-----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, CRjwpOn2wZuUqUaCJk9yJlh6+9WLThdhb4b/B6xLCWzD3PGdY0IUaW2XBgYLEPqf E2IfQc4LZzTkZikKLc6+1Q== 0000950130-97-002013.txt : 19970501 0000950130-97-002013.hdr.sgml : 19970501 ACCESSION NUMBER: 0000950130-97-002013 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19970430 SROS: NONE 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/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-23399 FILM NUMBER: 97590606 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/A 1 AMENDMENT #2 TO FORM S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 30, 1997 REGISTRATION NO. 333-23399 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- AMENDMENT NO. 2 TO 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 JURISDICTIONOF INDUSTRIALCLASSIFICATION 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 delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [X] --------------- 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.... 9,200,000 $22.00 $202,400,000 $61,334(3)
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (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(o). (3) Previously paid. --------------- 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 PROSPECTUS PRELIMINARY PROSPECTUS DATED APRIL 30, 1997 8,000,000 SHARES KNOLL COMMON STOCK ----------- All of the 8,000,000 shares of Common Stock offered hereby are being sold by Knoll, Inc. ("Knoll" or the "Company"). Of the 8,000,000 shares of Common Stock offered hereby, 6,400,000 shares are being offered for sale initially in the United States and Canada by the U.S. Underwriters and 1,600,000 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." Prior to the Offerings, there has been no public market for the Common Stock. It is currently estimated that the initial public offering price will be between $19.00 and $22.00 per share. For a discussion relating to factors to be considered in determining the initial public offering price, see "Underwriting." Investors purchasing shares of Common Stock in the Offerings will incur substantial and immediate dilution of $21.20 per share in pro forma net tangible book value of Common Stock, which exceeds the assumed initial public offering price of $20.50 per share (based on the midpoint of the estimated range of the initial public offering price). See "Risk Factors-- Dilution" and "Dilution." The Common Stock has been approved for listing on the New York Stock Exchange under the symbol "KNL," subject to notice of issuance. 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) COMPANY(2) - ----------------------------------------------------------------------------- Per Share....................... $ $ $ - ----------------------------------------------------------------------------- Total(3)........................ $ $ $
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) The Company and a certain selling stockholder (the "Selling Stockholder") 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 $1,500,000. (3) The Company has granted the U.S. Underwriters and the International Managers options to purchase up to an additional 384,000 shares and 96,000 shares of Common Stock, respectively, and the Selling Stockholder has granted the U.S. Underwriters and the International Managers options to purchase up to an additional 576,000 shares and 144,000 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, Proceeds to Company and Proceeds to Selling Stockholder 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 & CO. INCORPORATED ----------- The date of this Prospectus is , 1997. [PICTURE OF FURNITURE] ---------------- 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(TM) and SoHo(TM) are trademarks of the Company. ---------------- The Company intends to furnish its stockholders annual reports containing audited financial statements and will make available copies of quarterly reports containing unaudited interim financial information for the first three fiscal quarters of each fiscal year 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 Office Systems The Company does not manufacture or sell computers, computer hardware or telephone equipment. [PHOTO] [PHOTO] [PHOTO] Reff Morrison Equity Seating Storage [PHOTO] [PHOTO] [PHOTO] Sapper Bulldog Calibre Files [PHOTO] [PHOTO] [PHOTO] Parachute SoHo Reuter Overhead Desks & Casegoods Tables Knoll [PHOTO] [PHOTO] [PHOTO] Magnusson Desk Propeller Tables with Interaction SoHo Chairs Counterforce Table KnollStudio [PHOTO] [PHOTO] [PHOTO] Florence Knoll Table Desk Mies van der Bertoia Collection with deArmas Chairs Rohe Collection KnollExtra Spinneybeck KnollTextiles [PHOTO] [PHOTO] [PHOTO] Adjustable Keyboard Support Machine Age Leathers Honeycomb with Surf Ergonomic Accessories 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 290 professionals and its network of approximately 200 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; (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. In 1996, the Company had revenues of $651.8 million. 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. 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. 3 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 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 are often the first design component that the customer specifies and typically represent the largest part of a customer's furniture purchase. . 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 while its office systems market share was 11.2% during this same period (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. . 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 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. Additionally, the Company is developing new products 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. 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. 4 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 experienced strong growth in sales, gross margins and operating margins from 1994 to 1996. Sales increased from $562.9 million in 1994 to $651.8 million in 1996, despite the discontinuance of several product lines. Gross margins were 35.6% on a pro forma basis in 1996 and 27.1% in 1994. The operating margin was 12.0% on a pro forma basis in 1996, which the Company believes is among the highest of its major competitors. The Company's improved financial and operating results allowed it in 1996 to prepay $72.0 million of its senior credit facilities and refinance such facilities on more favorable terms. 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, 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 5 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." BACKGROUND 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 Electric Corporation ("Westinghouse") by a majority-owned subsidiary of Warburg, Pincus Ventures, L.P. ("Warburg"). As part of the Acquisition, Warburg, NationsBanc Investment Corp. ("NationsBanc" and also referred to herein as the "Selling Stockholder") and senior management invested $160 million in the Company's Common Stock, $.01 par value ("Common Stock"), and Series A 12% Participating Convertible Preferred Stock, $1.00 par value ("Series A Preferred Stock"). Knoll International, Inc. ("Knoll International"), 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. 6 THE OFFERINGS The offering of 6,400,000 shares of the Common Stock in the United States and Canada (the "U.S. Offering") and the offering of 1,600,000 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................ 8,000,000 shares Common Stock to be outstanding after the Offerings...................... 42,732,227 shares(1) Use of Proceeds(2).................. The net proceeds will be used (i) to redeem that portion of the Series A Preferred Stock not converted into Common Stock, (ii) to redeem a portion of the Company's outstanding subordinated debt and (iii) to the extent available, to repay revolving credit indebtedness of the Company and/or for working capital and general corporate purposes or additional debt retirement. See "Use of Proceeds." NYSE Symbol......................... "KNL"
- -------- (1) Includes 4,144,030 restricted shares issued under the Company's 1996 Stock Plan, of which 1,224,365 shares have vested and 2,919,665 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 1,318,552 shares have been granted and 502,316 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 an employee stock purchase plan to be implemented by the Company after consummation of the Offerings. Assumes the Underwriters' over-allotment options are not exercised. If such over-allotment options are exercised in full, an additional 480,000 shares will be issued and sold by the Company and 720,000 shares will be sold by the Selling Stockholder. (2) Of the 1,602,998 shares of Series A Preferred Stock outstanding prior to the Offerings, 800,000 shares held by Warburg and the Selling Stockholder will be redeemed for an aggregate redemption price of $80 million in cash and 11,749,361 shares of Common Stock, and the remaining 802,998 shares of Series A Preferred Stock (including those held by Warburg and the Selling Stockholder) will be converted into 15,691,558 shares of Common Stock. 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." Investors purchasing shares of Common Stock in the Offerings will incur substantial and immediate dilution of $21.20 per share in pro forma net tangible book value of Common Stock, which exceeds the assumed initial public offering price of $20.50 per share (based on the midpoint of the estimated range of the initial public offering price). See "Risk Factors--Dilution" and "Dilution." ------------------ Except as otherwise indicated herein, the information contained in this Prospectus (i) assumes no exercise of the Underwriters' over-allotment options, (ii) assumes the redemption or conversion to Common Stock of the Company's outstanding Series A Preferred Stock and (iii) gives effect to an amendment and restatement of the Company's Certificate of Incorporation and a 3.13943:1 stock split of the Common Stock to be effected prior to the effective date of the Offerings. 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, (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 and (iv) summary pro forma as adjusted information of the Company, as of the dates and for the periods indicated, after giving effect to the Offerings, the application of the estimated net proceeds therefrom and 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 one month period ended March 31, 1996 and the three month period ended March 31, 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 and pro forma as adjusted information does not purport to represent what the Company's results actually would have been if such events had occurred at the dates indicated, nor does such information purport to project the results of the Company for any future period. The summary financial information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Financial Statements and notes thereto and the Unaudited Pro Forma Financial Information and notes thereto included elsewhere in this Prospectus.
PREDECESSOR THE COMPANY -------------------------------- -------------------------------------- PRO FORMA YEAR ENDED TWO MONTHS TEN MONTHS PRO FORMA AS ADJUSTED DECEMBER 31, ENDED ENDED YEAR ENDED YEAR ENDED ------------------ FEBRUARY 29, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1994 1995 1996 1996 1996 (1) 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 $651,766 Cost of sales(3)........ 410,104 417,632 59,714 358,841 419,908 419,908 -------- -------- -------- -------- -------- -------- Gross profit............ 152,765 203,260 30,518 202,693 231,858 231,858 Provision for restruc- turing................. 29,180 -- -- -- -- -- Selling, general and administrative expenses(4)............ 167,238 138,527 21,256 131,349 153,388 153,388 Westinghouse long-term incentive compensation........... -- -- 47,900 -- -- -- Allocated corporate ex- penses(3)(4)........... 5,881 9,528 921 -- -- -- -------- -------- -------- -------- -------- -------- Operating income (loss)................. (49,534) 55,205 (39,559) 71,344 78,470 78,470 Interest expense........ 3,225 1,430 340 32,952 40,030 32,730 Other income (expense), net.................... 699 (1,597) (296) 447 151 151 -------- -------- -------- -------- -------- -------- Income (loss) before income taxes and extraordinary item..... (52,060) 52,178 (40,195) 38,839 38,591 45,891 Income tax expense (ben- efit).................. 7,713 22,846 (16,107) 16,844 16,848 19,739 -------- -------- -------- -------- -------- -------- Income (loss) before extraordinary item(5).. $(59,773) $ 29,332 $(24,088) $ 21,995 $ 21,743 $ 26,152 ======== ======== ======== ======== ======== ======== Pro forma income before extraordinary item per share of Common Stock(5)(6)............ $ .63 $ .62 $ .61 Pro forma weighted aver- age shares of Common Stock outstanding(6)... 35,030 35,030 43,030
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PREDECESSOR THE COMPANY -------------- ------------------------------------------------------- PRO FORMA AS PRO FORMA ADJUSTED TWO MONTHS ONE MONTH THREE MONTHS THREE MONTHS THREE MONTHS ENDED ENDED ENDED ENDED ENDED MARCH 31, FEBRUARY 29, MARCH 31, MARCH 31, MARCH 31, ------------------- 1996 1996 1997 1996 (1) 1996(1)(2) 1997(2) -------------- --------- ------------ ------------ ---------- -------- (IN THOUSANDS) (IN THOUSANDS, EXCEPT PER SHARE DATA) INCOME STATEMENT DATA: Total sales............. $ 90,232 $48,080 $177,833 $138,312 $138,312 $177,833 Cost of sales(3)........ 59,714 32,543 109,859 93,610 93,610 109,859 -------- ------- -------- -------- -------- -------- Gross profit............ 30,518 15,537 67,974 44,702 44,702 67,974 Selling, general and administrative expenses(4)............ 21,256 10,999 40,058 33,038 33,038 40,058 Westinghouse long-term incentive compensation........... 47,900 -- -- -- -- -- Allocated corporate ex- penses(3)(4)........... 921 -- -- -- -- -- -------- ------- -------- -------- -------- -------- Operating income (loss)................. (39,559) 4,538 27,916 11,664 11,664 27,916 Interest expense........ 340 3,602 7,742 10,680 8,855 5,952 Other income (expense), net.................... (296) (49) (74) (345) (345) (74) -------- ------- -------- -------- -------- -------- Income (loss) before income taxes and extraordinary item..... (40,195) 887 20,100 639 2,464 21,890 Income tax expense (ben- efit).................. (16,107) 438 8,462 442 1,165 9,171 -------- ------- -------- -------- -------- -------- Income (loss) before extraordinary item(5).. $(24,088) $ 449 $ 11,638 $ 197 $ 1,299 $ 12,719 ======== ======= ======== ======== ======== ======== Pro forma income before extraordinary item per share of Common Stock(5)(6)............ $ .01 $ .33 $ .01 $ .03 $ .30 Pro forma weighted aver- age shares of Common Stock outstanding(6)... 35,030 35,030 35,030 43,030 43,030
PREDECESSOR THE COMPANY ----------------- ----------------------------------------------- MARCH 31, PRO FORMA DECEMBER 31, DECEMBER 31, ----------------- AS ADJUSTED 1994 1995 1996 1996 1997 MARCH 31,1997(2) -------- -------- ------------ -------- -------- ---------------- (IN THOUSANDS) (IN THOUSANDS) BALANCE SHEET DATA (AT PERIOD END): Working capital......... $ 22,898 $ 82,698 $ 64,754 $100,936 $ 77,716 $ 78,763 Total assets............ 705,316 656,710 675,712 694,780 662,034 662,197 Total long-term debt, including current portion................ 12,451 3,538 354,154 426,228 336,034 270,196 Total liabilities....... 247,310 176,259 497,908 533,952 474,660 407,775 Stockholders' equity.... 458,006 480,451 177,804 160,828 187,374 254,422
- -------- (1) Reflects summary pro forma financial information of the Company derived from the Financial Statements and notes thereto included elsewhere in this Prospectus, adjusted for the completion of the Acquisition and the application of the net proceeds of $160,000 from the sale of capital stock of the Company and borrowings of $260,000 and $165,000 under the Credit Facilities (as defined) and the Notes (as defined), respectively. (2) Adjusted to reflect the sale of Common Stock offered hereby, the application of the estimated net proceeds therefrom and the redemption of 800,000 shares of Series A Preferred Stock held by Warburg and the Selling Stockholder for an aggregate redemption price of $80 million in cash and 11,749,361 shares of Common Stock, and the conversion of the remaining 802,998 shares of Series A Preferred Stock (including those held by Warburg and the Selling Stockholder) into 15,691,558 shares of Common Stock. See "Use of Proceeds." (3) Cost of sales has been increased by (i) $801 for the pro forma and the pro forma as adjusted year ended December 31, 1996 and the pro forma and the pro forma as adjusted three months ended March 31, 1996 to reflect an increase in depreciation resulting from the Acquisition and (ii) $552 for the pro forma and the pro forma as adjusted year ended December 31, 1996 and the pro forma and the pro forma as adjusted three months ended March 31, 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 to the Predecessor, including (i) benefit expense related to (footnotes continued on following page) 9 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 and the pro forma as adjusted year ended December 31, 1996 and the pro forma and the pro forma as adjusted three months ended March 31, 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 and the pro forma as adjusted year ended December 31, 1996 and the pro forma and the pro forma as adjusted three months ended March 31, 1996 to reflect an increase in amortization and depreciation resulting from the Acquisition. (5) The pro forma and the pro forma as adjusted 1996 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 as adjusted income statement data for the year ended December 31, 1996, the three month period ended March 31, 1996 and the three month period ended March 31, 1997 does not include an anticipated extraordinary loss of $5,612 net of taxes associated with the redemption of a portion of the Notes in connection with the Offerings. (6) 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 that will result from the amendment of the Company's Certificate of Incorporation that will occur prior to the effective date of the Offerings. Because of the significance of the redemption and conversion into Common Stock of the outstanding Series A Preferred Stock upon consummation of the Offerings, historical net income (loss) before extraordinary item per share is not presented herein. Pro forma and pro forma as adjusted net 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. Accordingly, the launch of any particular product may be later than originally anticipated by the Company. 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. SIGNIFICANT LEVERAGE AND DEBT SERVICE At March 31, 1997, on a pro forma basis taking into account the application of the estimated net proceeds of the Offerings as described in "Use of Proceeds," the Company would have had total consolidated outstanding debt of approximately $270.2 million. Subject to the restrictions contained in the Company's existing bank credit facilities (the "Credit Facilities") and the indenture (the "Indenture") related to the Company's 10 7/8% Senior Subordinated Notes (the "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 high level of the Company's indebtedness could have important consequences to holders of the Common Stock, given that: (i) a 11 substantial 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." RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS The terms of the Credit Facilities and the Notes impose 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 significantly 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 Credit Facilities or the Indenture. If payments to the lenders under the Credit Facilities or payments to the holders of the Notes were to be accelerated, there can be no assurance that the assets of the Company would be sufficient to repay in full such indebtedness and the other indebtedness of the Company. 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 EXISTING STOCKHOLDERS Upon completion of the Offerings, the Company's existing stockholders, including Warburg and the Company's executive officers, will beneficially own approximately 80% of the outstanding shares of the Company's Common Stock (approximately 77% if the Underwriters' over-allotment options are exercised in full). As a result, existing stockholders 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 policies of the Company. In addition, pursuant to a stockholders agreement, upon consummation of the Offerings the stockholders who are a party thereto (comprising approximately 79% of the outstanding shares of Common Stock of the Company upon completion of the Offerings) 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. At the time of the completion of the Offerings, the Board of Directors of the Company will consist of eight members. So long as Warburg has the right to designate four nominees and the Board of Directors is composed of eight or fewer members, Warburg will have the ability to block any corporate action 12 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 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." 13 POTENTIAL LABOR DISRUPTIONS Certain of the Company's employees in Grand Rapids, Michigan and in Italy are represented by unions. 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. There can be no assurance that the Company will not experience work stoppages or other labor problems in the future or that the Company will be able to successfully negotiate new contracts with such unions. EXCHANGE RATE FLUCTUATION The Company's foreign sales and certain expenses are transacted in foreign currencies. In 1996, approximately 12% of the Company's revenues and 24% 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. Upon completion of the Offerings, the Company will have outstanding 39,812,562 shares of Common Stock, excluding 2,919,665 shares of Common Stock which have been granted under the Company's stock incentive plans but have not vested. Of these shares, the 8,000,000 shares of Common Stock 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 be acquired by an "affiliate" of the Company. In connection with the Offerings, existing stockholders (holding an aggregate of 31,812,562 shares of Common Stock upon consummation of the Offerings) have agreed not to dispose of any shares of Common Stock for a period of 180 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 lockup period, 31,010,274 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, promptly after the closing of the Offerings, the Company intends to file a registration statement under the Securities Act covering the sale of 6,964,898 shares of Common Stock previously issued as restricted stock (including 2,919,665 shares which have been granted but not yet vested) or reserved for issuance or sale under the stock incentive plans and the Company's employee stock purchase plan. Upon completion of the Offerings, there will be outstanding options to purchase a total of 1,318,552 shares of Common Stock. See "Management--Stock Incentive Plans." The Company has granted all existing stockholders registration rights with respect to all of the shares of Common Stock held by them prior to the Offerings, whether vested or unvested. See "Certain Transactions." The sale of such shares could have an adverse effect on the Company's ability to raise equity capital in the public markets. See "Shares Eligible for Future Sale." SUBSTANTIAL AND IMMEDIATE DILUTION TO INVESTORS PURCHASING IN THE OFFERINGS Investors purchasing shares of Common Stock in the Offerings will incur substantial and immediate dilution of $21.20 per share in the pro forma net tangible book value of the Common Stock which exceeds the assumed 14 initial public offering price of $20.50 per share (based on the midpoint of the estimated range of the initial public offering price). In addition, these investors will incur additional dilution upon the exercise of outstanding stock options. See "Dilution." RESTRICTIONS ON PAYMENT OF DIVIDENDS; ABSENCE OF DIVIDENDS The Indenture pursuant to which the Notes were issued and the Credit Facilities 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 are beyond the Company's control. Actual results could differ materially from these forward-looking statements as a result of 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. ABSENCE OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE Prior to the Offerings, there has been no public market for the Common Stock. Although the Common Stock has been approved for listing on the NYSE, subject to notice of issuance, there can be no assurance that an active trading market for the Common Stock will develop or be sustained following the Offerings or that the market price of the Common Stock will not decline below the initial public offering price. The initial public offering price will be determined by negotiation among the Company, the Selling Stockholder and the Underwriters based upon several factors and may not be indicative of future market prices. The price at which the Common Stock will trade will depend upon a number of factors, including, but not limited to, the Company's historical and anticipated operating results and general market and economic conditions, some of which factors are beyond the Company's control. Factors such as quarterly fluctuations in the Company's financial and operating results, announcements by the Company or others and developments affecting the Company, its products, its clients, the markets in which it competes or the industry generally, also could cause the market price of the Common Stock to fluctuate substantially. In addition, the stock market has from time to time experienced extreme price and volume fluctuations. These broad market fluctuations may adversely affect the market price of the Common Stock. See "Underwriting." 15 USE OF PROCEEDS The net proceeds to the Company from the sale of the 8,000,000 shares of Common Stock offered in the Offerings, based upon an assumed initial public offering price of $20.50 per share (the midpoint of the estimated range of the initial public offering price), are estimated to be $152.7 million ($161.9 million if the Underwriters' over-allotment options are exercised in full), after deducting the underwriting discount and estimated offering expenses. The Company will not receive any of the proceeds of any sale of shares by the Selling Stockholder upon exercise of the Underwriters' over-allotment options. The estimated net proceeds of the Offerings will be used (i) to pay $80.0 million in connection with the redemption of 800,000 shares of Series A Preferred Stock held by Warburg and NationsBanc not converted into Common Stock, (ii) to redeem an aggregate principal amount of $57.8 million of the Notes for a total redemption price of $64.6 million, including a redemption premium of $5.7 million and accrued and unpaid interest thereon of $1.1 million (assuming a redemption date of May 15, 1997) and (iii) to the extent available, to repay revolving credit indebtedness of $8.1 million under the Credit Facilities and/or for working capital and general corporate purposes or additional debt retirement. The Notes bear interest at a rate of 10 7/8% per annum and will mature on March 15, 2006. Indebtedness under Credit Facilities bears interest at a floating rate based, at the Company's option, upon (i) LIBOR plus 0.875% or (ii) the prime rate. The revolving portion of the Credit Facilities matures in 2002. The Notes were originally issued, and the Credit Facilities were originally entered into, in order to finance a portion of the Acquisition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and "Description of Certain Indebtedness." DIVIDEND POLICY The Company has not paid a cash dividend on its Common Stock since the Acquisition, and does not anticipate paying any cash 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 Credit Facilities 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." 16 CAPITALIZATION The following table sets forth: (i) the long-term debt (including current portion) and the capitalization of the Company as of March 31, 1997 and (ii) the long-term debt and capitalization as adjusted to reflect the redemption and conversion, concurrent with the Offerings, of the outstanding shares of Series A Preferred Stock for an aggregate of $80 million and 27,440,919 shares of Common Stock and the sale by the Company of the 8,000,000 shares of Common Stock offered hereby at an assumed initial public offering price of $20.50 per share (the midpoint of the estimated range of the initial public offering price) and application of the estimated net proceeds therefrom as described in "Use of Proceeds." 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.
MARCH 31, 1997 --------------------- PRO FORMA ACTUAL AS ADJUSTED -------- ----------- (IN THOUSANDS, EXCEPT SHARE DATA) Long-term debt (including current portion): Revolving Credit Facility (1).......................... $ 75,000 $ 66,912 Term Loan Facilities................................... 95,000 95,000 Notes.................................................. 165,000 107,250 Other.................................................. 1,034 1,034 -------- -------- Total long-term debt................................. 336,034 270,196 -------- -------- Stockholders' equity: Series A 12% Participating Convertible Preferred Stock, $1.00 par value, 1,920,000 shares authorized; 1,602,998 shares issued and outstanding actual, 10,000,000 shares authorized; no shares issued and outstanding pro forma as adjusted..................... 1,603 -- Common Stock, $0.01 par value, 100,000,000 shares au- thorized (2); 7,291,308 shares issued and outstanding actual and 42,732,227 shares issued and outstanding as adjusted (3)................................................... 73 427 Additional paid-in capital............................. 160,147 234,056 Unearned stock grant compensation...................... (1,381) (1,381) Retained earnings (4).................................. 28,474 22,862 Cumulative foreign currency translation adjustment..... (1,542) (1,542) -------- -------- Total stockholders' equity........................... 187,374 254,422 -------- -------- Total capitalization............................... $523,408 $524,618 ======== ========
- -------- (1) At March 31, 1997 the Company had $55,000 (actual) and $63,088 (pro forma as adjusted) of unused credit availability under the Credit Facilities. See "Use of Proceeds." (2) Gives effect to an amendment and restatement to the Company's Certificate of Incorporation. (3) Actual and pro forma as adjusted include 4,144,030 restricted shares which have been issued under the Company's 1996 Stock Plan (including 2,919,665 shares which have been granted but have not yet vested). (4) The reduction of retained earnings reflects the extraordinary loss, net of related tax benefit, of $5,612 to be recognized on the redemption of Notes with a portion of the net proceeds of the Offerings. 17 DILUTION The pro forma net tangible book deficit of the Company at March 31, 1997 was ($176,959,000) or approximately ($5.09) per share. Pro forma net tangible book deficit per share represents the amount of total assets, excluding intangibles (goodwill, trademarks and deferred financing fees), less total liabilities, divided by the aggregate number of shares of Common Stock outstanding as of March 31, 1997 (on a pro forma basis after giving effect to the redemption and conversion of the outstanding shares of Series A Preferred Stock into an aggregate of $80 million and 27,440,919 shares of Common Stock). Without taking into account any changes in the Company's net tangible book deficit after March 31, 1997, other than to give effect to (i) the receipt of the estimated net proceeds from the sale of the 8,000,000 shares of Common Stock offered hereby, assuming an initial public offering price of $20.50 per share (the midpoint of the estimated range of the initial public offering price) and the deduction of the underwriting discount and estimated offering expenses to be paid by the Company, and (ii) the deduction of non-recurring and extraordinary expenses to be incurred upon the completion of the Offerings, the pro forma net tangible book deficit of the Company at March 31, 1997 would have been ($29,911,000), or ($0.70) per share. This represents an immediate increase in net tangible book value of $4.39 per share of Common Stock to existing stockholders and an immediate dilution of approximately $21.20 per share to new investors purchasing shares in the Offerings. The following table illustrates the per share dilution: Assumed initial public offering price per share................. $20.50 Pro forma net tangible book deficit per share before the Of- ferings...................................................... $(5.09) Increase per share attributable to new investors.............. 4.39 ------ Pro forma net tangible book deficit per share after the Offer- ings........................................................... (.70) ------ Dilution per share to new investors............................. $21.20 ======
- -------- (1) If the Underwriters' over allotment options are exercised in full, dilution to new investors will be $20.98 per share. The following table sets forth, on a pro forma basis as of March 31, 1997, the number of shares of Common Stock purchased from the Company, the total consideration paid to the Company and the average price per share paid by existing stockholders and by the new investors purchasing shares of Common Stock from the Company in the Offerings (before deducting underwriting discount and estimated offering expenses). Total contribution from existing stockholders reflect the $160.4 million paid for the Series A Preferred Stock and Common Stock purchased, less $80 million paid in connection with the redemption of the Series A Preferred Stock.
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE ------------------ -------------------- PRICE PER NUMBER PERCENT AMOUNT PERCENT SHARE ---------- ------- ------------ ------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Existing stockholders......... 34,732,227 81.3% $ 80,541,000 32.9% $ 2.32 New investors................. 8,000,000 18.7 164,000,000 67.1 20.50 ---------- ----- ------------ ----- Total....................... 42,732,227 100.0% $244,541,000 100.0% $ 5.72 ========== ===== ============ =====
The foregoing tables assume no exercise of the Underwriters' over-allotment options. There were 1,318,552 options outstanding at March 31, 1997. Between December 31, 1996 and March 7, 1997, the Company granted options to purchase an aggregate of 1,318,552 shares of Common Stock at a weighted average exercise price of $15.93 per share. See "Management--Stock Incentive Plans." To the extent that outstanding options are exercised in the future, there will be further dilution to new investors. 18 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, (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 and (iv) summary pro forma as adjusted information of the Company, as of the dates and for the periods indicated, after giving effect to the Offerings, the application of the estimated net proceeds therefrom and 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 one month period ended March 31, 1996 and the three month period ended March 31, 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 and pro forma as adjusted information does not purport to represent what the Company's results actually would have been if such events had occurred at the dates indicated, nor does such information purport to project the results of the Company for any future period. The 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 ------------------------------------------------------- -------------------------------------- PRO FORMA TWO MONTHS TEN MONTHS PRO FORMA AS ADJUSTED YEAR ENDED DECEMBER 31, ENDED ENDED YEAR ENDED YEAR ENDED ----------------------------------------- FEBRUARY 29, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1992 1993 1994 1995 1996 1996 1996(1) 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 $651,766 Cost of sales(3).......... 417,213 376,875 410,104 417,632 59,714 358,841 419,908 419,908 --------- --------- --------- -------- --------- -------- --------- -------- Gross profit.............. 159,408 131,508 152,765 203,260 30,518 202,693 231,858 231,858 Provision for restructuring............ 26,000 6,165 29,180 -- -- -- -- -- Selling, general and administrative expenses(4).. 165,913 163,015 167,238 138,527 21,256 131,349 153,388 153,388 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 78,470 Interest expense.......... 3,866 3,301 3,225 1,430 340 32,952 40,030 32,730 Other income (expense), net...................... (929) 2,082 699 (1,597) (296) 447 151 151 --------- --------- --------- -------- --------- -------- --------- -------- 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 38,591 45,891 Income tax expense (benefit).. (4,795) (3,571) 7,713 22,846 (16,107) 16,844 16,848 19,739 --------- --------- --------- -------- --------- -------- --------- -------- 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 21,743 26,152 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 21,743 26,152 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 $ 21,743 $ 26,152 ========= ========= ========= ======== ========= ======== ========= ======== Pro forma income before extraordinary item per share of Common Stock(5)(6).............. $ .63 $ .62 $ .61 Pro forma net income per share of Common Stock(5)(6).............. $ .48 $ .62 $ .61 Pro forma weighted average shares of Common Stock outstanding(6).. 35,030 35,030 43,030
(continued on following page) 19
PREDECESSOR THE COMPANY -------------- ----------------------------------------------------------- PRO FORMA PRO FORMA AS ADJUSTED TWO MONTHS ONE MONTH THREE MONTHS THREE MONTHS THREE MONTHS ENDED ENDED ENDED ENDED ENDED MARCH 31, FEBRUARY 29, MARCH 31, MARCH 31, MARCH 31, ----------------------- 1996 1996 1997 1996(1) 1996(1)(2) 1997(2) -------------- --------- ------------ ------------ ------------ ---------- (IN THOUSANDS) (IN THOUSANDS, EXCEPT PER SHARE DATA) INCOME STATEMENT DATA: Total sales............. $90,232 $48,080 $177,833 $138,312 $ 138,312 $ 177,833 Cost of sales(3)........ 59,714 32,543 109,859 93,610 93,610 109,859 ------- ------- -------- -------- ---------- ---------- Gross profit............ 30,518 15,537 67,974 44,702 44,702 67,974 Selling, general and administrative expenses(4)............ 21,256 10,999 40,058 33,038 33,038 40,058 Westinghouse long-term incentive compensation........... 47,900 -- -- -- -- -- Allocated corporate expenses(3)(4)......... 921 -- -- -- -- -- ------- ------- -------- -------- ---------- ---------- Operating income (loss)................. (39,559) 4,538 27,916 11,664 11,664 27,916 Interest expense........ 340 3,602 7,742 10,680 8,855 5,952 Other income (expense), net.................... (296) (49) (74) (345) (345) (74) ------- ------- -------- -------- ---------- ---------- Income (loss) before income taxes and extraordinary item..... (40,195) 887 20,100 639 2,464 21,890 Income tax expense (benefit).............. (16,107) 438 8,462 442 1,165 9,171 ------- ------- -------- -------- ---------- ---------- Income (loss) before extraordinary item..... (24,088) $ 449 $ 11,638 $ 197 $ 1,299 $ 12,719 ======= ======= ======== ======== ========== ========== Pro forma income before extraordinary item per share of Common Stock(5)(6)............ $ .01 $ .33 $ .01 $ .03 $ .30 Pro forma weighted average shares of Common Stock outstanding(6)......... 35,030 35,030 35,030 43,030 43,030
PREDECESSOR THE COMPANY ----------------------------------- ------------------------------------------ PRO FORMA DECEMBER 31, MARCH 31, AS ADJUSTED ----------------------------------- DECEMBER 31, ----------------- MARCH 31, 1992 1993 1994 1995 1996 1996 1997 1997(2) -------- -------- -------- -------- ------------ -------- -------- ----------- BALANCE SHEET DATA (AT (IN THOUSANDS) (IN THOUSANDS) PERIOD END): Working capital......... $ 67,063 $ 41,933 $ 22,898 $ 82,698 $ 64,754 $100,936 $ 77,716 $ 78,763 Total assets............ 726,469 691,043 705,316 656,710 675,712 694,780 662,034 662,197 Total long-term debt, including current por- tion................... 20,106 15,204 12,451 3,538 354,154 426,228 336,034 270,196 Total liabilities....... 186,347 205,104 247,310 176,259 497,908 533,952 474,660 407,775 Stockholders' equity.... 540,122 485,939 458,006 480,451 177,804 160,828 187,374 254,422
- -------- (1) Reflects summary pro forma financial information of the Company derived from the Financial Statements and notes thereto included elsewhere in this Prospectus, adjusted for the completion of the Acquisition and the application of the net proceeds of $160,000 from the sale of capital stock of the Company and borrowings of $260,000 and $165,000 under the Credit Facilities and the Notes, respectively. (2) Adjusted to reflect the sale of Common Stock offered hereby, the application of the estimated net proceeds therefrom and the redemption of 800,000 shares of Series A Preferred Stock held by Warburg and the Selling Stockholder for an aggregate redemption price of $80 million in cash and 11,749,361 shares of Common Stock, and the conversion of the remaining 802,998 shares of Series A Preferred Stock (including those held by Warburg and the Selling Stockholder) into 15,691,558 shares of Common Stock. See "Use of Proceeds." (3) Cost of sales has been increased by (i) $801 for the pro forma and the pro forma as adjusted year ended December 31, 1996 and the pro forma as adjusted three months ended March 31, 1996 to reflect an increase in depreciation resulting from the Acquisition and (ii) $552 for the pro forma and the pro forma as adjusted 20 year ended December 31, 1996 and the pro forma and pro forma as adjusted three months ended March 31, 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 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 and the pro forma as adjusted year ended December 31, 1996 and the pro forma and pro forma as adjusted three months ended March 31, 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 and the pro forma as adjusted year ended December 31, 1996 and the pro forma and the pro forma as adjusted three months ended March 31, 1996 to reflect an increase in amortization and depreciation resulting from the Acquisition. (5) The pro forma and the pro forma as adjusted 1996 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 as adjusted income statement data for the year ended December 31, 1996, the three month period ended March 31, 1996, and the three month period ended March 31, 1997 does not include an anticipated extraordinary loss of $5,612 net of taxes associated with the redemption of a portion of the Notes in connection with the Offerings. (6) 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 that will result from the amendment of the Company's Certificate of Incorporation that will occur prior to the effective date of the Offerings. Because of the significance of the redemption and conversion into Common Stock of the outstanding Series A Preferred Stock upon consummation of the Offerings, historical net income (loss) per share is not presented herein. Pro forma and pro forma as adjusted 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 each period presented. See Note (i) of the Notes to the Unaudited Pro Forma Financial Information. 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND 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 Selected Financial Information of the Company, the Financial Statements of the Company and notes thereto and the Unaudited Financial Information and notes thereto 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 to 1996, primarily due to 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. 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. 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 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. 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 such facilities on more favorable terms. 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 22 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. In addition, BIFMA estimates that the U.S. office furniture industry will grow approximately 5% in 1997. 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 pursue 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 1996 U.S. office furniture market sales by category.
