As filed with the Securities and Exchange Commission on May 6, 1999
Registration No. 333-52049
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-4/A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
ALCHEMY HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Florida 3730 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
_______________, 1999 (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>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Title of each class of securities Amount to be Proposed Proposed Amount of
to be registered registered(1) maximum maximum registration fee
offering price aggregate
per unit(2) offering price
<S> <C> <C> <C> <C>
Common Stock, $0.001 par value 4,719,450 $2.00 $9,438,900 $2,624.01
--------- ------- ----------
Preferred Stock, Series A, $.001 par value 100 $10,000 $1,000,000 $ 278.00
--- ------- ----------
Preferred Stock, Series B, $.001 par value 100 $10,000 $1,000,000 $ 278.00
--- ------- ----------
Class A Warrants, no par value 1,000,000
---------
Common Stock, $0.001 par value
underlying Class A Warrants (3) 1,000,000 $3.00 $3,000,000 $ 834.00
--------- ----- ----------
Class B Warrants, no par value 1,000,000
---------
Common Stock, $0.001 par value
underlying Class B Warrants (4) 1,000,000 $4.00 $4,000,000 $1,112.00
--------- ----- ----------
Class X Warrants, no par value 180,000
-------
Common Stock, $0.001 par value
underlying the Class X Warrants (5) 180,000 $2.00 $360,000 $ 100.08
------- ----- ----------
Class Y Warrants, no par value 100,000
-------
Common Stock, $0.001 par value
underlying the Class Y Warrants (6) 100,000 $2.00 $200,000 $ 70.25
------- ----- ----------
Options 50,000
------
Common Stock, $0.001 par value
underlying the Options (7) 50,000 $2.00 $100,000 $ 27.80
------ ----- ----------
Total $ 5324.14
=========
</TABLE>
(1) This registration statement relates to shares of Common Stock of Alchemy
to be retained by holders of Alchemy's Common Stock in the proposed merger
of Cigarette Racing Team, Inc. with and into Alchemy, with Alchemy
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 Alchemy'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.
(5) Reserved for issuance upon exercise of the Class X Common Stock Purchase
Warrants.
(6) Reserved for issuance upon exercise of the Class Y Common Stock Purchase
Warrants.
(7) Reserved for issuance upon exercise of the underlying non-qualified stock
options.
ALCHEMY HEREBY RESERVES THE RIGHT TO AMEND THIS REGISTRATION STATEMENT ON SUCH
DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE TIME UNTIL ALCHEMY
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
ii
<PAGE>
UNTIL THE REGISTRATION STATEMENT BECOMES EFFECTIVE ON SUCH DATE AS THE
COMMISSION, ACTING PURSUANT TO SAID SECTION 8 (a), MAY DETERMINE.
iii
<PAGE>
ALCHEMY HOLDINGS, INC.
3025 N.E., 188th Street
Aventura, Florida 33180
(305) 932-9230
___________, 1999
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
_________________, 1999, 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 (i) approve and adopt the Agreement and Plan of Merger, dated as
of ___________, 1999 (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; (ii) retire 2,000,000 shares of
Alchemy Common Stock held by Offshore Racing, Inc. ("Offshore") in exchange for
$1,000,000 worth of Alchemy Preferred Stock, Series B; and (iii) approve and
adopt an Employee Incentive Stock Option Plan.
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 October 31, 1998, an aggregate of
approximately 4,759,450 shares of Alchemy Common Stock would be issued in
connection with the Merger, representing approximately 87.0% 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
shares, evidenced by certificates, 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. Notwithstanding the
above Cigarette shareholders who vote against the Merger and choose to exercise
their appraisal rights pursuant to the Florida Business Corporation Act, will
not receive Alchemy Common Stock, but will receive the "fair value" as defined
in section 607.1301 of the FBCA. See "The Meetings-Cigarette Shareholders'
Appraisal Rights.
At the Effective Time, each share of Cigarette Preferred Stock, Series A
("Cigarette Preferred Stock, Series A"), 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, Series A"), possessing
somewhat different rights, terms and conditions as the Cigarette Preferred
Stock, Series A exclusive of dividends accrued prior to the closing of the
Merger. Alchemy will also issue 100 shares of Alchemy Preferred Stock, Series B
("Alchemy Preferred Stock, Series B") to Offshore Racing, Inc. in connection
with the Merger. Based upon the number of shares of Cigarette Preferred Stock
outstanding at October 31, 1998 and with the additional issuance of Alchemy
Preferred Stock, Series B, an aggregate of approximately 200 shares of Alchemy
Preferred Stock would be issued in connection with the Merger.
In addition, at the Effective Time, each outstanding Class A Warrant, Class
B Warrant and Class X Warrant of Cigarette, no par value, with 5 year terms,
respectively (individually, the "Cigarette Class A Warrants","Cigarette Class B
Warrants" and "Cigarette Class X 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, Cigarette
Class B Warrants and Cigarette Class X 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, Cigarette Class B Warrants and Class
X Warrants would have been entitled to receive pursuant to the Merger had such
holder exercised such Cigarette Class A Warrants, Cigarette Class B Warrants and
Cigarette Class X Warrants in full, immediately prior to the Effective Time
("Alchemy Class A Warrants", "Alchemy Class B Warrants" and "Alchemy Class X
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 October 31, 1998, 1,000,000
additional shares of Alchemy Common Stock would be reserved for issuance to
holders of
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<PAGE>
Cigarette Class A Warrants in connection with Alchemy's assumption of such
warrants. Based upon the number of Cigarette Class B Warrants outstanding at
October 31, 1998, 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. Based on the number of Cigarette
Class X Warrants outstanding at October 31, 1998, 180,000 additional shares of
Alchemy Common Stock would be reserved for issuance to holders of Alchemy Class
X Warrants. Based upon the number of Alchemy non-qualified stock options
outstanding at March 31, 1999, 50,000 additional shares of Alchemy Common Stock
would be reserved for issuance to the holder of Alchemy non-qualified stock
options. Based upon the number of Alchemy Class Y Warrants outstanding at April
15, 1999, 100,000 additional shares of Alchemy Common Stock would be reserved
for issuance to the holders of Alchemy Class Y 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
_____________, 1999.
BY VOTING FOR THE MERGER AGREEMENT A SHAREHOLDER ASSENTS TO ALL TERMS SET
FORTH THEREUNDER. ONE SUCH TERM RESTRICTS FROM TRANSFER THE SHARES OF ALCHEMY
COMMON STOCK RECEIVED PURSUANT TO THE MERGER FOR A PERIOD OF TWELVE MONTHS FROM
THE EFFECTIVE DATE AS THAT TERM IS DEFINED IN SECTION 1.2 OF THE MERGER
AGREEMENT (THE "LOCKUP PERIOD"). DURING THE LOCKUP PERIOD THE BOARD OF DIRECTORS
OF THE SURVIVING CORPORATION SHALL HAVE THE EXCLUSIVE RIGHT TO RELEASE ANY OR
ALL OF THE SHAREHOLDERS OF THE NEWLY ISSUED ALCHEMY COMMON STOCK FOR ANY
NECESSARY REASON.
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.
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, 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.
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<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 __________, 1999
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 _____________, _____________, 1999, 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 ____________,
1999, 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"), 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 one (1) share of common stock, $0.001 par value, of
Alchemy ("Alchemy Common Stock");
2. To consider and vote upon a proposal to approve and adopt an Employee
Incentive Stock Option Plan; and
3. 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 October 31, 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.
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
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__________, 1999
BY VOTING FOR THE MERGER AGREEMENT A SHAREHOLDER ASSENTS TO ALL TERMS SET FORTH
THEREUNDER. ONE SUCH TERM RESTRICTS FROM TRANSFER THE SHARES OF ALCHEMY COMMON
STOCK RECEIVED PURSUANT TO THE MERGER FOR A PERIOD OF TWELVE MONTHS FROM THE
EFFECTIVE DATE AS THAT TERM IS DEFINED IN SECTION 1.2 OF THE MERGER AGREEMENT
(THE "LOCKUP PERIOD"). DURING THE LOCKUP PERIOD THE BOARD OF DIRECTORS OF THE
SURVIVING CORPORATION SHALL HAVE THE EXCLUSIVE RIGHT TO RELEASE ANY OR ALL OF
THE SHAREHOLDERS OF THE NEWLY ISSUED ALCHEMY COMMON STOCK FOR ANY NECESSARY
REASON.
