<PAGE>
FILED PURSUANT TO RULE 424(b)(3)
REGISTRATION NO. 333-2972
PROSPECTUS
KNOLL, INC.
Offer to Exchange $1,000 in principal amount of 10-7/8% Senior Subordinated
Notes Due 2006 for each $1,000 in principal amount of outstanding 10-7/8% Senior
Subordinated Notes Due 2006 that were issued and sold in a transaction exempt
from registration under the Securities Act of 1933, as amended.
Knoll, Inc., a Delaware corporation (the "Company"), hereby offers to
exchange (the "Exchange Offer") $165,000,000 in aggregate principal amount of
its 10-7/8% Senior Subordinated Notes Due 2006 (the "Exchange Notes") for
$165,000,000 in aggregate principal amount of its outstanding 10-7/8% Senior
Subordinated Notes Due 2006 that were issued and sold in a transaction exempt
from registration under the Securities Act of 1933, as amended (the "Senior
Notes" and, together with the Exchange Notes, the "Notes").
The terms of the Exchange Notes are the same in all respects (including
principal amount, interest rate, maturity and ranking) as the terms of the
Senior Notes for which they may be exchanged pursuant to the Exchange Offer,
except that the Exchange Notes have been registered under the Securities Act and
therefore will not be subject to certain restrictions on transfer applicable to
the Senior Notes and will not be entitled to registration rights. The Exchange
Notes will be issued under the indenture governing the Senior Notes. The
Exchange Notes will be, and the Senior Notes are, unsecured obligations of the
Company and will be subordinated in right of payment to all existing and future
Senior Indebtedness (as defined herein) of the Company. At December 31, 1995, on
a pro forma basis after giving effect to the Acquisition, the Equity
Contribution (as defined herein), the offering of the Senior Notes and the other
financing transactions and the application of the net proceeds therefrom, the
Company had $260 million of outstanding Senior Indebtedness. For a complete
description of the terms of the Exchange Notes, including provisions relating to
the ability of the Company to create indebtedness that is senior to or pari
passu with the Exchange Notes, see "Description of the Notes." There will be no
cash proceeds to the Company from the Exchange Offer.
The Exchange Notes will bear interest from and including their respective
dates of issuance. Holders whose Senior Notes are accepted for exchange will
receive accrued interest thereon to, but not including, the date of issuance of
the Exchange Notes, such interest to be payable with the first interest payment
on the Exchange Notes, but will not receive any payment in respect of interest
on the Senior Notes accrued after the issuance of the Exchange Notes.
The Senior Notes were originally issued and sold on February 29, 1996 in a
transaction not registered under the Securities Act of 1933, as amended (the
"Securities Act"), in reliance upon the exemption provided in Section 4(2) of
the Securities Act and Rule 144A of the Securities Act (the "Initial Offering").
Accordingly, the Senior Notes may not be reoffered, resold or otherwise pledged,
hypothecated or transferred in the United States unless so registered or unless
an applicable exemption from the registration requirements of the Securities Act
is available. Based upon its view of interpretations provided to third parties
by the Staff (the "Staff") of the
(Cover continued on following page)
---------------
SEE "RISK FACTORS" ON P. 19 FOR A DESCRIPTION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY PARTICIPANTS IN THE EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is June 13, 1996
<PAGE>
Securities and Exchange Commission (the "Commission"), the Company believes that
the Exchange Notes issued pursuant to the Exchange Offer in exchange for the
Senior Notes may be offered for resale, resold and otherwise transferred by
holders thereof (other than any holder which is (i) an "affiliate" of the
Company within the meaning of Rule 405 under the Securities Act (an
"Affiliate"), (ii) a broker-dealer who acquired Senior Notes directly from the
Company or (iii) a broker-dealer who acquired Senior Notes as a result of market
making or other trading activities) without compliance with the registration and
prospectus delivery provisions of the Securities Act provided that such Exchange
Notes are acquired in the ordinary course of such holders' business and such
holders are not engaged in, and do not intend to engage in, and have no
arrangement or understanding with any person to participate in, a distribution
of such Exchange Notes. Each broker-dealer who receives Exchange Notes for its
own account pursuant to the Exchange Offer must acknowledge that it will deliver
a prospectus in connection with any resale of such Exchange Notes. The Letter of
Transmittal that is filed as an exhibit to the Registration Statement of which
this Prospectus is a part (the "Letter of Transmittal") states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
Broker-dealers who acquired Senior Notes as a result of market making or other
trading activities may use this Prospectus, as supplemented or amended, in
connection with resales of the Exchange Notes. The Company has agreed that it
will make this Prospectus available to any broker-dealer for use in connection
with any such resale for a period of no more than 60 days after this
Registration Statement is declared effective by the Commission unless the
Company has been notified in writing on or prior to the 60th day by any
broker-dealer that it has received Exchange Notes as to which it will be
required to deliver a prospectus upon resale. Any holder that cannot rely upon
such interpretations must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction. See "Plan of Distribution."
The Senior Notes and the Exchange Notes constitute new issues of
securities with no established public trading market. Any Senior Notes not
tendered and accepted in the Exchange Offer will remain outstanding. To the
extent that Senior Notes are tendered and accepted in the Exchange Offer, a
holder's ability to sell untendered, and tendered but unaccepted, Senior Notes
could be adversely affected. Following consummation of the Exchange Offer, the
holders of Senior Notes will continue to be subject to the existing restrictions
on transfer thereof and the Company will have no further obligation to such
holders to provide for the registration under the Securities Act of the Senior
Notes except under certain limited circumstances. (See "Senior Notes
Registration Rights.") No assurance can be given as to the liquidity of the
trading market for either the Senior Notes or the Exchange Notes.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Senior Notes being tendered or accepted for exchange. The Exchange
Offer will expire at 5:00 p.m., New York City time, on July 15, 1996,
unless extended (the "Expiration Date"). The date of acceptance for exchange of
the Senior Notes (the "Exchange Date") will be the first business day following
the Expiration Date, upon surrender of the Senior Notes. Senior Notes tendered
pursuant to the Exchange Offer may be withdrawn at any time prior to the
Expiration Date; otherwise such tenders are irrevocable.
UNTIL SEPTEMBER 12, 1996 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
2
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (the "Registration Statement," which term shall include all amendments,
exhibits, annexes and schedules thereto) pursuant to the Securities Act, and the
rules and regulations promulgated thereunder, covering the Exchange Notes being
offered hereby. This Prospectus does not contain all the information set forth
in the Registration Statement, certain parts of which are omitted in accordance
with the rules and regulations of the Commission. Statements made in this
Prospectus as to the contents of any contract, agreement or other document
referred to in the Registration Statement are not necessarily complete. With
respect to each such contract, agreement or other document filed as an exhibit
to the Registration Statement, reference is made to the exhibit for a more
complete description of the matter involved, and each such statement shall be
deemed qualified in its entirety by such reference.
Upon consummation of the Exchange Offer, the Company will become subject
to the periodic reporting and other informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Periodic reports, proxy
statements and other information filed by the Company with the Commission may be
inspected at the public reference facilities maintained by the Commission at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, or at its regional
offices located at Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661 and Seven World Trade Center, Suite 1300, New
York, New York 10048. Copies of such material can be obtained from the Company
upon request.
The Company is required by the terms of (i) the indenture dated as of
February 29, 1996 by and among T.K.G. Acquisition Sub, Inc., The Knoll Group,
Inc., Knoll North America, Inc., the Guarantors (as defined herein) and IBJ
Schroder Bank & Trust Company, as trustee (the "Trustee"), under which the
Senior Notes were issued, and under which the Exchange Notes are to be issued
(the "Indenture"), and (ii) the Supplemental Indenture No. 1 dated as of
February 29, 1996 by and among the Company, as successor to T.K.G. Acquisition
Sub. Inc., the Guarantors and the Trustee, to furnish the Trustee and the
holders of the Notes with annual reports containing consolidated financial
statements audited by its independent certified public accountants, with
quarterly reports containing unaudited condensed consolidated financial
statements for each of the first three quarters of each fiscal year and with
current reports on Form 8-K.
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE EXCHANGE OFFER COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL,
OR A SOLICITATION OF AN OFFER TO BUY, THE EXCHANGE NOTES IN ANY JURISDICTION
WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATIONS THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF.
FOR NEW HAMPSHIRE RESIDENTS ONLY
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A
LICENSE HAS BEEN FILED UNDER CHAPTER 421-B OF THE NEW HAMPSHIRE UNIFORM
SECURITIES ACT WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS
EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE
CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT ANY DOCUMENT FILED UNDER
RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT, NOR THE
FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACTION
MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE MERITS OR
QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY OR
TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY PROSPECTIVE
PURCHASER, CUSTOMER, OR CLIENT ANY REPRESENTATION INCONSISTENT WITH THE
PROVISIONS OF THIS PARAGRAPH.
3
<PAGE>
Knoll(R), The Knoll Group(R), KnollStudio(R), KnollExtra(R), Reff(TM),
Bulldog(R), Calibre(R), Equity(R), ParachuteTM, Spinneybeck(R), Good Design is
Good Business(TM), Propeller(TM) and SoHo(TM) are trademarks of the Company.
4
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
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<S> <C>
SUMMARY...........................................................................................................8
RISK FACTORS.....................................................................................................19
Consequences of Exchange and Failure to Exchange..............................................................19
Significant Leverage and Debt Service.........................................................................19
Subordination of Notes........................................................................................20
Restrictions Imposed by Terms of the Company's Indebtedness...................................................20
Guarantees....................................................................................................20
Fraudulent Conveyance Statutes................................................................................21
Effects of the Company's Turnaround Program; Sustainability of Cost Savings...................................21
Dependence on Key Personnel...................................................................................21
Competition...................................................................................................22
Short-Term Dealership Commitments.............................................................................22
Control of the Company........................................................................................22
Potential Inability to Fund a Change of Control Offer.........................................................22
Absence of Public Market......................................................................................22
Compliance with Environmental Regulations.....................................................................23
Exchange Rate Fluctuation.....................................................................................23
Economic Factors Affecting the Industry.......................................................................23
USE OF PROCEEDS..................................................................................................23
THE EXCHANGE OFFER...............................................................................................24
Purpose of the Exchange Offer.................................................................................24
Terms of the Exchange.........................................................................................24
Expiration Date; Extensions; Termination; Amendments..........................................................25
How to Tender.................................................................................................26
Terms and Conditions of the Letter of Transmittal.............................................................27
Withdrawal Rights.............................................................................................28
Acceptance of Senior Notes for Exchange; Delivery of Exchange Notes...........................................28
Conditions to the Exchange Offer..............................................................................29
Exchange Agent................................................................................................29
Solicitation of Tenders; Expenses.............................................................................30
Appraisal Rights..............................................................................................30
Federal Income Tax Consequences...............................................................................30
Other.........................................................................................................30
THE ACQUISITION..................................................................................................32
General.......................................................................................................32
Financing of the Acquisition..................................................................................32
PRO FORMA CAPITALIZATION.........................................................................................34
SELECTED FINANCIAL INFORMATION...................................................................................35
UNAUDITED PRO FORMA FINANCIAL INFORMATION........................................................................38
THE KNOLL GROUP UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET...................................................39
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET....................................................................40
THE KNOLL GROUP UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT................................................41
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT.......................................................41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.....................................................................................42
General.......................................................................................................42
Overview......................................................................................................42
Results of Operations.........................................................................................43
Liquidity and Capital Resources...............................................................................46
Inflation.....................................................................................................46
Backlog.......................................................................................................46
BUSINESS.........................................................................................................47
General.......................................................................................................47
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
History and Prior Management..................................................................................47
Turnaround Program............................................................................................48
Industry Overview.............................................................................................49
Business Strategy.............................................................................................50
Products......................................................................................................52
Product Design and Development................................................................................55
Sales, Marketing and Distribution.............................................................................56
Manufacturing and Operations..................................................................................57
Raw Materials and Suppliers...................................................................................57
Competition...................................................................................................57
Patents and Trademarks........................................................................................58
Environmental Matters.........................................................................................58
Employees.....................................................................................................58
Properties....................................................................................................59
Legal Proceedings.............................................................................................59
MANAGEMENT.......................................................................................................60
Directors and Executive Officers of the Company...............................................................60
Summary Compensation Table....................................................................................62
Pension Plans.................................................................................................62
Employment Agreements.........................................................................................63
Stock Incentive Plan..........................................................................................63
Westinghouse Long-Term Incentive Plan and Other Employee Arrangements.........................................64
Compensation Committee Interlocks and Insider Participation...................................................64
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................................................................64
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...................................................65
DESCRIPTION OF NOTES..........................................................................................66
General.......................................................................................................66
Principal, Maturity and Interest..............................................................................66
Note Guarantees...............................................................................................66
Subordination.................................................................................................67
Subordination of Note Guarantees; Release of Domestic Subsidiary Guarantees...................................68
Optional Redemption...........................................................................................69
Mandatory Redemption..........................................................................................69
Repurchase at the Option of Holders...........................................................................70
Certain Covenants.............................................................................................72
No Personal Liability of Directors, Officers, Employees and Stockholders......................................79
Legal Defeasance and Covenant Defeasance......................................................................79
Transfer and Exchange.........................................................................................80
Amendment, Supplement and Waiver..............................................................................80
Payments for Consent..........................................................................................81
Concerning the Trustee........................................................................................81
Additional Information........................................................................................81
Book-entry; Delivery and Form.................................................................................81
Certain Definitions...........................................................................................83
SENIOR NOTES REGISTRATION RIGHTS.................................................................................96
PLAN OF DISTRIBUTION.............................................................................................97
DESCRIPTION OF CREDIT FACILITIES.................................................................................98
General.......................................................................................................98
Security......................................................................................................98
Interest......................................................................................................99
Maturity......................................................................................................99
Certain Fees..................................................................................................99
Conditions to Closing and Extensions of Credit................................................................99
Covenants.....................................................................................................99
Events of Default............................................................................................100
LEGAL MATTERS...................................................................................................100
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
EXPERTS.........................................................................................................100
INDEX TO FINANCIAL STATEMENTS...................................................................................F-1
INFORMATION NOT REQUIRED IN PROSPECTUS.........................................................................II-1
SIGNATURES.....................................................................................................II-5
POWER OF ATTORNEY..............................................................................................II-5
</TABLE>
7
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SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial data, including
the notes thereto, appearing elsewhere in this Prospectus. Unless the context
otherwise requires, the term the "Company" refers to Knoll, Inc. and its
subsidiaries as a combined entity following the completion of the Acquisition,
the Merger and related transactions. In this Prospectus, the pro forma financial
information as of and for the year ended December 31, 1995 and for the three
month period ended March 31, 1996 has been prepared to reflect the events
described in "Unaudited Pro Forma Financial Information" included elsewhere in
this Prospectus as if such events had occurred at the beginning of 1995 and
1996, respectively, which events include the Acquisition, the Merger, the Equity
Contribution, the Offering and the Credit Facilities (together with the
Offering, the "Financing Transactions"). Except as otherwise indicated, the
market and Company market share data contained in this Prospectus are based on
information from The Business and Institutional Furniture Manufacturer's
Association ("BIFMA"), the United States office furniture trade association. The
Company believes that such data are considered within the industry to be the
best available and generally are indicative of the Company's relative market
share and competitive position. Unless otherwise indicated, all market share
data are based on sales by dollar amount.
The Company
The Company is a leading manufacturer of office furniture, focusing on the
middle to high end segments of the contract furniture market. With a design
heritage spanning nearly 50 years, a history of award-winning products and 30
designs in the permanent collection of the Museum of Modern Art in New York, the
Company enjoys a reputation for superior design and quality among architects and
designers, facilities managers and dealers. The Company offers innovative,
functional and flexible furniture designs providing customers with workspace
solutions that enhance the quality and image of the workplace and aid worker
productivity. In early 1994, a new management team initiated a turnaround
program at the Company. As a result, from 1993 to 1995 the Company's sales
increased from $508.4 million to $620.9 million, net income increased from
$(41.3) million to $29.3 million, EBITDA (as defined herein) increased from
$(9.7) million to $79.6 million and U.S. market share increased from
approximately 5.3% to approximately 5.7%.1
The Company offers a broad range of office furniture and accessories in five
basic categories: (i) office systems (typically modular and moveable workspaces,
with integrated work surfaces, space dividers and lighting), comprised mainly of
the Reff, Morrison and Equity product lines; (ii) seating, including the Sapper,
Bulldog, Parachute and SoHo chairs; (iii) storage solutions and filing cabinets,
including the Calibre collection; (iv) desks and casegoods, including bookcases
and credenzas; and (v) tables. The Company's KnollStudio collection features its
signature design classics, including high image side chairs, sofas, desks and
tables for both office and home use. The Company also carries its own lines of
textiles and leather products and a line of desk, office and computer
accessories, which complement its furniture products and are also sold to other
manufacturers.
Recent History and Turnaround Program
Westinghouse Electric Corporation ("Westinghouse") created Knoll (as defined
herein) by acquiring The Shaw-Walker Company, Reff Inc. and Knoll International,
Inc. in 1989 and 1990 and combining them with Westinghouse Furniture Systems, a
division of Westinghouse. By joining these four separate companies under the
Knoll name, Westinghouse created a business with a full line of office
furnishings, a reputation for high quality and superior design, and an
internationally-recognized brand name.
Knoll's former management failed or was unsuccessful, however, in taking
what the Company believes to have been the necessary actions to reduce costs and
integrate the four companies, leaving Knoll with four
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1 EBITDA is defined as net income (loss) before interest expense, income taxes,
and depreciation and amortization expense. The Company believes that EBITDA is
a frequently used measure that provides additional information for determining
its ability to meet debt service requirements. EBITDA does not represent, and
should not be considered as an alternative to, net income ($(41.3) million for
1993 and $29.3 million for 1995) or cash flow from operations ($(24.7) million
for 1993 and $51.9 million for 1995) as determined by generally accepted
accounting principles.
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8
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essentially separate operations with independent factories and administrative
support staffs. In addition, the Company believes that former management's steps
to rationalize the Company's U.S. dealer network and consolidate its sales
forces may have impaired Knoll's distribution and sales capabilities. A decline
in revenues in the U.S. office furniture industry in 1991, the first such
decline in 16 years, followed in 1992 by Westinghouse's announcement of its
intention to sell Knoll, exacerbated the difficult operating environment within
Knoll. As a result, from 1991 to 1993, sales under the prior management team
decreased from $671.0 million to $508.4 million and net income decreased from
$14.5 million to $(41.3) million.
In December 1993, Westinghouse appointed Burton B. Staniar, then Chairman
and Chief Executive Officer of Westinghouse Broadcasting, as Knoll's Chairman
and Chief Executive Officer, and ended its efforts to sell Knoll. Mr. Staniar
promptly recruited John H. Lynch as Vice Chairman, and together they initiated a
major turnaround and restructuring program. Messrs. Staniar and Lynch installed
a senior management team which significantly reduced operating costs, instituted
product line management, focused on sales growth, improved the competitive
position of its products, introduced management incentives and restructured the
European business. As part of the turnaround, the Company took a restructuring
charge of $29.2 million which resulted in a widening of the Company's operating
loss and net loss for 1994.
Management's turnaround efforts have had a dramatic impact on the Company's
competitive position and financial performance. Since mid-1994, virtually every
product line has been modified and improved, and the lead time required to bring
new and enhanced products to market has been decreased significantly through the
use of computer-aided design techniques and other process improvements; customer
service, as measured by on-time shipments, improved to 95% in the fourth quarter
of 1995 from 87% in the third quarter of 1995; average lead times between order
entry and delivery of products to customers have been reduced from seven weeks
to five weeks; and over 550 salaried and non-salaried positions have been
eliminated. In addition, in 1995 the Company eliminated approximately $25
million in variable operating costs and approximately $45 million in fixed
operating costs and general expenses, including approximately $22 million of
variable and fixed costs in Europe. The Company has outperformed the U.S. office
furniture industry as a whole over the past two years in terms of percentage
sales growth, and it has achieved seven consecutive quarters of year-over-year
operating income improvement (excluding restructuring charges). From 1993 to
1995, the Company's sales increased from $508.4 million to $620.9 million; gross
margin increased from 28.4% to 34.7%; and EBITDA as a percentage of sales
increased from (1.9)% to 12.8%.
Business Strategy
The Company's operating strategy is to continue and improve upon its
turnaround initiatives, as management believes that significant cost savings and
revenue enhancement opportunities remain. As a result, management will continue
to (i) analyze and control fixed and variable expenses; (ii) emphasize the role
of product line management in product positioning, profitability and
development; and (iii) recognize and reward achievement of corporate financial
goals. In addition, management intends to:
* Enhance existing product offerings. The Company will continue its
efforts to improve and expand upon existing product offerings to respond
to market trends and individual customer needs. Based on market research
and collaboration with customers, the Company adapts its products to
respond to ergonomic concerns, unique space and use constraints, and
technological and wire management needs in a manner designed to preserve
the value of its customers' investments in the Company's furniture. The
Company believes that it has an industry-leading ability to respond
quickly to special customer requests for product enhancements, which
management considers to be particularly important in the middle to high
end of the contract furniture market where the demand for custom
solutions is greatest.
* Commission works by prominent designers. By utilizing its long-standing
designer relationships, the Company plans to reemphasize its practice of
commissioning the design of selected high-image furniture pieces by
world-renowned independent designers. Management believes that this
practice is a key element of the Company's strong relationship with the
architect and design community, and that, when
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9
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combined with a broad-based product development effort, it will continue
to enhance Knoll's high-end brand image.
* Expand into new markets. The Company plans to introduce new products in
order to expand into markets where its market share is relatively low and
where superior design can be a competitive advantage. Through extensive
market research and direct customer feedback, the Company has targeted
underpenetrated segments of the office systems market, such as team work
spaces, and product categories, such as tables, seating and textiles, for
which it is developing products in conjunction with independent
designers. The Company will continue to emphasize superior design,
functionality and innovation and believes that its expansion effort will
benefit from its significant installed base and strong brand name.
* Expand dealer marketing programs. While a significant share of the sales
volume of the Company's dealers is in the corporate customer segment, the
opportunity exists to leverage its dealers' estimated 900-person sales
force to capture a larger share of the business with medium- to
smaller-sized companies and independent business purchasers. In order to
stimulate sales in this segment, the Company has introduced its QuickShip
and PrimeTime! marketing programs which make it easier and more
profitable for the dealers' sales forces to market the Company's products
to such customers. Sales via the QuickShip and PrimeTime! programs,
initiated in 1992 and 1993, respectively, accounted for approximately $43
million of the Company's total sales in 1995.
* Improve information systems. In conjunction with a national information
systems provider, the Company is developing an integrated, comprehensive
management information system for its North American operations.
Management believes that a new, corporate-wide information system will
enable the Company to improve its ability to respond quickly and
accurately to product orders of all sizes, improve manufacturing
processes, reduce delivery times, improve shipping accuracy and reduce
customer service costs.
* Improve manufacturing processes. Management believes that it can improve
manufacturing processes and large-order management capabilities by
changing plant layout, enhancing outsourcing strategy, implementing the
new information system and investing in additional automated
manufacturing equipment.
Management believes that total capital expenditures, which include the capital
costs of these initiatives, will be $22 million in 1996 and $25 million in 1997.
Competitive Position Within the Industry
The Company believes that its competitive position in the industry is based
upon a reputation for superior product design and quality. This reputation,
combined with the Company's approximately 200 U.S. dealers and what management
believes to be one of the most effective sales forces in the industry, provides
the Company with a strong marketing position and has enabled the Company to
capture in 1995 an estimated 10.7% share of the U.S. office systems market. The
Company historically has targeted this segment, which typically accounts for the
end-user's largest furniture purchase and which represented an estimated 35% of
the U.S. office furniture industry sales in 1995. The Company estimates that it
has sold in excess of $4 billion in office furniture systems, which management
believes generates more than $150 million of annual sales through repeat and
add-on orders. Management believes that the Company commands a premium price for
many of its products as a result of their superior design and quality.
The Company generated 83% of its 1995 sales in the U.S. office furniture
market, which had estimated sales of $9.4 billion in 1995, 10% in Europe, 5% in
Canada and 2% in other international markets. The dollar value of U.S. office
furniture industry shipments has increased in each of the past 25 years, with
the exception of 1975 and 1991, and has grown at compound annual rates of
approximately 4.0% and 7.3% over the respective ten-year and three-year periods
ended December 31, 1995. BIFMA has estimated that 1995 industry sales growth in
the United
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10
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States was 7.8%. The Company expects the middle- to high-end segments of the
industry to grow faster than the industry as a whole, as it believes that within
those segments there will be greater demand for furniture that addresses
changing technology requirements and ergonomic concerns.
In addition to factors such as white collar employment levels, corporate
cash flow and non-residential construction, which reflect certain macroeconomic
conditions, management believes that industry growth is significantly influenced
by: (i) continued corporate reengineering, restructuring and reorganizing; (ii)
new office technology and the resulting necessity for improved wire and data
management; (iii) heightened sensitivity to concerns about ergonomic standards
and demand for improved designs to increase worker productivity; and (iv)
corporate relocations.
The Company has approximately 3,900 employees worldwide, the majority of
whom are located in the United States and Canada. The Company operates six
manufacturing plants, which are located in East Greenville, Pennsylvania; Grand
Rapids and Muskegon, Michigan; Toronto, Canada; and Graffignana and Foligno,
Italy. The Company's principal executive offices are located at 1235 Water
Street, East Greenville, Pennsylvania 18041, and its telephone number is (215)
679-4171.
The Acquisition
On February 29, 1996, pursuant to a Stock Purchase Agreement (the "Stock
Purchase Agreement") dated as of December 20, 1995 by and between Westinghouse
and T.K.G. Acquisition Corp. ("TKG"), T.K.G. Acquisition Sub, Inc. ("TKG Sub"),
a wholly owned subsidiary of TKG, acquired all of the outstanding capital stock
of The Knoll Group, Inc. and related entities ("Knoll") for a purchase price of
$561,745,407, subject to certain post-closing adjustments, as described below
(the "Acquisition"). TKG and TKG Sub were formed by Warburg, Pincus Ventures,
L.P. ("Warburg") and certain members of the Company's management in order to
consummate the Acquisition.
The Senior Notes were issued by TKG Sub (the "Initial Offering") and the
proceeds thereof were used, together with (i) the net proceeds of a sale of
$160,000,000 of the capital stock of TKG (the "Equity Contribution") and (ii)
borrowings of $260,000,000 under senior credit facilities (the "Credit
Facilities," and together with the Equity Contribution and the Initial Offering,
the "Financing Transactions"), to finance the Acquisition and approximately $20
million of related fees and expenses. Immediately following the Acquisition, TKG
Sub and The Knoll Group, Inc. merged (the "Merger") with and into Knoll North
America, Inc., the principal U.S. operating company of The Knoll Group, Inc.,
which changed its name to "Knoll, Inc." As a result of the Acquisition and the
Merger, the Senior Notes and the Credit Facilities became obligations of Knoll,
Inc., and Knoll, Inc., as successor to TKG Sub, owns the Knoll business.
- --------------------------------------------------------------------------------
11
<PAGE>
- --------------------------------------------------------------------------------
Ownership Structure
[The following table was presented as a organization chart
in the printed document]
- --------------- ------------------ ----------
Warburg, Pincus NationsBanc Management
Ventures, L.P. Investment Corp.
- --------------- ------------------ ----------
91.9% 5% 3.1%
------------------------------
T.K.G. Acquisition Corp.
(Delaware)
------------------------------
100%
------------------------------
Knoll, Inc.
(Delaware)
------------------------------
100% 100% 34.63% 100%
- --------------------- ----------------- ------------------- --------------------
TKG Canada, Inc. Spinneybeck Knoll International Knoll Overseas, Inc.
(New Brunswick, Can.) Enterprises, Inc. Japan, Ltd. (Delaware)
(New York) (Japan)
- --------------------- ----------------- ------------------- --------------------
100% 100% *
- ------------------- ------------------- -----------------
Knoll North America Spinneybeck Limited Non-U.S.
Corp. (Ontario, Canada) Subsidiaries
(Ontario, Canada)
- ------------------- ------------------- -----------------
[LEGEND] |___| =Guarantors of Notes
* Knoll Overseas, Inc. owns a 9% interest in a Columbian joint venture and
100% of Knoll Europe B.V., the European holding company which, directly or
indirectly, holds 100% of the Company's European subsidaries.
- --------------------------------------------------------------------------------
12
<PAGE>
- --------------------------------------------------------------------------------
The Exchange Offer
The Exchange Offer......... The Company is offering to exchange up to
$165,000,000 aggregate principal amount of 10-7/8%
Senior Subordinated Notes Due 2006 (the "Exchange
Notes") for up to $165,000,000 aggregate principal
amount of its outstanding 10-7/8% Senior
Subordinated Notes Due 2006 that were issued and
sold on February 29, 1996 in a transaction exempt
from registration under the Securities Act (the
"Senior Notes"). The terms of the Exchange Notes
are substantially identical in all respects
(including principal amount, interest rate,
maturity and ranking) to the terms of the Senior
Notes for which they may be exchanged pursuant to
the Exchange Offer, except that the Exchange Notes
have been registered under the Securities Act and
therefore will not be subject to certain
restrictions on transfer except as provided herein
(see "The Exchange Offer --Terms of the Exchange"
and "--Terms and Conditions of the Letter of
Transmittal") and will not be entitled to
registration rights.
Exchange Notes issued pursuant to the Exchange
Offer in exchange for the Senior Notes may be
offered for resale, resold and otherwise
transferred by holders thereof (other than any
holder which is (i) an Affiliate of the issuer,
(ii) a broker-dealer who acquired Senior Notes
directly from the Issuer or (iii) broker-dealers
who acquired Senior Notes as a result of market
making or other trading activities) without
compliance with the registration and prospectus
delivery provisions of the Securities Act provided
that such Exchange Notes are acquired in the
ordinary course of such holders' business and such
holders are not engaged in, and do not intend to
engage in, and have no arrangement or understanding
with any person to participate in, a distribution
of such Exchange Notes. Each broker-dealer that
receives Exchange Notes for its own account in
exchange for Senior Notes, where such Senior Notes
were acquired by such broker-dealer as a result of
market-making activities or other trading
activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such
Exchange Notes. See "Plan of Distribution."
Minimum Condition.......... The Exchange Offer is not conditioned upon any
minimum aggregate principal amount of Senior Notes
being tendered for exchange.
Expiration Date............ The Exchange Offer will expire at 5:00 p.m., New
York City time, on July 15, 1996 unless extended
(the "Expiration Date").
Exchange Date.............. The first date of acceptance for exchange for the
Senior Notes will be the first business day
following the Expiration Date.
Conditions to the
Exchange Offer ............ The obligation of the Company to consummate the
Exchange Offer is subject to certain conditions.
See "The Exchange Offer--Conditions to the Exchange
Offer." The Company reserves the right to terminate
or amend the Exchange Offer at any time prior to
the Expiration Date upon the occurrence of any such
condition.
Withdrawal Rights.......... Tenders may be withdrawn at any time prior to the
Expiration Date. Any Senior Notes not accepted for
any reason will be returned without expense to the
tendering holders thereof as promptly as
practicable after the expiration or termination of
the Exchange Offer.
Procedures for Tendering
Senior Notes............ See "The Exchange Offer--How to Tender."
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13
<PAGE>
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Federal Income Tax
Consequences............ The Company has been advised by its counsel,
Willkie Farr & Gallagher, that the exchange of
Senior Notes for Exchange Notes by holders should
not be a taxable exchange for federal income tax
purposes, and holders will not recognize any
taxable gain or loss or any interest income as a
result of such exchange.
Effect on Holders of
Senior Notes............ As a result of the making of this Exchange Offer,
and upon acceptance for exchange of all validly
tendered Senior Notes pursuant to the terms of this
Exchange Offer, the Company will have fulfilled a
covenant contained in the terms of the Senior Notes
and the Registration Rights Agreement (the
"Registration Rights Agreement") dated as of
February 29, 1996 among the Company, the Guarantors
(as defined below) and NationsBanc Capital Markets,
Inc., as initial purchaser (the "Initial
Purchaser") and, accordingly, the holders of the
Senior Notes will have no further registration or
other rights under the Registration Rights
Agreement, except that under certain limited
circumstances, the Company shall file with the
Commission a shelf registration statement on an
appropriate form under Rule 415 under the
Securities Act (the "Shelf Registration
Statement"). See "Senior Notes Registration
Rights." Holders of the Senior Notes who do not
tender their Senior Notes in the Exchange Offer
will continue to hold such Senior Notes and will be
entitled to all the rights and limitations
applicable thereto under the Indenture. All
untendered, and tendered but unaccepted, Senior
Notes will continue to be subject to the
restrictions on transfer provided for in the Senior
Notes and the Indenture. To the extent that Senior
Notes are tendered and accepted in the Exchange
Offer, the trading market, if any, for the Senior
Notes could be adversely affected. See "Risk
Factors--Consequences of Failure to Exchange."
Terms of the Notes
The Exchange Offer applies to $165,000,000 aggregate principal amount of the
Senior Notes. The form and terms of the Exchange Notes are the same as the form
and terms of the Senior Notes except that the Exchange Notes have been
registered under the Securities Act and, therefore, will not bear legends
restricting the transfer thereof. The Exchange Notes will evidence the same debt
as the Senior Notes and will be entitled to the benefits of the Indenture. See
"Description of the Notes."
Notes Offered.............. $165 million aggregate principal amount of 10-7/8%
Senior Subordinated Notes Due 2006 of the Company.
Maturity Date.............. March 15, 2006.
Interest Payment Dates..... March 15 and September 15, commencing
September 15, 1996.
Note Guarantees............ The Senior Notes are, and the Exchange Notes will
be, unconditionally guaranteed on a senior
subordinated basis by TKG under the Parent
Guarantee and by each of the existing and future
Domestic Subsidiary Guarantors under the Domestic
Subsidiary Guarantees (all as defined herein). Each
of the Note Guarantees will be a guarantee of
payment and not of collection. See "Description of
the Notes--Note Guarantees."
- --------------------------------------------------------------------------------
14
<PAGE>
Subordination.............. The Senior Notes are, and the Exchange Notes will
be, general unsecured obligations of the Company,
subordinated in right of payment to all existing
and future Senior Indebtedness of the Company,
which will include borrowings under the Credit
Facilities. At December 31, 1995, on a pro forma
basis after giving effect to the Acquisition, the
Equity Contribution, the Financing Transactions and
the application of the net proceeds therefrom, the
Company had $260 million of outstanding Senior
Indebtedness, which would rank senior in right of
payment to the Notes. The Parent Guarantee and the
Domestic Subsidiary Guarantees (the "Note
Guarantees") will be subordinated in right of
payment to all existing and future Senior
Indebtedness of the Company. See "Description of
the Notes--Subordination of Note Guarantees;
Release of Domestic Subsidiary Guarantees."
Optional Redemption........ On or after March 15, 2001, the Company may redeem
the Notes, in whole or in part, at the redemption
prices set forth herein, plus accrued and unpaid
interest, if any, to the date of redemption.
Notwithstanding the foregoing, any time on or
before March 15, 1999, the Company may redeem up to
35% of the original aggregate principal amount of
the Notes with the net proceeds of a Public Equity
Offering (as defined herein) at a redemption price
equal to 110% of the principal amount thereof, plus
accrued and unpaid interest thereon, if any, to the
date of redemption, provided that at least 65% of
the original aggregate principal amount of the
Notes remains outstanding immediately after such
redemption.
Mandatory Redemption....... None, except at maturity on March 15, 2006.
Change of Control.......... Upon a Change of Control (as defined herein), the
Company will be required to make an offer to
repurchase all outstanding Notes at 101% of the
principal amount thereof plus accrued and unpaid
interest thereon to the date of repurchase.
Covenants.................. The Indenture restricts, among other things, the
Company's ability to incur additional indebtedness,
pay dividends or make certain other restricted
payments, incur liens to secure pari passu or
subordinated indebtedness, engage in any sale and
leaseback transaction, sell stock of subsidiaries,
apply net proceeds from certain asset sales, merge
or consolidate with any other person, sell, assign,
transfer, lease, convey or otherwise dispose of
substantially all of the assets of the Company,
enter into certain transactions with affiliates, or
incur indebtedness that is subordinate in right of
payment to any Senior Indebtedness and senior in
right of payment to the Notes. The Indenture
permits, under certain circumstances, the Company's
subsidiaries to be deemed Unrestricted Subsidiaries
(as defined herein) and thus not subject to the
restrictions of the Indenture. See "Description of
Notes--Certain Covenants."
Risk Factors
Holders of Senior Notes should carefully consider the matters set forth
under the caption "Risk Factors" prior to making a decision with respect to the
Exchange Offer. See "Risk Factors."
- --------------------------------------------------------------------------------
15
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
The following table presents (i) summary selected historical consolidated
financial information of Knoll, as of the dates and for the periods indicated,
and (ii) summary pro forma consolidated financial information of the Company, as
of the dates and for the periods indicated, after giving effect to the events
described in the notes below and in "Unaudited Pro Forma Financial Data." The
historical consolidated financial information for each of the two years in the
period ended December 31, 1995 has been derived from Knoll's financial
statements, which have been audited by Price Waterhouse LLP. The historical
consolidated financial information for the two and one month periods ended
February 29, 1996 and March 31, 1996 respectively has been derived from
unaudited financial statements and, in the opinion of management, includes all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of financial position and results of operations and cash flows as
of the dates and for the periods indicated. The summary pro forma information
does not purport to represent what the Company's results actually would have
been if such events had occurred at the dates indicated, nor does such
information purport to project the results of the Company for any future period.
The summary financial information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Unaudited Pro Forma Financial Information" and the Financial
Statements and the Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
KNOLL HISTORICAL THE COMPANY
----------------------------------------- ---------------------------------------------------
Two Months Pro Forma(1)
Year Ended Ended One Month Three Months
December 31, February 29 Ended March 31, Pro Forma(1) Ended March 31,
-------------------- -------------- --------------- ------------ ----------------
1994 1995 1996 1996 1995 1996
---------- ---------- ---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total sales................... $562,869 $620,892 $ 90,232 $ 48,080 $620,892 $138,312
Cost of goods sold............ 397,995 405,740 57,568 30,964 406,190 88,532
Provision for restructuring... 29,180 -- -- -- -- --
Selling, general and 150,863 124,420 19,085 9,825 129,993 29,876
administrative expenses(2)(3).
Depreciation and amortization. 28,484 25,999 4,317 2,753 31,726 8,240
Allocated corporate
expenses(3) .................. 5,881 9,528 921 -- 4,000 --
Westinghouse long term
incentive compensation........ -- -- 47,900 -- -- --
-------- -------- -------- -------- -------- --------
Total costs and expenses.. 612,403 565,687 129,791 43,542 571,909 126,648
-------- -------- -------- -------- -------- --------
Income (loss) from operations. (49,534) 55,205 (39,559) 4,538 48,983 11,664
Other income (expense), net... 699 (1,597) (296) (49) (1,597) (345)
Interest expense.............. 3,225 1,430 340 3,602 40,945 10,680
-------- -------- -------- -------- -------- --------
Income (loss) before income
taxes......................... (52,060) 52,178 (40,195) 887 6,441 639
Income taxes (benefit)........ 7,713 22,846 (16,107) 438 2,505 442
Cumulative effect of changes
in accounting principles...... -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Net income (loss)......... $(59,773) $ 29,332 $(24,088) $ 449 $ 3,736 $ 197
======== ======== ======== ======== ======== ========
OTHER DATA:
Ratio of earnings to fixed
charges(4)................... -- 11.8x -- 1.2x 1.1x 1.1x
EBITDA(5)..................... $(20,351) $ 79,607 $ (35,538) $ 7,242 $ 79,112 $19,559
Adjusted EBITDA (6)........... -- -- -- -- 81,722 $ 20,239
Capital expenditures.......... 20,157 19,334 2,296 447 19,334 2,245
Cost of goods sold as a % of
total sales................... 70.7% 65.3% 63.8% 64.4% 65.4% 64.0%
Selling, general and
administrative expenses as a %
of total sales................ 26.8% 20.0% 21.2% 20.4% 20.9% 21.6%
EBITDA as a % of total sales(7) (3.6)% 12.8% (39.4)% 15.1% 12.7% 14.1%
Ratio of long-term debt to
Adjusted EBITDA(8)............ -- -- -- -- 5.1x --
Ratio of Adjusted EBITDA to
cash interest expense(9)...... -- -- -- -- 2.2x 2.0x
Cash provided by (used in:)
Operating activities (3.8) 51.9 (54.0) 9.0 -- --
Investing activities (19.8) (19.0) (2.3) (0.4) -- --
Financing activities 28.3 (36.8) 57.0 (0.0) -- --
</TABLE>
16
<PAGE>
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<TABLE>
<CAPTION>
At December 31,
-------------------------------------
The
Company
Knoll Historical -------------------
---------------- Pro
Forma(1) March 31,
Balance Sheet Data: 1991 1992 1993 1994 1995 1995 1996
- ------------------ -------- -------- -------- -------- -------- -------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Working capital............ $ 62,124 $ 67,063 $ 41,933 $ 22,898 $ 82,698 $ 95,621 $100,936
Total assets............... 787,936 726,469 691,043 705,316 656,710 705,217 694,780
Total long-term debt,
including current portion. 13,276 16,623 12,215 12,451 3,538 425,000 426,228
Total liabilities.......... 224,504 186,347 205,104 247,310 176,259 545,217 533,952
Shareholders' equity....... 563,432 540,122 485,939 458,006 480,451 160,000 160,828
</TABLE>
(1) Reflects summary pro forma financial information of the Company derived
from the Financial Statements and Notes thereto included elsewhere in this
Prospectus, adjusted for the completion of the Acquisition and the
application of the net proceeds of the Financing Transactions and the
Equity Contribution.
(2) The pro forma amount reflects the reclassification of allocated corporate
expenses. Management estimates that the replacement cost for services
formerly provided by Westinghouse would, on a stand-alone basis, include
benefit expense of $4,573 (including $1,963 in cash expense), in 1995, and
$794 (including $341 in cash expense), in the three-month period ended
March 31, 1996, related to the adoption of various independent benefit
plans comparable to Westinghouse benefit plans, and operating expenses of
$1,000 in 1995 and $172 in the three-month period ended March 31, 1996
(cost of services required to replace those specific activities formerly
provided to the Company by Westinghouse, including audit, tax, general
ledger, accounts receivable, human resources, legal, insurance and data
communications).
(3) Charges for certain services used by Knoll that Westinghouse provides to
its business units, including information systems support, certain
accounting functions such as transaction processing, legal, environmental
affairs, and human resources consulting and compliance support, are
included in sales, general and administrative expenses. In addition,
Westinghouse allocates a portion of its corporate expenses to its business
units. These expenses are reflected as allocated corporate expenses and
include Westinghouse executive management and corporate overhead; corporate
legal, environmental, audit, treasury and tax services; pension charges
related to corporate functions; and other corporate support and executive
costs. Such allocations are not necessarily indicative of actual or future
costs. See Note 3 of Notes to Financial Statements. The summary pro forma
financial information reflects the reclassification of the allocated
corporate expenses from Westinghouse. The remaining balance in allocated
corporate expense in 1995 represents the incentive compensation accrued for
Knoll executives under Westinghouse long-term incentive plans.
(4) For the purpose of computing this ratio, earnings consists of earnings
before income taxes and fixed charges. Fixed charges consists of interest
expense plus the portion of rental expense under operating leases that has
been deemed by the Company to be representative of the interest factor
(approximately one third of rental expense). Earnings in 1992, 1993 and
1994 and for the two-month period ended February 29, 1996 were insufficient
to cover fixed charges by $34,011, $36,159, $45,196 and $39,291,
respectively.
(5) EBITDA is defined as net income (loss) before interest expense, income
taxes, and depreciation and amortization expense. EBITDA does not represent
and should not be considered as an alternative to net income or cash flow
from operations as determined by generally accepted accounting principles,
and EBITDA does not necessarily indicate whether cash flow will be
sufficient for items such as working capital, capital expenditures,
research and development or acquisitions or to react to changes in the
Company's industry or to economic changes generally. The Company believes
that EBITDA is a frequently used measure that provides additional
information for determining its ability to meet debt service requirements
and that it is one of the indicators upon which the Company and its lenders
assess the Company's financial performance and its capacity to service
debt.
(6) Adjusted EBITDA excludes the non-cash portion of pension and post-
retirement benefit expense of $2,610 in 1995 and $680 in the three-month
period ended March 31, 1996. The Company believes that Adjusted EBITDA
provides additional information for determining its ability to meet debt
service requirements. Adjusted EBITDA does not necessarily indicate whether
cash flow will be sufficient for cash requirements for items such as
working capital, capital expenditures, research and development or
acquisitions or to react to changes in the Company's industry or economic
changes generally.
(7) For the purposes of computing this ratio, EBITDA is divided by total sales.
The Company believes that EBITDA as a percentage of total sales is a
frequently used measure that provides additional information for
determining its ability to meet debt service requirements. This ratio does
not necessarily indicate whether cash flow will be sufficient for cash
requirements for items such as working capital, capital expenditures,
research and development or acquisitions or to react to changes in the
Company's industry or economic changes generally.
(8) For the purposes of computing this ratio, Debt is divided by Adjusted
EBITDA. Debt is defined as the sum of the pro forma Borrowings under the
Credit Facilities and Notes. The Company believes that the ratio of
long-
- --------------------------------------------------------------------------------
17
<PAGE>
- --------------------------------------------------------------------------------
term debt to EBITDA is a frequently used measure that provides additional
information for determining its ability to meet debt service requirements.
This ratio does not necessarily indicate whether cash flow will be
sufficient for cash requirements for items such as working capital, capital
expenditures, research and development or acquisitions or to react to
changes in the Company's industry or economic changes generally.
(9) Cash interest expense excludes the amortization of deferred financing
charges of $1,830 in 1995 and $450 in the three-month period ended March
31, 1996.
- --------------------------------------------------------------------------------
18
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, before
tendering their Senior Notes for the Exchange Notes offered hereby, holders of
Senior Notes should consider carefully the following factors, which (other than
"Consequences of Exchange and Failure to Exchange" and "Absence of Public
Market") are generally applicable to the Senior Notes as well as the Exchange
Notes:
Consequences of Exchange and Failure to Exchange
Holders of Senior Notes who do not exchange their Senior Notes for Exchange
Notes pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of such Senior Notes as set forth in the legend thereon
as a consequence of the issuance of the Senior Notes pursuant to exemptions
from, or in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws. In general, the Senior
Notes may not be offered or sold, unless registered under the Securities Act and
applicable state securities laws, or pursuant to an exemption therefrom. Except
under certain limited circumstances, the Company does not intend to register the
Senior Notes under the Securities Act. In addition, any holder of Senior Notes
who tenders in the Exchange Offer for the purpose of participating in a
distribution of the Exchange Notes may be deemed to have received restricted
securities and, if so, will be required to comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction. To the extent Senior Notes are tendered and accepted in the
Exchange Offer, the trading market, if any, for the Senior Notes could be
adversely affected. See "The Exchange Offer" and "Senior Notes Registration
Rights."
Significant Leverage and Debt Service
At December 31, 1995, on a pro forma basis, after giving effect to the
Acquisition and the Financing Transactions, the Company would have had total
consolidated outstanding debt of $425 million. In addition, subject to the
restrictions in the Indenture, the Company and its subsidiaries may incur
additional indebtedness (including additional Senior Indebtedness) from time to
time to finance acquisitions or capital expenditures or for other purposes. At
the Acquisition Closing, the Company had borrowing capacity of up to $50 million
under the Revolving Credit Facility.
The high level of the Company's indebtedness could have important
consequences to holders of the Notes, including: (i) a substantial portion of
the Company's cash flow from operations must be dedicated to debt service and
will not be available for other purposes; (ii) the Company's ability to obtain
additional debt financing in the future for working capital, capital
expenditures, research and development or acquisitions may be limited; and (iii)
the Company's level of indebtedness could limit its flexibility in reacting to
changes in its industry or economic conditions generally. For a discussion of
the fixed payments due under the Company's indebtedness and the amount of
indebtedness with floating interest rates, see "Description of Credit
Facilities--Interest" and "--Maturity."
