with T.K.G. Acquisition Corp. ("TKG"), a subsidiary of
Warburg, Pincus Ventures, L.P. Under the terms of the Agreement, TKG acquired
all of the outstanding capital stock of The Knoll Group, Inc. and related
entities on February 29, 1996 through its wholly owned subsidiary T.K.G.
Acquisition Sub, Inc. Immediately following this transaction, T.K.G. Acquisition
Sub, Inc. and The Knoll Group, Inc. merged with and into Knoll North America,
Inc., the principal U.S. operating company of The Knoll Group, Inc. Knoll North
America, Inc. changed its name to Knoll, Inc. at the time of the merger. On
March 14, 1997, Knoll, Inc. merged with and into TKG. TKG then changed its name
to Knoll, Inc.

F-9
<PAGE>

KNOLL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The cost of the acquisition was $579,801,000. TKG funded the acquisition
through proceeds of $160,000,000 received from the sale of TKG capital stock,
$165,000,000 received from an offering of 10.875% Senior Subordinated Notes due
2006 (the "Senior Subordinated Notes") and $260,000,000 in borrowings under
senior bank credit facilities. T.K.G. Acquisition Sub, Inc. executed the
offering of the Senior Subordinated Notes and borrowings under the credit
facilities. As such, upon the acquisition and subsequent mergers, the Senior
Subordinated Notes and credit facility borrowings became obligations of Knoll,
Inc.

The acquisition was accounted for using the purchase method of accounting.
Accordingly, the purchase price has been allocated to the assets acquired and
liabilities assumed based upon fair market value at the date of acquisition. The
excess of the consideration paid over the estimated fair value of the net assets
acquired, totaling $66,850,000, has been recorded as goodwill and is being
amortized on a straight-line basis over 40 years.

4. INITIAL PUBLIC OFFERING

The Company completed an initial public offering (the "IPO") during the
second quarter of 1997. An aggregate of 9,200,000 shares, including 720,000
shares sold by a selling stockholder, were sold during May and June 1997 at
$17.00 per share. The net proceeds to the Company amounted to $133,440,000 after
deducting related expenses. The net proceeds, together with borrowings of
$11,673,000 under the Company's then-existing revolving credit facility, were
used (i) to redeem 800,000 shares of Series A Preferred Stock and (ii) to redeem
an aggregate principal amount of $57,750,000 of the Company's Senior
Subordinated Notes for a total redemption price of $65,113,000, including a
redemption premium of $5,775,000 and accrued and unpaid interest thereon of
$1,588,000. The 800,000 shares of Series A Preferred Stock were redeemed for
$80,000,000 and 11,749,361 shares of common stock. Additionally, in connection
with the IPO, another 802,998 shares of Series A Preferred Stock were converted
into 15,691,558 shares of common stock.

5. RELATED PARTY TRANSACTIONS OF THE PREDECESSOR

The Predecessor purchased products from and sold products to other
Westinghouse operations. Additionally, Westinghouse provided certain services to
the Predecessor, some of which the Predecessor purchased and some of which
Westinghouse charged directly to the Predecessor. Services that the Predecessor
purchased from Westinghouse included telecommunications, printing and
productivity and quality consulting. Other services provided by Westinghouse for
which the Predecessor was charged directly included information systems support;
certain accounting functions, such as transaction processing; legal,
environmental affairs and human resources consulting and compliance support; and
liability, property and workers' compensation insurance programs administration.
The cost of all services provided by Westinghouse, whether they were purchased
by the Predecessor or charged directly to the Predecessor by Westinghouse, are
included in the Predecessor's results of operations for the two months ended
February 29, 1996.

F-10
<PAGE>

KNOLL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Westinghouse did not charge its business units for the carrying costs
related to its investment in such units (i.e. parent company investment).
Therefore, the Predecessor's results of operations for the two months ended
February 29, 1996 do not include any allocated interest charges from
Westinghouse.

Certain members of management of the Predecessor were participants in a
long-term incentive compensation plan established by Westinghouse. The plan
provided for the payment of awards at the end of a five-year period based on the
achievement of certain performance goals set by Westinghouse's Board of
Directors. As a result of the consummation of the acquisition discussed in Note
3, the payment of awards was accelerated pursuant to the terms of the plan,
resulting in a charge to operations of $47,900,000 for the two months ended
February 29, 1996.

6. CUSTOMER RECEIVABLES

Customer receivables are presented net of an allowance for doubtful accounts
of $5,057,000 and $5,461,000 at December 31, 1998 and 1997, respectively.
Management performs ongoing credit evaluations of its customers and generally
does not require collateral. As of December 31, 1998 and 1997, the U.S.
government represented approximately 11.4% and 13.8%, respectively, of gross
customer receivables.

7. INVENTORIES
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Raw materials............................................................................... $ 42,625 $ 37,868
Work in process............................................................................. 11,827 9,638
Finished goods.............................................................................. 22,661 20,743
--------- ---------
Inventories................................................................................. $ 77,113 $ 68,249
--------- ---------
--------- ---------
</TABLE>

8. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Land and buildings........................................................................ $ 67,303 $ 62,249
Machinery and equipment................................................................... 169,261 139,592
Construction in progress.................................................................. 21,406 22,433
---------- ----------
Property, plant and equipment............................................................. 257,970 224,274
Accumulated depreciation.................................................................. (71,803) (43,824)
---------- ----------
Property, plant and equipment, net........................................................ $ 186,167 $ 180,450
---------- ----------
---------- ----------
</TABLE>

F-11
<PAGE>

KNOLL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. INTANGIBLE ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Goodwill.................................................................................. $ 53,943 $ 56,803
Trademarks................................................................................ 219,900 219,900
Deferred financing fees................................................................... 8,354 8,354
---------- ----------
Intangible assets......................................................................... 282,197 285,057
Accumulated amortization.................................................................. (22,154) (14,380)
---------- ----------
Intangible assets, net.................................................................... $ 260,043 $ 270,677
---------- ----------
---------- ----------
</TABLE>

10. OTHER CURRENT LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Accrued employee compensation............................................................... $ 51,593 $ 39,414
Accrued product warranty.................................................................... 10,407 10,871
Other....................................................................................... 29,756 27,556
--------- ---------
Other current liabilities................................................................... $ 91,756 $ 77,841
--------- ---------
--------- ---------
</TABLE>

11. INDEBTEDNESS

The Company's long-term debt is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
10.875% Senior Subordinated Notes due 2006................................................ $ 107,250 $ 107,250
Revolving loans, variable rate (5.675%--5.875% at December 31, 1998 and 6.25%--6.40% at
December 31, 1997), due 2002............................................................ 61,000 99,000
Other..................................................................................... 1,005 779
---------- ----------
169,255 207,029
Less current maturities................................................................... (10,000) (10,000)
---------- ----------
Long-term debt............................................................................ $ 159,255 $ 197,029
---------- ----------
---------- ----------
</TABLE>

SENIOR SUBORDINATED NOTES

The Company assumed the obligations under the 10.875% Senior Subordinated
Notes due 2006 as a direct result of the acquisition and merger that occurred on
February 29, 1996 (see Note 3). The Senior Subordinated Notes are unsecured and
are guaranteed by each existing and future wholly owned domestic subsidiary of
Knoll, Inc. However, if the Company is unable to satisfy all or any portion of
its obligations with respect to the Senior Subordinated Notes, it is unlikely
that the guarantors will be able to pay all or any portion of such unsatisfied
obligations.

F-12
<PAGE>

KNOLL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

During June 1997, the Company used proceeds from its IPO to repurchase an
aggregate principal amount of $57,750,000 of the Senior Subordinated Notes for a
total redemption price of $65,113,000, including a redemption premium of
$5,775,000 and accrued and unpaid interest thereon of $1,588,000. The Company
wrote off unamortized financing costs of $3,063,000 related to the portion of
the Senior Subordinated Notes that was redeemed. The early redemption premium
and write-off of unamortized financing costs resulted in an extraordinary loss
of $8,838,000 on a pretax basis ($5,337,000 on an after-tax basis) for the year
ended December 31, 1997.

