September 7, 2001 Paul G. Hughes
Also Admitted in New York
203-351-4207, Fax 203-708-3806
phughe@cl-law.com
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Re: Lincoln Snacks Company
Schedule 13E-3; File No. 5-53675
Schedule 14A; File No. 0-23048
Filed on August 6, 2001
Dear Sirs:
By letter dated September 4, 2001, we received your comments on the Schedule
13E-3 (file No. 5-53675) and the Schedule 14A (file No. 0-23048) filed with
respect to the proposed merger of Lincoln Snacks Company ("Lincoln Snacks") and
Lincoln Snacks Acquisition Corp. ("Lincoln Acquisition"). Along with this
letter, Lincoln Snacks is filing amended preliminary proxy material, and Lincoln
Snacks, Lincoln Acquisition, Brynwood Partners III L.P. ("Brynwood"), Hendrik J.
Hartong, Jr. and John T. Gray are filing an amendment to their Schedule 13E-3
relating to the proposed transaction, the principal purpose of which is to
respond to your comments. "Preliminary Proxy Statement" refers to the
preliminary proxy statement dated September 7, 2001 being filed on the date
hereof, and "Schedule 13E-3" refers to the Schedule 13E-3 filed on August 6,
2001, as amended by Amendment No. 1 thereto filed on the date hereof.
The purpose of this letter is to respond to your comments on the Preliminary
Proxy Statement and the Schedule 13E-3 as originally filed.
SCHEDULE 13E-3
SEC Comment No. 1. Please advise as why you believe that Lincoln Snacks'
officers and directors, including Mr. MacTaggart, should not be added as filing
persons on the Schedule 13E-3, as they appear to be affiliates engaged in this
going private transaction. Otherwise, these persons should be individually
included as persons on the Schedule 13E-3. For help in making this
determination, please review Section II.D.3 of our Current Issues Outline,
publicly available at our website at www.sec.gov.
Securities and Exchange Commission -2- September 7, 2001
Response. Following consummation of the proposed merger, Brynwood would
initially own 100% of the surviving company's common stock. As a result,
Brynwood would have the power acting alone to take all actions on behalf of the
stockholders of Lincoln Snacks. Hendrik J. Hartong, Jr. and John T. Gray, as the
sole general partners of the general partner of Brynwood, are the only
individuals who would have voting power with respect to the shares owned by
Brynwood. All directors and executive officers of Lincoln Snacks following the
merger would continue to serve as directors and executive officers only so long
as Brynwood wishes them to serve. These individuals would, as a result, not be
in a position effectively to control Lincoln Snacks.
Immediately following the merger, none of the current directors or executive
officers of Brynwood (other than Mr. Hartong, Jr. and Mr. Gray as the
controlling persons of Brynwood) would own any equity interest in the surviving
corporation. Such directors and executive officers are expected to have the
right to acquire common stock of the surviving corporation upon the exercise of
certain options. However, the aggregate number of shares which they would have
the right to acquire (assuming none exercises the right to surrender options
pursuant to the Merger Agreement) would be less than 9.4% of the common stock
then outstanding.
Based on the foregoing, we submit that none of the current directors or
executive officers of Lincoln Snacks other than Mr. Hartong, Jr. and Mr. Gray
will be in a position to "control" the surviving corporation because they will
not possess, directly or indirectly, the power to direct or cause the direction
of the management or policies of the surviving corporation. Any policy that any
of such directors or executive officers may wish to implement will be subject to
agreement of Brynwood in its absolute discretion. None of such directors or
executive officers should be deemed to be "engaged in" the Rule 13E-3
transaction and obligated to file a Schedule 13E-3.
SEC Comment No. 2. Each filing person must individually comply with the filing,
dissemination and disclosure requirements of Schedule 13E-3. Therefore, you will
need to include all of the information required by Schedule 13E-3 and its
Instructions for each filing person listed on the cover of the Schedule 13E-3
and any filing persons added in response to the preceding comment. For example,
include a statement as to whether each person believes the Rule 13e-3
transaction to be fair to unaffiliated securityholders and an analysis of the
material factors upon which s/he relied in reaching such a conclusion. See Item
8 of Schedule 13E-3, Item 1014 of Regulation M-A and Question 5 of Exchange Act
Release No. 34-17719 (April 13, 1981).
Response. The second and third paragraphs under "SPECIAL FACTORS - Background
and Reasons for the Merger; Recommendation of the Lincoln Snacks' Board -
Reasons for Approving the Merger" have been revised to read as follows:
Based on these factors, the board of directors determined to
approve the Merger Agreement and to recommend its approval by the
stockholders of Lincoln Snacks. These factors, including the
analyses performed by BNY Capital Markets, also formed the
Securities and Exchange Commission -3- September 7, 2001
basis for the evaluation by the Special Committee, the board of
directors, including Mr. Hartong, Jr. and Mr. Gray, and Brynwood of
the fairness of the merger to the stockholders of Lincoln Snacks
other than Brynwood.
None of the Special Committee, the board of directors, including
Mr. Hartong, Jr. and Mr. Gray, or Brynwood assigned any relative
weight to any of the factors considered. Rather, taking into
account all of the factors considered, each determined that the
merger was fair to the stockholders of Lincoln Snacks other than
Brynwood. The Special Committee determined that the merger would be
in the best interests of Lincoln Snacks and its stockholders other
than Brynwood and recommended that it be approved by the board of
directors and stockholders of Lincoln Snacks.
ITEM 2. SUBJECT COMPANY INFORMATION
SEC Comment No. 3. We note that Brynwood began accumulating shares of Lincoln
Snacks in 1998 and continued to purchase shares every quarter during the past
two years. As you know, a Schedule 13E-3 must be filed at the outset of the
first transaction in any series of transactions having a "going private effect"
within the meaning of Rule 13e-3(a)(3)(ii). Supplementally explain to us why
these prior transactions did not constitute the first steps in your going
private transactions.
