FORM 10-KSB
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ............... to...............
Commission File No. 0-28282
THE LION BREWERY, INC.
(Exact Name of Small Business Issuer as Specified in Its
Charter)
PENNSYLVANIA 24-0645190
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
700 NORTH PENNSYLVANIA AVENUE, WILKES-BARRE, PA
18703
(Address of Principal Executive Offices)
Registrant's telephone number, including area code (717)
823-8801
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK
Indicate by check whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Exchange Act during the past 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 _____
Indicate by check if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B is not contained herein, and will not
be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
State the aggregate market value of the registrant's shares held
by non-affiliates at December 22, 1997: $8,164,338.
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date:
December 22, 1997: 3,885,052 shares outstanding
State issuer's revenues for its most recent fiscal year:
$26,869,000
Transitional Small Business Disclosure Format (check one):
Yes _____No __X__
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
The definitive proxy statement for the registrant's 1997 Annual
Meeting, to be filed with the Commission no later than 120 days
after the close of the registrant's fiscal year has been
incorporated by reference, in whole or in part for Part III of
this Annual Report.
PART I.
ITEM 1. BUSINESS:
GENERAL
The Lion Brewery, Inc. ("Lion Brewery" or the "Company") is
a producer and bottler of brewed beverages, including malta,
specialty beers and specialty soft drinks. The Lion Brewery was
incorporated in Pennsylvania on April 5, 1933. The Company is the
dominant producer of malta in the continental United States.
Specialty beers, generally known as craft beers, are brewed by
the Company both for sale under its own label and on a contract
basis. Craft beers are distinguishable from other domestically
produced beers by their fuller flavor and adherence to
traditional European brewing styles. The Company produces
flavored alcoholic malt beverages and specialty soft drinks,
including all-natural brewed ginger beverages, on a contract
basis for third parties. The Lion Brewery also brews beer for
sale under traditional Company owned labels for the local market
at popular prices.
The Company's growth strategy is to expand its production
and marketing of specialty beverages, which includes
Company-owned labels and labels produced under contract. By
owning and operating its own brewery and with its significant
brewing and packaging experience, the Company believes it is well
positioned to optimize the quality and consistency of its
products as well as to formulate new products. The Company plans
to increase sales of its specialty beer labels through increased
penetration of these brands in its existing markets, through a
more focused and cost effective approach in its sales and
marketing efforts.
The Company's traditional beers - Stegmaier Gold Medal, 1857
Premium Lager, Liebotschaner Cream Ale and Stegmaier Porter - are
reminiscent of the Company's rich beer brewing heritage. The Lion
Brewery is the beneficiary of a long brewing tradition. The
brewhouse was built at the turn of the century in Wilkes-Barre,
Pennsylvania. The Company's flagship line of specialty craft
beers are marketed under the Brewery Hill name. The Company
currently produces seven styles of beer under the Brewery Hill
label, two of which are seasonal flavors.
The Company established its reputation as a quality leader
in the rapidly growing craft beer market by winning three Gold
Medals at the Great American Beer Festival. The Lion Brewery's
1857 Premium Lager was voted Best American Premium Lager in 1994
and Liebotschaner Cream Ale won back to back gold medals in the
American Lager Cream Ale Category in 1994 and 1995. In 1997, the
Company has also received the following awards at the World Beer
Championships:
Brewery Hill Caramel Porter Gold Medal
Stegmaier Porter Gold Medal
Brewery Hill Centennial Lager Silver Medal
Brewery Hill Honey Amber Silver Medal
Brewery Hill Pocono Raspberry Silver Medal
Stegmaier 1857 Premium Lager Silver Medal
Liebotschaner Cream Ale Silver Medal
Brewery Hill Pale Ale Bronze Medal
<PAGE>
Brewery Hill Caramel Porter and Stegmaier Porter were also
awarded Gold medals by Beer Connoisseur Magazine. In addition,
craft beers and specialty soft drinks brewed by the Company under
contract have won several awards.
COMPANY HISTORY AND INDUSTRY BACKGROUND
The brewhouse in which the Company continues to brew its
products was built at the turn of the century in Wilkes-Barre,
Pennsylvania. At that time, the U.S. brewing industry comprised
nearly 2,000 breweries, most of which were small operations that
produced distinctive beers for local markets. The Company was
incorporated as The Lion, Inc. in April 1933 to operate the
brewery, which was one of the fewer than 1,000 breweries to
reopen following Prohibition. Over the ensuing decades, lighter,
less distinctively flavored beers appealing to broad segments of
the population and supported by national advertising programs
became prevalent. These beers use lower cost ingredients and are
mass produced to take advantage of economies of scale. This shift
toward mass produced beers coincided with extreme consolidation
in the beer industry. In keeping with this consolidation trend,
the Company purchased other labels including the Stegmaier
brands, which had been produced on Brewery Hill in Wilkes-Barre
since 1857. Of the more than 60 breweries existing in eastern
Pennsylvania 50 years ago, only two, including the Lion Brewery,
remain. Today, according to industry sources, approximately 90%
of all domestic beer shipments come from the four largest
domestic brewers.
Beginning in the mid 1980s and continuing in the 1990s, a
number of domestic craft brewers began selling higher quality,
more full-flavored beers, usually in local markets, as a growing
number of consumers began to migrate away from less flavorful
mass-marketed beers towards greater taste and broader variety,
mirroring similar-trends in other beverage and food categories.
As an established regional specialty brewer, the Lion Brewery
believes it is well-positioned to benefit from this shift in
consumer preferences. In 1996, according to industry sources, the
craft beer segment increased to approximately 4.8 million
barrels, representing approximately 2.5% of the 190 million
barrel, $50 billion retail domestic beer market. In 1996, craft
beer shipments grew 28%; over the five year period ended December
31, 1995, craft beer shipments increased at a compound annual
rate of approximately 40%, while shipments in the total U.S. beer
industry remained relatively flat. Industry analysts have
attributed this flat over-all beer consumption to a variety of
factors, including increased concerns about the health
consequences of consuming alcoholic beverages, safety
consciousness and concerns about drinking and driving; a trend
toward a diet including lighter, lower calorie beverages such as
diet soft drinks, juices and sparkling water products; the
increased activity of anti-alcohol consumer protection groups; an
increase in the minimum drinking age from 18 to 21 years in all
states; the general aging of the population; and increased
federal and state excise taxes. Today the top three national
brewers have entered into this fast growing craft segment by
introducing their own specialty beers and/or by acquiring or
investing in smaller regional craft brewers.
Before the emergence of the market opportunity in specialty
beer, the Lion Brewery diversified into other products to sustain
operations and continue to utilize its brewhouse and bottling
facility. The Company's strategic entry into malta production in
1982 has resulted in the Company becoming the dominant producer
of malta in the continental United States. Malta was originally
developed many years ago by German brewers operating in the
Caribbean area. The brewers developed malta by blending the
excess molasses production from sugar with grain mash. Malta is
still popular throughout the Caribbean and South America. In
addition to malta, the Company also diversified into producing
premium soft drinks in 1991.
BUSINESS STRATEGY
The Company intends to enhance its position as a leading
producer of specialty brewed beverages by expanding production
and marketing of craft beers and other malt based premium
products, while maintaining the growth of its nonalcoholic brewed
beverages. Key elements of the Company's business strategy are
to:
Produce High Quality Brewed Beverages. The Company
is committed to producing a variety of full-flavored
brewed beverages. The Company employs a Head
Brewmaster, an assistant brewmaster and a brewing
assistant and retains a world recognized brewing
authority to ensure the high quality and consistency of
its products. To monitor the quality of its products,
the Company maintains its own quality control
laboratory staffed with two full-time quality control
technicians and submits its products for analysis to
the Seibel Institute of Technology, an independent
laboratory, on a continuous basis. To monitor
freshness, the Company dates each bottle and case with
the date and time of its bottling. The Company brews
its craft beers according to traditional styles and
methods, selecting and using only high quality
ingredients.
Brew Products in Company-Owned and Operated
Facilities. The Company owns and operates its own
brewing facility, which enables the Company to optimize
the quality and consistency of its products, to achieve
the greatest control over its production costs and to
formulate new brewed products. The Company believes
that its ability to engage in new product development
through onsite experimentation in its brewhouse and to
continuously monitor and control product quality in its
own facilities are competitive advantages.
Focused Distribution of Craft Beers. The Company
distributes craft beer under its own labels through a
network of wholesale distributor relationships.
Currently the Company distributes its products in
eleven states, although the majority of its sales
remain concentrated in Pennsylvania. The Company
intends to further penetrate its existing markets with
a targeted, cost effective approach in its sales and
marketing efforts. The Company chooses wholesaler
distributors that the Company believes will best
promote and sell the brands. The Company, through on
site tours and presentations, actively educates its
distributors in the total brewing process and the
growing craft beer industry.
Introduce New Products. The Company is committed
to developing and introducing new products to appeal to
the strong consumer interest under its own labels and
for its contract customers. The Company's diversified
product mix and brewing expertise enhance its ability
to create successful new products. The Company
believes that new product introductions have helped the
Company gain consumer awareness in its existing
markets. Currently, the Company markets seven craft
beers under the Brewery Hill label. In 1997, the
Company introduced Brewery Hill Centennial Lager and
Brewery Hill Caramel Porter, its winter seasonal. The
Company also entered the specialty soft drink arena
with the introduction of Lion Brewery Root Beer and
developed several new soft drink products for its
contract customers.
Flexible Production Capacity and Increased
Efficiency. The Company has increased its annual
production capacity from 340,000 to 400,000 barrels
based upon its anticipated product mix. This expansion
included the modification of its existing seven ounce
bottling line to also accommodate 12 oz. bottles, the
bottle size for most of the Company's products. In
addition, The Company has increased its fermentation
and lagering capacity with the relining of nine storage
tanks. The Company also installed automated malt
storage and elevation system and is in the process of
automating a portion of the brewing process.
Provide a High Level of Customer Service. The
Company, through its high quality brewing standards and
timely availability of product, believes it provides a
high level of customer service to its malta, contract
craft beer and specialty soft drink customers. The
Company believes its emphasis on customer service has
enabled the Company to increase sales to these
customers.
PRODUCTS
<PAGE>
The Lion Brewery's diversified product portfolio consists of
a variety of styles of malta, craft beers and specialty brewed
beverages and soft drinks, including all-natural brewed ginger
beverages, and popularly priced beer sold under traditional
Company-owned labels. The Company distributes its products in
glass bottles and kegs and its products are dated to monitor
freshness.
Malta. Malta is a non-alcoholic brewed beverage popular with
the Caribbean and certain other segments of the Hispanic
population, which the Company produces for distribution by major
Hispanic food distribution companies primarily in the eastern
United States. The leading malta brands have varying taste
characteristics based on different formulations provided to the
Lion Brewery by the distribution companies under whose labels the
product is sold.
The principal ingredients of malta are malt (a germinated
form of barley grain), several types of fructose syrup, caramel
coloring and hops in modest quantities. Significant variations
made by the Company involve the addition of molasses for one
customer and production with lower malt quantities and higher
levels of fructose sweetener for another. The Company also brews
an alcoholic form of malta called Extracto which resembles
standard malta but also includes some roasted malt and hops
extract to add bitterness. The Company developed for Goya Foods a
malta light product using Nutrasweet. In fiscal 1997 and 1996,
malta constituted approximately 67% and 68%, respectively, of the
Company's annual barrel shipments and 66% and 68%, respectively,
of net sales. The Lion Brewery is the dominant producer of malta
in the continental United States. Malta requires substantially
less production time than beer or ale. The product remains in
aging tanks for only a few days, compared to up to 50 days in
fermentation and lagering tanks for beer. Malta is bottled in
seven ounce and 12 oz. sizes.
Craft and Traditional Beers. The Company currently produces
eleven distinctive, craft and traditional full-flavored beers and
engages in the research and development of new specialty beers.
The Company brews its beers using high quality hops, malted
barley, and other natural ingredients. The Company utilizes both
a lager and ale yeast in the fermentation of its beers and ales.
The Company distributes its beers only in glass bottles and kegs.
All of the glass bottles are date coded for freshness and are
pasteurized.
Stegmaier 1857 Premium Lager. This award winning lager
is brewed with three different types of malt and four
different types of hops. The hops are imported German
Hallertau Hersbrucker, English East Kent Golding and Czech
Saaz, as well as domestic U.S. Mt. Hood. This lager is
distinguished by its clean, well balanced and full taste and
rich golden color. 1857 Premium Lager won the Gold Medal in
the American Premium Lager category at the 1994 Great
American Beer Festival. In 1997, Stegmaier 1857 Premium
Lager was awarded a Silver Medal in the World Beer
Championships.
Stegmaier Gold Medal Beer. This typical American
Pilsner is brewed with two different types of malt, corn and
a blend of domestic and imported hops. The hops are imported
Czech Saaz and domestic U.S. Mt. Hood and Cascade. This
lager is distinguished by its crisp and clean easy to drink
taste. Stegmaier Gold Medal Beer won a Silver Medal in the
1996 World Beer Championships.
Stegmaier Porter. This porter, or dark beer, is brewed
from four different varieties of malt, including two types
of roasted malt. Stegmaier Porter is brewed with the
Company's ale yeast and bittered and finished with English
East Kent Goldings and other hops to give a balanced flavor
and excellent drinkability for a dark beer. Stegmaier Porter
won Gold medals at the World Beer Championships and in Beer
Connoisseur Magazine in 1997.
Liebotschaner Cream Ale. Cream ale is brewed with a
lager yeast at higher fermentation temperatures than typical
lager, creating an ale-like taste. "Lieb" has a full creamy
flavor balanced by spicy, fruity characteristics from the
hop finish. "Lieb" utilizes two different varieties of pale
malt and three different varieties of hops, including
imported Czech Saaz. Liebotschaner Cream Ale won
consecutive Gold Medals in the American Lager Cream Ale
category at the Great American Beer Festival in 1994 and
1995. In 1997, Liebotschaner Cream Ale was awarded a Silver
Medal in the World Beer Championships.
Brewery Hill Black and Tan. This mixture of the Lion
Brewery's award winning 1857 Premium Lager and Stegmaier
Porter
creates a rich, full flavored beer. Brewery hill Black & Tan
won
first place--World Champion in 1996 at the World Beer
Championships.
Brewery Hill Caramel Porter. This flavorful beer uses a
top-fermenting ale yeast. Caramel Porter uses four different
malts, including an extra generous portion of Caramel and
Chocolate malts to give Caramel Porter a very pleasant
caramel
and chocolate flavor and aroma. Brewery Hill Caramel Porter
is a
winter seasonal brew. In 1997, Brewery Hill Caramel Porter
won
Gold medals at the World Beer Championships and in Beer
Connoisseur Magazine.
Brewery Hill Centennial Lager. This hand-crafted full
bodied
lager features four different barley malts (including
Roasted
Barley) and is kettled hopped with three hop varieties
(including
imported Hallertau Hersbrucker and Czech Saaz). Centennial
is
then dry hopped with Czech Sazz and allowed to slow age to
impart
an incredible balance of malt and hops and a wonderful hop
aroma
and flavor. Brewery Hill Centennial is a new world of old
world
brewing traditions. Brewery Hill Centennial Lager won a
Silver
Medal in the 1997 World Beer Championships.
Brewery Hill Cherry Wheat. This ale is brewed using
three
different malts, including a generous dose of wheat malt.
Brewery
Hill Cherry Wheat is blended with pure and natural cherry
juice
and flavors to give this brew a delicate cherry flavor.
Brewery
Hill Cherry Wheat is a summer seasonal brew. Brewery Hill
Cherry
Wheat won first place--World Champion at the World Beer
Championships in 1996.
Brewery Hill Honey Amber. This amber beer is brewed
with
three different malts and utilizes English East Kent
Goldings
hops. It is finished with pure, locally harvested clover
honey to
give a balance of flavor. The result is a rich amber color
and
malty bouquet. Brewery Hill Honey Amber won a Sliver medal
at the
World Beer Championships in 1997 and 1996.
Brewery Hill Pocono Raspberry. This award winning ale
is
blended with pure and natural raspberry juices and flavors
to
create a balanced flavor that is a delicate blend of the
sweetness and tartness of raspberries. Brewery Hill Pocono
Raspberry won a Silver medal at the World Beer Championships
in
1997 and 1996.
