EXHIBIT 3
EXECUTION VERSION
WARRANT ALLOCATION AGREEMENT
Agreement dated as of June 5, 1997 by and between HPA Associates,
LLC ("HPA"), EMP Associates LLC ("EMP"), Pellinore Securities Corp.
("Pellinore") and Axiom Capital Management Inc. ("Axiom") (Pellinore and Axiom
hereinafter being collectively referred to as the "Pellinore Placement Agents"),
in connection with the placement of $6,000,000 of Series A Preferred Stock
("Series A Preferred Stock") to be issued by Empire of Carolina, Inc.
("Empire").
HPA and EMP are parties to a Securities Purchase Agreement with
Empire dated as of May 5, 1997 (as it may be amended from time to time, the
"Securities Purchase Agreement"). Defined terms used in this Agreement that are
not otherwise defined have the meanings given to them in the Securities Purchase
Agreement. Pursuant to the Securities Purchase Agreement and Empire's exercise
of the option to obtain the Additional Financing specified thereunder, and
subject to the terms and conditions thereof, HPA and EMP have agreed to
purchase, or identify purchasers for, $11,000,000 of Series A Preferred Stock
(including Series A Preferred Stock to be acquired upon conversion of the Notes
issued in the Bridge Financing, as defined below) at the closing of the
Permanent Financing.
In conjunction with the sale of the Series A Preferred Stock and the
provision of earlier financing, effective May 6, 1997 (the "Bridge Financing"),
pursuant to which HPA and EMP purchased the Notes of and from Empire, HPA and
EMP received 5,000,000 Warrants to purchase common stock of Empire at a price of
$1.375 per share (the "Initial Warrants").
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HPA, EMP and the Pellinore Placement Agents desire to allocate the
Initial Warrants, in the manner herein provided, upon the occurrence of the
Permanent Financing.
Now, therefore, in consideration of the premises, the parties hereto
hereby agree as follows:
1. ALLOCATION OF INITIAL WARRANTS TO EMP.
1.1 Provided that, pursuant to the Securities Purchase
Agreement, HPA's and EMP's right to retain the Initial Warrants is not forfeited
as a result of a failure of the Permanent Financing to occur under the
circumstances specified in Section 2.2.1.3 of the Securities Purchase Agreement,
upon the closing of the Permanent Financing EMP shall be entitled to retain
841,734 of the Initial Warrants.
1.2 The Pellinore Placement Agents shall undertake, in
accordance with a placement agency agreement to be entered into between them and
Empire (as further described in Section 3), to use their best efforts to obtain
purchasers for $6,000,000 stated amount of Series A Preferred Stock (the
"Pellinore Placement"). A total of 600,000 Initial Warrants ("Incentive
Warrants") shall be sold to purchasers pursuant to the Pellinore Placement,
allocated at the ratio of 100 Warrants for each $1,000 of stated amount of
Series A Preferred Stock purchased. If HPA or any Pellinore Placement Agent (or
any affiliated party of any of them) purchases Series A Preferred Stock in the
Pellinore Placement for its own account, such purchaser shall be entitled to
receive the same allocation of Incentive Warrants as any other purchaser of
Series A Preferred Stock in the Pellinore Placement.
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1.3 In addition, the Pellinore Placement Agents shall be
entitled to be reallocated Initial Warrants, out of those held by HPA, in
connection with the Pellinore Placement at the rate of 56,377 Initial Warrants
("Further Warrants") for each $1,000,000 stated amount of Series A Preferred
Stock placed by them, PROVIDED that Series A Preferred Stock shall not be deemed
to have been placed by the Pellinore Placement Agents to the extent that HPA
Referred Parties (as defined in Section 1.4) purchase, together with purchases,
if any, by HPA, Xxxxxxx X. Xxxxxx or Xxxxx X. Xxxxx (the "HPA Parties") acting
as principals, more than $2,000,000 of Series A Preferred Stock in the Pellinore
Placement.
1.4 The HPA Parties shall refer potential purchasers ("HPA
Referred Parties") of Series A Preferred Stock to the Pellinore Placement Agents
until such time as HPA Referred Parties have committed to purchase at least
$2,000,000 stated amount of Series A Preferred Stock through the Pellinore
Placement Agents, PROVIDED that the Pellinore Placement Agents shall not be
required to accept such referrals. The Pellinore Placement Agents acknowledge,
however, that no warranty of any kind is offered by the HPA Parties that any
such referrals will lead to the placement of shares of Series A Preferred Stock
to HPA Referred Parties. The Pellinore Placement Agents shall be entitled to
receive all placement agency fees payable and Further Warrants to be reallocated
in connection with such placements of Series A Preferred Stock to HPA Referred
Parties, PROVIDED that the Pellinore Placement Agents acknowledge that HPA
Referred Parties may be represented by securities brokers unaffiliated with HPA
and that the Pellinore Placement Agents agree to pay a portion of the Placement
Fee (as defined in Section 3) to such
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securities brokers, in order to place sales of Series A Preferred Stock to HPA
Preferred Parties, of 1% of the 6% commission for the $2,000,000 so referred.
