-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GQ+6Ig+jWatj1ZcndkQahBKGowKsylV99AKtwx2/t+HpHNIfNDVvuNrn6972ahhL K/IZvp7HAYCvUbuK1/kUVg== 0000950120-97-000335.txt : 19971230 0000950120-97-000335.hdr.sgml : 19971230 ACCESSION NUMBER: 0000950120-97-000335 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971229 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: LION BREWERY INC CENTRAL INDEX KEY: 0001008990 STANDARD INDUSTRIAL CLASSIFICATION: MALT BEVERAGES [2082] IRS NUMBER: 240645190 STATE OF INCORPORATION: PA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-28282 FILM NUMBER: 97745821 BUSINESS ADDRESS: STREET 1: 700 N PENNSYLVANIA AVE CITY: WILKES BARRE STATE: PA ZIP: 18703 BUSINESS PHONE: 7178238801 10KSB 1 FORM 10-KSB - THE LION BREWERY, INC. FORM 10-KSB U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended September 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from ............... to............... Commission File No. 0-28282 THE LION BREWERY, INC. (Exact Name of Small Business Issuer as Specified in Its Charter) PENNSYLVANIA 24-0645190 (State or Other Jurisdiction (I.R.S. Employer Identification No.) of Incorporation or Organization) 700 NORTH PENNSYLVANIA AVENUE, WILKES-BARRE, PA 18703 (Address of Principal Executive Offices) Registrant's telephone number, including area code (717) 823-8801 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK Indicate by check whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No _____ Indicate by check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] State the aggregate market value of the registrant's shares held by non-affiliates at December 22, 1997: $8,164,338. State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: December 22, 1997: 3,885,052 shares outstanding State issuer's revenues for its most recent fiscal year: $26,869,000 Transitional Small Business Disclosure Format (check one): Yes _____No __X__ DOCUMENTS INCORPORATED BY REFERENCE The definitive proxy statement for the registrant's 1997 Annual Meeting, to be filed with the Commission no later than 120 days after the close of the registrant's fiscal year has been incorporated by reference, in whole or in part for Part III of this Annual Report. PART I. ITEM 1. BUSINESS: GENERAL The Lion Brewery, Inc. ("Lion Brewery" or the "Company") is a producer and bottler of brewed beverages, including malta, specialty beers and specialty soft drinks. The Lion Brewery was incorporated in Pennsylvania on April 5, 1933. The Company is the dominant producer of malta in the continental United States. Specialty beers, generally known as craft beers, are brewed by the Company both for sale under its own label and on a contract basis. Craft beers are distinguishable from other domestically produced beers by their fuller flavor and adherence to traditional European brewing styles. The Company produces flavored alcoholic malt beverages and specialty soft drinks, including all-natural brewed ginger beverages, on a contract basis for third parties. The Lion Brewery also brews beer for sale under traditional Company owned labels for the local market at popular prices. The Company's growth strategy is to expand its production and marketing of specialty beverages, which includes Company-owned labels and labels produced under contract. By owning and operating its own brewery and with its significant brewing and packaging experience, the Company believes it is well positioned to optimize the quality and consistency of its products as well as to formulate new products. The Company plans to increase sales of its specialty beer labels through increased penetration of these brands in its existing markets, through a more focused and cost effective approach in its sales and marketing efforts. The Company's traditional beers - Stegmaier Gold Medal, 1857 Premium Lager, Liebotschaner Cream Ale and Stegmaier Porter - are reminiscent of the Company's rich beer brewing heritage. The Lion Brewery is the beneficiary of a long brewing tradition. The brewhouse was built at the turn of the century in Wilkes-Barre, Pennsylvania. The Company's flagship line of specialty craft beers are marketed under the Brewery Hill name. The Company currently produces seven styles of beer under the Brewery Hill label, two of which are seasonal flavors. The Company established its reputation as a quality leader in the rapidly growing craft beer market by winning three Gold Medals at the Great American Beer Festival. The Lion Brewery's 1857 Premium Lager was voted Best American Premium Lager in 1994 and Liebotschaner Cream Ale won back to back gold medals in the American Lager Cream Ale Category in 1994 and 1995. In 1997, the Company has also received the following awards at the World Beer Championships: Brewery Hill Caramel Porter Gold Medal Stegmaier Porter Gold Medal Brewery Hill Centennial Lager Silver Medal Brewery Hill Honey Amber Silver Medal Brewery Hill Pocono Raspberry Silver Medal Stegmaier 1857 Premium Lager Silver Medal Liebotschaner Cream Ale Silver Medal Brewery Hill Pale Ale Bronze Medal Brewery Hill Caramel Porter and Stegmaier Porter were also awarded Gold medals by Beer Connoisseur Magazine. In addition, craft beers and specialty soft drinks brewed by the Company under contract have won several awards. COMPANY HISTORY AND INDUSTRY BACKGROUND The brewhouse in which the Company continues to brew its products was built at the turn of the century in Wilkes-Barre, Pennsylvania. At that time, the U.S. brewing industry comprised nearly 2,000 breweries, most of which were small operations that produced distinctive beers for local markets. The Company was incorporated as The Lion, Inc. in April 1933 to operate the brewery, which was one of the fewer than 1,000 breweries to reopen following Prohibition. Over the ensuing decades, lighter, less distinctively flavored beers appealing to broad segments of the population and supported by national advertising programs became prevalent. These beers use lower cost ingredients and are mass produced to take advantage of economies of scale. This shift toward mass produced beers coincided with extreme consolidation in the beer industry. In keeping with this consolidation trend, the Company purchased other labels including the Stegmaier brands, which had been produced on Brewery Hill in Wilkes-Barre since 1857. Of the more than 60 breweries existing in eastern Pennsylvania 50 years ago, only two, including the Lion Brewery, remain. Today, according to industry sources, approximately 90% of all domestic beer shipments come from the four largest domestic brewers. Beginning in the mid 1980s and continuing in the 1990s, a number of domestic craft brewers began selling higher quality, more full-flavored beers, usually in local markets, as a growing number of consumers began to migrate away from less flavorful mass-marketed beers towards greater taste and broader variety, mirroring similar-trends in other beverage and food categories. As an established regional specialty brewer, the Lion Brewery believes it is well-positioned to benefit from this shift in consumer preferences. In 1996, according to industry sources, the craft beer segment increased to approximately 4.8 million barrels, representing approximately 2.5% of the 190 million barrel, $50 billion retail domestic beer market. In 1996, craft beer shipments grew 28%; over the five year period ended December 31, 1995, craft beer shipments increased at a compound annual rate of approximately 40%, while shipments in the total U.S. beer industry remained relatively flat. Industry analysts have attributed this flat over-all beer consumption to a variety of factors, including increased concerns about the health consequences of consuming alcoholic beverages, safety consciousness and concerns about drinking and driving; a trend toward a diet including lighter, lower calorie beverages such as diet soft drinks, juices and sparkling water products; the increased activity of anti-alcohol consumer protection groups; an increase in the minimum drinking age from 18 to 21 years in all states; the general aging of the population; and increased federal and state excise taxes. Today the top three national brewers have entered into this fast growing craft segment by introducing their own specialty beers and/or by acquiring or investing in smaller regional craft brewers. Before the emergence of the market opportunity in specialty beer, the Lion Brewery diversified into other products to sustain operations and continue to utilize its brewhouse and bottling facility. The Company's strategic entry into malta production in 1982 has resulted in the Company becoming the dominant producer of malta in the continental United States. Malta was originally developed many years ago by German brewers operating in the Caribbean area. The brewers developed malta by blending the excess molasses production from sugar with grain mash. Malta is still popular throughout the Caribbean and South America. In addition to malta, the Company also diversified into producing premium soft drinks in 1991. BUSINESS STRATEGY The Company intends to enhance its position as a leading producer of specialty brewed beverages by expanding production and marketing of craft beers and other malt based premium products, while maintaining the growth of its nonalcoholic brewed beverages. Key elements of the Company's business strategy are to: Produce High Quality Brewed Beverages. The Company is committed to producing a variety of full-flavored brewed beverages. The Company employs a Head Brewmaster, an assistant brewmaster and a brewing assistant and retains a world recognized brewing authority to ensure the high quality and consistency of its products. To monitor the quality of its products, the Company maintains its own quality control laboratory staffed with two full-time quality control technicians and submits its products for analysis to the Seibel Institute of Technology, an independent laboratory, on a continuous basis. To monitor freshness, the Company dates each bottle and case with the date and time of its bottling. The Company brews its craft beers according to traditional styles and methods, selecting and using only high quality ingredients. Brew Products in Company-Owned and Operated Facilities. The Company owns and operates its own brewing facility, which enables the Company to optimize the quality and consistency of its products, to achieve the greatest control over its production costs and to formulate new brewed products. The Company believes that its ability to engage in new product development through onsite experimentation in its brewhouse and to continuously monitor and control product quality in its own facilities are competitive advantages. Focused Distribution of Craft Beers. The Company distributes craft beer under its own labels through a network of wholesale distributor relationships. Currently the Company distributes its products in eleven states, although the majority of its sales remain concentrated in Pennsylvania. The Company intends to further penetrate its existing markets with a targeted, cost effective approach in its sales and marketing efforts. The Company chooses wholesaler distributors that the Company believes will best promote and sell the brands. The Company, through on site tours and presentations, actively educates its distributors in the total brewing process and the growing craft beer industry. Introduce New Products. The Company is committed to developing and introducing new products to appeal to the strong consumer interest under its own labels and for its contract customers. The Company's diversified product mix and brewing expertise enhance its ability to create successful new products. The Company believes that new product introductions have helped the Company gain consumer awareness in its existing markets. Currently, the Company markets seven craft beers under the Brewery Hill label. In 1997, the Company introduced Brewery Hill Centennial Lager and Brewery Hill Caramel Porter, its winter seasonal. The Company also entered the specialty soft drink arena with the introduction of Lion Brewery Root Beer and developed several new soft drink products for its contract customers. Flexible Production Capacity and Increased Efficiency. The Company has increased its annual production capacity from 340,000 to 400,000 barrels based upon its anticipated product mix. This expansion included the modification of its existing seven ounce bottling line to also accommodate 12 oz. bottles, the bottle size for most of the Company's products. In addition, The Company has increased its fermentation and lagering capacity with the relining of nine storage tanks. The Company also installed automated malt storage and elevation system and is in the process of automating a portion of the brewing process. Provide a High Level of Customer Service. The Company, through its high quality brewing standards and timely availability of product, believes it provides a high level of customer service to its malta, contract craft beer and specialty soft drink customers. The Company believes its emphasis on customer service has enabled the Company to increase sales to these customers. PRODUCTS The Lion Brewery's diversified product portfolio consists of a variety of styles of malta, craft beers and specialty brewed beverages and soft drinks, including all-natural brewed ginger beverages, and popularly priced beer sold under traditional Company-owned labels. The Company distributes its products in glass bottles and kegs and its products are dated to monitor freshness. Malta. Malta is a non-alcoholic brewed beverage popular with the Caribbean and certain other segments of the Hispanic population, which the Company produces for distribution by major Hispanic food distribution companies primarily in the eastern United States. The leading malta brands have varying taste characteristics based on different formulations provided to the Lion Brewery by the distribution companies under whose labels the product is sold. The principal ingredients of malta are malt (a germinated form of barley grain), several types of fructose syrup, caramel coloring and hops in modest quantities. Significant variations made by the Company involve the addition of molasses for one customer and production with lower malt quantities and higher levels of fructose sweetener for another. The Company also brews an alcoholic form of malta called Extracto which resembles standard malta but also includes some roasted malt and hops extract to add bitterness. The Company developed for Goya Foods a malta light product using Nutrasweet. In fiscal 1997 and 1996, malta constituted approximately 67% and 68%, respectively, of the Company's annual barrel shipments and 66% and 68%, respectively, of net sales. The Lion Brewery is the dominant producer of malta in the continental United States. Malta requires substantially less production time than beer or ale. The product remains in aging tanks for only a few days, compared to up to 50 days in fermentation and lagering tanks for beer. Malta is bottled in seven ounce and 12 oz. sizes. Craft and Traditional Beers. The Company currently produces eleven distinctive, craft and traditional full-flavored beers and engages in the research and development of new specialty beers. The Company brews its beers using high quality hops, malted barley, and other natural ingredients. The Company utilizes both a lager and ale yeast in the fermentation of its beers and ales. The Company distributes its beers only in glass bottles and kegs. All of the glass bottles are date coded for freshness and are pasteurized. Stegmaier 1857 Premium Lager. This award winning lager is brewed with three different types of malt and four different types of hops. The hops are imported German Hallertau Hersbrucker, English East Kent Golding and Czech Saaz, as well as domestic U.S. Mt. Hood. This lager is distinguished by its clean, well balanced and full taste and rich golden color. 