November 1, 1995
To the holders of certain
warrants and options to
purchase common stock of
E&B Marine Inc.
Re: Exchange Offer
Ladies and Gentlemen:
The Board of Directors of E&B Marine Inc., a Delaware
corporation (the "Company"), has authorized the Company to make
the exchange offer (the "Exchange Offer") to you as described
herein.
General
According to the records of the Company, you may be the
holder of certain options and/or warrants (other than options
issued under the Company's 1983 Stock Option Plan) (collectively,
the "Derivative Securities") to purchase shares of common stock,
$0.001 par value per share (the "Common Stock"), of the Company.
Pursuant to the Exchange Offer, provided you are the legal owner
of Derivative Securities, and subject to the terms and conditions
set forth below, the Company is hereby offering you the
opportunity to exchange the Derivative Securities owned by you
for shares of Common Stock. The number of shares of Common Stock
offered in exchange for Derivative Securities depends on which
class of Derivative Securities is owned by you and is based upon
a valuation performed by the independent investment banking firm
of Houlihan, Lokey, Howard & Zukin Inc. ("Houlihan Lokey"), all
as further described below.
Background
The Board of Directors of the Company has authorized a
special committee of the Board of Directors (the "Special
Committee"), comprised of Bradford J. Klatt and William V.
Roberti, to consider the terms and conditions of the Exchange
Offer. The Company engaged Houlihan Lokey to advise the Special
Committee as to the appropriate number of shares of Common Stock
to be offered in exchange for each class of Derivative Securities
and to render a written opinion (the "Opinion") as to the
fairness, from a financial point of view, of the Exchange Offer
to the holders of the Company's Common Stock, other than holders
of Derivative Securities. At meetings of the Special Committee
held in May, August and October 1995, the Special Committee
recommended to the Board of Directors of the Company that the
Company effect the Exchange Offer on the terms and conditions
described herein. The Board of Directors of the Company, at
meetings held in May, August and October 1995, adopted the
recommendation of the Special Committee and authorized the
Company to proceed with the Exchange Offer on the terms and
conditions described herein. Houlihan Lokey delivered the
Opinion dated October 27, 1995 to the Board of Directors.
Reasons for the Exchange Offer
The Board of Directors has been considering the
Exchange Offer and has determined to commence the Exchange Offer
promptly following the termination in October 1995 of the
Stockholders' Agreement dated as of February 22, 1989 among the
Company and certain of its stockholders. The Special Committee
and the Board of Directors of the Company have concluded that
elimination of the Derivative Securities should contribute to the
Company's future ability to access capital markets, whether
through a public offering or private placement of debt or equity
securities, or otherwise. The Special Committee and the Board of
Directors of the Company concluded, in part based upon advice
from Houlihan Lokey, that the elimination of the Derivative
Securities should contribute to a capitalization of the Company
which is more understandable to securities analysts and
investors. In turn, this should better position the Company for
possible future capital raising transactions. However, many
other factors will also contribute to the ability or inability of
the Company to access capital markets in the future, including
the financial performance of the Company, the perception of the
industry in which the Company operates, and the condition of
financial markets and the United States economy in general.
Accordingly, the Exchange Offer, or your acceptance thereof,
should not be construed as an assurance that the Company will
access capital markets in the future. Although the Company
considers capital raising alternatives from time to time, the
Company does not have any present plans to raise additional
capital through the issuance of additional debt or equity
securities.
Terms and Conditions
Unless extended by the Special Committee or the Board
of Directors of the Company, all without notice, the Exchange
Offer will remain open until the close of business (New York
time) on December 1, 1995 (the "Exchange Date") and thereafter
will terminate. The Exchange Offer may be terminated at any time
without notice by the Special Committee or the Board of Directors
of the Company. All Derivative Securities exchanged will be
cancelled by the Company and will have no further force or
effect.