U.S. MARKET % OF U.S. PRODUCT CATEGORY SIZE MARKET ---------------- ------------- --------- (IN BILLIONS) Office systems................................... $3.4 34.1% Seating.......................................... 2.6 25.4 Storage.......................................... 1.4 14.1 Desks and casegoods.............................. 1.6 16.4 Tables........................................... 0.7 6.6
In addition, the Company had 1996 sales of approximately $79.5 million in Canada and Europe. European sales are primarily in the United Kingdom, Germany, France, Belgium and Italy. RESULTS OF OPERATIONS COMPARISON OF FIRST QUARTER ENDED MARCH 31, 1997 TO PRO FORMA FIRST QUARTER ENDED MARCH 31, 1996 Total Sales. Sales for the first quarter of 1997 were $177.8 million, an increase of $39.5 million, or 28.6%, from first quarter 1996 sales of $138.3 million. The sales growth principally resulted from increased volume across all North American product categories, offset by a slight reduction in European volume. A significant portion of the growth in sales volume was attributable to sales of office systems, which grew $32.6 million, or 32.2%. Additionally, first quarter sales growth benefitted from favorable industry dynamics which the Company believes were, in part, the result of strong white collar employment growth in the United States in the second half of 1996. Gross profit. Gross profit was $68.0 million for the first quarter of 1997, increasing $23.3 million, or 52.1%, from gross profit of $44.7 million for the first quarter of 1996. Gross profit as a percentage of sales increased to 38.2% for the first quarter of 1997 from 32.3% for the first quarter of 1996. These increases were principally due to the higher sales volume and better pricing in North America, continued worldwide factory operating cost improvements, the benefit of lower operating costs in Europe resulting from consolidation and centralization of functions implemented in 1996 and other fixed cost reductions. Selling, general and administrative expenses. Selling, general and administrative expenses were $40.1 million for the first quarter of 1997, an increase of $7.1 million from $33.0 for the first quarter of 1996. The 23 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 the centralization of administrative functions in Europe. As a percentage of sales, the Company's selling, general and administrative expenses decreased to 22.6% for the first quarter of 1997 from 23.9% for the same period in 1996. Operating income. Operating income increased to $27.9 million for the first quarter of 1997 from $11.7 million for the first quarter of 1996. As a percentage of sales, operating income increased to 15.7% for the first quarter of 1997 from 8.5% in the first quarter of 1996. As noted above, this improvement was driven by higher sales volume, better pricing, factory cost improvements and efficiencies gained from consolidation and centralization of administrative functions. Interest expense. Interest expense decreased $2.9 million for the first quarter of 1997 to $7.7 million from $10.7 million for the first quarter of 1996. The decrease was primarily attributable to the refinancing of the Company's previously existing credit agreement in December 1996 and the prepayment of $72.0 million of indebtedness under such credit agreement during the ten month period ended December 31, 1996. Income tax expense. Income tax expense for the first quarter of 1997 was 42.1% of pre-tax income as compared to 69.2% for the first quarter of 1996. The decrease in the effective tax rate was primarily attributable to pre-tax losses incurred in Europe in the first quarter of 1996 for which no benefit was recorded. 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 24 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 totalling $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 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 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 25 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. 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 26 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 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 Credit Facilities and the issuance of the Notes, as well as scheduled principal payments of term loans under the Credit Facilities, significantly increased interest expense and cash requirements compared to previous years. Following completion of the Offerings, outstanding indebtedness will be reduced, which will partly reduce the Company's interest expense. If the net proceeds from the Offerings are less than the amount necessary to redeem the shares of Series A Preferred Stock from Warburg and NationsBanc and redeem a portion of the Notes, the 27 Company will use cash on hand or the proceeds from borrowings under the Credit Facilities. See "Use of Proceeds." The Credit Facilities provide for a $100 million term loan and a $130 million revolving credit facility. The term loan is subject to quarterly amortization of principal which commenced on March 31, 1997, in an aggregate amount of $15 million in 1997, $15 million in 1998, $15 million in 1999, $15 million in 2000, $20 million in 2001 and $20 million in 2002. Loans made pursuant to the revolving credit facility may be borrowed, repaid and reborrowed from time to time until December 17, 2002. Indebtedness under the Credit Facilities bears interest at a floating rate based, at the Company's option, upon (i) LIBOR plus 0.875% or (ii) the prime rate. These rates are subject to change based on the Company's ratio of funded debt to EBITDA. The Credit Facilities contain restrictive covenants, financial covenants and events of default. See "Description of Certain Indebtedness--Description of Credit Facilities." In addition to the Credit Facilities, in connection with the Acquisition the Company also issued $165 million aggregate principal amount of 10 7/8% Senior Subordinated Notes due 2006. The Notes are subordinated to all existing and future senior indebtedness of the Company, including all indebtedness under the Credit Facilities. 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 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. At any time on or before March 15, 1999 the Company may redeem up to 35% of the original aggregate principal amount of the Notes at a redemption price of 110% of their principal amount with the net proceeds of a public equity offering by the Company. The Company intends to redeem $57.8 million aggregate principal amount of the Notes with the net proceeds of the Offerings. See "Description of Certain Indebtedness--Description of the Notes." The Company's foreign subsidiaries from time to time maintain local credit facilities to provide credit for overdraft, working capital and other purposes. The Credit Facilities restrict such indebtedness to $10.0 million at any one time. As of March 31, 1997, the Company's total credit available under such facilities was approximately $8.7 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 $23.9 million for the three months ended March 31, 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 net earnings, depreciation and amortization, as well as increases in accounts payable and other current liabilities and decreases in inventory. Cash used in investing activities totaled $2.8 million for the three months ended March 31, 1997 and was primarily comprised of capital expenditures. Cash flow 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 million in 1997. The Credit Facilities restrict the Company's capital expenditures to $36 million annually (plus up to $10 million carried forward from a previous year). 28 Cash provided by (used in) financing activities totaled $(18.0) million for the three months ended March 31, 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 $18.0 million used by the Company for the three months ended March 31, 1997 includes $14.3 million for the prepayment of indebtedness under the Credit Facilities. 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 Credit Facilities. The Company has recorded approximately $1.5 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 March 31, 1997, the Company had four outstanding interest rate collar agreements with a total notional principal amount of $150 million and maximum and minimum rates ranging from 7.5% to 7.99% and 5.00% to 5.5%, respectively. These agreements mature over the next two years. Aggregate maturities of the total notional principal amount are $35 million in 1998 and $115 million in 1999. 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 Credit Facilities, 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 three months ended March 31, 1997. BACKLOG As of March 31, 1997, the Company's backlog of unfilled orders was $110.7 million. At March 31, 1996, the backlog totaled $84.1 million. The Company expects to fill 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. 29 FOREIGN OPERATIONS The Company's foreign sales and certain expenses are transacted in foreign currencies. In 1996, approximately 12% of the Company's revenues and 24% 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. QUARTERLY RESULTS OF OPERATIONS The following table sets forth certain unaudited summary pro forma and historical information on a quarterly basis for the Company.
PRO HISTORICAL FORMA ---------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER 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 extraordinary item... 197 7,527 7,685 6,334 PRO FORMA --------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER 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
The pro forma 1996 information presented above does not include the extraordinary loss on the early extinguishment of debt amounting to $8,542 pre-tax, $5,159 after-tax, recognized during the fourth quarter. 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 290 professionals and its network of approximately 200 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; (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. In 1996, the Company had revenues of $651.8 million. 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. 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 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." 31 . Corporate relocations. As companies redesign existing 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. 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 in 1996.
U.S. % OF U.S. PRODUCT CATEGORY MARKET SIZE MARKET ---------------- ----------- --------- (IN BILLIONS) Office systems...................................... $3.4 34.1% Seating............................................. 2.6 25.4 Storage............................................. 1.4 14.1 Desks and casegoods................................. 1.6 16.4 Tables.............................................. 0.7 6.6
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. 32 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 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 products 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. 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 while its office systems market share was 11.2% during this same period (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. . 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. Additionally, the Company is developing new products 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. 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. 33 . 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 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 program, the Company has developed an organization focused on expense control and operating efficiency. 34 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 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. 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 the Company. 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. The Company has created a platform to execute its growth strategy through the successful completion of its turnaround program. As part of these 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. . 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. 35 . 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 to 1996. Sales increased from $562.9 million in 1994 to $651.8 million in 1996, despite the discontinuance of several product lines. Gross margins were 35.6% on a pro forma basis in 1996 and 27.1% in 1994. The operating margin was 12.0% on a pro forma basis in 1996, which the Company believes is 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 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. 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 composed of adjustable partitions, work surfaces, storage cabinets and electrical and lighting systems which can be moved, re-configured and re-used within the office. Systems therefore offer a cost effective and flexible alternative to traditional drywall office construction. The Company has focused on this area of the office furniture industry because it is the largest category, typically provides attractive gross margins and often leads to repeat and add-on sales of additional systems, complementary furniture and furniture accessories. 36 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. The Company is developing new office systems products and line extensions that address price points and new category segments, such as the "teamwork" segment, where the Company's current product offerings may be limited and demand for quality products is underserved. The Company believes its brand identity, superior design and complementary product offerings give it a competitive advantage in launching new products. 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 37 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 same distribution channels as are office system sales. The Company will seek to leverage its presence in the office systems product line to increase sales in its other product lines, such as seating. The Company has conducted extensive research to improve the seating product line. 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 system sales. These products also function as free-standing furniture in private offices or open-plan environments. This product line is part of the Company's strategy of providing its customers with a one-stop source for office furniture and permits the Company to sell products to businesses whose office furniture systems are provided by its competitors. Additionally, the Company relies upon its dealers for the promotion of Calibre products to independent business purchasers and has instituted the QuickShip marketing program to serve the dealer-promoted product segment. See "--Sales, Marketing and Distribution." Desks and Casegoods The Company's collections of stand-alone wood furniture items, such as desks, bookshelves and credenzas, are available in a range of designs and price points. These products combine contemporary styling with sophisticated workplace solutions and attract a wide variety of customers, from those conducting large office reconfigurations to small retail purchasers. Casegoods are part of the Company's strategy of being a one-stop source of quality office furniture. Tables The Company recently has expanded its offerings in the table 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. 38 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 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 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 39 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. . 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 its competition. The Company employs approximately 290 direct sales representatives, who work closely with its approximately 200 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. 40 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 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. Since the Company's sales force is not required to generate such sales and since the Company grants lower discounts to individual purchasers, it generates gross margins higher than its average gross margins from 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 41 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 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, while its office systems market share was 11.2% during the same period. 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% of the Company's sales in 1996. 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(TM) 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 42 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. EMPLOYEES Management believes that relations with its employees are good. As of February 1, 1997, the Company employed a total of 3,550 people, including 2,266 hourly and 1,284 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 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 consist of one approximately 375,000 square foot owned building and two leased properties aggregating approximately 230,000 square feet. The Reff product line is manufactured at these facilities. The Company's owned facilities in East Greenville, Grand Rapids and Muskegon are encumbered by mortgages securing an original aggregate principal amount of $230 million that were entered into in connection with the Credit Facilities. The Company owns two manufacturing facilities in Italy: an approximately 258,000 square foot building in Foligno, which houses the Knoll Europe headquarters and where all of the Company's wood products are 43 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 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. 44 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 Vice Chairman of the Board, President and Chief Executive Officer Wolfgang Billstein...... 48 Managing Director--Knoll Europe Kathleen G. Bradley..... 47 Senior Vice President--Sales, Distribution and Customer Service Andrew B. Cogan......... 34 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..... 43 Vice President--Human Resources Barry L. McCabe......... 50 Vice President, Controller and Treasurer Patrick A. Milberger.... 40 Vice President, General Counsel and Secretary Jeffrey A. Harris....... 41 Director Sidney Lapidus.......... 59 Director Kewsong Lee............. 31 Director John L. Vogelstein...... 62 Director
The Company expects to add one additional director prior to completion of the Offerings and one additional director after completion of the Offerings. 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. 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. 45 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. Jeffrey A. Harris, a director of the Company since February 1996, has been a General Partner of Warburg, Pincus & Co., a private investment firm, and a Member and Managing Director of E.M. Warburg, Pincus & Co., LLC 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 & Co. and a Member and Managing Director of E.M. Warburg, Pincus & Co., LLC 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 & Co. and a Member and Managing Director of E.M. Warburg, Pincus & Co., LLC 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, Pincus & Co., Inc. and prior to that had been a consultant at McKinsey & Company, Inc. since 1990. Mr. Lee is currently a director of RenaissanceRe Holdings Ltd. and several privately held companies. John L. Vogelstein has been a director of the Company since February 1996. Mr. Vogelstein is a General Partner of Warburg, Pincus & Co., and a Member, Vice Chairman and President of E. M. Warburg, Pincus & Co., LLC, where he has been employed since 1967. Mr. Vogelstein is currently a director of ADVO Inc., 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. 46 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...... -- Managing Director-- 1996 396,000 572,836 -- -- Knoll Europe 1995 360,000 653,100 --
- -------- (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 (as adjusted for the stock split). 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. 47 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. 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 The Company has not yet determined the compensation to be paid to directors who are not employees or officers of the Company or Warburg. Directors will also be 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 will 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 an annual bonus of up to 100% of base salary based on the attainment of targets set by the Board of Directors. The agreements may be terminated at any time by the Company, but if so terminated without "cause," or if the Company fails to renew the agreements, the Company must pay the employee 125% of one year's base salary (100% of base salary in the case of Mr. Cogan). The agreements also contain non-compete 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 $30,000 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 $181,000 based on current exchange rates) plus a portion of Mr. Billstein's incentive compensation. 48 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. 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 753,456 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 will also determine 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 will be fixed by the Committee, in its discretion, at the time options are granted, provided that in no event shall the per share purchase price of an option granted under the 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 will 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. 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 will be 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 1997 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 Stock Plans, (ii) expand the class of employees eligible to participate therein, (iii) reduce the minimum purchase price at which options may be granted under the Stock Plans, (iv) extend the maximum term of options or (v) extend the term of the 1997 Stock Plan. Options and Restricted Stock granted under the Stock Plans will be 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 will be determined by the Committee, and need not be uniform among recipients. 49 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Company expects to form a Compensation Committee shortly after completion of the Offerings. 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 million term loan, issuance of the Notes and with 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 million and Warburg purchased $147 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 of the Company in 1996, Warburg Pincus Ventures, L.P., 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 50 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, 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 30,588,197 shares of Common Stock held by the Holders upon completion of the Offerings. In connection with the Offerings, each of the Holders waived all registration, subscription and other similar rights that they may have. 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, the stockholders who are a party thereto (comprising approximately 79% of the outstanding shares of Common Stock of the Company upon completion of the Offerings) 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. The Company, Warburg, NationsBanc and the Company's other stockholders have entered into an Agreement, pursuant to which the Company's stockholders have agreed to waive certain subscription, registration and other rights in connection with the Offerings. Pursuant to the Agreement, the Company's preferred stockholders have agreed to redeem and/or convert their shares of Series A Preferred Stock for an aggregate of $80 million in cash and 27,440,919 shares of Common Stock. Of such amounts, Warburg will receive $75.9 million and 25,024,481 shares of Common Stock and NationsBanc will receive $4.1 million and 1,361,877 shares of Common Stock. Messrs. Staniar, Lynch, Billstein, Cogan, Purdom, McCabe and Milberger will receive 400,736, 400,736, 6,249, 78,116, 78,116, 9,374 and 18,748 shares, respectively, and Mmes. Bradley and Ellixson will receive 12,499 and 9,374 shares, respectively. 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) after the Offerings, upon 30 days prior written notice to the Board of Directors. The restrictions on transfer terminate after the Offerings when Warburg owns less than 10% of the outstanding shares of Common Stock and less than 10% of the outstanding shares of preferred 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. In connection with the Offerings, each recipient of shares of Common Stock under the 1996 Stock Plan waived all registration and other similar rights that they may have. 51 Pursuant to the 1996 Stock Incentive 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 NationsBanc, which is a beneficial owner of approximately five percent of the outstanding capital stock of the Company, is an affiliate of (i) NationsBank N.A., which is a party to the Credit Facilities, and (ii) NationsBanc Capital Markets, Inc., the initial purchaser of the Company's Notes. See "Principal and Selling Stockholders" and "Description of Certain Indebtedness." During 1996, the Company paid $137,337 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 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. 52 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information with regard to the beneficial ownership of the Common Stock and Series A Preferred Stock as of April 18, 1997 and as adjusted to reflect the Offerings and the transactions contemplated hereby, by (i) each person known by the Company to own beneficially more than 5% of the outstanding shares of Common Stock, (ii) the Selling Stockholder, (iii) each director and named executive officer of the Company and (iv) all current directors and executive officers of the Company as a group.
BENEFICIAL OWNERSHIP PRIOR TO THE BENEFICIAL OWNERSHIP OFFERINGS(1)(2) AFTER THE OFFERINGS(1)(2) ----------------------------------------------- ----------------------------- NAME AND ADDRESS OF SHARES OF SERIES A SHARES OF BENEFICIAL OWNER PREFERRED STOCK PERCENT COMMON STOCK PERCENT SHARES PERCENT - ------------------- ------------------ ------- ------------ ------- --------------- ------------- Warburg, Pincus Ven- tures, L.P.(3)......... 1,469,081 91.6% 2,884,351 66.0% 27,908,832 70.1% 466 Lexington Avenue New York, NY 10017 NationsBanc Investment Corp.(4)............... 79,950 5.0% 156,972 3.6% 1,518,848 3.8% 100 Tryon Street, 10th Floor Charlotte, NC 28255 Burton B. Staniar(5).... 20,507 1.3% 416,994 9.5% 817,729 2.1% John H. Lynch(5)........ 20,507 1.3% 40,263 * 440,998 1.1% Wolfgang Billstein(5)(6)........ 320 * 628 * 6,877 * Kathleen G. Brad- ley(5)(6).............. 640 * 38,929 * 51,427 * Andrew B. Cogan(5)...... 3,998 * 158,541 3.6% 236,656 * Jeffrey A. Harris(7).... 1,469,081 91.6% 2,884,351 66.0% 27,908,832 70.1% Sidney Lapidus(7)....... 1,469,081 91.6% 2,884,351 66.0% 27,908,832 70.1% Kewsong Lee(7).......... 1,469,081 91.6% 2,884,351 66.0% 27,908,832 70.1% John L. Vogelstein(7)... 1,469,081 91.6% 2,884,351 66.0% 27,908,832 70.1% All current directors and executive officers as a group (14 persons)........... 1,520,969 94.9% 3,607,829 82.5% 29,646,252 74.5%
- -------- * Less than 1%. (1) Except as otherwise indicated, the persons in this table have sole voting and investment power with respect to all shares of Common Stock and Series A Preferred 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. There are no shares subject to stock options exercisable within 60 days of the date of this Prospectus. (2) The number of shares outstanding prior to the Offerings consists of 4,371,643 shares of Common Stock (excluding 2,919,665 restricted shares which have not yet vested) and 1,602,998 shares of Series A Preferred Stock. The number of shares of Common Stock deemed outstanding after the Offerings consists of 39,812,562 shares (excluding 2,919,665 restricted shares which have not yet vested, including an additional 8,000,000 shares of Common Stock being offered for sale by the Company in the Offerings and assuming the redemption and conversion of all outstanding shares of Series A Preferred Stock for an aggregate of $80 million and 27,440,919 shares of Common Stock). (3) The sole general partner of Warburg, Pincus Ventures, L.P. ("Warburg"), is Warburg, Pincus & Co., a New York general partnership ("WP"). E.M. Warburg, Pincus & Co., LLC, a New York limited liability company ("EMW LLC"), manages Warburg. The members of EMW LLC are substantially the same as the partners of WP. Lionel I. Pincus is the managing partner of WP and the managing member of EMW LLC and may be deemed to control both WP and EMW LLC. WP 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 EMW LLC and general partners of WP. 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 Securities Exchange Act of 1934) in an indeterminate portion of the shares beneficially owned by Warburg. See Note 5 below. (4) If the Underwriters exercise their overallotment options in full, NationsBanc will own 798,848 shares of Common Stock, or 2.0% of the shares of Common Stock outstanding. (5) Excludes 565,098, 565,098, 0, 226,039, 150,692 and 2,015,514 restricted shares of Common Stock for Messrs. Staniar, Lynch, Billstein and Cogan, Ms. Bradley and all current directors and executive officers as a group, respectively, which have not yet vested. (6) Does not include 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. (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 Securities Exchange Act of 1934. See Note 3 above. 53 DESCRIPTION OF CAPITAL STOCK The following description of the capital stock of the Company and certain provisions of the Company's Amended and Restated Certificate of Incorporation (the "Certificate") and Restated By-laws (the "By-laws"). Upon completion of the Offerings, the authorized capital stock of the Company will consist of (i) 100,000,000 shares of Common Stock, par value $.01 per share, of which 39,812,562 shares will be outstanding (excluding 2,919,665 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 will be 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 Company 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. At present, there is no established trading market for the Common Stock. The Common Stock has been approved for listing on the New York Stock Exchange, subject to notice of issuance. PREFERRED STOCK As of April 18, 1997, there were outstanding 1,602,998 shares of Series A Preferred Stock held of record by Warburg and NationsBanc and certain members of management. With a portion of the net proceeds of the Offerings, the Company will redeem 800,000 shares of Series A Preferred Stock; the remaining shares of Series A Preferred Stock will be converted into 27,440,919 shares of Common 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 Certificate and 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 54 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. 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 CREDIT FACILITIES General. The Company has 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 $230 million, consisting of a $130 million revolving credit facility (the "Revolving Credit Facility") and $100 million term loan facility (the "Term Loan Facility," and together with the Revolving Credit Facility, the "Credit Facilities"). The Credit Facilities are guaranteed by all existing and future domestic wholly owned subsidiaries of the Company (in this context, the "Guarantors"). The Revolving Credit Facility includes a $20 million sub-limit for standby and commercial letters of credit. Security. Indebtedness of the Company under the Credit Facilities is secured by, among other things, (i) 100% of the capital stock of the Company and each of its domestic subsidiaries and (ii) 65% of the capital stock of each of its foreign subsidiaries that are directly owned by the Company or by a wholly owned domestic subsidiary of the Company. In addition, the Lenders hold a first priority security interest in substantially all of the assets and properties of the Company and the Guarantors. The Lenders will release all of the collateral securing the Credit Facilities (i) if the Company's debt ratings reach specified levels or (ii) if the Company receives at least $100 million net cash proceeds of an initial public offering and reaches and maintains specified 55 ratios of funded debt to EBITDA (as defined in the Credit Facilities). The Company believes that the Lenders will release all of the Collateral in connection with the Offerings. Interest. Indebtedness under the Credit Facilities bears interest at a floating rate based, at the Company's option, upon (i) LIBOR (the London Interbank Offered Rate) for one, two, three or six months plus .875% or (ii) the greater of the federal funds rate plus 0.5% or the prime rate. These rates are subject to change based on the Company's ratio of funded debt to EBITDA. Maturity. Loans made pursuant to the Revolving Credit Facility may be borrowed, repaid and reborrowed from time to time until December 17, 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. The loan made under the Term Loan Facility was made in a single drawing on December 17, 1996 and will mature on December 17, 2002. The Term Loan Facilities will be subject to quarterly amortization of principal which commenced on March 31, 1997, in an aggregate amount of $15 million in 1997, $15 million in 1998, $15 million in 1999, $15 million in 2000, $20 million in 2001 and $20 million in 2002. The Credit Facilities will be permanently reduced with specified portions of the proceeds of asset sales. Certain Fees. The Company is also required to pay to the Banks a commitment fee equal to .25% 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 .875% per annum based on the 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 Credit Facilities require the Company to meet two financial tests quarterly, a Funded Debt to EBITDA Ratio and an EBITDA to Interest Ratio, which tests become increasingly restrictive during the term of the Credit Facilities. The Credit Facilities also contain covenants which limit, subject to certain exceptions, (i) the incurrence of additional indebtedness; (ii) capital expenditures in excess of an aggregate of $36 million in any fiscal year with a $10 million one-year carry-over; (iii) sale/leaseback transactions other than those for personal property in an amount of up to $5 million during the term of the Credit Facilities; (iv) declaration or payment of dividends and stock repurchases, provided that (A) subsequent to the Company's initial public offering the Company may pay dividends in an amount of $10 million so long as the Company's leverage ratio is less than or equal to 2.5 to 1 and (B) net cash proceeds from a public equity offering of the Company may be used to pay dividends or redeem stock within 60 days of such public equity offering in such amounts as the Company and the Guarantors may choose in their sole discretion; (v) loans to and investments in third parties; (vi) changes to the character of the business of the Company or Guarantors; (vii) most transactions with affiliates other than on terms substantially as favorable as would be obtainable in a comparable arm's length transaction; (viii) sales or leases of assets; (ix) acquisitions; (x) mergers and consolidations, provided that any of the subsidiaries of the Company may be merged into one another or into the Company; (xi) prepayments of subordinated indebtedness; and (xii) liens and encumbrances and other matters customarily restricted in such agreements. The Credit Facilities also require the Company to pledge after-acquired assets, including stock of after-acquired or formed subsidiaries, and to deliver guarantees by wholly owned domestic subsidiaries, with limited exceptions; to maintain its interest rate protection agreements in an amount equal to 40% or more of the outstanding principal amount under the Credit Facilities; and to maintain insurance. Events of Default. The Credit Facilities contain standard events of default, including (i) defaults in the payment of principal or interest, (ii) defaults in the observance of covenants contained in the Credit Facilities and related documentation, (iii) events which cause the guarantees to cease to be in full force and effect, (iv) certain bankruptcy events with respect to the Company and certain of its subsidiaries, (v) cross defaults on at least $5 million of other indebtedness of the Company or any of its subsidiaries, (vi) judgments, orders or decrees involving $5 million or more, (vii) certain events related to ERISA, (viii) events which cause the subordination provisions of certain subordinated debt to cease to be in full force and effect, and (ix) a change of control of the Company. After an initial public equity offering of the Company, a change of control is deemed to occur if, 56 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 Investment Corp. and the Company's senior management. DESCRIPTION OF THE NOTES General. The Company issued $165,000,000 of 10 7/8% 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 (the "Exchange Offer") to exchange such notes for the Notes registered under the Securities Act. Principal, Maturity and Interest. The Notes are limited in aggregate principal amount to $165 million and will mature on March 15, 2006. Interest on the Notes accrues at 10 7/8% 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 Senior Indebtedness of the Company, including borrowings under the Credit Facilities, 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%
In addition, at any time on or before March 15, 1999, the Company may redeem up to 35% of the original aggregate principal amount of the Notes with the net proceeds of a public equity offering at a redemption price equal to 110% of the principal amount thereof, plus accrued and unpaid interest thereon, if any, to the date of redemption, provided that at least 65% of the original aggregate principal amount of the Notes remains outstanding immediately after such redemption. The Company intends to use a portion of the net proceeds of the Offerings to redeem Notes in the aggregate principal amount of $57.8 million. See "Use of Proceeds." 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. After consummation of the Offerings, 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. 57 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 Credit Facilities 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 Prior to the Offerings there has been no market for the shares of the Common Stock. 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." Upon completion of the Offerings, the Company expects to have 39,812,562 shares of Common Stock outstanding (excluding 2,919,665 shares of Common Stock which have been granted but have not yet vested), assuming no exercise of the Underwriters' over-allotment options. Of these shares, the 8,000,000 shares of Common Stock sold in the Offerings will be freely tradable without restriction under the Securities Act, except for any such shares which may be 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 31,812,562 shares of Common Stock held by existing stockholders upon completion of this offering 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 31,010,274 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 398,125 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. 58 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 after 90 days after the initial public offering 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 after 90 days after the initial public offering without having to comply with Rule 144's holding period restrictions. The Company intends to file as soon as practicable after the closing of the Offerings a registration statement on Form S-8 under the Securities Act to register approximately 6,964,898 shares of Common Stock previously issued as restricted stock (including 2,919,665 shares which have been granted but not yet vested) or reserved for issuance (including shares subject to previously granted options) or sale under the Stock Plans and the Company's employee stock purchase plan. The Form S-8 will include, in some cases, shares for which an exemption under Rule 144 or Rule 701 would also be available, thus permitting the resale of shares issued under the Stock Incentive Plans by non- affiliates in the public market without restriction under the Securities Act. Such registration statement is expected to become effective immediately upon filing, whereupon shares registered thereunder will become 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 1,318,552 shares of Common Stock are outstanding under the Stock Plans. Notwithstanding the foregoing, in connection with the Offerings, the Company, its executive officers and directors and all existing 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 180 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 Offerings 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, (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 fiduciaries have the authority to control all substantial decisions of the trust. This discussion is based on current law 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). 59 ACCORDINGLY, PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISERS 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 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, which are proposed to be effective for payments made after December 31, 1997, 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. 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 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 such gain has been subject to a foreign income tax equal to at least 10% of the gain derived from such disposition), 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 60 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. 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 under "Dividends") 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 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 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). Proposed regulations state that backup withholding will not apply to such payments unless the broker has actual knowledge that the payee is a U.S. person. 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. 61 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 Stockholder and the U.S. Underwriters, and concurrently with the sale of 1,600,000 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......................................................... 6,400,000 =========
The Company and the Selling Stockholder 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 6,400,000 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 1,600,000 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 U.S. Purchase Agreement and the International Purchase Agreement. 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 Stockholder 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, the public offering price, concession and discount may be changed. The Company and the Selling Stockholder 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 960,000 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 62 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 Company and the Selling Stockholder 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 240,000 additional shares of Common Stock to cover over-allotments, if any, on terms similar to those granted to the U.S. Underwriters. At the request of the Company, the Underwriters have reserved for sale, at the initial public offering price, up to 5% of the shares to be sold and offered hereby by the Company to certain dealers of the Company. The number of shares of Common Stock available for sale to the general public will be reduced to the extent such persons purchase such reserved shares. Any reserved shares which are not orally confirmed for purchase within one day of the pricing of the Offerings will be offered by the Underwriters to the general public on the same terms as the other shares offered hereby. The Company, its executive officers and directors and all existing 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 180 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. Prior to the Offerings, there has been no public market for the Common Stock of the Company. The initial public offering price will be determined through negotiations among the Company, the Selling Stockholder and the U.S. Representatives and the Lead Managers. The factors considered in determining the initial public offering price, in addition to prevailing market conditions, are price-earnings ratios of publicly traded companies that the U.S. Representatives believe to be comparable to the Company, certain financial information of the Company, the history of, and the prospects for, the Company and the industry in which it competes, and an assessment of the Company's management, its past and present operations, the prospects for, and timing of, future revenues of the Company, the present state of the Company's development, and the above factors in relation to market values and various valuation measures of other companies engaged in activities similar to the Company. There can be no assurance that an active trading market will develop for the Common Stock or that the Common Stock will trade in the public market subsequent to the Offerings at or above the initial public offering price. The Common Stock has been approved for listing on the New York Stock Exchange, subject to notice of issuance, under the symbol "KNL." In order to meet the requirements for listing of the Common Stock on that exchange, the U.S. Underwriters and International Managers have undertaken to sell lots of 100 or more shares to a minimum of 2,000 beneficial owners. 63 The Underwriters do not intend to confirm sales of the Common Stock offered hereby to any accounts over which they exercise discretionary authority. The Company and the Selling Stockholder have agreed to indemnify the U.S. Underwriters and the International Managers against certain liabilities, including certain liabilities under the Securities Act. 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. 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. 64 ADDITIONAL INFORMATION 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 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. 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 site on the Internet at http://www.sec.gov. 65 KNOLL, INC. INDEX TO FINANCIAL STATEMENTS AUDITED FINANCIAL STATEMENTS PAGE ---- Reports of Independent Auditors........................................... F-2 Consolidated Balance Sheets at December 31, 1996 (Actual and Unaudited Pro Forma) and 1995 (Predecessor)............................................ F-4 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-5 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-6 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-7 Notes to the Consolidated Financial Statements............................ F-8 CONDENSED FINANCIAL STATEMENTS (UNAUDITED) Condensed Consolidated Balance Sheets at March 31, 1997 and December 31, 1996..................................................................... F-40 Condensed Consolidated Statements of Operations for the three months ended March 31, 1997, the one month ended March 31, 1996 and the two months ended February 29, 1996 (Predecessor).................................... F-41 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 1997, the one month ended March 31, 1996 and the two months ended February 29, 1996 (Predecessor).................................... F-42 Notes to the Condensed Consolidated Financial Statements.................. F-43 PRO FORMA FINANCIAL INFORMATION Unaudited Pro Forma Financial Information................................. P-1 Unaudited Pro Forma Consolidated Income Statement for the Year Ended December 31, 1996........................................................ P-2 Unaudited Pro Forma Consolidated Income Statement for the Three Months Ended March 31, 1997..................................................... P-3 Unaudited Pro Forma Consolidated Income Statement for the Three Months Ended March 31, 1996..................................................... P-4 Notes to Unaudited Pro Forma Financial Information........................ P-5
F-1 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. Ernst & Young LLP Philadelphia, Pennsylvania March 14, 1997, except for Note 23,as to which the date is the effective date of the registration statement. The foregoing report is in the form that will be signed upon the completion of the restatement of capital accounts to effect the change in common and preferred stock described in Note 23 to the financial statements. /s/ Ernst & Young LLP Philadelphia, Pennsylvania March 14, 1997 F-2 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-3 KNOLL, INC. CONSOLIDATED BALANCE SHEETS
(UNAUDITED) THE KNOLL GROUP, INC. ACTUAL PRO FORMA (PREDECESSOR) DECEMBER 31, DECEMBER 31, DECEMBER 31, 1996 1996 1995 ------------ ------------ --------------------- (IN THOUSANDS) (IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents................................................... $ 8,804 $ 8,804 $ 1,569 Customer receivables, net................................................... 111,166 111,166 114,592 Inventories................................................................. 57,811 57,811 59,643 Deferred income taxes....................................................... 17,474 17,474 18,273 Prepaid and other current assets............................................ 7,424 7,424 8,465 -------- -------- -------- Total current assets...................................................... 202,679 202,679 202,542 Property, plant, and equipment................................................ 176,218 176,218 164,633 Intangible assets............................................................. 286,940 286,940 240,772 Prepaid pension cost.......................................................... -- -- 45,161 Other noncurrent assets....................................................... 9,875 9,875 3,602 -------- -------- -------- Total Assets.............................................................. $675,712 $675,712 $656,710 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term debt............................................................. $ -- $ -- $ 1,496 Current maturities of long-term debt........................................ 23,265 23,265 3,287 Accounts payable--trade..................................................... 50,250 50,250 45,850 Accounts payable--related parties........................................... -- -- 413 Income taxes payable........................................................ 388 388 13,973 Accrued restructuring costs................................................. 1,979 1,979 10,868 Other current liabilities................................................... 62,043 62,043 43,957 -------- -------- -------- Total current liabilities................................................. 137,925 137,925 119,844 Long-term debt................................................................ 330,889 330,889 251 Deferred income taxes......................................................... 1,931 1,931 29,574 Postretirement benefits obligation............................................ 15,873 15,873 20,593 Other noncurrent liabilities.................................................. 11,290 11,290 5,997 Series A 12% Participating Convertible Preferred Stock to be redeemed; 800,000 shares; liquidation value at $100 per share.................................. -- 80,000 -- -------- -------- -------- Total liabilities......................................................... 497,908 577,908 176,259 -------- -------- -------- Stockholders' equity: Preferred stock; $1.00 par value; authorized 10,000,000 shares, issued and outstanding 1,602,998 shares at December 31, 1996.......................... 1,603 -- -- Common stock, $.01 par value; authorized 100,000,000 shares; issued and outstanding 7,291,308 shares actual and 34,732,227 shares pro forma........ 73 347 -- Additional paid-in-capital.................................................. 160,147 81,476 -- Unearned stock grant compensation........................................... (1,387) (1,387) -- Retained earnings........................................................... 16,836 16,836 -- Parent company investment................................................... -- -- 503,317 Cumulative foreign currency translation adjustment.......................... 532 532 (22,866) -------- -------- -------- Total stockholders' equity................................................ 177,804 97,804 480,451 -------- -------- -------- Total Liabilities and Stockholders' Equity................................ $675,712 $675,712 $656,710 - -------------------------------------------------- ======== ======== ========
