EXHIBIT 99.1
March 2, 1999
Xx. Xxxxxx Xxxxxxx
Chairman of the Board
Xxxxxx Snowboards, Inc.
0000 Xxxxxxx Xxxx, XX
Xxxxx, XX 00000
Re: Empire of Carolina, Inc./Xxxxxx Snowboards, Inc.
Letter of Intent to Merge and Interim Subordinated Loan
Dear Vic:
This letter is intended to set forth our understanding for the proposed
merger ("the Merger") of Xxxxxx Snowboards, Inc. and its subsidiaries ("Xxxxxx")
with and into Empire of Carolina, Inc. or its newly formed subsidiary
established for the purpose of the Merger ("Empire"). During the interim period
prior to the merger it is intended that Empire will lend through a loan facility
("the Subordinated Loan") up to Two Million Dollars ($2,000,000) to Xxxxxx for
its working capital requirements and that the Subordinated Loan and operations
of Xxxxxx will be administered through the joint control and supervision of
Xxxxxx and Empire. All of these terms and provisions of the Merger and
Subordinated Loan are more thoroughly provided for hereinafter:
I. The Merger
----------
A. Contemplated Transaction
------------------------
It is our understanding that Xxxxxx and Empire will enter into a
Merger Agreement within thirty (30) days from the date of the
execution of this letter of intent. Pursuant to the Merger Agreement
Xxxxxx will be merged with and into Empire on a tax free basis, with
Empire being the surviving corporation in the
Xx. Xxxxxx Xxxxxxx
March 2, 1999
Page 2
merger and each outstanding share of Xxxxxx common stock will be
exchanged for 0.375 shares of Empire common stock (the "Exchange
Ratio" or "Offer") provided however, that unless the reported closing
price per share of Empire common stock for at least 60 trading days
during the eighteen (18) month period subsequent to the effective date
of the merger (the "Closing Date") equals $2.00 per share or more, the
Exchange Ratio shall be adjusted based on the average reported closing
price for the eighteen (18) month period and additional shares of
common stock issued to make up for the difference between such average
closing price and $2.00 per share, or an effective Exchange Ratio post
the Closing Date of $0.75 (the "Lookback Shares"). However, not more
than one Lookback Share shall be issued for each share of Empire
common stock exchanged at the Closing.
For example, assuming there exists 6,176,556 shares of Xxxxxx, common
stock at the closing date, these shares will be exchanged for
2,316,209 shares of Empire common stock. Post the closing date, for
example, should the weighted average of Empire common stock for the
eighteen (18) month post closing adjustment period be $1.50, then
772,070 shares of Empire common stock would be distributed to the
right holders of the Xxxxxx merger transaction.
X. Xxxxxx Shareholder Rights
-------------------------
Each Xxxxxx shareholder would receive common stock registered under
the Securities Act of 1933 (the "Act") as a result of the merger
transaction along with a right to receive any prorata lookback shares
as calculated subsequent to the
Xx. Xxxxxx Xxxxxxx
March 2, 1999
Page 3
eighteen (18) month post the closing date of the merger transaction.
The Lookback Shares are also to be registered under the Act.
II. Interim Financing
-----------------
A. Subordinated Loan
-----------------
Empire is prepared to provide a 120-day demand note loan to Xxxxxx at
a twelve percent (12%) annual interest rate. It is contemplated that
the Subordinated Loan will be closed by March 10, 1999 and
administered as a junior participation in the existing Foothill
Capital Corporation ("Foothill") loan facility. The Subordinated Loan
will be secured by all of the assets of Xxxxxx subject only to the
first security interest of Foothill. If the Merger is not completed
within the 120 days, the Subordinated Loan's maturity will be extended
by 240 days.
B. Subordinated Loan Conversion Rights and Warrants
------------------------------------------------
The Subordinated Loan will be convertible at any time at Empire's sole
discretion into up to 1,333,000 shares of Xxxxxx common stock at a
conversion price of $.75 per share. In addition, Empire will be
granted five-year warrants issued on the date of the closing of the
Subordinated Loan facility to purchase 1,500,000 shares of common
stock of Xxxxxx at $0.75 per share.