Response. Brynwood made its initial purchase of Lincoln Snacks' common stock in
1998 because it believed that such stock represented an attractive investment.
For the same reason, it thereafter purchased additional shares in open market
and negotiated transactions. From time to time, Brynwood evaluated its strategic
alternatives concerning its investment in Lincoln Snacks. At the same time,
Brynwood was effectively prevented under Section 203 of the Delaware General
Corporation Law from effecting a going private transaction with Lincoln Snacks.
As recently as early June, Lincoln Snacks together with Brynwood was actively
considering a potential transaction pursuant to which Lincoln Snacks would be
acquired by an unaffiliated third party. As of the dates of those discussions,
Brynwood had made neither a decision nor a commitment to effect a going private
transaction with Lincoln Snacks. Only after those discussions terminated did
Brynwood determine to recommend the merger transaction.
ITEM 7. PURPOSES, ALTERNATIVES, REASONS AND EFFECTS
SEC Comment No. 4. Describe the effects of the transactions on each affiliate's
interest in the net book value and net earnings of the issuer in terms of both
dollar amounts and percentages. Refer to Instruction 3 to Item 1013 of
Regulation M-A.
Securities and Exchange Commission -4- September 7, 2001
Response. Other than Mr. MacDonald who owns 5,000 shares of Lincoln Snacks'
Common Stock which would be converted into the right to receive $3.50 per share
in the merger, none of the directors or executive officers of Lincoln Snacks
individually owns any Lincoln Snacks' Common Stock. As disclosed in the proxy
statement, Lincoln Snacks would become wholly owned by Brynwood upon
consummation of the proposed merger. As a result, Brynwood would have a 100%
interest in the net book value and net earnings of Lincoln Snacks.
The following sentence has been added to "SUMMARY - Parties to the Merger -
Brynwood and Lincoln Acquisition" and "THE MERGER AGREEMENT - General
Description":
Following the merger, Brynwood's interest in the net book value and
net earnings of Lincoln Snacks would be 100%. See the financial
statements of Lincoln Snacks included in Annex C and Annex D
hereto.
SEC Comment No. 5. Discuss the federal tax consequences of the Rule 13e-3
transaction on each filing party. See Item 1013(d) of Regulation M-A.
Response. The following paragraph has been added at the end of "MATERIAL FEDERAL
INCOME TAX CONSEQUENCES":
There will be no federal income tax consequences of the merger to
either Brynwood, Lincoln Acquisition or the directors and executive
officers of Brynwood except to the extent that any of such
directors and executive officers individually own shares of Lincoln
Snacks' common stock which are converted into the right to receive
cash in the merger. The federal income tax consequences to any
director or executive officer owning Lincoln Snacks' common stock
converted in the merger will be the same as the consequences
described above to the holders of Lincoln Snacks' common stock
generally.
ITEM 10. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION
SEC Comment No. 6. Disclose the total amount of funds needed to consummate the
proposed transaction in accordance with Item 1007(a) of Regulation M-A.
Response. The following language has been added under "THE MERGER AGREEMENT -
Consideration" in the Proxy Statement:
If all of the shares of Lincoln Snacks' Common Stock outstanding on
the record date and not owned by Brynwood are converted into cash
in the merger approximately $4,000,000 in cash will be paid upon
consummation of the merger.
Securities and Exchange Commission -5- September 7, 2001
SCHEDULE 14A
SEC Comment No. 7. In the letter to stockholders, you state that the board of
directors determined that "the merger is in the best interests of Lincoln Snacks
and its stockholders." Revise to state whether the board (and the Special
Committee) determined that the terms of the Rule 13e-3 transaction are fair to
"unaffiliated" shareholders. See Item 1014(a) of Regulation M-A and Question 19
in Exchange Act Release No. 34-17719. This comment also applies to similar
statements made throughout the document, such as the fifth paragraph on page 5.
Response. The first sentence of the paragraph at the bottom of the first page of
the letter to stockholders in the Proxy Statement has been revised to read as
follows:
Your board of directors and the Special Committee appointed to
evaluate the proposed merger, including each of the directors who
is not an affiliate of Brynwood, has unanimously determined that
the merger is in the best interests of Lincoln Snacks and its
stockholders and is fair to the stockholders of Lincoln Snacks who
are not affiliates of Brynwood.
Similar changes have been made in the Proxy Statement under "SUMMARY -
Recommendation of Lincoln Snacks' Board of Directors" and "SPECIAL FACTORS -
Background and Reasons for the Merger; Recommendation of the Lincoln Snacks'
Board - Recommendation of the Special Committee and the Board of Directors."
SUMMARY, PAGE 4
SEC Comment No. 8. Revise the introductory paragraph to make clear that you are
summarizing the material information in the proxy statement.
Response. The first sentence of the introductory paragraph of "SUMMARY" in the
Proxy Statement has been revised to read as follows:
The following is a brief summary of the material information
relating to the Merger Agreement and the merger contained elsewhere
in this Proxy Statement.
RECOMMENDATION OF THE LINCOLN SNACKS' BOARD OF DIRECTORS, PAGE 5
SEC Comment No. 9. In addition to the position of the board of directors, state
each filing person's position on the fairness of the transaction to unaffiliated
shareholders.
Response. See response to SEC Comment No. 2.
Securities and Exchange Commission -6- September 7, 2001
INTERESTS OF CERTAIN PERSONS IN THE MERGER, PAGE 6
SEC Comment No. 10. The first bullet point states that Brynwood has agreed to
advance expenses to Lincoln Snacks' directors, officers and employees; however,
you do not provide any additional disclosure of these advances in the
corresponding section beginning at page 21 of the proxy statement. Revise to
provide a complete description of these advances, including the purpose for and
the amounts of the expected payments.
