EXHIBIT 2
ITEM 5. OTHER EVENTS.
On June 17, 1997, pursuant to a Securities Purchase Agreement
dated as of May 5, 1997, as amended by Amendment No. 1 to the Securities
Purchase Agreement, dated as of June 5, 1997 (the "Securities Purchase
Agreement"), among Empire of Carolina, Inc., a Delaware corporation (the
"Company"), HPA Associates, LLC ("HPA") and EMP Associates, LLC ("EMP"),
the Company issued to HPA, EMP and other accredited investors (as defined
in Rule 501 under the Securities Act of 1933, as amended) ("Accredited
Investors") 1,100,000 shares of the Company's Series A preferred stock,
$.01 par value per share, $10 face value per share (the "Series A
Preferred Stock") and 5,000,000 warrants to purchase shares of the
Company's common stock, $.10 par value per share (the "Common Stock") (the
"Principal Investment"). On June 18, 1997, the Company issued to HPA and
other Accredited Investors an additional 500,000 shares of the Series A
Preferred Stock and an additional 2,500,000 warrants (the "Additional
Investment"). The investors in the Principal Investment and Additional
Investment are collectively referred to herein as the "Purchasers". The
total shares of Series A Preferred Stock issued to Purchasers in
connection with the foregoing was 1,600,000 and the total number of
warrants issued was 7,500,000. The total gross proceeds from the sale of
such securities was $16,000,000 (the "Purchase Price"). $5,000,000 of the
Purchase Price was non-cash consideration represented by the conversion of
$5 million of 12% bridge notes funded by HPA and EMP in May 1997 in
connection with the execution of the Securities Purchase Agreement.
The Series A Preferred Stock is convertible into Common Stock at
an initial conversion price of $1.25 per share (subject to adjustment in
certain circumstances) and the exercise price per share of the warrants is
$1.375 per share (subject to adjustment in certain circumstances). The
Series A Preferred Stock has the right, as a class of stock of the
Company, to designate two directors and is entitled to vote on all matters
presented to stockholders on an as if converted basis. Purchasers also
received certain registration rights. The Certificate of Designation
relating to the Series A Preferred Stock, the Warrant Amendment to Warrant
Certificate, the related Warrant Agreement, and the Letter of the Company
regarding the registration rights and provisions affecting the Series A
Preferred Stock are being filed herewith as Exhibits 3.5, 4.7, 4.8, and
10.43, respectively, and are incorporated herein by reference.
Pursuant to the Securities Purchase Agreement, all closing
conditions set forth in the Securities Purchase Agreement were met or
waived prior to the Principal Investment, including the following:
o The Company's 9% convertible debentures issued to
affiliates of Xxxxx, Xxxx & Xxxxx in the original
principal amount of $15 million were exchanged by the
holders thereof for newly-issued shares of Series C
Preferred Stock of the Company with an aggregate Stated
Value (as defined) of $15 million. Such holders also
released, among other things, their claims to accrued
and unpaid interest, fees and expenses. Each share of
Series C Preferred Stock is
convertible at any time, at the option of the holder
thereof, into fully paid and nonassessable shares of
Common Stock at a rate of one share of Common Stock for
each $2.00 of Stated Value of Series C Preferred Stock
(subject to adjustment in certain circumstances). Except
as otherwise expressly provided in the Charter or the
By-laws of the Company, the Certificate of Designation
relating to the Series C Preferred Stock, or as may
otherwise be required by law, the Series C Stockholders,
by virtue of their ownership thereof, have no voting
rights. The Certificate of Designation relating to the
Series C Preferred Stock, the WPG Release Agreement and
the WPG Registration Rights Agreement are being filed
herewith as Exhibits 3.6, 10.45 and 10.46, respectively,
and are incorporated herein by reference.
o The successor to the seller under the Company's
agreement to purchase the assets of Xxxxx X xxxxxx or
released the claim to certain earn out, price protection
and registration rights in exchange for: (i) $100,000 in
cash; (ii) 250,000 shares of Common Stock of the
Company; (iii) 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 date of the Preferred
Stock Investment (which note includes certain
affirmative and negative covenants which could in
certain circumstances accelerate payments with respect
to such note); and (iv) certain other benefits,
including registration rights. The Buddy L Settlement
Agreement, the Buddy L Promissory Note and the Buddy L
Registration Rights Agreement are being filed herewith
as Exhibits 10.42, 4.10 and 10.44, respectively, and are
incorporated herein by reference.
