<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 25, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
KNOLL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 2522 13-3873847
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL CLASSIFICATION IDENTIFICATION NO.)
INCORPORATION OR CODE NUMBER)
ORGANIZATION) ---------------
1235 WATER STREET
EAST GREENVILLE, PENNSYLVANIA 18041
(215) 679-7991
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
PATRICK A. MILBERGER, ESQ.
VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
KNOLL, INC.
1235 WATER STREET
EAST GREENVILLE, PENNSYLVANIA 18041
(215) 679-7991
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------
COPIES TO:
MICHAEL A. SCHWARTZ, ESQ. VALERIE FORD JACOB, ESQ.
WILLKIE FARR & GALLAGHER FRIED, FRANK, HARRIS, SHRIVER &
ONE CITICORP CENTER JACOBSON
153 EAST 53RD STREET ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10004
(212) 821-8000 (212) 859-8000
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===========================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value.... 6,612,500 $31.4375 $207,880,468.75 $62,994.08
===========================================================================================================
</TABLE>
(1) Includes shares issuable upon exercise of the Underwriters' over-allotment
options.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c), based upon the high and low sales prices of the Common
Stock quoted on the New York Stock Exchange on September 19, 1997.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
==============================================================================
<PAGE>
EXPLANATORY NOTE
This registration statement contains two forms of prospectus: one to be used
in connection with an offering in the United States and Canada (the "U.S.
Prospectus") and one to be used in connection with a concurrent offering
outside of the United States and Canada (the "International Prospectus"). The
two prospectuses are identical except for the front and back cover pages and
the section entitled "Underwriting." Each of the alternate pages for the
International Prospectus included herein is labeled "Alternate Page for
International Prospectus."
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED SEPTEMBER 25, 1997
PROSPECTUS
- ----------
5,750,000 SHARES
LOGO
[OF KNOLL]
COMMON STOCK
-----------
All of the 5,750,000 shares of Common Stock (the "Common Stock") of Knoll,
Inc. ("Knoll" or the "Company") offered hereby are being sold by certain
stockholders (the "Selling Stockholders") of the Company. See "Principal and
Selling Stockholders." The Company will not receive any of the proceeds from
the sale of shares of Common Stock offered hereby.
Of the 5,750,000 shares of Common Stock offered hereby, 4,600,000 shares are
being offered for sale initially in the United States and Canada by the U.S.
Underwriters and 1,150,000 shares are being offered for sale initially in a
concurrent offering outside the United States and Canada by the International
Managers. The initial public offering price and the aggregate underwriting
discount per share will be identical for both Offerings. See "Underwriting."
The Common Stock is listed on the New York Stock Exchange (the "NYSE") under
the symbol "KNL." On September 25, 1997, the last reported sale price of the
Common Stock on the NYSE was $33 15/16 per share. See "Price Range of Common
Stock."
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
-----------
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) SELLING STOCKHOLDERS(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share....................... $ $ $
- --------------------------------------------------------------------------------
Total(3)........................ $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including certain
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Selling Stockholders have granted the U.S. Underwriters and the
International Managers options to purchase up to an additional 690,000
shares and 172,500 shares of Common Stock, respectively, in each case
exercisable within 30 days after the date hereof, solely to cover over-
allotments, if any. If such options are exercised in full, the total Price
to Public, Underwriting Discount, and Proceeds to Selling Stockholders will
be $ , $ and $ , respectively. See "Underwriting."
-----------
The shares of Common Stock are being offered by the several Underwriters,
subject to prior sale, when, as and if issued to and accepted by them, subject
to approval of certain legal matters by counsel for the Underwriters and
certain other conditions. The Underwriters reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part. It is
expected that delivery of the shares of Common Stock will be made in New York,
New York, on or about , 1997.
-----------
MERRILL LYNCH & CO.
CREDIT SUISSE FIRST BOSTON
GOLDMAN, SACHS & CO.
MORGAN STANLEY DEAN WITTER
-----------
The date of this Prospectus is , 1997.
<PAGE>
[PHOTOGRAPHS OF KNOLL PRODUCTS]
---------------
Knoll(R), The Knoll Group(R), KnollStudio(R), KnollExtra(R), Reff(TM),
Bulldog(R), Calibre(R), Equity(R), Parachute(R), Spinneybeck(R), Good Design
is Good Business(R), Propeller(R) and SoHo(TM) are trademarks of the Company.
---------------
Certain persons participating in the Offerings may engage in transactions
that stabilize, maintain or otherwise affect the price of the Common Stock.
Such transactions may include stabilizing, the purchase of Common Stock to
cover syndicate short positions and the imposition of penalty bids. For a
description of these activities, see "Underwriting."
2
<PAGE>
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 terms "Knoll" and the "Company" refer to Knoll, Inc.
and its subsidiaries and predecessor entities as a combined entity. This
Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in such forward-looking statements. Factors that might cause
such differences include, but are not limited to, those discussed in "Risk
Factors."
THE COMPANY
Knoll designs, manufactures and distributes office systems and business
furniture noted for its high quality, innovative design and sophisticated
image. Knoll's products are designed to provide enduring value rooted in
timeless aesthetics, functionality, flexibility and reliable performance. For
nearly sixty years, Knoll has been widely recognized as a design leader, with
products represented in major art museums around the world, including more than
30 Knoll pieces housed in the permanent Design Collection of the Museum of
Modern Art in New York. Since 1994 alone, Knoll has won more than 20 design
awards for new products and enhancements across all of its product categories.
Knoll's customers are typically Fortune 1000 companies. The Company's direct
sales force of approximately 310 professionals and its network of approximately
210 independent dealers in North America work in close partnership with
customers and design professionals to create distinctive work environments
using Knoll products. Knoll's products and knowledgeable sales organization
have generated strong brand recognition and loyalty among architects, designers
and corporate facility managers, who are key influences in the purchasing
process for business furnishings. Knoll's strong customer relationships allow
the Company to adapt and customize its products to meet evolving customer
needs, technology practices and ergonomic standards.
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 (to be joined by two new systems
product lines, Currents and Dividends, which the Company expects to introduce
in 1998); (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 in conjunction with the
seating and systems products of other manufacturers. For the year ended
December 31, 1996 and the six month period ended June 30, 1997, the Company had
revenues of $651.8 million and $390.4 million, respectively.
INDUSTRY DYNAMICS
The Company believes that fundamental shifts in the nature of corporate
organizational structures, technology and work processes are driving new
opportunities for growth in the office furniture industry, especially in the
middle to high-end segments where Knoll believes it has competitive advantages.
The need for redesigned space has accelerated as large corporations continue to
focus on the benefits of reengineering, restructuring and reorganizing, placing
greater emphasis on teamwork, flatter organizational structures and direct
communication among employees. In addition, the proliferation of technology
throughout the organization has created increasingly complex wire and cable
requirements and placed new demands on office furniture.
3
<PAGE>
Furthermore, companies, workers and regulatory entities have become more
sensitive to ergonomic concerns and the need for designs that increase worker
productivity.
The U.S. office furniture market generated sales of approximately $10.0
billion in 1996. 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 according to estimates of The Business and Institutional Furniture
Manufacturer's Association ("BIFMA"), has grown at a compound annual rate of
approximately 7.2% over the three-year period ended December 31, 1996. For the
six month period ended June 30, 1997, versus the comparable period in 1996,
BIFMA estimates industry shipments increased by 15%.
GROWTH STRATEGY
Knoll focuses on the middle to high-end office furniture market which, as a
result of evolving workplace trends and industry dynamics, management expects
to grow faster than the industry as a whole. Management believes Knoll is well-
positioned to drive further growth in revenues, profitability and market share.
Key elements of the Company's growth strategy are as follows:
. CREATE INNOVATIVE NEW PRODUCTS TO INCREASE SALES AND MARKET SHARE. The
Company believes its focus on market research, brand identity, superior
design and complementary product offerings give it a competitive
advantage in launching new products. The Company intends to (i) expand
its product line in the $3.4 billion U.S. office systems category, where
it is a recognized leader, and (ii) expand the breadth of product
offerings in other growing office furniture categories, such as seating,
tables, desks and storage solutions, where the Company's market share is
relatively low. Leadership in office systems is critical to achieving
significant market share in the industry. Office systems, which
according to BIFMA statistics constitutes the fastest growing segment of
the office furniture market with estimated growth of 21% in the first
six months of 1997 versus the comparable period of 1996, are often the
first design component that the customer specifies and typically
represent the largest part of a customer's furniture purchase. In June
1997, the Company previewed to its dealers and customers as well as the
architect and design community two new systems product lines, Currents
and Dividends, targeting high-performance, flexible technology needs and
simple, affordable solutions, respectively. The Company expects to have
these two new product lines available for sale in 1998 and believes
these new product lines will further broaden the Company's systems
product offerings.
. LEVERAGE OFFICE SYSTEMS STRENGTH IN OTHER CATEGORIES. The Company
believes it has the opportunity to increase sales and market share in
seating, tables, desks and storage solutions. For example, the Company's
U.S. market share of seating and tables was 2.1% and 1.8%, respectively,
in 1996 and 2.3% and 2.2%, respectively, for the first half of 1997,
while its office systems market share was 11.2% in 1996 and 11.4% for
the first half of 1997 (excluding sales of KnollStudio, KnollExtra,
textiles and leather products). Since these products are often sold in
conjunction with the initial specification of an office system, the
Company believes that it can increase its market share in these
categories by leveraging its market share strength in office systems.
. EXPAND SCOPE OF SELLING EFFORTS. The Company intends to increase the
number of direct selling professionals over the next two years to
increase sales by (i) developing new corporate relationships, (ii)
further penetrating existing corporate accounts and (iii) expanding its
selling efforts into secondary markets. Secondary markets account for
approximately $800 million in annual industry sales, but to date have
received limited or no coverage by the Company's direct sales force or
dealers. Management believes expanded selling efforts will present an
opportunity to increase total revenues and market share. In the first
half of 1997, the Company added eight newly-hired sales force
professionals in eight initial target secondary markets, including
Baltimore, Maryland; Columbus, Ohio; and Marin County, California.
4
<PAGE>
. EXPAND THE RANGE AND QUANTITY OF PRODUCTS OFFERED THROUGH THE EXISTING
DEALER NETWORK. The Company intends to leverage its dealers' estimated
1,000-person sales force to capture a larger share of the business with
medium to smaller-size companies and independent business purchasers. In
order to stimulate sales in this segment, the Company has introduced
marketing programs such as QuickShip and PrimeTime! which make it easier
and more profitable for its dealers to market the Company's products. In
the six month period ended June 30, 1997, as compared with the
comparable period in 1996, sales through the QuickShip and PrimeTime!
programs increased 27%. Additionally, the Company is developing new
products, including the Dividends systems line, designed and targeted
for sale through the dealer distribution channel.
. CONTINUE TO USE SPECIALTY BUSINESSES TO ENHANCE REPUTATION AND DRIVE
INCREMENTAL GROWTH. The Company intends to expand its KnollStudio line,
which includes specially commissioned pieces by major architects and
designers. By relaunching KnollStudio classic products and introducing
new products, the Company expects to generate significant publicity and
goodwill in the design community and the media. The Company has engaged
internationally-known designer Maya Lin to develop a signature
collection of products for the KnollStudio line targeted for
introduction in the second half of 1998, in conjunction with the
celebration of the Company's 60th anniversary. Among Maya Lin's body of
work is her design of the National Vietnam Veterans Memorial in
Washington D.C. Further, Knoll's textile, leather and accessories lines
offer the opportunity to achieve incremental growth and attractive
margins both when sold as part of Knoll offerings and when sold in
conjunction with products of other manufacturers.
. IMPROVE INFORMATION SYSTEMS TO MAXIMIZE MANUFACTURING EFFICIENCY. The
Company is implementing integrated, comprehensive management information
systems for its operations. Management believes that new information
systems will enable it to enhance its order response time and accuracy,
improve manufacturing processes, reduce delivery times, improve shipping
accuracy and reduce fixed costs.
PLATFORM FOR GROWTH
The Company has created a platform to execute its growth strategy through the
successful completion of its turnaround program. As part of the restructuring
efforts initiated by current management in 1994, the Company evaluated all
major business activities and significantly reduced operating costs. Since then
(i) virtually every product line has been modified and improved; (ii) the lead
time required to bring new and enhanced products to market has decreased
significantly; (iii) average lead times between order entry and delivery of
products to customers have been reduced from seven weeks to five weeks; and
(iv) on-time shipments have improved to the current 95% level from
approximately 91% in 1993. In addition, management refocused and retrained the
Company's sales force, instituted product line profitability measures and
aligned management incentives with Company growth and profitability.
As a result of management's restructuring efforts, Knoll has experienced
strong growth in sales, gross margins and operating margins from 1994 through
the first half of 1997. Sales increased from $562.9 million in 1994 to $651.8
million in 1996, despite the discontinuance of several product lines. Sales for
the six months ended June 30, 1997 increased $85.6 million, or 28.1%, to $390.4
million, from $304.8 million for the comparable period in 1996. Gross margins
for the six months ended June 30, 1997 were 39.5% as compared with 33.9% for
the comparable period in 1996 on a pro forma basis. Operating income increased
to $63.5 million for the six months ended June 30, 1997, from $34.1 million for
the six months ended June 30, 1996, on a pro forma basis. Operating margins
were 16.3% for the six month period ended June 30, 1997 as compared with 11.2%
for the comparable period in 1996 on a pro forma basis, which the Company
believes are among the highest of its major competitors. The Company's improved
financial and operating results allowed it in 1996 to prepay $72.0 million
under its credit facilities and refinance such facilities on more favorable
terms. In addition, in 1997 the Company repaid $57.8 million of the Company's
10.875% Senior Subordinated Notes (the "Notes")
5
<PAGE>
with a portion of the proceeds the Company received from its initial public
offering in May 1997 (the "Initial Public Offering") and repaid $38.2 million
of bank debt during the six months ended June 30, 1997 from operating cash
flow.
COMPETITIVE STRENGTHS
Knoll's business philosophy is to pursue growth and profitability by
maintaining and enhancing the Knoll brand image and reputation for quality and
by working closely with its customers. The Company's growth strategy is
designed to leverage its competitive strengths, which include:
TRADITION OF SUPERIOR DESIGN. The Company's greatest business strength lies
in the history and depth of its commitment to create furniture of enduring
design value which is known for innovative performance. This design
heritage has enabled the Company to build over time strong relationships
with some of the world's preeminent designers. The Company engages
prominent outside architects and designers to create new products and
product enhancements. By combining their creative vision with the Company's
commitment to developing products which address changing business needs,
the Company seeks to launch new offerings which achieve recognition in the
marketplace and generate strong demand among corporate customers.
REPUTATION FOR PRODUCT QUALITY. Knoll's quality serves as an important
marketing tool with design professionals and with new and existing
customers. Knoll's products are constructed of high quality materials, and
Knoll believes its products are differentiated from many of its competitors
in workmanship and attention to detail. The Company believes this results
in products with superior aesthetics and durability.
PREMIER BRAND IDENTITY IN OFFICE SYSTEMS, FURNITURE AND SPECIALTY
PRODUCTS. Knoll's high-end image is an important factor in its customers'
initial selection and purchasing decision and provides credibility and
confidence as businesses seek to upgrade and enhance their installed
systems and purchase other business furnishings.
STRONG DIRECT SELLING ORGANIZATION AND DEALER NETWORK. The Company believes
that its direct sales force provides a strategic advantage relative to many
of its competitors. The direct sales force, in conjunction with the
Company's independent dealer network, has close relationships with
architects, designers and corporate facility managers, who have a
significant influence on product selection on large orders.
LEAN ORGANIZATION FOCUSED ON COSTS. As a result of the turnaround program
initiated by current management in 1994, the Company has developed an
organization focused on expense control and operating efficiency.
While the Company believes it possesses these competitive strengths, several
of the Company's competitors have larger market shares than the Company and
have consistently received higher rankings than the Company in certain
categories of subjective industry studies. For a description of competitive
factors within the U.S. office furniture market and the Company's competitive
position, see "Business--Competition."
6
<PAGE>
THE OFFERINGS
The offering of 4,600,000 shares of the Common Stock in the United States and
Canada (the "U.S. Offering") and the offering of 1,150,000 shares of the Common
Stock outside the United States and Canada (the "International Offering") are
collectively referred to herein as the "Offerings."
<TABLE>
<S> <C>
Common Stock offered by the Selling
Stockholders.............................. 5,750,000(1)
Common Stock to be outstanding before and
after the Offerings....................... 43,212,227 shares(2)
Use of Proceeds............................ The Company will not receive any of the net
proceeds from the sale by the Selling
Stockholders of shares of Common Stock in
the Offerings. See "Use of Proceeds" and
"Principal and Selling Stockholders."
NYSE Symbol................................ "KNL"
</TABLE>
- --------
(1) Of the 5,750,000 shares of Common Stock offered hereby, 5,000,000 shares
are being offered by Warburg, Pincus Ventures, L.P. ("Warburg") and 750,000
shares are being offered by certain members of management. Assumes the
Underwriters' over-allotment options are not exercised. If such over-
allotment options are exercised in full, an additional 612,500 shares will
be sold by Warburg and an additional 250,000 shares will be sold by the
members of management offering shares hereby. See "Principal and Selling
Stockholders."
(2) Includes 4,144,030 restricted shares issued under the Knoll, Inc. 1996
Stock Incentive Plan (the "1996 Stock Plan"), of which 1,280,874 shares
have vested and 2,863,156 shares have not yet vested. Excludes 1,820,868
shares of Common Stock reserved for sale or issuance under the Company's
stock incentive plans, of which options to purchase 1,337,158 shares have
been granted and 483,710 shares remain available for issuance or sale. See
"Management--Stock Incentive Plans." Also excludes up to 1,000,000 shares
of Common Stock which may be issued pursuant to the Company's employee
stock purchase plan.
RISK FACTORS
Purchasers of Common Stock in the Offerings should carefully consider the
risks relating to strong competition, achieving and managing growth and the
significant leverage of the Company and the other matters set forth under the
caption "Risk Factors" and the other information included in this Prospectus
prior to making an investment decision. See "Risk Factors."
----------------
Except as otherwise indicated herein, the information contained in this
Prospectus assumes no exercise of the Underwriters' over-allotment options.
Except as otherwise indicated, the market and Company market share data
contained in this Prospectus are based on information from BIFMA, the United
States office furniture trade association. The BIFMA data represents shipments
of office furniture from the United States (including U.S. exports to customers
abroad) and excludes foreign imports to customers in the United States. 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.
7
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
The following table presents (i) summary historical consolidated financial
information of the Company's predecessor (the "Predecessor"), as of the dates
and for the periods indicated, (ii) summary historical consolidated financial
information of the Company, as of the dates and for the periods indicated and
(iii) summary pro forma consolidated financial information of the Company, for
the periods indicated, after giving effect to the events described in the notes
below and in the Unaudited Pro Forma Financial Information and notes thereto
included elsewhere in this Prospectus. The historical consolidated financial
information for each of the two years in the period ended December 31, 1995 has
been derived from the Predecessor's financial statements, which have been
audited by Price Waterhouse LLP. The historical consolidated financial
information for the two month period ended February 29, 1996 and the ten month
period ended December 31, 1996 has been derived from the Predecessor's and the
Company's financial statements, respectively, which have been audited by Ernst &
Young LLP. The historical consolidated financial information for the four month
period ended June 30, 1996 and the six month period ended June 30, 1997 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 as of the
dates and for the periods indicated. The summary pro forma information does not
purport to represent what the Company's results 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," the Financial
Statements and notes thereto and the Unaudited Pro Forma Financial Information
and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
-------------------------------- -------------------------
YEAR ENDED TWO MONTHS TEN MONTHS PRO FORMA
DECEMBER 31, ENDED ENDED YEAR ENDED
------------------ FEBRUARY 29, DECEMBER 31, DECEMBER 31,
1994 1995 1996 1996 1996 (1)(2)
-------- -------- ------------ ------------ ------------
(IN THOUSANDS) (IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total sales............. $562,869 $620,892 $ 90,232 $561,534 $651,766
Cost of sales(3)........ 410,104 417,632 59,714 358,841 419,908
-------- -------- -------- -------- --------
Gross profit............ 152,765 203,260 30,518 202,693 231,858
Provision for
restructuring.......... 29,180 -- -- -- --
Selling, general and
administrative
expenses(4)............ 167,238 138,527 21,256 131,349 153,388
Westinghouse long-term
incentive
compensation........... -- -- 47,900 -- --
Allocated corporate
expenses(3)(4)......... 5,881 9,528 921 -- --
-------- -------- -------- -------- --------
Operating income
(loss)................. (49,534) 55,205 (39,559) 71,344 78,470
Interest expense........ 3,225 1,430 340 32,952 34,314
Other income (expense),
net.................... 699 (1,597) (296) 447 151
-------- -------- -------- -------- --------
Income (loss) before
income taxes and
extraordinary item..... (52,060) 52,178 (40,195) 38,839 44,307
Income tax expense
(benefit).............. 7,713 22,846 (16,107) 16,844 19,113
-------- -------- -------- -------- --------
Income (loss) before
extraordinary item(5).. $(59,773) $ 29,332 $(24,088) $ 21,995 $ 25,194
======== ======== ======== ======== ========
Pro forma income before
extraordinary item per
share of Common
Stock(5)(6)............ $ .58
Pro forma weighted
average shares of
Common Stock
outstanding(6)......... 43,262
</TABLE>
(continued on following page)
8
<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
-------------- -------------------------------------------
PRO FORMA
SIX MONTHS
TWO MONTHS FOUR MONTHS SIX MONTHS ENDED
ENDED ENDED ENDED JUNE 30,
FEBRUARY 29, JUNE 30, JUNE 30, --------------------
1996 1996 1997 1996(1)(2) 1997(2)
-------------- ----------- ---------- ---------- ---------
(IN THOUSANDS) (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total sales............. $ 90,232 $ 214,600 $390,415 $ 304,832 $ 390,415
Cost of sales(3)........ 59,714 140,489 236,265 201,556 236,265
--------- --------- -------- --------- ---------
Gross profit............ 30,518 74,111 154,150 103,276 154,150
Selling, general and ad-
ministrative ex-
penses(4).............. 21,256 47,141 90,635 69,180 90,635
Westinghouse long-term
incentive compensa-
tion................... 47,900 -- -- -- --
Allocated corporate ex-
penses(3)(4)........... 921 -- -- -- --
--------- --------- -------- --------- ---------
Operating income
(loss)................. (39,559) 26,970 63,515 34,096 63,515
Interest expense........ 340 13,952 14,696 18,172 11,977
Other income (expense),
net.................... (296) 340 73 44 73
--------- --------- -------- --------- ---------
Income (loss) before in-
come taxes and extraor-
dinary item............ (40,195) 13,358 48,892 15,968 51,611
Income tax expense (ben-
efit).................. (16,107) 5,382 20,298 6,518 21,375
--------- --------- -------- --------- ---------
Income (loss) before ex-
traordinary item(5).... $ (24,088) $ 7,976 $ 28,594 $ 9,450 $ 30,236
========= ========= ======== ========= =========
Pro forma income before
extraordinary item per
share of Common
Stock(5)(6)............ $ .22 $ .70
Pro forma weighted aver-
age shares of Common
Stock outstanding(6)... 43,262 43,300
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
----------------- ------------------------------
JUNE 30,
DECEMBER 31, DECEMBER 31, -----------------
1994 1995 1996 1996 1997
-------- -------- ------------ -------- --------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT PERIOD
END):
Working capital.............. $ 22,898 $ 82,698 $ 64,754 $ 89,741 $ 78,774
Total assets................. 705,316 656,710 675,712 708,184 669,622
Total long-term debt, includ-
ing current portion......... 12,451 3,538 354,154 410,849 258,047
Total liabilities............ 247,310 176,259 497,908 539,861 416,668
Stockholders' equity......... 458,006 480,451 177,804 168,323 252,954
</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 (as defined
herein) and the application of the net proceeds of $160,000 from the sale
of capital stock of the Company and related borrowings of $425,000.
(2) Adjusted to reflect the Initial Public Offering, the application of net
proceeds of $133,461 therefrom, together with borrowings of $11,652 under
the Company's credit facilities, for the redemption of 800,000 shares of
the Company's Series A 12% Participating Convertible Preferred Stock, $1.00
par value ("Series A Preferred Stock") held by Warburg and NationsBanc
Investment Corp. ("NationsBanc") for an aggregate redemption price of
$80,000 in cash and 11,749,361 shares of Common Stock, the conversion of
the remaining 802,998 shares of Series A Preferred Stock (including those
held by Warburg and NationsBanc) into 15,691,558 shares of Common Stock,
and the redemption of an aggregate principal amount of $57,750 of the Notes
for a total redemption price of $65,113, as if each of such events had
occurred at the beginning of the respective periods.
(3) Cost of sales has been increased by (i) $801 for the pro forma year ended
December 31, 1996 and the pro forma six months ended June 30, 1996 to
reflect an increase in depreciation resulting from the Acquisition and (ii)
$552 for the pro forma year ended December 31, 1996 and the pro forma six
months ended June 30, 1996 in order to reflect the reclassification of a
portion of allocated corporate expenses. The reclassified allocated
corporate expenses approximate the replacement cost to the Company for
services formerly provided by Westinghouse Electric Corporation
("Westinghouse") to the Predecessor, including (i) benefit expense related
to the adoption of various independent benefit plans comparable to
Westinghouse benefit plans and (ii) the cost of services required to
replace specific activities formerly provided by Westinghouse to the
Predecessor, including audit, tax, general ledger, accounts receivable,
human resources, legal, insurance and data communications.
(footnotes continued on following page)
9
<PAGE>
(4) Selling, general and administrative expenses have been increased by (i)
$369 for the pro forma year ended December 31, 1996 and the pro forma six
months ended June 30, 1996 to reflect the reclassification of allocated
corporate expenses which approximate the replacement cost to the Company
(described above in note 3) and (ii) $414 for the pro forma year ended
December 31, 1996 and the pro forma six months ended June 30, 1996 to
reflect an increase in amortization and depreciation resulting from the
Acquisition.
(5) The pro forma income statement data for the year ended December 31, 1996
does not include the $5,159 extraordinary loss on early extinguishment of
debt, net of taxes. In addition, the pro forma income statement data for
the year ended December 31, 1996, the six month period ended June 30, 1996
and the six month period ended June 30, 1997 does not include an
extraordinary loss of $5,337 net of taxes associated with the redemption of
a portion of the Notes in connection with the Initial Public Offering.
(6) Because of the significance of the redemption and conversion into Common
Stock of the outstanding Series A Preferred Stock upon consummation of the
Initial Public Offering, historical net income (loss) before extraordinary
item per share is not presented herein. Pro forma income before
extraordinary item per share amounts are based on the weighted average
number of shares of Common Stock and Common Stock equivalents (employee
stock options) outstanding during the period, after giving effect to the
redemption and conversion into Common Stock of the Series A Preferred Stock
assuming such redemption and conversion had occurred at the beginning of
each period presented. See Note (i) of the Notes to the Unaudited Pro Forma
Financial Information.
10
<PAGE>
RISK FACTORS
Prospective purchasers of the Common Stock offered hereby should consider
carefully all of the information set forth in this Prospectus, and, in
particular, should evaluate the following risks in connection with an
investment in the Common Stock.
STRONG COMPETITION
The office furniture industry is highly competitive, with a significant
number of competitors offering similar products. Many of the Company's
competitors, especially those in North America, are large and have
significantly greater financial, marketing, manufacturing and technical
resources than those of the Company. 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 could 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. There can be no assurance that the Company will be able to
compete successfully in its markets in the future. See "Business--
Competition."
RISKS ASSOCIATED WITH ACHIEVING AND MANAGING GROWTH
As a result of its growth strategy, the Company will seek to increase its
sales and market share by the introduction of innovative new products and
products for new category segments where the Company's current market share is
relatively low. There can be no assurance that the Company's new products will
achieve the same degree of success as that achieved by the Company's products
historically or that the Company will be able to replicate its success in the
office systems market in markets for other furniture products, such as tables,
seating and storage. In addition, the introduction of new products in part
requires the Company to align itself with independent architects and designers
who are able to design in a timely manner high quality products consistent
with the Company's image. Furthermore, the introduction of new products
requires the coordination of the design, manufacturing and marketing of such
products which may be affected by factors beyond the Company's control. In
addition, these new product lines may involve processes and equipment with
which the Company and its personnel are not experienced or are less
experienced. Accordingly, the launch of any particular product may be later
than originally anticipated by the Company.
Further, the success of the Company's growth strategy will depend in part
upon its ability to increase its production volume on a timely basis while
maintaining product quality. Manufacturers often encounter difficulties in
increasing production volumes, including problems involving delays, quality
control and shortages of qualified personnel. There can be no assurance that
the Company will be able to increase production volume without encountering
these or other problems, which might, individually or in the aggregate, have a
material adverse effect on the Company or its growth strategy.
In addition, part of the Company's growth strategy will also depend on its
ability to increase its sales to existing customers with a broader range of
products, develop new customers in its existing markets and expand into new
secondary markets. Factors beyond the Company's control, including general
economic factors and business conditions in such markets or affecting such
customers, may affect the Company's ability to achieve such objectives.
Furthermore, the ability to effectuate and manage any growth will depend on
the Company's ability to hire or develop successful sales personnel and
dealers and to continue to develop its management information systems. There
is no assurance that the Company will be able to successfully implement its
growth strategy.
11
<PAGE>
LEVERAGE AND DEBT SERVICE; RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS
At August 31, 1997, the Company had total consolidated outstanding debt of
approximately $231.5 million. Subject to the restrictions contained in the
Company's Revolving Credit Facility (as defined herein) and the indenture (the
"Indenture") related to the Company's 10.875% Senior Subordinated Notes, the
Company and its subsidiaries may incur additional indebtedness from time to
time to finance acquisitions or capital expenditures or for other purposes.
The Company's indebtedness could have important consequences to holders of the
Common Stock, given that: (i) a portion of the Company's cash flow from
operations must be dedicated to fund scheduled payments of principal and 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 in economic conditions generally. See
"Description of Certain Indebtedness."
Additionally, the terms of the Revolving Credit Facility and the Notes
impose certain operating and financial restrictions on the Company. As a
result, the ability of the Company to respond to changing business and
economic conditions and to secure additional financing, if needed, may be
restricted, and the Company may be prevented from engaging in transactions
that might further its growth strategy or otherwise be considered beneficial
to the Company. A breach of any of these covenants could result in a default
under the Revolving Credit Facility or the Indenture. If payments to the
lenders under the Revolving Credit Facility 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. See "Description of Certain Indebtedness."
DEPENDENCE ON KEY PERSONNEL
The Company's operations are dependent, to a significant extent, on the
continued efforts of certain of its executive officers, including Burton B.
Staniar, its Chairman, and John H. Lynch, its Vice Chairman, President and
Chief Executive Officer, with whom the Company has entered into one-year
employment agreements (which expire March 1, 1998, subject to automatic one-
year extensions unless either party gives 60 days notice not to renew)
containing one-year non-competition provisions. If these officers become
unable to continue in their present role, or if the Company is unable to
attract and retain other skilled employees, the Company's business could be
materially adversely affected. See "Management."
SHORT-TERM DEALERSHIP COMMITMENTS
The Company relies, to some extent, on a network of independent dealers for
the marketing of its products to end-users. The Company's dealers currently
operate primarily under one-year non-exclusive agreements. There can be no
assurance that 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. In addition, consolidation of
the office furniture distribution industry has caused and may in the future
cause the Company to end relationships with dealers that have been purchased
by a consolidator, as the Company continues to have a preference for locally-
owned entrepreneurial dealers. The loss of certain dealers or the termination
of dealer relationships could cause disputes with the Company or difficulties
for the Company in marketing and distributing its products.
CONTROL BY CERTAIN SELLING STOCKHOLDERS AND MANAGEMENT
Upon completion of the Offerings, Warburg, NationsBanc and the Company's
officers and other management employees will beneficially own approximately
62.9% of the outstanding shares of the Company's Common Stock (approximately
60.8% if the Underwriters' over-allotment options are exercised in full) (in
each case, excluding 2,863,156 restricted shares which have been granted under
the Company's stock incentive plans but have not yet vested). As a result,
such parties will be able to continue to elect the Company's Board of
Directors and take other corporate actions requiring stockholder approval, as
well as to dictate the direction and
12
<PAGE>
policies of the Company. In addition, pursuant to a stockholders agreement,
Warburg and the other stockholders who are a party thereto (who will hold an
aggregate of approximately % of the outstanding shares of Common Stock
upon completion of the Offerings, or approximately % of the outstanding
shares of Common Stock if the Underwriters exercise their over-allotment
options in full) have agreed to vote their shares of Common Stock for four
directors designated by Warburg if Warburg owns 50% or more of the Company's
outstanding shares of Common Stock, three directors if it owns 25% or more,
two directors if it owns 15% or more and one director if it owns 5% or more.
Following the Offerings, Warburg will own more than 50% of the Common Stock of
the Company and will therefore be entitled pursuant to the Stockholders
Agreement to nominate four members of the Board of Directors. At the time of
the completion of the Offerings, the Board of Directors of the Company will
consist of nine members, including four members designated by Warburg.
Accordingly, Warburg will have the ability to substantially influence any
corporate action requiring Board approval. In addition, Messrs. Staniar and
Lynch have employment agreements which provide that they will be appointed to
the Board of Directors during the duration of their employment. There can be
no assurance that Warburg and members of management will not decide to sell
all or a portion of their respective holdings at a future date. In addition,
there can be no assurance that in any transfer of a controlling interest in
the Company any other holders of Common Stock will be allowed to participate
in any such transaction or will realize any premium with respect to their
shares. The foregoing may have the effect of discouraging or preventing
certain types of transactions involving an actual or potential change of
control. See "Principal and Selling Stockholders" and "Certain Transactions."
RELIANCE ON PATENTS AND OTHER INTELLECTUAL PROPERTY
The Company owns numerous United States and foreign patents, trademarks and
service marks in order to protect certain of its innovations and designs. In
addition, the Company possesses a wide array of unpatented proprietary know-
how and common law trademarks and service marks. The Company's ability to
compete effectively with other companies depends, to a significant extent, on
its ability to maintain the proprietary nature of its intellectual property.
There can be no assurance as to the degree of protection offered by the claims
of the various patents, trademarks and service marks or the likelihood that
patents, trademarks or service marks will be issued on pending or contemplated
applications. If the Company were unable to maintain the proprietary nature of
its intellectual property with respect to its significant current or proposed
products, the Company's business could be materially adversely affected. See
"Business--Patents and Trademarks."
There can be no assurance that any patents, trademarks or service marks
issued to the Company will not be challenged, invalidated, cancelled, narrowed
or circumvented, or that the rights granted thereunder will provide
significant proprietary protection or competitive advantages to the Company.
There can be no assurance that, if challenged, the Company's patents,
trademarks or service marks would be held valid by a court of competent
jurisdiction. In addition, the Company's competitors may have filed for patent
protection which is not as yet a matter of public knowledge. Moreover, a court
could interpret a third party's patents broadly so as to cover some of the
Company's products.
In the past, certain products of the Company have been copied and sold by
others. The Company vigorously tries to enforce its intellectual property
rights. However, there can be no assurance that the sale of the Company's
products copied by others would not materially adversely impact the sale of
the Company's products.
RISK OF ENVIRONMENTAL LIABILITIES
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, including those relating to
discharges to air, water and land, the handling and disposal of solid and
hazardous waste and the cleanup of properties affected by hazardous
substances. 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
13
<PAGE>
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 remediation costs at these CERCLA sites are unknown, but
the Company does not expect any liability it may have under CERCLA to be
material, based on the information currently known to the Company. In addition,
under the stock purchase agreement entered into with Westinghouse in connection
with the Acquisition (the "Stock Purchase Agreement"), Westinghouse has agreed
to indemnify the Company for certain costs associated with CERCLA liabilities
known as of the date of the Acquisition. See "Business--Environmental Matters."
POTENTIAL LABOR DISRUPTIONS
Certain of the Company's employees in Grand Rapids, Michigan and in Italy are
represented by unions. With respect to the Grand Rapids plant, the Company has
a four-year contract with the Carpenters and Joiners of America-Local 1614
expiring on August 30, 1998. While management believes that relations with this
union are positive, there can be no assurance that the Company will be able to
successfully negotiate a new contract with the union on acceptable terms. In
addition, the Company has experienced brief work stoppages from time to time at
the Company's facilities in Italy as a result of national and local issues.
Although such work stoppages to date have not materially affected the Company,
there can be no assurance that the Company will not experience further work
stoppages, which individually or in the aggregate could have a material adverse
effect on the Company. There can be no assurance that the Company will not
experience other work stoppages or labor problems in the future.
EXCHANGE RATE FLUCTUATION
The Company's foreign sales and certain expenses are transacted in foreign
currencies. In the year ended December 31, 1996, and the six month period ended
June 30, 1997, approximately 12% and 11%, respectively, of the Company's
revenues and 24% and 25%, respectively, of the Company's expenses were
denominated in currencies other than U.S. dollars. The production costs, profit
margins and competitive position of the Company are affected by the strength of
the currencies in countries where it manufactures or purchases goods relative
to the strength of the currencies in countries where its products are sold. The
Company reviews from time to time its foreign currency exposure and evaluates
whether it should enter into hedging transactions. As the Company generally
does not hedge its foreign currency exposure and may determine not to do so in
the future, it is and in the future may be vulnerable to the effects of
currency exchange rate fluctuations.
ECONOMIC FACTORS AFFECTING THE OFFICE FURNITURE INDUSTRY; QUARTERLY
FLUCTUATIONS
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." In addition, in
certain years the Company has experienced variability in its sales from quarter
to quarter. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
SHARES ELIGIBLE FOR FUTURE SALE; POTENTIAL FOR ADVERSE EFFECT ON STOCK PRICE;
REGISTRATION RIGHTS
Sales of a substantial number of shares of Common Stock in the public market
or the perception that such sales could occur could adversely affect prevailing
market prices for the Common Stock. As of September 25, 1997, the Company had
outstanding 43,212,227 shares of Common Stock, including 2,863,156 shares of
14
<PAGE>
Common Stock which have been granted under the Company's stock incentive plans
but have not vested. Of the shares outstanding, 14,950,000 shares of Common
Stock, including the 5,750,000 Shares to be sold in the Offerings, will be
freely tradable without restriction under the Securities Act of 1933, as
amended (the "Securities Act"), except for any such shares which may have been
acquired by an "affiliate" of the Company.
In connection with the Offerings, the Company, its directors, executive
officers and other management employees and the Selling Stockholders, who will
hold an aggregate of 24,600,223 shares of Common Stock upon consummation of
the Offerings, have agreed not to dispose of any shares of Common Stock for a
period of 90 days from the date of this Prospectus without the consent of
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") on behalf
of the Underwriters. Upon expiration of the 90-day lockup period, shares
will be eligible for sale in the public market subject to compliance with the
volume limitations and other restrictions of Rule 144 under the Securities
Act. In addition, the Company has filed a registration statement under the
Securities Act covering the sale of 2,055,772 shares of Common Stock reserved
for issuance or sale under the Knoll, Inc. 1997 Stock Incentive Plan, The
Knoll Retirement Savings Plan and the Company's employee stock purchase plan.
Upon completion of the Offerings, there will be outstanding options to
purchase a total of 1,337,158 shares of Common Stock of which options to
purchase 10,000 shares of Common Stock are currently vested and exercisable.
See "Management--Stock Incentive Plans."
The Company has granted all the Selling Stockholders and certain other
members of management registration rights with respect to all of the shares of
Common Stock held by such parties prior to the Initial Public Offering,
whether vested or unvested. The Company may also provide for the registration
of shares of Common Stock held or acquired in the future by employees pursuant
to compensation arrangements, thereby permitting such shares to be sold in the
public market from time to time. See "Certain Transactions." The sale of such
shares could have an adverse effect on the market price of the Common Stock
and on the Company's ability to raise equity capital in the public markets.
See "Shares Eligible for Future Sale."
RESTRICTIONS ON PAYMENT OF DIVIDENDS; ABSENCE OF DIVIDENDS
The Indenture pursuant to which the Notes were issued and the Revolving
Credit Facility restrict, among other things, the ability of the Company to
pay dividends. The Company does not anticipate paying any cash dividends on
the Common Stock in the foreseeable future. See "Dividend Policy" and
"Description of Certain Indebtedness."
POTENTIAL ADVERSE EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS ON MARKET PRICE
The Company's certificate of incorporation authorizes the issuance of
preferred stock without stockholder approval and upon such terms as the Board
of Directors may determine. The issuance of preferred stock could have the
effect of making it more difficult for a third party to acquire, or of
discouraging a third party from acquiring or making a proposal to acquire, a
majority of the outstanding stock of the Company and could adversely affect
the prevailing market price of the Common Stock. The rights of the holders of
Common Stock will be subject to, and may be adversely affected by, the rights
of holders of preferred stock that may be issued in the future. In addition,
under certain circumstances, Section 203 of the Delaware General Corporation
Law makes it more difficult for an "interested stockholder" (generally a 15%
stockholder) to effect various business combinations with a corporation for a
three-year period. See "Description of Capital Stock."
FORWARD-LOOKING STATEMENTS
This Prospectus includes forward-looking statements, including statements
regarding, among other items, (i) the Company's anticipated growth strategies,
(ii) the Company's intention to introduce new products, (iii) anticipated
trends in the Company's businesses, including trends in the market for office
furniture and corporate concerns for worker health and safety, (iv) future
expenditures for capital projects and (v) the Company's ability to continue to
control costs and maintain quality. These forward-looking statements are based
largely on the Company's expectations and are subject to a number of risks and
uncertainties, certain of which
15
<PAGE>
are beyond the Company's control. Actual results could differ materially from
these forward-looking statements as a result of many factors, including the
factors described in "Risk Factors" including, among others, (i) changes in
the competitive marketplace, including the introduction of new products or
pricing changes by the Company's competitors, and (ii) changes in the trends
in the market for office furniture, including changes in the trend of
increased white collar employment. The Company undertakes no obligation to
publicly update or revise any forward-looking statements, whether as a result
of new information, future events or otherwise. In light of these risks and
uncertainties, there can be no assurance that the forward-looking information
contained in this Prospectus will in fact transpire.
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of shares of Common
Stock by the Selling Stockholders. The Company will pay all fees and expenses
related to the Offerings. See "Principal and Selling Stockholders."
DIVIDEND POLICY
The Company has not paid a dividend on its Common Stock since the
Acquisition, and does not anticipate paying any dividends on the Common Stock
in the foreseeable future. The current policy of the Company's Board of
Directors is to retain earnings to finance the operations and expansion of the
Company's business. In addition, the Company's Revolving Credit Facility and
Indenture restrict the Company's ability to pay dividends to its stockholders.
Any future determination to pay dividends will depend on the Company's results
of operations, financial condition, capital requirements, contractual
restrictions and other factors deemed relevant by the Board of Directors. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Description of Certain
Indebtedness."
PRICE RANGE OF COMMON STOCK
The Common Stock has been listed on the NYSE since May 9, 1997. The
following table sets forth high and low closing sales prices for the Common
Stock for the fiscal quarters indicated as reported by the NYSE.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1997
Second quarter (commencing May 9, 1997).................. $23 3/4 $17 1/4
Third quarter (through September 25, 1997)............... $33 15/16 $22 7/8
</TABLE>
A recent closing sale price on the NYSE is set forth on the cover page of
this Prospectus. As of August 18, 1997, there were approximately 2,200 holders
of the Common Stock.
16
<PAGE>
CAPITALIZATION
The following table sets forth the long-term debt (including current
portion) and the capitalization of the Company as of June 30, 1997. The
Company will not receive any proceeds from the Offerings. This table should be
read in conjunction with the financial statements and notes thereto appearing
elsewhere in this Prospectus. See "Selected Financial Information" and the
Unaudited Pro Forma Financial Information and notes thereto included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1997
ACTUAL
---------------------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C>
Long-term debt (including current portion):
Senior credit facility (1)(2)....................... $150,000
Notes............................................... 107,250
Other............................................... 797
--------
Total long-term debt.............................. 258,047
--------
Stockholders' equity:
Common Stock, $0.01 par value, 100,000,000 shares
authorized; 43,212,227 shares issued and
outstanding (3).................................... 432
Additional paid-in capital.......................... 214,954
Unearned stock grant compensation................... (1,146)
Retained earnings................................... 40,093
Cumulative foreign currency translation adjustment.. (1,379)
Total stockholders' equity........................ 252,954
--------
Total capitalization............................ $511,001
========
</TABLE>
- --------
(1) At June 30, 1997 the Company had $68,583 of unused credit availability
under its then-outstanding revolving credit facility.
(2) From July 1, 1997 to August 31, 1997, the Company paid down $26,500 under
its then-outstanding term loan facility and revolving credit facility.
(3) Includes 4,144,030 restricted shares which have been issued under the
Company's 1996 Stock Plan (including 2,863,156 shares which have been
granted but have not yet vested).
17
<PAGE>
SELECTED FINANCIAL INFORMATION
The following table presents (i) selected historical consolidated financial
information of the Predecessor, as of the dates and for the periods indicated,
(ii) selected historical consolidated financial information of the Company, as
of the dates and for the periods indicated and (iii) summary pro forma
consolidated financial information of the Company, for the periods indicated,
after giving effect to the events described in the notes below and in the
Unaudited Pro Forma Financial Information and notes thereto included elsewhere
in this Prospectus. The historical consolidated financial information for each
of the three years in the period ended December 31, 1995 has been derived from
the Predecessor's financial statements, which have been audited by Price
Waterhouse LLP. The historical consolidated financial information for the two
month period ended February 29, 1996 and the ten month period ended December
31, 1996 has been derived from the Predecessor's and the Company's financial
statements, respectively, which have been audited by Ernst & Young LLP. The
historical consolidated financial information for the year ended December 31,
1992, for the four month period ended June 30, 1996 and the six month period
ended June 30, 1997 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 as of the dates and for the periods indicated. The
summary pro forma information does not purport to represent what the Company's
results 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 selected financial information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the Financial Statements and notes thereto and the
Unaudited Pro Forma Financial Information and notes thereto included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
---------------------------------------------------- -------------------------
TWO MONTHS TEN MONTHS PRO FORMA
YEAR ENDED DECEMBER 31, ENDED ENDED YEAR ENDED
-------------------------------------- FEBRUARY 29, DECEMBER 31, DECEMBER 31,
1992 1993 1994 1995 1996 1996 1996(1)(2)
-------- -------- -------- -------- ------------ ------------ ------------
(IN THOUSANDS) (IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total sales............. $576,621 $508,383 $562,869 $620,892 $ 90,232 $561,534 $651,766
Cost of sales(3)........ 417,213 376,875 410,104 417,632 59,714 358,841 419,908
-------- -------- -------- -------- -------- -------- --------
Gross profit............ 159,408 131,508 152,765 203,260 30,518 202,693 231,858
Provision for
restructuring.......... 26,000 6,165 29,180 -- -- -- --
Selling, general and
administrative
expenses(4)............ 165,913 163,015 167,238 138,527 21,256 131,349 153,388
Westinghouse long-term
incentive
compensation........... -- -- -- -- 47,900 -- --
Allocated corporate
expenses(3)(4)......... 5,036 4,899 5,881 9,528 921 -- --
-------- -------- -------- -------- -------- -------- --------
Operating income
(loss)................. (37,541) (42,571) (49,534) 55,205 (39,559) 71,344 78,470
Interest expense........ 3,866 3,301 3,225 1,430 340 32,952 34,314
Other income (expense),
net.................... (929) 2,082 699 (1,597) (296) 447 151
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
income taxes,
cumulative effect of
changes in accounting
principles and
extraordinary item..... (42,336) (43,790) (52,060) 52,178 (40,195) 38,839 44,307
Income tax expense
(benefit).............. (4,795) (3,571) 7,713 22,846 (16,107) 16,844 19,113
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
cumulative effect of
changes in accounting
principles and
extraordinary item..... (37,541) (40,219) (59,773) 29,332 (24,088) 21,995 25,194
Cumulative effect of
changes in accounting
principles............. 11,202 1,118 -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
extraordinary item..... (48,743) (41,337) (59,773) 29,332 (24,088) 21,995 25,194
Extraordinary loss on
early extinguishment of
debt, net of taxes..... -- -- -- -- -- 5,159 --
-------- -------- -------- -------- -------- -------- --------
Net income (loss)(5).... $(48,743) $(41,337) $(59,773) $ 29,332 $(24,088) $ 16,836 $ 25,194
======== ======== ======== ======== ======== ======== ========
Pro forma income before
extraordinary item per
share of Common
Stock(5)(6)............ $ .63 $ .58
Pro forma net income per
share of Common
Stock(5)(6)............ $ .48 $ .58
Pro forma weighted
average shares of
Common Stock
outstanding(6)......... 34,815 43,262
</TABLE>
(continued on following page)
18
<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
-------------- -------------------------------------------
PRO FORMA
TWO MONTHS FOUR MONTHS SIX MONTHS SIX MONTHS ENDED
ENDED ENDED ENDED JUNE 30,
FEBRUARY 29, JUNE 30, JUNE 30, --------------------
1996 1996 1997 1996 (1)(2) 1997(2)
-------------- ----------- ---------- ----------- --------
(IN THOUSANDS) (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total sales............. $ 90,232 $214,600 $390,415 $304,832 $390,415
Cost of sales(3)........ 59,714 140,489 236,265 201,556 236,265
-------- -------- -------- -------- --------
Gross profit............ 30,518 74,111 154,150 103,276 154,150
Selling, general and
administrative
expenses(4)............ 21,256 47,141 90,635 69,180 90,635
Westinghouse long-term
incentive
compensation........... 47,900 -- -- -- --
Allocated corporate
expenses(3)(4)......... 921 -- -- -- --
-------- -------- -------- -------- --------
Operating income
(loss)................. (39,559) 26,970 63,515 34,096 63,515
Interest expense........ 340 13,952 14,696 18,172 11,977
Other income (expense),
net.................... (296) 340 73 44 73
-------- -------- -------- -------- --------
Income (loss) before
income taxes and
extraordinary item..... (40,195) 13,358 48,892 15,968 51,611
Income tax expense
(benefit).............. (16,107) 5,382 20,298 6,518 21,375
-------- -------- -------- -------- --------
Income (loss) before
extraordinary item(5).. (24,088) 7,976 28,594 9,450 30,236
Extraordinary loss on
early extinguishment of
debt, net of taxes..... -- -- 5,337 -- --
-------- -------- -------- -------- --------
Net income (loss)....... $(24,088) $ 7,976 $ 23,257 $ 9,450 $ 30,236
======== ======== ======== ======== ========
Pro forma income before
extraordinary item per
share of Common
Stock(5)(6)............ $ .23 $ .76 $ .22 $ .70
Pro forma net income per
share of Common
Stock(5)(6)............ $ .23 $ .62 $ .22 $ .70
Pro forma weighted
average shares of
Common Stock
outstanding(6)......... 34,782 37,246 43,262 43,300
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
----------------------------------- ------------------------------
DECEMBER 31, JUNE 30,
----------------------------------- DECEMBER 31, -----------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- ------------ -------- --------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT
PERIOD END):
Working capital......... $ 67,063 $ 41,933 $ 22,898 $ 82,698 $ 64,754 $ 89,741 $ 78,774
Total assets............ 726,469 691,043 705,316 656,710 675,712 708,184 669,622
Total long-term debt,
including current
portion................ 20,106 15,204 12,451 3,538 354,154 410,849 258,047
Total liabilities....... 186,347 205,104 247,310 176,259 497,908 539,861 416,668
Stockholders' equity.... 540,122 485,939 458,006 480,451 177,804 168,323 252,954
</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, the
application of the net proceeds of $160,000 from the sale of capital stock
of the Company, and related borrowings of $425,000.
(2) Adjusted to reflect the Initial Public Offering, the application of the
net proceeds of $133,461 therefrom, together with borrowings of $11,652
under the Company's credit facilities, for the redemption of 800,000
shares of Series A Preferred Stock held by Warburg and NationsBanc for an
aggregate redemption price of $80,000 in cash and 11,749,361 shares of
Common Stock, the conversion of the remaining 802,998 shares of Series A
Preferred Stock (including those held by Warburg and NationsBanc) into
15,691,558 shares of Common Stock, and the redemption of an aggregate
principal amount of $57,750 of the Notes for a total redemption price of
$65,113, including a redemption premium of $5,775 and accrued and unpaid
interest thereon of $1,588, as if each of such events had occurred at the
beginning of the respective periods.
(3) Cost of sales has been increased by (i) $801 for the pro forma year ended
December 31, 1996 and the pro forma six months ended June 30, 1996 to
reflect an increase in depreciation resulting from the Acquisition and
(ii) $552 for the pro forma year ended December 31, 1996 and the pro forma
six months ended June 30, 1996 in order to reflect the reclassification of
a portion of allocated corporate expenses. The reclassified
(footnotes continued on following page)
19
<PAGE>
allocated corporate expenses approximate the replacement cost to the Company
for services formerly provided by Westinghouse to the Predecessor, including
(i) benefit expense related to the adoption of various independent benefit
plans comparable to Westinghouse benefit plans and (ii) the cost of services
required to replace specific activities formerly provided by Westinghouse to
the Predecessor, including audit, tax, general ledger, accounts receivable,
human resources, legal, insurance and data communications.
(4) Selling, general and administrative expenses have been increased by (i)
$369 for the pro forma year ended December 31, 1996 and the pro forma six
months ended June 30, 1996 to reflect the reclassification of allocated
corporate expenses which approximate the replacement cost to the Company
(described above in note 3) and (ii) $414 for the pro forma year ended
December 31, 1996 and the pro forma six months ended June 30, 1996 to
reflect an increase in amortization and depreciation resulting from the
Acquisition.
(5) The pro forma income statement data presented for the year ended December
31, 1996 does not include the $5,159 extraordinary loss on early
extinguishment of debt, net of taxes. In addition, the pro forma income
statement data for the year ended December 31, 1996, the six month period
ended June 30, 1996, and the six month period ended June 30, 1997 does not
include an extraordinary loss of $5,337 net of taxes associated with the
redemption of a portion of the Notes in connection with the Initial Public
Offering.
(6) Because of the significance of the redemption and conversion into Common
Stock of the outstanding Series A Preferred Stock upon consummation of the
Initial Public Offering, historical net income (loss) per share is not
presented herein. Pro forma income per share amounts are based on the
weighted average number of shares of Common Stock and Common Stock
equivalents (employee stock options) outstanding during the period, after
giving effect to the redemption and conversion into Common Stock of the
Series A Preferred Stock assuming such redemption and conversion had
occurred at the beginning of each period presented. See Note (i) of the
Notes to the Unaudited Pro Forma Financial Information.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of the Company's historical and pro forma results
of operations and of its liquidity and capital resources should be read in
conjunction with the Condensed Consolidated Financial Statements and notes
thereto (unaudited), the Audited Consolidated Financial Statements and notes
thereto and the Pro Forma Financial Information and notes thereto (unaudited)
included elsewhere in this Prospectus.
Prior to the Acquisition, the Predecessor's results of domestic operations
were included in the consolidated U.S. federal income tax return of
Westinghouse and the results of the Canadian and European operations were
reported separately in their respective taxing jurisdictions. For the purposes
of the Prospectus, the income tax expense and other tax-related items included
in the financial statements is presented as if the Predecessor had been a
stand-alone taxpayer.
BACKGROUND
Westinghouse created The Knoll Group, Inc. by acquiring The Shaw-Walker
Company, Reff Inc. and Knoll International 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.
For various reasons, the combined entities did not perform well. The Company
continued to be run as four separate entities, with essentially separate
operations with independent factories and administrative support personnel. 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, followed in 1992 by Westinghouse's
announcement of its intention to sell Knoll, exacerbated the difficult
operating environment within Knoll. As a result, under previous management
from 1991 to 1993 sales and net income deteriorated. 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 in 1994 they initiated a major turnaround
and restructuring program which led to significantly improved financial
performance. Management's turnaround efforts had a dramatic impact on the
Company's competitive position and financial performance and positioned the
Company for growth.
OVERVIEW
Operating performance improved from 1994 through the first half of 1997,
primarily due to improving industry trends, increased sales, improved
operating and manufacturing effectiveness and the continuing benefits of the
turnaround program and the restructuring efforts undertaken by the Company.
Sales increased from $562.9 million in 1994 to $651.8 million in 1996. Sales
for the six months ended June 30, 1997 increased $85.6 million, or 28.1%, to
$390.4 million from $304.8 million for the comparable period in 1996. Gross
margins increased from 27.1% in 1994 to 32.7% in 1995 and, on a pro forma
basis, from 31.5% in 1995 to 35.6% in 1996. Gross margins for the six months
ended June 30, 1997 were 39.5% as compared with 33.9% for the comparable
period in 1996 on a pro forma basis. Operating income improved by $104.7
million from a loss of $49.5 million in 1994 to a profit of $55.2 million in
1995; pro forma operating income improved by $29.5 million from $49.0 million
in 1995 to $78.5 million in 1996. Operating income increased to $63.5 million
for the six months ended June 30, 1997, from $34.1 million for the six months
ended June 30, 1996, on a pro forma basis. Operating margins increased from
(8.8)% in 1994 to 8.9% in 1995 and, on a pro forma basis, from 7.9% in 1995 to
12.0% in 1996. For the six month period ended June 30, 1997, operating margins
were 16.3% as compared to 11.2% for the comparable period in 1996 on a pro
forma basis. The most significant cost reductions, which improved operating
performance, were in 1995, when the Company eliminated approximately $25.0
million in variable operating costs and approximately $45.0 million in fixed
operating costs and general expenses. The Company's improved financial and
operating results allowed it in 1996 to prepay $72.0 million under its credit
facilities and refinance
21
<PAGE>
such facilities on more favorable terms. In addition, in 1997 the Company
repaid $57.8 million of the Company's 10.875% Senior Subordinated Notes with a
portion of the proceeds from the Initial Public Offering and repaid $38.2
million of bank debt during the six months ended June 30, 1997 from operating
cash flow. Periods prior to the Acquisition are not comparable to periods
after the Acquisition on a non-pro forma basis.
Since 1994, virtually every product line has been modified and improved, and
the lead time required to bring new and enhanced products to the market has
been decreased significantly through the use of computer-aided design
techniques and other process improvements; average lead times between order
entry and delivery of products to customers have been reduced from seven weeks
to five weeks; and on-time shipments, a measure of customer service, improved
to the current 95% level from approximately 91% in 1993. Management renewed
sales growth by refocusing and retraining the Company's sales force, and
instituted product line profitability measures and management incentive
programs. Finally, management accelerated the development of new and enhanced
products and restructured the European business.
The Company believes that its recent sales growth exceeded industry growth
as a whole. According to BIFMA, U.S. furniture industry shipments have
increased at a compound annual growth rate of 4.3% over the ten-year period
ended December 31, 1996. For the six month period ended June 30, 1997, as
compared with the comparable period in 1996, BIFMA estimates that industry
shipments increased by 15%, although there can be no assurance that such
growth, or growth at the rates experienced in these periods, will continue in
the future. The Company's sales increased 10.7% in 1994 and 10.3% in 1995.
Sales increases of 5.0% in 1996 were negatively affected by management
initiatives undertaken in the turnaround to increase the profitability of the
Company's sales, including (i) the discontinuation of several products that
were sold to customers in 1995 and (ii) an intentional decrease in heavily
discounted, lower profit sales to selected customers. During this transitional
period, orders for new products increased at a faster rate than sales, with
1996 orders of $686.8 million, up $87.3 million, or 14.6%, over 1995 orders of
$599.5 million.
The Company intends to continue its pursuit of growth by introducing new
products in the office systems category, where the Company is already a
recognized leader, and in other product categories where the Company's market
share could be increased by leveraging the Company's design expertise and
brand awareness. The Company estimates that its share of the 1996 U.S. office
furniture market was 11.2% for office systems, 2.1% for seating, 2.1% for
storage, 1.2% for desks and casegoods and 1.8% for tables. Such percentages do
not include sales of KnollStudio, KnollExtra, textiles and leather products.
The following table describes the estimated U.S. office furniture market sales
in the year ended December 31, 1996 and the six month period ended June 30,
1997 by product category.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 JUNE 30, 1997
----------------------- -----------------------
U.S. MARKET % OF U.S. U.S. MARKET % OF U.S.
PRODUCT CATEGORY SIZE MARKET SIZE MARKET
---------------- ------------- --------- ------------- ---------
(IN BILLIONS) (IN BILLIONS)
<S> <C> <C> <C> <C>
Office systems............ $3.4 34.1% $2.1 37.3%
Seating................... 2.6 25.4 1.3 23.0
Storage................... 1.4 14.1 0.8 14.7
Desks and casegoods....... 1.6 16.4 0.8 14.4
Tables.................... 0.7 6.6 0.4 6.5
</TABLE>
In addition, the Company had sales in Canada and Europe of approximately
$79.5 million and $44.3 million for the year ended December 31, 1996 and the
six month period ended June 30, 1997, respectively. European sales are
primarily in the United Kingdom, Germany, France, Belgium and Italy.
RESULTS OF OPERATIONS
Because the Company was formed as a result of the Acquisition on February
29, 1996, the following discussion refers to the pro forma results of
operations for the six months ended June 30, 1996 presented as supplemental
data in the Condensed Consolidated Financial Statements (unaudited).
22
<PAGE>
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1997 TO PRO FORMA SIX MONTHS ENDED
JUNE 30, 1996
Sales. Sales for the first six months of 1997 were $390.4 million, an
increase of $85.6 million, or 28.1%, from sales of $304.8 million for the same
period in 1996. This growth resulted from increased sales across all product
categories. A significant portion of the sales growth was attributable to
sales of office systems, which grew $69.1 million, or 30.3%. Sales levels
continue to benefit from product improvements, increased sales and marketing
efforts and favorable industry dynamics.
Gross profit. Gross profit for the six months ended June 30, 1997 was $154.2
million, an increase of $50.9 million, or 49.3%, from gross profit of $103.3
million for the same period in 1996. Gross profit as a percentage of sales
increased to 39.5% for the six months ended June 30, 1997 from 33.9% for the
same period in 1996. This increase was principally due to higher sales volume,
better pricing in North America and continued worldwide factory operating cost
improvements.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $90.6 million for the six months ended June 30,
1997 compared to $69.2 million for the six months ended June 30, 1996. This
increase of $21.4 million is due primarily to increased employee costs related
to higher sales and profit levels in addition to increased expenses related to
new product and technology initiatives. As a percentage of sales, the
Company's selling, general and administrative expenses increased to 23.2% for
the six months ended June 30, 1997 from 22.7% for the same period in 1996.
Operating income. Operating income for the six months ended June 30, 1997
increased to $63.5 million, an increase of $29.4 million, or 86.2%, from
operating income of $34.1 million for the same period in 1996. As noted above,
this improvement was driven by higher sales volume, better pricing in North
America and factory cost improvements as well as continuing efficiencies
gained from consolidation and centralization of administrative functions.
Interest expense. Interest expense was $14.7 million for the six months
ended June 30, 1997 compared to $21.0 million for the six months ended June
30, 1996. The decrease in interest expense is attributable to the overall
reduction in debt in addition to lower interest rates associated with the
Company's senior credit agreement, which was refinanced in December of 1996.
Income tax expense. Income tax expense was 41.5% for the six months ended
June 30, 1997 compared to 41.1% for the six months ended June 30, 1996. This
difference is primarily attributable to the changing quarterly mix of pre-tax
income between countries in which the Company operates with differing
effective tax rates.
Pro forma earnings per share of common stock. Income before extraordinary
item per share for the six months ended June 30, 1997 increased 245.5% to
$0.76 per share from $0.22 per share for the six months ended June 30, 1996.
Supplemental pro forma as adjusted net income and earnings per share.
Supplemental pro forma as adjusted net income for the six months ended June 30,
1997 increased $20.7 million ($0.48 per share), or 217.9%, to $30.2 million or
$0.70 per share compared to $9.5 million or $0.22 per share for the same period
of 1996. Supplemental pro forma as adjusted results of operations reflect the
sale of 8,480,000 shares of Common Stock by the Company in its Initial Public
Offering and the application of the net proceeds therefrom together with related
borrowings under the Company's then-outstanding revolving credit facility as if
such events occurred at the beginning of each period presented. Consequently,
such results include interest savings from the early redemption of a portion of
the Company's 10.875% Senior Subordinated Notes, additional interest expense for
related borrowings under the Company's credit facilities and related income tax
effects. Pro forma as adjusted results do not, however, reflect the 1997
extraordinary loss of $5.3 million, net of taxes, incurred in connection with
the early redemption of a portion of the 10.875% Senior Subordinated Notes.
23
<PAGE>
COMPARISON OF PRO FORMA YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER
31, 1995
Total sales. Total sales were $651.8 million for the year ended December 31,
1996, an increase of $30.9 million, or 5.0%, from $620.9 million for the year
ended December 31, 1995. The sales growth resulted from price increases (an
average of 2.4% over 1995) and increased volume across all North American
product categories, and was partially offset by the elimination of certain
lower profit product lines and contracts during 1995. Sales of office systems
grew $27.8 million, or 6.0%, while sales of the Company's specialty products
(KnollStudio, KnollExtra, KnollTextiles and Spinneybeck) and seating grew
$10.4 million, or 10.8%, and $3.1 million, or 5.7%, respectively. This growth
is attributable to product enhancements in all categories as well as continued
growth from new product introductions. The 1996 sales increase of continued
product was $41.3 million, or 6.8%, as 1995 sales included lower profit
discontinued product sales of $10.4 million.
Gross profit. Gross profit was $231.9 million for the year ended December
31, 1996, an increase of $28.6 million, or 14.1%, from gross profit of $203.3
million for the year ended December 31, 1995. Gross profit as a percentage of
sales increased to 35.6% for the year ended December 31, 1996 from 32.7% for
the previous year. As noted in the Overview, the actual gross margin generated
by the Predecessor for the year ended December 31, 1995 is not comparable to
the pro forma gross margin generated by the Company for the year ended
December 31, 1996. Several factors affect the comparability of these amounts.
Approximately $3.1 million of costs included in 1996 pro forma cost of sales
were included in allocated corporate expenses in the 1995 historical income
statement. These costs were related to the adoption of various independent
employee benefit plans comparable to Westinghouse benefit plans. In addition,
$4.2 million of depreciation expense related directly to the Acquisition is
included in 1996 pro forma cost of sales. These increased depreciation costs
were not incurred during 1995. However, the above noted factors affecting
comparability were more than offset by improvements in operating results
experienced by the Company. These increases were principally due to the higher
sales volume in North America, better pricing, discontinuance of unprofitable
products, continued factory operating cost improvements, consolidation of
European operations and other fixed cost reductions.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $153.4 million for the year ended December 31,
1996, up $14.9 million, or 10.8%, from the year ended December 31, 1995. As
noted in the Overview, actual selling, general and administrative expenses
incurred by the Predecessor for the year ended December 31, 1995 is not
comparable to the pro forma selling, general and administrative expenses
incurred by the Company for the year ended December 31, 1996. Several factors
affect the comparability of these amounts. Approximately $2.5 million of costs
were incurred in 1996 to replace employee benefit plans and other services
(audit, tax, general ledger, accounts receivable, human resources and legal)
that were provided by Westinghouse prior to the Acquisition. These costs were
included in allocated corporate expenses in the 1995 historical income
statement. In addition, increased depreciation and amortization costs totaling
$1.6 million resulting from the Acquisition are included in 1996 pro forma
selling, general and administrative expenses. These increased depreciation and
amortization costs were not incurred during 1995. In addition to the above
noted factors affecting comparability, selling, general and administrative
expenses increased by $10.8 million primarily due to increased sales incentive
compensation and employee benefits related to higher sales volumes in North
America, and expenses related to new product and technology initiatives,
partially offset by savings resulting from showroom consolidations in Germany,
Italy and Belgium along with the centralization of administrative functions in
Europe. As a percentage of sales, the Company's selling, general and
administrative expenses were 23.6% for the year ended December 31, 1996 and
22.3% for the year ended December 31, 1995.
Allocated corporate expenses. Allocated corporate expenses of $9.5 million
in 1995 include (i) Westinghouse overhead charges for Westinghouse executive
management and corporate legal, environmental, audit, tax, treasury and other
related services and (ii) incentive compensation payable to Knoll executives
under Westinghouse long-term incentive plans. These allocated corporate
expenses, with the exception of incentive compensation, were payable by
Westinghouse and allocated to Knoll primarily based on sales. The 1996 pro
forma results do not include a $47.9 million charge to operations for the 1996
payment of awards to certain key executives of the Company pursuant to a long-
term incentive plan established by Westinghouse. The plan provided for payment
of awards at the end of a five-year period based on the achievement of certain
performance
24
<PAGE>
goals set by Westinghouse's board of directors. As a result of the
consummation of the Acquisition, the payment of awards was accelerated
pursuant to the terms of the plan. The Company has not implemented an
incentive plan similar to the Westinghouse plan and does not expect such
compensation to be payable in future periods.
Operating income. Operating income increased to $78.5 million for the year
ended December 31, 1996 from $55.2 million for the year ended December 31,
1995. As a percentage of sales, operating income increased to 12.0% for the
year ended December 31, 1996 from 8.9% for the same period in 1995. As noted
above, these improvements were driven by higher sales volume, better pricing,
discontinuance of lower profit product lines, factory cost improvements and
efficiencies gained from consolidation and centralization of administrative
functions.
Interest expense. Interest expense increased $38.6 million to $40.0 million
for the year ended December 31, 1996. This increase is attributable to the
debt incurred by the Company in connection with the Acquisition. This debt
consisted of $165 million of the Company's Notes and $260 million of
borrowings under the Company's credit facilities.
Income tax expense. Income tax expense for the years ended December 31, 1996
and 1995 was 43.8% of pre-tax income.
Extraordinary item. For the year ended December 31, 1996, there was an
extraordinary charge of $5.2 million net of a tax benefit of $3.3 million
relating to the write-off of unamortized financing costs following the
refinancing of the Company's previous credit agreement.
COMPARISON OF PRO FORMA YEAR ENDED DECEMBER 31, 1996 TO PRO FORMA YEAR ENDED
DECEMBER 31, 1995
Because the Company was formed as a result of the Acquisition on February
29, 1996, the following discussion refers to the pro forma results of
operations as shown in Note 3 to the Consolidated Financial Statements.
Total sales. Total sales were $651.8 million for the year ended December 31,
1996, an increase of $30.9 million, or 5.0%, from $620.9 million for the year
ended December 31, 1995. The sales growth resulted from price increases (an
average of 2.4% over 1995) and increased volume across all North American
product categories, and was partially offset by the elimination of certain
lower profit product lines and contracts during 1995. Sales of office systems
grew $27.8 million, or 6.0%, while sales of the Company's specialty products
(KnollStudio, KnollExtra, KnollTextiles and Spinneybeck) and seating grew
$10.4 million, or 10.8%, and $3.1 million, or 5.7%, respectively. This growth
is attributable to product enhancements in all categories as well as continued
growth from new product introductions. The 1996 sales increase of continued
product was $41.3 million, or 6.8%, as 1995 sales included lower profit
discontinued product sales of $10.4 million.
Gross profit. Gross profit was $231.9 million for the year ended December
31, 1996, an increase of $36.3 million, or 18.6%, from gross profit of $195.6
million for the year ended December 31, 1995. Gross profit as a percentage of
sales increased to 35.6% for the year ended December 31, 1996 from 31.5% for
the previous year. These increases were principally due to the higher sales
volume in North America, better pricing, discontinuance of unprofitable
products, continued factory operating cost improvements, consolidation of
European operations and other fixed cost reductions.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $153.4 million for the year ended December 31,
1996, up $10.8 million, or 7.6%, from the year ended December 31, 1995. The
increase was primarily due to increased sales incentive compensation and
employee benefits related to higher sales volumes in North America, and
expenses related to new product and technology initiatives, partially offset
by savings resulting from showroom consolidations in Germany, Italy and
Belgium along with the centralization of administrative functions in Europe.
