As filed with the Securities and Exchange Commission on May 6, 1998
Registration No. 333-
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
ALCHEMY HOLDINGS, INC.
----------------------
(Exact name of registrant as specified in its charter)
Florida 59-1886450
- ---------------- --------------------
(State or other (Primary Standard (IRS Identification
jurisdiction of Industrial Number)
incorporation or Classification
organization) Code Number)
3025 N.E., 188th Street, Aventura, Florida 33180, (305) 932-9230
(Address, including ZIP Code, and telephone number, including area code, of
registrant's principal executive offices)
Craig Barrie, President
Alchemy Holdings, Inc.
3025 N.E., 188th Street
Aventura, Florida 33180
(305) 932-9230
(Name, address and telephone number of agent for service)
Copies to:
Steven A. Sanders, Esq.
Beckman, Millman & Sanders, L.L.P.
116 John Street
New York, New York 10038
(212) 406-4700
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this registration statement and the
effective time of the merger (the "Merger") of Cigarette Racing team, inc.
("Cigarette") with and into Alchemy Holdings, Inc., f/k/a Hawk Marine Power,
Inc., ("Alchemy") pursuant to the Agreement and Plan of Merger, dated as of ,
1998 (the "Merger Agreement"), by and among Cigarette and Alchemy, as described
in the enclosed Proxy Statement/ Prospectus included as Part I of this
Registration Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ----------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] -----------------
<PAGE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
=====================================================================================================
Title of each class of securities Amount to be Proposed Proposed Amount of
to be registered registered(1) maximum maximum registration
offering price aggregate fee
per unit(2) offering price
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.001 par value 3,601,000 $6.88 $ 24,774,880 $ 7,308.59
- -----------------------------------------------------------------------------------------------------
Class A Warrants, $0.001 par value 1,000,000
- -----------------------------------------------------------------------------------------------------
Common Stock, $0.001 par value $ 885.00
underlying Class A Warrants (3) 1,000,000 $3.00 $ 3,000,000
- -----------------------------------------------------------------------------------------------------
Class B Warrants, $0.001 par value 1,000,000
- -----------------------------------------------------------------------------------------------------
Common Stock, $0.001 par value $ 1,180.00
underlying Class B Warrants (4) 1,000,000 $4.00 $ 4,000,000
- -----------------------------------------------------------------------------------------------------
Total............................. $ 9,373.59
=====================================================================================================
</TABLE>
(1) This registration statement relates to shares of Common Stock of the
registrant to be retained by holders of the registrant's Common Stock in
the proposed merger of Cigarette Racing Team, Inc. with and into the
registrant, with the registrant continuing as the surviving corporation of
the merger.
(2) Estimated solely for the purpose of determining the amount of the
registration fee in accordance with Rule 457 (f) under the Securities Act
of 1933, as amended, based on the proposed offering price to existing
holders of the registrant's Common Stock.
(3) Reserved for issuance upon exercise of the Class A Common Stock Purchase
Warrants.
(4) Reserved for issuance upon exercise of the Class B Common Stock Purchase
Warrants.
---------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8 (a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8 (a), MAY DETERMINE.
<PAGE>
ALCHEMY HOLDINGS, INC.
3025 N.E., 188th Street
Aventura, Florida 33180
(305) 932-9230
, 1998
To the Shareholders of Alchemy Holdings, Inc.:
A Special Meeting of the Shareholders (the "Alchemy Special Meeting") of
Alchemy Holdings, Inc., formally known as Hawk Marine Power, Inc., a Florida
corporation ("Alchemy"), will be held at 9:00 a.m., local time, on Wednesday,
July 1, 1998, at the offices of Alchemy located at 3025 N.E., 188th Street,
Aventura, Florida 33180.
At the Alchemy Special Meeting, you will be asked to consider and vote
upon a proposal to approve and adopt the Agreement and Plan of Merger, dated as
of , 1998 (the "Merger Agreement"), by and among Alchemy,
Cigarette Racing Team, Inc., a Florida corporation ("Cigarette"), and Cigarette
Boats, Inc., a Delaware corporation which is a wholly-owned subsidiary of
Alchemy (the "Merger Sub" or "Sub"), and the transactions contemplated
thereunder, including a merger pursuant to which the Merger Sub will be merged
with and into Cigarette (the "Merger"), whereby, among other things, Cigarette
will survive the Merger and become a wholly-owned subsidiary of Alchemy.
Approval of the Merger Agreement requires the affirmative vote of the holders of
a majority of the outstanding shares of Alchemy Common Stock.
In connection with the Merger, each share of Cigarette Common Stock, $.01
par value ("Cigarette Common Stock"), issued and outstanding as of the time the
Merger becomes effective, which will occur upon filing of required documentation
with the Secretary of the State of Florida and the Secretary of the State of
Delaware (the "Effective Time"), will be converted into one (1) share (the
"Exchange Ratio") of Alchemy's common stock, par value $.001 per share ("Alchemy
Common Stock"). Based upon the number of shares of Cigarette Common Stock and
Alchemy Common Stock outstanding at , 1998, an aggregate of
approximately 3,601,000 shares of Alchemy Common Stock would be issued in
connection with the merger, representing approximately 93.8% of the total number
of shares of Alchemy Common Stock outstanding after giving effect to such
issuance. To receive their Alchemy Common Stock, Cigarette shareholders holding
certificated shares must, after the Merger, deliver their Cigarette Common Stock
certificates (or a bond in respect thereof) in the manner described in the
attached Joint Proxy Statement/ Prospectus.
At the Effective Time, each share of Cigarette Preferred Stock, Series A,
("Cigarette Preferred Stock"), issued and outstanding as of the Effective Time
of the Merger will be converted into one (1) share of Alchemy's Preferred Stock,
Series A, ("Alchemy Preferred Stock") possessing the same rights, terms and
conditions as the Cigarette Preferred Stock. Based upon the number of shares of
Cigarette Preferred Stock outstanding at , 1998, an aggregate
of approximately 100 shares of Alchemy Preferred Stock would be issued in
connection with the Merger.
<PAGE>
In addition, at the Effective Time, each outstanding par value $.001 Class
A Warrant and par value $.001 Class B Warrant of Cigarette (individually, the
"Cigarette Class A Warrants" and, the "Cigarette Class B Warrants"), will be
assumed by Alchemy and become Alchemy warrants to purchase, on substantially the
same terms and conditions as were applicable under such Cigarette Class A
Warrants and Cigarette Class B Warrants, the number of whole shares of Cigarette
Common Stock (rounded down to the nearest whole number) that the holder of such
Cigarette Class A Warrants and Cigarette Class B Warrants would have been
entitled to receive pursuant to the Merger had such holder exercised such
Cigarette Class A Warrants and Cigarette Class B Warrants in full, immediately
prior to the Effective Time ("Alchemy Class A Warrants" and "Alchemy Class B
Warrants"). The exercise price of the Alchemy Class A Warrants will equal $3.00
per share of Alchemy Common Stock and the exercise price of the Alchemy Class B
Warrants will equal $4.00 per share of Alchemy Common Stock. Based upon the
number of Cigarette Class A Warrants outstanding at , 1998,
approximately 1,000,000 additional shares of Alchemy Common Stock would be
reserved for issuance to holders of Cigarette Class A Warrants in connection
with Alchemy's assumption of such warrants. Based upon the number of Cigarette
Class B Warrants outstanding at , 1998, approximately 1,000,000
additional shares of Alchemy Common Stock would be reserved for issuance to
holders of Cigarette Class B Warrants in connection with Alchemy's assumption of
such warrants.
Both Alchemy shareholders and Cigarette shareholders must vote on the
transactions contemplated by the Merger Agreement. The holders of the Alchemy
common Stock must vote, pursuant to the rules of the OTC-Bulletin Board, on the
issuance of shares of Alchemy Common Stock in connection with the Merger. The
Alchemy shareholders must approve the Merger Agreement. Cigarette shareholders
will consider the Merger Agreement at a separate meeting to be held on July 1,
1998.
THE ALCHEMY BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER
AGREEMENT AND THE MERGER AND BELIEVES THAT THE TERMS OF THE MERGER AGREEMENT ARE
FAIR TO, AND THAT THE MERGER IS IN THE BEST INTEREST OF, ALCHEMY AND ITS
SHAREHOLDERS AND, THEREFORE, UNANIMOUSLY RECOMMENDS THAT THE HOLDERS OF ALCHEMY
COMMON STOCK VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
Subject to the satisfaction of certain conditions, holders of Common Stock
will be entitled to the appraisal rights provided under Florida law in
connection with the Merger as described in the accompanying Proxy Statement/
Prospectus.
IT IS VERY IMPORTANT THAT YOUR SHARES OF COMMON STOCK BE REPRESENTED AT
THE SPECIAL MEETING, WHETHER OR NOT YOU PLAN TO ATTEND PERSONALLY. THEREFORE,
YOU SHOULD COMPLETE AND SIGN THE ENCLOSED PROXY AND RETURN IT AS SOON AS
POSSIBLE IN THE ENCLOSED POSTAGE-PAID ENVELOPE. THIS WILL ENSURE THAT YOUR
SHARES ARE REPRESENTED AT THE SPECIAL MEETING.
<PAGE>
In the material accompanying this letter, you will find a Notice of
Special Meeting of Shareholders, a Joint Proxy Statement/Prospectus relating to
the actions to be taken by the shareholders at the Alchemy Special Meeting and a
proxy card. The Joint Proxy Statement/Prospectus, which you should read
carefully, more fully describes the terms of the Merger Agreement and the Merger
and includes information about Alchemy and Cigarette. The Merger Agreement is
attached as Annex A to the Joint Proxy Statement/Prospectus.
All shareholders are cordially invited to attend the Alchemy Special
Meeting in person. If you attend the Alchemy Special Meeting, you may vote in
person if you wish, even though you have previously returned your proxy card. If
you require assistance in completing your proxy card or have questions about
voting procedures or the Proxy Statement/Prospectus, please contact Adam Schild,
Alchemy's Secretary, at (305) 932-9230.
Sincerely,
CRAIG BARRIE
President
YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND THE ALCHEMY
SPECIAL MEETING, PLEASE COMPLETE, SIGN AND DATE YOUR PROXY CARD AND RETURN IT
PROMPTLY IN THE ENCLOSED POSTAGE-PREPAID ENVELOPE. YOUR PROXY MAY BE WITHDRAWN
BY YOU AT ANY TIME BEFORE IT IS VOTED. EXECUTED BUT UNMARKED PROXIES WILL BE
VOTED FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE MERGER.
<PAGE>
ALCHEMY HOLDINGS, INC.
3025 N.E., 188th Street
Aventura, Florida 33180
(305) 932-9230
---------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held on July 1, 1998
---------------------------
To the Shareholders of Alchemy Holdings, Inc.:
PLEASE TAKE NOTICE that a Special Meeting of Shareholders (the "Alchemy
Special Meeting") of Alchemy Holdings, Inc., a Florida corporation ("Alchemy"),
will be held on Wednesday, July 1, 1998, at the principal executive offices of
Alchemy located at 3025 N.E., 188th Street, Aventura, Florida 33180 commencing
at 9:00 am., local time, for the following purposes:
1. To consider and vote upon a proposal to approve and adopt an
Agreement and Plan of Merger (the "Merger Agreement"), dated as of
........................ , 1998, by and among Cigarette Racing Team,
Inc., a Florida corporation ("Cigarette"), Cigarette Boats, Inc., a
Delaware corporation and a wholly-owned subsidiary of Alchemy
("Merger Sub" or "Sub"), and Alchemy, pursuant to which, among other
things, (a) Merger Sub will be merged with and into Cigarette,
whereby Cigarette will be the surviving corporation and will become
a wholly-owned subsidiary of Alchemy (the "Merger") and (b) each
outstanding share of common stock, $0.01 par value per share, of
Cigarette ("Cigarette Common Stock") will be converted into the
right to receive one (1) share of common stock, $0.001 par value, of
Alchemy ("Alchemy Common Stock"); and
2. To transact such other business as may properly come before the
Alchemy Special Meeting, including any motion to adjourn to a later
date to permit further solicitation of proxies, if necessary, to
establish a quorum or to obtain additional votes in favor of the
Merger, or any postponement or adjournment thereof.
The Merger and related transactions are more fully described in the Joint
Proxy Statement/Prospectus and the annexes thereto, including the Merger
Agreement, accompanying this Notice. Any action may be taken on any of the
foregoing proposals at the Alchemy Special Meeting on the date specified above
or on any date to which the Alchemy Special Meeting may be properly postponed or
adjourned. Shareholders of record at the close of business on , 1998 are
entitled to notice of and to vote at the Alchemy Special Meeting and any
adjournment or postponement thereof. Approval of the Merger Agreement requires
the affirmative vote of the holders of a majority of the outstanding shares of
Alchemy Common Stock. The list of shareholders entitled to vote at the Alchemy
Special Meeting will be available for examination ten (10) days prior to the
Alchemy Special Meeting at the principal executive offices of Alchemy, 3025
N.E., 188th Street Aventura, Florida 33180.
<PAGE>
All shareholders are cordially invited to attend the meeting in person. However,
to ensure your representation at the meeting, you are urged to complete and sign
the enclosed proxy card and return it as promptly as possible in the enclosed
postage-prepaid envelope.
By Order of the Board of Directors
CRAIG BARRIE
President
Aventura, Florida
, 1998
YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND THE ALCHEMY
SPECIAL MEETING, PLEASE COMPLETE, SIGN AND DATE YOUR PROXY CARD AND RETURN IT
PROMPTLY IN THE ENCLOSED POSTAGE-PREPAID ENVELOPE. YOUR PROXY MAY BE WITHDRAWN
BY YOU AT ANY TIME BEFORE IT IS VOTED. EXECUTED BUT UNMARKED PROXIES WILL BE
VOTED FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE MERGER. PLEASE
DO NOT SEND ANY ALCHEMY STOCK CERTIFICATES IN YOUR PROXY ENVELOPE.
<PAGE>
(This page intentionally left blank)
<PAGE>
ALCHEMY HOLDINGS, INC.
and
CIGARETTE RACING TEAM, INC.
------------------
JOINT PROXY STATEMENT
------------------
ALCHEMY HOLDINGS, INC. PROSPECTUS
This Joint Proxy Statement/Prospectus (the "Joint Proxy
Statement/Prospectus") relates to the transactions contemplated by the Agreement
and Plan of Merger (the "Merger Agreement"), dated as of e, 1998,
by and among Alchemy Holdings, Inc., a Florida corporation ("Alchemy"),
Cigarette Boats, Inc., a Delaware corporation and a wholly-owned subsidiary of
Alchemy ("Merger Sub" or "Sub"), and Cigarette Racing Team, Inc., a Florida
corporation ("Cigarette"), which provides for Cigarette to become a wholly-owned
subsidiary of Alchemy by means of a merger with Merger Sub (the "Merger") and
for the shareholders of Cigarette to become shareholders of Alchemy. Alchemy and
Cigarette are referred to collectively herein as the "Companies." Alchemy and
Cigarette are referred to herein, after the consummation of the Merger and the
transactions contemplated thereby, as the "Combined Company."
This Joint Proxy Statement/Prospectus is being furnished to holders of
Common Stock, par value $0.001 per share ("Alchemy Common Stock"), of Alchemy in
connection with the solicitation of proxies by the Board of Directors of
Cigarette (the "Alchemy Board") for use at a Special Meeting of Alchemy
shareholders (the "Alchemy Special Meeting") to be held on Wednesday, July 1,
1998, at the principal executive offices of Alchemy located at 3025 N.E., 188th
Street, Aventura, Florida 33180, commencing at 9:00 a.m., local time, and at any
adjournment or postponement thereof. At the Alchemy Special Meeting, the Alchemy
shareholders will be asked to vote (i) to approve the issuance of Alchemy Common
Stock in connection with the Merger and (ii) to transact such other matters as
may properly come before the Alchemy Special Meeting, including any motion to
adjourn to a later date to permit further solicitation of proxies, if necessary,
or any postponement or adjournment thereof.
This Joint Proxy Statement/Prospectus is also being furnished to holders
of Common Stock, $0.01 par value per share ("Cigarette Common Stock"), of
Cigarette, in connection with the solicitation of proxies by the Board of
Directors of Cigarette (the "Cigarette Board") for use at a Special Meeting of
Cigarette shareholders (the "Cigarette Special Meeting") to be held on
Wednesday, July 1, 1998, at the principal executive offices of Cigarette located
at 3131 N.E. 188th Street, Aventura, Florida 33180, commencing at 9:00 a.m.,
local time, and at any adjournment or postponement thereof. The Cigarette
Special Meeting and the Alchemy Special Meeting are referred to collectively
herein as the "Special Meetings." At the Cigarette Special Meeting, the
Cigarette shareholders will be asked to vote (i) to consider and vote upon a
proposal to approve and adopt the Merger Agreement and (ii) to transact such
other matters as may properly come before the Cigarette Special Meeting,
including any motion to adjourn to a later date to permit further solicitation
of proxies if necessary, to establish a quorum or to obtain additional votes in
favor of the Merger or any postponement or adjournment thereof.
<PAGE>
This Joint Proxy Statement/Prospectus also constitutes the prospectus of
Alchemy for use in connection with the offer and issuance of shares of Alchemy
Common Stock pursuant to the Merger. Upon the consummation of the Merger, which
will occur upon the filing of required documentation with the Secretary of State
of the State of Florida and the Secretary of State of the State of Delaware (the
"Effective Time"), each outstanding share of Cigarette Common Stock (other than
treasury shares and shares owned by Alchemy or its subsidiaries) will be
converted into the right to receive one (1) share of Alchemy Common Stock (the
"Exchange Ratio"). At the Effective Time, each outstanding par value $.001 Class
A Warrants and par value $.001 Class B Warrants of Cigarette (individually, the
"Cigarette Class A Warrants" and, the "Cigarette Class B Warrants"), will be
assumed by Alchemy and become Alchemy warrants to purchase, on substantially the
same terms and conditions as were applicable under such Cigarette Class A
Warrants and Cigarette Class B Warrants, the number of whole shares of Cigarette
Common Stock (rounded down to the nearest whole number) that the holder of such
Cigarette Class A Warrants and Cigarette B Warrants would have been entitled to
receive pursuant to the Merger had such holder exercised such Cigarette Class A
Warrants and Cigarette Class B Warrants in full, immediately prior to the
Effective Time ("Alchemy Class A Warrants" and "Alchemy Class B Warrants"). The
exercise price of the Alchemy Class A Warrants will equal $3.00 per share of
Alchemy Common Stock and the exercise price of the Alchemy Class B Warrants will
equal $4.00 per share of Alchemy Common Stock. Based upon the number of
Cigarette Class A Warrants outstanding at , 1998, approximately 1,000,000
additional shares of Alchemy Common Stock would be reserved for issuance to
holders of Cigarette Class A Warrants in connection with Alchemy's assumption of
such warrants. Based upon the number of Cigarette Class B Warrants outstanding
at , 1998, approximately 1,000,000 additional shares of Alchemy Common
Stock would be reserved for insurance to holders of Cigarette Class B Warrants
in connection with Alchemy's assumption of such warrants. Based upon the number
of shares of Alchemy Common Stock and Cigarette Common Stock outstanding at ,
1998, an aggregate of approximately 3,601,000 shares of Alchemy Common Stock
would be issued in connection with the Merger, representing approximately 93.8%
of the total number of shares of Alchemy Common Stock outstanding after giving
effect to such issuance. In addition, at the Effective Time, each share of
Cigarette Preferred Stock, Series A, ("Cigarette Preferred Stock"), issued and
outstanding as of the Effective Time of the Merger will be converted into one
(1) share of Alchemy's Preferred Stock, Series A, ("Alchemy Preferred Stock")
possessing the same rights, terms and conditions as the Cigarette Preferred
Stock. Based upon the number of shares of Cigarette Preferred Stock outstanding
at , 1998, an aggregate of approximately 100 shares of Alchemy
Preferred Stock would be issued in connection with the Merger. All information
contained in this Joint Proxy Statement/Prospectus relating to Cigarette has
been supplied by Cigarette, and all information relating to Alchemy has been
supplied by Alchemy.
The outstanding shares of Alchemy Common Stock are listed on the OTC-
Bulletin Board under the symbol "ALCH", and it is a condition to the obligations
of Alchemy and Cigarette to consummate the Merger that the shares of Alchemy
Common Stock to be issued in the Merger be approved for listing on the OTC-
Bulletin Board, upon official notice of issuance. The last reported sale price
of Alchemy Common Stock on the OTC-Bulletin Board on , 1998
was $ per share. Based on such last reported sale price, the Exchange
Ratio would equal a purchase price for the Alchemy Common Stock of $
per share. Because the Exchange
<PAGE>
Ratio is fixed, a change in the market price of Alchemy Common Stock before the
Merger will affect the market value of the Alchemy Common Stock to be received
by the shareholders of Cigarette in the Merger. The trading price of Alchemy
Common Stock is subject to volatility. See "Risk Factors - Risks Relating to the
Merger - Fixed Exchange Ratio." Neither Alchemy nor Cigarette is entitled to
terminate the Merger Agreement based on changes in the per share trading price
of Alchemy Common Stock.
--------------------
See "Risk Factors," beginning on page , for certain information that
should be considered by Alchemy shareholders and Cigarette shareholders.
--------------------
THE SECURITIES TO BE ISSUED PURSUANT TO THIS JOINT PROXY STATEMENT/PROSPECTUS
HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
--------------------
This Joint Proxy Statement/Prospectus and the accompanying forms of proxy
are first being mailed to shareholders of Alchemy and Cigarette on or about
, 1998.
--------------------
The date of this Joint Proxy Statement/Prospectus is , 1998.
--------------------
<PAGE>
NO PERSON HAS BEEN AUTHORIZED BY ALCHEMY OR CIGARETTE TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS IN CONNECTION WITH THE SOLICITATION OF PROXIES OR THE
OFFERING OF SECURITIES MADE HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY ALCHEMY OR
CIGARETTE. THIS JOINT PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES OFFERED BY THIS JOINT
PROXY STATEMENT/PROSPECTUS OR A SOLICITATION OF A PROXY IN ANY JURISDICTION
WHERE, OR TO ANY PERSON TO WHOM, IT WOULD BE UNLAWFUL TO MAKE SUCH AN OFFER OR
SOLICITATION.
NEITHER THE DELIVERY OF THIS JOINT PROXY STATEMENT/PROSPECTUS NOR ANY
DISTRIBUTION OF THE SECURITIES TO WHICH THIS JOINT PROXY STATEMENT/PROSPECTUS
RELATES SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS NOT
BEEN ANY CHANGE IN THE INFORMATION CONTAINED HEREIN SINCE THE DATE HEREOF.
<PAGE>
TABLE OF CONTENTS
AVAILABLE INFORMATION..........................................................1
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE................................2
TRADEMARKS.....................................................................2
FORWARD LOOKING STATEMENTS.....................................................2
SUMMARY .......................................................................4
Introduction...........................................................4
The Companies..........................................................4
The Proposed Merger....................................................5
Date and Place of Meetings.............................................7
Purpose of the Special Meeting.........................................7
Votes Required; Voting Agreements......................................8
Recommendations of the Board of Directors..............................8
Reasons for the Merger.................................................8
No Solicitation........................................................9
Representations and Warranties; Covenants..............................9
Conditions to the Merger...............................................9
Amendment and Waiver..................................................10
Termination...........................................................11
Transfer of Cigarette Stock Certificates..............................11
Certain Federal Income Tax Consequences...............................12
Accounting Treatment..................................................12
Governmental and Regulatory Matters...................................12
Restrictions on Resale of Alchemy Common Stock........................13
Comparison of Shareholder Rights......................................13
Risk Factors..........................................................14
RISK FACTORS..................................................................15
Risks Relating to the Merger..........................................15
Company-Related Risk Factors..........................................16
SELECTED HISTORICAL AND
UNAUDITED SELECTED FINANCIAL DATA .......................................19
Alchemy Selected Consolidated Financial Data..........................20
Cigarette Selected Financial Data.....................................21
THE MEETINGS..................................................................23
Matter To Be Considered at the Meetings...............................23
<PAGE>
THE MERGER....................................................................25
Background of the Merger..............................................26
Reasons for the Merger................................................27
Interests of Certain Persons in the Merger............................28
Federal Income Tax Consequences.......................................28
THE MERGER AGREEMENT..........................................................31
The Merger............................................................31
Conversion of Securities..............................................31
Representations and Warranties of Merger Sub, Cigarette and Alchemy...32
Certain Covenants and Agreements......................................34
No Solicitation.......................................................35
Indemnification and Insurance.........................................36
Conditions............................................................37
Termination...........................................................38
Termination Fees and Expenses.........................................40
Amendment and Waiver..................................................41
BUSINESS......................................................................43
The Companies.........................................................43
Alchemy Holdings, Inc..........................................43
Cigarette Racing Team, Inc.....................................46
ALCHEMY MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................................47
CIGARETTE MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................................48
LEGAL PROCEEDINGS.............................................................48
ALCHEMY MANAGEMENT............................................................50
EXECUTIVE COMPENSATION........................................................51
CIGARETTE MANAGEMENT..........................................................52
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................53
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT...........................................................54
FINANCIAL STATEMENTS.........................................................F-1
<PAGE>
AVAILABLE INFORMATION
Alchemy is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, file reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). The Registration
Statement (as defined below), the exhibits and schedules forming a part thereof,
and the additional reports, proxy statements and other information filed by
Alchemy with the Commission can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
located at 7 World Trade Center, Suite 1300, New York, New York 10048 and
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material may also be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates. The Alchemy Common Stock is presently traded on the
OTC-Bulletin Board. Reports and other information concerning Alchemy can also be
inspected at the offices of the National Association of Securities Dealers,
Inc., Reports Section, 1735 K Street, N.W., Washington, D.C. 20006. In addition,
certain of the documents filed by Alchemy with the Commission are available
through the Commission's Electronic Data Gathering and Retrieval System
("EDGAR") on the Commission's World Wide Web site at http://www.sec.gov.
Alchemy has filed with the Commission a Registration Statement on Form S-4
(together with any amendments thereto, the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
shares of Alchemy Common Stock to be issued in connection with the transactions
contemplated by the Merger Agreement. This Joint Proxy Statement/Prospectus does
not contain all the information set forth in the Registration Statement. Certain
portions of the Registration Statement are omitted from this Joint Proxy
Statement/Prospectus in accordance with the rules and regulations of the
Commission. Copies of the Registration Statement, including the exhibits to the
Registration Statement and other material that is not included herein, may be
inspected without charge at the regional offices of the Commission referred to
above, or obtained at prescribed rates from the Public Reference Section of the
Commission set forth above. The omitted portions of the Joint Proxy
Statement/Prospectus may also be obtained through EDGAR at http://www.sec.gov.
Statements contained in this Joint Proxy Statement/Prospectus or in any
document incorporated by reference in this Joint Proxy Statement/Prospectus as
to the contents of any contract or other document referred to herein or therein
are not necessarily complete, and in each instance reference is made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement or such other document, each such statement being qualified in all
respects by such reference.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents and reports subsequently filed by Alchemy pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Joint Proxy Statement/Prospectus and prior to the termination of the offering
under this Joint Proxy Statement/Prospectus shall be deemed to be incorporated
by reference in this Joint Proxy Statement/Prospectus and to be part hereof from
the date of filing of such documents or reports. Any statement contained in a
document deemed to be incorporated by reference herein shall be deemed to be
modified or superseded for purposes of this Joint Proxy Statement/Prospectus to
the extent that a statement contained herein or in any other subsequently filed
document which also is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Joint Proxy Statement/Prospectus.
TRADEMARKS
Cigarette Racing Team, the Cigarette Racing Team logo, the Cafe Racer
Script logo, Decathlon, Firefox, Hard Candy, Revolution 188, Rough Rider, the
Squadron XII logo and Top Gun are trademarks of Cigarette or its subsidiaries.
This Joint Proxy Statement/Prospectus also includes other trademarks and
trade names which are the property of their respective owners.
FORWARD LOOKING STATEMENTS
OTHER THAN STATEMENTS OF HISTORICAL FACT, STATEMENTS MADE IN THIS JOINT
PROXY STATEMENT/PROSPECTUS, INCLUDING STATEMENTS AS TO THE BENEFITS EXPECTED TO
RESULT FROM THE MERGER AND AS TO FUTURE FINANCIAL PERFORMANCE, ARE FORWARD
LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT AND
SECTION 21E OF THE EXCHANGE ACT. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE ANTICIPATED IN SUCH FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN
FACTORS, INCLUDING THOSE SET FORTH IN "RISK FACTORS" BEGINNING ON PAGE
HEREIN, WHICH SHAREHOLDERS OF ALCHEMY AND CIGARETTE SHOULD CAREFULLY REVIEW.
Neither Alchemy nor Cigarette makes any express or implied representation
or warranty as to the attainability of the projected or estimated financial
information referenced or elsewhere herein or as to the accuracy or completeness
of the assumptions from which such projected or estimated information is
derived. Projections or estimations of Alchemy's or Cigarette's future
performance
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are necessarily subject to a high degree of uncertainty and may vary materially
from actual results. Reference is made to the particular discussions set forth
under "Risk Factors," "Alchemy Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Cigarette Management's Discussion and
Analysis of Financial Condition and Results of Operation."
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SUMMARY
The following is a summary of certain information contained elsewhere in
this Joint Proxy Statement/Prospectus. This summary does not contain a complete
description of the Merger Agreement, a copy of which is attached hereto as Annex
A. Reference is made to, and this summary is qualified in its entirety by, the
more detailed information contained in this Joint Proxy Statement/Prospectus and
the Annexes hereto. Shareholders of Alchemy and shareholders of Cigarette are
urged to read carefully this Joint Proxy Statement/Prospectus and the Annexes in
their entirely.
Information contained in this Joint Proxy Statement/Prospectus contains
"forward-looking statements" within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act, which can be identified by the use of
forward-looking terminology, such as "may," "will," "expect," "anticipate,"
"estimate," "project," "continue," "potential" or "opportunity" or the negative
thereof or other variations thereon or comparable terminology. See "FOR WARD
LOOKING STATEMENTS." The matters set forth under the caption "RISK FACTORS" in
this Joint Proxy Statement/Prospectus constitute cautionary statements
identifying important factors with respect to such forward-looking statements,
including certain risks and uncertainties, that could cause actual results to
differ materially from those in such forward-looking statements.
With respect to Alchemy, references to any fiscal year refer to Alchemy's
fiscal year ended September 30. With respect to Cigarette, references to any
fiscal year refer to Cigarette's fiscal year ended September 30.
Introduction
This Joint Proxy Statement/Prospectus is furnished in connection with the
solicitation by the Alchemy Board of proxies from holders of Alchemy Common
Stock for use at the Alchemy Special Meeting and by the Cigarette Board in
connection with the solicitation of proxies from holders of Cigarette Common
Stock for use at the Cigarette Special Meeting. At the Cigarette Special
Meeting, the holders of Cigarette Common Stock will be asked to approve and
adopt the Merger Agreement by and among Cigarette, Alchemy and Merger Sub and to
approve the Merger. At the Alchemy Special Meeting, the holders of Alchemy
Common Stock will be asked to approve the issuance of shares of Alchemy Common
Stock in connection with the Merger. As a result of the Merger, Cigarette will
become a wholly-owned subsidiary of Alchemy.
The Companies
Alchemy. Alchemy, formally known as Hawk Marine Power, Inc., a Florida
corporation, is engaged in the design, production and sale of high performance
marine engines for installation
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in high speed recreational powerboats and offshore racing boats. Alchemy
manufactures its own line of five high output, all gasoline V-8 engines, as well
as customized engines which are produced solely for racing. Alchemy's engines
are hand built from component parts and are sold primarily to premium boat
manufacturers. Alchemy's high performance engines have established a distinctive
reputation among powerboat enthusiasts, for performance, speed and endurance.
On October 25, 1983, Swift Development, Inc. ("Swift") was incorporated
under the laws of the State of Utah. On that same date, Swift acquired all of
the outstanding common stock of the Hawk Marine Power, Inc., a Florida
corporation. On September 30, 1990, Swift merged into its wholly-owned
subsidiary, Hawk Marine Power, Inc., on February 26, 1986. Simultaneously with
the merger, Swift changed its name to Hawk Marine Power, Inc. The effect of the
transaction was to reincorporate Swift in the state of Florida. On May 12, 1997,
Hawk Marine Power, Inc. changed its name to Alchemy Holdings, Inc. Alchemy's
principal executive offices are located at 3025 N.E., 188th Street, Aventura,
Florida 33180. Its telephone number at that address is (305) 932-9230.
Cigarette. Cigarette, a Florida corporation, designs, manufactures and
sells offshore recreational boats and related accessories under the Cigarette
brand name. The well-known Cigarette name has become synonymous with offshore
racing boats. Cigarette's principal product line consists of six models in six
sizes, from 20 to 46 feet in length, at current prices ranging from $55,000 to
$875,000.
Cigarette was originally incorporated as, New CRT, Inc., on May 26, 1994,
under the laws of the State of Florida. On June 1, 1994, New CRT, Inc. changed
its name to Cigarette Racing Team, Inc. Cigarette's principal executive offices
are located at 3131 N.E. 188th Street, Aventura, Florida 33180. Its telephone
number is (305) 931-4564.
Merger Sub. Merger Sub, a Delaware corporation, is a newly-formed,
wholly-owned subsidiary of Alchemy formed solely for the purpose of the Merger.
Merger Sub has no material assets or liabilities and has not engaged in any
material operations since its incorporation. Merger Sub's principal executive
offices are located at Alchemy's 3025 N.E., 188th Street, Aventura, Florida
33180. Its telephone number at that address is (305) 932-9230.
The Proposed Merger
At the Effective Time, pursuant to the Merger Agreement, (i) Merger Sub
will be merged with and into Cigarette, whereupon Cigarette will be the
surviving corporation and will become a wholly-owned subsidiary of Alchemy, (ii)
each share of Cigarette Preferred Stock, Series A ("Cigarette Preferred Stock"),
issued and outstanding as of the Effective Time of the Merger will be converted
into one (1) share of Alchemy's Preferred Stock, Series A ("Alchemy Preferred
Stock") possessing the same rights, terms and conditions as the Cigarette
Preferred Stock and, (iii) each issued and outstanding share of Cigarette Common
Stock will be converted into the
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right to receive one (1) share of Alchemy Common Stock.
At the Effective Time, each outstanding par value $.001 Class A Warrants
and par value $.001 Class B Warrants of Cigarette (individually, the "Cigarette
Class A Warrants" and, the "Cigarette Class B Warrants"), will be assumed by
Alchemy and become Alchemy warrants to purchase, on substantially the same terms
and conditions as were applicable under such Cigarette Class A Warrants and
Cigarette Class B Warrants, the number of whole shares of Cigarette Common Stock
(rounded down to the nearest whole number) that the holder of such Cigarette
Class A Warrants and Cigarette Class B Warrants would have been entitled to
receive pursuant to the Merger had such holder exercised such Cigarette Class A
Warrants and Cigarette Class B Warrants in full, immediately prior to the
Effective Time ("Alchemy Class A Warrants" and "Alchemy Class B Warrants"). The
exercise price of the Alchemy Class A Warrants will equal $3.00 per share of
Alchemy Common Stock and the exercise price of the Alchemy Class B Warrants will
equal $4.00 per share of Alchemy Common Stock.
Based upon the number of shares of Alchemy Common Stock and Cigarette
Common Stock outstanding at , 1998, an aggregate of approximately 3,601,000
shares of Alchemy Common Stock would be issued in connection with the Merger,
representing approximately 93.8% of the total number of shares of Alchemy Common
Stock outstanding after giving effect to such issuance. Based upon the number of
Cigarette Class A Warrants outstanding at , 1998, approximately
1,000,000 additional shares of Alchemy Common Stock would be reserved for
insurance to holders of Cigarette Class A Warrants in connection with Alchemy's
assumption of such warrants. Based upon the number of Cigarette Class B Warrants
outstanding at , 1998, approximately 1,000,000 additional shares of
Alchemy Common Stock would be reserved for issuance to holders of Cigarette
Class B Warrants in connection with Alchemy's assumption of such warrants. In
addition, at the Effective Time, each share of Cigarette Preferred Stock, Series
A ("Cigarette Preferred Stock"), issued and outstanding as of the Effective Time
of the Merger will be converted into one (1) share of Alchemy's Preferred Stock,
Series A ("Alchemy Preferred Stock") possessing the same rights, terms and
conditions as the Cigarette Preferred Stock. Based upon the number of shares of
Cigarette Preferred Stock outstanding at , 1998, an aggregate of approximately
100 shares of Alchemy Preferred Stock would be issued in connection with the
Merger. All information contained in this Joint Proxy Statement/Prospectus
relating to Cigarette has been supplied by Cigarette, and all information
relating to Alchemy has been supplied by Alchemy.
It is anticipated that the Merger will become effective as promptly as
practicable after the requisite shareholder approvals have been obtained and all
other conditions to the Merger have been satisfied or waived (if allowed by
applicable law). If the Merger is not consummated on or before , 1998,
Alchemy and Cigarette may each have the right (subject to certain limitations)
to terminate the Merger Agreement unless the waiting-period, if applicable,
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"HSR Act"), has not expired, in which event either party may terminate the
Merger Agreement if the Merger is not consummated on or before , 1998.
See "The Merger -Regulatory Approvals" and "The Merger Agreement - Termination."
Following the Merger, the directors of Alchemy prior to the Merger will be
the officers and directors of the Combined Company.
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Date and Place of Meetings
The Alchemy Special Meeting will be held on Wednesday, July 1, 1998 at
Alchemy's' principal executive offices at 3025 N.E., 188th Street, Aventura,
Florida 33180, commencing at 9:00 a.m., local time.
The Cigarette Special Meeting will be held on Wednesday, July 1, 1998 at
Cigarette's principal executive offices located at 3131 N.E. 188th Street,
Aventura, Florida 33180, commencing at 9:00 a.m., local time.
Shareholders Entitled to Vote
Holders of record of shares of Alchemy Common Stock at the close of
business on , 1998 (the "Alchemy Record Date"), are entitled
to notice of and to vote at the Alchemy Special Meeting. At such date, there
were shares of Alchemy Common Stock outstanding, each of which will
be entitled to one (1) vote on each matter to be acted upon or which may
properly come before the Alchemy Special Meeting.
Holders of record of shares of Cigarette Common Stock at the close of
business on , 1998 (the "Cigarette Record Date"), are entitled
to notice of and to vote at the Cigarette Special Meeting. At such date, there
were shares of Cigarette Common Stock outstanding, each of which
will be entitled to one (1) vote on each matter to be acted upon or which may
properly come before the Cigarette Special Meeting.
Purpose of the Special Meeting
Alchemy Special Meeting. The purpose of the Alchemy Special Meeting are
for holders of the Alchemy Common Stock (i) to approve the issuance of shares of
Alchemy Common Stock pursuant to the Merger Agreement and in connection with the
Merger and (ii) to transact such other business as may properly come before the
Alchemy Special Meeting, including any motion to adjourn to a later date to
permit further solicitation of proxies, if necessary, to establish a quorum or
to obtain additional or postponement thereof. See "The Meetings."
Cigarette Special Meeting. The purpose of the Cigarette Special Meeting
are for holders of Cigarette Common Stock (i) to consider and vote upon a
proposal to approve and adopt the Merger Agreement and the transactions
contemplated thereunder and (ii) to transact such other business as may properly
come before the Cigarette Special Meeting, including any motion to adjourn to a
later date to permit further solicitation of proxies, if necessary, to establish
a quorum or to obtain additional votes in favor of the Merger, or any
postponement or adjournment thereof. See "The Meeting".
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Votes Required; Voting Agreements
Alchemy. The approval of the issuance of Alchemy Common Stock in
connection with the Merger will require the affirmative vote of the holders of a
majority of the shares of Alchemy Common Stock present in person or represented
by proxy at the Alchemy Special Meeting and entitled to vote. The approval of
the issuance of Alchemy Common Stock in connection with the Merger is required
by the rules of the OTC Bulletin Board governing corporations with securities
listed on the OTC Bulletin Board. As of 1998, directors and
executive officers of Alchemy and their respective affiliates may be deemed to
be beneficial owners of approximately % of the outstanding shares (excluding
shares subject to stock options) of Alchemy Common Stock. Each of the directors
and executive officers of Alchemy has advised Alchemy that he or she has voting
control in favor of approval of the issuance of Alchemy Common Stock in
connection with the Merger.
Cigarette. The approval and adoption of the Merger Agreement by Cigarette
shareholders will require the affirmative vote of the holders of a majority of
the outstanding shares of Cigarette Common Stock entitled to vote.