o The bank lenders under the Company's Credit Agreement
were to have agreed to certain amendments to the Credit
Agreement as a closing condition. This condition was
waived by HPA. The Company's senior lenders agreed,
however, to extend the May 31, 1997 deadline for receipt
of $6 million of additional equity financing to June 30,
1997 (which deadline was satisfied upon the closing of
the Principal Investment), and have orally advised the
Company that they will agree to the adoption of a
proposed amendment to the Credit Agreement to convert
the current portion of the term loan to a one year and a
day obligation and have agreed to engage in further
discussions with the Company following the completion of
the Principal Investment.
On June 12, 1997, the Company and American Stock Transfer & Trust
Company, a New York corporation, as Rights Agent (the "Rights Agent"),
adopted the Second Amendment (the "Second Amendment") to the Rights
Agreement dated as of September 11, 1996 (the "Rights Agreement") between
the Company and the Rights Agent, as amended by the First Amendment
thereto dated as of May 5, 1997. The Second Amendment, among other things,
amends the definition of "Acquiring Person" in Section 1(a) of the Rights
Agreement to base the 15% threshold specified therein on the aggregate
number of "Fully- Diluted Common Shares" (as defined in the Second
Amendment) of the Company. The
Second Amendment is attached as Exhibit 4.9 hereto, and is incorporated
herein by reference.
On June 19, 1997, the Company issued the press release attached
hereto as Exhibit 99.1, which press release is hereby incorporated by
reference herein, announcing the closing of the Principal Investment and
the Additional Investment.
As of May 23, 1997, the Company had 7,403,564 shares of Common
Stock outstanding. Immediately following the closing of the Additional
Investment, the Company had 7,653,564 shares of Common Stock outstanding
and the Purchasers in the aggregate represent approximately 63% of the
total voting power on matters presented to the Company's stockholders, in
each case without giving effect to the exercise of any warrants, stock
options or other derivative securities issued by the Company. If all of
the Series A Preferred Stock and Series C Preferred Stock issued pursuant
to the Securities Purchase Agreement were converted, all outstanding
warrants and stock options were exercised and all authorized shares of
Common Stock under the Company's employee benefit plans were issued, the
Purchasers in the aggregate would represent approximately 53% of the total
voting power on matters presented to the Company's stockholders. However,
to the knowledge of the Company, immediately following the consummation of
the Additonal Investment, no Purchaser beneficially owns securities
representing 10% or more of the voting power on matters to be presented to
the Company's stockholders or would have such voting power on a
fully-diluted basis.
On June 24, 1997, the Company issued the press release attached
hereto as Exhibit 99.2, which press release is hereby incorporated by
reference herein, announcing the election of Xxxxxxx X. Xxxxxx to replace
Xxxxx Xxxxxx as Chairman of the Board of Directors of the Company.
In addition to the securities offered in connection with the
Principal Investment and Additional Investment, the Company intends to
offer for sale 500,000 additional shares of Series A Preferred Stock and
500,000 warrants to purchase shares of Common Stock) at an initial
exercise price of $1.375 per share. In connection with the sale of such
additional securities, an additional 2,000,000 warrants to purchase shares
of Common Stock will be allocated as follows: 750,000 warrants to the
placement agents who place the additional securities in addition to a 6%
cash commission payable upon closing of the sale of such additional
securities and 1,250,000 warrants to HPA. The additional securities will
be offered pending and conditioned upon receiving stockholder approval.
The offering of such additional securities will have a significant
dilutive effect upon stockholders of the Company, including the
Purchasers. There can be no assurance that the sale of such additional
securities will be approved by the stockholders or consummated. Reference
is made to Amendment No. 1 to the Securities Purchase Agreement filed as
Exhibit 10.41 hereto for additional information regarding the sale of such
additional securities, which exhibit is incorporated herein by reference.
The foregoing descriptions of documents are summaries that do not
purport to be complete and are qualified in their entirety by reference to
the actual terms and provisions of such documents filed as exhibits
hereto.