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.
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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 __________________,
1999, 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"), 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." Further,
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
Alchemy Common Stock, par value $0.001 per share ("Alchemy Common Stock"), in
connection with the solicitation of proxies by the Board of Directors of Alchemy
(the "Alchemy Board") for use at a Special Meeting of Alchemy shareholders (the
"Alchemy Special Meeting") to be held on __________, __________, 1999, 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, (ii) to approve and adopt an Employee
Incentive Stock Option Plan and (iii) 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. However a motion to postpone or
adjourn the meeting will not be entertained by the shareholders in the event
that: (i) A satisfactory number of shares were represented at such meeting; and
(ii) the majority of such shares were voted against the Merger.
This Joint Proxy Statement/Prospectus is also being furnished to holders of
Cigarette Common Stock, $0.01 par value per share ("Cigarette Common Stock"), 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 ____________,
__________, 1999, 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. However a motion to postpone
or adjourn the meeting will not be entertained by the shareholders in the event
that: (i) A satisfactory number of shares were represented at such meeting; and
(ii) the majority of such shares were voted against the Merger.
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 one (1) share of Alchemy Common Stock (the "Exchange Ratio"). At
the Effective Time, each outstanding no par value Class A Warrant, no par value
Class B Warrant and no par value Class X Warrant of Cigarette (individually, the
"Cigarette Class A Warrants", the "Cigarette Class B Warrants" and the
"Cigarette Class X Warrants", collectively the"Cigarette 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, Cigarette Class B Warrants and Cigarette Class X 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, Cigarette Class B
Warrants and Cigarette Class X Warrants would have been entitled to receive
pursuant to the Merger had such holder exercised such Cigarette Class A
Warrants, Cigarette Class B Warrants and Cigarette Class X Warrants in full,
immediately prior to the Effective Time ("Alchemy Class A Warrants", "Alchemy
Class B Warrants" and "Alchemy Class X Warrants", respectively). Each of the
Cigarette Warrants has a term of 5 years. Such terms will be the same for the
respective Alchemy Warrants. The exercise price of the Alchemy Class A Warrants
will equal $3.00 per share of Alchemy Common Stock. The exercise price of the
Alchemy Class B Warrants will equal $4.00 per share of Alchemy Common Stock. The
exercise price
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of Alchemy Class X Warrants will equal $2.00 per share of Alchemy Common Stock.
Based upon the number of Cigarette Class A Warrants outstanding at October 31,
1998, 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 October 31, 1998, 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. Based on the number of
Cigarette Class X Warrants outstanding at October 31, 1998, approximately
180,000 additional shares of Alchemy Common Stock would be reserved for issuance
to holders of Alchemy Class X Warrants. Further, 100,000 shares of Alchemy
Common Stock will be registered and reserved for issuance to the holder of
Alchemy Class Y Warrants. Such Alchemy Class Y Warrants are exercisable at a
price of $2.00 per share. Additionally, 50,000 shares of Alchemy Common Stock
will be registered and reserved for issuance (the "Option Shares"). The Option
Shares underlie 50,000 non-qualified stock options exercisable at a price of
$2.00. Based upon the number of shares of Alchemy Common Stock and Cigarette
Common Stock outstanding at October 31, 1998, an aggregate of approximately
4,719,450 shares of Alchemy Common Stock would be issued in connection with the
Merger, representing approximately 87.0% 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 similar rights,
terms and conditions as the Cigarette Preferred Stock. Based upon the number of
shares of Cigarette Preferred Stock outstanding at October 31, 1998, an
aggregate of approximately 200 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"; as a condition to the merger, the shares
of Alchemy Common Stock to be issued pursuant to the Merger must 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 April
26, 1999 was $7.00 per share. Because the Exchange Ratio is fixed, a change in
the market price of Alchemy Common Stock before the Merger may 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 10, 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__________, 1999.
The date of this Joint Proxy Statement/Prospectus is _________________, 1999.
Dissenter's Rights. Pursuant to Section 607.1302(a) of the Florida 1989
Business 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 FBCA Section 607.1301, 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. Failure
to vote against the Merger shall constitute a waiver of that shareholder's
appraisal rights.
(b) Within 10 days after the date on which the vote is taken approving the
Merger, such shareholder must make written demand on Cigarette for payment
of the fair value of such shareholder's shares.
Within 10 days after the Merger is effected, Cigarette shall give written
notice ("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
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at a specified price deemed by Cigarette to be the fair value thereof.
Cigarette shall also notify each dissenting shareholder that within 20 days
after Cigarette gives Notice, any dissenting shareholder(s) must file with
Cigarette a notice of such election, stating the name and address, the number,
classes, and series of shares as to which he dissents, and a demand for payment
of the fair value of his shares in order to perfect his rights. Any shareholder
failing to file such election to dissent within the period set forth shall be
bound by the terms of the proposed corporate action. Any shareholder filing an
election to dissent shall deposit his certificates for certified shares with
Cigarette simultaneously with the filing of the election to dissent. Cigarette
may restrict the transfer of uncertified shares from the date that the
shareholder's election to dissent is filed with the corporation.
In the event that Cigarette and the dissenting shareholder(s) do 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 Alchemy 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.
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.
BY VOTING FOR THE MERGER AGREEMENT A SHAREHOLDER ASSENTS TO ALL TERMS SET FORTH
THEREUNDER. ONE SUCH TERM RESTRICTS FROM TRANSFER THE SHARES OF ALCHEMY COMMON
STOCK RECEIVED PURSUANT TO THE MERGER FOR A PERIOD OF TWELVE MONTHS FROM THE
EFFECTIVE DATE AS THAT TERM IS DEFINED IN SECTION 1.2 OF THE MERGER AGREEMENT
(THE "LOCKUP PERIOD"). DURING THE LOCKUP PERIOD THE BOARD OF DIRECTORS OF THE
SURVIVING CORPORATION SHALL HAVE THE EXCLUSIVE RIGHT TO RELEASE ANY OR ALL OF
THE SHAREHOLDERS OF THE NEWLY ISSUED ALCHEMY COMMON STOCK FOR ANY NECESSARY
REASON.
