May 23, 1995
Challenger International, Ltd.
Reid House
31 Church Street
P.O. Box HM 1437
Hamilton HMFX Bermuda
Gentlemen:
LETTER OF INTENT
We are pleased to set forth herein the current intentions of Mossberg
Corporation ("Mossberg") with respect to the proposed acquisition by Mossberg of
all of the outstanding capital stock, including all warrants, options, and other
rights to acquire capital stock (collectively, the "Savage Stock"), of
Challenger Industries, Inc., a Delaware corporation (referred to herein as
"Savage"), on the terms set forth herein. Unless the context indicates
otherwise, references to Savage are intended to refer to Savage and its
subsidiaries, which it is our understanding will include Savage Arms, Inc.,
Lakefield Arms Limited, Passive Bullet Traps, Ltd., and Passive Bullet Traps,
Inc., d/b/a/ Savage Range Systems.
1. Purchase Price. In consideration for the assignment to Mossberg of
all of the outstanding Savage Stock, Mossberg will pay $35,000,000 (the "Base
Purchase Price") to Challenger International, Ltd. ("Challenger International"),
plus or minus the Adjusted Consideration, as set forth herein. Prior to the
closing of the sale of the Savage Stock (the "Closing"), Challenger
International will be responsible for: (i) acquiring any Savage Stock that is
not currently owned by Challenger International; and (ii) consummating a
tax-free reorganization pursuant to which Passive Bullet Traps, Ltd., an Isle of
Man corporation, which Challenger International has advised Mossberg owns the
intellectual property rights related to the passive bullet traps manufactured
and distributed by Challenger International and its subsidiaries, becomes a
wholly-owned subsidiary of Savage. The Base Purchase Price will be payable at
the Closing by wire transfer, plus, if the Closing occurs after July 31, 1995
and the delay in the Closing is not caused by an act or omission on the part of
Challenger International, interest on the Base Purchase Price equal to the prime
rate of Bank of Boston for the period from July 31, 1995 through the date of the
Closing. A portion of the Base Purchase
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Price shall also be used at the closing to repay in full the Interim Note, plus
accrued interest, referred to below.
Challenger International shall cause KPMG Peat Marwick LLP to conduct
an audit of the consolidated financial statements of Savage as at July 31, 1995
(the "Closing Financial Statements") and to deliver an auditor's report to
Mossberg and Challenger International no later than September 10, 1995. If the
consolidated total shareholder's equity of Savage, as reflected in the Closing
Financial Statements, is greater than $10,500,000, then the amount by which the
total shareholder's equity exceeds $10,500,000 (the "Additional Consideration")
shall be paid by Mossberg to Challenger International in two installments, as
follows: (i) fifty percent (50%) of the Additional Consideration by wire
transfer on the later of twenty (20) days after delivery of the auditor's report
or September 30, 1995; and (ii) fifty percent (50%) of the Additional
Consideration by wire transfer on October 31, 1995. If the consolidated total
shareholder's equity of Savage, as reflected in the Closing Financial
Statements, is less than $10,500,000, then the amount by which the total
shareholder's equity is less than $10,500,000 (the "Subtracted Consideration")
shall be paid by Challenger International to Mossberg in two installments, as
follows: (i) fifty percent (50%) of the Subtracted Consideration by wire
transfer on the later of twenty (20) days after delivery of the auditor's report
or September 30, 1995; and (ii) fifty percent (50%) of the Subtracted
Consideration by wire transfer on October 31, 1995. The "Additional
Consideration" and the "Subtracted Consideration" are each sometimes referred to
herein as the "Adjusted Consideration."