Response. Article Tenth of the Certificate of Incorporation of Lincoln Snacks
provides:
The Corporation shall indemnify its officers and directors to the
fullest extent permitted by Section 145 of the General Corporation
Law of the State of Delaware, as the same exists or may hereafter
be amended from time to time. The Corporation may, by action of the
Board of Directors, provide indemnification to employees or agents
of the Corporation to the same extent as the foregoing
indemnification of officers and directors.
Under the Merger Agreement, Brynwood has agreed to cause Lincoln Snacks to meet
its obligations under this provision. As of the date hereof, neither Brynwood
nor Lincoln Snacks knows of any claim for indemnification or advancement of
expenses which might be asserted by a director or executive officer of Lincoln
Snacks under Lincoln Snack's Certificate of Incorporation. As a result, there
are no such payments currently expected to be made.
SPECIAL FACTORS
BACKGROUND AND REASONS FOR THE MERGER; RECOMMENDATION OF THE LINCOLN
SNACKS' BOARD
BACKGROUND, PAGE 9
SEC Comment No. 11. Revise the first paragraph to clearly explain who Brynwood
is, when it was formed, the nature of its affiliations with Lincoln Snacks, etc.
Also, disclose who negotiated on behalf of Brynwood during the discussions you
have summarized throughout this section.
Response. The first paragraph under "SPECIAL FACTORS - Background and Reasons
for the Merger; Recommendation of the Lincoln Snacks' Board - Background" in the
Proxy Statement has been revised to read as follows:
Brynwood is a private investment partnership which was organized in
1996. In 1998, Brynwood made its initial investment in Lincoln
Snacks when it purchased the stock then owned by Lincoln Snacks'
largest stockholder, thereby becoming the controlling stockholder
of Lincoln Snacks. Thereafter, through open market
Securities and Exchange Commission -7- September 7, 2001
and negotiated purchases and the conversion of a portion of a
Convertible Subordinated Debenture, Brynwood increased its
ownership of Lincoln Snacks. These purchases included purchases
made from Lincoln Snacks' stockholders who contacted Brynwood
directly soliciting Brynwood to buy their shares. As of the date
hereof, Brynwood owns 89.8% of the outstanding Lincoln Snacks'
common stock.
The following sentence has been added at the end of the second paragraph in this
section:
Mr. Hartong, Jr. and Mr. Gray, as the general partners of the
general partner of Brynwood, negotiated the terms of the Merger
Agreement and the transactions contemplated by it on behalf of
Brynwood.
SEC Comment No. 12. Each presentation, discussion, or report held with or
presented by the financial advisors, whether oral or written, is a separate
report that requires a reasonably detailed description meeting the requirements
of Item 1015 of Regulation M-A. Revise to summarize all the presentations made
by BNY Capital Markets during the course of the meetings you have described, and
file any written reports as exhibits pursuant to Item 9 of Schedule 13E-3. For
example, summarize the discussions and file any written reports for the
following contacts:
o BNY Capital Markets' preliminary analysis presented on July 17, 2001,
including the analysis of the premium to market value compared to other
transactions; and
o BNY Capital Markets' preliminary summary as distributed to the Special
Committee on July 31, 2001.
Response. At the meeting on July 17, 2001 between representatives of BNY Capital
Markets and Mr. MacDonald, BNY Capital Markets made oral comments to Mr.
MacDonald concerning the analyses they were making and commented on the results
of their analyses to that time. No written report was presented at that meeting.
We have been advised by BNY Capital Markets that the preliminary results of
their analyses were substantially consistent with the results formally presented
to the Special Committee and the board of directors on August 1, 2001 after BNY
Capital Markets had completed its analyses. To clarify the contents of BNY
Capital Markets' presentation to Mr. MacDonald, the following sentence has been
added to the sixth paragraph under "SPECIAL FACTORS - Background and Reasons for
the Merger; Recommendation of the Lincoln Snacks' Board - Background":
The preliminary analyses summarized for Mr. MacDonald at this meeting
were substantially consistent with the final analyses which were
included in BNY Capital Markets' presentations to the Special Committee
and the board of directors.
Securities and Exchange Commission -8- September 7, 2001
The only written report presented by BNY Capital Markets was its Presentation to
the Special Committee of The Board of Directors and The Board of Directors on
August 1, 2001. The text of such presentation has been filed as an exhibit to
the Schedule 13E-3.
SEC Comment No. 13. Revise the second paragraph on page 9 and the first
paragraph on page 10 to disclose how Brynwood determined that it should be the
sole stockholder of Lincoln Snacks and why the other options relating to its
investment in Lincoln Snacks were deemed inferior to the merger. In this regard,
disclose whether Brynwood hired a financial advisor. If so, please revise to
summarize all presentations made by its financial advisor, or any other outside
party, and file any written reports as exhibits in accordance with Item 1015 of
Regulation M-A and Item 9 of Schedule 13E-3.
Response. The first sentence of the fifth paragraph under "SPECIAL FACTORS -
Background and Reasons for the Merger; Recommendation of the Lincoln Snacks'
Board - Background" has been replaced by the following:
Brynwood believed that the price indicated by the interested party was
inadequate. Brynwood also believed that that party was the entity most
likely to be interested in acquiring Lincoln Snacks and most willing to
pay the highest price that any third party could reasonably be expected
to pay. Since three years has passed since Brynwood's initial
acquisition of Lincoln Snacks' common stock, Brynwood decided to review
its options relating to Lincoln Snacks. Among the choices which were
then available to Brynwood was to propose a going private transaction.
Because Brynwood was willing to propose a transaction pursuant to which
the other stockholders would receive value greater than Brynwood
believed could reasonably be expected from an unaffiliated third party,
Brynwood determined that it would be in its best interests, as well as
the best interests of Lincoln Snacks and its other stockholders, for
Lincoln Snacks to become a wholly owned subsidiary of Brynwood with the
stockholders of Lincoln Snacks other than Brynwood receiving cash in an
amount to be determined.
