<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
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. 1-7909
EMPIRE OF CAROLINA, INC.
------------------------
(Exact name of Registrant as specified in its charter)
Delaware 13-2999480
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
5150 LINTON BOULEVARD, 5TH FLOOR, DELRAY BEACH, FL 33484
--------------------------------------------------------
(Address of principal executive office)
(Zip Code)
(561) 498-4000
--------------
(Registrant's telephone number, including area code)
__________________________________________________
(Former name, former address and former fiscal year,
if changed since last report.)
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
----- -----
The number of shares outstanding of the Registrant's Common Stock, $.10 par
value, as of May 12, 1997 was 7,403,564.
<PAGE>
PART I--FINANCIAL INFORMATION
This Form 10-Q contains various forward-looking statements and information
that are based on management's beliefs as well as assumptions made by and
information currently available to management. Such statements are subject to
various risks and uncertainties which could cause actual results to vary
materially from those stated. Should one or more of these risks or
uncertainties materialize or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, estimated, expected
or projected. Such risks and uncertainties include the Company's ability to
close the proposed preferred stock transaction, the Company's ability to
manage inventory production and costs, to meet potential increases or decreases
in demand, potential adverse customer impact due to delivery delays including
effects on existing and future orders, competitive practices in the toy and
decorative holiday products industries, changing consumer preferences and risks
associated with customer acceptance of new product introductions, potential
increases in raw material prices, potential delays or production problems
associated with foreign sourcing of production and the impact of pricing
policies including providing discounts and allowances. Certain of these as well
as other risks and uncertainties are described in more detail in the Company's
Registration Statement on Form S-1 filed under the Securities Act of 1933,
Registration No. 333-4440, and the Company's Annual Report on Form 10-K/A for
the year ended December 31, 1996. The Company undertakes no obligation to update
any such factors or to publicly announce the result of any revisions to any of
the forward-looking statements contained herein to reflect future events or
developments.
<PAGE>
Item 1. Financial Statements
EMPIRE OF CAROLINA, INC., AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands)
MARCH 31, DECEMBER 31,
1997 1996
----------- ------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 828 $ 478
Accounts receivable, less allowances
and other deductions (1997-$6,349;
1996-$8,777) 25,510 39,678
Inventories, net 21,866 25,115
Income taxes receivable 13,004
Prepaid expenses and other current assets 1,919 2,142
Deferred income taxes 2,183 2,183
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Total current assets 52,306 82,600
Property, plant and equipment, net 23,077 24,845
Excess cost over fair value of net assets
acquired 12,659 12,867
Trademarks, patents, tradenames and licenses 6,442 6,567
Other noncurrent assets 851 981
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$ 95,335 $127,860
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LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Notes payable and current portion of long-
term debt $ 34,909 $ 58,712
Convertible subordinated debentures 14,211 14,139
Accounts payable--trade 20,573 24,783
Other accrued liabilities 15,142 15,464
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Total current liabilities 84,835 113,098
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Long-Term Liabilities:
Long-term debt 6,930 7,870
Deferred income taxes 2,183 2,183
Other noncurrent liabilities 2,878 2,938
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Total long-term liabilities 11,991 12,991
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Total liabilities 96,826 126,089
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Commitments and Contingencies (Note 3)
Stockholders' Equity (Deficit):
Common stock, $.10 par value, 30,000,000
shares authorized, shares issued and
outstanding; 1997 and 1996--7,403,564 740 740
Additional paid-in capital 50,438 50,438
Deficit (52,111) (48,860)
Stockholder loans (558) (547)
-------- --------
Total stockholders' equity (deficit) (1,491) 1,771
-------- --------
$ 95,335 $127,860
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See notes to consolidated condensed financial statements.
<PAGE>
EMPIRE OF CAROLINA, INC., AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31,
--------------------------------
1997 1996
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(In thousands except per share amount)
Net Sales $25,686 $22,186
Cost of Sales 21,878 16,217
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Gross Profit 3,808 5,969
Selling and Administrative Expense 6,493 7,298
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Operating Loss (2,685) (1,329)
Interest Expense (2,006) (2,119)
------- -------
Loss Before Income Taxes (4,691) (3,448)
Income Tax Benefit 1,440 1,292
------- -------
Net Loss $(3,251) $(2,156)
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Loss Per Common Share--
Primary and fully diluted $ (0.44) $ (0.41)
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Weighted average number of common shares
outstanding--primary and fully diluted 7,404 5,201
======= =======
See notes to consolidated condensed financial statements.
<PAGE>
EMPIRE OF CAROLINA, INC., AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------------
1997 1996
--------------------- ----------------
(In thousands except per share amounts)
<S><C>
Cash Flows From Operating Activities:
Net loss $ (3,251) $(2,156)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 2,356 2,126
Other 639 (413)
Changes in assets and liabilities 25,615 1,815
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Net cash provided by operating activities 25,359 1,372
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Cash Flows From Investing Activities:
Capital expenditures (255) (970)
Other (11)
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Net cash used in investing activities (266) (970)
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Cash Flows From Financing Activities:
Net repayments under lines of credit (23,803) (1,428)
Repayments of notes payable (940) (1,268)
Proceeds from issuance of common stock 65
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Net cash used in financing activities (24,743) (2,631)
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Net Increase (Decrease) in Cash and Cash Equivalents 350 (2,229)
Cash and Cash Equivalents, Beginning of Year 478 2,568
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Cash and Cash Equivalents, End of Year $ 828 $ 339
======== =======
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 1,365 $ 1,554
Income taxes, (net of refunds) (15,786) 43
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Three Months Ended March 31, 1997 and 1996
(Unaudited)
1. SUMMARY OF BUSINESS OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
The consolidated condensed financial statements included herein have
been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations; however, the Company believes that the
disclosures are adequate to make the information presented not misleading. It is
suggested that these condensed financial statements be read in conjunction with
the financial statements and the notes thereto included in the Company's latest
annual report, as amended, on Form 10-K/A.
In the opinion of management, the information contained in this report
reflects all adjustments necessary to present fairly the results for the interim
periods presented.
In response to the circumstances which gave rise to the loss for fiscal
1996, management restructured its operations by consolidating its previous four
SBU's into two, consolidating into one domestic manufacturing facility, reducing
staffing levels, rationalizing its product lines and amending borrowing
arrangements with its primary lenders.
Although management's actions have reduced the outflow of cash, the
Company's current lines of credit are insufficient to fund operations. As a
result, management believes that without a significant capital infusion, either
by completing the transaction described below, or an alternative transaction,
its cash resources will not be sufficient to fund continued operations.
The consolidated condensed financial statements have been prepared on a
going concern basis which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The factors
discussed above, as well as the requirement for the Company to raise significant
additional funding prior to May 31, 1997, indicate that, if the Company is
unable to raise significant additional funding, it may be unable to continue as
a going concern. The independent auditors' report on the December 31, 1996
financial statements stated that "These matters raise substantial doubt about
the Company's ability to continue as a going concern. . . . The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty."
The consolidated financial statements do not include adjustments
relating to the recoverability and classification of recorded assets, or the
amounts and classification of liabilities, that might be necessary should the
Company be unable to continue as a going concern. However, the convertible
subordinated debentures have been classified as current as March 31, 1997 and
December 31, 1996 to reflect the Company's failure to comply with certain loan
covenants. The Company's continuation as a going concern is dependent upon its
ability to obtain additional financing and operate profitably under its
restructured organization.
Management engaged investment bankers to assist the Company in
identifying and evaluating various alternatives, including the sale of certain
product lines or fixed assets, and the potential recapitalization of the
Company. During March 1997, the Company entered into a non-binding letter of
intent with an investor that proposed to invest in the Company, which proposal
was withdrawn in April 1997. Following the withdrawal of such proposal, the
Board of Directors, after presentation by the Company's legal and financial
advisors and consideration of the Company's liquidity and operational
requirements, concluded that pursuing the proposed investment described below is
in the best interests of the Company.
On May 8, 1997, the Company announced that it signed a definitive
securities purchase agreement with HPA Associates, LLC ("HPA") and EMP
Associates LLC ("EMP") providing for the investment of up to $16 million for
newly issued convertible Series A preferred stock of the Company. The Company
also reported that HPA and EMP have funded a $5 million bridge loan to provide
the Company with additional liquidity during the period prior to the closing of
the preferred stock investment described below. The bridge loan is repayable
upon the closing of the preferred stock investment in accordance with the
securities purchase agreement. At the election of the note holder, under certain
circumstances, the bridge loan may be converted on a dollar for dollar basis
into Series A preferred stock, described below, instead of being repaid.
<PAGE>
Upon funding of the bridge loan, HPA and EMP received an aggregate of
five million warrants to purchase common stock at $1.375 per share, which
warrants are forfeitable under certain circumstances if the $11 million
preferred stock investment described below is not completed. Each warrant has a
six-year term and entitles the holder thereof to purchase one share of common
stock at an initial exercise of $1.375 per share (subject to anti-dilution
adjustment in certain circumstances) and is callable by the Company in certain
circumstances.
The securities purchase agreement provides that HPA, EMP and other
investors will purchase $11 million of newly issued convertible preferred stock
on or before June 5, 1997. The Company intends to engage certain institutions to
act as placement agents with respect to such preferred stock investment. The
Series A preferred stock bears no dividend, is convertible into common stock at
an initial conversion price of $1.25 per share (subject to anti-dilution
adjustments in certain circumstances), has the right to designate two members of
the Board of Directors and is entitled to vote on all other matters presented to
stockholders on an as if converted basis.
The securities purchase agreement also provides that, in addition to the
$11 million of convertible preferred stock discussed above, the Company may
elect to issue an additional $5 million of the Series A preferred stock to the
investors within 180 days. If the Company elects to issue the additional $5
million of the Series A preferred stock described above, the investors will be
issued an additional 2.5 million warrants upon closing, each of which has a
six-year term and entitles the holder thereof to purchase one share of common
stock at an initial exercise price of $1.375 per share (subject to anti-dilution
adjustment in certain circumstances) and is callable by the Company in certain
circumstances. If the Company elects to issue such additional Series A preferred
stock within 30 days of the date of the securities purchase agreement (May 5,
1997), the bridge loan will be payable out of the proceeds of the additional
Series A preferred stock. If the investors do not purchase such additional
Series A preferred stock, the bridge loan is due on February 6, 1998. If the
Company does not give notice within such 30 day period that they wish to sell
the additional Series A preferred stock, the bridge loan is payable out of the
proceeds from the sale of $11 million of Series A preferred stock. On May 14,
1997, the Company notified the investors that it desired to sell the additional
$5 million of Series A preferred stock pursuant to the securities purchase
agreement.
If the $11 million preferred stock is not funded on or before June 5,
1997, and such failure to fund is not due to the Company's failure to satisfy
the closing conditions set forth in the securities purchase agreement, the
maturity date of the bridge loan shall be February 6, 1998 and the Company's
sole recourse under the securities purchase agreement shall be to cancel the
five million warrants issued at the time the bridge loan was funded.
Upon completion of the investment the investors will own securities
convertible into or exercisable for a substantial majority of the Company's
outstanding stock. The Company has also adopted an amendment to its Stockholder
Rights Agreement in order to facilitate the proposed investment. The American
Stock Exchange has advised the Company that the proposed transactions do not
require stockholder approval under applicable Exchange rules.
The preferred stock transaction is subject to certain closing conditions
which are specified in the securities purchase agreement. Such closing
conditions include (i) that the holders of the Company's 9% convertible
debentures, in the original principal amount of $15 million shall have exchanged
all of such debentures for Series C Preferred Stock of the Company, thereby
releasing, among other things, their claim to accrued and unpaid interest, fees
and expenses (ii) the successor to the seller under the Company's agreement to
purchase the assets of Buddy L shall have waived or amended certain earn out,
price protection provisions and registration rights in exchange for: $100,000 in
cash; 250,000 shares of common stock of the Company; a $2.5 million 9% note from
the Company's major subsidiary (and guaranteed by the Company) providing for
$625,000 principal payments on the first four anniversaries of the closing of
the preferred stock investment, and certain other benefits, including
registration rights and mutual releases; (iii) the bank senior lenders under the
secured bank facility shall have agreed to amend the loan and security agreement
in order to convert the current portion of the term loan to a one year and a day
obligation, waive existing defaults, make the maximum loan facility $75 million
and revise the loan covenants to the investors' satisfaction to avoid the
occurrence of early defaults; and (iv) the Company's then existing Board of
Directors shall have accepted a written outline of a plan to reduce costs or
expenses by approximately $8 million, which condition has been satisfied. The
Company can give no assurance that the preferred stock transaction will be
consummated, and, in the event that it is not consummated, there can be no
assurance that cash generated from operations will be sufficient to fund the
Company's continued operations or that the Company's senior lenders will provide
financing beyond May 31, 1997.
The secured bank facility of Empire Industries, Inc. ("Empire
Industries"), a wholly-owned subsidiary of the Company, was first amended in
December 1996. The first amendment increased the interest rate to a prime plus
1.75% (10.25% at March 31, 1997) and eliminated the LIBOR option. The amendment
provided for changes in certain terms, including certain formulas used to
calculate the eligible loan base, and required the Company to secure an
additional
<PAGE>
$6 million equity investment no later than April 30, 1997. On April 30, 1997,
the bank extended this provision to May 31, 1997. The first amendment enabled
the Company to borrow up to $4,000,000 against its 1996 income tax refund.
In February 1997, the Company entered into a second amendment with
respect to its $85,000,000 secured bank facility. Maximum borrowings under the
amendment were reduced to $75,000,000. Actual availability of borrowings under
the amendment is based on and secured by the Company's domestic accounts
receivable, inventory, property, plant and equipment as defined by the
amendment. In addition, certain financial covenants, including tangible net
worth, interest coverage, and weekly cash availability, as defined, were
amended. The income test covenant for March 1997 was not met. An additional
$4,500,000, secured by the Company's Federal income tax receivable was made
available to the Company to fund working capital requirements. The Company
incurred a fee of $1,687,500 for the amendment. Of the $1,687,500 fee, $187,500
was paid in February 1997 and the balance is payable in quarterly installments
in 1998 or earlier under certain circumstances. As a result of the execution of
the amended agreement, the Company was in compliance with the various financial
covenants of the secured banking facility at December 31, 1996. The second
amendment provided that new financial covenants be negotiated and agreed by May
1, 1997, which, on April 30, 1997 the bank extended to June 1, 1997. If new
financial covenants are not established by June 1, 1997, the financial covenants
would revert to those in the original loan agreement. Based on the March 31,
1997 financial statements, the Company would not be in compliance with the
original covenants, should they be reverted to at June 1, 1997. As noted above,
it is a condition to the closing of the proposed preferred stock investment that
the Company's loan and security agreement be further amended.
On March 31, 1997 and December 31, 1996, the Company did not make the
quarterly interest payments on its 9% five-year subordinated debentures and was
not in compliance with certain financial covenants. As a result, the convertible
subordinated debentures have been classified as current on the consolidated
balance sheets. The Company has received a waiver of any and all events of
noncompliance under the subordinated debentures. The debenture holders have
reserved the right to terminate this waiver by providing written notice to the
Company. As of May 14, 1997, such written notice has not been received by the
Company. As noted above, it is a condition to the closing of the proposed
preferred stock investment that the holders of the convertible debentures
exchange all of such debentures for Series C preferred stock of the Company and
release among other things, their claim to accrued and unpaid interest, fees and
expenses.
In connection with the acquisition of Buddy L, the consideration payable
included a five-year earnout based upon an amount equal to 1.5% of consolidated
net sales of the Company's and Buddy L's product or, at Buddy L's option, a
percentage of the Company's consolidated earnings before interest and income
taxes based on the sales of Buddy L products, subject to certain minimum and
maximum payment amounts and certain offset rights. Based on the amounts of
offsets, the Company does not anticipate that it will be required to make any
earnout payments with respect to the years ended December 31, 1996 and 1997, and
that the payment, if any, is dependent upon the Company's future offset claims
and financial performances, subject to required minimum payments of $750,000 in
April 1999 and $1.25 million in April 2000. No assurance can be given with
respect to the actual amount of any such earnout payment. As described above, it
is a condition to the closing of the proposed preferred stock transaction that
Buddy L or its successors waive their rights under such earn-out provision in
exchange for certain consideration.
Earnings per share - For the calculation of earnings per share for the
first quarter of 1997 and 1996, all of the various common stock equivalents,
convertible securities and contingently issuable shares are excluded from
primary and fully diluted earnings per share, because they are anti-dilutive. In
February 1997, SFAS No. 128, "Earnings Per Share", was issued. This Statement
establishes standards for computing and presenting earnings per share (EPS) and
applies to entities with publicly held common stock or potential common stock.
This Statement simplifies the standards for computing earnings per share
previously found in APB Opinion No. 15, Earnings Per Share, and makes them
comparable to international EPS standards. It replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual presentation
of basic and diluted EPS on the face of the income statement for all entities
with complex capital structures and requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation. This Statement is effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods; earlier application is not permitted. This Statement requires
restatement of all prior-period EPS data presented. Earnings per share, as
calculated in accordance with the provision of SFAS No. 128, are not materially
different from that presented for the quarters ended March 31, 1997 and 1996.
Use of Estimates - The preparation of the financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the period. Actual results could differ from those estimates.
<PAGE>
2. INVENTORIES
A summary of inventories, by major classification, at March 31, 1997 and
December 31, 1996 is as follows (in thousands):
March 31, December 31,
1997 1996
---- ----
Raw materials and purchase parts................... $ 5,205 $ 8,658
Work-in-process.................................... 4,377 4,593
Finished goods..................................... 12,284 11,864
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$21,866 $25,115
======= =======
Inventories are net of writedowns for lower of cost or market reserves
of $10,132,000 and $10,954,000 at March 31, 1997 and December 31, 1996,
respectively.
3. COMMITMENTS AND CONTINGENCIES
Letters of credit - The Company had outstanding commitments under
letters of credit totaling approximately $1,500,000 at March 31, 1997 compared
to $1,532,000 at December 31, 1996.
Indemnifications - In connection with the sale of the assets used in the
businesses of its wholly-owned subsidiaries, Isaly Klondike Company and Popsicle
Industries Ltd. to Thomas J. Lipton Company and it affiliates in 1993, the
Company agreed to certain indemnification obligations. The Company has
established reserves for all claims known to it and for other contingencies in
connection with the sale. Although there can be no assurance that claims and
other contingencies related to the sale will not exceed established reserves,
the Company believes that additional exposure related to the indemnification
obligations will not be material to the consolidated financial statements.
Litigation - There are two suits claiming infringement of various
intellectual property rights which have been filed against Marchon, Inc., a
wholly-owned subsidiary of the company. The Company believes that it has
meritorious defenses and intends to contest such claims.
During February 1997, Mr. Marvin Smollar, former President, Chief
Operating Officer and director of the Company, commenced an action against the
Company claiming breaches by the Company of certain agreements between the
Company and Smollar. The Company believes that it has meritorious defenses
against Mr. Smollar's claims and is contesting such allegations.
The Company's operating subsidiaries and its former operating
subsidiaries are subject to various types of consumer claims for personal injury
from their products. The Company's subsidiaries maintain product liability
insurance. Various product liability claims, each of which management believes
is adequately covered by insurance and/or reserves, are currently pending.
The Company does not believe the outcome of any of its litigation either
individually or in the aggregate would have a material adverse effect on the
Company's consolidated financial statements.
In January 1997, the Company filed suit against Marvin Smollar in which
the Company seeks to enforce a certain guarantee by Mr. Smollar of debt owed to
the Company by 555 Corporate Woods Parkway, Inc. Mr. Smollar has denied the
allegations in the Company's complaint.
Contingencies - The Company has been identified as a potentially
responsible party, along with numerous other parties, at various U.S.
Environmental Protection Agency ("EPA") designated superfund sites. The Company
is vigorously contesting these matters. It is the Company's policy to accrue
remediation costs when it is possible that such costs will be incurred and when
they can be reasonably estimated. As of March 31, 1997 and December 31, 1996,
the Company had reserves for environmental liabilities of $500,000. The amount
accrued for environmental liabilities was determined without consideration of
possible recoveries from third parties. Estimates of costs for future
remediation are necessarily imprecise due to, among other things, the allocation
of costs among potentially responsible parties. Although it is possible that
additional environmental liability related to these matters could result in
amounts that could be material to the Company's consolidated financial
statements, a reasonably possible range of such
<PAGE>
amounts cannot presently be estimated. Based upon the facts presently known, the
large number of other potentially responsible parties and potential defenses
that exist, the Company believes that its share of the costs of cleanup for its
current remediation sites will not, in the aggregate, have a material adverse
impact on its consolidated financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Sales of the Company's products are seasonal in nature. Generally, the
Company's largest sales occur in the third and fourth quarters of the year when
it ships its toys for the Christmas shopping season and holiday products for the
Christmas and Halloween shopping seasons. The Company's production generally is
heaviest in the period from June through September. Management expects that the
Company's quarterly operating results will vary significantly throughout the
year.
Results of Operations
Three Months Ended March 31, 1997 Compared to Three Months Ended March 31, 1996
Net Sales and Net Loss. Net sales for the three months ended March 31,
1997 increased by 15.8% to $25.7 million from $22.2 million for the three months
ended March 31, 1996. The net loss for the three months ended March 31, 1997
increased to $3.3 million from $2.2 million for the three months ended March 31,
1996.
The following table shows the Company's net sales and operating loss
from continuing operations (in thousands):
Three Months Ended
March 31,
1997 1996
---- ----
Net Sales:
Toys.................................... $24,070 $18,285
Holiday Products........................ 1,616 3,901
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Total Net Sales................................. $25,686 $22,186
======= =======
Operating Loss:
Toys.................................... $(2,627) $(1,207)
Holiday Products........................ (58) (122)
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Total Operating Loss............................ $(2,685) $(1,329)
======= =======
Toy sales increased $5.8 million to $24.1 million for the three months
ended March 31, 1997 from $18.3 million for the three months ended March 31,
1996. The increase was primarily due to sales of new products such as Real
Bugs(TM), increased sales of water slides and increased sales of discontinued or
slow moving items. This increase was partially offset by decreased sales of
other products, especially winter items, due to the mild winter.
