-----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, P8+DD/qqT91ycTaW0EwAuvXgXAXdX1MtXCJfKmwKfbI9BYMHu5WqxMkdpmRfSRLX HFgNUsPltbRMYemXgdapcA== 0000950130-97-001341.txt : 19970329 0000950130-97-001341.hdr.sgml : 19970329 ACCESSION NUMBER: 0000950130-97-001341 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: KNOLL INC CENTRAL INDEX KEY: 0001011570 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS FURNITURE & FIXTURES [2590] IRS NUMBER: 251648603 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 333-02972 FILM NUMBER: 97568054 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 10-K 1 FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 or [_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO Commission File No. 333-02972 KNOLL, INC. A Delaware Corporation I.R.S. Employer No. 13-3873847 1235 Water Street East Greenville, Pennsylvania 18041 Telephone Number (215) 679-7991 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] There is no public market for the voting stock of the Registrant. At March 27, 1997, 2,322,500 shares of the Registrant's common stock, par value $0.01 per share, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE None - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS GENERAL Knoll, Inc., a Delaware corporation, is the successor by merger to the business and operations of The Knoll Group, Inc. and related entities ("The Knoll Group"), which were acquired on February 29, 1996 (the "Acquisition") from Westinghouse Electric Corporation ("Westinghouse"). The Knoll Group was created by Westinghouse in 1989 and 1990, when it acquired The Shaw-Walker Company, Reff Inc. and Knoll International, Inc. and combined them with its Westinghouse Furniture Systems division. The Acquisition was completed by T.K.G. Acquisition Corp. ("TKG"), a corporation majority-owned by Warburg, Pincus Ventures, LLC ("Warburg") and whose other stockholders are NationsBanc Investment Corp. and members of Knoll's management. In the Acquisition, a wholly owned subsidiary of TKG acquired all of the outstanding capital stock of The Knoll Group and was merged, together with The Knoll Group, Inc. into a Knoll Group subsidiary which changed its name in the merger to "Knoll, Inc." On March 14, 1997, Knoll, Inc. was merged into TKG, which changed its name in the merger to "Knoll, Inc." Unless the context requires or specifies otherwise, the terms "Knoll" and the "Company" refer to Knoll, Inc., its subsidiaries and predecessor entities as a combined entity. The Company is engaged in the design, manufacture, and distribution of office furniture products and accessories, focusing on the middle to high end of the contract furniture market. The Company's principal executive offices are located at 1235 Water Street, East Greenville, Pennsylvania 18041, and its telephone number is (215) 679-7991. Except as otherwise indicated, the market and Company market share data contained in this Form 10-K are based on information from The Business and Institutional Furniture Manufacturer's Association ("BIFMA"), the United States office furniture trade association. The Company believes that such data are considered within the industry to be the best available and generally are indicative of the Company's relative market share and competitive position. INDUSTRY OVERVIEW 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 that can accommodate sophisticated technological demands. 1 The Company believes that fundamental shifts in the nature of corporate organizational structures, technology and work processes are driving growth in the office furniture industry. Companies increasingly use workplace design and furniture purchase decisions as catalysts for organizational and cultural change. Several significant factors that influence this change include: continued corporate reengineering, restructuring and reorganizing; corporate relocations; new office technology and the resulting necessity for improved wire and data management; and heightened sensitivity to concerns about ergonomic standards. 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. 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. 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. 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 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. Seating The Company believes that the office seating market includes three major segments: the "appearance," "comfort" and "basic" segments. The Company offers a complete line of seating in the appearance and comfort segments at various price, appearance, comfort and performance levels. The majority of sales in the U.S. seating market are made to the same customers as are the office systems sales. 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. These products consist of stand-alone metal filing, storage and desk products that integrate into and support the Company's systems sales. They also function as free-standing furniture in private offices or open-plan environments. These products support the Company's strategy of providing its customers with a one-stop source for office furniture and selling products to businesses whose office furniture systems are provided by its competitors. 2 Desks and Casegoods The Company's collections of stand-alone wood furniture items, such as desks, bookshelves and credenzas, are available in a range of designs and price points. These products combine contemporary styling with sophisticated workplace solutions and attract a wide variety of customers, from those conducting large office reconfigurations to small retail purchasers. Casegoods are part of the Company's strategy of being a one-stop source of quality office furniture. Tables The Company recently has expanded its offerings in the table category of the market with its innovative line of adjustable Interaction tables. Interaction tables are designed to be integrated into the Company's systems lines and to provide customers with ergonomically superior work surfaces. Additionally, these tables are often sold as stand-alone products to non-systems customers. In 1995, the Company introduced an award winning line of Propeller meeting and conference tables that provide advanced wire management and technology support while offering sufficient flexibility to allow end users to reconfigure a meeting room quickly and easily to accommodate their specific needs. KnollStudio The Company's historically significant KnollStudio collection serves the design-conscious segment of the fine furniture contract market, providing the architect and design community and customers with sophisticated furniture for high-profile office and home uses. KnollStudio provides a marketing umbrella for the full range of the Company's office products and is recognized as the "design engine" of the Company. KnollStudio products, including a wide variety of chairs and sofas, as well as conference, training, side and dining tables, were created by many of this century's most prominent architects and designers, such as Ludwig Mies van der Rohe, Marcel Breuer, Eero Saarinen and Frank Gehry, for prestigious corporate and residential interiors. This line includes complete collections by individual designers as well as distinctive single items. 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 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. 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. Leather. Spinneybeck Enterprises, Inc., a wholly owned subsidiary of the Company, supplies quality upholstery leather to the Company, to other furniture manufacturers and to aviation, custom coach and boating manufacturers. 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 3 fine furniture market; (iii) seating, including a comprehensive range of chairs such as Sapper, Bulldog, and Parachute; and (iv) cabinets, which are designed to complement its systems products. The Company also sells its products designed and manufactured in North America to the international operations of its core North American customers. PRODUCT DESIGN AND DEVELOPMENT Knoll's design philosophy is linked to its commitment to working with the world's preeminent designers to develop products that delight and inspire. The Company's collection of classic and current designs includes works by 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 the creative vision of architects and designers with a corporate commitment to products which address changing business needs, the Company seeks to launch new offerings which achieve recognition in the architect and design community and generate strong demand among corporate customers. 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. SALES AND DISTRIBUTION 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. 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. 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. In addition, the Company has two plants in Italy: one in Foligno and one in Graffignana. In 1994, all of the Company's plants were awarded registration to ISO 9000, an internationally developed set of manufacturing facility quality criteria. 4 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. In the United States, where the Company had a 5.8% market share and derived approximately 86% of its sales in 1996, five companies (including the Company) represent approximately 59% of the market. 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., Herman Miller, Inc., Haworth, Inc. and HON Industries, Inc. 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. 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 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 87 active United States utility patents on various components used in its products and systems and approximately 115 active United States design patents. The Company also has approximately 200 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 of the Company. The Company considers securing and protecting its intellectual property rights to be important to its business. BACKLOG The Company's backlog of unfilled orders was $94.1 million at December 31, 1996 and $70.8 million at December 31, 1995. 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 time is approximately five weeks. As a result, backlog is not a significant factor used to predict the Company's long-term business prospects. FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES For information regarding foreign and domestic operations and exports sales, refer to Note 21 (Business Segment and Geographical Region Information) of the Notes to the Consolidated Financial Statements beginning on page F-26. 5 ENVIRONMENTAL MATTERS The Company believes that it is substantially in compliance with all applicable laws and regulations for the protection of the environment and the health and safety of its employees based upon existing facts known to management. Compliance with federal, state, local and foreign environmental regulations relating to the discharge of substances into the environment, the disposal of hazardous wastes and other related activities has had and will continue to have an impact on the operations of the Company, but has, since the formation of Knoll in 1990, been accomplished without having a material adverse effect on the operations of the Company. There can be no assurance that such regulations will not change in the future or that the Company will not incur material costs as a result of such regulations. While it is difficult to estimate the timing and ultimate costs to be incurred due to uncertainties about the status of laws, regulations and technology, management presently has no planned expenditures of significant amounts for future environmental compliance. The Company has trained staff responsible for monitoring compliance with environmental, health and safety requirements. The Company's ultimate goal is to reduce and, wherever possible, eliminate the creation of hazardous waste in its manufacturing processes. The Company has been identified as a potentially responsible party pursuant to the Comprehensive Environmental Response Compensation and Liability Act ("CERCLA") for remediation costs associated with waste disposal sites previously used by the Company. CERCLA imposes liability without regard to fault or the legality of the disposal. The remediation costs at the CERCLA sites are unknown; however, the Company does not expect its liability to be material. At each of the sites, the Company is one of many potentially responsible parties and expects to have only a small percentage of liability. At some of the sites, the Company expects to qualify as a de minimis or de micromis contributor, eligible for a cash-out settlement. In addition, Westinghouse has agreed to indemnify the Company for certain costs associated with CERCLA liabilities known as of the date of the Acquisition. EMPLOYEES 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. ITEM 2. 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 East Greenville facility 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 and one approximately 274,000 square foot plant in Muskegon, Michigan. 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 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 Company's existing bank credit facilities (the "Credit Facilities"). 6 The Company owns two manufacturing facilities in Italy: an approximately 258,000 square foot building in Foligno, which houses the Knoll Europe headquarters, and an approximately 110,000 square foot building in Graffignana. The Company believes that its plants and other facilities are sufficient for its needs for the foreseeable future. ITEM 3. 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On October 16, 1996 and March 4, 1997, by written consents of the Company's majority stockholder in actions taken without a meeting, amendments to and restatements of the Company's certificate of incorporation were approved and adopted. On February 14, 1997, by written consent of the Company's majority stockholder in an action taken without a meeting, the Knoll, Inc. 1997 Stock Incentive Plan (the "1997 Stock Plan") was approved and adopted. 7 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION AND DIVIDEND POLICY (a) There is no established public trading market for the Company's common stock, par value $0.01 per share (the "Common Stock"). (b) At March 27, 1997, there were 39 holders of record of the Company's Common Stock. (c) 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 (the "Indenture") relating to the Company's 10 7/8% Senior Subordinated Notes (the "Notes") 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. On March 14, 1997, the Company filed a registration statement on Form S-1 with the Securities and Exchange Commission in anticipation of possible public offerings of Common Stock (the "Offerings"). Application will be made for listing the Common Stock on the New York Stock Exchange. However, there is no assurance that an active trading market for the Common Stock will develop or be sustained. RECENT SALES OF UNREGISTERED SECURITIES On February 29, 1996 and October 21, 1996, Warburg, NationsBanc Investment Corp. and certain members of management purchased an aggregate of 1,002,500 shares of the Common Stock and 1,602,997 shares of Series A 12% Participating Convertible Preferred Stock, par value $1.00 per share (the "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. For a description of the conversion feature of Series A Preferred Stock, see Note 11 (Preferred Stock) of the Notes to the Consolidated Financial Statements appearing on page F-17. On February 29, 1996, in connection with the Acquisition, the Company sold $165 million aggregate principal amount of the 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 1,320,000 shares of Common Stock, respectively, pursuant to the Knoll, Inc. 1996 Stock Incentive Plan (the "1996 Stock Plan", and together with the 1997 Stock Plan, the "Stock Plans"). These shares vest over periods determined at their date of grant. 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 180,000 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. Such grants were made in reliance on the exemption from registration pursuant to Section 4(2) of the Securities Act. Options to purchase 240,000 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. Such grants were made in reliance on the exemption from registration pursuant to Section 4(2) of the Securities Act. 8 ITEM 6. SELECTED FINANCIAL DATA The following table presents (i) selected historical consolidated financial information of the Company's predecessor (the "Predecessor"), as of the dates and for the periods indicated, (ii) selected historical consolidated financial information of the Company, as of the date and for the period indicated and (iii) summary pro forma consolidated financial information of the Company, as of the dates and for the periods indicated, after giving effect to the events described in the notes below. 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 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 date and for the period indicated. The summary pro forma information does not purport to represent what the Company's results actually would have been if such events had occurred at the dates indicated, nor does such information purport to project the results of the Company for any future period. The selected financial information should be read in conjunction with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Item 8, "Financial Statements and Supplementary Data."
PREDECESSOR THE COMPANY ---------------------------------------------------- --------------------------------------- PRO FORMA YEAR TWO MONTHS TEN MONTHS ENDED YEAR ENDED DECEMBER 31, ENDED ENDED DECEMBER 31, -------------------------------------- FEBRUARY 29, DECEMBER 31, ------------------ 1992 1993 1994 1995 1996 1996 1995(1) 1996(1) -------- -------- -------- -------- ------------ ------------ -------- -------- (IN THOUSANDS) INCOME STATEMENT DATA Total sales............. $576,621 $508,383 $562,869 $620,892 $ 90,232 $561,534 $620,892 $651,766 Cost of sales(2)........ 417,213 376,875 410,104 417,632 59,714 358,841 425,327 419,908 -------- -------- -------- -------- -------- -------- -------- -------- Gross profit............ 159,408 131,508 152,765 203,260 30,518 202,693 195,565 231,858 Provision for restructuring.......... 26,000 6,165 29,180 -- -- -- -- -- Selling, general and administrative expenses(3)............ 165,913 163,015 167,238 138,527 21,256 131,349 142,582 153,388 Westinghouse long-term incentive compensation(4)........ -- -- -- -- 47,900 -- -- -- Allocated corporate expenses(2)(3)......... 5,036 4,899 5,881 9,528 921 -- 4,000 -- -------- -------- -------- -------- -------- -------- -------- -------- Operating income (loss)................. (37,541) (42,571) (49,534) 55,205 (39,559) 71,344 48,983 78,470 Interest expense........ 3,866 3,301 3,225 1,430 340 32,952 40,945 40,030 Other income (expense), net.................... (929) 2,082 699 (1,597) (296) 447 (1,597) 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 6,441 38,591 Income tax expense (benefit).............. (4,795) (3,571) 7,713 22,846 (16,107) 16,844 2,705 16,848 -------- -------- -------- -------- -------- -------- -------- -------- 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 3,736 21,743 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 3,736 21,743 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 $ 3,736 $ 21,743 ======== ======== ======== ======== ======== ======== ======== ========
9
PREDECESSOR THE COMPANY ------------------------------- ------------ DECEMBER 31, ------------------------------- DECEMBER 31, 1992 1993 1994 1995 1996 ------- ------- ------- ------- ------------ (IN THOUSANDS) BALANCE SHEET DATA (AT PERIOD END): Working capital................... $67,063 $41,933 $22,898 $82,698 $64,754 Total assets...................... 726,469 691,043 705,316 656,710 675,712 Total long-term debt, including current portion.................. 16,623 12,215 12,451 3,538 354,154 Total liabilities................. 186,347 205,104 247,310 176,259 497,908 Stockholders' equity.............. 540,122 485,939 458,006 480,451 177,804
- -------- (1) Reflects summary pro forma financial information of the Company derived from the Financial Statements and notes thereto included elsewhere in this Form 10-K, 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) Cost of sales has been increased by (i) $4,158 in pro forma 1995 and $801 in pro forma 1996 to reflect an increase in amortization and depreciation resulting from the Acquisition, (ii) $450 in pro forma 1995 to reflect the sale of inventory acquired as part of the Acquisition and (iii) $3,087 in pro forma 1995 and $552 in pro forma 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. (3) Selling, general and administrative expenses have been increased by (i) $2,441 in pro forma 1995 and $369 in pro forma 1996 to reflect the reclassification of allocated corporate expenses which approximate the replacement cost to the Company (described above in note 2) and (ii) $1,614 in pro forma 1995 and $414 in pro forma 1996 to reflect an increase in amortization and depreciation resulting from the Acquisition. (4) Westinghouse long-term incentive compensation has been eliminated in pro forma 1996. Such compensation became payable from Westinghouse, and the amounts payable were established, as a result of consummation of the Acquisition. (5) The pro forma 1996 income statement data presented does not include the $5,159 extraordinary loss on early extinguishment of debt, net of taxes. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the Company's historical and pro forma results of operations and of its liquidity and capital resources should be read in conjunction with Item 6, "Selected Financial Data" and Item 8, "Financial Statements and Supplementary Data." 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 this Form 10-K, the income tax expense and other tax-related items included in the financial statements are presented as if the Predecessor had been a stand-alone taxpayer. BACKGROUND Westinghouse created The Knoll Group by acquiring The Shaw-Walker Company, Reff Inc. and Knoll International, Inc. in 1989 and 1990 and combining them with Westinghouse Furniture Systems, a division of Westinghouse. By joining these four separate companies under the Knoll name, Westinghouse created a business with a full line of office furnishings, a reputation for high quality and superior design, and an internationally recognized brand name. 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 10 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 approximately 95% in the fourth quarter of 1996. Management renewed sales growth by refocusing and retraining the Company's sales force, and instituted product line profitability measures and management incentive programs. Finally, management accelerated the development of new and enhanced products and restructured the European business. The Company believes that its recent sales growth exceeded industry growth as a whole. According to BIFMA, U.S. furniture industry shipments have increased at a compound annual growth rate of 4.3% over the ten-year period ended December 31, 1996. 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. 11 The Company believes that it is well-positioned for growth in sales and profitability. 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 PRODUCT CATEGORY SIZE U.S. 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 The following table summarizes the Company's results of operations on a pro forma basis for both 1995 and 1996 and as a percentage of net sales as if the Acquisition had been consummated at the beginning of each period.
PRO FORMA --------------------------- YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, 1995 1996 ------------- ------------ (DOLLARS IN MILLIONS) Total sales............. $620.9 100.0% $651.8 100.0% Cost of sales........... 425.3 68.5 419.9 64.4 ------ ----- ------ ----- Gross profit............ 195.6 31.5 231.9 35.6 Selling, general and administrative expenses............... 142.6 23.0 153.4 23.6 Allocated corporate expenses............... 4.0 0.6 -- -- ------ ----- ------ ----- Operating income........ 49.0 7.9 78.5 12.0 Interest expense........ 41.0 6.6 40.0 6.1 Other income (expense), net.................... (1.6) (0.3) 0.1 -- ------ ----- ------ ----- Income before income taxes and extraordinary item................... 6.4 1.0 38.6 5.9 Income tax expense...... 2.7 0.4 16.9 2.6 ------ ----- ------ ----- Income before extraordinary item..... $ 3.7 0.6% $ 21.7 3.3% ====== ===== ====== =====
COMPARISON OF PRO FORMA YEAR ENDED DECEMBER 31, 1996 TO PRO FORMA 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 (10.8%) and $3.1 million (5.7%), respectively. This growth is attributable to product enhancements in all categories as well as 12 continued growth from new product introductions. The 1996 sales increase of continued product was $41.3 million (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, increasing $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 (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. Interest expense. Interest expense decreased for the year ended December 31, 1996 from 1995 due to the prepayment of $72.0 million of indebtedness under the Credit Facilities. Income tax expense. Income tax expense for the year ended December 31, 1996 was 43.8% of pre-tax income as compared to 42.2% in 1995. The increase in the effective tax rate is primarily the result of increased earnings for 1996 in foreign countries with effective tax rates higher than those present in the United States. 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 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 13 to the higher sales volume, better pricing, discontinuance of lower profit product lines, factory operating cost improvements, and cost reductions realized from closing the Company's Legnano, Italy factory and consolidating its Muskegon, Michigan operations. As a result, gross profit as a percentage of sales increased to 32.7% for the year ended December 31, 1995 from 27.1% for the year ended December 31, 1994. Restructuring provision. The Company's restructuring provision of $29.2 million for the year ended December 31, 1994 includes costs associated with the factory closing and consolidation referred to above, lease cancellations, product discontinuations and employee separation costs associated with initiatives implemented by management in the turnaround program that commenced in early 1994. Selling, general and administrative expenses. Selling, general and administrative expenses were $138.5 million for the year ended December 31, 1995, representing a decrease of $28.7 million, or 17.2%, from $167.2 million for the year ended December 31, 1994. This decrease is primarily attributable to the cost reductions and improved operating efficiencies derived from consolidating and centralizing human resources, finance, purchasing and logistics, order entry and customer service, and management information systems operations at one facility, as well as from reducing marketing and selling expenses associated with showroom and sales office consolidations and eliminations. As a percentage of sales, selling, general and administrative expenses improved to 22.3% for the year ended December 31, 1995 from 29.7% for the year ended December 31, 1994. Allocated corporate expenses. Allocated corporate expenses, which include Westinghouse overhead charges for Westinghouse executive management and corporate legal, environmental, audit, tax, treasury, and other related services, were $9.5 million for the year ended December 31, 1995, an increase of $3.6 million, or 61.0%, from $5.9 million for the year ended December 31, 1994. Allocated corporate expenses for 1995 include approximately $4.0 million of long-term incentive compensation payable to Knoll executives. These allocated corporate expenses, which are payable by Westinghouse and "pushed down" to Knoll from Westinghouse, are allocated primarily based on sales, with the exception of the incentive compensation, and are not necessarily indicative of actual or future costs. Operating income (loss). Operating income increased to $55.2 million for the year ended December 31, 1995, representing an increase of $104.7 million, as compared to a loss of $49.5 million for the year ended December 31, 1994. As a percentage of total sales, operating income (loss) increased to 8.9% for the year ended 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. 14 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. If the Offerings are completed as contemplated, the Company will reduce outstanding indebtedness, which will partly reduce the Company's interest expense. 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 commencing 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. In addition to the Credit Facilities, in connection with the Acquisition the Company also issued $165 million aggregate principal amount of the Notes. 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. If the Offerings are completed as contemplated, the Company will redeem up to $57.8 million aggregate principal amount of the Notes with the net proceeds of the Offerings. 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 million at any one time. As of December 31, 1996, the Company's total credit available under such facilities was approximately $9.7 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 $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 $15.0 million for the ten months ended December 31, 1996, $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). 15 Cash provided by (used in) financing activities totaled $(73.2) 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 $73.2 million used by the Company in its financing activities during the ten months ended December 31, 1996 included $72.0 million for the prepayment of indebtedness under the Credit Facilities. The Company uses interest rate collar agreements in order to manage its exposure to fluctuations in interest rates on its floating rate debt. At December 31, 1996, the Company had five outstanding interest rate collar agreements with a total notional principal amount of $185 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 $70 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. In addition, Westinghouse has agreed to indemnify the Company for certain costs associated with CERCLA liabilities known as of the date of the Acquisition. 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. BACKLOG The Company's backlog of unfilled orders was $94.1 million at December 31, 1996 and $70.8 million at December 31, 1995. 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 time is approximately five weeks. As a result, backlog is not a significant factor used to predict the Company's long-term business prospects. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of the Company and supplementary data are filed under this Item, beginning on page F-1 of this Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 16 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 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 Senior Vice President and Chief Douglas J. Purdom................... 38 Financial Officer Barbara E. Ellixson................. 43 Vice President--Human Resources Vice President, Controller and Barry L. McCabe..................... 50 Treasurer Vice President, General Counsel and Patrick A. Milberger................ 40 Secretary Jeffrey A. Harris................... 41 Director Sidney Lapidus...................... 59 Director Kewsong Lee......................... 31 Director John L. Vogelstein.................. 62 Director
Burton B. Staniar was appointed Chairman of the Board of the Company in December 1993 to effect the restructuring of the Company and restore it to profitability. Mr. Staniar served as Chief Executive Officer of the Company from December 1993 to January 1997. Prior to that time, Mr. Staniar had held a number of assignments at Westinghouse, including President of Group W Cable and Chairman and Chief Executive Officer of Westinghouse Broadcasting. Prior to joining Westinghouse in 1980, he held a number of marketing and general management positions at Colgate Palmolive and Church and Dwight Co., Inc. John H. Lynch joined the Company as President and Vice Chairman of the Board in April 1994 and was elected Chief Executive Officer in January 1997. Prior to joining the Company, Mr. Lynch was a partner in BGI, a consulting company, and 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. 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. 17 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 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 was an Assistant General Counsel at Westinghouse and 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. 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 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 p1c., Golden Books Family Entertainment, Inc., 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 Series A Preferred Stock. If the Offerings are completed as contemplated, 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 of the Company. 18 ITEM 11. EXECUTIVE COMPENSATION 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").
ANNUAL LONG-TERM COMPENSATION COMPENSATION ------------ ------------ RESTRICTED NAME AND PRINCIPAL STOCK ALL OTHER POSITION YEAR SALARY($) BONUS($) AWARDS($)(1) COMPENSATION($)(2) ------------------ ---- --------- -------- ------------ ------------------ Burton B. Staniar....... 1996 410,830 600,000 30,000 5,595 Chairman of the Board 1995 465,000 350,000 -- 4,500 John H. Lynch........... 1996 393,330 600,000 30,000 9,449 Vice Chairman of the 1995 360,000 360,000 -- 6,075 Board, President and Chief Executive Officer Andrew B. Cogan......... 1996 197,930 250,000 12,000 -- Senior Vice President-- 1995 187,620 187,000 -- -- Marketing and Product Development Kathleen G. Bradley..... 1996 197,050 250,000 6,000 4,328 Senior Vice President-- 1995 163,668 256,740 -- 4,755 Sales, Distribution and Customer Service Wolfgang Billstein...... 1996 396,000 572,836 -- -- Managing Director-- 1995 360,000 653,100 -- -- Knoll Europe
- -------- (1) On February 29, 1996, Messrs. Staniar, Lynch and Cogan and Ms. Bradley were granted 300,000, 300,000, 120,000 and 60,000 shares of restricted stock, respectively. Holders of shares of restricted stock will not be entitled to receive dividends until such shares vest and become unrestricted. As of March 1, 1997, 40% of the grants of restricted stock to each of Messrs. Staniar, Lynch and Cogan had vested and an additional 20% will vest on each of the next three anniversaries thereof. As to Ms. Bradley, 20% of the grants of restricted stock vested on March 1, 1997 and an additional 20% will vest on each of the next four anniversaries thereof. The value of the shares listed above is based on the fair value thereof on the date of grant, based on the price of the shares of Common Stock sold in conjunction with the Acquisition. (2) Amounts in this column represent the Company's matching contributions to the Knoll, Inc. Retirement Savings Plan. PENSION PLANS Retirement benefits are provided to employees through two pension plans. Prior to the purchase of the Company from Westinghouse, benefits were provided under The Knoll Group Pension Plan which was retained by Westinghouse (the "Westinghouse Pension Plan"). Effective March 1, 1996, the Company established the Knoll, Inc. Pension Plan (the "Company Pension Plan"). The Westinghouse Pension Plan provides eligible employees with retirement benefits based on a career average compensation formula. The formula for computing normal retirement benefits under this plan is 1.45% of career compensation divided by twelve. Once a participant accumulates 5 years of vesting service, he or she can take early retirement anytime after reaching age 55. Accrued normal retirement benefit is reduced 6% per year prior to normal retirement age. The minimum benefit earned for any year of participation in the plan is $300 ($25 per month), prorated for the partial years worked during the first and last years of employment. The estimated annual benefits payable upon normal retirement under this plan for each of the named executive officers is as follows: Staniar ($0); Lynch ($4,712); Bradley ($24,648); and Cogan ($16,500). Mr. Billstein has never participated in the Westinghouse Pension Plan. 19 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 "Code"). 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 Directors do not receive compensation for service on the Company's Board of Directors but are reimbursed for certain expenses in connection with attendance at Board and committee meetings. 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 the first anniversary of the Acquisition closing, subject to automatic one-year extensions unless either party gives 60 days notice not to renew. The agreements with Messrs. Staniar and Lynch provide for a base salary of $400,000, with a service bonus of 25% of base salary at the end of each calendar year, and an annual bonus of up to 125% of base salary based on the attainment of targets set by the Board of Directors. The agreement with Mr. Cogan provides for a base salary of $200,000 and an annual bonus of up to 100% of base salary based on the attainment of targets set by the Board of Directors. The agreements may be terminated at any time by the Company, but if so terminated without "cause," or if the Company fails to renew the agreements, the Company must pay the employee 125% of one year's base salary (100% of base salary in the case of Mr. Cogan). The agreements also contain non-compete 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, 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 plus a portion of Mr. Billstein's incentive compensation. STOCK INCENTIVE PLANS Under the 1996 Stock Plan, 1,500,000 shares of the Common Stock were reserved for issuance pursuant to grants of restricted shares or options to purchase shares to officers, key employees, directors and consultants of 20 Knoll and its subsidiaries selected for participation in the 1996 Stock Plan. The Company has issued all 1,500,000 shares of restricted shares and options to acquire shares pursuant to the 1996 Stock Plan. On February 14, 1997 Knoll adopted the 1997 Stock Plan. 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 400,000 shares of the Common Stock 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 240,000 options to acquire 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. 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 of Common Stock 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. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Company currently does not have a Compensation Committee. During the fiscal 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. 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 fiscal 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. 21 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth the ownership of the Common Stock and Series A Prefered Stock of the Company as of March 27, 1997, of (i) each person known by the Company to own beneficially more than 5% of the outstanding shares of Common Stock or Series A Preferred Stock, (ii) each director and named executive officer of the Company and (iii) all current directors and executive officers of the Company as a group.
NUMBER OF SHARES OF NAME AND ADDRESS OF SERIES A PREFERRED NUMBER OF SHARES OF % OF EACH CLASS BENEFICIAL OWNER STOCK (1) COMMON STOCK (1) OUTSTANDING ------------------- ------------------- ------------------- --------------- Warburg, Pincus Ventures, LLC (2)....... 1,469,081 918,750 91.6%/65.1% 466 Lexington Avenue New York, NY 10017 Burton B. Staniar....... 20,507 132,825 1.3/9.4 John H. Lynch........... 20,507 132,825 1.3/9.4 Wolfgang Billstein...... 320 200 */* Kathleen G. Bradley..... 640 12,400 */* Andrew B. Cogan......... 3,998 50,500 */3.6 John L. Vogelstein (3).. 1,469,081 918,750 91.6/65.1 Sidney Lapidus (3)...... 1,469,081 918,750 91.6/65.1 Jeffrey A. Harris (3)... 1,469,081 918,750 91.6/65.1 Kewsong Lee (3)......... 1,469,081 918,750 91.6/65.1 All executive officers and directors as a group (14 persons)..... 1,520,969 1,269,200 94.8%/89.9%
- -------- * 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 of the Company 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. (2) The sole general partner of 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 l6a-1 under the Securities Exchange Act of 1934) in an indeterminate portion of the shares beneficially owned by Warburg. See Note 3 below. (3) 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 2 above. 22 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS THE ACQUISITION On February 29, 1996, pursuant to the 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 Investment Corp. and certain members of the Company's management 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 Warburg, NationsBanc Investment Corp. and senior management of the Company. 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 Investment Corp. purchased $8 million and Warburg purchased $147 million. The equity consisted of 1,002,500 shares of common stock, sold for $100,250, and 1,602,997 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 Investment Corp. and certain 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 Series A Preferred Stock ("Registrable Securities") held by such Holders (other than shares acquired pursuant to the Stock Plans). The following description of the Stockholders Agreement is qualified in its entirety by reference to the Stockholders Agreement (Common Stock and Preferred Stock), which is filed as an exhibit to this Form 10-K. 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 or Series A Preferred Stock, subject to certain conditions. If officers or directors of the Company holding other securities of the Company request inclusion of their securities in any such registration, or if holders of securities of the Company other than Registrable Securities who are entitled, by contract with the Company or otherwise, to have securities included in such a registration (the "Other Stockholders"), request such inclusion, the Holders shall offer to include the securities of such officers, directors and Other Stockholders in any underwriting involved in such registration, provided, among other conditions, that the underwriter representative of any such offering has the right, subject to certain conditions, to limit the number of Registrable Securities included in the registration. The Company may defer the registration for 120 days if it believes that it would be seriously detrimental to the Company for such registration statement to be filed. The Stockholders Agreement further provides that, if the Company proposes to register any of its securities (other than registrations related solely to employee benefit plans or pursuant to Rule 145 or on a form which does not permit secondary sales or does not include substantially the same information as would be required to be included in a registration statement covering the sale of Registrable Securities), either for its own account or for the account of other security holders, holders of Registrable Securities may require the Company to include all or a portion of their Registrable Securities in the registration and in any underwriting involved therein, 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 23 Holders) will be borne by the Company. The registration rights described above apply to 1,002,500 shares of Common Stock and 1,602,997 shares of Series A Preferred Stock held by the Holders. 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 have agreed to vote their shares of Common Stock for four directors nominated by Warburg if Warburg owns 50% or more of the Company's outstanding shares of Common Stock and Series A Preferred Stock, three directors if it owns 25% or more, two directors if it owns 15% or more and one director if it owns 5% or more. ISSUANCE OF RESTRICTED SHARES OF COMMON STOCK In connection with the issuance of 1,320,000 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 a public offering of Common Stock, upon 30 days prior written notice to the Board of Directors. The restrictions on transfer terminate after a public offering of Common Stock when Warburg owns less than 10% of the outstanding shares of Common Stock and less than 10% of the outstanding shares of Series A 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. 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 300,000 restricted shares, John Lynch received 300,000 restricted shares, Andrew Cogan received 120,000 restricted shares and Kathleen Bradley received 60,000 restricted shares. The agreements were dated February 29, 1996 and the shares vested at a rate of 20% per year, commencing on the date of grant (in the case of Messrs. Staniar, Lynch and Cogan) or on the first anniversary of the date of grant. The agreements provide that upon the voluntary termination of employment for reasons other than death, disability or retirement at age 65, or if the grantee's employment was terminated without cause, the nonvested restricted shares were to be immediately forfeited to the Company. Upon termination with cause, the agreements provide (i) in the case of Messrs. Staniar and Lynch, for the immediate forfeiture of all restricted shares, regardless of whether vested prior to termination, and (ii) that the Company may repurchase the shares of Common Stock at $0.10 per share. OTHER During 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. 24 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as part of the report: (1) CONSOLIDATED FINANCIAL STATEMENTS. The Consolidated Financial Statements of the Company are listed in the Index to Financial Statements beginning on page F-1 of this Form 10-K. (2) FINANCIAL STATEMENT SCHEDULES. Financial Statement Schedule II-Valuation and Qualifying Accounts is filed with this Form 10-K beginning on page S-1 of this Form 10-K preceding the exhibits. All other schedules for which provision is made in the applicable regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. (3) EXHIBITS.
EXHIBIT NO. DESCRIPTION ------- ----------- 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 --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 and 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. (Incorporated herein by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-4, Registration No. 333-2972.) 4.2 --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. (Incorporated herein by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-4, Registration No. 333- 2972.) 4.3 --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. 4.4 --Credit Agreement, dated as of February 29, 1996, by and among T.K.G. Acquisition Sub, Inc., the Guarantors (as defined therein), NationsBank, N.A., Chemical Bank and other lending institutions. (Incorporated herein by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-4, Registration No. 333-2972.) 4.5 --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. (Incorporated herein by reference to Exhibit 4.4 to the Company's Registration Statement on Form S-4, Registration No. 333-2972.)
25
EXHIBIT NO. DESCRIPTION ------- ----------- 4.6 --Registration Rights Agreement, dated as of February 29, 1996, by and among T.K.G. Acquisition Sub, Inc., The Knoll Group, Inc., Knoll North America, Inc., the Guarantors (as defined therein) and NationsBanc Capital Markets, Inc., as initial purchaser. (Incorporated herein by reference to Exhibit 4.5 to the Company's Registration Statement on Form S-4, Registration No. 333-2972.) 10.1 --Stock Purchase Agreement, dated as of December 20, 1995, by and between Westinghouse and TKG. (Incorporated herein by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-4, Registration No. 333-2972.) 10.2 --Knoll, Inc. 1996 Stock Incentive Plan. (Incorporated herein by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-4, Registration No. 333-2972.) 10.3 --Employment Agreement, dated as of February 29, 1996, between T.K.G. Acquisition Corp. and Burton B. Staniar. 10.4 --Employment Agreement, dated as of February 29, 1996, between T.K.G. Acquisition Corp. and John H. Lynch. 10.5 --Employment Agreement dated as of February 29, 1996, between T.K.G. Acquisition Corp. and Andrew B. Cogan. 10.6 --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. 10.7 --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. 10.8 --Knoll, Inc. 1997 Stock Incentive Plan. 10.9 --Consulting Agreement, dated as of December 1, 1996, between Wolfgang Billstein and Knoll, Inc. 21 --Subsidiaries of the Registrant. 27 --Financial Data Schedule.