Recommendations of the Board of Directors
The Alchemy Board has unanimously approved the Merger Agreement and the
issuance of shares of Alchemy Common Stock in connection with the Merger and
believes that the Merger is fair to, and in the best interest of, Alchemy and
its shareholders and, therefore, unanimously recommends that the shareholders of
Alchemy vote for the issuance of such shares of Alchemy Common Stock. See "The
Merger -- Reasons for the Merger; Recommendations of the Boards of Directors".
The Cigarette Board has unanimously approved the Merger Agreement and the
Merger and believes that the terms of the Merger Agreement are fair to, and that
the Merger is in the best interest of, Cigarette and its shareholders and,
therefore, unanimously recommends that the holders of Cigarette Common Stock
vote for approval and adoption of the Merger Agreement. See "The Merger --
Reasons for the Merger; Recommendations of the Board of Directors".
Reasons for the Merger
Certain statements made in the following paragraphs regarding the
potential benefits that could result from the Merger are forward-looking
statements based on current expectations and entail various risks and
uncertainties that could cause actual results to differ materially from those
expressed in such forward-looking statements. Such risks and uncertainties are
set forth under "Risk Factors" and elsewhere in this Joint Proxy
Statement/Prospectus.
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Joint Reasons. The Alchemy Board and the Cigarette Board concluded that
(i) the goals and philosophies of the Companies are compatible and consistent,
(ii) the products of the Companies are complementary, (iii) the post-Merger
entity has the potential to offer customers a wider variety of services and
products than it could offer independently, (iv) the Merger would be positively
received by customers of each of the Companies, and (v) the Companies'
respective shareholders would benefit by the enhanced ability of the Combined
Entity to compete in the marketplace.
No Solicitation
Under the terms of the Merger Agreement, Cigarette has agreed that it will
not engage in certain activities relating to, or which could result in, a
proposal to be acquired by a third party, except under certain limited
circumstances related to the performance by the Cigarette Board of its fiduciary
obligations under Florida law. See "The Plan of Merger -- No Solicitation".
Representations and Warranties; Covenants
Under the Merger Agreement, Alchemy and Cigarette made a number of
representations regarding their respective capital structures, operations,
financial condition and other matters. Each party agreed as to itself and its
subsidiaries that, until consummation of the Merger or the earlier termination
of the Merger Agreement, it will, among other things, maintain its business,
conduct its operations in the ordinary course, provide the other with reasonable
access to its financial, operating and other information, and use all reasonable
efforts to consummate the Merger. See "The Merger Agreement -- Representations
and Warranties" and "-- Certain Covenants and Agreements".
Conditions to the Merger
The respective obligations of Alchemy, Merger Sub and Cigarette to effect
the Merger are subject io the following conditions, among others: (a) the Merger
Agreement shall have been approved and adopted by the shareholders of Alchemy,
and the issuance of Alchemy Common Stock in connection with the Merger shall
have been approved by the shareholders of Alchemy; (b) the waiting period
applicable to the consummation of the Merger under the HSR Act shall have
expired or been terminated and no action shall have been instituted by the
Antitrust Division of the Department of Justice (the "Antitrust Division") or
Federal Trade Commission (the "FTC") challenging or seeking to enjoin the
consummation of the Merger, which action shall not have been withdrawn or
terminated; (c) all governmental authorizations, consents, orders or approvals
shall have been obtained except where the failure to obtain such consents,
orders or approvals would not have an Alchemy Material Adverse Effect or a
Cigarette Material Adverse Effect (as such terms are defined in the Merger
Agreement), as the case may be; (d) the Registration Statement shall have become
effective under the Securities Act and shall not be the subject of a stop order
or proceedings seeking a stop order; (e) no temporary restraining order,
preliminary or permanent injunction or
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other order shall be in effect nor shall there be any proceeding seeking any of
the foregoing that prevents, or seeks to prevent, the consummation of the
Merger; (f) no action shall be taken, nor any statute, rule, regulation, or
order enacted, entered, enforced or deemed applicable to the Merger which makes
the consummation of the Merger illegal or prevents or prohibits the Merger; (g)
the receipt of letters from the independent accountants of Alchemy and
Cigarette, respectively, dated the Closing Date stating that the independent
accountants concur with the conclusions of management of the Companies that the
Merger will qualify as a pooling of interests transaction under Accounting
Principles Board Opinion No. 16 and applicable regulations of the Commission, if
the Merger is consummated in accordance with the Merger Agreement (see "The
Merger -- Accounting Treatment"); (h) the Alchemy Common Stock to be issued, or
reserved for future issuance, in the Merger shall have been approved for
quotation on the OTC Bulletin Board; (i) Alchemy shall have received a written
opinion from Beckman, Millman & Sanders, L.L.P. ("BMS"), counsel to Alchemy, and
Cigarette shall have received a written opinion from Beckman, Millman & Sanders,
L.L.P., counsel to Cigarette, each such opinion to the effect that the Merger
will be treated for federal income tax purposes as a tax-free reorganization
within the meaning of Section 368 (a) of the Internal Revenue Code of 1986, as
amended (the "Code") (see "The Merger - Certain Federal Income Tax
Consequences"); j) the representations and warranties of the other party set
forth in the Merger Agreement shall have been true and correct at the time of
signing the Merger Agreement and shall be true and correct as of the Effective
Time, except for changes contemplated by the Merger Agreement or where failure
to be true and correct would not be reasonably likely to have an Alchemy
Material Adverse Effect or a Cigarette Material Adverse Effect, as the case may
be; (k) Alchemy or Cigarette as the case may be shall have performed in all
material respects all obligations required to be performed by it under the
Merger Agreement; and (l) no Material Adverse Effect with respect to either
party shall have occurred since the date of the Merger Agreement. See "The
Merger Agreement".
Amendment and Waiver
The Merger Agreement may not be amended except by an instrument in writing
signed on behalf of each of the parties thereto. The Merger Agreement may be
amended by the parties thereto, by action taken or authorized by their
respective Boards of Directors, at any time before or after approval of the
matters presented in connection with the Merger by the shareholders of Cigarette
and Alchemy, but, after any such approval, no amendment shall be made which by
law requires further approval by such shareholders without such further
approval.
At any time prior to the Effective Time, either Alchemy or Cigarette, by
action taken or authorized by their respective Boards of Directors, as the case
may be, to the extent legally allowed, (i) extend the time for the performance
of any of the obligations or other acts of the other party, (ii) waive any
inaccuracies in the representations and warranties of the other party contained
in the Merger Agreement or delivered pursuant to the Merger Agreement, and (iii)
waive compliance by the other party with any condition or agreement contained in
the Merger Agreement.
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Termination
The Merger Agreement is subject to termination by mutual written consent
of Alchemy and Cigarette if the Merger is not consummated before
, 1998 unless the waiting period, if applicable, pursuant to the HSR Act has not
expired, in which event Alchemy or Cigarette may terminate the Merger Agreement
if the Merger is not consummated before , 1998. The Merger
Agreement is also subject to termination by Alchemy or Cigarette upon the
occurrence of any of the following: a court order permanently restraining,
enjoining or otherwise prohibiting the Merger, failure of the other party to
obtain shareholder approval or, under certain circumstances, a breach by the
other party of a representation, warranty, covenant or agreement of the other
party contained in the Merger Agreement. In addition, Alchemy may terminate the
Merger Agreement if (i) the Cigarette Board withdraws or adversely modifies its
recommendation of the Merger Agreement; or (ii) the Cigarette Board approves one
of a limited number of certain types of alternative transactions. Cigarette may
terminate the Merger Agreement in the event of (i) a merger or consolidation to
which Alchemy is a party, if the shareholders of Alchemy immediately prior to
the effective date of such merger or consolidation have beneficial ownership of
less than 50% of the total combined voting power of Alchemy's then issued and
outstanding voting securities by any person, entity or group; or (iii) the sale
of all or substantially all of the assets of Alchemy to any person or entity
that is not a subsidiary of Alchemy. See "The Merger Agreement -- Termination".
Transfer of Cigarette Stock Certificates
If the Merger becomes effective, Cigarette will as soon as reasonably
practicable deliver a letter of transmittal with instructions to all holders of
record of Cigarette Common Stock immediately prior to the Merger for use in
surrendering their stock certificates in exchange for certificates representing
shares of Alchemy Common Stock. CERTIFICATES SHOULD NOT BE SURRENDERED BY THE
HOLDERS OF CIGARETTE COMMON STOCK UNTIL SUCH HOLDERS RECEIVE THE LETTER OF
TRANSMITTAL FROM CIGARETTE. WARRANT AGREEMENTS NEED NOT BE SURRENDERED. See "The
Merger Agreement - Conversion of Securities".
Appraisal Rights
Each shareholder of Cigarette Common Stock has a right to dissent from the
Merger, and, if the Merger is consummated, to receive "fair value" for his or
her shares in cash by complying with the provisions of Florida law, including
Section 607.247 of the Florida General Corporation Act (the "FGCA"). A
shareholder who wishes to exercise such rights must deliver to Cigarette, within
the requisite time period prior to the vote being taken on the Merger at the
Cigarette Special Meeting, written notice of his or her intent to demand payment
for his or her shares if the Merger is effected and must not vote in favor of
the Merger. The full text of Section 607.247 is attached as Annex to
this Joint Proxy Statement/Prospectus. See "Shareholders' Appraisal Rights" for
a
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further discussion of such rights and the legal consequences of voting shares of
Cigarette Common Stock in favor of the Merger.
Certain Federal Income Tax Consequences
The Merger is intended to be a tax-free reorganization for federal income
tax purposes, so that no gain or loss would generally be recognized by Alchemy
or Cigarette and no gain or loss would generally be recognized by Cigarette
shareholders. Cigarette shareholders are urged to consult their own tax advisors
as to the specific tax consequences of the Merger to the individual shareholder.
It is a condition to the Merger that Alchemy and Cigarette shall have each
received an opinion of their respective counsel to the effect that the Merger
will constitute a reorganization within the meaning of Section 368(a) of the
Code. For a further discussion of federal income tax consequences of the Merger,
see "The Merger - Certain Federal Income Tax Consequences". See also "The Merger
Agreement - Conditions".
Accounting Treatment
The Merger is intended to qualify as a pooling of interests for accounting
and financial reporting purposes. The obligations of Alchemy and Cigarette to
consummate the Merger are conditioned upon the receipt by Alchemy from Jere J.
Lane, C.P.A. and by Cigarette from Jere J. Lane, C.P.A., their independent
accountants, respectively, of letters dated as of the Closing Date stating their
concurrence with the conclusions of management of the Companies that the Merger
will qualify as a pooling of interests transaction under Accounting Principles
Board Opinion No. 16 and applicable regulations of the Commission if the Merger
is closed and consummated in accordance with the Merger Agreement. See "The
Merger -- Accounting Treatment" and "The Merger Agreement -- Conditions".
Governmental and Regulatory Matters
Under the HSR Act and the rules promulgated thereunder by the FTC, the
Merger may not be consummated until notifications have been given and certain
information has been furnished to the FTC and the Antitrust Division and
specified waiting period requirements have been satisfied. Alchemy and Cigarette
may file notification and report forms under the HSR Act with the FTC and the
Antitrust Division, if applicable. These filings commence a 30 day waiting
period under the HSR Act which should be scheduled to expire on or before the
date of the Special Meetings. If, prior to the expiration of such period, the
FTC or the Antitrust Division should request additional information or
documentary material under the HSR Act, consummation of the Merger could be
delayed until after the Companies have substantially complied with the request.
At any time before or after the Effective Time of the Merger, the Antitrust
Division, the FTC or any state or foreign government may take such action under
the federal, state or foreign antitrust laws as it deems necessary or
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desirable in the public interest, including seeking to impose conditions on
Alchemy with respect to the business operations of the Combined Company. Private
parties may also seek to take legal action under the antitrust laws under
certain circumstances.
The Merger must also satisfy the requirements of federal and certain state
securities laws.
See "The Merger -- Governmental and Regulatory Matters".
Restrictions on Resale of Alchemy Common Stock
The shares of Alchemy Common Stock issuable to shareholders of Cigarette
upon consummation of the Merger have been registered under the Securities Act.
Such shares will be freely tradable without restriction by those shareholders
who are not deemed to be "affiliates" of Alchemy or Cigarette, as that term is
defined in the rules under the Securities Act.
Shares of Alchemy Common Stock received by those shareholders of Cigarette
who are deemed to be affiliates of Cigarette may be resold without registration
under the Securities Act only as permitted by Rule 145 under the Securities Act
or as otherwise permitted under the Securities Act. Each affiliate of Cigarette
has agreed not to offer, sell, pledge, transfer or otherwise dispose of any
shares of Alchemy Common Stock distributed pursuant to the Merger, except in
compliance with Rule 145 under the Securities Act, or in a transaction that is
otherwise exempt from the registration requirements of the Securities Act and
provided that an opinion of counsel, satisfactory to Alchemy, has been provided
to Alchemy to the effect that no such registration is required in connection
with the proposed transaction, or in an offering that is registered under the
Securities Act. In addition, each affiliate of Cigarette has agreed not to sell,
transfer or otherwise dispose of, or reduce such person's interest in or risk
relating to (i) any shares of Alchemy Common Stock or Cigarette Common Stock
owned or subject to vested options as of the date of the Merger Agreement or
(ii) any shares of Alchemy Common Stock issued to such person in the Merger or
otherwise beneficially owned by such person, except in each case for amounts of
Alchemy Common Stock and Cigarette Common Stock not more than the de minimis
amount permitted by the rules and releases of the Commission relating to pooling
of interests accounting treatment, until Alchemy has publicly released combined
financial results of Alchemy and Cigarette for a period of at least 30 days of
combined operations. See "The Merger Restrictions on Resale of Alchemy Common
Stock."
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Risk Factors
See "Risk Factors" for a discussion of certain factors pertaining to the
Merger and the businesses of Alchemy and Cigarette. Risks related to the Merger
include (i) market risks associated with a fixed exchange ratio; (ii) dilution
in earnings per share of Alchemy Common Stock, (iii) risks associated with
restructuring Cigarette's operations and risks that anticipated synergies
between the Companies will not occur, (iv) management distraction resulting from
the need to integrate the businesses of the Companies; (v) risks associated with
the integration of other acquired businesses of Alchemy and Cigarette; (vi)
substantial expenses associated with the Merger, and (vii) the risk that the
Merger will have an adverse effect on customer buying patterns as a result of
uncertainties resulting from the Merger. Risks related to Alchemy include (i)
intense competition; (ii) uncertainty of market acceptance of new Alchemy
products; (iii) Alchemy's ability to manage growth; (iv) fixed operating
expenses that may result in adverse effect on net income if anticipated future
revenues are not realized; and (v) Alchemy's dependence on key personnel. Risks
related to Cigarette include (i) potential fluctuations in quarterly operating
results; (ii) intense competition; (iii) Cigarette's dependence on new products;
(iv) risks associated with Cigarette's product development efforts; (v) risk of
technological obsolescence; (vi) risks associated with intellectual property
rights; and (vii) Cigarette's dependence on key personnel.
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RISK FACTORS
The following factors should be considered carefully by each holder of
Common Stock in connection with the voting upon the Merger and the Merger
Agreement and in connection with the approving the issuance of shares of Common
Stock in connection with the Merger. The following discussion contains
"forward-looking statements" within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act, which can be identified by the use of
forward-looking terminology, such as "may," "will," "expect," "anticipate,"
"estimate," "project" or "continue," "potential" or "opportunity" or the
negative thereof or other variations thereon or comparable terminology. See
"FORWARD LOOKING STATEMENTS." The matters set forth below constitute cautionary
statements identifying important factors with respect to such forward-looking
statements, including certain risks and uncertainties, that could cause actual
results to differ materially from those in such forward-looking statements.
Risks Relating to the Merger
Fixed Exchange Ratio. As a result of the Merger, each outstanding share of
Cigarette Common Stock will be converted into the right to receive one (1) share
of Alchemy Common Stock. Accordingly, the market value of the consideration to
be received by the shareholders of Cigarette upon the Merger will depend
entirely on the market price of Alchemy Common Stock at the Effective Time. The
closing price for Alchemy Common Stock on the OTC Bulletin Board on the latest
practicable trading day before the printing of this Proxy Statement/ Prospectus,
1998 was $ . There can be no assurance that the market price of Alchemy Common
Stock on and after the Effective Time will not be lower than such prices.
Volatility of Trading Price. The trading price of the Combined Company's
shares may be affected by the risk factors set forth herein, as well as
prevailing economic and financial trends and conditions in the public securities
markets. During recent periods, share prices of smaller and medium-sized
publically traded companies have exhibited a high degree of volatility.
Shortfalls in revenues or earnings from the levels anticipated by the public
markets could have an immediate and significant adverse effect on the trading
price of the Combined Company's shares in any given period. Such shortfalls may
result from events that are beyond the Combined Company's immediate control. The
trading price of the Combined Company's shares may also be affected by
developments, including reported financial results and fluctuations in trading
prices of the shares of other publically held companies in the boating, and
related businesses, industry generally, which may not have any direct
relationship with the Surviving Corporation's business or prospects.
Potential Dilution of Interest. A number of shares equal to approximately
______% of Alchemy's outstanding Common Stock after giving effect to the Merger
will be issued to the shareholders and creditors of Cigarette upon consummation
of the Merger. The issuance of Alchemy Common Stock in the Merger and the
exercise of the Class A and Class B Warrants may
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cause a dilution of earnings per share which may negatively impact the price of
Alchemy Common Stock. There can be no assurance that Alchemy's Common Stock
price will not be negatively impacted.
Integration of Other Acquired Businesses. Although Alchemy's Board of
Directors believe that the Merger would successfully yield a power house in the
offshore powerboat and recreational powerboat world, there can be no assurance
that products, technologies, distribution channels, key personnel and businesses
of previously acquired companies will be effectively integrated into the
Combined Company's business or product offerings, or that such integration will
not adversely affect the Combined Company's business, financial condition or
results of operations. There can also be no assurance that any acquired
products, technologies or businesses will contribute at anticipated levels to
the Combined Company's sales or earnings, or that the sales and earnings from
combined businesses will not be a material adverse effect on the business,
financial condition and results of operations of the Combined Company's.
Transaction Charges. Alchemy estimates that it will incur direct
transaction costs of approximately $ associated with the Merger,
which will be charged to operations upon consummation of the Merger. In
addition, it is expected that after the Merger, the Combined Company will
incur an additional significant charge to operations, which is not currently
reasonably estimable, to reflect costs associated with integrating Cigarette.
Although Alchemy expects that the elimination of duplicative expenses as well as
other efficiencies related to the integration of the businesses may offset the
direct transaction costs and other integration-related charges over time, there
can be no assurance that such net benefit will be achieved in the near term, if
at all.
Company-Related Risk Factors
Competition. Success in the recreational boat and marine engine industry
is largely dependent on a company's ability to sell high quality boats and
engines at attractive prices with ample customer service and support. The
Combined Company competitors in the boat industry for product sales are
companies such as Magnum, Mako and Sea Ray. After the Merger, the Surviving
Corporation's competitors in the marine engine industry will include companies
such as Caterpillar, Mercury Marine and Volvo-Penta. Certain of the Surviving
Corporation's competitors, have significantly greater financial resources than
the Surviving Corporation. Competition for product sales is also based upon the
Combined Company ability to attract independent dealers who are willing
to distribute and market its products.
Nature of the Recreational Boat and Marine Engine Industry. The
recreational boat and marine engine industries are highly speculative and
historically have involved a substantial degree of risk. The sales success of a
boat and engine depends on unpredictable and changing factors such a general
economic climate, competition and market acceptance, which may bear little or no
correlation to the Combine Company production and other costs.
Acceptance of the
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Combined Company's products represents a response not only to the boat and
engine design and performance, but also to the level of advertising and
promotion by the distributor, the availability of competition products, general
economic conditions and public taste, and other intangible factors, all of which
change rapidly and cannot be predicted with certainty. Historically,
recreational boat companies had suffered substantially in poor general economic
conditions. Therefore, there is a substantial risk that some or all of the
Combined Company's products may not be commercially successful, resulting in
costs no being recouped or anticipated profits not being realized.
No History of Profitable Operations of Cigarette. Prior to the Merger,
Cigarette's boat business has had no operating revenues or history with no
certain prospects of future profitable operations.
Fluctuation in Results Due to Seasonality and Weather. The marine industry
is highly seasonal with retail sales strongest in the months of February through
July. Between July and the following January, manufacturers' shipments depend on
dealers' restocking activity and request for new season models presented at
trade shows and though promotional programs. The Combined Company's business is
also significantly affected by weather patterns. Unseasonably cool weather and
prolonged winter conditions may lead to a shorter selling season particularly in
the Northeast.
Impact of Economic Conditions. The marine industry is subject to economic
cycles. Purchase of marine products historically have been dependent on
discretionary spending by consumers, which may be adversely affected by
recessionary economic conditions. The marine industry experienced a severe
decline between 1989 and 1992. Any significant decline in general economic
conditions or uncertainties regarding future economic prospects that affect
consumer spending could have a material adverse effect on the Combined Company's
business. Similarly, rising interest rates could adversely impact consumers'
ability or willingness to obtain financing from third-party lenders, which could
adversely affect the Combined Company's ability to sell its products.
Impact of Environmental and Other Regulatory Matters. The Combined
Company's operations are subject to numerous federal, state and local laws and
regulations relating to the environment and health, safety and other regulatory
matters. Certain materials used in boat and engine manufacturing are classified
by federal and state governments as "hazardous materials." Control of these
substances is regulated by the Environmental Protection Agency ("EPA") and state
environmental protection agencies which require reports and inspect facilities
to monitor compliance. In addition, under the Comprehensive Environmental
Response Compensation and liability Act ("CERCLA"), any generator of hazardous
waste sent to a hazardous waste disposal site is potentially responsible for the
clean up and remediation cost required for such site in the event that the site
is not properly closed by the owner or operator, irrespective if the amount of
waste sent to the site. The Combined Company's believes that it will obtain all
material permits and that its facilities and operations will be in substantial
compliance with all material applicable laws and regulations. Nevertheless,
future events, such as changes in or modified interpretations of existing
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laws or regulations or enforcement policies, may give rise to additional
compliance costs that could have a material adverse effect on the Combined
Company.
Pursuant to the 1990 amendments to the Clean Air Act, the EPA has been
studying the impact of marine engines on the environment. The EPA is currently
establishing air emissions standards for new marine engines, which regulations
are expected to become effective in 1998. Such regulations could have a material
adverse effect on the Combined Company's business.
Production Liability. While management of Alchemy believes that its
engines are safe in normal operation, any motorized product can give rise to
product liability claims. Alchemy maintains product liability insurance in the
amount of $500,000. Alchemy has never been the subject of any claim or law suit
regarding product liability of associated with its engines, although there can
be no assurance that product liability claims associated with injury to property
or persons directly or indirectly attributable to Alchemy's engines may not be
asserted at a future date.
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SELECTED HISTORICAL AND UNAUDITED
SELECTED FINANCIAL DATA
The following selected historical financial information of Alchemy and
Cigarette, respectively has been derived from their respective historical
financial statements, and should be read in conjunction with such financial
statements and the notes thereto, included elsewhere in this Joint Proxy
Statement/Prospectus. No cash dividends have been declared or paid on Alchemy
Common Stock or Cigarette Common Stock. The information is presented for
illustrative purposes only and is not necessarily indicative of the operating
results or financial position that might occur if the Merger had been
consummated at the beginning of the respective financial periods indicated, nor
is it necessarily indicative of future operating results or financial position.
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Alchemy Selected Consolidated Financial Data
The following audited selected financial information concerning Alchemy,
other than the as adjusted balance sheet and statement of operations data, has
been derived from the financial statements included elsewhere in this Joint
Proxy Statement/Prospectus and should be read in conjunction with such financial
statements and the notes thereto. See "Financial Statements".
The selected financial data should be read in conjunction with and is
qualified in its entirety by, Alchemy's financial statements, related notes and
other financial information included elsewhere in this Joint Proxy/Prospectus.
Consolidated Balance Sheet Data:
September 30, 1997
------------------
Total assets $ 289,506
Current liabilities 318,076
Shareholders' Equity (deficit) (28,570)
Consolidated Statement of Operations:
September 30, 1997
------------------
Net sales $ 1,059,498
Net (loss) (65,249)
Net loss per Common Share (0.024)
Weighted Average Number of Common
Shares Outstanding 2,697,320
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Cigarette Selected Financial Data
The following audited selected financial information concerning Cigarette,
other than the as adjusted balance sheet and statement of operations data, has
been derived from the financial statements included elsewhere in this Joint
Proxy/Prospectus and should be read in conjunction with such financial
statements and the notes thereto. See "Financial Statements".
The selected financial data should be read in conjunction with and is
qualified in its entirety by, the Cigarette's financial statements, related
notes and other financial information included elsewhere in this Joint
Proxy/Prospectus.
Balance Sheet Data:
September 30, 1997
------------------
Total assets $ 5,879,720
Current liabilities 9,747,865
Stockholders' equity (deficit) (3,868,145)
Statement of Operations Data:
September 30, 1997
------------------
Net sales $ 2,158,406
Net (loss) (2,476,647)
Loss per Common Share (0.88)
Common Shares Outstanding 2,819,562
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Recent Share Prices
The following table sets forth the closing prices per share of Alchemy
Common Stock on the OTC - Bulletin Board on , 1998, the last full
trading date prior to the execution and delivery of the Merger Agreement and the
public announcement thereof.
Alchemy
Common Stock
------------
, 1998 ............................. $
No assurance can be given as to the market prices of Alchemy's Common
Stock at any time prior to the Effective Time or as to the market price of
Alchemy Common Stock at any time thereafter. The conversion ratio between
Alchemy and Cigarette is fixed and is not anticipated to be changed. However, in
the event that a reclassification, recapitalization, split-up, stock dividend,
stock combination, exchange of shares, readjustment or otherwise, occurs, then
the conversion ratio shall be correspondingly adjusted, provided however, that
any such changes shall be subject to the terms of the Merger Agreement annexed
hereto as Annex . Cigarette shareholders are urged to obtain a current market
quotation of the Alchemy Common Stock.
Dividends
Neither Alchemy nor Cigarette has ever paid cash dividends related to
their respective Common Stocks. Following the Merger, Alchemy does not
anticipate paying cash dividends in the foreseeable future. Pursuant to the
Merger Agreement, Alchemy and Cigarette have agreed not to pay cash dividends
pending the consummation of the Merger. If the Merger is not completed, the
Alchemy Board intends to continue a policy of retaining all earnings to finance
the expansion of its business.
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THE MEETINGS
Matter To Be Considered at the Meetings
The Cigarette Special Meeting and the Alchemy Special Meeting are referred
to collectively herein as the "Special Meetings." At the Special Meetings the
Agreement and Plan of Merger (the "Merger Agreement"), dated as of
, 1998, by and among Alchemy Holdings, Inc., a Florida
corporation ("Alchemy"), Cigarette Boats, Inc., a corporation and
a wholly-owned subsidiary of Alchemy ("Merger Sub" or "Sub"), and Cigarette
Racing Team, Inc., a Florida corporation ("Cigarette") will be considered. The
transactions contemplated thereby shall include Cigarette to become a
wholly-owned subsidiary of Alchemy by means of a merger with Merger Sub (the
"Merger") and for the shareholders of Cigarette to become shareholders of
Alchemy. Alchemy and Cigarette are referred to collectively herein as the
"Companies." Alchemy and Cigarette are referred to herein, after the
consummation of the Merger and the transactions contemplated thereby, as the
"Combined Company."
At the Alchemy Special Meeting, the Alchemy shareholders will be asked to
vote (i) to approve the issuance of Alchemy Common Stock in connection with the
Merger and (ii) to transact such other matters as may properly come before the
Alchemy Special Meeting, including any motion to adjourn to a later date to
permit further solicitation of proxies, if necessary, or any postponement or
adjournment thereof.
At the Cigarette Special Meeting, the Cigarette shareholders will be asked
to vote (i) to consider and vote upon a proposal to approve and adopt the Merger
Agreement and (ii) to transact such other matters as may properly come before
the Cigarette Special Meeting, including any motion to adjourn to a later date
to permit further solicitation of proxies if necessary, to establish a quorum or
to obtain additional votes in favor of the Merger or any postponement or
adjournment thereof.
Upon the consummation of the Merger, which will occur upon the filing of
required documentation with the Secretary of State of the State of Florida (the
"Effective Time"), each outstanding share of Cigarette Common Stock (other than
treasury shares and shares owned by Alchemy or its subsidiaries) will be
converted into the right to receive one (1) share of Alchemy Common Stock (the
"Exchange Ratio"). At the Effective Time, each outstanding each outstanding par
value $.001 Class A Warrants and par value $.001 Class B Warrants of Cigarette
(individually, the "Cigarette Class A Warrants" and, the "Cigarette Class B
Warrants"), will be assumed by Alchemy and become Alchemy warrants to purchase,
on substantially the same terms and conditions as were applicable under such
Cigarette Class A Warrants and Cigarette Class B Warrants, the number of whole
shares of Cigarette Common Stock (rounded down to the nearest whole number) that
the holder of such Cigarette Class A Warrants and Cigarette B Warrants would
have been entitled to receive pursuant to the Merger had such holder exercised
such Cigarette Class A Warrants and Cigarette Class B Warrants in full,
immediately prior to the Effective Time ("Alchemy Class A Warrants" and "Alchemy
Class B Warrants"). The exercise price of the Alchemy Class A
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Warrants will equal $3.00 per share of Alchemy Common Stock and the exercise
price of the Alchemy Class B Warrants will equal $4.00 per share of Alchemy
Common Stock. Based upon the number of Cigarette Class A Warrants outstanding at
, 1998, approximately 1,000,000 additional shares of Alchemy
Common Stock would be reserved for issuance to holders of Cigarette Class A
Warrants in connection with Alchemy's assumption of such warrants. Based upon
the number of shares of Alchemy Common Stock and Cigarette Common Stock
outstanding at , 1998, an aggregate of approximately 3,601,000
shares of Alchemy Common Stock would be issued in connection with the Merger,
representing approximately 93.8% of the total number of shares of Alchemy Common
Stock outstanding after giving effect to such issuance. Based upon the number of
Cigarette Class B Warrants outstanding at , 1998,
approximately 1,000,000 additional shares of Alchemy Common Stock would be
reserved for issuance to holders of Cigarette Class B Warrants in connection
with Alchemy's assumption of such warrants. In addition, at the Effective Time,
each share of Cigarette Preferred Stock, Series A, ("Cigarette Preferred
Stock"), issued and outstanding as of the Effective Time of the Merger will be
converted into one (1) share of Alchemy's Preferred Stock, Series A, ("Alchemy
Preferred Stock") possessing the same rights, terms and conditions as the
Cigarette Preferred Stock. Based upon the number of shares of Cigarette
Preferred Stock outstanding at , 1998, an aggregate of
approximately 100 shares of Alchemy Preferred Stock would be issued in
connection with the merger. All information contained in this Joint Proxy
Statement/Prospectus relating to Cigarette has been supplied by Cigarette, and
all information relating to Alchemy has been supplied by Alchemy.
The outstanding shares of Alchemy Common Stock are listed on the OTC
Bulletin Board under the symbol "ALCH," and it is a condition to the obligations
of Alchemy and Cigarette to consummate the Merger that the shares of Alchemy
Common Stock to be issued in the Merger be approved for listing on the OTC
Bulletin Board, upon official notice of issuance. The last reported sale price
of Alchemy Common Stock on the OTC Bulletin Board on , 1998
was $ per share. Based on such last reported sale price, the Exchange
Ratio would equal a purchase price for the Alchemy Common Stock of $ per
share. Because the Exchange Ratio is fixed, a change in the market price of
Alchemy Common Stock before the Merger will affect the market value of the
Alchemy Common Stock to be received by the shareholders of Cigarette in the
Merger. The trading price of Alchemy Common Stock is subject to volatility. See
"Risk Factors - Risks Relating to the Merger - Fixed Exchange Ratio." Neither
Alchemy nor Cigarette is entitled to terminate the Merger Agreement based on
changes in the per share trading price of Alchemy Common Stock.
Immediately after the Merger, there will be approximately 3,838,394 shares
of Common Stock, 1,000,000 Class A Warrants and 1,000,000 Class B Warrants
issued and outstanding. THE BOARD HAS APPROVED THE MERGER AGREEMENT AND
UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT
AND THE MERGER AND NAME CHANGE.
TIME AND PLACE; RECORD DATE. The Special Meeting of the Shareholders of
Alchemy will begin at 9:00 am, local time, at the principal executive offices of
Alchemy at 3025
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N.E., 188th Street, Aventura, Florida 33180, on Wednesday, July 1, 1998.
Shareholders of record at the close of business on the Record Date are entitled
to notice of, and vote at, the Special Meeting.
REQUIRED VOTE. The approval and adoption of the Merger Agreement and the
transactions contemplated thereby, including the Merger, will require the
affirmative vote of the holders of a majority of the outstanding shares of
Common Stock entitled to vote at the Special Meeting, provided a quorum is
present. If such approval is received, the Effective Time of the Merger is
expected to occur as soon as practicable following the Special Meeting.
RECORD DATE; STOCK ENTITLED TO VOTE; QUORUM. Only holders of Common Stock
at the close of business on , 1998 will be entitled to receive
notice of and to vote at the Special meeting. At the close of business on the
Record Date, Alchemy had outstanding and entitled to vote shares of
Common Stock. The presence, in person or by proxy, at the Special Meeting of the
holders of at least a majority of the votes entitled to be cast at the Special
Meeting is necessary to constitute a quorum for the transaction of business.
Abstentions will be counted as present for the purposes of determining whether a
quorum is present but will not be counted as votes cast in favor of the Merger.
Because the vote on the Merger requires the approval of a majority of the votes
entitled to be cast by the holders of the outstanding shares of Common Stock,
abstentions will have the same effect as a negative vote on the Merger. Proxies
relating to "street name" shares that are voted by brokers will be counted as
shares present for purposes of determining the presence of a quorum on all
matters, but will not be treated as shares having voted at the Special Meeting
as to any proposal as to which authority to vote is withheld by the broker.
CIGARETTE SHAREHOLDERS' APPRAISAL RIGHTS. Each shareholder of Cigarette
Common Stock has a right to dissent from the merger, and, if the Merger is
consummated, to receive "fair value" for his or her shares in cash by complying
with the provisions of Florida law, including the requirements of section
607.247 ("Section 607.247") of the Florida General Corporation Act (the "FGCA").
A shareholder who wishes to exercise such rights must deliver to Alchemy, prior
to the vote being taken on the Merger at the Special Meeting, written notice of
his or her intent to demand payment for his or her shares if the Merger is
effected and must not vote in favor of the Merger.
SOLICITATION OF PROXIES. Alchemy may solicit proxies and Alchemy's
directors, officers and employees may also solicit proxies by telephone,
telegram or personal interview. Such directors, officers and employees will not
be additionally compensated for any such solicitation but may be reimbursed for
reasonable out-of-pocket expenses in connection therewith. Arrangements will be
made to furnish copies of proxy materials to fiduciaries, custodians and
brokerage houses for forwarding to beneficial owners of Common Stock. Such
persons will be paid reasonable out-of-pocket expenses.
ALCHEMY SHAREHOLDERS SHOULD NOT SEND ANY STOCK
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CERTIFICATES WITH THEIR PROXY CARDS
THE MERGER
Background of the Merger
On , 1998, Alchemy (or the "Company") held a special
meeting of the Board of Directors and decided that in the best interests of
Alchemy's shareholders that they would attempt to engage in the business of
licensing, designing and marketing of Cigarette merchandise and apparel as
opposed to its current activities of high performance engine manufacturing, in
order to provide Alchemy's current shareholders with the potential of future
liquidity in their stock ownership and the possibility of future gain. As such,
the Company has sought and located management to assist in such a goal.
In connection therewith, at the Directors meeting, a unanimous consent of
the Board of Directors and a majority of the outstanding shareholders
represented at the meeting approved that the Company adopt a recapitalization.
Furthermore, the following individuals were elected as officers and
directors of the Company to serve until their successors are elected or
appointed: Craig N. Barrie, President/Director; Berton J. Lorow,
Vice-President/Director and Adam C. Schild, Secretary/Director.
Additionally, the Company adopted a proposal to amend the Articles of
Incorporation of the Company and change the name of the Company from Hawk Marine
Power, Inc. to Alchemy Holdings, Inc. Subsequent to the change of the Company's
name from Hawk Marine Power, Inc. to Alchemy Holdings, Inc., the Company intends
to form a new corporation under the laws of the State of Delaware, a wholly
owned subsidiary of the Company to be known as "Hawk Marine Power, Inc." to
operate its high performance engine manufacturing business.
Subsequent to the change of the Company's name from Hawk Marine Power,
Inc. to Alchemy Holdings, Inc., and subsequent to the formation of the wholly
owned subsidiary to be known as "Hawk Marine Power, Inc.", the Company sold all
of its assets and liabilities of its high performance engine building operation
to the Company's wholly owned subsidiary Hawk Marine Power, Inc. in exchange for
100 shares of Hawk Marine Power, Inc., the new wholly owned subsidiary. The 100
shares exchanged represents 100% of the issued and outstanding shares of Hawk
Marine Power, Inc.
The Company issued 2,000,000 post-split restricted shares of the Company's
common stock to Offshore Racing, Inc., in exchange for the Company's exclusive
world-wide right and license to use the trademarks, and service marks of
"Cigarette Racing Team, Inc.", for all goods and services other than the use of
the trademarks and service marks on any form of watercraft. In conjunction with
the purchasing of the licensing agreement, the Company has formed a corporation
under the laws of the State of Delaware, to be organized as a wholly owned
subsidiary of the Company to be known as "Cigarette Licensing, Inc." to operate
the Company's licensing business.
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Lastly, the Company issued 200,000 post-split shares of the Company's
common stock to the professionals responsible for the professional services
related to and for negotiating, arranging and brokering the licensing and other
related transactions described herein on behalf of the Company.
As a result, on May 20, 1997, the split became effective and the Company
began trading under its new symbol "ALCH" on the OTC - Bulletin Board.
On October 25, 1997, Alchemy's Board of Directors unanimously adopted a
resolution allowing the Company to enter into a Letter of Intent the result of
which would effectively allow Alchemy to acquire all of the issued and
outstanding shares of Cigarette.
Reasons for the Merger
Certain statements made in the following paragraphs regarding the
potential benefits that could result from the Merger are forward-looking
statements based on current expectations and entail various risks and
uncertainties that could cause actual results to differ materially from those
expressed in such forward-looking statements. Such risks and uncertainties are
set forth under "Risk Factors" and elsewhere in this Joint Proxy
Statement/Prospectus.
Joint Reasons for the Merger
In reaching their decisions to approve the Merger Agreement, the Merger
and the transactions contemplated by the Merger Agreement, the Alchemy Board and
the Cigarette Board consulted with their respective management teams and
advisors and independently considered the proposed Merger Agreement and the
transactions contemplated thereunder. Based on their respective independent
reviews of the proposed transactions and the business and operations of the
other party, the respective Boards each unanimously approved the Merger
Agreement, the Merger and the transactions contemplated thereby. The Board of
Directors of each of the Companies concluded that (i) the goals and philosophies
of the Companies are compatible and consistent, (ii) the products and services
of the Companies are complementary, (iii) the post-Merger entity has the
potential to offer customers a wider variety of services and products than it
could offer independently, (iv) the Merger would be positively received by
customers of each of the Companies, and (v) the Companies' respective
shareholders would benefit by the enhanced ability of the Combined Entity to
compete in the marketplace.
Recommendation of the Alchemy Board
The Alchemy Board has unanimously approved the Merger Agreement and the
issuance of Alchemy Common Stock in connection with the Merger and believes that
the Merger is fair to, and in the best interests of, Alchemy and its
shareholders, and therefore, unanimously recommends that the shareholders of
Alchemy vote FOR the issuance of such
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shares.
Recommendation of Cigarette's Board
The Cigarette Board has unanimously approved the Merger Agreement and the
cancellation of certain shares of Cigarette's Common Stock and the exchange of
other shares of Cigarette's Common Stock for Alchemy Common Stock in connection
with the Merger and believes that Merger is fair and in the best interests of,
Cigarette and its shareholders, and therefore, unanimously recommends that the
shareholders of Cigarette vote FOR the issuance of such shares.