C. Consummation of the Subordinated Loan Financing.
-----------------------------------------------
Consummation of the Subordinated Loan Financing and Merger are
conditioned (i) on Xxxxxx being satisfied with its due diligence
examination and inspection to be conducted by it of Empire by March
10, 1999, (ii) Empire and Xxxxxx
Xx. Xxxxxx Xxxxxxx
March 2, 1999
Page 4
agreeing to a Plan (as defined herein) by March 10, 1999 and (iii)
Foothill Capital Corporation's approval. If none of the foregoing
conditions is met, this letter of intent shall terminate by March 10,
1999, or, if earlier, the date one of such conditions is not met or
the parties determine the condition will not be met.
III. Corporate Governance
--------------------
A. Board of Directors
------------------
Xxxxxx shall immediately upon the execution of the Subordinated Loan
accept the resignation of two of its present directors and elect two
directors as designated by Empire as replacement directors to serve
until the Merger transaction is completed. The total number of
Directors shall not exceed seven (7). No major decisions of the
Xxxxxx Board of Directors concerning plans for recapitalization,
acquisition, merger, capital expenditures in excess of $10,000 per
month, employee salary increases or bonuses shall be approved without
the concurrence of at least one (1) Empire director designee.
B. Subordinated Loan Administration
--------------------------------
The Board of Directors of Xxxxxx shall appoint an executive committee
comprising two of the present members of the Board of Directors of
Xxxxxx and the two Empire director designees. The executive committee
shall administer the plan of operation and cash management for Xxxxxx
(the "Plan") until the closing of the Merger. The Plan, through the
Interim Financing or the Foothill credit facility, will include
provisions to allow expenses to cover the accounting and
Xx. Xxxxxx Xxxxxxx
March 2, 1999
Page 5
legal costs of Xxxxxx to prepare the merger documents and related
proxy materials and solicit its shareholders and provisions to address
dealing with Xxxxxx'x vendors, both as to disbursement or
nondisbursement of funds and how Xxxxxx and Empire will jointly deal
with such venders. No monies shall be advanced under the Subordinated
Loan facility without the majority concurrence of this Executive
Committee. Such Executive Committee shall weekly review and approve or
disapprove management requests for draw downs for the following week
under the Plan. The Plan shall also encompass any required downsizing
of Xxxxxx, restructuring of the assets and liabilities of Xxxxxx and a
daily operating plan for the interim operation of Xxxxxx prior to the
Merger.
C. Interim Operations
------------------
During the period from the execution of this letter until the earlier
of (i) the Merger or (ii) the termination of this letter or the
Definitive Agreement, each of Xxxxxx and its subsidiaries (a) will
conduct their respective businesses only in the ordinary course,
consistent with prior practices, and in a manner that will expedite
the consummation of the transactions contemplated hereby and (b) will
not materially change any of their respective accounting methods or
policies, without in each case the prior written consent of Empire.
Xxxxxx will advise Empire promptly of any actual or threatened claim,
suit, action or other court or regulatory proceeding regarding the
transactions contemplated hereby.
Xx. Xxxxxx Xxxxxxx
March 2, 1999
Page 6
IV. Definitive Agreement
--------------------
Empire and Xxxxxx are each prepared to commence negotiating in good faith a
Definitive Merger Agreement, and to enter into an Agreement, provided that
(i) Empire is satisfied with the result of the due diligence examination
and inspection to be conducted by it; (ii) the conditions regarding the
Interim Financing are met and such financing is closed; and (iii) the Board
of Directors of each of Empire and Xxxxxx approves the Definitive
Agreement. The Definitive Agreement will contain representations and
warranties, covenants, indemnities, conditions and other provisions which
are normal and typical to merger transactions of the type contemplated
hereby and which shall be satisfactory to each of the parties and its
respective board of directors. Conditions to the obligations of the
parties to consummate the Merger shall include among others, (a) receipt of
all necessary stockholders and other approvals and consents on terms and
conditions satisfactory to the parties, (b) there will have been no
material adverse effect on the financial condition, business, results of
operations, prospects and/or assets of Xxxxxx or any of its subsidiaries,
nor would such a material adverse effect be reasonably likely, and (c) the
agreement of the directors of Xxxxxx to each vote their common stock owned
by them for the Merger. It is the intention of the parties hereto that the
Merger be consummated before June 15, 1999.