As a percentage of sales, the Company's selling, general and administrative
expenses were 23.6% for the year ended December 31, 1996 and 23.0% for the
year ended December 31, 1995.
25
<PAGE>
Allocated corporate expenses. Allocated corporate expenses of $4.0 million
in 1995 represents incentive compensation payable to Knoll executives under
Westinghouse long-term incentive plans.
Operating income. Operating income increased to $78.5 million for the year
ended December 31, 1996 from $49.0 million for the year ended December 31,
1995. As a percentage of sales, operating income increased to 12.0% for the
year ended December 31, 1996 from 7.9% for the same period in 1995. As noted
above, these improvements were driven by higher sales volume, better pricing,
discontinuance of lower profit product lines, factory cost improvements and
efficiencies gained from consolidation and centralization of administrative
functions.
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 categories (an average increase of 8.7% over 1994).
Sales of office systems grew $50.7 million, or 15.1%, 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 $203.3 million for the year ended December
31, 1995, an increase of $50.5 million, or 33.0%, from $152.8 million for the
year ended December 31, 1994. This increase was principally due to the higher
sales volume, better pricing, discontinuance of lower profit product lines,
factory operating cost improvements, and cost reductions realized from closing
the Company's Legnano, Italy factory and consolidating its Muskegon, Michigan
operations. As a result, gross profit as a percentage of sales increased to
32.7% for the year ended December 31, 1995 from 27.1% 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 the turnaround program that commenced
in early 1994.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $138.5 million for the year ended December 31,
1995, representing a decrease of $28.7 million, or 17.2%, from $167.2 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 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 22.3% for the year ended December 31, 1995 from 29.7% 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 expenses for 1995 include approximately $4.0 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.
Operating income (loss). Operating income 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, operating income (loss) increased to 8.9% for the
year ended
26
<PAGE>
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.
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.
Other income (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.
Income tax expense. Income tax expense of $22.8 million was 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's free cash flow has historically been used to fund capital
expenditures, working capital requirements and debt service. Following the
Acquisition, interest expense associated with borrowings under the Company's
credit facilities and the issuance of the Notes, as well as scheduled
principal payments of term loans under the Company's credit facilities,
significantly increased interest expense and cash requirements compared to
previous years.
In May 1997, the Company completed the Initial Public Offering, generating
net proceeds to the Company of $133.5 million from its sale of 8,480,000
shares of Common Stock. The Company used the net proceeds to the Company,
together with borrowings under the Company's credit facilities, to redeem
800,000 shares of Series A 12% Participating Convertible Preferred Stock for
$80.0 million and to redeem an aggregate principal amount of $57.8 million of
the Company's 10.875% Senior Subordinated Notes for $65.1 million (including a
redemption premium of $5.7 million and accrued and unpaid interest thereon of
$1.6 million). In addition to the redemption of a portion of the Company's
10.875% Senior Subordinated Notes, the Company repaid from operating cash flow
$38.2 million of bank debt during the six months ended June 30, 1997.
The Revolving Credit Facility provides for a $275.0 million revolving credit
facility. Loans made pursuant to the revolving credit facility may be
borrowed, repaid and reborrowed from time to time until August 8, 2002.
Indebtedness under the Revolving Credit Facility bears interest at a floating
rate based, at the Company's option, upon (i) the Eurodollar Rate (as defined
therein) plus an applicable percentage which is subject to change based on the
Company's ratio of funded debt to EBITDA or (ii) the greater of the federal
funds rate plus 0.5% or the prime rate. The Revolving Credit Facility contains
restrictive covenants, financial covenants and events of default. As of August
31, 1997, the Company had an aggregate of $150.1 million available for
borrowing under the Revolving Credit Facility. See "Description of Certain
Indebtedness--Description of Revolving Credit Facility."
In addition to the Revolving Credit Facility, the Company has outstanding as
of August 31, 1997, $107.2 million aggregate principal amount of its 10.875%
Senior Subordinated Notes due 2006, which were issued in connection with the
Acquisition in the original aggregate principal amount of $165.0 million. The
Notes are subordinated to all existing and future senior indebtedness of the
Company, including all indebtedness under the Revolving Credit Facility. The
Indenture governing the terms of the Notes imposes certain restrictions on the
Company and its subsidiaries, including restrictions on its ability to incur
indebtedness, pay dividends, make
27
<PAGE>
investments, grant liens and engage in certain other activities. The Notes may
be required to be purchased by the Company upon a change of control (as
defined) and in certain circumstances with the proceeds of asset sales. The
Notes are redeemable at the option of the Company at any time after March 15,
2001, initially at 105.438% of their principal amount at maturity, plus
accrued interest, declining to 100% of their principal amount at maturity,
plus accrued interest, on or after March 15, 2004.
The Company's foreign subsidiaries from time to time maintain local credit
facilities to provide credit for overdraft, working capital and other
purposes. As of August 31, 1997, the Company's total credit available under
such facilities was approximately $11.6 million, of which none had been
utilized. The Company believes that it is currently in compliance with all
terms of its indebtedness and that it has been in such compliance since the
Acquisition.
Cash provided by (used in) operating activities totaled $57.6 million for
the six months ended June 30, 1997, $89.5 million for the ten months ended
December 31, 1996, $(54.0) million for the two months ended February 29, 1996,
$51.9 million in 1995 and $(3.8) million in 1994. Cash provided by operations
resulted primarily from earnings, net of depreciation and amortization, as
well as positive cash flow from working capital for the six months ended June
30, 1997 and the ten months ended December 31, 1996.
Cash used in investing activities totaled $7.6 million for the six months
ended June 30, 1997 and was primarily comprised of capital expenditures. Cash
used in investing activities totaled $594.8 million for the ten months ended
December 31, 1996 and was comprised primarily of the acquisition of the
Company from Westinghouse ($579.8 million) and capital expenditures by the
Company. Cash used in investing activities totaled $2.3 million for the two
months ended February 29, 1996, $19.0 million in 1995 and $19.8 million in
1994 and primarily was comprised of capital expenditures by the Company. The
Company's capital expenditures totaled $15.3 million for the ten months ended
December 31, 1996, $2.3 million for the two months ended February 29, 1996,
$19.3 million in 1995 and $20.2 million in 1994. Capital expenditures have
primarily been for new manufacturing equipment and information systems. The
Company expects to increase its capital expenditures over the next few years
as part of its growth strategy and efforts to provide superior service and
products to its customers. The Company estimates that capital expenditures
will be approximately $30.0 million in 1997.
Cash provided by (used in) financing activities totaled $(47.1) million for
the six months ended June 30, 1997, $511.8 million for the ten months ended
December 31, 1996, $57.0 million for the two months ended February 29, 1996
and $(36.8) million and $28.3 million for the years ended December 31, 1995
and 1994, respectively. The $47.1 million used by the Company for the six
months ended June 30, 1997 includes $80.0 million for the redemption of
800,000 shares of Series A Preferred Stock, $63.5 million for the redemption
of $57.8 million of the Company's 10.875% Senior Subordinated Notes (including
an early redemption premium of $5.7 million) and $38.2 million for the
repayment of bank debt primarily offset by net proceeds to the Company from
the Initial Public Offering. The $511.8 million provided by the Company in its
financing activities during the ten months ended December 31, 1996 included
$425.0 million for the issuance of debt and $160.0 million for the issuance of
stock in connection with the acquisition of the Company from Westinghouse,
partially offset by $72.0 million used by the Company for the prepayment of
indebtedness under the Company's credit facilities.
As of June 30, 1997, the Company has recorded approximately $1.1 million of
unearned stock grant compensation on its balance sheet. Such amount will be
expensed over the vesting period of the related stock awards, which is
generally five years.
The Company uses interest rate collar agreements in order to manage its
exposure to fluctuations in interest rates on its floating rate debt. At
August 31, 1997, the Company had four outstanding interest rate collar
agreements with a total notional principal amount of $150.0 million and
maximum and minimum rates ranging from 7.50% to 7.99% and 5.00% to 5.50%,
respectively. These agreements mature over the next two years. Aggregate
maturities of the total notional principal amount are $35.0 million in 1998
and $115.0 million in 1999.
28
<PAGE>
The past and present business operations of the Company and the past and
present ownership and operation of manufacturing plants on real property by
the Company are subject to extensive and changing federal, state, local and
foreign environmental laws and regulations. As a result, the Company is
involved from time to time in administrative and judicial proceedings and
inquiries relating to environmental matters. The Company cannot predict what
environmental legislation or regulations will be enacted in the future, how
existing or future laws or regulations will be administered or interpreted or
what environmental conditions may be found to exist. Compliance with more
stringent laws or regulations, or stricter interpretation of existing laws,
may require additional expenditures by the Company, some of which may be
material. The Company has been identified as a potentially responsible party
pursuant to CERCLA for remediation costs associated with waste disposal sites
previously used by the Company. The remediation costs at these CERCLA sites
are unknown, but the Company does not expect any liability it may have under
CERCLA to be material, based on the information presently known to the
Company. Under the Stock Purchase Agreement, Westinghouse has agreed to
indemnify the Company for certain costs associated with CERCLA liabilities
known as of the date of the Acquisition. See "Business--Environmental
Matters."
The Company continues to have significant liquidity requirements. In
addition to working capital needs and capital expenditures, the Company has
cash requirements for debt service. The Company believes that existing cash
balances and cash flow from operating activities, together with borrowings
available under the Revolving Credit Facility, will be sufficient to fund
working capital needs, capital spending requirements and debt service
requirements of the Company for at least the next 12 months.
INFLATION
There was no significant impact on Knoll's operations as a result of
inflation during the three years ended December 31, 1996 or the six months
ended June 30, 1997.
BACKLOG
As of June 30, 1997, the Company's backlog of unfilled orders was $111.2
million. At June 30, 1996, the backlog totaled $82.8 million. The Company
expects to fill substantially all outstanding unfilled orders within the next
twelve months. 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 a significant factor used to predict the Company's
long-term business prospects.
FOREIGN OPERATIONS
The Company's foreign sales and certain expenses are transacted in foreign
currencies. In the year ended December 31, 1996, and the six month period
ended June 30, 1997, approximately 12% and 11%, respectively, of the Company's
revenues and 24% and 25%, respectively, of the Company's expenses were
denominated in currencies other than U.S. dollars. The principal foreign
currencies in which the Company conducts business are the Canadian dollar and
the Italian lira. The production costs, profit margins and competitive
position of the Company are affected by the strength of the currencies in
countries where it manufactures or purchases goods relative to the strength of
the currencies in countries where its products are sold. The Company reviews
from time to time its foreign currency exposure and evaluates whether it
should enter into hedging transactions. The Company generally does not hedge
its foreign currency exposure and may determine not to do so in the future.
Exchange rate fluctuations did not have a material effect on the financial
results of the Company in 1996 or in the first six months of 1997.
29
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited summary pro forma and
historical information on a quarterly basis for the Company.
<TABLE>
<CAPTION>
HISTORICAL
-------------------------------
FIRST QUARTER SECOND QUARTER
---------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
1997
Net sales.............. $177,833 $212,582
Gross profit........... 67,974 86,176
Income before extraor-
dinary item(1)........ 11,638 16,956
<CAPTION>
HISTORICAL
PRO FORMA -------------------------------------------
FIRST QUARTER(3) SECOND QUARTER THIRD QUARTER FOURTH QUARTER
---------------- -------------- ------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
1996
Net sales.............. $138,312 $166,520 $167,184 $179,750
Gross profit........... 44,702 58,574 61,046 67,536
Income before extraor-
dinary item(2)........ 197 7,527 7,685 6,334
<CAPTION>
PRO FORMA(3)
------------------------------------------------------------
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
---------------- -------------- ------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
1995
Net sales.............. $147,410 $159,352 $155,055 $159,075
Gross profit........... 39,299 48,920 53,473 53,873
Net income (loss)...... (4,883) (484) 5,559 3,544
</TABLE>
- --------
(1) Excludes the extraordinary loss on the early extinguishment of debt
amounting to $8,838 pre tax, $5,337 after tax, recognized during the
second quarter.
(2) Excludes the extraordinary loss on the early extinguishment of debt
amounting to $8,542 pre tax, $5,159 after tax, recognized during the
fourth quarter.
(3) Reflects the Acquisition and the application of the net proceeds of
$160,000 from the sale of capital stock of the Company and borrowings of
$260,000 and $165,000 under the Company's credit facilities and the Notes,
respectively, as if such events had occurred at the beginning of the
period presented.
In certain years, the Company has experienced variability in its sales from
quarter to quarter.
30
<PAGE>
BUSINESS
GENERAL
Knoll designs, manufactures and distributes office systems and business
furniture noted for its high quality, innovative design and sophisticated
image. Knoll's products are designed to provide enduring value rooted in
timeless aesthetics, functionality, flexibility and reliable performance. For
nearly sixty years, Knoll has been widely recognized as a design leader, with
products represented in major art museums around the world, including more
than 30 Knoll pieces housed in the permanent Design Collection of the Museum
of Modern Art in New York. Knoll's heritage of design excellence has enabled
the Company to win hundreds of awards, with special recognition across all of
its product categories, including office systems, seating, desks and
credenzas, tables, files and storage, technology accessories and textiles.
Since 1994 alone, Knoll has won more than 20 design awards for new products
and enhancements across all of its product categories.
Knoll's customers are typically Fortune 1000 companies. The Company's direct
sales force of approximately 310 professionals and its network of
approximately 210 independent dealers in North America work in close
partnership with customers and design professionals to create distinctive work
environments using Knoll products. Knoll's products and knowledgeable sales
organization have generated strong brand recognition and loyalty among
architects, designers and corporate facility managers, who are key influences
in the purchasing process for business furnishings. Knoll's strong customer
relationships allow the Company to adapt and customize its products to meet
evolving customer needs, technology practices and ergonomic standards.
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 (to be joined
by two new systems product lines, Currents and Dividends, which the Company
expects to introduce in 1998); (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 in conjunction with the seating and systems products of other
manufacturers. For the year ended December 31, 1996 and the six month period
ended June 30, 1997, the Company had revenues of $651.8 million and $390.4
million, respectively. The combination of its strong product offerings,
experienced dealer network and a sales force which management believes to be
one of the most effective in the industry has enabled the Company to capture
an increasing share of the U.S. business furniture market over the last three
years.
Knoll, Inc. is a Delaware corporation which is the successor by merger to
the business and operations of The Knoll Group, Inc. and related entities,
which were acquired in February 1996 (the "Acquisition") from Westinghouse by
a majority-owned subsidiary of Warburg. Knoll International, Inc., which was
founded in 1938, and other predecessors of the Company have been engaged in
the design and manufacture of office furniture since before the turn of the
century. The Company's principal executive offices are located at 1235 Water
Street, East Greenville, Pennsylvania 18041, and its telephone number is (215)
679-7991.
INDUSTRY DYNAMICS
The Company believes that fundamental shifts in the nature of corporate
organizational structures, technology and work processes are driving new
opportunities for growth in the office furniture industry, especially in the
middle to high-end segments where Knoll believes it has competitive
advantages. Companies increasingly use workplace design and furniture purchase
decisions as catalysts for organizational and cultural change. Several
significant factors that influence this change are as follows:
. Continued corporate reengineering, restructuring and reorganizing. In
today's ever changing workplace, customers are more often experimenting
with workplace design with a goal of increasing
31
<PAGE>
worker productivity and reducing facility costs. As large corporations
have continued to focus on the benefits of reengineering, restructuring
and reorganizing, the nature of the corporate work environment has
changed. An emphasis on teams, flatter organizational structures, and
more direct communication among employees at varying levels, have
accelerated the need for redesigned space. Office furniture systems that
are simple, flexible and easy to install are popular with large
businesses that are reengineering, restructuring and reorganizing their
operations and offer significant advantages over traditional drywall
offices. 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."
. Corporate relocations. As companies redesign existing facilities or
relocate to 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.
. New office technology and the resulting necessity for improved wire and
data management. Technology proliferation in the workplace has placed,
and the Company believes will continue to place, new demands on
furniture performance. 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 can
easily accommodate increasingly complex wire and cable requirements. 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.
. Heightened sensitivity to concerns about ergonomic standards. Concerns
about ergonomics, health and safety in the office have intensified in
recent years, and, in 1996, California became the first state to adopt
legislation relating to ergonomics in the workplace. Such legislation
should 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.
In addition, other factors such as white collar employment levels, corporate
cash flow and non-residential construction reflect certain macroeconomic
conditions which management believes influence industry growth.
The U.S. office furniture market generated sales of approximately $10.0
billion in 1996. 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, according to BIFMA estimates, has grown at a compound annual rate of
approximately 7.2% over the three-year period ended December 31, 1996. For the
six month period ended June 30, 1997, as compared with the comparable period
in 1996, BIFMA estimates industry shipments increased by 15%, although there
can be no assurance that such growth, or growth at the rates experienced in
these periods, will continue in the future.
The U.S. office furniture market consists of five major product categories:
office systems, seating, storage, desks and casegoods, and tables. The
following table indicates the percentage of sales that each product category
contributed to the estimated U.S. office furniture industry for the year ended
December 31, 1996 and the six months ended June 30, 1997.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 JUNE 30, 1997
----------------------- -----------------------
U.S. MARKET % OF U.S. U.S. MARKET % OF U.S.
PRODUCT CATEGORY SIZE MARKET SIZE MARKET
- ---------------- ------------- --------- ------------- ---------
(IN BILLIONS) (IN BILLIONS)
<S> <C> <C> <C> <C>
Office systems.................. $3.4 34.1% $2.1 37.3%
Seating......................... 2.6 25.4 1.3 23.0
Storage......................... 1.4 14.1 0.8 14.7
Desks and casegoods............. 1.6 16.4 0.8 4.4
Tables.......................... 0.7 6.6 0.4 6.5
</TABLE>
32
<PAGE>
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, 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 sophisticated technological demands.
GROWTH STRATEGY
Knoll focuses on the middle to high-end office furniture market which, as a
result of evolving workplace trends and industry dynamics, management expects
to grow faster than the industry as a whole. Management believes Knoll is
well-positioned to drive further growth in revenues, profitability and market
share. Key elements of the Company's growth strategy are as follows:
. CREATE INNOVATIVE NEW PRODUCTS TO INCREASE SALES AND MARKET SHARE. The
Company believes its focus on market research, brand identity, superior
design and complementary product offerings give it a competitive
advantage in launching new products. The Company intends to (i) expand
its offerings in the $3.4 billion U.S. office systems category, where it
is a recognized leader, and (ii) expand the breadth of product offerings
in other growing office furniture categories, such as seating, tables,
desks and storage solutions, where the Company's market share is
relatively low. For example, the Company is developing new office
systems product lines and line extensions that address new price points
and category segments, such as the "teamwork" segment, where the
Company's current product offerings may be limited and management
believes demand for quality products is underserved. Leadership in
office systems is critical to achieving significant market share in the
industry. Office systems are often the first design component that the
customer specifies and typically represent the largest part of a
customer's furniture purchase. According to BIFMA statistics, the office
systems category is the fastest growing category of the office furniture
market, with estimated growth of 21% in the first six months of 1997
versus the first six months of 1996, as compared with estimated growth
of 15% in the overall office furniture market during the comparable
period. In June 1997, the Company previewed to its dealers and customers
as well as the architect and design community two new systems product
lines, Currents and Dividends, targeting high-performance, flexible
technology needs and simple, affordable solutions, respectively. The
Company expects to have these two new product lines available for sale
in 1998 and believes these new product lines will further broaden its
systems product offerings. Utilizing extensive market research and
direct customer feedback, the Company has developed new products in
other categories such as tables and seating, including the Propeller
table line and the Parachute chair line, which expand the breadth of the
Company's offerings in these growing categories.
. LEVERAGE OFFICE SYSTEMS STRENGTH IN OTHER CATEGORIES. The Company
believes it has the opportunity to increase sales and market share in
seating, tables, desks and storage solutions. For example, the Company's
U.S. market share of seating and tables was 2.1% and 1.8%, respectively,
in 1996 and 2.3% and 2.2%, respectively, for the first half of 1997,
while its office systems market share was 11.2% in 1996 and 11.4% for
the first half of 1997 (excluding sales of KnollStudio, KnollExtra,
textiles and leather products). Since these products are often sold in
conjunction with the initial specification of an office system, the
Company believes that it can increase its market share in these
categories by leveraging its market share strength in office systems.
. EXPAND SCOPE OF SELLING EFFORTS. The Company intends to increase the
number of direct selling professionals over the next two years to
increase office furniture sales by (i) developing new corporate
relationships, (ii) further penetrating existing corporate accounts and
(iii) expanding its selling efforts into secondary markets. Secondary
markets account for approximately $800 million in annual industry sales,
but to date have received limited or no coverage by the Company's direct
sales force or dealers. Management believes expanded selling efforts
will present an opportunity to increase total revenues and market share.
In the first half of 1997, the Company added eight newly-hired sales
force
33
<PAGE>
professionals in eight initial target secondary markets, including
Baltimore, Maryland; Columbus, Ohio; and Marin County, California.
. EXPAND THE RANGE AND QUANTITY OF PRODUCTS OFFERED THROUGH THE EXISTING
DEALER NETWORK. The Company intends to leverage its dealers' estimated
1,000-person sales force to capture a larger share of the business with
medium to smaller-size companies and independent business purchasers. In
order to stimulate sales in this segment, the Company has introduced
marketing programs such as QuickShip and PrimeTime! which make it easier
and more profitable for its dealers to market the Company's products. In
the six months ended June 30, 1997, as compared with the comparable
period in 1996, sales through the QuickShip and PrimeTime! programs
increased 27%. Additionally, the Company is developing new products,
including the Dividends systems line, designed and targeted for sale
through the dealer distribution channel.
. CONTINUE TO USE SPECIALTY BUSINESSES TO ENHANCE REPUTATION AND DRIVE
INCREMENTAL GROWTH. The Company intends to expand its KnollStudio line,
which includes specially commissioned pieces by major architects and
designers. By relaunching KnollStudio classic products and introducing
new products, the Company expects to generate significant publicity and
goodwill in the design community and the media. The Company has engaged
internationally-known designer Maya Lin to develop a signature
collection of products for the KnollStudio line targeted for
introduction in the second half of 1998, in conjunction with the
celebration of the Company's 60th anniversary. Among Maya Lin's body of
work is her design of the National Vietnam Veterans Memorial in
Washington D.C. Further, Knoll's textile, leather and accessories lines
offer the opportunity to achieve incremental growth and attractive
margins both when sold as part of Knoll offerings and when sold in
conjunction with products of other manufacturers.
. IMPROVE INFORMATION SYSTEMS TO MAXIMIZE MANUFACTURING EFFICIENCY. The
Company is implementing integrated, comprehensive management information
systems for its operations. Management believes that new information
systems will enable it to enhance its order response time and accuracy,
improve manufacturing processes, reduce delivery times, improve shipping
accuracy and reduce fixed costs.
COMPETITIVE STRENGTHS
Knoll's business philosophy is to pursue growth and profitability by
maintaining and enhancing the Knoll brand image and reputation for quality and
by working closely with its customers. The Company's growth strategy is
designed to leverage its competitive strengths, which include:
TRADITION OF SUPERIOR DESIGN. The Company's greatest business strength lies
in the history and depth of its commitment to create furniture of enduring
design value which is known for innovative performance. This design
heritage has enabled the Company to build over time strong relationships
with some of the world's preeminent designers. The Company's collection of
classic and current designs includes works by such internationally
recognized architects and designers as Ludwig Mies van der Rohe, Marcel
Breuer, Eero Saarinen, Harry Bertoia, Massimo Vignelli and Frank Gehry.
Today, the Company continues to engage prominent outside architects and
designers to create new products and product enhancements. By combining
their creative vision with the Company's commitment to developing products
which address changing business needs, the Company seeks to launch new
offerings which achieve recognition in the marketplace and generate strong
demand among corporate customers.
REPUTATION FOR PRODUCT QUALITY. Knoll's quality serves as an important
marketing tool with design professionals and with new and existing
customers. The Company believes its manufacturing employees take pride in
the Company's heritage and the quality of their execution of the Company's
designs. Knoll's products are constructed of high quality materials, and
Knoll believes its products are differentiated from many of its competitors
in workmanship and attention to detail. The Company believes this results
in products with superior aesthetics and durability.
PREMIER BRAND IDENTITY IN OFFICE SYSTEMS, FURNITURE AND SPECIALTY
PRODUCTS. Knoll's high-end image is an important factor in its customers'
initial selection and purchasing decision and provides credibility and
34
<PAGE>
confidence as businesses seek to upgrade and enhance their installed
systems and purchase other business furnishings. The Company believes its
brand identity reflects its strong brand heritage, its commitment to
quality, its strong links with the architect and design community and the
customized design solutions it offers its corporate clients. The Company
believes that this has made it a leader in the middle and high-end office
systems market, in the premium office furniture market and in its specialty
businesses, including textiles, leathers and accessories.
STRONG DIRECT SELLING ORGANIZATION AND DEALER NETWORK. The Company believes
that its direct sales force provides a strategic advantage relative to many
of its competitors. The direct sales force, in conjunction with the
Company's independent dealer network, has close relationships with
architects, designers and corporate facility managers, who have a
significant influence on product selection on large orders. The Company's
tradition of working closely with companies to design spaces that elevate
the appearance and productivity of the workplace dates back to the
Company's co-founder, Florence Knoll, and her work with major American
corporations in the 1950's.
LEAN ORGANIZATION FOCUSED ON COSTS. In 1994, Knoll's new management
instituted a series of initiatives designed to increase profitability.
Certain lower margin lines and products were discontinued, administrative
functions were centralized and manufacturing processes were significantly
rationalized and reorganized. Management also implemented an incentive
program under which the sales force and managers receive significant
performance bonuses if sales and profitability goals are achieved. As a
result of the turnaround efforts initiated by current management in 1994,
the Company has developed an organization focused on expense control and
operating efficiency.
While the Company believes it possesses these competitive strengths, several
of the Company's competitors have larger market shares than the Company and
have consistently received higher rankings than the Company in certain
categories of subjective industry studies. For a description of competitive
factors within the U.S. office furniture market and the Company's competitive
position, see "--Competition."
PREVIOUSLY IMPLEMENTED TURNAROUND PROGRAM
The Company has created a platform to execute its growth strategy through
the successful completion of its turnaround program. As part of the
restructuring efforts initiated by current management in 1994, the Company
evaluated all major business activities and significantly reduced operating
costs. Since then, (i) virtually every product line has been modified and
improved; (ii) 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; (iii) average lead times
between order entry and delivery of products to customers have been reduced
from seven weeks to five weeks; and (iv) on-time shipments, a measure of
customer service, have improved to the current 95% level from approximately
91% in 1993. The turnaround program initiatives also included:
. Significantly reduced operating costs. Management evaluated all major
business activities and subsequently centralized administrative
functions eliminating duplicative overhead, simplified and automated
certain manufacturing processes, sold and consolidated certain
manufacturing facilities and consolidated purchasing activities. In
1995, the Company eliminated approximately $25.0 million in variable
operating costs and approximately $45.0 million in fixed operating costs
and general expenses.
. Instituted product line management. The Company enhanced its marketing
department by hiring and training professional managers who evaluated
each product for its profitability and market potential.
. 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
growth.
. 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.
35
<PAGE>
. Realigned management incentives. Management realigned incentive programs
to reward plant and product line managers and department heads with
substantial cash bonuses when specific cost and gross margin targets are
attained.
. Restructured the European business. Management hired a managing director
for Europe and 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.
As a result of management's restructuring efforts, Knoll experienced strong
growth in sales, gross margins and operating margins from 1994 through the
first half of 1997. Sales increased from $562.9 million in 1994 to $651.8
million in 1996, despite the discontinuance of several product lines. Sales
for the six months ended June 30, 1997 increased $85.6 million, or 28.1%, to
$390.4 million, from $304.8 million for the comparable period in 1996 on a pro
forma basis. Gross margins were 35.6% on a pro forma basis in 1996 and 27.1%
in 1994. Gross margins for the six months ended June 30, 1997 were 39.5% as
compared with 33.9% for the comparable period in 1996 on a pro forma basis.
Operating income increased to $63.5 million for the six months ended June 30,
1997, from $34.1 million for the six months ended June 30, 1996, on a pro
forma basis. Operating margins were 16.3% for the six months ended June 30,
1997 compared with 11.2% for the comparable period of 1996 on a pro forma
basis, which the Company believes are among the highest of its major
competitors. The Company's improved financial and operating results allowed it
in 1996 to prepay $72.0 million under its credit facilities and refinance such
facilities on more favorable terms. In addition, in 1997 the Company repaid
$57.8 million of the Company's 10.875% Senior Subordinated Notes with a
portion of the proceeds from the Initial Public Offering and repaid $38.2
million of bank debt during the six months ended June 30, 1997 from operating
cash flow.
In February 1996, a majority-owned subsidiary of Warburg acquired from
Westinghouse all of the capital stock of The Knoll Group, Inc., which was the
holding company that owned, directly or indirectly, the capital stock of each
of the companies that comprised the Knoll businesses. Since the Acquisition,
the Company has enjoyed strong growth, building on the success of the
turnaround program initiated by Messrs. Staniar and Lynch.
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 sold under the KnollTextiles brand, lines of leather
products sold under the Spinneybeck name and a line of desk, office and
computer accessories under the KnollExtra brand that complement its furniture
products and are also sold to other manufacturers or with products
manufactured by others.
With the Company's strength in office systems, which typically represent the
largest part of a customer's furniture purchase, the Company believes it has a
significant opportunity to increase its share in seating, storage, desks and
tables by leveraging its direct sales force and independent dealers to create
incremental sales with new and existing customers.
Since 1994, nearly every product line, including each office system, has
been put under the individual management of an experienced product line
manager who carefully considers its market, competitive and strategic
positioning, marketing plan, costs, pricing, gross margin and gross profit
objective. A significant portion of the compensation of each product line
manager is based on achievement of product line-specific revenue and gross
profit targets. The Company's product line managers have 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 needs
and reduce manufacturing costs. The broad responsibility awarded to each
manager and the incentive-weighted compensation structure create a strong
sense of ownership of each product line.
36
<PAGE>
The following is a description of the Company's major product categories and
lines:
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 teamwork
settings, private offices and open floor plans and are comprised 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 category, typically
provides attractive gross margins and often leads to repeat and add-on sales
of additional systems, complementary furniture and furniture accessories. The
Company believes its focus on market research, brand identity, high-quality
design and complementary product offerings give it a competitive advantage in
launching new products.
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 data and communications technology. Desk-height wire management
enhancements support 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 among the
broadest ranges 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.
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.
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 customer.
New Systems Lines -- Currents and Dividends
The Company is developing two new office systems product lines that address
new category segments and price points where the Company's previous product
offerings may have been limited and where management believes that demand for
quality products has been under-served. In June 1997, the Company previewed
the two
37
<PAGE>
lines, Currents and Dividends, to the Company's dealers and customers as well
as the architect and design community. The Company currently intends to launch
sales of both lines in the first half of 1998. With the introduction of these
two new systems offerings, the Company will have products to serve the needs
of all five of the key systems market segments: Image (Reff), Performance
(Morrison), Efficiency (Equity), Teamwork/Technology (Currents) and Simplicity
(Dividends).
Currents. Currents has been designed to complement the latest technology in
the workplace with an emphasis on team-based workflow. Currents combines
advanced spine-based walls with freestanding components for flexibility and
mobility. Currents desks, credenzas, storage products and screens are simple
independent elements designed for mobility. Currents walls provide accessible
lay-in cable and power distribution and support multiple workplace
configurations with continuous non-modular attachment of screens, overhead
storage, worksurfaces and panels. The line has been designed to integrate
easily with other Knoll systems for add-on sales. Currents was designed by
Robert Reuter and Charles Rozier, independent New York based designers who
were part of the original Morrison design team.
Dividends. Dividends is an entry-level system at a lower average price point
than existing Knoll systems lines. It provides easily accessible wire
management for customers seeking a simple, easy to specify and affordable
workplace solution. To support its dealers' sales efforts, the Company is
introducing Dividends with an easy to use 3-D computer-based specification
system that will allow dealer sales representatives to work with clients to
facilitate the design of a complete office workstation. The Company expects
Dividends to be popular with customers focused on design and functionality who
are also seeking a high degree of price value.
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 Company believes that the office seating market
includes three major segments: 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 1996 were
approximately $836 million, $632 million and $572 million, respectively.
The Company competes in the appearance segment with its Bulldog and Sapper
chairs. The Company's Bulldog chair, which is offered in eight separate models
that target every level of large corporations, 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
targeted for use in executive offices and conference rooms. In 1995, the
Company 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 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 more 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
38
<PAGE>
same distribution channels as are office systems sales. The Company will seek
to leverage its presence in the office systems product category to increase
sales in its other product categories, such as seating.
The Company has conducted extensive research to improve its offerings in the
seating product category. Based on this research, the Company is developing a
new state-of-the-art seating product as well as enhancing its existing seating
lines with new ergonomic options that improve comfort and performance.
Storage Solutions and Filing Cabinets
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 filing, storage
and desk products that integrate into and support the Company's Morrison and
Equity systems 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 category 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 offering sufficient flexibility to allow end users to reconfigure a
meeting room quickly and easily to accommodate their specific needs.
KnollStudio
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
for prestigious corporate and residential interiors. This product line
includes complete collections by individual designers as well as distinctive
single items.
Complementary Products
The Company offers product lines that complement its primary office systems
and seating business, permitting it to sell a complete package of office
interiors and generate high gross margins by supplying many of its own
component products. Such products help maintain the Company's unique design
image by incorporating elements developed by its own team of designers.
KnollExtra. 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 bookends. In addition,
KnollExtra offers a number of computer accessories and ergonomic office
products. Besides serving as an
39
<PAGE>
attractive supplement to the Company's other product lines in sales to its
furniture customers, these products are also sold to customers for use in
connection with other manufacturers' products.
KnollTextiles. 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 1996, approximately 43% of the KnollTextiles coverings
were applied to Knoll furniture and 57% were sold to customers for use on
other manufacturers' products, thereby allowing the Company to benefit from
its competitors' sales.
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 to third parties in the "customer's own
material" segment of the contract furniture market.
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. The Company also sells its products
designed and manufactured in North America to the international operations of
its core North American customers.
PRODUCT DESIGN AND DEVELOPMENT
Knoll's design philosophy is linked to its commitment to working with the
world's preeminent designers to develop products that delight and inspire. The
Company's collection of classic and current designs includes works by a number
of internationally recognized architects and designers. Today, the Company
continues to engage prominent outside architects and designers to create new
products and product enhancements.
Since 1994, under the leadership of Carl G. Magnusson, the Company's Senior
Vice President-Design, the Company has 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
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, since 1994
the Company has redesigned or enhanced virtually every product line in order
to better meet customer preferences. Examples of recent product introductions
and enhancements include:
. An adjustable lumbar support for the Sapper chair.
. Freestanding desks in the Equity system.
. Propeller meeting and conference tables which provide for easy storage
and transportability and have extensive wire management capabilities.
. Morrison Access wire management capabilities.
. A belt-way panel and new edge detail for the Reff system, which offer
easier access to wire and data management and improved design options,
respectively.
40
<PAGE>
. Upgrades to all systems products to accommodate high-speed data
transmission cable requirements.
. Calibre desks and pedestals, which provide lower priced desk and storage
options.
. New Interaction table models.
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. Approximately
10% of the Company's U.S. sales in 1996 involved custom product solutions, the
majority of these consisting of modifications to the Company's standard
product offerings.
SALES, MARKETING AND DISTRIBUTION
The Company believes that its direct sales force provides a strategic
advantage relative to many of its competitors. The Company employs
approximately 310 direct sales representatives, who work closely with its
approximately 210 independent dealers in North America to present the
Company's products to prospective customers. The sales force, in conjunction
with the dealer network, has close relationships with architects, designers
and corporate facility managers, who often have a significant influence on
product selection on large orders.
The Company believes that its sales representatives are particularly
effective and productive due to realigned incentives and more focused
management. The commission based incentive system importantly rewards both
order growth and profitability of the sale. The sales representatives employ
personalized sales techniques to maintain close contact with the Company's
current customers and develop new customers. The Company's sales force
receives extensive training including annual seminars focused on the Company's
products. The Company's sales representatives are supplemented by the
estimated 1,000-member sales force employed by the Company's dealers who make
separate sales calls, primarily on small to mid-sized business purchasers. A
component of the Company's growth strategy is to leverage its dealers' sales
force in order to capture a larger share of business with medium to smaller-
sized companies and independent business purchasers.
In addition to coordinating sales efforts with the Company's sales
representatives, the Company's dealers generally handle project management,
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 acts as a dealer 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 1996 North American sales. No
customer represents more than 10% of the Company's 1996 North American sales.
However, a number of U.S. government agencies purchase the Company's products
through multiple contracts with the General Services Administration ("GSA").
Sales to the GSA aggregated approximately 10% in 1996.
The Company estimates that it has sold in excess of $4 billion in office
furniture systems since 1980 resulting in an installed base which management
believes generates significant 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 will increase. These customers tend to purchase the Company's
products rather than switch manufacturers, as switching sacrifices
compatibility, wastes inventory and makes reconfiguration more complex.
Knoll's customers are typically Fortune 1000 companies. 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 for sale through
41
<PAGE>
dealer channels. 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 $27.9 million
in 1996, and sales via the PrimeTime! program increased from $6.7 million in
1993 to $15.8 million in 1996. In the six month period ended June 30, 1997,
versus the comparable period in 1996, sales through the QuickShip and
PrimeTime! programs increased by 27%. Since the Company's sales force is not
required to generate such sales and since the Company grants lower discounts
to individual purchasers, such sales generate gross margins higher than the
Company's average gross margins from 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,
though each major European market has its own distinct characteristics. In the
Latin American and Asia-Pacific markets, the Company uses both dealers and
independent licensees.
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.
"Just-in-time" inventory practices have been 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 of these and other order
processing and customer service improvements, the Company's average lead times
have been reduced to five weeks from seven weeks before the restructuring, and
the Company currently delivers approximately 95% of its orders on time in
North America.
RAW MATERIALS AND SUPPLIERS
Based on management's 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" inventory practices. 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. The Company does not rely on any sole source suppliers for any of
its raw materials (other than certain electrical products).
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. The Company focuses its efforts on the high and middle
segments of the market, where product design, quality and durability are
placed at a premium. In the United States, where the Company had a 5.8%
overall market share (based on all segments, including the budget segment) and
derived approximately 86% of its sales in 1996, four larger
42
<PAGE>
competitors in terms of market share and the Company represent approximately
60% of the market. In certain product categories, the Company has a larger
market share. For example, the Company's U.S. market share of seating and
tables was 2.1% and 1.8%, respectively, in 1996 and 2.3% and 2.2%,
respectively, for the first half of 1997, while its office systems market
share was 11.2% in 1996 and 11.4% for the first half of 1997.
Many of the Company's competitors, especially those in North America, are
large and have significantly greater financial, marketing, manufacturing and
technical resources than those of the Company. The Company's most significant
competitors in its primary markets are Steelcase, Herman Miller, Haworth and
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. 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 "Risk
Factors--Competition."
The European market accounted for approximately 8% and 6% of the Company's
sales in the year ended December 31, 1996, and the six month period ended June
30, 1997, respectively. This market is highly fragmented, as the combined
sales of the estimated top 20 manufacturers, based on 1995 data, represent
less than 40% of the market. The Company believes that no single company holds
more than a 5% share of the European market.
PATENTS AND TRADEMARKS
The Company has approximately 100 active United States utility patents on
various components used in its products and systems and approximately 120
active United States design patents. The Company also has approximately 175
patents in various foreign countries. Knoll(R), The Knoll Group(R),
KnollStudio(R), KnollExtra(R), Reff(TM), Bulldog(R), Calibre(R), Equity(R),
Parachute(R), Good Design Is Good Business(R), Propeller(R) and SoHo(TM) are
trademarks and service marks 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 based upon existing facts known to
management. 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 in 1990, been accomplished without having a material
adverse effect on the operations of the Company. There can be no assurance
that such regulations will not change in the future or that the Company will
not incur material costs as a result of such regulations. 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 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 CERCLA liabilities known as of the date of
the Acquisition.
43
<PAGE>
EMPLOYEES
Management believes that relations with its employees are good. As of
September 19, 1997, the Company employed a total of 3,797 people, including
2,438 hourly and 1,359 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. While management believes that relations with this union are
positive, management cannot assure that it will be successful in reaching a
new contract. Certain workers in the Company's facilities in Italy are
represented by unions. The Company has experienced brief work stoppages from
time to time at the Company's plants in Italy, certain of which were related
to national or local issues. Such work stoppages have not materially affected
the Company.
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, which produce the Reff product line, consist of one approximately
375,000 square foot owned building and two leased properties aggregating
approximately 230,000 square feet.
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 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, based on information presently known, is likely to have a
material adverse effect on the Company.
The Company, for a number of years, has sold various products to the United
States Government under GSA multiple award schedule contracts. The GSA is
permitted to audit the Company's compliance with the terms of the GSA
contracts. As a result of one such audit, the GSA has asserted refund claims
under 1985-88 and 1987-90 contracts between GSA and The Shaw-Walker Company,
which has been merged into the Company, for approximately $2.15 million
("Shaw-Walker GSA Claims") and has other contracts under audit review. GSA has
referred both of these Shaw-Walker contracts to the Justice Department for
consideration of potential civil False Claims Act cases. Under the civil False
Claims Act, the Company is potentially liable for
44
<PAGE>
treble damages plus penalties of up to $10,000 for each "false" invoice
submitted to the Government. The former shareholders of The Shaw-Walker
Company have agreed to indemnify the Company for the Shaw-Walker GSA Claims.
Based upon information presently known, management disputes the audit results
and does not expect resolution of the Shaw-Walker GSA Claims to have a
material adverse effect on the Company's consolidated financial statements.
Management does not have information which would indicate a substantive basis
for a civil False Claims Act case under the contracts.
45
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Set forth below are the names, ages and positions of the directors and
executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Burton B. Staniar..... 55 Chairman of the Board
John H. Lynch......... 44 President, Chief Executive Officer and Director
Wolfgang Billstein.... 48 Managing Director--Knoll Europe
Kathleen G. Bradley... 48 Senior Vice President--Sales, Distribution and Customer Service
Andrew B. Cogan....... 35 Senior Vice President--Marketing and Product Development and Director
Carl G. Magnusson..... 57 Senior Vice President--Design
Douglas J. Purdom..... 38 Senior Vice President and Chief Financial Officer
Barbara E. Ellixson... 44 Vice President--Human Resources
Barry L. McCabe....... 50 Vice President, Controller and Treasurer
Patrick A. Milberger.. 40 Vice President, General Counsel and Secretary
John W. Amerman....... 65 Director
Robert J. Dolan....... 49 Director
Jeffrey A. Harris..... 41 Director
Sidney Lapidus........ 59 Director
Kewsong Lee........... 32 Director
John L. Vogelstein.... 62 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. Mr. Staniar served as Chief Executive Officer of the Company
from December 1993 to January 1997. 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.
John H. Lynch joined the Company as Vice Chairman of the Board in May 1994
to help initiate and lead the turnaround at Knoll. Mr. Lynch was subsequently
elected President of the Company and in January 1997 was elected Chief
Executive Officer. From 1990 to 1994, prior to joining the Company, Mr. Lynch
was a partner in BGI, a management firm. During that time, Mr. Lynch led the
restructuring of the Westinghouse Broadcasting television and radio stations.
From 1988 to 1990, Mr. Lynch was an associate dean at the Harvard Business
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. In
addition, since 1991, Mr. Billstein has been owner and Managing Director of
Peill & Putzler, a German-based manufacturer and distributor of glass
products. A German citizen, Mr. Billstein previously worked in Europe for The
Procter & Gamble Company and Benckiser GmbH, a consumer products company.
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.
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.
46
<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.
Douglas J. Purdom joined the Company as Senior Vice President and Chief
Financial Officer in August 1996. Prior to that time, Mr. Purdom served as
Vice President and Chief Financial Officer of Magma Copper Company, an
Arizona-based copper mining company, since 1992, and as Corporate Controller
of that company from 1989 to 1991.
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.
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.
Patrick A. Milberger joined the Company as Vice President and General
Counsel in April 1994. Prior to joining the Company, Mr. Milberger served as
an Assistant General Counsel and in a number of other positions in the
Westinghouse Law Department, which he joined in 1986. Prior to such time, Mr.
Milberger was in private practice at Buchanan Ingersoll, P.C.
John W. Amerman has been a director of the Company since May 1997. Mr.
Amerman is Chairman of the Board, and until January 1997 had served as Chief
Executive Officer, of Mattel, Inc., positions in which he served for ten
years. Mr. Amerman is also a director of Unocal, Inc. and Vanstar Corporation.
Robert J. Dolan has been a director of the Company since May 1997. Mr. Dolan
has been a Professor of Business Administration at Harvard University Graduate
School of Business Administration since 1980. From 1976 to 1980, Mr. Dolan was
a Professor of Business Administration at University of Chicago Graduate
School of Business.
Jeffrey A. Harris, a director of the Company since February 1996, has been a
General Partner of Warburg, Pincus & Co., a private investment firm ("Warburg,
Pincus"), and a Member and Managing Director of E.M. Warburg, Pincus & Co.,
LLC ("E.M. Warburg") and its predecessors since 1988, where he has been
employed since 1983. Mr. Harris is a director of Newfield Exploration Company,
Comcast UK Cable Partners Limited, Industri-Matematik International Corp.,
ECsoft Group plc and several privately held companies.
Sidney Lapidus, a director of the Company since February 1996, has been a
General Partner of Warburg, Pincus and a Member and Managing Director of E.M.
Warburg and its predecessors since January 1982, where he has been employed
since 1967. Mr. Lapidus is currently a director of Pacific Greystone
Corporation, Caribiner International, Inc., Grubb and Ellis Company, Journal
Register Company and Panavision Inc., as well as several privately held
companies.
Kewsong Lee, a director of the Company since February 1996, has been a
General Partner of Warburg, Pincus and a Member and Managing Director of E.M.
Warburg and its predecessors since January 1997. From January 1995 to January
1997, Mr. Lee was Vice President of Warburg, Pincus Ventures, Inc. From 1992
to 1995, Mr. Lee was an associate at E.M. Warburg 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 several privately held companies.
John L. Vogelstein, a director of the Company since February 1996, is a
General Partner of Warburg, Pincus, and has served since 1982 as Vice
Chairman, and since 1994 as President, of E. M. Warburg and its predecessors,
where he has been employed since 1967. Mr. Vogelstein is currently a director
of ADVO Inc.,
47
<PAGE>
Aegis Group plc., Golden Books Family Entertainment, Inc., Journal Register
Company, LCI International, Inc., Mattel, Inc., Value Health, Inc., Vanstar
Corporation and several privately held companies.
The employment agreements of Messrs. Staniar and Lynch provide that the
Company will nominate them to the board of directors during the term of their
employment pursuant to their employment agreements. In addition, the Company's
Stockholders Agreement, dated February 29, 1996, entitles Warburg to designate
between one and four directors depending on its percentage ownership of the
Company's outstanding shares of Common Stock or preferred stock. Following the
Offerings, Warburg will own more than 50% of the Common Stock of the Company
and will therefore be entitled pursuant to the Stockholders Agreement to
nominate four members of the board of directors. Messrs. Harris, Lapidus, Lee
and Vogelstein serve as Warburg's designees to the board of directors.
AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
The Company's Audit Committee has general responsibility for supervision of
financial controls, as well as for accounting and audit activities of the
Company. It is the responsibility of the Audit Committee to annually review
the qualifications of the Company's independent certified public accountants,
make recommendations to the board of directors as to their selection and
review the planning, fees and results of their audit. Additionally, the Audit
Committee meets periodically with the employees of the Company responsible for
financial and accounting matters to review the Company's internal procedures
and controls, monitors the business practices of the Company, and reports
regularly to the full Board on its activities. The Audit Committee presently
consists of Messrs. Amerman and Dolan. None of the members of the Audit
Committee are directly involved in the supervision of the financial affairs of
the Company.
COMPENSATION COMMITTEE; STOCK OPTION COMMITTEE
The Company has a Compensation Committee comprised of Messrs. Amerman,
Harris and Lapidus. The Compensation Committee has the authority to approve
the annual salary, bonus and other benefits paid to the Company's senior
executives, review and approve the Company's compensation programs and
establish, review and approve policies for management perquisites. A Stock
Option Committee of the Board, which presently consists of Messrs. Amerman and
Dolan, has the authority to grant options and restricted stock under the
Company's existing stock incentive plans, and to review and approve new stock
incentive plans and similar programs, as necessary and appropriate.
48
<PAGE>
SUMMARY COMPENSATION TABLE
The following table sets forth, for the years ended December 31, 1996 and
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, 1996 (the "named executive officers").
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------- ----------------
NAME AND PRINCIPAL RESTRICTED STOCK ALL OTHER
POSITION YEAR SALARY($) BONUS($) AWARDS($)(1) COMPENSATION($)(2)
------------------ ---- ---------- --------- ---------------- ------------------
<S> <C> <C> <C> <C> <C>
Burton B. Staniar....... 1996 410,830 600,000 30,000 5,595
Chairman of the Board 1995 465,000 350,000 -- 4,500
John H. Lynch........... 1996 393,330 600,000 30,000 9,449
Vice Chairman of the 1995 360,000 360,000 -- 6,075
Board, President and
Chief Executive Officer
Andrew B. Cogan......... 1996 197,930 250,000 12,000 --
Senior Vice President-- 1995 187,620 187,000 -- --
Marketing and Product
Development
Kathleen G. Bradley..... 1996 197,050 250,000 6,000 4,328
Senior Vice President-- 1995 163,668 256,740 -- 4,755
Sales, Distribution and
Customer Service
Wolfgang Billstein...... 1996 396,000 572,836 -- --
Managing Director-- 1995 360,000 653,100 -- --
Knoll Europe
</TABLE>
- --------
(1) On February 29, 1996, Messrs. Staniar, Lynch and Cogan and Ms. Bradley
were granted 941,829, 941,829, 376,731 and 188,365 shares of restricted
stock, respectively. Holders of shares of restricted stock will not be
entitled to receive dividends until such shares vest and become
unrestricted. As of March 1, 1997, 40% of the grants of restricted stock
to each of Messrs. Staniar, Lynch and Cogan had vested and an additional
20% will vest on each of the next three anniversaries thereof. As to Ms.
Bradley, 20% of the grants of restricted stock vested on March 1, 1997 and
an additional 20% will vest on each of the next four anniversaries
thereof. The value of the shares listed above is based on the fair value
thereof on the date of grant, based on the price of the shares of Common
Stock sold in conjunction with the Acquisition.
(2) Amounts in this column represent the Company's matching contributions to
the Knoll, Inc. Retirement Savings Plan.
PENSION PLANS
Retirement benefits are provided to employees through two pension plans.
Prior to the purchase of the Company from Westinghouse, benefits were provided
under The Knoll Group Pension Plan which was retained by Westinghouse (the
"Westinghouse Pension Plan"). Effective March 1, 1996, the Company established
the Knoll, Inc. Pension Plan (the "Company Pension Plan"). The Westinghouse
Pension Plan 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 five 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); Lynch ($4,712); Bradley ($24,648); and Cogan ($16,500).
Mr. Billstein has never participated in the Westinghouse Pension Plan.
The terms of the Company Pension Plan are the same as those of the
Westinghouse Pension Plan. The estimated annual benefits payable upon normal
retirement under this plan for each of the named executive officers is as
follows: Staniar ($1,812); Lynch ($1,812); Bradley ($1,812); and Cogan
($1,812). Mr. Billstein never participated in the Company Pension Plan.
49
<PAGE>
Messrs. Staniar, Lynch and Cogan and Ms. Bradley also participated in the
Westinghouse Executive Pension Program (the "Westinghouse Excess Plan")
through the first two months of fiscal 1996, which provides for benefits not
payable by the Westinghouse 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 Westinghouse Pension Plan. The estimated
annual benefits payable under this plan upon normal retirement for each of the
named executive officers is as follows: Staniar ($263,000); Lynch ($13,972);
Bradley ($5,820); and Cogan ($14,089). Mr. Billstein has never participated in
the Westinghouse Excess Plan.
Remuneration covered by the Westinghouse Pension Plan, the Company Pension
Plan and the Westinghouse Excess Plan primarily includes salary and bonus, as
set forth in the Summary Compensation Table. Under the Westinghouse Pension
Plan, the Company Pension Plan and the Westinghouse Excess Plan, Messrs.
Staniar, Lynch and Cogan and Ms. Bradley have the following years of credited
service, as of December 31, 1996: 0.00/0.84/15.44, 1.75/0.84/1.75,
7.14/0.84/5.498 and 16.64/0.84/5.498 years, respectively.
DIRECTOR COMPENSATION
Upon consummation of the Initial Public Offering, directors who were not
employees or officers of the Company or Warburg received options to purchase
25,000 shares of Common Stock at an exercise price equal to the initial public
offering price. Twenty percent of these options vested upon grant. The options
will continue to vest in four installments on the next four anniversaries of
the grant date. Such non-employee directors are also paid a fee of $1,000 for
each board meeting attended and are reimbursed for certain expenses in
connection with attendance at board and committee meetings. Other than with
respect to reimbursement of expenses, directors who are employees or officers
of the Company or Warburg do not receive additional compensation for services
as a director.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Burton B. Staniar,
the Company's Chairman of the Board, John H. Lynch, the Company's Vice
Chairman, Chief Executive Officer and President, and Andrew B. Cogan, the
Company's Senior Vice President--Marketing and Product Development, for a term
expiring on March 1, 1998, 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 a target annual bonus of 100% of base salary based on the
attainment of goals and objectives 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 and non-
solicitation (during the term of the agreement and for one year thereafter)
and confidentiality provisions.
In addition, the Company has entered into a Consulting Agreement, dated as
of December 1, 1996, with Mr. Wolfgang Billstein. Pursuant to this agreement,
Mr. Billstein receives a monthly fee of 52,249 Deutsche Marks (approximately
$29,200 based on current exchange rates), and contingent incentives based on
the positive operating profit of Knoll Europe (subject to certain conditions)
and Knoll Europe's order volume. The agreement terminates on November 30, 1997
but is automatically renewed for two one-year periods unless either party
elects not to renew. Knoll has the right to terminate this agreement upon
three months notice and payment of 313,494 Deutsche Marks (approximately
$175,000 based on current exchange rates) plus a portion of Mr. Billstein's
incentive compensation.
50
<PAGE>
STOCK INCENTIVE PLANS
At the Acquisition closing, Knoll adopted its 1996 Stock Incentive Plan (the
"1996 Stock Plan") pursuant to which up to 4,709,126 shares of Common Stock
were reserved for issuance pursuant to grants of restricted shares or options
to purchase such shares to officers, key employees, directors and consultants
of Knoll and its subsidiaries selected for participation in the 1996 Stock
Plan. The Company has issued 4,144,030 restricted shares and options to
acquire 565,096 shares pursuant to the 1996 Stock Plan, representing all of
the shares currently available for issuance pursuant to the 1996 Stock Plan.
On February 14, 1997 Knoll adopted its 1997 Stock Incentive Plan (the "1997
Stock Plan," and together with the 1996 Stock Plan, the "Stock Plans"). The
1997 Stock Plan contains terms substantially similar to the 1996 Stock Plan,
except that pursuant to the 1997 Stock Plan (i) an aggregate of only 1,255,772
shares are reserved for issuance thereunder, (ii) discounted options may be
granted, (iii) options may be repriced and (iv) the Board of Directors has
greater flexibility to amend the 1997 Stock Plan. The Company has issued
options to acquire 772,062 shares pursuant to the 1997 Stock Plan. The Stock
Plans are intended as an incentive to encourage stock ownership by such
individuals in order to increase their proprietary interest in Knoll's success
and to encourage them to remain in the employ of Knoll or its subsidiaries, as
the case may be.
The Stock Plans provide for the grant of restricted shares ("Restricted
Stock"), non-qualified stock options ("NQSOs") and incentive stock options as
defined in Section 422 of the Code ("ISOs").
The Stock Plans are administered by a Committee of at least two directors,
appointed by the Board of Directors of Knoll (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 also
determines the eligible individuals who are to receive options and the terms
of each option grant, including (i) the option prices of shares subject to
options, (ii) the dates on which options become exercisable and (iii) the
expiration date of each option. The Committee has the power to accelerate the
exercisability of outstanding options and to reprice any option at any time.
The purchase price of the shares subject to options 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 1996 Stock
Plan or any ISO granted under the 1997 Stock Plan be less than the Fair Market
Value Per Share (as defined in the Stock Plans) on the date of grant.
Optionees and holders of Restricted Stock have no voting, dividend, or other
rights as stockholders prior to the lapse of all restrictions or the receipt
of unrestricted shares 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 shares having a value equal to the exercise price, through a
brokered exercise or by having shares withheld from the shares to be delivered
upon exercise. The number of shares covered by options will be appropriately
adjusted in the event of any stock split, merger, recapitalization or similar
corporate event. No adjustments were made upon conversion of the Company's
Series A Preferred Stock.
The Board of Directors of Knoll may at any time terminate either or both of
the Stock Plans or from time to time make such modifications or amendments to
the Stock Plans as it may deem advisable; provided that, with respect to the
1996 Stock Plan, the Board may not, without the approval of the Knoll
stockholders, (i) increase the maximum number of shares for which options may
be granted under the 1996 Stock Plan, (ii) expand the class of employees
eligible to participate therein, (iii) reduce the minimum purchase price at
which options may be granted under the 1996 Stock Plan, (iv) extend the
maximum term of options or (v) extend the term of the 1996 Stock Plan.
Options and Restricted Stock granted under the Stock Plans are evidenced by
written agreements between the recipient and Knoll. Subject to limitations set
forth in the Stock Plans, the terms of option and Restricted Stock agreements
are determined by the Committee, and need not be uniform among recipients.
51
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the year ended December 31, 1996, the compensation of Messrs.
Staniar, Lynch and Cogan was determined pursuant to employment agreements which
each of them has with the Company. See "--Employment Agreements." The incentive
portion of the compensation of each of Messrs. Staniar and Lynch was determined
by Messrs. Lapidus, Harris and Lee and confirmed by the entire Board of
Directors, including Messrs. Staniar and Lynch. For the year ended December 31,
1996, the incentive compensation of Mr. Cogan and the compensation for all other
executive officers was determined by Messrs. Staniar and Lynch. Except for
Messrs. Staniar, Lynch and Cogan, no member of the Board of Directors is or has
been an officer or employee of the Company. No executive officer of the Company
served on any board of directors or compensation committee of any entity (other
than the Company) with which any member of the Board of Directors is affiliated.
CERTAIN TRANSACTIONS
THE ACQUISITION
On February 29, 1996, pursuant to a Stock Purchase Agreement, the Company
acquired all of the outstanding capital stock of the companies that constitute
the Knoll business for an aggregate purchase price of $579,801,000. The
Company was formed by Warburg, NationsBanc and certain members of the
Company's management (collectively, the "Initial Investors") to consummate the
Acquisition. The Acquisition and related fees and expenses were financed
through a $260.0 million term loan, issuance of the Notes and a $160.4 million
equity contribution by the Initial Investors. Of the $160.4 million of Company
capital stock sold in connection with the Acquisition (plus shares sold on
October 21, 1996), certain members of the Company's management (including the
named executive officers) purchased $5.4 million, NationsBanc purchased $8.0
million and Warburg purchased $147.0 million. The equity consisted of
3,147,278 shares of Common Stock, sold for $100,250, and 1,602,998 shares of
Series A Preferred Stock, sold for $160.3 million.
STOCKHOLDERS AGREEMENT
In connection with the Acquisition, Warburg, NationsBanc and 12 senior
members of management (each a "Holder" and collectively, the "Holders") and
the Company entered into a Stockholders Agreement (the "Stockholders
Agreement"), dated as of February 29, 1996, which governs certain matters
related to corporate governance and registration of shares of Common Stock and
preferred stock ("Registrable Securities") held by such Holders (other than
shares acquired pursuant to the Stock Plans).
Pursuant to the Stockholders Agreement, Warburg is entitled to request on up
to two occasions that the Company file a registration statement under the
Securities Act covering the sale of at least $25 million of shares of Common
Stock, subject to certain conditions. If officers or directors of the Company
holding other securities of the Company request inclusion of their securities
in any such registration, or if holders of securities of the Company other
than Registrable Securities who are entitled, by contract with the Company or
otherwise, to have securities included in such a registration (the "Other
Stockholders"), request such inclusion, the Holders shall offer to include the
securities of such officers, directors and Other Stockholders in any
underwriting involved in such registration, provided, among other conditions,
that the underwriter representative of any such offering has the right,
subject to certain conditions, to limit the number of Registrable Securities
included in the registration. The Company may defer the registration for 120
days if it believes that it would be seriously detrimental to the Company for
such registration statement to be filed.
The Stockholders Agreement further provides that, if the Company proposes to
register any of its securities (other than registrations related solely to
employee benefit plans or pursuant to Rule 145 or on a form which does not
permit secondary sales or does not include substantially the same information
as would be required to be included in a registration statement covering the
sale of Registrable Securities), either for its own account or for the account
of other security holders, holders of Registrable Securities may require the
Company to include all or a portion of their Registrable Securities in the
registration and in any underwriting involved therein,
52
<PAGE>
provided, among other conditions, that the underwriter representative of any
such offering has the right, subject to certain conditions, to limit the number
of Registrable Securities included in the registration. In addition, after the
Company becomes qualified to use Form S-3, the holders of Registrable
Securities will have the right to request an unlimited number of registrations
on Form S-3 to register at least $5 million of such shares, subject to certain
conditions, provided that the Company will not be required to effect such a
registration within 180 days of the effective date of the most recent
registration pursuant to this provision.
In general, all fees, costs and expenses of such registrations (other than
underwriting discounts and selling commissions applicable to sales of the
Registrable Securities) and all fees and disbursements of counsel for the
Holders will be borne by the Company. The registration rights described above
apply to 1,691,397 shares of Common Stock held by the Holders upon completion
of the Offerings.
The Stockholders Agreement provides that the original Board of Directors of
the Company was to be composed of Messrs. Staniar, Lynch, Vogelstein, Lapidus,
Harris and Lee. Pursuant to the Stockholders Agreement, Warburg and the other
stockholders who are a party thereto (who will hold in the aggregate
approximately % of the outstanding shares of Common Stock of the Company
upon completion of the Offerings, or approximately % of the outstanding
shares of Common Stock if the Underwriters exercise their over-allotment
options in full) have agreed to vote their shares of Common Stock for four
directors nominated by Warburg if Warburg owns 50% or more of the Company's
outstanding shares of Common Stock and Series A Preferred Stock, three
directors if it owns 25% or more, two directors if it owns 15% or more and one
director if it owns 5% or more.
ISSUANCE OF RESTRICTED SHARES OF COMMON STOCK
In connection with the issuance of 4,144,030 restricted shares of Common
Stock pursuant to the Company's 1996 Stock Plan established in connection with
the Acquisition, Warburg and the Company also entered into separate
Stockholders Agreements with all of the Company's executive officers and other
members of the Company's management. Pursuant to these agreements, members of
management agreed not to transfer their shares except (i) to members of their
immediate families and other related or controlled entities, (ii) to Warburg or
an affiliate thereof or (iii) upon 30 days prior written notice to the Board of
Directors. The restrictions on transfer will terminate when Warburg owns less
than 10% of the outstanding shares of Common Stock. In addition, pursuant to
these agreements, the Company agreed that, if the Company determined to
register any shares of Common Stock for its own account or for the account of
security holders, the Company would include in such registration all of the
vested shares of Common Stock received by management pursuant to the 1996 Stock
Plan. In addition, after the Company qualifies for Form S-3, management may
request unlimited registrations of at least $5,000,000 of securities on Form S-
3, provided that the Company is not required to effect a registration pursuant
to this provision within 180 days of the effective date of the most recent
registration pursuant to this provision.
Pursuant to the 1996 Stock Plan, the Company also entered into Restricted
Share Agreements with each recipient of restricted shares of Common Stock,
including each of the Company's executive officers. Pursuant to these
agreements, Burton Staniar received 941,829 restricted shares, John Lynch
received 941,829 restricted shares, Andrew Cogan received 376,731 restricted
shares and Kathleen Bradley received 188,365 restricted shares. The agreements
were dated February 29, 1996 and the shares vested at a rate of 20% per year,
commencing on the date of grant (in the case of Messrs. Staniar, Lynch and
Cogan) or on the first anniversary of the date of grant. The agreements provide
that upon the voluntary termination of employment for reasons other than death,
disability or retirement at age 65, or if the grantee's employment was
terminated without cause, the nonvested restricted shares were to be
immediately forfeited to the Company. Upon termination with cause, the
agreements provide (i) in the case of Messrs. Staniar and Lynch, for the
immediate forfeiture of all restricted shares, regardless of whether vested
prior to termination, and (ii) that the Company may repurchase the shares of
Common Stock at $0.10 per share.
OTHER
During the year ended December 31, 1996, and the six month period ended June
30, 1997, the Company paid $137,337 and $67,938, respectively, to Emanuela
Frattini Magnusson for design services and product royalties, the bulk of which
was payable pursuant to the terms of a July 1993 Design Development Agreement
53
<PAGE>
between Emanuela Frattini and the Company pertaining to the Company's
Propeller product line. Emanuela Frattini Magnusson is the wife of Carl G.
Magnusson, the Company's Senior Vice President--Design.
In connection with the Initial Public Offering and pursuant to an agreement,
dated as of April 14, 1997, among the Company, Warburg, NationsBanc and
certain members of the Company's management, upon consummation of the Initial
Public Offering 800,000 shares of the Company's Series A 12% Participating
Convertible Preferred Stock were redeemed for $80.0 million and 11,749,361
shares of Common Stock, and the remaining 802,998 shares of Preferred Stock
were converted into 15,691,558 shares of Common Stock. Further pursuant to
such arrangement, (i) Warburg received $75.9 million and 25,024,481 shares of
Common Stock, (ii) NationsBanc received $4.1 million and 1,361,877 shares of
Common Stock, (iii) Messrs. Staniar, Lynch, Billstein, Cogan, Purdom, McCabe
and Milberger received 400,736, 400,736, 6,249, 78,116, 78,116, 9,374 and
18,748 shares of Common Stock, respectively, and (iv) Mmes. Bradley and
Ellixson received 12,499 and 9,374 shares of Common Stock, respectively.
54
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with regard to the
beneficial ownership of the Common Stock as of September 25, 1997 and as
adjusted to reflect the Offerings contemplated hereby, by (i) each person
known by the Company to own beneficially more than 5% of the outstanding
shares of Common Stock, (ii) each director and named executive officer of the
Company, (iii) other Selling Stockholders and (iv) all current directors and
executive officers of the Company as a group.
<TABLE>
<CAPTION>
TOTAL OWNERSHIP PRIOR BENEFICIAL OWNERSHIP PRIOR BENEFICIAL OWNERSHIP
TO THE TO THE AFTER THE
OFFERINGS(1) OFFERINGS(2)(3) OFFERINGS(2)(3)(4)
------------------------------------------------------- ------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES PERCENT SHARES PERCENT SHARES PERCENT
- ------------------------------------ ------------- --------------------------- ------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Warburg, Pincus
Ventures, L.P.(5)
466 Lexington Avenue
New York, NY 10017..... 27,908,832 64.6% 27,908,832 69.2% 22,908,832 56.8%
Burton B. Staniar....... 1,382,827 3.2 817,729 2.0
John H. Lynch........... 1,006,096 2.3 440,998 1.1
Wolfgang Billstein...... 6,877 * 6,877 * *
Kathleen G. Bradley..... 202,119 * 51,427 * *
Andrew B. Cogan......... 462,695 1.1 236,656 * *
Douglas J. Purdom....... 368,512 * 142,473 * *
John W. Amerman(6)...... 5,000 * 5,000 * 5,000 *
Robert J. Dolan(6)...... 5,000 * 5,000 * 5,000 *
Jeffrey A. Harris(7).... 27,908,832 64.6 27,908,832 69.2 22,908,832 56.8
Sidney Lapidus(7)....... 27,908,832 64.6 27,908,832 69.2 22,908,832 56.8
Kewsong Lee(7).......... 27,908,832 64.6 27,908,832 69.2 22,908,832 56.8
John L. Vogelstein(7)... 27,908,832 64.6 27,908,832 69.2 22,908,832 56.8
Other Selling Stockhold-
ers(8).................
All current directors
and executive officers
as a group (14
persons)............... 32,038,497 74.1 30,079,492 74.6
</TABLE>
- --------
* Less than 1%.
(1) Includes 2,863,156 shares which have been granted pursuant to the
Company's stock incentive plans, including shares which have not vested
and which do not vest within the 60 days following September 25, 1997, but
excludes options to purchase 1,327,158 shares which have been granted but
which have not yet vested.
(2) Percentages are calculated pursuant to Rule 13d-3 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Percentage
calculations assume, for each person and group, that all shares which may
be acquired by such person or group pursuant to options currently
exercisable or which become exercisable within 60 days following September
25, 1997 are outstanding for the purpose of computing the percentage of
Common Stock owned by such person or group. However, those unissued shares
of Common Stock described above are not deemed to be outstanding for
calculating the percentage of Common Stock owned by any other person.
Except as otherwise indicated, the persons in this table have sole voting
and investment power with respect to all shares of Common Stock shown as
beneficially owned by them, subject to community property laws where
applicable and subject to the information contained in the footnotes to
this table. The number of shares outstanding as of September 25, 1997
consists of 40,349,071 shares of Common Stock (excluding 2,863,156
restricted shares which have not yet vested).
(3) Excludes 565,098, 565,098, 0, 226,039, 226,039, 150,692 and 1,959,005
restricted shares of Common Stock for Messrs. Staniar, Lynch, Billstein,
Cogan and Purdom, Ms. Bradley and all current directors and executive
officers as a group, respectively, which have not yet vested, as well as
options to purchase 376,731 and 188,365 shares of Common Stock held by Mr.
Billstein and Ms. Bradley, respectively, which vest at a rate of 20% per
year beginning March 1998.
(Notes continued on next page)
55
<PAGE>
(4) Does not include 250,000 shares of Common Stock which may, if the
Underwriters exercise their over-allotment options in full, be sold by the
employees of the Company who propose to offer shares of Common Stock in
the Offering.
(5) The sole general partner of Warburg is Warburg, Pincus. E.M. Warburg
manages Warburg. The members of E.M. Warburg are substantially the same as
the partners of Warburg, Pincus. Lionel I. Pincus is the managing partner
of Warburg, Pincus and the managing member of E.M. Warburg and may be
deemed to control both Warburg, Pincus and E.M. Warburg. Warburg, Pincus
has a 15% interest in the profits of Warburg as the general partner.
Jeffrey A. Harris, Sidney Lapidus, Kewsong Lee and John L. Vogelstein,
directors of the Company, are Managing Directors and members of E.M.
Warburg and general partners of Warburg, Pincus. As such, Messrs. Harris,
Lapidus, Lee and Vogelstein may be deemed to have an indirect pecuniary
interest (within the meaning of Rule 16a-1 under the Exchange Act) in an
indeterminate portion of the shares beneficially owned by Warburg. See
Note 7 below. If the Underwriters exercise their over-allotment options in
full, Warburg will own 22,296,332 shares of Common Stock, or 55.3% of the
Common Stock outstanding.
(6) Upon consummation of the Initial Public Offering, the Company granted each
of Messrs. Amerman and Dolan options to purchase 25,000 shares of Common
Stock. Twenty percent of these options vested upon grant. The options will
continue to vest in four installments on the next four anniversaries of
the grant date.