See accompanying notes to the consolidated financial statements. F-4 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............ 35,030 ========
See accompanying notes to the consolidated financial statements. F-5 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-6 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-7 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-8 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-9 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 assumed initial public offering price). Unaudited Pro Forma Balance Sheet The unaudited pro forma balance sheet at December 31, 1996 reflects the assumed redemption and conversion of the preferred stock for cash and shares of common stock upon consummation of the initial public offering. 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-10 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-11 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-12 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-13 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-14 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-15 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-16 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-17 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-18 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-19 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-20 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-21 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-22 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-23 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-24 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-25 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-26 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-27 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 Prior to the effective date of the Company's initial public offering, the Certificate of Incorporation will be 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 will be exchanged for 3.13943 shares of common stock. The amendment to the Certificate of Incorporation will have 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. This matter is subject to the stockholders' approval. F-28 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-29 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-30 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-31 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-32 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-33 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-34 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-35 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-36 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-37 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-38 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-39 KNOLL, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS)
PRO FORMA MARCH 31, MARCH 31, DECEMBER 31, 1997 1997 1996 --------- --------- ------------ ASSETS Current assets: Cash and cash equivalents................... $ 11,064 $ 11,064 $ 8,804 Customer receivables, net................... 105,478 105,478 111,166 Inventories................................. 61,033 61,033 57,811 Deferred income taxes....................... 19,010 19,010 17,474 Prepaid and other current assets............ 4,914 4,914 7,424 -------- -------- -------- Total current assets...................... 201,499 201,499 202,679 Property, plant, and equipment at cost........ 196,726 196,726 195,483 Accumulated depreciation...................... (25,826) (25,826) (19,265) -------- -------- -------- Property, plant and equipment, net........ 170,900 170,900 176,218 Intangible assets at cost..................... 293,206 293,206 293,753 Accumulated amortization...................... (8,873) (8,873) (6,813) -------- -------- -------- Intangible assets, net.................... 284,333 284,333 286,940 Other noncurrent assets....................... 5,302 5,302 9,875 -------- -------- -------- Total Assets.............................. $662,034 $662,034 $675,712 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt........ $ 15,238 $ 15,238 $ 23,265 Accounts payable............................ 50,226 50,226 50,250 Income taxes payable........................ 4,292 4,292 388 Other current liabilities................... 54,027 54,027 64,022 -------- -------- -------- Total current liabilities................. 123,783 123,783 137,925 Long-term debt................................ 320,796 320,796 330,889 Postretirement benefits obligation............ 16,193 16,193 15,873 Other noncurrent liabilities.................. 13,888 13,888 13,221 Series A 12% Participating Convertible Stock to be redeemed; 800,000 shares; liquidation value at $100 per share...................... -- 80,000 -- -------- -------- -------- Total liabilities......................... 474,660 554,660 497,908 -------- -------- -------- Stockholders' equity: Preferred stock, $1.00 par value; authorized 10,000,000 shares, issued and outstanding 1,602,998 shares of Series A 12% Participating Convertible Preferred Stock (liquidation preference of $160,300)....... 1,603 -- 1,603 Common stock, $0.01 par value; authorized 100,000,000 shares; issued and outstanding 7,291,308 shares actual and 34,732,227 shares pro forma .......................... 73 347 73 Additional paid-in-capital.................. 160,147 81,476 160,147 Unearned stock grant compensation........... (1,381) (1,381) (1,387) Retained earnings........................... 28,474 28,474 16,836 Cumulative foreign currency translation adjustment................................. (1,542) (1,542) 532 -------- -------- -------- Total stockholders' equity................ 187,374 107,374 177,804 -------- -------- -------- Total Liabilities and Stockholders' Equity................................... $662,034 $662,034 $675,712 ======== ======== ========
See accompanying notes. F-40 KNOLL, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (THOUSANDS, EXCEPT PER SHARE DATA)
THE KNOLL GROUP, INC. THREE MONTHS ONE MONTH (PREDECESSOR) ENDED ENDED TWO MONTHS ENDED MARCH 31, MARCH 31, FEBRUARY 29, 1997 1996 1996 ------------ --------- --------------------- Sales............................................................................ $177,833 $48,080 $ 90,232 Cost of sales.................................................................... 109,859 32,543 59,714 -------- ------- -------- Gross profit..................................................................... 67,974 15,537 30,518 Selling, general and administrative expenses..................................... 40,058 10,999 21,256 Westinghouse long-term incentive compensation.................................... -- -- 47,900 Allocated corporate expenses..................................................... -- -- 921 -------- ------- -------- Operating income (loss).......................................................... 27,916 4,538 (39,559) Interest expense................................................................. 7,742 3,602 340 Other expense, net............................................................... 74 49 296 -------- ------- -------- Income (loss) before income tax expense (benefit)................................ 20,100 887 (40,195) Income tax expense (benefit)..................................................... 8,462 438 (16,107) -------- ------- -------- Net income (loss)................................................................ $ 11,638 $ 449 $(24,088) -------- ------- -------- Earnings per share (see Note 4): Pro forma net income per share of Common Stock................................... $ .33 $ .01 - -------------------------------------------------- ======== ======= Pro forma weighted average shares of Common Stock ======== ======= outstanding..................................................................... 35,030 35,030
See accompanying notes. F-41 KNOLL, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
THE KNOLL GROUP, INC. THREE MONTHS ONE MONTH (PREDECESSOR) ENDED ENDED TWO MONTHS ENDED MARCH 31, MARCH 31, FEBRUARY 29, 1997 1996 1996 ------------ --------- --------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss)............................................................... $ 11,638 $ 449 $(24,088) Noncash items included in income: Depreciation and amortization................................................. 8,693 2,903 4,317 Other......................................................................... 81 -- -- Changes in assets and liabilities: Customer receivables.......................................................... 4,693 (3,684) 8,798 Inventories................................................................... (3,845) 2,656 671 Accounts payable.............................................................. 1,053 (2,853) (15,292) Current and deferred incomes taxes............................................ 6,830 873 (16,627) Other current assets and liabilities.......................................... (9,686) 3,807 (4,907) Other noncurrent assets and liabilities....................................... 4,470 (330) (6,911) -------- --------- -------- Cash provided by (used in) operating activities................................. 23,927 3,821 (54,039) -------- --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of the Company from Westinghouse.................................... -- (579,801) Purchases of property, plant and equipment...................................... (2,844) (447) (2,296) Proceeds from sale of assets.................................................... 33 -- -- -------- --------- -------- Cash used in investing activities............................................... (2,811) (580,248) (2,296) -------- --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Repayment of short-term debt.................................................... -- -- (3,805) Proceeds from long-term debt.................................................... 2,500 425,000 -- Repayment of long-term debt..................................................... (20,500) -- -- Issuance of stock............................................................... -- 160,000 -- Net receipts from (payments to) parent company.................................. -- -- 60,848 -------- --------- -------- Cash provided by (used in) financing activities................................. (18,000) 585,000 57,043 -------- --------- -------- Effect of exchange rate changes on cash and cash equivalents.................... (856) 379 58 -------- --------- -------- Increase (decrease) in cash and cash equivalents................................ 2,260 8,952 766 Cash and cash equivalents at beginning of period................................ 8,804 2,335 1,569 ======== ========= ======== -------- --------- -------- Cash and cash equivalents at end of period...................................... $ 11,064 $ 11,287 $ 2,335
See accompanying notes. F-42 KNOLL, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 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. 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 three months ended March 31, 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 (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. 3. PRO FORMA BALANCE SHEET The unaudited pro forma balance sheet at March 31, 1997 reflects the assumed redemption and conversion of the preferred stock for cash and shares of common stock that will occur upon consummation of the initial public offering. 4. SHARE AND PER SHARE AMOUNTS 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 to the audited financial statements appearing elsewhere in this registration statement. 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 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 offerings have been included as outstanding for all periods presented (using the treasury stock method at the assumed initial public offering price). F-43 KNOLL, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) MARCH 31, 1997 (UNAUDITED) 5. CAPITAL STRUCTURE Prior to the effective date of the Company's initial public offering, the Certificate of Incorporation will be 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 will be exchanged for 3.13943 shares of common stock. The amendment to the Certificate of Incorporation will have 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. This matter is subject to the stockholders' approval. 6. INVENTORIES
MARCH 31, DECEMBER 31, 1997 1996 --------- ------------ (IN THOUSANDS) Raw materials..................................... $35,969 $34,147 Work in process................................... 7,488 7,508 Finished goods.................................... 17,576 16,156 ------- ------- Inventories....................................... $61,033 $57,811 ======= =======
7. DIVIDENDS IN ARREARS Dividends on the Series A 12% Participating Convertible Preferred Stock (Series A 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 of Series A Preferred Stock to common stock, the holders lose their right to any dividends, including dividends in arrears. As of March 31, 1997 and December 31, 1996, the aggregate amount of cumulative dividends in arrears was $21.9 million and $16.6 million, respectively, and the per share amount was $13.66 and $10.36, respectively. 8. WESTINGHOUSE LONG-TERM INCENTIVE COMPENSATION Certain key executives of the Predecessor were participants in a long-term incentive compensation plan established by Westinghouse. The consummation of the acquisition of the Predecessor from Westinghouse triggered the payment of awards and established the amounts of payments due under the plan. Consequently, a charge to operations of $47.9 million was recognized for the two months ended February 29, 1996. 9. STOCK INCENTIVE PLANS On February 14, 1997, the Company established the Knoll, Inc. 1997 Stock Incentive Plan (the 1997 Stock Plan). Under the 1997 Stock 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 1,255,772 shares or options to purchase shares may be granted under the 1997 Stock Plan. The 1997 Stock Plan provides for the issuance of discounted options as well as repricing of options. A Stock Plan Committee of the Company's Board of Directors has sole discretion concerning administration of the 1997 Stock 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 amend or terminate the 1997 Stock Plan at its discretion at any time. F-44 KNOLL, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) MARCH 31, 1997 (UNAUDITED) On March 7, 1997, the Company granted 753,456 options to purchase shares under the 1997 Plan in addition to granting the remaining 565,096 shares available under the Knoll, Inc. 1996 Stock Incentive Plan in the form of options. The exercise price of these options is $15.93 per share. 10. INITIAL PUBLIC OFFERING On April 30, 1997, the Company filed an amendment to its registration statement on Form S-1 with the Securities and Exchange Commission in anticipation of a possible public offering of common stock. In connection with the possible public offering, a portion of the Series A Preferred Stock will be redeemed. The remaining shares of Series A Preferred Stock will be converted into shares of common stock. The converted Series A Preferred Stock, along with the previously outstanding shares of common stock will undergo a 3.13943:1 stock split bringing the outstanding shares of common stock immediately prior to the public offering to 34,732,227. If the public offering is completed, the net proceeds, from the sale of 8,000,000 shares of common stock are estimated to be $152.7 million after deducting related expenses. The estimated net proceeds will be used (i) to redeem a portion of the Series A Preferred Stock for $80.0 million, (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 $64.6 million, including a redemption premium of $5.7 million and accrued and unpaid interest thereon of $1.1 million and (iii) to the extent available, to repay $8.1 million of indebtedness under the Company's revolving loans and/or to fund general working capital needs or retire additional debt. The redemption premium of $5.7 million, along with the write-off of unamortized financing costs of $3.5 million associated with the redemption of the senior subordinated notes will result in an extraordinary loss, net of taxes, of $5.6 million. 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 three months ended March 31, 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 (the "Credit Facilities") and the issuance of 10- 7/8% Senior Subordinated Notes (the "Notes") and the application of the net proceeds therefrom as though they had occurred as of the beginning of the year. The pro forma income statements have been further adjusted to reflect the sale of the Common Stock offered hereby, the application of the estimated net proceeds therefrom to repurchase a portion of the Notes and pay down a portion of the indebtedness outstanding under the Credit Facilities and the redemption and conversion into Common Stock of the outstanding Series A Preferred Stock as if such transactions had occurred on January 1, 1996. 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 pro forma as adjusted income statement for the three months ended March 31, 1997 reflects the sale of the Common Stock offered hereby, the application of the estimated net proceeds therefrom to repurchase a portion of the Notes and pay down a portion of the indebtedness outstanding under the Credit Facilities and the redemption and conversion into Common Stock of the outstanding Series A Preferred Stock as if such transactions had occurred on January 1, 1997. 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 IPO PRO FORMA FEBRUARY 29, 1996 DECEMBER 31, 1996 ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED ----------------- ----------------- ----------- --------- ----------- ----------- (IN THOUSANDS) (IN THOUSANDS, EXCEPT PER SHARE DATA) Total sales............. $ 90,232 $561,534 $651,766 -- $651,766 Cost of sales........... 59,714 358,841 $ 552 (a) 801 (b) 419,908 -- 419,908 -------- -------- -------- -------- ------ -------- Gross profit............ 30,518 202,693 (1,353) 231,858 -- 231,858 Selling, general and administrative expenses............... 21,256 131,349 369 (a) 414 (b) 153,388 -- 153,388 Westinghouse long-term incentive compensation........... 47,900 -- (47,900)(c) -- -- -- Allocated corporate expenses............... 921 -- (921)(a) -- -- -- -------- -------- -------- -------- ------ -------- Operating income (loss)................. (39,559) 71,344 46,685 78,470 -- 78,470 Interest expense........ 340 32,952 6,738 (d) 40,030 (7,300)(f) 32,730 Other income (expense), net.................... (296) 447 -- 151 -- 151 -------- -------- -------- -------- ------ -------- Income (loss) before income taxes and extraordinary item..... (40,195) 38,839 39,947 38,591 7,300 45,891 Income tax expense (benefit).............. (16,107) 16,844 16,111 (e) 16,848 2,891 (h) 19,739 -------- -------- -------- -------- ------ -------- Income (loss) before extraordinary item..... (24,088) 21,995 23,836 21,743 4,409 26,152 Extraordinary loss on early extinguishment of debt, net of taxes..... -- 5,159 (5,159)(g) -- -- -- -------- -------- -------- -------- ------ -------- Net income (loss)....... $(24,088) $ 16,836 $ 28,995 $ 21,743 (g) $4,409 $ 26,152 (g) ======== ======== ======== ======== ====== ======== Pro forma income before extraordinary item per share of Common Stock.. $ .63 $ .62 $ .61 Pro forma net income per share of Common Stock.. $ .48 $ .62 (g) $ .61 (g) Pro forma weighted average shares of Common Stock outstanding(i)......... 35,030 35,030 43,030
P-2 KNOLL, INC. UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT THREE MONTHS ENDED MARCH 31, 1997
HISTORICAL THREE MONTHS ENDED MARCH 31, IPO PRO FORMA 1997 ADJUSTMENTS AS ADJUSTED ------------ ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Total sales.......................... $177,833 $ -- $177,833 Cost of sales........................ 109,859 -- 109,859 -------- ------- -------- Gross profit......................... 67,974 -- 67,974 Selling, general and administrative expenses............................ 40,058 -- 40,058 -------- ------- -------- Operating income (loss).............. 27,916 -- 27,916 Interest expense..................... 7,742 (1,790)(f) 5,952 Other income (expense), net.......... (74) -- (74) -------- ------- -------- Income before income taxes........... 20,100 (1,790) 21,890 Income tax expense (benefit)......... 8,462 709 (h) 9,171 -------- ------- -------- Net income (loss).................... $ 11,638 $ 1,081 $ 12,719 (g) ======== ======= ======== Pro forma net income per share of Common Stock........................ $ .33 $ .30 (g) Pro forma weighted average shares of Common Stock outstanding(i)......... 35,030 43,030
P-3 KNOLL, INC. UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT THREE MONTHS ENDED MARCH 31, 1996
HISTORICAL --------------------------------- THE KNOLL GROUP, INC. (PREDECESSOR) 2 MONTHS ENDED ONE MONTH ENDED IPO PRO FORMA FEBRUARY 29, 1996 MARCH 31, 1996 ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED ----------------- --------------- ----------- --------- ----------- ----------- (IN THOUSANDS) (IN THOUSANDS, EXCEPT PER SHARE DATA) Total sales............. $ 90,232 $48,080 $138,312 $ -- $138,312 Cost of sales........... 59,714 32,543 $ 552 (a) -- 801 (b) 93,610 93,610 -------- ------- -------- -------- ------ -------- Gross profit............ 30,518 15,537 (1,353) 44,702 -- 44,702 Selling, general and administrative expenses............... 21,256 10,999 369 (a) -- 414 (b) 33,038 33,038 Westinghouse long-term incentive compensation........... 47,900 -- (47,900)(c) -- -- -- Allocated corporate expenses............... 921 -- (921)(a) -- -- -- -------- ------- -------- -------- ------ -------- Operating income (loss)................. (39,559) 4,538 46,685 11,664 -- 11,664 Interest expense........ 340 3,602 6,738 (d) 10,680 (1,825)(f) 8,855 Other income (expense), net.................... (296) (49) -- (345) -- (345) -------- ------- -------- -------- ------ -------- Income (loss) before income taxes........... (40,195) 887 39,947 639 1,825 2,464 Income tax expense (benefit).............. (16,107) 438 16,111 (e) 442 723 (h) 1,165 -------- ------- -------- -------- ------ -------- Net income (loss)....... $(24,088) $ 449 $ 23,836 $ 197 $1,102 $ 1,299 (g) ======== ======= ======== ======== ====== ======== Pro forma income per share of Common Stock.. $ .01 $ .01 $ .03 (g) Pro forma weighted average shares of Common Stock outstanding(i)......... 35,030 35,030 43,030
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 had been utilized to repurchase the Notes and pay down the Credit Facilities 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 Credit Facilities for the year ended December 31, 1996 and the three months ended March 31, 1996 which approximates the actual interest expense for the ten month period ended December 31, 1996 and 6.5% for the Credit Facilities for the three months ended March 31, 1997 which approximates the actual interest expense for the three month period ended March 31, 1997. (g) The pro forma and the pro forma as adjusted 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 as adjusted income statement data for the year ended December 31, 1996, the three month period ended March 31, 1996 and the three month period ended March 31, 1997 does not include an anticipated extraordinary loss of $5,612, net of taxes associated with the redemption of a portion of the Notes in connection with the Offerings. (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 effective to the 3.13943-for-1 common stock split that will occur prior to the effective date of the Offerings. Because of the significance of the redemption and conversion into Common Stock of the outstanding Series A Preferred Stock upon consummation of the Offerings, historical net income (loss) per share is not presented herein. Pro forma and pro forma as adjusted net income per share 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 Offerings have been included as outstanding for all periods presented (using the treasury stock method at the assumed initial public offering price). P-5 Installations The Company does not maufacture or sell computers, computer hardware or telephone equipment. [PHOTO] Reff System [PHOTO] Morrison System [PHOTO] Morrison System - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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 STOCKHOLDER 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 Capitalization........................................................... 17 Dilution................................................................. 18 Selected Financial Information........................................... 19 Management's Discussion and Analysis of Financial Condition and Results of Operations........................ 22 Business................................................................. 31 Management............................................................... 45 Certain Transactions..................................................... 50 Principal and Selling Stockholders....................................... 53 Description of Capital Stock............................................. 54 Description of Certain Indebtedness...................................... 55 Shares Eligible for Future Sale ......................................... 58 Certain United States Federal Tax Considerations For Non-United States Holders................................................................. 59 Underwriting............................................................. 62 Legal Matters............................................................ 64 Experts.................................................................. 64 Additional Information................................................... 65 Index to Financial Statements............................................ F-1 Unaudited Pro Forma Financial Information................................ P-1
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 8,000,000 SHARES KNOLL COMMON STOCK ---------------- PROSPECTUS ---------------- MERRILL LYNCH & CO. CREDIT SUISSE FIRST BOSTON GOLDMAN, SACHS & CO. MORGAN STANLEY & CO. INCORPORATED , 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 APRIL 30, 1997 PROSPECTUS 8,000,000 SHARES KNOLL COMMON STOCK ----------- All of the 8,000,000 shares of Common Stock offered hereby are being sold by Knoll, Inc. ("Knoll" or the "Company"). Of the 8,000,000 shares of Common Stock offered hereby, 1,600,000 shares are being offered for sale initially outside the United States and Canada by the International Managers and 6,400,000 shares are being offered for sale initially in the United States and Canada by the U.S. Underwriters in a concurrent offering. The initial public offering price and the aggregate underwriting discount per share will be identical for both Offerings. See "Underwriting." Prior to the Offerings, there has been no public market for the Common Stock. It is currently estimated that the initial public offering price will be between $19.00 and $22.00 per share. For a discussion relating to factors to be considered in determining the initial public offering price, see "Underwriting." Investors purchasing shares of Common Stock in the Offerings will incur substantial and immediate dilution of $21.20 per share in pro forma net tangible book value of Common Stock, which exceeds the assumed initial public offering price of $20.50 per share (based on the midpoint of the estimated range of the initial public offering price). See "Risk Factors-- Dilution" and "Dilution." The Common Stock has been approved for listing on the New York Stock Exchange under the symbol "KNL," subject to notice of issuance. 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) COMPANY(2) - ----------------------------------------------------------------------------- Per Share....................... $ $ $ - ----------------------------------------------------------------------------- Total(3)........................ $ $ $
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) The Company and a certain selling stockholder (the "Selling Stockholder") 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 1,500,000. (3) The Company has granted the International Managers and the U.S. Underwriters options to purchase up to an additional 96,000 shares and 384,000 shares of Common Stock, respectively, and the Selling Stockholder has granted the International Managers and the U.S. Underwriters options to purchase up to an additional 144,000 shares and 576,000 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, Proceeds to Company and Proceeds to Selling Stockholder 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 & CO. INTERNATIONAL ----------- 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 Stockholder and the International Managers, and concurrently with the sale of 6,400,000 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 MANAGER SHARES --------------------- --------- Merrill Lynch International........................................ Credit Suisse First Boston (Europe) Limited........................ Goldman Sachs International........................................ Morgan Stanley & Co. International Limited......................... --------- Total......................................................... 1,600,000 =========
The Company and the Selling Stockholder 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 1,600,000 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 6,400,000 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. 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 Stockholder 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, the public offering price, concession and discount may be changed. The Company and the Selling Shareholder have granted options to the International Managers, exercisable for 30 days after the date of this Prospectus, to purchase up to an aggregate of 240,000 additional shares of 62 [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS] 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 Company and the Selling Stockholder have also granted options to the U.S. Underwriters, exercisable for 30 days after the date of this Prospectus, to purchase up to an aggregate of 960,000 additional shares of Common Stock to cover over-allotments, if any, on terms similar to those granted to the International Managers. At the request of the Company, the Underwriters have reserved for sale, at the initial public offering price, up to 5% of the shares to be sold and offered hereby by the Company to certain dealers of the Company. The number of shares of Common Stock available for sale to the general public will be reduced to the extent such persons purchase such reserved shares. Any reserved shares which are not orally confirmed for purchase within one day of the pricing of the Offerings will be offered by the Underwriters to the general public on the same terms as the other shares offered hereby. The Company, the Company's executive officers and directors and all existing 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 180 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. Prior to the Offerings, there has been no public market for the Common Stock of the Company. The initial public offering price will be determined through negotiations among the Company, the Selling Stockholder and the U.S. Representatives and the Lead Managers. The factors considered in determining the initial public offering price, in addition to prevailing market conditions, are price-earnings ratios of publicly traded companies that the U.S. Representatives believe to be comparable to the Company, certain financial information of the Company, the history of, and the prospects for, the Company and the industry in which it competes, and an assessment of the Company's management, its past and present operations, the prospects for, and timing of, future revenues of the Company, the present state of the Company's development, and the above factors in relation to market values and various valuation measures of other companies engaged in activities similar to the Company. There can be no assurance that an active trading market will develop for the Common Stock or that the Common Stock will trade in the public market subsequent to the Offerings at or above the initial public offering price. 63 [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS] The Common Stock has been approved for listing on the New York Stock Exchange, subject to notice of issuance, under the symbol "KNL." In order to meet the requirements for listing of the Common Stock on that exchange, the U.S. Underwriters and International Managers have undertaken to sell lots of 100 or more shares to a minimum of 2,000 beneficial owners. The Underwriters do not intend to confirm sales of the Common Stock offered hereby to any accounts over which they exercise discretionary authority. The Company and the Selling Stockholder have agreed to indemnify the International Managers and the U.S. Underwriters against certain liabilities, including certain liabilities under the Securities Act. 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 1995 or is a person to whom such document may otherwise lawfully be issued or passed on. 64 [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS] 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 Stockholder 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 country 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. 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 appearing in this Prospectus have been so included in reliance on the report of Price Waterhouse LLP, independent accountants, given the authority of said firm as experts in accounting and auditing. ADDITIONAL INFORMATION 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 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. 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 site on the Internet at http://www.sec.gov. 65 [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 STOCKHOLDER 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 Capitalization........................................................... 17 Dilution................................................................. 18 Selected Financial Information........................................... 19 Management's Discussion and Analysis of Financial Condition and Results of Operations........................ 22 Business................................................................. 31 Management............................................................... 45 Certain Transactions..................................................... 50 Principal and Selling Stockholders....................................... 53 Description of Capital Stock............................................. 54 Description of Certain Indebtedness...................................... 55 Shares Eligible for Future Sale ......................................... 58 Certain United States Federal Tax Considerations For Non-United States Holders................................................................. 56 Underwriting............................................................. 62 Legal Matters............................................................ 65 Experts.................................................................. 65 Additional Information................................................... 65 Index to Financial Statements............................................ F-1 Unaudited Pro Forma Financial Information................................ P-1
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 8,000,000 SHARES KNOLL COMMON STOCK --------------- PROSPECTUS --------------- MERRILL LYNCH INTERNATIONAL CREDIT SUISSE FIRST BOSTON GOLDMAN SACHS INTERNATIONAL MORGAN STANLEY & CO. INTERNATIONAL , 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, the NASD filing fee and the NYSE listing fee:
AMOUNT ---------- SEC registration fee.......................................... $ 61,334 NASD filing fee............................................... 20,740 NYSE listing fee.............................................. 220,000 Transfer agent and registrar fees and expenses................ 10,000 Printing and engraving expenses............................... 200,000 Legal fees and expenses....................................... 500,000 Accounting fees and expenses.................................. 400,000 Blue sky fees and expenses.................................... 7,500 Miscellaneous expenses........................................ 80,426 ---------- Total....................................................... $1,500,000 ==========
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 Seven of the Company's Certificate of Incorporation provides as follows: SEVENTH: 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 SEVENTH. 3. Nonexclusivity of Provision. The indemnification and other rights set forth in this Article SEVENTH 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 SEVENTH, subparagraph 1, 2, or 3, nor the adoption of any provision of this Certificate of Incorporation inconsistent with this Article SEVENTH, subparagraph 1, 2, or 3, shall eliminate or reduce the effect of this Article SEVENTH, 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 SEVENTH, 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, NationBanc 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. 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 --Certificate of Ownership and Merger merging Knoll, Inc. with and into T.K.G. Acquisition Corp. *3.3 --Restated By-Laws of the Company. **4.1 --Specimen of the Company's Common Stock Certificate. 5 --Form of Opinion of Willkie Farr & Gallagher. ***10.1 --Stock Purchase Agreement, dated as of December 20, 1995, by and between Westinghouse and TKG. ***10.2 --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 7/8% 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 7/8% Senior Subordinated Notes due 2006, including form of Initial Global Note.
II-3 *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 7/8% Senior Subordinated Notes due 2006, including form of Initial Global Note. ****10.6 --Amended and Restated Credit Agreement, dated as of December 17, 1996, by and among the Company, T.K.G. Acquisition Corp., the Guarantors (as defined therein), NationsBank, N.A., The Chase Manhattan Bank and other lending institutions. ***10.7 --Security Agreement dated February 29, 1996, by and among T.K.G. Acquisition Sub, Inc., the Guarantors (as defined therein), Knoll North America, Inc., The Knoll Group, Inc., and NationsBank, N.A. and other lending institutions. *10.8 --Employment Agreement, dated as of February 29, 1996, between T.K.G. Acquisition Corp. and Burton B. Staniar. *10.9 --Employment Agreement, dated as of February 29, 1996, between T.K.G. Acquisition Corp. and John H. Lynch. *10.10 --Employment Agreement, dated as of February 29, 1996, between T.K.G. Acquisition Corp. 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 --TKG 1997 Stock Incentive Plan. *10.14 --Consulting Agreement, dated as of December 1, 1996, between Wolfgang Bilstein 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 (as defined 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). *****27 --Financial Data Schedule.
- -------- * Filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. **To be filed by amendment. ***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/A-1 for the year ended December 31, 1996. *****Previously filed. (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. 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 II-4 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 Amendment No. 2 to 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 April 30, 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 Amendment No. 2 to Registration Statement has been signed by the following persons in the capacities and on the dates indicated: SIGNATURES TITLE DATE Chairman of the /s/ Burton B. Staniar Board April 30, 1997 - ------------------------------------- BURTON B. STANIAR * President, Chief - ------------------------------------- Executive Officer April 30, 1997 JOHN H. LYNCH and Director (Principal Executive Officer) * Chief Financial - ------------------------------------- Officer (Principal April 30, 1997 DOUGLAS J. PURDOM Financial Officer) II-6 SIGNATURES TITLE DATE Controller * (Principal April 30, 1997 - ------------------------------------- Accounting Officer) BARRY L. MCCABE * Director - ------------------------------------- April 30, 1997 ANDREW B. COGAN * Director - ------------------------------------- April 30, 1997 JEFFREY A. HARRIS Director , 1997 - ------------------------------------- SIDNEY LAPIDUS * Director - ------------------------------------- April 30, 1997 KEWSONG LEE Director * April 30, 1997 - ------------------------------------- JOHN L. VOGELSTEIN /s/ Burton B. Staniar *By: ________________________________ ATTORNEY-IN-FACT II-7 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E -------- ---------- ---------- ------------- -------- ADDITIONS BALANCE BALANCE AT CHARGED TO AT END BEGINNING COSTS AND 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 --Certificate of Ownership and Merger merging Knoll, Inc. with and into T.K.G. Acquisition Corp. *3.3 --Restated By-Laws of the Company. **4.1 --Specimen of the Company's Common Stock Certificate. 5 --Form of Opinion of Willkie Farr & Gallagher. ***10.1 --Stock Purchase Agreement, dated as of December 20, 1995, by and between Westinghouse and TKG. ***10.2 --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 7/8% 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 7/8% 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 7/8% Senior Subordinated Notes due 2006, including form of Initial Global Note. ****10.6 --Amended and Restated Credit Agreement, dated as of December 17, 1996, by and among the Company, T.K.G. Acquisition Corp., the Guarantors (as defined therein), NationsBank, N.A., The Chase Manhattan Bank and other lending institutions. ***10.7 --Security Agreement dated February 29, 1996, by and among T.K.G. Acquisition Sub, Inc., the Guarantors (as defined therein), Knoll North America, Inc., The Knoll Group, Inc., and NationsBank, N.A. and other lending institutions. *10.8 --Employment Agreement, dated as of February 29, 1996, between T.K.G. Acquisition Corp. and Burton B. Staniar. *10.9 --Employment Agreement, dated as of February 29, 1996, between T.K.G. Acquisition Corp. and John H. Lynch. *10.10 --Employment Agreement, dated as of February 29, 1996, between T.K.G. Acquisition Corp. 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 --TKG 1997 Stock Incentive Plan. *10.14 --Consulting Agreement, dated as of December 1, 1996, between Wolfgang Bilstein and Knoll, Inc.
EXHIBIT NO. DESCRIPTION PAGE ------- ----------- ---- *****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 (as defined 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). *****27 --Financial Data Schedule.
- -------- * Filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. ** To be filed by amendment. *** 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/A-1 for the year ended December 31, 1996. ***** Previously filed. EX-1.1 2 FORM OF U.S. UNDERWRITING AGREEMENT EXHIBIT 1.1 ______________________________________________________________________________ ______________________________________________________________________________ DRAFT 4/28/97 KNOLL, INC. (a Delaware corporation) 8,000,000 Shares of Common Stock U.S. PURCHASE AGREEMENT ----------------------- Dated: May ___, 1997 ______________________________________________________________________________ ______________________________________________________________________________ TABLE OF CONTENTS PAGE ---- U.S. PURCHASE AGREEMENT..................................................... 1 SECTION 1. Representations and Warranties................................ 4 (a) Representations and Warranties by the Company................. 4 (i) Compliance with Registration Requirements..................... 4 (ii) Independent Accountants....................................... 5 (iii) Financial Statements.......................................... 5 (iv) No Material Adverse Change in Business........................ 5 (v) Good Standing of the Company.................................. 6 (vi) Good Standing of Subsidiaries................................. 6 (vii) Capitalization................................................ 6 (viii) Authorization of Agreement.................................... 7 (ix) Authorization and Description of Securities................... 7 (x) Absence of Defaults and Conflicts............................. 7 (xi) Absence of Labor Dispute...................................... 8 (xii) Absence of Proceedings........................................ 8 (xiii) Accuracy of Exhibits.......................................... 8 (xiv) Possession of Intellectual Property........................... 8 (xv) Absence of Further Requirements............................... 8 (xvi) Possession of Licenses and Permits............................ 9 (xvii) Title to Property............................................. 9 (xviii) Compliance with Cuba Act...................................... 9 (xix) Investment Company Act........................................ 10 (xx) Environmental Laws............................................ 10 (xxi) Registration Rights........................................... 10 (xxii) Stabilization or Manipulation................................. 10 (xxiii) Accounting Controls........................................... 11 (xxiv) Tax Returns................................................... 11 (b) Representations and Warranties by the Selling Shareholder..... 11 (i) Accurate Disclosure........................................... 11 (ii) Authorization of Agreements................................... 11 (iii) Good and Marketable Title..................................... 12 (iv) Due Execution of Power of Attorney and Custody Agreement...... 12 (v) Absence of Manipulation....................................... 13 (vi) Absence of Further Requirements............................... 13 i (vii) Restriction on Sale of Securities............................. 13 (viii) Certificates Suitable for Transfer............................ 13 (ix) No Association with NASD...................................... 13 (c) Officer's Certificates........................................ 14 SECTION 2. Sale and Delivery to U.S. Underwriters; Closing............... 14 (a) Initial Securities............................................ 14 (b) Option Securities............................................. 14 (c) Payment....................................................... 14 (d) Denominations; Registration................................... 15 SECTION 3. Covenants of the Company...................................... 15 (a) Compliance with Securities Regulations and Commission Requests 15 (b) Filing of Amendments.......................................... 16 (c) Delivery of Registration Statements........................... 16 (d) Delivery of Prospectuses...................................... 16 (e) Continued Compliance with Securities Laws..................... 17 (f) Blue Sky Qualifications....................................... 17 (g) Rule 158...................................................... 17 (h) Use of Proceeds............................................... 17 (i) Listing....................................................... 18 (j) Restriction on Sale of Securities............................. 18 (k) Reporting Requirements........................................ 18 (l) Compliance with NASD Rules.................................... 18 (m) Good Standing................................................. 18 SECTION 4. Payment of Expenses........................................... 18 (a) Expenses...................................................... 18 (b) Expenses of the Selling Shareholder........................... 19 (c) Termination of Agreement...................................... 19 (d) Allocation of Expenses........................................ 19 SECTION 5. Conditions of U.S. Underwriters' Obligations.................. 20 (a) Effectiveness of Registration Statement....................... 20 (b) Opinion of Counsel for the Company and Counsel for the Selling Shareholder........................................... 20 (c) Opinion of Counsel for U.S. Underwriters...................... 20 (d) Officers' Certificate......................................... 21 (e) Accountant's Comfort Letter................................... 21 (f) Bring-down Comfort Letter..................................... 21 (g) Approval of Listing........................................... 21 ii (h) No Objection.................................................. 21 (i) Lock-up Agreements............................................ 21 (j) Purchase of Initial International Securities.................. 21 (k) Custody Agreement............................................. 22 (l) Conditions to Purchase of U.S. Option Securities 22 (m) Additional Documents.......................................... 23 (n) Transactions.................................................. 23 (o) Termination of Agreement...................................... 23 SECTION 6. Indemnification............................................... 23 (a) Indemnification of U.S. Underwriters.......................... 23 (b) Indemnification of Company, Directors and Officers and Selling Shareholder....................................... 25 (c) Actions against Parties; Notification......................... 25 (d) Settlement without Consent if Failure to Reimburse............ 26 (e) Indemnification for Reserved Securities....................... 26 (f) Other Agreements with Respect to Indemnification.............. 26 SECTION 7. Contribution.................................................. 26 SECTION 8. Representations, Warranties and Agreements to Survive Delivery 28 SECTION 9. Termination of Agreement...................................... 28 (a) Termination; General.......................................... 28 (b) Liabilities................................................... 28 SECTION 10. Default by One or More of the U.S. Underwriters............... 28 SECTION 11. Default by the Selling Shareholder or the Company............. 29 SECTION 12. Notices....................................................... 30 SECTION 13. Parties....................................................... 30 SECTION 14. Governing Law and Time........................................ 30 SECTION 15. Effect of Headings............................................ 