(b) REPORTS ON FORM 8-K The Company did not file any reports on Form 8-K during the last quarter of the year ended December 31, 1996. 26 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT ON FORM 10-K TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, THIS 28TH DAY OF MARCH, 1997. KNOLL, INC. /s/ Burton B. Staniar By:__________________________________ BURTON B. STANIAR CHAIRMAN OF THE BOARD PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT ON FORM 10-K HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATE(S) INDICATED. /s/ Burton B. Staniar Chairman of the March 28, 1997 - ------------------------------------- Board BURTON B. STANIAR /s/ John H. Lynch President, Chief March 28, 1997 - ------------------------------------- Executive Officer JOHN H. LYNCH and Director (Principal Executive Officer) /s/ Douglas J. Purdom Chief Financial March 28, 1997 - ------------------------------------- Officer (Principal DOUGLAS J. PURDOM Financial Officer) /s/ Barry L. McCabe Controller March 28, 1997 - ------------------------------------- (Principal BARRY L. MCCABE Accounting Officer) /s/ Andrew B. Cogan Director March 28, 1997 - ------------------------------------- ANDREW B. COGAN /s/ Jeffrey A. Harris Director March 28, 1997 - ------------------------------------- JEFFREY A. HARRIS /s/ Sidney Lapidus Director March 28, 1997 - ------------------------------------- SIDNEY LAPIDUS /s/ Kewsong Lee Director March 28, 1997 - ------------------------------------- KEWSONG LEE /s/ John L. Vogelstein Director March 28, 1997 - ------------------------------------- JOHN L. VOGELSTEIN 27 SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT. No annual report or proxy material has been sent to security holders of the Company. 28 KNOLL, INC. INDEX TO FINANCIAL STATEMENTS HISTORICAL PAGE ---- Reports of Independent Auditors........................................... F-2 Consolidated Balance Sheets at December 31, 1996 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
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 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the 1996 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Knoll, Inc. at December 31, 1996, and the consolidated results of its operations and its cash flows for the post-acquisition period in conformity with generally accepted accounting principles. Further, in our opinion, the aforementioned Predecessor consolidated financial statements present fairly, in all material respects, the consolidated results of operations and cash flows of the Knoll Group, Inc. for the pre-acquisition period in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic 1996 financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Philadelphia, Pennsylvania March 14, 1997 F-2 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Knoll, Inc. In our opinion, the consolidated financial statements listed in the Index appearing under Item 14(a)(1) and (2) 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 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, 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. We have not audited the consolidated financial statements of The Knoll Group, Inc. for any period subsequent to December 31, 1995. 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
THE KNOLL GROUP, INC. (PREDECESSOR) DECEMBER 31, DECEMBER 31, 1996 1995 ------------ --------------------- (IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents................. $ 8,804 $ 1,569 Customer receivables, net................. 111,166 114,592 Inventories............................... 57,811 59,643 Deferred income taxes..................... 17,474 18,273 Prepaid and other current assets.......... 7,424 8,465 -------- -------- Total current assets.................... 202,679 202,542 Property, plant, and equipment.............. 176,218 164,633 Intangible assets........................... 286,940 240,772 Prepaid pension cost........................ -- 45,161 Other noncurrent assets..................... 9,875 3,602 -------- -------- Total Assets............................ $675,712 $656,710 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term debt........................... $ -- $ 1,496 Current maturities of long-term debt...... 23,265 3,287 Accounts payable--trade................... 50,250 45,850 Accounts payable--related parties......... -- 413 Income taxes payable...................... 388 13,973 Accrued restructuring costs............... 1,979 10,868 Other current liabilities................. 62,043 43,957 -------- -------- Total current liabilities............... 137,925 119,844 Long-term debt.............................. 330,889 251 Deferred income taxes....................... 1,931 29,574 Postretirement benefits obligation.......... 15,873 20,593 Other noncurrent liabilities................ 11,290 5,997 -------- -------- Total liabilities....................... 497,908 176,259 -------- -------- Stockholders' equity: Preferred stock; $1.00 par value; authorized 3,000,000 shares, issued and outstanding 1,602,997 shares of Series A 12% Participating Convertible Preferred Stock (liquidation preference of $160,299,700)............................ 1,603 -- Common stock, $.01 par value; authorized 24,000,000 shares; issued and outstanding 2,322,500 shares......................... 23 -- Additional paid-in-capital................ 158,906 -- Unearned stock grant compensation......... (96) -- Retained earnings......................... 16,836 -- Parent company investment................. -- 503,317 Cumulative foreign currency translation adjustment............................... 532 (22,866) -------- -------- Total stockholders' equity.............. 177,804 480,451 -------- -------- Total Liabilities and Stockholders' Equity................................. $675,712 $656,710 ======== ========
See accompanying notes to the consolidated financial statements. F-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) 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) ======== ======== =========== ===========
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) 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 Capital expenditures..... (15,255) (2,296) (19,334) (20,157) Proceeds from sale of assets.................. 218 -- 316 332 --------- --------- ----------- ------------ Cash used in investing activities.............. (15,037) (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.................... 190,000 -- -- -- Repayment of long-term debt.................... (262,130) -- (8,913) (2,753) Additional equity contribution............ 400 -- -- -- Net receipts from (payments to) parent company................. -- 60,848 (6,900) 33,836 --------- --------- ----------- ------------ Cash provided by (used in) financing activities.............. (73,213) 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............. 1,270 766 (3,915) 2,720 Cash and cash equivalents at beginning of period.. 7,534 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) PREFERRED STOCK Balance at beginning of period (1,599,000 shares)....... $ 1,599 $ -- $ -- $ -- Shares issued (3,997 shares).................. 4 -- -- -- --------- --------- ----------- ----------- Balance at end of period.. 1,603 -- -- -- --------- --------- ----------- ----------- COMMON STOCK Balance at beginning of period (1,000,000 shares)....... 10 -- -- -- Shares issued under the Stock Incentive Plan (1,320,000 shares)....... 13 -- -- -- --------- --------- ----------- ----------- Balance at end of period.. 23 -- -- -- --------- --------- ----------- ----------- ADDITIONAL PAID-IN-CAPITAL Balance at beginning of period................... 158,391 -- -- -- Shares issued............. 396 -- -- -- Shares issued under the Stock Incentive Plan..... 119 -- -- -- --------- --------- ----------- ----------- Balance at end of period.. 158,906 -- -- -- --------- --------- ----------- ----------- UNEARNED STOCK GRANT COMPENSATION Balance at beginning of period................... -- -- -- -- Shares issued under the Stock Incentive Plan..... (132) -- -- -- Earned stock grant compensation............. 36 -- -- -- --------- --------- ----------- ----------- Balance at end of period.. (96) -- -- -- --------- --------- ----------- ----------- 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, patents and 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 patents 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. F-9 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 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. 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. 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 F-10 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 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. F-11 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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, 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. F-12 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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) 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) 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) Goodwill.................................. $ 62,627 $277,833 Patents and 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) 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) 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) 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) 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) 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. 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 1,500,000 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 1,320,000 restricted common shares, with a fair market value of $.10 per share, to key employees. Of such amount, 720,000 of these restricted common shares vest ratably over five years beginning on the grant date, while the other 600,000 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. No options were granted during the ten month period ended December 31, 1996. The remaining 180,000 shares available under the 1996 Plan were granted in the form of options on March 7, 1997. 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 400,000 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 240,000 options to purchase shares under the 1997 Plan. 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 February 29, 1996 and $58,090,000 and $56,142,000 for the years ended December 31, 1995 and 1994, F-27 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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) 1996 Net sales................. $ 90,232 $ 48,080 $166,520 $ 167,184 $179,750 Gross profit.............. 30,518 15,537 58,574 61,046 67,536 Income (loss) before ex- traordinary item......... (24,088) 449 7,527 7,685 6,334 Net income (loss)......... (24,088) 449 7,527 7,685 1,175 PREDECESSOR ---------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ----------- --------- -------- --------- (DOLLARS IN THOUSANDS) 1995 Net sales................. $147,410 $159,352 $155,055 $159,075 Gross profit.............. 42,919 50,279 54,829 55,233 Net income................ 1,216 5,945 12,174 9,997
Results for 1996 and 1995 have been restated to reflect the reclassification of certain expenses, principally product development, from cost of sales to selling, general and administrative expenses as compared to previously reported results. During the quarter ended December 31, 1996, the Company recorded a loss on the early extinguishment of debt amounting to $8,542,000 pre-tax, $5,159,000 after-tax. The loss consisted of the write-off of unamortized deferred financing fees. 23. SUBSEQUENT EVENT On March 14, 1997, the Company filed a registration statement on Form S-1 with the Securities and Exchange Commission in anticipation of possible public offerings of common stock. If the public offerings are completed, the net proceeds will be used to reacquire a portion of Series A Preferred Stock, to redeem up to $57.8 million of the 10.875% senior subordinated notes, to repay indebtedness under the Company's term and revolving loans, and to fund general working capital needs or retire additional debt. 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. F-28 KNOLL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) These Guarantors will irrevocably and unconditionally, jointly and severally, guarantee the performance and payment in full 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 wholly owned subsidiaries accounted for on the equity method. The condensed consolidating financial statements should be read in connection with the consolidated financial statements of the Company. Separate financial statements of the Guarantors are not presented because the Guarantors are jointly, severally and unconditionally liable under the guarantees, and the Company believes the condensed consolidating financial statements presented are more meaningful in understanding the financial position of the Guarantors. F-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.......... 23 -- -- -- -- 23 Additional paid-in- capital.............. 172,585 4,033 14,034 43,999 (75,745) 158,906 Unearned stock grant compensation......... (96) -- -- -- -- (96) 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 Capital expenditures.... $(12,531) $ (134) $ -- $ (2,590) $ -- $(15,255) Proceeds from sale of assets................. 43 -- -- 175 -- 218 -------- ------ ----- -------- ----- -------- Cash used in investing activities............. (12,488) (134) -- (2,415) -- (15,037) CASH FLOWS FROM FINANCING ACTIVITIES Repayment of short-term debt, net.............. -- -- -- (1,483) -- (1,483) Repayment of long-term debt, net.............. (72,000) -- -- (130) -- (72,130) Additional equity contribution........... 400 -- -- -- -- 400 Net receipts from (payments to) parent company................ (120) -- -- 120 -- -- -------- ------ ----- -------- ----- -------- Cash used in financing activities............. (71,720) -- -- (1,493) -- (73,213) Effect of exchange rate changes on cash and cash equivalents....... -- -- -- 18 -- 18 -------- ------ ----- -------- ----- -------- Increase (decrease) in cash and cash equivalents............ (5,319) 265 -- 6,324 -- 1,270 Cash and cash equivalents at beginning of period.... 5,360 2 -- 2,172 -- 7,534 -------- ------ ----- -------- ----- -------- 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 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E -------- -------- -------- -------- -------- ADDITIONS BALANCE CHARGED TO BALANCE AT BEGINNING COSTS AND AT END DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS(1) OF 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. S-1 EX-3.1 2 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION EXHIBIT 3.1 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF T.K.G. ACQUISITION CORP. It is hereby certified that: The present name of the corporation (hereinafter called the "Corporation") is T.K.G. Acquisition Corp. The date of filing of the original Certificate of Incorporation of the Corporation with the Secretary of State of the State of Delaware was December 15, 1995. This Amended and Restated Certificate of Incorporation has been duly adopted in accordance with Sections 228, 242 and 245 of the General Corporation Law of the State of Delaware. The majority stockholder has consented in writing to the adoption of this Amended and Restated Certificate of Incorporation. The text of the certificate of incorporation of the Corporation as amended hereby is restated to read in its entirety as follows: AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF T.K.G. ACQUISITION CORP. * * * * * * * FIRST: The name of the corporation (the "Corporation") is T.K.G. ----------- ACQUISITION CORP. SECOND: The address of the registered office of the Corporation in the State of Delaware is Corporation Trust Company, 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of its registered agent at such address is The Corporation Trust Company. THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware as now in effect or as hereafter amended. FOURTH: The total number of shares of stock which the Corporation shall have authority to issue is 27,000,000 shares, consisting of (i) 24,000,000 shares of common stock, par value $0.01 per share ("Common Stock"), and (ii) ------------ 3,000,000 shares of preferred stock, par value $1.00 per share (the "Preferred --------- Stock"), of which 1,920,000 shares shall be designated as "Series A 12% - ----- Participating Convertible Preferred Stock" (the "Series A Preferred Stock"). ------------------------ The Preferred Stock may be issued from time to time in one or more series. The Board of Directors of the Corporation (the "Board of Directors") is expressly ------------------ authorized at any time, and from time to time, to provide for the issuance of shares of Preferred Stock in one or more series, for such consideration (not less than its par value) and with the designations, powers, preferences and relative, participating, optional or other special rights, and the qualifications, limitations, or restrictions thereof, as shall be determined by the Board of Directors and fixed by resolution or resolutions adopted by the Board of Directors providing for the number of shares in each such series. The Common Stock and Series A Preferred Stock shall have the designations, powers, preferences and relative, participating, optional or other special rights, and the qualifications, limitations, or restrictions thereof, as hereinafter set forth in this Article FOURTH. The ability of the Corporation to issue shares of its capital stock shall be subject to the subscription rights of certain stockholders of the Corporation set forth in Section 1(d) of that certain Stockholders Agreement (Common Stock and Preferred Stock), dated as of February 29, 1996, by and among the Corporation, Warburg, Pincus Ventures, L.P. ("Warburg") and certain other stockholders of the Corporation, as the same may ------- be amended from time to time. (A) COMMON STOCK. ------------ (1) Dividends. The holders of Common Stock shall be entitled to --------- receive, when and as declared, out of assets and funds legally available therefor, cash or non-cash dividends payable as and when the Board of Directors in its sole business judgment so declares. Any such dividend shall be payable ratably to all record holders of Common Stock as of the record date fixed by the Board of Directors in accordance with the By-Laws of the Corporation for the payment thereof. (2) Liquidation Rights. In the event of any voluntary or ------------------ involuntary liquidation, dissolution or winding up of the Corporation ("Liquidation"), the holders of Common Stock then outstanding shall be ------------- entitled to be paid ratably out of the assets and funds of the Corporation available for distribution to its stockholders, after and subject to the payment in full of all amounts required to be distributed to the holders of any Preferred Stock upon Liquidation, an amount equal to their share (including any declared but unpaid dividends on the Common Stock, subject to proportionate adjustment in the event of any stock dividend, stock split, stock distribution or combination with respect to such shares) of such assets and funds. (3) Voting. ------ (a) Except as required by law, as may be limited in the T.K.G. Acquisition Corp. 1996 Stock Incentive Plan (the "Stock Plan") or any other ---------- incentive plan established for the directors or employees of the Corporation or any of its subsidiaries, or as otherwise provided herein or in any amendment hereof, the entire voting power of the Corporation shall be vested in the holders of the Common Stock and Series A Preferred Stock voting together as a single class. (b) Each holder of Common Stock entitled to vote shall at every meeting of the stockholders of the Corporation be entitled to one vote for each share of Common Stock registered in his or her name on the record of stockholders. Prior to the Conversion Date (as defined herein), each holder of Series A Preferred Stock entitled to vote shall at every meeting of the stockholders of the Corporation be entitled to one thousand votes for each share of Series A Preferred Stock registered in his or her name on the record of stockholders. From and after the Conversion -2- Date, each holder of Series A Preferred Stock entitled to vote shall at every meeting of the stockholders of the Corporation be entitled to the number of votes equal to the number of shares of Common Stock into which each share of Series A Preferred Stock would have been convertible at the Conversion Date (assuming all outstanding shares of Series A Preferred Stock were converted) for each share of Series A Preferred Stock registered in his or her name on the record of stockholders. (c) Without first obtaining the affirmative vote or written consent of a majority of the stockholders of the Corporation, the Corporation shall not amend the Stock Plan, adopt any other incentive plan that provides for the grant or sale of shares of the Corporation's capital stock or securities convertible or exchangeable therefor or issue any shares of the Corporation's capital stock or securities convertible or exchangeable therefor. (B) SERIES A PREFERRED STOCK. ------------------------ (1) Dividends. (a) The holders of Series A Preferred Stock --------- shall be entitled to receive, when and as declared, out of funds legally available therefor, dividends at the rate of $12.00 per annum, payable as the Board of Directors may determine, before any dividends or other amounts shall be set apart for or paid upon the Common Stock in any year. All dividends declared upon the Series A Preferred Stock shall be declared pro rata per share. (b) Dividends on the Series A Preferred Stock shall be fully cumulative, whether or not in any fiscal year there shall be net profits or surplus available for the payment of dividends in such fiscal year, so that if in any fiscal year or years dividends in whole or in part are not paid upon the Series A Preferred Stock, unpaid dividends shall accumulate and be compounded quarterly. Dividends on the Series A Preferred Stock shall accrue on a quarterly basis. Notwithstanding the foregoing, no dividends on any shares of Series A Preferred Stock shall be declared after the Conversion Date or shall accrue from and after such date. (c) Notwithstanding Section (A)(1) of this Article FOURTH, for so long as dividends on the Series A Preferred Stock are accrued and unpaid, the Corporation shall not pay any dividend upon the Common Stock, whether in cash or other property (other than Common Stock), or purchase, redeem or otherwise acquire any such Common Stock (other than redemptions or repurchases of any Common Stock held by employees of the Corporation or its subsidiaries, and then only upon such person's ceasing to be an employee of the Corporation or its subsidiaries, each in accordance with terms of any applicable agreement between the -3- Corporation or its subsidiaries and any such employee or the terms of any agreement or plan pursuant to which such Common Stock was issued). (2) Liquidation Rights. (a) In the event of Liquidation, the ------------------ holders of Series A Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders upon Liquidation, but before any payment shall be made to the holders of Common Stock, an amount equal to $100 per share plus any dividends thereon declared or accrued but unpaid (including as a result of quarterly compounding), subject to proportionate adjustment in the event of any stock dividend, stock split, stock distribution or combination with respect to such shares. (b) If upon Liquidation the remaining assets of the Corporation available for the distribution to its stockholders shall be insufficient to pay the holders of Series A Preferred Stock the full preferential amount set forth in paragraph (a) above, the holders of Series A Preferred Stock shall share ratably in any distribution of the remaining assets and funds of the Corporation in proportion to the respective amounts which would otherwise be payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to said shares were paid in full. (c) After the payment of all preferential amounts required to be paid to the holders of Series A Preferred Stock upon Liquidation, the holders of Common Stock then outstanding shall be entitled to receive the remaining assets and funds of the Corporation available for distribution to its stockholders, as provided in Section (A)(2) above. (d) The merger or consolidation of the Corporation into or with another corporation, the merger or consolidation of any other corporation into or with the Corporation, or the sale, conveyance, mortgage, pledge or lease of all or substantially all the assets of the Corporation shall not be deemed to be a Liquidation for purposes of this Section 3. (3) Voting. In addition to the voting rights of holders of ------ Series A Preferred Stock provided in Section A(3) above or as required by law, the Corporation shall not (and the holders of the Common Stock shall not cause the Corporation to), without first obtaining the affirmative vote or written consent of the holders of a majority of the outstanding Series A Preferred Stock: (a) amend or repeal any provision of the Corporation's Certificate of Incorporation or By-Laws; -4- (b) authorize or effect (i) any sale, lease, transfer or other disposition of all or substantially all the assets of the Corporation or of any assets of the Corporation not in the ordinary course of its business (including, without limitation, capital stock of or other ownership interests in any other entity); (ii) any merger or consolidation or other reorganization of the Corporation with or into another corporation, (iii) the acquisition by the Corporation of another corporation by means of a purchase of all or substantially all the assets of such corporation, or (iv) a liquidation, winding up or dissolution of the Corporation or adoption of any plan for the same; (c) employ or terminate the employment of the chief executive officer, chief financial officer or chief operating officer of the Corporation or any of its subsidiaries (or any person serving in any such capacity); or (d) amend the Stock Plan, adopt any other incentive plan that provides for the grant or sale of shares of the Corporation's capital stock or securities convertible or exchangeable therefor or issue any shares of the Corporation's capital stock or securities convertible or exchangeable therefor. (C) CONVERSION OF SERIES A PREFERRED STOCK. Each holder of -------------------------------------- Series A Preferred Stock shall be entitled to convert such Series A Preferred Stock into Common Stock upon the terms and subject to conditions hereinafter set forth in this Article FOURTH (C): (1) Conversion Decision. The holder or holders of a majority of ------------------- the outstanding Series A Preferred Stock, upon written notice to the Corporation, may elect (the "Conversion Decision") to cause all or a ------------------- portion of the shares of Series A Preferred Stock to be converted into shares of Common Stock and to determine the percentage of the shares of Series A Preferred Stock outstanding to be so converted (the "Conversion ---------- Percentage") as set forth herein. Such notice shall set forth the date (the ---------- "Conversion Date"), which shall not precede the date of the Conversion --------------- Decision nor be more than sixty days following such date and which may be conditioned on the occurrence of one or more events. Within five days following receipt of such notice, the Corporation shall notify all holders of Series A Preferred Stock of the Conversion Decision and the terms thereof, including the Conversion Percentage and the Conversion Date. Such notice shall be sent by overnight mail, postage prepaid, to each record holder of Series A Preferred Stock at such holder's address appearing on the stock register of the Corporation. Upon conversion of shares of Series A Preferred Stock on the Conversion Date, -5- the Series A Preferred Stock shall no longer be convertible into Common Stock or any other class of capital stock of the Corporation. Notwithstanding anything to the contrary contained herein, the holder or holders of a majority of the outstanding Series A Preferred Stock, upon written notice to the Corporation prior to the Conversion Date, may elect to revoke the Conversion Decision. Within five days following receipt of such notice, the Corporation shall notify all holders of Series A Preferred Stock of such revocation of the Conversion Decision. (2) Conversion of Shares. (a) On the Conversion Date, each share -------------------- of Series A Preferred Stock to be converted pursuant to Section (C)(1) above (the aggregate of such shares of Series A Preferred Stock being the "Aggregate Preferred Conversion Shares") shall be converted into that -------------------------------------- number of fully paid and nonassessable shares of Common Stock as shall be equal to the quotient of (x) the Aggregate Common Conversion Shares (as ------------ -- defined below) divided by (y) the Aggregate Preferred Conversion Shares; ------- provided, however, that if the Conversion Decision was made prior to March -------- ------- 1, 1998, then such number of fully paid and nonassessable shares of Common Stock shall be equal to the lesser of (i) the Ceiling Ratio (as defined --- ------ -- below) and (ii) the foregoing quotient. --- (b) For purposes of the foregoing conversion formula, (i) "Aggregate Common Conversion Shares" shall be equal to ---------------------------------- (NPF x GPS) ___________ - NPS 1 - NPF where GPS = the number of shares of Common Stock outstanding immediately prior to conversion that have been granted, whether vested or unvested, under the Stock Plan (also referred to herein as the "Granted Plan Shares"); ------------------- NPS = the number of shares of Common Stock issued and outstanding immediately prior to conversion other than Granted Plan Shares (also referred to herein as the "Non-Plan Shares"); --------------- and NPF = the Non-Plan Fraction (as defined below). -6- (ii) "Non-Plan Fraction" shall be equal to ----------------- P + (M x (E - P)) _________________ E where P = the sum of (x) the aggregate liquidation preference of the Aggregate Preferred Conversion Shares but not including any dividends declared or accrued thereon, less any dividends previously paid thereon, plus (y) the aggregate purchase ---- price paid for the Non-Plan Shares; M = 1 minus the product of .15 and the Granted Plan Shares ----- Percentage; and E = the fair market value of the Corporation (also referred to herein as the "Total Equity Value"), determined in good ------------------ faith by the Board of Directors; provided that the fair market value of the Corporation with respect to any Conversion Decision made in connection with an initial public offering of the Corporation's equity securities shall be determined by reference to the initial public offering price of such securities, net of any underwriting discounts or commissions. (iii) "Ceiling Ratio" shall be equal to ------------- (CRM x GPS) - ((1 - CRM) x NPS) ___________________________________________________ (1 - CRM) x (Aggregate Preferred Conversion Shares) where CRM = 1 minus the product of .10 and the ----- Granted Plan Shares Percentage. (iv) "Granted Plan Shares Percentage" shall be equal to the ------------------------------ quotient of (x) the Granted Plan Shares divided by (y) the sum of (a) -------- ------- the Granted Plan Shares and (b) the total number of shares of Common Stock available for future grant under the Stock Plan. (v) Notwithstanding anything in this Section (C)(2) of Article FOURTH to the contrary, shares of the Corporation's capital stock issued or issuable pursuant to the Corporation's 1997 Stock Incentive Plan shall be ignored for purposes of determining the number of Aggregate Common Conversion Shares and making the other calculations pursuant to such Section. -7- (c) If any fraction of a share of Common Stock would be issuable upon conversion of any Series A Preferred Stock, the Corporation may issue fractions of the shares of Common Stock, or in lieu thereof, pay to the person entitled thereto an amount in cash equal to the current value of such fraction, calculated to the nearest one-hundredth (1/100) of a share, to be computed (i) if the Common Stock is listed on any national securities exchange, on the basis of the last sales price per share of the Common Stock on such exchange (or the quoted closing bid price if there shall have been no sales) on the date of conversion, or (ii) if the Common Stock shall not be so listed, on the basis of the mean between the closing bid and asked prices per share for the Common Stock on the date of conversion as reported by NASDAQ, or its successor, and if there are not such closing bid and asked prices, on the basis of the fair market value per share as determined by the Board of Directors. (3) Conversion Procedure. -------------------- (a) On or after the Conversion Date, each holder of Series A Preferred Stock (i) shall surrender the certificate or certificates therefor to the principal office of the transfer agent for the Series A Preferred Stock (or if no transfer agent be at the time appointed, then to the Corporation at its principal office), and (ii) shall give written notice to the Corporation at such office of the name or names (with address) in which the certificate or certificates for Common Stock which shall be issuable on such conversion shall be issued, subject to any restrictions on transfer relating to shares of the Series A Preferred Stock or Common Stock upon conversion thereof. If so required by the Corporation, certificates surrendered for conversion shall be endorsed or accompanied by written instrument or instruments of transfer, in form satisfactory to the Corporation, duly authorized in writing. As soon as practicable after receipt of such notice and the surrender of the certificate or certificates for Series A Preferred Stock as aforesaid, the Corporation shall cause to be issued and delivered at such office to such holder, or on such holder's written order, a certificate or certificates for (i) the number of full shares of Common Stock issuable on such conversion of each holder's Conversion Percentage of his Series A Preferred Stock in accordance with the provisions hereof and fractional shares of Common Stock or cash as provided in Section (C)(2)(c) in respect of any fraction of a Common Stock otherwise issuable upon such conversion, and (ii) the number of shares of Series A Preferred Stock not being converted. The Corporation may legend or alter the form of the certificates for such shares of Series A Preferred Stock not being converted to reflect changes in the rights thereof as a result of the conversion. -8- (b) The Corporation shall at all times when Series A Preferred Stock shall be outstanding reserve and keep available out of its authorized but unissued stock, for the purposes of effecting the conversion of the Series A Preferred Stock, such number of shares of its duly authorized Common Stock as shall from time to time be sufficient to effect the conversion of all then outstanding Series A Preferred Stock. Notwithstanding the foregoing, for purposes of this Section (C) of Article FOURTH, the Corporation shall not be required to determine Total Equity Value except in connection with a Conversion Decision. (c) From and after the Conversion Date, all Series A Preferred Stock which shall have been surrendered for conversion and converted as herein provided shall no longer be deemed to be outstanding and all rights with respect to such shares, including the rights, if any, to receive notices and to vote, shall forthwith cease and terminate except only the right of the holder thereof to receive certificates representing Common Stock in exchange therefor and payment of any accrued and unpaid dividends upon such Common Stock. Any Series A Preferred Stock so converted shall be retired and canceled and shall not be reissued, and the Corporation may from time to time take such appropriate action as may be necessary to reduce the authorized Preferred Stock accordingly. FIFTH: The mailing address of the Corporation is as follows: c/o Warburg, Pincus Ventures, L.P. 466 Lexington Avenue New York, New York 10017 SIXTH: In furtherance and not in limitation of the powers conferred by statute, the by-laws of the Corporation may be made, altered, amended or repealed by the stockholders or by a majority of the entire Board of Directors. SEVENTH: Elections of directors need not be by written ballot. EIGHTH: 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 -9- 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. 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 EIGHTH. 3. Nonexclusivity of Provision. The indemnification and other rights --------------------------- set forth in this Article EIGHTH 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 ---------------- EIGHTH, subparagraph 1, 2, or 3, nor the adoption of any provision of this Certificate of Incorporation inconsistent with Article EIGHTH, subparagraph 1, 2, or 3, shall eliminate or reduce the effect of this Article EIGHTH, 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 EIGHTH, 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 -10- 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 of the filing of this Amended and Restated Certificate of Incorporation 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. NINTH: Whenever a compromise or arrangement is proposed between this Corporation and its creditors or any class of them and/or between this Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this Corporation or of any creditor or stockholder thereof on the application of any receiver or receivers appointed for this Corporation under the provisions of section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for the Corporation under the provisions of section 279 of Title 8 of the Delaware Code, order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of the Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this Corporation as consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of this Corporation, as the case may be, and also on this Corporation. -11- IN WITNESS WHEREOF, T.K.G. Acquisition Corp. has caused this Amended and Restated Certificate of Incorporation to be signed by Burton B. Staniar, its ----------------- Chairman of the Board, this 3rd day of March, 1997. - --------------------- --- /s/ Burton B. Staniar ____________________________ Name: Burton B. Staniar Title: Chairman of the Board -12- EX-3.2 3 CERTIFICATE OF OWNERSHIP & MERGER EXHIBIT 3.2 CERTIFICATE OF OWNERSHIP AND MERGER MERGING KNOLL, INC. WITH AND INTO T.K.G. ACQUISITION CORP. . T.K.G. Acquisition Corp., a corporation organized and existing under the laws of the State of Delaware (the "Company"), DOES HEREBY CERTIFY: FIRST: That the Company was incorporated on December 15, 1995, pursuant to the Delaware General Corporation Law (the "DGCL"), the provisions of which permit the merger of a subsidiary corporation organized and existing under the laws of said State into a parent corporation organized and existing under the laws of said State. SECOND: That the Company owns at least ninety percent (90%) of the outstanding shares of the Common Stock ("Common Stock"), par value $1.00 per share, of Knoll, Inc. ("Knoll"), a corporation incorporated on February 29, 1996, pursuant to the DGCL, as successor by merger to Knoll North America, Inc., a corporation incorporated on December 19, 1990, pursuant to the DGCL, and having no class of stock outstanding other than the Common Stock. THIRD: That the Company, by the following resolutions of its Board of Directors, duly adopted at a meeting held on March 13, 1997 and filed with the minutes of such Board, in accordance with Section 141(f) of the DGCL, determined to, and effective upon the filing of this Certificate of Ownership and Merger with the Secretary of State of the State of Delaware does, merge Knoll into the Company: WHEREAS, the Company is the legal and beneficial owner of at least ninety percent (90%) of the outstanding Common Stock; and WHEREAS, the only issued and outstanding class of stock of Knoll is the Common Stock; and WHEREAS, the Company desires to merge Knoll with and into the Company (the "Merger") pursuant to the provisions of Section 253 of the DGCL. NOW, THEREFORE, BE IT RESOLVED, that effective upon the filing of an appropriate Certificate of Ownership and Merger embodying these resolutions with the Secretary of State of Delaware (the "Effective Time"), Knoll hereby does merge with and into the Company; and be it FURTHER RESOLVED, that the terms and conditions of the Merger are as follows: 1. At the Effective Time, Knoll shall be merged into the Company in accordance with the DGCL, whereupon the separate existence of Knoll shall cease, and the Company shall be the surviving corporation (the "Surviving Corporation") and the Surviving Corporation shall be renamed "Knoll, Inc." At the Effective Time, the effect of the Merger shall be as provided in the applicable provisions of Delaware Law, including, without limitation, Section 259 of the DGCL. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time all the property, rights, privileges, powers and franchises of the Company and Knoll shall vest in the Surviving Corporation, and all debts, liabilities and duties of the Company and Knoll shall become the debts, liabilities and duties of the Surviving Corporation. 2. The Certificate of Incorporation of the Company, as in effect immediately before the Effective Time, shall be the Certificate of Incorporation of the Surviving Corporation (except that the name of the Surviving Corporation shall be "Knoll, Inc." as set forth above) until thereafter amended in accordance with applicable law and such Certificate of Incorporation. 3. The By-Laws of the Company, as in effect immediately before the Effective Time, shall be the By-Laws of the Surviving Corporation until thereafter amended in accordance with applicable law, the certificate of incorporation of the Surviving Corporation and such By-Laws. 4. At the Effective Time, the shares of common stock and preferred stock of the Company issued and outstanding prior to the Effective Time shall be converted into and become validly issued, fully paid and nonassessable shares -2- of common stock and preferred stock, respectively, of the Surviving Corporation, with the same rights and privileges in the Surviving Corporation as such shares of common stock and preferred stock, as applicable, held in the Company. Each certificate representing such shares of common stock and preferred stock of the Company issued prior to the Effective Time shall represent the same number of shares of common stock and preferred stock, as applicable, of the Surviving Corporation as stated thereon with respect of shares of such stock of the Company. 5. Each share of capital stock of Knoll immediately prior to the Effective Time shall be canceled and extinguished and no payment or other consideration shall be made with respect thereto. 