Brewery Hill Pale Ale. This American pale ale is brewed
with
two different malts and three different types of hops:
English
East Kent Golding, Cascade and domestic U.S. Mt. Hood. This
ale
is brewed with the Company's ale yeast and is kettle hopped.
After a seven day fermentation period the ale then undergoes
dry
hopping. Unboiled hop roots are added to give this ale
additional
hop aroma. When finished, the pale ale has a clean malty
fullness, an intense hop bitterness and a highly aromatic
hop.
Brewery Hill Pale Ale won a Bronze medal in the 1997 World
Beer
Championships.
The Company also brews many distinctive craft beers and
other
specialty malt beverages under contract for other labels. Some of
these customers are microbreweries and brewpubs that need
additional
brewing capacity to meet their production requirements and which
typically provide their own recipes. In other instances, the
Company
formulates beer and specialty malt beverages for customers
marketing
their own labels. Most of these contract brewing customers
provide
their own packaging and labels. The Company arranges shipment to
distributors F.O.B. the Company's warehouse and handles invoicing
as a
service to these customers. Among the Company's larger craft beer
and
specialty malt contract customers are:
Stoudt Brewing Company. This microbrewery and
restaurant is
located in Adamstown, Pennsylvania. The Lion Brewery
produces
Stoudt's Golden Lager, Fest, Honey Double Bock, Mai- Bock
and
Scarlet Lady in bottles pursuant to Stoudt's recipes and as
a
supplement to Stoudt's own production. Stoudt's beers have
won
five awards in the last five years, four at the Great
American
Beer Festival and one at the World Beer Championships.
Neuweiler Brewing Company. This craft beer marketing
company
is located in Allentown, Pennsylvania and sells four
different
styles of beer, all of which were formulated by and are
brewed at
the Lion Brewery. The Neuweiler Black and Tan won a Bronze
Medal,
Dark Lager Category, at the 1992 Great American Beer
Festival.
Valley Forge Brewing Company. This brewpub is located
in
Wayne, Pennsylvania. The Lion Brewery produces three
distinctive
flavors, Peach Wheat, Stout and Pale Ale in bottles pursuant
to
Valley Forge's recipes.
Blue Hen Ltd. This marketer of craft beers located in
Delaware sells three styles of beer formulated and produced
by
the Lion Brewery. The Blue Hen Lager won the Silver Medal at
the
World Beer Championships in both 1994 and 1996 and the Blue
Hen
Black and Tan won the Bronze Medal, Dark Lager category, at
the
1996 World Beer Championships. In 1997, the Company began
producing Blue Hen Chocolate Porter.
Better Beverage Importers. This marketer of specialty
malt
beverages located in Delaware sells alcoholic malt based
lemon
and raspberry brews under the One-Eyed Jack label. These
products
are distributed in over 30 states.
Bass Beers Americas. This marketer of specialty malt
beverages located in Atlanta sells an alcoholic malt based
lemon
brew called Hooper's Hooch TM. The Lion Brewery, Inc.
produces
Hooper's Hooch for distribution in 14 eastern states.
The Lion Brewery craft beer and specialty malt beverages
produced
for sale under its own labels and under contract for others
accounted
for approximately 13% and 14% of its annual barrel shipments and
17%
and 19% of its net sales in fiscal 1997 and 1996, respectively.
SPECIALTY SOFT DRINKS. The Lion Brewery first began blending
and
bottling specialty soft drinks in 1987. The Company currently
produces
specialty soft drinks under contract for five customers
including:
Original Beverage Company. In June 1991, the Lion
Brewery
began producing for this customer Reed's All Natural Ginger
Beer,
a soft drink based on brewed ginger root. The Company is
currently the sole brewer of beverages sold under the Reed's
label. This product was originally developed and produced in
a
small microbrewery in Colorado and the Company believes that
Reed's is the leading brewed soft drink in health food
stores.
Ginger roots are processed in the Lion Brewery's brew kettle
to
yield this all natural brewed product. The Reed's portfolio
consists of five all natural flavors of real brewed ginger
products: Original, Extra, Premium, Spiced Apple and
Raspberry.
In 1997, the Company began producing Borgnine's Coffee Soda
and
China Cola and Cherry Cola to be marketed by the Original
Beverage Company. Reed's Original Ginger Brew was named Best
Imported Food Product-Canadian Fancy Food Association and
the
1991 Outstanding Beverage Finalist-National Association for
the
Specialty Food Trade. Reed's Spiced Apple Brew won the 1994
Outstanding Beverage Finalist-National Association for the
Specialty Food Trade.
Mad River. The Company produces eleven varieties of
premium
all natural blended soft drinks for Mad River. The product
is
sold to consumers primarily in resort locations and in
upscale
specialty food stores.
The Company also produces specialty soft drinks for Goya
Foods,
Vitarroz and Virgil's. Specialty soft drinks accounted for
approximately 16% and 12% of the Lion Brewery's barrel shipments
and
14% and 9% of its net sales in fiscal 1997 and 1996,
respectively.
<PAGE>
POPULAR PRICED BEER. The Company brews beer for sale at popular
prices
in local markets under several traditional Company-owned brands.
A
majority of this beer is bottled in 16 oz. returnable bottles.
Popular
priced beer accounted for approximately 4% and 6% of barrel
shipments
and 3% and 4% of net sales in fiscal 1997 and 1996, respectively.
BREWING OPERATIONS
Beer is made primarily from four natural ingredients: malted
grain,
hops, yeast and water. Malt suppliers prepare malt from barley
grain
by soaking it in water to initiate germination and then drying
(kilning) the germinated grain with varying amounts of heat to
vary
the final characteristics of the malt (for example, more heat
yields
"roasted" malt). Hops grow in many varieties and impart
bitterness or
other distinctive flavors to the beer. Yeasts are either
top-fermenting, used in ale production, or bottom fermenting,
which
produce lager style beers. The components of malta are primarily
malted grain, water and supplemental sweeteners. Since malta is
not
fermented, yeast is not used.
[GRAPHIC OMITTED]
Brewing Process. The process of brewing beer consists of
extracting
fermentable sugar from the malt, brewing the liquid containing
these
sugars (wort) in combination with hops and other natural
flavorings,
fermenting the brewed liquid and then finishing (maturing) the
beer in
tanks for periods ranging from ten to 40 days depending upon the
beer
style. The brewing process for malta is substantially similar to
that
for beer except that fermentation is not involved. Malta's
sweetness
relative to beer is partly attributable to the malt sugars in the
beverage which would be transformed to alcohol if the beverage
was
fermented. The brewed ginger ale made by the Company uses ginger
root
rather than malt as the principal ingredient. The entire brewing
process for the Company's products varies from two days to 50
days,
depending on the type of products brewed.
Extracting the fermentable sugars begins with milling the
dried
malt. Milling consists of crushing (not grinding) the malt
between
pairs of rollers in the malt mill. This causes a separation of
the
husk from the body and also breaks the body and exposes the
internal
components of the barley malt for the mashing process.
The crushed malt is then combined with specially treated
brewing
water at a specific temperature in the mash tub to create the
mash.
The Company uses the traditional upward infusion mashing system
that
uses three precisely controlled temperature and time plateaus to
create the resultant sugar liquid called "wort." The completed
mash is
then filtered by gravity in the lauter tub. The filtration media
is
the crushed grain itself. The wort is collected and transferred
to the
brew kettle
The wort is boiled in the brew kettle for 90 to 120 minutes.
During this boiling process, the precise amount of the hop
varietals
are added at specified time intervals to create the desired
bitterness
and aroma. The boiled wort is then transferred to the hot wort
tank
(whirlpool) where the proteins from the malt and the tannins from
the
hops are allowed to settle out and are removed. The wort is then
rapidly cooled to the desired temperature and infused with air.
The aerated wort is then transferred to fermentation tanks
to
which a precisely monitored amount of yeast of a specific type at
a
specific temperature is added. Air in the wort allows the yeast
to
remain flexible and enables it to begin a rapid and complete
fermentation. After several hours, the air is depleted and the
fermentation continues in an anaerobic (without air) process. The
Company uses two types of yeast, a lager yeast (bottom
fermenting) and
an ale yeast (top fermenting). Fermentation takes seven days, and
during this time the yeast will multiply dramatically. At the end
of
the fermentation, the yeast will be recovered for a new
fermentation
and the beer is transferred to a storage (lager/ruh) tank.
The storing of beer at cold temperatures is called
"lagering"
and/or "ruh." The amount of time that the beer is allowed to
lager
varies with the type of beer, with ales having a shorter lager
period
than lagers. This storage period allows for the reduction of
harsh
flavors created during the fermentation process. It also allows
for
the clarification and maturing of the fine beer flavor. After
lagering, the beer is filtered to remove any yeast and other
insoluble
materials. The beer's carbonation results from a combination of
natural absorption of carbon dioxide byproduct from the
fermentation
process and carbonation after filtering.
Bottling and Kegging. The Company packages its products in
bottles and in the case of beer, and to a limited extent, ginger
beer,
in kegs. The bottling house has two automated bottling lines,
each
containing bottle filling and sealing machines, pasteurizing
lines,
bottle labeling equipment, bottle casing and uncasing machines
and
packing equipment. One line also contains capacity for bottle
soaking
and washing and a Majonnier flow mixer for soft drinks. Areas are
set
aside for packaging supplies and short term holding of finished
cases
pending shipment to the warehouse. Currently one bottling line
handles
recycled 16 oz. and 12 oz. bottling and the other line handles
new 12
oz. bottling and seven ounce bottling. The Company estimates that
its
current annual 12 oz. bottling capacity is approximately 3.7
million
cases (270,000 barrels) and its current seven ounce bottling
annual
capacity is approximately 4.0 million cases (174,000 barrels).
For most of the Company's output of 12 oz. bottled products,
the
Company uses recycled bottles from states that impose a bottle
deposit
at purchase, principally New York and Massachusetts. The
inability of
the Company to continue to obtain a sufficient supply of recycled
bottles could have an adverse affect on the Company's results of
operations. The Company anticipates a change in the availability
of
certain styles of recycled glass from its current sources. This
reduction in availability would result in an increased cost of
glass;
reducing future gross margins. The Company will make all efforts
to
mitigate the effect on gross margins, but no assurances can be
made
that the Company will be successful in this regard. This type of
glass is used for both the Lion Brewery's own labels and for
contract
packaged production. All seven ounce bottles are purchased new.
The
Company's 16 oz. returnable bottles are subject to deposit and
return
arrangements at the brewery.
Quality Assurance. The Lion Brewery employs a Head
Brewmaster, an
assistant brewmaster and a brewing supervisor and retains the
services
of a world recognized brewing authority to ensure the high
quality and
consistency of its products. To monitor the quality of its
products,
the Company maintains its own quality assurance lab, employs two
full-time quality control technicians and submits its products
for
analysis to the Seibel Institute of Technology, an independent
laboratory, on a continuous basis. To further enhance the
consistency
of its products, the Company is in the process of automating
several
steps in the brewing process. The Company brews it craft beers
according to traditional styles and methods, and precisely
maintains
and assures the highest quality and consistency within each
brewing
step. In order to maintain product quality for the consumer, the
Company pasteurizes its bottled products. To monitor freshness,
the
Company dates each bottle and case with the date and time of
bottling.
Product is brewed in small batches which allows for a thorough
analysis of each step. Each brew is carefully monitored and
tasted to
ensure the highest quality to the consumer. This high quality
standard
has allowed the Company to win three Gold Medals at the Great
American
Beer Festival and numerous medals at World Beer Championships.
PRODUCT DISTRIBUTION
The distribution of products which the Company makes under
contract, including malta, specialty beers sold under other craft
beer
labels and brewed and blended soft drinks, is managed entirely by
the
contracting customer. In the case of malta and soft drinks, the
customer typically distributes the product to supermarkets,
specialty
food markets, food service establishments and other retailers
through
independent or company employed sales personnel with occasional
involvement of wholesalers or distributors as middlemen.
The Company distributes its beers and ales marketed under
its own
brands through a network of independent distributors whose
principal
business is the distribution of beer and other alcoholic
beverages.
The Company's contract beer customers are likely to employ this
independent distributor channel as well. These independent
distributors resell the products to retailers which sell the
beers to
the consumer. Currently the Company's craft and traditional beer
products are primarily being distributed through fifty- two
independent distributors in 10 eastern states (Connecticut,
Delaware,
Maryland, Massachusetts, New Jersey, New York, North Carolina,
Ohio,
Pennsylvania, Virginia) and Washington, D.C. The Company selects
distributors in each market that it believes will devote
attention and
resources to the promotion and sales of its products. Most of its
distributors also represent a national beer brand and have
established
significant retail penetration in their territory to make that
brand
widely available. Management believes that both the brewing of
beer in
Company-owned facilities and a corresponding regional identity
are
viewed positively by independent distributors in deciding whether
to
carry the Lion Brewery's products. The appointment of
distributors is
also governed by beverage laws in some states which stipulate a
specific territory for each distributor.
SALES AND MARKETING
The Lion Brewery's four largest malta customers, Goya Foods,
Vitarroz, Cerveceria India and 7- Up/RC Puerto Rico, accounted
for 94%
and 95% of the Company's total malta sales for fiscal 1997 and
1996,
respectively. Mr. Lawson, the Company's Chief Executive Officer,
is
primarily responsible for selling and marketing these and the
Company's other contract accounts. The Head Brewmaster and the
Vice
President of Logistics are also actively involved with these
customer
relationships in discussing product recipes, new product
formulations,
production scheduling and delivery.
The Company's craft and traditional beers are sold to
independent
distributors by five full-time salespeople. The Company is
primarily
focused on building relationships through personal contact with
its
existing and new distributors to broaden the market presence of
the
Company's craft beer. Since the Company's beers are only a
portion of
its distributors' expanding portfolio of product offerings and
compete
with other beers, it is becoming more important for the Company
to
elevate its brand awareness with each distributor. This is
accomplished by on-site training of distributors' staff and, in
some
cases, offering educational tours of the brewery. Several of the
Company's largest distributors and their sales forces have
visited the
brewery to enhance their knowledge of the Company's products. The
Company's sales representatives also arrange taste testings of
Company
beers for its distributors and supply informational literature
for
circulation among distributors' retail customers. To further
promote
its product sales, the Company periodically offers price
discounts to
distributors in certain markets. The Company anticipates that it
may
continue to offer such promotions in response to competitive
conditions.
The Company believes that in order to stimulate consumer
demand
it must educate not only its distributors but also the retailer
and
consumer about the freshness and quality of its products. The
Lion
Brewery sales force travels with distributor sales personnel to
retail
accounts to familiarize new accounts with Company products and to
increase sales at existing accounts. The Company has participated
in
on- premise marketing such as product sampling and beer dinners.
In
addition, on premise marketing is also supported with point of
sale
material such as tap handles, table tents and, in some cases,
neon
signs.
The Company's strategy is to increase its penetration into
existing markets with a targeted, cost effective approach in its
sales
and marketing efforts. This strategy will be implemented by
further
developing the existing distributor relationships and/or
establishing
new distributors in target markets.
COMPETITION
The Company competes with other breweries in the production
and
marketing of malta and beer. Management believes that the Company
is
the dominant brewer of malta in the continental United States
because
of the high quality of its products, customer service and
location in
the eastern United States where the consumption of malta is
concentrated. Although foreign competition has recently entered
the
malta market, the Company's customer service and proximity to the
market has enabled it to maintain its customer base.
In the craft beer market, the Company competes against such
craft
brewers as The Boston Beer Company, Inc. and Pete's Brewing
Company,
and other regional breweries such as Redhook Ale Brewery, Inc.,
Pyramid Brewing, Inc., Genesee Brewing Company, Inc., Pittsburgh
Brewing Company, Latrobe Brewing, F. X. Matt Brewing Company and
D. G.
Yuengling and Son, Inc. as well the companies for which the
Company
performs contract brewing. The Company also faces competition
from
import specialty beer companies such as Bass PLC, Cerveceria
Modelo,
S.A. (brewer of Corona Extra), Cerveceria Moctezuma, S.A. (brewer
of
Dos Equis) and Heineken N.V., which currently produce premium
beer.