30 SCHEDULES SCHEDULE A LIST OF UNDERWRITERS SCHEDULE B SELLING SHAREHOLDER SCHEDULE C PRICING INFORMATION SCHEDULE D LIST OF PERSONS SUBJECT TO LOCK-UP iii EXHIBITS EXHIBIT A-1 FORM OF OPINION OF COMPANY'S COUNSEL EXHIBIT A-2 FORM OF OPINION OF SELLING SHAREHOLDER'S COUNSEL EXHIBIT B FORM OF LOCK-UP LETTER EXHIBIT C-1 FORM OF COMFORT LETTER OF ERNST & YOUNG LLP EXHIBIT C-2 FORM OF COMFORT LETTER OF PRICE WATERHOUSE LLP iv Draft of April 28, 1997 KNOLL, INC. (a Delaware corporation) 8,000,000 Shares of Common Stock (Par Value $0.01 Per Share) U.S. PURCHASE AGREEMENT ----------------------- May ___, 1997 MERRILL LYNCH & CO. Merrill Lynch, Pierce, Fenner & Smith Incorporated Credit Suisse First Boston Corporation Goldman, Sachs & Co. Morgan Stanley & Co. Incorporated as U.S. Representatives of the several U.S. Underwriters c/o Merrill Lynch & Co. Merrill Lynch, Pierce, Fenner & Smith Incorporated North Tower World Financial Center New York, New York 10281-1209 Ladies and Gentlemen: Knoll, Inc., a Delaware corporation (the "Company"), and the person listed in Schedule B hereto (the "Selling Shareholder"), confirm their respective agreements with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and each of the other U.S. Underwriters named in Schedule A hereto (collectively, the "U.S. Underwriters", which term shall also include any underwriter substituted as hereinafter provided in Section 10 hereof), for whom Merrill Lynch, Credit Suisse First Boston Corporation, Goldman, Sachs & Co. and Morgan Stanley & Co. Incorporated are acting as representatives (in such capacity, the "U.S. Representatives"), with respect to (i) the issue and sale by the Company and the purchase by the U.S. Underwriters, acting severally and not jointly, of the number of shares of Common Stock, par value $0.01 per share, of the Company ("Common Stock") set forth in Schedule B hereto and (ii) the grant by the Company and the Selling Shareholder, acting severally and not jointly, to the U.S. Underwriters, acting severally and not jointly, of the option described in Section 2(b) hereof to purchase all or any part of 960,000 additional shares of Common Stock to cover over-allotments, if any. The aforesaid 6,400,000 shares of Common Stock (the "Initial U.S. Securities") to be purchased by the U.S. Underwriters, and all or any part of the 960,000 shares of Common Stock subject to the option described in Section 2(b) hereof (the "U.S. Option Securities"), are hereinafter called, collectively, the "U.S. Securities." It is understood that the Company is concurrently entering into an agreement dated the date hereof (the "International Purchase Agreement") providing for the offering by the Company of an aggregate of 1,600,000 shares of Common Stock (the "Initial International Securities") through arrangements with certain underwriters outside the United States and Canada (the "International Managers") for which Merrill Lynch International, Credit Suisse First Boston (Europe) Limited, Goldman Sachs International and Morgan Stanley & Co. International are acting as lead managers (the "Lead Managers") and the grant by the Company and the Selling Shareholder, acting severally and not jointly, to the International Managers, acting severally and not jointly, of an option to purchase all or any part of the International Managers' pro rata portion of up to 240,000 additional shares of Common Stock solely to cover over-allotments, if any (the "International Option Securities" and, together with the U.S. Option Securities, the "Option Securities"). The Initial International Securities and the International Option Securities are hereinafter called the "International Securities." It is understood that the Company is not obligated to sell and the U.S. Underwriters are not obligated to purchase, any Initial U.S. Securities unless all of the Initial International Securities are contemporaneously purchased by the International Managers. The U.S. Underwriters and the International Managers are hereinafter collectively called the "Underwriters," the Initial U.S. Securities and the Initial International Securities are hereinafter collectively called the "Initial Securities," and the U.S. Securities and the International Securities are hereinafter collectively called the "Securities." The Underwriters will concurrently enter into an Intersyndicate Agreement of even date herewith (the "Intersyndicate Agreement") providing for the coordination of certain transactions among the Underwriters under the direction of Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated (in such capacity, the "Global Coordinator"). The Company and the Selling Shareholder understand that the U.S. Underwriters propose to make a public offering of the U.S. Securities as soon as the U.S. Representatives deem advisable after this Agreement has been executed and delivered. The Company, the Selling Shareholder and the U.S. Underwriters agree that up to 5% of the Securities to be purchased by the Underwriters (the "Reserved Securities") shall be reserved for sale by the Underwriters to certain dealers having business relationships with the Company as part of the distribution of the Securities by the Underwriters, subject to the terms of this Agreement, the applicable rules, regulations and interpretations of the National Association of Securities Dealers, Inc. and all other applicable laws, rules and regulations. To the extent that such Reserved Securities are not orally confirmed for purchase by certain dealers having business 2 relationships with the Company by the end of the first business day after the date of this Agreement, such Reserved Securities may be offered to the public as part of the public offering contemplated hereby. On March 14, 1997, Knoll, Inc. merged with and into the Company (then known as T.K.G. Acquisition Corp.), which changed its name to Knoll, Inc. (the "Merger"). At or prior to the Closing Time (as defined below), (i) the Company will file an amendment and restatement of its Certificate of Incorporation, (ii) the Company will effect a 3.13943:1 split of its Common Stock and (iii) the Company will repurchase certain outstanding shares of the Company's preferred stock with a portion of the proceeds from the sale of the Securities and any shares of the Company's preferred stock remaining outstanding after such repurchase will be converted into shares of Common Stock (collectively, with the Merger, the "Transactions"). The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-1 (No. 333-23399) covering the registration of the Securities under the Securities Act of 1933, as amended (the "1933 Act"), including the related preliminary prospectus or prospectuses. Promptly after execution and delivery of this Agreement, the Company will either (i) prepare and file a prospectus in accordance with the provisions of Rule 430A ("Rule 430A") of the rules and regulations of the Commission under the 1933 Act (the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of the 1933 Act Regulations or (ii) if the Company has elected to rely upon Rule 434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term sheet (a "Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b). Two forms of prospectus are to be used in connection with the offering and sale of the Securities: one relating to the U.S. Securities (the "Form of U.S. Prospectus") and one relating to the International Securities (the "Form of International Prospectus"). The Form of International Prospectus is identical to the Form of U.S. Prospectus, except for the front cover and back cover pages and the information under the caption "Underwriting." The information included in any such prospectus or in any such Term Sheet, as the case may be, that was omitted from such registration statement at the time it became effective but that is deemed to be part of such registration statement at the time it became effective (a) pursuant to paragraph (b) of Rule 430A is referred to as "Rule 430A Information" or (b) pursuant to paragraph (d) of Rule 434 is referred to as "Rule 434 Information." Each Form of U.S. Prospectus and Form of International Prospectus used before such registration statement became effective, and any prospectus that omitted, as applicable, the Rule 430A Information or the Rule 434 Information, that was used after such effectiveness and prior to the execution and delivery of this Agreement, is herein called a "preliminary prospectus." Such registration statement, including the exhibits thereto and schedules thereto at the time it became effective and including the Rule 430A Information and the Rule 434 Information, as applicable, is herein called the "Registration Statement." Any registration statement filed pursuant to Rule 462(b) of the 1933 Act Regulations is herein referred to as the "Rule 462(b) Registration Statement," and after such filing the term "Registration Statement" shall include the Rule 462(b) Registration Statement. The final Form of U.S. Prospectus and the final Form of International Prospectus in the forms first furnished to the Underwriters for use in connection with the offering of the Securities are 3 herein called the "U.S. Prospectus" and the "International Prospectus," respectively, and collectively, the "Prospectuses." If Rule 434 is relied on, the terms "U.S. Prospectus" and "International Prospectus" shall refer to the preliminary U.S. Prospectus dated April 18, 1997 and the preliminary International Prospectus dated April 18, 1997, respectively, each together with the applicable Term Sheet, and all references in this Agreement to the date of such Prospectuses shall mean the date of the applicable Term Sheet. For purposes of this Agreement, all references to the Registration Statement, any preliminary prospectus, the U.S. Prospectus, the International Prospectus or any Term Sheet or any amendment or supplement to any of the foregoing shall be deemed to include the copy filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval system ("EDGAR"). SECTION 1. Representations and Warranties. ------------------------------ (a) Representations and Warranties by the Company. The Company represents and warrants to each U.S. Underwriter as of the date hereof, as of the Closing Time referred to in Section 2(c) hereof, and as of each Date of Delivery (if any) referred to in Section 2(b) hereof, and agrees with each U.S. Underwriter, as follows: (i) Compliance with Registration Requirements. Each of the ----------------------------------------- Registration Statement and any Rule 462(b) Registration Statement has become effective under the 1933 Act and no stop order suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement has been issued under the 1933 Act and no proceedings for that purpose have been instituted or are pending or, to the knowledge of the Company, are contemplated by the Commission, and any request on the part of the Commission for additional information has been complied with. At the respective times the Registration Statement, any Rule 462(b) Registration Statement and any post-effective amendments thereto became effective and at the Closing Time (and, if any U.S. Option Securities are purchased, at the Date of Delivery), the Registration Statement, the Rule 462(b) Registration Statement and any amendments and supplements thereto complied and will comply in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations and did not and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and the Prospectuses, any preliminary prospectuses and any supplement thereto or prospectus wrapper prepared in connection therewith, at their respective times of issuance and at the Closing Time, complied and will comply in all material respects with any applicable laws or regulations of foreign jurisdictions in which the Prospectuses and such preliminary prospectuses, as amended or supplemented, if applicable, are distributed in connection with the offer and sale of Reserved Securities. Neither of the Prospectuses nor any amendments or supplements thereto (including any prospectus wrapper), at the time the Prospectuses or any amendments or supplements thereto were issued and at the Closing Time (and, if any U.S. Option Securities are purchased, at the Date of Delivery), included or will include an untrue statement of a material fact or omitted or will omit to state a 4 material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. If Rule 434 is used, the Company will comply with the requirements of Rule 434 and the Prospectuses shall not be "materially different," as such term is used in Rule 434, from the prospectuses included in the Registration Statement at the time it became effective. The representations and warranties in this subsection shall not apply to statements in or omissions from the Registration Statement or the Prospectuses made in reliance upon and in conformity with information furnished to the Company in writing by any Underwriter through the U.S. Representatives or the Lead Managers expressly for use in the Registration Statement or the Prospectuses. Each preliminary prospectus and the prospectuses filed as part of the Registration Statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the 1933 Act, complied when so filed in all material respects with the 1933 Act Regulations and each preliminary prospectus and the Prospectuses delivered to the Underwriters for use in connection with this offering was identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (ii) Independent Accountants. The accountants who certified the ----------------------- financial statements and supporting schedule included in the Registration Statement are independent public accountants as required by the 1933 Act and the 1933 Act Regulations. (iii) Financial Statements. The financial statements included in the -------------------- Registration Statement and the Prospectuses, together with the related schedule and notes, present fairly the financial position of the Company and its consolidated Subsidiaries (as defined below) and of the Company's predecessors and their consolidated subsidiaries at the dates indicated and the statement of operations, stockholders' equity and cash flows of the Company and its consolidated Subsidiaries and of the Company's predecessors and their consolidated subsidiaries for the periods specified; said financial statements have been prepared in conformity with generally accepted accounting principles ("GAAP") applied on a consistent basis throughout the periods involved. The supporting schedule included in the Registration Statement sets forth in accordance with GAAP the information required to be stated therein. The selected financial data and the summary financial information included in the Prospectuses have been compiled on a basis consistent with that of the audited financial statements included in the Registration Statement. The pro forma financial statements and the related notes thereto included in the Registration Statement and the Prospectuses have been prepared in accordance with the Commission's rules and guidelines with respect to pro forma financial statements and have been properly compiled on the bases described therein, and the assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions and circumstances referred to therein. 5 (iv) No Material Adverse Change in Business. Since the respective -------------------------------------- dates as of which information is given in the Registration Statement and the Prospectuses, except as otherwise stated therein, (A) there has been no material adverse change in the condition (financial or otherwise), earnings, business affairs or business prospects of the Company and its Subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business (a "Material Adverse Effect"), (B) there have been no transactions entered into by the Company or any of its Subsidiaries, other than those in the ordinary course of business, which are material with respect to the Company and its Subsidiaries considered as one enterprise, and (C) there has been no dividend or distribution of any kind declared, paid or made by the Company on any class of its capital stock. (v) Good Standing of the Company. The Company has been duly organized ---------------------------- and is validly existing as a corporation in good standing under the laws of the State of Delaware and has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectuses and to enter into and perform its obligations under this Agreement; and the Company is duly qualified as a foreign corporation to transact business and is in good standing in each other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect. (vi) Good Standing of Subsidiaries. Each subsidiary of the Company ----------------------------- which is required to be listed on Exhibit 21 to the Registration Statement (each a "Subsidiary" and, collectively, the "Subsidiaries") has been duly organized and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectuses and is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect; except as otherwise disclosed in the Registration Statement, all of the issued and outstanding capital stock of each such Subsidiary has been duly authorized and validly issued, is fully paid and non-assessable and is owned by the Company, directly or through Subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity; none of the outstanding shares of capital stock of any Subsidiary was issued in violation of the preemptive or similar rights of any securityholder of such Subsidiary. The only subsidiaries of the Company which are required to be listed on Exhibit 21 to the Registration Statement have been so listed. (vii) Capitalization. After giving effect to the Transactions, the -------------- authorized, issued and outstanding capital stock of the Company will be as set forth in the Prospectuses in the column entitled "Pro Forma As Adjusted" under the caption "Capitalization" (except for subsequent issuances, if any, pursuant to this Agreement, pursuant to reservations, agreements or employee benefit plans referred to in the 6 Prospectuses or pursuant to the exercise of convertible securities or options referred to in the Prospectuses). The shares of issued and outstanding capital stock of the Company have been and as of the Closing Time will have been duly authorized and validly issued and are or will be fully paid and non-assessable; none of the outstanding shares of capital stock of the Company was or as of the Closing Time will have been issued in violation of the preemptive or other similar rights of any securityholder of the Company. (viii) Authorization of Agreement. This Agreement and the -------------------------- International Purchase Agreement have been duly authorized, executed and delivered by the Company. (ix) Authorization and Description of Securities. The Securities to ------------------------------------------- be purchased by the U.S. Underwriters and the International Managers from the Company have been duly authorized for issuance and sale to the U.S. Underwriters pursuant to this Agreement and the International Managers pursuant to the International Purchase Agreement, respectively, and, when issued and delivered by the Company pursuant to this Agreement and the International Purchase Agreement, respectively, against payment of the consideration set forth herein and the International Purchase Agreement, respectively, will be validly issued, fully paid and non-assessable; the Common Stock conforms to all statements relating thereto contained in the Prospectuses and such description conforms to the rights set forth in the instruments defining the same; no holder of the Securities will be subject to personal liability by reason of being such a holder; and the issuance of the Securities is not subject to the preemptive or other similar rights of any securityholder of the Company. (x) Absence of Defaults and Conflicts. Neither the Company nor any of --------------------------------- its Subsidiaries is in violation of its charter or by-laws or in default in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or other agreement or instrument to which the Company or any of its Subsidiaries is a party or by which it or any of them may be bound, or to which any of the property or assets of the Company or any Subsidiary is subject (collectively, "Agreements and Instruments") except for such defaults that would not result in a Material Adverse Effect; and the execution, delivery and performance of this Agreement and the International Purchase Agreement and the consummation of the transactions contemplated in this Agreement, the International Purchase Agreement and in the Registration Statement (including the issuance and sale of the Securities and the use of the proceeds from the sale of the Securities as described in the Prospectuses under the caption "Use of Proceeds") and by the Transactions and compliance by the Company with its obligations under this Agreement and the International Purchase Agreement have been duly authorized by all necessary corporate action and do not and will not, whether with or without the giving of notice or passage of time or both, conflict with or constitute a breach of, or default or Repayment Event (as defined below) under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any Subsidiary pursuant to, the Agreements and Instruments (except for such conflicts, 7 breaches, defaults or Repayment Events or liens, charges or encumbrances that would not result in a Material Adverse Effect), nor will such action result in any violation of the provisions of the charter or by-laws of the Company or any Subsidiary or any applicable law, statute, rule, regulation, judgment, order, writ or decree of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Company or any Subsidiary or any of their assets, properties or operations. As used herein, a "Repayment Event" means any event or condition which gives the holder of any note, debenture or other evidence of indebtedness (or any person acting on such holder's behalf) the right to require the repurchase, redemption or repayment of all or a portion of such indebtedness by the Company or any Subsidiary. (xi) Absence of Labor Dispute. Except as described in the ------------------------ Registration Statement and except as would not reasonably be expected to result in a Material Adverse Effect, (i) no labor dispute with the employees of the Company or any Subsidiary exists or, to the knowledge of the Company, is imminent, and (ii) the Company is not aware of any existing or imminent labor disturbance by the employees of any of its or any Subsidiary's principal suppliers, manufacturers, customers, dealers or contractors. (xii) Absence of Proceedings. There is no action, suit, proceeding, ---------------------- inquiry or investigation before or brought by any court or governmental agency or body, domestic or foreign, now pending, or, to the knowledge of the Company, threatened, against or affecting the Company or any Subsidiary, which is required to be disclosed in the Registration Statement (other than as disclosed therein), or which would reasonably be expected to result in a Material Adverse Effect, or which would reasonably be expected to materially and adversely affect the properties or assets thereof taken as a whole or the consummation of the transactions contemplated in this Agreement and the International Purchase Agreement or by the Transactions or the performance by the Company of its obligations hereunder or thereunder; the aggregate of all pending legal or governmental proceedings to which the Company or any Subsidiary is a party or of which any of their respective property or assets is the subject which are not described in the Registration Statement, including ordinary routine litigation incidental to the business, would not reasonably be expected to result in a Material Adverse Effect. (xiii) Accuracy of Exhibits. There are no contracts or documents -------------------- which are required to be described in the Registration Statement or the Prospectuses or to be filed as exhibits thereto which have not been so described and filed as required. (xiv) Possession of Intellectual Property. The Company and its ----------------------------------- Subsidiaries own or possess, or can acquire on reasonable terms, adequate patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks, trade names or other intellectual property (collectively, "Intellectual Property") necessary to carry on the business now operated by them (other than such rights or other intellectual property, the absence of which would not have a 8 Material Adverse Effect), and neither the Company nor any of its Subsidiaries has received any notice or is otherwise aware of any infringement of or conflict with asserted rights of others with respect to any Intellectual Property or of any facts or circumstances which would render any Intellectual Property invalid or inadequate to protect the interest of the Company or any of its Subsidiaries therein, and which infringement or conflict (if the subject of any unfavorable decision, ruling or finding) or invalidity or inadequacy, singly or in the aggregate, would result in a Material Adverse Effect. (xv) Absence of Further Requirements. No filing with, or ------------------------------- authorization, approval, consent, license, order, registration, qualification or decree of, any court or governmental authority or agency is necessary or required for the performance by the Company of its obligations hereunder, in connection with the offering, issuance or sale of the Securities under this Agreement and the International Purchase Agreement or the consummation of the transactions contemplated by this Agreement and the International Purchase Agreement and by the Transactions, except (i) such as have been already obtained or as may be required under the 1933 Act or the 1933 Act Regulations and foreign or state securities or blue sky laws and (ii) such as have been obtained under the laws and regulations of jurisdictions outside the United States in which the Reserved Securities are offered. (xvi) Possession of Licenses and Permits. The Company and its ---------------------------------- Subsidiaries possess such permits, licenses, approvals, consents and other authorizations (collectively, "Governmental Licenses") issued by the appropriate federal, state, local or foreign regulatory agencies or bodies necessary to conduct the business now operated by them; the Company and its Subsidiaries are in compliance with the terms and conditions of all such Governmental Licenses, except where the failure to so possess or comply with such Governmental Licenses would not, singly or in the aggregate, have a Material Adverse Effect; all of the Governmental Licenses are valid and in full force and effect, except when the invalidity of such Governmental Licenses or the failure of such Governmental Licenses to be in full force and effect would not have a Material Adverse Effect; and neither the Company nor any of its Subsidiaries has received any notice of proceedings relating to the revocation or modification of any such Governmental Licenses which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in a Material Adverse Effect. (xvii) Title to Property. The Company and its Subsidiaries have good ----------------- and marketable title to all real property owned by the Company and its Subsidiaries and good title to all other properties owned by them, in each case, free and clear of all mortgages, pledges, liens, security interests, claims, restrictions or encumbrances of any kind except such as (a) are described in the Prospectuses or (b) do not, singly or in the aggregate, materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company or any of its Subsidiaries; and all of the leases and subleases material to the business of the Company and its Subsidiaries, considered as one enterprise, and under which the Company or any of its Subsidiaries 9 holds properties described in the Prospectuses, are in full force and effect, and neither the Company nor any Subsidiary has any notice of any material claim of any sort that has been asserted by anyone adverse to the rights of the Company or any Subsidiary under any of the leases or subleases mentioned above, or affecting or questioning the rights of the Company or such Subsidiary to the continued possession of the leased or subleased premises under any such lease or sublease. (xviii) Compliance with Cuba Act. The Company has complied with, and ------------------------ is and will be in compliance with, the provisions of that certain Florida act relating to disclosure of doing business with Cuba, codified as Section 517.075 of the Florida statutes, and the rules and regulations thereunder (collectively, the "Cuba Act") or is exempt therefrom. (xix) Investment Company Act. The Company is not, and upon the ---------------------- issuance and sale of the Securities as herein contemplated and the application of the net proceeds therefrom as described in the Prospectuses will not be, an "investment company" or an entity "controlled" by an "investment company" as such terms are defined in the Investment Company Act of 1940, as amended (the "1940 Act"). (xx) Environmental Laws. Except as described in the Registration ------------------ Statement and except as would not, singly or in the aggregate, result in a Material Adverse Effect, (A) neither the Company nor any of its Subsidiaries is in violation of any federal, state, local or foreign statute, law, rule, regulation, ordinance, code, policy or rule of common law or any judicial or administrative interpretation thereof, including any judicial or administrative order, consent decree or judgment, relating to pollution or protection of human health, the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata) or wildlife, including, without limitation, laws and regulations relating to the release or threatened release of chemicals, pollutants, contaminants, wastes, toxic substances, hazardous substances, petroleum or petroleum products (collectively, "Hazardous Materials") or to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials (collectively, "Environmental Laws"), (B) the Company and its Subsidiaries have all permits, licenses, authorizations and approvals currently required for their respective businesses and for the businesses contemplated to be conducted upon consummation of the offering of the Securities under any applicable Environmental Laws and are each in compliance with their requirements, (C) there are no pending or threatened administrative, regulatory or judicial actions, suits, demands, demand letters, claims, liens, notices of noncompliance or violation, investigation or proceedings relating to any Environmental Law against the Company or any of its Subsidiaries and (D) there are no events, facts or circumstances that might reasonably be expected to form the basis of any liability or obligation of the Company or any of its Subsidiaries, including, without limitation, any order, decree, plan or agreement requiring clean-up or remediation, or any action, suit or proceeding by any private party or governmental body or agency, against or affecting the Company or any of its Subsidiaries relating to any Hazardous Materials or any Environmental Laws. 10 (xxi) Registration Rights. There are no persons with registration ------------------- rights or other similar rights to have any securities registered pursuant to the Registration Statement or otherwise registered by the Company under the 1933 Act, other than the persons listed on Schedule D hereto, and all of the persons listed on Schedule D hereto have waived any registration, subscription or other similar rights they may have in connection with the registration of the Securities. (xxii) Stabilization or Manipulation. Neither the Company nor any of ----------------------------- its officers, directors or controlling persons has taken, directly or indirectly, any action designed to cause or to result in, or that has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of any security of the Company to facilitate the sale of the Securities. (xxiii) Accounting Controls. The Company and its Subsidiaries ------------------- maintain a system of internal accounting controls sufficient to provide reasonable assurances that (A) transactions are executed in accordance with management's general or specific authorization; (B) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain accountability for assets; (C) access to assets is permitted only in accordance with management's general or specific authorization; and (D) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (xxiv) Tax Returns. The Company and its Subsidiaries have filed all ----------- federal, state, local and foreign tax returns that are required to have been filed by them pursuant to applicable foreign, federal, state, local or other law or have duly requested extensions thereof, except insofar as the failure to file such returns or request such extensions would not reasonably be expected to result in a Material Adverse Effect, and has paid all taxes due pursuant to such returns or pursuant to any assessment received by the Company and its Subsidiaries, except for such taxes or assessments, if any, as are being contested in good faith and as to which adequate reserves have been provided or where the failure to pay would not reasonably be expected to result in a Material Adverse Effect. The charges, accruals and reserves on the books of the Company in respect of any income and corporation tax liability of the Company and each Subsidiary for any years not finally determined are adequate to meet any assessments or re-assessments for additional income tax for any years not finally determined, except to the extent of any inadequacy that would not reasonably be expected to result in a Material Adverse Effect. (b) Representations and Warranties by the Selling Shareholder. The Selling Shareholder represents and warrants to each U.S. Underwriter as of the date hereof, as of the Closing Time, and, if the Selling Shareholder is selling Option Securities on a Date of Delivery, as of each such Date of Delivery, and agrees with each U.S. Underwriter, as follows: 11 (i) Accurate Disclosure. (A) The information furnished in writing by ------------------- or on behalf of the Selling Shareholder expressly for use in the Registration Statement and any amendments and supplements thereto does not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements regarding the Selling Shareholder therein not misleading and (B) the information furnished in writing by or on behalf of the Selling Shareholder expressly for use in the Prospectus does not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements regarding the Selling Shareholder therein, in the light of the circumstances under which they were made, not misleading. (ii) Authorization of Agreements. Such Selling Shareholder has the --------------------------- full right, power and authority to enter into this Agreement and a Power of Attorney and Custody Agreement (the "Power of Attorney and Custody Agreement") and to sell, transfer and deliver the Securities to be sold by such Selling Shareholder hereunder. The execution and delivery of this Agreement and the Power of Attorney and Custody Agreement and the sale and delivery of the Securities to be sold by such Selling Shareholder and the consummation of the transactions contemplated herein and compliance by such Selling Shareholder with its obligations hereunder have been duly authorized by such Selling Shareholder and do not and will not, whether with or without the giving of notice or passage of time or both, conflict with or constitute a breach of, or default under, or result in the creation or imposition of any tax, lien, charge or encumbrance upon the Securities to be sold by such Selling Shareholder or any property or assets of such Selling Shareholder pursuant to any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, license, lease or other agreement or instrument to which such Selling Shareholder is a party or by which such Selling Shareholder may be bound, or to which any of the property or assets of such Selling Shareholder is subject (except for such conflicts, breaches or defaults or liens, charges or encumbrances that would not result in a material adverse change in the condition (financial or otherwise), earnings, business affairs or business prospects of the Selling Shareholder, whether or not arising in the ordinary course of business), nor will such action result in any violation of the provisions of the charter or by-laws or other organizational instrument of such Selling Shareholder, if applicable, or any applicable treaty, law, statute, rule, regulation, judgment, order, writ or decree of any government, government instrumentality or court, domestic or foreign, having jurisdiction over such Selling Shareholder or any of its properties. (iii) Good and Marketable Title. Such Selling Shareholder has, will at ------------------------- the Closing Time have and, if any Option Securities are purchased, will on the Date of Delivery have good and marketable title to the Securities to be sold by such Selling Shareholder hereunder, free and clear of any security interest, mortgage, pledge, lien, charge, claim, equity or encumbrance of any kind created by or on behalf of the Selling Shareholder, other than pursuant to this Agreement; and upon delivery of such Securities 12 and payment of the purchase price therefor as herein contemplated, assuming each such Underwriter has no notice of any adverse claim, each of the Underwriters will receive good and marketable title to the Securities purchased by it from such Selling Shareholder, free and clear of any security interest, mortgage, pledge, lien, charge, claim, equity or encumbrance of any kind. (iv) Due Execution of Power of Attorney and Custody Agreement. -------------------------------------------------------- Such Selling Shareholder has duly executed and delivered, in the form heretofore furnished to the U.S. Representatives, the Power of Attorney and Custody Agreement with Jennifer E. Bennett, as attorney-in-fact (the "Attorney-in-Fact") and The Bank of New York, as custodian (the "Custodian"); the Custodian is authorized by the Selling Shareholder to deliver the Securities to be sold by such Selling Shareholder hereunder and to accept payment therefor; and each Attorney-in-Fact is authorized by the Selling Shareholder to execute and deliver this Agreement and the certificate referred to in Section 5(e) or that may be required pursuant to Sections 5(l) and 5(m) on behalf of such Selling Shareholder, to sell, assign and transfer to the U.S. Underwriters the Securities to be sold by such Selling Shareholder hereunder, to determine the purchase price to be paid by the U.S. Underwriters to such Selling Shareholder, as provided in Section 2(b) hereof, to authorize the delivery of the Securities to be sold by such Selling Shareholder hereunder, to accept payment therefor, and otherwise to act on behalf of such Selling Shareholder in connection with this Agreement. (v) Absence of Manipulation. Such Selling Shareholder has not taken, ----------------------- and will not take, directly or indirectly, any action which is designed to or which has constituted or which might reasonably be expected to cause or result in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities. (vi) Absence of Further Requirements. No filing with, or consent, ------------------------------- approval, authorization, order, registration, qualification or decree of, any court or governmental authority or agency, domestic or foreign, is necessary or required for the performance by the Selling Shareholder of its obligations hereunder or in the Power of Attorney and Custody Agreement, or in connection with the sale and delivery of the Securities being sold by the Selling Shareholder hereunder or the consummation of the transactions contemplated by this Agreement, except (i) such as may have previously been made or obtained or as may be required under the 1933 Act or the 1933 Act Regulations or state securities laws and (ii) such as may be required under the laws and regulations of jurisdictions outside the United States in which the Reserved Securities are offered (as to which we make no representation). (vii) Restriction on Sale of Securities. During a period of 180 days --------------------------------- from the date of the Prospectus, such Selling Shareholder will not, without the prior written consent of Merrill Lynch, (i) offer, pledge, sell, contract to sell, sell any option or contract to 13 purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of, directly or indirectly, any share of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or file any registration statement under the 1933 Act with respect to any of the foregoing or (ii) enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of the Common Stock, whether any such swap or transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. The foregoing sentence shall not apply to the Securities to be sold hereunder. (viii) Certificates Suitable for Transfer. Certificates for all of the ---------------------------------- Securities to be sold by such Selling Shareholder pursuant to this Agreement, in suitable form for transfer by delivery or accompanied by duly executed instruments of transfer or assignment in blank with signatures guaranteed, have been placed in custody with the Custodian with irrevocable conditional instructions to deliver such Securities to the U.S. Underwriters pursuant to this Agreement. (ix) No Association with NASD. Neither such Selling Shareholder nor ------------------------ any of its affiliates directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, or has any other association with (within the meaning of Article I, Section 1(m) of the By-laws of the National Association of Securities Dealers, Inc.), any member firm of the National Association of Securities Dealers, Inc., other than NationsBanc Capital Markets, Inc., NationsBanc Investments, Inc., NationsBanc-CRT Services, Inc., NationsSecurities, NSI Agency, LLC, BankSouth Investment Services, Inc., Boatmen's Investment Services of Arkansas, Inc. and Boatmen's Investment Services, Inc. (c) Officer's Certificates. Any certificate signed by any officer of the Company or any of its Subsidiaries delivered to the Global Coordinator, the U.S. Representatives or to counsel for the U.S. Underwriters shall be deemed a representation and warranty by the Company to each U.S. Underwriter as to the matters covered thereby; and any certificate signed by or on behalf of any Selling Shareholder as such and delivered to the U.S. Representatives or to counsel for the U.S. Underwriters pursuant to the terms of this Agreement shall be deemed a representation and warranty by such Selling Shareholder to the U.S. Underwriters as to the matters covered thereby. SECTION 2. Sale and Delivery to U.S. Underwriters; Closing. ----------------------------------------------- (a) Initial Securities. On the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company agrees to sell to each U.S. Underwriter, severally and not jointly, and each U.S. Underwriter, severally and not jointly, agrees to purchase from the Company, at the price per share set forth in Schedule C, the number of Initial U.S. Securities set forth in Schedule A opposite the name of such U.S. 14 Underwriter, plus any additional number of Initial U.S. Securities which such Underwriter may become obligated to purchase pursuant to the provisions of Section 10 hereof. (b) Option Securities. In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company and the Selling Shareholder, severally and not jointly, hereby grant an option to the U.S. Underwriters, severally and not jointly, to purchase up to an additional 960,000 shares of Common Stock, as set forth in Schedule B, at the price per share set forth in Schedule C, less an amount per share equal to any dividends or distributions declared by the Company and payable on the Initial U.S. Securities but not payable on the U.S. Option Securities. The option hereby granted will expire 30 days after the date hereof and may be exercised in whole or in part from time to time on one or more occasions only for the purpose of covering over-allotments which may be made in connection with the offering and distribution of the Initial U.S. Securities upon notice by the Global Coordinator to the Company and the Selling Shareholder setting forth the number of U.S. Option Securities as to which the several U.S. Underwriters are then exercising the option and the time and date of payment and delivery for such U.S. Option Securities. Any such time and date of delivery for the U.S. Option Securities (a "Date of Delivery") shall be determined by the Global Coordinator, but shall not be later than seven full business days after the exercise of said option, nor in any event prior to the Closing Time, as hereinafter defined. If the option is exercised as to all or any portion of the U.S. Option Securities, each of the U.S. Underwriters, acting severally and not jointly, will purchase that proportion of the total number of U.S. Option Securities then being purchased which the number of Initial U.S. Securities set forth in Schedule A opposite the name of such U.S. Underwriter bears to the total number of Initial U.S. Securities, subject in each case to such adjustments as the Global Coordinator in its discretion shall make to eliminate any sales or purchases of fractional shares. (c) Payment. Payment of the purchase price for, and delivery of certificates for, the Initial Securities shall be made at the offices of Fried, Frank, Harris, Shriver & Jacobson, 1 New York Plaza, New York, New York 10004, or at such other place as shall be agreed upon by the Global Coordinator and the Company, at 9:00 A.M. (Eastern time) on the third (fourth, if the pricing occurs after 4:30 P.M. (Eastern time) on any given day) business day after the date hereof (unless postponed in accordance with the provisions of Section 10), or such other time not later than ten business days after such date as shall be agreed upon by the Global Coordinator and the Company (such time and date of payment and delivery being herein called "Closing Time"). In addition, in the event that any or all of the U.S. Option Securities are purchased by the U.S. Underwriters, payment of the purchase price for, and delivery of certificates for, such U.S. Option Securities shall be made at the above-mentioned offices, or at such other place as shall be agreed upon by the Global Coordinator, the Company and the Selling Shareholder, on each Date of Delivery as specified in the notice from the Global Coordinator to the Company and the Selling Shareholder. Payment shall be made to the Company and the Selling Shareholder by wire transfer of immediately available funds to a bank account designated by the Company and the Custodian 15 pursuant to the Selling Shareholder's Power of Attorney and Custody Agreement, as the case may be, against delivery to the U.S. Representatives for the respective accounts of the U.S. Underwriters of certificates for the U.S. Securities to be purchased by them. It is understood that each U.S. Underwriter has authorized the U.S. Representatives, for its account, to accept delivery of, receipt for, and make payment of the purchase price for, the Initial U.S. Securities and the U.S. Option Securities, if any, which it has agreed to purchase. Merrill Lynch, individually and not as representative of the U.S. Underwriters, may (but shall not be obligated to) make payment of the purchase price for the Initial U.S. Securities or the U.S. Option Securities, if any, to be purchased by any U.S. Underwriter whose funds have not been received by the Closing Time or the relevant Date of Delivery, as the case may be, but such payment shall not relieve such U.S. Underwriter from its obligations hereunder. (d) Denominations; Registration. Certificates for the Initial U.S. Securities and the U.S. Option Securities, if any, shall be in such denominations and registered in such names as the U.S. Representatives may request in writing at least one full business day before the Closing Time or the relevant Date of Delivery, as the case may be. The certificates for the Initial U.S. Securities and the U.S. Option Securities, if any, will be made available for examination and packaging by the U.S. Representatives in The City of New York not later than 10:00 A.M. (Eastern time) on the business day prior to the Closing Time or the relevant Date of Delivery, as the case may be. SECTION 3. Covenants of the Company. The Company covenants with each U.S. ------------------------ Underwriter as follows: (a) Compliance with Securities Regulations and Commission Requests. The Company, subject to Section 3(b), will comply with the requirements of Rule 430A or Rule 434, as applicable, and will notify the Global Coordinator immediately, and confirm the notice in writing, (i) when any post-effective amendment to the Registration Statement shall become effective, or any supplement to the Prospectuses or any amended Prospectuses shall have been filed, (ii) of the receipt of any comments from the Commission, (iii) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectuses or for additional information, and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of any order preventing or suspending the use of any preliminary prospectus, or of the suspension of the qualification of the Securities for offering or sale in any jurisdiction, or of the initiation or threatening of any proceedings for any of such purposes. The Company will promptly effect the filings necessary pursuant to Rule 424(b) and will take such steps as it deems necessary to ascertain promptly whether the form of prospectus transmitted for filing under Rule 424(b) was received for filing by the Commission and, in the event that it was not, it will promptly file such prospectus. The Company will make every reasonable effort to prevent the issuance of any stop order and, if any stop order is issued, to obtain the lifting thereof at the earliest possible moment. 16 (b) Filing of Amendments. The Company will give the Global Coordinator notice of its intention to file or prepare any amendment to the Registration Statement (including any filing under Rule 462(b)), any Term Sheet or any amendment, supplement or revision to either the prospectus included in the Registration Statement at the time it became effective or to the Prospectuses, will furnish the Global Coordinator with copies of any such documents a reasonable amount of time prior to such proposed filing or use, as the case may be, and will not file or use any such document to which the Global Coordinator or counsel for the U.S. Underwriters shall object. (c) Delivery of Registration Statements. The Company has furnished or will deliver to the U.S. Representatives and counsel for the U.S. Underwriters, without charge, signed copies of the Registration Statement as originally filed and of each amendment thereto (including exhibits filed therewith) and signed copies of all consents and certificates of experts, and will also deliver to the U.S. Representatives, without charge, a conformed copy of the Registration Statement as originally filed and of each amendment thereto (without exhibits) for each of the U.S. Underwriters. The copies of the Registration Statement and each amendment thereto furnished to the U.S. Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (d) Delivery of Prospectuses. The Company has delivered to each U.S. Underwriter, without charge, as many copies of each preliminary prospectus as such U.S. Underwriter reasonably requested, and the Company hereby consents to the use of such copies for purposes permitted by the 1933 Act. The Company will furnish to each U.S. Underwriter, without charge, during the period when the U.S. Prospectus is required to be delivered under the 1933 Act or the Securities Exchange Act of 1934 (the "1934 Act"), such number of copies of the U.S. Prospectus (as amended or supplemented) as such U.S. Underwriter may reasonably request. The U.S. Prospectus and any amendments or supplements thereto furnished to the U.S. Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (e) Continued Compliance with Securities Laws. The Company will comply with the 1933 Act and the 1933 Act Regulations so as to permit the completion of the distribution of the Securities as contemplated in this Agreement, the International Purchase Agreement and in the Prospectuses. If at any time when a prospectus is required by the 1933 Act to be delivered in connection with sales of the Securities, any event shall occur or condition shall exist as a result of which it is necessary, in the opinion of counsel for the U.S. Underwriters or for the Company, to amend the Registration 17 Statement or amend or supplement any Prospectus in order that the Prospectuses will not include any untrue statements of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in the light of the circumstances existing at the time it is delivered to a purchaser, or if it shall be necessary, in the opinion of such counsel, at any such time to amend the Registration Statement or amend or supplement any Prospectus in order to comply with the requirements of the 1933 Act or the 1933 Act Regulations, the Company will promptly prepare and file with the Commission, subject to Section 3(b), such amendment or supplement as may be necessary to correct such statement or omission or to make the Registration Statement or the Prospectuses comply with such requirements, and the Company will furnish to the U.S. Underwriters such number of copies of such amendment or supplement as the U.S. Underwriters may reasonably request. (f) Blue Sky Qualifications. The Company will use its best efforts, in cooperation with the U.S. Underwriters, to qualify the Securities for offering and sale under the applicable securities laws of such states and other jurisdictions (domestic or foreign) as the Global Coordinator may designate and to maintain such qualifications in effect for a period of not less than one year from the later of the effective date of the Registration Statement and any Rule 462(b) Registration Statement; provided, however, that neither the Company nor the Selling Shareholder shall be obligated to file any general consent to service of process or to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it is not so qualified or to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject. In each jurisdiction in which the Securities have been so qualified, the Company will file such statements and reports as may be required by the laws of such jurisdiction to continue such qualification in effect for a period of not less than one year from the effective date of the Registration Statement and any Rule 462(b) Registration Statement. (g) Rule 158. The Company will timely file such reports pursuant to the 1934 Act as are necessary in order to make generally available to its securityholders as soon as practicable an earnings statement for the purposes of, and to provide the benefits contemplated by, the last paragraph of Section 11(a) of the 1933 Act. (h) Use of Proceeds. The Company will use the net proceeds received by it from the sale of the Securities in the manner specified in the Prospectuses under "Use of Proceeds." (i) Listing. The Company will use its best efforts to effect the listing of the Common Stock (including the Securities) on the New York Stock Exchange. (j) Restriction on Sale of Securities. During a period of 180 days from the date of the Prospectuses, the Company will not, without the prior written consent of the Global Coordinator, (i) directly or indirectly, 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 to purchase or otherwise transfer or dispose of any share of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or file any registration statement under the 1933 Act with respect to any of the foregoing or (ii) enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of 18 ownership of the Common Stock, whether any such swap or transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. The foregoing sentence shall not apply to (A) the Securities to be sold hereunder or under the International Purchase Agreement, (B) any shares of Common Stock issued by the Company upon the exercise of an option or warrant or the conversion of a security outstanding on the date hereof and referred to in the Prospectuses or (C) any shares of Common Stock issued or options to purchase Common Stock granted pursuant to employee benefit plans of the Company referred to in the Prospectuses; provided, however, that ----------------- notwithstanding the preceding clauses (B) and (C), the Company agrees that it will not issue shares of Common Stock for 180 days after the date of the Prospectus upon the exercise of any options to acquire Common Stock if the vesting of such options has been accelerated during such period pursuant to the terms of the employee benefit plans under which such options were issued. (k) Reporting Requirements. The Company, during the period when the Prospectuses are required to be delivered under the 1933 Act or the 1934 Act, will file all documents required to be filed with the Commission pursuant to the 1934 Act within the time periods required by the 1934 Act and the rules and regulations of the Commission thereunder. (l) Compliance with NASD Rules(l)Compliance with NASD Rules. The Company hereby agrees that it will ensure that the Reserved Securities will be restricted if required by the National Association of Securities Dealers, Inc. (the "NASD") or the NASD rules from sale, transfer, assignment, pledge or hypothecation for a period of three or five months, as the case may be, following the date of this Agreement. The Underwriters will notify the Company as to which persons will need to be so restricted. At the request of the Underwriters, the Company will direct the transfer agent to place a stop transfer restriction upon such securities for such period of time. Should the Company release, or seek to release, from such restrictions any of the Reserved Securities, the Company agrees to reimburse the Underwriters for any reasonable expenses (including, without limitation, legal expenses) they incur in connection with such release. (m) Good Standing. The Company hereby agrees that it will use its best efforts to become in good standing as a foreign corporation in all of the jurisdictions in which it conducts business as a foreign corporation (to the extent that Knoll, Inc. was qualified as a foreign corporation in such jurisdiction immediately prior to the merger of Knoll, Inc. and T.K.G. Acquisition Corp.). SECTION 4. Payment of Expenses. (a) Expenses. The Company will pay all ------------------- expenses incident to the performance of its obligations under this Agreement, including (i) the preparation, printing and filing of the Registration Statement (including financial statements and exhibits) as originally filed and of each amendment thereto, (ii) the printing and delivery to the Underwriters of this Agreement, any Agreement among Underwriters and such other documents as may be required in connection with the offering, purchase, sale, issuance or delivery of the Securities, 19 (iii) the preparation, issuance and delivery of the certificates for the Securities to the Underwriters, including any stock or other transfer taxes and any stamp or other duties payable upon the sale, issuance or delivery of the Securities by the Company to the Underwriters and the transfer of the Securities between the U.S. Underwriters and the International Managers, (iv) the fees and disbursements of the Company's counsel, accountants and other advisors, (v) the qualification of the Securities under securities laws in accordance with the provisions of Section 3(f) hereof, including filing fees and the reasonable fees and disbursements of counsel for the Underwriters in connection therewith and in connection with the preparation of the Blue Sky Survey and any supplement thereto, (vi) the printing and delivery to the Underwriters of copies of each preliminary prospectus, any Term Sheets and of the Prospectuses and any amendments or supplements thereto, (vii) the preparation, printing and delivery to the Underwriters of copies of the blue sky survey and any supplement thereto, (viii) the fees and expenses of any transfer agent or registrar for the Securities, (ix) the filing fees incident to, and the reasonable fees and disbursements of counsel to the Underwriters in connection with, the review by the NASD of the terms of the sale of the Securities, (x) the fees and expenses incurred in connection with the listing of the Securities on the New York Stock Exchange and (xi) all costs and expenses of the Underwriters, including the fees and disbursements of counsel for the Underwriters, in connection with matters related to the Reserved Securities which are designated by the Company for sale to certain dealers having business relationships with the Company. (b) Expenses of the Selling Shareholder. The Selling Shareholder will pay all expenses incident to the performance of its obligations under, and the consummation of the transactions contemplated by this Agreement, including (i) any stamp duties, capital duties and stock transfer taxes, if any, payable upon the sale of the Securities by the Selling Shareholder to the Underwriters, and their transfer between the Underwriters pursuant to an agreement between such Underwriters and (ii) the fees and disbursements of its counsel and accountants. (c) Termination of Agreement. If this Agreement is terminated by the U.S. Representatives in accordance with the provisions of Section 5 or Sections 9(a)(i) or (ii) hereof, the Company shall reimburse the U.S. Underwriters for all of their out-of-pocket expenses, including the reasonable fees and disbursements of counsel for the U.S. Underwriters. (d) Allocation of Expenses. The provisions of this Section shall not affect any agreement that the Company and the Selling Shareholder may make for the sharing of such costs and expenses. 20 SECTION 5. Conditions of U.S. Underwriters' Obligations'. The obligations --------------------------------------------- of the several U.S. Underwriters hereunder are subject to the accuracy of the representations and warranties of the Company and the Selling Shareholder contained in Section 1 hereof or in certificates of any officer of the Company or any Subsidiary of the Company or on behalf of the Selling Shareholder delivered pursuant to the provisions hereof, to the performance by the Company of its covenants and other obligations hereunder, and to the following further conditions: (a) Effectiveness of Registration Statement. The Registration Statement, including any Rule 462(b) Registration Statement, has become effective and at Closing Time no stop order suspending the effectiveness of the Registration Statement shall have been issued under the 1933 Act or proceedings therefor initiated or threatened by the Commission, and any request on the part of the Commission for additional information shall have been complied with to the reasonable satisfaction of counsel to the U.S. Underwriters. A prospectus containing the Rule 430A Information shall have been filed with the Commission in accordance with Rule 424(b) (or a post- effective amendment providing such information shall have been filed and declared effective in accordance with the requirements of Rule 430A) or, if the Company has elected to rely upon Rule 434, a Term Sheet shall have been filed with the Commission in accordance with Rule 424(b). (b) Opinions of Counsel for the Company and the Selling Shareholder. At Closing Time, the U.S. Representatives shall have received the favorable opinions, dated as of Closing Time, of (i) Willkie Farr & Gallagher, counsel for the Company, and (ii) Jennifer E. Bennett, counsel to NationsBank Corporation, acting as special counsel to the Selling Shareholder, in each case in form and substance satisfactory to counsel for the U.S. Underwriters, together with signed or reproduced copies of such letter for each of the other U.S. Underwriters to the effect set forth in Exhibits A-1 and A-2, respectively, hereto and to such further effect as counsel to the U.S. Underwriters may reasonably request. (c) Opinion of Counsel for U.S. Underwriters. At Closing Time, the U.S. Representatives shall have received the favorable opinion, dated as of Closing Time, of Fried, Frank, Harris, Shriver & Jacobson, counsel for the U.S. Underwriters, together with signed or reproduced copies of such letter for each of the other U.S. Underwriters with respect to the matters set forth in clauses (i), (ii), (v), (viii), (x), (xi), (xv) (solely as to the information in the Prospectus under "Description of Capital Stock") and the penultimate paragraph of Exhibit A hereto. In giving such opinion such counsel may rely, as to all matters governed by the laws of jurisdictions other than the law of the State of New York and the federal law of the United States and the General Corporation Law of the State of Delaware, upon the opinions of counsel satisfactory to the U.S. Representatives. Such counsel may also state that, insofar as such opinion involves factual matters, they have relied, to the extent they deem proper, upon certificates of 21 officers of the Company and its Subsidiaries and of the Selling Shareholder and certificates of public officials. (d) Officers' Certificate. At Closing Time, there shall not have been, since the date hereof or since the respective dates as of which information is given in the Prospectuses, any material adverse change in the condition (financial or otherwise), earnings, business affairs or business prospects of the Company and its Subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, and the U.S. Representatives shall have received a certificate of the Chairman of the Board, President or a Vice President of the Company and of the chief financial or chief accounting officer of the Company, dated as of Closing Time, to the effect that (i) there has been no such material adverse change, (ii) the representations and warranties in Section 1(a) hereof are true and correct with the same force and effect as though expressly made at and as of Closing Time, (iii) the Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied at or prior to Closing Time, and (iv) no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or, to the best of their knowledge, are contemplated by the Commission. (e) Accountant's Comfort Letters. At the time of the execution of this Agreement, the U.S. Representatives shall have received from Ernst & Young LLP a letter in the form of Exhibit C-1 hereto and from Price Waterhouse LLP a letter in the form of Exhibit C-2 hereto, dated such date, in form and substance satisfactory to the U.S. Representatives, together with signed or reproduced copies of such letter for each of the other U.S. Underwriters containing statements and information of the type ordinarily included in accountants' "comfort letters" to underwriters with respect to the financial statements and certain financial information contained in the Registration Statement and the Prospectuses. (f) Bring-down Comfort Letters. At Closing Time, the U.S. Representatives shall have received letters from Ernst & Young LLP and Price Waterhouse LLP, dated as of Closing Time, to the effect that they reaffirm the statements made in the letter furnished pursuant to subsection (e) of this Section, except that the specified date referred to shall be a date not more than three business days prior to Closing Time. (g) Approval of Listing. At Closing Time, the Securities shall have been approved for listing on the New York Stock Exchange, subject only to official notice of issuance. (h) No Objection. The NASD shall have confirmed that it has not raised any objection with respect to the fairness and reasonableness of the underwriting terms and arrangements. 22 (i) Lock-up Agreements. At the date of this Agreement, the U.S. Representatives shall have received (i) an agreement substantially in the form of Exhibit B hereto signed by the persons listed on Schedule D hereto and (ii) copies of the Agreement, dated as of April 15, 1997, among the Company, Warburg, Pincus Ventures, L.P., NationsBanc Investment Corp. and certain other persons, signed by the Company and the persons listed on Schedule D hereto. (j) Purchase of Initial International Securities. Contemporaneously with the purchase by the U.S. Underwriters of the Initial U.S. Securities under this Agreement, the International Managers shall have purchased the Initial International Securities under the International Purchase Agreement. (k) Custody Agreement. At the date of this Agreement the U.S. Representatives shall have received copies of a Custody Agreement and Power of Attorney executed by the Selling Shareholder. (l) Conditions to Purchase of U.S. Option Securities. In the event that the U.S. Underwriters exercise their option provided in Section 2(b) hereof to purchase all or any portion of the U.S. Option Securities, the representations and warranties of the Company and the Selling Shareholder contained herein and the statements in any certificates furnished by the Company or any Subsidiary of the Company hereunder or the Selling Shareholder shall be true and correct as of each Date of Delivery and, at the relevant Date of Delivery, the U.S. Representatives shall have received: (i) Officers' Certificate. A certificate, dated such Date of --------------------- Delivery, of the Chairman of the Board, President or a Vice President of the Company and of the chief financial or chief accounting officer of the Company confirming that the certificate delivered at the Closing Time pursuant to Section 5(d) hereof remains true and correct as of such Date of Delivery. (ii) Selling Shareholder's Certificate. At the Date of Delivery, the --------------------------------- U.S. Representatives shall have received a certificate of the Selling Shareholder, dated as of Date of Delivery, to the effect that (i) the representations and warranties of the Selling Shareholder contained in Section 1(b) hereof are true and correct in all respects with the same force and effect as though expressly made at and as of Date of Delivery and (ii) the Selling Shareholder has complied in all material respects with all agreements and all conditions on its part to be performed under this Agreement at or prior to Date of Delivery. (iii) Opinions of Counsel for the Company and Counsel for the Selling --------------------------------------------------------------- Shareholder. The favorable opinions of Willkie Farr & Gallagher, ----------- counsel for the Company, and of Jennifer E. Bennett, counsel to NationsBank Corporation, acting as special counsel to the Selling Shareholder, in each 23 case in form and substance satisfactory to counsel for the U.S. Underwriters, dated such Date of Delivery, relating to the U.S. Option Securities to be purchased on such Date of Delivery and otherwise to the same effect as the opinions required by Section 5(b) hereof. (iv) Opinion of Counsel for U.S. Underwriters. The favorable opinion ---------------------------------------- of Fried, Frank, Harris, Shriver & Jacobson, counsel for the U.S. Underwriters, dated such Date of Delivery, relating to the U.S. Option Securities to be purchased on such Date of Delivery and otherwise to the same effect as the opinion required by Section 5(c) hereof. (v) Bring-down Comfort Letters. Letters from Ernst & Young LLP and -------------------------- Price Waterhouse LLP, in form and substance satisfactory to the U.S. Representatives and dated such Date of Delivery, substantially in the same form and substance as the letter furnished to the U.S. Representatives pursuant to Section 5(f) hereof, except that the "specified date" in the letter furnished pursuant to this paragraph shall be a date not more than five days prior to such Date of Delivery. (vi) Forms W-9 or W-8. A copy of a properly completed and executed ---------------- U.S. Treasury Department Form W-9 or W-8 (or other applicable form or statement specified by Treasury Department regulations) from the Selling Shareholder. (m) Additional Documents. At Closing Time and at each Date of Delivery, counsel for the U.S. Underwriters shall have been furnished with such documents and opinions as they may require for the purpose of enabling them to pass upon the issuance and sale of the Securities as herein contemplated, or in order to evidence the accuracy of any of the representations or warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken by the Company and the Selling Shareholder in connection with the issuance and sale of the Securities as herein contemplated shall be satisfactory in form and substance to the U.S. Representatives and counsel for the U.S. Underwriters. (n) Transactions. At or prior to the Closing Time, the Transactions, as described in the Registration Statement and Prospectuses, shall have been duly and validly effected and all corporate proceedings and legal matters incident to the Transactions shall be satisfactory to counsel for the U.S. Underwriters. (o) Termination of Agreement. If any condition specified in this Section shall not have been fulfilled when and as required to be fulfilled, this Agreement, or, in the case of any condition to the purchase of U.S. Option Securities on a Date of Delivery which is after the Closing Time, the obligations of the several U.S. Underwriters to purchase the relevant Option Securities, may be terminated by the U.S. Representatives 24 by notice to the Company at any time at or prior to Closing Time or such Date of Delivery, as the case may be, and such termination shall be without liability of any party to any other party except as provided in Section 4 and except that Sections 1, 6, 7 and 8 shall survive any such termination and remain in full force and effect. SECTION 6. Indemnification. --------------- (a) Indemnification of U.S. Underwriters. The Company and the Selling Shareholder, jointly and severally, agree to indemnify and hold harmless each U.S. Underwriter and each person, if any, who controls any U.S. Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act as follows: (i) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of any untrue statement or alleged untrue statement of a material fact included in any preliminary prospectus or the Prospectuses (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of (A) the violation of any applicable laws or regulations of foreign jurisdictions where Reserved Securities have been offered and (B) any untrue statement or alleged untrue statement of a material fact included in the supplement or prospectus wrapper material distributed in foreign jurisdictions in connection with the reservation and sale of the Reserved Securities to certain dealers having business relationships with the Company or the omission or alleged omission therefrom of a material fact necessary to make the statements therein, when considered in conjunction with the Prospectuses or preliminary prospectuses, not misleading; (iii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission or in connection with any violation of the nature referred to in Section 6(a)(ii)(A) hereof; provided that (subject to Section 6(d) below) any such settlement is effected with the written consent of the indemnifying party; and (iv) against any and all expense whatsoever, as incurred (including the fees and disbursements of counsel chosen by Merrill Lynch), reasonably incurred in investigating, 25 preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission or in connection with any violation of the nature referred to in Section 6(a)(ii)(A) hereof, to the extent that any such expense is not paid under (i), (ii) or (iii) above; - provided, however, that this indemnity agreement shall not (i) apply to any - -------- ------- loss, liability, claim, damage or expense to the extent arising out of any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished to the Company by any Underwriter through the U.S. Representatives or the Lead Managers expressly for use in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or any preliminary prospectus or the U.S. Prospectus (or any amendment or supplement thereto) or (ii) inure to the benefit of any U.S. Underwriter from whom the person asserting any loss, liability, claim, damage or expense purchased Securities, or any person controlling such U.S. Underwriter, if it shall be established that a copy of the Prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such U.S. Underwriter to such person, if required by law to have been so delivered, at or prior to the confirmation of the sale of such Securities to such person in any case where the Company complied with its obligations under Sections 3(a), 3(b) and 3(d), and if the Prospectus (as so amended or supplemented) would have cured any defect giving rise to such loss, liability, claim damage, or expense; provided, --------- however, further, that with respect to the Selling Shareholder, (x) the - ---------------- indemnification provision in this paragraph (a) shall be only with respect to the information furnished in writing by or on behalf of the Selling Shareholder expressly for use in the Registration Statement (or any amendment thereto), including Rule 430A Information, if applicable, or any preliminary prospectus or the Prospectus (or any amendment or supplement thereto) and (y) such Selling Shareholder's aggregate liability under this Section 6 shall be limited to an amount equal to the net proceeds (after deducting the underwriting discount but before deducting expenses) received by such Selling Shareholder from the sale of Securities pursuant to this Agreement. (b) Indemnification of Company, Directors and Officers and Selling Shareholder. Each U.S. Underwriter severally agrees to indemnify and hold harmless the Company, its directors, each of its officers who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act and the Selling Shareholder and each person, if any, who controls the Selling Shareholder within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act against any and all loss, liability, claim, damage and expense described in the indemnity contained in subsection (a) of this Section, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or any preliminary U.S. prospectus or the U.S. Prospectus (or any amendment or 26 supplement thereto) in reliance upon and in conformity with written information furnished to the Company by such U.S. Underwriter through the U.S. Representatives expressly for use in the Registration Statement (or any amendment thereto) or such preliminary prospectus or the U.S. Prospectus (or any amendment or supplement thereto). (c) Actions against Parties; Notification. Each indemnified party shall give notice as promptly as reasonably practicable to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve such indemnifying party from any liability hereunder to the extent it is not materially prejudiced as a result thereof and in any event shall not relieve it from any liability which it may have otherwise than on account of this indemnity agreement. In the case of parties indemnified pursuant to Section 6(a) above, counsel to the indemnified parties shall be selected by Merrill Lynch, and, in the case of parties indemnified pursuant to Section 6(b) above, counsel to the indemnified parties shall be selected by the Company. An indemnifying party may participate at its own expense in the defense of any such action; provided, however, that counsel to the indemnifying party shall not (except with the consent of the indemnified party) also be counsel to the indemnified party. In no event shall the indemnifying parties be liable for fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. No indemnifying party shall, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever in respect of which indemnification or contribution could be sought under this Section 6 or Section 7 hereof (whether or not the indemnified parties are actual or potential parties thereto), unless such settlement, compromise or consent (i) includes an unconditional release of each indemnified party from all liability arising out of such litigation, investigation, proceeding or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party. (d) Settlement without Consent if Failure to Reimburse. If at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel, such indemnifying party agrees that it shall be liable for any settlement of the nature contemplated by Section 6(a)(iii) effected without its written consent if (i) such settlement is entered into more than 45 days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall have received notice of the terms of such settlement at least 30 days prior to such settlement being entered into and (iii) such indemnifying party shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement. (e) Indemnification for Reserved Securities. In connection with the offer and sale of the Reserved Securities, the Company agrees, promptly upon a request in writing, to indemnify and hold harmless the Underwriters from and against any and all losses, liabilities, claims, 27 damages and expenses incurred by them as a result of the failure of certain dealers having business relationships with the Company and other persons to pay for and accept delivery of Reserved Securities which, by the end of the first business day following the date of this Agreement, were subject to an orally confirmed agreement to purchase. (f) Other Agreements with Respect to Indemnification. The provisions of this Section shall not affect any agreement among the Company and the Selling Shareholder with respect to indemnification. SECTION 7. Contribution. If the indemnification provided for in Section 6 ------------ hereof is for any reason unavailable to or insufficient to hold harmless an indemnified party in respect of any losses, liabilities, claims, damages or expenses referred to therein, then each indemnifying party shall contribute to the aggregate amount of such losses, liabilities, claims, damages and expenses incurred by such indemnified party, as incurred, (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Selling Shareholder on the one hand and the U.S. Underwriters on the other hand from the offering of the Securities pursuant to this Agreement or (ii) if the allocation provided by clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and the Selling Shareholder on the one hand and of the U.S. Underwriters on the other hand in connection with the statements or omissions, or in connection with any violation of the nature referred to in Section 6(a)(ii)(A) hereof, which resulted in such losses, liabilities, claims, damages or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Shareholder on the one hand and the U.S. Underwriters on the other hand in connection with the offering of the U.S. Securities pursuant to this Agreement shall be deemed to be in the same respective proportions as the total net proceeds from the offering of the U.S. Securities pursuant to this Agreement (before deducting expenses) received by the Company and the Selling Shareholder and the total underwriting discount received by the U.S. Underwriters, in each case as set forth on the cover of the U.S. Prospectus, or, if Rule 434 is used, the corresponding location on the Term Sheet, bear to the aggregate initial public offering price of the U.S. Securities as set forth on such cover. The relative fault of the Company and the Selling Shareholder on the one hand and the U.S. Underwriters on the other hand shall be determined by reference to, among other things, whether any such untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company or the Selling Shareholder or by the U.S. Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission or any violation of the nature referred to in Section 6(a)(ii)(A) hereof. The Company, the Selling Shareholder and the U.S. Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by pro rata allocation (even if the U.S. Underwriters were treated as one entity for such purpose) or by any 28 other method of allocation which does not take account of the equitable considerations referred to above in this Section 7. The aggregate amount of losses, liabilities, claims, damages and expenses incurred by an indemnified party and referred to above in this Section 7 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue or alleged untrue statement or omission or alleged omission. Notwithstanding the provisions of this Section 7, no U.S. Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the U.S. Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such U.S. Underwriter has otherwise been required to pay by reason of any such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 7, each person, if any, who controls a U.S. Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as such U.S. Underwriter, each director of the Company, each officer of the Company who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as the Company and each person, if any, who controls the Selling Shareholder within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as the Selling Shareholder. The U.S. Underwriters' respective obligations to contribute pursuant to this Section 7 are several in proportion to the number of Initial U.S. Securities set forth opposite their respective names in Schedule A hereto and not joint. The provisions of this Section shall not affect any agreement among the Company and the Selling Shareholder with respect to contribution. SECTION 8. Representations, Warranties and Agreements to Survive Delivery. -------------------------------------------------------------- All representations, warranties and agreements contained in this Agreement or in certificates of officers of the Company or any of its Subsidiaries or the Selling Shareholder submitted pursuant hereto, shall remain operative and in full force and effect, regardless of any investigation made by or on behalf of any U.S. Underwriter or controlling person, or by or on behalf of the Company or the Selling Shareholder, and shall survive delivery of the Securities to the U.S. Underwriters. SECTION 9. Termination of Agreement. ------------------------ (a) Termination; General. The U.S. Representatives may terminate this Agreement, by notice to the Company and the Selling Shareholder, at any time at or prior to Closing Time 29 (i) if there has been, since the time of execution of this Agreement or since the respective dates as of which information is given in the U.S. Prospectus, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its Subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, or (ii) if there shall have occurred a downgrading in the rating assigned to any of the Company's debt securities by any nationally recognized securities rating agency, or if such securities rating agency shall have publicly announced that it has under surveillance or review, with possible negative implications, its rating of any of the Company's debt securities, or (iii) if there has occurred any material adverse change in the financial markets in the United States or the international financial markets, any outbreak of hostilities or escalation thereof or other calamity or crisis or any change or development involving a prospective change in national or international political, financial or economic conditions, in each case the effect of which is such as to make it, in the judgment of the U.S. Representatives, impracticable to market the Securities or to enforce contracts for the sale of the Securities, or (iv) if trading in any securities of the Company has been suspended or materially limited by the Commission or the New York Stock Exchange, or if trading generally on the American Stock Exchange or the New York Stock Exchange or in the Nasdaq National Market has been suspended or materially limited, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices have been required, by any of said exchanges or by such system or by order of the Commission, the National Association of Securities Dealers, Inc. or any other governmental authority, or (v) if a banking moratorium has been declared by either Federal or New York authorities. (b) Liabilities. If this Agreement is terminated pursuant to this Section, such termination shall be without liability of any party to any other party except as provided in Section 4 hereof, and provided further that Sections 1, 6, 7 and 8 shall survive such termination and remain in full force and effect. SECTION 10. Default by One or More of the U.S. Underwriters. If one or ----------------------------------------------- more of the U.S. Underwriters shall fail at Closing Time or a Date of Delivery to purchase the Securities which it or they are obligated to purchase under this Agreement (the "Defaulted Securities"), the U.S. Representatives shall have the right, within 24 hours thereafter, to make arrangements for one or more of the non-defaulting U.S. Underwriters, or any other underwriters, to purchase all, but not less than all, of the Defaulted Securities in such amounts as may be agreed upon and upon the terms herein set forth; if, however, the U.S. Representatives shall not have completed such arrangements within such 24-hour period, then: (a) if the number of Defaulted Securities does not exceed 10% of the number of U.S. Securities to be purchased on such date, each of the non- defaulting U.S. Underwriters shall be obligated, severally and not jointly, to purchase the full amount thereof in the proportions that their respective underwriting obligations hereunder bear to the underwriting obligations of all non-defaulting U.S. Underwriters, or (b) if the number of Defaulted Securities exceeds 10% of the number of U.S. Securities to be purchased on such date, this Agreement or, with respect to any Date of 30 Delivery which occurs after the Closing Time, the obligation of the U.S. Underwriters to purchase and of the Company and the Selling Shareholder to sell the Option Securities to be purchased and sold on such Date of Delivery shall terminate without liability on the part of any non- defaulting U.S. Underwriter. No action taken pursuant to this Section shall relieve any defaulting U.S. Underwriter from liability in respect of its default. In the event of any such default which does not result in a termination of this Agreement or, in the case of a Date of Delivery which is after the Closing Time, which does not result in a termination of the obligation of the U.S. Underwriters to purchase and the Company and the Selling Shareholder to sell the relevant U.S. Option Securities, as the case may be, either (i) the U.S. Representatives or (ii) the Company and the Selling Shareholder shall have the right to postpone Closing Time or the relevant Date of Delivery, as the case may be, for a period not exceeding seven days in order to effect any required changes in the Registration Statement or Prospectus or in any other documents or arrangements. As used herein, the term "U.S. Underwriter" includes any person substituted for a U.S. Underwriter under this Section 10. SECTION 11. Default by the Selling Shareholder or the Company. ------------------------------------------------- (a) If the Selling Shareholder shall fail at a Date of Delivery to sell and deliver the number of Securities which such Selling Shareholder is obligated to sell hereunder, and the Company does not exercise the right hereby granted to increase, pro rata or otherwise, the number of Securities to be sold by it hereunder to the total number to be sold by the Company and the Selling Shareholder as set forth in Schedule B hereto, then the U.S. Underwriters may, at the option of the U.S. Representatives, by notice from the Representatives to the Company and the Selling Shareholder, either (a) terminate this Agreement without any liability on the fault of any non-defaulting party except that the provisions of Sections 1, 4, 6, 7 and 8 shall remain in full force and effect or (b) elect to purchase the Securities which the Company has agreed to sell hereunder. No action taken pursuant to this Section 11 shall relieve any Selling Shareholder so defaulting from liability, if any, in respect of such default. In the event of a default by any Selling Shareholder as referred to in this Section 11, each of the U.S. Representatives and the Company shall have the right to postpone Closing Time or Date of Delivery for a period not exceeding seven days in order to effect any required change in the Registration Statement or Prospectus or in any other documents or arrangements. (b) If the Company shall fail at Closing Time or at the Date of Delivery to sell the number of Securities that it is obligated to sell hereunder, then this Agreement shall terminate without any liability on the part of any nondefaulting party; provided, however, that the provisions of Sections 1, 4, 6, 7 and 8 shall remain in full force and effect. No action taken pursuant to this Section shall relieve the Company from liability, if any, in respect of such default. 31 SECTION 12. Notices. All notices and other communications hereunder shall ------- be in writing and shall be deemed to have been duly given if mailed or transmitted by any standard form of telecommunication. Notices to the U.S. Underwriters shall be directed to the U.S. Representatives at North Tower, World Financial Center, New York, New York 10281-1201, attention of Gregory L. Wright, with a copy to Fried, Frank, Harris, Shriver & Jacobson, 1 New York Plaza, New York, New York 10004, attention of Valerie Ford Jacob; and notices to the Company shall be directed to it at Knoll, Inc., 1235 Water Street, East Greenville, PA 18041, attention of Patrick A. Milberger, with a copy to Willkie Farr & Gallagher, One Citicorp Center, 153 East 53rd Street, New York, New York 10022, attention of Michael A. Schwartz, and notices to the Selling Shareholder shall be delivered to it at NationsBanc Investment Corp., 100 Tryon Street, 10th Floor, Charlotte, North Carolina 28255, attention of Ann B. Hayes, with a copy to NationsBank Corporation, 100 North Tryon Street, NCI-007-20-01, Charlotte, North Carolina 28255, attention of Jennifer E. Bennett. SECTION 13. Parties. This Agreement shall each inure to the benefit of and ------- be binding upon the U.S. Underwriters, the Company and the Selling Shareholder and their respective successors. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person, firm or corporation, other than the U.S. Underwriters, the Company and the Selling Shareholder and their respective successors and the controlling persons and officers and directors referred to in Sections 6 and 7 and their heirs and legal representatives, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision herein contained. This Agreement and all conditions and provisions hereof are intended to be for the sole and exclusive benefit of the U.S. Underwriters, the Company and the Selling Shareholder and their respective successors, and said controlling persons and officers and directors and their heirs and legal representatives, and for the benefit of no other person, firm or corporation. No purchaser of Securities from any U.S. Underwriter shall be deemed to be a successor by reason merely of such purchase. SECTION 14. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY ---------------------- AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME. SECTION 15. Effect of Headings. The Article and Section headings herein ------------------ and the Table of Contents are for convenience only and shall not affect the construction hereof. 32 If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Company and the Attorney-in-Fact for the Selling Shareholder a counterpart hereof, whereupon this instrument, along with all counterparts, will become a binding agreement among the U.S. Underwriters, the Company and the Selling Shareholder in accordance with its terms. Very truly yours, KNOLL, INC. By: ---------------------------- Name: Title: By: ---------------------------- Name: Title: Attorney-in-Fact on behalf of the Selling Shareholder named in Schedule B hereto CONFIRMED AND ACCEPTED, as of the date first above written: MERRILL LYNCH & CO. MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED CREDIT SUISSE FIRST BOSTON CORPORATION GOLDMAN, SACHS & CO. MORGAN STANLEY & CO. INCORPORATED By: MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By: ---------------------------------------- Authorized Signatory For themselves and as U.S. Representatives of the other U.S. Underwriters named in Schedule A hereto. 33 SCHEDULE A Number of Initial U.S. Name of U.S. Underwriter Securities - ------------------------ ------------ Merrill Lynch, Pierce, Fenner & Smith Incorporated......................... Credit Suisse First Boston Corporation........... Goldman, Sachs & Co.............................. Morgan Stanley & Co. Incorporated................ Total............................................ 6,400,000 SCHEDULE B
Number of Initial U.S. Maximum Number of U.S. Securities to be Sold Option Securities to be Sold ---------------------- ---------------------------- Knoll, Inc. 6,400,000 384,000 NationsBanc Investment Corp. 0 576,000 Total 6,400,000 960,000
SCHEDULE C Knoll, Inc. 8,000,000 Shares of Common Stock (Par Value $0.01 Per Share) 1. The initial public offering price per share for the Securities, determined as provided in said Section 2, shall be $ . 2. The purchase price per share for the U.S. Securities to be paid by the several U.S. Underwriters shall be $ , being an amount equal to the initial public offering price set forth above less $ per share; provided that the purchase price per share for any U.S. Option Securities purchased upon the exercise of the over-allotment option described in Section 2(b) shall be reduced by an amount per share equal to any dividends or distributions declared by the Company and payable on the Initial U.S. Securities but not payable on the U.S. Option Securities. SCHEDULE D List of Persons and Entities Subject to Lock-up Warburg, Pincus Ventures, L.P. NationsBanc Investment Corp. Wolfgang Billstein Kathleen G. Bradley Andrew B. Cogan Barbara E. Ellixson Arthur C. Graves Pamela G. Jones John H. Lynch Barry L. McCabe Patrick A. Milberger Alan S. Millstein Douglas J. Purdom Burton B. Staniar Louise W. Abbott Michael J. Benigno David G. Culp Miles T. Giidden Arthur C. Graves Catherine H. Havran Stephen J. Hummel Pamela G. Jones Michael A. Lehman Charles P. Lieb Carl G. Magnusson Keith M. McCann Lawrence S. Menzel Patrick A. Milberger Alan S. Millstein James R. Monzo Brian A. Mullaney Elizabeth L. Needle David P. Noel Ronald P. Racle Stephen A. Rockwell Robert Rowland Samuel Shaffer Meredith G. Stevens Kevin F. Thorton Richard K. Vales Richard S. Vledder Roger B. Wall Mark A. Workman EXHIBIT A-1 FORM OF OPINION OF COMPANY'S COUNSEL TO BE DELIVERED PURSUANT TO SECTION 5(b) (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware. (ii) The Company has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectuses and to enter into and perform its obligations under the U.S. Purchase Agreement and the International Purchase Agreement. (iii) The Company is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect. (iv) After giving effect to the Transactions, the authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectuses in the column entitled "Pro Forma As Adjusted" under the caption "Capitalization" (except for subsequent issuances, if any, pursuant to the U.S. Purchase Agreement and the International Purchase Agreement); the shares of issued and outstanding capital stock have been duly authorized and validly issued and are fully paid and non-assessable; and none of the outstanding shares of capital stock of the Company was issued in violation of the preemptive or other similar rights of any securityholder of the Company. (v) The Securities to be purchased by the U.S. Underwriters and the International Managers from the Company have been duly authorized for issuance and sale to the Underwriters pursuant to the U.S. Purchase Agreement and the International Purchase Agreement, respectively, and, when issued and delivered by the Company pursuant to the U.S. Purchase Agreement and the International Purchase Agreement, respectively, against payment of the consideration set forth in the U.S. Purchase Agreement and the International Purchase Agreement, will be validly issued and fully paid and non-assessable and no holder of the Securities is or will be subject to personal liability by reason of being such a holder. (vi) The issuance of the Securities is not subject to the preemptive or other similar rights of any securityholder of the Company which has not otherwise been waived in connection thereto. i (vii) Each domestic Subsidiary has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectuses and is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect; except as otherwise disclosed in the Registration Statement, all of the issued and outstanding capital stock of each domestic Subsidiary has been duly authorized and validly issued, is fully paid and non-assessable and, to the best of our knowledge, is owned by the Company, directly or through Subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity; none of the outstanding shares of capital stock of any domestic Subsidiary was issued in violation of the preemptive or similar rights of any securityholder of such Subsidiary. (viii) The U.S. Purchase Agreement and the International Purchase Agreement have been duly authorized, executed and delivered by the Company. (ix) The Company has all necessary corporate power and authority to enter into, to perform the obligations to be performed under and to consummate the Transactions. Each of the Transactions has been validly authorized by the Company, all actions and proceedings required by law to be taken by the Company and its stockholders in connection with the Transactions have been duly and validly taken and each of the Transactions has been duly and validly effected. (x) The Registration Statement, including any Rule 462(b) Registration Statement, has been declared effective under the 1933 Act; any required filing of the Prospectuses pursuant to Rule 424(b) has been made in the manner and within the time period required by Rule 424(b); and, to the best of our knowledge, no stop order suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement has been issued under the 1933 Act and no proceedings for that purpose have been instituted or are pending or threatened by the Commission. (xi) The Registration Statement, including any Rule 462(b) Registration Statement, the Rule 430A Information and the Rule 434 Information, as applicable, the Prospectuses and each amendment or supplement to the Registration Statement and the Prospectuses as of their respective effective or issue dates (other than the financial statements and supporting schedule included therein or omitted therefrom, as to which we need express no opinion) complied as to form in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations. (xii) If Rule 434 has been relied upon, the Prospectuses were not "materially different," as such term is used in Rule 434, from the prospectuses included in the Registration Statement at the time it became effective. ii (xiii) The form of certificate used to evidence the Common Stock complies in all material respects with all applicable statutory requirements, with any applicable requirements of the charter and by-laws of the Company and the requirements of the New York Stock Exchange. (xiv) Except as described in the Registration Statement, to the best of our knowledge, there is not pending or threatened any action, suit, proceeding, inquiry or investigation, to which the Company or any Subsidiary is a party, or to which the property of the Company or any Subsidiary is subject, before or brought by any court or governmental agency or body, domestic or foreign, which would reasonably be expected to result in a Material Adverse Effect, or which would reasonably be expected to materially and adversely affect the properties or assets thereof taken as a whole or the consummation of the transactions contemplated in the U.S. Purchase Agreement and International Purchase Agreement or the performance by the Company of its obligations thereunder or the consummation of the Transactions. (xv) The information in the Prospectuses under "Description of Capital Stock," "Business--Litigation," "Certain Transactions," "Description of Certain Indebtedness," "Shares Eligible for Future Sale," "Underwriting" and "Certain Federal Income Tax Considerations," and in the Registration Statement under Item 14, to the extent that it describes matters of law, summaries of legal matters, the Company's charter and bylaws or legal proceedings, or legal conclusions, has been reviewed by us and is correct in all material respects. (xvi) To the best of our knowledge, there are no statutes or regulations that are required to be described in the Prospectuses that are not described as required. (xvii) All descriptions in the Prospectuses of contracts and other documents to which the Company or its Subsidiaries are a party are accurate in all material respects; to the best of our knowledge, there are no franchises, contracts, indentures, mortgages, loan agreements, notes, leases or other instruments required to be described or referred to in the Registration Statement or to be filed as exhibits thereto other than those described or referred to therein or filed as exhibits thereto, and the descriptions thereof or references thereto are correct in all material respects. (xviii) To the best of our knowledge, neither the Company nor any Subsidiary is in violation of its charter or by-laws and no default by the Company or any Subsidiary exists in the due performance or observance of any material obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, loan agreement, note, lease or other agreement or instrument that is described or referred to in the Registration Statement or the Prospectuses or filed as an exhibit to the Registration Statement except for such defaults that would not result in a Material Adverse Effect. (xix) No filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any court or governmental authority or agency is necessary or required for the performance by the Company of its obligations under the U.S. Purchase Agreement and the International Purchase Agreement, in connection with the offering, issuance or sale of the Securities under the U.S. Purchase Agreement and the International Purchase Agreement or the iii consummation of the transactions