The Senior Subordinated Notes outstanding at December 31, 1998 may not be
redeemed at the Company's option prior to March 15, 2001. At such date, the
Senior Subordinated Notes are redeemable, in whole or in part, at 105.438% of
principal amount, and thereafter at an annually declining premium over par until
March 15, 2004 when they are redeemable at par. There are no sinking fund
requirements related to the Senior Subordinated Notes.

The indenture for the Senior Subordinated Notes limits the incurrence of
indebtedness, payment of dividends and purchase of Company stock and includes
certain other restrictions and limitations that are customary with subordinated
indebtedness of this type. Under the indenture, the amount available to pay
dividends and redeem stock was $102,055,000 as of December 31, 1998. The Company
was in compliance with the terms of the indenture at December 31, 1998.

TERM AND REVOLVING LOANS

On December 17, 1996, the Company entered into a $230,000,000 senior credit
agreement, consisting of a $100,000,000 term loan and a $130,000,000 revolving
credit facility, that replaced its then existing senior credit agreement. The
refinancing resulted in an extraordinary charge of $8,542,000 on a pretax basis
($5,159,000 on an after-tax basis) to operations for the ten months ended
December 31, 1996. This extraordinary charge consisted of the write-off of
unamortized financing costs related to the refinanced debt.

On August 8, 1997, the Company entered into a new agreement that modified
certain terms of the December 17, 1996 credit agreement. The new agreement
provides for a $275,000,000 revolving credit facility that matures in August
2002. At the time this change became effective, $90,000,000 of indebtedness
outstanding under the previously existing term loan and $50,000,000 under the
previously existing revolving credit facility became revolving borrowings under
the new agreement.

The new senior credit agreement contains a letter of credit subfacility that
allows for the issuance of up to $20,000,000 in letters of credit, a competitive
bid loan subfacility that provides for the issuance of up to $140,000,000 in
competitive bid loans and a swing line loan subfacility that allows for the
issuance of up to $10,000,000 in swing line loans. The amount available for
borrowing under the revolving credit facility is reduced by the total
outstanding letters of credit, competitive bid loans and swing line loans.

Under the terms of the existing credit agreement, the Company may use the
revolving credit facility for working capital and general purposes. Borrowings
bear interest at a floating rate based at the Company's option, upon (i) the
Eurodollar rate (as defined in the agreement) plus an applicable percentage that
is subject to change based on the Company's ratio of funded debt to EBITDA or
(ii) the greater of the federal funds rate plus 0.5% or the prime rate.

F-13
<PAGE>

KNOLL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The credit agreement subjects the Company to various affirmative and
negative covenants. Among other things, the covenants limit the Company's
ability to incur additional indebtedness, declare or pay dividends and purchase
Company stock and require the Company to maintain certain financial ratios with
respect to funded debt leverage. Under the credit agreement, the amount
available to pay dividends and redeem stock was $86,212,000 as of December 31,
1998. The Company was in compliance with the credit agreement covenants at
December 31, 1998.

At December 31, 1998, the Company had outstanding credit facility borrowings
totaling $61,000,000, of which $10,000,000 has been classified as current, and
total letters of credit of approximately $1,417,000. There were no borrowings
under the letters of credit.

The Company pays a commitment fee ranging from 0.125% to 0.25%, depending on
the Company's leverage ratio, on the unused portion of the revolving credit
facility. In addition, a letter of credit fee ranging from 0.325% to 0.75%,
depending on the Company's leverage ratio, is required to be paid on the amount
available to be drawn under letters of credit. As of December 31, 1998, the
commitment and letter of credit fees applicable to the Company were 0.125% and
0.325%, respectively.

The Company also has several revolving credit agreements with various
European financial institutions. These credit agreements are to provide credit
primarily for overdraft and working capital purposes. As of December 31, 1998,
total credit available under such agreements was approximately $12,247,000 or
the European equivalent. There is currently no expiration date on these
agreements. The interest rate on borrowings is variable and is based on the
monetary market rate that is linked to each country's prime rate. As of December
31, 1998, the Company did not have any outstanding borrowings under the European
credit facilities.

INTEREST PAID

For the years ended December 31, 1998 and 1997, the Company made interest
payments totaling $15,943,000 and $25,505,000, respectively. Total interest paid
for the ten months ended December 31, 1996 was $25,775,000.

MATURITIES

Aggregate maturities of the Company's indebtedness are as follows (in
thousands):

<TABLE>
<S> <C>
1999.............................................................. $ 10,000
2000.............................................................. --
2001.............................................................. --
2002.............................................................. 51,081
2003.............................................................. 100
Thereafter........................................................ 108,074
---------
$ 169,255
---------
---------
</TABLE>

F-14
<PAGE>

KNOLL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12. PREFERRED STOCK

The Company's Certificate of Incorporation authorizes the issuance of
10,000,000 shares of preferred stock with a par value of $1.00 per share.
1,920,000 of these shares are designated as Series A 12% Participating
Convertible Preferred Stock, of which 1,602,998 shares have been retired and
canceled as a result of the redemption and conversion discussed in Note 4 and
317,002 shares remain eligible to be issued. Subject to existing laws, the Board
of Directors is authorized to provide for the issuance of preferred shares in
one or more series, for such consideration and with designations, powers,
preferences and relative, participating, optional or other special rights and
the qualifications, limitations or restrictions thereof, as shall be determined
by the Board of Directors.

13. DERIVATIVE FINANCIAL INSTRUMENTS

The Company uses interest rate collar agreements to manage its exposure to
fluctuations in interest rates on its variable rate debt. Such agreements
effectively set agreed-upon maximum and minimum rates on a notional principal
amount and utilize the London Interbank Offered Rate ("LIBOR") as a variable
rate reference. The net amount paid or received on the agreements is recognized
as an adjustment to interest expense.

The aggregate notional principal amount of the Company's interest rate
collar agreements outstanding at December 31, 1998 and 1997 was $115,000,000 and
$150,000,000, respectively, and the related weighted average maximum and minimum
rates were 7.97% and 5.05%, respectively, at December 31, 1998 and 7.86% and
5.16%, respectively, at December 31, 1997. The agreements outstanding at
December 31, 1998 mature in April 1999. The counterparties to the interest rate
collar agreements are major financial institutions. During the years ended
December 31, 1998 and 1997 and the ten months ended December 31, 1996, the
Company was not required to make nor was it entitled to receive any payments as
a result of these hedging activities.

From time to time, the Company also enters into foreign currency forward
exchange contracts to manage its exposure to foreign exchange rates associated
with purchases of inventory from foreign suppliers. The terms of these contracts
are generally less than a year. Material gains and losses on these contracts are
recognized in income in the period the value of the contract changes. The
contract amounts outstanding at December 31, 1998 and 1997 as well as the
amounts of gains and losses recorded during the years ended December 31, 1998
and 1997 were not material. The Company had not entered into any foreign
currency forward exchange contracts during the ten months ended December 31,
1996.

14. CONTINGENT LIABILITIES AND COMMITMENTS

The Company is subject to various claims and litigation in the ordinary
course of its business. The Company is not a party to any lawsuit or proceeding
which, in the opinion of management, based on information presently known, is
likely to have a material adverse effect on the Company.

F-15
<PAGE>

KNOLL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

15. FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair values
of each class of financial instruments:

CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE

The fair values of these financial instruments approximate their carrying
amounts due to their immediate or short-term periods to maturity.

LONG-TERM DEBT

The fair values of the variable rate long-term debt instruments approximate
their carrying amounts. The fair value of other long-term debt was estimated
using quoted market values or discounted cash flow analyses based on current
incremental borrowing rates for similar types of borrowing arrangements. The
fair value of the Company's long-term debt, including the current portion, was
approximately $181,394,000 at December 31, 1998 and $220,435,000 at December 31,
1997 while the carrying amounts were $169,255,000 and $207,029,000,
respectively.

INTEREST RATE COLLAR AGREEMENTS

The fair value of the Company's interest rate collar agreements, as
estimated by dealers, was not material as of December 31, 1998 and 1997.

FOREIGN CURRENCY FORWARD EXCHANGE CONTRACTS

The fair value of the Company's foreign currency forward exchange contracts,
as determined by quoted market prices, was not material as of December 31, 1998
and 1997.