FAILURE TO RESPOND TO THE EXCHANGE OFFER IN ACCORDANCE
WITH THE PROCEDURES SET FORTH HEREIN BY THE CLOSE OF BUSINESS
(NEW YORK TIME) ON DECEMBER 1, 1995 WILL RESULT IN AN INABILITY
ON YOUR PART TO PARTICIPATE IN THE EXCHANGE OFFER.
On the basis of the analysis conducted by Houlihan
Lokey described below, provided you are the legal owner of
Derivative Securities, the Company is hereby offering you the
opportunity to exchange each Derivative Security owned by you for
the portion of a share of Common Stock determined by reference to
the table set forth below.
Portion of
a Share
Number of Exercise of Common
Share of Price Per Stock to
Common Share of be Issued in
Stock Expiration Common Stock Exchange
Class of Subject to Date of Under for Each
Derivative Derivative Derivative Deriative Derivative
Securities Securities(1) Security Security(2) Security
1989
Series B
Warrants 820,930 3/3/99 $11.15 0.0962
Options
for 1990
Services 50,000 1/17/01 2.25 0.7105
Former CEO
Options 32,863 1/17/96 3.72 0.3310
Alverez
Warrants 25,000 3/3/99 8.44 0.1685
CEO
Options 25,000 2/1/01 14.00 0.1306
Director
Options 1 17,500 4/28/99 3.72 0.4935
Director
Options 2 15,750 11/20/00 3.75 0.5493
Director
Options 3 12,750 3/31/01 3.50 0.5846
Director
Options 4 10,125 6/30/01 1.00 0.8699
Director
Options 5 9,750 12/31/01 2.75 0.6780
Director
Options 6 7,500 9/30/01 2.50 0.6975
Director
Options 7 5,250 12/31/00 3.00 0.6269
_______________
<TABLE/>
(1) The Company effected a one-for-four reverse stock split on
December 9, 1993. All share numbers in the above table reflect
this reverse stock split and, in certain cases, adjustments for
antidilutive events involving the Common Stock, all in accordance
with the terms of the Derivative Securities. See also "Common
Stock Information" below.
(2) In certain cases, the exercise price per share has been
adjusted for antidilutive events involving the Common Stock, all
in accordance with the terms of the applicable Derivative
Securities.
The number of shares of Common Stock to be issued in
exchange for each Derivative Security (the "Exchange Ratios") set
forth in the above table reflect the mid-point of the range of
values for each class of Derivative Securities (the "Mid-Point
Values") as determined by Houlihan Lokey. The Exchange Ratios
were arrived at by dividing the applicable Mid-Point Value by
$5.50, the value per share of Common Stock utilized by Houlihan
Lokey in its analysis. In valuing each class of Derivative
Securities, Houlihan Lokey utilized the Black-Scholes option
pricing model, a theoretical model used to approximate the value
of options and warrants. The Black-Scholes option pricing model
is a complex mathematical formula which takes into account a
number of factors, including assumptions and estimates regarding
the price of the underlying Common Stock and the volatility of
such price, the exercise price of each class of Derivative
Securities, the remaining term of each class of Derivative
Securities, and prevailing interest rates. Due to the subjective
nature of certain of these assumptions and estimates and other
factors, the calculated value of each class of Derivative
Securities determined in this manner does not purport to
constitute the actual value of each class of Derivative
Securities. The actual value of each class of Derivative
Securities at any particular time will be influenced by a number
of factors, including factors affecting the value of the Common
Stock and other objective and subjective factors not taken into
account in the application of the Black-Scholes model. As a
supporting methodology, Houlihan Lokey also reviewed four
transactions involving the exchange or repurchase of warrants by
public companies. The review included an analysis of the amount
paid, or value exchanged, relative to the intrinsic value of the
warrants.