Interests of Certain Persons in the Merger
Interests in Cigarette Common Stock
As , 1998, Offshore Racing, Inc. ("Offshore") owned 2,000,000
shares of Cigarette Common Stock. As of December 1, 1996 Offshore and Cigarette
entered into a licensing agreement the term of which is ten years (the
"Licensing Agreement"). Pursuant to the Licensing Agreement, Offshore, as the
user of the license, agreed to pay to Cigarette, as the owner, a royalty equal
to between 2.5% and 10% of the gross revenue generated by the use of the rights
defined therein. Such royalty is determined by Offshore's particular use of
rights granted in the Licensing Agreement.
Indemnification and Insurance
Pursuant to the Merger Agreement, Alchemy has agreed to indemnify each
person who was an officer, director or employee of Cigarette against certain
liabilities. See "Merger Agreement - Indemnification and Insurance."
Federal Income Tax Consequences
THE FOLLOWING IS A SUMMARY OF THE OPINION PROVIDED BY COUNSEL TO THE
COMPANY OF THE MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER. THIS
SUMMARY IS A COMPLETE DESCRIPTION OF ALL THE CONSEQUENCES OF THE MERGER.
THIS SUMMARY IS BASED UPON RELEVANT PROVISIONS OF THE INTERNAL REVENUE
CODE OF 1986, AS AMENDED, THE APPLICABLE TREASURY REGULATIONS PROMULGATED
THEREUNDER, JUDICIAL AUTHORITY AND CURRENT ADMINISTRATIVE RULINGS AND PRACTICE,
ALL OF WHICH ARE SUBJECT TO CHANGE, POSSIBLY ON A RETROACTIVE BASIS. THIS
SUMMARY DOES NOT
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ADDRESS ALL ASPECTS OF FEDERAL INCOME TAXATION THAT MAY BE RELEVANT TO
PARTICULAR SHAREHOLDERS IN LIGHT OF THEIR PERSONAL CIRCUMSTANCES, OR TO
SHAREHOLDERS SUBJECT TO SPECIAL TREATMENT UNDER THE CODE (FOR EXAMPLE, S
CORPORATIONS, CERTAIN ESTATES AND TRUSTS, INSURANCE COMPANIES, FOREIGN PERSONS,
TAX EXEMPT ORGANIZATIONS, TAXPAYERS SUBJECT TO THE ALTERNATIVE MINIMUM TAX,
FINANCIAL INSTITUTIONS, BROKERS, DEALERS OR HOLDERS THAT OWN 10% OR MORE OF THE
VOTING POWER OF ALCHEMY) THE COMPANY HAS NOT REQUESTED A RULING FROM THE
INTERNAL REVENUE SERVICE WITH RESPECT TO THESE MATTERS.
EACH SHAREHOLDER'S INDIVIDUAL CIRCUMSTANCES MAY AFFECT THE TAX
CONSEQUENCES OF THE MERGER TO SUCH SHAREHOLDER. IN ADDITION, NO INFORMATION IS
PROVIDED HEREIN WITH RESPECT TO THE TAX CONSEQUENCES OF THE MERGER UNDER
APPLICABLE FOREIGN, STATE OR LOCAL LAWS. CONSEQUENTLY, EACH CIGARETTE
SHAREHOLDER IS ADVISED TO CONSULT ITS OWN TAX ADVISOR AS TO THE SPECIFIC IMPACT
ON EACH SUCH SHAREHOLDER OF FEDERAL, FOREIGN, STATE OR LOCAL LAWS.
Beckman, Millman & Sanders, L.L.P., counsel to the Alchemy has provided
its opinion that the Merger will be treated as a tax-free reorganization as
defined in Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as amended
(the "Code"), and that, accordingly, (i) no gain or loss will be recognized by
the shareholders of Cigarette upon the exchange of their shares of Cigarette
Common Stock solely for shares of Alchemy Common Stock pursuant to the Merger,
(ii) the basis of the Alchemy Common Stock received by each shareholder of
Cigarette in exchange for shares of Alchemy Common Stock will be the same,
immediately after the exchange, as the basis of such shareholder's Alchemy
Common Stock exchanged therefor, and (iii) the holding period for any Alchemy
Common Stock received in exchange for Cigarette Common Stock will include the
period during which the Cigarette Common Stock surrendered for exchange was
held, provided such stock was held as a capital asset on the date of the
exchange.
A dissenting Cigarette shareholder who receives only cash for his shares
of Cigarette Common Stock will recognize gain or loss for federal income tax
purposes measured by the difference, if any, between such holder's basis in the
stock and the amount received by him for his stock. The gain or loss will be
characterized for federal income tax purposes as capital gain or loss or as
ordinary income. The gain or loss will be characterized as capital if (i) the
holder's shares of Cigarette Common Stock are held as capital asset, and (ii)
the holder receives cash with respect to all shares of Cigarette Common Stock
which he owns, including shares owned by application of the attribution rules of
Section 318 of the Code.
Section 318 of the Code provides, in part, that a shareholder will be
considered to be the owner of shares which are owned by certain corporations,
partnerships, trusts and estates in which the shareholder has a beneficial
ownership interest, shares which such shareholder has an option to acquire, and
shares owned by certain members of his family (not including brothers and
sisters).
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Under certain circumstances, the attribution rules with respect to shares
attributed from a family member may be waived.
Dissenter's Rights. Pursuant to Section 607.247 of the Florida General
Corporation Act, any holder of Cigarette Common Stock who objects to the Merger
will be entitled to dissent and exercise appraisal rights. That Section enables
an objecting shareholder to be paid, in cash, the value of his Cigarette Common
Stock as determined by FGCA Section 607.247(c), provided that the following
conditions are satisfied:
(a) Such shareholder must not vote in favor of the Merger, nor submit a
proxy in which directions are given to vote in favor of the Merger.
(b) Within 10 days after the date on which the vote is taken approving the
Merger, such shareholder must make written demand on Alchemy for payment
of the fair value of such shareholder's shares.
Within 10 days after the Merger is effected, Cigarette shall give written
notice thereof to each dissenting shareholder who has satisfied paragraphs (a)
and (b) hereof, and Cigarette shall make a written offer to each such
shareholder to pay for such shares at a specified price deemed by Cigarette to
be the fair value thereof.
In the event that Cigarette and the dissenting shareholder(s) does not
agree with the value Cigarette places on such shareholder's shares, then
Cigarette, within 30 days after the receipt of a written demand from any such
shareholder given within 60 days after the date on which the Merger was
effected, shall, or at its election at any time within such period of 60 days
may, file an action in any court of competent jurisdiction in the county in
Florida where the registered office of Cigarette is located requesting that the
fair value of such shares be found and determined. If Cigarette fails to
initiate such a proceeding, then any dissenting shareholder may do so in the
name of the corporation.
Notwithstanding the foregoing, a dissenting shareholder may withdraw his
appraisal demand so long as Cigarette consents thereto.
FAILURE BY A SHAREHOLDER TO FOLLOW THE STEPS REQUIRED BY FLORIDA LAW FOR
PERFECTING HIS OR HER DISSENTER'S RIGHTS WILL RESULT IN THE LOSS OF SUCH RIGHTS.
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THE MERGER AGREEMENT
The following is a brief summary of certain provisions of the Merger
Agreement, a copy of which is attached as Exhibit 2.0 to this Joint Proxy
Statement/Prospectus and incorporate herein by reference. Such summary is
qualified in its entirety by reference to the Merger Agreement. Shareholders of
Alchemy and Cigarette are urged to read the Merger Agreement in its entirety for
a more complete description of the Merger. In case any conflict between the
Merger Agreement and the summary set forth herein, the Merger Agreement shall
control.
The Merger
The Merger Agreement provides that, following the approval and adoption of
the Merger Agreement by the shareholders of Alchemy and Cigarette, the approval
of the issuance of shares of Alchemy and cancellation of the specified Cigarette
shares pursuant to the Merger Agreement in connection with the Merger, and the
satisfaction or waiver of the other conditions to the Merger, Merger Sub will
merge with and into Cigarette, with Cigarette continuing as the surviving
corporation (the "Surviving Corporation") and becoming a wholly-owned subsidiary
of Alchemy.
If all such conditions to the Merger are satisfied or waived, the Merger
will become effective upon the later of (a) the date and time of the filing of a
Certificate of Merger with the Secretary of State of the State of Florida or (b)
such later date and time as is agreed in writing by the Merger Sub, Cigarette
and Alchemy.
Conversion of Securities
Upon consummation of the Merger, each issued and outstanding share of the
capital stock of the Merger Sub shall be converted into and become one fully
paid and nonassessable share of common stock of Cigarette. All shares of
Cigarette Common Stock that are owned by Cigarette as treasury stock or by any
Subsidiary of Cigarette and any shares of Cigarette Common Stock owned by
Alchemy, Merger Sub or any other wholly-owned Subsidiary (as defined in Section
of the Merger Agreement) of Alchemy shall be canceled and retired and shall
cease to exist and no stock of Alchemy or other consideration shall be delivered
in exchange therefor. All shares of Common Stock, $.001 par value per share, of
Alchemy ("Alchemy Common Stock") owned by Cigarette shall remain unaffected by
the Merger.
Subject to terms of the Merger Agreement, each issued and outstanding
share of Cigarette Common Stock (other than shares to be canceled in accordance
with Section of the Merger Agreement) shall be converted into the right to
receive one (1) (the "Conversion Number") fully paid and nonassessable share of
Alchemy Common Stock. All such shares of Cigarette Common Stock, when so
converted, shall no longer be outstanding and shall automatically be canceled
and
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retired and shall cease to exist, and each holder of a certificate representing
any such shares shall cease to have any rights with respect thereto, except the
right to receive the shares of Alchemy Common Stock to be issued in
consideration therefor upon the surrender of such certificate in accordance with
the terms of the Merger Agreement, without interest.
If, between the date of the Merger Agreement and the effective date, the
outstanding shares of Alchemy Common Stock or Cigarette Common Stock shall have
changed into a different number of shares or a different class by reason of any
reclassification, recapitalization, split-up, stock dividend, stock combination,
exchange of shares, readjustment or otherwise, then the Conversion Number shall
be correspondingly adjusted; provided, however, that any such changes shall be
subject to the terms of the Merger Agreement.
Representations and Warranties of Merger Sub, Cigarette and Alchemy
The Merger Agreement contains statements that various representations and
warranties contained therein are true and correct, except (i) as disclosed or
incorporated by reference in filings with the Securities and Exchange Commission
by Alchemy or the Merger Sub, as the case may be, made prior to the date of the
Merger Agreement and (ii) where the failure of such a representation or warranty
to be true and correct would not have a Material Adverse Effect (as defined
below) on either Alchemy or Cigarette, taken as a whole, as the case may be,
with respect to items (a), (d) to (o), and (q) listed below. In particular, the
Merger Sub, Cigarette and Alchemy provided representations and warranties
relating to, among other things, (a) the due organization, valid existence and
good standing of each of the Merger sub, Cigarette and Alchemy; (b) the capital
structure of each of the Merger Sub, Cigarette and Alchemy; (c) each party's
authorization to execute and deliver the Merger Agreement and that the Merger
Agreement constitutes a valid and binding obligation of each party enforceable
in accordance with its terms, and each party's authority to consummate the
transactions contemplated by the Merger Agreement; (d) the absence of conflicts
under charters or bylaws, required consents or approvals (other than (i) the
filing of a pre-merger notification under the HSR; (ii) the filing by Alchemy of
the Registration Statement; (iii) the filing of the required merger documents
with the Secretary of State of the State of Florida; (iv) the filing of proxy
statement with the Commission by Alchemy and Cigarette; and (v) any other
consents that are not reasonably likely to have a Material Adverse Effect on the
ability to consummate the transactions contemplated by the Merger, and
violations of any instruments or law; (e) the accuracy and completeness in all
material respects of documents and financial statements filed by each of
Cigarette and Alchemy with the Commission; (f) the absence of undisclosed
liabilities; (g) the absence of certain material adverse changes or events; (h)
the accurate preparation and timely filing of all returns and payment of taxes
owed and the absence of any material liability for unpaid taxes that have not
been accrued or reserved for by the respective parties; (i) title to properties;
(j) title to intellectual property; (k) the absence of a breach or the
cancellation of material agreements, contracts and commitments; (l) the absence
of litigation; (m) compliance with environmental regulations, the absence of
conduct of activities involving hazardous materials and absence of any actions
against either party regarding environmental matters or hazardous materials; (n)
certain
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employment tax, labor and employee benefit matters; (o) compliance with laws;
(p) the absence of circumstances adversely affecting the availability of pooling
of interests accounting; (q) the absence of material interested party
transactions; and (r) the accuracy of information supplied by each of the Merger
Sub, Cigarette and Alchemy in connection with the Registration Statement and the
Joint Proxy Statement/Prospectus. In addition, the Merger Agreement contains a
representation and warranty by Alchemy as to (s) the interim operations of the
Merger Sub, and representations and warranties by Cigarette as to (t) the
absence of payments resulting from the Merger and (u) actions taken regarding
restrictions applicable to business combinations under the FGCA.
For purposes of the Merger Agreement, a Material Adverse Effect means any
change, event or effect that is materially adverse to the business, operations
or results of operations of Alchemy or Cigarette, as the case may be, and such
party's subsidiaries taken as a whole; provided, however that any of the
following are not deemed to constitute a Material Adverse Effect: (i) adverse
changes in or effect on the financial condition, revenues or gross margins of
the party (or the direct consequences thereof) to the extent attributable to a
delay of, reduction in or cancellation or change in the terms of product
licenses by the party's customers, to the extent attributable to a slowdown in a
party's sales organization; to the extent attributable to the loss of any key
officer or employee of a party to the extent attributable directly and primarily
to the transactions contemplated by the Merger Agreement; (ii) adverse changes
in the market prices for the party's common stock between the date of the Merger
Agreement and the Closing Date; and (iii) the outcome of certain litigation
pending against Cigarette and disclosed to Alchemy.
Timely filing of all returns and payment of taxes owed and the absence of any
material liability for unpaid taxes that have not been accrued or reserved for
by the respective parties; (i) title to properties; (j) title to intellectual
property; (k) the absence of a breach or the cancellation of material
agreements, contracts and commitments; (l) the absence of litigation; (m)
compliance with environmental regulations, the absence of conduct of activities
involving hazardous materials and absence of any actions against either party
regarding environmental matters or hazardous materials; (n) certain employment
tax, labor and employee benefit matters; (o) compliance with laws; (p) the
absence of circumstances adversely affecting the availability of pooling of
interests accounting; (q) the absence of material interested party transactions;
and (r) the accuracy of information supplied by each of Alchemy and Cigarette in
connection with the registration Statement and this Joint Proxy
Statement/Prospectus. In addition, the Merger Agreement contains a
representation and warranty by Alchemy as to (s) the interim operations of
Merger Sub, and representations and warranties by Cigarette as to (t) the
absence of payments resulting from the Merger, and (u) actions taken regarding
restrictions applicable to "business combinations" under the FGCA.
For purposes of the Merger Agreement, a Material Adverse Effect means any
change, event or effect that is materially adverse to the business, operations
or results of operations of Cigarette or Alchemy, as the case may be, and such
party's subsidiaries taken as a whole; provided, however that any of the
following are not deemed to constitute a Material Adverse Effect; (i) adverse
changes in or effect on the financial condition, revenues or gross margins of
the party (or the direct consequences thereof) to the extent attributable to a
delay of, reduction in or cancellation or change
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in the terms of product licenses by the party's customers to the extent
attributable to a slowdown in a party's sales organization; to the extent
attributable to the loss of any key officer or employee of a party to the extent
attributable directly and primarily to the transactions contemplated by the
Merger Agreement; (ii) adverse changes in the market prices for the party's
common stock between the date of the Merger Agreement and the Closing Date; or
(iii) the failure of the party's quarterly results of operations for any quarter
ending during the period starting on the date of the Merger Agreement and ending
at the Closing Date.
Certain Covenants and Agreements
Pursuant to the Merger Agreement, Cigarette has agreed that during the
period from the date of the Merger Agreement until the earlier of the
termination of the Merger Agreement or the Effective Time, except as otherwise
consented to in writing by Alchemy or as contemplated by the Merger Agreement,
Cigarette and its subsidiaries have agreed to; (a) carry on Cigarette's business
in the ordinary course in substantially the same manner as previously conducted,
including the use of reasonable efforts consistent with past practices and
policies of Cigarette to (i) preserve intact its present business organization,
(ii) keep available the services of its present officers and key employees and
(iii) preserve its relationships with customers, suppliers, distributors,
licensors, licensees, and others having business dealings with it; (b) not
accelerate, amend or change the period of exerciseability of Cigarette's
Warrants, except as required pursuant to the plan or any related agreement; (c)
not transfer or license or otherwise extend, amend or modify any rights to its
intellectual property, other than in the ordinary course of business consistent
with past practice; (d) not declare or pay any dividends on or make other
distributions in respect of any of its capital stock, not effect certain other
changes in its capitalization, and not purchase or otherwise acquire, directly
or indirectly, any shares of its capital stock except under certain
circumstances; (e) not issue, or authorize or propose the issuance of, any
shares of its capital stock or securities convertible into shares of its capital
stocks, or any subscriptions, rights, warrants, or options to acquire, or other
agreements obligating it to issue any such shares or other convertible
securities, subject to certain exceptions; (f) not agree to engage or engage in
material acquisitions (g) not sell, lease, license or otherwise dispose of
material properties or assets, except in the ordinary course of business; (h)
not increase the compensation or severance payable to its officers or employees
(except for increases in accordance with agreements entered into prior to the
Merger Agreement and increases consistent with past practices), enter into any
collective bargaining agreement or establish, adopt, enter into or amend in any
material respect any plan for the benefit of its directors, officers or
employees, subject to certain exceptions; (i) not amend its Certificates of
Incorporation or Bylaws, except as contemplated by the Merger Agreement; and (j)
not take any action that would or is reasonably likely to result in any of its
representations and warranties becoming untrue. In addition Cigarette has agreed
to confer on a regular basis with Alchemy on material operational matters.
Pursuant to the Merger Agreement, Alchemy has agreed that, during the
period from the date of the Merger Agreement until the earlier of the
termination of the Merger Agreement or the Effective Time, except as otherwise
consented to in writing by Cigarette or as contemplated by the
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Merger Agreement, Alchemy will not, without the prior written consent of
Cigarette; (as) declare or pay any dividends on or make any other distributions
in respect of any of its capital stock, or issue or authorize the issuance of
any other securities in respect of, in lieu of or in substitution for shares of
its capital stock (other than stock splits of Alchemy Common Stock or stock
dividends payable in shares of Alchemy Common Stock), or purchase or otherwise
acquire, directly or indirectly, any shares of its capital stock except from
former employees, directors and consultants under certain circumstances; (b)
issue, deliver or sell or authorize or purpose the issuance, delivery or sale
of, any shares of its capital stock or securities convertible into shares of its
capital stock, or subscriptions, rights, warrants or options to acquire, or
other agreements or commitments of any character obligating it to issue any such
shares or to her convertible securities, subject to certain exceptions; (c)
amend or propose to amend its Certificate of Incorporation or Bylaws, except as
contemplated by the Merger Agreement; (d) acquire or agree to acquire by merger
or consolidation with, or by purchase of a substantial equity interest in or
substantial portion of the assets of any business or any corporation,
partnership or other business organization or division, for consideration having
a fair market value (at the time of the public announcement of such acquisition
or agreement) in excess of $100,000,000; (e) sell, lease, license or otherwise
dispose of any of its properties or assets which are material, individually or
in the aggregate, to the business of Alchemy and its subsidiaries, taken as a
whole, except for transactions entered into in the ordinary course of business;
and (f) not take any action that would be reasonably likely to result in any of
its representations and warranties becoming untrue. In addition, Alchemy has
agreed to confer on a regular basis with Cigarette on material operational
matters.
No Solicitation
The Merger Agreement provides that Cigarette will not, directly or
indirectly, through any officer, director, employee, representative or agent (i)
solicit, initiate or encourage any inquiries or proposals that constitute, or
could reasonably be expected to lead to, a proposal offer for a merger,
consolidation, share exchange, business combination, sale of substantial assets,
sale of shares of capital stock (including, without limitation, pursuant to a
tender offer) or similar transactions or series of transactions involving
Cigarette, other than the transactions contemplated by the Merger Agreement (any
of the foregoing inquiries or proposals being referred to as an "Acquisition
Proposal"), (ii) engage in negotiations or discussions concerning, provide any
non-public information to any person or entity relating to, any Acquisitions
Proposal; provided, however, that nothing contained in the Merger Agreement
shall prevent Cigarette or the Alchemy Board from (A) furnishing non-public
information to, or entering into discussions or negotiations with, any person or
entity in connection with an unsolicited bona fide written Acquisition Proposal
by such person or entity (including a new and unsolicited Acquisition Proposal
received by Cigarette after the execution of the Merger Agreement from a person
or entity whose initial contact with Cigarette may have been solicited by
Cigarette prior to the execution of the Merger Agreement) or recommending such
as unsolicited bona fide written Acquisition Proposal to the stockholders of
Cigarette, if and only to the extent that (1) the Cigarette Board believes in
good faith (after consultation with and based upon the advice of its financial
advisor) that such Acquisition Proposal would, if
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consummated, result in a transaction more favorable to Cigarette's stockholders
from a financial point of view than the transaction contemplated by the Merger
Agreement (any such more favorable Acquisition Proposal being referred to as a
"Superior Proposal") and the Cigarette Board determines in good faith after
consultation with and based upon the advice of outside legal counsel that such
action is necessary for Cigarette to comply with its fiduciary duties to
stockholders under applicable law and (2) prior to furnishing such non-public
information to, or entering into discussions or negotiations with, such person
or entity, the Cigarette Board receives from such persons or entity an executed
confidentiality agreement; or (b) complying with Rule 14e-2 promulgated under
the Exchange Act with regard to an Acquisition Proposal.
Upon compliance with the foregoing, following receipt of a Superior
Proposal, Cigarette shall be entitled to (i) withdraw, modify or refrain from
making its recommendation in favor of the Merger Agreement and the Merger and
approve and recommend to the stockholders of Cigarette a Superior Proposal and
(ii) enter into an agreement with such third party concerning a Superior
Proposal provided that Cigarette shall concurrently make payment in full to
Alchemy of certain termination fees, if any. See"-Termination Fees."
Cigarette is required to notify Alchemy (orally and in writing) within 24
hours after receiving any Acquisition Proposal, learning of a third party's
intent to make an Acquisition Proposal, or receiving any request for non-public
information or access to its properties, books or records in connection with an
Acquisition Proposal.
Indemnification and Insurance
The Merger Agreement provides that Cigarette shall and, from and after the
Effective Time, Alchemy and the Surviving Corporation shall, indemnify, defend
and hold harmless each person who was an officer, director or employee of
Cigarette or any of its subsidiaries as of the date of the Merger Agreement or
has been at any time prior to the date thereof (or who becomes a director,
officer or employee of Cigarette or any of its subsidiaries prior to the
Effective Time) against all losses, claims, damages, costs, expenses,
liabilities or judgments or amounts that are paid in settlement with the
approval of the indemnifying party (which approval shall not be unreasonably
withheld or delayed) of or in connection with any claim, action, suit,
proceeding or investigation based in whole or in part on, or arising in whole or
in part out of, the fact that such person is or a director, officer or employee
of Cigarette or any Cigarette subsidiary, whether pertaining to any matter
existing or occurring at or prior to the Effective Time and whether asserted or
claimed prior to, or at or after, the Effective time ("Indemnified
Liabilities"), including, without limitation, all Indemnified Liabilities based
in whole or in part on, or arising in whole or in part out of, or pertaining to
the Merger Agreement or the transactions contemplated thereby, in each case to
the full extent that a corporation is permitted under the FGCA to indemnify its
own directors, officers or employees, as the case may be.
After the Effective Time, Alchemy and the Surviving Corporation will
fulfill, assume and
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honor in all respects the obligations of Cigarette pursuant to Cigarette's
Certificate of Incorporation, as amended, and any indemnification agreements
existing and in force as of the date of the Merger Agreement with Cigarette's
directors and officers.
Alchemy and the Surviving Corporation shall, until the th
anniversary of the Effective Time or such earlier date as may be mutually agreed
upon by the interested parties, cause to be maintained in effect, to the extent
available, the policies of directors' and officers' liability insurance, if any,
maintained by Cigarette and its subsidiaries as of the date of the Merger
Agreement (or policies of at least the same coverage and amounts containing
terms that are no less advantageous to the insured parties) with respect to
claims arising from facts or events that occurred on or prior to the Effective
Time. In lieu of the purchase of such insurance by Alchemy or the Surviving
Corporation, Cigarette may purchase a -year extended reporting period
endorsement under its existing directors' and officers' liability insurance
coverage, if any. In no event shall Alchemy or the Surviving Corporation be
obligated to expend any amount per year in excess of % of the
aggregate premiums paid by Cigarette and its subsidiaries in the fiscal year
ending for director' and officers'
liability insurance in order to maintain or procure such insurance coverage.
Conditions
The respective obligations of Alchemy, Merger Sub and Cigarette to effect
the Merger are subject to the following conditions: (a) the Merger Agreement
shall have been approved and adopted by the stockholders Cigarette and the
issuance of Alchemy Common Stock in connection with the Merger shall have been
approved by the Alchemy stockholders; (b) if applicable, the waiting period to
the consummation of the Merger under the HSR Act shall have expired or been
terminated, and no action shall have been instituted by the Antitrust Division
of FTC challenging or seeking to enjoin the consummation of the Merger, which
action shall not have been withdrawn or terminated; (c) all authorizations,
consents, orders or approvals of any shall not have been withdrawn or
terminated; (c) all authorizations, consents, orders or approvals of any
governmental entity required to consummate the Merger shall have been obtained
and be in effect, the absence of which would be reasonably likely to have a
Material Adverse Effect on either Alchemy or Cigarette, as the case may be; (d)
the Registration Statement shall have become effective under the Securities Act
and shall not be the subject of a stop order or proceedings seeking a stop
order; (e) no temporary restraining order, preliminary or permanent injunction
or other order issued by any court of competent jurisdiction, legal or
regulatory restraint or prohibition preventing the consummation of the Merger or
limiting or restricting Alchemy's conduct or operation of the business of
Alchemy or Cigarette after the Merger shall have been issued and be in effect,
nor shall there be any proceeding brought by any governmental entity seeking any
of the foregoing be pending; (f) no action shall be taken, or any statute, rule,
regulation, or order enacted, entered, enforced or deemed applicable to the
Merger which makes the consummation of the Merger illegal or prevents or
prohibits the Merger; (g) the receipt of letters, in form and substance
reasonably acceptable to Cigarette and Alchemy, from the independent accountants
of Alchemy and Cigarette, respectively,
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dated the closing date stating that the independent accountants concur with the
conclusions of management of the companies that the Merger will qualify as a
pooling of interest transaction under Accounting Principles Board Opinion No. 16
and applicable regulations of the Commission, if the Merger is consummated in
accordance with the Merger Agreement; (h) the Alchemy Common Stock to be issued
in the Merger, or reserved for future issuance, shall have been approved for
quotation on the OTC Bulletin Board; (i) receipt by Alchemy of a written opinion
from Beckman, Millman & Sanders, L.L.P. and receipt by Cigarette of an opinion
of Beckman, Millman & Sanders, L.L.P. both to the effect that the Merger will be
treated as a tax-free reorganization within the meaning of Section 368(a) of the
Code; (j) the accuracy in all material respects of the representations and
warranties of the other party set forth in the Merger Agreement, except for
changes contemplated by the Merger Agreement or where the failure to be true and
correct would not be reasonably likely to have a material Adverse Effect on
Alchemy or Cigarette, as the case may be; (k) the performance by the other party
in all material respects of all obligations required to be performed by such
party under the Merger Agreement; and (l) no Material Adverse Effect with
respect to the other party shall have occurred since the date of the Merger
Agreement.
Termination
The Merger Agreement may be terminated at any time prior to the Effective
Time, whether before or after approval of the matters presented in connection
with the Merger by the stockholders of Alchemy or the stockholders of Cigarette:
(a) by mutual written consent of Alchemy and Cigarette; or
(b) by either Alchemy or Cigarette if the Merger shall not have been
consummated by , 1998, provided that if the Merger shall not have been
consummated due to the waiting period (or any extension thereof) under the HSR
Act, if applicable, not having expired or been terminated, or due to an action
having been instituted by the Anti-trust Division or the FTC challenging or
seeking to enjoin the consummation of the Merger, then such date shall be
extended to , 1998, and provided further that the right to terminate the
Merger Agreement under this provision is not available to any party whose
failure to fulfill any obligation under the Merger Agreement has been the cause
of or resulted in the failure of the Merger to occur on or before such date; or
(c) by either Alchemy or Cigarette if a court of competent
jurisdiction or other Governmental Entity (as defined in the Merger Agreement)
shall have issued a non-appealable final order, decree or ruling or taken any
other action, in each case having the effect or permanently restraining,
enjoining or otherwise prohibiting the Merger, except, if the party relying on
such order, decree or ruling or other action has not complied with its
obligations under Section (Legal Conditions to the Merger) or Section
(Additional Agreements; Reasonable Efforts) of the Merger Agreement; or
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(d) by either Alchemy or Cigarette if the required approvals of the
stockholders of Alchemy or stockholders of Cigarette contemplated by the Merger
Agreement shall not have been obtained by reason of the failure to obtain the
required vote upon a vote taken at a meeting of such stockholders duly convened
therefor or at any adjournment thereof (provided that the right to terminate the
Merger Agreement under this provision is not available to any party where the
failure to obtain approval of such party's stockholders or stockholders shall
have been caused by the action or failure to act of such party in breach of the
Merger Agreement); or
(e) by Alchemy, if (i) the Cigarette Board shall have withdrawn or
modified its recommendation of the Merger Agreement in a manner adverse to
Alchemy or shall have publicly announced its intention to do any of the
foregoing; (ii) an Alternative Transaction (as defined below) shall have taken
place (including execution of an agreement to engage in the same) or the
Cigarette Board shall have recommended to the stockholders of Cigarette an
Alternative Transaction; (iii) a tender offer or exchange offer for 20% or mor
of the outstanding shares of Cigarette Common Stock is commenced (other than by
Alchemy or an Affiliate of Alchemy) and the Cigarette Board has not recommended
that the stockholders of Cigarette not tender their shares in such tender or
exchange offer within the time period prescribed by Rule 14e-2 promulgated under
the Exchange Act; or
(f) by Alchemy or Cigarette, if there has been a breach of any
representation, warranty, covenant or agreement on the part of the other party
set forth in the Merger Agreement, which breach causes the conditions set forth
in Sections (a) or (b) of the Merger Agreement (in the case of
termination by Alchemy) or (a) or (b) (in the case of termination by
Cigarette) not to be satisfied as of the time of such breach, provided that if
such breach by such party is curable by such party through the exercise of its
reasonable efforts and for so long as such party continues to exercise such
reasonable efforts, the other party may not terminate the Merger Agreement under
this provision; or
(g) by Cigarette, in the event of (i) a merger or consolidation to
which Alchemy is a party, if the stockholders of Alchemy immediately prior to
the effective date of such merger or consolidation have beneficial ownership (as
defined in Rule 13d-3 under the Exchange Act) of less than 50% of the total
combined voting power for election of directors of the surviving corporation
following the effective date of such merger or consolidation, (ii) the
acquisition or direct or indirect beneficial ownership (as defined in Rule 13d-3
under the Exchange Act) in the aggregate of securities of Alchemy representing
more than 50% of the total combined voting power of Alchemy's then issued and
outstanding voting securities by any person, entity or group, as shown on a
Schedule 13D filed with the SEC pursuant to the Exchange Act; or (iii) the sale
of all or substantially all of the assets of Alchemy to any person or entity
that is not a Subsidiary of Alchemy.
In the event of any termination of the Merger Agreement pursuant to clause
(a) above, there will be no liability or obligation on the part of any party to
the Merger Agreement or its officers, directors, stockholders or affiliates,
except as set forth in Section of the Merger Agreement (Fees and
Expenses), provided that the provisions of Sections (Brokers and finders),
and Article (Miscellaneous) of the Merger Agreement and the
Non-Disclosure Agreement shall
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remain in full force and effect and survive any such termination. In the event
of any termination of the Merger Agreement pursuant to Sections to ,
the Merger Agreement shall be of no further force and effect, except that
Sections (Effect of Termination) and and Article of the
Merger Agreement and the Non-Disclosure Agreement shall remain in full force and
effect and survive any termination of the Merger Agreement and nothing in the
Merger Agreement shall relieve any party from liability for any breach of the
Merger Agreement.
Except as described below, all fees and expenses incurred in connection
with the Merger Agreement and the transactions contemplated thereby shall be
paid by the party incurring such expenses, whether or not the Merger is
consummated, provided that Alchemy and Cigarette shall share equally all fees
and expenses, other than attorneys' fees, incurred in relation to the printing
filing of this Joint Proxy Statement/ Prospectus (including any related
preliminary materials) and the Registration Statement (including financial
statements and exhibits) and any amendments or supplements.
Termination Fees and Expenses
Section of the Merger Agreement provides for Cigarette to pay to
Alchemy a cash termination of fee of $ upon the earliest to occur of the
following events:
(i) the termination of the Merger Agreement by Alchemy pursuant to
Section of the Merger Agreement; or
(ii) the termination of the Merger Agreement by Alchemy pursuant to
Section of the Merger Agreement as a result of the failure to receive the
requisite vote for approval of the Merger Agreement and the Merger by the
stockholders of Cigarette at the Special Meeting if, at the time of such
failure,
(A) there shall have been announced or commenced an
Alternative Transaction (as defined in the Merger Agreement) or Cigarette shall
have executed an agreement to engage in the same and the Cigarette Board has
recommended against such Alternative Transaction, the Cigarette Board shall have
withdrawn such recommendation against such Alternative Transaction or modified
such recommendation in a manner adverse to Alchemy, or
(B) there shall have been announced an Alternative Transaction
(including, but not limited to, the definition contained in the Merger Agreement
and Cigarette shall have engaged in any merger, consolidation, share exchange,
business combination, or similar transaction with, or shall have sold, leased,
exchanged, or otherwise transferred Material Assets (as defined in
Section ) to the Third Party or any affiliate thereof proposing such
Alternative Transaction (or entered into an agreement with such Third Party or
any affiliate thereof to engage in the same) within six months after the date of
the Cigarette Special Meeting or the
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Cigarette Board shall have recommended an Alternative Transaction( as defined in
clause (i) of Section with the Third Party proposing such Alternative
Transaction or any affiliate thereof within six months after the date of the
Cigarette Special Meeting.
As used in the Merger Agreement, "Alternative Transaction" means either
(i) a transaction pursuant to which any person (or group of persons) other than
Alchemy or its affiliates (a "Third Party"), acquires more than 20% of the
outstanding shares of Cigarette Common Stock, pursuant to a tender offer or
exchange offer or otherwise, (ii) a merger or other business combination
involving Cigarette pursuant to which any Third Party acquires more than 20% of
the outstanding equity securities of Cigarette or the entity surviving such
merger or business combination, (iii) any other transaction pursuant to which
any Third Party acquires control of assets (including for this purpose the
outstanding equity securities of subsidiaries of Cigarette, and the entity
surviving any merger or business combination including any of them) of Cigarette
having a fair market value (as determined by the Cigarette Board in good faith)
equal to more than 20% of the fair market value of all the assets of Cigarette
immediately prior to such transaction ("Material Asserts"), or (iv) any public
announcement of a proposal, plan or intention to do any of the foregoing or any
agreement to engage in any of the foregoing.
Notwithstanding the foregoing, in no event is Cigarette required to pay
any termination fees to Alchemy if, immediately prior to the termination of the
Merger Agreement, Alchemy was in breach of any of its material obligations under
the Merger Agreement. Payment of the fees described above shall not be in lieu
of damages incurred in the event of breach of the Merger Agreement.
Pursuant to the Merger Agreement, Alchemy also agreed to pay Cigarette a
cash termination fee of $ upon the earlier to occur of (i) the
termination of the Merger Agreement by Cigarette pursuant to Section or
(ii) the termination of the Merger Agreement by Cigarette pursuant to Section
following the failure of Alchemy to receive the required approval of its
stockholders at the Alchemy Special Meeting. The termination fee, if applicable,
will be paid within one business day after the occurrence of the event resulting
in Alchemy's obligation to pay the fee, but Alchemy will not be required to pay
the termination fee if, immediately prior to the termination of the Merger
Agreement, Cigarette was in breach of any of its material obligations under the
Merger Agreement.
Amendment and Waiver
The Merger Agreement may not be amended except by an instrument in writing
signed on behalf of each of the parties thereto. The Merger Agreement may be
amended by the parties thereto, by action taken or authorized by their
respective Boards of directors, at any time before or after approval of the
matters presented in connection with the Merger by the stockholders of Cigarette
and Alchemy, but, after any such approval, no amendment shall be made which by
law requires further approval by such stockholders without such further
approval.
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At any time prior to the Effective time, either Alchemy or Cigarette, by
action taken or authorized by their respective Board of Directors, as the case
may be, to the extent legally allowed, (i) extend the time for the performance
of any of the obligations or other acts of the other party, (ii) waive any
inaccuracies in the representations and warranties of the other party contained
in the Merger Agreement or delivered pursuant to the Merger Agreement, and (iii)
waive compliance by the other party with any condition or agreement contained in
the Merger Agreement.
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BUSINESS
The Companies
Alchemy Holdings, Inc.
General Development of Business
Alchemy Holdings, Inc., formally known as Hawk Marine Power, Inc., (the
"Company") is engaged in the design, production and sale of high performance
marine engines for installation in high speed recreational powerboats and
offshore racing boats. The Company manufactures its own line of five high
output, all gasoline V-8 engines for high speed recreational powerboats and
racing, as well as customized engines which are produced solely for racing
boats. The Company's engines are hand built from component parts and are sold
primarily to premium boat manufacturers. The Company's high performance engine
has established a distinctive reputation among power boat enthusiasts for
performance, speed and endurance. The Company's engine has received critical
acclaim in boating and other publications. The Company regularly exhibits the
Company's engine at various international boat shows.
The Company was incorporated as Swift development, Inc. under the laws of
the State of Utah on October 25, 1983, at which time it sold an aggregate of
750,000 shares in common stock to three individuals for total consideration of
$15,000. In March 1984, the Company consummated an initial offering of shares of
common stock which resulted in the sale of 752,850 shares of common stock from
which the Company received net proceeds of approximately $65,000. In August
1984, the Company's original shareholders contributed an aggregate of 280,112
shares of common stock of the Company.
On August 6, 1987, the Company acquired all of the outstanding common
stock of the Company. In connection with the acquisition, the Company changed
its name from Swift Development, Inc. to Hawk Marine Power, Inc. The Company was
merged into its wholly owned subsidiary, Hawk Marine Power, Inc. effective
September 30, 1990. The effect of the transaction was to reincorporate the
Company in the state of Florida.
On December 11, 1989 and January 17, 1990, the Company completed the
public offering of an aggregate of 197,940 Units of its securities consisting of
593,820 shares of common stock and 197,940 warrants. The Company received net
proceeds of approximately $969,5000 from the public offering.
On May 12, 1997, the Company changed its name from Hawk Marine Power, Inc.
to Alchemy Holdings, Inc.
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Products
The Company designs, manufacturers and sells high output gasoline V-8
engines and also performs custom work on engines produced by other
manufacturers. The Company's engine was initially produced in 1979 for use in
the offshore speed boat racing circuit which was attaining initial popularity.
It was produced to accommodate participants in the offshore racing circuit who
required a high performance engine. In 1981, Company powered speedboats attained
international prominence by winning the U.S. Championship and the World
Championship of speed boat racing in conjunction with Cigarette Racing Team.
The success of the Company's engine in international competition generated
more widespread interest among speedboat as well as other racing enthusiasts.
Despite its reputation, the Company has never been able to attain consistent
profitable operations or capitalize on a commercial basis from critical
recognition received by the Company's engines. The Company intends to continue
to focus its operations to serve the upper segment of the powerboat market.
Following is a more detailed description of the Company's engines offered
directly and through its authorized dealer network:
HAWK 525: An 8-cylinder, four-stroke, 496 cubic inch engine which
produces approximately 525 horsepower and is liquid-cooled.
HAWK 750: An 8-cylinder, four-stroke, 588 cubic inch engine which
produces approximately 750 horsepower and is liquid-cooled.
HAWK 800: An 8-cylinder, four-stroke, 589 cubic inch engine which
produces approximately 800 horsepower and is liquid-cooled.
HAWK 900: An 8-cylinder, supercharged four-stroke, 572 cubic inch engine
which produces approximately 900 horsepower and is
liquid-cooled.