contemplated by this Agreement and the International Purchase Agreement and by the Transactions, except (i) such as have been already obtained or as may be required under the 1933 Act or the 1933 Act Regulations and foreign or state securities or blue sky laws. (xx) The execution, delivery and performance of the U.S. Purchase Agreement and the International Purchase Agreement and the consummation of the transactions contemplated in the U.S. Purchase Agreement, the International Purchase Agreement and in the Registration Statement (including the issuance and sale of the Securities and the use of the proceeds from the sale of the Securities as described in the Prospectuses under the caption "Use Of Proceeds") and by the Transactions and compliance by the Company with its obligations under the U.S. Purchase Agreement and the International Purchase Agreement have been duly authorized by all necessary corporate action and do not and will not, whether with or without the giving of notice or lapse of time or both, conflict with or constitute a breach of, or default or Repayment Event (as defined in Section 1(a)(x) of the Purchase Agreements) under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any Subsidiary pursuant to any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or any other agreement or instrument, known to us, to which the Company or any Subsidiary is a party or by which it or any of them may be bound, or to which any of the property or assets of the Company or any Subsidiary is subject (except for such conflicts, breaches, defaults or Repayment Events or liens, charges or encumbrances that would not have a Material Adverse Effect), nor will such action result in any violation of the provisions of the charter or by-laws of the Company or any Subsidiary, or any applicable law, statute, rule, regulation, judgment, order, writ or decree, known to us, of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Company or any Subsidiary or any of their respective properties, assets or operations. (xxi) To the best of our knowledge, there are no persons with registration rights or other similar rights to have any securities registered pursuant to the Registration Statement or otherwise registered by the Company under the 1933 Act which has not otherwise been waived in connection thereto. (xxii) The Company is not an "investment company" or an entity "controlled" by an "investment company," as such terms are defined in the 1940 Act. (xxiii) Assuming that the Power of Attorney and Custody Agreement of the Selling Shareholder has been duly authorized, executed and delivered by the Selling Shareholder, the Power of Attorney and Custody Agreement constitutes the legal, valid and binding agreement of such Selling Shareholder. (xxiv) [By delivery of a certificate or certificates representing the Securities to be sold by the Selling Shareholder to the Underwriters such Selling Shareholder will transfer to the Underwriters who have purchased such Securities pursuant to the Purchase Agreement (without notice of any defect in the title of such Selling Shareholder and who are otherwise bona fide iv purchasers for purposes of the Uniform Commercial Code) valid and marketable title to such Securities, free and clear of any pledge, lien, security interest, charge, claim, equity or encumbrance of any kind.] Nothing has come to our attention that would lead us to believe that the Registration Statement or any amendment thereto, including the Rule 430A Information and Rule 434 Information (if applicable) (except for financial statements and schedules and other financial data included therein or omitted therefrom, as to which we need make no statement), at the time such Registration Statement or any such amendment became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectuses or any amendment or supplement thereto (except for financial statements and schedules and other financial data included therein or omitted therefrom, as to which we need make no statement), at the time the Prospectuses were issued, at the time any such amended or supplemented Prospectus was issued or at the Closing Time, included or includes an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. In rendering such opinion, such counsel may rely as to matters of fact (but not as to legal conclusions), to the extent they deem proper, on certificates of responsible officers of the Company and public officials. Such opinion shall not state that it is to be governed or qualified by, or that it is otherwise subject to, any treatise, written policy or other document relating to legal opinions, including, without limitation, the Legal Opinion Accord of the ABA Section of Business Law (1991). v EXHIBIT A-2 FORM OF OPINION OF SELLING SHAREHOLDER'S COUNSEL TO BE DELIVERED PURSUANT TO SECTION 5(b) (i) No filing with, or consent, approval, authorization, license, order, registration, qualification or decree of, any court or governmental authority or agency, domestic or foreign, (other than the issuance of the order of the Commission declaring the Registration Statement effective and such authorizations, approvals or consents as may be necessary under state securities laws, as to which we need express no opinion) is necessary or required to be obtained by the Selling Shareholder for the performance by the Selling Shareholder of its obligations under the Purchase Agreement or in the Power of Attorney and Custody Agreement, or in connection with the offer, sale or delivery of the Securities. (ii) The Power of Attorney and Custody Agreement has been duly executed and delivered by the Selling Shareholder and constitutes the legal, valid and binding agreement of such Selling Shareholder. (iii) The Purchase Agreement has been duly authorized, executed and delivered by or on behalf of the Selling Shareholder. (iv) Each Attorney-in-Fact has been duly authorized by the Selling Shareholder to deliver the Securities on behalf of the Selling Shareholder in accordance with the terms of the Purchase Agreement. (v) The execution, delivery and performance of the Purchase Agreement and the Power of Attorney and Custody Agreement and the sale and delivery of the Securities and the consummation of the transactions contemplated in the Purchase Agreement and in the Registration Statement and compliance by the Selling Shareholder with its obligations under the Purchase Agreement have been duly authorized by all necessary action on the part of the Selling Shareholder and do not and will not, whether with or without the giving of notice or passage of time or both, conflict with or constitute a breach of, or default under or result in the creation or imposition of any tax, lien, charge or encumbrance upon the Securities or any property or assets of the Selling Shareholder pursuant to, any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, license, lease or other instrument or agreement to which any Selling Shareholder is a party or by which they may be bound, or to which any of the property or assets of the Selling Shareholder may be subject (except for such conflicts, breaches or defaults or liens, charges or encumbrances that would not result in a Material Adverse Effect on the Selling Shareholder) nor will such action result in any violation of the provisions of the charter or by- 1 laws of the Selling Shareholder, if applicable, or any material provision of any law, administrative regulation, judgment or order of any governmental agency or body or any administrative or court decree having jurisdiction over such Selling Shareholder or any of its properties. (vi) To the best of our knowledge, the Selling Shareholder has valid and marketable title to the Securities to be sold by such Selling Shareholder pursuant to the Purchase Agreement, free and clear of any pledge, lien, security interest, charge, claim, equity or encumbrance of any kind created by or on behalf of the Selling Shareholder, and has full right, power and authority to sell, transfer and deliver such Securities pursuant to the Purchase Agreement. By delivery of a certificate or certificates therefor such Selling Shareholder will transfer to the Underwriters who have purchased such Securities pursuant to the Purchase Agreement (without notice of any defect in the title of such Selling Shareholder and who are otherwise bona fide purchasers for purposes of the Uniform Commercial Code) valid and marketable title to such Securities, free and clear of any pledge, lien, security interest, charge, claim, equity or encumbrance of any kind. In rendering such opinion, such counsel may rely as to matters of fact (but not as to legal conclusions), to the extent they deem proper, on certificates of responsible officers of the Company and public officials. Such opinion shall not state that it is to be governed or qualified by, or that it is otherwise subject to, any treatise, written policy or other document relating to legal opinions, including, without limitation, the Legal Opinion Accord of the ABA Section of Business Law (1991). 2 EXHIBIT B April ____,1997 MERRILL LYNCH & CO. Merrill Lynch, Pierce, Fenner & Smith Incorporated Credit Suisse First Boston Corporation Goldman, Sachs & Co. Morgan Stanley & Co. Incorporated as U.S. Representatives of the several U.S. Underwriters to be named in the within-mentioned U.S. Purchase Agreement Merrill Lynch International Credit Suisse First Boston (Europe) Limited Goldman Sachs International Morgan Stanley & Co. International Limited as Lead Managers for the several Managers to be named in the within- mentioned International Purchase Agreement c/o Merrill Lynch & Co. Merrill Lynch, Pierce, Fenner & Smith Incorporated North Tower World Financial Center New York, New York 10281-1209 Re: Proposed Public Offering by Knoll, Inc. --------------------------------------- Dear Sirs: The undersigned, a stockholder of Knoll, Inc., a Delaware corporation (the "Company"), understands that Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Credit Suisse First Boston Corporation, Goldman, Sachs & Co. and Morgan Stanley & Co. Incorporated propose to enter into a U.S. Purchase Agreement (the "U.S. Purchase Agreement") with the Company and a Selling Stockholder, and Merrill Lynch International, Credit Suisse First Boston (Europe) Limited, Goldman Sachs International and Morgan Stanley & Co. International Limited propose to enter into an International Purchase Agreement (the "International Purchase Agreement") with the Company and the Selling Stockholder, providing for the public offering of shares (the "Securities") of the Company's common stock, par value $0.01 per share (the "Common Stock"). In recognition of the benefit that such an offering will confer upon the undersigned as a stockholder of the Company, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the undersigned agrees with each underwriter to be named in the U.S. Purchase Agreement and with each manager to be named in the International Purchase Agreement that, during a period of 180 days from the date of the U.S. Purchase Agreement and the International Purchase Agreement, the undersigned will not, without the prior written consent of Merrill Lynch, 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 the Company's Common Stock or any securities convertible into or exchangeable or exercisable for Common Stock, whether now owned or hereafter acquired by the undersigned or with respect to which the undersigned has or hereafter acquires the power of disposition, or file any registration statement under the Securities Act of 1933, as amended, with respect to any of the foregoing or (ii) enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, 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. Very truly yours, Signature: ___________________________ Print Name: __________________________ EXHIBIT C-1 FORM OF COMFORT LETTER OF ERNST & YOUNG LLP PURSUANT TO SECTION 5(f) (i) We are independent public accountants with respect to the Company within the meaning of the 1933 Act and the applicable published 1933 Act Regulations. (ii) In our opinion, the audited financial statements and the related financial statement schedules included in the Registration Statement and the Prospectuses comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the published rules and regulations thereunder. (iii) On the basis of procedures (but not an examination in accordance with generally accepted auditing standards) consisting of a reading of the unaudited interim consolidated financial statements of the Company for the three month periods ended March 31, 1997 and March 31, 1996, included in the Registration Statement and the Prospectuses (collectively, the "Quarterly Financials"), a reading of the minutes of all meetings of the stockholders and directors of the Company and its Subsidiaries and the committees of the Company's Board of Directors and any subsidiary committees since January 1, 1997, inquiries of certain officials of the Company and its subsidiaries responsible for financial and accounting matters, a review of interim financial information in accordance with standards established by the American Institute of Certified Public Accountants in Statement on Auditing Standards No. 71, Interim Financial Information ("SAS 71"), with respect to the Quarterly Financials and such other inquiries and procedures as may be specified in such letter, nothing came to our attention that caused us to believe that: (A) the Quarterly Financials included in the Registration Statement and the Prospectuses do not comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the 1933 Act Regulations or any material modifications should be made to the unaudited consolidated financial statements included in the Registration Statement and the Prospectuses for them to be in conformity with generally accepted accounting principles; (B) at a specified date not more than five days prior to the date of this Agreement, there was any change in the common stock of the Company and its subsidiaries or any decrease in the working capital, total assets, total current assets or stockholder's equity of the Company and its subsidiaries or any increase in the long-term debt or total liabilities of the Company and its subsidiaries, in each case as compared with amounts shown in the latest balance sheet included in the Registration Statement, except in each case for changes, decreases or increases that the Registration Statement discloses have occurred or may occur; or (C) for the period from April 1, 1997 to a specified date not more than five days prior to the date of this Agreement, there was any decrease in total sales, operating income, income before income taxes and extraordinary items, income before extraordinary item or net income, in each case as compared with the comparable period in the preceding year, except in each case for any decreases that the Registration Statement discloses have occurred or may occur. (iv) Based upon the procedures set forth in clause (iii) above and a reading of the Selected Financial Data included in the Registration Statement and a reading of the financial statements from which such data were derived, nothing came to our attention that caused us to believe that the Selected Financial Data included in the Registration Statement do not conform in all material respects with the disclosure requirements of Item 301 of Regulation S-K of the 1933 Act. (v) We have compared the information in the Registration Statement under selected captions with the disclosure requirements of Regulation S-K of the 1933 Act and on the basis of limited procedures specified herein, nothing came to our attention that caused us to believe that this information does not conform in all material respects with the disclosure requirements of Items 302 and 402, respectively, of Regulation S-K. (vi) W e are unable to and do not express any opinion on the Pro Forma Financial Information included in the Registration Statement or on the pro forma adjustments applied to the historical amounts included in the Pro Forma Financial Information. However, for purposes of this letter we have: (A) read the Pro Forma Financial Information; (B) performed an audit of the financial statements to which the pro forma adjustments were applied; (C) made inquiries of certain officials of the Company who have responsibility for financial and accounting matters about the basis for their determination of the pro forma adjustments and whether the Pro Forma Financial Information complies as to form in all material respects with the applicable accounting requirements of Rule 11-02 of Regulation S-X; and (D) proved the arithmetic accuracy of the application of the pro forma adjustments to the historical amounts in the Pro Forma Financial Information; and on the basis of such procedures and such other inquiries and procedures as specified herein, nothing came to our attention that caused us to believe that the Pro Forma Financial Information included in the Registration Statement does not comply as to form in all material respects with the applicable requirements of Rule 11-02 of Regulation S-X or that the pro forma adjustments have not been properly applied to the historical amounts in the compilation of those statements. (vii) In addition to the procedures referred to in clause (iii) above, we have performed other procedures, not constituting an audit, with respect to certain amounts, percentages, numerical data and financial information appearing in the Registration Statement, which are specified herein, and have compared certain of such items with, and have found such items to be in agreement with, the accounting and financial records of the Company. EXHIBIT C-2 FORM OF COMFORT LETTER OF PRICE WATERHOUSE LLP PURSUANT TO SECTION 5(f) (i) We are independent public accountants with respect to the Company and its predecessors within the meaning of the 1933 Act and the applicable published 1933 Act Regulations. (ii) In our opinion, the audited financial statements and the related financial statement schedules of The Knoll Group, Inc. included in the Registration Statement and the Prospectuses comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the published rules and regulations thereunder. (iii) In addition, we have performed other procedures, not constituting an audit, with respect to certain amounts, percentages, numerical data and financial information appearing in the Registration Statement, which are specified herein, and have compared certain of such items with, and have found such items to be in agreement with, the accounting and financial records of the Company. EX-1.2 3 FORM OF INTERNATIONAL UNDERWRITING AGREEMENT EXHIBIT 1.2 ______________________________________________________________________________ ______________________________________________________________________________ DRAFT 4/28/97 KNOLL, INC. (a Delaware corporation) 8,000,000 Shares of Common Stock INTERNATIONAL PURCHASE AGREEMENT -------------------------------- Dated: May ___, 1997 ______________________________________________________________________________ ______________________________________________________________________________ TABLE OF CONTENTS
PAGE ---- INTERNATIONAL PURCHASE AGREEMENT 1 SECTION 1. Representations and Warranties.......................................... 4 (a) Representations and Warranties by the Company........................... 4 (i) Compliance with Registration Requirements..................... 4 (ii) Independent Accountants....................................... 5 (iii) Financial Statements.......................................... 5 (iv) No Material Adverse Change in Business........................ 5 (v) Good Standing of the Company.................................. 6 (vi) Good Standing of Subsidiaries................................. 6 (vii) Capitalization................................................ 6 (viii) Authorization of Agreement.................................... 7 (ix) Authorization and Description of Securities................... 7 (x) Absence of Defaults and Conflicts............................. 7 (xi) Absence of Labor Dispute...................................... 8 (xii) Absence of Proceedings........................................ 8 (xiii) Accuracy of Exhibits.......................................... 8 (xiv) Possession of Intellectual Property........................... 8 (xv) Absence of Further Requirements............................... 8 (xvi) Possession of Licenses and Permits............................ 9 (xvii) Title to Property............................................. 9 (xviii) Compliance with Cuba Act...................................... 9 (xix) Investment Company Act........................................ 10 (xx) Environmental Laws............................................ 10 (xxi) Registration Rights........................................... 10 (xxii) Stabilization or Manipulation................................. 10 (xxiii) Accounting Controls........................................... 11 (xxiv) Tax Returns................................................... 11 (b) Representations and Warranties by the Selling Shareholder..... 11 (i) Accurate Disclosure........................................... 11 (ii) Authorization of Agreements................................... 11 (iii) Good and Marketable Title..................................... 12 (iv) Due Execution of Power of Attorney and Custody Agreement...... 12 (v) Absence of Manipulation....................................... 13 (vi) Absence of Further Requirements............................... 13
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PAGE ---- (vii) Restriction on Sale of Securities............................. 13 (viii) Certificates Suitable for Transfer............................ 13 (ix) No Association with NASD...................................... 13 (c) Officer's Certificates........................................ 14 SECTION 2. Sale and Delivery to International Managers; Closing.......... 14 (a) Initial Securities............................................ 14 (b) Option Securities............................................. 14 (c) Payment....................................................... 14 (d) Denominations; Registration................................... 15 SECTION 3. Covenants of the Company...................................... 15 (a) Compliance with Securities Regulations and Commission Requests 15 (b) Filing of Amendments.......................................... 16 (c) Delivery of Registration Statements........................... 16 (d) Delivery of Prospectuses...................................... 16 (e) Continued Compliance with Securities Laws..................... 17 (f) Blue Sky Qualifications....................................... 17 (g) Rule 158...................................................... 17 (h) Use of Proceeds............................................... 17 (i) Listing....................................................... 18 (j) Restriction on Sale of Securities............................. 18 (k) Reporting Requirements........................................ 18 (l) Compliance with NASD Rules.................................... 18 (m) Good Standing................................................. 18 SECTION 4. Payment of Expenses........................................... 18 (a) Expenses...................................................... 18 (b) Expenses of the Selling Shareholder........................... 19 (c) Termination of Agreement...................................... 19 (d) Allocation of Expenses........................................ 19 SECTION 5. Conditions of International Managers' Obligations............. 20 (a) Effectiveness of Registration Statement....................... 20 (b) Opinion of Counsel for the Company and Counsel for the Selling Shareholder.................................................. 20 (c) Opinion of Counsel for International Managers........................ 20 (d) Officers' Certificate................................................ 21
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PAGE ---- (e) Accountant's Comfort Letter.......................................... 21 (f) Bring-down Comfort Letter............................................ 21 (g) Approval of Listing.................................................. 21 (h) No Objection......................................................... 21 (i) Lock-up Agreements................................................... 21 (j) Purchase of Initial U.S. Securities.................................. 21 (k) Custody Agreement.................................................... 22 (l) Conditions to Purchase of International Option Securities............ 22 (m) Additional Documents................................................. 23 (n) Transactions......................................................... 23 (o) Termination of Agreement............................................. 23 SECTION 6. Indemnification...................................................... 23 (a) Indemnification of International Managers............................ 23 (b) Indemnification of Company, Directors and Officers and Selling Shareholder.......................................... 25 (c) Actions against Parties; Notification............................... 25 (d) Settlement without Consent if Failure to Reimburse.................. 26 (e) Indemnification for Reserved Securities............................. 26 (f) Other Agreements with Respect to Indemnification.................... 26 SECTION 7. Contribution........................................................ 26 SECTION 8. Representations, Warranties and Agreements to Survive Delivery...... 28 SECTION 9. Termination of Agreement............................................ 28 (a) Termination; General............................................... 28 (b) Liabilities........................................................ 28 SECTION 10. Default by One or More of the International Managers................ 28 SECTION 11. Default by the Selling Shareholder or the Company................... 29 SECTION 12. Notices............................................................. 30 SECTION 13. Parties............................................................. 30 SECTION 14. Governing Law and Time.............................................. 30 SECTION 15. Effect of Headings.................................................. 30
iii SCHEDULES SCHEDULE A LIST OF UNDERWRITERS SCHEDULE B SELLING SHAREHOLDER SCHEDULE C PRICING INFORMATION SCHEDULE D LIST OF PERSONS SUBJECT TO LOCK-UP EXHIBITS EXHIBIT A-1 FORM OF OPINION OF COMPANY'S COUNSEL EXHIBIT A-2 FORM OF OPINION OF SELLING SHAREHOLDER'S COUNSEL EXHIBIT B FORM OF LOCK-UP LETTER EXHIBIT C-1 FORM OF COMFORT LETTER OF ERNST & YOUNG LLP EXHIBIT C-2 FORM OF COMFORT LETTER OF PRICE WATERHOUSE LLP iv Draft of April 28, 1997 KNOLL, INC. (a Delaware corporation) 8,000,000 Shares of Common Stock (Par Value $0.01 Per Share) INTERNATIONAL PURCHASE AGREEMENT --------------------------------- May ___, 1997 MERRILL LYNCH INTERNATIONAL Credit Suisse First Boston (Europe) Limited Goldman Sachs International Morgan Stanley & Co. International Limited as Lead Managers of the several International Managers c/o Merrill Lynch International 25 Ropemaker Place London EC2Y 9LY England Ladies and Gentlemen: Knoll, Inc., a Delaware corporation (the "Company"), and the person identified in Schedule B hereto (the "Selling Shareholder"), confirm their respective agreements with Merrill Lynch International and each of the other International Managers named in Schedule A hereto (collectively, the "International Managers," which term shall also include any underwriter substituted as hereinafter provided in Section 10 hereof), for whom Merrill Lynch International, Credit Suisse First Boston (Europe) Limited, Goldman Sachs International and Morgan Stanley & Co. International Limited are acting as representatives (in such capacity, the "Lead Managers"), with respect to (i) the issue and sale by the Company and the purchase by the International Managers, acting severally and not jointly, of the number of shares of Common Stock, par value $0.01 per share, of the Company ("Common Stock") set forth in Schedule B hereto and (ii) the grant by the Company and the Selling Shareholder, acting severally and not jointly, to the International Managers, acting severally and not jointly, of the option described in Section 2(b) hereof to purchase all or any part of 240,000 additional shares of Common Stock to cover over-allotments, if any. The aforesaid 1,600,000 shares of Common Stock (the "Initial International Securities") to be purchased by the International Managers, and all or any part of 1 the 240,000 shares of Common Stock subject to the option described in Section 2(b) hereof (the "International Option Securities"), are hereinafter called, collectively, the "International Securities." It is understood that the Company is concurrently entering into an agreement dated the date hereof (the "U.S. Purchase Agreement") providing for the offering by the Company of an aggregate of 6,400,000 shares of Common Stock (the "Initial U.S. Securities") through arrangements with certain underwriters outside the United States and Canada (the "U.S. Managers") for which Merrill Lynch & Co., 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") and the grant by the Company and the Selling Shareholder, acting severally and not jointly, to the U.S. Underwriters, acting severally and not jointly, of an option to purchase all or any part of the U.S. Underwriters' pro rata portion of up to 960,000 additional shares of Common Stock solely to cover over-allotments, if any (the "U.S. Option Securities" and, together with the International Option Securities, the "Option Securities"). The Initial U.S. Securities and the U.S. Option Securities are hereinafter called the "U.S. Securities." It is understood that the Company is not obligated to sell and the International Managers are not obligated to purchase, any Initial International Securities unless all of the Initial U.S. Securities are contemporaneously purchased by the U.S. Underwriters. The International Managers and the U.S. Underwriters are hereinafter collectively called the "Underwriters," the Initial International Securities and the Initial U.S. Securities are hereinafter collectively called the "Initial Securities," and the International Securities and the U.S. Securities are hereinafter collectively called the "Securities." The Underwriters will concurrently enter into an Intersyndicate Agreement of even date herewith (the "Intersyndicate Agreement") providing for the coordination of certain transactions among the Underwriters under the direction of Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated (in such capacity, the "Global Coordinator"). The Company and the Selling Shareholder understand that the International Managers propose to make a public offering of the International Securities as soon as the Lead Managers deem advisable after this Agreement has been executed and delivered. The Company, the Selling Shareholder and the International Managers agree that up to 5% of the Securities to be purchased by the Underwriters (the "Reserved Securities") shall be reserved for sale by the Underwriters to certain dealers having business relationships with the Company as part of the distribution of the Securities by the Underwriters, subject to the terms of this Agreement, the applicable rules, regulations and interpretations of the National Association of Securities Dealers, Inc. and all other applicable laws, rules and regulations. To the extent that such Reserved Securities are not orally confirmed for purchase by certain dealers having business relationships with the Company by the end of the first business day after the date of this 2 Agreement, such Reserved Securities may be offered to the public as part of the public offering contemplated hereby. On March 14, 1997, Knoll, Inc. merged with and into the Company (then known as T.K.G. Acquisition Corp.), which changed its name to Knoll, Inc. (the "Merger"). At or prior to the Closing Time (as defined below), (i) the Company will file an amendment and restatement of its Certificate of Incorporation, (ii) the Company will effect a 3.13943:1 split of its Common Stock and (iii) the Company will repurchase certain outstanding shares of the Company's preferred stock with a portion of the proceeds from the sale of the Securities and any shares of the Company's preferred stock remaining outstanding after such repurchase will be converted into shares of Common Stock (collectively, with the Merger, the "Transactions"). The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-1 (No. 333-23399) covering the registration of the Securities under the Securities Act of 1933, as amended (the "1933 Act"), including the related preliminary prospectus or prospectuses. Promptly after execution and delivery of this Agreement, the Company will either (i) prepare and file a prospectus in accordance with the provisions of Rule 430A ("Rule 430A") of the rules and regulations of the Commission under the 1933 Act (the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of the 1933 Act Regulations or (ii) if the Company has elected to rely upon Rule 434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term sheet (a "Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b). Two forms of prospectus are to be used in connection with the offering and sale of the Securities: one relating to the International Securities (the "Form of International Prospectus") and one relating to the U.S. Securities (the "Form of U.S. Prospectus"). The Form of U.S. Prospectus is identical to the Form of International Prospectus, except for the front cover and back cover pages and the information under the caption "Underwriting." The information included in any such prospectus or in any such Term Sheet, as the case may be, that was omitted from such registration statement at the time it became effective but that is deemed to be part of such registration statement at the time it became effective (a) pursuant to paragraph (b) of Rule 430A is referred to as "Rule 430A Information" or (b) pursuant to paragraph (d) of Rule 434 is referred to as "Rule 434 Information." Each Form of International Prospectus and Form of U.S. Prospectus used before such registration statement became effective, and any prospectus that omitted, as applicable, the Rule 430A Information or the Rule 434 Information, that was used after such effectiveness and prior to the execution and delivery of this Agreement, is herein called a "preliminary prospectus." Such registration statement, including the exhibits thereto and schedules thereto at the time it became effective and including the Rule 430A Information and the Rule 434 Information, as applicable, is herein called the "Registration Statement." Any registration statement filed pursuant to Rule 462(b) of the 1933 Act Regulations is herein referred to as the "Rule 462(b) Registration Statement," and after such filing the term "Registration Statement" shall include the Rule 462(b) Registration Statement. The final Form of International Prospectus and the final Form of U.S. Prospectus in the forms first furnished to the Underwriters for use in connection with the offering of the Securities are herein called the "International Prospectus" and the "U.S. Prospectus," 3 respectively, and collectively, the "Prospectuses." If Rule 434 is relied on, the terms "International Prospectus" and "U.S. Prospectus" shall refer to the preliminary International Prospectus dated April 18, 1997 and the preliminary U.S. Prospectus dated April 18, 1997, respectively, each together with the applicable Term Sheet, and all references in this Agreement to the date of such Prospectuses shall mean the date of the applicable Term Sheet. For purposes of this Agreement, all references to the Registration Statement, any preliminary prospectus, the International Prospectus, the U.S. Prospectus or any Term Sheet or any amendment or supplement to any of the foregoing shall be deemed to include the copy filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval system ("EDGAR"). SECTION 1. Representations and Warranties. ------------------------------ (a) Representations and Warranties by the Company. The Company represents and warrants to each International Manager as of the date hereof, as of the Closing Time referred to in Section 2(c) hereof, and as of each Date of Delivery (if any) referred to in Section 2(b) hereof, and agrees with each International Manager, as follows: (i) Compliance with Registration Requirements. Each of the ----------------------------------------- Registration Statement and any Rule 462(b) Registration Statement has become effective under the 1933 Act and no stop order suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement has been issued under the 1933 Act and no proceedings for that purpose have been instituted or are pending or, to the knowledge of the Company, are contemplated by the Commission, and any request on the part of the Commission for additional information has been complied with. At the respective times the Registration Statement, any Rule 462(b) Registration Statement and any post-effective amendments thereto became effective and at the Closing Time (and, if any International Option Securities are purchased, at the Date of Delivery), the Registration Statement, the Rule 462(b) Registration Statement and any amendments and supplements thereto complied and will comply in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations and did not and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and the Prospectuses, any preliminary prospectuses and any supplement thereto or prospectus wrapper prepared in connection therewith, at their respective times of issuance and at the Closing Time, complied and will comply in all material respects with any applicable laws or regulations of foreign jurisdictions in which the Prospectuses and such preliminary prospectuses, as amended or supplemented, if applicable, are distributed in connection with the offer and sale of Reserved Securities. Neither of the Prospectuses nor any amendments or supplements thereto (including any prospectus wrapper), at the time the Prospectuses or any amendments or supplements thereto were issued and at the Closing Time (and, if any International Option Securities are purchased, at the Date of Delivery), included or will include an untrue statement of a material fact or omitted or will omit to 4 state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. If Rule 434 is used, the Company will comply with the requirements of Rule 434 and the Prospectuses shall not be "materially different," as such term is used in Rule 434, from the prospectuses included in the Registration Statement at the time it became effective. The representations and warranties in this subsection shall not apply to statements in or omissions from the Registration Statement or the Prospectuses made in reliance upon and in conformity with information furnished to the Company in writing by any Underwriter through the Lead Managers or the U.S. Representatives expressly for use in the Registration Statement or the Prospectuses. Each preliminary prospectus and the prospectuses filed as part of the Registration Statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the 1933 Act, complied when so filed in all material respects with the 1933 Act Regulations and each preliminary prospectus and the Prospectuses delivered to the Underwriters for use in connection with this offering was identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (ii) Independent Accountants. The accountants who certified the ----------------------- financial statements and supporting schedule included in the Registration Statement are independent public accountants as required by the 1933 Act and the 1933 Act Regulations. (iii) Financial Statements. The financial statements included in the -------------------- Registration Statement and the Prospectuses, together with the related schedule and notes, present fairly the financial position of the Company and its consolidated Subsidiaries (as defined below) and of the Company's predecessors and their consolidated subsidiaries at the dates indicated and the statement of operations, stockholders' equity and cash flows of the Company and its consolidated Subsidiaries and of the Company's predecessors and their consolidated subsidiaries for the periods specified; said financial statements have been prepared in conformity with generally accepted accounting principles ("GAAP") applied on a consistent basis throughout the periods involved. The supporting schedule included in the Registration Statement sets forth in accordance with GAAP the information required to be stated therein. The selected financial data and the summary financial information included in the Prospectuses have been compiled on a basis consistent with that of the audited financial statements included in the Registration Statement. The pro forma financial statements and the related notes thereto included in the Registration Statement and the Prospectuses have been prepared in accordance with the Commission's rules and guidelines with respect to pro forma financial statements and have been properly compiled on the bases described therein, and the assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions and circumstances referred to therein. 5 (iv) No Material Adverse Change in Business. Since the respective -------------------------------------- dates as of which information is given in the Registration Statement and the Prospectuses, except as otherwise stated therein, (A) there has been no material adverse change in the condition (financial or otherwise), earnings, business affairs or business prospects of the Company and its Subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business (a "Material Adverse Effect"), (B) there have been no transactions entered into by the Company or any of its Subsidiaries, other than those in the ordinary course of business, which are material with respect to the Company and its Subsidiaries considered as one enterprise, and (C) there has been no dividend or distribution of any kind declared, paid or made by the Company on any class of its capital stock. (v) Good Standing of the Company. The Company has been duly organized ---------------------------- and is validly existing as a corporation in good standing under the laws of the State of Delaware and has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectuses and to enter into and perform its obligations under this Agreement; and the Company is duly qualified as a foreign corporation to transact business and is in good standing in each other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect. (vi) Good Standing of Subsidiaries. Each subsidiary of the Company ----------------------------- which is required to be listed on Exhibit 21 to the Registration Statement (each a "Subsidiary" and, collectively, the "Subsidiaries") has been duly organized and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectuses and is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect; except as otherwise disclosed in the Registration Statement, all of the issued and outstanding capital stock of each such Subsidiary has been duly authorized and validly issued, is fully paid and non-assessable and is owned by the Company, directly or through Subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity; none of the outstanding shares of capital stock of any Subsidiary was issued in violation of the preemptive or similar rights of any securityholder of such Subsidiary. The only subsidiaries of the Company which are required to be listed on Exhibit 21 to the Registration Statement have been so listed. (vii) Capitalization. After giving effect to the Transactions, the -------------- authorized, issued and outstanding capital stock of the Company will be as set forth in the Prospectuses in the column entitled "Pro Forma As Adjusted" under the caption "Capitalization" (except for subsequent issuances, if any, pursuant to this Agreement, pursuant to reservations, agreements or employee benefit plans referred to in the 6 Prospectuses or pursuant to the exercise of convertible securities or options referred to in the Prospectuses). The shares of issued and outstanding capital stock of the Company have been and as of the Closing Time will have been duly authorized and validly issued and are or will be fully paid and non-assessable; none of the outstanding shares of capital stock of the Company was or as of the Closing Time will have been issued in violation of the preemptive or other similar rights of any securityholder of the Company. (viii) Authorization of Agreement. This Agreement and the U.S. -------------------------- Purchase Agreement have been duly authorized, executed and delivered by the Company. (ix) Authorization and Description of Securities. The Securities to ------------------------------------------- be purchased by the International Managers and the U.S. Underwriters from the Company have been duly authorized for issuance and sale to the International Managers pursuant to this Agreement and the U.S. Underwriters pursuant to the U.S. Purchase Agreement, respectively, and, when issued and delivered by the Company pursuant to this Agreement and the U.S. Purchase Agreement, respectively, against payment of the consideration set forth herein and the U.S. Purchase Agreement, respectively, will be validly issued, fully paid and non-assessable; the Common Stock conforms to all statements relating thereto contained in the Prospectuses and such description conforms to the rights set forth in the instruments defining the same; no holder of the Securities will be subject to personal liability by reason of being such a holder; and the issuance of the Securities is not subject to the preemptive or other similar rights of any securityholder of the Company. (x) Absence of Defaults and Conflicts. Neither the Company nor any of --------------------------------- its Subsidiaries is in violation of its charter or by-laws or in default in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or other agreement or instrument to which the Company or any of its Subsidiaries is a party or by which it or any of them may be bound, or to which any of the property or assets of the Company or any Subsidiary is subject (collectively, "Agreements and Instruments") except for such defaults that would not result in a Material Adverse Effect; and the execution, delivery and performance of this Agreement and the U.S. Purchase Agreement and the consummation of the transactions contemplated in this Agreement, the U.S. Purchase Agreement and in the Registration Statement (including the issuance and sale of the Securities and the use of the proceeds from the sale of the Securities as described in the Prospectuses under the caption "Use of Proceeds") and by the Transactions and compliance by the Company with its obligations under this Agreement and the U.S. Purchase Agreement have been duly authorized by all necessary corporate action and do not and will not, whether with or without the giving of notice or passage of time or both, conflict with or constitute a breach of, or default or Repayment Event (as defined below) under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any Subsidiary pursuant to, the Agreements and Instruments (except for such conflicts, breaches, defaults or Repayment Events or liens, charges or encumbrances that would not result in a Material Adverse Effect), nor will 7 such action result in any violation of the provisions of the charter or by- laws of the Company or any Subsidiary or any applicable law, statute, rule, regulation, judgment, order, writ or decree of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Company or any Subsidiary or any of their assets, properties or operations. As used herein, a "Repayment Event" means any event or condition which gives the holder of any note, debenture or other evidence of indebtedness (or any person acting on such holder's behalf) the right to require the repurchase, redemption or repayment of all or a portion of such indebtedness by the Company or any Subsidiary. (xi) Absence of Labor Dispute. Except as described in the ------------------------ Registration Statement and except as would not reasonably be expected to result in a Material Adverse Effect, (i) no labor dispute with the employees of the Company or any Subsidiary exists or, to the knowledge of the Company, is imminent, and (ii) the Company is not aware of any existing or imminent labor disturbance by the employees of any of its or any Subsidiary's principal suppliers, manufacturers, customers, dealers or contractors. (xii) Absence of Proceedings. There is no action, suit, proceeding, ---------------------- inquiry or investigation before or brought by any court or governmental agency or body, domestic or foreign, now pending, or, to the knowledge of the Company, threatened, against or affecting the Company or any Subsidiary, which is required to be disclosed in the Registration Statement (other than as disclosed therein), or which would reasonably be expected to result in a Material Adverse Effect, or which would reasonably be expected to materially and adversely affect the properties or assets thereof taken as a whole or the consummation of the transactions contemplated in this Agreement and the U.S. Purchase Agreement or by the Transactions or the performance by the Company of its obligations hereunder or thereunder; the aggregate of all pending legal or governmental proceedings to which the Company or any Subsidiary is a party or of which any of their respective property or assets is the subject which are not described in the Registration Statement, including ordinary routine litigation incidental to the business, would not reasonably be expected to result in a Material Adverse Effect. (xiii) Accuracy of Exhibits. There are no contracts or documents -------------------- which are required to be described in the Registration Statement or the Prospectuses or to be filed as exhibits thereto which have not been so described and filed as required. (xiv) Possession of Intellectual Property. The Company and its ----------------------------------- Subsidiaries own or possess, or can acquire on reasonable terms, adequate patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks, trade names or other intellectual property (collectively, "Intellectual Property") necessary to carry on the business now operated by them (other than such rights or other intellectual property, the absence of which would not have a Material Adverse Effect), and neither the Company nor any of its Subsidiaries has 8 received any notice or is otherwise aware of any infringement of or conflict with asserted rights of others with respect to any Intellectual Property or of any facts or circumstances which would render any Intellectual Property invalid or inadequate to protect the interest of the Company or any of its Subsidiaries therein, and which infringement or conflict (if the subject of any unfavorable decision, ruling or finding) or invalidity or inadequacy, singly or in the aggregate, would result in a Material Adverse Effect. (xv) Absence of Further Requirements. No filing with, or ------------------------------- authorization, approval, consent, license, order, registration, qualification or decree of, any court or governmental authority or agency is necessary or required for the performance by the Company of its obligations hereunder, in connection with the offering, issuance or sale of the Securities under this Agreement and the U.S. Purchase Agreement or the consummation of the transactions contemplated by this Agreement and the U.S. Purchase Agreement and by the Transactions, except (i) such as have been already obtained or as may be required under the 1933 Act or the 1933 Act Regulations and foreign or state securities or blue sky laws and (ii) such as have been obtained under the laws and regulations of jurisdictions outside the United States in which the Reserved Securities are offered. (xvi) Possession of Licenses and Permits. The Company and its ---------------------------------- Subsidiaries possess such permits, licenses, approvals, consents and other authorizations (collectively, "Governmental Licenses") issued by the appropriate federal, state, local or foreign regulatory agencies or bodies necessary to conduct the business now operated by them; the Company and its Subsidiaries are in compliance with the terms and conditions of all such Governmental Licenses, except where the failure