6. The directors of the Company immediately before the Effective Time shall be the directors of the Surviving Corporation, and the officers of the Company immediately before the Effective Time shall be the officers of the Surviving Corporation, in each case until their successors are elected or appointed and qualified. If, at the Effective Time, a vacancy shall exist on the Board of Directors or in any office of the Surviving Corporation, such vacancy may thereafter be filled in the manner provided by law. FURTHER RESOLVED, that the Chairman, Vice Chairman, President or any Vice President of the Company be, and each of them hereby is, authorized to make, execute and deliver, and the Secretary or any Assistant Secretary of the Company, be, and each of them hereby is, authorized to attest, a Certificate of Ownership and Merger setting forth a copy of these resolutions providing for the Merger, and the date of adoption hereof, and to cause the same to be filed with the Secretary of State of the State of Delaware and a certified copy recorded in the office of the recorder of the county in the State of Delaware, in which the registered office of each of the Company and Knoll is located and to do all acts and things, whatsoever, whether within or without the State of Delaware, which may be in any way necessary or appropriate to effect said Merger or to give effect to he foregoing resolutions. -3- IN WITNESS WHEREOF, the Company has caused this Certificate to be signed by Douglas J. Purdom, its authorized officer, this 14th day of March, 1997. T.K.G. Acquisition Corp. By: /s/ Douglas J. Purdom ______________________ Title: Senior Vice President and Chief Financial Officer -4- EX-3.3 4 TKG ACQUISITION CORP BY-LAWS EXHIBIT 3.3 T.K.G. ACQUISITION CORP. Incorporated Under the Laws of the State of Delaware BY-LAWS ------- ARTICLE I OFFICES ------- The registered office of the Corporation in Delaware shall be at 1209 Orange Street in the City of Wilmington, County of New Castle, and The Corporation Trust Company will be the resident agent of the Corporation in charge thereof. The Corporation may also have such other offices at such other places, within or without the State of Delaware, as the Board of Directors may from time to time designate or the business of the Corporation may require. ARTICLE II STOCKHOLDERS ------------ Section 1. Annual Meeting. The annual meeting of stockholders for -------------- the election of directors and the transaction of any other business will be held on such day in March, in such city and state and at such time and place as may be designated by the Board of Directors and set forth in the notice of such meeting. At the annual meeting any business may be transacted and any corporate action may be taken, whether stated in the notice of meeting or not, except as otherwise expressly provided by statute or the Certificate of Incorporation. Section 2. Special Meetings. Special meetings of the stockholders ---------------- for any purpose may be called at any time by the Board of Directors, or by the President, and will be called by the President at the request of the holders of a majority of the outstanding shares of capital stock entitled to vote. Special meetings shall be held at such place or places within or without the State of Delaware as shall from time to time be designated by the Board of Directors and stated in the notice of such meeting. At a special meeting no business shall be transacted and no corporate action shall be taken other than that stated in the notice of the meeting. Section 3. Notice of Meetings. Written notice of the time and place ------------------ of any stockholders' meeting, whether annual or special, will be given to each stockholder entitled to vote at that meeting, by personal delivery or by mailing the same to him or her at his or her address as the same appears upon the records of the Corporation at least ten days but not more than sixty days before the day of the meeting. Notice of any adjourned meeting need not be given except by announcement at the meeting so adjourned, unless otherwise ordered in connection with such adjournment. Further notice, if any, will be given as may be required by law. Section 4. Quorum. Any number of stockholders, together holding at ------ least a majority of the capital stock of the Corporation issued and outstanding and entitled to vote, who will be present in person or represented by proxy at any meeting duly called, shall constitute a quorum for the transaction of all business, except as otherwise provided by law, by the Certificate of Incorporation or by these By-Laws. Section 5. Adjournment of Meetings. If less than a quorum is in ----------------------- attendance at the time for which a meeting is called, the meeting may adjourn by a majority vote of the stockholders present or represented by proxy and entitled to vote at the meeting, without notice other than announcement at such meeting, until a quorum is in attendance. Any meeting at which a quorum is present may also be adjourned in like manner and for the amount of time as may be determined by a majority vote of the stockholders present or represented by proxy and entitled to vote. At any adjourned meeting at which a quorum is present, any business may be transacted and any corporate action may be taken which might have been transacted at the meeting as originally called. Section 6. Voting List. The Secretary will prepare and make, at ----------- least ten days before every election of directors, a complete list of the stockholders entitled to vote, arranged in alphabetical order and showing the address of each stockholder and the number of shares of each stockholder. The list will be open at either (i) a place within the city where the meeting is to be held, which place shall be specified in the notice of such meeting, or (ii) if not so specified, at the place the meeting is to be held, for said ten days, as well as at the time and place of such meeting, and will be subject to the inspection of any stockholder. Section 7. Voting. Each stockholder entitled to vote at any meeting ------ may vote either in person or by proxy, but no proxy shall be voted on or after three years from its date, unless the proxy provides for a longer period. Each stockholder entitled to vote will at every meeting of the stockholders be entitled to one vote for each share of stock registered in his or her name on the record of stockholders. At all meetings of stockholders, all matters, except as otherwise provided by statute, will be determined by the affirmative vote of the majority of shares present in person or by proxy and entitled to vote on the subject matter. Voting at meetings of stockholders need not be by written ballot. -2- Section 8. Record Date of Stockholders. The Board of Directors is --------------------------- authorized to fix in advance a date not exceeding sixty days nor less than ten days preceding the date of any meeting of stockholders, or the date for the payment of any dividend, or the date for the allotment of rights, or the date when any change or conversion or exchange of capital stock will go into effect, or a date in connection with obtaining the consent of stockholders for any purpose, as a record date for the determination of the stockholders entitled to notice of, and to vote at, any meeting of stockholders, and any adjournment of a meeting of stockholders, or entitled to receive payment of any dividend, or to any allotment of rights, or to exercise the rights in respect of any change, conversion or exchange of capital stock, or to give consent. Only the stockholders that are stockholders of record on the date so fixed shall be entitled to notice of, and to vote at, the meeting of stockholders, and any adjournment of the meeting, or to receive payment of the dividend, or to receive the allotment of rights, or to exercise the rights, or to give the consent, as the case may be, notwithstanding any transfer of any stock on the books of the Corporation, after the record date fixed in accordance with this Section 8. Section 9. Action Without Meeting. Any action required or permitted ---------------------- to be taken at any annual or special meeting of stockholders may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken (i) is signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take the action at a meeting at which all shares entitled to vote on the action were present and voted and (ii) is delivered to the Corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent will be given to those stockholders who have not consented in writing. Section 10. Conduct of Meetings. The Chairman of the Board of ------------------- Directors, or in his absence the President or any Vice President designated by the Chairman of the Board, shall preside at all regular or special meetings of stockholders. To the maximum extent permitted by law, the presiding person will have the power to set procedural rules, including but not limited to rules respecting the time allotted to stockholders to speak, governing all aspects of the conduct of the meetings. The Secretary of the Corporation will act as secretary of each meeting. In the absence of the Secretary, the chairman of the -3- meeting will appoint any person to act as secretary of the meeting. ARTICLE III DIRECTORS --------- Section 1. Number and Qualifications. The Board of Directors will ------------------------- consist initially of two directors, and thereafter will consist of the number as may be fixed from time to time by resolution of the Board. The directors need not be stockholders. Section 2. Election of Directors. The directors will be elected by --------------------- the stockholders at the annual meeting of stockholders. Section 3. Duration of Office. The directors chosen at any annual ------------------ meeting will, except as otherwise provided in these By-Laws, hold office until the next annual election and until their successors are elected and qualify. Section 4. Removal and Resignation of Directors. Any director may be ------------------------------------ removed from the Board of Directors, with or without cause, by the holders of a majority of the shares of capital stock entitled to vote, either by written consent or consents or at any special meeting of the stockholders called for that purpose, and the office of a removed director will immediately become vacant. Any director may resign at any time. Such resignation will take effect at the time specified in the resignation, and if no time is specified, at the time of its receipt by the President or Secretary. The acceptance of a resignation will not be necessary to make it effective, unless so specified in the resignation. Section 5. Filling of Vacancies. Any vacancy among the directors, -------------------- occurring from any cause whatsoever, may be filled by a majority of the remaining directors, though less than a quorum, provided however, that the -------- ------- stockholders removing any director may at the same meeting fill the vacancy caused by the removal, and provided further, that if the directors fail to fill -------- ------- any vacancy, the stockholders may at any special meeting called for that purpose fill the vacancy. In case of any increase in the number of directors, the additional directors may be elected by the directors in office before the increase. Any person elected to fill a vacancy will hold office, subject to the right of removal as provided in these By-Laws, until the next annual election and until his successor is elected and qualified. Section 6. Regular Meetings. The Board of Directors will hold an ---------------- annual meeting for the purpose of organization -4- and the transaction of any business immediately after the annual meeting of the stockholders, provided a quorum of directors is present. Other regular meetings may be held at any time as may be determined from time to time by resolution of the Board of Directors. Section 7. Special Meetings. Special meetings of the Board of ---------------- Directors may be called by the Chairman of the Board of Directors or by the President. Section 8. Notice and Place of Meetings. Meetings of the Board of ---------------------------- Directors may be held at the principal office of the Corporation, or at any other place as is stated in the notice of such meeting. Notice of any special meeting, and except as the Board of Directors may otherwise determine by resolution, notice of any regular meeting, will be mailed to each director addressed to him or her at his residence or usual place of business at least two days before the day on which the meeting is to be held, or if sent to him or her at such place by telegraph, cable or facsimile, or delivered personally or by telephone, not later than the day before the day on which the meeting is to be held. No notice of the annual meeting of the Board of Directors will be required if it is held immediately after the annual meeting of the stockholders and if a quorum is present. Section 9. Business Transacted at Meetings, etc. Any business may be ------------------------------------- transacted and any corporate action may be taken at any regular or special meeting of the Board of Directors at which a quorum is present, whether the business or proposed action is stated in the notice of that meeting or not, unless special notice of such business or proposed action is required by statute. Section 10. Quorum. A majority of the Board of Directors at any time ------ in office will constitute a quorum. At any meeting at which a quorum is present, the vote of a majority of the members present will be the act of the Board of Directors unless the act of a greater number is specifically required by law or by the Certificate of Incorporation or these By-Laws. The members of the Board will act only as the Board and the individual members of the Board will not have any powers in their individual capacities. Section 11. Compensation. The directors will not receive any stated ------------ salary for their services as directors, but by resolution of the Board of Directors a fixed fee and expenses of attendance may be allowed for attendance at each meeting. Nothing herein contained shall preclude any director from serving the Corporation in any other capacity, as an officer, agent or otherwise, and receiving compensation therefor. Section 12. Action Without a Meeting. Any action required or ------------------------ permitted to be taken at any meeting of the Board of Directors, or of any committee of the Board of Directors, may be -5- taken without a meeting if all members of the Board or committee, as the case may be, consent to the action in writing, and the writing or writings are filed with the minutes of the proceedings of the Board or committee. Section 13. Meetings Through Use of Communications Equipment. ------------------------------------------------ Members of the Board of Directors, or any committee designated by the Board of Directors, will, except as otherwise provided by law, the Certificate of Incorporation or these By-Laws, have the power to participate in a meeting of the Board of Directors, or any committee, by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and this participation will constitute presence in person at the meeting. ARTICLE IV COMMITTEES ---------- Section 1. Executive Committee. The Board of Directors may, by ------------------- resolution passed by a majority of the entire Board, designate two or more of their number to constitute an Executive Committee to hold office at the pleasure of the Board, which Committee will, during the intervals between meetings of the Board of Directors, have and exercise all of the powers of the Board of Directors in the management of the business and affairs of the Corporation, subject only to restrictions or limitations as the Board of Directors may from time to time specify, or as limited by the Delaware Corporation Law, and will have power to authorize the seal of the Corporation to be affixed to all papers that may require it. Any member of the Executive Committee may be removed at any time, with or without cause, by a resolution of a majority of the entire Board of Directors. Any person ceasing to be a director shall ipso facto cease to be a ---- ----- member of the Executive Committee. Any vacancy in the Executive Committee occurring from any cause whatsoever may be filled from among the directors by a resolution of a majority of the entire Board of Directors. Section 2. Other Committees. Other committees, whose members need ---------------- not be directors, may be appointed by the Board of Directors or the Executive Committee, which committees shall hold office for an amount of time and have powers and perform duties as may from time to time be assigned to them by the Board of Directors or the Executive Committee. Any member of these committees may be removed at any time, with or without cause, by the Board of Directors or the Executive Committee. Any vacancy in a committee occurring from -6- any cause whatsoever may be filled by the Board of Directors or the Executive Committee. Section 3. Resignation. Any member of a committee may resign at any ----------- time. This resignation will be made in writing and will take effect at the time specified in the resignation, or, if no time is specified, at the time of its receipt by the President or Secretary. The acceptance of a resignation will not be necessary to make it effective unless so specified in the resignation. Section 4. Quorum. A majority of the members of a committee shall ------ constitute a quorum. The act of a majority of the members of a committee present at any meeting at which a quorum is present will be the act of the committee. The members of a committee will act only as a committee, and the individual members of the committee will not have any powers in their individual capacities. Section 5. Record of Proceedings, etc. Each committee will keep a --------------------------- record of its acts and proceedings, and will report the same to the Board of Directors when and as required by the Board of Directors. Section 6. Organization, Meetings, Notices, etc. A committee may ------------------------------------- hold its meetings at the principal office of the Corporation, or at any other place that a majority of the committee may at any time agree upon. Each committee may make rules as it deems expedient for the regulation and carrying on of its meetings and proceedings. Unless otherwise ordered by the Executive Committee, any notice of a meeting of a committee may be given by the Secretary of the Corporation or by the chairman of the committee and will be sufficient if mailed to each member at his residence or usual place of business at least two days before the day on which the meeting is to be held, or if sent to him or her at that place by telegraph, cable or facsimile, or delivered personally or by telephone not later than 24 hours before the time at which the meeting is to be held. Section 7. Compensation. The members of any committee will be ------------ entitled to such compensation as may be allowed them by resolution of the Board of Directors. ARTICLE V OFFICERS -------- Section 1. Number. The officers of the Corporation shall be a ------ Chairman of the Board, a Vice Chairman of the Board, a President, a Managing Director for European Operations, such number of Vice Presidents (including Executive and Senior Vice Presidents) as may from time to time be elected by the Board, a Controller, a Treasurer, one or more Assistant Treasurers, a Secretary, one or more Assistant Secretaries, and such other -7- officers as the Board may from time to time determine. Such other officers shall be elected or appointed in such manner, have such duties and hold their offices for such terms as may be determined by the Board of Directors. Section 2. Election, Term of Office and Qualifications. The officers ------------------------------------------- of the Corporation shall be elected annually by the Board of Directors and, except in the case of officers appointed in accordance with the provisions of Section 1 of this Article, each shall hold office until the next annual election of officers and until his successor shall have been duly chosen and shall qualify or until his earlier death, resignation or removal in the manner hereinafter provided. Section 3. Other Officers. Other officers, including one or more -------------- additional vice presidents, assistant secretaries or assistant treasurers, may from time to time be appointed by the Board of Directors, which other officers shall have powers and perform duties as may be assigned to them by the Board of Directors or the officer or committee appointing them. Section 4. Removal of Officers. Any officer of the Corporation may ------------------- be removed from office, with or without cause, by a vote of a majority of the Board of Directors. Section 5. Resignation. Any officer of the Corporation may resign at ----------- any time. This resignation shall be in writing and take effect at the time specified in the resignation, or if no time is specified, at the time of its receipt by the President or Secretary. The acceptance of a resignation shall not be necessary in order to make it effective, unless so specified in the resignation. Section 6. Filling of Vacancies. A vacancy in any office will be -------------------- filled by the Board of Directors or by the authority appointing the predecessor in such office. Section 7. Compensation. The compensation of the officers will be ------------ fixed by the Board of Directors, or by any committee upon whom power in that regard may be conferred by the Board of Directors. Section 8. Chairman of the Board. The Chairman of the Board shall --------------------- preside at all meetings of the stockholders and Board of Directors. He shall be ex-officio a member and chairman of all standing committees. He shall be the medium of communication to the Board and to the standing committees of all matters presented for their consideration, and have general charge of the affairs of the Corporation. Section 9. Vice Chairman of the Board. In the absence of the -------------------------- Chairman of the Board, the Vice Chairman of the Board shall preside at meetings of the stockholders and the Board of Directors. He shall advise and counsel with the President and -8- the Chairman of the Board and shall perform such other duties as may be requested by the Board of Directors, or as shall be jointly determined by the Chairman of the Board or the President and himself. Section 10. President. The President shall have, subject to the --------- direction and control of the Chairman of the Board, the Vice Chairman, and the Board, immediate supervision and control of the Corporation's business. He may sign, with any other proper officer of the Corporation thereunto authorized, certificates for stock of the Corporation. Subject to the Board, the Chairman of the Board and the Vice Chairman, he shall have and perform such other powers and duties as from time to time may be assigned or delegated to him by the Board, the Chairman of the Board or the Vice Chairman. Section 11. Managing Director for European Operations. The Managing ----------------------------------------- Director for European Operations, subject to the direction and control of the Board, the Chairman of the Board, the Vice Chairman of the Board and the President, shall have general charge of the European operations of the Corporation. Subject to the Board, the Chairman of the Board, the Vice Chairman of the Board and the President, he shall have and perform such powers and duties as from time to time may be assigned or delegated to him by the Board, the Chairman of the Board, the Vice Chairman of the Board or the President. Section 12. Vice Presidents. At the request of the President, or in --------------- his absence or inability to act, the Vice President or, if there be more than one, the Vice President designated by the Board, shall perform all the duties of the President and, when so acting, shall have all the powers of and be subject to all the restrictions placed upon the President. Each Vice President shall perform such duties as from time to time may be assigned to him by the Chairman of the Board, the Vice Chairman, the President or the Board. Except where by law the signature of the President is required, each of the Vice Presidents shall possess the same power as the President to sign all certificates, contracts, obligations and other instruments of the Corporation. Section 13. Controller. The Controller shall have general charge of ---------- the Accounting Department of the Corporation. He shall prescribe and supervise a system of accounting and internal auditing that shall be adopted and followed by the Corporation. He, or some other person or persons designated by name, in writing, by him, shall prepare and certify all vouchers and payrolls. The Controller shall, except as otherwise provided in this Section 9 or in Section 10 of this Article IV, sign all checks before they are presented to the Treasurer. The Controller may designate by name, in writing, one or more other persons, each of whom may sign checks for him and on his behalf. The Controller shall at the close of each month present for the information of the Board of Directors a complete statement of the -9- Corporation's financial affairs and of its operations for the preceding month and for the months elapsed from the commencement of the fiscal year. He shall also present a full statement of the properties owned and controlled by the Corporation, under appropriate headings as the Board of Directors may at any time require. He shall carefully preserve and keep in his custody in the office of the Corporation all contracts, leases, assignments and other valuable instruments of writing. He shall be charged with the duty of verification of all property of the Corporation and of its proprietary companies and the supervision of taking of all inventories. Section 14. Treasurer. The Treasurer shall have charge of all monies --------- and securities belonging to the Corporation. He shall deposit all monies received by him in the name and to the credit of the Corporation, in such bank or other place or places of deposit as the Board of Directors shall from time to time designate; and for that purpose shall have power to endorse for collection or payment all checks or other negotiable paper drawn payable to his order or to the order of the Corporation. He shall disburse the monies of the Corporation as directed by the Board, by checks which shall bear his signature as Treasurer, or that of an Assistant Treasurer, and also the signature of the Controller or some other person designated by name, in writing, by the Controller. The Treasurer may designate by name, in writing, one or more other persons, each of whom may sign checks for him and on his behalf. The Board of Directors may authorize the establishment of dividend, disbursing, petty cash and payroll accounts in such banks or other place or places of deposit as the Board of Directors may from time to time designate, and monies of the Corporation may be deposited in such accounts by checks signed as above provided in this Section 10. The Treasurer may designate by name, in writing, one or more persons each of whom may sign checks on any one or more of such accounts for him or on his behalf and, notwithstanding the foregoing provisions of Section 9 and of this Section 10, funds in any such account may be withdrawn or disbursed by checks bearing the single signature of a person so designated, or bearing the Treasurer's facsimile signature by a check-signing machine if authorized by the Treasurer in writing. The Treasurer shall execute a bond (in the penalty fixed by the Board, with such surety as the Board may approve) conditioned for the delivery to the President, or according to the order of the Board, in case of his decease, resignation or discharge, of all monies, bonds, evidences of debts, vouchers, accounts, books, writings and papers, and securities of any kind belonging to the Corporation received by him or in his possession, charge or custody, and for the faithful performance of all the duties of his office. Section 15. Secretary. The Secretary, if present, shall act as --------- secretary at all meetings of the Board and of the stockholders and keep the minutes thereof in a book or books to be provided for that purpose; shall see that all notices required to be given by the Corporation are duly given and served; shall -10- be custodian of the seal of the Corporation and shall affix the seal or cause it to be affixed on all certificates of stock of the Corporation and to all documents the execution of which on behalf of the Corporation under its seal shall be duly authorized in accordance with the provisions of these By-laws; shall have charge of the stock records of the Corporation; may sign, with any other proper officer of the Corporation thereunto authorized, certificates for stock of the Corporation; and in general, shall perform all the duties incident to the office of Secretary and such other duties as from time to time may be assigned to him by the President or the Board. Section 16. Assistant Controller, Assistant Secretary and Assistant ------------------------------------------------------- Treasurer. In the event of the absence or inability to serve of the Controller, - --------- an assistant controller shall perform all the duties of the Controller; in the event of the absence or inability to serve of the Secretary, an assistant secretary shall perform all the duties of the Secretary, and in the event of the absence or inability to serve of the Treasurer, an assistant treasurer shall perform all the duties of the Treasurer. ARTICLE VI CAPITAL STOCK ------------- Section 1. Issue of Certificates of Stock. Certificates of capital ------------------------------ stock will be in the form approved by the Board of Directors. The certificates will be numbered in the order of their issue and will be signed by the Chairman of the Board of Directors, the President or one of the Vice Presidents, and the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer, and the seal of the Corporation or a facsimile of the seal will be impressed or affixed or reproduced on the certificates, provided, however, that where the certificates are signed by a transfer agent or an assistant transfer agent or by a transfer clerk acting on behalf of the Corporation and a registrar, the signature of the Chairman of the Board of Directors, President, Vice President, Secretary, Assistant Secretary, Treasurer or Assistant Treasurer may be facsimile. In case any officer or officers who have signed, or whose facsimile signature or signatures have been used on any certificate or certificates ceases to be an officer of the Corporation, whether because of death, resignation or otherwise, before that certificate or certificates are delivered by the Corporation, that certificate or certificates may nevertheless be adopted by the Corporation and be issued and delivered as though the person or persons who signed that certificate or certificates, or whose facsimile signature or signatures is used thereon have not ceased to be an officer or officers of the Corporation. Section 2. Registration and Transfer of Shares. The name of each ----------------------------------- person owning a share of the capital stock of the -11- Corporation will be entered on the books of the Corporation together with the number of shares held by him or her, the numbers of the certificates covering the shares and the dates of issue of the certificates. The shares of stock of the Corporation will be transferable on the books of the Corporation by the holders of the shares in person, or by their duly authorized attorneys or legal representatives, on surrender and cancellation of certificates for a like number of shares, accompanied by an assignment or power of transfer endorsed thereon or attached thereto, duly executed, and with such proof of the authenticity of the signature as the Corporation or its agents may reasonably require. A record will be made of each transfer. The Board of Directors may make other rules and regulations concerning the transfer and registration of certificates for stock and may appoint a transfer agent or registrar or both and may require all certificates of stock to bear the signature of either or both. Section 3. Lost, Destroyed and Mutilated Certificates. The holder of ------------------------------------------ any stock of the Corporation will immediately notify the Corporation of any loss, theft, destruction or mutilation of the certificates. The Corporation may issue a new certificate of stock in the place of any certificate previously issued by it and alleged to have been lost, stolen or destroyed, and the Board of Directors may, in its discretion, require the owner of the lost, stolen or destroyed certificate, or his legal representatives, to give the Corporation a bond, in such sum not exceeding double the value of the stock and with such surety or sureties as they may require, to indemnify it against any claim that may be made against it by reason of the issue of the new certificate and against all other liability in the premises, or may remit the owner to any remedy or remedies he or she may have under the laws of the State of Delaware. ARTICLE VII DIVIDENDS, SURPLUS, ETC. ------------------------ Section 1. General Discretion of Directors. The Board of Directors ------------------------------- will have power to fix and vary the amount to be set aside or reserved as working capital of the Corporation, or as reserves, or for other proper purposes of the Corporation, and, subject to the requirements of the Certificate of Incorporation, to determine whether any part of the surplus or net profits of the Corporation will be declared as dividends and paid to the stockholders, and to fix the date or dates for the payment of dividends. -12- ARTICLE VIII MISCELLANEOUS PROVISIONS ------------------------ Section 1. Fiscal Year. The fiscal year of the Corporation will ----------- commence on the first day of January and end on the last day of December. Section 2. Corporate Seal. The corporate seal will be in the form -------------- approved by the Board of Directors and may be altered at their pleasure. The corporate seal may be used by causing it or a facsimile of the seal to be impressed or affixed or reproduced or otherwise. Section 3. Notices. Except as otherwise expressly provided, any ------- notice required to be given by these By-Laws will be sufficient if given by depositing the same in a post office or letter box in a sealed postpaid wrapper addressed to the person entitled to the notice at his address, as the same appears upon the books of the Corporation, or by telegraphing or cabling the same to that person at that address, or by facsimile transmission to a number designated upon the books of the Corporation, if any; and the notice will be deemed to be given at the time it is mailed, telegraphed or cabled, or sent by facsimile. Section 4. Waiver of Notice. Any stockholder or director may at any ---------------- time, by writing or by telegraph, cable or facsimile transmission, waive any notice required to be given under these By-Laws, and if any stockholder or director is present at any meeting his presence will constitute a waiver of notice. Section 5. Checks, Drafts, etc. All checks, drafts or other orders -------------------- for the payment of money, notes or other evidences of indebtedness issued in the name of the Corporation, will be signed by an officer or officers, agent or agents of the Corporation, and in such manner, as will from time to time be designated by resolution of the Board of Directors. Section 6. Deposits. All funds of the Corporation will be deposited -------- from time to time to the credit of the Corporation in a bank or banks, trust companies or other depositories as the Board of Directors may select, and, for the purpose of the deposit, checks, drafts, warrants and other orders for the payment of money which are payable to the order of the Corporation, may be endorsed for deposit, assigned and delivered by any officer of the Corporation, or by agents of the Corporation as the Board of Directors or the President may authorize for that purpose. Section 7. Voting Stock of Other Corporations. Except as otherwise ---------------------------------- ordered by the Board of Directors or the Executive Committee, the President or the Treasurer has full power and authority on behalf of the Corporation to attend and to act and to vote at any meeting of the stockholders of any corporation of -13- which the Corporation is a stockholder, and to execute a proxy to any other person to represent the Corporation at any meeting, and at any meeting of the stockholders of any corporation of which the Corporation is a stockholder. The President or the Treasurer or the holder of any proxy, as the case may be, will possess and may exercise any and all rights and powers incident to ownership of the stock which the Corporation might have possessed and exercised if present. The Board of Directors or the Executive Committee may from time to time confer like powers upon any other person or persons. Section 8. Indemnification of Officers and Directors. The ----------------------------------------- Corporation will indemnify any and all of its directors and officers, including former directors and officers, including those serving as an officer or director of any corporation at the request of this Corporation, to the fullest extent permitted under and in accordance with the laws of the State of Delaware. ARTICLE IX AMENDMENTS ---------- The Board of Directors will have the power to make, rescind, alter, amend and repeal these By-Laws, provided, however, that the stockholders will have power to rescind, alter, amend or repeal any by-laws made by the Board of Directors, and to enact by-laws that will not be rescinded, altered, amended or repealed by the Board of Directors. Notice of the proposal to make, amend or repeal any provision of these By-Laws will be included in the notice of any meeting of the stockholders or the Board of Directors at which the action is to be considered. No change of the time or place for the annual meeting of the stockholders for the election of directors will be made except in accordance with the laws of the State of Delaware. Dated: February 28, 1996 -14- EX-4.3 5 SUPPLEMENTAL INDENTURE EXHIBIT 4.3 THIS SUPPLEMENTAL INDENTURE No. 2 (the "Supplemental Indenture") dated as of March 14, 1997 among Knoll, Inc. (formerly T.K.G. Acquisition Corp.), a Delaware corporation, as successor (the "Successor") to Knoll, Inc., a Delaware corporation ("Old Knoll"), as the Company, Knoll Overseas, Inc., a Delaware corporation and Spinneybeck Enterprises, Inc., a New York corporation, (the "Guarantors"), and IBJ Schroder Bank & Trust Company, as Trustee. W I T N E S S E T H: WHEREAS, there has previously been executed and delivered to the Trustee an Indenture (the "Indenture") dated as of February 29, 1996 among T.K.G. Acquisition Sub, Inc., a Delaware corporation ("Sub"), as the Company, the Successor, the Guarantors, The Knoll Group, Inc., a Delaware corporation, and Knoll North America, Inc., a Delaware corporation, as guarantors and the Trustee, providing for the issuance of 10 7/8% Senior Subordinated Notes due 2006 (the "Notes"); WHEREAS, there has previously been executed and delivered to the Trustee Supplemental Indenture No. 1 dated as of February 29, 1996 among the Successor, Sub, Old Knoll, the Guarantors and the Trustee pursuant to which Old Knoll succeeded Sub as the Company; WHEREAS, pursuant to the terms of the Certificate of Ownership and Merger, dated as of March 14, 1997, by and between the Successor and Old Knoll, Old Knoll merged with and into the Successor with the Successor being the surviving entity and being renamed "Knoll, Inc." (the "Merger"); WHEREAS, the provision of clause (i)(a) of the definition of Change of Control in the Indenture expressly contemplates that the Successor and Old Knoll could merge pursuant to Section 5.01 of the Indenture; WHEREAS, the Successor is planning to effectuate an initial public offering of the shares of capital stock of the Successor following the Merger; WHEREAS, under the Indenture, the Successor, the Guarantors and the Trustee may enter into a supplemental indenture (i) to evidence the succession of another person to the Company and the assumption by such successor of the covenants of the Company contained in the Indenture and in the Notes and (ii) to cure any ambiguity therein, or to correct or supplement any provision thereof which may be inconsistent with any other provision thereof, provided that such actions do not adversely affect the legal rights of the Holder of Notes, which supplement, pursuant to Section 9.01 of the Indenture, does not require the consent of the Holders of Notes; WHEREAS, the Successor wishes by this Supplemental Indenture to evidence its succession to the Company and its assumption of the covenants of the Company contained in the Indenture and the Notes; and WHEREAS, all acts and proceedings required by law and by the Indenture to constitute this Supplemental Indenture a valid and binding agreement for the uses and purposes set forth herein, in accordance with its terms, have been done and taken, and the execution of this Supplemental Indenture have been in all respects duly authorized by the Successor and the Guarantors; NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt of which is hereby acknowledged, the Successor, the Guarantors and the Trustee hereby agree as follows: 1. The Successor hereby acknowledges and agrees that it has succeeded Old Knoll as the Company under the Indenture and the Notes, and does hereby assume and agree to perform each and every covenant of the Company contained in the Indenture and the Notes and does otherwise agree to be bound by and subject to the terms and provisions of the Indenture and the Notes in each and every respect as if it had been initially named as the Company therein. Without in any way limiting the generality of the foregoing, the Successor hereby agrees to be liable for the due and punctual payment of principal (and premium, if any) and interest (and Special Interest) on all the Notes. 2. The Guarantors hereby agree, jointly and severally, that their respective Note Guarantees, including, without limitation, their Guarantees under Article XI of the Indenture of (i) the due and punctual payment of principal of, premium, if any, and interest (including Special Interest) in full on each Note when and as the same shall become due and payable whether at Stated Maturity, by declaration of acceleration, in connection with a Change of Control Offer, Asset Sale Offer or redemption, or otherwise, (ii) the due and punctual payment of interest on the overdue principal of, premium, if any, and interest, including Special Interest, if any, in full of each Note, to the extent permitted by law, and (iii) the due and punctual performance of all other Obligations of the Company and the other Guarantor to the Holders or the Trustee, including without limitation the payment of fees, expenses, indemnification or other amounts, all in accordance with the terms of the Notes and the Indenture, have not been amended, modified, rescinded or revoked in any respect whatsoever since their undertaking and remain in full force and effect upon the execution and delivery of this Supplemental Indenture. 3. The Notes issued on or after the effective date of the Merger shall bear a legend to the effect that: "On March 14, 1997, Knoll, Inc., a Delaware corporation (the "Predecessor"), merged with and into T.K.G. Acquisition Corp., a Delaware -2- corporation (the "Successor"), which changed its name to Knoll, Inc. (the "Merger"). Immediately following the Merger, the Successor executed a supplemental indenture no. 2, dated as of March 14, 1997, among the Successor, the Guarantors (as defined therein) and the Trustee, under which the Successor acknowledged and agreed that it had succeeded the Predecessor as the Company under the Indenture and the Notes, agreed to perform each and every covenant of the Company contained in the Indenture and the Notes and agreed to be bound by and subject to the terms and provision of the Indenture and the Notes in each and every respect as if it had been initially named as the Company in the Indenture and the Notes." 4. Section 4.17 of the Indenture is amended by inserting the following sentence as a new last sentence thereof: "The provisions of this Section 4.17 shall not prevent, and shall terminate upon a merger of Knoll, Inc. into TKG so long as such merger otherwise complies with the provisions of Section 5.01." 5. The Successor hereby represents and warrants to the Trustee that as of the date hereof: a. the Successor is a corporation validly existing and in good standing under the laws of the State of Delaware; and b. no Default or Event of Default will result from the Merger or the execution and delivery of this Supplemental Indenture. 6. For all purposes of this Supplemental Indenture, except as otherwise herein expressly provided or unless the context otherwise requires: (i) the terms and expressions used herein shall have the same meanings as corresponding terms and expressions used in the Indenture; and (ii) the words "herein," "hereof" and "hereby" and other words of similar import used in this Supplemental Indenture refer to this Supplemental Indenture as a whole and not any particular Section of this Supplemental Indenture. 7. The Trustee accepts the amendment to the Indenture effected by this Supplemental Indenture and agrees to execute the trust created by the Indenture, as hereby amended, but only upon the terms and conditions set forth in the Indenture, as hereby amended, including the terms and provisions defining and limiting the liabilities and responsibilities of the Trustee, which terms and provisions shall in like manner define and limit the Trustee's liabilities in the performance of the trust created by the Indenture, as hereby amended, and, without limiting the generality of the foregoing, the Trustee has no responsibility for the correctness of recitals of fact herein contained which shall be taken as the statements of the Successor and each Guarantor and makes no representations as to the validity or sufficiency of this Supplemental Indenture and shall incur no -3- liability or responsibility in respect of the validity thereof. In furtherance thereof, the Successor shall indemnify the Trustee and hold it harmless against any and all loss, damage, claim, liability or expense (including reasonable attorneys' fees and expenses) arising out of or incurred by it in connection with its acceptance and execution of this Supplemental Indenture. Notwithstanding the foregoing, the Successor need not reimburse any expense or indemnify against any loss, liability or expense incurred by the Trustee through the Trustee's own willful misconduct, negligence or bad faith. 8. Except as expressly amended hereby, the Indenture is in all respects ratified and confirmed and all the terms, conditions and provisions thereof shall remain in full force and effect. 9. This Supplemental Indenture shall form a part of the Indenture for all purposes, and every Holder of Notes heretofore and hereafter authenticated and delivered shall be bound hereby. 10. This Supplemental Indenture may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original, and all of such counterparts shall together constitute one and the same instrument. 11. This Supplemental Indenture shall be deemed to be a contract made under the laws of the State of New York and for all purposes shall be governed by and construed in accordance with such laws. -4- IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture to be duly executed as of the day and year first above written. KNOLL, INC. (formerly T.K.G. ACQUISITION CORP.) By /s/ Douglas J. Purdom ____________________________ Name: Douglas J. Purdom Title: Senior Vice President and Chief Financial Officer KNOLL, INC. By /s/ Douglas J. Purdom ____________________________ Name: Douglas J. Purdom Title: Senior Vice President and Chief Financial Officer KNOLL OVERSEAS, INC. By /s/ Douglas J. Purdom ____________________________ Name: Douglas J. Purdom Title: Senior Vice President and Chief Financial Officer SPINNEYBECK ENTERPRISES, INC. By /s/ Douglas J. Purdom ____________________________ Name: Douglas J. Purdom Title: Senior Vice President and Chief Financial Officer IBJ SCHRODER BANK & TRUST COMPANY, as Trustee By /s/ Barbara McCluskey ____________________________ Name: Barbara McCluskey Title: Vice President -5- EX-10.3 6 EMPLOYMENT AGREEMENT WITH BURTON B. STANIAR EXHIBIT 10.3 EMPLOYMENT AGREEMENT -------------------- This Employment Agreement is dated as of February 29, 1996, and is entered into between T.K.G. Acquisition Corp., a Delaware corporation (the "Company"), and Burton B. Staniar ("Executive"). WHEREAS, Executive and the Company desire to embody in this Agreement the terms and conditions of Executive's employment by the Company. NOW, THEREFORE, the parties hereby agree: ARTICLE I Employment, Duties and Responsibilities --------------------------------------- 1.01. Employment. The Company shall employ Executive as Chairman and ---------- Chief Executive Officer of the Company. Executive hereby accepts such employment. Executive agrees to devote his full business time and efforts to promote the interests of the Company. 1.02. Duties and Responsibilities. Executive shall have such duties --------------------------- and responsibilities as are customarily associated with such position and as are assigned to the Executive from time to time by the Board of Directors of the Company (the "Board"). Executive and the Company agree that the Company may assign all or part of its rights and obligations under this Agreement, other than those set forth under Sections 1.03 hereof, to its principal United States operating subsidiary, and Executive consents to any such assignment and agrees that he will perform all of his duties and responsibilities for such assignee in the manner directed by its Board of Directors, unless otherwise directed by the Board. Executive shall in any event perform such additional services, without the receipt of additional compensation, with respect to the Company's subsidiaries as are assigned from time to time by the Board. 1.03 Member of the Board. During the Term (as defined below), ------------------- prior to any stockholder meeting at which directors will be elected (or prior to the circulation of any written consent in respect of the election of directors), the Company shall nominate Executive to be a member of the Board and of the Board of Directors of the Company's principal United States operating subsidiary. ARTICLE II Term ---- 2.01. Term. (a) The term of this Agreement (the "Term") shall ---- commence on the date of the closing of the acquisition (the "Acquisition") by the Company of the Knoll companies from Westinghouse Electric Corporation and shall continue for a period of one year from such date; provided, however, that the term of the Executive's employment shall be automatically extended without further action of either party for successive additional periods of one year, unless written notice of either party's intention not to extend has been given to the other party at least sixty (60) days prior to the expiration of the then effective term. (b) Executive represents and warrants to the Company that to the best of his knowledge, neither the execution and delivery of this Agreement nor the performance of his duties hereunder violates or will violate the provisions of any other agreement to which he is a party or by which he is bound. ARTICLE III Compensation and Expenses ------------------------- 3.01. Salary, Bonuses and Benefits. As compensation and ---------------------------- consideration for the performance by Executive of his obligations under this Agreement, Executive shall be entitled to the following (subject, in each case, to the provisions of Article V hereof): (a) The Company shall pay Executive a base salary ("Base Salary") during the Term, payable in accordance with the normal payment procedures of the Company and subject to such withholdings and other normal employee deductions as may be required by law, at the rate of not less than $400,000 per annum. The Company agrees to review such compensation (for possible increases, not decreases) not less frequently than annually during the Term. (b) Executive shall participate during the Term in such pension, life insurance, health, disability and major medical insurance plans, and in such other employee benefit plans and programs, for the benefit of the employees of the Company, as may be maintained from time to time during the Term, in each case to the extent and in the manner available to other executive officers of the Company and subject to the terms and provisions of such plans or programs. Executive confirms that he is aware that the Company or one of its affiliates may seek to obtain for their benefit "key man" insurance covering the Executive and Executive agrees to use his reasonable best efforts (without the incurrence of any unreimbursed out-of-pocket expenses) to cooperate in connection therewith. 