SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 3
TO
SCHEDULE 13E-3
RULE 13E-3 TRANSACTION STATEMENT
(PURSUANT TO SECTION 13(e) OF THE SECURITIES EXCHANGE ACT OF 1934 AND
RULE 13E-3 (Sec.240. 13E-3) THEREUNDER)
The Lion Brewery, Inc.
(NAME OF ISSUER)
The Lion Brewery, Inc.
Malt Acquiring, Inc.
Charles E. Lawson, Jr.
Patrick E. Belardi
(NAME OF THE PERSON(S) FILING STATEMENT)
Common Stock, $.01 par value per share, CUSIP Number 536192107
(TITLE AND CUSIP NUMBER OF CLASS OF SECURITIES)
Charles E. Lawson, Jr.
President
Malt Acquiring, Inc.
700 North Pennsylvania Avenue
Wilkes Barre, Pennsylvania 18703
(717)823-8801
Copies to:
Gregory Katz
Thelen Reid & Priest
40 West 57th Street
New York, New York 10019
(212)603-2000
(NAME, ADDRESS AND TELEPHONE NUMBER OF PERSON AUTHORIZED TO RECEIVE NOTICES
AND COMMUNICATIONS ON BEHALF OF THE PERSON(S) FILING STATEMENT)
------------------------
This statement is filed in connection with (check the appropriate box):
a. [X] The filing of solicitation materials or an information
statement subject to Regulation 14A [17 CFR 240.14a-1 to
240.14b-1], Regulation 14C [17 CFR 240.14c-1 to 240.14c-101] or
Rule 13E-3(c) [Sec.240.13E-3(c)] under the Securities Exchange
Act of 1934.
b. [ ] The filing of a registration statement under the Securities Act of 1933.
c. [ ] A tender offer.
d. [ ] None of the above.
Check the following box if the soliciting materials or information
statement referred to in checking box (a) are preliminary copies: [ ]
Page 2 of 11
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CALCULATION OF FILING FEE
TRANSACTION VALUATION* AMOUNT OF FILING FEE
---------------------- --------------------
$18,529,740 $3,652
( ) Pursuant to Section 1 3(e)(3) of the Securities Exchange Act of 1934, as
amended, and Rule 0-ll(b)(l) thereunder, the transaction value was
calculated based on the cash merger consideration of $4.70 per share.
[X] CHECK BOX IF ANY PART OF THE FEE IS OFFSET AS PROVIDED BY RULE 0-1l(A)(2)
AND IDENTIFY THE FILING WITH WHICH THE OFFSETTING FEE WAS PREVIOUSLY PAID.
IDENTIFY THE PREVIOUS FILING BY REGISTRATION STATEMENT NUMBER, OR THE FORM
OR SCHEDULE AND THE DATE OF ITS FILING.
Amount Previously Paid: $3,652
Filing Party: The Lion Brewery, Inc.
Form or Registration No.: Schedule 14A
Date Filed: September 30, 1998
Page 2 of 11
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This Rule 13E-3 Transaction Statement (this "Statement") relates to the
Agreement and Plan of Merger dated as of September 17, 1998, as amended on
December 9, 1998 (the "Merger Agreement"), by and between Malt Acquiring, Inc.,
a Pennsylvania Corporation (the "Purchaser") and The Lion Brewery, Inc., a
Pennsylvania Corporation (the "Company"). The Purchaser was formed for the
purpose of consummating the Merger (as defined below). A copy of the Merger
Agreement is attached as Appendix A to the definitive proxy statement filed
herewith (including all annexes thereto, the "Definitive Proxy Statement").
The Definitive Proxy Statement is attached hereto as Exhibit (d).
Upon the terms and subject to the conditions of the Merger Agreement,
on January 11, 1999 (i) Purchaser merged with and into the Company (the
"Merger") and (ii) each outstanding share of Common Stock of the Company
(other than shares owned by the Company) was converted into the right to
receive $4.70 in cash, without interest.
The following Cross Reference Sheet is supplied pursuant to General
Instruction F to Schedule 13E-3 and shows the location in the Definitive Proxy
Statement of the information required to be included in response to the items of
this Statement. The information in the Definitive Proxy Statement, a copy of
which is attached hereto as Exhibit (d), is hereby expressly incorporated herein
by reference and the responses to each item in this Statement are qualified in
their entirety by the information contained in the Definitive Proxy Statement.
Capitalized terms used herein and not otherwise defined shall have the meanings
ascribed to such terms in the Definitive Proxy Statement.
The filing of this Statement shall not be construed as an admission by
the Company, or by the Purchaser or any of its affiliates, that the Company is
"controlled" by the Purchaser or any of its affiliates or that any of the
Purchaser or any of its affiliates is an "affiliate" of the Company within the
meaning of Rule 13E-3 under Section 13(e) of the Securities Exchange Act of
1934, as amended.
CROSS REFERENCE SHEET
Item in Schedule 13E-3 Location in Proxy Statement
- ---------------------- ---------------------------
Item 1(a) and (b)....... Outside Front Cover Page; SUMMARY - Special Meeting
of the Stockholders; - The Merger; PARTIES TO THE
MERGER; VOTING AND PROXIES - Record Date and
Outstanding Shares
Item l(c) and (d)....... SUMMARY - The Merger - Recent Market Price of Company
Common Stock; MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
Item 1(e)............... MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Liquidity and
Capital Resources
Item l(f)............... SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT; MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS; MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Liquidity and Capital Resources
Item 2(a)-(d)........... Outside Front Cover Page; SUMMARY - The Merger - The
Company; - The Purchaser; MANAGEMENT OF THE COMPANY
Page 3 of 11
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Item 2(e) and (f)....... Negative
Item 2(g)............... THE PURCHASER
Item 3(a) and (b)....... SPECIAL FACTORS - Background of the Merger
Item 4(a) and (b)....... Outside Front Cover Page; SUMMARY - The Merger -
General; - Effective Time; - Conditions to the
Merger; - Additional Agreements between the
Company and the Purchaser; - Termination and
Amendment; - Termination Fee; - Indemnification;
- Conflicts of Interest; - Appraisal Rights;
SPECIAL FACTORS - Conflicts of Interest; FINANCING
OF THE MERGER; Annex A to the Proxy Statement.
Item 5(a) and (b)....... Not applicable
Item 5(c)............... CERTAIN PROVISIONS OF THE MERGER AGREEMENT -
Effective Time of the Merger Agreement
Item 5(d)-(g)........... SUMMARY - Certain Effects of the Merger; SPECIAL
FACTORS - Certain Effects of the Merger
Item 6(a) - (d)......... SUMMARY - Financing Arrangements; FINANCING OF THE
MERGER
Item 7.................. Outside Front Cover Page; SUMMARY - The Merger -
Background of the Merger; The Company's Reasons for
the Merger; -Recommendation of the Company's Board of
Directors; - Opinion of Financial Advisor; - Certain
Effects of the Merger; - Conflicts of Interest;
Federal Income Tax Consequences; - Appraisal Rights;
SPECIAL FACTORS - Background of the Merger; -
Reasons for and Fairness of the Merger; - Opinion
of Financial Advisor to the Company; - Conflicts of
Interest; - Certain Effects of the Merger; - Voting
Agreement; - Appraisal Rights; - Federal Income Tax
Considerations
Item 8(a) and (b)...... SUMMARY - The Merger - Background of the Merger; The
Company's Reasons for and Fairness of the Merger; -
Recommendation of the Company's Board of Directors; -
Opinion of Financial Advisor; SPECIAL FACTORS -
Background of the Merger; - Reasons for and
Fairness of the Merger; - Position of the Purchaser,
Mr. Lawson and Mr. Belardi as to the Fairness of the
Merger
Item 8(c).............. SUMMARY - Special Meeting of the Stockholders - Vote
Required; The Merger - Conditions to the Merger;
VOTING AND PROXIES - Vote Required; CERTAIN
PROVISIONS OF THE MERGER AGREEMENT- Conditions
to the Merger
Item 8(d) - (f)........ SUMMARY - The Merger - Background of the Merger; The
Company's Reasons for the Merger; - Recommendation of
the Company's Board of Directors; SPECIAL FACTORS
- Background of the Merger; - Reasons for and
Fairness of the Merger
Item 9(a) - (c)........ SUMMARY - The Merger - Background of the Merger;
The Company's Reasons for the Merger; - Opinion of
Financial Advisor; SPECIAL FACTORS - Background of the
Page 4 of 11
<PAGE>
Merger; - Reasons for and Fairness of the Merger; -
Opinion of Financial Advisor to the Company; ANNEX B
to the Proxy Statement
Item 10 (a)............ THE PURCHASER; SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
Item 11................ SUMMARY - The Merger - General; - Additional
Agreements between the Company and the Purchaser; -
Special Meeting of the Stockholders
- Vote Required; VOTING AND PROXIES - Vote Required;
SPECIAL FACTORS - Voting Agreement; CERTAIN
PROVISIONS OF THE MERGER AGREEMENT - Alternative
Proposals; ANNEXES A and C to the Proxy Statement
Item 12(a) and (b)..... SUMMARY - Special Meeting of the Stockholders - Vote
Required; SPECIAL FACTORS - Reasons For and Fairness
of the Merger; VOTING AND PROXIES - Vote Required;
SPECIAL FACTORS - Voting Agreement
Item 13(a)............. SUMMARY - The Merger - Appraisal Rights; SPECIAL
FACTORS - Appraisal Rights
Item 13(b) and (c)..... Not applicable
Item 14(a)............. SELECTED FINANCIAL DATA; INDEX TO FINANCIAL STATEMENTS
Item 14(b)............. Not applicable
Item 15(a) and (b)..... VOTING AND PROXIES - Solicitation of Proxies; Expenses
Item 16................ Copies of each of the Proxy Statement, Letter to
Stockholders and Notice of Special Meeting of
Stockholders separately included herewith as
Exhibit (d)
Item 17................ Separately included herewith as Exhibits
Page 5 of 11
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Item 1. Issuer and Class of Security Subject to the Transaction.
(a) The name of the Issuer is The Lion Brewery, Inc., a
Pennsylvania corporation that has its principal executive
offices at 700 Pennsylvania Avenue, Wilkes Barre, Pennsylvania
18703 (telephone number (717) 823-8801).
(b) The information set forth in the Outside Front Cover Page;
SUMMARY - Special Meeting of the Stockholders; - The Merger;
PARTIES TO THE MERGER; VOTING AND PROXIES - Record
Date and Outstanding Shares in the Proxy Statement is
incorporated herein by reference pursuant to General
Instruction D to Schedule 13E-3.
(c)-(d) The information set forth in the SUMMARY - The Merger - Recent
Market Price of Company Common Stock; MARKET FOR COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS in the Proxy Statement is
incorporated herein by reference pursuant to General
Instruction D to Schedule 13E-3.
(e) The information set forth in MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources in the Proxy Statement is
incorporated herein by reference to General Instruction D of
Schedule 13E-3.
(f) The information set forth in SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT; MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS in the Proxy Statement is
incorporated herein by reference pursuant to General
Instruction D to Schedule 13E-3.
Item 2. Identity and Background.
(a)-(d) The information set forth in the Outside Front Cover Page;
SUMMARY - The Merger - The Company; - The Purchaser; THE
PURCHASER; MANAGEMENT OF THE COMPANY in the Proxy Statement is
incorporated herein by reference pursuant to General
Instruction D to Schedule 13E-3. The Company is the issuer of
the class of equity securities which is the subject of the
Rule 13e-3 transaction.
(e) No executive officer or director of the Purchaser or the
Company has, during the last 5 years, been convicted in a
criminal proceeding (excluding traffic violations or
similar misdemeanors).
(f) No executive officer or director of the Purchaser or the
Company has, during the last 5 years, been a party to a
civil proceeding of a judicial or administrative body of
competent jurisdiction which proceeding resulted in
such officer or director being subject to a judgment, decree
or final order enjoining further violations of, or prohibiting
activities subject to, federal or state securities laws or
finding any violation of such laws.
(g) THE PURCHASER.
Item 3. Past Contacts, Transactions or Negotiations.
(a)-(b) SPECIAL FACTORS - Background of the Merger.
Item 4. Terms of the Transaction.
(a)-(b) The information set forth on the Outside Front Cover Page;
SUMMARY - The Merger - General; - Effective Time; Conditions
to the Merger; - Additional Agreements between the Company and
the Purchaser; - Termination and Amendment; - Termination Fee;
- Conflicts of Interest; - Appraisal Rights; SPECIAL FACTORS
- Conflicts of Interest; FINANCING OF THE MERGER; Annex A
Page 6 of 11
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to the Proxy Statement is incorporated herein by reference
pursuant to General Instruction D to Schedule 13E-3.
Item 5. Plans or Proposals of the Issuer or Affiliate.
(a)-(b) Not applicable.
(c) The information set forth in CERTAIN PROVISIONS OF THE MERGER
AGREEMENT - Effective Time of the Merger of the Proxy
Statement is incorporated herein by reference pursuant to
General Instruction D to Schedule 1 3E-3.
(d)-(g) The information set forth in SUMMARY - The Merger - Certain
Effects of the Merger; SPECIAL FACTORS in the Proxy Statement
is incorporated herein by reference pursuant to General
Instruction D to Schedule 1 3E-3.
Item 6. Source and Amounts of Funds or Other Consideration.
(a)-(d) The information set forth in SUMMARY - The Merger - Financing
of the Merger; FINANCING OF THE MERGER in the Proxy Statement
is incorporated herein by reference pursuant to General
Instruction D to Schedule 13E -3.
Item 7. Purpose(s), Alternatives, Reasons and Effects.
(a)-(d) The information set forth in Outside Front Cover Page; SUMMARY
- The Merger - Background of the Merger; The Company's
Reason for the Merger; - Recommendation of the Company's Board
of Directors; - Opinion of Financial Advisor; - Certain
Effects of the Merger; - Conflicts of Interest; - Federal
Income Tax Consequences; - Appraisal Rights; SPECIAL
FACTORS - Background of the Merger; - Reasons for and
Fairness of the Merger; - Opinion of Financial Advisor to
the Company; - Conflicts of Interest; - Certain Effects of
the Merger; - Voting Agreement; - Appraisal Rights; -
Federal Income Tax Considerations in the Proxy Statement
is incorporated herein by reference pursuant to General
Instruction D to Schedule 13E-3.
Item 8. Fairness of the Transaction.
(a)-(b) The information set forth in SUMMARY - The Merger - Background
of the Merger; The Company's Reasons for the Merger; -
Recommendation of the Company's Board of Directors; - Opinion
of Financial Advisor; SPECIAL FACTORS Background of the
Merger; - Reasons for and Fairness of the Merger; - Position
of the Purchaser, Mr. Lawson and Mr. Belardi as to the
Fairness of the Merger in the Proxy Statement is incorporated
herein by reference pursuant to General Instruction D to
Schedule 13E-3.
(c) The information set forth in SUMMARY - Special Meeting of
the Stockholders - Vote Required; - The Merger - Conditions
to the Merger; VOTING AND PROXIES - Vote Required; CERTAIN
PROVISIONS OF THE MERGER AGREEMENT - Conditions to the
Merger in the Proxy Statement is incorporated herein by
reference pursuant to General Instruction D to Schedule
13E-3.
(d)-(f) The information set forth in SUMMARY - The Merger -
Background of the Merger; The Company's Reasons for the
Merger; - Recommendation of the Company's Board of
Directors; SPECIAL FACTORS - Background of the Merger; -
Reasons for and Fairness of the Merger in the Proxy
Statement is incorporated herein by reference pursuant to
General Instruction D to Schedule 13E-3.
Item 9. Reports, Opinions, Appraisals and Certain Negotiations.
(a)-(c) The information set forth in SUMMARY - The Merger - Background
of the Merger; - The Company's Reasons for and Fairness of the
Merger; - Opinion of Financial Advisor; SPECIAL FACTORS -
Background of the Merger; - Reasons for and Fairness of the
Merger; - Opinion of Financial Advisor to the Company in the
Proxy Statement; Annex B to the Proxy Statement is
incorporated herein by reference pursuant to General
Instruction D to Schedule 13E-3.
Page 7 of 11
<PAGE>
Item 10. Interest in Securities of the Issuer.
(a) The information set forth in THE PURCHASER; SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT in the Proxy
Statement is incorporated herein by reference pursuant to
General Instruction D to Schedule 13E-3.
(b) Not applicable
Item 11. Contracts, Arrangements or Understandings with Respect to the
Issuer's Securities.
The information set forth in SUMMARY - The Merger - General;
- Additional Agreements between the Company and the Purchaser;
- Special Meeting of the Stockholders - Vote Required; VOTING
AND PROXIES - Vote Required; SPECIAL FACTORS - Voting
Agreement; CERTAIN PROVISIONS OF THE MERGER AGREEMENT -
Alternative Proposals in the Proxy Statement and Annexes A
and C to the Proxy Statement is incorporated herein by
reference pursuant to General Instruction D to Schedule 13E-3.
Item 12. Present Intention and Recommendation of Certain Persons with
Regard to the Transaction.
(a)-(b) The information set forth in SUMMARY - Special Meeting of the
Stockholders - Vote Required; SPECIAL FACTORS - Reasons For
and Fairness of the Merger; VOTING AND PROXIES - Vote
Required; SPECIAL FACTORS - Voting Agreement in the Proxy
Statement is incorporated herein by reference pursuant to
General Instruction D to Schedule 13E-3.
Item 13. Other Provisions of the Transaction.
(a) The information set forth in SUMMARY - The Merger - Appraisal
Rights; SPECIAL FACTORS - Appraisal Rights in the Proxy
Statement is incorporated herein by reference pursuant to
General Instruction D to Schedule 13E-3.
(b) Not applicable.
(c) Not applicable.
Item 14. Financial Information.
(a) The information set forth in SELECTED FINANCIAL DATA in the
Proxy Statement; INDEX TO FINANCIAL STATEMENTS is incorporated
herein by reference pursuant to General Instruction D to
Schedule 13E-3.
(b) Not applicable.
Item 15. Persons and Assets Employed, Retained or Utilized.
(a)-(b) The information set forth in VOTING AND PROXIES - Solicitation
of Proxies; Expenses in the Proxy Statement is incorporated
herein by reference pursuant to General Instruction D to
Schedule 13E-3.
Item 16. Additional Information.
Reference is hereby made to the Proxy Statement, Letter to
Stockholders and Notice of Special Meeting of Stockholders,
copies of which are attached hereto as Exhibit (d)
incorporated in their entirety herein by reference pursuant to
General Instruction D to Schedule 13E-3.
Item 17. Material to be Filed as Exhibits.
Page 8 of 11
<PAGE>
(a)(1) Commitment letter dated September 17, 1998 from American
Capital Strategies to Mr. Charles Lawson and Mr. Patrick
Belardi.
(a)(2) Commitment letter dated September 17, 1998 from a national
bank to Malt Acquiring, Inc.
(b) Opinion of Tucker Anthony Incorporated, dated September 17,
1998 (filed herewith as Annex B to the Definitive Proxy
Statement, which is filed as Exhibit (d) hereto).
(c)(1) Agreement and Plan of Merger, dated September 17, 1998, as
amended on December 9, 1998, between Malt Acquiring, Inc.
and The Lion Brewing, Inc. (filed herewith as Annex A to
the Definitive Proxy Statement, which is filed as Exhibit
(d) hereto).
(c)(2) Voting Agreement, dated as of September 17, 1998, among Malt
Acquiring, Inc. and certain institutional stockholders of The
Lion Brewing, Inc. (filed herewith as Annex C to the
Definitive Proxy Statement, which is filed as Exhibit (d)
hereto).
(d) Each of the Definitive Proxy Statement of the Company, Letter
to Stockholders and Notice of Special Meeting of Stockholders.
(e) Subchapter D of Chapter 15 of the Business Corporation Law of
Pennsylvania (filed herewith as Annex D to the Definitive
Proxy Statement, which is filed as Exhibit (d) hereto).
(f) Not applicable.
Page 9 of 11
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SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify that the
information set forth in this Statement is true, complete and correct.
Dated: January 14, 1998 MALT ACQUIRING, INC.
By: THE LION BREWERY, INC., its
successor by merger
By: /s/ Charles E. Lawson, Jr.
----------------------------
Name: Charles E. Lawson, Jr.
Title: President
/s/ Charles E. Lawson, Jr.
----------------------------
Charles E. Lawson, Jr.
/s/ Patrick E. Belardi
-----------------------------
Patrick E. Belardi
THE LION BREWERY, INC.
By: /s/ Charles E. Lawson, Jr.
------------------------------
Name: Charles E. Lawson, Jr.
Title: President
Page 10 of 11
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
(a)(1)* Commitment letter dated September 17, 1998 from
American Capital Strategies to Mr. Charles Lawson and
Mr. Patrick Belardi.
(a)(2)* Commitment letter dated September 17, 1998 from a
national bank to Malt Acquiring, Inc.
(b) Opinion of Tucker Anthony Incorporated, dated
September 17, 1998 (filed herewith as Annex B to the
Definitive Proxy Statement, which is filed as Exhibit
(d) hereto).
(c)(l) Agreement and Plan of Merger, dated September 17,
1998, as amended on December 9, 1998, between
Malt Acquiring, Inc. and The Lion Brewing, Inc.
(filed herewith as Annex A to the Definitive Proxy
Statement, which is filed as Exhibit (d) hereto).
(c)(2) Voting Agreement, dated as of September 17, 1998,
among Malt Acquiring, Inc. and certain institutional
stockholders of The Lion Brewing, Inc. (filed herewith
as Annex C to the Definitive Proxy Statement, which
is filed as Exhibit (d) hereto).
(d) Each of the Definitive Proxy Statement of the
Company, Letter to Stockholders and Notice of Special
Meeting of Stockholders.
(e) Subchapter D of Chapter 15 of the Business Corporation
Law of Pennsylvania (filed herewith as Annex D to the
Definitive Proxy Statement, which is filed as Exhibit
(d) hereto).
(f) Not applicable.
- ----------------------------
* Previously filed.
THE LION BREWERY, INC.
700 NORTH PENNSYLVANIA AVENUE
WILKES BARRE, PENNSYLVANIA 18703
December 22, 1998
Dear Stockholder:
You are invited to attend a Special Meeting of Stockholders of The Lion Brewery,
Inc. (the "Company") to be held at the offices of Thelen Reid & Priest LLP,
40 West 57th Street, New York, New York 10019 on January 11, 1999 at
10:00 a.m., local time.
At the Special Meeting you will be asked to consider and vote upon a proposal to
approve an Agreement and Plan of Merger (the "Merger Agreement") providing for
the merger (the "Merger") of Malt Acquiring, Inc., a Pennsylvania corporation
(the "Purchaser"), with and into the Company following which the separate
corporate existence of the Purchaser will cease. The Purchaser is owned by a
group led by members of the Company's senior operating management, including the
Company's chief executive officer. Upon the consummation of the Merger, each
share of common stock of the Company ("Common Stock") outstanding immediately
prior to the Merger will be converted into the right to receive $4.70 in cash.
Pursuant to a Voting Agreement dated as of September 17, 1998 among Lion
Partners Company, L.P., Weston Presidio Offshore Capital C.V., Quincy Partners
and Northwood Ventures LLC (the "Voting Agreement"), stockholders holding an
aggregate of 1,720,184 shares of Common Stock, or approximately 44.3% of the
outstanding shares, have granted to the Purchaser a proxy to vote such shares in
favor of the Merger and to vote against any competing transaction that might be
proposed by a third party prior to the Merger. Of the 1,720,184 shares of Common
Stock subject to the Voting Agreement, 1,545,184 of such shares are controlled
by Donald J. Sutherland, the Chairman of the Board of Directors of the Company.
The Purchaser intends to vote all shares subject to the Voting Agreement in
favor of the Merger. A copy of the Voting Agreement is attached to the enclosed
Proxy Statement as Annex C.
Tucker Anthony Incorporated, the investment banking firm retained by the Board
of Directors of the Company in connection with the Merger, has rendered its
opinion dated September 17, 1998 that, as of such date, the $4.70 per share of
Common Stock in cash to be received by the holders of shares of Common Stock
pursuant to the Merger Agreement was fair to such holders. A copy of the opinion
is attached to the enclosed Proxy Statement as Annex B and should be read in its
entirety.
YOUR BOARD OF DIRECTORS HAS APPROVED THE MERGER AND THE TRANSACTIONS RELATED
THERETO AND HAS DETERMINED THAT THEY ARE FAIR TO AND IN THE BEST INTERESTS OF
THE COMPANY AND ITS STOCKHOLDERS. AFTER CAREFUL CONSIDERATION, YOUR BOARD OF
<PAGE>
DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE MERGER AGREEMENT AND THE
MERGER AS DESCRIBED IN THE ACCOMPANYING PROXY STATEMENT.
Certain members of the Board of Directors have conflicts of interest with
respect to the Merger. See "SPECIAL FACTORS--Conflicts of Interest" in the
enclosed Proxy Statement.
If the Merger is consummated, holders of Common Stock who do not vote in favor
of approval of the Merger Agreement and the Merger and who otherwise comply with
the requirements of Subchapter D of Chapter 15 of the Business Corporation Law
of Pennsylvania will be entitled to statutory appraisal rights.
Certain shareholders of the Company commenced a lawsuit in Pennsylvania (Court
of Common Pleas, Luzerne County) purportedly on behalf of the Company seeking,
among other things, to enjoin the consummation of the Merger. After a three-day
hearing, the Court denied the plaintiff's application for a preliminary
injunction in its entirety. The Court also found that the plaintiffs were not
fair and adequate representatives of the Company's stockholders and should not
be permitted to bring a derivative action on their behalf.
If the Company receives competing offers for the Company prior to the Special
Meeting, the Company intends to announce such offers and the Board of
Directors' response to such offers through press releases.
In the materials accompanying this letter, you will find a Notice of Special
Meeting of Stockholders, a Proxy Statement relating to the actions to be taken
by stockholders of the Company at the Special Meeting and a proxy card. The
Proxy Statement more fully describes the proposed Merger and includes
information about the Company and the Purchaser. Stockholders are urged to read
carefully the Proxy Statement and Notice and to consider the information
included therein carefully. The Company, the Purchaser and certain members of
the Company's senior operating management have filed a Schedule 13E-3 with the
Securities and Exchange Commission. Stockholders are also urged to read
carefully the Schedule 13E-3 and to consider the information therein carefully.
ALL STOCKHOLDERS ARE INVITED TO ATTEND THE SPECIAL MEETING IN PERSON. WHETHER OR
NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, SIGN, DATE AND
RETURN YOUR PROXY IN THE ENCLOSED ENVELOPE. IF YOU ATTEND THE SPECIAL MEETING,
YOU MAY VOTE IN PERSON IF YOU WISH, EVEN THOUGH YOU HAVE PREVIOUSLY RETURNED
YOUR PROXY. IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AND VOTED AT THE
SPECIAL MEETING.
Sincerely,
/s/ Donald J. Sutherland
Donald J. Sutherland
Chairman of the Board of Directors
2
<PAGE>
The Lion Brewery, Inc.
700 North Pennsylvania Avenue
Wilkes Barre, Pennsylvania 18703
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD JANUARY 11, 1999
Wilkes Barre, Pennsylvania
December 22, 1998
To the Stockholders of The Lion Brewery, Inc.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the "Special
Meeting") of The Lion Brewery, Inc., a Pennsylvania corporation (the "Company"),
will be held at the offices of Thelen Reid & Priest LLP, 40 West 57th Street,
New York, New York 10019, on Monday, January 11, 1999, at 10:00 a.m., local
time, for the following purposes as more fully described in the accompanying
Proxy Statement:
(i) To consider and act upon a proposal to approve and adopt
the Agreement and Plan of Merger dated September 17, 1998 (as amended on
December 9, 1998, the "Merger Agreement") between Malt Acquiring, Inc., a
Pennsylvania corporation (the "Purchaser"), and the Company, providing for the
merger of the Purchaser with and into the Company (the "Merger"), whereupon the
separate corporate existence of the Purchaser shall cease, the Company will
continue as the surviving corporation, and the shareholders of the Company
will receive cash consideration of $4.70 per share, without interest; and
(ii) To transact such other business as may properly come
before the Special Meeting or any postponements or adjournments thereof.
Only stockholders of record at the close of business on December 8, 1998, are
entitled to notice of and to vote at the Special Meeting and any postponements
or adjournments thereof. The affirmative vote of the holders of a majority of
the outstanding shares of the common stock of the Company (the "Common Stock")
entitled to vote at the Special Meeting, in person or by proxy, is required to
approve the Merger Agreement and the Merger. If the Merger is consummated,
holders of Common Stock who do not vote in favor of approval of the Merger
Agreement and the Merger and who otherwise comply with the requirements of
Subchapter D of Chapter 15 of the Business Corporation Law of Pennsylvania shall
be entitled to statutory appraisal rights.
A complete list of stockholders entitled to vote at the Special Meeting will be
available for examination at the Company's principal executive offices, located
at 700 North Pennsylvania Avenue, Wilkes Barre, Pennsylvania 18703, for any
purpose germane to the Special Meeting, during ordinary business hours, for a
period of at least 10 days prior to the Special Meeting and will also be
available for inspection at the Special Meeting.
<PAGE>
IMPORTANT
YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES THAT YOU OWN. WHETHER
OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING IN PERSON, PLEASE COMPLETE, DATE
AND SIGN THE ENCLOSED PROXY AND RETURN IT WITHOUT DELAY IN THE ENCLOSED
ENVELOPE, WHICH REQUIRES NO ADDITIONAL POSTAGE IF MAILED IN THE UNITED STATES.
YOU MAY REVOKE YOUR PROXY BY ATTENDING THE SPECIAL MEETING AND VOTING IN PERSON.
PLEASE DO NOT SEND YOUR COMMON STOCK CERTIFICATES AT THIS TIME.
/s/ Donald J. Sutherland
Donald J. Sutherland
Chairman of the Board of Directors
/s/ Charles E. Lawson, Jr.
Charles E. Lawson, Jr.
President and Chief Executive Officer
Wilkes Barre, Pennsylvania
December 22, 1998
2
<PAGE>
THE LION BREWERY, INC.
700 North Pennsylvania Avenue
Wilkes Barre, Pennsylvania 18703
----------------------------------------------------
PROXY STATEMENT
----------------------------------------------------
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JANUARY 11, 1999
This Proxy Statement is being furnished to the holders of shares of common
stock, $.01 par value (the "Common Stock"), of The Lion Brewery, Inc., a
Pennsylvania corporation (the "Company"), in connection with the solicitation of
proxies by and on behalf of the Board of Directors of the Company for use at the
Special Meeting of Stockholders of the Company (the "Special Meeting") to be
held on Monday, January 11, 1999, at 10:00 a.m., local time, at the offices of
Thelen Reid & Priest LLP, 40 West 57th Street, New York, New York 10019 and at
any postponements or adjournments thereof.
This solicitation of proxies is made by and on behalf of the Board of Directors.
In addition to mailing copies of this Proxy Statement and the accompanying
Notice of Special Meeting of Stockholders and proxy to all stockholders of
record on December 8, 1998 (the "Record Date"), the Company will request
brokers, custodians, nominees and other fiduciaries to forward copies of this
material to persons for whom they hold Common Stock in order that such shares
may be voted. Solicitation may also be made by the Company's officers and
regular employees personally or by telephone. In addition, while the Company has
no present intention to retain anyone to assist in soliciting proxies, the
Company may do so if it deems such action necessary. The cost of the
solicitation of proxies will be borne by the Company.
At the Special Meeting, the Company's stockholders will be asked to consider and
vote upon a proposal to approve an Agreement and Plan of Merger, dated
September 17, 1998 (as amended on December 9, 1998, the "Merger Agreement"),
between the Company and Malt Acquiring, Inc., a Pennsylvania corporation (the
"Purchaser"), and the transactions contemplated thereby. A copy of the Merger
Agreement is attached to this Proxy Statement as Annex A. The Purchaser is
owned by a group of members of the Company's senior operating management,
including the Company's chief executive officer. The Merger Agreement provides
for the merger of the Purchaser with and into the Company (the "Merger"). At
the effective time of the Merger (the "Effective Time"): (i) the separate
corporate existence of the Purchaser will cease, (ii) the Company will
continue as the surviving corporation, and (iii) each share of Common Stock
outstanding immediately prior to the Merger (other than shares of Common Stock
held by the Company or by stockholders who have perfected and not withdrawn
their right to seek appraisal of their shares under applicable
<PAGE>
Pennsylvania law) will be converted into the right to receive $4.70 per share in
cash. See "CERTAIN PROVISIONS OF THE MERGER AGREEMENT--Conversion and
Cancellation of Common Stock" and "SPECIAL FACTORS--Appraisal Rights." In
addition, each holder of an employee stock option to acquire shares of Common
Stock will, immediately after the Effective Time, become entitled to receive a
cash payment equal to $4.70 less the per share exercise price under the option
for each share of Common Stock covered by such option. See "CERTAIN PROVISIONS
OF THE MERGER AGREEMENT--Treatment of Stock Options."
Any proxy may be revoked at any time before it is exercised. The casting of a
ballot at the Meeting by a stockholder who may theretofore have given a proxy
will have the effect of revoking that proxy.
The information contained in this Proxy Statement is qualified in its entirety
by the Annexes hereto, each of which is important and should be carefully
reviewed in its entirety.
This Proxy Statement, the accompanying Notice of Special Meeting of Stockholders
and the accompanying proxy are first being mailed to stockholders of the Company
on or about December 22, 1998.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE FAIRNESS OR MERITS OF SUCH TRANSACTION OR UPON THE ACCURACY OR ADEQUACY OF
THE INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY
IS UNLAWFUL.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. THEREFORE, WHETHER OR NOT YOU
PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, DATE, SIGN AND RETURN THE
PROXY CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
The date of this Proxy Statement is December 22, 1998.
2
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith, files reports, proxy statements and other information with
the Securities and Exchange Commission (the "SEC"). Such reports, proxy
statements and other information may be inspected and copied at the public
reference facilities maintained by the SEC at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's regional offices
located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511 and at Seven World Trade Center (13th Floor), New York, New
York 10048. Copies of such material may be obtained by mail from the Public
Reference Section of the SEC at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The SEC maintains a Web site that
contains reports, proxy and information statements and other materials that are
filed through the SEC's Electronic Data Gathering, Analysis, and Retrieval
system. This Web site can be accessed at http://www.sec.gov.
The Company, the Purchaser, Charles E. Lawson, Jr. and Patrick E. Belardi have
filed with the SEC a Rule 13e-3 Transaction Statement (including any amendments
thereto, the "Schedule 13E-3") under the Exchange Act with respect to the
Merger. This Proxy Statement does not contain all of the information set forth
in the Schedule 13E-3 and exhibits thereto, certain parts of which are omitted
in accordance with the rules and regulations of the SEC.
3
<PAGE>
INDEX
PROXY STATEMENT............................................................1
AVAILABLE INFORMATION................................................3
SUMMARY....................................................................7
Special Meeting of the Stockholders..................................7
The Merger...........................................................8
INTRODUCTION..............................................................17
PARTIES TO THE MERGER.....................................................17
The Lion Brewery....................................................17
Malt Acquiring, Inc.................................................18
VOTING AND PROXIES........................................................18
Date, Time and Place of Special Meeting.............................18
Record Date and Outstanding Shares..................................18
Voting Proxies......................................................19
Vote Required.......................................................19
Solicitation of Proxies; Expenses...................................20
SPECIAL FACTORS...........................................................20
Background of the Merger............................................20
Reasons for and Fairness of the Merger..............................24
Position of the Purchaser, Mr. Lawson and
Mr. Belardi as to the Fairness of the
Merger; Purpose of the Merger....................................26
Opinion of Financial Advisor to the Company.........................27
Certain Projections.................................................34
Conflicts of Interest...............................................38
Certain Effects of the Merger.......................................39
Treatment of Stock Options..........................................41
Voting Agreement....................................................41
Appraisal Rights....................................................42
Federal Income Tax Considerations...................................46
Regulatory Approvals................................................46
CERTAIN PROVISIONS OF THE MERGER AGREEMENT................................47
Effective Time of the Merger........................................47
Conversion and Cancellation of Common Stock.........................47
Purchaser Stock.....................................................47
Treatment of Stock Options..........................................48
Exchange Procedures.................................................48
Interim Operations of the Company; Conduct Pending Merger...........49
Alternative Proposals...............................................50
4
<PAGE>
Indemnification.....................................................51
Conditions to the Merger............................................52
Termination.........................................................55
Expenses and Termination Fees.......................................56
Amendment...........................................................57
FINANCING OF THE MERGER...................................................57
Terms of the Senior Debt............................................57
Terms of the Subordinated Debt......................................58
Expenses of the Merger..............................................59
THE PURCHASER.............................................................60
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..................62
SELECTED FINANCIAL DATA...................................................63
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.................................................65
Overview............................................................66
Results of Operations...............................................67
Nine Months Ended June 30, 1998 and 1997............................68
Gross Sales and Excise Taxes.....................................68
Net Sales........................................................69
Gross Margin.....................................................69
Delivery Expense.................................................69
Selling, Advertising and Promotional Expenses....................69
General and Administrative Expenses..............................69
Operating Income.................................................70
Interest Income..................................................70
Provision for Income Taxes.......................................70
Years Ended September 30, 1997 and 1996.............................70
Gross Sales and Excise Taxes.....................................70
Net Sales........................................................70
Gross Margin.....................................................71
Delivery Expense.................................................71
Selling, Advertising and Promotional Expenses....................71
General and Administrative Expenses..............................71
Operating Income.................................................71
Interest (Income) Expense........................................71
Provision For Income Taxes.......................................72
Extraordinary Item...............................................72
Years Ended September 30, 1996 and 1995.............................72
Gross Sales and Excise Taxes.....................................72
5
<PAGE>
Net Sales........................................................72
Gross Margin.....................................................73
Delivery Expense.................................................73
Selling, Advertising and Promotional Expenses....................73
General and Administrative Expenses..............................73
Operating Income.................................................73
Interest Expense.................................................74
Provision for Income Taxes.......................................74
Extraordinary Item...............................................74
Liquidity and Capital Resources.....................................74
Impact of Year 2000.................................................75
BUSINESS..................................................................76
General.............................................................76
Company History and Industry Background.............................77
Business Strategy...................................................78
Products............................................................79
Specialty Soft Drinks...............................................82
Brewing Operations..................................................83
Product Distribution................................................85
Sales and Marketing.................................................86
Competition.........................................................86
Customer Contracts..................................................87
Regulation..........................................................88
Trademarks..........................................................89
Employees...........................................................90
Properties: Brewing Facility.......................................90
Legal Proceedings...................................................91
MANAGEMENT OF THE COMPANY.................................................91
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.........................................................92
INDEPENDENT PUBLIC ACCOUNTANTS............................................96
OTHER MATTERS.............................................................96
1999 ANNUAL MEETING OF STOCKHOLDERS.......................................96
INDEX TO FINANCIAL STATEMENTS.............................................F-1
Annex A: Agreement and Plan of Merger
Annex B: Opinion Letter of Financial Advisor
Annex C: Voting Agreement
Annex D: Dissenters Rights Provisions of the Pennsylvania Business
Corporation Law Subchapter D - Dissenters Rights:
Section 1571 et.seq.
6
<PAGE>
SUMMARY
This Proxy Statement relates to the proposed merger (the "Merger") of the
Purchaser with and into the Company. The following is intended as a summary of
the information contained in this Proxy Statement, is not intended to be a
complete statement of all material features of the proposal to be voted on and
is qualified in its entirety by the more detailed information appearing
elsewhere in this Proxy Statement. Capitalized terms used but not defined in
this summary have the meaning given to them elsewhere in this Proxy Statement.
SPECIAL MEETING OF THE STOCKHOLDERS
Date, Time and Place........... The Special Meeting will be held on Monday,
January 11, 1999, at 10:00 a.m., local
time, at the offices of Thelen Reid & Priest
LLP, 40 West 57th Street, New York, New
York 10019.
Record Date.................... Only holders of record of shares of Common
Stock at the close of business on December 8,
1998 (the "Record Date") are entitled to
notice of and to vote at the Special Meeting
and at any postponements or adjournments
thereof.
Purpose of the
Meeting........................ The purpose of the Special Meeting is to
consider and vote upon a proposal to approve
the Merger Agreement and the transactions
contemplated thereby. The Merger Agreement
provides that, at the Effective Time, the
separate corporate existence of the
Purchaser will cease, the Company will
continue as the surviving corporation, and
each outstanding share of Common Stock
(other than shares owned by the Company, and
shares as to which appraisal rights are
properly perfected and not withdrawn) will
be converted into the right to receive
$4.70 in cash, without interest.
Outstanding Shares............. At the close of business on the Record Date,
there were 3,885,051 shares of Common Stock
outstanding, and each such share is entitled
to one vote.
Vote Required.................. Approval of the Merger Agreement and the
transactions contemplated thereby requires
the affirmative vote of the holders of a
majority of the outstanding shares of Common
Stock entitled to vote at the Special
Meeting. Certain stockholders of the
Company, holding in the aggregate
7
<PAGE>
1,720,184 shares of the Common Stock, or
approximately 44.3% of the outstanding
shares on the Record Date, have entered
into a Voting Agreement with the Purchaser
pursuant to which the Purchaser has been
granted a proxy to vote such shares in favor
of the Merger and to vote against any
competing transaction that might be proposed
by a third party prior to consummation of
the Merger, and will vote in favor of the
Merger. Of the 1,720,184 shares of Common
Stock subject to the Voting Agreement,
1,545,184 of such shares are controlled by
the Chairman of the Board of Directors of the
Company. At least 226,227 of the 2,164,867
shares of Common Stock outstanding that are
not subject to the Voting Agreement,
representing approximately 5.8% of the
outstanding shares on the Record Date,
must be voted in favor of the Merger in
order for the Merger to be approved by the
stockholders. The approval of a majority of
holders of Common Stock that are unaffiliated
with the Purchaser is not required. All of
the members of the Company's Board of
Directors and all executive officers have
indicated their present intention to
vote their shares in favor of the Merger.
Between the Voting Agreement and these
expressed intentions, an aggregate of
1,753,558 shares will be voted in favor of
the Merger. See "SPECIAL FACTORS--Voting
Agreement."
Voting and Proxies............. When a proxy card is returned properly signed
and dated, the shares represented thereby
will be voted in accordance with the
instructions on the proxy card. Abstentions
and broker non-votes will be counted and will
have the same effect as a vote against the
Merger. IF A STOCKHOLDER RETURNS A SIGNED
PROXY CARD AND A CHOICE IS NOT SPECIFIED,
THE SHARES REPRESENTED BY THAT PROXY CARD
WILL BE VOTED IN FAVOR OF THE MERGER. See
"VOTING AND PROXIES."
THE MERGER
The Company.................... The Company produces and bottles brewed
beverages, including malta, specialty beers
and specialty soft drinks. The Company's
Common Stock is traded on the Nasdaq National
Market under the symbol "MALT". The
principal executive offices of the Company
are located at 700 North Pennsylvania
8
<PAGE>
Avenue, Wilkes Barre, Pennsylvania 18703,
and the telephone number at that address is
(717) 823-8801. The Company is a
filing person of the Schedule 13E-3. See
"AVAILABLE INFORMATION"
The Purchaser.................. The Purchaser was formed by the senior
operating management of the Company,
including the Company's chief executive
officer, on September 15, 1998 for the
purpose of effecting the Merger. The
Purchaser has no prior business or
operating history, and shall cease to exist
as a separate corporate entity upon the
consummation of the Merger. The
principal executive offices and telephone
number of the Purchaser are the same as those
of the Company.
General........................ Pursuant to the terms of the Merger
Agreement, at the Effective Time (i) the
Purchaser will be merged with and
into the Company and will cease to exist as
a separate entity; (ii) the Company, as the
surviving corporation in the Merger (the
"Surviving Corporation"), will continue; and
(iii) each outstanding share of Common Stock
(other than shares owned by the Company, and
shares as to which appraisal rights are
properly perfected and not withdrawn)
will be converted into the right to receive
$4.70 in cash, without interest (the "Merger
Consideration").
Background of the Merger;
The Company's Reasons for
the Merger..................... Management of the Company made an initial bid
to acquire the Company in August 1997 for
$3.75 per share. The Company's Board of
Directors engaged Tucker Anthony Incorporated
("Tucker Anthony") as financial advisor in
September 1997, and explored, with the
assistance of Tucker Anthony, a number of
bids for the Company ranging from $4.20 to
$5.00 per share. Management has raised its
bid to $4.70 per share, fully financed.
The Company's Board of Directors, acting
through an independent special committee of
the Board (the "Special Committee"), believes
that the Merger Agreement and the Merger
are fair to, and in the best interests of the
Company and its stockholders, employees and
9
<PAGE>
customers, and has unanimously approved the
Merger Agreement and the Merger. In reaching
this conclusion, the Special Committee has
considered a number of factors relating
to the business and prospects of the Company,
the industry it serves and its customers, the
advice of its advisors, and the terms of the
Merger Agreement. For a more detailed
discussion of these matters, see "SPECIAL
FACTORS--Background of the Merger,"
"--Reasons for and Fairness of the Merger"
and "--Opinion of Financial Advisor to the
Company."
Recommendation of the
Company's Board of Directors... THE BOARD OF DIRECTORS ACTING THROUGH THE
SPECIAL COMMITTEE RECOMMENDS THAT THE
STOCKHOLDERS OF THE COMPANY VOTE IN
FAVOR OF THE APPROVAL OF THE MERGER AGREEMENT
AND THE MERGER. SEE "SPECIAL FACTORS--
Conflicts of Interest."
Opinion of Financial
Advisor........................ Tucker Anthony has delivered its written
opinion to the Board of Directors of the
Company that, as of September 17, 1998, the
$4.70 in cash per share of Common Stock to be
received by the holders of shares of Common
Stock pursuant to the Merger Agreement is
fair to such holders from a financial point
of view.