The Company's sales of holiday products, primarily in the Easter product
category, decreased by approximately 59% to $1.6 million for the three months
ended March 31, 1997 from the $3.9 million during the three months ended March
31, 1996.
Gross Profit Margins. Gross profit margins were lower for the three
months ended March 31, 1997 as compared to the three months ended March 31,
1996, due to increased sales of discontinued or slow moving toys and the impact
of allocating domestic manufacturing costs over lower production levels, in an
effort to reduce inventory levels. These decreases were partially offset by
greater profit contribution on certain new imported toys.
Selling and Administrative ("S&A"). S&A expenses were lower for the
three months ended March 31, 1997 as compared to the three months ended March
31, 1996, primarily as a result of cost cutting measures begun in the last
quarter of 1996, partially offset by higher advertising expenditures during the
first quarter of 1997 ($1,029,000 increase). Cost cutting measures include the
reduction of strategic business units, which are accountable for the sales and
marketing of specific product categories, from four to two ($373,000 decrease);
reductions in new product development costs ($474,000 decrease); reductions in
selling, customer service and distribution expenses ($559,000 decrease) and
reductions in administrative expenses ($626,000 decrease).
<PAGE>
S&A expenses for the three months ended March 31, 1996 reflect the
reversal of approximately $600,000 of certain indemnification reserves due to
the expiration of certain time limitations and the reversal of $200,000 of
environmental reserves. S&A expenses were approximately 25% of sales for the
three months ended March 31, 1997 as compared to 36% of sales for three months
ended March 31, 1996, excluding the impact of the reversal of the
indemnification reserves.
Interest Expense. Interest expense was $2.0 million for the three months
ended March 31, 1997 as compared to $2.1 million for the three months ended
March 31, 1996.
Income Taxes. The tax benefit for the three months ended March 31, 1997
and the three months ended March 31, 1996, approximates the federal statutory
rate net of certain nondeductible expenses, primarily amortization of goodwill.
The tax benefit for the first quarter of 1997 reflects the Company's anticipated
ability to generate taxable income in the future.
Seasonality of Sales
Sales of many toy products are seasonal in nature. Purchase orders for
the Christmas selling season are typically secured in the months of April, May
and June so that by the end of June, the Company has historically received
orders or order indications for a substantial majority of its full year's toy
business. The Company also offers products sold primarily in the spring and
summer months including Water Works pools, Crocodile Mile(R) water slides and
other items, which are shipped principally in the first and second quarters of
the year and counter some of this seasonality. In addition, Big Wheel(R) and
Power Drivers(TM) ride-ons, Grand Champions(R) horses and Buddy L(R) vehicles
ship year-round. The Company's production generally is heaviest in the period
from June through September. Typically over 60% of toy product revenues are
generated in the second half of the year with September and October being the
largest shipping months. As a result, a disproportionate amount of receivables
are collected and trade credits are negotiated in the first calendar quarter of
the following year. The Company expects that its quarterly operating results
will vary significantly throughout the year.
Sales of holiday products, which are also seasonal in nature, are
heavily concentrated in the Christmas and Halloween shopping seasons. Therefore,
substantially all shipments and operating income of the holiday products segment
occur in the third and fourth quarters of the year. Sales of Easter products are
made in the first quarter. Holiday products can be manufactured throughout the
year in anticipation of seasonal demand, because of the more stable nature of
the product line, and dependent upon financial resources.
Liquidity And Capital Resources
In response to the circumstances which gave rise to the loss for fiscal
1996, management restructured its operations by consolidating its previous four
SBU's into two, consolidating into one domestic manufacturing facility, reducing
staffing levels, rationalizing its product lines and amending borrowing
arrangements with its primary lenders. The resulting benefit of higher operating
efficiencies and lower S&A expenses during the first quarter of 1997 have
already been discussed.
Although management's actions have reduced the outflow of cash, the
Company's current lines of credit are insufficient to fund operations. As a
result, management believes that without a significant capital infusion, either
by completing the transaction described below, or an alternative transaction,
its cash resources will not be sufficient to fund continued operations.
The consolidated condensed financial statements have been prepared on a
going concern basis which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The factors
discussed above, as well as the requirement for the Company to raise significant
additional funding prior to May 31, 1997, indicate that, if the Company is
unable to raise significant additional funding, it may be unable to continue as
a going concern. The independent auditors' report on the December 31, 1996
financial statements stated that "These matters raise substantial doubt about
the Company's ability to continue as a going concern. . . . The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty."
The consolidated financial statements do not include adjustments
relating to the recoverability and classification of recorded assets, or the
amounts and classification of liabilities, that might be necessary should the
Company be unable to continue as a going concern. However, the convertible
subordinated debentures have been classified as current at March 31, 1997 and
December 31, 1996 to reflect the Company's failure to comply with certain loan
<PAGE>
covenants. The Company's continuation as a going concern is dependent upon its
ability to obtain additional financing and operate profitably under its
restructured organization.
Management engaged investment bankers to assist the Company in
identifying and evaluating various alternatives, including the sale of certain
product lines or fixed assets, and the potential recapitalization of the
Company. During March 1997, the Company entered into a non-binding letter of
intent with an investor that proposed to invest in the Company, which proposal
was withdrawn in April 1997. Following the withdrawal of such proposal, the
Board of Directors, after presentation by the Company's legal and financial
advisors and consideration of the Company's liquidity and operational
requirements, concluded that pursuing the proposed investment described below is
in the best interests of the Company.
On May 8, 1997, the Company announced that it signed a definitive
securities purchase agreement with HPA Associates, LLC ("HPA") and EMP
Associates LLC ("EMP") providing for the investment of up to $16 million for
newly issued convertible Series A preferred stock of the Company. The Company
also reported that HPA and EMP, have funded a $5 million bridge loan to provide
the Company with additional liquidity during the period prior to the closing of
the preferred stock investment described below. The bridge loan is repayable
upon the closing of the preferred stock investment in accordance with the
securities purchase agreement. At the election of the note holder, under certain
circumstances, the bridge loan may be converted on a dollar for dollar basis
into Series A preferred stock, described below, instead of being repaid.
Upon funding of the bridge loan, HPA and EMP received an aggregate of
five million warrants to purchase common stock at $1.375 per share, which
warrants are forfeitable under certain circumstances if the $11 million
preferred stock investment described below is not completed. Each warrant has a
six-year term and entitles the holder thereof to purchase one share of common
stock at an initial exercise price of $1.375 per share (subject to anti-dilution
adjustment in certain circumstances) and is callable by the Company in certain
circumstances.
The securities purchase agreement provides that HPA, EMP and other
investors will purchase $11 million of newly issued convertible preferred stock
on or before June 5, 1997. The Company intends to engage certain institutions to
act as placement agents with respect to such preferred stock investment. The
Series A preferred stock bears no dividend, is convertible into common stock at
an initial conversion price of $1.25 per share (subject to anti-dilution
adjustment in certain circumstances), has the right to designate two members of
the Board of Directors and is entitled to vote on all other matters presented to
stockholders on an as if converted basis.
The securities purchase agreement also provides that, in addition to the
$11 million of convertible preferred stock discussed above, the Company may
elect to issue an additional $5 million of the Series A preferred stock to the
investors within 180 days. If the Company elects to issue the additional $5
million of the Series A preferred stock described above, the investors will be
issued an additional 2.5 million warrants upon closing, each of which has a
six-year term and entitles the holder thereof to purchase one share of common
stock at an initial exercise price of $1.375 per share (subject to anti-dilution
adjustment in certain circumstances) and is callable by the Company in certain
circumstances. If the Company elects to issue such additional Series A preferred
stock within 30 days of the date of the securities purchase agreement (May 5,
1997), the bridge loan will be payable out of the proceeds of the additional
Series A preferred stock. If the investors do not purchase such additional
Series A preferred stock, the bridge loan is due on February 6, 1998. If the
Company does not give notice within such 30 day period that they wish to sell
the additional Series A preferred stock, the bridge loan is payable out of the
proceeds from the sale of $11 million of Series A preferred stock. On May 14,
1997, the Company notified the investors that it desired to sell the additional
$5 million of Series A preferred stock pursuant to the securities purchase
agreement.
If the $11 million preferred stock is not funded on or before June 5,
1997, and such failure to fund is not due to the Company's failure to satisfy
the closing conditions set forth in the securities purchase agreement, the
maturity date of the bridge loan shall be February 6, 1998 and the Company's
sole recourse under the securities purchase agreement shall be to cancel the
five million warrants issued at the time the bridge loan was funded.
Upon completion of the investment, the investors will own securities
convertible into or exercisable for a substantial majority of the Company's
outstanding stock. The Company has also adopted an amendment to its Stockholder
Rights Agreement in order to facilitate the proposed investment. The American
Stock Exchange has advised the Company that the proposed transactions do not
require stockholder approval under applicable Exchange rules.
The preferred stock transaction is subject to certain closing conditions
which are specified in the securities purchase agreement. Such closing
conditions include (i) that the holders of the Company's 9% convertible
debentures, in the original principal amount of $15 million shall have exchanged
all of such debentures for Series C Preferred
<PAGE>
Stock of the Company, thereby releasing, among other things, their claim to
accrued and unpaid interest, fees and expenses; (ii) the successor to the seller
under the Company's agreement to purchase the assets of Buddy L shall have
waived or amended certain earnout price protection provisions and registration
rights in exchange for: $100,000 in cash; 250,000 shares of common stock of the
Company; a $2.5 million 9% note from the Company's major subsidiary (and
guaranteed by the Company) providing for $625,000 principal payments on the
first four anniversaries of the closing of the preferred stock investment, and
certain other benefits, including registration rights and mutual releases; (iii)
the bank senior lenders under the secured bank facility shall have agreed to
amend the loan and security agreement in order to convert the current portion of
the term loan to a one year and a day obligation, waive existing defaults, make
the maximum loan facility $75 million and revise the loan covenants to the
investors' satisfaction to avoid the occurrence of early defaults; and (iv) the
Company's then existing Board of Directors shall have accepted a written outline
of a plan to reduce costs or expense by approximately $8 million, which
condition has been satisfied. The Company can give no assurance that the
preferred stock transaction will be consummated, and, in the event that it is
not consummated, there can be no assurance that cash generated from operations
will be sufficient to fund the Company's continued operations or that the
Company's senior lenders will provide financing beyond May 31, 1997.
The secured bank facility of Empire Industries, Inc. ("Empire
Industries"), a wholly-owned subsidiary of the Company, was first amended in
December 1996. The first amendment increased the interest rate to prime plus
1.75% (10.25% at March 31, 1997) and eliminated the LIBOR option. The amendment
provided for changes in certain terms, including certain formulas used to
calculate the eligible loan base, and required the Company to secure an
additional $6 million equity investment no later than April 30, 1997. On April
30, 1997, the bank extended this provision to May 31, 1997. The first amendment
enabled the Company to borrow up to $4,000,000 against its 1996 income tax
refund.
In February 1997, the Company entered into a second amendment with
respect to its $85,000,000 secured bank facility. Maximum borrowings under the
amendment were reduced to $75,000,000. Actual availability of borrowings under
the amendment is based on and secured by the Company's domestic accounts
receivable, inventory, property, plant and equipment as defined by the
amendment. In addition, certain financial covenants, including tangible net
worth, interest coverage, and weekly cash availability, as defined, were
amended. The income test covenant for March 1997 was not met. An additional
$4,500,000, secured by the Company's Federal income tax receivable was made
available to the Company to fund working capital requirements. The Company
incurred a fee of $1,687,500 for the amendment. Of the $1,687,500 fee, $187,500
was paid in February 1997 and the balance is payable in quarterly installments
in 1998 or earlier under certain circumstances. As a result of the execution of
the amended agreement, the Company was in compliance with the various financial
covenants of the secured banking facility at December 31, 1996. The second
amendment provided that new financial covenants be negotiated and agreed by May
1, 1997, which, on April 30, 1997 the bank extended to June 1, 1997. If new
financial covenants are not established by June 1, 1997, the financial covenants
would revert to those in the original loan agreement. Based on the March 31,
1997 financial statements, the Company would not be in compliance with the
original covenants, should they be reverted to at June 1, 1997. As noted above,
it is a condition to the closing of the proposed preferred stock investment that
the Company's loan and security agreement be further amended.
On March 31, 1997 and December 31, 1996, the Company did not make the
quarterly interest payments on its 9% five-year subordinated debentures and was
not in compliance with certain financial covenants. As a result, the convertible
subordinated debentures have been classified as current on the consolidated
balance sheets. The Company has received a waiver of any and all events of
noncompliance under the subordinated debentures. The debenture holders have
reserved the right to terminate this waiver by providing written notice to the
Company. As of May 14, 1997, such written notice has not been received by the
Company. As noted above, it is a condition to the closing of the proposed
preferred stock investment that the holders of the convertible debentures
exchange all of such debentures for Series C preferred stock of the Company and
release among other things, their claim to accrued and unpaid interest, fees and
expenses.
In connection with the acquisition of Buddy L, the consideration payable
included a five-year earnout based upon an amount equal to 1.5% of consolidated
net sales of the Company's and Buddy L's product or, at Buddy L's option, a
percentage of the Company's consolidated earnings before interest and income
taxes based on the sales of Buddy L products, subject to certain minimum and
maximum payment amounts and certain offset rights. Based on the amounts of
offsets, the Company does not anticipate that it will be required to make any
earnout payments with respect to the years ended December 31, 1996 and 1997, and
that the payment, if any, is dependent upon the Company's future offset claims
and financial performances, subject to required minimum payments of $750,000 in
April 1999 and $1.25 million in April 2000. No assurance can be given with
respect to the actual amount of any such earnout payment. As described above, it
is a condition to the closing of the proposed preferred stock transaction that
Buddy L or its successors waive their rights under such earn-out provision in
exchange for certain consideration.
<PAGE>
Due to the seasonality of its revenues, the Company's working capital
requirements fluctuate significantly during the year. The Company's seasonal
financing requirements are highest during the fourth quarter and lowest during
the first quarter. The Company's inventories, accounts receivable, accounts
payable, notes payable and current portion of long-term debt vary significantly
by quarter due to the seasonal nature of the Company's business.
During the first quarter of 1997, the Company received its 1996 federal
income tax refund of $15.6 million which was applied to general working capital
needs.
Caldwell Button Company ("Caldwell"), a division of Empire Industries,
manufactures and sells plastic apparel buttons, buckles and novelty items for
use in the garment industry (representing approximately 1% of the Company's
consolidated net sales in 1996). During 1996, the Company adopted a plan to sell
or liquidate Caldwell. A review of the carrying value of long-lived assets
related to Caldwell has been made in accordance with SFAS No. 121. Based on this
evaluation, $0.6 million reserve has been provided for the difference between
carrying value and fair value, less estimated costs of disposal, of the
long-lived assets and its including in the selling and administrative expenses.
The Company is negotiating with a potential buyer seeking to effect a sale of
such button, buckle and novelty item business. There can be no assurance as to
the timing, terms or consummation of any such sale transaction.
Capital expenditures, principally for the purchase of tooling for new
products and equipment, were $255,000 for the first quarter of 1997 compared to
$970,000 for the first quarter of 1996. The Company's capital forecast for 1997
provides for expenditures of approximately $4 million to acquire new equipment
and tooling.
The Company is subject to various actions and proceedings, including
those relating to intellectual property matters, environmental matters and
product liability matters. See notes to consolidated condensed financial
statements.
Backlog
The Company had open orders for toys of $27.3 million and $16.7 million
as of March 31, 1997 and March 31, 1996, respectively. Open orders at March 31,
1997 mainly reflected orders for pool products and water slides and boys and
girls toys, which is the beginning of orders for fall toy product sales. The
Company believes that because order patterns in the retail industry vary from
time to time, open orders on any date in a given year are not a meaningful
indication of the future sales.
The Company had open orders of $0.5 million and $0.7 million as of March
31, 1997 and 1996, respectively, for holiday products. Due to the seasonal
nature of this product line, management believes that the amount of open orders
at March 31 in any year is not a meaningful indication of future sales.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Collection matters - Due to the cash flow constraints experienced during
the third and fourth quarter of 1996 and the first quarter of 1997, several
actions have been brought against the Company seeking payment of past due
accounts. In each instance, the Company has either structured a payment plan
with the plaintiff or denied the allegations in the complaint. The Company
believes that none of these actions, either individually or in the aggregate,
will have a material adverse effect on the financial condition of the Company.
Item 3. Defaults Upon Senior Securities
Under the amended terms of the secured bank facility of Empire
Industries, Inc., a wholly-owned subsidiary of the Company, the income test
covenant for March 1997 was not met.
On March 31, 1997 and December 31, 1996, the Company did not make the
quarterly interest payments on its 9% five-year subordinated debentures and was
not in compliance with certain financial covenants. As a result, the convertible
subordinated debentures have been classified as current on the consolidated
balance sheets. The Company has received a waiver of any and all events of non
compliance under the subordinated debentures. The debenture holders have
reserved the right to terminate this waiver by providing written notice to the
Company. As of May 14, 1997, such written notice has not been received by the
Company. As noted under "Liquidity and Capital Resources", it is a condition to
the closing of the proposed preferred stock investment that the holders of the
convertible debentures
<PAGE>
exchange all of such debentures for Series C preferred stock of the Company and
release among other things, their claim to accrued and unpaid interest, fees and
expenses.
Item 6. Exhibits and Reports on Form 8-K
(a) Index and Exhibits
Exhibit No. Description
3.1 Restated Certificate of Incorporation of the Company.(1)
3.2 First Amendment to Restated Certificate of Incorporation of the
Company.(2)
3.3 Amended and Restated By-Laws of the Company.(3)
3.4 Certificate of Designation of the Series B Junior Participating
Preferred Stock.(4)
4.1 Form of specimen certificate representing the Company's Common
Stock.(5)
4.2 Excerpts from the Company's amended By-Laws and the Company's
Restated Certificate of Incorporation relating to rights of
holders of the Company's Common Stock.(6)
4.3 Form of 9% Convertible Debentures, issued December 22, 1994.(7)
4.4 Form of Warrant Certificate of purchase common stock of the
Company, issued December 22, 1994.(8)
4.5 Rights Agreement, dated as of September 11, 1996, between
Empire of Carolina, Inc. and American Stock Transfer & Trust
Company as Rights Agent, which includes (i) as Exhibit A
thereto the form of Certificate of Designation of the Series B
Junior Participating Preferred Stock, (ii) as Exhibit B thereto
the form of Right certificate (separate certificates for the
Rights will not be issued until after the Distribution Date)
and (iii) as Exhibit C thereto the Summary of Stockholder
Rights Agreement.(4)
4.6 First Amendment as of May 5, 1997, to Rights Agreement dated as
of September 11, 1996, between Empire of Carolina, Inc. and
American Stock Transfer & Trust Company as Rights Agent.(9)
4.7 Form of Warrant Certificate to purchase common stock of the
Company, issued May 6, 1997.
10.38 Consent and Second Amendment to Loan and Security Agreement
among Empire Industries, Inc. and LaSalle National Bank and the
lenders named therein.(10)
10.39 Third Amendment to Loan and Security Agreement among Empire
Industries, Inc., LaSalle National Bank and the lenders named
therein.(11)
10.40 Securities Purchase Agreement dated as of May 5, 1997 among the
Company, HPA Associates, LLC and EMP Associates LLC.
10.41 Form of Promissory Note dated May 6, 1997.
27 Financial Data Schedule
- -----------
1 Previously filed as an Exhibit to the Company's Current Report on Form 8-K
dated July 21, 1995 and incorporated by reference.
2 Previously filed as an exhibit to the Company's Annual Report on Form 10-K,
for the year ended December 31, 1996 and incorporated by reference.
<PAGE>
3 Previously filed as an exhibit to Amendment No. 1 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1994 and incorporated by
reference.
4 Previously filed as an exhibit to the Company's Current Report on Form 8-K,
for September 12, 1996 and incorporated by reference.
5 Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (File No. 2-273208), dated July 13, 1981 and incorporated by
reference.
6 Previously filed as an exhibit to the Company's Current Report on Form 8-K
dated July 21, 1995 and incorporated by reference.
7 Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the year ended December 31, 1994 and incorporated by reference.
8 Previously filed as an exhibit to the Company's Current Report on Form 8-K
for December 22, 1994 and incorporated by reference.
9 Previously filed as an exhibit to the Company's Current Report on Form 8-K
filed May 8, 1997 and incorporated by reference.
10 Previously filed as an exhibit to the Company's Current Report on Form 8-K
filed February 7, 1997 and incorporated by reference.
11 Previously filed as an exhibit to the Company's Current Report on Form 8-K
filed May 5, 1997 and incorporated by reference.
(b) The following reports on Form 8-K have been filed by the Company
during the last quarter of the period coverted by this report:
Form 8-K filed January 17, 1997 (relating to the Company's
press release dated January 16, 1997)
Form 8-K filed February 7, 1997 (relating to the Company's
press release dated February 5, 1997 and filing an amendment to
the Company's senior credit agreement)
Subsequent to March 31, 1997, the following reports on Form 8-K were
filed by the Company:
Form 8-K filed April 23, 1997 (relating to the Company's press
release dated April 23, 1997)
Form 8-K filed May 5, 1997 (relating to the Company's press
release dated May 1, 1997 and filing an amendment to the
Company's senior credit agreement)
Form 8-K filed May 6, 1997 (relating to the Company's press
release dated May 5, 1997)
Form 8-K filed May 8, 1997 (relating to the Company's press
release dated May 8, 1997 and filing an amendment to the
Company's stockholder rights agreement)
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EMPIRE OF CAROLINA, INC.
By: /s/ Steven Geller
---------------------
Steven Geller
Chairman of the Board and
Chief Executive Officer
/s/ William H. Craig
--------------------
William H. Craig
Chief Financial Officer
Dated: May 14, 1997
<PAGE>
EXHIBIT 4.7
[FORM OF WARRANT]
MAY 6, 1997
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAW OF ANY
STATE AND MAY NOT BE SOLD OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO
AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE
STATE SECURITIES LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH LAWS.
