-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K6/rCTnc2i002t5BJHiRP8ZWZfKoWT0iLa5Hdm6XqYeKXsqx/AIqh2emfVh9uZ6q eLDk6OwfEieivC8fX1DFTw== 0000940180-97-000833.txt : 19970926 0000940180-97-000833.hdr.sgml : 19970926 ACCESSION NUMBER: 0000940180-97-000833 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19970925 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: KNOLL INC CENTRAL INDEX KEY: 0001011570 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS FURNITURE & FIXTURES [2590] IRS NUMBER: 133873847 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-36407 FILM NUMBER: 97685667 BUSINESS ADDRESS: STREET 1: 1235 WATER ST CITY: EAST GREENVILLE STATE: PA ZIP: 18041 BUSINESS PHONE: 2156797991 MAIL ADDRESS: STREET 1: 1235 WATER STREET CITY: EAST GREENVILLE STATE: PA ZIP: 18041 S-1 1 FORM S-1 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
=========================================================================================================== 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 - ----------------------------------------------------------------------------------------------------------- Common Stock, $.01 par value.... 6,612,500 $31.4375 $207,880,468.75 $62,994.08 ===========================================================================================================
(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. ============================================================================== 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." ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +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. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO PUBLIC DISCOUNT(1) SELLING STOCKHOLDERS(2) - -------------------------------------------------------------------------------- Per Share....................... $ $ $ - -------------------------------------------------------------------------------- Total(3)........................ $ $ $
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (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. [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 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 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 . 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 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 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." 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"
- -------- (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 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.
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) 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
(continued on following page) 8
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) 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
PREDECESSOR THE COMPANY ----------------- ------------------------------ JUNE 30, DECEMBER 31, DECEMBER 31, ----------------- 1994 1995 1996 1996 1997 -------- -------- ------------ -------- -------- (IN THOUSANDS) (IN THOUSANDS) 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
- -------- (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 (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 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 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 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 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 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 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.
HIGH LOW ------- ------- 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
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 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.
JUNE 30, 1997 ACTUAL --------------------- (IN THOUSANDS, EXCEPT SHARE DATA) 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 ========
- -------- (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 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.
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) 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
(continued on following page) 18
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) 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
PREDECESSOR THE COMPANY ----------------------------------- ------------------------------ DECEMBER 31, JUNE 30, ----------------------------------- DECEMBER 31, ----------------- 1992 1993 1994 1995 1996 1996 1997 -------- -------- -------- -------- ------------ -------- -------- (IN THOUSANDS) (IN THOUSANDS) 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
- -------- (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 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 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 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.
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) 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
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 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 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 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 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 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 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 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 QUARTERLY RESULTS OF OPERATIONS The following table sets forth certain unaudited summary pro forma and historical information on a quarterly basis for the Company.
HISTORICAL ------------------------------- FIRST QUARTER SECOND QUARTER ---------------- -------------- (DOLLARS IN THOUSANDS) 1997 Net sales.............. $177,833 $212,582 Gross profit........... 67,974 86,176 Income before extraor- dinary item(1)........ 11,638 16,956 HISTORICAL PRO FORMA ------------------------------------------- FIRST QUARTER(3) SECOND QUARTER THIRD QUARTER FOURTH QUARTER ---------------- -------------- ------------- -------------- (DOLLARS IN THOUSANDS) 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 PRO FORMA(3) ------------------------------------------------------------ FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER ---------------- -------------- ------------- -------------- (DOLLARS IN THOUSANDS) 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
- -------- (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 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 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.
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) 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
32 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 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 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 . 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 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 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 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 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 . 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 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 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 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 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 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:
NAME AGE POSITION ---- --- -------- 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
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 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 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 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").
LONG-TERM ANNUAL COMPENSATION COMPENSATION -------------------- ---------------- NAME AND PRINCIPAL RESTRICTED STOCK ALL OTHER POSITION YEAR SALARY($) BONUS($) AWARDS($)(1) COMPENSATION($)(2) ------------------ ---- ---------- --------- ---------------- ------------------ 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
- -------- (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 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 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 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 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 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 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.
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 - ------------------------------------ ------------- --------------------------- ------------- ------------- ---------- 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
- -------- * 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 (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 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 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 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 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:
YEAR PERCENTAGE ---- ---------- 2001......................................................... 105.438% 2002......................................................... 103.625% 2003......................................................... 101.812% 2004 and thereafter.......................................... 100.000%
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 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 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 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 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 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.