The Company's ability to pay interest on the Notes and to satisfy its other
debt obligations will depend upon its future operating performance, which will
be affected by prevailing economic conditions and financial, business and other
factors, certain of which are beyond its control, as well as the availability of
borrowings under the Revolving Credit Facility or successor facilities. The
Company will require substantial amounts of cash to fund scheduled payments of
principal and interest on its outstanding indebtedness as well as future capital
expenditures and any increased working capital requirements. If the Company is
unable to meet its cash requirements out of cash flow from operations and its
currently available borrowings, there can be no assurance that it will be able
to obtain alternative financing or that it will be permitted to do so under the
terms of the Credit Facilities or other debt instruments. In the absence of such
financing, the Company's ability to respond to changing business and economic
conditions, to fund capital expenditures, to make future acquisitions or to
absorb adverse operating results may be adversely affected. In addition, actions
taken by the lending banks under the Credit Facilities are not subject to
approval by the holders of the Notes.
19
<PAGE>
Subordination of Notes
The Senior Notes are, and the Exchange Notes will be, subordinated in right
of payment to all existing and future Senior Indebtedness of the Company,
including borrowings under the Credit Facilities. In the event of bankruptcy,
liquidation or reorganization of the Company, the assets of the Company will be
available to pay obligations on the Notes only after all Senior Indebtedness has
been paid in full, and there may not be sufficient assets remaining to pay
amounts due on any or all of the Notes then outstanding. In addition, under
certain circumstances the Company will not be able to make payment of its
obligations under the Notes in the event of a default under certain Senior
Indebtedness. The aggregate principal amount of Senior Indebtedness of the
Company, as of December 31, 1995, would have been $260 million on a pro forma
basis after giving effect to the Acquisition, the Equity Contribution and the
Financing Transactions and the application of the net proceeds therefrom.
Additional Senior Indebtedness may be incurred by the Company from time to time,
subject to certain restrictions. See "Description of Notes--Subordination."
Restrictions Imposed by Terms of the Company's Indebtedness
The Indenture will restrict, among other things, the ability of the Company
and its subsidiaries, as the case may be, to incur additional indebtedness, pay
dividends or make certain other restricted payments, incur liens to secure pari
passu or subordinated indebtedness, engage in any sale and leaseback
transactions, sell stock of subsidiaries, apply net proceeds from certain asset
sales, merge or consolidate with any other person, sell, assign, transfer,
lease, convey or otherwise dispose of substantially all of the assets of the
Company, enter into certain transactions with affiliates, or incur indebtedness
that is subordinate in right of payment to any Senior Indebtedness and senior in
right of payment to the Notes. In addition, the Credit Facilities will contain
other and more restrictive covenants and will prohibit the Company from
prepaying other indebtedness (including the Notes). See "Description of
Notes--Certain Covenants" and "Description of Credit Facilities." As a result of
these covenants, the ability of the Company to respond to changing business and
economic conditions and to secure additional financing, if needed, may be
significantly restricted, and the Company may be prevented from engaging in
transactions that might otherwise be considered beneficial to the Company.
The Credit Facilities also will require the Company to maintain specified
financial ratios and satisfy certain financial condition tests. The Company's
ability to meet those financial ratios and tests can be affected by events
beyond its control, and there can be no assurance that the Company will meet
those tests. A breach of any of these covenants could result in a default under
the Credit Facilities. Upon the occurrence of an event of default under the
Credit Facilities, the lenders could elect to declare all amounts outstanding
under the Credit Facilities, together with any accrued interest, to be
immediately due and payable. If the Company were unable to repay those amounts,
the lenders could proceed against the collateral granted to them to secure that
indebtedness. In addition, the occurrence of an event of default and payment of
principal or interest under the Credit Facilities or acceleration of the Credit
Facilities will cause an event of default under the Indenture. If the Credit
Facilities or payments to the holders of the Notes were to be accelerated, there
can be no assurance that the assets of the Company would be sufficient to repay
in full such indebtedness and the other indebtedness of the Company.
Substantially all the assets and 100% of the capital stock of the Company and
its domestic subsidiaries and 65% of the capital stock of certain foreign
subsidiaries of the Company will be pledged as security under the Credit
Facilities. See "Description of Credit Facilities." Such assets and capital
stock may also be pledged in the future to secure other Indebtedness.
Guarantees
The Senior Notes are, and the Exchange Notes will be, guaranteed by TKG and
all existing and future directly or indirectly wholly owned domestic
subsidiaries of the Company (the "Guarantors") on a senior subordinated and
unsecured basis. These guarantees will be subordinated in right of payment to
the prior payment in full in cash of all Senior Indebtedness of the Company. The
Guarantors other than TKG are Knoll Overseas, Inc., a holding company for the
entities that principally conduct the Company's European business, and
Spinneybeck Enterprises, Inc., which directly and through a Canadian subsidiary
operates the Company's leather business. If the Company is
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unable to satisfy all or any portion of its obligations with respect to the
Notes, it is unlikely that the Guarantors will be able to pay all or any such
portion of such unsatisfied obligations.
Fraudulent Conveyance Statutes
Under applicable provisions of federal bankruptcy law or comparable
provisions of state fraudulent transfer law, if, among other things, the Company
or any of the Guarantors, at the time it incurred its indebtedness in connection
with the Offering (including a Note Guarantee), (i)(a) was or is insolvent or
rendered insolvent by reason of such incurrence or (b) was or is engaged in a
business or transaction for which the assets remaining with the Company or such
Guarantor constituted unreasonably small capital or (c) intended or intends to
incur, or believed or believes that it would incur, debts beyond its ability to
pay such debts as they mature, and (ii) the Company or such Guarantor received
or receives less than reasonably equivalent value or fair consideration for the
incurrence of such indebtedness, the Notes (and the Note Guarantee), and any
pledge or other security interest securing such indebtedness, could be voided,
or claims in respect of the Notes or the Note Guarantee could be subordinated to
all other debts of the Company or such Guarantor, as the case may be. The
voiding or subordination of any of such pledges or other security interests or
of any of such indebtedness could result in an Event of Default (as defined in
the Indenture) with respect to such indebtedness, which could result in
acceleration thereof. In addition, the payment of interest and principal by the
Company pursuant to the Notes or the payment of amounts by a Guarantor pursuant
to a Note Guarantee could be voided and be required to be returned to the person
making such payment, or to a fund for the benefit of the creditors of the
Company or such Guarantor, as the case may be.
The measures of insolvency for purposes of the foregoing considerations will
vary depending upon the law applied in any proceeding with respect to the
foregoing. Generally, however, the Company or a Guarantor would be considered
insolvent if (i) the sum of its debts, including contingent liabilities, were
greater than the fair saleable value of all of its assets at a fair valuation or
if the present fair saleable value of its assets were less than the amount that
would be required to pay its probable liability on its existing debts, including
contingent liabilities, as they become absolute and mature or (ii) it could not
pay its debts as they become due.
Effects of the Company's Turnaround Program; Sustainability of Cost Savings
As a part of the Company's turnaround program, management is currently in
the process of restructuring the Company in an attempt to achieve an integrated
and more efficient operation. This restructuring, which includes, among other
things, upgrading and standardizing its management information systems and
manufacturing processes, is not yet complete. Management estimates that total
capital expenditures, which includes the capital costs of these initiatives,
will be $22 million 1996 and $25 million in 1997. It believes that cash flow
from operations will be adequate to finance these projected expenditures. In
addition, at the Acquisition Closing, the Company had borrowing capacity of $50
million under the Revolving Credit Facility. However, the Company's ability to
meet debt service and other operating requirements will depend upon its future
operating performance, which will be affected by prevailing economic conditions
and financial, business and other factors, certain of which are beyond its
control. There can be no assurance that the Company will be able to complete its
restructuring program successfully or, if the restructuring program is
completed, to sustain any cost savings or other improvements that may be
achieved. See "Business--Turnaround Program" and "--Business Strategy."
Dependence on Key Personnel
The Company's operations are dependent, to a significant extent, on the
continued efforts of Burton B. Staniar, its Chairman and Chief Executive
Officer, and John H. Lynch, its Vice Chairman and President, with whom it has
entered into one-year employment agreements containing non-competition
provisions. If either of these people becomes unable to continue in his present
role, or if the Company is unable to attract and retain other skilled employees,
the Company's business could be adversely affected. See "Management."
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Competition
The office furniture industry is highly competitive, with a large number of
competitors offering similar products. Many of the Company's competitors,
especially those in North America, are large and have significant financial,
marketing, manufacturing and technical resources. The Company's most significant
competitors in its primary markets are Steelcase, Inc. ("Steelcase"), Herman
Miller, Inc. ("Herman Miller"), Haworth, Inc. ("Haworth") and HON Industries,
Inc. ("HON"). These competitors have a substantial volume of furniture installed
at businesses throughout the country, providing a continual source of demand for
further products and enhancements. Moreover, the products of these competitors
have strong acceptance in the marketplace, and such competitors could develop
alternative product designs which would give them a competitive advantage over
the Company. The Company also faces significant price competition from its
competitors and may encounter competition from new market entrants. Although the
Company believes that it has been able to compete successfully in its markets to
date, there can be no assurance that it will be able to continue to do so in the
future. See "Business--Competition."
Short-Term Dealership Commitments
The Company's dealers currently operate primarily under one-year agreements.
Although the Company has not experienced substantial turnover in its
distribution channels in the past except as initiated by Knoll, there can be no
assurance that a significant number of its dealers will not choose to end their
relationships with the Company, or, if dealers choose to do so, that any
replacements in areas covered by such persons will be satisfactory. The loss of
dealers could cause significant difficulties for the Company in marketing and
distributing its products.
Control of the Company
The Company is a wholly owned subsidiary of TKG, which is controlled by
Warburg. Warburg holds approximately 80% voting and economic interest in TKG on
a fully diluted basis. TKG has no business other than holding the stock of the
Company, which is the sole source of TKG's financial resources.
See "Security Ownership of Certain Beneficial Owners and Management."
Potential Inability to Fund a Change of Control Offer
Upon a Change of Control as defined in the Indenture, the Company will be
required to offer to repurchase all outstanding Notes at 101% of the principal
amount thereof plus accrued and unpaid interest to the date of repurchase. Since
100% of the capital stock of the Company has been pledged as security under the
Credit Facilities, a default under the Credit Facilities could trigger a Change
of Control. The source of funds for any such repurchase will be the Company's
available cash or cash generated from operating or other sources, including
borrowings, sales of equity or funds provided by a new controlling person.
However, there can be no assurance that sufficient funds will be available at
the time of any Change of Control to make any required repurchases of Notes
tendered, or that restrictions in the Credit Facilities will allow the Company
to make such required repurchases. Notwithstanding these provisions, the Company
could enter into certain transactions, including certain recapitalizations, that
would not constitute a Change of Control but would increase the amount of debt
outstanding at such time.
Absence of Public Market
There is no existing market for the Exchange Notes, and there can be no
assurance as to (i) the liquidity of any such market that may develop, (ii) the
ability of holders of Exchange Notes to sell their Exchange Notes, or (iii) the
price at which the holders of Exchange Notes would be able to sell their
Exchange Notes. If such a market were to exist, the Exchange Notes could trade
at prices that may be higher or lower than their principal amount or purchase
price, depending on many factors, including prevailing interest rates, the
market for similar notes, and the financial performance of the Company and its
subsidiaries. The Company has been advised by NationsBanc
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Capital Markets, Inc. that it presently intends to make a market in the Exchange
Notes. However, it is not obligated to do so, and any market-making activity
with respect to the Exchange Notes may be discontinued at any time without
notice. In addition, such market-making activity will be subject to the limits
imposed by the Exchange Act. The Company does not intend to apply for listing of
the Exchange Notes on any securities exchange.
Compliance with Environmental Regulations
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 the Comprehensive
Environmental Response Compensation and Liability Act ("CERCLA") for remediation
costs associated with waste disposal sites previously used by the Company.
CERCLA imposes liability without regard to fault or the legality of the
disposal. The Company believes that its exposure in such CERCLA actions is not
material. In addition, under the Stock Purchase Agreement, Westinghouse has
agreed to indemnify the Company for certain costs associated with currently
known CERCLA liabilities. See "Business--Environmental Matters."
Exchange Rate Fluctuation
The Company's foreign sales are conducted in foreign currency. In 1995,
approximately 15% of the Company's revenues and 25% of the Company's expenses
were denominated in currencies other than U.S. dollars. As the Company does not
hedge its foreign currency exposure, to the extent that the Company derives
revenues from its foreign operations, it is vulnerable to the effects of
currency exchange rate fluctuations.
Economic Factors Affecting the Industry
Fluctuations in industry revenues may be driven by a variety of
macroeconomic factors, such as white collar employment levels, corporate cash
flows, or non-residential commercial construction, as well as industry factors
such as corporate reengineering and restructuring, technology demands,
ergonomic, health and safety concerns and corporate relocations. There can be no
assurance that current or future economic or industry trends will not adversely
affect the business of the Company. See "Business--Industry Overview."
USE OF PROCEEDS
There will be no proceeds to the Company from the exchange pursuant to the
Exchange Offer. The net proceeds to TKG Sub from the issuance of the Senior
Notes were approximately $156 million. The net proceeds received by TKG Sub,
together with the net proceeds of the other Financing Transactions, were used to
fund the purchase price of the Acquisition and to pay related fees and expenses.
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THE EXCHANGE OFFER
Purpose of the Exchange Offer
The sole purpose of the Exchange Offer is to fulfill the obligations of the
Company with respect to the Registration Rights Agreement.
The Senior Notes were originally issued and sold on February 29, 1996 (the
"Issue Date"). Such sales were not registered under the Securities Act in
reliance upon the exemption provided by Section 4(2) of the Securities Act and
Rule 144A of the Securities Act. In connection with the sale of the Senior
Notes, the Company agreed to file with the Commission a registration statement
relating to an exchange offer (the "Exchange Offer Registration Statement")
pursuant to which another series of senior notes of the Company covered by such
registration statement and containing the same terms as the Senior Notes, except
as set forth in this Prospectus, would be offered in exchange for Senior Notes
tendered at the option of the holders thereof. In the event that any changes in
law or applicable interpretations of the Staff do not permit the Company to
effect the Exchange Offer, or if for any reason the Exchange Offer Registration
Statement is not declared effective within 115 days following the Issue Date
(unless the Company advises the Initial Purchaser that it is in the process of
resolving comments of the Staff and that it expects those comments to be
resolved within 30 days) or the Exchange Offer is not consummated within 145
days of the Issue Date (unless the Exchange Offer has commenced, in which case
the Exchange Offer is not consummated within 30 days after the date on which the
Exchange Offer was commenced) or in certain other circumstances, the Company
will, at its expense, (i) as promptly as practicable, and in any event on or
prior to 30 days after such filing obligation arises, file with the Commission a
Shelf Registration Statement covering resales of the Senior Notes, (ii) use its
best efforts to cause the Shelf Registration Statement to be declared effective
under the Securities Act as promptly as possible after such filing occurs and
(iii) keep the Shelf Registration Statement effective until three years after
its effective date (or such shorter period that will terminate when all the
Senior Notes covered thereby have been sold pursuant thereto or in certain other
circumstances). The Company will, in the event of the filing of a Shelf
Registration Statement, provide to each Holder of the Senior Notes covered by
the Shelf Registration Statement copies of the prospectus that is a part of the
Shelf Registration Statement, notify each such Holder when the Shelf
Registration Statement for the Senior Notes has become effective and take
certain other actions as are required to permit unrestricted resales of the
Senior Notes. In the event that either (a) the Exchange Offer Registration
Statement is not filed with the Commission on or prior to the 30th calendar day
following the Issue Date, (b) the Exchange Offer Registration Statement is not
declared effective prior to the 115th calendar day following the Issue Date, (c)
the Exchange Offer is not consummated on or prior to the 145th calendar day
following the Issue Date, or (d) a Shelf Registration Statement with respect to
the Senior Notes is not declared effective, the interest rate borne by the Notes
will be increased. See "Senior Notes Registration Rights."
Terms of the Exchange
The Company hereby offers to exchange, upon the terms and subject to the
conditions set forth herein and in the Letter of Transmittal accompanying this
Registration Statement of which this Prospectus is a part (the "Letter of
Transmittal"), $1,000 in principal amount of Exchange Notes for each $1,000 in
principal amount of Senior Notes. The terms of the Exchange Notes are identical
in all respects to the terms of the Senior Notes for which they may be exchanged
pursuant to this Exchange Offer, except that (i) the Exchange Notes will
generally be freely transferable by holders thereof and (ii) the holders of the
Exchange Notes will not be entitled to registration rights under the
Registration Rights Agreement. See "Senior Notes Registration Rights." The
Exchange Notes will evidence the same debt as the Senior Notes and will be
entitled to the benefits of the Indenture. See "Description of the Notes."
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Senior Notes being tendered or accepted for exchange.
Based on its view of interpretations set forth in no-action letters issued
by the Staff to third parties, the Company believes that Exchange Notes issued
pursuant to the Exchange Offer in exchange for the Senior Notes
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may be offered for resale, resold and otherwise transferred by holders thereof
(other than any holder which is (i) an Affiliate of the Company, (ii) a
broker-dealer who acquired Senior Notes directly from the Company or (iii) a
broker-dealer who acquired Senior Notes as a result of market making or other
trading activities) without compliance with the registration and prospectus
delivery provisions of the Securities Act provided that such Exchange Notes are
acquired in the ordinary course of such holders' business, and such holders are
not engaged in, and do not intend to engage in, and have no arrangement or
understanding with any person to participate in, a distribution of such Exchange
Notes. Each broker-dealer who receives Exchange Notes pursuant to the Exchange
Offer must acknowledge that it will deliver a prospectus in connection with any
resale of such Exchange Notes. The Letter of Transmittal states that by so
acknowledging, and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act. Broker-dealers who acquired Senior Notes as a result of market making or
other trading activities may use this Prospectus, as supplemented or amended, in
connection with resales of the Exchange Notes. The Company has agreed that it
will make this Prospectus available to any broker-dealer for use in connection
with any such resale for a period of no more than 60 days after this
Registration Statement is declared effective by the Commission unless the
Company has been notified in writing on or prior to the 60th day by any
broker-dealer that it has received Exchange Notes as to which it will be
required to deliver a prospectus upon resale. Any holder that cannot rely upon
such interpretations must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction. See "Plan of Distribution."
Tendering holders of Senior Notes will not be required to pay brokerage
commissions or fees or, subject to the instructions in the Letter of
Transmittal, transfer taxes with respect to the exchange of the Senior Notes
pursuant to the Exchange Offer.
The Exchange Notes will bear interest from and including their respective
dates of issuance. Holders whose Senior Notes are accepted for exchange will
receive accrued interest thereon to, but not including, the date of issuance of
the Exchange Notes, such interest to be payable with the first interest payment
on the Exchange Notes, but will not receive any payment in respect of interest
on the Senior Notes accrued after the issuance of the Exchange Notes.
Expiration Date; Extensions; Termination; Amendments
The Exchange Offer will expire on the Expiration Date. The term "Expiration
Date" means 5:00 p.m., New York City time, on July 15, 1996 unless the
Company in its sole discretion extends the period during which the Exchange
Offer is open, in which event the term "Expiration Date" means the latest time
and date on which the Exchange Offer, as so extended by the Company, expires.
The Company reserves the right to extend the Exchange Offer at any time and from
time to time prior to the Expiration Date by giving written notice to IBJ
Schroder Bank & Trust Company (the "Exchange Agent") and by timely public
announcement communicated by no later than 5:00 p.m. on the next business day
following the Expiration Date, unless otherwise required by applicable law or
regulation, by making a release to the Dow Jones News Service. During any
extension of the Exchange Offer, all Senior Notes previously tendered pursuant
to the Exchange Offer will remain subject to the Exchange Offer.
The initial Exchange Date will be the first business day following the
Expiration Date. The Company expressly reserves the right to (i) terminate the
Exchange Offer and not accept for exchange any Senior Notes for any reason,
including if any of the events set forth below under "--Conditions to the
Exchange Offer" shall have occurred and shall not have been waived by the
Company and (ii) amend the terms of the Exchange Offer in any manner, whether
before or after any tender of the Senior Notes. If any such termination or
amendment occurs, the Company will notify the Exchange Agent in writing and will
either issue a press release or give written notice to the holders of the Senior
Notes as promptly as practicable. Unless the Company terminates the Exchange
Offer prior to 5:00 p.m., New York City time, on the Expiration Date, the
Company will exchange the Exchange Notes for the Senior Notes on the Exchange
Date.
If the Company waives any material condition to the Exchange Offer, or
amends the Exchange Offer in any other material respect, and if at the time that
notice of such waiver or amendment is first published, sent or given
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to holders of Senior Notes in the manner specified above, the Exchange Offer is
scheduled to expire at any time earlier than the expiration of a period ending
on the fifth business day from, and including, the date that such notice is
first so published, sent or given, then the Exchange Offer will be extended
until the expiration of such period of five business days.
This Prospectus and the related Letter of Transmittal and other relevant
materials will be mailed by the Company to record holders of Senior Notes and
will be furnished to brokers, banks and similar persons whose names, or the
names of whose nominees, appear on the lists of holders for subsequent
transmittal to beneficial owners of Senior Notes.
How to Tender
The tender to the Company of Senior Notes by a holder thereof pursuant to
one of the procedures set forth below will constitute an agreement between such
holder and the Company in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal.
General Procedures. A holder of a Senior Note may tender the same by (i)
properly completing and signing the Letter of Transmittal or a facsimile thereof
(all references in this Prospectus to the Letter of Transmittal shall be deemed
to include a facsimile thereof) and delivering the same, together with the
certificate or certificates representing the Senior Notes being tendered and any
required signature guarantees (or a timely confirmation of a book-entry transfer
(a "Book-Entry Confirmation") pursuant to the procedure described below), to the
Exchange Agent at its address set forth on the back cover of this Prospectus on
or prior to the Expiration Date or (ii) complying with the guaranteed delivery
procedures described below.
If tendered Senior Notes are registered in the name of the signer of the
Letter of Transmittal and the Exchange Notes to be issued in exchange therefor
are to be issued (and any untendered Senior Notes are to be reissued) in the
name of the registered holder, the signature of such signer need not be
guaranteed. In any other case, the tendered Senior Notes must be endorsed or
accompanied by written instruments of transfer in form satisfactory to the
Company and duly executed by the registered holder and the signature on the
endorsement or instrument of transfer must be guaranteed by a bank, broker,
dealer, credit union, savings association, clearing agency or other institution
(each an "Eligible Institution") that is a member of a recognized signature
guarantee medallion program within the meaning of Rule 17Ad-15 under the
Exchange Act. If the Exchange Notes and/or Senior Notes not exchanged are to be
delivered to an address other than that of the registered holder appearing on
the note register for the Senior Notes, the signature on the Letter of
Transmittal must be guaranteed by an Eligible Institution.
Any beneficial owner whose Senior Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender Senior Notes should contact such holder promptly and instruct such
holder to tender Senior Notes on such beneficial owner's behalf. If such
beneficial owner wishes to tender such Senior Notes himself, such beneficial
owner must, prior to completing and executing the Letter of Transmittal and
delivering such Senior Notes, either make appropriate arrangements to register
ownership of the Senior Notes in such beneficial owner's name or follow the
procedures described in the immediately preceding paragraph. The transfer of
record ownership may take considerable time.
Book-Entry Transfer. The Exchange Agent will make a request to establish an
account with respect to the Senior Notes at The Depository Trust Company (the
"Book-Entry Transfer Facility") for purpose of the Exchange Offer within two
business days after receipt of this Prospectus, and any financial institution
that is a participant in the Book-Entry Transfer Facility's systems may make
book-entry delivery of Senior Notes by causing the Book-Entry Transfer Facility
to transfer such Senior Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility in accordance with the Book-Entry Transfer
Facility's procedures for transfer. However, although delivery of Senior Notes
may be effected through book-entry transfer at the Book-Entry Transfer Facility,
the Letter of Transmittal, with any required signature guarantees and any other
required documents, must, in any case, be transmitted to and received by the
Exchange Agent at the address specified on the back cover page of this
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Prospectus on or prior to the Expiration Date or the guaranteed delivery
procedures described below must be complied with.
THE METHOD OF DELIVERY OF sENIOR nOTES AND ALL OTHER DOCUMENTS IS AT THE
ELECTION AND RISK OF THE HOLDER. IF SENT BY MAIL, IT IS RECOMMENDED THAT
REGISTERED MAIL, RETURN RECEIPT REQUESTED, BE USED, PROPER INSURANCE BE
OBTAINED, AND THE MAILING BE MADE SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE
TO PERMIT DELIVERY TO THE EXCHANGE AGENT ON OR BEFORE THE EXPIRATION DATE.
Guaranteed Delivery Procedures. If a holder desires to accept the Exchange
Offer and time will not permit a Letter of Transmittal or Senior Notes to reach
the Exchange Agent before the Expiration Date, a tender may be effected if the
Exchange Agent has received at its office listed on the back cover hereof on or
prior to the Expiration Date a letter, telegram or facsimile transmission from
an Eligible Institution setting forth the name and address of the tendering
holder, the principal amount of the Senior Notes being tendered, the names in
which the Senior Notes are registered and, if possible, the certificate numbers
of the Senior Notes to be tendered, and stating that the tender is being made
thereby and guaranteeing that within three New York Stock Exchange trading days
after the date of execution of such letter, telegram or facsimile transmission
by the Eligible Institution, the Senior Notes, in proper form for transfer, will
be delivered by such Eligible Institution together with a properly completed and
duly executed Letter of Transmittal (and any other required documents). Unless
Senior Notes being tendered by the above-described method (or a timely
Book-Entry Confirmation) are deposited with the Exchange Agent within the time
period set forth above (accompanied or preceded by a properly completed Letter
of Transmittal and any other required documents), the Company may, at its
option, reject the tender. Copies of a Notice of Guaranteed Delivery which may
be used by Eligible Institutions for the purposes described in this paragraph
are available from the Exchange Agent.
A tender will be deemed to have been received as of the date when the
tendering holder's properly completed and duly signed Letter of Transmittal
accompanied by the Senior Notes (or a timely Book-Entry Confirmation) is
received by the Exchange Agent. Issuances of Exchange Notes in exchange for
Senior Notes tendered pursuant to a Notice of Guaranteed Delivery or letter,
telegram or facsimile transmission to similar effect (as provided above) by an
Eligible Institution will be made only against deposit of the Letter of
Transmittal (and any other required documents) and the tendered Senior Notes (or
a timely Book-Entry Confirmation).
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance for exchange of any tender of Senior Notes will be
determined by the Company, whose determination will be final and binding. The
Company reserves the absolute right to reject any or all tenders not in proper
form or the acceptances for exchange of which may, in the opinion of counsel to
the Company, be unlawful. The Company also reserves the absolute right to waive
any of the conditions of the Exchange Offer or any defect or irregularities in
tenders of any particular holder whether or not similar defects or
irregularities are waived in the case of other holders. Neither the Company, the
Exchange Agent nor any other person will be under any duty to give notification
of any defects or irregularities in tenders or shall incur any liability for
failure to give any such notification. The Company's interpretation of the terms
and conditions of the Exchange Offer (including the Letter of Transmittal and
the instructions thereto) will be final and binding.
Terms and Conditions of the Letter of Transmittal
The Letter of Transmittal contains, among other things, the following terms
and conditions, which are part of the Exchange Offer.
The party tendering Senior Notes for exchange (the "Transferor") exchanges,
assigns and transfers the Senior Notes to the Company and irrevocably
constitutes and appoints the Exchange Agent as the Transferor's agent and
attorney-in-fact to cause the Senior Notes to be assigned, transferred and
exchanged. The Transferor represents and warrants that it has full power and
authority to tender, exchange, assign and transfer the Senior Notes and to
xacquire Exchange Notes issuable upon the exchange of such tendered Senior
Notes, and that, when the same are accepted for exchange, the Company will
acquire good and unencumbered title to the tendered Senior Notes, free
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and clear of all liens, restrictions, charges and encumbrances and not subject
to any adverse claim. The Transferor also warrants that it will, upon request,
execute and deliver any additional documents deemed by the Company to be
necessary or desirable to complete the exchange, assignment and transfer of
tendered Senior Notes. The Transferor further agrees that acceptance of any
tendered Senior Notes by the Company and the issuance of Exchange Notes in
exchange therefor shall constitute performance in full by the Company of its
obligations under the Registration Rights Agreement and that the Company shall
have no further obligations or liabilities thereunder (except in certain limited
circumstances). All authority conferred by the Transferor will survive the death
or incapacity of the Transferor and every obligation of the Transferor shall be
binding upon the heirs, legal representatives, successors, assigns, executors
and administrators of such Transferor.
By tendering Senior Notes and executing the Letter of Transmittal, the
Transferor certifies that (a) it is not an Affiliate of the Company within the
meaning of Rule 405 under the Securities Act, that it is not a broker-dealer
that owns Senior Notes acquired directly from the Company or an Affiliate of the
Company, that it is acquiring the Exchange Notes offered hereby in the ordinary
course of such Transferor's business and that such Transferor has no arrangement
with any person to participate in the distribution of such Exchange Notes or (b)
that it is an Affiliate of the Company or of the initial purchaser of the Senior
Notes in the Initial Offering and that it will comply with the registration and
prospectus delivery requirements of the Securities Act to the extent applicable
to it.
Withdrawal Rights
Senior Notes tendered pursuant to the Exchange Offer may be withdrawn at any
time prior to the Expiration Date.
For a withdrawal to be effective, a written or facsimile transmission notice
of withdrawal must be timely received by the Exchange Agent at its address set
forth on the back cover of this Prospectus prior to the Expiration Date. Any
such notice of withdrawal must specify the person named in the Letter of
Transmittal as having tendered Senior Notes to be withdrawn, the certificate
numbers of Senior Notes to be withdrawn, the principal amount of Senior Notes to
be withdrawn, a statement that such holder is withdrawing his election to have
such Senior Notes exchanged, and the name of the registered holder of such
Senior Notes, and must be signed by the holder in the same manner as the
original signature on the Letter of Transmittal (including any required
signature guarantees) or be accompanied by evidence satisfactory to the Company
that the person withdrawing the tender has succeeded to the beneficial ownership
of the Senior Notes being withdrawn. The Exchange Agent will return the properly
withdrawn Senior Notes promptly following receipt of notice of withdrawal. All
questions as to the validity of notices of withdrawal, including time of
receipt, will be determined by the Company, and such determination will be final
and binding on all parties.
Acceptance of Senior Notes for Exchange; Delivery of Exchange Notes
Upon the terms and subject to the conditions of the Exchange Offer, the
acceptance for exchange of Senior Notes validly tendered and not withdrawn and
the issuance of the Exchange Notes will be made on the Exchange Date. For the
purposes of the Exchange Offer, the Company shall be deemed to have accepted for
exchange validly tendered Senior Notes when, as and if the Company has given
written notice thereof to the Exchange Agent.
The Exchange Agent will act as agent for the tendering holders of Senior
Notes for the purposes of receiving Exchange Notes from the Company and causing
the Senior Notes to be assigned, transferred and exchanged. Upon the terms and
subject to the conditions of the Exchange Offer, delivery of Exchange Notes to
be issued in exchange for accepted Senior Notes will be made by the Exchange
Agent promptly after acceptance of the tendered Senior Notes. Senior Notes not
accepted for exchange by the Company will be returned without expense to the
tendering holders (or in the case of Senior Notes tendered by book-entry
transfer into the Exchange Agent's account at the Book-Entry Transfer Facility
pursuant to the procedures described above, such non-exchanged Senior Notes will
be credited to an account maintained with such Book-Entry Transfer Facility)
promptly following the Expiration Date
28
<PAGE>
or, if the Company terminates the Exchange Offer prior to the Expiration Date,
promptly after the Exchange Offer is so terminated.
Conditions to the Exchange Offer
Notwithstanding any other provision of the Exchange Offer, or any extension
of the Exchange Offer, the Company will not be required to issue Exchange Notes
in respect of any properly tendered Senior Notes not previously accepted and may
terminate the Exchange Offer (by oral or written notice to the Exchange Agent
and by timely public announcement, unless otherwise required by applicable law
or regulation, by making a release to the Dow Jones News Service) or, at its
option, modify or otherwise amend the Exchange Offer, if (a) there shall be
threatened, instituted or pending any action or proceeding before, or any
injunction, order or decree shall have been issued by, any court or governmental
agency or other governmental regulatory or administrative agency or commission,
(i) seeking to restrain or prohibit the making or consummation of the Exchange
Offer or any other transaction contemplated by the Exchange Offer, (ii)
assessing or seeking any damages as a result thereof, or (iii) resulting in a
material delay in the ability of the Company to accept for exchange or exchange
some or all of the Senior Notes pursuant to the Exchange Offer; (b) any statute,
rule, regulation, order or injunction shall be sought, proposed, introduced,
enacted, promulgated or deemed applicable to the Exchange Offer or any of the
transactions contemplated by the Exchange Offer by any government or
governmental authority, domestic or foreign, or any action shall have been
taken, proposed or threatened, by any government, governmental authority, agency
or court, domestic or foreign, that in the sole judgment of the Company might
directly or indirectly result in any of the consequences referred to in clauses
(a)(i) or (ii) above or, in the sole judgment of the Company, might result in
the holders of Exchange Notes having obligations with respect to resales and
transfers of Exchange Notes which are greater than those described in the
interpretations of the Commission referred to on the cover page of this
Prospectus, or would otherwise make it inadvisable to proceed with the Exchange
Offer; or (c) a material adverse change shall have occurred in the business,
condition (financial or otherwise), operations, or prospects of the Company.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by it with respect to all or any portion of the Exchange Offer
regardless of the circumstances (including any action or inaction by the
Company) giving rise to such condition or may be waived by the Company in whole
or in part at any time or from time to time in its sole discretion. The failure
by the Company at any time to exercise any of the foregoing rights will not be
deemed a waiver of any such right, and each right will be deemed an ongoing
right which may be asserted at any time or from time to time. In addition, the
Company has reserved the right, notwithstanding the satisfaction of each of the
foregoing conditions, to terminate or amend the Exchange Offer.
Any determination by the Company concerning the fulfillment or
non-fulfillment of any conditions will be final and binding upon all parties.
In addition, the Company will not accept for exchange any Senior Notes
tendered and no Exchange Notes will be issued in exchange for any such Senior
Notes, if at such time any stop order shall be threatened or in effect with
respect to the Registration Statement of which this Prospectus constitutes a
part or qualification of the Indenture under the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act").
Exchange Agent
IBJ Schroder Bank & Trust Company has been appointed as the Exchange Agent
for the Exchange Offer. Letters of Transmittal must be addressed to the Exchange
Agent at its address set forth on the back cover page of this Prospectus.
Delivery to an address other than as set forth herein, or transmissions of
instructions via a facsimile or telex number other than the ones set forth
herein, will not constitute a valid delivery.
29
<PAGE>
Solicitation of Tenders; Expenses
The Company has not retained any dealer-manager or similar agent in
connection with the Exchange Offer and will not make any payments to brokers,
dealers or others for soliciting acceptances of the Exchange Offer. The Company
will, however, pay the Exchange Agent reasonable and customary fees for its
services and will reimburse it for reasonable out-of-pocket expenses in
connection therewith. The Company will also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding tenders for their customers. The expenses to be
incurred in connection with the Exchange Offer, including the fees and expenses
of the Exchange Agent and printing, accounting and legal fees, will be paid by
the Company and are estimated at approximately $250,000.
No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer other than those contained
in this Prospectus. If given or made, such information or representations should
not be relied upon as having been authorized by the Company. Neither the
delivery of this Prospectus nor any exchange made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the respective dates as of which information is
given herein. The Exchange Offer is not being made to (nor will tenders be
accepted from or on behalf of) holders of Senior Notes in any jurisdiction in
which the making of the Exchange Offer or the acceptance thereof would not be in
compliance with the laws of such jurisdiction. However, the Company may, at its
discretion, take such action as it may deem necessary to make the Exchange Offer
in any such jurisdiction and extend the Exchange Offer to holders of Senior
Notes in such jurisdiction. In any jurisdiction the securities laws or blue sky
laws of which require the Exchange Offer to be made by a licensed broker or
dealer, the Exchange Offer is being made on behalf of the Company by one or more
registered brokers or dealers which are licensed under the laws of such
jurisdiction.
Appraisal Rights
HOLDERS OF SENIOR NOTES WILL NOT HAVE DISSENTERS' RIGHTS OR APPRAISAL RIGHTS
IN CONNECTION WITH THE EXCHANGE OFFER.
Federal Income Tax Consequences
The Company has been advised by its counsel, Willkie Farr & Gallagher, that
the exchange for Exchange Notes by holders of Senior Notes should not be a
taxable exchange for federal income tax purposes, and such holders should not
recognize any taxable gain or loss or any interest income as a result of such
exchange.
Other
Participation in the Exchange Offer is voluntary, and holders should
carefully consider whether to accept the Exchange Offer and tender their Senior
Notes. Holders of the Senior Notes are urged to consult their financial and tax
advisors in making their own decisions on what action to take.
As a result of the making of, and upon acceptance for exchange of all
validly tendered Senior Notes pursuant to the terms of this Exchange Offer, the
Company will have fulfilled a covenant contained in the terms of the Senior
Notes and the Registration Rights Agreement. Holders of the Senior Notes who do
not tender their certificates in the Exchange Offer will continue to hold such
certificates and will be entitled to all the rights, and subject to all the
limitations applicable thereto, under the Indenture, except for any such rights
under the Registration Rights Agreement, which by their terms terminate or cease
to have further effect as a result of the making of this Exchange Offer. See
"Description of the Notes." All untendered Senior Notes will continue to be
subject to the restriction on transfer set forth in the Indenture. To the extent
that Senior Notes are tendered and accepted in the Exchange Offer, the trading
market, if any, for the Senior Notes could be adversely affected. See "Risk
Factors--Consequences of Failure to Exchange."
30
<PAGE>
The Company may in the future seek to acquire untendered Senior Notes in the
open market or privately negotiated transactions, through subsequent exchange
offers or otherwise. The Company has no present plan to acquire any Senior Notes
which are not tendered in the Exchange Offer.
31
<PAGE>
THE ACQUISITION
General
On February 29, 1996, pursuant to the Stock Purchase Agreement, TKG acquired
all of the outstanding capital stock of the companies that constitute the Knoll
business for an aggregate purchase price of $561,745,407. Pursuant to the Stock
Purchase Agreement, the purchase price is subject to post-Acquisition Closing
adjustments to the extent (i) Knoll's working capital as of the Acquisition
Closing (as adjusted for, among other things, cash credited against a purchase
price reduction made at the Acquisition Closing) is greater or less than $102.5
million and (ii) certain adjustments made at the Acquisition Closing were based
on estimates that vary from actual amounts. Pursuant to the Stock Purchase
Agreement, these post-Acquisition Closing adjustments are to be made within
ninety days after the Acquisition Closing, with an additional sixty-day period
thereafter for dispute resolution.
At the Acquisition Closing, T.K.G. Acquisition Sub, Inc., a wholly owned
subsidiary of TKG, acquired the capital stock of The Knoll Group, Inc., which is
the holding company that directly or indirectly owned, at the Acquisition
Closing, the capital stock of each of the companies that constitute the Knoll
business other than Knoll's principal Canadian subsidiary. The capital stock of
the Canadian subsidiary was purchased at the Acquisition Closing by TKG Canada,
Inc., a Canadian corporation that is wholly owned by T.K.G. Acquisition Sub,
Inc. Immediately following the Acquisition Closing, T.K.G. Acquisition Sub, Inc.
and The Knoll Group, Inc. merged (the "Merger") with and into Knoll North
America, Inc., Knoll's principal U.S. operating company. As a result of the
Acquisition and the Merger, the Senior Notes and the Credit Facilities became
obligations of Knoll North America, Inc., and TKG owns 100% of the capital stock
of Knoll North America, Inc., which owns, directly or indirectly, each of the
companies that constitute the Knoll business. At the time of the Merger, Knoll
North America, Inc.changed its name to Knoll, Inc.
Financing of the Acquisition
TKG was formed by Warburg and certain members of the Company's management to
consummate the Acquisition. Of the $160 million of TKG capital stock sold in
connection with the Acquisition, certain members of the Company's management
purchased $5 million; NationsBanc Investment Corp., an affiliate of the Initial
Purchaser, purchased $8 million; and Warburg purchased the balance. TKG made the
Equity Contribution by contributing such funds to the Company at the Acquisition
Closing.
The purchase price for the Acquisition and approximately $20 million of
related fees and expenses were funded through (i) the Equity Contribution, (ii)
the net proceeds of the Initial Offering and (iii) borrowings under the Credit
Facilities. Warburg will be reimbursed by the Company for due diligence expenses
incurred on behalf of TKG and T.K.G. Acquisition Sub, Inc. in connection with
the Acquisition and the Financing Transactions, but will not be paid any
sponsor's or other fee in connection therewith.
32
<PAGE>
The following table sets forth the estimated amounts of sources and uses of
the funds for the Acquisition:
<TABLE>
<CAPTION>
Amount
--------
(in millions)
<S> <C>
Sources of Funds:
The Credit Facilities(1).............................$ 260
The Offering......................................... 165
Equity Contribution(2)............................... 160
--------
Total............................................$ 585
========
Uses of Funds:
The Acquisition......................................$ 565
Transaction fees and expenses(3)..................... 20
--------
Total............................................$ 585
========
</TABLE>
(1) Consists of the $260 million Term Loan Facilities. The Company also has a
$50 million Revolving Credit Facility, under which it had no amount
outstanding upon the Acquisition Closing. See "Description of Credit
Facilities."
(2) Consists of a cash equity contribution by TKG to the Company.
(3) Includes estimated fees and expenses incurred in connection with the
Acquisition, the Initial Offering and the other Financing Transactions.
33
<PAGE>
PRO FORMA CAPITALIZATION
The following table sets forth the capitalization of the Company at December
31, 1995 as adjusted on a pro forma basis to reflect the Acquisition, the Equity
Contribution and the Financing Transactions, including the Initial Offering, and
the application of the net proceeds therefrom. This table should be read in
conjunction with "Unaudited Pro Forma Financial Information" and the Financial
Statements and Notes thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
At December 31, 1995
--------------------
The Company
Pro Forma
--------------------
(in thousands)
<S> <C>
Long-term debt (including current portion):
Revolving Credit Facility(1)............................. $ --
Term Loan Facilities..................................... 260,000
Senior Notes............................................. 165,000
--------
Total long-term debt.................................. 425,000
--------
Shareholder's equity......................................... 160,000
--------
Total Capitalization......................................... $585,000
========
</TABLE>
(1) Borrowings of up to $50 million under the Revolving Credit Facility are
available for general corporate purposes, including the funding of working
capital needs. The Company had no amount outstanding under this facility
upon the Acquisition Closing.
34
<PAGE>
SELECTED FINANCIAL INFORMATION
The following table presents (i) selected historical consolidated financial
information of Knoll, as of the dates and for the periods indicated, and (ii)
summary pro forma consolidated financial information of the Company, as of the
dates and for the periods indicated, after giving effect to the events described
in the notes below and in "Unaudited Pro Forma Financial Data." The historical
consolidated financial information for each of the three years in the period
ended December 31, 1995 has been derived from Knoll's financial statements,
which have been audited by Price Waterhouse LLP. The historical consolidated
financial information for each of the two years in the period ended December 31,
1992 and the two and one month periods ended February 29, 1996 and March 31,
1996, respectively has been derived from unaudited financial statements and, in
the opinion of management, includes all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of financial position and
results of operations and cash flows as of the dates and for the periods
indicated. The summary pro forma information does not purport to represent what
the Company's results actually would have been if such events had occurred at
the dates indicated, nor does such information purport to project the results of
the Company for any future period. The summary financial information should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Unaudited Pro Forma Financial
Information" and the Financial Statements and the Notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Knoll Historical
-------------------------------------------------------------
Year Ended December 31,
----------------------------------------
1991 1992 1993 1994 1995
--------- --------- --------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Total sales ............................................ $ 670,956 $ 576,621 $ 508,383 $ 562,869 $ 620,892
Cost of goods sold ..................................... 454,376 408,188 363,948 397,995 405,740
--------- --------- --------- --------- ---------
Gross profit ........................................... 216,580 168,433 144,435 164,874 215,152
Provision for restructuring ............................ -- 26,000 6,165 29,180 --
Selling, general and administrative expenses(2)(3) ..... 160,000 147,364 145,167 150,863 124,420
Depreciation and amortization .......................... 26,300 27,574 30,775 28,484 25,999
Allocated corporate expenses(3) ........................ (819) 5,036 4,899 5,881 9,528
Westinghouse long-term incentive compensation........... -- -- -- -- --
--------- --------- --------- --------- ---------
Total costs and expenses .......................... 639,857 614,162 550,954 612,403 565,687
--------- --------- --------- --------- ---------
Income (loss) from operations .......................... 31,099 (37,541) (42,571) (49,534) 55,205
Other income (expense), net ............................ (1,121) (929) 2,082 699 (1,597)
Interest expense ....................................... 4,628 3,866 3,301 3,225 1,430
--------- --------- --------- --------- ---------
Income (loss) before income taxes ...................... 25,350 (42,336) (43,790) (52,060) 52,178
Income taxes (benefit) ................................. 10,824 (4,795) (3,571) 7,713 22,846
Cumulative effect of changes in accounting principles: -- 11,202 1,118 -- --
--------- --------- --------- --------- ---------
Net income (loss) ................................. $ 14,526 $ (48,743) $ (41,337) $ (59,773) $ 29,332
========= ========= ========= ========= =========
Other Data:
Ratio of earnings to fixed charges(4) .................. 3.7x -- -- -- 11.8x
EBITDA(5) .............................................. $ -- $ -- $ (9,714) $ (20,351) $ 79,607
Adjusted EBITDA(6) ..................................... -- -- -- -- --
Capital expenditures ................................... 30,807 29,100 18,697 20,157 19,334
Cost of goods sold as a % of total sales ............... 67.7% 70.8% 71.6% 70.7% 65.3%
Selling, general and administrative expenses as a % of
total sales .......................................... 23.8% 25.6% 28.6% 26.8% 20.0%
EBITDA as a % of total sales(7) ........................ -- -- (1.9)% (3.6)% 12.8%
Ratio of long-term debt to Adjusted EBITDA(8) .......... -- -- -- -- --
Ratio of Adjusted EBITDA to cash interest expense(9) ... -- -- -- -- --
Cash provided by (used in:)
Operating activities ................................ -- -- (24.7) (3.8) 51.9
Investing activities ................................ -- -- (16.0) (19.8) (19.0)
Financing activities ................................ -- -- 44.6 28.3 (36.8)
<CAPTION>
KNOLL HISTORICAL THE COMPANY
---------------- ---------------------------------------
(1)
Pro
Forma
Three
Two Months One Month Months
Ended Ended Ended
February 29, March 31, Pro Forma (1) March 31,
1996 1996 1995 1996
----------- -------- ------------ ---------
<S> <C> <C> <C> <C>
Income Statement Data:
Total sales ............................................ $ 90,232 $ 48,080 $ 620,892 $138,312
Cost of goods sold ..................................... 57,568 30,964 406,190 88,532
-------- --------- --------- --------
Gross profit ........................................... 32,664 17,116 214,702 49,780
Provision for restructuring ............................ -- -- -- --
Selling, general and administrative expenses(2)(3) ..... 19,085 9,825 129,993 29,876
Depreciation and amortization .......................... 4,317 2,753 31,726 8,240
Allocated corporate expenses(3) ........................ 921 -- 4,000 --
Westinghouse long-term incentive compensation........... 47,900 -- -- --
------- --------- --------- --------
Total costs and expenses .......................... 129,791 43,542 571,909 126,648
-------- --------- --------- --------
Income (loss) from operations .......................... (39,559) 4,538 48,983 11,664
Other income (expense), net ............................ (296) (49) (1,597) (345)
Interest expense ....................................... 340 3,602 40,945 10,680
-------- --------- --------- --------
Income (loss) before income taxes ...................... (40,195) 887 6,441 639
Income taxes (benefit) ................................. (16,107) 438 2,705 442
Cumulative effect of changes in accounting principles: -- -- -- --
-------- --------- --------- --------
Net income (loss) ................................. $(24,088) $ 449 $ 3,736 $ 197
======== ========= ========= ========
Other Data:
Ratio of earnings to fixed charges(4) .................. -- 1.2x 1.1x 1.1x
EBITDA(5) .............................................. $(35,538) $ 7,242 $ 79,112 $ 19,559
Adjusted EBITDA(6) ..................................... -- -- 81,722 20,239
Capital expenditures ................................... 2,296 447 19,334 2,245
Cost of goods sold as a % of total sales ............... 63.8% 64.4% 65.4% 64.0%
Selling, general and administrative expenses as a % of
total sales .......................................... 21.2% 20.4% 20.9% 21.6%
EBITDA as a % of total sales(7) ........................ (39.4%) 15.1% 12.7% 14.1%
Ratio of long-term debt to Adjusted EBITDA(8) .......... 5.1x --
Ratio of Adjusted EBITDA to cash interest expense(9) ... 2.1x 2.0x
Cash provided by (used in:)
Operating activities ................................ (54.0) 9.0 -- --
Investing activities ................................ (2.3) (0.4) -- --
Financing activities ................................ 57.0 0.0 -- --
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
At December 31,
----------------------------------
Knoll Historical The Company
---------------- ------------------------
The Company Pro
(dollars in thousands) Forma March 31,
Balance Sheet Data: 1991 1992 1993 1994 1995 1995 1996
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Working capital ............................ $ 62,124 $ 67,063 $ 41,933 $ 22,898 $ 82,698 $ 95,621 $100,936
Total assets ............................... 787,936 726,469 691,043 705,316 656,710 705,217 694,780
Total long-term debt, including
current portion .......................... 13,276 16,623 12,215 12,451 3,538 425,000 426,228
Total liabilities .......................... 224,504 186,347 205,104 247,310 176,259 545,217 533,952
Shareholders' equity ....................... 563,432 540,122 485,939 458,006 480,451 160,000 160,828
</TABLE>
(1) Reflects summary pro forma financial information of the Company derived
from the Financial Statements and Notes thereto included elsewhere in this
Prospectus, adjusted for the completion of the Acquisition and the
application of the net proceeds of the Financing Transactions and the
Equity Contribution.