(7) All of the shares indicated as owned by Messrs. Harris, Lapidus, Lee and
Vogelstein are owned directly by Warburg and are included because of the
affiliation of such persons with Warburg. Messrs. Harris, Lapidus, Lee and
Vogelstein disclaim "beneficial ownership" of these shares within the
meaning of Rule 13d-3 under the Exchange Act. See Note 5 above.
(8) Comprised of employees of the Company who, in the aggregate, own less
than 1% of the outstanding shares of Common Stock prior to the Offerings,
and who propose to offer an aggregate of shares of Common Stock in the
Offerings or, if the Underwriters exercise their over-allotment options in
full, an aggregate of shares of Common Stock.
56
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of (i) 100,000,000
shares of Common Stock, par value $.01 per share, of which 43,212,277 shares
were outstanding at September 25, 1997 (including 2,863,156 restricted shares
which have not yet vested) and (ii) 10,000,000 shares of preferred stock, par
value $1.00 per share ("Preferred Stock"), of which no shares are outstanding.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share in all matters to
be voted on by the stockholders of the Company and do not have cumulative
voting rights. Accordingly, holders of a majority of the outstanding shares of
Common Stock entitled to vote in any election of directors may elect all of
the directors standing for election. Subject to preferences that may be
applicable to any Preferred Stock outstanding at the time, holders of Common
Stock are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the Board of Directors out of funds legally
available therefor. In the event of a liquidation, dissolution or winding up
of the Company, holders of Common Stock are entitled to share ratably in all
assets remaining after payment of the Company's liabilities and the
liquidation preference, if any, of any outstanding Preferred Stock. Holders of
shares of Common Stock have no preemptive, subscription, redemption or
conversion rights. There are no redemption or sinking fund provisions
applicable to the Common Stock. All of the outstanding shares of Common Stock
are, and the shares offered by the Selling Stockholders in the Offerings will
be, when issued and paid for, fully paid and non-assessable. The rights,
preferences and privileges of holders of Common Stock are subject to, and may
be adversely affected by, the rights of the holders of shares of any series of
Preferred Stock which the Company may designate and issue in the future.
The Common Stock is listed on the New York Stock Exchange.
PREFERRED STOCK
The Board of Directors is authorized to issue Preferred Stock without
stockholder approval and upon such terms as the Board of Directors may
determine. The issuance of Preferred Stock could have the effect of making it
more difficult for a third party to acquire, or of discouraging a third party
from acquiring or making a proposal to acquire, a majority of the outstanding
stock of the Company. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of holders of
Preferred Stock that may be issued in the future. For example, the issuance of
Preferred Stock could result in a class of securities outstanding that would
have preferences over the Common Stock with respect to dividends and in
liquidation and that could (upon conversion or otherwise) enjoy all of the
rights appurtenant to Common Stock. The Company has no present plans to issue
any shares of Preferred Stock.
LIMITATIONS ON DIRECTORS' LIABILITY
The Company's Amended and Restated Certificate of Incorporation (the
"Certificate") and Amended and Restated By-laws (the "By-laws") limit the
liability of directors and officers to the maximum extent permitted by
Delaware law. Delaware law provides that directors of a corporation will not
be personally liable for monetary damages for breach of their fiduciary duties
as directors, including gross negligence, except liability for (i) breach of
the directors' and officers' duty of loyalty, (ii) acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
the law, (iii) the unlawful payment of a dividend or unlawful stock purchase
or redemption and (iv) any transaction from which the director or officer
derives an improper personal benefit. Delaware law does not permit a
corporation to eliminate a director's or an officer's duty of care, and this
provision of the Company's Certificate has no effect on the availability of
equitable remedies, such as injunction or rescission, based upon a director's
breach of the duty of care. The Company does not believe that these provisions
will limit liability under state or federal securities laws. However, the
Company believes that these provisions will assist the Company in attracting
and retaining qualified individuals to serve as directors.
57
<PAGE>
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("Section 203"). Under Section 203, certain "business
combinations" between a Delaware corporation whose stock generally is publicly
traded or held of record by more than 2,000 stockholders and an "interested
stockholder" are prohibited for a three-year period following the date that
such a stockholder became an interested stockholder, unless (i) the
corporation has elected in its original certificate of incorporation not to be
governed by Section 203 (the Company did not make such an election), (ii) the
business combination was approved by the Board of Directors of the corporation
before the other party to the business combination became an interested
stockholder, (iii) upon consummation of the transaction that made it an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the commencement of the
transaction (excluding voting stock owned by directors who are also officers
or held in employee benefit plans in which the employees do not have a
confidential right to tender or vote stock held by the plan) or (iv) the
business combination was approved by the Board of Directors of the corporation
and ratified by two-thirds of the voting stock which the interested
stockholder did not own. The three-year prohibition also does not apply to
certain business combinations proposed by an interested stockholder following
the announcement or notification of certain extraordinary transactions
involving the corporation and a person who had not been an interested
stockholder during the previous three years or who became an interested
stockholder with the approval of the majority of the corporation's directors.
The term "business combination" is defined generally to include mergers or
consolidations between a Delaware corporation and an "interested stockholder,"
transactions with an "interested stockholder" involving the assets or stock of
the corporation or its majority-owned subsidiaries and transactions which
increase an interested stockholder's percentage ownership of stock. The term
"interested stockholder" is defined generally as a stockholder who, together
with affiliates and associates, owns (or, within three years prior, did own)
15% or more of a Delaware corporation's voting stock. Section 203 could
prohibit or delay a merger, takeover or other change in control of the Company
and therefore could discourage attempts to acquire the Company.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar of the Common Stock is The Bank of New
York.
DESCRIPTION OF CERTAIN INDEBTEDNESS
DESCRIPTION OF THE REVOLVING CREDIT FACILITY
General. In August 1997, the Company entered into a credit agreement with
various lenders (the "Lenders") and NationsBank, N.A., as Administrative
Agent, permitting the Company to borrow an aggregate principal amount of up to
$275.0 million under a revolving credit facility (the "Revolving Credit
Facility"). The Revolving Credit Facility includes a $20.0 million sub-limit
for standby and commercial letters of credit, a $10.0 million swing line sub-
limit and a $140.0 million sub-limit for competitive bid loans. The Revolving
Credit Facility is unsecured and replaces the previous facility which
consisted of a $100.0 million term loan facility and a $130.0 million
revolving credit facility.
Interest. Indebtedness under the Revolving Credit Facility bears interest at
a floating rate based, at the Company's option, upon (i) the Eurodollar Rate
(as defined therein) plus an applicable percentage which is subject to change
based on the Company's ratio of funded debt to EBITDA or (ii) the greater of
the federal funds rate plus 0.5% or the prime rate.
Maturity. Loans made pursuant to the Revolving Credit Facility may be
borrowed, repaid and reborrowed from time to time until August 8, 2002,
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.
Certain Fees. The Company is also required to pay to the Banks a commitment
fee equal to 0.15% per annum on the committed undrawn amount of the Revolving
Credit Facility, subject to adjustment based upon the Company's ratio of
funded debt to EBITDA, and letter of credit fees equal to 0.4% per annum based
on the
58
<PAGE>
average daily maximum amount available to be drawn on letters of credit from
the date of issuance to the date of expiration, subject to adjustment under
similar circumstances.
Covenants. The Revolving Credit Facility requires the Company quarterly to
satisfy a Funded Debt to EBITDA Ratio, which test becomes increasingly
restrictive during the term of the Revolving Credit Facility. In addition, the
Revolving Credit Facility requires that the total assets owned by the Company
be at least 50% of the total assets owned by the Company and its subsidiaries
taken up in whole. The Revolving Credit Facility also contains covenants which
limit, subject to certain exceptions, (i) the incurrence of additional
indebtedness; (ii) sale/leaseback transactions other than those for personal
property in an amount of up to $30.0 million during the term of the Revolving
Credit Facility; (iii) declaration or payment of dividends and stock
repurchases, provided that the Company may pay dividends in an amount of
$50,000,000 plus 50% of the Net Income (as defined in the Revolving Credit
Facility) (excluding any extraordinary items) earned subsequent to March 31,
1997 plus 50% of any Equity Issuance (as defined therein) occurring subsequent
to August 8, 1997; (iv) loans to and investments in third parties; (v) changes
to the character of the business of the Company; (vi) most transactions with
affiliates other than on terms substantially as favorable as would be
obtainable in a comparable arm's length transaction; (vii) sales or leases of
assets; (viii) acquisitions; (ix) mergers and consolidations, provided that
any of the subsidiaries of the Company may be merged into one another or into
the Company; (x) prepayments of subordinated indebtedness; and (xi) liens and
encumbrances and other matters customarily restricted in such agreements.
Events of Default. The Revolving Credit Facility contains standard events of
default, including (i) defaults in the payment of principal or interest, (ii)
defaults in the observance of covenants contained in the Revolving Credit
Facility and related documentation, (iii) certain bankruptcy events with
respect to the Company and certain of its subsidiaries, (iv) cross defaults on
at least $5.0 million of other indebtedness of the Company or any of its
subsidiaries, (v) judgments, orders or decrees involving $5.0 million or more,
(vi) certain events related to ERISA, (vii) events which cause the
subordination provisions of certain subordinated debt to cease to be in full
force and effect, and (viii) a change of control of the Company. A change of
control is deemed to occur if, among other events, any person or group becomes
the beneficial owner of 35% or more of the voting power of the voting stock of
the Company on a fully-diluted basis and such person or group is the
beneficial owner of a greater percentage of the voting power of the voting
stock than the percentage beneficially owned by Warburg, NationsBanc and the
Company's senior management.
DESCRIPTION OF THE NOTES
General. The Company issued $165.0 million of 10.875% Senior Subordinated
Notes Due 2006 in connection with the Acquisition pursuant to an Indenture
among the Company, 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"). On July 15, 1996,
the Company consummated an offer to exchange such notes for the Notes
registered under the Securities Act. In May 1997, the Company redeemed $57.8
million aggregate principal amount of the Notes.
Principal, Maturity and Interest. The Notes are limited in aggregate
principal amount to $165.0 million and will mature on March 15, 2006. Interest
on the Notes accrues at 10.875% per annum and is payable semiannually in
arrears on March 15 and September 15 of each year. Interest is computed on the
basis of a 360-day year comprised of twelve 30-day months.
Note Guarantees. The Notes are unsecured senior subordinated general
obligations of the Company and are unconditionally guaranteed on a senior
subordinated and unsecured basis by each existing and future Domestic
Subsidiary of the Company (the existing and future Domestic Subsidiaries of
the Company are referred to collectively as the "Guarantors").
Subordination. The payment of principal of, premium, if any, and interest on
the Notes and the guarantees thereon are subordinated in right of payment, as
set forth in the Indenture, to the prior payment in full in cash of
59
<PAGE>
Senior Indebtedness of the Company, including borrowings under the Revolving
Credit Facility, whether outstanding on the date of the Indenture or
thereafter incurred.
Redemption. The Notes are not redeemable at the Company's option prior to
March 15, 2001. Thereafter, the Notes are 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 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>
2001......................................................... 105.438%
2002......................................................... 103.625%
2003......................................................... 101.812%
2004 and thereafter.......................................... 100.000%
</TABLE>
The Company is not required to make mandatory redemption or sinking fund
payments with respect to the Notes.
Repurchase at the Option of Holders. Each holder of Notes has the right to
require the Company to repurchase all or any part of such holder's Notes at an
offer price in cash equal to 101% of the aggregate principal amount thereof
plus accrued and unpaid interest thereon upon a change of control of the
Company. A change of control for this purpose means, among other things, (i) a
person or group has become the beneficial owner of 35% or more of the voting
power of the voting stock of the Company, or of such percentage of the voting
power than that owned by the Initial Stockholders (as defined in the
Indenture), or (ii) during any period of two consecutive calendar years,
individuals elected to the Board of Directors of the Company by the Initial
Stockholders cease to be a majority of the directors of the Company then in
office.
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, sell assets, 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 (including indebtedness incurred under the Revolving Credit
Facility and any other indebtedness permitted to be incurred under the
Indenture) and senior in right of payment to the Notes. The Indenture permits,
under certain circumstances, the Company's subsidiaries to be deemed
unrestricted subsidiaries and thus not subject to the restrictions of the
Indenture.
Events of Default. The Indenture contains standard events of default,
including (i) defaults in the payment of principal, premium or interest, (ii)
defaults in the compliance with covenants contained in the Indenture, (iii)
cross defaults on more than $10 million of other indebtedness, (iv) failure to
pay more than $10 million of judgments, and (v) certain events of bankruptcy
with respect to the Company and certain of its subsidiaries.
SHARES ELIGIBLE FOR FUTURE SALE
The Company can make no predictions as to the effect, if any, that sales of
shares or the availability of shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of significant amounts of
the Common Stock in the public market, or the perception that such sales may
occur, could adversely affect prevailing market prices. See "Risk Factors--
Shares Eligible for Future Sale; Potential for Adverse Effect on Stock Price;
Registration Rights."
As of September 25, 1997, the Company had 43,212,227 shares of Common Stock
outstanding (including 2,863,156 restricted shares of Common Stock which have
been granted but have not yet vested). Of the shares
60
<PAGE>
outstanding, 14,950,000 shares of Common Stock, including the 5,750,000 shares
to be sold in the Offerings, will be freely tradable without restriction under
the Securities Act, except for any such shares which may have been acquired by
an "affiliate" of the Company (an "Affiliate") as that term is defined in Rule
144 under the Securities Act, which shares will be subject to the resale
limitations of Rule 144.
An aggregate of approximately shares of Common Stock held by existing
stockholders upon completion of the Offerings will be "restricted securities"
(as that phrase is defined in Rule 144) and may not be resold in the absence
of registration under the Securities Act or pursuant to exemptions from such
registration, including among others, the exemption provided by Rule 144 under
the Securities Act. Upon expiration of the lock-up period described below,
approximately shares will be eligible for sale in the public market under
Rule 144, subject to the volume limitations and other restrictions described
below.
In general, under Rule 144, if a period of at least one year has elapsed
since the later of the date the "restricted securities" were acquired from the
Company and the date they were acquired from an Affiliate, then the holder of
such restricted securities (including an Affiliate) is entitled to sell a
number of shares within any three-month period that does not exceed the
greater of 1% of the then outstanding shares of the Common Stock
(approximately 432,000 shares immediately after the Offerings) or the average
weekly reported volume of trading of the Common Stock on the NYSE during the
four calendar weeks preceding such sale. The holder may only sell such shares
through unsolicited brokers' transactions. Sales under Rule 144 are also
subject to certain requirements pertaining to the manner of such sales,
notices of such sales and the availability of current public information
concerning the Company. Affiliates may sell shares not constituting restricted
shares in accordance with the foregoing volume limitations and other
requirements but without regard to the one year holding period. Under Rule
144(k), if a period of at least two years has elapsed between the later of the
date restricted securities were acquired from the Company and the date they
were acquired from an Affiliate, as applicable, a holder of such restricted
securities who is not an Affiliate at the time of the sale and has not been an
Affiliate for at least three months prior to the sale would be entitled to
sell the shares immediately without regard to the volume limitations and other
conditions described above.
Subject to the lock-up agreements described below, any employee of the
Company who purchased his or her shares of Common Stock pursuant to a written
compensation plan or contract may be entitled to rely on the resale provisions
of Rule 701 under the Securities Act, which permits nonaffiliates to sell
their Rule 701 shares without having to comply with the current public
information, holding period, volume limitation or notice provision of Rule 144
and permits affiliates to sell their Rule 701 shares without having to comply
with Rule 144's holding period restrictions.
The Company has filed a registration statement on Form S-8 under the
Securities Act to register approximately 2,055,772 shares of Common Stock
reserved for issuance (including shares subject to previously granted options)
or sale under the 1997 Stock Plan, the Company's Retirement Savings Plan and
the Company's employee stock purchase plan (which permits the purchase of
shares at a discount to the market price). The shares registered thereunder
are eligible for sale in the public market, subject to vesting and, in certain
cases, subject to the lock-up agreements described below. At the date of this
Prospectus, options to purchase an aggregate of 1,337,158 shares of Common
Stock are outstanding under the Stock Plans, of which options to purchase
10,000 shares of Common Stock are currently vested and exercisable.
Notwithstanding the foregoing, in connection with the Offerings, the
Company, its executive officers and directors and the Selling Stockholders
have agreed, subject to certain exceptions, not to directly or indirectly (i)
offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant for the sale of or otherwise dispose of or transfer any shares of
Common Stock or securities convertible into or exchangeable or exercisable for
Common Stock, whether now owned or thereafter acquired by the person executing
the agreement or with respect to which the person executing the agreement
thereafter acquires the power of disposition, or file a registration statement
under the Securities Act with respect to the foregoing or (ii) enter into any
swap or other agreement that transfers, in whole or in part, the economic
consequence of ownership of the Common Stock whether any such swap or
transaction is to be settled
61
<PAGE>
by delivery of Common Stock or other securities, in cash or otherwise, without
the prior written consent of Merrill Lynch on behalf of the Underwriters for a
period of 90 days after the date of this Prospectus, other than (i) the sale
to the Underwriters of the shares of Common Stock under the Underwriting
Agreement, (ii) upon the exercise of outstanding stock options or (iii) the
issuance of options pursuant to the Stock Plans.
The holders of all shares outstanding prior to the Initial Public Offering
are entitled to certain registration rights with respect to their shares. See
"Certain Transactions--Stockholders Agreement."
CERTAIN UNITED STATES FEDERAL TAX
CONSIDERATIONS FOR NON-UNITED STATES HOLDERS
The following is a general discussion of certain United States federal
income and estate tax consequences of the ownership and disposition of Common
Stock applicable to Non-U.S. Holders. In general, a "Non-U.S. Holder" is any
holder other than (i) a citizen or resident of the United States, (ii) a
corporation or partnership created or organized in the United States or under
the laws of the United States or of any state (other than a partnership
treated as foreign under U.S. Treasury regulations), (iii) an estate, the
income of which is includable in gross income for United States federal income
tax purposes regardless of its source, or (iv) a trust if (a) a court within
the United States is able to exercise primary supervision over the
administration of the trust, and (b) one or more United States persons have
the authority to control all substantial decisions of the trust. This
discussion is based on the U.S. Internal Revenue Code of 1986, as amended, and
administrative and judicial interpretations as of the date hereof, all of
which may be changed either retroactively or prospectively, and is for general
information only. This discussion does not address aspects of United States
federal taxation other than income and estate taxation and does not address
all aspects of income and estate taxation, nor does it consider any specific
facts or circumstances that may apply to a particular Non-U.S. Holder
(including certain U.S. expatriates, financial institutions, insurance
companies, tax-exempt entities, securities dealers and holders of securities
held as part of a "straddle," "hedge" or "conversion transactions"). This
discussion does not consider the tax consequences to shareholders, partners or
beneficiaries of a holder of the Common Stock, nor does it consider the fact
that in the case of a Non-U.S. Holder that is a partnership, the tax
consequences of holding and disposing of shares of Common Stock may be
affected by determinations made at the partner level. This discussion does not
address any tax consequences arising under the laws of any state, local or
foreign taxing jurisdiction. ACCORDINGLY, PROSPECTIVE INVESTORS ARE URGED TO
CONSULT THEIR TAX ADVISORS REGARDING THE UNITED STATES FEDERAL, STATE, LOCAL
AND NON-UNITED STATES INCOME AND OTHER TAX CONSEQUENCES OF HOLDING AND
DISPOSING OF SHARES OF COMMON STOCK.
An individual may, subject to certain exceptions, be deemed to be a resident
alien (as opposed to a non-resident alien) by virtue of being present in the
United States for at least 31 days in the calendar year and for an aggregate
of at least 183 days during a three year period ending in the current calendar
year (counting for such purposes all of the days present in the current year,
one-third of the days present in the immediately preceding year, and one-sixth
of the days present in the second preceding year). In addition to the
"substantial presence test" described in the immediately preceding sentence,
an alien may be treated as a resident alien if he (i) meets a lawful permanent
residence test (a so-called "green card" test) or (ii) elects to be treated as
a U.S. resident and meets the "substantial presence test" in the immediately
following year. Resident aliens are subject to U.S. federal tax as if they
were U.S. citizens.
DIVIDENDS
In general, dividends paid to a Non-U.S. Holder will be subject to United
States withholding tax at a 30% rate (or a lower rate prescribed by an
applicable tax treaty) unless the dividends are either (i) effectively
connected with a trade or business carried on by the Non-U.S. Holder within
the United States, or (ii) if certain income tax treaties apply, attributable
to a permanent establishment in the United States maintained by the Non-U.S.
Holder. Dividends effectively connected with such a United States trade or
business or attributable to such
62
<PAGE>
a United States permanent establishment generally will not be subject to
United States withholding tax (if the Non-U.S. Holder files certain forms,
including Internal Revenue Service Form 4224, with the payor of the dividend)
and generally will be subject to United States federal income tax on a net
income basis, in the same manner as if the Non-U.S. Holder were a resident of
the United States. A Non-U.S. Holder that is a corporation may be subject to
an additional branch profits tax at a rate of 30% (or such lower rate as may
be specified by an applicable treaty) on the repatriation from the United
States of its "effectively connected earnings and profits," subject to certain
adjustments. To determine the applicability of a tax treaty providing for a
lower rate of withholding, dividends paid to an address in a foreign country
are presumed under current Treasury regulations to be paid to a resident of
that country absent knowledge to the contrary. Proposed Treasury regulations
not currently in effect (the "Proposed Regulations"), however, generally would
require Non-U.S. Holders to file an I.R.S. Form W-8 to obtain the benefit of
any applicable tax treaty providing for a lower rate of withholding tax on
dividends. In addition, under the Proposed Regulations, in the case of Common
Stock held by a foreign partnership, (i) the certification requirement would
generally be applied to the partners of the partnership, and (ii) the
partnership would be required to provide certain information, including a U.S.
taxpayer identification number. The Proposed Regulations also provide look-
through rules for tiered partnerships. It is not certain whether, or in what
form, the Proposed Regulations will be adopted as final regulations. A Non-
U.S. Holder that is eligible for a reduced rate of U.S. withholding tax
pursuant to a tax treaty may obtain a refund of any excess amounts withheld by
filing an appropriate claim for refund with the Internal Revenue Service.
SALE OF COMMON STOCK
In general, a Non-U.S. Holder will not be subject to United States federal
income tax on any gain realized upon the disposition of such holder's shares
of Common Stock unless (i) the gain either is effectively connected with a
trade or business carried on by the Non-U.S. Holder within the United States
or, alternatively, if certain tax treaties apply, is attributable to a
permanent establishment in the United States maintained by the Non-U.S. Holder
(and, in either case, the branch profits tax discussed above may also apply if
the Non-U.S. Holder is a corporation); (ii) the Non-U.S. Holder is an
individual who holds shares of Common Stock as a capital asset and is present
in the United States for 183 days or more in the taxable year of disposition,
and either (a) such individual has a "tax home" (as defined for United States
federal income tax purposes) in the United States (unless the gain from the
disposition is attributable to an office or other fixed place of business
maintained by such Non-U.S. Holder in a foreign country and a foreign income
tax equal to at least 10% of the gain derived from such disposition is
actually paid with respect to such gain), or (b) the gain is attributable to
an office or other fixed place of business maintained by such individual in
the United States; or (iii) the Company is or has been a United States real
property holding corporation (a "USRPHC") for United States federal income tax
purposes (which the Company does not believe that it is or is likely to
become) at any time within the shorter of the five year period preceding such
disposition or such Non-U.S. Holder's holding period. If the Company were or
were to become a USRPHC at any time during this period, gains realized upon a
disposition of Common Stock by a Non-U.S. Holder which did not directly or
indirectly own more than 5% of the Common Stock during this period generally
would not be subject to United States federal income tax, provided that the
Common Stock is regularly traded on an established securities market.
ESTATE TAX
Common Stock owned or treated as owned by an individual who is not a citizen
or resident (as defined for United States federal estate tax purposes) of the
United States at the time of death will be includable in the individual's
gross estate for United States federal estate tax purposes (unless an
applicable estate tax treaty provides otherwise), and therefore may be subject
to United States federal estate tax.
BACKUP WITHHOLDING, INFORMATION REPORTING AND OTHER REPORTING REQUIREMENTS
The Company must report annually to the Internal Revenue Service and to each
Non-U.S. Holder the amount of dividends paid to, and the tax withheld with
respect to, each Non-U.S. Holder. These reporting requirements apply
regardless of whether withholding was reduced or eliminated by an applicable
tax treaty.
63
<PAGE>
Copies of this information also may be made available under the provisions of
a specific treaty or agreement with the tax authorities in the country in
which the Non-U.S. Holder resides or is established.
United States backup withholding tax (which generally is imposed at the rate
of 31% on certain payments to persons that fail to furnish the information
required under the United States information reporting requirements) and
information reporting requirements (other than those discussed above)
generally will not apply to dividends paid on Common Stock to a Non-U.S.
Holder at an address outside the United States. Backup withholding and
information reporting generally will apply, however, to dividends paid on
shares of Common Stock to a Non-U.S. Holder at an address in the United
States, if such holder fails to establish an exemption or to provide certain
other information to the payor.
The payment of proceeds from the disposition of Common Stock to or through a
United States office of a broker will be subject to information reporting and
backup withholding unless the owner, under penalties of perjury, certifies,
among other things, its status as a Non-U.S. Holder or otherwise establishes
an exemption. The payment of proceeds from the disposition of Common Stock to
or through a non-U.S. office of a non-U.S. broker generally will not be
subject to backup withholding and information reporting except as noted below.
In the case of proceeds from a disposition of Common Stock paid to or through
a non-U.S. office of a broker that is (i) a United States person, (ii) a
"controlled foreign corporation" for United States federal income tax purposes
or (iii) a foreign person 50% or more of whose gross income from all sources
from certain periods is effectively connected with a United States trade or
business, information reporting (but not backup withholding) will apply unless
the broker has documentary evidence in its files that the owner is a Non-U.S.
Holder (and the broker has not actual knowledge to the contrary).
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules from a payment to a Non-U.S. Holder will be refunded
or credited against the Non-U.S. Holder's United States federal income tax
liability, if any, provided that the required information is furnished to the
Internal Revenue Service.
64
<PAGE>
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Credit
Suisse First Boston Corporation, Goldman, Sachs & Co. and Morgan Stanley & Co.
Incorporated are acting as representatives (the "U.S. Representatives") of
each of the Underwriters named below (the "U.S. Underwriters"). Subject to the
terms and conditions set forth in a U.S. purchase agreement (the "U.S.
Purchase Agreement") among the Company, the Selling Stockholders and the U.S.
Underwriters, and concurrently with the sale of shares of Common Stock to
the International Managers (as defined below), the Company has agreed to sell
to the U.S. Underwriters, and each of the U.S. Underwriters severally has
agreed to purchase from the Company, the number of shares of Common Stock set
forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER OF
U.S. UNDERWRITER SHARES
---------------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..............................................
Credit Suisse First Boston Corporation.............................
Goldman, Sachs & Co................................................
Morgan Stanley & Co. Incorporated..................................
----
Total..........................................................
====
</TABLE>
The Company and the Selling Stockholders have also entered into an
international purchase agreement (the "International Purchase Agreement") with
certain underwriters outside the United States and Canada (the "International
Managers" and, together with the U.S. Underwriters, the "Underwriters") for
whom Merrill Lynch International, Credit Suisse First Boston (Europe) Limited,
Goldman Sachs International and Morgan Stanley & Co. International Limited are
acting as lead managers (the "Lead Managers"). Subject to the terms and
conditions set forth in the International Purchase Agreement, and concurrently
with the sale of 4,600,000 shares of Common Stock to the U.S. Underwriters
pursuant to the U.S. Purchase Agreement, the Company has agreed to sell to the
International Managers, and the International Managers severally have agreed
to purchase from the Company, an aggregate of 1,150,000 shares of Common
Stock. The initial public offering price per share and the total underwriting
discount per share of Common Stock are identical under the U.S. Purchase
Agreement and the International Purchase Agreement.
65
<PAGE>
In the U.S. Purchase Agreement and the International Purchase Agreement, the
several U.S. Underwriters and the several International Managers,
respectively, have agreed, subject to the terms and conditions set forth
therein, to purchase all of the shares of Common Stock being sold pursuant to
each such agreement if any of the shares of Common Stock being sold pursuant
to such agreement are purchased. The closings with respect to the sale of
shares of Common Stock to be purchased by the U.S. Underwriters and the
International Managers are conditioned upon one another.
The U.S. Representatives have advised the Company and the Selling
Stockholders that the U.S. Underwriters propose initially to offer the shares
of Common Stock to the public at the initial public offering price set forth
on the cover page of this Prospectus, and to certain dealers at such price
less a concession not in excess of per share of Common Stock. The U.S.
Underwriters may allow, and such dealers may reallow, a discount not in excess
of per share of Common Stock on sales to certain other dealers. After the
initial public offering of the shares of Common Stock offered hereby, the
public offering price, concession and discount may be changed.
The Selling Stockholders have granted options to the U.S. Underwriters,
exercisable for 30 days after the date of this Prospectus, to purchase up to
an aggregate of 690,000 additional shares of Common Stock at the initial
public offering price set forth on the cover page of this Prospectus, less the
underwriting discount. The U.S. Underwriters may exercise these options only
to cover over-allotments, if any, made on the sale of the Common Stock offered
hereby. To the extent that the U.S. Underwriters exercise these options, each
U.S. Underwriter will be obligated, subject to certain conditions, to purchase
a number of additional shares of Common Stock proportionate to such U.S.
Underwriter's initial amount reflected in the foregoing table. The Selling
Stockholders also have granted options to the International Managers,
exercisable for 30 days after the date of this Prospectus, to purchase up to
an aggregate of 172,500 additional shares of Common Stock to cover over-
allotments, if any, on terms similar to those granted to the U.S.
Underwriters.
The Company, its executive officers, directors and other management
employees and the Selling Stockholders have agreed, subject to certain
exceptions, not to directly or indirectly (i) offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant for the sale of or otherwise
dispose of or transfer any shares of Common Stock or securities convertible
into or exchangeable or exercisable for Common Stock, whether now owned or
thereafter acquired by the person executing the agreement or with respect to
which the person executing the agreement thereafter acquires the power of
disposition, or file a registration statement under the Securities Act with
respect to the foregoing or (ii) enter into any swap or other agreement that
transfers, in whole or in part, the economic consequence of ownership of the
Common Stock whether any such swap or transaction is to be settled by delivery
of Common Stock or other securities, in cash or otherwise, without the prior
written consent of Merrill Lynch on behalf of the Underwriters for a period of
90 days after the date of this Prospectus. See "Shares Eligible for Future
Sale."
The U.S. Underwriters and the International Managers have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") that provides for
the coordination of their activities. Pursuant to the Intersyndicate
Agreement, the U.S. Underwriters and the International Managers are permitted
to sell shares of Common Stock to each other for purposes of resale at the
initial public offering price, less an amount not greater than the selling
concession. Under the terms of the Intersyndicate Agreement, the U.S.
Underwriters and any dealer to whom they sell shares of Common Stock will not
offer to sell or sell shares of Common Stock to persons who are non-U.S. or
non-Canadian persons or to persons they believe intend to resell to persons
who are non-U.S. or non-Canadian persons, and the International Managers and
any dealer to whom they sell shares of Common Stock will not offer to sell or
sell shares of Common Stock to U.S. persons or to Canadian persons or to
persons they believe intend to resell to U.S. or Canadian persons, except in
the case of transactions pursuant to the Intersyndicate Agreement.
The Common Stock is listed on the NYSE under the symbol "KNL."
The Company and the Selling Stockholders have agreed to indemnify the U.S.
Underwriters and the International Managers against certain liabilities,
including certain liabilities under the Securities Act.
66
<PAGE>
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters
and certain selling group members to bid for and purchase the Common Stock. As
an exception to these rules, the U.S. Representatives are permitted to engage
in certain transactions that stabilize the price of the Common Stock. Such
transactions consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in connection
with the Offerings, i.e., if they sell more shares of Common Stock than are set
forth on the cover page of this Prospectus, the U.S. Representatives may reduce
that short position by purchasing Common Stock in the open market. The U.S.
Representatives may also elect to reduce any short position by exercising all
or part of the over-allotment option described above.
The U.S. Representatives may also impose a penalty bid on certain
Underwriters and selling group members. This means that if the U.S.
Representatives purchase shares of Common Stock in the open market to reduce
the Underwriters' short position or to stabilize the price of the Common Stock,
they may reclaim the amount of the selling concession from the Underwriters and
selling group members who sold those shares as part of the Offerings.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the U.S.
Representatives will engage in such transactions or that such transactions,
once commenced, will not be discontinued without notice.
Each of the representatives of the Underwriters purchases or has purchased
furniture from the Company in the ordinary course of business on an arm's-
length basis.
67
<PAGE>
LEGAL MATTERS
Certain legal matters with respect to the validity of the Common Stock
offered hereby will be passed upon for the Company by Willkie Farr &
Gallagher, New York, New York. Certain legal matters relating to the Offerings
will be passed upon for the Underwriters by Fried, Frank, Harris, Shriver &
Jacobson (a partnership including professional corporations), New York, New
York.
EXPERTS
The consolidated financial statements of Knoll, Inc. at December 31, 1996
and for the ten month period then ended and the consolidated financial
statements of the Predecessor for the two month period ended February 29,
1996, appearing in this Prospectus and Registration Statement, have been
audited by Ernst & Young LLP, independent accountants, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing. The consolidated financial statements of The Knoll Group, Inc. as of
December 31, 1995 and for each of the two 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 accounting and auditing.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith files reports,
proxy statements, and other information with the Commission. Reports, proxy
statements and other information filed by the Company with the Commission can
be inspected and copied at 450 Fifth Street NW, Washington, D.C. 20549, and at
the following regional offices of the Commission: 7 World Trade Center, Suite
1300, New York, New York 10048, and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material can also be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, NW,
Washington, D.C. 20549, at prescribed rates. The Commission also maintains a
World Wide Web site (http://www.sec.gov) containing these reports, proxy
statements and other information. The Common Stock is listed on the New York
Stock Exchange, and these records and other information can also be inspected
at the offices of the New York Stock Exchange, Inc., 20 Broad Street, New
York, New York 10005.
The Company has filed with the Commission under the Securities Act a
Registration Statement on Form S-1 with respect to the Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in
the Registration Statement and the exhibits and financial schedules thereto,
in accordance with the rules and regulations of the Commission. For further
information pertaining to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement, including the exhibits
thereto and the financial statements, notes and schedule filed as a part
thereof. Statements contained in this Prospectus as to the contents of any
contract or other document are summaries which are not necessarily complete
and in each instance reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement, each such
statement herein being qualified in all respects by such reference. The
Registration Statement may be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the Commission's Regional Offices in New York (Seven World
Trade Center, New York, New York 10007) and Chicago (Suite 1400, Citicorp
Center, 500 West Madison Street, Chicago, Illinois 60661). Copies of such
material can be obtained from the public reference section of the Commission
at prescribed rates by writing to the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Such materials
can also be inspected at the offices of the New York Stock Exchange, Inc., 20
Broad Street, New York, New York 10005 or on the Commission's World Wide Web
site listed above.
68
<PAGE>
KNOLL, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets at June 30, 1997 and December 31,
1996..................................................................... F-2
Condensed Consolidated Statements of Operations for the Six Months Ended
June 30, 1997, the Four Months Ended June 30, 1996 and the Two Months
Ended February 29, 1996 (Predecessor).................................... F-3
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1997, the Four Months Ended June 30, 1996 and the Two Months
Ended February 29, 1996 (Predecessor).................................... F-4
Notes to the Condensed Consolidated Financial Statements.................. F-5
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Auditors........................................... F-8
Consolidated Balance Sheets at December 31, 1996 and 1995 (Predecessor)... F-10
Consolidated Statements of Operations for the Ten Months Ended December
31, 1996, the Two Months Ended February 29, 1996 (Predecessor) and the
Years Ended December 31, 1995 and 1994 (Predecessor)..................... F-11
Consolidated Statements of Cash Flows for the Ten Months Ended December
31, 1996, the Two Months Ended February 29, 1996 (Predecessor) and the
Years Ended December 31, 1995 and 1994 (Predecessor)..................... F-12
Consolidated Statements of Changes in Stockholders' Equity for the Ten
Months Ended December 31, 1996, the Two Months Ended February 29, 1996
(Predecessor) and the Years Ended December 31, 1995 and 1994
(Predecessor)............................................................ F-13
Notes to the Consolidated Financial Statements............................ F-14
PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
Unaudited Pro Forma Financial Information................................. P-1
Unaudited Pro Forma Consolidated Income Statement for the Year Ended De-
cember 31, 1996.......................................................... P-2
Unaudited Pro Forma Consolidated Income Statement for the Six Months Ended
June 30, 1997............................................................ P-3
Unaudited Pro Forma Consolidated Income Statement for the Six Months Ended
June 30, 1996............................................................ P-4
Notes to Unaudited Pro Forma Financial Information........................ P-5
</TABLE>
F-1
<PAGE>
KNOLL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PAR VALUE AND SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
-------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 10,873 $ 8,804
Customer receivables, net............................. 125,320 111,166
Inventories........................................... 62,339 57,811
Deferred income taxes................................. 19,101 17,474
Prepaid and other current assets...................... 767 7,424
-------- --------
Total current assets................................ 218,400 202,679
Property, plant, and equipment at cost.................. 200,565 195,483
Accumulated depreciation................................ (32,152) (19,265)
-------- --------
Property, plant and equipment, net.................. 168,413 176,218
Intangible assets at cost............................... 289,350 293,753
Accumulated amortization................................ (10,465) (6,813)
-------- --------
Intangible assets, net.............................. 278,885 286,940
Other noncurrent assets................................. 3,924 9,875
-------- --------
Total Assets........................................ $669,622 $675,712
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt.................. $ 12,500 $ 23,265
Accounts payable...................................... 57,382 50,250
Income taxes payable.................................. 3,256 388
Other current liabilities............................. 66,488 64,022
-------- --------
Total current liabilities........................... 139,626 137,925
Long-term debt.......................................... 245,547 330,889
Postretirement benefits obligation...................... 16,193 15,873
Other noncurrent liabilities............................ 15,302 13,221
-------- --------
Total liabilities................................... 416,688 497,908
-------- --------
Stockholders' equity:
Preferred stock, $1.00 par value; 10,000,000 shares
authorized; 1,602,998 shares issued and outstanding
in 1996 (liquidation preference of $160,300)......... -- 1,603
Common stock, $0.01 par value; 100,000,000 shares
authorized; 43,212,227 shares issued and outstanding
in 1997 and 7,291,308 shares issued and outstanding
in 1996.............................................. 432 73
Additional paid-in capital............................ 214,954 160,147
Unearned stock grant compensation..................... (1,146) (1,387)
Retained earnings..................................... 40,093 16,836
Cumulative foreign currency translation adjustment.... (1,379) 532
-------- --------
Total stockholders' equity.......................... 252,954 177,804
-------- --------
Total Liabilities and Stockholders' Equity.......... $669,622 $675,712
======== ========
</TABLE>
See accompanying notes.
F-2
<PAGE>
KNOLL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SUPPLEMENTAL
PRO FORMA DATA THE KNOLL GROUP, INC.
SIX MONTHS SIX MONTHS FOUR MONTHS (PREDECESSOR)
ENDED ENDED ENDED TWO MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1996 FEBRUARY 29, 1996
------------- -------------- ------------- ---------------------
<S> <C> <C> <C> <C>
(Note 7)
Sales....................................................... $390,415 $304,832 $214,600 $ 90,232
Cost of sales............................................... 236,265 201,556 140,489 59,714
-------- -------- -------- --------
Gross profit................................................ 154,150 103,276 74,111 30,518
Selling, general and administrative expenses................ 90,635 69,180 47,141 21,256
Westinghouse long-term incentive compensation............... -- -- -- 47,900
Allocated corporate expenses................................ -- -- -- 921
-------- -------- -------- --------
Operating income (loss)..................................... 63,515 34,096 26,970 (39,559)
Interest expense............................................ 14,696 21,030 13,952 340
Other income (expense), net................................. 73 44 340 (296)
-------- -------- -------- --------
Income (loss) before income tax expense (benefit) and ex-
traordinary item........................................... 48,892 13,110 13,358 (40,195)
Income tax expense (benefit)................................ 20,298 5,386 5,382 (16,107)
-------- -------- -------- --------
Income (loss) before extraordinary item..................... 28,594 7,724 7,976 (24,088)
Extraordinary loss on early extinguishment of debt, net of
taxes...................................................... 5,337 -- -- --
-------- -------- -------- --------
Net income (loss)........................................... $ 23,257 $ 7,724 $ 7,976 $(24,088)
======== ======== ======== ========
Pro forma earnings per share of common stock (Note 6):
Income before extraordinary item.......................... $ 0.76 $ 0.22 $ 0.23
Extraordinary loss on early extinguishment of debt, net of
taxes.................................................... (0.14) -- --
-------- -------- --------
Net income................................................ $ 0.62 $ 0.22 $ 0.23
======== ======== ========
Pro forma weighted average shares of common stock outstand-
ing (Note 6)............................................... 37,246 34,782 34,782
======== ======== ========
Supplemental pro forma as adjusted data (Note 8):
Pro forma net income...................................... $ 30,236 $ 9,450
======== ========
Pro forma net income per share of common stock............ $ 0.70 $ 0.22
======== ========
Pro forma weighted average shares of common stock
outstanding.............................................. 43,300 43,262
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
KNOLL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THE KNOLL GROUP, INC.
FOUR MONTHS (PREDECESSOR)
SIX MONTHS ENDED TWO MONTHS ENDED
ENDED JUNE 30, 1997 JUNE 30, 1996 FEBRUARY 29, 1996
------------------- ------------- ---------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)..................................................... $ 23,257 $ 7,976 $(24,088)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization....................................... 17,317 11,536 4,317
Extraordinary loss.................................................. 8,838 -- --
Other............................................................... 1,063 -- --
Changes in assets and liabilities:
Customer receivables.............................................. (15,151) (5,704) 8,798
Inventories....................................................... (5,109) 471 671
Accounts payable.................................................. 7,653 7,700 (15,292)
Current and deferred income taxes................................. 7,072 (14,032) (16,627)
Other current assets and liabilities.............................. 6,414 14,555 (4,907)
Other noncurrent assets and liabilities........................... 6,264 10,105 (6,911)
-------- --------- --------
Cash provided by (used in) operating activities....................... 57,618 32,607 (54,039)
-------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of the Company from Westinghouse.......................... -- (579,801) --
Purchases of property, plant and equipment............................ (7,686) (3,885) (2,296)
Proceeds from sale of assets.......................................... 127 -- --
-------- --------- --------
Cash used in investing activities..................................... (7,559) (583,686) (2,296)
-------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of short-term debt, net..................................... -- (2,349) (3,805)
Repayment of revolving credit facility, net........................... (26,000) -- --
Proceeds from long-term debt.......................................... -- 425,000 --
Repayment of long-term debt........................................... (69,988) (14,266) --
Premium paid for early extinguishment of debt......................... (5,775) -- --
Proceeds from issuance of stock, net of stock issuance costs.......... 134,656 160,000 --
Redemption of preferred stock......................................... (80,000) -- --
Net receipts from parent company...................................... -- -- 60,848
-------- --------- --------
Cash provided by (used in) financing activities....................... (47,107) 568,385 57,043
-------- --------- --------
Effect of exchange rate changes on cash and cash equivalents.......... (883) 347 58
-------- --------- --------
Increase in cash and cash equivalents................................. 2,069 17,653 766
Cash and cash equivalents at beginning of period...................... 8,804 2,335 1,569
-------- --------- --------
Cash and cash equivalents at end of period............................ $ 10,873 $ 19,988 $ 2,335
======== ========= ========
</TABLE>
See accompanying notes.
F-4
<PAGE>
KNOLL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Knoll, Inc. (the Company) and The Knoll Group, Inc. (the Predecessor) have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X and therefore do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation are reflected in the condensed consolidated financial
statements. Supplemental pro forma data is provided solely for additional
analysis and is not intended to be a presentation in accordance with generally
accepted accounting principles. The condensed consolidated balance sheet as of
December 31, 1996 and the condensed consolidated statement of operations and
condensed consolidated statement of cash flows for the two months ended
February 29, 1996 are derived from audited financial statements. The condensed
consolidated financial statements and notes thereto should be read in
conjunction with the consolidated financial statements and notes thereto
contained in the Company's annual report on Form 10-K for the year ended
December 31, 1996. The results of operations for the six months ended June 30,
1997 are not necessarily indicative of the results to be expected for the full
year ending December 31, 1997.
2. ACQUISITION OF KNOLL
On December 20, 1995, Westinghouse Electric Corporation (Westinghouse)
entered into a Stock Purchase Agreement (the Agreement) with T.K.G.
Acquisition Corp. (TKG), a subsidiary of Warburg, Pincus Ventures, L.P. Under
the terms of the Agreement, TKG acquired all of the outstanding capital stock
of The Knoll Group, Inc. and related entities on February 29, 1996 through its
wholly owned subsidiary T.K.G. Acquisition Sub, Inc. Immediately following
this transaction, T.K.G. Acquisition Sub, Inc. and The Knoll Group, Inc.
merged with and into Knoll North America, Inc., the principal United States
operating company of The Knoll Group, Inc. Knoll North America, Inc. changed
its name to Knoll, Inc. at the time of the merger. On March 14, 1997, Knoll,
Inc. merged with and into TKG. TKG then changed its name to Knoll, Inc.
3. INVENTORIES
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
-------- ------------
(In Thousands)
<S> <C> <C>
Raw materials....................................... $37,290 $34,147
Work in process..................................... 8,364 7,508
Finished goods...................................... 16,685 16,156
------- -------
Inventories......................................... $62,339 $57,811
======= =======
</TABLE>
4. CAPITAL STRUCTURE
On May 6, 1997, the Company's Certificate of Incorporation was amended to
increase the number of authorized shares of common stock from 24,000,000 to
100,000,000, increase the number of authorized shares of preferred stock from
3,000,000 to 10,000,000 and effect a 3.13943-for-1 split of the Company's
common stock. Fractional shares resulting from the common stock split were
settled in cash.
In connection with the initial public offering of the Company's common stock
discussed in Note 5, 800,000 shares of Series A 12% Participating Convertible
Preferred Stock (Series A Preferred Stock) were redeemed for
F-5
<PAGE>
KNOLL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
$80.0 million and 11,749,361 shares of common stock, and the remaining 802,998
shares of Series A Preferred Stock were converted into 15,691,558 shares of
common stock.
On June 27, 1997, the Company filed a registration statement on Form S-8
with the Securities and Exchange Commission to register an aggregate of
2,055,772 shares of its common stock issuable to participants under the Knoll,
Inc. 1997 Employee Stock Purchase Plan (300,000 shares), the Knoll, Inc. 1997
Stock Incentive Plan (1,255,772 shares) and The Knoll Retirement Savings Plan
(500,000 shares).
5. INITIAL PUBLIC OFFERING
The Company completed an initial public offering of its common stock during
the second quarter of 1997. An aggregate of 9,200,000 shares, including
720,000 shares sold by a selling stockholder, were sold during May and June
1997 at $17.00 per share. The net proceeds to the Company amounted to $133.5
million after deducting related expenses. The net proceeds, together with
borrowings of $11.6 million under the Company's revolving credit facilities,
have been used (i) to redeem a portion of the Series A Preferred Stock for
$80.0 million and (ii) to redeem an aggregate principal amount of $57.8
million of the Company's 10.875% Senior Subordinated Notes for a total
redemption price of $65.1 million, including a redemption premium of $5.7
million and accrued and unpaid interest thereon of $1.6 million. The
redemption premium of $5.7 million along with the write-off of unamortized
financing costs of $3.1 million associated with the early redemption of the
10.875% Senior Subordinated Notes resulted in an extraordinary loss of $5.3
million, net of taxes.
6. WEIGHTED AVERAGE SHARES AND PER SHARE DATA
All weighted average shares and per share data have been adjusted to give
retroactive effect to the 3.13943-for-1 stock split that occurred on May 6,
1997, as discussed in Note 4.
Because of the significance of the redemption and conversion into common
stock of the Series A Preferred Stock (see Note 4) in connection with the
initial public offering, historical earnings per share is not presented
herein. Pro forma earnings per share amounts are based on the weighted average
number of shares of common stock and common stock equivalents (employee stock
options) outstanding during the period, after giving effect to the redemption
and conversion into common stock of the Series A Preferred Stock assuming such
redemption and conversion had occurred at the beginning of each period
presented. Pursuant to Securities and Exchange Commission Staff Accounting
Bulletin No. 83, all common stock and options to purchase common stock issued
at prices below the initial public offering price per share during the twelve
month period immediately preceding the initial filing date of the Company's
registration statement for the offering have been included as outstanding for
all periods presented (using the treasury stock method at the initial public
offering price).
7. SUPPLEMENTAL PRO FORMA RESULTS OF OPERATIONS
The supplemental pro forma results of operations data for the six months
ended June 30, 1996 is presented for purposes of additional analysis. It
presents financial information assuming that the acquisition of the
Predecessor from Westinghouse had taken place on January 1, 1996. Such pro
forma results reflect the following adjustments: (i) Cost of sales and
selling, general and administrative expenses have been increased by $552,000
and $369,000, respectively, to reflect the reclassification of allocated
corporate expenses from Westinghouse. The reclassified allocated corporate
expenses approximate the replacement cost to the Company for services formerly
provided by Westinghouse to the Predecessor, including (a) benefit expense
related to the adoption of various independent benefit plans comparable to
Westinghouse benefit plans and (b) the cost of services required to replace
specific activities formerly provided by Westinghouse to the Predecessor,
including audit, tax, general ledger, accounts receivable, human resources,
legal, insurance and data communications. (ii) Cost of sales has been
increased by $801,000 to reflect increased depreciation resulting from the
acquisition of the Predecessor from Westinghouse. (iii) Selling, general and
administrative expenses have been increased by $414,000 to reflect
F-6
<PAGE>
KNOLL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
increased depreciation and amortization resulting from the acquisition. (iv)
The Westinghouse long-term incentive compensation of $47.9 million for the two
months ended February 29, 1996 has been eliminated on a pro forma basis due to
the amounts becoming payable, and for which the amounts payable were
established and subsequently paid by Westinghouse, as a result of consummation
of the acquisition. (v) Interest expense (including the amortization of
deferred financing fees) has been increased by $6.7 million assuming 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 $424.1 million in average outstanding
borrowings and amortization of deferred financing charges. If interest rates
changed 1/8%, the pro forma adjustment for interest costs would have changed
by approximately $88,000. (vi) Income tax expense has been increased by $16.1
million to reflect the assumed tax rate applied to the pro forma income.
The supplemental pro forma data does not purport to represent what the
Company's results actually would have been if such events had occurred on
January 1, 1996, nor does such information purport to project the results of
the Company for any future periods. The unaudited pro forma financial
information is based upon assumptions that the Company believes are
reasonable.
8. SUPPLEMENTAL PRO FORMA AS ADJUSTED DATA
The supplemental pro forma as adjusted data is included for purposes of
additional analysis. It presents results of operations assuming that the
initial public offering of the Company's common stock and the application of
the net proceeds to the Company therefrom together with related borrowings
under the Company's credit facilities occurred at the beginning of each
period. Such pro forma as adjusted data does not reflect the 1997
extraordinary loss of $5.3 million, net of taxes, incurred as a result of the
early redemption of a portion of the Company's 10.875% Senior Subordinated
Notes. The supplemental pro forma as adjusted weighted average shares of
common stock outstanding reflect the initial public offering of the Company's
common stock and the redemption and conversion into common stock of the Series
A Preferred Stock (see Note 4) as of the beginning of each period presented.
The supplemental pro forma as adjusted data reflects interest savings from
the redemption of an aggregate principal amount of $57.8 million of the
Company's 10.875% Senior Subordinated Notes, additional interest expense
incurred on $11.6 million in related borrowings under the Company's credit
facilities and related income tax effects. Interest expense (including the
amortization of deferred financing fees) has been decreased by $2.7 million
and $2.9 million for the six months ended June 30, 1997 and 1996,
respectively. Interest adjustments are based on the actual interest rate of
10.875% for the Senior Subordinated Notes and a weighted average interest rate
of 6.6% in 1997 and 8.25% in 1996 for the credit facilities. The weighted
average interest rates approximate actual interest expense on the Company's
average outstanding borrowings under the credit facilities during the
respective periods. Income tax expense has been increased by $1.1 million for
the six months ended June 30, 1997 and 1996 to reflect the assumed income tax
effects of the interest expense adjustments.
The supplemental pro forma as adjusted information does not purport to
represent what the Company's results actually would have been if the
aforementioned events had occurred at the beginning of each period presented,
nor does such information purport to project the results of the Company for
any future periods. The unaudited pro forma as adjusted financial information
is based upon assumptions that the Company believes are reasonable.
F-7
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Knoll, Inc.
We have audited the accompanying consolidated balance sheet of Knoll, Inc. as
of December 31, 1996 and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for the ten month period ended
December 31, 1996 (post-acquisition period), and the consolidated statements of
operations, changes in stockholders' equity and cash flows of The Knoll Group,
Inc. (Predecessor) for the two month period ended February 29, 1996 (pre-
acquisition period). Our audits also included the financial statement schedule
(as it pertains to 1996) as listed in the Index at Item 16(b). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the 1996 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Knoll, Inc. at December 31, 1996, and the consolidated results of its
operations and its cash flows for the post-acquisition period in conformity
with generally accepted accounting principles. Further, in our opinion, the
aforementioned Predecessor consolidated financial statements present fairly, in
all material respects, the consolidated results of operations and cash flows of
The Knoll Group, Inc. for the pre-acquisition period in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic 1996
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
March 14, 1997, except for Note 23,
as to which the date is May 6, 1997.
F-8
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Knoll, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, cash flows and changes in stockholders'
equity present fairly, in all material respects, the financial position of The
Knoll Group, Inc., an organizational unit of Westinghouse Electric Corporation
(Westinghouse), at December 31, 1995, and the results of their operations,
cash flows and changes in stockholders' equity for each of the two 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.
The Knoll Group, Inc. is a business unit of Westinghouse for each of the two
years ended December 31, 1995 and, as disclosed in Note 4 to the accompanying
financial statements, engaged in various transactions and relationships with
other Westinghouse entities.
/s/ Price Waterhouse LLP
Pittsburgh, Pennsylvania
January 15, 1996
F-9
<PAGE>
KNOLL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
THE KNOLL GROUP, INC.
ACTUAL (PREDECESSOR)
DECEMBER 31, DECEMBER 31,
1996 1995
-------------- ---------------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 8,804 $ 1,569
Customer receivables, net............................................................... 111,166 114,592
Inventories............................................................................. 57,811 59,643
Deferred income taxes................................................................... 17,474 18,273
Prepaid and other current assets........................................................ 7,424 8,465
-------- --------
Total current assets.................................................................. 202,679 202,542
Property, plant, and equipment............................................................ 176,218 164,633
Intangible assets......................................................................... 286,940 240,772
Prepaid pension cost...................................................................... -- 45,161
Other noncurrent assets................................................................... 9,875 3,602
-------- --------
Total Assets.......................................................................... $675,712 $656,710
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt......................................................................... $ -- $ 1,496
Current maturities of long-term debt.................................................... 23,265 3,287
Accounts payable--trade................................................................. 50,250 45,850
Accounts payable--related parties....................................................... -- 413
Income taxes payable.................................................................... 388 13,973
Accrued restructuring costs............................................................. 1,979 10,868
Other current liabilities............................................................... 62,043 43,957
-------- --------
Total current liabilities............................................................. 137,925 119,844
Long-term debt............................................................................ 330,889 251
Deferred income taxes..................................................................... 1,931 29,574
Postretirement benefits obligation........................................................ 15,873 20,593
Other noncurrent liabilities.............................................................. 11,290 5,997
-------- --------
Total liabilities..................................................................... 497,908 176,259
-------- --------
Stockholders' equity:
Preferred stock, $1.00 par value; authorized 10,000,000 shares, issued and outstanding
1,602,998 shares....................................................................... 1,603 --
Common stock, $.01 par value; authorized 100,000,000 shares; issued and outstanding
7,291,308 shares....................................................................... 73 --
Additional paid-in-capital.............................................................. 160,147 --
Unearned stock grant compensation....................................................... (1,387) --
Retained earnings....................................................................... 16,836 --
Parent company investment............................................................... -- 503,317
Cumulative foreign currency translation adjustment...................................... 532 (22,866)
-------- --------
Total stockholders' equity............................................................ 177,804 480,451
-------- --------
Total Liabilities and Stockholders' Equity............................................ $675,712 $656,710
- --------------------------------------------------
======== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-10
<PAGE>
KNOLL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THE KNOLL
GROUP, INC.
(PREDECESSOR) THE KNOLL GROUP, INC.
TEN MONTHS TWO MONTHS (PREDECESSOR)
ENDED ENDED YEAR ENDED DECEMBER 31,
DECEMBER 31, FEBRUARY 29, ------------------------
1996 1996 1995 1994
-------------- ------------- ----------- -----------
(IN THOUSANDS, (IN THOUSANDS)
EXCEPT PER
SHARE DATA)
<S> <C> <C> <C> <C>
Sales to customers...... $561,534 $ 89,933 $ 610,723 $ 562,598
Sales to related
parties................ -- 299 10,169 271
-------- -------- ----------- -----------
Total sales............. 561,534 90,232 620,892 562,869
Cost of sales to
customers.............. 358,841 59,514 410,615 409,909
Cost of sales to related
parties................ -- 200 7,017 195
-------- -------- ----------- -----------
Gross profit............ 202,693 30,518 203,260 152,765
Provision for
restructuring.......... -- -- -- 29,180
Selling, general, and
administrative
expenses............... 131,349 21,256 138,527 167,238
Westinghouse long-term
incentive
compensation........... -- 47,900 -- --
Allocated corporate
expenses............... -- 921 9,528 5,881
-------- -------- ----------- -----------
Operating income
(loss)................. 71,344 (39,559) 55,205 (49,534)
Interest expense........ 32,952 340 1,430 3,225
Other income (expense),
net.................... 447 (296) (1,597) 699
-------- -------- ----------- -----------
Income (loss) before
income taxes and
extraordinary item..... 38,839 (40,195) 52,178 (52,060)
Income tax expense
(benefit).............. 16,844 (16,107) 22,846 7,713
-------- -------- ----------- -----------
Income (loss) before
extraordinary item..... 21,995 (24,088) 29,332 (59,773)
Extraordinary loss on
early extinguishment of
debt, net of taxes..... 5,159 -- -- --
-------- -------- ----------- -----------
Net income (loss)....... $ 16,836 $(24,088) $ 29,332 $ (59,773)
======== ======== =========== ===========
Earnings per share (See
Note 2):
Pro forma income before
extraordinary item per
share of Common Stock.. $ .63
Pro forma loss per share
on extraordinary item.. (.15)
--------
Pro forma net income per
share of Common Stock.. $ .48
========
Pro forma weighted
average shares of
Common Stock
Outstanding............ 34,815
========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-11
<PAGE>
KNOLL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THE KNOLL
GROUP, INC.
(PREDECESSOR) THE KNOLL GROUP, INC.
TEN MONTHS TWO MONTHS (PREDECESSOR)
ENDED ENDED YEAR ENDED DECEMBER 31,
DECEMBER 31, FEBRUARY 29, -------------------------
1996 1996 1995 1994
-------------- ------------- ----------- ------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)..................................................... $ 16,836 $ (24,088) $ 29,332 $ (59,773)
Noncash items included in income:
Depreciation........................................................ 19,251 3,150 19,006 21,478
Amortization of intangible assets................................... 7,881 1,167 6,993 7,006
Loss on disposal of assets.......................................... 87 -- -- --
Extraordinary loss.................................................. 8,542 -- -- --
Noncash restructuring charges....................................... -- -- -- 9,367
Foreign currency transaction loss................................... 354 -- -- --
Changes in assets and liabilities:
Customer receivables................................................ (5,110) 8,798 (5,850) (11,269)
Inventories......................................................... 1,416 671 (76) (9,619)
Accounts payable.................................................... 15,870 (15,292) (7,005) 18,533
Current and deferred income taxes................................... (3,961) (16,627) 13,185 2,186
Other current assets................................................ 747 2,283 453 (1,186)
Other current liabilities........................................... 18,372 (7,190) (23,177) 16,951
Other noncurrent assets and liabilities............................. 9,217 (6,911) 19,003 2,542
--------- --------- ----------- ------------
Cash provided by (used in) operating activities....................... 89,502 (54,039) 51,864 (3,784)
--------- --------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of the company from Westinghouse.......................... (579,801) -- -- --
Capital expenditures.................................................. (15,255) (2,296) (19,334) (20,157)
Proceeds from sale of assets.......................................... 218 -- 316 332
--------- --------- ----------- ------------
Cash used in investing activities..................................... (594,838) (2,296) (19,018) (19,825)
--------- --------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of short-term debt, net..................................... (1,483) (3,805) (20,961) (2,758)
Proceeds from long-term debt.......................................... 615,000 -- -- --
Repayment of long-term debt........................................... (262,130) -- (8,913) (2,753)
Issuance of stock..................................................... 160,400 -- -- --
Net receipts from (payments to) parent company........................ -- 60,848 (6,900) 33,836
--------- --------- ----------- ------------
Cash provided by (used in) financing activities....................... 511,787 57,043 (36,774) 28,325
--------- --------- ----------- ------------
Effect of exchange rate changes on cash and cash equivalents.......... 18 58 13 (1,996)
--------- --------- ----------- ------------
Increase (decrease) in cash and cash equivalents...................... 6,469 766 (3,915) 2,720
Cash and cash equivalents at beginning of period...................... 2,335 1,569 5,484 2,764
--------- --------- ----------- ------------
Cash and cash equivalents at end of period............................ $ 8,804 $ 2,335 $ 1,569 $ 5,484
========= ========= =========== ============
</TABLE>
See accompanying notes to the consolidated financial statements.
F-12
<PAGE>
KNOLL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
THE KNOLL
GROUP, INC.
(PREDECESSOR) THE KNOLL GROUP, INC.
TEN MONTHS TWO MONTHS (PREDECESSOR)
ENDED ENDED YEAR ENDED DECEMBER 31,
DECEMBER 31, FEBRUARY 29, ------------------------
1996 1996 1995 1994
------------------ ------------- ----------- -----------
(IN THOUSANDS,
EXCEPT SHARE DATA) (IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
PREFERRED STOCK
Balance at beginning of period (1,599,000 shares)................... $ 1,599 $ -- $ -- $ --
Shares issued (3,998 shares)........................................ 4 -- -- --
--------- --------- ----------- -----------
Balance at end of period............................................ 1,603 -- -- --
--------- --------- ----------- -----------
COMMON STOCK
Balance at beginning of period (3,139,430 shares)................... 31 -- -- --
Shares issued under the Stock Incentive Plan (4,144,030 shares)..... 42 -- -- --
--------- --------- ----------- -----------
Balance at end of period............................................ 73 -- -- --
--------- --------- ----------- -----------
ADDITIONAL PAID-IN-CAPITAL
Balance at beginning of period...................................... 158,370 -- -- --
Shares issued....................................................... 396 -- -- --
Shares issued under the Stock Incentive Plan........................ 1,381 -- -- --
--------- --------- ----------- -----------
Balance at end of period............................................ 160,147 -- -- --
--------- --------- ----------- -----------
UNEARNED STOCK GRANT COMPENSATION
Balance at beginning of period...................................... -- -- -- --
Shares issued under the Stock Incentive Plan........................ (1,522) -- -- --
Earned stock grant compensation..................................... 135 -- -- --
--------- --------- ----------- -----------
Balance at end of period............................................ (1,387) -- -- --
--------- --------- ----------- -----------
RETAINED EARNINGS
Balance at beginning of period...................................... -- -- -- --
Net income.......................................................... 16,836 -- -- --
--------- --------- ----------- -----------
Balance at end of period............................................ 16,836 -- -- --
--------- --------- ----------- -----------
PARENT COMPANY INVESTMENT
Balance at beginning of period...................................... -- 503,317 480,885 506,822
Net income (loss)................................................... -- (24,088) 29,332 (59,773)
Capital expenditures................................................ -- 2,296 19,334 20,157
Proceeds from asset sales........................................... -- -- (316) (332)
Net interunit transactions.......................................... -- 58,552 (25,918) 14,011
--------- --------- ----------- -----------
Balance at end of period............................................ -- 540,077 503,317 480,885
--------- --------- ----------- -----------
CUMULATIVE FOREIGN CURRENCY TRANSLATION ADJUSTMENT
Balance at beginning of period...................................... -- (22,866) (22,879) (20,883)
Translation adjustment.............................................. 532 58 13 (1,996)
--------- --------- ----------- -----------
Balance at end of period............................................ 532 (22,808) (22,866) (22,879)
--------- --------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY.......................................... $ 177,804 $ 517,269 $ 480,451 $ 458,006
========= ========= =========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-13
<PAGE>
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Knoll, Inc. and its subsidiaries (the Company or Knoll) are engaged in the
design, manufacture, and sale of office furniture products and accessories,
focusing on the middle to high end segments of the contract furniture
market. The Company has operations in the United States (U.S.), Canada, and
Europe and sells its products primarily through its direct sales
representatives and independent dealers.
The Company was formed on February 29, 1996 as a result of the acquisition
of the office furniture business unit (The Knoll Group, Inc. and related
entities) of Westinghouse Electric Corporation (Westinghouse). See Note 3
for further discussion of the acquisition.
The accompanying consolidated financial statements present the financial
position of the Company as of December 31, 1996 and of the Predecessor as
of December 31, 1995, the results of operations, cash flows, and changes in
stockholders' equity of the Company for the ten month period ended December
31, 1996, and the results of operations, cash flows, and changes in
stockholders' equity of the Predecessor for the two month period ended
February 29, 1996 and the years ended December 31, 1995 and 1994.
Since the Predecessor was a business unit of Westinghouse, the accompanying
financial statements of the Predecessor include estimates for 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.
The results of the Predecessor's domestic operations were included in the
consolidated United States federal income tax return of Westinghouse, while
the results of its operations in Canada and Europe were reported separately
to their respective taxing jurisdictions. The income tax information in the
accompanying financial statements of the Predecessor is presented as if the
Predecessor had not been included in the consolidated tax returns of
Westinghouse or other affiliates (i.e. on a stand-alone basis). The
recognition and measurement of income tax expense and deferred income taxes
required certain assumptions, allocations, and significant estimates that
management believes are reasonable to measure the tax consequences as if
the Predecessor were a stand-alone taxpayer.
The operating results of the European subsidiaries are reported and
included in the consolidated financial statements on a one month lag to
allow for the timely presentation of consolidated information. The effect
of this presentation is not material to the financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements of the Company include the accounts
of Knoll, Inc. and its wholly owned subsidiaries. Intercompany transactions
and balances have been eliminated in consolidation.
The consolidated financial statements of the Predecessor include the
accounts of The Knoll Group, Inc. and related entities after elimination of
intercompany transactions and balances except for those with other units of
Westinghouse as described in Note 4.
Revenue Recognition
Sales are recognized as products are shipped and services are rendered.
F-14
<PAGE>
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Cash and Cash Equivalents
Cash and cash equivalents includes cash on hand and investments with
original maturities of three months or less.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method.
Property, Plant, Equipment, and Depreciation
Property, plant, and equipment are recorded at cost. Depreciation of plant
and equipment is computed using the straight-line method over the estimated
useful lives of the assets. The useful lives are as follows: 45 years for
buildings and 3 to 12 years for machinery and equipment.
Intangible Assets
Intangible assets consist of goodwill, trademarks and deferred financing
fees. Goodwill is recorded at the amount by which cost exceeds the net
assets of acquired businesses, and all other intangible assets are recorded
at cost. Goodwill and trademarks are amortized under the straight-line
method over 40 years, while deferred financing fees are amortized over the
life of the respective debt.
Management reviews the carrying value of goodwill and other intangibles on
an ongoing basis. When factors indicate that an intangible asset may be
impaired, management uses an estimate of the undiscounted future cash flows
over the remaining life of the asset in measuring whether the intangible
asset is recoverable. If such an analysis indicates that impairment has in
fact occurred, the book value of the intangible asset is written down to
its estimated fair value.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and are measured using enacted tax rates expected to
apply to taxable income in the years in which the temporary differences are
expected to reverse.
As discussed in Note 1, the U.S. operations of the Predecessor for the
first two months of 1996 and for the years ended December 31, 1995 and 1994
were included in a consolidated U.S. income tax return of Westinghouse and
its subsidiaries. Income taxes are provided in the accompanying financial
statements as if the Predecessor had filed a separate tax return.
Foreign Currency Translation
Results of foreign operations are translated into U.S. dollars using
average exchange rates during the period, while assets and liabilities are
translated into U.S. dollars using current rates. The resulting translation
adjustments are accumulated as a separate component of stockholders'
equity.
Transaction gains and losses resulting from exchange rate changes on
transactions denominated in currencies other than those of the foreign
subsidiaries are included in income in the year in which the change occurs.
Stock-Based Compensation
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," encourages entities to record compensation
expense for stock-based employee compensation plans at fair value but
provides the option of measuring compensation expense using the
F-15
<PAGE>
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
intrinsic value method prescribed in Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," the former standard.
The Company has elected to account for stock-based compensation under the
former standard. Accordingly, compensation expense for restricted stock
awards and stock options is measured as the excess, if any, of the quoted
market price of the Company's stock at the date of the grant over the
amount an employee must pay to acquire the stock. For those entities which
choose to measure compensation expense under the former standard, SFAS No.
123 requires supplemental disclosure to show the effects on operations as
if the new measurement criteria had been used. If the new measurement
criteria under SFAS No. 123 had been adopted, the Company's results of
operations would not differ from those reflected in the historical
financial statements.
Share and Per Share Amounts (Unaudited)
All numbers of shares of Common Stock and per share amounts have been
adjusted to give retroactive effect to the 3.13943-for-1 stock split as
discussed in Note 23.
Because of the significance of the redemption and conversion into Common
Stock of the outstanding Series A Preferred Stock upon consummation of the
initial public offering (IPO), historical net income (loss) per share is
not presented herein. Pro forma net income per share amounts are based on
the weighted average number of shares of Common Stock and Common Stock
equivalents (employee stock options) outstanding during the period, after
giving effect to the redemption and conversion into Common Stock of the
Series A Preferred Stock assuming such redemption and conversion had
occurred at the beginning of the period presented. Pursuant to Securities
and Exchange Commission Staff Accounting Bulletin No. 83, all Common Stock
and options to purchase Common Stock issued at prices below the initial
public offering price per share during the twelve month period immediately
preceding the initial filing date of the Company's registration statement
for the offerings have been included as outstanding for all periods
presented (using the treasury stock method at the initial public offering
price).
Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of certain
assets, liabilities, revenues and expenses and the disclosure of certain
contingent assets and liabilities. Actual future results may differ from
such estimates.
Reclassifications
Certain amounts in the accompanying financial statements of the Predecessor
have been reclassified to conform with the Company's 1996 classifications.
3. ACQUISITION
On December 20, 1995, Westinghouse entered into a Stock Purchase Agreement
(the Agreement) with T.K.G. Acquisition Corp. (TKG), a subsidiary of
Warburg, Pincus Ventures, L.P. Under the terms of the Agreement, TKG
acquired all of the outstanding capital stock of The Knoll Group, Inc. and
related entities on February 29, 1996 through its wholly owned subsidiary
T.K.G. Acquisition Sub, Inc. Immediately following this transaction, T.K.G.
Acquisition Sub, Inc. and The Knoll Group, Inc. merged with and into Knoll
North America, Inc., the principal U.S. operating company of The Knoll
Group, Inc. Knoll North America, Inc. changed its name to Knoll, Inc. at
the time of the merger. On March 14, 1997, Knoll, Inc. merged with and into
TKG. TKG then changed its name to Knoll, Inc.