As financial advisors to the Special Committee in
connection with the Exchange Offer, Houlihan Lokey will be paid
an aggregate financial advisory fee of $50,000. The Company has
agreed to reimburse Houlihan Lokey for reasonable out-of-pocket
expenses incurred by Houlihan Lokey in performing its services,
and to indemnify Houlihan Lokey and related persons against
certain liabilities, including liabilities under the Federal
securities laws, arising out of Houlihan Lokey's engagement.
The Exchange Offer is expressly conditioned upon
satisfaction of the following terms and conditions (the "Terms
and Conditions"), any or all of which may be waived, modified or
added to, at any time and from time to time without notice, by
the Special Committee or the Board of Directors:
1. The Exchange Offer is subject to the condition
that at least 90% of the Series B Warrants are exchanged pursuant
to the Exchange Offer. There are 820,930 Series B Warrants
outstanding. The Company has received indications from the
holders of approximately 70% of the Series B Warrants that such
holders will accept the Exchange Offer.
2. In order to accept the Exchange Offer, all
Derivative Securities of all classes held by a particular person
and all affiliates of that person (e.g. controlled corporations
or partnerships or family members) must be exchanged.
3. The Exchange Offer is conditioned upon the receipt
by the Board of Directors of the Company of an update of the
Opinion from Houlihan Lokey dated the Exchange Date. Houlihan
Lokey has informed the Company that if the Exchange Offer is
effected on the terms and conditions set forth herein and if
certain other conditions concerning the price ranges of the
Common Stock are satisfied, it will deliver the updated Opinion.
4. Acceptance of the Exchange Offer by a holder of
Derivative Securities is irrevocable. The Special Committee or
the Board of Directors of the Company may terminate the Exchange
Offer at any time and may waive, modify or add to any or all of
the Terms and Conditions at any time prior to the Exchange Date,
all without notice to any holder of Derivative Securities
(however, neither the Board of Directors nor the Special
Committee may alter the Exchange Ratios without prior notice to
the owners of the class(es) of Derivative Securities affected).
5. Acceptance of the Exchange Offer (by completing
and delivering proper documentation as described below, including
an Affidavit and an Indemnity Bond (each, as defined below), as
determined by the Company) must be received by the Company on or
before the close of business (New York time) on December 1, 1995.
The Company reserves the absolute right to reject any
attempted acceptance of the Exchange Offer for any reason, and
also to waive any defect (including the time of receipt) with
regard to any particular attempted acceptance of the Exchange
Offer. The Company shall not be under any duty to notify any
person that it has rejected any attempted acceptance of the
Exchange Offer and shall not be under any duty to notify any
person of any defects in the deposit and surrender of any
Derivative Securities, any Affidavit or any related
documentation. The Company shall not incur any liability or
other obligation to any person attempting to accept the Exchange
Offer for rejecting such attempted acceptance, for failure to
give any notification, for making the adjustments referred to
under "Common Stock Information" below or otherwise. Further, as
noted above, the Terms and Conditions may be waived, modified or
added to at any time without notice by the Special Committee or
the Board of Directors of the Company.
Common Stock Information
At the close of business on October 26, 1995, the
Company had 3,823,133 shares of Common Stock issued and
outstanding and held of record by approximately 1,400
stockholders. The Company does not have any other class or
series of voting stock outstanding other than the Common Stock.
The Company effected a one-for-four reverse stock split on
December 9, 1993. All references in this letter to shares of
Common Stock (including those issuable upon the exercise of
Derivative Securities) have been adjusted to take into account
this reverse stock split. The certificates representing
Derivative Securities are likely stated in pre-split numbers of
shares. Accordingly, as required by the terms of the Derivative
Securities, the number of shares of Common Stock actually
represented by the Certificate must be adjusted downward, and
will be appropriately adjusted downward by the Company, in
connection with an acceptance of the Exchange Offer. In
addition, as a result of certain antidilutive events involving
the Common Stock, also as required by the terms of certain of the
Derivative Securities, the number of shares of Common Stock
represented by and the exercise price per share of Common Stock
of certain of the Derivative Securities must be adjusted, and
will be appropriately adjusted by the Company, in connection with
an acceptance of the Exchange Offer. All of the foregoing
adjustments are required by the terms of the applicable
Derivative Securities and all such adjustments made by the
Company will be final and binding on the holders thereof.