2 (c) Executive shall receive a service bonus equal to 25% of Base Salary (each a "Service Bonus") to be paid promptly after completion of each calendar year of employment during the Term; provided, however, that upon the Executive's termination of employment hereunder, a pro-rated Service Bonus shall be paid to the Executive based on the ratio of (a) the number of days from the later of (i) the Executive's employment commencement date or (ii) January 1 of the year of termination, until the date of termination to (b) 365. (d) Executive shall participate during the Term in such other bonus plans or programs that are established during the Term for senior management by the Board, with a maximum target annual bonus opportunity for each year during the Term of up to 125% of Executive's Base Salary, which shall be calculated on the basis of achievement of goals set by the Board, which goals may include, without limitation, specific individual goals and/or corporate performance parameters such as revenue, profit, balance sheet and cash management objectives. The Board shall establish the goals applicable to Executive in consultation with the Executive in advance of any fiscal year or other applicable period. (e) Executive shall be entitled to a paid vacation, in accordance with Company policy (but not necessarily consecutive vacation weeks) during the Term. (f) During and after the Term the Company agrees that if Executive is made a party, or compelled to testify or otherwise participate in, any action, suit or proceeding, (a "Proceeding"), by reason of the fact that he is or was a director or officer of the Company or any of its subsidiaries, the Executive shall be indemnified by the Company to the fullest extent permitted by Section 145 of the Delaware General Corporation Law or authorized by the Company's certificate of incorporation or bylaws or resolutions of the Company's Board against all cost, expense, liability and loss reasonably incurred or suffered by the Executive in connection therewith, and such indemnification shall continue as to the Executive even if he has ceased to be a director or officer of the Company or subsidiary, for the period of any applicable statute of limitations or, if longer, for the period in which any such Proceeding which commenced within the period of any such statute of limitations is pending. The Company shall advance to the Executive all reasonable costs and expenses incurred by him in connection with a Proceeding within 20 days after receipt by the Company of a written request for such advance. Such request shall include an itemized list of the costs and expenses and an undertaking by the Executive to repay the amount of such advance if it shall ultimately be determined that, pursuant to applicable law, he is not entitled to be indemnified against such costs and expenses. During the Term (and thereafter for the period of any applicable statute of limitations), the Company agrees to purchase from a 3 reputable insurance company, and maintain, a directors' and officers' liability insurance policy covering the Executive, in amounts reasonably determined by the Board to be appropriate for directors and officers of the Company given the Company's business, securities, operations and financial condition. 3.02. Expenses. The Company will reimburse Executive for reasonable -------- business-related expenses incurred by him in connection with the performance of his duties hereunder during the Term, subject, however, to the Company's policies relating to business-related expenses as in effect from time to time during the Term. 3.03. Parachute Gross-Up. The sole shareholder of the Company has ------------------ previously approved the making of all payments due under or pursuant to this Agreement after having received full disclosure of all material facts concerning such payments. As a result, the provisions of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") are expected to be inapplicable. Notwithstanding anything to the contrary in this Agreement and in addition to any other compensation or other amount payable by the Company to the Executive pursuant to this Agreement or otherwise, if it shall be determined that, notwithstanding such shareholder approval, any payment or distribution by the Company to or for the benefit of the Executive, pursuant to the terms of this Agreement or otherwise or resulting from the accelerated vesting of shares of common stock or options to acquire common stock of the Company (a "Payment"), are subject to the excise tax imposed by Section 4999 of the Code, or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes on the Gross-Up Payment, (including any interest or penalties imposed with respect to such taxes, and any Excise Tax imposed upon the Gross-Up Payment), the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. If the Excise Tax is determined to exceed the amount taken into account hereunder at the time of the termination of the Executive's employment or otherwise (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by the Executive with respect to such excess) at the time that the amount of such excess is finally determined. The Executive and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Payments. All determinations required to be made under this Section, including whether a Gross-Up Payment is required and the amount of such Gross-Up Payment, shall be made by the Company's 4 independent accountants. If the Internal Revenue Service determines that Excise Tax is larger than the amount calculated by the Company's accountants, and the Company does not contest such determination and prevail in such contest at its own expense, the Gross-Up Payment due the Executive shall be recalculated and any additional amounts owed Executive shall be promptly paid to him. ARTICLE IV Exclusivity, Etc. ----------------- 4.01. Exclusivity. Executive agrees to perform his duties, ----------- responsibilities and obligations hereunder efficiently and to the best of his ability. Executive agrees that he will devote his entire working time, care and attention and best efforts to such duties, responsibilities and obligations throughout the Term. Executive also agrees that he will not engage in any other business activities, pursued for gain, profit or other pecuniary advantage, that are competitive with the activities of the Company, except as permitted in Section 4.02 below. Executive agrees that all of his activities as an employee of the Company shall be in conformity with all policies, rules and regulations and directions of the Company not inconsistent with this Agreement. 4.02. Other Business Ventures. Executive agrees that, so long as he ----------------------- is employed by the Company, he will not own, directly or indirectly, any controlling or substantial stock or other beneficial interest in any business enterprise which is engaged in, or competitive with, any business engaged in by the Company. Notwithstanding the foregoing, Executive may own, directly or indirectly, up to 1% of the outstanding capital stock of any business having a class of capital stock which is traded on any national stock exchange or in the over-the-counter market. 4.03. Confidentiality; Non-competition. (a) Executive agrees that -------------------------------- he will not, at any time during or after the Term, make use of or divulge to any other person, firm or corporation any trade or business secret, any information pertaining to any business process, method or means, any customer lists, details of contracts with or requirements of customers, any information pertaining to the Company's financial records, computer systems and software, sales or marketing plans, or any other written information treated as confidential or as a trade secret by the Company, which he may have learned or acquired in connection with his employment (collectively, "Confidential Information"). Executive's obligation under this Section 4.03(a) shall not apply to any information which (i) is known publicly; (ii) is in the public domain or hereafter enters the public domain without the fault of Executive; (iii) is known to Executive prior to his receipt of such information from the Company or any predecessor of the Company with which he was employed, as evidenced by written records of Executive or (iv) is 5 hereafter disclosed to Executive by a third party which, to Executive's knowledge, is not under an obligation of confidence to the Company. Executive agrees not to remove from the premises of the Company, except as an employee of the Company in pursuit of the business of the Company or except as specifically permitted in writing by the Company, any notes, memoranda, papers, documents, correspondence or writing (which shall include information recorded or stored in writing, on magnetic tape or disc, or otherwise stored for reproduction, whether by mechanical or electronic means and whether or not such reproduction will result in a permanent record being made) containing or reflecting any Confidential Information ("Documents"). Executive recognizes that all such Documents, whether developed by him or by someone else, will be the sole and exclusive property of the Company. Upon termination of his employment hereunder, Executive shall forthwith deliver to the Company all such Confidential Information, including without limitation all Documents, correspondence, and any other property held by him or under his control in relation to the business or affairs of the Company, and no copy of any Confidential Information shall be retained by him. (b) Upon any termination of Executive's employment with the Company, the Executive shall not, for a period of one year from the date of such termination, directly or indirectly, whether as an employee, consultant, independent contractor, partner, joint venture or otherwise, (i) engage in any business activities which are competitive, to a material extent, with any substantial type or kind of business activities conducted by the Company at the time of such termination (provided that Executive may own, directly or -------- indirectly, up to 1% of the outstanding capital stock of any business having a class of capital stock which is traded on any national stock exchange or in the over-the-counter market); (ii) solicit or induce, or in any manner attempt to solicit or induce, any person employed by, or as agent of, the Company to terminate such person's contract of employment or agency, as the case may be, with the Company or (iii) divert, or attempt to divert, any person, concern, or entity from doing business with the Company, nor will he attempt to induce any such person, concern or entity to cease being a customer or supplier of the Company. (c) Executive agrees that, at any time and from time to time during and after the Term, he will execute any and all documents which the Company may deem reasonably necessary or appropriate to effectuate the provisions of this Section 4.03. 4.04. Equitable Relief. Executive and the Company agree that the ---------------- restrictions, prohibitions and other provisions of Article IV of this Agreement are reasonable, fair, and equitable in scope, terms, and duration, are necessary to protect the legitimate business interests of the Company and are a material inducement to the Company to enter into this Agreement. The Company and the Executive recognize that the services to be 6 rendered under this Agreement by the Executive are special, unique and of extraordinary character, and that in the event of the breach by the Executive of the terms and conditions of this Agreement or if the Executive, without the prior consent of the Board, shall leave his employment for any reason and take any action in violation of this Article IV, the Company will be entitled to institute and prosecute proceedings in any court of competent jurisdiction referred to in Section 4.05 below, to enjoin the Executive from breaching the provisions of Article IV. In such action, the Company will not be required to plead or prove irreparable harm or lack of an adequate remedy at law. Nothing contained in this Article IV shall be construed to prevent the Company from seeking such other remedy in arbitration in case of any breach of this Agreement by the Executive, as the Company may elect. 4.05. Submission to Jurisdiction. Any proceeding or action must be -------------------------- commenced in the federal courts, or in the absence of federal jurisdiction in state court, in either case in New York. The Executive and the Company irrevocably and unconditionally submit to the jurisdiction of such courts and agree to take any and all future action necessary to submit to the jurisdiction of such courts. The Executive and the Company irrevocably waive any objection that they now have or hereafter may have to the laying of venue of any suit, action or proceeding brought in any court and further irrevocably waive any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum. Final judgment against the Executive or the Company in any such suit shall be conclusive and may be enforced in other jurisdictions by suit on the judgment, a certified or true copy or which shall be conclusive evidence of the fact and the account of any liability of the Executive or the Company therein described, or by appropriate proceedings under an applicable treaty or otherwise. 7 ARTICLE V Termination ----------- 5.01. Termination by the Company. The Company shall have the right -------------------------- to terminate Executive's employment at any time, with or without "Cause". For purposes of this Agreement, "Cause" shall mean (i) the substantial and continued failure of Executive to perform material duties reasonably required of Executive by the Board (it being understood that a failure to attain performance objectives shall not be treated as a failure to perform material duties for purpose of this clause (i)) for a period of not less than 30 consecutive days, provided notice in writing from the Board is given to Executive specifying in reasonable detail the circumstances constituting such substantial and continued failure, (ii) conduct substantially disloyal to the Company which conduct is identified in reasonable detail by notice in writing from the Board and which conduct, if susceptible of cure, is not remedied by Executive within 30 days of Executive's receipt of such notice, (iii) any act of fraud, embezzlement or misappropriation against the Company, or (iv) the conviction of Executive of a felony. 5.02. Death. In the event Executive dies during the Term, his ----- employment shall automatically terminate effective on the date of his death. 5.03. Disability. In the event that Executive shall suffer a ---------- disability which shall have prevented him from performing satisfactorily his obligations hereunder for a period of at least 90 consecutive days, or 180 non- consecutive days within any 365 day period, the Company shall have the right to terminate Executive's employment for "Disability," such termination to be effective upon the giving of notice thereof to Executive in accordance with Section 6.03 hereof. 5.04. Compensation upon Termination. (a) In the event of termination ----------------------------- of Executive's employment by the Company (other than for Cause or Disability), or in the event of termination of Executive's employment by the Company as a result of the Company's failure to renew this Agreement, or in the event of a termination of Executive's employment by Executive following a breach of a material provision of this Agreement by the Company, provided that the Executive has given advance written notice to the Company, identifying the basis for the breach in reasonable detail and, except in the event of a failure to pay Base Salary, giving the Company 30 days' opportunity to cure, the Company shall pay Executive an amount equal to 125% of the Executive's then current Base Salary, in twelve equal monthly installments following the date of such termination. (b) The Executive's rights upon termination of employment with respect to stock options or other incentive awards shall be governed by the terms and conditions of any stock 8 option agreements or as established by the Company with respect to such awards. (c) Upon termination of Employment for any reason, Executive shall be entitled to continued coverage under the Company's health, disability and medical benefits for the greater of (i) the period provided under applicable law (but only to the extent the Executive takes whatever actions are required of him under applicable law to secure such continued coverage) or (ii) 90 days from the date of termination; provided that nothing in this Section 5.04 shall affect -------- Executive's continuing entitlement under any disability insurance policy if Executive's employment is terminated by the Company for Disability. Notwithstanding the preceding sentence, if the Executive's employment is terminated under the circumstances described in Section 5.04(a), such continued coverage shall be provided on the same basis as for active employees for a period of one year from the date of termination. (d) Except as provided in this Section 5.04, Executive shall not be entitled to compensation as a result of any termination of his employment with the Company. ARTICLE VI Miscellaneous ------------- 6.01. Mitigation; Offset. Executive shall not be required to ------------------ mitigate damages resulting from his termination of employment and, during such time, the amounts payable to Executive pursuant to Article V of this Agreement shall not be offset or reduced by any other compensation earned by Executive. 6.02. Benefit of Agreement; Assignment; Beneficiary. (a) This --------------------------------------------- Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns, including, without limitation, any corporation or person which may acquire all or substantially all of the Company's assets or business, or with or into which the Company may be consolidated or merged. This Agreement shall also inure to the benefit of, and be enforceable by, the Executive and his personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amount would still be payable to the Executive hereunder if he had continued to live, all such amounts shall be paid in accordance with the terms of this Agreement to the Executive's beneficiary, devisee, legatee or other designee, or if there is no such designee, to the Executive's estate. (b) The Company shall require any successor (whether direct or indirect, by operation of law, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the 9 same extent that the Company would be required to perform it if no such succession had taken place. 6.03. Notices. Any notice required or permitted hereunder shall be ------- in writing and shall be sufficiently given if personally delivered or if sent by telegram or telecopier or by registered or certified mail, postage prepaid, with return receipt requested, addressed: (a) in the case of the Company to: T.K.G. Acquisition Corp., c/o Warburg, Pincus Ventures, L.P., 466 Lexington Avenue, New York, NY 10017, Attention: Jeffrey A. Harris, tel: (212) 878-0638; fax: (212) 878-9351, or to such other address and/or to the attention of such other person as the Company shall designate by written notice to Executive; and (b) in the case of Executive, to: Burton B. Staniar, 23 Glendon Road, Ho-Ho-Kus, NJ 07423, tel: (201) 447-5716; fax: (201) 612-9531, or to such other address as Executive shall designate by written notice to the Company, with a copy to F. George Davitt, Testa, Hurwitz & Thibeault, 125 High Street, Boston, MA 02110, tel: (617) 248-7000, fax: (617) 248-7100. Any notice given hereunder shall be deemed to have been given at the time of receipt thereof by the person to whom such notice is given. 6.04. Entire Agreement; Amendment. This Agreement contains the --------------------------- entire agreement of the parties hereto with respect to the terms and conditions of Executive's employment during the term and supersedes any and all prior agreements and understandings, whether written or oral, between the parties hereto with respect to compensation due for services rendered hereunder. This Agreement may not be changed or modified except by an instrument in writing signed by both of the parties hereto. 6.05. Waiver. The waiver by either party of a breach of any ------ provision of this Agreement shall not operate or be construed as a continuing waiver or as a consent to or waiver of any subsequent breach hereof. 6.06. Headings. The Article and Section headings herein are for -------- convenience of reference only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof. 6.07. Governing Law. This Agreement shall be governed by, and ------------- construed and interpreted in accordance with, the internal laws of the State of New York without reference to the principles of conflict of laws. 6.08. Agreement to Take Actions. Each party hereto shall execute and ------------------------- deliver such documents, certificates, agreements and other instruments, and shall take such other actions, as may be reasonably necessary or desirable in order to perform his or its obligations under this Agreement or to effectuate the purposes hereof. 10 6.09. Survivorship. The respective rights and obligations of the ------------ parties hereunder shall survive any termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations. 6.10. Validity. The invalidity or unenforceability of any provision -------- or provisions of this Agreement shall not affect the validity or enforceability of any other provision or provisions of this Agreement, which shall remain in full force and effect. 6.11. Information Rights. Until the earlier of (i) such time as ------------------ Executive no longer owns at least 50% of the shares of the Company's capital stock purchased by Executive pursuant to the Management Subscription Agreement, dated as of the date hereof, between Executive and the Company, (ii) an Initial Public Offering (as defined in the Stockholders Agreement referred to below), (iii) the termination of Executive's employment with the Company for Cause (as defined below), and (iv) Executive's employment by, or provision of consulting services to, a competitor of the Company or any of its subsidiaries, the Company shall provide Executive with the information set forth in Section 5(a) of the Stockholders Agreement (Common Stock and Preferred Stock), dated as of the date hereof, among the Company, Executive and certain other stockholders of the Company. For purposes of this paragraph, "Cause" shall having the meaning set forth in clauses (iii) and (iv) only in Section 5.01 of this Agreement. 6.12. Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 11 IN WITNESS WHEREOF, each of the parties hereto has duly executed this Agreement effective as of the date first above written. T.K.G. Acquisition Corp. By: /s/ Barry L. McCabe ________________________________ Name: Title: /s/ Burton B. Staniar ________________________________ Burton B. Staniar 12 EX-10.4 7 EMPLOYMENT AGREEMENT DATED WITH JOHN H. LYNCH EXHIBIT 10.4 EMPLOYMENT AGREEMENT -------------------- This Employment Agreement is dated as of February 29, 1996, and is entered into between T.K.G. Acquisition Corp., a Delaware corporation (the "Company"), and John H. Lynch ("Executive"). WHEREAS, Executive and the Company desire to embody in this Agreement the terms and conditions of Executive's employment by the Company. NOW, THEREFORE, the parties hereby agree: ARTICLE I Employment, Duties and Responsibilities --------------------------------------- 1.01. Employment. The Company shall employ Executive as Vice- ---------- Chairman and President of the Company. Executive hereby accepts such employment. Executive agrees to devote his full business time and efforts to promote the interests of the Company. 1.02. Duties and Responsibilities. Executive shall have such duties --------------------------- and responsibilities as are customarily associated with such position and as are assigned to the Executive from time to time by the Board of Directors of the Company (the "Board"). Executive and the Company agree that the Company may assign all or part of its rights and obligations under this Agreement, other than those set forth under Sections 1.03 hereof, to its principal United States operating subsidiary, and Executive consents to any such assignment and agrees that he will perform all of his duties and responsibilities for such assignee in the manner directed by its Board of Directors, unless otherwise directed by the Board. Executive shall in any event perform such additional services, without the receipt of additional compensation, with respect to the Company's subsidiaries as are assigned from time to time by the Board. 1.03 Member of the Board. During the Term (as defined below), ------------------- prior to any stockholder meeting at which directors will be elected (or prior to the circulation of any written consent in respect of the election of directors), the Company shall nominate Executive to be a member of the Board and of the Board of Directors of the Company's principal United States operating subsidiary. ARTICLE II Term ---- 2.01. Term. (a) The term of this Agreement (the "Term") shall ---- commence on the date of the closing of the acquisition (the "Acquisition") by the Company of the Knoll companies from Westinghouse Electric Corporation and shall continue for a period of one year from such date; provided, however, that the term of the Executive's employment shall be automatically extended without further action of either party for successive additional periods of one year, unless written notice of either party's intention not to extend has been given to the other party at least sixty (60) days prior to the expiration of the then effective term. (b) Executive represents and warrants to the Company that to the best of his knowledge, neither the execution and delivery of this Agreement nor the performance of his duties hereunder violates or will violate the provisions of any other agreement to which he is a party or by which he is bound. ARTICLE III Compensation and Expenses ------------------------- 3.01. Salary, Bonuses and Benefits. As compensation and ---------------------------- consideration for the performance by Executive of his obligations under this Agreement, Executive shall be entitled to the following (subject, in each case, to the provisions of Article V hereof): (a) The Company shall pay Executive a base salary ("Base Salary") during the Term, payable in accordance with the normal payment procedures of the Company and subject to such withholdings and other normal employee deductions as may be required by law, at the rate of not less than $400,000 per annum. The Company agrees to review such compensation (for possible increases, not decreases) not less frequently than annually during the Term. (b) Executive shall participate during the Term in such pension, life insurance, health, disability and major medical insurance plans, and in such other employee benefit plans and programs, for the benefit of the employees of the Company, as may be maintained from time to time during the Term, in each case to the extent and in the manner available to other executive officers of the Company and subject to the terms and provisions of such plans or programs. Executive confirms that he is aware that the Company or one of its affiliates may seek to obtain for their benefit "key man" insurance covering the Executive and Executive agrees to use his reasonable best efforts (without the incurrence of any unreimbursed out-of-pocket expenses) to cooperate in connection therewith. 2 (c) Executive shall receive a service bonus equal to 25% of Base Salary (each a "Service Bonus") to be paid promptly after completion of each calendar year of employment during the Term; provided, however, that upon the Executive's termination of employment hereunder, a pro-rated Service Bonus shall be paid to the Executive based on the ratio of (a) the number of days from the later of (i) the Executive's employment commencement date or (ii) January 1 of the year of termination, until the date of termination to (b) 365. (g) (d) Executive shall participate during the Term in such other bonus plans or programs that are established during the Term for senior management by the Board, with a maximum target annual bonus opportunity for each year during the Term of up to 125% of Executive's Base Salary, which shall be calculated on the basis of achievement of goals set by the Board, which goals may include, without limitation, specific individual goals and/or corporate performance parameters such as revenue, profit, balance sheet and cash management objectives. The Board shall establish the goals applicable to Executive in consultation with the Executive in advance of any fiscal year or other applicable period. (e) Executive shall be entitled to a paid vacation, in accordance with Company policy (but not necessarily consecutive vacation weeks) during the Term. (f) During and after the Term the Company agrees that if Executive is made a party, or compelled to testify or otherwise participate in, any action, suit or proceeding, (a "Proceeding"), by reason of the fact that he is or was a director or officer of the Company or any of its subsidiaries, the Executive shall be indemnified by the Company to the fullest extent permitted by Section 145 of the Delaware General Corporation Law or authorized by the Company's certificate of incorporation or bylaws or resolutions of the Company's Board against all cost, expense, liability and loss reasonably incurred or suffered by the Executive in connection therewith, and such indemnification shall continue as to the Executive even if he has ceased to be a director or officer of the Company or subsidiary, for the period of any applicable statute of limitations or, if longer, for the period in which any such Proceeding which commenced within the period of any such statute of limitations is pending. The Company shall advance to the Executive all reasonable costs and expenses incurred by him in connection with a Proceeding within 20 days after receipt by the Company of a written request for such advance. Such request shall include an itemized list of the costs and expenses and an undertaking by the Executive to repay the amount of such advance if it shall ultimately be determined that, pursuant to applicable law, he is not entitled to be indemnified against such costs and expenses. During the Term (and thereafter for the period of any applicable statute of limitations), the Company agrees to purchase from a reputable insurance company, and maintain, a directors' and 3 officers' liability insurance policy covering the Executive, in amounts reasonably determined by the Board to be appropriate for directors and officers of the Company given the Company's business, securities, operations and financial condition. 3.02. Expenses. The Company will reimburse Executive for reasonable -------- business-related expenses incurred by him in connection with the performance of his duties hereunder during the Term, subject, however, to the Company's policies relating to business-related expenses as in effect from time to time during the Term. 3.03. Parachute Gross-Up. The sole shareholder of the Company has ------------------ previously approved the making of all payments due under or pursuant to this Agreement after having received full disclosure of all material facts concerning such payments. As a result, the provisions of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") are expected to be inapplicable. Notwithstanding anything to the contrary in this Agreement and in addition to any other compensation or other amount payable by the Company to the Executive pursuant to this Agreement or otherwise, if it shall be determined that, notwithstanding such shareholder approval, any payment or distribution by the Company to or for the benefit of the Executive, pursuant to the terms of this Agreement or otherwise or resulting from the accelerated vesting of shares of common stock or options to acquire common stock of the Company (a "Payment"), are subject to the excise tax imposed by Section 4999 of the Code, or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes on the Gross-Up Payment, (including any interest or penalties imposed with respect to such taxes, and any Excise Tax imposed upon the Gross-Up Payment), the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. If the Excise Tax is determined to exceed the amount taken into account hereunder at the time of the termination of the Executive's employment or otherwise (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by the Executive with respect to such excess) at the time that the amount of such excess is finally determined. The Executive and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Payments. All determinations required to be made under this Section, including whether a Gross-Up Payment is required and the amount of such Gross-Up Payment, shall be made by the Company's independent accountants. If the Internal Revenue Service 4 determines that Excise Tax is larger than the amount calculated by the Company's accountants, and the Company does not contest such determination and prevail in such contest at its own expense, the Gross-Up Payment due the Executive shall be recalculated and any additional amounts owed Executive shall be promptly paid to him. ARTICLE IV Exclusivity, Etc. ----------------- 4.01. Exclusivity. Executive agrees to perform his duties, ----------- responsibilities and obligations hereunder efficiently and to the best of his ability. Executive agrees that he will devote his entire working time, care and attention and best efforts to such duties, responsibilities and obligations throughout the Term. Executive also agrees that he will not engage in any other business activities, pursued for gain, profit or other pecuniary advantage, that are competitive with the activities of the Company, except as permitted in Section 4.02 below. Executive agrees that all of his activities as an employee of the Company shall be in conformity with all policies, rules and regulations and directions of the Company not inconsistent with this Agreement. 4.02. Other Business Ventures. Executive agrees that, so long as he ----------------------- is employed by the Company, he will not own, directly or indirectly, any controlling or substantial stock or other beneficial interest in any business enterprise which is engaged in, or competitive with, any business engaged in by the Company. Notwithstanding the foregoing, Executive may own, directly or indirectly, up to 1% of the outstanding capital stock of any business having a class of capital stock which is traded on any national stock exchange or in the over-the-counter market. 4.03. Confidentiality; Non-competition. (a) Executive agrees that -------------------------------- he will not, at any time during or after the Term, make use of or divulge to any other person, firm or corporation any trade or business secret, any information pertaining to any business process, method or means, any customer lists, details of contracts with or requirements of customers, any information pertaining to the Company's financial records, computer systems and software, sales or marketing plans, or any other written information treated as confidential or as a trade secret by the Company, which he may have learned or acquired in connection with his employment (collectively, "Confidential Information"). Executive's obligation under this Section 4.03(a) shall not apply to any information which (i) is known publicly; (ii) is in the public domain or hereafter enters the public domain without the fault of Executive; (iii) is known to Executive prior to his receipt of such information from the Company or any predecessor of the Company with which he was employed, as evidenced by written records of Executive or (iv) is hereafter disclosed to Executive by a third party which, to 5 Executive's knowledge, is not under an obligation of confidence to the Company. Executive agrees not to remove from the premises of the Company, except as an employee of the Company in pursuit of the business of the Company or except as specifically permitted in writing by the Company, any notes, memoranda, papers, documents, correspondence or writing (which shall include information recorded or stored in writing, on magnetic tape or disc, or otherwise stored for reproduction, whether by mechanical or electronic means and whether or not such reproduction will result in a permanent record being made) containing or reflecting any Confidential Information ("Documents"). Executive recognizes that all such Documents, whether developed by him or by someone else, will be the sole and exclusive property of the Company. Upon termination of his employment hereunder, Executive shall forthwith deliver to the Company all such Confidential Information, including without limitation all Documents, correspondence, and any other property held by him or under his control in relation to the business or affairs of the Company, and no copy of any Confidential Information shall be retained by him. (b) Upon any termination of Executive's employment with the Company, the Executive shall not, for a period of one year from the date of such termination, directly or indirectly, whether as an employee, consultant, independent contractor, partner, joint venture or otherwise, (i) engage in any business activities which are competitive, to a material extent, with any substantial type or kind of business activities conducted by the Company at the time of such termination (provided that Executive may own, directly or -------- indirectly, up to 1% of the outstanding capital stock of any business having a class of capital stock which is traded on any national stock exchange or in the over-the-counter market); (ii) solicit or induce, or in any manner attempt to solicit or induce, any person employed by, or as agent of, the Company to terminate such person's contract of employment or agency, as the case may be, with the Company or (iii) divert, or attempt to divert, any person, concern, or entity from doing business with the Company, nor will he attempt to induce any such person, concern or entity to cease being a customer or supplier of the Company. (c) Executive agrees that, at any time and from time to time during and after the Term, he will execute any and all documents which the Company may deem reasonably necessary or appropriate to effectuate the provisions of this Section 4.03. 4.04. Equitable Relief. Executive and the Company agree that the ---------------- restrictions, prohibitions and other provisions of Article IV of this Agreement are reasonable, fair, and equitable in scope, terms, and duration, are necessary to protect the legitimate business interests of the Company and are a material inducement to the Company to enter into this Agreement. The Company and the Executive recognize that the services to be rendered under this Agreement by the Executive are special, 6 unique and of extraordinary character, and that in the event of the breach by the Executive of the terms and conditions of this Agreement or if the Executive, without the prior consent of the Board, shall leave his employment for any reason and take any action in violation of this Article IV, the Company will be entitled to institute and prosecute proceedings in any court of competent jurisdiction referred to in Section 4.05 below, to enjoin the Executive from breaching the provisions of Article IV. In such action, the Company will not be required to plead or prove irreparable harm or lack of an adequate remedy at law. Nothing contained in this Article IV shall be construed to prevent the Company from seeking such other remedy in arbitration in case of any breach of this Agreement by the Executive, as the Company may elect. 4.05. Submission to Jurisdiction. Any proceeding or action must be -------------------------- commenced in the federal courts, or in the absence of federal jurisdiction in state court, in either case in New York. The Executive and the Company irrevocably and unconditionally submit to the jurisdiction of such courts and agree to take any and all future action necessary to submit to the jurisdiction of such courts. The Executive and the Company irrevocably waive any objection that they now have or hereafter may have to the laying of venue of any suit, action or proceeding brought in any court and further irrevocably waive any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum. Final judgment against the Executive or the Company in any such suit shall be conclusive and may be enforced in other jurisdictions by suit on the judgment, a certified or true copy or which shall be conclusive evidence of the fact and the account of any liability of the Executive or the Company therein described, or by appropriate proceedings under an applicable treaty or otherwise. 7 ARTICLE V Termination ----------- 5.01. Termination by the Company. The Company shall have the right -------------------------- to terminate Executive's employment at any time, with or without "Cause". For purposes of this Agreement, "Cause" shall mean (i) the substantial and continued failure of Executive to perform material duties reasonably required of Executive by the Board (it being understood that a failure to attain performance objectives shall not be treated as a failure to perform material duties for purpose of this clause (i)) for a period of not less than 30 consecutive days, provided notice in writing from the Board is given to Executive specifying in reasonable detail the circumstances constituting such substantial and continued failure, (ii) conduct substantially disloyal to the Company which conduct is identified in reasonable detail by notice in writing from the Board and which conduct, if susceptible of cure, is not remedied by Executive within 30 days of Executive's receipt of such notice, (iii) any act of fraud, embezzlement or misappropriation against the Company, or (iv) the conviction of Executive of a felony. 5.02. Death. In the event Executive dies during the Term, his ----- employment shall automatically terminate effective on the date of his death. 5.03. Disability. In the event that Executive shall suffer a ---------- disability which shall have prevented him from performing satisfactorily his obligations hereunder for a period of at least 90 consecutive days, or 180 non- consecutive days within any 365 day period, the Company shall have the right to terminate Executive's employment for "Disability," such termination to be effective upon the giving of notice thereof to Executive in accordance with Section 6.03 hereof. 5.04. Compensation upon Termination. (a) In the event of termination ----------------------------- of Executive's employment by the Company (other than for Cause or Disability), or in the event of termination of Executive's employment by the Company as a result of the Company's failure to renew this Agreement, or in the event of a termination of Executive's employment by Executive following a breach of a material provision of this Agreement by the Company, provided that the Executive has given advance written notice to the Company, identifying the basis for the breach in reasonable detail and, except in the event of a failure to pay Base Salary, giving the Company 30 days' opportunity to cure, the Company shall pay Executive an amount equal to 125% of the Executive's then current Base Salary, in twelve equal monthly installments following the date of such termination. (b) The Executive's rights upon termination of employment with respect to stock options or other incentive awards shall be governed by the terms and conditions of any stock 8 option agreements or as established by the Company with respect to such awards. (c) Upon termination of Employment for any reason, Executive shall be entitled to continued coverage under the Company's health, disability and medical benefits for the greater of (i) the period provided under applicable law (but only to the extent the Executive takes whatever actions are required of him under applicable law to secure such continued coverage) or (ii) 90 days from the date of termination; provided that nothing in this Section 5.04 shall affect -------- Executive's continuing entitlement under any disability insurance policy if Executive's employment is terminated by the Company for Disability. Notwithstanding the preceding sentence, if the Executive's employment is terminated under the circumstances described in Section 5.04(a), such continued coverage shall be provided on the same basis as for active employees for a period of one year from the date of termination. (d) Except as provided in this Section 5.04, Executive shall not be entitled to compensation as a result of any termination of his employment with the Company. ARTICLE VI Miscellaneous ------------- 6.01. Mitigation; Offset. Executive shall not be required to ------------------ mitigate damages resulting from his termination of employment and, during such time, the amounts payable to Executive pursuant to Article V of this Agreement shall not be offset or reduced by any other compensation earned by Executive. 6.02. Benefit of Agreement; Assignment; Beneficiary. (a) This --------------------------------------------- Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns, including, without limitation, any corporation or person which may acquire all or substantially all of the Company's assets or business, or with or into which the Company may be consolidated or merged. This Agreement shall also inure to the benefit of, and be enforceable by, the Executive and his personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amount would still be payable to the Executive hereunder if he had continued to live, all such amounts shall be paid in accordance with the terms of this Agreement to the Executive's beneficiary, devisee, legatee or other designee, or if there is no such designee, to the Executive's estate. (b) The Company shall require any successor (whether direct or indirect, by operation of law, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the 9 same extent that the Company would be required to perform it if no such succession had taken place. 6.03. Notices. Any notice required or permitted hereunder shall be ------- in writing and shall be sufficiently given if personally delivered or if sent by telegram or telecopier or by registered or certified mail, postage prepaid, with return receipt requested, addressed: (a) in the case of the Company to: T.K.G. Acquisition Corp., c/o Warburg, Pincus Ventures, L.P., 466 Lexington Avenue, New York, NY 10017, Attention: Jeffrey A. Harris, tel: (212) 878-0638; fax: (212) 878-9351, or to such other address and/or to the attention of such other person as the Company shall designate by written notice to Executive; and (b) in the case of Executive, to: John H. Lynch, 166 Hopkins Green, Hopkinton, NH 03229, tel: (603) 224-4824; fax: (603) 669-1612, or to such other address as Executive shall designate by written notice to the Company, with a copy to F. George Davitt, Testa, Hurwitz & Thibeault, 125 High Street, Boston, MA 02110, tel: (617) 248-7000, fax: (617) 248-7100. Any notice given hereunder shall be deemed to have been given at the time of receipt thereof by the person to whom such notice is given. 