Imported beer accounts for a greater share of the domestic beer
market
than craft beers. The Company also competes with niche beers
produced
by affiliates of certain major domestic brewers as well as with
craft
beers produced for its contract brewing customers. For example,
Anheuser-Busch, Miller Brewing Co. and Adolph Coors market
Pacific
Ridge Ale, Leinenkeugel and Killian's Red, respectively. In
addition,
the Company expects that the major national brewers, with their
superior financial resources and established distribution
networks,
will seek further participation in the continuing growth of the
specialty beer market through the investment in, or formation of
distribution alliances with, smaller specialty brewers. The
increased
participation of the major national brewers will likely increase
competition for market share and heighten price sensitivity
within the
craft beer market. The Company also expects competition to
increase as
new craft brewers emerge and existing craft brewers expand their
capacity. Access to capital and other resources is a prerequisite
to
increasing sales and production in order to benefit from this
market
opportunity. Many of the Lion Brewery's competitors have
significantly
greater financial, production, product distribution and marketing
resources than the Company.
<PAGE>
The Company's products also compete generally with other
alcoholic beverages, including products offered in other segments
of
the beer industry and low alcohol products. The Company competes
with
other beer and beverage companies not only for consumer
acceptance and
loyalty but also for shelf and tap space in retail establishments
and
for marketing focus by the Company's distributors and their
customers,
all of which distribute and sell other beer and alcoholic
beverage
products.
As an element of its craft beer business, the Company
currently
produces and will continue to produce specialty beer products
under
contract for certain breweries and marketers of craft beer. The
Company's competition for this segment are breweries with excess
capacity. The Company believes its contract packaging experience
and
the quality of its product enhance its ability to attract
additional
craft beer marketers as customers.
The Company's soft drinks are produced under contract for
niche
marketers. Specialty soft drinks using natural ingredients
require
pasteurization. The Company believes its principal competitors
for
this business are bottlers with specialized equipment such as
pasteurizers not generally used in mass market soft drink
production.
CUSTOMER CONTRACTS
The Company's contracts with its malta and contract brewing
customers vary; however, they generally provide for initial terms
of
two to five years, subject to renewal, exclusive rights for the
Lion
Brewery to produce the product, price and payment terms and
brewing
and packaging specifications. The contracts may be terminated by
either party under certain circumstances, including the failure
to
reach minimum annual purchase levels in the case of its contract
beer
customers, and generally provide for no minimum purchases.
The Company's contracts with its beer distributors provide
for
assigned territories and the products to be distributed. Delivery
terms are F.O.B. the Company's brewery or warehouse. In some
states,
the terms of the Company's contracts with its distributors may be
affected by laws that restrict enforceability for some contracts
terms, especially those related to the Company's right to
terminate
the services of its distributors.
REGULATION
The Company's beer business is highly regulated at federal,
state
and local levels. Various permits, licenses and approvals
necessary to
the Company's brewery and the sale of alcoholic beverages are
required
from various agencies, including the U.S. Treasury Department,
Bureau
of Alcohol, Tobacco and Firearms (the "BATF"); the United States
Department of Agriculture; the United States Food and Drug
Administration; state alcohol beverage regulatory agencies in the
states in which the Company sells its products; and state and
local
health, sanitation, safety, fire and environmental agencies. In
addition, the beer industry is subject to substantial federal
excise
taxes, although the Company benefits from favorable treatment
granted
to brewers producing less than two million barrels per year.
Management believes that the Company currently has all
licenses,
permits and approvals necessary for its current operations.
However,
existing permits or licenses could be revoked if the Company were
to
fail to comply with the terms of such permits or licenses, and
additional permits could in the future be required for the
Company's
existing or expanded operations. If licenses, permits or
approvals
necessary for the Company's operations were unavailable or unduly
delayed, or of any such permits or licenses were revoked, the
Company's ability to conduct its business could be substantially
and
adversely affected.
Alcoholic Beverage Regulation and Taxation. The Company is
subject to licensing and regulation by a number of governmental
authorities. The Company operates its brewery under federal
licensing
requirements imposed by the BATF. Commercial breweries are
required to
file an amended Brewer's Notice with the BATF and certain states
every
time there is a material change in the brewing process or brewing
equipment, change in the brewery's location, change in the
brewery's
management or a material change in the brewery's ownership. The
Company's operations are subject to audit and inspection by the
BATF
at any time.
In addition to the regulations imposed by the BATF, the
Company
is subject to various regulations concerning deliveries and
selling
practices in states in which the Company sells its products.
Failure
by the Company to comply with applicable federal or state
regulations
could result in limitations on the Company's ability to conduct
is
business. The BATF's permits can be revoked for failure to pay
taxes,
to keep proper accounts, to pay fees, to bond premises, and to
abide
by federal alcoholic beverage production and distribution
regulations,
or if holders of 10% or more of the Company's equity securities
are
found to be of questionable character. Permits from state
regulatory
agencies can be revoked for many of the same reasons
The U.S. federal government currently imposes an excise tax
of
$18.00 per barrel on every barrel of beer produced for
consumption in
the United States. However, any domestic brewer with production
under
two million barrels per year pays a federal excise tax in the
amount
of $7.00 per barrel on the first 60,000 barrels it produces
annually.
While the Company is not aware of any plans by the federal
government
to reduce or eliminate this benefit to small brewers, any such
reduction in a material amount could have an adverse effect on
the
Company. Individual states also impose excise taxes on alcoholic
beverages in varying amounts, which are also been subject to
change.
It is possible that excise taxes will be increased in the future
by
both the federal and state governments. In addition, increased
excise
taxes on alcoholic beverages have been considered in connection
with
various governmental budget-balancing or funding proposals. Any
such
increases in excise taxes, if enacted, could adversely affect the
Company's results of operations.
State and Federal Environmental Regulation. The Company's
operations are subject to environmental regulations and local
permitting requirements regarding, among other things, air
emissions,
water discharges and the handling and disposal of wastes. While
the
Company has no reason to believe its operation violates any such
regulation or requirements, if such a violation were to occur,
the
Company's business may be adversely affected. In addition, if
environmental regulations were to become more stringent in the
future,
the Company could be adversely affected.
TRADEMARKS
The Company considers its trademarks, particularly the
"Brewery
Hill" brand name, beer recipes and product package, advertising
and
promotion design and artwork to be of considerable value to its
business. The Company relies on a combination of trade secret,
copyright and trademark laws and nondisclosure and other
arrangements
to protect its proprietary rights. Despite the Company's efforts
to
protect its proprietary rights, unauthorized parties may attempt
to
copy or obtain and use information that the Company regards as
proprietary. There can be no assurance that the steps taken by
the
Company to protect its proprietary information will prevent
misappropriation of such information and such protections may not
preclude competitors from developing confusingly similar brand
names
or promotional materials or developing products with taste and
other
qualities similar to the Company's beers. While the Company
believes
that its trademarks, copyrights and recipes do not infringe upon
the
proprietary rights of third parties, there can be no assurance
that
the Company will not receive future communications from third
parties
asserting that the Company's trademarks, copyrights and recipes
infringe, or may infringe, the proprietary rights of third
parties.
The potential for such claims will increase as the Company
introduces
new beers, increases distribution in recently entered geographic
areas
or enters new geographic regions. Any such claims, with or
without
merit, could be time consuming, result in costly litigation and
diversion of management personnel, cause product distribution
delays
or require the Company to enter into royalty or licensing
agreements.
Such royalty or licensing agreements, if required, may not be
available on terms acceptable to the Company or at all. In the
event
of a successful claim of infringement against the Company and
failure
or inability of the Company to license the infringed or similar
proprietary information, the Company's business, operating
results and
financial condition could be materially adversely affected.
EMPLOYEES
At September 30, 1997, the Company had 131 full time employees,
including 114 in production, 6 in sales and marketing, and 11 in
administration. Of these, 103 are represented by a labor union.
The
collective bargaining agreement with the union expires on May 31,
2000. The Company believes its relations with its employees to be
good.
ITEM 2. PROPERTIES
BREWING FACILITY
The Lion Brewery produces and packages its beverages in its
own
brewing and bottling facility. By owning and operating its own
brewery, the Lion Brewery is able to precisely monitor and
control
each step of the brewing process. The brewery is a complex of
brick
buildings housing a boiler room, an engine room, a brew house,
three
storage cellars and keg filling lines. Adjacent to the brew house
is
the bottling house, which contains the bottle washing equipment,
two
complete bottling lines including pasteurizers and warehousing
for
packaging materials. The Company leases two warehouses near the
brewery aggregating approximately 150,000 square feet. One
warehouse
stores glass bottles which will be used in bottling and the other
warehouse stores finished product and packaging materials. The
warehouse leases expire in February 1999 and June 2001,
respectively.
The Company also leases a third warehouse on an as needed,
temporary
basis. The Company believes that its current brewing facilities
are
adequate to meet its currently anticipated needs. The Company can
expand its facilities, if required, to meet increased production
requirements.
The brewery has one series of vats and tanks that are used
to
produce the Company's brewed products. The Company's brew kettle
is a
390 barrel copper Schock-Gusmer. The Lion Brewery's products are
brewed in small 330 barrel batches. Another major piece of
brewing
equipment is a 21 foot diameter Schock-Gusmer combination mash
and
lauter tub with knives and rakes. Also located in the brewing
area is
a quality control laboratory and various refrigerated rooms for
storing special brewing ingredients. Located in the basement of
the
brewery are special stainless steel tanks and equipment that
allow the
Lion Brewery to mix syrups and flavorings for a wide range of
products. Blended beverages are transported from these tanks
directly
to the bottling house through connecting lines. The brewery's
estimated annual capacity based upon the current product mix is
approximately 400,000 barrels (31 gallons or 13.8 cases of 24
twelve
oz. bottles equal one barrel) of product per year, assuming three
seven-hour shifts, five days a week. Capacity is a function of
the
product being produced because of the varying storage times for
the
different types of products. Since beer requires as much as 50
days in
tanks to allow for fermentation and finishing as contrasted with
only
two days for non-alcoholic brewed beverages such as malta,
anticipated
increases in the percentage of total output represented by beer
production will require capital outlays for additional tanks. In
fiscal 1997 and 1996, the Company shipped 335,000 barrels and
329,000
barrels of beverages, of which 67% and 68% were malta, 17% and
20%
were beer and 16% and 12% were soft drinks, respectively.
The Lion Brewery is located on approximately 5.9 acres of
Company
owned land in Wilkes-Barre, Pennsylvania. The property is served
by
the Luzerne & Susquehanna Railway Company and carloads of grains
used
in brewery production are usually on site.
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
LEGAL PROCEEDINGS
The Company is not currently involved in any material
pending
legal proceedings and is not aware of any material legal
proceedings
threatened against it.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security
holders
during the fourth quarter of the year ended September 30, 1997.
PART II.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock is traded on the Nasdaq National
Market System under the symbol "MALT". There were approximately
33
holders of record of the Company's common stock at December 22,
1997
although the Company believes that there are in excess of 300
beneficial holders. As of such date, the closing sales price per
share
for the Company's common stock was $3-1/2.
Securities of the Company were first publicly traded in the third
quarter of fiscal 1996. The high and low closing sale prices
reflect
inter-dealer prices, without mark-up, mark-down or commission and
may
not necessarily reflect actual transactions. The following table
sets
forth the high and low closing sales per share for the Company's
common stock for the third and fourth quarters of fiscal 1996,
the
first, second, third and fourth quarters of 1997 and for the two
months ended November 30, 1997 as reported by Nasdaq:
Quarter ended High Low
------------- ---- ----
June 30, 1996 6 5-1/8
September 30, 1996 5-7/8 5
December 31, 1996 5-3/8 3-3/4
March 31, 1997 4-3/8 2-5/8
June 30, 1997 3-1/8 2-3/8
September 30, 1997 4-1/8 3-1/2
Two months ended
----------------
November 30, 1997 4-1/8 3-1/2
There were no cash dividends declared on the common stock of the
Company during the fiscal years ended September 30, 1997 and
1996.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in
conjunction with the Company's Financial Statements and related
Notes
thereto. All references to fiscal years are references to the
Company's fiscal year ended September 30. This Annual Report
includes certain forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act) which
are subject to the occurrence of certain contingencies which may
not occur in the time frames anticipated or otherwise, and, as a
result, could cause actual results to differ materially from such
statements. These contingencies include the introduction and
acceptance of new products, the penetration of existing and new
markets, the availability of recycled bottles and the completion
of capital improvements.
OVERVIEW
The Lion Brewery is a producer and bottler of brewed
beverages
for several markets in which it believes its ability to
formulate,
brew and package quality products in a consistent manner in a
Company
owned and operated facility affords it a competitive advantage.
The
Company is the dominant producer of malta in the continental
United
States. Malta, a brewed non-alcoholic beverage popular in the
Caribbean and South America, is sold to food and beverage
distribution
companies marketing to these population segments in the United
States.
Malta sales have increased from $8.7 million, representing 73% of
the
Company's net sales in 1991, to a high of $18.6 million,
representing
75% of net sales in fiscal 1996. Net sales of malta were $17.8
million
or 66% of net sales in fiscal 1997.
While the Lion Brewery has been engaged in the production of
beer
since repeal of Prohibition in 1933 in facilities in which beer
was
first produced at the turn of the century, the Company has
reemphasized its production of full-flavored craft beers for sale
under its own labels in the last three years. This emphasis
complements the Company's production of craft beers on a contract
basis for other breweries and marketers of craft beer which
commenced
nine years ago. Since 1991, craft beer and specialty malt
beverage
sales under Company labels or pursuant to contract for other
breweries
or marketers have increased from $479,000, representing 3% of net
sales, to a high of $5.0 million, representing 19% of net sales,
in
fiscal 1996. Net sales of craft beer and specialty malt beverage
sales
under Company labels or pursuant to contract were $4.6 million or
17%
of net sales in fiscal 1997.
The Company also brews and blends specialty soft drinks for
beverage marketers and for some of its malta customers. In 1991
soft
drink sales totaled $724,000, representing 5% of net sales,
increasing
to $3.7 million, representing 14% of net sales, in fiscal 1997.
The Company still brews beer sold at popular prices in local
markets and predominantly packaged in 16 oz. returnable bottles.
The Company obtains the highest net sales dollar per barrel
from
the sale of craft beer under its own labels, which had an average
net
selling price of approximately $119 in fiscal 1997 and $127 per
barrel
in fiscal 1996. This decline in the average net selling price is
due
to line pricing of the Company's Brewery Hill product portfolio,
product sales mix and the concentration of sales in the local
markets.
The Company's average selling price per barrel for craft beer
produced
under contract is lower than for the Company's own brands, but
most
contract customers bear the cost of labels and packaging so that
gross
margins remain favorable.
The Company's gross margin has historically been, and is
anticipated to be, affected by several factors, including product
mix,
sales prices, cost of ingredients, bottles and other packaging
materials, labor productivity, overhead utilization and equipment
utilization. Due to its reliance on a Company-owned production
facility, a significant portion of the Company's overhead is not
susceptible to short term adjustment in response to sales below
management's expectations, thus an excess of production capacity
could
have a significant negative impact on the Company's operating
results.
A variety of other factors may also lead to significant
fluctuations
in the Company's quarterly results of operations, including
timing of
new product introductions, seasonality of demand, changes in
consumer
preferences and general economic conditions.
The Company sells approximately 85% of its beer in bottles
and
the remainder in kegs. All other products are sold in bottles
except
for Reed's premium brewed soft drinks, which are also available
in
kegs. Malta is packaged in 12 oz. and seven ounce bottles, craft
beer
and soft drinks are packaged in 12 oz. bottles and popular priced
beer
is packaged in both 12 oz. bottles and 16 oz. returnable bottles.
A
substantial portion of the Company's bottled products are bottled
in
recycled bottles which have a lower cost than new bottles.
However in
fiscal 1997, the Company purchased a significant amount of new 12
oz.
bottles which were required for several new products produced
under
contract. As a result the gross margin on these products was
substantially lower than that of similar products packaged in
recycled
bottles.
The Company anticipates a change in the availability of
certain
styles of recycled glass from its current sources. This reduction
in
availability would result in an increased cost of glass; reducing
future
gross margins and could have a significant impact on overall
profitability.
The Company will make all efforts to mitigate the effects on
gross margins
and overall profitability, but no assurances can be made that the
Company
will be successful in this regard.
The Company brews five days per week, 24 hours per day, as
demand
requires, and packages production five days per week in two
seven-hour
shifts. During peak demand, the Company lengthens each packaging
shift
by two hours per shift. At its present capacity and product mix
(approximately 67% malta, 17% beer and 16% specialty soft
drinks), the
Company believes it could produce and package approximately
400,000
barrels per year.