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TABLE OF CONTENTS
AVAILABLE INFORMATION ...................................................... 1
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE ............................ 2
TRADEMARKS ........................................................ 2
FORWARD LOOKING STATEMENTS ........................................ 2
SUMMARY .................................................................... 3
Introduction ...................................................... 3
The Companies ..................................................... 3
Alchemy .................................................. 3
Cigarette ................................................ 3
Cigarette Boats, Inc. ("Merger Sub") ..................... 4
The Proposed Merger ............................................... 4
Date and Place of Meetings ........................................ 5
Shareholders Entitled to Vote ..................................... 5
Purposes of the Alchemy and Cigarette Special Meetings ............ 5
Alchemy Special Meeting .................................. 5
Cigarette Special Meeting ................................ 5
Votes Required; Voting Agreements ................................. 6
Alchemy .................................................. 6
Cigarette ................................................ 6
Recommendations of the Board of Directors ......................... 6
Reasons for the Merger ............................................ 6
Joint Reasons ............................................ 6
No Solicitation ................................................... 6
Representations and Warranties; Covenants ......................... 6
Conditions to the Merger .......................................... 7
Amendment and Waiver .............................................. 7
Potential for Conflicts of Interest ............................... 7
Termination ....................................................... 7
Transfer of Cigarette Stock Certificates .......................... 8
Appraisal Rights .................................................. 8
Certain Federal Income Tax Consequences ........................... 8
Accounting Treatment .............................................. 8
Governmental and Regulatory Matters ............................... 8
Restrictions on Resale of Alchemy Common Stock .................... 8
Risk Factors ...................................................... 9
RISK FACTORS ............................................................... 10
Risks Related to Alchemy and Cigarette ............................ 10
No History of Profitable Operations ...................... 10
Modification of Accountants'Reports ...................... 10
Intense competition ...................................... 10
Nature of the Recreational Boat and Marine Engine Industry 10
Dependence on New Products and Additional Capital ........ 10
Fluctuation in Results Due to Seasonality and Weather .... 10
Alchemy's reliance on the General Motors Corporation ..... 10
Dependence on a Limited Number of Customers .............. 11
Impact of Environmental and Other Regulatory Matters ..... 11
Product Liability ........................................ 11
Dependence on Key Personnel .............................. 11
Risk of Technological Obsolescence ....................... 11
Risks Associated with Intellectual Property Rights ....... 11
Impact of Economic Conditions ............................ 11
Market and Other Risks Relating to the Merger ..................... 11
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Fixed Exchange Ratio ..................................... 11
Volatility of Trading Price .............................. 12
Penny Stock Regulation ................................... 12
Potential Dilution of Interest ........................... 12
Integration of Other Acquired Businesses ................. 12
Substantial Expenses Associated with the Merger .......... 12
Possible Adverse Affect on Customer Buying Patterns ...... 12
Risks Relating to the Merger ...................................... 12
Fixed Exchange Ratio ..................................... 12
Volatility of Trading Price .............................. 13
Potential Dilution of Interest ........................... 13
Integration of Other Acquired Businesses ................. 13
Transaction Charges ...................................... 13
Possible Adverse Affect on Customer Buying Patterns ...... 13
Alchemy-Related Risk Factors ...................................... 13
No History of Profitable Operations of Alchemy ........... 13
Competition .............................................. 13
Nature of the Recreational Boat and Marine Engine Industry 13
Fluctuation in Results Due to Seasonality and Weather .... 14
Impact of Economic Conditions ............................ 14
Alchemy's reliance on the General Motors Corporation
("General Motors")...................................... 14
Dependence on a Limited Number of Customers .............. 14
Impact of Environmental and Other Regulatory Matters ..... 14
Production Liability ..................................... 14
Penny Stock Regulation ................................... 14
Cigarette Related Risk Factors ........................... 15
Interests of Certain Persons ...................................... 15
Interests in Alchemy Common Stock and Options ............ 15
Cigarette Warrant Holders ................................ 15
Management ............................................... 15
Forbearance From Certain Creditors ................................ 15
Risks Associated with the OTC - Bulletin Board .................... 16
SELECTED HISTORICAL AND UNAUDITED
FINANCIAL DATA .................................................... 17
Alchemy Selected Consolidated Financial Data ...................... 18
Consolidated Balance Sheet Data .......................... 18
Consolidated Statement of Operations ..................... 18
Cigarette Selected Financial Data ................................. 19
Balance Sheet Data ....................................... 19
Statement of Operations Data ............................. 19
Recent Share Prices ............................................... 20
Dividends ......................................................... 20
THE MEETINGS ............................................................... 21
MATTERS TO BE CONSIDERED AT THE MEETINGS .......................... 21
TIME AND PLACE; RECORD DATE ....................................... 22
REQUIRED VOTE ..................................................... 22
RECORD DATE; STOCK ENTITLED TO VOTE; QUORUM ....................... 22
CIGARETTE SHAREHOLDERS' APPRAISAL RIGHTS .......................... 22
SOLICITATION OF PROXIES ........................................... 22
THE MERGER ................................................................. 23
Background of the Merger .......................................... 23
Reasons for the Merger ............................................ 23
Joint Reasons for the Merger ...................................... 24
Recommendation of the Alchemy Board ............................... 24
Interests in Alchemy Common Stock ................................. 24
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Interests in Cigarette Common Stock .............................. 24
Recommendation of Cigarette's Board .............................. 24
Factors Considered by Alchemy's Board ............................ 24
Factors Considered by Cigarette's Board .......................... 24
Interests of Certain Persons in the Merger ....................... 25
Retirement of Offshore Shares .................................... 25
Future Employment Agreements ..................................... 25
Description of Alchemy's Securities .............................. 25
Capital Stock ........................................... 25
Common Stock ............................................ 25
General ........................................ 25
Voting Rights .................................. 25
Dividend Policy ................................ 25
Miscellaneous Rights and Provisions ............ 25
Shares Eligible for Future Sale ................ 25
Preferred Stock ......................................... 26
Preferred Stock outstanding .................... 26
Warrants and Options .................................... 26
Indemnification and Insurance .................................... 26
Cigarette and Alchemy Year 2000 Compliance ....................... 26
Federal Income Tax Consequences .................................. 28
Dissenter's Rights ...................................... 28
AGREEMENT AND PLAN OF MERGER .............................................. 30
Shareholders' Rights ............................................. 30
Conversion of Securities ......................................... 30
Restriction on Alchemy Shares Issued Pursuant to this
Registration Statement ........................................ 31
Representations and Warranties of Merger Sub, Cigarette
and Alchemy ................................................... 31
Certain Covenants and Agreements ................................. 32
No Solicitation .................................................. 32
Indemnification and Insurance .................................... 33
Conditions ....................................................... 33
Termination ...................................................... 34
Amendment and Waiver ............................................. 35
Reasons for the Merger ........................................... 35
SECURITIES OF ALCHEMY ..................................................... 37
Market Price of Dividends on Alchemy's Common Stock ..... 37
Holders ................................................. 38
Dividends ............................................... 38
Common Stock ................................... 38
Preferred Stock ................................ 38
Miscellaneous Rights and Provisions ..................... 39
Shares Eligible for Future Sale ......................... 39
Transfer Agent ................................................... 39
BUSINESS .................................................................. 40
The Companies .................................................... 40
Alchemy Holdings, Inc. .................................. 40
General Development of Business ................ 40
Products ....................................... 40
Manufacturing Operations ....................... 41
Marketing, Sales and Distribution .............. 42
Employees ...................................... 42
Facilities ..................................... 42
Competitive Conditions in the High-Performance
Marine Engine Industry ...................... 42
Cigarette Racing Team, Inc. ............................. 42
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Employees ...................................... 43
Facilities ..................................... 43
Competitive Conditions in the Power Boat
Manufacturing Industry ...................... 43
ALCHEMY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS .............................. 44
Liquidity and Capital Resources .................................. 44
CIGARETTE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS .............................. 45
Liquidity and Capital Resources .................................. 45
LEGAL PROCEEDINGS ......................................................... 47
Paramount Pictures Corporation ................................... 47
HRH Tunku Abraham Ismail ......................................... 47
Mr. Fredy Link ................................................... 47
Magnum Marine .................................................... 47
Tomas Arencibia .................................................. 47
Mark Donato and Steven Donato .................................... 47
ALCHEMY MANAGEMENT ........................................................ 48
CRAIG BARRIE - PRESIDENT/DIRECTOR ................................ 48
BERTON LOROW - VICE PRESIDENT/DIRECTOR ........................... 48
ADAM SCHILD - SECRETARY/DIRECTOR ................................. 48
EXECUTIVE COMPENSATION .................................................... 49
Compensation Pursuant to Plans ................................... 49
CIGARETTE MANAGEMENT ...................................................... 49
CRAIG BARRIE - PRESIDENT ......................................... 49
ADAM SCHILD - SECRETARY/DIRECTOR ................................. 50
EXECUTIVE COMPENSATION .................................................... 51
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ............................ 52
Sales to Cigarette ............................................... 52
Alchemy's and its Affiliates' Potential Conflicts with
Mr. Craig Barrie ............................................. 52
Offshore's Holdings of Alchemy's Common Stock and its
Licensing Agreement With Alchemy ............................. 52
Alchemy's Lack of Chief Financial Officer ........................ 52
Interested Directors ............................................. 52
Relationships With Jeffrey Friedman and Central Manufacturing .... 52
OTAM Licensing Agreement ......................................... 53
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT ....................................................... 54
Title of Class ................................................... 54
Common Stock ..................................................... 54
Preferred ........................................................ 54
UNDERTAKINGS .............................................................. 55
INDEX TO FINANCIAL STATEMENTS ............................................. 56
EXHIBIT INDEX ............................................................. 58
SIGNATURES ................................................................ 59
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AVAILABLE INFORMATION
Alchemy Holdings, Inc. ("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 completion date 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 10
HEREIN, WHICH SHAREHOLDERS OF ALCHEMY AND CIGARETTE RACING TEAM, INC.