No. A-1 Shares of Common Stock
EMPIRE OF CAROLINA, INC.
COMMON STOCK PURCHASE WARRANT
Void after 5 p.m. on May 6, 2003
EMPIRE OF CAROLINA, INC., a Delaware corporation (the
"COMPANY"), hereby certifies that for value received, ___________________, a
__________________, or successors and assigns (the "HOLDER") is entitled to
purchase, subject to the terms and conditions hereinafter set forth, an
aggregate of _____________ fully paid and nonassessable shares of Common Stock
(as hereinafter defined) of the Company, at an exercise price of $1.375 per
share subject to adjustment as provided herein (the "PURCHASE PRICE"), at any
time or from time to time prior to 5:00 P.M., New York City time, on May 6, 2003
(the "EXPIRATION DATE").
1. Definitions. For the purposes of this Warrant, the
following terms have the meanings indicated:
"Applicable Price" shall mean the higher of (a) the Current
Market Price per
<PAGE>
share of Common Stock on the applicable record or other relevant date and (b)
the Purchase Price.
"Business Day" means any day other than a Saturday, Sunday or
other day on which commercial banks in the City of New York are authorized or
required by law or executive order to close.
"Closing Price" shall mean, with respect to each share of
Common Stock for any day, (a) the last reported sale price regular way or, in
case no such sale takes place on such day, the average of the closing bid and
asked prices regular way, in either case as reported on the principal national
securities exchange on which the Common Stock is listed or admitted for trading,
or (b) if the Common Stock is not listed or admitted for trading on any national
securities exchange, the last reported sale price or, in case no such sale takes
place on such day, the average of the highest reported bid and the lowest
reported asked quotation for the Common Stock, in either case as reported on the
Automated Quotation System of NASDAQ or a similar service if NASDAQ is no longer
reporting such information.
"Common Stock" means the shares of Common Stock, par value
$.10 per share, of the Company and any class or series of common stock of the
Company authorized after the date of this Warrant, or any other class of stock
resulting from successive changes or reclassifications of such Common Stock.
"Company" has the meaning ascribed to such term in the first paragraph of this
Warrant.
"Current Market Price" shall be determined in
accordance with Section 3(e).
"Exercise Date" has the meaning ascribed to such
term in Section 2(d).
"Expiration Date" has the meaning ascribed to such
term in the first paragraph of this Warrant.
"Final Exercise Date" has the meaning ascribed to
such term in Section 9.
"Holder" has the meaning ascribed to such term in
the first paragraph of this Warrant.
"NASDAQ" shall mean the National Association of
Securities Dealers, Inc.
"Person" means any individual, firm, corporation, company,
partnership, trust, incorporated or unincorporated association, joint venture,
joint stock company, Governmental Authority or other entity of any kind, and
shall include any successor (by merger or otherwise) of such entity.
<PAGE>
"Purchase Price" has the meaning ascribed to such term in the
first paragraph of this Warrant.
"Securities Act" means the Securities Act of 1933, as amended,
and the rules and regulations of the Commission thereunder.
"Trigger Price" has the meaning ascribed to such term
in Section 9.
"Warrant Register" has the meaning ascribed to such
term in Section 10(b).
2. Exercise of Warrant.
(a) Exercise; Payment of Purchase Price. This Warrant
may be exercised, in whole or in part, at any time or from time to time on or
prior to the Expiration Date, by surrendering to the Company at its principal
office this Warrant, with the form of Election to Purchase Shares attached
hereto as Exhibit A duly executed by the Holder and accompanied by payment of
the Purchase Price for the number of shares of Common Stock specified in such
form, in United States currency by wire transfer to an account designated by the
Company or delivery of a certified check or bank check payable to the order of
the Company.
(b) Delivery of Shares. As soon as practicable after
surrender of this Warrant and receipt of payment, the Company shall promptly
issue and deliver to the Holder a certificate or certificates for the number of
shares of Common Stock set forth in the Election to Purchase Shares, in such
name or names as may be designated by such Holder, along with a check for the
amount of cash to be paid in lieu of issuance of fractional shares, if any.
(c) Partial Exercise. If this Warrant is exercised
for less than all of the shares of Common Stock purchasable under this Warrant,
the Company shall cancel this Warrant upon surrender hereof and shall execute
and deliver to the Holder a new Warrant of like tenor for the balance of the
shares of Common Stock purchasable hereunder.
(d) When Exercise Effective. The exercise of this
Warrant shall be deemed to have been effective immediately prior to the close of
business on the Business Day on which this Warrant is surrendered to and the
Purchase Price is received by the Company as provided in this Section 2 (the
"EXERCISE DATE"), and the Person in whose name any certificate for shares of
Common Stock shall be issuable upon such exercise, as provided in Section 2(b),
shall be deemed to be the record holder of such shares of Common Stock for all
purposes on the Exercise Date.
If the last day for the exercise of the Warrant is
not a Business Day, then such exercise may be made on the next succeeding
Business Day.
-3-
<PAGE>
3. Adjustment of Purchase Price and Number of Shares. The
Purchase Price, the Trigger Price and the number of shares of Common Stock
issuable upon exercise of this Warrant shall be adjusted from time to time upon
the occurrence of the following events:
(a) Dividend, Subdivision, Combination or
Reclassification of Common Stock. If the Company shall, at any time or from time
to time, (i) declare a dividend on the Common Stock payable in shares of its
capital stock (including Common Stock), (ii) subdivide the outstanding Common
Stock, (iii) combine the outstanding Common Stock into a smaller number of
shares, or (iv) issue any shares of its capital stock in a reclassification of
the Common Stock (including any such reclassification in connection with a
consolidation or merger in which the Company is the continuing corporation),
then in each such case, the Purchase Price and the Trigger Price in effect at
the time of the record date for such dividend or of the effective date of such
subdivision, combination or reclassification, and the number and kind of shares
of capital stock issuable on such date shall be proportionately adjusted so that
the Holder of any Warrant exercised after such date shall be entitled to
receive, upon payment of the same aggregate amount as would have been payable
before such date, the aggregate number and kind of shares of capital stock
which, if such Warrant had been exercised immediately prior to such date, such
Holder would have owned upon such exercise and been entitled to receive by
virtue of such dividend, subdivision, combination or reclassification. Any such
adjustment shall become effective immediately after the record date of such
dividend or the effective date of such subdivision, combination or
reclassification. Such adjustment shall be made successively whenever any event
listed above shall occur. If a dividend is declared and such dividend is not
paid, the Purchase Price shall again be adjusted to be the Purchase Price in
effect immediately prior to such record date.
(b) Issuance of Rights to Purchase Common Stock Below
Current Market Price or Purchase Price. If the Company shall, at any time or
from time to time, fix a record date for the issuance of rights or warrants to
all holders of Common Stock entitling them (for a period expiring within 45
calendar days after such record date) to subscribe for or purchase Common Stock
or securities convertible into Common Stock at a price per share of Common
Stock, or having a conversion price per share of Common Stock, if a security is
convertible into Common Stock (determined in either such case by dividing (x)
the total consideration payable to the Company upon exercise, conversion or
exchange of such rights, warrants or other securities convertible into Common
Stock by (y) the total number of shares of Common Stock covered by such rights,
warrants or other securities convertible into Common Stock) lower than either
the Current Market Price per share of Common Stock to be issued upon exercise of
this Warrant on such record date (or, if an ex-dividend date has been
established for such record date, on the day next preceding such ex-dividend
date) or the Purchase Price, then the Purchase Price shall be reduced to the
price determined by multiplying the Purchase Price in effect immediately prior
to such record date by a fraction, the numerator of which shall be the sum of
the number of shares of Common Stock outstanding on such record date plus the
number of additional shares of Common Stock which the aggregate offering price
of the total number of shares of Common Stock so to be offered (or the aggregate
initial conversion price of the convertible securities so to be offered) would
purchase at the Applicable Price and the denominator of which shall be the
number of shares of Common Stock
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outstanding on such record date plus the number of additional shares of Common
Stock to be offered for subscription or purchase (or into which the convertible
securities so to be offered are initially convertible). In case such price for
subscription or purchase may be paid in a consideration part or all of which
shall be in a form other than cash, the value of such consideration shall be
determined in good faith by the Board of Directors of the Company. Any such
adjustment shall become effective immediately after the record date for such
rights or warrants. Such adjustment shall be made successively whenever such a
record date is fixed. If such rights or warrants are not so issued, the Purchase
Price shall be adjusted to the Purchase Price in effect immediately prior to
such record date.
(c) Certain Distributions. If the Company shall, at
any time or from time to time, fix a record date for the distribution to all
holders of Common Stock (including any such distribution made in connection with
a consolidation or merger in which the Company is the continuing corporation) of
evidences of indebtedness, assets or other property (other than regularly
scheduled cash dividends or cash distributions payable out of consolidated
earnings or earned surplus or dividends payable in capital stock for which
adjustment is made under Section 3(a)) or subscription rights or warrants
(excluding those referred to in Section 3(b)), the Purchase Price shall be
reduced to the price determined by multiplying the Purchase Price in effect
immediately prior to such record date by a fraction (which shall in no event be
less than zero), the numerator of which shall be the Current Market Price per
share of Common Stock to be issued upon exercise of this Warrant on such record
date (or, if an ex-dividend date has been established for such record date, on
the next day preceding such ex-dividend date), less the fair market value (as
determined in good faith by the Board of Directors of the Company) of the
portion of the assets, evidences of indebtedness, other property, subscription
rights or warrants so to be distributed applicable to one share of Common Stock
and the denominator of which shall be such Current Market Price per share of
Common Stock to be issued upon exercise of this Warrant. Any such adjustment
shall become effective immediately after the record date for such distribution.
Such adjustments shall be made successively whenever such a record date is
fixed. In the event that such distribution is not so made, the Purchase Price
shall be adjusted to the Purchase Price in effect immediately prior to such
record date.
(d) Issuance of Common Stock Below Current Market
Price or Purchase Price. If the Company shall after the date hereof, directly or
indirectly, sell or issue shares of Common Stock (regardless of whether
originally issued or from the Company's treasury), or rights, options, warrants
or convertible or exchangeable securities containing the right to subscribe for
or purchase shares of Common Stock (excluding shares issued (i) in any of the
transactions described in Sections 3(a), (b) and (c), (ii) upon exercise
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of the Warrants, (iii) upon the exercise or conversion of options, warrants or
any other securities convertible into or exchangeable for shares of Common Stock
outstanding as of the date hereof, and (iv) to the Company's employees,
independent contractors or directors under bona fide benefit plans approved or
adopted by the Company's Board of Directors, if such shares would otherwise be
included in this Section 3(d)) at a price per share of Common Stock (determined,
in the case of rights, options, warrants or convertible or exchangeable
securities, by dividing (x) the total consideration received or receivable by
the Company in consideration of the sale or issuance of such rights, options,
warrants or con vertible or exchangeable securities, plus the total
consideration payable to the Company upon exercise or conversion or exchange
thereof, by (y) the total number of shares of Common Stock covered by such
rights, options, warrants or convertible or exchangeable securities)
lower than either the Current Market Price per share of Common Stock to be
issued upon exercise of this Warrant or the Purchase Price immediately prior to
such sale or issuance, then the Purchase Price shall be reduced to a price
determined by multiplying the Purchase Price in effect immediately prior thereto
by a fraction, the numerator of which shall be the sum of the number of shares
of Common Stock outstanding immediately prior to such sale or issuance plus the
number of shares of Common Stock which the aggregate consideration received
(determined as provided below) for such sale or issuance would purchase at the
Applicable Price and the denominator of which shall be the total number of
shares of Common Stock outstanding immediately after such sale or issuance. Such
adjustment shall be made successively whenever such sale or issuance is made.
For the purposes of such adjustments, the shares of Common Stock which the
holder of any such rights, options, warrants, or convertible or exchangeable
securities shall be entitled to subscribe for or purchase shall be deemed to be
issued and outstanding as of the date of such sale or issuance and the
consideration "received" by the Company therefor shall be deemed to be the
consideration actually received or receivable by the Company (plus any
underwriting discounts or commissions in connection therewith) for such rights,
options, warrants or convertible or exchangeable securities, plus the
consideration stated in such rights, options, warrants or convertible or
exchangeable securities to be payable to the Company for the shares of Common
Stock covered thereby. If the Company shall sell or issue shares of Common Stock
for a consideration consisting, in whole or in part, of property other than cash
or its equivalent, then in determining the "price per share of Common Stock" and
the "consideration" received or receivable by or payable to the Company for
purposes of the first sentence and the immediately preceding sentence of this
Section 3(d), the fair value of such property shall be determined in good faith
by the Board of Directors of the Company. The determination of whether any
adjustment is required under this Section 3(d) by reason of the sale and
issuance of rights, options, warrants or convertible or exchangeable securities
and the amount of such adjustment, if any, shall be made only at the time of
such issuance or sale and not at the subsequent time of issuance of shares of
Common Stock upon the exercise of such rights to subscribe or purchase. Any such
adjustment shall become effective immediately after the record date of such
issuance or sale. Such adjustment shall be made successively whenever any event
listed above shall occur. In the event that such issuance or sale of shares of
Common Stock or rights, options, warrants or convertible or exchangeable
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securities containing the right to subscribe for or purchase shares of Common
Stock, at a price below the Current Market Price or the Purchase Price, is not
made, the Purchase Price shall be adjusted to the Purchase Price in effect
immediately prior to such record date.
(e) Determination of Current Market Price. For the
purpose of any computation under paragraphs (b), (c) or (d) of this Section 3 or
any other provision of this Warrant, the Current Market Price per share of
Common Stock on any date shall be deemed to be the average of the daily Closing
Prices per share of Common Stock for the 10 consecutive trading days commencing
15 trading days before such date. If on any such date the shares of Common Stock
are not listed or admitted for trading on any national securities exchange or
quoted by NASDAQ or a similar service, the Current Market Price for such shares
shall be the fair market value of such shares on such date as determined in good
faith by a committee of disinterested members of the Board of Directors of the
Company based on a written opinion of an independent investment banking firm of
nationally recognized stature.
(f) De Minimis Adjustments. No adjustment in the
Purchase Price shall be made if the amount of such adjustment would result in a
change in the Purchase Price per share of less than $.02, but in such case any
adjustment that would otherwise be required to be made shall be carried forward
and shall be made at the time of and together with the next subsequent
adjustment that, together with any adjustment so carried forward, would result
in a change in the Purchase Price of $.05 per share. If the Company shall, at
any time or from time to time, issue Common Stock by way of dividends on any
stock of the Company or subdivide or combine the outstanding shares of the
Common Stock, such amounts of $.02 and $.05 (as theretofore increased or
decreased, if such amounts shall have been adjusted in accordance with the
provisions of this clause) shall forthwith be proportion ately increased in the
case of a combination or decreased in the case of a subdivision or stock
dividend so as appropriately to reflect the same. Notwithstanding the provisions
of the first sentence of this Section 3(f), any adjustment postponed pursuant to
this Section 3(f) shall be made no later than the earlier of (i) three years
from the date of the transaction that would, but for the provisions of the first
sentence of this Section 3(f), have required such adjustment, (ii) an Exercise
Date or (iii) the Expiration Date.
(g) Adjustments to Other Shares. In the event that at
any time, as a result of an adjustment made pursuant to Section 3(a), the Holder
shall become entitled to receive, upon exercise of this Warrant, any shares of
capital stock of the Company other than shares of Common Stock, the number of
such other shares so receivable upon exercise of this Warrant shall be subject
to adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the shares of Common Stock
contained in Sections 3(a), (b), (c) and (d), inclusive, and the provisions of
Sections 2, 4, 5, 6 and 7 with respect to the shares of Common Stock shall apply
on like terms to any such other shares.
(h) Adjustment of Number of Shares Issuable Upon
Exercise. Upon each adjustment of the Purchase Price as a result of the
calculations made in Sections 3(a),
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(b), (c) or (d), this Warrant shall thereafter evidence the right to receive, at
the adjusted Purchase Price, that number of shares of Common Stock (calculated
to the nearest one-hundredth) obtained by dividing (x) the product of the
aggregate number of shares of Common Stock covered by this Warrant immediately
prior to such adjustment and the Purchase Price in effect immediately prior to
such adjustment of the Purchase Price by (y) the Purchase Price in effect
immediately after such adjustment of the Purchase Price.
4. Reorganization, Reclassification, Merger and Sale of
Assets. If there occurs any capital reorganization or any reclassification of
the Common Stock of the Company, the consolidation or merger of the Company with
or into another Person (other than a merger or consolidation of the Company in
which the Company is the continuing corporation and which does not result in any
reclassification or change of outstanding shares of its Common Stock) or the
sale or conveyance of all or substantially all of the assets of the Company to
another Person, then the Holder will thereafter be entitled to receive, upon the
exercise of this Warrant in accordance with the terms hereof, the same kind and
amounts of securities (including shares of stock) or other assets, or both,
which were issuable or distributable to the holders of outstanding Common Stock
of the Company upon such reor ganization, reclassification, consolidation,
merger, sale or conveyance, in respect of that number of shares of Common Stock
then deliverable upon the exercise of this Warrant if this Warrant had been
exercised immediately prior to such reorganization, reclassification,
consolidation, merger, sale or conveyance; and, in any such case, appropriate
adjustments (as determined in good faith by the Board of Directors of the
Company) shall be made to assure that the provisions hereof (including
provisions with respect to changes in, and other adjustments of, the Purchase
Price) shall thereafter be applicable, as nearly as reasonably may be
practicable, in relation to any securities or other assets thereafter
deliverable upon exercise of this Warrant.
5. Certificate as to Adjustments. Whenever the Purchase Price
and the number of shares of Common Stock issuable, or the securities or other
property deliverable, upon the exercise of this Warrant shall be adjusted
pursuant to the provisions hereof, the Company shall promptly give written
notice thereof to the Holder, in accordance with Section 17, in the form of a
certificate signed by the Chairman of the Board, President or one of the Vice
Presidents of the Company, and by the Chief Financial Officer, Treasurer or one
of the Assistant Treasurers of the Company, stating the adjusted Purchase Price,
the number of shares of Common Stock issuable, or the securities or other
property deliverable, upon exercise of the Warrant calculated to the nearest
cent or the nearest one one-hundredth of a share and setting forth in
reasonable detail the method of calculation and the facts requiring such
adjustment and upon which such calculation is based. Each adjustment shall
remain in effect until a subsequent adjustment is required.
6. Fractional Shares. Notwithstanding an adjustment pursuant
to Section 3(h) in the number of shares of Common Stock covered by this Warrant
or any other provision of this Warrant, the Company shall not be required to
issue fractions of shares
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upon exercise of this Warrant or to distribute certificates which evidence
fractional shares. In lieu of fractional shares, the Company may make payment
to the Holder, at the time of exercise of this Warrant as herein provided,
of an amount in cash equal to such fraction multiplied by the greater of the
Current Market Price of a share of Common Stock on the Exercise Date and the
Purchase Price.
7. Notice of Proposed Actions. In case the Company shall
propose at any time or from time to time (a) to declare or pay any dividend
payable in stock of any class to the holders of Common Stock or to make any
other distribution to the holders of Common Stock (other than a regularly
scheduled cash dividend), (b) to offer to the holders of Common Stock rights or
warrants to subscribe for or to purchase any additional shares of Common Stock
or shares of stock of any class or any other securities, rights or options, (c)
to effect any reclassification of its Common Stock, (d) to effect any
consolidation, merger or sale, transfer or other disposition of all or
substantially all of the property, assets or business of the Company which
would, if consummated, adjust the Purchase Price or the securities issuable upon
exercise of the Warrants, (e) to effect the liquidation, dissolution or winding
up of the Company, or (f) to take any other action that would require a vote of
the Company's stockholders, then, in each such case, the Company shall give to
the Holder, in accordance with Section 17, a written notice of such proposed
action, which shall specify (i) the record date for the purposes of such stock
dividend, distribution of rights or warrants or vote of the stockholders of the
Company, or if a record is not to be taken, the date as of which the holders of
shares of Common Stock of record to be entitled to such dividend, distribution
of rights or warrants, or vote is to be determined, or (ii) the date on which
such reclassification, consolidation, merger, sale, transfer, disposition,
liquidation, dissolution or winding up is expected to become effective, and such
notice shall be so given as promptly as possible but in any event at least ten
(10) Business Days prior to the applicable record, determination or effective
date specified in such notice.
8. No Dilution or Impairment. The Company will not, by
amendment of its Certificate of Incorporation or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other action, avoid or seek to avoid the observance or
performance of any of the terms of this Warrant, but will at all times in good
faith assist in the carrying out of all such terms and in the taking of all such
action as may be necessary or appropriate in order to protect the rights of the
Holder of this Warrant against dilution or other impairment. Without limiting
the generality of the foregoing, the Company (a) will not increase the par value
of any shares of stock receivable on the exercise of this Warrant above the
amount payable therefor on such exercise, (b) will at all times reserve and keep
available the maximum number of its authorized shares of Common Stock, free from
all preemptive rights therein, which will be sufficient to permit the full
exercise of this Warrant, and (c) will take all such action as may be necessary
or appropriate in order that all shares of Common Stock as may be issued
pursuant to the exercise of this Warrant will, upon issuance, be duly and
validly issued, fully paid and nonassessable, and free from all taxes, liens and
charges with respect to the issue thereof.