The Company's strategy is to expand its production and
marketing
of specialty beverages, which includes Company-owned labels and
labels
produced under contract. The Company plans to increase sales of
its
specialty beer labels through increased penetration of these
brands in
its existing markets, through a more focused and cost effective
approach in its sales and marketing efforts.
RESULTS OF OPERATIONS
The following tables set forth for the periods indicated
certain
income statement data expressed as a percentage of net sales, and
certain operating data expressed as a percentage of net sales and
net
sales per barrel.
Income Statement Data
Year Ended September 30,
------------------------
1997 1996
1995
------ ------
-----
Gross sales 101.9% 102.1%
101.5%
Less excise taxes 1.9 2.1
1.5
----- -----
-----
Net sales 100.0 100.0
100.0
Cost of sales 74.8 75.4
76.0
----- -----
-----
Gross profit 25.2 24.6
24.0
----- -----
-----
Operating expenses:
Delivery 3.1 3.1
3.3
Selling, advertising and promotional 5.4 4.7
3.2
General and administrative 5.2 5.2
5.4 ----- -----
-----
Total operating expenses 13.7 13.0
11.9
----- -----
-----
Operating income 11.5 11.6
12.1
Interest (income) expense, net (0.5) 2.0
4.2
----- -----
-----
Income before provision of income taxes
and extraordinary item 12.0 9.6
7.9
Provision for income taxes 5.2 4.3
3.7
----- -----
-----
Income before extraordinary item 6.8 5.3
4.2
Extraordinary item 0.0 1.2
0.0
----- -----
-----
Net income 6.8% 4.1%
4.2%
<PAGE>
Operating data
Year Ended September 30,
Percent of Net Sales Net
Sales Per Barrel
----------------------
----------------------
1997 1996 1995 1997
1996 1995
---- ---- ---- ----
---- ----
Malta 66.2% 67.8% 75.0% $ 80
$ 80 $ 78.
Beer:
Craft:
Company label 4.8 6.7 4.9 119
127 110.
Contract 12.4 12.4 7.4 100
99 84.
---- ---- ----- ----
17.2 19.1 12.3
Popular priced 2.9 3.7 5.0 57
55 54.
Total beer 20.1 22.8 17.3
Specialty soft drinks 13.7 9.4 7.7 68
64 62.
100.0% 100.0% 100.0% $ 80
$ 80 $ 76.
===== ===== =====
YEARS ENDED SEPTEMBER 30, 1997 AND 1996
Gross Sales and Excise Taxes
The Company's gross sales increased 1.4% to $27.4 million in
fiscal 1997 from $27.0 million in fiscal 1996. Gross sales of
craft
beer and specialty malt beverages decreased 7.4% to $5.0 million
in
fiscal 1997 from $5.4 million in fiscal 1996. Gross sales of
craft
beer and specialty malt beverages represented 18.3% of gross
sales in
fiscal 1997 as compared to 20.2% of gross sales in fiscal 1996.
Gross
sales of popular priced beer decreased 18.2% to $0.9 million in
fiscal
1997 from $1.1 million in fiscal 1996.
The Company is required to pay federal and state excise
taxes on
sales of its beer. The federal excise tax increases from $7.00 to
$18.00 per barrel on production over 60,000 barrels. Total excise
taxes decreased 8.5% to $498,000 in fiscal 1997 from $544,000 in
fiscal 1996. Excise taxes as a percentage of sales decreased in
fiscal
1997 due to beer sales comprising a lesser percentage of the
Company's
product mix. As the Company increases its beer production above
60,000
barrels, federal excise taxes will increase as a percentage of
sales.
During fiscal 1997 and 1996, the Company sold 57,761 barrels and
64,797 barrels of beer respectively. The Company records excise
tax
expense based on anticipated barrel shipments during the calendar
year.
Net Sales
The Company's net sales increased 1.6% to $26.9 million in
fiscal
1997 from $26.4 million in fiscal 1996. Malta sales decreased
1.0% to
$17.8 million in fiscal 1997 from $17.9 million in fiscal 1996.
Malta
sales decreased as a percentage of net sales to 66.2% in fiscal
1997
from 67.8% in fiscal 1996. This decrease resulted from the
decrease in
Malta sales and the growth in sales of soft drinks. Specialty
soft
drink sales increased 48.0% to $3.7 million in fiscal 1997 from
$2.5
million in fiscal 1996.
Gross Margin
The Company's gross margin (the Company's gross profit as a
percentage of net sales) was 25.2% in fiscal 1997, compared to
24.6%
in fiscal 1996. The increase in gross margin was primarily the
result
of production efficiencies.
<PAGE>
Delivery Expense
Delivery expense as a percentage of net sales remained at
3.1% or
$831,000 in fiscal 1997 and $824,000 in fiscal 1996.
Substantially all
beer sales are shipped F.O.B. shipping point. Malta and specialty
soft
drinks produced for the Company's malta customers are shipped
common
carrier at the Company's expense.
Selling, Advertising and Promotional Expenses
Selling, advertising and promotional expenses increased 16.0% to
$1.4
million in fiscal 1997 from $1.2 million in fiscal 1996. This
increase
in selling, advertising and promotional expenses occurred as the
Company geared up its Company label craft beer packaging and
sales and
marketing efforts. This increase results from an increase in
promotional activities, advertising, point of sale materials and
package design. The Company introduced Brewery Hill Brewer's
Choice, a
variety package, Centennial Lager and Caramel Porter and Lion
Brewery
Root Beer in fiscal 1997. A significant portion of the Company's
sales
and marketing efforts are dedicated to the introduction and
promotion
of its new labels and the implementation of promotional and
advertising programs. In March 1997, the Company began to
strategically reduce its sales and marketing expenditures for
Company
label craft beers due to the softening of the craft beer category
and
the intense competition from both large and small brewers.
General and Administrative Expenses
General and administrative expenses remained at $1.4 million
or
5.2% of net sales in fiscal 1997 and 1996.
Operating Income
Operating income remained at $3.1 million in fiscal 1997 and
1996,
despite a 16.0% increase in selling advertising and promotional
expenses. The Company has implemented a more focused and cost
effective approach to marketing its Company label craft beers,
concentrating on its local and contiguous markets.
Interest (Income) Expense
Interest income in fiscal 1997 was $124,000 as compared to
interest expense of $520,000 in fiscal 1996. Interest income is
primarily the result of increases in cash and cash equivalents
through
cash provided from operations. The decrease in interest expense
results from the repayment of the debt outstanding with the
proceeds
of the 1996 initial public offering.
Provision for Income Taxes
The effective income tax rate was 43% in fiscal 1997 and 45%
in
fiscal 1996. State income taxes and nondeductible goodwill
amortization impact the effective tax rates.
Extraordinary Item
The extraordinary item recorded in 1996 consists of
prepayment
penalties of $160,000, unamortized debt discounts of $213,000 and
the
write-off of unamortized deferred financing costs of $177,000
related
to the early extinguishment of debt, net of an income tax benefit
of
$228,000.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded operations primarily
through
cash generated from operations and bank and other debt. On May 2,
1996, the Company completed an initial public offering of equity
securities. A portion of the proceeds of the initial public
offering
were used to repay indebtedness of the Company.
In February 1997, the Company obtained a $5,000,000
revolving
line of credit and a $2,500,000 revolving equipment line of
credit
from a financial institution. Both facilities are unsecured and
interest is payable monthly based upon either the bank's prime
rate
minus 1/2%, LIBOR plus 75 basis points or the bank's offered
rate. The
line of credit agreements require, among other things, the
maintenance
of certain financial ratios. These lines of credit mature in 3
years,
and the Company, at its option, may convert the principal
outstanding
on the revolving equipment line to a term loan of either 3 or 5
years
at the same rates or at a fixed rate to be determined by the
financial
institution. There were no borrowings under these line of credit
facilities in 1997.
Cash flows provided from operations were $2.7 million in
fiscal
1997 and in 1996. The cash flows from operations have been
affected by
collections of accounts receivable, inventory levels and accounts
and
income taxes payable. In fiscal 1997, the timing of sales to
malta
customers and certain contract customers was primarily
responsible for
an increase in accounts receivable of $455,000 to $2.4 million at
September 30, 1997 as compared to $2.0 million at September 30,
1996.
The increase in accounts receivable can also be attributable to
several contract customers receiving more traditional terms, in
lieu
of advanced payments. Inventory levels increased by $167,000 in
fiscal
1997 due to increased finished goods inventory. Accounts payable,
accrued expenses and refundable security deposits increased
$598,000,
primarily as a result of increased new 12 oz. bottle and other
raw
material purchases, an increase in accrued payroll and customer
deposits. Income taxes payable increased by $202,000 in fiscal
1997 as
a result of the increase in income before taxes and the timing of
tax
payments. In fiscal 1997, the cash provided from operations was
used
to purchase equipment and increase the Company's cash reserves.
During fiscal 1997, the Company expended $1.5 million on
capital
improvements. The Company completed the modification of its
existing
seven ounce bottling line to also accommodate 12 oz. new bottles,
the
bottle size for most of the Company products and relining of nine
storage tanks increasing its fermentation and lagering capacity.
The
Company also reconditioned its combination mash / lauter tub,
installed a malt storage and elevation system, purchased two
rebuilt
fillers and began upgrading its ammonia refrigeration system.
The Company believes that the cash flow provided from
operations
and its borrowing availability under revolving credit facilities
will
be sufficient to support the Company's capital expenditure and
working
capital requirements through the end of fiscal 1998. There can be
no
assurance that additional financing will be available on
favorable
terms or at all.
ITEM 7. FINANCIAL STATEMENTS
The response to this item is submitted in a separate section
of
this report commencing on Page F - 1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS;
COMPLIANCE WITH SECTIONS 16(C) OF THE EXCHANGE ACT.
<PAGE>
Information regarding the Company's directors and executive
officers is incorporated by reference from the Company's
definitive
proxy statement for its 1997 Annual Meeting of Stockholders (the
"1997
Proxy Statement") under the captions "Board of Directors" or
"Executive Compensation."
ITEM 10. EXECUTIVE COMPENSATION
Information regarding executive compensation is incorporated
by
reference from the 1997 Proxy Statement under the caption
"Executive
Compensation."
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information regarding security ownership of certain
beneficial
owners and management is incorporated by reference from the 1997
Proxy
Statement under the caption "Security Ownership of Certain
Beneficial
Owners and Management."
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related
transactions is incorporated by reference from the 1997 Proxy
Statement under the caption "Certain Relationships and Related
Transactions."
PART IV.
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
The following documents are filed as part of this report:
Financial Statements and Financial Statement Schedules. See Index
to
Financial Statements at Item 7 on pages F - 1 through F - 15
of
this report. All other financial statement schedules are
omitted
because they are not required or the required information is
included in the Financial Statement or Notes thereto.
Exhibit Index is included in the Form 10-KSB filed with the
Securities
and Exchange Commission.
No reports on Form 8-K were filed during the fourth quarter of
the
fiscal year ended September 30, 1997.
Index to Exhibits:
Exhibits incorporated by reference to the registrant's
registration statement on Form SB-2 (Registration No.
333-01644).
Exhibit
No. Description
1.1** Underwriting Agreement
3.1** Amendment and Restated Articles of
Incorporation
filed with the Secretary of the Commonwealth
of
Pennsylvania on January 23, 1996
3.2** By-Laws of the Company
4.1** Specimen Stock Certificate
<PAGE>
Exhibit
No. Description
10.1** Employment Agreement, dated as of January 3,
1996,
between the Company and Charles Lawson
10.2* Employment Agreement, dated as of October 1,
1996,
between the Company and Patrick Belardi
10.3** Lease dated March 1989 between the Company
and
Mericle Development Corporation
10.5** 1996 Stock Option Plan
10.6** Form of 1996 Stock Option Agreement
10.7** Agreement dated as of January 3, 1996 between
the
Company and The Marlborough Capital
Investment
Fund, L.P.
10.8** Agreement dated as of January 3, 1996 between
the
Company and Weston Presidio Offshore Capital
C.V.
10.9** Credit and Security Agreement dated as of
October
6, 1993 between the Company and Norwest Bank
Minnesota, National Association
10.10* Mortgage and Security Agreement dated as of
October 6, 1993 between the Company and
William J.
Smulowitz
10.11* Mortgage and Security Agreement dated as of
October 6, 1993 between the Company and
Norwest
Bank Minnesota, National Association
10.12* Mortgage and Security Agreement dated as of
October 6, 1993 between the Marlborough
Capital
Investment Fund, L.P. and Weston Presidio
Offshore
Capital C.V.
10.13** Securities Purchase Agreement dated as of
October
6, 1993
10.14* Letter Agreement dated as of March 29, 1996
between the Company and Lester Smulowitz and
Lynn
Muchnick
10.15* Loan Agreement between the Company and
Corestates
Bank, N.A. dated February 6, 1997
* Filed herewith
** Incorporated by reference to the Company's registration
statement
on Form S-1, File No. 333-01644
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the
Exchange Act, the Registrant has duly caused this Report to be
signed
on its behalf by the undersigned, thereunto duly authorized, in
the
City of Wilkes- Barre, State of Pennsylvania, on December 29,
1997
THE LION BREWERY, INC.
By /s/ Charles E. Lawson, Jr.
------------------------------------
Charles E. Lawson, Jr.
President, Chief
Executive
Officer and Director
Pursuant to the requirements of Securities Exchange Act of
1934,
this Report has been signed by the following persons on its
behalf of
the Registrant and in the capacities and on the dates indicated.
President, Chief Executive
/s/ Charles E. Lawson, Jr. Officer and Director
December 29, 1997
--------------------------
Charles E. Lawson, Jr.
Vice President,
Chief Financial Officer
/s/ Patrick E. Belardi Treasurer and Director
December 29, 1997
--------------------------
Patrick E. Belardi
/s/ Donald J. Sutherland Chairman of the Board
December 29, 1997
--------------------------
Donald J. Sutherland
/s/Thomas S, Ablum Director
December 29, 1997
--------------------------
Thomas S. Ablum
/s/ George W. Peck, IV Director
December 29, 1997
--------------------------
George W. Peck, IV
/s/ Carlo A. von Schroeter Director
December 29, 1997
--------------------------
Carlo A. von Schroeter
/s/ Henry T. Wilson Director
December 29, 1997
--------------------------
Henry T. Wilson
<PAGE>
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
THE LION BREWERY, INC.
INDEX TO FINANCIAL STATEMENTS
Page No.
Report of Independent Public Accountants F
- 2
Financial Statements:
Balance Sheets - September 30, 1997 and 1996 F
- 3
Statements of Income for the Years Ended September 30, 1997
and 1996 F
- 4
Statements of Shareholders' Equity for the Years Ended
September 30, 1997 and 1996 F
- 5
Statements of Cash Flows for the Years Ended
September 30, 1997 and 1996 F
- 6
Notes to Financial Statements F
- 7
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
The Lion Brewery, Inc.:
We have audited the accompanying balance sheets of The Lion
Brewery,
Inc. (a Pennsylvania corporation) as of September 30, 1997 and
1996,
and the related statements of income, shareholders' equity and
cash
flows for the years then ended. These financial statements are
the
responsibility of the Company's management. Our responsibility is
to
express an opinion on these financial statements based upon our
audits.
We conducted our audits in accordance with generally accepted
auditing
standards. Those standards require that we plan and perform the
audit
to obtain reasonable assurance about whether the financial
statements
are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in
the
financial statements. An audit also includes assessing the
accounting
principles used and significant estimates made by management, as
well
as evaluating the overall financial statement presentation. We
believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present
fairly, in all material respects, the financial position of The
Lion
Brewery, Inc. as of September 30, 1997 and 1996, and the results
of
its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
November 21, 1997
F-2
<PAGE>
THE LION BREWERY, INC.