6.04. Entire Agreement; Amendment. This Agreement contains the --------------------------- entire agreement of the parties hereto with respect to the terms and conditions of Executive's employment during the term and supersedes any and all prior agreements and understandings, whether written or oral, between the parties hereto with respect to compensation due for services rendered hereunder. This Agreement may not be changed or modified except by an instrument in writing signed by both of the parties hereto. 6.05. Waiver. The waiver by either party of a breach of any ------ provision of this Agreement shall not operate or be construed as a continuing waiver or as a consent to or waiver of any subsequent breach hereof. 6.06. Headings. The Article and Section headings herein are for -------- convenience of reference only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof. 6.07. Governing Law. This Agreement shall be governed by, and ------------- construed and interpreted in accordance with, the internal laws of the State of New York without reference to the principles of conflict of laws. 6.08. Agreement to Take Actions. Each party hereto shall execute and ------------------------- deliver such documents, certificates, agreements and other instruments, and shall take such other actions, as may be reasonably necessary or desirable in order to perform his or its obligations under this Agreement or to effectuate the purposes hereof. 10 6.09. Survivorship. The respective rights and obligations of the ------------ parties hereunder shall survive any termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations. 6.10. Validity. The invalidity or unenforceability of any provision -------- or provisions of this Agreement shall not affect the validity or enforceability of any other provision or provisions of this Agreement, which shall remain in full force and effect. 6.11. Information Rights. Until the earlier of (i) such time as ------------------ Executive no longer owns at least 50% of the shares of the Company's capital stock purchased by Executive pursuant to the Management Subscription Agreement, dated as of the date hereof, between Executive and the Company, (ii) an Initial Public Offering (as defined in the Stockholders Agreement referred to below), (iii) the termination of Executive's employment with the Company for Cause (as defined below), and (iv) Executive's employment by, or provision of consulting services to, a competitor of the Company or any of its subsidiaries, the Company shall provide Executive with the information set forth in Section 5(a) of the Stockholders Agreement (Common Stock and Preferred Stock), dated as of the date hereof, among the Company, Executive and certain other stockholders of the Company. For purposes of this paragraph, "Cause" shall having the meaning set forth in clauses (iii) and (iv) only in Section 5.01 of this Agreement. 6.12. Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 11 IN WITNESS WHEREOF, each of the parties hereto has duly executed this Agreement effective as of the date first above written. T.K.G. Acquisition Corp. By: /s/ Burton B. Staniar -------------------------------- Name: Burton B. Staniar Title: President and Chief Executive Officer /s/ John H. Lynch -------------------------------- John H. Lynch 12 EX-10.5 8 EMPLOYMENT AGREEMENT WITH ANDREW B. COGAN EXHIBIT 10.5 EMPLOYMENT AGREEMENT -------------------- This Employment Agreement is dated as of February 29, 1996, and is entered into between T.K.G. Acquisition Corp., a Delaware corporation (the "Company"), and Andrew B. Cogan ("Executive"). WHEREAS, Executive and the Company desire to embody in this Agreement the terms and conditions of Executive's employment by the Company. NOW, THEREFORE, the parties hereby agree: ARTICLE I Employment, Duties and Responsibilities --------------------------------------- 1.01. Employment. The Company shall employ Executive as Senior Vice ---------- President, Marketing and Product Development of the Company. Executive hereby accepts such employment. Executive agrees to devote his full business time and efforts to promote the interests of the Company. 1.02. Duties and Responsibilities. Executive shall have such duties --------------------------- and responsibilities as are customarily associated with such position and as are assigned to the Executive from time to time by the Company's Chairman and Chief Executive Officer ("CEO"). Executive and the Company agree that the Company may assign all or part of its rights and obligations under this Agreement, other than those set forth under Sections 1.03 hereof, to its principal United States operating subsidiary, and Executive consents to any such assignment and agrees that he will perform all of his duties and responsibilities for such assignee in the manner directed by its Board of Directors, unless otherwise directed by the Board of Directors of the Company (the "Board"). Executive shall in any event perform such additional services, without the receipt of additional compensation, with respect to the Company's subsidiaries as are assigned from time to time by the CEO. ARTICLE II Term ---- 2.01. Term. (a) The term of this Agreement (the "Term") shall ---- commence on the date of the closing of the acquisition (the "Acquisition") by the Company of the Knoll companies from Westinghouse Electric Corporation and shall continue for a period of one year from such date; provided, however, that the term of the Executive's employment shall be automatically extended without further action of either party for successive additional periods of one year, unless written notice of either party's intention not to extend has been given to the other party at least sixty (60) days prior to the expiration of the then effective term. (b) Executive represents and warrants to the Company that to the best of his knowledge, neither the execution and delivery of this Agreement nor the performance of his duties hereunder violates or will violate the provisions of any other agreement to which he is a party or by which he is bound. ARTICLE III Compensation and Expenses ------------------------- 3.01. Salary, Bonuses and Benefits. As compensation and ---------------------------- consideration for the performance by Executive of his obligations under this Agreement, Executive shall be entitled to the following (subject, in each case, to the provisions of Article V hereof): (a) The Company shall pay Executive a base salary ("Base Salary") during the Term, payable in accordance with the normal payment procedures of the Company and subject to such withholdings and other normal employee deductions as may be required by law, at the rate of not less than $200,000 per annum. The Company agrees to review such compensation (for possible increases, not decreases) not less frequently than annually during the Term. (b) Executive shall participate during the Term in such pension, life insurance, health, disability and major medical insurance plans, and in such other employee benefit plans and programs, for the benefit of the employees of the Company, as may be maintained from time to time during the Term, in each case to the extent and in the manner available to other executive officers of the Company and subject to the terms and provisions of such plans or programs. Executive confirms that he is aware that the Company or one of its affiliates may seek to obtain for their benefit "key man" insurance covering the Executive and Executive agrees to use his reasonable best efforts (without the incurrence of any unreimbursed out-of-pocket expenses) to cooperate in connection therewith. (c) Executive shall participate during the Term in such other bonus plans or programs that are established during the Term for senior management by the Board, with a maximum target annual bonus opportunity for each year during the Term of up to 100% of Executive's Base Salary, which shall be calculated on the basis of achievement of goals set by the Board, which goals may include, without limitation, specific individual goals 2 and/or corporate performance parameters such as revenue, profit, balance sheet and cash management objectives. The Board shall establish the goals applicable to Executive in consultation with the Executive in advance of any fiscal year or other applicable period. (d) Executive shall be entitled to a paid vacation, in accordance with Company policy (but not necessarily consecutive vacation weeks) during the Term. (e) During and after the Term the Company agrees that if Executive is made a party, or compelled to testify or otherwise participate in, any action, suit or proceeding, (a "Proceeding"), by reason of the fact that he is or was a director or officer of the Company or any of its subsidiaries, the Executive shall be indemnified by the Company to the fullest extent permitted by Section 145 of the Delaware General Corporation Law or authorized by the Company's certificate of incorporation or bylaws or resolutions of the Company's Board against all cost, expense, liability and loss reasonably incurred or suffered by the Executive in connection therewith, and such indemnification shall continue as to the Executive even if he has ceased to be a director or officer of the Company or subsidiary, for the period of any applicable statute of limitations or, if longer, for the period in which any such Proceeding which commenced within the period of any such statute of limitations is pending. The Company shall advance to the Executive all reasonable costs and expenses incurred by him in connection with a Proceeding within 20 days after receipt by the Company of a written request for such advance. Such request shall include an itemized list of the costs and expenses and an undertaking by the Executive to repay the amount of such advance if it shall ultimately be determined that, pursuant to applicable law, he is not entitled to be indemnified against such costs and expenses. During the Term (and thereafter for the period of any applicable statute of limitations), the Company agrees to purchase from a reputable insurance company, and maintain, a directors' and officers' liability insurance policy covering the Executive, in amounts reasonably determined by the Board to be appropriate for directors and officers of the Company given the Company's business, securities, operations and financial condition. 3.02. Expenses. The Company will reimburse Executive for reasonable -------- business-related expenses incurred by him in connection with the performance of his duties hereunder during the Term, subject, however, to the Company's policies relating to business-related expenses as in effect from time to time during the Term. 3.03. Parachute Gross-Up. The sole shareholder of the Company has ------------------ previously approved the making of all payments due under or pursuant to this Agreement after having received full disclosure of all material facts concerning such payments. As a result, the provisions of Section 280G of the Internal 3 Revenue Code of 1986, as amended (the "Code") are expected to be inapplicable. Notwithstanding anything to the contrary in this Agreement and in addition to any other compensation or other amount payable by the Company to the Executive pursuant to this Agreement or otherwise, if it shall be determined that, notwithstanding such shareholder approval, any payment or distribution by the Company to or for the benefit of the Executive, pursuant to the terms of this Agreement or otherwise or resulting from the accelerated vesting of shares of common stock or options to acquire common stock of the Company (a "Payment"), are subject to the excise tax imposed by Section 4999 of the Code, or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes on the Gross-Up Payment, (including any interest or penalties imposed with respect to such taxes, and any Excise Tax imposed upon the Gross-Up Payment), the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. If the Excise Tax is determined to exceed the amount taken into account hereunder at the time of the termination of the Executive's employment or otherwise (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by the Executive with respect to such excess) at the time that the amount of such excess is finally determined. The Executive and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Payments. All determinations required to be made under this Section, including whether a Gross-Up Payment is required and the amount of such Gross-Up Payment, shall be made by the Company's independent accountants. If the Internal Revenue Service determines that Excise Tax is larger than the amount calculated by the Company's accountants, and the Company does not contest such determination and prevail in such contest at its own expense, the Gross-Up Payment due the Executive shall be recalculated and any additional amounts owed Executive shall be promptly paid to him. ARTICLE IV Exclusivity, Etc. ----------------- 4.01. Exclusivity. Executive agrees to perform his duties, ----------- responsibilities and obligations hereunder efficiently and to the best of his ability. Executive agrees that he will devote his entire working time, care and attention and best efforts to such duties, responsibilities and obligations throughout the Term. Executive also agrees that he will not 4 engage in any other business activities, pursued for gain, profit or other pecuniary advantage, that are competitive with the activities of the Company, except as permitted in Section 4.02 below. Executive agrees that all of his activities as an employee of the Company shall be in conformity with all policies, rules and regulations and directions of the Company not inconsistent with this Agreement. 4.02. Other Business Ventures. Executive agrees that, so long as he ----------------------- is employed by the Company, he will not own, directly or indirectly, any controlling or substantial stock or other beneficial interest in any business enterprise which is engaged in, or competitive with, any business engaged in by the Company. Notwithstanding the foregoing, Executive may own, directly or indirectly, up to 1% of the outstanding capital stock of any business having a class of capital stock which is traded on any national stock exchange or in the over-the-counter market. 4.03. Confidentiality; Non-competition. (a) Executive agrees that -------------------------------- he will not, at any time during or after the Term, make use of or divulge to any other person, firm or corporation any trade or business secret, any information pertaining to any business process, method or means, any customer lists, details of contracts with or requirements of customers, any information pertaining to the Company's financial records, computer systems and software, sales or marketing plans, or any other written information treated as confidential or as a trade secret by the Company, which he may have learned or acquired in connection with his employment (collectively, "Confidential Information"). Executive's obligation under this Section 4.03(a) shall not apply to any information which (i) is known publicly; (ii) is in the public domain or hereafter enters the public domain without the fault of Executive; (iii) is known to Executive prior to his receipt of such information from the Company or any predecessor of the Company with which he was employed, as evidenced by written records of Executive or (iv) is hereafter disclosed to Executive by a third party which, to Executive's knowledge, is not under an obligation of confidence to the Company. Executive agrees not to remove from the premises of the Company, except as an employee of the Company in pursuit of the business of the Company or except as specifically permitted in writing by the Company, any notes, memoranda, papers, documents, correspondence or writing (which shall include information recorded or stored in writing, on magnetic tape or disc, or otherwise stored for reproduction, whether by mechanical or electronic means and whether or not such reproduction will result in a permanent record being made) containing or reflecting any Confidential Information ("Documents"). Executive recognizes that all such Documents, whether developed by him or by someone else, will be the sole and exclusive property of the Company. Upon termination of his employment hereunder, Executive shall forthwith deliver to the Company all such Confidential Information, including without limitation all Documents, correspondence, and any other property held by him or under his 5 control in relation to the business or affairs of the Company, and no copy of any Confidential Information shall be retained by him. (b) Upon any termination of Executive's employment with the Company, the Executive shall not, for a period of one year from the date of such termination, directly or indirectly, whether as an employee, consultant, independent contractor, partner, joint venture or otherwise, (i) engage in any business activities which are competitive, to a material extent, with any substantial type or kind of business activities conducted by the Company at the time of such termination (provided that Executive may own, directly or -------- indirectly, up to 1% of the outstanding capital stock of any business having a class of capital stock which is traded on any national stock exchange or in the over-the-counter market); (ii) solicit or induce, or in any manner attempt to solicit or induce, any person employed by, or as agent of, the Company to terminate such person's contract of employment or agency, as the case may be, with the Company or (iii) divert, or attempt to divert, any person, concern, or entity from doing business with the Company, nor will he attempt to induce any such person, concern or entity to cease being a customer or supplier of the Company. (c) Executive agrees that, at any time and from time to time during and after the Term, he will execute any and all documents which the Company may deem reasonably necessary or appropriate to effectuate the provisions of this Section 4.03. 4.04. Equitable Relief. Executive and the Company agree that the ---------------- restrictions, prohibitions and other provisions of Article IV of this Agreement are reasonable, fair, and equitable in scope, terms, and duration, are necessary to protect the legitimate business interests of the Company and are a material inducement to the Company to enter into this Agreement. The Company and the Executive recognize that the services to be rendered under this Agreement by the Executive are special, unique and of extraordinary character, and that in the event of the breach by the Executive of the terms and conditions of this Agreement or if the Executive, without the prior consent of the Board, shall leave his employment for any reason and take any action in violation of this Article IV, the Company will be entitled to institute and prosecute proceedings in any court of competent jurisdiction referred to in Section 4.05 below, to enjoin the Executive from breaching the provisions of Article IV. In such action, the Company will not be required to plead or prove irreparable harm or lack of an adequate remedy at law. Nothing contained in this Article IV shall be construed to prevent the Company from seeking such other remedy in arbitration in case of any breach of this Agreement by the Executive, as the Company may elect. 4.05. Submission to Jurisdiction. Any proceeding or action must be -------------------------- commenced in the federal courts, or in the 6 absence of federal jurisdiction in state court, in either case in New York. The Executive and the Company irrevocably and unconditionally submit to the jurisdiction of such courts and agree to take any and all future action necessary to submit to the jurisdiction of such courts. The Executive and the Company irrevocably waive any objection that they now have or hereafter may have to the laying of venue of any suit, action or proceeding brought in any court and further irrevocably waive any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum. Final judgment against the Executive or the Company in any such suit shall be conclusive and may be enforced in other jurisdictions by suit on the judgment, a certified or true copy or which shall be conclusive evidence of the fact and the account of any liability of the Executive or the Company therein described, or by appropriate proceedings under an applicable treaty or otherwise. ARTICLE V Termination ----------- 5.01. Termination by the Company. The Company shall have the right -------------------------- to terminate Executive's employment at any time, with or without "Cause". For purposes of this Agreement, "Cause" shall mean (i) the substantial and continued failure of Executive to perform material duties reasonably required of Executive by the Board (it being understood that a failure to attain performance objectives shall not be treated as a failure to perform material duties for purpose of this clause (i)) for a period of not less than 30 consecutive days, provided notice in writing from the Board is given to Executive specifying in reasonable detail the circumstances constituting such substantial and continued failure, (ii) conduct substantially disloyal to the Company which conduct is identified in reasonable detail by notice in writing from the Board and which conduct, if susceptible of cure, is not remedied by Executive within 30 days of Executive's receipt of such notice, (iii) any act of fraud, embezzlement or misappropriation against the Company, or (iv) the conviction of Executive of a felony. 5.02. Death. In the event Executive dies during the Term, his ----- employment shall automatically terminate effective on the date of his death. 5.03. Disability. In the event that Executive shall suffer a ---------- disability which shall have prevented him from performing satisfactorily his obligations hereunder for a period of at least 90 consecutive days, or 180 non- consecutive days within any 365 day period, the Company shall have the right to terminate Executive's employment for "Disability," such termination to be effective upon the giving of notice thereof to Executive in accordance with Section 6.03 hereof. 7 5.04. Compensation upon Termination. (a) In the event of termination ----------------------------- of Executive's employment by the Company (other than for Cause or Disability), or in the event of termination of Executive's employment by the Company as a result of the Company's failure to renew this Agreement, or in the event of a termination of Executive's employment by Executive following a breach of a material provision of this Agreement by the Company, provided that the Executive has given advance written notice to the Company, identifying the basis for the breach in reasonable detail and, except in the event of a failure to pay Base Salary, giving the Company 30 days' opportunity to cure, the Company shall pay Executive an amount equal to 100% of the Executive's then current Base Salary, in twelve equal monthly installments following the date of such termination. (b) The Executive's rights upon termination of employment with respect to stock options or other incentive awards shall be governed by the terms and conditions of any stock option agreements or as established by the Company with respect to such awards. (c) Upon termination of Employment for any reason, Executive shall be entitled to continued coverage under the Company's health, disability and medical benefits for the greater of (i) the period provided under applicable law (but only to the extent the Executive takes whatever actions are required of him under applicable law to secure such continued coverage) or (ii) 90 days from the date of termination; provided that nothing in this Section 5.04 shall affect -------- Executive's continuing entitlement under any disability insurance policy if Executive's employment is terminated by the Company for Disability. Notwithstanding the preceding sentence, if the Executive's employment is terminated under the circumstances described in Section 5.04(a), such continued coverage shall be provided on the same basis as for active employees for a period of one year from the date of termination. (d) Except as provided in this Section 5.04, Executive shall not be entitled to compensation as a result of any termination of his employment with the Company. ARTICLE VI Miscellaneous ------------- 6.01. Mitigation; Offset. Executive shall not be required to ------------------ mitigate damages resulting from his termination of employment and, during such time, the amounts payable to Executive pursuant to Article V of this Agreement shall not be offset or reduced by any other compensation earned by Executive. 6.02. Benefit of Agreement; Assignment; Beneficiary. (a) This --------------------------------------------- Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns, 8 including, without limitation, any corporation or person which may acquire all or substantially all of the Company's assets or business, or with or into which the Company may be consolidated or merged. This Agreement shall also inure to the benefit of, and be enforceable by, the Executive and his personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amount would still be payable to the Executive hereunder if he had continued to live, all such amounts shall be paid in accordance with the terms of this Agreement to the Executive's beneficiary, devisee, legatee or other designee, or if there is no such designee, to the Executive's estate. (b) The Company shall require any successor (whether direct or indirect, by operation of law, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. 6.03. Notices. Any notice required or permitted hereunder shall be ------- in writing and shall be sufficiently given if personally delivered or if sent by telegram or telecopier or by registered or certified mail, postage prepaid, with return receipt requested, addressed: (a) in the case of the Company to: T.K.G. Acquisition Corp., c/o Warburg, Pincus Ventures, L.P., 466 Lexington Avenue, New York, NY 10017, Attention: Jeffrey A. Harris, tel: (212) 878-0638; fax: (212) 878-9351, or to such other address and/or to the attention of such other person as the Company shall designate by written notice to Executive; and (b) in the case of Executive, to: Andrew B. Cogan, 1 West 64th Street, Apartment 4B, New York, New York 10023, or to such other address as Executive shall designate by written notice to the Company, with a copy to F. George Davitt, Testa, Hurwitz & Thibeault, 125 High Street, Boston, MA 02110, tel: (617) 248-7000, fax: (617) 248-7100. Any notice given hereunder shall be deemed to have been given at the time of receipt thereof by the person to whom such notice is given. 6.04. Entire Agreement; Amendment. This Agreement contains the --------------------------- entire agreement of the parties hereto with respect to the terms and conditions of Executive's employment during the term and supersedes any and all prior agreements and understandings, whether written or oral, between the parties hereto with respect to compensation due for services rendered hereunder. This Agreement may not be changed or modified except by an instrument in writing signed by both of the parties hereto. 6.05. Waiver. The waiver by either party of a breach of any ------ provision of this Agreement shall not operate or be construed as a continuing waiver or as a consent to or waiver of any subsequent breach hereof. 9 6.06. Headings. The Article and Section headings herein are for -------- convenience of reference only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof. 6.07. Governing Law. This Agreement shall be governed by, and ------------- construed and interpreted in accordance with, the internal laws of the State of New York without reference to the principles of conflict of laws. 6.08. Agreement to Take Actions. Each party hereto shall execute and ------------------------- deliver such documents, certificates, agreements and other instruments, and shall take such other actions, as may be reasonably necessary or desirable in order to perform his or its obligations under this Agreement or to effectuate the purposes hereof. 6.09. Survivorship. The respective rights and obligations of the ------------ parties hereunder shall survive any termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations. 6.10. Validity. The invalidity or unenforceability of any provision -------- or provisions of this Agreement shall not affect the validity or enforceability of any other provision or provisions of this Agreement, which shall remain in full force and effect. 6.11. Information Rights. Until the earlier of (i) such time as ------------------ Executive no longer owns at least 50% of the shares of the Company's capital stock purchased by Executive pursuant to the Management Subscription Agreement, dated as of the date hereof, between Executive and the Company, (ii) an Initial Public Offering (as defined in the Stockholders Agreement referred to below), (iii) the termination of Executive's employment with the Company for Cause (as defined below), and (iv) Executive's employment by, or provision of consulting services to, a competitor of the Company or any of its subsidiaries, the Company shall provide Executive with the information set forth in Section 5(a) of the Stockholders Agreement (Common Stock and Preferred Stock), dated as of the date hereof, among the Company, Executive and certain other stockholders of the Company. For purposes of this paragraph, "Cause" shall having the meaning set forth in clauses (iii) and (iv) only in Section 5.01 of this Agreement. 6.12. Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 10 IN WITNESS WHEREOF, each of the parties hereto has duly executed this Agreement effective as of the date first above written. T.K.G. Acquisition Corp. By: /s/ Burton B. Staniar ________________________________ Name: Burton B. Staniar Title: President and Chief Executive Officer /s/ Andrew B. Cogan ________________________________ Andrew B. Cogan 11 EX-10.6 9 STOCKHOLDERS AGREEMENT (COMMON & PREFERRED) EXHIBIT 10.6 T.K.G. ACQUISITION CORP. STOCKHOLDERS AGREEMENT (COMMON STOCK AND PREFERRED STOCK) Stockholders Agreement, dated as of this 29th day of February, 1996, by and among Warburg, Pincus Ventures, L.P., a Delaware limited partnership ("Warburg"); the individuals whose names and addresses appear from time to time on Schedule I hereto (the "Management Investors"); the persons whose names and addresses appear from time to time on Schedule II hereto (the "Non-Management Investors," and, together with the Management Investors, the "Third Party Investors" and, together with Warburg and the Management Investors, the "Investors"); and T.K.G. Acquisition Corp., a Delaware corporation (the "Company"). Certain terms used in this Agreement are defined in Section 8 hereof. R E C I T A L S --------------- WHEREAS, certain of the Investors, pursuant to the terms of certain subscription agreements with the Company (collectively, the "Subscription Agreements"), have agreed to purchase shares of the Common Stock, par value $.01 per share, of the Company (the "Common Stock") and the Series A 12% Participating Convertible Preferred Stock, par value $1.00 per share, of the Company (the "Preferred Stock"); and WHEREAS, the Investors and the Company desire to promote their mutual interests by agreeing to certain matters relating to the operations of the Company and the disposition and voting of the shares of Common Stock and Preferred Stock purchased by the Investors pursuant to the Subscription Agreements, together with any other shares of Common Stock or Preferred Stock acquired by them (other than shares of Common Stock issued under the T.K.G. Acquisition Corp. 1996 Stock Incentive Plan (as it may be amended from time, the "Stock Plan")) (collectively, the "Shares"). NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, the parties hereto hereby agree as follows: 1. COVENANTS OF THE PARTIES ------------------------ (a) Legends. The certificates evidencing the Shares acquired by the ------- Investors pursuant to the Subscription Agreements or their permitted transferees will bear the following legend reflecting the restrictions on the transfer of such securities contained in this Agreement: "The securities evidenced hereby are subject to the terms of that certain Stockholders Agreement (Common Stock and Preferred Stock), dated as of February 29, 1996, by and among the Company and certain holders of the Common Stock and Preferred Stock, including certain restrictions on transfer and rights of first refusal. A copy of such Stockholders Agreement has been filed with the Secretary of the Company and is available upon request." (b) Election of Directors. --------------------- (i) As of the date hereof, the Board of Directors of the Company (the "Board") will consist of Burton B. Staniar ("Staniar"), John H. Lynch ("Lynch"), John L. Vogelstein, Sidney Lapidus, Jeffrey A. Harris and Kewsong Lee. From and after the date hereof, the Investors and the Company shall take all action within their respective power, including but not limited to, the voting of all shares of capital stock of the Company owned by them, required to cause the Board to consist of six members or such other number as the Board may from time to time establish, and at all times throughout the term of this Agreement to include (A) that number of Warburg Directors as shall constitute a majority of the Board, or, at Warburg's written election, which election shall be irrevocable, as shall constitute one director less than a majority of the Board, (B) Staniar, who shall be entitled to be a member of the Board until termination of his employment in accordance with the terms of the Staniar Employment Agreement, and (C) Lynch, who shall be entitled to be a member of the Board until termination of his employment in accordance with the terms of the Lynch Employment Agreement. (ii) From the later of the date on which the Company completes an Initial Public Offering and the date (the "Lender Board Requirement Termination Date") when the Company's lenders no longer require that Warburg Directors constitute a majority of the Board: (i) for as long as Warburg owns beneficially at least 50% of the outstanding shares of Common Stock or Preferred Stock, the Company and each Investor will nominate and use its best efforts to have four Warburg Directors elected to the Board, (ii) for as long as Warburg owns beneficially at least 25% of the outstanding shares of Common Stock or Preferred Stock, the Company and each Investor will nominate and use its best efforts to have three Warburg Directors elected to the Board, (iii) for as long as Warburg owns beneficially at least 15% of the outstanding shares of Common Stock or Preferred Stock, the Company and each Investor will nominate and use its best efforts to have two Warburg Directors elected to the Board and (iv) for as long as Warburg owns beneficially at least 5% of the outstanding shares of Common Stock or Preferred Stock, the Company and each Investor will nominate and use its best efforts to have one Warburg Director elected to the Board. 2 (c) Replacement Directors. In the event that any Warburg Director is --------------------- unable to serve, or once having commenced to serve, is removed or withdraws from the Board (a "Withdrawing Director"), such Withdrawing Director's replacement (the "Substitute Director") will be designated by Warburg. A Warburg Director may be removed, with or without cause, by Warburg, and Warburg shall thereafter have the right to nominate a replacement for such director. The Investors and the Company agree to take all action within their respective power, including but not limited to, the voting of all shares of capital stock of the Company owned by them, to cause the election of such Substitute Director promptly following his or her nomination pursuant to this Section 1(c). (d) Subscription Right. If at any time after the date hereof, except ------------------ for (i) grants or issuances of equity securities pursuant to the Stock Plan or any other incentive plan for the Company's or any of its Subsidiaries' directors or employees (collectively, "Plan Stock") and (ii) securities issuable upon exercise of previously issued warrants, options or other rights to acquire equity securities or upon conversion of previously issued securities convertible into equity securities, the Company proposes to sell equity securities of any kind (the term "equity securities" shall include for these purposes any warrants, options or other rights to acquire equity securities and debt securities convertible into equity securities) of the Company, then, as to each Investor who holds shares of capital stock of the Company, the Company shall: (i) give written notice setting forth in reasonable detail (1) the designation and all of the terms and provisions of the securities proposed to be issued (the "Proposed Securities"), including, where applicable, the voting powers, preferences and relative participating, optional or other special rights, and the qualifications, limitations or restrictions thereof and interest rate and maturity; (2) the price and other terms of the proposed sale of such securities; (3) the amount of such securities proposed to be issued; and (4) such other information as may be reasonably required in order to evaluate the proposed issuance; and (ii) offer to sell to each such Investor a portion of the Proposed Securities equal to a percentage determined by dividing (x) the number of shares of Preferred Stock then held by such Investor (and if no shares of Preferred Stock are outstanding, then the number of shares of Common Stock (other than Plan Stock)) by (y) the total number of shares of Preferred Stock then outstanding (and if no shares of Preferred Stock are outstanding, then the number of shares of Common Stock (other than Plan Stock)). 3 Each such Investor must exercise its purchase rights hereunder within ten (10) days after receipt of such notice from the Company. If all of the Proposed Securities offered to such Investors are not fully subscribed by such Investors, the remaining Proposed Securities will be reoffered to those Investors purchasing their full allotment upon the terms set forth in this Section 1(d) (with an allocation based on the respective percentages of the aggregate number of shares of Preferred Stock held by such Investors and, if no shares of Preferred Stock are outstanding, then of the aggregate number of shares of Common Stock (other than Plan Stock)), until all such Proposed Securities are fully subscribed for or until all such Investors have subscribed for all such Proposed Securities which they desire to purchase, except that such Investors must exercise their purchase rights within five days after receipt of all such reoffers. To the extent that the Company offers two or more securities in units, Investors must purchase such units as a whole and will not be given the opportunity to purchase only one of the securities making up such unit. Upon the expiration of the offering periods described above, the Company will be free to sell such Proposed Securities that the Investors have not elected to purchase during the ninety (90) days following such expiration on terms and conditions no more favorable to the purchasers thereof than those offered to such holders. Any Proposed Securities offered or sold by the Company after such 90-day period must be reoffered to the Investors pursuant to this Section 1(d). The election by an Investor not to exercise its subscription rights under this Section 1(d) in any one instance shall not affect its right (other than in respect of a reduction in its percentage holdings) as to any subsequent proposed issuance. Any sale of such securities by the Company without first giving the Investors the rights described in this Section 1(d) shall be void and of no force and effect. (e) Additional Investors. The parties hereto acknowledge that, subject -------------------- to the terms hereof, certain employees of the Company or its Subsidiaries or other investors may become shareholders of the Company after the date hereof and that each such employee or other investor will be required, as a condition to the issuance of shares of Common Stock or Preferred Stock to them, to execute a Joinder Agreement in the form attached hereto as Exhibit A (the "Joinder Agreement"). Upon execution of a Joinder Agreement, each such employee or other investor shall be deemed to be a Management Investor (with respect to employees of the Company or its Subsidiaries) or a Non-Management Investor (with respect to additional investors who are not employees of the Company or its Subsidiaries) under this Agreement and shall be entitled to all of the rights and benefits afforded to, and shall be subject to all the obligations of, such Investors hereunder. 4 2. TRANSFER OF STOCK ----------------- (a) Resale of Securities. Without the approval of the Board, no Third -------------------- Party Investor shall Transfer any Shares, or any beneficial interest therein, other than in accordance with the provisions of this Section 2. Any Transfer or purported Transfer made in violation of this Section 2 shall be null and void and of no effect. (b) Rights of First Refusal. No Third Party Investor shall Transfer ----------------------- any Shares, or any beneficial interest therein (except (i)(x) to an Affiliate of such Investor or to members of such Third Party Investor's immediate family or trusts for the benefit of such Investor or such Third Party Investor's immediate family, and (y) upon the death of any Management Investor, to his or her respective executors, administrators, or testamentary trustees; to a corporation or partnership, the sole stockholders or limited or general partners of which include only such Management Investor and members of such Management Investor's immediate family; a transfer from a Management Investor's trust or other transferee back to such Management Investor; a transfer to the legal guardian of a disabled Management Investor or of a Management Investor's disabled immediate family member, provided in each instance in this clause (i) that such transferee -------- executes and delivers to the Company and Warburg a Joinder Agreement, or (ii) to Warburg or an Affiliate thereof), unless the Third Party Investor desiring to make the Transfer (hereinafter referred to as the "Transferor") shall have first made the offers to sell to the Company and then to Warburg as contemplated by Section 2(c) through 2(i), and such offers shall not have been accepted. (c) Offer by Transferor. Copies of the Transferor's offer shall be ------------------- given to the Company and Warburg and shall consist of an offer to sell to the Company or, failing its election to purchase, then to Warburg, all of the shares then proposed to be transferred by the Transferor (the "Subject Shares") pursuant to a bona fide offer of a third party, to which copies shall be attached a statement of intention to Transfer to such third party, the name and address of the prospective third party transferee, the number of shares of Common Stock and/or Preferred Stock involved in the proposed Transfer and terms of such Transfer. (d) Acceptance of Offer. (i) Within 10 days after the receipt of the ------------------- offer described in Section 2(c), the Company may, at its option, elect to purchase all, but not less than all, of the Subject Shares. The Company shall exercise such option by giving notice thereof to the Transferor and to Warburg within such 10 day period. (ii) In the event that the Company does not exercise its option to purchase the Subject Shares within such 10 day period, Warburg may exercise its election to purchase all, but 5 not less than all, of the Subject Shares by giving notice thereof to the Transferor and to the Company within 10 days after receipt of notice from the Transferor in accordance with Section 2(c) to the effect that the Company did not exercise its option to purchase. (iii) In either event, the notice required to be given by the purchasing party (the "Purchaser") shall specify a date for the closing of the purchase which shall not be more than 30 days after the date of the giving of such notice. (e) Purchase Price. The purchase price per share for the Subject -------------- Shares shall be the price per share offered to be paid by the prospective transferee described in the offer, which price shall be paid in cash or, if so provided in the offer of the prospective transferee, cash plus deferred payments of cash in the same proportions, and with the same terms of deferred payment as therein set forth. (f) Consideration Other Than Cash. If the offer of Subject Shares ----------------------------- under this Section 2 is for consideration other than cash or cash plus deferred payments of cash, the Purchaser shall pay the cash equivalent of such other consideration. If the Transferor and the Purchaser cannot agree on the amount of such cash equivalent within 10 days after the beginning of the 10-day period under Section 2(d)(i), any of such parties may, by 3 days' written notice to the other, initiate appraisal proceedings under Section 2(g) for determination of the cash equivalent. (g) Appraisal Procedure. If any party shall initiate an appraisal ------------------- procedure to determine the amount of the cash equivalent of any consideration for Subject Shares under Section 2(f), then the Transferor, on the one hand, and the Purchaser, on the other hand, shall each promptly appoint as an appraiser an individual who shall be a member of a reputable valuation firm. Each appraiser shall, within 30 days of appointment, separately investigate the value of the consideration for the Subject Shares as of the proposed transfer date and shall submit a notice of an appraisal of that value to each party. Each appraiser shall be instructed to determine such value without regard to income tax consequences to the Transferor as a result of receiving cash rather than other consideration. If, upon the completion of the initial appraisals (the "Earlier Appraisals"), the higher appraised value of such consideration is not more than 110% of the lower appraised value of such consideration, the average of the two appraisals on a per share basis shall be controlling as the amount of the cash equivalent. If the higher appraised value is more than 110% of the lower appraised value, the appraisers, within 10 days of the submission of the last appraisal, shall appoint a third appraiser who shall be member of a reputable valuation firm. The third appraiser shall, within 30 days of his appointment, appraise the value of the consideration for the 6 Subject Shares (without regard to the income tax consequences to the Transferor as a result of receiving cash rather than other consideration) as of the proposed transfer date and submit notice of his appraisal to each party. The value determined by the third appraiser shall be controlling as the amount of the cash equivalent unless the value is greater than the two Earlier Appraisals, in which case the higher of the two Earlier Appraisals will control, and unless that value is lower than the two Earlier Appraisals, in which case the lower of the two Earlier Appraisals will control. If any party fails to appoint an appraiser or if one of the two initial appraisers fails after appointment to submit his appraisal within the required period, the appraisal submitted by the remaining appraiser shall be controlling. The cost of the foregoing appraisals shall be shared one-half by the Transferor and one-half by the Purchaser. (h) Closing of Purchase. The closing of the purchase shall take place ------------------- at the office of the Company or such other location as shall be mutually agreeable and the purchase price, to the extent comprised of cash, shall be paid at the closing, and cash equivalents and documents evidencing any deferred payments of cash permitted pursuant to Section 2(e) above shall be delivered at the closing. At the closing, the Transferor shall deliver to the Purchaser the certificates evidencing the Subject Shares to be conveyed, duly endorsed and in negotiable form with all the requisite documentary stamps affixed thereto. (i) Release from Restriction; Termination of Rights. If the offer to ----------------------------------------------- sell is neither accepted by the Company nor by Warburg, the Transferor may make a bona fide Transfer to the prospective transferee named in the statement attached to the offer in accordance with the agreed upon terms of such Transfer, provided, that (A) such Transfer shall be made only in strict accordance with - -------- the terms therein stated and (B) the transferee executes and delivers to the Company and Warburg a copy of the Joinder Agreement. If the Transferor shall fail to make such Transfer within sixty (60) days following the expiration of the time hereinabove provided for the election by Warburg or, in the event the Purchaser revokes an election to purchase the Subject Shares pursuant to Section 2(f), within sixty (60) days of the date of such notice of revocation, such Shares shall again become subject to all the restrictions of this Section 2. 