The full text of the written opinion of
Tucker Anthony, which sets forth assumptions
made, matters considered and limitations
on the review undertaken in connection with
the opinion, is attached hereto as Annex B
-------
and is incorporated herein by reference.
HOLDERS OF SHARES OF COMMON STOCK ARE
URGED TO, AND SHOULD, READ SUCH OPINION IN
ITS ENTIRETY. See "SPECIAL FACTORS--Opinion
of Financial Advisor to the Company."
Effective Time................. The Effective Time will be the later of the
time and date when the Articles of Merger are
accepted for filing by the Department of
State of the Commonwealth of Pennsylvania and
the Merger thereby becomes effective or such
later time established by the Articles of
10
<PAGE>
Merger. See "CERTAIN PROVISIONS OF THE
MERGER AGREEMENT--Effective Time of the
Merger," "--Conditions to the Merger" and
"--Regulatory Approvals."
Conditions to the Merger....... The respective obligations of the Company
and the Purchaser to consummate the Merger
are subject to certain conditions,
including, among others, the approval of the
Merger Agreement by the affirmative vote of
the holders of a majority of the outstanding
shares of Common Stock entitled to vote at
the Special Meeting. See "CERTAIN PROVISIONS
OF THE MERGER AGREEMENT--Conditions to the
Merger."
Additional Agreements
between the Company and
the Purchaser.................. In the Merger Agreement, the Company has
agreed, among other things, that (i) the
Company will conduct business only in
the ordinary and usual course and (ii) the
Company will not, nor will the Company permit
its officers, directors, employees, agents
and representatives to, initiate, solicit
or knowingly encourage, directly or
indirectly, any inquiries or the making or
implementation of any proposal or
offer with respect to a merger, acquisition,
consolidation or similar transaction
involving, or any purchase of any equity
securities of, the Company or all or any
significant portion of the assets of the
Company (an "Alternative Proposal");
provided, however, that the Board of
Directors of the Company is not prohibited
from (A) furnishing information to, or
entering into discussions or negotiations
with, any person or entity that makes an
unsolicited, bona fide Alternative Proposal
which would yield to the Company's
stockholders a net price of not less than
$4.85 per share in cash, which is not
subject to the arrangement of financing
and that the Board of Directors
of the Company determines, in good faith,
represents a financially superior transaction
for the stockholders of the Company as
compared to the Merger (a "Qualifying
Alternative Proposal"), if, and only to the
extent that, (1) the Board of Directors of
the Company, based upon the advice of outside
counsel, determines in good faith that such
action is required for the Board of Directors
to comply with its fiduciary duties
11
<PAGE>
to stockholders imposed by law, (2) prior to
furnishing such information to, or entering
into discussions or negotiations with, such
person or entity, the Company provides
written notice to the Purchaser to the effect
that it is furnishing information to, or
entering into discussions or negotiations
with, such person or entity, and (3) subject
to the same fiduciary standards as in the
preceding clause (1), the Company keeps the
Purchaser informed of the status and all
material information with respect to any such
discussions or negotiations; and (B) to the
extent applicable, complying with Rule 14e-2
promulgated under the Exchange Act with
regard to an Alternative Proposal. See
"CERTAIN PROVISIONS OF THE MERGER AGREEMENT--
Interim Operations of the Company; Conduct
Pending Merger" and "--Alternative
Proposals."
Termination and
Amendment...................... The Merger Agreement may be terminated at any
time prior to the Effective Time, before or
after the approval of the Merger Agreement by
the stockholders of the Company, by
mutual consent of the Company and the
Purchaser or by either the Company or the
Purchaser if, among other things, (i) the
Merger has not been consummated by
January 29, 1999, (ii) a United States
federal or state court of competent
jurisdiction issues an order, judgment or
decree (other than a temporary restraining
order) restraining, enjoining or otherwise
prohibiting the Merger and such order,
judgment or decree has become final, or
(iii) the approval of the Merger by the
stockholders has not been obtained at the
Special Meeting.
The Company may terminate the Merger
Agreement if (i) there is an uncured or
uncurable material breach or nonperformance
by the Purchaser which has resulted in or
could reasonably be expected to result in a
failure of a condition to closing under
the Merger Agreement, or (ii) there is a
Qualifying Alternative Proposal and the Board
of Directors of the Company in good faith
determines (in consultation with its
financial advisors) that such Qualifying
Alternative Proposal represents a superior
12
<PAGE>
proposal for the stockholders of the Company
and in the exercise of its good faith
judgment as to its fiduciary duties to its
stockholders imposed by law, as advised by
outside counsel, the Board of Directors of
the Company determines that such termination
is required by reason of such Qualifying
Alternative Proposal being made.
In addition, the Merger Agreement may be
terminated by the Purchaser if, among
other things, (i) there is an uncured or
incurable material breach or nonperformance
by the Company which has or could reasonably
be expected to have resulted in a failure
of a condition to closing under the Merger
Agreement, or (ii) the Board of Directors of
the Company withdraws or modifies in a
manner materially adverse to the Purchaser
the Board's approval or recommendation of the
Merger or recommends an Alternative Proposal
to the Company's stockholders. The Merger
Agreement may be amended by action taken by
their respective Board of Directors of the
Company and the Purchaser. See "CERTAIN
PROVISIONS OF THE MERGER AGREEMENT--
Termination" and "--Amendment."
Termination Fee................ The Company has agreed to pay to the
Purchaser in cash a termination fee of
$800,000 (the "Termination Fee") if any
person shall have made an Alternative
Proposal and thereafter the Merger Agreement
is terminated, (i) by the Company in response
to a Qualifying Alternative Proposal,
(ii) by the Purchaser if the Board of
Directors of the Company withdraws or
modifies in a manner materially adverse
to the Purchaser the Board's approval or
recommendation of the Merger or recommends
an Alternative Proposal to the Company's
stockholders, or (iii) for any other reason
(other than a breach of the Merger Agreement
by the Purchaser) if in the case of this
clause (iii) the transaction contemplated by
the Alternative Proposal is consummated
within one year after such termination. See
"CERTAIN PROVISIONS OF THE MERGER AGREEMENT--
Expenses and Termination Fees."
13
<PAGE>
Conflicts of Interest.......... In considering the recommendation of the
Board of Directors of the Company with
respect to the Merger, stockholders
should be aware that certain officers and
directors of the Company have interests in
connection with the Merger. Specifically,
the President and Chief Executive Officer and
the Vice President and Chief Financial
Officer of the Company, both of whom are also
directors of the Company, are officers of
and substantial equity holders in the
Purchaser. These officers intend to use,
among other financing sources, (i) cash
bonuses payable by the Company upon a sale of
the Company at a price in excess of $4.00 per
share and (ii) $188,928 received by the
President and Chief Executive Officer in
respect of a stock option granted in
1994 at an exercise price of $1.40 per share.
However, no member of the Special Committee
has any interest in connection with the
Merger, other than as a stockholder of
the Company (or through the general partner
of a principal stockholder). See "SPECIAL
FACTORS--Conflicts of Interest."
Financing of the Merger........ Financing of the Merger will require
approximately $20.5 million to pay the Merger
consideration of $4.70 per share and to pay
the fees and expenses in connection with the
Merger and such financing. These funds are
expected to be provided through (i) up to
$10.5 million of senior secured debt
consisting of $7.5 million in senior term
financing (the "Term Loan") and a revolving
line of credit (the "Revolver") not to exceed
$3.0 million (the Term Loan and the Revolver,
collectively, the "Senior Debt") to be
provided by a bank in the ordinary course of
its business, (ii) up to $6.6 million of
senior subordinated notes (the
"Subordinated Debt") to be purchased by
American Capital Strategies, Ltd. ("ACS"),
(iii) approximately $2.9 million of cash of
the Company (of which there was approximately
$3.8 million at September 30, 1998), and
(iv) $575,000 of cash equity from senior
management, a substantial portion of
which will derive from management bonuses to
be paid by the Company upon the closing of
the Merger and from the conversion of shares
of Common Stock in the Merger received
14
<PAGE>
by senior management upon the exercise of
stock options. See "FINANCING OF THE
MERGER."
Federal Income Tax
Consequences................... In general, each stockholder, including
stockholders who exercise appraisal rights,
will recognize gain or loss per
share equal to the difference between the
cash received for the stockholder's shares
and the stockholder's tax basis per
share in the Common Stock. Such gain or loss
generally will be treated as capital gain or
loss if a stockholder's shares of Common
Stock were held as capital assets at the time
of the Merger. THE FOREGOING TAX DISCUSSION
IS BASED UPON PRESENT LAW. EACH STOCKHOLDER
SHOULD CAREFULLY REVIEW THE MORE DETAILED
DESCRIPTION CONTAINED IN "SPECIAL
FACTORS--FEDERAL INCOME TAX CONSIDERATIONS"
AND CONSULT SUCH STOCKHOLDER'S OWN TAX
ADVISOR AS TO THE SPECIFIC TAX
CONSEQUENCES OF THE MERGER TO SUCH
STOCKHOLDER. See "SPECIAL FACTORS--Federal
Income Tax Considerations."
Certain Effects of the Merger.. As a result of the Merger, the Company's
stockholders will cease to have any ownership
interest in the Company and will cease to
participate in future earnings and growth,
if any, of the Company. Moreover, if the
Merger is consummated, public trading of the
Company Common Stock will cease, the
Company Common Stock will cease to be quoted
on the Nasdaq National Market, the
registration of the Company Common Stock
under the Exchange Act will be terminated
and the Company will cease filing reports
with the SEC. See "SPECIAL FACTORS--Certain
Effects of the Merger".
Treatment of Stock Options..... Each holder of Company stock options shall be
entitled to receive immediately after the
Effective Time, an amount in cash equal to
the Merger Consideration minus the per share
exercise price. There are 238,431 options
outstanding under the Company's 1996 Employee
Stock Option Plan, all of which have an
exercise price of $6.00 per share and
therefore such option holders will not be
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entitled to any portion of the Merger
Consideration. In addition, Mr. Lawson
has an option granted to him in 1994 to
acquire 57,251 shares at an exercise price of
$1.40 per share and will receive $188,928
in respect of this option upon the Merger.
Appraisal Rights............... Stockholders who do not vote in favor of the
Merger and who have fully complied with the
applicable provisions of Subchapter D of
Chapter 15 of the Business Corporation Law
of Pennsylvania ("PBCL") may have the right
to require the Surviving Corporation to
purchase the shares of Common Stock
held by them for cash at the fair value of
those shares as determined in accordance with
the PBCL. See "SPECIAL FACTORS--Appraisal
Rights."
Recent Market Price of
Company Common Stock........... On September 17, 1998, the last full trading
day prior to public announcement of the
signing of the Merger Agreement, the closing
price per share reported on the Nasdaq
National Market for the Common Stock was
$4.00. The average daily closing price per
share reported on the Nasdaq National
Market for the Common Stock during the month
of August 1998 was $3.92. On December 16,
1998, the closing price per share reported
on the Nasdaq National Market for the Common
Stock was $4.50.
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<PAGE>
INTRODUCTION
This Proxy Statement is furnished in connection with the solicitation
by the Company of proxies to be voted at a Special Meeting of Stockholders of
the Company to be held on Monday, January 11, 1999 (the "Special Meeting").
This Proxy Statement is first being mailed to stockholders of the Company on or
about December 22, 1998.
The purpose of the Special Meeting is to consider and vote upon a
proposal to approve the Agreement and Plan of Merger, dated September 17, 1998,
(as amended on December 9, 1998, (the "Merger Agreement"), between the
Company and the Purchaser pursuant to
which, among other things, (a) the Purchaser will be merged with and into the
Company (the "Merger") and the separate corporate existence of the Purchaser
will cease, (b) the Company will continue as the Surviving Corporation, and (c)
each share of Common Stock outstanding immediately prior to the Merger (other
than shares held by the Company or by stockholders who have perfected and not
withdrawn their rights to seek appraisal of their shares under applicable
Pennsylvania law) will be converted into the right to receive $4.70 in cash,
without interest. In addition, each holder of an employee stock option to
acquire shares of Common Stock will, immediately after the Effective Time,
become entitled to receive a cash payment equal to $4.70 less the per share
exercise price under the option for each share of Common Stock covered by such
option. Upon the consummation of the Merger, the separate corporate existence of
the Purchaser will cease, all of the rights, privileges, powers, franchises,
properties, assets, liabilities and obligations of the Purchaser will be vested
in the Company and the Company will continue as the surviving corporation. See
"CERTAIN PROVISIONS OF THE MERGER AGREEMENT." The Purchaser is owned by a group
led by the Company's senior operating management, including the Company's chief
executive officer.
THE BOARD OF DIRECTORS OF THE COMPANY, ACTING THROUGH THE SPECIAL COMMITTEE, HAS
DETERMINED THAT THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY
ARE REASONABLE, FAIR TO, AND IN THE BEST INTERESTS OF, THE COMPANY AND ITS
STOCKHOLDERS AND RECOMMENDS THAT THE STOCKHOLDERS OF THE COMPANY APPROVE THE
MERGER AGREEMENT AND THE MERGER. Certain members of the Board of Directors, have
conflicts of interest with respect to the Merger. See "SPECIAL FACTORS --
Conflicts of Interest."
PARTIES TO THE MERGER
THE LION BREWERY
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
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<PAGE>
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 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
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.
MALT ACQUIRING, INC.
The Purchaser was formed by the senior operating management of the
Company on September 15, 1998 to effect the Merger and has had no prior business
or operating history. Upon consummation of the Merger, the Purchaser will be
merged with and into the Company, and the Purchaser's separate corporate
existence will thereupon cease.
VOTING AND PROXIES
DATE, TIME AND PLACE OF SPECIAL MEETING
The Special Meeting is scheduled to be held at 10:00 a.m., local time,
on Monday, January 11, 1999, at the offices of Thelen Reid & Priest LLP,
40 West 57th Street, New York, New York.
RECORD DATE AND OUTSTANDING SHARES
Only holders of record of shares of Common Stock at the close of
business on December 8, 1998 (the "Record Date") are entitled to notice of, and
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<PAGE>
may vote at, the Special Meeting or at any adjournments or postponements
thereof. As of the Record Date, there were 3,885,051 shares of Common Stock
outstanding, the only class of securities of the Company entitled to vote at the
Special Meeting, held by approximately 45 stockholders of record. Each
stockholder is entitled to one vote for each share registered in the
stockholder's name on the Record Date.
VOTING PROXIES
Many of the Company's stockholders may be unable to attend the Special
Meeting. Therefore, the Company's Board of Directors is soliciting proxies so
that each stockholder has the opportunity to vote on the proposals to be
considered at the Special Meeting. When a proxy card is returned properly signed
and dated, the shares represented thereby will be voted in accordance with the
instructions on the proxy card. However, if a stockholder does not return a
signed proxy card, his or her shares will not be voted by the proxies.
Stockholders are urged to mark the boxes on the proxy card to indicate how their
shares are to be voted. IF A STOCKHOLDER RETURNS A SIGNED PROXY CARD AND A
CHOICE IS NOT SPECIFIED, THE SHARES REPRESENTED BY THAT PROXY CARD WILL BE VOTED
IN FAVOR OF THE MERGER AND MAY ALSO BE VOTED IN THE PROXY HOLDER'S DISCRETION ON
SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING OR ANY ADJOURNMENTS
OR POSTPONEMENTS THEREOF, EXCEPT THAT SHARES REPRESENTED BY PROXIES WHICH HAVE
BEEN VOTED "AGAINST" THE MERGER AGREEMENT AND THE MERGER WILL NOT BE USED TO
VOTE "FOR" POSTPONEMENT OR ADJOURNMENT OF THE SPECIAL MEETING FOR THE PURPOSE OF
ALLOWING ADDITIONAL TIME FOR SOLICITING ADDITIONAL VOTES "FOR" THE MERGER
AGREEMENT AND THE MERGER. See "--Vote Required" and "Other Matters."
Stockholders of the Company who execute proxies retain the right to
revoke them at any time before they are voted. Any proxy given by a stockholder
may be revoked (i) by duly executing and delivering a later proxy prior to the
exercise of such proxy, (ii) by giving notice of revocation in writing to the
Secretary of the Company prior to the meeting at 700 North Pennsylvania Avenue,
Wilkes Barre, Pennsylvania 18703, or (iii) by attending the Special Meeting and
voting in person.
VOTE REQUIRED
A quorum for the transaction of business at the meeting consists of
holders of the majority of the outstanding shares of the Company's Common Stock,
present in person or by proxy. In the event that less than a majority of the
outstanding shares are present at the Special Meeting, either in person or by
proxy, a majority of the shares so represented may vote to adjourn the Special
Meeting from time to time without further notice, other than announcement at the
Special Meeting, until a quorum shall be present or represented.
The affirmative vote of holders of at least a majority of the
outstanding shares of Common Stock of the Company as of the Record Date is
required to approve and adopt the Merger Agreement and the transactions
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<PAGE>
contemplated thereby. The Purchaser, Lion Partners Company L.P., Weston Presidio
Offshore Capital C.V., Quincy Partners and Northwood Ventures, LLC, holding in
the aggregate 1,720,184 shares of Common Stock, or approximately 44.3% of the
outstanding shares on the Record Date, have entered into a Voting Agreement with
the Purchaser pursuant to which the Purchaser has been granted a proxy to vote
such shares in favor of the Merger and to vote against any competing transaction
that might be proposed by a third party prior to the consummation of the Merger,
and will vote in favor of the Merger. Of the 1,720,184 shares of Common Stock
subject to the Voting Agreement, 1,545,184 of such shares are controlled by the
Chairman of the Board of Directors of the Company. A copy of the Voting
Agreement is attached to this Proxy Statement as Annex C. At least 226,227
shares of the 2,164,867 shares of Common Stock outstanding that are not subject
to the Voting Agreement, representing approximately 5.8% of the outstanding
shares on the Record Date, must be voted in favor of the Merger in order for the
Merger to be approved by the stockholders. The approval of a majority of holders
of Common Stock that are unaffiliated with the Purchaser is not required. Under
the PBCL, in determining whether the proposal regarding the adoption of the
Merger Agreement has received the requisite number of affirmative votes,
abstentions and broker non-votes will be counted and will have the same effect
as a vote against such proposal.
SOLICITATION OF PROXIES; EXPENSES
The cost of solicitation, including the cost of preparing and mailing
the Notice of the Special Meeting of Stockholders and this Proxy Statement, will
be borne by the Company. Solicitation will be made primarily by mailing this
Proxy Statement to all stockholders entitled to vote at the Special Meeting. In
addition, the Company will request brokers, custodians, nominees and other
fiduciaries to forward copies of such materials to persons for whom they hold
Common Stock in order that such shares may be voted. Proxies may be solicited by
officers and regular employees, personally or by telephone, but at no
compensation in addition to their regular compensation as employees. The Company
may reimburse brokers, custodians, nominees and other fiduciaries holding shares
in their names for third parties, for the cost of forwarding Proxy Statements to
and obtaining proxies from third parties. In addition, while the Company has no
present intention to retain anyone to assist in soliciting proxies, the Company
may do so if it deems such action necessary.
SPECIAL FACTORS
BACKGROUND OF THE MERGER
As early as November 1996, as a result of the decline in stock prices
for both the Company and other craft beer brewers, the Board of Directors of the
Company began to consider strategic alternatives, including a stock buyback, in
order to maximize value for stockholders. As a member of the Board of Directors,
Charles E. Lawson, Jr., the Company's President and Chief Executive Officer, was
a party to those discussions. Among the strategic alternatives which were
considered by the Board were acquiring craft beer brands which had achieved
greater prominence than the Company's brands, acquiring brewing capacity for
malta in other regions, engaging a public relations firm to expand knowledge of
the Company in the investment community, a stock buy-back program and paying
cash dividends. These alternatives were rejected for two principal reasons: the
market for craft beers had deteriorated because of increased competition and
more restricted distribution opportunities and the Company needed a strong
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<PAGE>
balance sheet with little debt in view of the continuous risks it faced due to
customer concentration.
In early August 1997, in anticipation of an offer from the Company's
senior management to acquire the Company, the Board of Directors established a
Special Committee in order to evaluate strategic alternatives. The Special
Committee was comprised of every member of the Board of Directors, except for
Messrs. Lawson, Belardi and Thomas S. Ablum, namely Donald J. Sutherland, George
W. Peck, IV, Carlo A. von Schroeter and Henry T. Wilson. On August 13, 1997, the
Chairman of the Board of Directors (the "Chairman") of the Company received an
offer for 100% of the Common Stock of the Company at $3.75 per share from a
group comprised of Messrs. Lawson and Belardi and a third-party investor
affiliated with Thomas S. Ablum, an outside director of the Company. The August
13 offer lapsed. During late August, a sub-committee of the Board of Directors
interviewed several investment banks in order to select a firm to facilitate the
sale process. On September 25, 1997, the Special Committee engaged Tucker
Anthony as its financial advisor in connection with the possible sale of the
Company. The Special Committee also engaged the law firm of Haythe & Curley to
provide it with legal advice with respect to the sale process.
Shortly after Tucker Anthony was retained, the Board of Directors
advised management that bonuses would be given to management upon the closing of
a sale of the Company at a price in excess of $4.00 per share.
As a result of its engagement by the Special Committee, Tucker Anthony,
with the Company's assistance, prepared a Confidential Information Memorandum,
financial model, including estimates of Company performance for fiscal year
1998, and conducted research on over 250 potential buyers, of which over 212
were contacted and 100 signed confidentiality agreements and received copies of
such Confidential Information Memorandum.
During mid-December 1997, Tucker Anthony received preliminary
indications of interest from potential acquirers. In January 1998, seven
potential buyers met with management and conducted plant tours of the Company.
On January 29, 1998, bid letters were sent to interested parties with a February
10, 1998 reply date. On February 10, 1998, Tucker Anthony received on behalf of
the Company four bids to purchase the Company, ranging from $4.20 to $5.00 per
share. One of those bids was from a group comprised of Messrs. Lawson and
Belardi and a third-party investor affiliated with Mr. Ablum.
On March 3, 1998, the Company signed a letter of intent with one of the
non-management bidders for a sale of the Company for $5.00 per share. The bidder
had extended to management an offer to participate in the ownership of the
acquiring entity. In mid May 1998, after performing due diligence, the bidding
party adjusted its offer downward to $4.50 per share. Reasons cited for reducing
the bid included significant required capital expenditures relating to the
Company's facility, significant concentration of revenues with one customer and
the dependence of the Company on an uncertain supply of recycled glass bottles.
During the next several months, the Company experienced a number of
alterations in the manner in which it historically operated. More specifically,
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<PAGE>
the supply of recycled glass (which supply provided the Company with a
competitive cost advantage) was reduced because a major supplier was in the
process of being acquired. In addition, the possibility was raised by management
that the supply of recycled glass could be impacted materially should the
acquirer of the Company's supplier decide to use returnable as opposed to
non-returnable (recyclable) bottles. The bidder decided to withdraw its offer
until the Company resolved this glass supply issue.
In late April 1998, American Maple Leaf Financial Corporation ("Maple
Leaf") contacted Tucker Anthony regarding its interest, on behalf of a client,
in acquiring the Company. On May 5, 1998, Maple Leaf executed a Confidentiality
Agreement and was provided the Confidential Information Memorandum. On or about
May 27, 1998, Maple Leaf, together with its client, microbrewer and brewpub
operator, Red Bell Brewing Company ("Red Bell"), visited the Company's
headquarters in Wilkes Barre, Pennsylvania and toured the facility.
On June 10, 1998, Maple Leaf, as financial advisor to Red Bell,
submitted a preliminary indication of interest for the Company at $3.42 per
fully diluted share in cash at closing, plus an additional $1.52 per fully
diluted share in cash ($4.94 in the aggregate) payable on the first anniversary
of the closing, such additional payment to be made contingent on the absence of
any reduction in the Company's supply of recycled glass. Tucker Anthony informed
Red Bell on July 1, 1998 of the Special Committee's decision that the contingent
payment structure of its bid was unacceptable. On July 14, 1998, Red Bell
submitted a revised offer of $16.0 million, or approximately $4.06 per share,
subject to various conditions, including completion of due diligence and Red
Bell's obtaining financing for its offer; Red Bell's revised offer also was
unclear as to the treatment of the Company's cash.
In general, the Special Committee participated in the negotiations
related to the Merger through the Chairman, assisted by a representative of
Tucker Anthony. The Chairman reported on the status of the negotiations to the
Special Committee either in individual conversations with members of the Special
Committee or at meetings of the full Committee. The Special Committee then
provided the Chairman with instructions as to how he should proceed in the
negotiations.
On July 17, 1998, the Chairman and a representative of Tucker Anthony
met with Messrs. Lawson and Belardi and representatives of their financial
advisor, Mellon Financial Markets, Inc. ("MFMI"), to discuss management's
interest inmaking their bid, as well as preliminary discussions with financing
sources for management's bid. MFMI assisted Messrs. Lawson and Belardi as a
placement agent and advisor in raising subordinated debt and senior financing
to finance the Merger. The Chairman indicated that a financing commitment would
be an important consideration in the evaluation of any bid. At the meeting, the
Company's senior management submitted a bid of $4.20 per share, which bid
reflected the uncertainty surrounding the Company's supply of recycled glass, as
well as substantial and necessary capital expenditures. By this time, the
management group no longer included the affiliate of Mr. Ablum, who had joined
the Special Committee.
On July 28, 1998, the Chairman and a representative of Tucker Anthony
met with representatives from Red Bell to clarify Red Bell's offer and,
specifically, to clarify the treatment of cash on the Company's balance sheet.
Red Bell indicated that cash remaining after deductions for capital
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<PAGE>
expenditures, expenses and working capital would accrue to the Company's
shareholders. Red Bell stated that, after giving effect to the remaining cash,
the net price to be received by shareholders pursuant to their offer would be
$17.0 million or $4.31 per fully diluted share.
Shortly thereafter, Messrs. Lawson and Belardi were advised by Tucker
Anthony that there was a competing bid and that they would need to raise their
bid to remain competitive. Messrs. Lawson and Belardi subsequently increased
their offer to $4.40 per share. At a meeting of the Special Committee, the
Special Committee decided to proceed with the group consisting of Messrs. Lawson
and Belardi. The Special Committee's decision to proceed with the group
consisting of Messrs. Lawson and Belardi reflected the higher economic value of
management's bid as well as the Board's belief that Messrs. Lawson and Belardi
were more familiar with the Company's business and potential due diligence
issues than any other potential bidder. On August 11, 1998, the Company executed
a letter of intent with Messrs. Lawson and Belardi at $4.40 per fully diluted
share, net in cash to the shareholders.
On August 11, 1998, the Special Committee informed Red Bell that its
$17.0 million bid was not accepted and that it had executed a letter of intent
with another bidder. In a subsequent conversation with Red Bell and its
advisors, Tucker Anthony informed them that such letter of intent contained a
"no-shop/no-solicitation" clause.
On August 27, 1998, Red Bell submitted a bid letter for the purchase of
the Company at $19.0 million, or $4.82 per fully diluted share ($4.89 based on
primary shares).
On September 4, 1998, the Special Committee conferred with Tucker
Anthony and the Special Committee's legal counsel, and determined that it would
explore Red Bell's offer and terminate management's exclusivity. On September 8,
1998, the Special Committee notified Messrs. Lawson and Belardi in writing that,
pursuant to the 10-day notification requirement in their letter of intent, the
Special Committee was terminating Messrs. Lawson and Belardi's exclusivity as of
September 18, 1998. During this 10-day notification period, and in accordance
with the letter of intent, discussions were had with Messrs. Lawson and Belardi
and they proceeded to secure commitments for the financing required to
consummate the transaction.
On September 17, 1998, the Special Committee received a fully financed
bid from Messrs. Lawson and Belardi at $4.70 per fully diluted share in cash and
executed the Merger Agreement. In determining to reject Red Bell's higher offer,
the Special Committee considered that Red Bell's offer was subject to a 30-day
due diligence period and a 90-day period to obtain financing, and that there
could be no certainty that such financing would be obtained, particularly in
light of unsettled financial markets. The Special Committee also considered that
after performing due diligence, at least one other bidder had first reduced its
bid and then withdrew its offer, primarily due to the recycled glass supply
issue described above, as well as the substantial capital expenditures required
to be undertaken by the Company. In that connection, the Special Committee was
concerned that if Red Bell reduced or withdrew its offer after a lengthy process
there could be no assurance that Messrs. Lawson and Belardi's offer or its
financing sources would still be available to the stockholders. In addition, the
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<PAGE>
Special Committee did not want to incur the risk of a withdrawal of the Red Bell
offer after proprietary information had already been disclosed to Red Bell, a
perceived competitor of the Company, during the due diligence process. Finally,
the Special Committee considered and gave weight to communications it had
received from employees and customers of the Company indicating that the
interests of these groups would be better served by effecting the Merger than by
entering into a transaction with Red Bell.
REASONS FOR AND FAIRNESS OF THE MERGER
The Company's Board of Directors, acting through the Special Committee,
believes that the Merger Agreement and the Merger are advisable and fair to and
in the best interests of the Company and its unaffiliated stockholders and has
unanimously approved the Merger Agreement and the Merger. The Merger was
unanimously approved by the directors of the Company who are not employees of
the Company. ACCORDINGLY, THE BOARD OF DIRECTORS ACTING THROUGH THE SPECIAL
COMMITTEE UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF THE COMPANY VOTE FOR
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE MERGER. SEE "--CONFLICTS
OF INTEREST."
In reaching its unanimous determination that the Merger Agreement and
the Merger are fair to and in the best interests of the Company and its
stockholders, the Special Committee considered a number of factors, including,
without limitation, the following, which constitute all the material factors
considered by the Special Committee:
(i) the relationship of the Merger Consideration to the current
market stock price and the historical stock price for the
Common Stock, and that the price represents a substantial
premium over the trading range of the Common Stock of the
Company over the prior two-year period (see "--Opinion of
Financial Advisor to the Company--Analysis of Purchase
Price");
(ii) information relating to the financial condition and results of
operations of the Company including management's estimates of
the prospects of the Company (and the range of going concern
values, derived by Tucker Anthony therefrom of $3.71 to $5.03
per share, with a midpoint value of $4.31 per share, based on
a discounted cash flow analysis (See "--Opinion of Financial
Advisor to the Company--Discounted Cash Flow Analysis")),
which, in the Special Committee's view, supported a
determination that the Merger Consideration for the Common
Stock was fair to the Company's unaffiliated stockholders;
(iii) that approximately 40% of the outstanding Common Stock is held
by entities controlled by the Chairman of the Company, and
hence there is not an active trading market for the Company's
Common Stock and, consequently, there is generally a lack of
liquidity for the Company's stockholders;
(iv) that increasingly larger companies in the domestic brewing
industry with greater marketing and production resources are
gaining greater opportunities for retail sales;
(v) the opinion of Tucker Anthony, who were retained by the
Special Committee (which consists entirely of directors who
are not employees of the Company nor participants in the
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Purchaser) for the purpose of preparing a report concerning
the fairness of the Merger, that, as of September 17, 1998,
the $4.70 per share of Common Stock in cash to be received by
the holders of shares of Common Stock pursuant to the Merger
Agreement was fair to such holders;
(vi) the interests of the Company's employees and customers in
continuing with the current operating management of the
Company as compared to having an outside third party acquire
control of the Company;
(vii) the risks associated with the business of the Company,
including the possible unavailability of recycled glass;
(viii) increased competition in the craft-brewing segment; and
(ix) the Special Committee's view that the terms of the Merger
Agreement, as reviewed by the Special Committee with its legal
advisors and Tucker Anthony, are advisable and fair to the
Company and its stockholders in the light of the nature of the
transaction with the Purchaser and provide the Company and its
stockholders with the flexibility to, under certain
circumstances, accept a superior Alternative Proposal for a
competing transaction and terminate the Merger Agreement.
The main negative factor considered by the Special Committee was that
the stockholders of the Company would not have a continuing interest in the
Company and thus would not be able to participate in any future growth or
financial success of the Company. In addition, as described under "-- Background
of the Merger" above, the Special Committee considered, and rejected,
alternative transactions to the Merger such as the offer from Red Bell. See
"--Background of the Merger" for a discussion of these alternative transactions
and the reasons for their rejection.
The Special Committee did not consider relevant the price of $7.16 per
share of Common Stock paid to certain subordinated noteholders of the Company in
May of 1996 because the price was set over two years prior to the Special
Committee's consideration of the Merger. Similarly, the Special Committee did
not consider it important that the Merger be structured so that approval of at
least a majority of the unaffiliated holders be required because the Company,
under certain circumstances, has the flexibility to accept a superior
Alternative Proposal for a competing transaction and terminate the Merger
Agreement and because substantially all the outstanding Common Stock is held by
persons who are not employees of the Company or otherwise affiliated with the
Purchaser. The Special Committee did not consider the liquidation value or net
book value because the going concern value far exceeded both measures. The
Special Committee did not conduct a specific analysis of each of the foregoing
supporting and detracting factors. The members of the Special Committee are
experienced financial investors who are knowledgeable of the Company's business
and in the purchasing and sale of companies. Since members of the Board of
Directors are substantial equity holders in the Company, they were properly
incentivized to seek maximum value for all stockholders consistent with the
members' fiduciary duties to all constituencies of the Company.
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The Special Committee was aware of and considered the interests of
Messrs. Lawson and Belardi in the Merger as described under "-- Conflicts of
Interest" below. For the reasons noted above, the Special Committee did not
consider these interests to be an unfavorable factor in evaluating the Merger.
See "-- Background of the Merger." The Special Committee did not consider the
tax consequences of the Merger to shareholders as a material factor in
evaluating the Merger since the Merger could have different consequences to
each shareholder based on each shareholder's individual tax position. See
"--Federal Income Tax Considerations." The Special Committee did not perform
its own valuation or analysis of the Company.
The foregoing discussion of the information and factors discussed by
the Special Committee is not meant to be exhaustive, but includes material
factors considered by the Special Committee. The Special Committee did not
quantify or attach any particular weight to the various factors that it
considered in reaching its determination that the Merger is in the best
interests of the Company and its stockholders.
No unaffiliated representative was retained by the Special Committee to
act on behalf of unaffiliated stockholders. The Special Committee determined
that this was not necessary in light of the fact that all of the members of
Special Committee are non-employee directors. Each of these non-employee
directors has voted in favor of the adoption of the Merger Agreement and the
consummation of the transactions contemplated thereby.
POSITION OF THE PURCHASER, MR. LAWSON AND MR. BELARDI AS TO THE FAIRNESS OF THE
MERGER; PURPOSE OF THE MERGER
Neither Messrs. Lawson nor Belardi, the controlling persons of the
Purchaser, participated in the deliberations of the Special Committee of the
Company regarding, or received advice from the Company's financial advisor as to
the fairness to the Company's stockholders of, the Merger. As a result, the
Purchaser, Mr. Lawson and Mr. Belardi are not in a position to specifically
adopt the conclusions of the Special Committee with respect to such matters.
However, considering
(a) the current and historical market prices for shares of Company Common
Stock,
(b) the premium of the cash Merger Consideration over the closing price on
September 17, 1998,
(c) the extent of the sale process described in "Background of the
Merger,"
(d) the unanimous recommendation of the Board of the Directors, including
directors who are not employees of the Company,
(e) the agreement of certain principal stockholders to vote their shares
of Company Common Stock in favor of the Merger Agreement and the
transactions contemplated thereby,
(f) the receipt by the Board of Directors of the written opinion of its
independent financial advisor,
26
<PAGE>
(g) information relating to the financial condition, including net book
value, and results of operations of the Company, and estimates of
Messrs. Lawson and Belardi of the prospects of the Company (and the
range of going concern values derived by Tucker Anthony therefrom
of $3.71 to $5.03 per share, with a midpoint value of $4.31 per share,
based on a discounted cash flow analysis (See "Opinion of Financial
Advisor to the Company--Discounted Cash Flow Analysis")) (liquidation
value was not considered), and
(h) the arm's-length nature of the negotiations between the Company and
the Purchaser,
each of the Purchaser, Mr. Lawson and Mr. Belardi believes that the Merger is
fair to and in the best interests of the unaffiliated stockholders of the
Company. The foregoing constitute all the material factors considered by the
Purchaser and Messrs. Lawson and Belardi in making this determination. This
belief should not, however, be construed as a recommendation to the Company's
stockholders by the Purchaser, Mr. Lawson or Mr. Belardi to vote to approve
the Merger Agreement. Neither the Purchaser, Mr. Lawson nor Mr. Belardi
considered relevant to their respective determinations as to the fairness of
the Merger (i) conflicts of interest, because the Special Committee had no
conflicts of interest, (ii) tax consequences, because the Merger could have
different consequences to each shareholder based on each shareholder's
individual tax position, (iii) that the transaction was not structured to
require the approval of at least a majority of unaffiliated stockholders,
because the voting power of Messrs. Lawson and Belardi was so insignificant (up
to 60,251 and 1,000 shares, respectively), (iv) that the Special Committee did
not retain an unaffiliated representative to act solely on behalf of
unaffiliated stockholders, because the Special Committee is comprised of
non-employee directors, or (v) any prior purchase prices paid for the Common
Stock by the Company or Messrs. Lawson or Belardi, since such purchases occurred
over two years prior to any discussion of the Merger. The main disadvantages of
the transaction to unaffiliated stockholders is that unaffiliated stockholders
will not have a continuing interest in the Company and thus will not be able to
participate in any future growth or financial success of the Company.
Neither the Purchaser, Mr. Lawson nor Mr. Belardi has undertaken any
formal evaluation of the fairness of the Merger to the stockholders of the
Company or has assigned specific relative weights to the factors considered by
them. A substantial portion of the equity to be invested in the Purchaser by
senior management will be derived from management bonuses to be paid by the
Company upon the closing of the Merger and from the conversion of shares of
Common Stock in the Merger received by senior management upon the exercise of
stock options. See "--Conflicts of Interest."
OPINION OF FINANCIAL ADVISOR TO THE COMPANY
GENERAL
On September 25, 1997, the Board of Directors of the Company engaged
Tucker Anthony to act as financial advisor in connection with a possible sale,
merger or other form of business combination involving the Company (the
"Transaction"). As financial advisor, Tucker Anthony was engaged to: assist in
developing an overall strategy for any potential Transaction; manage the
preparation of an information memorandum designed to introduce the Company to
prospective acquirers or merger partners; identify and screen potential
acquirers, and initiate contact with potential acquirers on a confidential
basis; assist in the evaluation of any offers made with regard to a Transaction,
27
<PAGE>
including preparation and review of documents related thereto; assist in the
structuring, negotiating and closing of a Transaction; and assist the Company
and its counsel in preparing any necessary documents pertaining to a
Transaction. (See "--Background of the Merger"). Tucker Anthony subsequently was
engaged to render a fairness opinion with respect to the Merger.
Tucker Anthony delivered a written opinion to the Company's Board of
Directors on September 17, 1998 (the "Opinion") which concluded, based on and
subject to the assumptions and qualifications set forth therein, that the Merger
Consideration of $4.70 in cash per share of Common Stock of the Company to be
received by the stockholders of the Company pursuant to the Merger Agreement was
fair, from a financial point of view, to such stockholders as of the date
thereof. THE FULL TEXT OF THE OPINION, SETTING FORTH THE ASSUMPTIONS MADE,
PROCEDURES FOLLOWED, MATTERS CONSIDERED AND CERTAIN LIMITATIONS ON THE REVIEW
UNDERTAKEN BY TUCKER ANTHONY, IS ATTACHED HERETO AS ANNEX B. HOLDERS OF COMMON
STOCK ARE URGED TO READ THE OPINION IN ITS ENTIRETY. THE OPINION IS DIRECTED TO
THE COMPANY'S BOARD OF DIRECTORS ONLY AND DOES NOT CONSTITUTE A RECOMMENDATION
TO ANY HOLDER OF COMMON STOCK AS TO HOW SUCH STOCKHOLDER SHOULD VOTE AT THE
SPECIAL MEETING. Tucker Anthony has consented to the use of the Opinion in this
Proxy Statement.
The Company and Tucker Anthony agreed that they do not believe that any
person other than the Company's Board of Directors has the legal right to rely
on the Opinion and that, absent any controlling precedent, the Company and
Tucker Anthony would resist any assertion otherwise. The engagement letter
between the Company and Tucker Anthony contains an express disclaimer of the
ability of any party other than the Board of Directors to rely on the Opinion.
The Company and Tucker Anthony are not aware of any controlling precedent that
would create a statutory or common law right for persons other than the Board of
Directors to rely on the Opinion. The Company and Tucker Anthony base their
belief that no such person may rely on the Opinion on the limited nature of
Tucker Anthony's contractual duty and the absence of such controlling precedent.
In the absence of such controlling precedent, the ability of a stockholder to
rely on the Opinion would be resolved by a court of competent jurisdiction.
Resolution of the question of a stockholder's ability to rely on the Opinion
will have no effect on the rights and responsibilities of the Board under
applicable state law or on the rights and responsibilities of either Tucker
Anthony or the Board under federal securities laws.
ANALYSES OF TUCKER ANTHONY
In rendering the Opinion, Tucker Anthony, among other things: (i)
reviewed the Merger Agreement; (ii) reviewed certain historical financial and
other information concerning the Company for the five fiscal years ended
September 30, 1997 and for the quarter and nine months ended June 30, 1998,
including the Company's reports on Forms 10-K and 10-Q; (iii) held discussions
with the senior management of the Company with respect to its past and current
financial performance, financial condition and future prospects; (iv) reviewed
certain internal financial data, projections and other information of the
Company, including financial projections provided by the Company, and performed
a discounted cash flow analysis using such projections; (v) analyzed certain
publicly available information of selected publicly traded companies that
28
<PAGE>
operate in similar industries or were deemed otherwise relevant to its inquiry,
and compared the Company from a financial point of view with certain of these
companies; (vi) reviewed the consideration received by stockholders in selected
publicly announced merger and acquisition transactions involving companies that
operate in similar industries or were deemed otherwise relevant to its inquiry;
(vii) reviewed historical trading activity of the Common Stock and considered
the prospects for dividends and price movement; and (viii) conducted such other
financial studies, analyses and investigations and reviewed such other
information as it deemed appropriate to enable it to render the Opinion. In its
review, Tucker Anthony also took into account an assessment of general economic,
market and financial conditions and certain industry trends and related matters.
The Opinion was necessarily based upon market, economic and other conditions as
they existed and could be evaluated on the date thereof, and the information
made available to Tucker Anthony through the date thereof.
No limitations were imposed by the Board of Directors of the Company
upon Tucker Anthony with respect to the investigations made or procedures
followed by Tucker Anthony in its review and analysis. In its review and
analysis and in arriving at its opinion, Tucker Anthony assumed and relied upon
the accuracy and completeness of all the financial information publicly
available or provided to it by the Company, and did not attempt to verify any of
such information. Tucker Anthony assumed (i) that the financial projections of
the Company provided to it were prepared on a basis reflecting the best
available estimates and judgments of the Company's management as to the future
financial performance and results of the Company, and (ii) that such forecasts
and estimates would be realized in the amounts and in the time periods
estimated. Tucker Anthony did not make or obtain any independent valuations or
appraisals of any assets or liabilities of the Company, and did not verify any
of the Company's books or records.
On September 17, 1998, Tucker Anthony made a presentation to the
Company's Board of Directors and subsequently issued the Opinion. Set forth
below is a summary of the principal elements of the financial analyses performed
by Tucker Anthony in connection with rendering the Opinion. This summary does
not purport to be a complete description of the analyses performed by Tucker
Anthony or of the presentation by Tucker Anthony to the Company's Board of
Directors on September 17, 1998. Tucker Anthony believes that its analyses must
be considered as a whole and that selecting portions of its analyses and the
factors considered by it, without considering all factors and analyses, could
create an incomplete or misleading view of the process underlying its Opinion.
Analysis of Publicly Traded Reference Companies. Tucker Anthony
compared selected financial data and financial ratios of the Company to the
corresponding data and ratios of selected publicly traded companies that operate
in similar industries or were deemed otherwise relevant to its inquiry.
Specifically, the companies included in Tucker Anthony's review were: Boston
Beer Company, Inc., Genesee Corporation, Pyramid Breweries, Inc., Redhook Ale
Brewery, Inc., Cott Corporation, National Beverage Corporation, and Todhunter
International, Inc. (the "Public Reference Companies"). In the selection of the
Public Reference Companies, consideration also was given to total revenues and
market capitalization.
29
<PAGE>
Tucker Anthony compared multiples for the Merger implied by the Merger
Consideration and certain financial data of the Company to the corresponding
implied trading multiples of the Public Reference Companies. In this portion of
its analysis, Tucker Anthony focused on (i) enterprise value (market value of
equity plus net debt) as a multiple of estimated revenues for the twelve months
ended June 30, 1998, (ii) enterprise value as a multiple of estimated earnings
before interest, taxes, depreciation and amortization ("EBITDA") for the twelve
months ended June 30, 1998, (iii) enterprise value as a multiple of estimated
earnings before interest and taxes ("EBIT") for the twelve months ended June 30,
1998, (iv) market value of equity as a multiple of projected 1998 earnings,
based on information for calendar 1998 from First Call Corporation and
independent research analysts and (v) market value of equity as a multiple of
book value.
The implied multiples for the Merger based on the Merger Consideration
and the Company's financial data compare as follows with the mean (adjusted to
exclude the high and low values) multiples for the Public Reference Companies
(the "Mean") using closing share prices as of September 8, 1998: (i) enterprise
value to estimated fiscal 1998 revenue of 0.5x for the Merger versus 0.6x for
the Mean, (ii) enterprise value to estimated fiscal 1998 EBITDA of 3.4x for the
Merger versus 6.3x for the Mean, (iii) enterprise value to estimated fiscal 1998
EBIT of 4.3x for the Merger versus 9.0x for the Mean, and (iv) market value of
equity to book value of 2.6x for the Merger versus 1.1x for the Mean. None of
the implied multiples for the Merger was above the Mean for the Multiples
derived from the Public Reference Companies. While taken alone, the multiples
for the Merger do not support an opinion of fairness. However, Tucker Anthony
does not believe the analysis of Publicly Traded Reference Companies to be a
relevant indicator of fairness.