The Company's Common Stock is listed on the NASDAQ-
National Market System under the symbol EBMA. On October 30,
1995, the closing sales price for the Company's Common Stock was
$6.00 per share as reported on the NASDAQ-National Market System.
The Derivative Securities represent the right to
purchase an aggregate of 1,032,418 shares of Common Stock
expiring at various times and at various exercise prices (see
"Terms and Conditions" above) and would represent approximately
21% of the shares of Common Stock that would be issued and
outstanding if all of the Derivative Securities were exercised by
the holders thereof. Of this amount, Derivative Securities
representing the right to purchase an aggregate of approximately
730,286 shares of Common Stock are held by executive officers,
directors and other affiliates of the Company. In the event that
all of the Derivative Securities are exchanged for Common Stock
pursuant to the Exchange Offer, the Company will issue an
yaggregate of 181,531 shares of Common Stock which will result in
the number of shares of Common Stock issued and outstanding
increasing to 4,004,664. No fractional shares of Common Stock
(or cash in lieu thereof) will be issued in connection with the
Exchange Offer.
Procedure for Exchange
Subject to the other terms and conditions set forth
herein, the Exchange Offer may be accepted by owners of
Derivative Securities at any time on or prior to the close of
business (New York time) on December 1, 1995 (the Exchange Date),
or such later date as may be determined by the Special Committee
or the Board of Directors of the Company. Unless accepted on or
prior to the Exchange Date, your ability to participate in the
Exchange Offer will automatically terminate at the close of
business (New York time) on the Exchange Date.
Derivative Securities must be exchanged (for
cancellation) by delivering a properly completed letter of
transmittal (the "Letter of Transmittal"), together with the
warrant certificate(s) and/or option certificate(s)
(collectively, the "Certificates") representing the Derivative
Securities owned by you and to be exchanged pursuant to the
Exchange Offer, to the Company on or before the Exchange Date,
unless extended as aforesaid. Letters of Transmittal,
Certificates and other required documents should be sent by
registered mail, overnight courier or hand delivery to the
following address:
E&B Marine Inc.
201 Meadow Road
Edison, New Jersey 08818
Attention: Chief Financial Officer
THE METHOD OF DELIVERY OF LETTERS OF TRANSMITTAL,
CERTIFICATES, AFFIDAVITS AND OTHER DOCUMENTS IS AT THE ELECTION
AND RISK OF HOLDERS OF DERIVATIVE SECURITIES. HOLDERS SHOULD
ALLOW AMPLE TIME TO DELIVER LETTERS OF TRANSMITTAL, CERTIFICATES,
AFFIDAVITS AND OTHER DOCUMENTS.
In the event that the Certificates representing the
Derivative Securities to be exchanged by you pursuant to the
Exchange Offer have been lost, you should nonetheless properly
complete the Letter of Transmittal and you must send it and a
properly completed affidavit of loss and indemnification
agreement (an "Affidavit") to the address set forth above.
The Company may, as a condition to any acceptance of
the Exchange Offer, require any person attempting to accept the
Exchange Offer, including when accompanied by an Affidavit, to
execute and deliver any additional documents deemed necessary or
desirable by the Company (including without limitation, an
indemnity bond (an "Indemnity Bond"), at such person's sole cost
and expense, from an insurance company or other surety
satisfactory to the Company covering an amount at least equal to
the value of the Derivative Securities plus all other associated
costs, charges and expenses (as determined by the Company in its
sole discretion) and naming the Company, its directors, officers,
employees, agents (including transfer agents) and representatives
as indemnitees). These documents (including the Indemnity Bond)
must also be received by the Company on or before the Exchange
Date, unless extended as aforesaid.