F-16
<PAGE>
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The cost of the acquisition was $579,801,000. TKG funded the acquisition
through proceeds of $160,000,000 received from the sale of TKG capital
stock, $165,000,000 received from an offering of 10.875% senior
subordinated notes due 2006, and $260,000,000 in borrowings under senior
bank credit facilities. T.K.G. Acquisition Sub, Inc. executed the offering
of the senior notes and borrowings under the credit facilities. As such,
upon the acquisition and subsequent merger, the senior notes and credit
facility borrowings became obligations of Knoll, Inc.
The acquisition was accounted for using the purchase method of accounting.
Accordingly, the purchase price has been allocated to the assets acquired
and liabilities assumed based upon fair market value at the date of
acquisition. The excess of the consideration paid over the estimated fair
value of the net assets acquired, totaling $66,850,000, has been recorded
as goodwill and is being amortized on a straight-line basis over 40 years.
The purchase price allocation is summarized as follows (in thousands):
<TABLE>
<S> <C>
Net working capital............................................. $101,446
Property, plant and equipment................................... 180,074
Goodwill........................................................ 66,850
Other intangible assets......................................... 239,557
Other noncurrent liabilities, net............................... (8,126)
--------
$579,801
========
</TABLE>
The following table sets forth unaudited pro forma consolidated results of
operations assuming that the acquisition had taken place at the beginning
of the years presented:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Sales.......................................... $ 651,766 $ 620,892
Cost of sales.................................. 419,908 425,327
----------- -----------
Gross profit................................... 231,858 195,565
Selling, general and administrative expenses... 153,388 142,582
Allocated corporate expenses................... -- 4,000
----------- -----------
Operating income............................... 78,470 48,983
Interest expense............................... 40,030 40,945
Other income (expense), net.................... 151 (1,597)
----------- -----------
Income before income taxes and extraordinary
item.......................................... 38,591 6,441
Income taxes................................... 16,848 2,705
----------- -----------
Income before extraordinary item............... 21,743 3,736
Extraordinary loss on early extinguishment of
debt, net of taxes............................ 5,159 --
----------- -----------
Net income..................................... $ 16,584 $ 3,736
=========== ===========
</TABLE>
These pro forma results of operations have been prepared for comparative
purposes only and include certain adjustments, such as additional
depreciation expense as a result of a step-up in the basis of fixed assets,
additional selling, general and administrative costs for services
previously provided by Westinghouse, additional amortization expense as a
result of goodwill and other intangible assets, increased interest expense
as a result of the debt assumed to finance the acquisition, elimination of
incentive compensation under Westinghouse's long-term incentive plans which
became payable, and for which amounts payable were established, as a result
of the acquisition, and related income tax effects. Such results do not
purport
F-17
<PAGE>
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
to be indicative of the actual results which would have occurred had the
acquisition been consummated at the beginning of each year presented, nor
do they purport to be indicative of results that will be obtained in the
future.
4. RELATED PARTY TRANSACTIONS OF THE PREDECESSOR
The Predecessor purchased products from and sold products to other
Westinghouse operations. The Predecessor also purchased certain services
from Westinghouse, including liability, property, and workers' compensation
insurance. These transactions are discussed in further detail below.
Cash and Cash Equivalents
The Predecessor utilized Westinghouse's centralized cash management
services in North America. Accounts receivable were collected and cash was
invested at a central location. Additionally, disbursements were funded
centrally on demand. As a result, the Predecessor maintained a low cash
balance on its books, and received charges and credits against the parent
company's investment for cash used and collected through a central
clearinghouse arrangement.
Intercompany Purchases and Payables
The Predecessor purchased products and services from other Westinghouse
operations. For intercompany purchases in the U.S., the Predecessor used
the central clearinghouse arrangement through which intercompany
transactions were settled at the transfer date.
Accounts payable to related parties at December 31, 1995 represents
balances payable for purchases from units of Westinghouse that do not
participate in the central clearinghouse arrangement.
Intercompany Sales and Receivables
The Predecessor sold products to various Westinghouse operations. These
transactions were settled immediately through the central clearinghouse or
the internal customer was invoiced and an intercompany receivable was
established.
Corporate Services
The Predecessor used, and was charged directly for, certain services that
Westinghouse provided to its business units. These services generally
included information systems support, certain accounting functions such as
transaction processing, legal, environmental affairs and human resources
consulting and compliance support.
Westinghouse centrally developed, negotiated, and administered the
Predecessor's insurance programs. The insurance included broad all-risk
coverage for real and personal property and third-party liability coverage,
employer's liability coverage, automobile liability, general and product
liability, and other standard liability coverage. The Predecessor also
maintained a program of self-insurance for workers' compensation in the
United States through Westinghouse. Westinghouse charged 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 liability and workers' compensation claims are presented in the
Predecessor's consolidated financial statements.
All of the charges for the corporate services described above are included
in the costs of the Predecessor's operations in the consolidated statements
of operations. Such charges were based on costs which directly related to
the Predecessor or on a pro rata portion of Westinghouse's total costs for
the services provided. These costs were allocated to the Predecessor on a
basis that management believes is reasonable. However,
F-18
<PAGE>
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 two month period ended February 29, 1996
and the years ended December 31, 1995 and 1994, charges related to
corporate services above totaled $510,000, $3,304,000, and $4,172,000,
respectively.
The Predecessor also purchased other Westinghouse internally-provided
services as necessary including telecommunications, printing, productivity
and quality consulting, and other services.
Allocated Corporate Expenses
Westinghouse allocated 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. For the year ended
December 31, 1995, allocated corporate expenses also include $4,000,000 of
incentive compensation payable to the Predecessor's executives under
Westinghouse long-term incentive plans.
These corporate expenses were 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. On an annual basis, it was not practical for Westinghouse management
to estimate the level of expenses that might have been incurred had the
Predecessor operated as a separate stand-alone entity.
Westinghouse did not charge its business units for the carrying costs
related to its investment in such units (parent company investment).
Therefore, the Predecessor's results of operations for each of the periods
presented do not include any allocated interest charges from Westinghouse.
Westinghouse Long-Term Incentive Compensation
Certain key executives of the Predecessor were participants in a long-term
incentive compensation plan established by Westinghouse. The plan provided
for payment of awards at the end of a five year period based on the
achievement of certain performance goals set by Westinghouse's Board of
Directors. As a result of the consummation of the acquisition discussed in
Note 3, the payment of awards was accelerated pursuant to the terms of the
plan, resulting in a charge to operations of $47,900,000 for the two months
ended February 29, 1996.
Parent Company Investment
Since the Predecessor was an operating unit of Westinghouse and was not a
distinct legal entity, there were no customary equity and capital accounts
recorded on the consolidated balance sheet. Instead, parent company
investment was maintained by the Predecessor and Westinghouse to account
for interunit transactions described above.
5. CUSTOMER RECEIVABLES
Customer receivables are presented net of an allowance for doubtful
accounts of $5,713,000 and $5,782,000 at December 31, 1996 and 1995,
respectively. Management performs ongoing credit evaluations of its
customers and generally does not require collateral. As of December 31,
1996 and 1995, the U.S. government represented approximately 17.3% and
16.4%, respectively, of gross customer receivables.
F-19
<PAGE>
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
6. INVENTORIES
THE KNOLL GROUP,
INC. (PREDECESSOR)
DECEMBER 31, DECEMBER 31,
1996 1995
-------------- ------------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C>
Raw materials......................... $ 34,147 $ 34,857
Work in process....................... 7,508 9,829
Finished goods........................ 16,156 14,957
-------- ---------
Inventories........................... $ 57,811 $ 59,643
======== =========
7. PROPERTY, PLANT AND EQUIPMENT
THE KNOLL GROUP,
INC. (PREDECESSOR)
DECEMBER 31, DECEMBER 31,
1996 1995
-------------- ------------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C>
Land and buildings.................... $ 61,844 $ 100,197
Machinery and equipment............... 122,573 180,057
Construction in progress.............. 11,066 10,473
-------- ---------
Property, plant and equipment, at
cost................................. 195,483 290,727
Accumulated depreciation.............. (19,265) (126,094)
-------- ---------
Property, plant and equipment, net.... $176,218 $ 164,633
======== =========
8. INTANGIBLE ASSETS
THE KNOLL GROUP,
INC. (PREDECESSOR)
DECEMBER 31, DECEMBER 31,
1996 1995
-------------- ------------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C>
Goodwill.............................. $ 62,627 $ 277,833
Trademarks............................ 219,900 623
Deferred financing fees............... 11,226 --
-------- ---------
293,753 278,456
Accumulated amortization.............. (6,813) (37,684)
-------- ---------
Intangible assets, net................ $286,940 $ 240,772
======== =========
9. OTHER CURRENT LIABILITIES
THE KNOLL GROUP,
INC. (PREDECESSOR)
DECEMBER 31, DECEMBER 31,
1996 1995
-------------- ------------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C>
Accrued employee compensation......... $ 27,881 $ 19,486
Accrued product warranty.............. 7,173 6,763
Other................................. 26,989 17,708
-------- ---------
Other current liabilities............. $ 62,043 $ 43,957
======== =========
</TABLE>
F-20
<PAGE>
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. INDEBTEDNESS
The Company did not have any short-term borrowings outstanding as of
December 31, 1996. As of December 31, 1995, the Predecessor had outstanding
short-term European bank loans totaling $1,496,000. The composite and
weighted average interest rates on these borrowings was 11.00% and 10.356%,
respectively.
The Company's and the Predecessor's long-term debt is summarized as
follows:
<TABLE>
<CAPTION>
THE KNOLL GROUP, INC.
(PREDECESSOR)
DECEMBER 31, DECEMBER 31,
1996 1995
-------------- ---------------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C>
10.875% Senior subordinated notes, due 2006......................................... $165,000 $ --
Term loans, variable rate (6.515% at December 31, 1996) due through 2002............ 100,000 --
Revolving loans, variable rate (6.515% at December 31, 1996) due 2002............... 88,000 --
7.00% Urban Redevelopment Authority Grant, due 1996................................. -- 2,055
Other............................................................................... 1,154 1,483
-------- ------
354,154 3,538
Less current maturities............................................................. (23,265) (3,287)
-------- ------
Long-term debt...................................................................... $330,889 $ 251
======== ======
</TABLE>
Senior Subordinated Notes
The Company assumed the obligations under the 10.875% senior subordinated
notes as a direct result of the acquisition and merger which occurred on
February 29, 1996, as discussed in Note 3. The notes are unsecured and are
guaranteed by each existing and future wholly owned domestic subsidiary of
Knoll, Inc. However, if the Company is unable to satisfy all or any portion
of its obligations with respect to the notes, it is unlikely that the
guarantors will be able to pay all or any portion of such unsatisfied
obligations. There are no sinking fund requirements related to these notes,
and they are not redeemable at the Company's option prior to March 15,
2001. At such date, the notes are redeemable at 105.438% of principal
amount, and thereafter at an annually declining premium over par until
March 15, 2004 when they are redeemable at par. Notwithstanding the
foregoing, at any time on or before March 15, 1999, the Company may, under
certain conditions, redeem up to 35% of the original aggregate principal
amount of the notes at a redemption price of 110% of principal amount plus
interest with net proceeds from a public equity offering made by the
Company. The indenture limits the payment of dividends and incurrence of
indebtedness and includes certain other restrictions and limitations that
are customary with subordinated indebtedness of this type.
Term and Revolving Loans
On December 17, 1996, the Company entered into a $230,000,000 credit
agreement with a group of financial institutions that provides for a six
year term loan facility in the aggregate principal amount of $100,000,000
and a six year revolving credit facility in an aggregate amount of up to
$130,000,000. In addition, the revolving credit facility contains a letter
of credit subfacility which allows for the issuance of
F-21
<PAGE>
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
up to $20,000,000 in letters of credit. The amount available for borrowing
under the revolving credit facility is reduced by the total outstanding
letters of credit. This credit agreement expires in December 2002.
The proceeds of the facilities were used to refinance the Company's debt
under the previously existing senior bank credit facilities that was
assumed as a result of the acquisition, as discussed in Note 3, and for
working capital and general corporate purposes. The refinancing resulted in
an extraordinary charge of $8,542,000 on a pre-tax basis, $5,159,000 on an
after-tax basis, to operations for the ten months ended December 31, 1996.
This extraordinary charge consisted of the write-off of unamortized
financing costs related to the refinanced debt.
Borrowings under the existing credit agreement bear interest at rates based
on a bank base rate or the Eurodollar rate adjusted by a certain percentage
which depends on the Company's leverage ratio, as defined by the agreement.
The Company is required to make quarterly principal payments on the term
loans through December 2002, commencing on March 31, 1997. All loans under
the agreement are secured by substantially all of the Company's assets,
100% of the capital stock of the Company's domestic operations, and 65% of
the capital stock of the Company's foreign operations. All borrowings are
also unconditionally guaranteed by the Company's existing and future wholly
owned domestic subsidiaries. However, if the Company is unable to satisfy
all or any portion of its obligations with respect to the credit agreement,
it is unlikely that the guarantors will be able to pay all or any portion
of such unsatisfied obligations.
The credit agreement subjects the Company to various affirmative and
negative covenants. Among other things, the covenants limit the Company's
ability to incur additional indebtedness, declare or pay dividends, and
make capital expenditures; require the Company to maintain certain
financial ratios with respect to interest coverage and funded debt
leverage; and require the Company to maintain interest rate protection
agreements in a notional amount of at least 40% of the outstanding
principal amount. See note 12 for further discussion of interest rate
protection agreements.
At December 31, 1996, the Company had outstanding borrowings totaling
$88,000,000, of which $8,000,000 has been classified as current, and total
letters of credit of approximately $1,406,000, under the revolving credit
facility. There were no borrowings under the letters of credit. The Company
pays a commitment fee ranging from 0.175% to 0.375%, depending on the
Company's leverage ratio, on the unused portion of the revolving credit
facility. In addition, a letter of credit fee ranging from 0.50% to 1.50%,
depending on the Company's leverage ratio, is required to be paid on the
amount available to be drawn under letters of credit.
The Company also has a revolving credit agreement with various European
financial institutions that allows for borrowings up to an aggregate amount
of $9,685,000 or the European equivalent. There is currently no expiration
date on this agreement. The interest rate on borrowings varies by bank. The
majority of the banks involved assess a fixed rate ranging from 6.0% to
11.0%, while others charge a floating rate equal to the monetary market
rate plus 0.6% to 1.1%. Any borrowings would be collateralized by certain
real property and receivables of the Company's European operations. As of
December 31, 1996, the Company did not have any outstanding borrowings
under this European credit facility.
Interest Paid
For the ten months ended December 31, 1996, the Company made interest
payments totaling $25,775,000.
F-22
<PAGE>
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Maturities
Aggregate maturities of the Company's indebtedness are as follows (in
thousands):
<TABLE>
<S> <C>
1997............................................................. $ 23,265
1998............................................................. 15,000
1999............................................................. 15,000
2000............................................................. 15,000
2001............................................................. 20,000
Thereafter....................................................... 265,889
--------
$354,154
========
</TABLE>
11. PREFERRED STOCK
Dividends on the Series A 12% Participating Convertible Preferred Stock are
fully cumulative, accrue on a quarterly basis at a rate of $12 per annum,
and are payable only at the discretion of the Board of Directors. Upon
conversion, the holders of the outstanding Series A Preferred Stock lose
their right to any dividends, including dividends in arrears. As of
December 31, 1996, the aggregate and per share amounts of cumulative
dividends in arrears were $16.6 million and $10.36, respectively. Each
share of Series A Preferred Stock is convertible into a certain number of
shares of the Company's common stock based on the fair market equity value
of the Company at the time of conversion. Only the holder or holders of a
majority of the outstanding Series A Preferred Stock can cause all or a
portion of such stock to be converted. The Company may not redeem any of
the Series A Preferred Stock at its option. Holders are not granted the
benefit of any sinking fund. Upon involuntary liquidation, holders are
entitled to receive $100 per share plus any unpaid dividends. For each
share of Series A Preferred Stock, the holder is entitled to one thousand
votes on matters generally submitted to the stockholders of the Company and
certain matters on which a majority vote of holders of the Series A
Preferred Stock is required by the Company's Articles of Incorporation.
12. DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses interest rate collar agreements for other than trading
purposes to manage its exposure to fluctuations in interest rates on its
floating rate debt. Such agreements effectively set agreed-upon maximum and
minimum rates on a notional principal amount and utilize the London
Interbank Offered Rate (LIBOR) as a floating rate reference. The notional
amounts are utilized to measure the amount of interest to be paid or
received and do not represent the amount of exposure to credit loss. These
interest rate collar agreements provide that, at specified intervals, when
the floating rate is less than the minimum rate, the Company will pay the
counterparty the differential computed on the notional principal amount,
and when the floating rate exceeds the maximum rate, the counterparty will
pay the Company the differential computed on the notional principal amount.
The net amount paid or received on the interest rate collar agreements is
recognized as an adjustment to interest expense. During the ten months
ended December 31, 1996, the Company was not required to make nor was it
entitled to receive any payments as a result of these hedging activities.
At December 31, 1996, the Company had five outstanding interest rate collar
agreements with a total notional principal amount of $185,000,000 and
maximum and minimum rates ranging from 7.50% to 7.99% and 5.00% to 5.50%,
respectively. These agreements mature over the next two years. Aggregate
maturities of the total notional principal amount are as follows:
$70,000,000 in 1998 and $115,000,000 in 1999.
The counterparties to the interest rate collar agreements are major
financial institutions. The Company continually monitors its positions and
the credit ratings of the counterparties and does not anticipate
nonperformance by them. The Company has not been required to provide nor
has it received any collateral related to its hedging activities.
F-23
<PAGE>
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. CONTINGENT LIABILITIES AND COMMITMENTS
There are various claims and lawsuits pending against the Company, all of
which management believes, based upon information presently known, 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.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair values
of each class of financial instruments:
Cash and Cash Equivalents, Accounts Receivable, Accounts Payable, and Short-
Term Debt
The fair values of these financial instruments approximate their carrying
amounts due to their immediate or short-term periods to maturity.
Long-Term Debt
The fair values of the variable rate long-term debt instruments approximate
their carrying amounts. The fair value of other long-term debt was
estimated using quoted market values or discounted cash flow analyses based
on current incremental borrowing rates for similar types of borrowing
arrangements. The fair value of the Company's long-term debt, including the
current portion, is approximately $371,892,000 at December 31, 1996 while
the carrying amount is $354,154,000. The fair value of the Predecessor's
long-term debt, including the current portion, approximates its carrying
amount at December 31, 1995.
Interest Rate Collar Agreements
The fair value of the Company's interest rate collar agreements
approximates cost as of December 31, 1996.
15. INCOME TAXES
Income (loss) before income taxes and extraordinary item consists of the
following:
<TABLE>
<CAPTION>
THE KNOLL
GROUP, INC.
(PREDECESSOR) THE KNOLL GROUP, INC.
TEN MONTHS TWO MONTHS (PREDECESSOR)
ENDED ENDED YEAR ENDED DECEMBER 31,
DECEMBER 31, FEBRUARY 29, ------------------------
1996 1996 1995 1994
-------------- ------------- ----------- ------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. operations.............. $23,381 $(39,105) $ 46,908 $ 7,729
Foreign operations........... 15,458 (1,090) 5,270 (59,789)
------- -------- ----------- ------------
$38,839 $(40,195) $ 52,178 $ (52,060)
======= ======== =========== ============
</TABLE>
F-24
<PAGE>
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income tax expense (benefit), excluding extraordinary items, is comprised
of the following:
<TABLE>
<CAPTION>
THE KNOLL
GROUP, INC.
(PREDECESSOR) THE KNOLL GROUP, INC.
TEN MONTHS TWO MONTHS (PREDECESSOR)
ENDED ENDED YEAR ENDED DECEMBER 31,
DECEMBER 31, FEBRUARY 29, -----------------------
1996 1996 1995 1994
-------------- ------------- ------------ -----------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Current:
Federal........................................................ $10,909 $(13,801) $ 11,130 $ --
State.......................................................... 2,953 (1,814) 3,687 1,920
Foreign........................................................ 661 28 -- --
------- -------- ------------ -----------
Total current................................................ 14,523 (15,587) 14,817 1,920
------- -------- ------------ -----------
Deferred:
Federal........................................................ (2,850) (460) 7,795 5,704
State.......................................................... (612) (60) 234 89
Foreign........................................................ 5,783 -- -- --
------- -------- ------------ -----------
Total deferred............................................... 2,321 (520) 8,029 5,793
------- -------- ------------ -----------
Income tax expense (benefit)..................................... $16,844 $(16,107) $ 22,846 $ 7,713
======= ======== ============ ===========
</TABLE>
Income taxes paid by the Company for the ten months ended December 31, 1996
totaled $13,137,000.
The following table sets forth the tax effects of temporary differences
that give rise to significant portions of the deferred tax assets and
liabilities:
<TABLE>
<CAPTION>
THE KNOLL GROUP,
INC. (PREDECESSOR)
DECEMBER 31, DECEMBER 31,
1996 1995
-------------- ------------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due
to allowance for doubtful accounts.. $ 1,659 $ 1,753
Inventories.......................... 2,603 4,856
Net operating loss carryforwards..... 28,253 37,339
Accrued restructuring costs.......... 966 3,367
Postretirement benefit obligation.... 6,880 8,925
Accrued liabilities and other items.. 20,669 9,344
-------- --------
Gross deferred tax assets.............. 61,030 65,584
Valuation allowance.................... (33,161) (37,990)
-------- --------
Net deferred tax assets................ 27,869 27,594
-------- --------
Deferred tax liabilities:
Intangibles, principally due to
differences in amortization......... 3,338 --
Plant and equipment, principally due
to differences in depreciation and
assigned values..................... 1,930 22,369
Prepaid pension cost................. -- 16,526
-------- --------
Gross deferred tax liabilities......... 5,268 38,895
-------- --------
Net deferred tax asset (liability)..... $ 22,601 $(11,301)
======== ========
</TABLE>
F-25
<PAGE>
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As discussed in Notes 1 and 2, the recognition and measurement of income
tax expense and deferred taxes for the Predecessor required certain
assumptions, allocations, and significant estimates in order to measure the
tax consequences as if the Predecessor were a stand-alone taxpayer.
As of December 31, 1996, the Company has pre-acquisition net operating loss
carryforwards totaling approximately $76,000,000 in various foreign tax
jurisdictions which generally expire between 1997 and 2001 or may be
carried forward for an unlimited time.
The Company has recorded a valuation allowance for net deferred tax assets
in foreign tax jurisdictions, primarily related to pre-acquisition net
operating loss carryforwards, due to the significant losses incurred by the
Predecessor in these tax jurisdictions in previous years.
At February 29, 1996 and December 31, 1994 and 1993, the Predecessor had
recorded a valuation allowance of $38,446,000, $43,066,000, and
$24,881,000, respectively.
For the ten months ended December 31, 1996, tax benefits recognized through
reductions of the valuation allowance had the effect of reducing goodwill
by $4,246,000. If additional tax benefits are recognized in the future
through further reduction of the valuation allowance, such benefits will
reduce goodwill.
The following table sets forth a reconciliation of the statutory federal
income tax rate to the effective income tax rate:
<TABLE>
<CAPTION>
THE KNOLL THE KNOLL
GROUP, INC. GROUP, INC.
(PREDECESSOR) (PREDECESSOR)
TEN MONTHS TWO MONTHS YEAR ENDED
ENDED ENDED DECEMBER 31,
DECEMBER 31, FEBRUARY 29, ---------------
1996 1996 1995 1994
------------ ------------- ------ -------
<S> <C> <C> <C> <C>
Federal statutory tax rate................................................... 35.0% (35.0%) 35.0% (35.0%)
Increase (decrease) in the tax rate resulting from:
State taxes, net of federal effect......................................... 3.9 (4.5) 4.9 2.5
Higher effective income taxes of other countries, net of change in
valuation allowance....................................................... 3.2 (0.2) (1.4) 41.8
Non-deductible goodwill amortization....................................... 1.0 1.1 4.7 4.7
Other...................................................................... 0.3 (1.4) 0.6 0.8
---- ----- ------ -------
Effective tax rate........................................................... 43.4% (40.0%) 43.8% 14.8%
==== ===== ====== =======
</TABLE>
At December 31, 1996, the Company has not made provision for U.S. federal
and state income taxes on approximately $9,194,000 of foreign earnings
which are expected to be reinvested indefinitely. Upon distribution of
those earnings in the form of dividends or otherwise, the Company would be
subject to U.S. income taxes (subject to an adjustment for foreign tax
credits) and withholding taxes payable to the various foreign countries.
Determination of the amount of the unrecognized deferred tax liability is
not practicable.
F-26
<PAGE>
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
16. RESTRUCTURING
In 1994, the Predecessor 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.
<TABLE>
<CAPTION>
FACILITY
EMPLOYEE CLOSURE AND
SEPARATION ASSET RATIONALIZATION
COSTS WRITEDOWN COSTS TOTAL
---------- --------- --------------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
North America................ $10,559 $19,104 $ 7,982 $37,645
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 totaling $10,868,000 at December 31, 1995
consist primarily of employee separation costs, lease costs related to
properties that are no longer being utilized, and product guarantees. The
remaining accrued costs of $1,979,000 at December 31, 1996 consist of
employee separation costs and product guarantees. The Company expects to
pay the remaining accrued restructuring costs during 1997.
17. LEASES
The Company has commitments under operating leases for certain machinery
and equipment and facilities used in its operations. Total rental expense
for the ten months ended December 31, 1996 was $7,787,000. Future minimum
rental payments required under those operating leases that have an initial
or remaining noncancelable lease term in excess of one year are as follows
(in thousands):
<TABLE>
<S> <C>
1997............................................................. $ 5,270
1998............................................................. 4,731
1999............................................................. 3,550
2000............................................................. 2,390
2001............................................................. 1,907
Subsequent years................................................. 3,241
-------
Total minimum rental payments.................................... $21,089
=======
</TABLE>
The Predecessor also had operating leases for certain machinery and
equipment and facilities. Total rental expense charged to operations was
$1,668,000 for the two months ended February 29, 1996 and $10,149,000 and
$10,917,000 for the years ended December 31, 1995 and 1994, respectively.
18. STOCK INCENTIVE PLANS
In connection with the acquisition discussed in Note 3, the Company
established the Knoll, Inc. 1996 Stock Incentive Plan (the 1996 Plan).
Under the 1996 Plan, awards denominated or payable in shares or options to
purchase shares of the Company's common stock may be granted to officers
and other key employees of the Company. A combined maximum of 4,709,126
shares or options may be granted under the 1996 Plan. A Stock Plan
Committee of the Company's Board of Directors has sole discretion
concerning administration of the 1996 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 Board of
Directors may terminate the 1996 Plan at its discretion at any time.
F-27
<PAGE>
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For the ten months ended December 31, 1996, the Company granted 4,144,030
restricted common shares, with a weighted average fair market value of
$0.34 per share, to key employees. Of such amount, 2,260,389 of these
restricted common shares vest ratably over five years beginning on the
grant date, while the other 1,883,641 shares vest over five years
commencing one year subsequent to the grant date. The fair market value of
the shares on the date of the grant has been recorded as unearned stock
grant compensation and is presented as a separate component of
stockholders' equity. Compensation expense is recognized ratably over the
vesting period. Compensation expense recognized for the ten months ended
December 31, 1996 with respect to the restricted common shares granted
under the 1996 Plan was $135,000. No options were granted during the ten
month period ended December 31, 1996. The remaining 565,096 shares
available under the 1996 Plan were granted in the form of options on March
7, 1997. The exercise price with respect to these options is $15.93 per
share.
The Knoll, Inc. 1997 Stock Incentive Plan (the 1997 Plan) was established
on February 14, 1997. The terms of the 1997 Plan are essentially the same
as those of the 1996 Plan, except that pursuant to the 1997 Plan an
aggregate of only 1,255,772 shares of common stock are reserved for
issuance thereunder, discounted options may be granted, options may be
repriced and the Board of Directors has greater flexibility to amend the
1997 Plan. On March 7, 1997, the Company granted 753,456 options to
purchase shares under the 1997 Plan. The exercise price with respect to
these options is $15.93 per share.
19. PENSION PLANS
On March 1, 1996, the Company established two defined benefit pension
plans: The Knoll Pension Plan and The Knoll Pension Plan for Bargaining
Unit Employees. The first plan covers all eligible U.S. employees who are
not members of a collective bargaining unit (i.e. union), while the second
plan pertains to all U.S. employees who are covered by a collective
bargaining agreement. Benefits for these plans are based primarily on years
of credited service, annual compensation for each year of participation,
and age when payments begin. In order to accrue benefits under The Knoll
Pension Plan for Bargaining Unit Employees, participants are required to
make certain contributions to the plan. The Company makes contributions to
both plans as determined by an actuarial funding method. This funding
policy is consistent with the minimum funding requirements set forth by the
Employee Retirement Income Security Act of 1974, as amended, and other
governmental laws and regulations.
The Company's net periodic pension cost, which consists entirely of service
cost, for the ten months ended December 31, 1996 was $3,953,000.
The funded status of the Company's pension plans is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
--------------
(IN THOUSANDS)
<S> <C>
Actuarial present value of benefit obligation:
Vested................................................. $(2,784)
Nonvested.............................................. (273)
-------
Accumulated benefit obligation......................... (3,057)
Additional obligation for projected compensation
increases on accumulated years of service............. (896)
-------
Projected benefit obligation............................. (3,953)
Plan assets at fair value................................ 30
-------
Plan assets less than projected benefit obligation and
accrued pension cost.................................... $(3,923)
=======
</TABLE>
F-28
<PAGE>
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The projected benefit obligation was measured using a discount rate of
7.25%. The assumed rate of compensation increase was 4.5%.
Prior to March 1, 1996, the Predecessor sponsored a defined benefit pension
plan, The Knoll Group Pension Plan, for all eligible U.S. nonunion
employees. The plan provisions were substantially the same as the current
pension plan for nonunion employees offered by Knoll, Inc. As a result of
the sale of the Predecessor by Westinghouse, benefits earned through
February 29, 1996 under The Knoll Group Pension Plan were frozen and
participants were fully vested in their benefits. The plan was subsequently
merged into a Westinghouse pension plan.
The following table sets forth the Predecessor's net periodic pension cost
(income) for The Knoll Group Pension Plan:
<TABLE>
<CAPTION>
TWO MONTHS
ENDED YEAR ENDED DECEMBER 31,
FEBRUARY 29, -------------------------
1996 1995 1994
------------ ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost.................... $ 522 $ 2,278 $ 2,955
Interest cost on projected
benefit obligation............. 933 5,212 5,016
Amortization of unrecognized
prior service cost............. 68 385 385
Amortization of unrecognized net
loss........................... 197 -- 468
------ ------------ -----------
1,720 7,875 8,824
Return on plan assets........... (1,543) (8,993) (8,846)
------ ------------ -----------
Net periodic pension cost
(income)....................... $ 177 $ (1,118) $ (22)
====== ============ ===========
</TABLE>
The return on plan assets was determined based on a weighted-average
expected long-term rate of return on plan assets of 9.75% for each period
presented.
The following table sets forth the funded status of The Knoll Group Pension
Plan:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
--------------
(IN THOUSANDS)
<S> <C>
Actuarial present value of benefit obligation:
Vested................................................. $ (68,081)
Nonvested.............................................. (3,363)
---------
Accumulated benefit obligation......................... (71,444)
Additional obligation for projected compensation
increases on accumulated years of service............. (12,491)
---------
Projected benefit obligation............................. (83,935)
Plan assets at fair value................................ 95,940
---------
Plan assets in excess of projected benefit obligation.... 12,005
Unrecognized prior service cost.......................... 4,458
Unrecognized net loss.................................... 28,698
---------
Prepaid pension cost..................................... $ 45,161
=========
</TABLE>
F-29
<PAGE>
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The projected benefit obligation was measured using a discount rate of
6.75%. The assumed rate of compensation increase was 4.0%. As of December
31, 1995, plan assets consisted primarily of listed stocks, fixed income
securities, and real estate investments.
The Predecessor also participated in two single-employer defined benefit
pension plans sponsored by Westinghouse. These plans covered all U.S. union
employees of the Predecessor, certain domestic Westinghouse employees, and
certain domestic executives of the Predecessor and Westinghouse.
For purposes of these financial statements, the Predecessor's participation
in the plans sponsored by Westinghouse is accounted for as though such
plans were multiemployer plans. For multiemployer plans, employers are
required to recognize total contributions for the period as net pension
expense. For the two months ended February 29, 1996 and the years ended
December 31, 1995 and 1994, the Predecessor's contributions to Westinghouse
for these defined benefit pension plans totaled $212,000, $1,076,000, and
$1,223,000, respectively.
Employees of the Canadian and United Kingdom (U.K.) operations participate
in defined contribution plans. The Company's expense related to the
Canadian plan for the ten months ended December 31, 1996 was $607,000. The
Predecessor's expense for the two months ended February 29, 1996 and years
ended December 31, 1995, and 1994 totaled $114,000; $398,000; and $398,000;
respectively. Expense for the U.K. plan during each of the four
aforementioned periods was not significant.
The Company also sponsors a 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, for all U.S. nonunion employees and
U.S. hourly union employees. Under this plan, participants may defer a
portion of their pretax earnings up to the annual contribution limit
established by the Internal Revenue Service. The Company matches 40% of
employee contributions on up to 6% of employee compensation. The plan also
provides for additional employer matching based on the achievement of
certain profitability goals. The Company's total expense under this plan
was $2,957,000 for the ten months ended December 31, 1996. The Predecessor
administered a similar retirement savings plan and incurred related expense
totaling $406,000; $2,675,000; and $1,592,000 for the two months ended
February 29, 1996 and the years ended December 31, 1995 and 1994,
respectively.
20. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides postretirement medical and life insurance coverage for
certain retired U.S. nonunion and union employees and their eligible
dependents. The amount of benefits provided to retired nonunion employees
varies according to the age of the retiree as of a predetermined date,
while benefits provided to retired union employees are based on annual
compensation. The Company does not currently fund its obligation related to
postretirement medical and life insurance benefits.
Net periodic postretirement benefit cost for the Company includes the
following components:
<TABLE>
<CAPTION>
TEN MONTHS
ENDED
DECEMBER 31,
1996
--------------
(IN THOUSANDS)
<S> <C>
Service cost............................................... $ 440
Interest cost on projected benefit obligation.............. 1,000
------
Net periodic postretirement benefit cost................... $1,440
======
</TABLE>
F-30
<PAGE>
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company's liability related to the postretirement medical and life
insurance benefits is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
--------------
(IN THOUSANDS)
<S> <C>
Accumulated postretirement benefit obligation:
Retirees................................................. $ (7,329)
Fully eligible active participants....................... (1,593)
Other active participants................................ (8,235)
--------
Total accumulated postretirement benefit obligation........ (17,157)
Unrecognized net gain...................................... (217)
--------
Accrued postretirement benefit cost........................ $(17,374)
========
</TABLE>
The accumulated postretirement benefit obligation was measured using the
following assumptions: discount rate of 7.25%, rate of compensation
increase of 4.5%, and health care cost trend rate of 9.5% in 1996,
decreasing by 1.0% per year to 5.5% in 2000, and remaining at that level
thereafter. Increasing the assumed health care cost trend rate by one
percentage point in each year would increase the accumulated postretirement
benefit obligation by approximately $1,450,000 and increase the aggregate
of the service and interest cost by approximately $151,000.
The Predecessor provided postretirement medical and life insurance benefits
to U.S. retired nonunion employees. The current postretirement medical and
life insurance benefits which the Company provides to retired nonunion
employees remain essentially unchanged from those which the Predecessor had
provided.
Net periodic postretirement benefit cost incurred by the Predecessor
includes the following:
<TABLE>
<CAPTION>
TWO MONTHS
ENDED YEAR ENDED DECEMBER 31,
FEBRUARY 29, ------------------------
1996 1995 1994
------------ ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost...................... $103 $ 449 $ 556
Interest cost on projected benefit
obligation....................... 207 1,509 1,509
Amortization of unrecognized prior
service cost..................... (56) (12) --
Amortization of unrecognized net
(gain) loss...................... 10 (25) 18
---- ----------- -----------
Net periodic postretirement
benefit cost..................... $264 $ 1,921 $ 2,083
==== =========== ===========
</TABLE>
The Predecessor's liability related to the postretirement medical and life
insurance benefits which it provided to U.S. retired nonunion employees is
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
--------------
(IN THOUSANDS)
<S> <C>
Accumulated postretirement benefit obligation:
Retirees................................................. $ (7,581)
Fully eligible active participants....................... (1,680)
Other active participants................................ (8,480)
---------
Total accumulated postretirement benefit obligation........ (17,741)
Unrecognized prior service cost............................ (4,155)
Unrecognized net loss...................................... 1,303
---------
Accrued postretirement benefit cost........................ $ (20,593)
=========
</TABLE>
F-31
<PAGE>
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The accumulated postretirement benefit obligation was measured using the
following assumptions: discount rate of 7.25%, rate of compensation
increase of 4.0%, and health care cost trend rate of 11.5% in 1995,
decreasing by 0.5% per year to 7.0% in 2004, and remaining at that level
thereafter.
The Predecessor also participated in a single-employer postretirement
benefit arrangement maintained by Westinghouse. Westinghouse provided
medical and life insurance benefits to all retired U.S. union employees and
certain Westinghouse employees. For purposes of these financial statements,
the Predecessor's participation in this postretirement benefit arrangement
is accounted for as though it was a multiemployer postretirement benefit
plan. For multiemployer plans, employers are required to recognize total
contributions for the period as net periodic postretirement benefit
expense. The Predecessor's contributions for the postretirement benefit
arrangements sponsored by Westinghouse totaled $82,500 for the two months
ended February 29, 1996, $151,000 for the year ended December 31, 1995 and
$122,000 for the year ended December 31, 1994.
21. BUSINESS SEGMENT AND GEOGRAPHICAL REGION INFORMATION
The Company conducts business predominantly in the office furniture
industry through its operations in the United States, Canada, and Europe.
Summarized financial information regarding the Company's operations in
these geographic areas is presented below:
<TABLE>
<CAPTION>
TEN MONTHS ENDED UNITED
DECEMBER 31, 1996 STATES CANADA EUROPE ELIMINATIONS TOTALS
----------------- -------- ------- ------- ------------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Sales to customers....... $493,653 $24,456 $43,425 $ -- $561,534
Sales between geographic
areas................... 13,637 60,866 1,714 (76,217) --
-------- ------- ------- --------- --------
Net sales................ $507,290 $85,322 $45,139 $ (76,217) $561,534
======== ======= ======= ========= ========
Operating profit......... $ 54,381 $10,681 $ 6,282 -- $ 71,344
======== ======= ======= ========= ========
Identifiable assets...... $648,868 $52,690 $39,725 $ (65,571) $675,712
======== ======= ======= ========= ========
</TABLE>
F-32
<PAGE>
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Predecessor also operated primarily in the office furniture industry in
the United States, Canada, and Europe. Summarized financial data regarding
the Predecessor's operations according to geographic area is as follows:
<TABLE>
<CAPTION>
TWO MONTHS ENDED UNITED
FEBRUARY 29, 1996 STATES CANADA EUROPE ELIMINATIONS TOTALS
----------------- -------- ------- -------- ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Sales to customers...... $ 78,267 $ 4,415 $ 7,251 $ -- $ 89,933
Sales to related
parties................ 299 -- -- -- 299
Sales between geographic
areas.................. 1,377 6,708 227 (8,312) --
-------- ------- -------- -------- ---------
Net sales............... $ 79,943 $11,123 $ 7,478 $ (8,312) $ 90,232
======== ======= ======== ======== =========
Operating profit........ $(39,010) $ (734) $ 185 -- $ (39,559)
======== ======= ======== ======== =========
<CAPTION>
YEAR ENDED UNITED
DECEMBER 31, 1995 STATES CANADA EUROPE ELIMINATIONS TOTALS
----------------- -------- ------- -------- ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Sales to customers...... $517,314 $31,132 $ 62,277 $ -- $ 610,723
Sales to related
parties................ 10,169 -- -- -- 10,169
Sales between geographic
areas.................. 17,349 61,262 1,882 (80,493) --
-------- ------- -------- -------- ---------
Net 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
======== ======= ======== ========
General corporate
assets................. 62,406
Total assets............ $ 656,710
=========
<CAPTION>
YEAR ENDED UNITED
DECEMBER 31, 1994 STATES CANADA EUROPE ELIMINATIONS TOTALS
----------------- -------- ------- -------- ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Sales to customers...... $471,662 $30,294 $ 60,642 $ -- $ 562,598
Sales to related par-
ties................... 271 -- -- 271
Sales between geographic
areas.................. 20,994 43,541 2,445 (66,980) --
-------- ------- -------- -------- ---------
Net 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)
======== ======= ======== ======== =========
</TABLE>
For the two months ended February 29, 1996 and the years ended December 31,
1995 and 1994, allocated corporate expenses from Westinghouse were prorated
to the geographic segments based on sales. In addition, general corporate
assets at December 31, 1995 include cash and cash equivalents, prepaid
pension assets, and current and deferred tax assets that were maintained by
Westinghouse.
The Predecessor typically derived more than 10% of net sales from the U.S.
federal government. The Predecessor's sales to the U.S. federal government
totaled $9,925,000 for the two months ended
F-33
<PAGE>
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
February 29, 1996 and $58,090,000 and $56,142,000 for the years ended
December 31, 1995 and 1994, respectively. The Company's total sales to the
U.S. federal government were $51,046,000 for the ten months ended December
31, 1996. Neither the Company nor the Predecessor engaged in export sales
from the U.S. to unaffiliated customers in foreign countries.
Sales between geographic areas are made at a transfer price that includes
an appropriate mark- up.
22. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth summary information on a quarterly basis for
the Company and the Predecessor for the respective periods presented below.
<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
----------- -------------------------------------
TWO MONTHS ONE MONTH
ENDED ENDED SECOND THIRD FOURTH
FEBRUARY 29 MARCH 31 QUARTER QUARTER QUARTER
----------- --------- -------- --------- --------
(DOLLARS IN
THOUSANDS) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1996
Net sales................. $ 90,232 $ 48,080 $166,520 $ 167,184 $179,750
Gross profit.............. 30,518 15,537 58,574 61,046 67,536
Income (loss) before ex-
traordinary item......... (24,088) 449 7,527 7,685 6,334
Net income (loss)......... (24,088) 449 7,527 7,685 1,175
<CAPTION>
PREDECESSOR
----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
1995
Net sales................. $147,410 $159,352 $155,055 $159,075
Gross profit.............. 42,919 50,279 54,829 55,233
Net income................ 1,216 5,945 12,174 9,997
</TABLE>
Results for 1996 and 1995 have been restated to reflect the reclassification
of certain expenses, principally product development, from cost of sales to
selling, general and administrative expenses as compared to previously
reported results.
During the quarter ended December 31, 1996, the Company recorded a loss on
the early extinguishment of debt amounting to $8,542,000 pre-tax,
$5,159,000 after-tax. The loss consisted of the write-off of unamortized
deferred financing fees.
23. SUBSEQUENT EVENT
On May 6, 1997, the Company's Certificate of Incorporation was amended to
increase the number of authorized shares of common stock from 24,000,000 to
100,000,000, increase the number of authorized shares of preferred stock
from 3,000,000 to 10,000,000 and effect a 3.13943-for-1 split of common
stock whereby each share of common stock was exchanged for 3.13943 shares
of common stock. The amendment to the Certificate of Incorporation had no
effect on the par value of the common or preferred stock. Fractional shares
resulting from the common stock split will be settled in cash.
F-34
<PAGE>
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
24. FINANCIAL INFORMATION FOR GUARANTORS OF THE COMPANY'S DEBT
As discussed in Note 10, certain debt of the Company is guaranteed by all
existing and future directly or indirectly wholly owned domestic
subsidiaries of the Company (the "Guarantors"). The Guarantors are Knoll
Overseas, Inc., a holding company for the entities that conduct the
Company's European business, and Spinneybeck Enterprises, Inc., which
directly and through a Canadian subsidiary operates the Company's leather
business.
These Guarantors will irrevocably and unconditionally, fully, jointly and
severally, guarantee the performance and payment when due, of all
obligations under the 10.875% Senior Subordinated Notes and credit
agreement outstanding as of December 31, 1996, 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:
. Condensed financial statements as of December 31, 1996 and 1995, and for
the ten months ended December 31, 1996, two months ended February 29,
1996, and the years ended December 31, 1995 and 1994 of (a) Knoll, Inc.
(as the Issuer), (b) the Guarantors, (c) the combined non-Guarantors,
(d) elimination entries and (e) the Company on a consolidated basis.
. The Issuer and the Guarantors are shown with their investments in their
subsidiaries accounted for on the equity method.
The condensed consolidating financial statements should be read in
connection with the consolidated financial statements of the Company.
Separate financial statements of the Guarantors are not presented because
Management has determined that separate financial statements are not
material. The Guarantors are fully, jointly, severally and unconditionally
liable under the guarantees.
F-35
<PAGE>
KNOLL, INC.
BALANCE SHEET
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTORS
---------------------------
SPINNEYBECK
ENTERPRISES, KNOLL NON-
KNOLL, INC. INC. OVERSEAS, INC. GUARANTORS ELIMINATIONS TOTAL
----------- ------------ -------------- ---------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.......... $ 41 $ 267 $ -- $ 8,496 $ -- $ 8,804
Customer receivables.. 85,959 1,398 -- 23,809 -- 111,166
Inventories........... 39,951 6,747 -- 11,113 -- 57,811
Deferred income
taxes................ 17,079 -- -- 395 -- 17,474
Prepaid and other
current assets....... 9,769 50 (586) 2,817 (4,626) 7,424
-------- ------ ------- ------- -------- --------
Total current assets.... 152,799 8,462 (586) 46,630 (4,626) 202,679
Property, plant, and
equipment.............. 141,357 368 -- 34,493 -- 176,218
Intangible assets....... 278,389 -- -- 8,551 -- 286,940
Equity investments...... 75,571 550 12,789 -- (88,910) --
Other noncurrent
assets................. 9,976 13 97 2,289 (2,500) 9,875
-------- ------ ------- ------- -------- --------
Total assets............ $658,092 $9,393 $12,300 $91,963 $(96,036) $675,712
======== ====== ======= ======= ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of
long-term debt....... $ 23,000 $ -- $ -- $ 265 $ -- $ 23,265
Accounts payable--
trade................ 34,076 350 -- 15,824 -- 50,250
Accounts payable--
related parties...... 1,543 -- (5,169) 8,252 (4,626) --
Income taxes payable.. 11 19 (1) 359 -- 388
Accrued restructuring
costs................ 1,598 -- -- 381 -- 1,979
Other current
liabilities.......... 54,649 288 1,668 5,438 -- 62,043
-------- ------ ------- ------- -------- --------
Total current
liabilities............ 114,877 657 (3,502) 30,519 (4,626) 137,925
Long-term debt.......... 330,000 2,500 -- 889 (2,500) 330,889
Deferred income taxes... -- -- -- 1,931 -- 1,931
Postretirement benefits
obligation............. 15,873 -- -- -- -- 15,873
Other noncurrent
liabilities............ 6,391 -- -- 4,899 -- 11,290
-------- ------ ------- ------- -------- --------
Total liabilities....... 467,141 3,157 (3,502) 38,238 (7,126) 497,908
Stockholders' equity:
Preferred stock....... 1,603 -- -- -- -- 1,603
Common stock.......... 73 -- -- -- -- 73
Additional paid-in-
capital.............. 173,826 4,033 14,034 43,999 (75,745) 160,147
Unearned stock grant
compensation......... (1,387) -- -- -- -- (1,387)
Retained earnings..... 16,836 2,203 1,768 9,194 (13,165) 16,836
Cumulative foreign
currency translation
adjustment........... -- -- -- 532 -- 532
-------- ------ ------- ------- -------- --------
Total stockholders'
equity................. 190,951 6,236 15,802 53,725 (88,910) 177,804
-------- ------ ------- ------- -------- --------
Total liabilities and
stockholders' equity... $658,092 $9,393 $12,300 $91,963 $(96,036) $675,712
======== ====== ======= ======= ======== ========
</TABLE>
F-36
<PAGE>
KNOLL, INC.
BALANCE SHEET
DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTORS
---------------------------
SPINNEYBECK
ENTERPRISES, KNOLL NON-
KNOLL, INC. INC. OVERSEAS, INC. GUARANTORS ELIMINATIONS TOTAL
----------- ------------ -------------- ---------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.......... $ (182) $ 182 $ -- $ 1,569 $ -- $ 1,569
Customer receivables.. 88,656 1,173 135 24,628 -- 114,592
Inventories........... 38,570 6,436 -- 14,637 -- 59,643
Deferred income
taxes................ 17,024 528 411 310 -- 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
Property, plant, and
equipment.............. 121,144 310 -- 43,179 -- 164,633
Intangible assets....... 160,072 4,430 626 75,644 -- 240,772
Prepaid pension cost.... 45,161 -- -- -- -- 45,161
Equity investments...... 32,050 2,140 26,152 -- (60,342) --
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
STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt....... $ -- $ -- $ -- $ 1,496 $ -- $ 1,496
Current maturities of
long-term debt....... 2,055 -- -- 1,232 -- 3,287
Accounts payable--
trade................ 27,534 910 123 17,283 -- 45,850
Accounts payable--
related parties...... 633 117 -- 6,591 (6,928) 413
Income taxes payable.. 13,760 984 (771) -- -- 13,973
Accrued restructuring
costs................ 5,893 -- -- 4,975 -- 10,868
Other current
liabilities.......... 36,726 861 1,778 4,592 -- 43,957
-------- ------- ------- -------- -------- --------
Total current
liabilities............ 86,601 2,872 1,130 36,169 (6,928) 119,844
Long-term debt.......... -- -- -- 251 -- 251
Deferred income taxes... 27,566 (56) 56 2,008 -- 29,574
Postretirement benefits
obligation............. 20,593 -- -- -- -- 20,593
Other noncurrent
liabilities............ 2,256 -- -- 3,741 -- 5,997
-------- ------- ------- -------- -------- --------
Total liabilities....... 137,016 2,816 1,186 42,169 (6,928) 176,259
Stockholders' equity:
Parent company
investment........... 370,140 12,419 30,789 170,192 (80,223) 503,317
Cumulative foreign
currency translation
adjustment........... -- -- -- (22,866) -- (22,866)
-------- ------- ------- -------- -------- --------
Total stockholders'
equity................. 370,140 12,419 30,789 147,326 (80,223) 480,451
-------- ------- ------- -------- -------- --------
Total liabilities and
stockholders' equity... $507,156 $15,235 $31,975 $189,495 $(87,151) $656,710
======== ======= ======= ======== ======== ========
</TABLE>
F-37
<PAGE>
KNOLL, INC.
STATEMENT OF OPERATIONS
TEN MONTHS ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTORS
---------------------------
SPINNEYBECK
ENTERPRISES, KNOLL NON-
KNOLL, INC. INC. OVERSEAS, INC. GUARANTORS ELIMINATIONS TOTAL
----------- ------------ -------------- ---------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Sales to customers...... $480,857 $12,796 $ -- $67,881 $ -- $561,534
Sales to related
parties................ 13,227 2,210 -- 62,580 (78,017) --
-------- ------- ------ ------- --------- --------
Total sales............. 494,084 15,006 -- 130,461 (78,017) 561,534
Cost of sales to
customers.............. 323,607 6,109 521 50,293 (21,689) 358,841
Cost of sales to related
parties................ 8,902 1,054 -- 46,372 (56,328) --
-------- ------- ------ ------- --------- --------
Gross profit............ 161,575 7,843 (521) 33,796 -- 202,693
Selling, general, and
administrative
expenses............... 108,713 4,342 1,461 16,833 -- 131,349
-------- ------- ------ ------- --------- --------
Operating income
(loss)................. 52,862 3,501 (1,982) 16,963 -- 71,344
Interest expense........ 32,706 -- -- 246 -- 32,952
Other income (expense),
net.................... 757 (4) 953 (1,259) -- 447
Income (loss) from
equity investments..... 10,319 77 2,769 -- (13,165) --
-------- ------- ------ ------- --------- --------
Income (loss) before
income taxes and
extraordinary item..... 31,232 3,574 1,740 15,458 (13,165) 38,839
Income tax expense
(benefit).............. 9,237 1,371 (28) 6,264 -- 16,844
-------- ------- ------ ------- --------- --------
Income (loss) before
extraordinary item..... 21,995 2,203 1,768 9,194 (13,165) 21,995
Extraordinary loss on
early extinguishment of
debt, net of taxes..... 5,159 -- -- -- -- 5,159
-------- ------- ------ ------- --------- --------
Net income (loss)....... $ 16,836 $ 2,203 $1,768 $ 9,194 $ (13,165) $ 16,836
======== ======= ====== ======= ========= ========
</TABLE>
F-38
<PAGE>
KNOLL, INC.
STATEMENT OF OPERATIONS
TWO MONTHS ENDED FEBRUARY 29, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTORS
---------------------------
SPINNEYBECK
ENTERPRISES, KNOLL NON-
KNOLL, INC. INC. OVERSEAS, INC. GUARANTORS ELIMINATIONS TOTAL
----------- ------------ -------------- ---------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Sales to customers...... $ 76,172 $2,095 $ -- $11,666 $ -- $ 89,933
Sales to related
parties................ 1,617 330 -- 6,935 (8,583) 299
-------- ------ ----- ------- ------ --------
Total sales............. 77,789 2,425 -- 18,601 (8,583) 90,232
Cost of sales to
customers.............. 50,380 931 111 9,041 (949) 59,514
Cost of sales to related
parties................ 1,083 149 -- 6,602 (7,634) 200
-------- ------ ----- ------- ------ --------
Gross profit............ 26,326 1,345 (111) 2,958 -- 30,518
Selling, general, and
administrative
expenses............... 16,800 725 224 3,507 -- 21,256
Westinghouse long-term
incentive
compensation........... 47,900 -- -- -- -- 47,900
Allocated corporate
expenses............... 921 -- -- -- -- 921
-------- ------ ----- ------- ------ --------
Operating income
(loss)................. (39,295) 620 (335) (549) -- (39,559)
Other income (expense),
net.................... (265) -- 170 (201) -- (296)
Income (loss) from
equity investments..... (218) 23 (493) -- 688 --
Interest expense........ -- -- -- 340 -- 340
-------- ------ ----- ------- ------ --------
Income (loss) before
income taxes........... (39,778) 643 (658) (1,090) 688 (40,195)
Income tax expense
(benefit).............. (16,338) 259 (56) 28 -- (16,107)
-------- ------ ----- ------- ------ --------
Net income (loss)....... $(23,440) $ 384 $(602) $(1,118) $ 688 $(24,088)
======== ====== ===== ======= ====== ========
</TABLE>
F-39
<PAGE>
KNOLL, INC.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTORS
---------------------------
SPINNEYBECK
ENTERPRISES, KNOLL NON-
KNOLL, INC. INC. OVERSEAS, INC. GUARANTORS ELIMINATIONS TOTAL
----------- ------------ -------------- ---------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Sales to customers...... $500,892 $14,090 $ -- $ 93,409 $ 2,332 $610,723
Sales to related
parties................ 12,411 2,332 -- 60,309 (64,883) 10,169
-------- ------- ------- -------- ------- --------
Total sales............. 513,303 16,422 -- 153,718 (62,551) 620,892
Cost of sales to
customers.............. 342,202 5,501 831 84,544 (22,463) 410,615
Cost of sales to related
parties................ 8,564 2,472 373 35,696 (40,088) 7,017
-------- ------- ------- -------- ------- --------
Gross profit............ 162,537 8,449 (1,204) 33,478 -- 203,260
Selling, general, and
administrative
expenses............... 104,388 4,894 1,749 27,496 -- 138,527
Allocated corporate
expenses............... 9,528 -- -- -- -- 9,528
-------- ------- ------- -------- ------- --------
Operating income
(loss)................. 48,621 3,555 (2,953) 5,982 -- 55,205
Interest expense........ 282 -- -- 1,148 -- 1,430
Other income (expense),
net.................... (2,101) -- 68 436 -- (1,597)
Income (loss) from
equity investments..... 211 -- (166) -- (45) --
-------- ------- ------- -------- ------- --------
Income (loss) before
income taxes........... 46,449 3,555 (3,051) 5,270 (45) 52,178
Income tax expense (ben-
efit).................. 22,553 1,476 (1,183) -- -- 22,846
-------- ------- ------- -------- ------- --------
Net income (loss)....... $ 23,896 $ 2,079 $(1,868) $ 5,270 $ (45) $ 29,332
======== ======= ======= ======== ======= ========
</TABLE>
F-40
<PAGE>
KNOLL, INC.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTORS
---------------------------
SPINNEYBECK
ENTERPRISES, KNOLL NON-
KNOLL, INC. INC. OVERSEAS, INC. GUARANTORS ELIMINATIONS TOTAL
----------- ------------ -------------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Sales to customers...... $ 453,792 $15,123 $ (1) $ 90,936 $ 2,748 $ 562,598
Sales to related
parties................ 7,035 2,766 -- 43,775 (53,305) 271
--------- ------- -------- --------- ------- ---------
Total sales............. 460,827 17,889 (1) 134,711 (50,557) 562,869
Cost of sales to
customers.............. 324,051 7,497 412 87,937 (9,988) 409,909
Cost of sales to related
parties................ 5,065 2,915 314 32,470 (40,569) 195
--------- ------- -------- --------- ------- ---------
Gross profit............ 131,711 7,477 (727) 14,304 -- 152,765
Provision for
restructuring.......... -- -- -- 29,180 -- 29,180
Selling, general, and
administrative
expenses............... 118,188 6,215 (489) 43,324 -- 167,238
Allocated corporate
expenses............... 5,881 -- -- -- -- 5,881
--------- ------- -------- --------- ------- ---------
Operating income
(loss)................. 7,642 1,262 (238) (58,200) -- (49,534)
Interest expense........ 626 -- -- 2,599 -- 3,225
Other income (expense),
net.................... (300) -- (11) 1,010 -- 699
Income (loss) from
equity investments..... (19,724) -- (20,103) -- 39,827 --
--------- ------- -------- --------- ------- ---------
Income (loss) before
income taxes........... (13,008) 1,262 (20,352) (59,789) 39,827 (52,060)
Income tax expense
(benefit).............. 7,079 639 (5) -- -- 7,713
--------- ------- -------- --------- ------- ---------
Net income (loss)....... $ (20,087) $ 623 $(20,347) $ (59,789) $39,827 $ (59,773)
========= ======= ======== ========= ======= =========
</TABLE>
F-41
<PAGE>
KNOLL, INC.
STATEMENT OF CASH FLOWS
TEN MONTHS ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTORS
---------------------------
SPINNEYBECK
ENTERPRISES, KNOLL NON-
KNOLL, INC. INC. OVERSEAS, INC. GUARANTORS ELIMINATIONS TOTAL
----------- ------------ -------------- ---------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
CASH PROVIDED BY
OPERATING ACTIVITIES... $ 78,889 $ 399 $ -- $ 10,214 $ -- $ 89,502
CASH FLOWS FROM
INVESTING ACTIVITIES
Acquisition of the
company from
Westinghouse........... (579,801) -- -- -- -- (579,801)
Capital expenditures.... (12,531) (134) -- (2,590) -- (15,255)
Proceeds from sale of
assets................. 43 -- -- 175 -- 218
-------- ----- ----- -------- ----- --------
Cash used in investing
activities............. (592,289) (134) -- (2,415) -- (594,838)
CASH FLOWS FROM
FINANCING ACTIVITIES
Repayment of short-term
debt, net.............. -- -- -- (1,483) -- (1,483)
Repayment of long-term
debt, net.............. 353,000 -- -- (130) -- 352,870
Issuance of stock....... 160,400 -- -- -- -- 160,400
Net receipts from
(payments to) parent
company................ (120) -- -- 120 -- --
-------- ----- ----- -------- ----- --------
Cash used in financing
activities............. 513,280 -- -- (1,493) -- 511,787
Effect of exchange rate
changes on cash and
cash equivalents....... -- -- -- 18 -- 18
-------- ----- ----- -------- ----- --------
Increase (decrease) in
cash and cash
equivalents............ (120) 265 -- 6,324 -- 6,469
Cash and cash
equivalents at
beginning of period.... 161 2 -- 2,172 -- 2,335
-------- ----- ----- -------- ----- --------
Cash and cash
equivalents at end of
period................. $ 41 $ 267 $ -- $ 8,496 $ -- $ 8,804
======== ===== ===== ======== ===== ========
</TABLE>
F-42
<PAGE>
KNOLL, INC.
STATEMENT OF CASH FLOWS
TWO MONTHS ENDED FEBRUARY 29, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTORS
---------------------------
SPINNEYBECK
ENTERPRISES, KNOLL NON-
KNOLL, INC. INC. OVERSEAS, INC. GUARANTORS ELIMINATIONS TOTAL
----------- ------------ -------------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
CASH PROVIDED BY (USED
IN) OPERATING
ACTIVITIES............. $ (53,218) $ 1,267 $ 651 $ 17,142 $ (19,881) $ (54,039)
CASH FLOWS FROM
INVESTING ACTIVITIES
Capital expenditures.... (2,022) (28) -- (246) -- (2,296)
--------- ------- ----- -------- --------- ---------
Cash used in investing
activities............. (2,022) (28) -- (246) -- (2,296)
CASH FLOWS FROM
FINANCING ACTIVITIES
Repayment of short-term
debt, net.............. (2,055) -- -- (1,750) -- (3,805)
Net receipts from
(payments to) parent
company................ 57,635 (1,419) (651) (14,598) 19,881 60,848
--------- ------- ----- -------- --------- ---------
Cash provided by (used
in) financing
activities............. 55,580 (1,419) (651) (16,348) 19,881 57,043
Effect of exchange rate
changes on cash and
cash equivalents....... -- -- -- 58 -- 58
--------- ------- ----- -------- --------- ---------
Increase (decrease) in
cash and cash
equivalents............ 340 (180) -- 606 -- 766
Cash and cash
equivalents at
beginning of period.... (182) 182 -- 1,569 -- 1,569
--------- ------- ----- -------- --------- ---------
Cash and cash
equivalents at end of
period................. $ 158 $ 2 $ -- $ 2,175 $ -- $ 2,335
========= ======= ===== ======== ========= =========
</TABLE>
F-43
<PAGE>
KNOLL, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTORS
---------------------------
SPINNEYBECK
ENTERPRISES, KNOLL NON-
KNOLL, INC. INC. OVERSEAS, INC. GUARANTORS ELIMINATIONS TOTAL
----------- ------------ -------------- ---------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
CASH PROVIDED BY (USED
IN) OPERATING
ACTIVITIES............. $ 50,270 $ 6,203 $ (4,017) $ (9,992) $ 9,400 $ 51,864
CASH FLOWS FROM
INVESTING ACTIVITIES
Capital expenditures.... (14,871) -- -- (4,463) -- (19,334)
Proceeds from sale of
assets................. 42 -- -- 274 -- 316
Net receipts from
(payments to) equity
investments............ (186) -- -- -- 186 --
-------- ------- -------- -------- ------- --------
Cash provided by (used
in) investing
activities............. (15,015) -- -- (4,189) 186 (19,018)
CASH FLOWS FROM
FINANCING ACTIVITIES
Repayment of short-term
debt, net.............. -- -- -- (20,961) -- (20,961)
Repayment of long-term
debt................... (6,646) -- -- (2,267) -- (8,913)
Net receipts from
(payments to) parent
company................ (28,791) (6,021) 4,017 33,481 (9,586) (6,900)
-------- ------- -------- -------- ------- --------
Cash provided by (used
in) financing
activities............. (35,437) (6,021) 4,017 10,253 (9,586) (36,774)
Effect of exchange rate
changes on cash and
cash equivalents....... -- -- -- 13 -- 13
-------- ------- -------- -------- ------- --------
Increase (decrease) in
cash and cash
equivalents............ (182) 182 -- (3,915) -- (3,915)
Cash and cash
equivalents at
beginning of year...... -- -- -- 5,484 -- 5,484
-------- ------- -------- -------- ------- --------
Cash and cash
equivalents at end of
year................... $ (182) $ 182 $ -- $ 1,569 $ -- $ 1,569
======== ======= ======== ======== ======= ========
</TABLE>
F-44
<PAGE>
KNOLL, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTORS
---------------------------
SPINNEYBECK
ENTERPRISES, KNOLL NON-
KNOLL, INC. INC. OVERSEAS, INC. GUARANTORS ELIMINATIONS TOTAL
----------- ------------ -------------- ---------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
CASH PROVIDED BY (USED
IN) OPERATING
ACTIVITIES............. $ 23,756 $ 887 $(1,725) $(30,368) $ 3,666 $ (3,784)
CASH FLOWS FROM
INVESTING ACTIVITIES
Capital expenditures.... (12,935) (72) -- (7,150) -- (20,157)
Proceeds from sale of
assets................. 189 -- -- 143 -- 332
Net receipts from
(payments to) equity
investments............ (1,429) 738 (1,488) -- 2,179 --
-------- ------- ------- -------- ------- --------
Cash provided by (used
in) investing
activities............. (14,175) 666 (1,488) (7,007) 2,179 (19,825)
CASH FLOWS FROM
FINANCING ACTIVITIES
Repayment of short-term
debt, net.............. -- -- -- (2,758) -- (2,758)
Repayment of long-term
debt................... (263) -- -- (2,490) -- (2,753)
Net receipts from
(payments to) parent
company................ (11,080) (1,553) 3,147 49,167 (5,845) 33,836
-------- ------- ------- -------- ------- --------
Cash provided by (used
in) financing
activities............. (11,343) (1,553) 3,147 43,919 (5,845) 28,325
Effect of exchange rate
changes on cash and
cash equivalents....... -- -- -- (1,996) -- (1,996)
-------- ------- ------- -------- ------- --------
Increase (decrease) in
cash and cash
equivalents............ (1,762) -- (66) 4,548 -- 2,720
Cash and cash
equivalents at
beginning of year...... 1,762 -- 66 936 -- 2,764
-------- ------- ------- -------- ------- --------
Cash and cash
equivalents at end of
year................... $ -- $ -- $ -- $ 5,484 $ -- $ 5,484
======== ======= ======= ======== ======= ========
</TABLE>
F-45
<PAGE>
KNOLL, INC.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma consolidated income statements for the
year ended December 31, 1996 and the six months ended June 30, 1996 give
effect to the acquisition by merger (the "Acquisition") of the business and
operations of The Knoll Group, Inc. and its subsidiaries in February 1996 by
Knoll, Inc. (the "Company"), the borrowings under the Company's bank credit
facilities and the issuance of 10.875% Senior Subordinated Notes (the "Notes")
and the application of the net proceeds therefrom as though they had occurred
as of the beginning of the periods presented. The pro forma income statements
also reflect the sale by the Company of Common Stock in the Initial Public
Offering, the application by the Company of the estimated net proceeds
therefrom, together with borrowings of $11.6 million under the Company's
credit facilities, to repurchase a portion of the Notes and the redemption and
conversion into Common Stock of the outstanding Series A Preferred Stock as if
such transactions had occurred at the beginning of the period presented.
The Acquisition has been accounted for by the purchase method of accounting,
and accordingly, the purchase price of $579.8 million (including estimated
fees and expenses) has been allocated to the assets acquired and liabilities
assumed based upon the estimated fair value at the date of Acquisition. The
excess of such purchase price over the estimated fair values at the date of
Acquisition has been recognized as goodwill, which is amortized over 40 years.
The unaudited pro forma consolidated income statements do not purport to
represent what the Company's results of operations actually would have been if
the events described above had occurred as of the dates 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.
P-1
<PAGE>
KNOLL, INC.
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
HISTORICAL
---------------------------------------
THE KNOLL GROUP, INC.
(PREDECESSOR)
2 MONTHS ENDED TEN MONTHS ENDED ACQUISITION IPO
FEBRUARY 29, 1996 DECEMBER 31, 1996 ADJUSTMENTS ADJUSTMENTS PRO FORMA
--------------------- ----------------- ----------- ----------- ---------
(IN THOUSANDS) (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Total sales..... $ 90,232 $561,534 $ -- $ -- $651,766
Cost of sales... 59,714 358,841 552 (a)
801 (b) -- 419,908
-------- -------- -------- ------- --------
Gross profit.... 30,518 202,693 (1,353) 231,858
Selling, general
and administrative
expenses....... 21,256 131,349 369 (a)
414 (b) -- 153,388
Westinghouse
long-term
incentive
compensation... 47,900 -- (47,900)(c) -- --
Allocated corpo-
rate expenses.. 921 -- (921)(a) -- --
-------- -------- -------- ------- --------
Operating income
(loss)......... (39,559) 71,344 46,685 -- 78,470
Interest ex-
pense.......... 340 32,952 6,738 (d) (5,716)(f) 34,314
Other income
(expense),
net............ (296) 447 -- -- 151
-------- -------- -------- ------- --------
Income (loss)
before income
taxes and ex-
traordinary
item........... (40,195) 38,839 39,947 5,716 44,307
Income tax ex-
pense (bene-
fit)........... (16,107) 16,844 16,111 (e) 2,265 (h) 19,113
-------- -------- -------- ------- --------
Income (loss)
before extraor-
dinary item.... (24,088) 21,995 23,836 3,451 25,194
Extraordinary
loss on early
extinguishment
of debt, net of
taxes.......... -- 5,159 (5,159)(g) -- --
-------- -------- -------- ------- --------
Net income
(loss)......... $(24,088) $ 16,836 $ 28,995 $ 3,451 $ 25,194 (g)
======== ======== ======== ======= ========
Pro forma income
before extraor-
dinary item per
share of Common
Stock.......... $ .63 $ .58
Pro forma net
income per
share of Common
Stock.......... $ .48 $ .58 (g)
Pro forma
weighted aver-
age shares of
Common Stock
outstanding(i).. 34,815 43,262
</TABLE>
P-2
<PAGE>
KNOLL, INC.
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT
SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
HISTORICAL
SIX MONTHS
ENDED
JUNE 30, IPO
1997 ADJUSTMENTS PRO FORMA
------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Total sales............... $ 390,415 $ -- $ 390,415
Cost of sales............. 236,265 -- 236,265
------------- ----------- -------------
Gross profit.............. 154,150 -- 154,150
Selling, general and ad-
ministrative expenses.... 90,635 -- 90,635
------------- ----------- -------------
Operating income (loss)... 63,515 -- 63,515
Interest expense.......... 14,696 (2,719)(f) 11,977
Other income (expense),
net...................... 73 -- 73
------------- ----------- -------------
Income (loss) before in-
come taxes and extraordi-
nary item................ 48,892 2,719 51,611
Income tax expense (bene-
fit)..................... 20,298 1,077 (h) 21,375
------------- ----------- -------------
Income before extraordi-
nary item................ 28,594 1,642 30,236
Extraordinary loss on
early extinguishment of
debt, net of taxes....... 5,337 (5,337)(g) --
------------- ----------- -------------
Net income (loss)......... $ 23,257 $ 6,979 $ 30,236 (g)
============= =========== =============
Pro forma income before
extraordinary item per
share of Common Stock.... $ .76 $ .70
Pro forma net income per
share of Common Stock.... $ .62 -- $ .70 (g)
Pro forma weighted average
shares of Common Stock
outstanding(i)........... 37,246 43,300
</TABLE>
P-3
<PAGE>
KNOLL, INC.