(2) The pro forma amount reflects the reclassification of allocated corporate
expenses. Management estimates that the replacement cost for services
formerly provided by Westinghouse would, on a stand-alone basis, include
benefit expense of $4,573 (including $1,963 in cash expense), in 1995, and
$794 (including $341 in cash expense), in the three-month period ended
March 31, 1996, related to the adoption of various independent benefit
plans comparable to Westinghouse benefit plans, and operating expenses of
$1,000 in 1995 and $172 in the three-month period ended March 31, 1996
(cost of services required to replace those specific activities formerly
provided to the Company by Westinghouse, including audit, tax, general
ledger, accounts receivable, human resources, legal, insurance and data
communications).
(3) Charges for certain services used by Knoll that Westinghouse provides to
its business units, including information systems support, certain
accounting functions such as transaction processing, legal, environmental
affairs, and human resources consulting and compliance support, are
included in sales, general and administrative expenses. In addition,
Westinghouse allocates a portion of its corporate expenses to its business
units. These expenses are reflected as allocated corporate expenses and
include Westinghouse executive management and corporate overhead; corporate
legal, environmental, audit, treasury and tax services; pension charges
related to corporate functions; and other corporate support and executive
costs. Such allocations are not necessarily indicative of actual or future
costs. See Note 3 of Notes to Financial Statements. The Summary Pro Forma
Financial Information reflects the reclassification of the allocated
corporate expenses from Westinghouse. The remaining balance in allocated
corporate expense in 1995 represents the incentive compensation accrued for
Knoll executives under Westinghouse long-term incentive plans.
(4) For the purpose of computing this ratio, earnings consists of earnings
before income taxes and fixed charges. Fixed charges consists of interest
expense plus the portion of rental expense under operating leases that has
been deemed by the Company to be representative of the interest factor
(approximately one third of rental expense). Earnings in 1992, 1993 and
1994 and for the two-month period ended February 29, 1996 were insufficient
to cover fixed charges by $34,011, $36,159, $45,196 and $39,291,
respectively.
(5) EBITDA is defined as net income (loss) before interest expense, income
taxes, and depreciation and amortization expense. EBITDA does not represent
and should not be considered as an alternative to net income or cash flow
from operations as determined by generally accepted accounting principles,
and EBITDA does not necessarily indicate whether cash flow will be
sufficient for items such as working capital, capital expenditures,
research and development or acquisitions or to react to changes in the
Company's industry or economic changes generally. The Company believes that
EBITDA is a frequently used measure that provides additional information
for determining its ability to meet debt service requirements and that it
is one of the indicators upon which the Company and its lenders assess the
Company's financial performance and its capacity to service debt.
(6) Adjusted EBITDA excludes the non-cash portion of pension and post-
retirement benefit expense of $2,610 in 1995 and $680 in the three-month
period ended March 31, 1996. The Company believes that Adjusted EBITDA
provides additional information for determining its ability to meet debt
service requirements. Adjusted EBITDA does not necessarily indicate whether
cash flow will be sufficient for cash requirements for items such as
working capital, capital expenditures, research and development or
acquisitions or to react to changes in the Company's industry or economic
changes generally.
(7) For the purposes of computing this ratio, EBITDA is divided by total sales.
The Company believes that EBITDA as a percentage of total sales is a
frequently used measure that provides additional information for
determining its ability to meet debt service requirements. This ratio does
not necessarily indicate whether cash flow will be sufficient for cash
requirements for items such as working capital, capital expenditures,
research and development or acquisitions or to react to changes in the
Company's industry or economic changes generally.
36
<PAGE>
(8) For the purposes of computing this ratio, Debt is divided by Adjusted
EBITDA. Debt is defined as the sum of the pro forma Borrowings under the
Credit Facilities and Notes. The Company believes that the ratio of
long-term debt to EBITDA is a frequently used measure that provides
additional information for determining its ability to meet debt service
requirements. This ratio does not necessarily indicate whether cash flow
will be sufficient for cash requirements for items such as working capital,
capital expenditures, research and development or acquisitions or to react
to changes in the Company's industry or economic changes generally.
(9) Cash interest expense excludes the amortization of deferred financing
charges of $1,830 in 1995 and $450 in the three-month period ended March
31, 1996.
37
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The Acquisition has been accounted for by the purchase method of
accounting, and accordingly the purchase price of $585 million (including
estimated fees and expenses) has been allocated on a preliminary basis to the
assets acquired and liabilities assumed based upon the estimated fair value at
the Acquisition Closing. Management does not believe that either adjustments to
the preliminary allocation of the purchase price or the resolution of known
contingencies will have a material impact on the pro forma information
presented. The excess of such purchase price over the estimated fair values at
the Acquisition Closing has been preliminarily recognized as goodwill, which is
amortized over 40 years.
The unaudited pro forma consolidated balance sheet is based on the
historical consolidated financial statements for Knoll, as the Company's
predecessor, and the assumptions and adjustments described in the accompanying
notes. The unaudited pro forma consolidated income statement does not purport to
represent what the Company's results of operation actually would have been if
the events described above had occurred as of the date indicated or what results
will be for any future periods. The unaudited pro forma financial information is
based upon the assumptions that the Company believes are reasonable and should
be read in conjunction with the Financial Statements and accompanying Notes
thereto included elsewhere in this Prospectus.
The following unaudited pro forma consolidated income statements for the
year ended December 31, 1995 and for the three-month period ended March 31,
1996 give effect to the Acquisition, the Equity Contribution, the Financing
Transactions and the application of the net proceeds therefrom as though they
had occurred on January 1, 1995 and January 1, 1996, respectively. The unaudited
pro forma consolidated balance sheet of the Company at December 31, 1995 was
prepared as if such transactions had occurred on such date.
38
<PAGE>
KNOLL INC. UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
Historical Adjustments Pro Forma
---------- ----------- ---------
(in thousands)
<S> <C> <C> <C>
Assets:
Cash ............................................................................ $ 1,569 $ (1,569)(a) $ 0
Customer receivables, net ....................................................... 114,592 114,592
Inventories ..................................................................... 59,643 450(i) 60,093
Deferred income taxes ........................................................... 18,273 (18,273)(a) 7,941
7,941(j)
Prepaid and other current assets ................................................ 8,465 8,465
--------- --------- ---------
Total current assets ....................................................... 202,542 (11,451) 191,091
Plant and equipment ............................................................. 164,633 26,467(h) 191,100
Goodwill and other intangible assets ............................................ 240,772 (240,772)(b) 295,520
295,520(b)
Deferred financing fees ......................................................... 0 14,400 (c) 14,400
Prepaid pension cost ............................................................ 45,161 (45,161)(a) 0
Deferred income taxes ........................................................... 0 9,504(j) 9,504
Other noncurrent assets ......................................................... 3,602 3,602
--------- --------- ---------
Total assets ............................................................... $ 656,710 $ 48,507 $ 705,217
========= ========= =========
Liabilities and Equity:
Short-term debt ................................................................. $ 1,496 $ (1,496)(d) $ 0
Current maturities of long-term debt ............................................ 3,287 (3,287)(d) 5,250
5,250 (e)
Accounts payable--trade ......................................................... 45,850 45,850
Accounts payable--related parties ............................................... 413 413
Income taxes payable ............................................................ 13,973 (13,973)(a) 0
Accrued restructuring costs ..................................................... 10,868 (10,868)(a) 0
Other current liabilities ....................................................... 43,957 43,957
--------- --------- ---------
Total current liabilities .................................................. 119,844 (24,374) 95,470
Long-term debt .................................................................. 251 (251)(d) 0
Borrowings under the Credit Facilities .......................................... 0 254,750(e) 254,750
Notes ........................................................................... 0 165,000(e) 165,000
Deferred income taxes ........................................................... 29,574 (29,574)(a) 0
Post-retirement benefits obligation ............................................. 20,593 3,407(f) 24,000
Other noncurrent liabilities .................................................... 5,997 5,997
--------- --------- ---------
Total liabilities .......................................................... 176,259 368,958 545,217
Deferred foreign currency translation adjustments ............................... (22,866) 22,866(g) 0
Parent company investment ....................................................... 503,317 (503,317)(g) 0
Common stock .................................................................... 0 160,000(g) 160,000
--------- --------- ---------
Total stockholders' equity ................................................. 480,451 (320,451) 160,000
--------- --------- ---------
Total liabilities and equity ............................................... $ 656,710 $ 48,507 $ 705,217
========= ========= =========
</TABLE>
39
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
(a) To eliminate certain assets and liabilities of The Knoll Group that
were not purchased or assumed, respectively, under the terms of the Stock
Purchase Agreement.
(b) Adjustment to reflect the elimination of existing goodwill and the
excess of the purchase price (including $20,000 of transaction fees and
expenses) over the estimated fair value of the net assets acquired, which has
been allocated on a preliminary basis as follows:
<TABLE>
<S> <C>
Purchase price........................................ $585,000
Estimated fair value of net assets, excluding
goodwill and other intangible assets................ 289,480
-------
Goodwill and other intangible assets.................. $295,520
========
Goodwill.............................................. $ 75,620
Identifiable intangible assets....................... 219,900
--------
Goodwill and other intangible assets (the other
intangible assets consist principally of
trade names)........................................ $295,520
========
</TABLE>
(c) Represents the deferred financing costs associated with the
consummation of the transaction.
(d) Reflects the repayment of existing indebtedness as follows:
<TABLE>
<S> <C>
Short-term debt....................................... $ 1,496
Current maturities of long-term debt.................. 3,287
Long-term debt........................................ 251
--------
$ 5,034
</TABLE>
(e) Reflects the Financing Transactions as follows:
<TABLE>
<S> <C>
Borrowings under the Credit Facilities:
Current.......................................... $ 5,250
Long-term........................................ 254,750
Notes .............................................. 165,000
Common stock.......................................... 160,000
--------
$585,000
</TABLE>
(f) Represents the increased liability for post-retirement benefits
resulting from the Company's assuming these liabilities and establishing plans
independent of those previously administered by Westinghouse.
(g) To eliminate the historical stockholders' equity of The Knoll Group and
record the current capitalization.
(h) Represents the write up to fair value of the plant and equipment
based upon the results of an independent fair market value study performed on
the acquired assets.
(i) Represents the increase in inventory values to estimated selling prices
less the sum of (a) costs of disposal and (b) a reasonable profit allowance for
the selling effort of the Company.
(j) Represents the differences between financial statement carrying amounts
and the corresponding taxes bases of the net assets acquired.
40
<PAGE>
KNOLL INC.
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT
<TABLE>
<CAPTION>
Year ended December 31, 1995
-------------------------------------------------------
Historical Adjustments Pro Forma
---------- ----------- ---------
(in thousands)
<S> <C> <C> <C>
Total sales ...................................................... $ 620,892 $ $ 620,892
Cost of goods sold ............................................... 405,740 450(a) 406,190
Selling, general and administrative expenses ..................... 124,420 5,573(b) 129,993
Depreciation and amortization .................................... 25,999 5,727(c) 31,726
Allocated corporate expenses ..................................... 9,528 (5,528)(d) 4,000
--------- --------- ---------
Total costs and expenses .................................... 565,687 6,222 571,909
Income from operations ........................................... 55,205 (6,222) 48,983
Other (expense), net ............................................. (1,597) (1,597)
Interest expense ................................................. 1,430 39,515(e) 40,945
--------- --------- ---------
Income (loss) before income taxes ................................ 52,178 (45,737) 6,441
Income taxes (benefit) ........................................... 22,846 (20,141)(f) 2,705
--------- --------- ---------
Net income .................................................. $ 29,332 $ (25,596) $ 3,736
========= ========= =========
</TABLE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT
(a) Represents the increase in cost of sales resulting from the sale of
inventory acquired as part of the Acquisition. This inventory was valued at the
estimated selling prices less the sum of (a) costs of disposal and (b) a
reasonable profit allowance for the selling effort of the Company.
(b) Represents the reclassification of allocated corporate expenses.
Management estimates that the replacement cost for services formerly provided by
Westinghouse would, on a stand-alone basis, include benefit expense of $4,573
(including $1,963 in cash expense), related to the adoption of various
independent benefit plans comparable to Westinghouse benefit plans, and
operating expenses of $1,000 (cost of services required to replace those
specific activities formerly provided to the Company by Westinghouse, including
audit, tax, general ledger, accounts receivable, human resources, legal,
insurance and data communications).
(c) Represents the increase in amortization and depreciation resulting from
the Acquisition.
(d) Represents the reclassification of the allocated corporate expenses
from Westinghouse. The remaining balance represents the incentive compensation
accrued for Knoll executives under Westinghouse long-term incentive plans.
(e) To reflect interest expense (and amortization of deferred financing
fees) on a pro forma basis as if the Acquisition had been completed on January
1, 1995. Interest expenses assumes a weighted average interest rate of 9.2%,
which approximates the actual interest rate on the date of the Acquisition, on
$424,125 in average outstanding borrowings and amortization of deferred
financing charges. If interest rates changed 1/8%, interest costs would be
adjusted by $530.
(f) Adjustment to reflect the assumed 42% tax rate applied to the pro forma
income.
41
<PAGE>
KNOLL INC.
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT
<TABLE>
<CAPTION>
HISTORICAL
--------------------------------------------
The Knoll Group, Inc. Knoll, Inc.
2 Months Ended 1 Month Ended
February 29, 1996 March 31, 1996 Adjustments Pro Forma
--------------------- ------------------ --------------- ------------
(in thousands)
<S> <C> <C> <C> <C>
Total sales............................. $ 90,232 $ 48,080 $ -- $138,312
Cost of goods sold...................... 57,568 30,964 88,532
Selling, general and administrative
expenses........................... 19,085 9,825 966(a) 29,876
Depreciation and amortization........... 4,317 2,753 1,170(b) 8,240
Allocated corporated expenses........... 921 -- (921)(c) --
Westinghouse long-term incentive
compensation........................ 47,900 -- (47,900)(d) --
-------- -------- -------- --------
Total costs and expenses........... 129,791 43,542 (46,685) 126,648
Income (loss) from operations........... (39,559) 4,538 46,685 11,664
Other income (expense), net............. (296) (49) -- (345)
Interest expense........................ 340 3,602 6,738(e) 10,680
-------- -------- -------- --------
Income (loss) before income taxes....... (40,195) 887 39,947 639
Income taxes (benefit).................. (16,107) 438 16,111(f) 442
-------- -------- -------- --------
Net income (loss).................. $(24,088) $ 449 $23,836 $ 197
======== ======== ======== ========
</TABLE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT
(a) Represents the reclassification of allocated corporate expenses.
Management estimates that the replacement cost for services formerly provided by
Westinghouse would, on a stand-alone basis, include benefit expense of $794
(including $341 in cash expense), related to the adoption of various independent
benefit plans comparable to Westinghouse benefit plans, and operating expenses
of $172 (cost of services required to replace those specific activities formerly
provided to the Company by Westinghouse, including audit, tax, general ledger,
accounts receivable, human resources, legal, insurance and data communications).
(b) Represents the increase in amortization and depreciation resulting
from the Acquisition.
(c) Represents the reclassification of the allocated corporate expenses
from Westinghouse.
(d) Represents the elimination of incentive compensation under
Westinghouse's long term incentive plans, which became payable, and for which
the amounts payable were established, as a result of consummation of the
Acquisition.
(e) To reflect interest expense (and amortization of deferred financing
fees) on a pro forma basis as if the Acquisition had been completed on January
1, 1996. Interest expense assumes a weighted average interest rate of 9.2%,
which approximates the actual interest rate on the date of the Acquisition, on
$424,125 in average outstanding borrowings and amortization of deferred
financing charges. If interest rates changed 1/8%, annual interest costs would
be adjusted by $530.
(f) Adjustment to reflect the assumed effective tax rate applied to the
pro forma income.
42
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
General
In the Acquisition, the Company acquired Knoll from Westinghouse. Prior to
the Acquisition, (i) the Company had no significant assets or liabilities, and
had not conducted any business, other than in connection with the Acquisition
and the Financing Transactions, and (ii) Knoll operated as a business unit of
Westinghouse and, at the business unit level, was not a distinct legal entity.
Knoll's results of domestic operations have been included in the
consolidated U.S. federal income tax return of Westinghouse. Knoll's results of
operations in Canada and Europe have been reported separately to their
respective taxing jurisdictions. The income tax expense and other tax-related
information included in the financial statements is presented as if Knoll had
not been eligible to be included in the consolidated tax returns of Westinghouse
and require certain assumptions, allocations and significant estimates that
management believes are reasonable to measure the tax consequences as if Knoll
were a stand-alone taxpayer.
The following discussion should be read in conjunction with the
consolidated financial statements and related notes of Knoll, as predecessor to
the Company, and the unaudited pro forma consolidated financial statements and
related notes of the Company, included elsewhere in this Prospectus.
Overview
Knoll was created by Westinghouse in 1989 and 1990 through the combination
of four separate office furniture companies. For a variety of reasons, the
combined entities did not perform well in their early years together, and a
significant restructuring program was initiated in early 1994 to return Knoll to
profitability. The turnaround program was implemented through a combination of
cost reductions, revenue growth, product eliminations and productivity
improvement. The Company operates in a single business segment and conducts most
of its business in the United States, although it currently derives
approximately 10% of its sales in Europe, primarily in the United Kingdom,
Germany, France, Belgium and Italy, and approximately 5% of its sales in Canada.
The operating results of Knoll's European subsidiaries are included in its
consolidated financial statements on a one month lag.
The Company maintains manufacturing sites in the United States, Canada and
Italy. The Company generally conducts its business in local currencies and
reports its consolidated financial results in U.S. dollars. Fluctuations in the
currency exchange rates of the countries in which the Company operates, such as
the decline in the average exchange rate of the U.S. dollar to the Italian lire,
can affect the Company's consolidated U.S. dollar-denominated financial results.
The Company has no operations in countries that have experienced highly
inflationary economies.
43
<PAGE>
Results of Operations
The following table sets forth certain data from Knoll's consolidated
financial statements expressed as a percentage of total sales.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1993 1994 1995
----- ----- -----
<S> <C> <C> <C>
Total sales ............................................................... 100.0% 100.0% 100.0%
Cost of goods sold ........................................................ 71.6 70.7 65.3
----- ----- -----
Gross profit ......................................................... 28.4 29.3 34.7
Provision for restructuring ............................................... 1.2 5.2 0.0
Selling, general and administrative expenses .............................. 28.6 26.8 20.0
Depreciation and amortization ............................................. 6.0 5.1 4.3
Allocated corporate expenses .............................................. 1.0 1.0 1.5
----- ----- -----
Income (loss) from operations ........................................ (8.4) (8.8) 8.9
Other income (expense), net ............................................... 0.4 0.1 (0.3)
Interest expense .......................................................... 0.6 0.5 0.2
----- ----- -----
Income (loss) before income taxes ......................................... (8.6) (9.2) 8.4
Income taxes (benefit) .................................................... (0.7) 1.4 3.7
Cumulative effect of changes in accounting principles ..................... 0.2 0.0 0.0
----- ----- -----
Net income (loss) .................................................... (8.1)% (10.6)% 4.7%
===== ===== =====
</TABLE>
Comparison of Year Ended December 31, 1995 to Year Ended December 31, 1994
Total sales. Total sales were $620.9 million for the year ended December
31, 1995, an increase of $58.0 million, or 10.3%, from $562.9 million for the
year ended December 31, 1994. Sales growth resulted from price increases (an
average increase of 1.6% over 1994) and increased volume across all major North
American product lines (an average increase of 8.7% over 1994). Sales of office
systems grew $56.0 million, or 16.7%, as sales of the Equity, Morrison and Reff
product lines increased due to product enhancements and sales incentives at both
the dealer and sales division level. Sales from the Company's specialty products
(KnollStudio, KnollExtra, Spinneybeck and KnollTextiles) and seating products
grew $4.9 million and $2.4 million, respectively, a combined increase of 6.3%
over 1994, due in part to continued growth from new product introductions such
as the Propeller table and the Parachute and SoHo chairs.
Gross profit. Gross profit was $215.2 million for the year ended December
31, 1995, an increase of $50.3 million, or 30.5%, from $164.9 million for the
year ended December 31, 1994. This increase was principally due to the higher
sales volume, better pricing, discontinuance of low margin products, factory
operating cost improvements, and the cost reductions realized from closing the
Company's Legnano, Italy factory and consolidating its Muskegon, Michigan
operations. As a result, gross profit margin, as a percentage of sales,
increased to 34.7% for the year ended December 31, 1995 from 29.3% for the year
ended December 31, 1994.
Restructuring provision. The Company's restructuring provision of $29.2
million for the year ended December 31, 1994 includes costs associated with the
factory closing and consolidation referred to above, lease cancellations,
product discontinuations, and employee separation costs associated with
initiatives implemented by management in their turnaround program that commenced
in early 1994.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $124.4 million for the year ended December 31,
1995, representing a decrease of $26.5 million, or 17.5%, from $150.9 million
for the year ended December 31, 1994. This decrease is primarily attributable to
the cost reductions and improved operating efficiencies derived from
consolidating and centralizing human resources, finance, purchasing
44
<PAGE>
and logistics, order entry and customer service, and management information
systems operations at one facility, as well as from reducing marketing and
selling expenses associated with showroom and sales office consolidations and
eliminations. As a percentage of sales, selling, general and administrative
expenses improved to 20.0% for the year ended December 31, 1995 from 26.8% for
the year ended December 31, 1994.
Allocated corporate expenses. Allocated corporate expenses, which include
Westinghouse overhead charges for Westinghouse executive management and
corporate legal, environmental, audit, tax, treasury, and other related
services, were $9.5 million for the year ended December 31, 1995, an increase of
$3.6 million, or 61.0%, from $5.9 million for the year ended December 31, 1994.
Allocated corporate expenditures for 1995 include approximately $4 million of
long-term incentive compensation payable to Knoll executives. These allocated
corporate expenses, which are payable by Westinghouse and "pushed down" to Knoll
from Westinghouse, are allocated primarily based on sales, with the exception of
the incentive compensation, and are not necessarily indicative of actual or
future costs.
Income from operations. Income from operations increased to $55.2 million
for the year ended December 31, 1995, representing an increase of $104.7
million, as compared to a loss of $49.5 million for the year ended December 31,
1994. As a percentage of total sales, income from operations increased to 8.9%
for the year ended December 31, 1995 from (8.8)% for the same period in 1994.
This improvement was driven by higher sales volume, better pricing, cost
reductions and improved operating efficiencies, decreased depreciation and
amortization expense, and the restructuring provision charged in 1994 as
described above.
Other expense. The Company incurred other expenses of $1.6 million for the
year ended December 31, 1995, primarily due to the one-time write-off of certain
tooling that was purchased but not used, as compared to $0.7 million in other
income for the year ended December 31, 1994.
Interest expense. Interest expense decreased to $1.4 million for the year
ended December 31, 1995, a decrease of $1.8 million, or 56.3%, as compared to
$3.2 million for the year ended December 31, 1994. This decrease was due
primarily to the reduction of debt in the Company's European subsidiaries.
Income taxes. Income taxes of $22.8 million were recorded for the Company
as a stand-alone entity for the year ended December 31, 1995, an increase of
$15.1 million from $7.7 million for the year ended December 31, 1994.
The deferred income tax liability increased from $3.3 million at December
31, 1994 to $11.3 million at December 31, 1995. This increase resulted in
deferred income tax expense of $8.0 million for the year ended December 31,
1995, an increase of $2.2 million from $5.8 million for the year ended December
31, 1994. The increase in the deferred income tax liability is due primarily to
the reversal of temporary differences arising from restructuring charges
recorded in 1994 partially offset by temporary differences arising from certain
charges recorded in 1995. The effective tax rate increased to 43.8% in 1995 from
an effective rate of 14.8% in 1994, reflecting the impact of positive income
from operations.
Comparison of Year Ended December 31, 1994 to Year Ended December 31, 1993
Total sales. Total sales for the year ended December 31, 1994 were $562.9
million, an increase of $54.5 million, or 10.7%, from total sales of $508.4
million for the year ended December 31, 1993. Sales growth resulted from
increased volume (an average increase of 12.6% over 1993) offset by price
decreases (an average of 1.9% below 1993) across all major North American
product lines. This sales increase was driven by growth from the Company's
office systems product lines, an expanded sales force and new product
introductions. Sales from the Company's office systems grew $29.8 million, or
9.8%, driven by growth in the Morrison and Reff product lines. Sales from
seating, storage, and KnollExtra grew $20.1 million, an increase of 23.2%,
driven by new product introductions, such as the Parachute and SoHo chairs, and
continued Calibre file sales growth. The decrease in average selling price was
the result of price discounting to increase volume.
45
<PAGE>
Gross profit. Gross profit was $164.9 million for the year ended December
31, 1994, an increase of $20.5 million, or 14.2%, from $144.4 million for the
year ended December 31, 1993. This increase was principally due to higher sales
volume and significant cost reductions in the North American operations, which
were implemented during the third and fourth quarters of 1994. Costs were
reduced through employee reductions and consolidation of factory operations. As
a result, gross profit margin, as a percentage of sales, increased to 29.3% for
the year ended December 31, 1994 from 28.4% for the year ended December 31,
1993.
Restructuring provision. The restructuring provision of $29.2 million for
the year ended December 31, 1994 discussed above reflects an increase of $23.0
million over the $6.2 million provided for the same period in 1993 due to the
turnaround initiatives such as cost reductions and the elimination of
unprofitable product lines. The $6.2 million provision in 1993 related primarily
to the consolidation of operations in Europe.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $150.9 million for the year ended December 31,
1994, representing an increase of $5.7 million, or 3.9%, from $145.2 million for
the year ended December 31, 1993. This increase is primarily attributable to
higher marketing and sales costs associated with new product introductions,
expansion of the sales force, and higher commission payments on the increased
sales, partially offset by the cost reductions derived from consolidating and
centralizing administrative functions. As a percentage of sales, selling,
general and administrative expenses improved to 26.8% for the year ended
December 31, 1994 from 28.6% for the year ended December 31, 1993.
Allocated corporate expenses. Allocated corporate expenses, which include
Westinghouse overhead charges for Westinghouse executive management, and
corporate legal, environmental, audit, tax, treasury, and other related
services, were $5.9 million for the year ended December 31, 1994, an increase of
$1.0 million, or 20.4%, from the $4.9 million for the year ended December 31,
1993. These allocated corporate expenses, which are payable by Westinghouse and
"pushed down" to Knoll from Westinghouse, are allocated primarily on the basis
of sales and are not necessarily indicative of actual or future costs.
Loss from operations. The Company's loss from operations was $49.5 million
for the year ended December 31, 1994, as compared to a loss of $42.6 million for
the year ended December 31, 1993. As a percentage of total sales, income from
operations was (8.8)% for the year ended December 31, 1994, as compared with
(8.4)% for the year ended December 31, 1993. The increase in loss from
operations in 1994 is due to the higher restructuring provision for that year,
partially offset by the improvement in gross profit as described above.
Other income. Other income of $0.7 million for the year ended December 31,
1994 decreased $1.4 million from $2.1 million for the year ended December 31,
1993 due to the gain recognized from the sale of excess properties in 1993.
Interest expense. Interest expense was $3.2 million for the year ended
December 31, 1994, a decrease of $0.1 million from the $3.3 million for the year
ended December 31, 1993.
Income taxes. As a stand-alone entity, the Company's income taxes were $7.7
million for the year ended December 31, 1994, an increase of $11.3 million from
the tax benefit of $3.6 million for the year ended December 31, 1993.
The deferred income tax liability increased from $(2.5) million at December
31, 1993 to $3.3 million at December 31, 1994. This increase resulted in
deferred income tax expense of $5.8 million for the year ended December 31,
1994, an increase of $10.0 million from $(4.2) million for the year ended
December 31, 1993. The increase in the deferred income tax liability is due
primarily to the utilization of net operating losses to offset current taxable
income and the recording of a valuation allowance to offset foreign net
operating loss carryforward and deductible temporary differences. These items
were partially offset by temporary differences arising from restructuring
charges recorded in 1994. The effective tax rate increased to 14.8% in 1994 from
an effective rate of (8.2)% in 1993 due to tax rate changes related to the
Company's foreign subsidiaries.
46
<PAGE>
Liquidity and Capital Resources
During the period of its ownership by Westinghouse, the Company relied on
Westinghouse for its cash and cash management needs. As part of the transaction
to acquire Knoll, Westinghouse was obligated to deliver the Company on a
debt-free basis, or to the extent that third-party debt was not repaid prior to
closing, to reduce the purchase price on a dollar-for-dollar basis. The
aggregate purchase price paid in the Acquisition at the Acquisition Closing was
$561,745,407.
In connection with the Acquisition, the Company established a $50 million
Revolving Credit Facility, which was undrawn at the Acquisition Closing.
Borrowings under the Revolving Credit Facility are available for working capital
and other general corporate purposes. Borrowings under the Revolving Credit
facility bear interest at a rate based, at the Company's option, upon (i) LIBOR
(the London Interbank Offered Rate) for one, two, three or six months plus 2.5%
or (ii) ABR (a rate based on a premium over the federal funds rate or on the
prime rate) plus 1.5%. See "Description of the Credit Facilities--Interest."
As a result of the Initial Offering and borrowings under the Term Loan
Facilities, the Company substantially increased its indebtedness and interest
expense. On a pro forma basis, after giving effect to the Acquisition, the
Equity Contribution, the Financing Transactions and the application of the net
proceeds therefrom, at December 31, 1995 the Company had $425 million of
indebtedness, and for the year ended December 31, 1995 the Company had interest
expense of approximately $40.9 million. See "Risk Factors--Significant Leverage
and Debt Service" and "Unaudited Pro Forma Financial Information."
The Company made capital expenditures of $18.7 million, $20.2 million and
$19.3 million in 1993, 1994 and 1995, respectively, primarily for new
manufacturing equipment. For 1996, the Company estimates that approximately $22
million will be required primarily for new manufacturing equipment to improve
productivity, a new management information system, and tooling for new products.
The Company believes that internally generated cash flow, together with
borrowings under the Revolving Credit Facility, will be sufficient to meet its
cash needs for the next 12 months and beyond.
As of December 31, 1995, the Company had $114.6 million of accounts
receivable outstanding, which represented 67 days' sales, as compared to $108.7
million, which represented 70 days' sales, in 1994. As of December 31, 1995, the
Company had $59.6 million of total inventory, which represented 54 days of cost
of goods sold, as compared to $66.9 million, which represented 61 days of cost
of goods outstanding, in 1994.
Inflation
There was no significant impact on Knoll's operations as a result of
inflation during the period ended December 31, 1995 or the two preceding years.
Backlog
As of March 31, 1996, the Company's backlog of unfilled orders was $84.1
million. At March 31, 1995, the Company's backlog totaled $87.6 million. The
Company expects to fill all of the orders comprising its backlog by December 31,
1996, as the Company manufactures substantially all of its products to order and
its average manufacturing lead time is approximately five weeks. As a result,
backlog is not significant to the Company's business.
47
<PAGE>
BUSINESS
General
The Company is a leading manufacturer of office furniture, focusing on the
middle to high end segments of the contract furniture market. With a design
heritage spanning nearly 50 years, a history of award-winning products and 30
designs in the permanent collection of the Museum of Modern Art in New York, the
Company enjoys a reputation for superior design and quality among architects and
designers, facilities managers and dealers. The Company offers innovative,
functional and flexible furniture designs providing customers with workspace
solutions that enhance the quality and image of the workplace and contribute to
worker productivity.
In early 1994, a new management team initiated a turnaround program at the
Company. From 1993 to 1995 the Company's sales increased from $508.4 million to
$620.9 million, EBITDA increased from $(9.7) million to $79.6 million and U.S.
market share increased from approximately 5.3% to approximately 5.7%. EBITDA is
defined as net income (loss) before interest expense, income taxes, and
depreciation and amortization expense. The Company believes that EBITDA is a
frequently used measure that provides additional information for determining its
ability to meet debt service requirements. EBITDA does not represent, and should
not be considered as an alternative to, net income ($(41.3) million for 1993 and
$29.3 million for 1995) or cash flow from operations ($(24.7) million for 1993
and $51.9 million for 1995) as determined by generally accepted accounting
principles.
The Company is headquartered in East Greenville, Pennsylvania and currently
has approximately 3,900 employees worldwide, the majority of whom are located in
the United States and Canada. The Company generated 83% of its 1995 sales in the
United States, which had estimated sales of $9.4 billion in 1995, 10% in Europe,
5% in Canada and 2% in other international markets. The Company operates six
manufacturing plants, which are located in East Greenville, Pennsylvania; Grand
Rapids and Muskegon, Michigan; Toronto, Canada; and Graffignana and Foligno,
Italy.
History and Prior Management
Westinghouse created Knoll by acquiring The Shaw-Walker Company, Reff Inc.
and Knoll International, Inc. in 1989 and 1990 and combining them with
Westinghouse Furniture Systems, a division of Westinghouse. By joining these
four separate companies under the Knoll name, Westinghouse created a business
with a full line of office furnishings, a reputation for high quality and
superior design, and an internationally-recognized brand name.
Knoll's former management failed or was unsuccessful, however, in taking
what the Company believes to have been the necessary actions to reduce costs and
integrate the four companies, leaving Knoll with four essentially separate
operations with independent factories and administrative support staffs.
Moreover, former management took steps that the Company believes may have
impaired Knoll's distribution and sales capabilities. From 1991 to 1993, the
number of Knoll-affiliated dealers was reduced from approximately 520 to 200,
and Knoll attempted to create a single sales force to sell its broadened range
of products. As part of this effort, a large part of the Reff and Shaw-Walker
direct sales forces were eliminated, and the Knoll International sales force,
which had strong ties to the architect and design community but little in-depth
knowledge of Knoll's full range of products, was designated to lead the sales
effort of the combined companies. In addition, most of the former Shaw-Walker
dealers were eliminated, and the remaining dealers and sales representatives did
not have sufficient background and product knowledge to sell Shaw-Walker's
products effectively. Due to the lack of distribution and sales support,
essentially all of Shaw-Walker's products, representing in excess of $70 million
in sales in 1990, have been discontinued.
In addition, Westinghouse was not able to achieve substantial economies
through shared corporate functions such as accounting, sales and distribution.
The impact of these failures was exacerbated by a decline in revenues in the
office furniture industry in 1991. In 1992 Westinghouse decided to put Knoll "on
the market," where it
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remained into 1993. As a result of its prolonged "for sale" status, Knoll
suffered from low employee morale, high employee turnover and a reluctance among
potential customers to commit to Knoll products due to confusion and uncertainty
surrounding Knoll's status. From 1991 to 1993, sales under the prior management
team decreased from $671.0 million to $508.4 million and net income decreased
from $14.5 million to $(41.3) million.
Turnaround Program
In December 1993, Westinghouse appointed Burton B. Staniar, then Chairman
and Chief Executive Officer of Westinghouse Broadcasting, as Knoll's Chairman
and Chief Executive Officer, and ended its efforts to sell Knoll. Mr. Staniar
promptly recruited John H. Lynch as Vice Chairman, and together with Andrew B.
Cogan, Senior Vice President--Marketing and Product Development, and a new
senior management team, they initiated a major turnaround and restructuring
program which:
o Significantly reduced operating costs. Management evaluated all major
business activities and subsequently (i) eliminated duplicative
overhead functions by centralizing and consolidating support services,
such as human resources, finance, accounting, management information
systems and customer service; (ii) simplified the manufacturing
process by redesigning existing products and standardizing certain
component parts across product lines; (iii) sold and consolidated
certain manufacturing facilities; (iv) consolidated purchasing
activities across plants and product lines; and (v) automated certain
labor-intensive manufacturing processes. In the second quarter of
1994, management defined functional "cost buckets" and assigned
responsibility and accountability for each to managers who are
required to develop monthly budgets and to track targets and results.
In addition, certain overhead departments were consolidated and
streamlined in the East Greenville headquarters and discretionary
spending was decreased. Management believes that these cost reductions
were achieved without impairing the quality of the Company's products
or adversely affecting its reputation.
o Instituted product line management. In a significant departure from
prior practice, management began measuring profitability at the
product line level. The Company enhanced its marketing department by
hiring and training professional managers who evaluated each product
for its profitability and market potential. As a result, the number of
pattern types was reduced substantially and certain unprofitable
product lines were eliminated.
o Focused on sales growth. Management renewed sales growth by refocusing
and retraining the Company's sales force, aggressively pursuing
competitively held accounts and targeting the Company's large
installed base. Sales commissions were redefined to reward only
profitable sales volume, and customer service policies, procedures and
measurements were unified and monitored in an effort to improve
customer relations and increase repeat and add-on business.
o Improved the competitive position of its products. Management
accelerated the development of new and enhanced products and placed
product development under the direction of the Company's marketing
department in order to respond better to customer needs. As a result,
the product development process was streamlined through the
elimination and consolidation of duplicate engineering, research and
development groups. The Company estimates that $75 million of its 1995
sales resulted from the introduction of new or enhanced products in
1994 and 1995.
o Introduced management incentives. Management introduced an incentive
program to reward plant and product line managers and department heads
with substantial cash bonuses when specific cost and gross margin
targets are attained. These programs create common objectives among
plant and product managers and have encouraged communication and
teamwork.
o Restructured the European business. In order to better reflect
distinct markets within Europe, management hired a managing director
for Europe and placed responsibility for each country's operations
under a local manager. In addition to adopting product line strategies
similar to those used in
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North America, management assigned profit responsibility to each
country manager, instituted a bonus plan for country managers to
reward profitability at the country level, and revised compensation
systems to reward salespeople on gross margin rather than sales
volume. Finally, management pared Knoll's European infrastructure to a
level commensurate with its sales volume, greatly reducing costs
through plant and showroom closings, elimination of excess personnel
and manufacturing cost improvements.
Management's turnaround and restructuring program resulted in the Company's
taking a restructuring charge of $29.2 million, which resulted in a widening of
the Company's operating loss and net loss for 1994. These efforts also had a
dramatic positive impact on the Company's competitive position and financial
performance. Since mid-1994, virtually every product line has been modified and
improved, and the lead time required to bring new and enhanced products to
market has been decreased significantly through the use of computer-aided design
techniques and other process improvements; customer service, as measured by on-
time shipments, improved to 95% in the fourth quarter of 1995 from 87% in the
third quarter of 1995; average lead times between order entry and delivery of
products to customers have been reduced from seven weeks to five weeks; and over
550 salaried and non-salaried positions have been eliminated. In addition, in
1995 the Company eliminated approximately $25 million in variable operating
costs and approximately $45 million in fixed operating costs and general
expenses, including approximately $22 million of variable and fixed costs in
Europe. In the United States the Company has outperformed the office furniture
industry as a whole over the past two years in terms of percentage sales growth,
and it has achieved seven consecutive quarters of year-over-year operating
income improvement (excluding restructuring charges). From 1993 to 1995, the
Company's sales increased from $508.4 million to $620.9 million; gross margin
increased from 28.4% to 34.7%; and EBITDA as a percentage of sales increased
from (1.9)% to 12.8%.
Industry Overview
The dollar value of U.S. office furniture industry shipments has increased
in each of the past 25 years, with the exception of 1975 and 1991, and has grown
at compound annual rates of approximately 4.0% and 7.3% over the respective
ten-year and three-year periods ended December 31, 1995. BIFMA has estimated
that 1995 industry sales growth in the United States was 7.8%. The Company
expects the middle- to high-end segments of the industry to grow faster than the
industry as a whole, as it believes that within those segments there will be
greater demand for furniture that addresses changing technology requirements and
ergonomic concerns.
The U.S. office furniture market consists of five major segments: office
systems, seating, storage, desks and casegoods, and tables. The following table
shows the percentage of sales that each segment contributed to the U.S. office
furniture industry in 1995 and the Company's estimated market share by segment:
<TABLE>
<CAPTION>
% of 1995 Estimated
U.S. % of U.S. Knoll Knoll
Product Type Market Size Market Sales (1) Share (1)
------------ ----------- ------ --------- ---------
(in billions)
<S> <C> <C> <C> <C>
Office systems......................................... $3.3 35.5% 66.6% 10.7%
Seating................................................ 2.3 23.9 8.9 2.1
Storage................................................ 1.4 15.3 5.3 2.0
Desks and casegoods.................................... 1.4 14.5 3.8 1.5
Tables................................................. 0.7 7.0 1.4 1.1
</TABLE>
(1) Does not reflect $22.3 million of seating products, desks and
casegoods and tables sold under the KnollStudio name.
Office systems consist of movable panels, work surfaces and storage units,
electrical distribution, lighting, organizing tools and freestanding components.
These modular systems are popular with customers who require flexible space
configurations, or where many people share open floor space as is common in
modern office buildings. Both seating, ranging from executive desk chairs to
task chairs and side chairs, and storage products,
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such as overhead shelving, file cabinets and desk pedestals (file cabinets that
serve to support desks), are sold to users of office systems and also are sold
separately to non-systems users. Desks and tables range from classic writing
desks in private offices to conference and meeting room tables which can
accommodate the latest technology.
In addition to factors such as white collar employment levels, corporate
cash flow and non-residential construction which reflect certain macroeconomic
conditions, management believes that industry growth is significantly influenced
by:
o Continued corporate reengineering, restructuring and reorganizing.
Office furniture systems that are simple, flexible and easy to install
are popular with large businesses when reengineering, restructuring
and reorganizing their operations. The Company has experienced
increased demand for systems able to accommodate new work arrangements
such as team workspaces and workspaces shared by several employees who
are frequently out of the office, an arrangement known as "hoteling."
o New office technology and the resulting necessity for improved wire
and data management. Increasingly, office furniture must have the
capability to support the use of multiple monitors, video
conferencing, local area network and wide area network communications,
fiber optics and portable technologies. As businesses become more
dependent upon these technological systems, facility managers demand
furniture that easily can accommodate the office's increasingly
complex wire and cable requirements. For example, the use of "Category
V" high-speed cabling in data networks is rapidly increasing because
it permits ten times more information flow than standard cabling,
reduces electromagnetic or radio frequency interference between the
transmit and receive pairs of wires inside the cable and is cheaper to
install than other high-speed alternatives such as fiber optic cable.
In response, the Company recently redesigned each of its office
systems lines in accordance with anticipated Electronic Industry
Association/Telecommunications Industry Association (EIA/TIA)
guidelines.
o Heightened sensitivity to concerns about ergonomic standards and
demand for improved designs to increase worker productivity. Concerns
about ergonomics, health and safety in the office have intensified in
recent years, prompting some states, such as California, Washington,
Maine and Kentucky, to institute ergonomic standards and guidelines
for all workers. These standards and guidelines have a direct effect
on the demand for ergonomically designed office furniture products. As
a result, the Company believes that corporations will increasingly
seek furniture like that offered by the Company to enhance employee
comfort and productivity through ergonomic design.
o Corporate relocations. As companies relocate to redesigned or new
facilities to take advantage of more sophisticated building services
or to reduce real estate costs, they often take the opportunity to
install furniture that is better adapted to their technological,
ergonomic, organizational and facility needs.
Business Strategy
The Company's operating strategy is to continue and improve upon its
turnaround initiatives, as management believes that significant cost savings and
revenue enhancement opportunities remain. As a result, management will continue
to (i) analyze and control fixed and variable expenses; (ii) emphasize the role
of product line management in product positioning, profitability and
development; and (iii) recognize and reward achievement of corporate financial
goals. In addition, management intends to:
o Enhance existing product offerings. The Company will continue its
efforts to improve and expand upon existing product offerings to
respond to market trends and individual customer needs. Based on
market research and collaboration with customers, the Company adapts
its products to respond to ergonomic concerns, unique space and use
constraints, and technological and wire management needs in a manner
designed to preserve the value of its customers' investments in the
Company's furniture. For example, the Company introduced in 1995 its
Morrison Access wire management components to allow both new and
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existing customers to more easily support their technological needs.
The Company also enhanced its award-winning Sapper chair with an
ergonomically superior mechanism for adjustable lumbar support to
improve its comfort and performance and realized a 68% increase in the
chair's sales in North America in 1995. The Company believes that it
has an industry-leading ability to respond quickly to special customer
requests for product enhancements, which management considers to be
particularly important in the middle to high end of the contract
furniture market where demand for custom solutions is greatest.
o Commission works by prominent designers. By utilizing its
long-standing designer relationships, the Company plans to reemphasize
the practice of commissioning the design of selected high-image
furniture pieces by world-renowned independent designers. Management
believes that this practice is a key element of the Company's strong
relationship with the architect and design community, and that, when
combined with a broad-based product development effort, it will
continue to enhance Knoll's high-end brand image.
o Expand into new markets. The Company plans to introduce new products
in order to expand into markets where its market share is relatively
low and where superior design can be a competitive advantage. Through
extensive market research and direct customer feedback, the Company
has targeted underpenetrated segments of the office systems market,
such as team work spaces, and product categories, such as tables,
seating and textiles, for which it is developing products in
conjunction with independent designers. The Company will continue to
emphasize superior design, functionality and innovation and believes
that its expansion effort will benefit from its significant installed
base and strong brand name. For example, to capitalize on the need for
more sophisticated meeting room and conferencing capabilities driven
by new office technology, the Company recently introduced an
innovative line of Propeller conference and meeting room tables that
accommodate the latest in wire management and technology support while
being flexible enough to allow end users to quickly and easily
reconfigure a meeting room to accommodate their specific needs.
o Expand dealer marketing programs. While a significant share of the
sales volume of the Company's dealers is in the corporate customer
segment, the opportunity exists to leverage its dealers' estimated
900-person sales force to capture a larger share of the business with
medium- to smaller-sized companies and independent business
purchasers. In order to stimulate sales in this segment, the Company
has introduced its QuickShip and PrimeTime! marketing programs which
make it easier and more profitable for the dealers' sales forces to
market the Company's products to such customers. Sales via the
QuickShip and PrimeTime! programs, initiated in 1992 and 1993,
respectively, accounted for approximately $43 million of the Company's
total sales in 1995. The Company has also instituted a Frequent Seller
Club for its dealers' sales forces in order to increase product
promotion.
o Improve information systems. In conjunction with a national
information systems provider, the Company is developing an integrated,
comprehensive management information system for its North American
operations. Management believes that a new, corporate-wide information
system and its recent addition of a Chief Information Officer will
enable the Company to improve its ability to respond quickly and
accurately to product orders of all sizes, improve manufacturing
processes, reduce delivery times, improve shipping accuracy and reduce
customer service costs.
o Improve manufacturing processes. Management believes that it can
improve manufacturing processes and large-order management
capabilities by changing plant layout, enhancing outsourcing strategy,
implementing the new information system, adding a Senior Vice
President--Manufacturing and investing in additional automated
manufacturing equipment.