F-16
<PAGE>

KNOLL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

16. 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. Earnings per share amounts for the year ended
December 31, 1997 and the ten months ended December 31, 1996 are pro forma. See
Note 2 for a description of the pro forma basis of presentation.

<TABLE>
<CAPTION>
INCOME BEFORE
EXTRAORDINARY WEIGHTED AVERAGE
ITEM SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------- ----------------- -----------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, 1998
Basic earnings per share............................................. $ 93,044 41,271 $ 2.25
-----
-----
Effect of dilutive potential common shares:
Employee stock options............................................. -- 476
Nonvested restricted stock grants.................................. -- 1,762
------------- ------
Diluted earnings per share........................................... $ 93,044 43,509 $ 2.14
------------- ------ -----
------------- ------ -----
YEAR ENDED DECEMBER 31, 1997
Basic pro forma earnings per share................................... $ 66,443 37,284 $ 1.78
-----
-----
Effect of dilutive potential common shares:
Employee stock options............................................. -- 235
Nonvested restricted stock grants.................................. -- 2,879
------------- ------
Diluted pro forma earnings per share................................. $ 66,443 40,398 $ 1.64
------------- ------ -----
------------- ------ -----
TEN MONTHS ENDED DECEMBER 31, 1996
Basic pro forma earnings per share................................... $ 21,995 31,040 $ 0.71
-----
-----
Dilutive effect of nonvested restricted stock grants................. -- 3,661
------------- ------
Diluted pro forma earnings per share................................. $ 21,995 34,701 $ 0.63
------------- ------ -----
------------- ------ -----
</TABLE>

As discussed in Note 11, the Company recognized an extraordinary loss on
early extinguishment of debt of $5,337,000, net of taxes, in 1997 and
$5,159,000, net of taxes, in 1996. On a per share basis, these extraordinary
losses amounted to $0.14 basic and $0.13 diluted in 1997 and $0.17 basic and
$0.15 diluted in 1996.

F-17
<PAGE>

KNOLL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

17. INCOME TAXES

Income (loss) before income taxes and extraordinary item consists of the
following:

Income tax expense (benefit), excluding extraordinary items, is comprised of
the following:

<TABLE>
<CAPTION>
| THE KNOLL
| GROUP, INC.
| (PREDECESSOR)
| -------------
YEAR YEAR TEN MONTHS | TWO MONTHS
ENDED ENDED ENDED | ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, | FEBRUARY 29,
1998 1997 1996 | 1996
------------ ------------ ------------ | -------------
(IN THOUSANDS) | (IN THOUSANDS)
<S> <C> <C> <C> | <C>
Current: |
Federal................................ $ 42,364 $ 21,585 $ 10,909 | $ (13,801)
State.................................. 9,456 5,980 2,953 | (1,814)
Foreign................................ 5,414 11,295 661 | 28
----------- ------------- ----------- | -----------
Total current........................ 57,234 38,860 14,523 | (15,587)
----------- ------------- ----------- | -----------
Deferred: |
Federal................................ 4,423 6,258 (2,850) | (460)
State.................................. 1,113 708 (612) | (60)
Foreign................................ 1,601 2,200 5,783 | --
----------- ------------- ----------- | -----------
Total deferred....................... 7,137 9,166 2,321 | (520)
----------- ------------- ----------- | -----------
Income tax expense (benefit)............. $ 64,371 $ 48,026 $ 16,844 | $ (16,107)
----------- ------------- ----------- | -----------
----------- ------------- ----------- | -----------
</TABLE>

Income taxes paid by the Company for the years ended December 31, 1998 and
1997 totaled $61,404,000 and $24,026,000, respectively. For the ten months ended
December 31, 1996, income taxes paid by the Company amounted to $13,137,000.

The recognition and measurement of the income tax benefit for the
Predecessor required certain assumptions, allocations and significant estimates
in order to measure the tax consequences as if the Predecessor were a
stand-alone taxpayer.

F-18
<PAGE>

KNOLL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table sets forth the tax effects of temporary differences that
give rise to significant portions of the deferred tax assets and liabilities:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to allowance for doubtful accounts................. $ 1,624 $ 1,634
Inventories............................................................................. 2,640 3,153
Net operating loss carryforwards........................................................ 19,045 21,359
Obligation for postretirement benefits other than pension............................... 7,591 7,039
Accrued liabilities and other items..................................................... 20,915 20,493
---------- ----------
Gross deferred tax assets................................................................. 51,815 53,678
Valuation allowance....................................................................... (22,528) (25,172)
---------- ----------
Net deferred tax assets................................................................... 29,287 28,506
---------- ----------
Deferred tax liabilities:
Intangibles, principally due to differences in amortization............................. 11,260 7,303
Plant and equipment, principally due to differences in depreciation and assigned
values................................................................................ 7,411 5,011
Other items............................................................................. 227 198
---------- ----------
Gross deferred tax liabilities............................................................ 18,898 12,512
---------- ----------
Net deferred tax asset.................................................................... $ 10,389 $ 15,994
---------- ----------
---------- ----------
</TABLE>

As of December 31, 1998, the Company had net operating loss carryforwards
totaling approximately $49,959,000 in various foreign tax jurisdictions, of
which $17,658,000 generally expire through 2000 and $32,301,000 may be carried
forward for an unlimited time.

The Company has recorded a valuation allowance for net deferred tax assets
in foreign tax jurisdictions, primarily related to pre-acquisition net operating
loss carryforwards, due to losses incurred in these tax jurisdictions in
previous years.

At December 31, 1996, the Company had recorded a valuation allowance of
$33,161,000.

For the years ended December 31, 1998 and 1997 and the ten months ended
December 31, 1996, tax benefits recognized through reductions of the valuation
allowance for pre-acquisition net operating loss carryforwards had the effect of
reducing goodwill by $1,457,000, $4,524,000 and $4,246,000, respectively. If
additional tax benefits are recognized in the future through further reduction
of the valuation allowance, such benefits will generally reduce goodwill.

F-19
<PAGE>

KNOLL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table sets forth a reconciliation of the statutory federal
income tax rate to the effective income tax rate:

The Company has not made provision for U.S. federal and state income taxes
as of December 31, 1998 on approximately $35,522,000 of foreign earnings that
are expected to be reinvested indefinitely. Upon distribution of those earnings
in the form of dividends or otherwise, the Company would be subject to U.S.
income taxes (subject to an adjustment for foreign tax credits) and withholding
taxes payable to the various foreign countries. Determination of the amount of
the unrecognized deferred tax liability is not practicable.

18. LEASES

The Company has commitments under operating leases for certain machinery and
equipment and facilities used in its operations. Total rental expense for the
years ended December 31, 1998 and 1997 and the ten months ended December 31,
1996 was $9,256,000, $8,902,000 and $7,787,000, respectively. Future minimum
rental payments required under those operating leases that have an initial or
remaining noncancelable lease term in excess of one year are as follows (in
thousands):

<TABLE>
<S> <C>
1999............................................................... $ 7,442
2000............................................................... 6,470
2001............................................................... 5,569
2002............................................................... 4,803
2003............................................................... 3,532
Subsequent years................................................... 3,653
---------
Total minimum rental payments...................................... $ 31,469
---------
---------
</TABLE>

F-20
<PAGE>

KNOLL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

19. STOCK PLANS

In connection with the acquisition discussed in Note 3, the Company
established the Knoll, Inc. 1996 Stock Incentive Plan (the "1996 Stock Plan").
Under the 1996 Stock Plan, awards denominated or payable in shares or options to
purchase shares of the Company's common stock may be granted to officers and
other key employees of the Company. A combined maximum of 4,709,126 shares or
options to purchase shares were authorized for issuance under the 1996 Stock
Plan. Options that are granted have a contractual life of ten years. A Stock
Plan Committee of the Company's Board of Directors has sole discretion
concerning administration of the 1996 Stock Plan, including selection of
individuals to receive awards, types of awards, the terms and conditions of the
awards and the time at which awards will be granted.