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT
SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
HISTORICAL
------------------------------------
THE KNOLL GROUP,
INC. (PREDECESSOR)
2 MONTHS ENDED FOUR MONTHS ENDED ACQUISITION IPO
FEBRUARY 29, 1996 JUNE 30, 1996 ADJUSTMENTS ADJUSTMENTS PRO FORMA
------------------ ----------------- ----------- ----------- ---------
(IN THOUSANDS) (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Total sales............. $ 90,232 $214,600 $ -- $ -- $304,832
Cost of sales........... 59,714 140,489 552 (a)
801 (b) -- 201,556
-------- -------- ------- ------- --------
Gross profit............ 30,518 74,111 (1,353) -- 103,276
Selling, general and ad-
ministrative expenses.. 21,256 47,141 369 (a)
414 (b) -- 69,180
Westinghouse long-term
incentive compensa-
tion................... 47,900 -- (47,900)(c) -- --
Allocated corporate ex-
penses................. 921 -- (921)(a) -- --
-------- -------- ------- ------- --------
Operating income
(loss)................. (39,559) 26,970 46,685 -- 34,096
Interest expense........ 340 13,952 6,738 (d) (2,858)(f) 18,172
Other income (expense),
net.................... (296) 340 -- -- 44
-------- -------- ------- ------- --------
Income (loss) before in-
come taxes............. (40,195) 13,358 39,947 2,858 15,968
Income tax expense (ben-
efit).................. (16,107) 5,382 16,111 (e) 1,132 (h) 6,518
-------- -------- ------- ------- --------
Net income (loss)....... $(24,088) $ 7,976 $23,836 $ 1,726 $ 9,450 (g)
======== ======== ======= ======= ========
Pro forma net income per
share of Common Stock.. $ .23 $ .22 (g)
Pro forma weighted aver-
age shares of Common
Stock outstanding(i)... 34,782 43,262
</TABLE>
P-4
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
(a) Represents the reclassification of allocated corporate expenses from
Westinghouse. The reclassified allocated corporate expenses approximate the
replacement cost to the Company for services formerly provided by Westinghouse
to the Predecessor, including (i) benefit expense related to the adoption of
various independent benefit plans comparable to Westinghouse benefit plans and
(ii) the cost of services required to replace specific activities formerly
provided by Westinghouse to the Predecessor, 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 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.
(d) 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%, the pro forma adjustment
for interest costs would change by approximately $88.
(e) Adjustment to reflect the assumed effective tax rate applied to the pro
forma income.
(f) To reflect interest expense (and amortization of deferred financing
fees) on a pro forma basis as if the net proceeds from the offerings, together
with borrowings of $11.6 million under the Company's bank credit facilities,
had been utilized to repurchase the Notes and redeem Series A Preferred Stock
at the beginning of each period presented. Interest expense assumes 10.875%
for the Notes which is the actual interest expense for all periods presented,
8.25% for the Company's bank credit facilities for the year ended December 31,
1996 and the six months ended June 30, 1996 which approximates the actual
interest expense for the ten month period ended December 31, 1996 and 6.6% for
the revolving credit facility for the six months ended June 30, 1997 which
approximates the actual interest expense for the six month period ended June
30, 1997.
(g) The pro forma income statement data presented for the year ended
December 31, 1996 does not include the $5,159 extraordinary loss on early
extinguishment of debt, net of taxes. In addition, the pro forma income
statement data for the year ended December 31, 1996, the six month period
ended June 30, 1996 and the six month period ended June 30, 1997 does not
include the extraordinary loss of $5,337, net of taxes, associated with the
redemption of a portion of the Notes in connection with the Initial Public
Offering.
(h) Income tax expense applied at the United States effective tax rate
during the ten month period ended December 31, 1996 (39.6%), which
approximates the actual effective tax rate for all periods presented.
(i) All numbers of shares of Common Stock and per share amounts have been
adjusted to give retroactive effect to the 3.13943-for-1 common stock split
that occurred on May 6, 1997. Because of the significance of the redemption
and conversion into Common Stock of the outstanding Series A Preferred Stock
upon consummation of the Initial Public Offering historical net income (loss)
per share is not presented herein. Pro forma income per share data is based on
the weighted average number of shares of Common Stock and Common Stock
equivalents (employee stock options) outstanding during the period, after
giving effect to the redemption and conversion into Common Stock of the Series
A Preferred Stock assuming such redemption and conversion had occurred at the
beginning of each period presented. Pursuant to Securities and Exchange
Commission Staff Accounting Bulletin No. 83, all Common Stock and options to
purchase Common Stock issued at prices below the initial public offering price
per share during the twelve month period immediately preceding the initial
filing date of the Company's registration statement for the Initial Public
Offering have been included as outstanding for all periods presented (using
the treasury stock method at the Initial Public Offering price).
P-5
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPEC-
TUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY THE COMMON STOCK 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 AN IMPLICATION 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 HERE-
OF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary.................................................................. 3
Risk Factors............................................................. 11
Use of Proceeds.......................................................... 16
Dividend Policy.......................................................... 16
Price Range of Common Stock.............................................. 16
Capitalization........................................................... 17
Selected Financial Information........................................... 18
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 21
Business................................................................. 31
Management............................................................... 46
Certain Transactions..................................................... 52
Principal and Selling Stockholders....................................... 55
Description of Capital Stock............................................. 57
Description of Certain Indebtedness...................................... 58
Shares Eligible for Future Sale.......................................... 60
Certain United States Federal Tax Considerations For Non-United States
Holders................................................................. 62
Underwriting............................................................. 65
Legal Matters............................................................ 68
Experts.................................................................. 68
Additional Information................................................... 68
Index to Financial Statements............................................ F-1
Unaudited Pro Forma Financial Information................................ P-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
5,750,000 SHARES
KNOLL
COMMON STOCK
---------------
PROSPECTUS
---------------
MERRILL LYNCH & CO.
CREDIT SUISSE FIRST BOSTON
GOLDMAN, SACHS & CO.
MORGAN STANLEY DEAN WITTER
, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED SEPTEMBER 25, 1997
PROSPECTUS
- ----------
5,750,000 SHARES
LOGO
[OF KNOLL]
COMMON STOCK
-----------
All of the 5,750,000 shares of Common Stock (the "Common Stock") of Knoll,
Inc. ("Knoll" or the "Company") offered hereby are being sold by certain
stockholders (the "Selling Stockholders") of the Company. See "Principal and
Selling Stockholders." The Company will not receive any of the proceeds from
the sale of shares of Common Stock offered hereby.
Of the 5,750,000 shares of Common Stock offered hereby, 1,150,000 shares are
being offered for sale initially outside the United States and Canada by the
International Managers and 4,600,000 shares are being offered for sale
initially in a concurrent offering in the United States and Canada by the U.S.
Underwriters. The initial public offering price and the aggregate underwriting
discount per share will be identical for both Offerings. See "Underwriting."
The Common Stock is listed on the New York Stock Exchange (the "NYSE") under
the symbol "KNL." On September 25, 1997, the last reported sale price of the
Common Stock on the NYSE was $33 15/16 per share. See "Price Range of Common
Stock."
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
-----------
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) SELLING STOCKHOLDERS(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share........................ $ $ $
- --------------------------------------------------------------------------------
Total(3)......................... $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including certain
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Selling Stockholders have granted the International Managers and the
U.S. Underwriters options to purchase up to an additional 172,500 shares
and 690,000 shares of Common Stock, respectively, in each case exercisable
within 30 days after the date hereof, solely to cover over-allotments, if
any. If such options are exercised in full, the total Price to Public,
Underwriting Discount, and Proceeds to Selling Stockholders will be $ ,
$ and $ , respectively. See "Underwriting."
-----------
The shares of Common Stock are being offered by the several Underwriters,
subject to prior sale, when, as and if issued to and accepted by them, subject
to approval of certain legal matters by counsel for the Underwriters and
certain other conditions. The Underwriters reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part. It is
expected that delivery of the shares of Common Stock will be made in New York,
New York, on or about , 1997.
-----------
MERRILL LYNCH INTERNATIONAL
CREDIT SUISSE FIRST BOSTON
GOLDMAN SACHS INTERNATIONAL
MORGAN STANLEY DEAN WITTER
-----------
The date of this Prospectus is , 1997.
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
UNDERWRITING
Merrill Lynch International, Credit Suisse First Boston (Europe) Limited,
Goldman Sachs International and Morgan Stanley & Co. International Limited are
acting as lead managers (the "Lead Managers") for each of the International
Managers named below (the "International Managers"). Subject to the terms and
conditions set forth in an international purchase agreement (the
"International Purchase Agreement") among the Company, the Selling
Stockholders and the International Managers, and concurrently with the sale of
4,600,000 shares of Common Stock to the U.S. Underwriters (as defined below),
the Company has agreed to sell to the International Managers, and each of the
International Managers severally has agreed to purchase from the Company, the
number of shares of Common Stock set forth opposite its name below.
NUMBER OF
INTERNATIONAL MANAGERS SHARES
---------------------- ---------
Merrill Lynch International......................................
Credit Suisse First Boston (Europe) Limited......................
Goldman Sachs International......................................
Morgan Stanley & Co. International Limited.......................
----
Total............................................................
====
The Company and the Selling Stockholders have also entered into a U.S.
purchase agreement (the "U.S. Purchase Agreement") with certain underwriters
in the United States and Canada (the "U.S. Underwriters" and, together with
the International Managers, the "Underwriters") for whom Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Credit Suisse First
Boston Corporation, Goldman, Sachs & Co., and Morgan Stanley & Co.
Incorporated are acting as representatives (the "U.S. Representatives").
Subject to the terms and conditions set forth in the U.S. Purchase Agreement,
and concurrently with the sale of 1,150,000 shares of Common Stock to the
International Managers pursuant to the International Purchase Agreement, the
Company has agreed to sell to the U.S. Underwriters, and the U.S. Underwriters
severally have agreed to purchase from the Company, an aggregate of 4,600,000
shares of Common Stock. The initial public offering price per share and the
total underwriting discount per share of Common Stock are identical under the
International Purchase Agreement and the U.S. Purchase Agreement.
65
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
In the International Purchase Agreement and the U.S. Purchase Agreement, the
several International Managers and the several U.S. Underwriters, respectively,
have agreed, subject to the terms and conditions set forth therein, to purchase
all of the shares of Common Stock being sold pursuant to each such agreement if
any of the shares of Common Stock being sold pursuant to such agreement are
purchased. The closings with respect to the sale of shares of Common Stock to
be purchased by the International Managers and the U.S. Underwriters are
conditioned upon one another.
The Lead Managers have advised the Company and the Selling Stockholders that
the International Managers propose initially to offer the shares of Common
Stock to the public at the initial public offering price set forth on the cover
page of this Prospectus, and to certain dealers at such price less a concession
not in excess of per share of Common Stock. The International Managers may
allow, and such dealers may reallow, a discount not in excess of per share
of Common Stock on sales to certain other dealers. After the initial public
offering of the shares of Common Stock offered hereby, the public offering
price, concession and discount may be changed.
The Selling Stockholders have granted options to the International Managers,
exercisable for 30 days after the date of this Prospectus, to purchase up to an
aggregate of 172,500 additional shares of Common Stock at the initial public
offering price set forth on the cover page of this Prospectus, less the
underwriting discount. The International Managers may exercise these options
only to cover over-allotments, if any, made on the sale of the Common Stock
offered hereby. To the extent that the International Managers exercise these
options, each International Manager will be obligated, subject to certain
conditions, to purchase a number of additional shares of Common Stock
proportionate to such International Manager's initial amount reflected in the
foregoing table. The Selling Stockholders also have granted options to the U.S.
Underwriters, exercisable for 30 days after the date of this Prospectus, to
purchase up to an aggregate of 690,000 additional shares of Common Stock to
cover over-allotments, if any, on terms similar to those granted to the
International Managers.
The Company, its executive officers, directors and other management employees
and the Selling Stockholders have agreed, subject to certain exceptions, not to
directly or indirectly (i) offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant for the sale of or otherwise dispose of or
transfer any shares of Common Stock or securities convertible into or
exchangeable or exercisable for Common Stock, whether now owned or thereafter
acquired by the person executing the agreement or with respect to which the
person executing the agreement thereafter acquires the power of disposition, or
file a registration statement under the Securities Act with respect to the
foregoing or (ii) enter into any swap or other agreement that transfers, in
whole or in part, the economic consequence of ownership of the Common Stock
whether any such swap or transaction is to be settled by delivery of Common
Stock or other securities, in cash or otherwise, without the prior written
consent of Merrill Lynch on behalf of the Underwriters for a period of 90 days
after the date of this Prospectus. See "Shares Eligible for Future Sale."
The International Managers and the U.S. Underwriters have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") that provides for the
coordination of their activities. Pursuant to the Intersyndicate Agreement, the
International Managers and the U.S. Underwriters are permitted to sell shares
of Common Stock to each other for purposes of resale at the initial public
offering price, less an amount not greater than the selling concession. Under
the terms of the Intersyndicate Agreement, the U.S. Underwriters and any dealer
to whom they sell shares of Common Stock will not offer to sell or sell shares
of Common Stock to persons who are non-U.S. or non-Canadian persons or to
persons they believe intend to resell to persons who are non-U.S. or non-
Canadian persons, and the International Managers and any dealer to whom they
sell shares of Common Stock will not offer to sell or sell shares of Common
Stock to U.S. persons or to Canadian persons or to persons they believe intend
to resell to U.S. or Canadian persons, except in the case of transactions
pursuant to the Intersyndicate Agreement.
The Common Stock is listed on the NYSE under the symbol "KNL."
The Company and the Selling Stockholders have agreed to indemnify the
International Managers and the U.S. Underwriters against certain liabilities,
including certain liabilities under the Securities Act.
66
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters
and certain selling group members to bid for and purchase the Common Stock. As
an exception to these rules, the U.S. Representatives are permitted to engage
in certain transactions that stabilize the price of the Common Stock. Such
transactions consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in connection
with the Offerings, i.e., if they sell more shares of Common Stock than are set
forth on the cover page of this Prospectus, the U.S. Representatives may reduce
that short position by purchasing Common Stock in the open market. The U.S.
Representatives may also elect to reduce any short position by exercising all
or part of the over-allotment option described above.
The U.S. Representatives may also impose a penalty bid on certain
Underwriters and selling group members. This means that if the U.S.
Representatives purchase shares of Common Stock in the open market to reduce
the Underwriters' short position or to stabilize the price of the Common Stock,
they may reclaim the amount of the selling concession from the Underwriters and
selling group members who sold those shares as part of the Offerings.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the U.S.
Representatives will engage in such transactions or that such transactions,
once commenced, will not be discontinued without notice.
Each International Manager has agreed that (i) it has not offered or sold
and, prior to the expiration of the period of six months from the Closing Date,
will not offer or sell any shares of Common Stock to persons in the United
Kingdom, except to persons whose ordinary activities involve them in acquiring,
holding, managing or disposing of investments (as principal or agent) for the
purposes of their businesses or otherwise in circumstances which do not
constitute an offer to the public in the United Kingdom within the meaning of
the Public Offers of Securities Regulations 1995; (ii) it has complied and will
comply with all applicable provisions of the Financial Services Act 1986 with
respect to anything done by it in relation to the Common Stock in, from or
otherwise involving the United Kingdom; and (iii) it has only issued or passed
on and will only issue or pass on in the United Kingdom any document received
by it in connection with the issuance of Common Stock to a person who is of a
kind described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996 or is a person to whom such document
may otherwise lawfully be issued or passed on.
No action has been or will be taken in any jurisdiction (except in the United
States) that would permit a public offering of the shares of Common Stock, or
the possession, circulation or distribution of this Prospectus or any other
material relating to the Company, the Selling Stockholders or shares of Common
Stock in any jurisdiction where action for that purpose is required.
Accordingly, the shares of Common Stock may not be offered or sold, directly or
indirectly, and neither this Prospectus nor any other offering material or
advertisements in connection with the shares of Common Stock may be distributed
or published, in or from any county or jurisdiction except in compliance with
any applicable rules and regulations of any such country or jurisdiction.
Purchasers of the shares offered hereby may be required to pay stamp taxes
and other charges in accordance with the laws and practices of the country of
purchase in addition to the offering price set forth on the cover page hereof.
Each of the representatives of the Underwriters purchases or has purchased
furniture from the Company in the ordinary course of business on an arm's-
length basis.
67
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHO-
RIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR THE UNDERWRITERS. THIS PRO-
SPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY THE COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PRO-
SPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION 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.
IN THE PROSPECTUS, REFERENCES TO "DOLLARS" AND "$" ARE TO UNITED STATES DOL-
LARS.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary.................................................................. 3
Risk Factors............................................................. 11
Use of Proceeds.......................................................... 16
Dividend Policy.......................................................... 16
Price Range of Common Stock.............................................. 16
Capitalization........................................................... 17
Selected Financial Information........................................... 18
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 21
Business................................................................. 31
Management............................................................... 46
Certain Transactions..................................................... 52
Principal and Selling Stockholders....................................... 55
Description of Capital Stock............................................. 57
Description of Certain Indebtedness...................................... 58
Shares Eligible for Future Sale.......................................... 60
Certain United States Federal Tax Considerations For Non-United States
Holders................................................................. 62
Underwriting............................................................. 65
Legal Matters............................................................ 68
Experts.................................................................. 68
Additional Information................................................... 68
Index to Financial Statements............................................ F-1
Unaudited Pro Forma Financial Information................................ P-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
5,750,000 SHARES
LOGO
[OF KNOLL]
COMMON STOCK
---------------
PROSPECTUS
---------------
MERRILL LYNCH INTERNATIONAL
CREDIT SUISSE FIRST BOSTON
GOLDMAN SACHS INTERNATIONAL
MORGAN STANLEY DEAN WITTER
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered which will be paid
solely by the Company. All amounts shown are estimates, except the SEC
registration fee and the NASD filing fee:
<TABLE>
<CAPTION>
AMOUNT
----------
<S> <C>
SEC registration fee.......................................... $62,994.08
NASD filing fee............................................... 21,288.00
Transfer agent and registrar fees and expenses................ *
Printing and engraving expenses............................... *
Legal fees and expenses....................................... *
Accounting fees and expenses.................................. *
Blue sky fees and expenses.................................... *
Miscellaneous expenses........................................ *
----------
Total....................................................... $ *
==========
</TABLE>
- --------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company, which is a Delaware corporation, is empowered by the Delaware
General Corporation Law, subject to the procedures and limitations stated
therein, to indemnify any person against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with any threatened, pending or completed
action, suit or proceeding in which such person is made a party by reason of
his being or having been a director, officer, employee or agent of the
Company. The statute provides that indemnification pursuant to its provisions
is not exclusive of other rights of indemnification to which a person may be
entitled under any by-law, agreement, vote of stockholders or disinterested
directors, or otherwise. The Certificate of Incorporation and By-Laws of the
Company provide for indemnification of the directors and officers of such
entities to the full extent permitted by the Delaware General Corporation Law.
Article Nine of the Company's Certificate of Incorporation provides as
follows:
NINTH: 1. Indemnification. The Corporation shall indemnify to the fullest
extent permitted under and in accordance with the laws of the State of
Delaware any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or
in the right of the Corporation) by reason of the fact that he is or was a
director, officer, incorporator, employee or agent of the Corporation, or is
or was serving at the request of the Corporation as a director, officer,
trustee, employee or agent of or in any other similar capacity with another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon
a plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in, or not opposed to, the best interests of the
Corporation, and, with respect to any criminal action or proceeding, shall
not, of itself, create a presumption that the person had reasonable cause to
believe that his conduct was unlawful.
II-1
<PAGE>
2. Payment of Expenses. Expenses (including attorneys' fees) incurred in
defending any civil, criminal, administrative or investigative action, suit or
proceeding shall (in the case of any action, suit or proceeding against a
director of the Corporation) or may (in the case of any action, suit or
proceeding against an officer, trustee, employee or agent) be paid by the
Corporation in advance of the final disposition of such action, suit or
proceeding as authorized by the Board of Directors upon receipt of an
undertaking by or on behalf of the indemnified person to repay such amount if
it shall ultimately be determined that he is not entitled to be indemnified by
the Corporation as authorized in this Article NINTH.
3. Nonexclusivity of Provision. The indemnification and other rights set
forth in this Article NINTH shall not be exclusive of any provisions with
respect thereto in the by-laws or any other contract or agreement between the
Corporation and any officer, director, employee or agent of the Corporation.
4. Effect of Repeal. Neither the amendment nor repeal of this Article NINTH,
subparagraph 1, 2, or 3, nor the adoption of any provision of this Certificate
of Incorporation inconsistent with this Article NINTH, subparagraph 1, 2, or
3, shall eliminate or reduce the effect of this Article NINTH, subparagraphs
1, 2, and 3, in respect of any matter occurring before such amendment, repeal
or adoption of an inconsistent provision or in respect of any cause of action,
suit or claim relating to any such matter which would have given rise to a
right of indemnification or right to receive expenses pursuant to this Article
NINTH, subparagraph 1, 2, or 3, if such provision had not been so amended or
repealed or if a provision inconsistent therewith had not been so adopted.
5. Limitation on Liability. No director or officer shall be personally
liable to the Corporation or any stockholder for monetary damages for breach
of fiduciary duty as a director or officer, except for any matter in respect
of which such director or officer (A) shall be liable under Section 174 of the
General Corporation Law of the State of Delaware or any amendment thereto or
successor provision thereto, or (B) shall be liable by reason that, in
addition to any and all other requirements for liability, he:
(i) shall have breached his duty of loyalty to the Corporation or its
stockholders;
(ii) shall not have acted in good faith or, in failing to act, shall not
have acted in good faith;
(iii) shall have acted in a manner involving intentional misconduct or a
knowing violation of law or, in failing to act, shall have acted in a
manner involving intentional misconduct or a knowing violation of
law; or
(iv) shall have derived an improper personal benefit.
If the General Corporation Law of the State of Delaware is amended after the
date hereof to authorize corporate action further eliminating or limiting the
personal liability of directors, then the liability of a director of the
Corporation shall be eliminated or limited to the fullest extent permitted by
the General Corporation Law of the State of Delaware, as so amended.
The Company maintains an insurance policy providing for indemnification of
its officers, directors and certain other persons against liabilities and
expenses incurred by any of them in certain stated proceedings and under
certain stated conditions. In addition, the Company's employment agreements
with Burton B. Staniar, John H. Lynch and Andrew B. Cogan provide that if
during and after the term of such officers' employment the executive is made a
party or compelled to participate in any action by reason of the fact that he
is or was a director or officer of the Company, the executive will be
indemnified by the Company to the fullest extent permitted by Delaware general
corporation law or authorized by the Company's Certificate of Incorporation or
Bylaws or resolutions.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On February 29, 1996 and October 21, 1996, Warburg, NationsBanc and certain
members of management purchased an aggregate of 3,147,278 shares of Common
Stock and 1,602,998 shares of Series A Preferred Stock for an aggregate
purchase price of $160.4 million. Such sales were made in reliance on the
exemption from registration pursuant to Section 4(2) of the Securities Act and
Regulation D promulgated thereunder.
II-2
<PAGE>
On February 29, 1996, in connection with the Acquisition, the Company sold
$165 million aggregate principal amount of its Notes to NationsBanc Capital
Markets, Inc. at a price of 96.75% of its face value. Such sale was made in
reliance on the exemption from registration pursuant to Section 4(2) of the
Securities Act and Rule 144A and Regulation D promulgated thereunder.
On February 29, 1996 and August 20, 1996, certain members of management were
granted a total of 4,144,030 shares of Common Stock, pursuant to the 1996
Stock Plan. These shares vest over periods determined at their date of grant.
See "Management--Stock Incentive Plans." These grants were made in reliance on
the exemption from registration pursuant to Section 4(2) of the Securities Act
and Rule 701 promulgated thereunder.
Options to purchase 565,096 shares of Common Stock were granted to certain
employees of the Company on March 7, 1997 pursuant to the 1996 Stock Plan.
These options vest over periods determined at their date of grant. See
"Management--Stock Incentive Plans." Such grants were made in reliance on the
exemption from registration pursuant to Section 4(2) of the Securities Act.
Options to purchase 753,456 shares of Common Stock were granted to certain
employees of the Company on March 7, 1997 pursuant to the 1997 Stock Plan.
These options vest over periods determined at their date of grant. See
"Management--Stock Incentive Plans." Such grants were made in reliance on the
exemption from registration pursuant to Section 4(2) of the Securities Act.
In connection with the Initial Public Offering and pursuant to an agreement,
dated as of April 14, 1997, among the Company, Warburg, NationsBanc and
certain members of the Company's management, upon consummation of the Initial
Public Offering 800,000 shares of the Company's Series A 12% Participating
Convertible Preferred Stock were redeemed for $80.0 million and 11,749,361
shares of Common Stock, and the remaining 802,998 shares of Series A Preferred
Stock were converted into 15,691,558 shares of Common Stock. Further pursuant
to such arrangement, (i) Warburg received $75.9 million and 25,024,481 shares
of Common Stock, (ii) NationsBanc received $4.1 million and 1,361,877 shares
of Common Stock, (iii) Messrs. Staniar, Lynch, Billstein, Cogan, Purdom,
McCabe and Milberger received 400,736, 400,736, 6,249, 78,116, 78,116, 9,374
and 18,748 shares of Common Stock, respectively, and (iv) Mmes. Bradley and
Ellixson received 12,499 and 9,374 shares of Common Stock, respectively. Such
issuances of Common Stock were made in reliance on the exemption from
registration pursuant to Section 4(2) of the Securities Act and Regulation D
promulgated thereunder.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
+1.1 --Form of U.S. Underwriting Agreement
+1.2 --Form of International Underwriting Agreement.
++3.1 --Amended and Restated Certificate of Incorporation of the Company.
++3.2 --Amended and Restated By-Laws of the Company.
++4 --Specimen of the Company's Common Stock Certificate.
+5 --Opinion of Willkie Farr & Gallagher.
*10.1 --Stock Purchase Agreement, dated as of December 20, 1995, by and
between Westinghouse and TKG.
*10.2 --Knoll, Inc. 1996 Stock Incentive Plan (formerly called the TKG 1996
Stock Incentive Plan).
*10.3 --Indenture, dated as of February 29, 1996, by and among the Company,
T.K.G. Acquisition Corp., T.K.G. Acquisition Sub, Inc., The Knoll
Group, Inc., Knoll North America, Inc., Spinneybeck Enterprises,
Inc. and Knoll Overseas, Inc., as guarantors, and IBJ Schroder Bank
& Trust Company, as trustee, relating to $165,000,000 principal
amount of 10.875% Senior Subordinated Notes due 2006, including form
of Initial Global Note.
II-3
<PAGE>
<TABLE>
<C> <S>
*10.4 --Supplemental Indenture, dated as of February 29, 1996, by and among
the Company, as successor to T.K.G. Acquisition Sub, Inc., the
Guarantors (as defined therein), and IBJ Schroder Bank & Trust
Company, as trustee, relating to $165,000,000 principal amount of
10.875% Senior Subordinated Notes due 2006, including form of
Initial Global Note.
**10.5 --Supplemental Indenture No. 2, dated as of March 14, 1997, by and
among the Company, the Guarantors (as defined therein), and IBJ
Schroder Bank & Trust Company, as trustee, relating to $165,000,000
principal amount of 10.875% Senior Subordinated Notes due 2006,
including form of Initial Global Note.
10.6 --Credit Agreement, dated as of August 8, 1997, by and among the
Company, NationsBank, N.A., as Administrative Agent, The Chase
Manhattan Bank, as Documentation Agent and other lending
institutions.
**10.7 --Employment Agreement, dated as of February 29, 1996, between T.K.G.
Acquisition Corp. and Burton B. Staniar.
**10.8 --Employment Agreement, dated as of February 29, 1996, between T.K.G.
Acquisition Corp. and John H. Lynch.
**10.9 --Employment Agreement, dated as of February 29, 1996, between T.K.G.
Acquisition Corp. and Andrew B. Cogan.
++10.10 --Amendment to Employment Agreement, dated as of April 30, 1997,
between the Company and Andrew B. Cogan.
**10.11 --Stockholders Agreement (Common Stock and Preferred Stock), dated as
of February 29, 1996, among T.K.G. Acquisition Corp., Warburg,
Pincus Ventures, L.P., and the signatories thereto.
**10.12 --Form of Stockholders Agreement (Restricted Shares), dated as of
February 29, 1996, among T.K.G. Acquisition Corp., Warburg, Pincus
Ventures, L.P. and the signatories thereto.
**10.13 --Knoll, Inc. 1997 Stock Incentive Plan.
**10.14 --Consulting Agreement, dated as of December 1, 1996, between
Wolfgang Billstein and Knoll, Inc.
++10.15 --Form of Agreement, dated as of April 15, 1997, by and among the
Company, Warburg, Pincus Ventures, L.P., NationsBanc Investment
Corp. and the Investors named therein.
11 --Statement Re: Computation of Earnings Per Share.
**21 --Subsidiaries of the Registrant.
23.1 --Independent Accountants' Consent of Price Waterhouse LLP.
23.2 --Independent Accountants' Consent of Ernst & Young LLP.
+23.3 --Consent of Willkie Farr & Gallagher (included in their opinion
filed as Exhibit 5).
24 --Powers of Attorney (included on signature pages).
</TABLE>
- --------
* Filed as an exhibit to the Company's Registration Statement on Form S-4
dated March 29, 1996.
** Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996.
++ Filed as an exhibit to the Company's Registration Statement on Form S-1
(File No. 333-23399), which was declared effective by the Commission on
May 9, 1997.
+ To be filed by amendment.
(b) Financial Statement Schedules:
Schedule II--Valuation and Qualifying Accounts
All other schedules have been omitted because they are not applicable or not
required or the required information is included in the financial statements
or notes thereto.
II-4
<PAGE>
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions, described under Item 14 above, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the option of their counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective; and
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on September 25, 1997.
KNOLL, INC.
/s/ Burton B. Staniar
_____________________________________
BY: BURTON B. STANIAR
TITLE: CHAIRMAN OF THE BOARD
POWER OF ATTORNEY
We, the undersigned directors and officers of Knoll, Inc., do hereby
severally constitute and appoint Burton B. Staniar, John H. Lynch, Douglas J.
Purdom and Patrick A. Milberger, and each of them, our true and lawful
attorneys and agents, to do any and all acts and things in our name and behalf
in our capacities as directors and officers and to execute any and all
instruments for us and in our names in the capacities indicated below, which
said attorneys and agents, or any of them, may deem necessary or advisable to
enable said Corporation to comply with the Securities Act of 1933, as amended,
and any rules, regulations and requirements of the Securities and Exchange
Commission, in connection with this Registration Statement on Form S-1,
including specifically, but without limitation, power and authority to sign
for us or any of us, in our names in the capacities indicated below, any and
all amendments (including post-effective amendments and including any
subsequent registration statement for the same offering which may be filed
under Rule 462(b) pursuant to the Securities Act of 1933, as amended) hereto;
and we do each hereby ratify and confirm all that said attorneys and agents,
or any one of them, shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
SIGNATURE TITLE DATE
/s/ Burton B. Staniar Chairman of the September 25,
- ------------------------------------- Board 1997
BURTON B. STANIAR
/s/ John H. Lynch President, Chief September 25,
- ------------------------------------- Executive Officer 1997
JOHN H. LYNCH and Director
(Principal
Executive Officer)
/s/ Douglas J. Purdom Chief Financial September 25,
- ------------------------------------- Officer (Principal 1997
DOUGLAS J. PURDOM Financial Officer)
II-6
<PAGE>
SIGNATURE TITLE DATE
/s/ Barry L. McCabe Controller September 25,
- ------------------------------------- (Principal 1997
BARRY L. MCCABE Accounting Officer)
/s/ John W. Amerman Director September 25,
- ------------------------------------- 1997
JOHN W. AMERMAN
/s/ Andrew B. Cogan Director September 25,
- ------------------------------------- 1997
ANDREW B. COGAN
/s/ Robert J. Dolan Director September 25,
- ------------------------------------- 1997
ROBERT J. DOLAN
/s/ Jeffrey A. Harris Director September 25,
- ------------------------------------- 1997
JEFFREY A. HARRIS
/s/ Sidney Lapidus Director September 25,
- ------------------------------------- 1997
SIDNEY LAPIDUS
/s/ Kewsong Lee Director September 25,
- ------------------------------------- 1997
KEWSONG LEE
/s/ John L. Vogelstein Director September 25,
- ------------------------------------- 1997
JOHN L. VOGELSTEIN
II-7
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ---------- ---------- ------------- ---------
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS(1) PERIOD
----------- ---------- ---------- ------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
VALUATION ACCOUNTS DEDUCTED IN
THE CONSOLIDATED BALANCE SHEET
FROM THE ASSETS TO WHICH THEY
APPLY:
TEN MONTHS ENDED DECEMBER 31,
1996:
Allowance for doubtful
accounts..................... $5,838 $2,098 $2,223 $5,713
TWO MONTHS ENDED FEBRUARY 29,
1996:
Allowance for doubtful
accounts..................... 5,790 159 210 5,739
YEAR ENDED DECEMBER 31, 1995:
Allowance for doubtful
accounts..................... 4,700 2,720 1,630 5,790
YEAR ENDED DECEMBER 31, 1994:
Allowance for doubtful
accounts..................... 2,162 3,636 1,098 4,700
</TABLE>
- --------
(1) Uncollectible accounts written off.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ----
<S> <C> <C>
+1.1 --Form of U.S. Underwriting Agreement.
+1.2 --Form of International Underwriting Agreement.
++3.1 --Amended and Restated Certificate of Incorporation of the
Company.
++3.2 --Amended and Restated By-Laws of the Company.
++4 --Specimen of the Company's Common Stock Certificate.
+5 --Opinion of Willkie Farr & Gallagher.
*10.1 --Stock Purchase Agreement, dated as of December 20, 1995,
by and between Westinghouse and TKG.
*10.2 --Knoll, Inc. 1996 Stock Incentive Plan (formerly called
the TKG 1996 Stock Incentive Plan).
*10.3 --Indenture, dated as of February 29, 1996, by and among
the Company, T.K.G. Acquisition Corp., T.K.G. Acquisition
Sub, Inc., The Knoll Group, Inc., Knoll North America,
Inc., Spinneybeck Enterprises, Inc. and Knoll Overseas,
Inc., as guarantors, and IBJ Schroder Bank & Trust
Company, as trustee, relating to $165,000,000 principal
amount of 10.875% Senior Subordinated Notes due 2006,
including form of Initial Global Note.
*10.4 --Supplemental Indenture, dated as of February 29, 1996, by
and among the Company, as successor to T.K.G. Acquisition
Sub, Inc., the Guarantors (as defined therein), and IBJ
Schroder Bank & Trust Company, as trustee, relating to
$165,000,000 principal amount of 10.875% Senior
Subordinated Notes due 2006, including form of Initial
Global Note.
**10.5 --Supplemental Indenture No. 2, dated as of March 14, 1997,
by and among the Company, the Guarantors (as defined
therein), and IBJ Schroder Bank & Trust Company, as
trustee, relating to $165,000,000 principal amount of
10.875% Senior Subordinated Notes due 2006, including form
of Initial Global Note.
10.6 --Credit Agreement, dated as of August 8, 1997, by and
among the Company, as Administrative Agent, NationsBank,
N.A., The Chase Manhattan Bank, as Documentation Agent and
other lending institutions.
**10.7 --Employment Agreement, dated as of February 29, 1996,
between T.K.G. Acquisition Corp. and Burton B. Staniar.
**10.8 --Employment Agreement, dated as of February 29, 1996,
between T.K.G. Acquisition Corp. and John H. Lynch.
**10.9 --Employment Agreement, dated as of February 29, 1996,
between T.K.G. Acquisition Corp. and Andrew B. Cogan.
++10.10 --Amendment to Employment Agreement, dated as of April 30,
1997, between the Company and Andrew B. Cogan.
**10.11 --Stockholders Agreement (Common Stock and Preferred
Stock), dated as of February 29, 1996, among T.K.G.
Acquisition Corp., Warburg, Pincus Ventures, L.P., and the
signatories thereto.
**10.12 --Form of Stockholders Agreement (Restricted Shares), dated
as of February 29, 1996, among T.K.G. Acquisition Corp.,
Warburg, Pincus Ventures, L.P. and the signatories
thereto.
**10.13 --Knoll, Inc. 1997 Stock Incentive Plan.
**10.14 --Consulting Agreement, dated as of December 1, 1996,
between Wolfgang Billstein and Knoll, Inc.
++10.15 --Form of Agreement, dated as of April 15, 1997, by and
among the Company, Warburg, Pincus Ventures, L.P.,
NationsBanc Investment Corp. and the Investors named
therein.
11 --Statement Re: Computation of Earnings Per Share.
**21 --Subsidiaries of the Registrant.
23.1 --Independent Accountants' Consent of Price Waterhouse LLP.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ----
<S> <C> <C>
23.2 --Independent Accountants' Consent of Ernst & Young LLP.
+23.3 --Consent of Willkie Farr & Gallagher (included in their
opinion filed as Exhibit 5).
24 --Powers of Attorney (included on signature pages).
</TABLE>
- --------
* Filed as an exhibit to the Company's Form S-4 dated March 29, 1996.
** Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996.
++ Filed as an exhibit to the Company's Registration Statement on Form S-1
(File No. 333-23399), which was declared effective by the Commission on May
9, 1997.
+ To be filed by amendment.
<PAGE>
CREDIT AGREEMENT
among
KNOLL, INC.
as Borrower,
THE LENDERS IDENTIFIED HEREIN,
AND
NATIONSBANK, N.A.,
as Administrative Agent
AND
THE CHASE MANHATTAN BANK,
as Documentation Agent
DATED AS OF AUGUST 8, 1997
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
<S> <C>
SECTION 1. DEFINITIONS AND ACCOUNTING TERMS 1
--------------------------------
1.1. Definitions........................................................ 1
-----------
1.2. Computation of Time Periods and Other Definitional Provisions...... 19
-------------------------------------------------------------
1.3. Accounting Terms................................................... 19
----------------
SECTION 2. CREDIT FACILITIES............................................. 20
-----------------
2.1. Revolving Loans.................................................... 20
---------------
2.2. Letter of Credit Subfacility....................................... 22
----------------------------
2.3. Competitive Bid Loans Subfacility.................................. 27
---------------------------------
2.4. Swing Line Loans Subfacility....................................... 30
----------------------------
2.5. Continuations and Conversions...................................... 31
-----------------------------
2.6. Minimum Amounts.................................................... 32
---------------
SECTION 3. GENERAL PROVISIONS APPLICABLE TO LOANS AND LETTERS OF CREDIT.. 32
------------------------------------------------------------
3.1. Interest........................................................... 32
--------
3.2. Place and Manner of Payments....................................... 32
----------------------------
3.3. Prepayments........................................................ 33
-----------
3.4. Fees............................................................... 34
----
3.5. Payment in full at Maturity........................................ 35
---------------------------
3.6. Computations of Interest and Fees.................................. 35
---------------------------------
3.7. Pro Rata Treatment................................................. 36
------------------
3.8. Allocation of Payments After Event of Default...................... 37
---------------------------------------------
3.9. Sharing of Payments................................................ 38
-------------------
3.10. Capital Adequacy.................................................. 39
----------------
3.11. Inability To Determine Interest Rate.............................. 39
------------------------------------
3.12. Illegality........................................................ 39
----------
3.13. Requirements of Law............................................... 40
-------------------
3.14. Taxes............................................................. 41
-----
3.15. Indemnity......................................................... 44
---------
3.16. Replacement Lenders............................................... 44
-------------------
SECTION 4. CONDITIONS PRECEDENT.......................................... 45
--------------------
4.1. Closing Conditions................................................. 45
------------------
4.2. Conditions to All Extensions of Credit............................. 47
--------------------------------------
SECTION 5. REPRESENTATIONS AND WARRANTIES................................ 48
------------------------------
5.1. Financial Condition................................................ 48
-------------------
5.2. No Material Change................................................. 48
------------------
5.3. Organization and Good Standing..................................... 48
------------------------------
5.4. Due Authorization.................................................. 49
-----------------
5.5. No Conflicts....................................................... 49
------------
</TABLE>
<PAGE>
5.6. Consents........................................................... 49
--------
5.7. Enforceable Obligations............................................ 49
-----------------------
5.8. No Default......................................................... 49
----------
5.9. Ownership.......................................................... 50
---------
5.10. Indebtedness...................................................... 50
------------
5.11. Litigation........................................................ 50
----------
5.12. Taxes............................................................. 50
-----
5.13. Compliance with Law............................................... 50
-------------------
5.14. ERISA............................................................. 50
-----
5.15. Subsidiaries...................................................... 51
------------
5.16. Use of Proceeds; Margin Stock..................................... 52
-----------------------------
5.17. Government Regulation............................................. 52
---------------------
5.18. Environmental Matters............................................. 52
---------------------
5.19. Intellectual Property............................................. 53
---------------------
5.20. Solvency.......................................................... 53
--------
5.21. Investments....................................................... 54
-----------
5.22. No Financing of Corporate Takeovers............................... 54
-----------------------------------
5.23. Disclosure........................................................ 54
----------
5.24. Licenses, etc..................................................... 54
-------------
5.25. No Burdensome Restrictions........................................ 54
--------------------------
5.26. Brokers' Fees..................................................... 54
-------------
5.27. Labor Matters..................................................... 54
-------------
SECTION 6. AFFIRMATIVE COVENANTS......................................... 55
---------------------
6.1. Information Covenants.............................................. 55
---------------------
6.2. Preservation of Existence and Franchises........................... 57
----------------------------------------
6.3. Books and Records.................................................. 58
-----------------
6.4. Compliance with Law................................................ 58
-------------------
6.5. Payment of Taxes and Other Indebtedness............................ 58
---------------------------------------
6.6. Insurance.......................................................... 58
---------
6.7. Maintenance of Property............................................ 58
-----------------------
6.8. Performance of Obligations......................................... 59
--------------------------
6.9. Use of Proceeds.................................................... 59
---------------
6.10. Audits/Inspections................................................ 59
------------------
6.11. Financial Covenants............................................... 59
-------------------
SECTION 7. NEGATIVE COVENANTS............................................ 60
------------------
7.1. Indebtedness....................................................... 60
------------
7.2. Liens.............................................................. 61
-----
7.3. Nature of Business................................................. 62
------------------
7.4. Consolidation and Merger........................................... 62
------------------------
7.5. Sale or Lease of Assets............................................ 62
------------------------
7.6. Advances, Investments and Loans.................................... 62
-------------------------------
7.7. Restricted Payments................................................ 63
-------------------
7.8. Transactions with Affiliates....................................... 63
----------------------------
7.9. Fiscal Year; Organizational Documents.............................. 63
-------------------------------------
ii
<PAGE>
<TABLE>
<S> <C>
7.10. Subordinated Debt................................................. 64
-----------------
7.11. Limitations....................................................... 64
-----------
7.12. Sale Leasebacks................................................... 64
---------------
SECTION 8. EVENTS OF DEFAULT............................................. 65
-----------------
8.1. Events of Default.................................................. 65
-----------------
8.2. Acceleration; Remedies............................................. 68
----------------------
SECTION 9. AGENCY PROVISIONS............................................. 69
-----------------
9.1. Appointment........................................................ 69
-----------
9.2. Delegation of Duties............................................... 69
--------------------
9.3. Exculpatory Provisions............................................. 69
----------------------
9.4. Reliance on Communications......................................... 70
--------------------------
9.5. Notice of Default.................................................. 70
-----------------
9.6. Non-Reliance on Agents and Other Lenders........................... 70
----------------------------------------
9.7. Indemnification.................................................... 71
---------------
9.8. Agents in Their Individual Capacity................................ 71
-----------------------------------
9.9. Successor Agent.................................................... 72
---------------
SECTION 10. MISCELLANEOUS................................................ 72
-------------
10.1. Notices........................................................... 72
-------
10.2. Right of Set-Off.................................................. 72
----------------
10.3. Benefit of Agreement.............................................. 73
--------------------
10.4. No Waiver; Remedies Cumulative.................................... 75
------------------------------
10.5. Payment of Expenses; Indemnification.............................. 76
------------------------------------
10.6. Amendments, Waivers and Consents.................................. 76
--------------------------------
10.7. Counterparts...................................................... 77
------------
10.8. Headings.......................................................... 78
--------
10.9. Defaulting Lender................................................. 78
-----------------
10.10. Survival of Indemnification and Representations and Warranties... 78
--------------------------------------------------------------
10.11. Governing Law; Venue............................................. 78
--------------------
10.12. Waiver of Jury Trial............................................. 79
--------------------
10.13. Time............................................................. 79
----
10.14. Severability..................................................... 79
------------
10.15. Entirety......................................................... 79
--------
10.16. Binding Effect; Termination of Prior Credit Agreement............ 79
-----------------------------------------------------
10.17. Confidentiality.................................................. 79
---------------
</TABLE>
iii
<PAGE>
SCHEDULES
- ---------
Schedule 1.1(a) Commitment Percentages
Schedule 1.1(b) Existing Letters of Credit
Schedule 1.1(c) Initial Shareholders
Schedule 5.6 Consents, Approvals and Authorizations
Schedule 5.10 Indebtedness
Schedule 5.11 Litigation
Schedule 5.15 Subsidiaries
Schedule 5.18 Environmental Matters
Schedule 5.27 Labor Disputes
Schedule 7.2 Liens
Schedule 7.6 Investments
Schedule 10.1 Notices
EXHIBITS
- --------
Exhibit 2.1 Form of Notice of Borrowing
Exhibit 2.1(e) Form of Revolving Note
Exhibit 2.3(b) Form of Competitive Bid Loan Note
Exhibit 2.3(d) Form of Competitive Bid Accept/Reject Letter
Exhibit 2.3(h) Form of Competitive Bid Loan Note
Exhibit 2.4(b) Form of Swing Line Loan Request
Exhibit 2.4(e) Form of Swing Line Loan Note
Exhibit 2.5 Form of Notice of Continuation/Conversion
Exhibit 6.1(c) Form of Officer's Certificate
Exhibit 10.3 Form of Assignment Agreement
iv
<PAGE>
CREDIT AGREEMENT
THIS CREDIT AGREEMENT (this "Credit Agreement"), is entered into as of
------------------
August 8, 1997 among KNOLL, INC., a Delaware corporation ("Borrower"), the
--------
Lenders (as defined herein), NATIONSBANK, N.A., as Administrative Agent for the
Lenders and THE CHASE MANHATTAN BANK, as Documentation Agent for the Lenders.
RECITALS
WHEREAS, the Borrower, T.K.G. Acquisition Corp. and each of the
Borrower's Domestic Subsidiaries entered into that certain Amended and Restated
Credit Agreement dated as of December 17, 1996 which provided a $230,000,000
credit facility to the Borrower (the "Prior Credit Agreement");
----------------------
WHEREAS, the Borrower desires to pay in full all obligations owing under
the Prior Credit Agreement such that the Borrower and all obligors thereunder
are discharged from all obligations under the Prior Credit Agreement (other than
any provisions thereof that expressly survive as set forth in the Prior Credit
Agreement);
WHEREAS, the Borrower has requested that the Lenders provide a new
$275,000,000 credit facility; and
WHEREAS, the Lenders have agreed to make the requested credit facility
available to the Borrower on the terms and conditions hereinafter set forth.
NOW, THEREFORE, IN CONSIDERATION of the premises and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
SECTION 1.
DEFINITIONS AND ACCOUNTING TERMS
--------------------------------
1.1. Definitions.
-----------
As used herein, the following terms shall have the meanings herein
specified unless the context otherwise requires. Defined terms herein shall
include in the singular number the plural and in the plural the singular:
"Adjusted Base Rate" means the Base Rate plus the Applicable
------------------
Percentage.
"Adjusted Eurodollar Rate" means the Eurodollar Rate plus the
------------------------
Applicable Percentage.
"Administrative Agent" means NationsBank, N.A. or any successor
--------------------
administrative agent appointed pursuant to Section 9.9.
<PAGE>
"Administrative Agent Fee Letter" means that certain letter agreement
-------------------------------
dated as of June 23, 1997 between the Administrative Agent and the
Borrower, as it may be amended, modified, supplemented or replaced from
time to time.
"Agency Services Address" means NationsBank, N.A., NC1-001-15-04, 101
-----------------------
North Tryon Street, Charlotte, North Carolina 28255, Attn: Agency Services,
or such other address as may be identified by written notice from the
Administrative Agent to the Borrower.
"Agents" mean the Administrative Agent and the Documentation Agent and
------
any successors and assigns in such capacity.
"Agents Fee Letter" means that certain letter agreement dated as of
-----------------
June 23, 1997 among the Agents and the Borrower, as it may be amended,
modified, supplemented or replaced from time to time.
"Affiliate" means, with respect to any Person, any other Person
---------
directly or indirectly controlling (including but not limited to all
directors and officers of such Person), controlled by or under direct or
indirect common control with such Person. A Person shall be deemed to
control a corporation if such Person possesses, directly or indirectly, the
power (i) to vote 10% or more of the securities having ordinary voting
power for the election of directors of such corporation or (ii) to direct
or cause direction of the management and policies of such corporation,
whether through the ownership of voting securities, by contract or
otherwise.
"Applicable Percentage" means for Revolving Loans, Letter of Credit
---------------------
Fees and Commitment Fees, the appropriate applicable percentages
corresponding to the Leverage Ratio in effect as of the most recent
Calculation Date as shown below:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
Applicable
Applicable Applicable Percentage Applicable
Percentage Percentage For Percentage
For For Letter of For
Pricing Leverage Eurodollar Base Rate Credit Commitment
Level Ratio Loans Loans Fee Fees
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
I greater than or equal to 3.5 to 1.0 .75% 0% .75% .25%
------------------------------------------------------------------------------------------
II less than 3.5 to 1.0 but .625% 0% .625% .20%
greater than or equal to 3.0 to 1.0
------------------------------------------------------------------------------------------
III less than 3.0 to 1.0 but .50% 0% .50% .175%
2.5 to 1.0
-------------------------------------------------------------------------------------------
IV less than 2.5 to 1.0 but .40% 0% .40% .15%
2.0 to 1.0
-------------------------------------------------------------------------------------------
V less than 2.0 to 1.0 .325% 0% .325% .125%
----------------------------------------------------------------------------------------------------------
</TABLE>
The Applicable Percentage for Revolving Loans, the Letter of Credit
Fees and the Commitment Fees shall, in each case, be determined and
adjusted quarterly on the date (each a "Calculation Date") five Business
----------------
Days after the date by which the Borrower is
2
<PAGE>
required to provide the officer's certificate in accordance with the
provisions of Section 6.1(c); provided that the initial Applicable
Percentage for Revolving Loans, the Letter of Credit Fees and the
Commitment Fees shall be based on Pricing Level IV (as shown above) and
shall remain at Pricing Level IV until the first Calculation Date
subsequent to December 31, 1997 and thereafter, the Pricing Level shall be
determined by the then current Leverage Ratio; and provided further that if
the Borrower fails to provide the officer's certificate required by Section
6.1(c) on or before the most recent Calculation Date, the Applicable
Percentage for Revolving Loans, the Letter of Credit Fees and the
Commitment Fees from such Calculation Date shall be based on Pricing Level
I until such time that an appropriate officer's certificate is provided
whereupon the Pricing Level shall be determined by the then current
Leverage Ratio. Each Applicable Percentage shall be effective from one
Calculation Date until the next Calculation Date except as set forth in the
prior sentence. Any adjustment in the Applicable Percentage shall be
applicable to all existing Revolving Loans and Letters of Credit as well as
any new Revolving Loans made or Letters of Credit issued.
At the time the officer's certificate is required to be delivered
pursuant to Section 6.1(c), the Borrower shall promptly deliver to the
Administrative Agent, at the address set forth on Schedule 10.1 and at the
-------------
Agency Services Address, information regarding any change in the Leverage
Ratio that would change the then existing Pricing Level.
"Asset Disposition" means the disposition of any or all of the assets
-----------------
(or the sale of the stock of a Subsidiary) of the Borrower or any of its
Subsidiaries whether by sale, lease, transfer or otherwise.
"Bankruptcy Code" means the Bankruptcy Code in Title 11 of the United
---------------
States Code, as amended, modified, succeeded or replaced from time to time.
"Base Rate" means, for any day, the rate per annum (rounded upwards,
---------
if necessary, to the nearest whole multiple of 1/100 of 1%) equal to the
greater of (a) the Federal Funds Rate in effect on such day plus __ of 1%
----
or (b) the Prime Rate in effect on such day. If for any reason the
Administrative Agent shall have determined (which determination shall be
conclusive absent manifest error) that it is unable after due inquiry to
ascertain the Federal Funds Rate for any reason, including the inability or
failure of the Administrative Agent to obtain sufficient quotations in
accordance with the terms hereof, the Base Rate shall be determined without
regard to clause (a) of the first sentence of this definition until the
circumstances giving rise to such inability no longer exist. Any change in
the Base Rate due to a change in the Prime Rate or the Federal Funds Rate
shall be effective on the effective date of such change in the Prime Rate
or the Federal Funds Rate, respectively.
"Base Rate Loan" means any Loan bearing interest at a rate determined
--------------
by reference to the Base Rate.
"Borrower" means Knoll, Inc., a Delaware corporation, together with
--------
any successors and permitted assigns.
3
<PAGE>
"Business Day" means any day other than a Saturday, a Sunday, a legal
------------
holiday or a day on which banking institutions are authorized or required
by law or other governmental action to close in Charlotte, North Carolina
or New York, New York; provided that in the case of Eurodollar Loans, such
day is also a day on which dealings between banks are carried on in U.S.
dollar deposits in the London interbank market.
"Calculation Date" has the meaning set forth in the definition of
----------------
Applicable Percentage.
"Capital Expenditures" means all expenditures of the Borrower and its
--------------------
Subsidiaries which, in accordance with GAAP, would be classified as capital
expenditures, including, without limitation, Capital Leases.
"Capital Lease" means, as applied to any Person, any lease of any
-------------
property (whether real, personal or mixed) by that Person as lessee which,
in accordance with GAAP, is or should be accounted for as a capital lease
on the balance sheet of that Person.
"Cash Equivalents" 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 of America is pledged in support thereof) having maturities
of not more than twelve months from the date of acquisition, (b) U.S.
dollar denominated time deposits and certificates of deposit of (i) any
Lender, (ii) any domestic commercial bank of recognized standing having
capital and surplus in excess of $500,000,000 or (iii) any bank whose
short-term commercial paper rating from S&P is at least A-1 or the
equivalent thereof or from Moody's is at least P-1 or the equivalent
thereof (any such bank being an "Approved Bank"), in each case with
-------------
maturities of not more than 270 days from the date of acquisition, (c)
commercial paper and variable or fixed rate notes issued by any Approved
Bank (or by the parent company thereof) or any variable rate notes issued
by, or guaranteed by, any domestic corporation rated A-1 (or the equivalent
thereof) or better by S&P or P-1 (or the equivalent thereof) or better by
Moody's and maturing within six months of the date of acquisition, (d)
repurchase agreements with a bank or trust company (including any of the
Lenders) or recognized securities dealer having capital and surplus in
excess of $500,000,000 for direct obligations issued by or fully guaranteed
by the United States of America in which the Borrower shall have a
perfected first priority security interest (subject to no other Liens) and
having, on the date of purchase thereof, a fair market value of at least
100% of the amount of the repurchase obligations and (e) Investments,
classified in accordance with GAAP as current assets, in money market
investment programs registered under the Investment Company Act of 1940, as
amended, which are administered by reputable financial institutions having
capital of at least $500,000,000 and the portfolios of which are limited to
Investments of the character described in the foregoing subdivisions (a)
through (d).
4
<PAGE>
"Change of Control" means any of the following events:
-----------------
(a) (i) 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 Borrower on a fully-diluted basis, after giving effect
to the conversion and exercise of all outstanding warrants, options and
other securities of the Borrower convertible into or exercisable for Voting
Stock of the Borrower (whether or not such securities are then currently
convertible or exercisable), and (ii) 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 Borrower calculated on such fully-
diluted basis, than the percentage beneficially owned by the Initial
Shareholders; or
(b) 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 the Borrower together with any new members of such
board or board of directors (i) whose elections by such board or board of
directors or whose nomination for election by the stockholders of the
Borrower 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 (ii) elected by the Initial Shareholders, cease
for any reason to constitute a majority of the directors of the Borrower
then in office; or
(c) a "change of control" (as defined in the Indenture) occurs.
"Closing Date" means the date hereof.
------------
"Code" means the Internal Revenue Code of 1986, as amended, modified,
----
succeeded or replaced from time to time.
"Commitment Fees" means the fees payable to the Lenders pursuant to
---------------
Section 3.4(a).
"Commitments" means the commitment of each Lender with respect to the
-----------
Revolving Committed Amount and the commitment of NationsBank with respect
to the Swing Line Committed Amount.
"Competitive Bid" means an offer by a Lender to make a Competitive Bid
---------------
Loan pursuant to the terms of Section 2.3.
"Competitive Bid Loan" means a loan made by a Lender in its discretion
--------------------
pursuant to the provisions of Section 2.3.
5
<PAGE>
"Competitive Bid Loan Maximum Amount" shall have the meaning assigned
-----------------------------------
such term in Section 2.3(a).
"Competitive Bid Loan Notes" means the promissory notes of the
--------------------------
Borrower in favor of each of the Lenders evidencing the Competitive Bid
Loans provided pursuant to Section 2.3, individually or collectively, as
appropriate, as such promissory notes may be amended, modified,
supplemented, extended, renewed or replaced from time to time and as
evidenced in the form of Exhibit 2.3(h).
--------------
"Competitive Bid Loan Request" means a request by the Borrower for
----------------------------
Competitive Bids substantially in the form of Exhibit 2.3(b).
--------------
"Competitive Bid Request Fee" shall have the meaning assigned to such
---------------------------
term in Section 3.4(d).
"Competitive Bid Rate" means, as to any Competitive Bid made by a
--------------------
Lender in accordance with the provisions of Section 2.3, the fixed rate of
interest offered by the Lender making the Competitive Bid.
"Credit Documents" means this Credit Agreement, the Notes, the LOC
----------------
Documents, the Fee Letters and all other related agreements and documents
issued or delivered hereunder or thereunder or pursuant hereto or thereto.
"Default" means any event, act or condition which with notice or lapse
-------
of time, or both, would constitute an Event of Default.
"Defaulting Lender" means, at any time, any Lender that, within one
-----------------
Business Day of when due (a) has failed to make a Loan or purchase a
Participation Interest required pursuant to the term of this Credit
Agreement, (b) other than as set forth in (a) above, has failed to pay to
the Agents or any Lender an amount owed by such Lender pursuant to the
terms of this Credit Agreement unless such amount is subject to a good
faith dispute or (c) has been deemed insolvent or has become subject to a
bankruptcy or insolvency proceeding or to a receiver, trustee or similar
official.
"Documentation Agent" means The Chase Manhattan Bank or any successor
-------------------
documentation agent appointed pursuant to Section 9.9.
"Dollars" and "$" means dollars in lawful currency of the United
------- -
States of America.
"Domestic Subsidiaries" means all direct and indirect Subsidiaries of
---------------------
the Borrower that are domiciled, incorporated or organized under the laws
of any state of the United States or the District of Columbia (or has any
material assets located in the United States).
"EBITDA" means, for any period, with respect to the Borrower and its
------
Subsidiaries on a consolidated basis, the sum of (a) Net Income for such
period (excluding the effect of any extraordinary or other non-recurring
gains or losses outside of the
6
<PAGE>
ordinary course of business) plus (b) an amount which, in the determination
of Net Income for such period has been deducted for (i) cash Interest
Expense for such period, (ii) total Federal, state, foreign or other income
taxes for such period and (iii) all Non-Cash Charges for such period, all
as determined in accordance with GAAP.
"Effective Date" means the date on which the conditions set forth in
--------------
Section 4.1 shall have been fulfilled (or waived in the sole discretion of
the Lenders).
"Eligible Assignee" means (a) any Lender or Affiliate or subsidiary of
-----------------
a Lender and (b) any other commercial bank, financial institution,
institutional lender or "accredited investor" (as defined in Regulation D
of the Securities and Exchange Commission).
"Environmental Claim" means any investigation, written notice,
-------------------
violation, written demand, written allegation, action, suit, injunction,
judgment, order, consent decree, penalty, fine, lien, proceeding, or
written claim whether administrative, judicial, or private in nature from
activities or events taking place during or prior to the Borrower's or any
of its Subsidiaries' ownership or operation of any Real Property and
arising (a) pursuant to, or in connection with, an actual or alleged
violation of, any Environmental Law, (b) in connection with any Hazardous
Material, (c) from any assessment, abatement, removal, remedial,
corrective, or other response action required by an Environmental Law or
other order of a Governmental Authority or (d) from any actual or alleged
damage, injury, threat, or harm to health, safety, natural resources, or
the environment.
"Environmental Laws" means any current or future legal requirement of
------------------
any Governmental Authority pertaining to (a) the protection of health,
safety, and the environment, (b) the conservation, management, or use of
natural resources and wildlife, (c) the protection or use of surface water
and groundwater or (d) the management, manufacture, possession, presence,
use, generation, transportation, treatment, storage, disposal, release,
threatened release, abatement, removal, remediation or handling of, or
exposure to, any hazardous or toxic substance or material and includes,
without limitation, the Comprehensive Environmental Response, Compensation,
and Liability Act of 1980, as amended by the Superfund Amendments and
Reauthorization Act of 1986, 42 USC 9601 et seq., Solid Waste Disposal Act,
as amended by the Resource Conservation and Recovery Act of 1976 and
Hazardous and Solid Waste Amendment of 1984, 42 USC 6901 et seq., Federal
Water Pollution Control Act, as amended by the Clean Water Act of 1977, 33
USC 1251 et seq., Clean Air Act of 1966, as amended, 42 USC 7401 et seq.,
Toxic Substances Control Act of 1976, 15 USC 2601 et seq., Hazardous
Materials Transportation Act, 49 USC App. 1801 et seq., Occupational Safety
and Health Act of 1970, as amended, 29 USC 651 et seq., Oil Pollution Act
of 1990, 33 USC 2701 et seq., Emergency Planning and Community Right-to-
Know Act of 1986, 42 USC 11001 et seq., National Environmental Policy Act
of 1969, 42 USC 4321 et seq., Safe Drinking Water Act of 1974, as amended,
42 USC 300(f) et seq., any analogous implementing or successor law, and any
amendment, rule, regulation, order, or directive issued thereunder.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
-----
amended, and any successor statute thereto, as interpreted by the rules and
regulations
7
<PAGE>
thereunder, all as the same may be in effect form time to time.
References to sections of ERISA shall be construed also to refer to any
successor sections.
"ERISA Affiliate" means an entity, whether or not incorporated, which
---------------
is under common control with the Borrower or any of its Subsidiaries within
the meaning of Section 4001(a)(14) of ERISA, or is a member of a group
which includes the Borrower or any of its Subsidiaries and which is treated
as a single employer under Sections 414(b), (c), (m), or (o) of the Code.
"Equity Issuance" means any issuance by the Borrower to any Person of
---------------
(a) shares of its capital stock or other equity interests, (b) any shares
of its capital stock or other equity interests pursuant to the exercise of
options (other than stock issued to employees and directors pursuant to
employees or directors stock option plans) or warrants or (c) any shares of
its capital stock or other equity interests pursuant to the conversion of
any debt securities issued subsequent to the Closing Date to equity. The
amount of any Equity Issuance shall be the net cash proceeds derived
therefrom, including, in the case of any conversion of any debt securities,
issued after the Closing Date, into equity the amount of such debt.
"Eurodollar Loan" means a Loan (other than a Competitive Bid Loan)
---------------
bearing interest based at a rate determined by reference to the Eurodollar
Rate.
"Eurodollar Rate" means, for the Interest Period for each Eurodollar
---------------
Loan comprising part of the same borrowing (including conversions,
extensions and renewals), a per annum interest rate determined pursuant to
the following formula:
Eurodollar Rate = London Interbank Offered Rate
-----------------------------
1 - Eurodollar Reserve Percentage
"Eurodollar Reserve Percentage" means for any day, that percentage
-----------------------------
(expressed as a decimal) which is in effect from time to time under
Regulation D of the Board of Governors of the Federal Reserve System (or
any successor), as such regulation may be amended from time to time or any
successor regulation, as the maximum reserve requirement (including,
without limitation, any basic, supplemental, emergency, special, or
marginal reserves) applicable with respect to Eurocurrency liabilities as
that term is defined in Regulation D (or against any other category of
liabilities that includes deposits by reference to which the interest rate
of Eurodollar Loans is determined), whether or not a Lender has any
Eurocurrency liabilities subject to such reserve requirement at that time.
Eurodollar Loans shall be deemed to constitute Eurocurrency liabilities and
as such shall be deemed subject to reserve requirements without benefits of
credits for proration, exceptions or offsets that may be available from
time to time to a Lender. The Eurodollar Rate shall be adjusted
automatically on and as of the effective date of any change in the
Eurodollar Reserve Percentage.
"Event of Default" has the meaning specified in Section 8.1.
----------------
8
<PAGE>
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
------------
and the rules and regulations promulgated thereunder.
"Existing Letters of Credit" means the letters of credit described by
--------------------------
date of issuance, letter of credit number, undrawn amount, name of
beneficiary and the date of expiry on Schedule 1.1(b) hereto.
---------------
"Extension of Credit" means, as to any Lender, the making of a Loan by
-------------------
such Lender (or a participation therein by a Lender) or the issuance of, or
participation in, a Letter of Credit by such Lender.
"Federal Funds Rate" means for any day the rate per annum (rounded
------------------
upward, if necessary, to the nearest 1/100th of 1%) equal to the weighted
average of the rates on overnight Federal funds transactions with members
of the Federal Reserve System arranged by Federal funds brokers on such
day, as published by the Federal Reserve Bank of New York on the Business
Day next succeeding such day; provided that (a) if such day is not a
Business Day, the Federal Funds Rate for such day shall be such rate on
such transactions on the next preceding Business Day and (b) if no such
rate is so published on such next preceding Business Day, the Federal Funds
Rate for such day shall be the average rate quoted to the Administrative
Agent on such day on such transactions as determined by the Administrative
Agent.
"Fee Letters" means (a) the Agents Fee Letter and (b) the
-----------
Administrative Agent Fee Letter.
"Funded Debt" means, without duplication, the sum of (a) all
-----------
Indebtedness of the Borrower and its Subsidiaries for borrowed money (it
being understood that with respect to Indebtedness incurred with an
original issue discount, the obligations shall consist of the then accreted
value), (b) all purchase money Indebtedness of the Borrower and its
Subsidiaries, (c) the principal portion of all obligations of the Borrower
and its Subsidiaries under Capital Leases, (d) commercial letters of credit
and the maximum amount of all performance and standby letters of credit
issued or bankers' acceptance facilities created for the account of the
Borrower or one of its Subsidiaries, including, without duplication, all
unreimbursed draws thereunder, (e) all Guaranty Obligations of the Borrower
and its Subsidiaries with respect to Funded Debt of another person, (f) all
Funded Debt of another entity secured by a Lien on any property of the
Borrower or any of its Subsidiaries whether or not such Funded Debt has
been assumed by the Borrower or any of its Subsidiaries, (g) all Funded
Debt of any partnership or unincorporated joint venture to the extent the
Borrower or one of its Subsidiaries is legally obligated or has a
reasonable expectation of being liable with respect thereto, net of any
assets of such partnership or joint venture and (h) the principal balance
outstanding under any synthetic lease, tax retention operating lease, off-
balance sheet loan or similar off-balance sheet financing product where
such transaction is considered borrowed money indebtedness for tax purposes
but is classified as an operating lease in accordance with GAAP.
9
<PAGE>
"GAAP" means generally accepted accounting principles in the United
----
States applied on a consistent basis and subject to Section 1.3.
"Governmental Authority" means any Federal, state, local, provincial
----------------------
or foreign court or governmental agency, authority, instrumentality or
regulatory body.
"Guaranty Obligations" means, with respect to any Person, without
--------------------
duplication, any obligations (other than endorsements in the ordinary
course of business of negotiable instruments for deposit or collection)
guaranteeing or intended to guarantee any Indebtedness of any other Person
in any manner, whether direct or indirect, and including without limitation
any obligation, whether or not contingent, (a) to purchase any such
Indebtedness or other obligation or any property constituting security
therefor, (b) to advance or provide funds or other support for the payment
or purchase of such indebtedness or obligation or to maintain working
capital, solvency or other balance sheet condition of such other Person
(including, without limitation, maintenance agreements, comfort letters,
take or pay arrangements, put agreements or similar agreements or
arrangements) for the benefit of the holder of Indebtedness of such other
Person, (c) to lease or purchase property, securities or services primarily
for the purpose of assuring the owner of such Indebtedness or (d) to
otherwise assure or hold harmless the owner of such Indebtedness or
obligation against loss in respect thereof. The amount of any Guaranty
Obligation hereunder shall (subject to any limitations set forth therein)
be deemed to be an amount equal to the outstanding principal amount (or
maximum principal amount, if larger) of the Indebtedness in respect of
which such Guaranty Obligation is made.
"Hazardous Materials" means any substance, material or waste defined
-------------------
or regulated in or under any Environmental Laws.
"Hedging Agreements" means any interest rate protection agreement,
------------------
foreign exchange contract, currency swap agreement, commodity purchase or
option agreement or other interest or exchange rate or commodity price
hedging agreement or other similar agreement between the Borrower and any
Lender, or any Affiliate of a Lender, designed to protect the Borrower or
any of its Subsidiaries against fluctuations in currency.
"Indebtedness" of any Person means, without duplication, (a) all
------------
obligations of such Person for borrowed money, (b) all obligations of such
Person evidenced by bonds, debentures, notes or similar instruments, (c)
all obligations of such Person under conditional sale or other title
retention agreements relating to property purchased by such Person to the
extent of the value of such property (other than customary reservations or
retentions of title under agreements with suppliers entered into in the
ordinary course of business), (d) all obligations, other than intercompany
items, of such Person issued or assumed as the deferred purchase price of
property or services purchased by such Person which would appear as
liabilities on a balance sheet of such Person, (e) all Indebtedness of
others secured by (or for which the holder of such Indebtedness has an
existing right, contingent or otherwise, to be secured by) any Lien on, or
payable out of the proceeds of production from, property owned or acquired
by such Person, whether or not the obligations secured thereby have been
assumed, (f) all Guaranty Obligations of such
10
<PAGE>
Person, (g) the principal portion of all obligations of such Person under
(i) Capital Leases and (ii) any synthetic lease, tax retention operating
lease, off-balance sheet loan or similar off-balance sheet financing
product where such transaction is considered borrowed money indebtedness
for tax purposes but is classified as an operating lease in accordance with
GAAP (collectively, "TROLS"), (h) all obligations of such Person in
-----
respect of interest rate protection agreements, foreign currency exchange
agreements, or other interest or exchange rate or commodity price hedging
agreements, (i) the maximum amount of all performance and standby letters
of credit issued or bankers' acceptances facilities created for the account
of such Person and, without duplication, all drafts drawn thereunder (to
the extent unreimbursed), (j) all preferred stock issued by such Person and
required by the terms thereof to be redeemed, or for which mandatory
sinking fund payments are due, by a fixed date and (k) the aggregate amount
of uncollected accounts receivable of such Person subject at such time to a
sale of receivables (or similar transaction) regardless of whether such
transaction is effected without recourse to such Person or in a manner that
would not be reflected on the balance sheet of such Person in accordance
with GAAP. The Indebtedness of any Person shall include the Indebtedness of
any partnership or unincorporated joint venture in which such Person is
legally obligated or has a reasonable expectation of being liable with
respect thereto. Indebtedness shall not include (i) "teaming agreements"
pursuant to which the Borrower or any of its Subsidiaries shall agree with
another supplier of services to provide services (including the sale of
inventory) to a third person and pursuant to such agreement shall be
responsible to the third Person for the performance of the obligations of
such other supplier, (ii) warranty claims, (iii) product guarantees, (iv)
guarantees by a Person of obligations not constituting Indebtedness of the
Borrower or any of its Subsidiaries and (v) obligations under joint
development agreements pursuant to which the Borrower and any of its
Subsidiaries agree to develop a product.