V. Exclusivity
-----------
During the period from the date hereof to the earlier of (a) the
consummation of the Merger or (b) the termination of this letter, neither
Xxxxxx nor any of its affiliates will,
Xx. Xxxxxx Xxxxxxx
March 2, 1999
Page 7
directly or indirectly, through any directors, officers, employees, agents,
representatives or otherwise, solicit, initiate, facilitate or encourage
(including by way of furnishing or disclosing non-public information) any
inquiries or the making of any proposal with respect to any merger,
consolidation or other business combination involving Xxxxxx or its
subsidiaries or the acquisition of all or any significant assets or capital
stock of Xxxxxx and its subsidiaries taken as a whole (an "Acquisition
Transaction") or negotiate, explore or otherwise engage in discussions with
any person (other than Empire and its representatives) with respect to any
Acquisition Transaction or enter into any agreement, arrangement or
understanding requiring it to abandon, terminate or fail to consummate the
Merger or any other transaction contemplated by this letter, provided that
Xxxxxx may, in response to an unsolicited written proposal engage in
discussions with such third party, furnish information to and negotiate,
explore or otherwise engage in discussions with such third party, and enter
into any such agreement, arrangement or understanding, in each case only if
the Board of Directors of Xxxxxx determines in good faith, based upon the
written opinion of outside counsel to Xxxxxx, that failing to take such
action, would result in a breach of the fiduciary duties of the board of
directors in connection with seeking an Acquisition Transaction that is
more favorable to the stockholders of Xxxxxx than the Merger contemplated
by this letter. Xxxxxx shall immediately advise Empire in writing of the
receipt of any inquiries or proposals related to an Acquisition
Transaction.
Xx. Xxxxxx Xxxxxxx
March 2, 1999
Page 8
Empire acknowledges that the Board of Directors of Xxxxxx has a fiduciary
obligation to its shareholders to consider and possibly accept an
unsolicited offer, if any, received by Xxxxxx from a third party for an
Acquisition Transaction. In consideration of Empire's willingness to incur
the expenses and devote the time and resources necessary to undertake its
due diligence investigation and to execute a Definitive Agreement,
notwithstanding such possibility, in the event that Xxxxxx shall have taken
any action, directly or indirectly, to further an Acquisition Transaction,
regardless of whether any such Acquisition Transaction is more favorable
than the proposed Merger provided for herein the Acquisition Transactions
will provide that (a) Xxxxxx will promptly pay to Empire cash in the amount
of its out-of-pocket expenses (including without limitation fees and
expenses of outside professionals) up to a maximum of $150,000, the
immediate repayment of the Subordinated Loan facility with any interest due
and a termination fee of $500,000 which may be paid in Xxxxxx Common Stock
at the then current prices.
VI. Publicity
---------
Neither Xxxxxx nor Empire will issue or otherwise make any announcements or
other disclosures regarding the proposed transaction without first
consulting with each other; provided, no announcement will be made, except
as otherwise required to meet any legal disclosure requirements, until
Foothill Capital Corporation's verbal approval of the proposed arrangements
has been received and the key elements of the Plan have been agreed to.
Xx. Xxxxxx Xxxxxxx
March 2, 1999
Page 9
VII. Binding Offer
-------------
Empire and Xxxxxx agree that this letter merely constitutes a statement of
their present mutual intentions with respect to the proposed Merger, does
not contain all matters upon which agreement must be reached in order for
the consummation of the Merger to take place and is not intended to create
a legally binding and enforceable obligation to consummate the Merger or
the Subordinated Loan. A binding obligation will exist only upon the
execution of a Definitive Agreement and the Subordinated Loan facility
subject to the terms and conditions expressed therein. The foregoing,
notwithstanding, paragraph V hereof is intended to constitute a binding
agreement between the parties, enforceable in accordance with and subject
to the terms and conditions thereof. No person is intended to be third
party beneficiary of this letter and no person other than the parties is
entitled to rely on this letter for any purpose.
VIII. Expenses
--------
Subject to the provisions of paragraph V above, Empire and Xxxxxx will each
be responsible for all expenses, including any investment banking fees,
incurred by it in connection with the transactions contemplated hereby.
Xx. Xxxxxx Xxxxxxx
March 2, 1999
Page 10
If you are in agreement with the provisions of this letter, kindly confirm your
agreement by signing the enclosed counterpart of this letter and returning it to
me on or prior to March 3, 1999, after which the proposal expressed herein will
no longer be effective.
Very truly yours,
EMPIRE OF CAROLINA, INC.
By: /s/ Xxxxxxx Xxxxx
Xxxxxxx Xxxxx
President and Chief Executive Officer
Accepted and Agreed to:
XXXXXX SNOWBOARDS, INC.
By Board of Directors
by: /s/ Xxxxxx Xxxxxxx
Xxxxxx Xxxxxxx
Chairman of the Board