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9. Mandatory Exercise. Notwithstanding the provisions of
Section 2, at any time after May 5, 2000, the Closing Price of shares of Common
Stock for a period of not less than thirty (30) consecutive trading days is
equal to or greater than the following "Trigger Prices" (subject to adjustment
as set forth in Section 3(a)) for any of the following periods:
Period Trigger Price
May 7, 2000 to May 6, 2001 $6.25
May 7, 2001 to May 6, 2002 $7.75
May 7, 2002 to February 28, 2003 $9.25
(each such event being referred to herein as the "Triggering
Event"), the Corporation may elect to cancel all Warrants that have not been
exercised pursuant to Section 2 and that remain outstanding on or prior to the
date that is 45 days from the Triggering Event (the "Final Exercise Date"),
without compensation to the Holders for their loss. To invoke such mandatory
exercise mechanism, the Company shall provide written notice to each Holder of
Warrants, which notice shall be mailed no later than the 35th day before the
Final Exercise Date, by registered mail, return receipt requested, which notice
shall (i) state that a Triggering Event has occurred and inform the Holders of
Warrants that the Company has elected to cancel all Warrants that have not been
exercised on or prior to the Final Exercise Date, (ii) set forth the Purchase
Price then in effect and the number of shares of Common Stock that may be
purchased upon exercise of the Warrants and (iii) inform the Holders that all
Warrants that have not been exercised in compliance with Section 2 by the close
of business on the Final Exercise Date shall automatically be canceled in
accordance with this Section 9 and that all rights of the Holders of such
Warrants as holders will cease with respect to such Warrants at such time. No
failure to mail such notice nor any defect therein or in the mailing thereof
shall affect the validity of the proceedings for such mandatory exercise except
as to a Holder (a) to whom notice was not mailed or (b) whose notice was
defective. Effective at 5:00 P.M. (New York City time) on the Final Exercise
Date, all Warrants then outstanding shall be canceled and the Holders thereof
shall have no further rights thereunder.
10. Replacement of Warrants. On receipt by the Company of an
affidavit of an authorized representative of the Holder stating the
circumstances of the loss, theft, destruction or mutilation of this Warrant (and
in the case of any such mutilation, on surrender and cancellation of such
Warrant) and of such bond and indemnification as the Company may reasonably
require, the Company at its expense will promptly execute and deliver, in lieu
thereof, a new Warrant of like tenor.
11. Transfer.
(a) The term "Holder" as used herein shall also include any
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transferee of this Warrant whose name has been recorded by the Company in the
Warrant Register. Each transferee of this Warrant acknowledges that this Warrant
has not been registered under the Securities Act and may be transferred only
pursuant to an effective registration under the Securities Act or pursuant to an
applicable exemption from the registration requirements of the Securities Act.
(b) The Company shall maintain a register (the "WARRANT
REGISTER") in its principal office for the purpose of registering the Warrant
and any transfer thereof, which register shall reflect and identify, at all
times, the ownership of any interest in the Warrant. Upon the issuance of this
Warrant, the Company shall record the name of the initial purchaser of this
Warrant in the Warrant Register as the first Holder. Upon surrender for
registration of transfer or exchange of this Warrant together with a properly
completed and executed Form of Assignment together with the Certificate attached
hereto as Exhibit B and all documents required to be provided by this Form of
Assignment, at the principal office of the Company, the Company shall, at its
expense, execute and deliver one or more new Warrants of like tenor which shall
be exercisable for a like aggregate number of shares of Common Stock, registered
in the name of the Holder or a transferee or transferees.
12. Registration Rights. The Holder of this Warrant and of the
shares of Common Stock to be issued upon the exercise of this Warrant shall be
entitled to the registration rights set forth in Appendix I attached hereto.
13. No Rights or Liability as a Stockholder. This Warrant does
not entitle the Holder hereof to any voting rights or other rights as a
stockholder of the Company. No provisions hereof, in the absence of affirmative
action by the Holder hereof to purchase Common Stock, and no enumeration
herein of the rights or privileges of the Holder shall give rise to any
liability of such Holder as a stockholder of the Company.
14. Reservation of Shares. The Company shall at all times
reserve and keep available out of its authorized Common Stock, solely for the
purpose of issue or delivery upon exercise of this Warrant, as provided herein,
the maximum number of shares of Common Stock that may be issuable or deliverable
upon such exercise. Such shares shall, when issued or delivered in accordance
with this Warrant, be duly and validly issued and fully paid and non-assessable.
The Company shall issue such shares in accordance with the provisions of this
Warrant, and shall otherwise comply with the terms thereof.
15. Charges, Taxes and Expenses. Issuance of certificates for
shares of Common Stock upon the exercise of this Warrant shall be made without
charge to the Holder hereof for any issue or transfer tax, or other incidental
expense, in respect of the issuance or delivery of such certificates or the
securities represented thereby, all of which taxes and expenses shall be paid by
the Company.
16. Amendment or Waiver. This Warrant and any term hereof may
be
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amended, waived, discharged or terminated only by and with the written
consent of the Company and the Holders of 75% of the Warrants given in writing
upon at least 20 days' notice or at a meeting called for the purpose in
accordance with the By-laws of the Company applicable to meetings of
stockholders.
17. Notices. Any notice or other communication (or delivery)
required or permitted hereunder shall be made in writing and shall be by
telecopier, courier service or personal delivery to the Holder at its address as
it appears in the Warrant Register and to the Company at:
EMPIRE OF CAROLINA, INC.
5150 Linton Blvd.
Delray Beach, FL 33484
Telecopier No.: (561) 498-0722
Attention: Steve Geller, Chairman and Chief Executive Officer
Lawrence Geller, General Counsel
All such notices and communications (and deliveries) shall be deemed to have
been duly given: when delivered by hand, if personally delivered; when delivered
by courier, if delivered by commercial overnight courier service; and when
receipt is acknowledged, if telecopied.
18. Restatement. The company shall be entitled, at its
election and its sole discretion, to restate the provisions of this Warrant in a
form such that, to the extent the Company deems it appropriate to do so, and
subject to any applicable requirements of law or any stock exchange or other
market upon which the Warrants are then listed or traded, the provisions
governing the Warrants and the rights of Holders are set forth in a separate
warrant agreement, rather than in the form of Warrants themselves, to which the
form of Warrant shall make reference for the purpose of incorporating the
provisions of such agreement into the rights and obligations applicable to the
Warrants, provided, however, that no such amendment of form shall change any
right of the Holder or obligation of the Company hereunder in a manner that is
adverse to the Warrant Holders. If the Company elects to so amend the form of
the Warrants, the Company shall so inform the Warrant Holders and give notice
to the Warrant Holders that such replacement has been effected. Thereupon,
(i) no further Warrants shall be issuable in the form of this Warrant in
connection with any transfer or replacement of Warrants or Warrant
certification, and (ii) the Holder of such Warrants may submit Warrants in the
form hereof to the Company for replacement with Warrants in such altered form,
but any Warrant that continues to be held in the form hereof shall continue to
evidence the rights with respect to the Company that are set forth herein.
19. Effect of Failure to Notify. Failure to file any
certificate or notice or to mail any notice, or any defect in any certificate or
notice shall not affect the legality or
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validity of the adjustment to the Exercise Price, the number of shares
purchasable upon exercise of this Warrant, or any transaction giving rise
thereto.
20. Certain Remedies. The Holder shall be entitled to an
injunction or injunctions to prevent breaches of the provisions of this Warrant
and to enforce specifically the terms and provisions of this Warrant in any
court of the United States or any state thereof having jurisdiction, this being
in addition to any other remedy to which such Holder may be entitled at law or
in equity.
21. Governing Law. This Warrant shall be governed by and
construed in accordance with the laws of the state of New York, without regard
to the principles of con flicts of law of such State.
22. Headings. The headings in this Warrant are for convenience
of reference only and shall not limit or otherwise affect the meaning hereof.
EMPIRE OF CAROLINA, INC.
By: /s/ Steven Geller
----------------------------------
Name: Steve Geller
Title: Chairman and Chief Executive
Officer
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EXHIBIT A
[Form of Election to Purchase]
[To Be Executed upon Exercise of Warrant]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant, to receive ______ shares of Common Stock and
herewith tenders payment for such shares to the order of Empire of Carolina,
Inc. in the amount of $___________ in accordance with the terms hereof. The
undersigned requests that a certificate for such shares be registered in the
name of _______________________, whose address is ____________________________
and that such shares be delivered to __________________ whose address is
____________________________. If said number of shares is less than all of the
shares of Common Stock purchasable hereunder, the undersigned requests that a
new Warrant representing the remaining balance of such shares be registered in
the name of ____________________________, whose address is
_________________________, and that such Warrant be delivered to
_______________________, whose address is _________________________.
Signature:
Date:
Signature Guaranteed:
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EXHIBIT B
ASSIGNMENT FORM
To assign this Warrant, fill in the form below:
I or we assign and transfer this Warrant to
(Print or type assignee's name, address and zip code)
(Insert assignee's soc. sec. or tax I.D. No.)
Date: Your Signature*:
Signature Guarantee:
(Signature must be guaranteed by a participant in a recognized
signature guarantee medallion program)
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(*) Sign exactly as your name appears on this Warrant.
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CERTIFICATE TO BE DELIVERED UPON EXCHANGE OR REGISTRATION OF
WARRANTS
This certificate relates to ________ Warrants held in (check applicable space)
____ book-entry or ____ certificated form by the undersigned.
In connection with any transfer or exchange of any of the Warrants evidenced by
this certificate, the undersigned confirms that such Warrants are being:
CHECK ONE BOX BELOW:
(1) / / acquired for the undersigned's own account, without transfer; or
(2) / / transferred to the Company; or
(3) / / transferred pursuant to and in compliance with Rule 144A or in
accordance with Regulation S under the Securities Act of 1933, as
amended (the"Securities Act"); or
(4) / / transferred to an institutional "accredited investor" (as defined in
Rule 501(a)(1), (2), (3) or (7) under the Securities Act), that has
furnished to the Company a signed letter containing certain
representations and agreements (the form of which letter can be
obtained from the Administrators); or
(5) / / transferred pursuant to another available exemption from the
registration requirements of the Securities Act; or
(6) / / transferred pursuant to an effective registration statement.
Unless one of the boxes is checked, the Company shall refuse to register any of
the Warrants evidenced by this certificate in the name of any person other than
the registered holder thereof; provided, however, that (i) if box (1) is checked
and the Warrants are being
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acquired prior to registration under the securities laws, or (ii) if box (3),
(4) or (5) is checked, the Company may require, prior to registering any such
transfer of the Capital Securities, in its sole discretion, such legal opinions,
certifications and other information as is reasonably requested to confirm that
such transfer is being made pursuant to an exemption from, or in a transaction
not subject to, the registration requirements of the Securities Act, such as the
exemption provided by Rule 144 under such Act; provided, further, that if box 3
is checked, the transferee must also certify that it is a qualified
institutional buyer as defined in Rule 144A of the Securities Act.
Signature
Signature Guarantee:
Signature
(Signature must be guaranteed by a participant in a signature
guarantee medallion program)
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APPENDIX I
REGISRATION RIGHTS
Terms used in this Appendix that are defined in the Warrant to
which this Appendix is attached have the meaning given to them in the Warrant.
(a) Shelf Registration. Within 180 days from the
Closing Date, the Company shall cause to be filed a registration statement (a
"Shelf Registration") on Form S-3 or any other appropriate form under the
Securities Act for an offering to be made on a delayed or continuous basis
pursuant to Rule 415 thereunder or any similar rule that may be adopted by the
Securities and Exchange Commission (the "Commission") and permitting (i) sales
of Warrants, both in ordinary course brokerage or dealer transactions or in any
other transfer for consideration not involving an underwritten public offering,
and (ii) the sale of shares of Common Stock to the Warrant Holders upon the
exercise of this Warrant (together, the "Registrable Securities") (and in both
cases shall register or qualify the shares to be sold in such offering under
such other securities or "blue sky" laws, if any, as would be required pursuant
to paragraph (d)(ii) hereof). In addition, shares of Common Stock ("HPA Party
Common Stock") that are acquired upon the exercise of Warrants by HPA, Charles
S. Holmes or James J. Pinto, or any direct or indirect transferee of Warrants
from any of them in transactions not involving a public offering (an "HPA
Person"), shall constitute Registrable Securities and, subject to paragraph (c)
below, shall be registered as part of the Shelf Registration promptly upon such
party's request. Prior to the filing of the Shelf Registration or any supplement
or amendment thereto, the Company will furnish copies of the Shelf Registration
or such amendment to one counsel designated by HPA, and will not file the Shelf
Registration or such amendment without the prior consent of such counsel, which
consent shall not be unreasonably withheld. The Company shall use its reasonable
efforts to (1) cause the Shelf Registration to be declared effective by the
Commission as soon as practicable after its filing with the Commission and (2)
keep the Shelf Registration continuously effective, subject to paragraph (c)
below. The Company shall, if necessary, supplement or make amendments to the
Shelf Registration, if required by the registration form used by the Company for
the Shelf Registration or by the instructions applicable to such registration
form or by the Securities Act or the rules or regulations thereunder or as may
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<PAGE>
reasonably be requested by HPA. The Company shall pay all Registration Expenses
incurred in connection with the Shelf Registration.
(b) Piggyback Registration. At any time prior to May
6, 2000 (or, with respect to the HPA Party Common Stock, so long as shares of
HPA Party Common Stock are held by an HPA Party who is an affiliate of the
Company for purposes of Rule 144 (as defined below)), whenever the Company
proposes to file a registration statement under the Securities Act with respect
to an underwritten public offering of Common Stock by the Company for its own
account or for the account of any other holder of Common Stock, the Company
shall give written notice (the "Offering Notice") of such proposed filing to
each Holder of at least 100,000 Warrants at least 30 days before the anticipated
filing date. Such Offering Notice shall offer all such Holders the opportunity
to register such number of Warrants or HPA Party Common Stock as each such
Holder may request in writing, which request for registration (each, a
"Piggyback Registration") must be received by the Company within 15 days after
the Offering Notice is given. The Company shall use all reasonable efforts to
cause the managing underwriter or underwriters of a proposed underwritten
offering to permit the Holders of the Registrable Securities requested to be
included in the registration for such offering to include such Registrable
Securities in such offering on the same terms and conditions as the securities
of the Company included therein. Notwithstanding the foregoing, if the managing
underwriter or underwriters of a proposed underwritten offering advise the
Company in writing that in its or their opinion the number of Registrable
Securities proposed to be sold in such offering exceeds the number of
Registrable Securities that can be sold in such offering without adversely
affecting the market for the Company's securities or the price that may be
obtained in such offering, the Company will include in such registration the
number of Registrable Securities that in the opinion of such managing
underwriter or underwriters can be sold without adversely affecting the market
for the Company's common stock or the price to be received in such offering. In
such event, the number of Registrable Securities, if any, to be offered for the
accounts of Holders shall be reduced pro rata on the basis of the relative
number of any Registrable Securities requested by each such Holder to be
included in such registration to the extent necessary to reduce the total number
of Registrable Securities to be included in such offering to the number
recommended by such managing underwriter or underwriters, provided that if any
other Person has rights to a Piggyback Registration with respect to the same
underwritten public offering, the rights of the Holders to sell their
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<PAGE>
securities together with such other Persons holding Piggyback Rights shall be
cut back proportionately (in relation to the number of shares that each Person
so participating in the Piggyback Registration has requested to be included
compared to the number of all shares with respect to which inclusion has been
properly requested (with Warrants to be considered shares for the purposes of
this calculation)), except to the extent that the instrument providing for such
other Piggyback Rights specifically provides that the rights held by such other
Person either take precedence over or shall be subordinated to the Piggyback
Rights held by the Holders hereunder. The Company shall pay all Registration
Expenses incurred in connection with any Piggyback Registration.
(c) Termination of Registration Rights; Provision of
Rule 144 Information. As used in this section "affiliate" has the meaning given
to it in Rule 144 under the Securities Act ("Rule 144"). The registration rights
provided hereunder shall continue so long as any Warrants remain outstanding and
shall then terminate (except in the case of HPA Party Common Stock), provided
that (i) the Company shall be entitled to remove from registration under
paragraph (a) Warrants held by Persons (other than HPA Persons who are
affiliates of the Company) who have acquired such Warrants for consideration
pursuant to a transaction covered by the registration provided by paragraph (a),
and (ii) at any time after two years after the date of the issuance of the
Warrants, so long as the Warrants are freely tradable under Rule 144 in the
hands of Persons who are not affiliates of the Company, (A) the Company shall be
entitled to remove Warrants held by non-affiliates from registration under
paragraph (a) and, (B) if no HPA Person remains an affiliate of the Company, or
no HPA Person who is an affiliate of the Company owns more than 1% of the then
outstanding Warrants, registration of the Warrants under paragraph (a) shall no
longer be required. Registration may terminate with respect to HPA Party Common
Stock when, and to the extent that, no HPA Person who remains an affiliate of
the Company owns more than 1% of the then outstanding shares of Common Stock.
For a period of at least two years, and continuing while any
HPA Person remains an affiliate of the Company and continues to hold Warrants or
HPA Party Common Stock, the Company shall be required (i) to file such reports
under the Exchange Act, or otherwise make publicly available such information,
as may be required by section (c) of Rule 144 in order for sales to be permitted
under the provisions of Rule 144 and (ii) to provide confirmation of such filing
or availability upon request to any Holder or HPA Person
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who seeks to rely upon Rule 144 (other than section (k) thereof) in the sale of
Warrants or HPA Party Common Stock.
(d) Registration Procedures. Whenever Registrable
Securities are to be registered pursuant hereto, the Company shall use its best
efforts to effect the registration of Registrable Securities in accordance with
the intended method of disposition thereof as expeditiously as practicable and,
in connection with any such request, the Company shall as expeditiously as
possible:
(i) furnish to each seller of Registrable
Securities such number of copies of the registration statement, each amendment
and supplement thereto (in each case including all exhibits thereto), the
prospectus included in such registration statement (including each preliminary
prospectus) and such other documents as each seller may reasonably request in
order to facilitate the disposition of the Registrable Securities owned by such
seller;
(ii) if required, use best efforts to register or
qualify such Registrable Securities under such other securities or "blue sky"
laws of such jurisdictions as any seller reasonably requests in writing and to
do any and all other acts and things that may be reasonably necessary or
advisable to register or qualify for sale in such jurisdictions the
Registrable Securities owned by such seller; provided, however, that the
Company shall not be required to (i) qualify generally to do business in any
jurisdiction where it is not then so qualified, (ii) subject itself to taxation
in any such jurisdiction, (iii) consent to general service of process in any
such jurisdiction or (iv) provide any undertaking required by such other
securities or "blue sky" laws or make any change in its charter or by-laws that
the Board of Directors of the Company determines in good faith to be contrary
to the best interest of the Company and its stockholders;
(iii) use best efforts to cause the Registrable
Securities covered by such registration statement to be registered with or
approved by such other governmental agencies or authorities as may be necessary
by virtue of the business and operations of the Company to enable the seller or
sellers thereof to consummate the disposition of such Registrable Securities;
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<PAGE>
(iv) notify each seller of such Registrable
Securities at any time when a prospectus relating thereto is required to be
delivered under the Securities Act of the happening of any event as a result of
which the prospectus included in such registration statement contains an untrue
statement of a material fact or omits to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, and prepare and file
with the Commission a supplement or amendment to such prospectus so that, as
thereafter delivered to the purchasers of such Registrable Securities, such
prospectus will not contain an untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, provided, in the use of a Piggyback Registration, that prior to
the filing of such supplement or amendment, the Company will furnish copies
thereof to the Holders whose shares or Warrants are included in such
registration, any underwriters and counsel for such Holders, and will not file
such supplement or amendment without the prior consent of such counsel, which
consent shall not be unreasonably withheld;
(v) enter into customary agreements (including an
underwriting agreement in customary form) if the offering is an underwritten
offering) and take such other actions as are reasonably required in order to
expedite or facilitate the disposition of such Registrable Securities;
(vi) make available for inspection by any seller of
Registrable Securities and any attorney, accountant or other agent retained by
any such seller (collectively, the "Inspectors"), all financial and other
records, pertinent corporate documents and properties of the Company
(collectively, the "Records") as are reasonably necessary to enable them to
exercise their due diligence responsibility, and cause the Company's officers,
directors, employees and agents to supply all information reasonably requested
by any such Inspector in connection with such registration statement. Records
that the Company determines, in good faith, to be confidential and that it
notifies the Inspectors are confidential shall not be disclosed by the
Inspectors unless (i) the disclosure of such Records is, in the reasonable
judgment of any Inspector, necessary to avoid or correct a misstatement or
omission of a material fact in the registration statement or (ii) the release
of such Records is ordered pursuant to a subpoena or other order from a court
or governmental agency of competent jurisdiction or required (in the written
opinion of counsel to such Holder or
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underwriter, which counsel shall be reasonably acceptable to the Company)
pursuant to applicable state or federal law. Each seller of Registrable
Securities shall be required to agree, however, that it will, upon learning that
disclosure of such Records are sought by a court or governmental agency, give
notice to the Company and allow the Company, at the Company's expense, to
undertake appropriate action to prevent disclosure of the Records deemed
confidential;
(vii) if such sale is pursuant to an underwritten
offering, use reasonable efforts to obtain a "cold comfort" letter and updates
thereof from the Company's independent public accountants in customary form
and covering such matters of the type customarily covered by "cold comfort"
letters as the managing underwriter or underwriters reasonably request; and
(viii) otherwise use its best efforts to comply with
all applicable rules and regulations of the Commission, and make generally
available to its security holders, as soon as reasonably practicable, an
earnings statement covering a period of 12 months, beginning within three months
after the effective date of the registration statement, which earnings statement
shall satisfy the provisions of Section 11(a) of the Securities Act.
Provided that the applicable listing requirements continue to
be satisfied, the Company shall use its best efforts to maintain the listing of
the Common Stock on the American Stock Exchange or, if such stock is delisted
from the American Stock Exchange, to provide for the listing of the Common Stock
on NASDAQ/NMS; and provided that such a listing continues to be in effect, the
Company shall cause any Common Stock received upon the exercise of the Warrants
to be listed on the applicable market. In the case of the Warrants, if (i) at
least 500,000 Warrants have been sold pursuant to one or more Piggyback
Registrations or (ii) Holders of at least 20% of the then outstanding Warrants
request the Company to make a determination whether the public distribution and
float of the Warrants will qualify for such a listing and the Company determines
that the applicable standards have been met, the Company shall use its best
efforts to cause the Warrants to be registered under the Securities Exchange
Act of 1934 (the "Exchange Act") and to be listed for trading on each
securities market, if any, on which the Common Stock is then listed or, with
the consent of the Company (which shall not be unreasonably withheld), on any
other United
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States securities exchange that is registered under the Exchange Act or
over-the-counter market that is maintained by the National Association of
Securities Dealers, Inc.