"Indenture" means that certain Indenture dated as of February 29, 1996
---------
among Knoll, Inc. (f/k/a T.K.G. Acquisition Sub, Inc.) as issuer, the
guarantors named therein and IBJ Schroder Bank & Trust Company, as trustee,
as the same may be modified, supplemented or amended from time to time.
"Initial Shareholders" means the Persons on Schedule 1.1(c).
-------------------- ---------------
"Insignificant Subsidiary" means any Subsidiary of the Borrower that
------------------------
(a) has assets of less than $2,500,000 and (b) for the most recent fiscal
year of the Borrower, accounted for less than 3% of the consolidated
revenues of the Borrower and its Subsidiaries.
"Interest Expense" means, for any period, with respect to the Borrower
----------------
and its Subsidiaries on a consolidated basis, all net interest expense,
including the interest component under Capital Leases, as determined in
accordance with GAAP; it being understood that Interest Expense shall, at
the option of the Borrower, include the amortized cost of any interest rate
protection agreements, foreign exchange contracts, currency swap agreements
or other similar agreements or arrangements designed to protect the
Borrower or any of its Subsidiaries against fluctuations in currency
values, to the extent permitted by GAAP.
11
<PAGE>
"Interest Payment Date" means (a) as to Base Rate Loans, the last day
---------------------
of each fiscal quarter of the Borrower and the Revolving Loan Maturity
Date, (b) as to Eurodollar Loans, the last day of each applicable Interest
Period and the Revolving Loan Maturity Date, and in addition where the
applicable Interest Period for a Eurodollar Loan is greater than three
months, then also the date three months from the beginning of the Interest
Period and each three months thereafter and (c) as to Competitive Bid
Loans, the last day of the Interest Period applicable to such Loan and the
Revolving Loan Maturity Date; provided, that if the Interest Period for a
Competitive Bid Loan is greater than 90 days, then also the last day of
each fiscal quarter of the Borrower.
"Interest Period" means (i) as to Eurodollar Loans, a period of one,
---------------
two, three or six months' duration, as the Borrower may elect, commencing,
in each case, on the date of the borrowing (including continuations and
conversions thereof) and (ii) with respect to Competitive Bid Loans, a
period commencing on the date of the borrowing and ending on the date
specified in the applicable Competitive Bid whereby the offer to make such
Competitive Loan was extended (such ending date in any event to be not less
than 7 nor more than 180 days from the date of borrowing); provided,
--------
however, (a) if any Interest Period would end on a day which is not a
-------
Business Day, such Interest Period shall be extended to the next succeeding
Business Day (except that where the next succeeding Business Day falls in
the next succeeding calendar month, then on the next preceding Business
Day), (b) no Interest Period shall extend beyond the Revolving Loan
Maturity Date and (c) in the case of Eurodollar Loans, where an Interest
Period begins on a day for which there is no numerically corresponding day
in the calendar month in which the Interest Period is to end, such Interest
Period shall end on the last Business Day of such calendar month.
Notwithstanding the above, for the first 30 days subsequent to the Closing
Date, the Borrower may not, without the consent of the Agents, request any
Interest Period other than a one month Interest Period for any Eurodollar
Loans.
"Investment" means (a) the acquisition (whether for cash, property,
----------
services, assumption of Indebtedness, securities or otherwise) of assets,
shares of capital stock, bonds, notes, debentures, partnership, joint
ventures or other ownership interests or other securities of any Person or
(b) any deposit with, or advance, loan or other extension of credit to,
such Person (other than deposits made in connection with the purchase of
equipment or other assets in the ordinary course of business) or (c) any
other capital contribution to or investment in such Person, including,
without limitation, any Guaranty Obligation (including any support for a
Letter of Credit issued on behalf of such Person) incurred for the benefit
of such Person.
"Issuing Lender" means NationsBank, N.A.
--------------
"Issuing Lender Fees" has the meaning set forth in Section 3.4(b).
-------------------
"Lender" means any of the Persons identified as a "Lender" on the
------
signature pages hereto, and any Person which may become a Lender by way of
assignment in accordance with the terms hereof, together with their
successors and permitted assigns.
12
<PAGE>
"Letter of Credit" means (i) a Letter of Credit issued for the account
----------------
of the Borrower by the Issuing Lender pursuant to Section 2.2, as such
Letter of Credit may be amended, modified, extended, renewed or replaced
and (ii) any Existing Letters of Credit.
"Letter of Credit Fee" shall have the meaning assigned to such term in
--------------------
Section 3.4(b).
"Leverage Ratio" means, as of the end of each fiscal quarter of the
--------------
Borrower, with respect to the Borrower and its Subsidiaries on a
consolidated basis, the ratio of (a) Funded Debt on such date to (b) EBITDA
for the twelve month period ending on such date.
"Lien" means any mortgage, pledge, hypothecation, assignment, deposit
----
arrangement, security interest, encumbrance, lien (statutory or otherwise),
preference, priority or charge of any kind, including, without limitation,
any agreement to give any of the foregoing, any conditional sale or other
title retention agreement, and any lease in the nature thereof.
"Loan" or "Loans" means the Revolving Loans, the Swing Line Loans and
---- -----
the Competitive Bid Loans, individually or collectively, as appropriate.
"LOC Documents" means, with respect to any Letter of Credit, such
-------------
Letter of Credit, any amendments thereto, any documents delivered in
connection therewith, any application therefor, and any agreements,
instruments, guarantees or other documents (whether general in application
or applicable only to such Letter of Credit) governing or providing for (a)
the rights and obligations of the parties concerned or at risk or (b) any
collateral security for such obligations.
"LOC Obligations" means, at any time, the sum of (a) the maximum
---------------
amount which is, or at any time thereafter may become, available to be
drawn under Letters of Credit then outstanding, assuming compliance with
all requirements for drawings referred to in such Letters of Credit plus
----
(b) the aggregate amount of all drawings under Letters of Credit honored by
an Issuing Lender but not theretofore reimbursed.
"LOC Participants" means the Lenders.
----------------
"London Interbank Offered Rate" means, with respect to any Eurodollar
-----------------------------
Loan for the Interest Period applicable thereto, the rate of interest per
annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing
on Telerate Page 3750 (or any successor page) as the London interbank
offered rate for deposits in Dollars at approximately 11:00 A.M. (London
time) two Business Days prior to the first day of such Interest Period for
a term comparable to such Interest Period; provided, however, if more than
one rate is specified on Telerate Page 3750, the applicable rate shall be
the arithmetic mean of all such rates. If, for any reason, such rate is
not available, the term "London Interbank Offered Rate" shall mean, with
-----------------------------
respect to any Eurodollar Loan for the Interest Period applicable thereto,
the rate of interest per annum (rounded upwards, if necessary, to the
13
<PAGE>
nearest 1/100 of 1%) appearing on Reuters Screen LIBO Page as the London
interbank offered rate for deposits in Dollars at approximately 11:00 A.M.
(London time) two Business Days prior to the first day of such Interest
Period for a term comparable to such Interest Period; provided, however, if
more than one rate is specified on Reuters Screen LIBO Page, the applicable
rate shall be the arithmetic mean of all such rates.
"Management" means any current or former officer, director or employee
----------
of the Borrower; provided that with respect to former officers, directors
or employees, any stock or option in question must have been earned or
received while such Person was an officer, director or employee.
"Mandatory Borrowing" has the meaning set forth in Section 2.2(e).
-------------------
"Material Adverse Effect" means a material adverse effect, after
-----------------------
taking into account any applicable insurance and any applicable
indemnification (to the extent the provider of such insurance or
indemnification has the financial ability to support its obligations with
respect thereto and is not disputing or refusing to acknowledge same), on
(a) the operations, financial condition or business of the Borrower and its
Subsidiaries taken as a whole, (b) the ability of the Borrower to perform
its obligations under this Credit Agreement or any of the other Credit
Documents, or (c) the validity or enforceability of this Credit Agreement,
any of the other Credit Documents, or the rights and remedies of the
Lenders hereunder or thereunder taken as a whole.
"Moody's" means Moody's Investors Service, Inc., or any successor or
-------
assignee of the business of such company in the business of rating
securities.
"Multiemployer Plan" means a Plan covered by Title IV of ERISA which
------------------
is a multiemployer plan as defined in Section 3(37) or 4001(a)(3) of ERISA.
"Multiple Employer Plan" means a Plan covered by Title IV of ERISA,
----------------------
other than a Multiemployer Plan, which the Borrower or any of its
Subsidiaries or any ERISA Affiliate and at least one employer other than
the Borrower or any of its Subsidiaries or any ERISA Affiliate are
contributing sponsors.
"Net Income" means, for any period, the net income after taxes for
----------
such period of the Borrower and its Subsidiaries on a consolidated basis,
as determined in accordance with GAAP.
"Non-Cash Charges" means, for any period, with respect to the Borrower
----------------
and its Subsidiaries on a consolidated basis, all depreciation,
amortization and other non-cash charges (excluding any non-cash charges
that require 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).
"Non-Excluded Taxes" has the meaning set forth in Section 3.14.
------------------
14
<PAGE>
"Note" or "Notes" means the Revolving Loan Notes, the Competitive Bid
---- -----
Loan Notes and the Swing Line Notes, individually or collectively, as
appropriate.
"Notice of Borrowing" means a request by the Borrower for a Revolving
-------------------
Loan, in the form of Exhibit 2.1.
-----------
"Notice of Continuation/Conversion" means a request by the Borrower to
---------------------------------
continue an existing Eurodollar Loan to a new Interest Period or to convert
a Eurodollar Loan to a Base Rate Loan or a Base Rate Loan to a Eurodollar
Loan, in the form of Exhibit 2.5.
-----------
"Participation Interest" means the Extension of Credit by a Lender by
----------------------
way of a purchase of a participation in Letters of Credit or LOC
Obligations as provided in Section 2.2, in Swing Line Loans as provided in
Section 2.4(c) or in any Loans as provided in Section 3.9.
"PBGC" means the Pension Benefit Guaranty Corporation established
----
pursuant to Subtitle A of Title IV of ERISA and any successor thereto.
"Permitted Acquisition" means the acquisition of (a) all of the
---------------------
capital stock of another Person or (b) all or substantially all of the
assets of another Person; provided that (i) the capital stock or Person
acquired in such acquisition relates to a line of business similar to the
business of the Borrower engaged in on the Closing Date and (ii) no Default
or Event of Default exists and is continuing.
"Permitted Investments" means Investments which are (a) cash or Cash
---------------------
Equivalents, (b) accounts receivable created, acquired or made in the
ordinary course of business and payable or dischargeable in accordance with
customary trade terms or otherwise in the prudent judgment of the Borrower,
(c) inventory, raw materials and general intangibles acquired in the
ordinary course of business, (d) loans to directors, officers, employees,
agents, customers or suppliers in the ordinary course of business for
reasonable business expenses, not to exceed in the aggregate $5,000,000 at
any one time, (e) the Investments set forth on Schedule 7.6, (f)
------------
Investments in a Subsidiary of the Borrower as long as such Investment
would not cause a violation of Section 6.11(b), (g) Investments in
Permitted Acquisitions, (h) Investments in Capital Expenditures, (i)
Investments made as a result of the receipt of non-cash consideration from
an Asset Disposition permitted by this Credit Agreement, (j) Investments in
dealers and customers in the ordinary course of business, (k) Investments
in dealers and customers received in connection with any bankruptcy or
reorganization of such dealer or customer as a result of an Investment
previously made in such dealer or customer in accordance with the
provisions of clause (j), (l) Investments comprised of progress payments to
suppliers and (m) Investments not otherwise permitted by the other clauses
of this definition not to exceed $5,000,000, in the aggregate, at any one
time outstanding.
"Permitted Liens" means (a) Liens for taxes not yet due or Liens for
---------------
taxes being contested in good faith by appropriate proceedings for which
adequate reserves determined in accordance with GAAP have been established
(and as to which the property
15
<PAGE>
subject to any such Lien is not yet subject to foreclosure, sale or loss on
account thereof), (b) Liens in respect of property imposed by law arising
in the ordinary course of business such as materialmen's, mechanics',
warehousemen's, carrier's, landlords' and other nonconsensual statutory
Liens which are not yet due and payable, which have been in existence less
than 90 days or which are being contested in good faith by appropriate
proceedings for which adequate reserves determined in accordance with GAAP
have been established (and as to which the property subject to any such
Lien is not yet subject to foreclosure, sale or loss on account thereof),
(c) pledges or deposits made in the ordinary course of business to secure
payment of worker's compensation insurance, unemployment insurance,
pensions or social security programs, (d) Liens arising from good faith
deposits in connection with or to secure performance of tenders, bids,
leases, government contracts, performance and return-of-money bonds and
other similar obligations incurred in the ordinary course of business
(other than obligations in respect of the payment of borrowed money), (e)
Liens arising from good faith deposits in connection with or to secure
performance of statutory obligations and surety and appeal bonds, (f)
easements, rights-of-way, restrictions (including zoning restrictions),
minor defects or irregularities in title and other similar charges or
encumbrances not, in any material respect, impairing the use of the
encumbered property for its intended purposes, (g) judgment Liens that
would not constitute an Event of Default, (h) Liens in connection with
Indebtedness allowed under Section 7.1(f) and, to the extent applicable,
Section 7.12, (i) Liens arising by virtue of any statutory or common law
provision relating to banker's liens, rights of setoff or similar rights as
to deposit accounts or other funds maintained with a creditor depository
institution, (j) Liens existing on the date hereof and identified on
Schedule 7.2; provided that no such Lien shall extend to any property other
------------
than the property subject thereto on the Closing Date and (k) Liens on real
property, equipment and fixtures acquired in connection with a Permitted
Acquisition; provided that (A) such Lien shall have existed at the time
such Permitted Acquisition was consummated, (B) such Lien was not incurred
in anticipation thereof and (C) such Liens, in the aggregate, do not secure
Indebtedness in excess of $10,000,000 aggregate principal amount at any one
time outstanding.
"Person" means any individual, partnership, joint venture, firm,
------
corporation, limited liability company, association, trust or other
enterprise (whether or not incorporated), or any Governmental Authority.
"Plan" means any employee benefit plan (as defined in Section 3(3) of
----
ERISA) which is covered by ERISA and with respect to which the Borrower or
any of its Subsidiaries or any ERISA Affiliate is (or, if such plan were
terminated at such time, would under Section 4069 of ERISA be deemed to be)
an "employer" within the meaning of Section 3(5) of ERISA.
"Prime Rate" means the per annum rate of interest established from
----------
time to time by the Administrative Agent at its principal office in
Charlotte, North Carolina (or such other principal office of the
Administrative Agent as communicated in writing to the Borrower and the
Lenders) as its Prime Rate. Any change in the interest rate resulting from
a change in the Prime Rate shall become effective as of 12:01 a.m. of the
Business Day on which each change in the Prime Rate is announced by the
Administrative Agent. The
16
<PAGE>
Prime Rate is a reference rate used by the Administrative Agent in
determining interest rates on certain loans and is not intended to be the
lowest rate of interest charged on any extension of credit to any debtor.
"Real Properties" shall have the meaning set forth in Section 5.18
---------------
hereof.
"Regulation D, G, U, or X" means Regulation D, G, U or X,
------------------------
respectively, of the Board of Governors of the Federal Reserve System as
from time to time in effect and any successor to all or a portion thereof.
"Reportable Event" means a "reportable event" as defined in Section
----------------
4043 of ERISA with respect to which the notice requirements to the PBGC
have not been waived.
"Required Lenders" means Lenders whose aggregate Credit Exposure (as
----------------
hereinafter defined) constitutes at least 51% of the Credit Exposure of all
Lenders at such time; provided, however, that if any Lender shall be a
Defaulting Lender at such time then there shall be excluded from the
determination of Required Lenders the aggregate principal amount of Credit
Exposure of such Lender at such time. For purposes of the preceding
sentence, the term "Credit Exposure" as applied to each Lender shall mean
(a) at any time prior to the termination of the Commitments, the Revolving
Commitment Percentage of such Lender multiplied by the Revolving Committed
Amount and (b) at any time after the termination of the Commitments, the
sum of (i) the principal balance of the outstanding Loans of such Lender
plus (ii) such Lender's Participation Interests in the face amount of the
outstanding Letters of Credit and Swing Line Loans.
"Requirement of Law" means, as to any Person, the articles or
------------------
certificate of incorporation and by-laws or other organizational or
governing documents of such Person, and any law, treaty, rule or regulation
or final, non-appealable determination of an arbitrator or a court or other
Governmental Authority, in each case applicable to or binding upon such
Person or to which any of its material property is subject.
"Revolving Committed Amount" means TWO HUNDRED SEVENTY-FIVE MILLION
--------------------------
DOLLARS ($275,000,000) or such lesser amount as the Revolving Committed
Amount may be reduced pursuant to Section 2.1(d) or Section 3.3(c).
"Revolving Loan Commitment Percentage" means, for each Lender, the
------------------------------------
percentage identified as its Revolving Commitment Percentage on Schedule
--------
1.1(a), as such percentage may be modified in connection with any
------
assignment made in accordance with the provisions of Section 10.3.
"Revolving Loans" means the Revolving Loans made to the Borrower
---------------
pursuant to Section 2.1.
"Revolving Loan Maturity Date" means August 8, 2002.
----------------------------
"Revolving Note" or "Revolving Notes" means the promissory notes of
-------------- ---------------
the Borrower in favor of each of the Lenders evidencing the Revolving Loans
provided
17
<PAGE>
pursuant to Section 2.1, individually or collectively, as
appropriate, as such promissory notes may be amended, modified,
supplemented, extended, renewed or replaced from time to time and as
evidenced in the form of Exhibit 2.1(e).
--------------
"S&P" means Standard & Poor's Ratings Group, a division of McGraw
---
Hill, Inc., or any successor or assignee of the business of such division
in the business of rating securities.
"Securities Act" means the Securities Act of 1933, as amended, and the
--------------
rules and regulations promulgated thereunder.
"Single Employer Plan" means any Plan which is covered by Title IV of
--------------------
ERISA, but which is not a Multiemployer Plan.
"Solvent" means, with respect to any Person as of a particular date,
-------
that on such date (a) such Person is able to pay its debts and other
liabilities, contingent obligations and other commitments as they mature in
the normal course of business, (b) such Person does not intend to, and does
not believe that it will, incur debts or liabilities beyond such Person's
ability to pay as such debts and liabilities mature in their ordinary
course, (c) such Person is not engaged in a business or a transaction, and
is not about to engage in a business or a transaction, for which such
Person's assets would constitute unreasonably small capital after giving
due consideration to the prevailing practice in the industry in which such
Person is engaged or is to engage, (d) the fair value of the assets of such
Person is greater than the total amount of liabilities, including, without
limitation, contingent liabilities, of such Person and (e) the present fair
saleable value of the assets of such Person is not less than the amount
that will be required to pay the probable liability of such Person on its
debts as they become absolute and matured. In computing the amount of
contingent liabilities at any time, it is intended that such liabilities
will be computed at the amount which, in light of all the facts and
circumstances existing at such time, represents the amount that can
reasonably be expected to become an actual or matured liability.
"Subordinated Debt" means the Indebtedness evidenced by the Indenture
-----------------
or by the guarantees thereof in the original amount of $165 million.
"Subsidiary" means, as to any Person, (a) any corporation more than
----------
50% of whose stock of any class or classes having by the terms thereof
ordinary voting power to elect a majority of the directors of such
corporation (irrespective of whether or not at the time, any class or
classes of such corporation shall have or might have voting power by reason
of the happening of any contingency) is at the time owned by such Person
directly or indirectly through Subsidiaries, and (b) any partnership,
association, joint venture or other entity in which such person directly or
indirectly through Subsidiaries has more than a 50% equity interest at any
time.
"Swing Line Loans" means the loans made by NationsBank pursuant to
----------------
Section 2.4.
18
<PAGE>
"Swing Line Committed Amount" means Ten Million Dollars ($10,000,000).
---------------------------
"Swing Line Loan Request" means a request by the Borrower for a Swing
-----------------------
Line Loan in substantially the form of Exhibit 2.4(b).
--------------
"Swing Line Loan Note" means the promissory note of the Borrower in
--------------------
favor of NationsBank evidencing the Swing Line Loans provided pursuant to
Section 2.4, as such promissory note may be amended, modified,
supplemented, extended, renewed or replaced from time to time in and as
evidenced by the form of Exhibit 2.4(e).
--------------
"Termination Event" means (a) with respect to any Single Employer
-----------------
Plan, the occurrence of a Reportable Event or the substantial cessation of
operations (within the meaning of Section 4062(e) of ERISA); (b) the
withdrawal of the Borrower or any of its Subsidiaries or any ERISA
Affiliate from a Multiple Employer Plan during a plan year in which it was
a substantial employer (as such term is defined in Section 4001(a)(2) of
ERISA), or the termination of a Multiple Employer Plan; (c) the
distribution of a notice of intent to terminate or the actual termination
of a Plan pursuant to Section 4041(a)(2) or 4041A of ERISA; (d) the
institution of proceedings to terminate or the actual termination of a Plan
by the PBGC under Section 4042 of ERISA; (e) any event or condition which
might reasonably constitute grounds under Section 4042 of ERISA for the
termination of, or the appointment of a trustee to administer, any Plan; or
(f) the complete or partial withdrawal of the Borrower or any of its
Subsidiaries or any ERISA Affiliate from a Multiemployer Plan.
"TROLS" has the meaning set forth in the definition of Indebtedness.
-----
"Unused Commitment" means, for any period, the amount by which (a) the
-----------------
then applicable aggregate Revolving Committed Amount exceeds (b) the daily
average sum for such period of the outstanding aggregate principal amount
of all Revolving Loans plus the aggregate amount of LOC Obligations
outstanding.
"Voting Stock" of a corporation means all classes of the capital stock
------------
of such corporation then outstanding and normally entitled to vote in the
election of directors.
1.2 Computation of Time Periods and Other Definitional Provisions.
-------------------------------------------------------------
For purposes of computation of periods of time hereunder, the word "from"
means "from and including" and the words "to" and "until" each mean "to but
excluding." References in this Agreement to "Articles", "Sections", "Schedules"
or "Exhibits" shall be to Articles, Sections, Schedules or Exhibits of or to
this Agreement unless otherwise specifically provided.
1.3. Accounting Terms.
----------------
Except as otherwise expressly provided herein, all accounting terms used
herein shall be interpreted, and all financial statements and certificates and
reports as to financial matters required to be delivered to the Lenders
hereunder shall be prepared, in accordance with GAAP applied on a consistent
basis. All financial statements delivered to the Lenders hereunder shall be
19
<PAGE>
accompanied by a statement from the Borrower that GAAP has not changed since the
most recent financial statements delivered by the Borrower to the Lenders or if
GAAP has changed describing such changes in detail and explaining how such
changes affect the financial statements. All calculations made for the purposes
of determining compliance with this Credit Agreement shall (except as otherwise
expressly provided herein) be made by application of GAAP applied on a basis
consistent with the most recent annual or quarterly financial statements
delivered pursuant to Section 6.1 (or, prior to the delivery of the first
financial statements pursuant to Section 6.1, consistent with the financial
statements described in Section 4.1(c)); provided, however, if (a) the Borrower
shall object to determining such compliance on such basis at the time of
delivery of such financial statements due to any change in GAAP or the rules
promulgated with respect thereto or (b) either the Administrative Agent or the
Required Lenders shall so object in writing within 60 days after delivery of
such financial statements (or after the Lenders have been informed of the change
in GAAP affecting such financial statements, if later), then such calculations
shall be made on a basis consistent with the most recent financial statements
delivered by the Borrower to the Lenders as to which no such objection shall
have been made.
SECTION 2.
CREDIT FACILITIES
-----------------
2.1 Revolving Loans.
---------------
(a) Revolving Loan Commitment. Subject to the terms and conditions
-------------------------
set forth herein, each Lender severally agrees to make revolving loans
(each a "Revolving Loan" and collectively the "Revolving Loans") to the
-------------- ---------------
Borrower, in Dollars, at any time and from time to time, during the period
from and including the Effective Date to but not including the Revolving
Loan Maturity Date (or such earlier date if the Revolving Committed Amount
has been terminated as provided herein); provided, however, that (i) the
-------- -------
sum of the aggregate amount of Revolving Loans outstanding plus the
aggregate amount of LOC Obligations outstanding plus the aggregate amount
of Swing Line Loans outstanding plus the aggregate amount of Competitive
Bid Loans outstanding shall not exceed the Revolving Committed Amount and
(ii) with respect to each individual Lender, the Lender's pro rata share of
outstanding Revolving Loans plus such Lender's pro rata share of
outstanding LOC Obligations plus (other than NationsBank) such Lender's pro
rata share of Swing Line Loans outstanding shall not exceed such Lender's
Revolving Loan Commitment Percentage of the Revolving Committed Amount.
Subject to the terms of this Credit Agreement (including Section 3.3), the
Borrower may borrow, repay and reborrow Revolving Loans.
(b) Method of Borrowing for Revolving Loans. By no later than 11:00
---------------------------------------
a.m. (i) on the date of the requested borrowing of Revolving Loans that
will be Base Rate Loans or (ii) three Business Days prior to the date of
the requested borrowing of Revolving Loans that will be Eurodollar Loans,
the Borrower shall submit a written Notice of Borrowing in the form of
Exhibit 2.1 to the Administrative Agent setting forth (A) the amount
-----------
requested, (B) whether such Revolving Loans shall accrue interest at the
Adjusted Base Rate or the Adjusted Eurodollar Rate, (C) with respect to
Revolving Loans that will
20
<PAGE>
be Eurodollar Loans, the Interest Period applicable thereto and (D)
certification that the Borrower has complied in all respects with Section
4.2. All Revolving Loans on the Effective Date shall be Base Rate Loans.
Thereafter, all or any portion of the Revolving Loans may be converted into
Eurodollar Loans in accordance with the terms of Section 2.5;
(c) Funding of Revolving Loans. Upon receipt of a Notice of
--------------------------
Borrowing, the Administrative Agent shall promptly inform the applicable
Lenders as to the terms thereof. Each such Lender shall make its Revolving
Loan Commitment Percentage of the requested Revolving Loans available to
the Administrative Agent by 1:00 p.m. on the date specified in the Notice
of Borrowing by deposit, in Dollars, of immediately available funds at the
offices of the Administrative Agent at its principal office in Charlotte,
North Carolina or at such other address as the Administrative Agent may
designate in writing. The amount of the requested Revolving Loans will
then be made available to the Borrower by the Administrative Agent by
crediting the account of the Borrower on the books of such office of the
Administrative Agent, to the extent the amount of such Revolving Loans are
made available to the Administrative Agent.
No Lender shall be responsible for the failure or delay by any other
Lender in its obligation to make Revolving Loans hereunder; provided,
however, that the failure of any Lender to fulfill its obligations
hereunder shall not relieve any other Lender of its obligations hereunder.
Unless the Administrative Agent shall have been notified by any Lender
prior to the date of any such Revolving Loan that such Lender does not
intend to make available to the Administrative Agent its portion of the
Revolving Loans to be made on such date, the Administrative Agent may
assume that such Lender has made such amount available to the
Administrative Agent on the date of such Revolving Loans, and the
Administrative Agent in reliance upon such assumption, may (in its sole
discretion but without any obligation to do so) make available to the
Borrower a corresponding amount. If such corresponding amount is not in
fact made available to the Administrative Agent, the Administrative Agent
shall be able to recover such corresponding amount from such Lender. If
such Lender does not pay such corresponding amount forthwith upon the
Administrative Agent's demand therefor, the Administrative Agent will
promptly notify the Borrower, and the Borrower shall immediately pay such
corresponding amount to the Administrative Agent. The Administrative Agent
shall also be entitled to recover from the Lender or the Borrower, as the
case may be, interest on such corresponding amount in respect of each day
from the date such corresponding amount was made available by the
Administrative Agent to the Borrower to the date such corresponding amount
is recovered by the Administrative Agent at a per annum rate equal to (i)
from the Borrower at the applicable rate for such Revolving Loan pursuant
to the Notice of Borrowing and (ii) from a Lender at the Federal Funds
Rate.
(d) Reductions of Revolving Committed Amount. Upon at least three
----------------------------------------
Business Days' notice, the Borrower shall have the right to permanently
terminate or reduce the aggregate unused amount of the Revolving Committed
Amount at any time or from time to time; provided that (i) each partial
reduction shall be in an aggregate amount at least equal to $5,000,000 and
in integral multiples of $1,000,000 above such amount
21
<PAGE>
and (ii) no reduction shall be made which would reduce the Revolving
Committed Amount to an amount less than the aggregate amount of outstanding
Revolving Loans plus the aggregate amount of outstanding LOC Obligations
plus the aggregate amount of Swing Line Loans outstanding plus the
aggregate amount of Competitive Bid Loans outstanding. Any reduction in (or
termination of) the Revolving Committed Amount shall be permanent and may
not be reinstated.
(e) Revolving Loan Notes. The Revolving Loans made by each Lender
--------------------
shall be evidenced by a duly executed promissory note of the Borrower to
each applicable Lender in the face amount of its Revolving Loan Commitment
Percentage of the Revolving Committed Amount in substantially the form of
Exhibit 2.1(e).
--------------
2.2. Letter of Credit Subfacility.
----------------------------
(a) Issuance. Subject to the terms and conditions hereof and of the
--------
LOC Documents, if any, and any other terms and conditions which the Issuing
Lender may reasonably require (so long as such terms and conditions do not
impose any financial obligation on or require any Lien (not otherwise
contemplated by this Credit Agreement) to be given by the Borrower or
conflict with any obligation of, or detract from any action which may be
taken by the Borrower under this Credit Agreement), the Issuing Lender
shall from time to time upon request issue, in Dollars, and the LOC
Participants shall participate in, letters of credit (the "Letters of
----------
Credit") for the account of the Borrower or any of its Subsidiaries, from
------
the Effective Date until the Revolving Loan Maturity Date, in a form
reasonably acceptable to the Issuing Lender; provided, however, that (i)
-------- -------
the aggregate amount of LOC Obligations shall not at any time exceed TWENTY
MILLION DOLLARS ($20,000,000), (ii) the sum of the aggregate amount of LOC
Obligations outstanding plus Revolving Loans outstanding plus Swing Line
Loans outstanding plus Competitive Bid Loans outstanding shall not exceed
the Revolving Committed Amount and (iii) with respect to each individual
LOC Participant, the LOC Participant's pro rata share of outstanding
Revolving Loans plus its pro rata share of outstanding LOC Obligations
shall not exceed such LOC Participant's Revolving Loan Commitment
Percentage of the Revolving Committed Amount. The issuance and expiry date
of each Letter of Credit shall be a Business Day. Except as otherwise
expressly agreed upon by all the LOC Participants, no Letter of Credit
shall have an original expiry date more than one year from the date of
issuance, or as extended, shall have an expiry date extending beyond the
Revolving Loan Maturity Date. Each Letter of Credit shall be either (x) a
standby letter of credit issued to support the obligations (including
pension or insurance obligations), contingent or otherwise, of the Borrower
or any of its Subsidiaries, or (y) a commercial letter of credit in respect
of the purchase of goods or services by the Borrower or any of its
Subsidiaries in the ordinary course of business. Each Letter of Credit
shall comply with the related LOC Documents.
(b) Notice and Reports. The request for the issuance of a Letter of
------------------
Credit shall be submitted to the Issuing Lender at least three Business
Days prior to the requested date of issuance. The Issuing Lender will, at
least quarterly and more frequently upon request, provide to the
Administrative Agent for dissemination to the Lenders a detailed report
22
<PAGE>
specifying the Letters of Credit which are then issued and outstanding and
any activity with respect thereto which may have occurred since the date of
the prior report, and including therein, among other things, the account
party, the beneficiary, the face amount, and the expiry date as well as any
payments or expirations which may have occurred. The Issuing Lender will
further provide to the Administrative Agent, promptly upon request, copies
of the Letters of Credit.
(c) Participations.
--------------
(i) On the Effective Date, each LOC Participant shall
automatically acquire a participation in the liability of the Issuing
Lender under each Existing Letter of Credit in an amount equal to its
Revolving Loan Commitment Percentage of such Existing Letters of
Credit. Each Existing Letter of Credit shall be deemed for all
purposes of this Credit Agreement and the other Credit Documents to be
a Letter of Credit.
(ii) Each LOC Participant, upon issuance of a Letter of Credit,
shall be deemed to have purchased without recourse a risk
participation from the Issuing Lender in such Letter of Credit and the
obligations arising thereunder and any collateral relating thereto, in
each case in an amount equal to its Revolving Loan Commitment
Percentage of the obligations under such Letter of Credit, and shall
absolutely, unconditionally and irrevocably assume, as primary obligor
and not as surety, and be obligated to pay to the Issuing Lender
therefor and discharge when due, its Revolving Loan Commitment
Percentage of the obligations arising under such Letter of Credit.
Without limiting the scope and nature of each LOC Participant's
participation in any Letter of Credit, to the extent that the Issuing
Lender has not been reimbursed as required hereunder or under any such
Letter of Credit, each such LOC Participant shall pay to the Issuing
Lender its Revolving Loan Commitment Percentage of such unreimbursed
drawing in same day funds on the day of notification by the Issuing
Lender of an unreimbursed drawing pursuant to the provisions of
subsection (d) hereof. The obligation of each LOC Participant to so
reimburse the Issuing Lender shall be absolute and unconditional and
shall not be affected by the occurrence of a Default, an Event of
Default or any other occurrence or event. Any such reimbursement
shall not relieve or otherwise impair the obligation of the Borrower
to reimburse the Issuing Lender under any Letter of Credit, together
with interest as hereinafter provided.
(d) Reimbursement. In the event of any drawing under any Letter of
-------------
Credit, the Issuing Lender will promptly notify the Borrower. Unless the
Borrower shall immediately notify the Issuing Lender of its intent to
otherwise reimburse the Issuing Lender, the Borrower shall be deemed to
have requested a Revolving Loan at the Adjusted Base Rate in the amount of
the drawing as provided in subsection (e) hereof, the proceeds of which
will be used to satisfy the reimbursement obligations. The Borrower shall
reimburse the Issuing Lender on the day of drawing under any Letter of
Credit either with the proceeds of a Revolving Loan obtained hereunder or
otherwise in same day funds as provided herein or in the LOC Documents. If
the Borrower shall fail to reimburse the
23
<PAGE>
Issuing Lender as provided hereinabove, the unreimbursed amount of such
drawing shall bear interest at a per annum rate equal to the Base Rate plus
the Applicable Percentage for the Base Rate Loans that are Revolving Loans
plus two percent (2%). The Borrower's reimbursement obligations hereunder
shall be absolute and unconditional under all circumstances irrespective of
(but without waiver of) any rights of set-off, counterclaim or defense to
payment that the applicable account party or the Borrower may claim or have
against the Issuing Lender, the Agents, the Lenders, the beneficiary of the
Letter of Credit drawn upon or any other Person, including without
limitation, any defense based on any failure of the applicable account
party or the Borrower to receive consideration or the legality, validity,
regularity or unenforceability of the Letter of Credit. The Issuing Lender
will promptly notify the LOC Participants of the amount of any unreimbursed
drawing and each LOC Participant shall promptly pay to the Administrative
Agent for the account of the Issuing Lender, in Dollars and in immediately
available funds, the amount of such LOC Participant's Revolving Loan
Commitment Percentage of such unreimbursed drawing. Such payment shall be
made on the day such notice is received by such Lender from the Issuing
Lender if such notice is received at or before 2:00 p.m., otherwise such
payment shall be made at or before 12:00 Noon on the Business Day next
succeeding the day such notice is received. If such LOC Participant does
not pay such amount to the Issuing Lender in full upon such request, such
LOC Participant shall, on demand, pay to the Administrative Agent for the
account of the Issuing Lender interest on the unpaid amount during the
period from the date the LOC Participant received the notice regarding the
unreimbursed drawing until such LOC Participant pays such amount to the
Issuing Lender in full at a rate per annum equal to, if paid within two
Business Days of the date of drawing, the Federal Funds Rate and thereafter
at a rate equal to the Base Rate. Each LOC Participant's obligation to make
such payment to the Issuing Lender, and the right of the Issuing Lender to
receive the same, shall be absolute and unconditional, shall not be
affected by any circumstance whatsoever and without regard to the
termination of this Credit Agreement or the Commitments hereunder, the
existence of a Default or Event of Default or the acceleration of the
obligations hereunder and shall be made without any offset, abatement,
withholding or reduction whatsoever. Simultaneously with the making of each
such payment by a LOC Participant to the Issuing Lender, such LOC
Participant shall, automatically and without any further action on the part
of the Issuing Lender or such LOC Participant, acquire a participation in
an amount equal to such payment (excluding the portion of such payment
constituting interest owing to the Issuing Lender) in the related
unreimbursed drawing portion of the LOC Obligation and in the interest
thereon and in the related LOC Documents, and shall have a claim against
the Borrower with respect thereto.
(e) Repayment with Revolving Loans. On any day on which the Borrower
------------------------------
shall have requested, or been deemed to have requested, a Revolving Loan
borrowing to reimburse a drawing under a Letter of Credit, the
Administrative Agent shall give notice to the applicable Lenders that a
Revolving Loan has been requested or deemed requested in connection with a
drawing under a Letter of Credit, in which case a Revolving Loan borrowing
comprised solely of Base Rate Loans (each such borrowing, a "Mandatory
---------
Borrowing") shall be immediately made from all applicable Lenders (without
---------
giving effect
24
<PAGE>
to any termination of the Commitments pursuant to Section 8.2)
pro rata based on each Lender's respective Revolving Loan Commitment
--- ----
Percentage and the proceeds thereof shall be paid directly to the Issuing
Lender for application to the respective LOC Obligations. Each such Lender
hereby irrevocably agrees to make such Revolving Loans immediately upon any
such request or deemed request on account of each such Mandatory Borrowing
in the amount and in the manner specified in the preceding sentence and on
the same such date notwithstanding (i) the amount of Mandatory Borrowing
---------------
may not comply with the minimum amount for borrowings of Revolving Loans
otherwise required hereunder, (ii) whether any conditions specified in
Section 4 are then satisfied, (iii) whether a Default or Event of Default
then exists, (iv) failure of any such request or deemed request for
Revolving Loans to be made by the time otherwise required hereunder, (v)
the date of such Mandatory Borrowing, or (vi) any reduction in the
Revolving Committed Amount or any termination of the Commitments. In the
event that any Mandatory Borrowing cannot for any reason be made on the
date otherwise required above (including, without limitation, as a result
of the commencement of a proceeding under the Bankruptcy Code with respect
to the Borrower), then each such Lender hereby agrees that it shall
forthwith fund (as of the date the Mandatory Borrowing would otherwise have
occurred, but adjusted for any payments received from the Borrower on or
after such date and prior to such purchase) its Participation Interest in
the outstanding LOC Obligations; provided, further, that in the event any
-------- -------
Lender shall fail to fund its Participation Interest on the day the
Mandatory Borrowing would otherwise have occurred, then the amount of such
Lender's unfunded Participation Interest therein shall bear interest
payable to the Issuing Lender upon demand, at the rate equal to, if paid
within two Business Days of such date, the Federal Funds Rate, and
thereafter at a rate equal to the Base Rate.
(f) Designation of Subsidiaries as Account Parties. Notwithstanding
----------------------------------------------
anything to the contrary set forth in this Credit Agreement, a Letter of
Credit issued hereunder may contain a statement to the effect that such
Letter of Credit is issued for the account of a Subsidiary of the Borrower;
provided that notwithstanding such statement, the Borrower shall be the
actual account party for all purposes of this Credit Agreement for such
Letter of Credit and such statement shall not affect the Borrower's
reimbursement obligations hereunder with respect to such Letter of Credit.
(g) Modification and Extension. The issuance of any supplement,
--------------------------
modification, amendment, renewal, or extensions to any Letter of Credit
shall, for purposes hereof, be treated in all respects the same as the
issuance of a new Letter of Credit hereunder.
(h) Uniform Customs and Practices. The Issuing Lender may have the
-----------------------------
Letters of Credit be subject to The Uniform Customs and Practice for
Documentary Credits, as published as of the date of issue by the
International Chamber of Commerce (Publication No. 500 or the most recent
publication, the "UCP"), in which case the UCP may be incorporated therein
---
and deemed in all respects to be a part thereof.
25
<PAGE>
(i) Responsibility of Issuing Lender. It is expressly understood and
--------------------------------
agreed that the obligations of the Issuing Lender hereunder to the LOC
Participants are only those expressly set forth in this Credit Agreement
and that the Issuing Lender shall be entitled to assume that the conditions
precedent set forth in Section 4 have been satisfied unless it shall have
acquired actual knowledge that any such condition precedent has not been
satisfied; provided, however, that nothing set forth in this Section 2.2
shall be deemed to prejudice the right of any LOC Participant to recover
from the Issuing Lender any amounts made available by such LOC Participant
to the Issuing Lender pursuant to this Section 2.2 in the event that it is
determined by a court of competent jurisdiction that the payment with
respect to a Letter of Credit constituted gross negligence or willful
misconduct on the part of the Issuing Lender.
(j) Conflict with LOC Documents. In the event of any conflict
---------------------------
between this Credit Agreement and any LOC Document, this Credit Agreement
shall govern.
(k) Indemnification of Issuing Lender.
---------------------------------
(i) In addition to its other obligations under this Credit
Agreement, the Borrower hereby agrees to protect, indemnify, pay and
save the Issuing Lender harmless from and against any and all claims,
demands, liabilities, damages, losses, costs, charges and expenses
(including reasonable attorneys' fees) that the Issuing Lender may
incur or be subject to as a consequence, direct or indirect, of (A)
the issuance of any Letter of Credit or (B) the failure of the Issuing
Lender to honor a drawing under a Letter of Credit as a result of any
act or omission, whether rightful or wrongful, of any present or
future de jure or de facto government or governmental authority (all
such acts or omissions, herein called "Government Acts").
---------------
(ii) As between the Borrower and the Issuing Lender, the Borrower
shall assume all risks of the acts, omissions or misuse of any Letter
of Credit by the beneficiary thereof. The Issuing Lender shall not be
responsible for: (A) the form, validity, sufficiency, accuracy,
genuineness or legal effect of any document submitted by any party in
connection with the application for and issuance of any Letter of
Credit, even if it should in fact prove to be in any or all respects
invalid, insufficient, inaccurate, fraudulent or forged; (B) the
validity or sufficiency of any instrument transferring or assigning or
purporting to transfer or assign any Letter of Credit or the rights or
benefits thereunder or proceeds thereof, in whole or in part, that may
prove to be invalid or ineffective for any reason; (C) failure of the
beneficiary of a Letter of Credit to comply fully with conditions
required in order to draw upon a Letter of Credit; (D) errors,
omissions, interruptions or delays in transmission or delivery of any
messages, by mail, cable, telegraph, telex or otherwise, whether or
not they be in cipher; (E) errors in interpretation of technical
terms; (F) any loss or delay in the transmission or otherwise of any
document required in order to make a drawing under a Letter of Credit
or of the proceeds thereof; and (G) any consequences arising from
causes beyond the control of the Issuing Lender, including, without
limitation, any Government Acts. None of
26
<PAGE>
above shall affect, impair, or prevent the vesting of the Issuing
Lender's rights or powers hereunder.
(iii) In furtherance and extension and not in limitation of the
specific provisions hereinabove set forth, any action taken or omitted
by the Issuing Lender, under or in connection with any Letter of
Credit or the related certificates, if taken or omitted in good faith,
shall not put the Issuing Lender under any resulting liability to the
Borrower. It is the intention of the parties that this Credit
Agreement shall be construed and applied to protect and indemnify the
Issuing Lender against any and all risks involved in the issuance of
the Letters of Credit, all of which risks are hereby assumed by the
Borrower, including, without limitation, any and all risks of the acts
or omissions, whether rightful or wrongful, of any present or future
Government Acts. The Issuing Lender shall not, in any way, be liable
for any failure by the Issuing Lender or anyone else to pay any
drawing under any Letter of Credit as a result of any Government Acts
or any other cause beyond the control of the Issuing Lender.
(iv) Nothing in this subsection (k) is intended to limit the
reimbursement obligation of the Borrower contained in this Section
2.2. The obligations of the Borrower under this subsection (k) shall
survive the termination of this Credit Agreement. No act or omission
of any current or prior beneficiary of a Letter of Credit shall in any
way affect or impair the rights of the Issuing Lender to enforce any
right, power or benefit under this Credit Agreement.
(v) Notwithstanding anything to the contrary contained in this
subsection (k), the Borrower shall have no obligation to indemnify the
Issuing Lender in respect of any liability incurred by the Issuing
Lender arising solely out of the gross negligence or willful
misconduct of the Issuing Lender, as determined by a court of
competent jurisdiction. Nothing in this Credit Agreement shall
relieve the Issuing Lender of any liability to the Borrower in respect
of any action taken by the Issuing Lender which action constitutes
gross negligence or willful misconduct of the Issuing Lender or a
violation of the UCP or Uniform Commercial Code (as applicable), as
determined by a court of competent jurisdiction.
2.3. Competitive Bid Loans Subfacility.
---------------------------------
(a) Competitive Bid Loans. Subject to the terms and conditions set
---------------------
forth herein, the Borrower may, from time to time, during the period from
and including the Effective Date to but not including the Revolving Loan
Maturity Date, request and each Lender may, in its sole discretion, agree
to make Competitive Bid Loans in Dollars to the Borrower; provided,
--------
however, that (i) the aggregate principal amount of outstanding Competitive
-------
Bid Loans shall be the lesser of (a) ONE HUNDRED FORTY MILLION DOLLARS
------
($140,000,000) or (b) the Revolving Committed Amount (the "Competitive Bid
---------------
Loan Maximum Amount"), (ii) the sum of the Revolving Loans outstanding plus
-------------------
Competitive Bid Loans outstanding plus Swing Line Loans outstanding plus
the aggregate amount of LOC Obligations outstanding shall not exceed the
Revolving Committed
27
<PAGE>
Amount and (iii) if a Lender does make a Competitive Bid Loan it shall not
reduce such Lender's obligation to make its pro rata share of any Revolving
Loan.
(b) Competitive Bid Requests. The Borrower may solicit Competitive
------------------------
Bids by delivery of a Competitive Bid Loan Request to the Administrative
Agent by 10:00 a.m. on a Business Day not less than one nor more than four
Business Days prior to the date of a requested Competitive Bid Loan. A
Competitive Bid Loan Request must (i) be substantially in the form of
Exhibit 2.3(b), (ii) shall specify (A) the date of the requested
--------------
Competitive Bid Loan (which shall be a Business Day), (B) the amount of the
requested Competitive Bid Loan and (C) the applicable Interest Periods
requested, (iii) shall be accompanied by payment of the Competitive Bid
Request Fee unless other procedures are agreed to by the Administrative
Agent and the Borrower for the payment of such fee and (iv) shall comply in
all respects with Section 4.2. The Administrative Agent shall notify the
Lenders of its receipt of a Competitive Bid Request and the contents
thereof and invite the Lenders to submit Competitive Bids in response
thereto. The Borrower may not request a Competitive Bid for more than
three different Interest Periods per Competitive Bid Request and
Competitive Bid Requests may be made no more frequently than once every
five Business Days.
(c) Competitive Bid Procedure. Each Lender may, in its sole
-------------------------
discretion, make one or more Competitive Bids to the Borrower in response
to a Competitive Bid Request. Each Competitive Bid must be received by the
Administrative Agent not later than 10:00 a.m. on the Business Day next
succeeding the date of receipt by the Administrative Agent of the related
Competitive Bid Request; provided, however, that should the Administrative
-------- -------
Agent, in its capacity as a Lender, desire to submit a Competitive Bid it
shall notify the Borrower of its Competitive Bid and the terms thereof not
later than 9:45 a.m. on such date. A Lender may offer to make all or part
of the requested Competitive Bid Loan and may submit multiple Competitive
Bids in response to a Competitive Bid Request. The Competitive Bid must
specify (i) the particular Competitive Bid Request as to which the
Competitive Bid is submitted, (ii) the minimum (which shall be not less
than $1,000,000 and integral multiples of $500,000 in excess thereof) and
maximum principal amounts of the requested Competitive Bid Loan or Loans as
to which the Lender is willing to make and (iii) the applicable interest
rate or rates and Interest Period or Interest Periods therefor. A
Competitive Bid submitted by a Lender in accordance with the provisions
hereof shall be irrevocable. The Administrative Agent shall promptly
notify the Borrower of all Competitive Bids made and the terms thereof and
shall send a copy of each of the Competitive Bids to the Borrower for its
records as soon as practicable.
(d) Acceptance of Competitive Bids. The Borrower may, in its sole
------------------------------
discretion, subject only to the provisions of this subsection (d), accept
or refuse any Competitive Bid offered to it. To accept a Competitive Bid,
the Borrower shall give written notification (or telephonic notice promptly
confirmed in writing) in the form of Exhibit 2.3(d) of its acceptance of
--------------
any or all such Competitive Bids to the Administrative Agent by 11:00 a.m.
on the date on which notice of election to make a Competitive Bid is to be
given to the Administrative Agent by the Lenders; provided, however, (i)
-------- -------
the failure by the Borrower to give timely notice of its acceptance of a
Competitive Bid shall be deemed to be a refusal
28
<PAGE>
thereof, (ii) to the extent Competitive Bids are for comparable Interest
Periods, the Borrower may accept Competitive Bids only in ascending order
of rates, (iii) the aggregate amount of Competitive Bids accepted by the
Borrower shall not exceed the principal amount specified in the Competitive
Bid Request, (iv) the Borrower may accept a portion of a Competitive Bid in
the event, and to the extent, acceptance of the entire amount thereof would
cause the Borrower to exceed the principal amount specified in the
Competitive Bid Request, subject however to the minimum amounts provided
herein (and provided that where two or more Lenders submit such a
Competitive Bid at the same Competitive Bid Rate, then pro rata between or
among such Lenders) and (v) no bid shall be accepted for a Competitive Bid
Loan unless such Competitive Bid Loan is in a minimum principal amount of
$5,000,000 and integral multiples of $1,000,000 in excess thereof, except
that where a portion of a Competitive Bid is accepted in accordance with
the provisions of subsection (iv) hereof, then in a minimum principal
amount of $1,000,000 and integral multiples of $500,000 (but not in any
event less than the minimum amount specified in the Competitive Bid), and
in calculating the pro rata allocation of acceptances of portions of
multiple bids at a particular Competitive Bid Rate pursuant to subsection
(iv) hereof, the amounts shall be rounded to integral multiples of $500,000
in a manner which shall be in the discretion of the Borrower. A notice of
acceptance of a Competitive Bid given by the Borrower in accordance with
the provisions hereof shall be irrevocable. The Administrative Agent shall,
not later than 1:00 p.m. on the date of receipt by the Administrative Agent
of a notification from the Borrower of its acceptance or rejection of
Competitive Bid, notify each bidding Lender whether or not its Competitive
Bid has been accepted (and if so, in what amount and at what Competitive
Bid Rate), and each successful bidder will thereupon become bound, subject
to the other applicable conditions hereof, to make the Competitive Bid Loan
in respect of which its bid has been accepted.
(e) Funding of Competitive Bid Loans. Each Lender that is to make a
--------------------------------
Competitive Bid Loan shall make its Competitive Bid Loan available to the
Administrative Agent by 2:00 P.M. on the date specified in the Competitive
Bid Request by deposit in Dollars of immediately available funds at the
office of the Administrative Agent in Charlotte, North Carolina, or at such
other address as the Administrative Agent may designate in writing. The
Administrative Agent will, upon receipt, make the proceeds of such
Competitive Bid Loans available to the Borrower.
(f) Maturity of Competitive Bid Loans. Each Competitive Bid Loan
---------------------------------
shall mature and be due and payable in full on the last day of the Interest
Period applicable thereto, unless accelerated sooner pursuant to Section
8.2. Unless the Borrower shall give notice to the Administrative Agent
otherwise, or a Default or Event of Default exists and is continuing, on
the Business Day prior to the last day of the applicable Interest Period of
a maturing Competitive Bid Loan, the Borrower shall be deemed to have
requested from all of the Lenders Revolving Loans in Dollars in the amount
of such maturing Competitive Bid Loan, accruing interest at the Base Rate,
the proceeds of which will be used to repay such Competitive Bid Loan.
29
<PAGE>
(g) Minimum Amounts. Each Competitive Bid Loan shall be in an amount
---------------
not less than $5,000,000 and in integral multiples of $1,000,000 thereof.
(h) Competitive Bid Loan Notes. The Competitive Bid Loans made by
--------------------------
each Lender shall be evidenced by a duly executed promissory note of the
Borrower to such Lender in the original principal amount of the Competitive
Bid Loan Maximum Amount and in substantially the form of Exhibit 2.3(h).
--------------
2.4. Swing Line Loans Subfacility.
----------------------------
(a) Swing Line Loans. NationsBank hereby agrees, on the terms and
----------------
subject to the conditions set forth herein and in the other Credit
Documents, to make loans to the Borrower in Dollars at any time and from
time to time during the period from and including the Effective Date to but
not including the Revolving Loan Maturity Date (each such loan, a "Swing
-----
Line Loan" and collectively, the "Swing Line Loans"); provided that (i) the
--------- ----------------
aggregate principal amount of the Swing Line Loans outstanding at any one
time shall not exceed the Swing Line Committed Amount and (ii) the sum of
Swing Line Loans outstanding plus Revolving Loans outstanding plus
Competitive Bid Loans outstanding plus the aggregate amount of LOC
Obligations outstanding shall not exceed the Revolving Committed Amount.
Prior to the Revolving Loan Maturity Date, Swing Line Loans may be repaid
and reborrowed by the Borrower in accordance with the provisions hereof.
(b) Method of Borrowing and Funding Swing Line Loans. By no later
------------------------------------------------
than 10:00 a.m., on the date of the requested borrowing of Swing Line
Loans, the Borrower shall submit a Swing Line Loan Request to NationsBank
in the form of Exhibit 2.4(b) setting forth (i) the amount of the requested
--------------
Swing Line Loan and (ii) the date of the requested Swing Line Loan and
complying in all respects with Section 4.2. NationsBank shall initiate the
transfer of funds representing the Swing Line Loan advance to the Borrower
by 3:00 p.m. on the Business Day of the requested borrowing.
(c) Repayment and Participations of Swing Line Loans. The Borrower
------------------------------------------------
agrees to repay all Swing Line Loans within one Business Day of demand
therefor by NationsBank. Each repayment of a Swing Line Loan may be
accomplished by requesting Revolving Loans which request is not subject to
the conditions set forth in Section 4.2(b). In the event that the Borrower
shall fail to timely repay any Swing Line Loan, and in any event upon (i) a
request by NationsBank, (ii) the occurrence of an Event of Default
described in Section 8.1(f) or (iii) the acceleration of any Loan or
termination of any Commitment pursuant to Section 8.2, each other Lender
shall irrevocably and unconditionally purchase from NationsBank, without
recourse or warranty, an undivided interest and participation in such Swing
Line Loan in an amount equal to such other Lender's Revolving Loan
Commitment Percentage thereof, by directly purchasing a participation in
such Swing Line Loan in such amount (regardless of whether the conditions
precedent thereto set forth in Section 4.2 hereof are then satisfied,
whether or not the Borrower has submitted a Notice of Borrowing and whether
or not the Commitments are then in effect, any Event of Default exists or
all the Loans have been accelerated) and paying the proceeds thereof to
NationsBank at the address provided in
30
<PAGE>
Section 10.1, or at such other address as NationsBank may designate, in
Dollars and in immediately available funds. If such amount is not in fact
made available to NationsBank by any Lender, NationsBank shall be entitled
to recover such amount on demand from such Lender, together with accrued
interest thereon for each day from the date of demand thereof, at the
Federal Funds Rate. If such Lender does not pay such amount forthwith upon
NationsBank's demand therefor, and until such time as such Lender makes the
required payment, NationsBank shall be deemed to continue to have
outstanding Swing Line Loans in the amount of such unpaid participation
obligation for all purposes of the Credit Documents other than those
provisions requiring the other Lenders to purchase a participation therein.
Further, such Lender shall be deemed to have assigned any and all payments
made of principal and interest on its Loans, and any other amounts due to
it hereunder to NationsBank to fund Swing Line Loans in the amount of the
participation in Swing Line Loans that such Lender failed to purchase
pursuant to this Section 2.4(c) until such amount has been purchased (as a
result of such assignment or otherwise).
(d) Minimum Amounts. Each Swing Line Loan shall be in the minimum
---------------
amount of $100,000 and in integral multiples of $50,000 in excess thereof.
(e) Swing Line Note. The Swing Line Loans made by NationsBank shall
---------------
be evidenced by a duly executed promissory note of the Borrower to
NationsBank in the face amount of the Swing Line Committed Amount and in
substantially the form of Exhibit 2.4(e).
--------------
2.5 Continuations and Conversions.
-----------------------------
The Borrower shall have the option, on any Business Day, to continue
existing Eurodollar Loans for a subsequent Interest Period, to convert Revolving
Loans that are Base Rate Loans into Eurodollar Loans or to convert Eurodollar
Loans into Revolving Loans that are Base Rate Loans; provided, however, that (a)
each such continuation or conversion must be requested by the Borrower pursuant
to a written Notice of Continuation/Conversion, in the form of Exhibit 2.5, in
-----------
compliance with the terms set forth below, (b) except as provided in Section
3.12, Eurodollar Loans may only be continued or converted into Revolving Loans
that are Base Rate Loans on the last day of the Interest Period applicable
hereto, (c) after notice from the Administrative Agent or the Required Lenders,
Eurodollar Loans may not be continued nor may Revolving Loans that are Base Rate
Loans be converted into Eurodollar Loans during the existence and continuation
of a Default or Event of Default and (d) any request to extend a Eurodollar Loan
that fails to comply with the terms hereof or any failure to request an
extension of a Eurodollar Loan at the end of an Interest Period shall constitute
a conversion to a Revolving Loan that is a Base Rate Loan on the last day of the
applicable Interest Period. Each continuation or conversion must be requested by
the Borrower no later than 11:00 a.m. (i) the date for a requested conversion of
a Eurodollar Loan to a Revolving Loan that is a Base Rate Loan or (ii) three
Business Days prior to the date for a requested continuation of a Eurodollar
Loan or conversion of a Revolving Loan that is a Base Rate Loan to a Eurodollar
Loan, in each case pursuant to a written Notice of Continuation/Conversion
submitted to the Administrative Agent which shall set forth (A) whether the
Borrower wishes to continue or convert such Loans and (B) if the request is to
continue a
31
<PAGE>
Eurodollar Loan or convert a Revolving Loan that is a Base Rate Loan
to a Eurodollar Loan, the Interest Period applicable thereto.
2.6 Minimum Amounts.
---------------
Each request for a borrowing, conversion or continuation shall be subject
to the requirements that (a) each Eurodollar Loan shall be in a minimum amount
of $5,000,000 and in integral multiples of $1,000,000 in excess thereof, (b)
each Base Rate Loan (other than a Swing Line Loan) shall be in a minimum amount
of the lesser of $1,000,000 (an integral multiples of $500,000 in excess
thereof) or the remaining amount available under the Revolving Committed Amount
and (c) no more than ten Eurodollar Loans shall be outstanding hereunder at any
one time. For the purposes of this Section, all Eurodollar Loans with the same
Interest Periods shall be considered as one Eurodollar Loan, but Eurodollar
Loans with different Interest Periods, even if they begin on the same date,
shall be considered as separate Eurodollar Loans.
SECTION 3.
GENERAL PROVISIONS APPLICABLE TO LOANS
--------------------------------------
AND LETTERS OF CREDIT
---------------------
3.1 Interest.
--------
(a) Interest Rate. All Revolving Loans that are Base Rate Loans
-------------
shall accrue interest at the Adjusted Base Rate, and all Revolving Loans
that are Eurodollar Loans shall accrue interest at the Adjusted Eurodollar
Rate. All Swing Line Loans shall accrue interest at the Adjusted Base
Rate. All Competitive Bid Loans shall accrue interest at the Competitive
Bid Rate applicable thereto.
(b) Default Rate of Interest. Upon the occurrence, and during the
------------------------
continuance, of an Event of Default, the principal of and, to the extent
permitted by law, interest on the Loans and any other amounts owing (but
not timely paid) hereunder or under the other Credit Documents (including
without limitation fees and expenses) shall bear interest, payable on
demand, at a per annum rate equal to 2% plus the rate which would otherwise
be applicable (or if no rate is applicable, then the rate for Revolving
Loans that are Base Rate Loans plus two percent (2%) per annum).
(c) Interest Payments. Interest on Loans shall be due and payable in
-----------------
arrears on each Interest Payment Date. If an Interest Payment Date falls
on a date which is not a Business Day, such Interest Payment Date shall be
deemed to be the next succeeding Business Day, except that in the case of
Eurodollar Loans where the next succeeding Business Day falls in the next
succeeding calendar month, then on the next preceding day.
3.2 Place and Manner of Payments.
----------------------------
All payments of principal, interest, fees, expenses and other amounts to be
made by the Borrower under this Credit Agreement shall be received not later
than 2:00 p.m. on the date when due, in Dollars and in immediately available
funds, by the Administrative Agent at its offices at
32
<PAGE>
NationsBank Corporate Center, Charlotte, North Carolina. Payments received after
such time shall be deemed to have been received on the next Business Day. The
Borrower shall, at the time it makes any payment under this Credit Agreement,
specify to the Administrative Agent, the Loans, Letters of Credit, fees or other
amounts payable by the Borrower hereunder to which such payment is to be applied
(and in the event that it fails to specify, or if such application would be
inconsistent with the terms hereof, the Administrative Agent shall, subject to
Section 3.7, distribute such payment to the Lenders in such manner as the
Administrative Agent may deem appropriate). The Administrative Agent will
distribute such payments to the applicable Lenders if any such payment is
received prior to 2:00 p.m.; otherwise the Administrative Agent will distribute
such payment to the applicable Lenders on the next succeeding Business Day.
Whenever any payment hereunder shall be stated to be due on a day which is not a
Business Day, the due date thereof shall be extended to the next succeeding
Business Day (subject to accrual of interest and fees for the period of such
extension), except that in the case of Eurodollar Loans, if the extension would
cause the payment to be made in the next following calendar month, then such
payment shall instead be made on the next preceding Business Day.
3.3. Prepayments.
-----------
(a) Voluntary Prepayments. The Borrower shall have the right to
---------------------
prepay Loans in whole or in part from time to time without premium or
penalty; provided, however, that (i) Eurodollar Loans may only be prepaid
on three Business Days' prior written notice to the Administrative Agent
and any prepayment of Eurodollar Loans will be subject to Section 3.15;
(ii) each such partial prepayment of Loans shall be (A) in the case of
Revolving Loans, in the minimum principal amount of $5,000,000 and integral
multiples of $1,000,000 in excess thereof, (B) in the case of Competitive
Bid Loans, in the minimum principal amount of $5,000,000 and integral
multiples of $1,000,000 in excess thereof and (C) in the case of Swing Line
Loans, in the minimum principal amount of $100,000 and integral multiples
of $50,000 in excess thereof. Amounts prepaid hereunder shall be applied
as the Borrower may elect; provided, that if the Borrower fails to specify
a voluntary prepayment then such prepayment shall be applied first to
Revolving Loans that are Base Rate Loans, then to Eurodollar Loans in
direct order of Interest Period maturities, then to Swing Line Loans and
then to Competitive Bid Loans pro rata among all Lenders holding same.
(b) Mandatory Prepayments. If at any time (i) the sum of the
---------------------
aggregate amount of Revolving Loans outstanding plus the aggregate amount
of Swing Line Loans outstanding plus the aggregate amount of Competitive
Bid Loans outstanding plus the aggregate amount of LOC Obligations
outstanding exceeds the Revolving Committed Amount, (ii) the aggregate
amount of outstanding Competitive Bid Loans exceeds the Competitive Bid
Loan Maximum Amount, (iii) the aggregate amount of Swing Line Loans
outstanding exceeds the Swing Line Committed Amount or (iv) the aggregate
amount of LOC Obligations outstanding exceeds the LOC Committed Amount, the
Borrower shall immediately make a principal payment to the Administrative
Agent in the manner and in an amount necessary to be in compliance with
Section 2.1, 2.2, 2.3 and 2.4, as applicable.
33
<PAGE>
(c) Application of Prepayments. All amounts required to be paid
--------------------------
pursuant to Section 3.3(b) shall be applied first to Revolving Loans,
-----
second to Swing Line Loans, third, to a cash collateral account in respect
------ -----
of LOC Obligations and fourth to Competitive Bid Loans pro rata among the
------
Lenders holding same. Within the parameters of the application set forth
above, prepayments shall be applied first to Base Rate Loans and then to
Eurodollar Loans in direct order of Interest Period maturities. All
prepayments hereunder shall be subject to Section 3.15.
3.4. Fees.
----
(a) Commitment Fees. In consideration of the Revolving Committed
---------------
Amount being made available by the Lenders hereunder, the Borrower agrees
to pay to the Administrative Agent, for the pro rata benefit of each
applicable Lender (based on each Lender's Revolving Loan Commitment
Percentage of the Revolving Committed Amount), a fee equal to the product
of (a) the Applicable Percentage for Commitment Fees multiplied by (b) the
Unused Commitment (the "Commitment Fees"). The accrued Commitment Fees
---------------
shall commence to accrue on the Effective Date and shall be due and payable
in arrears on the last Business Day of each fiscal quarter of the Borrower
(as well as on the Revolving Loan Maturity Date and on any date that the
Revolving Committed Amount is reduced) for the immediately preceding fiscal
quarter (or portion thereof), beginning with the first of such dates to
occur after the Closing Date.
(b) Letter of Credit Fees.
---------------------
(i) Letter of Credit Fee. In consideration of the issuance of
--------------------
Letters of Credit hereunder, the Borrower agrees to pay to the Issuing
Lender for the pro rata benefit of the applicable Lenders (based on
each Lender's Revolving Loan Commitment Percentage of the Revolving
Committed Amount), a fee (the "Letter of Credit Fee") equal to the
--------------------
Applicable Percentage for the Letter of Credit Fee on the average
daily maximum amount available to be drawn under each such Letter of
Credit from the date of issuance to the date of expiration. The
Letter of Credit Fee will be payable quarterly in arrears 15 days
after the end of each fiscal quarter of the Borrower and on the
Revolving Loan Maturity Date.
(ii) Issuing Lender Fees. In addition to the Letter of Credit
Fees payable pursuant to subsection (i) above, the Borrower shall pay
to the Issuing Lender for its own account, without sharing by the
other Lenders, (A) a fee equal to one-fourth of one percent (.25%) per
annum on the total sum of all Letters of Credit issued by the Issuing
Lender, such fee to be paid quarterly in arrears 15 days after the end
of each fiscal quarter of the Borrower (as well as on the Revolving
Loan Maturity Date) and (B) the customary charges from time to time to
the Issuing Lender for its services in connection with the issuance,
amendment, payment, transfer, administration, cancellation and
conversion of, and drawings under, such Letters of Credit
(collectively, the "Issuing Lender Fees").
-------------------
34
<PAGE>
(c) Administrative Fees. The Borrower agrees to pay to the
-------------------
Administrative Agent, for its own account, an annual fee as agreed to
between the Borrower and the Administrative Agent in the Administrative
Agent Fee Letter.
(d) Competitive Bid Request Fees. The Borrower agrees to pay to the
----------------------------
Administrative Agent a Competitive Bid administration fee (the "Competitive
-----------
Bid Request Fee") as agreed to between the Borrower and the Administrative
---------------
Agent as set forth in the Administrative Agent Fee Letter.
3.5. Payment in full at Maturity.
---------------------------
On the Revolving Loan Maturity Date, the entire outstanding principal
balance of all Revolving Loans, all Swing Line Loans, all Competitive Bid Loans
and all LOC Obligations, together with accrued but unpaid interest and all other
sums owing with respect thereto, shall be due and payable in full, unless
accelerated sooner pursuant to Section 8.
3.6. Computations of Interest and Fees.
---------------------------------
(a) Except for Base Rate Loans, in which case interest shall be
computed on the basis of a 365 or 366 day year as the case may be (unless
the Base Rate is determined by reference to the Federal Funds Rate), all
computations of interest and fees hereunder shall be made on the basis of
the actual number of days elapsed over a year of 360 days. Interest shall
accrue from and include the date of borrowing (or continuation or
conversion) but exclude the date of payment.
(b) It is the intent of the Lenders and the Borrower to conform to
and contract in strict compliance with applicable usury law from time to
time in effect. All agreements between the Lenders and the Borrower are
hereby limited by the provisions of this paragraph which shall override and
control all such agreements, whether now existing or hereafter arising and
whether written or oral. In no way, nor in any event or contingency
(including but not limited to prepayment or acceleration of the maturity of
any obligation), shall the interest taken, reserved, contracted for,
charged, or received under this Credit Agreement, under the Notes or
otherwise, exceed the maximum nonusurious amount permissible under
applicable law. If, from any possible construction of any of the Credit
Documents or any other document, interest would otherwise be payable in
excess of the maximum nonusurious amount, any such construction shall be
subject to the provisions of this paragraph and such documents shall be
automatically reduced to the maximum nonusurious amount permitted under
applicable law, without the necessity of execution of any amendment or new
document. If any Lender shall ever receive anything of value which is
characterized as interest on the Loans under applicable law and which
would, apart from this provision, be in excess of the maximum lawful
amount, an amount equal to the amount which would have been excessive
interest shall, without penalty, be applied to the reduction of the
principal amount owing on the Loans and not to the payment of interest, or
refunded to the Borrower or the other payor thereof if and to the extent
such amount which would have been excessive exceeds such unpaid principal
amount of the Loans. The right to demand payment of the Loans or any other
indebtedness evidenced by
35
<PAGE>
any of the Credit Documents does not include the right to receive any
interest which has not otherwise accrued on the date of such demand, and
the Lenders do not intend to charge or receive any unearned interest in the
event of such demand. All interest paid or agreed to be paid to the Lenders
with respect to the Loans shall, to the extent permitted by applicable law,
be amortized, prorated, allocated, and spread throughout the full stated
term (including any renewal or extension) of the Loans so that the amount
of interest on account of such indebtedness does not exceed the maximum
nonusurious amount permitted by applicable law.
3.7. Pro Rata Treatment.
------------------
Except to the extent otherwise provided herein:
(a) Loans. Each Revolving Loan borrowing (including, without
-----
limitation, each Mandatory Borrowing), each payment or prepayment of
principal of any Revolving Loan, each payment of fees (other than the
Issuing Lender Fees retained by the Issuing Lender for its own account and
the administrative fees and the Competitive Bid Request Fees retained by
the Administrative Agent for its own account), each reduction of the
Revolving Committed Amount, and each conversion or continuation of any
Revolving Loan, shall be allocated pro rata among the relevant Lenders in
accordance with the respective Revolving Loan Commitment Percentages of
such Lenders (or, if the Commitments of such Lenders have expired or been
terminated, in accordance with the respective principal amounts of the
outstanding Revolving Loans and Participation Interests of such Lenders);
provided that, if any Lender shall have failed to pay its applicable pro
--------
rata share of any Revolving Loan, then any amount to which such Lender
would otherwise be entitled pursuant to this subsection (a) shall instead
be payable to the Administrative Agent; provided further, that in the event
-------- -------
any amount paid to any Lender pursuant to this subsection (a) is rescinded
or must otherwise be returned by the Administrative Agent, each Lender
shall, upon the request of the Administrative Agent, repay to the
Administrative Agent the amount so paid to such Lender, with interest for
the period commencing on the date such payment is returned by the
Administrative Agent until the date the Administrative Agent receives such
repayment at a rate per annum equal to, during the period to but excluding
the date two Business Days after such request, the Federal Funds Rate, and
thereafter, the Base Rate plus two percent (2%) per annum.