Brynwood did not retain a financial advisor in connection with the proposed
transaction. The fifth paragraph under "SPECIAL FACTORS - Background and Reasons
for the Merger; Recommendation of the Lincoln Snacks' Board - Background" has
been revised to disclose this fact. As a result, there are not written reports
to Brynwood which need to be filed as exhibits to the Schedule 13E-3 pursuant to
Item 1015 of Regulation M-A and Item 9 of Schedule 13E-3.
SEC Comment No. 14. Indicate whether the board considered any alternatives
besides the merger with Brynwood and the acquisition by the one interested
party. If not, disclose why the board did not consider any alternatives.
Securities and Exchange Commission -9- September 7, 2001
Response. The fifth paragraph under "SPECIAL FACTORS - Background and Reasons
for the Merger; Recommendation of the Lincoln Snacks' Board - Background" has
been revised to add the following at the end:
The board of directors of Lincoln Snacks was aware of the strategic
alternatives which were periodically reviewed by Brynwood with respect
to its investment in Lincoln Snacks, including the possibility of the
sale of Lincoln Snacks to an unaffiliated third party. Based on the
price that the unaffiliated interested person indicated it might be
willing to pay for Lincoln Snacks which Brynwood deemed to be
inadequate, Brynwood told the board of directors of Lincoln Snacks that
it wished to become the sole stockholder of Lincoln Snacks. Since the
board of directors of Lincoln Snacks believed that the price indicated
by the interested party was the highest price which could reasonably be
expected in a transaction with an unaffiliated third party and any
transaction alternative to the proposed merger would require the
affirmative vote of Brynwood as the owner of 89.8% of the Lincoln
Snacks' common stock, the board of directors of Lincoln Snacks and the
Special Committee determined that, under the circumstances, the
consideration of other alternative transactions would not be
productive.
SEC Comment No. 15. At the top of page 10, identify the independent directors
who served on the Special Committee.
Response. The fifth paragraph under "SPECIAL FACTORS - Background and Reasons
for the Merger; Recommendation of the Lincoln Snacks' Board - Background" has
been revised to identify C. Alan MacDonald and Robert Zwartendijk as the members
of the Special Committee.
SEC Comment No. 16. Where you refer to an individual, specify his or her
affiliation with Lincoln Snacks and/or Brynwood. For example, in the third
paragraph on page 10, disclose the position held by Mr. MacDonald.
Response. The paragraph referred to has been revised to identify Mr. MacDonald
as a member of the Special Committee. Since the Special Committee has been
identified as consisting of the independent directors of Lincoln Snacks, we
believe that it is not necessary further to state that Mr. MacDonald is not an
affiliate of Brynwood.
SEC Comment No. 17. Clarify how BNY Capital Markets ultimately determined that
the consideration was fair despite the results of its preliminary analysis on
July 17.
Response. We believe that the description of the July 17, 2001 meeting between
representatives of BNY Capital Markets and Mr. MacDonald does not indicate that
the preliminary results of
Securities and Exchange Commission -10- September 7, 2001
BNY Capital Markets' analyses indicated that BNY Capital Markets would be unable
to render a fairness opinion on the transaction. Rather, one of the analyses
summarized indicated that the premium to market value of the proposed
transaction was not as high as the median for minority transactions. The final
opinion rendered by BNY Capital Markets was the result of numerous analyses and
no one of them was determinative.
SEC Comment No. 18. Indicate whether the members of Brynwood who are also
directors of Lincoln Snacks attended the various meetings of the board of
directors or whether they recused themselves.
Response. The Proxy Statement description of the meetings of the board of
directors of Lincoln Snacks has been modified to clarify that Mr. Hartong, Jr.
and Mr. Gray attended such meetings and voted in favor of the actions approved
by the board of directors. Please note, however, that none of the directors of
Lincoln Snacks other than the members of the Special Committee attended any of
the meetings of the Special Committee. A new final sentence has been added to
the final paragraph under "SPECIAL FACTORS - Background and Reasons for the
Merger; Recommendation of the Lincoln Snacks' Board - Background" which reads as
follows:
While all of the directors of Lincoln Snacks attended each of the board
meetings described and voted at them, only the members of the Special
Committee attended the meetings of the Special Committee.
SEC Comment No. 19. Please summarize the discussions leading to Brynwood
indicating its unwillingness to increase the amount of the merger consideration.
Response. The third and fourth sentences of the seventh paragraph under "SPECIAL
FACTORS - Background and Reasons for the Merger; Recommendation of the Lincoln
Snacks' Board - Background" has been replaced by the following:
BNY Capital Markets' preliminary analyses indicated that the proposed
transaction was fair to the stockholders of Lincoln Snacks other than
Brynwood although the analysis of the premium to market value was lower
than the premium paid in certain minority transactions. Based on BNY
Capital Markets' preliminary analysis of the premium to market value of
the proposed transaction, the Special Committee negotiated with
Brynwood to determine if it would approve an increased price per share.
Because Brynwood believed that the premium to market value analysis
should not be the only one considered and the other preliminary
analyses indicated that the proposed price was fair, Brynwood indicated
that it would not approve a higher price per share.
Securities and Exchange Commission -11- September 7, 2001
REASONS FOR APPROVING THE MERGER, PAGE 11
SEC Comment No. 20. Expand your discussion to address each of the factors listed
in Instruction 2 to Item 1014 of Regulation M-A. For example, this section does
not address the factors listed in Instruction 2(i), (iii), (iv), (v), (vi) and
(viii). If one party relied on the analysis of another, such as the financial
advisor, to fulfill this disclosure obligation, the relying party must expressly
adopt the conclusion and analyses of the party that performed the Item 1014(b)
analysis. If a filing person did not consider one or more of the factors
material or relevant to its determination, state that and explain why the
factor(s) were not deemed important or relevant. See Question No. 20 in Exchange
Act Release No. 34-17719.