("CIGARETTE") SHOULD CAREFULLY REVIEW.
2
<PAGE>
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 Agreement and Plan of Merger, dated as of _________, 1999
(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
entirety.
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 "FORWARD
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 results 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 Directors (the "Alchemy Board") of proxies
from holders of Alchemy Common Stock for use at the special meeting of Alchemy
shareholders (the "Alchemy Special Meeting") and by the Cigarette Board of
Directors (the "Cigarette Board") in connection with the solicitation of proxies
from holders of Cigarette Common Stock for use at the special meeting of
Cigarette shareholders (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 Cigarette
Boats, Inc. (the "Merger Sub") and to approve the merger whereby Cigarette will
become a wholly owned subsidiary of Alchemy (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 in high speed recreational powerboats and
offshore racing boats. Alchemy manufactures its own line of seven high output,
all gasoline 8 cylinder 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 August 6, 1986, Swift acquired all of
the outstanding common stock of Hawk Marine Power, Inc., a Florida corporation.
The transaction was a reverse acquisition of Swift and the company's name was
subsequently changed to that of the substantive acquirer Hawk Marine Power, Inc.
In connection with the acquisition, Swift was reincorporated in 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 eight models in six
sizes, from 20 to 46 feet in length, at current prices ranging from $80,000 to
$800,000. Cigarette is currently in the process of designing and manufacturing
50 and 60 foot models which will exceed the $800,000 threshold and which are
projected to be in production by December of 1999 and 2000, respectively.
Cigarette was reincorporated as New CRT, Inc., on May 26, 1994, under the
laws of the State of Florida. Such reincorporation was in connection with a
change of ownership of Cigarette from Central Manufacturing, Inc. to the entity
which subsequently sold it to current ownership. On June 1, 1994, New CRT, Inc.
changed its name to Cigarette Racing Team, Inc. Cigarette's principal executive
3
<PAGE>
offices are located at 3131 N.E. 188th Street, Aventura, Florida 33180. Its
telephone number is (305) 931-4564. The sole director of Cigarette is also a
director of Alchemy. The two officers of Cigarette are also officers of Alchemy.
Cigarette is a privately held company with approximately 30 shareholders. SEE
"SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."
Cigarette Boats, Inc. ("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 3025 N.E., 188th Street, Aventura,
Florida 33180. Its telephone number at that address is (305) 931-4564.
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,
Series A"), 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, Series A") possessing similar rights, terms and conditions as
the Cigarette Preferred Stock, Series A, (iii) each share of Cigarette Preferred
Stock, Series B ("Cigarette Preferred Stock, Series B"), issued and outstanding
as of the Effective Time of the Merger will be converted into one (1) share of
Alchemy Preferred Stock, Series B ("Alchemy Preferred Stock, Series B")
possessing similar rights, terms and conditions as the Cigarette Preferred
Stock, Series B and (iv) each issued and outstanding share of Cigarette Common
Stock will be converted into one (1) share of Alchemy Common Stock. Based upon
the number of shares of Cigarette Preferred Stock outstanding at October 31,
1998, an aggregate of approximately 200 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.
Alchemy management anticipates that Central Manufacturing, Inc., an Alabama
corporation, ("Central") will receive 1,000,000 shares of Alchemy Common Stock
and $1,000,000 of Alchemy Preferred Stock, Series B in exchange for the
forgiveness and cancellation of Cigarette's indebtedness to Central. It is also
expected by Alchemy management that pursuant to the Merger, Offshore Racing,
Inc., a foreign corporation, ("Offshore") will retire 2,000,000 shares of
Alchemy Common Stock in exchange for its receipt of $1,000,000 of Alchemy
Preferred Stock, Series B.
Alchemy management anticipates that Piparo Enterprises, Inc. ("Piparo"), a
creditor of Cigarette, will receive 78,450 shares of Alchemy Common Stock in
exchange for the forgiveness and cancellation of all Cigarette indebtedness to
Piparo.
Mr. Fredy Link, a creditor of Cigarette and a judgement holder, will
receive approximately $89,000 as result of the Merger in exchange for the
forgiveness and cancellation of all debts from Cigarette to Mr. Link and his
associated business entities. The satisfaction of the debt herein is expected to
take place within 120 days of the Effective Time. See "Legal Proceedings".
HRH Tunku Abraham Ismail, a creditor of Cigarette and a judgement holder,
will receive approximately $348,000 as a result of the Merger in exchange for
the forgiveness and cancellation of all debts from Cigarette to that party. The
satisfaction of the debt herein is expected to take place within 120 days of the
Effective Time. See "Legal Proceedings".
At the Effective Time, each outstanding Class A Warrant, Class B Warrant
and Class X Warrant of Cigarette (individually, the "Cigarette Class A
Warrants", the "Cigarette Class B Warrants" and the "Cigarette Class X
Warrants"), will be assumed by Alchemy and become Alchemy warrants to purchase,
on the same terms and conditions as were applicable under such Cigarette Class A
Warrants, Cigarette Class B Warrants and Cigarette Class X Warrants,
respectively, 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,
Cigarette Class B Warrants and Cigarette Class X Warrants, respectively, would
have been entitled to receive pursuant to the Merger had such holder exercised
such Cigarette Class A Warrants, Cigarette Class B Warrants and Cigarette Class
X Warrants in full, immediately prior to the Effective Time ("Alchemy Class A
Warrants", "Alchemy Class B Warrants" and "Alchemy Class X Warrants"). The
exercise price of the Alchemy Class A Warrants will equal $3.00 per share of
Alchemy Common Stock. The exercise price of the Alchemy Class B Warrants will
equal $4.00 per share of Alchemy Common Stock. The exercise price of Alchemy
Class X Warrants will equal $2.00 per share of Alchemy Common Stock.
Based upon the number of shares of Alchemy Common Stock and Cigarette
Common Stock outstanding at October 31, 1998, an aggregate of approximately
4,719,450 shares of Alchemy Common Stock would be issued in connection with the
Merger, representing approximately 87.0% of the total number of shares of
Alchemy Common Stock outstanding after giving effect to such issuance. Based
4
<PAGE>
upon the number of Cigarette Class A Warrants outstanding at October 31, 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 October 31, 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. Based on the number of Cigarette Class X Warrants outstanding at
October 31, 1998, approximately 180,000 additional shares of Alchemy Common
Stock would be reserved for issuance to holders of Alchemy Class X Warrants.
Further, based on the number of Alchemy Class Y Warrants outstanding at April
15, 1999, approximately 100,000 additional shares of Alchemy Common Stock would
be reserved for issuance to holders of Alchemy Class Y Warrants. Based upon the
number of Alchemy non-qualifeid stock options outstanding at March 31, 1999,
50,000 additional shares of Alchemy Common Stock would be reserved for issuance
to the holder of Alchemy non-qualified stock options.
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).
Alchemy and Cigarette each have the right (subject to certain limitations)
to terminate the Merger Agreement as the Merger was not consummated on or before
March 31, 1999. However, neither party has exercised such right.
See "The Merger -Regulatory Approvals" and "The Merger Agreement -
Termination."
Following the Merger, the pre-Merger directors of Alchemy will be the
officers and directors of the combined company of Alchemy and Cigarette (the
"Combined Company") after the Effective Time.
Date and Place of Meetings
The Alchemy Special Meeting will be held on _______________, 1999 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 ___________, 1999 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 October 31, 1998 (the "Alchemy Record Date"), are entitled to notice
of and to vote at the Alchemy Special Meeting. At such date, there were
2,702,394 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.
Alchemy Special Meeting.