The group of imputed transaction multiples as a whole was not
considered sufficiently conclusive to be an important element of Tucker
Anthony's analysis for several reasons. Principally, (i) most of the Public
Reference Companies displayed only limited comparability to the Company; and
(ii) many of the Public Reference Companies exhibited either no or limited
profitability which reduced the number of available multiples to which the value
of the Merger could be compared.
It should be noted, however, that Tucker Anthony compared the implied
multiples for the Merger with the multiples for Todhunter International, Inc.
because Todhunter was more comparable in terms of lines of business than the
other Public Reference Companies. Specifically, like the Company, the majority
of Todhunter's business involves the manufacture of beverages under contract for
others, whereas most of the other Public Reference Companies are branded
beverage companies with larger geographic presence, or produce beer as their
principal business (whereas less than 30% of the Company's revenues is derived
from beer production).
The implied multiples for the Merger based on the Merger Consideration
and the Company's financial data compare as follows with the multiples for
Todhunter International, Inc. using closing share prices as of September 8,
1998: (i) enterprise value to estimated fiscal 1998 revenue of 0.5x for the
Merger versus 1.1x for Todhunter, (ii) enterprise value to estimated fiscal 1998
EBITDA of 3.4x for the Merger versus 6.6x for Todhunter, (iii) enterprise value
30
<PAGE>
to estimated fiscal 1998 EBIT of 4.3x for the Merger versus 10.1x for Todhunter,
(iv) market value of equity to book value of 2.6x for the Merger versus 0.9x for
Todhunter, (v) market value of equity to latest twelve months' earnings of 8.9x
for the Merger versus 8.1x for Todhunter, (vi) market value of equity to
estimated 1998 earnings of 10.2x for the Merger versus 8.1x for Todhunter, and
(vii) market value of equity to estimated 1999 earnings of 13.0x for the Merger
versus 7.8x for Todhunter.
Analysis of Reference Transactions. Tucker Anthony reviewed the
consideration received by stockholders in selected publicly announced merger and
acquisition transactions (the "Reference Transactions") announced since January
1, 1993 in which the target companies operate in similar industries or were
deemed otherwise relevant to its inquiry. The transactions reviewed by Tucker
Anthony were: Canandaigua Wine Co., Inc.'s acquisition of Barton Inc., Todhunter
International Inc.'s acquisition of Virgin Islands Rum Industries, Canandaigua's
acquisition of United Distillers (domestic), Cott Corporation's acquisition of
Texas Beverage Packers Inc., Triarc Companies, Inc.'s acquisition of Cable Car
Beverage, Saratoga Beverage Group Inc.'s pending acquisition of Fresh Juice Co.,
Inc., Gambrinus Company's acquisition of Pete's Brewing Company, Fortune Brands,
Inc.'s acquisition of Geyser Peak Winery, and Northland Cranberries, Inc.'s
pending acquisition of Seneca Foods Corporation juice division.
Tucker Anthony compared multiples for the Merger implied by the Merger
Consideration and certain financial data of the Company to the corresponding
multiples in the selected merger and acquisition transactions. In this portion
of its analysis, Tucker Anthony focused on (i) enterprise value for the
respective transaction as a multiple of revenues for the latest twelve months
preceding the transaction, (ii) enterprise value as a multiple of EBITDA for the
last twelve months preceding the respective transaction, (iii) enterprise value
as a multiple of EBIT for the last twelve months preceding the respective
transaction and (iv) market value of equity as a multiple of earnings for the
last twelve months preceding the respective transaction.
The implied multiples for the Merger based on the Merger Consideration
and the Company's estimated financial data for the twelve months ended September
30, 1998 compare as follows with the mean (adjusted to exclude the high and low
values) multiples for the Reference Transactions (the "Mean"): (i) enterprise
value to estimated fiscal 1998 revenue of 0.5x for the Merger versus 1.0x for
the Mean, (ii) enterprise value to estimated fiscal 1998 EBITDA of 3.4x for the
Merger versus 6.2x for the Mean, and (iii) enterprise value to estimated fiscal
1998 EBIT of 4.3x for the Merger versus 8.9x for the Mean. None of the implied
multiples for the Merger was above the Mean of the multiples derived from the
Reference Transactions. While taken alone, the multiples for the Merger do not
support an opinion of fairness. However, Tucker Anthony does not believe the
analysis of Reference Transactions to be a relevant indicator of fairness.
While a number of transactions were identified for which transaction
value and at least one relevant operating statistic were reported, the group of
imputed transaction multiples as a whole was not considered sufficiently
conclusive to be an important element of Tucker Anthony's analysis because of
the relatively low number of operating statistic data points.
31
<PAGE>
Discounted Cash Flow Analysis. Tucker Anthony developed a discounted
cash flow analysis of the Company based on projected financial statements for
the fiscal year ending September 30, 1999 through the fiscal year ending
September 30, 2003. For the purpose of the analysis, Tucker Anthony utilized the
Company's projections which assumed, among other things, (i) that the
year-over-year increases in revenue for the years ending September 30, 1999
through 2003 would range from 2.1% to 4.1%, and (ii) that the operating margin
(operating income as a percentage of revenues) for the years ending September
30, 1999 through 2003 would range from 8.5% to 9.2%.
The projected cash flows consisted of the after-tax free cash flow for
the fiscal years ending September 30, 1999 through 2003 plus a terminal value at
September 30, 2003. In estimating the appropriate terminal value at September
30, 2003, Tucker Anthony applied a range of multiples of 4.0x to 9.0x to
estimated EBIT in fiscal year 2003. Specifically, this range was chosen to
reflect a range of multiples with the high end of the range corresponding to the
adjusted mean EBIT multiples for the Public Reference Companies and the adjusted
mean EBIT multiples paid in Reference Transactions, with the low end of the
range approximating the EBIT multiple being paid in the Merger. Acquisition and
trading multiples from time to time fluctuate considerably, and no assurance can
be made that future trading multiples will be comparable to historical levels.
The present value of the stream of projected cash flows was obtained by
discounting the cash flows to September 30, 1998 using a range of weighted
average costs of capital ("WACC") of 20% to 30% estimated with particular
reference to the capital structure of the Public Reference Companies, the
estimated cost of equity for the Public Reference Companies, and a range of cost
of equity considered to reflect the small market capitalization of the Company
compared to the Public Reference Companies and the relative illiquidity of the
Company's shares. Ibbotson's Cost of Capital Quarterly (1997 yearbook) uses a
-------------------------
WACC of 25.9% for small capitalization beverage companies which WACC accounts
for the small size and relative illiquidity of companies similar to the Company.
The foregoing analysis resulted in a range of estimated present values of $2.96
to $5.06 per share of Common Stock. If a narrower range of terminal EBIT
multiples of approximately 8x to 10x was used and a tighter discount range of
22% to 30% was used as well, the per share values would be $3.71 to $5.03, with
a midpoint value of $4.31 per share, well below the $4.70 per share offered in
this transaction. Tucker Anthony considers the present value of future cash
flows to be an important factor in determining the fair value of the Company.
Specifically, since neither Publicly Traded Reference Companies nor Reference
Transactions provided true comparability or sufficient data points to be
relevant, the use of a discounted cash flow analysis provides the best
theoretical value for the Company.
Stock Trading History. Tucker Anthony examined the historical trading
prices and volume of the Common Stock, and compared the historical trading
prices of the Common Stock in relation to movements in certain stock indices,
specifically an index of the Public Reference Companies, the Nasdaq Composite
Index and the Standard & Poor's 500 Composite Index. It was noted that during
the twelve months ended September 4, 1998, the highest closing price for the
Common Stock was $4.375 and the lowest closing price was $2.875. Thus, the
32
<PAGE>
proposed Merger Consideration of $4.70 in cash per share is in excess of any
closing price reached by the Common Stock during the past 12 months. Tucker
Anthony believes that the fact that the proposed consideration is above any
closing price reached by the Common Stock during the past twelve months
supports its opinion of fairness.
Premium to Market Price. Tucker Anthony reviewed summary statistics
relating to the historical premium to the market price of the target paid in
acquisitions. According to the 1998 Mergerstat Review, the average of the median
premium offered in all acquisitions over the three year period 1995-1997 (1,142
transactions) was 28.0%.
Based on the closing price of the Company's stock on September 29, 1997
(the day before the Board of Directors announced the retention of investment
bankers) of $3.625 per share, the proposed consideration of $4.70 per share
represents a premium of 28.3%. However, Tucker Anthony noted the relative
illiquidity of the Common Stock as compared to many publicly traded companies
(using total market capitalization, number of shares actively traded and
historical trading volume as points of reference), when considering the market
price of the Common Stock as an indicator of value. Thus, while the premium to
market is comparable in this transaction to that paid in other reported
transactions, Tucker Anthony realizes that the relative illiquidity of the
Company's shares may subject the market price to levels that are above or below
those which would prevail in a more liquid security. Nonetheless, Tucker
Anthony believes that the fact that the premium of the proposed consideration
over the closing price of the Company Common Stock on the day before the Board
of Directors announced the retention of an investment banker is comparable to
premiums paid in all acquisitions over the three-year period from 1995 through
1997 supports its opinion of fairness.
The foregoing is a summary of the principal elements of the financial
analyses performed by Tucker Anthony, but it does not purport to be a complete
description of such analyses. In performing its analyses, Tucker Anthony made
numerous assumptions, many of which are beyond the control of the Company. With
respect to industry performance, Tucker Anthony assumed that growth in the craft
beer business would moderate substantially from the double-digit growth
experienced in the mid-1990's, and further assumed that the over-capacity in the
contract beverage manufacturing business would remain for the next 3-5 years.
With respect to the general business and economic environment, Tucker Anthony
assumed that conditions would remain substantially unchanged. Further, Tucker
Anthony utilized projections supplied by the Company which contained certain
assumptions regarding growth rates and margin performance in the future. Those
assumptions are described in the Discounted Cash Flow Analysis section. The
preparation of an opinion involves various determinations as to the most
appropriate and relevant methods of financial analysis and the application of
these methods to the particular circumstances based upon experience and
judgment. Accordingly, notwithstanding the separate factors summarized above,
Tucker Anthony believes that its analyses must be considered as a whole and that
selecting portions of its analyses and factors considered by it, without
considering all analyses and factors, could create an incomplete view of the
evaluation process underlying Tucker Anthony's opinion.
In reaching its conclusion that the Merger Consideration was fair from
a financial point of view, Tucker Anthony attached significance to the fact that
over 200 potential buyers were contacted over more than six months. Of those
contacted, over 100 reviewed confidential information regarding the Company and
its business. The bid from the entity controlled by management was the highest
fully financed offer received. Tucker Anthony also took into account the fact
that certain of its financial analyses, including the Analysis of Publicly
Traded Reference Companies and Analysis of Reference Transactions, were
33
<PAGE>
determined not to be meaningful because of the limited comparability of the
reference companies or reference transactions to the Company and the Merger.
ENGAGEMENT TERMS
As compensation for its services as financial advisor, the Company has
agreed to pay Tucker Anthony a total of approximately $350,000 (to be finally
calculated at the time of the Closing) plus expenses, of which amount $25,000
has been paid as of the date hereof with the balance payable at the Closing.
Tucker Anthony also received $125,000 for the issuance of the Opinion, which fee
was not contingent upon the closing of the Transaction. The Company also has
agreed to reimburse Tucker Anthony for its expenses and to indemnify Tucker
Anthony against certain liabilities arising out of its services.
The Company selected Tucker Anthony for a variety of reasons including
its familiarity with the Company and its business and Tucker Anthony's
experience and reputation in the area of valuation and financial advisory work
generally. Tucker Anthony is a nationally recognized investment banking firm and
is regularly engaged in the valuation of businesses and their securities in
connection with mergers, acquisitions, leveraged buyouts, negotiated
underwritings, secondary distributions of listed and unlisted securities,
private placements and valuations for estate, corporate and other purposes. In
the ordinary course of its business, Tucker Anthony may actively trade the
securities of the Company for its own account or for the accounts of its
customers and, accordingly, may at any time hold a long or short position in
such securities.
CERTAIN PROJECTIONS
The Company does not as a matter of policy make public forecasts or
projections as to future performance or earnings. However, in connection with
the sale of the Company, the Company prepared projections of its anticipated
future operating performance for the five fiscal years ending September 30,
2003, based on projections the Company had prepared for capital budgeting
and similar purposes.
Such projections were prepared assuming that the sale had not occurred
and upon estimates and assumptions (including with respect to industry
performance, general economic and business conditions, taxes, and other matters)
that inherently are subject to material uncertainties and risk, all of which are
difficult to quantify and many of which are beyond the control of the Company.
The projections were not prepared with a view to public disclosure or compliance
with the published guidelines of the SEC or the guidelines established by the
American Institute of Certified Public Accountants regarding projections or
forecasts and are included herein only because such information was provided to
potential acquirors. The Company's internal operating projections are, in
general, prepared solely for internal use in connection with capital budgeting
and other management decisions and are subjective in many respects and thus
susceptible to various interpretations. Certain assumptions on which the
projections were based related to the achievement of strategic goals,
objectives, and targets over the applicable periods. There can be no assurance
that the assumptions made in preparing the projections will prove accurate, and
actual results may be materially greater or less than those contained in the
projections. Neither the Company's independent auditors, nor any other
independent accountants or financial advisors, have compiled, examined, or
34
<PAGE>
performed any procedures with respect to the projections contained herein, nor
have they expressed any opinion or any form of assurance on such information or
its achievability and assume no responsibility for, and disclaim any association
with, the projections. The inclusion of the projections should not be regarded
as an indication that the Company, or any other person who received such
information, considers it an accurate prediction of future events. The Company
does not intend to update, revise, or correct such projections if they become
inaccurate (even in the short term).
The projections below constitute forward looking statements and involve
numerous risks and uncertainties. The Company's actual results may differ
materially from the results anticipated from the projections discussed herein as
a result of various factors, including, but not limited to, general economic
conditions and growth rates in the malt beverage, soft drink and related
industries, competitive factors and pricing pressure, changes in the Company's
product mix, the timely development and acceptance of new products, inventory
risks due to shifts in market demands, supply of recycled glass and other
constraints and shortages. There can be no assurance that the Company will
achieve the results anticipated from the projections discussed herein.
35
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PROJECTED INCOME STATEMENTS ($000S)
- --------------------------------------------------------------------------------
Fiscal Year Ended September 30,
------------------------------
1999 2000 2001
---- ---- ----
Net Sales 28,263 28,858 29,707
% increase in Net Sales - 2.1% 2.9%
Cost of Sales 21,944 22,408 23,147
------------------------------
Gross Profit 6,319 6,450 6,560
Gross profit % 22.4% 22.4% 22.1%
Selling, General and Administrative Expenses
(excluding Depreciation & Amortization) 2,795 2,923 3,118
------------------------------
EBITDA 3,524 3,527 3,442
EBITDA % 12.5% 12.2% 11.6%
Depreciation 767 783 743
Amortization 164 164 164
------------------------------
EBIT 2,593 2,580 2,535
EBIT % 9.2% 8.9% 8.5%
Interest Expense / (Income), net (302) (402) (502)
------------------------------
Income before Taxes 2,895 2,982 3,037
Provision (credit) for income taxes 1,187 1,223 1,245
------------------------------
Net Income 1,708 1,759 1,792
==============================
Fiscal Year Ended September 30,
-------------------------------
2002 2003 Assumptions
---- ---- -----------
Net Sales 30,889 32,150
% increase in Net Sales 4.0% 4.1%
Cost of Sales 24,019 24,951
------------------
Gross Profit 6,870 7,199
Gross profit % 22.2% 22.4%
Selling, General and Administrative
Expenses (excluding Depreciation
& Amortization) 3,268 3,425
------------------
EBITDA 3,602 3,774
EBITDA % 11.7% 11.7%
Depreciation 765 789
Amortization 164 164
------------------
EBIT 2,673 2,821
EBIT % 8.7% 8.8%
Interest Expense / (Income), net (602) (702)
------------------
Income before Taxes 3,275 3,523
Provision (credit) for income taxes 1,343 1,444 41% Tax Rate
------------------
Net Income 1,932 2,079
==================
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PROJECTED BALANCE SHEET ($000S) (1)
- -------------------------------------------------------------------------------
As of September 30,
1998
-------------------
CURRENT ASSETS
Cash 3,847
Accounts receivable 3,152
Inventories 2,423
Prepaid expenses 75
Other current assets -
----------------------
Total Current assets 9,497
......................
PROPERTY &EQUIPMENT, AT COST
Property and equipment 7,595
Accumulated Depreciation (2,902)
----------------------
Total property and 4,693
equipment, net
......................
GOODWILL
Goodwill, gross 8,653
Amortization (2,902)
----------------------
Amortization, net 5,751
......................
Other noncurrent assets 4
----------------------
TOTAL ASSETS 19,945
======================
CURRENT LIABILITIES
Revolver -
Accounts payable 1,941
Accrued expenses 1,237
Refundable deposits 311
Income taxes payable 292
Net pension liability 341
Deferred income taxes 54
----------------------
Total Liabilities 4,176
......................
STOCKHOLDERS' EQUITY
Preferred stock -
Common stock 39
Additional Paid In Capital 10,492
Retained earnings 5,238
(Accumulated deficit)
----------------------
Total Stockholders' 15,769
equity
......................
TOTAL LIABILITIES &
STOCKHOLDERS' 19,945
EQUITY
======================
(1) Balance sheet as of June 30, 1998 used as a proxy for September 30, 1998.
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PROJECTED CASH FLOW STATEMENTS ($000S)
- -------------------------------------------------------------------------------
As of and for the Year Ended September 30,
------------------------------------------------------
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
Net Income 1,708 1,759 1,792 1,932 2,079
Depreciation expense 767 783 743 765 789
Amortization 164 164 164 164 164
Capital expenditures (1,000) (400) (400) (400) (400)
CONFLICTS OF INTEREST
In considering the recommendation of the Special Committee with respect
to the Merger, stockholders should be aware that certain officers and directors
of the Company, including Charles E. Lawson, Jr., the President and Chief
Executive Officer and a director of the Company, and Patrick E. Belardi, the
Vice President, Chief Financial Officer and Treasurer and a director of the
Company, are officers of and substantial equity holders in the Purchaser. These
officers intend to use, among other financing sources, (i) cash bonuses payable
by the Company upon the sale of the Company at a price in excess of $4.00 per
share (which aggregate $263,928 for Messrs. Lawson and Belardi) and (ii)
$188,928 to be received by Mr. Lawson in respect of a stock option granted in
1994 at an exercise price of $1.40 per share. However, no member of the Special
Committee has any interest in connection with the Merger, other than as a
stockholder of the Company. As of November 30, 1998, Mr. Lawson beneficially
owned 131,151 shares of Common Stock and Mr. Belardi beneficially owned 33,201
shares of Common Stock, representing 3.3% and less than 1%, respectively, of the
total outstanding shares of Common Stock and neither of Messrs. Lawson or
Belardi participated in any of the negotiations related to the Merger on behalf
of the Company.
Charles E. Lawson, Jr., the President and Chief Executive Officer and a
director of the Company and the President of the Purchaser, has pledged his
options (the "Lawson Options") to purchase 57,251 shares of the Company's Common
Stock at an exercise price of $1.40 per share to secure the Purchaser's
obligation to effect the Merger in the event that (a) all conditions to the
Purchaser's obligation have been fulfilled prior to the Termination Date, and
(b) but the Purchaser fails or refuses to effect the Merger (unless such failure
or refusal is caused solely by the Purchaser's financing sources being unwilling
to fund their commitments in amounts necessary for the Purchaser to effect the
Merger). THE PURCHASER IS A NEWLY FORMED CORPORATION WITHOUT SUBSTANTIAL ASSETS.
EXCEPT FOR THE LIMITED RECOURSE TO THE LAWSON OPTIONS DESCRIBED ABOVE, THE
COMPANY AND ITS STOCKHOLDERS MAY BE UNABLE TO RECOVER ANY DAMAGES IN THE EVENT
THAT THE PURCHASER BREACHES ITS OBLIGATION TO EFFECT THE MERGER.
The Purchaser has agreed that after the Effective Time of the Merger it
will, and will cause the Surviving Corporation to, indemnify and hold harmless
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all past and present officers and directors of the Company to the full extent
such persons may be indemnified by the Company pursuant to the Company's
Articles of Incorporation and Bylaws as in effect on the date of the Merger
Agreement for acts and omissions occurring at or prior to the Effective Time of
the Merger. The Purchaser has also agreed not to amend such indemnification
provisions for a period of six years from the Effective Time and to use
reasonable commercial efforts to maintain in effect for six years from the
Effective Time directors' and officers' "tail" liability insurance covering
those persons who are currently covered by the Company's directors' and
officers' liability insurance policy on terms comparable to existing coverage.
See "-- Indemnification."
While the Special Committee does not consider ownership by certain of
its members or their affiliates of shares of Common Stock as raising a conflicts
of interest issue, stockholders in their evaluation of the recommendation of the
Board of Directors acting through the Special Committee may want to consider
such ownership and the benefits realizable from the cash consideration to be
received from the disposition of such ownership as a result of the Merger. See
"SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT".
CERTAIN EFFECTS OF THE MERGER
If the Merger is consummated, the Company's stockholders (other than
those stockholders who have perfected and have not withdrawn their right to seek
appraisal of their shares under applicable Pennsylvania law) will have the right
to receive $4.70 in cash, without interest, for each share of Company Common
Stock held immediately prior to the Effective Time. As a result of the Merger,
such stockholders will cease to have any ownership interest in the Company and
will cease to participate in future earnings and growth, if any, of the Company.
Moreover, if the Merger is consummated, public trading of the Company Common
Stock under the Exchange Act will be terminated. Since the Company will no
longer be a reporting company under the Exchange Act, it will not be subject to
the periodic reporting obligations of the Exchange Act, the short swing profit
provisions of Section 16 of the Exchange Act and the going-private disclosure
obligations of Rule 13e-3 under the Exchange Act.
Among the benefits to the Company and its affiliates is that it will
not be required to incur the expenses of filing periodic reports under the
Exchange Act, or to comply with other reporting obligations, including under
Section 16, which currently aggregate, on an annual basis, approximately
$40,000. Other expenses that the Company will no longer incur are the $50,000
annual management fee payable to Quincy Partners and fees for transfer agents,
Nasdaq listing, printing and similar fees aggregating approximately $40,000 per
year. Similarly, the Company will not be required to purchase directors and
officers insurance, which currently costs the Company $90,000 per year, although
it will be required to pay approximately $35,000 per year in "tail" premiums. An
additional benefit to the affiliates of the Company who are also equity holders
of the Purchaser, specifically Messrs. Lawson and Belardi, is that future
earnings and growth of the Company will be for the benefit of the Purchaser and
its shareholders and not for the current public shareholders of the Company. The
detriments to the Company and its affiliates who are also equity holders of the
Purchaser are the lack of liquidity for the common stock of the Purchaser and
the incurrence of $17.1 million of indebtedness to fund the Merger.
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The only benefit to unaffiliated holders of Common Stock is the right
to receive the Merger Consideration. The detriments are that such stockholders
will cease to participate in future earnings and growth, if any, of the Company
and that the receipt of the Merger Consideration will be a taxable transaction
for federal income tax purposes. Each stockholder's gain or loss per share will
be equal to the difference between $4.70 and the stockholder's tax basis per
share in the Common Stock. If a stockholder holds Common Stock as a capital
asset, the gain or loss from the exchange will be a capital gain or loss. The
gain or loss will be long term if the stockholder's holding period is more than
one year. See "--Federal Income Tax Considerations."
As a result of the Merger, management of the Company will receive
bonuses aggregating approximately $339,000. No other "change of control,"
termination, resignation or similar payments will be made. No options will be
exercisable as a direct result of the Merger but Mr. Lawson will receive
$188,928 from an option received in 1994 to acquire 57,251 shares at $1.40
per share.
The Merger Agreement provides that the current directors of the Company
will be replaced by the directors of the Purchaser. It is currently anticipated
that the Surviving Corporation will be operated after the Merger in a manner
substantially the same as the Company's current operations.
Based on the Purchaser's and Messrs. Lawson and Belardi's current
aggregate percentage of ownership of 1.6% of the outstanding Common Stock (which
excludes currently exercisable options having an exercise price of $6.00 per
share), their aggregate interest in the Company's net book value was
approximately $223,000 at September 30, 1997 and $245,000 at June 30, 1998. Mr.
Lawson's and Mr. Belardi's current percentage of ownership is 1.5% and 0.1%
respectively of the outstanding Common Stock and their interest in the Company's
net book value was approximately $220,000 and $4,000 at September 30, 1997 and
$241,000 and $4,000 at June 30, 1998, respectively. The Purchaser's and Messrs.
Lawson and Belardi's aggregate interest in the Company's net earnings was
approximately $28,000 for the year ended September 30, 1997 and $22,000 for the
nine months ended June 30, 1998. Mr. Lawson's and Mr. Belardi's interest in the
Company's net earnings was approximately $27,000 and $1,000 for the year ended
September 30, 1997 and $21,000 and $1,000 for the nine months ended June 30,
1998, respectively.
Assuming the Merger had occurred on September 30, 1997 and June 30 ,
1998, respectively, and the Purchaser had owned all the Company's outstanding
Common Stock as of such date, the Purchaser's pro forma interest in the
Company's net book value at September 30, 1997 and June 30, 1998 would have been
$6.0 million and $6.6 million, respectively. Mr. Lawson's and Mr. Belardi's pro
forma interest in the Company's net book value would be approximately $3.0
million each at September 30, 1997 and $3.3 million each at June 30, 1998. The
Purchaser's pro forma interest in the Company's net earnings would be
approximately $767,000 for the year ended September 30, 1997 and $584,000 for
the nine months ended June 30, 1998. Mr. Lawson's and Mr. Belardi's pro forma
interest in the Company's net earnings would be approximately $388,000 and
$379,000 for the year ended September 30, 1997 and $295,000 and $289,000 for the
nine months ended June 30, 1998, respectively.
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At the effective time, the Purchaser will contribute $575,000 to the
Company and will own 46% percent of the equity interest in the Company.
The purpose of the transaction for the Company is to maximize shareholder
value. See "--Background of the Merger."
The purposes of the transaction for Messrs. Lawson and Belardi is to
make an investment in and gain control of the Company.
TREATMENT OF STOCK OPTIONS
Each holder of Company stock options shall be entitled to receive
immediately after the Effective Time, an amount in cash equal to the Merger
Consideration minus the per share exercise price. There are 238,431 options
outstanding under the Company's 1996 Employee Stock Option Plan, all of which
have an exercise price of $6.00 per share and therefore such option holders will
not be entitled to any portion of the Merger Consideration. In addition, Mr.
Lawson has an option granted to him in 1994 to acquire 57,251 shares at an
exercise price of $1.40 per share.
VOTING AGREEMENT
The Purchaser, Lion Partners Company, L.P., Weston Presidio Offshore
Capital C.V., Quincy Partners and Northwood Ventures LLC (for purposes of this
paragraph only, the "Stockholders") entered into a Voting Agreement (the "Voting
Agreement") dated as of September 17, 1998, a copy of which is attached hereto
as Annex C. Pursuant to the Voting Agreement, the Stockholders have agreed to
restrict their ability to sell or otherwise transfer their shares; and the
Stockholders have further agreed to appoint the Purchaser as their attorney and
proxy to vote such shares at, among other things, every special meeting of the
Company's stockholders (i) in favor of the adoption of the Merger Agreement and
approval of the Merger, (ii) against any proposal for any recapitalization,
merger, sale of assets or other business combination between the Company and any
person or entity (other than the Merger) or any other action or agreement that
would result in a breach of any covenant, representation or warranty or any
other obligation or agreement of the Company under the Merger Agreement and
(iii) in favor of any other matter relating to consummation of the transactions
contemplated by the Merger Agreement.
The Voting Agreement covers a total of 1,720,184 shares representing
approximately 44.3% of the outstanding shares on the Record Date. Of the
1,720,184 shares of Common Stock subject to the Voting Agreement, 1,545,184 of
such shares are controlled by the Chairman of the Board of Directors of the
Company. The Purchaser intends to vote such shares in favor of the Merger. The
Voting Agreement terminates upon the termination of the Merger Agreement
pursuant to Article 7 thereof (i.e. if the Company terminates the Merger
Agreement in accordance within its terms).
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APPRAISAL RIGHTS
For purposes of this section, the term "Company" will be deemed to
refer also to the Surviving Corporation with respect to actions taken after the
Effective Time.
Pursuant to the Merger Agreement and the PBCL, the owners of Common
Stock will have dissenters rights in connection with the Merger under Sections
1571 through 1580 of Subchapter 15D of the PBCL (hereinafter "Subchapter 15D"),
a copy of which (as well as a copy of Section 1930 of the PBCL) is included in
this Proxy Statement as Annex D, and may object to the Merger Agreement and
demand in writing that the Company pay the fair value of their Common Stock.
If any holders of Common Stock properly exercise dissenters rights of
appraisal in connection with the Merger under Subchapter 15D of the PBCL (a
"Dissenting Shareholder"), any shares held by such holders will not be converted
into the right to receive $4.70 per share, but instead will be converted into
the right to receive the "fair value" of such shares pursuant to Subchapter D of
Chapter 15 of the PBCL. THE FOLLOWING SUMMARY SETS FORTH ALL MATERIAL PROCEDURES
TO BE FOLLOWED BY HOLDERS OF COMMON STOCK WISHING TO DEMAND APPRAISAL OF THEIR
SHARES UNDER THE PBCL. THE FOLLOWING SUMMARY OF THE PROVISIONS OF SUBCHAPTER 15D
IS NOT INTENDED TO BE A COMPLETE STATEMENT OF SUCH PROVISIONS AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUBCHAPTER 15D, A COPY OF WHICH
(AS WELL AS A COPY OF SECTION 1930 OF THE PBCL) IS ATTACHED TO THIS PROXY
STATEMENT AS ANNEX D AND INCORPORATED HEREIN BY REFERENCE. The Company will not
give any notice of the following requirements other than as described in this
Proxy Statement and as required by the PBCL.
General. Any holder of Common Stock who has duly demanded the payment
of the fair value of his or her shares under Subchapter 15D will not, after the
Effective Time, be a shareholder of the Company for any purpose or be entitled
to the payment of dividends or other distributions on any such Common Stock;
moreover, the Common Stock of any Dissenting Shareholder will be converted into
the right to receive either (i) the fair value of such Common Stock, determined
in accordance with Subchapter 15D, or (ii) the right to receive $4.70 per share,
if any Dissenting Shareholder effectively withdraws his or her demand for
appraisal rights.
SHAREHOLDERS OF THE COMPANY SHOULD NOTE THAT, UNLESS ALL THE REQUIRED
PROCEDURES FOR CLAIMING DISSENTERS RIGHTS ARE FOLLOWED WITH PARTICULARITY,
DISSENTERS RIGHTS WILL BE LOST. VOTING AGAINST APPROVAL AND ADOPTION OF THE
MERGER AGREEMENT, WHETHER IN PERSON OR BY PROXY, IS NOT SUFFICIENT NOTICE TO
PERFECT DISSENTERS RIGHTS. A VOTE TO APPROVE THE MERGER WILL EFFECTIVELY WAIVE A
SHAREHOLDER'S APPRAISAL RIGHTS.
Filing Notice of Intention to Demand Fair Value. Before any shareholder
vote is taken on the Merger Agreement, a Dissenting Shareholder must deliver to
the Company a written notice of his or her intention to demand the fair value of
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his or her Common Stock if the Merger is effected. Such written notice may be
sent to Donald J. Sutherland, c/o The Lion Brewery, Inc., 700 North Pennsylvania
Avenue, Wilkes Barre, Pennsylvania 18703. Neither the return of a proxy by the
Dissenting Shareholder with instructions to vote the Common Stock represented
thereby against the approval and adoption of the Merger Agreement nor a vote
against the approval and adoption of the Merger Agreement or an abstention from
voting on the approval and adoption of the Merger Agreement is sufficient to
satisfy the requirement of delivering a written notice to the Company. In
addition, the Dissenting Shareholder must not effect any change in the
beneficial ownership of his or her Common Stock from the date of filing the
notice with the Company through the Effective Time, and the Dissenting
Shareholder must not vote his or her Common Stock for which payment of fair
value is sought in favor of the approval and adoption of the Merger Agreement.
The submission of a signed blank proxy will serve to waive appraisal rights if
not revoked, but a failure to vote, a vote against or an abstention from voting
on the approval and adoption of the Merger Agreement will not waive such rights.
Proper revocation of a signed blank proxy or a signed proxy instructing a vote
for approval and adoption of the Merger Agreement will also preserve dissenters
rights under the PBCL. Failure by a Dissenting Shareholder to comply with any of
the foregoing will result in such Dissenting Shareholder's forfeiting any right
to payment of the fair value of such Dissenting Shareholder's Common Stock.
Record and Beneficial Owners. A record holder of Common Stock may
assert dissenters rights as to fewer than all the Common Stock of the same class
or series registered in his or her name only if the holder dissents with respect
to all the Common Stock beneficially owned by any one person and discloses the
name and address of the person or persons on whose behalf he or she dissents. A
beneficial owner of Common Stock who is not the record holder may assert
dissenters rights with respect to Common Stock held on his or her behalf if such
Dissenting Shareholder submits to the Company the written consent of the record
holder not later than the time of assertion of dissenters rights. The beneficial
owner may not dissent with respect to less than all the Common Stock he or she
owns, whether or not such Common Stock is registered in the beneficial owner's
name.
Notice to Demand Payment. If the Merger is approved by the requisite
vote at the Special Meeting, the Company shall mail to all Dissenting
Shareholders who gave due notice of their intention to demand payment of fair
value and who refrained from voting in favor of the Merger a notice stating
where and when a demand for payment must be sent, and stock certificates
representing the Common Stock held by the Dissenting Shareholder must be
deposited to obtain payment. The notice shall be accompanied by a copy of
Subchapter 15D of the PBCL and include a form for demanding payment, which form
shall have a request for certification of the date that beneficial ownership of
the Common Stock was acquired by the Dissenting Shareholder or the person on
whose behalf the Dissenting Shareholder dissents. The time set for the receipt
of a demand and the Dissenting Shareholder's stock certificates shall not be
less than 30 days from the mailing of the notice. Failure by a Dissenting
Shareholder to timely demand payment and deposit the stock certificates pursuant
to such notice will cause such Dissenting Shareholder to lose all right to
receive payment of the fair value of his or her Common Stock. All mailings to
the Company are at the risk of the dissenter. However, the Company recommends
that the Notice of Intention to Dissent, the Demand Form and the holder's stock
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certificates be sent by certified mail. If the Merger has not been effected
within 60 days after the date set for demanding payment and depositing stock
certificates, the Company shall return any stock certificates that have been
deposited. The Company, however, may at any later time send a new notice
regarding demand for payment and deposit of stock certificates with like effect.
Payment of Fair Value of Common Stock. Promptly after the Effective
Time, or upon timely receipt of demand for payment if the Merger has already
been effected, the Company shall either remit to Dissenting Shareholders who
have made demand and deposited their stock certificates the amount the Company
estimates to be the fair value of the Common Stock or give written notice that
no remittance will be made under Section 1577 of the PBCL. Such remittance or
notice shall be accompanied by:
(i) the Company's closing balance sheet and statement of income for a
fiscal year ending not more than 16 months prior to the date of remittance
or notice, together with the latest available interim financial statements;
(ii) a statement of the Company's estimate of the fair value of the
Common Stock; and
(iii) a notice of the right of a Dissenting Shareholder to demand
payment or supplemental payment, as the case may be, accompanied by a copy
of Subchapter 15D of the PBCL.
If the Company does not remit the amount of its estimate of the fair
value of the Common Stock, it will return all stock certificates that have been
deposited and may make a notation thereon that a demand for payment has been
made. If shares carrying such notation are thereafter transferred, each new
stock certificate issued therefor will bear a similar notation, together with
the name of the original dissenting holder or owner of such shares. A transferee
of such shares will not acquire by such transfer any rights in the Company other
than those which the original dissenter had after making demand for payment of
their fair value.
Estimate by Dissenting Shareholder of Fair Value of Common Stock. If a
Dissenting Shareholder believes that the amount estimated or paid by the Company
for his or her Common Stock is less than their fair value, the Dissenting
Shareholder may send to the Company his or her own estimate of the fair value,
which shall be deemed a demand for payment of the amount of the deficiency. If
the Dissenting Shareholder does not file his or her own estimate of the fair
value within 30 days after such remittance or notice has been mailed by the
Company, the Dissenting Shareholder will be entitled to no more than the amount
estimated in the notice or remitted by the Company.
Valuation Proceedings. Within 60 days after the latest of (i) the
Effective Time, (ii) timely receipt of any demands for payment or (iii) timely
receipt of any Dissenting Shareholder estimates of fair value, if any demands
for payment remain unsettled, the Company may file in court an application for
relief requesting that the fair value of the Common Stock be determined by the
court. The Court of Common Pleas, Luzerne County, Pennsylvania, would have
jurisdiction over any appraisal proceedings. Each Dissenting Shareholder whose
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demands have not been settled will be made a party to the proceeding and will be
entitled to recover the amount by which the fair value of such Dissenting
Shareholder's Common Stock is found to exceed the amount, if any, previously
remitted. Such Dissenting Shareholder will also be entitled to interest on such
amount from the Effective Time until the date of payment. There is no assurance,
however, that the Company will file such an application. If the Company fails to
file an application within the 60-day period, any Dissenting Shareholder who has
not settled his or her claim may do so in the Company's name within 30 days
after the expiration of the 60-day period. If a Dissenting Shareholder does not
file an application within such 30-day period, each Dissenting Shareholder
entitled to file an application shall be paid no more than the Company's
estimate of the fair value of the Common Stock and may bring an action to
recover any amount not previously remitted.
In determining the fair value of the Common Stock, a court will take
into account all relevant factors, including proof of value by any techniques or
methods which are generally considered acceptable in the financial community and
otherwise admissible in court, but excluding any appreciation or depreciation in
the Common Stock in anticipation of the Merger. Some factors which courts have
previously used in determining fair value of stock include: (1) the net asset
value; (2) the investment value; and (3) the market value. A court may determine
that the fair value of the Common Stock is more than, less than or equal to the
Merger Consideration.
Costs and Expenses of Valuation Proceedings. The costs and expenses of
any valuation proceeding, including the reasonable compensation and expenses of
any appraiser appointed by the court, will be determined by the court and
assessed against the Company, except that any part of such costs and expenses
may be assessed as the court deems appropriate against all or some of the
Dissenting Shareholders whose action in demanding supplemental payment is found
by the court to be dilatory, obdurate, arbitrary, vexatious or in bad faith. The
court may also assess the fees and expenses of counsel and experts for any or
all of the Dissenting Shareholders against the Company if it fails to comply
substantially with Subchapter 15D or acts in a dilatory, obdurate, arbitrary or
vexatious manner or in bad faith. The court can also assess any such fees or
expenses incurred by the Company against any Dissenting Shareholder if such
Dissenting Shareholder is found to have acted in a dilatory, obdurate, arbitrary
or vexatious manner or in bad faith. If the court finds that the services of
counsel for any Dissenting Shareholder were of substantial benefit to the other
Dissenting Shareholders and should not be assessed against the Company, it may
award to such counsel reasonable fees to be paid out of the amounts awarded to
the Dissenting Shareholders who were benefited.
Under the PBCL, a shareholder of the Company has no right to obtain, in
the absence of fraud or fundamental unfairness, an injunction against the
Merger, nor any right to valuation and payment of the fair value of the holder's
shares because of the Merger, except to the extent provided by the dissenters
rights provisions of Subchapter 15D. The PBCL also provides that absent fraud or
fundamental unfairness, the rights and remedies provided by Subchapter 15D are
exclusive.
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The foregoing description of the rights of dissenters under Subchapter
15D should be read in conjunction with Annex D to this Proxy Statement, and is
qualified in its entirety by reference to the provisions of Subchapter 15D.
The Board of Directors recommends that shareholders vote "FOR" the
proposal to approve and adopt the Merger Agreement.
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material federal income tax
considerations relevant to the Merger that are generally applicable to holders
of Common Stock. This discussion is based on currently existing provisions of
the Internal Revenue Code of 1986, as amended, existing and proposed Treasury
Regulations thereunder and current administrative rulings and court decisions,
all of which are subject to change. Any such change, which may or may not be
retroactive, could alter the tax consequences to the Company's stockholders as
described herein.
The receipt by the stockholders of cash, in the Merger or through the
exercise of appraisal rights, for shares of Common Stock will be a taxable
transaction for federal income tax purposes. Each stockholder's gain or loss per
share will be equal to the difference between $4.70 and the stockholder's tax
basis per share in the Common Stock. If a stockholder holds Common Stock as a
capital asset, the gain or loss from the exchange will be a capital gain or
loss. This gain or loss will be long term if the stockholder's holding period is
more than one year.
Shares of Common Stock which were acquired through the exercise of
employee stock options and which have not been held for a period of two years
since the option was granted and a period of one year since the option was
exercised are not treated as capital assets and gain on such shares will be
subject to federal income tax at ordinary income tax rates.
THE FOREGOING TAX DISCUSSION IS BASED UPON PRESENT LAW. EACH
STOCKHOLDER SHOULD CONSULT SUCH STOCKHOLDER'S OWN TAX ADVISOR AS TO THE SPECIFIC
TAX CONSEQUENCES OF THE MERGER TO SUCH STOCKHOLDER, INCLUDING THE APPLICATION
AND EFFECT OF FEDERAL, STATE, LOCAL AND OTHER TAX LAWS AND THE POSSIBLE EFFECT
OF CHANGES IN SUCH TAX LAWS. SPECIAL RULES APPLY TO COMMON STOCK RECEIVED
PURSUANT TO THE EXERCISE OF EMPLOYEE STOCK OPTIONS OR OTHERWISE AS COMPENSATION.
REGULATORY APPROVALS
Neither the Company nor the Purchaser is aware of any regulatory
approvals that must be obtained in order to consummate the Merger.
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CERTAIN PROVISIONS OF THE MERGER AGREEMENT
The discussion in this Proxy Statement of the Merger and the
description of all the material terms of the Merger Agreement are subject to and
qualified in their entirety by reference to the Merger Agreement and the Voting
Agreement, copies of which are attached hereto as Annex A and Annex C,
respectively, and incorporated herein by reference, and to each of the other
Annexes to this Proxy Statement.
EFFECTIVE TIME OF THE MERGER
The Merger Agreement provides that the Purchaser will be merged with
and into the Company and that following the Merger, the separate existence of
the Purchaser will cease and the Company will continue as the Surviving
Corporation. The Merger will become effective upon the filing of the Articles of
Merger contemplated by the Merger Agreement with the Department of State of the
Commonwealth of Pennsylvania (the "Effective Time") in accordance with the PBCL.
The Effective Time of the Merger will be as soon as practicable after all
conditions to the Merger have been fulfilled or waived, which is anticipated to
be on or about the date of the Special Meeting. The Merger Agreement also
provides that (i) the Articles of Incorporation of the Company as in effect
immediately prior to the Effective Time shall be the Articles of Incorporation
of the Surviving Corporation; (ii) the Bylaws of the Company as in effect
immediately prior to the Effective Time shall be the Bylaws of the Surviving
Corporation; (iii) the directors of the Purchaser shall be the initial directors
of the Surviving Corporation; (iv) the officers of the Purchaser and such other
persons as designated by the Purchaser shall be the initial officers of the
Surviving Corporation; and (v) the Merger shall, from and after the Effective
Time, have all the effects provided by the PBCL.
CONVERSION AND CANCELLATION OF COMMON STOCK
Upon the consummation of the Merger, each then outstanding share of
Common Stock (other than shares owned by the Company and shares, if any, that
are held by stockholders exercising appraisal rights in accordance with the PBCL
("Dissenting Shares"')) will be converted into, and become exchangeable for,
$4.70 in cash without interest (the "Merger Consideration"). At the Effective
Time, all such shares of Common Stock will no longer be outstanding and will be
canceled and retired and will cease to exist, and each certificate representing
any shares of Common Stock (the "Certificates") will thereafter represent only
the right to receive the Merger Consideration, or the right, if any, to receive
payment from the Surviving Corporation of the "fair value" of such shares as
determined in accordance with Subchapter D of Chapter 15 of the PBCL. See
"--Appraisal Rights."
PURCHASER STOCK
At the Effective Time, each share of the common stock of Purchaser
outstanding immediately prior to the Effective Time shall be converted into and
become one share of common stock, par value $.01 per share, of the Surviving
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Corporation, and each certificate theretofore representing any such shares
shall, without any action on the part of the holder thereof, be deemed to
represent the same number of shares of the Surviving Corporation.
TREATMENT OF STOCK OPTIONS
At or prior to the Effective Time, the Company will make arrangements,
the effect of which shall be that no shares of Common Stock or other capital
stock of the Surviving Corporation shall be issuable pursuant to options or
warrants to purchase shares, or securities convertible into shares, of Common
Stock ("Company Options"). The Company is required to (i) cause the Stock Plan
(as defined in Section 3.2 of the Merger Agreement) to terminate as of the
Effective Time and (ii) grant no additional Company Options after the date of
the Merger Agreement. The Company is required to take all such actions under the
Stock Plan or otherwise necessary so that each holder of a Company Option shall
be entitled to receive immediately after the Effective Time, in cancellation and
settlement of such Company Option, for each share of Common Stock subject to
such Company Option an amount in cash equal to the Merger Consideration minus
the per share exercise, purchase or conversion price of such Company Option as
of the date of the Merger Agreement (the "Option Consideration"). Payment of the
Option Consideration with respect to each Company Option will be contingent upon
consummation of the Merger and will be subject to applicable withholding of
income and other taxes. Payment of the Option Consideration will be made by the
Surviving Corporation to the holders of the Company Options at or as promptly as
practicable after the Effective Time, without interest.
