<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No. 001-12907
KNOLL, INC.
A Delaware Corporation I.R.S. Employer No. 13-3873847
1235 Water Street
East Greenville, PA 18041
Telephone Number (215)679-7991
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
--- ---
As of November 9, 2000, there were 23,203,748 shares of the Registrant's common
stock, par value $0.01 per share, outstanding.
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KNOLL, INC.
TABLE OF CONTENTS FOR FORM 10-Q
Item Page
---- ----
PART I -- FINANCIAL INFORMATION
1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets at September 30, 2000
and December 31, 1999...................................... 3
Condensed Consolidated Statements of Operations for the
three months and nine months ended September 30, 2000
and 1999................................................... 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2000 and 1999.............. 5
Notes to the Condensed Consolidated Financial Statements..... 6
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 8
3. Quantitative and Qualitative Disclosures about Market Risk....... 10
PART II -- OTHER INFORMATION
2. Changes in Securities and Use of Proceeds........................ 11
6. Exhibits and Reports on Form 8-K................................. 11
Signatures........................................................... 12
Exhibit Index........................................................ 13
2
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PART I -- FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
----------------------------------------------------------------
KNOLL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........ $ 10,469 $ 10,785
Restricted cash.................. -- 7,776
Customer receivables, net........ 142,229 167,767
Inventories...................... 82,371 82,738
Deferred income taxes............ 22,587 22,440
Prepaid and other current
assets......................... 8,749 7,720
--------- --------
Total current assets......... 266,405 299,226
Property, plant and equipment........ 288,027 279,972
Accumulated depreciation............. (114,978) (95,331)
--------- --------
Property, plant and
equipment, net............. 173,049 184,641
Intangible assets.................... 280,210 281,730
Accumulated amortization............. (32,815) (26,773)
--------- --------
Intangible assets, net....... 247,395 254,957
Other noncurrent assets.............. 2,530 3,482
--------- --------
Total Assets................. $ 689,379 $742,306
========= ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current maturities of long-
term debt...................... $ 25,000 $ 17,500
Accounts payable................. 79,426 72,914
Income taxes payable............. 3,775 3,483
Other current liabilities........ 95,918 101,242
--------- --------
Total current liabilities.... 204,119 195,139
Long-term debt....................... 439,273 592,876
Deferred income taxes................ 23,428 18,956
Other noncurrent liabilities......... 30,142 29,529
--------- --------
Total liabilities............ 696,962 836,500
--------- --------
Stockholders' deficit:
Common stock, $0.01 par value;
100,000,000 shares authorized;
23,206,748 shares issued and
outstanding (net of 8,800
treasury shares) in 2000 and
23,289,898 shares issued and
outstanding (net of 1,000
treasury shares) in 1999....... 232 233
Additional paid-in-capital....... 3,695 4,173
Unearned stock grant
compensation................... (4) (433)
Retained earnings (deficit)...... 1,247 (91,328)
Accumulated other
comprehensive loss............. (12,753) (6,839)
--------- --------
Total stockholders' deficit.. (7,583) (94,194)
--------- --------
Total Liabilities and
Stockholders' Deficit...... $ 689,379 $742,306
========= ========
</TABLE>
See accompanying notes.
3
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KNOLL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Sales...................... $295,357 $247,543 $879,565 $710,479
Cost of sales.............. 173,075 150,958 516,663 430,149
-------- -------- -------- --------
Gross profit............... 122,282 96,585 362,902 280,330
Selling, general and
administrative expenses.. 58,188 50,154 175,158 151,469
-------- -------- -------- --------
Operating income........... 64,094 46,431 187,744 128,861
Interest expense........... 10,699 3,796 34,894 12,175
Recapitalization expense... -- 541 -- 3,541
Other income (expense),
net...................... 1,044 168 2,606 (769)
-------- -------- -------- --------
Income before income tax
expense.................. 54,439 42,262 155,456 112,376
Income tax expense......... 21,948 17,249 62,881 47,165
-------- -------- -------- --------
Net income................. $ 32,491 $ 25,013 $ 92,575 $ 65,211
======== ======== ======== ========
</TABLE>
See accompanying notes.