The Company may require each seller or prospective seller of
Registrable Securities as to which any registration is being effected to furnish
to the Company such infor mation regarding the distribution of such securities
and other matters as may be required to be included in the registration
statement.
Upon receipt of any notice from the Company of the happening
of any event of the kind described in clause (iv), each holder of Registrable
Securities shall forthwith discontinue disposition of Registrable Securities
pursuant to the registration statement covering such Registrable Securities
until such holder's receipt of the copies of the supplemented or amended
prospectus contemplated by this clause (iv) and, if so directed by the Company,
such holder shall deliver to the Company (at the Company's expense) all copies,
other than permanent file copies then in such holder's possession, of the
prospectus covering such Registrable Securities current at the time of receipt
of such notice. If the Company gives any such notice, the Company shall extend
the period during which such registration statement shall be maintained
effective pursuant to this Agreement by the number of days during the period
from and including the date of the giving of such notice pursuant to clause (iv)
to and including the date when each seller of Registrable Securities covered by
such registration statement shall have received the copies of the supplemented
or amended prospectus contemplated in clause (iv). Notwithstanding anything to
the contrary set forth above in this paragraph, the Company may not require the
holders of Registrable Securities to discontinue disposition of Registrable
Securities for purposes of effecting a public offering of any securities of the
Company by any of its securityholders (other than an offering made pursuant to a
registration on Form S-8). Notwithstanding the foregoing, if the Company
furnishes to the Holders a certificate signed by the Chief Financial Officer of
the Company stating that (i) in the good faith judgment of the Board of
Directors of the Company it would be significantly disadvantageous to the
Company and its stockholders for any such Shelf Registration to be amended or
supplemented and (ii) the need for such an amendment or supplement is not caused
by a proposed secondary public offering of securities of the Company by any of
its securityholders (other than an offering made pursuant to a registration on
Form S-8), the Company may defer such amending or supplementing of such Shelf
Registration for not more than 45 days and in such event the Holders shall be
required to
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<PAGE>
discontinue disposition of any Registrable Securities covered by such Shelf
Registration during such period. Notwithstanding the foregoing, in connection
with any amendment or supplement required to reflect a public offering of
securities by the Company, the Company shall file such amendment or supplement
no later than the same day that it files a registration statement relating to
such offering and shall provide written notice of the filing of such amendment
or supplement to the holders of Registrable Securities promptly following such
filing.
(e) Registration Expenses. The Company shall pay all
expenses incident to its performance of or compliance with this Agreement,
regardless of whether such registration becomes effective including, without
limitation, (a) all Commission, stock exchange or market and National
Association of Securities Dealers, Inc. registration and filing fees, (b) all
fees and expenses incurred in complying with securities or "blue sky" laws
(including reasonable fees and disbursements of counsel in connection with "blue
sky" qualifications of the Registrable Securities), (c) all printing, messenger
and delivery expenses, (d) all fees and disbursements of the Company's
independent public accountants and counsel, (e) all fees and expenses of any
special experts retained by the Company in connection with any Piggyback
Registration pursuant to the terms of this Agreement, and (f) the fees and
disbursements of one counsel retained collectively by the Holders for a
registration; provided, however, that the Company shall not pay the costs and
expenses of any counsel, accountants or other representatives retained by the
Holders, individually or in the aggregate.
(f) Indemnification; Contribution.
(1) Indemnification by the Company. The
Company shall indemnify, to the fullest extent permitted by law, each Holder,
its officers, directors and agents and each Person, if any, who controls such
Holder (within the meaning of the Securities Act) (it being understood that, for
these purposes, an HPA Person who is an affiliate of the Company shall be
considered a Holder in respect of HPA Party Common Stock), against any and all
losses, claims, damages, liabilities and expenses caused by any untrue or
alleged untrue statement of material fact contained in any registration
statement, prospectus or preliminary prospectus or any amendment thereof or
supplement thereto or any omission or alleged omission to state therein a
material fact required to be stated therein or
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<PAGE>
necessary to make the statements therein (in the case of a prospectus, in light
of the circumstances under which they were made) not misleading, except insofar
as the same are caused by or contained in any information with respect to such
Holder furnished in writing to the Company by such Holder expressly for use
therein or by such Holder's failure to deliver a copy of the prospectus or any
supplements thereto after the Company has furnished such Holder with a
sufficient number of copies of the same or by the delivery of prospectuses by
such Holder after the Company notified such Holder in writing to discontinue
delivery of prospectuses. The Company also shall indemnify any underwriters of
the Registrable Securities, their officers and directors and each Person who
controls such underwriters (within the meaning of the Securities Act) to the
same extent as provided above with respect to the indemnification of the
Holders.
(2) Indemnification by Holders. In
connection with any registration statement in which a Holder is participating,
each such Holder shall furnish to the Company in writing such information and
affidavits with respect to such Holder as the Company reasonably requests for
use in connection with any such registration statement or prospectus and agrees
to indemnify, severally and not jointly, to the fullest extent permitted by law,
the Company, its officers, directors and agents and each Person, if any, who
controls the Company (within the meaning of the Securities Act) against any and
all losses, claims, damages, liabilities and expenses resulting from any untrue
or alleged untrue state ment of a material fact or any omission or alleged
omission of a material fact required to be stated in any registration statement,
prospectus or preliminary prospectus or any amendment thereof or supplement
thereto or necessary to make the statements therein (in the case of a
prospectus, in light of the circumstances under which they were made) not
misleading, to the extent, but only to the extent, that such untrue or alleged
untrue statement or omission is contained in or improperly omitted from, as the
case may be, any information or affidavit with respect to such Holder so
furnished in writing by such Holder. Each Holder also shall indemnify any
underwriters of the Registrable Securities, their officers and directors and
each Person who controls such underwriters (within the meaning of the Securities
Act) to the same extent as provided above with respect to the indemnification of
the Company.
(3) Conduct of Indemnification
Proceedings. Any party that proposes to assert the right to be indemnified
hereunder shall, promptly after receipt of notice of commencement of any action
against such party in respect of which a claim is to be
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<PAGE>
made against an indemnifying party or parties hereunder, notify each such
indemnifying party of the commencement of such action, enclosing a copy of all
papers served, but the omission so to notify such indemnifying party will not
relieve it from any liability that it may have to any indemnified party under
the foregoing provisions unless, and only to the extent that, such omission
results in the forfeiture of substantive rights or defenses by the indemnifying
party. If any such action is brought against any indemnified party and it
notifies the indemnifying party of its commencement, the indemnifying party will
be entitled to participate in and, to the extent that it elects by delivering
written notice to the indemnified party promptly after receiving notice of the
commencement of the action from the indemnified party, jointly with any other
indemnifying party similarly notified, to assume the defense of the action, with
counsel reasonably satisfactory to the indemnified party, and after notice from
the indemnifying party to the indemnified party of its election to assume the
defense, the indemnifying party will not be liable to the indemnified party for
any legal or other expenses except as provided below and except for the
reasonable costs of investigation subsequently incurred by the indemnified
party in connection with the defense. If the indemnifying party assumes the
defense, the indemnifying party shall have the right to settle such action
without the consent of the indemnified party; provided, however, that the
indemnifying party shall be required to obtain such consent (which consent
shall not be unreasonably withheld) if the settlement includes any admission
of wrongdoing on the part of the indemnified party or any decree or
restriction on the indemnified party or its officers or directors; provided,
further, that no indemnifying party, in the defense of any such action, shall,
except with the consent of the indemnified party (which consent shall not be
unreasonably withheld), consent to entry of any judgment or enter into any
settlement that 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 with respect to such action against the indemnified party. The
indemnified party will have the right to employ its own counsel in any such
action, but the fees, expenses and other charges of such counsel will be at the
expense of such indemnified party unless (a) the employment of counsel by the
indemnified party has been authorized in writing by the indemnifying party, (b)
the indemnified party has reasonably concluded (based on advice of counsel) that
there may be legal defenses available to it or other indemnified parties that
are different from or in addition to those available to the indemnifying party,
(c) a conflict or potential conflict exists (based on advice of counsel to the
indemnified party) between the indemnified party and the indemnifying party (in
which case the indemnifying party will not have the right to direct the defense
of such action on
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behalf of the indemnified party) or (d) the indemnifying party has not in fact
employed counsel to assume the defense of such action within a reasonable time
after receiving notice of the commencement of the action, in each of which
cases the reasonable fees, dis bursements and other charges of counsel will be
at the expense of the indemnifying party or parties. It is understood that the
indemnifying party or parties shall not, in connection with any proceeding or
related proceedings in the same jurisdiction, be liable for the reasonable fees,
disbursements and other charges of more than one separate firm admitted to
practice in such jurisdiction at any one time from all such indemnified party
or parties unless (x) the employment of more than one counsel has been
authorized in writing by the indemnifying party or parties, (y) an indemnified
party has reasonably concluded (based on advice of counsel) that there may be
legal defenses available to it that are different from or in addition to those
available to the other indemnified parties or (z) a conflict or potential
conflict exists (based on advice of counsel to an indemnified party) between
such indemnified party and the other indemnified parties, in each of which
cases the indemnifying party shall be obligated to pay the reasonable fees and
expenses of such additional counsel or counsels. An indem nifying party shall
not be liable for any settlement of any action or claim effected without
its written consent (which consent shall not be unreasonably withheld).
(4) Contribution. If the indemnification provided for herein from the
indemnifying party is unavailable to an indemnified party hereunder in respect
of any losses, claims, damages, liabilities or expenses referred to herein,
then the indemnifying party, to the extent such indemnification is unavailable,
in lieu of indemnifying such indemnified party, shall contribute to the amount
paid or payable by such indemnified party as a result of such losses, claims,
damages, liabilities or expenses in such proportion as is appropriate to
reflect the relative fault of the indemnifying party and indemnified parties in
connection with the actions that resulted in such losses, claims, damages,
liabilities or expenses. The relative fault of such indemnifying party and
indemnified parties shall be determined by reference to, among other things,
whether any action in question, including any untrue or alleged untrue statement
of a material fact or omission or alleged omission to state a material fact, has
been made by, or relates to information supplied by, such indemnifying party or
indemnified parties, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such action. The amount paid
or payable by a party as a result of the losses, claims, damages, liabilities
and expenses referred to above shall be deemed to include, subject to the
limitations set forth in subparagraph (3)
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hereof, any legal or other fees or expenses reasonably incurred by such party
in connection with any investigation or proceeding.
If indemnification is available hereunder, the indemnifying
parties shall indemnify each indemnified party to the full extent provided in
subparagraphs (1) and (2) hereof without regard to the relative fault of said
indemnifying parties or indemnified party.
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<PAGE>
EXHIBIT 10.40
- --------------------------------------------------------------------------------
SECURITIES PURCHASE AGREEMENT
among
EMPIRE OF CAROLINA, INC.
HPA ASSOCIATES, LLC
and
EMP ASSOCIATES LLC
----------------------------
Dated as of May 5, 1997
----------------------------
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE 1
DEFINITIONS.....................................................................................1
1.1 Definitions................................................................................1
1.2 Accounting Terms; Financial Statements.....................................................6
1.3 Knowledge of the Company...............................................................6
ARTICLE 2
PURCHASE AND SALE OF NOTES, WARRANTS
AND SERIES A PREFERRED STOCK .......................................................6
2.1 Purchase and Sale of Notes and Warrants....................................................6
2.1.1 Purchase and Sale of Notes...........................................6
2.1.2 Purchase and Sale of Warrants........................................7
2.2 Purchase and Sale of Series A Preferred Stock..........................................7
2.2.1 Permanent Financing..................................................7
2.2.2 Additional Financing.................................................8
ARTICLE 3
CONDITIONS TO THE OBLIGATION
OF THE PURCHASERS TO CLOSE ...................................................................9
3.1 Conditions to All Closings.............................................................9
3.1.1 Representations and Warranties.......................................9
3.1.2 Company Officers' Certificate........................................9
3.2 Conditions to Closing on Permanent Financing...........................................9
3.3 Conditions to Closing on Purchase and Sale of Securities...............................9
3.3.1 Restructuring Plan...................................................9
3.3.2 Conversion of Senior Notes..........................................10
3.3.3 Restructuring of Buddy L Shareholders' Rights.......................10
3.3.4 Board of Directors..................................................10
3.4 Conditions to Closing on Permanent Financing..........................................10
3.4.1 Consummation of Transactions........................................10
3.4.2 Restructuring of the Senior Loan....................................10
3.5 Certificates..........................................................................11
ARTICLE 4
CONDITIONS TO THE OBLIGATION
OF THE COMPANY TO CLOSE .................................................................11
4.1 Representations and Warranties True............................................................11
ARTICLE 5
REPRESENTATIONS AND
WARRANTIES OF THE COMPANY......................................................................11
5.1 Corporate Existence and Power.........................................................11
5.2 Corporate Authorization; No Contravention.............................................12
5.3 Governmental Authorization; Third Party Consents......................................12
5.4 Binding Effect........................................................................12
<PAGE>
5.5 No Legal Bar..........................................................................12
5.6 Litigation................................................................................12
5.7 Compliance with Laws......................................................................13
5.8 No Default or Breach......................................................................13
5.9 Title to Properties.......................................................................13
5.10 Taxes....................................................................................13
5.11 Financial Condition......................................................................13
5.12 No Material Adverse Change...............................................................14
5.13 Commission Documents.....................................................................14
5.14 Disclosure...........................................................................14
5.15 Environmental Matters....................................................................14
5.16 Subsidiaries.............................................................................15
5.17 Capitalization...........................................................................15
5.18 Broker's, Finder's or Similar Fees.......................................................16
5.19 Labor Relations..........................................................................16
5.20 Patents, Trademarks, Etc.................................................................16
5.21 Other Documents..........................................................................17
ARTICLE 6
REPRESENTATIONS AND
WARRANTIES OF THE PURCHASERS...................................................................17
6.1 Authorization; No Contravention...........................................................17
6.2 Binding Effect............................................................................17
6.3 No Legal Bar..............................................................................17
6.4 Purchase for Own Account..................................................................18
6.5 Broker's, Finder's or Similar Fees........................................................18
6.6 Governmental Authorization; Third Party Consent...........................................18
INDEMNIFICATION.........................................................................................19
7.1 Indemnification...........................................................................19
7.1.1 Indemnification by the Company......................................19
7.1.2 Indemnification by HPA and EMP......................................20
7.2 Notification..............................................................................20
ARTICLE 8
AFFIRMATIVE COVENANTS..........................................................................21
8.1 Financial Statements and Other Information............................................21
8.2 Notices...............................................................................22
8.3 Inspection............................................................................23
8.4 Use of Proceeds.......................................................................23
8.5 Amendment to Certificate of Incorporation and Shareholders Agreement
.....................................................................................23
ARTICLE 9
NEGATIVE COVENANTS.............................................................................23
9.1 Consolidations and Mergers................................................................23
9.2 No Inconsistent Agreements................................................................23
<PAGE>
ARTICLE 10
OPTIONAL PREPAYMENT; PRO RATA TREATMENT........................................................24
ARTICLE 11
MISCELLANEOUS..................................................................................24
11.1 Survival of Representations and Warranties...............................................24
11.2 Notices..................................................................................24
11.3 Successors and Assigns...................................................................26
11.4 Amendment and Waiver.................................................................26
11.5 Counterparts.............................................................................27
11.6 Headings.................................................................................27
11.7 Determinations, Requests or Consents.....................................................27
11.8 GOVERNING LAW............................................................................27
11.9 JURISDICTION.............................................................................27
11.10 Severability............................................................................27
11.11 Rules of Construction...................................................................28
11.12 Entire Agreement........................................................................28
11.13 Publicity...............................................................................28
11.14 Further Assurances......................................................................28
EXHIBITS
A Form of Note
B Form of Warrant
SCHEDULES
APPENDICES
I Terms of Series A Preferred Stock
II Terms of Series C Preferred Stock
</TABLE>
<PAGE>
SECURITIES PURCHASE AGREEMENT
AGREEMENT, dated May 5, 1997, among EMPIRE OF CAROLINA, INC.,
a Delaware corporation (the "COMPANY"), HPA ASSOCIATES, LLC, a Delaware limited
liability company ("HPA"), and EMP ASSOCIATES LLC, a Delaware limited liability
company ("EMP").
HPA and EMP wish to purchase, or to arrange for the purchase,
from the Company, and the Company wishes to issue and sell, on, and subject to
the terms hereof, (a) Promissory Notes due February 5, 1998 in the aggregate
principal amount of $5,000,000 (together with all notes issued in connection
with the substitution, replacement or transfer thereof, the "NOTES"), and (b) 5
million warrants (the "WARRANTS") to purchase shares of Common Stock of the
Company (the "WARRANT SHARES").
In addition, HPA and EMP wish to purchase, or arrange for
purchase, from the Company, and the Company wishes to issue and sell shares of
its Series A Preferred Stock, par value $.01 per share and a face value per
share to be determined (the "SERIES A PREFERRED STOCK"), in an aggregate amount
of up to $16,000,000 but not less than $11,000,000.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth herein, the parties hereto agree as follows:
ARTICLE 1
DEFINITIONS
1.1 Definitions. As used in this Agreement, and unless the
context requires a different meaning, the following terms have the meanings
indicated:
"Additional Financing" has the meaning assigned to that term
in Section 2.2.
"Additional Financing Closing Date" means the date of the
closing on the Additional Financing.
"Additional Financing Final Date" means the date which is 45
days from the Closing Date if the request set forth in Section 2.2.2.1 was
received by the
<PAGE>
Permanent Financing Stock Purchasers within 15 days from the Closing Date, or 30
days from the receipt of the request set forth in Section 2.2.2.1 if such
request was received more than 15 days after the Closing Date.
"Additional Preferred Stock Purchaser" has the meaning
assigned to that term in Section 2.2.2.1.
"Additional Warrants" has the meaning assigned to that term in
Section 2.2.
"Affiliate" means any Person who is an "affiliate" as defined
in Rule 12b-2 of the General Rules and Regulations under the Exchange Act.
"Agreement" means this Agreement as the same may be amended,
supplemented or modified in accordance with the terms hereof.
"Asset Purchase Agreement" means the Asset Purchase Agreement,
dated as of March 3, 1995, among the Company, Buddy L, Inc. and Buddy L (Hong
Kong) Limited.
"Business Day" means any day other than a Saturday, Sunday or
other day on which commercial banks in the City of New York are authorized or
required by law or executive order to close.
"Capital Lease Obligations" of any Person means the
obligations of such Person to pay rent or other amounts under any lease of (or
other arrangement conveying the right to use) real or personal property, or a
combination thereof, which obligations are required to be classified and
accounted for as capital leases on a balance sheet of such Person under GAAP
and, for the purposes of this Agreement, the amount of such obligations at any
time shall be the capitalized amount thereof at such time determined in
accordance with GAAP consistently applied.
"Cash" shall mean currency of the United States of America.
"Certificate of Incorporation" means the Restated Certificate
of Incorporation of the Company, dated June 23, 1995, as amended and as in
effect on the Closing Date.
"Closing Date" means May 6, 1996.
"Code" means the Internal Revenue Code of 1986, as amended, or
any successor statute thereto.
"Commission" means the Securities and Exchange Commission or
any similar agency then having jurisdiction to enforce the Securities Act.
<PAGE>
3
"Common Stock" means the shares of Common Stock, par value
$.10 per share, of the Company, or any other capital stock of the Company into
which such stock is reclassified or reconstituted.
"Condition of the Company" means the assets, business,
properties, operations or financial condition of the Company and its
Subsidiaries, taken as a whole.
"Contractual Obligations" means as to any Person, any
provision of any security issued by such Person or of any agreement,
undertaking, contract, indenture, mortgage, deed of trust or other instrument to
which such Person is a party or by which it or any of its property is bound.
"Contractual Obligations" with respect to the Company and its Subsidiaries
includes the Senior Loan Agreement and the Parent Guarantee.
"Empire Industries" means Empire Industries, Inc., a North
Carolina corporation and Subsidiary of the Company.
"Environmental Laws" means any federal, state, territorial,
provincial or local law, common law doctrine, rule, order, decree, judgment,
injunction, license, permit or regulation relating to environmental matters,
including those pertaining to land use, air, soil, surface water, ground water
(including the protection, cleanup, removal, remediation or damage thereof),
public or employee health or safety or any other environmental matter, together
with any other laws (federal, state, territorial, provincial or local) relating
to emissions, discharges, releases or threatened releases of any pollutant or
contaminant including, without limitation, medical, chemical, biological,
biohazardous or radioactive waste and materials, into ambient air, land, surface
water, groundwater, personal property or structures, or otherwise relating to
the manufacture, processing, distribution, use, treatment, storage, disposal,
transportation, discharge or handling of any contaminant, including, without
limitation, the Comprehensive Environmental Response, Compensation, and
Liability Act (42 U.S.C. ss. 9601 et seq.), the Hazardous Material
Transportation Act (49 U.S.C. ss.1801 et seq.), the Resource Conservation and
Recovery Act (42 U.S.C. ss.6901 et seq.), the Federal Water Pollution Control
Act (33 U.S.C. ss.1251 et seq.), the Clean Air Act (42 U.S.C. ss.1251 et seq.),
the Toxic Substances Control Act (15 U.S.C. ss.2601 et seq.), and the
Occupational Safety and Health Act (29 U.S.C. ss.651 et seq.), as such laws have
been, or are, amended, modified or supplemented heretofore or from time to time
hereafter and any analogous future federal, or present or future state or local
laws, statutes and regulations promulgated thereunder.
"Event of Default" shall mean an event of default under the
Notes.
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4
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the Commission thereunder.