Management believes that total capital expenditures, which include the capital
costs of these initiatives, will be $22 million in 1996 and $25 million in 1997.
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Products
The Company offers a broad range of office furniture and accessories in
five basic categories: (i) office systems, comprised mainly of the Reff,
Morrison and Equity product lines; (ii) seating, including the Sapper, Bulldog,
Parachute and SoHo chairs; (iii) storage solutions and filing cabinets,
including the Calibre collection; (iv) desks and casegoods, including bookcases
and credenzas; and (v) tables. The Company's KnollStudio collection features its
signature design classics, including high image side chairs, sofas, desks and
tables for both office and home use. The Company also carries its own lines of
textiles and leather products and a line of desk, office and computer
accessories that complement its furniture products and are also sold to other
manufacturers.
With the Company's strength in office systems, which typically accounts for
the end user's largest furniture purchase, the Company believes it has a
significant opportunity to increase its share in seating, storage, desks and
tables by utilizing existing channels to sell to its established customers.
As part of the Company's restructuring program, nearly every product line,
including each office system, was put under the individual management of an
experienced product line manager who carefully considers its market,
competition, strategic positioning, marketing plan, costs, pricing, gross margin
and gross profit objective and is rewarded based on achievement of these
objectives. During 1994 and 1995, the product line managers conducted extensive
market studies and, in coordination with the product development team that was
brought under their control, used the results of the studies to re-design
portions of every major product line in an effort to respond to customer
preferences and reduce manufacturing costs.
The following is a description of the Company's major product lines sold in
the United States and Canada:
Office Systems
The Company offers a complete line of systems products in order to meet the
needs of a variety of organizations. Systems may be used for team work settings,
private offices and open floor plans and are composed of adjustable partitions,
work surfaces, storage cabinets and electrical and lighting systems which can be
moved, re-configured and re-used within the office. Systems therefore offer a
cost effective and flexible alternative to traditional drywall office
construction. The Company has focused on this area of the office furniture
industry because it is the largest segment, typically provides attractive gross
margins and often leads to repeat and add-on sales of additional systems,
complementary furniture and furniture accessories.
Reff. The Reff system is the Company's flagship product for high-image
corporate customers, offering high-quality, sophisticated all-wood construction
with natural veneers and durable laminate and metal options that can be used
interchangeably in private offices, as freestanding casegoods, and in
panel-supported applications. The Reff system offers customers the choice of a
variety of panel types, making the system easy to transform into hundreds of
customized configurations, and has extensive power management capabilities for
the latest in power, data and communications technology. Desk-height wire
management enhancements support Category V high-speed data transmission and
fiber optics, and circuits are arranged to separate data and power cabling while
accommodating the electrical needs of large clusters of workstations and
providing easy access to outlets.
Morrison. The Company believes that the Morrison system offers the broadest
range of performance of any individual system line in the industry. Morrison
creates high-performance furniture options for team environments, private
offices, and open floor plans, and offers the customer completely
interchangeable options from its Morrison Network, Morrison Access and Morrison
Options lines. These products allow the customer to choose from premium wood
surfaces or standard laminate finishes, fully powered desk systems or panels
with accessible wire management, or lower cost alternatives. Morrison products
include partitions, work surfaces, file storage and wire management solutions
which benefit new and existing customers by integrating fully into existing
Morrison platforms. Morrison products also carry a lifetime warranty that is
among very few of its kind in the industry. In addition, the Company's Calibre
desks, pedestals, files and overhead cabinets (described below) may be
integrated with the Morrison system to provide compatible, cost-effective
freestanding work surfaces and storage.
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Equity. The Equity system, with its unique centerline design, simplifies
planning and maximizes the efficient use of space for growing companies and
high-density workplaces. Using a small inventory of parts, Equity offers a wide
variety of panel-based and freestanding applications that are easy to
reconfigure on-site. This flexibility minimizes inventory needs and facilitates
in-house management of expansion and rapid change. Equity's wire management
enhancements also support the latest in power, data and communications
technology. Freestanding products can easily be integrated with the Equity panel
system to reduce the cost of a typical workstation and increase planning
options. The Company finds Equity products to be popular among government
agencies, utilities and high tech and engineering organizations. Equity products
also carry a lifetime warranty that is among very few of its kind in the
industry. In 1995, Knoll instituted an Equity sales training program, primarily
aimed at educating sales representatives on the system's value, and provided a
$1 million sales incentive contest linked to Equity's overall gross profit
performance. The success of this program can be seen in the 22% increase in
Equity sales from 1994 to 1995.
The Company's innovative Reuter Overhead Storage and its height-adjustable
Interaction Tables complement these system product lines by providing storage
and worktable products that address the ease, convenience and ergonomic concerns
of the end user.
Seating
The Company's predecessors focused on the highest end of the seating
market. This focus provided the Company with excellent brand name awareness
among seating customers and in the architect and design community despite the
fact that its seating selection has not been broad enough to allow the Company
to penetrate the seating market to the same extent that it has penetrated the
office systems market. The three major segments of the office seating market are
the "appearance" segment, that appeals to more hierarchical businesses, the
"comfort" segment and the "basic" segment. The Company estimates that U.S. sales
from these three segments in 1995 were approximately $740 million, $560 million
and $500 million, respectively.
The Company competes in the appearance segment with its Bulldog chair,
which offers eight separate models that target every level of a large
corporation, and with its Sapper models. The Company's Bulldog chair has won the
gold award from the International Facilities Management Association (IFMA) and
numerous Institute of Business Designers (IBD) citations for its synchronized
tilt mechanism that improves comfort by enabling the seat to tilt more slowly
than the backrest. The Sapper chair, designed by renowned industrial designer
Richard Sapper, is especially popular in executive offices and conference rooms.
For 1995, the Company has enhanced the comfort of the Sapper chair with a unique
adjustable lumbar support. The Company competes in the comfort segment with its
Parachute and SoHo models. The Parachute chair, introduced in March 1994, was
designed for the less hierarchical organizations typically found in small to
mid-sized businesses and is available in several models targeted to these
cost-conscious customers. SoHo is an affordable task chair with a distinctive,
contemporary look and easy adjustability. The Company does not have product
offerings in the basic seating segment.
Key customer criteria in seating include superior ergonomics, aesthetics,
comfort and quality, all of which the Company believes to be consistent with its
strengths and reputation. With the introduction in 1994 of its Parachute and
SoHo chairs and recent ergonomic enhancements to its Sapper and Bulldog chairs,
the Company has focused on product development to give it a competitive
advantage in this market. In order to capitalize on these introductions, the
Company will also increase sales incentives and has recently added seating
specialists in each sales region who will continue to expand access to the
Company's systems customers in order to further penetrate the seating market.
The majority of sales in the U.S. office seating market are conducted through
the same distribution channels and to the same customers as are office system
sales.
Storage Solutions and Filing Cabinets
Calibre. The Company offers a variety of storage options designed to be
integrated with its office systems as well as with its and others' stand-alone
furniture. The Company's Calibre Collection consists of stand-alone metal
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filing, storage and desk products that integrate into and support the Company's
Morrison and Equity system sales. These products also function as free-standing
furniture in private offices or open-plan environments. This product line is
part of the Company's strategy of providing its customers with a one-stop source
for office furniture and permits the Company to sell products to businesses
whose office furniture systems are provided by its competitors. Additionally,
the Company relies upon its dealers for the promotion of Calibre products to
independent business purchasers and has instituted the QuickShip marketing
program to serve the dealer-promoted product segment. See "--Sales, Marketing
and Distribution."
Desks and Casegoods
The Company's collections of stand-alone wood furniture items, such as
desks, bookshelves and credenzas, are available in a range of designs and price
points. These products combine contemporary styling with sophisticated workplace
solutions and attract a wide variety of customers, from those conducting large
office reconfigurations to small retail purchasers. Casegoods are part of the
Company's strategy of being a one-stop source of quality office furniture.
Tables
The Company recently has expanded its offerings in the table segment of the
market with its innovative line of adjustable Interaction tables. Interaction
tables are designed to be integrated into the Company's systems lines and to
provide customers with ergonomically superior work-surfaces. Additionally, these
tables are often sold as stand-alone products to non-systems customers. In 1995,
the Company introduced an award winning line of Propeller meeting and conference
tables that provide advanced wire management and technology support while being
flexible enough to allow end users to reconfigure a meeting room quickly and
easily to accommodate their specific needs.
Studio
The Company's historically significant KnollStudio collection serves the
design-conscious segment of the fine furniture contract market, providing the
architect and design community and customers with sophisticated furniture for
high-profile office and home uses. KnollStudio provides a marketing umbrella for
the full range of the Company's office products and is recognized as the "design
engine" of the Company. KnollStudio products, including a wide variety of chairs
and sofas, as well as conference, training, side and dining tables, were created
by many of this century's most prominent architects and designers, such as Mies
van der Rohe, Marcel Breuer, Eero Saarinen and Frank Gehry, for prestigious
corporate and residential interiors. This line includes complete collections by
individual designers as well as distinctive single items. The Sapper chair and
Propeller table are marketed as part of the KnollStudio collection.
Complementary Products
The Company offers lines of products that complement its primary office
systems and seating business by permitting it to sell a complete package of
office interiors, generate high gross margins by supplying many of its own
component products, and maintain the Company's unique design image by
incorporating elements developed by its own team of designers.
Textiles. KnollTextiles offers a wide range of coverings for walls, panels
and seating. KnollTextiles was established in 1947 to develop high quality
fabrics for Knoll furniture. These products allow the Company to distinguish its
systems offerings by providing specialty fabric options and flexibility in
fabric selection and application. As it does with its furniture lines, the
Company uses many independent designers to create its fabrics which has helped
it establish what management believes to be a unique reputation for textile
design. During 1995, approximately 43% of the KnollTextiles coverings were
applied to Knoll furniture and 57% were sold to competitors for use in their
office systems, thereby allowing the Company to benefit from its competitors'
systems sales.
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Leather. Spinneybeck supplies quality upholstery leather to the Company, to
other furniture manufacturers and to aviation, custom coach and boating
manufacturers. Spinneybeck was the first to introduce quality aniline-dyed
Italian leathers to the North American design community. Besides using the
leather in its own product offerings, the Company has also established itself as
the largest seller of leather in the "customer's own material" segment of the
contract furniture market, holding what the Company estimates to be a 40% share
of this market in 1995.
Extra. KnollExtra is a rapidly growing line of desk and office accessories,
including letter trays, sorters, binder bins, file holders, calendars, desk
pads, planters, wastebaskets and book ends. In addition, KnollExtra offers a
number of computer accessories and ergonomic office products. Besides being an
attractive supplement to the Company's furniture customers, these products are
also sold to other manufacturers. Sales of KnollExtra products totaled $22.2
million in 1995 and have grown at a compound annual rate of 35% from 1990.
European Products
Knoll Europe has a broad product offering which allows customers to
single-source a complete office environment, including certain products designed
specifically for the European market. Knoll Europe's core product categories
include: (i) office systems, including the Hannah Desking System which is
targeted to Northern Europe, the Allesandri System which is targeted to the
French market, and the SoHo Desking System, which has broad market appeal; (ii)
KnollStudio, which serves the image- and design-oriented segment of the fine
furniture market; (iii) seating, including a comprehensive range of chairs such
as Sapper, Bulldog, and Parachute; and (iv) cabinets, which are designed to
complement its systems products.
Product Design and Development
The Company believes product design and development is one of its
competitive strengths. During 1994 and 1995, under the leadership of Carl G.
Magnusson, the Company's Senior Vice President--Design, the Company won over 20
design awards for its recent product introductions. An important part of the
Company's product development capabilities is its responsiveness to customer
needs and the flexibility to handle customized manufacturing requests. In order
to develop products across its product range, the Company works closely with
independent designers from a number of industries. By utilizing these
long-standing design relationships and listening to customers to analyze their
needs, the Company redesigned or enhanced virtually every product line over the
past 18 months in order to better meet customer preferences. Examples of recent
product introductions and enhancements include:
o An adjustable lumbar support for the Sapper chair.
o Freestanding desks in the Equity system.
o Propeller meeting and conference tables which provide for easy storage
and transportability and have extensive wire management capabilities.
o Morrison Access wire management capabilities.
o A belt-line panel for the Reff system, which offers easier access to
wire and data management.
o Upgrades to all system products to accommodate Category V cable
requirements.
o Calibre desks and pedestals, which provide lower priced desk and
storage options.
The Company has also made a significant investment in computer-aided design
tools to reduce product design and development lead time and improve upon what
management believes to be an industry leading position in quick response to
special customer requests. The Company believes this capability to be
particularly important in the middle to high end of the contract furniture
market where the demand for custom solutions is the greatest.
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Approximately 12% of the Company's U.S. sales in 1995 involved custom products
solutions, the majority of these consisting of modifications to the Company's
standard product offerings. In 1995 the Company instituted new pricing policies
for custom products to ensure that they generate above average margins, and
significantly reduced the development lead time for new products and product
enhancements through the use of computer-aided design techniques and other
process improvements.
Sales, Marketing and Distribution
The Company's products are sold in North America by its 280 direct sales
representatives, who work closely with its approximately 200 dealers to call on
the corporate facilities managers and the architects and designers who influence
the corporate customer's purchasing decisions. The Company believes its sales
representatives in North America and Europe to be particularly resourceful,
having reacted to realigned incentive packages and more focused management by
employing intensified and personalized sales techniques to maintain contact with
the Company's current customers and to seek out new customers in the
marketplace. The Company's sales representatives are supplemented by the
estimated 900-member sales force employed by the Company's dealers who make
separate sales calls, primarily on small to mid-sized business purchasers.
In addition to coordinating sales efforts with the Company's sales
representatives, the Company's dealers generally handle installation and
maintenance for the account after the initial product selection and sale.
Although many of these dealers also carry products of other manufacturers, none
of them act as dealers for the Company's principal direct competitors. The
Company has not experienced significant turnover in its dealer network except at
its own initiation, as the dealer's economic investment in learning all aspects
of a particular manufacturer's product offerings and the value of the
relationships the dealer forms with the Company and with customers discourage
dealers from changing their vendor affiliations. The Company is not dependent on
any one of its dealers, the largest of them accounting for less than 5% of the
Company's North American sales.
The Company estimates that it has sold in excess of $4 billion in office
furniture systems resulting in an installed base which management believes
generates more than $150 million of annual sales through repeat and add-on
orders. Management believes that as the Company's existing office systems
customers expand and reconfigure their workplaces, their need for supplemental
Company products increases. These customers tend to purchase the Company's
products rather than switching manufacturers, as switching sacrifices
compatibility, wastes inventory and makes reconfiguration more complex.
The Company's core customers are "Fortune 1000" companies and businesses
with over 250 employees, which the Company estimates represented approximately
75% of its North American revenues in 1995. The Company has increased its
efforts to penetrate the growing market of medium-sized businesses by expanding
its offerings of affordable free-standing products and by establishing marketing
programs such as QuickShip and PrimeTime!, which are targeted toward dealers.
These quick shipment programs help dealers to access customers with Company
products directly by providing a direct mail catalog and price list along with a
dependable delivery program and firm delivery commitments. Sales of
dealer-promoted products are a fast-growing segment of the Company's business,
benefiting from improved customer access resulting from the QuickShip and
PrimeTime! programs and increased promotions due to dealer incentive programs
such as the Company's Frequent Seller Club. Sales via the QuickShip program
increased from $7.0 million in 1992 to $25.0 million in 1995, and sales via the
PrimeTime! program increased from $6.7 million in 1993 to $18.1 million in 1995.
Since the Company's sales force is not required to generate such sales and since
the Company grants lower discounts to individual purchasers, it generates gross
margins higher than its average gross margins from these dealer-promoted sales.
In Europe, the Company sells its products in largely the same manner as it
does in North America, through a direct sales force and a network of dealers. In
the Latin American and Asia-Pacific markets, the Company uses both dealers and
independent licensees.
57
<PAGE>
Manufacturing and Operations
The Company operates four manufacturing sites in North America, with plants
located in East Greenville, Pennsylvania; Grand Rapids and Muskegon, Michigan;
and Toronto, Canada. The Morrison system and the Bulldog, Parachute and Sapper
chairs are manufactured at the East Greenville plant, while the Equity product
line is produced primarily at the Grand Rapids plant. The Muskegon plant
produces metal products, including Calibre files and desks. The Company's
Toronto facilities encompass three buildings, which manufacture wood products,
panels, and metal products for the Company's Reff product line. In addition, the
Company has two plants in Italy: in Foligno, where wood products are
manufactured, and in Graffignana, where metal components and cabinets are
produced. In 1994, all of the Company's plants were awarded registration to ISO
9000, an internationally developed set of manufacturing facility quality
criteria that the Company believes to be widely recognized.
"Just-in-time" concepts are being implemented at all plant locations and
all plants "build to order" rather than to "forecast," which directly reduces
finished goods inventory levels and stresses continuous improvement in set-up
and delivery time. As a result, the Company's average lead times have been
reduced to five weeks from seven weeks before the restructuring and the Company
currently delivers 95% of its orders on time in North America.
In connection with the Acquisition, the Company entered into a Services
Agreement with Westinghouse, pursuant to which Westinghouse will continue to
provide the Company with certain services it provided previously to the Company.
The Company will reimburse Westinghouse for the cost of providing such services,
including an allocation of corporate overhead.
Raw Materials and Suppliers
Based on management's new initiatives, the Company has centralized
purchasing in its East Greenville facility and has formed close working
relationships with its main suppliers. This effort focuses on achieving
purchasing economies and "just-in-time" manufacturing techniques. The Company
utilizes steel, lumber, paper, paint, plastics, laminates, particleboard,
veneers, glass, fabrics, leathers, and upholstery filling material. Management
currently maintains no long-term supply contracts and believes that the supply
sources for these materials are adequate.
Competition
The office furniture market is highly competitive. Office furniture
companies compete on the basis of (i) product design, including ergonomic and
aesthetic factors, (ii) product quality and durability, (iii) price (primarily
in the middle and budget segments), (iv) on-time delivery and (v) service and
technical support. In the United States, where the Company had a 5.7% market
share and derived approximately 83% of its sales in 1995, five companies
(including the Company) represent approximately 57% of the market.
Steelcase is the largest company in the industry with what management
estimates to be a 23% U.S. market share in 1995 and is a major player in all
pricing segments of the market. Steelcase has historically relied on its
extensive dealer network and a significant installed base to increase sales,
producing approximate 1995 revenues of over $2 billion. With a full-line of
office furniture, accessory products, and a textile subsidiary, Steelcase is a
direct competitor of the Company.
Herman Miller is the Company's most direct competitor, with a strong
position in the middle to high end segments of the market. Management believes
that Herman Miller holds an approximate 10% share of the 1995 U.S. office
furniture market. Herman Miller produces a full line of office furniture,
targeting market segments in which the Company competes.
Haworth, with what management estimates to be an 9.3% share of the U.S.
market, also competes with the Company. Haworth focuses on all price points of
the market by offering a full line of office furniture, although recently
Haworth has expanded its presence in the budget pricing segment through
acquisitions.
58
<PAGE>
HON holds an approximate 9% share of the 1995 U.S. market, and competes
primarily in the budget pricing segment of the market. In addition, through its
Gunlocke subsidiary, HON maintains a small presence in the middle to high end
market with wood office furniture products. Both Haworth and HON distribute
their budget products through non-traditional contract office furniture channels
such as office supply superstores and contract stationary catalogs.
The European market accounted for approximately 10% of the Company's sales
in 1995. This market is highly fragmented, as the combined sales of the
estimated top 20 manufacturers represent less than 40% of the market. The
Company believes that no single company holds more than 5% of the European
market share.
Patents and Trademarks
The Company has approximately 87 active United States utility patents on
various components used in its products and systems and approximately 115 active
United States design patents. The Company also has approximately 113 patents in
various foreign countries. Knoll(R), The Knoll Group(R), KnollStudio(R),
KnollExtra(R), Reff(TM), Bulldog(R), Calibre(R), Equity(R), Parachute(TM), Good
Design Is Good Business(TM), Propeller(TM) and SoHo(TM) are trademarks of the
Company. The Company considers securing and protecting its intellectual property
rights to be important to its business.
Environmental Matters
The Company believes that it is substantially in compliance with all
applicable laws and regulations for the protection of the environment and the
health and safety of its employees. Compliance with federal, state, local and
foreign environmental regulations relating to the discharge of substances into
the environment, the disposal of hazardous wastes and other related activities
has had and will continue to have an impact on the operations of the Company,
but has, since the formation of Knoll, been accomplished without having a
material adverse effect on the operations of the Company. While it is difficult
to estimate the timing and ultimate costs to be incurred due to uncertainties
about the status of laws, regulations and technology, management presently has
no planned expenditures of significant amounts for future environmental
compliance. The Company has trained staff responsible for monitoring compliance
with environmental, health and safety requirements. The Company's ultimate goal
is to reduce and, wherever possible, eliminate the creation of hazardous waste
in its manufacturing processes.
The Company has been identified as a potentially responsible party pursuant
to the Comprehensive Environmental Response Compensation and Liability Act
("CERCLA") for remediation costs associated with waste disposal sites previously
used by the Company. CERCLA imposes liability without regard to fault or the
legality of the disposal. The remediation costs at the CERCLA sites are unknown;
however, the Company does not expect its liability to be material. At each of
the sites, the Company is one of many potentially responsible parties and
expects to have only a small percentage of liability. At some of the sites, the
Company expects to qualify as a de minimis or de micromis contributor, eligible
---------- -----------
for a cash-out settlement. In addition, under the Stock Purchase Agreement,
Westinghouse has agreed to indemnify the Company for certain costs associated
with currently known CERCLA liabilities.
Employees
As of December 31, 1995, the Company employed a total of 3,907 people,
including 2,455 hourly, 197 temporary and 1,255 salaried employees. The Grand
Rapids, Michigan plant is the only unionized Company plant within the United
States, with the Carpenters and Joiners of America--Local 1615 having a
four-year contract expiring August 30, 1998. Management believes that relations
with its employees are generally good. In late 1995, there was a brief work
stoppage at the Company's plant in Foligno, Italy. Although this stoppage has
since ended, there may be further work stoppages at the Foligno plant in the
future.
Management has engaged an executive search firm to help it fill the
positions of Chief Financial Officer and Senior Vice President--Operations. In
February 1996, the Company hired a Chief Information Officer.
59
<PAGE>
Properties
The Company operates over 2,947,000 square feet of facilities, including
manufacturing plants, warehouses and sales offices. Of these facilities, the
Company owns approximately 2,372,000 square feet and leases approximately
575,000 square feet. The Company's manufacturing plants are located in East
Greenville, Pennsylvania; Grand Rapids and Muskegon, Michigan; Toronto, Canada;
and Foligno and Graffignana, Italy.
The Company's corporate headquarters are located in East Greenville,
Pennsylvania, where the Company owns two manufacturing facilities aggregating
approximately 547,000 square feet and leases three warehouses aggregating
approximately 142,000 square feet. The Morrison system and seating for the
Bulldog, Sapper and Parachute product lines are manufactured at the East
Greenville facility, which is also the distribution center for KnollStudio,
KnollExtra and KnollTextiles.
The Company owns one approximately 500,000 square foot manufacturing
facility in Grand Rapids, Michigan, which produces most of the Equity product
line and the Interaction table. The Company also owns an approximately 274,000
square foot plant in Muskegon, Michigan, which produces Calibre files and desks
and Reuter Overhead storage units. The Company's plants in Toronto, Canada
consist of one approximately 375,000 square foot owned building and two leased
properties aggregating approximately 230,000 square feet. The Reff product line
is manufactured at these facilities. The Company's owned facilities in East
Greenville, Grand Rapids and Muskegon are encumbered by mortgages securing an
original aggregate principal amount of $310,000,000 that were entered into in
connection with the Credit Facilities.
The Company owns two manufacturing facilities in Italy: an approximately
258,000 square foot building in Foligno, which houses the Knoll Europe
headquarters and where all of the Company's wood products are manufactured for
Europe, and an approximately 110,000 square foot building in Graffignana, where
metal components and cabinets are manufactured. The Foligno plant is encumbered
by mortgages securing an original amount of approximately $94,500.
The Company believes that its plants and other facilities are sufficient
for its needs for the foreseeable future.
Legal Proceedings
The Company is subject to 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, is likely to have a material adverse effect on the
Company.
60
<PAGE>
MANAGEMENT
Directors and Executive Officers of the Company
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---------------------------- --- ----------------------------------------------------------------------
<S> <C> <C>
Burton B. Staniar 54 Chairman of the Board and Chief Executive Officer
John H. Lynch 43 Vice Chairman of the Board and President
Wolfgang Billstein 47 Managing Director--Knoll Europe
Kathleen G. Bradley 46 Senior Vice President--Sales, Distribution and Customer Service
Andrew B. Cogan 33 Senior Vice President--Marketing and Product Development and Director
Carl G. Magnusson 55 Senior Vice President--Design
Barbara E. Ellixson 42 Vice President--Human Resources
Barry L. McCabe 49 Vice President, Controller and Treasurer
Patrick A. Milberger 39 Vice President, General Counsel and Secretary
John L. Vogelstein 61 Director
Sidney Lapidus 58 Director
Jeffrey A. Harris 40 Director
Kewsong Lee 30 Director
</TABLE>
Burton B. Staniar was appointed Chairman of the Board of the Company in
December 1993 to effect the restructuring of the Company and restore it to
profitability. Prior to that time, Mr. Staniar had held a number of assignments
at Westinghouse, including President of Group W Cable and Chairman and Chief
Executive Officer of Westinghouse Broadcasting. Prior to joining Westinghouse in
1980, he held a number of marketing and general management positions at Colgate
Palmolive and Church and Dwight Co., Inc. He is a graduate of Washington and Lee
University and has an MBA from Columbia University.
John H. Lynch joined the Company as President and Vice Chairman of the
Board in April 1994 and has since worked closely with Mr. Staniar in leading the
restructuring of the Company. Prior to joining the Company, Mr. Lynch was a
partner in BGI, a consulting company, and an associate dean at the Harvard
Business School. He is a graduate of the University of New Hampshire, the
Harvard Business School and Georgetown Law School. Mr. Lynch is a director of
Renaissance Cosmetics, Inc.
Wolfgang Billstein was recruited in November 1994 to lead the restructuring
of the Company's European operations as Managing Director--Knoll Europe. A
German citizen, Mr. Billstein previously worked in Europe for Procter and Gamble
and Benckiser GmbH, a consultancy. He attended the PMD Program at the Harvard
Business School.
Kathleen G. Bradley was named Senior Vice President--Sales, Distribution
and Customer Service in January 1996, after serving as Divisional Vice President
for Knoll's southeast region since 1988. Prior to that time, Ms. Bradley was
regional manager for the Company's Atlanta territory, a position to which she
was promoted in 1983. She began her career with Knoll in 1979. She attended the
University of Wisconsin and the Arts Center College of Design, where she studied
office design.
Andrew B. Cogan has been a director of the Company since February 1996. He
has held the position of Senior Vice President--Marketing and Product
Development since May 1994. Mr. Cogan has held several positions in the design
and marketing group since joining the Company in 1989. He is a graduate of
Harvard University and attended the Strategic Marketing Management program at
Stanford Graduate School of Business.
61
<PAGE>
Carl G. Magnusson has held the position of Senior Vice President--Design
since February 1993. Mr. Magnusson has been involved in design, product
development, quality and communications since joining the Company in 1976. He is
a graduate of St. George's in British Columbia and studied architecture at the
University of Idaho and the Charlmers Technical University in Sweden.
Barbara E. Ellixson was promoted to her current position as Vice
President--Human Resources in August 1994, after serving as Manager of Human
Resources for the Company's East Greenville site. Ms. Ellixson began her career
with Westinghouse in 1971 and has held a variety of human resources positions in
several different business units. She is a graduate of Widener University.
Barry L. McCabe joined the Company in August 1990 as Controller. Mr. McCabe
worked with a number of Westinghouse business units after joining Westinghouse
in 1974 in the Auditing Department. He is a graduate of Penn State University,
has an MBA from Duquesne University and is a Certified Public Accountant.
Patrick A. Milberger joined the Company as Vice President and General
Counsel in April 1994. Prior to joining the Company, Mr. Milberger was an
Assistant General Counsel at Westinghouse and was in private practice at
Buchanan Ingersoll, P.C. He is a graduate of Dickinson College and the
University of Pittsburgh School of Law.
John L. Vogelstein has been a director of the Company since February 1996.
Since 1982, Mr. Vogelstein has been Vice Chairman of the Board of Directors,
and, since 1994, President, of E.M. Warburg Pincus & Co., Inc., a limited
partner of Warburg, and certain of its affiliates. Prior thereto, he was an
officer and a director of E.M. Warburg, Pincus & Co., Inc. and certain of its
affiliates. Mr. Vogelstein currently is a director of Value Health, Inc.,
Mattel, Inc., ADVO Inc., AEGIS GROUP plc., LCI International, Vanstar
Corporation and several privately held companies.
Sidney Lapidus, a director of the Company since February 1996, has been a
Managing Director of E.M. Warburg, Pincus & Co., Inc. since January 1982, where
he has been employed since 1967. Mr. Lapidus is currently a director of
Renaissance Communications Corp. and Pacific Greystone Corporation, as well as
several privately held companies.
Jeffrey A. Harris, a director of the Company since February 1996, has been
a Managing Director of E.M. Warburg, Pincus & Co., Inc. since 1988, where he has
been employed since 1983. Mr. Harris is a director of Newfield Exploration
Company, Comcast UK Cable Partner Limited and several privately held companies.
Kewsong Lee, a director of the Company since February 1996, has been a Vice
President of Warburg, Pincus Ventures, L.P. since January 1995. From 1992 to
1995, Mr. Lee was an associate at E.M. Warburg, Pincus & Co., Inc. and prior to
that had been a consultant at McKinsey & Company, Inc. since 1990. Mr. Lee is
currently a director of RenaissanceRe Holdings Ltd. and a privately held
company.
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<PAGE>
Summary Compensation Table
The following table sets forth, for the fiscal year ended December 31,
1995, individual compensation information for the Chief Executive Officer of the
Company and each of the four other most highly compensated executive officers of
the Company who were serving as executive officers at December 31, 1995 (the
"named executive officers").
<TABLE>
<CAPTION>
Annual Compensation
-------------------
Name and Principal Fiscal All Other
Position Year Salary Bonus Compensation(1)
- ------------------ ------ ------ ----- ---------------
<S> <C> <C> <C> <C>
Burton B. Staniar 1995 465,000 350,000 4,500
Chairman and Chief
Executive Officer
Wolfgang Billstein 1995 360,000 653,100 -0-
Managing Director--
Knoll Europe
John H. Lynch 1995 360,000 360,000 6,075
Vice Chairman and
President
William G. Abel 1995 200,000 200,000 7,200
Senior Vice President--
Sales and Distribution
Andrew B. Cogan 1995 187,620 187,000 -0-
Senior Vice President--
Marketing and Product
Development
</TABLE>
- ----------------
(1) Amounts in this column represent the Company's matching contributions to
The Knoll Group Retirement Savings Plan.
Pension Plans
During fiscal 1995, the Company maintained The Knoll Group Pension Plan
(the "Company Pension Plan") which provides eligible employees with retirement
benefits based on a career average compensation formula. The formula for
computing normal retirement benefits under this plan is 1.45% of career
compensation divided by twelve. Once a participant accumulates 5 years of
vesting service, he or she can take early retirement anytime after reaching age
55. Accrued normal retirement benefit is reduced 6% per year prior to normal
retirement age. The minimum benefit earned for any year of participation in the
plan is $300 ($25 per month), prorated for the partial years worked during the
first and last years of employment. The estimated annual benefits payable upon
normal retirement under this plan for each of the named executive officers is as
follows: Staniar ($0); Billstein ($0); Lynch ($4,350); Abel ($3,938); Cogan
($16,138). Messrs. Staniar and Billstein have never participated in the Company
Pension Plan.
Messrs. Staniar, Lynch, Abel, and Cogan also participated in the
Westinghouse Executive Pension Program (the "Westinghouse Excess Plan") during
fiscal 1995, which provides for benefits not payable by the Company Pension Plan
because of limitations imposed by the Internal Revenue Code of 1986, as amended.
The benefit formula for this plan is average total compensation and years of
eligibility service multiplied by 1.47% minus amounts payable under the Company
Retirement Plan. The estimated annual benefits payable under this plan upon
normal retirement for each of the named executive officers is as follows:
Staniar ($263,989); Billstein ($0); Lynch ($16,188); Abel ($8,028); Cogan
($18,360). Mr. Billstein has never participated in the Westinghouse Excess Plan.
63
<PAGE>
Remuneration covered by the Company Retirement Plan and the Westinghouse
Excess Plan primarily includes salary and bonus, as set forth in the Summary
Compensation Table. Messrs. Staniar, Billstein, Lynch, Abel and Cogan have, as
of December 31, 1995, 0/15.44, 0/0, 1.58/1.58, 1.45/1.45, and 6.97/5.49 years,
respectively, of credited service under the Company Retirement Plan and
Westinghouse Excess Plan, respectively.
Employment Agreements
The Company has entered into employment agreements with Burton B. Staniar,
the Company's Chairman of the Board and Chief Executive Officer, John H. Lynch,
the Company's Vice Chairman and President, and Andrew B. Cogan, the Company's
Senior Vice President--Marketing and Product Development, for a term expiring on
the first anniversary of the Acquisition Closing, subject to automatic one-year
extensions unless either party gives 60 days notice not to renew. The agreements
with Messrs. Staniar and Lynch provide for a base salary of $400,000, with a
service bonus of 25% of base salary at the end of each calendar year, and an
annual bonus of up to 125% of base salary based on the attainment of targets set
by the Board of Directors. The agreement with Mr. Cogan provides for a base
salary of $200,000 and an annual bonus of up to 100% of base salary based on the
attainment of targets set by the Board of Directors. The agreements may be
terminated at any time by the Company, but if so terminated without "cause," or
if the Company fails to renew the agreements, the Company must pay the employee
125% of one year's base salary (100% of base salary in the case of Mr. Cogan).
The agreements also contain non-compete, non-solicitation and confidentiality
provisions.
1996 Stock Incentive Plan
At the Acquisition Closing, TKG adopted the T.K.G. Acquisition Corp. 1996
Stock Incentive Plan (the "Stock Plan. ") pursuant to which up to 1,500,000
shares of TKG common stock (the "Stock"), or options to purchase such stock, may
be granted to officers, key employees, directors and consultants of TKG and its
subsidiaries selected for participation in the Stock Plan. The Stock Plan is
intended as an incentive to encourage stock ownership by such individuals in
order to increase their proprietary interest in TKG's success and to encourage
them to remain in the employ of TKG or its subsidiaries, as the case may be.
The Stock Plan provides for the grant of restricted stock ("Restricted
Stock"), non-qualified stock options ("NQSOs") and incentive stock options as
defined in Section 422 of the Code ("ISOs").
The Stock Plan is administered by a Committee, of at least two directors,
appointed by the Board of Directors of TKG (the "Committee"). The Committee
determines the eligible individuals who are to receive shares of Restricted
Stock, the number of shares to be granted, the terms of the restrictions and
period of time that the restrictions will be effective. The Committee will also
determine the eligible individuals who are to receive options and the terms of
each option grant, including (1) the options price of shares subject to options,
(2) the dates on which options become exercisable, and (3) the expiration date
of each option. The Committee has the power to accelerate the exercisability of
outstanding options at any time.
The purchase price of the shares of Stock subject to options will be fixed
by the Committee, in its discretion, at the time options are granted; provided,
that in no event shall the per share purchase price of an option granted under
the Stock Plan be less than the Fair Market Value Per Share (as defined in the
Stock Plan) on the date of grant.
Optionees and holders of Restricted Stock will have no voting, dividend, or
other rights as shareholders prior to the lapse of all restrictions or the
receipt of unrestricted Stock upon the exercise of options. The exercise price
for options may be paid in cash or, at the discretion of the Committee,
satisfied by tendering Stock having a value equal to the exercise price. The
number of shares covered by options will be appropriately adjusted in the event
of any merger, recapitalization or similar corporate event.
64
<PAGE>
The Board of Directors of TKG may at any time terminate the Stock Plan or
from time to time make such modifications or amendments to the Stock Plan as it
may deem advisable; provided that the Board may not, without the approval of the
TKG shareholders, (i) increase the maximum number of shares of Stock for which
options may be granted under the Stock Plan or (ii) reduce the minimum purchase
price at which options may be granted under the Stock Plan.
Options and Restricted Stock granted under the Stock Plan will be evidenced
by written agreements between the recipient and TKG. Subject to limitations set
forth in the Stock Plan, the terms of option and Restricted Stock agreements
will be determined by the Committee, and need not be uniform among recipients.
Westinghouse Long-Term Incentive Plan and Other Employee Arrangements
Certain Company employees were participants in a long-term incentive
compensation plan established by Westinghouse for key executives of Knoll. The
plan generally provided for payment of awards at the end of a five year period
based on the achievement of certain performance goals. As a result of
consummation of the Acquisition, payment of awards was accelerated pursuant to
the terms of the plan. All awards under the plan were paid by Westinghouse on
February 29, 1996, and the Company did not bear any cash cost of the plan. Under
applicable accounting principles, Westinghouse is required to "push down" the
financial reporting impact of the plan to the financial statements of the
Company. For the fiscal year ended December 31, 1995, a cost of $4 million was
recorded on the books of Knoll as a component of the Westinghouse corporate
expenses allocated to Knoll. The Company understands that payments by
Westinghouse to Company employees under the plan, together with certain payments
to other employees and payments under a severance arrangement, were
approximately $52 million. As a result, the Company believes it will be required
to record an additional noncash charge of approximately $48 million as of
February 29, 1996 in respect of such payments. The financial covenants contained
in the Indenture and the Credit Facilities disregard the financial accounting
impact of any such payments made by Westinghouse.
Compensation Committee Interlocks and Insider Participation
The Company does not have a compensation committee. During the fiscal year
ending December 31, 1995, Messrs. Staniar and Lynch participated in
deliberations of the Company's board of directors concerning executive
compensation for employees of the Company other than Mr. Staniar. Both Messrs.
Staniar and Lynch are officers of the Company. For the fiscal year ending
December 31, 1995, the Compensation Committee of Westinghouse made compensation
decisions with respect to Mr. Staniar.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There have been no transactions between the Company, on the one hand, and
its management, on the other, that are required to be disclosed herein in
accordance with the rules and regulations of the Commission.
65
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
All of the outstanding capital stock of the Company is owned by TKG. All of
the capital stock of the Company and the Guarantors is pledged to NationsBank,
N.A. under the Credit Facilities. See "Description of the Credit Facilities." As
a result, a default of the Company under the Credit Facilities could result in a
change of control of the Company.
The following table sets forth the ownership of the common stock and
preferred stock of TKG of (i) each director of the Company, (ii) the named
executive officers of the Company and (iii) the directors and executive officers
of the Company as a group. Each stockholder holds the same percentage of the
common stock of TKG as he or she owns of the preferred stock of TKG. Except as
otherwise indicated, each stockholder has (i) sole voting and investment power
with respect to such stockholder's shares of stock, except to the extent that
authority is shared by spouses under applicable law and (ii) record and
beneficial ownership with respect to such stockholder's shares of stock.
<TABLE>
<CAPTION>
Number of Shares of Number of Shares of % of Each Class
Name of Beneficial Owner Preferred Stock Common Stock Outstanding
- ----------------------------------- ---------------------- ------------------ --------------
<S> <C> <C> <C>
Burton B. Staniar 20,507.175 72,825 1.3% /6.37%
John H. Lynch 20,507.175 72,825 1.3 /6.37
Wolfgang Billstein 319.8 200 *
William G. Abel --- -- --
Andrew B. Cogan 3,997.5 26,500 * /2.3
John L. Vogelstein -- -- --
Sidney Lapidus -- -- --
Jeffrey A. Harris -- -- --
Kewsong Lee -- -- --
All executive officers and directors as a 49,968.75 172,350 3.1% /15%
group (16 persons)
</TABLE>
- ----------------
* Less than 1%
Warburg owns 1,469,081.25 shares of Preferred Stock and 918,750 shares of
Common Stock. The sole general partner of Warburg is Warburg, Pincus & Co., a
New York general partnership ("WP"). Lionel I. Pincus is the managing partner of
WP and may be deemed to control it. E.M. Warburg Pincus & Co., Inc. ("EMW"),
through a wholly owned subsidiary, manages Warburg. WP owns all of the
outstanding stock of EMW and, as the sole general partner of Warburg has a 15%
interest in the profits of Warburg. EMW owns 1.2% of the limited partnership
interests in Warburg.
66
<PAGE>
DESCRIPTION OF NOTES
General
The Exchange Notes will be issued, and the Senior Notes were issued,
pursuant to an Indenture (the "Indenture") among the Company and TKG, 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
(the "Trustee"). The terms of the Exchange Notes will and the Senior Notes
include those stated in the Indenture and those made part of the Indenture by
reference to the Trust Indenture Act of 1939, as amended (the "Trust Indenture
Act"). The Exchange Notes will be, and the Senior Notes are, subject to all such
terms, and Holders of Notes are referred to the Indenture and the Trust
Indenture Act for a statement thereof. The following summary of certain
provisions of the Indenture does not purport to be complete and is qualified in
its entirety by reference to the Indenture, including the definitions therein of
certain terms used below. Copies of the Indenture and the Registration Rights
Agreement are available as set forth under "Additional Information." The
definitions of certain terms used in the following summary are set forth below
under the caption "Certain Definitions."
The Exchange Notes will be, and the Senior Notes are, unsecured senior
subordinated general obligations of the Company. The Exchange Notes will be, and
the Senior Notes are, unconditionally guaranteed on a senior subordinated and
unsecured basis by TKG (the "Parent Guarantee") and by each existing and future
Domestic Subsidiary of the Company (each, a "Domestic Subsidiary Guarantee" and,
collectively, the "Domestic Subsidiary Guarantees") (TKG and the existing and
future Domestic Subsidiaries of the Company are referred to collectively as the
"Guarantors"), and the Company will cause each future Domestic Subsidiary to
enter into a supplemental indenture providing for a Domestic Subsidiary
Guarantee as required in the Indenture.
Principal, Maturity and Interest
The Notes will be limited in aggregate principal amount to $165 million and
will mature on March 15, 2006. Interest on the Notes will accrue at 10-7/8% per
annum and will be payable semiannually in arrears on March 15 and September 15,
commencing on September 15, 1996, to Holders of record on the immediately
preceding March 1 and September 1. Interest on the Notes will accrue from the
most recent date to which interest has been paid or, if no interest has been
paid, from the date of original issuance. Interest will be computed on the basis
of a 360-day year comprised of twelve 30-day months. Principal, premium, if any,
and interest, including Special Interest (as defined below), on the Notes will
be payable at the office or agency of the Company maintained for such purpose
within the City and State of New York or, at the option of the Company, payment
of interest and Special Interest may be made by check mailed to the Holders of
the Notes at their respective addresses set forth in the register of Holders of
Notes; provided that all payments with respect to Global Notes and Certificated
Securities the Holders of which have given wire transfer instructions to the
Company will be required to be made by wire transfer of immediately available
funds to the accounts specified by the Holders thereof. Until otherwise
designated by the Company, the Company's office or agency in New York will be in
the office of the Trustee maintained for such purpose. The Notes will be issued
in denominations of $1,000 and integral multiples thereof.
Note Guarantees
The Parent Guarantee and the Domestic Subsidiary Guarantees will
irrevocably and unconditionally, jointly and severally, guarantee the
performance and punctual payment when due, whether at Stated Maturity, by
acceleration or otherwise, of all Obligations of the Company under the Indenture
and the Notes. Each of the Guarantors will agree to pay, in addition to any
amount stated above, any and all expenses (including reasonable counsel fees and
expenses) incurred by the Trustee in enforcing any rights under the Parent
Guarantee or the Domestic Subsidiary Guarantees. Each of the Parent Guarantee
and the Domestic Subsidiary Guarantees will be limited in amount to an amount
not to exceed the maximum amount that can be Guaranteed by the relevant
Guarantor without rendering the Parent Guarantee as it relates to TKG or each
Domestic Subsidiary Guarantee as it relates to such Domestic Subsidiary voidable
under applicable law relating to fraudulent conveyance or
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fraudulent transfer or similar laws affecting the rights of creditors generally.
See "Risk Factors--Fraudulent Conveyance Statutes."
Each of the Parent Guarantee and the Domestic Subsidiary Guarantees will be
a continuing Guarantee and shall (a) remain in full force and effect until
payment in full of all of the Company's Obligations under the Indenture and the
Notes or, in the case of a Domestic Subsidiary Guarantee, upon such Domestic
Subsidiary no longer being a Subsidiary and (b) inure to the benefit of and be
enforceable by the Trustee, the Holders and their successors, transferees and
assigns. Each of the Note Guarantees shall be a Guarantee of payment and not of
collection.
Subordination
The payment of principal of, premium, if any, and interest on the Senior
Notes are, and the Exchange Notes will be, subordinated in right of payment, as
set forth in the Indenture, to the prior payment in full in cash of Senior
Indebtedness of the Company, which will include borrowings under the Credit
Facilities, whether outstanding on the date of the Indenture or thereafter
Incurred.
Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its property, an
assignment for the benefit of creditors or any marshaling of the Company's
assets and liabilities, the holders of Senior Indebtedness of the Company will
be entitled to receive payment in full in cash of all Obligations due in respect
of such Senior Indebtedness (including interest after the commencement of any
such proceeding at the rate specified in the applicable Senior Indebtedness of
the Company whether or not the claim for such interest is allowed as a claim
after such bankruptcy filing) before the Holders of Notes will be entitled to
receive any payment with respect to the Notes, and until all Obligations with
respect to Senior Indebtedness of the Company are paid in full in cash, any
distribution to which the Holders of Notes would be entitled shall be made to
the holders of Senior Indebtedness of the Company (except that Holders of Notes
may receive securities that are subordinated at least to the same extent as the
Notes to Senior Indebtedness of the Company and to any securities issued in
exchange for Senior Indebtedness of the Company ("Subordinated Reorganization
Securities") and Holders of Notes may recover payments made from the trust
described under the caption "Legal Defeasance and Covenant Defeasance").
The Company also may not make any payment upon or in respect of the Notes
(except in such Subordinated Reorganization Securities or from the trust
described under the caption "Legal Defeasance and Covenant Defeasance") if (i) a
default in the payment of the principal of, premium, if any, or interest on
Designated Senior Indebtedness of the Company (or any other Senior Indebtedness
of the Company having a principal amount at the time of determination in excess
of $25 million) occurs and is continuing beyond any applicable period of grace
or (ii) any other default occurs and is continuing with respect to Designated
Senior Indebtedness of the Company which permits holders of the Designated
Senior Indebtedness of the Company as to which such default relates to
accelerate its maturity and the Trustee receives a notice of such default (a
"Payment Blockage Notice") from the holders or the representative of the holders
of any Designated Senior Indebtedness of the Company. Payments on the Notes may
and shall be resumed (a) in the case of a payment default, upon the date on
which such default is cured or waived and (b) in the case of a nonpayment
default, the earlier of the date on which such nonpayment default is cured or
waived or 179 days after the date on which the applicable Payment Blockage
Notice is received, unless the maturity of any Designated Senior Indebtedness of
the Company has been accelerated. No new period of payment blockage may be
commenced by a Payment Blockage Notice unless and until 360 days have elapsed
since the effectiveness of the immediately prior Payment Blockage Notice. No
nonpayment default that existed or was continuing on the date of delivery of any
Payment Blockage Notice to the Trustee shall be, or be made, the basis for a
subsequent Payment Blockage Notice.