3. RIGHT OF CO-SALE. ---------------- (a) In the event that Warburg intends to Transfer (i) shares of Common Stock which, together with any previous sales of shares of Common Stock by Warburg, represent more than fifteen percent (15%) of the issued and outstanding shares of Common Stock on a cumulative basis or (ii) shares of Preferred Stock which, together with any previous sales of shares of Preferred Stock by Warburg, represent more than fifteen percent (15%) of the issued and outstanding shares of Preferred Stock on a cumulative basis (in each case other than to an Affiliate of 7 Warburg or pursuant to a distribution of such shares to its partners), Warburg shall notify each other Investor holding shares of such class of stock, in writing, of such Transfer and its terms and conditions (the "Proposed Sale"). Within 10 days of the date of such notice, each Investor that wishes to participate in the Proposed Sale shall so notify Warburg in writing (a "Transfer Notice"). In the event Warburg fails to receive a Transfer Notice from any Investor within such 10-day period, such Investor shall be deemed to have declined to participate in the Proposed Sale. Each Investor delivering a Transfer Notice shall have the right to sell, at the same price and on the same terms as Warburg, that number of shares of Common Stock or Preferred Stock, as the case may be, equal to the number of shares of Common Stock or Preferred Stock, as the case may be, the third party proposes to purchase multiplied by a fraction, the numerator of which shall be the number of shares of Common Stock or Preferred Stock (other than Plan Stock), as the case may be, issued and owned by such Investor and the denominator of which shall be the aggregate number of shares of Common Stock or Preferred Stock (other than Plan Stock), as the case may be, issued and owned by Warburg and each other Investor (including such Investor exercising its rights under this Section 3). Nothing contained herein shall obligate Warburg to consummate the Proposed Sale or limit Warburg's right to amend or modify the terms of the Proposed Sale in any respect; provided that the Investors are offered the opportunity to participate in the Proposed Sale on such amended or modified terms. (b) Notwithstanding anything contained in this Section 3, in the event that all or a portion of the consideration to be paid in the Proposed Sale consists of securities and the sale of such securities to Investors would require either a registration under the Securities Act or the preparation of a disclosure document pursuant to Regulation D under the Securities Act (or any successor regulation) or a similar provision of any applicable state securities law, then, at the option of Warburg, the Third Party Investors may receive, in lieu of such securities, the fair market value of such securities in cash, as determined in good faith by the Board unless (i) the holders of a majority of the shares other than those held by Warburg or its Affiliates or (ii) Management Investors holding a majority of shares held by Management Investors shall request an appraisal, in which case the appraisal procedure set forth in Section 2(g) shall be followed as closely as practicable, with such majority holders (which shall include Management Investors holding a majority of such shares held by Management Investors), on the one hand, and Warburg, on the other hand, each appointing an appraiser meeting the qualifications set forth in said Section 2(g). 8 4. DRAG-ALONG RIGHT ---------------- (a) If at any time and from time to time after the date of this Agreement, the holder or holders of a majority of the outstanding shares of voting capital stock of the Company (the "Proposed Transferors") wish to Transfer in a bona fide arms' length sale all shares of Common Stock and Preferred Stock then owned by them to any Person or Persons who are not Affiliates of the Proposed Transferors (for purposes of this Section 4(a), the "Proposed Transferee"), the Proposed Transferors shall have the right (the "Drag-Along Right") to require each Investor to sell to the Proposed Transferee all shares of Common Stock and Preferred Stock (for the same per share consideration received by the Proposed Transferor for each such class of capital stock) then held by the Investors, subject to purchase by the Proposed Transferee. Each Investor agrees to take all steps necessary to enable him or it to comply with the provisions of this Section 4(a), including, if necessary, voting any shares of Common Stock and Preferred Stock in favor of the transaction with the Proposed Transferee (whether effected as a merger or otherwise) to facilitate the Proposed Transferors' exercise of a Drag-Along Right. (b) To exercise a Drag-Along Right, the Proposed Transferors shall give each Investor a written notice (for purposes of this Section 4, a "Drag- Along Notice") containing (i) the number of shares of Common Stock and Preferred Stock that the Proposed Transferee proposes to acquire from the Proposed Transferors, (ii) the name and address of the Proposed Transferee, and (iii) the proposed purchase price, terms of payment and other material terms and conditions of the Proposed Transferee's offer. Each Investor shall thereafter be obligated to sell the shares of Common Stock (and, if applicable, Preferred Stock) subject to such Drag-Along Notice, provided that the sale to the Proposed -------- Transferee is consummated within 120 days of delivery of the Drag-Along Notice. If the sale is not consummated within such 120-day period, then each Investor shall no longer be obligated to sell such shareholder's shares pursuant to that specific Drag-Along Right but shall remain subject to the provisions of this Section 4. (c) Notwithstanding anything contained in this Section 4, in the event that all or a portion of the purchase price consists of securities and the sale of such securities to the Investors would require either a registration under the Securities Act or the preparation of a disclosure document pursuant to Regulation D under the Securities Act (or any successor regulation) or a similar provision of any applicable state securities law, then, at the option of the Proposed Transferors, the Third Party Investors may receive, in lieu of such securities, the fair market value of such securities in cash, as determined in good faith by the Board unless (i) the Third Party Investors holding a majority of the shares or (ii) Management Investors holding a majority of shares held by 9 Management Investors shall request an appraisal, in which case the appraisal procedure set forth in Section 2(g) shall be followed as closely as practicable, with such majority holders (which shall include Management Investors holding a majority of such shares held by Management Investors), on the one hand, and Warburg, on the other hand, each appointing an appraiser meeting the qualifications set forth in Section 2(g). 5. INFORMATION AS TO COMPANY AND RELATED COVENANTS ----------------------------------------------- (a) Investor Financial Information. From and after the date hereof, ------------------------------ the Company shall deliver to each Investor owning more than 5% of the issued and outstanding shares of Common Stock or Preferred Stock (except for the annual reports referred to in (a)(ii) below, which shall be delivered to each Investor as long as such Investor owns any shares of Common Stock or Preferred Stock): (i) Quarterly Statements. As soon as practicable, and in any event -------------------- within 45 days after the close of each of the first three fiscal quarters of each fiscal year of the Company, a consolidated balance sheet, statement of income and statement of changes in cash flow of the Company and its Subsidiaries (as hereinafter defined) as of the close of such quarter and the portion of the Company's fiscal year ending on the last day of such quarter, all in reasonable detail and prepared in accordance with U.S. generally accepted accounting principles, consistently applied, subject to audit and year end adjustments, setting forth in each case in comparative form the figures for the comparable period of the previous year; (ii) Annual Statements. As soon as practicable after the end of each ----------------- fiscal year of the Company, and in any event within 120 days thereafter, a copy of the consolidated balance sheet, and consolidated statements of income, stockholders' equity and changes in cash flow of the Company and its Subsidiaries for such year, setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail and accompanied by an opinion thereon of independent certified public accountants of recognized national standing selected by the Company, which opinion shall state that such financial statements fairly present the financial position and results of operations of the Company and its Subsidiaries on a consolidated basis and have been prepared in accordance with U.S. generally accepted accounting principles consistently applied (except for changes in application in which such accountants concur) and that the examination of such accountants has been made in accordance with generally accepted auditing standards, and accordingly included such tests of the accounting records and such other auditing procedures as were considered necessary in the circumstances. (b) Director Materials. The Company shall prepare and deliver to each ------------------ director of the Company: 10 (i) Monthly Financial Statements. As soon as practicable, and in any ---------------------------- event within 30 days after the close of each of month of each fiscal year of the Company, a consolidated balance sheet, statement of income and statement of changes in cash flow of the Company and its Subsidiaries as of the close of each month and the portion of the Company's fiscal year ending on the last day of such month, all in reasonable detail and prepared in accordance with U.S. generally accepted accounting principles, consistently applied, subject to audit and year end adjustments, setting forth in each case in comparative form the figures for the comparable period of the previous year; (ii) Business Plan; Projections. Prior to the commencement of each -------------------------- fiscal year of the Company, an annual business plan of the Company and projections of operating results, prepared on a monthly basis, and a three-year business plan of the Company and projections of operating results. Within 45 days of the close of each fiscal quarter of the Company, the Company shall provide its directors with a comparison of actual year-to-date results with the corresponding budgeted figures; (iii) Audit Reports. Promptly upon receipt thereof, one copy of each ------------- other financial report and internal control letter submitted to the Company by independent accountants in connection with any annual, interim or special audit made by them of the books of the Company and its Subsidiaries; and (iv) Requested Information. With reasonable promptness, the Company --------------------- shall furnish each director with such other data and information as from time to time may be reasonably requested. The Company acknowledges that its obligations under this Section 5(b) shall not limit the rights of its directors under applicable law to obtain information and other materials from the Company. (c) Inspection. From and after the date hereof, the Company will ---------- permit each Investor owning more than 5% of the issued and outstanding shares of Common Stock or Preferred Stock, its nominee, assignee or its representative to visit and inspect any of the properties of the Company, to examine all its books of account, records, reports and other papers not contractually required of the Company to be confidential or secret, to make copies and extracts therefrom, and to discuss its affairs, finances and accounts with its officers, directors, key employees and independent public accountants or any of them (and by this provision the Company authorizes said accountants to discuss with said Investor, its nominee, assign and representatives the finances and affairs of the Company and its Subsidiaries), all at such reasonable times and as often as may be reasonably requested. 11 (d) Confidentiality. As to so much of the information and other --------------- material furnished under or in connection with this Agreement (whether furnished before, on or after the date hereof) as constitutes or contains confidential business, financial or other information of the Company or its Subsidiaries, each Investor covenants for itself and its directors, officers, partners and stockholders that it will use due care to prevent its respective officers, directors, employees, counsel, accountants and other representatives from disclosing such information to persons other than their respective authorized employees, counsel, accountants, stockholders, partners, limited partners and other authorized representatives; provided, however, that the Investor may -------- ------- disclose or deliver any information or other material disclosed to or received by the Investor should such disclosure or delivery be required by law. 6. REGISTRATION RIGHTS ------------------- (a) Definitions. As used in this Section 6: (i) "Commission" shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act; (ii) the term "Holder" shall mean any holder of Registrable Securities; (iii) the term "Initiating Holder" shall mean Warburg; (iv) the terms "register," "registered" and "registration" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act (and any post-effective amendments filed or required to be filed) and the declaration or ordering of effectiveness of such registration statement; (v) the term "Registrable Securities" means (A) the shares of Common Stock and Preferred Stock issued to the Investors pursuant to the Subscription Agreements, dated as of February 29, 1996, between each of such Investors and the Company, (B) any additional shares of Common Stock or Preferred Stock acquired by the Investors (other than pursuant to the Stock Plan or any other incentive plan), (C) any shares of Common Stock issued in exchange for, or upon the conversion of, Preferred Stock and (D) any capital stock of the Company issued as a dividend or other distribution with respect to, or in exchange for or in replacement of, the shares of Common Stock or Preferred Stock referred to in clause (A), (B) or (C) above; (vi) "Registration Expenses" shall mean (x) all expenses incurred by the Company in compliance with Sections 6(b) and (c) hereof, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel for the Company blue sky fees and expenses and the 12 expense of any special audits incident to or required by any such registration (but excluding the compensation of regular employees of the Company, which shall be paid in any event by the Company) and (y) all reasonable fees and disbursements of counsel for each of the Holders; and (vii) "Selling Expenses" shall mean all underwriting discounts and selling commissions applicable to the sale of Registrable Securities. (b) Requested Registration. ---------------------- (i) Request for Registration. If the Company shall receive from the ------------------------ Initiating Holder, at any time, a written request that the Company effect any registration with respect to all or a part of the Registrable Securities, the Company will: (A) promptly give written notice of the proposed registration to all other Holders of Registrable Securities of the same class as the Registrable Securities specified in such request; and (B) as soon as practicable, use all reasonable efforts to effect such registration (including, without limitation, the execution of an undertaking to file post-effective amendments, appropriate qualification under applicable blue sky or other state securities laws and appropriate compliance with applicable regulations issued under the Securities Act) as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of the same class as the Registrable Securities specified in such request of any Holder or Holders joining in such request as are specified in a written request received by the Company within 10 business days after written notice from the Company is given under Section 6(b)(i)(A) above; provided that the Company shall not be obligated to -------- effect, or take any action to effect, any such registration pursuant to this Section 6(b): (x) In any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, qualification or compliance, unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act or applicable rules or regulations thereunder; (y) (i) With respect to a request for registration of shares of Common Stock, after the Company has effected two (2) such registrations pursuant to this Section 6(b) requested by the 13 Initiating Holder and (ii) with respect to a request for registration of shares of Preferred Stock, after the Company has effected two (2) such registrations pursuant to this Section 6(b) requested by the Initiating Holder, and, in each case, such registrations have been declared or ordered effective and the sales of such Registrable Securities shall have closed; or (z) If the Registrable Securities requested by all Holders to be registered pursuant to such request do not have an anticipated aggregate public offering price (before any underwriting discounts and commissions) of at least $25,000,000. The registration statement filed pursuant to the request of the Initiating Holder may, subject to the provisions of Section 6(b)(ii) below, include other securities of the Company which are held by officers or directors of the Company, or which are held by Persons who, by virtue of agreements with the Company, are entitled to include their securities in any such registration, but the Company's right to include any of its securities in any such registration shall be subject to the limitations set forth in Section 6(b)(ii) below. The registration rights set forth in this Section 6 shall be assignable, in whole or in part, to any permitted transferee of the Shares, provided such transferee executes and delivers to the Company and Warburg a Joinder Agreement. (ii) Underwriting. If the Initiating Holder intends to distribute ------------ the Registrable Securities covered by its request by means of an underwriting, it shall so advise the Company as a part of its request made pursuant to Section 6(b). If officers or directors of the Company holding shares of Common Stock (other than Registrable Securities) shall request inclusion in any registration pursuant to Section 6(b), 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 Shareholders") request such inclusion, the Holders shall offer to include the securities of such officers, directors and Other Shareholders in the underwriting and may condition such offer on their acceptance of the further applicable provisions of this Section 6. The Holders whose shares are to be included in such registration and the Company shall (together with all officers, directors and Other Shareholders proposing to distribute their securities (in each case, other than Registrable Securities) through such underwriting) enter into an underwriting agreement in customary form with the representative of the underwriter or underwriters selected for such underwriting by the Initiating Holder and reasonably acceptable to the Company. Notwithstanding any other provision of this Section 6(b), (i) if 14 the representative advises the Holders in writing that marketing factors require a limitation on the number of shares to be underwritten, then the securities of the Company held by officers or directors (other than Registrable Securities) of the Company and the securities held by Other Shareholders shall be excluded from such registration to the extent so required by such limitations and (ii) if the representative advises the Holders in writing that marketing factors require a limitation on the number of shares to be sold by officers and directors of the Company, the securities of the Company held by such officers or directors (including Registrable Securities) shall be excluded from such registration to the extent so required by such limitations. If, after the exclusion of such shares, further reductions are still required, the number of shares included in the registration by each Holder shall be reduced on a pro rata basis (based on the number of shares held by the respective Holders) by such minimum number of shares as is necessary to comply with such request. No Registrable Securities or any other securities excluded from the underwriting by reason of the underwriter's marketing limitation shall be included in such registration. If any officer, director or Other Shareholder who has requested inclusion in such registration as provided above disapproves of the terms of the underwriting, such person may elect to withdraw therefrom by written notice to the Company, the underwriter and the Initiating Holder. The securities so withdrawn shall also be withdrawn from registration. If the underwriter has not limited the number of Registrable Securities or other securities to be underwritten, the Company may include its securities for its own account in such registration if the representative so agrees and if the number of Registrable Securities and other securities which would otherwise have been included in such registration and underwriting will not thereby be limited. (iii) Notwithstanding the foregoing, if the Company shall furnish to Holders requesting the filing of a registration statement pursuant to this Section 6(b), a certificate signed by the President or Chief Executive Officer of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its stockholders for such registration statement to be filed and it is therefore essential to defer the filing of such registration statement, then the Company shall have the right to defer such filing for a period of not more than 120 days after receipt of the request of the Initiating Holder; provided, however, that -------- ------- the Company may not utilize this right more than once in any twelve (12) month period. (c) Company Registration. -------------------- (i) If the Company shall determine to register any of its equity securities either for its own account or for the account of a security holder or holders, other than a registration relating solely to employee benefit plans, or a registration relating solely to a Commission Rule 145 15 transaction, or a registration on any registration 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, the Company will: (A) promptly give to each of the Holders a written notice thereof (which shall include a list of the jurisdictions in which the Company intends to attempt to qualify such securities under the applicable blue sky or other state securities laws); and (B) include in such registration (and any related qualification under blue sky laws or other compliance), and in any underwriting involved therein, all the Registrable Securities (of the same class of equity securities being registered under such registration statement) specified in a written request or requests, made by the Holders within ten business days after receipt of the written notice from the Company described in clause (i) above, except as set forth in Section 6(c)(ii) below. Such written request may specify all or a part of the Holders' Registrable Securities of the same class of equity securities being registered under such registration statement. (ii) Underwriting. If the registration of which the Company gives ------------ notice is for a registered public offering involving an underwriting, the Company shall so advise each of the Holders as a part of the written notice given pursuant to Section 6(c)(i)(A). In such event, the right of each of the Holders to registration pursuant to this Section 6(c) shall be conditioned upon such Holders' participation in such underwriting and the inclusion of such Holders' Registrable Securities (of the same class of equity securities being registered under such registration statement) in the underwriting to the extent provided herein. The Holders whose shares are to be included in such registration shall (together with the Company and the Other Shareholders distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the representative of the underwriter or underwriters selected for underwriting by the Company. Notwithstanding any other provision of this Section 6(c), if the representative determines that marketing factors require a limitation on the number of shares to be underwritten, the Company shall so advise all holders of securities requesting registration, and the number of shares of securities that are entitled to be included in the registration and underwriting shall be allocated in the following manner: The securities of the Company held by officers, directors and Other Shareholders of the Company (in each case, other than Registrable Securities) and, if required by the representative of the underwriters, the securities of the Company held by officers and directors of the Company (including Registrable Securities), shall be excluded from such registration and underwriting to the extent required by such limitation, and, 16 if a limitation on the number of shares is still required, the number of shares that may be included in the registration and underwriting by each of the Holders shall be reduced, on a pro rata basis (based on the number of shares held by such Holder), by such minimum number of shares as is necessary to comply with such limitation. If any of the Holders or any officer, director or Other Shareholder disapproves of the terms of any such underwriting, he may elect to withdraw therefrom by written notice to the Company and the underwriter. Any Registrable Securities or other securities excluded or withdrawn from such underwriting shall be withdrawn from such registration. (iii) Number and Transferability. Each of the Holders shall be -------------------------- entitled to have its shares included in an unlimited number of registrations pursuant to this Section 6(c). The registration rights granted pursuant to this Section 6(c) shall be assignable, in whole or in part, to any permitted transferee of the Shares, provided such transferee executes and delivers to the Company and to Warburg a Joinder Agreement. (d) Form S-3. Following the Initial Public Offering the Company shall -------- use its best efforts to qualify for registration on Form S-3 for secondary sales. After the Company has qualified for the use of Form S-3, Holders of Registrable Securities shall have the right to request unlimited registrations on Form S-3 (such requests shall be in writing and shall state the number of shares of Registrable Securities to be disposed of and the intended method of disposition of shares by such holders), subject only to the following: (i) The Company shall not be required to effect a registration pursuant to this Section 6(d) unless the Holder or Holders of Registrable Securities requesting registration propose to dispose of shares of Registrable Securities having an aggregate price to the public (before deduction of underwriting discounts and expenses of sale) of more than $5,000,000. (ii) The Company shall not be required to effect a registration pursuant to this Section 6(d) within 180 days of the effective date of the most recent registration pursuant to this Section 6(d) in which securities held by the requesting Holder could have been included for sale or distribution. (iii) The Company shall not be required to effect a registration pursuant to this Section 6(d) if the Company shall furnish to the Holders a certificate signed by the President or Chief Executive Officer of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its shareholders for such registration statement to be filed and it is therefore essential to defer the filing of such registration statement. In such event, the Company shall have the right to defer the filing of the registration statement no more than once during any twelve (12) month period for a period of not more than one hundred 17 twenty (120) days after receipt of the request of the Holder or Holders under this Section 6(d). (iv) The Company shall not be obligated to effect any registration pursuant to this Section 6(d) in any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, qualification or compliance, unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act or applicable rules or regulations thereunder. The Company shall give written notice thereof to all Holders of Registrable Securities within five (5) days of the receipt of a request for registration pursuant to this Section 6(d) and shall provide a reasonable opportunity for other Holders of Registrable Securities to participate in the registration, provided that if the registration is for an underwritten offering, the terms of Section 6(b)(ii) shall apply to all participants in such offering. Subject to the foregoing, the Company will use its best efforts to effect promptly the registration of all shares of Registrable Securities on Form S-3 to the extent requested by the Holder or Holders thereof for purposes of disposition. (e) Expenses of Registration. All Registration Expenses incurred in ------------------------ connection with any registration, qualification or compliance pursuant to this Section 6 (whether or not such registration, qualification or compliance is effectuated) shall be borne by the Company, and all Selling Expenses shall be borne by the Holders of the securities so registered (or proposed to be registered) pro rata on the basis of the number of their shares so registered (or proposed to be registered). (f) Registration Procedures. In the case of each registration ----------------------- effected by the Company pursuant to Section 6, the Company will keep the Holders, as applicable, advised in writing as to the initiation of each registration and as to the completion thereof. At its expense, the Company will: (i) keep such registration effective for a period of one hundred twenty (120) days or until the Holders, as applicable, have completed the distribution described in the registration statement relating thereto, whichever first occurs; provided, however, that (A) such 120-day period shall be extended for a period of time equal to the period during which the Holders, as applicable, refrain from selling any securities included in such registration in accordance with provisions in Section 6(j) hereof; and (B) in the case of any registration of Registrable Securities on Form S-3 which are intended to be offered on a continuous or delayed basis, such 120-day period shall be extended until all such Registrable Securities are sold, provided that Rule 415, or any successor rule under the 18 Securities Act, permits an offering on a continuous or delayed basis, and provided further that applicable rules under the Securities Act governing the obligation to file a post-effective amendment permit, in lieu of filing a post- effective amendment which (y) includes any prospectus required by Section 10(a)(3) of the Securities Act or (z) reflects facts or events representing a material or fundamental change in the information set forth in the registration statement, the incorporation by reference of information required to be included in (y) and (z) above to be contained in periodic reports filed pursuant to Section 13 or 15(d) of the Exchange Act in the registration statement; and (ii) furnish such number of prospectuses and other documents incident thereto as each of the Holders, as applicable, from time to time may reasonably request. (g) Indemnification. --------------- (i) The Company will indemnify each of the Holders, as applicable, each of its officers, directors and partners, and each person controlling each of the Holders, with respect to each registration which has been effected pursuant to this Section 6, and each underwriter, if any, and each person who controls any underwriter, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any prospectus, offering circular or other document (including any related registration statement, notification or the like) incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by the Company of the Securities Act or any rule or regulation thereunder applicable to the Company and relating to action or inaction required of the Company in connection with any such registration, qualification or compliance, and will reimburse each of the Holders, each of its officers, directors and partners, and each person controlling each of the Holders, each such underwriter and each person who controls any such underwriter, for any legal and any other expenses reasonably incurred in connection with investigating and defending any such claim, loss, damage, liability or action, provided that the Company will not be liable in any such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any untrue statement or omission based upon written information furnished to the Company by any Holder with respect to such Holder or underwriter with respect to such underwriter and stated to be specifically for use therein. (ii) Each of the Holders will, if Registrable Securities held by it are included in the securities as to which such registration, qualification or compliance is being effected, indemnify the Company, each of its directors and officers and each underwriter, if any, of the Company's securities covered by 19 such a registration statement, each person who controls the Company or such underwriter within the meaning of the Securities Act and the rules and regulations thereunder, each Other Shareholder and each of their officers, directors, and partners, and each person controlling such Other Shareholder against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact with respect to such Holder contained in any such registration statement, prospectus, offering circular or other document made by such Holder, or any omission (or alleged omission) to state therein a material fact with respect to such Holder required to be stated therein or necessary to make the statements by such Holder therein not misleading, and will reimburse the Company and such Other Shareholders, directors, officers, partners, persons, underwriters or control persons for any legal or any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company by such Holder with respect to such Holder and stated to be specifically for use therein; provided, however, that the obligations of each of the Holders hereunder shall be limited to an amount equal to the proceeds to such Holder of securities sold as contemplated herein. (iii) Each party entitled to indemnification under this Section 6(g) (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or any litigation resulting therefrom shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld) and the Indemnified Party may participate in such defense at such party's expense (unless the Indemnified Party shall have reasonably concluded that there may be a conflict of interest between the Indemnifying Party and the Indemnified Party in such action, in which case the fees and expenses of counsel shall be at the expense of the Indemnifying Party), and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Section 6 unless the Indemnifying Party is materially prejudiced thereby. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such 20 Indemnified Party of a release from all liability in respect to such claim or litigation. Each Indemnified Party shall furnish such information regarding itself or the claim in question as an Indemnifying Party may reasonably request in writing and as shall be reasonably required in connection with the defense of such claim and litigation resulting therefrom. (iv) If the indemnification provided for in this Section 6(g) is held by a court of competent jurisdiction to be unavailable to an Indemnified Party with respect to any loss, liability, claim, damage or expense referred to herein, then the Indemnifying Party, in lieu of indemnifying such Indemnified Party hereunder, shall contribute to the amount paid or payable by such Indemnified Party as a result of such loss, liability, claim, damage or expense in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party on the one hand and of the Indemnified Party on the other in connection with the statements or omissions which resulted in such loss, liability, claim, damage or expense, as well as any other relevant equitable considerations. The relative fault of the Indemnifying Party and of the Indemnified Party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the Indemnifying Party or by the Indemnified Party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. (v) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with any underwritten public offering contemplated by this Agreement are in conflict with the foregoing provisions, the provisions in such underwriting agreement shall be controlling. (vi) The foregoing indemnity agreement of the Company and Holders is subject to the condition that, insofar as they relate to any loss, claim, liability or damage made in a preliminary prospectus but eliminated or remedied in the amended prospectus on file with the Commission at the time the registration statement in question becomes effective or the amended prospectus filed with the Commission pursuant to Commission Rule 424(b) (the "Final Prospectus"), such indemnity agreement shall not inure to the benefit of any underwriter if a copy of the Final Prospectus was furnished to the underwriter and was not furnished to the person asserting the loss, liability, claim or damage at or prior to the time such action is required by the Securities Act. (vii) Any indemnification payments required to be made to an Indemnified Party under this Section 6(g) shall be made as the related claims, losses, damages, liabilities or expenses are incurred. 21 (h) Information by the Holders. Each of the Holders and each Other -------------------------- Shareholder holding securities included in any registration, shall furnish to the Company such information regarding such Holder or Other Shareholder and the distribution proposed by such Holder or Other Shareholder as the Company may reasonably request in writing and as shall be reasonably required in connection with any registration, qualification or compliance referred to in this Section 6. Neither Warburg nor any Non-Management Investor shall be required, in connection with any underwriting arrangements entered into in connection with any registration, to provide any information, representations or warranties, or covenants with respect to the Company, its business or its operations, and such Investors shall not be required to provide any indemnification with respect to any registration statement except as specifically provided for in Section 6(g)(ii) hereof. (i) Rule 144 Reporting. ------------------ With a view to making available the benefits of certain rules and regulations of the Commission which may permit the sale of the restricted securities to the public without registration, the Company agrees to: (A) make and keep public information available as those terms are understood and defined in Rule 144, at all times from and after ninety (90) days following the effective date of the first registration under the Securities Act filed by the Company for an offering of its securities to the general public; (B) use its best efforts to file with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act at any time after it has become subject to such reporting requirements; and (C) so long as the Holder owns any Registrable Securities, furnish to the Holder upon request, a written statement by the Company as to its compliance with the reporting requirements of Rule 144 (at any time from and after ninety (90) days following the effective date of the first registration statement filed by the Company for an offering of its securities to the general public), and of the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents so filed as the Holder may reasonably request in availing itself of any rule or regulation of the Commission allowing the Holder to sell any such securities without registration. 22 (j) "Market Stand-off" Agreement. Each of the Holders agrees, if ---------------------------- requested by the Company and an underwriter of Common Stock or Preferred Stock (or other securities) of the Company, not to sell or otherwise transfer or dispose of any shares of Common Stock or Preferred Stock (or other securities) of the Company held by such Holder during the 90-day period (or such longer period if requested by such underwriter, up to 180 days) following the effective date of a registration statement of the Company filed under the Securities Act, provided that: (i) such agreement only applies to the first such registration statement of the Company which includes securities to be sold on the Company's behalf to the public in an underwritten offering; and (ii) all officers and directors of the Company enter into similar agreements. If requested by the underwriters, the Holders shall execute a separate agreement to the foregoing effect. The Company may impose stop-transfer instructions with respect to the shares (or securities) subject to the foregoing restriction until the end of said 90-day period (or such longer period if requested by the underwriter, up to 180 days). The provisions of this Section 6(j) shall be binding upon any transferee who acquires Registrable Securities, whether or not such transferee is entitled to the registration rights provided hereunder. (k) Termination. The registration rights set forth in this Section 6 ----------- shall not be available to any Holder if, in the opinion of counsel to the Company, all of the Registrable Securities then owned by such Holder could be sold in any 90-day period pursuant to Rule 144 under the Securities Act (without giving effect to the provisions of Rule 144(k)). The Company will arrange for a provision to the transfer agent for such shares of an opinion of counsel in connection with any such sale under Rule 144. 7. TERMINATION. The Agreement shall terminate: ----------- (a) upon the closing of the Initial Public Offering, except for the provisions of Sections 1(b)(i), 1(b)(ii), 1(c), 5(d) and 6, any election made by Warburg pursuant to Section 1(b)(i) or 9(d) and any election made by NationsBanc Investment Corp. pursuant to Section 9(d), which shall remain in full force and effect following the closing of the Initial Public Offering, provided, however, that Section 1(b)(i) shall terminate upon the later of the closing of an Initial Public Offering and the Lender Board Requirement Termination Date; or (b) on the date on which (i) Warburg, (ii) the holder or holders of a majority of the shares of Common Stock (other than Plan Stock and other than those shares held by Warburg or its Affiliates), which shall include Management Investors holding 23 a majority of such shares held by Management Investors, and (iii) during such time that the Preferred Stock is convertible into Common Stock, the holder or holders of a majority of the shares of Preferred Stock (other than those shares held by Warburg or its Affiliates), which shall include Management Investors holding a majority of such shares held by Management Investors, shall have agreed in writing to terminate this Agreement. Notwithstanding anything in this Agreement to the contrary, if a Management Investor's employment with the Company and its Subsidiaries is terminated, whether by such Management Investor or by the Company, whether with or without cause or whether due to the death or disability, all rights (other than his rights under Section 6) of such Management Investor under this Agreement (but not the obligations) shall be terminated. 8. INTERPRETATION OF THIS AGREEMENT -------------------------------- (a) Terms Defined. As used in this Agreement, the following terms ------------- have the respective meaning set forth below: Affiliate: any person or entity, directly or indirectly, controlling, --------- controlled by or under common control with such person or entity. Exchange Act: the Securities Exchange Act of 1934, as amended. ------------ Initial Public Offering: the completion of an underwritten initial ----------------------- public offering for shares of Common Stock pursuant to a registration statement under the Securities Act resulting in net proceeds to the Company and/or any selling shareholders of not less than $25,000,000. Lynch Employment Agreement: the Employment Agreement, dated as of -------------------------- February 29, 1996, between Lynch and the Company. Person: an individual, partnership, joint-stock company, corporation, ------ limited liability company, trust or unincorporated organization, and a government or agency or political subdivision thereof. Security, Securities: as defined in Section 2(1) of the Securities -------------------- Act. Securities Act: the Securities Act of 1933, as amended. -------------- Staniar Employment Agreement: the Employment Agreement, dated as of ---------------------------- February 29, 1996, between Staniar and the Company. Subsidiary: a corporation of which the Company owns, directly or ---------- indirectly, more than fifty percent 50% of the Voting Stock. 24 Transfer: any sale, assignment, pledge, hypothecation, or other -------- disposition or encumbrance, whether or not for consideration. Voting Stock: securities of any class or classes of a corporation the ------------ holders of which are ordinarily, in the absence of contingencies, entitled to elect a majority of the corporate directors (or Persons performing similar functions). Warburg Directors: any director of the Company, including a ----------------- Substitute Director, designated by Warburg pursuant to a provision of this Agreement. (b) Accounting Principles. Where the character or amount of any asset --------------------- or amount of any asset or liability or item of income or expense is required to be determined or any consolidation or other accounting computation is required to be made for the purposes of this Agreement, this shall be done in accordance with U.S. generally accepted accounting principles at the time in effect, to the extent applicable, except where such principles are inconsistent with the requirements of this Agreement. (c) Directly or Indirectly. Where any provision in this Agreement ---------------------- refers to action to be taken by any Person, or which such Person is prohibited from taking, such provision shall be applicable whether such action is taken directly or indirectly by such Person. (d) Governing Law. This Agreement shall be governed by and construed ------------- in accordance with the laws of the State of New York applicable to contracts made and to be performed entirely within such State. (e) Section Headings. The headings of the sections and subsections of ---------------- this Agreement are inserted for convenience only and shall not be deemed to constitute a part thereof. 