NUMBER OF U.S. UNDERWRITER SHARES ---------------- --------- Merrill Lynch, Pierce, Fenner & Smith Incorporated.............................................. Credit Suisse First Boston Corporation............................. Goldman, Sachs & Co................................................ Morgan Stanley & Co. Incorporated.................................. ---- Total.......................................................... ====
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 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 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 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 KNOLL, INC. INDEX TO FINANCIAL STATEMENTS
PAGE ---- 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
F-1 KNOLL, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS, EXCEPT PAR VALUE AND SHARE DATA)
JUNE 30, DECEMBER 31, 1997 1996 -------- ------------ 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 ======== ========
See accompanying notes. F-2 KNOLL, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
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 ------------- -------------- ------------- --------------------- (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 ======== ========
See accompanying notes. F-3 KNOLL, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
THE KNOLL GROUP, INC. FOUR MONTHS (PREDECESSOR) SIX MONTHS ENDED TWO MONTHS ENDED ENDED JUNE 30, 1997 JUNE 30, 1996 FEBRUARY 29, 1996 ------------------- ------------- --------------------- 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 ======== ========= ========
See accompanying notes. F-4 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
JUNE 30, DECEMBER 31, 1997 1996 -------- ------------ (In Thousands) Raw materials....................................... $37,290 $34,147 Work in process..................................... 8,364 7,508 Finished goods...................................... 16,685 16,156 ------- ------- Inventories......................................... $62,339 $57,811 ======= =======
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 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 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 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 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 KNOLL, INC. CONSOLIDATED BALANCE SHEETS
THE KNOLL GROUP, INC. ACTUAL (PREDECESSOR) DECEMBER 31, DECEMBER 31, 1996 1995 -------------- --------------------- (IN THOUSANDS) (IN THOUSANDS) 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 - -------------------------------------------------- ======== ========
See accompanying notes to the consolidated financial statements. F-10 KNOLL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
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) 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 ========
See accompanying notes to the consolidated financial statements. F-11 KNOLL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
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) 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 ========= ========= =========== ============
See accompanying notes to the consolidated financial statements. F-12 KNOLL, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
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) 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 ========= ========= =========== ===========
See accompanying notes to the consolidated financial statements. F-13 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 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 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 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): 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 ========
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:
YEAR ENDED DECEMBER 31, ----------------------- 1996 1995 ----------- ----------- (IN THOUSANDS) 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 =========== ===========
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 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 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 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. INVENTORIES THE KNOLL GROUP, INC. (PREDECESSOR) DECEMBER 31, DECEMBER 31, 1996 1995 -------------- ------------------ (IN THOUSANDS) (IN THOUSANDS) 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) 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) 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) 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 ======== =========
F-20 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:
THE KNOLL GROUP, INC. (PREDECESSOR) DECEMBER 31, DECEMBER 31, 1996 1995 -------------- --------------------- (IN THOUSANDS) (IN THOUSANDS) 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 ======== ======
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 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 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Maturities Aggregate maturities of the Company's indebtedness are as follows (in thousands): 1997............................................................. $ 23,265 1998............................................................. 15,000 1999............................................................. 15,000 2000............................................................. 15,000 2001............................................................. 20,000 Thereafter....................................................... 265,889 -------- $354,154 ========
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 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:
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) 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) ======= ======== =========== ============
F-24 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Income tax expense (benefit), excluding extraordinary items, is comprised of the following:
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) 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 ======= ======== ============ ===========
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:
THE KNOLL GROUP, INC. (PREDECESSOR) DECEMBER 31, DECEMBER 31, 1996 1995 -------------- ------------------ (IN THOUSANDS) (IN THOUSANDS) 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) ======== ========
F-25 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:
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 ------------ ------------- ------ ------- 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% ==== ===== ====== =======
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 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.
FACILITY EMPLOYEE CLOSURE AND SEPARATION ASSET RATIONALIZATION COSTS WRITEDOWN COSTS TOTAL ---------- --------- --------------- ------- (IN THOUSANDS) 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 ======= ======= ======= =======
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): 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 =======
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 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:
DECEMBER 31, 1996 -------------- (IN THOUSANDS) 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) =======
F-28 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:
TWO MONTHS ENDED YEAR ENDED DECEMBER 31, FEBRUARY 29, ------------------------- 1996 1995 1994 ------------ ------------ ----------- (IN THOUSANDS) 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) ====== ============ ===========
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:
DECEMBER 31, 1995 -------------- (IN THOUSANDS) 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 =========
F-29 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:
TEN MONTHS ENDED DECEMBER 31, 1996 -------------- (IN THOUSANDS) Service cost............................................... $ 440 Interest cost on projected benefit obligation.............. 1,000 ------ Net periodic postretirement benefit cost................... $1,440 ======
F-30 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:
DECEMBER 31, 1996 -------------- (IN THOUSANDS) 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) ========
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:
TWO MONTHS ENDED YEAR ENDED DECEMBER 31, FEBRUARY 29, ------------------------ 1996 1995 1994 ------------ ----------- ----------- (IN THOUSANDS) 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 ==== =========== ===========
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:
DECEMBER 31, 1995 -------------- (IN THOUSANDS) 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) =========
F-31 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:
TEN MONTHS ENDED UNITED DECEMBER 31, 1996 STATES CANADA EUROPE ELIMINATIONS TOTALS ----------------- -------- ------- ------- ------------ -------- (IN THOUSANDS) 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 ======== ======= ======= ========= ========
F-32 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:
TWO MONTHS ENDED UNITED FEBRUARY 29, 1996 STATES CANADA EUROPE ELIMINATIONS TOTALS ----------------- -------- ------- -------- ------------ --------- (IN THOUSANDS) 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) ======== ======= ======== ======== ========= YEAR ENDED UNITED DECEMBER 31, 1995 STATES CANADA EUROPE ELIMINATIONS TOTALS ----------------- -------- ------- -------- ------------ --------- (IN THOUSANDS) 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 ========= YEAR ENDED UNITED DECEMBER 31, 1994 STATES CANADA EUROPE ELIMINATIONS TOTALS ----------------- -------- ------- -------- ------------ --------- (IN THOUSANDS) 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) ======== ======= ======== ======== =========
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 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.