1857 Premium Lager won the Gold Medal in the American Premium Lager category at the 1994 Great American Beer Festival. In 1997, Stegmaier 1857 Premium Lager was awarded a Silver Medal in the World Beer Championships. Stegmaier Gold Medal Beer. This typical American Pilsner is brewed with two different types of malt, corn and a blend of domestic and imported hops. The hops are imported Czech Saaz and domestic U.S. Mt. Hood and Cascade. This lager is distinguished by its crisp and clean easy to drink taste. Stegmaier Gold Medal Beer won a Silver Medal in the 1996 World Beer Championships. Stegmaier Porter. This porter, or dark beer, is brewed from four different varieties of malt, including two types of roasted malt. Stegmaier Porter is brewed with the Company's ale yeast and bittered and finished with English East Kent Goldings and other hops to give a balanced flavor and excellent drinkability for a dark beer. Stegmaier Porter won Gold medals at the World Beer Championships and in Beer Connoisseur Magazine in 1997. Liebotschaner Cream Ale. Cream ale is brewed with a lager yeast at higher fermentation temperatures than typical lager, creating an ale-like taste. "Lieb" has a full creamy flavor balanced by spicy, fruity characteristics from the hop finish. "Lieb" utilizes two different varieties of pale malt and three different varieties of hops, including imported Czech Saaz. Liebotschaner Cream Ale won consecutive Gold Medals in the American Lager Cream Ale category at the Great American Beer Festival in 1994 and 1995. In 1997, Liebotschaner Cream Ale was awarded a Silver Medal in the World Beer Championships. Brewery Hill Black and Tan. This mixture of the Lion Brewery's award winning 1857 Premium Lager and Stegmaier Porter creates a rich, full flavored beer. Brewery hill Black & Tan won first place--World Champion in 1996 at the World Beer Championships. Brewery Hill Caramel Porter. This flavorful beer uses a top-fermenting ale yeast. Caramel Porter uses four different malts, including an extra generous portion of Caramel and Chocolate malts to give Caramel Porter a very pleasant caramel and chocolate flavor and aroma. Brewery Hill Caramel Porter is a winter seasonal brew. In 1997, Brewery Hill Caramel Porter won Gold medals at the World Beer Championships and in Beer Connoisseur Magazine. Brewery Hill Centennial Lager. This hand-crafted full bodied lager features four different barley malts (including Roasted Barley) and is kettled hopped with three hop varieties (including imported Hallertau Hersbrucker and Czech Saaz). Centennial is then dry hopped with Czech Sazz and allowed to slow age to impart an incredible balance of malt and hops and a wonderful hop aroma and flavor. Brewery Hill Centennial is a new world of old world brewing traditions. Brewery Hill Centennial Lager won a Silver Medal in the 1997 World Beer Championships. Brewery Hill Cherry Wheat. This ale is brewed using three different malts, including a generous dose of wheat malt. Brewery Hill Cherry Wheat is blended with pure and natural cherry juice and flavors to give this brew a delicate cherry flavor. Brewery Hill Cherry Wheat is a summer seasonal brew. Brewery Hill Cherry Wheat won first place--World Champion at the World Beer Championships in 1996. Brewery Hill Honey Amber. This amber beer is brewed with three different malts and utilizes English East Kent Goldings hops. It is finished with pure, locally harvested clover honey to give a balance of flavor. The result is a rich amber color and malty bouquet. Brewery Hill Honey Amber won a Sliver medal at the World Beer Championships in 1997 and 1996. Brewery Hill Pocono Raspberry. This award winning ale is blended with pure and natural raspberry juices and flavors to create a balanced flavor that is a delicate blend of the sweetness and tartness of raspberries. Brewery Hill Pocono Raspberry won a Silver medal at the World Beer Championships in 1997 and 1996. Brewery Hill Pale Ale. This American pale ale is brewed with two different malts and three different types of hops: English East Kent Golding, Cascade and domestic U.S. Mt. Hood. This ale is brewed with the Company's ale yeast and is kettle hopped. After a seven day fermentation period the ale then undergoes dry hopping. Unboiled hop roots are added to give this ale additional hop aroma. When finished, the pale ale has a clean malty fullness, an intense hop bitterness and a highly aromatic hop. Brewery Hill Pale Ale won a Bronze medal in the 1997 World Beer Championships. The Company also brews many distinctive craft beers and other specialty malt beverages under contract for other labels. Some of these customers are microbreweries and brewpubs that need additional brewing capacity to meet their production requirements and which typically provide their own recipes. In other instances, the Company formulates beer and specialty malt beverages for customers marketing their own labels. Most of these contract brewing customers provide their own packaging and labels. The Company arranges shipment to distributors F.O.B. the Company's warehouse and handles invoicing as a service to these customers. Among the Company's larger craft beer and specialty malt contract customers are: Stoudt Brewing Company. This microbrewery and restaurant is located in Adamstown, Pennsylvania. The Lion Brewery produces Stoudt's Golden Lager, Fest, Honey Double Bock, Mai- Bock and Scarlet Lady in bottles pursuant to Stoudt's recipes and as a supplement to Stoudt's own production. Stoudt's beers have won five awards in the last five years, four at the Great American Beer Festival and one at the World Beer Championships. Neuweiler Brewing Company. This craft beer marketing company is located in Allentown, Pennsylvania and sells four different styles of beer, all of which were formulated by and are brewed at the Lion Brewery. The Neuweiler Black and Tan won a Bronze Medal, Dark Lager Category, at the 1992 Great American Beer Festival. Valley Forge Brewing Company. This brewpub is located in Wayne, Pennsylvania. The Lion Brewery produces three distinctive flavors, Peach Wheat, Stout and Pale Ale in bottles pursuant to Valley Forge's recipes. Blue Hen Ltd. This marketer of craft beers located in Delaware sells three styles of beer formulated and produced by the Lion Brewery. The Blue Hen Lager won the Silver Medal at the World Beer Championships in both 1994 and 1996 and the Blue Hen Black and Tan won the Bronze Medal, Dark Lager category, at the 1996 World Beer Championships. In 1997, the Company began producing Blue Hen Chocolate Porter. Better Beverage Importers. This marketer of specialty malt beverages located in Delaware sells alcoholic malt based lemon and raspberry brews under the One-Eyed Jack label. These products are distributed in over 30 states. Bass Beers Americas. This marketer of specialty malt beverages located in Atlanta sells an alcoholic malt based lemon brew called Hooper's Hooch TM. The Lion Brewery, Inc. produces Hooper's Hooch for distribution in 14 eastern states. The Lion Brewery craft beer and specialty malt beverages produced for sale under its own labels and under contract for others accounted for approximately 13% and 14% of its annual barrel shipments and 17% and 19% of its net sales in fiscal 1997 and 1996, respectively. SPECIALTY SOFT DRINKS. The Lion Brewery first began blending and bottling specialty soft drinks in 1987. The Company currently produces specialty soft drinks under contract for five customers including: Original Beverage Company. In June 1991, the Lion Brewery began producing for this customer Reed's All Natural Ginger Beer, a soft drink based on brewed ginger root. The Company is currently the sole brewer of beverages sold under the Reed's label. This product was originally developed and produced in a small microbrewery in Colorado and the Company believes that Reed's is the leading brewed soft drink in health food stores. Ginger roots are processed in the Lion Brewery's brew kettle to yield this all natural brewed product. The Reed's portfolio consists of five all natural flavors of real brewed ginger products: Original, Extra, Premium, Spiced Apple and Raspberry. In 1997, the Company began producing Borgnine's Coffee Soda and China Cola and Cherry Cola to be marketed by the Original Beverage Company. Reed's Original Ginger Brew was named Best Imported Food Product-Canadian Fancy Food Association and the 1991 Outstanding Beverage Finalist-National Association for the Specialty Food Trade. Reed's Spiced Apple Brew won the 1994 Outstanding Beverage Finalist-National Association for the Specialty Food Trade. Mad River. The Company produces eleven varieties of premium all natural blended soft drinks for Mad River. The product is sold to consumers primarily in resort locations and in upscale specialty food stores. The Company also produces specialty soft drinks for Goya Foods, Vitarroz and Virgil's. Specialty soft drinks accounted for approximately 16% and 12% of the Lion Brewery's barrel shipments and 14% and 9% of its net sales in fiscal 1997 and 1996, respectively. POPULAR PRICED BEER. The Company brews beer for sale at popular prices in local markets under several traditional Company-owned brands. A majority of this beer is bottled in 16 oz. returnable bottles. Popular priced beer accounted for approximately 4% and 6% of barrel shipments and 3% and 4% of net sales in fiscal 1997 and 1996, respectively. BREWING OPERATIONS Beer is made primarily from four natural ingredients: malted grain, hops, yeast and water. Malt suppliers prepare malt from barley grain by soaking it in water to initiate germination and then drying (kilning) the germinated grain with varying amounts of heat to vary the final characteristics of the malt (for example, more heat yields "roasted" malt). Hops grow in many varieties and impart bitterness or other distinctive flavors to the beer. Yeasts are either top-fermenting, used in ale production, or bottom fermenting, which produce lager style beers. The components of malta are primarily malted grain, water and supplemental sweeteners. Since malta is not fermented, yeast is not used. [GRAPHIC OMITTED] Brewing Process. The process of brewing beer consists of extracting fermentable sugar from the malt, brewing the liquid containing these sugars (wort) in combination with hops and other natural flavorings, fermenting the brewed liquid and then finishing (maturing) the beer in tanks for periods ranging from ten to 40 days depending upon the beer style. The brewing process for malta is substantially similar to that for beer except that fermentation is not involved. Malta's sweetness relative to beer is partly attributable to the malt sugars in the beverage which would be transformed to alcohol if the beverage was fermented. The brewed ginger ale made by the Company uses ginger root rather than malt as the principal ingredient. The entire brewing process for the Company's products varies from two days to 50 days, depending on the type of products brewed. Extracting the fermentable sugars begins with milling the dried malt. Milling consists of crushing (not grinding) the malt between pairs of rollers in the malt mill. This causes a separation of the husk from the body and also breaks the body and exposes the internal components of the barley malt for the mashing process. The crushed malt is then combined with specially treated brewing water at a specific temperature in the mash tub to create the mash. The Company uses the traditional upward infusion mashing system that uses three precisely controlled temperature and time plateaus to create the resultant sugar liquid called "wort." The completed mash is then filtered by gravity in the lauter tub. The filtration media is the crushed grain itself. The wort is collected and transferred to the brew kettle The wort is boiled in the brew kettle for 90 to 120 minutes. During this boiling process, the precise amount of the hop varietals are added at specified time intervals to create the desired bitterness and aroma. The boiled wort is then transferred to the hot wort tank (whirlpool) where the proteins from the malt and the tannins from the hops are allowed to settle out and are removed. The wort is then rapidly cooled to the desired temperature and infused with air. The aerated wort is then transferred to fermentation tanks to which a precisely monitored amount of yeast of a specific type at a specific temperature is added. Air in the wort allows the yeast to remain flexible and enables it to begin a rapid and complete fermentation. After several hours, the air is depleted and the fermentation continues in an anaerobic (without air) process. The Company uses two types of yeast, a lager yeast (bottom fermenting) and an ale yeast (top fermenting). Fermentation takes seven days, and during this time the yeast will multiply dramatically. At the end of the fermentation, the yeast will be recovered for a new fermentation and the beer is transferred to a storage (lager/ruh) tank. The storing of beer at cold temperatures is called "lagering" and/or "ruh." The amount of time that the beer is allowed to lager varies with the type of beer, with ales having a shorter lager period than lagers. This storage period allows for the reduction of harsh flavors created during the fermentation process. It also allows for the clarification and maturing of the fine beer flavor. After lagering, the beer is filtered to remove any yeast and other insoluble materials. The beer's carbonation results from a combination of natural absorption of carbon dioxide byproduct from the fermentation process and carbonation after filtering. Bottling and Kegging. The Company packages its products in bottles and in the case of beer, and to a limited extent, ginger beer, in kegs. The bottling house has two automated bottling lines, each containing bottle filling and sealing machines, pasteurizing lines, bottle labeling equipment, bottle casing and uncasing machines and packing equipment. One line also contains capacity for bottle soaking and washing and a Majonnier flow mixer for soft drinks. Areas are set aside for packaging supplies and short term holding of finished cases pending shipment to the warehouse. Currently one bottling line handles recycled 16 oz. and 12 oz. bottling and the other line handles new 12 oz. bottling and seven ounce bottling. The Company estimates that its current annual 12 oz. bottling capacity is approximately 3.7 million cases (270,000 barrels) and its current seven ounce bottling annual capacity is approximately 4.0 million cases (174,000 barrels). For most of the Company's output of 12 oz. bottled products, the Company uses recycled bottles from states that impose a bottle deposit at purchase, principally New York and Massachusetts. The inability of the Company to continue to obtain a sufficient supply of recycled bottles could have an adverse affect on the Company's results of operations. The Company anticipates a change in the availability of certain styles of recycled glass from its current sources. This reduction in availability would result in an increased cost of glass; reducing future gross margins. The Company will make all efforts to mitigate the effect on gross margins, but no assurances can be made that the Company will be successful in this regard. This type of glass is used for both the Lion Brewery's own labels and for contract packaged production. All seven ounce bottles are purchased new. The Company's 16 oz. returnable bottles are subject to deposit and return arrangements at the brewery. Quality Assurance. The Lion Brewery employs a Head Brewmaster, an assistant brewmaster and a brewing supervisor and retains the services of a world recognized brewing authority to ensure the high quality and consistency of its products. To monitor the quality of its products, the Company maintains its own quality assurance lab, employs two full-time quality control technicians and submits its products for analysis to the Seibel Institute of Technology, an independent laboratory, on a continuous basis. To further enhance the consistency of its products, the Company is in the process of automating several steps in the brewing process. The Company brews it craft beers according to traditional styles and methods, and precisely maintains and assures the highest quality and consistency within each brewing step. In order to maintain product quality for the consumer, the Company pasteurizes its bottled products. To monitor freshness, the Company dates each bottle and case with the date and time of bottling. Product is brewed in small batches which allows for a thorough analysis of each step. Each brew is carefully monitored and tasted to ensure the highest quality to the consumer. This high quality standard has allowed the Company to win three Gold Medals at the Great American Beer Festival and numerous medals at World Beer Championships. PRODUCT DISTRIBUTION The distribution of products which the Company makes under contract, including malta, specialty beers sold under other craft beer labels and brewed and blended soft drinks, is managed entirely by the contracting customer. In the case of malta and soft drinks, the customer typically distributes the product to supermarkets, specialty food markets, food service establishments and other retailers through independent or company employed sales personnel with occasional involvement of wholesalers or distributors as middlemen. The Company distributes its beers and ales marketed under its own brands through a network of independent distributors whose principal business is the distribution of beer and other alcoholic beverages. The Company's contract beer customers are likely to employ this independent distributor channel as well. These independent distributors resell the products to retailers which sell the beers to the consumer. Currently the Company's craft and traditional beer products are primarily being distributed through fifty- two independent distributors in 10 eastern states (Connecticut, Delaware, Maryland, Massachusetts, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Virginia) and Washington, D.C. The Company selects distributors in each market that it believes will devote attention and resources to the promotion and sales of its products. Most of its distributors also represent a national beer brand and have established significant retail penetration in their territory to make that brand widely available. Management believes that both the brewing of beer in Company-owned facilities and a corresponding regional identity are viewed positively by independent distributors in deciding whether to carry the Lion Brewery's products. The appointment of distributors is also governed by beverage laws in some states which stipulate a specific territory for each distributor. SALES AND MARKETING The Lion Brewery's four largest malta customers, Goya Foods, Vitarroz, Cerveceria India and 7- Up/RC Puerto Rico, accounted for 94% and 95% of the Company's total malta sales for fiscal 1997 and 1996, respectively. Mr. Lawson, the Company's Chief Executive Officer, is primarily responsible for selling and marketing these and the Company's other contract accounts. The Head Brewmaster and the Vice President of Logistics are also actively involved with these customer relationships in discussing product recipes, new product formulations, production scheduling and delivery. The Company's craft and traditional beers are sold to independent distributors by five full-time salespeople. The Company is primarily focused on building relationships through personal contact with its existing and new distributors to broaden the market presence of the Company's craft beer. Since the Company's beers are only a portion of its distributors' expanding portfolio of product offerings and compete with other beers, it is becoming more important for the Company to elevate its brand awareness with each distributor. This is accomplished by on-site training of distributors' staff and, in some cases, offering educational tours of the brewery. Several of the Company's largest distributors and their sales forces have visited the brewery to enhance their knowledge of the Company's products. The Company's sales representatives also arrange taste testings of Company beers for its distributors and supply informational literature for circulation among distributors' retail customers. To further promote its product sales, the Company periodically offers price discounts to distributors in certain markets. The Company anticipates that it may continue to offer such promotions in response to competitive conditions. The Company believes that in order to stimulate consumer demand it must educate not only its distributors but also the retailer and consumer about the freshness and quality of its products. The Lion Brewery sales force travels with distributor sales personnel to retail accounts to familiarize new accounts with Company products and to increase sales at existing accounts. The Company has participated in on- premise marketing such as product