BALANCE SHEETS
SEPTEMBER 30, 1997 AND 1996
1997 1996
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,184,000 $ 1,992,000
Accounts receivable, less allowance
for doubtful accounts of $186,000 and
$157,000 at September 30, 1997 and
1996, respectively 2,444,000 2,001,000
Inventories 2,271,000 2,128,000
209,000 190,000
Prepaid expenses and other assets ------------ ------------
Total current assets 8,108,000 6,311,000
Property, plant & equipment, net of
accumulated depreciation of $2,352,000
and $1,684,000 at September 30, 1997
and 1996, respectively 4,481,000 3,600,000
Goodwill, net of accumulated
amortization of $640,000 and $475,000 at
September 30, 1997 and 1996,
respectively 5,874,000 6,039,000
4,000 4,000
Other assets ------------ ------------
$ 18,467,000 $ 15,954,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities: 1,986,000 1,663,000
Accounts payable 1,069,000 839,000
Accrued expenses 250,000 205,000
Refundable deposits 380,000 178,000
Income taxes payable ------------ ------------
Total current liabilities 3,685,000 2,885,000
Net pension liability 341,000 243,000
67,000 206,000
Deferred income taxes ------------ ------------
4,093,000 3,334,000
Total liabilities ------------ ------------
Shareholders' equity:
Common stock, $.01 par value;
10,000,000 shares authorized;
$3,885,052
shares issued and outstanding 39,000 39,000
Preferred stock, $.01 par value;
1,000,000 shares authorized;
0 shares issued and outstanding 0 0
Additional paid-in capital 10,612,000 10,612,000
Adjustment to reflect minimum pension
liability, net of deferred (120,000) (42,000)
income taxes 3,843,000 2,011,000
Retained earnings ------------ ------------
14,374,000 12,620,000
Total shareholders' equity ------------ ------------
Total liabilities and shareholders' $ 18,467,000 $ 15,954,000
equity ============ ============
The accompanying notes to financial statements are an integral part of
these balance sheets.
THE LION BREWERY, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996
1997 1996
-------------- ----------------
Gross sales $ 27,367,000 $ 26,983,000
Less excise taxes 498,000 544,000
------------ ------------
Net sales 26,869,000 26,439,000
Cost of sales 20,099,000 19,939,000
------------ ------------
Gross profit 6,770,000 6,500,000
------------ ------------
Operating expenses: 831,000 824,000
Delivery
Selling, advertising and 1,439,000 1,240,000
promotional expenses 1,410,000 1,373,000
General and administrative ------------ ------------
3,680,000 3,437,000
------------ ------------
Operating income 3,090,000 3,063,000
Interest (income) expense and (124,000) 520,000
amortization of debt discount, net ------------ ------------
Income before provision for income 3,214,000 2,543,000
taxes and extraordinary item 1,382,000 1,125,000
Provision for income taxes ------------ ------------
Income before extraordinary 1,832,000 1,418,000
item
Extraordinary item, net of income 0 0
tax benefit of $228,000 ------------ ------------
Net income 1,832,000 1,096,000
Warrant accretion 0 0
------------ ------------
Net income available to common 1,832,000 1,007,000
shareholders ============ ============
Income per share before $ 0.47 $ 0.47
extraordinary item
Extraordinary item - loss per 0.00 (0.11)
share ------------ ------------
Net income per share $ 0.47 $ 0.36
------------ ------------
Shares used in per share 3,923,000 2,835,000
calculation ============ ============
The accompanying notes to financial statements are an integral part of
these balance sheets.
THE LION BREWERY, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996
Common Stock
Shares Amount Total
--------- ------- ----------
Balance, September 30, 1995 1,851,183 $19,000 $2,317,000
Accretion of warrants (89,000)
Conversion of warrants 291,565 3,000 812,000
Proceeds of Initial Public 1,875,000 18,000 9,466,000
Offering, net of costs
Repurchase of common stock (132,696) (1,000) (950,000)
Adjustment to reflect minimum (32,000)
pension liability, net of
deferred taxes
Net income __________ _________ 1,096,000
Balance, September 30, 1996 3,885,052 39,000 12,620,000
Adjustment to reflect minimum (78,000)
pension liability net of
deferred taxes
Net income _________ _________ 1,832,000
-----------
Balance, September 30, 1997 3,885,052 $39,000 $14,374,000
========= ========= ===========
The accompanying notes to financial statements are an integral part of
these statements.
Additional
Paid-in Pension Retained
Capital Liability Earnings Total
----------- --------- ---------- -----------
Balance, $1,304,000 $(10,000) $1,004,000 $2,317,000
September 30,
1995
Accretion of (89,000) (89,000)
warrants
Conversion of 8092,000 812,000
warrants
Proceeds of 9,448,000 9,466,000
Initial
Public
Offering,
net of costs
Repurchase of (949,000) (950,000)
common stock
Adjustment to (32,000) (32,000)
reflect
minimum
pension
liability,
net of
deferred
taxes
Net income 0000 0000 1,096,000 1,096,000
Balance, 10,612,000 (42,000) 2,011,000 12,620,000
September 30,
1996
Adjustment to
reflect
minimum
pension
liability
net of
deferred
taxes (78,000) (78,000)
Net income 0000 0000 1,832,000 1,832,000
----------- ----------- ----------- -----------
Balance, $10,612,000 $(120,000) $3,843,000 $14,374,000
September 30, =========== =========== =========== ===========
1997
The accompanying notes to financial statements are an integral part of
these statements.
THE LION BREWERY, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996
Year ended September 30,
--------------------------
1997 1996
----------- -----------
Cash flows from operating
activities:
Net income $1,832,000 $1,096,000
Adjustments to reconcile net
income to net cash provided by
operating activities
Extraordinary item 0 550,000
Depreciation and amortization 833,000 830,000
Provision for bad debt
reserve 12,000 12,000
Provision for inventory
reserve 24,000 75,000
Benefit for deferred income
taxes (139,000) (145,000)
Changes in assets and
liabilities:
(Increase) decrease in:
Accounts receivable (455,000) 463,000
Inventories (167,000) (200,000)
Prepaid expenses and other
assets (19,000) 87,000
Increase (decrease) in:
Accounts payable, accrued
expenses and refundable
deposits 598,000 80,000
Income taxes payable 202,000 (152,000)
20,000 (7,000)
Pension liability ---------- ----------
Net cash provided by operating 2,741,000 2,689,000
activities ---------- ----------
Cash flows from investing
activities:
Purchase of equipment (1,549,000) (908,000)
---------- ----------
Cash flows from financing
activities:
Net proceeds from sale of common
stock 0 9,466,000
Repurchase of common stock 0 (950,000)
Net reduction in line of credit 0 (721,000)
Repayment of long term debt 0 (7,584,000)
Net cash provided by financing 0 211,000
activities ---------- ----------
Net increase in cash and cash
equivalents 1,192,000 1,992,000
Cash and cash equivalents, 1,192,000 0
beginning of year ---------- ----------
Cash and cash equivalents, end of $3,184,000 $1,992,000
year ========== ==========
Supplementary disclosure of cash
flow information:
Cash paid for:
Interest $ 0 $ 516,000
========== ==========
Income taxes $1,282,000 $1,183,000
========== ==========
The accompanying notes to financial statements are an integral
part of these statements.
THE LION BREWERY, INC.
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND DESCRIPTION OF THE BUSINESS
The Lion Brewery, Inc. ("the Company") formerly The Lion, Inc.,
was
incorporated in Pennsylvania on April 5, 1933. The Company is a
brewer
and bottler of brewed beverages, including malta, specialty beers
and
specialty soft drinks. Malta is a non-alcoholic brewed beverage
which
the Company produces for major Hispanic food distribution
companies
primarily for sale in the eastern United States. Specialty beers,
generally known as craft beers, are brewed by the Company both
for
sale under its own labels and on a contract basis for other
marketers
of craft beer brands. Craft beers are distinguishable from other
domestically produced beers by their fuller flavor and adherence
to
traditional European brewing styles. The Company also produces
specialty soft drinks, including all-natural brewed ginger
beverages,
on a contract basis for third parties. The Lion Brewery, Inc.
also
brews beer for sale under traditional Company-owned labels for
the
local market at popular prices.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with
generally
accepted accounting principles requires management to make
estimates
and assumptions that affect the recorded amounts of assets and
liabilities at the date of the financial statements and the
reported
amounts of revenues and expenses during the reporting period.
Actual
results could differ from those estimates.
Revenue Recognition
Revenue is generally recognized upon shipment. For products
brewed
under beer and soft drink contracts, revenue is generally
recognized
upon completion of production.
Cash and Cash Equivalents
The Company considers all highly liquid investments with
maturities at
the purchase date of three months or less to be cash equivalents.
The
carrying amount of cash equivalents approximates fair value.
Inventories
Inventories are stated at the lower of cost or market determined
on a
first-in, first-out method (FIFO).
Property, Plant and Equipment
Property, plant and equipment are recorded at cost and are
depreciated
using the straight-line method over the useful lives of the
assets.
All significant additions and improvements are capitalized and
repairs
and maintenance charges are expensed as incurred. Estimated
useful
lives for the assets are as follows:
Years
-----
Buildings 20
Machinery and equipment 3 - 10
Kegs and bottles 3 - 7
F-3
<PAGE>
THE LION BREWERY, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes
The Company recognizes deferred tax assets and liabilities for
the
estimated future tax effects of events based on temporary
differences
between financial statement and tax basis of assets and
liabilities
using enacted tax rates in effect in the years the differences
are
expected to be reversed. Valuation allowances are established
when
necessary to reduce deferred tax assets to the amounts expected
to be
realized. Income tax expense is comprised of current taxes
payable and
the change in deferred tax assets and liabilities during the
year.
Intangible Assets
The excess of the cost of the acquired assets over their fair
values
is being amortized using the straight-line method over forty
years.
Product, Customer and Supply Concentrations
The sale of malta, beer and soft drinks has accounted for all of
the
Company's sales, with malta accounting for 66% and 68% for the
years
ended September 30, 1997 and 1996. The Company's top three
customers
accounted for 66% and 60% of sales in fiscal 1997 and 1996.
Accounts
receivable from these three customers totaled $1,984,000 and
$1,712,000 at September 30, 1997 and 1996. The Company's largest
customer accounted for 32% and 27% of sales in fiscal 1997 and
1996.
The Company does maintain contracts with several of its top
customers;
however there are no minimum purchase requirements. The Company
does
not have a contract with its largest customer. The length of such
contracts range from two to four years. The decision by a major
customer to switch production of its contract beverages from the
Company to another brewer, or to build facilities to brew its own
product, could have a materially adverse effect on the Company's
financial results.
The Company anticipates a change in the availability of certain
styles
of recycled glass from its current sources. This reduction in
availability would result in an increased cost of glass; reducing
future gross margins and could have a significant impact on
overall
profitability. The Company will make all efforts to mitigate the
effects on gross margins and overall profitability, but no
assurances
can be made that the Company will be successful in this regard.
Excise Taxes
The U.S. federal government currently imposes an excise tax of
$18 per
barrel on every barrel of beer produced for consumption in the
United
States. However, any brewer with production under 2 million
barrels
per year pays a federal excise tax of $7 per barrel on the first
60,000 barrels it produces annually. Individual states also
impose
excise taxes on alcoholic beverages in varying amounts. The
Company
records the excise tax as a reduction of gross sales in the
accompanying financial statements.
F-4
<PAGE>
THE LION BREWERY, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Net Income Per Share
Net income per share is computed using the weighted average
number of
common and dilutive common equivalent shares outstanding during
the
period. Common equivalent shares consist of stock options and
warrants
(using the treasury stock method for all periods presented).
Accretion
relating to the Company's warrants (see Note 11) is deducted in
computing income applicable to common stock.
On March 31, 1997, the Financial Accounting Standards Board
issued
SFAS No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128 is
effective
for fiscal years ending after December 15, 1997, and, when
adopted, it
will require the restatement of prior years' earnings per share.
If
the Company had adopted SFAS 128 for the year ended September 30,
1997, there would have been no effect on net income per share, on
either the basic or diluted basis.
Financial Instruments
Financial instruments that potentially subject the Company to
credit
risk consist principally of trade receivables. The fair value of
accounts receivable approximates carrying value.
Long-Lived Assets
During 1996, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 121, "Accounting for the
Impairment
of Long-Lived Assets" ("SFAS 121"). SFAS 121 requires, among
other
things, that an entity review its long-lived assets and certain
related intangibles for impairment whenever changes in
circumstances
indicate that the carrying amount of an asset may not be fully
recoverable. The Company does not believe that any impairment
exists
in the recoverability of its long- lived assets.
Stock Based Compensation
In October 1995, the Financial Accounting Standards Board issued
Statement No. 123, "Accounting for Stock-Based Compensation"
("SFAS
123"), which requires companies to measure employee stock
compensation
plans based on the fair value method using an option pricing
model or
to continue to apply APB No. 25, "Accounting for Stock Issued to
Employees," and provide pro forma footnote disclosures under the
fair
value method. The Company continues to apply APB No. 25 and will
provide pro forma footnote disclosures (see Note 11).
F-5
<PAGE>
THE LION BREWERY, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
3. INVENTORIES
Inventories consist of the following:
1997 1996
---- ----
Raw materials $ 195,000 $ 163,000
Finished goods 854,000 673,000
Supplies 1,222,000 1,292,000
---------- ----------
$2,271,000 $2,128,000
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
1997 1996
---- ----
Land and building $1,084,000 $1,024,000
Machinery and equipment 5,534,000 4,038,000
Kegs and bottles 215,000 222,000
6,833,000 5,284,000
Less accumulated depreciation 2,352,000 1,684,000
---------- ----------
$4,481,000 $3,600,000
========== ==========
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
1997 1996
---- ----
Payroll and related accruals $ 535,000 $ 427,000
Other accruals 534,000 412,000
---------- ----------
$1,069,000 $ 839,000
========== ==========
F-6
<PAGE>
THE LION BREWERY, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
6. INCOME TAXES
The provision for income taxes is as follows:
1997 1996
---- ----
Current:
Federal $1,223,000 $ 786,000
State 240,000 256,000
---------- ----------
1,463,000 1,042,000
---------- ----------
Deferred:
Federal (69,000)
(105,000)
State (12,000) (
40,000)
----------- -----------
(81,000)
(145,000)
----------- -----------
$1,382,000 $ 897,000
========== =========
The principal items accounting for the difference between income
taxes
computed at the statutory rate and the provision for income taxes
reflected in the statements of income are as follows:
1997 1996
United States statutory rate 35% 35%
State taxes (net of federal
tax benefit) 6 7
Nondeductible expenses -
goodwill amortization 2 3
-- --
43% 45%
== ==
Components of the Company's deferred income tax balances are as
follows:
1997 1996
---- ----
Deferred income tax assets:
Benefit accruals $ 332,000 $ 235,000
Accounts receivable 83,000 71,000
Inventories 110,000 96,000
---------- ----------
525,000 402,000
Deferred income tax liabilities:
Property, plant and equipment 549,000 559,000
Other 43,000 49,000
---------- ----------
592,000 608,000
---------- ----------
$ 67,000 $ 206,000
========== ==========
F-7
<PAGE>
THE LION BREWERY, INC.
NOTES TO THE FINANCIAL STATEMENTS - (CONTINUED)
7. DEBT
In February 1997, the Company obtained a $5,000,000 revolving
line of
credit and a $2,500,000 revolving equipment line of credit from a
financial institution. Both facilities are unsecured and interest
is
payable monthly based upon either the bank's prime rate minus
1/2%,
LIBOR plus 75 basis points or the bank's offered rate. The line
of
credit agreements require, among other things, the maintenance of
certain financial ratios. These lines of credit mature in 3
years, and
the Company, at its option, may convert the principal outstanding
on
the revolving equipment line to a term loan of either 3 or 5
years at
the same rates or at a fixed rate to be determined by the
financial
institution.
On May 2, 1996, the Company completed an initial public offering
of
equity securities. A portion of the proceeds were used to repay
indebtedness of the Company (see Note 12). The extraordinary item
recorded in 1996 consists of prepayment penalties of $160,000,
unamortized debt discounts of $213,000 and the write-off of
unamortized deferred financing costs of $177,000 related to the
early
extinguishment of debt, net of an income tax benefit of $228,000.
8. PENSION PLANS
The Company maintains a noncontributory defined benefit pension
plan
covering nonunion employees. The plan provides benefits based on
years
of service and compensation levels. The Company's funding policy
for
these plans is predicted on allowable limits for federal income
tax
purposes.