1.5 Pursuant to the terms of the Securities Purchase Agreement
and the Notes, EMP has the right to convert all or any portion of the $2,500,000
Note purchased by it in the Bridge Financing (the "EMP Note") into Series A
Preferred Stock on a dollar-for-dollar basis. EMP shall be obligated to so
convert the full amount of the EMP Note at the earliest time that EMP is
permitted to do so under the Securities Purchase Agreement, and upon doing so
EMP shall be entitled to an allocation of 312,500 Initial Warrants.
2. ALLOCATION OF BALANCE OF WARRANTS. The balance of the Initial
Warrants, as well as all Additional Warrants issuable pursuant to the Securities
Purchase Agreement, shall be either retained by HPA or allocated to other
placement agents, for division among purchasers of Series A Preferred Stock and
such placement agents, in HPA's discretion, PROVIDED that HPA acknowledges that
it currently intends to allocate 1,250,000 Warrants to Commonwealth Associates,
which is expected to serve as placement agent in the sale of $5,000,000 of
Series A Preferred Stock in the Additional Financing.
3. COMMISSIONS AND FEES.
3.1 PAYMENT OF COMMISSIONS. The Pellinore Placement Agents
shall enter into a placement agency agreement with Empire providing, in
accordance with the terms of the Securities Purchase Agreement, for the payment
by Empire of a placement agency fee equal to 6% of the dollar amount of Series A
Preferred Stock sold through the Pellinore Placement Agents (the "Placement
Fee"),
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including the Series A Preferred Stock that may be received upon conversion of
the EMP Note in the amount of $2,500,000.
3.2 COUNSEL FEES. Out of the proceeds of the Placement Fee so
payable to the Pellinore Placement Agents, they shall pay Empire's counsel,
Xxxxxxxxxxxx Xxxx & Xxxxxxxxx, $20,000 in consideration of such counsel's legal
services to Empire in connection exclusively with the placement of the Series A
Preferred Stock.
4. VOTING OF INITIAL WARRANTS UNTIL THE PERMANENT FINANCING. The
parties acknowledge that at the closing of the Bridge Financing, a certificate
representing 1,562,500 Initial Warrants was issued to EMP and a certificate
representing 3,437,500 Initial Warrants was issued to HPA (the "Initial Warrant
Certificates"). If any matter is submitted to a vote of holders of the Initial
Warrants prior to the closing of the Permanent Financing, EMP and HPA shall each
be entitled to vote the number of Warrants represented by the Initial Warrant
Certificates.
5. FAILURE OF PERMANENT FINANCING TO OCCUR DUE TO FAILURE TO MEET
CERTAIN CLOSING CONDITIONS. If, in accordance with section 2.2.1.1 of the
Securities Purchase Agreement, Permanent Financing Stock Purchasers are ready,
willing and able to purchase $11,000,000 of Series A Preferred Stock (including
through the conversion of the Notes issued in the Bridge Financing) in the
Permanent Financing, but such purchase is not closed as a result of a failure of
other closing conditions provided in section 3 of the Securities Purchase
Agreement to be met, HPA and EMP shall be entitled to retain the 5,000,000
Initial Warrants pursuant to the terms of the Securities Purchase Agreement. If
such circumstances occur, HPA shall be entitled to
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retain 3,437,500 Initial Warrants and EMP shall be entitled to retain 1,562,500
Initial Warrants, as represented by the Initial Warrant Certificates currently
held by each of them.
6. RESTRICTIONS ON, AND REQUIREMENTS OF, TRANSFER. Until the earlier
of (i) the failure of the Permanent Financing to close as described in Section 5
or (ii) the occurrence of the closing of the Permanent Financing and the
reallocation of the Initial Warrants in accordance with the provisions of this
Agreement, EMP shall not sell, pledge, hypothecate or otherwise in any way
transfer ("Transfer") ownership, or any incident thereof, of any Initial
Warrants represented by the Initial Warrant Certificate held by it, and HPA
shall not Transfer ownership, or any incident thereof, of 529,996 of the Initial
Warrants represented by the Initial Warrant Certificate held by it (it being
understood that such restriction upon HPA is imposed because the maximum number
of Initial Warrants to which EMP and the Pellinore Placement Agents are entitled
pursuant hereto (either for their own account or for transmission to third
parties) is 2,092,496, or 529,996 greater than the 1,562,500 Initial Warrants
represented by the Initial Warrant Certificate held by EMP). HPA and EMP shall
transfer, between each other or to third parties, such number of Initial
Warrants represented by their Initial Warrant Certificates as may be necessary
to effectuate the allocations provided hereby.
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IN WITNESS WHEREOF this agreement is executed as set forth below as
of the date first written above.
HPA ASSOCIATES, LLC
By: /s/ Xxxxxxx X. Xxxxxx
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Name: Xxxxxxx X. Xxxxxx
Title: Managing Director
EMP ASSOCIATES LLC
By: EMP Management LLC
as Managing Member
By: /s/ J. Xxxxxxx Xxxxxxx
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Name: J. Xxxxxxx Xxxxxxx
Title: Manager
PELLINORE SECURITIES CORP.
By: /s/ J. Xxxxxxx Xxxxxxx
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Name: J. Xxxxxxx Xxxxxxx
Title: President
AXIOM CAPITAL MANAGEMENT INC.
By: /s/ Xxxx X. Xxxxxxx
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Name: Xxxx X. Xxxxxxx
Title: Managing Director