"Exchange Act Filings" means the Company's filings under the
Securities Act and the Exchange Act for the three years prior to the date
hereof.
"GAAP" means generally accepted accounting principles in
effect from time to time.
"Governmental Authority" means the government of any nation,
state, city, locality or other political subdivision of any thereof, any entity
exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government, and any corporation or other entity
owned or controlled, through stock or capital ownership or otherwise, by any of
the foregoing.
"Hazardous Materials" means those substances which are
regulated by or form the basis of liability under any Environmental Laws.
"Intercreditor Agreement" means that certain agreement between
HPA, EMP and WPG Corporate Development Associates IV, L.P. and all other holders
of interests in the Senior Notes on the other hand, relating to the sharing of
certain benefits pursuant to a guarantee given by Empire Industries pursuant to
the Senior Notes.
"Lien" means any mortgage, deed of trust, pledge,
hypothecation, assignment, encumbrance, lien (statutory or other) or preference,
priority, right or other security interest or preferential arrangement of any
kind or nature whatsoever (excluding preferred stock and equity related
preferences) including, without limitation, those created by, arising under or
evidenced by any conditional sale or other title retention agreement, the
interest of a lessor under a Capital Lease Obligation, or any financing lease
having substantially the same economic effect as any of the foregoing.
"Notes" has the meaning assigned to that term in the second
paragraph of this Agreement, in the form set forth as Exhibit A hereto.
"Note Purchaser" has the meaning assigned to that term in
Section 2.1.
"Parent Guarantee" means the guarantee by the Company of the
obligations of Empire Industries under the Senior Loan Agreement.
<PAGE>
"Permanent Financing" has the meaning assigned to that term in
Section 2.2.
"Permanent Financing Closing Date" means the date of the
closing on the Permanent Financing as provided in Section 2.2.1.2.
"Permanent Financing Final Date" means the date which is 30
days from the Closing Date.
"Permanent Financing Stock Purchaser" has the meaning assigned
to that term in Section 2.2.1.1.
"Person" means any individual, firm, corporation, company,
part nership, trust, incorporated or unincorporated association, joint venture,
joint stock company, Governmental Authority or other entity of any kind, and
shall include any successor (by merger or otherwise) of such entity.
"Purchasers" means the Note Purchasers, the Permanent
Financing Stock Purchasers and the Additional Preferred Stock Purchasers,
collectively or individually as the case may be.
"Requirements of Law" means as to any Person, the certificate
of incorporation and by-laws or other organizational or governing documents of
such Person, and any law, treaty, rule, regulation, right, privilege,
qualification, license or franchise or determination of an arbitrator or a court
or other Governmental Authority, in each case applicable or binding upon such
Person or any of its property or to which such Person or any of its property is
subject or pertaining to any or all of the transactions contemplated or referred
to herein.
"Securities" means, collectively, the Notes and the Warrants.
"Securities Act" means the Securities Act of 1933, as amended,
and the rules and regulations of the Commission thereunder.
"Senior Lenders" means BT Commercial Corporation, LaSalle
National Bank and other related lenders that are parties to the Senior Loan
Agreement.
"Senior Loan Agreement" means the Loan and Security Agreement,
dated as of May 29, 1996, between the Senior Lenders and Empire Industries as
borrower, as guaranteed by the Company, as the same may be amended,
<PAGE>
6
supplemented or modified in accordance with the terms thereof.
"Senior Notes" means the 9% Convertible Debentures of the
Company due December 22, 1999.
"Series A Preferred Stock" means the Series A Preferred Stock
of the Company to be issued with the terms set forth in Appendix I.
"Series C Preferred Stock" means the Series C Preferred Stock
of the Company to be issued with the terms set forth in Appendix II.
"Shareholders Agreement" means the Shareholders Agreement,
dated as of December 22, 1994, among WPG Corporate Development Associates IV,
L.P., WPG Corporate Development Associates IV (Overseas), Ltd., Steven E.
Geller, Neil Saul, Marvin Smollar, Champ Enterprises Limited Partnership and the
Persons named therein, as amended by Amendment No. 1 to Shareholders Agreement,
dated as of April 10, 1995 and by Amendment No. 2 to Shareholders Agreement,
dated as of June 29, 1995.
"Subsidiary" means, with respect to any Person, an operating
corporation or other operating entity of which 50% or more of the voting power
of the voting equity securities or equity interest is owned, directly or
indirectly, by such Person. Unless otherwise qualified, all references to a
"Subsidiary" or to "Subsidiaries" in this Agreement shall refer to a Subsidiary
or Subsidiaries of the Company.
"Transaction Documents" means collectively, this Agreement,
the Notes, the Warrants, the Series A Preferred Stock, the Certificate of
Incorporation and the by-laws of the Company as in effect on the Closing Date.
"Warrants" has the meaning ascribed to such term in the second
paragraph of this Agreement, in the form set forth on Exhibit B hereto.
"Warrant Shares" has the meaning ascribed to such term in the
second paragraph of this Agreement.
1.2 Accounting Terms; Financial Statements. All accounting
terms used herein not expressly defined in this Agreement shall have the
respective meanings given to them in accordance with sound accounting practice.
The term "sound accounting practice" shall mean such accounting practice as, in
the opinion of the independent certified public accountants regularly retained
by the Company,
<PAGE>
7
conforms at the time to GAAP applied on a consistent basis except for changes
with which such accountants concur. If any changes in accounting principles are
hereafter occasioned by promulgation of rules, regulations, pronouncements or
opinions of or are otherwise required by, the Financial Accounting Standards
Board or the American Institute of Certified Public Accountants (or successors
thereto or agencies with similar functions), and any of such changes results in
a change in the method of calculation of, or affects the results of such
calculation of, any of the financial cove nants, standards or terms found
herein, then the parties hereto agree to enter into and diligently pursue
negotiations in order to amend such financial covenants, standards or terms so
as to reflect fairly and equitably such changes, with the desired result that
the criteria for evaluating the Company's financial condition and results of
operations shall be the same after such changes as if such changes had not been
made.
1.3 Knowledge of the Company. All references to the knowledge
of the Company or to facts known by the Company shall mean actual knowledge or
notice of the Chief Executive Officer or Chief Financial Officer of the Company
or any President or Vice-President of the Company.
ARTICLE 2
PURCHASE AND SALE OF NOTES, WARRANTS
AND SERIES A PREFERRED STOCK
2.1 Purchase and Sale of Notes and Warrants. On the Closing
Date:
2.1.1 Purchase and Sale of Notes. The Company shall issue
to HPA and EMP (together, the "NOTE PURCHASERS"), and the Note Purchasers shall
acquire from the Company, the Notes substantially in the form attached hereto as
Exhibit A, appropriately completed in conformity herewith. The purchase price of
the Notes, to be divided in the amounts specified next to the signatures of the
Note Purchasers, shall be $5,000,000.
2.1.2 Purchase and Sale of Warrants. The Company shall
issue to the Note Purchasers, and the Note Purchasers shall acquire from the
Company, 5,000,000 Warrants substantially in the form attached hereto as Exhibit
B, appropriately completed in conformity herewith, and in such proportions as
specified beside the appropriate Note Purchaser's name on the signature page
hereto. Each Warrant shall entitle its holder to purchase 1 share of Common
Stock, subject to adjustment as provided therein.
2.2 Purchase and Sale of Series A Preferred Stock.
<PAGE>
8
2.2.1 Permanent Financing.
2.2.1.1 Subject to the terms and conditions herein
set forth, on the Permanent Financing Closing Date, the Company shall issue to
HPA and such other persons as may agree to acquire (the "PERMANENT FINANCING
STOCK PURCHASERS"), and the Permanent Financing Stock Purchasers shall acquire
from the Company, shares of Series A Preferred Stock, appropriately completed in
conformity herewith, in an aggregate amount of $11,000,000 (the "PERMANENT
FINANCING"). The Permanent Financing Stock Purchasers shall include Persons who
wish to acquire Series A Preferred Stock upon the conversion of Notes in
accordance with the terms thereof unless the Company has exercised the
Additional Financing Option set forth in Section 2.2.2.1 prior to the Permanent
Financing Final Date, in which case the Notes shall not be convertible on the
Permanent Financing Closing Date.
2.2.1.2 The Closing on the Permanent Financing,
which shall be held no later than on the Permanent Financing Final Date, shall
take place on the Permanent Financing Closing Date at the offices of Paul,
Weiss, Rifkind, Wharton & Garrison, 1285 Avenue of the Americas, New York, New
York 10019, at 10:00 a.m. New York time, or on such date or other place and time
as the Permanent Financing Stock Purchasers and the Company shall agree.
2.2.1.3 If Permanent Financing Stock Purchasers are
not ready, willing and able to close in the required amount on the Permanent
Financing on the Permanent Financing Final Date, and the conditions set forth in
Article 3 have been met, (i) the Note Purchasers shall automatically be
obligated to return to the Company, and the Company shall cancel, all Warrants
issued under this Agreement to the Note Purchasers or transferees without any
compensation to the Note Purchasers or transferees for their loss, (ii) Charles
S. Holmes and the HPA designee shall resign from the Board of Directors and the
Company shall no longer be obligated to designate Charles S. Holmes and any
designee of HPA to be a member of its Board of Directors and (iii) all further
obligations of the parties hereunder (other than under Articles 7, 9, 10 and 11
and Sections 8.1 and 8.2) shall terminate, except as provided in the Notes.
<PAGE>
9
2.2.2 Additional Financing.
2.2.2.1 Subject to the terms and conditions herein
set forth, if requested by a majority vote of the Board of Directors of the
Company (with Charles S. Holmes and the HPA designee on the Board of Directors
not participating in such vote), within 180 days from the Closing Date, on the
Additional Financing Closing Date, the Company shall issue to HPA and such other
persons who may agree to acquire (the "ADDITIONAL PREFERRED STOCK PURCHASERS"),
and the Additional Preferred Stock Purchasers shall acquire from the Company, an
additional aggregate amount of up to $5,000,000 of Series A Preferred Stock (the
"ADDITIONAL FINANCING"), and the Company shall issue, pro rata in relation to
the proportion of $5,000,000 of Series A Preferred Stock that is purchased in
the Additional Financing, to such Person or Persons as may be specified by HPA
(including HPA itself), an additional 2,500,000 Warrants (the "ADDITIONAL
WARRANTS").
2.2.2.2 If, on the Additional Financing Final Date,
sufficient Additional Preferred Stock Purchasers are ready, willing and able to
close on the Additional Financing, but the Company fails to close on such
Additional Financing on the Additional Financing Final Date despite such
potential Additional Preferred Stock Purchasers' readiness to do so, the Company
shall issue to such Persons as HPA may designate (including HPA itself) the
Additional Warrants, promptly after the Additional Financing Final Date.
2.2.2.3 If the Company requests Additional Financing
in accordance with Section 2.2.2.1 and sufficient Additional Preferred Stock
Purchasers (including Persons converting Notes) are not ready, willing and able
to close on the full amount of Additional Financing on the Additional Financing
Final Date, (i) the Company shall issue such amount of Series A Preferred Stock,
either by separate purchase or upon conversion of Notes, as may be requested by
those Additional Preferred Stock Purchasers who do wish to purchase Series A
Preferred Stock in the Additional Financing, together with the appropriate pro
rata portion of the Additional Warrants (as specified by HPA), (ii) the parties
shall have no further obligation to one another under this Agreement with regard
to the provision of financing and the issuance of additional securities, but
(iii) the obligations of the parties pursuant to Articles 7 through 11 shall
continue and, if such request was made prior to the Permanent Financing Final
Date, the Notes (except to the extent converted) shall remain outstanding in
accordance with their terms.
<PAGE>
10
ARTICLE 3
CONDITIONS TO THE OBLIGATION
OF THE PURCHASERS TO CLOSE
The obligation of the Purchasers to purchase the Securities or
the Series A Preferred Stock, as the case may be, to pay the purchase price
therefor at the Closing Date, the Permanent Financing Closing Date and the
Additional Financing Closing Date, as the case may be, and to perform any
obligations thereunder shall be subject to the satisfaction as determined by, or
waived by, HPA of the following conditions on or before the Closing Date, the
Permanent Financing Closing Date or the Additional Financing Closing Date, as
the case may be:
3.1 Conditions to All Closings. The following shall be
conditions to all closings:
3.1.1 Representations and Warranties. The representations
and warranties of the Company contained in Article 5 hereof shall be true and
correct in all material respects at and as of the applicable closing date, as if
made at and as of such date.
3.1.2 Company Officers' Certificate. On the Closing Date,
the Permanent Financing Closing Date or the Additional Financing Closing Date,
as the case may be, HPA shall have received a certificate, dated such date, from
(i) the President, any Vice-President, the Chairman, any Vice-Chairman or the
Chief Executive Officer and (ii) the Secretary, any Assistant Secretary, the
Treasurer or any Assistant Treasurer of the Company, in form and substance
reasonably satisfactory to the Purchasers that the applicable conditions set
forth under this Article 3 have been satisfied and setting forth such other
matters as counsel to HPA may reasonably request.
3.2 Conditions to Closing on Permanent Financing. The
following shall be conditions to the closing of the Permanent Financing and the
Additional Financing:
(a) No Event of Default shall have occurred under the
Notes.
(b) The Company shall have performed and complied with all
material obligations imposed upon it pursuant hereto.
<PAGE>
11
3.3 Conditions to Closing on Purchase and Sale of Securities.
The following shall be conditions to the closing of the sale of the Securities
on the Closing Date:
3.3.1 Restructuring Plan. By the Closing Date, the Board
of Directors of the Company shall have accepted a general plan to reduce costs
or expenses by approximately $8 million and, after the Closing Date,
expenditures shall be approved by a committee made up of Charles S. Holmes and
Steven Geller.
3.3.2 Conversion of Senior Notes. On the Closing Date,
holders in the required majority of Senior Notes shall have agreed to the
replacement of all the outstanding Senior Notes by newly issued non-voting Class
C Convertible Preferred Stock of the Company (the "SERIES C PREFERRED STOCK")
that will rank PARI PASSU with the Series A Preferred Stock in exchange for all
rights and claims (including without limitation, claims for accrued interest,
fees, expenses and payments) under the Senior Notes.
3.3.3 Restructuring of Buddy L Shareholders' Rights. On
the Closing Date, the Seller (as defined in the Asset Purchase Agreement) or
their successors and assigns under the Asset Purchase Agreement shall have
agreed to waive their rights under the earn-out and price protection provisions
of the Asset Purchase Agreement in exchange for (i) $100,000 in cash, (ii)
250,000 shares of Common Stock, (iii) a promissory note issued by Empire
Industries and fully and unconditionally guaranteed by the Company, in the
principal amount of $2.5 million, bearing simple interest (payable quarterly) at
9% and payable, as to principal, in the amount of $625,000 on the first, second,
third and fourth anniversary of the Closing Date, (iv) registration rights
relating to the 250,000 shares of Common Stock issued under (ii) above under
which the Company shall, at its own expense, cause to be effective within 180
days from the Closing Date and maintain for two years following the issuance of
such shares, an evergreen shelf-registration statement for such shares and (v)
the execution and delivery of mutually acceptable releases by the Company,
Empire Industries and such Seller.
3.3.4 Board of Directors. By the Closing Date, WPG
Corporate Development Associates IV, L.P. shall have exercised its rights under
the Shareholders' Agreement to appoint directors to the Board of Directors of
the Company upon the occurrence of a Grade I Management Event (as defined in the
Shareholders' Agreement), and by the date the bridge loan is funded, Steven
Geller, Steven Hutchinson, Eugene Matalene, Charles S. Holmes and a designee of
HPA who will act as independent director shall have been appointed to the Board
of Directors of the Company.
<PAGE>
12
3.4 Conditions to Closing on Permanent Financing. The
following shall be conditions to the closing of the Permanent Financing:
3.4.1 Consummation of Transactions. The transactions
contemplated by Sections 3.3.2 and 3.3.3 shall have been consummated.
3.4.2 Restructuring of the Senior Loan. On the Permanent
Financing Closing Date, the Senior Loan Agreement and related agreements with
the Senior Lenders shall have been amended or replaced by loan arrangements with
other parties with terms substantially equivalent to those currently in effect
with the Senior Lenders, to:
3.4.2.1 provide that the current portion of the
outstanding term loan will not be due until a year and a day following the
Closing Date;
3.4.2.2 waive all existing defaults and events of
default;
3.4.2.3 provide that the maximum amount of the loan
facility available under the Senior Loan Agreement is $75 million; and
3.4.2.4 revise the covenants to the Purchasers'
reasonable satisfaction to avoid the occurrence of any early default.
3.5 Certificates. Each party shall provide such certificates
and other documents as may be reasonably requested by counsel to the other
party.
ARTICLE 4
CONDITIONS TO THE OBLIGATION
OF THE COMPANY TO CLOSE
The obligations of the Company to issue and sell the
Securities or Series A Preferred Stock, as the case may be, and to perform its
other obligations thereunder shall be subject to the satisfaction as determined
by, or waived by, the Company of the following conditions on or before the
Closing Date, the Permanent Financing Closing Date or the Additional Financing
Closing Date, as the case may be:
4.1 Representations and Warranties True. The representations
and
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13
warranties of the Purchasers contained in Article 6 hereof shall be true and
correct in all material respects at and as of the Closing Date, the Permanent
Financing Closing Date of the Additional Financing Closing Date, as the case may
be, as if made at and as of such date.
ARTICLE 5
REPRESENTATIONS AND
WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to the Purchasers,
after giving effect to the transactions contemplated by this Agreement and
except as disclosed in the Exchange Act Filings, as follows:
5.1 Corporate Existence and Power. The Company and each of its
Subsidiaries: (a) is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation; (b) has all
requisite corporate power and authority to own and operate its property, to
lease the property it operates as lessee and to conduct the business in which it
is currently, or is currently proposed to be, engaged; (c) is duly qualified as
a foreign corporation, licensed and in good standing under the laws of each
jurisdiction where its ownership, lease or operation of property or the conduct
of its business requires such qualification, except to the extent that the
failure to do so would not have a material adverse effect on the Condition of
the Company; and (d) has the corporate power and authority to execute, deliver
and perform its obligations under each Transaction Document to which it is or
will be a party and to borrow hereunder.
5.2 Corporate Authorization; No Contravention. The execution,
delivery and performance by the Company of each Transaction Document to which it
is a party and the consummation of the transactions contemplated hereby and
thereby, including without limitation the issuance of the Securities: (a) has
been duly authorized by all necessary corporate action; (b) does not contravene
the terms of the Company's Certificate of Incorporation or by-laws, or any
amendment of either thereof; and (c) will not violate, conflict with or result
in any breach or contravention of or the creation of any Lien under, any
Contractual Obligation of the Company or any of its Subsidiaries, or any
Requirement of Law or rule or regulation of the American Stock Exchange
applicable to the Company or any of its Subsidiaries; except where the
violations referred to in (b) and (c) above would not have a material adverse
effect on the Condition of the Company or the ability of the Company and its
Subsidiaries to perform their obligations under the Transaction Documents.
<PAGE>
14
5.3 Governmental Authorization; Third Party Consents. No
approval, consent, compliance, exemption, authorization, or other action by, or
notice to, or filing with, any Governmental Authority or any other Person in
respect of any Requirement of Law, and no lapse of a waiting period under a
Requirement of Law (including but not limited to the Hart-Scott-Rodino Antitrust
Improvement Act), is necessary or required in connection with the execution,
delivery or performance (including, without limitation, the payment of interest
on the Note and the issuance of the Warrant Shares) by, or enforcement against,
the Company or any of its Subsidiaries, as the case may be, of the Transaction
Documents to which it is a party or the consummation of the transactions
contemplated hereby or thereby.
5.4 Binding Effect. Each of the Transaction Documents to which
it is a party has been duly executed and delivered by the Company and
constitutes the legal, valid and binding obligation of the Company enforceable
against the Company in accordance with its terms, except as enforceability may
be limited by applicable bankruptcy, insolvency or other similar laws affecting
the enforcement of creditors' rights generally and by general principles of
equity relating to enforceability.
5.5 No Legal Bar. All consents, exemptions, authorizations or
other actions by, or notices to, or filings with, Governmental Authorities and
other Persons, with respect to all Requirements of Law and with respect to those
Contractual Obligations of the Company and its Subsidiaries necessary, desirable
or required in connection with the execution, delivery or performance by the
Company or enforcement against the Company of the Transaction Documents have
been obtained and are in full force and effect, except where the failure to
comply with the above would not have a material adverse effect on the Condition
of the Company or the ability of the Company and its Subsidiaries to perform
their obligations under the Transaction Documents.
5.6 Litigation. Except as disclosed in Schedule 5.6 hereto,
there are no legal actions, suits, proceedings, claims or disputes pending, or
to the knowledge of the Company, threatened, at law, in equity, in arbitration
or before any Governmental Authority against or affecting the Company or any of
its Subsidiaries (a) with respect to the Transaction Documents, or any of the
transactions contemplated hereby or thereby, including actions, suits,
proceedings, claims or disputes which would prohibit the purchase of the
Securities hereunder or would subject the Purchasers to any penalty or other
onerous conditions, or (b) which would, if adversely determined, (i) have a
material adverse effect on the Condition of the Company or (ii) have a material
adverse effect on the ability of the Company or any of its Subsidiaries to
perform their obligations under the Transaction Documents. No injunction, writ,
temporary restraining order, decree or any order of any nature
<PAGE>
15
has been issued by any court or other Governmental Authority purporting to
enjoin or restrain the execution, delivery or performance of the Transaction
Documents.
5.7 Compliance with Laws. The Company and each of its
Subsidiaries are in compliance with all Requirements of Law in all material
respects.
5.8 No Default or Breach. Except for defaults under the Senior
Loan Agreement and the Senior Notes, and except for litigation listed in
Schedule 5.6, (i) to the knowledge of the Company, no event has occurred and is
continuing which constitutes or, with the giving of notice or lapse of time or
both, would constitute an Event of Default and (ii) neither the Company nor any
of its Subsidiaries is in default under or with respect to any Contractual
Obligation in any material respect, which, individually or together with all
such defaults, would have a material adverse effect on the Condition of the
Company, or which would adversely affect the ability of the Company or any of
its Subsidiaries to perform their obligations under the Transaction Documents.