HAWK 1000: An 8-cylinder, four-stroke, 698 cubic inch engine which
produces approximately 1000 horsepower and is liquid-cooled.
The Company's engines described above may be used for recreational or
offshore racing boats, although the Company manufacturers custom engines
utilized solely for racing. The Company's engines, which usually sell in sets of
two or three, range in price from $23,000 to
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$69,000 per engine.
The Company's engines, to management's best knowledge, have been produced
for the longest continuous period of any high performance marine engine. Apart
from success in various offshore racing events, the Company's engines have
received critical recognition in various boating publications including BOATING
MAGAZINE, MOTOR BOATING AND SAILING and POWERBOAT MAGAZINE, as well as in
various consumer publications not specifically published for the benefit of
speedboat enthusiasts.
Manufacturing Operations
The Company's engines are manufactured at the Company's production
facility in Aventura, Florida. The engines are hand built from component parts
and in certain instances, are custom designed for individual customers. The
Company believes the recognition for its high performance engines is
attributable to the accumulated experience, knowledge and know-how related to
the innovation, design, balancing, assembly and testing of the engine.
The manufacture of the Company's engines consist of three stages: (i) hand
tooling and modification of component parts; (ii) assembly of the engine; and
(iii) testing of the engine. The Company orders most of the components used in
the Company's engine directly from manufacturers, distributors and speciality
automobile parts suppliers. With the exception of General Motors, which
manufactures the engine blocks used in most of the Company's engines, the
Company does not regard any single supplier a essential to its operations. Most
of the components the Company utilizes are available from multiple sources at
competitive prices.
Following assembly of the Company's engines, a rigorous tuning and testing
program is utilized. The testing is performed both manually and through use of
advanced computer technology. At present time, the normal production period and
the manufacture of the Company's engines is five to ten working days. The
Company has present production capacity of approximately sixteen (16) engines
per month. The Company believes its extensive know-how and experience at all
stages of production has enabled it to establish a position of leadership.
The Company warrants its engines for up to one year against defects in
materials and workmanship, and to date has not experienced more than a limited
number of warranty claims.
At September 30, 1996, the Company accrued approximately $10,000 for
anticipated future warranty costs.
Marketing and Sales
The Company concentrates its sales of its engines in the high performance
recreational
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speedboat and racing market. Management believes the high-performance segment of
the market represents no more than 5% of the entire recreational market, of
which the Company is one of the largest and best known manufacturers. The
Company sells its engines directly to premium boat manufacturers including
Apache Performance Boats, Pantera U.S.A., and Jaguar Marine.
For the years ended September 30, 1996 and 1995, sales of the Company's
engines to Cigarette amounted to approximately 24% and 33%, respectively, of
total sales.
The Company regularly exhibits its engines at various international boat
shows and receives extensive publicity in editorial articles appearing in
various boating publications as well as consumer and upscale lifestyle
magazines.
Cigarette Racing Team, Inc.
Cigarette Racing Team, Inc. ("Cigarette") was incorporated under the laws
of the state of Florida on May 26, 1994. Cigarette is one of the world's
preeminent producers of high performance power boats. Cigarette has earned a
reputation for being an engineering and technological leader in the design and
manufacture of its class of powerboats. Cigarette designs, manufacturers and
sells its offshore recreational and racing boats and related accessories under
the Cigarette brand name. Cigarette's principal product line consists of six
boat models in six sizes, from 20 to 46 feet in length, at current prices
ranging rom $55,000 to $875,000.
Cigarette boats are manufactured by a core group of highly skilled
laborers. Construction of a boat generally takes from 8 to 16 weeks on a one
shift per day basis, with overtime. Currently, Cigarette has the capacity to
manufacture approximately 130 boats per year (depending on the models),
utilizing one shift per day, 5 1/2 days per week. Cigarette boats are made
completely by hand and are constructed using the finest tri-axial and bi-axial
fiberglass and resins laid up by hand. A variety of materials are used to form
the composite structure. The boats are made in molds designed and constructed by
Cigarette's own engineering department. This technique, known as "composite
construction" allows Cigarette to create a significantly stronger and more
resilient structure. The decks are bonded to the hulls using the same axial
materials with which the boats are built.
There is currently no public market for the securities of Cigarette.
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ALCHEMY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For the year ended September 30, 1997, the Company reported a net loss of
$65,249. This compared to a net loss of $252,041 for the 1996 fiscal year.
The decrease in loss from operations resulted primarily from decreased
administrative costs. Sales of $1,059,498 during the current fiscal year
increased by $56,052 or 5.6% over $1,003,446 for the prior year.
Gross profit for 1997 was $157,773 or 15% compared to $157,488 or 16% in
1996.
Selling, general and administrative expenses for 1997 were $223,022, a
decrease of $186,685 or 46% from $409,707 in 1996. Selling, general and
administrative expenses represented 21% of sales in 1997 and 41% in 1996. The
decrease in expenses from the prior year was primarily due to new management.
Liquidity and Capital Resources
The Company had cash on hand in the amount of $44,753 at September 30,
1997 compared to $85,737 at September 30, 1996. At September 30, 1997 there was
a working capital deficit of $51,588 compared to working capital of $11,605 at
September 30, 1996. The working capital decrease was related principally to the
decrease in inventory.
The Company does not anticipate any significant capital expenditures
during the 1998 fiscal year. However, the Company was obligated to retire at
November 1, 1991, $405,000 principal amount of its 11% secured promissory notes
issued to a group of private investors in October 1988. On April 16, 1992, the
Company agreed to enter into settlement agreements with the note holders
pursuant to which the participants who accepted the terms of the settlement
agreement would receive a cash payment equal to 86% of their entire investment.
To date, the holders of 10 units in the private placement (representing $337,500
of notes) have accepted the Company's settlement offer. In order to finance the
settlement agreement, the Company borrowed $200,000 from three private
investors.
The Company made the first payment to the note holders in April 1992.
However, due to insufficient cash flow, the Company was unable to make the
August 15 installment pursuant to the settlement agreements. On October 8, 1992,
the Company made a partial payment of $9,026 to certain note holders who had
initiated litigation. In September, 1994, the Company made another partial
payment of $5,000 to the note holders, leaving a balance of $53,673 pursuant to
the settlement. The Company, subsequent to year end, has reached an agreement
with said note holders for retirement of such promissory notes for the sum of
$50,000. Consummation of the debt retirement is expected to take place in the
Company's second fiscal quarter of 1998 through the
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arrangement of interim financing.
CIGARETTE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Sales for fiscal year 1997 were $2,158,406. This was a 123% decrease from
Cigarette's sales in fiscal year 1996 which were $5,010,125.
The Company's gross profit margin decreased substantially to a deficit of
$ (1,245,238) from a surplus of $448,411 in fiscal 1996. Such a reduction was a
reflection of a decrease in the net cash provided by financing activities in
addition to an increase in the cash paid during fiscal 1997 for interest.
As a result of the above, Cigarette's net income per share decreased to
$(0.88) in fiscal 1997 from $(0.78) per share in fiscal 1996.
LEGAL PROCEEDINGS
Cigarette is the defendant in a lawsuit filed by Paramount Pictures (the
"Lawsuit"). The Lawsuit was filed in the Federal District Court in Miami,
Florida. The Lawsuit primarily involves the disputed ownership of the
intellectual property rights associated with the terms "Top Gun". The parties to
the Lawsuit are presently in the process of negotiating a settlement.
In January 1992, the Company was named as a defendant in a lawsuit by
certain note holders of the company who had participated in the Company's
private financing undertaken in September 1988. In Petrocelli Electric Company,
Inc., et al v. Hawk Marine Power, Inc. (Case No. 92-00240), a suit filed in the
11th Judicial Circuit for Dade County, Florida, the plaintiff's requested
repayment of such promissory notes together with interest and attorneys' fees.
On April 16, 1992, the Company entered into settlement agreements with the
plaintiff's along with substantially all of the other note holders pursuant to
which each of the participants who accepted the terms of the settlement
agreement would receive a cash payment equal to 86% of their entire investment.
Pending consummation of such settlement, further pleadings in such lawsuit have
been held in abeyance. The payment would represent full satisfaction of amounts
payable under their notes. In consideration for repayment of the notes, those
participants accepting the terms of the settlement agreement agreed to assign
their shares of common stock received pursuant to the private placement to Mr.
Craig Barrie. An amount equal to 68% of the original investment was paid at the
time each settlement agreement was executed. The remaining 18% was due August
15, 1992. Due to insufficient cash flow, the Company was unable to make the
August 15 installment pursuant to the settlement dated April 16, 1992. On
October 8, 1992, the Company made a partial payment of $9,026 to the plaintiff's
leaving a balance of $58,673 pursuant to the settlement, which is technically in
default.
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The note holders retain a security interest in various collateral of the
Company until the amounts due under the promissory notes and settlement
agreements are paid. The Company made a payment of $5,000 toward the settlement
in September, 1994 and is continuing negotiations with the note holders.
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ALCHEMY MANAGEMENT
The following table sets forth certain information concerning directors
and executive officers of Alchemy as of the date hereof. Officers and Directors
are elected on an annual basis.
The present term for each Director will expire at the next annual meeting
of shareholders or at such time as his successors is duly elected. Executive
officers are elected annually and except to the extent governed by employment
contracts, serve at the discretion of the Board of Directors.
NAME POSITIONS(S) AGE
---- ------------ ---
Craig Barrie President/Director 48
Berton Lorow Vice President/Director 42
Adam Schild Secretary/Director 28
CRAIG BARRIE - PRESIDENT/DIRECTOR
Mr. Barrie has been a Director since August 1987 and President since
November 1990. Mr. Barrie founded Alchemy Holdings, Inc. (a Florida corporation)
F/K/A Hawk Marine Power, Inc. in February 1986 and has served as its Chairman of
the Board. Mr. Barrie was elected to the position of President of Cigarette
Racing Team, Inc., Miami, Florida during 1992. From 1985 to 1992, Mr. Barrie was
the Director of Sales of Cigarette. Between 1968 and 1985, Mr. Barrie was
employed by Faberge, Inc., a manufacturer and distributor of cosmetics and other
beauty products. He served in various executive capacities, including executive
vice president - advertising, and was a member of the Board of Directors of that
company. Mr. Barrie currently races powerboats for Cigarette which are powered
by Hawk engines.
BERTON LOROW - VICE PRESIDENT/DIRECTOR
Mr. Lorow has been employed by Alchemy or its predecessors since January
1984 in various technical capacities. He has been employed in the marine
industry since 1982, acquiring experience in boat building, rigging and engine
assembly. In may 1989, Mr. Lorow was elected Vice President of Alchemy, and in
November 1990 was elected a Director of Alchemy.
ADAM SCHILD - SECRETARY/DIRECTOR
Mr. Schild is Secretary and a Director of Alchemy and has held said
positions since 1997.
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From 1994 to 1997 Mr. Schild was a senior partner of a management consulting
firm specializing in crisis management and mergers and acquisitions. From 1987
to 1994 Mr. Schild was employed by a corporate communications company
specializing in Fortune 500 companies. Mr. Schild began his tenure in the
finance department and was promoted to Director of Finance.
Mr. Lorow is a full time employee of Alchemy. Mr. Barrie devotes
approximately 20 hours a week to Alchemy's operations. Mr. Schild devotes
approximately 10 hours a week to the Alchemy's operations. It is not anticipated
any Directors will receive an annual fee or other compensation for their duties.
Directors will be reimbursed for reasonable expenses incurred in connection with
their attendance at meetings.
EXECUTIVE COMPENSATION
Total cash compensation paid to all executive officers as a group for
services provided to Alchemy and its subsidiaries in all capacities during the
fiscal year ended September 30, 1997 aggregated $81,385. Set forth below is a
summary compensation table prepared in accordance with the applicable rules of
the Securities and Exchange Commission.
Summary Compensation Table
Annual Compensation Long Term Compensation
Name and Other Resid.
Principal Annual Stock All
Position Year Salary Bonus Compensa- LTIP Other
tion Awards Options Payouts
- --------------------------------------------------------------------------------
Craig 1997 $26,000 none none none none none
Barrie
1996 26,000 none none none none none
1995 26,200 none none none none none
Berton 1997 $55,385 none none none none none
Lorow
1996 33,385 none none none none none
1995 58,520 none none none none none
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Compensation Pursuant to Plans
In addition to the compensation previously described, Alchemy will create
a bonus pool equal to 15% of Alchemy's net income before taxes in excess of
$250,000 up to a maximum yearly bonus pool of $300,000. Each of the Alchemy's
executive officers and other key management personnel will be entitled to
participate in the bonus pool. Participating in the bonus pool and the
allocation of amounts thereunder will be determined at the sole discretion of
the Alchemy's Board of Directors. No bonus has been paid or accrued under this
plan to date.
CIGARETTE MANAGEMENT
The following table sets forth certain information concerning directors
and executive officers of Cigarette as of the date hereof. Officers and
Directors are elected on an annual basis.
The present term for each Director will expire at the next annual meeting
of shareholders or at such time as his successor is duly elected. Executive
officers are elected annually and except to the extent governed by employment
contracts, serve at the discretion of the Board of Directors.
NAME POSITIONS(S) AGE
---- ------------ ---
Craig Barrie President/Director 48
Adam Schild Secretary/Director 28
CRAIG BARRIE - PRESIDENT/DIRECTOR
Mr. Barrie has been a Director and President since its inception. Since
1985, Mr. Barrie has been President of Alchemy, f/k/a Hawk Marine Power, Inc.
From 1985 to 1992, Mr. Barrie also served as Vice President of Sales and
Marketing for Cigarette. From 1971 to 1984, Mr. Barrie was an Executive Vice
President of Sales and Marketing for Faberge, Inc.
ADAM SCHILD - SECRETARY/DIRECTOR
Mr. Schild serves as the Secretary and Director of Cigarette, offices he
has held since 1997. From 1994 to 1997, Mr. Schild was a Senior Partner of a
management consulting firm specializing in crises management and mergers and
acquisitions. From 1987 to 1994, Mr. Schild was employed by a corporate
communications company specializing in Fortune 500 companies. Mr. Schild began
his tenure in the finance department and was promoted to Director of Finance.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Cigarette had sales to Cigarette Racing Team, Inc. of $176,197,
representing 17% of total sales for the year. Mr. Craig Barrie is Cigarette's
President.
In October 1988, in conjunction with the private placement of units of the
Company's securities, an aggregate of $405,000 principal amount of its 11%
secured promissory notes due November 1, 1991 and 575,000 shares of Common Stock
of Cigarette were issued to the participants. In January 1992, certain of the
aforementioned noteholders filed a lawsuit against Cigarette which requested
repayment of such promissory notes together with interest and attorney's fees.
On April 16, 1992, Cigarette agreed to enter into settlement agreements
with these noteholders pursuant to which the participants who accepted the terms
of settlement agreement would receive a cash payment from Cigarette and Mr.
Craig Barrie (Cigarette's, President / Director and a principal shareholder of
the Company) equal to 86% of their entire investment. Pending consummation of
such settlement, further pleadings in such lawsuit have been held in abeyance.
An amount equal to 68% of the original investment was paid at the item each
settlement agreement was executed. The remaining 18% was due August 15, 1992.
Due to insufficient cash flow, Cigarette was unable to make the August 15
installment pursuant to the settlement. Partial payments were made to the
plaintiffs in October 1992 and September 1994 for $9,026 and $5,000,
respectively, leaving a balance due of $53,673. The noteholders retain a
security interest in various collateral of Cigarette until the amounts due under
the promissory notes and settlement agreements are paid. Cigarette, subsequent
to year end, has reached an agreement with said note holders for retirement of
such promissory notes for the sum of $50,000.
Consummation of the debt retirement is expected to take place in
Cigarette's second fiscal quarter of 1998.
As part of Hawk Marine Power, Inc.'s ("Hawk") product development and
testing, and advertising and promotion programs, Cigarette has previously paid
for certain parts and provided labor for the Hawk engines in Mr. Barrie's
offshore racing boat. Commencing October 1, 1988, Mr. Barrie agreed to reimburse
Cigarette for such expenses, and they have been repaid in full. Under the terms
of Mr. Barrie's Employment Agreement, at such time as Hawk allocates funds to
sponsor offshore powerboat racing, Hawk will provide certain parts and labor for
Hawk engines for use by Mr. Barrie without reimbursement. Such expenses are not
expected to exceed $50,000 in any fiscal year.
Lastly, Alchemy's Board and Cigarette's Board are comprised of the same
individuals. Therefore, any transaction between Cigarette and Alchemy must be
scrutinized closely by any interested party.
53
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth the number of shares Cigarette's common
stock beneficially owned by each officer and director of Cigarette and each
shareholder who holds more than 5% of the outstanding common stock of the
Company. Unless specifically indicated otherwise, all such ownership interest
are direct.
Title of Class Name and Address of Amount and Percent of class
Beneficial Owner Nature of
Beneficial Owner
Common Stock Craig Barrie (1)(2) 15,378 .7%
3025 NE 188th St.
North Miami, Florida
33180
Berton Lorow (1)(3) 153 __
3025 NE 188th Street
North Miami, Florida
33180
Offshore Racing, Inc. 2,000,000 89.4
3025 NE 188th Street
North Miami, Florida
33180
Alcott Simpson & Co. 200,000 8.9
Inc.
1 Lady Janes Way
Northport, N.Y.
11768
Gerald Jospehson
Cloister Drive
Box N732
Paradise Island,
Nassau, Bahamas 2,883 .1
(1) Does not include shares of Cigarette Common Stock issuable pursuant to
Cigarette's Incentive Stock Option Plan.
(2) Mr. Barrie is President and a Director of Cigarette. Does not include
options to purchase 938 shares of Cigarette's Common Stock.
54
<PAGE>
(3) Does not include options to purchase 625 shares of Cigarette's Common
Stock.
55
<PAGE>
CIGARETTE RACING TEAM, INC. AND
ALCHEMY HOLDINGS, INC.
COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(UNAUDITED)
F-1
<PAGE>
CIGARETTE RACING TEAM, INC. AND ALCHEMY HOLDINGS, INC.
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
Accountant's Report 3
Combined Balance Sheet 4-5
Combined Statement of Operations 6
Combined Statement of Cash Flows 7
F-2
<PAGE>
[LETTERHEAD JERE J. LANE]
ACCOUNTANT'S COMPILATION REPORT
To the Boards of Directors and Stockholders of
Cigarette Racing Team, Inc. and Alchemy Holdings, Inc.
Aventura, FL.
I have compiled the accompanying combined balance sheet of Cigarette Racing
Team, Inc. and Alchemy Holdings, Inc. as of December 31, 1997, and the related
combined statements of operations and cash flows for the three months then
ended, in accordance with Statements on Standards for Accounting and Review
Services issued by the American Institute of Certified Public Accountants.
A compilation is limited to presenting in the form of financial statements
information that is the representation of management. I have not audited or
reviewed the accompanying financial statements and, accordingly, do not express
an opinion or any other form of assurance on them.
Management has elected to omit substantially all of the disclosures required by
generally accepted accounting principles. If the omitted disclosures were
included in the financial statements, they might influence the user's
conclusions about the company's financial position, results of operations, and
cash flows. Accordingly, these financial statements are not designed for those
who are not informed about such matters.
/s/ Jere J. Lane
March 20, 1998
Coral Springs, Florida
F-3
<PAGE>
CIGARETTE RACING TEAM, INC. AND ALCHEMY HOLDINGS, INC.
COMBINED BALANCE SHEET
DECEMBER 31, 1997
(UNAUDITED)
ASSETS
CIGARETTE ALCHEMY TOTAL
---------- ---------- ----------
CURRENT ASSETS:
Cash $ 61,245 $ 21,530 $ 82,775
Accounts Receivable 54,078 54,078
Inventory 807,387 165,994 973,381
Prepaid Expenses 123,760 1,943 125,703
---------- ---------- ----------
TOTAL CURRENT ASSETS 992,392 243,545 1,235,937
---------- ---------- ----------
PROPERTY AND EQUIPMENT 365,353 20,489 385,842
---------- ---------- ----------
OTHER ASSETS:
Costs in Excess of Fair
Value of Net Assets of
Business Acquired 4,579,342 4,579,342
Trademark 277,045 277,045
Deposits 10,000 10,000
---------- ---------- ----------
TOTAL OTHER ASSETS 4,866,387 4,866,387
---------- ---------- ----------
TOTAL ASSETS $6,224,132 $ 264,034 $6,488,166
========== ========== ==========
F-4
<PAGE>
CIGARETTE RACING TEAM, INC. AND ALCHEMY HOLDINGS, INC.
COMBINED BALANCE SHEET (CONTINUED)
DECEMBER 31, 1997
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
CIGARETTE ALCHEMY TOTAL
----------- ----------- -----------
CURRENT LIABILITIES:
Note Payable to Seller $ 3,280,000 $ $ 3,280,000
Loans Payable 983,463 176,548 1,160,011
Accounts Payable 1,038,958 59,982 1,098,940
Accrued Expenses 2,618,993 25,498 2,644,491
Customer Deposits 247,985 51,725 299,710
Stockholder Loans 856,429 856,429
----------- ----------- -----------
TOTAL LIABILITIES 9,025,828 313,753 9,339,581
----------- ----------- -----------
STOCKHOLDERS' EQUITY:
Preferred Stock 1,166,667 1,166,667
Common Stock 36,010 2,237 38,247
Additional Paid In Capital 2,733,990 1,606,998 4,340,988
Accumulated Deficit (6,738,363) (1,658,954) (8,397,317)
----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY (2,801,696) (49,719) (2,851,415)
----------- ----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $ 6,224,132 $ 264,034 $ 6,488,166
=========== =========== ===========
F-5
<PAGE>
CIGARETTE RACING TEAM, INC. AND ALCHEMY HOLDINGS, INC.
COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1997
(UNAUDITED)
CIGARETTE ALCHEMY TOTAL
----------- ----------- -----------
NET SALES $ 953,890 $ 206,402 $ 1,160,292
Cost of Sales 786,839 200,332 987,171
----------- ----------- -----------
GROSS MARGIN 167,051 6,070 173,121
Selling, General and
Administrative Expenses 491,626 27,219 518,845
Interest Expense 96,476 96,476
----------- ----------- -----------
OPERATING LOSS (421,051) (21,149) (442,200)
Other Income 400,000 400,000
----------- ----------- -----------
NET LOSS $ (21,051) $ (21,149) $ (42,200)
=========== =========== ===========
F-6
<PAGE>
CIGARETTE RACING TEAM, INC. AND ALCHEMY HOLDINGS, INC.
COMBINED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
CIGARETTE ALCHEMY TOTAL
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (21,051) $ (21,149) $ (42,200)
Adjustments to Reconcile Net Loss
to Net Cash Used by Operating Activities:
Depreciation and Amortization 155,150 476 155,626
(Increase) in Accounts Receivable (147) (147)
(Increase) in Inventory (409,219) (409,219)
(Increase) Decrease in Prepaid Expenses (53,798) 1,920 (51,878)
(Decrease) in Accounts Payable (239,946) (3,658) (243,604)
(Decrease) in Accrued Expenses (171,372) (5,040) (176,412)
Increase in Customer Deposits 42,985 42,985
----------- ----------- -----------
Net Cash Used by Operating Activities (697,251) (27,598) (724,849)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures (9,041) (9,041)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (Decrease) in Loans Payable (353,704) 4,375 (349,329)
Proceeds from Stock Transactions 1,087,500 1,087,500
----------- ----------- -----------
Net Cash Provided by Financing Activities 733,796 4,375 738,171
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 27,504 (23,223) 4,281
CASH AT OCTOBER 1, 1997 33,741 44,753 78,494
----------- ----------- -----------
CASH AT DECEMBER 31, 1997 $ 61,245 $ 21,530 $ 82,775
=========== =========== ===========
Supplemental Cash Flow Information:
Cash Paid During the Period for Interest $ 18,526 $ 18,526
=========== ===========
</TABLE>
F-7
<PAGE>
ALCHEMY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
F-8
<PAGE>
ALCHEMY HOLDINGS, INC. AND SUBSIDIARIES
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
----
Auditor's Report 3
Consolidated Balance Sheet 4
Consolidated Statement of Operations 5
Consolidated Statement of Cash Flows 6
Consolidated Statement of Changes in Stockholders' Equity 7
Notes to Consolidated Financial Statements 8 - 14
F-9
<PAGE>
[Letterhead of Jere J. Lane]
To the Board of Directors and Stockholder's
Alchemy Holdings, Inc. and Subsidiaries
3025 N.E. 188 Street
Aventura, Florida 33180
I have audited the accompanying consolidated balance sheet of Alchemy Holdings,
Inc. (F/K/A Hawk Marine Power, Inc.) and Subsidiaries (the Company) as of
September 30, 1997 and 1996, and the related consolidated statements of
operations, cash flows and stockholder's equity for the years then ended. These
financial statements are the responsibility of the Company's management. My
responsibility is to express an opinion of these financial statements based on
my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatements. 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.
I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Alchemy Holdings, Inc. (F/K/A Hawk
Marine Power, Inc.) and Subsidiaries as of September 30, 1997 and 1996 and the
results of its operations, changes in cash flows and stockholder's equity for
the year then ended in conformity with generally accepted accounting principals.
As discussed in Note 9 to the consolidated financial statements, a significant
part of the Company's business is dependent upon one customer, and the loss of
that customer could have a materially adverse effect on the Company. There are
no formal contracts to continue business with this customer.
The consolidated financial statements have been prepared assuming the company
will continue as a going concern. As discussed in Note 3 to the consolidated
financial statements, the liquidity of the Company has been adversely affected
by losses from operations and the Company is past due on its obligations to
certain note holders pursuant to a settlement agreement dated April 16, 1992
(see Note 6). All of the foregoing raises substantial doubt about the Company's
ability to continue as a going concern. Management's plans concerning these
matters are described in Note 3. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
/s/ Jere J. Lane
Jere J. Lane, C.P.A.
January 15, 1998
F-10
<PAGE>
ALCHEMY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997 AND 1996
1997 1996
----------- -----------
ASSETS
CURRENT ASSETS:
Cash $ 44,753 $ 85,737
Accounts Receivable 53,931 8,321
Inventory 165,994 247,610
Prepaid Expenses 1,810 2,968
----------- -----------
Total Current Assets 266,488 344,636
PROPERTY AND EQUIPMENT 20,965 22,874
OTHER ASSETS:
Licenses 2,053 --
----------- -----------
TOTAL ASSETS $ 289,506 $ 367,510
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable $ 63,640 $ 83,169
Accrued Expenses 30,538 26,989
Customer Deposits 51,725 121,700
Notes Payable 172,173 101,173
----------- -----------
Total Current Liabilities 318,076 333,031
----------- -----------
TOTAL LIABILITIES 318,076 333,031
----------- -----------
STOCKHOLDERS' EQUITY:
Common Stock 2,237 2,990
Additional Paid-In Capital 1,606,998 1,604,045
Accumulated Deficit (1,637,805) (1,572,556)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY (28,570) 34,479
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 289,506 $ 367,510
=========== ===========
The accompanying notes are an integral part of
the consolidated financial statements
F-11
<PAGE>
ALCHEMY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996
1997 1996
----------- ------------
NET SALES $ 1,059,498 $ 1,003,446
Cost of Sales 901,725 845,958
----------- -----------
GROSS MARGIN 157,773 157,488
Selling, General and 223,022 409,707
Administrative Expenses
Interest Income -- 178
----------- -----------
NET (LOSS) $ (65,249) $ (252,041)
=========== ===========
Net Loss Per Share $ (0.024) $ (6.743)
=========== ==========
Weighted Average Number of Common
Shares Outstanding 2,697,320 37,377
=========== ===========
The accompanying notes are an integral part of
the consolidated financial statements
F-12
<PAGE>
ALCHEMY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996
1997 1996
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss) $ (65,249) $(252,041)
Adjustments to Reconcile Net Loss
to Net Cash Used by Operating Activities:
Depreciation and Amortization 2,056 7,509
(Decrease) in Provision for Bad Debts (2,046) (1,162)
(Increase) Decrease in Accounts Receivable (43,564) 159,855
Decrease in Inventory 81,616 48,105
Decrease in Prepaid Expenses 1,158 1,172
Decrease in Purchase Deposits 38,525
Decrease in Other Current Assets 3,519
Increase (Decrease) in Accounts Payable (19,529) 14,177
Increase (Decrease) in Accrued Expenses 3,549 (8,297)
(Decrease) in Customer Deposits (69,975) (14,356)
--------- ---------
Net Cash Used by Operating Activities (111,984) (2,994)
CASH UTILIZED FOR INVESTING ACTIVITIES:
Purchase of Equipment (282)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in Notes Payable 71,000
--------- ---------
NET INCREASE (DECREASE) IN CASH (40,984) (3,276)
CASH AT BEGINNING OF YEAR 85,737 89,013
--------- ---------
CASH AT END OF YEAR $ 44,753 $ 85,737
========= =========
The accompanying notes are an integral part of
the consolidated financial statements
F-13
<PAGE>
ALCHEMY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
Common Stock
$.001 Par Value Additional Total
------------------------ Paid-In Accumulated Stockholders'
Shares Amount Capital Deficit Equity
--------- --------- --------- ---------- --------
<S> <C> <C> <C> <C> <C>
BALANCES AT OCTOBER 1, 1995 2,990,198 $ 2,990 $ 1,604,045 $(1,320,515) $ 286,520
Net (Loss) for the Year Ended
September 30, 1996 (252,041) (252,041)
--------- --------- --------- ---------- --------
BALANCES AT SEPTEMBER 30, 1996 2,990,198 2,990 1,604,045 (1,572,556) 34,479
Net (Loss) for the Year Ended
September 30, 1997 (65,249) (65,249)
Effective Change in Common Stock
in Connection with Stock Split (2,952,821) (2,953) 2,953
Private Placement of Common Stock 2,200,000 2,200 2,200
--------- --------- --------- ---------- --------
BALANCES AT SEPTEMBER 30, 1997 2,237,377 $ 2,237 $ 1,606,998 $(1,637,805) $ (28,570)
========= ========= =========== =========== ==========
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements
F-14
<PAGE>
ALCHEMY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION
Alchemy Holdings, Inc. (the Company) is engaged in managing the business affairs
of its subsidiaries. Hawk Marine Power, Inc. (HMP), a subsidiary of the Company,
is engaged in the design, production and sale of high performance marine engines
for installation in high speed recreational powerboats and offshore racing
boats. HMP engines are custom designed and hand built from component parts and
sold primarily to premium boat manufacturers. Cigarette Licensing, Inc. (CRI),
another subsidiary of the Company is engaged in the world-wide licensing of
trademarks and service marks.
During the fiscal year ended September 30, 1997 the Company adopted a proposal
to amend the Articles of Incorporation of the Company and change the name of the
Company from Hawk Marine Power, Inc. to Alchemy Holdings, Inc. Subsequent to the
change of the Company's name from Hawk Marine Power, Inc. to Alchemy Holdings,
Inc., the Company formed a new corporation under the laws of the State of
Delaware, a wholly owned subsidiary of the Company known as "Hawk Marine Power,
Inc." to operate its high performance engine manufacturing business.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Alchemy Holdings,
Inc. and its subsidiaries. All intercompany accounts and transactions have been
eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of ninety days or less to be the equivalent of cash for financial
statement purposes.
Inventory
Inventory consists of merchandise held for sale and includes finished goods as
well as work-in-process and is valued at lower of cost (first-in, first-out) or
market.
Property and Equipment
Property and Equipment are stated at cost. Depreciation is calculated on the
various asset classes over their estimated useful lives, which range from five
to ten years, except leasehold improvements which are depreciated over their
lease term. Expenditures for maintenance and repairs are charged against
operations as incurred.
Warranties
The Company's products are generally under warranty against defects in material
and workmanship for a period of ninety days to one year from date of sale. The
Company has established an accrual for these anticipated future warranty costs.
F-15
<PAGE>
ALCHEMY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net Loss Per Share
Net Loss Per Share is calculated by dividing the net loss by the weighted
average number of common shares outstanding during the period, as well as common
stock equivalents.
Income Taxes
The Company accounts for income taxes pursuant to Statement of Financial
Accounting Standards No. 109. Under such standard, deferred taxes are computed
based on the tax liability or benefit in future years of the reversal of
temporary differences in the recognition of income or deduction of expenses
between financial and tax reporting purposes. The principal item resulting in
the difference is depreciation. The net difference, if any, between the
provision for taxes and taxes currently payable is reflected in the balance
sheet as deferred income taxes. Deferred tax assets and/or liabilities are
classified as current or noncurrent based on the classification of the related
asset or liability for financial reporting purposes, or on the expected reversal
date for deferred taxes that are not related to an asset or liability. A
valuation allowance is provided for deferred tax assets that do not meet a "more
likely than not" criterion. The Company accounts for income taxes under the
liability method in accordance with Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes. Deferred income taxes are determined based
upon the difference between the financial statement carrying amount and the tax
basis of assets and liabilities using tax rates expected to be in effect in the
years in which the differences are expected to reverse.
Revenue and Cost Recognition
Sales and the associated Cost of Sales are recognized upon delivery of finished
goods to the customer. Service revenue is recognized when the service is
performed.
Financial Instruments and Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentrations of
credit risk are primarily cash and temporary investments and accounts
receivable. The Company invests its excess cash in both deposits and high
quality short-term liquid money market instruments with major financial
institutions and the carrying value approximates market value. The Company has
not incurred losses related to these investments.
Major Customer
For the years ended September 30, 1997 and 1996, one customer accounted for 17%
and 24% of total sales. (See Note 9.)
Use of Estimates
Management of the Company uses estimates and assumptions in preparing financial
statements in accordance with generally accepted accounting principles. Those
estimates and assumptions affect the reported amounts of assets and liabilities
as well as revenues and expenses. Actual results could vary from the estimates
that management has utilized.
F-16
<PAGE>
ALCHEMY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - BASIS OF PRESENTATION AND CONTINUED EXISTENCE
The Company's consolidated financial statements have been presented on the basis
that it is a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company
reported a net loss of $65,249 for the year ended September 30, 1997, and
cumulative losses since inception of $1,637,805. In addition, the Company's has
a working capital deficit as of September 30, 1997. As a result of the losses
and debt service requirements borrowing requirements have increased, and
financial position has been significantly impaired. The Company is past due on
its obligations to certain note holders pursuant to a settlement agreement dated
April 16, 1994. The Company's ability to continue operations is dependent upon
its ability to reach a satisfactory level of profitability and to obtain
suitable, sufficient financing or the restructuring of existing obligations. The
accompanying financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
The Company's continued existence as a going concern is substantially dependent
on achieving its 1998 operating plans which include the following:
The Company commenced cost-savings measures and is otherwise seeking to improve
its cash flow. In this regard, the Company reduced factory and corporate
overhead by implementing payroll efficiencies and reduced rent costs upon
expiration of the operating lease. The Company has plans to reduce other
operating and overhead costs, including, but not limited to reduction in
production costs (direct labor and raw materials) through increased labor and
purchasing efficiencies.
The Company has obtained deposits from customers in connection with firm
purchase orders which it believes will further help finance operating costs.
NOTE 4 - INVENTORY
Inventory consists of the following:
September 30,
1997 1996
---- ----
Parts and Accessories $ 94,700 $130,411
Work-In-Process 71,294 117,199
-------- -------
Total Inventory $165,994 $247,610
======== ========
F-17
<PAGE>
ALCHEMY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
September 30,
1997 1996
---------- ----------
Office Furniture and Equipment $ 40,193 $ 40,193
Shop Equipment 166,026 166,026
Leasehold Improvements 28,521 28,521
---------- ----------
234,740 234,740
Less: Accumulated Depreciation 213,775 211,866
---------- ----------
Total Property and Equipment $ 20,965 $ 22,874
========== ==========
Depreciation expense was $1,909 and $7,509 for the years ended September 30,
1997 and 1996, respectively.
NOTE 6 - NOTES PAYABLE
The Company is delinquent on a Note Payable in the amount of $101,173 originally
due November 1, 1991, collateralized by all of the Company's assets, and
accruing interest at 11%. The note is currently being renegotiated and
management expects a favorable settlement during the second fiscal quarter of
1998. Additionally, the Company has a new demand Note Payable for $65,000 that
accrues interest at two points over the Chase Manhattan Bank prime rate.
Finally, the Company has a Loan Payable with an officer in the amount of $6,000.
NOTE 7 - CONTINGENT LIABILITIES
In April 1991, the Company was named in a lawsuit arising from the sale of two
engines. In Mark Donato, et al v. Highway Service Connecticut, Inc. d/b/a Ocean
Performance, Hawk Marine Power, and Cigarette Racing Team, Inc. (Case No.
91-2528), a suit filed the Superior Court Department of the Trial Court Civil
Action in the Commonwealth of Massachusetts, the plaintiff is seeking damages in
connection with alleged breach of contract, breach of express warranty, breach
of implied warranty, negligence, revocation of acceptance and breach of a
written agreement of compromise and settlement. The lawsuit pertains to the sale
of a Cigarette powerboat equipped with two Hawk engines purchased by the
plaintiffs in 1989. The plaintiffs contend the boat's engines were defective and
did not operate properly. The Company intends to vigorously contest the
complaint. Based upon information presently available to the Company, management
believes the outcome of this litigation will not have a material adverse effect
on the consolidated financial position of the Company.
In January 1992, The Company was named as a defendant in a lawsuit by certain
note holders (which represents $27,080 of the outstanding balance) of the
Company who had participated in the Company's private financing undertaken in
September 1988. In Petrocelli Electric Company, Inc., et al v. Hawk Marine
Power, Inc. (Case No. 92-00240), a suit filed in the 11th Judicial Circuit for
Dade County, Florida,
F-18
<PAGE>
ALCHEMY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the plaintiffs are requesting repayment of such promissory notes together with
interest and attorneys' fees. Effective April 16, 1992, the Company entered into
settlement agreements and made initial payments to these plaintiffs. In October
1992 a second payment of $9,027 was made towards effecting this settlement. A
third payment of $5,000 was made in September 1995. The note holders retain a
security interest in various collateral of the Company until the amounts due per
the settlement agreements and notes payable are paid.
NOTE 8 - COMMITMENTS
Lease Commitments
The Company leases its facilities in Aventura, Florida pursuant to an operating
lease. As of September 30, 1997 the Company is paying rent on a month-to-month
basis. Rent expense, excluding common overhead, for the years ended September
30, 1997 and 1996 amounted to $94,800 and $94,800 respectively.
Compensation Plans
a. An agreement with an officer provides for compensation of $25,000 per year
for three years and incentive compensation equal to 1.5% of sales
generated by the officer. The agreement automatically renews on a year to
year basis unless written notice of termination is delivered by either
party to the other no later than thirty days prior to any renewal term.
The agreement was renewed for the year ended September 30, 1997.
b. The Company has created a management bonus pool for key management
personnel equal to 15% of the income in excess of $250,000 up to a maximum
yearly bonus of $300,000.
c. 1988 Incentive Stock Option Plan - In August 1988, the Company adopted the
1988 Incentive Stock Option Plan (the "Plan") under which 100,000
pre-reverse split shares of common stock have been reserved for issuance
to employees of the Company upon exercise of options designated as
"Incentive Stock Options" within the meaning of Section 422A of the
Internal Revenue Code of 1986. The exercise price of any stock option
granted under the Plan to an eligible employee must be equal to the fair
market value of the shares on the date of grant and, with respect to
persons owning more than 10% of the outstanding common stock, the exercise
price may not be less than 110% of the fair market value of the shares
underlying such option on the date of grant. The Board will determine the
term of each option and the manner in which it may be exercised provided
that no option may be exercisable more that ten (10) years after the date
of grant except for optionees who own more than 10% of the Company's
common stock, in which case the option may not be for more than five (5)
years. Further, a director of the Company will not be eligible to receive
benefits unless such director is also an employee of the Company.
The Company has not awarded any options to date under the Plan.
d. Non-statutory Employee Stock Option Program - On May 1, 1991, the Company
adopted a non-statutory employee stock option program. The plan provides
for the allocation of 295,000 pre-reverse split options, all of which are
issued, each exercisable for a five year period for one share of common
stock. The options are exercisable at $0.20 per share and expired April
30, 1996. As of September 30, 1997, no options were exercised.
F-19
<PAGE>
ALCHEMY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - MAJOR CUSTOMER AND RELATED PARTY TRANSACTIONS
Of the Company's total sales for the years ended September 30, 1997, and 1996,
$176,197 and $242,332 or 17% and 24%, respectively , were with one customer,
Cigarette Racing Team, Inc. A principal shareholder and President of the Company
is also an officer and employee of this customer.