The components of net periodic pension cost for the defined
benefit
plan are as follows:
1997 1996
---- ----
Service cost - benefits earned
during the period $ 45,000 $
30,000
Interest cost on projected benefit
obligation 46,000
36,000
Actual return on plan assets (41,000)
(23,000)
Net amortization and deferral (43,000)
(19,000)
----------
----------
Net pension expense $ 93,000 $
62,000
----------
----------
Assumptions used in the accounting for the defined benefit plan
are as
follows:
1997
1996
----
----
Weighted average discount rate 7.5%
8.5%
Expected long-term rate of return on assets 7.5 9.0
Average salary increase 5.0 5.0
F-8
<PAGE>
THE LION BREWERY, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
8. PENSION PLANS (CONTINUED)
The following table sets forth the funded status and the net
pension
liability included in the balance sheet for the defined benefit
plan:
1997 1996
Actuarial present value of benefit obligation:
Accumulated benefit obligation (including
vested benefits of $515,000 and $392,000) $ 532,000
$ 403,000
======== ======== =========
=========
Projected benefit obligation 598,000
438,000
Plan assets at fair value 191,000
160,000
---------
---------
Projected benefit obligation in excess
of plan assets 407,000
278,000
Unrecognized net loss (278,000)
(111,000)
Adjustment required to recognize minimum
liability 212,000
76,000
---------
---------
Net pension liability recognized in balance sheet $ 341,000
$ 243,000
In 1997, the Company established a combined 401(k) / profit
sharing
plan, covering substantially all nonunion employees, meeting
certain
eligibility requirements. The profit sharing plan is
noncontributory.
Under the 401(k) plan, eligible employees may contribute up to
15% of
their compensation annually. The Company currently does not match
employee contributions. Contributions to the profit sharing plan
are
determined by the Board of Directors and are discretionary. In
1997,
the Company contributed $35,000 to the profit sharing plan.
Employer
match, if any, and profit sharing contributions vest over a 6
year
period, unless termination is the result of death, disability or
retirement.
The Company also participates in a multiemployer pension plan
which
provides defined benefits to union employees. Contributions are
based
on a fixed amount per hour worked. Pension cost aggregated
$182,000
and $162,000 for the years ended September 30, 1997 and 1996,
respectively.
9. COMMITMENTS AND CONTINGENCIES
The Company leases warehouse facilities and equipment under
noncancelable operating leases. Future minimum lease payments
under
these leases are:
1998 $246,000
1999 187,000
2000 136,000
2001 102,000
Rent expense for all leased facilities amounted to $332,000 in
1997
and $294,000 in 1996.
The Company has entered into employment agreements with the
Company's
President and Chief Financial Officer at annual base salaries
aggregating $240,000. Bonuses are determined at the discretion of
the
Board of Directors. The contracts also provide for up to 2 years
severance in the case of involuntary termination.
F-9
<PAGE>
THE LION BREWERY, INC.
NOTES TO THE FINANCIAL STATEMENTS - (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company has retained an investment banking firm to act as its
exclusive financial advisor in connection with a possible sale,
merger
or other form of business combination.
The Company is engaged in certain legal and administrative
proceedings
incidental to its normal course of business activities.
Management
believes the outcome of these proceedings will not have a
material
adverse effect on the Company's financial position or results of
operations.
RELATED PARTY TRANSACTIONS
Quincy Partners, a general partner of Lion Partners Company, L.P.
had
a management consulting agreement with the Company providing for
an
annual fee of $130,000. This agreement was terminated on May 2,
1996,
the effective date of the initial public offering (see Note 12).
In
connection with the offering Quincy Partners received a
consulting fee
of $80,000. The chairman of the Board of Directors receives
$50,000
annually plus stock options for his services in this capacity.
The Company obtained covenants not to compete from two selling
employee/shareholders for an aggregate of $600,000 payable in
annual
installments of $100,000 over a six year noncompete period, one
covenant ending in October, 1999 and the other ending in October,
2000.
11. STOCK OPTION PLANS AND WARRANTS
The Company's 1996 Employee Stock Option Plan (the Plan) permits
the
granting of options to directors and employees of the Company.
The
Plan is administered by the Compensation Committee of the Board
of
Directors, which generally has the authority to select
individuals who
are to receive options and to specify the terms and conditions of
each
option so granted, including the number of shares covered by the
option, the type of option (incentive stock option or
nonqualified
stock option), the exercise price (which in all cases must be at
least
100% of the fair market value of the common stock on the date of
grant), vesting provisions, and the overall option term. Options
to
purchase a total of 400,000 shares of common stock were reserved
for
future grants of options under the Plan. In January 1996, the
Company
granted options for an aggregate of 268,431 shares of common
stock to
a director, certain officers and other key employees of the
Company.
All of these options vest over a period of two years and have an
exercise price of $6 per share and are outstanding as of
September 30,
1997.
For the purpose of supplemental disclosures required by SFAS 123,
the
fair value of options granted during 1996 was estimated as of the
respective date of grant using a Black-Scholes option pricing
model
with the following assumptions for 1996; risk free interest rate
of
6.5%; volatility factor of the expected market price of the
common
stock of 40%; expected life of the options of 8 years and
expected
dividend yield of zero. The weighted average fair value of
options
granted during 1996 was $3.44. For pro forma purposes, the
estimated
fair value of options is amortized to expense over the options'
vesting period. Net earnings on a pro forma basis, determined as
if
the Company had accounted for its stock options under the fair
value
method using an option pricing mode, were $1,676,000 and
$851,000,
respectively, for the years ended September 30, 1997 and 1996 and
pro
forma earnings per share were $0.43 and $0.30, respectively.
F-10
<PAGE>
THE LION BREWERY, INC.
NOTES TO THE FINANCIAL STATEMENTS - (CONTINUED)
11. STOCK OPTION PLANS AND WARRANTS (CONTINUED)
On March 21, 1994, the Company's Board of Directors granted
options to
purchase an aggregate of 57,251 shares of common stock of the
Company
to the President at $1.40 per share (estimated fair market value
on
the date of grant) expiring in 2001. The options vest over three
years. Vesting accelerated at the initial public offering (see
Note
12).
The senior subordinated noteholders received warrants for the
purchase
of 291,565 shares of the Company's common stock having a nominal
exercise price. The loan agreement provided that the noteholders
may
put these warrants to the Company and accordingly, the warrants
were
accreted to the estimated redemption price. During fiscal 1996 an
accretion of $89,000 was recorded and charged to retained
earnings.
The warrants were exercised in December 1995. The Company used
$950,000 of the net proceeds of the initial public offering to
repurchase 132,696 shares of common stock issued upon the
exercise of
the warrants.
12. PUBLIC OFFERING AND PREFERRED STOCK AUTHORIZATION
On May 2, 1996, the Company completed an initial public offering
of
1,875,000 shares of common stock for $6.00 per share, including
the
partial exercise of the over-allotment option. The proceeds of
the
initial public offering, including the partial exercise of the
over-allotment option, net of the underwriting commissions and
expenses totaled $9,466,000. A portion of these proceeds were
used to
repay indebtedness of the Company of $7,948,000 and to retire
132,696
shares of Common Stock, in connection with the termination of a
loan
agreement, at a cost of $950,000.
In connection with this offering, the Company issued warrants to
the
underwriters to purchase up to 135,000 shares of common stock at
an
exercise price of $7.20, which are exercisable for a period of
five
years from the date of the offering. The holders have certain
rights
to obtain the registration of these shares under the Securities
Act.
F-11
<PAGE>
Exhibit Index
No. Description
10.1** Employment Agreement, dated as of January 3,
1996,
between the Company and Charles Lawson
10.2* Employment Agreement, dated as of October 1,
1996,
between the Company and Patrick Belardi
10.3** Lease dated March 1989 between the Company
and
Mericle Development Corporation
10.5** 1996 Stock Option Plan
10.6** Form of 1996 Stock Option Agreement
10.7** Agreement dated as of January 3, 1996 between
the
Company and The Marlborough Capital
Investment
Fund, L.P.
10.8** Agreement dated as of January 3, 1996 between
the
Company and Weston Presidio Offshore Capital
C.V.
10.9** Credit and Security Agreement dated as of
October
6, 1993 between the Company and Norwest Bank
Minnesota, National Association
10.10* Mortgage and Security Agreement dated as of
October 6, 1993 between the Company and
William J.
Smulowitz
10.11* Mortgage and Security Agreement dated as of
October 6, 1993 between the Company and
Norwest
Bank Minnesota, National Association
10.12* Mortgage and Security Agreement dated as of
October 6, 1993 between the Marlborough
Capital
Investment Fund, L.P. and Weston Presidio
Offshore
Capital C.V.
10.13** Securities Purchase Agreement dated as of
October
6, 1993
10.14* Letter Agreement dated as of March 29, 1996
between the Company and Lester Smulowitz and
Lynn
Muchnick
10.15* Loan Agreement between the Company and
Corestates
Bank, N.A. dated February 6, 1997
* Filed herewith
** Incorporated by reference to the Company's registration
statement on Form S-1, File No. 333-01644
Exhibit 10.2
Dated as of October 1, 1996
Patrick E. Belardi
2504 Winfield Avenue
Scranton, Pennsylvania 18505
Dear Mr. Belardi:
The following sets forth our agreement as to the terms of
your employment as the Chief Financial Officer of The Lion
Brewery, Inc. (the "Company").
1. The Company agrees to employ you, and you agree to be
so employed, in the capacity of Chief Financial Officer of the
Company. In consideration of the services to be rendered by you,
the Company shall pay you and you shall accept as compensation an
annual salary, payable in equal installments in accordance with
the Company's past payroll practices with respect to executives,
but in no event less frequently than monthly, at the rate of
$80,000.00 per annum (the "Annual Salary"). The Board of
Directors of the Company may, in its sole discretion, also pay
annually to you a bonus as additional compensation.
2. In addition to the compensation provided above, (i) you
shall be entitled to participate in all health benefits and other
employee benefit programs of the Company and (ii) the Company
will pay for your dues to the professional associations and pay
for your ongoing educational expenses (approximately 80 hours
every two years) for your CPA license. Actual educational time
spent will be paid by the Company. In case of death, in addition
to the life insurance policy benefits, all earned but unpaid
salary, bonus or remaining severance pay shall be paid to the
life insurance policy beneficiary.
3. Vacation will be earned at the rate of one day per
month up to twelve (12) days per year. Days earned but unused
will be vested and paid in full upon termination of employment
without cause.
4. The Company may terminate your employment at any time
for Cause (as hereinafter defined), without further compensation
liability on the part of the Company. For purposes of this
Agreement, the term "Cause" shall mean (i) action by you
involving willful, gross misconduct having a material adverse
effect on the Company, (ii) any material breach by you of any
provision of this Agreement, or (iii) you being convicted of a
felony or equivalent crime under the laws of the United States or
any state, or a felony or equivalent crime under the laws of any
other country or political subdivision thereof involving moral
turpitude.
5. Upon termination of your employment hereunder by the
Company without Cause, the Company shall pay you the Annual
Salary for a period of one (1) year from the date of such
termination, provided you are actively seeking employment during
such one year period. All severance payments shall be payable in
equal installments in accordance with the Company's past payroll
practices with respect to executives, but in no event less
frequently than monthly, and shall be reduced by all compensation
received by you from any other source employing you during the
applicable severance period.
This Agreement shall automatically renew itself on a year to
year basis, with mutually agreed upon terms, unless either party
gives to the other party at least 45 days prior written notice of
its intent to terminate this Agreement.
This Agreement shall be governed by the laws of the
Commonwealth of Pennsylvania and sets forth our complete and full
understanding of the matters contained herein.
Please confirm that the foregoing correctly sets forth our
understanding and agreement as to the matters contained herein
and that you agree to be bound by the terms and conditions hereof
by signing below.
Very truly yours,
The Lion Brewery, Inc.
By: /s/
--------------------
Agreed and Accepted:
/s/ Patrick E. Belardi
--------------------------
Patrick E. Belardi
Exhibit 10.13
LOAN AGREEMENT
--------------
THIS AGREEMENT ("Agreement") made and entered into as of the
6th day of February, 1997, by and between THE LION BREWERY, INC.,
a Pennsylvania corporation with its principal office at 700 North
Pennsylvania Avenue, Wilkes-Barre, Pennsylvania (the "Borrower");
and CORESTATES BANK, N.A., a banking corporation with offices
located at 130 Wyoming Avenue, Scranton, Lackawanna County,
Pennsylvania 18704 (the "Bank")
W I T N E S S E T H:
WHEREAS, the Borrower is in the process of making capital
improvements to its production facility in Wilkes-Barre,
Pennsylvania to increase its production capacity and efficiency
(the "Project"); and
WHEREAS, in connection with the Project, Borrower has
applied to the Bank for a revolving line of credit in the amount
of TWO MILLION FIVE HUNDRED THOUSAND and 00/100 ($2,500,000.00)
DOLLARS (the "Revolver") and further, has applied to the Bank for
a working capital line of credit in the amount of FIVE MILLION
and 00/100 ($5,000,000.00) DOLLARS (the "Line") (the Revolver and
the Line being hereinafter sometimes collectively referred to as
the "Loans"); and
WHEREAS, the Bank is willing to make the Loans to Borrower
pursuant to the terms and conditions of this Agreement and all
other loan documents referred to in this Agreement (all of which
are hereinafter sometimes collectively referred to as the "Loan
Documents" and are incorporated into this Agreement by
reference).
NOW, THEREFORE, in consideration of the premises and the
mutual covenants hereinafter set forth, and for other good and
valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the parties hereto agree as follows:
SECTION 1. THE LOANS.
---------
(a) Revolver. The Bank shall make a credit facility
--------
available to Borrower in the principal amount of TWO MILLION FIVE
HUNDRED THOUSAND and 00/100 ($2,500,000.00) DOLLARS, the proceeds
of which will be used by Borrower for capital expenditures
related to increasing production capacity and efficiency at its
production facility in Wilkes-Barre, Pennsylvania.
(b) The Line. The Bank shall make a credit facility
--------
available to Borrower in the principal amount of FIVE MILLION AND
00/100 ($5,000,000.00) DOLLARS which shall be used primarily for
working capital.
(c) Term and Interest.
-----------------
(i) Revolver. Unless terminated due to an Event
--------
of Default (hereinafter defined) or unless converted to a term
loan as hereinafter provided, the Revolver shall mature three (3)
years from the date hereof, at which time all outstanding
principal, accrued and unpaid interest and any and all other
costs associated with the Revolver shall be due and payable.
Interest on the outstanding principal balance of the Revolver
shall be paid monthly on all prime rate loans and on the earlier
of the last day of the applicable rate period or quarterly for
all LIBOR costs, whichever is sooner, based upon, and at
Borrower's option, either:
A) Bank's Prime Rate (hereinafter defined)
minus one-half (1/2%) percent; or
B) LIBOR Based Rate (hereinafter defined)
plus 75 basis points; or
C) Bank's Offered Rate (hereinafter
defined).
All rate requests shall be in writing on the Bank's Rate
Notification Form. Interest on all loans shall be computed on
actual/360 basis.
The Borrower shall have the option, at any time, to convert
the outstanding principal balance of the Revolver to a term loan
of either three (3) or five (5) years from the date of the
exercise of the option (the "Term Loan Option"). In the event
the Term Loan Option is exercised, Borrower shall repay the
outstanding principal balance under the Term Loan Option in equal
monthly payments of principal plus interest based upon the term
selected. Bank agrees to quote a fixed rate of interest option
to the Borrower upon request. Fixed rate loans may not be
prepaid without penalty. Bank shall advise Borrower of penalty
upon Borrower's request for fixed rate loan. All outstanding
Term Loans shall reduce the availability for borrowing under the
Revolver.
(ii) The Line. Unless terminated due to an Event
--------
of Default (hereinafter defined), the Line shall mature three (3)
years from the date hereof, at which time all outstanding
principal, accrued and unpaid interest and any and all other
costs associated with the Line shall be due and payable.
Interest on the outstanding principal balance of the Line shall
be paid monthly based upon and at Borrower's option, either:
A) Bank's Prime Rate (hereinafter defined)
minus one-half (1/2%) percent; or
B) LIBOR Based Rate (hereinafter defined)
plus 75 basis points; or
C) Bank's Offered Rate (hereinafter
defined).
The Bank's Prime Rate is a floating rate of interest that is
designated from time to time by the Bank as the "Prime Rate" and
is used by the Bank as a reference rate with respect to different
interest rates charged to Borrower. The rate of interest payable
shall change simultaneously and automatically upon the Bank's
designation of any change in such Prime Rate. The Bank's
determination and designation from time to time of the Prime Rate
shall not in any way preclude the Bank from making loans to other
borrowers at a rate which is higher or lower than or different
from the Prime Rate.