Response. The following bullet points have been added to the first paragraph
under "SPECIAL FACTORS - Background and Reasons for the Merger; Recommendation
of the Lincoln Snacks' Board - Reasons for Approving the Merger":
o the $3.50 per share provided for in the Merger Agreement
substantially exceeded the book value of $2.08 as of March 31,
2001;
o the trading price per share of Lincoln Snacks' common stock
during the 52-week period ended July 27, 2001 ranged from a low
of $1.50 to a high of $3.10;
o the purchase price per share paid by Brynwood for shares acquired
in arms' length transactions during the two years preceding the
Merger Agreement ranged from a low of $1.13 to a high of $2.25.
Neither the Special Committee nor the board of directors of Lincoln Snacks
commissioned or received a going concern or liquidation valuation for Lincoln
Snacks. To reflect this, a new fourth paragraph has been added to "SPECIAL
FACTORS - Background and Reasons for the Merger; Recommendation of the Lincoln
Snacks' Board - Reasons for Approving the Merger" as follows:
Neither the Special Committee nor the board of directors sought nor
received a going concern or liquidation valuation for Lincoln Snacks.
Neither Lincoln Snacks nor Brynwood is aware of any firm offer made by an
unaffiliated entity during the past two years for any transaction relating to
Lincoln Snacks of the type described in Instruction 2(viii) to Item 1014 of
Regulation M-A.
SEC Comment No. 21. Please revise to expressly indicate whether or not the board
and the Special Committee believe the transaction is both substantively and
procedurally fair to your
Securities and Exchange Commission -12- September 7, 2001
unaffiliated shareholders. Refer to Question and Answer No. 21 of Exchange Act
Release No. 34-17719. Each filing person must disclose their belief as to the
procedural fairness of the transaction and the bases for their belief. Your
fairness discussion must be revised to separately address Item 1014(c), (d) and
(e) of Regulation M-A.
If a conclusion is reached that the transaction is procedurally fair, disclose
why such a conclusion was reached in the absence of the procedural safeguards
set forth in Item 1014(c), (d) and (e) of Regulation M-A. For example, we note
that the merger is not conditioned upon the approval of a majority of the
unaffiliated stockholders. In addition, revise the disclosure to indicate
whether or not the proposed transaction is procedurally fair to the unaffiliated
security holders while considering that:
o there are no provisions to grant unaffiliated security holders access to
the corporate files of the filing persons; and
o each member of management will continue their employment with Lincoln
Snacks following the merger.
Response. The following has been added as the final paragraph under "SPECIAL
FACTORS - Background and Reasons for the Merger; Recommendation of the Lincoln
Snacks' Board - Reasons for Approving the Merger":
Approval of the Merger Agreement is not structured to require the
affirmative vote of the holders of a majority of the Lincoln Snacks'
common stock not owned by Brynwood. In addition, a majority of the
non-employee directors did not retain an unaffiliated representative to
act solely on behalf of the unaffiliated stockholders for the purpose
of negotiating the terms of the Merger Agreement. Notwithstanding the
foregoing, the Special Committee and the board of directors believe
that the merger is procedurally fair to the stockholders of Lincoln
Snacks other than Brynwood both because of the rights afforded to them
under Delaware law, including the right to seek an appraisal of their
Lincoln Snacks' common stock and to access to certain business records
of Lincoln Snacks and because of the substantial business experience
and knowledge of the snack food industry of Mr. MacDonald and Mr.
Zwartendijk, the members of the Special Committee.
SEC Comment No. 22. Supplementally advise whether the Special Committee or board
evaluated any negative factors relating to the transaction. If so, please revise
to have one list of factors favoring the transaction, and a separate list of
factors not supporting the transaction.
Securities and Exchange Commission -13- September 7, 2001
Response. Neither the Special Committee nor the board believed that, in light of
the terms of the proposed merger, there were any negative factors relating to
the transaction. As a result, the Proxy Statement does not include a list of
factors not supporting the transaction.
SEC Comment No. 23. Discuss in detail each filing persons' purpose for engaging
in the transaction, and the reasons for undertaking the transaction now.
Consider Instruction 1 to Item 1013 of Regulation M-A in drafting your
disclosure. For example, please address Lincoln Snacks' reasons for soliciting
the transaction at this time, as opposed to any other time in its operating
history.
Response. See response to SEC Comment No. 13.
SEC Comment No. 24. We note in the second bullet point that you believe Lincoln
Snacks lacks significant analyst coverage. Discuss whether any steps were ever
taken in the company's history to attract attention from analysts.
Response. Based on a market capitalization of approximately $12 million, the
ownership of approximately 90% of the Lincoln Snacks' common stock by Brynwood
and the fact that the Lincoln Snacks' common stock was no longer eligible for
quotation on NASDAQ thereby further limiting its marketability, Lincoln Snacks
did not take specific action to attract attention from analysts because it
believed such action would not be effective. The second bullet point in the
first paragraph under "SPECIAL FACTORS - Background and Reasons for the Merger;
Recommendation of the Lincoln Snacks' Board - Reasons for Approving the Merger"
has been revised to read as follows:
o the absence of coverage of Lincoln Snacks by securities analysts
which the board of directors believed could not be attracted
because of the size and market value of Lincoln Snacks' common
stock, its share ownership distribution and the lack of readily
available public quotations for the Lincoln Snacks' common stock;
SEC Comment No. 25. Revise the fourth bullet point to disclose the various
historical market prices considered.
Response. The bullet point referred to has been revised to include a cross
reference to the market price information contained under "MARKET INFORMATION."
SEC Comment No. 26. We note that the factors considered by the Special Committee
were "among the factors considered by the board of directors." As stated in our
earlier comment, to the extent they are relying on the Special Committee's
analyses or those of any other party with respect to any of the factors, then
the board should adopt the analyses of such party.