EXCHANGE PROCEDURES
Prior to the Effective Time, the Purchaser will appoint a bank or trust
company to act as paying agent, which will be American Stock Transfer and Trust
Company, or such other entity as the Purchaser and the Company may mutually
select (the "Paying Agent") for the payment of the Merger Consideration upon
surrender of Certificates.
The Purchaser is required to take all steps necessary to enable and
cause the Surviving Corporation to provide the Paying Agent with cash in amounts
necessary to pay the Merger Consideration, when and as such amounts are needed
by the Paying Agent.
As soon as reasonably practicable after the Effective Time, the Paying
Agent will mail to each holder of record of Common Stock immediately prior to
the Effective Time (excluding any Dissenting Shares) (i) a letter of transmittal
(which shall specify that delivery shall be effected, and risk of loss and title
to the Certificates shall pass, only upon delivery of such Certificates to the
Paying Agent and shall be in such form and have such other provisions as the
Purchaser shall reasonably specify) and (ii) instructions for the use thereof in
effecting the surrender of the Certificates in exchange for the Merger
Consideration. Upon surrender of a Certificate for cancellation to the Paying
Agent or to such other agent or agents as may be appointed by the Surviving
Corporation, together with such letter of transmittal, duly executed, and such
other documents as may reasonably be required by the Paying Agent, the holder of
such Certificate will be entitled to receive in exchange therefor an amount of
cash equal to $4.70 multiplied by the number of shares of Common Stock
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represented by such Certificate. No interest will be paid or will accrue on the
cash payable upon the surrender of any Certificate. If payment is to be made to
a person other than the person in whose name the Certificate so surrendered is
registered, it will be a condition of payment that such Certificate be properly
endorsed or otherwise in proper form of transfer and that the person requesting
such payment will pay any transfer or other taxes required by reason of the
transfer of such Certificate or establish to the satisfaction of the Surviving
Corporation that such tax has been paid or is not applicable. CERTIFICATES
SHOULD NOT BE SURRENDERED BY THE HOLDERS OF COMMON STOCK UNTIL SUCH HOLDERS
RECEIVE THE LETTER OF TRANSMITTAL.
Until surrendered as contemplated by the Merger Agreement, each
Certificate (other than Certificates representing Dissenting Shares) will be
deemed at any time after the Effective Time to represent only the right to
receive upon such surrender the amount of cash, without interest, into which the
shares of Common Stock theretofore represented by such Certificate shall have
been converted pursuant to the Merger Agreement.
INTERIM OPERATIONS OF THE COMPANY; CONDUCT PENDING MERGER
From and after the date of the Merger Agreement until the Effective
Time, except as contemplated by any other provision of the Merger Agreement,
unless the Purchaser has consented in writing thereto, the Company has agreed:
(i) to conduct its operations according to its usual, regular and ordinary
course in substantially the same manner as theretofore conducted; (ii) to use
its reasonable efforts to preserve intact its business organization and
goodwill, keep available the services of its officers and employees and maintain
satisfactory relationships with those persons having business relationships with
it; (iii) to refrain from amending its Articles of Incorporation or Bylaws or
comparable governing instruments; (iv) to promptly notify the Purchaser of any
breach of any representation or warranty contained in the Merger Agreement or
any event that is materially adverse to the business, assets, financial
condition or results of operations of the Company; (v) to promptly deliver to
the Purchaser true and correct copies of any report, statement or schedule filed
with the SEC subsequent to the date of the Merger Agreement; (vi) (A) to refrain
from, except pursuant to the exercise of options, warrants, conversion rights
and other contractual rights existing on the date of the Merger Agreement and
disclosed pursuant to the Merger Agreement, issuing any shares of its capital
stock, effecting any stock split or otherwise changing its capitalization as it
existed on the date of the Merger Agreement and (B) to refrain from (x)
granting, conferring or awarding any option, warrant, conversion right or other
right not existing on the date of the Merger Agreement to acquire any shares of
its capital stock or granting, conferring or awarding any bonuses or other forms
of cash incentives to any officer, director or key employee, (y) except in the
ordinary course of business consistent with past practice, increasing any
compensation with any present or future officers, directors or key employees,
granting any severance or termination pay to, or entering into any employment or
severance agreement with any officer, director or key employee or amending any
such existing agreement in any material respect (other than pursuant to
severance agreements previously delivered to the Purchaser), or (z) adopting any
new employee benefit plan (including any stock option, stock benefit or stock
purchase plan) or amending any existing employee benefit plan in any material
respect; (vii) to refrain from (i) declaring, setting aside or paying any
dividend or making any other distribution or payment with respect to any shares
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of its capital stock or other ownership interests or (ii) directly or indirectly
redeeming, purchasing or otherwise acquiring any shares of its capital stock or
making any commitment for any such action; (viii) to refrain from selling,
leasing, abandoning or otherwise disposing of any of its assets or acquiring by
merging or consolidating with, or by purchasing a substantial portion of the
assets of or equity in, or by any other manner, any business or any corporation,
partnership, association or other business organization or division thereof or
otherwise acquiring any assets, except in the ordinary course of business
consistent with past practice; (ix) to refrain from incurring or guarantying any
indebtedness for borrowed money or making any loans, advances or capital
contributions to, or investments in, any other person, or issuing or selling any
debt securities other than borrowings under existing lines of credit and usual
and customary advancements of expenses in the ordinary course of business; (x)
to refrain from mortgaging or otherwise encumbering or subjecting to any Lien
(as defined in the Merger Agreement) any of its properties or assets; (xi) to
refrain from making any change to its accounting (including tax accounting)
methods, principles or practices, except as may be required by generally
accepted accounting principles and except, in the case of tax accounting
methods, principles or practices, in the ordinary course of business of the
Company; (xii) to refrain from making any commitment or entering into any
contract or agreement or making any capital expenditure except for (x) customer
purchase orders and purchases of raw materials used in the business of the
Company agreed to or made in the ordinary course of business consistent with
past practice, (y) any other commitment, contract and agreement involving
aggregate payments to or by the Company not in excess of $100,000, providing for
termination without notice by the Company on 90 or fewer days' notice, and made
by the Company in the ordinary course of business consistent with past practice
or (z) capital expenditures that individually or in the aggregate do not exceed
$100,000; (xiii) to refrain from revaluing any of its assets, including, without
limitation, writing down the value of its inventory or writing off notes or
accounts receivable, other than in the ordinary course of business; (xiv) to
refrain from making any tax election except consistent with past practice or
settling or compromising any material income tax liability; (xv) to refrain from
settling or compromising any pending or threatened suit, action or claim
relating to the transactions contemplated by the Merger Agreement; (xvi) to
refrain from paying, discharging or satisfying any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or otherwise)
other than the payment, discharge or satisfaction in the ordinary course of
business of liabilities reflected or reserved against in, or contemplated by,
the financial statements (or the notes thereto) of the Company or incurred in
the ordinary course of business consistent with past practice; or (xvii) to
refrain from agreeing or otherwise committing to take any of the foregoing
actions or taking, or agreeing to take, any action which would result in a
failure of the condition to closing set forth in Section 6.3(a) of the Merger
Agreement.
ALTERNATIVE PROPOSALS
The Company has agreed, pursuant to the Merger Agreement, that prior to
the Effective Time, the Company will not, nor will it permit its officers,
directors, employees, agents and representatives (including, without limitation,
any investment banker, attorney or accountant retained by it) to, initiate,
solicit or knowingly encourage, directly or indirectly, any inquiries or the
making or implementation of any proposal or offer (including, without
limitation, any proposal or offer to its stockholders) with respect to a merger,
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acquisition, consolidation or similar transaction involving, or any purchase of
any equity securities of, the Company or all or any significant portion of the
assets of the Company (any such proposal or offer being hereinafter referred to
as an "Alternative Proposal") or engage in any negotiations concerning, or
provide any confidential information or data to, or have any discussions with,
any person or entity relating to an Alternative Proposal or otherwise take an
action to knowingly facilitate any effort or attempt to make or implement an
Alternative Proposal; that it will immediately cease and cause to be terminated
any existing activities, discussions or negotiations with any person or entity
conducted prior to the date of the Merger Agreement with respect to any of the
foregoing and will take the necessary steps to inform any such person or entity
of the Company's foregoing obligations; and that it will notify the Purchaser
immediately if any such inquiries or proposals are received by, any such
information is requested from, or any such negotiations or discussions are
sought to be initiated or continued with, it; provided, however, that the Board
of Directors of the Company may (i) furnish information to or enter into
discussions or negotiations with, any person or entity that makes an
unsolicited, bona fide, Qualifying Alternative Proposal which would yield to
stockholders a net price of not less than $4.85 per share in cash that the Board
of Directors of the Company in good faith determines (in consultation with its
financial advisors) represents a financially superior transaction for the
stockholders of the Company as compared to the Merger, if, and only to the
extent that, (A) the Board of Directors of the Company, based upon the advice of
outside counsel, determines in good faith that such action is required for the
Board of Directors to comply with its fiduciary duties imposed by law, (B) prior
to furnishing such information to, or entering into discussions or negotiations
with, such person or entity, the Company provides written notice to the
Purchaser to the effect that it is furnishing information to, or entering into
discussions or negotiations with, such person or entity, and (C) the Company
keeps the Purchaser informed of the status and all material information with
respect to any such discussions or negotiations; and (ii) to the extent
applicable, comply with Rule 14e-2 promulgated under the Exchange Act with
regard to an Alternative Proposal. The Company may not enter into any agreement
with respect to an Alternative Proposal for as long as the Merger Agreement
remains in effect unless the Company shall have given the Purchaser ten days'
prior written notice of its intent to terminate the Merger Agreement during
which period the Purchaser will have the opportunity to match the consideration
offered by any such Alternative Proposal (if the Purchaser offers to match such
consideration, the Merger Agreement will be amended to increase the
consideration and, if necessary, to extend time periods to permit proxy
recirculation). A "Qualifying Alternative Proposal" is one where the prospective
acquirer through its possession of one or more of (i) marketable securities,
cash and cash equivalents, (ii) undrawn lines of credit from reputable financial
institutions and (iii) commitment letters from one or more reputable
institutions (which may only be subject to completion of due diligence and other
standard conditions), has sufficient financing to pay in full the consideration
provided for in such Qualifying Alternative Proposal and any termination fees
payable (see "--Expenses and Termination Fees"). A Qualifying Alternative
Proposal may be subject to the reasonable due diligence of the prospective
acquirer.
INDEMNIFICATION
The Merger Agreement provides that from and after the Effective Time,
the Purchaser will, and will cause the Surviving Corporation to, indemnify and
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hold harmless all past and present officers and directors of the Company (the
"Indemnified Parties") to the full extent such persons may be indemnified by the
Company pursuant to the Company's Articles of Incorporation and Bylaws as in
effect as of the date of the Merger Agreement for acts and omissions occurring
at or prior to the Effective Time and will advance reasonable litigation
expenses incurred by such persons in connection with defending any action
arising out of such acts or omissions, provided that such persons provide the
requisite affirmations and undertakings, as required by applicable law or set
forth in the Company's Bylaws as in effect prior to the Effective Time.
The Merger Agreement further provides that any Indemnified Party will
promptly notify the Purchaser and the Surviving Corporation of any claim,
action, suit, proceeding or investigation for which such party may seek
indemnification under such provision; provided, however, that the failure to
furnish any such notice shall not relieve the Purchaser or the Surviving
Corporation from any indemnification obligation under the Merger Agreement
except to the extent the Purchaser or the Surviving Corporation is prejudiced
thereby. In the event of any such claim, action, suit, proceeding, or
investigation, (i) the Surviving Corporation will have the right to assume the
defense thereof by counsel reasonably acceptable to the Indemnified Parties, and
the Surviving Corporation will not be liable to such Indemnified Parties for any
legal expenses of other counsel or any other expenses subsequently incurred
thereafter by such Indemnified Parties in connection with the defense thereof,
except that all Indemnified Parties (as a group) will have the right to retain
one separate counsel, reasonably acceptable to such Indemnified Parties and the
Purchaser, at the expense of the indemnifying party if the named parties to any
such proceeding include both the Indemnified Parties and the Surviving
Corporation and the representation of such parties by the same counsel would be
inappropriate due to a conflict of interest between them, (ii) the Indemnified
Parties will cooperate in the defense of any such matter, and (iii) the
Surviving Corporation will not be liable for any settlement effected without its
prior written consent.
In addition, the Merger Agreement states that the Articles of
Incorporation and Bylaws of the Surviving Corporation shall contain provisions
that are no less favorable to the past and present officers and directors of the
Company than those set forth as of the date of the Merger Agreement in the
Articles of Incorporation and the Bylaws of the Company, which provisions shall
not be amended, repealed or otherwise modified for a period of six years from
the Effective Time in any manner that would affect adversely the rights
thereunder of individuals who at or at any time prior to the Effective Time were
entitled to indemnification therein.
Moreover, the Surviving Corporation has agreed to use reasonable
commercial efforts to maintain in effect for six years from the Effective Time
directors' and officers' "tail" liability insurance covering those persons who
are currently covered by the Company's directors' and officers' liability
insurance policy on terms comparable to the existing coverage.
CONDITIONS TO THE MERGER
Each party's respective obligation to effect the Merger is subject to
the fulfillment at or prior to the date of the closing of the transactions
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contemplated by the Merger Agreement (the "Closing Date") of the following
conditions: (i) the Merger Agreement and the transactions contemplated therein
shall have been approved, in the manner required by applicable law or by the
applicable regulations of any stock exchange or other regulatory body, as the
case may be, by the holders of the issued and outstanding shares of capital
stock of the Company, (ii) neither of the parties to the Merger Agreement shall
be subject to any order or injunction of a court of competent jurisdiction which
prohibits the consummation of the transactions contemplated by the Merger
Agreement, (iii) all consents, authorizations, orders and approvals of (or
filings or registrations with) any governmental entity required in connection
with the execution, delivery and performance of the Merger Agreement shall have
been obtained or made, except for filings in connection with the Merger and any
other documents required to be filed after the Effective Time and except where
the failure to have obtained or made any such consent, authorization, order,
approval, filing or registration would not have a material adverse effect on the
business, assets, financial condition or results of operations of either the
Purchaser or the Company.
The obligations of the Company to effect the Merger shall be subject to
the fulfillment at or prior to the Closing Date of each of the following
conditions, unless waived by the Company: (i) there shall have been no
intentional or willful nonperformance, in any material respect, by the Purchaser
of its agreements contained in the Merger Agreement required to be performed on
or prior to the Closing Date nor shall there have been, in any material respect,
any willfully or intentionally untrue representation or warranty of the
Purchaser contained in the Merger Agreement or in any document delivered in
connection therewith, (ii) the Purchaser shall have performed in all material
respects its agreements contained in the Merger Agreement required to be
performed on or prior to the Closing Date, and the representations and
warranties of the Purchaser contained in the Merger Agreement and in any
document delivered in connection therewith shall be true and correct as of the
Closing Date, except (A) for changes specifically permitted by the Merger
Agreement, (B) for non-performance or breaches which, separately or in the
aggregate, would not have a material adverse effect on the business, assets,
financial condition or results of operations of the Company or on the ability of
the parties to consummate the transactions contemplated by the Merger Agreement
and (C) that those representations and warranties which address matters only as
of a particular date shall remain true and correct, in all material respects, as
of such date, (iii) the Company shall have received a certificate of the
President or a Vice President of the Purchaser, dated the Closing Date,
certifying to the effect of the preceding clauses (i) and (ii), (iv) the Board
of Directors of the Company shall have received a certificate of the President
and the Chief Financial Officer of the Company, dated the Closing Date,
certifying as to the correctness in all material respects of the representations
and warranties of the Company contained in the Merger Agreement or in any
document delivered in connection therewith, (v) there shall not have been any
action taken, or any statute, rule, regulation, order, judgment or decree
proposed, enacted, promulgated, entered, issued, or enforced by any foreign or
United States federal, state or local governmental entity, and there shall be no
action, suit or proceeding pending (with a reasonable likelihood of success),
which (A) makes the Merger Agreement, the Merger, or any of the other
transactions contemplated by the Merger Agreement illegal or imposes or may
impose material damages or penalties in connection therewith, or (B) otherwise
prohibits, restricts, or delays consummation of the Merger or any of the other
transactions contemplated by the Merger Agreement in any material respect, (vi)
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the Company shall have received an opinion of Thelen Reid & Priest LLP, special
counsel for the Purchaser, in form and substance reasonably satisfactory to the
Company and its counsel.
The obligations of the Purchaser to effect the Merger shall be subject
to the fulfillment at or prior to the Closing Date of the following conditions,
unless waived by the Purchaser: (i) there shall have been no intentional or
willful non-performance, in any material respect, by the Company of its
agreements contained in the Merger Agreement required to be performed on or
prior to the Closing Date nor shall there have been any willfully or
intentionally untrue representation or warranty of the Company contained in the
Merger Agreement or in any document delivered in connection therewith, (ii) the
Company shall have performed in all material respects its agreements contained
in the Merger Agreement required to be performed on or prior to the Closing
Date, and the representations and warranties of the Company contained in the
Merger Agreement and in any document delivered in connection therewith shall be
true and correct as of the Closing Date, except (A) for changes specifically
permitted by the Merger Agreement or other accepted writing by the Purchaser,
(B) for non-performance or breaches which, separately or in the aggregate, would
not have a material adverse effect on the business, assets, financial condition
or results of operations of the Purchaser or the Company or on the ability of
the parties to consummate the transactions contemplated by the Merger Agreement
and (C) that those representations and warranties which address matters only as
of a particular date shall remain true and correct, in all material respects, as
of such date, (iii) the Purchaser shall have received a certificate of the
President or a Vice President of the Company, dated the Closing Date, certifying
to the effect of the preceding clauses (i) and (ii), (iv) from the date of the
Merger Agreement through the Effective Time, there shall not have occurred any
change or effect, either individually or in the aggregate, that is materially
adverse to the business, assets, financial condition, or results of operations
of the Company (it being understood that the incurrence of capital expenditures
set forth in Schedule 3.13(b) of the Merger Agreement shall not be deemed to be
a material adverse change), (v) after the Effective Time, no person shall have
any right under any Stock Plan or other plan, program or arrangement to acquire
any equity securities of the Company, (vi) there shall not have been any action
taken, or any statute, rule, regulation, order, judgment or decree proposed,
enacted, promulgated, entered, issued, or enforced by any foreign or United
States federal, state or local governmental entity, and there shall be no
action, suit or proceeding pending (with a reasonable likelihood of success),
which (A) makes the Merger Agreement, the Merger, or any of the other
transactions contemplated by the Merger Agreement illegal or imposes or may
impose material damages or penalties in connection therewith, (B) requires the
divestiture of a material portion of the business of the Purchaser, the Company
or of the Surviving Corporation taken as a whole, (C) imposes material
limitations on the ability of the Purchaser effectively to exercise full rights
of ownership of shares of capital stock of the Surviving Corporation (including
the right to vote such shares on all matters properly presented to the
stockholders of the Surviving Corporation) or makes the holding by the Purchaser
of any such shares illegal or subject to any materially burdensome requirement
or condition, (D) requires the Purchaser, the Company, the Surviving Corporation
or any of their respective material subsidiaries or affiliates to cease or
refrain from engaging in any material business, or (E) otherwise prohibits,
restricts, or delays consummation of the Merger or any of the other transactions
contemplated by the Merger Agreement in any material respect or increases or may
increase in any material respect the liabilities or obligations of the Purchaser
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or the Surviving Corporation arising out of the Merger Agreement, the Merger, or
any of the other transactions contemplated by the Merger Agreement, (vii) the
Purchaser shall have received an opinion from Haythe & Curley, special counsel
for the Company, in form and substance reasonably satisfactory to the Purchaser
and its counsel and (viii) not more than 10% of the outstanding shares of Common
Stock of the Company entitled to vote at the Special Meeting shall have
perfected appraisal rights in respect of the Merger.
TERMINATION
The Merger Agreement may be terminated and the Merger may be abandoned
at any time prior to the Effective Time, before or after the approval of the
Merger Agreement by the stockholders of the Company, by the mutual consent of
the Purchaser and the Company. In addition, the Merger Agreement may be
terminated and the Merger may be abandoned by action of the Board of Directors
of either the Purchaser or the Company if (i) the Merger shall not have been
consummated by January 29, 1999 (the "Termination Date"), (ii) the approval of
the Company's stockholders required by the Merger Agreement shall not have been
obtained at a meeting duly convened therefor or at any adjournment thereof, or
(iii) a United States federal or state court of competent jurisdiction or United
States federal or state governmental, regulatory or administrative agency or
commission shall have issued an order, decree or ruling or taken any other
action permanently restraining, enjoining or otherwise prohibiting the
transactions contemplated by the Merger Agreement and such order, decree, ruling
or other action shall have become final and nonappealable; provided, that the
party seeking to terminate the Merger Agreement pursuant to clause (iii) shall
have used all reasonable efforts to remove such injunction, order or decree; and
provided, in the case of a termination pursuant to clause (i), that the
terminating party shall not have breached in any material respect its
obligations under the Merger Agreement in any manner that shall have proximately
contributed to the failure to consummate the Merger by the Termination Date.
The Merger Agreement may be terminated and the Merger may be abandoned
at any time prior to the Effective Time, before or after the adoption and
approval by the stockholders of the Company, by action of the Board of Directors
of the Company, if (i) there is a Qualifying Alternative Proposal that the Board
of Directors of the Company in good faith determines (in consultation with its
financial advisors) represents a financially superior transaction for the
stockholders of the Company as compared to the Merger and in the exercise of its
good faith judgment as to its fiduciary duties to its stockholders imposed by
law, as advised by outside counsel, the Board of Directors of the Company
determines that such termination is required by reason of such Qualifying
Alternative Proposal being made; provided that the Company must notify the
Purchaser promptly of its intention to terminate the Merger Agreement or enter
into a definitive agreement with respect to any Qualifying Alternative Proposal
(which notice shall describe the material terms of such definitive agreement)
and give Purchaser 10 days to increase the consideration payable under the
Merger Agreement to that payable pursuant to the Qualifying Alternative Proposal
(if so increased, the Merger Agreement may not be terminated) but in no event
shall such notice be given less than 48 hours prior to the public announcement
of the Company's proposed termination of the Merger Agreement; and provided
further that the right to terminate the Merger Agreement pursuant to this clause
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will not be available if there has been a nonperformance or breach by the
Company which has or would reasonably be expected to have resulted in a failure
of a condition to closing under the Merger Agreement, or (ii) there has been a
nonperformance or breach by the Purchaser which has or would reasonably be
expected to have resulted in a failure of a condition to closing under the
Merger Agreement, which nonperformance or breach is not curable or, if curable,
is not cured within 30 days after written notice of such nonperformance or
breach is given by the Company to the Purchaser. The Company's ability to
terminate the Merger Agreement pursuant to these provisions is conditioned in
certain circumstances upon the prior payment by the Company of any termination
fees owed by it to the Purchaser pursuant to the Merger Agreement. See
"--Expenses and Termination Fees."
The Merger Agreement may be terminated and the Merger may be abandoned
at any time prior to the Effective Time, before or after the approval by the
stockholders of the Company, by action of the Board of Directors of the
Purchaser, if (i) the Board of Directors of the Company shall have withdrawn or
modified in a manner materially adverse to the Purchaser its approval or
recommendation of the Merger Agreement or the Merger or shall have recommended
an Alternative Proposal to the Company's stockholders, (ii) there has been a
nonperformance or breach by the Company which has or would reasonably be
expected to have resulted in a failure of a condition to closing under the
Merger Agreement, which nonperformance or breach is not curable or, if curable,
is not cured within 30 days after written notice of such nonperformance or
breach is given by the Purchaser to the Company.
EXPENSES AND TERMINATION FEES
Whether or not the Merger is consummated, all costs and expenses
incurred in connection with the Merger Agreement and the transactions
contemplated thereby (including, without limitation, the fees and expenses of
advisers, accountants and legal counsel) will be paid by the party incurring
such expense, except as further described below. In the event that any person
shall have made an Alternative Proposal for the Company and (i) thereafter the
Merger Agreement is terminated by the Company in response to a Qualifying
Alternative Proposal or by the Purchaser if the Board of Directors of the
Company withdraws or modifies in a manner materially adverse to the Purchaser
the Board's approval or recommendation of the Merger or recommends an
Alternative Proposal to the Company's stockholders or (ii) the Merger Agreement
is terminated for any other reason (other than the breach of the Merger
Agreement by the Purchaser) and, in the case of this clause (ii) only, a
transaction contemplated by an Alternative Proposal is consummated within one
year after such termination, then the Company must pay the Purchaser a fee of
$800,000. If the Company fails to promptly pay the $800,000 termination fee,
and, in order to obtain such payment, the Purchaser commences a suit which
results in a judgment against the Company for such fee, the Company must also
pay to the Purchaser its costs and expenses (including attorneys' fees) in
connection with such suit, together with interest on the amount of the fee at
the rate of 12% per annum.
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AMENDMENT
The Merger Agreement may be amended by the Purchaser and the Company,
by action taken by their respective Boards of Directors, at any time before or
after approval of the Merger by the stockholders of the Company, but after any
such stockholder approval, no amendment may be made which by law requires the
further approval of stockholders unless such further approval is obtained.
FINANCING OF THE MERGER
Financing of the Merger will require approximately $20.5 million to pay
the Merger consideration of $4.70 per share and to pay the fees and expenses in
connection with the Merger and such financing. These funds are expected to be
provided through (i) up to $10.5 million of senior secured debt consisting of
$7.5 million in senior term financing (the "Term Loan") and a revolving line of
credit (the "Revolver") not to exceed $3.0 million (the Term Loan and the
Revolver, collectively, the "Senior Debt") to be provided by a bank in the
ordinary course of its business, (ii) up to $6.6 million of senior subordinated
notes (the "Subordinated Debt") to be purchased by ACS, (iii) approximately $2.9
million of cash of the Company (of which there was approximately $3.8 million at
September 30, 1998), and (iv) $575,000 of cash equity from senior management, a
substantial portion of which will derive from management bonuses to be paid by
the Company upon the closing of the Merger and from the conversion of shares of
Common Stock in the Merger received by senior management upon the exercise of
stock options. No plans or arrangements have been made to refinance or repay the
Senior Debt or the Subordinated Debt.
TERMS OF THE SENIOR DEBT
Principal and Maturity. The Term Loan will be in an amount not to
exceed $7.5 million and will mature five years from the Effective Time. The
Revolver will be in an amount not to exceed the lesser of $3.0 million or the
borrowing base thereunder and will mature five years from the Effective Time;
however, during such period, the principal of the Revolver may be repaid and
reborrowed.
Ranking. The Senior Debt will be a secured obligation of the Surviving
Corporation and will rank pari passu in right of payment to all existing and
future senior indebtedness of the Company and senior in right of payment to all
subordinated obligations of the Company.
Collateral. The Senior Debt is expected to be secured by
first-priority perfected liens and security interests in (a) all personal
property, including accounts, chattel paper, documents, instruments, general
intangibles, inventory and equipment of the Surviving Corporation, both now
existing and hereafter acquired, (b) a negative pledge of the common stock of
the Surviving Corporation, and (c) an assignment of the life insurance policies
in the face amounts of $3.5 million and $1.5 million insuring the lives of
Charles E. Lawson, Jr. and Patrick E. Belardi, respectively.
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Repayment. Principal on the Term Loan will be payable in twenty (20)
equal consecutive quarterly installments of $250,000 and a final balloon payment
at maturity of $2.5 million. In addition, mandatory prepayments of principal
equal to 50% of excess cash flow will be required to be paid within 95 days of
each fiscal year until such time as the Surviving Corporation delivers audited
financial statements which reflect a ratio of senior debt to earnings before
interest, taxes, depreciation and amortization ("EBITDA") for the preceding
twelve-month period of less than 2 to 1.
Interest Rate. The Senior Debt shall bear interest at a fluctuating
rate equal to, at the election of the Surviving Corporation from time to time,
(a) the lending bank's prime rate plus up to 50 basis points, or (b) LIBOR plus
up to 200 basis points. In each case, the level of added basis points will be
determined based on the Surviving Corporation's ratio of Senior Debt to EBITDA
from time to time.
Certain Covenants. The Senior Debt is expected to contain certain
covenants with respect to the Surviving Corporation, that among other things and
subject to certain exceptions, restrict (a) sales of assets, (b) loans, advances
and investments, (c) additional indebtedness, liens and leases, (d)
distributions to shareholders, (e) changes in control, and (f) mergers and
acquisitions. In addition, the Senior Debt is expected to require the following
financial covenants: (i) fixed charge coverage ratio, (ii) leverage ratio, (iii)
EBITDA levels, and (iv) limitation on capital expenditures.
Events of Default. The Senior Debt is expected to include customary
events of default, including, without limitation, payment defaults, breach of
representations or warranties, violations of covenants, cross defaults,
bankruptcy and insolvency defaults and change of control defaults.
TERMS OF THE SUBORDINATED DEBT
The Subordinated Debt is expected to be provided by ACS.
Principal and Maturity. The Subordinated Debt will be in the amount
of up to $6.6 million and will mature ten years from the Effective Time.
Ranking. The Subordinated Debt will be subordinate in right of payment
to the Senior Debt.
Collateral. The Subordinated Debt will be secured by (a) a second lien
on all assets of the Surviving Corporation and (b) an assignment of the life
insurance policies in the face amounts of $3.5 million and $1.5 million insuring
the lives of Charles E. Lawson, Jr. and Patrick E. Belardi, respectively.
Interest Rate. Interest shall be payable monthly in arrears at a
floating rate equal to the prime rate published in the Wall Street Journal plus
450 basis points. For the first 17 monthly interest payment dates, the Surviving
Corporation may accrue the payment of 44% of the interest due on such payment
58
<PAGE>
dates, with all such accrued interest due and payable in cash on the 18th
monthly payment date.
Certain Covenants. Covenants are expected to be substantially similar
to those for the Senior Debt.
Defaults. Defaults are expected to be substantially similar to those
for the Senior Debt.
Voting Rights. The common stock to be issued to ACS upon exercise of
the warrants shall have full voting rights only if (i) there is a payment
default on the Subordinated Debt (or in the case of interest payment default,
only if the default is for more than one month), (ii) any of the financial
covenants for the Notes are breached for two successive quarterly measurement
dates, (iii) payment of principal of the Subordinated Debt is accelerated or
(iv) Charles Lawson ceases to be the President of the Surviving Corporation. In
the event that such circumstance giving the common stock issued to ACS voting
rights is cured, such voting rights shall continue for only twelve months after
the cure; provided that if such voting rights are reinstated because of a
subsequent occurrence of one or more of such events, such voting rights will
become permanent.
Warrants. ACS will be issued warrants to purchase 54% of the Surviving
Corporation's common stock, on a fully diluted basis. The warrants will have an
exercise price of $.01 per share and will expire on the tenth anniversary of the
Effective Time. ACS will have the right to put the warrants to the Surviving
Corporation at any time after the fifth anniversary of the Effective Time, upon
the payment in full of the Subordinated Debt or upon a sale of the Surviving
Corporation or a material portion of its assets, at a price equal to the fair
market value of the warrants or the common stock issuable upon exercise of the
warrants, in each case less the exercise price.
Board Rights. ACS will have the right to designate that number of
members of the Surviving Corporation's Board of Directors that bears the same
ratio to the total number of directors as the number of shares of the Surviving
Corporation's common stock owned by ACS bears to the total number of shares
outstanding (on a fully diluted basis); provided that so long as the shares
underlying the warrants would not have the right to vote on election of
directors, the number of ACS designated directors shall be one less than the
majority of the total number of directors; and provided further, ACS shall in
any case have the right to designate one director for so long as the
Subordinated Debt is outstanding or for so long as ACS owns the warrants or the
shares issued upon exercise of the warrants.
EXPENSES OF THE MERGER
The Merger Agreement provides that the Company and the Purchaser will
bear their respective expenses incurred in connection with the Merger Agreement
and the transactions contemplated thereby, whether or not the Merger is
consummated, except in certain circumstances specified in the Merger Agreement
relating to the termination thereof. See "CERTAIN PROVISIONS OF THE MERGER
AGREEMENT -- Expenses and Termination Fees." The total expenses of the Merger
are expected to be approximately $2,305,000, with the respective obligations of
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<PAGE>
the Purchaser and the Company as set forth on the following table:
The Purchaser The Company
------------- -----------
Financing and commitment fees $ 463,000 $ 0
Financial advisory fees $ 264,000 $ 450,000
Management bonuses $ 0 $ 339,000
Legal fees $ 200,000 $ 325,000
Accounting fees $ 10,000 $ 20,000
SEC filing fees $ 0 $ 3,652
Printing and mailing $ 0 $ 50,000
Miscellaneous $ 139,000 $ 41,348
-------------- -----------
Total $ 1,076,000 $ 1,229,000
THE PURCHASER
The Purchaser was recently incorporated under the laws of the
Commonwealth of Pennsylvania for the purpose of consummating the Merger.
The Purchaser has not conducted any business other than the
transactions described herein. The Purchaser will not have any assets or
liabilities other than those arising under the Merger Agreement or in connection
with the Merger, or engage in any activities other than those incident to its
formation and capitalization and the Merger. The principal business office of
the Purchaser is 700 Pennsylvania Avenue, Wilkes Barre, Pennsylvania 18703.
Charles E. Lawson, Jr. is the President and a director of the Purchaser
and currently is the President, Chief Executive Officer and a director of the
Company. Mr. Lawson joined the Company as Executive Vice President in March 1994
and was appointed President, Chief Executive Officer and a director of the
Company in May 1994. Prior to joining the Company, Mr. Lawson had over twenty
years experience in the beverage packaging industry and from April 1992 until
March 1994, was Director of Sales of the brewery and soft drink divisions of
Riverwood International, Inc. The principal business address of Riverwood
International, Inc. is 3350 Cumberland Circle, Suite 1600, Atlanta, Georgia
30339. Prior thereto, Mr. Lawson was employed by Julian B. Slevin Co., Inc. in
various capacities since 1973, and from 1988 to 1992, was its Vice President of
Sales and Marketing. Mr. Lawson is a citizen of the United States.
Patrick E. Belardi is Vice President, Secretary and Treasurer of the
Purchaser and is currently Vice President, Chief Financial Officer and a
director of the Company. Mr. Belardi, a certified public accountant, was
employed by Laventhol & Horwath from 1982 to 1990 and then was a principal at
Kronick Kalada Berdy & Co., P.C., at its principal business address of 190
Lathrop Street, Kingston, Pennsylvania 18704, a prior accounting firm of the
Company, from 1990 to October 1994. Mr. Belardi is a citizen of the United
States.
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ACS is a buyout and specialty finance company that is principally
engaged in investing in senior debt, subordinated debt and equity of private
middle market companies in need of capital for employee buyouts, management
buyouts, growth, acquisitions, liquidity and restructurings. It has elected to
be regulated as a business development company under the Investment Company Act
of 1940. ACS disclaims any affiliation at any time between itself and the
Purchaser. It presently owns no securities of the Purchaser and none of its
affiliates are officers, directors or security holders of the Purchaser.
ACS is a Delaware corporation with principal executive offices located
at 3 Bethesda Metro Center, Suite 860, Bethesda, Maryland 20814. The executive
officers and directors of ACS are the following:
Robert L. Allbritton. Mr. Allbritton is a director of ACS and has
served as the Executive Vice President and Chief Operating Officer of Allbritton
Communications Company since 1994 and as a Director of that Company since 1992.
Mr. Allbritton is currently a Director of Riggs National Corporation, Riggs Bank
Europe, Limited, All Newsco, Inc., Perpetual Corporation and Allbritton
Jacksonville, Inc.
Adam Blumenthal. Mr. Blumenthal is a director of ACS and has served as
ACS's Executive Vice President since 1995. From 1990 to 1995, Mr. Blumenthal
served as a Vice President of ACS. Mr. Blumenthal currently serves as a Director
of Mobile Tool International, Martino's Bakery, Inc., Good Stuff Food Company,
Inc. and the Yale School of Management Alumni Association.
David Gladstone. Mr. Gladstone is a director and Vice-Chairman of the
Board of ACS. He has been Vice-Chairman since August 1998 and previously has
served as Chairman of the Board of ACS since June 1997. From 1974 to February
1997, Mr. Gladstone held various positions, including Chairman and Chief
Executive Officer, with Allied Capital Corporation, Allied Capital Corporation
II, Allied Capital Lending Corporation, Allied Capital Commercial Corporation
and Allied Capital Advisors Inc. From 1992 to 1997, Mr. Gladstone served as a
Director and President and Chief Executive Officer of Business Mortgage
Investors. Mr. Gladstone served as a Director of The Riggs National Corporation
(the parent of Riggs Bank) from 1993 to May 1997 and of Riggs Bank from 1991 to
1993. He currently serves as a Trustee of The George Washington University. Mr.
Gladstone is the managing member of Capital Investor, a private fund backed by
information technology professionals to make investments in start-up companies
and is chairman of Coastal Berry Company, LLC, a large farming business in
California.
Neil M. Hahl. Mr. Hahl is a director of ACS and has been President of
The Weitling Group, a business consulting firm, since 1996. From 1995 to 1996,
Mr. Hahl served as Senior Vice President of the American Financial Group. From
1982 to 1996, Mr. Hahl served as Senior Vice President and CFO of Penn Central
Corporation. Mr. Hahl is currently a Director of Buckeye Management Company and
American Financial Enterprises.
Stan Lundine. Mr. Lundine is a director of ACS and has served as Of
Counsel for the law firm of Sotir and Goldman since 1995. From 1987 to 1994, he
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was the Lieutenant Governor of the State of New York. Mr. Lundine is a Director
of U.S. Investigations Services, Inc. and National Forge Holdings. From 1976 to
1986, Mr. Lundine served as a member of the U.S. House of Representatives.
Philip R. Harper. Mr. Harper is a director of ACS and since July 1996,
Mr. Harper has served as President, Chief Executive Officer and a Director of
U.S. Investigations Services, Inc. From 1991 to 1995, Mr. Harper served as
President of Wells Fargo Alarm Services. From 1988 to 1991, Mr. Harper served as
President of Burns International Security Services--Western Business Unit.
Stephen P. Walko. Mr. Walko is a director of ACS and since April 1998
has been President and Chief Executive Officer and a director of Decorative
Surfaces International Inc. From 1990 to May 1998, Mr. Walko was President and a
Director of Textileather Corporation, a manufacturer of vinyl products. Mr.
Walko is a Director of Mobile Tool International, Inc. and Bliss Salem Steel
Corp.
Malon Wilkus. Mr. Wilkus founded ACS in 1986 and has served as a
director and its President since that time. Since August 1988 he had been
Chairman of its Board of Directors. Mr. Wilkus previously served as Chairman and
is a Director of the National Center for Employee Ownership. Mr. Wilkus is a
member of the Board of Governors of the ESOP Association. Mr. Wilkus is a
Director of Erie Forge & Steel, Inc., Good Stuff Food Company, Inc. and
Martino's Bakery, Inc.
Roland Cline. Mr. Cline has been a Vice-President of ACS since 1990
and has been employed by ACS since 1991. Mr. Cline is a director of BIW
Connector Systems, LLC and Four-S Baking Company.
Stephen L. Hester. Mr. Hester is a Vice President of ACS and has been
employed by the Company since 1994. From 1973 to 1993, he was a partner in the
law firm of Arnold & Porter. Mr. Hester is a director of Copper Range Company
and US Investigations Services, Inc. and Trustee of the Northwest Airlines
flight attendants' employee stock ownership plan.
Alvin N. Puryear. Dr. Puryear has been a director of ACS since
September 1998. He is a Professor of Management at Baruch College of the City
University of New York and has been on the Baruch faculty since 1970. He is a
director of Bank of Tokyo-Mitsubishi Trust Company, the GreenPoint Financial
Corporation and the GreenPoint Bank.
All of the executive officers and directors of ACS are citizens of the
United States. None of ACS or any executive officer or director of ACS owns any
shares of Common Stock of the Company.
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 45 holders of record of
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the Company's common stock at December 8, 1998 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 $4.50.
Securities of the Company were first publicly traded in the third
quarter of fiscal 1996. The following table sets forth the high and low closing
sales prices 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 fiscal
1997 and 1998, and the first quarter of fiscal 1999 through December 16, 1998,
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
December 31, 1997 4 1/8 3 1/4
March 31, 1998 3 13/16 3 1/4
June 30, 1998 4 1/4 3 3/16
September 30, 1998 5 3 1/4
December 31, 1998 (through December 16, 1998) 4 3/4 4 1/8
----- -----
There were no cash dividends declared on the common stock of the
Company during the fiscal years ended September 30, 1998, 1997 and 1996.
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction
with the Company's Financial Statements and the Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Proxy Statement. The selected income statement and
balance sheet data for, and as of the end of, the nine months period ended
October 3, 1993 and the year ended September 30, 1994 are derived from the
audited financial statements of the Company. The selected income statement and
balance sheet data as of the end of, and for, each of the years in the
three-year period ended September 30, 1997 are derived from the financial
statements of the Company included elsewhere in this Proxy Statement which were
audited by Arthur Andersen LLP. The selected income statement data for the nine
months ended June 30, 1997 and June 30, 1998 and the balance sheet data as of
June 30, 1998 have been prepared on the same basis as the audited financial
statements of the Company included herein and, in the opinion of the Company,
include all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the information set forth therein. The results for
the nine months ended June 30, 1998 are not necessarily indicative of the
results to be achieved for the full fiscal year.
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<PAGE>
NINE MONTH YEAR ENDED
PERIOD ENDED SEPTEMBER 30,
------------ --------------
OCTOBER 3,
1993(1) 1994(1)
------- --------
(in thousands, except per share data)
INCOME STATEMENT DATA:
Gross sales................. $16,030 $22,057
Less excise taxes........... 255 361
------- -------
Net sales................... 15,775 21,696
Cost of sales............... 11,930 17,373
------- -------
Gross profit................ 3,845 4,323
------- -------
Operating expenses:.........
Delivery................. 572 771
Selling, advertising and
promotional............ 388 584
General and administrative 602 1,322
------- -------
Total operating expenses: 1,562 2,677
------- -------
Operating income............ 2,283 1,646
Interest (income) expense(2) 76 1,147
------- -------
Income before provision
for income taxes and
extraordinary item........ 2,207 499
Provision for income taxes(3) 962 246
------- -------
Income before extraordinary
item...................... 1,245 253
Extraordinary item, net of
income taxes.............. -- --
------- -------
Net income.................. $ 1,245 253
Warrant accretion........... --
------- -------
Net income available to
common shareholders....... $ 1,245 $ 253
======= =======
BASIC NET INCOME PER SHARE(4):
Income per share before
extraordinary item........ $ 0.89 $ 0.14
Extraordinary item per share -- --
------- -------
Net income per share........ $ 0.89 $ 0.14
======= =======
DILUTED NET INCOME PER SHARE(4):
Income per share before
extraordinary item........ $ 0.89 $ 0.12
Extraordinary item per share -- --
------- -------
Net income per share........ $ 0.89 $ 0.12
======= =======
SHARES USED IN CALCULATING
NET INCOME PER SHARE:
Basic(4).................... 1,400 1,851
======= =======
Diluted(4).................. 1,400 2,154
======= =======
YEAR ENDED SEPTEMBER 30,
-----------------------------
1995 1996 1997
---- ---- ----
(in thousands, except per share data)
INCOME STATEMENT DATA:
Gross sales................. $25,175 $26,983 $27,367
Less excise taxes........... 382 544 498
------- ------- -------
Net sales................... 24,793 26,439 26,869
Cost of sales............... 18,834 19,939 20,099
------- ------- -------
Gross profit................ 5,959 6,500 6,770
------- ------- -------
Operating expenses:.........
Delivery................. 827 824 831
Selling, advertising and
promotional............ 782 1,240 1,439
General and administrative 1,336 1,373 1,410
------- ------- -------
Total operating expenses: 2,945 3,437 3,680
------- ------- -------
Operating income............ 3,014 3,063 3,090
Interest (income) expense(2) 1,042 520 (124)
------- ------- -------
Income before provision
for income taxes and
extraordinary item........ 1,972 2,543 3,214
Provision for income taxes(3) 921 1,125 1,382
------- ------- -------
Income before extraordinary
item...................... 1,051 1,418 1,832
Extraordinary item, net of
income taxes.............. -- 322 --
------- ------- -------
Net income.................. 1,051 1,096 1,832
Warrant accretion........... (300) (89) --
------- ------- -------
Net income available to
common shareholders....... $ 751 $ 1,007 $ 1,832
======= ======= =======
BASIC NET INCOME PER SHARE(4):
Income per share before
extraordinary item........ $ 0.41 $ 0.48 $ 0.47
Extraordinary item per share -- (0.12) --
------- ------- -------
Net income per share........ $ 0.41 $ 0.36 $ 0.47
======= ======= =======
DILUTED NET INCOME PER SHARE(4):
Income per share before
extraordinary item........ $ 0.40 $ 0.47 $ 0.47
Extraordinary item per share -- (0.11) --
------- ------- -------
Net income per share........ $ 0.40 $ 0.36 $ 0.47
======= ======= =======
SHARES USED IN CALCULATING
NET INCOME PER SHARE:
Basic(4).................... 1,851 2,792 3,885
======= ======= =======
Diluted(4).................. 1,874 2,816 3,905
======= ======= =======
NINE MONTHS ENDED JUNE 30,
--------------------------
1997 1998
---- ----
(in thousands, except per share data)
INCOME STATEMENT DATA:
Gross sales................. $19,552 $20,428
Less excise taxes........... 353 308
------- -------
Net sales................... 19,199 20,120
Cost of sales............... 14,434 15,279
------- -------
Gross profit................ 4,765 4,843
------- -------
Operating expenses:.........