If the Company fails to make any payment on the Notes when due or within
any applicable grace period, whether or not on account of the payment blockage
provisions described above, such failure would constitute an Event of Default
under the Indenture and would enable the Holders of the Notes to accelerate the
maturity of the
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Notes. See "--Events of Default." The Indenture will further require that the
Company promptly notify holders of Senior Indebtedness of the Company if payment
of the Notes is accelerated because of any Event of Default.
As a result of the subordination provisions described above, in the event
of an insolvency, bankruptcy, reorganization or liquidation of the Company, or
upon the occurrence of a Change of Control or an Asset Sale requiring repurchase
by the Company of any Notes, there may not be sufficient assets remaining to
satisfy the claims of the Holders after satisfying the claims of creditors who
are holders of Senior Indebtedness of the Company. See "Risk
Factors--Subordination of Notes." As of December 31, 1995, on a pro forma basis
after giving effect to the Acquisition and the application of the net proceeds
of the Financing Transactions, there was $260 million of outstanding Senior
Indebtedness of the Company. The Indenture will limit, subject to certain
financial tests, the amount of additional Indebtedness, including Senior
Indebtedness of the Company, that the Company can Incur. See "Certain
Covenants--Limitation on Incurrence of Indebtedness."
Subordination of Note Guarantees; Release of Domestic Subsidiary Guarantees
The Parent Guarantee and the Domestic Subsidiary Guarantees will be
subordinated in right of payment, as set forth in the Indenture, to the prior
payment in full in cash of Senior Indebtedness of the Company.
Upon any distribution to creditors of a Guarantor in a liquidation or
dissolution of such Guarantor or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to such Guarantor or its property,
an assignment for the benefit of creditors or any marshaling of such Guarantor's
assets and liabilities, the holders of Senior Indebtedness will be entitled to
receive payment in full in cash of all Obligations due in respect of such Senior
Indebtedness (including interest after the commencement of any such proceeding
at the rate specified in the applicable Senior Indebtedness, whether or not the
claim for such interest is allowed as a claim after such bankruptcy filing)
before the Holders of Notes will be entitled to receive any payment with respect
to the Parent Guarantee or the Domestic Subsidiary Guarantee, and until all
Obligations with respect to Senior Indebtedness are paid in full in cash, any
payment that would have been made under the Parent Guarantee or the Domestic
Subsidiary Guarantee shall be made to the holders of Senior Indebtedness (except
that Holders of Notes may receive Subordinated Reorganization Securities of such
Guarantor).
Such Guarantor also may not make any payment upon or in respect of the
Parent Guarantee or any Domestic Subsidiary Guarantee (except in such
Subordinated Reorganization Securities of such Guarantor) if (i) a default in
the payment of the principal of, premium, if any, or interest on Designated
Senior Indebtedness (or any other Senior Indebtedness having a principal amount
at the time of determination in excess of $25 million) occurs and is continuing
beyond any applicable period of grace or (ii) any other default occurs and is
continuing with respect to Designated Senior Indebtedness which permits holders
of the Designated Senior Indebtedness as to which such default relates to
accelerate its maturity and the Trustee receives a Payment Blockage Notice from
the holders or the representative of the holders of any Designated Senior
Indebtedness. Any payments under the Parent Guarantee or any Domestic Subsidiary
Guarantee may and shall be resumed (a) in the case of a payment default, upon
the date on which such default is cured or waived and (b) in the case of a
nonpayment default, the earlier of the date on which such nonpayment default is
cured or waived or 179 days after the date on which the applicable Payment
Blockage Notice is received, unless the maturity of any Designated Senior
Indebtedness has been accelerated. No new period of payment blockage may be
commenced by a Payment Blockage Notice unless and until 360 days have elapsed
since the effectiveness of the immediately prior Payment Blockage Notice. No
nonpayment default that existed or was continuing on the date of delivery of any
Payment Blockage Notice to the Trustee shall be, or be made, the basis for a
subsequent Payment Blockage Notice.
As a result of the subordination provisions described above, in the event
of an insolvency, bankruptcy, reorganization or liquidation of a Guarantor,
there may not be sufficient assets remaining to satisfy the claims of the
Holders with respect to the Parent Guarantee or any Domestic Subsidiary
Guarantee after satisfying the claims of creditors who are holders of Senior
Indebtedness.
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In the event of a sale or other disposition of all or substantially all of
the assets of any Domestic Subsidiary Guarantor, by way of merger, consolidation
or otherwise, or a sale or other disposition of all of the Capital Stock of any
Domestic Subsidiary Guarantor, by way of merger, consolidation or otherwise,
such Domestic Subsidiary Guarantor (in the event of a sale or other disposition
of all of the Capital Stock of such Domestic Subsidiary Guarantor) will be
released and relieved of its Obligations under its Domestic Subsidiary Guarantee
or the Person acquiring the property (in the event of a sale or other
disposition of all or substantially all of the assets of such Domestic
Subsidiary Guarantor) (other than a Domestic Subsidiary Guarantor) will not be
required to enter into a Domestic Subsidiary Guarantee, provided, in each case,
that such transaction is carried out pursuant to and in accordance with
"Repurchase at the Option of Holder--Asset Sales" and "Certain
Covenants--Merger, Consolidation or Sale of Assets" below.
Optional Redemption
The Notes will not be redeemable at the Company's option prior to March 15,
2001. Thereafter, the Notes will be subject to redemption at the option of the
Company, in whole or in part, at the redemption prices (expressed as percentages
of principal amount) set forth below plus accrued and unpaid interest, including
any Special Interest, thereon to the applicable redemption date, if redeemed
during the twelve-month period beginning on March 15 of the years indicated
below:
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C> <C>
2001.............................................. 105.438%
2002.............................................. 103.625%
2003.............................................. 101.812%
2004 and thereafter............................... 100.000%
</TABLE>
Notwithstanding the foregoing, at any time on or before March 15, 1999, the
Company may (but shall not have the obligation to) redeem up to 35% of the
original aggregate principal amount of the Notes at a redemption price of 110%
of the principal amount thereof, plus accrued and unpaid interest, including any
Special Interest, thereon to the redemption date, with the net proceeds of a
Public Equity Offering made by the Company or of a capital contribution made by
TKG to the common equity capital of the Company with the net proceeds of a
Public Equity Offering made by TKG; provided that at least 65% of the aggregate
principal amount of Notes originally issued remain outstanding immediately after
the occurrence of such redemption; and provided, further, that such redemption
shall occur within 75 days of the date of the closing of such Public Equity
Offering.
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee, on a pro rata basis, by lot or
by such method as the Trustee shall deem fair and appropriate and in compliance
with the requirements of the principal national securities exchange, if any, on
which the Notes are listed; provided that no Notes of $1,000 or less shall be
redeemed in part. Notices of redemption shall be mailed by first class mail at
least 30 but not more than 60 days before the redemption date to each Holder of
Notes to be redeemed at its registered address. If any Note is to be redeemed in
part only, the notice of redemption that relates to such Note shall state the
portion of the principal amount thereof to be redeemed. A new Note in principal
amount equal to the unredeemed portion thereof will be issued in the name of the
Holder thereof upon cancellation of the original Note. On and after the
redemption date, interest ceases to accrue on Notes or portions of them called
for redemption.
Mandatory Redemption
The Company is not required to make mandatory redemption or sinking fund
payments with respect to the Notes.
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Repurchase at the Option of Holders
Change of Control
Upon the occurrence of a Change of Control, each Holder of Notes will have
the right to require the Company to repurchase all or any part (equal to $1,000
or an integral multiple thereof) of such Holder's Notes pursuant to the offer
described below (the "Change of Control Offer") at an offer price in cash equal
to 101% of the aggregate principal amount thereof plus accrued and unpaid
interest, including any Special Interest, thereon (the "Change of Control
Payment") to the date of purchase (the "Change of Control Payment Date"). Within
30 days following any Change of Control, the Company will mail a notice to each
Holder describing the transaction or transactions that constitute the Change of
Control and offering to repurchase Notes pursuant to the procedures required by
the Indenture and described in such notice. The Change of Control Payment Date
shall be a business day not less than 30 days nor more than 60 days after such
notice is mailed. The Company will comply with the requirements of Rule 14e-1
under the Exchange Act and any other securities laws and regulations thereunder
to the extent such laws and regulations are applicable in connection with the
repurchase of the Notes as a result of a Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an
amount equal to the Change of Control Payment in respect of all Notes or
portions thereof so tendered and (3) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officers' Certificate stating the
aggregate principal amount of Notes or portions thereof being purchased by the
Company. The Paying Agent will promptly mail to each Holder of Notes so tendered
the Change of Control Payment for such Notes, and the Trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each Holder
a new Note equal in principal amount to any unpurchased portion of the Notes
surrendered, if any; provided that each such new Note will be in a principal
amount of $1,000 or an integral multiple thereof. The Indenture will provide
that, prior to complying with the provisions of this covenant, but in any event
within 30 days following a Change of Control, the Company will either repay all
outstanding Senior Indebtedness of the Company or obtain the requisite consents,
if any, under all agreements governing outstanding Senior Indebtedness of the
Company to permit the repurchase of Notes required by this covenant. The Company
will publicly announce the results of the Change of Control Offer on or as soon
as practicable after the Change of Control Payment Date.
Except as described above with respect to a Change of Control, the
Indenture does not contain provisions that permit the Holders of the Notes to
require that the Company repurchase or redeem the Notes in the event of a
takeover, recapitalization or similar restructuring.
The Credit Facilities provides that certain change of control events with
respect to the Company would constitute a default thereunder. Any future credit
agreements or other agreements relating to Senior Indebtedness of the Company to
which the Company becomes a party may contain similar restrictions and
provisions. In the event a Change of Control occurs at a time when the Company
is prohibited from purchasing Notes, the Company could seek the consent of its
lenders to the purchase of Notes or could attempt to refinance the borrowings
that contain such prohibition. If the Company does not obtain such a consent or
repay such borrowings, the Company will remain prohibited from purchasing Notes.
In such case, the Company's failure to purchase tendered Notes would constitute
an Event of Default under the Indenture which would, in turn, constitute a
default under the Credit Facilities. In such circumstances, the subordination
provisions in the Indenture would likely restrict payments to the Holders of
Notes.
The meaning of the phrase "all or substantially all" as used in the
definition of "Change of Control" with respect to a sale of assets varies
according to the facts and circumstances of the subject transaction, has no
clearly established meaning under relevant law and is subject to judicial
interpretation. Accordingly, in certain circumstances, there may be a degree of
uncertainty in ascertaining whether a particular transaction would involve a
disposition of "all or substantially all" of the assets of the Company, and
therefore it may be unclear whether a Change of Control has occurred and whether
the Notes are subject to a Change of Control Offer.
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Restrictions in the Indenture described herein on the ability of the
Company and its Subsidiaries to incur additional Indebtedness, to grant Liens on
its or their property, to make Restricted Payments and to make Asset Sales may
also make more difficult or discourage a takeover of the Company, whether
favored or opposed by the management of the Company. Consummation of any such
transaction in certain circumstances may require redemption or repurchase of the
Notes, and there can be no assurance that the Company or the acquiring party
will have sufficient financial resources to effect such redemption or
repurchase. Such restrictions and the restrictions on transactions with
Affiliates may, in certain circumstances, make more difficult or discourage any
leveraged buyout of the Company or any of its Subsidiaries by the management of
the Company or other Persons. While such restrictions cover a variety of
arrangements which have traditionally been used to effect highly leveraged
transactions, the Indenture may not afford the Holders of Notes protection in
all circumstances from the adverse aspects of a highly leveraged transaction,
reorganization, restructuring, merger or similar transaction.
Asset Sales
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly, engage in an Asset Sale
(except an Asset Sale (an "Exempt Asset Sale") the Net Proceeds of which plus
the Net Proceeds of all other Asset Sales concurrently or previously made in the
same fiscal year do not exceed $1 million) unless (i) the Company (or the
Subsidiary) receives consideration at the time of such Asset Sale at least equal
to the Fair Market Value (as determined by the Board, whose determination shall
be conclusive if made in good faith and evidenced by a Board Resolution), and in
the case of a lease of assets, a lease providing for rent and other conditions
which are no less favorable to the Company (or the Subsidiary) in any material
respect than the then prevailing market conditions (as determined by the Board,
whose determination shall be conclusive if made in good faith and evidenced by a
Board Resolution) of the assets or Capital Stock sold or otherwise disposed of,
and (ii) at least 85% (100% in the case of lease payments) of the consideration
therefor received by the Company or such Subsidiary is in the form of cash or
Cash Equivalents; provided that for purposes of this clause (ii), "cash" shall
include the amount of any Indebtedness for money borrowed and any Capital Lease
Obligation that (x) is assumed by the transferee of any such assets or other
property in such Asset Sale or (y) with respect to the sale or other disposition
of all of the Capital Stock of any Subsidiary of the Company, remains the
liability of such Subsidiary subsequent to such sale or other disposition, but
only to the extent that such assumption, sale or other disposition, as the case
may be, is effected on a basis under which there is no further recourse to the
Company or any of its Subsidiaries with respect to such liability.
The Company may apply Net Proceeds of an Asset Sale, at its option, within
270 days from the receipt of such Net Proceeds (a) to permanently reduce Senior
Indebtedness of the Company other than Indebtedness under the Revolving Credit
Facility, (b) to permanently reduce Indebtedness under the Revolving Credit
Facility (and to correspondingly reduce commitments with respect thereto), (c)
to acquire another business (including through purchase of stock or merger) or
other assets, in each case in, or used or useful in, the same or a similar line
of business as the Company or any of its Subsidiaries was engaged in on the date
of the Indenture or any reasonable extensions or expansions thereof or (d) to
reimburse the Company or its Subsidiaries for expenditures made, and costs
incurred, to repair, rebuild, replace or restore property subject to loss,
damage or taking to the extent that the Net Proceeds consist of insurance
proceeds received on account of such loss, damage or taking. Pending the final
application of any such Net Proceeds, the Company may temporarily reduce
Indebtedness under the Revolving Credit Facility (without any obligation to
reduce the commitments thereunder) or otherwise invest such Net Proceeds in any
manner that is not prohibited by the Indenture. Any Net Proceeds from Asset
Sales (other than Exempt Asset Sales) that are not applied or invested as
provided and in the relevant time period described in the first sentence of this
paragraph will be deemed to constitute "Excess Proceeds." When the aggregate
amount of Excess Proceeds exceeds $5 million, the Company will be required to
make an offer to all Holders of Notes (and, at its option, other pari passu
Indebtedness) (an "Asset Sale Offer") to purchase the maximum principal amount
of Notes (and such other Indebtedness) that may be purchased out of the Excess
Proceeds, at an offer price in cash in an amount equal to 100% of the principal
amount thereof plus accrued and unpaid interest, including Special Interest,
thereon to the date of purchase, in accordance with the procedures set forth
below. If the aggregate principal amount of Notes (and such other Indebtedness)
surrendered by Holders thereof exceeds the amount of
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Excess Proceeds, the Company shall select the Notes (and such other
Indebtedness) to be purchased on a pro rata basis, provided that only Notes in
denominations of $1,000 or integral multiples thereof shall be purchased.
Holders whose Notes are purchased only in part will be issued new Notes equal in
principal amount to the unpurchased portion of the Notes surrendered. Upon
completion of such offer to purchase, the amount of Excess Proceeds shall be
reset at zero.
In the event the Company is required to make an Asset Sale Offer, it shall
promptly, and in any event within 30 days after the Company becomes obligated to
make such Asset Sale Offer, deliver to the Trustee and send, by first-class mail
to each Holder, a written notice stating that the Holder may elect to have such
Holder's Notes purchased by the Company either in whole or in part subject to
proration in integral multiples of $1,000 of principal amount, at the applicable
purchase price. The notice shall specify a purchase date not less than 30 days
or more than 60 days after the date of such notice (the "Asset Sale Purchase
Date") and shall contain information concerning the Asset Sale Offer (including,
to the extent available, appropriate pro forma financial information) and all
instructions and materials necessary to tender Notes pursuant to the Asset Sale
Offer, together with the information contained in the next following paragraph.
Not later than the date upon which written notice of an Asset Sale Offer is
delivered to the Trustee as provided above, the Company shall deliver to the
Trustee an Officers' Certificate as to (i) the amount of the Asset Sale Offer
(the "Asset Sale Offer Amount"), (ii) the allocation of the Net Proceeds from
the Asset Sale pursuant to which such Asset Sale Offer is being made and (iii)
the compliance of such allocation with the provisions of the next preceding
paragraph. On such date, the Company shall also deposit irrevocably with the
Trustee or with the Paying Agent in cash an amount equal to the Asset Sale Offer
Amount to be held for payment in accordance with the provisions of this
provision. On the Asset Sale Purchase Date, the Company shall deliver, or cause
to be delivered, to the Trustee the Notes or portions thereof that have been
tendered properly to and are to be accepted by the Company. The Paying Agent
shall promptly mail or deliver payment to each tendering Holder in the amount of
the purchase price. In the event that the aggregate purchase price of the Notes
delivered to the Trustee is less than the Asset Sale Offer Amount, the excess
shall be delivered to the Company immediately after completion of the Asset Sale
Offer.
A Holder electing to have a Note purchased will be required to surrender
the Note, with an appropriate form duly completed, to the Paying Agent at the
address specified in the notice at least five business days prior to the Asset
Sale Purchase Date. A Holder will be entitled to withdraw his election if the
Paying Agent receives not later than three business days prior to the Asset Sale
Purchase Date, a facsimile transmission or letter setting forth the name of the
Holder, the principal amount of the Note that was delivered for purchase by the
Holder and a statement that such Holder is withdrawing his election to have such
Note purchased.
At the time the Company delivers, or causes to be delivered, Notes to the
Trustee that are to be accepted for purchase, the Company will also deliver an
Officers' Certificate stating that such Notes are to be accepted by the Company
pursuant to and in accordance with the terms of this provision. A Note shall be
deemed to have been accepted for purchase at the time the Paying Agent mails or
delivers payment therefor to the surrendering Holder.
The Company shall comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act and any other securities laws or
regulations in connection with the repurchase of Notes pursuant to this
provision. To the extent that the provisions of any securities laws or
regulations conflict with this provision, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under this provision by virtue thereof.
Certain Covenants
Limitation on Incurrence of Indebtedness
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly, Incur any Indebtedness
(including Acquired Indebtedness) other than Permitted Indebtedness; provided,
however, that the Company and its Subsidiaries may Incur Indebtedness (including
Acquired
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Indebtedness) if: (i) the Consolidated Interest Coverage Ratio for the Company's
most recently ended four full fiscal quarters for which internal financial
statements are available immediately preceding the date on which such additional
Indebtedness is Incurred would have been at least 2.0 to 1.0 with respect to any
Incurrence on or before December 31, 1997, or at least 2.25 to 1.0 after
December 31, 1997 but on or before December 31, 1998, or at least 2.5 to 1.0
thereafter, determined on a pro forma basis (including a pro forma application
of the Net Proceeds therefrom), as if the additional Indebtedness had been
Incurred at the beginning of such four-quarter period; and (ii) no Default or
Event of Default (except any as may be cured through the application of proceeds
of such Indebtedness) shall have occurred and be continuing or would occur as a
consequence thereof.
For purposes of determining any particular amount of Indebtedness under
this "--Limitation on Incurrence of Indebtedness" covenant, Guarantees, Liens or
Obligations with respect to letters of credit supporting Indebtedness otherwise
included in the determination of such particular amount shall not be included.
For purposes of determining compliance with such covenant, in the event that an
item of Indebtedness meets the criteria of more than one of the types of
Indebtedness described in the definition of Permitted Indebtedness, the Company,
in its sole discretion, shall classify such item of Indebtedness and shall only
be required to include the amount and type of such Indebtedness in one of such
clauses.
Limitation on Restricted Payments
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly: (i) declare or pay any
dividend or make any distribution on account of the Company's or any of its
Subsidiaries' Capital Stock (including, without limitation, any payment to
stockholders of the Company in connection with a merger or consolidation
involving the Company), other than dividends or distributions payable solely in
Capital Stock (other than Redeemable Stock) of the Company or dividends or
distributions payable solely to the Company or any Wholly Owned Subsidiary of
the Company; (ii) purchase, redeem or otherwise acquire or retire for value any
Capital Stock of the Company or any direct or indirect parent of the Company or
Subsidiary or Unrestricted Subsidiary or other Affiliate of the Company (other
than any such Capital Stock owned by the Company or any Wholly Owned Subsidiary
of the Company); (iii) make any principal payment on, or purchase, redeem,
defease or otherwise acquire or retire for value, prior to a scheduled mandatory
sinking fund payment date or Stated Maturity any (a) Subordinated Indebtedness
of the Company or (b) Indebtedness of any Subsidiary, other than Indebtedness of
the Company owing to a Wholly Owned Subsidiary or of a Subsidiary owing to the
Company or Indebtedness under the Credit Facilities; or (iv) make any Investment
other than a Permitted Investment (all such payments and other actions set forth
in clauses (i) through (iv) above being collectively referred to as "Restricted
Payments"), unless, at the time of and after giving effect to such Restricted
Payment:
(a) no Default or Event of Default shall have occurred and be continuing or
would occur as a consequence thereof;
(b) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made at
the beginning of the applicable four-quarter period, have been permitted to
Incur at least $1.00 of additional Indebtedness (other than Permitted
Indebtedness) pursuant to the Consolidated Interest Coverage Ratio test set
forth in the first paragraph of the covenant described above under the caption
"--Limitation on Incurrence of Indebtedness"; and
(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments declared or made by the Company and its Subsidiaries after
the date of the Indenture, is less than the sum of (i) 50% of the Consolidated
Net Income of the Company for the period (taken as one accounting period) from
the beginning of the first fiscal quarter commencing after the date of the
Indenture to the end of the Company's most recently ended fiscal quarter for
which internal financial statements are available at the time of such Restricted
Payment (or, if such Consolidated Net Income for such period is a deficit, less
100% of such deficit), plus (ii) 100% of the aggregate net cash proceeds
received by the Company from the issue or sale after the date of the Indenture
of Capital Stock of the Company or of debt securities of the Company that have
been converted into such Capital Stock (other than Capital Stock (or convertible
debt securities) sold to a Subsidiary or an Unrestricted Subsidiary of
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the Company and other than Redeemable Stock or debt securities that have been
converted into Redeemable Stock), plus (iii) 100% of the net reduction in
Investments in any Unrestricted Subsidiary resulting from payments of interest
on Indebtedness, dividends, repayments of loans or advances, or other transfers
of assets, in each case to the Company or any Subsidiary of the Company from
such Unrestricted Subsidiary (except to the extent that any such payment is
included in the calculation of Consolidated Net Income), or from redesignations
of Unrestricted Subsidiaries as Subsidiaries of the Company, provided that the
amount included in this clause (iii) shall not exceed the amount of Investments
previously made by the Company and its Subsidiaries in such Unrestricted
Subsidiary.
The foregoing provisions, however, will not prohibit (i) the payment of any
dividend within 60 days after the date of declaration thereof, if at said date
of declaration such payment would have complied with the provisions of the
Indenture; (ii) the making of any Restricted Investment in exchange for, or out
of the proceeds of, the substantially concurrent sale (other than to a
Subsidiary or any Unrestricted Subsidiary of the Company) of Capital Stock of
the Company (other than Redeemable Stock); provided, that any net cash proceeds
that are utilized for any such Restricted Investment, and any Net Income
resulting therefrom, shall be excluded from clause (c) of the preceding
paragraph; (iii) the redemption, repurchase, retirement or other acquisition of
any Capital Stock or Subordinated Indebtedness of the Company in exchange for,
or out of the proceeds of, the substantially concurrent sale (other than to a
Subsidiary or any Unrestricted Subsidiary of the Company) of other Capital Stock
of the Company (other than any Redeemable Stock); provided, that any net cash
proceeds that are utilized for any such redemption, repurchase, retirement or
other acquisition, and any Net Income resulting therefrom, shall be excluded
from clause (c) of the preceding paragraph; (iv) the redemption, repurchase,
defeasance or other acquisition or retirement for value of Subordinated
Indebtedness, including premium, if any, and accrued and unpaid interest, with
the proceeds of Qualified Subordinated Indebtedness; (v) Investments at any one
time outstanding in an aggregate amount not to exceed $5 million in any Person
or Persons the primary business of which is related, ancillary or complementary
to the businesses of the Company and its Subsidiaries on the date of such
Investments; (vi) any payment by the Company or any of its Subsidiaries directly
or through any direct or indirect parent company (a) in connection with the
repurchase of outstanding shares of Capital Stock of the Company or TKG
following the death, disability or termination of employment of Management
Shareholders and (b) of amounts required to be paid to participants or former
participants in employee benefit plans upon any termination of employment by
such participants as provided in the documents related thereto, in an aggregate
amount (for both clauses (a) and (b)) not to exceed $5 million in any fiscal
year (provided that any unused amount may be carried over to any subsequent
fiscal year subject to a maximum amount of $10 million in any fiscal year);
(vii) payments to TKG pursuant to tax sharing agreement under which the Company
is allocated its proportionate share of the tax liability of the affiliated
group of corporations that file consolidated federal income tax returns (or that
file state or local income tax returns on a consolidated basis); (viii) loans,
advances, dividends or distributions by the Company or any of its Subsidiaries
to TKG to pay for corporate, administrative and operating expenses in the
ordinary course of business, including payment of directors' and officers'
insurance premiums, key man life insurance premiums, directors' fees, and fees,
expenses and indemnities in connection with the Acquisition and Financing
Transactions and related transactions (including the registration under
applicable laws and regulations of its debt securities as required by the
Registration Rights Agreement (as defined below); (ix) (A) loans, advances,
dividends or distributions by the Company or any of its Subsidiaries to TKG not
to exceed an amount necessary to permit TKG to pay (1) its costs (including all
professional fees and expenses) incurred to comply with its reporting
obligations under federal or state laws or under the Indenture, including as
described under "--Reports," or in connection with reporting or other
obligations under the Credit Facilities or any related collateral documents or
guarantees, (2) its expenses incurred in connection with any public offering of
equity securities which has been terminated by the board of directors of TKG,
the net proceeds of which were specifically intended to be received by or
contributed or loaned to the Company and (B) loans or advances by the Company or
any of its Subsidiaries to TKG not to exceed an amount necessary to permit TKG
to pay its interim expenses incurred in connection with any public offering of
equity securities the net proceeds of which are specifically intended to be
received by or contributed or loaned to the Company, which, unless such offering
shall have been terminated by the board of directors of TKG, shall be repaid to
the Company promptly out of the proceeds of such offering and (x) Investments in
Currency Agreements. In computing the amount of Restricted Payments for purposes
of clause (c) of the preceding paragraph, Restricted Payments under clauses
(ii), (iii), (iv), (v), (vii), (viii), (ix) and (x) shall not be included.
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The amount of all Restricted Payments (other than cash) shall be the Fair
Market Value (as determined by the Board, whose determination shall be
conclusive if made in good faith and evidenced in a Board Resolution) on the
date of the Restricted Payment of the asset(s) proposed to be transferred by the
Company or such Subsidiary, as the case may be, pursuant to the Restricted
Payment. Not later than the date of making any Restricted Payment, the Company
shall deliver to the Trustee an Officers' Certificate stating that such
Restricted Payment is permitted and setting forth the basis upon which the
calculations required by the covenant described under the caption "--Limitation
on Restricted Payments" were computed, which calculations may be based upon the
Company's latest available financial statements.
Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly, create or otherwise cause or
suffer to exist or become effective any consensual encumbrance or restriction of
any kind on the ability of any Subsidiary to (i)(a) pay dividends or make any
other distributions to the Company or any of its Subsidiaries on its Capital
Stock or with respect to any other interest or participation in, or measured by,
its profits, or (b) pay any Indebtedness owed to the Company or any of its
Subsidiaries, (ii) make loans or advances to the Company or any of its
Subsidiaries, or (iii) transfer any of its properties or assets to the Company
or any of its Subsidiaries, except for such encumbrances or restrictions
existing under or by reason of (A) Existing Indebtedness as in effect on the
date of the Indenture, (B) the Credit Facilities as in effect as of the date of
the Indenture, and any amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacements or refinancings thereof,
provided that such amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacements or refinancings are no more restrictive
(as determined by the Board, whose determination shall be conclusive if made in
good faith and evidenced by a Board Resolution) with respect to such dividend
and other payment restrictions than those contained in the Credit Facilities as
in effect on the date of the Indenture, (C) the Indenture and the Notes, (D)
applicable law, (E) Refinancing Indebtedness, provided that the restrictions
contained in the agreements governing such Refinancing Indebtedness are no more
restrictive than those contained in the agreements governing the Indebtedness
being refinanced, (F) Indebtedness of a Person existing at the time such Person
becomes a Subsidiary of the Company (provided that (1) such Indebtedness is not
incurred in connection with, or in contemplation of, such Person becoming a
Subsidiary of the Company, (2) such encumbrance or restriction is not applicable
to any Person, or the properties or assets of any Person, other than the Person
so acquired and its Subsidiaries and (3) such Indebtedness is otherwise
permitted to be incurred pursuant to the provisions of the covenant described
under "--Limitation on Incurrence of Indebtedness" above), (G) secured
Indebtedness otherwise permitted to be incurred pursuant to the provisions of
the covenants described under "--Limitation on Incurrence of Indebtedness" above
and "--Limitation on Subordinated Liens" below to the extent that such
Indebtedness limits the right of the debtor to dispose of the assets securing
such Indebtedness, (H) customary non-assignment provisions restricting
subletting or assignment of any lease or other agreement entered into by the
Company or any of its Subsidiaries, (I) customary net worth provisions contained
in leases and other agreements entered into by the Company or any of its
Subsidiaries in the ordinary course of business, and (J) customary restrictions
with respect to a Subsidiary of the Company pursuant to an agreement that has
been entered into for the sale or other disposition of all or substantially all
of the Capital Stock or assets of such Subsidiary.
Limitation on Subordinated Liens
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly, create, Incur or suffer to
exist any Lien (other than Permitted Liens) on any of its assets, now owned or
hereafter acquired, securing any Indebtedness other than Senior Indebtedness of
the Company, in the case of the Company, or Senior Indebtedness of the
Subsidiary, in the case of a Subsidiary, unless the Notes or, in the case of a
Domestic Subsidiary, its Domestic Subsidiary Guarantee, are secured equally and
ratably with such other Indebtedness; provided that, if such Indebtedness is by
its terms expressly subordinate to the Notes in the case of the Company or to
the Domestic Subsidiary Guarantees in the case of the Domestic Subsidiaries, the
Lien securing such Indebtedness shall be subordinate or junior to the Lien
securing the Notes or the Domestic Subsidiary
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Guarantees, as the case may be, with the same relative priority as such
Indebtedness shall have with respect to the Notes or the Domestic Subsidiary
Guarantees, as the case may be.
Sale and Leaseback Transactions
The Indenture will provide that the Company shall not, and shall not cause
or permit any of its Subsidiaries to, enter into any Sale and Leaseback
Transaction. Notwithstanding the foregoing, the Company or any Subsidiary may
enter into a Sale and Leaseback Transaction if: (i) after giving pro forma
effect to any such Sale and Leaseback Transaction, the Company shall be in
compliance with the covenants described under the captions "--Limitation on
Incurrence of Indebtedness" and "--Limitation on Subordinated Liens" above; (ii)
the gross cash proceeds of such Sale and Leaseback Transaction are at least
equal to the Fair Market Value of such property (as determined by the Board,
whose determination shall be conclusive if made in good faith and evidenced by a
Board Resolution); (iii) the aggregate rent payable (exclusive of the interest
component thereof) by the Company in respect of such Sale and Leaseback
Transaction is not in excess of the fair market rental value of the property
leased pursuant to such Sale and Leaseback Transaction; and (iv) the Company
shall apply the net cash proceeds of the sale as provided under "Repurchase at
the Option of Holders--Asset Sales" above, to the extent required therein.
Limitation on Ownership of and Liens on Capital Stock
The Indenture will provide that the Company will not permit any Person
(other than the Company or any Wholly Owned Subsidiary of the Company) to own
any Capital Stock of any Subsidiary of the Company or any lien or security
interest therein, and will not permit any Subsidiary of the Company to issue
Capital Stock (except to the Company or to a Wholly Owned Subsidiary of the
Company) or create, Incur or suffer to exist any lien or security interest
therein, in each case except (a) directors' qualifying shares, (b) Capital Stock
issued prior to the time such Subsidiary became a Subsidiary of the Company that
was neither issued in contemplation of such Subsidiary becoming a Subsidiary nor
acquired at that time by the Company or any other Subsidiary, (c) if such
Subsidiary ceases to be a Subsidiary (as a result of the sale of 100% of the
shares of such Subsidiary, the Net Proceeds from which are applied in accordance
with "Repurchase at the Option of Holders--Asset Sales"), or (d) liens or
security interests on Capital Stock of any Subsidiary to secure Indebtedness
under the Credit Facilities or other Senior Indebtedness of such Subsidiary
Incurred in compliance with the Consolidated Interest Coverage Ratio test set
forth in the first paragraph of the covenant described under the caption
"--Limitation on Incurrence of Indebtedness."
Merger, Consolidation or Sale of Assets
The Indenture will provide that the Company may not, in a single
transaction or series of related transactions, consolidate or merge with or into
(whether or not the Company is the surviving corporation), or directly and/or
indirectly through its Subsidiaries sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of its properties or assets
(determined on a consolidated basis for the Company and its Subsidiaries taken
as a whole) in one or more related transactions to, another Person, or allow any
Person to merge into the Company (other than the consolidation or merger of a
Wholly Owned Subsidiary with or into the Company) (provided that the creation of
a Lien by a Person on or in any of its assets shall not in and of itself
constitute the sale, assignment, transfer, lease, conveyance or other
disposition of the asset or assets subject to the Lien) unless (i) either (a)
the Company is the surviving corporation or (b) the entity or the Person formed
by or surviving any such consolidation or merger (if other than the Company) or
to which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made is a corporation organized or existing under the laws of
the United States, any state thereof or the District of Columbia and expressly
assumes all the obligations of the Company under the Notes and the Indenture
pursuant to a supplemental indenture in a form reasonably satisfactory to the
Trustee; (ii) immediately after such transaction no Default or Event of Default
exists; and (iii) the Company or, if other than the Company, the entity or
Person formed by or surviving any such consolidation or merger, or to which such
sale, assignment, transfer, lease, conveyance or other disposition shall have
been made (A) will have Consolidated Net Worth immediately after the transaction
on a pro forma basis equal to or greater than the Consolidated Net Worth
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of the Company immediately preceding the transaction and (B) will, at the time
of such transaction and after giving pro forma effect thereto as if such
transaction had occurred at the beginning of the applicable four-quarter period,
be permitted to Incur at least $1.00 of additional Indebtedness (other than
Permitted Indebtedness) pursuant to the Consolidated Interest Coverage Ratio
test set forth in the first paragraph of the covenant described above under the
caption "Limitation on Incurrence of Indebtedness."
Notwithstanding the foregoing, the consummation of the Merger need not
comply with clauses (ii) or (iii) of the foregoing paragraph.
In the event of any transaction (other than a lease) described in and
complying with the immediately preceding paragraphs in which the Company is not
the surviving person and the surviving person assumes all the obligations of the
Company under the Notes and the Indenture pursuant to a supplemental indenture,
such surviving person shall succeed to, and be substituted for, and may exercise
every right and power of, the Company, and the Company will be discharged from
its obligations under the Indenture and the Notes; provided that solely for the
purpose of calculating amounts described in clause (c) under "--Limitation on
Restricted Payments, any such surviving person shall only be deemed to have
succeeded to and be substituted for the Company with respect to the period
subsequent to the effective time of such transaction, and the Company (before
giving effect to such transaction) shall be deemed to be the "Company" for such
purposes for all prior periods.
For purposes of the first paragraph of this covenant, the transfer (by
lease, assignment, sale or otherwise, in a single transaction or series of
transactions) of all or substantially all of the properties or assets of one or
more Subsidiaries of the Company, the Capital Stock of which constitutes all or
substantially all of the properties and assets of the Company, shall be deemed
to be the transfer of all or substantially all of the properties and assets of
the Company.
Transactions with Affiliates
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly, after the date of the
Indenture, in any one or a series of related transactions, sell, lease, transfer
or otherwise dispose of any of its properties, assets or services to, or make
any payment to, or purchase any property, assets or services from, or enter into
or make any agreement, loan, advance or Guarantee with, or for the benefit of,
any Affiliate (each of the foregoing, an "Affiliate Transaction"), other than
Exempt Affiliate Transactions, unless (i) such Affiliate Transaction is on terms
that are no less favorable to the Company or the relevant Subsidiary than those
that would have been obtained in a comparable transaction by the Company or such
Subsidiary with an unrelated Person and (ii) the Company delivers to the Trustee
(a) with respect to any Affiliate Transaction entered into after the date of the
Indenture involving aggregate consideration in excess of $1 million but not in
excess of $5 million, a resolution of a committee of Independent Directors of
the Company set forth in an Officers' Certificate certifying that such Affiliate
Transaction complies with clause (i) above or (b) in the event there are no
Independent Directors or with respect to any Affiliate Transaction involving
aggregate consideration in excess of $5 million, an opinion as to the fairness
to the Company or such Subsidiary of such Affiliate Transaction from a financial
point of view issued by an Independent Financial Advisor.
Limitation on Layering Debt
The Indenture will provide that the Company will not Incur any Indebtedness
that is subordinate or junior in right of payment to any Senior Indebtedness of
the Company and senior in any respect in right of payment to the Notes.
Restrictions on TKG
The Indenture will contain covenants limiting the activities of TKG to
acting as a holding company for the Company and activities reasonably incidental
thereto.
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Reports
The Indenture will provide that, whether or not required by the rules and
regulations of the Commission, so long as any Notes are outstanding, the Company
will furnish to the Trustee and to the Holders of Notes within 15 days after it
is or would have been required to file such with the Commission (i) all
quarterly and annual financial information that would be required to be
contained in a filing with the Commission on Forms 10-Q and 10-K if the Company
were required to file such Forms, including a "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and, with respect to
the annual information only, a report thereon by the Company's certified
independent accountants and (ii) all current reports that would be required to
be filed with the Commission on Form 8-K if the Company were required to file
such reports. In addition, whether or not required by the rules and regulations
of the Commission, at any time after the Company files a registration statement
with respect to the Exchange Offer or a Shelf Registration Statement, the
Company will (i) file a copy of all such information and reports with the
Commission for public availability (unless the Commission will not accept such a
filing) and (ii) if the Commission will not accept such filing, promptly upon
written request and payment of the reasonable cost of duplication and delivery,
supply copies of such documents to securities analysts and prospective
investors. In addition, the Company has agreed that, for so long as any Notes
remain outstanding, it will furnish to the Trustee, to the Holders and to
securities analysts and prospective investors, upon their request, the
information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act.
Additional Covenants
The Indenture also contains covenants with respect to the following matters
(i) payment of principal, premium and interest, including Special Interest, (ii)
maintenance of an office or agency in the City of New York; and (iii)
maintenance of corporate existence.
Events of Default and Remedies
The Indenture will provide that each of the following constitutes an Event
of Default: (i) default for 30 days in the payment when due of interest,
including any Special Interest, on the Notes (whether or not prohibited by the
subordination provisions of the Indenture); (ii) default in payment when due
upon redemption or otherwise of the principal of or premium, if any, on the
Notes (whether or not prohibited by the subordination provisions of the
Indenture); (iii) failure by the Company to comply with the provisions described
under the captions "Repurchase at Option of Holders--Change of Control" and
"Repurchase at Option of Holders--Asset Sales"; (iv) failure by the Company for
30 days after written notice by the Trustee or Holders of at least 25% of the
aggregate principal amount of the Notes outstanding to comply with any of its
other agreements, covenants or warranties in the Indenture or the Notes; (v)
default under any mortgage, indenture or instrument under which there may be
issued or by which there may be secured or evidenced any Indebtedness for money
borrowed by the Company or any of its Subsidiaries (or the payment of which is
guaranteed by the Company or any of its Subsidiaries) whether such Indebtedness
or Guarantee now exists, or is created after the date of the Indenture, which
default (a) is caused by a failure to pay principal of or interest on such
Indebtedness when due after giving effect to applicable grace periods (a
"Payment Default") or (b) results in the acceleration of such Indebtedness prior
to its express maturity and, in each case, the principal amount of any such
Indebtedness, together with the principal amount of any other such Indebtedness
under which there has been a Payment Default or the maturity of which has been
so accelerated, aggregates $10 million or more; (vi) failure by the Company or
any of its Significant Subsidiaries to pay final judgments or orders (not fully
covered by insurance) aggregating in excess of $10 million, which judgments or
orders either (a) are the subject of any enforcement proceeding commenced by any
creditor or (b) remain unstayed for 45 days; and (vii) certain events of
bankruptcy or insolvency with respect to the Company or any of its Significant
Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in aggregate principal amount of the then outstanding
Notes may declare by written notice to the Company all the Notes to be due and
payable immediately in an amount equal to the principal amount of the Notes,
together with accrued interest to the date the Notes become due and payable.
Notwithstanding the foregoing, in the case of an Event of
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Default specified in clause (vii) above, all outstanding Notes will become due
and payable without further action or notice. Holders of the Notes may not
enforce the Indenture or the Notes except as provided in the Indenture. Subject
to certain limitations, Holders of a majority in principal amount of the then
outstanding Notes may direct the Trustee in its exercise of any trust or power.
The Indenture provides that if a Default occurs and is continuing, generally the
Trustee must, within 90 days after the occurrence of such Default, give to the
Holders notice of such Default. The Trustee may withhold from Holders of the
Notes notice of any continuing Default or Event of Default (except a Default or
Event of Default relating to the payment of principal, premium or interest or
Special Interest) if it determines that withholding notice is in their interest.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
Notes waive any existing Default or Event of Default and its consequences under
the Indenture except a continuing Default or Event of Default in the payment of
interest on, or the principal of, the Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
No Personal Liability of Directors, Officers, Employees and Stockholders
No director, officer, employee, incorporator or stockholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Notes or the Indenture or for any claim based on, in respect of, or by reason
of, such obligations or their creation. Each Holder of Notes by accepting a Note
waives and releases all such liability. The waiver and release are part of the
consideration for issuance of the Notes. Such waiver may not be effective to
waive liabilities under the federal securities laws and it is the view of the
Commission that such waiver is against public policy.
Legal Defeasance and Covenant Defeasance
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Notes (and the
obligations of the Guarantors under the Guarantees) ("Legal Defeasance") except
for (i) the rights of Holders of outstanding Notes to receive payments in
respect of the principal of, premium, if any, and interest, including Special
Interest, on such Notes when such payments are due from the trust referred to
below, (ii) the Company's obligations with respect to the Notes concerning
issuing temporary Notes, registration of Notes, mutilated, destroyed, lost or
stolen Notes and the maintenance of an office or agency for payment and money
for security payments held in trust, (iii) the rights, powers, trusts, duties
and immunities of the Trustee, and the Company's obligations in connection
therewith and (iv) the Legal Defeasance provisions of the Indenture. In
addition, the Company may, at its option and at any time, elect to have the
obligations of the Company released with respect to certain covenants that are
described in the Indenture ("Covenant Defeasance") and thereafter any omission
to comply with such obligations shall not constitute a Default or Event of
Default with respect to the Notes. In the event Covenant Defeasance occurs,
certain events (not including nonpayment, bankruptcy, receivership,
rehabilitation and insolvency events) described under "Events of Default" will
no longer constitute an Event of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Notes, cash in U.S. dollars, noncallable Government
Securities, or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, premium, if any, and interest, including Special
Interest, on the outstanding Notes on the Stated Maturity or on the applicable
redemption date, as the case may be, and the Company must specify whether the
Notes are being defeased to maturity or to a particular redemption date; (ii) in
the case of Legal Defeasance, the Company shall have delivered to the Trustee an
opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that (A) the Company has received from, or there has been published
by, the Internal Revenue Service a ruling or (B) since
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the date of the Indenture, there has been a change in the applicable federal
income tax law, in either case to the effect that, and based thereon such
opinion of counsel shall confirm that, the Holders of the outstanding Notes will
not recognize income, gain or loss for federal income tax purposes as a result
of such Legal Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such Legal Defeasance had not occurred; (iii) in the case of Covenant
Defeasance, the Company shall have delivered to the Trustee an opinion of
counsel in the United States reasonably acceptable to the Trustee confirming
that the Holders of the outstanding Notes will not recognize income, gain or
loss for federal income tax purposes as a result of such Covenant Defeasance and
will be subject to federal income tax on the same amounts, in the same manner
and at the same times as would have been the case if such Covenant Defeasance
had not occurred; (iv) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit (other than a Default or Event of Default
resulting from the borrowing of funds to be applied to such deposit) or insofar
as Events of Default from bankruptcy or insolvency events are concerned, at any
time in the period ending on the 95th day after the date of deposit; (v) such
Legal Defeasance or Covenant Defeasance will not result in a breach or violation
of, or constitute a default under any material agreement or instrument (other
than the Indenture) to which the Company or any of its Subsidiaries is a party
or by which the Company or any of its Subsidiaries is bound, although neither a
Legal Defeasance nor a Covenant Defeasance shall occur while the Credit
Facilities are outstanding unless such defeasance is permitted thereunder or the
holders of the Indebtedness represented by the Credit Facilities (or a
representative thereof) consent to such Legal Defeasance or Covenant Defeasance;
(vi) the Company must deliver to the Trustee an Officers' Certificate stating
that the deposit was not made by the Company with the intent of preferring the
Holders of Notes over other creditors of the Company or with the intent of
defeating, hindering, delaying or defrauding creditors of the Company or others;
and (vii) the Company must deliver to the Trustee an Officers' Certificate and
an opinion of counsel, each stating that all conditions precedent provided for
relating to the Legal Defeasance or the Covenant Defeasance have been complied
with.
Transfer and Exchange
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a Holder to pay any taxes, fees and expenses required by law or
permitted by the Indenture. The Company is not required to transfer or exchange
any Note selected for redemption. Also, the Company is not required to transfer
or exchange any Note for a period of 15 days before a selection of Notes to be
redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
Amendment, Supplement and Waiver
Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the Notes then outstanding (including
consents obtained in connection with a tender offer or exchange offer for
Notes), and any existing default or compliance with any provision of the
Indenture or the Notes may be waived with the consent of the Holders of a
majority in principal amount of the then outstanding Notes (including consents
obtained in connection with a tender offer or exchange offer for Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a nonconsenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment, supplement
or waiver, (ii) reduce the principal of or change the fixed maturity of any Note
or alter the provisions with respect to the redemption of the Notes (other than
provisions relating to the covenants described above under the caption
"Repurchase at the Option of Holders"), (iii) reduce the rate of or change the
time for payment of interest on any Note, (iv) waive a Default or Event of
Default in the payment of principal of or premium, if any, or interest on the
Notes (except a rescission of acceleration of the Notes by the Holders of at
least a majority in aggregate principal amount of the Notes and a waiver of the
payment default that resulted from such acceleration), (v) make any Note payable
in money other than that stated in the Notes, (vi) make any change in the
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provisions of the Indenture relating to waivers of past Defaults or the rights
of Holders of Notes to receive payments of principal of or premium, if any, or
interest on the Notes, (vii) waive a redemption payment with respect to any Note
(other than a payment required by one of the covenants described above under the
caption "Repurchase at the Option of Holders"), (viii) amend or modify the
Guarantees on the Notes, or (ix) make any change in the foregoing amendment and
waiver provisions.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company and the Trustee may amend or supplement the Indenture or the Notes
to cure any ambiguity, defect or inconsistency, to provide for uncertificated
Notes in addition to or in place of certificated Notes, to provide for the
assumption of the Company's obligations to Holders of Notes in the case of a
merger or consolidation, to make any change that would provide any additional
rights or benefits to the Holders of Notes or that does not adversely affect the
legal rights under the Indenture of any such Holder, or to comply with
requirements of the Commission in order to effect or maintain the qualification
of the Indenture under the Trust Indenture Act.