Securities and Exchange Commission -14- September 7, 2001
Response. The third bullet point under "SPECIAL FACTORS - Background and Reasons
for the Merger; Recommendation of the Lincoln Snacks' Board - Reasons for
Approving the Merger" has been revised to read as follows:
o the opinion it received from BNY Capital Markets and the analyses
underlying such opinion;
OPINION OF FINANCIAL ADVISOR, PAGE 11
SEC Comment No. 27. Show the multiples, ranges, means/medians that BNY Capital
Markets calculated for each analysis you discuss. Also, indicate the
significance of the numbers you disclose and show how they impact or relate to
the determination that the consideration is fair.
Response. The following has been added as the fourth paragraph under "SPECIAL
FACTORS - Opinion of Financial Advisor - Comparable Transaction Analysis":
BNY Capital Markets then compared the total enterprise value to revenue
and EBITDA. Total enterprise value for a given company was defined as
the equity value of the announced acquisition plus total debt assumed
and preferred stock, less cash and cash equivalents, plus the value of
any minority stakes in consolidated businesses. The results were as
follows: Delicious Brands, Inc. (0.6 times LTM revenue); Lincoln Snacks
Company (0.4 times LTM revenue, 3.8 times LTM EBITDA) and Wortz Company
(0.6 times LTM revenue). The high and low multiples of LTM revenue were
0.4 and 0.6 times LTM revenue. The mean and median multiples of LTM
revenue were 0.5 and 0.6 times LTM revenue. The high and low multiples
of LTM EBITDA were 3.8 and 3.8 times LTM EBITDA. The mean and median
multiples of LTM EBITDA were 3.8 and 3.8 times LTM EBITDA.
The following has been added as the fifth paragraph under "SPECIAL FACTORS -
Opinion of Financial Advisor - Comparable Company Analysis":
The multiples of total enterprise value / LTM revenue, total enterprise
value / LTM EBIT, total enterprise value / LTM EBITDA, Price / LTM
Earnings and Price / June 2002 Earnings (where available) were
calculated for the comparable companies: Lance, Inc. (total enterprise
value of 0.8 times LTM revenue, 11.9 times LTM EBIT and 6.7 times LTM
EBITDA; and a price of 18.3 times LTM earnings and 13.9 times June 2002
earnings), J&J Snack Foods Corp. (total enterprise value of 0.7 times
LTM revenue, 14.9 times LTM EBIT and 7.3 times LTM EBITDA; and a price
of 23.5 times LTM earnings), John B. Sanfilippo & Son,
Securities and Exchange Commission -15- September 7, 2001
Inc. (total enterprise value of 0.4 times LTM revenue, 7.3 times LTM
EBIT and 5.2 times LTM EBITDA; and a price of 6.3 times LTM earnings
and 5.7 times June 2002 earnings), Poore Brothers, Inc. (total
enterprise value of 1.6 times LTM revenue, 14.8 times LTM EBIT and 10.8
times LTM EBITDA; and a price of 17.1 times LTM earnings), Golden
Enterprises, Inc. (total enterprise value of 0.5 times LTM revenue,
10.4 times LTM EBIT and 6.9 times LTM EBITDA; and a price of 15.4 times
LTM earnings) and Sherwood Brands, Inc. (total enterprise value of 0.3
times LTM revenue, 5.4 times LTM EBIT and 5.0 times LTM EBITDA; and a
price of 8.5 times LTM earnings). Total enterprise value/LTM revenue
ranged from 0.3 to 1.6 times, with a mean of 0.7 times and a median of
0.5 times LTM revenue. Total enterprise value/LTM EBIT ranged from 5.4
to 14.8 times, with a mean of 10.8 times and a median of 10.4 times LTM
EBIT. Total enterprise value/LTM EBITDA ranged from 5.0 to 10.8 times,
with a mean of 7.0 times and a median of 6.8 times LTM EBITDA.
Price/LTM earnings ranged from 6.3 to 23.5 times, with a mean of 14.9
times and a median of 16.3 times LTM earnings. Price/ June 2002
expected earnings ranged from 5.7 to 13.9 times, with a mean of 9.8
times and a median of 9.8 times June 2002 expected earnings.
Finally, the following language has been added at the beginning of the first
paragraph under "SPECIAL FACTORS - Opinion of Financial Advisor - Minority
Interest Transaction":
The median premiums offered in these transactions were 38%, 29% and 22%
for four weeks, one week and one day prior to announcement,
respectively. The premiums offered for Lincoln Snacks' common stock are
27%, 27% and 17% for four weeks, one week and one day prior to
announcement, respectively.
See also the response to SEC Comment No. 33.
SEC Comment No. 28. Summarize the projections used by BNY Capital Markets in its
analysis, including the company's 2002 budget and the 2003-2006 projections made
by BNY Capital Markets.
Response. The following paragraphs have been added as the second through the
fifth paragraphs of "SPECIAL FACTORS - Opinion of Financial Advisor - Discounted
Cash Flow Analysis:
The fiscal 2002 budget prepared by Lincoln Snacks contemplates revenues
of approximately $41.7 million (estimated 9% growth from fiscal 2001
estimate), gross profit of $18.0 million (43%
Securities and Exchange Commission -16- September 7, 2001
gross margin) and EBITDA of $3.1 million. This budget was used intact
for all cases of the discounted cash flow analysis.