2. Conditions to the Purchase. The acquisition of Savage by Mossberg
will be undertaken pursuant to a written agreement in form and substance
mutually acceptable to Challenger International and Mossberg (the "Definitive
Agreement"). Mossberg's execution of the Definitive Agreement shall be
conditioned on Challenger International's delivery to Mossberg of Savage's
business plan, budget, and interim consolidated financial statements, through
the latest available date. The Definitive Agreement will contain
representations, warranties, covenants, conditions, and indemnities customary
for transactions of this kind, including without limitation: (i) warranties
regarding the capitalization, financial statements, liabilities, taxes,
litigation, employee obligations, environmental obligations, compliance with
ERISA, and material agreements, of Savage; (ii) confirmation that no approval of
the transaction is needed by the stockholders of Challenger International; and
(iii) indemnity of Mossberg by Challenger International for any known or unknown
liabilities of Savage that are not set forth in their financial statements
delivered to Mossberg or otherwise disclosed in writing to Mossberg
(collectively, "Indemnified Liabilities"), provided however, that
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(a) in no event will Challenger International be responsible to Mossberg for (I)
Indemnification Payments in excess of $5,000,000 in the aggregate (exclusive of
any claim for federal, state, or local taxes and any claim based on fraud,
intentional harm or similar basis), or (II) the first $50,000 of Indemnification
Payments, and thereafter, the first $5,000 of Indemnification Payments for each
occurrence, and (b) the amount of any Indemnification Payments incurred by
Mossberg shall be net of any insurance proceeds received by Mossberg. The
indemnification obligation referred to in subclause (iii) above shall expire,
unless Challenger has received notice of such claim: (w) on the date that is
three years from the date of the Closing with respect to any federal, state or
local tax claims; (x) on the date that is two years from the date of the Closing
with respect to any litigation or adversary proceeding initiated by third
parties, including product liability claims; (y) on December 31, 1995 with
respect to representations or warranties that relate to the financial statements
of Savage; and (z) on December 31, 1996 with respect to any other Indemnified
Liability. As used herein, the term "Indemnification Payments" means payments
for losses, claims, damages, costs, and expenses (including, without limitation,
reasonable attorney's fees) incurred by Mossberg for any Indemnified
Liabilities.
The Definitive Agreement will set forth conditions to the Closing,
including that: (i) any required third party, regulatory, or governmental
consents or approvals shall have been obtained; (ii) employee relations,
customer concentration levels, distributor relationships, and other matters
regarding production and distribution capabilities of Savage shall have been
reviewed by Mossberg and determined to be satisfactory; (iii) no material
adverse change shall have occurred in the business, financial condition, or
prospects of Savage since October 31, 1994; and (iv) the Closing occur on or
before August 11, 1995. In addition to the specific conditions set forth above,
consummation of the contemplated transaction will be contingent upon: (i)
Mossberg's completion, by June 15, 1995, of a due diligence investigation of the
business, operations, properties, and liabilities of Savage that results in
Mossberg being satisfied as to such matters, including specifically Mossberg's
satisfaction with the achievability of the business plan and projections
furnished by Challenger International and Savage to Mossberg in conjunction with
the acquisition process; and (ii) Mossberg's delivery to Challenger
International, by June 30, 1995, of a commitment letter issued by the Bank of
Boston or a financial institution of similar standing to extend a credit
facility to Mossberg in an amount of at least $50,000,000, an amount which
Mossberg currently believes necessary to complete the transactions contemplated
by this letter and to provide sufficient on-going working capital financing.
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3. Employment Agreements. In addition to the other conditions to the
contemplated transaction, the Definitive Agreement shall provide for the
execution of a mutually satisfactory employment agreement between Mossberg and
Ronald Coburn.
4. Timing of Purchase; Conduct of Business. The parties will use their
best efforts to execute a Definitive Agreement by June 15, 1995 and to close the
transaction by July 31, 1995. During the time between the date of this letter
and the Closing of the transaction (the "Interim Time"), the business of Savage
shall be conducted in the ordinary course consistent with its prior operations,
and Savage shall use reasonable efforts to maintain its relationships and good
will with its suppliers, customers, and others with which it has business
relationships. In addition, during the Interim Time: (a) Savage shall limit the
amount of other indebtedness incurred to an amount necessary to maintain
adequate levels of working capital in a manner and amount consistent with past
practices; (b) Savage will permit Mossberg, Bank of Boston, and their authorized
representatives to have access to and examine the properties, assets, and
financial and corporate records of Savage, and to contact, in consultation with,
and with advance agreement from, Savage, customers of Savage for the purpose of
conducting their due diligence review of Savage; and (c) Savage shall not pay
any dividends or distributions, or transfer any assets or rights, to its
stockholders or their affiliates. For the purposes of the preceding subclause
(c), Savage's redemption of shares held by Cerrito Partners and its affiliates
will not be considered such a dividend, distribution, or transfer of assets or
rights.
5. Exclusivity. During the Interim Time (or, if no Definitive
Agreement is executed on or before June 15, 1995, until June 15, 1995) neither
Challenger International, Savage nor any of their representatives will directly
or indirectly: (a) solicit, initiate discussions, or engage in discussions or
negotiations with any person relating to the possible acquisition of Savage or
any material asset of Savage (whether such contacts are initiated by Challenger
International, Savage, or any of their representatives or otherwise); (b)
provide or cause to provide any information to any person, relating to the
possible acquisition of Savage; or (c) enter into a transaction with any person
or persons concerning the possible acquisition of Savage. You acknowledge and
agree that Savage's business is unique, and that Mossberg shall have, in
addition to all other legal remedies that may be available to it, the right to
seek enforcement of the provisions of this paragraph by an injunction or other
equitable relief.