----
With respect to Competitive Bid Loans, if the Borrower fails to
specify the particular Competitive Bid Loan or Bid Loans as to which any
payment or other amount should be applied and it is not otherwise clear as
to the particular Competitive Bid Loan or Bid Loans to which such payment
or other amounts relate, or any such payment or other amount is to be
applied to Competitive Bid Loans without regard to any such direction by
the Borrower, then each payment or prepayment of principal on Competitive
Bid Loans and each payment of interest or other amount on or in respect of
Competitive Bid Loans, shall be allocated pro rata among the relevant
Competitive Bid Loan Lenders in accordance with the then outstanding
amounts of their respective Competitive Bid Loans; and
36
<PAGE>
(b) Letters of Credit. Each payment of unreimbursed drawings in
-----------------
respect of LOC Obligations shall be allocated to each LOC Participant pro
rata in accordance with its Revolving Loan Commitment Percentage; provided
--------
that, if any LOC Participant shall have failed to pay its applicable pro
rata share of any drawing under any Letter of Credit, then any amount to
which such LOC Participant would otherwise be entitled pursuant to this
subsection (b) shall instead be payable to the Issuing Lender; provided
--------
further, that in the event any amount paid to any LOC Participant pursuant
-------
to this subsection (b) is rescinded or must otherwise be returned by the
Issuing Lender, each LOC Participant shall, upon the request of the Issuing
Lender, repay to the Administrative Agent for the account of the Issuing
Lender the amount so paid to such LOC Participant, with interest for the
period commencing on the date such payment is returned by the Issuing
Lender until the date the Issuing Lender receives such repayment at a rate
per annum equal to, during the period to but excluding the date two
Business Days after such request, the Federal Funds Rate, and thereafter,
the Base Rate plus two percent (2%) per annum.
----
3.8. Allocation of Payments After Event of Default.
---------------------------------------------
Notwithstanding any other provisions of this Credit Agreement, after the
occurrence and during the continuance of an Event of Default, all amounts
collected or received by an Agent or any Lender on account of amounts
outstanding under any of the Credit Documents shall be paid over or delivered as
follows:
FIRST, to the payment of all reasonable out-of-pocket costs and
expenses (including without limitation reasonable attorneys' fees) of the
Agents in connection with enforcing the rights of the Lenders under the
Credit Documents;
SECOND, to payment of any fees owed to an Agent or a Issuing Lender;
THIRD, to the payment of all reasonable out-of-pocket costs and
expenses, (including, without limitation, reasonable attorneys' fees) of
each of the Lenders in connection with enforcing its rights under the
Credit Documents;
FOURTH, to the payment of all accrued fees and interest payable to the
Lenders hereunder;
FIFTH, to the payment of the outstanding principal amount of the
Loans, to the payment or cash collateralization of the outstanding LOC
Obligations and to any principal amounts outstanding under Hedging
Agreements, pro rata, as set forth below;
SIXTH, to all other obligations which shall have become due and
payable under the Credit Documents and not repaid pursuant to clauses
"FIRST: through "FIFTH" above; and
SEVENTH, to the payment of the surplus, if any, to whoever may be
lawfully entitled to receive such surplus.
37
<PAGE>
In carrying out the foregoing, (a) amounts shall be applied in the
numerical order provided until prior to application to the next succeeding
category; (b) each of the Lenders shall receive an amount equal to its pro
rata share (based on the proportion that the then outstanding Loans, LOC
Obligations and obligations under Hedging Agreements held by such Lender
bears to the aggregate then outstanding Loans, LOC Obligations and
obligations under Hedging Agreements) of amounts available to be applied
pursuant to clauses "THIRD", "FOURTH," "FIFTH," and "SIXTH" above; and (c)
to the extent that any amounts available for distribution pursuant to
clause "FIFTH" above are attributable to the issued but undrawn amount of
outstanding Letters of Credit, such amounts shall be held by the
Administrative Agent in a cash collateral account and applied (x) first, to
reimburse the Issuing Lender from time to time for any drawings under such
Letters of Credit and (y) then, following the expiration of all Letters of
Credit, to all other obligations of the types described in clauses "FIFTH"
and "SIXTH" above in the manner provided in this Section 3.8.
3.9. Sharing of Payments.
-------------------
The Lenders agree among themselves that, except to the extent otherwise
provided herein, in the event that any Lender shall obtain payment in respect of
any Loan, unreimbursed drawing with respect to any LOC Obligations or any other
obligation owing to such Lender under this Credit Agreement through the exercise
of a right of setoff, banker's lien or counterclaim, or pursuant to a secured
claim under Section 506 of the Bankruptcy Code or other security or interest
arising from, or in lieu of, such secured claim, received by such Lender under
any applicable bankruptcy, insolvency or other similar law or otherwise, or by
any other means, in excess of its pro rata share of such payment as provided for
in this Credit Agreement, such Lender shall promptly pay in cash or purchase
from the other Lenders a participation in such Loans, LOC Obligations, and other
obligations in such amounts, and make such other adjustments from time to time,
as shall be equitable to the end that all Lenders share such payment in
accordance with their respective ratable shares as provided for in this Credit
Agreement. The Lenders further agree among themselves that if payment to a
Lender obtained by such Lender through the exercise of a right of setoff,
banker's lien, counterclaim or other event as aforesaid shall be rescinded or
must otherwise be restored, each Lender which shall have shared the benefit of
such payment shall, by payment in cash or a repurchase of a participation
theretofore sold, return its share of that benefit (together with its share of
any accrued interest payable with respect thereto) to each Lender whose payment
shall have been rescinded or otherwise restored. The Borrower agrees that any
Lender so purchasing such a participation may, to the fullest extent permitted
by law, exercise all rights of payment, including setoff, banker's lien or
counterclaim, with respect to such participation as fully as if such Lender were
a holder of such Loan, LOC Obligation or other obligation in the amount of such
participation. Except as otherwise expressly provided in this Credit Agreement,
if any Lender or an Agent shall fail to remit to an Agent or any other Lender an
amount payable by such Lender or such Agent to such Agent or such other Lender
pursuant to this Credit Agreement on the date when such amount is due, such
payments shall be made together with interest thereon for each date from the
date such amount is due until the date such amount is paid to such Agent or such
other Lender at a rate per annum equal to the Federal Funds Rate. If under any
applicable bankruptcy, insolvency or other similar law, any Lender receives a
secured claim in lieu of a setoff to which this Section 3.9 applies, such Lender
shall, to the extent practicable, exercise its rights in respect of such secured
claim in a manner consistent with the
38
<PAGE>
rights of the Lenders under this Section 3.9 to share in the benefits of any
recovery on such secured claim.
3.10. Capital Adequacy.
----------------
If, after the date hereof, any Lender has determined that the adoption or
the becoming effective of, or any change in, or any change by any Governmental
Authority, central bank or comparable agency charged with the interpretation or
administration thereof in the interpretation or administration of, any
applicable law, rule or regulation regarding capital adequacy, or compliance by
such Lender, or its parent corporation, with any request or directive regarding
capital adequacy (whether or not having the force of law) of any such authority,
central bank or comparable agency, has or would have the effect of reducing the
rate of return on such Lender's (or parent corporation's) capital or assets as a
consequence of its commitments or obligations hereunder to a level below that
which such Lender, or its parent corporation, could have achieved but for such
adoption, effectiveness, change or compliance (taking into consideration such
Lender's (or parent corporation's) policies with respect to capital adequacy),
then, upon notice from such Lender to the Borrower, the Borrower shall be
obligated to pay to such Lender such additional amount or amounts as will
compensate such Lender on an after-tax basis (after taking into account
applicable deductions and credits in respect of the amount indemnified) for such
reduction. Each determination by any such Lender of amounts owing under this
Section shall, absent manifest error, be conclusive and binding on the parties
hereto. This covenant shall survive the termination of this Credit Agreement
and the payment of the Loans and all other amounts payable hereunder. No Lender
or parent corporation shall be entitled to receive any compensation for such
amounts incurred more than 180 days prior to delivery of such notice.
3.11. Inability To Determine Interest Rate.
------------------------------------
If prior to the first day of any Interest Period, the Administrative Agent
shall have determined in good faith (which determination shall be conclusive and
binding upon the Borrower) that, by reason of circumstances affecting the
relevant market, adequate and reasonable means do not exist for ascertaining the
Eurodollar Rate for such Interest Period, the Administrative Agent shall give
telecopy or telephonic notice thereof to the Borrower and the Lenders as soon as
practicable thereafter, and will also give prompt written notice to the Borrower
when such conditions no longer exist. If such notice is given (a) any
Eurodollar Loans requested to be made on the first day of such Interest Period
shall be made as Base Rate Loans, (b) any Loans that were to have been converted
on the first day of such Interest Period to or continued as Eurodollar Loans
shall be converted to or continued as Base Rate Loans and (c) any outstanding
Eurodollar Loans shall be converted, on the first day of such Interest Period,
to Base Rate Loans. Until such notice has been withdrawn by the Administrative
Agent, no further Eurodollar Loans shall be made or continued as such, nor shall
the Borrower have the right to convert Base Rate Loans to Eurodollar Loans.
3.12. Illegality.
----------
Notwithstanding any other provision herein, if the adoption of or any
change in any Requirement of Law or in the interpretation or application thereof
occurring after the Closing
39
<PAGE>
Date shall make it unlawful for any Lender to make or maintain Eurodollar Loans
as contemplated by this Credit Agreement, (a) such Lender shall promptly give
written notice of such circumstances to the Borrower and the Administrative
Agent (which notice shall be withdrawn whenever such circumstances no longer
exist), (b) the commitment of such Lender hereunder to make Eurodollar Loans,
continue Eurodollar Loans as such and convert a Base Rate Loan to Eurodollar
Loans shall forthwith be canceled and, until such time as it shall no longer be
unlawful for such Lender to make or maintain Eurodollar Loans, such Lender shall
then have a commitment only to make a Base Rate Loan when a Eurodollar Loan is
requested and (c) such Lender's Loans then outstanding as Eurodollar Loans, if
any, shall be converted automatically to Base Rate Loans on the respective last
days or the then current Interest Periods with respect to such Loans or within
such earlier period as required by law. If any such conversion of a Eurodollar
Loan occurs on a day which is not the last day of the then current Interest
Period with respect thereto, the Borrower shall pay to such Lender such amounts,
if any, as may be required pursuant to Section 3.15.
3.13 Requirements of Law.
-------------------
If the adoption of or any change in any Requirement of Law or in the
interpretation or application thereof applicable to any Lender, or compliance by
any Lender with any request or directive (whether or not having the force of
law) from any central bank or other Governmental Authority, in each case made
subsequent to the Closing Date (or, if later, the date on which such Lender
becomes a Lender):
(a) shall subject such Lender to any tax of any kind whatsoever with
respect to any Letter of Credit, any Eurodollar Loans made by it or its
obligation to make Eurodollar Loans, or change the basis of taxation of
payments to such Lender in respect thereof (except for Non-Excluded Taxes
covered by Section 3.14 (including Non-Excluded Taxes imposed solely by
reason of any failure of such Lender to comply with its obligations under
Section 3.14(b)) and changes in taxes measured by or imposed upon the
overall net income, or franchise tax (imposed in lieu of such net income
tax), of such Lender or its applicable lending office, branch, or any
affiliate thereof);
(b) shall impose, modify or hold applicable any reserve, special
deposit, compulsory loan or similar requirement against assets held by,
deposits or other liabilities in or for the account of, advances, loans or
other extensions of credit by, or any other acquisition of funds by, any
office of such Lender which is not otherwise included in the determination
of the Eurodollar Rate hereunder; or
(c) shall impose on such Lender any other condition (excluding any
tax of any kind whatsoever);
and the result of any of the foregoing is to increase the cost to such Lender,
by an amount which such Lender deems to be material, of making, converting into,
continuing or maintaining Eurodollar Loans or issuing or participating in
Letters of Credit or to reduce any amount receivable hereunder in respect
thereof, then, in any such case, upon notice to the Borrower from such Lender,
through the Administrative Agent, in accordance herewith, the Borrower shall be
40
<PAGE>
obligated to promptly pay such Lender, upon its demand, any additional amounts
necessary to compensate such Lender on an after-tax basis (after taking into
account applicable deductions and credits in respect of the amount indemnified)
for such increased cost or reduced amount receivable, provided that, in any such
--------
case, the Borrower may elect to convert the Eurodollar Loans made by such Lender
hereunder to Base Rate Loans by giving the Administrative Agent at least one
Business Day's notice of such election, in which case the Borrower shall
promptly pay to such Lender, upon demand, without duplication, such amounts, if
any, as may be required pursuant to Section 3.15. If any Lender becomes
entitled to claim any additional amounts pursuant to this Section 3.13, it shall
provide prompt notice thereof to the Borrower, through the Administrative Agent,
certifying (x) that one of the events described in this Section 3.13 has
occurred and describing in reasonable detail the nature of such event, (y) as to
the increased cost or reduced amount resulting from such event and (z) as to the
additional amount demanded by such Lender and a reasonably detailed explanation
of the calculation thereof. Such a certificate as to any additional amounts
payable pursuant to this Section 3.13 submitted by such Lender, through the
Administrative Agent, to the Borrower shall be conclusive and binding on the
parties hereto in the absence of manifest error. This covenant shall survive
the termination of this Credit Agreement and the payment of the Loans and all
other amounts payable hereunder. No Lender shall be entitled to receive any
compensation for such amounts incurred more than 180 days prior to delivery of
such certificate.
3.14. Taxes.
-----
(a) Except as provided below in this Section 3.14, all payments made
by the Borrower under this Credit Agreement and any Notes shall be made
free and clear of, and without deduction or withholding for or on account
of, any present or future income, stamp or other taxes, levies, imposts,
duties, charges, fees, deductions or withholdings, now or hereafter
imposed, levied, collected, withheld or assessed by any court, or
governmental body, agency or other official, excluding taxes measured by or
imposed upon the overall net income of any Lender or its applicable lending
office, or any branch or affiliate thereof, and all franchise taxes, branch
taxes, taxes on doing business or taxes on the overall capital or net worth
of any Lender or its applicable lending office, or any branch or affiliate
thereof, in each case imposed in lieu of net income taxes, imposed: (i) by
the jurisdiction under the laws of which such Lender, applicable lending
office, branch or affiliate is organized or is located, or in which its
principal executive office is located, or any nation within which such
jurisdiction is located or any political subdivision thereof; or (ii) by
reason of any connection between the jurisdiction imposing such tax and
such Lender, applicable lending office, branch or affiliate other than a
connection arising solely from such Lender having executed, delivered or
performed its obligations, or received payment under or enforced, this
Credit Agreement or any Notes. If any such non-excluded taxes, levies,
imposts, duties, charges, fees, deductions or withholdings ("Non-Excluded
------------
Taxes") are required to be withheld from any amounts payable to an Agent or
-----
any Lender hereunder or under any Notes, (A) the amounts so payable to an
Agent or such Lender shall be increased to the extent necessary to yield to
an Agent or such Lender (after payment of all Non-Excluded Taxes) interest
or any such other amounts payable hereunder at the rates or in the amounts
specified in this Credit Agreement and any Notes, provided, however, that
-------- -------
the Borrower shall be entitled to deduct and withhold any Non-
41
<PAGE>
Excluded Taxes and shall not be required to increase any such amounts
payable to any Lender that is not organized under the laws of the United
States of America or a state thereof if such Lender fails to comply with
the requirements of paragraph (b) of this Section 3.14 whenever any Non-
Excluded Taxes are payable by the Borrower, and (B) as promptly as possible
thereafter the Borrower shall send to such Agent for its own account or for
the account of such Lender, as the case may be, a certified copy of an
original official receipt received by the Borrower showing payment thereof.
If the Borrower fails to pay any Non-Excluded Taxes when due to the
appropriate taxing authority or fails to remit to the Administrative Agent
the required receipts or other required documentary evidence, the Borrower
shall indemnify an Agent and any Lender for any incremental taxes, interest
or penalties that may become payable by an Agent or any Lender as a result
of any such failure. If a Lender shall change its office that makes or
maintains a Loan hereunder, the Borrower shall not be required to pay any
increased amounts to the Lender in respect of any Non-Excluded Taxes
pursuant to this subsection 3.14 to the extent that any obligation to
withhold or deduct any amount with respect to such Non-Excluded Taxes
existed on the date the Lender changed such office, unless the Lender
changed the office at the request of the Borrower. The agreements in this
subsection shall survive the termination of this Credit Agreement and the
payment of the Loans and all other amounts payable hereunder.
(b) Each Lender that is not incorporated under the laws of the
United States of America or a state thereof shall:
(i) (A) on or before the date of any payment by the Borrower
under this Credit Agreement or Notes to such Lender, deliver to the
Borrower and the Administrative Agent (x) two duly completed copies of
United States Internal Revenue Service Form 1001 or 4224, or successor
applicable form, as the case may be, certifying that it is entitled to
receive payments under this Credit Agreement and any Notes without
deduction or withholding of any United States federal income taxes and
(y) an Internal Revenue Service Form W-8 or W-9, or successor
applicable form, as the case may be, certifying that it is entitled to
an exemption from United States backup withholding tax;
(B) deliver to the Borrower and the Administrative Agent two
further copies of any such form or certification on or before the
date that any such form or certification expires or becomes
obsolete and after the occurrence of any event requiring a change
in the most recent form previously delivered by it to the
Borrower; and
(C) obtain such extensions of time for filing and complete
such forms or certifications as may reasonably be requested by
the Borrower or the Administrative Agent; or
(ii) in the case of any such Lender that is not a "bank" within
the meaning of Section 881(c)(3)(A) of the Internal Revenue Code, (A)
represent to the Borrower (for the benefit of the Borrower and the
Agents) that it is not a bank
42
<PAGE>
within the meaning of Section 881(c)(3)(A) of the Internal Revenue
Code, (B) agree to furnish to the Borrower, on or before the date of
any payment by the Borrower, with a copy to the Administrative Agent,
two accurate and complete original signed copies of Internal Revenue
Service Form W-8, or successor applicable form certifying to such
Lender's legal entitlement at the date of such certificate to an
exemption from U.S. withholding tax under the provisions of Section
881(c) of the Internal Revenue Code with respect to payments to be
made under this Credit Agreement and any Notes (and to deliver to the
Borrower and the Administrative Agent two further copies of such form
on or before the date it expires or becomes obsolete and after the
occurrence of any event requiring a change in the most recently
provided form and, if necessary, obtain any extensions of time
reasonably requested by the Borrower or the Administrative Agent for
filing and completing such forms), and (C) agree, to the extent
legally entitled to do so, upon reasonable request by the Borrower, to
provide to the Borrower (for the benefit of the Borrower and the
Agents) such other forms as may be reasonably required in order to
establish the legal entitlement of such Lender to an exemption from
withholding with respect to payments under this Credit Agreement and
any Notes.
Notwithstanding the above, if any change in treaty, law or regulation has
occurred after the date such Person becomes a Lender hereunder which
renders all such forms inapplicable or which would prevent such Lender from
duly completing and delivering any such form with respect to it and such
Lender so advises the Borrower and the Administrative Agent then such
Lender shall be exempt from such requirements. Each Person that shall
become a Lender or a participant of a Lender pursuant to Section 10.3
shall, upon the effectiveness of the related transfer, be required to
provide all of the forms, certifications and statements required pursuant
to this subsection (b); provided that in the case of a participant of a
--------
Lender, the obligations of such participant of a Lender pursuant to this
subsection (b) shall be determined as if the participant of a Lender were a
Lender except that such participant of a Lender shall furnish all such
required forms, certifications and statements to the Lender from which the
related participation shall have been purchased.
(c) If any such taxes shall be or become applicable after the date of
this Credit Agreement to such payments by the Borrower to a Lender, such
Lender shall use reasonable efforts to make, fund or maintain the Loan or
Loans, as the case may be, through another lending office located in
another jurisdiction so as to reduce, to the fullest extent possible, the
Borrower's liability hereunder, if the making, funding or maintenance of
such Loan or Loans through such other office does not, in the reasonable
judgment of the Lender, materially affect the Lender of such Loan. If the
Borrower is required to make any additional payment to a Lender pursuant to
this Section 3.14, and any such Lender receives, or is entitled to receive,
a credit against, remission for, or repayment of, any tax paid or payable
by it in respect of, or calculated with reference to, the taxes giving rise
to such payment, such Lender shall, within a reasonable time after it
receives such credit, relief, remission or repayment, reimburse the
Borrower the amount of any such credit, relief, remission or repayment.
43
<PAGE>
3.15. Indemnity.
---------
The Borrower promises to indemnify each Lender and to hold each Lender
harmless from any loss or expense which such Lender may sustain or incur (other
than through such Lender's gross negligence or willful misconduct) as a
consequence of (a) default by the Borrower in making a borrowing of, conversion
into or continuation of Eurodollar Loans after the Borrower has given a notice
requesting the same in accordance with the provisions of this Credit Agreement,
(b) default by the Borrower in making any prepayment of a Eurodollar Loan after
the Borrower has given a notice thereof in accordance with the provisions of
this Credit Agreement and (c) the making of a prepayment of Eurodollar Loans on
a day which is not the last day of an Interest Period with respect thereto.
Such indemnification may include an amount equal to (i) the present value of the
amount of interest which would have accrued on the amount so prepaid, or not so
borrowed, converted or continued, for the period from the date of such
prepayment or of such failure to borrow, convert or continue to the last day of
the applicable Interest Period (or, in the case of a failure to borrow, convert
or continue, the Interest Period that would have commenced on the date of such
failure) in each case at the applicable rate of interest for such Eurodollar
Loans provided for herein (excluding, however, the Applicable Percentage
included therein, if any) minus (ii) the amount of interest (as reasonably
determined by such Lender) which would have accrued to such Lender on such
amount by placing such amount on deposit for a comparable period with leading
banks in the interbank Eurodollar market. The agreements in this Section shall
survive the termination of this Credit Agreement and the payment of the Loans
and all other amounts payable hereunder.
3.16. Replacement Lenders.
-------------------
At any time after the payment by the Borrower to any Lender of any amount
pursuant to Section 3.13 or 3.14 that the Borrower reasonably deems material,
the Borrower may, by writing addressed to the Administrative Agent and each
Lender that requested the payment of such amount, nominate or propose an
Eligible Assignee that is willing to become the assignee of the Commitment and
other obligations of such Lender (a "Replacement Lender") pursuant to Section
------------------
10.3, and within fifteen (15) Business Days after receipt of such proposal from
the Borrower, each such Lender shall execute and deliver to the Administrative
Agent an Assignment Agreement whereby such Lender shall assign its entire
Commitment in favor of the proposed Replacement Lender in accordance with
Section 10.3 unless, prior to the expiration of such period, the Administrative
Agent shall have notified the Borrower and such Lender that the proposed
Replacement Lender is not reasonably acceptable to the Administrative Agent;
provided, that in no event will (i) any Lender be required to enter into an
Assignment Agreement at a price less than par plus accrued interest and prorated
fees and other costs due hereunder to the effective date thereof, (ii) the
Administrative Agent or any Lender be obligated to assist the Borrower in
identifying any Eligible Assignees that are willing to become such a Replacement
Lender or (iii) any such assignment be required if the consummation thereof
conflicts with any Requirement of Law.
44
<PAGE>
SECTION 4.
CONDITIONS PRECEDENT
--------------------
4.1. Closing Conditions.
------------------
The obligation of the Lenders to enter into this Credit Agreement and make
the initial Extension of Credit is subject to satisfaction of the following
conditions:
(a) Executed Credit Documents. Receipt by the Agents of duly
-------------------------
executed copies of: (i) this Credit Agreement; (ii) the Notes and (iii)
all other Credit Documents, each in form and substance acceptable to the
Lenders in their sole discretion.
(b) Corporate Documents. Receipt by the Agents of the following:
-------------------
(i) Charter Documents. Copies of the articles or certificate of
-----------------
incorporation or other charter documents of the Borrower certified to
be true and complete as of a recent date by the appropriate
Governmental Authority of the state or other jurisdiction of its
incorporation and certified by a secretary or assistant secretary of
the Borrower to be true and correct as of the Effective Date.
(ii) Bylaws. A copy of the bylaws of the Borrower certified by a
------
secretary or assistant secretary of the Borrower to be trueand correct
as of the Effective Date.
(iii) Resolutions. Copies of resolutions of the Board of
-----------
Directors of the Borrower approving and adopting the Credit Documents,
the transactions contemplated therein and authorizing execution and
delivery thereof, certified by a secretary or assistant secretary of
the Borrower to be true and correct and in force and effect as of the
Effective Date.
(iv) Good Standing. Copies of (A) certificates of good standing,
-------------
existence or its equivalent with respect to the Borrower certified as
of a recent date by the appropriate Governmental Authorities of the
state or other jurisdiction of incorporation and each other
jurisdiction in which the failure to so qualify and be in good
standing would have a Material Adverse Effect on the business or
operations of the Borrower in such jurisdiction and (B) to the extent
available, a certificate indicating payment of all corporate franchise
taxes certified as of a recent date by the appropriate governmental
taxing authorities.
(v) Incumbency. An incumbency certificate of the Borrower
----------
certified by a secretary or assistant secretary to be true and correct
as of the Effective Date.
(c) Financial Statements. Receipt by the Agents and the Lenders of
--------------------
(i) the consolidated and consolidating financial statements of the Borrower
and its Subsidiaries including balance sheets and income and cash flow
statements for the fiscal quarter ended March 31, 1997 (or, if available
for the fiscal quarter ended June 30, 1997) and (ii)
45
<PAGE>
satisfactory projections (the "Projections") for each twelve month period
-----------
for theimmediately succeeding five fiscal years.
(d) Opinion of Counsel. Receipt by the Agents of an opinion, or
------------------
opinions (which shall cover, among other things, authority, legality,
validity, binding effect and enforceability), satisfactory to the Agents,
addressed to the Agents on behalf of the Lenders and dated as of the
Effective Date, from legal counsel to the Borrower.
(e) Consent. Receipt by the Agents of evidence that all
-------
governmental, shareholder and material third party consents and approvals
necessary or desirable in connection with the execution and delivery of the
Credit Documents and the consummation of the transactions set forth
therein.
(f) Material Adverse Effect. There shall not have occurred a change
-----------------------
since May 9, 1997 that has had or could reasonably be expected to have a
Material Adverse Effect.
(g) Litigation. There shall not exist any (i) order, decree,
----------
judgment, ruling or injunction or (ii) any pending or threatened action,
suit, investigation or proceeding against the Borrower or any of its
Subsidiaries that would have or would reasonably be expected to have a
Material Adverse Effect.
(h) Change in Market. The absence of any material adverse change
----------------
in the market for syndicated bank credit facilities similar in nature to
the transactions described herein or a material disruption of, or a
material adverse change in, financial, banking or capital market
conditions.
(i) Officer's Certificates. The Agents shall have received a
----------------------
certificate or certificates executed by the chief financial officer of the
Borrower on behalf of the Borrower as of the Effective Date stating that
(A) the Borrower and each of the Borrower's Subsidiaries are in compliance
with all existing material financial obligations, (B) all governmental,
shareholder and third party consents and approvals, if any, with respect to
the Credit Documents and the transactions contemplated thereby have been
obtained, (C) no action, suit, investigation or proceeding is pending or
threatened in any court or before any arbitrator or governmental
instrumentality that purports to effect the Borrower, any of the Borrower's
Subsidiaries or any transaction contemplated by the Credit Documents, if
such action, suit, investigation or proceeding could have or could be
reasonably expected to have a Material Adverse Effect, (D) the Projections
(as defined in Section 4.1(c)) were prepared in good faith and using
reasonable assumptions and (E) immediately after giving effect to this
Credit Agreement, the other Credit Documents and all the transactions
contemplated therein to occur on such date, (1) the Borrower is Solvent,
(2) no Default or Event of Default exists, (3) all representations and
warranties contained herein and in the other Credit Documents are true and
correct in all material respects, and (4) the Borrower is in compliance
with each of the financial covenants set forth in Section 6.11.
46
<PAGE>
(j) Payment of Prior Credit Facility. Receipt by the
--------------------------------
Administrative Agent of evidence that all obligations outstanding under the
Prior Credit Agreement have been paid in full or are now evidenced by the
Credit Documents.
(k) Fees and Expenses. Payment by the Borrower of all fees and
-----------------
expenses owed by the Borrower to the Lenders and the Agents, including,
without limitation, payment to the Agents of the fees set forth in the Fee
Letters.
(l) Other. Receipt by the Lenders of such other documents,
-----
instruments, agreements or information as reasonably and timely requested
by any Lender, including, but not limited to, information regarding
litigation, tax, accounting, labor, insurance, pension liabilities (actual
or contingent), real estate leases, material contracts, debt agreements,
property ownership and contingent liabilities of the Borrower and its
Subsidiaries.
4.2. Conditions to All Extensions of Credit.
--------------------------------------
In addition to the conditions precedent stated elsewhere herein, the
Lenders shall not be obligated to make new Loans nor shall the Issuing Lender be
required to issue or extend a Letter of Credit unless:
(a) Notice. The Borrower shall have delivered (i) in the case of
------
any new Revolving Loan, a Notice of Borrowing, duly executed and completed,
by the time specified in Section 2.1, (ii) in the case of any Letter of
Credit, the Issuing Lender shall have received an appropriate request for
issuance in accordance with the provisions of Section 2.2, (iii) in the
case of any Competitive Bid Loans, a Competitive Bid Loan Request, duly
executed and completed, by the time specified in Section 2.3 and (iv) in
the case of any Swing Line Loan, a Swing Line Loan Request, duly executed
and completed, by the time specified in Section 2.4.
(b) Representations and Warranties. The representations and
------------------------------
warranties made by the Borrower in any Credit Document are true and correct
in all material respects at and as if made as of such date except to the
extent they expressly relate to an earlier date;
(c) No Default. No Default or Event of Default shall exist or be
----------
continuing either prior to or after giving effect thereto;
(d) No Material Adverse Effect. There shall not have occurred any
--------------------------
Material Adverse Effect; and
(e) Availability. Immediately after giving effect to the making
------------
of a Loan (and the application of the proceeds thereof) or to the issuance
of a Letter of Credit, as the case may be, the sum of the Revolving Loans
outstanding plus LOC Obligations outstanding plus Swing Line Loans
----
outstanding plus Competitive Bid Loans outstanding shall not exceed the
Revolving Commitment Amount.
47
<PAGE>
The delivery of each Notice of Borrowing, Competitive Bid Loan Request, Swing
Line Loan Request and each request for a Letter of Credit shall constitute a
representation and warranty by the Borrower of the correctness of the matters
specified in subsections (b), (c), (d) and (e) above. This Section 4.2 shall
not apply to continuations or conversions of Loans made pursuant to Section 2.5.
SECTION 5.
REPRESENTATIONS AND WARRANTIES
------------------------------
The Borrower hereby represents to the Agents and each Lender that:
5.1. Financial Condition.
-------------------
The financial statements delivered to the Lenders pursuant to Section
4.1(c)(i) and Section 6.1(a) and (b), (a) have been prepared in accordance with
GAAP (except as may otherwise be permitted under Section 6.1(a) and (b)) and (b)
present fairly (on the basis disclosed in the footnotes to such financial
statements) the consolidated and consolidating (as applicable) financial
condition, results of operations and cash flows of the Borrower and its
Subsidiaries as of such date and for such periods. Since June 30, 1997, there
has been no sale, transfer or other disposition by the Borrower or any of its
Subsidiaries of any material part of the business or property of the Borrower
and its Subsidiaries, taken as a whole, and no purchase or other acquisition by
any of them of any business or property (including any capital stock of any
other Person) material in relation to the consolidated financial condition of
the Borrower which is not (x) reflected in the most recent financial statements
delivered to the Lenders pursuant to Section 6.1 or in the notes thereto or (y)
otherwise permitted by the terms of this Credit Agreement and communicated to
the Administrative Agent.
5.2. No Material Change.
------------------
Since May 9, 1997, there has been no development or event relating to or
affecting the Borrower or any of its Subsidiaries which has had or would be
reasonably expected to have a Material Adverse Effect and (b) from and after the
Closing Date, except as otherwise permitted under this Credit Agreement, no
dividends or other distributions have been declared, paid or made upon the
capital stock or other equity interest in the Borrower or any of its
Subsidiaries nor has any of the capital stock or other equity interest in the
Borrower been redeemed, retired, purchased or otherwise acquired for value.
5.3 Organization and Good Standing.
------------------------------
The Borrower and each of its Subsidiaries (a) is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
(or other jurisdiction) of its incorporation, (b) is duly qualified and in good
standing as a foreign corporation and authorized to do business in every
jurisdiction unless the failure to be so qualified, in good standing or
authorized would have a Material Adverse Effect and (c) has the requisite
corporate power and authority to own its properties and to carry on its business
as now conducted and as proposed to be conducted.
48
<PAGE>
5.4. Due Authorization.
-----------------
The Borrower (a) has the requisite corporate power and authority to
execute, deliver and perform this Credit Agreement and the other Credit
Documents and to incur the obligations herein and therein provided for and (b)
is duly authorized to, and has been authorized by all necessary corporate
action, to execute, deliver and perform this Credit Agreement and the other
Credit Documents.
5.5. No Conflicts.
------------
Neither the execution and delivery of the Credit Documents, nor the
consummation of the transactions contemplated therein, nor performance of and
compliance with the terms and provisions thereof by the Borrower will (a)
violate or conflict with any provision of its articles or certificate of
incorporation or bylaws, (b) violate, contravene or materially conflict with any
Requirement of Law or any other law, regulation (including, without limitation,
Regulation U or Regulation X), order, writ, judgment, injunction, decree or
permit applicable to it, (c) violate, contravene or conflict with contractual
provisions of, or cause an event of default under, any indenture, loan
agreement, mortgage, deed of trust, contract or other agreement or instrument to
which it is a party or by which it may be bound, the violation of which would
have or might be reasonably expected to have a Material Adverse Effect, or (d)
result in or require the creation of any Lien upon or with respect to its
properties.
5.6. Consents.
--------
Except for consents, approvals and authorizations (a) which have been
obtained or (b) which are listed on Schedule 5.6, no consent, approval,
------------
authorization or order of, or filing, registration or qualification with, any
court or Governmental Authority or third party in respect of the Borrower is
required in connection with the execution, delivery or performance of this
Credit Agreement or any of the other Credit Documents by the Borrower.
5.7. Enforceable Obligations.
-----------------------
This Credit Agreement and the other Credit Documents have been duly
executed and delivered and constitute legal, valid and binding obligations of
the Borrower enforceable against the Borrower in accordance with their
respective terms, except as may be limited by bankruptcy or insolvency laws or
similar laws affecting creditors' rights generally or by general equitable
principles.
5.8. No Default.
----------
Neither the Borrower nor any of its Subsidiaries is in default in any
respect under any contract, lease, loan agreement, indenture, mortgage, security
agreement or other agreement or obligation to which it is a party or by which
any of its properties is bound which default would have or would be reasonably
expected to have a Material Adverse Effect. No Default or Event of Default has
occurred or exists except as previously disclosed in writing to the Lenders.
49
<PAGE>
5.9. Ownership.
---------
The Borrower and its Subsidiaries is the owner of, and has good and
marketable title to, all of its respective assets and none of such assets is
subject to any Lien other than Permitted Liens.
5.10. Indebtedness.
------------
The Borrower and its Subsidiaries have no Indebtedness except (a) as
disclosed in the financial statements referenced in Section 5.1, (b) as set
forth on Schedule 5.10 and (c) as otherwise permitted by this Credit Agreement.
-------------
5.11. Litigation.
----------
Except as disclosed in Schedule 5.11, there are no actions, suits or legal,
-------------
equitable, arbitration or administrative proceedings, pending or, to the
knowledge of the Borrower, threatened against the Borrower or any of its
Subsidiaries which will have or might be reasonably expected to have a Material
Adverse Effect.
5.12. Taxes.
-----
Each of the Borrower and its Subsidiaries has filed, or caused to be filed,
all tax returns (federal, state, local and foreign) required to be filed and
paid (a) all amounts of taxes shown thereon to be due (including interest and
penalties) and (b) all other taxes, fees, assessments and other governmental
charges (including mortgage recording taxes, documentary stamp taxes and
intangibles taxes) owing by it, except for such taxes (i) which are not yet
delinquent or (ii) that are being contested in good faith and by proper
proceedings, and against which adequate reserves are being maintained in
accordance with GAAP. The Borrower is not aware as of the Closing Date of any
proposed tax assessments against it or any of its Subsidiaries.
5.13. Compliance with Law.
-------------------
Each of the Borrower and its Subsidiaries is in compliance with all
Requirements of Law and all other laws, rules, regulations, orders and decrees
(including without limitation Environmental Laws) applicable to it, or to its
properties, unless such failure to comply would not have or would not be
reasonably expected to have a Material Adverse Effect. No Requirement of Law
would be reasonably expected to cause a Material Adverse Effect.
5.14. ERISA.
-----
Except as would not result or be reasonably expected to result in a
Material Adverse Effect:
(a) During the five-year period prior to the date on which this
representation is made or deemed made: (i) no Termination Event has
occurred, and, to the best knowledge of the Borrower, no event or condition
has occurred or exists as a result of which any Termination Event could
reasonably be expected to occur, with respect to any Plan; (ii) no
50
<PAGE>
"accumulated funding deficiency," as such term is defined in Section 302 of
ERISA and Section 412 of the Code, whether or not waived, has occurred with
respect to any Plan; (iii) each Plan has been maintained, operated, and
funded in compliance with its own terms and in material compliance with the
provisions of ERISA, the Code, and any other applicable federal or state
laws; and (iv) no lien in favor or the PBGC or a Plan has arisen or is
reasonably likely to arise on account of any Plan.
(b) Neither the Borrower, nor any of its Subsidiaries nor any ERISA
Affiliate has incurred, or, to the best knowledge of the Borrower, are
reasonably expected to incur, any withdrawal liability under ERISA to any
Multiemployer Plan or Multiple Employer Plan. Neither the Borrower, any of
its Subsidiaries nor any ERISA Affiliate has received any notification that
any Multiemployer Plan is in reorganization (within the meaning of Section
4241 of ERISA), is insolvent (within the meaning of Section 4245 of ERISA),
or has been terminated (within the meaning of Title IV of ERISA), and no
Multiemployer Plan is, to the best knowledge of the Borrower, reasonably
expected to be in reorganization, insolvent, or terminated.
(c) No prohibited transaction (within the meaning of Section 406 of
ERISA or Section 4975 of the Code) or breach of fiduciary responsibility
has occurred with respect to a Plan which has subjected or is reasonably
likely to subject the Borrower or any of its Subsidiaries or any ERISA
Affiliate to any liability under Sections 406, 409, 502(i), or 502(l) of
ERISA or Section 4975 of the Code, or under any agreement or other
instrument pursuant to which the Borrower or any of its Subsidiaries or any
ERISA Affiliate has agreed or is required to indemnify any person against
any such liability.
(d) The present value (determined using actuarial and other
assumptions which are reasonable with respect to the benefits provided and
the employees participating) of the liability of the Borrower and its
Subsidiaries and each ERISA Affiliate for post-retirement welfare benefits
to be provided to their current and former employees under Plans which are
welfare benefit plans (as defined in Section 3(1) of ERISA), net of all
assets under all such Plans allocable to such benefits, are reflected on
the Financial Statements in accordance with FASB 106.
(e) Each Plan which is a welfare plan (as defined in Section 3(1) of
ERISA) to which Sections 601-609 of ERISA and Section 4980B of the Code
apply has been administered in compliance in all material respects with
such sections.
5.15. Subsidiaries.
------------
Set forth on Schedule 5.15 is a complete and accurate list of all
-------------
Subsidiaries of the Borrower. Schedule 5.15 may be updated from time to time by
-------------
the Borrower by giving written notice thereof to the Administrative Agent.
51
<PAGE>
5.16. Use of Proceeds; Margin Stock.
-----------------------------
The proceeds of the Loans hereunder will be used solely for the purposes
specified in Section 6.9. None of the proceeds of the Loans will be used for
the purpose of purchasing or carrying any "margin stock" as defined in
Regulation U, Regulation X or Regulation G, or for the purpose of reducing or
retiring any Indebtedness which was originally incurred to purchase or carry
"margin stock" or any "margin security" or for any other purpose which might
constitute this transaction a "purpose credit" within the meaning of Regulation
U, Regulation X, Regulation G or Regulation T. The Borrower does not own any
"margin stock".
5.17. Government Regulation.
---------------------
The Borrower is not subject to regulation under the Public Utility Holding
Company Act of 1935, the Federal Power Act, the Investment Company Act of 1940
or the Interstate Commerce Act, each as amended. In addition, the Borrower is
not (a) an "investment company" registered or required to be registered under
the Investment Company Act of 1940, as amended, or controlled by such a company,
or (b) a "holding company," or a "Subsidiary company" of a "holding company," or
an "affiliate" of a "holding company" or of a "Subsidiary" or a "holding
company," within the meaning of the Public Utility Holding Company Act of 1935,
as amended. No director, executive officer or principal shareholder of the
Borrower or any of its Subsidiaries is a director, executive officer or
principal shareholder of any Lender. For the purposes hereof the terms
"director", "executive officer" and "principal shareholder" (when used with
reference to any Lender) have the respective meanings assigned thereto in
Regulation O issued by the Board of Governors of the Federal Reserve System.
5.18. Environmental Matters.
---------------------
(a) Except as set forth on Schedule 5.18 or except as would not
-------------
have or be reasonably expected to have a Material Adverse Effect:
(i) Each of the real property assets owned by the Borrower or
any of its Subsidiaries (the "Real Properties") and all operations
---------------
at the Real Properties are in compliance with all applicable
Environmental Laws, and there is no violation of any Environmental
Law with respect to the Real Properties or the businesses operated
by the Borrower or any of its Subsidiaries (the "Businesses"), and
----------
there are no conditions relating to the Businesses or Real
Properties that would be reasonably expected to give rise to
liability under any applicable Environmental Laws.
(ii) Neither the Borrower nor any of its Subsidiaries has
received any written or oral notice of, or inquiry from any
Governmental Authority regarding, any violation, alleged violation,
non-compliance, liability or potential liability regarding Hazardous
Materials or compliance with Environmental Laws with regard to any
of the Real Properties or the Businesses, nor does the Borrower or
any of its Subsidiaries have knowledge or reason to believe that any
such notice is being threatened.
52
<PAGE>
(iii) Hazardous Materials have not been transported or disposed
of from the Real Properties, or generated, treated, stored or
disposed of at, on or under any of the Real Properties or any other
location, in each case by, or on behalf or with the permission of
the Borrower or any of its Subsidiaries in a manner that would
reasonably be expected to give rise to liability under any
applicable Environmental Law.
(iv) No judicial proceeding or governmental or administrative
action is pending or, to the knowledge of the Borrower or any of its
Subsidiaries, threatened, under any Environmental Law to which the
Borrower or any of its Subsidiaries is or will be named as a party,
nor are there any consent decrees or other decrees, consent orders,
administrative orders or other orders, or other administrative or
judicial requirements outstanding under any Environmental Law with
respect to the Borrower or any of its Subsidiaries, the Real
Properties or the Businesses, in any amount reportable under the
federal Comprehensive Environmental Response, Compensation and
Liability Act or any analogous state law, except releases in
compliance with any Environmental Laws.
(v) There has been no release or threat of release of Hazardous
Materials at or from the Real Properties, or arising from or related
to the operations (including, without limitation, disposal) of the
Borrower or any of its Subsidiaries in connection with the Real
Properties or otherwise in connection with the Businesses.
(b) The Borrower has adopted procedures that are designed to (i)
ensure that the Borrower and its Subsidiaries, any of their operations and
each of the properties owned or leased by the Borrower and/or its
Subsidiaries remains in compliance with applicable Environmental Laws and
(ii) minimize any liabilities or potential liabilities that the Borrower
and its Subsidiaries, any of their operations and each of the properties
owned or leased by the Borrower and/or its Subsidiaries may have under
applicable Environmental Laws.
5.19. Intellectual Property.
---------------------
The Borrower and each of its Subsidiaries owns, or has the legal right to
use, all trademarks, tradenames, copyrights, technology, know-how and processes
(the "Intellectual Property") necessary for each of them to conduct its business
---------------------
as currently conducted except for those the failure to own or have such legal
right to use would not have or be reasonably expected to have a Material Adverse
Effect.
5.20. Solvency.
--------
The Borrower is and, after consummation of the transactions contemplated by
this Credit Agreement, will be Solvent.
53
<PAGE>
5.21. Investments.
-----------
All Investments of the Borrower and its Subsidiaries are either Permitted
Investments or otherwise permitted by the terms of this Credit Agreement.
5.22. No Financing of Corporate Takeovers.
-----------------------------------
No proceeds of the Loans hereunder have been or will be used to acquire,
directly or indirectly, any security in any transaction which is subject to
Sections 13 or 14 of the Securities Exchange Act of 1934, as amended (including,
without limitation, Sections 13(d) and 14(d) thereof) or to refinance any
Indebtedness used to acquire any such securities.
5.23. Disclosure.
----------
Neither this Credit Agreement nor any financial statements delivered to the
Lenders nor any other document, certificate or statement furnished to the
Lenders by or on behalf of the Borrower in connection with the transactions
contemplated hereby contains any untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements contained
therein or herein not misleading.
5.24. Licenses, etc.
--------------
The Borrower has obtained and holds in full force and effect, all
franchises, licenses, permits, certificates, authorizations, qualifications,
accreditations, easements, rights of way and other rights, consents and
approvals which are necessary for the operation of its business as presently
conducted except where the failure to do so would not have or would not be
reasonably expected to have a Material Adverse Effect.
5.25. No Burdensome Restrictions.
--------------------------
The Borrower is not a party to any agreement or instrument or subject to
any other obligation or any charter or corporate restriction or any provision of
any applicable law, rule or regulation which, individually or in the aggregate,
would have or be reasonably expected to have a Material Adverse Effect.
5.26. Brokers' Fees.
-------------
The Borrower does not have any obligation to any Person in respect of any
finder's, broker's, investment banking or other similar fee in connection with
any of the transactions contemplated under the Credit Documents.
5.27. Labor Matters.
-------------
Except as disclosed on Schedule 5.27, there are no collective bargaining
-------------
agreements or Multiemployer Plans covering the employees of the Borrower as of
the Effective Date and none of such Persons has suffered any strikes, walkouts,
work stoppages or other material labor difficulty within the last five years.
54
<PAGE>
SECTION 6.
AFFIRMATIVE COVENANTS
---------------------
The Borrower hereby covenants and agrees that so long as this Credit
Agreement is in effect and until the Loans and LOC Obligations, together with
interest and fees hereunder, have been paid in full and the Commitments and
Letters of Credit hereunder shall have terminated:
6.1. Information Covenants.
---------------------
The Borrower will furnish, or cause to be furnished, to the Administrative
Agent and each of the Lenders:
(a) Annual Financial Statements. As soon as available, and in any
---------------------------
event within 90 days after the close of each fiscal year of the Borrower, a
consolidated and consolidating balance sheet and income statement of the
Borrower and its Subsidiaries, as of the end of such fiscal year, together
with related consolidated and consolidating statements of operations and
retained earnings and of cash flows for such fiscal year, setting forth in
comparative form consolidated figures for the preceding fiscal year, all
such financial information described above to be in reasonable form and
detail and audited (with respect to consolidated financial statements only)
by independent certified public accountants of recognized national standing
reasonably acceptable to the Agents and whose opinion shall be to the
effect that such financial statements have been prepared in accordance with
GAAP (except for changes with which such accountants concur) and shall not
be limited as to the scope of the audit or qualified in any manner.
(b) Quarterly Financial Statements. As soon as available, and in
------------------------------
any event within 45 days after the close of each fiscal quarter of the
Borrower (other than the fourth fiscal quarter) a consolidated and
consolidating balance sheet and income statement of the Borrower and its
Subsidiaries, as of the end of such fiscal quarter, together with related
consolidated and consolidating statements of operations and retained
earnings and of cash flows for such fiscal quarter in each case setting
forth in comparative form consolidated and consolidating figures for the
corresponding period of the preceding fiscal year, all such financial
information described above to be in reasonable form and detail and
reasonably acceptable to the Agents, and accompanied by a certificate of
the chief financial officer of the Borrower to the effect that such
quarterly financial statements fairly present in all material respects the
financial condition of the Borrower and its Subsidiaries and have been
prepared in accordance with GAAP, subject to changes resulting from audit
and normal year-end audit adjustments.
(c) Officer's Certificate. At the time of delivery of the financial
---------------------
statements provided for in Sections 6.1(a) and 6.1(b) above, a certificate
of the chief financial officer of the Borrower substantially in the form of
Exhibit 6.1(c), (i) demonstrating compliance with the financial covenants
--------------
contained in Section 6.11 by calculation thereof as of the end of each such
fiscal period, (ii) stating whether any dividends were paid or redemptions
made during the most recent fiscal quarter and if any dividends were paid
or redemptions made showing compliance with the terms of Section 7.7, as
applicable (including
55
<PAGE>
calculations as necessary), (iii) stating whether any principal payments,
redemptions or deposits were made with respect to Subordinated Debt during
the most recent fiscal quarter and if any principal payments, redemptions
or deposits were made with respect to Subordinated Debt showing compliance
with the terms of Section 7.11, as applicable (including calculations as
necessary) and (iv) stating that no Default or Event of Default exists, or
if any Default or Event of Default does exist, specifying the nature and
extent thereof and what action the Borrower proposes to take with respect
thereto.
(d) Annual Business Plan and Budgets. Promptly upon completion
--------------------------------
thereof, any annual business plan and budget of the Borrower and its
Subsidiaries on a consolidated basis.
(e) Accountant's Certificate. Within the period for delivery of
------------------------
the annual financial statements provided in Section 6.1(a), a certificate
of the accountants conducting the annual audit stating that they have
reviewed this Credit Agreement and stating further whether, in the course
of their audit, they have become aware of any Default or Event of Default
and, if any such Default or Event of Default exists, specifying the nature
and extent thereof; provided that no such certificate shall be required if
the Borrower has used its best efforts to obtain same and such accountants
are unwilling to provide such a certificate and other independent certified
public accountants of recognized national standing are unwilling to provide
such a certificate.
(f) Auditor's Reports. Promptly upon receipt thereof, a copy of any
-----------------
"management letter" submitted by independent accountants to the
Borrower or any of its Subsidiaries in connection with any
annual, interim or special audit of the books of the Borrower
or any of its Subsidiaries.
(g) Reports. Promptly upon transmission or receipt thereof, (a)
-------
copies of any filings and registrations with, and reports to or from, the
Securities and Exchange Commission, or any successor agency, and copies of
all financial statements, proxy statements, notices and reports as the
Borrower or any of its Subsidiaries shall send to its shareholders
generally or to a holder of the Subordinated Debt in its capacity as such a
holder and (b) upon the written request of an Agent, all reports and
written information to and from the United States Environmental Protection
Agency, or any state or local agency responsible for environmental
matters, the United States Occupational Health and Safety Administration,
or any state or local agency responsible for health and safety matters, or
any successor agencies or authorities concerning environmental, health or
safety matters.
(h) Notices. Upon the Borrower obtaining knowledge thereof, the
-------
Borrower will give written notice to the Administrative Agent immediately
of (a) the occurrence of an event or condition consisting of a Default or
Event of Default, specifying the nature and existence thereof and what
action the Borrower proposes to take with respect thereto, and (b) the
occurrence of any of the following with respect to the Borrower or any of
its Subsidiaries (i) the pendency or commencement of any litigation,
arbitral or governmental proceeding against the Borrower or any of its
Subsidiaries which if adversely determined would have or would be
reasonably expected to have a Material Adverse Effect, or (ii) the
56
<PAGE>
institution of any proceedings against the Borrower or any of its
Subsidiaries with respect to, or the receipt of notice by such Person of
potential liability or responsibility for violation, or alleged violation
of any federal, state or local law, rule or regulation, including but not
limited to, Environmental Laws, the violation of which would have or would
be reasonably expected to have a Material Adverse Effect.
(i) ERISA. Upon the Borrower or any ERISA Affiliate obtaining
-----
knowledge thereof, Borrower will give written notice to the Administrative
Agent and each of the Lenders promptly (and in any event within five
Business Days) of: (i) any event or condition, including, but not limited
to, any Reportable Event, that constitutes, or might reasonably lead to, a
Termination Event; (ii) with respect to any Multiemployer Plan, the receipt
of notice as prescribed in ERISA or otherwise of any withdrawal liability
assessed against the Borrower or any of its ERISA Affiliates, or of a
determination that any Multiemployer Plan is in reorganization or insolvent
(both within the meaning of Title IV of ERISA); (iii) the failure to make
full payment on or before the due date (including extensions) thereof of
all amounts which the Borrower or any of its Subsidiaries or ERISA
Affiliates is required to contribute to each Plan pursuant to its terms and
as required to meet the minimum funding standard set forth in ERISA and the
Code with respect thereto; or (iv) any change in the funding status of any
Plan that could have a Material Adverse Effect; together, with a
description of any such event or condition or a copy of any such notice and
a statement by the principal financial officer of the Borrower briefly
setting forth the details regarding such event, condition, or notice, and
the action, if any, which has been or is being taken or is proposed to be
taken by the Borrower with respect thereto. Promptly upon request, the
Borrower shall furnish the Administrative Agent and each of the Lenders
with such additional information concerning any Plan as may be reasonably
requested, including, but not limited to, copies of each annual
report/return (Form 5500 series), as well as all schedules and attachments
thereto required to be filed with the Department of Labor and/or the
Internal Revenue Service pursuant to ERISA and the Code, respectively, for
each "plan year" (within the meaning of Section 3(39) of ERISA).
(j) Other Information. With reasonable promptness upon any such
-----------------
request, such other information regarding the business, properties or
financial condition of the Borrower and its Subsidiaries as an Agent may
reasonably request.
6.2. Preservation of Existence and Franchises.
----------------------------------------
The Borrower will do all things necessary to preserve and keep in full
force and effect its existence, rights, franchises and authority except (with
respect to rights, franchises and authority only) where the failure to do so
would not have or be reasonably expected to have a Material Adverse Effect.
57
<PAGE>
6.3. Books and Records.
-----------------
The Borrower will, and will cause each of its Subsidiaries to, keep
complete and accurate books and records of its transactions in accordance with
good accounting practices on the basis of GAAP (including the establishment and
maintenance of appropriate reserves).
6.4. Compliance with Law.
-------------------
The Borrower will, and will cause each of its Subsidiaries to, comply with
all laws, rules, regulations and orders, and all applicable restrictions imposed
by all Governmental Authorities, applicable to it and its property (including,
without limitation, Environmental Laws) if noncompliance with any such law,
rule, regulation, order or restriction would have or reasonably be expected to
have a Material Adverse Effect.
6.5. Payment of Taxes and Other Indebtedness.
---------------------------------------
The Borrower will, and will cause its Subsidiaries to, pay, settle or
discharge (a) all taxes, assessments and governmental charges or levies imposed
upon it, or upon its income or profits, or upon any of its properties, before
they shall become delinquent, (b) all lawful claims (including claims for labor,
materials and supplies) which, if unpaid, might give rise to a Lien upon any of
its properties, and (c) except as prohibited hereunder, all of its other
Indebtedness as it shall become due; provided, however, that the Borrower or its
Subsidiaries shall not be required to pay any such tax, assessment, charge,
levy, claim or Indebtedness which (x) is being contested in good faith by
appropriate proceedings and as to which adequate reserves therefor have been
established in accordance with GAAP, unless the failure to make any such payment
(i) would give rise to an immediate right to foreclose on a Lien securing such
amounts or (ii) would have a Material Adverse Effect or (y) if the aggregate
amount of such unpaid tax, assessment, charge, levy, claim or Indebtedness does
not exceed $10,000,000 (taking into account applicable insurance or indemnities
to the extent the provider of such insurance or indemnity has the financial
ability to support its obligations with respect thereto and is not disputing
same).
6.6. Insurance.
---------
The Borrower will, and will cause each of its Subsidiaries to, at all times
maintain in full force and effect insurance (including worker's compensation
insurance, liability insurance, casualty insurance and business interruption
insurance) in such amounts, covering such risks and liabilities and with such
deductibles or self-insurance retentions as are in accordance with normal
industry practice.
6.7. Maintenance of Property.
-----------------------
The Borrower will, and will cause its Subsidiaries to, maintain and
preserve its properties and equipment in good repair, working order and
condition, normal wear and tear excepted, and will make, or cause to be made, in
such properties and equipment from time to time all repairs, renewals,
replacements, extensions, additions, betterments and improvements thereto as may
be needed or proper, to the extent and in the manner customary for companies in
similar businesses.
58
<PAGE>
6.8. Performance of Obligations.
--------------------------
The Borrower will, and will cause its Subsidiaries to, perform in all
respects all of its obligations under the terms of all agreements, indentures,
mortgages, security agreements or other debt instruments to which it is a party
or by which it is bound unless the failure to do so will not have or be
reasonably expected to have a material adverse effect on the ability of the
Borrower to perform its obligations under this Credit Agreement or the other
Credit Documents.
6.9. Use of Proceeds.
---------------
The Borrower will use the proceeds of the Loans solely (a) to refinance all
amounts outstanding under the Prior Credit Agreement, (b) to provide working
capital and for general corporate purposes, (c) to finance Permitted
Acquisitions and (d) to redeem or defease amounts owing under the existing
Subordinated Debt so long as after giving pro forma effect to any such
redemption (i) the Leverage Ratio as at the end of the fiscal quarter
immediately preceding the date of such redemption is less than 3.0 to 1.0 and
(ii) there shall be at least $15,000,000 of availability existing under the
Revolving Committed Amount. The Borrower will use the Letters of Credit solely
for the purposes set forth in Section 2.2(a).
6.10. Audits/Inspections.
------------------
Upon reasonable notice and during normal business hours (but absent the
existence of an Event of Default or other reasonable cause, not more than twice
during any fiscal year), the Borrower will, and will cause its Subsidiaries to,
permit, subject to the provisions of Section 10.17, representatives appointed by
an Agent, including, without limitation, independent accountants, agents,
attorneys and appraisers to visit and inspect the Borrower's (or its
Subsidiary's) property, including its books and records, its accounts receivable
and inventory, its facilities and its other business assets, and to make
photocopies or photographs thereof and to write down and record any information
such representative obtains and shall permit an Agent or its representatives to
investigate and verify the accuracy of information provided to the Lenders and
to discuss all such matters with the officers, employees and representatives of
the Borrower and its Subsidiaries.
6.11. Financial Covenants.
-------------------
(a) Leverage Ratio. The Leverage Ratio, as of the end of each
--------------
fiscal quarter, shall be less than or equal to:
(i) From the Effective Date to and including June 30, 1999, 4.0
to 1.0; and
(ii) From July 1, 1999 and thereafter, 3.5 to 1.0.
(b) Ownership of Assets. At all times, the combined sum of total
-------------------
assets (other than the capital stock of the Subsidiaries of the Borrower)
owned by the Borrower shall be greater than or equal to fifty percent (50%)
of the total assets owned by the Borrower and its Subsidiaries on a
consolidated basis, in each case calculated in accordance with GAAP.
59
<PAGE>
SECTION 7.
NEGATIVE COVENANTS
------------------
The Borrower hereby covenants and agrees that so long as this Credit
Agreement is in effect and until the Loans and LOC Obligations, together with
interest and fees hereunder, have been paid in full and the Commitments and
Letters of Credit hereunder shall have terminated:
7.1. Indebtedness.
------------
The Borrower will not, nor will it permit any of its Subsidiaries to,
contract, create, incur, assume or permit to exist any Indebtedness, except:
(a) Indebtedness arising under this Credit Agreement and the other
Credit Documents;
(b) the Subordinated Debt;
(c) (i) Indebtedness existing as of the Closing Date (other than the
Subordinated Debt) as referenced in Section 5.10, (ii) Indebtedness
incurred under Section 7.1(j) and (iii) Indebtedness incurred under Section
7.1(k) (in each case including renewals, refinancings or extensions of such
Indebtedness in a principal amount not in excess of that outstanding as of
the date of such renewal, refinancing or extension); provided that with
--------
respect to the Indebtedness referenced in (iii) (A) such Indebtedness
remains unsecured and (B) the terms and conditions of such Indebtedness
remain not more favorable to the creditors providing such Indebtedness than
the terms and conditions of this Credit Agreement and the other Credit
Documents (including without limitation the maturity date of such
Indebtedness which must occur on a date later than the Revolving Loan
Maturity Date);
(d) Indebtedness in respect of current accounts payable and accrued
expenses incurred in the ordinary course of business including, to the
extent not current, accounts payable and accrued expenses that are subject
to bona fide dispute;
(e) Indebtedness owing from (i) a Subsidiary of the Borrower to the
Borrower or another Subsidiary of the Borrower and (ii) the Borrower to any
Subsidiary of the Borrower;
(f) purchase money Indebtedness (including Capital Leases) or TROLS
incurred by the Borrower or any of its Subsidiaries to finance the purchase
of fixed assets; provided that (i) the total of all such Indebtedness for
--------
all such Persons taken together shall not exceed an aggregate principal
amount of $5,000,000 at any one time outstanding (including any such
Indebtedness referred to in subsection (c) above); (ii) such Indebtedness
when incurred shall not exceed the purchase price of the asset(s) financed;
and (iii) no such Indebtedness shall be refinanced for a principal amount
in excess of the principal balance outstanding thereon at the time of such
refinancing;
60
<PAGE>
(g) obligations of the Borrower or its Subsidiaries evidenced by
interest rate protection agreements, foreign exchange contracts, currency
swap agreements or other similar agreements or arrangements designed to
protect the Borrower or any of its Subsidiaries against fluctuations in
currency values which the Borrower or any of its Subsidiaries may in their
respective prudent judgment enter into so long as such interest rate
protection agreements, foreign exchange contracts, currency swap agreements
or other agreements or arrangements were not entered into for investment or
speculative reasons;
(h) Indebtedness in respect of performance, surety or appeal bonds
in the ordinary course of business;
(i) 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 Borrower or any of its Subsidiaries
pursuant to such agreements), in any case incurred in connection with the
disposition of any business, assets or Subsidiary of the Borrower, to the
extent otherwise permitted under this Credit Agreement, (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 Borrower or any of its Subsidiaries in connection
with such disposition;
(j) Indebtedness of the Borrower and its Subsidiaries; provided that
(i) such Indebtedness is unsecured and (ii) after giving effect to the
incurrence of such Indebtedness the Borrower remains in compliance with the
financial covenants contained in Section 6.11 hereof; and
(k) Indebtedness (which may or may not be subordinated to the
repayment of the Loans) incurred by the Borrower for the purpose of
redeeming or defeasing all or part of the Subordinated Debt; provided that
(i) such Indebtedness is unsecured, (ii) after giving pro forma effect to
the incurrence of such Indebtedness the Leverage Ratio, as of the end of
the fiscal quarter immediately preceding the date of such incurrence, is
less than 3.0 to 1.0 and (iii) the terms and conditions of such additional
Indebtedness are not more favorable to the creditors providing such
Indebtedness than the terms and conditions of this Credit Agreement and the
other Credit Documents (including without limitation the maturity date of
such Indebtedness which must occur on a date later than the Revolving Loan
Maturity Date).
7.2. Liens.
-----
The Borrower will not, nor will it permit its Subsidiaries to, contract,
create, incur, assume or permit to exist any Lien with respect to any of its
property or assets of any kind (whether real or personal, tangible or
intangible), whether now owned or after acquired, except for Permitted Liens.
61
<PAGE>
7.3. Nature of Business.
------------------
The Borrower will not, nor will it permit its Subsidiaries to, alter the
character of its business from that, or substantially similar to that, conducted
as of the Closing Date or engage in any business other than the business
conducted as of the Closing Date with reasonable extensions and expansions of
such business.
7.4. Consolidation and Merger.
------------------------
The Borrower will not enter into any transaction of merger or consolidation
or liquidate, wind up or dissolve itself (or suffer any liquidation or
dissolution); provided that notwithstanding the foregoing provisions of this
Section 7.4, any Subsidiary of the Borrower may be merged or consolidated with
or into the Borrower if (a) the Borrower shall be the continuing or surviving
corporation, (b) the Administrative Agent is given prior written notice of such
action and (c) after giving effect thereto no Default or Event of Default
exists.
7.5. Sale or Lease of Assets.
-----------------------
The Borrower will not, nor will it permit any of its Subsidiaries to,
convey, sell, lease, transfer or otherwise dispose of, in one transaction or a
series of transactions, all or any part of its business or assets whether now
owned or hereafter acquired, including, without limitation, inventory,
receivables, leasehold interests, equipment and securities other than (a) any
inventory or other assets sold, leased, licensed or disposed of (including
through commercial accommodations and going out of business sales) in the
ordinary course of business, (b) any assets replaced within 60 days after the
disposition thereof with assets to be used in the business of the Borrower and
its Subsidiaries having a value in the aggregate at least equal to the value of
the assets disposed of, (c) obsolete, idle or worn-out assets no longer used or
useful in its business, (d) the sale, lease or transfer or other disposal by the
Borrower of any of its assets to a Subsidiary, as long as after giving effect to
such transfer the Borrower is still in compliance with Section 6.11(b), (e) the
sale or other dispositions of Cash Equivalents for fair market value, (f) the
issuance of capital stock, (g) the transfer of assets which constitute a
Permitted Investment, (h) other sales of assets not to exceed $5,000,000, in the
aggregate, during any fiscal year or (i) other sales of assets, in addition to
those permitted by subsection (h) above, if (i) the transfer is for fair market
value, (ii) at the time of transfer no Default or Event of Default exists, (iii)
as a result of such transfer, no Material Adverse Effect would occur or be
reasonably likely to occur, (iv) the proceeds from such transfer are, within 12
months from the date of such transfer, reinvested in a business of a type
similar to that which the Borrower and its Subsidiaries are already engaged and
(v) such transfers do not exceed, in the aggregate, $25,000,000, during any
fiscal year.
7.6. Advances, Investments and Loans.
-------------------------------
The Borrower will not, nor will it permit any of its Subsidiaries to, make
any Investments except for Permitted Investments.
62
<PAGE>
7.7. Restricted Payments.
-------------------
The Borrower will not, nor will it permit any of its Subsidiaries to,
directly or indirectly, (a) declare or pay any dividends (except for
distributions by the Borrower of its capital stock which does not by its terms
mature or become redeemable at the option of the holder thereof) or make any
other distribution upon any shares of its capital stock of any class or (b)
purchase, redeem or otherwise acquire or retire or make any provisions for
redemption, acquisition or retirement of any shares of its capital stock of any
class or any warrants or options to purchase any such shares other than a
Permitted Investment; provided that (i) any Subsidiary of the Borrower may pay
dividends to its parent or the Borrower, (ii) the Borrower may (A) repurchase
outstanding shares of capital stock of the Borrower following the death,
disability or termination of employment of a member of Management or (B) fund
amounts payable 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)
above) not to exceed $5,000,000 in any fiscal year (provided that any unused
amount may be carried over to the next succeeding fiscal year) and (iii) an
amount up to $50,000,000 plus 50% of Net Income (excluding any extraordinary
----
items) earned subsequent to March 31, 1997 plus 50% of any Equity Issuance
----
occurring subsequent to the Closing Date may be used to pay dividends or redeem
stock so long as no Default or Event of Default exists and is continuing, or is
caused as a result thereof.
7.8. Transactions with Affiliates.
----------------------------
Except for (a) loans or advances to employees and officers of the Borrower
or any of its Subsidiaries in the ordinary course of business to provide for the
payment of reasonable expenses incurred by each such Persons in the performance
of their responsibilities to the Borrower or such Subsidiary or in connection
with any relocation (to the extent otherwise permitted by this Credit
Agreement), (b) fees, compensation or employee benefit arrangements paid to and
indemnity provided on behalf of directors, officers or employees of the Borrower
or any of its Subsidiaries in the ordinary course of business, (c) any
employment agreement (including customary benefits thereunder) that is entered
into in the ordinary course of business, (d) any dividend or other payment that
is permitted by Section 7.7 and (e) any transactions between or among the
Borrower and any of its Subsidiaries (to the extent otherwise permitted by this
Credit Agreement), the Borrower will not, nor will it permit its Subsidiaries
to, enter into any transaction or series of transactions, whether or not in the
ordinary course of business, with any officer, director, shareholder, Subsidiary
or Affiliate other than on terms and conditions substantially as favorable as
would be obtainable in a comparable arm's-length transaction with a Person other
than an officer, director, shareholder, Subsidiary or Affiliate.
7.9. Fiscal Year; Organizational Documents.
-------------------------------------
The Borrower will not, nor will it permit any of its Subsidiaries to, (a)
change its fiscal year without prior written notice to the Administrative Agent
(provided that no such change may occur if such change materially affects the
Lenders ability to read and interpret the financial statements delivered
pursuant to Section 6.1 or calculate the financial covenants in Section 6.11
63
<PAGE>
or (b) change its articles or certificate of incorporation or its bylaws if such
change would have or be reasonably expected to have a Material Adverse Effect.
7.10. Subordinated Debt.
-----------------
The Borrower will not (a) make or offer to make any principal payments with
respect to the Subordinated Debt, (b) redeem or offer to redeem any of the
Subordinated Debt (other than as permitted pursuant to the terms of Section 6.9
and Section 7.1(k)), or (c) deposit any funds intended to discharge or defease
any or all of the Subordinated Debt. The Subordinated Debt may not be amended
or modified in any manner that would affect the Lenders without the prior
written consent of the Required Lenders.
7.11. Limitations.
-----------
The Borrower will not, nor will it permit any of its Subsidiaries to,
directly or indirectly, create or otherwise cause, incur, assume, suffer or
permit to exist or become effective any consensual encumbrance or restriction of
any kind on the ability of any such Person to (a) pay dividends or make any
other distribution on any of such Person's capital stock, (b) pay any
Indebtedness owed to the Borrower, (c) make loans or advances to the Borrower or
(d) transfer any of its property to the Borrower, except for encumbrances or
restrictions existing under or by reason of (i) customary non-assignment or net
worth provisions in any lease governing a leasehold interest or customary
provisions in documents evidencing the transactions permitted by Section 7.1(f),
(ii) any agreement or other instrument of a Person existing at the time it
becomes a Subsidiary of the Borrower; provided that such encumbrance or
--------
restriction is not applicable to any other Person, or any property of any other
Person, other than such Person becoming a Subsidiary of the Borrower and was not
entered into in contemplation of such Person becoming a Subsidiary of the
Borrower, (iii) this Credit Agreement and the other Credit Documents, (iv) the
Subordinated Debt, (v) Indebtedness permitted by Section 7.1(c)(i) or, to the
extent it will not impair the obligations of the Borrower under the Credit
Documents, Indebtedness of the Subsidiaries of the Borrower permitted by Section
7.1(j), (vi) Requirements of Law and (vii) customary restrictions with respect
to a Subsidiary of the Borrower 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.
7.12. Sale Leasebacks.
---------------
The Borrower will not, nor will it permit any of its Subsidiaries to,
directly or indirectly become or remain liable as lessee or as guarantor or
other surety with respect to any lease of any property (whether real or personal
or mixed), whether now owned or hereafter acquired, (a) which the Borrower or
Subsidiary has sold or transferred or is to sell or transfer to any other Person
or (b) which the Borrower or Subsidiary intends to use for substantially the
same purpose as any other property which has been sold or is to be sold or
transferred by the Borrower or Subsidiary to any Person in connection with such
lease; provided, however, that the Borrower may enter into such transactions
with respect to personal property, in an aggregate amount of up to $30,000,000
in sales proceeds during the term of this Credit Agreement, if (i) after giving
pro forma effect to any such transaction the Borrower shall be in compliance
with all other provisions
64
<PAGE>
of this Credit Agreement, including Section 7.1 and Section 7.2 and (ii) the
gross cash proceeds of any such transaction are at least equal to the fair
market value of such property (as determined by the Board of Directors whose
determination shall be conclusive if made in good faith).
SECTION 8.