BNY Capital Markets made certain assumptions regarding Lincoln Snacks'
financial performance for fiscal 2003-2006. BNY Capital Markets' base
case grew revenues at a level consistent with revenues budgeted for
fiscal 2002 (9% revenue growth). The upside case grew revenues at 15%
per year (a 10% increase to average historical revenue growth rate);
the downside case contemplated 0% revenue growth. The base and upside
cases maintained a gross margin consistent with fiscal 2002 budgeted
levels. The downside case reflects a 15% increase in key raw materials
(nuts and butter), which results in a decrease in gross margin to 41%
from 43%. All cases grow the fixed portion of SG&A (fixed warehouse,
fixed marketing, selling and G&A) at 3% to reflect inflation. The
remaining variable portion of SG&A is maintained as a percentage of
sales (2002 budgeted level). The base and upside cases contemplated
capital expenditures of $500,000 per year (management's estimate of
maintenance and capital expenditures); while the downside case
forecasts $300,000 per year to reflect lower capital investment to
maintain 0% revenue growth. Similarly, annual depreciation under the
downside case is approximately $100,000 lower than fiscal 2002 budgeted
levels. A tax rate of 40% and net operating loss carryforwards of
$664,000 in 2002 and $539,000 in 2003 are applied under all cases
(based on discussions with management).
The discount rate for the free cash flows was determined by the Capital
Asset Pricing Model. A Beta of 1.0 was used after the actual Beta of
0.1 was deemed inappropriate, given the limited and sporadic trading of
Lincoln Snacks' common stock. The Capital Asset Pricing Model
calculated a discount rate of approximately 15%. BNY Capital Markets,
based on its valuation and investment banking experience, determined
this figure to be more appropriate as the low end of discount rates
given the relatively small size of Lincoln Snacks and business risks
outlined by management. BNY Capital Markets selected a range of
discount rates of 15% to 25% to be more appropriate for use in a
discounted cash flow analysis for Lincoln Snacks. A range of 5.0 to 7.5
times projected 2006 EBITDA was used to determine the terminal value,
which was consistent with the median comparable company multiple of 6.8
times LTM EBITDA.
Securities and Exchange Commission -17- September 7, 2001
Focusing on the base case, the implied per share values of Lincoln
Snacks common stock, adjusted for excess cash, ranged from $2.45 (with
a 6.5 times terminal EBITDA multiple and a 21% discount rate) to $3.06
(with a 7.5 times terminal EBITDA multiple and a 17% discount rate).
SEC Comment No. 29. Furnish a statement regarding the availability of the
opinion for inspection and copying at Lincoln Snacks' principal executive
offices. Refer to Item 1015(c) of Regulation M-A.
Response. Since the text of the opinion of BNY Capital Markets is attached as
Annex B to the Proxy Statement which will be delivered to each stockholder of
Lincoln Snacks, a statement that the opinion is available for inspection and
copying at Lincoln Snacks' principal executive offices would seem unnecessary.
The document which would be available for inspection and copying would be no
different from the material already provided to each stockholder.
COMPARABLE TRANSACTION ANALYSIS, PAGE 13
SEC Comment No. 30. Identify the transactions used in this analysis and why BNY
Capital Markets deemed them to be comparable to Lincoln Snacks.
Response. The following has been added as the second paragraph under "SPECIAL
FACTORS - Opinion of Financial Advisor - Comparable Transaction Analysis":
These transactions were selected by screening transactions in which the
target had a primary SIC code of 2052 (cookies and crackers), 2064
(candy & other confectionary products), 2066 (chocolate and cocoa
products), 2068 (salted and roasted nuts & seeds) or 2096 (potato
chips). Transactions were screened further to eliminate transactions in
which the target had sales of greater than $500 million, the target
exhibited significant differences in distribution channels from those
of Lincoln Snacks (such as a significant retail presence), the target
had significant differences in product focus, or for transactions in
which valuation data were unavailable. The targets in the ultimately
selected transactions were Delicious Brands, Inc., Lincoln Snacks
(Brynwood's initial purchase of Lincoln Snacks shares) and Wortz
Company.
COMPARABLE COMPANY ANALYSIS, PAGE 14
SEC Comment No. 31. Explain why BNY Capital Markets deemed the companies to be
comparable to Lincoln Snacks.
Securities and Exchange Commission -18- September 7, 2001
Response. The following has been added as the second paragraph under "SPECIAL
FACTORS - Opinion of Financial Advisor - Comparative Company Analysis":
The Comparable Companies were selected by screening publicly-traded
companies that have a primary SIC code of 2052 (cookies and crackers),
2064 (candy & other confectionary products), 2066 (chocolate and cocoa
products), 2068 (salted and roasted nuts & seeds) or 2096 (potato
chips). The companies were screened further to eliminate companies
which had a total enterprise value of greater than $500 million,
significant differences in distribution channels from those of Lincoln
Snacks (such as a significant retail presence) or significant
differences in product focus.
SEC Comment No. 32. Revise to clearly explain how BNY Capital Markets calculated
the amount of "excess cash" and why the adjustments were necessary.
Response. The following language has been added following the first sentence of
the fifth paragraph under "SPECIAL FACTORS - Opinion of Financial Advisor -
Comparable Company Analysis":
Excess cash was calculated as the amount of cash on the balance sheet
at the time at which working capital is greatest. This is projected to
occur in October of 2001, when the cash balance is budgeted to be $3.56
million, which was rounded to $4 million. This approach was necessary
to accurately take into account seasonality and fluctuations in working
capital inherent in Lincoln Snacks' business. Excess cash was deemed to
be additive to the value of Lincoln Snacks because of its debt-free
capital structure.
In addition, the following sentence was added at the beginning of the sixth
paragraph under "SPECIAL FACTORS - Opinion of Financial Advisor - Comparative
Company Analysis":
The per share values of Lincoln Snacks' common stock implied by the
application of the median comparable company multiples, plus the excess
cash per share of $0.44 as calculated by BNY Capital Markets, ranged
from $1.47 to $2.77.
SEC Comment No. 33. Clarify how BNY Capital Markets determined to apply a 75%
weighting to this analysis and 25% to the discounted cash flow analysis.