THE COMPANY RESERVES THE ABSOLUTE RIGHT TO REJECT ANY
ATTEMPTED ACCEPTANCE OF THE EXCHANGE OFFER FOR ANY REASON
WHATSOEVER, INCLUDING ANY ATTEMPTED ACCEPTANCE WHICH IS
ACCOMPANIED BY AN AFFIDAVIT(S) IN LIEU OF A CERTIFICATE(S).
Any questions or requests for assistance concerning the
Exchange Offer should be addressed to the Company's counsel as
follows:
Haythe & Curley
237 Park Avenue
New York, New York 10017
Attention: Bradley P. Cost
Telephone: (212) 880-6000
Facsimile: (212) 682-0200
No Board or Company Recommendation
An investment in the Company's Common Stock by
acceptance of the Exchange Offer must be made in accordance with
each person's evaluation of its, his or her best interest.
Accordingly, neither the Special Committee, the Board of
Directors of the Company, nor the Company makes any
recommendation to holders of Derivative Securities regarding
whether they should accept the Exchange Offer.
Absence of Registration
The Common Stock issued in exchange for Derivative
Securities has not been and will not be registered under the
Securities Act of 1933, as amended (the "Securities Act"), and
may not be sold in the United States absent registration thereof
under the Securities Act or absent an applicable exemption from
the registration requirements of the Securities Act. See
"Federal Securities Laws Consequences" below.
Federal Income Tax Consequences of the Exchange Offer
The Exchange Offer will be a taxable event to the
holders of the Derivative Securities who accept the Exchange
Offer.
The Federal income tax consequences of the Exchange
Offer, both to the Company and to the holders of the Derivative
Securities, will depend on the nature of the Exchanged Security
exchanged, that is, whether the particular Exchanged Security was
acquired in a capital transaction (as in the case of the Series B
Warrants) or as part of a compensatory arrangement (as in the
case of all other Derivative Securities other than the Series B
Warrants).
Capital Transaction
An exchange involving the Series B Warrants will, for
Federal income tax purposes, be treated as a capital transaction.
The holders of Series B Warrants who accept the Exchange Offer
will realize capital gain or loss equal to the difference between
the value of the Company Common Stock received (determined by
reference to the value of the Company's Common Stock on the
Exchange Date) and their basis in the Series B Warrants. In this
case, the Company will not recognize any gain or loss for Federal
income tax purposes.
Compensatory Arrangements
In the case of all Derivative Securities other than the
Series B Warrants, for Federal income tax purposes, the holders
who accept the Exchange Offer will realize taxable income, taxed
at ordinary income rates, equal to the difference between the
value of the Company's Common Stock received in the Exchange
Offer (determined by reference to the value of the Company's
Common Stock on the Exchange Date) and their basis (if any) in
the applicable Derivative Securities. In turn, the Company will
be entitled to claim a Federal income tax deduction in an amount
equal to the ordinary income realized by the holder.
For Federal income tax purposes, the holding period for
the Company's Common Stock received in the Exchange Offer will
commence on the Exchange Date.
THE SUMMARY OF THE FEDERAL INCOME TAX CONSEQUENCES SET
FORTH ABOVE IS FOR GENERAL INFORMATION ONLY. HOLDERS OF
DERIVATIVE SECURITIES SHOULD CONSULT THEIR OWN ADVISORS AS TO THE
TAX CONSEQUENCES OF THE EXCHANGE OFFER TO THEM, INCLUDING THE
APPLICATION AND EFFECT OF FEDERAL, STATE AND LOCAL TAX LAWS.