9. MISCELLANEOUS ------------- (a) Notices. ------- (i) All communications under this Agreement shall be in writing and shall be delivered by hand or mailed by overnight courier or by registered or certified mail, postage prepaid: (A) if to any of the Management Investors, at the address of such Management Investor shown on Schedule I, or at such other address as the Management Investor may have furnished the Company in writing; (B) if to Warburg, at 466 Lexington Avenue, New York, New York 10017, Attention: Jeffrey A. Harris, or at such 25 other address as Warburg may have furnished the Company in writing; (C) if to the Company, to T.K.G. Acquisition Corp., c/o Warburg, Pincus Ventures, L.P., 466 Lexington Avenue, New York, New York 10017, Attention: Jeffrey A. Harris, or at such other address as it may have furnished in writing to each of the Investors; and (D) if to any of the Non-Management Investors, at the address of such Non-Management Investor shown on Schedule II, or at such other address as the Non-Management Investor may have furnished the Company in writing. (ii) Any notice so addressed shall be deemed to be given: if delivered by hand, on the date of such delivery; if mailed by courier, on the first business day following the date of such mailing; and if mailed by registered or certified mail, on the third business day after the date of such mailing. (b) Reproduction of Documents. This Agreement and all documents ------------------------- relating thereto, including, without limitation, (i) consents, waivers and modifications which may hereafter be executed, (ii) documents received by each Investors pursuant hereto and (iii) financial statements, certificates and other information previously or hereafter furnished to each Investor, may be reproduced by each Investor by an photographic, photostatic, microfilm, microcard, miniature photographic or other similar process and each Investor may destroy any original document so reproduced. All parties hereto agree and stipulate that any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding (whether or not the original is in existence and whether or not such reproduction was made by each Investor in the regular course of business) and that any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence. (c) Successors and Assigns. This Agreement shall inure to the benefit ---------------------- of and be binding upon the successors and assigns of each of the parties. (d) Entire Agreement; Amendment and Waiver. This Agreement and the -------------------------------------- Subscription Agreements constitute the entire understanding of the parties hereto relating to the subject matter hereof and supersede all prior understandings among such parties. This Agreement may be amended, and the observance of any term of this Agreement may be waived, with (and only with) the written consent of (i) Warburg, (ii) the holder or holders of a majority of the shares of Common Stock (other than Plan Stock and other than those shares held by Warburg or its Affiliates), which shall include Management Investors holding a majority of such shares held by Management Investors, and (iii) during such time that the Preferred Stock is convertible into Common Stock, 26 the holder or holders of a majority of the shares of Preferred Stock (other than those shares held by Warburg or its Affiliates), which shall include Management Investors holding a majority of such shares held by Management Investors. Without limiting the foregoing, at any time, by written notice to the Company, (I) Warburg may elect, which election shall be irrevocable, (A) to limit its rights to vote the shares of Common Stock and Preferred Stock held by it to the lesser of (i) 50.0% of the voting rights of the Common Stock and Preferred Stock outstanding and (ii) the voting rights of the Common Stock and Preferred Stock held by it, or (B) to waive any or all rights it may have under this Agreement; provided, that, unless such election shall expressly state to the contrary, such election shall not apply to any shares that are Transferred by Warburg and (II) NationsBanc Investment Corp. may elect, which election shall be irrevocable, (A) to limit its rights to vote the shares of Common Stock and Preferred Stock held by it to the lesser of (i) 5.0% of the voting rights of the Common Stock and Preferred Stock outstanding and (ii) the voting rights of the Common Stock and Preferred Stock held by it, or (B) to waive any or all rights it may have under this Agreement; provided, that, unless such election shall expressly state to the contrary, such election shall not apply to any shares that are Transferred by NationsBanc Investment Corp. (e) Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which shall be deemed an original and all of which together shall be considered one and the same agreement. 27 IN WITNESS WHEREOF, the parties hereto have executed this Stockholders Agreement as of the date first above written. T.K.G. ACQUISITION CORP. By: /s/ Burton B. Staniar _______________________________ Name: Burton B. Staniar Title: Chairman of the Board and Chief Executive Officer WARBURG, PINCUS VENTURES, L.P. By: Warburg, Pincus & Co., General Partner By: /s/ Jeffrey A. Harris _______________________________ Name: Jeffrey A. Harris Title: Managing Director NON-MANAGEMENT INVESTOR: NATIONSBANC INVESTMENT CORP. By: /s/ Ann B. Hayes ________________________________ Name: Ann B. Hayes Title: Senior Vice President MANAGEMENT INVESTORS: [Signatures on following pages] Signature Page to 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 certain other stockholders, including the Management Investor set forth below. /s/ Burton B. Staniar ----------------------------------- Burton B. Staniar Signature Page to 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 certain other stockholders, including the Management Investor set forth below. /s/ John H. Lynch ----------------------------------- John H. Lynch Signature Page to 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 certain other stockholders, including the Management Investor set forth below. /s/ Wolfgang Billstein ----------------------------------- Wolfgang Billstein Signature Page to 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 certain other stockholders, including the Management Investor set forth below. /s/ Kathleen G. Bradley ----------------------------------- Kathleen G. Bradley Signature Page to 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 certain other stockholders, including the Management Investor set forth below. /s/ Andrew B. Cogan ----------------------------------- Andrew B. Cogan Signature Page to 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 certain other stockholders, including the Management Investor set forth below. /s/ Barbara E. Ellixson ----------------------------------- Barbara E. Ellixson Signature Page to 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 certain other stockholders, including the Management Investor set forth below. /s/ Arthur C. Graves ----------------------------------- Arthur C. Graves Signature Page to 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 certain other stockholders, including the Management Investor set forth below. /s/ Pamela G. Jones ----------------------------------- Pamela G. Jones Signature Page to 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 certain other stockholders, including the Management Investor set forth below. /s/ Barry L. McCabe ----------------------------------- Barry L. McCabe Signature Page to 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 certain other stockholders, including the Management Investor set forth below. /s/ Patrick A. Milberger ----------------------------------- Patrick A. Milberger Signature Page to 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 certain other stockholders, including the Management Investor set forth below. /s/ Alan S. Millstein ----------------------------------- Alan S. Millstein SCHEDULE I Management Investors -------------------- Wolfgang Billstein Ziegelhoette 32 61476 Kronberg Germany Kathleen G. Bradley 3925 N. Stratford Atlanta, Georgia 30342 Andrew B. Cogan 1 West 64th Street, Apt. 4B New York, New York 10023 Barbara E. Ellixson 308 Country Club Dr. Lansdale, Pennsylvania 19446 Arthur C. Graves 222 Cazneau Ave. Sausalito, California 94965 Pamela G. Jones 6205 Mountain Brook Lane Atlanta, Georgia 30328 John H. Lynch c/o F. George Davitt, Esq. Testa Hurwitz & Thibeault 125 High Street Boston, Massachusetts 02110 Barry L. McCabe 5255 Deborah Court Doylestown, Pennsylvania 18901 Patrick A. Milberger 2427 Saucon Circle Emmaus, Pennsylvania 18049 Alan S. Millstein 750 Hunt Drive Yardley, Pennsylvania 19067 Burton B. Staniar 23 Glendon Road Ho-Ho-Kus, New Jersey 07423 SCHEDULE II Non-Management Investors ------------------------ NationsBanc Investment Corp. 100 North Tryon Street, 10th Floor Charlotte, North Carolina 28255 Attn: Ann Hayes EXHIBIT A --------- JOINDER AGREEMENT ----------------- Joinder Agreement, dated as of this ____ day of February, 1996, by and among T.K.G. Acquisition Corp., a Delaware corporation (the "Company"), and the undersigned (the "Investor"). Reference is made to that certain Stockholders Agreement (Common Stock and Preferred Stock) (the "Stockholders Agreement"), dated as of February 29, 1996, by and among T.K.G. Acquisition Corp., Warburg, Pincus Ventures, L.P. and the other holders of Common Stock and Preferred Stock from time to time party thereto, as the same may from time to time be amended. By executing this Joinder Agreement, the Investor hereby agrees to be bound by the terms of the Stockholders Agreement as if he were an original signatory to such Agreement and shall be deemed to be a [Non-]Management Investor thereunder. [insert for corporations only: The Investor hereby represents and warrants that (i) it is a corporation duly organized, validly existing and in good standing under the laws of ____________ and has the power and authority to ------------ execute and deliver this Agreement and perform its obligations hereunder, (ii) the execution, delivery and performance of this Agreement has been authorized by the board of directors of the Investor and no other approval or authorization is necessary and (iii) the execution, delivery and performance of this Agreement does not conflict with or violate the terms of its Certificate of Incorporation or By-laws or any agreement to which it is a party or may be bound.] IN WITNESS WHEREOF, the parties hereto have executed this Joinder Agreement as of the date first above written. ------------------------------ Name: Agreed to and Accepted by: T.K.G. ACQUISITION CORP. _____________________________ Name: Title: EX-10.7 10 STOCKHOLDERS AGREE (COM STK UND STK INCENT PLAN) EXHIBIT 10.7 T.K.G. ACQUISITION CORP. STOCKHOLDERS AGREEMENT (COMMON STOCK UNDER STOCK INCENTIVE PLAN) Stockholders Agreement, dated as of this ____ day of _________, 1996, by and among Warburg, Pincus Ventures, L.P., a Delaware limited partnership ("Warburg"); the individuals whose names and addresses appear from time to time on Schedule I hereto (the "Management Stockholders"); and T.K.G. Acquisition Corp., a Delaware corporation (the "Company"). Certain terms used in this Agreement are defined in Section 6 hereof. R E C I T A L S --------------- WHEREAS, pursuant to the T.K.G. Acquisition Corp. 1996 Stock Incentive Plan (the "Stock Plan") of the Company, the Company will make certain grants or sales of shares (including any capital stock of the Company issued as a dividend or other distribution with respect to, or in exchange for or in replacement of such shares and any shares of Common Stock issued upon exercise of any Options (as defined below), the "Shares") of its Common Stock, par value $.01 per share (the "Common Stock"), or options to purchase shares of Common Stock ("Options" and, together with the Shares, the "Securities") to the Management Stockholders; and WHEREAS. Warburg and certain management investors have agreed to purchase from the Company shares of its Common Stock and Series A 12% Participating Convertible Preferred Stock, par value $1.00 per share (the "Preferred Stock"); and WHEREAS, the Warburg, the Management Stockholders and the Company desire to promote their mutual interests by agreeing to certain matters relating to the operations of the Company and the disposition and voting of the Securities. NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, the parties hereto hereby agree as follows: 1. COVENANTS OF THE PARTIES ------------------------ (a) Legends. The certificates evidencing the Securities acquired by ------- the Stockholders pursuant the Stock Plan or their permitted transferees will bear the following legend reflecting the restrictions on the transfer of such securities contained in this Agreement: "The securities evidenced hereby are subject to the terms of that certain Stockholders Agreement (Common Stock Under Stock Incentive Plan), dated as of February 29, 1996, by and among the Company, -- Warburg, Pincus Ventures, L.P. and certain holders of Common Stock, including certain restrictions on transfer. A copy of such Stockholders Agreement has been filed with the Secretary of the Company and is available upon request." (b) Employee Stock Incentives. The Company shall reserve an aggregate ------------------------- of 1,500,000 shares (the "Incentive Shares") of Common Stock for grant or sale to key employees of the Company or its Subsidiaries, in such amounts and in such manner (including incentive and non-qualified stock options, restricted stock grants, stock bonuses or other stock incentive programs) as the Board of Directors of the Company (the "Board") shall, from time to time, determine in accordance with the provisions of the Stock Plan. The number of Incentive Shares so reserved shall be adjusted as set forth in the Stock Plan. (c) Additional Stockholders. The parties hereto acknowledge that, ----------------------- subject to the terms hereof, certain employees of the Company or its Subsidiaries may become stockholders of the Company after the date hereof and that such employees will be required, as a condition to the issuance of Securities to them under the Stock Plan, to execute a Joinder Agreement in the form attached hereto as Exhibit A (the "Joinder Agreement"). Upon execution of a Joinder Agreement, such employees shall be deemed to be Management Stockholders under this Agreement and shall be entitled to all of the rights and benefits afforded to, and shall be subject to all the obligations of, such Stockholders hereunder. 2. TRANSFER OF SECURITIES ---------------------- Without the approval of the Board and subject to the restrictions on transfer under the Stock Plan, no Management Stockholder shall Transfer any Securities, or any beneficial interest therein, except (i) to members of such Management Stockholder's immediate family or trusts for the benefit of such Management Stockholder or such Management Stockholder's immediate family; upon the death of any Management Investor, to his or her respective executors, administrators or testamentary trustees; to a corporation or partnership, the sole stockholders or limited or general partners of which include only such Management Investor and members of such Management Investor's immediate family; a transfer from a Management Investor's trust or other transferee back to such Management Investor; a transfer to the legal guardian of a disabled Management Investor or of a Management 2 Investor's disabled immediate family member, provided in each instance that (A) -------- such transferee executes and delivers to the Company and Warburg a Joinder Agreement and (B) any such transferee shall take such Securities subject to all limitations and obligations imposed on the Management Stockholder under the Stock Plan and any related grant agreement, (ii) to Warburg or an Affiliate thereof or (iii) after an Initial Public Offering, upon 30 days prior written notice to the Board; provided, however, that the restrictions on Transfer pursuant to this Section 2 shall terminate after an Initial Public Offering when Warburg owns less than 10% of the outstanding Common Stock and less than 10% of the outstanding Preferred Stock. Any Transfer or purported Transfer made in violation of this Section 2 shall be null and void and of no effect. 3. DRAG-ALONG RIGHT ---------------- (a) If at any time and from time to time after the date of this Agreement, the holder or holders of a majority of the outstanding shares of voting capital stock of the Company (the "Proposed Transferors") wish to Transfer in a bona fide arms' length sale all shares of Common Stock and Preferred Stock then owned by them to any Person or Persons who are not Affiliates of the Proposed Transferors (for purposes of this Section 3(a), the "Proposed Transferee"), the Proposed Transferors shall have the right (the "Drag-Along Right") to require each Management Stockholder to sell to the Proposed Transferee all Securities (for the same per share consideration received by the Proposed Transferor for each such class of capital stock, and with respect to unexercised Options, less any exercise price payable with respect thereto) then held by the Management Stockholders, subject to purchase by the Proposed Transferee. Each Management Stockholders, agrees to take all steps necessary to enable him or it to comply with the provisions of this Section 3(a), including, if necessary, voting any Securities in favor of the transaction with the Proposed Transferee (whether effected as a merger or otherwise) to facilitate the Proposed Transferors' exercise of a Drag-Along Right. (b) To exercise a Drag-Along Right, the Proposed Transferors shall give each Management Stockholder a written notice (for purposes of this Section 3, a "Drag-Along Notice") containing (i) the number of Securities that the Proposed Transferee proposes to acquire from the Proposed Transferors, (ii) the name and address of the Proposed Transferee, and (iii) the proposed purchase price, terms of payment and other material terms and conditions of the Proposed Transferee's offer. Each Management Stockholder shall thereafter be obligated to sell the Securities subject to such Drag-Along Notice, provided that the sale -------- to the Proposed Transferee is consummated within 120 days of delivery of the Drag-Along Notice. If the sale is not consummated within such 120-day period, then each Management Stockholder shall no longer be obligated to sell such Management 3 Stockholder's Securities pursuant to that specific Drag-Along Right but shall remain subject to the provisions of this Section 3. (c) Notwithstanding anything contained in this Section 3, in the event that all or a portion of the purchase price consists of securities and the sale of such securities to the Management Stockholders would require either a registration under the Securities Act or the preparation of a disclosure document pursuant to Regulation D under the Securities Act (or any successor regulation) or a similar provision of any applicable state securities law, then, at the option of the Proposed Transferors, the Management Stockholders may receive, in lieu of such securities, the fair market value of such securities in cash, as determined in good faith by the Board, unless, at the request of the Management Stockholders holding a majority of the Shares, the appraisal procedure set forth in Section 3(d) below is invoked. (d) Appraisal Procedure. If the Management Stockholders invoke an ------------------- appraisal procedure to determine the amount of the fair market value in cash of the consideration for the Securities under Section 3(c) (the "Subject Securities"), then the Proposed Transferors, on the one hand, and the Management Stockholders, on the other hand, shall each promptly appoint as an appraiser an individual who shall be a member of a reputable valuation firm. Each appraiser shall, within 30 days of appointment, separately investigate the value of the consideration for the Subject Securities as of the proposed transfer date and shall submit a notice of an appraisal of that value to each party. Each appraiser shall be instructed to determine such value without regard to income tax consequences to the Management Stockholders as a result of receiving cash rather than other consideration. If, upon the completion of the initial appraisals (the "Earlier Appraisals"), the higher appraised value of such consideration is not more than 110% of the lower appraised value of such consideration, the average of the two appraisals on a per share basis shall be controlling as the amount of the cash equivalent. If the higher appraised value is more than 110% of the lower appraised value, the appraisers, within 10 days of the submission of the last appraisal, shall appoint a third appraiser who shall be member of a reputable valuation firm. The third appraiser shall, within 30 days of his appointment, appraise the value of the consideration for the Subject Securities (without regard to the income tax consequences to the Management Stockholders as a result of receiving cash rather than other consideration) as of the proposed transfer date and submit notice of his appraisal to each party. The value determined by the third appraiser shall be controlling as the amount of the cash equivalent unless the value is greater than the two Earlier Appraisals, in which case the higher of the two Earlier Appraisals will control, and unless that value is lower than the two Earlier Appraisals, in which case the lower of the two Earlier Appraisals will control. If any party fails to 4 appoint an appraiser or if one of the two initial appraisers fails after appointment to submit his appraisal within the required period, the appraisal submitted by the remaining appraiser shall be controlling. The cost of the foregoing appraisals shall be shared one-half by the Proposed Transferor and one-half by the Management Stockholders. 4. REGISTRATION RIGHTS ------------------- (a) Definitions. As used in this Section 4: (i) "Commission" shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act; (ii) the term "Holder" shall mean any holder of Registrable Securities; (iii) the terms "register," "registered" and "registration" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act (and any post-effective amendments filed or required to be filed) and the declaration or ordering of effectiveness of such registration statement; (iv) the term "Registrable Securities" means (A) the shares of Common Stock issued to Management Stockholders under the Stock Plan, which have theretofore become vested and have not theretofore become forfeited under the Stock Plan, and (B) any capital stock of the Company issued as a dividend or other distribution with respect to, or in exchange for or in replacement of, the shares of Common Stock referred to in clause (A) above; provided that "Registrable Securities" shall not include any shares previously registered on a registration relating solely to employee benefit plans. (v) "Registration Expenses" shall mean (x) all expenses incurred by the Company in compliance with Sections 4(b) hereof, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel for the Company blue sky fees and expenses and the expense of any special audits incident to or required by any such registration (but excluding the compensation of regular employees of the Company, which shall be paid in any event by the Company) and (y) all reasonable fees and disbursements of counsel for each of the Holders; and (vi) "Selling Expenses" shall mean all underwriting discounts and selling commissions applicable to the sale of Registrable Securities. (b) Company Registration. -------------------- 5 (i) If the Company shall determine to register any shares of Common Stock either for its own account or for the account of a security holder or holders, other than a registration relating solely to employee benefit plans, or a registration relating solely to a Commission Rule 145 transaction, or a registration on any registration 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, the Company will: (A) promptly give to each of the Holders a written notice thereof (which shall include a list of the jurisdictions in which the Company intends to attempt to qualify such securities under the applicable blue sky or other state securities laws); and (B) include in such registration (and any related qualification under blue sky laws or other compliance), and in any underwriting involved therein, all the Registrable Securities (of the same class of equity securities being registered under such registration statement) specified in a written request or requests, made by the Holders within fifteen (15) days after receipt of the written notice from the Company described in clause (i) above, except as set forth in Section 4(b)(ii) below. Such written request may specify all or a part of the Holders' Registrable Securities of the same class of equity securities being registered under such registration statement. (ii) Underwriting. If the registration of which the Company gives ------------ notice is for a registered public offering involving an underwriting, the Company shall so advise each of the Holders as a part of the written notice given pursuant to Section 4(b)(i)(A). In such event, the right of each of the Holders to registration pursuant to this Section 4(b) shall be conditioned upon such Holders' participation in such underwriting and the inclusion of such Holders' Registrable Securities in the underwriting to the extent provided herein. The Holders whose shares are to be included in such registration shall (together with the Company and the Other Stockholders distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the representative of the underwriter or underwriters selected for underwriting by the Company. Notwithstanding any other provision of this Section 4(b), if the representative determines that marketing factors require a limitation on the number of shares to be underwritten, the Company shall so advise all holders of Registrable Securities requesting registration, and the Registrable Securities of the Company held by Holders shall be excluded from such registration and underwriting to the extent required by such limitation. If any of the Holders or any officer, director or Other Stockholder disapproves of the terms of any such underwriting, he may elect to withdraw therefrom by written notice to the Company and the 6 underwriter. Any Registrable Securities or other securities excluded or withdrawn from such underwriting shall be withdrawn from such registration. (iii) Number and Transferability. Each of the Holders shall be -------------------------- entitled to have its shares included in an unlimited number of registrations pursuant to this Section 4(b). The registration rights granted pursuant to this Section 4(b) shall be assignable, in whole or in part, to any permitted transferee of the Shares, provided such transferee executes and delivers to the Company and to Warburg a Joinder Agreement. (c) Form S-3. Following the Initial Public Offering the Company shall -------- use its best efforts to qualify for registration on Form S-3 for secondary sales. After the Company has qualified for the use of Form S-3, Holders of Registrable Securities shall have the right to request unlimited registrations on Form S-3 (such requests shall be in writing and shall state the number of shares of Registrable Securities to be disposed of and the intended method of disposition of shares by such holders), subject only to the following: (i) The Company shall not be required to effect a registration pursuant to this Section 4(c) unless the Holder or Holders of Registrable Securities requesting registration propose to dispose of shares of Registrable Securities having an aggregate price to the public (before deduction of underwriting discounts and expenses of sale) of more than $5,000,000. (ii) The Company shall not be required to effect a registration pursuant to this Section 4(c) within 180 days of the effective date of the most recent registration pursuant to this Section 4(c) in which securities held by the requesting Holder could have been included for sale or distribution. (iii) The Company shall not be required to effect a registration pursuant to this Section 4(c) if the Company shall furnish to the Holders a certificate signed by the President or Chief Executive Officer of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its stockholders for such registration statement to be filed and it is therefore essential to defer the filing of such registration statement. In such event, the Company shall have the right to defer the filing of the registration statement no more than once during any twelve (12) month period for a period of not more than one hundred twenty (120) days after receipt of the request of the Holder or Holders under this Section 4(d). (iv) The Company shall not be obligated to effect any registration pursuant to this Section 4(c) in any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, qualification or compliance, unless the Company is 7 already subject to service in such jurisdiction and except as may be required by the Securities Act or applicable rules or regulations thereunder. The Company shall give written notice thereof to all Holders of Registrable Securities within five (5) days of the receipt of a request for registration pursuant to this Section 4(c) and shall provide a reasonable opportunity for other Holders of Registrable Securities to participate in the registration, provided that if the registration is for an underwritten offering, the terms of Section 4(b)(ii) shall apply to all participants in such offering. Subject to the foregoing, the Company will use its best efforts to effect promptly the registration of all shares of Registrable Securities on Form S-3 to the extent requested by the Holder or Holders thereof for purposes of disposition. (d) Expenses of Registration. All Registration Expenses incurred in ------------------------ connection with any registration, qualification or compliance pursuant to this Section 4 (whether or not such registration, qualification or compliance is effectuated) shall be borne by the Company, and all Selling Expenses shall be borne by the Holders of the securities so registered (or proposed to be registered) pro rata on the basis of the number of their shares so registered (or proposed to be registered. (e) Registration Procedures. In the case of each registration ----------------------- effected by the Company pursuant to Section 4, the Company will keep the Holders, as applicable, advised in writing as to the initiation of each registration and as to the completion thereof. At its expense, the Company will: (i) keep such registration effective for a period of one hundred twenty (120) days or until the Holders, as applicable, have completed the distribution described in the registration statement relating thereto, whichever first occurs; provided, however, that (A) such 120-day period shall be extended for a period of time equal to the period during which the Holders, as applicable, refrain from selling any securities included in such registration in accordance with provisions in Section 4(i) hereof; and (B) in the case of any registration of Registrable Securities on Form S-3 which are intended to be offered on a continuous or delayed basis, such 120-day period shall be extended until all such Registrable Securities are sold, provided that Rule 415, or any successor rule under the Securities Act, permits an offering on a continuous or delayed basis, and provided further that applicable rules under the Securities Act governing the obligation to file a post-effective amendment permit, in lieu of filing a post-effective amendment which (y) includes any prospectus required by Section 10(a)(3) of the Securities Act or (z) reflects facts or events representing a material or fundamental change in the information set forth in the registration statement, the incorporation by reference of 8 information required to be included in (y) and (z) above to be contained in periodic reports filed pursuant to Section 13 or 15(d) of the Exchange Act in the registration statement; and (ii) furnish such number of prospectuses and other documents incident thereto as each of the Holders, as applicable, from time to time may reasonably request. (f) Indemnification. --------------- (i) The Company will indemnify each of the Holders, as applicable, each of its officers, directors and partners, and each person controlling each of the Holders, with respect to each registration which has been effected pursuant to this Section 4, and each underwriter, if any, and each person who controls any underwriter, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any prospectus, offering circular or other document (including any related registration statement, notification or the like) incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by the Company of the Securities Act or any rule or regulation thereunder applicable to the Company and relating to action or inaction required of the Company in connection with any such registration, qualification or compliance, and will reimburse each of the Holders, each of its officers, directors and partners, and each person controlling each of the Holders, each such underwriter and each person who controls any such underwriter, for any legal and any other expenses reasonably incurred in connection with investigating and defending any such claim, loss, damage, liability or action, provided that the Company will not be liable in any such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any untrue statement or omission based upon written information furnished to the Company by any Holder with respect to such Holder or underwriter with respect to such underwriter and stated to be specifically for use therein. (ii) Each of the Holders will, if Registrable Securities held by it are included in the securities as to which such registration, qualification or compliance is being effected, indemnify the Company, each of its directors and officers and each underwriter, if any, of the Company's securities covered by such a registration statement, each person who controls the Company or such underwriter within the meaning of the Securities Act and the rules and regulations thereunder, each Other Stockholder and each of their officers, directors, and partners, and each person controlling such Other Stockholder against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact with respect to such 9 Holder contained in any such registration statement, prospectus, offering circular or other document made by such Holder, or any omission (or alleged omission) to state therein a material fact with respect to such Holder required to be stated therein or necessary to make the statements by such Holder therein not misleading, and will reimburse the Company and such Other Stockholders, directors, officers, partners, persons, underwriters or control persons for any legal or any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company by such Holder with respect to such Holder and stated to be specifically for use therein; provided, however, that the obligations of each of the Holders hereunder shall be limited to an amount equal to the proceeds to such Holder of securities sold as contemplated herein. (iii) Each party entitled to indemnification under this Section 4(f) (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or any litigation resulting therefrom shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld) and the Indemnified Party may participate in such defense at such party's expense (unless the Indemnified Party shall have reasonably concluded that there may be a conflict of interest between the Indemnifying Party and the Indemnified Party in such action, in which case the fees and expenses of counsel shall be at the expense of the Indemnifying Party), and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Section 4 unless the Indemnifying Party is materially prejudiced thereby. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. Each Indemnified Party shall furnish such information regarding itself or the claim in question as an Indemnifying Party may reasonably request in writing and as shall be reasonably required in connection with the defense of such claim and litigation resulting therefrom. 10 (iv) If the indemnification provided for in this Section 4(f) is held by a court of competent jurisdiction to be unavailable to an Indemnified Party with respect to any loss, liability, claim, damage or expense referred to herein, then the Indemnifying Party, in lieu of indemnifying such Indemnified Party hereunder, shall contribute to the amount paid or payable by such Indemnified Party as a result of such loss, liability, claim, damage or expense in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party on the one hand and of the Indemnified Party on the other in connection with the statements or omissions which resulted in such loss, liability, claim, damage or expense, as well as any other relevant equitable considerations. The relative fault of the Indemnifying Party and of the Indemnified Party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the Indemnifying Party or by the Indemnified Party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. (v) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with any underwritten public offering contemplated by this Agreement are in conflict with the foregoing provisions, the provisions in such underwriting agreement shall be controlling. (vi) The foregoing indemnity agreement of the Company and Holders is subject to the condition that, insofar as they relate to any loss, claim, liability or damage made in a preliminary prospectus but eliminated or remedied in the amended prospectus on file with the Commission at the time the registration statement in question becomes effective or the amended prospectus filed with the Commission pursuant to Commission Rule 424(b) (the "Final Prospectus"), such indemnity agreement shall not inure to the benefit of any underwriter if a copy of the Final Prospectus was furnished to the underwriter and was not furnished to the person asserting the loss, liability, claim or damage at or prior to the time such action is required by the Securities Act. (vii) Any indemnification payments required to be made to an Indemnified Party under this Section 4(f) shall be made as the related claims, losses, damages, liabilities or expenses are incurred. (g) Information by the Holders. Each of the Holders and each Other -------------------------- Stockholder holding securities included in any registration, shall furnish to the Company such information regarding such Holder or Other Stockholder and the distribution proposed by such Holder or Other Stockholder as the Company may reasonably request in writing and as shall be reasonably required 11 in connection with any registration, qualification or compliance referred to in this Section 4. (h) Rule 144 Reporting. ------------------ With a view to making available the benefits of certain rules and regulations of the Commission which may permit the sale of the restricted securities to the public without registration, the Company agrees to: (A) make and keep public information available as those terms are understood and defined in Rule 144, at all times from and after ninety (90) days following the effective date of the first registration under the Securities Act filed by the Company for an offering of its securities to the general public; (B) use its best efforts to file with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act at any time after it has become subject to such reporting requirements; and (C) so long as the Holder owns any Registrable Securities, furnish to the Holder upon request, a written statement by the Company as to its compliance with the reporting requirements of Rule 144 (at any time from and after ninety (90) days following the effective date of the first registration statement filed by the Company for an offering of its securities to the general public), and of the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents so filed as the Holder may reasonably request in availing itself of any rule or regulation of the Commission allowing the Holder to sell any such securities without registration. (i) "Market Stand-off" Agreement. Each of the Holders agrees, if ---------------------------- requested by the Company and an underwriter of shares of Common Stock (or other securities) of the Company, not to sell or otherwise transfer or dispose of any shares of Common Stock (or other securities) of the Company held by such Holder during the 90-day period (or such longer period if requested by such underwriter, up to 180 days) following the effective date of a registration statement of the Company filed under the Securities Act, provided that: (i) such agreement only applies to the first such registration statement of the Company which includes securities to be sold on the Company's behalf to the public in an underwritten offering; and 12 (ii) all officers and directors of the Company enter into similar agreements. If requested by the underwriters, the Holders shall execute a separate agreement to the foregoing effect. The Company may impose stop-transfer instructions with respect to the shares (or securities) subject to the foregoing restriction until the end of said 90-day period (or such longer period if requested by the underwriter, up to 180 days). The provisions of this Section 4(i) shall be binding upon any transferee who acquires Registrable Securities, whether or not such transferee is entitled to the registration rights provided hereunder. (j) Termination. The registration rights set forth in this Section 4 ----------- shall not be available to any Holder if, in the opinion of counsel to the Company, all of the Registrable Securities then owned by such Holder could be sold in any 90-day period pursuant to Rule 144 under the Securities Act (without giving effect to the provisions of Rule 144(k)). The Company will arrange for a provision to the transfer agent for such shares of an opinion of counsel in connection with any such sale under Rule 144. 5. TERMINATION. The Agreement shall terminate on the date on which ----------- the Board and the holder or holders of a majority of the Securities issued under the Stock Plan shall have agreed in writing to terminate this Agreement; provided that Section 3 shall terminate upon an Initial Public Offering. Notwithstanding anything in this Agreement to the contrary, if a Management Stockholder's employment with the Company or its Subsidiaries is terminated, whether by such Management Stockholder or by the Company or its Subsidiaries, whether with or without cause, all rights of such Management Stockholder under this Agreement (but not the obligations) shall be terminated; provided that the Company's rights under Section 3 shall remain in full force and effect. 6. INTERPRETATION OF THIS AGREEMENT -------------------------------- (a) Terms Defined. As used in this Agreement, the following terms ------------- have the respective meaning set forth below: Affiliate: means any person or entity, directly or indirectly, --------- controlling, controlled by or under common control with such person or entity. Exchange Act: the Securities Exchange Act of 1934, as amended. ------------ Initial Public Offering: means the completion of an underwritten ----------------------- initial public offering for shares of Common Stock pursuant to a registration statement under the Securities Act 13 resulting in net proceeds to the Company and/or any selling stockholders of not less than $25,000,000. Other Stockholders: 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 a registration. Person: an individual, partnership, joint-stock company, corporation, ------ limited liability company, trust or unincorporated organization, and a government or agency or political subdivision thereof. Security, Securities: as defined in Section 2(1) of the Securities -------------------- Act. Securities Act: the Securities Act of 1933, as amended. -------------- Subsidiary: a corporation of which the Company owns, directly or ---------- indirectly, more than fifty percent (50%) of the Voting Stock. Transfer: any sale, assignment, pledge, hypothecation, or other -------- disposition or encumbrance, whether or not for consideration. Voting Stock: securities of any class or classes of a corporation the ------------ holders of which are ordinarily, in the absence of contingencies, entitled to elect a majority of the corporate directors (or Persons performing similar functions). (b) Accounting Principles. Where the character or amount of any asset --------------------- or amount of any asset or liability or item of income or expense is required to be determined or any consolidation or other accounting computation is required to be made for the purposes of this Agreement, this shall be done in accordance with U.S. generally accepted accounting principles at the time in effect, to the extent applicable, except where such principles are inconsistent with the requirements of this Agreement. (c) Directly or Indirectly. Where any provision in this Agreement ---------------------- refers to action to be taken by any Person, or which such Person is prohibited from taking, such provision shall be applicable whether such action is taken directly or indirectly by such Person. (d) Governing Law. This Agreement shall be governed by and construed ------------- in accordance with the laws of the State of New York applicable to contracts made and to be performed entirely within such State. 14 (e) Section Headings. The headings of the sections and subsections of ---------------- this Agreement are inserted for convenience only and shall not be deemed to constitute a part thereof. 