Response. A new subsection titled "SPECIAL FACTORS - Opinion of Financial
Advisor - Conclusion" has been added reading as follows:
Securities and Exchange Commission -19- September 7, 2001
Conclusion
In weighing the results of the analyses, BNY Capital Markets applied a
weighting of 75% to the valuation range computed by the comparative
company analysis in its valuation of Lincoln Snacks. The comparable
company approach was relied upon most heavily because it was based on a
more full complement of data (including that of many comparative
companies) and did not require any further assumptions on behalf on BNY
Capital Markets. The remaining weighting of 25% was reserved for the
discounted cash flow approach, which was performed only as a secondary
measure of Lincoln Snacks' value, given that Lincoln Snacks only
prepares a budget for one fiscal year forward. The lower weighting of
the DCF was due to the short timeframe of Lincoln Snacks' budget
provided by management and the requirement that BNY Capital Markets
establish further assumptions to complete the DCF. If projections were
available for additional years, the DCF might have received greater
weighting. As the comparable transaction approach was excluded from BNY
Capital Markets' valuation analysis, it received 0% weighting.
Based on weighting of 75% for the comparative company approach and 25%
for the DCF approach, shares of Lincoln Snacks' common stock
representing a minority interest have a fair market value in the range
of $1.98 to $2.84. BNY Capital Markets noted that the consideration to
be received by the stockholders of Lincoln Snacks other than Brynwood
in the merger was greater than the consideration implied by the above
range, and that this analysis supported a fairness determination
concerning the merger. The minority interest transactions were not used
directly to determine per share values of Lincoln Snacks, but rather to
determine that the premium being paid was consistent with those data.
MINORITY INTEREST TRANSACTIONS, PAGE 15
SEC Comment No. 34. Disclose the premiums offered in the recent minority
interest transactions as compared to the proposed transaction.
Securities and Exchange Commission -20- September 7, 2001
Response. See response to SEC Comment No. 27.
SEC Comment No. 35. In the first full paragraph on page 22, disclose the amount
of compensation that Bank of New York received during the past two years as a
result of its relationships with Lincoln Snacks and its affiliates. Refer to
Item 1015(b)(4) of Regulation M-A.
Response. A paragraph has been included in "SPECIAL FACTORS - Background and
Reasons for the Merger; Recommendation of the Lincoln Snacks' Board - Opinion of
Financial Advisor - Other" reading as follows:
During 1999 and 2000, Lincoln Snacks paid Bank of New York $15,236 and
$49,489, respectively, for fees relating to its revolving credit
agreement. In addition, Brynwood and certain of its affiliates paid
Bank of New York $777,609 and $923,054 during 1999 and 2000,
respectively, for interest on loans outstanding and other fees.
THE MERGER AGREEMENT
LINCOLN SNACKS STOCK OPTIONS, PAGE 18
SEC Comment No. 36. Please advise us what consideration you have given with
respect to the applicability of the tender offer rules to the surrender program
described and the "program . . . to realize the value of . . . options in cash."
We may have further comment.
Response. Lincoln Snacks, Lincoln Acquisition and Brynwood have agreed to an
amendment to the Merger Agreement to eliminate the right of holders of
exercisable options to purchase Lincoln Snacks' common stock to surrender all or
a portion of such options in exchange for a cash payments. Corresponding changes
have been made to "SUMMARY - Interests of Certain Persons in the Merger," "THE
MERGER AGREEMENT - Lincoln Snacks Stock Options" and "INTERESTS OF CERTAIN
PERSONS IN THE MERGER" to eliminate references to such a right. Following
consummation of the merger, there will be no public market for the Lincoln
Snacks' common stock; Lincoln Snacks will no longer file periodic reports under
the Exchange Act; and the registration of the Lincoln Snacks' common stock under
the Exchange Act will be terminated. Since neither the options nor any Lincoln
Snacks' common stock acquired upon exercise of options will be registered under
the Exchange Act, the tender offer rules would not apply to them.
CONDITIONS TO THE MERGER, PAGE 18
SEC Comment No. 37. Disclose the status of the condition relating to the deposit
by Lincoln Snacks of sufficient money to pay the cash payable upon consummation
of the merger. If Lincoln Snacks has not yet deposited the funds, revise to make
clear whether it has the financial
Securities and Exchange Commission -21- September 7, 2001
resources to pay for all outstanding shares. If it will have to borrow funds to
pay for the shares, provide disclosure in accordance with Item 1007(d) of
Regulation M-A.
Response. Following the description of the obligations of Brynwood and Lincoln
Acquisition under "THE MERGER AGREEMENT - Conditions to the Merger," a new
paragraph has been added reading as follows:
While Lincoln Snacks has not yet deposited any funds with the
independent paying agent, it has sufficient cash on hand to meet this
condition without the need to borrow funds for such purpose.
OTHER MATTERS, PAGE 28
SEC Comment No. 38. Refer to the last sentence. The postponement or adjournment
of a meeting to solicit additional proxies does not constitute a matter
incidental to the conduct of the meeting. Discretionary authority, therefore, is
unavailable when a procedural action is intended to be taken with respect to a
substantive matter for which a proxy is solicited. See Rule 14a-4. Consequently,
the use of discretionary voting authority to postpone or adjourn the meeting to
solicit additional proxies is a substantive proposal for which proxies must be
independently solicited. Provide a separate voting box on the proxy card so that
stockholders may decide whether to grant a proxy to vote in favor of
postponement or adjournment for the solicitation of additional proxies.
Response. While it does not necessarily agree that the postponement or
adjournment of a meeting to solicit additional proxies does not constitute a
matter incidental to the conduct of the meeting, Lincoln Snacks has agreed that
it will not vote any proxy on any motion to adjourn the meeting. Accordingly,
the final sentence under "OTHER MATTERS" has been replaced by the following:
The enclosed proxy will not, however, be voted on any proposal to
adjourn the meeting to a later date.
Very truly yours,
/s/ Paul G. Hughes
Paul G. Hughes
