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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 August 9, 2000, there were 23,264,260 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 June 30, 2000
and December 31, 1999...................................... 3
Condensed Consolidated Statements of Operations for the
three months and six months ended June 30, 2000 and 1999... 4
Condensed Consolidated Statements of Cash Flows for the
six months ended June 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>
June 30, 2000 December 31, 1999
--------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......... $ 12,194 $ 10,785
Restricted cash.................... -- 7,776
Customer receivables, net.......... 153,807 167,767
Inventories........................ 85,276 82,738
Deferred income taxes.............. 23,083 22,440
Prepaid and other current assets... 3,938 7,720
-------- --------
Total current assets........... 278,298 299,226
Property, plant and equipment.......... 285,659 279,972
Accumulated depreciation............... (108,448) (95,331)
-------- --------
Property, plant and
equipment, net............... 177,211 184,641
Intangible assets...................... 280,558 281,730
Accumulated amortization............... (30,824) (26,773)
-------- --------
Intangible assets, net......... 249,734 254,957
Other noncurrent assets................ 3,316 3,482
-------- --------
Total Assets................... $708,559 $742,306
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current maturities of long-term
debt............................. $ 26,282 $ 17,500
Accounts payable................... 82,048 72,914
Income taxes payable............... 5,556 3,483
Other current liabilities.......... 95,446 101,242
-------- --------
Total current liabilities...... 209,332 195,139
Long-term debt......................... 484,811 592,876
Deferred income taxes.................. 22,013 18,956
Other noncurrent liabilities........... 29,924 29,529
-------- --------
Total liabilities.............. 746,080 836,500
-------- --------
Stockholders' deficit:
Common stock, $0.01 par value;
100,000,000 shares authorized;
23,274,679 shares issued and
outstanding (net of 6,800
treasury shares) in 2000 and
23,289,898 shares issued and
outstanding (net of 1,000
treasury shares) in 1999......... 233 233
Additional paid-in-capital......... 4,011 4,173
Unearned stock grant compensation.. (297) (433)
Retained deficit................... (31,244) (91,328)
Accumulated other comprehensive
loss............................. (10,224) (6,839)
-------- --------
Total stockholders' deficit.... (37,521) (94,194)
-------- --------
Total Liabilities and
Stockholders' Deficit........ $708,559 $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 Six Months Ended
June 30, June 30,
---------------------- ----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Sales...................... $315,374 $253,726 $584,208 $462,936
Cost of sales.............. 182,937 151,528 343,588 279,191
-------- -------- -------- --------
Gross profit............... 132,437 102,198 240,620 183,745
Selling, general and
administrative expenses.. 61,753 55,902 116,970 101,315
-------- -------- -------- --------
Operating income........... 70,684 46,296 123,650 82,430
Interest expense........... 11,718 4,157 24,195 8,379
Recapitalization expense... -- 3,000 -- 3,000
Other income (expense),
net...................... 1,126 (539) 1,562 (937)
-------- -------- -------- --------
Income before income tax
expense.................. 60,092 38,600 101,017 70,114
Income tax expense......... 24,174 16,796 40,933 29,916
-------- -------- -------- --------
Net income................. $ 35,918 $ 21,804 $ 60,084 $ 40,198
======== ======== ======== ========
</TABLE>
See accompanying notes.
4
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KNOLL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------
2000 1999
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income..................................... $ 60,084 $ 40,198
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization............ 18,024 17,649
Recapitalization expense................. -- 3,000
Other noncash items...................... 118 1,298
Changes in assets and liabilities:
Customer receivables................. 12,539 1,453
Inventories.......................... (3,438) (2,887)
Accounts payable..................... 10,256 (1,594)
Current and deferred income taxes.... 8,553 (4,664)
Other current assets and
liabilities........................ 7,002 (16,500)
Other noncurrent assets and
liabilities........................ (3,135) 2,952
-------- --------
Cash provided by operating activities.......... 110,003 40,905
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures........................... (8,119) (9,320)
Proceeds from sale of assets................... 92 91
-------- --------
Cash used in investing activities.............. (8,027) (9,229)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of revolving credit facility, net.... (91,718) (5,000)
Repayment of long-term debt.................... (7,500) --
Net proceeds from issuance of stock............ -- 946
Purchase of common stock....................... (162) (28,675)
Payment of recapitalization costs.............. (230) --
-------- --------
Cash used in financing activities.............. (99,610) (32,729)
-------- --------
Effect of exchange rate changes on cash and
cash equivalents............................. (957) (563)
-------- --------
Increase (decrease) in cash and cash
equivalents.................................. 1,409 (1,616)
Cash and cash equivalents at beginning
of period.................................... 10,785 17,465
-------- --------
Cash and cash equivalents at end of period..... $ 12,194 $ 15,849
======== ========
</TABLE>
See accompanying notes.