NOTE 10 - CAPITAL STOCK TRANSACTIONS
Stock Split
On May 12, 1997 the Board of Directors approved a 1 for 80 reverse stock split
of the Company's common stock. The weighted average number of shares outstanding
for net loss per share calculations for the fiscal year ended September 30, 1996
have been retroactively adjusted for the split.
Private Placements
The Company issued 2,000,000 post-split restricted shares of the Company's
common stock to Offshore Racing, Inc., in exchange for the Company's exclusive
world-wide right and license to use the trademarks, and service marks of
"Cigarette Racing Team, Inc.", for all goods and services other than the use of
the trademarks and service marks on any form of watercraft. In conjunction with
the purchasing of the licensing agreement, the Company formed a corporation
under the laws of the State of Delaware, organized as a wholly owned subsidiary
of the Company known as "Cigarette Licensing, Inc." to operate the Company's
licensing business.
Lastly, the Company issued 200,000 post-split shares of the Company's common
stock to the professionals responsible for the professional services related to
and for negotiating, arranging and brokering the licensing and other related
transactions described herein on behalf of the Company.
NOTE 11 - INCOME TAXES
Income taxes are computed at statutory rates on pretax income. Deferred taxes
would be recorded based on differences in financial statements and taxable
income. To date, the Company has incurred tax operating losses and therefore,
has generated no income tax liabilities. As of September 30, 1997, the Company
has generated net operating loss carry forwards totaling approximately
$1,556,210 which are available to offset future taxable income through 2012. As
utilization of such an operating loss for tax purposes is not assured, the
deferred tax asset has been fully reserved through the recording of a 100%
valuation allowance.
The components of the net deferred tax as of September 30, 1997 are as follows:
Net Operating Loss Carryforward $ 529,111
Investment Credit 7,712
----------
536,823
Valuation Allowance (536,823)
----------
Net Deferred Tax $ -
==========
F-20
<PAGE>
ALCHEMY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net operating loss carry forwards are scheduled to expire as follows:
Expiration Date Amount
--------------- ------
September 30, 2003 $ 80,900
September 30, 2004 20,300
September 30, 2005 357,400
September 30, 2006 333,000
September 30, 2007 259,500
September 30, 2008 179,000
September 30, 2010 8,820
September 30, 2011 252,041
September 30, 2012 65,249
------------
Total $ 1,556,210
============
The Company also has investment credit carry forwards of $7,712 which will
expire on September 30, 2001 if not utilized.
F-21
<PAGE>
CIGARETTE RACING TEAM, INC.
FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
F-22
<PAGE>
CIGARETTE RACING TEAM
MARCH 31, 1998
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
----
Accountant's Compilation Report 3
Balance Sheet 4 - 5
Statement of Operations 6
Statement of Cash Flows 7
Notes to Financial Statements 8 - 12
F-23
<PAGE>
[Letterhead of Jere J. Lane]
ACCOUNTANT'S COMPILATION REPORT
To the Board of Directors and Stockholders of
Cigarette Racing Team, Inc.
Aventura, Florida
I have compiled the accompanying balance sheet of Cigarette Racing Team, Inc. as
of March 31, 1998, and the related statements of operations and cash flows for
the three and six months then ended, in accordance with Statements on Standards
for Accounting and Review Services issued by the American Institute of Certified
Public Accountants.
A compilation is limited to presenting in the form of financial statements
information that is the representation of management. I have not audited or
reviewed the accompanying financial statements and, accordingly, do not express
an opinion or any other form of assurance on them.
The financial statements have been prepared assuming that the Company will
continue as a going concern. As discussed in the notes to the financial
statements, the Company has suffered recurring losses from operations and has a
net capital deficiency that raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in the notes. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
April 28, 1998
Coral Springs, Florida
F-24
<PAGE>
CIGARETTE RACING TEAM, INC.
BALANCE SHEET
MARCH 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash $ 369,968
Inventory 980,601
Prepaid Expenses 67,203
----------
TOTAL CURRENT ASSETS $1,417,772
PROPERTY AND EQUIPMENT, Net of Accumulated
Depreciation of $733,911 320,529
OTHER ASSETS:
Costs in Excess of Fair Value of Net Assets of Business
Acquired, Net of Accumulated Amortization of $1,537,590 4,479,064
Trademark, Net of Accumulated Amortization of $93,019 270,979
Deposits 10,000
----------
TOTAL OTHER ASSETS 4,760,043
----------
TOTAL ASSETS $6,498,344
==========
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements
F-25
<PAGE>
CIGARETTE RACING TEAM, INC.
BALANCE SHEET (CONTINUED)
MARCH 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
<S> <C> <C>
Note Payable to Seller $ 3,280,000
Loans Payable 1,120,393
Accounts Payable 1,398,351
Accrued Expenses 2,154,888
Customer Deposits 818,070
Stockholder Loans 856,429
-----------
TOTAL LIABILITIES $ 9,628,131
STOCKHOLDERS' EQUITY:
Preferred Stock, Series A, Cumulative, No Par Value, 1,000
Shares Authorized, 100 Shares Issued and Outstanding,
Including Cumulative Dividends of $166,667 1,166,667
Common Stock, $.01 Par Value, 10,000,000 Shares Authorized,
3,601,000 Shares Issued and Outstanding 36,010
Additional Paid-In Capital 2,733,990
Accumulated Deficit (7,066,454)
-----------
TOTAL STOCKHOLDERS' EQUITY (3,129,787)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,498,344
===========
The accompanying notes are an integral part of
the consolidated financial statements
</TABLE>
F-26
<PAGE>
CIGARETTE RACING TEAM, INC.
STATEMENT OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
Three Six
Months Ended Months Ended
March 31 March 31
----------- -----------
NET SALES $ 1,629,568 $ 2,583,458
Cost of Sales 1,403,120 2,189,959
----------- -----------
GROSS MARGIN 226,448 393,499
Selling, General and Administrative Expenses 428,040 919,666
Interest Expense 126,499 222,975
----------- -----------
OPERATING LOSS (328,091) (749,142)
Other Income -- 400,000
----------- -----------
NET LOSS $ (328,091) $ (349,142)
=========== ===========
The accompanying notes are an integral part of
the consolidated financial statements
F-27
<PAGE>
CIGARETTE RACING TEAM, INC.
STATEMENT OF CASH FLOWS
FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
Three Six
Months Ended Months Ended
March 31 March 31
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (328,091) $ (349,142)
Adjustments to Reconcile Net Loss
to Net Cash Used by Operating Activities:
Depreciation and Amortization 155,468 310,618
(Increase) in Inventory (173,214) (582,433)
Decrease in Prepaid Expenses 56,557 2,759
Increase in Accounts Payable 359,393 119,447
(Decrease) in Accrued Expenses (464,105) (635,477)
Increase in Customer Deposits 570,085 613,070
----------- -----------
Net Cash Used by Operating Activities 176,093 (521,158)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures (4,300) (13,341)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (Decrease) in Loans Payable 136,930 (216,774)
Proceeds from Stock Transactions 1,087,500
----------- -----------
Net Cash Provided by Financing Activities 136,930 870,726
----------- -----------
NET INCREASE IN CASH 308,723 336,227
CASH AT BEGINNING OF PERIOD 61,245 33,741
----------- -----------
CASH AT END OF PERIOD $ 369,968 $ 369,968
=========== ===========
Supplemental Cash Flow Information:
Cash Paid During the Period for Interest $ 26,149 $ 44,675
=========== ===========
The accompanying notes are an integral part of
the consolidated financial statements
F-28
<PAGE>
CIGARETTE RACING TEAM, INC.
NOTES TO FINANCIAL STATEMENTS
Organization and Background
Cigarette Racing Team, Inc. (the Company) was incorporated in the State of
Florida on April 28, 1994 under the name, New CRT, Inc. The Company is engaged
in the design, production and sale of high performance recreational powerboats
and offshore racing boats. Such vessels are custom designed and hand built from
component parts and sold primarily to premium boat dealers.
On May 26, 1994, New CRT, Inc. entered into an asset purchase and contribution
agreement with the predecessor Cigarette Racing Team, Inc. (the Seller) whereby
the Company acquired substantially all of the net assets of the Seller used in
the business. In consideration for the purchase of certain assets including
accounts receivable, inventory, intangible assets and intellectual property, the
Company issued the Seller a promissory note in the amount of $3,600,000 and
assumed all of the liabilities and obligations of the Seller. In consideration
for the contribution of certain machinery, equipment, molds and other tangible
personal property having an estimated fair market value of approximately
$1,000,000, the Company issued 100 shares of series A, redeemable, no par value,
cumulative preferred stock. As a result of this transaction, the Company
recorded goodwill in the amount of $6,016,654, and incurred $128,056 of
expenses. In addition, as part of the agreement, the Company entered into a
lease with the Seller for the operating facilities used in the business. In June
1, 1994, the Company changed its name from New CRT, Inc. to Cigarette Racing
Team, Inc.
Basis of Presentation, continued Existence and Subsequent events
The Company's financial statements have been presented on the basis of a going
concern, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company incurred net losses of
$328,091 and $349,142 for the three and six months ended March 31, 1998,
respectively, and cumulative losses since inception of $7,066,454. At March 31,
1998, the Company has a net stockholder's equity deficiency of $3,129,787 and a
working capital deficit of $8,210,359. In addition, the Company was in arrears
on total indebtedness to the Seller of $4,985,804 including $3,280,000 of note
principal, $822,109 of accrued interest thereon and $883,695 of unpaid rent.
Such amounts do not include $1,166,667 of redeemable preferred stock and accrued
cumulative dividends. The Company's continuation as a going concern is dependent
upon its ability to control costs and attain a satisfactory level of
profitability, obtain suitable, sufficient financing or equity investment and
restructure its indebtedness to the seller. The Company has entered into
negotiation with the Seller to restructure the applicable debt. If such an
agreement is consummated, the Company would substantially reduce its outstanding
obligations to the Seller. The Company has reduced factory and corporate
overhead and has plans to reduce other operating and overhead costs, including,
but not limited to reduction in production costs (direct labor and raw
materials) through increased labor and purchasing efficiencies.
There is no assurance that the Company will be successful in these endeavors.
The accompanying financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
F-29
<PAGE>
CIGARETTE RACING TEAM, INC.
NOTES TO FINANCIAL STATEMENTS
Summary of Significant Accounting Policies
Cash - The Company considers all highly liquid debt instruments purchased with a
maturity of 90 days or less to be the equivalents of cash for financial
statements purposes.
Inventory - Inventory consists of raw materials, work-in-process and finished
goods which are valued at the lower of cost (first-in, first-out method) or
market.
Property and Equipment - Property and equipment are stated at cost. Depreciation
of the various classes of assets is provided on the straight-line method over
estimated useful lives us follows:
Molds and Tooling 5 years
Machinery and Equipment 5-7 years
Furniture and Fixtures 5 years
Costs In Excess Of Fair Market Value Of Net Assets Of Business Acquired
(Goodwill) - Goodwill arose in connection with the asset purchase and
contribution agreement discussed above which was accounted for as a purchase.
Amortization thereon is computed using the straight-line method over 15 years.
Statement of Financial Accounting Standards No 121, "Accounting for Long - Lived
Assets to Be Disposed of," established financial accounting and reporting
standards for long - lived assets and was effective for the Company's fiscal
year beginning October 1, 1996. Adoption of this standard did not have a
material effect on the Company's financial position or results of operations.
Trademark - Trademark is reflected at the estimated fair market value as of the
date of acquisition. Amortization thereon is computed using the straight-line
method over 15 years.
Warranties - The Company's products are generally under warranty against defects
in material and workmanship for a period of 90 days to one year from the date of
sale. An estimated warranty liability was established at the date of purchase,
as well as for subsequent balance sheet dates.
Sales Recognition - Sales and associated cost of sales of products are
recognized upon shipment to the customer. Service revenue is recognized when the
service is performed.
Income Taxes - The Company accounts for income taxes pursuant to Statement of
Financial Accounting Standards No. 109. Under such standard, deferred taxes are
computed based on the tax liability or benefits in future years of the reversal
of temporary differences in the recognition of income or deduction of expenses
between financial and tax reporting purposes. The principal items resulting in
the difference are depreciation and amortization and the net operating loss
carryforward. The net difference, if any, between the provision for taxes and
taxes currently payable is reflected in the balance sheet as deferred income
taxes. Deferred tax assets and/or liabilities are classified as current or non
current based on the classification of the related asset or liability for
financial reporting purposes, or on the expected reversal date for deferred
taxes that are not related to an asset or liability. A valuation allowance is
provided for deferred tax assets that do not meet a "more likely than not"
criterion.
F-30
<PAGE>
CIGARETTE RACING TEAM, INC.
NOTES TO FINANCIAL STATEMENTS
Use of Estimates - Management of the Company uses estimates and assumptions in
preparing financial statements in accordance with generally accepted accounting
principles. Those estimates and assumption affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities, and the
reported revenues and expenses. Actual results could vary from the estimates
that management uses.
Property and Equipment
Property and Equipment consists of the following as of September 30, 1997:
Molds and Tooling $ 750,000
Machinery and Equipment 239,040
Furniture and Fixtures 65,400
----------
Total Property and Equipment 1,054,440
Less: Accumulated Depreciation 733,911
----------
Property and Equipment $ 320,529
==========
Note Payable to Bank
In connection with the asset purchase and contribution agreement of May 26,
1994, the Company issued the Seller a promissory note in the amount of
$3,600,000. The note bears interest at the prime rate plus 1.75% and was to be
repayable in 12 monthly principal installments of $40,000, followed by 62
monthly principal installments of $50,000, with a final principal payment due on
September 3, 2001. This indebtedness is secured by substantially all assets of
the Company, as well as the Company's outstanding common stock. Under the terms
of the promissory note, the Company may not pay any dividends on, issue new
shares of, or redeem its common stock, merge into or consolidate with any other
entity, unless control of the new entity remains with the Company's founder,
make dispositions of its assets not in the ordinary course of business, pay
annual compensation to any one individual in excess of $150,000, or enter into
transactions with affiliates without the prior written consent of the note
holder.
The Company is in default of this obligation which has a principal balance
outstanding as of March 31, 1998 of $3,280,000. As such, this balance has been
reflected as a current liability in the accompanying balance sheet. In addition,
accrued interest payable on this loan totals $822,109 as of March 31, 1998. The
Seller has the right to impose a default interest rate of 5.75% over the prime
rate, but has not yet done so. The Company is also in arrears on $883,695 of
unpaid rent owed to the Seller. As discussed, the Company is in the process of
renegotiating its obligations to the Seller.
Loan Payable
In February 1997, the Company entered into a settlement agreement with a
supplier with respect to
F-31
<PAGE>
CIGARETTE RACING TEAM, INC.
NOTES TO FINANCIAL STATEMENTS
indebtedness which was assumed by the Company under the asset purchase and
contribution agreement. In connection therewith, the Company agreed to pay the
supplier $300,000 of the $350,000 of indebtedness outstanding as of the date of
the settlement, as well as $5,000 in legal fees. A first installment of $30,000
was paid at closing and the balance of the loan was to be repaid in nine monthly
installments of $30,000 beginning in February 1996. Interest on all unpaid
balance accrues at the prime rate. The Company is in default of this settlement
agreement, which has a balance outstanding as of March 31, 1998 totaling
$164,579.
Accrued Expenses
Accrued Expenses consist of the following as of March 31, 1998:
Rent $ 883,695
Interest 822,109
Property Taxes 253,062
Bonuses 67,971
Vacation Pay 64,611
Payroll 30,312
Warranty 20,913
Payroll Taxes 12,215
-----------
Total Accrued Expenses $ 2,154,888
===========
Redeemable Preferred Stock
In connection with the asset purchase and contribution agreement of May 26,
1994, the Company issued 100 shares of Series A, no par value, cumulative,
redeemable preferred stock in exchange for the contribution of certain
machinery, equipment, molds and other tangible7 personal property having an
estimated fair market value of $1,000,000. The preferred stock was accordingly
recorded at a stated value of $1,000,000.
The preferred stock bears a dividend rate of $500 per share per annum. Dividends
are payable quarterly unless the Company elects not to pay the dividend in which
event such dividend shall be cumulative and shall accrue (regardless of whether
declared) without interest. No dividend shall be declared or paid on the
Company's common stock unless all preferred stock dividends have been paid in
full. As of March 31, 1998 cumulative dividends accrued on preferred stock
totaled $166,667.
In the event of any involuntary liquidation, the amount to be paid to preferred
stockholders shall be $10,000 per share plus all cumulative dividends accrued.
F-32
<PAGE>
CIGARETTE RACING TEAM, INC.
NOTES TO FINANCIAL STATEMENTS
The preferred stock may be repurchased at any time at the option of the Company.
The holders of the preferred stock may require the Company to repurchase their
shares at such time as the Company has paid at least $3,500,000 of the principal
amount of the promissory note issued in connection with the asset purchase and
contribution agreement of May 26, 1994. The purchase price for the preferred
stock shall be $10,000 per share plus all dividends payable at the time of
repurchase.
Common Stock
Stock Split - On November 1, 1996 the Board of Directors approved a 1,000-for-1
split of the Company's common stock effective as of that date for stockholders
of record on November 1, 1996.
Private Placement of Common Stock - The Company raised $1,087,500 of capital by
issuing 625,000 shares of its $.01 par value common stock through a private
placement during the three months ended December 31, 1997. The additional
capital indicated herein does not include $162,500 of placement costs.
F-33
<PAGE>
CIGARETTE RACING TEAM, INC.
FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
F-34
<PAGE>
CIGARETTE RACING TEAM
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
Auditor's Report 3
Balance Sheet 4 - 5
Statement of Operations 6
Statement of Cash Flows 7
Statement of Changes in Stockholders' Equity 8
Notes to Financial Statements 9 - 14
F-35
<PAGE>
[Letterhead of Jere J. Lane]
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders' of
Cigarette Racing Team, Inc.
Aventura, FL.
I have audited the accompanying balance sheet of Cigarette Racing Team, Inc.
(the Company) as of September 30, 1997, and the related statements of
operations, cash flows and stockholders' equity for the year then ended. These
financial statements are the responsibility of the Company's management. My
responsibility is to express an opinion of these financial statements based on
my audit. The statements of operations, stockholders' equity and cash flows of
Cigarette Racing Team, Inc. for the year ended September 30, 1996 were audited
by other auditors whose report dated December 13, 1996 on those statements
included an explanatory paragraph that raised substantial doubt about the
Company's ability to continue as a going concern.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I 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. I
believe that my audit provides a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly in all
respects the financial position of Cigarette Racing Team, Inc. as of September
30, 1997 and the results of its operations and cash flows for the year then
ended in conformity with generally accepted accounting principles.
The financial statements have been prepared assuming that the Company will
continue as a going concern. As discussed in the notes to the financial
statements, the Company has suffered recurring losses from operations and has a
net capital deficiency that raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in the notes. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Jere J. Lane
January 15, 1998
Coral Springs, Florida
F-36
<PAGE>
CIGARETTE RACING TEAM, INC.
BALANCE SHEET
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash $ 33,741
Inventory 398,168
Prepaid Expenses 69,962
----------
TOTAL CURRENT ASSETS $ 501,871
PROPERTY AND EQUIPMENT, Net of Accumulated
Depreciation of $635,981 405,118
OTHER ASSETS:
Costs in Excess of Fair Value of Net Assets of Business
Acquired, Net of Accumulated Amortization of $1,337,035 4,679,619
Trademark, Net of Accumulated Amortization of $80,886 283,112
Deposits 10,000
----------
TOTAL OTHER ASSETS 4,972,731
----------
TOTAL ASSETS $5,879,720
==========
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements
F-37
<PAGE>
CIGARETTE RACING TEAM, INC.
BALANCE SHEET (CONTINUED)
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
<S> <C> <C>
Note Payable to Seller $ 3,280,000
Loans Payable 1,337,167
Accounts Payable 1,278,904
Accrued Expenses 2,790,365
Customer Deposits 205,000
Stockholder Loans 856,429
-----------
TOTAL LIABILITIES $ 9,747,865
STOCKHOLDERS' EQUITY:
Preferred Stock, Series A, Cumulative, No Par Value, 1,000
Shares Authorized, 100 Shares Issued and Outstanding,
Including Cumulative Dividends of $166,667 1,166,667
Common Stock, $.01 Par Value, 10,000,000 Shares Authorized,
2,976,000 Shares Issued and Outstanding 29,760
Additional Paid-In Capital 1,652,740
Accumulated Deficit (6,717,312)
-----------
TOTAL STOCKHOLDERS' EQUITY (3,868,145)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,879,720
===========
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements
F-38
<PAGE>
CIGARETTE RACING TEAM, INC.
STATEMENT OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996
1997 1996
----------- -----------
NET SALES $ 2,158,406 $ 5,010,125
Cost of Sales 3,403,644 4,561,714
----------- -----------
GROSS MARGIN (1,245,238) 448,411
Selling, General and Administrative Expenses 905,566 2,343,006
Interest Expense 365,764 419,732
----------- -----------
OPERATING LOSS (2,516,568) (2,314,327)
Other Income 39,921 285,960
----------- -----------
NET LOSS $(2,476,647) $(2,028,367)
=========== ===========
Net Income Per Share $ (0.88) $ (0.78)
=========== ===========
Weighted Average Number of Common
Shares Outstanding 2,819,562 2,601,000
=========== ===========
The accompanying notes are an integral part of
the consolidated financial statements
F-39
<PAGE>
CIGARETTE RACING TEAM, INC.
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996
1997 1996
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(2,476,647) $(2,028,367)
Prior Period Adjustment (50,000)
Adjustments to Reconcile Net Loss
to Net Cash Used by Operating Activities:
Depreciation and Amortization 617,996 615,406
Decrease in Accounts Receivable 22,770 38,645
(Increase) Decrease in Inventory (281,019) 400,277
(Increase) Decrease in Prepaid Expenses (69,962) 260,415
Decrease in Deposits 48,590 --
Increase (Decrease) in Accounts Payable 54,086 (298,535)
Increase in Accrued Expenses 1,466,033 631,756
Increase (Decrease) in Customer Deposits (1,340,695) 61,329
----------- -----------
Net Cash Used by Operating Activities (2,008,848) (319,074)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures (18,811) --
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (Decrease) in Loans Payable 1,215,434 (406,581)
Advances from Shareholder 160,546 695,883
Proceeds from Stock Transactions 682,500 --
----------- -----------
Net Cash Provided by Financing Activities 2,058,480 289,302
----------- -----------
NET INCREASE (DECREASE) IN CASH 30,821 (29,772)
CASH AT BEGINNING OF YEAR 2,920 32,692
----------- -----------
CASH AT END OF YEAR $ 33,741 $ 2,920
=========== ===========
Supplemental Cash Flow Information:
Cash Paid During the Year for Interest $ 224,119 $ 99,672
=========== ===========
Cumulative Dividends Accrued
on Preferred Stock $ 50,000 $ 50,000
=========== ===========
The accompanying notes are an integral part of
the consolidated financial statements
F-40
<PAGE>
<TABLE>
<CAPTION>
Additional Total
Common Preferred Paid-In Accumulated Stockholders'
Stock Stock Capital Deficit Equity
=========== =========== =========== =========== ===========
<S> <C> <C> <C> <C> <C>
BALANCES AT OCTOBER 1, 1995 $ 26 $ 1,066,667 $ 999,974 $(2,062,298) $ 4,369
Net Loss for the Year Ended
September 30, 1996 (2,028,367) (2,028,367)
Dividends on Preferred Stock 50,000 (50,000)
----------- ----------- ----------- ----------- -----------
BALANCES AT SEPTEMBER 30, 1996 26 1,116,667 999,974 (4,140,665) (2,023,998)
Net Loss for the Year Ended
September 30, 1997 (2,476,647) (2,476,647)
Private Placement of 250,000 Shares 2,500 462,500 465,000
Private Placement of 125,000 Shares 1,250 216,250 217,500
Prior Period Adjustment to Reverse
Effect of Loan Renegotiation Recorded
as of September 30, 1996 (50,000) (50,000)
Effective Change in Common Stock
in Connection with Stock Split 25,984 (25,984)
Dividends on Preferred Stock 50,000 (50,000)
----------- ----------- ----------- ----------- -----------
BALANCES AT SEPTEMBER 30, 1997 $ 29,760 $ 1,166,667 $ 1,652,740 $(6,717,312) $(3,868,145)
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements
F-41
<PAGE>
CIGARETTE RACING TEAM, INC.
NOTES TO FINANCIAL STATEMENTS
Organization and Background
Cigarette Racing Team, Inc. (the Company) was incorporated in the State of
Florida on April 28, 1994 under the name, New CRT, Inc. The Company is engaged
in the design, production and sale of high performance recreational powerboats
and offshore racing boats. Such vessels are custom designed and hand built from
component parts and sold primarily to premium boat dealers.
On May 26, 1994, New CRT, Inc. entered into an asset purchase and contribution
agreement with the predecessor Cigarette Racing Team, Inc. (the Seller) whereby
the Company acquired substantially all of the net assets of the Seller used in
the business. In consideration for the purchase of certain assets including
accounts receivable, inventory, intangible assets and intellectual property, the
Company issued the Seller a promissory note in the amount of $3,600,000 and
assumed all of the liabilities and obligations of the Seller. In consideration
for the contribution of certain machinery, equipment, molds and other tangible
personal property having an estimated fair market value of approximately
$1,000,000, the Company issued 100 shares of series A, redeemable, no par value,
cumulative preferred stock. As a result of this transaction, the Company
recorded goodwill in the amount of $6,016,654, and incurred $128,056 of
expenses. In addition, as part of the agreement, the Company entered into a
lease with the Seller for the operating facilities used in the business. In June
1, 1994, the Company changed its name from New CRT, Inc. to Cigarette Racing
Team, Inc.
Basis of Presentation, continued Existence and Subsequent events
The Company's financial statements have been presented on the basis of a going
concern, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company incurred net losses of
$2,476,647 and $2,028,367 for the fiscal years ended September 30, 1997 and
1996, respectively, and cumulative losses since inception of $6,717,312. At
September 30, 1997, the Company has a net stockholder's equity deficiency of
$3,868,145 and a working capital deficit of $9,245,994. In addition, the Company
was in arrears on total indebtedness to the Seller of $4,884,441 including
$3,280,000 of note principal, $910,109 of accrued interest thereon and $694,332
of unpaid rent. Such amounts do not include $1,166,667 of redeemable preferred
stock and accrued cumulative dividends. The Company's continuation as a going
concern is dependent upon its ability to control costs and attain a satisfactory
level of profitability, obtain suitable, sufficient financing or equity
investment and restructure its indebtedness to the seller. The Company has
entered into negotiation with the Seller to restructure the applicable debt. If
such an agreement is consummated, the Company would substantially reduce its
outstanding obligations to the Seller. The Company has reduced factory and
corporate overhead and has plans to reduce other operating and overhead costs,
including, but not limited to reduction in production costs (direct labor and
raw materials) through increased labor and purchasing efficiencies.
There is no assurance that the Company will be successful in these endeavors.
The accompanying financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
Subsequent to the balance sheet date, the Company completed a private placement
of common stock that provided an additional capital infusion to the Company of
$1,087,500.
F-42
<PAGE>
CIGARETTE RACING TEAM, INC.
NOTES TO FINANCIAL STATEMENTS
Summary of Significant Accounting Policies
Cash - The Company considers all highly liquid debt instruments purchased with a
maturity of 90 days or less to be the equivalents of cash for financial
statements purposes.
Inventory - Inventory consists of raw materials, parts and accessories which are
valued at the lower of cost (first-in, first-out method) or market. At September
30, 1997 there were no other components of inventory on hand.
Property and Equipment - Property and equipment are stated at cost. Depreciation
of the various classes of assets is provided on the straight-line method over
estimated useful lives us follows:
Molds and Tooling 5 years
Machinery and Equipment 5-7 years
Furniture and Fixtures 5 years
Costs In Excess Of Fair Market Value Of Net Assets Of Business Acquired
(Goodwill) - Goodwill arose in connection with the asset purchase and
contribution agreement discussed above which was accounted for as a purchase.
Amortization thereon is computed using the straight-line method over 15 years.
Statement of Financial Accounting Standards No 121, "Accounting for Long - Lived
Assets to Be Disposed of," established financial accounting and reporting
standards for long - lived assets and was effective for the Company's fiscal
year beginning October 1, 1996. Adoption of this standard did not have a
material effect on the Company's financial position or results of operations.
Trademark - Trademark is reflected at the estimated fair market value as of the
date of acquisition. Amortization thereon is computed using the straight-line
method over 15 years.
Warranties - The Company's products are generally under warranty against defects
in material and workmanship for a period of 90 days to one year from the date of
sale. An estimated warranty liability was established at the date of purchase,
as well as for subsequent balance sheet dates.
Sales Recognition - Sales and associated cost of sales of products are
recognized upon shipment to the customer. Service revenue is recognized when the
service is performed.
Income Taxes - The Company accounts for income taxes pursuant to Statement of
Financial Accounting Standards No. 109. Under such standard, deferred taxes are
computed based on the tax liability or benefits in future years of the reversal
of temporary differences in the recognition of income or deduction of expenses
between financial and tax reporting purposes. The principal items resulting in
the difference are depreciation and amortization and the net operating loss
carryforward. The net difference, if any, between the provision for taxes and
taxes currently payable is reflected in the balance sheet as deferred income
taxes. Deferred tax assets and/or liabilities are classified as current or non
current based on the classification of the related asset or liability for
financial reporting purposes, or on the expected reversal date for deferred
taxes that are not related to an asset or liability. A valuation allowance is
provided for deferred tax assets that do not meet a "more likely than not"
criterion.
Net Loss Per Share - Net loss per share is computed by dividing net loss by the
weighted average number of common shares outstanding during the period.
F-43
<PAGE>
CIGARETTE RACING TEAM, INC.
NOTES TO FINANCIAL STATEMENTS
Use of Estimates - Management of the Company uses estimates and assumptions in
preparing financial statements in accordance with generally accepted accounting
principles. Those estimates and assumption affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities, and the
reported revenues and expenses. Actual results could vary from the estimates
that management uses.
Property and Equipment
Property and Equipment consists of the following as of September 30, 1997:
Molds and Tooling $ 750,000
Machinery and Equipment 225,699
Furniture and Fixtures 65,400
----------
Total Property and Equipment 1,041,099
Less: Accumulated Depreciation 635,981
----------
Property and Equipment $ 405,118
==========
Note Payable to Bank
In connection with the asset purchase and contribution agreement of May 26,
1994, the Company issued the Seller a promissory note in the amount of
$3,600,000. The note bears interest at the prime rate plus 1.75% and was to be
repayable in 12 monthly principal installments of $40,000, followed by 62
monthly principal installments of $50,000, with a final principal payment due on
September 3, 2001. This indebtedness is secured by substantially all assets of
the Company, as well as the Company's outstanding common stock. Under the terms
of the promissory note, the Company may not pay any dividends on, issue new
shares of, or redeem its common stock, merge into or consolidate with any other
entity, unless control of the new entity remains with the Company's founder,
make dispositions of its assets not in the ordinary course of business, pay
annual compensation to any one individual in excess of $150,000, or enter into
transactions with affiliates without the prior written consent of the note
holder.
The Company is in default of this obligation which has a principal balance
outstanding as of September 30, 1997 of $3,280,000. As such, this balance has
been reflected as a current liability in the accompanying balance sheet. In
addition, accrued interest payable on this loan totals $910,109 as of September
30, 1997. The Seller has the right to impose a default interest rate of 5.75%
over the prime rate, but has not yet done so. The Company is also in arrears on
$694,332 of unpaid rent owed to the Seller. As discussed, the Company is in the
process of renegotiating its obligations to the Seller.
Loan Payable
In February 1997, the Company entered into a settlement agreement with a
supplier with respect to indebtedness which was assumed by the Company under the
asset purchase and contribution agreement. In
F-44
<PAGE>
CIGARETTE RACING TEAM, INC.
NOTES TO FINANCIAL STATEMENTS
connection therewith, the Company agreed to pay the supplier $300,000 of the
$350,000 of indebtedness outstanding as of the date of the settlement, as well
as $5,000 in legal fees. A first installment of $30,000 was paid at closing and
the balance of the loan was to be repaid in nine monthly installments of $30,000
beginning in February 1996. Interest on all unpaid balance accrues at the prime
rate. The Company is in default of this settlement agreement, which has a
balance outstanding as of September 30, 1997 totaling $171,253, including
accrued interest thereon of $1,253. The original gain on the settlement included
as other income during the fiscal year ended September 30, 1996 was reversed as
a prior period adjustment during the fiscal year ended September 30, 1997.
Accrued Expenses
Accrued Expenses consist of the following as of September 30, 1997:
Interest $ 910,109
Rent 694,332
Production and Deferred Profit 624,853
Property Taxes 225,914
Professional Fees 86,257
Bonus 67,971
Vacation 64,611
Warranty 35,446
Payroll and Payroll Taxes 31,163
Other 49,709
----------
Total Accrued Expenses $2,790,365
==========
Redeemable Preferred Stock
In connection with the asset purchase and contribution agreement of May 26,
1994, the Company issued 100 shares of Series A, no par value, cumulative,
redeemable preferred stock in exchange for the contribution of certain
machinery, equipment, molds and other tangible personal property having an
estimated fair market value of $1,000,000. The preferred stock was accordingly
recorded at a stated value of $1,000,000.
The preferred stock bears a dividend rate of $500 per share per annum. Dividends
are payable quarterly unless the Company elects not to pay the dividend in which
event such dividend shall be cumulative and shall accrue (regardless of whether
declared) without interest. No dividend shall be declared or paid on the
Company's common stock unless all preferred stock dividends have been paid in
full. As of September 30, 1997, cumulative dividends accrued on preferred stock
totaled $166,667.
In the event of any involuntary liquidation, the amount to be paid to preferred
stockholders shall be $10,000 per share plus all cumulative dividends accrued.
F-45
<PAGE>
CIGARETTE RACING TEAM, INC.
NOTES TO FINANCIAL STATEMENTS
The preferred stock may be repurchased at any time at the option of the Company.
The holders of the preferred stock may require the Company to repurchase their
shares at such time as the Company has paid at least $3,500,000 of the principal
amount of the promissory note issued in connection with the asset purchase and
contribution agreement of May 26, 1994. The purchase price for the preferred
stock shall be $10,000 per share plus all dividends payable at the time of
repurchase.
Common Stock
Stock Split - On November 1, 1996 the Board of Directors approved a 1,000-for-1
split of the Company's common stock effective as of that date for stockholders
of record on November 1, 1996. The weighted average number of shares outstanding
for net loss per share calculations for the fiscal year ended September 30, 1996
have been retroactively adjusted for the split.
Private Placement of Common Stock - The Company raised $682,500 of capital by
issuing 375,000 shares of its $.01 par value common stock through two separate
private placements. The additional capital indicated herein does not include
$67,500 of placement costs.
On June 30, 1997 the Company's majority shareholder sold his entire interest in
Cigarette Racing Team, Inc. (2,601,000 shares) to a foreign corporation.
Income Taxes
The Company neither incurred an expense for nor benefit from any current or
deferred income taxes for the fiscal years ended September 30, 1997 and 1996.
The Company has approximately $6,000,000 of loss carry forwards to offset future
taxable income expiring in the years 2009 through 2012.
The following is a reconciliation of the Federal Statutory Tax rate with the
effective tax rate:
Year Ended September 30,
1997 1996
---- ----
Statutory Tax Rate 34% 34%
Tax Benefit of Net Operating
Loss Carry Forward (34) (34)
--- ---
Effective Rate -% -%
--- ---
Commitments and Contingencies
Facilities Lease - In connection with the asset purchase and contribution
agreement of May 26, 1994, the Company entered into an agreement with the Seller
for the lease of its facilities. Under the terms of the original agreement, the
Company was subject to rent during the initial term of $336,000 per annum,
subject to adjustment for changes in the prime interest rate as defined in the
lease, plus real estate taxes. The initial lease term was to expire on the later
to occur of May 31, 2002 or the date on which the Company fully repaid all
principal and interest on its $3,6000,000 promissory note to the Seller and
repurchased all outstanding shares of the Company's preferred stock. The lease
provides for three five year renewal options.
F-46
<PAGE>
The Company is currently in default of this lease agreement, as of September 30,
1997; unpaid rent totals $694,332. As previously indicated, the Company is in
the process of renegotiating its obligations to the Seller. In addition, the
Company is delinquent on real estate tax payments of $225,914.
Rent expense for the years ended September 30, 1997 and 1996 was $388,318 and
$389,235 respectively.
Litigation - In October of 1996, a customer of the Company brought a lawsuit
relating to an order for certain boats placed with the predecessor company. In
July 1997, the Company entered into a settlement agreement with the customer
whereby the Company agreed to complete and deliver by March 31, 1998, two boats
for which the customer had made deposits of approximately $981,000. This
settlement was subsequently amended wherein the Company agreed to complete and
deliver two boats and return $305,000. One of the boats has since been delivered
and the other was in production as of September 30, 1997. The $305,000 debt is
included in the loans payable reported on the accompanying balance sheet.
The Company is currently involved in other lawsuits arising in the normal course
of business. In management's opinion, based on the advise of legal counsel, the
ultimate outcome of such lawsuits will not have a material adverse effect on the
Company's financial statements.
Subsequent Events
Private Placement of Common Stock - During the three months ended December
31,1997 the Company completed a private placement of its $.01 par value common
stock wherein they raised an additional $1,087,500 of capital through the sale
of 625,000 shares of common stock.
F-47
<PAGE>
CIGARETTE RACING TEAM, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1997
(UNAUDITED)
F-48
<PAGE>
CIGARETTE RACING TEAM, INC.
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
Accountant's Report 3
Balance Sheet 4 - 5
Statement of Operations 6
Statement of Cash Flows 7
Notes to Financial Statements 8 - 12
F-49
<PAGE>
[Letterhead of Jere J. Lane]
ACCOUNTANT'S COMPILATION REPORT
To the Board of Directors and Stockholders of
Cigarette Racing Team, Inc.
Aventura, FL.
I have compiled the accompanying balance sheet of Cigarette Racing Team, Inc. as
of December 31, 1997, and the related statements of operations and cash flows
for the three months then ended, in accordance with Statements on Standards for
Accounting and Review Services issued by the American Institute of Certified
Public Accountants.
A compilation is limited to presenting in the form of financial statements
information that is the representation of management. I have not audited or
reviewed the accompanying financial statements and, accordingly, do not express
an opinion or any other form of assurance on them.
The financial statements have been prepared assuming that the Company will
continue as a going concern. As discussed in the notes to the financial
statements, the Company has suffered recurring losses from operations and has a
net capital deficiency that raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in the notes. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Jere J. Lane
March 20, 1998
Coral Springs, Florida
F-50
<PAGE>
CIGARETTE RACING TEAM, INC.
BALANCE SHEET
DECEMBER 31,1997
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
CURRENT ASSETS:
<S> <C> <C>
Cash $ 61,245
Inventory 807,387
Prepaid Expenses 123,760
----------
TOTAL CURRENT ASSETS $ 992,392
PROPERTY AND EQUIPMENT, Net of Accumulated
Depreciation of $684,787 365,353
OTHER ASSETS:
Costs in Excess of Fair Value of Net Assets of Business
Acquired, Net of Accumulated Amortization of$l,437,313 4,579,342
Trademark, Net of Accumulated Amortization of$86,953 277,045
Deposits 10,000
----------
TOTAL OTHER ASSETS 4,866,387
----------
TOTAL ASSETS $6,224,132
==========
</TABLE>
The accompanying notes are an integral part of
the financial statements
F-51
<PAGE>
CIGARETTE RACING TEAM, INC.
BALANCE SHEET (CONTINUED)
DECEMBER 31,1997
(UNAUDITED)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Note Payable to Seller $ 3,280,000
Loans Payable 983,463
Accounts Payable 1,038,958
Accrued Expenses 2,618,993
Customer Deposits 247,985
Stockholder Loans 856,429
-----------
TOTAL LIABILITIES $ 9,025,828
STOCKHOLDERS' EQUITY:
Preferred Stock, Series A, Cumulative, No Par Value, 1,000
Shares Authorized, 100 Shares Issued and Outstanding,
Including Cumulative Dividends of $166,667 1,166,667
Common Stock, $.0l Par Value, 10,000,000 Shares Authorized,
3,601,000 Shares Issued and Outstanding 36,010
Additional Paid-In Capital 2,733,990
Accumulated Deficit (6,738,363)
-----------
TOTAL STOCKHOLDERS' EQUITY (2,801,696)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,224,132
===========
</TABLE>
The accompanying notes are an integral part of
the financial statements
F-52
<PAGE>
CIGARETTE RACING TEAM, INC.