6. Interim Loan. If the terms set forth herein for the purchase of the
Savage Stock by Mossberg are acceptable to you,
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Mossberg will lend to you $9,000,000, subject to obtaining from Mossberg's
principal lender, Bank of Boston, consent to Mossberg's making such loan. Bank
of Boston has advised Mossberg that Bank of Boston will be in a position to
determine whether to give such consent by May 31, 1995, before which time Bank
of Boston would review the various information and documents provided by Savage
to Mossberg and seek internal credit approvals, for the purpose of determining
whether to give such consent. The terms of the loan will include the following:
(a) Challenger International and Savage will be jointly and severally obligated
upon the loan; (b) the loan will be evidenced by a promissory note (the "Interim
Note") that will be payable on the date of the Closing or, if no Closing occurs,
in two equal installments of principal, plus accrued interest, on October 31,
1995 and October 31, 1996; (c) the Interim Note will bear interest prior to July
31, 1995 at the prime rate ("Prime Rate") of Bank of Boston as of the date of
issuance, and will bear interest at the rate of 2% above the Prime Rate per
annum during August, 1995, 4% above the Prime Rate during September, 1995, and
8% above the Prime Rate thereafter until the Interim Note is paid in full; and
(d) the Interim Note will be secured by a pledge of the outstanding capital
stock of Savage. The Interim Note and any related pledge agreements and other
documents will be in form and substance acceptable to Challenger International
and Mossberg.
7. Preemptive Fee. If Mossberg lends $9,000,000 to Challenger
International as contemplated herein, and if within the 12 months after the date
hereof an agreement or transaction is executed by or consented to by Challenger
International or Savage or any of their subsidiaries pursuant to which all or
substantially all of the assets or capital stock of Savage (or control thereof)
are thereafter actually sold or transferred (whether directly, upon exercise of
an option, upon conversion of a security, or otherwise) for a price, including
any non-competition payments and other consideration to be paid in connection
therewith, that is based upon or would result in a value (the "Savage
Valuation") of Savage in its entirety of more than the $39,000,000 for Savage
(e.g., if 40% of the capital stock or assets of Savage is to be sold for more
than $l5,600,000), then, so long as the transaction contemplated herein was not
consummated due to the failure of Challenger to proceed as set forth in this
letter, and Mossberg was willing, ready, and able to perform as set forth
herein, Challenger International, Savage, and their subsidiaries shall be
jointly and severally obligated to pay to Mossberg a fee equal to 20% of the
amount by which the Savage Valuation exceeds $39,000,000 or $2 million,
whichever is greater (collectively, "Break-Up Fees"), and the payment of the
Break-Up Fees shall represent Mossberg's sole remedy (absent fraud or similar
conduct by Challenger International) for Challenger's failure to consummate the
transaction contemplated herein. If a Definitive Agreement is
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executed, it will include a provision for a fee equivalent to that set forth in
the preceding sentence (which would be payable if the definitive Agreement were
terminated as a result of a breach by Challenger and a transaction referred to
above occurred within the next 12 months).
8. Confidentiality. The parties to this letter acknowledge that they
have each executed Confidentiality Agreements, dated May 17, 1995.
9. Brokers' or Finders' Fees. Mossberg will indemnify and hold
Challenger International harmless from any claim for brokerage or finders' fees
or expenses arising out of the transactions contemplated hereunder by any person
claiming to have been engaged by Mossberg. Challenger International will
indemnify and hold Mossberg harmless from any claim for such fees or expenses
arising out of the transactions contemplated hereunder by any person claiming to
have been engaged by Savage or Challenger International.
10. Non-Binding Nature. This letter is a letter of intent only and no
legal obligations are created hereby except with respect to the provisions of
paragraphs 5, 6, 7, and 9 hereof. If the Definitive Agreement and related
definitive documentation are not executed or delivered for any reason, no party
to this letter of intent shall have any liability to any other party hereto
based upon, arising from or relating to the provisions hereof other than those
set forth in paragraphs 5, 6, 7, and 9 hereof.
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If the foregoing sets forth terms upon which you desire to proceed further,
please sign below (and such acceptance by you will confirm your agreement to be
bound by the terms of paragraphs 5, 6, 7 and 9 above). Upon your acceptance of
the terms set forth herein, we will instruct our counsel to commence preparation
of a Definitive Agreement and we will continue, and we will request Bank of
Boston to commence, the review of any information and documents that you make
available to us for the purposes of this transaction.
Very truly yours,
MOSSBERG CORPORATION
By /s/ William H. Schoner
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William H. Schoner
Its Vice President Finance
Reviewed and Agreed to:
CHALLENGER INTERNATIONAL, LTD.
By /s/ Peter Leighton
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Peter Leighton
Its President and Managing Director