5.9 Title to Properties. Except for mechanic Liens disclosed
in Schedule 5.9, the Company and each of its Subsidiaries have good record and
marketable title in fee simple to, or, hold interests as lessees under leases in
full force and effect in, all their real property, except for such defects in
title as could not, individually or in the aggregate, have a material adverse
effect on the Condition of the Company, or a material adverse effect on the
ability of the Company to perform its obligations under the Transaction
Documents.
5.10 Taxes. The Company and each of its Subsidiaries have
filed or caused to be filed, or have properly filed extensions for, all tax
returns which are required to be filed and have paid or caused to be paid all
material taxes required to be paid by them and all assessments received by them
to the extent that such taxes have become due, except taxes the validity or
amount of which is being contested in good faith by appropriate proceedings and
with respect to which adequate reserves have been set aside. The Company and
each of its Subsidiaries have paid or caused to be paid, or have established
reserves that the Company reasonably believes to be adequate in all material
respects, for all tax liabilities applicable to the Company and its Subsidiaries
for all fiscal years which have not been audited and reported on by the taxing
authorities (or closed by applicable statutes).
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16
5.11 Financial Condition. The Company has furnished the
Purchasers with true and complete copies of (i) the audited consolidated balance
sheets of the Company and its Subsidiaries as of December 31, 1996 and December
31, 1995 and the related consolidated statements of operations and cash flows,
together with the notes thereto, of the Company and its Subsidiaries for the
years ended December 31, 1996 and December 31, 1995 (the "AUDITED FINANCIAL
STATEMENTS"). The Audited Financial Statements fairly present the consolidated
financial position of the Company and its Subsidiaries as of the respective
dates thereof, and the results of operations and cash flows of the Company and
its Subsidiaries as of the respective dates or for the respective periods set
forth therein, all in conformity with GAAP consistently applied during the
periods involved.
5.12 No Material Adverse Change. Subsequent to the date of the
Exchange Act Filings, except as publicly disclosed or disclosed to Charles S.
Holmes, there has not been any change or any development involving a prospective
change, which has affected or may affect materially and adversely the Condition
of the Company and its Subsidiaries, taken as a whole.
5.13 Commission Documents. The Company has filed all
registration statements, proxy statements, reports and other documents required
to be filed by it under the Securities Act or the Exchange Act, and all
amendments thereto (collectively, the "COMMISSION DOCUMENTS"); and the Company
has furnished the Purchasers copies of all such Commission Documents, each as
filed with the Commission, as the Purchasers have requested in connection with
the transactions contemplated herein. Each Commission Document when filed with
the Commission was true and accurate in all material respects and in compliance
in all material respects with the requirements of its respective report form.
5.14 Disclosure. No statement by the Company contained in any
of the Transaction Documents, any Commission Documents or any other documents,
certificates, notices or consents (collectively, "DOCUMENTS") delivered to the
Purchasers in connection with the purchase and sale of the Securities, taken as
a whole, contains (or will contain) an untrue statement of a material fact or
omits (or will omit) to state a material fact required to be stated therein or
necessary to make the statements made, in light of the circumstances in which
made, not materially false or misleading.
5.15 Environmental Matters. Except as set forth in the
Exchange Act Filings:
(a) The property, assets and operations of the Company and
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17
its Subsidiaries are and have been in material compliance with all applicable
Environ mental Laws; there are no Hazardous Materials stored or otherwise
located in, on or under any of the property or assets of the Company or its
Subsidiaries including the groundwater except in compliance with applicable
Environmental Laws; and to the knowledge of the Company, there have been no
material releases or threatened releases of Hazardous Materials in, on or under
any property adjoining any of the property or assets of the Company or its
Subsidiaries which have not been remediated to the satisfaction of the
appropriate Governmental Authorities.
(b) None of the property, assets or operations of the
Company or its Subsidiaries is the subject of any federal, state or local
investigation evaluating whether (i) any remedial action is needed to respond to
a release or threatened release of any Hazardous Materials into the environment
or (ii) any release or threatened release of any Hazardous Materials into the
environment is in contravention of any Environmental Law.
(c) Neither the Company nor its Subsidiaries has received
any notice or claim, nor are there pending, or to the knowledge of the Company,
threatened or reasonably anticipated, lawsuits or proceedings against any of
them, with respect to violations of an Environmental Law or in connection with
the presence of or exposure to any Hazardous Materials in the environment or any
release or threatened release of any Hazardous Materials into the environment,
and neither the Company nor its Subsidiaries is or was the owner or operator of
any property which (i) pursuant to any Environmental Law has been placed on any
list of Hazardous Materials disposal sites, including, without limitation, the
"National Priorities List" or "CERCLIS List," (ii) has, or to the knowledge of
the Company had, any subsurface storage tanks located thereon, or (iii) to the
knowledge of the Company, has ever been used as or for a waste disposal
facility, a mine, a gasoline service station or, other than for petroleum
substances stored in the ordinary course of business, a petroleum products
storage facility.
(d) Neither the Company nor any of its Subsidiaries has
any present or contingent liability in connection with the presence either on or
off the property or assets of the Company or its Subsidiaries of any Hazardous
Materials in the environment or any release or threatened release of any
Hazardous Materials into the environment, except for any such contingent
liability that would not have a material adverse effect on the Condition of the
Company.
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18
5.16 Subsidiaries. Schedule 5.16 sets forth a complete and
accurate list of all of the Subsidiaries of the Company together with their
respective jurisdictions of incorporation or organization. Each such Subsidiary
is directly or indirectly wholly owned by the Company. All of the outstanding
shares of capital stock of the Subsidiaries that are corporations are validly
issued, fully paid and nonassessable. As of the date hereof, all of the
outstanding shares of capital stock of, or other ownership interests in, each of
the Subsidiaries are owned by the Company or by a wholly owned Subsidiary free
and clear of any Liens, claims, charges or encumbrances, except to the extent
set forth in the Senior Loan Agreement or the Parent Guarantee, as the case may
be. No Subsidiary has outstanding options, warrants, subscriptions, calls,
rights, convertible securities or other agreements or commitments obligating the
Subsidiary to issue, transfer or sell any securities of the Subsidiary.
5.17 Capitalization.
(a) As of the date hereof, the authorized capital stock of
the Company is as set forth in the Exchange Act Filings. All outstanding shares
of capital stock of the Company have been duly authorized. All outstanding
shares of capital stock of the Company are, and the Warrant Shares when issued
will be, validly issued, fully paid and nonassessable. In addition, the Warrant
Shares have been duly reserved for issuance.
(b) On the Closing Date, except for the agreements set
forth herein and as set forth in the Exchange Act Filings and except for options
and warrants granted in the ordinary course of business, there will be no
outstanding securities convertible into or exchangeable for capital stock of the
Company or options, warrants or other rights to purchase or subscribe to capital
stock of the Company or any of its Subsidiaries or contracts, commitments,
agreements, under standings or arrangements of any kind to which the Company is
a party relating to the issuance of any capital stock of the Company or any of
its Subsidiaries, any such convertible or exchangeable securities or any such
options, warrants or rights.
5.18 Broker's, Finder's or Similar Fees. Except as disclosed
in Schedule 5.18, there are no brokerage commissions, finder's fees or similar
fees or commissions payable in connection with the transactions contemplated
hereby based on any agreement, arrangement or understanding with the Company or
any of its Subsidiaries, or any action taken by any such entity that could give
rise to a charge to the Purchasers, and the Company agrees to satisfy any of its
obligations, subject to its right to contest any such charges.
<PAGE>
19
5.19 Labor Relations. Neither the Company nor any of its
Subsidiaries has committed or is engaged in any unfair labor practice. There is
(a) no unfair labor practice complaint pending or, to the knowledge of the
Company, threatened against the Company or any of its Subsidiaries before the
National Labor Relations Board and no grievance or arbitration proceeding
arising out of or under collective bargaining agreements is so pending or, to
the knowledge of the Company, threatened, (b) no strike, labor dispute, slowdown
or stoppage pending or, to the knowledge of the Company, threatened against the
Company or any of its Subsidiaries, and (c) no union representation question
existing with respect to the employees of the Company or any of its
Subsidiaries.
5.20 Patents, Trademarks, Etc. The Company and its
Subsidiaries own or are licensed or otherwise have the right to use all patents,
trademarks, service marks, trade names, copyrights, licenses, franchises and
other rights (collectively, "RIGHTS") that are material and necessary for the
operation of their businesses as presently conducted. To the knowledge of the
Company, no Right or product, process, method, substance or other material
presently sold by or employed by the Company or any of its Subsidiaries, or
which the Company or any of its Subsidiaries contemplates selling or employing,
infringes upon the patents, trademarks, service marks, copyrights or licenses
that are owned by others. Except as set forth in the Exchange Act Filings, no
litigation is pending and no claim has been made against the Company or any of
its Subsidiaries or, to the knowledge of the Company, is threatened, contesting
the right of the Company or any of its Subsidiaries to sell or use any Right or
product, process, method, substance or other material presently sold by or
employed by the Company or any of its Subsidiaries. To the knowledge of the
Company, no patent, invention, device, principle or any statute, law, rule,
regulation, standard or code is pending or proposed, which would have a material
adverse effect on the Condition of the Company.
5.21 Other Documents. The Company has delivered to the
Purchasers true, complete and correct copies of the Senior Loan Agreement, the
Parent Guarantee, and all other documents requested by the Purchasers in
connection with or relating to the sale of the Securities and the transactions
contemplated hereby, together with all amendments and modifications thereto.
Such documents (including the schedules and exhibits thereto) comprise a full
and complete copy of all agreements between the parties thereto with respect to
the subject matter thereof and all transactions related thereto, and there are
no agreements or understandings, oral or written, or side agreements not
contained therein that relate to or modify the substance thereof. Each of such
documents to which it is a party has been duly authorized by all necessary
corporate action on the part of the Company and its Subsidiaries, was validly
executed and delivered by the Company and its Subsidiaries
<PAGE>
20
and is the legal, valid and binding obligation of the Company and its
Subsidiaries and their successors, enforceable in accordance with its terms,
except as limited by bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance or other similar laws affecting creditors' rights
generally and by general principles of equity relating to enforceability. Each
of such documents is in full force and effect, and none of their provisions have
been waived by any party thereto.
ARTICLE 6
REPRESENTATIONS AND
WARRANTIES OF THE PURCHASERS
Each of the Purchasers hereby represents and warrants as
follows:
6.1 Authorization; No Contravention. The execution, delivery
and performance by the Purchaser of this Agreement: (a) is within the
Purchaser's power and authority and has been duly authorized by all necessary
action; (b) does not contravene the terms of the Purchaser's organizational
documents or any amendment thereof; and (c) will not violate, conflict with or
result in any breach or contravention of any Contractual Obligation of the
Purchaser, or any order or decree directly relating to the Purchaser.
6.2 Binding Effect. This Agreement has been duly executed and
delivered by the Purchaser, and this Agreement constitutes the legal, valid and
binding obligation of the Purchaser enforceable against it in accordance with
its terms, except as enforceability may be limited by applicable bankruptcy,
insolvency, or similar laws affecting the enforcement of creditors' rights
generally or by equitable principles relating to enforceability.
6.3 No Legal Bar. The execution, delivery and performance of
this Agreement will not violate any Requirement of Law.
6.4 Purchase for Own Account. The Notes, the Warrants, the
Warrant Shares and the Series A Preferred Stock to be acquired by the Purchaser
pursuant to this Agreement are being or will be acquired for its own account and
with no intention of distributing or reselling such securities or any part
thereof in any transaction that would be in violation of the securities laws of
the United States of America, or any state, without prejudice, however, to the
rights of the Purchaser at all times to sell or otherwise dispose of all or any
part of its Notes, its Warrants, its Warrant Shares and its Series A Preferred
Stock under an effective registration
<PAGE>
21
statement under the Securities Act, or under an exemption from such registration
available under the Securities Act, and subject, nevertheless, to the
disposition of the Purchaser's property being at all times within its control.
If the Purchaser should in the future decide to dispose of any of its Notes, its
Warrants, its Warrant Shares and its Series A Preferred Stock, the Purchaser
understands and agrees that it may do so only in compliance with the Securities
Act and applicable state securities laws, as then in effect. The Purchaser
agrees to the imprinting of a legend on certificates representing all of its
Notes, its Warrants, its Warrant Shares and its Series A Preferred Stock to the
following effect: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS
OF ANY STATE AND MAY NOT BE SOLD OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES
LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS
OF SUCH ACT AND SUCH LAWS."
6.5 Broker's, Finder's or Similar Fees. There are no brokerage
commissions, finder's fees or similar fees or commissions payable in connection
with the transactions contemplated hereby based on any agreement, arrangement or
understanding with the Purchaser or any action taken by the Purchaser that will
or could give rise to a charge to the Company, and the Purchaser agrees to
satisfy any of its obligations, subject to its right to contest any such
charges.
6.6 Governmental Authorization; Third Party Consent. No
approval, consent, compliance, exemption, authorization, or other action by, or
notice to, or filing with, any Governmental Authority or any other Person in
respect of any Requirement of Law (including but not limited to the
Hart-Scott-Rodino Antitrust Improvement Act), and no lapse of a waiting period
under a Requirement of Law, is necessary or required in connection with the
execution, delivery or performance by the Purchaser or enforcement against the
Purchaser of this Agreement or the transactions contemplated hereby.
ARTICLE 7
INDEMNIFICATION
7.1 Indemnification.
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22
7.1.1 Indemnification by the Company. In addition to all
other sums due hereunder or provided for in this Agreement, the Company shall
indemnify and hold harmless the Purchasers and their Affiliates and their
respective officers, directors, agents, employees, subsidiaries, partners and
controlling persons (each, a "COMPANY INDEMNIFIED PARTY") to the fullest extent
permitted by law from and against any and all losses, claims, damages, expenses
(including reasonable fees, dis bursements and other charges of counsel) or
other liabilities (collectively, the "COMPANY LIABILITIES") resulting from or
arising out of any breach of any representation or warranty, covenant or
agreement of the Company in this Agreement, the Certificate of Incorporation or
the Notes, including without limitation, the failure to make payment when due of
amounts owing pursuant to the Notes on the due date thereof (whether at the
scheduled maturity, by acceleration or otherwise) or any legal, administrative
or other actions (including actions brought by the Purchasers, the Company or
any equity holders of the Company or derivative actions brought by any Person
claiming through or in the Company's name), proceedings or investigations
(whether formal or informal), or written threats thereof, based upon, relating
to or arising out of the Transaction Documents, the transactions contemplated
thereby, or any Company Indemnified Party's role therein or in the transactions
contemplated thereby; provided, however, that the Company shall not be liable
under this Sec tion 7.1.1 to a Company Indemnified Party: (a) for any amount
paid in settlement of claims without the Company's consent (which consent shall
not be unreasonably withheld), (b) to the extent that such Company Liabilities
resulted primarily from the willful misconduct or gross negligence of such
Company Indemnified Party or (c) to the extent that such Company Liabilities
resulted primarily from the breach by such Company Indemnified Party of any
representation, warranty, covenant or other agreement of such Company
Indemnified Party contained in this Agreement; provided, further, that if and to
the extent that such indemnification is unenforceable for any reason, the
Company shall make the maximum contribution to the payment and satisfaction of
such Company Liabilities which shall be permissible under applicable laws. In
connection with the obligation of the Company to indemnify for expenses as set
forth above, the Company also shall, upon presentation of appropriate invoices
containing reasonable detail, reimburse each Company Indemnified Party for all
such reasonable expenses (including reasonable fees, disbursements and other
charges of counsel) as they are incurred by such Company Indemnified Party;
provided, however, that if a Company Indemnified Party is reimbursed hereunder
for any expenses, such reimbursement of expenses shall be refunded to the extent
that the Company Liabilities in question resulted primarily from (i) the willful
misconduct or gross negligence of such Company Indemnified Party or (ii) the
breach by such Company Indemnified Party of any representation, warranty,
covenant or other agreement of such Company Indemnified Party contained in this
Agreement or any other Transaction Document.
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23
7.1.2 Indemnification by HPA and EMP. HPA and EMP shall,
severally and not jointly, indemnify and hold harmless the Company and its
officers, directors, agents, employees, subsidiaries, partners and controlling
persons (each, a "PURCHASER INDEMNIFIED PARTY" and, together with the Company
Indemnified Party, an "INDEMNIFIED PARTY") to the fullest extent permitted by
law from and against any and all losses, claims, damages, expenses (including
reasonable fees, disbursements and other charges of counsel) or other
liabilities (collectively, the "PURCHASER LIABILITIES" and, together with the
Company Liabilities, the "LIABILITIES") resulting from or arising out of any
breach of any representation or warranty of HPA or EMP set forth in Article 6 of
this Agreement, including without limitation, any legal, administrative or other
actions (including actions brought by the Company or any equity holders of the
Company or derivative actions brought by any Person claiming through or in the
Company's name), proceedings or investigations (whether formal or informal), or
written threats thereof, based upon, relating to or arising out of any breach of
such representations and warranties or the affect thereof on the Purchaser
Indemnified Parties, the Transaction Documents or the transactions contemplated
thereby; provided, however, that HPA and EMP shall not be liable under this
Section 7.1.2 to a Purchaser Indemnified Party: (a) for any amount paid in
settlement of claims without HPA's or EMP's (as applicable) consent (which
consent shall not be unreasonably withheld), (b) to the extent that such
Purchaser Liabilities resulted primarily from the willful misconduct or gross
negligence of such Purchaser Indemnified Party or (c) to the extent that such
Purchaser Liabilities resulted primarily from the breach by such Purchaser
Indemnified Party of any representation, warranty, covenant or other agreement
of such Purchaser Indemnified Party contained in this Agreement; provided,
further, that if and to the extent that such indemnification is unenforceable
for any reason, HPA or EMP (as applicable) shall make the maximum contribution
to the payment and satisfaction of such Purchaser Liabilities which shall be
permissible under applicable laws. In connection with the obligation of HPA and
EMP to indemnify for expenses as set forth above, HPA and EMP shall, upon
presentation of appropriate invoices containing reasonable detail, reimburse
each Purchaser Indemnified Party for all such reasonable expenses (including
reasonable fees, disbursements and other charges of counsel) as they are
incurred by such Purchaser Indemnified Party; provided, however, that if a
Purchaser Indemnified Party is reimbursed hereunder for any expenses, such
reimbursement of expenses shall be refunded to the extent that the Purchaser
Liabilities in question resulted primarily from (i) the willful misconduct or
gross negligence of such Purchaser Indemnified Party or (ii) the breach by such
Purchaser Indemnified Party of any representation, warranty, covenant or other
agreement of such Purchaser Indemnified Party contained in this Agreement or any
other Transaction Document. The Company shall be entitled to offset any and all
amounts to be paid to it by EMP pursuant to this Section 7.1.2 against any and
all amounts required to be paid by the
<PAGE>
24
Company to EMP under the outstanding Notes.
7.2 Notification. Each Indemnified Party under this Article 7
will, promptly after the receipt of notice of the commencement of any action,
investigation, claim or other proceeding against such Indemnified Party in
respect of which indemnity may be sought from the Company, HPA or EMP, as the
case may be (each, an "INDEMNIFYING PARTY") under this Article 7, notify the
Indemnifying Party in writing of the commencement thereof. The omission of any
Indemnified Party so to notify the Indemnifying Party of any such action shall
not relieve the Indemnifying Party from any liability which it may have to such
Indemnified Party (a) other than pursuant to this Article 7 or (b) under this
Article 7 unless, and only to the extent that, such omission results in the
Indemnifying Party's forfeiture of substantive rights or defenses or other
damage. In case any such action, claim or other proceeding shall be brought
against any Indemnified Party and it shall notify the Indemnifying Party of the
commencement thereof, the Indemnifying Party shall be entitled to assume the
defense thereof at their own expense, with counsel satisfactory to such
Indemnified Party in its reasonable judgment; provided, however, that any
Indemnified Party may, at its own expense, retain separate counsel to
participate in such defense. Notwith standing the foregoing, in any action,
claim or proceeding in which both the Indemnifying Party, on the one hand, and
an Indemnified Party, on the other hand, is, or is reasonably likely to become,
a party, such Indemnified Party shall have the right to employ separate counsel
at the Indemnifying Party's expense and to control its own defense of such
action, claim or proceeding if, in the reasonable opinion of counsel to such
Indemnified Party, a conflict or potential conflict that cannot be waived
without prejudice to the waiving party exists between the Indemnifying Party, on
the one hand, and such Indemnified Party, on the other hand, that would make
such separate representation advisable; provided, however, that in no event
shall the Indemnifying Party be required to pay fees and expenses under this
Article 7 for more than one firm of attorneys in any jurisdiction in any one
legal action or group of related legal actions. The Indemnifying Party agrees
that it will not, without the prior written consent of the Purchasers, settle,
compromise or consent to the entry of any judgment in any pending or threatened
claim, action or proceeding relating to the matters contemplated hereby (if any
Indemnified Party is a party thereto or has been actually threatened to be made
a party thereto) unless such settlement, compromise or consent includes an
unconditional release of the Purchasers and each other Indemnified Party from
all liability arising or that may arise out of such claim, action or proceeding.
The Indemnifying Party shall not be liable for any settlement of any claim,
action or proceeding effected against an Indemnified Party without its written
consent, which consent shall not be unreasonably withheld. The rights accorded
to Indemnified Parties hereunder shall be in addition to any rights that any
Indemnified Party may have at common law, by separate agreement or otherwise.