The Knoll, Inc. 1997 Stock Incentive Plan (the "1997 Stock Plan") was
established on February 14, 1997. The terms of the 1997 Stock Plan are
essentially the same as those of the 1996 Stock Plan, except pursuant to the
1997 Stock Plan, discounted options may be granted, options may be repriced, the
Board of Directors has greater flexibility to amend the 1997 Plan and, as of
December 31, 1998, a combined maximum of 2,255,772 shares or options to purchase
shares were authorized for issuance under the plan.

During the ten months ended December 31, 1996, the Company granted 4,144,030
restricted common shares, with a weighted average fair market value of $0.34 per
share, to key employees. The fair market value of the shares on the date of
grant has been recorded as unearned stock grant compensation and is presented as
a separate component of stockholders' equity. Compensation expense is recognized
ratably over the vesting period. As of December 31, 1998, a total of 2,486,404
restricted shares have vested. The remaining 1,657,626 restricted shares will
vest as follows: 640,432 shares in 1999, 640,433 shares in 2000 and 376,761
shares in 2001.

The following table summarizes the Company's stock option activity:

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------------- -------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE
OPTIONS PRICE OPTIONS PRICE
---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year.......................... 2,142,158 $ 20.73 -- $ --
Granted................................................... 50,000 28.21 2,173,552 20.66
Exercised................................................. (196,647) 16.06 -- --
Forfeited................................................. (30,000) 28.50 (31,394) 15.93
---------- ----------
Outstanding at end of year................................ 1,965,511 21.27 2,142,158 20.73
---------- ----------
---------- ----------
Exercisable at end of year................................ 240,789 24.33 10,000 17.00
---------- ----------
---------- ----------
Available for future grants............................... 658,710 678,710
---------- ----------
---------- ----------
</TABLE>

On February 10, 1999, the Board of Directors authorized an additional
1,000,000 shares or options to purchase shares, subject to stockholder approval,
for issuance under the 1997 Stock Plan. Also on such date, the Company granted
an additional 270,000 options with an exercise price of $21.25 per share.

Options were granted at an exercise price equal to the market price on the
date of grant.

F-21
<PAGE>

KNOLL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes information regarding stock options
outstanding and exercisable at December 31, 1998:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OF REMAINING EXERCISE NUMBER OF EXERCISE
RANGE OF EXERCISE PRICES OPTIONS CONTRACTUAL LIFE PRICE OPTIONS PRICE
- ------------------------ ---------- ------------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
$15.93--$17.00 1,142,511 8.19 years $ 15.98 82,789 $ 16.19
$24.88--$33.38 823,000 8.88 28.62 158,000 28.59
---------- -----------
$15.93--$33.38 1,965,511 8.48 21.27 240,789 24.33
---------- -----------
---------- -----------
</TABLE>

The Company also has a qualified, noncompensatory employee stock purchase
plan, which provides all employees the ability to purchase common stock of the
Company at a price equal to 15.0% below the lower of the market price at (i) the
beginning of each quarterly offering period or (ii) the end of each quarterly
offering period. Purchases under the plan are limited to 10.0% of an employee's
eligible gross pay, up to $25,000. The Company has reserved 300,000 shares of
its common stock for issuance under its employee stock purchase plan. During the
year ended December 31, 1998, the Company issued 75,609 shares at a weighted
average price of $21.89 under this plan. From August 1, 1997, the date the
employee stock purchase plan commenced, through December 31, 1997, the Company
issued 22,716 shares at a weighted average price of $26.71.

As discussed in Note 2, the Company continues to account for its stock-based
compensation plans in accordance with APB 25. Accordingly, no compensation cost
has been recognized for the Company's stock options or stock purchase rights
granted in connection with the employee stock purchase plan. If the Company had
recognized compensation cost based upon the fair value of the stock options and
stock purchase rights at the date of grant as prescribed by SFAS 123, the
Company's pro forma net income and pro forma net income per share would have
been as follows (in thousands, except per share amounts):

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Pro forma net income................................................................. $ 89,804 $ 59,731
Pro forma net income per share of common stock:
Basic.............................................................................. 2.18 1.60
Diluted............................................................................ 2.06 1.48
</TABLE>

The weighted average fair value of options granted in 1998 and 1997 was
$13.68 and $10.13 per share, respectively, and the weighted average fair value
of stock purchase rights granted under the employee stock purchase plan was
$4.84 and $5.31 per share in 1998 and 1997, respectively. The fair value of the
options and stock purchase rights was estimated at the date of grant using a
Black-Scholes option pricing model with the following assumptions: risk-free
interest rate of 5.75% in 1998 and 6.0% in 1997, dividend yield of 0.0% in 1998
and 1997, expected volatility of the market price of the common stock of 35.0%
in 1998 and 1997 and weighted average expected lives of 7 years for the options
and 3 months for the stock purchase rights in 1998 and 1997. The estimated fair
value of the options was amortized to expense over the vesting period of the
options for purposes of determining pro forma net income and pro forma net
income per share. The effects of applying SFAS 123 for purposes of providing
pro forma disclosures are not likely to be representative of the effects on
reported net income in future years.

F-22
<PAGE>

KNOLL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

20. STOCK REPURCHASE PROGRAM

In September 1998, the Board of Directors approved a share repurchase
program that authorized the repurchase of up to 3,000,000 shares of the
Company's common stock. The Board of Directors subsequently approved an increase
of 2,000,000 shares to the program on February 2, 1999. As such, the program now
allows for the repurchase of up to 5,000,000 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. During 1998, the
Company purchased 1,707,700 shares for $38,849,000, or an average price of
$22.75 per share. As of March 24, 1999, the Company purchased a total of
2,894,700 shares for $67,524,000 under the program. The repurchased shares are
held in treasury.

21. PENSION AND OTHER POSTRETIREMENT BENEFITS

The Company has two domestic defined benefit pension plans and two plans
providing for other postretirement benefits, including medical and life
insurance coverage. One of the pension plans and one of the other postretirement
benefits plans cover eligible U.S. nonunion employees while the other pension
plan and other postretirement benefits plan cover eligible U.S. union employees.

The following table sets forth a reconciliation of the benefit obligation,
plan assets and accrued benefit cost related to the pension and other
postretirement benefits provided by the Company:

<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
-------------------- ----------------------
1998 1997 1998 1997
--------- --------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at January 1...................................... $ 8,078 $ 3,953 $ 18,149 $ 17,157
Service cost......................................................... 5,396 4,893 595 560
Interest cost........................................................ 615 207 1,294 1,224
Participant contributions............................................ 252 276 -- --
Amendment............................................................ 451 -- -- --
Actuarial loss (gain)................................................ 3,214 (1,160) 1,302 592
Benefits paid........................................................ (109) (91) (493) (1,384)
--------- --------- ---------- ----------
Benefit obligation at December 31.................................... 17,897 8,078 20,847 18,149
--------- --------- ---------- ----------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at January 1............................... 3,721 30 -- --
Actual return on plan assets......................................... 241 55 -- --
Employer contributions............................................... 4,536 3,451 493 1,384
Participant contributions............................................ 252 276 -- --
Benefits paid........................................................ (109) (91) (493) (1,384)
--------- --------- ---------- ----------
Fair value of plan assets at December 31............................. 8,641 3,721 -- --
--------- --------- ---------- ----------

Funded status........................................................ (9,256) (4,357) (20,847) (18,149)
Unrecognized net loss (gain)......................................... 2,156 (1,160) 1,677 375
Unrecognized prior service cost...................................... 416 -- -- --
--------- --------- ---------- ----------
Accrued benefit cost................................................. $ (6,684) $ (5,517) $ (19,170) $ (17,774)
--------- --------- ---------- ----------
--------- --------- ---------- ----------
</TABLE>

F-23
<PAGE>

KNOLL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Significant assumptions as of December 31 that were used in accounting for
the pension and other postretirement benefits plans are as follows:

<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
-------------------- --------------------
<S> <C> <C> <C> <C>
1998 1997 1998 1997
--------- --------- --------- ---------
Discount rate.......................................................... 6.75% 7.25% 6.75% 7.25%
Expected return on plan assets......................................... 8.50 8.50 -- --
Rate of compensation increase.......................................... 4.50 4.50 4.50 4.50
</TABLE>

The following table sets forth the components of the net periodic benefit
cost for the Company's pension and other postretirement benefits plans:

<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
--------------------------------------------- -------------------------------------------
YEAR YEAR TEN MONTHS YEAR YEAR TEN MONTHS
ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996 1998 1997 1996
------------- --------------- ------------- ------------- ------------- -------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Service cost.................... $ 5,396 $ 4,893 $ 3,953 $ 595 $ 560 $ 440
Interest cost................... 615 207 -- 1,294 1,224 1,000
Expected return on plan
assets........................ (321) (55) -- -- -- --
Amortization of prior
service costs................. 35 -- -- -- -- --
Recognized actuarial gain....... (22) -- -- -- -- --
------ ------ ------ ------ ------ ------
Net periodic benefit cost....... $ 5,703 $ 5,045 $ 3,953 $ 1,889 $ 1,784 $ 1,440
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
</TABLE>

For purposes of measuring the benefit obligation and the net periodic
benefit cost as of and for the year ended December 31, 1998, respectively,
associated with the Company's other postretirement benefits plans, a 7.50%
annual rate of increase in the per capita cost of covered health care benefits
was assumed for 1998. The rate was then assumed to decrease 1.00% per year to
5.50% in 2000 and remain at that level thereafter. Increasing the assumed health
care cost trend rate by 1.00% in each year would increase the benefit obligation
as of December 31, 1998 by $2,415,000 and increase the net periodic benefit cost
for the year ended December 31, 1998 by $258,000. Decreasing the assumed health
care cost trend rate by 1.00% in each year would decrease the benefit obligation
as of December 31, 1998 by $2,073,000 and decrease the net periodic benefit cost
for the year ended December 31, 1998 by $217,000.

Prior to March 1, 1996, the Predecessor sponsored a defined benefit pension
plan and other postretirement benefits plan for all eligible U.S. nonunion
employees. As a result of the sale of the Predecessor by Westinghouse, as
discussed in Note 3, benefits earned through February 29, 1996 under the pension
plan were frozen and participants were fully vested in their benefits. The
pension plan was subsequently merged into a Westinghouse pension plan.
Furthermore, the Company assumed the liability related to the Predecessor's
other postretirement benefits plan. For the two months ended February 29, 1996,
the Predecessor incurred an aggregate of $441,000 of pension and other
postretirement benefits expense.

Employees of the Canadian and United Kingdom (U.K.) operations participate
in defined contribution plans. The Company's expense related to these plans for
the years ended December 31, 1998 and 1997 and the ten months ended December 31,
1996 was $842,000, $1,121,000 and $632,000, respectively.

F-24
<PAGE>

KNOLL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company also sponsors a retirement savings plan (i.e. 401(k) plan) for
all U.S. nonunion employees and U.S. hourly union employees. Under this plan,
participants may defer a portion of their earnings up to the annual contribution
limits established by the Internal Revenue Service. The Company matches 40.0% of
participant contributions on up to the first 6.0% of compensation for
nonunion employees and matches 50.0% of participant contributions on up to the
first 6.0% of compensation for union employees. For participants who are
nonunion employees, the plan also provides for additional employer matching
based on the achievement of certain profitability goals. The Company's common
stock is offered as an investment option under the 401(k) plan. Although the
stock is typically purchased on the open market, the Company has reserved
500,000 shares of its common stock for issuance under its 401(k) plan. The
Company's total expense under this plan was $5,472,000 and $5,180,000 for the
years ended December 31, 1998 and 1997, respectively, and $2,957,000 for the ten
months ended December 31, 1996. The Predecessor administered a similar
retirement savings plan and incurred related expense totaling $406,000 for the
two months ended February 29, 1996.

22. SEGMENT AND GEOGRAPHIC REGION INFORMATION

The Company operates exclusively in the business of design, manufacture and
sale of office furniture products and accessories. In addition to its principal
manufacturing operations and markets in North America, the Company conducts
manufacturing and sales operations in Europe.

The Company's sales to customers, operating income and net property, plant
and equipment are summarized by geographic areas below. Sales to customers are
attributed to the geographic areas based on the point of sale.

<TABLE>
<CAPTION>
UNITED
STATES CANADA EUROPE CONSOLIDATED
------------ --------- --------- ------------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1998
Sales to customers............................................. $ 857,711 $ 29,361 $ 61,619 $ 948,691
Operating income............................................... 158,880 9,915 2,748 171,543
Property, plant and equipment, net............................. 146,488 27,754 11,925 186,167

YEAR ENDED DECEMBER 31, 1997
Sales to customers............................................. 717,326 37,674 55,857 810,857
Operating income............................................... 108,002 24,497 5,378 137,877
Property, plant and equipment, net............................. 145,215 23,829 11,406 180,450

TEN MONTHS ENDED DECEMBER 31, 1996
Sales to customers............................................. 493,653 24,456 43,425 561,534
Operating income............................................... 54,381 10,681 6,282 71,344
Property, plant and equipment, net............................. 141,725 21,882 12,611 176,218
</TABLE>

F-25
<PAGE>

KNOLL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

23. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following table sets forth unaudited summary information on a quarterly
basis for the Company for the years ended December 31, 1998 and 1997.

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1998
Net sales........................................................ $ 220,775 $ 246,957 $ 235,028 $ 245,931
Gross profit..................................................... 87,323 97,838 93,022 97,752
Net income....................................................... 19,810 25,063 24,937 23,234
Earnings per share of common stock:
Basic.......................................................... 0.48 0.60 0.60 0.57
Diluted........................................................ 0.45 0.57 0.57 0.55

1997
Net sales........................................................ 177,833 212,582 208,402 212,040
Gross profit..................................................... 67,974 86,176 83,714 83,031
Income before extraordinary item................................. 11,638 16,956 19,471 18,378
Net income....................................................... 11,638 11,619 19,471 18,378
Income before extraordinary item per share of
common stock:
Basic........................................................ 0.37 0.46 0.48 0.45
Diluted...................................................... 0.34 0.43 0.45 0.42
</TABLE>

Income before extraordinary item per share amounts reported for the first
and second quarters of 1997 are pro forma as they are adjusted to reflect the
redemption and conversion into common stock of the Series A Preferred Stock as
of the beginning of the respective periods (see Note 2).

The Company recorded an extraordinary loss of $8,838,000 pretax ($5,337,000
after-tax) during the second quarter of 1997. This loss consisted of the
write-off of unamortized deferred financing fees and the premium paid in
connection with the early redemption of a portion of the Company's Senior
Subordinated Notes.

24. SUBSEQUENT EVENTS

On March 23, 1999, the Company received a proposal from Warburg, Pincus
Ventures, L.P. and certain members of Knoll management to acquire all of the
outstanding shares of the Company's common stock owned by public stockholders at
a price of $25.00 per share. The Board of Directors has authorized the
appointment of a special committee, consisting of independent members of the
Board of Directors, to consider the proposal. Consummation of the acquisition
would be subject to approval by the Board of Directors and stockholders of
Knoll, as well as to the receipt of financing, the execution of a definitive
merger agreement and other conditions customary in a transaction of this type.
Five class action complaints relating to the proposal were filed on or about
March 24, 1999. The Company is among the defendants. The Company is unable to
predict what impact, if any, such litigation may have on the Company or the
proposed transaction. The financial statements do not reflect any effects of the
litigation or the proposed transaction.

F-26
<PAGE>

KNOLL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

25. FINANCIAL INFORMATION FOR GUARANTORS OF THE COMPANY'S DEBT

As discussed in Note 11, the Company's Senior Subordinated Notes are
guaranteed by all existing and future directly or indirectly wholly owned
domestic subsidiaries of the Company (the "Guarantors"). The Guarantors are
Knoll Overseas, Inc., a holding company for the entities that conduct the
Company's European business, and Spinneybeck Enterprises, Inc., which directly
and through a Canadian subsidiary operates the Company's leather business.

These Guarantors will irrevocably and unconditionally, fully, jointly and
severally, guarantee the performance and payment when due, of all obligations
under the Senior Subordinated Notes, limited to the largest amount that would
not render such Guarantors' obligations under the guarantees subject to
avoidance under any applicable federal or state fraudulent conveyance or similar
law.