5
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KNOLL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 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 six months ended June 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 ended June 30, 1999, the Company incurred $3.0 million
of expense relating to the recapitalization of the Company that occurred upon
consummation of the merger. 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>
June 30, 2000 December 31, 1999
--------------- -----------------
(In Thousands)
<S> <C> <C>
Raw materials.................. $51,501 $49,795
Work in process................ 8,438 10,313
Finished goods................. 25,337 22,630
------- -------
Inventories.................... $85,276 $82,738
======= =======
</TABLE>
6
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4. Comprehensive Income
For the three months ended June 30, 2000 and 1999, total comprehensive income
amounted to $33.7 million and $22.7 million, respectively. Total comprehensive
income for the six months ended June 30, 2000 and 1999 was $56.7 million and
$41.2 million, respectively.
5. Accounting Pronouncement Pending Implementation
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 Second Quarter and Six Months Ended June 30, 2000 to Second
Quarter and Six Months Ended June 30, 1999
Sales. Sales for the second quarter of 2000 were $315.4 million, an increase
of 24.3%, or $61.7 million, from second quarter 1999 sales of $253.7 million.
Sales for the six months ended June 30, 2000 were $584.2 million, an increase
of 26.2%, or $121.3 million, from sales of $462.9 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 42.0% for the second quarter of 2000 from 40.3% for the second
quarter of 1999 and increased to 41.2% for the six months ended June 30, 2000
from 39.7% for the same period of 1999. Operating income as a percentage of
sales increased to 22.4% for the second quarter of 2000 from 18.2% for the
second quarter of 1999 and increased to 21.2% for the six months ended June 30,
2000 from 17.8% for the same period of 1999. Both gross profit and operating
income in 2000 benefited from increased volume and the Company's continued
focus on cost control.
Although selling, general and administrative expenses increased in terms of
dollars for the second quarter and six months ended June 30, 2000 compared to
the same periods of 1999, such expenses decreased as a percentage of sales.
The increases of $5.9 million and $15.7 million for the second quarter and six
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 19.6% for
the second quarter of 2000 from 22.0% for the second quarter of 1999 and
decreased to 20.0% for the six months ended June 30, 2000 from 21.9% 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 second quarter and six months ended
June 30, 2000 compared to the same periods of 1999. The higher debt balances
were the principal cause of the $7.6 million and $15.8 million increases in
interest expense in the second quarter and six months of 2000, respectively,
compared to the same periods of 1999.
Recapitalization Expense. During the second quarter of 1999, the Company
incurred $3.0 million 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 second quarter
and six months ended June 30, 2000 was 40.2% and 40.5%, respectively, compared
to 43.5% and 42.7% for the second quarter and six months ended June 30, 1999,
respectively. The decreases in the Company's effective tax rate for the second
quarter and six 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 second quarter and six 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
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Liquidity and Capital Resources
During the six months ended June 30, 2000, the Company generated cash flow
from operations of $110.0 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 $8.1 million in capital expenditures and the
repayment of $99.2 million of bank debt.
As of June 30, 2000, the Company had an aggregate of $246.4 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.
Backlog
The Company's backlog of unfilled orders was $169.9 million at June 30, 2000
and $172.3 million at June 30, 1999. 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 not experienced any significant disruptions in mission critical
information technology and non-information technology systems and believes that
its systems have thus far responded successfully to the year 2000 date change.
The Company is not aware of any material problems resulting from year 2000
issues, either with its internal systems or the systems or products of its
vendors, dealers and other third parties. The Company intends to continue to
monitor its mission critical information systems throughout the year 2000 and
address any significant latent year 2000 issues that may arise. If the Company
or its vendors, dealers or other third parties are unable to successfully
address significant latent year 2000 issues that may arise, a material adverse
effect on the Company's operations could result. At this time, the Company is
not aware of any such issues.
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
9
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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.
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 $403.0 million of such debt outstanding at June 30, 2000, which is
a decrease of $99.2 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 June 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, and it does not currently
contemplate paying dividends in the near 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 125,000 shares of Knoll common stock were granted to
certain employees of the Company during the three months ended June 30, 2000
pursuant to the Knoll, Inc. 1999 Stock Incentive Plan. 5,000 of such options
were granted on April 26, 2000, and the remaining 120,000 options were granted
on June 6, 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 June 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: August 11, 2000 By: /s/ Burton B. Staniar
------------------------------
Burton B. Staniar
Chairman of the Board
Date: August 11, 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