to so possess or comply with such Governmental Licenses would not, singly or in the aggregate, have a Material Adverse Effect; all of the Governmental Licenses are valid and in full force and effect, except when the invalidity of such Governmental Licenses or the failure of such Governmental Licenses to be in full force and effect would not have a Material Adverse Effect; and neither the Company nor any of its Subsidiaries has received any notice of proceedings relating to the revocation or modification of any such Governmental Licenses which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in a Material Adverse Effect. (xvii) Title to Property. The Company and its Subsidiaries have good ----------------- and marketable title to all real property owned by the Company and its Subsidiaries and good title to all other properties owned by them, in each case, free and clear of all mortgages, pledges, liens, security interests, claims, restrictions or encumbrances of any kind except such as (a) are described in the Prospectuses or (b) do not, singly or in the aggregate, materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company or any of its Subsidiaries; and all of the leases and subleases material to the business of the Company and its Subsidiaries, considered as one enterprise, and under which the Company or any of its Subsidiaries holds properties described in the Prospectuses, are in full force and effect, and neither the 9 Company nor any Subsidiary has any notice of any material claim of any sort that has been asserted by anyone adverse to the rights of the Company or any Subsidiary under any of the leases or subleases mentioned above, or affecting or questioning the rights of the Company or such Subsidiary to the continued possession of the leased or subleased premises under any such lease or sublease. (xviii) Compliance with Cuba Act. The Company has complied with, and ------------------------ is and will be in compliance with, the provisions of that certain Florida act relating to disclosure of doing business with Cuba, codified as Section 517.075 of the Florida statutes, and the rules and regulations thereunder (collectively, the "Cuba Act") or is exempt therefrom. (xix) Investment Company Act. The Company is not, and upon the ---------------------- issuance and sale of the Securities as herein contemplated and the application of the net proceeds therefrom as described in the Prospectuses will not be, an "investment company" or an entity "controlled" by an "investment company" as such terms are defined in the Investment Company Act of 1940, as amended (the "1940 Act"). (xx) Environmental Laws. Except as described in the Registration ------------------ Statement and except as would not, singly or in the aggregate, result in a Material Adverse Effect, (A) neither the Company nor any of its Subsidiaries is in violation of any federal, state, local or foreign statute, law, rule, regulation, ordinance, code, policy or rule of common law or any judicial or administrative interpretation thereof, including any judicial or administrative order, consent decree or judgment, relating to pollution or protection of human health, the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata) or wildlife, including, without limitation, laws and regulations relating to the release or threatened release of chemicals, pollutants, contaminants, wastes, toxic substances, hazardous substances, petroleum or petroleum products (collectively, "Hazardous Materials") or to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials (collectively, "Environmental Laws"), (B) the Company and its Subsidiaries have all permits, licenses, authorizations and approvals currently required for their respective businesses and for the businesses contemplated to be conducted upon consummation of the offering of the Securities under any applicable Environmental Laws and are each in compliance with their requirements, (C) there are no pending or threatened administrative, regulatory or judicial actions, suits, demands, demand letters, claims, liens, notices of noncompliance or violation, investigation or proceedings relating to any Environmental Law against the Company or any of its Subsidiaries and (D) there are no events, facts or circumstances that might reasonably be expected to form the basis of any liability or obligation of the Company or any of its Subsidiaries, including, without limitation, any order, decree, plan or agreement requiring clean-up or remediation, or any action, suit or proceeding by any private party or governmental body or agency, against or affecting the Company or any of its Subsidiaries relating to any Hazardous Materials or any Environmental Laws. 10 (xxi) Registration Rights. There are no persons with registration ------------------- rights or other similar rights to have any securities registered pursuant to the Registration Statement or otherwise registered by the Company under the 1933 Act, other than the persons listed on Schedule D hereto, and all of the persons listed on Schedule D hereto have waived any registration, subscription or other similar rights they may have in connection with the registration of the Securities. (xxii) Stabilization or Manipulation. Neither the Company nor any of ----------------------------- its officers, directors or controlling persons has taken, directly or indirectly, any action designed to cause or to result in, or that has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of any security of the Company to facilitate the sale of the Securities. (xxiii) Accounting Controls. The Company and its Subsidiaries ------------------- maintain a system of internal accounting controls sufficient to provide reasonable assurances that (A) transactions are executed in accordance with management's general or specific authorization; (B) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain accountability for assets; (C) access to assets is permitted only in accordance with management's general or specific authorization; and (D) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (xxiv) Tax Returns. The Company and its Subsidiaries have filed all ----------- federal, state, local and foreign tax returns that are required to have been filed by them pursuant to applicable foreign, federal, state, local or other law or have duly requested extensions thereof, except insofar as the failure to file such returns or request such extensions would not reasonably be expected to result in a Material Adverse Effect, and has paid all taxes due pursuant to such returns or pursuant to any assessment received by the Company and its Subsidiaries, except for such taxes or assessments, if any, as are being contested in good faith and as to which adequate reserves have been provided or where the failure to pay would not reasonably be expected to result in a Material Adverse Effect. The charges, accruals and reserves on the books of the Company in respect of any income and corporation tax liability of the Company and each Subsidiary for any years not finally determined are adequate to meet any assessments or re-assessments for additional income tax for any years not finally determined, except to the extent of any inadequacy that would not reasonably be expected to result in a Material Adverse Effect. (b) Representations and Warranties by the Selling Shareholder. The Selling Shareholder represents and warrants to each International Manager as of the date hereof, as of the Closing Time, and, if the Selling Shareholder is selling Option Securities on a Date of Delivery, as of each such Date of Delivery, and agrees with each International Manager, as follows: 11 (i) Accurate Disclosure. (A) The information furnished in writing by ------------------- or on behalf of the Selling Shareholder expressly for use in the Registration Statement and any amendments and supplements thereto does not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements regarding the Selling Shareholder therein not misleading and (B) the information furnished in writing by or on behalf of the Selling Shareholder expressly for use in the Prospectus does not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements regarding the Selling Shareholder therein, in the light of the circumstances under which they were made, not misleading. (ii) Authorization of Agreements. Such Selling Shareholder has the --------------------------- full right, power and authority to enter into this Agreement and a Power of Attorney and Custody Agreement (the "Power of Attorney and Custody Agreement") and to sell, transfer and deliver the Securities to be sold by such Selling Shareholder hereunder. The execution and delivery of this Agreement and the Power of Attorney and Custody Agreement and the sale and delivery of the Securities to be sold by such Selling Shareholder and the consummation of the transactions contemplated herein and compliance by such Selling Shareholder with its obligations hereunder have been duly authorized by such Selling Shareholder and do not and will not, whether with or without the giving of notice or passage of time or both, conflict with or constitute a breach of, or default under, or result in the creation or imposition of any tax, lien, charge or encumbrance upon the Securities to be sold by such Selling Shareholder or any property or assets of such Selling Shareholder pursuant to any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, license, lease or other agreement or instrument to which such Selling Shareholder is a party or by which such Selling Shareholder may be bound, or to which any of the property or assets of such Selling Shareholder is subject (except for such conflicts, breaches or defaults or liens, charges or encumbrances that would not result in a material adverse change in the condition (financial or otherwise), earnings, business affairs or business prospects of the Selling Shareholder, whether or not arising in the ordinary course of business), nor will such action result in any violation of the provisions of the charter or by-laws or other organizational instrument of such Selling Shareholder, if applicable, or any applicable treaty, law, statute, rule, regulation, judgment, order, writ or decree of any government, government instrumentality or court, domestic or foreign, having jurisdiction over such Selling Shareholder or any of its properties. (iii) Good and Marketable Title. Such Selling Shareholder has, will at ------------------------- the Closing Time have and, if any Option Securities are purchased, will on the Date of Delivery have good and marketable title to the Securities to be sold by such Selling Shareholder hereunder, free and clear of any security interest, mortgage, pledge, lien, charge, claim, equity or encumbrance of any kind created by or on behalf of the Selling Shareholder, other than pursuant to this Agreement; and upon delivery of such Securities 12 and payment of the purchase price therefor as herein contemplated, assuming each such Underwriter has no notice of any adverse claim, each of the Underwriters will receive good and marketable title to the Securities purchased by it from such Selling Shareholder, free and clear of any security interest, mortgage, pledge, lien, charge, claim, equity or encumbrance of any kind. (iv) Due Execution of Power of Attorney and Custody Agreement. Such -------------------------------------------------------- Selling Shareholder has duly executed and delivered, in the form heretofore furnished to the Lead Managers, the Power of Attorney and Custody Agreement with Jennifer E. Bennett, as attorney-in-fact (the "Attorney-in-Fact") and The Bank of New York, as custodian (the "Custodian"); the Custodian is authorized by the Selling Shareholder to deliver the Securities to be sold by such Selling Shareholder hereunder and to accept payment therefor; and each Attorney-in-Fact is authorized by the Selling Shareholder to execute and deliver this Agreement and the certificate referred to in Section 5(e) or that may be required pursuant to Sections 5(l) and 5(m) on behalf of such Selling Shareholder, to sell, assign and transfer to the International Managers the Securities to be sold by such Selling Shareholder hereunder, to determine the purchase price to be paid by the International Managers to such Selling Shareholder, as provided in Section 2(b) hereof, to authorize the delivery of the Securities to be sold by such Selling Shareholder hereunder, to accept payment therefor, and otherwise to act on behalf of such Selling Shareholder in connection with this Agreement. (v) Absence of Manipulation. Such Selling Shareholder has not taken, ----------------------- and will not take, directly or indirectly, any action which is designed to or which has constituted or which might reasonably be expected to cause or result in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities. (vi) Absence of Further Requirements. No filing with, or consent, ------------------------------- approval, authorization, order, registration, qualification or decree of, any court or governmental authority or agency, domestic or foreign, is necessary or required for the performance by the Selling Shareholder of its obligations hereunder or in the Power of Attorney and Custody Agreement, or in connection with the sale and delivery of the Securities being sold by the Selling Shareholder hereunder or the consummation of the transactions contemplated by this Agreement, except (i) such as may have previously been made or obtained or as may be required under the 1933 Act or the 1933 Act Regulations or state securities laws and (ii) such as may be required under the laws and regulations of jurisdictions outside the United States in which the Reserved Securities are offered (as to which we make no representation). (vii) Restriction on Sale of Securities. During a period of 180 days --------------------------------- from the date of the Prospectus, such Selling Shareholder will not, without the prior written consent of Merrill Lynch, (i) offer, pledge, sell, contract to sell, sell any option or contract to 13 purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of, directly or indirectly, any share of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or file any registration statement under the 1933 Act with respect to any of the foregoing or (ii) enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of the Common Stock, whether any such swap or transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. The foregoing sentence shall not apply to the Securities to be sold hereunder. (viii) Certificates Suitable for Transfer. Certificates for all of the ---------------------------------- Securities to be sold by such Selling Shareholder pursuant to this Agreement, in suitable form for transfer by delivery or accompanied by duly executed instruments of transfer or assignment in blank with signatures guaranteed, have been placed in custody with the Custodian with irrevocable conditional instructions to deliver such Securities to the International Managers pursuant to this Agreement. (ix) No Association with NASD. Neither such Selling Shareholder nor ------------------------ any of its affiliates directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, or has any other association with (within the meaning of Article I, Section 1(m) of the By-laws of the National Association of Securities Dealers, Inc.), any member firm of the National Association of Securities Dealers, Inc., other than NationsBanc Capital Markets, Inc., NationsBanc Investments, Inc., NationsBanc-CRT Services, Inc., NationsSecurities, NSI Agency, LLC, BankSouth Investment Services, Inc., Boatmen's Investment Services of Arkansas, Inc. and Boatmen's Investment Services, Inc. (c) Officer's Certificates. Any certificate signed by any officer of the Company or any of its Subsidiaries delivered to the Global Coordinator, the Lead Managers or to counsel for the International Managers shall be deemed a representation and warranty by the Company to each International Manager as to the matters covered thereby; and any certificate signed by or on behalf of any Selling Shareholder as such and delivered to the Lead Managers or to counsel for the International Managers pursuant to the terms of this Agreement shall be deemed a representation and warranty by such Selling Shareholder to the International Managers as to the matters covered thereby. SECTION 2. Sale and Delivery to International Managers; Closing. ---------------------------------------------------- (a) Initial Securities. On the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company agrees to sell to each International Manager, severally and not jointly, and each International Manager, severally and not jointly, agrees to purchase from the Company, at the price per share set forth in Schedule C, the number of Initial International Securities set forth in Schedule A opposite the name of 14 such International Manager, plus any additional number of Initial International Securities which such Underwriter may become obligated to purchase pursuant to the provisions of Section 10 hereof. (b) Option Securities. In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company and the Selling Shareholder, severally and not jointly, hereby grant an option to the International Managers, severally and not jointly, to purchase up to an additional 960,000 shares of Common Stock, as set forth in Schedule B, at the price per share set forth in Schedule C, less an amount per share equal to any dividends or distributions declared by the Company and payable on the Initial International Securities but not payable on the International Option Securities. The option hereby granted will expire 30 days after the date hereof and may be exercised in whole or in part from time to time on one or more occasions only for the purpose of covering over-allotments which may be made in connection with the offering and distribution of the Initial International Securities upon notice by the Global Coordinator to the Company and the Selling Shareholder setting forth the number of International Option Securities as to which the several International Managers are then exercising the option and the time and date of payment and delivery for such International Option Securities. Any such time and date of delivery for the International Option Securities (a "Date of Delivery") shall be determined by the Global Coordinator, but shall not be later than seven full business days after the exercise of said option, nor in any event prior to the Closing Time, as hereinafter defined. If the option is exercised as to all or any portion of the International Option Securities, each of the International Managers, acting severally and not jointly, will purchase that proportion of the total number of International Option Securities then being purchased which the number of Initial International Securities set forth in Schedule A opposite the name of such International Manager bears to the total number of Initial International Securities, subject in each case to such adjustments as the Global Coordinator in its discretion shall make to eliminate any sales or purchases of fractional shares. (c) Payment. Payment of the purchase price for, and delivery of certificates for, the Initial Securities shall be made at the offices of Fried, Frank, Harris, Shriver & Jacobson, 1 New York Plaza, New York, New York 10004, or at such other place as shall be agreed upon by the Global Coordinator and the Company, at 9:00 A.M. (Eastern time) on the third (fourth, if the pricing occurs after 4:30 P.M. (Eastern time) on any given day) business day after the date hereof (unless postponed in accordance with the provisions of Section 10), or such other time not later than ten business days after such date as shall be agreed upon by the Global Coordinator and the Company (such time and date of payment and delivery being herein called "Closing Time"). In addition, in the event that any or all of the International Option Securities are purchased by the International Managers, payment of the purchase price for, and delivery of certificates for, such International Option Securities shall be made at the above-mentioned offices, or at such other place as shall be agreed upon by the Global Coordinator, the Company and the Selling Shareholder, on each Date of Delivery as specified in the notice from the Global Coordinator to the Company and the Selling Shareholder. 15 Payment shall be made to the Company and the Selling Shareholder by wire transfer of immediately available funds to a bank account designated by the Company and the Custodian pursuant to the Selling Shareholder's Power of Attorney and Custody Agreement, as the case may be, against delivery to the Lead Managers for the respective accounts of the International Managers of certificates for the International Securities to be purchased by them. It is understood that each International Manager has authorized the Lead Managers, for its account, to accept delivery of, receipt for, and make payment of the purchase price for, the Initial International Securities and the International Option Securities, if any, which it has agreed to purchase. Merrill Lynch, individually and not as representative of the International Managers, may (but shall not be obligated to) make payment of the purchase price for the Initial International Securities or the International Option Securities, if any, to be purchased by any International Manager whose funds have not been received by the Closing Time or the relevant Date of Delivery, as the case may be, but such payment shall not relieve such International Manager from its obligations hereunder. (d) Denominations; Registration. Certificates for the Initial International Securities and the International Option Securities, if any, shall be in such denominations and registered in such names as the Lead Managers may request in writing at least one full business day before the Closing Time or the relevant Date of Delivery, as the case may be. The certificates for the Initial International Securities and the International Option Securities, if any, will be made available for examination and packaging by the Lead Managers in The City of New York not later than 10:00 A.M. (Eastern time) on the business day prior to the Closing Time or the relevant Date of Delivery, as the case may be. SECTION 3. Covenants of the Company. The Company covenants with each ------------------------ International Manager as follows: (a) Compliance with Securities Regulations and Commission Requests. The Company, subject to Section 3(b), will comply with the requirements of Rule 430A or Rule 434, as applicable, and will notify the Global Coordinator immediately, and confirm the notice in writing, (i) when any post-effective amendment to the Registration Statement shall become effective, or any supplement to the Prospectuses or any amended Prospectuses shall have been filed, (ii) of the receipt of any comments from the Commission, (iii) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectuses or for additional information, and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of any order preventing or suspending the use of any preliminary prospectus, or of the suspension of the qualification of the Securities for offering or sale in any jurisdiction, or of the initiation or threatening of any proceedings for any of such purposes. The Company will promptly effect the filings necessary pursuant to Rule 424(b) and will take such steps as it deems necessary to ascertain promptly whether the form of prospectus transmitted for filing under Rule 424(b) was received for filing by the Commission and, in the event that it was not, it will promptly file such prospectus. The Company will make every reasonable 16 effort to prevent the issuance of any stop order and, if any stop order is issued, to obtain the lifting thereof at the earliest possible moment. (b) Filing of Amendments. The Company will give the Global Coordinator notice of its intention to file or prepare any amendment to the Registration Statement (including any filing under Rule 462(b)), any Term Sheet or any amendment, supplement or revision to either the prospectus included in the Registration Statement at the time it became effective or to the Prospectuses, will furnish the Global Coordinator with copies of any such documents a reasonable amount of time prior to such proposed filing or use, as the case may be, and will not file or use any such document to which the Global Coordinator or counsel for the International Managers shall object. (c) Delivery of Registration Statements. The Company has furnished or will deliver to the Lead Managers and counsel for the International Managers, without charge, signed copies of the Registration Statement as originally filed and of each amendment thereto (including exhibits filed therewith) and signed copies of all consents and certificates of experts, and will also deliver to the Lead Managers, without charge, a conformed copy of the Registration Statement as originally filed and of each amendment thereto (without exhibits) for each of the International Managers. The copies of the Registration Statement and each amendment thereto furnished to the International Managers will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (d) Delivery of Prospectuses. The Company has delivered to each International Manager, without charge, as many copies of each preliminary prospectus as such International Manager reasonably requested, and the Company hereby consents to the use of such copies for purposes permitted by the 1933 Act. The Company will furnish to each International Manager, without charge, during the period when the International Prospectus is required to be delivered under the 1933 Act or the Securities Exchange Act of 1934 (the "1934 Act"), such number of copies of the International Prospectus (as amended or supplemented) as such International Manager may reasonably request. The International Prospectus and any amendments or supplements thereto furnished to the International Managers will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (e) Continued Compliance with Securities Laws. The Company will comply with the 1933 Act and the 1933 Act Regulations so as to permit the completion of the distribution of the Securities as contemplated in this Agreement, the U.S. Purchase Agreement and in the Prospectuses. If at any time when a prospectus is required by the 1933 Act to be delivered in connection with sales of the Securities, any event shall occur or condition shall exist as a result of which it is necessary, in the opinion of counsel for the International Managers or for the Company, to amend the Registration Statement or amend or supplement any Prospectus in order that the Prospectuses will not include any 17 untrue statements of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in the light of the circumstances existing at the time it is delivered to a purchaser, or if it shall be necessary, in the opinion of such counsel, at any such time to amend the Registration Statement or amend or supplement any Prospectus in order to comply with the requirements of the 1933 Act or the 1933 Act Regulations, the Company will promptly prepare and file with the Commission, subject to Section 3(b), such amendment or supplement as may be necessary to correct such statement or omission or to make the Registration Statement or the Prospectuses comply with such requirements, and the Company will furnish to the International Managers such number of copies of such amendment or supplement as the International Managers may reasonably request. (f) Blue Sky Qualifications. The Company will use its best efforts, in cooperation with the International Managers, to qualify the Securities for offering and sale under the applicable securities laws of such states and other jurisdictions (domestic or foreign) as the Global Coordinator may designate and to maintain such qualifications in effect for a period of not less than one year from the later of the effective date of the Registration Statement and any Rule 462(b) Registration Statement; provided, however, that neither the Company nor the Selling Shareholder shall be obligated to file any general consent to service of process or to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it is not so qualified or to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject. In each jurisdiction in which the Securities have been so qualified, the Company will file such statements and reports as may be required by the laws of such jurisdiction to continue such qualification in effect for a period of not less than one year from the effective date of the Registration Statement and any Rule 462(b) Registration Statement. (g) Rule 158. The Company will timely file such reports pursuant to the 1934 Act as are necessary in order to make generally available to its securityholders as soon as practicable an earnings statement for the purposes of, and to provide the benefits contemplated by, the last paragraph of Section 11(a) of the 1933 Act. (h) Use of Proceeds. The Company will use the net proceeds received by it from the sale of the Securities in the manner specified in the Prospectuses under "Use of Proceeds." (i) Listing. The Company will use its best efforts to effect the listing of the Common Stock (including the Securities) on the New York Stock Exchange. (j) Restriction on Sale of Securities. During a period of 180 days from the date of the Prospectuses, the Company will not, without the prior written consent of the Global Coordinator, (i) directly or indirectly, 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 to purchase or otherwise transfer or dispose of any share of Common 18 Stock or any securities convertible into or exercisable or exchangeable for Common Stock or file any registration statement under the 1933 Act with respect to any of the foregoing or (ii) enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of the Common Stock, whether any such swap or transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. The foregoing sentence shall not apply to (A) the Securities to be sold hereunder or under the U.S. Purchase Agreement, (B) any shares of Common Stock issued by the Company upon the exercise of an option or warrant or the conversion of a security outstanding on the date hereof and referred to in the Prospectuses or (C) any shares of Common Stock issued or options to purchase Common Stock granted pursuant to employee benefit plans of the Company referred to in the Prospectuses; provided, however, that notwithstanding the preceding clauses (B) and (C), -------- ------- the Company agrees that it will not issue shares of Common Stock for 180 days after the date of the Prospectus upon the exercise of any options to acquire Common Stock if the vesting of such options has been accelerated during such period pursuant to the terms of the employee benefit plans under which such options were issued. (k) Reporting Requirements. The Company, during the period when the Prospectuses are required to be delivered under the 1933 Act or the 1934 Act, will file all documents required to be filed with the Commission pursuant to the 1934 Act within the time periods required by the 1934 Act and the rules and regulations of the Commission thereunder. (l) Compliance with NASD Rules. The Company hereby agrees that it will ensure that the Reserved Securities will be restricted if required by the National Association of Securities Dealers, Inc. (the "NASD") or the NASD rules from sale, transfer, assignment, pledge or hypothecation for a period of three or five months, as the case may be, following the date of this Agreement. The Underwriters will notify the Company as to which persons will need to be so restricted. At the request of the Underwriters, the Company will direct the transfer agent to place a stop transfer restriction upon such securities for such period of time. Should the Company release, or seek to release, from such restrictions any of the Reserved Securities, the Company agrees to reimburse the Underwriters for any reasonable expenses (including, without limitation, legal expenses) they incur in connection with such release. (m) Good Standing. The Company hereby agrees that it will use its best efforts to become in good standing as a foreign corporation in all of the jurisdictions in which it conducts business as a foreign corporation (to the extent that Knoll, Inc. was qualified as a foreign corporation in such jurisdiction immediately prior to the merger of Knoll, Inc. and T.K.G. Acquisition Corp.). SECTION 4. Payment of Expenses. (a) Expenses. The Company will pay all ------------------- expenses incident to the performance of its obligations under this Agreement, including (i) the preparation, 19 printing and filing of the Registration Statement (including financial statements and exhibits) as originally filed and of each amendment thereto, (ii) the printing and delivery to the Underwriters of this Agreement, any Agreement among Underwriters and such other documents as may be required in connection with the offering, purchase, sale, issuance or delivery of the Securities, (iii) the preparation, issuance and delivery of the certificates for the Securities to the Underwriters, including any stock or other transfer taxes and any stamp or other duties payable upon the sale, issuance or delivery of the Securities by the Company to the Underwriters and the transfer of the Securities between the International Managers and the U.S. Underwriters, (iv) the fees and disbursements of the Company's counsel, accountants and other advisors, (v) the qualification of the Securities under securities laws in accordance with the provisions of Section 3(f) hereof, including filing fees and the reasonable fees and disbursements of counsel for the Underwriters in connection therewith and in connection with the preparation of the Blue Sky Survey and any supplement thereto, (vi) the printing and delivery to the Underwriters of copies of each preliminary prospectus, any Term Sheets and of the Prospectuses and any amendments or supplements thereto, (vii) the preparation, printing and delivery to the Underwriters of copies of the blue sky survey and any supplement thereto, (viii) the fees and expenses of any transfer agent or registrar for the Securities, (ix) the filing fees incident to, and the reasonable fees and disbursements of counsel to the Underwriters in connection with, the review by the NASD of the terms of the sale of the Securities, (x) the fees and expenses incurred in connection with the listing of the Securities on the New York Stock Exchange and (xi) all costs and expenses of the Underwriters, including the fees and disbursements of counsel for the Underwriters, in connection with matters related to the Reserved Securities which are designated by the Company for sale to certain dealers having business relationships with the Company. (b) Expenses of the Selling Shareholder. The Selling Shareholder will pay all expenses incident to the performance of its obligations under, and the consummation of the transactions contemplated by this Agreement, including (i) any stamp duties, capital duties and stock transfer taxes, if any, payable upon the sale of the Securities by the Selling Shareholder to the Underwriters, and their transfer between the Underwriters pursuant to an agreement between such Underwriters and (ii) the fees and disbursements of its counsel and accountants. (c) Termination of Agreement. If this Agreement is terminated by the Lead Managers in accordance with the provisions of Section 5 or Sections 9(a)(i) or (ii) hereof, the Company shall reimburse the International Managers for all of their out-of-pocket expenses, including the reasonable fees and disbursements of counsel for the International Managers. (d) Allocation of Expenses. The provisions of this Section shall not affect any agreement that the Company and the Selling Shareholder may make for the sharing of such costs and expenses. 20 SECTION 5. Conditions of International Managers' Obligations. The ------------------------------------------------- obligations of the several International Managers hereunder are subject to the accuracy of the representations and warranties of the Company and the Selling Shareholder contained in Section 1 hereof or in certificates of any officer of the Company or any Subsidiary of the Company or on behalf of the Selling Shareholder delivered pursuant to the provisions hereof, to the performance by the Company of its covenants and other obligations hereunder, and to the following further conditions: (a) Effectiveness of Registration Statement. The Registration Statement, including any Rule 462(b) Registration Statement, has become effective and at Closing Time no stop order suspending the effectiveness of the Registration Statement shall have been issued under the 1933 Act or proceedings therefor initiated or threatened by the Commission, and any request on the part of the Commission for additional information shall have been complied with to the reasonable satisfaction of counsel to the International Managers. A prospectus containing the Rule 430A Information shall have been filed with the Commission in accordance with Rule 424(b) (or a post-effective amendment providing such information shall have been filed and declared effective in accordance with the requirements of Rule 430A) or, if the Company has elected to rely upon Rule 434, a Term Sheet shall have been filed with the Commission in accordance with Rule 424(b). (b) Opinions of Counsel for the Company and the Selling Shareholder. At Closing Time, the Lead Managers shall have received the favorable opinions, dated as of Closing Time, of (i) Willkie Farr & Gallagher, counsel for the Company, and (ii) Jennifer E. Bennett, counsel to NationsBank Corporation, acting as special counsel to the Selling Shareholder, in each case in form and substance satisfactory to counsel for the International Managers, together with signed or reproduced copies of such letter for each of the other International Managers to the effect set forth in Exhibits A-1 and A-2, respectively, hereto and to such further effect as counsel to the International Managers may reasonably request. (c) Opinion of Counsel for International Managers. At Closing Time, the Lead Managers shall have received the favorable opinion, dated as of Closing Time, of Fried, Frank, Harris, Shriver & Jacobson, counsel for the International Managers, together with signed or reproduced copies of such letter for each of the other International Managers with respect to the matters set forth in clauses (i), (ii), (v), (viii), (x), (xi), (xv) (solely as to the information in the Prospectus under "Description of Capital Stock") and the penultimate paragraph of Exhibit A hereto. In giving such opinion such counsel may rely, as to all matters governed by the laws of jurisdictions other than the law of the State of New York and the federal law of the United States and the General Corporation Law of the State of Delaware, upon the opinions of counsel satisfactory to the Lead Managers. Such counsel may also state that, insofar as such opinion involves factual matters, they have relied, to the extent they deem proper, upon certificates of officers of the Company and its Subsidiaries and of the Selling Shareholder and certificates of public officials. 21 (d) Officers' Certificate. At Closing Time, there shall not have been, since the date hereof or since the respective dates as of which information is given in the Prospectuses, any material adverse change in the condition (financial or otherwise), earnings, business affairs or business prospects of the Company and its Subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, and the Lead Managers shall have received a certificate of the Chairman of the Board, President or a Vice President of the Company and of the chief financial or chief accounting officer of the Company, dated as of Closing Time, to the effect that (i) there has been no such material adverse change, (ii) the representations and warranties in Section 1(a) hereof are true and correct with the same force and effect as though expressly made at and as of Closing Time, (iii) the Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied at or prior to Closing Time, and (iv) no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or, to the best of their knowledge, are contemplated by the Commission. (e) Accountant's Comfort Letters. At the time of the execution of this Agreement, the Lead Managers shall have received from Ernst & Young LLP a letter in the form of Exhibit C-1 hereto and from Price Waterhouse LLP a letter in the form of Exhibit C-2 hereto, dated such date, in form and substance satisfactory to the Lead Managers, together with signed or reproduced copies of such letter for each of the other International Managers containing statements and information of the type ordinarily included in accountants' "comfort letters" to underwriters with respect to the financial statements and certain financial information contained in the Registration Statement and the Prospectuses. (f) Bring-down Comfort Letters. At Closing Time, the Lead Managers shall have received letters from Ernst & Young LLP and Price Waterhouse LLP, dated as of Closing Time, to the effect that they reaffirm the statements made in the letter furnished pursuant to subsection (e) of this Section, except that the specified date referred to shall be a date not more than three business days prior to Closing Time. (g) Approval of Listing. At Closing Time, the Securities shall have been approved for listing on the New York Stock Exchange, subject only to official notice of issuance. (h) No Objection. The NASD shall have confirmed that it has not raised any objection with respect to the fairness and reasonableness of the underwriting terms and arrangements. (i) Lock-up Agreements. At the date of this Agreement, the Lead Managers shall have received (i) an agreement substantially in the form of Exhibit B hereto signed by the persons listed on Schedule D hereto and (ii) copies of the Agreement, dated as of April 15, 1997, among the Company, Warburg, Pincus Ventures, L.P., NationsBanc 22 Investment Corp. and certain other persons, signed by the Company and the persons listed on Schedule D hereto. (j) Purchase of Initial U.S. Securities. Contemporaneously with the purchase by the International Managers of the Initial International Securities under this Agreement, the U.S. Underwriters shall have purchased the Initial U.S. Securities under the U.S. Purchase Agreement. (k) Custody Agreement. At the date of this Agreement the Lead Managers shall have received copies of a Custody Agreement and Power of Attorney executed by the Selling Shareholder. (l) Conditions to Purchase of International Option Securities. In the event that the International Managers exercise their option provided in Section 2(b) hereof to purchase all or any portion of the International Option Securities, the representations and warranties of the Company and the Selling Shareholder contained herein and the statements in any certificates furnished by the Company or any Subsidiary of the Company hereunder or the Selling Shareholder shall be true and correct as of each Date of Delivery and, at the relevant Date of Delivery, the Lead Managers shall have received: (i) Officers' Certificate. A certificate, dated such Date of --------------------- Delivery, of the Chairman of the Board, President or a Vice President of the Company and of the chief financial or chief accounting officer of the Company confirming that the certificate delivered at the Closing Time pursuant to Section 5(d) hereof remains true and correct as of such Date of Delivery. (ii) Selling Shareholder's Certificate. At the Date of Delivery, the --------------------------------- Lead Managers shall have received a certificate of the Selling Shareholder, dated as of Date of Delivery, to the effect that (i) the representations and warranties of the Selling Shareholder contained in Section 1(b) hereof are true and correct in all respects with the same force and effect as though expressly made at and as of Date of Delivery and (ii) the Selling Shareholder has complied in all material respects with all agreements and all conditions on its part to be performed under this Agreement at or prior to Date of Delivery. (iii) Opinions of Counsel for the Company and Counsel for the Selling --------------------------------------------------------------- Shareholder. The favorable opinions of Willkie Farr & Gallagher, ----------- counsel for the Company, and of Jennifer E. Bennett, counsel to NationsBank Corporation, acting as special counsel to the Selling Shareholder, in each case in form and substance satisfactory to counsel for the International Managers, dated such Date of Delivery, relating to the International Option Securities to be purchased on such Date of Delivery and otherwise to the same effect as the opinions required by Section 5(b) hereof. 23 (iv) Opinion of Counsel for International Managers. The favorable --------------------------------------------- opinion of Fried, Frank, Harris, Shriver & Jacobson, counsel for the International Managers, dated such Date of Delivery, relating to the International Option Securities to be purchased on such Date of Delivery and otherwise to the same effect as the opinion required by Section 5(c) hereof. (v) Bring-down Comfort Letters. Letters from Ernst & Young LLP and -------------------------- Price Waterhouse LLP, in form and substance satisfactory to the Lead Managers and dated such Date of Delivery, substantially in the same form and substance as the letter furnished to the Lead Managers pursuant to Section 5(f) hereof, except that the "specified date" in the letter furnished pursuant to this paragraph shall be a date not more than five days prior to such Date of Delivery. (vi) Forms W-9 or W-8. A copy of a properly completed and executed ---------------- U.S. Treasury Department Form W-9 or W-8 (or other applicable form or statement specified by Treasury Department regulations) from the Selling Shareholder. (m) Additional Documents. At Closing Time and at each Date of Delivery, counsel for the International Managers shall have been furnished with such documents and opinions as they may require for the purpose of enabling them to pass upon the issuance and sale of the Securities as herein contemplated, or in order to evidence the accuracy of any of the representations or warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken by the Company and the Selling Shareholder in connection with the issuance and sale of the Securities as herein contemplated shall be satisfactory in form and substance to the Lead Managers and counsel for the International Managers. (n) Transactions. At or prior to the Closing Time, the Transactions, as described in the Registration Statement and Prospectuses, shall have been duly and validly effected and all corporate proceedings and legal matters incident to the Transactions shall be satisfactory to counsel for the International Managers. (o) Termination of Agreement. If any condition specified in this Section shall not have been fulfilled when and as required to be fulfilled, this Agreement, or, in the case of any condition to the purchase of International Option Securities on a Date of Delivery which is after the Closing Time, the obligations of the several International Managers to purchase the relevant Option Securities, may be terminated by the Lead Managers by notice to the Company at any time at or prior to Closing Time or such Date of Delivery, as the case may be, and such termination shall be without liability of any party to any other party except as provided in Section 4 and except that Sections 1, 6, 7 and 8 shall survive any such termination and remain in full force and effect. 24 SECTION 6. Indemnification. --------------- (a) Indemnification of International Managers. The Company and the Selling Shareholder, jointly and severally, agree to indemnify and hold harmless each International Manager and each person, if any, who controls any International Manager within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act as follows: (i) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of any untrue statement or alleged untrue statement of a material fact included in any preliminary prospectus or the Prospectuses (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of (A) the violation of any applicable laws or regulations of foreign jurisdictions where Reserved Securities have been offered and (B) any untrue statement or alleged untrue statement of a material fact included in the supplement or prospectus wrapper material distributed in foreign jurisdictions in connection with the reservation and sale of the Reserved Securities to certain dealers having business relationships with the Company or the omission or alleged omission therefrom of a material fact necessary to make the statements therein, when considered in conjunction with the Prospectuses or preliminary prospectuses, not misleading; (iii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission or in connection with any violation of the nature referred to in Section 6(a)(ii)(A) hereof; provided that (subject to Section 6(d) below) any such settlement is effected with the written consent of the indemnifying party; and (iv) against any and all expense whatsoever, as incurred (including the fees and disbursements of counsel chosen by Merrill Lynch), reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission or in connection with any violation of the nature referred to in Section 25 6(a)(ii)(A) hereof, to the extent that any such expense is not paid under (i), (ii) or (iii) above; provided, however, that this indemnity agreement shall not (i) apply to any - -------- ------- loss, liability, claim, damage or expense to the extent arising out of any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished to the Company by any Underwriter through the Lead Managers or the U.S. Representatives expressly for use in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or any preliminary prospectus or the International Prospectus (or any amendment or supplement thereto) or (ii) inure to the benefit of any International Manager from whom the person asserting any loss, liability, claim, damage or expense purchased Securities, or any person controlling such International Manager, if it shall be established that a copy of the Prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such International Manager to such person, if required by law to have been so delivered, at or prior to the confirmation of the sale of such Securities to such person in any case where the Company complied with its obligations under Sections 3(a), 3(b) and 3(d), and if the Prospectus (as so amended or supplemented) would have cured any defect giving rise to such loss, liability, claim damage, or expense; provided, --------- however, further, that with respect to the Selling Shareholder, (x) the - ---------------- indemnification provision in this paragraph (a) shall be only with respect to the information furnished in writing by or on behalf of the Selling Shareholder expressly for use in the Registration Statement (or any amendment thereto), including Rule 430A Information, if applicable, or any preliminary prospectus or the Prospectus (or any amendment or supplement thereto) and (y) such Selling Shareholder's aggregate liability under this Section 6 shall be limited to an amount equal to the net proceeds (after deducting the underwriting discount but before deducting expenses) received by such Selling Shareholder from the sale of Securities pursuant to this Agreement. (b) Indemnification of Company, Directors and Officers and Selling Shareholder. Each International Manager severally agrees to indemnify and hold harmless the Company, its directors, each of its officers who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act and the Selling Shareholder and each person, if any, who controls the Selling Shareholder within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act against any and all loss, liability, claim, damage and expense described in the indemnity contained in subsection (a) of this Section, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or any preliminary International Prospectus or the International Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to the Company by such International Manager through the Lead Managers expressly for use in the Registration Statement (or any amendment thereto) or such preliminary prospectus or the International Prospectus (or any amendment or supplement thereto). 