EVENTS OF DEFAULT
-----------------
8.1. Events of Default.
-----------------
An Event of Default shall exist upon the occurrence of any of the following
specified events (each an "Event of Default"):
----------------
(a) Payment. The Borrower shall:
-------
(i) default in the payment when due of any principal of any of the
Loans or of any reimbursement obligation arising from drawings under
Letters of Credit; or
(ii) default, and such default shall continue for three or more
Business Days, in the payment when due of any interest on the Loans,
or on any reimbursement obligations arising from drawings under
Letters of Credit or of any fees or other amounts owing hereunder,
under any of the other Credit Documents or in connection herewith.
(b) Representations. Any representation, warranty or statement
---------------
made or deemed to be made by the Borrower herein, in any of the other Credit
Documents, or in any statement or certificate delivered or required to be
delivered pursuant hereto or thereto shall prove untrue in any material respect
on the date as of which it was made or deemed to have been made.
(c) Covenants. The Borrower shall:
---------
(i) default in the due performance or observance of any term,
covenant or agreement contained in Sections 6.2, 6.4, 6.6, 6.9,
6.11(a), 6.11(b), 7.3, 7.4, 7.7 or 7.10 or
(ii) default in the due performance or observance by it of any
term, covenant or agreement contained in Sections 6.1, 6.5, 6.8, 7.1,
7.2, 7.5, 7.6, 7.8, 7.9, 7.11 or 7.12 and such default shall continue
unremedied for a period of five Business Days after the earlier of an
executive officer of the Borrower becoming aware of such default or
notice thereof given by an Agent; or
(iii) default in the due performance or observance by it of
any term, covenant or agreement (other than those referred to in
subsections (a), (b) or (c)(i) or (ii) of this Section 8.1) contained
in this Credit Agreement and such default shall continue unremedied
for a period of at least 30 days after the earlier of an
65
<PAGE>
executive officer of the Borrower becoming aware of such default or
notice thereof given by an Agent.
(d) Other Credit Documents. (i) The Borrower shall default in the
----------------------
due performance or observance of any term, covenant or agreement in any of
the other Credit Documents and such default shall continue unremedied for a
period of at least 30 days after the earlier of an executive officer of the
Borrower becoming aware of such default or notice thereof given by an
Agent, (ii) except pursuant to the terms thereof, any Credit Document shall
fail to be in full force and effect or the Borrower shall so assert or
(iii) except pursuant to the terms thereof, any Credit Document shall fail
to give the Agents and/or the Lenders the security interests, liens,
rights, powers and privileges purported to be created thereby.
(e) Bankruptcy, etc. The occurrence of any of the following with
---------------
respect to the Borrower or any of its Subsidiaries (other than
Insignificant Subsidiaries): (i) a court or governmental agency having
jurisdiction in the premises shall enter a decree or order for relief in
respect of the Borrower or any of its Subsidiaries (other than
Insignificant Subsidiaries) in an involuntary case under any applicable
bankruptcy, insolvency or other similar law now or hereafter in effect, or
appoint a receiver, liquidator, assignee, custodian, trustee, sequestrator
or similar official of the Borrower or any of its Subsidiaries (other than
Insignificant Subsidiaries) or for any substantial part of its property or
ordering the winding up or liquidation of its affairs; or (ii) an
involuntary case under any applicable bankruptcy, insolvency or other
similar law now or hereafter in effect is commenced against the Borrower or
any of its Subsidiaries (other than Insignificant Subsidiaries) and such
petition remains unstayed and in effect for a period of 60 consecutive
days; or (iii) the Borrower or any of its Subsidiaries (other than
Insignificant Subsidiaries) shall commence a voluntary case under any
applicable bankruptcy, insolvency or other similar law now or hereafter in
effect, or consent to the entry of an order for relief in an involuntary
case under any such law, or consent to the appointment or taking possession
by a receiver, liquidator, assignee, custodian, trustee, sequestrator or
similar official of such Person or any substantial part of its property or
make any general assignment for the benefit of creditors; or (iv) the
Borrower or any of its Subsidiaries (other than Insignificant Subsidiaries)
shall admit in writing its inability to pay its debts generally as they
become due or any action shall be taken by such Person in furtherance of
any of the aforesaid purposes.
(f) Defaults under Other Agreements. With respect to any
-------------------------------
Indebtedness (other than Indebtedness outstanding under this Credit
Agreement) of the Borrower or any of its Subsidiaries in an aggregate
principal amount in excess of $5,000,000, including, without limitation,
the Subordinated Debt (i) the Borrower or one of its Subsidiaries shall (A)
default in any payment (beyond the applicable grace period with respect
thereto, if any) with respect to any such Indebtedness, or (B) default
(after giving effect to any applicable grace period) in the observance or
performance relating to such Indebtedness or contained in any instrument or
agreement evidencing, securing or relating thereto, or any other event or
condition shall occur or condition exist, the effect of which default or
other event or condition is to cause, or permit, the holder or holders of
such Indebtedness (or
66
<PAGE>
trustee or agent on behalf of such holders) to cause (determined without
regard to whether any notice or lapse of time is required) any such
Indebtedness to become due prior to its stated maturity; or (ii) any such
Indebtedness shall be declared due and payable, or required to be prepaid
other than by a regularly scheduled required prepayment or by a prepayment
from the proceeds of an Equity Issuance to the holders of Subordinated
Debt, prior to the stated maturity thereof.
(g) Judgments. One or more judgments, orders, or decrees shall be
---------
entered against any one or more of the Borrower or any of its Subsidiaries
involving a liability of $5,000,000 or more, in the aggregate, (to the
extent not paid or covered by insurance provided by a carrier who has
acknowledged coverage) and such judgments, orders or decrees (i) are the
subject of any enforcement proceeding commenced by any creditor or (ii)
shall continue unsatisfied, undischarged and unstayed for a period ending
on the first to occur of (A) the last day on which such judgment, order or
decree becomes final and unappealable or (B) 60 days.
(h) ERISA. The occurrence of any of the following events or
-----
conditions if such occurrence would cause or be reasonably expected to
cause a Material Adverse Effect: (A) any "accumulated funding deficiency,"
as such term is defined in Section 302 of ERISA and Section 412 of the
Code, whether or not waived, shall exist with respect to any Plan, or any
lien shall arise on the assets of the Borrower or any of its Subsidiaries
or any ERISA Affiliate in favor of the PBGC or a Plan; (B) a Termination
Event shall occur with respect to a Single Employer Plan, which is, in the
reasonable opinion of the Agent, likely to result in the termination of
such Plan for purposes of Title IV of ERISA; (C) a Termination Event shall
occur with respect to a Multiemployer Plan or Multiple Employer Plan, which
is, in the reasonable opinion of the Agent, likely to result in (i) the
termination of such Plan for purposes of Title IV of ERISA, or (ii) the
Borrower or any of its Subsidiaries or any ERISA Affiliate incurring any
liability in connection with a withdrawal from, reorganization of (within
the meaning of Section 4241 of ERISA), or insolvency (within the meaning of
Section 4245 of ERISA) of such Plan; or (D) any prohibited transaction
(within the meaning of Section 406 of ERISA or Section 4975 of the Code) or
breach of fiduciary responsibility shall occur which may subject the
Borrower or any of its Subsidiaries or any ERISA Affiliate to any liability
under Sections 406, 409, 502(i), or 502(l) of ERISA or Section 4975 of the
Code, or under any agreement or other instrument pursuant to which the
Borrower or any of its Subsidiaries or any ERISA Affiliate has agreed or is
required to indemnify any person against any such liability.
(i) Ownership. There shall occur a Change of Control.
---------
(j) Subordinated Debt. (i) Any Governmental Authority with
-----------------
applicable jurisdiction determines that the Lenders are not holders of
Designated Senior Indebtedness (as defined in the Indenture) or (ii) the
subordination provisions creating the Subordinated Debt shall, in whole or
in part, terminate, cease to be effective or cease to be legally valid,
binding and enforceable as to any holder of the Subordinated Debt.
67
<PAGE>
8.2. Acceleration; Remedies.
----------------------
Upon the occurrence of an Event of Default, and at any time thereafter
unless and until such Event of Default has been waived in writing by the
Required Lenders (or the Lenders as may be required hereunder), the
Administrative Agent shall, upon the request and direction of the Required
Lenders, by written notice to the Borrower, take any of the following actions
without prejudice to the rights of the Agents or any Lender to enforce its
claims against the Borrower except as otherwise specifically provided for
herein:
(a) Termination of Commitments. Declare the Commitments terminated
--------------------------
whereupon the Commitments shall be immediately terminated.
(b) Acceleration of Loans. Declare the unpaid principal of and any
---------------------
accrued interest in respect of all Loans, any reimbursement obligations
arising from drawings under Letters of Credit and any and all other
indebtedness or obligations of any and every kind owing by the Borrower to
any of the Lenders hereunder to be due whereupon the same shall be
immediately due and payable without presentment, demand, protest or other
notice of any kind, all of which are hereby waived by the Borrower.
(c) Cash Collateral. Direct the Borrower to pay (and the Borrower
---------------
agrees that upon receipt of such notice, or upon the occurrence of an Event
of Default under Section 8.1(e), they will immediately pay) to the
Administrative Agent additional cash, to be held by the Administrative
Agent, for the benefit of the Lenders, in a cash collateral account as
additional security for the LOC Obligations in respect of subsequent
drawings under all then outstanding Letters of Credit in an amount equal to
the maximum aggregate amount which may be drawn under all Letters of
Credits then outstanding.
(d) Enforcement of Rights. Enforce any and all rights and interests
---------------------
created and existing under the Credit Documents, including, without
limitation, all rights of set-off.
Notwithstanding the foregoing, if an Event of Default specified in Section
8.1(e) shall occur, then the Commitments shall automatically terminate and all
Loans, all reimbursement obligations under Letters of Credit, all accrued
interest in respect thereof, all accrued and unpaid fees and other indebtedness
or obligations owing to the Lenders hereunder shall immediately become due and
payable without the giving of any notice or other action by the Agents or the
Lenders, which notice or other action is expressly waived by the Borrower.
Notwithstanding the fact that enforcement powers reside primarily with the
Administrative Agent, each Lender has, to the extent permitted by law, a
separate right of payment and shall be considered a separate "creditor" holding
a separate "claim" within the meaning of Section 101(5) of the Bankruptcy Code
or any other insolvency statute.
68
<PAGE>
SECTION 9
AGENCY PROVISIONS
-----------------
9.1. Appointment.
-----------
Each Lender hereby designates and appoints NationsBank, N.A. as
Administrative Agent and The Chase Manhattan Bank as Documentation Agent of such
Lender to act as specified herein and the other Credit Documents, and each such
Lender hereby authorizes the Agents, as the agents for such Lender, to take such
action on its behalf under the provisions of this Credit Agreement and the other
Credit Documents and to exercise such powers and perform such duties as are
expressly delegated by the terms hereof and of the other Credit Documents,
together with such other powers as are reasonably incidental thereto.
Notwithstanding any provision to the contrary elsewhere herein and in the other
Credit Documents, the Agents shall not have any duties or responsibilities,
except those expressly set forth herein and therein, or any fiduciary
relationship with any Lender, and no implied covenants, functions,
responsibilities, duties, obligations or liabilities shall be read into this
Credit Agreement or any of the other Credit Documents, or shall otherwise exist
against the Agents. The provisions of this Section (other than Section 9.9) are
solely for the benefit of the Agents and the Lenders and the Borrower shall not
have any rights as a third party beneficiary of the provisions hereof (other
than Section 9.9). In performing its functions and duties under this Credit
Agreement and the other Credit Documents, each Agent shall act solely as an
agent of the Lenders and does not assume and shall not be deemed to have assumed
any obligation or relationship of agency or trust with or for the Borrower.
9.2. Delegation of Duties.
--------------------
An Agent may execute any of its duties hereunder or under the other Credit
Documents by or through agents or attorneys-in-fact and shall be entitled to
advice of counsel concerning all matters pertaining to such duties. An Agent
shall not be responsible for the negligence or misconduct of any agents or
attorneys-in-fact selected by it with reasonable care.
9.3. Exculpatory Provisions.
----------------------
Neither the Agents nor any of their officers, directors, employees, agents,
attorneys-in-fact or affiliates shall be (a) liable for any action lawfully
taken or omitted to be taken by it or such Person under or in connection
herewith or in connection with any of the other Credit Documents (except for its
or such Person's own gross negligence or willful misconduct) or (b) responsible
in any manner to any of the Lenders for any recitals, statements,
representations or warranties made by the Borrower contained herein or in any of
the other Credit Documents or in any certificate, report, document, financial
statement or other written or oral statement referred to or provided for in, or
received by an Agent under or in connection herewith or in connection with the
other Credit Documents, or enforceability or sufficiency therefor of any of the
other Credit Documents, or for any failure of the Borrower to perform its
obligations hereunder or thereunder. The Agents shall not be responsible to any
Lender for the effectiveness, genuineness, validity, enforceability,
collectibility or sufficiency of this Credit Agreement, or any of the other
Credit Documents or for any representations, warranties, recitals or statements
made herein or therein or made by the Borrower in any written or oral statement
or in any financial or other statements, instruments,
69
<PAGE>
reports, certificates or any other documents in connection herewith or therewith
furnished or made by an Agent to the Lenders or by the Borrower to the Agents or
any Lender or be required to ascertain or inquire as to the performance or
observance of any of the terms, conditions, provisions, covenants or agreements
contained herein or therein or as to the use of the proceeds of the Loans or the
use of the Letters of Credit or of the existence or possible existence of any
Default or Event of Default or to inspect the properties, books or records of
the Borrower. The Agents are not trustees for the Lenders and owe no fiduciary
duty to the Lenders.
9.4. Reliance on Communications.
--------------------------
The Agents shall be entitled to rely, and shall be fully protected in
relying, upon any note, writing, resolution, notice, consent, certificate,
affidavit, letter, cablegram, telegram, telecopy, telex or teletype message,
statement, order or other document or conversation believed by it to be genuine
and correct and to have been signed, sent or made by the proper Person or
Persons and upon advice and statements of legal counsel (including, without
limitation, counsel to the Borrower, independent accountants and other experts
selected by the Agents with reasonable care). The Agents may deem and treat the
Lenders as the owner of its interests hereunder for all purposes unless a
written notice of assignment, negotiation or transfer thereof shall have been
filed with the Administrative Agent in accordance with Section 10.3(b). The
Agents shall be fully justified in failing or refusing to take any action under
this Credit Agreement or under any of the other Credit Documents unless it shall
first receive such advice or concurrence of the Required Lenders as it deems
appropriate or it shall first be indemnified to its satisfaction by the Lenders
against any and all liability and expense which may be incurred by it by reason
of taking or continuing to take any such action. The Agents shall in all cases
be fully protected in acting, or in refraining from acting, hereunder or under
any of the other Credit Documents in accordance with a request of the Required
Lenders (or to the extent specifically provided in Section 10.6, all the
Lenders) and such request and any action taken or failure to act pursuant
thereto shall be binding upon all the Lenders (including their successors and
assigns).
9.5. Notice of Default.
-----------------
An Agent shall not be deemed to have knowledge or notice of the occurrence
of any Default or Event of Default hereunder unless such Agent has received
notice from a Lender or the Borrower referring to the Credit Document,
describing such Default or Event of Default and stating that such notice is a
"notice of default." In the event that the Administrative Agent receives such a
notice, the Administrative Agent shall give prompt notice thereof to the
Lenders. The Administrative Agent shall take such action with respect to such
Default or Event of Default as shall be reasonably directed by the Required
Lenders.
9.6. Non-Reliance on Agents and Other Lenders.
----------------------------------------
Each Lender expressly acknowledges that neither the Agents nor any of its
officers, directors, employees, agents, attorneys-in-fact or affiliates has made
any representations or warranties to it and that no act by the Agents or any
affiliate thereof hereinafter taken, including any review of the affairs of the
Borrower, shall be deemed to constitute any representation or warranty by the
Agents to any Lender. Each Lender represents to the Agents that it has,
70
<PAGE>
independently and without reliance upon the Agents or any other Lender, and
based on such documents and information as it has deemed appropriate, made its
own appraisal of and investigation into the business, assets, operations,
property, financial and other conditions, prospects and creditworthiness of the
Borrower and made its own decision to make its Loans hereunder and enter into
this Credit Agreement. Each Lender also represents that it will, independently
and without reliance upon the Agents or any other Lender, and based on such
documents and information as it shall deem appropriate at the time, continue to
make its own credit analysis, appraisals and decisions in taking or not taking
action under this Credit Agreement, and to make such investigation as it deems
necessary to inform itself as to the business, assets, operations, property,
financial and other conditions, prospects and creditworthiness of the Borrower.
Except for notices, reports and other documents expressly required to be
furnished to the Lenders by the Administrative Agent hereunder, the Agents shall
not have any duty or responsibility to provide any Lender with any credit or
other information concerning the business, operations, assets, property,
financial or other conditions, prospects or creditworthiness of the Borrower
which may come into the possession of the Agents or any of its officers,
directors, employees, agents, attorneys-in-fact or affiliates.
9.7. Indemnification.
---------------
The Lenders agree to indemnify each Agent in its capacity as such (to the
extent not reimbursed by the Borrower and without limiting the obligation of the
Borrower to do so), ratably according to their respective Commitments (or if the
Commitments have expired or been terminated, in accordance with the respective
principal amounts of outstanding Loans and Participation Interest of the
Lenders), from and against any and all liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses or disbursements
of any kind whatsoever which may at any time (including without limitation at
any time following payment in full of all obligations of the Borrower hereunder
and under the other Credit Documents) be imposed on, incurred by or asserted
against an Agent in its capacity as such in any way relating to or arising out
of this Credit Agreement or the other Credit Documents or any documents
contemplated by or referred to herein or therein or the transactions
contemplated hereby or thereby or any action taken or omitted by an Agent under
or in connection with any of the foregoing; provided that no Lender shall be
--------
liable for the payment of any portion of such liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses or disbursements
resulting from the gross negligence or willful misconduct of an Agent. If any
indemnity furnished to an Agent for any purpose shall, in the opinion of such
Agent, be insufficient or become impaired, such Agent may call for additional
indemnity and cease, or not commence, to do the acts indemnified against until
such additional indemnity is furnished; provided that no Agent shall be
indemnified for any event caused by its gross negligence or willful misconduct.
The agreements in this Section shall survive the payment of the Loans, LOC
Obligations and all other obligations and amounts payable hereunder and under
the other Credit Documents.
9.8. Agents in Their Individual Capacity.
-----------------------------------
Each Agent and its affiliates may make loans to, accept deposits from and
generally engage in any kind of business with the Borrower as though such Agent
were not an Agent
71
<PAGE>
hereunder. With respect to the Loans made and Letters of Credit issued and all
obligations owing to it, an Agent shall have the same rights and powers under
this Credit Agreement as any Lender and may exercise the same as though they
were not an Agent, and the terms "Lender" and "Lenders" shall include each Agent
in its individual capacity.
9.9. Successor Agent.
---------------
Any Agent may, at any time, resign upon 20 days written notice to the
Lenders. Upon any such resignation, the Required Lenders shall have the right
to appoint a successor Agent. If no successor Agent shall have been so
appointed by the Required Lenders, and shall have accepted such appointment,
within 45 days after the notice of resignation, then the retiring Agent shall
select a successor Agent provided such successor is a Lender hereunder or a
commercial bank organized under the laws of the United States of America or of
any State thereof and has a combined capital and surplus of at least
$400,000,000. Upon the acceptance of any appointment as an Agent hereunder by
a successor, such successor Agent shall thereupon succeed to and become vested
with all the rights, powers, privileges and duties of the retiring Agent, and
the retiring Agent shall be discharged from its duties and obligations as an
Agent, as appropriate, under this Credit Agreement and the other Credit
Documents and the provisions of this Section 9.9 shall inure to its benefit as
to any actions taken or omitted to be taken by it while it was an Agent under
this Credit Agreement. There shall at all times be a Person servicing as
Administrative Agent hereunder and, so long as no Default or Event of Default
shall have occurred and be continuing, the appointment of any new Administrative
Agent shall require the consent of the Borrower (which consent shall not be
unreasonably withheld).
SECTION 10.
MISCELLANEOUS
-------------
10.1. Notices.
-------
Except as otherwise expressly provided herein, all notices and other
communications shall have been duly given and shall be effective (a) when
delivered, (b) when transmitted via telecopy (or other facsimile device) to the
number set out below, (c) the Business Day following the day on which the same
has been delivered prepaid to a reputable national overnight air courier
service, or (d) the third Business Day following the day on which the same is
sent by certified or registered mail, postage prepaid, in each case to the
respective parties at the address or telecopy numbers set forth on Schedule
--------
10.1, or at such other address as such party may specify by written notice to
- ----
the other parties hereto.
10.2. Right of Set-Off.
----------------
In addition to any rights now or hereafter granted under applicable law or
otherwise, and not by way of limitation of any such rights, upon the occurrence
of an Event of Default and the commencement of remedies described in Section
8.2, each Lender is authorized at any time and from time to time, without
presentment, demand, protest or other notice of any kind (all of which rights
being hereby expressly waived), to set-off and to appropriate and apply any and
all deposits
72
<PAGE>
(general or special) and any other indebtedness at any time held or
owing by such Lender (including, without limitation, branches, agencies or
Affiliates of such Lender wherever located) to or for the credit or the account
of the Borrower against obligations and liabilities of the Borrower to the
Lenders hereunder, under the Notes, the other Credit Documents or otherwise,
irrespective of whether the Administrative Agent or the Lenders shall have made
any demand hereunder and although such obligations, liabilities or claims, or
any of them, may be contingent or unmatured, and any such set-off shall be
deemed to have been made immediately upon the occurrence of an Event of Default
even though such charge is made or entered on the books of such Lender
subsequent thereto. The Borrower hereby agrees that to the extent permitted by
law any Person purchasing a participation in the Loans and Commitments hereunder
pursuant to Section 10.3(c) or 3.9 may exercise all rights of set-off with
respect to its participation interest as fully as if such Person were a Lender
hereunder and any such set-off shall reduce the amount owed by the Borrower to
the Lender.
10.3. Benefit of Agreement.
--------------------
(a) Generally. This Credit Agreement shall be binding upon and inure
---------
to the benefit of and be enforceable by the respective successors and
assigns of the parties hereto; provided that the Borrower may not assign
--------
and transfer any of its interests in violation of Section 7.4 or 7.5 or
without the prior written consent of either the Required Lenders or the
Lenders, as the terms set forth in Section 10.6 may require; and provided
--------
further that the rights of each Lender to transfer, assign or grant
-------
participations in its rights and/or obligations hereunder shall be limited
as set forth below in subsections (b) and (c) of this Section 10.3.
Notwithstanding the above (including anything set forth in subsections (b)
and (c) of this Section 10.3), nothing herein shall restrict, prevent or
prohibit (i) any Lender from (A) pledging its Loans hereunder to a Federal
Reserve Bank in support of borrowings made by such Lender from such Federal
Reserve Bank, or (B) granting assignments or participations in such
Lender's Loans and/or Commitments hereunder to its parent company and/or to
any Affiliate of such Lender or to any existing Lender or Affiliate thereof
or (ii) the Borrower from engaging in a transaction permitted by Section
7.4 or 7.5.
(b) Assignments. In addition to the assignments permitted by Section
-----------
10.3(a), each Lender may, with the prior written consent of the Borrower
and the Administrative Agent (provided that no consent of the Borrower
shall be required during the existence and continuation of an Event of
Default), which consent shall not be unreasonably withheld or delayed,
assign all or a portion of its rights and obligations hereunder pursuant to
an assignment agreement substantially in the form of Exhibit 10.3 to one or
------------
more Eligible Assignees; provided that () any such assignment shall be in a
--------
minimum aggregate amount of $15,000,000 of the Commitments and in integral
multiples of $1,000,000 above such amount (or the remaining amount of
Commitments held by such Lender) and (i) each such assignment shall be of a
constant, not varying, percentage of all of the assigning Lender's rights
and obligations under the Commitment being assigned. Any assignment
hereunder shall be effective upon satisfaction of the conditions set forth
above and delivery to the Administrative Agent of a duly executed
assignment agreement together with a transfer fee of $3,500 payable to the
Administrative Agent for its own account; provided
73
<PAGE>
that any assignment required to be made by a Lender pursuant to Section
3.16 shall not require a transfer fee. Upon the effectiveness of any such
assignment, the assignee shall become a "Lender" for all purposes of this
Credit Agreement and the other Credit Documents and, to the extent of such
assignment, the assigning Lender shall be relieved of its obligations
hereunder to the extent of the Loans and Commitment components being
assigned. Along such lines the Borrower agrees that upon notice of any such
assignment and surrender of the appropriate Note or Notes, it will promptly
provide to the assigning Lender and to the assignee separate promissory
notes in the amount of their respective interests substantially in the form
of the original Note or Notes (but with notation thereon that it is given
in substitution for and replacement of the original Note or Notes or any
replacement notes thereof).
By executing and delivering an assignment agreement in accordance with this
Section 10.3(b), the assigning Lender thereunder and the assignee
thereunder shall be deemed to confirm to and agree with each other and the
other parties hereto as follows: (i) such assigning Lender warrants that it
is the legal and beneficial owner of the interest being assigned thereby
free and clear of any adverse claim and the assignee warrants that it is an
Eligible Assignee; (ii) except as set forth in clause (i) above, such
assigning Lender makes no representation or warranty and assumes no
responsibility with respect to any statements, warranties or
representations made in or in connection with this Credit Agreement, any of
the other Credit Documents or any other instrument or document furnished
pursuant hereto or thereto, or the execution, legality, validity,
enforceability, genuineness, sufficiency or value of this Credit Agreement,
any of the other Credit Documents or any other instrument or document
furnished pursuant hereto or thereto or the financial condition of the
Borrower or the performance or observance by the Borrower of any of its
obligations under this Credit Agreement, any of the other Credit Documents
or any other instrument or document furnished pursuant hereto or thereto;
(iii) such assignee represents and warrants that it is legally authorized
to enter into such assignment agreement; (iv) such assignee confirms that
it has received a copy of this Credit Agreement, the other Credit Documents
and such other documents and information as it has deemed appropriate to
make its own credit analysis and decision to enter into such assignment
agreement; (v) such assignee will independently and without reliance upon
the Agents, such assigning Lender or any other Lender, and based on such
documents and information as it shall deem appropriate at the time,
continue to make its own credit decisions in taking or not taking action
under this Credit Agreement and the other Credit Documents; (vi) such
assignee appoints and authorizes the Agents to take such action on its
behalf and to exercise such powers under this Credit Agreement or any other
Credit Document as are delegated to the Agents by the terms hereof or
thereof, together with such powers as are reasonably incidental thereto;
and (vii) such assignee agrees that it will perform in accordance with
their terms all the obligations which by the terms of this Credit Agreement
and the other Credit Documents are required to be performed by it as a
Lender.
(c) Participations. Each Lender may sell, transfer, grant or assign
--------------
participations in all or any part of such Lender's interests and
obligations hereunder; provided that (i) such selling Lender shall remain a
--------
"Lender" for all purposes under this
74
<PAGE>
Credit Agreement (such selling Lender's obligations under the Credit
Documents remaining unchanged) and the participant shall not constitute a
Lender hereunder, (ii) no such participant shall have, or be granted,
rights to approve any amendment or waiver relating to this Credit Agreement
or the other Credit Documents except to the extent any such amendment or
waiver would (A) reduce the principal of or rate of interest on or fees in
respect of any Loans in which the participant is participating or increase
any Commitments with respect thereto or (B) postpone the date fixed for any
payment of principal (including the extension of the final maturity of any
Loan or the date of any mandatory prepayment pursuant to Section 3.3(b)),
interest or fees in which the participant is participating, (iii) sub-
participations by the participant (except to an Affiliate, parent company
or Affiliate of a parent company of the participant) shall be prohibited
and (iv) any such participations shall be in a minimum aggregate amount of
$15,000,000 of the Commitments and in integral multiples of $1,000,000 in
excess thereof. In the case of any such participation, the participant
shall not have any rights under this Credit Agreement or the other Credit
Documents (the participant's rights against the selling Lender in respect
of such participation to be those set forth in the participation agreement
with such Lender creating such participation) and all amounts payable by
the Borrower hereunder shall be determined as if such Lender had not sold
such participation; provided, however, that such participant shall be
--------
entitled to receive additional amounts under Section 3.15 to the same
extent that the Lender from which such participant acquired its
participation would be entitled to the benefit of such cost protection
provisions and the amount otherwise payable to such Lender shall be so
reduced.
(d) Registration. The Administrative Agent, acting for this purpose
------------
solely on behalf of the Borrower, shall maintain a register (the
"Register") for the recordation of the names and addresses of the Lenders
--------
and the principal amount of the Loans owing to each Lender from time to
time. The entries in the Register shall be conclusive, in the absence of
manifest error, and the Borrower, the Administrative Agent and the Lenders
shall treat each Person whose name is recorded in the Register as the owner
of a Loan or other obligation hereunder for all purposes of this Credit
Agreement and the other Credit Documents, notwithstanding notice to the
contrary. Any assignment of any Loan or other obligation hereunder shall
be effective only upon appropriate entries with respect thereto being made
in the Register. The Register shall be available for inspection by the
Borrower or any Lender at any reasonable time and from time to time upon
reasonable prior notice.
10.4. No Waiver; Remedies Cumulative.
------------------------------
No failure or delay on the part of an Agent or any Lender in exercising any
right, power or privilege hereunder or under any other Credit Document and no
course of dealing between the Borrower and the Agents or any Lender shall
operate as a waiver thereof; nor shall any single or partial exercise of any
right, power or privilege hereunder or under any other Credit Document preclude
any other or further exercise thereof or the exercise of any other right, power
or privilege hereunder or thereunder. The rights and remedies provided herein
are cumulative and not exclusive of any rights or remedies which the Agents or
any Lender would otherwise have. No notice to or demand on the Borrower in any
case shall entitle the Borrower to any other or further notice or demand in
similar or other circumstances or constitute a waiver of the rights of
75
<PAGE>
the Agents or the Lenders to any other or further action in any circumstances
without notice or demand.
10.5. Payment of Expenses; Indemnification.
------------------------------------
The Borrower agrees to: (a) pay all reasonable out-of-pocket costs and
expenses of (i) the Agents in connection with (A) the negotiation, preparation,
execution and delivery and administration of this Credit Agreement and the other
Credit Documents and the documents and instruments referred to therein
(including, without limitation, the reasonable fees and expenses of Moore & Van
Allen, special counsel to the Agents but not the fees and expenses of any other
Lender's counsel), and (B) any amendment, waiver or consent relating hereto and
thereto including, but not limited to, any such amendments, waivers or consents
resulting from or related to any work-out, renegotiation or restructure relating
to the performance by the Borrower under this Credit Agreement and (ii) the
Agents and the Lenders in connection with (A) enforcement of the Credit
Documents and the documents and instruments referred to therein, including,
without limitation, in connection with any such enforcement, the reasonable fees
and disbursements of counsel for the Agents and each of the Lenders, and (B) any
bankruptcy or insolvency proceeding of the Borrower or any of its Subsidiaries
and (b) indemnify each Agent and each Lender, its officers, directors,
employees, representatives and agents from and hold each of them harmless
against any and all losses, liabilities, claims, damages or expenses incurred by
any of them as a result of, or arising out of, or in any way related to, or by
reason of, any investigation, litigation or other proceeding (whether or not any
Agent or Lender is a party thereto) related to (i) the entering into and/or
performance of any Credit Document or the use of proceeds of any Loans
(including other extensions of credit) hereunder or the consummation of any
other transactions contemplated in any Credit Document, including, without
limitation, the reasonable fees and disbursements of counsel incurred in
connection with any such investigation, litigation or other proceeding (but
excluding any such losses, liabilities, claims, damages or expenses to the
extent incurred by reason of gross negligence or willful misconduct on the part
of the Person to be indemnified), (ii) any Environmental Claim (except to the
extent such claim arises from the gross negligence or willful misconduct of any
indemnified party) and (iii) any claims for Non-Excluded Taxes; provided that no
indemnity or reimbursement shall be required in respect of (a) any claims
relating to the rights of a Lender as a holder of the Subordinated Debt or (b)
any claims relating to the obligations of any indemnified party in any capacity
other than as an Agent or a Lender.
10.6. Amendments, Waivers and Consents.
--------------------------------
Neither this Credit Agreement nor any other Credit Document nor any of the
terms hereof or thereof may be amended, changed, waived, discharged or
terminated unless such amendment, change, waiver, discharge or termination is in
writing and signed by the Required Lenders and the Borrower; provided that no
--------
such amendment, change, waiver, discharge or termination shall (a), without the
consent of each Lender affected thereby,
(i) extend the final maturity of any Loan or the time of payment
of any reimbursement obligation, or any portion thereof, arising from
drawings under Letters of Credit, or postpone or extend the time for
any payment or prepayment of principal of any Loan, or any portion
thereof;
76
<PAGE>
(ii) reduce the rate or extend the time of payment of interest
(other than as a result of waiving the applicability of any post-
default increase in interest rates) thereon or fees hereunder;
(iii) reduce or waive the principal amount of any Loan or of any
reimbursement obligation, or any portion thereof, arising from
drawings under Letters of Credit;
(iv) increase the Commitment of a Lender over the amount thereof
in effect (it being understood and agreed that a waiver of any Default
or Event of Default or a mandatory reduction in the Commitments shall
not constitute a change in the terms of any Commitment of any Lender);
(v) release the Borrower from its obligations under the Credit
Documents;
(vi) amend, modify or waive any provision of this Section or
Section 3.4(a), 3.4(b)(i), 3.7, 3.8, 3.9, 3.10, 3.11, 3.12, 3.13,
3.14, 3.15, 3.16, 8.1(a), 10.2, 10.3 or 10.5;
(vii) reduce any percentage specified in, or otherwise modify, the
definition of Required Lenders; or
(viii) consent to the assignment or transfer by the Borrower of
any of its rights and obligations under (or in respect of) the Credit
Documents except as permitted thereby; and
(ix) no provision of Section 9 may be amended without the consent
of the Agents.
Notwithstanding the above, the right to deliver a Payment Blockage Notice (as
defined in the Indenture) shall reside solely with the Administrative Agent, and
the Administrative Agent shall deliver such Payment Blockage Notice only upon
the direction of the Required Lenders.
Notwithstanding the fact that the consent of all the Lenders is required in
certain circumstances as set forth above, (x) each Lender is entitled to vote as
such Lender sees fit on any bankruptcy reorganization plan that affects the
Loans or the Letters of Credit, and each Lender acknowledges that the provisions
of Section 1126(c) of the Bankruptcy Code supersedes the unanimous consent
provisions set forth herein and (y) the Required Lenders may consent to allow
the Borrower to use cash collateral in the context of a bankruptcy or insolvency
proceeding.
10.7. Counterparts.
------------
This Credit Agreement may be executed in any number of counterparts, each
of which where so executed and delivered shall be an original, but all of which
shall constitute one and the same instrument. It shall not be necessary in
making proof of this Credit Agreement to produce or account for more than one
such counterpart. Delivery of an executed counterpart by facsimile
77
<PAGE>
shall be as effective as an original executed counterpart and shall be deemed a
representation that an original executed counterpart will be delivered.
10.8. Headings.
--------
The headings of the sections and subsections hereof are provided for
convenience only and shall not in any way affect the meaning or construction of
any provision of this Credit Agreement.
10.9. Defaulting Lender.
-----------------
Each Lender understands and agrees that if such Lender is a Defaulting
Lender then notwithstanding the provisions of Section 10.6 it shall not be
entitled to vote on any matter requiring the consent of the Required Lenders or
to object to any matter requiring the consent of all the Lenders adversely
affected thereby; provided, however, that all other benefits and obligations
under the Credit Documents shall apply to such Defaulting Lender.
10.10. Survival of Indemnification and Representations and Warranties.
--------------------------------------------------------------
All indemnities set forth herein and all representations and warranties
made herein shall survive the execution and delivery of this Credit Agreement,
the making of the Loans, the issuance of the Letters of Credit and the repayment
of the Loans, LOC Obligations and other obligations and the termination of the
Commitments hereunder.
10.11. Governing Law; Venue.
--------------------
(a) THIS AGREEMENT AND THE OTHER CREDIT DOCUMENTS AND THE RIGHTS AND
OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER SHALL BE GOVERNED BY
AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
NEW YORK. Any legal action or proceeding with respect to this Agreement or
any other Credit Document may be brought in the courts of the State of
North Carolina or the State of New York, or of the United States for either
the Western District of North Carolina or the Southern District of New
York, and, by execution and delivery of this Credit Agreement, the Borrower
hereby irrevocably accepts for itself and in respect of its property,
generally and unconditionally, the jurisdiction of such courts. The
Borrower further irrevocably consents to the service of process out of any
of the aforementioned courts in any such action or proceeding by the
mailing of copies thereof by registered or certified mail, postage prepaid,
to it at the address for notices pursuant to Section 10.1, such service to
become effective 30 days after such mailing. Nothing herein shall affect
the right of a Lender to serve process in any other manner permitted by law
or to commence legal proceedings or to otherwise proceed against the
Borrower in any other jurisdiction.
(b) The Borrower hereby irrevocably waives any objection which it may
now or hereafter have to the laying of venue of any of the aforesaid
actions or proceedings arising out of or in connection with this Credit
Agreement or any other Credit Document brought in the courts referred to in
subsection (a) hereof and hereby further irrevocably
78
<PAGE>
waives and agrees not to plead or claim in any such court that any such
action or proceeding brought in any such court has been brought in an
inconvenient forum.
10.12. Waiver of Jury Trial.
--------------------
EACH OF THE PARTIES TO THIS AGREEMENT HEREBY IRREVOCABLY WAIVES ALL RIGHT
TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR
RELATING TO THIS AGREEMENT, ANY OF THE OTHER CREDIT DOCUMENTS OR THE
TRANSACTIONS CONTEMPLATED HEREBY.
10.13. Time.
----
All references to time herein shall be references to Eastern Standard Time
or Eastern Daylight time, as the case may be, unless specified otherwise.
10.14. Severability.
------------
If any provision of any of the Credit Documents is determined to be
illegal, invalid or unenforceable, such provision shall be fully severable and
the remaining provisions shall remain in full force and effect and shall be
construed without giving effect to the illegal, invalid or unenforceable
provisions.
10.15. Entirety.
--------
This Credit Agreement together with the other Credit Documents represent
the entire agreement of the parties hereto and thereto, and supersede all prior
agreements and understandings, oral or written, if any, including any commitment
letters or correspondence relating to the Credit Documents or the transactions
contemplated herein and therein.
10.16. Binding Effect; Termination of Prior Credit Agreement.
-----------------------------------------------------
This Credit Agreement shall become effective at such time when all of the
conditions set forth in Section 4.1 have been satisfied or waived by the Lenders
and it shall have been executed by the Borrower and the Agents, and the Agents
shall have received copies hereof (telefaxed or otherwise) which, when taken
together, bear the signatures of each Lender, and thereafter this Credit
Agreement shall be binding upon and inure to the benefit of the Borrower, the
Agents and each Lender and their respective successors and assigns. Upon this
Credit Agreement becoming effective, the Prior Credit Agreement shall be deemed
terminated and the lenders party to the Prior Credit Agreement shall no longer
have any obligations thereunder.
10.17. Confidentiality.
---------------
Each Lender agrees that it will use its reasonable best efforts to keep
confidential and to cause any representative designated under Section 6.11 to
keep confidential any non-public information from time to time supplied to it
under any Credit Document; provided, however, that nothing herein shall affect
-------- -------
the disclosure of any such information to (i) the extent such Lender in
79
<PAGE>
good faith believes is required by statute, rule, regulation or judicial
process, (ii) counsel for such Lender or to its accountants, (iii) bank
examiners or auditors or comparable Persons, (iv) any affiliate of such Lender,
(v) any other Lender, or any assignee, transferee or participant, or any
potential assignee, transferee or participant, of all or any portion of any
Lender's rights under this Credit Agreement who is notified of the confidential
nature of the information and agrees to be bound by this provision or provisions
reasonably comparable hereto, or (vi) any other Person in connection with any
litigation to which any one or more of the Lenders is a party; and provided
--------
further that no Lender shall have any obligation under this Section 10.17 to the
- -------
extent any such information becomes available on a non-confidential basis from a
source other than the Borrower or its Subsidiaries or that any information
becomes publicly available other than by a breach of this Section 10.17. Each
Lender agrees it will use all confidential information exclusively for the
purpose of evaluating, monitoring, selling, protecting or enforcing its Loans
and other rights under the Credit Documents. Without affecting any other rights
of the Borrower, each Lender acknowledges that the Borrower shall be entitled to
seek the remedies of injunction, specific performance and other equitable relief
for any breach of the provisions of this Section 10.17.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
80
<PAGE>
Signature page to Credit Agreement, dated as of August 8, 1997, among
Knoll, Inc. as Borrower, the Lenders party thereto, NationsBank, N.A. as
Administrative Agent and The Chase Manhattan Bank as Documentation Agent.
Each of the parties hereto has caused a counterpart of this Credit
Agreement to be duly executed and delivered as of the date first above written.
BORROWER:
- --------
KNOLL, INC.,
a Delaware corporation
By: -----------------------------------------
Name: Douglas J. Purdom
Title: Senior Vice President and Chief Financial Officer
LENDERS:
- -------
NATIONSBANK, N.A.,
individually in its capacity as a
Lender and in its capacity as Administrative Agent
By:--------------------------------------------
Name: Rajesh Sood
Title: Vice President
THE CHASE MANHATTAN BANK,
individually in its capacity as a Lender and in its
capacity as Documentation Agent
By:-------------------------------------------
Name: Lawrence Palumbo, Jr.
Title: Vice President
<PAGE>
Signature page to Credit Agreement, dated as of August 8, 1997, among
Knoll, Inc. as Borrower, the Lenders party thereto, NationsBank, N.A. as
Administrative Agent and The Chase Manhattan Bank as Documentation Agent.
THE BANK OF NEW YORK
By:------------------------------------
Name:----------------------------------
Title:---------------------------------
<PAGE>
Signature page to Credit Agreement, dated as of August 8, 1997, among
Knoll, Inc. as Borrower, the Lenders party thereto, NationsBank, N.A. as
Administrative Agent and The Chase Manhattan Bank as Documentation Agent.
THE BANK OF NOVA SCOTIA
By:------------------------------------
Name:----------------------------------
Title:---------------------------------
<PAGE>
Signature page to Credit Agreement, dated as of August 8, 1997, among
Knoll, Inc. as Borrower, the Lenders party thereto, NationsBank, N.A. as
Administrative Agent and The Chase Manhattan Bank as Documentation Agent.
CIBC, INC.
By:------------------------------------
Name:----------------------------------
Title:---------------------------------
<PAGE>
Signature page to Credit Agreement, dated as of August 8, 1997, among
Knoll, Inc. as Borrower, the Lenders party thereto, NationsBank, N.A. as
Administrative Agent and The Chase Manhattan Bank as Documentation Agent.
FLEET NATIONAL BANK
By:------------------------------------
Name:----------------------------------
Title:---------------------------------
<PAGE>
Signature page to Credit Agreement, dated as of August 8, 1997, among
Knoll, Inc. as Borrower, the Lenders party thereto, NationsBank, N.A. as
Administrative Agent and The Chase Manhattan Bank as Documentation Agent.
FIRST UNION NATIONAL BANK
By:------------------------------------
Name:----------------------------------
Title:---------------------------------
<PAGE>
Signature page to Credit Agreement, dated as of August 8, 1997, among
Knoll, Inc. as Borrower, the Lenders party thereto, NationsBank, N.A. as
Administrative Agent and The Chase Manhattan Bank as Documentation Agent.
CAISSE NATIONALE DE CREDIT AGRICOLE
By:------------------------------------
Name:----------------------------------
Title:---------------------------------
<PAGE>
Signature page to Credit Agreement, dated as of August 8, 1997, among
Knoll, Inc. as Borrower, the Lenders party thereto, NationsBank, N.A. as
Administrative Agent and The Chase Manhattan Bank as Documentation Agent.
CORESTATES BANK, N.A.
By:------------------------------------
Name:----------------------------------
Title:---------------------------------
<PAGE>
Signature page to Credit Agreement, dated as of August 8, 1997, among
Knoll, Inc. as Borrower, the Lenders party thereto, NationsBank, N.A. as
Administrative Agent and The Chase Manhattan Bank as Documentation Agent.
SUMMIT BANK
By:------------------------------------
Name:----------------------------------
Title:---------------------------------
<PAGE>
Exhibit 2.1
to
Credit Agreement
FORM OF
NOTICE OF BORROWING
-------------------
TO: NATIONSBANK, N.A., as Administrative Agent
100 North Tryon Street
Charlotte, North Carolina 28255
RE: Credit Agreement dated as of August ___, 1997 among Knoll, Inc. (the
"Borrower"), NationsBank, N.A., as Administrative Agent, The Chase
Manhattan Bank, as Documentation Agent and the Lenders party thereto (as
the same may be amended, modified, extended or restated from time to time,
the "Credit Agreement")
DATE: _____________, 199__
- --------------------------------------------------------------------------------
1. This Notice of Borrowing is made pursuant to the terms of the Credit
Agreement. All capitalized terms used herein unless otherwise defined shall
have the meanings set forth in the Credit Agreement.
2. Please be advised that the Borrower is requesting Revolving Loans in the
amount of $_______________ to be funded on ____________, 199__ at the
interest rate option set forth in paragraph 3 below. Subsequent to the
funding of the requested Revolving Loans, the aggregate amount of Revolving
Loans outstanding will be $_______________, which together with the
aggregate amount of LOC Obligations outstanding plus the aggregate amount of
Swing Line Loans outstanding plus the aggregate amount of Competitive Bid
Loans outstanding is less than or equal to the Revolving Committed Amount.
<PAGE>
3. The interest rate option applicable to the requested Revolving
Loans shall be:
a. ________ the Adjusted Base Rate
b. ________ the Adjusted Eurodollar Rate for an Interest
Period of:
________ one month
________ two months
________ three months
________ six months
4. The representations and warranties made by the Borrower in any Credit
Document are true and correct in all material respects at and as if made on
the date hereof except to the extent they expressly relate to an earlier
date.
5. As of the date hereof, no Default or Event of Default has occurred and is
continuing or would be caused by this Notice of Borrowing.
6. No Material Adverse Effect has occurred since the Closing Date.
KNOLL, INC.
By: ____________________________________
Name: __________________________________
Title: _________________________________
-2-
<PAGE>
Exhibit 2.1(e)
to
Credit Agreement
FORM OF
REVOLVING NOTE
--------------
Lender: ___________________ ______________, 1997
Principal Sum: $____________
FOR VALUE RECEIVED, Knoll, Inc., a Delaware corporation (the "Borrower"),
--------
hereby promises to pay to the order of the Lender set forth above (the
"Lender"), at the office of NationsBank, N.A. (the "Administrative Agent") as
------ --------------------
set forth in that certain Credit Agreement dated as of August ___, 1997 between
the Borrower, the Lenders party thereto (including the Lender), NationsBank,
N.A., as Administrative Agent and The Chase Manhattan Bank, as Documentation
Agent (as amended, modified, extended or restated from time to time, the "Credit
------
Agreement"), the Principal Sum set forth above (or such lesser amount as shall
- ---------
equal the aggregate unpaid principal amount of the Revolving Loans made by the
Lender to the Borrower under the Credit Agreement), in lawful money of the
United States of America and in immediately available funds, on the dates and in
the principal amounts provided in the Credit Agreement, and to pay interest on
the unpaid principal amount of each such Revolving Loan, at such office, in like
money and funds, for the period commencing on the date of such Revolving Loan
until such Revolving Loan shall be paid in full, at the rates per annum and on
the dates provided in the Credit Agreement.
This Note is one of the Revolving Notes referred to in the Credit Agreement
and evidences Revolving Loans made by the Lender thereunder. Capitalized terms
used in this Revolving Note and not otherwise defined shall have the respective
meanings assigned to them in the Credit Agreement and the terms and conditions
of the Credit Agreement are expressly incorporated herein and made a part
hereof.
The Credit Agreement provides for the acceleration of the maturity of the
Revolving Loans evidenced by this Revolving Note upon the occurrence of certain
events (and for payment of collection costs in connection therewith) and for
prepayments of Revolving Loans upon the terms and conditions specified therein.
In the event this Revolving Note is not paid when due at any stated or
accelerated maturity, the Borrower agrees to pay, in
<PAGE>
addition to the principal and interest, all costs of collection, including
reasonable attorney fees.
The date, amount, type, interest rate and duration of Interest Period (if
applicable) of each Revolving Loan made by the Lender to the Borrower, and each
payment made on account of the principal thereof, shall be recorded by the
Lender on its books; provided that the failure of the Lender to make any such
recordation or endorsement shall not affect the obligations of the Borrower to
make a payment when due of any amount owing hereunder or under this Revolving
Note in respect of the Revolving Loans to be evidenced by this Revolving Note,
and each such recordation or endorsement shall be prima facie evidence of such
information.
This Note and the Revolving Loans evidenced hereby may be transferred in
whole or in part only by registration of such transfer on the Register
maintained for such purpose by or on behalf of the Borrower as provided in
Section 10.3(d) of the Credit Agreement.
THIS REVOLVING NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH,
THE LAWS OF THE STATE OF NEW YORK.
IN WITNESS WHEREOF, the Borrower has caused this Revolving Note to be
executed as of the date first above written.
KNOLL, INC.
By: ________________________________
Name: ______________________________
Title: _____________________________
-2-
<PAGE>
Exhibit 2.3(b)
to
Credit Agreement
FORM OF
COMPETITIVE BID LOAN REQUEST
----------------------------
TO: NATIONSBANK, N.A., as Administrative Agent
100 North Tryon Street
Charlotte, North Carolina 28255
RE: Credit Agreement dated as of August ___, 1997 among Knoll, Inc. (the
"Borrower"), NationsBank, N.A., as Administrative Agent, The Chase
Manhattan Bank, as Documentation Agent and the Lenders party thereto
(as the same may be amended, modified, extended or restated from time
to time, the "Credit Agreement")
DATE: _____________, 199__
- --------------------------------------------------------------------------------
1. This Competitive Bid Loan Request is made pursuant to the terms of the
Credit Agreement. All capitalized terms used herein unless otherwise defined
shall have the meanings set forth in the Credit Agreement.
2. The Borrower hereby gives you notice it requests solicitation of Competitive
Bids under the Credit Agreement, and in connection therewith sets forth
below the terms on which the related Competitive Bid Loan borrowing is
requested to be made:
(A) Date of requested Competitive
Bid Loan (which is a Business Day)
____________________
<PAGE>
(B) Principal amount of requested
Competitive Bid Loan
____________________
(C) Interest Period and the last
day thereof
____________________
3. Subsequent to the funding of the requested Competitive Bid Loans, the
aggregate amount of Competitive Bid Loans outstanding will be
$_______________, which together with the aggregate amount of Revolving
Loans outstanding plus the aggregate amount of LOC Obligations outstanding
plus the aggregate amount of Swing Line Loans outstanding is less than or
equal to the Revolving Committed Amount.
4. The representations and warranties made by the Borrower in any Credit
Document are true and correct in all material respects at and as if made on
the date hereof except to the extent they expressly relate to an earlier
date.
5. As of the date hereof, no Default or Event of Default has occurred and is
continuing or would be caused by this Competitive Bid Loan Request.
6. No Material Adverse Effect has occurred since the Closing Date.
KNOLL, INC.
By: _______________________________
Name: _____________________________
Title: ____________________________
-2-
<PAGE>
Exhibit 2.3(d)
to
Credit Agreement
FORM OF
COMPETITIVE BID ACCEPT/REJECT LETTER
------------------------------------
NATIONSBANK, N.A., as Administrative Agent
100 North Tryon Street
Charlotte, North Carolina 28255
Ladies and Gentlemen:
Reference is made to the Credit Agreement dated as of August ___, 1997
among Knoll, Inc. (the "Borrower"), NationsBank, N.A., as Administrative Agent,
The Chase Manhattan Bank, as Documentation Agent and the Lenders party thereto
(as amended, modified, extended or restated from time to time, the "Credit
------
Agreement").
- ---------
In accordance with Section 2.3(d) of the Credit Agreement and in connection
with our Competitive Bid Request dated ____________, we hereby accept the
following bids for maturity on _____________:
<TABLE>
<CAPTION>
Principal Amount Competitive Bid Rate Lender
---------------- -------------------- ------
<S> <C> <C>
$__________ ____________% ____________
$__________ ____________% ____________
</TABLE>
<PAGE>
We hereby reject the following bids:
<TABLE>
<CAPTION>
Principal Amount Competitive Bid Rate Lender
---------------- -------------------- ------
<S> <C> <C>
$__________ ____________% ____________
$__________ ____________% ____________
</TABLE>
KNOLL, INC.
By: ______________________________
Name: ____________________________
Title: ___________________________
-2-
<PAGE>
Exhibit 2.3(h)
to
Credit Agreement
FORM OF
COMPETITIVE BID LOAN NOTE
-------------------------
Lender: ___________________ ______________, 1997
Principal Sum: $____________
FOR VALUE RECEIVED, Knoll, Inc., a Delaware corporation (the "Borrower"),
--------
hereby promises to pay to the order of the Lender set forth above (the
"Lender"), at the office of NationsBank, N.A. (the "Administrative Agent") as
------ --------------------
set forth in that certain Credit Agreement dated as of August ___, 1997 between
the Borrower, the Lenders party thereto (including the Lender), NationsBank,
N.A., as Administrative Agent and The Chase Manhattan Bank, as Documentation
Agent (as amended, modified, extended or restated from time to time, the "Credit
------
Agreement"), the Principal Sum set forth above (or such lesser amount as shall
- ---------
equal the aggregate unpaid principal amount of the Competitive Bid Loans made by
the Lender to the Borrower under the Credit Agreement), in lawful money of the
United States of America and in immediately available funds, on the dates and in
the principal amounts provided in the Credit Agreement, and to pay interest on
the unpaid principal amount of each such Competitive Bid Loan, at such office,
in like money and funds, for the period commencing on the date of such
Competitive Bid Loan until such Competitive Bid Loan shall be paid in full, at
the rates per annum and on the dates provided in the Credit Agreement.
This Note is one of the Competitive Bid Loan Notes referred to in the Credit
Agreement and evidences Competitive Bid Loans made by the Lender thereunder.
Capitalized terms used in this Competitive Bid Loan Note and not otherwise
defined shall have the respective meanings assigned to them in the Credit
Agreement and the terms and conditions of the Credit Agreement are expressly
incorporated herein and made a part hereof.
The Credit Agreement provides for the acceleration of the maturity of the
Competitive Bid Loans evidenced by this Competitive Bid Loan Note upon the
occurrence of certain events (and for payment of collection costs in connection
therewith) and for prepayments of Competitive Bid Loans upon the terms and
conditions specified therein. In the event this Competitive Bid Loan Note is
not paid when due at any stated or accelerated maturity, the Borrower agrees to
pay, in addition to the
<PAGE>
principal and interest, all costs of collection, including reasonable attorney
fees.
The date, amount, type, interest rate and duration of Interest Period (if
applicable) of each Competitive Bid Loan made by the Lender to the Borrower, and
each payment made on account of the principal thereof, shall be recorded by the
Lender on its books; provided that the failure of the Lender to make any such
recordation or endorsement shall not affect the obligations of the Borrower to
make a payment when due of any amount owing hereunder or under this Competitive
Bid Loan Note in respect of the Competitive Bid Loans to be evidenced by this
Competitive Bid Loan Note, and each such recordation or endorsement shall be
prima facie evidence of such information.
This Note and the Competitive Bid Loans evidenced hereby may be transferred
in whole or in part only by registration of such transfer on the Register
maintained for such purpose by or on behalf of the Borrower as provided in
Section 10.3(d) of the Credit Agreement.
THIS COMPETITIVE BID LOAN NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
IN WITNESS WHEREOF, the Borrower has caused this Competitive Bid Loan Note
to be executed as of the date first above written.
KNOLL, INC.
By: ______________________________
Name: ____________________________
Title: ___________________________
-2-
<PAGE>
Exhibit 2.4(b)
to
Credit Agreement
FORM OF
SWING LINE LOAN REQUEST
-----------------------
TO: NATIONSBANK, N.A., as Lender
100 North Tryon Street
Charlotte, North Carolina 28255
RE: Credit Agreement dated as of August ___, 1997 among Knoll, Inc. (the
"Borrower"), NationsBank, N.A., as Administrative Agent, The Chase
Manhattan Bank, as Documentation Agent and the Lenders named therein (as
the same may be amended, modified, extended or restated from time to time,
the "Credit Agreement")
DATE: _____________, 199__
- --------------------------------------------------------------------------------
1. This Swing Line Loan Request is made pursuant to the terms of the Credit
Agreement. All capitalized terms used herein unless otherwise defined
shall have the meanings set forth in the Credit Agreement.
2. Please be advised that the Borrower is requesting a Swing Line Loan on the
terms set forth below:
(A) Principal amount of requested
Swing Line Loan ____________________
(B) Date of requested Swing Line
Loan ____________________
3. Subsequent to the funding of the requested Swing Line Loan, (a) the
aggregate amount of Swing Line Loans outstanding will be $______________
which is less than or equal to the Swing Line Committed Amount and (b) the
sum of the aggregate
<PAGE>
amount of Swing Line Loans outstanding plus the aggregate amount of
Revolving Loans outstanding plus the aggregate amount of Competitive Bid
Loans outstanding plus the aggregate amount of LOC Obligations outstanding
will be $______________ which is less than or equal to the then Revolving
Committed Amount.
4. The representations and warranties made by the Borrower in any Credit
Document are true and correct in all material respects at and as if made on
the date hereof except to the extent they expressly relate to an earlier
date.
5. As of the date hereof, no Default or Event of Default has occurred and is
continuing or would be caused by this Swing Line Loan Request.
6. No Material Adverse Effect has occurred since the Closing Date.
KNOLL, INC.
By: _________________________________
Name: _______________________________
Title: ______________________________
-2-
<PAGE>
Exhibit 2.4(e)
to
Credit Agreement
FORM OF
SWING LINE LOAN NOTE
--------------------
$10,000,000 August ___, 1997
FOR VALUE RECEIVED, Knoll, Inc., a Delaware corporation (the "Borrower"),
--------
hereby promises to pay to the order of NationsBank, N.A. (the "Lender"), at the
-------
office of the Lender as set forth in that certain Credit Agreement dated as of
August ___, 1997 between the Borrower, the Lenders party thereto (including the
Lender), NationsBank, N.A., as Administrative Agent and The Chase Manhattan
Bank, as Documentation Agent (as amended, modified, extended or restated from
time to time, the "Credit Agreement"), $10,000,000 (or such lesser amount as
----------------
shall equal the aggregate unpaid principal amount of the Swing Line Loans made
by the Lender to the Borrower under the Credit Agreement), in lawful money of
the United States of America and in immediately available funds, on the dates
and in the principal amounts provided in the Credit Agreement, and to pay
interest on the unpaid principal amount of each such Swing Line Loan, at such
office, in like money and funds, for the period commencing on the date of each
Swing Line Loan until each Swing Line Loan shall be paid in full, at the rates
per annum and on the dates provided in the Credit Agreement.
This Note is the Swing Line Loan Note referred to in the Credit Agreement
and evidences Swing Line Loans made by the Lender thereunder. Capitalized terms
used in this Swing Line Loan Note and not otherwise defined shall have the
respective meanings assigned to them in the Credit Agreement and the terms and
conditions of the Credit Agreement are expressly incorporated herein and made a
part hereof.
The Credit Agreement provides for the acceleration of the maturity of the
Swing Line Loans evidenced by this Swing Line Loan Note upon the occurrence of
certain events (and for payment of collection costs in connection therewith) and
for prepayments of Swing Line Loans upon the terms and conditions specified
therein. In the event this Swing Line Loan Note is not paid when due at any
stated or accelerated maturity, the Borrower agrees to pay, in addition to the
principal and interest, all costs of collection, including reasonable attorney
fees.
The date, amount and interest rate of each Swing Line Loan made by the
Lender to the Borrower, and each payment made on account of the principal
thereof, shall be recorded by the Lender
<PAGE>
on its books; provided that the failure of the Lender to make any such
recordation or endorsement shall not affect the obligations of the Borrower to
make a payment when due of any amount owing hereunder or under this Swing Line
Loan Note in respect of the Swing Line Loans to be evidenced by this Swing Line
Loan Note, and each such recordation or endorsement shall be prima facie
evidence of such information.
This Note and the Swing Line Loans evidenced hereby may be transferred in
whole or in part only by registration of such transfer on the Register
maintained for such purpose by or on behalf of the Borrower as provided in
Section 10.3(d) of the Credit Agreement.
THIS SWING LINE LOAN NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE
WITH, THE LAWS OF THE STATE OF NEW YORK.
IN WITNESS WHEREOF, the Borrower has caused this Swing Line Loan Note to be
executed as of the date first above written.
KNOLL, INC.
By: ___________________________
Name: _________________________
Title: ________________________
-2-
<PAGE>
Exhibit 2.5
to
Credit Agreement
FORM OF
NOTICE OF CONTINUATION/CONVERSION
---------------------------------
TO: NATIONSBANK, N.A., as Administrative Agent
100 North Tryon Street
Charlotte, North Carolina 28255
RE: Credit Agreement dated as of August ___, 1997 among Knoll, Inc. (the
"Borrower"), NationsBank, N.A., as Administrative Agent, The Chase
Manhattan Bank, as Documentation Agent, and the Lenders party thereto (as
the same may be amended, modified, extended or restated from time to time,
the "Credit Agreement")
DATE: _____________, 199__
1. This Notice of Continuation/Conversion is made pursuant to the terms of the
Credit Agreement. All capitalized terms used herein unless otherwise
defined shall have the meanings set forth in the Credit Agreement.
2. Please be advised that the Borrower is requesting that a portion of the
current outstanding Revolving Loans in the amount of $________________
currently accruing interest at __________ be continued or converted as of
_____________ at the interest rate option set forth in paragraph 3 below.
3. The interest rate option applicable to the continuation or conversion of all
or part of the existing Revolving Loans shall be:
a. ________ the Adjusted Base Rate
<PAGE>
b. ________ the Adjusted Eurodollar Rate for an Interest Period of:
________ one month
________ two months
________ three months
________ six months
KNOLL, INC.
By: ________________________________
Name: ______________________________
Title: _____________________________
-2-
<PAGE>
Exhibit 6.1(c)
to
Credit Agreement
FORM OF
OFFICER'S CERTIFICATE
---------------------
For the fiscal quarter ended _________________, 19___.
I, ______________________, chief financial officer of Knoll, Inc. (the
"Borrower") hereby certify on behalf of the Borrower and not in my individual
- ---------
capacity that, with respect to that certain Credit Agreement dated as of August
___, 1997 (as it may be amended, modified, extended or restated from time to
time, the "Credit Agreement"; all of the defined terms in the Credit Agreement
----------------
are incorporated herein by reference) among the Borrower, the Lenders party
thereto, NationsBank, N.A., as Administrative Agent and The Chase Manhattan
Bank, as Documentation Agent:
a. Attached hereto as Schedule 1 are calculations demonstrating
-
compliance by the Borrower with the financial covenants contained in
Section 6.11 of the Credit Agreement as of the end of the fiscal period
referred to above.
b. No dividends were paid or redemptions made during the fiscal period
referenced above or if any dividends were made or redemptions paid,
attached hereto as Schedule 2 is a description thereof and evidence of
----------
compliance with the terms of Section 7.7 of the Credit Agreement, as
applicable, including calculations as necessary.
c. No principal payments, redemptions or deposits were made with
respect to Subordinated Debt during the fiscal period referenced above or
if any principal payments, redemption or deposits were made with respect to
Subordinated Debt, attached hereto as Schedule 3 is a description thereof
----------
and evidence of compliance with the terms of Section 7.10 of the Credit
Agreement, as applicable, including calculations as necessary.
d. No Default or Event of Default has occurred under the Credit
Agreement/1/.
- ----------------
/1/ If a Default or Event of Default shall have occurred an explanation of such
Default or Event of Default shall be provided on a separate page together
with an explanation of the action taken or proposed to be taken by the
Borrower with respect thereto.
<PAGE>
e. The Borrower - prepared quarterly financial statements which
accompany this certificate fairly present in all material respects the
financial condition of the Borrower and has been prepared in accordance
with GAAP, subject to changes resulting from normal year-end audit
adjustments.
This ______ day of ___________, 1997.
KNOLL, INC.
By: ___________________________
Chief Financial Officer
-2-
<PAGE>
Exhibit 10.3
to
Credit Agreement
FORM OF
ASSIGNMENT AGREEMENT
--------------------
Reference is made to that certain Credit Agreement dated as of August ___,
1997 among Knoll, Inc. (the "Borrower"), the Lenders party thereto, NationsBank,
N.A., as Administrative Agent and The Chase Manhattan Bank, as Documentation
Agent (as the same may be amended, modified, extended or restated from time to
time, the "Credit Agreement"). All capitalized terms used herein and not
otherwise defined shall have the meanings set forth in the Credit Agreement.
1. The Assignor (as defined below) hereby sells and assigns, without
recourse, to the Assignee (as defined below), and the Assignee hereby purchases
and assumes, without recourse, from the Assignor, effective as of effective date
of the assignment as designated below (the "Effective Date"), the interests set
forth below (the "Assigned Interest") in the Assignor's rights and obligations
under the Credit Agreement, including, without limitation, (a) the interests set
forth below in the Revolving Loan Commitment Percentage of the Assignor on the
Effective Date, (b) the Loans owing to the Assignor in connection with the
Assigned Interest which are outstanding on the Effective Date, and (c) the
Assignor's participation interests in all Letters of Credit as of the Effective
Date and the rights and obligations appurtenant thereto under the LOC Documents.
The purchase of the Assigned Interest shall be at par and periodic payments made
with respect to the Assigned Interest which (i) accrued prior to the Effective
Date shall be remitted to the Assignor and (ii) accrue from and after the
Effective Date shall be remitted to the Assignee. From and after the Effective
Date, the Assignee, if it is not already a Lender under the Credit Agreement,
shall become a "Lender" for all purposes of the Credit Agreement and the other
Credit Documents and, to the extent of such assignment, the assigning Lender
shall be relieved of its obligations under the Credit Agreement.
2. The Assignor represents and warrants to the Assignee that it is the
holder of the Assigned Interest, and the Loans and Participation Interests
related thereto, and it has not previously transferred or encumbered such
Assigned Interest, Loans or Participation Interests.
3. The Assignee represents and warrants to the Assignor that it is an
Eligible Assignee.
<PAGE>
4. This Assignment shall be effective only upon (a) the consent of the
Borrower and the Administrative Agent to the extent required under Section
10.3(b) of the Credit Agreement and (b) delivery to the Administrative Agent of
this Assignment Agreement together with the transfer fees, if applicable, set
forth in Section 10.3(b) of the Credit Agreement.
5. The Assignor and the Assignee confirm to and agree with each other and
the other parties to the Credit Agreement as to the terms set forth in paragraph
2 of Section 10.3(b) of the Credit Agreement.
6. This Assignment shall be governed by and construed in accordance with
the laws of the State of New York.
Terms of Assignment
(a) Date of Assignment _____________
(b) Legal Name of Assignor _____________
(c) Legal Name of Assignee _____________
(d) Effective Date of Assignment _____________
(e) Revolving Loan Commitment
Percentage assigned _____________%
(f) Total Revolving Loans
outstanding as of Effective Date $_____________
(g) Principal Amount of Revolving
Loans assigned on Effective
Date (the amount set forth
in (f) multiplied by the
percentage set forth in (e)) $_____________
(h) Revolving Committed Amount $_____________
(i) Principal Amount of Revolving
Committed Amount Assigned on
the Effective Date (the amount
set forth in (h) multiplied by
the percentage set forth in (e)) $_____________
<PAGE>
The terms set forth above
are hereby agreed to:
_________________________, as Assignor
By: _____________________
Name: ___________________
Title: __________________
_________________________, as Assignee
By: _____________________
Name: ___________________
Title: __________________
CONSENTED TO (if applicable):
KNOLL, INC.
By: ______________________________
Name: ____________________________
Title: ___________________________
NATIONSBANK, N.A., as
Administrative Agent
By: _____________________________
Name: ___________________________
Title: __________________________
<PAGE>
EXHIBIT 11
KNOLL, INC.
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
FOUR MONTHS TEN MONTHS SIX MONTHS PRO FORMA YEAR SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED ENDED ENDED
JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31, JUNE 30, JUNE 30,
1996 1996 1997 1996 1996 1997
----------- ------------ ---------- -------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net income before
extraordinary
item (a)............... $7,976 $21,995 $28,594 $21,743 $7,724 $28,594
Extraordinary loss on
early extinguishment of
debt................... -- (5,159) (5,337) -- -- --
------ ------- ------- ------- ------ -------
Net income (b).......... $7,976 $16,836 $23,257 21,743 7,724 28,594
====== ======= =======
Adjustment of interest
expense for repayment
of debt net of tax
effect................. 3,451 1,726 1,642
------- ------ -------
Net income as adjusted
before extraordinary
item (c)............... $25,194 $9,450 $30,236
======= ====== =======
Common stock outstanding
during the period...... 7,291 7,291 7,291 7,291 7,291 7,291
Dilutive effect of stock
options computed in
accordance with the
treasury stock method
as required by SAB 83.. 50 83 88 50 50 88
Conversion of preferred
shares into common
shares upon completion
of IPO................. 27,441 27,441 27,441 27,441 27,441 27,441
------ ------- ------- ------- ------ -------
Pro forma weighted
average number of
common shares
outstanding prior to
shares in connection
with IPO (d)........... 34,782 34,815 34,820 34,782 34,782 34,820
====== =======
Shares issued in
connection with
the IPO................ 2,426 8,480 8,480 8,480
------- ------- ------ -------
Pro forma weighted
average number of
common shares
outstanding after
shares issued in
connection with
IPO (e)................ 37,246 43,262 43,262 43,300
======= ======= ====== =======
Pro forma income before
extraordinary item per
share of Common
Stock (a)/(d).......... $ .23 $ .63 N/A N/A $ .22 N/A
====== ======= ======= ======= ====== =======
Pro forma net income per
share of Common Stock
(b)/(d)................ $ .23 $ .48 N/A N/A $ .22 N/A
====== ======= ======= ======= ====== =======
Pro forma income before
extraordinary item per
share of Common
Stock(a)/(e)........... N/A N/A $ .76 N/A N/A N/A
====== ======= ======= ======= ====== =======
Pro forma net income per
share of Common Stock
(b)/(e)................ N/A N/A $ .62 N/A N/A N/A
====== ======= ======= ======= ====== =======
Pro forma as adjusted
income before
extraordinary item per
share of Common Stock
(c)/(e)................ N/A N/A N/A $ .58 $ .22 $ .70
====== ======= ======= ======= ====== =======
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration on Form S-1 of Knoll, Inc. of our report dated January 15, 1996,
relating to the financial statements The Knoll Group, Inc., which appears in
such Prospectus. We also consent to the application of such report to the
Financial Statement Schedule for the two years ended December 31, 1995 listed
under Item 16(b) of this Registration Statement when such schedule is read in
conjunction with the consolidated financial statements referred to in our
report. The audits referred to in such report also included this schedule. We
also consent to the references to us under the headings "Experts" and
"Selected Financial Information" in such Prospectus. However, it should be
noted that Price Waterhouse LLP has not prepared or certified such "Selected
Financial Data."
/s/ Price Waterhouse
Price Waterhouse LLP
600 Grant Street
Pittsburgh, Pennsylvania 15219
September 24, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the references to our firm under the captions "Summary
Historical and Pro Forma Financial Information," "Selected Financial
Information" and "Experts," and to the use of our report dated March 14, 1997
(except for Note 23, as to which the date is May 6, 1997) in the Registration
Statement on Form S-1 and related Prospectus of Knoll, Inc. dated September 25,
1997.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
September 23, 1997