Holders of record of shares of Cigarette Common Stock at the close of
business on October 31, 1998 (the "Cigarette Record Date"), are entitled to
notice of and to vote at the Cigarette Special Meeting. At such date, there were
3,719,450 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.
Purposes of the Alchemy and Cigarette Special Meetings
Alchemy Special Meeting. The purpose of the Alchemy Special Meeting is 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; (ii) to approve and adopt an Employee Incentive Stock Option Plan; and
(iii) 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 is
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".
Votes Required; Voting Agreements
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Although the Merger Agreement has not been executed and therefore ratified
by either Cigarette and Alchemy, the parties to such agreement expect to
finalize and execute the Merger Agreement prior to the Registration Statement's
effectiveness. The effectiveness of the Registration Statement is a condition
subsequent to the Merger Agreement. However, the Merger must be ratified by the
shareholders of both Cigarette and Alchemy and the management of Cigarette is
unaware of any voting trust agreement between its shareholders.
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 October 31, 1998, directors and
executive officers of Alchemy and their respective affiliates may be deemed to
be beneficial owners of approximately 0% of the outstanding shares (excluding
shares subject to stock options) of Alchemy Common Stock.
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. Each of the
directors, officers and control shareholders of Cigarette advised Cigarette that
he or she has agreed to vote in favor of the Merger and therefore, their
approval of the Merger is assured.
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.
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
(the "Combined 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 two companies, (v) both
companies' respective shareholders would benefit by the enhanced ability of the
Combined Entity to compete in the marketplace, and (vi) the economic advantages
as a result of increased operating efficiencies are substantial. See "The Merger
- -- Factors Considered by the Board of Alchemy" and "Factors Considered by the
Board of Cigarette".
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 Merger Agreement -- 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
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Agreements".
Conditions to the Merger
The respective obligations of Alchemy, Merger Sub and Cigarette to effect
the Merger are subject to 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) 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; (c) 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;
(d) no temporary restraining order, preliminary or permanent injunction or 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;
(e) 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; (f) 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; (g)
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"); (h) 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; (i) 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 (j) 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. Specifically, but not exclusively, amendments to the Merger Agreement
which adversely affect the rights of shareholders must be approved by the
shareholders.
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, may (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.
Potential for Conflicts of Interest
One director of Alchemy comprises Cigarette's entire Board. As there is a
substantial overlap of management between Cigarette and Alchemy, a potential
conflict of interest may arise which may negatively affect the negotiations of
the Merger terms. There is a certain increased risk that either companies'
management may determine, prior to the execution of the Merger Agreement, that
the Merger is not in the best interests of that particular party.
Termination
Pursuant to the Companies letter of intent dated October 25, 1997, both
Cigarette and Alchemy have the right to terminate the Merger Agreement by mutual
written consent in the event that the Merger is not consummated before March 31,
1999. 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
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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 (ii) 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 607.1302 of the Florida Business Corporation Act (the "FBCA"). 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 Sections 607.1302 and .1320 are attached as Annex
_________ to this Joint Proxy Statement/Prospectus. See "The Meetings--Cigarette
Shareholders' Appraisal Rights" for a 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 will be accounted for as a purchase transaction/reverse
acquisition of Alchemy by Cigarette. The legal and capital structure of Alchemy
will survive, but Cigarette will be treated as the accounting acquirer. See "Pro
Forma Financial Information."
Governmental and Regulatory Matters
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 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
BY VOTING FOR THE MERGER AGREEMENT A SHAREHOLDER ASSENTS TO ALL TERMS SET
FORTH THEREUNDER. ONE SUCH TERM RESTRICTS FROM TRANSFER THE SHARES OF ALCHEMY
COMMON STOCK RECEIVED PURSUANT TO THE MERGER FOR A PERIOD OF TWELVE MONTHS FROM
THE EFFECTIVE DATE AS THAT TERM IS DEFINED IN SECTION 1.2 OF THE MERGER
AGREEMENT (THE "LOCKUP PERIOD"). DURING THE LOCKUP PERIOD THE BOARD OF DIRECTORS
OF THE SURVIVING CORPORATION SHALL HAVE THE EXCLUSIVE RIGHT TO RELEASE ANY OR
ALL OF THE SHAREHOLDERS OF THE NEWLY ISSUED ALCHEMY COMMON STOCK FOR ANY
NECESSARY REASON.
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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, 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."
Risk Factors
See "Risk Factors" for a discussion of certain factors pertaining to the Merger,
the businesses of Alchemy and Cigarette and of the Combined Company. The "Risk
Factors" have been grouped into two broad classifications as follows: (A) Risks
Related to the Combined Company: (i) No history of profitable operations; (ii)
Modification of accountant's report; (iii) Intense competition; (iv) Nature of
the recreational boat and marine engine industry; (v) Dependence on new products
and additional capital; (vi) Seasonality of the marine industry and related risk
of potential fluctuation of quarterly operating results; (vii) Alchemy's
reliance on General Motors; (viii) Dependence on a limited number of customers;
(ix) Potential adverse environmental impact; (x) Product liability; (xi)
Dependence on key personnel; (xii) Risk of technological obsolescence; (xiii)
Risks associated with intellectual property rights; (xiv) Impact of economic
conditions; (B) Market and Other Risks Related to the Merger: (i) Market risks
associated with a fixed exchange ratio; (ii) Volatility of the trading price of
Alchemy common stock; (iii) Risks associated with penny stock regulation; (iv)
Potential dilution of interest; (v) Risks associated with the integration of
other acquired businesses of Alchemy and Cigarette; (vi) Substantial expenses
associated with the Merger; (vii) Possible adverse effect on customer buying
patterns.
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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 of 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 Related to Alchemy and Cigarette:
No History of Profitable Operations. Prior to the Merger, both Alchemy and
Cigarette have incurred recurring losses from operations. At September 30, 1997
and September 30, 1998 the cumulative losses from inception were $1,693,000 and
$2,012,288 for Alchemy and $6,641,658 and $7,432,723 for Cigarette. There can be
no assurance that future operations will be profitable.
Modification of Accountants Reports. The financial statements of both
Alchemy and Cigarette included in this Joint Proxy Statement/Prospectus have
each been prepared on a going concern basis. Each Company's ability to continue
as a going concern is dependent upon restructuring its debt, obtaining adequate
financing for its operations on acceptable terms and attaining profitable
operations. The independent auditor's report on each Company's financial
statements has been modified to include an explanatory paragraph relating to the
issues that raise substantial doubt about their abilities' to continue as going
concerns.
Intense 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.
Cigarette's competitors in the boat industry for product sales are companies
such as Magnum Marine, Mako Marine and Sea Ray. After the Merger, Cigarette's
competitors in the marine engine industry will include companies such as
Caterpillar, Mercury Marine and Volvo-Penta. Certain of the Combined Company's
competitors have significantly greater financial resources than the Combined
Company. Competition for product sales is also based upon the Combined Company's
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 as general
economic climate, competition and market acceptance, which may bear little or no
correlation to the Combined Company's production and other costs. Acceptance of
the 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 have 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 not being recouped or anticipated profits not being realized.
Dependence on New Products and Additional Capital. The recreational boat
industry is capital intensive. Average boat manufacturing costs rise each year
as the cost of parts and labor continue to increase. Further, competitiveness in
the recreational boat industry requires that new products be introduced to the
market place in a constant and consistent manner. There is no assurance that
Cigarette will be able to produce new products which generate the same levels of
revenue that the present products produce.
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 through promotional programs. Both companies' fiscal years end
on September 30, and, as a result, management estimates that more than one-half
of sales could occur in its second and third quarters. Accordingly, annual
results would be materially and adversely affected if sales were to fall below
expected seasonal levels during that period. The Companies' 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
Alchemy's reliance on the General Motors Corporation. Alchemy relies on
General Motors to manufacture and supply the engine blocks used in most of
Alchemy's engines. In the event that a strike or other work stoppage occurs
which is either anticipated or otherwise at General Motors, the manufacture or
distribution of such engine blocks may be adversely affected thereby resulting
in a significant decline in Alchemy's ability to sell engines. However, Alchemy
believes that the lack of any formal agreement with General Motors allows
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management the flexibility to choose other suppliers in the event that the above
occurs.