Payments for Consent
Neither the Company nor any of its Subsidiaries shall, directly or
indirectly, pay or cause to be paid any consideration, whether by way of
interest, fee or otherwise, to any Holder of any Notes for or as an inducement
to any consent, waiver or amendment of any terms or provisions of the Notes,
unless such consideration is offered to be paid or agreed to be paid to all
Holders of the Notes which so consent, waive or agree to amend in the time frame
set forth in the solicitation documents relating to such consent, waiver or
agreement.
Concerning the Trustee
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Commission for permission to continue
or resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request of any Holder of Notes, unless such Holder shall have offered to the
Trustee security and indemnity satisfactory to it against any loss, liability or
expense.
Additional Information
Anyone who receives this Prospectus may obtain a copy of the Indenture and
Registration Rights Agreement without charge by writing to the Company at 1235
Water Street, East Greenville, Pennsylvania 18041, Attention: Secretary.
Book-entry; Delivery and Form
The certificates representing the Exchange Notes will be issued in fully
registered form and may, if agreed by the Company and the Holder, be issued in
the form of a permanent global certificate in fully registered form (the "Global
Note") and will be deposited with the Trustee as custodian for The Depository
Trust Company ("DTC") and registered in the name of a nominee of DTC.
Global Note. The Company expects that upon the issuance of the Global Note,
DTC or its custodian will credit, on its book-entry registration and transfer
system, the respective principal amount of Exchange Notes of the
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individual beneficial interests represented by such Global Note to the accounts
of Persons who have accounts with such depositary. Such accounts initially will
be designated by or on behalf of the Initial Purchaser. Ownership of beneficial
interests in the Global Note will be limited to Persons who have accounts with
DTC ("participants") or Persons who hold interests through participants.
Ownership of beneficial interests in the Global Note will be shown on, and the
transfer of that ownership will be effected only through, records maintained by
DTC or its nominee (with respect to interests of participants) and the records
of participants (with respect to interests of Persons other than participants).
So long as DTC, or its nominee, is the registered owner or holder of the
Global Note, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the Exchange Notes represented by such Global Note for
all purposes under the Indenture and the Exchange Notes. No beneficial owner of
an interest in the Global Note will be able to transfer that interest except in
accordance with DTC's applicable procedures, in addition to those provided for
under the Indenture.
Payments of the principal of, premium (if any) and interest on, the Global
Note will be made to DTC or its nominee, as the case may be, as the registered
owner thereof. Neither the Company, the Trustee nor any Paying Agent will have
any responsibility or liability for any aspect of the record relating to or
payments made on account of beneficial ownership interests in the Global Note or
for maintaining, supervising or reviewing any record relating to such beneficial
ownership interest.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, or interest in respect of the Global Note, will
credit participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of such Global Note as
shown on the records of DTC or its nominee. The Company also expects that
payments by participants to owners of beneficial interests in such Global Note
held through such participants will be governed by standing instructions and
customary practice, as is now the case with securities held for the accounts of
customers registered in the names of nominees for such customers. Such payments
will be the responsibility of such participants.
The Company expects that transfers between participants in DTC will be
effected in the ordinary way in accordance with DTC rules and will be settled in
clearinghouse funds. If a holder requires physical delivery of a Certificated
Note for any reason, including to sell Exchange Notes to Persons in states which
require physical delivery of such Exchange Notes or to pledge such Exchange
Notes, such holder must transfer its interest in the Global Note in accordance
with the normal procedures of DTC and the procedures set forth in the Indenture.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Exchange Notes (including the presentation of Exchange
Notes for exchange as described below) only at the direction of one or more
participants to whose account the DTC interests in the Global Note is credited
and only in respect of such portion of the aggregate principal amount of
Exchange Notes as to which such participant or participants has or have given
such direction. However, if there is an Event of Default under the Exchange
Notes or the Indenture, DTC will exchange the Global Note for Exchange Notes in
definitive form, which it will distribute to its participants.
To the Company's knowledge, DTC is a limited purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the Uniform
Commercial Code and a "Clearing Agency" registered pursuant to the provisions of
Section 17A of the Exchange Act. DTC was created to hold securities for its
participants and facilitate the clearance and settlement of securities
transactions between participants through electronic book-entry changes in
accounts of its participants, thereby eliminating the need for physical movement
of certificates. Participants include securities brokers and dealers (including
the Initial Purchaser), banks, trust companies and clearing corporations and
certain other organizations. Indirect access to the DTC system is available to
others such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a participant, either directly or
indirectly ("indirect participants").
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Although DTC customarily agrees to the foregoing procedures in order to
facilitate transfers of interests in global notes among participants of DTC, it
is under no obligation to perform such procedures, and such procedures may be
discontinued at any time. Neither the Company nor the Trustee will have any
responsibility for the performance by DTC or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
Certificated Securities. If DTC is at any time unwilling or unable to
continue as a depositary for the Global Note and a successor depositary is not
appointed by the Company within 90 days, Exchange Notes in definitive form will
be issued in exchange for the Global Note.
Certain Definitions
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Acquired Indebtedness" means, with respect to any specified Person, (i)
any Indebtedness of any other Person existing at the time such other Person is
merged with or into or becomes a Subsidiary of such specified Person, including,
without limitation, Indebtedness Incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means (i) any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person or (ii) any other Person who is a director or
executive officer of (a) such specified Person or (b) any Person described in
the preceding clause (i). For purposes of this definition, "control" (including,
with correlative meanings, the terms "controlling," "controlled by" and "under
common control with"), as used with respect to any Person, shall mean the
possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of any class, or any series of any class, of
equity securities of a Person, whether or not voting, shall be deemed to be
control.
"Asset Sale" means with respect to any Person, the sale, lease, conveyance,
disposition or other transfer, that does not constitute a Restricted Payment or
an Investment, by such Person of any of its property or assets (including,
without limitation, by way of a Sale and Leaseback Transaction and including the
issuance, sale or other transfer of any Capital Stock in any Subsidiary or the
sale or other transfer of Capital Stock in any Unrestricted Subsidiary of such
Person) (including the receipt of proceeds of insurance paid on account of the
loss of or damage to any asset and awards of compensation for any asset taken by
condemnation, eminent domain or similar proceeding, and including the receipt of
proceeds of business interruption insurance), in each case, in one or a series
of related transactions provided, that notwithstanding the foregoing, the term
"Asset Sale" shall not include: (a) the sale, lease, conveyance, disposition or
other transfer of all or substantially all of the assets of the Company, as
permitted pursuant to the covenant entitled "Merger, Consolidation or Sale of
Assets," (b) the sale or lease of equipment, inventory, accounts receivable or
other assets (including obsolete assets) in the ordinary course of business, (c)
a transfer of assets by any Person to the Company or a Wholly Owned Subsidiary
of the Company, (d) an issuance of Capital Stock by any Person to the Company or
to a Wholly Owned Subsidiary of the Company, (e) the sale or other disposition
of cash or Cash Equivalents, (f) the issuance by the Company of shares of its
Capital Stock, or (g) the licensing of intellectual property in the ordinary
course of business.
"Bankruptcy Law" means Title 11, U.S. Code or any similar federal, state or
foreign law for the relief of debtors.
"Board" means the board of directors of the Company.
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"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" of any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible or exchangeable into such
equity.
"Cash Equivalent" means (a) securities issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States is pledged in support thereof) having maturities not more than twelve
months from the date of acquisition, (b) U.S. dollar denominated (or foreign
currency fully hedged) time deposits, certificates of deposit, Eurodollar time
deposits or Eurodollar certificates of deposit of (i) any commercial bank of
recognized standing having capital and surplus in excess of $500 million or (ii)
any bank whose short-term commercial paper rating from Standard and Poor's
Rating Group is at least A-1 or the equivalent thereof or from Moody's Investors
Service, Inc. is at least P-1 or the equivalent thereof (any such bank being an
"Approved Lender"), in each case with maturities of not more than twelve months
from the date of acquisition, (c) commercial paper issued by any Approved Lender
(or by the parent company thereof), (d) repurchase obligations of any lender
under the Credit Facilities (as in effect on the Closing Date) or any Approved
Lender and (e) any shares of money market mutual or similar funds having assets
in excess of $500 million or which invest exclusively in the assets satisfying
the requirements of clauses (a) through (d) of this definition.
"Change of Control" means such time as either:
(i) prior to the initial Public Equity Offering by the Company or TKG of
its Common Stock, (a) TKG ceases to be, directly or indirectly, the beneficial
owner of 100% of the voting power of the Voting Stock of the Company (unless the
Company has merged with or into TKG in compliance with the covenant set forth
under the caption "Merger, Consolidation or Sale of Assets") or (b) the Initial
Shareholders cease to be, directly or indirectly, the beneficial owners, in the
aggregate, of more than 50% of the voting power of the Voting Stock of the
Company and of TKG, in each case on a fully-diluted basis, after giving effect
to the conversion and exercise of all outstanding warrants, options and other
securities of the Company or TKG, as the case may be, convertible into or
exercisable for Voting Stock of the Company or TKG, as the case may be (whether
or not such securities are then currently convertible or exercisable); or
(ii) after the initial Public Equity Offering by the Company or TKG of its
common stock, (a) any "person" or "group" (within the meaning of Section 13(d)
or 14(d) of the Exchange Act) (other than one or more of the Initial
Shareholders) has become, directly or indirectly, the "beneficial owner" (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a Person
shall be deemed to have "beneficial ownership" of all shares that any such
Person has the right to acquire, whether such right is exercisable immediately
or only after the passage of time), by way of merger, consolidation or
otherwise, of 35% or more of the voting power of the Voting Stock of the Company
or TKG on a fully-diluted basis, after giving effect to the conversion and
exercise of all outstanding warrants, options and other securities of the
Company or TKG, as the case may be, convertible into or exercisable for Voting
Stock of the Company or TKG, as the case may be (whether or not such securities
are then currently convertible or exercisable) and (b) such person or group is
or becomes, directly or indirectly, the beneficial owner of a greater percentage
of the voting power of the Voting Stock of the Company or of TKG, as the case
may be, calculated on such fully-diluted basis, than the percentage beneficially
owned by the Initial Shareholders; or
(iii) the Company merges with or into another Person or sells, assigns,
conveys, transfers, leases or otherwise disposes of all or substantially all of
its assets to any Person, or any Person merges with or into the Company, in any
such event pursuant to a transaction in which the outstanding Voting Stock of
the Company is converted into or exchanged for cash, securities or other
property, other than any such transaction where (x) the outstanding Voting Stock
of the Company is converted into or exchanged for (1) Voting Stock (other than
Redeemable Stock) of the surviving or transferee corporation and/or (2) cash,
securities and other property in an amount which could
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be paid by the Company as a Restricted Payment under the Indenture and (y)
immediately after such transaction no "person" or "group" (within the meaning of
Section 13(d) and 14(d) of the Exchange Act) (other than one or more of the
Initial Shareholders) is the "beneficial owner" (as defined in Rules 13d-3 and
13d-5 under the Exchange Act, except that a Person shall be deemed to have
"beneficial ownership" of all shares that any such Person has the right to
acquire, whether such right is exercisable immediately or only after the passage
of time), directly or indirectly, of (1) 35% or more of the voting power of the
Voting Stock of the surviving or transferee corporation on a fully diluted
basis, after giving effect to the conversion and exercise of all outstanding
warrants, options and other securities of such surviving or transferee
corporation, convertible into or exercisable for Voting Stock of such surviving
or transferee corporation (whether or not such securities are then currently
convertible or exercisable) and (2) a greater percentage of the voting power of
the Voting Stock of such surviving or transferee corporation calculated on such
fully diluted basis, than the percentage beneficially owned by the Initial
Shareholders; or
(iv) during any period of two consecutive calendar years, individuals who
at the beginning of such period constituted either the Board or the board of
directors of TKG, as the case may be, together with any new members of such
Board or board of directors (a) whose election by such Board or board of
directors or whose nomination for election by the stockholders of the Company or
the stockholders of TKG, as the case may be, was approved by a vote of a
majority of the members of such Board or board of directors then still in office
who either were directors at the beginning of such period or whose election or
nomination for election was previously so approved or (b) elected by the Initial
Shareholders, cease for any reason to constitute a majority of the directors of
the Company or of TKG, as the case may be, then in office.
"Consolidated Interest Coverage Ratio" as of any date of determination
means the ratio of (i) the aggregate amount of EBITDA for the period of the most
recent four consecutive fiscal quarters ending at least 45 days prior to the
date of such determination to (ii) the sum of (a) Consolidated Interest Expense
for such four fiscal quarters plus (b) all cash preferred dividends (tax
effected) for such period; provided, however, that:
(a) if the Company or any Subsidiary of the Company (x) has Incurred any
Indebtedness since the beginning of such period that remains outstanding on such
date of determination or if the transaction giving rise to the need to calculate
the Consolidated Interest Coverage Ratio is an Incurrence of Indebtedness,
EBITDA and Consolidated Interest Expense for such period shall be calculated
after giving effect on a pro forma basis to such Indebtedness and the
application of the proceeds thereof as if such Indebtedness had been Incurred
and the proceeds thereof applied on the first day of such period or (y) has
repaid, repurchased, defeased or otherwise discharged any Indebtedness since the
beginning of the period that is no longer outstanding on such date of
determination, or if the transaction giving rise to the need to calculate the
Consolidated Interest Coverage Ratio involves a discharge of Indebtedness,
EBITDA and Consolidated Interest Expense for such period shall be calculated
after giving effect to such discharge of such Indebtedness, including with the
proceeds of such new Indebtedness, as if such discharge had occurred on the
first day of such period (except that, in making such computation, the amount of
Indebtedness under the Revolving Credit Facility or other revolving credit
facility shall be computed based upon the average daily balance of such
Indebtedness during such four-quarter period);
(b) if since the beginning of such period the Company or any of its
Subsidiaries shall have disposed of any company or any business or any group of
assets constituting an operating unit (a "Disposal"), the EBITDA for such period
shall be reduced by an amount equal to the EBITDA (if positive) directly
attributable to the assets that are the subject of such Disposal for such period
or increased by an amount equal to the EBITDA (if negative) directly
attributable thereto for such period and Consolidated Interest Expense for such
period shall be reduced by an amount equal to the Consolidated Interest Expense
directly attributable to any Indebtedness of the Company or any of its
Subsidiaries repaid, repurchased, defeased or otherwise discharged with respect
to the Company and its continuing Subsidiaries in connection with such Disposal
for such period (or, if the Capital Stock of any Subsidiary is sold, the
Consolidated Interest Expense for such period directly attributable to the
Indebtedness of such Subsidiary to the extent the Company and its continuing
Subsidiaries are no longer liable for such Indebtedness after such sale);
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(c) if since the beginning of such period, the Company or any Subsidiary
(by merger or otherwise) shall have acquired any company or any business or any
group of assets constituting an operating unit (an "Acquisition"), EBITDA and
Consolidated Interest Expense for such period shall be calculated after giving
pro forma effect thereto (including the Incurrence of any Indebtedness) as if
such Acquisition occurred on the first day of such period; and
(d) if since the beginning of such period, any Person (that subsequently
became a Subsidiary of the Company or was merged with or into the Company or any
Subsidiary of the Company since the beginning of such period) shall have made
any Disposal or Acquisition that would have required an adjustment pursuant to
clause (b) or (c) above if made by the Company or a Subsidiary of the Company
during such period, EBITDA and Consolidated Interest Expense for such period
shall be calculated after giving pro forma effect thereto as if such Disposal or
Acquisition occurred on the first day of such period.
If any Indebtedness bears a floating rate of interest and is being given
pro forma effect, the interest expense on such Indebtedness shall be calculated
as if the rate in effect on the date of determination had been the applicable
rate for the entire period (taking into account any Hedging Obligations
applicable to such Indebtedness if such Hedging Obligations have a remaining
term as at the date of determination in excess of 12 months). If any
Indebtedness bears, at the option of the Company or a Subsidiary of the Company,
a fixed or floating rate of interest and is being given pro forma effect, the
interest expense on such Indebtedness shall be computed by applying, at the
option of the Company, either a fixed or floating rate. If any Indebtedness that
is being given pro forma effect was Incurred under the Revolving Credit Facility
or any other revolving credit facility, the interest expense on such
Indebtedness shall be computed based upon the average daily balance of such
Indebtedness during the applicable period.
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its consolidated Subsidiaries as determined in
accordance with GAAP, plus, to the extent not included in such interest, (i) the
interest component of Capital Lease Obligations and Indebtedness deemed to be
Incurred in respect of a Sale and Leaseback Transaction, whether paid or
accrued, (ii) amortization of debt discount, (iii) non-cash interest expense,
(iv) accrued interest, (v) interest actually paid by the Company or any such
Subsidiary under any Guarantee of Indebtedness or other obligation of any other
Person, (vi) net costs associated with Hedging Obligations, (vii) the interest
portion of any deferred obligation, (viii) Preferred Stock dividends in respect
of all Preferred Stock (including Redeemable Stock) of Subsidiaries and
Redeemable Stock of the Company held by Persons other than the Company or a
Wholly Owned Subsidiary of the Company, (ix) the cash contributions to any
employee stock ownership plan or similar trust to the extent such contributions
are used by such plan or trust to pay interest or fees to any Person (other than
the Company) in connection with Indebtedness Incurred by such plan or trust;
provided, however, that there shall be excluded therefrom any such interest
expense of any Unrestricted Subsidiary to the extent the related Indebtedness is
not Guaranteed or paid by the Company or any Subsidiary of the Company and (x)
earned discount or yield with respect to the sale of accounts receivable.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Subsidiaries for such
period, on a consolidated basis, determined in accordance with GAAP; provided
that (i) the Net Income (but not loss) of any Person that is not a Subsidiary or
that is accounted for by the equity method of accounting shall be included only
to the extent of the amount of dividends or distributions paid in cash to the
referent Person or a Wholly Owned Subsidiary thereof, (ii) the Net Income of any
Subsidiary shall be excluded to the extent that the declaration or payment of
dividends or similar distributions by that Subsidiary of that Net Income is not
at the date of determination permitted without any prior governmental approval
(which has not been obtained) or, directly or indirectly, by operation of the
terms of its charter or any agreement, instrument, judgment, decree, order,
statute, rule or governmental regulation applicable to that Subsidiary or its
stockholders, (iii) the Net Income (if positive) of any Person acquired in a
pooling of interests transaction for any period prior to the date of such
acquisition shall be excluded, (iv) the cumulative effect of a change in
accounting principles shall be excluded, and (v) the Net Income of, or any
dividends or other distributions from, any Unrestricted Subsidiary, to the
extent otherwise included, shall be excluded, until distributed in cash to the
Company or one of its Subsidiaries.
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"Consolidated Net Worth" means the total of the amounts shown on the
balance sheet of the Company and its Subsidiaries, determined on a consolidated
basis in accordance with GAAP, as of the end of the most recent fiscal quarter
of the Company ending at least 45 days prior to the taking of any action for the
purpose of which the determination is being made, as (i) the par or stated value
of all outstanding Capital Stock of the Company plus (ii) paid-in capital or
capital surplus relating to such Capital Stock plus (iii) any retained earnings
or earned surplus less (A) any accumulated deficit and (B) any amounts
attributable to Redeemable Stock of the Company.
"Consolidated Non-Cash Charges" of any Person means, for any period, the
aggregate depreciation, amortization and other non-cash charges of such Person
and its consolidated Subsidiaries for such period, on a consolidated basis, as
determined in accordance with GAAP (excluding any non-cash charge that requires
an accrual or reserve for cash charges for any future period, other than
accruals for future retiree medical obligations made pursuant to SFAS No. 87,
No. 112 and No. 106, as amended or modified).
"Credit Facilities" means the Revolving Credit Facility and the Term Credit
Facility, including any related notes, guarantees, collateral documents,
instruments and agreements executed in connection therewith, and in each case as
amended, modified, renewed, refunded, replaced, restated or refinanced from time
to time.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any of its Subsidiaries against fluctuations in currency values to or
under which the Company or any of its Subsidiaries is a party or a beneficiary.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Designated Senior Indebtedness" means, with respect to any Person, (i) so
long as the Credit Facilities are outstanding, Indebtedness of such Person under
the Credit Facilities and (ii) thereafter, any other Senior Indebtedness of such
Person permitted under the Indenture the principal amount of which is $25
million or more and that has been designated by such Person as "Designated
Senior Indebtedness."
"Domestic Subsidiary" means any direct or indirect Wholly Owned Subsidiary
of the Company that is organized and existing under the laws of the United
States, any state thereof or the District of Columbia.
"EBITDA" for any period means the sum of Consolidated Net Income, income
tax expense, Consolidated Interest Expense and Consolidated Non-Cash Charges
deducted in computing Consolidated Net Income, without duplication, in each case
for such period, of such Person and its consolidated Subsidiaries on a
consolidated basis, all determined in accordance with GAAP.
"Exempt Affiliate Transactions" means (a) transactions between or among the
Company and/or its Wholly Owned Subsidiaries, (b) loans or advances to employees
and officers of the Company or any Subsidiary of the Company in the ordinary
course of business to provide for the payment of reasonable expenses incurred by
such persons in the performance of their responsibilities to the Company or such
Subsidiary or in connection with any relocation, (c) fees, compensation or
employee benefit arrangements paid to and indemnity provided on behalf of
directors, officers or employees of the Company or any Subsidiary of the Company
in the ordinary course of business, (d) any employment agreement (including
customary benefits thereunder) that is in effect on the date of the Indenture in
the ordinary course of business and any such agreement entered into by the
Company or a Subsidiary of the Company after the date of the Indenture in the
ordinary course of business of the Company or such Subsidiary, (e) any
Restricted Payment that is not prohibited by the covenant set forth under the
caption "Limitation on Restricted Payments" above, (f) payments by the Company
to TKG in respect of corporate expenses of TKG and operating expenses of TKG
attributable to its ownership of Capital Stock of the Company and to pay taxes
allocable to the Net Income of the Company and its Subsidiaries, and (g)
transactions pursuant to agreements in effect on the date of original issuance
of the Notes, including amendments thereto entered into after the Issue Date,
provided that the terms of any such amendment are not, in the aggregate, less
favorable to the Company than
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the terms of such agreement prior to such amendment, and provided further that
such agreements are set forth in a schedule to the Indenture.
"Existing Indebtedness" means the Indebtedness of the Company and its
Subsidiaries (other than Indebtedness under the Credit Facilities) in existence
on the date of the Indenture, until such amounts are repaid.
"Fair Market Value" means, with respect to any asset or property, the price
that could be negotiated in an arms'-length free market transaction, for cash,
between a willing seller and a willing buyer, neither of whom is under undue
pressure or compulsion to complete the transaction.
"Foreign Subsidiary" means any Subsidiary of the Company that is not a
Domestic Subsidiary.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the Indenture.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person,
including any such obligation, direct or indirect, contingent or otherwise, of
such Person (i) to purchase or pay (or advance or supply funds for the purchase
or payment of) such Indebtedness or other obligation of such other Person
(whether arising by agreement to purchase assets, goods, securities or services,
to take-or-pay, or to maintain financial statement conditions or otherwise) or
(ii) entered into for purposes of assuring in any other manner the obligee of
such Indebtedness or to protect such obligee against loss in respect thereof (in
whole or in part); provided, however, that the term "Guarantee" shall not
include endorsements for collection or deposit in the ordinary course of
business. The term "Guarantee" used as a verb shall have a correlative meaning.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a Person
existing at the time such person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be Incurred by such
Subsidiary at the time it becomes a Subsidiary, provided that neither the
accrual of interest nor the accretion of original issue discount shall be
considered an Incurrence of Indebtedness. The terms "Incurred," "Incurrence" and
"Incurring" shall each have a correlative meaning.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication),
(i) the principal (accreted value in the case of Indebtedness Incurred with
original issue discount) of and premium (if any) in respect of indebtedness of
such Person for borrowed money;
(ii) the principal (accreted value in the case of Indebtedness Incurred
with original issue discount) of and premium (if any) in respect of obligations
of such Person evidenced by bonds, debentures, notes or other similar
instruments;
(iii) all Capital Lease Obligations of such Person;
(iv) all obligations of such Person to pay the deferred and unpaid purchase
price of property or services (except Trade Payables);
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(v) all reimbursement obligations of such Person in respect of letters of
credit, bankers' acceptances or other similar instruments or credit
transactions, other than obligations with respect to letters of credit securing
obligations (other than obligations described in clauses (i) through (iv) of
this sentence) entered into in the ordinary course of business of such Person to
the extent such letters of credit are not drawn upon or, if and to the extent
drawn upon, such drawing is reimbursed no later than the third business day
following receipt by such Person of a demand for reimbursement following payment
on the letter of credit;
(vi) the amount of all obligations of such Person with respect to the
redemption, repayment or other repurchase of any Redeemable Stock of such Person
or any Redeemable Stock of such Person's Subsidiaries (but excluding, in each
case, any accrued dividends);
(vii) the amount of Preferred Stock of such Person's Subsidiaries (but
excluding any unaccrued dividends);
(viii) all Indebtedness of other Persons secured by a Lien on any asset of
such Person, whether or not such Indebtedness is assumed by such Person;
provided, however, that if such Indebtedness is not assumed by such Person, the
amount of such Indebtedness shall be the lesser of (a) the Fair Market Value (as
determined by the Board, whose determination shall be conclusive if made in good
faith and evidenced by a Board Resolution) of such asset at such date of
determination and (b) the amount of such Indebtedness of such other Person;
(ix) all Indebtedness of other Persons to the extent Guaranteed by such
Person; and
(x) to the extent not otherwise included in this definition, net
obligations in respect of Hedging Obligations.
For purposes of this definition, the maximum fixed redemption, repayment or
repurchase price of any Redeemable Stock that does not have a fixed redemption,
repayment or repurchase price shall be calculated in accordance with the terms
of such Redeemable Stock as if such Redeemable Stock were redeemed, repaid or
repurchased on any date on which Indebtedness shall be required to be determined
pursuant to the Indenture; provided, however, that if such Redeemable Stock is
not then permitted to be redeemed, repaid or repurchased, the redemption,
repayment or repurchase price shall be the book value of such Redeemable Stock
as reflected in the most recent financial statements of such Person. The amount
of Indebtedness of any Person at any date shall be the outstanding balance at
such date of all unconditional obligations as described above and the maximum
liability, upon the occurrence of the contingency giving rise to the obligation,
of any contingent obligations at such date.
"Independent Director" means a director of the Company other than a
director who is a party, or who is a director, officer, employee or Affiliate
(or is related by blood or marriage to any such person) of the other party, to
the transaction in question, and who is, in fact, independent in respect of such
transaction.
"Independent Financial Advisors" means a reputable accounting, appraisal or
nationally recognized investment banking or consulting firm that is, in the
reasonable judgment of the Board, qualified to perform the task for which such
firm has been engaged and disinterested and independent with respect to the
Company.
"Initial Shareholders" means the Sponsor, Management Shareholders and
NationsBanc Investment Corp., an affiliate of the Initial Purchaser, in the
event it exercises its option to purchase up to $8 million of Capital Stock of
TKG no later than the Acquisition Closing and issuance of the Notes.
"Investment" means, with respect to any Person, any investment by such
Person in any other Person (including an Affiliate) in the form of a direct or
indirect loan (including a guarantee of Indebtedness or other Obligation),
advance or other extension of credit or capital contribution (by means of any
transfer of cash or other property) (excluding an advance to any officer or
employee of the type specified in clause (b) of the definition of Exempt
Affiliate Transactions and accounts receivable and other extensions of trade
credit on commercially reasonable terms in accordance with normal trade
practices), purchase or other acquisition for consideration or ownership of
Indebtedness, Capital Stock or other security issued or owned by any other
Person and any other item that is or would be classified as an investment on a
balance sheet prepared in accordance with GAAP; provided
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that an acquisition of assets, Capital Stock or other securities by the Company
for consideration consisting of common equity securities of the Company shall
not be deemed to be an Investment.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction).
"Management Shareholder" means an officer, director or employee of the
Company or any Subsidiary of the Company who is the beneficial owner of any
Capital Stock of the Company or of TKG.
"Net Income" means, with respect to any Person for any period, the net
income (loss) of such Person for such period, determined in accordance with GAAP
and before any reduction in respect of preferred stock dividends, excluding,
however, (i) any gain (but not loss), together with any related provision for
taxes on such gain (but not loss), realized in connection with (a) any Asset
Sale (including, without limitation, any dispositions pursuant to a Sale and
Leaseback Transaction) or (b) the disposition of any securities by such Person
or any of its Subsidiaries or the extinguishment of any Indebtedness of such
Person or any of its Subsidiaries, (ii) any extraordinary or nonrecurring gain
(but not loss), together with any related provision for taxes on such
extraordinary or nonrecurring gain (but not loss) and (iii) any gains (but not
losses) from currency exchange transactions not in the ordinary course of
business consistent with past practice.
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Subsidiaries in respect of any Asset Sale (including, without
limitation, any cash received upon the sale or other disposition of any noncash
consideration received in any Asset Sale but only as and when received), net of
(i) the amount of cash applied to repay or defease Indebtedness secured by the
asset involved in such Asset Sale, (ii) the direct costs and expenses relating
to such Asset Sale (including, without limitation, legal, accounting and
investment banking fees, and sales commissions), (iii) any relocation expenses
incurred as a result thereof, (iv) taxes (including income taxes and taxes
payable upon payment or other distribution of funds from a Foreign Subsidiary to
the Company or another Subsidiary of the Company), paid or payable as a result
thereof, (v) any reserve for adjustment in respect of the sale price of such
asset or assets established in accordance with GAAP, (vi) a reasonable reserve
for the after-tax cost of any indemnification payments (fixed or contingent)
attributable to the seller's indemnities to purchaser in respect of such Asset
Sale undertaken by the Company or any of its Subsidiaries in connection with
such Asset Sale and (vii) if such Person is a Subsidiary of the Company, any
dividends or distributions payable to holders of minority interests in such
Subsidiary from the proceeds of such Asset Sale.
"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company
nor any of its Subsidiaries (a) provides credit support of any kind (including
any undertaking, agreement or instrument that would constitute Indebtedness),
(b) is directly or indirectly liable (as a Guarantor or otherwise), or (c)
constitutes the lender; and (ii) no default with respect to which (including any
rights that the holders thereof may have to take enforcement action against an
Unrestricted Subsidiary) would permit (upon notice, lapse of time or both) any
holder of any other Indebtedness of the Company or any of its Subsidiaries to
declare a default on such other Indebtedness or cause the payment thereof to be
accelerated or payable prior to its Stated Maturity.
"Obligations" means any principal, interest, special interest, penalties,
premiums, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing any Indebtedness.
"Officers" Certificate" means a certificate signed by two officers of the
Company at least one of whom shall be the principal executive officer, principal
accounting officer or principal financial officer of the Company.
"Parent" means T.K.G. Acquisition Corp., a Delaware corporation.
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"pari passu," as applied to the ranking of any Indebtedness of a Person in
relation to other Indebtedness of such Person, means that each such Indebtedness
either (i) is not subordinate in right of payment to any Indebtedness or (ii) is
subordinate in right of payment to the same Indebtedness as is the other, and is
so subordinate to the same extent, and is not subordinate in right of payment to
each other or to any Indebtedness as to which the other is not so subordinate.
"Permitted Indebtedness" means:
(i) Indebtedness of the Company under the Credit Facilities (and of the
Domestic Subsidiaries under the Guarantees thereof), or any refinancing thereof,
in an aggregate principal amount at any time outstanding (with letters of credit
being deemed to have a principal amount equal to the maximum potential liability
of the Company and its Subsidiaries thereunder) not to exceed $320 million, less
the aggregate amount of all Net Proceeds of Asset Sales applied to permanently
reduce the outstanding amount or the commitments with respect to such
Indebtedness pursuant to the covenant described above under the caption
"--Repurchase at the Option of Holders--Asset Sales";
(ii) the Existing Indebtedness of the Company and its Subsidiaries;
(iii) the Indebtedness of the Company under the Notes and of the Domestic
Subsidiaries under the Domestic Subsidiary Guarantees;
(iv) Indebtedness of the Company or any of its Subsidiaries represented by
Capital Lease Obligations, mortgage financings or Purchase Money Obligations, in
each case Incurred for the purpose of financing all or any part of the purchase
price or cost of construction or improvement of property used in the business of
the Company or such Subsidiary or any Refinancing Indebtedness thereof (provided
that the requirements of clause (ii) of the definition of Refinancing
Indebtedness need not be met for the purposes of this clause (iv)), in an
aggregate principal amount not to exceed $10 million at any time outstanding;
(v) Refinancing Indebtedness of the Company or any of its Subsidiaries;
(vi) Indebtedness of the Company owing to and held by any of its Wholly
Owned Subsidiaries or Indebtedness of a Subsidiary owing to and held by the
Company and any of its Wholly Owned Subsidiaries; provided, however, that (i)
any subsequent issuance or transfer of Capital Stock that results in any such
Indebtedness being held by a Person other than a Wholly Owned Subsidiary and
(ii) any sale or other transfer of any such Indebtedness to a Person that is not
either the Company or a Wholly Owned Subsidiary of the Company shall be deemed,
in each case, to constitute an Incurrence of such Indebtedness by the Company or
such Subsidiary, as the case may be;
(vii) (a) Hedging Obligations that are Incurred by the Company or any
Subsidiary for the purpose of fixing or hedging interest rate risk with respect
to any floating rate Indebtedness that is permitted by the Indenture to be
Incurred, (b) Indebtedness for letters of credit relating to workers'
compensation claims and self-insurance or similar requirements in the ordinary
course of business, (c) Indebtedness in respect of performance, surety or appeal
bonds in the ordinary course of business and (d) Indebtedness in respect of any
Currency Agreement;
(viii) Indebtedness of the Company, to the extent the proceeds thereof are
immediately used after the Incurrence thereof to purchase Notes tendered in an
offer to purchase made as a result of a Change of Control;
(ix) Indebtedness arising from agreements providing for indemnification,
adjustment of purchase price or similar obligations (or from Guarantees or
letters of credit, surety bonds or performance bonds securing any obligations of
the Company or any Subsidiary of the Company pursuant to such agreements), in
any case Incurred in connection with the disposition of any business, assets or
Subsidiary of the Company (other than Guarantees of Indebtedness Incurred by any
Person acquiring all or any portion of such business, assets or Subsidiary for
the purpose of financing such acquisition), in a principal amount not to exceed
the gross proceeds actually received by the Company or any Subsidiary of the
Company in connection with such disposition;
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(x) Qualified Subordinated Indebtedness of the Company or a Domestic
Subsidiary, provided that the aggregate amount of such Indebtedness shall not at
any time exceed $100 million;
(xi) Indebtedness of Foreign Subsidiaries in an amount not at any time
exceeding $10 million; and
(xii) Indebtedness of the Company and its Subsidiaries (in addition to
Indebtedness permitted by any other clause of this paragraph) in an aggregate
principal amount at any time outstanding not to exceed $10 million.
"Permitted Investments" means (a) any Investments in the Company; (b) any
Investments in Cash Equivalents; (c) Investments made as a result of the receipt
of noncash consideration from an Asset Sale that was made pursuant to and in
compliance with the covenant described above under the caption "--Repurchase at
the Option of Holders--Asset Sales"; (d) Investments outstanding as of the date
of the Indenture; (e) Investments in property or assets to be used in (or in
Subsidiaries and any entity that, as a result of such Investment, is a
Subsidiary engaged in) the same or a similar line of business as the Company or
any of its Subsidiaries was engaged in on the date of the Indenture or any
reasonable extensions or expansions thereof, (f) payroll, travel and similar
advances to cover matters that are expected at the time of such advances
ultimately to be treated as expenses in accordance with GAAP, (g) loans or
advances to employees made in the ordinary course of business in accordance with
past practice of the Company and its Subsidiaries that do not in the aggregate
exceed $2.5 million at any time outstanding, (h) accounts receivables and other
extensions of trade credit on commercially reasonable terms in accordance with
normal trade practices, (i) Investments in any dealer or customer, provided that
the aggregate amount of such Investments in all dealers and customers shall not
at any time exceed $5 million; (j) Investments in dealers or customers received
as distributions on debt claims under a plan or plans of reorganization in any
bankruptcy proceeding filed by or against any dealer or customer under Chapter
11 of Title 11 of the U.S. Code, provided that the Company liquidates such
Investments as soon as practicable; and (k) Investments in Indebtedness incurred
by the Company or any Subsidiary of the Company in compliance with the covenant
described under "--Limitation on Incurrence of Indebtedness."
"Permitted Liens" means Liens securing Indebtedness of a Person existing at
the time that such Person is merged into or consolidated with the Company or a
Subsidiary of the Company or its assets are acquired by such Person, provided
that such Liens were not created in contemplation of such merger or
consolidation or purchase and do not extend to any assets or property of the
Company or any Subsidiary of the Company, other than the surviving person and
its Subsidiaries or such assets .
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, government
or any agency or political subdivision thereof or any other entity.
"Preferred Stock," as applied to the Capital Stock of any corporation,
means Capital Stock of any class or classes (however designated) that is
preferred as to the payment of dividends, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of such
corporation, over shares of Capital Stock of any other class of such
corporation.
"Public Equity Offering" means an underwritten primary public offering of
the common stock of the Company or of the common stock of TKG pursuant to an
effective registration statement filed with the Commission in accordance with
the Securities Act (whether alone or in conjunction with a secondary public
offering).
"Purchase Money Obligations" of any Person means any obligations of such
Person to any seller or any other Person Incurred or assumed to finance the
construction and/or acquisition of real or personal property to be used in the
business of such Person or any of its Subsidiaries in an amount that is not more
than 100% of the cost of such property, and Incurred in contemplation of or
within 180 days after the date of such acquisition (excluding accounts payable
to trade creditors Incurred in the ordinary course of business).
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"Qualified Subordinated Indebtedness" means Subordinated Indebtedness owing
to an Initial Shareholder that does not (i) require or permit any payment for
any reason upon or in respect thereof, whether principal, interest or otherwise,
except in additional Qualified Subordinated Indebtedness, and (ii) permit any
acceleration thereof, in the case of clauses (i) and (ii) at any time prior to
the payment in full in cash of the Notes.
"Redeemable Stock" means (a) with respect to any Person, Capital Stock of
such Person that, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any event
(unless any redemption or repurchase of such Capital Stock thereupon is required
by any such terms, but only to the extent that a payment in respect thereof
would be permitted under the covenant set forth under the caption "Limitation on
Restricted Payments"), matures or is mandatorily redeemable, pursuant to a
sinking fund obligation or otherwise, or redeemable at the option of the Holder
thereof, in whole or in part, on or prior to the date which is one year after
the date on which the Notes mature.
"Refinancing Indebtedness" means any Indebtedness of the Company or any of
its Subsidiaries issued in exchange for, or the net proceeds of which are used
to extend, refinance, renew, replace, defease or refund other Indebtedness of
the Company or any of its Subsidiaries, provided that: (i) the principal amount
of such Refinancing Indebtedness does not exceed the principal amount of the
Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded
(plus the amount of reasonable expenses and penalties and premiums incurred in
connection therewith); (ii) such Refinancing Indebtedness has a Weighted Average
Life to Maturity equal to or greater than the Weighted Average Life to Maturity
of, the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; (iii) such Refinancing Indebtedness ranks in right of payment to the
Notes at least to the same extent as the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; and (iv) such Indebtedness
is Incurred either by the Company or by the Subsidiary who is the obligor on the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded.
"Resolution" means a copy of a resolution certified by the secretary or an
assistant secretary of the Company to have been duly adopted by the Board and to
be in full force and effect on the date of such certification, delivered to the
Trustee.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Revolving Credit Facility" means that certain senior revolving credit
facility among NationsBank, N.A. and Chemical Bank, as agents and lenders, the
other lenders named therein, the Company and the guarantors named therein in an
amount of $50 million at the Acquisition Closing and/or any successor facility
or facilities.
"Sale and Leaseback Transaction" means any direct or indirect arrangement
with any Person or to which any such Person is a party, providing for the
leasing to the Company or a Subsidiary of any property, whether owned by the
Company or any Subsidiary as of the date of the Indenture or later acquired,
which has been or is to be sold or transferred by the Company or such Subsidiary
to such Person or to any other Person from whom funds have been or are to be
advanced by such Person on the security of such property.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"Senior Indebtedness" means, with respect to Indebtedness of the Company,
(i) Indebtedness Incurred under the Credit Facilities and (ii) any other
Indebtedness permitted to be Incurred under the terms of the Indenture, unless
the instrument under which such Indebtedness is Incurred expressly provides that
it is on parity with or subordinated in right of payment to any Indebtedness for
money borrowed. Notwithstanding anything to the contrary in the foregoing,
Senior Indebtedness will not include (w) any liability for federal, state, local
or other taxes, (x) any Indebtedness of the Company to any of its Subsidiaries,
Unrestricted Subsidiaries or other Affiliates, (y) any Trade Payables or (z) any
Indebtedness that is Incurred in violation of the Indenture. Senior Indebtedness
shall include (a) the principal of, premium, if any, and interest (including
interest accruing after the filing of a petition initiating any proceeding
pursuant to any Bankruptcy Law) in accordance with and at the rate (including
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any rate applicable upon any default, to the extent lawful) specified in any
document evidencing the Senior Indebtedness (whether or not the claim for such
interest is allowed as a claim after such filing in any proceeding under such
Bankruptcy Law), and (b) all other obligations with respect to any Senior
Indebtedness (including all reimbursement obligations in respect of letters of
credit issued under the Credit Facilities and all obligations for fees,
expenses, indemnities and other amounts payable thereunder or in connection
therewith).
"Significant Subsidiary" means, at any date of determination, any
Subsidiary or Unrestricted Subsidiary of the Company that, together with its
Subsidiaries, (i) for the most recent fiscal year of the Company, accounted for
more than 5% of the consolidated revenues of the Company and its Subsidiaries or
(ii) as of the end of such fiscal year, was the owner of more than 5% of the
consolidated assets of the Company and its Subsidiaries, all as set forth on the
most recently available consolidated financial statements of the Company for
such fiscal year.
"Sponsor" means Warburg, Pincus Ventures, L.P.
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency beyond the control of the issuer unless such contingency has
occurred).
"Subordinated Indebtedness" means Indebtedness of the Company or any
Domestic Subsidiary if the instrument creating or evidencing such Indebtedness
or pursuant to which such Indebtedness is outstanding provides that such
Indebtedness is subordinated in right of payment to the Notes or the Domestic
Subsidiary Guarantees of such Domestic Subsidiary, as the case may be, and may
be subordinated to Senior Indebtedness.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of such Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof). Notwithstanding the
foregoing, an Unrestricted Subsidiary and all of its Subsidiaries shall not be a
Subsidiary of the Company for any purposes of the Indenture.
"Term Credit Facility" means those certain senior term loan facilities
among NationsBank, N.A. and Chemical Bank, as agents and lenders, the other
lenders named therein, the Company and the guarantors named therein, aggregating
$260 million in amount.
"Trade Payables" means, with respect to any Person, any accounts payable or
any Indebtedness or monetary obligation to trade creditors created, assumed or
Guaranteed by such Person arising in the ordinary course of business of such
Person in connection with the acquisition of goods or services.
"Unrestricted Subsidiary" means (i) any Person that (a) at the time of
determination shall be designated an Unrestricted Subsidiary by the Board of
Directors of the Company in the manner provided below and (b) would, but for
such designation, be a Subsidiary of the Company and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors of the Company may designate any
Subsidiary of the Company (including any newly acquired or newly formed
Subsidiary of the Company) to be an Unrestricted Subsidiary unless at the time
of designation such Subsidiary or any Subsidiary of such Subsidiary owns any
Capital Stock or Indebtedness of, or owns or holds any Lien on any property of,
the Company or any other Subsidiary of the Company that is not a Subsidiary of
the Subsidiary to be so designated; provided, however, that either (a) the
Subsidiary to be so designated has total assets of $1,000 or less or (b) if such
Subsidiary has assets greater than $1,000, then such designation would be
permitted under "--Certain Covenants--Limitation on Restricted Payments" as a
"Restricted
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Payment" after giving effect to the designation. The Board of Directors of the
Company may designate any Unrestricted Subsidiary to be a Subsidiary; provided,
however, that immediately after giving pro forma effect to such designation (1)
the Company could Incur $1.00 of additional Indebtedness pursuant to the
Consolidated Interest Coverage Ratio test in "--Certain Covenants--Limitation on
Indebtedness" and (2) no Default or Event of Default shall have occurred and be
continuing. Any such designation by the Board of Directors of the Company shall
be evidenced to the Trustee by promptly filing with the Trustee a copy of the
board resolution giving effect to such designation and an Officers' Certificate
certifying that such designation complies with the foregoing provisions.
"Voting Stock" of a corporation means all classes of Capital Stock of such
corporation then outstanding and normally entitled to vote in the election of
directors.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the product
obtained by multiplying (a) the amount of each then remaining installment,
sinking fund, serial maturity or other required payments of principal, including
payments at final maturity, in respect thereof, by (b) the number of years
(calculated to the nearest one-twelfth) that will elapse between such date and
the making of such payment, by (ii) the then outstanding principal amount of
such Indebtedness.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person. Unrestricted
Subsidiaries shall not be included in the definition of Wholly Owned Subsidiary
for any purposes of the Indenture.
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SENIOR NOTES REGISTRATION RIGHTS
The predecessors of the Company, the Guarantors and the initial purchaser
of the Senior Notes entered into the Registration Rights Agreement dated
February 29, 1996 pursuant to which the Company agreed, for the benefit of the
holders of the Senior Notes, at the Company's cost, (i) within 30 days after the
Issue Date, to file this Exchange Offer Registration Statement pursuant to which
the Senior Notes will be exchanged for the Exchange Notes, which will have the
same terms as the Senior Notes (except that the Exchange Notes will not contain
terms with respect to the interest rate step-up provision and transfer
restrictions), (ii) to cause this Exchange Offer Registration Statement to be
declared effective under the Securities Act within 115 days after the Issue Date
and (iii) to consummate the Exchange Offer within 145 days of the Issue Date.
Upon this Exchange Offer Registration Statement being declared effective, the
Company will offer the Exchange Notes in exchange for surrender of the Senior
Notes. The Company will keep the Exchange Offer open for not less than 30
business days (or longer if required by applicable law) after the date notice of
the Exchange Offer is mailed to the holders of the Senior Notes. For each Senior
Note surrendered to the Company pursuant to the Exchange Offer and not validly
withdrawn by the holder thereof, the holder of such Senior Note will receive an
Exchange Note having a principal amount equal to that of the surrendered Senior
Note. Holders whose Senior Notes are accepted for exchange will receive accrued
interest thereon to, but not including, the date of issuance of the Exchange
Notes, such interest to be payable with the first interest payment on the
Exchange Notes, but will not receive any payment in respect of interest on the
Senior Notes accrued after the issuance of the Exchange Notes. See "The Exchange
Offer."