sampling and beer dinners. In addition, on premise marketing is also supported with point of sale material such as tap handles, table tents and, in some cases, neon signs. The Company's strategy is to increase its penetration into existing markets with a targeted, cost effective approach in its sales and marketing efforts. This strategy will be implemented by further developing the existing distributor relationships and/or establishing new distributors in target markets. COMPETITION The Company competes with other breweries in the production and marketing of malta and beer. Management believes that the Company is the dominant brewer of malta in the continental United States because of the high quality of its products, customer service and location in the eastern United States where the consumption of malta is concentrated. Although foreign competition has recently entered the malta market, the Company's customer service and proximity to the market has enabled it to maintain its customer base. In the craft beer market, the Company competes against such craft brewers as The Boston Beer Company, Inc. and Pete's Brewing Company, and other regional breweries such as Redhook Ale Brewery, Inc., Pyramid Brewing, Inc., Genesee Brewing Company, Inc., Pittsburgh Brewing Company, Latrobe Brewing, F. X. Matt Brewing Company and D. G. Yuengling and Son, Inc. as well the companies for which the Company performs contract brewing. The Company also faces competition from import specialty beer companies such as Bass PLC, Cerveceria Modelo, S.A. (brewer of Corona Extra), Cerveceria Moctezuma, S.A. (brewer of Dos Equis) and Heineken N.V., which currently produce premium beer. Imported beer accounts for a greater share of the domestic beer market than craft beers. The Company also competes with niche beers produced by affiliates of certain major domestic brewers as well as with craft beers produced for its contract brewing customers. For example, Anheuser-Busch, Miller Brewing Co. and Adolph Coors market Pacific Ridge Ale, Leinenkeugel and Killian's Red, respectively. In addition, the Company expects that the major national brewers, with their superior financial resources and established distribution networks, will seek further participation in the continuing growth of the specialty beer market through the investment in, or formation of distribution alliances with, smaller specialty brewers. The increased participation of the major national brewers will likely increase competition for market share and heighten price sensitivity within the craft beer market. The Company also expects competition to increase as new craft brewers emerge and existing craft brewers expand their capacity. Access to capital and other resources is a prerequisite to increasing sales and production in order to benefit from this market opportunity. Many of the Lion Brewery's competitors have significantly greater financial, production, product distribution and marketing resources than the Company. The Company's products also compete generally with other alcoholic beverages, including products offered in other segments of the beer industry and low alcohol products. The Company competes with other beer and beverage companies not only for consumer acceptance and loyalty but also for shelf and tap space in retail establishments and for marketing focus by the Company's distributors and their customers, all of which distribute and sell other beer and alcoholic beverage products. As an element of its craft beer business, the Company currently produces and will continue to produce specialty beer products under contract for certain breweries and marketers of craft beer. The Company's competition for this segment are breweries with excess capacity. The Company believes its contract packaging experience and the quality of its product enhance its ability to attract additional craft beer marketers as customers. The Company's soft drinks are produced under contract for niche marketers. Specialty soft drinks using natural ingredients require pasteurization. The Company believes its principal competitors for this business are bottlers with specialized equipment such as pasteurizers not generally used in mass market soft drink production. CUSTOMER CONTRACTS The Company's contracts with its malta and contract brewing customers vary; however, they generally provide for initial terms of two to five years, subject to renewal, exclusive rights for the Lion Brewery to produce the product, price and payment terms and brewing and packaging specifications. The contracts may be terminated by either party under certain circumstances, including the failure to reach minimum annual purchase levels in the case of its contract beer customers, and generally provide for no minimum purchases. The Company's contracts with its beer distributors provide for assigned territories and the products to be distributed. Delivery terms are F.O.B. the Company's brewery or warehouse. In some states, the terms of the Company's contracts with its distributors may be affected by laws that restrict enforceability for some contracts terms, especially those related to the Company's right to terminate the services of its distributors. REGULATION The Company's beer business is highly regulated at federal, state and local levels. Various permits, licenses and approvals necessary to the Company's brewery and the sale of alcoholic beverages are required from various agencies, including the U.S. Treasury Department, Bureau of Alcohol, Tobacco and Firearms (the "BATF"); the United States Department of Agriculture; the United States Food and Drug Administration; state alcohol beverage regulatory agencies in the states in which the Company sells its products; and state and local health, sanitation, safety, fire and environmental agencies. In addition, the beer industry is subject to substantial federal excise taxes, although the Company benefits from favorable treatment granted to brewers producing less than two million barrels per year. Management believes that the Company currently has all licenses, permits and approvals necessary for its current operations. However, existing permits or licenses could be revoked if the Company were to fail to comply with the terms of such permits or licenses, and additional permits could in the future be required for the Company's existing or expanded operations. If licenses, permits or approvals necessary for the Company's operations were unavailable or unduly delayed, or of any such permits or licenses were revoked, the Company's ability to conduct its business could be substantially and adversely affected. Alcoholic Beverage Regulation and Taxation. The Company is subject to licensing and regulation by a number of governmental authorities. The Company operates its brewery under federal licensing requirements imposed by the BATF. Commercial breweries are required to file an amended Brewer's Notice with the BATF and certain states every time there is a material change in the brewing process or brewing equipment, change in the brewery's location, change in the brewery's management or a material change in the brewery's ownership. The Company's operations are subject to audit and inspection by the BATF at any time. In addition to the regulations imposed by the BATF, the Company is subject to various regulations concerning deliveries and selling practices in states in which the Company sells its products. Failure by the Company to comply with applicable federal or state regulations could result in limitations on the Company's ability to conduct is business. The BATF's permits can be revoked for failure to pay taxes, to keep proper accounts, to pay fees, to bond premises, and to abide by federal alcoholic beverage production and distribution regulations, or if holders of 10% or more of the Company's equity securities are found to be of questionable character. Permits from state regulatory agencies can be revoked for many of the same reasons The U.S. federal government currently imposes an excise tax of $18.00 per barrel on every barrel of beer produced for consumption in the United States. However, any domestic brewer with production under two million barrels per year pays a federal excise tax in the amount of $7.00 per barrel on the first 60,000 barrels it produces annually. While the Company is not aware of any plans by the federal government to reduce or eliminate this benefit to small brewers, any such reduction in a material amount could have an adverse effect on the Company. Individual states also impose excise taxes on alcoholic beverages in varying amounts, which are also been subject to change. It is possible that excise taxes will be increased in the future by both the federal and state governments. In addition, increased excise taxes on alcoholic beverages have been considered in connection with various governmental budget-balancing or funding proposals. Any such increases in excise taxes, if enacted, could adversely affect the Company's results of operations. State and Federal Environmental Regulation. The Company's operations are subject to environmental regulations and local permitting requirements regarding, among other things, air emissions, water discharges and the handling and disposal of wastes. While the Company has no reason to believe its operation violates any such regulation or requirements, if such a violation were to occur, the Company's business may be adversely affected. In addition, if environmental regulations were to become more stringent in the future, the Company could be adversely affected. TRADEMARKS The Company considers its trademarks, particularly the "Brewery Hill" brand name, beer recipes and product package, advertising and promotion design and artwork to be of considerable value to its business. The Company relies on a combination of trade secret, copyright and trademark laws and nondisclosure and other arrangements to protect its proprietary rights. Despite the Company's efforts to protect its proprietary rights, unauthorized parties may attempt to copy or obtain and use information that the Company regards as proprietary. There can be no assurance that the steps taken by the Company to protect its proprietary information will prevent misappropriation of such information and such protections may not preclude competitors from developing confusingly similar brand names or promotional materials or developing products with taste and other qualities similar to the Company's beers. While the Company believes that its trademarks, copyrights and recipes do not infringe upon the proprietary rights of third parties, there can be no assurance that the Company will not receive future communications from third parties asserting that the Company's trademarks, copyrights and recipes infringe, or may infringe, the proprietary rights of third parties. The potential for such claims will increase as the Company introduces new beers, increases distribution in recently entered geographic areas or enters new geographic regions. Any such claims, with or without merit, could be time consuming, result in costly litigation and diversion of management personnel, cause product distribution delays or require the Company to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company or at all. In the event of a successful claim of infringement against the Company and failure or inability of the Company to license the infringed or similar proprietary information, the Company's business, operating results and financial condition could be materially adversely affected. EMPLOYEES At September 30, 1997, the Company had 131 full time employees, including 114 in production, 6 in sales and marketing, and 11 in administration. Of these, 103 are represented by a labor union. The collective bargaining agreement with the union expires on May 31, 2000. The Company believes its relations with its employees to be good. ITEM 2. PROPERTIES BREWING FACILITY The Lion Brewery produces and packages its beverages in its own brewing and bottling facility. By owning and operating its own brewery, the Lion Brewery is able to precisely monitor and control each step of the brewing process. The brewery is a complex of brick buildings housing a boiler room, an engine room, a brew house, three storage cellars and keg filling lines. Adjacent to the brew house is the bottling house, which contains the bottle washing equipment, two complete bottling lines including pasteurizers and warehousing for packaging materials. The Company leases two warehouses near the brewery aggregating approximately 150,000 square feet. One warehouse stores glass bottles which will be used in bottling and the other warehouse stores finished product and packaging materials. The warehouse leases expire in February 1999 and June 2001, respectively. The Company also leases a third warehouse on an as needed, temporary basis. The Company believes that its current brewing facilities are adequate to meet its currently anticipated needs. The Company can expand its facilities, if required, to meet increased production requirements. The brewery has one series of vats and tanks that are used to produce the Company's brewed products. The Company's brew kettle is a 390 barrel copper Schock-Gusmer. The Lion Brewery's products are brewed in small 330 barrel batches. Another major piece of brewing equipment is a 21 foot diameter Schock-Gusmer combination mash and lauter tub with knives and rakes. Also located in the brewing area is a quality control laboratory and various refrigerated rooms for storing special brewing ingredients. Located in the basement of the brewery are special stainless steel tanks and equipment that allow the Lion Brewery to mix syrups and flavorings for a wide range of products. Blended beverages are transported from these tanks directly to the bottling house through connecting lines. The brewery's estimated annual capacity based upon the current product mix is approximately 400,000 barrels (31 gallons or 13.8 cases of 24 twelve oz. bottles equal one barrel) of product per year, assuming three seven-hour shifts, five days a week. Capacity is a function of the product being produced because of the varying storage times for the different types of products. Since beer requires as much as 50 days in tanks to allow for fermentation and finishing as contrasted with only two days for non-alcoholic brewed beverages such as malta, anticipated increases in the percentage of total output represented by beer production will require capital outlays for additional tanks. In fiscal 1997 and 1996, the Company shipped 335,000 barrels and 329,000 barrels of beverages, of which 67% and 68% were malta, 17% and 20% were beer and 16% and 12% were soft drinks, respectively. The Lion Brewery is located on approximately 5.9 acres of Company owned land in Wilkes-Barre, Pennsylvania. The property is served by the Luzerne & Susquehanna Railway Company and carloads of grains used in brewery production are usually on site. ITEM 3. LEGAL PROCEEDINGS LEGAL PROCEEDINGS The Company is not currently involved in any material pending legal proceedings and is not aware of any material legal proceedings threatened against it. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of the year ended September 30, 1997. PART II. ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's common stock is traded on the Nasdaq National Market System under the symbol "MALT". There were approximately 33 holders of record of the Company's common stock at December 22, 1997 although the Company believes that there are in excess of 300 beneficial holders. As of such date, the closing sales price per share for the Company's common stock was $3-1/2. Securities of the Company were first publicly traded in the third quarter of fiscal 1996. The high and low closing sale prices reflect inter-dealer prices, without mark-up, mark-down or commission and may not necessarily reflect actual transactions. The following table sets forth the high and low closing sales per share for the Company's common stock for the third and fourth quarters of fiscal 1996, the first, second, third and fourth quarters of 1997 and for the two months ended November 30, 1997 as reported by Nasdaq: Quarter ended High Low ------------- ---- ---- June 30, 1996 6 5-1/8 September 30, 1996 5-7/8 5 December 31, 1996 5-3/8 3-3/4 March 31, 1997 4-3/8 2-5/8 June 30, 1997 3-1/8 2-3/8 September 30, 1997 4-1/8 3-1/2 Two months ended ---------------- November 30, 1997 4-1/8 3-1/2 There were no cash dividends declared on the common stock of the Company during the fiscal years ended September 30, 1997 and 1996. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Company's Financial Statements and related Notes thereto. All references to fiscal years are references to the Company's fiscal year ended September 30. This Annual Report includes certain forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act) which are subject to the occurrence of certain contingencies which may not occur in the time frames anticipated or otherwise, and, as a result, could cause actual results to differ materially from such statements. These contingencies include the introduction and acceptance of new products, the penetration of existing and new markets, the availability of recycled bottles and the completion of capital improvements. OVERVIEW The Lion Brewery is a producer and bottler of brewed beverages for several markets in which it believes its ability to formulate, brew and package quality products in a consistent manner in a Company owned and operated facility affords it a competitive advantage. The Company is the dominant producer of malta in the continental United States. Malta, a brewed non-alcoholic beverage popular in the Caribbean and South America, is sold to food and beverage distribution companies marketing to these population segments in the United States. Malta sales have increased from $8.7 million, representing 73% of the Company's net sales in 1991, to a high of $18.6 million, representing 75% of net sales in fiscal 1996. Net sales of malta were $17.8 million or 66% of net sales in fiscal 1997. While the Lion Brewery has been engaged in the production of beer since repeal of Prohibition in 1933 in facilities in which beer was first produced at the turn of the century, the Company has reemphasized its production of full-flavored craft beers for sale under its own labels in the last three years. This emphasis complements the Company's production of craft beers on a contract basis for other breweries and marketers of craft beer which commenced nine years ago. Since 1991, craft beer and specialty malt beverage sales under Company labels or pursuant to contract for other breweries or marketers have increased from $479,000, representing 3% of net sales, to a high of $5.0 million, representing 19% of net sales, in fiscal 1996. Net sales of craft beer and specialty malt beverage sales under Company labels or pursuant to contract were $4.6 million or 17% of net sales in fiscal 1997. The Company also brews and blends specialty soft drinks for beverage marketers and for some of its malta customers. In 1991 soft drink sales totaled $724,000, representing 5% of net sales, increasing to $3.7 million, representing 14% of net sales, in fiscal 1997. The Company still brews beer sold at popular prices in local markets and predominantly packaged in 16 oz. returnable bottles. The Company obtains the highest net sales dollar per barrel from the sale of craft beer under its own labels, which had an average net selling price of approximately $119 in fiscal 1997 and $127 per barrel in fiscal 1996. This decline in the average net selling price is due to line pricing of the Company's Brewery Hill product portfolio, product sales mix and the concentration of sales in the local markets. The Company's average selling price per barrel for craft beer produced under contract is lower than for the Company's own brands, but most contract customers bear the cost of labels and packaging so that gross margins remain favorable. The Company's gross margin has historically been, and is anticipated to be, affected by several factors, including product mix, sales prices, cost of ingredients, bottles and other packaging materials, labor productivity, overhead utilization and equipment utilization. Due to its reliance on a Company-owned production facility, a significant portion of the Company's overhead is not susceptible to short term adjustment in response to sales below management's expectations, thus an excess of production capacity could have a significant negative impact on the Company's operating results. A variety of other factors may also lead to significant fluctuations in the Company's quarterly results of operations, including timing of new product introductions, seasonality of demand, changes in consumer preferences and general economic conditions. The Company sells approximately 85% of its beer in bottles and the remainder in kegs. All other products are sold in bottles except for Reed's premium brewed soft drinks, which are also available in kegs. Malta is packaged in 12 oz. and seven ounce bottles, craft beer and soft drinks are packaged in 12 oz. bottles and popular priced beer is packaged in both 12 oz. bottles and 16 oz. returnable bottles. A substantial portion of the Company's bottled products are bottled in recycled bottles which have a lower cost than new bottles. However in fiscal 1997, the Company purchased a significant amount of new 12 oz. bottles which were required for several new products produced under contract. As a result the gross margin on these products was substantially lower than that of similar products packaged in recycled bottles. The Company anticipates a change in the availability of certain styles of recycled glass from its current sources. This reduction in availability would result in an increased cost of glass; reducing future gross margins and could have a significant impact on overall profitability. The Company will make all efforts to mitigate the effects on gross margins and overall profitability, but no assurances can be made that the Company will be successful in this regard. The Company brews five days per week, 24 hours per day, as demand requires, and packages production five days per week in two seven-hour shifts. During peak demand, the Company lengthens each packaging shift by two hours per shift. At its present capacity and product mix (approximately 67% malta, 17% beer and 16% specialty soft drinks), the Company believes it could produce and package approximately 400,000 barrels per year. The Company's strategy is to expand its production and marketing of specialty beverages, which includes Company-owned labels and labels produced under contract. The Company plans to increase sales of its specialty beer labels through increased penetration of these brands in its existing markets, through a more focused and cost effective approach in its sales and marketing efforts. RESULTS OF OPERATIONS The following tables set forth for the periods indicated certain income statement data expressed as a percentage of net sales, and certain operating data expressed as a percentage of net sales and net sales per barrel. Income Statement Data Year Ended September 30, ------------------------ 1997 1996 1995 ------ ------ ----- Gross sales 101.9% 102.1% 101.5% Less excise taxes 1.9 2.1 1.5 ----- ----- ----- Net sales 100.0 100.0 100.0 Cost of sales 74.8 75.4 76.0 ----- ----- ----- Gross profit 25.2 24.6 24.0 ----- ----- ----- Operating expenses: Delivery 3.1 3.1 3.3 Selling, advertising and promotional 5.4 4.7 3.2 General and administrative 5.2 5.2 5.4 ----- ----- ----- Total operating expenses 13.7 13.0 11.9 ----- ----- ----- Operating income 11.5 11.6 12.1 Interest (income) expense, net (0.5) 2.0 4.2 ----- ----- ----- Income before provision of income taxes and extraordinary item 12.0 9.6 7.9 Provision for income taxes 5.2 4.3 3.7 ----- ----- ----- Income before extraordinary item 6.8 5.3 4.2 Extraordinary item 0.0 1.2 0.0 ----- ----- ----- Net income 6.8% 4.1% 4.2% Operating data Year Ended September 30, Percent of Net Sales Net Sales Per Barrel ---------------------- ---------------------- 1997 1996 1995 1997 1996 1995 ---- ---- ---- ---- ---- ---- Malta 66.2% 67.8% 75.0% $ 80 $ 80 $ 78. Beer: Craft: Company label 4.8 6.7 4.9 119 127 110. Contract 12.4 12.4 7.4 100 99 84. ---- ---- ----- ---- 17.2 19.1 12.3 Popular priced 2.9 3.7 5.0 57 55 54. Total beer 20.1 22.8 17.3 Specialty soft drinks 13.7 9.4 7.7 68 64 62. 100.0% 100.0% 100.0% $ 80 $ 80 $ 76. ===== ===== ===== YEARS ENDED SEPTEMBER 30, 1997 AND 1996 Gross Sales and Excise Taxes The Company's gross sales increased 1.4% to $27.4 million in fiscal 1997 from $27.0 million in fiscal 1996. Gross sales of craft beer and specialty malt beverages decreased 7.4% to $5.0 million in fiscal 1997 from $5.4 million in fiscal 1996. Gross sales of craft beer and specialty malt beverages represented 18.3% of gross sales in fiscal 1997 as compared to 20.2% of gross sales in fiscal 1996. Gross sales of popular priced beer decreased 18.2% to $0.9 million in fiscal 1997 from $1.1 million in fiscal 1996. The Company is required to pay federal and state excise taxes on sales of its beer. The federal excise tax increases from $7.00 to $18.00 per barrel on production over 60,000 barrels. Total excise taxes decreased 8.5% to $498,000 in fiscal 1997 from $544,000 in fiscal 1996. Excise taxes as a percentage of sales decreased in fiscal 1997 due to beer sales comprising a lesser percentage of the Company's product mix. As the Company increases its beer production above 60,000 barrels, federal excise taxes will increase as a percentage of sales. During fiscal 1997 and 1996, the Company sold 57,761 barrels and 64,797 barrels of beer respectively. The Company records excise tax expense based on anticipated barrel shipments during the calendar year. Net Sales The Company's net sales increased 1.6% to $26.9 million in fiscal 1997 from $26.4 million in fiscal 1996. Malta sales decreased 1.0% to $17.8 million in fiscal 1997 from $17.9 million in fiscal 1996. Malta sales decreased as a percentage of net sales to 66.2% in fiscal 1997 from 67.8% in fiscal 1996. This decrease resulted from the decrease in Malta sales and the growth in sales of soft drinks. Specialty soft drink sales increased 48.0% to $3.7 million in fiscal 1997 from $2.5 million in fiscal 1996. Gross Margin The Company's gross margin (the Company's gross profit as a percentage of net sales) was 25.2% in fiscal 1997, compared to 24.6% in fiscal 1996. The increase in gross margin was primarily the result of production efficiencies. Delivery Expense Delivery expense as a percentage of net sales remained at 3.1% or $831,000 in fiscal 1997 and $824,000 in fiscal 1996. Substantially all beer sales are shipped F.O.B. shipping point. Malta and specialty soft drinks produced for the Company's malta customers are shipped common carrier at the Company's expense. Selling, Advertising and Promotional Expenses Selling, advertising and promotional expenses increased 16.0% to $1.4 million in fiscal 1997 from $1.2 million in fiscal 1996. This increase in selling, advertising and promotional expenses occurred as the Company geared up its Company label craft beer packaging and sales and marketing efforts. This increase results from an increase in promotional activities, advertising, point of sale materials and package design. The Company introduced Brewery Hill Brewer's Choice, a variety package, Centennial Lager and Caramel Porter and Lion Brewery Root Beer in fiscal 1997. A significant portion of the Company's sales and marketing efforts are dedicated to the introduction and promotion of its new labels and the implementation of promotional and advertising programs. In March 1997, the Company began to strategically reduce its sales and marketing expenditures for Company label craft beers due to the softening of the craft beer category and the intense competition from both large and small brewers. General and Administrative Expenses General and administrative expenses remained at $1.4 million or 5.2% of net sales in fiscal 1997 and 1996. Operating Income Operating income remained at $3.1 million in fiscal 1997 and 1996, despite a 16.0% increase in selling advertising and promotional expenses. The Company has implemented a more focused and cost effective approach to marketing its Company label craft beers, concentrating on its local and contiguous markets. Interest (Income) Expense Interest income in fiscal 1997 was $124,000 as compared to interest expense of $520,000 in fiscal 1996. Interest income is primarily the result of increases in cash and cash equivalents through cash provided from operations. The decrease in interest expense results from the repayment of the debt outstanding with the proceeds of the 1996 initial public offering. Provision for Income Taxes The effective income tax rate was 43% in fiscal 1997 and 45% in fiscal 1996. State income taxes and nondeductible goodwill amortization impact the effective tax rates. Extraordinary Item The extraordinary item recorded in 1996 consists of prepayment penalties of $160,000, unamortized debt discounts of $213,000 and the write-off of unamortized deferred financing costs of $177,000 related to the early extinguishment of debt, net of an income tax benefit of $228,000. LIQUIDITY AND CAPITAL RESOURCES The Company has historically funded operations primarily through cash generated from operations and bank and other debt. On May 2, 1996, the Company completed an initial public offering of equity securities. A portion of the proceeds of the initial public offering were used to repay indebtedness of the Company. In February 1997, the Company obtained a $5,000,000 revolving line of credit and a $2,500,000 revolving equipment line of credit from a financial institution. Both facilities are unsecured and interest is payable monthly based upon either the bank's prime rate minus 1/2%, LIBOR plus 75 basis points or the bank's offered rate. The line of credit agreements require, among other things, the maintenance of certain financial ratios. These lines of credit mature in 3 years, and the Company, at its option, may convert the principal outstanding on the revolving equipment line to a term loan of either 3 or 5 years at the same rates or at a fixed rate to be determined by the financial institution. There were no borrowings under these line of credit facilities in 1997. Cash flows provided from operations were $2.7 million in fiscal 1997 and in 1996. The cash flows from operations have been affected by collections of accounts receivable, inventory levels and accounts and income taxes payable. In fiscal 1997, the timing of sales to malta customers and certain contract customers was primarily responsible for an increase in accounts receivable of $455,000 to $2.4 million at September 30, 1997 as compared to $2.0 million at September 30, 1996. The increase in accounts receivable can also be attributable to several contract customers receiving more traditional terms, in lieu of advanced payments. Inventory levels increased by $167,000 in fiscal 1997 due to increased finished goods inventory. Accounts payable, accrued expenses and refundable security deposits increased $598,000, primarily as a result of increased new 12 oz. bottle and other raw material purchases, an increase in accrued payroll and customer deposits. Income taxes payable increased by $202,000 in fiscal 1997 as a result of the increase in income before taxes and the timing of tax payments. In fiscal 1997, the cash provided from operations was used to purchase equipment and increase the Company's cash reserves. During fiscal 1997, the Company expended $1.5 million on capital improvements. The Company completed the modification of its existing seven ounce bottling line to also accommodate 12 oz. new bottles, the bottle size for most of the Company products and relining of nine storage tanks increasing its fermentation and lagering capacity. The Company also reconditioned its combination mash / lauter tub, installed a malt storage and elevation system, purchased two rebuilt fillers and began upgrading its ammonia refrigeration system. The Company believes that the cash flow provided from operations and its borrowing availability under revolving credit facilities will be sufficient to support the Company's capital expenditure and working capital requirements through the end of fiscal 1998. There can be no assurance that additional financing will be available on favorable terms or at all. ITEM 7. FINANCIAL STATEMENTS The response to this item is submitted in a separate section of this report commencing on Page F - 1. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III. ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTIONS 16(C) OF THE EXCHANGE ACT. Information regarding the Company's directors and executive officers is incorporated by reference from the Company's definitive proxy statement for its 1997 Annual Meeting of Stockholders (the "1997 Proxy Statement") under the captions "Board of Directors" or "Executive Compensation." ITEM 10. EXECUTIVE COMPENSATION Information regarding executive compensation is incorporated by reference from the 1997 Proxy Statement under the caption "Executive Compensation." ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information regarding security ownership of certain beneficial owners and management is incorporated by reference from the 1997 Proxy Statement under the caption "Security Ownership of Certain Beneficial Owners and Management." ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding certain relationships and related transactions is incorporated by reference from the 1997 Proxy Statement under the caption "Certain Relationships and Related Transactions." PART IV. ITEM 13. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K The following documents are filed as part of this report: Financial Statements and Financial Statement Schedules. See Index to Financial Statements at Item 7 on pages F - 1 through F - 15 of this report. All other financial statement schedules are omitted because they are not required or the required information is included in the Financial Statement or Notes thereto. Exhibit Index is included in the Form 10-KSB filed with the Securities and Exchange Commission. No reports on Form 8-K were filed during the fourth quarter of the fiscal year ended September 30, 1997. Index to Exhibits: Exhibits incorporated by reference to the registrant's registration statement on Form SB-2 (Registration No. 333-01644). Exhibit No. Description 1.1** Underwriting Agreement 3.1** Amendment and Restated Articles of Incorporation filed with the Secretary of the Commonwealth of Pennsylvania on January 23, 1996 3.2** By-Laws of the Company 4.1** Specimen Stock Certificate Exhibit No. Description 10.1** Employment Agreement, dated as of January 3, 1996, between the Company and Charles Lawson 10.2* Employment Agreement, dated as of October 1, 1996, between the Company and Patrick Belardi 10.3** Lease dated March 1989 between the Company and Mericle Development Corporation 10.5** 1996 Stock Option Plan 10.6** Form of 1996 Stock Option Agreement 10.7** Agreement dated as of January 3, 1996 between the Company and The Marlborough Capital Investment Fund, L.P. 10.8** Agreement dated as of January 3, 1996 between the Company and Weston Presidio Offshore Capital C.V. 10.9** Credit and Security Agreement dated as of October 6, 1993 between the Company and Norwest Bank Minnesota, National Association 10.10* Mortgage and Security Agreement dated as of October 6, 1993 between the Company and William J. Smulowitz 10.11* Mortgage and Security Agreement dated as of October 6, 1993 between the Company and Norwest Bank Minnesota, National Association 10.12* Mortgage and Security Agreement dated as of October 6, 1993 between the Marlborough Capital Investment Fund, L.P. and Weston Presidio Offshore Capital C.V. 10.13** Securities Purchase Agreement dated as of October 6, 1993 10.14* Letter Agreement dated as of March 29, 1996 between the Company and Lester Smulowitz and Lynn Muchnick 10.15* Loan Agreement between the Company and Corestates Bank, N.A. dated February 6, 1997 * Filed herewith ** Incorporated by reference to the Company's registration statement on Form S-1, File No. 333-01644 SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Wilkes- Barre, State of Pennsylvania, on December 29, 1997 THE LION BREWERY, INC. By /s/ Charles E. Lawson, Jr. ------------------------------------ Charles E. Lawson, Jr. President, Chief Executive Officer and Director Pursuant to the requirements of Securities Exchange Act of 1934, this Report has been signed by the following persons on its behalf of the Registrant and in the capacities and on the dates indicated. President, Chief Executive /s/ Charles E. Lawson, Jr. Officer and Director December 29, 1997 -------------------------- Charles E. Lawson, Jr. Vice President, Chief Financial Officer /s/ Patrick E. Belardi