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1997
(UNAUDITED)
NET SALES $ 953,890
Cost of Sales 786,839
---------
GROSS MARGIN 167,051
Selling, General and Administrative Expenses 491,626
Interest Expense 96,476
---------
OPERATING LOSS (421,051)
Other Income 400,000
---------
NET LOSS $ (21,051)
=========
The accompanying notes are an integral part of
the financial statements
F-53
<PAGE>
CIGARETTE RACING TEAM, INC.
STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31,1997
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (21,051)
Adjustments to Reconcile Net Loss
to Net Cash Used by Operating Activities:
Depreciation and Amortization 155,150
(Increase) in Inventory (409,219)
(Increase) in Prepaid Expenses (53,798)
(Decrease) in Accounts Payable (239,946)
(Decrease) in Accrued Expenses (171,372)
Increase in Customer Deposits 42,985
-----------
Net Cash Used by Operating Activities (697,251)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures (9,041)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) in Loans Payable (353,704)
Proceeds from Stock Transactions 1,087,500
Net Cash Provided by Financing Activities 733,796
NET INCREASE IN CASH 27,504
CASH AT OCTOBER 1, 1997 33,741
-----------
CASH AT DECEMBER 31, 1997 $ 61,245
===========
Supplemental Cash Flow Information:
Cash Paid During the Period for Interest $ 18,526
===========
The accompanying notes are an integral part of
the financial statements
F-54
<PAGE>
CIGARETTE RACING TEAM, INC.
NOTES TO FINANCIAL STATEMENTS
Organization and Background
Cigarette Racing Team, Inc. (the Company) was incorporated in the State of
Florida on April 28, 1994 under the name, New CRT, Inc. The Company is engaged
in the design, production and sale of high performance recreational powerboats
and offshore racing boats. Such vessels are custom designed and hand built from
component parts and sold primarily to premium boat dealers.
On May 26, 1994, New CRT, Inc. entered into an asset purchase and contribution
agreement with the predecessor Cigarette Racing Team, Inc. (the Seller) whereby
the Company acquired substantially all of the net assets of the Seller used in
the business. In consideration for the purchase of certain assets including
accounts receivable, inventory, intangible assets and intellectual property, the
Company issued the Seller a promissory note in the amount of $3,600,000 and
assumed all of the liabilities and obligations of the Seller. In consideration
for the contribution of certain machinery, equipment, molds and other tangible
personal property having an estimated fair market value of approximately
$1,000,000, the Company issued 100 shares of series A, redeemable, no par value,
cumulative preferred stock. As a result of this transaction, the Company
recorded goodwill in the amount of $6,016,654, and incurred $128,056 of
expenses. In addition, as part of the agreement, the Company entered into a
lease with the Seller for the operating facilities used in the business. In June
1, 1994, the Company changed its name from New CRT, Inc. to Cigarette Racing
Team, Inc.
Basis of Presentation, continued Existence and Subsequent events
The Company's financial statements have been presented on the basis of a going
concern, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company incurred net losses of
$ 21,051 and $2,476,647 for the three months ended December 31, 1997 and the
fiscal year ended September 30, 1997, respectively, and cumulative losses since
inception of $6,738,363. At December 31, 1997, the Company has a net
stockholder's equity deficiency of $2,801,696 and a working capital deficit of
$8,033,436. In addition, the Company was in arrears on total indebtedness to the
Seller of $4,807,073 including $3,280,000 of note principal, $738,059 of accrued
interest thereon and $789,014 of unpaid rent. Such amounts do not include
$1,166,667 of redeemable preferred stock and accrued cumulative dividends. The
Company's continuation as a going concern is dependent upon its ability to
control costs and attain a satisfactory level of profitability, obtain suitable,
sufficient financing or equity investment and restructure its indebtedness to
the seller. The Company has entered into negotiation with the Seller to
restructure the applicable debt. If such an agreement is consummated, the
Company would substantially reduce its outstanding obligations to the Seller.
The Company has reduced factory and corporate overhead and has plans to reduce
other operating and overhead costs, including, but not limited to reduction in
production costs (direct labor and raw materials) through increased labor and
purchasing efficiencies.
There is no assurance that the Company will be successful in these endeavors.
The accompanying financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
F-55
<PAGE>
CIGARETTE RACING TEAM, INC.
NOTES TO FINANCIAL STATEMENTS
Summary of Significant Accounting Policies
Cash - The Company considers all highly liquid debt instruments purchased with a
maturity of 90 days or less to be the equivalents of cash for financial
statements purposes.
Inventory - Inventory consists of raw materials, work-in-process and finished
goods which are valued at the lower of cost (first-in, first-out method) or
market.
Property and Equipment - Property and equipment are stated at cost. Depreciation
of the various classes of assets is provided on the straight-line method over
estimated useful lives as follows:
Molds and Tooling 5 years
Machinery and Equipment 5-7 years
Furniture and Fixtures 5 years
Costs In Excess Of Fair Market Value Of Net Assets Of Business Acquired
(Goodwill) - Goodwill arose in connection with the asset purchase and
contribution agreement discussed above which was accounted for as a purchase.
Amortization thereon is computed using the straight-line method over 15 years.
Statement of Financial Accounting Standards No 121, "Accounting for Long - Lived
Assets to Be Disposed of," established financial accounting and reporting
standards for long - lived assets and was effective for the Company's fiscal
year beginning October 1, 1996. Adoption of this standard did not have a
material effect on the Company's financial position or results of operations.
Trademark - Trademark is reflected at the estimated fair market value as of the
date of acquisition. Amortization thereon is computed using the straight-line
method over 15 years.
Warranties - The Company's products are generally under warranty against defects
in material and workmanship for a period of 90 days to one year from the date of
sale. An estimated warranty liability was established at the date of purchase,
as well as for subsequent balance sheet dates.
Sales Recognition - Sales and associated cost of sales of products are
recognized upon shipment to the customer. Service revenue is recognized when the
service is performed.
Income Taxes - The Company accounts for income taxes pursuant to Statement of
Financial Accounting Standards No. 109. Under such standard, deferred taxes are
computed based on the tax liability or benefits in future years of the reversal
of temporary differences in the recognition of income or deduction of expenses
between financial and tax reporting purposes. The principal items resulting in
the difference are depreciation and amortization and the net operating loss
carryforward. The net difference, if any, between the provision for taxes and
taxes currently payable is reflected in the balance sheet as deferred income
taxes. Deferred tax assets and/or liabilities are classified as current or non
current based on the classification of the related asset or liability for
financial reporting purposes, or on the expected reversal date for deferred
taxes that are not related to an asset or liability. A valuation allowance is
provided for deferred tax assets that do not meet a "more likely than not"
criterion.
F-56
<PAGE>
CIGARETTE RACING TEAM, INC.
NOTES TO FINANCIAL STATEMENTS
Use of Estimates - Management of the Company uses estimates and assumptions in
preparing financial statements in accordance with generally accepted accounting
principles. Those estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities, and
the reported revenues and expenses. Actual results could vary from the estimates
that management uses.
Property and Equipment
Property and Equipment consists of the following as of September 30, 1997:
Molds and Tooling $ 750,000
Machinery and Equipment 234,740
Furniture and Fixtures 65,400
----------
Total Property and Equipment 1,050,140
Less: Accumulated Depreciation 684,787
----------
Property and Equipment $ 365,353
==========
Note Payable to Bank
In connection with the asset purchase and contribution agreement of May 26,
1994, the Company issued the Seller a promissory note in the amount of
$3,600,000. The note bears interest at the prime rate plus 1.75% and was to be
repayable in 12 monthly principal installments of $40,000, followed by 62
monthly principal installments of $50,000, with a final principal payment due on
September 3, 2001. This indebtedness is secured by substantially all assets of
the Company, as well as the Company's outstanding common stock. Under the terms
of the promissory note, the Company may not pay any dividends on, issue new
shares of, or redeem its common stock, merge into or consolidate with any other
entity, unless control of the new entity remains with the Company's founder,
make dispositions of its assets not in the ordinary course of business, pay
annual compensation to any one individual in excess of $150,000, or enter into
transactions with affiliates without the prior written consent of the note
holder.
The Company is in default of this obligation which has a principal balance
outstanding as of December 31,1997 of $3,280,000. As such, this balance has
been reflected as a current liability in the accompanying balance sheet. In
addition, accrued interest payable on this loan totals $738,059 as of December
31, 1997. The Seller has the right to impose a default interest rate of 5.75%
over the prime rate, but has not yet done so. The Company is also in arrears on
$789,014 of unpaid rent owed to the Seller. As discussed, the Company is in the
process of renegotiating its obligations to the Seller.
Loan Payable
In February 1997, the Company entered into a settlement agreement with a
supplier with respect to
F-57
<PAGE>
CIGARETTE RACING TEAM, INC.
NOTES TO FINANCIAL STATEMENTS
indebtedness which was assumed by the Company under the asset purchase and
contribution agreement. In connection therewith, the Company agreed to pay the
supplier $300,000 of the $350,000 of indebtedness outstanding as of the date of
the settlement, as well as $5,000 in legal fees. A first installment of $30,000
was paid at closing and the balance of the loan was to be repaid in nine monthly
installments of $30,000 beginning in February 1996. Interest on all unpaid
balance accrues at the prime rate. The Company is in default of this settlement
agreement, which has a balance outstanding as of December 31, 1997 totaling
$164,579.
Accrued Expenses
Accrued Expenses consist of the following as of December 31, 1997:
Interest $ 738,059
Rent 789,014
Production and Deferred Profit 624,860
Property Taxes 240,179
Professional Fees 66,647
Bonus 67,971
Vacation 64,611
Warranty 27,652
----------
Total Accrued Expenses $2,618,993
==========
Redeemable Preferred Stock
In connection with the asset purchase and contribution agreement of May 26,
1994, the Company issued 100 shares of Series A, no par value, cumulative,
redeemable preferred stock in exchange for the contribution of certain
machinery, equipment, molds and other tangible personal property having an
estimated fair market value of $1,000,000. The preferred stock was accordingly
recorded at a stated value of $1,000,000.
The preferred stock bears a dividend rate of $500 per share per annum. Dividends
are payable quarterly unless the Company elects not to pay the dividend in which
event such dividend shall be cumulative and shall accrue (regardless of whether
declared) without interest. No dividend shall be declared or paid on the
Company's common stock unless all preferred stock dividends have been paid in
full. As of December 31, 1997, cumulative dividends accrued on preferred stock
totaled $166,667.
In the event of any involuntary liquidation, the amount to be paid to preferred
stockholders shall be $10,000 per share plus all cumulative dividends accrued.
F-58
<PAGE>
CIGARETTE RACING TEAM, INC.
NOTES TO FINANCIAL STATEMENTS
The preferred stock may be repurchased at any time at the option of the Company.
The holders of the preferred stock may require the Company to repurchase their
shares at such time as the Company has paid at least $3,500,000 of the principal
amount of the promissory note issued in connection with the asset purchase and
contribution agreement of May 26, 1994. The purchase price for the preferred
stock shall be $10,000 per share plus all dividends payable at the time of
repurchase.
Common Stock
Stock Split - On November 1, 1996 the Board of Directors approved a 1,000-for-1
split of the Company's common stock effective as of that date for stockholders
of record on November 1, 1996.
Private Placement of Common Stock - The Company raised $1,087,500 of capital by
issuing 625,000 shares of its $.01 par value common stock through a private
placement during the three months ended December 31, 1997. The additional
capital indicated herein does not include $162,500 of placement costs.
F-59
<PAGE>
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
Item 702. Indemnification of Directors and Officers
In accordance with the Florida General Corporation Law, the Company has
included in its Articles of Incorporation and By-laws provisions which reduce
the potential personal liability of directors for certain monetary damages and
provide for indemnity of directors and other persons. The Company is unaware of
any pending or threatened litigation against the Company or its directors that
would result in any liability for which such director would seek indemnification
or similar protection.
Such indemnification provisions are intended to increase the protection
provided directors and, thus, increase the Company's ability to attract and
retain qualified persons to serve as directors. Because directors liability
insurance is only available at considerable cost and with low dollar limits of
coverage and broad policy exclusions, the Company does not currently maintain a
liability insurance policy for the benefit of its directors, although the
Company may attempt to acquire such insurance in the future, The Company
believes that the substantial increase in the number of lawsuits being
threatened or filed against corporations and their directors and the general
unavailability of directors liability insurance to provide protection against
the increased risk of personal liability resulting from such lawsuits have
combined to result in a growing reluctance on the part of capable persons to
serve as members of boards of directors of companies, particularly of companies
which intend to become public companies. The Company also believes that the
increased risk of personal liability without adequate insurance or other
indemnity protection for its directors could result in overcautious and less
effective direction and management of the Company. Although no directors have
resigned or have threatened to resign as a result of the Company's failure to
provide insurance or other indemnity protection from liability, it is uncertain
whether the Company's directors would continue to serve in such capacities if
improved protection from liability were not provided.
56
<PAGE>
Item 512. UNDERTAKINGS
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
57
<PAGE>
Item 601. EXHIBITS
Index of Exhibits
================================================================================
Exhibit No. Description
- --------------------------------------------------------------------------------
2.0 Agreement and Plan of Merger
3.0 Articles of Incorporation of Hawk Marine Power, Inc. (a Utah
corporation), as Amended(1)
3.1 Articles of Incorporation of Hawk Marine Power, Inc. (a
Florida corporation), as Amended(1)
3.11 Certificate of Amendment of the Articles of Incorporation of
Hawk Marine Power, Inc.(1)
3.2 By-Laws of Hawk Marine Power, Inc. (a Utah corporation)(1)
3.3 By-Laws of Hawk Marine Power, Inc. (a Florida corporation)(1)
5.0 Opinion re: Legality(2)
8.0 Opinion re: Tax Matters(2)
11.0 Statement re: Computation of Per Share Earnings(2)
12.0 Statements re: Computations of Ratios(2)
13.0 Form 10QSB (filed: 05/01/1998)(3)
13.1 Form 10QSB (filed: 03/11/1998)(3)
13.2 Form 10QSB (filed: 08/19/1997)(3)
13.3 Form 10QSB (filed: 05/22/1997)(3)
13.4 Form 10QSB (filed: 05/14/1997)(3)
13.5 Form 10QSB (filed: 08/14/1996)(3)
13.6 Form 10QSB (filed: 05/21/1996)(3)
13.7 Form 10KSB (filed: 04/30/1998)(3)
13.8 Form 10KSB (filed: 05/14/1997)(3)
15.0 Letter on Unaudited Interim Financial Information(2)
22.0 Subsidiaries of the Registrants(2)
58
<PAGE>
23.0 Consent of Counsel(2)
24.0 Power of Attorney(2)
99.0 Additional Exhibits(2)
- ----------
(1) Filed as the same encumbered exhibit to the Registrant's
Registration Statement (File No. 33-30906-A) previously filed.
(2) To be filed by amendment.
(3) Previously filed with the Securities and Exchange Commission as
separate filings.
59
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form S-4 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the City of Miami,
State of Florida, on May 4, 1998.
ALCHEMY HOLDINGS, INC.
By: /S/ Craig N. Barrie
-----------------------
Craig N. Barrie, President**
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
Signature Title Date
- --------------------------- President, Director May 4, 1998
(Craig N. Barrie)*
- --------------------------- Vice-President, Director May 4, 1998
(Berton J. Lorow)*
- ---------------------------
(Adam C. Schild)* Secretary, Director May 4, 1998
* Craig N. Barrie, pursuant to a Power of Attorney, executed by each of
the Directors and Officers noted above and filed with the Securities and
Exchange Commission, by signing his name hereto, does hereby sign and execute
this Form S-4 Registration Statement on behalf of each of the persons noted
above and designated by an asterisk, in the capacities understood and does
hereby sign and execute this Form S-4 Registration Statement on his own behalf
as President.
60
AGREEMENT AND PLAN OF MERGER
DATED AS OF _____________________, 1998
BY AND AMONG
ALCHEMY HOLDINGS, INC.,
CIGARETTE BOATS, INC.
AND CIGARETTE RACING TEAM, INC.
<PAGE>
TABLE OF CONTENTS
ARTICLE I......................................................................1
THE MERGER...............................................................1
Section 1.1 The Merger............................................1
Section 1.2 Closing; Effective Time of the Merger.................2
Section 1.3 Effects of Merger.....................................2
Section 1.4 Directors and Officers. .............................2
ARTICLE II.....................................................................2
CONVERSION OF SECURITIES.................................................2
Section 2.1 Conversion of Capital Stock. ........................2
Section 2.2 Exchange of Certificates. ...........................3
ARTICLE III....................................................................3
REPRESENTATIONS AND WARRANTIES OF CIGARETTE..............................3
Section 3.2 Cigarette Subsidiaries and Joint Ventures. ..........4
Section 3.3 Cigarette Capital Structure. ........................4
Section 3.4 Authority; No Conflict; Required Filings and
Consents..............................................5
Section 3.5 SEC Filings; Financial Statements.....................6
Section 3.6 Absence of Undisclosed Liabilities. .................7
Section 3.7 Absence of Certain Changes or Events..................7
Section 3.8 Taxes.................................................7
Section 3.9 Properties............................................8
Section 3.11 Agreements, Contracts and Commitments. ..............9
Section 3.12 Litigation. .........................................9
Section 3.13 Environmental Matters................................10
Section 3.14 Compliance with Laws. ..............................10
Section 3.15 Pooling of Interests. ..............................10
Section 3.16 Interested Party Transactions........................10
Section 3.17 Registration Statement; Proxy Statement/Prospectus...10
Section 3.18 Payments Resulting from Mergers......................11
Section 3.19 Option of Financial Advisor..........................11
Section 3.20 Business Combination.................................11
ARTICLE IV....................................................................12
REPRESENTATIONS AND WARRANTIES OF ALCHEMY AND MERGER SUB ...............12
Section 4.1 Organization.........................................12
Section 4.2 Alchemy Subsidiaries and Joint Ventures..............12
Section 4.3 Alchemy Capital Structure............................13
Section 4.4 Authority; No Conflict; Required Filings and
Consents.............................................13
i
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Section 4.4 SEC Filings; Financial Statements....................14
Section 4.6 Absence of Undisclosed Liabilities...................15
Section 4.7 Absence of Certain Changes or Events.................15
Section 4.8 Taxes................................................16
Section 4.9 Properties. .........................................16
Section 4.10 Intellectual Property................................16
Section 4.11 Agreements, Contracts and Commitments................17
Section 4.12 Litigation...........................................17
Section 4.13 Environmental Matters................................17
Section 4.14 Compliance with Laws.................................18
Section 4.15 Pooling of Interests.................................18
Section 4.16 Interested Party Transactions........................18
Section 4.17 Registration Statement; Proxy Statement/Prospectus...18
Section 4.18 Interim Operations of Merger Sub.....................19
ARTICLE V.....................................................................19
CONDUCT OF BUSINESS.....................................................19
Section 5.1 Covenants of Cigarette...............................19
Section 5.2 Covenants of Alchemy.................................20
Section 5.3 Cooperation..........................................22
ARTICLE VI....................................................................22
ADDITIONAL AGREEMENTS...................................................22
Section 6.1 No Solicitation......................................22
Section 6.2 Proxy Statement/Prospectus; Registration Statement...23
Section 6.3 Consents.............................................24
Section 6.4 Current OTC Bulletin Board Listing...................24
Section 6.5 Access to Information................................24
Section 6.6 Shareholder Meetings.................................25
Section 6.7 Legal Conditions to Merger. .......................25
Section 6.8 Public Disclosure....................................26
Section 6.9 Tax-Free Reorganization..............................26
Section 6.10 Pooling Accounting...................................26
Section 6.11 Affiliate Agreements.................................26
Section 6.12 OTC Bulletin Board Listing...........................27
Section 6.13 Brokers or Finders...................................27
Section 6.14 Indemnification......................................27
Section 6.15 Additional Agreements; Reasonable Efforts............29
Section 6.16 Notification of Certain Matters......................30
ARTICLE VII...................................................................30
CONDITIONS TO MERGER....................................................30
Section 7.1 Conditions to Each Party's Obligation to Effect
The Merger...........................................30
ii
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(a) Shareholder Approvals.......................................30
(b) HSR Act.....................................................30
(c) Approvals...................................................30
(d) Registration Statement......................................30
(e) No Injunctions or Restraints; Illegality....................30
(f) Pooling.....................................................31
(g) OTC Bulletin Board Listing. ...............................31
(h) Tax Opinions................................................31
Section 7.2 Additional Conditions to Obligations of Alchemy and
Merger Sub..................................................31
(a) Representations and Warranties..............................31
(b) Performance of Obligations..................................32
(c) Affiliate and Other Agreements..............................32
(d) Absence of Cigarette Material Adverse Effect................32
Section 7.3 Additional Conditions to obligations of Cigarette........32
(a) Representations and Warranties..............................32
(b) Performance of Obligations..................................32
(c) Absence of Alchemy Material Adverse Effect.................32
ARTICLE VIII..................................................................32
TERMINATION AND AMENDMENT...............................................32
Section 8.1 Termination..........................................32
Section 8.2 Effect of Termination................................34
Section 8.3 Fees and Expenses....................................34
Section 8.4 Amendment............................................36
Section 8.5 Extension; Waiver....................................36
ARTICLE IX....................................................................36
MISCELLANEOUS...........................................................36
Section 9.1 Nonsurvival of Representations, Warranties and
Agreements...........................................36
Section 9.2 Notices..............................................36
Section 9.3 Interpretation; Certain Definitions..................37
Section 9.4 Counterparts.........................................38
Section 9.5 Entire Agreement; No Third-Party Beneficiaries.......38
Section 9.6 Governing Law........................................38
Section 9.7 Specific Performance.................................38
Section 9.8 Assignment...........................................38
Section 9.9 Severability.........................................39
iii
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of , 1998
among Alchemy Holdings, Inc., a Florida corporation ("Alchemy"), Cigarette
Boats, Inc., a Delaware corporation and a wholly-owned subsidiary of Alchemy
("Merger Sub"), and Cigarette Racing Team, Inc., a Florida corporation
("Cigarette").
RECITALS
WHEREAS, the Boards of Directors of Alchemy, Merger Sub and Cigarette (i)
deem it advisable and in the best interest of each corporation and its
respective shareholders that Alchemy and Cigarette combine in order to advance
their long-term business interests and (ii) have approved this Agreement, the
Merger (as defined below) and the other transactions contemplated by this
Agreement;
WHEREAS, the combination of Alchemy and Cigarette shall be effected by the
terms of this Agreement through a transaction in which Merger Sub will merge
with and into Cigarette, Cigarette will become a wholly-owned subsidiary of
Alchemy and the shareholders of Cigarette will become shareholders of Alchemy
(the "Merger");
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization with the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, for accounting purposes, the parties intend that the Merger shall
be accounted for as a pooling of interests;
NOW, THEREFORE, the parties, intending to be legally bound, hereby agree
as follows:
ARTICLE I
THE MERGER
SECTION 1.1 The Merger. Subject to the provisions of this Agreement and in
accordance with the Florida General Corporation Act (the "FGCA"), Merger Sub
shall be merged with and into Cigarette. As a result of the Merger, the
outstanding shares of capital stock of the Merger Sub and Cigarette shall be
converted or canceled in the manner provided in Article II of this Agreement;
the separate corporate existence of Merger Sub shall cease, and Cigarette shall
be the surviving corporation in the Merger.
1
<PAGE>
SECTION 1.2 Closing; Effective Time of the Merger. Unless this Agreement
shall have been terminated pursuant to Section 8.1, the closing of the Merger
(the "Closing") will take place at 10 a.m., Florida time, on a date to be
specified by Alchemy and Cigarette (the "Closing Date"), which shall be no later
than the second business day after satisfaction (or waiver in accordance with
Section 8.5) of all conditions set forth in Article VII at the offices of
Cigarette Racing Team, Inc., unless another date or place is agreed to in
writing by Alchemy and Cigarette. Subject to the provisions of this Agreement, a
certificate of merger meeting the applicable requirements of the FGCA (the
"certificate of Merger") shall be duly prepared, executed and acknowledged by
Cigarette and simultaneously with or as soon as practicable following the
Closing delivered to the Secretary of State of the State of Florida for filing.
The Merger shall become effective upon the date and time of the filing of the
Certificate of merger with the Secretary of State of the State of Florida or at
such other date and time as is provided in the Certificate of Merger (the
"Effective Time").
SECTION 1.3 Effects of Merger.
(a) At the Effective Time: (i) the separate existence of Merger Sub
shall cease and Merger Sub shall be merged with and into Cigarette (Merger
Sub and Cigarette are sometimes referred to collectively herein as the
"Constituent Corporations" and Cigarette is sometimes referred to herein
as the "Surviving Corporation"); (ii) the Certificate of Incorporation and
Bylaws of Cigarette as in effect immediately prior to the Effective Time
shall be the Certificate of Incorporation and Bylaws of the Surviving
Corporation until amended in accordance with the terms thereof and in
accordance with applicable law; provided, however, that, notwithstanding
the foregoing, Article I of the Certificate of Incorporation of Merger Sub
shall be amended to read as follows: "The name of the Corporation is
"Cigarette Racing Team, Inc."
(b) The Merger shall have the effects set forth in this Agreement
and in the FGCA.
SECTION 1.4 Directors and Officers. The directors and officers of Merger
Sub immediately prior to the Effective Time shall be the initial directors and
officers of the Surviving Corporation, and shall hold office in accordance with
the Certificate of Incorporation and Bylaws of the Surviving Corporation, in
each case until their respective successors are duly elected or appointed.
ARTICLE II
CONVERSION OF SECURITIES
SECTION 2.1 Conversion of Capital Stock. As of the Effective Time, by
virtue of the Merger and without any action on the part of the Constituent
Corporations or the holder of any shares of Common Stock, $0.01 par value per
share, of Cigarette ("Cigarette Common Stock") or capital stock of Merger Sub:
(a) Capital Stock of Merger Sub. Each issued and outstanding share
of the capital
2
<PAGE>
stock of Merger Sub shall be converted into and become one fully paid and
nonassessable share of common stock of the Surviving Corporation.
(b) Cancellation of Treasury Stock and Alchemy-Owned Stock. All
shares of Cigarette Common Stock that are owned by Cigarette as treasury
stock or by any Subsidiary of Cigarette and any shares of Cigarette Common
Stock owned by Alchemy, Merger Sub or any other wholly-owned Subsidiary
(as defined in Section 9.3) of Alchemy shall be canceled and retired and
shall cease to exist and no stock of Alchemy or other consideration shall
be delivered in exchange therefor. All shares of Common Stock, $.001 par
value per share, of Alchemy ("Alchemy Common Stock") owned by Cigarette
shall remain unaffected by the Merger.
(c) Exchange Ratio for Cigarette Common Stock. Subject to Section
2.2, each issued and outstanding share of Cigarette Common Stock (other
than shares to be canceled in accordance with Section 2.1(b)) shall be
converted into the right to receive one (1) (the "Conversion Number")
fully paid and nonassessable share of Alchemy Common Stock. All such
shares of Cigarette Common Stock, when so converted, shall no longer be
outstanding and shall automatically be canceled and retired and shall
cease to exist, and each holder of a certificate representing any such
shares shall cease to have any rights with respect thereto, except the
right to receive the shares of Alchemy Common Stock to be issued in
consideration therefor upon the surrender of such certificate in
accordance with Section 2.2, without interest.
(d) Adjustment of Exchange Ratio. If, between the date of this
Agreement and the effective Time, the outstanding shares of Alchemy Common
Stock or Cigarette Common Stock shall have changed into a different number
of shares or a different class by reason of any reclassification,
recapitalization, split-up, stock dividend, stock combination, exchange of
shares, readjustment or otherwise, then the Conversion Number shall be
correspondingly adjusted; provided, however, that any such changes shall
be subject to Sections 5.1 and 5.2.
SECTION 2.2 Exchange of Certificates. The procedures for exchanging
outstanding shares of Cigarette Common Stock for Alchemy Common Stock pursuant
to the Merger are set forth in Exhibit A hereto, which is incorporated by
reference as if set forth in full herein.
SECTION 2.3 Dissenter's Rights. Pursuant to Section 607.247 of the Florida
General Corporation Act, a copy of which is attached hereto as Exhibit ___, any
holder of Cigarette Common Stock who objects to the Merger will be entitled to
dissent and exercise appraisal rights. That Section enables an objecting
shareholder to be paid, in cash, the value of his Cigarette Common Stock as
determined by FGCA Section 607.247(c), provided that the following conditions
are satisfied:
(a) Such shareholder must not vote in favor of the Merger, nor submit a
proxy in which directions are given to vote in favor of the Merger.
3
<PAGE>
(b) Within 10 days after the date on which the vote is taken approving the
Merger, such shareholder must make written demand on Alchemy for payment
of the fair value of such shareholder's shares.
Within 10 days after the Merger is effected, Alchemy shall give written notice
thereof to each dissenting shareholder who has satisfied paragraphs (a) and (b)
hereof, and Alchemy shall make a written offer to each such shareholder to pay
for such shares at a specified price deemed by Alchemy to be the fair value
thereof.
In the event that Alchemy and the dissenting shareholder(s) does not agree with
the value Alchemy places on such shareholder's shares, then Alchemy, within 30
days after the receipt of a written demand from any such shareholder given
within 60 days after the date on which the Merger was effected, shall, or at its
election at any time within such period of 60 days may, file an action in any
court of competent jurisdiction in the county in Florida where the registered
office of Alchemy is located requesting that the fair value of such shares be
found and determined. If Alchemy fails to initiate such a proceeding, then any
dissenting shareholder may do so in the name of the corporation.
Notwithstanding the foregoing, a dissenting shareholder may withdraw his
appraisal demand so long as Alchemy consents thereto.
FAILURE BY A SHAREHOLDER TO FOLLOW THE STEPS REQUIRED BY FLORIDA LAW FOR
PERFECTING HIS DISSENTER'S RIGHTS WILL RESULT IN THE LOSS OF SUCH RIGHTS.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF CIGARETTE
Cigarette represents and warrants to Alchemy and Merger Sub that the
statements contained in this Article III are true and correct, except (i) as
disclosed or incorporated by reference in the Cigarette SEC Reports (as defined
in Section 3.5(a)) filed prior to this Agreement; (ii) in the case of the
representations and warranties in Sections 3.1, 3.2, 3.4(b), 3.5 through 3.14
and 3.16, where the failure to be true and correct would not, either
individually or in the aggregate, have a Cigarette Material Adverse Effect (as
defined below), or (iii) as set forth on the disclosure schedule delivered by
Cigarette to Alchemy prior to execution of this Agreement (the "Cigarette
Disclosure Schedule"). When used in connection with Cigarette or any of its
Subsidiaries, if any, the term "Cigarette Material Adverse Effect" means any
change, event or effect that is materially adverse to the business, assets
(including intangible assets), liabilities, financial condition, operations or
results of operations of Cigarette and its Subsidiaries, if any, taken as a
whole; provided, however, that the following shall not be deemed to constitute a
"Cigarette Material Adverse Effect": (i) an adverse change in or effect
4
<PAGE>
on the financial condition, revenues or gross margins of Cigarette (or the
direct consequences thereof) following the date of this Agreement to the extent
attributable to (A) a delay of, reduction in or cancellation or change in the
terms of product licenses by customers of Cigarette, (B) a slow down in the
activity of Cigarette's sales organization or (C) the loss of any officer or key
employee of Cigarette which is directly and primarily attributable to the
transactions contemplated by this Agreement; (ii) an adverse change in or effect
on the market price of Cigarette Common Stock between the date of this Agreement
and the Closing Date; or (iii) the outcome of any litigation disclosed pursuant
to Section 3.12.
SECTION 3.1 Organization. Each of Cigarette and its Subsidiaries, if any,
is a corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation, has all requisite corporate power
to own, lease and operate its property and to carry on its business as now being
conducted, and is duly qualified to do business and is in good standing as a
foreign corporation in each jurisdiction in which the failure to be so qualified
would have a Cigarette Material Adverse Effect. Neither Cigarette nor any of its
Subsidiaries, if any, directly or indirectly owns any equity or similar interest
in, or any interest convertible into or exchangeable or exercisable for any such
entity or similar interest in, any corporation, limited liability company,
partnership, joint venture or other business association or entity, excluding
securities of any publicly traded company held for investment by Cigarette and
comprising less than five percent of the outstanding stock of such company.
SECTION 3.2 Cigarette Subsidiaries and Joint Ventures. All of the issued
and outstanding shares of capital stock of each Subsidiary are owned by
Cigarette or by a Subsidiary of Cigarette (other than directors' qualifying
shares in the case of foreign Subsidiaries, if any,) and are validly issued,
fully paid, and nonassessable, and there are no outstanding subscriptions,
options, calls, contracts, voting trusts, proxies or other commitments,
understandings, restrictions, arrangements, rights or warrants with respect to
any such Subsidiary's capital stock, including any right obligating any such
Subsidiary to issue, deliver, or sell additional shares of its capital stock
other than those mentioned below in this paragraph 3.2. In a pledge agreement
dated May 26, 1994 between Robert E. Torter and Cigarette Racing team, Robert E.
Torter pledged 100% (2601) shares of the Common Stock of New CRT, Inc., the
predecessor of Cigarette Racing Team, Inc.
SECTION 3.3 Cigarette Capital Structure.
(a) The authorized capital stock of Cigarette consists of 10,000,000
shares of Cigarette Common Stock $.01 par value per share and 1,000 shares
of Preferred Stock. As of December 31, 1997, (i) 3,601,000 shares of
Cigarette Common Stock were issued and outstanding, all of which issued
and outstanding shares are validly issued, fully paid and nonassessable;
and (ii) 6,399,000 shares of Cigarette Common Stock were held in the
treasury of Cigarette or by Subsidiaries, if any, of Cigarette. As of
December 31, 1997 (i) 100 shares of Cigarette Preferred Stock, Series A
were issued and outstanding, all of which issued and outstanding shares
are validly issued, fully paid and non-assessable; and (ii) 900 shares of
Cigarette Preferred Stock Series A, were held in the treasury of Cigarette
or by
5
<PAGE>
subsidiaries, if any, of cigarette. There are no obligations, contingent
or otherwise, of Cigarette or any of its Subsidiaries, if any, to
repurchase, redeem or otherwise acquire any shares of Cigarette Common
Stock , Cigarette Preferred Stock Series A or the capital stock of any
Cigarette Subsidiary or make any investment (in the form of a loan,
capital contribution or otherwise) in any such Subsidiary or any other
entity other than guarantees of debt obligations of such Subsidiaries, if
any, entered into in the ordinary course of business. All of the
outstanding shares of capital stock of each Subsidiary of Cigarette are
duly authorized, validly issued, fully paid and nonassessable, and all
such shares (other than directors' qualifying shares in the case of
foreign Subsidiaries, if any,) are owned by Cigarette or another Cigarette
Subsidiary free and clear of all security interests, liens, claims,
pledges, agreements, limitations on Cigarette's voting rights, charges or
other encumbrances of any nature.
(b) Except for the pledge agreements set forth in Section 3.2, there
are no equity securities of any class of Cigarette or any of its
Subsidiaries, if any, or any security exchangeable into or exercisable for
such equity securities, issued, reserved for issuance or outstanding.
Except as set forth in Section 3.2, there are no options, warrants, equity
securities, calls, rights, commitments or agreements of any character to
which Cigarette or any of its Subsidiaries, if any, is a party or by which
it is bound obligating Cigarette or any of its Subsidiaries, if any, to
issue, deliver or sell, or cause to be issued, delivered or sold,
additional shares of capital stock of Cigarette or any of its
Subsidiaries, if any, or obligating Cigarette or any of its Subsidiaries,
if any, to grant, extend, accelerate the vesting of or enter into any such
option, warrant, equity security, call, right, commitment or agreement,
and, except for the proxies contemplated by this Agreement, there are no
proxies or other agreements or understandings with respect to the shares
of capital stock of Cigarette.
SECTION 3.4 Authority; No Conflict; Required Filings and Consents.
(a) Cigarette has all requisite corporate power and authority to
enter into this Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the consummation
of the transactions contemplated hereby have been duly authorized by all
necessary corporate and shareholder action on the part of Cigarette,
subject only (in the case of this Agreement and certain of the
transactions contemplated hereby) to the approval of the Merger by
Cigarette and Alchemy's shareholders in accordance with the FGCA. This
Agreement has been duly executed and delivered by Cigarette and constitute
the valid and binding obligations of Cigarette, enforceable in accordance
with their respective terms.
(b) The execution and delivery of this Agreement by Cigarette does
not, and the consummation of the transactions contemplated hereby will
not, (i) conflict with, or result in any violation or breach of any
provision of the Certificate of Incorporation or Bylaws of Cigarette or
any of its Subsidiaries, if any, (in each case as heretofore amended),
(ii) result in any violation or breach of, or constitute (with or without
notice or lapse of time, or both)
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a default (or give rise to a right of termination, cancellation or
acceleration of any obligation or loss of any benefit) under any of the
terms, conditions or provisions of any note, bond, mortgage, indenture,
lease, contract or other agreement, instrument or obligation to which
Cigarette or any of its Subsidiaries, if any, is a party or by which any
of them or any of their respective properties or assets may be bound, or
(iii) conflict with or violate any permit, concession, franchise, license,
judgement, order, decree, statute, law, ordinance, rule or regulation
applicable to Cigarette or any of its Subsidiaries, if any, or any of
their respective properties or assets.
(c) No consent, approval, order or authorization of, or
registration, declaration or filing with, any court, administrative
agency, commission or other governmental authority or instrumentality
("Governmental Entity") is required by or with respect to Cigarette or any
of its Subsidiaries, if any, in connection with the execution and delivery
of this Agreement or the consummation of the transactions contemplated
hereby, except for (i) the filing, if applicable, of a premerger
notification report under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended (the "HSR Act"), (ii) the filing by Alchemy of the
Registration Statement (as defined in Section 3.17) with the Securities
and Exchange Commission (the "SEC") in accordance with the Securities Act
of 1933, as amended (the "Securities Act"), (iii) the filing of the
Certificate of Merger with the Secretary of State of the State of Florida
in accordance with the FGCA, and (iv) the filing of the Proxy Statement
(as defined in Section 3.17) and related proxy materials with the SEC in
accordance with the Securities Exchange Act of 1934, as amended (the
"Exchange Act").
SECTION 3.5 SEC Filings; Financial Statements.
(a) Cigarette has filed all forms, reports and documents, if any,
required to be filed by Cigarette with the SEC since __________________
and has made available to Alchemy all of the same so filed (collectively,
the "Cigarette SEC Reports"). The Cigarette SEC Reports (i) at the time
filed, complied in all material respects with the applicable requirements
of the Securities Act and the Exchange Act, as the case may be, and (ii)
did not at the time they were filed (or if amended or superseded by a
filing prior to the date of this Agreement, then on the date of such
filing) contain any untrue statement of a material fact or omit to state a
material fact required to be stated in such Cigarette SEC Reports or
necessary in order to make the statements in such Cigarette SEC Reports,
in light of the circumstances under which they were made, not misleading.
None of Cigarette's Subsidiaries, if any, is required to file any forms,
reports or other documents with the SEC.
(b) Each of the consolidated financial statements (including, in
each case, any related notes thereto) contained in the Cigarette SEC
Reports, including any Cigarette SEC Reports filed after the date of this
Agreement prior to the Closing (the "Cigarette Financial Statements"),
complied or will comply as to form in all material respects with the
applicable published rules and regulations of the SEC with respect
thereto, was or was or will be prepared in accordance with U.S. generally
accepted accounting principles ("GAAP")
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applied on a consistent basis throughout the periods involved (except as
may be indicated in the notes to such financial statements or, in the case
of unaudited statements, as permitted by Form 10- Q promulgated by the
SEC), and fairly presented or will fairly present in all material
respects, the consolidated financial position of Cigarette and its
Subsidiaries, if any, as at the respective dates and the consolidated
results of its operations and cash flows for the periods indicated, except
that the unaudited interim financial statements were or are subject to
normal and recurring year-end adjustments which were not or are not
expected to be material in amount.