Dependence on a Limited Number of Customers. The Combined Company's
dependence on a limited number of customers results in an unstable economic
environment. In the event that the Combined Company is unable to sell its
products to anticipated or previous customers the Combined Company's revenue
base may be significantly affected. Further, in the event that market interest
in the Combined Company's products decrease for whatever reason, the Combined
Company may not have significant resources to remain a viable business entity.
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 of the amount of
waste sent to the site. The Combined Company 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 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 1999. Such regulations could have a material
adverse effect on the Combined Company's business.
Product 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
$1,000,000 per incident. Additionally, Alchemy maintains a $2,000,000 umbrella
policy. Alchemy has never been the subject of any claim or law suit regarding
product liability 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.
Dependence on Key Personnel. The Companies' success is dependent on
technical and other contributions of key employees, including any individuals
who will join the Combined Company in connection with the Merger. There can be
no assurance that the Companies can continue to recruit and retain such key
personnel. Failure to successfully recruit and retain such personnel could have
a material adverse affect on the Companies' business, financial condition and
results of operations.
Risk of Technological Obsolescence. Cigarette's products are designed for
high tolerance applications. In order to ensure the customer's safety and
enjoyment when using its products, Cigarette relies on cutting edge
technologies. In the event that the appropriate technologies advance to the
point where Cigarette is unable to take advantage of such changes, its products
may become obsolete in the market place.
Risks Associated with Intellectual Property Rights. A substantial portion
of Cigarette's revenue is derived from Cigarette's intellectual property rights
associated with its name and the names of its products. A specific example of
such intellectual property rights is evidenced by the licensing agreement to
which both Alchemy and Offshore Racing Team, Inc. are parties. See "Offshore
Racing Team, Inc. - Licensing Agreement".
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.
Market and Other 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 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
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Common Stock on the OTC-Bulletin Board on the latest practicable trading day
before the printing of this Proxy Statement/ Prospectus, 1998 was $4.50. There
can be no assurance that the market price of Alchemy Common Stock on and after
the Effective Time will not be lower than any previous price for such stock.
Volatility of Trading Price. The trading price of Alchemy's stock after the
Merger has been effected 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 publicly 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 publicly held companies in
the boating industry and related businesses in general, which may not have any
direct relationship with the Combined Company's business or prospects.
Penny Stock Regulation. The Securities and Exchange Commission (the
"Commission") has adopted rules that regulate broker-dealer practices in
connection with transactions in "penny stocks." Penny stocks generally are
equity securities with a price of less than $5.00 (other than securities
registered on certain national securities exchanges or quoted on the NASDAQ
system, provided that current price and volume information with respect to
transactions in such securities is provided by the exchange or system). The
penny stock rules require a broker-dealer, prior to a transaction in a penny
stock not otherwise exempt from the rules, to deliver a standardized risk
disclosure document prepared by the Commission that provides information about
penny stocks and the nature and level of risks in the penny stock market. The
broker-dealer also must provide the customer with other information. In
addition, the penny stock rules require that prior to a transaction in a penny
stock not otherwise exempt from such rules, the broker-dealer must make a
special written determination that the penny stock is a suitable investment for
the purchaser and receive the purchaser's written agreement to the transaction.
These disclosure requirements may have the effect of reducing the level of
trading activity in the secondary market for a stock that becomes subject to the
penny stock rules. If the Company's Common Stock becomes subject to the penny
stock rules, shareholders in this offering may find it more difficult to sell
such securities.
Potential Dilution of Interest. A number of shares equal to approximately
87.0% 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, Class B, Class X and Class Y Warrants, respectively,
which may cause an additional dilution of interest, may negatively impact the
price of Alchemy Common Stock. There can be no assurance that Alchemy's Common
Stock price will not be negatively effected.
Integration of Other Acquired Businesses. Although Alchemy's Board of
Directors believes that the Merger would successfully yield a powerhouse in the
offshore powerboat and recreational powerboat world, there can be no assurance
that products, technologies, distribution channels, key personnel and businesses
of other 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 have a material adverse effect on the business, financial
condition and results of operations of the Combined Company.
Substantial Expenses Associated with the Merger. Alchemy estimates that it
will incur direct transaction costs of approximately $200,000 associated with
the Merger. In addition, it is expected that after the Merger, the Combined
Company will incur additional significant costs, which are not currently
reasonably estimable, associated with integrating Cigarette. Although management
expects that the elimination of duplicate 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.
Possible Adverse Affect on Customer Buying Patterns. As a result of the
Merger, the Companies' customers may decide to purchase boats and motors
elsewhere based upon unanticipated problems with product availability, design
limitations or otherwise. Such a response by the Companies' customers would
adversely affect profitability.
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 one (1) share of Alchemy Common
Stock. Accordingly, the market value of the consideration to be received by the
shareholders of Cigarette
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<PAGE>
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, was $7.00. 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 price.
Volatility of Trading Price. The trading price of Alchemy's stock after the
Merger 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 industry
and related businesses in general, 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
87.0% 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, Class B, Class X and Class Y Warrants, respectively,
may 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 powerhouse 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.
Transaction Charges. Alchemy estimates that it will incur direct
transaction costs of approximately $150,000 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.
Possible Adverse Affect on Customer Buying Patterns. As a result of the
Merger, Alchemy's customers may decide to purchase boats and motors elsewhere
based upon unanticipated problems with product availability, design limitations
or otherwise. Such a response by Alchemy's customers would adversely affect
Alchemy's profitability.
Alchemy-Related Risk Factors
No History of Profitable Operations of Alchemy. Prior to the Merger,
Alchemy's boat business had no operating revenues or history attributable to the
manufacturing of boats. Further, no certain prospects of future profitable
operations are presently expected.
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. Cigarette's
competitors in the boat industry for product sales are companies such as Magnum,
Mako and Sea Ray. After the Merger, Cigarette's competitors in the marine engine
industry will include companies such as Caterpillar, Mercury Marine and
Volvo-Penta. Certain of the Combined Company's competitors, have significantly
greater financial resources than the Combined Company. Competition for product
sales is also based upon the Combined Company's 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 Combined Company's production and other costs. Acceptance of
the 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
13
<PAGE>
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 not being recouped or anticipated
profits not being realized.
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 through 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 has been dependent on
discretionary spending by consumers, which spending may be adversely affected by
recessionary economic conditions. The marine industry experienced a severe
economic 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.
Alchemy's reliance on the General Motors Corporation ("General Motors").
Alchemy relies on General Motors to manufacture and supply the engine blocks
used in most of Alchemy's engines. In the event that a strike or other work
stoppage occurs which is either anticipated or otherwise at General Motors, the
manufacture or distribution of such engine blocks may be adversely affected
thereby resulting in a significant decline in Alchemy's ability to sell engines.
However, Alchemy believes that the lack of any formal agreement with General
Motors allows management the flexibility to choose other suppliers in the event
that the above occurs.
Dependence on a Limited Number of Customers. The Combined Company's
dependence on a limited number of customers results in an unstable economic
environment. In the event that the Combined Company is unable to sell its
products to anticipated or previous customers the Combined Company's revenue
base may be significantly impacted. Further, in the event that market interest
in the Combined Company's products decrease for whatever reason, the Combined
Company may not have significant resources to remain a viable business entity.
Additionally, in the event that Alchemy's financial structure is detrimentally
impacted, Alchemy's management may determine that the Merger is no longer
practicable.
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 of the amount of
waste sent to the site. The Combined Company 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 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 1999. 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
$1,000,000 per incident. Additionally, Alchemy maintains a $2,000,000 umbrella
policy. Alchemy has never been the subject of any claim or law suit regarding
product liability 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.