4
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KNOLL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
2000 1999
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income..................................... $ 92,575 $ 65,211
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization............ 26,944 26,705
Recapitalization expense................. -- 3,541
Other noncash items...................... (466) 1,419
Changes in assets and liabilities:
Customer receivables................. 23,409 (6,647)
Inventories.......................... (1,090) (4,106)
Accounts payable..................... 8,108 (3,584)
Current and deferred income taxes.... 8,210 (1,084)
Other current assets and
liabilities........................ 3,357 (13,771)
Other noncurrent assets and
liabilities........................ (1,741) (1,157)
--------- --------
Cash provided by operating activities.......... 159,306 66,527
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures........................... (11,916) (14,376)
Proceeds from sale of assets................... 93 106
--------- --------
Cash used in investing activities.............. (11,823) (14,270)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of revolving credit facilities, net.. (134,685) (30,000)
Repayment of long-term debt.................... (11,250) --
Net proceeds from issuance of stock............ -- 3,674
Purchase of common stock....................... (218) (28,675)
Payment of recapitalization costs.............. (230) (2,738)
--------- --------
Cash used in financing activities.............. (146,383) (57,739)
--------- --------
Effect of exchange rate changes on cash and
cash equivalents............................. (1,416) (445)
--------- --------
Decrease in cash and cash equivalents.......... (316) (5,927)
Cash and cash equivalents at beginning
of period.................................... 10,785 17,465
--------- --------
Cash and cash equivalents at end of period..... $ 10,469 $ 11,538
========= ========
</TABLE>
See accompanying notes.
5
<PAGE>
KNOLL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
Knoll, Inc. (the "Company" or "Knoll") have been prepared in accordance with
generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X and
therefore do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation are reflected in the
condensed consolidated financial statements. The condensed consolidated
balance sheet as of December 31, 1999 is derived from the Company's 1999
audited balance sheet. The unaudited condensed consolidated financial
statements and notes thereto should be read in conjunction with the
consolidated financial statements and notes thereto contained in the Company's
annual report on Form 10-K for the year ended December 31, 1999. The results
of operations for the three and nine months ended September 30, 2000 are not
necessarily indicative of the results to be expected for the full year ending
December 31, 2000 or other future periods.
2. Recapitalization (Merger)
On November 4, 1999, the Company consummated a merger of a newly formed
entity, which was organized by Warburg, Pincus Ventures, L.P., with and into
Knoll, with Knoll continuing as the surviving corporation. As a result of the
merger, 17,738,634 shares of common stock held by the public stockholders of
Knoll immediately prior to the merger were converted into the right to receive
$28.00 per share in cash and were canceled. Furthermore, the Company's common
stock ceased to be listed on the New York Stock Exchange, and the registration
of the Company's securities under the Securities Exchange Act of 1934 was
terminated. The merger and related transactions were accounted for as a
leveraged recapitalization. The historical accounting bases of Knoll's assets
and liabilities were retained subsequent to the transactions.
During the three months and nine months ended September 30, 1999, the Company
incurred $0.5 million and $3.5 million, respectively, of expense relating to
the recapitalization of the Company that occurred upon consummation of the
merger. This expense was not deductible for income tax purposes. The
Company's consolidated balance sheet as of December 31, 1999 includes
restricted cash and a current liability of $7.8 million related to merger
consideration held by the Company's exchange agent for canceled shares of
Knoll common stock that, as of such date, were not yet presented to the
exchange agent.
3. Inventories
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
(In Thousands)
<S> <C> <C>
Raw materials............... $50,989 $49,795
Work in process............. 8,309 10,313
Finished goods.............. 23,073 22,630
------- -------
Inventories.................. $82,371 $82,738
======= =======
</TABLE>
6
<PAGE>
4. Comprehensive Income
For the three months ended September 30, 2000 and 1999, total comprehensive
income amounted to $30.0 million and $25.5 million, respectively. Total
comprehensive income for the nine months ended September 30, 2000 and 1999 was
$86.7 million and $66.7 million, respectively.
5. Accounting Pronouncements Pending Implementation
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended ("SFAS 133"), which is required to be
adopted in fiscal years beginning after June 15, 2000. Because of the
Company's limited use of derivatives, management does not anticipate that the
adoption of SFAS 133 will have a significant effect on earnings or the
financial position of the Company.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements,"
as amended ("SAB 101"). SAB 101 summarizes certain of the staff's views in
applying generally accepted accounting principles to revenue recognition in
the financial statements and requires entities to begin reporting changes, if
any, to their revenue recognition practices no later than the fourth fiscal
quarter of fiscal years beginning after December 15, 1999. At this time, the
Company does not expect any revenue recognition changes as a result of
applying SAB 101.
7
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Item 2. Management's Discussion and Analysis of Financial Condition and
------------------------------------------------------------------------
Results of Operations
---------------------
The following discussion should be read in conjunction with the accompanying
unaudited condensed consolidated financial statements and notes thereto and
in conjunction with the Company's annual report on Form 10-K for the year
ended December 31, 1999.