Treasurer and Director December 29, 1997 -------------------------- Patrick E. Belardi /s/ Donald J. Sutherland Chairman of the Board December 29, 1997 -------------------------- Donald J. Sutherland /s/Thomas S, Ablum Director December 29, 1997 -------------------------- Thomas S. Ablum /s/ George W. Peck, IV Director December 29, 1997 -------------------------- George W. Peck, IV /s/ Carlo A. von Schroeter Director December 29, 1997 -------------------------- Carlo A. von Schroeter /s/ Henry T. Wilson Director December 29, 1997 -------------------------- Henry T. Wilson ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA THE LION BREWERY, INC. INDEX TO FINANCIAL STATEMENTS Page No. Report of Independent Public Accountants F - 2 Financial Statements: Balance Sheets - September 30, 1997 and 1996 F - 3 Statements of Income for the Years Ended September 30, 1997 and 1996 F - 4 Statements of Shareholders' Equity for the Years Ended September 30, 1997 and 1996 F - 5 Statements of Cash Flows for the Years Ended September 30, 1997 and 1996 F - 6 Notes to Financial Statements F - 7 F-1 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 THE LION BREWERY, INC. BALANCE SHEETS SEPTEMBER 30, 1997 AND 1996 1997 1996 ------------- ------------- ASSETS Current assets: Cash and cash equivalents $ 3,184,000 $ 1,992,000 Accounts receivable, less allowance for doubtful accounts of $186,000 and $157,000 at September 30, 1997 and 1996, respectively 2,444,000 2,001,000 Inventories 2,271,000 2,128,000 209,000 190,000 Prepaid expenses and other assets ------------ ------------ Total current assets 8,108,000 6,311,000 Property, plant & equipment, net of accumulated depreciation of $2,352,000 and $1,684,000 at September 30, 1997 and 1996, respectively 4,481,000 3,600,000 Goodwill, net of accumulated amortization of $640,000 and $475,000 at September 30, 1997 and 1996, respectively 5,874,000 6,039,000 4,000 4,000 Other assets ------------ ------------ $ 18,467,000 $ 15,954,000 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: 1,986,000 1,663,000 Accounts payable 1,069,000 839,000 Accrued expenses 250,000 205,000 Refundable deposits 380,000 178,000 Income taxes payable ------------ ------------ Total current liabilities 3,685,000 2,885,000 Net pension liability 341,000 243,000 67,000 206,000 Deferred income taxes ------------ ------------ 4,093,000 3,334,000 Total liabilities ------------ ------------ Shareholders' equity: Common stock, $.01 par value; 10,000,000 shares authorized; $3,885,052 shares issued and outstanding 39,000 39,000 Preferred stock, $.01 par value; 1,000,000 shares authorized; 0 shares issued and outstanding 0 0 Additional paid-in capital 10,612,000 10,612,000 Adjustment to reflect minimum pension liability, net of deferred (120,000) (42,000) income taxes 3,843,000 2,011,000 Retained earnings ------------ ------------ 14,374,000 12,620,000 Total shareholders' equity ------------ ------------ Total liabilities and shareholders' $ 18,467,000 $ 15,954,000 equity ============ ============ The accompanying notes to financial statements are an integral part of these balance sheets. THE LION BREWERY, INC. STATEMENTS OF INCOME FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996 1997 1996 -------------- ---------------- Gross sales $ 27,367,000 $ 26,983,000 Less excise taxes 498,000 544,000 ------------ ------------ Net sales 26,869,000 26,439,000 Cost of sales 20,099,000 19,939,000 ------------ ------------ Gross profit 6,770,000 6,500,000 ------------ ------------ Operating expenses: 831,000 824,000 Delivery Selling, advertising and 1,439,000 1,240,000 promotional expenses 1,410,000 1,373,000 General and administrative ------------ ------------ 3,680,000 3,437,000 ------------ ------------ Operating income 3,090,000 3,063,000 Interest (income) expense and (124,000) 520,000 amortization of debt discount, net ------------ ------------ Income before provision for income 3,214,000 2,543,000 taxes and extraordinary item 1,382,000 1,125,000 Provision for income taxes ------------ ------------ Income before extraordinary 1,832,000 1,418,000 item Extraordinary item, net of income 0 0 tax benefit of $228,000 ------------ ------------ Net income 1,832,000 1,096,000 Warrant accretion 0 0 ------------ ------------ Net income available to common 1,832,000 1,007,000 shareholders ============ ============ Income per share before $ 0.47 $ 0.47 extraordinary item Extraordinary item - loss per 0.00 (0.11) share ------------ ------------ Net income per share $ 0.47 $ 0.36 ------------ ------------ Shares used in per share 3,923,000 2,835,000 calculation ============ ============ The accompanying notes to financial statements are an integral part of these balance sheets. THE LION BREWERY, INC. STATEMENTS OF INCOME FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996 Common Stock Shares Amount Total --------- ------- ---------- Balance, September 30, 1995 1,851,183 $19,000 $2,317,000 Accretion of warrants (89,000) Conversion of warrants 291,565 3,000 812,000 Proceeds of Initial Public 1,875,000 18,000 9,466,000 Offering, net of costs Repurchase of common stock (132,696) (1,000) (950,000) Adjustment to reflect minimum (32,000) pension liability, net of deferred taxes Net income __________ _________ 1,096,000 Balance, September 30, 1996 3,885,052 39,000 12,620,000 Adjustment to reflect minimum (78,000) pension liability net of deferred taxes Net income _________ _________ 1,832,000 ----------- Balance, September 30, 1997 3,885,052 $39,000 $14,374,000 ========= ========= =========== The accompanying notes to financial statements are an integral part of these statements. Additional Paid-in Pension Retained Capital Liability Earnings Total ----------- --------- ---------- ----------- Balance, $1,304,000 $(10,000) $1,004,000 $2,317,000 September 30, 1995 Accretion of (89,000) (89,000) warrants Conversion of 8092,000 812,000 warrants Proceeds of 9,448,000 9,466,000 Initial Public Offering, net of costs Repurchase of (949,000) (950,000) common stock Adjustment to (32,000) (32,000) reflect minimum pension liability, net of deferred taxes Net income 0000 0000 1,096,000 1,096,000 Balance, 10,612,000 (42,000) 2,011,000 12,620,000 September 30, 1996 Adjustment to reflect minimum pension liability net of deferred taxes (78,000) (78,000) Net income 0000 0000 1,832,000 1,832,000 ----------- ----------- ----------- ----------- Balance, $10,612,000 $(120,000) $3,843,000 $14,374,000 September 30, =========== =========== =========== =========== 1997 The accompanying notes to financial statements are an integral part of these statements. THE LION BREWERY, INC. STATEMENTS OF INCOME FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996 Year ended September 30, -------------------------- 1997 1996 ----------- ----------- Cash flows from operating activities: Net income $1,832,000 $1,096,000 Adjustments to reconcile net income to net cash provided by operating activities Extraordinary item 0 550,000 Depreciation and amortization 833,000 830,000 Provision for bad debt reserve 12,000 12,000 Provision for inventory reserve 24,000 75,000 Benefit for deferred income taxes (139,000) (145,000) Changes in assets and liabilities: (Increase) decrease in: Accounts receivable (455,000) 463,000 Inventories (167,000) (200,000) Prepaid expenses and other assets (19,000) 87,000 Increase (decrease) in: Accounts payable, accrued expenses and refundable deposits 598,000 80,000 Income taxes payable 202,000 (152,000) 20,000 (7,000) Pension liability ---------- ---------- Net cash provided by operating 2,741,000 2,689,000 activities ---------- ---------- Cash flows from investing activities: Purchase of equipment (1,549,000) (908,000) ---------- ---------- Cash flows from financing activities: Net proceeds from sale of common stock 0 9,466,000 Repurchase of common stock 0 (950,000) Net reduction in line of credit 0 (721,000) Repayment of long term debt 0 (7,584,000) Net cash provided by financing 0 211,000 activities ---------- ---------- Net increase in cash and cash equivalents 1,192,000 1,992,000 Cash and cash equivalents, 1,192,000 0 beginning of year ---------- ---------- Cash and cash equivalents, end of $3,184,000 $1,992,000 year ========== ========== Supplementary disclosure of cash flow information: Cash paid for: Interest $ 0 $ 516,000 ========== ========== Income taxes $1,282,000 $1,183,000 ========== ========== The accompanying notes to financial statements are an integral part of these statements. THE LION BREWERY, INC. NOTES TO FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION AND DESCRIPTION OF THE BUSINESS The Lion Brewery, Inc. ("the Company") formerly The Lion, Inc., was incorporated in Pennsylvania on April 5, 1933. The Company is a brewer and bottler of brewed beverages, including malta, specialty beers and specialty soft drinks. Malta is a non-alcoholic brewed beverage which the Company produces for major Hispanic food distribution companies primarily for sale in the eastern United States. Specialty beers, generally known as craft beers, are brewed by the Company both for sale under its own labels and on a contract basis for other marketers of craft beer brands. Craft beers are distinguishable from other domestically produced beers by their fuller flavor and adherence to traditional European brewing styles. The Company also produces specialty soft drinks, including all-natural brewed ginger beverages, on a contract basis for third parties. The Lion Brewery, Inc. also brews beer for sale under traditional Company-owned labels for the local market at popular prices. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the recorded amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition Revenue is generally recognized upon shipment. For products brewed under beer and soft drink contracts, revenue is generally recognized upon completion of production. Cash and Cash Equivalents The Company considers all highly liquid investments with maturities at the purchase date of three months or less to be cash equivalents. The carrying amount of cash equivalents approximates fair value. Inventories Inventories are stated at the lower of cost or market determined on a first-in, first-out method (FIFO). Property, Plant and Equipment Property, plant and equipment are recorded at cost and are depreciated using the straight-line method over the useful lives of the assets. All significant additions and improvements are capitalized and repairs and maintenance charges are expensed as incurred. Estimated useful lives for the assets are as follows: Years ----- Buildings 20 Machinery and equipment 3 - 10 Kegs and bottles 3 - 7 F-3 THE LION BREWERY, INC. NOTES TO FINANCIAL STATEMENTS - (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Income Taxes The Company recognizes deferred tax assets and liabilities for the estimated future tax effects of events based on temporary differences between financial statement and tax basis of assets and liabilities using enacted tax rates in effect in the years the differences are expected to be reversed. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. Income tax expense is comprised of current taxes payable and the change in deferred tax assets and liabilities during the year. Intangible Assets The excess of the cost of the acquired assets over their fair values is being amortized using the straight-line method over forty years. Product, Customer and Supply Concentrations The sale of malta, beer and soft drinks has accounted for all of the Company's sales, with malta accounting for 66% and 68% for the years ended September 30, 1997 and 1996. The Company's top three customers accounted for 66% and 60% of sales in fiscal 1997 and 1996. Accounts receivable from these three customers totaled $1,984,000 and $1,712,000 at September 30, 1997 and 1996. The Company's largest customer accounted for 32% and 27% of sales in fiscal 1997 and 1996. The Company does maintain contracts with several of its top customers; however there are no minimum purchase requirements. The Company does not have a contract with its largest customer. The length of such contracts range from two to four years. The decision by a major customer to switch production of its contract beverages from the Company to another brewer, or to build facilities to brew its own product, could have a materially adverse effect on the Company's financial results. The Company anticipates a change in the availability of certain styles of recycled glass from its current sources. This reduction in availability would result in an increased cost of glass; reducing future gross margins and could have a significant impact on overall profitability. The Company will make all efforts to mitigate the effects on gross margins and overall profitability, but no assurances can be made that the Company will be successful in this regard. Excise Taxes The U.S. federal government currently imposes an excise tax of $18 per barrel on every barrel of beer produced for consumption in the United States. However, any brewer with production under 2 million barrels per year pays a federal excise tax of $7 per barrel on the first 60,000 barrels it produces annually. Individual states also impose excise taxes on alcoholic beverages in varying amounts. The Company records the excise tax as a reduction of gross sales in the accompanying financial statements. F-4 THE LION BREWERY, INC. NOTES TO FINANCIAL STATEMENTS - (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Net Income Per Share Net income per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Common equivalent shares consist of stock options and warrants (using the treasury stock method for all periods presented). Accretion relating to the Company's warrants (see Note 11) is deducted in computing income applicable to common stock. On March 31, 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128 is effective for fiscal years ending after December 15, 1997, and, when adopted, it will require the restatement of prior years' earnings per share. If the Company had adopted SFAS 128 for the year ended September 30, 1997, there would have been no effect on net income per share, on either the basic or diluted basis. Financial Instruments Financial instruments that potentially subject the Company to credit risk consist principally of trade receivables. The fair value of accounts receivable approximates carrying value. Long-Lived Assets During 1996, the Company adopted the provisions of Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets" ("SFAS 121"). SFAS 121 requires, among other things, that an entity review its long-lived assets and certain related intangibles for impairment whenever changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. The Company does not believe that any impairment exists in the recoverability of its long- lived assets. Stock Based Compensation In October 1995, the Financial Accounting Standards Board issued Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which requires companies to measure employee stock compensation plans based on the fair value method using an option pricing model or to continue to apply APB No. 25, "Accounting for Stock Issued to Employees," and provide pro forma footnote disclosures under the fair value method. The Company continues to apply APB No. 25 and will provide pro forma footnote disclosures (see Note 11). F-5 THE LION BREWERY, INC. NOTES TO FINANCIAL STATEMENTS - (CONTINUED) 3. INVENTORIES Inventories consist of the following: 1997 1996 ---- ---- Raw materials $ 195,000 $ 163,000 Finished goods 854,000 673,000 Supplies 1,222,000 1,292,000 ---------- ---------- $2,271,000 $2,128,000 4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following: 1997 1996 ---- ---- Land and building $1,084,000 $1,024,000 Machinery and equipment 5,534,000 4,038,000 Kegs and bottles 215,000 222,000 6,833,000 5,284,000 Less accumulated depreciation 2,352,000 1,684,000 ---------- ---------- $4,481,000 $3,600,000 ========== ========== 5. ACCRUED EXPENSES Accrued expenses consist of the following: 1997 1996 ---- ---- Payroll and related accruals $ 535,000 $ 427,000 Other accruals 534,000 412,000 ---------- ---------- $1,069,000 $ 839,000 ========== ========== F-6 THE LION BREWERY, INC. NOTES TO FINANCIAL STATEMENTS - (CONTINUED) 6. INCOME TAXES The provision for income taxes is as follows: 1997 1996 ---- ---- Current: Federal $1,223,000 $ 786,000 State 240,000 256,000 ---------- ---------- 1,463,000 1,042,000 ---------- ---------- Deferred: Federal (69,000) (105,000) State (12,000) ( 40,000) ----------- ----------- (81,000) (145,000) ----------- ----------- $1,382,000 $ 897,000 ========== ========= The principal items accounting for the difference between income taxes computed at the statutory rate and the provision for income taxes reflected in the statements of income are as follows: 1997 1996 United States statutory rate 35% 35% State taxes (net of federal tax benefit) 6 7 Nondeductible expenses - goodwill amortization 2 3 -- -- 43% 45% == == Components of the Company's deferred income tax balances are as follows: 1997 1996 ---- ---- Deferred income tax assets: Benefit accruals $ 332,000 $ 235,000 Accounts receivable 83,000 71,000 Inventories 110,000 96,000 ---------- ---------- 525,000 402,000 Deferred income tax liabilities: Property, plant and equipment 549,000 559,000 Other 43,000 49,000 ---------- ---------- 592,000 608,000 ---------- ---------- $ 67,000 $ 206,000 ========== ========== F-7 THE LION BREWERY, INC. NOTES TO THE FINANCIAL STATEMENTS - (CONTINUED) 7. DEBT In February 1997, the Company obtained a $5,000,000 revolving line of credit and a $2,500,000 revolving equipment line of credit from a financial institution. Both facilities are unsecured and interest is payable monthly based upon either the bank's prime rate minus 1/2%, LIBOR plus 75 basis points or the bank's offered rate. The line of credit agreements require, among other things, the maintenance of certain financial ratios. These lines of credit mature in 3 years, and the Company, at its option, may convert the principal outstanding on the revolving equipment line to a term loan of either 3 or 5 years at the same rates or at a fixed rate to be determined by the financial institution. On May 2, 1996, the Company completed an initial public offering of equity securities. A portion of the proceeds were used to repay indebtedness of the Company (see Note 12). The extraordinary item recorded in 1996 consists of prepayment penalties of $160,000, unamortized debt discounts of $213,000 and the write-off of unamortized deferred financing costs of $177,000 related to the early extinguishment of debt, net of an income tax benefit of $228,000. 