The condensed consolidating information that follows presents:

- Condensed consolidating financial information as of December 31, 1998 and
1997 and for the years ended December 31, 1998 and 1997, ten months ended
December 31, 1996 and two months ended February 29, 1996 of (a) Knoll,
Inc. (as the Issuer), (b) the Guarantors, (c) the combined non-Guarantors,
(d) elimination entries and (e) the Company on a consolidated basis.

- The Issuer and the Guarantors are shown with their investments in their
subsidiaries accounted for on the equity method.

The condensed consolidating financial information should be read in
connection with the consolidated financial statements of the Company. Separate
financial statements of the Guarantors are not presented because management has
determined that separate financial statements are not material. The Guarantors
are fully, jointly, severally and unconditionally liable under the guarantees.

Certain amounts for 1997 and 1996 in the condensed consolidating information
have been reclassified to conform to the 1998 classifications.

F-27
<PAGE>

KNOLL, INC.

BALANCE SHEET

DECEMBER 31, 1998

(IN THOUSANDS)

<TABLE>
<CAPTION>
GUARANTORS
------------------------
SPINNEYBECK KNOLL
KNOLL, ENTERPRISES, OVERSEAS, NON-
INC. INC. INC. GUARANTORS ELIMINATIONS TOTAL
---------- ----------- ----------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................... $ 3,503 $ 561 $ -- $ 13,401 $ -- $ 17,465
Customer receivables, net.................... 115,823 1,698 -- 20,435 -- 137,956
Accounts receivable--related parties......... 13,954 40 3,568 40,061 (57,623) --
Inventories.................................. 53,146 8,270 -- 15,697 -- 77,113
Deferred income taxes........................ 20,169 -- -- 898 -- 21,067
Prepaid and other current assets............. 2,132 14 4 7,692 -- 9,842
---------- ----------- ----------- ----------- ------------ ----------
Total current assets....................... 208,727 10,583 3,572 98,184 (57,623) 263,443
Property, plant and equipment, net............. 146,275 213 -- 39,679 -- 186,167
Intangible assets, net......................... 258,604 -- -- 1,439 -- 260,043
Equity investments............................. 106,709 666 15,932 -- (123,307) --
Other noncurrent assets........................ 2,046 9 97 2,222 -- 4,374
---------- ----------- ----------- ----------- ------------ ----------
Total Assets............................... $ 722,361 $ 11,471 $ 19,601 $ 141,524 $ (180,930) $ 714,027
---------- ----------- ----------- ----------- ------------ ----------
---------- ----------- ----------- ----------- ------------ ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt......... $ 10,000 $ -- $ -- $ -- $ -- $ 10,000
Accounts payable--trade...................... 37,446 415 -- 21,690 -- 59,551
Accounts payable--related parties............ 39,826 235 2,526 15,036 (57,623) --
Income taxes payable......................... 5,872 637 35 552 -- 7,096
Other current liabilities.................... 81,100 838 1,061 8,757 -- 91,756
---------- ----------- ----------- ----------- ------------ ----------
Total current liabilities.................. 174,244 2,125 3,622 46,035 (57,623) 168,403
Long-term debt................................. 158,250 -- -- 1,005 -- 159,255
Deferred income taxes.......................... 8,531 -- -- 2,147 -- 10,678
Postretirement benefits other than pension..... 18,450 -- -- -- -- 18,450
Other noncurrent liabilities................... 8,049 -- -- 5,342 -- 13,391
---------- ----------- ----------- ----------- ------------ ----------
Total liabilities.......................... 367,524 2,125 3,622 54,529 (57,623) 370,177
---------- ----------- ----------- ----------- ------------ ----------
Stockholders' equity:
Common stock................................. 418 -- -- -- -- 418
Additional paid-in-capital................... 184,145 273 12,812 60,107 (75,545) 181,792
Unearned stock grant compensation............ (712) -- -- -- -- (712)
Retained earnings............................ 170,986 9,073 3,167 35,522 (47,762) 170,986
Accumulated other comprehensive income....... -- -- -- (8,634) -- (8,634)
---------- ----------- ----------- ----------- ------------ ----------
Total stockholders' equity................. 354,837 9,346 15,979 86,995 (123,307) 343,850
---------- ----------- ----------- ----------- ------------ ----------
Total Liabilities and Stockholders'
Equity................................... $ 722,361 $ 11,471 $ 19,601 $ 141,524 $ (180,930) $ 714,027
---------- ----------- ----------- ----------- ------------ ----------
---------- ----------- ----------- ----------- ------------ ----------
</TABLE>

F-28
<PAGE>

KNOLL, INC.

BALANCE SHEET

DECEMBER 31, 1997

(IN THOUSANDS)

<TABLE>
<CAPTION>
GUARANTORS
------------------------
SPINNEYBECK KNOLL
KNOLL, ENTERPRISES, OVERSEAS, NON-
INC. INC. INC. GUARANTORS ELIMINATIONS TOTAL
---------- ----------- ----------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................... $ 1,052 $ 291 $ -- $ 9,447 $ -- $ 10,790
Customer receivables, net.................... 97,364 1,629 -- 23,858 -- 122,851
Accounts receivable--related parties......... 2,380 35 2,257 41,427 (46,099) --
Inventories.................................. 46,665 7,443 -- 14,141 -- 68,249
Deferred income taxes........................ 20,323 -- -- 972 -- 21,295
Prepaid and other current assets............. 2,258 (2) 4 1,437 -- 3,697
---------- ----------- ----------- ----------- ------------ ----------
Total current assets....................... 170,042 9,396 2,261 91,282 (46,099) 226,882
Property, plant and equipment, net............. 144,923 292 -- 35,235 -- 180,450
Intangible assets, net......................... 267,231 -- -- 3,446 -- 270,677
Equity investments............................. 95,308 567 14,947 -- (110,822) --
Other noncurrent assets........................ 731 9 97 2,013 -- 2,850
---------- ----------- ----------- ----------- ------------ ----------
Total Assets............................... $ 678,235 $ 10,264 $ 17,305 $ 131,976 $ (156,921) $ 680,859
---------- ----------- ----------- ----------- ------------ ----------
---------- ----------- ----------- ----------- ------------ ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt......... $ 10,000 $ -- $ -- $ -- $ -- $ 10,000
Accounts payable--trade...................... 46,709 482 -- 19,506 -- 66,697
Accounts payable--related parties............ 41,290 137 (10) 4,682 (46,099) --
Income taxes payable......................... (2,046) 223 (69) 8,683 -- 6,791
Other current liabilities.................... 67,291 678 1,886 7,986 -- 77,841
---------- ----------- ----------- ----------- ------------ ----------
Total current liabilities.................. 163,244 1,520 1,807 40,857 (46,099) 161,329
Long-term debt................................. 196,250 -- -- 779 -- 197,029
Deferred income taxes.......................... 3,149 -- -- 2,152 -- 5,301
Postretirement benefits other than pension..... 16,424 -- -- -- -- 16,424
Other noncurrent liabilities................... 7,803 -- -- 4,684 -- 12,487
---------- ----------- ----------- ----------- ------------ ----------
Total liabilities.......................... 386,870 1,520 1,807 48,472 (46,099) 392,570
---------- ----------- ----------- ----------- ------------ ----------
Stockholders' equity:
Common stock................................. 432 -- -- -- -- 432
Additional paid-in-capital................... 213,984 3,535 12,897 60,079 (75,545) 214,950
Unearned stock grant compensation............ (993) -- -- -- -- (993)
Retained earnings............................ 77,942 5,209 2,601 27,467 (35,277) 77,942
Accumulated other comprehensive income....... -- -- -- (4,042) -- (4,042)
---------- ----------- ----------- ----------- ------------ ----------
Total stockholders' equity................. 291,365 8,744 15,498 83,504 (110,822) 288,289
---------- ----------- ----------- ----------- ------------ ----------
Total Liabilities and Stockholders'
Equity................................... $ 678,235 $ 10,264 $ 17,305 $ 131,976 $ (156,921) $ 680,859
---------- ----------- ----------- ----------- ------------ ----------
---------- ----------- ----------- ----------- ------------ ----------
</TABLE>

F-29
<PAGE>

KNOLL, INC.