26 (c) Actions against Parties; Notification. Each indemnified party shall give notice as promptly as reasonably practicable to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve such indemnifying party from any liability hereunder to the extent it is not materially prejudiced as a result thereof and in any event shall not relieve it from any liability which it may have otherwise than on account of this indemnity agreement. In the case of parties indemnified pursuant to Section 6(a) above, counsel to the indemnified parties shall be selected by Merrill Lynch, and, in the case of parties indemnified pursuant to Section 6(b) above, counsel to the indemnified parties shall be selected by the Company. An indemnifying party may participate at its own expense in the defense of any such action; provided, however, that counsel to the indemnifying party shall not (except with the consent of the indemnified party) also be counsel to the indemnified party. In no event shall the indemnifying parties be liable for fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. No indemnifying party shall, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever in respect of which indemnification or contribution could be sought under this Section 6 or Section 7 hereof (whether or not the indemnified parties are actual or potential parties thereto), unless such settlement, compromise or consent (i) includes an unconditional release of each indemnified party from all liability arising out of such litigation, investigation, proceeding or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party. (d) Settlement without Consent if Failure to Reimburse. If at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel, such indemnifying party agrees that it shall be liable for any settlement of the nature contemplated by Section 6(a)(iii) effected without its written consent if (i) such settlement is entered into more than 45 days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall have received notice of the terms of such settlement at least 30 days prior to such settlement being entered into and (iii) such indemnifying party shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement. (e) Indemnification for Reserved Securities. In connection with the offer and sale of the Reserved Securities, the Company agrees, promptly upon a request in writing, to indemnify and hold harmless the Underwriters from and against any and all losses, liabilities, claims, damages and expenses incurred by them as a result of the failure of certain dealers having business relationships with the Company and other persons to pay for and accept delivery of Reserved Securities which, by the end of the first business day following the date of this Agreement, were subject to an orally confirmed agreement to purchase. 27 (f) Other Agreements with Respect to Indemnification. The provisions of this Section shall not affect any agreement among the Company and the Selling Shareholder with respect to indemnification. SECTION 7. Contribution. If the indemnification provided for in Section 6 ------------ hereof is for any reason unavailable to or insufficient to hold harmless an indemnified party in respect of any losses, liabilities, claims, damages or expenses referred to therein, then each indemnifying party shall contribute to the aggregate amount of such losses, liabilities, claims, damages and expenses incurred by such indemnified party, as incurred, (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Selling Shareholder on the one hand and the International Managers on the other hand from the offering of the Securities pursuant to this Agreement or (ii) if the allocation provided by clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and the Selling Shareholder on the one hand and of the International Managers on the other hand in connection with the statements or omissions, or in connection with any violation of the nature referred to in Section 6(a)(ii)(A) hereof, which resulted in such losses, liabilities, claims, damages or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Shareholder on the one hand and the International Managers on the other hand in connection with the offering of the International Securities pursuant to this Agreement shall be deemed to be in the same respective proportions as the total net proceeds from the offering of the International Securities pursuant to this Agreement (before deducting expenses) received by the Company and the Selling Shareholder and the total underwriting discount received by the International Managers, in each case as set forth on the cover of the International Prospectus, or, if Rule 434 is used, the corresponding location on the Term Sheet, bear to the aggregate initial public offering price of the International Securities as set forth on such cover. The relative fault of the Company and the Selling Shareholder on the one hand and the International Managers on the other hand shall be determined by reference to, among other things, whether any such untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company or the Selling Shareholder or by the International Managers and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission or any violation of the nature referred to in Section 6(a)(ii)(A) hereof. The Company, the Selling Shareholder and the International Managers agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by pro rata allocation (even if the International Managers were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 7. The aggregate amount of losses, liabilities, claims, damages and expenses incurred by an indemnified party and referred to above in this Section 7 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in 28 investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue or alleged untrue statement or omission or alleged omission. Notwithstanding the provisions of this Section 7, no International Manager shall be required to contribute any amount in excess of the amount by which the total price at which the International Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such International Manager has otherwise been required to pay by reason of any such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 7, each person, if any, who controls a International Manager within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as such International Manager, each director of the Company, each officer of the Company who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as the Company and each person, if any, who controls the Selling Shareholder within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as the Selling Shareholder. The International Managers' respective obligations to contribute pursuant to this Section 7 are several in proportion to the number of Initial International Securities set forth opposite their respective names in Schedule A hereto and not joint. The provisions of this Section shall not affect any agreement among the Company and the Selling Shareholder with respect to contribution. SECTION 8. Representations, Warranties and Agreements to Survive Delivery. -------------------------------------------------------------- All representations, warranties and agreements contained in this Agreement or in certificates of officers of the Company or any of its Subsidiaries or the Selling Shareholder submitted pursuant hereto, shall remain operative and in full force and effect, regardless of any investigation made by or on behalf of any International Manager or controlling person, or by or on behalf of the Company or the Selling Shareholder, and shall survive delivery of the Securities to the International Managers. SECTION 9. Termination of Agreement. ------------------------ (a) Termination; General. The Lead Managers may terminate this Agreement, by notice to the Company and the Selling Shareholder, at any time at or prior to Closing Time (i) if there has been, since the time of execution of this Agreement or since the respective dates as of which information is given in the International Prospectus, any material adverse change in the 29 condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its Subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, or (ii) if there shall have occurred a downgrading in the rating assigned to any of the Company's debt securities by any nationally recognized securities rating agency, or if such securities rating agency shall have publicly announced that it has under surveillance or review, with possible negative implications, its rating of any of the Company's debt securities, or (iii) if there has occurred any material adverse change in the financial markets in the United States or the international financial markets, any outbreak of hostilities or escalation thereof or other calamity or crisis or any change or development involving a prospective change in national or international political, financial or economic conditions, in each case the effect of which is such as to make it, in the judgment of the Lead Managers, impracticable to market the Securities or to enforce contracts for the sale of the Securities, or (iv) if trading in any securities of the Company has been suspended or materially limited by the Commission or the New York Stock Exchange, or if trading generally on the American Stock Exchange or the New York Stock Exchange or in the Nasdaq National Market has been suspended or materially limited, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices have been required, by any of said exchanges or by such system or by order of the Commission, the National Association of Securities Dealers, Inc. or any other governmental authority, or (v) if a banking moratorium has been declared by either Federal or New York authorities. (b) Liabilities. If this Agreement is terminated pursuant to this Section, such termination shall be without liability of any party to any other party except as provided in Section 4 hereof, and provided further that Sections 1, 6, 7 and 8 shall survive such termination and remain in full force and effect. SECTION 10. Default by One or More of the International Managers. If one ---------------------------------------------------- or more of the International Managers shall fail at Closing Time or a Date of Delivery to purchase the Securities which it or they are obligated to purchase under this Agreement (the "Defaulted Securities"), the Lead Managers shall have the right, within 24 hours thereafter, to make arrangements for one or more of the non-defaulting International Managers, or any other underwriters, to purchase all, but not less than all, of the Defaulted Securities in such amounts as may be agreed upon and upon the terms herein set forth; if, however, the Lead Managers shall not have completed such arrangements within such 24-hour period, then: (a) if the number of Defaulted Securities does not exceed 10% of the number of International Securities to be purchased on such date, each of the non-defaulting International Managers shall be obligated, severally and not jointly, to purchase the full amount thereof in the proportions that their respective underwriting obligations hereunder bear to the underwriting obligations of all non-defaulting International Managers, or (b) if the number of Defaulted Securities exceeds 10% of the number of International Securities to be purchased on such date, this Agreement or, with respect to any Date of Delivery which occurs after the Closing Time, the obligation of the International Managers to purchase and of the Company and the Selling Shareholder to 30 sell the Option Securities to be purchased and sold on such Date of Delivery shall terminate without liability on the part of any non- defaulting International Manager. No action taken pursuant to this Section shall relieve any defaulting International Manager from liability in respect of its default. In the event of any such default which does not result in a termination of this Agreement or, in the case of a Date of Delivery which is after the Closing Time, which does not result in a termination of the obligation of the International Managers to purchase and the Company and the Selling Shareholder to sell the relevant International Option Securities, as the case may be, either (i) the Lead Managers or (ii) the Company and the Selling Shareholder shall have the right to postpone Closing Time or the relevant Date of Delivery, as the case may be, for a period not exceeding seven days in order to effect any required changes in the Registration Statement or Prospectus or in any other documents or arrangements. As used herein, the term "International Manager" includes any person substituted for a International Manager under this Section 10. SECTION 11. Default by the Selling Shareholder or the Company. ------------------------------------------------- (a) If the Selling Shareholder shall fail at a Date of Delivery to sell and deliver the number of Securities which such Selling Shareholder is obligated to sell hereunder, and the Company does not exercise the right hereby granted to increase, pro rata or otherwise, the number of Securities to be sold by it hereunder to the total number to be sold by the Company and the Selling Shareholder as set forth in Schedule B hereto, then the International Managers may, at the option of the Lead Managers, by notice from the Representatives to the Company and the Selling Shareholder, either (a) terminate this Agreement without any liability on the fault of any non-defaulting party except that the provisions of Sections 1, 4, 6, 7 and 8 shall remain in full force and effect or (b) elect to purchase the Securities which the Company has agreed to sell hereunder. No action taken pursuant to this Section 11 shall relieve any Selling Shareholder so defaulting from liability, if any, in respect of such default. In the event of a default by any Selling Shareholder as referred to in this Section 11, each of the Lead Managers and the Company shall have the right to postpone Closing Time or Date of Delivery for a period not exceeding seven days in order to effect any required change in the Registration Statement or Prospectus or in any other documents or arrangements. (b) If the Company shall fail at Closing Time or at the Date of Delivery to sell the number of Securities that it is obligated to sell hereunder, then this Agreement shall terminate without any liability on the part of any nondefaulting party; provided, however, that the provisions of Sections 1, 4, 6, 7 and 8 shall remain in full force and effect. No action taken pursuant to this Section shall relieve the Company from liability, if any, in respect of such default. SECTION 12. Notices. All notices and other communications hereunder shall ------- be in writing and shall be deemed to have been duly given if mailed or transmitted by any standard 31 form of telecommunication. Notices to the International Managers shall be directed to the Lead Managers at North Tower, World Financial Center, New York, New York 10281-1201, attention of Gregory L. Wright, with a copy to Fried, Frank, Harris, Shriver & Jacobson, 1 New York Plaza, New York, New York 10004, attention of Valerie Ford Jacob; and notices to the Company shall be directed to it at Knoll, Inc., 1235 Water Street, East Greenville, PA 18041, attention of Patrick A. Milberger, with a copy to Willkie Farr & Gallagher, One Citicorp Center, 153 East 53rd Street, New York, New York 10022, attention of Michael A. Schwartz, and notices to the Selling Shareholder shall be delivered to it at NationsBanc Investment Corp., 100 Tryon Street, 10th Floor, Charlotte, North Carolina 28255, attention of Ann B. Hayes, with a copy to NationsBank Corporation, 100 North Tryon Street, NCI-007-20-01, Charlotte, North Carolina 28255, attention of Jennifer E. Bennett. SECTION 13. Parties. This Agreement shall each inure to the benefit of and ------- be binding upon the International Managers, the Company and the Selling Shareholder and their respective successors. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person, firm or corporation, other than the International Managers, the Company and the Selling Shareholder and their respective successors and the controlling persons and officers and directors referred to in Sections 6 and 7 and their heirs and legal representatives, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision herein contained. This Agreement and all conditions and provisions hereof are intended to be for the sole and exclusive benefit of the International Managers, the Company and the Selling Shareholder and their respective successors, and said controlling persons and officers and directors and their heirs and legal representatives, and for the benefit of no other person, firm or corporation. No purchaser of Securities from any International Manager shall be deemed to be a successor by reason merely of such purchase. SECTION 14. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY ---------------------- AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME. SECTION 15. Effect of Headings. The Article and Section headings herein ------------------ and the Table of Contents are for convenience only and shall not affect the construction hereof. 32 If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Company and the Attorney-in-Fact for the Selling Shareholder a counterpart hereof, whereupon this instrument, along with all counterparts, will become a binding agreement among the International Managers, the Company and the Selling Shareholder in accordance with its terms. Very truly yours, KNOLL, INC. By: ____________________________ Name: Title: By: _____________________________ Name: Title: Attorney-in-Fact on behalf of the Selling Shareholder named in Schedule B hereto CONFIRMED AND ACCEPTED, as of the date first above written: MERRILL LYNCH INTERNATIONAL CREDIT SUISSE FIRST BOSTON (EUROPE) LIMITED GOLDMAN SACHS INTERNATIONAL MORGAN STANLEY & CO. INTERNATIONAL LIMITED By: MERRILL LYNCH INTERNATIONAL By: _______________________________________ Authorized Signatory For themselves and as Lead Managers of the other International Managers named in Schedule A hereto. 33 SCHEDULE A Number of Initial International Name of International Manager Securities - ----------------------------- ------------- Merrill Lynch, International........................... Credit Suisse First Boston (Europe) Limited............ Goldman Sachs International............................ Morgan Stanley & Co. International Limited............. Total.................................................. 1,600,000 SCHEDULE B
Number of Initial Maximum Number of International International Option Securities Securities to be Sold to be Sold Knoll, Inc. 1,600,000 96,000 NationsBanc Investment Corp. 0 144,000 Total............................ 1,600,000 240,000
SCHEDULE C Knoll, Inc. 8,000,000 Shares of Common Stock (Par Value $0.01 Per Share) 1. The initial public offering price per share for the Securities, determined as provided in said Section 2, shall be $ . 2. The purchase price per share for the International Securities to be paid by the several International Managers shall be $ , being an amount equal to the initial public offering price set forth above less $ per share; provided that the purchase price per share for any International Option Securities purchased upon the exercise of the over-allotment option described in Section 2(b) shall be reduced by an amount per share equal to any dividends or distributions declared by the Company and payable on the Initial International Securities but not payable on the International Option Securities. SCHEDULE D List of Persons and Entities Subject to Lock-up Warburg, Pincus Ventures, L.P. NationsBanc Investment Corp. Wolfgang Billstein Kathleen G. Bradley Andrew B. Cogan Barbara E. Ellixson Arthur C. Graves Pamela G. Jones John H. Lynch Barry L. McCabe Patrick A. Milberger Alan S. Millstein Douglas J. Purdom Burton B. Staniar Louise W. Abbott Michael J. Benigno David G. Culp Miles T. Giidden Arthur C. Graves Catherine H. Havran Stephen J. Hummel Pamela G. Jones Michael A. Lehman Charles P. Lieb Carl G. Magnusson Keith M. McCann Lawrence S. Menzel Patrick A. Milberger Alan S. Millstein James R. Monzo Brian A. Mullaney Elizabeth L. Needle David P. Noel Ronald P. Racle Stephen A. Rockwell Robert Rowland Samuel Shaffer Meredith G. Stevens 1 Kevin F. Thorton Richard K. Vales Richard S. Vledder Roger B. Wall Mark A. Workman 2 EXHIBIT A-1 FORM OF OPINION OF COMPANY'S COUNSEL TO BE DELIVERED PURSUANT TO SECTION 5(b) (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware. (ii) The Company has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectuses and to enter into and perform its obligations under the U.S. Purchase Agreement and the International Purchase Agreement. (iii) The Company is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect. (iv) After giving effect to the Transactions, the authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectuses in the column entitled "Pro Forma As Adjusted" under the caption "Capitalization" (except for subsequent issuances, if any, pursuant to the U.S. Purchase Agreement and the International Purchase Agreement); the shares of issued and outstanding capital stock have been duly authorized and validly issued and are fully paid and non-assessable; and none of the outstanding shares of capital stock of the Company was issued in violation of the preemptive or other similar rights of any securityholder of the Company. (v) The Securities to be purchased by the U.S. Underwriters and the International Managers from the Company have been duly authorized for issuance and sale to the Underwriters pursuant to the U.S. Purchase Agreement and the International Purchase Agreement, respectively, and, when issued and delivered by the Company pursuant to the U.S. Purchase Agreement and the International Purchase Agreement, respectively, against payment of the consideration set forth in the U.S. Purchase Agreement and the International Purchase Agreement, will be validly issued and fully paid and non-assessable and no holder of the Securities is or will be subject to personal liability by reason of being such a holder. (vi) The issuance of the Securities is not subject to the preemptive or other similar rights of any securityholder of the Company which has not otherwise been waived in connection thereto. 1 (vii) Each domestic Subsidiary has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectuses and is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect; except as otherwise disclosed in the Registration Statement, all of the issued and outstanding capital stock of each domestic Subsidiary has been duly authorized and validly issued, is fully paid and non-assessable and, to the best of our knowledge, is owned by the Company, directly or through Subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity; none of the outstanding shares of capital stock of any domestic Subsidiary was issued in violation of the preemptive or similar rights of any securityholder of such Subsidiary. (viii) The U.S. Purchase Agreement and the International Purchase Agreement have been duly authorized, executed and delivered by the Company. (ix) The Company has all necessary corporate power and authority to enter into, to perform the obligations to be performed under and to consummate the Transactions. Each of the Transactions has been validly authorized by the Company, all actions and proceedings required by law to be taken by the Company and its stockholders in connection with the Transactions have been duly and validly taken and each of the Transactions has been duly and validly effected. (x) The Registration Statement, including any Rule 462(b) Registration Statement, has been declared effective under the 1933 Act; any required filing of the Prospectuses pursuant to Rule 424(b) has been made in the manner and within the time period required by Rule 424(b); and, to the best of our knowledge, no stop order suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement has been issued under the 1933 Act and no proceedings for that purpose have been instituted or are pending or threatened by the Commission. (xi) The Registration Statement, including any Rule 462(b) Registration Statement, the Rule 430A Information and the Rule 434 Information, as applicable, the Prospectuses and each amendment or supplement to the Registration Statement and the Prospectuses as of their respective effective or issue dates (other than the financial statements and supporting schedule included therein or omitted therefrom, as to which we need express no opinion) complied as to form in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations. (xii) If Rule 434 has been relied upon, the Prospectuses were not "materially different," as such term is used in Rule 434, from the prospectuses included in the Registration Statement at the time it became effective. 2 (xiii) The form of certificate used to evidence the Common Stock complies in all material respects with all applicable statutory requirements, with any applicable requirements of the charter and by-laws of the Company and the requirements of the New York Stock Exchange. (xiv) Except as described in the Registration Statement, to the best of our knowledge, there is not pending or threatened any action, suit, proceeding, inquiry or investigation, to which the Company or any Subsidiary is a party, or to which the property of the Company or any Subsidiary is subject, before or brought by any court or governmental agency or body, domestic or foreign, which would reasonably be expected to result in a Material Adverse Effect, or which would reasonably be expected to materially and adversely affect the properties or assets thereof taken as a whole or the consummation of the transactions contemplated in the U.S. Purchase Agreement and U.S. Purchase Agreement or the performance by the Company of its obligations thereunder or the consummation of the Transactions. (xv) The information in the Prospectuses under "Description of Capital Stock," "Business--Litigation," "Certain Transactions," "Description of Certain Indebtedness," "Shares Eligible for Future Sale," "Underwriting" and "Certain Federal Income Tax Considerations," and in the Registration Statement under Item 14, to the extent that it describes matters of law, summaries of legal matters, the Company's charter and bylaws or legal proceedings, or legal conclusions, has been reviewed by us and is correct in all material respects. (xvi) To the best of our knowledge, there are no statutes or regulations that are required to be described in the Prospectuses that are not described as required. (xvii) All descriptions in the Prospectuses of contracts and other documents to which the Company or its Subsidiaries are a party are accurate in all material respects; to the best of our knowledge, there are no franchises, contracts, indentures, mortgages, loan agreements, notes, leases or other instruments required to be described or referred to in the Registration Statement or to be filed as exhibits thereto other than those described or referred to therein or filed as exhibits thereto, and the descriptions thereof or references thereto are correct in all material respects. (xviii) To the best of our knowledge, neither the Company nor any Subsidiary is in violation of its charter or by-laws and no default by the Company or any Subsidiary exists in the due performance or observance of any material obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, loan agreement, note, lease or other agreement or instrument that is described or referred to in the Registration Statement or the Prospectuses or filed as an exhibit to the Registration Statement except for such defaults that would not result in a Material Adverse Effect. (xix) No filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any court or governmental authority or agency is necessary or required for the performance by the Company of its obligations under the U.S. Purchase Agreement and the International Purchase Agreement, in connection with the offering, issuance or sale of the Securities under the U.S. Purchase Agreement and the 3 International Purchase Agreement or the consummation of the transactions contemplated by the U.S. Purchase Agreement and the International Purchase Agreement and by the Transactions, except (i) such as have been already obtained or as may be required under the 1933 Act or the 1933 Act Regulations and foreign or state securities or blue sky laws. (xx) The execution, delivery and performance of the U.S. Purchase Agreement and the International Purchase Agreement and the consummation of the transactions contemplated in the U.S. Purchase Agreement, the International Purchase Agreement and in the Registration Statement (including the issuance and sale of the Securities and the use of the proceeds from the sale of the Securities as described in the Prospectuses under the caption "Use Of Proceeds") and by the Transactions and compliance by the Company with its obligations under the U.S. Purchase Agreement and the International Purchase Agreement have been duly authorized by all necessary corporate action and do not and will not, whether with or without the giving of notice or lapse of time or both, conflict with or constitute a breach of, or default or Repayment Event (as defined in Section 1(a)(x) of the Purchase Agreements) under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any Subsidiary pursuant to any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or any other agreement or instrument, known to us, to which the Company or any Subsidiary is a party or by which it or any of them may be bound, or to which any of the property or assets of the Company or any Subsidiary is subject (except for such conflicts, breaches, defaults or Repayment Events or liens, charges or encumbrances that would not have a Material Adverse Effect), nor will such action result in any violation of the provisions of the charter or by-laws of the Company or any Subsidiary, or any applicable law, statute, rule, regulation, judgment, order, writ or decree, known to us, of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Company or any Subsidiary or any of their respective properties, assets or operations. (xxi) To the best of our knowledge, there are no persons with registration rights or other similar rights to have any securities registered pursuant to the Registration Statement or otherwise registered by the Company under the 1933 Act which has not otherwise been waived in connection thereto. (xxii) The Company is not an "investment company" or an entity "controlled" by an "investment company," as such terms are defined in the 1940 Act. (xxiii) Assuming that the Power of Attorney and Custody Agreement of the Selling Shareholder has been duly authorized, executed and delivered by the Selling Shareholder, the Power of Attorney and Custody Agreement constitutes the legal, valid and binding agreement of such Selling Shareholder. (xxiv) [By delivery of a certificate or certificates representing the Securities to be sold by the Selling Shareholder to the Underwriters such Selling Shareholder will transfer to the Underwriters who have purchased such Securities pursuant to the Purchase Agreement (without notice of any defect in the title of such Selling Shareholder and who are otherwise bona fide purchasers for purposes of the Uniform Commercial Code) valid and marketable title to such 4 Securities, free and clear of any pledge, lien, security interest, charge, claim, equity or encumbrance of any kind.] Nothing has come to our attention that would lead us to believe that the Registration Statement or any amendment thereto, including the Rule 430A Information and Rule 434 Information (if applicable) (except for financial statements and schedules and other financial data included therein or omitted therefrom, as to which we need make no statement), at the time such Registration Statement or any such amendment became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectuses or any amendment or supplement thereto (except for financial statements and schedules and other financial data included therein or omitted therefrom, as to which we need make no statement), at the time the Prospectuses were issued, at the time any such amended or supplemented Prospectus was issued or at the Closing Time, included or includes an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. In rendering such opinion, such counsel may rely as to matters of fact (but not as to legal conclusions), to the extent they deem proper, on certificates of responsible officers of the Company and public officials. Such opinion shall not state that it is to be governed or qualified by, or that it is otherwise subject to, any treatise, written policy or other document relating to legal opinions, including, without limitation, the Legal Opinion Accord of the ABA Section of Business Law (1991). 5 EXHIBIT A-2 FORM OF OPINION OF SELLING SHAREHOLDER'S COUNSEL TO BE DELIVERED PURSUANT TO SECTION 5(b) (i) No filing with, or consent, approval, authorization, license, order, registration, qualification or decree of, any court or governmental authority or agency, domestic or foreign, (other than the issuance of the order of the Commission declaring the Registration Statement effective and such authorizations, approvals or consents as may be necessary under state securities laws, as to which we need express no opinion) is necessary or required to be obtained by the Selling Shareholder for the performance by the Selling Shareholder of its obligations under the Purchase Agreement or in the Power of Attorney and Custody Agreement, or in connection with the offer, sale or delivery of the Securities. (ii) The Power of Attorney and Custody Agreement has been duly executed and delivered by the Selling Shareholder and constitutes the legal, valid and binding agreement of such Selling Shareholder. (iii) The Purchase Agreement has been duly authorized, executed and delivered by or on behalf of the Selling Shareholder. (iv) Each Attorney-in-Fact has been duly authorized by the Selling Shareholder to deliver the Securities on behalf of the Selling Shareholder in accordance with the terms of the Purchase Agreement. (v) The execution, delivery and performance of the Purchase Agreement and the Power of Attorney and Custody Agreement and the sale and delivery of the Securities and the consummation of the transactions contemplated in the Purchase Agreement and in the Registration Statement and compliance by the Selling Shareholder with its obligations under the Purchase Agreement have been duly authorized by all necessary action on the part of the Selling Shareholder and do not and will not, whether with or without the giving of notice or passage of time or both, conflict with or constitute a breach of, or default under or result in the creation or imposition of any tax, lien, charge or encumbrance upon the Securities or any property or assets of the Selling Shareholder pursuant to, any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, license, lease or other instrument or agreement to which any Selling Shareholder is a party or by which they may be bound, or to which any of the property or assets of the Selling Shareholder may be subject (except for such conflicts, breaches or defaults or liens, charges or encumbrances that would not result in a Material Adverse Effect on the Selling Shareholder) nor will such action result in any violation of the provisions of the charter or by- laws of the Selling Shareholder, if applicable, or any material provision of any law, administrative regulation, judgment or order of any governmental agency or body or any 1 administrative or court decree having jurisdiction over such Selling Shareholder or any of its properties. (vi) To the best of our knowledge, the Selling Shareholder has valid and marketable title to the Securities to be sold by such Selling Shareholder pursuant to the Purchase Agreement, free and clear of any pledge, lien, security interest, charge, claim, equity or encumbrance of any kind created by or on behalf of the Selling Shareholder, and has full right, power and authority to sell, transfer and deliver such Securities pursuant to the Purchase Agreement. By delivery of a certificate or certificates therefor such Selling Shareholder will transfer to the Underwriters who have purchased such Securities pursuant to the Purchase Agreement (without notice of any defect in the title of such Selling Shareholder and who are otherwise bona fide purchasers for purposes of the Uniform Commercial Code) valid and marketable title to such Securities, free and clear of any pledge, lien, security interest, charge, claim, equity or encumbrance of any kind. In rendering such opinion, such counsel may rely as to matters of fact (but not as to legal conclusions), to the extent they deem proper, on certificates of responsible officers of the Company and public officials. Such opinion shall not state that it is to be governed or qualified by, or that it is otherwise subject to, any treatise, written policy or other document relating to legal opinions, including, without limitation, the Legal Opinion Accord of the ABA Section of Business Law (1991). 2 EXHIBIT B April ____,1997 MERRILL LYNCH & CO. Merrill Lynch, Pierce, Fenner & Smith Incorporated Credit Suisse First Boston Corporation Goldman, Sachs & Co. Morgan Stanley & Co. Incorporated as U.S. Representatives of the several U.S. Underwriters to be named in the within-mentioned U.S. Purchase Agreement Merrill Lynch International Credit Suisse First Boston (Europe) Limited Goldman Sachs International Morgan Stanley & Co. International Limited as Lead Managers for the several Managers to be named in the within- mentioned International Purchase Agreement c/o Merrill Lynch & Co. Merrill Lynch, Pierce, Fenner & Smith Incorporated North Tower World Financial Center New York, New York 10281-1209 Re: Proposed Public Offering by Knoll, Inc. --------------------------------------- Dear Sirs: The undersigned, a stockholder of Knoll, Inc., a Delaware corporation (the "Company"), understands that Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Credit Suisse First Boston Corporation, Goldman, Sachs & Co. and Morgan Stanley & Co. Incorporated propose to enter into a U.S. Purchase Agreement (the "U.S. Purchase Agreement") with the Company and a Selling Stockholder, and Merrill Lynch International, Credit Suisse First Boston (Europe) Limited, Goldman Sachs International and Morgan Stanley & Co. International Limited propose to enter into an International Purchase Agreement (the "International Purchase Agreement") with the Company and the Selling Stockholder, providing for the public offering of shares (the "Securities") of the Company's common stock, par value $0.01 per share (the "Common Stock"). In recognition of the benefit that such an offering will 1 confer upon the undersigned as a stockholder of the Company, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the undersigned agrees with each underwriter to be named in the U.S. Purchase Agreement and with each manager to be named in the International Purchase Agreement that, during a period of 180 days from the date of the U.S. Purchase Agreement and the International Purchase Agreement, the undersigned will not, without the prior written consent of Merrill Lynch, 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 the Company's Common Stock or any securities convertible into or exchangeable or exercisable for Common Stock, whether now owned or hereafter acquired by the undersigned or with respect to which the undersigned has or hereafter acquires the power of disposition, or file any registration statement under the Securities Act of 1933, as amended, with respect to any of the foregoing or (ii) enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, 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. Very truly yours, Signature: ___________________________ Print Name: __________________________ 2 EXHIBIT C-1 FORM OF COMFORT LETTER OF ERNST & YOUNG LLP PURSUANT TO SECTION 5(f) (i) We are independent public accountants with respect to the Company within the meaning of the 1933 Act and the applicable published 1933 Act Regulations. (ii) In our opinion, the audited financial statements and the related financial statement schedules included in the Registration Statement and the Prospectuses comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the published rules and regulations thereunder. (iii) On the basis of procedures (but not an examination in accordance with generally accepted auditing standards) consisting of a reading of the unaudited interim consolidated financial statements of the Company for the three month periods ended March 31, 1997 and March 31, 1996, included in the Registration Statement and the Prospectuses (collectively, the "Quarterly Financials"), a reading of the minutes of all meetings of the stockholders and directors of the Company and its Subsidiaries and the committees of the Company's Board of Directors and any subsidiary committees since January 1, 1997, inquiries of certain officials of the Company and its subsidiaries responsible for financial and accounting matters, a review of interim financial information in accordance with standards established by the American Institute of Certified Public Accountants in Statement on Auditing Standards No. 71, Interim Financial Information ("SAS 71"), with respect to the Quarterly Financials and such other inquiries and procedures as may be specified in such letter, nothing came to our attention that caused us to believe that: (A) the Quarterly Financials included in the Registration Statement and the Prospectuses do not comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the 1933 Act Regulations or any material modifications should be made to the unaudited consolidated financial statements included in the Registration Statement and the Prospectuses for them to be in conformity with generally accepted accounting principles; (B) at a specified date not more than five days prior to the date of this Agreement, there was any change in the common stock of the Company and its subsidiaries or any decrease in the working capital, total assets, total current assets or stockholder's equity of the Company and its subsidiaries or any increase in the long-term debt or total liabilities of the Company and its subsidiaries, in each case as compared with amounts shown in the latest balance sheet included in the Registration Statement, except in each case for changes, decreases or increases that the Registration Statement discloses have occurred or may occur; or (C) for the period from April 1, 1997 to a specified date not more than five days prior to the date of this Agreement, there was any decrease in total sales, operating 1 income, income before income taxes and extraordinary items, income before extraordinary item or net income, in each case as compared with the comparable period in the preceding year, except in each case for any decreases that the Registration Statement discloses have occurred or may occur. (iv) Based upon the procedures set forth in clause (iii) above and a reading of the Selected Financial Data included in the Registration Statement and a reading of the financial statements from which such data were derived, nothing came to our attention that caused us to believe that the Selected Financial Data included in the Registration Statement do not conform in all material respects with the disclosure requirements of Item 301 of Regulation S-K of the 1933 Act. (v) We have compared the information in the Registration Statement under selected captions with the disclosure requirements of Regulation S-K of the 1933 Act and on the basis of limited procedures specified herein. nothing came to our attention that caused us to believe that this information does not conform in all material respects with the disclosure requirements of Items 302 and 402, respectively, of Regulation S-K. (vi) W e are unable to and do not express any opinion on the Pro Forma Financial Information included in the Registration Statement or on the pro forma adjustments applied to the historical amounts included in the Pro Forma Financial Information. However, for purposes of this letter we have: (A) read the Pro Forma Financial Information; (B) performed an audit of the financial statements to which the pro forma adjustments were applied; (C) made inquiries of certain officials of the Company who have responsibility for financial and accounting matters about the basis for their determination of the pro forma adjustments and whether the Pro Forma Financial Information complies as to form in all material respects with the applicable accounting requirements of Rule 11-02 of Regulation S-X; and (D) proved the arithmetic accuracy of the application of the pro forma adjustments to the historical amounts in the Pro Forma Financial Information; and on the basis of such procedures and such other inquiries and procedures as specified herein, nothing came to our attention that caused us to believe that the Pro Forma Financial Information included in the Registration Statement does not comply as to form in all material respects with the applicable requirements of Rule 11-02 of Regulation S-X or that the pro forma adjustments have not been properly applied to the historical amounts in the compilation of those statements. (vii) In addition to the procedures referred to in clause (iii) above, we have performed other procedures, not constituting an audit, with respect to certain amounts, percentages, numerical data and financial information appearing in the Registration Statement, which are 2 specified herein, and have compared certain of such items with, and have found such items to be in agreement with, the accounting and financial records of the Company. 3 EXHIBIT C-2 FORM OF COMFORT LETTER OF PRICE WATERHOUSE LLP PURSUANT TO SECTION 5(f) (i) We are independent public accountants with respect to the Company and its predecessors within the meaning of the 1933 Act and the applicable published 1933 Act Regulations. (ii) In our opinion, the audited financial statements and the related financial statement schedules of The Knoll Group, Inc. included in the Registration Statement and the Prospectuses comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the published rules and regulations thereunder. (iii) In addition, we have performed other procedures, not constituting an audit, with respect to certain amounts, percentages, numerical data and financial information appearing in the Registration Statement, which are specified herein, and have compared certain of such items with, and have found such items to be in agreement with, the accounting and financial records of the Company. 1 EX-5 4 FORM OF OPINION OF WILKIE FARR & GALLAGHER EXHIBIT 5 May , 1997 Knoll, Inc. 1235 Water Street East Greenville, Pennsylvania 18041 Ladies and Gentlemen: We have acted as counsel to Knoll, Inc. (the "Company"), a corporation organized under the laws of the State of Delaware, in connection with the preparation of a Registration Statement on Form S-1 (Registration No. 333-23399) (as amended, the "Registration Statement") relating to the offer and sale of up to 9,200,000 shares of the common stock of the Company, par value $.01 per share, including 1,200,000 shares of common stock which are subject to the underwriters' over- allotment options (the "Shares"). We have examined copies of the Amended and Restated Certificate of Incorporation and By-Laws of the Company, the Registration Statement, all resolutions adopted by the Company's Board of Directors and other records and documents that we have deemed necessary for the purpose of this opinion. We have also examined such other documents, papers, statutes and authorities as we have deemed necessary to form a basis for the opinion hereinafter expressed. In our examination, we have assumed the genuineness of all signatures and the conformity to original documents of all copies submitted to us. As to various questions of fact material to our opinion, we have relied on statements and certificates of officers and representatives of the Company and public officials. Based on the foregoing, we are of the opinion that: (1) the Company has duly organized and is validly existing as a corporation in good standing under the laws of the State of Delaware; and (2) the Shares, when duly sold, issued and paid for in accordance with the terms of the Prospectus included as part of the Registration Statement, will be Knoll, Inc. May , 1997 Page 2 duly authorized and validly issued and will be fully paid and nonassessable. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to us in the Prospectus included as part of the Registration Statement. Very truly yours, EX-11 5 STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11 KNOLL, INC. STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
PRO FORMA PRO FORMA TEN MONTHS PRO FORMA THREE MONTHS THREE MONTHS ONE MONTH ENDED YEAR ENDED ENDED ENDED ENDED DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31, MARCH 31, 1996 1996 1996 1996 1997 -------------- ------------ ------------ ------------ ------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) Net income before extraordinary item (a).................... $ 449 $21,995 $21,743 $ 197 $11,638 Extraordinary loss on early extinguishment of debt................... -- (5,159) -- -- -- ------- ------- ------- ------- ------- Net income (b).......... $ 449 $16,836 21,743 197 11,638 ======= ======= Adjustment of interest expense for assumed repayment of debt net of tax effect.......... 4,409 1,102 1,081 ------- ------- ------- Net income as adjusted before extraordinary item (c)............... $26,152 $ 1,299 $12,719 ======= ======= ======= Common stock outstanding during the period...... 2,323 2,323 2,323 2,323 2,323 Dilutive effect of stock options computed in accordance with the treasury stock method as required by SAB 83.. 95 95 95 95 95 Conversion of preferred shares into common shares upon completion of IPO................. 8,740 8,740 8,740 8,740 8,740 ------- ------- ------- ------- ------- 11,158 11,158 11,158 11,158 11,158 Adjust for 3.13943 for stock split............ 3.13943 3.13943 3.13943 3.13943 3.13943 ------- ------- ------- ------- ------- Pro forma weighted average number of common shares outstanding prior to shares issued in connection with IPO (d).................... 35,030 35,030 35,030 35,030 35,030 Shares issued in connection with the IPO.................... 8,000 8,000 8,000 8,000 8,000 ------- ------- ------- ------- ------- Pro forma weighted average number of common shares outstanding after shares issued in connection with IPO (e).................... 43,030 43,030 43,030 43,030 43,030 ======= ======= ======= ======= ======= Pro forma income before extraordinary item per share of Common Stock (a)/(d)................ $ .01 $.63 $.62 $.01 $.33 ======= ======= ======= ======= ======= Pro forma net income per share of Common Stock (b)/(d).......... $ .01 $.48 N/A N/A $.33 ======= ======= ======= ======= ======= Pro forma as adjusted income before extraordinary item per share of Common Stock (c)/(e)................ N/A N/A $.61 $.03 $.30 ======= ======= ======= ======= =======
EX-23.1 6 CONSENT OF PRICE WATERHOUSE EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form S-1 of Knoll, Inc. of our report dated January 15, 1996 relating to the consolidated financial statements of 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," "Summary Historical and Pro Forma Financial Information," and "Selected Financial Information" in such Prospectus. However, it should be noted that Price Waterhouse LLP has not prepared or certified such "Summary Historical and Pro Forma Financial Information" and "Selected Financial Data." /s/ Price Waterhouse LLP Price Waterhouse LLP 600 Grant Street Pittsburgh, Pennsylvania 15219 April 29, 1997 EX-23.2 7 CONSENT OF ERNST & YOUNG EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the references to our firm under the captions "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 the effective date of the registration statement) in the Registration Statement (Form S-1 No. 333- 23399) and related Prospectus of Knoll, Inc. dated April 30, 1997. Ernst & Young LLP Philadelphia, Pennsylvania The forgoing consent is in the form that will be signed upon the completion of the restatement of the capital accounts to effect the change in common and preferred stock described in Note 23 to the financial statements. /s/ Ernst & Young LLP Philadelphia, Pennsylvania April 30, 1997 -----END PRIVACY-ENHANCED MESSAGE-----