8. PENSION PLANS The Company maintains a noncontributory defined benefit pension plan covering nonunion employees. The plan provides benefits based on years of service and compensation levels. The Company's funding policy for these plans is predicted on allowable limits for federal income tax purposes. The components of net periodic pension cost for the defined benefit plan are as follows: 1997 1996 ---- ---- Service cost - benefits earned during the period $ 45,000 $ 30,000 Interest cost on projected benefit obligation 46,000 36,000 Actual return on plan assets (41,000) (23,000) Net amortization and deferral (43,000) (19,000) ---------- ---------- Net pension expense $ 93,000 $ 62,000 ---------- ---------- Assumptions used in the accounting for the defined benefit plan are as follows: 1997 1996 ---- ---- Weighted average discount rate 7.5% 8.5% Expected long-term rate of return on assets 7.5 9.0 Average salary increase 5.0 5.0 F-8 THE LION BREWERY, INC. NOTES TO FINANCIAL STATEMENTS - (CONTINUED) 8. PENSION PLANS (CONTINUED) The following table sets forth the funded status and the net pension liability included in the balance sheet for the defined benefit plan: 1997 1996 Actuarial present value of benefit obligation: Accumulated benefit obligation (including vested benefits of $515,000 and $392,000) $ 532,000 $ 403,000 ======== ======== ========= ========= Projected benefit obligation 598,000 438,000 Plan assets at fair value 191,000 160,000 --------- --------- Projected benefit obligation in excess of plan assets 407,000 278,000 Unrecognized net loss (278,000) (111,000) Adjustment required to recognize minimum liability 212,000 76,000 --------- --------- Net pension liability recognized in balance sheet $ 341,000 $ 243,000 In 1997, the Company established a combined 401(k) / profit sharing plan, covering substantially all nonunion employees, meeting certain eligibility requirements. The profit sharing plan is noncontributory. Under the 401(k) plan, eligible employees may contribute up to 15% of their compensation annually. The Company currently does not match employee contributions. Contributions to the profit sharing plan are determined by the Board of Directors and are discretionary. In 1997, the Company contributed $35,000 to the profit sharing plan. Employer match, if any, and profit sharing contributions vest over a 6 year period, unless termination is the result of death, disability or retirement. The Company also participates in a multiemployer pension plan which provides defined benefits to union employees. Contributions are based on a fixed amount per hour worked. Pension cost aggregated $182,000 and $162,000 for the years ended September 30, 1997 and 1996, respectively. 9. COMMITMENTS AND CONTINGENCIES The Company leases warehouse facilities and equipment under noncancelable operating leases. Future minimum lease payments under these leases are: 1998 $246,000 1999 187,000 2000 136,000 2001 102,000 Rent expense for all leased facilities amounted to $332,000 in 1997 and $294,000 in 1996. The Company has entered into employment agreements with the Company's President and Chief Financial Officer at annual base salaries aggregating $240,000. Bonuses are determined at the discretion of the Board of Directors. The contracts also provide for up to 2 years severance in the case of involuntary termination. F-9 THE LION BREWERY, INC. NOTES TO THE FINANCIAL STATEMENTS - (CONTINUED) 9. COMMITMENTS AND CONTINGENCIES (CONTINUED) The Company has retained an investment banking firm to act as its exclusive financial advisor in connection with a possible sale, merger or other form of business combination. The Company is engaged in certain legal and administrative proceedings incidental to its normal course of business activities. Management believes the outcome of these proceedings will not have a material adverse effect on the Company's financial position or results of operations. RELATED PARTY TRANSACTIONS Quincy Partners, a general partner of Lion Partners Company, L.P. had a management consulting agreement with the Company providing for an annual fee of $130,000. This agreement was terminated on May 2, 1996, the effective date of the initial public offering (see Note 12). In connection with the offering Quincy Partners received a consulting fee of $80,000. The chairman of the Board of Directors receives $50,000 annually plus stock options for his services in this capacity. The Company obtained covenants not to compete from two selling employee/shareholders for an aggregate of $600,000 payable in annual installments of $100,000 over a six year noncompete period, one covenant ending in October, 1999 and the other ending in October, 2000. 11. STOCK OPTION PLANS AND WARRANTS The Company's 1996 Employee Stock Option Plan (the Plan) permits the granting of options to directors and employees of the Company. The Plan is administered by the Compensation Committee of the Board of Directors, which generally has the authority to select individuals who are to receive options and to specify the terms and conditions of each option so granted, including the number of shares covered by the option, the type of option (incentive stock option or nonqualified stock option), the exercise price (which in all cases must be at least 100% of the fair market value of the common stock on the date of grant), vesting provisions, and the overall option term. Options to purchase a total of 400,000 shares of common stock were reserved for future grants of options under the Plan. In January 1996, the Company granted options for an aggregate of 268,431 shares of common stock to a director, certain officers and other key employees of the Company. All of these options vest over a period of two years and have an exercise price of $6 per share and are outstanding as of September 30, 1997. For the purpose of supplemental disclosures required by SFAS 123, the fair value of options granted during 1996 was estimated as of the respective date of grant using a Black-Scholes option pricing model with the following assumptions for 1996; risk free interest rate of 6.5%; volatility factor of the expected market price of the common stock of 40%; expected life of the options of 8 years and expected dividend yield of zero. The weighted average fair value of options granted during 1996 was $3.44. For pro forma purposes, the estimated fair value of options is amortized to expense over the options' vesting period. Net earnings on a pro forma basis, determined as if the Company had accounted for its stock options under the fair value method using an option pricing mode, were $1,676,000 and $851,000, respectively, for the years ended September 30, 1997 and 1996 and pro forma earnings per share were $0.43 and $0.30, respectively. F-10 THE LION BREWERY, INC. NOTES TO THE FINANCIAL STATEMENTS - (CONTINUED) 11. STOCK OPTION PLANS AND WARRANTS (CONTINUED) On March 21, 1994, the Company's Board of Directors granted options to purchase an aggregate of 57,251 shares of common stock of the Company to the President at $1.40 per share (estimated fair market value on the date of grant) expiring in 2001. The options vest over three years. Vesting accelerated at the initial public offering (see Note 12). The senior subordinated noteholders received warrants for the purchase of 291,565 shares of the Company's common stock having a nominal exercise price. The loan agreement provided that the noteholders may put these warrants to the Company and accordingly, the warrants were accreted to the estimated redemption price. During fiscal 1996 an accretion of $89,000 was recorded and charged to retained earnings. The warrants were exercised in December 1995. The Company used $950,000 of the net proceeds of the initial public offering to repurchase 132,696 shares of common stock issued upon the exercise of the warrants. 12. PUBLIC OFFERING AND PREFERRED STOCK AUTHORIZATION On May 2, 1996, the Company completed an initial public offering of 1,875,000 shares of common stock for $6.00 per share, including the partial exercise of the over-allotment option. The proceeds of the initial public offering, including the partial exercise of the over-allotment option, net of the underwriting commissions and expenses totaled $9,466,000. A portion of these proceeds were used to repay indebtedness of the Company of $7,948,000 and to retire 132,696 shares of Common Stock, in connection with the termination of a loan agreement, at a cost of $950,000. In connection with this offering, the Company issued warrants to the underwriters to purchase up to 135,000 shares of common stock at an exercise price of $7.20, which are exercisable for a period of five years from the date of the offering. The holders have certain rights to obtain the registration of these shares under the Securities Act. F-11 Exhibit Index No. Description 10.1** Employment Agreement, dated as of January 3, 1996, between the Company and Charles Lawson 10.2* Employment Agreement, dated as of October 1, 1996, between the Company and Patrick Belardi 10.3** Lease dated March 1989 between the Company and Mericle Development Corporation 10.5** 1996 Stock Option Plan 10.6** Form of 1996 Stock Option Agreement 10.7** Agreement dated as of January 3, 1996 between the Company and The Marlborough Capital Investment Fund, L.P. 10.8** Agreement dated as of January 3, 1996 between the Company and Weston Presidio Offshore Capital C.V. 10.9** Credit and Security Agreement dated as of October 6, 1993 between the Company and Norwest Bank Minnesota, National Association 10.10* Mortgage and Security Agreement dated as of October 6, 1993 between the Company and William J. Smulowitz 10.11* Mortgage and Security Agreement dated as of October 6, 1993 between the Company and Norwest Bank Minnesota, National Association 10.12* Mortgage and Security Agreement dated as of October 6, 1993 between the Marlborough Capital Investment Fund, L.P. and Weston Presidio Offshore Capital C.V. 10.13** Securities Purchase Agreement dated as of October 6, 1993 10.14* Letter Agreement dated as of March 29, 1996 between the Company and Lester Smulowitz and Lynn Muchnick 10.15* Loan Agreement between the Company and Corestates Bank, N.A. dated February 6, 1997 * Filed herewith ** Incorporated by reference to the Company's registration statement on Form S-1, File No. 333-01644 EX-10 2 EXHIBIT 10.2 Exhibit 10.2 Dated as of October 1, 1996 Patrick E. Belardi 2504 Winfield Avenue Scranton, Pennsylvania 18505 Dear Mr. Belardi: The following sets forth our agreement as to the terms of your employment as the Chief Financial Officer of The Lion Brewery, Inc. (the "Company"). 1. The Company agrees to employ you, and you agree to be so employed, in the capacity of Chief Financial Officer of the Company. In consideration of the services to be rendered by you, the Company shall pay you and you shall accept as compensation an annual salary, payable in equal installments in accordance with the Company's past payroll practices with respect to executives, but in no event less frequently than monthly, at the rate of $80,000.00 per annum (the "Annual Salary"). The Board of Directors of the Company may, in its sole discretion, also pay annually to you a bonus as additional compensation. 2. In addition to the compensation provided above, (i) you shall be entitled to participate in all health benefits and other employee benefit programs of the Company and (ii) the Company will pay for your dues to the professional associations and pay for your ongoing educational expenses (approximately 80 hours every two years) for your CPA license. Actual educational time spent will be paid by the Company. In case of death, in addition to the life insurance policy benefits, all earned but unpaid salary, bonus or remaining severance pay shall be paid to the life insurance policy beneficiary. 3. Vacation will be earned at the rate of one day per month up to twelve (12) days per year. Days earned but unused will be vested and paid in full upon termination of employment without cause. 4. The Company may terminate your employment at any time for Cause (as hereinafter defined), without further compensation liability on the part of the Company. For purposes of this Agreement, the term "Cause" shall mean (i) action by you involving willful, gross misconduct having a material adverse effect on the Company, (ii) any material breach by you of any provision of this Agreement, or (iii) you being convicted of a felony or equivalent crime under the laws of the United States or any state, or a felony or equivalent crime under the laws of any other country or political subdivision thereof involving moral turpitude. 5. Upon termination of your employment hereunder by the Company without Cause, the Company shall pay you the Annual Salary for a period of one (1) year from the date of such termination, provided you are actively seeking employment during such one year period. All severance payments shall be payable in equal installments in accordance with the Company's past payroll practices with respect to executives, but in no event less frequently than monthly, and shall be reduced by all compensation received by you from any other source employing you during the applicable severance period. This Agreement shall automatically renew itself on a year to year basis, with mutually agreed upon terms, unless either party gives to the other party at least 45 days prior written notice of its intent to terminate this Agreement. This Agreement shall be governed by the laws of the Commonwealth of Pennsylvania and sets forth our complete and full understanding of the matters contained herein. Please confirm that the foregoing correctly sets forth our understanding and agreement as to the matters contained herein and that you agree to be bound by the terms and conditions hereof by signing below. Very truly yours, The Lion Brewery, Inc. By: /s/ -------------------- Agreed and Accepted: /s/ Patrick E. Belardi -------------------------- Patrick E. Belardi EX-10 3 EXHIBIT 10.13 Exhibit 10.13 LOAN AGREEMENT -------------- THIS AGREEMENT ("Agreement") made and entered into as of the 6th day of February, 1997, by and between THE LION BREWERY, INC., a Pennsylvania corporation with its principal office at 700 North Pennsylvania Avenue, Wilkes-Barre, Pennsylvania (the "Borrower"); and CORESTATES BANK, N.A., a banking corporation with offices located at 130 Wyoming Avenue, Scranton, Lackawanna County, Pennsylvania 18704 (the "Bank") W I T N E S S E T H: WHEREAS, the Borrower is in the process of making capital improvements to its production facility in Wilkes-Barre, Pennsylvania to increase its production capacity and efficiency (the "Project"); and WHEREAS, in connection with the Project, Borrower has applied to the Bank for a revolving line of credit in the amount of TWO MILLION FIVE HUNDRED THOUSAND and 00/100 ($2,500,000.00) DOLLARS (the "Revolver") and further, has applied to the Bank for a working capital line of credit in the amount of FIVE MILLION and 00/100 ($5,000,000.00) DOLLARS (the "Line") (the Revolver and the Line being hereinafter sometimes collectively referred to as the "Loans"); and WHEREAS, the Bank is willing to make the Loans to Borrower pursuant to the terms and conditions of this Agreement and all other loan documents referred to in this Agreement (all of which are hereinafter sometimes collectively referred to as the "Loan Documents" and are incorporated into this Agreement by reference). NOW, THEREFORE, in consideration of the premises and the mutual covenants hereinafter set forth, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: SECTION 1. THE LOANS. --------- (a) Revolver. The Bank shall make a credit facility -------- available to Borrower in the principal amount of TWO MILLION FIVE HUNDRED THOUSAND and 00/100 ($2,500,000.00) DOLLARS, the proceeds of which will be used by Borrower for capital expenditures related to increasing production capacity and efficiency at its production facility in Wilkes-Barre, Pennsylvania. (b) The Line. The Bank shall make a credit facility -------- available to Borrower in the principal amount of FIVE MILLION AND 00/100 ($5,000,000.00) DOLLARS which shall be used primarily for working capital. (c) Term and Interest. ----------------- (i) Revolver. Unless terminated due to an Event -------- of Default (hereinafter defined) or unless converted to a term loan as hereinafter provided, the Revolver shall mature three (3) years from the date hereof, at which time all outstanding principal, accrued and unpaid interest and any and all other costs associated with the Revolver shall be due and payable. Interest on the outstanding principal balance of the Revolver shall be paid monthly on all prime rate loans and on the earlier of the last day of the applicable rate period or quarterly for all LIBOR costs, whichever is sooner, based upon, and at Borrower's option, either: A) Bank's Prime Rate (hereinafter defined) minus one-half (1/2%) percent; or B) LIBOR Based Rate (hereinafter defined) plus 75 basis points; or C) Bank's Offered Rate (hereinafter defined). All rate requests shall be in writing on the Bank's Rate Notification Form. Interest on all loans shall be computed on actual/360 basis. The Borrower shall have the option, at any time, to convert the outstanding principal balance of the Revolver to a term loan of either three (3) or five (5) years from the date of the exercise of the option (the "Term Loan Option"). In the event the Term Loan Option is exercised, Borrower shall repay the outstanding principal balance under the Term Loan Option in equal monthly payments of principal plus interest based upon the term selected. Bank agrees to quote a fixed rate of interest option to the Borrower upon request. Fixed rate loans may not be prepaid without penalty. Bank shall advise Borrower of penalty upon Borrower's request for fixed rate loan. All outstanding Term Loans shall reduce the availability for borrowing under the Revolver. (ii) The Line. Unless terminated due to an Event -------- of Default (hereinafter defined), the Line shall mature three (3) years from the date hereof, at which time all outstanding principal, accrued and unpaid interest and any and all other costs associated with the Line shall be due and payable. Interest on the outstanding principal balance of the Line shall be paid monthly based upon and at Borrower's