7. MISCELLANEOUS ------------- (a) Notices. ------- (i) All communications under this Agreement shall be in writing and shall be delivered by hand or mailed by overnight courier or by registered or certified mail, postage prepaid: (A) if to any of the Management Stockholders, at the address of such Management Stockholder shown on Schedule I, or at such other address as the Management Stockholder may have furnished the Company in writing; (B) if to Warburg, at 466 Lexington Avenue, New York, New York 10017, Attention: Jeffrey A. Harris, or at such other address as Warburg may have furnished the Company in writing; and (C) if to the Company, to T.K.G. Acquisition Corp., c/o Warburg, Pincus Ventures, L.P., 466 Lexington Avenue, New York, New York 10017, Attention: Jeffrey A. Harris, or at such other address as it may have furnished in writing to each of the Stockholders. (ii) Any notice so addressed shall be deemed to be given: if delivered by hand, on the date of such delivery; if mailed by courier, on the first business day following the date of such mailing; and if mailed by registered or certified mail, on the third business day after the date of such mailing. (b) Reproduction of Documents. This Agreement and all documents ------------------------- relating thereto, including, without limitation, (i) consents, waivers and modifications which may hereafter be executed and , (ii) documents received by each Stockholders pursuant hereto and (iii) financial statements, certificates and other information previously or hereafter furnished to each Management Stockholder, may be reproduced by each Management Stockholder by an photographic, photostatic, microfilm, microcard, miniature photographic or other similar process and each Management Stockholder may destroy any original document so reproduced. All parties hereto agree and stipulate that any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding (whether or not the original is in existence and whether or not such reproduction was made by each Management Stockholder in the regular course of business) and that any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence. 15 (c) Successors and Assigns. This Agreement shall inure to the benefit ---------------------- of and be binding upon the successors and assigns of each of the parties. (d) Entire Agreement; Amendment and Waiver. This Agreement, together -------------------------------------- with the Stock Plan, and the Subscription Agreements constitute the entire understanding of the parties hereto relating to the subject matter hereof and supersede all prior understandings among such parties. This Agreement may be amended, and the observance of any term of this Agreement may be waived, with (and only with) the written consent of Warburg and the holder or holders (other than Warburg) of a majority of the shares of Common Stock. (e) Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which shall be deemed an original and all of which together shall be considered one and the same agreement. 16 IN WITNESS WHEREOF, the parties hereto have executed this Stockholders Agreement as of the date first above written. T.K.G. ACQUISITION CORP. By: _______________________________ Name: Title: WARBURG, PINCUS VENTURES, L.P. By: Warburg, Pincus & Co., General Partner By: _______________________________ Name: Title: MANAGEMENT STOCKHOLDERS: ----------------------------------- Burton B. Staniar ----------------------------------- John H. Lynch 17 SCHEDULE I Management Stockholders ----------------------- Burton B. Staniar [address] John H. Lynch [address] EXHIBIT A --------- JOINDER AGREEMENT ----------------- Joinder Agreement, dated as of this ____ day of February, 1996, by and among T.K.G. Acquisition Corp., a Delaware corporation (the "Company"), and the undersigned (the "Stockholder"). Reference is made to that certain Stockholders Agreement (Common Stock Under Stock Incentive Plan) (the "Stockholders Agreement"), dated as of February 29, 1996, by and among T.K.G. Acquisition Corp., Warburg, Pincus Ventures, L.P. and the other holders of Securities from time to time party thereto, as the same may from time to time be amended. By executing this Joinder Agreement, the Stockholder hereby agrees to be bound by the terms of the Stockholders Agreement as if he were an original signatory to such Agreement and shall be deemed to be a Management Stockholder thereunder. IN WITNESS WHEREOF, the parties hereto have executed this Joinder Agreement as of the date first above written. ------------------------------ Name: Agreed to and Accepted by: T.K.G. ACQUISITION CORP. _____________________________ Name: Title: EX-10.8 11 1997 STOCK INCENTIVE PLAN EXHIBIT 10.8 1997 STOCK INCENTIVE PLAN ARTICLE I PURPOSE ------- The TKG Acquisition Corp. 1997 Stock Incentive Plan (the "Plan") is intended as an incentive to encourage stock ownership by officers, certain other key employees, directors and consultants of TKG Acquisition Corp. (the "Company") in order to increase their proprietary interest in the Company's success and to encourage them to remain in the employ of the Company. The term "Company," when used in the Plan or a related Restricted Share agreement or option agreement with reference to eligibility and employment, shall include the Company and its subsidiaries. The word "subsidiary," when used in the Plan, shall mean any subsidiary of the Company within the meaning of Section 424(f) of the Internal Revenue Code of 1986, as amended (the "Code"). It is intended that certain options granted under this Plan will qualify as "incentive stock options" under Section 422 of the Code. ARTICLE II ADMINISTRATION -------------- The Plan shall be administered by a Committee (the "Committee") appointed by the Board of Directors of the Company (the "Board") and shall consist of not less than two members. Upon and after the time that the Company first becomes subject to Section 16(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), each member of the Committee must be a "Non-Employee Director" within the meaning of the rules promulgated under Section 16(b) and upon and after the time that grants under the Plan become subject to Section 162(m) of the Code, each member of the Committee shall also be an "outside director" within the meaning of Section 162(m) of the Code. Subject to the provisions of the Plan, the Committee shall have sole authority, in its absolute discretion: (a) to determine which individuals shall be granted shares of restricted stock ("Restricted Shares") and which shall be granted options; (b) to make grants of Restricted Shares, incentive stock options and nonqualified options to acquire Common Stock; (c) to determine the times when Restricted Shares and options shall be granted and the number of shares to be granted or optioned; (d) to determine the option price of the shares subject to each option; (e) to determine the nature of any rights and restrictions to be imposed on Restricted Shares granted under the Plan; (f) to determine the time or times when each option becomes exercisable, the duration of the exercise period and any other restrictions on the exercise of options issued hereunder; (g) to determine the time or times at which options shall be repriced and the terms and conditions of such repriced options; (h) to prescribe the form or forms of agreements for Restricted Shares granted under the Plan and the form or forms of the option agreements for options granted under the Plan (which forms shall be consistent with the terms of the Plan but need not be identical); (i) to adopt, amend and rescind such rules and regulations as, in its opinion, may be advisable in the administration of the Plan; and (j) to construe and interpret the Plan, the rules and regulations, the Restricted Share agreements and the option agreements under the Plan and to make all other determinations deemed necessary or advisable for the administration of the Plan. All decisions, determinations and interpretations of the Committee shall be final and binding on all grantees and optionees. ARTICLE III STOCK ----- The stock to be granted or optioned under the Plan shall be shares of authorized but unissued Common Stock of the Company, par value $.01 per share, or previously issued shares of Common Stock reacquired by the Company (the "Stock"). Under the Plan, the total number of shares of Stock which may be granted or purchased pursuant to options granted hereunder shall not exceed, in the aggregate, 400,000 shares, except as such number of shares shall be adjusted in accordance with the provisions of ARTICLE XII hereof. The number of shares of Stock available for issuance or grant of options under the Plan shall be decreased by the sum of (i) the number of Restricted Shares which are granted and then outstanding, (ii) the number of shares with respect to which options have been issued and are then outstanding and (iii) the number of shares issued upon exercise of options. In the event that any Restricted Shares are forfeited or that any outstanding option under the Plan for any reason expires, is terminated or is canceled without exercise prior to the end of the period during which options may be granted, the Restricted Shares so forfeited and the shares of Stock called for by the unexercised portion of such option shall again be available for grant or issuance under the Plan. ARTICLE IV ELIGIBILITY OF PARTICIPANTS --------------------------- Subject to ARTICLE IX in the case of incentive stock options, officers and other key employees of the Company shall be eligible to receive Restricted Shares and options under the Plan. In addition, Restricted Shares and options which are not incentive stock options may be granted to directors, consultants (including employees of consultants) or other key persons who the Committee determines shall receive options under the Plan. As of any grant date which is prior to the occurrence of an initial public offering of the Stock ("IPO"), it shall be a condition to the grant of Restricted Shares or options under the Plan that the grantee or optionee execute a Joinder Agreement in the form attached to the TKG Acquisition Corp. Stockholders Agreement (Common Stock Under Stock Incentive Plan) (the "Stockholders Agreement") agreeing to be bound by the terms of such Agreement. ARTICLE V FAIR MARKET VALUE ----------------- "Fair Market Value" means, (1) as of any date prior to an IPO, the Fair Market Value of the Company's Stock on such date, as determined by the Board in good faith, and (2) at the time of an IPO, the per share price to the public in such IPO, less any underwriting discount, multiplied by the number of shares of Stock issued and outstanding immediately prior to the time such IPO occurs. "Fair Market Value Per Share" means (1) prior to an IPO, the Fair Market Value per share of Stock, determined on a Fully Diluted Basis, (2) at the time of an IPO, the per share price to the public in such IPO less any per share underwriting discount, and (3) after an IPO, as of any date when the Stock is quoted on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") National Market System ("NMS") or listed on one or more national securities exchanges, the closing price reported on NASDAQ-NMS or the principal national securities exchange on which such Stock is listed and traded on the date of determination. If, after an IPO, the Stock is not quoted on NASDAQ-NMS or listed on an exchange, or representative quotes are not otherwise available, the Fair Market Value Per Share shall mean the amount determined by the Board in good faith to be the fair market value per share of Stock. "Fully Diluted Basis" means, with regard to determining Fair Market Value Per Share, the amount determined by dividing (1) the sum of (i) the Fair Market Value as of the date of determination, plus (ii) the exercise or conversion price, if any, associated with any dilutive options, warrants or other securities which could be exchanged for Stock, by (2) the sum of (i) the total number of shares of Stock outstanding, plus (ii) the number of shares of Stock subject to such dilutive options, warrants or other securities. ARTICLE VI TERMS AND CONDITIONS OF RESTRICTED SHARES ----------------------------------------- Restricted Shares will become unrestricted and vest only in accordance with a vesting period set by the Committee with respect to each grant of Restricted Shares (the "Restriction Period"). The Committee may provide in the Restricted Share Agreement for acceleration of the Restriction Period and accelerated vesting upon termination of the grantee's employment by reason of death or disability, or by the Company without Cause, or upon any other event for which the Committee determines, in its discretion, that such acceleration is appropriate. With respect to each grant of Restricted Shares, "Cause" shall have the meaning given such term in a grantee's Restricted Share Agreement. During the Restriction Period, Restricted Shares shall constitute issued and outstanding shares of Stock for all corporate purposes but unless and until such Restricted Shares shall have become vested (i.e., the date at which such shares shall not be subject to forfeiture) (a) the Company shall retain custody of the stock certificate or certificates representing such shares, (b) the Company will retain custody of all dividends and distributions ("Retained Distributions") made or declared thereon (and such Retained Distributions shall be subject to the same restrictions, terms and vesting and other conditions as are applicable to the Restricted Shares) until such time, if ever, as the Restricted Shares with respect to which such Retained Distributions shall have been made, paid or declared shall have become vested, and such Retained Distributions shall not bear interest or be segregated in a separate account; provided, however, that in the event such retained dividends or distributions are taxable to the grantee in the year of payment, notwithstanding their failure to have become vested by the date of payment, the Company shall arrange for the release to the grantee of such part of the retained dividiends or distributions as are sufficient to cover the taxes payable by the grantee with respect thereto; (c) the grantee of such Restricted Shares shall not be entitled to vote such shares, and (d) except as otherwise permitted by the Stockholders Agreement, the grantee of such Restricted Shares may not, whether voluntarily or involuntarily, sell, assign, transfer, pledge, exchange, encumber or dispose of the Restricted Shares or any Retained Distributions thereon or his interest in any of them (it being understood that, except to the extent so permitted, any sale, assignment, transfer, pledge, exchange, or disposition (i) before the shares shall have become vested shall be null and void and of no effect and (ii) after the shares shall have become vested shall only be as permitted under the terms of the Stockholders Agreement). Any Restricted Shares which have not vested as of, or by reason of, a grantee's termination of employment shall be immediately forfeited to the Company and the grantee and any permitted transferee shall have no further rights in respect of such forfeited shares. With respect to Restricted Shares which have become vested pursuant to the provisions of the Restricted Share Agreement, the Company shall promptly deliver the Stock certificate or certificates representing such shares to the grantee, registered in the name of the grantee. The Company may endorse such legends on such certificates as may be required by law or under the terms of this Agreement, the Restricted Share Agreement or the Stockholders Agreement. ARTICLE VII OPTION EXERCISE PRICE --------------------- The option price per share of Stock for each option shall be set by the Committee at the time of grant, subject to the ability of the Committee to reprice options pursuant to ARTICLE VIII; provided, however, that the option price per share of Stock for incentive stock options, subject to ARTICLE IX, shall not be less than the Fair Market Value Per Share at the time the option was granted. ARTICLE VIII EXERCISE AND TERMS OF OPTIONS ----------------------------- The Committee shall determine the dates after which options may be exercised, in whole or in part. If an option is exercisable in installments, installments or portions thereof which are exercisable and not exercised shall remain exercisable. Any other provision of the Plan to the contrary notwithstanding, but subject to ARTICLE IX in the case of incentive stock options, no option shall be exercised after the date ten years from the date of grant of such option (the "Termination Date"). Options shall become exercisable only in accordance with the exercise schedule set forth in the option agreement entered into with respect to each grant of options (the "Option Agreement"). The Committee may provide in the Option Agreement for acceleration of exercisability upon termination of the optionee's employment by reason of death, disability, or by the Company without Cause, or upon any other event for which the Committee determines, in its discretion, that such acceleration is appropriate. With respect to each grant of options, "Cause" shall have the meaning given such term in the optionee's Option Agreement. Notwithstanding the foregoing provisions of this ARTICLE VIII or the terms of any option agreement, the Committee may in its sole discretion (i) accelerate the exercisability of any option granted hereunder and (ii) reprice any option to a lower exercise price. Any such acceleration shall not affect the terms and conditions of any such option other than with respect to exercisability. ARTICLE IX SPECIAL PROVISIONS APPLICABLE TO INCENTIVE STOCK OPTIONS ONLY ------------------------------- To the extent the aggregate Fair Market Value Per Share (determined as of the time the option is granted in accordance with Article V) with respect to which any options granted hereunder which are intended to be incentive stock options may be exercisable for the first time by the optionee in any calendar year (under this Plan or any other stock option plan of the Company or any parent or subsidiary thereof) exceeds $100,000, such options shall not be considered incentive stock options but rather shall be nonqualified options. No incentive stock option may be granted to an individual who, at the time the option is granted, owns directly, or indirectly within the meaning of Section 424(d) of the Code, stock possessing more than 10 percent of the total combined voting power of all classes of stock of the Company or of any parent or subsidiary thereof, unless such option (i) has an option price of at least 110 percent of the Fair Market Value Per Share on the date of the grant of such option; and (ii) cannot be exercised more than five years after the date it is granted. Each optionee who receives an incentive stock option must agree to notify the Company in writing immediately after the optionee makes a disqualifying disposition of any Stock acquired pursuant to the exercise of an incentive stock option. A disqualifying disposition is any disposition (including any sale) of such Stock made within the period which is (a) two years after the date the optionee was granted the incentive stock option or (b) one year after the date the optionee acquired Stock by exercising the incentive stock option. ARTICLE X PAYMENT FOR SHARES ------------------ Payment for shares of Stock purchased under an option granted hereunder shall be made in full upon exercise of the option, by certified or bank cashier's check payable to the order of the Company or by any other means acceptable to the Company. The Committee, in its discretion, may allow an optionee to pay such exercise price by having the Company withhold shares of Stock being purchased having an aggregate Fair Market Value equal to the amount of such exercise price. ARTICLE XI NON-TRANSFERABILITY OF OPTION RIGHTS ------------------------------------ No option shall be transferable except by will or the laws of descent and distribution. During the lifetime of the optionee, the option shall be exercisable only by him. The Committee may, however, in its sole discretion, allow for transfer of options which are not incentive stock options to other persons or entities, subject to such conditions or limitations as it may establish. ARTICLE XII ADJUSTMENT FOR RECAPITALIZATION, MERGER, ETC. --------------------------------------------- The aggregate number of shares of Stock which may be granted or purchased pursuant to options granted hereunder, the number of shares of Stock covered by each outstanding option and the price per share thereof in each such option shall be appropriately adjusted for any increase or decrease in the number of outstanding shares of stock resulting from a stock split or other subdivision or consolidation of shares of Stock or for other capital adjustments or payments of stock dividends or distributions or other increases or decreases in the outstanding shares of Stock without receipt of consideration by the Company. No adjustments shall be made upon any conversion of the Company's Series A Preferred Stock. Any adjustment shall be conclusively determined by the Committee. In the event of any change in the outstanding shares of Stock by reason of any recapitalization, merger, consolidation, spin-off, combination or exchange of shares or other corporate change, or any distributions to common shareholders other than cash dividends, the Committee shall make such substitution or adjustment, if any, as it deems to be equitable, as to the number or kind of shares of Stock or other securities issued or reserved for issuance pursuant to the Plan, and the number or kind of shares of Stock or other securities covered by outstanding options, and the option price thereof. In instances where another corporation or other business entity is being acquired by the Company, and the Company has assumed outstanding employee option grants and/or the obligation to make future or potential grants under a prior existing plan of the acquired entity, similar adjustments are permitted at the discretion of the Committee. The Committee shall notify optionees of any intended sale of all or substantially all of the Company's assets within a reasonable time prior to such sale. The foregoing adjustments and the manner of application of the foregoing provisions shall be determined by the Committee in its sole discretion. Any such adjustment may provide for the elimination of any fractional share which might otherwise become subject to an option. ARTICLE XIII NO OBLIGATION TO EXERCISE OPTION -------------------------------- The granting of an option shall impose no obligation on the recipient to exercise such option. ARTICLE XIV USE OF PROCEEDS --------------- The proceeds received from the sale of Stock pursuant to the Plan shall be used for general corporate purposes. ARTICLE XV RIGHTS AS A STOCKHOLDER ----------------------- An optionee or a transferee of an option shall have no rights as a stockholder with respect to any share covered by his option until he shall have become the holder of record of such share, and he shall not be entitled to any dividends or distributions or other rights in respect of such share for which the record date is prior to the date on which he shall have become the holder of record thereof. Notwithstanding anything herein to the contrary, the Committee, in its sole discretion, may restrict the transferability of all or any number of shares issued under the Plan upon the exercise of an option by legending the stock certificate as it deems appropriate. ARTICLE XVI EMPLOYMENT RIGHTS ----------------- Nothing in the Plan or in any agreement related to options or Restricted Shares granted hereunder shall confer on any optionee or grantee any right to continue in the employ of the Company or any of its subsidiaries, or to be evidence of any agreement or understanding, express or implied, that the Company or any if its subsidiaries will employ the optionee or grantee in any particular position or at any particular rate of remuneration, or for any particular period of time, or to interfere in any way with the right of the Company or any of its subsidiaries to terminate the optionee's employment at any time. ARTICLE XVII COMPLIANCE WITH THE LAW ----------------------- The Company is relieved from any liability for the nonissuance or non- transfer or any delay in issuance or transfer of any shares of Stock subject to options under the Plan which results from the inability of the Company to obtain or any delay in obtaining from any regulatory body having jurisdiction, all requisite authority to issue or transfer shares of Stock of the Company either upon exercise of the options under the Plan or shares of Stock issued as a result of such exercise, if counsel for the Company deems such authority necessary for lawful issuance or transfer of any such shares. Appropriate legends may be placed on the stock certificates evidencing shares issued upon exercise of options to reflect such transfer restrictions. Each option granted under the Plan is subject to the requirement that if at any time the Committee determines, in its discretion, that the listing, registration or qualification of shares of Stock issuable upon exercise of options is required by any securities exchange or under any state or Federal law, or that the consent or approval of any governmental regulatory body is necessary or desirable as a condition of, or in connection with, the grant of options or the issuance of shares of Stock, no shares of Stock shall be issued, in whole or in part, unless such listing, registration, qualification, consent or approval has been effected or obtained free of any conditions or with such conditions as are acceptable to the Committee. ARTICLE XVIII CANCELLATION OF OPTIONS ----------------------- The Committee, in its discretion, may, with the consent of any optionee, cancel any outstanding option hereunder. ARTICLE XIX EFFECTIVE DATE AND EXPIRATION DATE OF PLAN ------------------------------------------ The Plan is effective as of February 14, 1997, the date of adoption of the Plan by the Company's Board, subject to approval by the stockholders of the Company in a manner which complies with Section 422(b)(1) of the Code and the Treasury Regulations thereunder. The expiration date of the Plan, after which no option may be granted hereunder, shall be February 13, 2007. ARTICLE XX AMENDMENT OR DISCONTINUANCE OF PLAN ----------------------------------- The Board may, without the consent of the Company's stockholders or optionees under the Plan, at any time terminate the Plan entirely and at any time or from time to time amend or modify the Plan, provided that no such action shall adversely affect Restricted Shares or options theretofore granted hereunder without the grantee's or optionee's consent. ARTICLE XXI REPURCHASE OF OPTIONS --------------------- In granting options hereunder, the Committee may in its discretion, and on terms it considers appropriate, require an optionee, or the executors or administrators of an optionee's estate, to sell back to the Company such options in the event such optionee's employment with the Company is terminated. ARTICLE XXII MISCELLANEOUS ------------- (a) Grants of options and Restricted Shares shall be evidenced by agreements (which need not be identical) in such forms as the Committee may from time to time approve. Such agreements shall conform to the terms and conditions of the Plan and may provide that the grant of any Restricted Share or option under the Plan and Stock acquired upon the exercise of options shall also be subject to such other conditions (whether or not applicable to any other grantee or optionee) as the Committee determines appropriate, including, without limitation, provisions to assist the Optionee in financing the purchase of Stock through the exercise of options, provisions for the forfeiture of, or restrictions on, resale or other disposition of shares under the Plan, provisions giving the Company the right to repurchase shares acquired under the Plan in the event the participant elects to dispose of such shares, and provisions to comply with Federal and state securities laws and Federal and state income tax withholding requirements. (b) At such time that the delivery of shares of Stock to a grantee or optionee becomes subject to tax withholding requirements, the Company may require that the grantee or optionee pay to the Company such amount as the Company deems necessary to satisfy its obligation to withhold Federal, state or local income or other taxes. The Committee, in its discretion, may allow the grantee or optionee to pay such amount by having the Company withhold shares of Stock which would otherwise be delivered to such grantee or optionee having an aggregate Fair Market Value equal to such amount. (c) If the Committee shall find that any person to whom any amount is payable under the Plan is unable to care for his affairs because of illness or accident, or is a minor, or has died, then any payment due to such person or his estate (unless a prior claim therefor has been made by a duly appointed legal representative) may, if the Committee so directs the Company, be paid to his spouse, child, relative, an institution maintaining or having custody of such person, or any other person deemed by the Committee to be a proper recipient on behalf of such person otherwise entitled to payment. Any such payment shall be a complete discharge of the liability of the Committee and the Company therefor. (d) No member of the Committee shall be personally liable by reason of any contract or other instrument executed by such member or on his behalf in his capacity as a member of the Committee nor for any mistake of judgment made in good faith, and the Company shall indemnify and hold harmless each member of the Committee and each other employee, officer or director of the Company to whom any duty or power relating to the administration or interpretation of the Plan may be allocated or delegated, against any cost or expense (including counsel fees) or liability (including any sum paid in settlement of a claim) arising out of any act or omission to act in connection with the Plan unless arising out of such person's own fraud or bad faith; provided, however, that approval of the Company's Board shall be required for the payment of any amount in settlement of a claim against any such person. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company's Certificate of Incorporation or By-Laws, as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless. (e) The Plan shall be governed by and construed in accordance with the internal laws of the State of New York without reference to the principles of conflicts of law thereof. (f) No provision of the Plan shall require the Company, for the purpose of satisfying any obligations under the Plan, to purchase assets or place any assets in a trust or other entity to which contributions are made or otherwise to segregate any assets, nor shall the Company maintain separate bank accounts, books, records or other evidence of the existence of a segregated or separately maintained or administered fund for such purposes. Optionees shall have no rights under the Plan other than as unsecured general creditors of the Company, except that insofar as they may have become entitled to payment of additional compensation by performance of services, they shall have the same rights as other employees under general law. (g) Each member of the Committee and each member of the Company's Board shall be fully justified in relying, acting or failing to act, and shall not be liable for having so relied, acted or failed to act in good faith, upon any report made by the independent public accountant of the Company and upon any other information furnished in connection with the Plan by any person or persons other than such member. (h) Except as otherwise specifically provided in the relevant plan document, no payment under the Plan shall be taken into account in determining any benefits under any pension, retirement, profit-sharing, group insurance or other benefit plan of the Company. (i) The expenses of administering the Plan shall be borne by the Company. (j) Masculine pronouns and other words of masculine gender shall refer to both men and women. * * * As adopted by the Board of Directors of TKG Acquisition Corp. as of February 14, 1997 EX-10.9 12 CONSULTING AGREEMENT DATED DECEMBER 1, 1996 EXHIBIT 10.9 December 1, 1996 Mr. Wolfgang Billstein Ziegelhuette 32 D-61476 Kronberg GERMANY RE: CONSULTING AGREEMENT BETWEEN KNOLL, INC. AND WOLFGANG BILLSTEIN Dear Wolfgang: This letter, once it is signed by both parties, shall act as the Consulting Agreement ("Agreement") between Knoll, Inc. ("Knoll") and Wolfgang Billstein ("Consultant"). Please sign both originals of this letter and return one original to me. ENGAGEMENT - Consultant will perform a variety of consulting services to Knoll - ---------- and its European affiliates, as directed by the Chairman or the Vice Chairman of Knoll during the term of this Agreement, including but not limited to the following services: a. Developing and implementing a plan to maximize the financial performance and revenue growth of Knoll Europe in accordance with the financial objectives agreed upon with Knoll; b. Advising the management of Knoll and of Knoll Europe, as appropriate; and c. Continuing to implement and monitor performance under the Knoll Ethics Program. Major financial, structural, legal issues as well as all contracts and personnel matters and "extraordinary business matters" (as hereinafter defined) shall be pre-approved by the Chairman or Vice Chairman of Knoll. Consultant shall keep Knoll Europe's affairs completely separate from any other business(es) for which Consultant does work or in which Consultant has any direct or indirect ownership, financial or other interest. Consultant will spend whatever amount of his personal time is necessary or appropriate to complete Consultant's services and duties hereunder. Consultant will spend his full time performing consulting services for Knoll. Page 1 Mr. Wolfgang Billstein December 1, 1996 COMPENSATION - Consultant shall receive a monthly fee of 52,249 Deutsche Marks - ------------ ("Monthly Fee") and shall be reimbursed on a monthly basis for his reasonable out-of-pocket travel and business expenses. Consultant shall submit monthly invoices with supporting documentation as reasonably required by Knoll. Payment terms are net thirty (30) days. For Fiscal 1997, in addition to the Monthly Fee, Consultant shall receive a contingent incentive in U.S. Dollars equal to 6% of the positive operating profit of Knoll Europe on Knoll's U.S. Dollar internal financial statements for Knoll Europe for the fiscal year commencing on December 1, 1996 and ending on November 30, 1997 ("Fiscal 1997"), provided that such operating profit is at least $2 Million ("OP Incentive"). If operating profit for Knoll Europe is less than $2 Million for Fiscal 1997, the OP Incentive shall be zero. Notwithstanding anything to the contrary, the OP Incentive shall not exceed the sum of $240,000. For example: (a) If operating profit for Knoll Europe for Fiscal 1997 is $1.9 Million, the OP Incentive shall be zero. (b) If operating profit for Knoll Europe for Fiscal 1997 is $2.9 Million, the OP Incentive shall be $174,000. (c) If operating profit for Knoll Europe for Fiscal 1997 is $3.9 Million, the OP Incentive shall be $234,000. For Fiscal 1997, in addition to the Monthly Fee and the OP Incentive, Consultant shall receive a contingent incentive in U.S. Dollars equal to 4% of the incremental "Orders" (as defined by this Agreement and Knoll's internal accounting policies, practices and procedures) volume in excess of $55 Million for Fiscal 1997 for Knoll Europe on Knoll's U.S. Dollar financial statements, provided that Knoll Europe's operating profit for Fiscal 1997 is at least $2 Million ("Orders Incentive"). If Knoll Europe's operating profit for Fiscal 1997 is less than $2 Million, the Orders Incentive shall be zero. There is no maximum payout or limit on the amount of the Orders Incentive. For example: (a) If operating profit for Knoll Europe for Fiscal 1997 is $1.9 Million and Orders for Fiscal 1997 are $60 Million, the Orders Incentive shall be zero. (b) If operating profit for Knoll Europe for Fiscal 1997 is equal to or greater than $2.0 Million and Orders for Fiscal 1997 are $60 Million, the Orders Incentive shall be $200,000 ($60 Million less $55 Million = $5 Million x 4% = $200,000). Page 2 Mr. Wolfgang Billstein December 1, 1996 (c) If the facts are the same as section (b) above except that Orders for Fiscal 1997 are $65 Million, the Orders Incentive shall be $400,000 ($65 Million less $55 Million = $10 Million x 4% = $400,000). All determinations of valid Orders and all operating profit calculations for purposes of determining the Orders Incentive and OP Incentive shall be made using Knoll's internal accounting policies, practices and procedures as interpreted and determined by Knoll's Vice President and Controller in his sole discretion and after Knoll Europe's financial statements are converted to U.S. Dollars using Knoll's internal currency conversion policies. The calculation of Knoll Europe's operating profit on Knoll's internal financial statements shall include charges for Consultant's Monthly Fees, OP Incentive, Orders Incentive, travel and business expenses and incentive accruals for all other Knoll Europe incentives. Unusual income (such as gains on sales of fixed assets), unusual expenditures (such as restructuring costs), changes in depreciation and goodwill (other than changes in depreciation and goodwill in the ordinary course of business) shall be disregarded in determining operating profit as determined by the Chairman of Knoll. Knoll Europe is the group of Knoll entities included in Knoll's internal financial statements as of the date hereof. Payment of the Orders Incentive and OP Incentive, if appropriate hereunder, would be paid to Consultant on or before February 28, 1998. The payments of the OP Incentive and the Orders Incentive shall be made in German Deutsche Marks using the exchange rate from the U.S. Dollar calculations contemplated hereby at the exchange rates that are reported in the Wall Street Journal on the date of the payments. ------------------- For the fiscal years after Fiscal 1997, the parties will discuss and attempt in good faith to design incentives for Consultant that are consistent with Knoll's financial objectives for said fiscal years; provided, however, that Knoll reserves the right to ultimately determine said incentives in its sole discretion. TERM; TERMINATION - The term of this Agreement shall begin on December 1, 1996 - ----------------- and end on November 30, 1997, subject to termination as hereinafter set forth. This Agreement shall automatically renew for an additional one (1)-year period for "Fiscal 1998" (December 1, 1997 to November 30, 1998) and "Fiscal 1999" (December 1, 1998 to November 30, 1999) unless either party elects not to renew and informs the other party prior to October 1, 1997 (for Fiscal 1998) or October 1, 1998 (for Fiscal 1999). If a party elects not to renew this Agreement or if Knoll terminates the Agreement for "Good Cause," Knoll shall be released for any and all future liability to Consultant under this Agreement, including any liability for a "Termination Payment" (as hereinafter defined), fees, compensation or any incentives. Page 3 Mr. Wolfgang Billstein December 1, 1996 In addition, notwithstanding any other provision hereof, Knoll shall have the unilateral right to terminate Consultant with or without any cause and without any further liability for fees, compensation or incentives whatsoever upon three (3) month's notice and upon payment to Consultant of the "Termination Payment". Payment of the Termination Payment, if appropriate hereunder, would be made within thirty (30) days of the effective date of termination. For purposes of this Agreement, the term "Termination Payment" means 313,494 Deutsche Marks ("Base Termination Payment") plus the "Additional Termination Payment" (as hereinafter defined). In addition, for notices of termination of Consultant sent by Knoll during Fiscal 1997, the "Additional Termination Payment" shall be defined as the sum of the OP Incentive and the Orders Incentive determined in accordance hereunder multiplied by a fraction having as its numerator the number of months actually worked by Consultant after December 1, 1996 but before the earlier of notice of termination is given to Consultant and November 30, 1997, and having as its denominator the number twelve (12). For Fiscal 1998 and Fiscal 1999, assuming this Agreement is in force and has not earlier been terminated, not renewed or expired, if incentives have been successfully determined for said fiscal years, then the parties will discuss and attempt in good faith to design an Additional Termination Payment that is consistent with the above approach and is consistent with Knoll's financial objectives for said fiscal years; provided, however, that Knoll reserves the right to ultimately determine said Additional Termination Payments in its sole discretion. As a condition precedent to receiving the Termination Payment, Consultant shall execute a complete release of Knoll and its affiliates in a form satisfactory to Knoll. For purposes of this Agreement, "Good Cause" means: a. Termination or breach of this Agreement by Consultant; b. Conviction of Consultant or any employee of Consultant of a felony (or similar international law); or c. Consultant's willful misconduct or fraud. The expiration or termination by this Agreement shall not affect Knoll's rights to enforce the "Miscellaneous" provisions hereof. MISCELLANEOUS - Consultant is an independent contractor and not an agent or - ------------- employee of Knoll. Consultant is not integrated into the operation of Knoll Europe and is free to decide how, were and when to work on the assignments necessary for it to perform under Page 4 Mr. Wolfgang Billstein December 1, 1996 this Agreement. Except as permitted herein, Consultant shall not enter into any contracts on behalf of Knoll or its affiliates. Consultant shall keep all information and trade secrets regarding Knoll or its affiliates strictly confidential, including the terms of this Agreement. Any and all intellectual property rights and other drawings, designs, specifications, data maskworks, copyrightable works, inventions, discoveries, computer programs, photos and documents developed by Consultant, his employees, agents and subcontractors during this Agreement or for a period of one (1) year thereafter shall belong to Knoll. Consultant shall not take any action which directly or indirectly competes with or conflicts with the business of Knoll in Europe during the term of this Agreement. Knoll acknowledges that on July 1, 1996, the Board of Directors of Knoll International S.p.A. (Italy) appointed Consultant as Chairman of the Board of Knoll International S.p.A. (Italy) and granted certain powers to Consultant to manage that company. Knoll is aware that certain managerial powers relating to extraordinary business matters of Knoll International S.p.A. (Italy) may conflict with the provisions set forth in this Agreement. Therefore, Consultant will have full authority for any ordinary business matters while Knoll will require that any extraordinary business matters are referred to the Chairman or Vice Chairman of Knoll for Knoll's prior approval, as required hereunder. For purposes of this Agreement, "extraordinary business matters" shall include the following with respect to Knoll or any Knoll subsidiary or affiliate: acquisitions, divestitures, joint ventures, partnerships, or other unusual business combinations; purchasing, selling or leasing real estate; major product development initiatives; licensing agreements or other purchase or sale of intellectual property; covenants not to compete; hiring, firing and promoting senior management; consulting agreements or other material agreements outside the ordinary course of business. Knoll will also keep Consultant indemnified against any losses and damages which Consultant may suffer in connection with the performance of Consultant's duties as Chairman of the Board of Knoll International S.p.A. (Italy) under the law and under the Knoll International S.p.A. (Italy) Board of Directors' resolution of July 1, 1996, except in the event that Wolfgang Billstein has performed his duties with gross negligence or fraud or in a manner inconsistent with the terms hereof. All services performed by Consultant, including, but not limited to, the services rendered in the capacity of Chairman of the Board of Knoll International S.p.A. (Italy) shall not entitle Consultant to any compensation or benefits in addition to the compensation provided in the Agreement. Page 5 Mr. Wolfgang Billstein December 1, 1996 All taxes applicable to any amounts paid by Knoll to Consultant shall be Consultant's liability and Knoll shall not withhold any such amounts for taxes. Consultant shall comply with all applicable laws (including U.S. laws) in the performance of his duties hereunder. This Agreement sets forth the entire understanding of the parties with regard to the subject matter herein and merges and supersedes any other oral or written agreements, discussions, understandings and/or terms. This Agreement shall be construed in accordance with and governed by the laws of the State of New York, United States of America applicable to agreements made and to be performed wholly within such jurisdiction. The parties agree that any legal action, suit or proceeding arising out of or relating to this Agreement shall be instituted in a Federal or State court sitting in the State of New York which shall be the exclusive jurisdiction and venue of said legal proceedings and each party hereto waives any objection which such party may now or hereafter have to the laying of venue of any such actions, suit or proceeding, and irrevocably submits to the jurisdiction of any such court in any such action, suit or proceeding. Any and all service of process and any other notice in any such action, suit or proceeding shall be effective against such party when transmitted in writing to the address of each contained herein. Nothing contained herein shall be deemed to affect the right of any party hereto to serve process in any manner permitted by law. Consultant shall not assign this Agreement. Any attempted assignment shall be null, void and of no legal effect. This Agreement shall not become effective until and unless the Agreement and Exhibit "A" are signed by the Consultant and the Agreement signed by Knoll. KNOLL , INC. BY:_________________________________ BURTON B. STANIAR, CHAIRMAN AGREED: BY:________________________________ WOLFGANG BILLSTEIN Page 6 EXHIBIT "A" CONSULTANT CERTIFICATION The undersigned hereby certifies that Wolfgang Billstein has not made and will not make any gift or payment of money or anything of value, directly or indirectly, to any official or employee of any government, or any department or agency thereof (including government-owned companies) or to any political party or candidate for political office for the corrupt purpose of inducing such official, employee, party or candidate to misuse his position or to influence any act or decision of a government, department or agency thereof in order to obtain, retain or direct business to or for Knoll, Inc. and/or any subsidiary or affiliate thereof. WITNESS: ____________________________ ____________________________ Wolfgang Billstein Date:_______________________ EX-21 13 LIST OF SUBSIDIARIES EXHIBIT 21 LIST OF SUBSIDIARIES Wholly Owned Subsidiaries of the Company Jurisdiction of Incorporation - --------------------------- ----------------------------- T.K.G. Canada, Inc. New Brunswick, Canada Knoll North America Corp. Ontario, Canada (wholly owned by T.K.G. Canada, Inc.) Spinneybeck Enterprises, Inc. New York Spinneybeck, Ltd. Ontario, Canada (wholly owned subsidiary of Spinneybeck Enterprises, Inc.) Knoll Overseas, Inc. Delaware Knoll Europe B.V. Netherlands (wholly owned subsidiary of Knoll Overseas, Inc.) Knoll Italy, Ltd. England & Wales (wholly owned subsidiary of Knoll Europe B.V.) Knoll International S.p.A. Italy (75% owned by Knoll Europe B.V. and 25% owned by Knoll Italy, Ltd.) Knoll International, Ltd. England & Wales (wholly owned subsidiary of Knoll Europe B.V.) Knoll International S.A. France (wholly owned subsidiary of Knoll Europe B.V.) Knoll International Deutschland GmBH Germany (wholly owned subsidiary of Knoll Europe B.V.) Knoll International Belgium S.A. Belgium (wholly owned subsidiary of Knoll Europe B.V.) EX-27 14 FINANCIAL DATA SCHEDULE
5 1,000 10-MOS DEC-31-1996 DEC-31-1996 8,804 0 116,879 5,713 57,811 202,679 195,483 19,265 675,712 137,925 330,889 0 1,603 23 176,178 675,712 561,534 561,534 358,841 358,841 131,349 0 32,952 38,839 16,844 21,995 0 (5,159) 0 16,836 0 0
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