Results of Operations
Comparison of Third Quarter and Nine Months Ended September 30, 2000 to Third
Quarter and Nine Months Ended September 30, 1999
Sales. Sales for the third quarter of 2000 were $295.4 million, an increase
of 19.4%, or $47.9 million, from third quarter 1999 sales of $247.5 million.
Sales for the nine months ended September 30, 2000 were $879.6 million, an
increase of 23.8%, or $169.1 million, from sales of $710.5 million for the
same period of 1999. Such growth resulted from increased volume in both North
America and Europe.
Gross Profit and Operating Income. As a percentage of sales, gross profit
increased to 41.4% for the third quarter of 2000 from 39.0% for the third
quarter of 1999 and increased to 41.3% for the nine months ended September 30,
2000 from 39.5% for the same period of 1999. Operating income as a percentage
of sales increased to 21.7% for the third quarter of 2000 from 18.8% for the
third quarter of 1999 and increased to 21.3% for the nine months ended
September 30, 2000 from 18.1% for the same period of 1999. Both gross profit
and operating income in 2000 benefited from increased volume, the Company's
continued focus on cost control and the ability to correct certain
manufacturing inefficiencies at the Company's Toronto, Canada facility that
resulted in part from implementation issues associated with the transition to
a new manufacturing system in 1999.
Although selling, general and administrative expenses increased in terms of
dollars for the third quarter and nine months ended September 30, 2000
compared to the same periods of 1999, such expenses decreased as a percentage
of sales. The increases of $8.0 million and $23.7 million for the third
quarter and nine months, respectively, were due primarily to incremental
employee costs related to higher sales and profit levels in addition to
increased expenses related to sales, marketing and technology initiatives. As
a percentage of sales, the Company's selling, general and administrative
expenses decreased to 19.7% for the third quarter of 2000 from 20.3% for the
third quarter of 1999 and decreased to 19.9% for the nine months ended
September 30, 2000 from 21.3% for the same period of 1999.
Interest Expense. In connection with the merger that was consummated on
November 4, 1999, which is discussed in Note 2 to the condensed consolidated
financial statements, the Company incurred $533.0 million of debt under a new
senior credit agreement with higher interest rates than those under the credit
agreement replaced thereby. Such debt resulted in significantly higher
outstanding debt balances during the third quarter and nine months ended
September 30, 2000 compared to the same periods of 1999. The higher debt
balances were the principal cause of the $6.9 million and $22.7 million
increases in interest expense in the third quarter and nine months of 2000,
respectively, compared to the same periods of 1999.
Recapitalization Expense. During the third quarter and nine months ended
September 30, 1999, the Company incurred $0.5 million and $3.5 million,
respectively, of expense relating to the recapitalization of the Company that
occurred upon consummation of the merger on November 4, 1999.
Income Tax Expense. The Company's effective tax rate for the third quarter
and nine months ended September 30, 2000 was 40.3% and 40.4%, respectively,
compared to 40.8% and 42.0% for the third quarter and nine months ended
September 30, 1999, respectively. The decreases in the Company's effective
tax rate for the third quarter and nine months were primarily a result of
recapitalization expense recorded in 1999 that was not deductible for income
tax purposes. The changes in the effective tax rate for the third quarter and
nine months have also been impacted by the increase in and mix of pretax
income and the varying effective tax rates attributable to the countries in
which the Company operates.
8
<PAGE>
Liquidity and Capital Resources
During the nine months ended September 30, 2000, the Company generated cash
flow from operations of $159.3 million. Cash provided by operations resulted
primarily from earnings before depreciation and amortization in addition to
positive cash flow from working capital. The cash flow from operations was
applied to the funding of $11.9 million in capital expenditures and the
repayment of $145.9 million of bank debt.
As of September 30, 2000, the Company had an aggregate of $285.1 million
available for borrowing under its U.S. and European revolving credit
facilities. The Company believes that existing cash balances and internally
generated cash flows, together with borrowings available under its revolving
credit facilities, will be sufficient to fund normal working capital needs,
capital spending requirements and debt service requirements for at least the
next twelve months. The Company's debt instruments contain certain covenants
that, among other things, limit the Company's ability to incur additional
indebtedness, pay dividends and purchase Company stock as well as require the
Company to maintain certain financial ratios.