SECTION 3.6 Absence of Undisclosed Liabilities. Cigarette and its
Subsidiaries, if any, do not have any liabilities, either accrued or contingent
(whether or not required to be reflected in financial statements, including the
notes thereto, in accordance with GAAP), and whether due or to become due, which
individually or in the aggregate, are or would be reasonably likely to have a
Cigarette Material Adverse Effect, other than (i) liabilities reflected in the
unaudited consolidated balance sheet of Cigarette as of December 31, 1997 (the
"Cigarette Balance Sheet") (which as of the date of this Agreement had not been
filed with the SEC), and (ii) normal or recurring liabilities incurred since
December 31, 1997, in the ordinary course of business consistent with past
practices.
SECTION 3.7 Absence of Certain Changes or Events. Since the date of the
Cigarette Balance Sheet, Cigarette and its Subsidiaries, if any, have conducted
their businesses only in the ordinary course, in a manner consistent with past
practice, and there has not been: (i) any Cigarette Material Adverse Effect;
(ii) any damage, destruction or loss (whether or not covered by insurance) with
respect to Cigarette or any of its Subsidiaries, if any, having a Cigarette
Material Adverse Effect; (iii) any material change by Cigarette or any of its
subsidiaries, if any, in its accounting methods, principles or practices to
which Alchemy has not previously consented in writing; (iv) any revaluation by
Cigarette or any of its Subsidiaries, if any, of any of its assets having a
Cigarette Material Adverse Effect, including writing off notes or accounts
receivable, other than in the ordinary course of business consistent with past
practice, unless Alchemy has previously consented in writing thereto; or (v) any
other action or event that would have required the consent of Alchemy pursuant
to Section 5.1 had such action or event occurred after the date of this
Agreement and that could reasonably be expected to result in a Cigarette
Material Adverse Effect.
SECTION 3.8 Taxes.
(a) For purposes of this Agreement, a "Tax" or, collectively,
"Taxes" means any and all material federal, state, local and foreign
taxes, assessments and other governmental charges, duties, impositions and
liabilities, including taxes based upon or measured by gross receipts,
income, profits, sales, use and occupation, and value added, ad valorem,
transfer, franchise, withholding, payroll, recapture, employment, excise
and property taxes, together with all interest, penalties and additions
imposed with respect to such amounts and any obligations under any
agreements or arrangements with any other person with respect to such
amounts and including any liability for taxes of a predecessor entity.
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(b) Each of Cigarette and its Subsidiaries, if any, has accurately
prepared and timely filed all material federal, state, local and foreign
returns, estimates, information statements and reports required to be
filed at or before the Effective Time ("Returns") relating to any and all
Taxes concerning or attributable to Cigarette or any of its Subsidiaries,
if any, or to their operations, and such Returns are true and correct in
all material respects.
(c) each of Cigarette and its Subsidiaries, if any, as of the
Effective Time: (i) will have paid all Taxes it is required to pay prior
to the Effective Time, and (ii) will have withheld with respect to its
employees all federal and state income taxes, FICA, FUTA and other Taxes
required to be withheld, except where any failure to make such payment or
withholding would not be reasonably likely to have a Cigarette Material
Adverse Effect.
(d) There is no Tax deficiency outstanding, proposed or assessed
against Cigarette or any of its Subsidiaries, if any, that is not
reflected as a liability on the Cigarette balance Sheet nor has Cigarette
or any of its Subsidiaries, if any, executed any waiver of any statute of
limitations on or extending the period for the assessment or collection of
any Tax (other than Taxes in the ordinary course of business in an amount
that is not material to Cigarette and its Subsidiaries, if any, taken
together as a whole).
(e) neither Cigarette nor any of its Subsidiaries, if any, has any
material liability for unpaid Taxes that has not been accrued for or
reserved on the Cigarette Balance Sheet, whether asserted or unasserted,
contingent or otherwise.
SECTION 3.9 Properties. All material real property leases ("Material
Lease(s)") of Cigarette and its Subsidiaries, if any, are in good standing,
valid and effective in accordance with their respective terms, and neither
Cigarette nor its Subsidiaries, if any, is in default under any of such leases,
except where the lack of such good standing, validity or effectiveness or the
existence of such default would not be reasonably likely to have a Cigarette
Material Adverse effect.
SECTION 3.10 Intellectual Property.
(a) Cigarette and its Subsidiaries, if any, own or are licensed or
otherwise possess legally enforceable rights to use, all patents,
trademarks, trade names, service marks and copyrights, any applications
for and registrations of such patents, trademarks, trade names, service
marks, copyrights and mask works, and all processes, formulae, methods,
schematics, technology, know-how and tangible or intangible proprietary
information or material that are necessary to conduct the business of
Cigarette and its Subsidiaries, if any, as currently conducted, or planned
to be conducted, the absence of which would be reasonably likely to have a
Cigarette Material Adverse Effect (the "cigarette Intellectual Property
Rights").
(b) Neither Cigarette nor any of its Subsidiaries, if any, is, or
will as a result of the execution and delivery of the Agreement or the
performance of Cigarette's obligations under this Agreement or otherwise
be, in breach of any license, sublicense or other agreement
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relating to the Cigarette Intellectual Property Rights, or any material
licenses, sublicenses and other agreements as to which Cigarette or any of
its Subsidiaries, if any, is a party and pursuant to which Cigarette or
any of its Subsidiaries, if any is authorized to use any third party
patents, trademarks or copyrights ("Cigarette Third Party Intellectual
Property rights") which is used in the manufacture of, incorporated in, or
forms a part of any product sold by or expected to be sold by Cigarette or
any of its Subsidiaries, if any, the breach of which would be reasonably
likely to have a Cigarette Material Adverse Effect.
(c) All patents, registered trademarks, service marks and copyrights
which are held by Cigarette or any of its Subsidiaries, if any, and which
are material to the business of Cigarette and its Subsidiaries, if any,
taken as a whole, are valid and subsisting. Cigarette (i) has not been
sued in any suit, action or proceeding which involves a claim or
infringement of any patents, trademarks, service marks, copyrights or
violation of any trade secret or other proprietary right of any third
party, which infringement would reasonably be expected to have a Cigarette
Material Adverse Effect.
SECTION 3.11 Agreements, Contracts and Commitments. Neither Cigarette nor
any of its Subsidiaries, if any, has breached, or received in writing any claim
or threat that it has breached, any of the terms or conditions of any agreement,
contract or commitment that (i) is filed as an exhibit to a Cigarette SEC Report
or (ii) with respect to agreements, contracts or commitments entered into by
Cigarette since _______________________, would have been required to be filed as
an exhibit to a Cigarette SEC Report had they been entered into prior to such
date ("Cigarette material Contracts") in such a manner as would permit any other
party to cancel or terminate the same or would permit any other party to collect
material damages from Cigarette or any of its Subsidiaries, if any, under any
Cigarette Material Contract. Each Cigarette Material Contract that has not
expired or been terminated in accordance with its terms is in full force and
effect and is not subject to any material default thereunder of which Cigarette
is aware by any party obligated to Cigarette or any of its Subsidiaries, if any,
pursuant to such Cigarette Material Contract. To the knowledge of Cigarette,
none of the parties to the Cigarette Material Contracts have terminated, or in
any way expressed an intent to materially reduce or terminate the amount of
business with Cigarette and its Subsidiaries, if any, in the future.
SECTION 3.12 Litigation. There is no action, suit or proceeding, claim,
arbitration or investigation against Cigarette or any of its Subsidiaries, if
any, pending or as to which Cigarette has received any notice of assertion,
which, if decided adversely to Cigarette or any Subsidiary, if any, would be
reasonably expected to have a Cigarette material Adverse Effect, or a material
adverse effect on the ability of Cigarette to consummate the transactions
contemplated by this Agreement.
If, however, there exists an action, suit or proceeding, claim,
arbitration or investigation against Cigarette or any of its Subsidiaries, if
any, pending or as to which Cigarette has received any notice of assertion,
which, if decided adversely to Cigarette or any Subsidiary, if any, would be
reasonably expected to have a Cigarette material Adverse Effect, or a material
adverse effect on the ability of Cigarette to consummate the transactions
contemplated by this Agreement, such
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information shall be listed and submitted to Alchemy and Merger Sub prior to the
execution of this Agreement and shall be annexed hereto as a separate schedule.
SECTION 3.13 Environmental Matters. Due to the manufacturing process
employed by Cigarette, the Company has been directly involved in the storage and
use of a number of hazardous materials. At all times that hazardous materials
were either stored or used, Cigarette and it subsidiaries believe that they held
all of the required environmental permits for the storage and use of such
materials (as defined in section 9.3). If it is subsequently determined that
Cigarette and its subsidiaries, if any, did not hold a required Environmental
Permits (as defined in Section 9.3), the absence of such would most likely
result in a Material Adverse Effect. No action, proceeding, revocation
proceeding, amendment procedure, writ, injunction or claim is pending or, to the
knowledge of Cigarette, threatened concerning any Environmental Permit or any
Hazardous Materials Activity of Cigarette or any of its Subsidiaries, if any.
Cigarette is not aware of any fact or circumstance which could involve Cigarette
or any of its Subsidiaries, if any, in any environmental litigation or impose
upon Cigarette or any of its Subsidiaries, if any, any environmental liability
which would be reasonably likely to have a Cigarette material Adverse Effect.
SECTION 3.14 Compliance with Laws. Each of Cigarette and its Subsidiaries,
if any, has complied in all material respects with all applicable federal,
state, local and foreign statutes, laws and regulations, and is not in violation
of, and has not received any notices of violation with respect to, any such
statute, law or regulation, with respect to the conduct of its business or the
ownership or operation of its business, including the federal Foreign Corrupt
Practices Act and all United States statutes, laws and regulations as from time
to time govern the license and delivery of technology and products abroad by
persons subject to the jurisdiction of the United States.
SECTION 3.15 Pooling of Interests. Neither Cigarette nor, to its
knowledge, any of its Affiliates (as defined in Section 6.11) has, through the
date of this Agreement, taken or agreed to take any action which could affect
the ability of Alchemy to account for the business combination to be effected by
the Merger as a pooling of interests.
SECTION 3.16 Interested Party Transactions. If applicable, since the date
of Cigarette's most recent proxy statement to its shareholders, if any, no event
has occurred that would be required to be reported by Cigarette as a Certain
Relationship or Related Transaction, pursuant to Item 404 of Regulation S-K
promulgated by the SEC.
SECTION 3.17 Registration Statement; Proxy Statement/Prospectus. The
information supplied to Alchemy by Cigarette expressly for inclusion in the
registration statement on Form S-4 pursuant to which shares of Alchemy Common
Stock to be issued in the Merger will be registered with the SEC (the
"Registration Statement") does not, and at the time the Registration Statement
is declared effective by the SEC shall not, contain any untrue statement of a
material fact or omit to state any material fact required to be stated in the
Registration Statement or necessary in order to make the statements in the
Registration Statement, in light of the circumstances under which they
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were made, not misleading. The information supplied to Alchemy by Cigarette
expressly for inclusion in the proxy statement/prospectus (the "Proxy
Statement") to be sent to the shareholders of Cigarette in connection with the
special meeting of Cigarette's shareholders to consider this Agreement and the
Merger (the "Cigarette Shareholder Meeting") and to the shareholders of Alchemy
in connection with the meeting of Alchemy shareholders to approve the issuance
of Alchemy Common Stock in connection with the meeting of Alchemy shareholders
to approve the issuance of Alchemy Common Stock in connection with the
transactions contemplated by this Agreement (the "Alchemy Shareholder Meeting")
shall not, on the date the Proxy Statement is first mailed to shareholders of
Cigarette and shareholders of Alchemy, at the time of the Cigarette Shareholder
Meeting, the Alchemy Shareholder Meeting or at the Effective Time, contain any
statement which, at such time and in light of the circumstances under which it
was made, is false or misleading with respect to any material fact, or omit to
state any material fact necessary in order to make the statements make in the
Proxy Statement not false or misleading or omit to state any material fact
necessary to correct any statement in any earlier communication with respect to
the solicitation of proxies for the Cigarette Shareholders Meeting or the
Alchemy Shareholders Meeting which has become false or misleading. If at any
time prior to the Effective Time any event relating to Cigarette or any of its
Affiliates, officers or directors should be discovered by Cigarette which should
be set forth in an amendment to the Registration Statement or a supplement to
the Proxy Statement, Cigarette shall promptly notify Alchemy of such event in
reasonable detail.
SECTION 3.18 Payments Resulting from Mergers. Except as provided in this
Agreement, the consummation or announcement of any transaction contemplated by
this Agreement will not (either alone or upon the occurrence of any additional
or further acts or events) result in any (i) material payment (whether of
severance pay or otherwise) becoming due from Cigarette or any of its
Subsidiaries, if any, to any officer, employee, former employee or director
thereof or to the trustee under any management, employment, deferred
compensation, severance (including any payment, right or benefit resulting from
a change in control), bonus or other contract for personal services with any
officer, director or employee or any plan, agreement or understanding similar to
any of the foregoing, or any "rabbi trust" or similar arrangement, or (ii)
material benefit under any Cigarette benefit plan being established or becoming
accelerated, vested or payable.
SECTION 3.19 Option of Financial Advisor. As of the date hereof, Cigarette
has not yet determined who will serve as financial advisor to the merger
contemplated herein.
SECTION 3.20 Business Combination. The Board of Directors of Cigarette has
taken all actions so that the restrictions contained in the FGCA applicable to a
"business combination" will not apply to the execution, delivery or performance
of this Agreement or consummation of the Merger or other transactions
contemplated by this Agreement.
ARTICLE IV
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REPRESENTATIONS AND WARRANTIES OF ALCHEMY AND MERGER SUB
Alchemy and Merger Sub represent and warrant to Cigarette that the
statements contained in this Article IV are true and correct, except (i) as
disclosed or incorporated by reference in the Alchemy SEC Reports (as defined in
Section 4.4 (a)) filed prior to the date of this Agreement (ii) in the case of
the representations and warranties in Sections 4.1, 4.2, 4.4(b), 4.5 through
4.14 and 4.17, where the failure to be true and correct would not, either
individually or in the aggregate, have an Alchemy Material Adverse Effect (as
defined below), or (iii) as set forth on the disclosure schedule, if any,
delivered by Alchemy to Cigarette prior to execution of this Agreement (the
"Alchemy Disclosure Schedule"). When used in connection with Alchemy or any of
its Subsidiaries, the term "Alchemy Material Adverse Effect" means any change,
event or effect that is materially adverse to the business, assets (including
intangible assets) liabilities, financial condition, operations or results of
operations of Alchemy and its Subsidiaries, taken as a whole; provided, however,
that the following shall not be deemed to constitute an "Alchemy Material
Adverse Effect": (i) an adverse change in or effect on the financial conditions,
revenues or gross margins of Alchemy (or the direct consequences thereof)
following the date of this Agreement to the extent attributable to (A) a delay
of, reduction in or cancellation or change in the terms of product licenses by
customers of Alchemy , (B) a slow down in the activity of Alchemy's sales
organization or (C) the loss of any officer or key employee of Alchemy to the
extent attributable directly and primarily to the transactions contemplated by
this Agreement; (ii) an adverse change in or effect on the market price of
Alchemy Common Stock between the date of this Agreement and the Closing Date;
(iii) a failure of quarterly results of operations for any quarter between the
date of this Agreement and the Closing Date to meet generally analysts'
expectations as reflected in the First Call Consensus estimate, if any; or (iv)
the outcome of any litigation disclosed pursuant to Section 4.12.
SECTION 4.1 Organization. Each of Alchemy, Merger Sub and the other
Subsidiaries of Alchemy is a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation, has all
requisite power to own lease and operate its property and to carry on its
business as now being conducted and as proposed to be conducted and is duly
qualified to do business and is in good standing as a foreign corporation in
each jurisdiction where the failure to be so qualified would have an Alchemy
Material Adverse Effect. Neither Alchemy nor any of its Subsidiaries directly or
indirectly owns any equity, or similar interest in, or any interest convertible
into or exchangeable or exercisable for any such equity or similar interests in
any corporation, limited liability company, partnership, joint venture or other
business association or entity, excluding securities of any publicly traded
company held for investment by Alchemy and comprising less than five percent of
the outstanding stock of such company.
SECTION 4.2 Alchemy Subsidiaries and Joint Ventures. All issued and
outstanding shares of capital stock of each Subsidiary are owned by Alchemy or a
Subsidiary of Alchemy and are validly issued, fully paid and nonassessable, and
there are no outstanding subscriptions, options, calls, contracts, voting
trusts, proxies or other commitments, understandings, restrictions,
arrangements, rights or warrants with respect to any such Subsidiary's capital
stock, including any right obligating any such Subsidiary to issue, deliver or
sell additional shares of its capital stock.
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SECTION 4.3 Alchemy Capital Structure.
(a) The authorized capital stock of Alchemy consists of 50,000,000
shares of Alchemy Common Stock and 10,000,000 shares of Preferred Stock,
$0.001 par value ("Alchemy Preferred Stock"). As of , 1998: (i)
shares of Alchemy Common Stock and 100,000 shares of Alchemy
Preferred were issued and outstanding, all of which are validly issued,
fully paid and nonassessable; and (ii) no shares of Alchemy Common Stock
were held in the treasury of Alchemy or by Subsidiaries of Alchemy. No
material change in such capitalization has occurred between , 1998
and the date of this Agreement. As of the date of this Agreement, 100,000
shares of Alchemy Preferred Stock are issued and outstanding. All the
shares of Alchemy Common Stock subject to issuance as specified above,
upon issuance on the terms and conditions specified in the instruments
pursuant to which they are issuable, shall be duly authorized, validly
issued, fully paid and nonassessable. There are no obligations, contingent
or otherwise, of Alchemy, or any of its Subsidiaries to repurchase,
redeem, or otherwise acquire any shares of Alchemy Common Stock or the
capital stock of any Alchemy Subsidiary or to provide funds or to make any
investment (in the form of a loan, capital contribution or otherwise) in
any such Subsidiary or entity other than guarantees of debt obligations of
such Subsidiaries entered into in the ordinary course of business. All of
the outstanding shares of capital stock of each Subsidiary of Alchemy are
duly authorized, validly issued, fully paid and nonassessable, and all
such shares (other than directors' qualifying shares in the case of
foreign Subsidiaries) are owned by Alchemy or another Alchemy Subsidiary
free and clear of all security interests, liens, claims, pledges,
agreements, limitations on the voting rights of Alchemy, charges or other
encumbrances of any nature.
(b) Except as contemplated by this Agreement, there are no equity
securities of any class of Alchemy or any of its Subsidiaries or any
security exchangeable for such equity securities, issued, reserved for
issuance, or outstanding. Except as contemplated by this Agreement, there
are no options, warrants, securities, calls, rights, commitments or
agreements of any character to which Alchemy or any of its Subsidiaries is
a party or by which it is bound obligating Alchemy or any of its
Subsidiaries to issue, deliver or sell, or cause to be issued, delivered
or sold, additional shares of any capital stock of Alchemy or any of its
Subsidiaries or obligating Alchemy or any of its Subsidiaries to grant,
accelerate the vesting of or enter into any such option, warrant, equity
security, call, right, commitment, or agreement, and to the best knowledge
of Alchemy, there are no voting trusts, proxies or other agreements or
understandings with respect to the shares of the capital stock of Alchemy.
SECTION 4.4 Authority; No Conflict; Required Filings and Consents.
(a) Alchemy has all requisite corporate power and authority to enter
into this Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the consummation
of the transactions contemplated hereby
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and thereby have been duly authorized by all corporate and shareholder
action on the part of Alchemy, subject only to the approval by Alchemy
shareholders of the issuance of the shares of Alchemy Common Stock issued
pursuant to this Agreement. This Agreement has been duly executed and
delivered by Alchemy and constitutes the valid and binding obligation of
Alchemy, enforceable in accordance with the terms hereof and thereof.
(b) The execution and delivery of this Agreement by Alchemy does
not, and the consummation of the transactions contemplated hereby will not
(i) conflict with, or result in any violation or breach of any provision
with the Articles of Incorporation or Bylaws of Alchemy or any of its
Subsidiaries (in each case as heretofore amended (ii) result in any
violation or breach of, or constitute (with or without notice, or lapse of
time, or both) a default (or give rise to a right of termination,
cancellation or acceleration of any obligation or any loss of benefit)
under any of the terms, conditions or provisions of any note, bond,
mortgage, indenture, lease, contractor other agreement, instrument or
obligation to which Alchemy or any of its Subsidiaries is a party or by
which any of them or any of their respective properties or assets may be
bound, or (iii) conflict with or violate any permit, concession,
franchise, license, judgement, order, decree, statute, law, ordinance,
rule or regulation applicable to Alchemy or any of its Subsidiaries or any
of its or their respective properties or assets.
(c) No consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Entity is
required by or with respect to Alchemy or any of its Subsidiaries in
connection with the execution and delivery of this Agreement or the
consummation of the transactions contemplated hereby, except for (i) the
filing, if applicable, of a pre-merger notification report under the HSR
Act, (ii) the filing of the registration statement with the SEC in
accordance with the Securities Act, (iii) the filing of the Certificate of
Merger with the Secretary of State of the State of Florida, (iv) such
other consents, approvals, orders, authorizations, registrations,
declarations and filings as may be required under applicable federal and
state securities laws and the laws of any foreign country, (v) the filing
of the Registration Statement and the Proxy Statement with the SEC in
accordance with the Securities Act and the Exchange Act and (vi) such
other consents, authorizations, filings, approvals and registrations
which, if not obtained or made, would not be reasonably likely to have an
Alchemy Material Adverse Effect or a material adverse effect on the
ability of Alchemy to consummate the transactions contemplated by this
Agreement.
SECTION 4.4 SEC Filings; Financial Statements.
(a) Alchemy has filed all forms, reports and documents required to
be filed by Alchemy with the SEC since , 1998 (collectively, the
"Alchemy SEC Reports") and has made available to Cigarette all of the same
so filed, complied in all material respects with the applicable
requirements of the Securities Act and the Exchange Act, as the case may
be, and (ii) did not at the time they were filed (or if amended or
superseded by a filing prior to the date of this Agreement, then on the
date of such filing) contain any untrue statement
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of a material fact or omit to state a material fact required to be stated
in such Alchemy SEC Reports or necessary in order to make the statements
in the in such Alchemy SEC Reports, in the light of the circumstances
under which they were made, not misleading. No Alchemy Subsidiary is
required to file any forms, reports or other documents with the SEC.
(b) Each of the consolidated financial statements (including, in
each case, any related notes thereto) contained in the Alchemy SEC Reports
filed after the date of this Agreement prior to the Closing, complied or
will comply as to form in all material respects with the applicable
published rules and regulations of the SEC with respect thereto, was or
will be prepared in accordance with GAAP applied on a consistent basis
throughout the periods involved (except as to be indicated in the notes to
such financial statements or, in the case of unaudited statements, as
permitted by Form 10-Q promulgated by the SEC) and fairly presented or
will present, in all material respects, the consolidated financial
position of Alchemy and its Subsidiaries as at the respective dates of its
operations and cash flows for the periods indicated, except that the
unaudited interim financial statements were or are subject to normal and
recurring year end adjustments which were not or are not expected to be
material in amount.
SECTION 4.6 Absence of Undisclosed Liabilities. Alchemy and its
Subsidiaries do not have any liabilities, either accrued or contingent (whether
or not required to be reflected in financial statements, including the notes
thereto, in accordance with GAAP), and whether due or to become due, which
individually or in the aggregate would be reasonably likely to have an Alchemy
Material Adverse Effect, other than (i) liabilities reflected in the unaudited
consolidated balance sheet of Alchemy as of December 31, 1997 in the ordinary
course of business consistent with past practices.
SECTION 4.7 Absence of Certain Changes or Events. Since the date of the
Alchemy Balance Sheet, Alchemy and its Subsidiaries have conducted their
business only in the ordinary course, in a manner consistent with past practice,
and there has not been: (i) any Alchemy Material Effect; (ii) any damage,
destruction or loss (whether or not covered by insurance) with respect to
Alchemy or any of its Subsidiaries having a Alchemy Material Adverse Effect;
(iii) any material change by Alchemy in its accounting methods, principles or
practices to which Cigarette has not previously consented in writing; (iv) any
reevaluation by Alchemy of any of its assets having an Alchemy Material Adverse
Effect, including writing down the value of capitalized software or inventory or
writing off notes or accounts receivable other than in the ordinary course of
business consistent with past practice, unless Cigarette has previously
consented in writing thereto; or (v) any such action or event that would have
required the consent of Cigarette pursuant to Section 5.2 had such action or
event occurred after the date of this Agreement and that could reasonably be
expected to result in an Alchemy Material Adverse Effect.
SECTION 4.8 Taxes.
(a) Each of Alchemy and its Subsidiaries has accurately prepared and
timely filed all material required Returns relating to any and all Taxes
concerning or attributable to Alchemy or its operations and such Returns
are true and correct in all material respects.
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(b) Each of Alchemy and its Subsidiaries as of the Effective Time:
(i) will have paid all Taxes it is required to pay prior to the Effective
Time and (ii) will have withheld with respect to its employees all federal
and state income taxes, FICA, FUTA and other Taxes required to be
withheld, except where any failure to make payment or withholding would
not be reasonably likely to have an Alchemy Material Adverse Effect.
(c) There is no Tax deficiency outstanding, proposed or assessed
against Alchemy or any of its Subsidiaries that is not reflected as a
liability on the Alchemy Balance Sheet nor has Alchemy or any of its
Subsidiaries executed any waiver of any statute of limitations on or
extending the period for the assessment or collection of any Tax (other
than Taxes in the ordinary course of business in an amount that is not
material to Alchemy and its Subsidiaries taken as a whole).
(d) Neither Alchemy nor any of its Subsidiaries has any material
liability for unpaid Taxes that have not been accrued for or reserved on
Alchemy Balance Sheet, whether asserted or unasserted, contingent or
otherwise.
SECTION 4.9 Properties. All Material Leases under which Alchemy and its
Subsidiaries lease real property are in good standing, valid and effective in
accordance with their respective terms, and neither Alchemy nor any of its
Subsidiaries is in default under any material provision of such Material Leases,
except where the lack of such good standing, validity and effectiveness or the
existence of such default would not be reasonably likely to have an Alchemy
Material Adverse Effect.
SECTION 4.10 Intellectual Property.
(a) Alchemy and its Subsidiaries own, or are licensed or otherwise
possess legally enforceable rights to use, all patents, trademarks, trade
names, service marks, copyrights and mask works, any applications for and
registrations of such patents, trademarks, trade names, service marks,
copyrights and mask works, and all processes, formulae, methods,
schematics, technology, know-how, computer software programs or
applications, and tangible or intangible proprietary information or
material that are necessary to conduct the business of Alchemy and its
subsidiaries as currently conducted or planned to be conducted, the
absence of which would be reasonably likely to have an Alchemy Material
Adverse Effect (the "Alchemy Intellectual Property Rights").
(b) Neither Alchemy nor any of its Subsidiaries has or will it be as
a result of the execution and delivery of this Agreement or the
performance of its obligations under this Agreement, in breach of any
license, sublicense or other agreement relating to the Alchemy
Intellectual Property Rights or any material license, sublicense or other
agreement pursuant to which Alchemy is authorized to use any third party
patents, trademarks or copyrights, including software, which is used in
the manufacture of, incorporated in, or forms a part of
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any Alchemy product sold or expected to be sold by Alchemy or any of its
Subsidiaries, the breach of which would be reasonably likely to have an
Alchemy Material Adverse Effect.
(c) All patents, registered trademarks, service marks and copyrights
which are held by Alchemy or any of its Subsidiaries and which are
material to the business of Alchemy and its Subsidiaries, taken as a
whole, are valid and subsisting. Alchemy (i) has not been sued in any
suit, action or proceeding which involves a claim of infringement of any
patents, trademarks, service marks. copyrights or violation of any trade
secret or other proprietary right of any third party; and (ii) has no
knowledge that the manufacturing, marketing, licensing or sale of its
products infringes any patent, trademark, service mark, copyright, trade
secret or other proprietary right of any third party, which infringement
would be reasonably likely to have an Alchemy Material Adverse Effect.
SECTION 4.11 Agreements, Contracts and Commitments. Neither Alchemy nor
any of its Subsidiaries has breached, or received in writing any claim or threat
that it has breached, any of the terms or conditions of any agreement, contract
or commitment that (i) is filed as an exhibit to a Alchemy SEC Report or (ii)
with respect to agreements, contracts or commitments entered into by Alchemy
since ________________, would have been required to be filed as an exhibit to an
Alchemy SEC Report if they had been entered into prior to such date ("Alchemy
Material Contacts") in such a manner as would permit any other party to cancel
or terminate the same or would permit any other party to collect material
damages from Alchemy under any Alchemy Material Contract. Each Alchemy Material
Contract that has not expired or been terminated in accordance with its terms is
in full force and effect and is not subject to any material default thereunder
of which Alchemy is aware by any party obligated to Alchemy pursuant to such
Alchemy Material Contract. To the knowledge of Alchemy, none of the parties to
the Alchemy Material Contracts have terminated or in any way expressed an intent
to materially reduce or terminate the amount of business with Alchemy or its
Subsidiaries in the future.
SECTION 4.12 Litigation. There is no action, suit or proceeding, claim,
arbitration or investigation against Alchemy pending or as to which Alchemy has
received any written notice of assertion, which would be reasonably expected to
have an Alchemy Material Adverse Effect or a material adverse effect on the
ability of Alchemy to consummate the transactions contemplated by this
Agreement.
SECTION 4.13 Environmental Matters. As of the date hereof, to its
knowledge, no underground storage tanks are present under any property that
Alchemy or any of its Subsidiaries currently occupies, or that Alchemy or any of
its Subsidiaries has at anytime owned, operated, occupied or leased. Due to the
manufacturing process employed by Cigarette, the Company has been directly
involved in the storage and use of a number of hazardous materials. At all times
that hazardous materials were either stored or used, Cigarette and it
subsidiaries believe that they held all of the required environmental permits
for the storage and use of such materials (as defined in section 9.3). If it is
subsequently determined that Cigarette and its subsidiaries, if any, did not
hold a required Environmental Permits (as defined in Section 9.3), the absence
of such would most likely
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result in a Material Adverse Effect. No action, proceeding, revocation
proceeding, amendment procedure, writ, injunction or claim is pending or, to the
knowledge of Cigarette, threatened concerning any Environmental Permit or any
Hazardous Materials Activity of Cigarette or any of its Subsidiaries, if any.
Cigarette is not aware of any fact or circumstance which could involve Cigarette
or any of its Subsidiaries, if any, in any environmental litigation or impose
upon Cigarette or any of its Subsidiaries, if any, any environmental liability
which would be reasonably likely to have a Cigarette material Adverse Effect.
SECTION 4.14 Compliance with Laws. Each of Alchemy and its Subsidiaries
has complied with all federal, state, local and foreign statutes, laws and
regulations, and, is not in violation of, and has not received any notices of
violation with respect to, any such statute, law or regulation, with respect to
the conduct of its business or the ownership or operation of its business,
including the federal Foreign Corrupt Practices Act and all United States
statutes, laws and regulations as from time to time govern the license and
delivery of technology and products abroad by persons subject to the
jurisdiction of the United States, except for failures to comply or violations
which would not be reasonably likely to have an Alchemy Material Adverse Effect.
SECTION 4.15 Pooling of Interests. Neither Alchemy nor, to its knowledge,
any of its Affiliates (as defined in Section 6.11) has, through the date of this
Agreement, taken or agreed to take any action which would affect the ability of
Alchemy to account for the business combination to be effected by the Merger as
a pooling of interests.
SECTION 4.16 Interested Party Transactions. Since the date of the most
recent proxy statement of Alchemy to its shareholders, no event has occurred
that would be required to be reported by Alchemy as a Certain Relationship or
Related Transaction pursuant to Item 404 of Regulation S-K promulgated by the
SEC.
SECTION 4.17 Registration Statement; Proxy Statement/Prospectus. The
information supplied by Alchemy expressly for inclusion in the Registration
Statement shall not at the time the Registration Statement is declared effective
by the SEC contain any untrue statement of a material fact or omit to state any
material fact required to be stated in the Registration Statement or necessary
in order to make the statements in the Registration Statement, in light of the
circumstances under which they were made, not misleading. The information
supplied to Cigarette by Alchemy expressly for inclusion in the Proxy Statement
shall not, on the date the Proxy Statement is first mailed to shareholders of
Cigarette, at the time of the Cigarette Shareholders Meeting or at the Effective
Time, contain any statement which, at such time and in light of the
circumstances under which it shall be made, is false or misleading with respect
to any material fact, or omit to state any material fact necessary in order to
make the statements made in the Proxy Statement not false or misleading; or omit
to state any material fact necessary to correct any statement in any earlier
communication with respect to the solicitation of proxies for the Cigarette
Shareholders Meeting which has become false or misleading. If at any time prior
to the Effective Time any event relating to Alchemy or any of its affiliates,
officers or directors should be discovered by Alchemy which should be set forth
in an amendment to the Registration Statement or a supplement to the Proxy
Statement, Alchemy shall
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promptly inform Cigarette.
SECTION 4.18 Interim Operations of Merger Sub. Merger Sub was formed
solely for the purpose of engaging in the transactions contemplated by this
Agreement, has engaged in no other business activities and has conducted its
operations only as contemplated by this Agreement.
ARTICLE V
CONDUCT OF BUSINESS
SECTION 5.1 Covenants of Cigarette. Except as expressly contemplated by
this Agreement, during the period from the date of this Agreement and continuing
until the earlier of the termination of this Agreement pursuant to Section 8.1
or the Effective Time, Cigarette agrees as to itself and its Subsidiaries, if
any, except to the extent that Alchemy shall otherwise consent in writing (which
consent shall not be unreasonably withheld or delayed), to carry on its business
in the usual, regular and ordinary course in substantially the same manner as
previously conducted, to pay its debts and taxes when due, subject to good faith
disputes over such debts or taxes, to pay or perform its other obligations when
due, and to use all reasonable efforts consistent with past practices and
policies to (i) preserve intact its present business organization, (ii) keep
available the services of its present officers and key employees and (iii)
preserve its relationships with customers, suppliers, distributors, licensors,
licensees and others having business dealings with it. Without limiting the
generality of the foregoing, Cigarette shall not (and shall not permit any of
its Subsidiaries, if any, to), without prior written consent of Alchemy (which
consent shall not be unreasonably withheld or delayed):
(a) transfer or license to any person or entity or otherwise extend,
amend or modify any rights to the Cigarette Intellectual Property Rights
other than in the ordinary course of business consistent with past
practices;
(b) declare or pay any dividends on or make any other distributions
(whether in cash, stock or property) in respect of any of its capital
stock, or split, combine or reclassify any of its capital stock or issue
or authorize the issuance of any other securities in respect of, in lieu
of or in substitution for shares of its capital stock, or purchase or
otherwise acquire, directly or indirectly, any shares of its capital stock
except from former employees, directors and consultants in accordance with
agreements providing for the repurchase of shares in connection with any
termination of service by such party;
(c) issue, deliver or sell or authorize or propose the issuance,
delivery or sale of, any shares of its capital stock or securities
convertible into shares of its capital stock, or subscriptions, rights,
warrants or options to acquire, or other agreements or commitments of any
character obligating it to issue any such shares or other convertible
securities;
(d) acquire or agree to acquire by merging or consolidating with, or
by purchasing a substantial portion of the assets of, or by any other
manner, any business or any corporation, partnership or other business
organization or division, except as set forth in the Cigarette
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Disclosure Schedule;
(e) sell, lease, license or otherwise dispose of any of its
properties or assets which are material, individually or in the aggregate,
to the business of Cigarette and its Subsidiaries, if any, taken as a
whole, except for transactions entered into in the ordinary course of
Cigarette's business consistent with past practice;
(f) take any action to: (i) increase or agree to increase the
compensation payable or to become payable to its officers or employees,
except for increases in salary or wages of employees in accordance with
agreements entered into before the date of this Agreement or otherwise in
the ordinary course of Cigarette's business consistent with past
practices, (ii) grant any additional severance or termination pay to, or
enter into any employment or severance agreement, with any employee,
except in accordance with agreements entered into before the date of this
Agreement or otherwise in the ordinary course of Cigarette's business
consistent with past practices, (iv) enter into any collective bargaining
agreement, or (v) establish, adopt, enter into or amend in any material
respect any bonus, profit sharing, thrift, compensation, stock option,
restricted stock, pension, retirement, deferred compensation, employment,
termination, severance or other plan, trust, fund, policy or arrangement
for the benefit of any directors, officers or employees;
(g) amend or propose to amend its Certificate of Incorporation or
Bylaws, except as contemplated by this Agreement; or
(h) take, or agree in writing or otherwise to take, any of the
actions described in the foregoing clauses (a) through (h), or any action
which is reasonably likely to make any of Cigarette's representations or
warranties contained in this Agreement untrue or incorrect in any material
respect on the date made (to the extent so limited) or as of the Effective
Time.
SECTION 5.2 Covenants of Alchemy. During the period from the date of this
Agreement and continuing until the earlier of the termination of the Agreement
pursuant to Section 8.1 or the Effective Time, except as expressly contemplated
by this Agreement, Alchemy shall not, without the prior written consent of
Cigarette (which consent shall not be unreasonably withheld or delayed):
(a) declare or pay any dividends on or make any other distributions
(whether in cash, stock or property) in respect of any of its capital
stock, or reclassify any of its capital stock or issue or authorize the
issuance of any other securities in respect of, in lieu of or in
substitution for shares of its capital stock (other than stock splits of
the Alchemy Common Stock or stock dividends payable in shares of Alchemy
Common Stock), or purchase or otherwise acquire, directly or indirectly,
any shares of its capital stock except from former employees, directors
and consultants in accordance with agreements providing for the repurchase
of shares in connection with any termination of service by such party;
(b) issue, deliver or sell or authorize or propose the issuance,
delivery or sale of, any
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shares of its capital stock or securities convertible into shares of its
capital stock, or subscriptions, rights, warrants or options to acquire,
or other agreements or commitments of any character obligating it to issue
any such shares or convertible securities, other than (i) the issuance of
such shares or convertible securities pursuant to a transaction in which
Alchemy acquires or agrees to acquire by merging or consolidating with, or
by purchasing a substantial equity interest in or substantial portion of
the assets of, or otherwise, any business or any corporation, partnership
or other business organization or division, for consideration having a
fair market value (at the time of the public announcement of such
acquisition or agreement) of less than $100 million, or (ii) the grant to
employees, directors or consultants of options to purchase Alchemy Common
Stock in the ordinary course of business consistent with past practices
pursuant to agreements and plans entered into or established before the
date of this Agreement or otherwise in the ordinary course of business
consistent with past practices, or (iii) as contemplated in this
Agreement;
(c) amend or propose to amend its Certificate of Incorporation or
Bylaws, except as contemplated by this Agreement;
(d) acquire or agree to acquire by merging or consolidating with, or
by purchasing a substantial equity interest in or substantial portion of
the assets of, or otherwise, any business or any corporation, partnership
or other business organization or division, for consideration having a
fair market value (at the time of the public announcement of such
acquisition or agreement) in excess of $ten million;
(e) sell, lease, license or otherwise dispose of any of its
properties or assets which are material, individually or in the aggregate,
to the business of Alchemy and its Subsidiaries, taken as a whole, except
for transactions entered into in the ordinary course of business; or
(f) take, or agree in writing or otherwise to take, any of the
actions described in clauses (a) through (e) above, or any action which is
reasonably likely to make any representations or warranties of Alchemy
contained in this Agreement untrue or incorrect in any material respect on
the date made (to the extent so limited) or as of the Effective Time.
SECTION 5.3 Cooperation. Subject to compliance with applicable law, from
the date hereof until the Effective Time, each of Alchemy and Cigarette shall
confer on a regular and frequent basis with one or more representatives of the
other party to report operational matters of materiality and the general status
of ongoing operations and shall promptly provide the other party or its counsel
with copies of all filings made by such party with any Governmental Entity in
connection with this Agreement, the Merger and the transactions contemplated
hereby.
ARTICLE VI
ADDITIONAL AGREEMENTS
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SECTION 6.1 No Solicitation.