In the event that any changes in law or applicable interpretations of the
Staff do not permit the Company to effect the Exchange Offer, or if for any
reason the Exchange Offer Registration Statement is not declared effective
within 115 days following the Issue Date (unless the Company advises the Initial
Purchaser that it is in the process of resolving comments of the Staff and that
it expects those comments to be resolved within 30 days) or the Exchange Offer
is not consummated within 145 days of the Issue Date (unless the Exchange Offer
has commenced, in which case the Exchange Offer is not consummated within 30
days after the date on which the Exchange Offer was commenced) or in certain
other circumstances, the Company will, at its expense, (i) as promptly as
practicable, and in any event on or prior to 30 days after such filing
obligation arises, file with the Commission a shelf registration statement (the
"Shelf Registration Statement") covering resales of the Senior Notes, (ii) use
its best efforts to cause the Shelf Registration Statement to be declared
effective under the Securities Act as promptly as possible after such filing
occurs and (iii) keep effective the Shelf Registration Statement until three
years after its effective date (or such shorter period that will terminate when
all the Senior Notes covered thereby have been sold pursuant thereto or in
certain other circumstances). The Company will, in the event of the filing of a
Shelf Registration Statement, provide to each Holder of the Notes covered by the
Shelf Registration Statement copies of the prospectus that is a part of the
Shelf Registration Statement, notify each such Holder when the Shelf
Registration Statement for the Notes has become effective and take certain other
actions as are required to permit unrestricted resales of the Notes. A Holder of
Senior Notes that sells such Senior Notes pursuant to the Shelf Registration
Statement generally will be required to be named as a selling securityholder in
the related prospectus and to deliver a prospectus to the purchaser, will be
subject to certain of the civil liability provisions under the Securities Act in
connection with such sales and will be bound by the provisions of the
Registration Rights Agreement that are applicable to such Holder (including
certain indemnification obligations). In addition, each Holder of the Senior
Notes will be required to deliver information to be used in connection with the
Shelf Registration Statement in order to have its Notes included in the Shelf
Registration Statement.
In the event that either (a) the Exchange Offer Registration Statement is
not filed with the Commission on or prior to the 30th calendar day following the
Issue Date (b) the Exchange Offer Registration Statement is not declared
effective prior to the 115th calendar day following the Issue Date or (c) the
Exchange Offer is not consummated or a Shelf Registration Statement with respect
to the Notes is not declared effective on or prior to the 145th calendar day
following the Issue Date, the interest rate borne by the notes will be increased
by 0.25% per annum for the first 30 days following such 30-day period in the
case of (a) above, or the first 90 days following such 115-day or such 145-day
period in the case of (b) or (c) above. Such interest rate will increase by an
additional 0.25% per annum at the beginning of each subsequent 30-day period in
the case of (a) above, or 90-day period in the case of (b) or (c) above, up to a
maximum aggregate increase of 1.5% per annum. Upon (x) the filing
97
<PAGE>
of the Exchange Offer Registration Statement after the 30-day period described
in clause (a) above, (y) the effectiveness of the Exchange Offer Registration
Statement after the 115-day period described in clause (b) above or (z) the
consummation of the Exchange Offer or the effectiveness of a Shelf Registration
Statement, as the case may be, after the 145-day period described in clause (c)
above, the interest rate borne by the Senior Notes from the date of such filing,
consummation or effectiveness, as the case may be, will be reduced to the
interest rate that would have been in effect had the delay in filing,
consummation or effectiveness not occurred.
In the event that a Shelf Registration Statement is declared effective
pursuant to the paragraph preceding the immediately preceding paragraph, if the
Company fails to keep such Shelf Registration Statement continuously effective
for the period required by the Registration Rights Agreement, then from such
time as the Shelf Registration Statement is no longer effective until the
earlier of (i) the date that the Shelf Registration Statement is again deemed
effective, (ii) the date that is the third anniversary of the effective date
(or, in the case of a Shelf Registration Statement filed at the request of the
Initial Purchaser, the first anniversary of the effective date) or (iii) the
date as of which all of the Notes are sold pursuant to the Shelf Registration
Statement, the interest rate borne by the Notes will be increased by 0.25% per
annum for the first 30 days following the date such Shelf Registration Statement
is no longer effective, and by an additional 0.25% per annum at the beginning of
each 30-day period thereafter that the Shelf Registration Statement is not
effective, up to a maximum increase of 1.5% per annum.
The additional interest borne by the Notes as provided in the immediately
preceding paragraphs is referred to herein as "Special Interest." The summary
herein of certain provisions of the Registration Rights Agreement does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, all the provisions of the Registration Rights Agreement, a copy of
which is available upon request to the Company. See "--Additional Information."
PLAN OF DISTRIBUTION
Based on interpretations by the Staff set forth in no-action letters issued
to third parties, the Company believes that Exchange Notes issued pursuant to
the Exchange Offer in exchange for the Senior Notes may be offered for resale,
resold and otherwise transferred by holders thereof (other than any holder which
is (i) an Affiliate of the Company, (ii) a broker-dealer who acquired Senior
Notes directly from the Company or (iii) a broker-dealer who acquired Senior
Notes as a result of market-making or other trading activities) without
compliance with the registration and prospectus delivery provisions of the
Securities Act provided that such Exchange Notes are acquired in the ordinary
course of such holders' business, and such holders are not engaged in, and do
not intend to engage in, and have no arrangement or understanding with any
person to participate in, a distribution of such Exchange Notes; provided that
broker-dealers ("Participating Broker-Dealers") receiving Exchange Notes in the
Exchange Offer will be subject to a prospectus delivery requirement with respect
to resales of such Exchange Notes. To date, the Staff has taken the position
that Participating Broker-Dealers may fulfill their prospectus delivery
requirements with respect to transactions involving an exchange of securities
such as the exchange pursuant to the Exchange Offer (other than a resale of an
unsold allotment from the sale of the Senior Notes to the Initial Purchaser)
with the prospectus contained in the Exchange Offer Registration Statement.
Pursuant to the Registration Rights Agreement, the Company has agreed to permit
Participating Broker-Dealers and other persons, if any, subject to similar
prospectus delivery requirements to use this Prospectus in connection with the
resale of such Exchange Notes.
Each holder of the Senior Notes who wishes to exchange its Senior Notes for
Exchange Notes in the Exchange Offer will be required to make certain
representations to the Company as set forth in "The Exchange Offer--Terms and
Conditions of the Letter of Transmittal." In addition, each holder who is a
broker-dealer and who receives Exchange Notes for its own account in exchange
for Senior Notes that were acquired by it as a result of market-making
activities or other trading activities, will be required to acknowledge that it
will deliver a prospectus in connection with any resale by it of such Exchange
Notes.
This Prospectus, as it may be amended or supplemented from time to time,
may be used by a broker-dealer in connection with resales of Exchange Notes
received in exchange for Senior Notes where such Senior Notes were acquired as a
result of market making activities or other trading activities. The Company has
agreed that, during the Exchange Offer Registration Period (as defined below),
it will make this Prospectus, as amended or supplemented, available to any
broker-dealer for use in connection with any such resale; provided, however,
that the Company shall not be required to maintain the effectiveness of the
Exchange Offer unless the Company has been notified in writing on or prior to
the 60th day following the consummation of the Exchange Offer by one or more
exchanging broker-dealers that such holder has received Exchange Notes as to
which it will be required to deliver a prospectus upon resale. In addition,
until September 12, 1996, all dealers effecting transactions in the Exchange
Notes may be required to deliver a prospectus. "Exchange Offer Registration
Period" means the longer of (a) the period until the consummation of the
Exchange Offer and (b) one year after effectiveness of the Exchange Offer
Registration Statement, exclusive of any period during which any stop order
shall be in effect suspending the effectiveness of the Exchange Offer
Registration Statement; provided, however, that in the event that all resales of
Exchange Notes (including, subject to the time periods set forth herein, any
resales by a broker-dealer exchanging Senior Notes acquired for its own account
as a result of market-making activities or other trading activities for Exchange
Notes) covered by the Exchange Offer Registration Statement have been made, the
Exchange Offer Registration Statement need not remain continuously effective for
the period set forth in clause (b) above.
98
<PAGE>
The Company will not receive any proceeds from any sale of Exchange Notes
by broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or at negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from any
such broker-dealer and/or the purchasers of any such Exchange Notes. Any
broker-dealer that resells Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. The Letter of Transmittal states that by acknowledging that it will deliver
and by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act.
During the Exchange Offer Registration Period, the Company will promptly
send additional copies of this Prospectus and any amendment or supplement to
this Prospectus to any broker-dealer that requests such documents in the Letter
of Transmittal. The Company has agreed to pay all expenses incidental to the
Exchange Offer other than commissions and concessions of any brokers or dealers
and will indemnify holders of the Notes (including any broker-dealers) against
certain liabilities, including liabilities under the Securities Act, as set
forth in the Registration Rights Agreement.
DESCRIPTION OF CREDIT FACILITIES
Set forth below is a summary description of the Credit Facilities the
Company has entered into in connection with the Acquisition. The summary does
not purport to be complete and is qualified in its entirety by reference to such
agreements. Copies of such agreements (other than schedules and exhibits) are
available from the Company upon request.
General
The Company has entered into agreements with NationsBank, N.A.
("NationsBank," and in its capacity as administrative agent, the "Agent"),
Chemical Bank ("Chemical") and other lending institutions (collectively, the
"Banks") to borrow an aggregate principal amount of up to $310 million,
consisting of (i) a $50 million revolving credit facility (the "Revolving Credit
Facility"), (ii) a $160 million term loan facility ("Term Loan Facility A") and
(iii) a $100 million term loan facility ("Term Loan Facility B" and, together
with Term Loan Facility A, the "Term Loan Facilities"). NationsBank and Chemical
have each committed to provide 50% of the total principal amount of the Credit
Facilities, which are guaranteed by TKG and all existing and future domestic
wholly owned or material subsidiaries of the Company (in this context, the
"Guarantors"). The Revolving Credit Facility includes a $20 million sub-limit
for standby and commercial letters of credit, and the Company did not draw down
the Revolving Credit Facility in connection with the Acquisition.
Security
Indebtedness of the Company under the Credit Facilities will be secured by,
among other things, (i) 100% of the capital stock of the Company and each of its
domestic subsidiaries and (ii) 65% of the capital stock of each of its foreign
subsidiaries that are directly owned by the Company or by a wholly owned
domestic subsidiary of the Company. In addition, the Banks will receive a first
priority security interest in substantially all assets and properties of the
Company and the Guarantors.
99
<PAGE>
Interest
Indebtedness under the Credit Facilities will bear interest at a floating
rate. Indebtedness under the Revolving Credit Facility and Term Loan Facility A
will bear interest at a rate based, at the Company's option, upon (i) LIBOR (the
London Interbank Offered Rate) for one, two, three or six months plus 2.5% or
(ii) ABR (a rate based on a premium over the federal funds rate or on the prime
rate) plus 1.5%. These rates are subject to performance step-downs based on the
Company's ratio of Funded Debt to EBITDA. Indebtedness under Term Loan Facility
B will bear interest at a rate based, at the Company's option, upon (i) LIBOR
for one, two, three or six months plus 3.0% or (ii) ABR plus 2.0%.
Maturity
Loans made pursuant to the Revolving Credit Facility may be borrowed,
repaid and reborrowed from time to time until the sixth anniversary of the
Closing Date, subject to satisfaction of certain conditions on the date of any
such borrowing. No letter of credit shall have an expiration date that is more
than one year after the issuance date thereof or that is after the termination
date of the Revolving Credit Facility. The loans made under the Term Loan
Facilities will be available in a single drawing at Closing and will mature 6
years from Closing under Term Loan Facility A and 7.5 years from the Closing
under Term Loan Facility B. The Term Loan Facilities will be subject to
quarterly amortization of principal commencing on December 31, 1996, in an
aggregate amount, in the case of Term Loan Facility A, of $5 million on December
31, 1996, $20 million in 1997, $23 million in 1998, $27 million in 1999, $34
million in 2000, $40.5 million in 2001 and $10.5 million in 2002 and, in the
case of Term Loan Facility B, in an aggregate amount of $250,000 on December 31,
1996, $1 million per year through 2001 and $47.5 million in 2002 and $47.25
million in 2003. The Credit Facilities will be permanently reduced with
specified portions of the proceeds of asset sales or of the issuance of
additional debt or equity by the Company or its subsidiaries and a portion of
the Company's excess cash flows.
Certain Fees
The Company is also required to pay to the Banks a commitment fee equal to
1/2% per annum on the committed undrawn amount of the Revolving Credit Facility,
subject to performance pricing step-downs based upon the Company's ratio of
Funded Debt to EBITDA and letters of credit fees equal to the margin over the
LIBOR rate charged for LIBOR loans under the Revolving Credit Facility on a per
annum basis, plus a facing fee of 1/4% per annum to be paid to the issuer of the
letter of credit.
Conditions to Closing and Extensions of Credit
The obligation of the Banks to extend letters of credit under the Revolving
Credit Facility after the Closing is subject to the satisfaction of certain
customary closing conditions.
Covenants
The Credit Facilities require the Company to meet certain financial tests
quarterly, including Funded Debt to EBITDA Ratio, Fixed Charge Coverage Ratio,
EBITDA to Interest Ratio and Minimum Net Worth. The Credit Facilities also
contain covenants which limit (i) the incurrence of additional indebtedness;
(ii) capital expenditures in excess of an aggregate of $30,000,000 in any fiscal
year; (iii) sale/leaseback transactions other than those for personal property
in an amount of up to $2,000,000 during the term of the Credit Facilities; (iv)
declaration or payment of dividends other than by a subsidiary of the borrower
to the borrower or its parent, or by the borrower to its parent for the
repurchase of capital stock upon termination of a member of management or to
fund amounts payable under employee benefit plans, in an amount not to exceed
$5,000,000 in any fiscal year; (v) loans and investments; (vi) changes to the
character of the business of the borrower or Guarantors; (vii) most transactions
with affiliates other than on terms substantially as favorable as would be
obtainable in a comparable arm's length transaction; (viii) sales or leases of
assets; (ix) acquisitions; (x) mergers and consolidations except that any of the
subsidiaries of the borrower may be merged into one another or into the
borrower; (xi) prepayments of
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<PAGE>
subordinated indebtedness (including the Notes); and (xii) liens and
encumbrances and other matters customarily restricted in such agreements. The
covenants also require the Company to pledge after-acquired assets, including
stock of after-acquired or formed subsidiaries, and to deliver guarantees by
wholly owned domestic subsidiaries, with limited exceptions; to execute within
120 days of the Closing interest rate protection agreements for a specified
period covering at least $130 million of indebtedness; and to maintain
insurance.
Events of Default
The Credit Facilities contain customary events of default, including
payment defaults, breach of representations and warranties, covenant defaults,
cross-default and cross-acceleration, bankruptcy, material judgments, ERISA,
actual or asserted invalidity of any loan documents or security interests or the
occurrence of a change of control (which term includes (i) until an initial
public offering by TKG of common stock, the failure of Warburg to own at least
51% of the voting stock of TKG or to elect at least a majority of the board of
directors of TKG and (ii) after such an initial public offering, (a) certain
events giving rise to a Change of Control as such term is defined in the
Indenture and (b) the failure of Warburg to own 40% of the voting stock of TKG
(but Warburg may own below 40% but not less than 20% if, among other
requirements, such reduction below 40% is in connection with a distribution made
at least three years after the closing date of the offering of non-restricted
shares of voting stock of TKG to limited partners of Warburg)).
LEGAL MATTERS
Certain legal matters with respect to the validity of the Exchange Notes
will be passed upon for the Company by Willkie Farr & Gallagher, New York, New
York.
EXPERTS
The consolidated financial statements as of December 31, 1995 and 1994 and
for each of the three years in the period ended December 31, 1995 included in
this Prospectus have been so included in reliance on the report of Price
Waterhouse LLP, independent accountants, given on the authority of said firm as
experts in auditing and accounting.
The balance sheet of T.K.G. Acquisition Corp. as of December 31, 1995
included in this Prospectus has been so included in reliance on the report of
Ernst & Young LLP, independent accountants, given on the authority of said firm
as experts in auditing and accounting.
101
<PAGE>
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
Page
----
<S> <C>
Knoll, Inc.:
Report of Independent Accountants.......................................................... F-2
Consolidated Balance Sheets................................................................ F-3
Consolidated Statements of Income.......................................................... F-4
Consolidated Statements of Cash Flows...................................................... F-5
Notes to Consolidated Balance Sheets and Consolidated Statements of Income................ F-6
T.K.G. Acquisition Corp.:
Report of Independent Accountants......................................................... F-31
Consolidated Balance Sheet................................................................ F-32
Notes to Consolidated Balance Sheet....................................................... F-33
Knoll, Inc.:
Consolidated Balance Sheets
March 31, 1996 and December 31, 1995................................................... F-34
Consolidated Statements of Operations
One Month Ended March 31, 1996, Two Months Ended February 29, 1996 (Predecessor)
and Three Months Ended March 31, 1995 (Predecessor).................................... F-36
Consolidated Statements of Cash Flows
One Month Ended March 31, 1996, Two Months Ended February 29, 1996 (Predecessor)
and Three Months Ended March 31, 1995 (Predecessor).................................... F-37
Notes to Consolidated Financial Statements................................................ F-38
Pro Forma Consolidated Statements of Operations........................................... F-40
Management's Discussion and Analysis of Financial Condition and Results of Operations..... F-41
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Knoll, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income and of cash flows present fairly, in
all material respects, the financial position of Knoll, Inc., which was, prior
to February 29, 1996, an organizational unit of Westinghouse Electric
Corporation (Westinghouse), at December 31, 1995 and 1994, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of Westinghouse's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance that 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
Knoll, Inc. was a business unit of Westinghouse and, as disclosed in Note 3
to the accompanying financial statements, has engaged in various transactions
and relationships with other Westinghouse entities.
Price Waterhouse LLP
600 Grant Street
Pittsburgh, PA 15219
January 15, 1996, except for Note 19, as to which the date is March 27, 1996
F-2
<PAGE>
KNOLL, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
At December 31,
----------------------
1995 1994
--------- ---------
($ in thousands)
Assets:
<S> <C> <C>
Cash ................................................. $ 1,569 $ 5,484
Customer receivables, net (note 7) ................... 114,592 108,742
Inventories (note 8) ................................. 59,643 66,903
Deferred income taxes (note 6) ....................... 18,273 19,077
Prepaid and other current assets ..................... 8,465 8,918
--------- ---------
Total current assets ............................ 202,542 209,124
Plant and equipment (note 9) ......................... 164,633 200,700
Goodwill and other intangible assets (note 10) ....... 240,772 246,912
Prepaid pension cost (note 4) ........................ 45,161 44,043
Other noncurrent assets .............................. 3,602 4,537
--------- ---------
Total assets .................................... $ 656,710 $ 705,316
========= =========
Liabilities and investment:
Short-term debt (note 11) ............................ $ 1,496 $ 22,457
Current maturities of long-term debt (note 11) ....... 3,287 2,539
Accounts payable--trade .............................. 45,850 51,952
Accounts payable--related parties .................... 413 1,316
Income taxes payable (note 6) ........................ 13,973 1,592
Accrued restructuring costs (note 14) ................ 10,868 58,184
Other current liabilities (note 12 ) ................. 43,957 48,186
--------- ---------
Total current liabilities ....................... 119,844 186,226
Long-term debt (note 11) ............................. 251 9,912
Deferred income taxes (note 6) ....................... 29,574 22,349
Postretirement benefits obligation (note 5) .......... 20,593 20,118
Other noncurrent liabilities ......................... 5,997 8,705
--------- ---------
Total liabilities ............................... 176,259 247,310
Deferred foreign currency translation adjustments
(note 2) ........................................... (22,866) (22,879)
Parent company investment (note 13) .................. 503,317 480,885
--------- ---------
Total investment ................................ 480,451 458,006
--------- ---------
Total liabilities and investment ................ $ 656,710 $ 705,316
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
KNOLL, INC.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1995 1994 1993
--------- --------- ---------
($ in thousands)
<S> <C> <C> <C>
Customer sales ................................................ $ 610,723 $ 562,598 $ 506,307
Sales to related parties ...................................... 10,169 271 2,076
--------- --------- ---------
Total sales .............................................. 620,892 562,869 508,383
Cost of goods sold to customers ............................... 398,723 397,800 362,422
Cost of goods sold to related parties ......................... 7,017 195 1,526
Provision for restructuring ................................... -- 29,180 6,165
Selling, general, and administrative expenses ................. 124,420 150,863 145,167
Depreciation and amortization ................................. 25,999 28,484 30,775
Allocated corporate expenses (note 3) ......................... 9,528 5,881 4,899
--------- --------- ---------
Total costs and expenses ................................. 565,687 612,403 550,954
--------- --------- ---------
Income (loss) from operations ................................. 55,205 (49,534) (42,571)
Other income (expense), net ................................... (1,597) 699 2,082
Interest expense .............................................. 1,430 3,225 3,301
--------- --------- ---------
Income (loss) before income taxes ............................. 52,178 (52,060) (43,790)
Income taxes .................................................. 22,846 7,713 (3,571)
--------- --------- ---------
Income (loss) before cumulative effect of changes in accounting
principles ................................................. 29,332 (59,773) (40,219)
Cumulative effect of changes in accounting principles:
Postemployment benefits (note 5)
-- -- 1,118
--------- --------- ---------
Net income (loss) ............................................. $ 29,332 $ (59,773) $ (41,337)
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
KNOLL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
-------- -------- --------
($ in thousands)
<S> <C> <C> <C>
Operating activities:
Net income (loss) ................................. $ 29,332 $(59,773) $(41,337)
Noncash items included in income:
Depreciation and amortization ................ 25,999 28,484 30,775
Noncash restructuring charges ................ -- 9,367 2,219
Changes in operating assets and liabilities:
Customer receivables ......................... (5,850) (11,269) 4,457
Inventories .................................. (76) (9,619) (887)
Prepaid and other current assets ............. 453 (1,186) (41)
Accounts payable and other current liabilities (11,234) 19,226 (32,023)
Current and deferred income taxes ............ 13,185 2,186 (10,472)
Accrued restructuring costs .................. (18,948) 16,258 3,946
Other noncurrent assets and liabilities ...... 19,003 2,542 18,663
-------- -------- --------
Cash provided by (used in) operating activities ... 51,864 (3,784) (24,700)
-------- -------- --------
Investing activities:
Capital expenditures .............................. (19,334) (20,157) (18,697)
Asset sales proceeds .............................. 316 332 2,720
-------- -------- --------
Cash used in investing activities ................. (19,018) (19,825) (15,977)
-------- -------- --------
Financing activities:
Borrowing (repayment) of short-term debt, net ..... (20,961) (2,758) 27,665
Repayment of long-term debt ....................... (8,913) (2,753) (4,902)
Net receipts from (payments to) parent company .... (6,900) 33,836 21,799
-------- -------- --------
Cash provided by (used in) financing activities ... (36,774) 28,325 44,562
-------- -------- --------
Effect of exchange rate changes on cash ........... 13 (1,996) (6,645)
Increase (decrease) in cash ....................... (3,915) 2,720 (2,760)
Cash at beginning of year ......................... 5,484 2,764 5,524
-------- -------- --------
Cash at end of year ............................... $ 1,569 $ 5,484 $ 2,764
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
KNOLL, INC.
NOTES TO CONSOLIDATED BALANCE SHEET
AND CONSOLIDATED STATEMENT OF INCOME
Note 1: Basis of Presentation
The Knoll Group, Inc. ("Knoll") was previously a business unit of
Westinghouse Electric Corporation (Westinghouse or the Corporation) that
comprised the Corporation's office furniture business. In February 1996,
Westinghouse sold Knoll to Warburg, Pincus Ventures, L.P., an affiliate of E.M.
Warburg, Pincus & Company, a financial services organization based in New York.
Immediately following the acquisition, The Knoll Group, Inc.
changed its name to Knoll, Inc. (the "Company").
Knoll provides a wide range of furniture products ranging from
designer-oriented individual pieces to systems designed to improve work
environments and contribute to productivity. Products include individually
hand-crafted furniture, executive furniture, general office furniture,
furniture-grade textiles, office accessories, and furniture systems. Knoll is a
holding company that includes Knoll North America, Inc. (primary U.S. operating
company), Spinneybeck Enterprises, Inc., Knoll Overseas, Inc. (U.S. holding
company of foreign subsidiaries) and an interest in Knoll Japan, KK.
The Securities and Exchange Commission, in Staff Accounting Bulletin No. 55
(SAB 55), requires that historical financial statements of a subsidiary,
division, or lesser business component of another entity include certain
expenses incurred by the parent 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. These financial statements include the
estimated costs of such expenses and services. See note 3.
Historically, the results of Knoll's domestic operations have been included
in the consolidated U.S. federal income tax return of Westinghouse. The results
of operations in Canada and Europe have been reported separately to their
respective taxing jurisdictions. The income tax expense and other tax related
information in these statements is presented as if Knoll had not been eligible
to be included in the consolidated tax returns of Westinghouse or other
affiliates (i.e. Knoll on a stand-alone basis). The recognition and measurement
of income tax expense and deferred income taxes required certain assumptions,
allocations, and significant estimates which management believes are reasonable
to measure the tax consequences as if Knoll were a stand-alone taxpayer.
These consolidated financial statements include the historical financial
position, results of operations, and cash flows of Knoll previously included in
the Westinghouse consolidated financial statements. These consolidated financial
statements have been prepared by Westinghouse management in conformity with
generally accepted accounting principles and include such estimates and
adjustments as deemed necessary to present fairly the consolidated financial
position of Knoll at December 31, 1995 and 1994 and the results of their
operations and cash flows for each of the three years in the period ended
December 31, 1995. The operating results of Knoll's European subsidiaries are
reported and included in Knoll's 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.
Note 2: Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements of Knoll include the accounts of
Knoll after elimination of intercompany accounts and transactions other than
those with other units of Westinghouse as described in note 3.
F-6
<PAGE>
KNOLL, INC.
NOTES TO CONSOLIDATED BALANCE SHEET
AND CONSOLIDATED STATEMENT OF INCOME--(Continued)
Revenue Recognition
Sales are recognized primarily as products are shipped and services are
rendered.
Inventories
Inventories are stated at the lower of actual cost on a first-in, first-out
(FIFO) basis, or market, measured in the aggregate. Inventoried costs include
direct materials, direct labor, and certain overheads. See note 8.
Plant and Equipment
Plant and equipment are recorded at cost and depreciated generally using
the straight-line method over their estimated useful lives. The estimated useful
lives are 45 years for plant and 5 to 12 years for equipment. Expenditures for
additions and improvements are capitalized, and costs for repairs and
maintenance are charged to operations as incurred. Capitalization of newly
acquired assets is limited to those assets with cost in excess of $1,500.
Goodwill and Other Intangibles
Goodwill and other acquired intangible assets are amortized under the
straight-line method over 40 years.
Subsequent to the acquisition of an intangible asset, management
continually evaluates whether later events or circumstances have occurred that
indicate the remaining estimated useful life of an intangible asset may warrant
revision or that the remaining balance of such an asset may not be recoverable.
When factors indicate that an intangible asset should be evaluated for possible
impairment, 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.
Product Warranty
Estimated product warranty costs are accrued when products are shipped. The
warranty costs are estimated and measured based on historical warranty costs as
a percentage of revenue.
Income Taxes
The Corporation accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). SFAS 109 requires the asset and liability method of accounting for income
taxes. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Deferred income taxes are not provided on the undistributed earnings of
foreign affiliates because any tax on the distribution is expected to be offset
by foreign tax credits.
F-7
<PAGE>
KNOLL, INC.
NOTES TO CONSOLIDATED BALANCE SHEET
AND CONSOLIDATED STATEMENT OF INCOME--(Continued)
As discussed in note 1 to the financial statements, the U.S. operations of
Knoll are included in a consolidated U.S. tax return with Westinghouse and its
subsidiaries. In accordance with SFAS 109, income taxes are provided in these
statements as if Knoll filed a separate income 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 current rates. The resulting translation
adjustments are recognized as deferred foreign currency translation adjustments
in total investment.
Knoll has no operations in countries with highly inflationary economies.
Note 3: Related Party Transactions
Knoll purchases products from and sells to other Westinghouse operations.
Knoll also purchases certain services from the Corporation, including liability,
property, and workers' compensation insurance. These transactions are discussed
in further detail below.
Cash and Cash Equivalents
Knoll utilizes the Westinghouse centralized cash management services in
North America. Under such service arrangements, accounts receivable are
collected and cash is invested centrally. Additionally, disbursements are funded
centrally on demand. As a result, Knoll maintains a low cash balance on its
books, and receives charges and credits against parent company investment for
cash used and collected through a central clearinghouse arrangement.
Intercompany Purchases and Payables
Knoll purchases products and services from other Westinghouse operations
generally on an arms-length basis. For intercompany purchases in the U.S., Knoll
uses the central clearinghouse arrangement through which intercompany
transactions are settled at the transfer date.
Accounts payable to related parties represents balances payable for
purchases from units of Westinghouse that do not participate in the central
clearinghouse arrangement.
Intercompany Sales and Receivables
Knoll sells products to various Westinghouse operations generally on an
arms-length basis. These transactions are settled immediately through the
central clearinghouse or the internal customer is invoiced and an intercompany
receivable is established.
F-8
<PAGE>
KNOLL, INC.
NOTES TO CONSOLIDATED BALANCE SHEET
AND CONSOLIDATED STATEMENT OF INCOME--(Continued)
Corporate Services
Knoll uses, and is charged directly for, certain services that Westinghouse
provides to its business units. These services generally include information
systems support, certain accounting functions such as transaction processing,
legal, environmental affairs, and human resources consulting and compliance
support.
Westinghouse centrally develops, negotiates, and administers Knoll's
insurance programs. The insurance includes broad all-risk coverage for real and
personal property and third-party liability coverage, employer's liability
coverage, automobile liability, general product liability, and other standard
liability coverage. Knoll also maintains a program of self-insurance for
workers' compensation in the United States. Westinghouse charges its business
units for all of the centrally administered insurance programs based in part on
claims history. Specific liabilities for general and product liability,
automobile and workers' compensation claims are presented in Knoll's
consolidated financial statements.
All of the charges for the corporate services described above are included
in the costs of Knoll's operations in the consolidated statement of income. Such
charges are based on costs which directly relate to Knoll or on a pro rata
portion of Westinghouse's total costs for the services provided. These costs
have been allocated to Knoll on a basis that management believes is reasonable.
However, management believes that it is possible that the costs of these
transactions may differ from those that would result from transactions among
unrelated parties. For the years ended December 31, 1995, 1994, and 1993,
charges related to the services above totalled $3,304,000, $4,172,000 and
$4,856,000, respectively.
Knoll also purchases other Westinghouse internally-provided services as
necessary including telecommunications, printing, productivity and quality
consulting, and other services.
Allocated Corporate Expenses
Westinghouse allocates a certain portion of its corporate expenses to its
business units. These allocated costs include Westinghouse executive management
and corporate overhead; corporate legal, environmental, audit, treasury and tax
services, pension charges related to corporate functions, and other corporate
support and executive costs. Allocated corporate expenses for 1995 also include
approximately $4,000,000 of incentive compensation payable to Knoll's executives
under Westinghouse long-term incentive plans.
These corporate expenses are allocated primarily based on sales with the
exception of the incentive compensation allocation. This methodology of
allocating corporate expenses to business units is reasonable and consistent,
but such allocations are not necessarily indicative of actual costs. It is not
practical for management to estimate the level of expenses that might have been
incurred had Knoll operated as a separate stand-alone entity.
Westinghouse does not charge its business units for the carrying costs
related to its investment in such units (parent company investment). Therefore,
Knoll's results of operations for each of the periods presented do not include
any allocated interest charges from Westinghouse.
Note 4: Pensions
Westinghouse sponsors various pension arrangements covering substantially
all domestic and foreign employees of Knoll. Most plan benefits are based on
either years of service and compensation levels at the time of retirement, a
formula based on career earnings, or a final average compensation amount.
Pension benefits are paid from trusts funded by contributions from employees and
Westinghouse.
F-9
<PAGE>
KNOLL, INC.
NOTES TO CONSOLIDATED BALANCE SHEET
AND CONSOLIDATED STATEMENT OF INCOME--(Continued)
The pension funding policy is consistent with the funding requirements of U.S.
federal and other governmental laws and regulations. Plan assets consist
primarily of listed stocks, fixed income securities, and real estate
investments.
Knoll participates in single-employer pension plans maintained by both
Knoll and Westinghouse. For purposes of these financial statements, Knoll's
participation in single-employer pension plans maintained by Westinghouse is
accounted for as though such plans were multiemployer plans. The single-employer
plan maintained by Knoll consists of The Knoll Group Pension Plan.
Net Periodic Pension Costs--The Knoll Group Pension Plan
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1995 1994 1993
------- ------- -------
($ in thousands)
<S> <C> <C> <C>
Service cost .................................. $ 2,278 $ 2,955 $ 2,349
Interest cost on projected benefit obligation . 5,212 5,016 4,879
Amortization of unrecognized prior service cost 385 385 385
Amortization of unrecognized net loss ......... -- 468 --
------- ------- -------
7,875 8,824 7,613
Return on plan assets ......................... (8,993) (8,846) (9,589)
------- ------- -------
Net periodic pension income ................... $(1,118) $ (22) $(1,976)
======= ======= =======
</TABLE>
The funding status at December 31, 1995 and 1994 for the Knoll Group
Pension Plan is as follows:
Funding Status--The Knoll Group Pension Plan
<TABLE>
<CAPTION>
At December 31,
--------------------
1995 1994
-------- --------
($ in thousands)
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested ................................................................... $(68,081) $(51,502)
Nonvested
(3,363) (3,155)
-------- --------
Accumulated benefit obligation ................................................ (71,444) (54,657)
Additional obligation for projected compensation increases on accumulated years
of service
(12,491) (8,487)
-------- --------
Projected benefit obligation .................................................. (83,935) (63,144)
Plan assets at fair value ..................................................... 95,940 92,192
-------- --------
Projected benefit obligation less than plan assets ............................ 12,005 29,048
Unrecognized net loss ......................................................... 28,698 10,152
Prior service cost 4,458 4,843
-------- --------
Prepaid pension cost .......................................................... $ 45,161 $ 44,043
======== ========
</TABLE>
F-10
<PAGE>
KNOLL, INC.
NOTES TO CONSOLIDATED BALANCE SHEET
AND CONSOLIDATED STATEMENT OF INCOME--(Continued)
Significant Pension Plan Assumptions--The Knoll Group Pension Plan
<TABLE>
<CAPTION>
At December 31,
-------------------------
1995 1994
---------- ----------
<S> <C> <C>
Discount rate.................................... 6.75% 8.50%
Compensation increase rate....................... 4.00% 4.00%
Long-term return on plan assets.................. 9.75% 9.75%
</TABLE>
The plans accounted for as multiemployer plans consist of the Westinghouse
Pension Plan and the Westinghouse Executive Pension Plan. These plans are
defined benefit plans sponsored by Westinghouse and include certain domestic
employees of Knoll as well as other domestic employees of Westinghouse. For
multiemployer plans, employers are required to recognize as net pension expense
total contributions for the period. For the years ended December 31, 1995, 1994,
and 1993, Knoll's contribution to Westinghouse for these multiemployer defined
benefit pension plans totalled $1,076,000, $1,223,000, and $684,000,
respectively.
In addition, employees of Knoll's Canadian and United Kingdom (U.K.)
operations participate in defined contribution plans. Costs related to the
Canadian plan for the years ended December 31, 1995, 1994, and 1993 totalled
$398,000, $398,000, and $399,000, respectively. Knoll's costs for the plan in
the U.K. for each of the three years in the period ended December 31, 1995 were
not significant.
Knoll also sponsors the Knoll Group Retirement Savings Plan, which is an
employee savings plan that qualifies as a deferred salary arrangement under
Section 401(k) of the Internal Revenue Code. Under this plan, participating U.S.
employees may defer a portion of their pretax earnings, up to the annual
contribution limit established by the Internal Revenue Service. Knoll matches
40% of employee contributions up to 6% of employee compensation. The plan also
provides for additional employer matching based on the achievement of certain
profitability goals. Costs related to this plan in 1995, 1994, and 1993 were
$2,675,000, $1,592,000, and $1,586,000, respectively.
Note 5: Postretirement Benefits Other Than Pensions and Postemployment Benefits
Knoll participates in single-employer postretirement benefit arrangements
maintained by both Knoll and Westinghouse. For purposes of these financial
statements, Knoll's participation in the single-employer postretirement benefit
plan maintained by Westinghouse is accounted for as though such plan was a
multiemployer postretirement benefit plan. The single-employer plan maintained
by Knoll consists of The Kroll Group Retiree Medical and Life Insurance Plan.
Net Periodic Postretirement Costs--The Knoll Group Retiree Medical and Life
Insurance Plan
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1995 1994 1993
------- ------- -------
($ in thousands)
<S> <C> <C> <C>
Service cost............................................... $ 449 $ 556 $ 394
Interest cost on projected benefit obligation .............. 1,509 1,509 1,621
Amortization of unrecognized prior service cost ............ (12) -- --
Amortization of unrecognized net (gain) loss ............... (25) 18 (7)
------- ------- -------
Net periodic post-retirement benefit cost .................. $ 1,921 $ 2,083 $ 2,008
======= ======= =======
</TABLE>
F-11
<PAGE>
KNOLL, INC.
NOTES TO CONSOLIDATED BALANCE SHEET
AND CONSOLIDATED STATEMENT OF INCOME--(Continued)
The funding status at December 31, 1995 and 1994 for The Knoll Group
Retiree Medical and Life Insurance Plan is as follows:
Funding Status--The Knoll Group Retiree Medical and Life Insurance Plan
<TABLE>
<CAPTION>
At December 31,
--------------------
1995 1994
-------- --------
($ in thousands)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees ............................................ $ (7,581) $(11,397)
Fully eligible active participants .................. (1,680) (1,241)
Other active participants ........................... (8,480) (6,879)
-------- --------
Accumulated benefit obligation ...................... (17,741) (19,517)
Plan assets at fair value ........................... -- --
-------- --------
Projected benefit obligation ........................ (17,741) (19,517)
Prior service cost .................................. (4,155) --
Unrecognized net (gain) loss ........................ 1,303 (601)
-------- --------
Liability ........................................... $(20,593) $(20,118)
======== ========
</TABLE>
Significant Postretirement Benefit Plan Assumptions
<TABLE>
<CAPTION>
At December 31,
----------------------
1995 1994
------ ------
<S> <C> <C>
Discount rate .................................. 7.25% 8.50%
Health care cost trend rate .................... *11.50% *12.00%
Compensation increase rate ..................... 4.00% 4.00%
</TABLE>
* Decreasing .5% annually from December 31, 1995 and 1994 to the ultimate
rate of 7%.
The effect of a 1% annual increase in the assumed health care cost trend
rate would increase the accumulated postretirement benefit obligation by
approximately $1,744,000 and would increase annual net periodic postretirement
benefit cost by approximately $242,000.
The plan accounted for as a multiemployer plan consists of the retiree
medical, dental, and life insurance arrangements sponsored by Westinghouse. For
multiemployer plans, employers are required to recognize as net periodic
postretirement benefit expense, total contributions for the period. Knoll's
postretirement benefit expense for the multiemployer plan sponsored by
Westinghouse totalled $151,000 in 1995, $122,000 in 1994, and $301,000 in 1993.
Postemployment Benefits
Knoll provides certain postemployment benefits to former or inactive
employees and their dependents during the time period following employment but
before retirement. At December 31, 1995 and 1994, the
F-12
<PAGE>
KNOLL, INC.
NOTES TO CONSOLIDATED BALANCE SHEET
AND CONSOLIDATED STATEMENT OF INCOME--(Continued)
Company's liability for postemployment benefits totalled $1,720,000 for both
years. Knoll's postemployment expense for 1995, 1994, and 1993 was not
significant. In December 1993, Knoll adopted, retroactive to January 1, 1993,
SFAS 112, "Employers Accounting for Postemployment Benefits." Knoll's charge for
adoption of SFAS 112 at January 1, 1993 was $1,118,000, net of $602,000 of
deferred taxes, and was immediately recognized as a cumulative effect of a
change in accounting for postemployment benefits.
Note 6: Income Taxes
The recognition and measurement of income tax expense and deferred taxes
requires certain assumptions, allocations, and significant estimates to measure
the tax consequences as if Knoll were a stand-alone taxpayer.
See notes 1 and 2.
Provision (Benefit) for Consolidated Income Taxes
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1995 1994 1993
------- ------- -------
($ in thousands)
<S> <C> <C> <C>
Current:
Federal ....................... $11,130 $ -- $ --
State ......................... 3,687 1,920 677
Foreign ....................... -- -- --
------- ------- -------
Total income taxes--current ........ 14,817 1,920 677
------- ------- -------
Deferred:
Federal ....................... 7,795 5,704 (4,586)
State ......................... 234 89 338
Foreign ....................... -- -- --
------- ------- -------
Total income taxes--deferred ....... 8,029 5,793 (4,248)
------- ------- -------
Income taxes ....................... $22,846 $ 7,713 $(3,571)
======= ======= =======
</TABLE>
A deferred income tax benefit of $602,000 was allocated to the cumulative
effect of changes in accounting principle (postemployment benefits) for the year
ended December 31, 1993.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1995 and 1994 are presented below:
Consolidated Deferred Income Tax Sources
<TABLE>
<CAPTION>
At December 31,
-------------------
1995 1994
------- -------
($ in thousands)
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to allowance for doubtful accounts..... $ 1,753 $ 1,615
Inventories................................................................. 4,856 4,413
Net operating loss carryforwards............................................ 37,339 40,908
Accrued restructuring costs................................................. 3,367 22,319
Postretirement benefit obligations.......................................... 8,925 8,735
Accrued liabilities and other items......................................... 9,344 1,337
------- -------
Gross deferred tax assets........................................................ 65,584 79,327
Less: valuation allowance........................................................ (37,990) (43,066)
------- -------
</TABLE>
F-13
<PAGE>
KNOLL, INC.
NOTES TO CONSOLIDATED BALANCE SHEET
AND CONSOLIDATED STATEMENT OF INCOME--(Continued)
<TABLE>
<CAPTION>
At December 31,
-------------------
1995 1994
------- -------
($ in thousands)
<S> <C> <C>
Net deferred tax assets.......................................................... 27,594 36,261
------- -------
Deferred tax liabilities:
Plant and equipment, principally due to differences in depreciation......... 22,369 23,007
Pensions.................................................................... 16,526 16,526
------- -------
Gross deferred tax liabilities................................................... 38,895 39,533
------- -------
Net deferred tax liability....................................................... $11,301 $ 3,272
======= =======
</TABLE>
As of December 31, 1995, Knoll has net operating loss carryforwards in
various foreign tax jurisdictions totalling approximately $95,000,000 which
generally expire between 1996 and 2000. Knoll's share of the consolidated
Westinghouse domestic net operating loss carryforwards at December 31, 1995, is
approximately $14,500,000 expiring in 2007 and 2008. Such amount does not agree
with the domestic net operating loss amounts included in the preparation of
these financial statements due to Knoll's inclusion in the consolidated U.S.
income tax return of Westinghouse and the required allocation of certain
expenses incurred by Westinghouse on behalf of Knoll. See notes 1 and 2.
A valuation allowance of $24,881,000 and $9,893,000 was recorded as of
December 31, 1993 and 1992, respectively.
The excess of the foreign net operating loss carryforwards over the net
taxable temporary differences as of December 31, 1995, has been entirely offset
by a valuation allowance.
F-14
<PAGE>
KNOLL, INC.
NOTES TO CONSOLIDATED BALANCE SHEET
AND CONSOLIDATED STATEMENT OF INCOME--(Continued)
Effective Tax Rate
<TABLE>
<CAPTION>
Year Ended
December 31,
------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Federal statutory income tax rate...................................... 35.0% (35.0%) (35.0)%
Increase (decrease) in the tax rate resulting from:
State income tax, net of federal effect........................... 4.9 2.5 1.5
Different tax rate on foreign subsidiaries, net of change in valuation
allowance...................................................... (1.4) 41.8 19.2
Non-deductible goodwill amortization.............................. 4.7 4.7 5.6
Other............................................................. .6 .8 .5
---- ---- ----
Effective tax rate..................................................... 43.8% 14.8% (8.2)%
==== ==== ====
</TABLE>
Note 7: Customer Receivables, Net
An allowance for doubtful accounts of $5,782,000 and $5,732,000 at December
31, 1995 and 1994, respectively, was deducted from customer receivables.
Customer receivables from sales on open account with the U.S. government
represented approximately 16.4% and 16.7% of Knoll's customer receivables for
1995 and 1994, respectively. Management performs ongoing credit evaluations of
its customers and generally does not require collateral.
Note 8: Inventories
Inventories
<TABLE>
<CAPTION>
At December 31,
----------------------------
1995 1994
-------- --------
($ in thousands)
<S> <C> <C>
Raw materials .......................... $ 38,749 $ 41,637
Work in process ........................ 8,718 8,445
Finished goods ......................... 13,268 19,562
Other .................................. 1,574 805
-------- --------
Gross inventories ...................... 62,309 70,449
Valuation allowances ................... (2,666) (3,546)
-------- --------
Inventories, net ....................... $ 59,643 $ 66,903
======== ========
</TABLE>
F-15
<PAGE>
KNOLL, INC.
NOTES TO CONSOLIDATED BALANCE SHEET
AND CONSOLIDATED STATEMENT OF INCOME--(Continued)
Note 9: Plant and Equipment
Plant and Equipment
<TABLE>
<CAPTION>
At December 31,
----------------------
1995 1994
--------- ---------
($ in thousands)
<S> <C> <C>
Land and buildings ...................... $ 92,744 $ 115,635
Machinery and equipment ................. 180,548 178,946
Construction in progress ................ 10,473 11,973
--------- ---------
Plant and equipment, at cost ............ 283,765 306,554
Valuation allowance ..................... (1,943) --
Accumulated depreciation ................ (117,189) (105,854)
--------- ---------
Plant and equipment, net ................ $ 164,633 $ 200,700
========= =========
</TABLE>
Note 10: Goodwill and Other Intangible Assets
Goodwill and other intangible assets consist principally of goodwill, which
totalled $278,456,000, before amortization, at December 31, 1995. Of this
amount, approximately $96,000,000 related to the acquisition of Shaw-Walker
Company and Reff, Inc. in 1989. The remaining portion of the goodwill is
primarily attributable to the acquisition in 1990 of substantially all of the
assets and assumption of certain liabilities of Knoll International, Inc.
Accumulated amortization totalled $37,684,000 and $30,695,000 at December 31,
1995 and 1994, respectively.
Note 11: Short-term and Long-term Debt
Short-term Debt
<TABLE>
<CAPTION>
At December 31 During the Year
------------------------- -----------------------------
Composite Maximum Average Wtd. Avg.
Balance Rate Outstanding Outstanding Rate
------- ---- --------- --------- -----
(in thousands)
<S> <C> <C> <C> <C> <C>
1995
European bank loans...... $ 1,496 11.00% $ 11,336 $ 6,373 10.356%
------- ---- --------- --------- ------
1994
European bank loans...... $22,457 8.36% $ 29,742 $ 25,548 8.126%
======= ==== ========= ========= ======
</TABLE>
Average outstanding borrowings were determined based on monthly balances
outstanding.
F-16
<PAGE>
KNOLL, INC.
NOTES TO CONSOLIDATED BALANCE SHEET
AND CONSOLIDATED STATEMENT OF INCOME--(Continued)
Long-term Debt
<TABLE>
<CAPTION>
At December 31,
-----------------
1995 1994
------- -------
($ in thousands)
<S> <C> <C> <C>
Lehigh County Industrial Development Bond due 2004 (interest is variable) $ -- $ 5,700
7% Urban Redevelopment Authority Grant due March 15, 1996 ............... 2,055 2,188
Other ................................................................... 1,483 4,563
------- -------
3,538 12,451
Current maturities ...................................................... 3,287 2,539
------- -------
Long-term debt .......................................................... $ 251 $ 9,912
======= =======
</TABLE>
In April 1995, the Lehigh County Industrial Development Bond was paid in
full.
Note 12: Other Current Liabilities
Other Current Liabilities
<TABLE>
<CAPTION>
At December 31,
--------------------
1995 1994
------- -------
($ in thousands)
<S> <C> <C>
Accrued employee compensation ........................ $19,486 $15,609
Accrued product warranty ............................. 6,763 6,906
Accrued taxes other than federal income taxes ........ 1,621 1,738
Group insurance and related accruals ................. 1,961 3,340
Workers compensation ................................. 3,285 3,526
General and product liability ........................ 1,349 1,535
Other ................................................ 9,492 15,532
------- -------
Other current liabilities ............................ $43,957 $48,186
======= =======
</TABLE>
Note 13: Parent Company Investment
Because The Knoll Group was an operating unit and was not a distinct legal
entity (see note 1) there were no customary equity and capital accounts recorded
on the consolidated balance sheet. Instead, parent company investment was
maintained by Knoll and Westinghouse to account for interunit transactions as
described in Note 3. Parent company investment consists of net income, advances
for capital expenditures, and other transactions as shown below.