LIBOR Based Rate means the rate per annum (rounded upward,
if necessary, to the nearest 1/16 of 1%) quoted at approximately
11:00 a.m. London time, to the principal London branch of the
Bank, two business days prior to the first day of the date on
which the quoted rate is to become effective for the offering by
leading banks in the London interbank market of dollar deposits
in immediately available funds for a one, two, three or six month
period as appropriate ("Interest Period"), and in an amount
comparable to the unpaid principal balance of the Applicable
Loan. Interest Periods with respect to the LIBOR Based Rate
means each 30, 60, 90 or 180 day period as elected by the
Borrower commencing of the date hereof and ending on the date
which is the numerically corresponding day in the first, second,
third or sixth calendar month thereafter, provided that if an
Interest Period would end on a day that is not a Business Day
(hereinafter defined), such Interest Period shall be extended to
the next succeeding Business Day, unless such Business Day would
fall in the next calendar month, in which case such Interest
Period shall end on the immediately preceding Business Day.
The Bank's Offered Rate is a rate of interest quoted by the
Bank, from time to time, as an interest rate that the Borrower
has the option of selecting with respect to advances under this
facility, the quotation and duration of which interest rate shall
be offered to the Borrower from time to time by the Bank in its
sole discretion.
Notwithstanding anything contained herein to the contrary,
upon and after the occurrence of an Event of Default which is not
cured to the satisfaction of the Bank, interest shall accrue at
an annual rate (before and after judgment) equal to the Prime
Rate plus three percent (3%) per annum.
Subject to the provisions of this Agreement, interest shall
be payable by the Borrower monthly, in arrears, on the first day
of each month, or as otherwise billed by the Bank.
"Business Day" means any day other than a Saturday, Sunday
or other day on which commercial banks in Philadelphia,
Pennsylvania are authorized or required to close under the laws
of the Commonwealth of Pennsylvania and a day on which dealings
in United States dollar deposits are also are also carried on in
the London interbank market and banks are open for business in
London, England.
No later than three (3) Business Days prior to the end of
each relevant Interest Period in the case of renewal of a LIBOR
Based Rate, the Borrower shall elect, in writing, the LIBOR Based
Rate and Interest Period, Bank's Prime Rate minus one-half (1/2%)
percent or Bank's Offered Rate. Such election in the case of the
LIBOR Based Rate, once made, shall be irrevocable and if no
election is made three (3) Business Days prior to the end of each
relevant Interest Period, the Borrower shall be deemed to have
elected to pay interest at the Prime Rate minus one-half (1/2%)
percent until such time as it elects by giving three (3) Business
Days prior notice to pay interest at the LIBOR Based Rate for an
Interest Period. LIBOR Rate Loans may not be added to or prepaid
prior to the expiration of their stated interest period without
penalty.
Upon prepayment of any LIBOR Rate Loan on a day other than
the last day of the applicable Interest Period (whether
voluntarily, involuntarily, by reason of acceleration, demand or
otherwise), the Borrower shall pay to the Bank within five (5)
Business Days after demand, an amount equal to the Bank's
"funding costs", which shall mean the sum of:
(i) the principal amount of the LIBOR Rate Loan
prepaid, multiplied by the number of days between the date of
prepayment and the last day of the applicable Interest Period,
divided by 360, multiplied by the applicable Interest
Differential (provided that the product of the foregoing formula
must be a positive number); plus
(ii) all reasonable out-of-pocket expenses
incurred by the Bank in connection with such payment, prepayment
or failure to borrow.
The Bank's determination of the amount of any "funding costs"
payable under this paragraph shall be conclusive in the absence
of manifest error.
If the adoption of any applicable law, rule or regulation,
or any change therein, or any change in the interpretation or
administration thereof by any governmental authority, central
bank or comparable agency charged with the interpretation or
administration thereof, or compliance by the Bank with any
request or directive of any such authority, central bank or
comparable agency shall make it unlawful or impossible for any
Bank to make, maintain or fund its LIBOR Rate Loans, the Bank
shall give notice thereof to the Borrower, whereupon (until the
Bank notifies the Borrower that the circumstances giving rise to
such suspension no longer exist), the obligation of the Bank to
make LIBOR Rate Loans shall be suspended. If the Bank shall
determine that it may not lawfully continue to maintain and fund
any of its outstanding LIBOR Rate Loans to maturity and shall so
specify in such notice, the Borrower shall immediately prepay in
full the then outstanding principal amount of each such LIBOR
Rate Loan, together with accrued interest thereon and any
"funding costs" incurred by the Bank hereunder.
(d) Method of Payments. Borrower irrevocably
------------------
authorizes Bank to debit its designated account for all payments
due under the Loans. The Bank shall furnish written verification
of each payment charged against the account. The Borrower shall
promptly pay Bank such amounts as may be due if the designated
account balance is insufficient.
(e) Notes. The Loans shall be evidenced by the
-----
Borrower's Notes of even date herewith (the "Notes"), the terms
of which are incorporated herein by reference thereto. If
Borrower shall have the privilege of prepaying (as herein
provided) the principal balance of the Notes, such prepayments
shall be applied to the installments of the Note in inverse order
of maturity and shall not postpone or interrupt the payment of
monthly or other installments as they shall become due.
SECTION 2. CLOSING DOCUMENTS.
-----------------
This Loan Agreement, the documents referenced herein
and those executed and exchanged at settlement are hereinafter
sometimes collectively referred to as the "Loan Documents" and
are incorporated herein by reference thereto.
SECTION 3. CLOSING AND DISBURSEMENTS.
-------------------------
(a) The obligation of the Bank to close on the Loans
shall be conditioned upon:
(i) An opinion of counsel for the Borrower
satisfactory to the Bank and its counsel, providing, among other
things, that to the best of counsel's knowledge the
representations and warranties of the Borrower contained in the
Loan Documents are true and correct, that the Loan Documents
executed and delivered to the Bank by the Borrower are valid and
binding subject to appropriate reservation of creditors' rights
language;
(ii) Its receipt of fully executed original copies
of this Loan Agreement, the Loan Documents and any and all other
documents reasonably requested by the Bank and its counsel;
(iii) Its receipt of the tax identification
numbers of Borrower; and
(iv) Its receipt of the Articles of
Incorporation and By-Laws of Borrower.
SECTION 4. EVENTS OF DEFAULT. Each of the following
-----------------
shall constitute an Event of Default under the Loans ("Event of
Default"), whatever the reason for such event and whether it
shall be voluntary or involuntary, or within or without the
control of the Borrower, or be effected by operations of law or
pursuant to any judgment or order of any court or any order, rule
or regulation of any governmental or non-governmental body:
(a) Any payment of the principal, interest or other
charges under or in connection with any of the Loans shall not be
made within fifteen (15) days of their due date.
(b) Any Representation or Warranty in the Loan
Documents shall prove to have been incorrect or misleading when
made, in any material respect.
(c) Borrower shall (i) become insolvent, (ii) admit
its inability to pay its debts as they become due, (iii) make an
assignment for the benefit of its creditors, (iv) be adjudicated,
bankrupt or insolvent, (v) voluntarily initiate proceedings under
any present or future bankruptcy or reorganization law, or (vi)
become the subject of any involuntary proceedings under any
present or future bankruptcy or reorganization law that shall not
have been discharged within sixty (60) days after commencement of
such proceedings.
(d) The Borrower shall fail to observe or perform any
other agreement or covenant contained in any of the Loan
Documents not cured within thirty (30) days of written notice to
Borrower from Bank (such notice period being concurrent with and
not in addition to any other notice period that may be specified
in any of the other Loan Documents), provided, however, that Bank
may, in its sole discretion, allow Borrower to pursue a cure of
the default if it is incapable of being cured within the thirty
(30) day period and Borrower diligently pursues a cure.
(e) The Borrower or any Subsidiary of the Borrower
shall fail to pay any indebtedness for borrowed money (other than
the Notes) of the Borrower or such Subsidiary, as the case may
be, or any interest or premium thereon, when due (whether by
scheduled maturity, required prepayment, acceleration, demand or
otherwise) after the giving of any required notice or the
expiration of any grace or cure period, or any such indebtedness
shall be declared to be due and payable or required to be prepaid
(other than by a regularly scheduled required prepayment), prior
to the stated maturity thereof; or
(f) The entry of any judgment against the Borrower or
any Subsidiary thereof or the issuing of any attachment or
garnishment against any property of the Borrower or any
Subsidiary thereof in the aggregate amount of $250,000 which
judgment, attachment or garnishment shall continue unsatisfied
and in effect for a period of 20 consecutive days (following
notice from the creditor and/or Bank and/or any other reliable
party) without being vacated, discharged, satisfied or bonded
pending appeal; or
(g) The dissolution, merger, consolidation,
reorganization or change in control (as "control" is defined in
Rule 12b-2 under the Securities Exchange Act of 1934, as amended)
of the Borrower or any Subsidiary thereof or the sale or transfer
of any substantial portion of the Borrower's assets; or
(h) Any "Event of Default" shall occur under the terms
of any of the Loan Documents.
SECTION 5. CROSS-DEFAULT OF LOANS.
-----------------------
The Borrower agrees, covenants and represents that a
default under either of the Loans shall constitute a default
under all of the Loans and would allow Bank the right to exercise
any of its remedies with respect to any of the Loans.
SECTION 6. REMEDIES. Upon the occurrence and during the
--------
continuance of any Event of Default, and in every such event, the
Bank shall have the right, after the expiration of any applicable
notice and cure period, to:
(a) Declare the outstanding principal of, and all
unpaid and accrued interest on the Loans, and all other amounts
owed by the Borrower under this Agreement with respect to the
Loans or otherwise to the Bank (whenever or howsoever arising,
and whether or not then due) to be, and such principal, interest
and other amounts shall thereupon become immediately due and
payable;
(b) Exercise all rights and remedies specified in this
Agreement and/or the other Loan Documents; and
(c) Exercise all other rights and remedies available
at law or at equity.
Presentment, demand, promise or notice of any kind are
hereby expressly waived. The Bank's rights and remedies shall be
cumulative and not exclusive, may be exercised from time to time,
and need not be exercised in any given order.
The Bank shall further be entitled to be reimbursed for
any and all reasonable costs incurred by it in exercising its
remedies.
SECTION 7. WARRANTIES AND REPRESENTATIONS. The Borrower
------------------------------
warrants and represents to the Bank and agree that:
(a) Borrower is a Pennsylvania corporation, duly
organized, validly existing and in good standing under the laws
of the Commonwealth of Pennsylvania and that Borrower has the
power and authority to own its property and assets, to carry on
its business as is now being conducted and is qualified to do
business in every jurisdiction in which it is required to qualify
to do business.
(b) no consent of any party is required in connection
with the Borrower's execution, delivery, performance, validity or
enforceability of the Loan Documents.
(c) the Borrower has the power to execute, deliver and
perform this Agreement and the other Loan Documents, and when
executed and delivered, this Agreement and the other Loan
Documents will be valid and binding obligations of the Borrower
enforceable in accordance with their respective terms.
(d) the execution, delivery and performance of this
Agreement and the other Loan Documents has been duly authorized
by all corporate and legal action required for the lawful
creation and issuance of such documents by the Borrower will not
violate any provision of any law, any order of any court or
governmental agency or the By-Laws of the Borrower.
(e) the execution, delivery and performance of this
Agreement and the other Loan Documents will not violate any
provision of any contract to which the Borrower's properties or
assets are bound, and will not be in conflict with, result in a
breach of, or constitute (with due notice and/or lapse of time) a
default under any such Contract or result in the creation or
imposition of any lien, charge, or encumbrance of any nature
whatsoever upon any of the properties or assets of the Borrower.
(f) except as disclosed in the Schedule attached
hereto, there are no actions, suits or proceedings before any
court or governmental department or agency pending, or to the
knowledge of the Borrower, threatened (i) with respect to any of
the transactions contemplated by the Loan Documents or (ii)
against or affecting the Borrower or any of its properties which,
if adversely determined, would have a material adverse affect on
the financial condition, business or operations of the Borrower
or upon its ability to perform any of its obligations under the
Loan Documents. The Borrower is not in default with respect to
any judgment, order, writ, injunction, decree, rule or regulation
of any court or federal, state, municipal or other governmental
department or agency, which default would have a material adverse
affect on the financial condition, business operations of the
Borrower or upon its ability to perform any of its obligations
under the Loan Documents.
(g) the Borrower is not in default under any material
existing agreement, and no event has occurred which, with the
giving of notice or passage of time, or both, would constitute an
Event of Default hereunder as of the date hereof.
(h) the Borrower has filed or caused to be filed all
tax returns and reports required by law and have paid all taxes
shown to be due and payable on said returns or reports or on any
assessments made against it. No tax liens have been filed
against any asset of the Borrower and no claims are being
asserted with respect to such taxes which could have a material
adverse affect on the financial condition, business or operations
of the Borrower.
(i) the Borrower is in compliance with, and has
received no notice of non-compliance with respect to all federal,
state and local laws relating to the conduct of its business.
(j) all financial information regarding the Borrower
which has been or will be furnished to the Bank is, or will be
when furnished, true and correct and does or will when furnished
represent fairly, accurately and completely, the financial
condition of the Borrower and the results of its operations as of
the dates and for the periods for which the same were furnished.
All such financial statements of the Borrower will have been
prepared in accordance with the generally accepted accounting
principals ("GAAP"). There are no liabilities, direct or
indirect, fixed or contingent, of the Borrower of a character
which under GAAP should have been but were not reflected in such
financial statements or in the notes thereto.
(k) the proceeds of the Loans shall be used solely and
exclusively as provided in Section 1 hereof.
SECTION 8. AFFIRMATIVE COVENANTS. Borrower hereby
---------------------
covenants and agrees that:
(a) Borrower shall furnish to the Bank, within ninety-
one (91) days after the close of each fiscal year, audited
financial statements, together with its annual 10-K financial
reports, all supporting schedules and notes, and accompanied by
an opinion thereon to the Bank by an independent certified public
accountant satisfactory to the Bank. The statements will be
prepared in accordance with GAAP.
(b) Borrower shall furnish to the Bank, within forty-
five (45) days of the close of each fiscal quarter, its 10-Q
quarterly financial reports, certified by the Chief Financial
Officer of the Borrower as having been prepared in accordance
with GAAP.
(c) Borrower shall provide the Bank within thirty (30)
days after the end of each fiscal year, with its annual
projection and budget for the immediately succeeding fiscal year.
(d) Borrower shall maintain and keep all of its
property in good repair, working order and condition or make or
cause to be made all necessary or appropriate repairs, renewals,
replacements, substitutions, additions, betterments and
improvements thereto so that the efficiency of all such property
shall at all times be properly preserved and maintained.
(e) Borrower shall duly pay and discharge all taxes,
assessments and governmental charges levied upon or assessed
against it or against its properties or income prior to the date
on which penalties are attached thereto, unless and except to the
extent only that such taxes and assessments and charges shall be
contested in good faith and by appropriate proceedings diligently
conducted by it (unless and until foreclosure, distraint, sale or
other similar proceedings shall have been commenced) and provided
that such reserve or other appropriate provisions, if any, as
shall be required by GAAP shall have been made therefore.
(f) Borrower shall promptly give notice, in writing,
to the Bank of the occurrence of any material litigation,
arbitration or governmental proceeding affecting it and of any
governmental investigation or labor dispute pending or, to its
knowledge, threatened, which could reasonably be expected to
interfere substantially with its normal operations or materially
adversely affect its financial condition.
(g) Borrower shall maintain and keep proper records
and books of account in conformance with GAAP applied on a
consistent basis and to which full, true and correct entries
shall be made of all of its dealings and business affairs.
(h) Borrower shall permit any of the officers,
employees or representatives of the Bank to visit and to examine
and copy the books and records and discuss their affairs,
finances and accounts during normal business hours, and as often
as the Bank may reasonably request subject to reasonable prior
notice to Borrower and opportunity to be present and participate
in any such examination and/or discussions. The Bank shall
exercise its customary care in maintaining the confidentiality of
such information.
(i) Borrower shall keep all insurable property, real
and personal, now owned or hereinafter acquired, insured at all
times against loss or damage by fire and extended coverage risks
and other hazards of the kinds customarily insured against and in
amounts customarily carried by businesses engaged in comparable
businesses and comparably situated and promptly from time to time
upon request of the Bank, deliver to the Bank a summary schedule
indicating all insurance then in effect, together with all such
policies, certificates of insurance and such other information
relating thereto as the Bank may, from time to time, request.
(j) Borrower shall preserve and protect each of its
patents, franchises, licenses, trademarks and trademark rights,
trade name, trade name rights, and copyrights used or useful in
the conduct of its business. Changes to brands and/or labels in
the ordinary course of Borrower's business shall be excluded from
this provision.