Delivery................. 601 674
Selling, advertising and
promotional............ 1,139 858
General and administrative 1,073 1,100
------- -------
Total operating expenses: 2,813 2,632
------- -------
Operating income............ 1,952 2,211
Interest (income) expense(2) 86 154
------- -------
Income before provision
for income taxes and
extraordinary item........ 2,038 2,365
Provision for income taxes(3) 884 970
------- -------
Income before extraordinary
item...................... 1,154 1,395
Extraordinary item, net of
income taxes.............. -- --
------- -------
Net income.................. 1,154 1,395
Warrant accretion........... -- --
------- -------
Net income available to
common shareholders....... $ 1,154 $ 1,395
======= =======
BASIC NET INCOME PER SHARE(4):
Income per share before
extraordinary item........ $ 0.30 $ 0.36
Extraordinary item per share -- --
------- -------
Net income per share........ $ 0.30 $ 0.36
======= =======
DILUTED NET INCOME PER SHARE(4):
Income per share before
extraordinary item........ $ 0.30 $ 0.36
Extraordinary item per share -- --
------- -------
Net income per share........ $ 0.30 $ 0.36
======= =======
SHARES USED IN CALCULATING
NET INCOME PER SHARE:
Basic(4).................... 3,885 3,885
======= =======
Diluted(4).................. 3,906 3,905
======= =======
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BALANCE SHEET DATA:
SEPTEMBER 30,
OCTOBER 3, ------------------
1993 1994 1995
---- ---- ----
(in thousands)
Working capital............. $(1,303) $ 1,797 $ 54
Total assets................ 6,774 15,172 14,441
Long-term debt, including
current portion........... 4,379 10,088 7,876
Redeemable equity(5)........ -- 422 722
Shareholders' equity........ 916 1,522 2,317
Book value per share........
Tangible book value per share
BALANCE SHEET DATA:
SEPTEMBER 30, JUNE 30,
----------------- --------
1996 1997 1998
---- ---- ----
(in thousands)
Working capital............. $ 3,426 $ 4,423 $ 5,716
Total assets................ 15,954 18,467 19,945
Long-term debt, including
current portion........... -- -- --
Redeemable equity(5)........ -- -- --
Shareholders' equity........ 12,620 14,374 15,769
Book value per share........ $ 3.70 $ 4.06
Tangible book value per share $ 2.19 $ 2.58
- --------------------------------------
(1) On October 4, 1993, Lion Partners Company, L.P. ("Lion Partners"), in a
series of related transactions, acquired 81% of the Company's Common
Stock. The Company accounted for these transactions as a purchase by
Lion Partners resulting in the write-up of acquired assets by $1.8
million and the recording of $6.5 million of goodwill on the balance
sheet. In connection with these transactions, the Company changed its
fiscal year from December 31 to September 30.
(2) Includes amortization of debt discount. See Note 7 of Notes to
Financial Statements.
(3) Includes for the nine months ended October 3, 1993, pro forma provision
for income taxes using statutory federal and state income tax rates
that would have been applied had the Company been taxed as a "C
corporation." Prior to October 3, 1993 the Company was treated for
federal income tax purposes as an S corporation under Subchapter S of
the Internal Revenue Code of 1986, as amended, and was treated as an S
corporation for certain state corporate income tax purposes under
certain comparable state tax laws. As a result, the Company's earnings
during such period were taxed directly to the Company's shareholders,
at their individual federal and state income tax rates, rather than to
the Company.
(4) Basic and diluted earnings per share have replaced primary and fully
diluted earnings per share in accordance with SFAS No. 128.
(5) Represents the carrying value of 291,565 shares of Common Stock issued
upon exercise of warrants in December 1995 (the "Put Price"). The
holders of these shares had the right to require the Company to
repurchase these shares of Common Stock for an amount based upon the
fair market value of the Common Stock (as specified in the agreement
relating to this put option) at any time beginning September 1998 and
earlier upon the occurrence of certain events. This right terminated
upon the consummation of the Company's initial public offering, and the
Put Price was reclassified to shareholders' equity.
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
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<PAGE>
references to fiscal years are references to the Company's fiscal year ended
September 30. This Proxy Statement 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
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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.
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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,
------------------------
1995 1996 1997
---- ---- ----
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%
========== ======== =========
Operating data
PERCENT OF NET SALES
--------------------
YEAR ENDED SEPTEMBER 30,
------------------------
1997 1996 1995
---- ---- ----
Malta 66.2% 67.8% 75.0%
BEER:
CRAFT:
Company label 4.8 6.7 4.9
Contract 12.4 12.4 7.4
Popular Priced 2.9 3.7 5.0
------ ------ ------
Total beer 20.1 22.8 17.3
Specialty soft drinks 13.7 9.4 7.7
------ ------ ------
100.0% 100.0% 100.0%
======= ======= =======
SALES PER BARREL
----------------
YEAR ENDED SEPTEMBER 30,
------------------------
1997 1996 1995
---- ---- ----
Malta $ 80 $ 80 $ 78
BEER:
CRAFT:
Company label 119 127 110
Contract 100 99 84
Popular Priced 57 55 54
------ ------ -------
Total beer
Specialty soft drinks 68 64 62
------ ------ -------
$ 80 $ 80 $ 76
====== ====== =======
NINE MONTHS ENDED JUNE 30, 1998 AND 1997
Gross Sales and Excise Taxes
The Company's gross sales increased 4.5% to $20,428,000 in the nine
months ended June 30, 1998 from $19,552,000 in the nine months ended June 30,
1997. The Company's sales volumes for the first nine months of fiscal 1998 were
favorably impacted by increases in contract beer and soda sales.
The Company is required to pay federal and state excise taxes on sales
of its beer. The federal excise tax increases from $7 to $18 per barrel on
production over 60,000 barrels. Total excise taxes decreased 12.7% to $308,000
in the first nine months of fiscal 1998 from $353,000 in the same period of
fiscal 1997. This decrease results from a reduction in the excise tax rate
applied. Excise taxes are accrued at a rate of $7 per barrel in expectation that
beer production will not exceed 60,000 barrels.
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Net Sales
The Company's net sales increased 4.8% to $20,120,000 in the nine
months ended June 30, 1998 from $19,199,000 in the nine months ended June 30,
1997. Net sales of malta, alcoholic specialty beverages, produced under
contract, and specialty soft drinks increased 1.5%, 20.5%, and 16.8%,
respectively. Net sales of craft beers, produced under the Company's own labels
decreased 3.9%, despite a sale of 12,300 cases of Brewery Hill Pale Ale to Beers
Across America. Net sales of popular priced beers decreased 10.0%.
Gross Margin
The Company's gross margin (gross profit as a percentage of net sales)
was 24.1% for the first nine months of fiscal 1998, in comparison to 24.8% for
the first nine months of fiscal 1997. This decrease in gross margin results from
a reduction in the availability of recycled bottles and the composition of the
Company's sales mix. The Company experienced a reduction in the availability of
certain styles of recycled bottles from its current sources. This reduction in
availability resulted in an increased cost of bottles; reducing the gross
margin. The Company will make all efforts to mitigate the future effect of the
increased cost of bottles on gross margins, but no assurances can be made that
the Company will be successful in this regard. The gross margin was also
negatively impacted by the increase in specialty soft drinks to 13.6% of net
sales in the first nine months of fiscal 1998 from 12.2% in the first nine
months of fiscal 1997. The growth in the specialty soft drinks has occurred in a
product line which yields a lower gross margin because it is primarily packaged
using new bottles.
Delivery Expense
Delivery expense as a percentage of net sales increased to 3.3% of net
sales, increasing to $674,000 during the first ninth months of fiscal 1998 from
$601,000 during the first nine months of fiscal 1997. This increase results from
the increase in specialty soft drink sales. Malta and specialty soft drinks are
shipped common carrier at the Company's expense.
Selling, Advertising and Promotional Expenses
Selling, advertising and promotional expenses decreased 24.7% to
$858,000 in the first nine months of fiscal 1998 from $1,139,000 in the
comparable period of fiscal 1997. This decrease is the result of the Company
strategically reducing 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. The Company is focusing its
efforts more heavily on its local and contiguous markets.
General and Administrative Expenses
General and administrative expenses were $1,100,000 or 5.5% of net
sales in the first nine months of fiscal 1998 in comparison to $1,073,000 or
5.6% in the first nine months of fiscal 1997.
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Operating Income
Operating income increased 13.3% to $2,211,000, or 11.0% of net sales
in the first nine months of fiscal 1998 increasing from $1,952,000, or 10.2% of
net sales in the first nine months of fiscal 1997. This increase results from
the increase in sales and the decrease in selling, advertising and promotional
expenses.
Interest Income
Interest income was $154,000 in the first nine months of fiscal 1998
compared to $86,000 in the first nine months of fiscal 1997. The interest income
results from income earned on short-term investments. Cash and cash equivalents
increased to $3,847,000 at June 30, 1998 from $1,772,000 at June 30, 1997.
Provision for Income Taxes
The effective tax rate was 41% and 43% for the first nine months of
fiscal 1998 and 1997, respectively. State income taxes and nondeductible
goodwill amortization impact the effective tax rates.
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
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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.
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.
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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.
YEARS ENDED SEPTEMBER 30, 1996 AND 1995
Gross Sales and Excise Taxes
The Company's gross sales increased 7.2% to $27.0 million in fiscal
1996 from $25.2 million in fiscal 1995. Gross sales of craft beer and specialty
malt beverages increased 63.6% to $5.4 million in fiscal 1996 from $3.3 million
in fiscal 1995. Gross sales of craft beer and specialty malt beverages
represented 19.1% of gross sales in fiscal 1996 as compared to 13.1% of gross
sales in fiscal 1995. Gross sales of popular priced beer decreased 21.4% to $1.1
million in fiscal 1996 from $1.4 million in fiscal 1995.
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 increased 42.4% to $544,000
in fiscal 1996 from $382,000 in fiscal 1995. Excise taxes as a percentage of
sales increased in fiscal 1996 due to the greater percentage of beer sales in
the Company's product mix and because excise taxes were accrued at an effective
annual rate above $7.00 per barrel in the expectation that beer production for
calendar 1996 will exceed 60,000 barrels. As the Company increases its beer
production above 60,000 barrels, federal excise taxes will continue to increase
as a percentage of sales. During fiscal 1996 and 1995, the Company sold 64,797
barrels and 55,554 barrels of beer respectively. The Company records excise tax
expense based on anticipated barrel shipments.
Net Sales
The Company's net sales increased 6.6% to $26.4 million in fiscal 1996
from $24.8 million in fiscal 1995. Malta sales decreased 3.8% to $17.9 million
in fiscal 1996 from $18.6 million in fiscal 1995. Malta sales decreased as a
percentage of net sales to 67.8% in fiscal 1996 from 75.0% in fiscal 1995. This
decrease resulted from the decrease in Malta sales, but more importantly the
rapid growth in net sales of craft beer and specialty malt beverages and, to a
lesser extent, the growth in sales of soft drinks. Craft beer and specialty malt
beverage sales increased 65.1% to $5.0 million and soft drink sales increased
30.6% to $2.5 million.
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Gross Margin
The Company's gross margin (the Company's gross profit as a percentage
of net sales) was 24.6% in fiscal 1996, compared to 24.0% in fiscal 1995. The
increase in gross margin was primarily the result of a 65.1% increase in craft
beer and specialty malt beverage net sales (both under its own labels and under
contract for third parties) and a 30.6% increase in soft drink net sales, both
of which have significantly higher margins than its malta and popular priced
beers. The growth in gross margin was significantly offset by lower paper
recycling income and higher malt prices.
Delivery Expense
Delivery expense as a percentage of net sales decreased to 3.1% or
$824,000 in fiscal 1996 from 3.3% or $827,000 in fiscal 1995. This reduction
primarily relates to the decrease in malta sales and higher percentage of beer
sales. Substantially all beer sales are shipped F.O.B. shipping point. Malta
products are shipped common carrier at the Company's expense.
Selling, Advertising and Promotional Expenses
Selling, advertising and promotional expenses increased 58.6% to $1.2
million in fiscal 1996 from $782,000 .in fiscal 1995. This increase in selling,
advertising and promotional expenses occurred as the Company began to gear 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 the Classic
Collection in late November 1995, Brewery Hill Pale Ale in March 1996 and
Brewery Hill Cherry Wheat in late May 1996. A significant portion of the
Company's sales and marketing efforts are dedicated to the introduction of its
new labels and the implementation of promotional and advertising programs. In
March 1996, the Company hired a Vice President of Sales and Marketing to
spearhead the growth of the Company label craft beer sales by further developing
the Company's distribution system in the states it currently services and in the
additional states the Company is expanding into. During fiscal 1996, the Company
increased its distribution area from nine to twelve states, adding Connecticut,
Ohio and Washington, D.C. The Company plans to significantly increase its
selling, advertising and promotional programs on Company label craft beers.
General and Administrative Expenses
General and administrative expenses decreased as a percentage of net
sales to 5.2% in fiscal 1996 from 5.4% in fiscal 1995, as a result of
controlling growth in salaries, professional fees and general overhead costs.
Operating Income
Operating income increased 1.6% to $3.1 million, or 11.6% of net sales,
in fiscal 1996 from $3.0 million, or 12.1% of net sales, in fiscal 1995. This
decrease, as a percentage of net sales, is attributable to the 58.6% increase in
selling advertising and promotional expenses. The Company plans to continue
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increasing its selling, advertising and promotional expenses to further its
strategy of expanding its craft beer sales.
Interest Expense
Interest expense decreased 50.1% to $520,000 in fiscal 1996 from $1.0
million in fiscal 1995. This decrease interest expense resulted primarily from
the repayment of the debt outstanding with the proceeds of the initial public
offering.
Provision for Income Taxes
The effective income tax rate was 45% in fiscal 1996 and 47% in fiscal
1995. 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded operations primarily through cash
generated from operations and bank and other debt. Cash flows provided from
operations were $1,425,000 and $1,083,000 in the first nine months of fiscal
1998 and 1997, respectively.
The cash flows from operations were primarily generated from net
income, a decrease in prepaid expenses and an increase in accounts payable,
which was offset by increases in accounts receivable and inventory and a decease
in income taxes payable. The increases in accounts receivable and inventory of
$737,000 and $170,000, respectively, result from the seasonality of the business
and the expansion of products produced by the Company. The increase in inventory
was offset by a decline in recycled bottle inventory, due to the Company
experiencing a reduction in the availability of certain styles of recycled
bottles from its current sources. Accounts payable, accrued expenses and
refundable security deposits increased $184,000. Income taxes payable decreased
by $88,000 as a result of the timing of tax payments. In the first nine months
of fiscal 1998, the cash provided from operations was used to purchase equipment
of $762,000 and to increase cash reserves. The Company anticipates capital
expenditure requirements for the remainder of fiscal 1998 will range from
$300,000 to $400,000. These capital expenditures include upgrading the
electrical systems and structural repairs to the brewhouse and bottleshop.
On May 2, 1996, the Company completed an initial public offering of
1,875,000 shares of Common Stock for $6.00 per share. The proceeds of the
initial public offering, net of the underwriting commissions and expenses,
totaled $9,466,000. A portion of these proceeds was used to repay indebtedness
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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.
The Company believes that its cash on hand, together with cash flows
from operations and borrowing availability under its revolving credit
facilities, will be sufficient to support the Company's capital expenditure and
working capital requirements for the foreseeable future.
IMPACT OF YEAR 2000
Management of the Company has considered the impact on the Company's
computer systems of the widely-known dating system flaw inherent in most
operating systems (the "Year 2000 Issue"). The Year 2000 Issue is the result of
computer programs being written using two digits rather than four to define the
applicable year. Any of the Company's programs that have time-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000. The
Year 2000 Issue could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities. Although the Company is in the process of investigating whether and
to what extent its computer operating systems, hardware and production equipment
and those of its suppliers will be disrupted by the Year 2000 Issue, and is
developing a remediation plan and believes that the Year 2000 Issue will not
have a material effect on the Company's business operations or financial
condition, there is no assurance that occurrences beyond the Company's control
will not adversely affect the Company.
As part of its Year 2000 review, the Company may obtain an assessment
of its Year 2000 readiness from an expert in strategic planning, information
systems and management development. The Company believes that most of its
hardware and software is Year 2000 compliant and that the new hardware and
software it intends to install will be Year 2000 ready by December 31, 1999.
Although no assurances can be given, the Company presently believes that with
its existing software and conversions to new software, the Year 2000 Issue will
not pose significant operational problems for its computer systems. In addition,
the Company is investigating whether its non-information technology systems,
including its brewing, and bottling and kegging equipment, will pose Year 2000
problems. The cost of Year 2000 compliance efforts is not expected to be
material.
The Company has been unable to obtain complete information from
suppliers, customers and financial institutions about their Year 2000 readiness.
However, the Year 2000 Issue, with respect to such suppliers, customers and
institutions, is mitigated by the fact that a significant number of the
Company's customers use paper-based ordering and accounting systems.
Nevertheless, there can be no assurance that the Year 2000 Issue will not have a
material adverse effect on the Company's business, operations or financial
condition, including in the event that the systems of the Company's suppliers,
buyers or other third parties are adversely affected by the Year 2000 Issue. The
Company has not yet developed a Year 2000 Issue contingency plan.
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BUSINESS
GENERAL
The Lion Brewery 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:
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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
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
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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.
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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. In 1998, the Company introduced Brewery Hill Pocono Pilsner as its
summer 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 an 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
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
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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 11
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.
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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 kettle
hopped with three hop varieties (including imported Hallertau Hersbrucker and
Czech Saaz). Centennial is then dry hopped with Czech Saaz and allowed to slow
age to impart an incredible balance of malt and hops and a wonderful 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
Silver 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.
Brewery Hill Pocono Pilsner. Pocono Pilsner is a light bodied
American Pilsner, Pocono Pilsner is brewed with the finest American 6-row and
2-row malts to achieve a very crisp, clean and smooth tasting beer with
excellent drinkability. It is expertly hopped with the highest quality
American hop varietals to present a smooth, light bitterness that is a perfect
partner to the clean crisp malt character.
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.
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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.
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, raspberry, orange and
apple 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 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
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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 11 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.
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.
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
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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
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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 its 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 52 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.
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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 have enabled it to maintain its customer
base. In the craft beer market, the Company competes against such craft brewers
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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 as 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.
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
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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 of some
contract 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 if 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
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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
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.
89
<PAGE>
EMPLOYEES
At August 31, 1998, the Company had 130 full time employees, including
114 in production, 5 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.
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.
90
<PAGE>
LEGAL PROCEEDINGS
On October 2, 1998, a lawsuit was filed in the Court of Common Pleas,
Luzerne County, Pennsylvania (Index No. 80-E-1998) by Bryan Simmons, James
Rivest, Mark Rivest, Robert Huttick and James R. Bell against the Company,
allegedly as shareholders suing derivatively on behalf of the Company, and each
member of the Board of Directors, individually, alleging, among other things,
the breach by the directors of their fiduciary duty to the Company by failing to
conduct a fair and open auction of the Company. The plaintiffs sought a
preliminary injunction to enjoin the Company from taking any steps to consummate
the Merger, the voiding of the provisions of the Merger Agreement relating to
payment of the Termination Fee in certain circumstances or in the alternative,
the award of unspecified damages. A hearing on the request for a preliminary
injunction was held on November 2-4, 1998. By order dated November 12, 1998, the
plaintiffs' request for preliminary injunction was denied in its entirety. The
Court subsequently issued an opinion explaining its reasoning for the denial of
the plaintiffs' request.
Based on the advice of counsel and the outcome of the preliminary
injunction hearing, the Company believes that the lawsuit is without merit and
intends to vigorously defend the action including an appeal of the denial of the
injunction.
The Company is not currently involved in any other material pending
legal proceedings and is not aware of any material other legal proceedings
threatened against it.
MANAGEMENT OF THE COMPANY
The directors and executive officers of the Company are as follows:
Donald J. Sutherland was elected a Director and Chairman of the Board
of the Company in October 1993. Since 1975, Mr. Sutherland has been President
and sole employee of the general partner of Quincy Partners, a buyout and
management firm. Quincy Partners is the general partner of the Company's largest
shareholder.
Charles E. Lawson, Jr. joined the Company as Executive Vice President
in March 1994 and was appointed President, Chief Executive Officer and a
Director of the Company in May 1994. Prior to joining the Company, Mr. Lawson
had over twenty years experience in the beverage packaging industry and from
April 1992 until March 1994 was Director of Sales of the brewery and soft drink
divisions of Riverwood International, Inc. Prior thereto Mr. Lawson was employed
by Julian B. Slevin Co., Inc. in various capacities since 1973 and from 1988 to
1992 was its Vice President of Sales and Marketing. See "THE PURCHASER."
Patrick E. Belardi joined the Company in October 1994 as Vice President
and Chief Financial Officer and was appointed a Director of the Company in March
1997. Mr. Belardi, a certified public accountant, was employed by Laventhol &
Horwath from 1982 to 1990 and then was a principal at Kronick Kalada Berdy &
Co., P.C., a prior accounting firm of the Company, from 1990 to October 1994.
See "THE PURCHASER."
91
<PAGE>
Thomas S. Ablum was elected a Director of the Company in October 1993,
and has been a principal in Ablum, Brown & Company, a private investment banking
firm, since February 1988.
George W. Peck, IV was elected a Director of the Company in
October 1993. Since January 1997, Mr. Peck has been a special limited
partner of Kohlberg & Co. LLC, a private merchant bank formerly known as
Kohlberg & Co. ("Kohlberg"). From 1987 until December 1996, Mr. Peck was a
general partner of Kohlberg. Mr. Peck serves as a director for ABC Rail
Products Corp., Northwestern Steel & Wire Co. and ABT Building Products
Corp.
Carlo A. von Schroeter was elected a Director of the Company in
May 1996. Since August 1996, Mr. von Schroeter has been a general partner
at Weston Presidio Capital, a venture capital firm. From 1992 until August
1996, Mr. von Schroeter was a principal at Weston Presidio Capital. Mr. von
Schroeter is also a limited partner of Weston Presidio Management LP, a
general partner of Weston Presidio Offshore Capital C.V.
Henry T. Wilson was elected a Director of the Company in October 1993.
Since 1991, Mr. Wilson has been Managing Director and, most recently, Special
Member of Northwood Ventures LLC, a limited liability company which invests in
venture capital opportunities. From 1986 to 1991, Mr. Wilson was employed in the
Investment Banking Division of Merrill Lynch & Co., most recently as a Vice
President.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth information as of November 30, 1998
regarding (i) persons known to the management of the Company to be the
beneficial owners of more than 5% of the Company's Common Stock on such date,
(ii) the ownership interest of each director of the Company, (iii) the ownership
interest of executive officers and key employees of the Company based upon
currently exercisable options and (iv) the ownership interest of all executive
officers and directors as a group.
Beneficial Ownership(1)
--------------------------
Name Position With the Shares Percentage
Company
- -------------------------------------------------------------------------------
Donald J. Sutherland Chairman of the Board 1,570,966(1) 40.2%
Sans Peur Corporation None 1,545,184(2) 39.8%
c/o Quincy Partners
P.O. Box 154
Glen Head, NY 11545
92
<PAGE>
Beneficial Ownership(1)
--------------------------
Name Position With the Shares Percentage
Company
- -------------------------------------------------------------------------------
Quincy Partners None 1,545,184(3) 39.8%
P.O. Box 154
Glen Head, NY 11545
Lion Partners Company L.P. None 1,495,184 38.5%
c/o Quincy Partners
P.O. Box 154
Glen Head, NY 11545
Heartland Advisors, Inc. None 375,000 9.7%
790 North Milwaukee St.
Milwaukee, WI 53202
Charles E. Lawson, Jr. Chief Executive Officer, 131,151(4) 3.3%
President and Director
Patrick E. Belardi Vice President, Chief 33,210(5) *
Financial Officer,
Treasurer and Director
Leo Orlandini Head Brewmaster 12,890(6) *
David Finn Vice President - Packaging 8,586(6) *
Robert Covert Vice President - Logistics 8,586(6) *
Carlo A. von Schroeter Director 2,200(7) *
George W. Peck, IV Director 1,000(8) *
Thomas S. Ablum Director --(9)
Henry T. Wilson Director --(10)
All executive officers
and directors 1,788,589(11) 43.1%
as a group (10 persons)
- ---------------------------------
* less than 1%
(1) Includes (i) 1,495,184 shares of Common Stock owned by Lion Partners
Company L.P. ("Lion Partners"), (ii) 50,000 shares of Common Stock
owned by Quincy Partners and (iii) presently exercisable options to
purchase 25,782 shares of Common Stock held by Mr. Sutherland. Mr.
93
<PAGE>
Sutherland is the sole stockholder of Sans Peur Corporation, which is
the sole general partner of Quincy Partners. Mr. Sutherland is the sole
beneficial holder of Quincy Partners. Quincy Partners is the sole
general partner of Lion Partners and is entitled to 20% of the profits
of Lion Partners, including those derivable from the Merger (which 20%
profits interest will result in receipt of approximately $1,000,000 by
Quincy Partners), Lion Partners was formed for the purpose of investing
in the Company and its sole asset consists of shares of Common Stock.
(2) Includes (i) 1,495,184 shares of Common Stock owned by Lion Partners
and (ii) 50,000 shares of Common Stock owned by Quincy Partners. Sans
Peur Corporation is the sole general partner of Quincy Partners, which
is the sole general partner of Lion Partners.
(3) Includes (i) 1,495,184 shares of Common Stock owned by Lion Partners
and (ii) 50,000 shares of Common Stock owned directly by Quincy
Partners. Quincy Partners is the sole general partner of Lion Partners.
(4) Includes presently exercisable options to purchase 57,251 shares of
Common Stock at $1.40 per share and 70,900 shares of Common Stock at
$6.00 per share. Mr. Lawson purchased 3,000 shares of Common Stock on
May 2, 1996, at a price of $6.00 per share.
(5) Includes presently exercisable options to purchase 32,210 shares of
Common Stock at $6.00 per share. Mr. Belardi purchased 1,000 shares
of Common Stock on May 2, 1996, at a price of $6.00 per share.
(6) Includes presently exercisable options to purchase shares of Common
Stock at $6.00 per share.
(7) Does not include (i) 150,000 shares of Common Stock owned directly by
Weston Presidio Offshore Capital C.V. or (ii) shares of Common Stock
attributable to a 16.67% limited partnership interest in Lion Partners
owned by Weston Presidio Offshore Capital C.V. Mr. von Schroeter is a
limited partner of Weston Presidio Management LP, a general partner of
Weston Presidio Offshore Capital C.V.
(8) Does not include shares of Common Stock attributable to a 4.76%
limited partnership interest in Lion Partners owned by Canbo
Partners, of which Mr. Peck is the general partner.
(9) Does not include shares of Common Stock attributable to his 1.19%
limited partnership interest in Lion Partners.
(10) Does not include (i) 25,000 shares of Common Stock owned directly by
Northwood Ventures LLC, a limited liability company of which Mr. Wilson
is a special member, or (ii) shares of Common Stock attributable to a
16.67% limited partnership interest in Lion Partners by Northwood
Ventures LLC.
94
<PAGE>
(11) Includes presently exercisable options to purchase 216,205 shares of
Common Stock held by the following persons: Donald J. Sutherland
(25,782); Charles E. Lawson, Jr. (128,151); Patrick E. Belardi
(32,210); Leo Orlandini (12,890); David Finn (8,586) and Robert Covert
(8,586).
95
<PAGE>
INDEPENDENT PUBLIC ACCOUNTANTS
The consolidated financial statements of the Company as of and for the
three years ended September 30, 1997, included in this Proxy Statement, have
been audited by Arthur Andersen LLP, independent public accountants, as stated
in their reports appearing herein. A representative of Arthur Andersen LLP will
be at the Special Meeting to answer questions by shareholders and will have the
opportunity to make a statement, if so desired.
OTHER MATTERS
At the time of preparation of this Proxy Statement, the Board knows of
no other matters which will be acted upon at the Special Meeting other than the
approval of the Merger Agreement and the transactions contemplated thereby. If
any other matters are presented for action at the Special Meeting or at any
adjournment or adjournments thereof, it is intended that the proxies will be
voted with respect thereto in accordance with the best judgment and in the
discretion of the proxy holders.
1999 ANNUAL MEETING OF STOCKHOLDERS
The Company does not plan to hold an annual meeting of stockholders
during 1999 unless the Merger is not consummated. If the Merger is not
consummated, stockholder proposals must have been received by the Secretary of
the Company in a timely manner in order to be considered for inclusion in the
proxy materials for the Company's 1999 Annual Meeting of Stockholders.
96
<PAGE>
THE LION BREWERY, INC.
INDEX TO FINANCIAL STATEMENTS
Page No.
Report of Independent Public Accountants
dated November 21, 1997 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
Report of Independent Public Accountants
dated November 21, 1996 F-15
Financial Statements:
Balance Sheets - September 30, 1996 and 1995 F-16
Statements of Income for the Years Ended
September 30, 1996 and 1995 F-17
Statements of Shareholders' Equity for the
Years Ended September 30, 1996 and 1995 F-18
Statements of Cash Flows for the Years Ended
September 30, 1996 and 1995 F-19
Notes to Financial Statements F-20
Interim Financial Statements:
Balance Sheets - June 30, 1998 (unaudited)
and September 30, 1997 F-27
Statements of Income for the Nine Months
Ended June 30, 1998 (unaudited) and
June 30, 1997 (unaudited) F-28
Statements of Cash Flows for the Nine Months
Ended June 30, 1998 (unaudited) and
June 30, 1997 (unaudited) F-29
Notes to Financial Statements F-30
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
Prepaid expenses and other assets 209,000 190,000
------------ ------------
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
Other assets 4,000 4,000
------------ ------------
Total Assets $ 18,467,000 $ 15,954,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,986,000 $ 1,663,000
Accrued expenses 1,069,000 839,000
Refundable deposits 250,000 205,000
Income taxes payable 380,000 178,000
------------ ------------
Total current liabilities 3,685,000 2,885,000
Net pension liability 341,000 243,000
Deferred income taxes 67,000 206,000
------------ ------------
Total liabilities 4,093,000 3,334,000
------------ ------------
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
income taxes (120,000) (42,000)
Retained earnings 3,843,000 2,011,000
------------ ------------
Total shareholders' equity 14,374,000 12,620,000
------------ ------------
Total liabilities and shareholders'
equity $ 18,467,000 $ 15,954,000
============ ============
The accompanying notes to financial statements are an integral part of
these balance sheets.
F-3
<PAGE>
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:
Delivery 831,000 824,000
Selling, advertising and
promotional expenses 1,439,000 1,240,000
General and administrative 1,410,000 1,373,000
------------ ------------
3,680,000 3,437,000
------------ ------------
Operating income 3,090,000 3,063,000
Interest (income) expense and
amortization of debt discount, net (124,000) 520,000
------------ ------------
Income before provision for income
taxes and extraordinary item 3,214,000 2,543,000
Provision for income taxes 1,382,000 1,125,000
------------ ------------
Income before extraordinary
item 1,832,000 1,418,000
Extraordinary item, net of income
tax benefit of $228,000 0 322,000
------------ ------------
Net income 1,832,000 1,096,000
Warrant accretion 0 89,000
------------ ------------
Net income available to common
shareholders $ 1,832,000 $ 1,007,000
============ ============
Income per share before
extraordinary item $ 0.47 $ 0.47
Extraordinary item - loss per
share 0.00 (0.11)
------------ ------------
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.
F-4
<PAGE>
THE LION BREWERY, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996
Common Stock
---------------------
Shares Amount
--------- --------
Balance, September 30, 1995 1,851,183 $19,000
Accretion of warrants -- --
Conversion of warrants 291,565 3,000
Proceeds of Initial Public
Offering, net of costs 1,875,000 18,000
Repurchase of common stock (132,696) (1,000)
Adjustment to reflect minimum
pension liability, net of
deferred taxes -- --
Net income -- --
---------- --------
Balance, September 30, 1996 3,885,052 39,000
Adjustment to reflect minimum
pension liability net of
deferred taxes -- --
Net income -- --
---------- --------
Balance, September 30, 1997 3,885,052 $39,000
========== ========
Additional
Paid-in Pension Retained
Capital Liability Earnings Total
----------- --------- ---------- -----------
Balance,
September 30,
1995 $1,304,000 $(10,000) $1,004,000 $2,317,000
Accretion of
warrants -- -- (89,000) (89,000)
Conversion of
warrants 809,000 -- -- 812,000
Proceeds of
Initial
Public
Offering,
net of costs 9,448,000 -- -- 9,466,000
Repurchase of
common stock (949,000) -- -- (950,000)
Adjustment to
reflect
minimum
pension
liability,
net of
deferred
taxes -- (32,000) -- (32,000)
Net income -- -- 1,096,000 1,096,000
---------- --------- ---------- -----------
Balance,
september 30,
1996 10,612,000 (42,000) 2,011,000 12,620,000
Adjustment to
reflect
minimum
pension
liability
net of
deferred
taxes -- (78,000) -- (78,000)
Net income -- -- 1,832,000 1,832,000
----------- --------- ---------- -----------
Balance,
September 30,
1997 $10,612,000 $(120,000) $3,843,000 $14,374,000
=========== ========= ========== ===========
The accompanying notes to financial statements are an integral part of
these statements.
F-5
<PAGE>
THE LION BREWERY, INC.
STATEMENTS OF CASH FLOWS
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)
Pension liability 20,000 (7,000)
---------- ----------
Net cash provided by operating
activities 2,741,000 2,689,000
---------- ----------
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
activities 0 211,000
---------- ----------
Net increase in cash and cash
equivalents 1,192,000 1,992,000
Cash and cash equivalents,
beginning of year 1,992,000 0
---------- ----------
Cash and cash equivalents, end of
year $3,184,000 $1,992,000
========== ==========
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.
F-6
<PAGE>
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-7
<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-8
<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-9
<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-10
<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-11
<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-12
<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-13
<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-14
<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-15
<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, 1996 and 1995, 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, 1996 and 1995, and the results of its operations and
its cash flows for the years then ended in conformity with generally
accepted accounting principles.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
New York, New York
November 21, 1996
F-16
<PAGE>
THE LION BREWERY, INC.
BALANCE SHEETS
SEPTEMBER 30, 1996 AND 1995
1996 1995
---------- -----------
ASSETS
Current assets:
Cash and cash equivalents $1,992,000 $ 0
Accounts receivable, less allowance
for doubtful accounts of $157,000
and $129,000 at September 30, 1996
and 1995, respectively 2,001,000 2,476,000
Inventories 2,128,000 2,003,000
Prepaid expenses and other assets 190,000 277,000
------------ -----------
Total current assets 6,311,000 4,756,000
Property, plant & equipment, net of
accumulated depreciation of $1,684,000
and $1,122,000 at September 30, 1996
and 1995, respectively 3,600,000 3,254,000
Goodwill, net of accumulated
amortization of $475,000 and
$311,000 at September 30, 1996
and 1995, respectively 6,039,000 6,203,000
Deferred financing costs and other
assets, net of accumulated
amortization of $144,000
at September 30, 1995 4,000 228,000
---------- -----------
Total Assets $15,954,000 $14,441,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 0 $ 1,745,000
Accounts payable 1,663,000 1,978,000
Accrued expenses 839,000 478,000
Refundable deposits 205,000 171,000
Income taxes payable 178,000 330,000
----------- -----------
Total current liabilities 2,885,000 4,702,000
Long-term debt, less current portion 0 6,131,000
Net pension liability 243,000 218,000
Deferred income taxes 206,000 351,000
----------- -----------
Total liabilities 3,334,000 11,402,000
----------- ------------
Warrants 0 722,000
----------- ------------
Shareholders' equity:
Common stock, $.01 par value;
10,000,000 shares authorized;
3,885,052 and 1,851,183 shares
issued and outstanding at September
30, 1996 and 1995, respectively 39,000 19,000
Additional paid-in capital 10,612,000 1,304,000
Adjustment to reflect minimum
pension liability, net of
deferred income taxes (42,000) (10,000)
Retained earnings 2,011,000 1,004,000
----------- ------------
Total shareholders' equity 12,620,000 2,317,000
----------- ------------
Total liabilities and
shareholders' equity $ 15,954,000 $ 14,441,000
============ ============
The accompanying notes to financial statements are an integral part of
these balance sheets.
F-17
<PAGE>
THE LION BREWERY, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995
Year ended September 30,
------------------------
1996 1995
--------- ---------
Gross sales $26,983,000 $25,175,000
Less excise taxes 544,000 382,000
---------- -----------
Net sales 26,439,000 24,793,000
Cost of sales 19,939,000 18,834,000
----------- -----------
Gross profit 6,500,000 5,959,000
----------- -----------
Operating expenses:
Delivery 824,000 827,000
Selling, advertising and
promotional expenses 1,240,000 782,000
General and administrative 1,373,000 1,336,000
----------- -----------
3,437,000 2,945,000
----------- -----------
Operating income 3,063,000 3,014,000
Interest expense and amortization
of debt discount, net 520,000 1,042,000
----------- -----------
Income before provision for income
taxes and extraordinary item 2,543,000 1,972,000
Provision for income taxes 1,125,000 921,000
----------- -----------
Income before extraordinary
item 1,418,000 1,051,000
Extraordinary item, net of income
tax benefit of $228,000 (322,000) 0
----------- -----------
Net income 1,096,000 1,051,000
Warrant accretion 89,000 300,000
----------- -----------
Net income available to common
shareholders $ 1,007,000 $ 751,000
=========== ===========
Income per share before extraordinary
item $ 0.47 $ 0.40
Extraordinary item - loss per share (0.11) (0.00)
----------- -----------
Net income per share $ 0.36 $ 0.40
=========== ===========
Shares used in per share calculation 2,835,000 1,898,000
=========== ===========
The accompanying notes to financial statements are an integral part of
these statements.
F-18
<PAGE>
THE LION BREWERY, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995
Common Stock
-----------------------------------
Shares Amount
--------- --------------
Balance, September 30, 1994..... 1,851,183 $ 19,000
Accretion of warrants..........
Adjustment to reflect
minimum pension liability,
net of deferred taxes........
Net income.....................
--------- ---------
Balance, September 30, 1995..... 1,851,183 19,000
Accretion of warrants..........
Conversion of warrants......... 291,565 3,000
Proceeds of Initial Public
Offering, net of costs....... 1,875,000 18,000
Repurchase of common stock..... (132,696) (1,000)
Adjustment to reflect
minimum pension liability,
net of deferred taxes........
Net income.....................
--------- ---------
Balance, September 30, 1996..... 3,885,052 $ 39,000
========= =========
Additional
Paid-in Pension
Capital Liability
----------- -----------
Balance, September 30, 1994..... $ 1,304,000 $ (54,000)
Accretion of warrants.........
Adjustment to reflect minimum
pension liability, net of
deferred taxes.............. 44,000
Net income....................
----------- ---------
Balance, September 30, 1995..... 1,304,000 (10,000)
Accretion of warrants.........
Conversion of warrants........ 809,000
Proceeds of Initial Public
Offering, net of costs...... 9,448,000
Repurchase of common stock.... (949,000)
Adjustment to reflect minimum
pension liability, net of
deferred taxes............. (32,000)
Net income...................
----------- ---------
Balance, September 30, 1996.... $10,612,000 $ (42,000)
=========== =========
Retained
Earnings Total
----------- -----------
Balance, September 30, 1994..... $ 253,000 $ 1,522,000
Accretion of warrants......... (300,000) (300,000)
Adjustment to reflect minimum
pension liability, net of
deferred taxes.............. 44,000
Net income.................... 1,051,000 1,051,000
----------- -----------
Balance, September 30, 1995..... 1,004,000 2,317,000
Accretion of warrants......... (89,000) (89,000)
Conversion of warrants........ 812,000
Proceeds of Initial Public
Offering, net of costs...... 9,466,000
Repurchase of common stock.... (950,000)
Adjustment to reflect minimum
pension liability, net of
deferred taxes.............. (32,000)
Net income.................... 1,096,000 1,096,000
----------- -----------
Balance, September 30, 1996..... $ 2,011,000 $12,620,000
=========== ===========
The accompanying notes to financial statements are an integral part of
these statements.
F-19
<PAGE>
THE LION BREWERY, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995
Year ended September 30,
-------------------------
1996 1995
---------- -----------
Cash flows from operating activities:
Net income.............................. $1,096,000 $1,051,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Extraordinary item.................... 550,000 0
Depreciation and amortization......... 830,000 947,000
Bad debt expense...................... 12,000 36,000
Provision for inventory reserve....... 75,000 45,000
Benefit for deferred income taxes..... (145,000) (132,000)
Loss on disposal of equipment......... 0 2,000
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable................. 463,000 153,000
Inventories......................... (200,000) (212,000)
Prepaid expenses and other assets... 87,000 23,000
Increase (decrease) in:
Accounts payable, accrued expenses and
refundable deposits................ 80,000 248,000
Income taxes payable................ (152,000) 330,000
Pension liability................... (7,000) (16,000)
---------- ----------
Net cash provided by operating
activities.......................... 2,689,000 2,475,000
---------- ----------
Cash flows from investing activities:
Proceeds from sale of equipment....... 0 12,000
Purchase of equipment................. (908,000) (319,000)
---------- ----------
Net cash used in investing activities (908,000) (307,000)
---------- ----------
Cash flows from financing activities:
Net proceeds from sale of common stock 9,466,000 0
Repurchase of common stock............ (950,000) 0
Deferred financing costs.............. 0 (25,000)
Issuance of long term debt............ 0 500,000
Net reductions in line of credit...... (721,000) (1,860,000)
Repayment of long term debt........... (7,584,000) (924,000)
---------- ----------
Net cash provided by (used in) financing
activities.......................... 211,000 (2,309,000)
---------- ----------
Net increase (decrease) in cash and cash
equivalents......................... 1,992,000 (141,000)
Cash and cash equivalents. beginning of
year.................................. 0 141,000
---------- ----------
Cash and cash equivalents, end of year.. $1,992,000 $ 0
========== ==========
Supplementary disclosure of cash flow information:
Cash paid for:
Interest............................ $ 516,000 $ 951,000
========== ==========
Income taxes........................ $1,183,000 $ 672,000
========== ==========
The accompanying notes to financial statements are an integral part of
these statements.
F-20
<PAGE>
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., 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
also brews beer for sale under traditional Company-owned labels for the
local market at popular prices.
The Company was incorporated in Pennsylvania on April 5, 1933. On October
4, 1993, Lion Partners Company, L.P. (the Partnership) acquired shares of
common stock of the Company for $2,100,000. Prior to this transaction, the
Partnership had no affiliation with the Company. The Company then redeemed
shares of common stock for $6,983,000 (of which $2,500,000 was payable in a
note), including $1,008,000 of direct acquisition costs. After these
transactions, the Partnership owned 81% of the common stock of the Company.
The Company accounted for these transactions as a purchase by the
Partnership whereby the cost of acquiring 81% of the Company was pushed
down to establish a new accounting basis which is reflected in the
accompanying financial statements. The Company allocated the cost of the
acquisition of 81% of the Company to the assets acquired and liabilities
assumed based on their fair values and carried over 19% of the historical
cost at the date of the acquisition. The purchase price was $8,677,000 and
was allocated to tangible assets ($8,782,000) and liabilities ($6,619,000).
The excess of the purchase price over net assets acquired of $6,514,000 was
assigned to goodwill.
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
date purchase 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).
F-21
<PAGE>
THE LION BREWERY, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. The new accounting
pronouncement on impairment of long lived assets had no impact on the
Company's financial statements. Estimated useful lives for the assets are
as follows:
Years
-----
Buildings 20
Machinery and equipment 3-10
Kegs and bottles 3-7
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. The
Company continually evaluates the remaining estimated useful lives and the
recoverability of its intangible assets utilizing the undiscounted cash
flow method.
Product and Customer Concentrations
The sale of malta, beer and soft drinks has accounted for all of the
Company's sales, with malta accounting for 68% and 75% for the years ended
September 30, 1996 and 1995. The Company's top three customers accounted
for 60% and 68% of sales in fiscal 1996 and 1995. Accounts receivable from
these three customers totaled $1,712,000 and $1,831,000 at September 30,
1996 and 1995. The Company's largest customer accounted for 27% and 30% of
sales in fiscal 1996 and 1995. 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.
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-22
<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.
Stock spilt
In January 1996, the Company's Board of Directors amended the Company's
Articles of Incorporation to effect a 3,091.33 for 1 stock split. All
common shares and per share amounts in the accompanying financial
statements have been adjusted retroactively to give effect to the stock
split.
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.
Stock Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, "Accounting for Stock-Based Compensation," 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 the pro forma footnote disclosures.