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) 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 PREDECESSOR ---------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ----------- --------- -------- --------- (DOLLARS IN THOUSANDS) 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
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 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 KNOLL, INC. BALANCE SHEET DECEMBER 31, 1996 (IN THOUSANDS)
GUARANTORS --------------------------- SPINNEYBECK ENTERPRISES, KNOLL NON- KNOLL, INC. INC. OVERSEAS, INC. GUARANTORS ELIMINATIONS TOTAL ----------- ------------ -------------- ---------- ------------ -------- 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 ======== ====== ======= ======= ======== ========
F-36 KNOLL, INC. BALANCE SHEET DECEMBER 31, 1995 (IN THOUSANDS)
GUARANTORS --------------------------- SPINNEYBECK ENTERPRISES, KNOLL NON- KNOLL, INC. INC. OVERSEAS, INC. GUARANTORS ELIMINATIONS TOTAL ----------- ------------ -------------- ---------- ------------ -------- 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 ======== ======= ======= ======== ======== ========
F-37 KNOLL, INC. STATEMENT OF OPERATIONS TEN MONTHS ENDED DECEMBER 31, 1996 (IN THOUSANDS)
GUARANTORS --------------------------- SPINNEYBECK ENTERPRISES, KNOLL NON- KNOLL, INC. INC. OVERSEAS, INC. GUARANTORS ELIMINATIONS TOTAL ----------- ------------ -------------- ---------- ------------ -------- 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 ======== ======= ====== ======= ========= ========
F-38 KNOLL, INC. STATEMENT OF OPERATIONS TWO MONTHS ENDED FEBRUARY 29, 1996 (IN THOUSANDS)
GUARANTORS --------------------------- SPINNEYBECK ENTERPRISES, KNOLL NON- KNOLL, INC. INC. OVERSEAS, INC. GUARANTORS ELIMINATIONS TOTAL ----------- ------------ -------------- ---------- ------------ -------- 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) ======== ====== ===== ======= ====== ========
F-39 KNOLL, INC. STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1995 (IN THOUSANDS)
GUARANTORS --------------------------- SPINNEYBECK ENTERPRISES, KNOLL NON- KNOLL, INC. INC. OVERSEAS, INC. GUARANTORS ELIMINATIONS TOTAL ----------- ------------ -------------- ---------- ------------ -------- 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 ======== ======= ======= ======== ======= ========
F-40 KNOLL, INC. STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1994 (IN THOUSANDS)
GUARANTORS --------------------------- SPINNEYBECK ENTERPRISES, KNOLL NON- KNOLL, INC. INC. OVERSEAS, INC. GUARANTORS ELIMINATIONS TOTAL ----------- ------------ -------------- ---------- ------------ --------- 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) ========= ======= ======== ========= ======= =========
F-41 KNOLL, INC. STATEMENT OF CASH FLOWS TEN MONTHS ENDED DECEMBER 31, 1996 (IN THOUSANDS)
GUARANTORS --------------------------- SPINNEYBECK ENTERPRISES, KNOLL NON- KNOLL, INC. INC. OVERSEAS, INC. GUARANTORS ELIMINATIONS TOTAL ----------- ------------ -------------- ---------- ------------ -------- 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 ======== ===== ===== ======== ===== ========
F-42 KNOLL, INC. STATEMENT OF CASH FLOWS TWO MONTHS ENDED FEBRUARY 29, 1996 (IN THOUSANDS)
GUARANTORS --------------------------- SPINNEYBECK ENTERPRISES, KNOLL NON- KNOLL, INC. INC. OVERSEAS, INC. GUARANTORS ELIMINATIONS TOTAL ----------- ------------ -------------- ---------- ------------ --------- 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 ========= ======= ===== ======== ========= =========
F-43 KNOLL, INC. STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 1995 (IN THOUSANDS)
GUARANTORS --------------------------- SPINNEYBECK ENTERPRISES, KNOLL NON- KNOLL, INC. INC. OVERSEAS, INC. GUARANTORS ELIMINATIONS TOTAL ----------- ------------ -------------- ---------- ------------ -------- 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 ======== ======= ======== ======== ======= ========
F-44 KNOLL, INC. STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 1994 (IN THOUSANDS)
GUARANTORS --------------------------- SPINNEYBECK ENTERPRISES, KNOLL NON- KNOLL, INC. INC. OVERSEAS, INC. GUARANTORS ELIMINATIONS TOTAL ----------- ------------ -------------- ---------- ------------ -------- 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 ======== ======= ======= ======== ======= ========
F-45 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 KNOLL, INC. UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT YEAR ENDED DECEMBER 31, 1996
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) 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
P-2 KNOLL, INC. UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT SIX MONTHS ENDED JUNE 30, 1997
HISTORICAL SIX MONTHS ENDED JUNE 30, IPO 1997 ADJUSTMENTS PRO FORMA ------------- ------------- ------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) 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
P-3 KNOLL, INC. UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT SIX MONTHS ENDED JUNE 30, 1996
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) 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
P-4 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 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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
PAGE ---- 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
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 5,750,000 SHARES KNOLL COMMON STOCK --------------- PROSPECTUS --------------- MERRILL LYNCH & CO. CREDIT SUISSE FIRST BOSTON GOLDMAN, SACHS & CO. MORGAN STANLEY DEAN WITTER , 1997 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +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. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO PUBLIC DISCOUNT(1) SELLING STOCKHOLDERS(2) - -------------------------------------------------------------------------------- Per Share........................ $ $ $ - -------------------------------------------------------------------------------- Total(3)......................... $ $ $
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (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. [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 [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 [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 [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
PAGE ---- 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
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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:
AMOUNT ---------- 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....................................................... $ * ==========
- -------- * 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 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 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 *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).
- -------- * 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 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 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 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 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
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) 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
- -------- (1) Uncollectible accounts written off. EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE ----------- ----------- ---- +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.
EXHIBIT NO. DESCRIPTION PAGE ----------- ----------- ---- 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).
- -------- * 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. EX-10.6 2 CREDIT AGREEMENT DATED AS OF 08/08/1997 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 TABLE OF CONTENTS -----------------
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 ------------
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 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 ---------------