(k) Borrower shall maintain, obtain (to the extent
necessary) and comply, in all material respects, with all
required permits, licenses, registrations, and approvals relating
to its operations.
(l) Borrower shall comply, in all material respects,
with all laws, rules, regulations and governmental orders and
directives relating to the generation, treatment, storage,
transportation, disposal and release into the environment and
clean up of any hazardous or toxic waste or substance which is
subject to the provisions of any federal, state or local
environmental statute or regulation.
(m) Borrower shall notify the Bank if it receives (i)
any notice from any governmental agency that it is a potentially
responsible party in any proceeding under federal, state or local
environmental statutes or regulations, (ii) any notice of any
claim, proceeding, litigation, order, directive, citation or
request for information concerning environmental condition, or
notice of any alleged violation of any environmental statute,
ordinance, regulation or permanent condition, or (iii) any
information concerning any potentially adverse environmental
condition, including but not limited to, any spilling, leaking,
discharge, release or threat of release of any hazardous or toxic
waste or substance.
(n) Borrower shall promptly give notice, in writing,
to the Bank, of the occurrence of any Event of Default and of any
condition, event, act or omission which, with the given of notice
or the lapse of time or both, would constitute an Event of
Default hereunder or under the other Loan Documents, or under any
agreement or document securing, evidencing or relating to the
Loan Documents.
(o) Except as set forth herein, all other lines of
credit of the Borrower shall be cancelled or terminated.
SECTION 9. NEGATIVE COVENANTS. Borrower hereby
------------------
covenants and agrees that:
(a) Borrower will not undergo a change in control or
ownership absent the written consent of the Bank.
(b) Borrower shall not violate any applicable law to
the extent that the consequences of any such violation may have a
material adverse affect on its financial condition or operations
or may impair its ability to perform its obligations under the
Loan Documents.
(c) Borrower shall not, except for sales or other
dispositions of inventory in the ordinary course of business,
sell, lease, transfer, or otherwise dispose of in a single
transaction, or a series of related transactions, all or any
material part of its property or assets, whether now owned or
hereinafter acquired, to any person, firm or corporation; nor
sell, assign or discount any of its accounts receivable or any
promissory note held by it, with or without recourse.
(d) Borrower shall not, in the aggregate, incur
additional indebtedness (including capital leases) and/or pledge
its assets in excess of $250,000.00 per year without the Bank's
prior written consent.
SECTION 10. FINANCIAL COVENANTS. Borrower hereby
-------------------
covenants and agrees that:
(a) The Borrower will maintain a ratio of current
assets to current liabilities of not less than 1.50 to 1.00 as of
the end of each fiscal quarter during the term of this Agreement
commencing with the Borrower's fiscal year beginning October 1,
1996. The outstanding balances under the revolver and line of
credit facility referred to herein shall be excluded from this
ratio.
(b) The Borrower will maintain at the end of each
fiscal quarter a combined ratio of total debt to Tangible Net
Worth of no greater than .75 to 1.00.
(c) The Borrower will maintain on a rolling four
quarter basis a combined Debt Service Coverage Ratio of at least
1.50 to 1.00. As used herein, "Debt Service Coverage Ratio"
shall be calculated as follows: the sum of (1) net income after
taxes plus depreciation and amortization minus dividends and
unfunded capital expenditures paid of the Borrower; divided by
(2) the combined current maturities of long term debt plus
capital leases of the Borrower for that period. The outstanding
balances under the revolver and line of credit facility referred
to herein shall be excluded from this ratio.
SECTION 11. DEPOSIT RELATIONSHIP. The Borrower agrees
--------------------
that all operating and cash management accounts will be
maintained at the Bank.
SECTION 12. DISCLAIMER OF RELATIONSHIPS. The Borrower
---------------------------
acknowledges that nothing contained in this Agreement or in the
other Loan Documents, or any act of the Bank, shall be deemed or
construed to create any relationship of a third-party
beneficiary, or of principal or agent, or of limited or general
partnership, or of joint venture, or of any association or
relationship between the Borrower and the Bank other than that of
debtor and creditor.
SECTION 13. NOTICES. All notices to be given by any
-------
party as required hereunder shall be in writing and shall be
addressed as follows:
Bank: Corestates Bank, N.A.
130 Wyoming Avenue
Scranton, PA 18503
Attention: Frank Heston,
Assistant Vice President
With a copy to: Joseph L. Persico, Esquire
Rosenn, Jenkins & Greenwald, L.L.P.
15 South Franklin Street
Wilkes-Barre, PA 18711
Borrower: The Lion Brewery, Inc.
700 North Pennsylvania Avenue
Wilkes-Barre, PA 18705
Attention: Patrick Belardi,
Vice-President
With a copy to: Alan Kluger, Esquire
Hourigan, Kluger, Spohrer & Quinn
Suite 700, Mellon Bank Center
8 West Market Street
Wilkes-Barre, PA 18711
Notices shall be delivered by either an independent
courier service that obtains a receipt for delivery or certified
or registered United States Postal Service mail, return receipt
requested. Any party hereto may change their address for notices
by written notice to the other parties as aforesaid.
SECTION 14. EXPENSES. The Borrower shall pay, or
--------
reimburse the Bank for (i) out-of-pocket expenses in connection
with the preparation, execution and delivery of any waiver,
amendment or consent by the Bank relating to the Loan Documents
and (ii) all costs of obtaining performance under the Loan
Documents by the Borrower, and all costs of collection if Default
is made in the payment of the Loan or any other amount payable
hereunder and all costs of realizing upon any security for any
obligation hereunder, which costs shall include reasonable
counsel fees and expenses.
SECTION 15. RIGHTS CUMULATIVE: NO IMPLIED WAIVERS OF
-----------------------------------------
RIGHTS. The rights and remedies of the Bank under this Agreement
------
and under the other Loan Documents shall be cumulative and not
exclusive of any rights or remedies that it would otherwise have,
and no failure or delay by the Bank in exercising any right shall
operate as a waiver of such right, nor shall any single or
partial exercise of any power or right preclude its other or
further exercise or the exercise of any other power or right.
SECTION 16. SET-OFF. Upon and after the occurrence of
-------
any Event of Default by the Borrower, the Bank is hereby
authorized by the Borrower, at any time and from time to time,
without notice, (i) to set-off against, and to appropriate and
apply to the payment of the obligations and liabilities of the
Borrower under the Loan Documents (whether matured or unmatured,
fixed or contingent or liquidated or unliquidated), any and all
amounts owing by the Bank to the Borrower (whether payable in
Dollars or any other currency, whether matured or unmatured, and,
in the case of deposits, whether general or special, time or
demand and however evidenced) and (ii) pending any such action,
to the extent necessary, to hold such amounts as collected to
secure such obligations and liabilities and to return as unpaid
for insufficient funds any and all checks and other items drawn
against and deposits so held as the Bank in its sole discretion
may elect.
SECTION 17. INDEMNIFICATION. Borrower shall, and does
---------------
hereby, indemnify the Bank, its successors and assigns, and hold
them harmless, of and from any and all claims, demands and
liabilities whatsoever (except to the extent the same was the
result of Bank's negligence, willful misconduct or knowing
violations of law), including the reasonable costs of attorney's
fees and other defense costs, fines or other penalties or
payments, arising from the making of the Loans by the Bank, or
any other relationship, real or asserted, between the Bank and
the Borrower especially including, but specifically not limited
to any claims, demands or liabilities, asserted or arising under
any federal, state or local environmental law and any other
failure to comply in all respects with all environmental laws,
regulations, ordinances or administrative orders which may effect
the same, now or in the future. This indemnification is intended
to, and shall, survive payment in full of the Loans.
SECTION 18. ACKNOWLEDGEMENT OF CONFESSION OF JUDGMENT
-----------------------------------------
PROVISIONS.
----------
THE BORROWER ACKNOWLEDGES AND AGREES THAT THE LOAN DOCUMENTS
CONTAIN PROVISIONS WHEREBY THE BANK MAY UPON CERTAIN
CIRCUMSTANCES ENTER JUDGMENT BY CONFESSION AGAINST THE BORROWER,
BEING FULLY AWARE OF THE BORROWER'S WAIVER OF RIGHTS TO PRIOR
NOTICE AND HEARING ON THE QUESTION OF THE VALIDITY OF ANY CLAIMS
THAT MAY BE ASSERTED AGAINST THE BORROWER BY THE BANK UNDER THE
LOAN DOCUMENTS, BEFORE JUDGMENT CAN BE ENTERED. THE BORROWER
HEREBY CONSENTS TO THE BANK ENTERING JUDGMENT AGAINST THE
BORROWER BY CONFESSION AS PROVIDED IN THE LOAN DOCUMENTS. ANY
PROVISION IN A CONFESSION OF JUDGMENT IN ANY OF THE LOAN
DOCUMENTS FOR AN ATTORNEY'S COLLECTION COMMISSION SHALL IN NO WAY
LIMIT ANY OF THE BORROWER'S LIABILITY TO REIMBURSE THE BANK FOR
ALL LEGAL FEES ACTUALLY INCURRED BY THE BANK, EVEN IF SUCH FEES
ARE IN EXCESS OF THE ATTORNEY'S COLLECTED COMMISSION PROVIDED FOR
IN SUCH CONFESSION OF JUDGMENT.
THE BORROWER HEREBY KNOWINGLY AND INTELLIGENTLY, IRREVOCABLY
WAIVES ANY RIGHT WHICH THE BORROWER HAS OR MAY HAVE TO A HEARING
PRIOR TO THE ISSUANCE OF EXECUTION PROCESS AGAINST THE BORROWER
PURSUANT TO A JUDGMENT OBTAINED BY THE BANK (WHETHER BY
CONFESSION OR OTHERWISE), AND AGREES TO INDEMNIFY AND HOLD
HARMLESS THE BANK, ITS AGENTS, ATTORNEYS, EMPLOYEES, SUCCESSORS
AND ASSIGNS FROM AND AGAINST ANY AND ALL LIABILITY ASSOCIATED
WITH SUCH EXECUTION PROCESS.
SECTION 19. WAIVER OF JURY TRIAL. THE BORROWER AND THE
--------------------
BANK WAIVE ANY RIGHT TO TRIAL BY JURY ON ANY CLAIM, DEMAND,
ACTION OR CAUSE OF ACTION (a) ARISING UNDER ANY OF THE LOAN
DOCUMENTS, OR (b) IN ANY WAY CONNECTED WITH OR RELATED OR
INCIDENTAL TO THE DEALINGS OF THE BORROWER OR THE BANK WITH
RESPECT TO ANY OF THE LOAN DOCUMENTS OR THE TRANSACTIONS RELATED
HERETO OR THERETO, IN EACH CASE WHETHER SOUNDING IN CONTRACT OR
TORT OR OTHERWISE. THE BORROWER AND THE BANK AGREE AND CONSENT
THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE
DECIDED BY COURT TRIAL WITHOUT A JURY, AND THAT ANY PARTY TO THIS
AGREEMENT MAY FILE AN ORIGINAL COUNTER PART OR A COPY OF THIS
SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE
BORROWER AND THE BANK TO THE WAIVER OF THEIR RIGHTS TO TRIAL BY
JURY. THE BORROWER ACKNOWLEDGES THAT IT HAS HAD THE OPPORTUNITY
TO CONSULT WITH COUNSEL REGARDING THIS SECTION, THAT IT FULLY
UNDERSTAND ITS TERMS, CONTENT AND EFFECT, AND THAT IT VOLUNTARILY
AND KNOWINGLY AGREE TO THE TERMS OF THIS SECTION.
SECTION 20. SURVIVAL OF COVENANTS. All covenants,
---------------------
agreements, representations and warranties made by the Borrower
in the Loan Documents are made by or on its behalf in connection
with the transactions contemplated herein shall be true in all
material respects at all times this Agreement is in effect and
shall survive the execution and delivery of the Loan Documents,
any investigation at any time made by the Bank or on its behalf
in the making by the Bank of the Loans to the Borrower. All
statements contained in any certificate, statement or other
documents delivered by or on behalf of the Borrower pursuant
hereto or in connection with the transactions contemplated
hereunder shall be deemed representations and warranties by the
Borrower.
SECTION 21. NO ASSIGNMENT. The Borrower may not assign
-------------
any of its rights hereunder without the prior written consent of
the Bank and the Bank shall not be required to lend hereunder
except to the Borrower as it presently exists.
SECTION 22. PARTICIPATION. The Bank may sell, assign or
-------------
participate all or any portion of its interest in the Loan
Documents and in connection therewith may make available to any
prospective purchaser, assignee or participant any information
relative to the Borrower in its possession.
SECTION 23. NO THIRD PARTY RIGHTS. The rights and
---------------------
benefits of this Agreement and the other Loan Documents shall not
inure to the benefit of any third party.
SECTION 24. INTEGRATION. The Loan Documents shall be
-----------
construed as integrated and complementary of each other, and as
augmenting and not restricting the rights, powers, remedies and
security of the Bank. The Loan Documents contain the entire
understanding of the parties thereto with respect to the matters
contained therein and supersede all prior agreements and
understandings between the parties with respect to the subject
matter thereof and do not require parol or extrinsic evidence in
order to reflect the intent of the parties. In the event of any
inconsistency between the terms of this Agreement and the terms
of the other Loan Documents, the terms of this Agreement shall
prevail.
SECTION 25. WAIVERS. The provision of this Agreement
-------
may, from time to time, be waived in writing by the Bank in its
sole discretion. Any such waiver of any kind on the part of the
Bank of any breach or default under this Agreement or any waiver
of any provision or condition of this Agreement must be in
writing and shall be effective only to the extent set forth in
such writing. No delay by the Bank in exercising any right or
remedy hereunder shall operate as a waiver thereof.
SECTION 26. BINDING NATURE. The rights and privileges of
--------------
the Bank contained in this Agreement shall inure to the benefit
of its successors and assigns, and the duties of the Borrower
shall bind all of its successors and assigns.
SECTION 27. GOVERNING LAW. Time of performance hereunder
-------------
is of the essence of this Agreement. This Agreement and any
written supplement hereto executed by the Borrower in which
reference to this Agreement is made shall in all respects be
governed by the laws of the Commonwealth of Pennsylvania (except
to the extent that federal law governs).
SECTION 28. SEVERABILITY. If any provision hereof shall
------------
for any reason be held invalid or unenforceable, no other
provision shall be affected thereby, and this Agreement shall be
construed as if the invalid or unenforceable provision had never
been a part of it. The descriptive headings hereof are for
convenience only and shall not in any way affect the meaning or
construction of any provisions hereof.
SECTION 29. EXECUTION OF COUNTERPARTS. This Agreement may
-------------------------
be executed in as many counterparts as may be deemed necessary by
the parties, each of which, when so executed, shall be deemed an
original, but all such counterparts shall constitute one and the
same instrument.
[SIGNATURE PAGE FOLLOWS]
<PAGE>
IN WITNESS WHEREOF, and intending to be legally bound
thereby, the parties hereto have hereunder set their respective
hands and seals the day and year first above written.
ATTEST: BANK:
CORESTATES BANK, N.A.
/s/ /s/
______________________ By: ______________________________
Its: _________________________
(Corporate Seal)
ATTEST: BORROWER:
THE LION BREWERY, INC.
/s/ /s/
______________________ By: ______________________________
Its: _________________________
(Corporate Seal)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE LION
BREWERY, INC.'S BALANCE SHEETS, STATEMENTS OF INCOME AND STATEMENTS OF CASH
FLOWS FOR THE PERIOD ENDED SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 3,184
<SECURITIES> 0
<RECEIVABLES> 2,444
<ALLOWANCES> 186
<INVENTORY> 2,271
<CURRENT-ASSETS> 8,108
<PP&E> 6,833
<DEPRECIATION> 2,352
<TOTAL-ASSETS> 18,467
<CURRENT-LIABILITIES> 3,685
<BONDS> 0
0
0
<COMMON> 39
<OTHER-SE> 14,335
<TOTAL-LIABILITY-AND-EQUITY> 18,467
<SALES> 26,869
<TOTAL-REVENUES> 26,869
<CGS> 20,099
<TOTAL-COSTS> 20,099
<OTHER-EXPENSES> 3,680
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,214
<INCOME-TAX> 1,382
<INCOME-CONTINUING> 1,832
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,832
<EPS-PRIMARY> 0.47
<EPS-DILUTED> 0.47
</TABLE>