<PAGE>
25
ARTICLE 8
AFFIRMATIVE COVENANTS
Until the payment by the Company of all principal of and
interest on the Notes and all other amounts due at the time of payment of such
principal and interest to the Purchasers under this Agreement, the Company
hereby covenants and agrees with HPA and EMP as follows:
8.1 Financial Statements and Other Information. The Company
shall deliver to HPA and EMP, in form satisfactory to them:
(a) as soon as available, but not later than one hundred
and twenty (120) days after the end of each fiscal year of the Company, a copy
of the audited consolidated balance sheet of the Company and its Subsidiaries as
of the end of such year and the related consolidated statements of operations
and cash flows for such fiscal year, setting forth in each case in comparative
form the figures for the previous year, all in reasonable detail and accompanied
by a management summary and analysis of the operations of the Company and its
Subsidiaries for such fiscal year and by the opinion of Deloitte & Touche, LLP
(or any successor thereto) or another nationally recognized independent
certified public accounting firm which report shall state without qualification
that such consolidated financial statements present fairly the financial
condition as of such date and results of operations and cash flows for the
periods indicated in conformity with GAAP applied on a consistent basis;
provided, however, that the delivery of a copy of the Company's Annual Report on
Form 10-K shall satisfy the requirements of this Section 8.1(a);
(b) commencing with the fiscal period ending on June 30,
1997, as soon as available, but in any event not later than sixty (60) days
after the end of each of the first three fiscal quarters of each year, the
unaudited consolidated balance sheet of the Company and its Subsidiaries, and
the related consolidated statements of operations and cash flows for such
quarter and for the period commencing on the first day of the fiscal year and
ending on the last day of such quarter, all certified by an appropriate officer
of the Company as presenting fairly the financial condition as of such date and
results of operations and cash flows for the periods indicated in conformity
with GAAP applied on a consistent basis, subject to normal year-end audit
adjustments and the absence of footnotes required by GAAP; provided, however,
that the delivery of a copy of the Company's Quarterly Report on Form 10-Q shall
satisfy the requirements of this Section 8.1(b);
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26
(c) at any time when it is not subject to Section 13 or
15(d) of the Exchange Act, upon request, to the Purchasers and prospective
purchasers of the Series A Preferred Stock, information of the type that would
satisfy the requirement of subsection (d)(4)(i) of Rule 144A (or any similar
successor provision) under the Securities Act; and
(d) except as otherwise provided in Sections 8.1(a) and
(b), promptly after the same are filed, copies of all Commission Documents.
8.2 Notices. Within 5 days of obtaining knowledge of the
Company of the events described below, the Company shall give written notice to
HPA and EMP of the occurrence of any Event of Default or any event that, after
notice or lapse of time or both, would become an Event of Default.
Each notice pursuant to this Section 8.2 shall be accompanied
by an officer's certificate signed by the Chief Executive Officer, President or
Chief Financial Officer of the Company setting forth details of the occurrence
referred to therein and stating what action the Company proposes to take with
respect thereto.
8.3 Inspection. The Company will permit, and will cause each
of its Subsidiaries to permit, representatives of HPA and EMP to visit and
inspect any of its properties, to examine its corporate, financial and operating
records and make copies thereof or abstracts therefrom, and to discuss its
affairs, finances and accounts with its directors, officers and independent
public accountants, all at such reasonable times during normal business hours
and as often as may be reasonably requested, upon reasonable advance notice to
the Company.
8.4 Use of Proceeds. The Company shall use the proceeds of the
sale of Securities hereunder only for general corporate purposes.
8.5 Amendment to Certificate of Incorporation and Shareholders
Agreement. At the next meeting of its shareholders, the Company shall propose an
amendment to its Certificate of Incorporation to provide for a maximum number of
8 directors to its Board of Directors, as shall be determined by the Board of
Directors from time to time, and shall procure the parties to the Shareholders
Agreement to amend such agreement to effectuate such changes in the Certificate
of Incorporation.
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27
ARTICLE 9
NEGATIVE COVENANTS
Until the payment by the Company of all principal of and
interest on the Notes and all other amounts due at the time of payment of such
principal and interest to the Purchasers under this Agreement, including,
without limitation, all fees, expenses and amounts due at such time in respect
of indemnity obligations under Article 7, the Company hereby covenants and
agrees with the Purchasers as follows:
9.1 Consolidations and Mergers. The Company shall not merge,
consolidate with or into, or convey, transfer, lease or otherwise dispose of
(whether in one transaction or in a series of transactions) all or substantially
all of its assets (whenever acquired) or liquidate, and shall not allow any of
its Subsidiaries to merge or consolidate with or into any other Person, except
the Company may consolidate or merge with another Subsidiary of the Company.
9.2 No Inconsistent Agreements. None of the Company or any of
its Subsidiaries shall enter into any Contractual Obligation or enter into any
amendment or other modification to any currently existing Contractual Obligation
of the Company or any of its Subsidiaries which by its terms restricts or
prohibits the ability of the Company to pay the principal of or interest on the
Note. Notwithstanding the foregoing, the Company and its Subsidiaries may amend
the Senior Loan Agreement and the Parent Guarantee as in effect on the date
hereof, but shall not, without the consent of HPA, amend or modify (or permit
the amendment or modification of) any of the terms or provisions of the Senior
Loan Agreement to (a) increase the principal amount thereof, (b) shorten the
maturity (or weighted average life to maturity) thereof, (c) increase the
interest rate applicable thereto, (d) upon the occurrence and during the
continuance of an Event of Default, cause any covenants or undertakings (whether
affirmative or negative) of the Company or its Subsidiaries in respect thereof
to be more restrictive than such covenants or undertakings had been prior to
such amendments or modifications, (e) facilitate the exercise or enforcement of
any remedies of any obligee thereof in respect of any default or event of
default thereunder.
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ARTICLE 10
OPTIONAL PREPAYMENT; PRO RATA TREATMENT
Subject to Section 3 of the Notes, the Company shall not be
obligated to prepay outstanding principal (together with accrued interest) on
the Notes. The Company may prepay outstanding principal (together with accrued
interest) on the Notes only if the Notes are prepaid in accordance with the
"Optional Prepayment" provisions set forth in Section 4 of the Notes. All
payments of any kind made on the Notes will be made pro rata in relation to the
principal amount of the outstanding Notes.
ARTICLE 11
MISCELLANEOUS
11.1 Survival of Representations and Warranties. The
representations and warranties made herein shall survive the Closing Date and
shall cease, as to representations and warranties of the Company, 15 days after
the delivery to HPA and EMP of the Company's audited financial statements for
the year ending December 31, 1997 and, as to the representations and warranties
of HPA and EMP, on the first anniversary of the Closing Date.
11.2 Notices. All notices, demands and other communications
provided for or permitted hereunder shall be made in writing and shall be by
registered or certified mail, telecopier, courier service or personal delivery:
<PAGE>
29
(a) if to the Purchasers:
HPA ASSOCIATES, LLC
c/o Asset Management Associates of New York, Inc.
P.O. Box 2850
Southhampton, NY 11969
Telecopier No.: (516) 287-4473
Attention: Charles S. Holmes
And
EMP ASSOCIATES LLC
c/o Summit Capital Associates, Inc.
745 Fifth Avenue, Suite 900
New York, New York 10151
Telecopier No.: (212) 223-7363
Attention: J. Richard Messina
with a copy to:
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019-6064
Telecopier No.: (212) 757-3990
Attention: Edwin C. Laurenson
and with a copy to:
Rubin Baum Levin Constant & Friedman
30 Rockefeller Plaza
New York, New York 10112
Telecopier No.: (212) 698-7825
Attention: Richard M. Hoffman
(b) if to the Company:
EMPIRE OF CAROLINA, INC.
<PAGE>
30
5150 Linton Blvd.
Delray Beach, FL 33484
Telecopier No.: (561) 498-0722
Attention: Steve Geller, Chairman and Chief
Executive Officer
Lawrence Geller, General Counsel
with a copy to:
Sonnenschein Nath & Rosenthal
8000 Sears Tower
Chicago, IL 60606-6404
Telecopier No.: (312) 876-7934
Attention: Kenneth G. Kolmin
All such notices and communications shall be deemed to have
been duly given: when delivered by hand, if personally delivered; when delivered
by courier, if delivered by commercial overnight courier service; five business
days after mailing; and when receipt is acknowledged, if telecopied.
11.3 Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the successors and permitted assigns of the
parties hereto. Subject to applicable securities laws, the Purchasers may assign
any of their rights under any of the Transaction Documents to any Person, and
any holder of Notes, Warrants or Series A Preferred Stock may assign such
securities to any Person subject to any restrictions required by state or
federal securities laws. The Company may not assign any of its rights under this
Agreement without the prior written consent of the Purchasers. Except as
provided in Article 7, no Person other than the parties hereto and their
successors and permitted assigns is intended to be a beneficiary of any of the
Transaction Documents.
11.4 Amendment and Waiver.
(a) No failure or delay on the part of any of the parties
hereto in exercising any right, power or remedy hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise of any such right,
power or remedy preclude any other or further exercise thereof or the exercise
of any other right, power or remedy except as otherwise provided in Article 2.
The remedies provided for herein are cumulative and are not exclusive of any
remedies that may be available to the parties hereto at law, in equity or
otherwise.
<PAGE>
31
(b) Any amendment, supplement or modification of or to any
provision of this Agreement, any waiver of any provision of this Agreement, and
any consent to any departure by any party from the terms of any provision of
this Agreement, shall be effective (i) only if it is made or given in writing
and signed by all of the parties hereto, and (ii) only in the specific instance
and for the specific purpose for which made or given. Except where notice is
specifically required by this Agreement, no notice to or demand on the Company
or the Purchasers in any case shall entitle the Company or the Purchasers to any
other or further notice or demand in similar or other circumstances.
11.5 Counterparts. This Agreement may be executed in any
number of counterparts and by the parties hereto in separate counterparts, each
of which when so executed shall be deemed to be an original and all of which
taken together shall constitute one and the same agreement.
11.6 Headings. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
11.7 Determinations, Requests or Consents. Except as specified
in particular sections of this Agreement, all determinations, requests,
consents, waivers or amendments to be made by the Purchasers in their opinion or
judgment or with their approval or otherwise pursuant to the Transaction
Documents shall be made (i) with respect to the Notes, by the holders of a
majority in aggregate principal amount of Notes outstanding or to be issued
pursuant to this Agreement or otherwise, and (ii) with respect to the Warrants,
by the holders of 75% of the Warrants outstanding or to be issued pursuant to
this Agreement.
11.8 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD
TO THE PRINCIPLES OF CONFLICTS OF LAW OF SUCH STATE.
11.9 JURISDICTION. EACH PARTY TO THIS AGREEMENT HEREBY
IRREVOCABLY AGREES THAT ANY LEGAL ACTION OR PRO CEEDING ARISING OUT OF OR
RELATING TO THIS AGREEMENT, THE NOTES OR ANY AGREEMENTS OR TRANSACTIONS
CONTEMPLATED HEREBY OR THEREBY MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW
YORK OR OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK
AND HEREBY EXPRESSLY SUBMITS TO THE PERSONAL JURISDICTION AND VENUE OF SUCH
COURTS FOR THE PURPOSES THEREOF AND EXPRESSLY WAIVES ANY CLAIM OF
<PAGE>
32
IMPROPER VENUE AND ANY CLAIM THAT SUCH COURTS ARE AN INCONVENIENT FORUM. EACH
PARTY HEREBY IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OF ANY OF THE
AFOREMENTIONED COURTS IN ANY SUCH SUIT, ACTION OR PROCEEDING BY THE MAILING OF
COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO THE ADDRESS
SET FORTH IN SECTION 11.2, SUCH SERVICE TO BECOME EFFECTIVE 10 DAYS AFTER SUCH
MAILING.
11.10 Severability. If any one or more of the provisions
contained herein, or the application thereof in any circumstance, is held
invalid, illegal or unenforceable in any respect for any reason, the validity,
legality and enforceability of any such provision in every other respect and of
the remaining provisions hereof shall not be in any way impaired, unless the
provisions held invalid, illegal or unenforceable shall substantially impair the
benefits of the remaining provisions hereof.
11.11 Rules of Construction. Unless the context otherwise
requires, "or" is not exclusive, and references to sections or subsections refer
to sections or subsections of this Agreement.
11.12 Entire Agreement. This Agreement, together with the
exhibits and schedules hereto and the other Transaction Documents, is intended
by the parties as a final expression of their agreement and intended to be a
complete and exclusive statement of the agreement and understanding of the
parties hereto in respect of the subject matter contained herein and therein.
There are no restrictions, promises, warranties or undertakings, other than
those set forth or referred to herein or therein. This Agreement, together with
the exhibits and schedules hereto, and the other Transaction Documents supersede
all prior agreements and understandings between the parties with respect to such
subject matter.
11.13 Publicity. Except as may be required by applicable law,
none of the parties hereto shall issue a publicity release or announcement or
otherwise make any public disclosure concerning this Agreement or the
transactions con templated hereby, without prior approval by the other parties
hereto, which will not be unreasonably withheld or delayed. If any announcement
is required by law to be made by any party hereto, prior to making such
announcement such party will deliver a draft of such announcement to the other
parties and shall give the other parties an opportunity to comment thereon.
11.14 Further Assurances. Each of the parties shall execute
such
<PAGE>
33
documents and perform such further acts (including, without limitation,
obtaining any consents, exemptions, authorizations, or other actions by, or
giving any notices to, or making any filings with, any Governmental Authority or
any other Person) as may be reasonably required or desirable to carry out or to
perform the provisions of this Agreement.
11.15 Expenses. The parties shall each bear their own expenses
in connection with the negotiation and implementation of this transaction,
provided that (i) the Company shall reimburse the Note Purchasers for reasonable
fees and expenses of council, first to HPA, then to EMP, of up to a maximum of
$150,000 and (ii) the Company shall pay fees and commissions of placement agents
in the sale of up to $8,500,000 of Preferred Stock in the Permanent Financing
(including through the conversion of Notes) and the Additional Financing
(including through the conversion of Notes), in each case to the extent that
Series A Preferred Stock issued therein is not purchased by HPA or any affiliate
thereof.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed and delivered by their respective officers hereunto
duly authorized as of the date first above written.
EMPIRE OF CAROLINA, INC.
By /s/ Steven Geller
Name: Steven Geller
Title: Chairman and Chief
Executive Officer
HPA ASSOCIATES, LLC
By /s/ Charles S. Holmes
Name: Charles S. Holmes
Title: Managing Director
EMP ASSOCIATES LLC
By: EMP Management, LLC
as Managing Member
By /s/ J. Richard Messina
Name: J. Richard Messina
Title: Manager
34
<PAGE>
<PAGE>
EXHIBIT 10.41
[FORM OF PROMISSORY NOTE]
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY
NOT BE SOLD OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE
STATE SECURITIES LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION
FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH LAWS
EMPIRE OF CAROLINA, INC.
PROMISSORY NOTE
DUE FEBRUARY 6, 1998
$____________ New York, New York
May 6, 1997
FOR VALUE RECEIVED, the undersigned, EMPIRE OF CAROLINA, INC.,
a Delaware corporation (the "Company"), promises to pay to the order of
________________________, a ______________________, or its registered assigns
(the "Holder"), the principal sum of __________________________
($_______________) on February 6, 1998, with interest thereon as provided
herein.
1. Purchase Agreement. This Promissory Note (this "Note") is
issued pursuant to the Securities Purchase Agreement, dated as of May 5, 1997,
among the Company and certain purchasers named therein (the "Purchase
Agreement"), and the Holder is entitled to the benefits of (and subject to the
obligations expressly contained in) this Note and the Purchase Agreement and may
enforce the agreements of the Company contained herein and therein and exercise
the remedies provided for hereby and thereby or otherwise available in respect
hereto and thereto. Capitalized terms used herein without definition are used
herein with the
<PAGE>
meanings ascribed to such terms in the Purchase Agreement.
2. Interest. The Company promises to pay simple interest on
the principal amount of this Note at the rate of 12% per annum. The Company
shall pay accrued interest upon maturity of this Note, upon conversion in
accordance with paragraph 7 hereof (on the amount converted) or upon earlier
repayment of principal. Interest on this Note shall accrue from the date of
issuance until repayment of the principal and payment of all accrued interest in
full. Interest shall be computed on the basis of a 360-day year of twelve 30-day
months. Notwithstanding the foregoing provisions of this Section 2, but subject
to applicable law, any overdue principal of and overdue interest on this Note
shall bear interest, payable on demand in immediately available funds, for each
day from the date payment thereof was due to the date of actual payment, at a
rate equal to the rate of interest otherwise in effect pursuant to this Section
2, and, upon and during the occurrence of an Event of Default, this Note shall
bear interest, from the date of the occurrence of such Event of Default until
such Event of Default is cured or waived, payable on demand in immediately
available funds, at a rate equal to the rate of interest otherwise in effect
pursuant to this Section 2. Subject to applicable law, any interest that shall
accrue on overdue interest on this Note as provided in the preceding sentence
shall itself be deemed to be overdue interest on this Note to which the
preceding sentence shall apply.
3. Repayment. All payments of principal, interest and other
amounts due under this Note shall be paid at the earlier to occur of (i)
February 6, 1998, or (ii) the later of (x) the closing on the Permanent
Financing or (y) the closing on the Additional Financing if such Additional
Financing is requested by the Company pursuant to the terms of the Purchase
Agreement by giving notice prior to the closing on the Permanent Financing. All
payments and prepayments of principal of and interest on this Note shall be made
in lawful money of the United States of America.
4. Optional Prepayment. The Company, at its option, may prepay
all or any portion of this Note, at any time on or after the Permanent Financing
Closing Date or, if the Company has made a request for the Additional Financing
prior to the Permanent Financing Closing Date, on or after the Additional
Financing Closing Date, by paying an amount equal to the outstanding principal
amount of this Note, or the portion of this Note called for prepayment, together
with interest accrued and unpaid thereon to the date fixed for prepayment and
any other amounts due under this Note and the Purchase Agreement, without
penalty or premium.
5. Defaults. As the Company serves as a Guarantor of the
obligations of Empire Industries, Inc., a North Carolina corporation (the
"Borrower") under that certain Loan and Security Agreement, dated as of May 29,
1996, as amended, by and among BT Commercial Corporation, as a lender, and as
administrative agent for all "Lenders" (as defined therein), LaSalle National
Bank, a national banking association, as a lender and as collateral agent for
all Lenders, and the Borrower (the "Senior Loan Agreement"), and as the Company
is party to that certain Debenture Purchase Agreement, dated as of December 22,
1994, between the
<PAGE>
Company as borrower, the purchasers listed therein and WPG as agent (the
"Debenture Purchase Agreement"), this Note hereby incorporates by reference
Paragraph 13 of the Senior Loan Agreement and Article 6.1 of the Debenture
Purchase Agreement with respect to an event of default. Any event of default
under the Senior Loan Agreement or the Debenture Purchase Agreement that results
in an actual acceleration or an actual declaration of acceleration shall
constitute an Event of Default under this Note. An Event of Default also shall
occur hereunder upon (i) a call for any payment of guarantee of the Company
under the Senior Loan Agreement; (ii) proof that any representation or warranty
by the Company (or any of its officers) under the Purchase Agreement shall have
been incorrect in any material respect when made, provided that such has a
material adverse impact on the financial condition or the results of operations
of the Company and its Subsidiaries taken as a whole; or (iii) the entry of any
final judgment or final order against the Company in an amount exceeding $1.5
million which remains unsatisfied or undischarged and in effect for 30 days
after such entry without a stay of enforcement or execution. Upon any Event of
Default provided herein, the Holder shall be entitled to declare the outstanding
principal amount and accrued interest under this Note immediately due and
payable. However, in an Event of Default under Article 6.1.5 of the Debenture
Purchase Agreement or Paragraph 13(c) of the Senior Loan Agreement pertaining to
bankruptcy proceedings, this Note shall immediately and automatically become due
and payable, without notice of any kind.
6. Pro Rata Treatment. Payments of principal, interest and
other amounts, if any, under the Notes shall be made pro rata to each Holder
based on the principal amount outstanding of such Holder's Note as compared to
the aggregate principal amount of all outstanding Notes.
7. Convertibility. This Note may be converted, at the election
of the Holder, in whole or in part, on a dollar-for-dollar basis into shares of
Series A Preferred Stock (based upon the face amount thereof) (i) issued
pursuant to the Permanent Financing in the event the Company does not give
notice that it requires the Additional Financing within 30 days from the Closing
Date, or (ii) issued pursuant to the Additional Financing in the event the
Company gives notice that it requires Additional Financing no later than 30 days
from the Closing Date.
8. Covenants Bind Successors and Assigns. All the covenants,
stipulations, promises and agreements in this Note contained by or on behalf of
the Company shall bind its successors and assigns, whether so expressed or not.
9. Governing Law. This Note shall be governed by and construed
in accordance with the laws of the State of New York without regard to the
principles
<PAGE>
of conflicts of law of such State.
10. Variation in Pronouns. All pronouns and any variations
thereof refer to the masculine, feminine or neuter, singular or plural, as the
context may require.
11. Headings. The headings in this Note are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
EMPIRE OF CAROLINA, INC.
By _____________________________
Name: Steven Geller
Title: Chairman and Chief
Executive Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE UNAUDITED CONSOLIDATED BALANCE SHEET AND THE UNAUDITED
STATEMENT OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 828
<SECURITIES> 0
<RECEIVABLES> 25,510
<ALLOWANCES> 6,349
<INVENTORY> 21,866
<CURRENT-ASSETS> 52,306
<PP&E> 57,396
<DEPRECIATION> 34,319
<TOTAL-ASSETS> 95,335
<CURRENT-LIABILITIES> 84,835
<BONDS> 0
0
0
<COMMON> 740
<OTHER-SE> (2,231)
<TOTAL-LIABILITY-AND-EQUITY> 95,335
<SALES> 25,686
<TOTAL-REVENUES> 25,686
<CGS> 21,878
<TOTAL-COSTS> 21,878
<OTHER-EXPENSES> 6,493
<LOSS-PROVISION> 175
<INTEREST-EXPENSE> 2,012
<INCOME-PRETAX> (4,691)
<INCOME-TAX> 1,440
<INCOME-CONTINUING> (3,251)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,251)
<EPS-PRIMARY> (0.44)
<EPS-DILUTED> (0.44)
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