3. INVENTORIES
Inventories consist of the following:
1996 1995
---------- ----------
Raw materials $ 163,000 $ 176,000
Finished goods 673,000 663,000
Supplies 1,292,000 1,164,000
----------- ----------
$2,128,000 $2,003,000
========== ==========
F-23
<PAGE>
THE LION BREWERY, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
1996 1995
--------- ----------
Land and building $ 1,024,000 $ 1,014,000
Machinery and equipment 4,038,000 3,167,000
Kegs and bottles 222,000 195,000
----------- ----------
5,284,000 4,376,000
Less accumulated
depreciation 1,684,000 1,122,000
----------- ----------
$ 3,600,000 $3,254,000
=========== ==========
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
1996 1995
---------- ---------
Payroll and related accruals $ 427,000 $ 346,000
Other accruals 412,000 132,000
---------- --------
$ 839,000 $ 478,000
========= =========
6. INCOME TAXES
The provision for income taxes is as follows:
1996 1995
--------- ----------
Current:
Federal $ 786,000 $ 755,000
State 256,000 298,000
---------- ----------
1,042,000 1,053,000
---------- ----------
Deferred:
Federal (105,000) (102,000)
State (40,000) (30,000)
---------- ----------
(145,000) (132,000)
---------- ----------
$ 897,000 $ 921,000
========== ==========
F-24
<PAGE>
THE LION BREWERY, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
6. INCOME TAXES (CONTINUED)
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:
1996 1995
---- -----
United States statutory rate 35% 35%
State taxes (net of federal tax 7 9
benefit)
Nondeductible expenses - goodwill 3 3
amortization --- ---
45% 47%
=== ===
Components of the Company's deferred tax balances are as follows:
1996 1995
--------- ---------
Deferred tax assets:
Benefit accruals $ 235,000 $ 160,000
Accounts receivable 71,000 53,000
Inventories 96,000 46,000
Other - 18,000
--------- ---------
402,000 277,000
--------- ---------
Deferred tax liabilities:
Property, plant and
equipment 559,000 628,000
Other 49,000 -
--------- ---------
608,000 628,000
--------- ---------
$ 206,000 $ 351,000
========= =========
7. DEBT
Debt at September 30, 1995 consists of the following:
1995
----------
Revolving credit loan $ 721,000
Term loan 1,019,000
Senior subordinate notes 3,631,000
Junior subordinate notes 2,500,000
Other 5,000
---------
7,876,000
Current portion 1,745,000
----------
$6,131,000
==========
F-25
<PAGE>
THE LION BREWERY, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
7. DEBT (CONTINUED)
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.
The Company is currently negotiating a $5,000,000 revolving line of credit
and a $2,500,000 revolving equipment line of credit. Both facilities would
be unsecured and interest will be paid monthly based upon either the Bank's
prime rate minus 1/2%, LIBOR plus 75 basis points or the Bank's offered
rate. There can be no assurance that such agreement will be finalized.
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:
1996 1995
-------- --------
Service cost - benefits earned
during the period $ 30,000 $ 24,000
Interest cost on projected
benefit obligation 36,000 36,000
Actual return on plan assets (23,000) (39,000)
Net amortization and deferral 19,000 38,000
Effect of settlement - 15,000
--------- --------
Net pension expense $ 62,000 $ 74,000
========= ========
Assumptions used in the accounting for the defined benefit plan are as
follows as of September 30, 1996 and 1995:
Weighted average discount rate 8.5%
Expected long-term rate of
return on assets 9.0
Average salary increase 5.0
F-26
<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:
1996 1995
--------- ---------
Actuarial present value of benefit
obligation:
Accumulated benefit
obligation (including
vested benefits of $392,000
and $327,000) $ 403,000 $ 340,000
--------- ---------
Projected benefit obligation 438,000 413,000
Plan assets at fair value 160,000 122,000
--------- ---------
Projected benefit obligation
in excess of plan assets (278,000) (291,000)
Unrecognized net loss 111,000 87,000
Adjustment required to
recognize minimum liability (76,000) (14,000)
--------- ---------
Net pension liability
recognized in balance sheet $ 243,000 $ 218,000
========= =========
The Company also participates in a multi-employer pension plan which
provides defined benefits to union employees. Contributions are based on a
fixed amount per hour worked. Pension cost aggregated $162,000 and $142,000
for the years ended September 30, 1996 and 1995, respectively.
9. COMMITMENTS AND CONTINGENCIES
The Company leases warehouse facilities and equipment under noncancelable
operating leases. Future minimum lease payments under these leases are:
1997 $234,000
1998 246,000
1999 187,000
2000 136,000
2001 102,000
Rent expense for all leased facilities amounted to $294,000 in 1996 and
$249,000 in 1995.
The Company has entered into employment agreements with the Company's
President and Chief Financial Officer at annual base salaries aggregating
$235,000. 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.
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.
F-27
<PAGE>
THE LION BREWERY, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
10. 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 238,431 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.
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 provides that the noteholders may put these
warrants to the Company and accordingly, the warrants were accreted to the
estimated redemption price. During fiscal 1996 and 1995, accretion of
$89,000 and $300,000, respectively, 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-28
<PAGE>
THE LION BREWERY, INC.
NOTES TO THE FINANCIAL STATEMENTS - (CONTINUED)
12. PUBLIC OFFERING AND PREFERRED STOCK AUTHORIZATION (CONTINUED)
In January 1996, the Company's Board of Directors authorized a change in
the Company's authorized capitalization to 10,000,000 shares of common
stock and 1,000,000 shares of undesignated preferred shares.
F-29
<PAGE>
THE LION BREWERY, INC.
BALANCE SHEETS
June 30, September 30,
1998 1997
----------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 3,847,000 $ 3,184,000
Accounts receivable, less allowance for
doubtful accounts of $215,000 at
June 30, 1998 and $186,000 at
September 30, 1997 3,152,000 2,444,000
Inventories 2,423,000 2,271,000
Prepaid expenses and other assets 75,000 209,000
----------- -----------
Total current assets 9,497,000 8,108,000
Property, plant & equipment, net of
accumulated depreciation of $2,902,000
at June 30, 1998 and $2,352,000 at
September 30, 1997 4,693,000 4,481,000
Goodwill, net of accumulated amortization of
$763,000 at June 30, 1998 and $640,000 at
September 30, 1997 5,751,000 5,874,000
Other assets 4,000 4,000
----------- -----------
Total Assets $19,945,000 $18,467,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,941,000 $ 1,986,000
Accrued expenses 1,237,000 1,069,000
Refundable deposits 311,000 250,000
Income taxes payable 292,000 380,000
----------- -----------
3,781,000 3,685,000
Net pension liability 341,000 341,000
Deferred income taxes 54,000 67,000
----------- -----------
Total liabilities 4,176,000 4,093,000
----------- -----------
Stockholders' equity:
Common stock, $.01 par value; 10,000,000
shares authorized; 3,885,051 issued and
outstanding 39,000 39,000
Preferred stock, $.01 par value; 1,000,000
shares authorized; no shares issued or
outstanding 0 0
Additional paid-in capital 10,612,000 10,612,000
Adjustment to reflect minimum pension
liability, net of deferred income taxes (120,000) (120,000)
Retained earnings 5,238,000 3,843,000
----------- -----------
Total stockholders' equity 15,769,000 14,374,000
----------- -----------
Total liabilities and stockholders' equity $19,945,000 $18,467,000
=========== ===========
The accompanying notes to financial statements are an integral part
of these balance sheets.
F-30
<PAGE>
THE LION BREWERY, INC.
STATEMENTS OF INCOME
(Unaudited)
Three Months Ended June 30, Nine Months Ended June 30,
--------------------------- --------------------------
1998 1997 1998 1997
---- ---- ---- ----
Gross sales $ 7,897,000 $ 7,747,000 $20,428,000 $19,552,000
Less excise taxes 141,000 140,000 308,000 353,000
----------- ----------- ----------- -----------
Net sales 7,756,000 7,607,000 20,120,000 19,199,000
Cost of sales 5,878,000 5,636,000 15,277,000 14,434,000
----------- ----------- ----------- -----------
Gross profit 1,878,000 1,971,000 4,843,000 4,765,000
----------- ----------- ----------- -----------
Operating expenses:
Delivery 262,000 239,000 674,000 601,000
Selling, advertising
and promotional
expenses 268,000 319,000 858,000 1,139,000
General and
administrative 383,000 369,000 1,100,000 1,073,000
----------- ----------- ----------- -----------
913,000 927,000 2,632,000 2,813,000
----------- ----------- ----------- -----------
Operating income 965,000 1,044,000 2,211,000 1,952,000
Interest income 58,000 27,000 154,000 86,000
----------- ----------- ----------- -----------
Income before provision
for income taxes 1,023,000 1,071,000 2,365,000 2,038,000
Provision for
income taxes 415,000 449,000 970,000 884,000
----------- ----------- ----------- -----------
Net income $ 608,000 $ 622,000 $ 1,395,000 $ 1,154,000
=========== =========== =========== ===========
Net income per share:
Basic $ 0.16 $ 0.16 $ 0.36 $ 0.30
=========== =========== =========== ===========
Diluted $ 0.16 $ 0.16 $ 0.36 $ 0.30
=========== =========== =========== ===========
Shares used in the
per share
calculation:
Basic 3,885,000 3,885,000 3,885,000 3,885,000
=========== =========== =========== ===========
Diluted 3,906,000 3,905,000 3,906,000 3,905,000
=========== =========== =========== ===========
The accompanying notes to financial statements are an integral part
of these statements.
F-31
<PAGE>
THE LION BREWERY, INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 1998 AND 1997
(Unaudited)
1998 1997
----------- -----------
Cash flows from operating activities:
Net income $ 1,395,000 $ 1,154,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 673,000 613,000
Bad debt expense 29,000 9,000
Provision for inventory reserve 18,000 18,000
Benefit for deferred income taxes (13,000) (17,000)
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (737,000) (711,000)
Inventories (170,000) (339,000)
Prepaid expenses and other assets 134,000 67,000
Increase (decrease) in:
Accounts payable, accrued expenses
and refundable deposits 184,000 163,000
Income taxes payable (88,000) 126,000
----------- -----------
Net cash provided by operating
activities 1,425,000 1,083,000
Cash flows from investing activities:
Purchase of equipment (762,000) (1,303,000)
----------- -----------
Net increase (decrease) in cash
and cash equivalents 663,000 (220,000)
Cash and cash equivalents, beginning of year 3,184,000 1,992,000
----------- -----------
Cash and cash equivalents, end of period $ 3,847,000 $ 1,772,000
=========== ===========
Supplementary disclosure of cash flow
information:
Cash paid for:
Income taxes $ 1,071,000 $ 797,000
=========== ===========
The accompanying notes to financial statements are an integral part
of these statements.
F-32
<PAGE>
THE LION BREWERY, INC.
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The financial statements and accompanying information as of June 30, 1998
and for the three and nine month periods ended June 30, 1998 and 1997 are
unaudited but, in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments and accruals) which the
Company considers necessary for a fair presentation of the financial
position of the Company at such dates and the operating results and cash
flows for those periods. Results for the interim periods are not necessarily
indicative of results for the entire year. The interim financial statements
and the related notes should be read in conjunction with the notes to the
financial statements of the Company included in the Form 10-KSB for the year
ended September 30, 1997.
2. NET INCOME PER SHARE:
The Company has adopted Statement of Financial Accounting Standards SFAS No.
128, "Earnings Per Share" ("Statement 128"). Statement 128 requires the
presentation of basic earnings per share and diluted earnings per share.
Basic earnings per common share was calculated based upon net income divided
by the weighted average number of common shares outstanding during the
period. Diluted earnings per common share was calculated based upon net
income divided by the weighted average number of common shares outstanding,
adjusted for the incremental dilution of outstanding stock options during
the period. (Common share equivalents of outstanding dilutive stock options
were 21,000 and 20,000 for the three and nine month periods ending June 30,
1998 and June 30, 1997, respectively.) Diluted earnings per common share
excludes the impact of certain stock options as they are antidilutive. Basic
and diluted earnings per common share for the period ended June 30, 1997,
are the same amounts as the Company's historical presentation of net income
per share.
F-33
<PAGE>
ANNEX A
-------
AGREEMENT AND PLAN OF MERGER
<PAGE>
AGREEMENT AND PLAN OF MERGER
BETWEEN
MALT ACQUIRING, INC.
AND
THE LION BREWERY, INC.
DATED SEPTEMBER 17, 1998
<PAGE>
TABLE OF CONTENTS
PAGE
----
ARTICLE 1
The Merger . . . . . . . . . . . -1-
1.1 The Merger . . . . . . . . . . . . . . . . . . . . -1-
----------
1.2 Effective Time . . . . . . . . . . . . . . . . . . -1-
--------------
1.3 Effects of the Merger . . . . . . . . . . . . . . . -2-
---------------------
1.4 Articles of Incorporation and Bylaws; Directors
-----------------------------------------------
and Officers . . . . . . . . . . . . . . . . . . . -2-
------------
1.5 The Closing . . . . . . . . . . . . . . . . . . . . -2-
-----------
ARTICLE 2
Effect of the Merger on Securities
of the Company . . . . . . . . . . . . . . . . . . . . . . . -2-
2.1 Purchaser Stock . . . . . . . . . . . . . . . . . . -2-
---------------
2.2 Conversion of Common Stock . . . . . . . . . . . . -3-
--------------------------
2.3 Exchange of Certificates . . . . . . . . . . . . . -4-
------------------------
2.4 Closing of Transfer Books . . . . . . . . . . . . . -5-
-------------------------
2.5 No Further Ownership Rights in Common Stock . . . . -5-
-------------------------------------------
ARTICLE 3
Representations and Warranties of the Company . . . . . . . . -5-
3.1 Organization, Standing and Power . . . . . . . . . -5-
--------------------------------
3.2 Capital Structure . . . . . . . . . . . . . . . . . -6-
-----------------
3.3 Subsidiaries . . . . . . . . . . . . . . . . . . . -6-
------------
3.4 Other Interests . . . . . . . . . . . . . . . . . . -7-
---------------
3.5 Authority; Non-Contravention . . . . . . . . . . . -7-
----------------------------
3.6 SEC Documents . . . . . . . . . . . . . . . . . . . -8-
-------------
3.7 Absence of Certain Events . . . . . . . . . . . . . -9-
-------------------------
3.8 Litigation . . . . . . . . . . . . . . . . . . . . -9-
----------
3.9 Compliance with Applicable Law . . . . . . . . . . -9-
------------------------------
3.10 Employee Plans . . . . . . . . . . . . . . . . . -10-
--------------
3.11 Employment Relations and Agreements . . . . . . . -12-
-----------------------------------
3.12 Limitation on Business Conduct . . . . . . . . . -12-
------------------------------
3.13 Title to, and Sufficiency and Condition of,
-------------------------------------------
Assets . . . . . . . . . . . . . . . . . . . . . -12-
------
3.14 Environmental Laws and Regulations . . . . . . . -13-
----------------------------------
3.15 Patents, Trademarks, Copyrights . . . . . . . . . -14-
-------------------------------
3.16 Taxes . . . . . . . . . . . . . . . . . . . . . . -14-
-----
3.17 Brokers . . . . . . . . . . . . . . . . . . . . . -15-
-------
<PAGE>
ARTICLE 4
Representations and Warranties of
the Purchaser . . . . . . . . . . . . . . . . . . . . . . . -15-
4.1 Organization, Standing and Power . . . . . . . . -15-
--------------------------------
4.2 Authority; Non-Contravention . . . . . . . . . . -16-
----------------------------
4.3 Financing . . . . . . . . . . . . . . . . . . . . -17-
---------
4.4 Brokers . . . . . . . . . . . . . . . . . . . . . -17-
-------
ARTICLE 5
Covenants . . . . . . . . . . . . . . . . . . . . . . . . . -17-
5.1 Alternative Proposals . . . . . . . . . . . . . . -17-
---------------------
5.2 Interim Operations of the Company . . . . . . . . -18-
---------------------------------
5.3 Meeting of the Company's Stockholders . . . . . . -20-
-------------------------------------
5.4 Filings, Other Action . . . . . . . . . . . . . . -20-
---------------------
5.5 Inspection of Records . . . . . . . . . . . . . . -21-
---------------------
5.6 Publicity . . . . . . . . . . . . . . . . . . . . -21-
---------
5.7 Proxy Statement . . . . . . . . . . . . . . . . . -21-
---------------
5.8 Further Action . . . . . . . . . . . . . . . . . -22-
--------------
5.9 Expenses . . . . . . . . . . . . . . . . . . . . -22-
--------
5.10 Indemnification . . . . . . . . . . . . . . . . . -22-
---------------
5.11 Takeover Statute . . . . . . . . . . . . . . . . -23-
----------------
5.12 Conduct of Business by Purchaser Pending the
---------------------------------------------
Merger . . . . . . . . . . . . . . . . . . . . . -24-
------
5.13 Conveyance Taxes . . . . . . . . . . . . . . . . -24-
----------------
ARTICLE 6
Conditions to Merger . . . . . . . . . . . . . . . . . . . -25-
6.1 Conditions to Each Party's Obligation to Effect
-----------------------------------------------
the Merger . . . . . . . . . . . . . . . . . . . -25-
----------
6.2 Conditions to Obligation of Company to Effect the
-------------------------------------------------
Merger . . . . . . . . . . . . . . . . . . . . . -25-
------
6.3 Conditions to Obligation of Purchaser to Effect
-----------------------------------------------
the Merger . . . . . . . . . . . . . . . . . . . -27-
----------
ARTICLE 7
Termination . . . . . . . . . . . . . . . . . . . . . . . . -29-
7.1 Termination by Mutual Consent . . . . . . . . . . -29-
-----------------------------
7.2 Termination by Either Purchaser or Company . . . -29-
------------------------------------------
7.3 Termination by Company . . . . . . . . . . . . . -30-
----------------------
7.4 Termination by Purchaser . . . . . . . . . . . . -30-
------------------------
7.5 Effect of Termination and Abandonment . . . . . . -31-
-------------------------------------
7.6 Extension, Waiver. . . . . . . . . . . . . . . . -31-
-----------------
-ii-
<PAGE>
ARTICLE 8
General Provisions . . . . . . . . . . . . . . . . . . . . -32-
8.1 Nonsurvival of Representations, Warranties and
----------------------------------------------
Agreements . . . . . . . . . . . . . . . . . . . -32-
----------
8.2 Notices . . . . . . . . . . . . . . . . . . . . . -32-
-------
8.3 Assignment; Binding Effect . . . . . . . . . . . -32-
--------------------------
8.4 Entire Agreement . . . . . . . . . . . . . . . . -33-
----------------
8.5 Amendment . . . . . . . . . . . . . . . . . . . . -33-
---------
8.6 Governing Law . . . . . . . . . . . . . . . . . . -33-
-------------
8.7 Counterparts . . . . . . . . . . . . . . . . . . -33-
------------
8.8 Headings . . . . . . . . . . . . . . . . . . . . -33-
--------
8.9 Interpretation . . . . . . . . . . . . . . . . . -33-
--------------
8.10 Waivers . . . . . . . . . . . . . . . . . . . . . -33-
-------
8.11 Incorporation of Exhibits and Schedules . . . . . -33-
---------------------------------------
8.12 Severability . . . . . . . . . . . . . . . . . . -34-
------------
8.13 Confidentiality . . . . . . . . . . . . . . . . . -34-
---------------
8.14 Enforcement of Agreement . . . . . . . . . . . . -34-
------------------------
-iii-
<PAGE>
DEFINITIONS
Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Alternative Proposal . . . . . . . . . . . . . . . . . . . . 17
Articles of Merger . . . . . . . . . . . . . . . . . . . . . . 1
Certificates . . . . . . . . . . . . . . . . . . . . . . . . . 3
Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Closing Date . . . . . . . . . . . . . . . . . . . . . . . . . 2
Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . 1
Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Company SEC Documents . . . . . . . . . . . . . . . . . . . . . 8
Company Benefit Plans . . . . . . . . . . . . . . . . . . . . 10
Company Options . . . . . . . . . . . . . . . . . . . . . . . . 3
Company Permits . . . . . . . . . . . . . . . . . . . . . . . . 9
Department of State . . . . . . . . . . . . . . . . . . . . . . 1
Dissenting Shares . . . . . . . . . . . . . . . . . . . . . . . 3
ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Effective Time . . . . . . . . . . . . . . . . . . . . . . . . 1
Employment Agreements . . . . . . . . . . . . . . . . . . . . 12
Environmental Laws . . . . . . . . . . . . . . . . . . . . . 13
Exchange Act . . . . . . . . . . . . . . . . . . . . . . . . . 8
Governmental Entity . . . . . . . . . . . . . . . . . . . . . . 8
Hazardous Material . . . . . . . . . . . . . . . . . . . . . 13
Instrument . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Indemnified Parties . . . . . . . . . . . . . . . . . . . . . 23
Lawson Options . . . . . . . . . . . . . . . . . . . . . . . . 6
Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Material Adverse Change . . . . . . . . . . . . . . . . . . . . 6
Material Adverse Effect . . . . . . . . . . . . . . . . . . . . 6
Meeting of Stockholders . . . . . . . . . . . . . . . . . . . 21
Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Merger Consideration . . . . . . . . . . . . . . . . . . . . . 3
Multiemployer Plan . . . . . . . . . . . . . . . . . . . . . 11
Option Consideration . . . . . . . . . . . . . . . . . . . . . 3
Paying Agent . . . . . . . . . . . . . . . . . . . . . . . . . 4
PBCL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Pension Plan . . . . . . . . . . . . . . . . . . . . . . . . 10
Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . 6
Proxy Statement . . . . . . . . . . . . . . . . . . . . . . . 22
Purchaser . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Qualifying Alternative Proposal . . . . . . . . . . . . . . . 18
-iv-
<PAGE>
Releases . . . . . . . . . . . . . . . . . . . . . . . . . . 13
SEC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Secretary of State . . . . . . . . . . . . . . . . . . . . . 16
June 30 Balance Sheet . . . . . . . . . . . . . . . . . . . . 12
Stock Plans . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Surviving Corporation . . . . . . . . . . . . . . . . . . . . . 1
Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Tax Return . . . . . . . . . . . . . . . . . . . . . . . . . 15
-v-
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated
September 17, 1998, between MALT ACQUIRING, INC., a Pennsylvania
corporation ("Purchaser"), and THE LION BREWERY, INC., a
Pennsylvania corporation (the"Company").
RECITALS
--------
A. The Boards of Directors of the Purchaser and the
Company have approved, and deem it advisable and in the best
interests of their respective companies and stockholders to
consummate a merger (the "Merger") of Purchaser, with and into
the Company, wherein each issued and outstanding share of Common
Stock, par value $.01 per share, of the Company (the "Common
Stock"), except shares of Common Stock held by holders who comply
with the provisions of Pennsylvania law regarding the right of
stockholders to dissent from the Merger and require appraisal of
their shares of Common Stock, will be converted into the right to
receive $4.70 per share, in cash, without interest.
B. The Purchaser and the Company desire to make certain
representations, warranties, covenants and agreements in
connection with the transactions contemplated hereby.
NOW, THEREFORE, in consideration of the foregoing, and
of the representations, warranties, covenants and agreements
contained herein, the parties hereto hereby agree as follows:
ARTICLE 1
THE MERGER
1.1 The Merger. Upon the terms and subject to the
----------
conditions hereof, and in accordance with the Business
Corporation Law of Pennsylvania ("PBCL"), Purchaser shall be
merged with and into the Company at the Effective Time (as
hereinafter defined). Following the Merger, the separate
corporate existence of Purchaser shall cease and the Company
shall continue as the surviving corporation (the "Surviving
Corporation") and shall succeed to and assume all the rights and
obligations of Purchaser in accordance with the PBCL.
1.2 Effective Time. The Merger shall become effective when
--------------
Articles of Merger (the "Articles of Merger"), executed in
accordance with the relevant provisions of the PBCL, are accepted
for filing by the Department of State of the Commonwealth of
Pennsylvania (the "Department of State"). When used in this
Agreement, the term "Effective Time" shall mean the later of the
date and time at which the Articles of Merger are accepted for
filing by the Department of State or such later time established
by the Articles of Merger. The filing of the Articles of Merger
shall be made as soon as reasonably practicable (but not later
than the first business day) after the satisfaction or waiver of
the conditions to the Merger set forth herein.
1.3 Effects of the Merger. The Merger shall have the
---------------------
effects set forth in the PBCL.
<PAGE>
1.4 Articles of Incorporation and Bylaws; Directors and
---------------------------------------------------
Officers.
--------
(a) Subject to the terms of Section 5.10, the Articles
of Incorporation of the Company, as in effect immediately prior
to the Effective Time, shall be amended by the Articles of Merger
to make such changes regarding the capitalization of the
Surviving Corporation as Purchaser may request and, as so
amended, the Articles of Incorporation and the Bylaws of the
Company shall be the Articles of Incorporation and the Bylaws of
the Surviving Corporation until thereafter changed or amended as
provided therein or by applicable law.
(b) The directors of Purchaser at the Effective Time
shall, from and after the Effective Time, be the initial
directors of the Surviving Corporation until their successors
have been duly elected or appointed and qualified or until their
earlier death, resignation or removal, in accordance with the
Surviving Corporation's Articles of Incorporation and Bylaws.
(c) The officers of Purchaser at the Effective Time
and such other persons as designated by Purchaser shall, from and
after the Effective Time, be the initial officers of the
Surviving Corporation until their successors have been duly
elected or appointed and qualified or until their earlier death,
resignation or removal, in accordance with the Surviving
Corporation's Articles of Incorporation and Bylaws.
1.5 The Closing. Subject to the terms and conditions of
-----------
this Agreement, the closing of the transactions contemplated by
this Agreement (the "Closing") shall take place (a) at the
offices of Thelen Reid & Priest LLP, 40 West 57th Street, New
York, NY 10019, at 10:00 a.m., local time, on the first business
day following the day on which the last to be fulfilled or waived
of the conditions set forth in Article 6 shall be fulfilled or
waived in accordance herewith or (b) at such other time, date or
place as the Purchaser and the Company may agree. The date on
which the Closing occurs is hereinafter referred to as the
"Closing Date."
ARTICLE 2
EFFECT OF THE MERGER ON SECURITIES
OF THE COMPANY
2.1 Purchaser Stock. At the Effective Time, each share of
---------------
the common stock of Purchaser outstanding immediately prior to
the Effective Time shall be converted into and become one share
of common stock, par value $.01 per share, of the Surviving
Corporation, and each certificate theretofore representing any
such shares shall, without any action on the part of the holder
thereof, be deemed to represent the same number of shares of the
Surviving Corporation.
-2-
<PAGE>
2.2 Conversion of Common Stock.
--------------------------
(a) Subject to Sections 2.2(b) and 2.2(c), at the
Effective Time each issued and outstanding share of Common Stock
shall be converted into the right to receive $4.70, in cash,
without interest (the "Merger Consideration"). All such shares
of Common Stock, when so converted, shall cease to be outstanding
and shall be canceled and retired and shall cease to exist, and
each holder of a certificate or certificates (the "Certificates")
representing any such shares of Common Stock shall thereafter
cease to have any rights with respect thereto, except the right
to receive the Merger Consideration.
(b) Notwithstanding any provision of this Agreement to
the contrary, if required by the PBCL but only to the extent
required thereby, shares of Common Stock which are issued and
outstanding immediately prior to the Effective Time and which are
held by holders of such shares of Common Stock who have properly
exercised appraisal rights with respect thereto in accordance
with the PBCL (the "Dissenting Shares") will not be exchangeable
for the right to receive the Merger Consideration, and holders of
such shares of Common Stock will be entitled to receive payment
of the appraised value of such shares of Common Stock in
accordance with the provisions of the PBCL unless and until such
holders shall fail to perfect or shall effectively withdraw or
shall have lost their rights to appraisal and payment under the
PBCL. If, after the Effective Time, any such holder fails to
perfect or effectively withdraws or loses such right, such shares
of Common Stock will thereupon be treated as if they had been
converted into and have become exchangeable for, at the Effective
Time, the right to receive the Merger Consideration, without any
interest thereon. The Company will give the Purchaser prompt
notice of any demands received by the Company for appraisals of
shares of Common Stock. The Company shall not, except with the
prior written consent of Purchaser, make any payment with respect
to any demands for appraisal or offer to settle or settle any
such demands.
(c) At or prior to the Effective Time, the Company
shall have made arrangements, the effect of which shall be that
no shares of Common Stock or other capital stock of the Surviving
Corporation shall be issuable pursuant to options or warrants to
purchase shares, or securities convertible into shares, of Common
Stock ("Company Options"). The Company shall (i) cause each
Stock Plan (as defined in Section 3.2) to terminate as of the
Effective Time and (ii) grant no additional Company Options after
the date of this Agreement. The Company shall take all such
actions under the Stock Plans necessary so that each holder of a
Company Option shall be entitled to receive immediately after the
Effective Time, in cancellation and settlement of such Company
Option, for each share of Common Stock subject to such Company
Option an amount in cash equal to the Merger Consideration minus
the per share exercise, purchase or conversion price of such
Company Option as of the date hereof (the "Option
Consideration"). Payment of the Option Consideration with
respect to each Company Option shall be contingent upon
consummation of the Merger and shall be subject to applicable
withholding of income and other taxes. Payment of the Option
Consideration shall be made by the Surviving Corporation to the
holders of the Company Options at or as promptly as practicable
after the Effective Time, without interest. Prior to
consummation of the Merger and as a condition thereof, the
-3-
<PAGE>
Company shall furnish Purchaser evidence reasonably satisfactory
to Purchaser of the Company's compliance with its obligations
under this Section 2.2(c).
2.3 Exchange of Certificates.
------------------------
(a) Prior to the Effective Time, Purchaser shall
appoint a bank or trust company to act as paying agent hereunder,
which shall be American Stock Transfer and Trust Company, or such
other entity as Purchaser and the Company may mutually select
(the "Paying Agent") for the payment of the Merger Consideration
upon surrender of Certificates. All of the fees and expenses of
the Paying Agent shall be borne by the Surviving Corporation.
(b) Purchaser shall take all steps necessary to enable
and cause the Surviving Corporation to provide the Paying Agent
with cash in amounts necessary to pay the Merger Consideration,
when and as such amounts are needed by the Paying Agent.
(c) As soon as reasonably practicable after the
Effective Time, the Paying Agent shall mail to each holder of
record of Common Stock immediately prior to the Effective Time
(excluding any Dissenting Shares) (i) a letter of transmittal
(which shall specify that delivery shall be effected, and risk of
loss and title to the Certificates shall pass, only upon delivery
of such Certificates to the Paying Agent and shall be in such
form and have such other provisions as Purchaser shall reasonably
specify) and (ii) instructions for the use thereof in effecting
the surrender of the Certificates in exchange for the Merger
Consideration. Upon surrender of a Certificate for cancellation
to the Paying Agent or to such other agent or agents as may be
appointed by the Surviving Corporation, together with such letter
of transmittal, duly executed, and such other documents as may
reasonably be required by the Paying Agent, the holder of such
Certificate shall be entitled to receive in exchange therefor a
bank check in the amount of cash into which the shares of Common
Stock theretofore represented by such Certificate shall have been
converted pursuant to Section 2.2, and the Certificates so
surrendered shall forthwith be canceled. No interest will be
paid or will accrue on the cash payable upon the surrender of any
Certificate. If payment is to be made to a person other than the
person in whose name the Certificate so surrendered is
registered, it shall be a condition of payment that such
Certificate shall be properly endorsed or otherwise in proper
form for transfer and that the person requesting such payment
shall pay any transfer or other taxes required by reason of the
transfer of such Certificate or establish to the satisfaction of
the Surviving Corporation that such tax has been paid or is not
applicable.
Until surrendered as contemplated by this Section 2.3, each
Certificate (other than Certificates representing Dissenting
Shares) shall be deemed at any time after the Effective Time to
represent only the right to receive upon such surrender the
amount of cash, without interest, into which the shares of Common
Stock theretofore represented by such Certificate shall have been
converted pursuant to Section 2.2.
-4-
<PAGE>
(d) Purchaser shall have the right to make additional
rules, not inconsistent with the terms of this Agreement,
governing the payment of cash for shares of Common Stock
converted into the right to receive the Merger Consideration.
(e) None of the Purchaser, the Company, the Surviving
Corporation, the Paying Agent or any other person shall be liable
to any former holder of shares of Common Stock for any amount
properly delivered to a public official pursuant to applicable
abandoned property, escheat or similar laws.
(f) In the event that any Certificate shall have been
lost, stolen or destroyed, upon the making of an affidavit of
that fact by the person claiming such Certificate to be lost,
stolen or destroyed and, if required by the Purchaser, the
posting by such person of a bond in such reasonable amount as the
Purchaser may direct as indemnity against any claim that may be
made against it with respect to such Certificate, the Paying
Agent will issue in exchange for such lost, stolen or destroyed
Certificate the Merger Consideration, deliverable in respect
thereof pursuant to this Agreement.
2.4 Closing of Transfer Books. At or after the Effective
-------------------------
Time, there shall be no transfers on the stock transfer books of
the Company of the shares of Common Stock which were outstanding
immediately prior to the Effective Time. If, after the Effective
Time, Certificates are presented to the Surviving Corporation,
they shall be canceled and exchanged for the consideration
deliverable in respect thereof pursuant to this Agreement in
accordance with the procedures set forth in this Article 2.
2.5 No Further Ownership Rights in Common Stock. From and
-------------------------------------------
after the Effective Time, the holders of shares of Common Stock
which were outstanding immediately prior to the Effective Time
shall cease to have any rights with respect to such shares of
Common Stock except as otherwise provided in this Agreement or by
applicable law. All cash paid upon the surrender of Certificates
in accordance with the terms hereof shall be deemed to have been
paid in full satisfaction of all rights pertaining to the shares
of Common Stock.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Purchaser that,
except as set forth in schedules hereto specifically referring to
the Sections hereof intended to be so qualified (the
"Schedules"):
3.1 Organization, Standing and Power. The Company is a
--------------------------------
corporation duly organized, validly existing and in good standing
under the laws of the jurisdiction in which it is incorporated
and has the requisite corporate power and authority to carry on
its business as now being conducted. The Company is duly
qualified to do business, and is in good standing, in each
jurisdiction where the character of its properties owned or held
under lease or the nature of its activities makes such
-5-
<PAGE>
qualification necessary, except where the failure to be so
qualified and in good standing would not, individually or in the
aggregate, have a Material Adverse Effect on the Company. For
purposes of this Agreement, "Material Adverse Change" or
"Material Adverse Effect" means, when used with respect to
Purchaser or the Company, as the case may be, any change or
effect, either individually or in the aggregate, that is
materially adverse to the business, assets, financial condition
or results of operations of Purchaser, or the Company, as the
case may be.
3.2 Capital Structure. The authorized capital stock of the
-----------------
Company consists of 10 million shares of Common Stock and one
million shares of Preferred Stock, par value $.01 per share
("Preferred Stock").
At the date hereof (i) 3,885,052 shares of Common Stock were
issued and outstanding, and (ii) no shares of Common Stock are
held by the Company in its treasury. As of the date hereof there
are no shares of Preferred Stock outstanding. All outstanding
shares of capital stock of the Company are validly issued, fully
paid and nonassessable and not subject to preemptive rights.
At the date hereof there are (i) Company Options outstanding
under the Company's 1996 Employee Stock Option Plan to acquire
238,431 shares of Company Common Stock and (ii) Company Options
issued in 1994 to Charles E. Lawson, Jr. to acquire 57,251 shares
of Company Common Stock (the "Lawson Options").
The foregoing 1996 stock option plan of the Company is
herein called the "Stock Plan." Except for such Company Options
and the Lawson Options, there are no options, warrants, rights,
commitments, agreements, arrangements or undertakings of any kind
to which the Company is a party or by which it is bound
obligating the Company to issue, deliver or sell, or cause to be
issued, delivered or sold, additional shares of capital stock or
other voting securities of the Company or of any of its
Subsidiaries. Schedule 3.2 sets forth the name of each holder
of a Company Option, the number of shares of Common Stock for
which such Company Option is exercisable and the exercise price
per share of Common Stock subject to such Company Option. Since
July 1, 1996, no shares of the Company's capital stock have been
issued other than pursuant to the exercise of Company Options
already in existence on such date and the Company has not granted
any stock options for any capital stock or other voting
securities of the Company.
3.3 Subsidiaries. The Company has no Subsidiaries.
------------
"Subsidiary" means any corporation, partnership, joint venture or
other legal entity of which Purchaser or the Company, as the case
may be (either alone or through or together with any other
Subsidiary), owns, directly or indirectly, 50% or more of the
stock or other equity interests the holders of which are
generally entitled to vote for the election of the board of
directors or other governing body of such corporation or other
legal entity.
-6-
<PAGE>
3.4 Other Interests. The Company does not own directly or
---------------
indirectly any equity interest or equity investment in, nor is
the Company subject to any obligation or requirement to provide
for or to make any equity investment in, any corporation, limited
liability company, partnership, joint venture, business, trust or
entity.
3.5 Authority; Non-Contravention.
----------------------------
(a) The Board of Directors of the Company has approved
this Agreement and determined that the Merger is fair and in the
best interests of the Company and its stockholders, and the
Company has all requisite corporate power and authority to enter
into this Agreement and, subject to approval of the Merger by the
stockholders of the Company, to consummate the transactions
contemplated hereby. The execution and delivery of this
Agreement by the Company and the consummation by the Company of
the transactions contemplated hereby have been duly authorized by
all necessary corporate action on the part of the Company,
subject to such approval of the Merger by the stockholders of the
Company. This Agreement has been duly executed and delivered by
the Company and (assuming the valid authorization, execution and
delivery of this Agreement by the Purchaser) constitutes a valid
and binding obligation of the Company enforceable against the
Company in accordance with its terms. The execution and delivery
of this Agreement do not, and the consummation of the
transactions contemplated hereby and compliance with the
provisions hereof will not, conflict with, or result in any
violation of, or default (with or without notice or lapse of
time, or both) under, or give rise to a right of termination,
cancellation or acceleration of any obligation, contractually
require any offer to purchase or any prepayment of any debt,
contractually require the payment of (or result in the vesting
of) any severance, golden parachute, change of control or similar
type of payment, or give rise to the loss of a material benefit
under, or result in the creation of any lien, security interest,
charge or encumbrance upon any of the properties or assets of the
Company under, any provision of:
(i) the Articles of Incorporation or Bylaws of
the Company,
(ii) any loan or credit agreement, note, bond,
mortgage, indenture, lease or other agreement, instrument,
concession, franchise or license (any of the foregoing, an
"Instrument") applicable to the Company or any of its
Subsidiaries (other than Instruments involving aggregate payments
by or to the Company of $100,000 or less), or
(iii) subject to the governmental filings and other
matters referred to in Section 3.5(b) and approval of this
Agreement by the Company's stockholders, any judgment, order,
decree, statute, law, ordinance, rule or regulation applicable
to, or Company Permit (as defined in Section 3.9) of or relating
to, the Company or any of its Subsidiaries or any of their
respective properties or assets, other than, in the case of
clauses (ii) or (iii), any such conflicts, violations, defaults,
rights, offers, prepayments, payments, losses or liens, that,
individually or in the aggregate, would not have a Material
Adverse Effect on the Company, materially impair the ability of
the Company to perform its obligations hereunder or prevent the
consummation of any of the transactions contemplated hereby.
Copies of all contracts, agreements, instruments or other
-7-
<PAGE>
documents referred to in Schedule 3.5 have been furnished to
Purchaser. Schedule 3.5 lists the amounts payable or that will
or may become payable to directors, officers or employees or
former directors, officers or employees of the Company as a
result of the execution and delivery by the Company of this
Agreement or the consummation of the transactions contemplated
hereby.
(b) No filing or registration with, or authorization,
consent or approval of, any domestic (federal and state), foreign
or supranational court, commission, governmental body, regulatory
or administrative agency, authority or tribunal (a "Governmental
Entity") is required by or with respect to the Company in
connection with the execution and delivery of this Agreement by
the Company or the consummation by the Company of the
transactions contemplated hereby, except for (i) in connection or
in compliance with the provisions of the Securities Exchange Act
of 1934, as amended (including the rules and regulations
promulgated thereunder, the "Exchange Act"), (ii) the filing of
the Articles of Merger with the Department of State and
appropriate documents with the relevant authorities of other
states in which the Company is qualified to do business, (iii)
such filings and approvals as may be required by any applicable
state securities or "blue sky" laws or state takeover laws, and
(iv) such other consents, orders authorizations, registrations,
approvals, declarations and filings the failure of which to be
obtained or made would not, individually or in the aggregate,
have a Material Adverse Effect on the Company, materially impair
the ability of the Company to perform its obligations hereunder
or prevent the consummation of any of the transactions
contemplated hereby.
3.6 SEC Documents.
-------------
(a) Since May 2, 1996, the Company has filed all
documents with the Securities and Exchange Commission ("SEC")
required to be filed under the Securities Act of 1993, as amended
(including the rules and regulations promulgated thereunder) (the
"Securities Act"), or the Exchange Act (such documents filed with
the SEC on or before the date of this Agreement being the
"Company SEC Documents"). As of their respective dates, (i) the
Company SEC Documents complied in all material respects with the
requirements of the Securities Act or the Exchange Act, as the
case may be, and (ii) none of the Company SEC Documents contained
any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances
under which they were made, not misleading. The financial
statements of the Company included in the Company SEC Documents
comply as to form in all material respects with applicable
accounting requirements and the published rules and regulations
of the SEC with respect thereto, have been prepared in accordance
with generally accepted accounting principles (except, in the
case of unaudited statements contained in Quarterly Reports on
Form 10-Q of the Company, as permitted by the Exchange Act)
applied on a consistent basis during the periods involved (except
as may be indicated therein or in the notes thereto) and fairly
present in all material respects the financial position of the
Company as at the dates thereof and the results of its operations
and changes in stockholders' equity and cash flow for the periods
-8-
<PAGE>
then ended (subject, in the case of unaudited statements, to
normal year-end audit adjustments and to any other adjustments
described therein).
(b) Except as set forth in the Company SEC Documents,
the Company has no liability or obligation of any nature (whether
accrued, absolute, contingent or otherwise) which would be
required to be reflected on a balance sheet, or in the notes
thereto, prepared in accordance with generally accepted
accounting principles, except for liabilities and obligations
incurred in the ordinary course of business consistent with past
practice since June 30, 1998 which would not, individually or in
the aggregate, have a Material Adverse Effect on the Company.
(c) To the extent there are such, the Company has
heretofore made available to Purchaser a complete and correct
copy of any amendments or modifications which have not yet been
filed with the SEC to agreements, documents or other instruments
which previously have been filed with the SEC pursuant to the
Exchange Act.
3.7 Absence of Certain Events. Since September 30, 1997,
-------------------------
the Company has operated its business only in the ordinary course
consistent with past practice and, except as contemplated by this
Agreement or disclosed in the Company SEC Documents, there has
not occurred (i) any Material Adverse Change in the Company; (ii)
any change by the Company in its accounting methods, principles
or practices; (iii) any amendments or changes in the Articles of
Incorporation or Bylaws of the Company; (iv) any revaluation by
the Company of any of its assets, including, without limitation,
write-offs of accounts receivable or write-offs or write-downs of
inventory, other than in the ordinary course of the Company's
business consistent with past practices; (v) any damage,
destruction or loss with respect to property or assets of the
Company having a book value, individually or in the aggregate, of
in excess of $100,000; (vi) any declaration, setting aside or
payment of any dividend or other distribution with respect to any
shares of capital stock of the Company, or any repurchase,
redemption or other acquisition by the Company of any outstanding
shares of capital stock or other securities of, or other
ownership interests in, the Company; (vii) any grant of any
severance or termination pay to any director, officer or key
employee of the Company; (viii) any entry into any employment,
deferred compensation or other similar agreement (or any
amendment to any such existing agreement) with any director,
officer or key employee of the Company; (ix) any increase in
benefits payable under any existing severance or termination pay
policies or employment agreements with any director, officer or
key employee of the Company or any of its Subsidiaries except in
the ordinary course of business consistent with past practice; or
(x) any increase in compensation, bonus or other benefits payable
to directors, officers or key employees of the Company except in
the ordinary course of business consistent with past practice.
3.8 Litigation. Except as set forth in the Company SEC
----------
Documents, there are no actions, suits, proceedings,
investigations or reviews pending against the Company or, to the
knowledge of the Company, threatened against the Company, at law
or in equity, or before or by any federal or state commission,
board, bureau, agency, regulatory or administrative
instrumentality or other Governmental Entity or any arbitrator or
arbitration tribunal.
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<PAGE>
3.9 Compliance with Applicable Law. The Company holds all
------------------------------
permits, licenses, variances, exceptions, orders and approvals of
all Governmental Entities necessary for the lawful conduct of its
business (the "Company Permits"), except where the failure to
hold any Company Permit, individually or in the aggregate, is not
reasonably likely to result in a Material Adverse Effect on the
Company. The Company is conducting its business in compliance in
all material respects with the terms of the Company Permits. The
business of the Company is not being, and has not been, conducted
in violation in any material respect of any law, Company Permit,
ordinance or regulation of any Governmental Entity.
3.10 Employee Plans.
--------------
(a) Schedule 3.10 to this Agreement sets forth a list
of each of the Company Benefit Plans (as defined below). The
Company has complied with and performed in all material respects
all contractual obligations and all obligations under applicable
federal, state and local laws, rules and regulations required to
be performed by it under or with respect to any of the Company
Benefit Plans or any related trust agreement or insurance
contract. All contributions and other payments required to be
made by the Company to any Company Benefit Plan prior to the date
hereof have been made, all accruals required to be made under any
Company Benefit Plan have been made, and there are no unfunded
benefit obligations with respect to any Company Benefit Plan
which have not been accounted for by reserves or otherwise
properly footnoted in accordance with generally accepted
accounting principles in the financial statements included in the
Company SEC Documents. There is no claim, dispute, grievance,
charge, complaint, restraining or injunctive order, litigation or
proceeding pending, or, to the best knowledge of the Company,
threatened or anticipated (other than routine claims for
benefits) against or relating to any Company Benefit Plan or
against the assets of any Company Benefit Plan. The Company has
not communicated generally to employees or specifically to any
employee regarding any future increase of benefit levels (or
future creations of new benefits) with respect to any Company
Benefit Plan beyond those reflected in the Company Benefit Plans.
Except as indicated on Schedule 3.10 the Company does not
presently sponsor, maintain, contribute to, nor is the Company
required to contribute to, nor has the Company ever sponsored,
maintained, contributed to, or been required to contribute to,
any employee pension benefit plan within the meaning of Section
3(2) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), or otherwise.