iii 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 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. "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:
---------------------------------------------------------------------------------------------------------- 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 ---------------------------------------------------------------------------------------------------------- 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% ----------------------------------------------------------------------------------------------------------
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 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 "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 "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 "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 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 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 "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 "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 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 "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 "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 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 "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 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 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 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 "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 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 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 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 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 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 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 (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 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 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 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 (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 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 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 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 (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 (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 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 (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 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 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 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 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 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 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 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 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 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 (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 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 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 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 "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 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 (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 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 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 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 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 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 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 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 (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 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 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 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 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 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 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 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 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 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 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 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 (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 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 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 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 (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 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 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 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 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 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:--------------------------------- 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:--------------------------------- 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:--------------------------------- 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:--------------------------------- 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:--------------------------------- 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:--------------------------------- 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:--------------------------------- 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:--------------------------------- 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. 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- 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 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- 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) ____________________ (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- 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 _____________:
Principal Amount Competitive Bid Rate Lender ---------------- -------------------- ------ $__________ ____________% ____________ $__________ ____________% ____________
We hereby reject the following bids:
Principal Amount Competitive Bid Rate Lender ---------------- -------------------- ------ $__________ ____________% ____________ $__________ ____________% ____________
KNOLL, INC. By: ______________________________ Name: ____________________________ Title: ___________________________ -2- 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 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- 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 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- 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 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- 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 b. ________ the Adjusted Eurodollar Rate for an Interest Period of: ________ one month ________ two months ________ three months ________ six months KNOLL, INC. By: ________________________________ Name: ______________________________ Title: _____________________________ -2- 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. 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- 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. 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)) $_____________ 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: __________________________ EX-11 3 STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11 KNOLL, INC. STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
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 ----------- ------------ ---------- -------------- ---------- ---------- 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 ====== ======= ======= ======= ====== =======
EX-23.1 4 CONSENT OF PRICE WATERHOUSE LLP 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 EX-23.2 5 CONSENT OF ERNST & YOUNG LLP 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 -----END PRIVACY-ENHANCED MESSAGE-----