Penny Stock Regulation. The Commission has adopted rules that regulate
broker-dealer practices in connection with transactions in "penny stocks." Penny
stocks generally are equity securities with a price of less than $5.00 (other
than securities registered on certain national securities exchanges or quoted on
the NASDAQ system, provided that current price and volume information with
respect to transactions in such securities is provided by the exchange or
system). The penny stock rules require a broker-dealer, prior to a transaction
in a penny stock not otherwise exempt from the rules, to deliver a standardized
risk disclosure document prepared by the Commission that
14
<PAGE>
provides information about penny stocks and the nature and level of risks in the
penny stock market. The broker-dealer also must provide the customer with other
information. In addition, the penny stock rules require that prior to a
transaction in a penny stock not otherwise exempt from such rules, the
broker-dealer must make a special written determination that the penny stock is
a suitable investment for the purchaser and receive the purchaser's written
agreement to the transaction. These disclosure requirements may have the effect
of reducing the level of trading activity in the secondary market for a stock
that becomes subject to the penny stock rules. If the Company's Common Stock
becomes subject to the penny stock rules, shareholders in this offering may find
it more difficult to sell such securities.
Cigarette Related Risk Factors.
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 through promotional programs. Cigarette's fiscal year ends on
September 30, and, as a result, Cigarette estimates that more than one-half of
sales to dealers should occur in its second and third quarters. Accordingly,
Cigarette's annual results would be materially and adversely affected if sales
were to fall below expected seasonal levels during that period. Cigarette'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.
Cigarette's Dependence on New Products and Additional Capital. The
recreational boat industry is capital intensive. Average boat manufacturing
costs rise each year as the cost of parts and labor continue to increase.
Further, competitiveness in the recreational boat industry requires that new
products be introduced to the market place in a constant and consistent manner.
There is no assurance that Cigarette will be able to produce new products which
generate the same levels of revenue that the present products produce.
Risk of Technological Obsolescence. Cigarette's products are designed for
high tolerance applications. In order to ensure the customer's safety and
enjoyment when using its products, Cigarette relies on cutting edge
technologies. In the event that the appropriate technologies advance to the
point where Cigarette is unable to take advantage of such changes, its products
may become obsolete in the market place.
Risks Associated with Intellectual Property Rights. A substantial portion
of Cigarette's revenue is derived from Cigarette's intellectual property rights
associated with its name and the names of its products. A specific example of
such intellectual property rights is evidenced by the licensing agreement to
which both Alchemy and Offshore Racing Team, Inc. are parties. See "Offshore
Racing Team, Inc. - Licensing Agreement".
Dependence on Key Personnel. Cigarette's success is dependent on technical
and other contributions of key employees, including any individuals who will
join Cigarette in connection with the Merger. There can be no assurance that
Cigarette can continue to recruit and retain such key personnel. Failure to
successfully recruit and retain such personnel could have a material adverse
affect on Cigarette's business, financial condition and results of operations.
Interests of Certain Persons.
Interests in Alchemy Common Stock and Options. As of September 30, 1998,
Offshore Racing, Inc. owns 2,000,000 shares of Alchemy Common Stock or
approximately 74% of Alchemy's outstanding Common Stock. However, Alchemy's
management anticipates that pursuant to the special directors' meeting of June
4, 1998, and the resolutions promulgated therein, such Common Stock holdings
shall be converted into $1,000,000 worth of Preferred Stock, Series B
simultaneously with the effectiveness of the Merger.
Cigarette Warrant Holders. As of September 30, 1998 there were four
entities which held approximately 2,280,000 warrants and options to purchase
Cigarette Common Stock. If such warrants are exercised the holders of those
warrants would cumulatively hold 42.0% of the outstanding shares of Common Stock
of Cigarette. Notwithstanding the above, the Cigarette warrants will be
converted into Alchemy warrants with similar terms to those of the Cigarette
warrants.
Management. Cigarette's sole Director, Adam Schild, is also a Director of
Alchemy. Further, Mr. Schild is the general partner of Winchester Partners, L.P.
the largest single shareholder of Cigarette.
Forbearance From Certain Creditors. Cigarette has a number of creditors to
which the Company is in default. Each of those creditors have orally agreed to
forbear from taking further actions until such time that the Merger and
Alchemy's Form S-4 Registration Statement are each deemed effective. However,
there can be no assurance that: (i) any or all of Cigarette's creditors referred
to herein will continue to forbear from taking further actions against Cigarette
to collect upon their debts; and (ii) Cigarette will be able to satisfy any such
creditor in the event that such creditor fails to continue its forbearance.
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<PAGE>
Risks Associated with the OTC-Bulletin Board.
Alchemy's common stock is presently listed on the OTC-Bulletin Board. Thus,
the Alchemy Common Stock issued in connection with the Merger will also be
listed on the OTC-Bulletin Board. Due to the nature of the limited number of
market makers for the Alchemy stock on the OTC-Bulletin Board, a shareholder may
find it difficult to: (i) dispose of Alchemy Common Stock; or (ii) obtain
accurate quotations as to the market value of such stock. See "Penny Stock
Regulation" in this section.
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<PAGE>
SELECTED HISTORICAL AND UNAUDITED 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 positions.
No cash dividends have been declared or paid on Alchemy Common Stock or
Cigarette Common Stock.
<TABLE>
<CAPTION>
September 30, 1998 March 31, 1999
------------------------------- --------------------------------------------------
Alchemy Cigarette Alchemy Cigarette Pro-Forma
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Total Current Assets $ 244,841 $ 1,450,983 $ 332,867 $ 1,549,896 $1,882,873
Property and equipment 20,060 285,785 19,606 443,761 463,367
Intangible assets and other 189,750 4,545,227 178,750 4,348,430 6,674,427
Total assets 454,651 6,282,995 531,223 6,342,087 9,020,667
Total current liabilities 239,904 9,766,921 273,792 10,549,708 5,112,460
Redeemable preferred stock -- 1,216,667 -- 1,241,667 --
Total stockholders' equity (deficit) 214,747 (4,700,593) 257,431 (4,207,621) 3,908,207
Statement of Operations:
<CAPTION>
Fiscal Year Ended Fiscal Year Ended
September 30, 1997 September 30, 1998
------------------------------- --------------------------------------------------
Alchemy Cigarette Alchemy Cigarette Pro-Forma
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ 1,059,498 $ 2,158,406 $ 742,289 $ 7,026,625 $7,581,656
Net loss (92,762) (2,560,606) (319,288) (791,065) (538,577)
Net loss per share (0.11) (0.91) (0.14) (0.22) (0.10)
Weighted Average Shares Outstanding 851,093 2,819,562 2,291,093 3,577,027 5,421,844
<CAPTION>
Six Months Ended Six Months Ended
March 31, 1998 March 31, 1999
------------------------------- --------------------------------------------------
Alchemy Cigarette Alchemy Cigarette Pro-Forma
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ 329,560 $2,583,458 $ 319,080 $ 5,194,008 $5,361,856
Net loss (11,871) (393,034) (267,316) (904,487) (885,915)
Net loss per share (0.01) (0.11) (0.10) (0.24) (0.16)
Weighted Average Shares Outstanding 2,237,394 3,552,923 2,550,608 3,699,708 5,421,844
</TABLE>
17
<PAGE>
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, 1998
------------------
Total assets $454,651
Current liabilities 239,904
Shareholders' Equity (deficit) 214,747
Consolidated Statement of Operations :
September 30, 1998
------------------
Net sales $742,289
Net (loss) (319,288)
Net loss per Common Share (.14)
Weighted Average Number of Common
Shares Outstanding 2,291,093
18
<PAGE>
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, 1998
------------------
Total assets $6,282,995
Current liabilities 9,766,921
Stockholders' equity (deficit) (4,700,593)
Statement of Operations Data:
September 30, 1998
------------------
Net sales $7,026,625
Net (loss) (791,065)
Loss per Common Share (0.22)
Common Shares Outstanding 3,577,027
19
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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 April 26, 1999, the last full
trading date prior to the execution and delivery of the Merger Agreement and the
public announcement thereof.
Alchemy
Common Stock
April 30, 1999.................................. $ 7.00
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 Exhibit 2.0. 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. Additionally, following the Merger, Alchemy does not
anticipate paying cash dividends in the foreseeable future. Additionally,
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, if any, to finance the expansion of its business.