STATEMENT OF OPERATIONS

YEAR ENDED DECEMBER 31, 1998

(IN THOUSANDS)

F-30
<PAGE>

KNOLL, INC.

STATEMENT OF OPERATIONS

YEAR ENDED DECEMBER 31, 1997

(IN THOUSANDS)

F-31
<PAGE>

KNOLL, INC.

STATEMENT OF OPERATIONS

TEN MONTHS ENDED DECEMBER 31, 1996

(IN THOUSANDS)

F-32
<PAGE>

KNOLL, INC.

STATEMENT OF OPERATIONS

TWO MONTHS ENDED FEBRUARY 29, 1996

(IN THOUSANDS)

<TABLE>
<CAPTION>
GUARANTORS
------------------------
SPINNEYBECK KNOLL
ENTERPRISES, OVERSEAS, NON-
KNOLL, INC. INC. INC. GUARANTORS ELIMINATIONS TOTAL
----------- ----------- ----------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Sales to customers............................. $ 76,471 $ 2,095 $ -- $ 11,666 $ -- $ 90,232
Sales to related parties....................... 1,318 330 -- 6,935 (8,583) --
----------- ----------- ----- ----------- ------------ ----------
Total sales.................................... 77,789 2,425 -- 18,601 (8,583) 90,232
Cost of sales to customers..................... 50,580 931 111 9,041 (949) 59,714
Cost of sales to related parties............... 883 149 -- 6,602 (7,634) --
----------- ----------- ----- ----------- ------------ ----------
Gross profit (loss)............................ 26,326 1,345 (111) 2,958 -- 30,518
Selling, general and administrative expenses... 16,800 725 224 3,507 -- 21,256
Westinghouse long-term incentive
compensation................................. 47,900 -- -- -- -- 47,900
Allocated corporate expenses................... 921 -- -- -- -- 921
----------- ----------- ----- ----------- ------------ ----------
Operating income (loss)........................ (39,295) 620 (335) (549) -- (39,559)
Interest expense............................... -- -- -- 340 -- 340
Other income (expense), net.................... (265) -- 170 (201) -- (296)
Income (loss) from equity
investments.................................. (218) 23 (493) -- 688 --
----------- ----------- ----- ----------- ------------ ----------
Income (loss) before income tax expense
(benefit).................................... (39,778) 643 (658) (1,090) 688 (40,195)
Income tax expense (benefit)................... (16,338) 259 (56) 28 -- (16,107)
----------- ----------- ----- ----------- ------------ ----------
Net income (loss).............................. $ (23,440) $ 384 $ (602) $ (1,118) $ 688 $ (24,088)
----------- ----------- ----- ----------- ------------ ----------
----------- ----------- ----- ----------- ------------ ----------
</TABLE>

F-33
<PAGE>

KNOLL, INC.

STATEMENT OF CASH FLOWS

YEAR ENDED DECEMBER 31, 1998

(IN THOUSANDS)

<TABLE>
<CAPTION>
GUARANTORS
----------------------------
SPINNEYBECK KNOLL
KNOLL, ENTERPRISES, OVERSEAS, NON-
INC. INC. INC. GUARANTORS ELIMINATIONS TOTAL
---------- --------------- ----------- ----------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C>
CASH PROVIDED BY OPERATING ACTIVITIES......... $ 101,588 $ 285 $ -- $ 12,690 $ -- $ 114,563

CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures.......................... (27,170) (15) -- (9,205) -- (36,390)
Proceeds from sale of assets.................. 69 -- -- 83 -- 152
---------- ----- ----- ----------- ----- ----------
Cash used in investing activities............. (27,101) (15) -- (9,122) -- (36,238)

CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of revolving credit facility, net... (38,000) -- -- -- -- (38,000)
Proceeds from long-term debt.................. -- -- -- 201 -- 201
Net proceeds from issuance of stock........... 4,813 -- -- -- -- 4,813
Purchase of common stock...................... (38,849) -- -- -- -- (38,849)
---------- ----- ----- ----------- ----- ----------
Cash provided by (used in) financing
activities.................................. (72,036) -- -- 201 -- (71,835)

Effect of exchange rate changes on cash and
cash equivalents............................ -- -- -- 185 -- 185
---------- ----- ----- ----------- ----- ----------
Increase in cash and cash equivalents......... 2,451 270 -- 3,954 -- 6,675
Cash and cash equivalents at beginning
of year..................................... 1,052 291 -- 9,447 -- 10,790
---------- ----- ----- ----------- ----- ----------
Cash and cash equivalents at end of
year........................................ $ 3,503 $ 561 $ -- $ 13,401 $ -- $ 17,465
---------- ----- ----- ----------- ----- ----------
---------- ----- ----- ----------- ----- ----------
</TABLE>

F-34
<PAGE>

KNOLL, INC.

STATEMENT OF CASH FLOWS

YEAR ENDED DECEMBER 31, 1997

(IN THOUSANDS)

CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures........................... (26,740) (22) -- (6,347) 29 (33,080)
Proceeds from sale of assets................... 108 -- -- 85 (29) 164
Payments received on intercompany loans........ 2,500 -- -- -- (2,500) --
---------- ----------- ----- ----------- ------ ----------
Cash used in investing activities.............. (24,132) (22) -- (6,262) (2,500) (32,916)

CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of revolving credit facility,
net.......................................... (79,000) -- -- -- -- (79,000)
Repayment of long-term debt, net............... (67,750) -- -- (238) -- (67,988)
Repayment of intercompany loans................ -- (2,500) -- -- 2,500 --
Premium paid for early extinguishment of
debt......................................... (5,775) -- -- -- -- (5,775)
Net proceeds from issuance of stock............ 133,559 -- -- -- -- 133,559
Redemption of preferred stock.................. (80,000) -- -- -- -- (80,000)
---------- ----------- ----- ----------- ------ ----------
Cash used in financing activities.............. (98,966) (2,500) -- (238) 2,500 (99,204)

Effect of exchange rate changes on cash and
cash equivalents............................. -- -- -- (1,156) -- (1,156)
---------- ----------- ----- ----------- ------ ----------
Increase in cash and cash equivalents.......... 1,011 24 -- 951 -- 1,986
Cash and cash equivalents at beginning of
year......................................... 41 267 -- 8,496 -- 8,804
---------- ----------- ----- ----------- ------ ----------
Cash and cash equivalents at end of
year......................................... $ 1,052 $ 291 $ -- $ 9,447 $ -- $ 10,790
---------- ----------- ----- ----------- ------ ----------
---------- ----------- ----- ----------- ------ ----------
</TABLE>

F-35
<PAGE>

KNOLL, INC.

STATEMENT OF CASH FLOWS

TEN MONTHS ENDED DECEMBER 31, 1996

(IN THOUSANDS)

<TABLE>
<CAPTION>
GUARANTORS
--------------------------
SPINNEYBECK KNOLL
ENTERPRISES, OVERSEAS, NON-
KNOLL, INC. INC. INC. GUARANTORS ELIMINATIONS TOTAL
----------- ------------- ----------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
CASH PROVIDED BY OPERATING ACTIVITIES....... $ 78,889 $ 399 $ -- $ 10,214 $ -- $ 89,502

CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of the Company from
Westinghouse.............................. (579,801) -- -- -- -- (579,801)
Capital expenditures........................ (12,531) (134) -- (2,590) -- (15,255)
Proceeds from sale of assets................ 43 -- -- 175 -- 218
----------- ----- ----------- ----------- ----- -----------
Cash used in investing activities........... (592,289) (134) -- (2,415) -- (594,838)

CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of short-term debt, net........... -- -- -- (1,483) -- (1,483)
Proceeds from revolving credit facility,
net....................................... 88,000 -- -- -- -- 88,000
Proceeds from (repayment of) long-term debt,
net....................................... 265,000 -- -- (130) -- 264,870
Net proceeds from issuance of stock......... 160,400 -- -- -- -- 160,400
Net receipts from (payments to) parent
company................................... (120) -- -- 120 -- --
----------- ----- ----------- ----------- ----- -----------
Cash provided by (used in) financing
activities................................ 513,280 -- -- (1,493) -- 511,787

Effect of exchange rate changes on cash and
cash equivalents.......................... -- -- -- 18 -- 18
----------- ----- ----------- ----------- ----- -----------
Increase (decrease) in cash and cash
equivalents............................... (120) 265 -- 6,324 -- 6,469
Cash and cash equivalents at beginning of
period.................................... 161 2 -- 2,172 -- 2,335
----------- ----- ----------- ----------- ----- -----------
Cash and cash equivalents at end of
period.................................... $ 41 $ 267 $ -- $ 8,496 $ -- $ 8,804
----------- ----- ----------- ----------- ----- -----------
----------- ----- ----------- ----------- ----- -----------
</TABLE>

F-36
<PAGE>

KNOLL, INC.