F-17
<PAGE>
KNOLL, INC.
NOTES TO CONSOLIDATED BALANCE SHEET
AND CONSOLIDATED STATEMENT OF INCOME--(Continued)
Parent Company Investment
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1995 1994 1993
--------- --------- ---------
($ in thousands)
<S> <C> <C> <C>
Balance, beginning of year ........ $ 480,885 $ 506,822 $ 526,360
Net income ........................ 29,332 (59,773) (41,337)
Capital expenditures .............. 19,334 20,157 18,697
Proceeds from asset sales ......... (316) (332) (2,720)
Net interunit transactions (note 3) (25,918) 14,011 5,822
--------- --------- ---------
Balance, end of year .............. $ 503,317 $ 480,885 $ 506,822
========= ========= =========
</TABLE>
Note 14: Restructuring
Management is committed to strengthening its businesses and improving its
profitability through restructuring actions including changes in business and
product line strategies, as well as downsizing for process reengineering and
productivity improvements.
In 1994, Knoll adopted a $61,345,000 restructuring program that included
the separation of approximately 500 employees, the closing of various
facilities, and the exiting of several product lines. The total cost of this
program was offset by accruals previously established for actions that were
deferred and subsequently included in this program, resulting in a net charge to
operations in 1994 of $29,180,000. A summary of the program's costs is shown
below.
Restructuring Program
<TABLE>
<CAPTION>
Facility Closure
Employee &
Separation Asset Rationalization
Costs Writedown Costs Total
------- ------- ------- -------
($ in thousands)
<S> <C> <C> <C> <C>
Knoll North America ........ $10,559 $19,104 $ 7,982 $37,645
Knoll Europe ............... 7,526 9,264 6,910 23,700
------- ------- ------- -------
Total ................. $18,085 $28,368 $14,892 $61,345
======= ======= ======= =======
</TABLE>
At December 31, 1995, the restructuring actions were essentially complete.
The remaining accrued costs totalling $10,868,000 consist primarily of
separation costs that are generally payable over a two-year period following
separation, and lease costs related to properties that are no longer being
utilized.
Note 15: Contingent Liabilities and Commitments
There are various claims and lawsuits pending against Knoll, all of which
management believes either to be without merit or subject to adequate defenses.
The resolution of these claims and lawsuits is not expected to have a material
adverse effect on the Company.
F-18
<PAGE>
KNOLL, INC.
NOTES TO CONSOLIDATED BALANCE SHEET
AND CONSOLIDATED STATEMENT OF INCOME--(Continued)
Note 16: Leases
Knoll has commitments under operating leases for certain machinery and
equipment and facilities used in its operations. Rental expense in 1995, 1994,
and 1993 was $10,149,000, $10,917,000, and $12,989,000, respectively.
Minimum Rental Payments
<TABLE>
<CAPTION>
At December 31,
---------------
1995
----
($ in thousands)
------------
<C> <C>
1996.................................... $ 5,172
1997.................................... 4,810
1998.................................... 4,597
1999.................................... 3,430
2000.................................... 2,215
Subsequent years........................ 4,528
------------
Minimum rental payments................. $ 24,752
============
</TABLE>
These amounts exclude lease payments that have previously been accrued as
part of the 1994 restructuring program. See note 14.
Note 17: Fair Values of Financial Instruments
The following methods and assumptions were used in estimating the fair
values of Knoll's financial instruments:
Cash
The carrying amount reported in the consolidated balance sheet for cash
approximates its fair value.
Short and Long-term Debt
The carrying amounts of Knoll's short-term foreign bank borrowings and
variable long-term debt instruments approximates their fair value. The fair
value of Knoll's other long-term debt is estimated using discounted cash flow
analyses based on Westinghouse's current incremental borrowing rates for similar
types of borrowing arrangements.
The carrying amounts and fair values of Knoll's financial instruments at
December 31, 1995 and 1994 are as follows:
F-19
<PAGE>
KNOLL, INC.
NOTES TO CONSOLIDATED BALANCE SHEET
AND CONSOLIDATED STATEMENT OF INCOME--(Continued)
Fair Values of Financial Instruments
<TABLE>
<CAPTION>
At December 31,
--------------------------------------
1995 1994
------------------ ------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
------- ------- ------- -------
($ in thousands)
<S> <C> <C> <C> <C>
Assets:
Cash ............................... $ 1,569 $ 1,569 $ 5,484 $ 5,484
Liabilities:
Short-term debt .................... 1,496 1,496 22,457 22,457
Current maturities of long-term debt 3,287 3,287 2,539 2,539
Long-term debt ..................... 251 251 9,912 10,080
======= ======= ======= =======
</TABLE>
F-20
<PAGE>
KNOLL, INC.
NOTES TO CONSOLIDATED BALANCE SHEET
AND CONSOLIDATED STATEMENT OF INCOME--(Continued)
Note 18: Business Segment and Geographical Region Information
Knoll is principally engaged in one line of business--office furniture. Its
manufactured products include office systems, seating, wood casegoods, files and
storage cabinets, tables, executive furniture, contract textiles, and computer
support accessories.
Knoll sells its products to customers primarily in North America and Europe
using domestic operations and foreign subsidiaries. Generally, products
manufactured outside the United States are sold outside the United States.
Geographic Region Information
<TABLE>
<CAPTION>
United
States Canada Europe Eliminations Totals
--------- --------- --------- --------- ---------
($ in thousands)
<S> <C> <C> <C> <C> <C>
1995
Sales .................................... $ 544,832 $ 92,394 $ 64,159 $ (80,493) $ 620,892
Operating profit ......................... 54,043 483 679 -- 55,205
Identifiable assets ...................... 455,784 98,953 72,265 (32,698) 594,304
========= ========= ========= ========= =========
1994
Sales .................................... $ 492,927 $ 73,835 $ 63,087 $ (66,980) $ 562,869
Operating profit ......................... (11,378) (7,292) (30,864) -- (49,534)
Operating profit without restructuring ... 7,134 (7,292) (20,196) -- (20,354)
Identifiable assets ...................... 486,165 89,865 92,447 (27,846) 640,631
========= ========= ========= ========= =========
1993
Sales .................................... $ 439,716 $ 49,804 $ 71,349 $ (52,486) $ 508,383
Operating profit ......................... (8,105) (13,705) (20,761) -- (42,571)
Operating profit without restructuring ... (7,640) (13,705) (15,061) -- (36,406)
========= ========= ========= ========= =========
</TABLE>
Allocated corporate expenses have been prorated to the geographic segments
based on sales.
Note 19: Subsequent Events
In February 1996, the Company issued and sold 10 7/8% Senior Subordinated
Notes Due 2006 (the "Senior Notes") in a transaction not registered under the
Securities Act of 1933, as amended (the "Securities Act"), in reliance upon the
exemption provided in Section 4(2) of the Securities Act and Rule 144A of the
Securities Act. The Company is now offering to exchange these previously issued
Senior Notes for 10 7/8% Senior Subordinated Notes Due 2006 that will be
registered under the Securities Act (the "Exchange Notes" and, together with the
Senior Notes, the "Notes").
The Notes are guaranteed by TKG Acquisition Corp. ("TKG") and all existing
and future directly or indirectly wholly owned domestic subsidiaries of the
Company (the "Guarantors") on a senior subordinated and unsecured basis. The
Guarantors other than TKG 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. If the Company is unable to satisfy all or any
portion of its obligations with respect to the Notes, it is unlikely that the
Guarantors will be able to pay all or any of such portion of such unsatisfied
obligations.
F-21
<PAGE>
KNOLL, INC.
NOTES TO CONSOLIDATED BALANCE SHEET
AND CONSOLIDATED STATEMENT OF INCOME--(Continued)
These Guarantees will irrevocably and unconditionally, jointly and
severally, guarantee the performance and payment in full when due of all
obligations under the Notes, limited to the largest amount that would not render
such Guarantor's obligations under the guarantees subject to avoidance under any
applicable federal or state fraudulent conveyance or similar law.
The condensed consolidating information which follows presents:
o Condensed financial statements as of December 31, 1995 and 1994 and
for the year ended December 31, 1995, 1994 and 1993 of (a) Knoll,
Inc. (as the Issuer), (b) the Guarantors other than TKG, (c) the
combined non-Guarantors, (d) elimination entries and (e) the
Company on a consolidated basis. The financial information of TKG
is not considered meaningful and not included in the Guarantors
column because its only assets and liabilities is its investment in
the Company and it has no other operations.
o The Issuer and the Guarantors are shown with their investments in
their wholly owned subsidiaries accounted for on the equity method.
The condensed consolidating financial statements should be read in
connection with the consolidated financial statements of the Company. Separate
financial statements of the Guarantors are not presented because the Guarantors
are jointly, severally and unconditionally liable under the guarantees, and the
Company believes the condensed consolidating financial statements presented are
more meaningful in understanding the financial position of the Guarantors.
F-22
<PAGE>
STATEMENT OF INCOME
($ in thousands)
1993
<TABLE>
<CAPTION>
GUARANTORS
----------------------------
SPINNEYBECK
ENTERPRISES, KNOLL NON-
KNOLL, INC. INC. OVERSEAS, INC. GUARANTORS ELIMINATIONS TOTAL
----------- ------------ ------------ ------------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Customer sales....................... $ 402,102 $ 14,616 $ 138 $ 86,937 $ 2,514 $ 506,307
Sales to related parties............. 6,663 2,514 0 33,188 (40,289) 2,076
----------- ------------ ------------ ------------- -------------- ----------
Total sales..................... 408,765 17,130 138 120,125 (37,775) 508,383
Cost of goods sold to customers...... 281,257 6,584 123 78,687 (4,230) 362,422
Cost of goods sold to related parties 4,931 2,313 44 27,784 (33,545) 1,526
Provision for restructuring.......... 465 0 0 5,700 0 6,165
Selling, general, and administrative 100,350 8,695 (457) 36,579 0 145,167
expenses.............................
Depreciation and amortization........ 24,358 0 19 6,398 0 30,775
Allocated corporate expenses......... 4,899 0 0 0 0 4,899
----------- ------------ ------------ ------------- -------------- ----------
Total costs and expenses........ 416,260 17,592 (271) 155,148 (37,775) 550,954
----------- ------------ ------------ ------------- -------------- ----------
Income (loss) from operations........ (7,495) (462) 409 (35,023) 0 (42,571)
Other income (expenses), net......... (626) 0 (1,066) 2,521 1,253 2,082
Income (loss) from equity investments (14,317) 0 (13,446) 0 27,763 0
Interest expense..................... 627 0 0 2,674 0 3,301
----------- ------------ ------------ ------------- -------------- ----------
Income (loss) before income taxes.... (23,065) (462) (14,103) (35,176) 29,016 (43,790)
Income taxes......................... (3,323) (8) (240) 0 0 (3,571)
----------- ------------ ------------ ------------- -------------- ----------
Income (loss) before cumulative
effect of changes in accounting (19,742) (454) (13,863) (35,176) 29,016 (40,219)
principles........................
Cumulative effect of changes in
accounting principles:
Postemployment benefits.......... 1,118 0 0 - - 1,118
----------- ------------ ------------ ------------- -------------- ----------
Net income (loss)..................... $ (20,860) $ (454) $ (13,863) $ (35,176) $ 29,016 $ (41,337)
=========== ============ ============ ============= ============== ==========
</TABLE>
F-23
<PAGE>
STATEMENT OF INCOME
($ in thousands)
1994
<TABLE>
<CAPTION>
GUARANTORS
----------------------------
SPINNEYBECK
ENTERPRISES, KNOLL NON-
KNOLL, INC. INC. OVERSEAS, INC. GUARANTORS ELIMINATIONS TOTAL
----------- ------------ ------------ ------------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Customer Sales.........................$ 453,792 $ 15,123 $ (1) $ 90,936 $ 2,748 $ 562,598
Sales to related parties............... 7,035 2,766 0 43,775 (53,305) 271
------- -------- ------------ ------- -------- ---------
Total sales....................... 460,827 17,889 (1) 134,711 (50,557) 562,869
Cost of goods sold to customers........ 314,881 7,497 411 84,999 (9,988) 397,800
Cost of goods sold to related parties.. 5,065 2,915 314 32,470 (40,569) 195
Provision for restructuring............ 0 0 0 29,180 0 29,180
Selling, general, and administrative 106,679 6,215 (903) 38,872 0 150,863
expenses............................
Depreciation and amortization.......... 20,679 0 415 7,390 0 28,484
Allocated corporate expenses........... 5,881 0 0 0 0 5,881
------- -------- ------------ ------- -------- ---------
Total costs and expenses.......... 453,185 16,627 237 192,911 (50,557) 612,403
------- -------- ------------ ------- -------- ---------
Income (loss) from operations.......... 7,642 1,262 (238) (58,200) 0 (49,534)
Other Income (expense), net............ (300) 0 (11) 1,010 0 699
Income (loss) from equity investments.. (19,724) 0 (20,103) 0 39,827 0
Interest expense....................... 626 0 0 2,599 0 3,225
------- -------- ------------ ------- -------- ---------
Income (loss) before income taxes...... (13,008) 1,262 (20,352) (59,789) 39,827 (52,060)
Income taxes........................... 7,079 639 (5) 0 0 7,713
------- -------- ------------- ------- -------- ---------
Income (loss) before cumulative effect
changes in accounting principles.... (20,087) 623 (20,347) (59,789) 39,827 (59,773)
------- -------- ------------- ------- -------- ---------
Cumulative effect of changes in account
principles: - 0 0 - - -
------- -------- ------- ------- -------- ---------
Postemployment benefits...........
Net Income (loss).....................$ (20,087) $ 623 $ (20,347) $ (59,789) $ 39,827 $ (59,773)
======= ======== ============= ======= ======== =========
</TABLE>
F-24
<PAGE>
STATEMENT OF INCOME
($ in thousands)
1995
<TABLE>
<CAPTION>
GUARANTORS
----------------------------
SPINNEYBECK
ENTERPRISES, KNOLL NON-
KNOLL, INC. INC. OVERSEAS, INC. GUARANTORS ELIMINATIONS TOTAL
----------- ------------ ------------ ------------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Customer sales.........................$ 500,892 $ 14,090 $ 0 $ 93,409 $ 2,332 $ 610,723
Sales to related parties............... 12,411 2,332 0 60,309 (64,883) 10,169
--------- --------- ------------ ------- ------- ---------
Total sales....................... 513,303 16,422 0 153,718 (62,551) 620,892
Cost of goods sold to customers........ 333,068 5,501 651 81,966 (22,463) 398,723
Cost of goods sold to related parties.. 8,564 2,472 373 35,696 (40,088) 7,017
Provision for restructuring............ 0 0 0 0 0 0
Selling, general, and administrative 94,322 4,894 1,730 23,474 0 124,420
expenses............................
Depreciation and amortization.......... 19,200 0 199 6,600 0 25,999
Allocated corporate expenses........... 9,528 0 0 0 0 9,528
--------- --------- ------------ ------- ------- ---------
Total costs and expenses.......... 464,682 12,867 2,953 147,736 (62,551) 565,687
--------- --------- ------------ ------- ------- ---------
Income (loss) from operations.......... 48,621 3,555 (2,953) 5,982 0 55,205
Other Income (expense), net............ (2,101) 0 68 436 0 (1,597)
Income (loss) from equity investments.. 211 0 (166) 0 (45) 0
Interest expense....................... 282 0 0 1,148 0 1,430
--------- --------- ------------ ------- ------- ---------
Income (loss) before income taxes...... 46,449 3,555 (3,051) 5,270 (45) 52,178
Income taxes........................... 22,553 1,476 (1,183) 0 0 22,846
--------- --------- ------------- ------- ------- ---------
Income (loss) before cumulative effect
changes in accounting principles.... 23,896 2,079 (1,868) 5,270 (45) 29,332
Cumulative effect of changes in
accounting principles: - 0 0 - - -
--------- --------- ------------ ------- ------- ---------
Postemployment benefits...........
Net Income (loss).....................$ 23,896 $ 2,079 $ (1,868) $ 5,270 $ (45) $ 29,332
========= ========= ============= ======= ======= =========
</TABLE>
F-25
<PAGE>
BALANCE SHEET
($ in thousands)
1994
<TABLE>
<CAPTION>
GUARANTORS
----------------------------
SPINNEYBECK
ENTERPRISES, KNOLL NON-
KNOLL, INC. INC. OVERSEAS, INC. GUARANTORS ELIMINATIONS TOTAL
----------- ------------ ------------ ------------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Cash.................................. $ 0 $ 0 $ 0 $ 5,484 $ 0 $ 5,484
Customer receivables.................. 81,459 2,151 0 25,132 0 108,742
Inventories........................... 43,629 7,730 (81) 15,625 0 66,903
Deferred income taxes................. 18,058 847 172 0 0 19,077
Prepaid and other current assets...... 5,036 53 3,070 14,714 (13,955) 8,918
-------- --------- ------------ ------- --------- ---------
Total current assets............. 148,182 10,781 3,161 60,955 (13,955) 209,124
Plant and equipment................... 139,719 668 0 60,313 0 200,700
Goodwill and other intangible assets.. 164,426 4,737 647 77,102 0 246,912
Prepaid pension cost.................. 44,043 0 0 0 0 44,043
Equity investments.................... 31,653 2,140 26,318 0 (60,111) 0
Other noncurrent assets............... 4,214 58 97 2,698 (2,530) 4,537
-------- --------- ------------ ------- --------- ---------
Total assets..................... 532,237 18,384 30,223 201,068 (76,596) 705,316
======== ========= ============ ======= ========= =========
Liabilities and investment:...........
Short-term debt....................... 0 0 0 22,457 0 22,457
Current maturities of long-term debt.. 256 0 0 2,283 0 2,539
Accounts payable - trade.............. 31,375 389 (78) 20,266 0 51,952
Accounts payable - related parties.... 1,309 0 0 6,011 (6,004) 1,316
Income taxes payable.................. 638 245 709 0 0 1,592
Accrued restructuring costs........... 32,116 0 0 26,068 0 58,184
Other current liabilities............. 39,853 1,411 930 5,992 0 48,186
-------- --------- ------------ ------- --------- ---------
Total current liabilities........ 105,547 2,045 1,561 83,077 (6,004) 186,226
Long-term debt........................ 8,445 0 0 1,467 0 9,912
Deferred income taxes................. 20,652 0 0 1,697 0 22,349
Postretirement benefits obligation.... 20,118 0 0 0 0 20,118
Other noncurrent liabilities.......... 2,440 (22) 22 6,265 0 8,705
-------- ---------- ------------ ------- --------- ---------
Total liabilities................ 157,202 2,023 1,583 92,506 (6,004) 247,310
Deferred foreign
currency translation adjustments... 0 0 0 (22,879) 0 (22,879)
Parent company investment............. 375,035 16,361 28,640 131,441 (70,592) 480,885
-------- --------- ------------ ------- --------- ---------
Total investment................. 375,035 16,361 28,640 108,562 (70,592) 458,006
Total liabilities and investment. $ 532,237 $ 18,384 $ 30,223 $ 201,068 $ (76,596) $ 705,316
======== ========= ============ ======= ========= =========
</TABLE>
F-26
<PAGE>
BALANCE SHEET
($ in thousands)
1995
<TABLE>
<CAPTION>
GUARANTORS
----------------------------
SPINNEYBECK
ENTERPRISES, KNOLL NON-
KNOLL, INC. INC. OVERSEAS, INC. GUARANTORS ELIMINATIONS TOTAL
----------- ------------ ------------ ------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Cash $ (182) $ 182 $ 0 $ 1,569 $ 0 $ 1,569
Customer receivables 88,656 1,173 135 24,628 0 114,592
Inventories 38,570 6,436 0 14,637 0 59,643
Deferred income taxes 17,024 528 411 310 0 18,273
Prepaid and other current assets 2,093 6 4,554 26,377 (24,565) 8,465
------------ ------------ ------------ ------------ ------------ ------------
Total current assets 146,161 8,325 5,100 67,521 (24,565) 202,542
Plant and equipment 121,144 310 0 43,179 0 164,633
Goodwill and other 160,072 4,430 626 75,644 0 240,772
intangible assets
Prepaid pension cost 45,161 0 0 0 0 45,161
Equity investments 32,050 2,140 26,152 0 (60,342) 0
Other noncurrent assets 2,568 30 97 3,151 (2,244) 3,602
------------ ------------ ------------ ------------ ------------ ------------
Total assets 507,156 15,235 31,975 189,495 (87,151) 656,710
============ ============ ============ ============ ============ ============
Liabilities and investment:
Short-term debt 0 0 0 1,496 0 1,496
Current maturities of 2,055 0 0 1,232 0 3,287
long-term debt
Accounts payable - trade 27,534 910 123 17,283 0 45,850
Accounts payable - related parties 633 117 0 6,591 (6,928) 413
Income taxes payable 13,760 984 (771) 0 0 13,973
Accrued restructuring costs 5,893 0 0 4,975 0 10,868
Other current liabilities 35,726 861 1,778 4,592 0 43,957
------------ ------------ ------------ ------------ ------------ ------------
Total current liabilities 86,601 2,872 1,130 36,169 (6,928) 119,844
Long-term debt 0 0 0 251 0 251
Deferred income taxes 27,566 (56) 56 2,008 0 29,574
Postretirement benefits 20,593 0 0 0 0 20,593
obligation
Other noncurrent liabilities 2,256 0 0 3,741 0 5,997
------------ ------------ ------------ ------------ ------------ ------------
Total liabilities 137,016 2,816 1,186 42,169 (6,928) 176,259
Deferred foreign currency
translation adjustments 0 0 0 (22,866) 0 (22,866)
Parent company investment 370,140 12,419 30,789 170,192 (80,223) 503,317
------------ ------------ ------------ ------------ ------------ ------------
Total investment 370,140 12,419 30,789 147,326 (80,223) 480,451
Total liabilities and
investment $ 507,156 $ 15,235 $ 31,975 $ 189,495 $ (87,151) $ 656,710
============ ============ ============ ============ ============ ============
</TABLE>
F-27
<PAGE>
STATEMENT OF CASH FLOW
($ in thousands)
1993
<TABLE>
<CAPTION>
GUARANTORS
-------------------------------
SPINNEYBECK KNOLL
ENTERPRISES, OVERSEAS, NON-
KNOLL, INC . INC. INC. GUARANTORS ELIMINATIONS TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net Income $ (20,860) $ (454) $ (13,863) $ (35,176) $ 29,016 $ (41,337)
Adjustments to reconcile net income to
net cash provided by operating
activities: 14,317 0 13,446 0 (27,763) 0
Equity loss (income)
Depreciation and amortization 24,358 0 19 6,398 0 30,775
Noncash restructuring charges 178 0 0 2,041 0 2,219
Losses (gains) on asset disposition 0 0
Changes in assets and liabilities
excluding sales of assets: 0 0
Accounts receivable (7,918) (240) 0 12,615 0 4,457
Inventories (3,330) 314 (328) 2,457 0 (887)
Prepaid and other current assets (2,375) 5 (529) (1,338) 4,196 (41)
Accounts payable and other current (11,482) (978) (1,172) (13,423) (4,968) (32,023)
liabilities
Current and deferred income taxes (21,286) (254) 499 10,569 0 (10,472)
Accrued restructuring costs 287 0 0 3,659 0 3,946
Other noncurrent assets and liabilities 9,527 413 39 (14,838) 23,522 18,663
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating (18,584) (1,194) (1,889) (27,036) 24,003 (24,700)
activities
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital Expenditures (14,130) (205) 0 (4,362) 0 (18,697)
Proceeds from sales of assets 16 0 0 2,704 0 2,720
Net receipts from (payments to) equity
investments (6,592) 0 (6,348) 0 12,940 0
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) (20,706) (205) (6,348) (1,658) 12,940 (15,977)
investing activities
- -----------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Borrowing (repayment) of short-term 0 0 0 27,665 0 27,665
debt, net
Repayment of long-term debt (225) 0 0 (4,677) 0 (4,902)
Net receipts from (payments to) parent 39,711 1,399 6,725 10,907 (36,943) 21,799
company
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) 39,486 1,399 6,725 33,895 (36,943) 44,562
financing activities
Effects of exchange rate changes on cash 0 0 0 (6,645) 0 (6,645)
- -----------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash 196 (0) (1,512) (1,444) 0 (2,760)
equivalents
Cash and cash equivalents at beginning 1,566 0 1,578 2,380 0 5,524
of year
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 1,762 $ (0) $ 66 $ 936 $ 0 $ 2,764
===================================================================================================================================
</TABLE>
F-28
<PAGE>
STATEMENT OF CASH FLOW
($ in thousands)
1994
<TABLE>
<CAPTION>
GUARANTORS
----------------------------
SPINNEYBECK
ENTERPRISES, KNOLL NON-
KNOLL, INC. INC. OVERSEAS, INC. GUARANTORS ELIMINATIONS TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net Income $ (20,087) $ 623 $ (20,347) $ (59,789) $ 39,827 $ (59,773)
Adjustments to reconcile net
income to net cash provided by
operating activities:
Equity loss (income) 19,724 0 20,103 0 (39,827) 0
Depreciation and amortization 20,679 0 415 7,390 0 28,484
Noncash restructuring charges 5,152 0 0 4,215 0 9,367
Losses (gains) on asset disposition 0 0
Changes in assets and
liabilities excluding sales of
assets:
Accounts receivable (8,611) (299) 0 (2,359) 0 (11,269)
Inventories (6,852) (227) 53 (2,593) 0 (9,619)
Prepaid and other current assets (943) 1 (1,572) (174) 1,502 (1,186)
Accounts payable and other
current liabilities 16,535 (161) (205) 967 2,090 19,226
Current and deferred income taxes 1,644 412 130 0 0 2,186
Accrued restructuring costs 7,437 0 0 8,821 0 16,258
Other noncurrent assets and
liabilities (10,922) 538 (302) 13,154 74 2,542
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 23,756 887 (1,725) (30,368) 3,666 (3,784)
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital Expenditures (12,935) (72) 0 (7,150) 0 (20,157)
Proceeds from sales of assets 189 0 0 143 0 332
Net receipts from (payments to)
equity investments (1,429) 738 (1,488) 0 2,179 0
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in)
investing activities (14,175) 666 (1,488) (7,007) 2,179 (19,825)
- -----------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Borrowing (repayment) of
short-term debt, net 0 0 0 (2,758) 0 (2,758)
Repayment of long-term debt (263) 0 0 (2,490) 0 (2,753)
Net receipts from (payments to)
parent company (11,080) (1,553) 3,147 49,167 (5,845) 33,836
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities (11,343) (1,553) 3,147 43,919 (5,845) 28,325
Effects of exchange rate changes on cash 0 0 0 (1,996) 0 (1,996)
- -----------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents (1,762) 0 (66) 4,548 0 2,720
Cash and cash equivalents at
beginning of year 1,762 0 66 936 0 2,764
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of
year $ 0 $ 0 $ 0 $ 5,484 $ 0 $ 5,484
===================================================================================================================================
</TABLE>
F-29
<PAGE>
STATEMENT OF CASH FLOW
($ in thousands)
1995
<TABLE>
<CAPTION>
GUARANTORS
-----------------------------
SPINNEYBECK
ENTERPRISES, KNOLL NON-
KNOLL, INC. INC. OVERSEAS, INC. GUARANTORS ELIMINATIONS TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net Income $ 23,896 $ 2,079 $ (1,868) $ 5,270 $ (45) $ 29,332
Adjustments to reconcile net
income to net cash provided by
operating activities:
Equity loss (income) (211) 0 166 0 45 0
Depreciation and amortization 19,200 0 199 6,600 0 25,999
Noncash restructuring charges 0 0 0 0 0 0
Losses (gains) on asset disposition 0 0
Changes in assets and
liabilities excluding sales of
assets:
Accounts receivable (7,197) 978 (135) 504 0 (5,850)
Inventories (2,277) 1,294 (81) 988 0 (76)
Prepaid and other current assets 2,943 47 (1,484) (11,663) 10,610 453
Accounts payable and other
current liabilities (7,644) 88 1,049 (3,803) (924) (11,234)
Current and deferred income taxes 14,156 1,058 (1,719) (310) 0 13,185
Accrued restructuring costs (7,117) 0 0 (11,831) 0 (18,948)
Other noncurrent assets and 14,521 659 (144) 4,253 (286) 19,003
liabilities
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating 50,270 6,203 (4,017) (9,992) 9,400 51,864
activities
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital Expenditures (14,871) 0 0 (4,463) 0 (19,334)
Proceeds from sales of assets 42 0 0 274 0 316
Net receipts from (payments to)
equity (186) 0 0 0 186 0
investments
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in)
investing (15,015) 0 0 (4,189) 186 (19,018)
activities
- -----------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Borrowing (repayment) of
short-term debt, 0 0 0 (20,961) 0 (20,961)
net
Repayment of long-term debt (6,646) 0 0 (2,267) 0 (8,913)
Net receipts from (payments to)
parent (28,791) (6,021) 4,017 33,481 (9,586) (6,900)
company
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities (35,437) (6,021) 4,017 10,253 (9,586) (36,774)
Effects of exchange rate changes on cash 0 0 0 13 0 13
- -----------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents (182) 182 0 (3,915) 0 (3,915)
Cash and cash equivalents at 0 0 0 5,484 0 5,484
beginning of year
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of $ (182) $ 182 $ 0 $ 1,569 $ 0 $ 1,569
year
===================================================================================================================================
</TABLE>
F-30
<PAGE>
Report of Independent Accountants
To the Stockholder of
T.K.G. Acquisition Corp.
We have audited the accompanying consolidated balance sheet of T.K.G.
Acquisition Corp. as of December 31, 1995. This consolidated balance sheet is
the responsibility of the Company's management. Our responsibility is to express
an opinion on this consolidated balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated balance sheet. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall consolidated balance sheet
presentation. We believe that our audit of the consolidated balance sheet
provides a reasonable basis for our opinion.
In our opinion, the consolidated balance sheet referred to above presents
fairly, in all material respects, the financial position of T.K.G. Acquisition
Corp. at December 31, 1995, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
New York, New York
March 25, 1996
F-31
<PAGE>
T.K.G. Acquisition Corp.
Consolidated Balance Sheet
December 31, 1995
<TABLE>
<S> <C>
Assets:
Cash $ 10
-----
Total assets $ 10
=====
Stockholder's equity:
Common stock, $.01 par value:
Authorized shares -100
Issued and outstanding shares - 100 $ 1
Paid in capital 9
-----
Total stockholder's equity $ 10
=====
</TABLE>
See accompanying notes.
F-32
<PAGE>
T.K.G. Acquisition Corp.
Notes to Consolidated Balance Sheet
December 31, 1995
1. Organization
T.K.G. Acquisition Corp. ("TKG") was formed in December 1995 in connection with
the acquisition of The Knoll Group, Inc. and related entities (Knoll) from
Westinghouse. In the formation of TKG, 100 shares of common stock were issued to
TKG's stockholder.
2. Description of Business
Since formation, the Company has not engaged in any activities other than those
incident to its formation and capitalization; therefore, no statements of
operations have been presented. It is not expected that the Company will have
any significant assets, liabilities or operations other than those incident to
its formation, capitalization, and the above described acquisition.
3. Significant Accounting Policies
Principles of Consolidation
The consolidated balance sheet includes the accounts of the Company and its
wholly owned subsidiary T.K.G. Acquisition Sub, Inc. Significant intercompany
accounts and transactions have been eliminated.
4. Stock Incentive Plan
Effective February 28, 1996, in anticipation of the above described acquisition,
TKG established the T.K.G. Acquisition Corp. 1996 Stock Incentive Plan (the
"Plan") to increase its ability to attract and retain key employees. Under the
Plan, awards denominated or payable in shares of the TKG stock may be granted to
employees. The maximum number of shares that may be granted under the Plan are
1,500,000 shares of common stock. A Stock Plan Committee of TKG Board of
Directors has sole discretion concerning administration of the 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 Plan
may be terminated at any time at the discretion of the Board of Directors.
5. Subsequent Events
On February 29, 1996, TKG issued and sold an aggregate of 1,000,000 shares of
common stock, $.01 par value per share; and 1,599,000 shares of Series A 12%
Participating Convertible Preferred Stock, $1.00 par value per share for
$100,000, and $159,900,000, respectively.
On February 29, 1996, T.K.G. Acquisition Sub, Inc., a wholly owned subsidiary of
TKG, acquired all of the outstanding capital stock of Knoll for a purchase price
of $561,745,407, subject to certain post-closing adjustments. On the same date,
T.K.G. Acquisition Sub, Inc. and The Knoll Group, Inc. merged with and into
Knoll North America, Inc. and as a result, Knoll, Inc. is a direct wholly owned
subsidiary of TKG. In addition to an equity contribution, the Acquisition was
funded through borrowings under Knoll credit facilities and the issuance of
Knoll Senior Subordinated Notes. The credit facilities and Senior Subordinated
Notes of the Company are unconditionally guaranteed by TKG.
F-33
<PAGE>
<TABLE>
<CAPTION>
KNOLL, INC.
CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS)
The Knoll Group, Inc.
(Predecesor)
March 31, December 31,
1996 1995
---- ----
(Unaudited) (Audited)
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 11,287 $ 1,569
Accounts receivable, net 109,477 114,592
Inventories
Finished goods 13,977 14,842
Work in process 7,474 8,718
Raw materials 38,528 38,749
Reserves (3,213) (2,666)
--------- ---------
Total inventories 56,766 59,643
Deferred income taxes 7,941 18,273
Prepaid and other current assets 1,254 8,465
--------- ---------
Total current assets 186,725 202,542
Property, plant, and equipment at cost 192,147 283,765
Less accumulated depreciation 2,125 119,132
--------- ---------
Net property, plant and equipment 190,022 164,633
Goodwill and other intangible assets 305,088 240,772
Deferred income taxes 9,504 0
Other noncurrent assets 3,441 48,763
Total assets $ 694,780 $ 656,710
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable $ 28,115 $ 46,263
Accrued payroll 14,252 19,486
Accrued interest payable 3,351 0
Income taxes payable 911 13,973
Current portion of long term debt 6,220 3,287
Other current liabilities 32,940 36,835
--------- ---------
Total current liabilities 85,789 119,844
Long term debt 420,008 251
Postretirement benefits obligation 24,163 20,593
Deferred income taxes 0 29,574
Other noncurrent liabilities 3,992 5,997
--------- ---------
Total liabilities 533,952 176,259
</TABLE>
F-34
<PAGE>
<TABLE>
<S> <C> <C>
STOCKHOLDERS' EQUITY:
Parent company investment 503,317
Common stock, $1.00 par value; authorized 1
and issued 1,000 shares
Additional paid-in capital 159,999
Cumulative translation adjustment 379 (22,866)
Retained earnings 449
--------- ---------
Total stockholders' equity 160,828 480,451
Total liabilities and stockholders' equity $ 694,780 $ 656,710
========= =========
See accompanying notes
</TABLE>
F-35
<PAGE>
<TABLE>
<CAPTION>
KNOLL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
($ in thousands)
The Knoll Group, Inc. The Knoll Group, Inc.
(Predecessor) (Predecessor)
One Month Ended Two Months Ended Three Months Ended
March 31, 1996 February 29, 1996 March 31, 1995
--------------- --------------------- ---------------------
<S> <C> <C> <C>
Sales $ 48,080 $ 90,232 $147,410
Cost of Sales 30,964 57,568 101,692
-------- -------- --------
Gross profit 17,116 32,664 45,718
Selling, general, and
administrative expenses 9,825 19,085 31,124
Depreciation and amortization
2,753 4,317 6,850
Allocated corporate expenses 0 921 2,200
Westinghouse long-term
incentive compensation -- 47,900 --
-------- -------- --------
Operating income (loss) 4,538 (39,559) 5,544
Interest expense 3,602 340 146
Other income (expense) (49) (296) 648
-------- -------- --------
Income (loss) before income 887 (40,195) 6,046
taxes
Income taxes 438 (16,107) 4,830
-------- -------- --------
Net income (loss) $ 449 $(24,088) $ 1,216
======== ======== ========
See accompanying notes
</TABLE>
F-36
<PAGE>
<TABLE>
<CAPTION>
KNOLL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
($ in thousands)
The Knoll Group, The Knoll Group,
Inc. (Predecessor) Inc. (Predecessor)
One Month Two Months Three Months
Ended Ended Ended
March 31, 1996 February 29, 1996 March 31, 1995
-------------- ----------------- --------------
CASH FROM OPERATIONS
<S> <C> <C> <C>
Net income (loss) $ 449 $(24,088) $ 1,216
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 2,753 4,317 6,850
Non-cash interest expense 150 -- --
Accounts receivable (3,684) 8,798 (7,223)
Inventories 2,656 671 1,026
Accounts payable (2,853) (15,292) (8,904)
Other Working capital, net 9,879 (21,534) 3,217
Change in other assets and liabilities (330) (6,911) 353
Net cash provided by (used in) operating activities 9,020 (54,039) (3,465)
-------- -------- --------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (447) (2,296) (2,245)
-------- -------- --------
Net cash used in investing activities (447) (2,296) (2,245)
-------- -------- --------
FINANCING ACTIVITIES
Decrease in short term borrowings 0 (3,805) (2,767)
Decrease in long term borrowings 0 0 (349)
Net receipts from parent company 0 60,848 3,406
-------- -------- --------
Net cash provided by financing activities 0 57,043 290
-------- -------- --------
Effect of exchange rate on cash 379 58 460
-------- -------- --------
Increase (decrease) in cash 8,952 766 (4,960)
Cash and cash equivalents at beginning of period 2,335 1,569 5,484
-------- -------- --------
Cash and cash equivalents at end of period $ 11,287 $ 2,335 $ 524
-------- -------- --------
See accompanying notes
</TABLE>
F-37
<PAGE>
KNOLL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(Unaudited)
Note 1: Basis of Presentation
The accompanying consolidated financial statements of Knoll, Inc. (the
"Company") have been prepared in accordance with generally accepted accounting
principles for interim financial information. They 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 have been included. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's registration statement on Form S-4.
The pro forma statements of operations for the three months ended March 31, 1995
and March 31, 1996 reflect the acquisition of The Knoll Group, Inc. as if the
acquisition occurred at the beginning of each period.
Note 2: Acquisition of Knoll
T.K.G. Acquisition Corp. ("TKG") was formed in December 1995 in connection with
the acquisition of The Knoll Group, Inc. and related entities ("Knoll") from
Westinghouse. TKG does not have any significant assets, liabilities, or
operations other than those incident to its formation, capitalization, and
acquisition of Knoll.
On February 29, 1996, TKG issued and sold an aggregate of 1,000,000 shares of
common stock, $.01 par value per share; and 1,599,000 shares of Series A 12%
Participating Convertible Preferred Stock, $1.00 par value per share for
$100,000 and $159,900,000, respectively.
On February 29, 1996, T.K.G. Acquisition Sub, Inc., a wholly owned subsidiary of
TKG, acquired all of the outstanding capital stock of Knoll. On the same date,
T.K.G. Acquisition Sub, Inc. and The Knoll Group, Inc. merged with and into
Knoll North America, Inc., and as a result, Knoll, Inc. became a direct wholly
owned subsidiary of TKG. In addition to an equity contribution, the acquisition
was funded through borrowings under the Company's credit facilities and the
issuance of the Company's Senior Subordinated Notes. The specifics of the credit
facilities and the Company's Senior Subordinated Notes are:
$160,000,000 term loan facility with a group of banks with
interest at LIBOR, plus 2.5% due $5,000,000 in 1996, $20,000,000
in 1997, $23,000,000 in 1998, $27,000,000 in 1999, $34,000,000 in
2000, $40,500,000 in 2001, and $10,500,000 in 2002.
$100,000,000 term loan facility with a group of banks with
interest at LIBOR, plus 3% due $250,000 in 1996, $1,000,000 in
1997, $1,000,000 in 1998, $1,000,000 in 1999, $1,000,000 in 2000,
$1,000,000 in 2001, $47,500,000 in 2002 and $47,250,000 in 2003.
$165,000,000 principal amount of 10-7/8% Senior Subordinated
Notes due in 2006.
The credit facilities and Senior Subordinated Notes of the Company are
unconditionally guaranteed by TKG.
The cost of the acquisition, subject to certain post-closing adjustments, and
the allocation of the purchase price on a preliminary basis is as follows:
F-38
<PAGE>
<TABLE>
<S> <C>
Net working capital..................... $103,232,000
Property, plant and equipment........... 191,379,000
Other non-current liabilities, net...... (15,547,000)
Goodwill and other intangibles.......... 305,936,000
------------
Total.............................. $585,000,000
</TABLE>
Note 3: Income Taxes
Income taxes for the Pro forma three months ended March 31, 1995 and March 31,
1996 were computed using the actual tax rate experienced in the foreign
subsidiaries and a 42% tax rate domestically.
The tax effect of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at March 31, 1996 are
presented below:
Deferred tax assets:
Postretirement benefit obligations..................... $ 9,504,000
Net operating loss carryforwards...................... 11,278,000
Other.................................................. 7,783,000
-----------
Gross deferred tax assets................................... 28,565,000
Less: Valuation allowance................................... (9,632,000)
-----------
Net deferred tax assets..................................... 18,933,000
-----------
Deferred tax liabilities:
Plant and equipment, principally due to differences in
depreciation........................................... 1,488,000
-----------
Gross deferred tax liabilities.............................. 1,488,000
-----------
Net deferred tax asset...................................... $17,445,000
-----------
As of March 31, 1996, the Company has net operating loss carryforwards in
various foreign tax jurisdictions totalling $35,100,000 which generally expire
between 1996 and 1999.
The excess of the foreign net operating loss carryforwards over the net
foreign taxable temporary differences as of March 31, 1996, has been entirely
offset by a valuation allowance.
Note 4: Stock Incentive Plan
Effective February 28, 1996, TKG established the T.K.G. Acquisition Corp. 1996
Stock Incentive Plan (the "Plan") to increase its ability to attract and retain
key employees of the Company. Under the Plan, awards denominated or payable in
shares of the TKG stock may be granted to employees of the Company. The maximum
number of shares that may be granted under the Plan are 1,500,000 shares of
common stock. A Stock Plan Committee of TKG's Board of Directors has sole
discretion concerning administration of the 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 Plan may be terminated
at any time at the discretion of the Board of Directors.
Note 5: Goodwill and Other Intangibles
The Company reviews the carrying value of goodwill and other intangibles on an
ongoing basis if the facts and circumstances suggest that it may be impaired.
Management uses an estimate of the undiscounted cash flows of the asset over the
remaining life of the asset in measuring whether the intangible asset is
recoverable. If such analysis indicates that an impairment has in fact occurred,
the carrying value of the intangible asset is reduced to its estimated fair
value.
Note 6: Corporate Services
For the two-month period ended February 29, 1996 and the three-month period
ended March 31, 1995, charges,related to services provided by Westinghouse
totaled $510,000 and $826,000, respectively and are included in selling,
general and administrative expenses.
Note 7: Westinghouse Long Term Incentive Compensation
The results of operations for the two-month period ended February 29, 1996
include $47,900,000 of incentive compensation payable to the Company's employees
as a result of consummation of the Acquisition, which triggered the payment of
awards and established the amounts of payments due under Westinghouse's
long-term incentive plans.
F-39
<PAGE>
<TABLE>
<CAPTION>
KNOLL, INC.
PRO FORMA CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
($ in thousands)
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, 1996 MARCH 31, 1995
------------ ------------
<S> <C> <C>
Sales $ 138,312 $ 147,410
Cost of sales 88,532 102,970
--------- ---------
Gross profit 49,780 44,440
Selling, general, and administrative expenses 29,876 31,745
Depreciation and amortization 8,240 8,284
Allocated corporate expenses 0 1,000
--------- ---------
Operating income 11,664 3,411
Interest expense 10,680 10,617
Other income (expense) (345) 648
Income (loss) before income taxes 639 (6,558)
Income taxes 442 (1,675)
--------- ---------
Net income (loss) $ 197 $ (4,883)
========= =========
</TABLE>
F-40
<PAGE>
KNOLL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three Months Ended March 31, 1996 (Pro forma) Compared to
Three Months Ended March 31, 1995 (Pro forma)
The following relates to the Pro forma results of operations for the three
months ended March 31, 1996 compared to the three months ended March 31, 1995.
Sales for the quarter ended March 31, 1996 were $138.3 million, a decrease of
$9.1 million, or 6.2%, below sales of $147.4 million for the quarter ended March
31, 1995. This decrease was principally due to the discontinuance of products
that were announced in 1994 but continued to ship into 1995, and a temporary
slowdown in orders during the months of November and December 1995.
First Quarter 1996 bookings were higher than in any First Quarter since the
Knoll consolidation in 1990. This has created a backlog of unfilled orders at
March 31, 1996 of $84.1 million compared with $87.6 million a year earlier and
$73.6 million at December 31, 1995.
Gross profit margin has increased from 30.0% in the First Quarter 1995 to 36.0%.
The discontinuation of unprofitable products, price increases and improved
discounting, along with significant cost reductions in both direct material and
direct labor, have all led to the margin improvement.
First Quarter 1996 selling, general and administrative expenses are $1.9 million
or 5.9% less than the same period last year. This decrease is primarily
attributable to the cost reduction and operating efficiencies derived from the
consolidation and centralization efforts begun in mid-1994.
The increased gross margin, the reduced operating expenses and absence of
allocated corporate expenses have led to an $8.3 million improvement from First
Quarter 1995 operating profit. Operating margin has increased from 2.3% in the
First Quarter of 1995 to 8.4% in the First Quarter of 1996.
Interest expense is Pro forma as if the acquisition and corresponding debt
issuance had taken place at the beginning of each period.
Other income/(expense) of $(.3) million for the quarter ended March 31, 1996
represents foreign exchange losses in Europe as compared to foreign exchange
gains of $.6 million for the quarter ended March 31, 1995.
Income taxes differed from the amount computed by applying the U.S. federal
statutory tax rate to pretax income (loss) primarily due to state income taxes
net of the federal tax benefit and foreign operating loss for which no tax
benefit has been recorded.
Liquidity and Capital Resources:
During the one month ended March 31, 1996, since the acquisition, the company
generated $9.0 million from operating activities and used $.4 million for
investing activities. There was no change in cash from financing activities, and
a gain from the change in foreign exchange rates of $.4 million was experienced.
The overall result was an increase in cash of $9.0 million. Some of the major
components of the $9.9 million source of cash from other changes in working
capital were: Accruals made for interest ($3.5 million), Payroll ($1.0 million)
and taxes ($.9 million), along with a decrease in prepaid expenses of $3.5
million.
Cash provided by operations is expected to be sufficient to meet all short-term
and long-term obligations of the Company as they are due. As of March 31, 1996,
the Company has available lines of credit of $60 million, of which approximately
$59 million was available and unused.
F-41
<PAGE>
The Company's debt instruments contain covenants restricting the Company's
ability to sell assets, incur debt, pay dividends and make investments and
requiring the Company to maintain certain financial ratios.
F-42
<PAGE>
KNOLL, INC.
TKG ACQUISITION CORP.
KNOLL OVERSEAS, INC.
SPINNEYBECK ENTERPRISES, INC.
All tendered Senior Notes, executed Letters of Transmittal, and other
related documents should be directed to the Exchange Agent. Requests for
assistance and for additional copies of the Prospectus, the Letter of
Transmittal and other related documents should be directed to the Exchange
Agent.
The Exchange Agent
for the Exchange Offer is
IBJ SCHRODER BANK & TRUST COMPANY
By Facsimile:
(212) 858-2611
Confirm By Telephone:
(212) 858-2103
Attention: Reorganization Department
By Hand/Overnight Delivery:
IBJ Schroder Bank & Trust Company
One State Street
Securities Processing Window
Floor SC-1
New York, New York 10004
Attention: Reorganization Department
By Registered or Certified Mail:
IBJ Schroder Bank & Trust Company
Attention: Reorganization Department
P.O. Box 84
Bowling Green Station
New York, New York 10274-0084