(b) With respect to each Company Benefit Plan subject
to Title IV of ERISA, (i) no termination of any Company Benefit
Plan has occurred pursuant to which all liabilities have not been
satisfied in full, and no event has occurred and no condition
exists that could reasonably be expected to result in the Company
incurring a liability under Title IV of ERISA or which could
constitute grounds for terminating any pension plan of the
Company ("Pension Plan"); (ii) each such Company Benefit Plan
which is subject to Part 3 of Subtitle B of Title I of ERISA or
Section 412 of the Internal Revenue Code of 1986, as amended (the
"Code"), has been maintained in compliance with the minimum
funding standards of ERISA and the Code and no such Company
Benefit Plan has incurred any "accumulated funding deficiency,"as
defined in Section 412 of the Code and Section 302 of ERISA,
whether or not waived; (iii) the Company has not sought or
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<PAGE>
received a waiver of its funding requirements with respect to any
Company Benefit Plan and all contributions payable with respect
to each Pension Plan have been timely made; (iv) no reportable
event, within the meaning of Section 4043 of ERISA, and no event
described in Section 4062 or 4063 of ERISA, has occurred with
respect to any Company Benefit Plan; and (v) the aggregate of
accumulated benefit obligations of each Company Benefit Plan
subject to Title IV of ERISA (as of the date of the most recent
actuarial valuation prepared for such Company Benefit Plan) does
not exceed the fair market value of the assets of such Company
Benefit Plan (as of the date of such valuation).
(c) The Company has not incurred, nor has any event
occurred which has imposed or is reasonably likely to impose upon
the Company, any withdrawal liability (complete or partial within
the meaning of Sections 4203 or 4205 of ERISA, respectively) in
respect of any multiemployer plan (within the meaning of Section
3(37) or 4001(a)(3) of ERISA) (a "Multiemployer Plan"), which
withdrawal liability has not been satisfied or discharged in
full. Schedule 3.10 sets forth a description of each
Multiemployer Plan to which the Company has ever had an
obligation to contribute.
(d) The execution, delivery and performance of this
Agreement and consummation of the transactions contemplated
hereby will not result in the imposition of any federal excise
tax under Section 4975 of the Code with respect to any Company
Benefit Plan.
(e) The Company does not maintain or contribute to (or
has maintained or contributed to) any Company Benefit Plan which
provides, or has a liability to provide, life insurance, medical,
severance, or other employee welfare benefits to any employee
upon his retirement or termination of employment, except as may
be required by Section 4980B of the Code.
(f) (i) "Plan" means any bonus, incentive
compensation, deferred compensation, pension, profit sharing,
retirement, stock purchase, stock option, stock ownership, stock
appreciation rights, phantom stock, leave of absence, layoff,
vacation, day or dependent care, legal services, cafeteria, life,
health, accident, disability, workers' compensation or other
insurance, severance, separation or other employee benefit plan,
practice, policy or arrangement of any kind, including, but not
limited to, any "employee benefit plan" within the meaning of
Section 3(3) of ERISA and (ii) "Company Benefit Plan" means any
employee pension benefit plan and any Plan, other than a
Multiemployer Plan, established by the Company or to which the
Company contributes or has contributed (including any such Plans
not now maintained by the Company or to which the Company does
not now contribute, but with respect to which the Company has or
may have any liability). Copies of all Company Benefit Plans
(and, if applicable, related trust agreements) and all amendments
thereto and written interpretations thereof and the most recent
Forms 5500 required to be filed with respect thereto have been
furnished to Purchaser. Schedule 3.10 sets forth each Plan with
respect to which benefits will be accelerated, vested, increased
or paid as a result of the transactions contemplated by this
Agreement.
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<PAGE>
3.11 Employment Relations and Agreements.
-----------------------------------
(a) (i) The Company is in compliance with all federal,
state or other applicable laws respecting employment and
employment practices, terms and conditions of employment and
wages and hours, except for any such non-compliance as would not
result, individually or in the aggregate, in a Material Adverse
Effect on the Company; (ii) there is no labor strike, dispute,
slowdown or stoppage pending or, to the best knowledge of the
Company, threatened against or involving the Company; (iii)
except as set forth in Schedule 3.11, the Company is not a party
to any collective bargaining agreement, and no collective
bargaining agreement is being negotiated as of the date of this
Agreement by the Company; and (iv) the Company has not
experienced any material labor difficulty during the last three
years.
(b) The Company does not have any employment, bonus,
severance, "change of control", collective bargaining or similar
agreements ("Employment Agreements") except as disclosed in
Schedule 3.11. Copies of all Employment Agreements and all
amendments thereto have been previously furnished to the
Purchaser.
(c) The insurance policies maintained by the Company
with respect to workers compensation and medical claims are
described in Schedule 3.11. All such insurance policies are in
full force and effect; all premiums due and payable thereunder
have been paid and the Company is otherwise in full compliance in
all material respects with the terms thereof; the Company does
not know of any threatened termination of, or any proposed
material premium increase with respect to any such policy; no
claim or claims by the Company in an aggregate amount greater
than $100,000 have been questioned, denied or disputed by the
underwriter of such policy; and the reserves maintained by the
Company for the uninsured portion of such claims are sufficient
to cover the full liability of the Company for all claims that
have been incurred and are not covered (in whole or in part,
including the deductible thereon) by insurance.
3.12 Limitation on Business Conduct. The Company is not a
------------------------------
party to, or has any obligation under, any contract or agreement,
written or oral, which contains any covenants currently or
prospectively limiting the freedom of the Company to engage in
any line of business or to compete with any entity.
3.13 Title to, and Sufficiency and Condition of, Assets.
--------------------------------------------------
(a) The Company has good and marketable title, or a
valid leasehold interest in, all material items of its assets and
properties, whether real or personal, tangible or intangible, and
including without limitation all assets and properties reflected
on the balance sheet and the notes thereto (other than as covered
by Section 3.15 hereof), included in its June 30, 1998 financial
statements and the notes thereto (the "June 30 Balance Sheet") or
acquired after the date of the June 30 Balance Sheet (except for
assets and properties sold or otherwise disposed of since such
date in the ordinary course of business), free and clear of any
mortgages, security interests, liens and encumbrances ("Liens")
except:
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<PAGE>
(i) Liens disclosed in the June 30 Balance Sheet;
(ii) Liens for taxes not yet due or being
contested in good faith (and for which adequate reserves are
reflected on the June 30 Balance Sheet);
(iii) Liens arising under financing agreements of
the Company identified in the June 30 Balance Sheet;
(iv) Statutory or common law Liens relating to
obligations of the Company that are not delinquent or are being
contested in good faith;
(v) Purchase money Liens of the Company that are
not delinquent for the purchase of goods in the ordinary course
of business consistent with past practice; or
(vi) Liens which do not materially detract from
the value of such property or assets as now used, or materially
interfere with any present or intended use of such property or
assets. The assets so owned or leased by the Company constitute
all of the material assets, properties and rights of any type
used in or necessary for the conduct of its business.
(b) Except for scheduled capital improvements which
are identified in Schedule 3.13, the plants, structures,
facilities, machinery, equipment, automobiles, trucks, tools and
other properties and assets owned or leased by the Company which
are material to the business of the Company are in good operating
condition and repair, subject to normal wear and use, and useable
in a manner consistent with their current use. All improvements
on real property owned or leased by the Company conform in all
material respects to applicable state and local zoning and other
land use ordinances and building codes.
3.14 Environmental Laws and Regulations.
----------------------------------
(a) The Company is in compliance with all applicable
Environmental Laws, except where such noncompliance, individually
or in the aggregate, is not reasonably likely to result in a
Material Adverse Effect on the Company. The term "Environmental
Laws" means any federal, state, local or foreign statute,
ordinance, rule, regulation, policy, permit, consent, approval,
license, judgment, order, decree, injunction or other
authorization, relating to: (i) pollution or protection of human
health or safety, health or safety of employees, sanitation, or
the environment (including, without limitation, ambient air,
surface water, ground water, land surface or subsurface strata),
(ii) Releases (as defined in 42 U.S.C.(Section)9601(22)) or
threatened Releases of Hazardous Material (as hereinafter
defined) into the environment or (iii) the generation, treatment,
storage, disposal, use, handling, manufacturing, transportation
or shipment of Hazardous Material.
(b) During the period of ownership or operation by the
Company of any of its current or previously owned or leased
properties, there have been no Releases of Hazardous Material by
the Company, or, to the best of its knowledge, any other party
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<PAGE>
in, on, under or affecting such properties, which have not been
fully remediated to the extent required by applicable
Environmental Law and the Company has not disposed of any
Hazardous Material or any other substance in a manner that has
led, or could reasonably be anticipated to lead, to a Release.
The Company has not received any notice or claim that it is a
"potentially responsible party" under the Comprehensive
Environmental Response, Compensation, and Liability Act, 42
U.S.C. (Section)9601, et. seq., as amended, or similar,
applicable state or local laws, which claim has not been settled
or otherwise released. There is not currently pending any
notice, summons, complaint, lawsuit, citation, directive, order,
notice letter, or legal or administrative action from any party
or Governmental Entity with respect to alleged liabilities
arising under Environmental Laws. The term "Hazardous Material"
means any pollutants, contaminants, hazardous substances,
hazardous chemicals, toxic substances, hazardous wastes,
infectious and medical wastes, radioactive materials, petroleum
(including crude oil or any fraction thereof), natural gas,
synthetic gas and mixtures thereof, PCBs or materials containing
PCBs, asbestos and/or asbestos-containing materials or solid
wastes, in each case to the extent regulated under any
Environmental Law and all regulations promulgated under each and
all amendments thereto, or any other federal, state or local
environmental law, ordinance, regulations, rule or order.
(c) There are no underground storage tanks in or on
the owned or leased properties of the Company.
(d) There is no friable asbestos or
asbestos-containing materials at, on, or in the owned or leased
properties of the Company, except that which has been
encapsulated or otherwise managed in place and in good repair.
The Company has made available to the Purchaser records
concerning the presence, location and quantity of
asbestos-containing materials and presumed-asbestos containing
materials in such properties to the extent called for in 29 CFR
Section 1910.1001(j).
3.15 Patents, Trademarks, Copyrights. The Company owns or
-------------------------------
possesses adequate licenses or other valid rights to use all
material patents, patent rights, trademarks, trademark rights,
trade names, trade name rights, copyrights, know-how and other
proprietary information used or held for use in connection with
the business of the Company as currently being conducted and, to
the knowledge of the Company, there are no assertions or claims
challenging the validity of any of the foregoing.
3.16 Taxes. (i) The Company has filed all material Tax
-----
Returns required to have been filed on or before the date hereof,
which returns are true and complete in all material respects and
all Taxes shown due thereon have been paid; (ii) no issues that
have been raised by the relevant taxing authority in connection
with the examination of the Tax Returns referred to in clause (i)
are currently pending; (iii) all deficiencies asserted or
assessments made as a result of any examination of the Tax
Returns referred to in clause (i) by a taxing authority have been
paid in full or are being contested in good faith by the Company;
and (iv) a reserve which the Company reasonably believes to be
adequate has been set up for the payment of all such Taxes
anticipated to be payable in respect of periods through the date
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<PAGE>
hereof. The Company has disclosed on its federal income Tax
Returns all positions taken therein that could give rise to a
substantial understatement of federal income Tax within the
meaning of Code Sec. 6662. The Company is not a party to any Tax
allocation or sharing agreement. The Company (A) has not been a
member of an affiliated group filing a consolidated federal
income Tax Return or (B) has any liability for the Taxes of any
person under Treas. Reg. (Section) 1.1502-6 (or any similar
provision of state, local, or foreign law), as a transferee or
successor, by contract, or otherwise. Neither the Company nor
the Surviving Corporation will be obligated to make a payment to
an individual that would be a "parachute payment" to a
"disqualified individual," as those terms are defined in Section
280G of the Code, without regard to whether such payment is to be
made in the future. For purposes of this Agreement, (a) "Tax"
(and, with correlative meaning, "Taxes" and "Taxable") means any
federal, state, local or foreign income, gross receipts,
property, sales, use, license, excise, franchise, employment,
payroll, premium, withholding, alternative or added minimum, ad
valorem, transfer or excise tax, or any other tax, custom duty,
governmental fee or other like assessment or charge of any kind
whatsoever, together with any interest or penalty, imposed by any
governmental authority, and (b) "Tax Return" means any return,
report or similar statement required to be filed with respect to
any Tax (including any attached schedules), including, without
limitation, any information return, claim for refund, amended
return or declaration of estimated Tax.
3.17 Brokers. No broker, investment banker or other person,
-------
other than Tucker Anthony Incorporated, the fees and expenses of
which will be paid by the Company, is entitled to any broker's,
finder's or other similar fee or commission in connection with
the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of the Company. A copy of the
engagement letter between Tucker Anthony Incorporated and the
Company setting forth the fees and expenses to be paid by the
Company in connection with the transactions contemplated by this
Agreement has been provided to Purchaser.
3.18 Opinion of Financial Advisor. The Company has received
----------------------------
the opinion of Tucker Anthony Incorporated, to the effect that,
as of the date hereof, the Merger Consideration in cash to be
received by the holders of shares of Common Stock is fair to such
holders from a financial point of view.
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<PAGE>
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF
THE PURCHASER
The Purchaser represents and warrants to the Company as
follows:
4.1 Organization, Standing and Power. The Purchaser is a
--------------------------------
corporation duly organized, validly existing and in good standing
under the laws of the jurisdiction in which it is incorporated
and has the requisite corporate power and authority to carry on
its business as now being conducted.
4.2 Authority; Non-Contravention.
----------------------------
(a) The Purchaser has all requisite corporate power
and authority to enter into this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of
this Agreement by the Purchaser and the consummation by it of the
transactions contemplated hereby have been duly authorized by all
necessary corporate action on its part. This Agreement has been
duly executed and delivered by the Purchaser and (assuming the
valid authorization, execution and delivery of this Agreement by
the Company) constitutes a valid and binding obligation of the
Purchaser enforceable against the Purchaser in accordance with
its terms. The execution and delivery of this Agreement do not,
and the consummation of the transactions contemplated hereby and
compliance with the provisions hereof will not, conflict with, or
result in any violation of, or default (with or without notice or
lapse of time, or both) under, or give rise to a right of
termination, cancellation or acceleration of any obligation or
give rise to the loss of a material benefit under, or result in
the creation of any Lien upon any of the properties or assets of
the Purchaser under, any provision of:
(i) the Articles of Incorporation or Bylaws of
the Purchaser,
(ii) any loan or credit agreement, note, bond,
mortgage, indenture, lease or other agreement, instrument,
permit, concession, franchise or license applicable to the
Purchaser, or
(iii) subject to the governmental filings and other
matters referred to in the following sentence, any judgment,
order, decree, statute, law, ordinance, rule or regulation
applicable to the Purchaser or any of its properties or assets,
other than, in the case of clauses (ii) or (iii), any such
conflicts, violations, defaults, rights, offers, prepayments,
payments, losses or Liens, that, individually or in the
aggregate, would not have a Material Adverse Effect on the
Purchaser, materially impair the ability of the Purchaser to
perform its obligations hereunder or prevent the consummation of
any of the transactions contemplated hereby.
(b) No filing or registration with, or authorization,
consent or approval of, any Governmental Entity is required by or
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<PAGE>
with respect to the Purchaser in connection with the execution
and delivery of this Agreement by the Purchaser or the
consummation by the Purchaser of the transactions contemplated
hereby, except for (i) compliance with the provisions of the
Exchange Act, (ii) the filing of the Certificate of Merger with
the Department of State and appropriate documents with the
relevant authorities of other states in which the Purchaser is
qualified to do business, (iii) such filings and approvals as may
be required by any applicable state securities or "blue sky" laws
or state takeover laws, and (iv) such other consents, orders,
authorizations, registrations, approvals, declarations and
filings the failure of which to be obtained or made would not,
individually or in the aggregate, have a Material Adverse Effect
on the Purchaser, materially impair the ability of Purchaser to
perform its obligations hereunder or prevent the consummation of
any of the transactions contemplated hereby.
4.3 Financing. Purchaser possesses, or has commitments
---------
for, sufficient funds to enable it to acquire all issued and
outstanding shares of Common Stock on a fully diluted basis
pursuant to the Merger and to pay all fees and expenses payable
by Purchaser related to the transactions contemplated by this
Agreement.
4.4 Brokers. No broker, investment banker or other person,
-------
is entitled to any broker's, finder's or other similar fee or
commission in connection with the transactions contemplated by
this Agreement based upon arrangements made by or on behalf of
the Purchaser.
ARTICLE 5
COVENANTS
5.1 Alternative Proposals. Prior to the Effective Time,
---------------------
the Company agrees
(a) that it shall not, nor shall it permit its
officers, directors, employees, agents and representatives
(including, without limitation, any investment banker, attorney
or accountant retained by it) to, initiate, solicit or knowingly
encourage, directly or indirectly, any inquiries or the making or
implementation of any proposal or offer (including, without
limitation, any proposal or offer to its stockholders) with
respect to a merger, acquisition, consolidation or similar
transaction involving, or any purchase of any equity securities
of, the Company or all or any significant portion of the assets
of the Company (any such proposal or offer being hereinafter
referred to as an "Alternative Proposal") or engage in any
negotiations concerning, or provide any confidential information
or data to, or have any discussions with, any person or entity
relating to an Alternative Proposal or otherwise take any action
to knowingly facilitate any effort or attempt to make or
implement an Alternative Proposal;
(b) that it will immediately cease and cause to be
terminated any existing activities, discussions or negotiations
with any person or entity conducted heretofore with respect to
any of the foregoing and will take the necessary steps to inform
any such person or entity of the Company's obligations under this
Section 5.1; and
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<PAGE>
(c) that it will notify the Purchaser immediately if
any such inquiries or proposals are received by, any such
information is requested from, or any such negotiations or
discussions are sought to be initiated or continued with, it;
provided, however, that nothing contained in this Section 5.1
shall prohibit the Board of Directors of the Company from (i)
furnishing information to or entering into discussions or
negotiations with, any person or entity that makes an
unsolicited, bona fide, Fully-Financed (as hereinafter defined)
Alternative Proposal which would yield to stockholders a net
price of not less than $4.85 per share in cash and without
reduction of any sort (a "Qualifying Alternative Proposal") and
that the Board of Directors of the Company in good faith
determines (in consultation with its financial advisors)
represents a financially superior transaction for the
stockholders of the Company as compared to the Merger, if, and
only to the extent that, (A) the Board of Directors of the
Company, based upon the advice of outside counsel, determines in
good faith that such action is required for the Board of
Directors to comply with its fiduciary duties imposed by law, (B)
prior to furnishing such information to, or entering into
discussions or negotiations with, such person or entity, the
Company provides written notice to the Purchaser to the effect
that it is furnishing information to, or entering into
discussions or negotiations with, such person or entity, and (C)
the Company keeps the Purchaser informed of the status and all
material information with respect to any such discussions or
negotiations; and (ii) to the extent applicable, complying with
Rule 14e-2 promulgated under the Exchange Act with regard to an
Alternative Proposal. Nothing in this Section 5.1 shall (A)
permit the Company to terminate this Agreement (except as
specifically provided in Article 7 hereof), (B) permit the
Company to enter into any agreement with respect to an
Alternative Proposal for as long as this Agreement remains in
effect unless the Company shall have given the Purchaser ten
days' prior written notice of its intent to terminate the
Agreement during which period the Purchaser will have the
opportunity to match the consideration offered by any such
Alternative Proposal (if the Purchaser offers to match such
consideration, the Agreement shall be amended to increase the
consideration and, if necessary, to extend time periods to permit
proxy recirculation (it being agreed that for as long as this
Agreement remains in effect, the Company shall not enter into any
agreement with any person that provides for, or in any way
facilitates, an Alternative Proposal), or (C) affect any other
obligation of the Company under this Agreement. For purposes
hereof, a "Fully-Financed" Alternative Proposal shall be one
where the prospective acquiror through its possession of one or
more of (i) marketable securities, cash and cash equivalents,
(ii) undrawn lines of credit from reputable financial
institutions and (iii) commitment letters from one or more
reputable institutions (which may only be subject to completion
of due diligence and other standard conditions), has sufficient
financing to pay in full the consideration provided for in such
Alternative Proposal and any amounts payable pursuant to Section
7.5(a) of this Agreement. Notwithstanding anything to the
contrary contained herein, a Qualifying Alternative Proposal may
be subject to the reasonable due diligence of the prospective
acquiror.
5.2 Interim Operations of the Company.
---------------------------------
(a) From and after the date of this Agreement until
the Effective Time, except as contemplated by any other provision
of this Agreement, unless the Purchaser has consented in writing
thereto, the Company:
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<PAGE>
(i) Shall conduct its operations according to its
usual, regular and ordinary course in substantially the same
manner as heretofore conducted;
(ii) Shall use its reasonable efforts to preserve
intact its business organization and goodwill, keep available the
services of its officers and employees and maintain satisfactory
relationships with those persons having business relationships
with it;
(iii) Shall not amend its Articles of Incorporation
or Bylaws or comparable governing instruments;
(iv) Shall promptly notify the Purchaser of any
breach of any representation or warranty contained herein or any
Material Adverse Effect with respect to the Company;
(v) Shall promptly deliver to the Purchaser true
and correct copies of any report, statement or schedule filed
with the SEC subsequent to the date of this Agreement;
(vi) (A) Shall not, except pursuant to the
exercise of options, warrants, conversion rights and other
contractual rights existing on the date hereof and disclosed
pursuant to this Agreement, issue any shares of its capital
stock, effect any stock split or otherwise change its
capitalization as it existed on the date hereof and (B) shall not
(x) grant, confer or award any option, warrant, conversion right
or other right not existing on the date hereof to acquire any
shares of its capital stock or grant, confer or award any bonuses
or other forms of cash incentives to any officer, director or key
employee, (y) except in the ordinary course of business
consistent with past practice, increase any compensation with any
present or future officers, directors or key employees, grant any
severance or termination pay to, or enter into any employment or
severance agreement with any officer, director or key employee or
amend any such existing agreement in any material respect (other
than pursuant to severance agreements previously delivered to
Purchaser), or (z) adopt any new employee benefit plan (including
any stock option, stock benefit or stock purchase plan) or amend
any existing employee benefit plan in any material respect;
(vii) Shall not (i) declare, set aside or pay any
dividend or make any other distribution or payment with respect
to any shares of its capital stock or other ownership interests
or (ii) directly or indirectly redeem, purchase or otherwise
acquire any shares of its capital stock or make any commitment
for any such action;
(viii) Shall not sell, lease, abandon or otherwise
dispose of any of its assets or acquire by merging or
consolidating with, or by purchasing a substantial portion of the
assets of or equity in, or by any other manner, any business or
any corporation, partnership, association or other business
organization or division thereof or otherwise acquire any assets,
except in the ordinary course of business consistent with past
practice;
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<PAGE>
(ix) Shall not incur or guarantee any indebtedness
for borrowed money or make any loans, advances or capital
contributions to, or investments in, any other person, or issue
or sell any debt securities other than borrowings under existing
lines of credit and usual and customary advancement of expenses
in the ordinary course of business;
(x) Shall not mortgage or otherwise encumber or
subject to any Lien any of its properties or assets;
(xi) Shall not make any change to its accounting
(including tax accounting) methods, principles or practices,
except as may be required by generally accepted accounting
principles and except, in the case of tax accounting methods,
principles or practices, in the ordinary course of business of
the Company;
(xii) Shall not make any commitment or enter into
any contract or agreement or make any capital expenditure except
for (x) customer purchase orders and purchases of raw materials
used in the business of the Company agreed to or made in the
ordinary course of business consistent with past practice, (y)
any other commitment, contract and agreement involving aggregate
payments to or by the Company not in excess of $100,000,
providing for termination without notice by the Company on 90 or
fewer days' notice, and made by the Company in the ordinary
course of business consistent with past practice or (z) capital
expenditures that individually or in the aggregate do not exceed
$100,000;
(xiii) Shall not revalue any of its assets,
including, without limitation, writing down the value of its
inventory or writing off notes or accounts receivable, other than
in the ordinary course of business;
(xiv) Shall not make any tax election except
consistent with past practice or settle or compromise any
material income tax liability;
(xv) Shall not settle or compromise any pending or
threatened suit, action or claim relating to the transactions
contemplated hereby;
(xvi) Shall not pay, discharge or satisfy any
claims, liabilities or obligations (absolute, accrued, asserted
or unasserted, contingent or otherwise), other than the payment,
discharge or satisfaction in the ordinary course of business of
liabilities reflected or reserved against in, or contemplated by,
the financial statements (or the notes thereto) of the Company or
incurred in the ordinary course of business consistent with past
practice; or
(xvii) Shall not agree or otherwise commit to take
any of the foregoing actions or take, or agree to take, any
action which would result in a failure of the condition to
Closing set forth in Section 6.3(a).
5.3 Meeting of the Company's Stockholders. The Company
-------------------------------------
will take all action necessary in accordance with applicable law
and its Articles of Incorporation and Bylaws to convene a meeting
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of its stockholders (the "Meeting of Stockholders") as promptly
as practicable to consider and vote upon the approval of this
Agreement and the Merger. The Board of Directors of the Company
shall recommend such approval and the Purchaser and the Company
shall each take all lawful action to solicit such approval,
including, without limitation, timely mailing the Proxy Statement
(as defined in Section 5.7); provided, however, that such
recommendation or solicitation is subject to any action
(including any withdrawal or change of its recommendation) taken
(but only in compliance with the proviso in Section 5.1(c)) by,
or upon authority of, the Board of Directors of the Company in
the exercise of its good faith judgment based upon the advice of
outside counsel as to its fiduciary duties imposed by law.
5.4 Filings, Other Action. Subject to the terms and
---------------------
conditions herein provided, the Company and the Purchaser shall:
(a) use all reasonable efforts to cooperate with one
another in (i) determining which filings are required to be made
prior to the Effective Time with, and which consents, approvals,
permits or authorizations are required to be obtained prior to
the Effective Time from, governmental or regulatory authorities
of the United States, the several states and foreign
jurisdictions in connection with the execution and delivery of
this Agreement and the consummation of the transactions
contemplated hereby and (ii) timely making all such filings and
timely seeking all such consents, approvals, permits or
authorizations; and
(b) use all reasonable efforts to take, or cause to be
taken, all other action and do, or cause to be done, all other
things necessary, proper or appropriate to consummate and make
effective the transactions contemplated by this Agreement. If,
at any time after the Effective Time, any further action is
necessary or desirable to carry out the purpose of this
Agreement, the proper officers and directors of the Purchaser and
the Company shall take all such necessary action.
5.5 Inspection of Records. From the date hereof to the
---------------------
Effective Time, the Company shall (i) allow all designated
officers, attorneys, accountants and other representatives of the
Purchaser reasonable access at all reasonable times upon
reasonable notice to the offices, records and files,
correspondence, audits and properties, as well as to all
information relating to commitments, contracts, titles and
financial position, or otherwise pertaining to the business and
affairs, of the Company, (ii) furnish to the Purchaser's counsel,
financial advisors, auditors and other authorized representatives
such financial and operating data and other information as such
persons may reasonably request, (iii) instruct its employees,
counsel and financial advisors to cooperate with the Purchaser in
the Purchaser's investigation of the business of the Company, and
(iv) make its management personnel available for discussions with
representatives of the Purchaser at mutually convenient times.
5.6 Publicity. The initial press release relating to this
---------
Agreement shall be a joint press release and thereafter the
Company and the Purchaser shall, subject to their respective
legal obligations (including requirements of stock exchanges and
other similar regulatory bodies), consult with each other, and
use reasonable efforts to agree upon the text of any press
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<PAGE>
release, before issuing any such press release or otherwise
making public statements with respect to the transactions
contemplated hereby and in making any filings with any federal or
state governmental or regulatory agency or with any national
securities exchange (or other similar regulatory body) with
respect thereto.
5.7 Proxy Statement.
---------------
(a) The Company shall prepare and file with the SEC as
soon as practicable but in any event within two weeks from the
date hereof a preliminary form of the proxy statement (the "Proxy
Statement") to be mailed to the holders of Common Stock in
connection with the meeting of such holders in connection with
the Merger. The Company will cause the Proxy Statement to comply
as to form in all material respects with the applicable
provisions of the Exchange Act. The Company will use its
reasonable best efforts to respond to any comments of the SEC or
its staff and to cause the Proxy Statement to be cleared by the
SEC. The Company will notify the Purchaser of the receipt of any
comments from the SEC or its staff and of any request by the SEC
or its staff for amendments or supplements to the Proxy Statement
or for additional information and will supply the Purchaser with
copies of all correspondence between the Company or any of its
representatives, on the one hand, and the SEC or its staff, on
the other hand, with respect to the Proxy Statement prior to its
being filed with the SEC and shall give the Purchaser and its
counsel the opportunity to review all amendments and supplements
to the Proxy Statement and all responses to requests for
additional information and replies to comments prior to their
being filed with, or sent to, the SEC. Each of the Company and
the Purchaser agrees to use its reasonable best efforts, after
consultation with the other parties hereto, to respond promptly
to all such comments of and requests by the SEC. As promptly as
practicable after the Proxy Statement has been cleared by the
SEC, the Company shall mail the Proxy Statement to the
stockholders of the Company. If at any time prior to the
approval of this Agreement by the Company's stockholders there
shall occur any event that should be set forth in an amendment or
supplement to the Proxy Statement, the Company will prepare and
mail to its stockholders such an amendment or supplement.
(b) The Company agrees that the Proxy Statement and
each amendment or supplement thereto at the time of mailing
thereof and at the time of the meeting of stockholders of the
Company will not include an untrue statement of a material fact
or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading;
provided, however, that the foregoing shall not apply to the
extent that any such untrue statement of a material fact or
omission to state a material fact was made by the Company in
reliance upon and in conformity with written information
concerning the Purchaser furnished to the Company by the
Purchaser specifically for use in the Proxy Statement. The
Purchaser agrees that the information concerning the Purchaser
provided by it in writing for inclusion in the Proxy Statement
and each amendment or supplement thereto, at the time of mailing
thereof and at the time of the meeting of stockholders of the
Company will not include an untrue statement of a material fact
or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
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<PAGE>
5.8 Further Action. Each party hereto shall, subject to
--------------
the fulfillment at or before the Effective Time of each of the
conditions of performance set forth herein or the waiver thereof,
perform such further acts and execute such documents as may be
reasonably required to effect the Merger.
5.9 Expenses. Whether or not the Merger is consummated,
--------
all costs and expenses incurred in connection with this Agreement
and the transactions contemplated hereby shall be paid by the
party incurring such expenses except as expressly provided
herein.
5.10 Indemnification.
---------------
(a) From and after the Effective Time, Purchaser
agrees to, and to cause the Surviving Corporation to, indemnify
and hold harmless all past and present officers and directors of
the Company and of its Subsidiaries (the "Indemnified Parties")
to the full extent such persons may be indemnified by the Company
pursuant to the Company's Articles of Incorporation and Bylaws as
in effect as of the date hereof for acts and omissions occurring
at or prior to the Effective Time and shall advance reasonable
litigation expenses incurred by such persons in connection with
defending any action arising out of such acts or omissions,
provided that such persons provide the requisite affirmations and
undertakings, as required by applicable law or set forth in the
Company's Bylaws as in effect prior to the Effective Time.
(b) Any Indemnified Party will promptly notify
Purchaser and the Surviving Corporation of any claim, action,
suit, proceeding or investigation for which such party may seek
indemnification under this Section; provided, however, that the
failure to furnish any such notice shall not relieve Purchaser or
the Surviving Corporation from any indemnification obligation
under this Section except to the extent Purchaser or the
Surviving Corporation is prejudiced thereby. In the event of any
such claim, action, suit, proceeding, or investigation, (x) the
Surviving Corporation will have the right to assume the defense
thereof by counsel reasonably acceptable to the Indemnified
Parties, and the Surviving Corporation will not be liable to such
Indemnified Parties for any legal expenses of other counsel or
any other expenses subsequently incurred thereafter by such
Indemnified Parties in connection with the defense thereof,
except that all Indemnified Parties (as a group) will have the
right to retain one separate counsel, reasonably acceptable to
such Indemnified Parties and Purchaser, at the expense of the
indemnifying party if the named parties to any such proceeding
include both the Indemnified Parties and the Surviving
Corporation and the representation of such parties by the same
counsel would be inappropriate due to a conflict of interest
between them, (y) the Indemnified Parties will cooperate in the
defense of any such matter, and (z) the Surviving Corporation
will not be liable for any settlement effected without its prior
written consent.
(c) The Articles of Incorporation and Bylaws of the
Surviving Corporation shall contain provisions that are no less
favorable to the past and present officers and directors of the
Company than those set forth as of the date hereof in the
Articles of Incorporation of the Company and the Bylaws of the
Company, which provisions shall not be amended, repealed or
otherwise modified for a period of six years from the Effective
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<PAGE>
Time in any manner that would affect adversely the rights
thereunder of individuals who at or at any time prior to the
Effective Time were entitled to indemnification thereunder.
(d) The Surviving Corporation shall use reasonable
commercial efforts to maintain in effect for six years from the
Effective Time directors' and officers' "tail" liability
insurance covering those persons who are currently covered by the
Company's directors' and officers' liability insurance policy on
terms comparable to the existing coverage.
(e) This Section 5.10 is intended to benefit the
Indemnified Parties and shall be binding on all successors and
assigns of Purchaser, Purchaser, the Company and the Surviving
Corporation. Purchaser hereby guarantees the performance by the
Surviving Corporation of the indemnified obligations pursuant to
this Section 5.10.
5.11 Takeover Statute. If any "fair price", "moratorium",
----------------
"control share acquisition" or other form of anti-takeover
statute or regulation shall become applicable to the transactions
contemplated hereby, the Company and the members of the Board of
Directors of the Company shall grant such approvals and take such
actions as are reasonably necessary so that the transactions
contemplated hereby may be consummated as promptly as practicable
on the terms contemplated hereby and otherwise act to eliminate
or minimize the effects of such statute or regulation on the
transactions contemplated hereby.
5.12 Conduct of Business by Purchaser Pending the Merger.
---------------------------------------------------
Prior to the Effective Time and subject to any applicable
regulatory approvals, the Purchaser shall (a) perform its
obligations under this Agreement in accordance with the terms
hereof and thereof and take all other actions necessary or
appropriate for the consummation of the transactions contemplated
hereby and (b) not engage directly or indirectly in any business
or activities of any type or kind whatsoever and not enter into
any agreements or arrangements with any person or entity, or be
subject to or be bound by any obligation or undertaking which is
not contemplated by this Agreement.
5.13 Conveyance Taxes. The Company and the Purchaser shall
----------------
cooperate in the preparation, execution and filing of all
returns, questionnaires, applications or other documents
regarding any real property transfer or gains, sales, use,
transfer, value added, stock transfer and stamp taxes, any
transfer, recording, registration and other fees, and any similar
taxes which become payable in connection with the transactions
contemplated by this Agreement that are required or permitted to
be filed on or before the Effective Time.
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<PAGE>
ARTICLE 6
CONDITIONS TO MERGER
6.1 Conditions to Each Party's Obligation to Effect the
---------------------------------------------------
Merger. The respective obligation of each party to effect the
------
Merger shall be subject to the fulfillment at or prior to the
Closing Date of the following conditions:
(a) This Agreement and the transactions contemplated
hereby shall have been approved, in the manner required by
applicable law or by the applicable regulations of any stock
exchange or other regulatory body, as the case may be, by the
holders of the issued and outstanding shares of capital stock of
the Company.
(b) Neither of the parties hereto shall be subject to
any order or injunction of a court of competent jurisdiction
which prohibits the consummation of the transactions contemplated
by this Agreement. In the event any such order or injunction
shall have been issued, each party agrees to use its reasonable
efforts to have any such injunction lifted.
(c) All consents, authorizations, orders and approvals
of (or filings or registrations with) any Governmental Entity
required in connection with the execution, delivery and
performance of this Agreement shall have been obtained or made,
except for filings in connection with the Merger and any other
documents required to be filed after the Effective Time and
except where the failure to have obtained or made any such
consent, authorization, order, approval, filing or registration
would not have a Material Adverse Effect on the Purchaser or the
Company following the Effective Time.
6.2 Conditions to Obligation of Company to Effect the
-------------------------------------------------
Merger. The obligation of the Company to effect the Merger shall
------
be subject to the fulfillment at or prior to the Closing Date of
the conditions that:
(a) There shall have been no intentional or willful
non-performance, in any material respect, by the Purchaser of its
agreements contained in this Agreement required to be performed
on or prior to the Closing Date nor shall there have been, in any
material respect, any willfully or intentionally untrue
representation or warranty of the Purchaser contained in this
Agreement or in any document delivered in connection herewith.
(b) The Purchaser shall have performed in all material
respects its agreements contained in this Agreement required to
be performed on or prior to the Closing Date, and the
representations and warranties of the Purchaser contained in this
Agreement and in any document delivered in connection herewith
shall be true and correct as of the Closing Date, except (i) for
changes specifically permitted by this Agreement, (ii) for
non-performance or breaches which, separately or in the
aggregate, would not have a Material Adverse Effect on the
Company or on the ability of the parties to consummate the
transactions contemplated by this Agreement and (iii) that those
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<PAGE>
representations and warranties which address matters only as of a
particular date shall remain true and correct, in all material
respects, as of such date, and
(c) The Company shall have received a certificate of
the President or a Vice President of the Purchaser, dated the
Closing Date, certifying to the effect of the preceding clauses
(a) and (b).
(d) The Board of Directors of the Company shall have
received a certificate of the President and the Chief Financial
Officer of the Company, dated that Closing Date, certifying to
the effect of clause (a)(ii) of Section 6.3 insofar as it relates
to the representations and warranties of the Company contained in
this Agreement or in any document delivered in connection
herewith.
(e) There shall not have been any action taken, or any
statute, rule, regulation, order, judgment or decree proposed,
enacted, promulgated, entered, issued, or enforced by any foreign
or United States federal, state or local Governmental Entity, and
there shall be no action, suit or proceeding pending (with a
reasonable likelihood of success), which (i) makes this
Agreement, the Merger, or any of the other transactions
contemplated by this Agreement illegal or imposes or may impose
material damages or penalties in connection therewith, or (ii)
otherwise prohibits, restricts, or delays consummation of the
Merger or any of the other transactions contemplated by this
Agreement in any material respect.
(f) The Company shall have received an opinion of
Thelen Reid & Priest LLC, special counsel for the Purchaser,
dated the Closing Date and in form and substance reasonably
satisfactory to Purchaser and its counsel, to the effect that:
(i) the Purchaser is a corporation duly organized, validly
existing and in good standing under the laws of the state of its
organization, and has all requisite corporate power and authority
to own, lease and operate its properties, to carry on its
business as then being conducted and to consummate the
transactions contemplated by this Agreement, (ii) all necessary
corporate proceedings of the Board of Directors and the
stockholders of the Purchaser to the extent required by law, the
Articles of Incorporation and the By-laws of the Purchaser or
otherwise, to authorize the execution and delivery of this
Agreement and to consummate the Merger contemplated hereby have
been duly and validly taken, (iii) the Purchaser has corporate
power to execute and deliver this Agreement, and this Agreement
constitutes the legal, duly authorized, valid and binding
obligation of Purchaser, enforceable against the Purchaser in
accordance with its terms, subject to the application of
insolvency, bankruptcy or other laws affecting the enforcement of
creditors rights or limitations on the availability of equitable
remedies, and (iv) execution and performance of this Agreement
and consummation of the Merger and the transactions contemplated
hereunder does not and will not violate or result in a breach of
any provision of any charter or by-law or other organizational or
constitutional document of the Purchaser.
Such opinion shall also state that such counsel
have participated in the preparation of the Proxy Statement and,
on the basis of a general review of the Proxy Statement and
participation in conferences at which the contents of the Proxy
Statement and related matters were discussed, but without
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<PAGE>
independent verification of the accuracy, completeness or
fairness of the statements contained in the Proxy Statement, such
counsel does not have actual knowledge which would lead them to
believe that the Proxy Statement (except as to the financial
statements and other financial and statistical information
contained therein and material relating to or supplied by Company
for use therein as to which counsel need not comment), as of the
date thereof, contained any untrue statement of a material fact
or omitted to state any material fact necessary to make the
statements therein, in light of the circumstances under which
they were made, not misleading.
In rendering such opinion, such counsel may rely
to the extent specified therein upon certificates of state
officials and officers of the Purchaser as to matters of fact and
upon one or more opinions of local counsel of established
reputation as to all legal matters involving other than Federal
law. Such opinion will also cover such other matters as the
Company may reasonably request.
6.3 Conditions to Obligation of Purchaser to Effect the
---------------------------------------------------
Merger. The obligation of the Purchaser to effect the Merger
------
shall be subject to the fulfillment at or prior to the Closing
Date of the following conditions:
(a) (i) There shall have been no intentional or
willful non-performance, in any material respect, by the Company
of its agreements contained in this Agreement required to be
performed on or prior to the Closing Date nor shall there have
been any willfully or intentionally untrue representation or
warranty of the Company contained in this Agreement or in any
document delivered in connection herewith, (ii) the Company shall
have performed in all material respects its agreements contained
in this Agreement required to be performed on or prior to the
Closing Date, and the representations and warranties of the
Company contained in this Agreement and in any document delivered
in connection herewith shall be true and correct as of the
Closing Date, except (A) for changes specifically permitted by
this Agreement or otherwise accepted in writing by Purchaser, (B)
for non-performance or breaches which, separately or in the
aggregate, would not have a Material Adverse Effect on the
Company or the Purchaser or on the ability of the parties to
consummate the transactions contemplated by this Agreement and
(C) that those representations and warranties which address
matters only as of a particular date shall remain true and
correct, in all material respects, as of such date, and (iii) the
Purchaser shall have received a certificate of the President or a
Vice President of the Company, dated the Closing Date, certifying
to the effect of the preceding clauses (i) and (ii).
(b) From the date of this Agreement through the
Effective Time, there shall not have occurred any Material
Adverse Change with respect to the Company (it being understood
and agreed that the incurrence of capital expenditures set forth
in Schedule 3.13(b) shall not be deemed to be a Material Adverse
Change).
(c) After the Effective Time, no person shall have any
right under any Stock Plan (or any Company Option granted
thereunder) or other plan, program or arrangement to acquire any
equity securities of the Company.
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<PAGE>
(d) There shall not have been any action taken, or any
statute, rule, regulation, order, judgment or decree proposed,
enacted, promulgated, entered, issued, or enforced by any foreign
or United States federal, state or local Governmental Entity, and
there shall be no action, suit or proceeding pending (with a
reasonable likelihood of success), which (i) makes this
Agreement, the Merger, or any of the other transactions
contemplated by this Agreement illegal or imposes or may impose
material damages or penalties in connection therewith, (ii)
requires the divestiture of a material portion of the business of
the Purchaser, or of the Company or of the Surviving Corporation
taken as a whole, (iii) imposes material limitations on the
ability of the Purchaser effectively to exercise full rights of
ownership of shares of capital stock of the Surviving Corporation
(including the right to vote such shares on all matters properly
presented to the stockholders of the Surviving Corporation) or
makes the holding by the Purchaser of any such shares illegal or
subject to any materially burdensome requirement or condition,
(iv) requires the Purchaser, the Company, the Surviving
Corporation or any of their respective material Subsidiaries or
affiliates to cease or refrain from engaging in any material
business, or (v) otherwise prohibits, restricts, or delays
consummation of the Merger or any of the other transactions
contemplated by this Agreement in any material respect or
increases or may increase in any material respect the liabilities
or obligations of the Purchaser or the Surviving Corporation
arising out of this Agreement, the Merger, or any of the other
transactions contemplated by this Agreement.
(e) Purchaser shall have received an opinion of Haythe
& Curley, special counsel for the Company, dated the Closing Date
and in form and substance reasonably satisfactory to Purchaser
and its counsel, to the effect that: (i) the Company is a
corporation duly organized, validly existing and in good standing
under the laws of the state of its organization, and has all
requisite corporate power and authority to own, lease and operate
its properties, to carry on its business as then being conducted
and to consummate the transactions contemplated by this
Agreement, (ii) the equity capitalization of the Company is as
set forth in Section 3.2 hereof, (iii) to the knowledge of such
counsel, except as disclosed in Section 3.2, there are not
outstanding any options or agreements binding on the Company to
sell, issue or dispose of any capital stock or other interests of
the Company, (iv) all necessary corporate proceedings of the
Board of Directors and the stockholders of the Company, to the
extent required by law, the Articles of Incorporation and the
Bylaws of the Company or otherwise, to authorize the execution
and delivery of this Agreement and to consummate the Merger
contemplated hereby have been duly and validly taken, (v) the
Company has corporate power to execute and deliver this
Agreement, and this Agreement constitutes the legal, duly
authorized, valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms,
subject to the application of insolvency, bankruptcy or other
laws affecting the enforcement of creditors rights and
limitations on the availability of equitable remedies, and (vi)
execution and performance of this Agreement and consummation of
the Merger and the transactions contemplated hereunder does not
and will not violate or result in a breach of any provision of
any charter or by-law or other organizational or constitutional
document of the Company.
Such opinion shall also state that such counsel
have participated in the preparation of the Proxy Statement and,
on the basis of a general review of the Proxy Statement and
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<PAGE>
participation in conferences at which the contents of the Proxy
Statement and related matters were discussed, but without
independent verification of the accuracy, completeness or
fairness of the statements contained in the Proxy Statement, such
counsel does not have actual knowledge which would lead them to
believe that the Proxy Statement (except as to the financial
statements and other financial and statistical information
contained therein and material relating to or supplied by
Purchaser for use therein as to which counsel need not comment),
as of the date thereof, contained any untrue statement of a
material fact or omitted to state any material fact necessary to
make the statements therein, in light of the circumstances under
which they were made, not misleading.