option, either: A) Bank's Prime Rate (hereinafter defined) minus one-half (1/2%) percent; or B) LIBOR Based Rate (hereinafter defined) plus 75 basis points; or C) Bank's Offered Rate (hereinafter defined). The Bank's Prime Rate is a floating rate of interest that is designated from time to time by the Bank as the "Prime Rate" and is used by the Bank as a reference rate with respect to different interest rates charged to Borrower. The rate of interest payable shall change simultaneously and automatically upon the Bank's designation of any change in such Prime Rate. The Bank's determination and designation from time to time of the Prime Rate shall not in any way preclude the Bank from making loans to other borrowers at a rate which is higher or lower than or different from the Prime Rate. LIBOR Based Rate means the rate per annum (rounded upward, if necessary, to the nearest 1/16 of 1%) quoted at approximately 11:00 a.m. London time, to the principal London branch of the Bank, two business days prior to the first day of the date on which the quoted rate is to become effective for the offering by leading banks in the London interbank market of dollar deposits in immediately available funds for a one, two, three or six month period as appropriate ("Interest Period"), and in an amount comparable to the unpaid principal balance of the Applicable Loan. Interest Periods with respect to the LIBOR Based Rate means each 30, 60, 90 or 180 day period as elected by the Borrower commencing of the date hereof and ending on the date which is the numerically corresponding day in the first, second, third or sixth calendar month thereafter, provided that if an Interest Period would end on a day that is not a Business Day (hereinafter defined), such Interest Period shall be extended to the next succeeding Business Day, unless such Business Day would fall in the next calendar month, in which case such Interest Period shall end on the immediately preceding Business Day. The Bank's Offered Rate is a rate of interest quoted by the Bank, from time to time, as an interest rate that the Borrower has the option of selecting with respect to advances under this facility, the quotation and duration of which interest rate shall be offered to the Borrower from time to time by the Bank in its sole discretion. Notwithstanding anything contained herein to the contrary, upon and after the occurrence of an Event of Default which is not cured to the satisfaction of the Bank, interest shall accrue at an annual rate (before and after judgment) equal to the Prime Rate plus three percent (3%) per annum. Subject to the provisions of this Agreement, interest shall be payable by the Borrower monthly, in arrears, on the first day of each month, or as otherwise billed by the Bank. "Business Day" means any day other than a Saturday, Sunday or other day on which commercial banks in Philadelphia, Pennsylvania are authorized or required to close under the laws of the Commonwealth of Pennsylvania and a day on which dealings in United States dollar deposits are also are also carried on in the London interbank market and banks are open for business in London, England. No later than three (3) Business Days prior to the end of each relevant Interest Period in the case of renewal of a LIBOR Based Rate, the Borrower shall elect, in writing, the LIBOR Based Rate and Interest Period, Bank's Prime Rate minus one-half (1/2%) percent or Bank's Offered Rate. Such election in the case of the LIBOR Based Rate, once made, shall be irrevocable and if no election is made three (3) Business Days prior to the end of each relevant Interest Period, the Borrower shall be deemed to have elected to pay interest at the Prime Rate minus one-half (1/2%) percent until such time as it elects by giving three (3) Business Days prior notice to pay interest at the LIBOR Based Rate for an Interest Period. LIBOR Rate Loans may not be added to or prepaid prior to the expiration of their stated interest period without penalty. Upon prepayment of any LIBOR Rate Loan on a day other than the last day of the applicable Interest Period (whether voluntarily, involuntarily, by reason of acceleration, demand or otherwise), the Borrower shall pay to the Bank within five (5) Business Days after demand, an amount equal to the Bank's "funding costs", which shall mean the sum of: (i) the principal amount of the LIBOR Rate Loan prepaid, multiplied by the number of days between the date of prepayment and the last day of the applicable Interest Period, divided by 360, multiplied by the applicable Interest Differential (provided that the product of the foregoing formula must be a positive number); plus (ii) all reasonable out-of-pocket expenses incurred by the Bank in connection with such payment, prepayment or failure to borrow. The Bank's determination of the amount of any "funding costs" payable under this paragraph shall be conclusive in the absence of manifest error. If the adoption of any applicable law, rule or regulation, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by the Bank with any request or directive of any such authority, central bank or comparable agency shall make it unlawful or impossible for any Bank to make, maintain or fund its LIBOR Rate Loans, the Bank shall give notice thereof to the Borrower, whereupon (until the Bank notifies the Borrower that the circumstances giving rise to such suspension no longer exist), the obligation of the Bank to make LIBOR Rate Loans shall be suspended. If the Bank shall determine that it may not lawfully continue to maintain and fund any of its outstanding LIBOR Rate Loans to maturity and shall so specify in such notice, the Borrower shall immediately prepay in full the then outstanding principal amount of each such LIBOR Rate Loan, together with accrued interest thereon and any "funding costs" incurred by the Bank hereunder. (d) Method of Payments. Borrower irrevocably ------------------ authorizes Bank to debit its designated account for all payments due under the Loans. The Bank shall furnish written verification of each payment charged against the account. The Borrower shall promptly pay Bank such amounts as may be due if the designated account balance is insufficient. (e) Notes. The Loans shall be evidenced by the ----- Borrower's Notes of even date herewith (the "Notes"), the terms of which are incorporated herein by reference thereto. If Borrower shall have the privilege of prepaying (as herein provided) the principal balance of the Notes, such prepayments shall be applied to the installments of the Note in inverse order of maturity and shall not postpone or interrupt the payment of monthly or other installments as they shall become due. SECTION 2. CLOSING DOCUMENTS. ----------------- This Loan Agreement, the documents referenced herein and those executed and exchanged at settlement are hereinafter sometimes collectively referred to as the "Loan Documents" and are incorporated herein by reference thereto. SECTION 3. CLOSING AND DISBURSEMENTS. ------------------------- (a) The obligation of the Bank to close on the Loans shall be conditioned upon: (i) An opinion of counsel for the Borrower satisfactory to the Bank and its counsel, providing, among other things, that to the best of counsel's knowledge the representations and warranties of the Borrower contained in the Loan Documents are true and correct, that the Loan Documents executed and delivered to the Bank by the Borrower are valid and binding subject to appropriate reservation of creditors' rights language; (ii) Its receipt of fully executed original copies of this Loan Agreement, the Loan Documents and any and all other documents reasonably requested by the Bank and its counsel; (iii) Its receipt of the tax identification numbers of Borrower; and (iv) Its receipt of the Articles of Incorporation and By-Laws of Borrower. SECTION 4. EVENTS OF DEFAULT. Each of the following ----------------- shall constitute an Event of Default under the Loans ("Event of Default"), whatever the reason for such event and whether it shall be voluntary or involuntary, or within or without the control of the Borrower, or be effected by operations of law or pursuant to any judgment or order of any court or any order, rule or regulation of any governmental or non-governmental body: (a) Any payment of the principal, interest or other charges under or in connection with any of the Loans shall not be made within fifteen (15) days of their due date. (b) Any Representation or Warranty in the Loan Documents shall prove to have been incorrect or misleading when made, in any material respect. (c) Borrower shall (i) become insolvent, (ii) admit its inability to pay its debts as they become due, (iii) make an assignment for the benefit of its creditors, (iv) be adjudicated, bankrupt or insolvent, (v) voluntarily initiate proceedings under any present or future bankruptcy or reorganization law, or (vi) become the subject of any involuntary proceedings under any present or future bankruptcy or reorganization law that shall not have been discharged within sixty (60) days after commencement of such proceedings. (d) The Borrower shall fail to observe or perform any other agreement or covenant contained in any of the Loan Documents not cured within thirty (30) days of written notice to Borrower from Bank (such notice period being concurrent with and not in addition to any other notice period that may be specified in any of the other Loan Documents), provided, however, that Bank may, in its sole discretion, allow Borrower to pursue a cure of the default if it is incapable of being cured within the thirty (30) day period and Borrower diligently pursues a cure. (e) The Borrower or any Subsidiary of the Borrower shall fail to pay any indebtedness for borrowed money (other than the Notes) of the Borrower or such Subsidiary, as the case may be, or any interest or premium thereon, when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) after the giving of any required notice or the expiration of any grace or cure period, or any such indebtedness shall be declared to be due and payable or required to be prepaid (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof; or (f) The entry of any judgment against the Borrower or any Subsidiary thereof or the issuing of any attachment or garnishment against any property of the Borrower or any Subsidiary thereof in the aggregate amount of $250,000 which judgment, attachment or garnishment shall continue unsatisfied and in effect for a period of 20 consecutive days (following notice from the creditor and/or Bank and/or any other reliable party) without being vacated, discharged, satisfied or bonded pending appeal; or (g) The dissolution, merger, consolidation, reorganization or change in control (as "control" is defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended) of the Borrower or any Subsidiary thereof or the sale or transfer of any substantial portion of the Borrower's assets; or (h) Any "Event of Default" shall occur under the terms of any of the Loan Documents. SECTION 5. CROSS-DEFAULT OF LOANS. ----------------------- The Borrower agrees, covenants and represents that a default under either of the Loans shall constitute a default under all of the Loans and would allow Bank the right to exercise any of its remedies with respect to any of the Loans. SECTION 6. REMEDIES. Upon the occurrence and during the -------- continuance of any Event of Default, and in every such event, the Bank shall have the right, after the expiration of any applicable notice and cure period, to: (a) Declare the outstanding principal of, and all unpaid and accrued interest on the Loans, and all other amounts owed by the Borrower under this Agreement with respect to the Loans or otherwise to the Bank (whenever or howsoever arising, and whether or not then due) to be, and such principal, interest and other amounts shall thereupon become immediately due and payable; (b) Exercise all rights and remedies specified in this Agreement and/or the other Loan Documents; and (c) Exercise all other rights and remedies available at law or at equity. Presentment, demand, promise or notice of any kind are hereby expressly waived. The Bank's rights and remedies shall be cumulative and not exclusive, may be exercised from time to time, and need not be exercised in any given order. The Bank shall further be entitled to be reimbursed for any and all reasonable costs incurred by it in exercising its remedies. SECTION 7. WARRANTIES AND REPRESENTATIONS. The Borrower ------------------------------ warrants and represents to the Bank and agree that: (a) Borrower is a Pennsylvania corporation, duly organized, validly existing and in good standing under the laws of the Commonwealth of Pennsylvania and that Borrower has the power and authority to own its property and assets, to carry on its business as is now being conducted and is qualified to do business in every jurisdiction in which it is required to qualify to do business. (b) no consent of any party is required in connection with the Borrower's execution, delivery, performance, validity or enforceability of the Loan Documents. (c) the Borrower has the power to execute, deliver and perform this Agreement and the other Loan Documents, and when executed and delivered, this Agreement and the other Loan Documents will be valid and binding obligations of the Borrower enforceable in accordance with their respective terms. (d) the execution, delivery and performance of this Agreement and the other Loan Documents has been duly authorized by all corporate and legal action required for the lawful creation and issuance of such documents by the Borrower will not violate any provision of any law, any order of any court or governmental agency or the By-Laws of the Borrower. (e) the execution, delivery and performance of this Agreement and the other Loan Documents will not violate any provision of any contract to which the Borrower's properties or assets are bound, and will not be in conflict with, result in a breach of, or constitute (with due notice and/or lapse of time) a default under any such Contract or result in the creation or imposition of any lien, charge, or encumbrance of any nature whatsoever upon any of the properties or assets of the Borrower. (f) except as disclosed in the Schedule attached hereto, there are no actions, suits or proceedings before any court or governmental department or agency pending, or to the knowledge of the Borrower, threatened (i) with respect to any of the transactions contemplated by the Loan Documents or (ii) against or affecting the Borrower or any of its properties which, if adversely determined, would have a material adverse affect on the financial condition, business or operations of the Borrower or upon its ability to perform any of its obligations under the Loan Documents. The Borrower is not in default with respect to any judgment, order, writ, injunction, decree, rule or regulation of any court or federal, state, municipal or other governmental department or agency, which default would have a material adverse affect on the financial condition, business operations of the Borrower or upon its ability to perform any of its obligations under the Loan Documents. (g) the Borrower is not in default under any material existing agreement, and no event has occurred which, with the giving of notice or passage of time, or both, would constitute an Event of Default hereunder as of the date hereof. (h) the Borrower has filed or caused to be filed all tax returns and reports required by law and have paid all taxes shown to be due and payable on said returns or reports or on any assessments made against it. No tax liens have been filed against any asset of the Borrower and no claims are being asserted with respect to such taxes which could have a material adverse affect on the financial condition, business or operations of the Borrower. (i) the Borrower is in compliance with, and has received no notice of non-compliance with respect to all federal, state and local laws relating to the conduct of its business. (j) all financial information regarding the Borrower which has been or will be furnished to the Bank is, or will be when furnished, true and correct and does or will when furnished represent fairly, accurately and completely, the financial condition of the Borrower and the results of its operations as of the dates and for the periods for which the same were furnished. All such financial statements of the Borrower will have been prepared in accordance with the generally accepted accounting principals ("GAAP"). There are no liabilities, direct or indirect, fixed or contingent, of the Borrower of a character which under GAAP should have been but were not reflected in such financial statements or in the notes thereto. (k) the proceeds of the Loans shall be used solely and exclusively as provided in Section 1 hereof. SECTION 8. AFFIRMATIVE COVENANTS. Borrower hereby --------------------- covenants and agrees that: (a) Borrower shall furnish to the Bank, within ninety- one (91) days after the close of each fiscal year, audited financial statements, together with its annual 10-K financial reports, all supporting schedules and notes, and accompanied by an opinion thereon to the Bank by an independent certified public accountant satisfactory to the Bank. The statements will be prepared in accordance with GAAP. (b) Borrower shall furnish to the Bank, within forty- five (45) days of the close of each fiscal quarter, its 10-Q quarterly financial reports, certified by the Chief Financial Officer of the Borrower as having been prepared in accordance with GAAP. (c) Borrower shall provide the Bank within thirty (30) days after the end of each fiscal year, with its annual projection and budget for the immediately succeeding fiscal year. (d) Borrower shall maintain and keep all of its property in good repair, working order and condition or make or cause to be made all necessary or appropriate repairs, renewals, replacements, substitutions, additions, betterments and improvements thereto so that the efficiency of all such property shall at all times be properly preserved and maintained. (e) Borrower shall duly pay and discharge all taxes, assessments and governmental charges levied upon or assessed against it or against its properties or income prior to the date on which penalties are attached thereto, unless and except to the extent only that such taxes and assessments and charges shall be contested in good faith and by appropriate