STATEMENT OF CASH FLOWS

TWO MONTHS ENDED FEBRUARY 29, 1996

(IN THOUSANDS)

CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures........................... (2,022) (28) -- (246) -- (2,296)
----------- ----------- ----- ----------- ------------ ----------
Cash used in investing activities.............. (2,022) (28) -- (246) -- (2,296)

CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of short-term debt, net.............. (2,055) -- -- (1,750) -- (3,805)
Net receipts from (payments to) parent
company...................................... 57,635 (1,419) (651) (14,598) 19,881 60,848
----------- ----------- ----- ----------- ------------ ----------
Cash provided by (used in) financing
activities................................... 55,580 (1,419) (651) (16,348) 19,881 57,043

Effect of exchange rate changes on cash and
cash equivalents............................. -- -- -- 58 -- 58
----------- ----------- ----- ----------- ------------ ----------
Increase (decrease) in cash and cash
equivalents.................................. 343 (180) -- 603 -- 766
Cash and cash equivalents at beginning of
period....................................... (182) 182 -- 1,569 -- 1,569
----------- ----------- ----- ----------- ------------ ----------
Cash and cash equivalents at end of period..... $ 161 $ 2 $ -- $ 2,172 $ -- $ 2,335
----------- ----------- ----- ----------- ------------ ----------
----------- ----------- ----- ----------- ------------ ----------
</TABLE>

F-37
<PAGE>

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ---------------------------------------------------------- ----------- ----------- --------------- -------------
<S> <C> <C> <C> <C>
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING COSTS AND BALANCE AT
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS (1) END OF PERIOD
- ---------------------------------------------------------- ----------- ----------- --------------- -------------

<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C>
VALUATION ACCOUNTS DEDUCTED IN THE CONSOLIDATED BALANCE
SHEET FROM THE ASSETS TO WHICH THEY APPLY:
Year Ended December 31, 1998:
Allowance for doubtful accounts......................... $ 5,461 $ 1,313 $ 1,717 $ 5,057
Year Ended December 31, 1997:
Allowance for doubtful accounts......................... 5,713 1,943 2,195 5,461
Ten Months Ended December 31, 1996:
Allowance for doubtful accounts......................... 5,838 2,098 2,223 5,713
Two Months Ended February 29, 1996:
Allowance for doubtful accounts......................... 5,790 159 210 5,739
</TABLE>

- ------------------------

(1) Uncollectible accounts written off and foreign currency translation.

S-1
<PAGE>

EXHIBIT INDEX
-------------

EXHIBIT
NUMBER DESCRIPTION
- ------------ ----------------------------------------------------------------
<S> <C>
3.1*** Amended and Restated Certificate of Incorporation of the Company.

3.2*** Amended and Restated By-Laws of the Company.

10.1* Stock Purchase Agreement, dated as of December 20, 1995, by and
between Westinghouse and TKG.

10.2* Knoll, Inc. 1996 Stock Incentive Plan (formerly called the TKG
Stock Incentive Plan).

10.3* Indenture, dated as of February 29, 1996, by and among the
Company, T.K.G. Acquisition Corp., T.K.G. Acquisition Sub, Inc.,
The Knoll Group, Inc., Knoll North America, Inc., Spinneybeck
Enterprises, Inc. and Knoll Overseas, Inc., as guarantors, and
IBJ Schroder Bank & Trust Company, as trustee, relating to
$165,000,000 principal amount of 10.875% Senior Subordinated
Notes due 2006, including form of Initial Global Note.

10.4* Supplemental Indenture, dated as of February 29, 1996, by and
among the Company, as successor to T.K.G. Acquisition Sub, Inc.,
the Guarantors (as defined therein), and IBJ Schroder Bank &
Trust Company, as trustee, relating to $165,000,000 principal
amount of 10.875% Senior Subordinated Notes due 2006, including
form of Initial Global Note.

10.5** Supplemental Indenture No. 2, dated as of March 14, 1997, by and
among the Company, the Guarantors (as defined therein), and IBJ
Schroder Bank & Trust Company, as trustee, relating to
$165,000,000 principal amount of 10.875% Senior Subordinated
Notes due 2006, including form of Initial Global Note.

10.6**** Credit Agreement, dated as of August 8, 1997, by and among the
Company, NationsBank, N.A., as Administrative Agent, The Chase
Manhattan Bank, as Documentation Agent and other lending
institutions.

10.7** Employment Agreement, dated as of February 29, 1996, between
T.K.G. Acquisition Corp. and Burton B. Staniar.

10.8** Employment Agreement, dated as of February 29, 1996, between
T.K.G. Acquisition Corp. and John H. Lynch.

10.9** Employment Agreement, dated as of February 29, 1996, between
T.K.G. Acquisition Corp. and Andrew B. Cogan.

10.10*** Amendment to Employment Agreement, dated as of April 30, 1997,
between the Company and Andrew B. Cogan.

10.11+ Amendment #2 to Employment Agreement, dated as of August 1, 1998,
between the Company and Andrew B. Cogan.

10.12** Stockholders Agreement (Common Stock and Preferred Stock), dated
as of February 29, 1996, among T.K.G. Acquisition Corp., Warburg,
Pincus Ventures, L.P., and the signatories thereto.

10.13** Form of Stockholders Agreement (Restricted Shares), dated as of
February 29, 1996, among T.K.G. Acquisition Corp., Warburg,
Pincus Ventures, L.P., and the signatories thereto.

10.14*** Form of Agreement, dated as of April 15, 1997, by and among the
Company, Warburg, Pincus Ventures, L.P., NationsBanc Investment
Corp. and the Investors (as defined therein).

10.15+ Voting Agreement, dated as of September 11, 1998, by and among
the Company, Warburg, Pincus Ventures, L.P. and Warburg, Pincus &
Co.

10.16***** Amended and Restated Knoll, Inc. 1997 Stock Incentive Plan.

10.17+ Letter Agreement between the Company and Douglas J. Purdom,
dated August 13, 1996.

21** Subsidiaries of the Registrant.

23 Consent of Independent Auditors.

27+ Financial Data Schedule.

</TABLE>

(i)
<PAGE>

- ----------

+ Previously filed with the Original Form 10-K.

* Incorporated by reference to the Company's Registration Statement on
Form S-4 (File No. 333-2972), which was declared effective by the
Commission on June 12, 1996.

** Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996.

*** Incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 333-23399), which was declared effective by the
Commission on May 9, 1997.

**** Incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 333-36407), which was filed on September 25, 1997 and
subsequently withdrawn.

***** Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997.

(ii)

<PAGE>

EXHIBIT 23

CONSENT OF INDEPENDENT AUDITORS

We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-30277) pertaining to the

(i) Knoll Retirement Savings Plan,
(ii) Knoll, Inc. 1997 Employee Stock Purchase Plan, and
(iii) Knoll, Inc. 1997 Stock Incentive Plan,

the Registration Statement (Form S-8 No. 333-49117) pertaining to the Knoll,
Inc. 1997 Stock Incentive Plan and the Registration Statement (Form S-3 No.
333-85191) of Knoll, Inc. pertaining to the registration of 1,384,858 shares
of common stock, of our report dated January 29, 1999 (except for Note 19, as
to which the date is February 10, 1999, and Notes 20 and 24, as to which the
date is March 24, 1999), with respect to the consolidated financial
statements, as amended, and schedule of Knoll, Inc. included in this Form
10-K/A.

/s/ Ernst & Young LLP

Philadelphia, Pennsylvania
September 9, 1999