In rendering such opinion, such counsel may rely
to the extent specified therein upon certificates of state
officials and officers of the Company as to matters of fact and
upon one or more opinions of local counsel of established
reputation as to all legal matters involving other than Federal
law. Such opinion will also cover such other matters as
Purchaser or its counsel may reasonably request, and will permit
reliance on such opinion by Purchaser s investors and lenders.
(f) Not more than 10% of the outstanding shares of the
Company entitled to vote at the Meeting of Stockholders shall
have perfected appraisal rights in respect of the Merger.
ARTICLE 7
TERMINATION
7.1 Termination by Mutual Consent. This Agreement may be
-----------------------------
terminated and the Merger may be abandoned at any time prior to
the Effective Time, before or after the approval of this
Agreement by the stockholders of the Company, by the mutual
consent of the Purchaser and the Company.
7.2 Termination by Either Purchaser or Company. This
------------------------------------------
Agreement may be terminated and the Merger may be abandoned by
action of the Board of Directors of either the Purchaser or the
Company if (a) the Merger shall not have been consummated by
December 31, 1998 (b) the approval of the Company's stockholders
required by Section 6.1(a) shall not have been obtained at a
meeting duly convened therefor or at any adjournment thereof, or
(c) a United States federal or state court of competent
jurisdiction or United States federal or state governmental,
regulatory or administrative agency or commission shall have
issued an order, decree or ruling or taken any other action
permanently restraining, enjoining or otherwise prohibiting the
transactions contemplated by this Agreement and such order,
decree, ruling or other action shall have become final and
non-appealable; provided, that the party seeking to terminate
this Agreement pursuant to this clause (c) shall have used all
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<PAGE>
reasonable efforts to remove such injunction, order or decree;
and provided, in the case of a termination pursuant to clause (a)
above, that the terminating party shall not have breached in any
material respect its obligations under this Agreement in any
manner that shall have proximately contributed to the failure to
consummate the Merger by December 31 1998.
7.3 Termination by Company. This Agreement may be
----------------------
terminated and the Merger may be abandoned at any time prior to
the Effective Time, before or after the adoption and approval by
the stockholders of the Company referred to in Section 6.1(a), by
action of the Board of Directors of the Company, if (a) there is
a Qualifying Alternative Proposal (as defined in Section 5.1(b))
that the Board of Directors of the Company in good faith
determines (in consultation with its financial advisors)
represents a financially superior transaction for the
stockholders of the Company as compared to the Merger and in the
exercise of its good faith judgment as to its fiduciary duties
imposed by law, as advised by outside counsel, the Board of
Directors of the Company determines that such termination is
required by reason of such being made; provided that the Company
shall (i) notify the Purchaser promptly of its intention to
terminate this Agreement or to enter into a definitive agreement
with respect to any such Qualifying Alternative Proposal (which
notice shall describe the material terms of such definitive
agreement), and (ii) give Purchaser 10 days to increase the
consideration payable hereunder to that payable pursuant to the
Qualifying Alternative Proposal (if so increased this Agreement
may not be terminated) but in no event shall such notice be given
less than 48 hours prior to the public announcement of the
Company's proposed termination of this Agreement; and provided
further that the right to terminate this Agreement pursuant to
this clause shall not be available if there has been a
non-performance or breach by the Company which has or would
reasonably be expected to have resulted in a failure of condition
under Section 6.3(a) hereof, or (b) there has been a
non-performance or breach by the Purchaser which has or would
reasonably be expected to have resulted in a failure of condition
under Section 6.2, which non-performance or breach is not curable
or, if curable, is not cured within 30 days after written notice
of such non-performance or breach is given by the Company to the
Purchaser. Notwithstanding the foregoing, the Company's ability
to terminate this Agreement pursuant to Section 7.2 or this
Section 7.3 is conditioned upon the payment by the Company of any
amounts owed by it pursuant to Section 7.5(a) to the extent owed
thereunder.
7.4 Termination by Purchaser. This Agreement may be
------------------------
terminated and the Merger may be abandoned at any time prior to
the Effective Time, before or after the approval by the
stockholders of the Company referred to in Section 6.1(a), by
action of the Board of Directors of the Purchaser, if (i) the
Board of Directors of the Company shall have withdrawn or
modified in a manner materially adverse to the Purchaser its
approval or recommendation of this Agreement or the Merger or
shall have recommended an Alternative Proposal to the Company's
stockholders, or (ii) there has been a non-performance or breach
by the Company which has or would reasonably be expected to have
resulted in a failure of condition under Section 6.3, which
non-performance or breach is not curable or, if curable, is not
cured within 30 days after written notice of such non-performance
or breach is given by the Purchaser to the Company.
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<PAGE>
7.5 Effect of Termination and Abandonment.
-------------------------------------
(a) In the event that any person shall have made an
Alternative Proposal for the Company and (i) thereafter this
Agreement is terminated pursuant to Section 7.3(a) or clause (i)
of Section 7.4 or (ii) this Agreement is terminated for any other
reason (other than the breach of this Agreement by the Purchaser)
and, in the case of this clause (ii) only, a transaction
contemplated by such Alternative Proposal is consummated within
one year after such termination (either of the foregoing events
being called a "Payment Event"), then the Company shall pay the
Purchaser the sum of Eight Hundred Thousand Dollars ($800,000)
which amount shall be payable by wire transfer of same day funds
either on the date contemplated in the last sentence of Section
7.3 if applicable or, otherwise, within two business days after
such amount becomes due. The Company acknowledges that the
agreements contained in this Section 7.5(a) are an integral part
of the transactions contemplated in this Agreement, and that,
without these agreements, the Purchaser would not enter into this
Agreement; accordingly, if the Company fails to promptly pay the
amount due pursuant to this Section 7.5(a), and, in order to
obtain such payment, the Purchaser commences a suit which results
in a judgment against the Company for the fee set forth in this
Section 7.5(a), the Company shall pay to the Purchaser its costs
and expenses (including attorneys' fees) in connection with such
suit, together with interest on the amount of the fee at the rate
of 12% per annum.
(b) In the event of termination of this Agreement and
the abandonment of the Merger pursuant to this Article 7, all
obligations of the parties hereto shall terminate, except the
obligations of the parties pursuant to this Section 7.5 and
except for the provisions of Sections 5.9, 8.3, 8.4, 8.6, 8.8,
8.9, 8.12 and 8.13. Moreover, in the event of termination of
this Agreement pursuant to Sections 7.2, 7.3 or 7.4, nothing
herein shall prejudice the ability of the non-breaching party
from seeking damages from any other party for any willful breach
of any material provision of this Agreement, including without
limitation, attorneys' fees and the right to pursue any remedy at
law or in equity.
7.6 Extension, Waiver.
-----------------
At any time prior to the Effective Time, any party hereto,
by action taken by its Board of Directors, may, to the extent
legally allowed, (i) extend the time for the performance of any
of the obligations or other acts of the other parties hereto,
(ii) waive any inaccuracies in the representations and warranties
made to such party contained herein or in any document delivered
pursuant hereto and (iii) waive compliance with any of the
agreements or conditions for the benefit of such party contained
herein. Any agreement on the part of a party hereto to any such
extension or waiver shall be valid only if set forth in an
instrument in writing signed on behalf of such party.
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<PAGE>
ARTICLE 8
GENERAL PROVISIONS
8.1 Nonsurvival of Representations, Warranties and
----------------------------------------------
Agreements. All representations, warranties and agreements in
----------
this Agreement or in any instrument delivered pursuant to this
Agreement shall be deemed to the extent expressly provided herein
to be conditions to the Merger and shall not survive the Merger,
provided, however, that the agreements contained in Article 2,
Sections 5.9 and 5.10 and this Article 8 shall survive the
Merger.
8.2 Notices. Any notice required to be given hereunder
-------
shall be sufficient if in writing, and sent by facsimile
transmission or by courier service (with proof of service), hand
delivery or certified or registered mail (return receipt
requested and first-class postage prepaid), addressed as follows:
If to the Purchaser: If to the Company:
Mr. Charles E. Lawson, Jr. Mr. D.J. Sutherland, Chairman
700 North Pennsylvania Avenue High Farms Road, Box 154
Wilkes Barre, PA 18705 Glen Head, NY 11545
Telecopy No.: (717) 823-9073 Telecopy No.: (516) 759-1754
With copies to: With copies to:
Gregory Katz, Esq. Andrew J. Beck, Esq.
Thelen Reid & Priest LLP Haythe & Curley
40 West 57th Street 237 Park Avenue
New York, NY 10019 New York, NY 10017-3142
Telecopy No.: (212) 603-2001 Telecopy No.: (212) 682-0200
or to such other address as any party shall specify by written
notice so given, and such notice shall be deemed to have been
delivered as of the date so telecommunicated, personally
delivered or mailed.
8.3 Assignment; Binding Effect. Neither this Agreement nor
--------------------------
any of the rights, interests or obligations hereunder shall be
assigned by any of the parties hereto (whether by operation of
law or otherwise) without the prior written consent of the other
parties. Subject to the preceding sentence, this Agreement shall
be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and assigns.
Notwithstanding anything contained in this Agreement to the
contrary, except for the provisions of Section 5.10, nothing in
this Agreement, expressed or implied, is intended to confer on
any person other than the parties hereto or their respective
heirs, successors, executors, administrators and assigns any
rights, remedies, obligations or liabilities under or by reason
of this Agreement.
-32-
<PAGE>
8.4 Entire Agreement. This Agreement, the Schedules, and
----------------
any documents delivered by the parties in connection herewith
constitute the entire agreement among the parties with respect to
the subject matter hereof and supersede all prior agreements and
understandings among the parties with respect thereto. No
addition to or modification of any provision of this Agreement
shall be binding upon any party hereto unless made in writing and
signed by all parties hereto.
8.5 Amendment. This Agreement may be amended by the
---------
parties hereto, by action taken by their respective Boards of
Directors, at any time before or after approval of matters
presented in connection with the Merger by the stockholders of
the Company, but after any such stockholder approval, no
amendment shall be made which by law requires the further
approval of stockholders without obtaining such further approval.
This Agreement may not be amended except by an instrument in
writing signed on behalf of each of the parties hereto.
8.6 Governing Law. This Agreement shall be governed by,
-------------
and construed in accordance with the laws of Pennsylvania
applicable to contracts executed and to be performed entirely
within that State without regard to the conflicts of laws
principles thereof.
8.7 Counterparts. This Agreement may be executed by the
------------
parties hereto in separate counterparts, each of which when so
executed and delivered shall be an original, but all such
counterparts shall together constitute one and the same
instrument. Each counterpart may consist of a number of copies
hereof each signed by less than all, but together signed by all
of the parties hereto.
8.8 Headings. Headings of the Articles and Sections of
--------
this Agreement are for the convenience of the parties only, and
shall be given no substantive or interpretive effect whatsoever.
8.9 Interpretation. In this Agreement, unless the context
--------------
otherwise requires, words describing the singular number shall
include the plural and vice versa, and words denoting any gender
shall include all genders and words denoting natural persons
shall include corporations and partnerships and vice versa.
8.10 Waivers. Except as provided in this Agreement, no
-------
action taken pursuant to this Agreement, including, without
limitation, any investigation by or on behalf of any party, shall
be deemed to constitute a waiver by the party taking such action
of compliance with any representations, warranties, covenants or
agreements contained in this Agreement. The waiver by any party
hereto of a breach of any provision hereunder shall not operate
or be construed as a waiver of any prior or subsequent breach of
the same or any other provision hereunder.
8.11 Incorporation of Exhibits and Schedules. The Exhibits
---------------------------------------
and Schedules attached hereto and referred to herein are hereby
incorporated herein and made a part hereof for all purposes as if
fully set forth herein.
-33-
<PAGE>
8.12 Severability. Any term or provision of this Agreement
------------
which is invalid or unenforceable in any jurisdiction shall, as
to that jurisdiction, be ineffective to the extent of such
invalidity or unenforceability without rendering invalid or
unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of
the terms or provisions of this Agreement in any other
jurisdiction. If any provision of this Agreement is so broad as
to be unenforceable, the provision shall be interpreted to be
only so broad as is enforceable.
8.13 Confidentiality. Purchaser agrees to treat
---------------
confidentially all non-public confidential information, trade
secrets and proprietary business practices and concepts (the
"Evaluation Material") disclosed by the Company to the Purchaser
at any time prior to the Closing Date. Purchaser agrees to
transmit the Evaluation Material only to its employees, agents,
financing sources or partners, and others who need to know such
information and who shall be advised by the Purchaser of this
provision and agree to be bound by the terms hereof. In the
event that the Purchaser is required (by oral questions,
interrogatories, requests for information or document subpoena,
civil investigative demand or similar process) to disclose any of
the Evaluation Material, it will provide the Company with prompt
notice of such request(s) so that the Company may seek an
appropriate protective order and/or waive the Purchaser's
compliance with these provisions. It is further agreed that if,
in the absence of a protective order or the receipt of a waiver
hereunder, the Purchaser is nonetheless, in the opinion of its
counsel, compelled to disclose any of the Evaluation Material to
any tribunal or else stand liable for contempt or suffer other
censure or penalty, the Purchaser may disclose such Evaluation
Material to such tribunal without liability hereunder. In the
event that the Merger is not effected after the Purchaser has
been furnished with Evaluation Material, it will promptly upon
the request of the Company deliver to the Company the Evaluation
Material, without retaining any copy thereof. The term
"Evaluation Material" does not include information which (i)
becomes or has been generally available to the public other than
as a result of a disclosure by the Purchaser or its
representatives, (ii) was available to the Purchaser on a non-
confidential basis prior to its disclosure to the Purchaser by
the Company or its representatives, or (iii) becomes available to
the Purchaser on a non-confidential basis from a source other
than the Company or its representatives, provided, however, that
such source is not bound by a confidentiality agreement with the
Company or its representatives.
8.14 Enforcement of Agreement. The parties hereto agree
------------------------
that irreparable damage would occur in the event any provision of
this Agreement was not performed in accordance with its specific
terms or was otherwise breached. It is accordingly agreed that
the parties shall be entitled to obtain an injunction or
injunctions to prevent breaches of this Agreement, this being in
addition to any other remedy to which they are entitled at law or
in equity. By each party's execution and delivery hereof, such
party hereby irrevocably submits to the jurisdiction of any such
court in connection with any such suit or proceeding, irrevocably
waives any objection, including any objection to the laying of
venue or based on the grounds of forum non conveniens, which it
may now or hereafter have to the bringing of any action or
proceeding in such jurisdiction in respect of this Agreement or
any document related hereto and each waives personal service of
any summons, complaint or other process which may be made by any
-34-
<PAGE>
other means permitted by Pennsylvania law. The parties hereto
irrevocably consent to service of process in the manner described
in Section 8.2 hereof, AND EACH PARTY HERETO IRREVOCABLY WAIVES
ANY RIGHT TO TRIAL BY JURY IN ANY SUIT OR PROCEEDING BROUGHT TO
ENFORCE OR INTERPRET THIS AGREEMENT.
-35-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement
and caused the same to be duly delivered on their behalf on the
day and year first written above.
The Lion Brewery, Inc.
By: /s/ Donald J. Sutherland
-------------------------------
Chairman of the Board
Malt Acquiring, Inc.
By: /s/ Charles E. Lawson, Jr.
-------------------------------
President
-36-
<PAGE>
AMENDMENT TO
AGREEMENT AND PLAN OF MERGER
AMENDMENT dated December 9, 1998 TO AGREEMENT AND PLAN OF
MERGER (the "Merger Agreement"), dated September 17, 1998,
between MALT ACQUIRING, INC., a Pennsylvania corporation
("Purchaser"), and THE LION BREWERY, INC., a Pennsylvania
corporation (the"Company").
RECITALS
--------
WHEREAS, the Board of Directors of the Purchaser and the
Company have approved this Amendment.
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Amendment. The Merger Agreement is hereby amended so
---------
that all references in Section 7.2 thereof to December 31, 1998
are hereby changed to January 29, 1999.
2. Continuing Effectiveness. The Merger Agreement, as
------------------------
hereby amended, shall remain in full force and effect.
3. Counterparts. This Amendment may be signed in multiple
------------
counterparts and facsimile signatures shall be valid as
originals.
IN WITNESS WHEREOF, the parties have executed this Amendment
and caused the same to be duly delivered on their behalf on the
day and year first written above.
The Lion Brewery, Inc.
By: /s/ Donald J. Sutherland
-------------------------------
Chairman of the Board
Malt Acquiring, Inc.
By: /s/ Charles E. Lawson, Jr.
-------------------------------
President
ANNEX B
-------
OPINION LETTER OF FINANCIAL ADVISOR
<PAGE>
TUCKER ANTHONY INCORPORATED
One Beacon Street
Boston, Massachusetts 02108
(617) 725-1762
(617) 725-2483 Fax
Investment Banking
September 17, 1998
Board of Directors
The Lion Brewery, Inc.
700 North Pennsylvania Avenue
Wilkes Barre, PA 18793
Members of the Board:
You have requested the opinion of Tucker Anthony Incorporated ("Tucker
Anthony") as to the fairness, from a financial point of view, of the
consideration to be received by the holders of The Lion Brewery, Inc.
(the "Company") common stock, $.01 par value (the "Common Stock")
pursuant to the Agreement and Plan of Merger dated September 17, 1998
(the "Agreement") by and among the Company and Malt Acquiring, Inc.
("MAI"). Pursuant to the Agreement, MAI will be merged with and into
the Company in accordance with applicable law (the "Merger"). Under
the terms of the Agreement, each outstanding share of Common Stock
(other than shares held by dissenting shareholders, if any) shall be
converted into the right to receive an amount in cash of $4.70 (the
"Merger Consideration").
Tucker Anthony, as part of its investment banking business, is
regularly engaged in the valuation of businesses and their securities
in connection with mergers and acquisitions, negotiated underwritings,
private placements and valuations for corporate and other purposes.
In the ordinary course of our business, we may actively trade the
securities of the Company for our own account and for the accounts of
customers and, accordingly, may at any time hold a long or short
position in such securities. Tucker Anthony has served as financial
advisor to the Company in connection with the Merger and will receive
a fee from the Company for its services, a significant portion of
which is payable upon the consummation of the Merger.
In arriving at our opinion, we have among other things:
(i) Reviewed the Agreement;
(ii) Reviewed certain historical financial and other information
concerning the Company for the five fiscal years ended September
30, 1997 and results for the nine months ended June 30, 1998,
including the Company's reports on Forms 10-K and 10-Q;
(iii)Held discussions with the senior management of the Company
with respect to its past and current financial performance,
financial condition and future prospects;
(iv) Reviewed certain internal financial data, projections and other
information of the Company, including financial projections
prepared by management, and performed a discounted cash flow
analysis using such projections;
<PAGE>
Board of Directors
The Lion Brewery, Inc.
September 17, 1998
Page 2 of 2
(v) Analyzed certain publicly available information of other
companies that operate in similar industries and compared the
Company from a financial point of view with certain of these
companies;
(vi) Reviewed the consideration received by stockholders in
acquisitions of companies that operate in similar industries or
that we otherwise deemed relevant to our inquiry;
(vii)Reviewed historical trading activity of the Common Stock and
considered the prospects for dividends and price movement;
and
(viii)Conducted such other financial studies, analyses and
investigations and reviewed such other information as we
deemed appropriate to enable us render our opinion. In our
review, we have also taken into account an assessment of
general economic, market and financial conditions and
certain industry trends and related matters.
In our review and analysis and in arriving at our opinion we have
assumed and relied upon the accuracy and completeness of all the
financial information publicly available or provided to us by the
Company and have not attempted to verify any of such information. We
have assumed (i) that the financial projections provided to us have
been prepared on a basis reflecting the best currently available
estimates and judgments of the Company's management as to the future
financial performance and results of the Company, and (ii) that such
forecasts and estimates will be realized in the amounts and in the
time periods estimated. We did not make or obtain any independent
evaluations or appraisals of any assets or liabilities of the Company
nor did we verify any of the Company's books or records. Our opinion
is necessarily based upon market, economic and other conditions as
they exist and can be evaluated as of the date hereof, and the
information made available to us through the date hereof.
This opinion is being furnished for the use and benefit of the
Company's Board of Directors and is not a recommendation to
shareholders. Tucker Anthony has advised the Board of Directors that
it does not believe any person other than the Board of Directors has
the legal right to rely on the opinion and, absent any controlling
precedent, would resist any assertion otherwise.
Based upon and subject to the foregoing, it is our opinion that the
Merger Consideration to be received by the stockholders of the Company
pursuant to the Agreement is fair to such stockholders, from a
financial point of view, as of the date hereof.
Very truly yours,
/s/ Tucker Anthony Inc.
<PAGE>
ANNEX C
-------
VOTING AGREEMENT
<PAGE>
VOTING AGREEMENT
VOTING AGREEMENT, dated as of September 17, 1998, among MALT
ACQUIRING, INC., a Pennsylvania corporation ("Purchaser"), and
each other entity and person listed on the signature pages hereof
(each, a "Stockholder"). WHEREAS, as of the date hereof, each
Stockholder owns (either beneficially or of record) the number of
shares of common stock, par value $.01 per share ("Lion Common
Stock"), of The Lion Brewery, Inc., a Pennsylvania corporation
("Lion"), set forth opposite such Stockholder's name on Exhibit A
hereto (all such shares and any shares hereafter acquired by any
Stockholder prior to the termination of this Agreement being
referred to herein as the "Shares");
WHEREAS, Purchaser and Lion propose to enter into an
Agreement and Plan of Merger, dated as of the date hereof (as the
same may be amended from time to time, the "Merger Agreement"),
which provides, upon the terms and subject to the conditions
thereof, for the merger (the "Merger") of Purchaser with and into
Lion; and
WHEREAS, as a condition to the willingness of Purchaser to
enter into the Merger Agreement, Purchaser has requested that
each Stockholder agree, and, in order to induce Purchaser to
enter into the Merger Agreement, each Stockholder has agreed,
severally and not jointly, to grant Purchaser certain voting
rights and enter into certain other agreements with respect
thereto;
NOW, THEREFORE, in consideration of the premises and of the
mutual agreements and covenants set forth herein and in the
Merger Agreement, the parties hereto agree as follows:
ARTICLE I
TRANSFER AND VOTING OF SHARES
Section 1.01. Transfer of Shares. During the term of this
------------------
Agreement, and except as otherwise provided herein, each
Stockholder shall not (a) sell, pledge (other than Permitted
Liens (as defined below)) or otherwise dispose of any of its
Shares, (b) deposit its Shares into a voting trust or enter into
a voting agreement or arrangement with respect to its Shares or
grant any proxy with respect thereto or (c) enter into any
contract, option or other arrangement or undertaking with respect
to the direct or indirect acquisition or sale,assignment,
transfer or other disposition of any Lion Common Stock.Exercise
of rights or remedies pursuant to bona fide pledges of Shares to
banks or other financial institutions ("Permitted Liens") are not
restricted by this Agreement; provided that in the case of
Permitted Liens granted after the date of this Agreement, such
Shares continue to be subject to Section 1.02 hereof.
Section 1.02. Voting of Shares; Further Assurances. (a)
------------------------------------
Each Stockholder, by this Agreement, with respect to those Shares
that it owns of record, does hereby constitute and appoint
Purchaser, or any nominee of Purchaser, with full power of
substitution, during and for the term of this Agreement, as its
true and lawful attorney and proxy, for and in its name, place
and stead, to vote each of such Shares as its proxy, at every
annual, special or adjourned meeting of the stockholders of Lion,
or any action by written consent in lieu of a meeting of the
stockholders of Lion (including the right to sign its name (as
stockholder) to any consent, certificate or other document
relating to Purchaser that the law of the Commonwealth of
Pennsylvania may permit or require) (i) in favor of the adoption
of the Merger Agreement and approval of the Merger and the other
transactions contemplated by the Merger Agreement, (ii) against
any proposal for any recapitalization, merger, sale of assets or
other business combination between Lion and any person or entity
(other than the Merger) or any other action or agreement that
would result in a breach of any covenant, representation or
warranty or any other obligation or agreement of Lion under the
Merger Agreement, and (iii) in favor of any other matter relating
to consummation of the transactions contemplated by the Merger
Agreement. Each Stockholder further agrees to cause the Shares
owned by it beneficially to be voted in accordance with the
foregoing. Each Stockholder acknowledges receipt and review of a
copy of the Merger Agreement,and that the proxy and voting
authority created hereby are coupled with an interest in the
Shares and irrevocable until termination of the Merger Agreement.
(b) Each Stockholder shall perform such further acts and
execute such further documents and instruments as may reasonably
be required to vest in Purchaser the power to carry out the
provisions of this Agreement.
Section 1.03. Term. This Agreement shall remain in effect
----
until the consummation of the Merger Agreement or its earlier
termination pursuant to Article 7 thereof.
ARTICLE II
GENERAL PROVISIONS
Section 2.01. Notices. All notices and other
-------
communications given or made pursuant hereto shall be in writing
and shall be deemed to have been duly given or made as of the
date delivered, mailed or transmitted, and shall be effective
upon receipt, if delivered personally, mailed by registered or
certified mail (postage prepaid, return receipt requested) to the
parties at the following addresses (or at such other address for
a party as shall be specified by like changes of address) or sent
by electronic transmission to the telecopier number specified
below:
(a) if to Purchaser
Mr. Charles E. Lawson, Jr.
700 North Pennsylvania Avenue
Wilkes-Barre, PA 18705
Telecopier No.: (717) 823-9073
with a copy to:
Gregory Katz, Esq.
Thelen Reid & Priest, LLP
40 West 57th Street
New York, New York 10019
Telecopier No.: (212) 603-2001
(b) If to a Stockholder, to the address set forth under
that Stockholder's name on Exhibit A hereof.
with a copy to:
Andrew J. Beck, Esq.
Haythe & Curley
237 Park Avenue
New York, New York 10017-3142
Telecopier No.: (212) 682-0200
Section 2.02. Headings. The headings contained in this
--------
Agreement are for reference purposes only and shall not affect in
any way the meaning or interpretation of this Agreement.
Section 2.03. Severability. If any term or other provision
------------
of this Agreement is invalid, illegal or incapable of being
enforced by any rule of law or public policy, all other
conditions and provisions of this Agreement shall nevertheless
remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected
in any manner materially adverse to any party. Upon such
determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties hereto shall
negotiate in good faith to modify this Agreement so as to effect
the original intent of the parties as closely as possible to the
fullest extent permitted by applicable law in an acceptable
manner to the end that the transactions contemplated hereby are
fulfilled to the extent possible.
Section 2.04. Entire Agreement. This Agreement constitutes
----------------
the entire agreement of the parties and supersedes all prior
agreements and undertakings,both written and oral, between the
parties, or any of them, with respect to the subject matter
hereof.
Section 2.05. Assignment. This Agreement shall not be
----------
assigned by operation of law or otherwise.
Section 2.06. Parties in Interest. This Agreement shall be
-------------------
binding upon and inure solely to the benefit of each party
hereto, and nothing in this Agreement, express or implied, is
intended to or shall confer upon any person any right, benefit or
remedy of any nature whatsoever under or by reason of this
Agreement.
Section 2.07. Enforcement of Agreement. The parties hereto
------------------------
agree that irreparable damage would occur in the event any
provision of this Agreement was not performed in accordance with
its specific terms or was otherwise breached. It is accordingly
agreed that the parties shall be entitled to obtain an injunction
or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof in the
courts of the Commonwealth of Pennsylvania located in Wilkes-
Barre, Pennsylvania or of the United States for the Middle
District of Pennsylvania, this being in addition to any other
remedy to which such party may be entitled at law or in equity.
By each party's execution and delivery hereof, such party hereby
irrevocably submits to the jurisdiction of any such court in
connection with any such suit or proceeding,irrevocably waives
any objection, including any objection to the laying of venue or
based on the grounds of forum non conveniens, which it may now or
hereafter have to the bringing of any action or proceeding in
such jurisdiction in respect of this Agreement, and each party
irrevocably waives personal service of any summons, complaint or
other process which may be made by any other means permitted by
Pennsylvania law, and irrevocably consents to service pursuant to
the notice provisions of Section 2.01 hereof. EACH PARTY HERETO
FURTHER HEREBY IRREVOCABLY WAIVES ITS RIGHT TO TRIAL BY JURY IN
ANY LEGAL PROCEEDING BROUGHT HEREUNDER.
Section 2.08. Governing Law. This Agreement shall be
-------------
governed by, and construed in accordance with, the laws of the
Commonwealth of Pennsylvania applicable to contracts executed and
to be performed entirely within that state, without regard to the
conflicts of laws principles thereof.
Section 2.09. Counterparts. This Agreement may be executed
------------
in one or more counterparts, and by the different parties hereto
in separate counterparts,each of which when executed shall be
deemed to be an original but all of which taken together shall
constitute one and the same agreement.
Section 2.10 Amendments. This Agreement may not be amended
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except by an instrument in writing signed by or on behalf of each
of the parties hereto.
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IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first written above.
MALT ACQUIRING, INC.
By: /s/ Charles E. Lawson
-----------------------------
Charles E. Lawson, Jr.,
President
QUINCY PARTNERS
By: Sans Peur Corp., general
partner
By: /s/ D.J. Sutherland
-----------------------------
D.J. Sutherland, President
LION PARTNERS COMPANY L.P.
By: /s/ D.J. Sutherland
-----------------------------
D.J. Sutherland, President of
the corporate general partner
of Quincy Partners, its
general partner.
NORTHWOOD VENTURES LLC
By: /s/ Henry T. Wilson
----------------------------
Managing Director
WESTON PRESIDIO OFFSHORE
CAPITAL C.V.
By: Carlo von Schroeter
----------------------------
Authorized Signatory
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EXHIBIT A
LIST OF STOCKHOLDERS
NAME AND ADDRESS OF STOCKHOLDER NUMBER OF SHARES
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Lion Partners Company, L.P. 1,495,184
c/o Quincy Partners
P.O. Box 154
High Farms Road
Glen Head, New York 11545
Telecopier No. 516-759-1754
Weston Presidio Offshore Capital C.V. 150,000
One Federal Street
21st Floor
Boston, MA 02111
Telecopier No. 617-988-2515
Quincy Partners 50,000
P. O. Box 154
High Farms Road
Glen Head, New York 11545
Telecopier No. 516-759-1754
Northwood Ventures LLC 25,000
485 Underhill Boulevard
Syosset, New York 11791-3419
Telecopier No. 516-364-0879
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ANNEX D
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DISSENTERS RIGHTS PROVISIONS OF THE
PENNSYLVANIA BUSINESS CORPORATION LAW
SUBCHAPTER D - DISSENTERS RIGHTS
ss.1571. Application and effect of subchapter.
(a) General rule. Except as otherwise provided in subsection (b), any
shareholder of a business corporation shall have the right to dissent from, and
to obtain payment of the fair value of his shares in the event of, any corporate
action, or to otherwise obtain fair value for his shares, where this part
expressly provides that a shareholder shall have the rights and remedies
provided in this subchapter. See:
Section 1906(c) (relating to dissenters rights upon special
treatment).
Section 1930 (relating to dissenters rights).
Section 1931(d) (relating to dissenters rights in share exchanges).
Section 1932(c) (relating to dissenters rights in asset transfers).
Section 1952(d) (relating to dissenters rights in division).
Section 1962(c) (relating to dissenters rights in conversion).
Section 2104(b) (relating to procedure).
Section 2324 (relating to corporation option where a restriction
on transfer of a security is held invalid).
Section 2325(b) (relating to minimum vote requirement).
Section 2704(c) (relating to dissenters rights upon election).
Section 2705(d) (relating to dissenters rights upon renewal of
election).
Section 2907(a) (relating to proceedings to terminate breach of
qualifying conditions).
Section 7104(b)(3) (relating to procedure).
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(b) Exceptions.
(1) Except as otherwise provided in paragraph (2), the holders
of the shares of any class or series of shares that, at the record date fixed to
determine the shareholders entitled to notice of and to vote at the meeting at
which a plan specified in any of section 1930, 1931(d), 1932(c) or 1952(d) is to
be voted on, are either:
(i) listed on a national securities exchange; or
(ii) held of record by more than 2,000 shareholders;
shall not have the right to obtain payment of the fair value of any such shares
under this subchapter.
(2) Paragraph (1) shall not apply to and dissenters rights
shall be available without regard to the exception provided in that paragraph in
the case of:
(i) Shares converted by a plan if the shares are not
converted solely into shares of the acquiring, surviving, new
or other corporation or solely into such shares and money in
lieu of fractional shares.
(ii) Shares of any preferred or special class unless
the articles, the plan or the terms of the transaction entitle
all shareholders of the class to vote thereon and require for
the adoption of the plan or the effectuation of the
transaction the affirmative vote of a majority of the votes
cast by all shareholders of the class.
(iii) Shares entitled to dissenters rights under
section 1906(c) (relating to dissenters rights upon special
treatment).
(3) The shareholders of a corporation that acquires by
purchase, lease, exchange or other disposition all or substantially all of the
shares, property or assets of another corporation by the issuance of shares,
obligations or otherwise, with or without assuming the liabilities of the other
corporation and with or without the intervention of another corporation or other
person, shall not be entitled to the rights and remedies of dissenting
shareholders provided in this subchapter regardless of the fact, if it be the
case, that the acquisition was accomplished by the issuance of voting shares of
the corporation to be outstanding immediately after the acquisition sufficient
to elect a majority or more of the directors of the corporation.
(c) Grant of optional dissenters rights. The bylaws or a resolution of
the board of directors may direct that all or a part of the shareholders shall
have dissenters rights in connection with any corporate action or other
transaction that would otherwise not entitle such shareholders to dissenters
rights.
(d) Notice of dissenters rights. Unless otherwise provided by statute,
if a proposed corporate action that would give rise to dissenters rights under
this subpart is submitted to a vote at a meeting of shareholders, there shall be
included in or enclosed with the notice of meeting:
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(1) A statement of the proposed action and a statement that
the shareholders have a right to dissent and obtain payment of the fair value of
their shares by complying with the terms of this subchapter; and
(2) A copy of this subchapter.
(e) Other statutes. The procedures of this subchapter shall also be
applicable to any transaction described in any statute other than this part that
makes reference to this subchapter for the purpose of granting dissenters
rights.
(f) Certain provisions of articles ineffective. This subchapter may not
be relaxed by any provision of the articles.
(g) Cross references. See sections 1105 (relating to restriction on
equitable relief), 1904 (relating to de facto transaction doctrine abolished)
and 2512 (relating to dissenters rights procedure).
ss.1572. Definitions.
The following words and phrases when used in this subchapter shall have
the meanings given to them in this section unless the context clearly indicates
otherwise:
"Corporation." The issuer of the shares held or owned by the dissenter
before the corporate action or the successor by merger, consolidation, division,
conversion or otherwise of that issuer. A plan of division may designate which
of the resulting corporations is the successor corporation for the purposes of
this subchapter. The successor corporation in a division shall have the sole
responsibility for payments to dissenters and other liabilities under this
subchapter except as otherwise provided in the plan of division.
"Dissenter." A shareholder or beneficial owner who is entitled to and
does assert dissenters rights under this subchapter and who has performed every
act required up to the time involved for the assertion of those rights.
"Fair value." The fair value of shares immediately before the
effectuation of the corporate action to which the dissenter objects, taking into
account all relevant factors, but excluding any appreciation or depreciation in
anticipation of the corporate action.
"Interest." Interest from the effective date of the corporate action
until the date of payment at such rate as is fair and equitable under all the
circumstances, taking into account all relevant factors, including the average
rate currently paid by the corporation on its principal bank loans.
ss.1573. Record and beneficial holders and owners.
(a) Record holders of shares. A record holder of shares of a business
corporation may assert dissenters rights as to fewer than all of the shares
registered in his name only if he dissents with respect to all the shares of the
same class or series beneficially owned by any one person and discloses the name
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and address of the person or persons on whose behalf he dissents. In that event,
his rights shall be determined as if the shares as to which he has dissented and
his other shares were registered in the names of different shareholders.
(b) Beneficial owners of shares. A beneficial owner of shares of a
business corporation who is not the record holder may assert dissenters rights
with respect to shares held on his behalf and shall be treated as a dissenting
shareholder under the terms of this subchapter if he submits to the corporation
not later than the time of the assertion of dissenters rights a written consent
of the record holder. A beneficial owner may not dissent with respect to some
but less than all shares of the same class or series owned by the owner, whether
or not the shares so owned by him are registered in his name.
ss.1574. Notice of intention to dissent.
If the proposed corporate action is submitted to a vote at a meeting of
shareholders of a business corporation, any person who wishes to dissent and
obtain payment of the fair value of his shares must file with the corporation,
prior to the vote, a written notice of intention to demand that he be paid the
fair value for his shares if the proposed action is effectuated, must effect no
change in the beneficial ownership of his shares from the date of such filing
continuously through the effective date of the proposed action and must refrain
from voting his shares in approval of such action. A dissenter who fails in any
respect shall not acquire any right to payment of the fair value of his shares
under this subchapter. Neither a proxy nor a vote against the proposed corporate
action shall constitute the written notice required by this section.
ss.1575. Notice to demand payment.
(a) General rule. If the proposed corporate action is approved by the
required vote at a meeting of shareholders of a business corporation, the
corporation shall mail a further notice to all dissenters who gave due notice of
intention to demand payment of the fair value of their shares and who refrained
from voting in favor of the proposed action. If the proposed corporate action is
to be taken without a vote of shareholders, the corporation shall send to all
shareholders who are entitled to dissent and demand payment of the fair value of
their shares a notice of the adoption of the plan or other corporate action. In
either case, the notice shall:
(1) State where and when a demand for payment must be sent and
certificates for certificated shares must be deposited in order to obtain
payment.
(2) Inform holders of uncertificated shares to what extent
transfer of shares will be restricted from the time that demand for payment is
received.
(3) Supply a form for demanding payment that includes a
request for certification of the date on which the shareholder, or the person on
whose behalf the shareholder dissents, acquired beneficial ownership of the
shares.
(4) Be accompanied by a copy of this subchapter.
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(b) Time for receipt of demand for payment. The time set for receipt of
the demand and deposit of certificated shares shall be not less than 30 days
from the mailing of the notice.
ss.1576. Failure to comply with notice to demand payment, etc.
(a) Effect of failure of shareholder to act. A shareholder who fails to
timely demand payment, or fails (in the case of certificated shares) to timely
deposit certificates, as required by a notice pursuant to section 1575 (relating
to notice to demand payment) shall not have any right under this subchapter to
receive payment of the fair value of his shares.
(b) Restriction on uncertificated shares. If the shares are not
represented by certificates, the business corporation may restrict their
transfer from the time of receipt of demand for payment until effectuation of
the proposed corporate action or the release of restrictions under the terms of
section 1577(a) (relating to failure to effectuate corporate action).
(c) Rights retained by shareholder. The dissenter shall retain all
other rights of a shareholder until those rights are modified by effectuation of
the proposed corporate action.
ss.1577. Release of restrictions or payment for shares.
(a) Failure to effectuate corporate action. Within 60 days after the
date set for demanding payment and depositing certificates, if the business
corporation has not effectuated the proposed corporate action, it shall return
any certificates that have been deposited and release uncertificated shares from
any transfer restrictions imposed by reason of the demand for payment.
(b) Renewal of notice to demand payment. When uncertificated shares
have been released from transfer restrictions and deposited certificates have
been returned, the corporation may at any later time send a new notice
conforming to the requirements of section 1575 (relating to notice to demand
payment), with like effect.
(c) Payment of fair value of shares. Promptly after effectuation of the
proposed corporate action, or upon timely receipt of demand for payment if the
corporate action has already been effectuated, the corporation shall either
remit to dissenters who have made demand and (if their shares are certificated)
have deposited their certificates the amount that the corporation estimates to
be the fair value of the shares, or give written notice that no remittance under
this section will be made. The remittance or notice shall be accompanied by:
(1) The closing balance sheet and statement of income of the
issuer of the shares held or owned by the dissenter for a fiscal year ending not
more than 16 months before the date of remittance or notice together with the
latest available interim financial statements.
(2) A statement of the corporation's estimate of the fair
value of the shares.
(3) A notice of the right of the dissenter to demand payment
or supplemental payment, as the case may be, accompanied by a copy of this
subchapter.
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(d) Failure to make payment. If the corporation does not remit the
amount of its estimate of the fair value of the shares as provided by subsection
(c), it shall return any certificates that have been deposited and release
uncertificated shares from any transfer restrictions imposed by reason of the
demand for payment. The corporation may make a notation on any such certificate
or on the records of the corporation relating to any such uncertificated shares
that such demand has been made. If shares with respect to which notation has
been so made shall be transferred, each new certificate issued therefor or the
records relating to any transferred uncertificated shares shall bear a similar
notation, together with the name of the original dissenting holder or owner of
such shares. A transferee of such shares shall not acquire by such transfer any
rights in the corporation other than those that the original dissenters had
after making demand for payment of their fair value.
ss.1578. Estimate by dissenter of fair value of shares.
(a) General rule. If the business corporation gives notice of its
estimate of the fair value of the shares, without remitting such amount, or
remits payment of its estimate of the fair value of a dissenter's shares as
permitted by section 1577(c) (relating to payment of fair value of shares) and
the dissenter believes that the amount stated or remitted is less than the fair
value of his shares, he may send to the corporation his own estimate of the fair
value of the shares, which shall be deemed a demand for payment of the amount or
the deficiency.
(b) Effect of failure to file estimate. Where the dissenter does not
file his own estimate under subsection (a) within 30 days after the mailing by
the corporation of its remittance or notice, the dissenter shall be entitled to
no more than the amount stated in the notice or remitted to him by the
corporation.
ss.1579. Valuation proceedings generally.
(a) General rule. Within 60 days after the latest of:
(1) Effectuation of the proposed corporate action;
(2) Timely receipt of any demands for payment under
section 1575 (relating to notice to demand payment);
or
(3) Timely receipt of any estimates pursuant to section 1578
(relating to estimate by dissenter of fair value of shares);
If any demands for payment remain unsettled, the business
corporation may file in court an application for relief requesting that the fair
value of the shares be determined by the court.
(b) Mandatory joinder of dissenters. All dissenters, wherever residing,
whose demands have not been settled shall be made parties to the proceeding as
in an action against their shares. A copy of the application shall be served on
each such dissenter. If a dissenter is a nonresident, the copy may be served on
him in the manner provided or prescribed by or pursuant to 42 Pa.C.S. Ch. 53
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(relating to bases of jurisdiction and interstate and international procedure).
42 Pa.C.S.A. ss.5301 et. seq.
(c) Jurisdiction of the court. The jurisdiction of the court shall be
plenary and exclusive. The court may appoint an appraiser to receive evidence
and recommend a decision on the issue of fair value. The appraiser shall have
such power and authority as may be specified in the order of appointment or in
any amendment thereof.
(d) Measure of recovery. Each dissenter who is made a party shall be
entitled to recover the amount by which the fair value of his shares is found to
exceed the amount, if any, previously remitted, plus interest.
(e) Effect of corporation's failure to file application. If the
corporation fails to file an application as provided in subsection (a), any
dissenter who made a demand and who has not already settled his claim against
the corporation may do so in the name of the corporation at any time within 30
days after the expiration of the 60-day period. If a dissenter does not file an
application within the 30-day period, each dissenter entitled to file an
application shall be paid the corporation's estimate of the fair value of the
shares and no more, and may bring an action to recover any amount not previously
remitted.
ss.1580. Costs and expenses of valuation proceedings.
(a) General rule. The costs and expenses of any proceeding under
section 1579 (relating to valuation proceedings generally), including the
reasonable compensation and expenses of the appraiser appointed by the court,
shall be determined by the court and assessed against the business corporation
except that any part of the costs and expenses may be apportioned and assessed
as the court deems appropriate against all or some of the dissenters who are
parties and whose action in demanding supplemental payment under section 1578
(relating to estimate by dissenter of fair value of shares) the court finds to
be dilatory, obdurate, arbitrary, vexatious or in bad faith.
(b) Assessment of counsel fees and expert fees where lack of good faith
appears. Fees and expenses of counsel and of experts for the respective parties
may be assessed as the court deems appropriate against the corporation and in
favor of any or all dissenters if the corporation failed to comply substantially
with the requirements of this subchapter and may be assessed against either the
corporation or a dissenter, in favor of any other party, if the court finds that
the party against whom the fees and expenses are assessed acted in bad faith or
in a dilatory, obdurate, arbitrary or vexatious manner in respect to the rights
provided by this subchapter.
(c) Award of fees for benefits to other dissenters. If the court finds
that the services of counsel for any dissenter were of substantial benefit to
other dissenters similarly situated and should not be assessed against the
corporation, it may award to those counsel reasonable fees to be paid out of the
amounts awarded to the dissenters who were benefited.
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ss.1930. Dissenters rights.
(a) General rule. If any shareholder of a domestic business corporation
that is to be a party to a merger or consolidation pursuant to a plan of merger
or consolidation objects to the plan of merger or consolidation and complies
with the provisions of Subchapter D of Chapter 15 Pa.C.S.A. ss. 1571 et. seq.
(relating to dissenters rights), the shareholder shall be entitled to the rights
and remedies of dissenting shareholders therein provided, if any. See also
section 1906(c) (relating to dissenters rights upon special treatment).
(b) Plans adopted by directors only. Except as otherwise provided
pursuant to section 1571(c) (relating to grant of optional dissenters rights),
Subchapter D of Chapter 15 shall not apply to any of the shares of a corporation
that is a party to a merger or consolidation pursuant to section 1924(1)(i)
(relating to adoption by board of directors).
(c) Cross references. See sections 1571(b) (relating to exceptions) and
1904 (relating to de facto transaction doctrine abolished).
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