(a) From and after the date of this Agreement until the earlier of
the Effective Time or the termination of this Agreement in accordance with
its terms, Cigarette shall not, directly or indirectly, through any
officer, director, employee, representative or agent, (i) solicit,
initiate or encourage any inquiries or proposals that constitute, or could
reasonably be expected lead to, a proposal or offer for a merger,
consolidation, share exchange, business combination, sale of substantial
assets, sale of shares of capital stock (including without limitation
pursuant to a tender offer) or similar transaction or series of
transactions involving Cigarette, other than the transactions contemplated
by this Agreement (any of the foregoing inquiries or proposals being
referred to in this Agreement as an "Acquisition Proposal"), or (ii)
engage in negotiations or discussions concerning, or provide any
non-public information to any person or entity relating to, any
Acquisition Proposal, or (iii) agree to, approve or recommend any
Acquisition Proposal; provided however, that nothing contained in this
Agreement shall prevent Cigarette or its Board of Directors from (A)
furnishing non-public information to, or entering into discussions or
negotiations with, any person or entity (including a new and unsolicited
Acquisition proposal received by Cigarette after the execution of this
Agreement from a person or entity whose initial contact with Cigarette may
have been solicited by Cigarette prior to the execution of this Agreement)
or recommending such an unsolicited bona fide written Acquisition Proposal
to the shareholders of Cigarette, if and only to the extent that (1) the
Board of Directors of Cigarette believes in good faith (after consultation
with and based upon the advice of its financial advisor) that such
Acquisition Proposal would, if consummated, result in a transaction more
favorable to Cigarette shareholders from a financial point of view than
the transaction contemplated by this Agreement (any such more favorable
Acquisition Proposal being referred to in this Agreement as a "Superior
Proposal") and the Board of Directors of Cigarette determines in good
faith after consultation with and based upon the advice of outside legal
counsel that such action is necessary for Cigarette to comply with its
fiduciary duties to its shareholders under applicable law and (2) prior to
furnishing such non-public information to, or entering into discussions or
negotiations with, such person or entity, such Board of Directors receives
from such person or entity an executed non-disclosure agreement or (B)
complying with Rule 14e- 2 promulgated under the Exchange Act with regard
to an Acquisition Proposal.
(b) Upon compliance with the foregoing, following receipt of a
Superior Proposal, Cigarette shall be entitled to (i) withdraw, modify or
refrain from making its recommendation referred to in Section 6.2 and
approve and recommend to the shareholders of Cigarette a Superior Proposal
and (ii) enter into an agreement with such third party concerning a
Superior Proposal provided that Cigarette shall concurrently make payment
in full to Alchemy of the fee provided in Section 8.3(b) below.
(c) Cigarette shall notify Alchemy within 24 hours after receipt by
Cigarette (or its advisors) of any Acquisition Proposal or any request for
non-public information in connection with an Acquisition Proposal or for
access to the properties, books or records of
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Cigarette by any person or entity that informs Cigarette that it is
considering making, or has make, an Acquisition Proposal. Such notice
shall be made orally and in writing ans shall indicate in reasonable
detail the identity of the offeror and the terms and conditions of such
proposal, inquiry or contact. Cigarette shall notify Alchemy of any
discussions with any such offeror within 24 hours of such discussions and
shall disclose to Alchemy within such 24-hour period the substance of such
discussions in reasonable detail.
(d) Cigarette shall be entitled to provide copies of this Section
6.1 to third parties who, on an unsolicited basis after the date of this
Agreement, contact Cigarette regarding an Acquisition Proposal, provided
that Alchemy shall concurrently be notified of such contact and delivery
of such copy.
SECTION 6.2 Proxy Statement/Prospectus; Registration Statement. As
promptly as practicable after the execution of this Agreement, Alchemy and
Cigarette shall prepare and file with the SEC a preliminary Proxy Statement in
form and substance satisfactory to each of Cigarette and Alchemy, and Alchemy
shall prepare and file with the SEC the Registration Statement, in which the
Proxy Statement will be included. Each of Alchemy and Cigarette shall use its
reasonable efforts to respond to any comments of the SEC, to have the
Registration Statement declared effective under the Securities Act as promptly
as practicable after such filing and to cause the Proxy Statement to be mailed
to such company's shareholders at the earliest practicable time. As promptly as
practicable after the date of this Agreement, Alchemy and Cigarette shall
prepare and file any other filings required under the Exchange Act, the
Securities Act or any other federal or state securities laws relating to the
Merger and the transactions contemplated by this Agreement including under the
HSR Act and state takeover laws (the "Other Filings"), if applicable. Alchemy
shall also take any action (other than qualifying to do business in any
jurisdiction in which it is not now so qualified or filing a general consent to
service of process) required to be taken under any applicable state securities
laws in connection with the issuance of Alchemy Common Stock in the Merger, and
Cigarette shall furnish all information concerning Cigarette and the holders of
Cigarette Common Stock as may be reasonably required in connection with any such
action. Each of Alchemy and Cigarette will notify the other promptly of the
receipt of any comments from the SEC or its staff and of any request by the SEC
or its staff or any other government officials, on the other hand, with respect
to the Registration Statement and the Other Filings shall comply in all material
respects with all applicable requirements of law. Whenever any event occurs
which is required to be set forth in an amendment or supplement to the Proxy
Statement, the Registration Statement or any Other Filing, Alchemy or Cigarette,
as the case may be, shall promptly inform the other of such occurrence, provide
the other party reasonable opportunity to review and comment, and cooperate in
filing with the SEC or its staff or any other government officials, and/or
mailing to shareholders of Alchemy and shareholders of Cigarette, such amendment
or supplement. The Proxy Statement shall include the recommendations of the
Board of Directors of Alchemy in favor of the issuance of Alchemy Common Stock
in connection with the Merger and of the Board of Directors of Cigarette in
favor of the Merger and this Agreement.
SECTION 6.3 Consents. Each of Alchemy and Cigarette shall use all
reasonable efforts to
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obtain all necessary, consents, waivers and approvals, and to make all necessary
notifications or filings under any of Alchemy's or Cigarette's material
agreements, contracts, licenses or leases as may be necessary or advisable to
consummate the Merger and the other transactions contemplated by this Agreement.
SECTION 6.4 Current OTC Bulletin Board Listing. Alchemy agrees to continue
the listing of the Alchemy Common Stock on the OTC Bulletin Board until the
Closing or the earlier termination of this Agreement pursuant to Section 8.1.
SECTION 6.5 Access to Information.
(a) Upon reasonable notice, Cigarette shall (and shall cause each of
its Subsidiaries, if any, to) afford (i) to the officers, employees,
independent auditors, legal counsel (including outside legal counsel) and
other representatives of Alchemy, reasonable access, during normal
business hours during the period prior to the Effective Time, to all of
Cigarette and its Subsidiaries', if any, properties, books, contracts,
commitments and records in order that such Alchemy representatives have a
full opportunity to make such investigation as they reasonably desire to
make of Cigarette and its Subsidiaries, if any, and, (ii) to the
independent auditors of Alchemy, reasonable access to the audit work
papers and other records of the independent auditors of Cigarette and its
Subsidiaries, if any. Additionally, Cigarette and its Subsidiaries, if
any, will permit such Alchemy representatives to make such reasonable
inspections of Cigarette and its Subsidiaries, if any, and their
respective operations during normal business hours as Alchemy may
reasonably require and Cigarette and its Subsidiaries, if any, will cause
its officers and the officers of its Subsidiaries, if any, to furnish
Alchemy with such financial and operating data and other information with
respect to the business and properties of Cigarette and its Subsidiaries,
if any, as Alchemy may from time to time reasonably request. During the
period prior to the Effective Time or the earlier termination of this
agreement pursuant to Section 8.1, Cigarette shall (and shall cause each
of its Subsidiaries, if any, to) furnish promptly to Alchemy (i) a copy of
each report, schedule, registration statement and other document filed or
received by it during such period pursuant to the requirements of federal
securities laws and (ii) all other information concerning its business,
properties and personnel as Alchemy may reasonably request.
(b) Upon reasonable notice, Alchemy shall (and shall cause each of
its Subsidiaries to) afford (i) to the officers, employees, independent
auditors, legal counsel (including outside legal counsel) and other
representatives of Cigarette, reasonable access, during normal business
hours during the period prior to the Effective Time, to all of Alchemy and
its Subsidiaries' properties, books, contracts, commitments and records in
order that such Cigarette representatives have a full opportunity to make
such investigation as they reasonably desire to make of Alchemy and its
Subsidiaries and, (ii) to the independent auditors of Cigarette,
reasonable access to the audit work papers and other records of the
independent auditors of Alchemy and its Subsidiaries. Additionally,
Alchemy and its Subsidiaries will permit such Cigarette representatives to
make such reasonable inspections
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of Alchemy and its Subsidiaries and their respective operations during
normal business hours as Cigarette may reasonably require and Alchemy and
its Subsidiaries will cause its officers and the officers of its
Subsidiaries to furnish Cigarette with such financial and operating data
and other information with respect to the business and properties of
Alchemy and its Subsidiaries as Cigarette may from time to time reasonably
request. During the period prior to the Effective Time or the earlier
termination of this agreement pursuant to Section 8.1, Alchemy shall (and
shall cause each of its Subsidiaries to) furnish promptly to Cigarette (i)
a copy of each report, schedule, registration statement and other document
filed or received by it during such period pursuant to the requirements of
federal securities laws and (ii) all other information concerning its
business, properties and personnel as Cigarette may reasonably request.
(c) No information or knowledge obtained in any investigation
pursuant to this Section 6.5 shall affect or be deemed to modify any
representation or warranty contained in this Agreement or the conditions
to the obligations of the parties to consummate the Merger.
SECTION 6.6 Shareholder Meetings. As promptly as practicable after the
date hereof, Cigarette shall duly call, give notice of, convene and hold a
meeting of its shareholders for the purpose of voting upon the Merger and this
Agreement and Alchemy shall duly call, give notice of, convene and hold a
meeting of its shareholders for the purpose of voting upon the issuance of the
shares of Alchemy Common Stock in connection with the Merger. Cigarette and
Alchemy shall coordinate and cooperate with respect to the timing of such
meetings and shall use their respective reasonable efforts to hold such meetings
on the same day as soon as practicable after the date hereof.
SECTION 6.7 Legal Conditions to Merger. Each of Alchemy and Cigarette will
take all reasonable actions necessary to comply promptly with all legal
requirements which may be imposed on itself with respect to the Merger (which
actions shall include furnishing all information required under the HSR Act, if
applicable, and in connection with approvals of or filings with any other
Governmental Entity) and will promptly cooperate with and furnish information to
each other in connection with any such requirements imposed upon any of them or
any of their Subsidiaries, if any, in connection with the Merger. Each of
Alchemy and Cigarette will, and will cause its Subsidiaries, if any, to, take
all reasonable actions necessary (i) to obtain (and to cooperate with each other
in obtaining) any consents, authorization, order or approval of, or any
exemption by, any governmental entity or other public third party, required to
be obtained or made by Cigarette, Alchemy or any of their Subsidiaries, if any,
in connection with the Merger of the taking of any action contemplated by this
Agreement, (ii) to lift, rescind or mitigate the effect of any injunction or
restraining order or other order adversely affecting its ability to consummate
the transactions contemplated hereby, (iii) to fulfill all conditions applicable
to Alchemy, Cigarette or Merger Sub pursuant to this Agreement, and (iv) to
prevent, with respect to a threatened or pending temporary, preliminary or
permanent injunction or other order, decree or ruling or statute, rule
regulation or executive order, the entry, enactment or promulgation thereof, as
the case may be.
SECTION 6.8 Public Disclosure. Except as otherwise required by law, court
process or the
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rules of the OTC Bulletin Board or as provided elsewhere herein, prior to the
closing or the earlier termination of this Agreement pursuant to Section 8.1,
neither Cigarette nor Alchemy shall, or shall permit any of its Subsidiaries, if
any, to, issue or cause the publication of any press release or other public
announcement with respect to the transactions contemplated by this Agreement
without the consent of the other party, which consent shall not be unreasonably
withheld or delayed.
SECTION 6.9 Tax-Free Reorganization. Alchemy and Cigarette shall take no
action to cause the Merger to fail to be treated as a reorganization within the
meaning of Section 368(a) of the Code.
SECTION 6.10 Pooling Accounting. Alchemy and Cigarette each agrees not to
take any action after the date of this Agreement that would adversely affect the
ability of Alchemy to treat the business combination to be effected by the
Merger a s a pooling of interests, and each of Alchemy and Cigarette agrees to
take such action as may be reasonably required to negate the impact of any past
actions that would adversely impact the ability of Alchemy to treat the business
combination to be effected by the Merger as a pooling of interests. Each of
Cigarette and Alchemy shall use all reasonable efforts to cause its respective
Affiliates, as defined in Section 6.11, and Subsidiaries, if any, not to take
any action that would adversely affect the ability of Alchemy to account for the
business combination to be effected by the Merger as a pooling of interests.
SECTION 6.11 Affiliate Agreements. As soon as practicable following the
date hereof, Cigarette will provide Alchemy a list of those persons who are, in
the respective reasonable knowledge and judgment of Cigarette, after
consultation with legal counsel, "affiliates" of Cigarette, within the meaning
of Rule 145 (each such person who is an "affiliate" of Cigarette within the
meaning of rule 145 is referred to herein as an "Affiliate") promulgated under
the Securities Act ("Rule 145"). Cigarette shall provide Alchemy such
information and documents as the other shall reasonably request for purposes of
reviewing such list and shall notify Alchemy in writing regarding any change in
the identity of such Affiliates prior to the Closing Date. Cigarette shall use
its reasonable efforts to deliver or cause to be delivered to Alchemy no later
than _____ days from the date hereof from each of the Affiliates of Cigarette,
an executed Affiliate Agreement, substantially in the form attached hereto as
Exhibit B, which each such Affiliate of Cigarette agrees to, among other things,
comply with the applicable requirements of Rule 145 (an "Affiliate Agreement").
Alchemy shall be entitled to place appropriate legends on the certificates
evidencing any Alchemy Common Stock to be received by such Affiliates of
Cigarette pursuant to the terms of this Agreement, and to issue appropriate stop
transfer instructions to the transfer agent for the Alchemy Common Stock,
consistent with the terms of the Affiliate Agreements. Following the Effective
Time, Alchemy shall use all reasonable efforts to cause its "affiliates" within
the meaning of Rule 145 (its "Affiliates") to make any dispositions of Alchemy
Common Stock in accordance with the applicable provisions of Rule 145 under the
Exchange Act.
SECTION 6.12 OTC Bulletin Board Listing. Alchemy shall use its best
efforts to cause the shares of Alchemy Common Stock to be issued in the Merger,
and those required to be reserved for issuance in connection with the Merger, to
be approved for listing on the OTC Bulletin Board,
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subject to official notice of issuance, prior to the Closing Date.
SECTION 6.13 Indemnification.
(a) Cigarette shall and, from and after the Effective Time, Alchemy
and the Surviving Corporation shall, indemnify, defend and hold harmless
each person who is now, or has been at any time prior to the date of this
Agreement or who becomes prior to the Effective Time, an officer, director
or employee of Cigarette or any of its Subsidiaries, if any (the
"Indemnified Parties"), against all losses, claims, damages, costs,
expenses, liabilities or judgments or amounts that are paid in settlement
with the approval of the indemnifying party (which approval shall not be
unreasonably withheld or delayed) of or in connection with any claim,
action, suit, proceeding or investigation based in whole or in part on or
arising in whole or in part out of the fact that such person is or was a
director, officer, or employee of Cigarette or any of its Subsidiaries, if
any, whether pertaining to any matter existing or occurring at or prior to
the Effective Time and whether asserted or claimed prior to, or at or
after, the Effective Time ("Indemnified Liabilities") including all
losses, claims, damages, costs, expenses, liabilities or judgments based
in whole or in part on, or arising in whole or in part our of, or
pertaining to this Agreement or the transactions contemplated hereby, in
each case to the full extent a corporation is permitted under the FGCA to
indemnify its own directors, officers and employees, as the case may be
(Cigarette, Alchemy and the Surviving Corporation, as the case may be,
will pay expenses in advance of the final disposition of any such action
or proceeding to each Indemnified Party to the full extent permitted by
law upon receipt of any undertaking Party to the full extent permitted by
law upon receipt of any undertaking contemplated by the FGCA). Without
limiting the foregoing, in the event any such claim, action, suit,
proceeding or investigation is brought against any Indemnified Party
(whether arising before or after the Effective time), (i) the Indemnified
Parties may retain counsel satisfactory to them and Cigarette (or them and
Alchemy and the Surviving Corporation after the Effective Time), (ii)
Cigarette (or after the Effective Time, Alchemy and the Surviving
Corporation) shall pay all reasonable fees and expenses of such counsel
for the Indemnified Parties promptly as statements therefore are received,
and (iii) Cigarette (or after the Effective Time, Alchemy and the
Surviving Corporation) will use all reasonable efforts to assist in the
vigorous defense of any such matter, provided that none of the Cigarette,
Alchemy or the Surviving Corporation shall be liable for any settlement of
any claim effected without its written consent, which consent, however,
shall not be unreasonably withheld or delayed. Any Indemnified Party
wishing to claim indemnification under this Section 6.14, upon learning of
any such claim, action, suit, proceeding or investigation, shall promptly
notify Cigarette, Alchemy or the Surviving Corporation (but the failure to
so notify an Indemnifying Party shall not relieve it from any liability
which it may have under this Section 6.14 except to the extent such
failure prejudices such party), and shall deliver to Cigarette (or after
the Effective time, Alchemy and the Surviving Corporation) the undertaking
contemplated by the FGCA. The Indemnified Parties as a group may retain
only one law firm to represent them with respect to each such matter
unless there is, under applicable standards of professional conduct, a
conflict on any significant issue between the
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positions of any two or more Indemnified Parties. The obligations of the
parties set forth in this Section 6.14(a) shall be in the furtherance of
and not in limitation of the succeeding paragraphs of this Section 6.14.
(b) From and after the Effective Time, the Surviving Corporation and
Alchemy will fulfill, assume and honor in all respects the obligations of
Cigarette pursuant to Cigarette's Certificate of Incorporation, Bylaws and
any indemnification agreement between Cigarette and Cigarette's directors
and officers existing and in force as of the Effective Time.
(c) Alchemy and the Surviving Corporation shall, until the sixth
anniversary of the Effective Time or such earlier date as may be mutually
agreed upon by Alchemy, the Surviving Corporation and the applicable
Indemnified Party, cause to be maintained in effect, to the extent
available, the policies of directors' and officers' liability insurance
maintained by Cigarette and its Subsidiaries as of the date hereof (or
policies of directors' and officers' liability insurance maintained by
Cigarette and its Subsidiaries as of the date hereof (or policies of at
least the same coverage and amounts containing terms that are no less
advantageous to the insured parties) with respect to claims arising from
facts or events that occurred on or prior to the Effective Time, In lieu
of the purchase of such insurance by Alchemy or the Surviving Corporation,
Cigarette may purchase a six-year extended reporting period endorsement
("reporting tail coverage") under its existing directors' and liability
insurance coverage.
(d) The provisions of this Section 6.14(i) are intended to be for
the benefit of, and will be enforceable by, each indemnified party, his or
her heirs and his or her representatives and (ii) may not be amended or
repealed without the written consent of any affected, indemnified party.
SECTION 6.15 Additional Agreements; Reasonable Efforts. Subject to the
terms and conditions of this Agreement, each of the parties agrees to use all
reasonable efforts to take, or cause to be taken, all action and to do, or cause
to be done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated by
this Agreement, subject to the appropriate vote of shareholders of Cigarette and
shareholders of Alchemy described in Section 6.6, including cooperating fully
with the other party, including by provision of information and making all
necessary filings under the HSR Act, if applicable. Alchemy and Cigarette will
use their reasonable best efforts to resolve any competitive issues relating to
or arising under the HSR Act or any other federal or state antitrust or fair
trade law raised by any Governmental Entity. If such offers are not accepted by
such Governmental Entity, Alchemy (with Cigarette's cooperation) shall pursue
all litigation resulting from such issues. The parties hereto will consult and
cooperate with one another, and consider in good faith the views of one another,
in connection with any analysis, appearances, presentations, memoranda, briefs,
arguments, opinions and proposals made or submitted by or on behalf of any party
hereto in connection with proceedings under or relating to the HSR Act or any
other federal or state antitrust or fair trade law. In the event of a challenge
to the transactions contemplated by this Agreement pursuant to the HSR ACT,
Alchemy
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and Cigarette shall use their reasonable best efforts to defeat such challenge,
including by institution and defense of ligation, or to settle such challenge on
terms that permit the consummation of the Merger; provided, however, that
nothing herein shall require either party to agree to divest or hold separate
any portion of its business or otherwise take action that could reasonably be
expected to have a Cigarette Material Adverse Effect or an Alchemy Material
Adverse Effect. Without limiting the foregoing, in the event that either the
Federal Trade Commission or the Antitrust Division of the United States
Department of Justice should issue a Request for Additional Information or
Documentary Material under 17 C.F.R. Section 803.20 (a "Second Request"), then
Alchemy and Cigarette each agree to use their reasonable best efforts to respond
fully to such Second Request within 20 days after its receipt and shall promptly
make any further filings or information submissions and make any employee
available for interview or testimony pursuant to the foregoing (both before and
after any Second Request) that may be necessary, proper or advisable. In case at
any time after the effective Time any further action is necessary or desirable
to carry out the purposes of this Agreement or to vest the Surviving Corporation
with full title to all properties, assets, rights, approvals, immunities and
franchises of either of the Constituent Corporations, the proper officers and
directors of each party to this Agreement shall take all such necessary action.
SECTION 6.16 Notification of Certain Matters. Cigarette shall give prompt
notice to Alchemy, and Alchemy and Merger Sub shall give prompt notice to
Cigarette, of the occurrence, or failure to occur, of any event, which
occurrence or failure to occur would be likely to cause (a) any representation
or warranty contained in this Agreement to be untrue or inaccurate in any
material respect at any time from the date of this Agreement to the Effective
Time, or (b) any material failure of Cigarette or Alchemy and Merger Sub, as the
case may be, or of any officer, director, employee or agent thereof, to comply
with or satisfy any covenant, condition or agreement to be complied with or
satisfied by it under this Agreement. The delivery of any notice pursuant to
this Section 6.19 shall not limit or otherwise affect the remedies available
hereunder to the party receiving such notice.
ARTICLE VII
CONDITIONS TO MERGER
SECTION 7.1 Conditions to Each Party's Obligation to Effect The Merger.
The respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction prior to the Closing Date of the following
conditions:
(a) Shareholder Approvals. This Agreement and the Merger shall have
been approved and adopted by the requisite vote of holders of Cigarette
Common Stock pursuant to the FGCA and the Certificate of Incorporation of
Cigarette and the issuance of Alchemy Common Stock in connection with the
Merger shall have been approved by the requisite vote of the holders of
Alchemy Common Stock pursuant to the FGCA, the Certificate of
Incorporation of Alchemy and the regulations of the OTC Bulletin Board.
(b) HSR Act, if applicable. The waiting period applicable to the
consummation of the Merger
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under the HSR Act, if applicable, shall have expired or been terminated,
and no action shall have been instituted by the Department of Justice or
Federal trade Commission challenging or seeking to enjoin the consummation
of the Merger, which action shall not have been withdrawn or terminated.
(c) Approvals. All authorizations, consents, orders or approvals of
any Governmental Entity required to consummate the transactions
contemplated by this Agreement, the absence of which would be reasonably
likely to have an Alchemy Material Adverse effect of a Cigarette Material
Adverse Effect, shall have been obtained and be in effect.
(d) Registration Statement. The Registration Statement shall have
become effective under the Securities Act and shall not be the subject of
any stop order or proceedings seeking a stop order.
(e) No Injunctions or Restraints; Illegality. No temporary
restraining order, preliminary or permanent injunction or other order
issued by any court of competent jurisdiction or other legal or regulatory
restraint or prohibition preventing the consummation of the Merger or
limiting or restricting Alchemy's conduct or operation of the business of
Alchemy or Cigarette after the Merger shall have been issued and be in
effect, nor shall any proceeding brought by a domestic administrative
agency or commission or other domestic Governmental entity, seeking any of
the foregoing be pending; nor shall there be any action taken, or any
statute, rule, regulation or order enacted, entered, enforced or deemed
applicable to the Merger which makes the consummation of the Merger
illegal or prevents or prohibits the Merger.
(f) Pooling. Alchemy shall have received a letter from its
independent accountants, dated the Closing date, in form and substance
reasonably satisfactory to Alchemy and Cigarette, stating that they concur
with the conclusion of Alchemy's management that the Merger will qualify
as a pooling of interests transaction under Accounting Principles Board
Opinion No. 16 and applicable SEC regulations, if the Merger is
consummated in accordance with this Agreement. Cigarette shall have
received a letter from its independent accountants, dated the Closing
Date, in form and substance reasonably satisfactory to Cigarette and
Alchemy, stating that they concur with the conclusion of Cigarette's
management that the Merger will qualify as a pooling of interests
transaction under Accounting Principles Board Opinion No. 16 and
applicable SEC regulations, if the Merger is consummated in accordance
with this Agreement.
(g) OTC Bulletin Board Listing. The shares of Alchemy Common Stock
to be issued in the Merger shall have been approved for listing on the OTC
Bulletin Board.
(h) Tax Opinions. Alchemy and Cigarette shall each have received
written opinions from their respective counsel, in form and substance
reasonably satisfactory to them to the
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effect that the Merger will be treated for federal income tax purposes as
a tax-free reorganization within the meaning of Section 368(a) of the
Code. In rendering such opinions, counsel may rely upon, and Alchemy and
Cigarette shall be required to make, reasonable representations regarding
certain factual matters.
SECTION 7.2 Additional Conditions to Obligations of Alchemy and Merger
Sub. The obligations of Alchemy and Merger Sub to effect the Merger are subject
to the satisfaction of each of the following conditions, any of which may be
waived, in writing, exclusively by Alchemy:
(a) Representations and Warranties. The representations and
warranties of Cigarette set forth in this Agreement shall be true and
correct in all material respects as of the date of this Agreement and
(except to the extent such representations and warranties expressly speak
as of an earlier date) as of the Closing date as though made on and as of
the Closing Date, except (i) for changes contemplated by this Agreement or
(ii) where the failure to be true and correct would not be reasonably
likely to have a Cigarette Material Adverse Effect, and Alchemy shall have
received a certificate signed on behalf of Cigarette by the chief
executive officer and the chief financial officer of Cigarette to such
effect.
(b) Performance of Obligations. Cigarette shall have performed all
obligations required to be performed by it under this Agreement at or
prior to the Closing Date; and Alchemy shall have received a certificate
signed on behalf of Cigarette by the chief executive officer and the chief
financial officer of Cigarette to such effect.
(c) Affiliate and Other Agreements. An Affiliate Agreement shall
have been executed and delivered to Alchemy by each director and officer
and each applicable Affiliate of Cigarette; and each Affiliate Agreement
shall be in full force and effect.
(d) Absence of Cigarette Material Adverse Effect. No Cigarette
Material Adverse Effect shall have occurred since the date of this
Agreement.
SECTION 7.3 Additional Conditions to obligations of Cigarette. The
obligation of Cigarette to effect the Merger is subject to the satisfaction of
each of the following conditions, any of which may be waived, in writing,
exclusively by Cigarette:
(a) Representations and Warranties. The representations and
warranties of Alchemy and Merger Sub set forth in this Agreement shall be
true and correct in all material respects as of the date of this Agreement
and (except to the extent such representation speak as of an earlier date)
as of the closing date as though made on and as of the Closing date,
except (i) for changes contemplated by this Agreement or (ii) where the
failure to be true and correct would not be reasonably likely to have an
Alchemy Material Adverse Effect, and Cigarette shall have received a
certificate signed on behalf of Alchemy and Merger sub by the chief
executive officer and the chief financial officer of Alchemy and Merger
Sub to such effect.
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(b) Performance of Obligations. Alchemy and Merger Sub shall have
performed all obligations required to be performed by them under this
Agreement at or prior to the Closing Date; and Cigarette shall have
received a certificate signed on behalf of Alchemy and Merger Sub by the
chief executive officer and the chief financial officer of Alchemy and
Merger sub to such effect.
(c) Absence of Alchemy Material Adverse Effect. No Alchemy Material
Adverse effect shall have occurred since the date of this Agreement.
ARTICLE VIII
TERMINATION AND AMENDMENT
SECTION 8.1 Termination. This Agreement may be terminated at any time
prior to the Effective Time (with respect to Sections 8.1(b) through 8.1(f)), by
written notice by the terminating party to the other party), whether before or
after approval of the matters presented in connection with the Merger by the
shareholders of Alchemy or shareholders of Cigarette:
(a) by mutual written consent of Alchemy and Cigarette; or
(b) by either Alchemy or Cigarette if the Merger shall not have been
consummated by , 1998; provided, however, that if the Merger shall
not have been consummated due to the waiting period, if applicable (or any
extension thereof) under the HSR Act not having expired or been
terminated, or due to an action having been instituted by the Department
of Justice or Federal Trade Commission challenging or seeking to enjoin
the consummation of the Merger, then such date shall be extended to
, 1998; provided, further, however, that the right to
terminate this Agreement under this Section 8.1(b) shall not be available
to any party whose failure to fulfill any obligation under this Agreement
has been the cause of or resulted in the failure of the Merger to occur on
or before such date; or
(c) by either Alchemy or Cigarette if a court of competent
jurisdiction or other Governmental entity shall have issued a
nonappealable final order, decree or ruling or taken any other action, in
each case having the effect of permanently restraining, enjoining or
otherwise prohibiting the Merger, except, if the party relying on such
order, decree or ruling or other action has not complied with its
obligations under Section 6.7 or 6.15 of this Agreement; or
(d) by either Alchemy or Cigarette if the required approvals of the
shareholders of Alchemy or of Cigarette contemplated by this Agreement
shall not have been obtained by reason of the failure to obtain the
required vote upon a vote taken at a meeting of such shareholders duly
convened therefor or at any adjournment thereof; provided, however, that
the right to terminate this Agreement under this Section 8.1(d) shall not
be available to any
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party where the failure to obtain approval of such party's shareholders
shall have been caused by the action or failure to obtain approval of such
party's shareholders shall have been caused by the action or failure to
act of such party in breach of this Agreement; or
(e) by Alchemy, if (i) the Board of Directors of Cigarette shall
have withdrawn or modified its recommendation of this Agreement in a
manner adverse to Alchemy or shall have publicly announced its intention
to do any of the foregoing; (ii) an Alternative transaction (as defined in
clauses (ii) or (iii) of Section 8.3(d)) shall have taken place (including
execution of an agreement to engage in the same) or the Board of Directors
of Cigarette shall have recommended to the shareholders of Cigarette an
Alternative Transaction; (iii) a tender offer or exchange offer for 20% or
more of the outstanding shares of Cigarette Common Stock is commenced
(other than by Alchemy or an affiliate of Alchemy) and the Board of
Directors of Cigarette has not recommended that the shareholders of
Cigarette not tender their shares in such tender or exchange offer within
the time period prescribed by Rule 14e-2 promulgated under the Exchange
Act; or
(f) by Alchemy or Cigarette, if there has been a breach of any
representation, warranty, covenant or agreement on the part of the other
party set forth in this Agreement, which breach causes the conditions set
forth in Section 7.2(a) or 7.2(b) (in the case of termination by Alchemy)
or 7.3(a) or 7.3(b) (in the case of termination by Cigarette) not to be
satisfied as of the time of such breach, provided that if such breach by
such party is curable by such party through the exercise of its reasonable
efforts and for so long as such party continues to exercise such
reasonable efforts, the other party may not terminate this Agreement under
this Section 8.1(f); or
(g) by Cigarette, in the event of (i) a merger or consolidation to
which Alchemy is a party, if the shareholders of Alchemy immediately prior
to the effective date of such merger or consolidation have beneficial
ownership (as defined in Rule 13d-3 under the Exchange Act) of less than
50 percent of the total combined voting power for election of directors of
the surviving corporation following the effective date of such merger or
consolidation, (ii) the acquisition or direct or indirect beneficial
ownership (as defined in Rule 13d-3 under the Exchange Act) in the
aggregate of securities of Alchemy representing more than 50 percent of
the total combined voting power of Alchemy's then issued and outstanding
voting securities by any person, entity or group, as shown on a Schedule
13D filed with the SEC pursuant to the Exchange Act; or (iii) the sale of
all or substantially all of the assets of Alchemy to any person or entity
that is not a Subsidiary of Alchemy.
SECTION 8.2 Effect of Termination. In the event of termination of this
Agreement as provided in Section 8.1(b) through 8.1(g), this Agreement shall be
of no further force and effect, except Section 8.2, Section 8.3 and Article IX
of this Agreement and the Non-Disclosure Agreement shall remain in full force
and effect and survive any termination of this Agreement and nothing herein
shall relieve any party from liability for any breach of this Agreement. In the
event of termination of this Agreement as provided in Section 8.1(a), there
shall be no liability or obligation
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on the part of any party hereto, or any of its officers, directors, shareholders
or affiliates except as set forth in Section 8.3; provided, however, that the
provisions of Section 6.13 and 8.3 and Article IX of this Agreement shall remain
in full force and effect and survive any termination of this Agreement.
SECTION 8.3 Fees and Expenses.
(a) Except as set forth in this Section 8.3, all fees and expenses
incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such expenses,
whether or not the Merger is consummated; provided, however, that Alchemy
and Cigarette shall share equally all fees and expenses, other than
attorneys' fees, incurred in relation to the printing and filing of the
Proxy Statement (including any related preliminary materials) and the
Registration Statement (including financial statements and exhibits) and
any amendments or supplements.
(b) As used in this Agreement, "Alternative Transaction" means
either (i) a transaction pursuant to which any person (or group of
persons) other than Alchemy or its affiliates (a "Third Party"), acquires
more than 20% of the outstanding shares of Cigarette Common Stock,
pursuant to a tender offer or exchange offer or otherwise, (ii) a merger
or other business combination involving Cigarette pursuant to which any
Third Party acquires more than 20% of the outstanding equity securities of
Cigarette or the entity surviving such merger or business combination,
(iii) any other transaction pursuant to which any Third Party acquires
control of assets (including for this purpose the outstanding equity
securities of Subsidiaries of Cigarette, if any, and the entity surviving
any merger or business combination including any of them, if applicable)
of Cigarette have a fair market value (as determined by the Board of
Directors of Cigarette in good faith) equal to more than 20% of the fair
market value of all the assets of Cigarette immediately prior to such
transaction ("Material Assets"), or (iv) any public announcement of a
proposal, plan or intention to do any of the foregoing or any agreement to
engage in any of the foregoing.
(c) Payment of the fees described in Section 8.3(b) above shall not
be in lieu of damages incurred in the event of breach of this Agreement.
SECTION 8.4 Amendment. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto. This
Agreement may be amended by the parties hereto, by action taken or authorized by
their respective Boards of Directors, at any time before or after approval of
the matters presented in connection with the Merger by the shareholders of
Cigarette and Alchemy, but, after any such approval, no amendment shall be made
which by law requires further approval by such shareholders without such further
approval.
SECTION 8.5 Extension; Waiver. At any time prior to the Effective Time,
the parties hereto, by action taken or authorized by their respective Boards of
Directors, may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other
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acts of the other parties hereto, (ii) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant hereto and (iii) waive compliance with any of the agreements or
conditions contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in a written
instrument signed on behalf of such party.
ARTICLE IX
MISCELLANEOUS
SECTION 9.1 Nonsurvival of Representations, Warranties and Agreements.
None of the representations, warranties and agreements in this Agreement or in
any instrument delivered pursuant to this Agreement shall survive the Closing
and the Effective Time, except for the agreements contained in Section 1.3, 1.4,
Article II, 6.13, 6.14, 6.19 and 8.3, the last sentence of Section 6.15, the
last sentence of Section 8.4, and Article IX, and the agreements of the
Affiliates of Cigarette delivered pursuant to this Agreement.
SECTION 9.2 Notices. All notices and other communications hereunder shall
be in writing and shall be deemed given if delivered personally, telecopied
(which is confirmed), sent by nationally-recognized overnight courier or mailed
by registered or certified mail (return receipt requested) to the parties at the
following addresses (or at such other address for a party as shall be specified
by like notice):
(a) if to Alchemy
or Merger Sub, to: Alchemy Holdings, Inc.
with a copy to: Beckman, Millman & Sanders, L.L.P.
116 John Street
New York, New York 10038
Attention: Steven A. Sanders, Esq.
Telephone: (212) 406-4700
Facsimile: (212) 406-3750
(b) if to Cigarette, to: Cigarette Racing Team, Inc.
with a copy to: Beckman, Millman & Sanders, L.L.P.
116 John Street
New York, New York 10038
Attention: Steven A. Sanders, Esq.
Telephone: (212) 406-4700
Facsimile: (212) 406-3750
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SECTION 9.3 Interpretation; Certain Definitions.
(a) When a reference is made in this Agreement to a section, such
reference shall be to a Section of this Agreement unless otherwise
indicated. The table of contents and headings contained in this Agreement
are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. Whenever the words "include,"
"includes," or "including" are used in this Agreement they shall be deemed
to be followed by the words "without limitation." The phrase "made
available" in this Agreement shall mean that the information referred to
has been make available if requested by the party whom such information is
to be made available. The phrases "the date of this Agreement", "the date
hereof", and terms of similar import, unless the context otherwise
requires, shall be deemed to refer to 1998.
(b) "Environmental Permits" means environmental approvals, permits,
licenses, clearances and consents.
(c) "Hazardous Material" means substance that has been designated by
any Governmental Entity or by applicable federal, state or local law to be
radioactive, toxic, hazardous or otherwise a danger to health or the
environment, including PCBs, asbestos, petroleum, urea-formaldehyde and
all substances listed as hazardous substances pursuant to the
Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended, or defined as a hazardous waste pursuant to the United
States Resource Conservation and Recovery Act of 1976, as amended, and the
regulations promulgated pursuant to said laws.
(d) "Hazardous Materials Activities" means the transportation,
storage, use, manufacture, disposal of, release or exposure of employees
or others to Hazardous Materials.
(e) "Joint Venture" means, with respect to any party, any
corporation, limited liability company, partnership, joint venture or
other entity in which (i) such party, directly or indirectly, owns or
control more than five percent and less than a majority of any class of
the outstanding voting securities or economic interests, or (ii) such
party or a Subsidiary of such party is a general partner.
(f) "Subsidiary" means, with respect to any party, any corporation,
limited liability company, partnership, joint venture, or other business
association or entity, (i) at least a majority of the voting securities or
economic interests of which is directly or indirectly owned or controlled
by such party or by anyone or more of its Subsidiaries, or (ii) of which
such party or any other Subsidiary of such party is a general partner
(excluding partnerships, the general partnership interests of which held
by such party or any Subsidiary of such party do not have a majority of
the voting interest in such partnership).
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SECTION 9.4 Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when two or more counterparts have signed by each of the
parties and delivered to the other parties, it being understood that all parties
need not sign the same counterpart.
SECTION 9.5 Entire Agreement; No Third-Party Beneficiaries. This Agreement
(including the Exhibits hereto, and other documents and the instruments referred
to herein) (a) constitutes the entire agreement and supersedes all prior
agreements and understandings, both written and oral, among the parties with
respect to the subject matter hereof, and (b) except as provided in Section 6.14
is not intended to confer upon any person other than the parties hereto any
rights or remedies hereunder.
SECTION 9.6 Governing Law. This Agreement shall be governed and construed
in accordance with the laws of the State of Florida without regard to any
applicable conflicts of law.
SECTION 9.7 Specific Performance. Without limiting the rights and remedies
otherwise available to Alchemy, Cigarette (i) acknowledges that the remedy at
law for damages resulting from its breach of its obligations under this
Agreement is inadequate and (ii) consents to the institution of an action for
specific performance in the event of such a breach.
SECTION 9.8 Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto (whether by operation of law or otherwise) without the prior written
consent of the other parties. Subject to the preceding sentence, this Agreement
will be binding upon, inure to the benefit of and be enforceable by the parties
and their respective successors and assigns.
SECTION 9.9 Severability. It is the desire and intent of the parties that
the provisions of this Agreement be enforced to the fullest extent permissible
under the law and public policies applied in each jurisdiction in which
enforcement is sought. Accordingly, in the event that any provision of this
Agreement would be held in any jurisdiction to be invalid, prohibited or
unenforceable for any reason, such provision, as to such jurisdiction, shall be
ineffective, without invalidating the remaining provisions of this Agreement or
affecting the validity or enforceability of such provision in any other
jurisdiction. Notwithstanding the foregoing, if such provision could be more
narrowly drawn, without invalidating the remaining provisions of this Agreement
or affecting the validity or enforceability of such provision in any other
jurisdiction.
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IN WITNESS WHEREOF, Alchemy, Merger Sub and Cigarette have caused this
Agreement to be signed by their respective officers thereunto duly authorized as
of the date first written above.
ALCHEMY HOLDINGS, INC.
By:_________________________________
Title:________________________________
CIGARETTE BOATS, INC.
By:_________________________________
Title:________________________________
CIGARETTE RACING TEAM, INC.
By:_________________________________
Title:________________________________
39