proceedings diligently conducted by it (unless and until foreclosure, distraint, sale or other similar proceedings shall have been commenced) and provided that such reserve or other appropriate provisions, if any, as shall be required by GAAP shall have been made therefore. (f) Borrower shall promptly give notice, in writing, to the Bank of the occurrence of any material litigation, arbitration or governmental proceeding affecting it and of any governmental investigation or labor dispute pending or, to its knowledge, threatened, which could reasonably be expected to interfere substantially with its normal operations or materially adversely affect its financial condition. (g) Borrower shall maintain and keep proper records and books of account in conformance with GAAP applied on a consistent basis and to which full, true and correct entries shall be made of all of its dealings and business affairs. (h) Borrower shall permit any of the officers, employees or representatives of the Bank to visit and to examine and copy the books and records and discuss their affairs, finances and accounts during normal business hours, and as often as the Bank may reasonably request subject to reasonable prior notice to Borrower and opportunity to be present and participate in any such examination and/or discussions. The Bank shall exercise its customary care in maintaining the confidentiality of such information. (i) Borrower shall keep all insurable property, real and personal, now owned or hereinafter acquired, insured at all times against loss or damage by fire and extended coverage risks and other hazards of the kinds customarily insured against and in amounts customarily carried by businesses engaged in comparable businesses and comparably situated and promptly from time to time upon request of the Bank, deliver to the Bank a summary schedule indicating all insurance then in effect, together with all such policies, certificates of insurance and such other information relating thereto as the Bank may, from time to time, request. (j) Borrower shall preserve and protect each of its patents, franchises, licenses, trademarks and trademark rights, trade name, trade name rights, and copyrights used or useful in the conduct of its business. Changes to brands and/or labels in the ordinary course of Borrower's business shall be excluded from this provision. (k) Borrower shall maintain, obtain (to the extent necessary) and comply, in all material respects, with all required permits, licenses, registrations, and approvals relating to its operations. (l) Borrower shall comply, in all material respects, with all laws, rules, regulations and governmental orders and directives relating to the generation, treatment, storage, transportation, disposal and release into the environment and clean up of any hazardous or toxic waste or substance which is subject to the provisions of any federal, state or local environmental statute or regulation. (m) Borrower shall notify the Bank if it receives (i) any notice from any governmental agency that it is a potentially responsible party in any proceeding under federal, state or local environmental statutes or regulations, (ii) any notice of any claim, proceeding, litigation, order, directive, citation or request for information concerning environmental condition, or notice of any alleged violation of any environmental statute, ordinance, regulation or permanent condition, or (iii) any information concerning any potentially adverse environmental condition, including but not limited to, any spilling, leaking, discharge, release or threat of release of any hazardous or toxic waste or substance. (n) Borrower shall promptly give notice, in writing, to the Bank, of the occurrence of any Event of Default and of any condition, event, act or omission which, with the given of notice or the lapse of time or both, would constitute an Event of Default hereunder or under the other Loan Documents, or under any agreement or document securing, evidencing or relating to the Loan Documents. (o) Except as set forth herein, all other lines of credit of the Borrower shall be cancelled or terminated. SECTION 9. NEGATIVE COVENANTS. Borrower hereby ------------------ covenants and agrees that: (a) Borrower will not undergo a change in control or ownership absent the written consent of the Bank. (b) Borrower shall not violate any applicable law to the extent that the consequences of any such violation may have a material adverse affect on its financial condition or operations or may impair its ability to perform its obligations under the Loan Documents. (c) Borrower shall not, except for sales or other dispositions of inventory in the ordinary course of business, sell, lease, transfer, or otherwise dispose of in a single transaction, or a series of related transactions, all or any material part of its property or assets, whether now owned or hereinafter acquired, to any person, firm or corporation; nor sell, assign or discount any of its accounts receivable or any promissory note held by it, with or without recourse. (d) Borrower shall not, in the aggregate, incur additional indebtedness (including capital leases) and/or pledge its assets in excess of $250,000.00 per year without the Bank's prior written consent. SECTION 10. FINANCIAL COVENANTS. Borrower hereby ------------------- covenants and agrees that: (a) The Borrower will maintain a ratio of current assets to current liabilities of not less than 1.50 to 1.00 as of the end of each fiscal quarter during the term of this Agreement commencing with the Borrower's fiscal year beginning October 1, 1996. The outstanding balances under the revolver and line of credit facility referred to herein shall be excluded from this ratio. (b) The Borrower will maintain at the end of each fiscal quarter a combined ratio of total debt to Tangible Net Worth of no greater than .75 to 1.00. (c) The Borrower will maintain on a rolling four quarter basis a combined Debt Service Coverage Ratio of at least 1.50 to 1.00. As used herein, "Debt Service Coverage Ratio" shall be calculated as follows: the sum of (1) net income after taxes plus depreciation and amortization minus dividends and unfunded capital expenditures paid of the Borrower; divided by (2) the combined current maturities of long term debt plus capital leases of the Borrower for that period. The outstanding balances under the revolver and line of credit facility referred to herein shall be excluded from this ratio. SECTION 11. DEPOSIT RELATIONSHIP. The Borrower agrees -------------------- that all operating and cash management accounts will be maintained at the Bank. SECTION 12. DISCLAIMER OF RELATIONSHIPS. The Borrower --------------------------- acknowledges that nothing contained in this Agreement or in the other Loan Documents, or any act of the Bank, shall be deemed or construed to create any relationship of a third-party beneficiary, or of principal or agent, or of limited or general partnership, or of joint venture, or of any association or relationship between the Borrower and the Bank other than that of debtor and creditor. SECTION 13. NOTICES. All notices to be given by any ------- party as required hereunder shall be in writing and shall be addressed as follows: Bank: Corestates Bank, N.A. 130 Wyoming Avenue Scranton, PA 18503 Attention: Frank Heston, Assistant Vice President With a copy to: Joseph L. Persico, Esquire Rosenn, Jenkins & Greenwald, L.L.P. 15 South Franklin Street Wilkes-Barre, PA 18711 Borrower: The Lion Brewery, Inc. 700 North Pennsylvania Avenue Wilkes-Barre, PA 18705 Attention: Patrick Belardi, Vice-President With a copy to: Alan Kluger, Esquire Hourigan, Kluger, Spohrer & Quinn Suite 700, Mellon Bank Center 8 West Market Street Wilkes-Barre, PA 18711 Notices shall be delivered by either an independent courier service that obtains a receipt for delivery or certified or registered United States Postal Service mail, return receipt requested. Any party hereto may change their address for notices by written notice to the other parties as aforesaid. SECTION 14. EXPENSES. The Borrower shall pay, or -------- reimburse the Bank for (i) out-of-pocket expenses in connection with the preparation, execution and delivery of any waiver, amendment or consent by the Bank relating to the Loan Documents and (ii) all costs of obtaining performance under the Loan Documents by the Borrower, and all costs of collection if Default is made in the payment of the Loan or any other amount payable hereunder and all costs of realizing upon any security for any obligation hereunder, which costs shall include reasonable counsel fees and expenses. SECTION 15. RIGHTS CUMULATIVE: NO IMPLIED WAIVERS OF ----------------------------------------- RIGHTS. The rights and remedies of the Bank under this Agreement ------ and under the other Loan Documents shall be cumulative and not exclusive of any rights or remedies that it would otherwise have, and no failure or delay by the Bank in exercising any right shall operate as a waiver of such right, nor shall any single or partial exercise of any power or right preclude its other or further exercise or the exercise of any other power or right. SECTION 16. SET-OFF. Upon and after the occurrence of ------- any Event of Default by the Borrower, the Bank is hereby authorized by the Borrower, at any time and from time to time, without notice, (i) to set-off against, and to appropriate and apply to the payment of the obligations and liabilities of the Borrower under the Loan Documents (whether matured or unmatured, fixed or contingent or liquidated or unliquidated), any and all amounts owing by the Bank to the Borrower (whether payable in Dollars or any other currency, whether matured or unmatured, and, in the case of deposits, whether general or special, time or demand and however evidenced) and (ii) pending any such action, to the extent necessary, to hold such amounts as collected to secure such obligations and liabilities and to return as unpaid for insufficient funds any and all checks and other items drawn against and deposits so held as the Bank in its sole discretion may elect. SECTION 17. INDEMNIFICATION. Borrower shall, and does --------------- hereby, indemnify the Bank, its successors and assigns, and hold them harmless, of and from any and all claims, demands and liabilities whatsoever (except to the extent the same was the result of Bank's negligence, willful misconduct or knowing violations of law), including the reasonable costs of attorney's fees and other defense costs, fines or other penalties or payments, arising from the making of the Loans by the Bank, or any other relationship, real or asserted, between the Bank and the Borrower especially including, but specifically not limited to any claims, demands or liabilities, asserted or arising under any federal, state or local environmental law and any other failure to comply in all respects with all environmental laws, regulations, ordinances or administrative orders which may effect the same, now or in the future. This indemnification is intended to, and shall, survive payment in full of the Loans. SECTION 18. ACKNOWLEDGEMENT OF CONFESSION OF JUDGMENT ----------------------------------------- PROVISIONS. ---------- THE BORROWER ACKNOWLEDGES AND AGREES THAT THE LOAN DOCUMENTS CONTAIN PROVISIONS WHEREBY THE BANK MAY UPON CERTAIN CIRCUMSTANCES ENTER JUDGMENT BY CONFESSION AGAINST THE BORROWER, BEING FULLY AWARE OF THE BORROWER'S WAIVER OF RIGHTS TO PRIOR NOTICE AND HEARING ON THE QUESTION OF THE VALIDITY OF ANY CLAIMS THAT MAY BE ASSERTED AGAINST THE BORROWER BY THE BANK UNDER THE LOAN DOCUMENTS, BEFORE JUDGMENT CAN BE ENTERED. THE BORROWER HEREBY CONSENTS TO THE BANK ENTERING JUDGMENT AGAINST THE BORROWER BY CONFESSION AS PROVIDED IN THE LOAN DOCUMENTS. ANY PROVISION IN A CONFESSION OF JUDGMENT IN ANY OF THE LOAN DOCUMENTS FOR AN ATTORNEY'S COLLECTION COMMISSION SHALL IN NO WAY LIMIT ANY OF THE BORROWER'S LIABILITY TO REIMBURSE THE BANK FOR ALL LEGAL FEES ACTUALLY INCURRED BY THE BANK, EVEN IF SUCH FEES ARE IN EXCESS OF THE ATTORNEY'S COLLECTED COMMISSION PROVIDED FOR IN SUCH CONFESSION OF JUDGMENT. THE BORROWER HEREBY KNOWINGLY AND INTELLIGENTLY, IRREVOCABLY WAIVES ANY RIGHT WHICH THE BORROWER HAS OR MAY HAVE TO A HEARING PRIOR TO THE ISSUANCE OF EXECUTION PROCESS AGAINST THE BORROWER PURSUANT TO A JUDGMENT OBTAINED BY THE BANK (WHETHER BY CONFESSION OR OTHERWISE), AND AGREES TO INDEMNIFY AND HOLD HARMLESS THE BANK, ITS AGENTS, ATTORNEYS, EMPLOYEES, SUCCESSORS AND ASSIGNS FROM AND AGAINST ANY AND ALL LIABILITY ASSOCIATED WITH SUCH EXECUTION PROCESS. SECTION 19. WAIVER OF JURY TRIAL. THE BORROWER AND THE -------------------- BANK WAIVE ANY RIGHT TO TRIAL BY JURY ON ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (a) ARISING UNDER ANY OF THE LOAN DOCUMENTS, OR (b) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE BORROWER OR THE BANK WITH RESPECT TO ANY OF THE LOAN DOCUMENTS OR THE TRANSACTIONS RELATED HERETO OR THERETO, IN EACH CASE WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE. THE BORROWER AND THE BANK AGREE AND CONSENT THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY, AND THAT ANY PARTY TO THIS AGREEMENT MAY FILE AN ORIGINAL COUNTER PART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE BORROWER AND THE BANK TO THE WAIVER OF THEIR RIGHTS TO TRIAL BY JURY. THE BORROWER ACKNOWLEDGES THAT IT HAS HAD THE OPPORTUNITY TO CONSULT WITH COUNSEL REGARDING THIS SECTION, THAT IT FULLY UNDERSTAND ITS TERMS, CONTENT AND EFFECT, AND THAT IT VOLUNTARILY AND KNOWINGLY AGREE TO THE TERMS OF THIS SECTION. SECTION 20. SURVIVAL OF COVENANTS. All covenants, --------------------- agreements, representations and warranties made by the Borrower in the Loan Documents are made by or on its behalf in connection with the transactions contemplated herein shall be true in all material respects at all times this Agreement is in effect and shall survive the execution and delivery of the Loan Documents, any investigation at any time made by the Bank or on its behalf in the making by the Bank of the Loans to the Borrower. All statements contained in any certificate, statement or other documents delivered by or on behalf of the Borrower pursuant hereto or in connection with the transactions contemplated hereunder shall be deemed representations and warranties by the Borrower. SECTION 21. NO ASSIGNMENT. The Borrower may not assign ------------- any of its rights hereunder without the prior written consent of the Bank and the Bank shall not be required to lend hereunder except to the Borrower as it presently exists. SECTION 22. PARTICIPATION. The Bank may sell, assign or ------------- participate all or any portion of its interest in the Loan Documents and in connection therewith may make available to any prospective purchaser, assignee or participant any information relative to the Borrower in its possession. SECTION 23. NO THIRD PARTY RIGHTS. The rights and --------------------- benefits of this Agreement and the other Loan Documents shall not inure to the benefit of any third party. SECTION 24. INTEGRATION. The Loan Documents shall be ----------- construed as integrated and complementary of each other, and as augmenting and not restricting the rights, powers, remedies and security of the Bank. The Loan Documents contain the entire understanding of the parties thereto with respect to the matters contained therein and supersede all prior agreements and understandings between the parties with respect to the subject matter thereof and do not require parol or extrinsic evidence in order to reflect the intent of the parties. In the event of any inconsistency between the terms of this Agreement and the terms of the other Loan Documents, the terms of this Agreement shall prevail. SECTION 25. WAIVERS. The provision of this Agreement ------- may, from time to time, be waived in writing by the Bank in its sole discretion. Any such waiver of any kind on the part of the Bank of any breach or default under this Agreement or any waiver of any provision or condition of this Agreement must be in writing and shall be effective only to the extent set forth in such writing. No delay by the Bank in exercising any right or remedy hereunder shall operate as a waiver thereof. SECTION 26. BINDING NATURE. The rights and privileges of -------------- the Bank contained in this Agreement shall inure to the benefit of its successors and assigns, and the duties of the Borrower shall bind all of its successors and assigns. SECTION 27. GOVERNING LAW. Time of performance hereunder ------------- is of the essence of this Agreement. This Agreement and any written supplement hereto executed by the Borrower in which reference to this Agreement is made shall in all respects be governed by the laws of the Commonwealth of Pennsylvania (except to the extent that federal law governs). SECTION 28. SEVERABILITY. If any provision hereof shall ------------ for any reason be held invalid or unenforceable, no other provision shall be affected thereby, and this Agreement shall be construed as if the invalid or unenforceable provision had never been a part of it. The descriptive headings hereof are for convenience only and shall not in any way affect the meaning or construction of any provisions hereof. SECTION 29. EXECUTION OF COUNTERPARTS. This Agreement may ------------------------- be executed in as many counterparts as may be deemed necessary by the parties, each of which, when so executed, shall be deemed an original, but all such counterparts shall constitute one and the same instrument. [SIGNATURE PAGE FOLLOWS] IN WITNESS WHEREOF, and intending to be legally bound thereby, the parties hereto have hereunder set their respective hands and seals the day and year first above written. ATTEST: BANK: CORESTATES BANK, N.A. /s/ /s/ ______________________ By: ______________________________ Its: _________________________ (Corporate Seal) ATTEST: BORROWER: THE LION BREWERY, INC. /s/ /s/ ______________________ By: ______________________________ Its: _________________________ (Corporate Seal) EX-27 4 ART 5. FDS FOR 10-KSB
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE LION BREWERY, INC.'S BALANCE SHEETS, STATEMENTS OF INCOME AND STATEMENTS OF CASH FLOWS FOR THE PERIOD ENDED SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS SEP-30-1997 SEP-30-1997 3,184 0 2,444 186 2,271 8,108 6,833 2,352 18,467 3,685 0 0 0 39 14,335 18,467 26,869 26,869 20,099 20,099 3,680 0 0 3,214 1,382 1,832 0 0 0 1,832 0.47 0.47
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