Federal Securities Laws Consequences
The issuance by the Company of Common Stock in the
Exchange Offer has not been and will not be registered under the
Securities Act. See "Absence of Registration" above. However,
if a holder of Derivative Securities is not an executive officer,
director or holder of a significant percentage of shares of
Common Stock and has held the Derivative Securities for more than
three years, the Common Stock received in the Exchange Offer will
be freely transferable. The ability of executive officers,
directors and other affiliates of the Company to publicly trade
the Common Stock received in the Exchange Offer will be subject
to Rule 144 under the Securities Act as described below.
Resale of Common Stock Received in the Exchange Offer
Since the Derivative Securities are "restricted
securities" for purposes of Rule 144 under the Securities Act,
the Common Stock issued by the Company in the Exchange Offer will
also be "restricted securities." However, for purposes of Rule
144, the Common Stock issued in the Exchange Offer will assume
the holding period characteristics of the applicable Derivative
Security. That is, the holding period for the applicable
Derivative Security will be "tacked" onto the holding period for
the Common Stock received in the Exchange Offer.
Since the procedures and requirements under Rule 144
differ depending on whether the applicable security is held by an
affiliate or a nonaffiliate, the following would be the
consequences under Rule 144 of the Exchange Offer depending on
whether the Common Stock received in the Exchange Offer is held
by an affiliate or a nonaffiliate of the Company.
Affiliate. Generally, an executive officer, director
or holder of a significant percentage of the outstanding shares
of Common Stock will be deemed to be an affiliate of the Company.
Assuming that the affiliate held the Derivative Security for more
than two years, the Common Stock received by the affiliate in the
Exchange Offer may be publicly sold by the affiliate under Rule
144 by complying with the volume limitations and the notice
requirements of the Rule. Generally, the volume limitations
provide that an affiliate may sell an amount of securities, which
when aggregated with all other sales of securities of the same
class within the preceding three months, does not exceed the
greater of (i) 1% of the issued and outstanding shares of Common
Stock (in the case of the Company, 1% of approximately 3.82
million, i.e., approximately 38,200 shares) and (ii) the average
weekly reported trading volume of the Common Stock during the
four calendar weeks preceding the filing of the notice referred
to in the next sentence. The notice provisions of Rule 144
require an affiliate to file a Form 144 with the Securities and
Exchange Commission setting forth the affiliate's good faith
intention to sell Common Stock.
Nonaffiliate. Under Rule 144, a nonaffiliate will be
subject to the same rules as outlined under the caption
"Affiliate" above if the nonaffiliate has held the Derivative
Security for more than two but less than three years.
Additionally, if the nonaffiliate has held the Derivative
Security for more than three years, then, pursuant to Rule
144(k), the nonaffiliate may publicly sell the Common Stock
received in the Exchange Offer without regard to the requirements
or restrictions of Rule 144.
Absence of Future Liquidity if Exchange Offer Not Accepted
The Company does not intend to register any of the
Derivative Securities (or the underlying Common Stock) under the
Securities Act and does not intend to otherwise take steps which
could result in the Common Stock issuable upon the exercise of
any Derivative Securities becoming freely transferable upon such
exercise.
In the event that you do not accept the Exchange Offer,
the Derivative Securities held by you will remain outstanding and
will remain exercisable in accordance with their terms. Under
the Securities Act, the holding period of a warrant or option may
not be "tacked" to the holding period of the underlying Common
Stock upon the exercise of such warrant or option. Any future
exercise of a Derivative Security will result in the issuance of
Common Stock which will be a "restricted security" within the
meaning of Rule 144 under the Securities Act. As such, any shares
of Common Stock received upon the exercise of Derivative
Securities must be held at least two additional years before that
Common Stock may be sold publicly pursuant to Rule 144.
* * *
The Company requests that you carefully consider the
Exchange Offer and notes that your prompt attention to the
matters covered by this letter is required.
Very truly yours,
E&B MARINE INC.
By: /s/ Kenneth G. Peskin
-----------------------------
Kenneth G. Peskin
Chairman of the Board
and Chief Executive Officer