Statement Regarding Forward-Looking Disclosure
Certain portions of this Form 10-Q, including "Management's Discussion and
Analysis of Financial Condition and Results of Operations," contain various
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that
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. Although the Company believes the expectations reflected
in these forward-looking statements are based upon reasonable assumptions, no
assurance can be given that Knoll will attain these expectations or that any
deviations will not be material. Readers of this Form 10-Q are cautioned not
to unduly rely on any 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; the Company's
indebtedness, which requires a significant 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; risks
associated with conducting business via the Internet and the Company's ability
to react appropriately and in a timely fashion to changing technologies and
business models; the Company's dependence on key personnel; the ability of the
Company to maintain its relationships with its dealers; the Company's reliance
on its patents and other intellectual property; environmental laws and
regulations, including those that may be enacted in the future, that affect
the ownership and operation of the Company's manufacturing plants; risks
relating to potential labor disruptions; fluctuations in foreign currency
exchange rates; possible risks relating to latent year 2000 issues that may
arise, which could impair the Company's operations if not resolved successfully
or on time; 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. Except as otherwise required by the
federal securities laws, the Company disclaims any obligation or undertaking to
disseminate any updates or revisions to any forward-looking statement contained
in this Form 10-Q to reflect any change in its expectations with regard thereto
or any change in events, conditions or circumstances on which any such
statement is based.
9
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk
-------------------------------------------------------------------
During the normal course of business, the Company is routinely subjected to
market risk associated with interest rate movements and foreign currency
exchange rate movements. Interest rate risk arises from the Company's debt
obligations and related interest rate collar agreements. Foreign currency
exchange rate risk arises from the Company's foreign operations and purchases
of inventory from foreign suppliers.
With the exception of the Company's variable rate debt obligations and interest
rate collar agreements, there have been no material changes in the carrying
amounts or fair values of the Company's financial instruments or its exposure
to market risk since December 31, 1999. Regarding its variable rate debt, the
Company had $356.3 million of such debt outstanding at September 30, 2000,
which is a decrease of $145.9 million from December 31, 1999. The fair value
of this debt continues to approximate its carrying amount. As disclosed in
the Company's annual report on Form 10-K for the year ended December 31, 1999,
the Company entered into three interest rate collar agreements in January 2000.
These agreements, which will expire in February 2003, have an aggregate
notional principal amount of $135.0 million and weighted average maximum and
minimum rates of 10.00% and 5.64%, respectively. The fair value of the
Company's interest rate collar agreements was not material as of September 30,
2000.
10
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PART II -- OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
--------------------------------------------------
Restrictions on Dividends
The indenture relating to the Company's 10.875% Senior Subordinated Notes due
2006 and the credit agreement governing the Company's credit facilities limit
the Company's ability to pay dividends to its stockholders. The Company has
never paid dividends on its common stock but reserves the right to do so in
the future. Any future determination to pay dividends will depend on the
Company's results of operations, financial condition, capital requirements,
contractual restrictions and other factors deemed relevant by the Board of
Directors.
Recent Sales of Unregistered Securities
Options to purchase 5,000 shares of Knoll common stock were granted to an
employee of the Company on August 8, 2000. These options were granted at an
exercise price of $28.00, will vest in installments over four years (30% on
the first vesting date, 20% on each of the second and third vesting dates and
30% on the fourth vesting date) and may be exercised pursuant to the terms of
the related stock option agreement. The Company did not receive any
consideration for such grant. This grant was exempt from registration under
the Securities Act of 1933 as not involving the sale of a security.
Options to purchase 40,000 shares of Knoll common stock were granted to
certain employees of the Company on October 30, 2000. These options were
granted at an exercise price of $28.00, will vest in installments over four
years (30% on the first vesting date, 20% on each of the second and third
vesting dates and 30% on the fourth vesting date) and may be exercised
pursuant to the terms of the related stock option agreements. The Company did
not receive any consideration for such grants. These grants were exempt from
registration under the Securities Act of 1933 as not involving the sale of a
security.
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
a. Exhibits:
27 Financial Data Schedule.
b. Current Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the three months
ended September 30, 2000.
11
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SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KNOLL, INC.
Date: November 13, 2000 By: /s/ Burton B. Staniar
------------------------------
Burton B. Staniar
Chairman of the Board
Date: November 13, 2000 By: /s/ Barry L. McCabe
------------------------------
Barry L. McCabe
Senior Vice President,
Treasurer and Controller
(Chief Accounting Officer)
12
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EXHIBIT INDEX
-------------
Exhibit
Number Description Page
--------- ----------------------------------------------------- --------
27 Financial Data Schedule.
13