20
<PAGE>
THE MEETINGS
MATTERS 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
Merger Agreement, dated as of _________, 1999, by and among Alchemy, Merger Sub
and 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, (ii) upon a proposal to approve and adopt the Merger Agreement, (iii) to
approve and adopt an Employee Incentive Stock Option Plan and (iv) 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. However, a
motion to postpone or adjourn the meeting will not be entertained by the
shareholders in the event that: (i) a satisfactory number of shares were
represented at such meeting; and (ii) the majority of such shares were voted
against the Merger.
At the Cigarette Special Meeting, the Cigarette shareholders will be asked
to (i) 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. However, a motion to postpone or adjourn the meeting will
not be entertained by the shareholders in the event that: (i) a satisfactory
number of shares were represented at such meeting; and (ii) the majority of such
shares were voted against 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
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 one (1) share of Alchemy Common Stock (the
"Exchange Ratio"). At the Effective Time, each outstanding Cigarette Class A
Warrant, Cigarette Class B Warrant and Cigarette Class X Warrant with a par
value of $0.01, respectively, 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, Cigarette Class B Warrants and
Cigarette Class X Warrants, respectively, the number of whole shares of Alchemy
Common Stock equivalent to the number of Cigarette shares (rounded down to the
nearest whole number) that the holder of such Cigarette Class A Warrants,
Cigarette Class B Warrants and Cigarette Class X Warrants, respectively, would
have been entitled to receive pursuant to the Merger had such holder exercised
such Cigarette Class A Warrants, Cigarette Class B Warrants and Cigarette Class
X Warrants, respectively, in full, immediately prior to the Effective Time. The
exercise price of the Alchemy Class A Warrants will equal $3.00 per share of
Alchemy Common Stock, the exercise price of the Alchemy Class B Warrants will
equal $4.00 per share of Alchemy Common Stock and the Alchemy Class X Warrants
and Alchemy Class Y Warrants will equal $2.00 per share of Alchemy Common Stock.
Based upon the number of Cigarette Class A Warrants outstanding at October 31,
1998, 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 October 31, 1998, 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. Based upon the number of
Cigarette Class X Warrants outstanding at October 31, 1998, 180,000 additional
shares of Alchemy Common Stock would be reserved for issuance to holders of
Cigarette Class X Warrants in connection with Alchemy's assumption of such
warrants. Based upon the number of Alchemy Class Y Warrants outstanding at April
15, 1999, 100,000 additional shares of Alchemy Common Stock would be reserved
for issuance to holders of Alchemy Class Y Warrants. In addition, at the
Effective Time, each share of Cigarette Preferred Stock, Series A and Cigarette
Preferred Stock, Series B 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 and Alchemy Preferred Stock, Series B, respectively possessing similar rights,
terms and conditions as the Cigarette Preferred Stock. Based upon the number of
shares of Cigarette Preferred Stock outstanding at October 31, 1998, an
aggregate of approximately 200 shares of Alchemy Preferred Stock would be issued
in connection with the Merger. Based upon the number of shares of Alchemy Common
Stock and Cigarette Common Stock outstanding at October 31, 1998, an aggregate
of approximately 4,719,450 shares of Alchemy Common Stock would be issued in
connection with the Merger, representing approximately 87.0% of the total number
of shares of Alchemy Common Stock outstanding after giving effect to such
issuance. 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.
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The outstanding shares of Alchemy Common Stock are listed on the
OTC-Bulletin Board under the symbol "ALCH"; as a condition to the Merger, the
shares of Alchemy Common Stock which are to be issued in the Merger, must 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 April 30, 1999 was $7.00 per share. Because the Exchange
Ratio is fixed, a change in the market price of Alchemy Common Stock before the
Merger may 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 5,421,844 shares
of Alchemy Common Stock issued and outstanding. Further, an additional 2,280,000
shares of Alchemy Common Stock will be reserved for issuance as underlying
shares for the Alchemy Class A, Class B, Class X and Class Y warrants,
respectively. Further, 1,000,000 Alchemy Class A Warrants, 1,000,000 Alchemy
Class B Warrants, 180,000 Alchemy Class X Warrants, 100,000 Alchemy Class Y
Warrants, $1,000,000 of Alchemy Preferred Stock, Series A and $1,000,000 of
Alchemy Preferred Stock, Series B will be issued and outstanding. An additional
50,000 shares are being registered and will be reserved for issuance underlying
50,000 non-qualified stock options granted in 1998 and exercisable at $2.00 per
share. Offshore Racing, Inc. will hold $1,000,000 or equal to 100 shares of
Alchemy Preferred Stock, Series B and it is expected that Central Manufacturing,
Inc. will hold $1,000,000 or equal to 100 shares of Alchemy Preferred Stock,
Series A. 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 N.E., 188th Street, Aventura, Florida 33180, on ___________,
1999. 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 for Alchemy and Cigarette, respectively entitled to vote at the
Special Meetings, 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 October 31, 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 702,394 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 Meetings
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
607.1302 and 607.1320 of the FBCA. 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 such materials to beneficial owners of Common
Stock. Such persons will be paid reasonable out-of-pocket expenses.
ALCHEMY SHAREHOLDERS SHOULD NOT SEND ANY STOCK
CERTIFICATES WITH THEIR PROXY CARD
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THE MERGER
Background of the Merger
On May 12, 1997 Alchemy 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 in addition 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, Alchemy 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 Alchemy adopt a recapitalization
pursuant to which the issued and outstanding shares of Alchemy's Common Stock
would reverse split on a one for eighty basis so that the shareholders received
one share of Alchemy's Common Stock for every eighty shares of Common Stock
held.
Furthermore, the following individuals were elected as officers and
directors of Alchemy 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 Alchemy and change the name of Alchemy from Hawk Marine Power,
Inc. to Alchemy Holdings, Inc. On May 12, 1997, and subsequent to the change of
Alchemy's name from Hawk Marine Power, Inc. to Alchemy Holdings, Inc., Alchemy
formed a new corporation under the laws of the State of Delaware, a wholly owned
subsidiary of Alchemy to be known as "Hawk Marine Power, Inc." to operate its
high performance engine manufacturing business.
Alchemy issued 2,000,000 post-split restricted shares of Alchemy's common
stock to Offshore, in exchange for Alchemy'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, to be organized as a wholly owned subsidiary of Alchemy to be
known as "Cigarette Licensing, Inc." to operate the Company's licensing
business. Such issuance became effective on May 19, 1998.
Lastly, Alchemy issued 200,000 post-split shares of Alchemy's common stock
to Alcott, Simpson & Co., Inc., 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. Such issuance became effective on May 19, 1998.
As a result, on May 20, 1997, the split became effective and Alchemy began
trading under its new symbol "ALCH" on the OTC - Bulletin Board.
Subsequent to the change of Alchemy'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.", Alchemy sold all of its
assets and liabilities of its high performance engine building operation to
Alchemy's wholly owned subsidiary Hawk Marine Power, Inc. in exchange for 100
shares of Hawk Marine Power, Inc. The 100 shares exchanged represents 100% of
the issued and outstanding shares of Hawk Marine Power, Inc.
On October 25, 1997, Alchemy's Board of Directors unanimously adopted a
resolution allowing Alchemy 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.
On May 12, 1998, Alchemy held a Special Meeting of the Board of Directors
wherein the Company determined that in the best interest of the Company's
shareholders the Articles of Incorporation should be amended to authorize a
class of preferred stock consisting of 10,000,000 shares, $.001 par value per
share.
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 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,
(v) the Companies' respective shareholders would benefit by the enhanced ability
of the Combined Entity to compete in the marketplace, and (vi) that there would
be economic advantages as a result of increased operating efficiencies are
substantial.
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 shares.
Interests in Alchemy Common Stock
Offshore owns 2,000,000 shares of Alchemy Common Stock the issuance of
which became effective on May 19, 1997 pursuant to the terms of Licensing
Agreement dated May 12, 1997 (the "Licensing Agreement"). As of May 12, 1996,
Offshore and Hawk Marine Power, Inc. ("Hawk") (Alchemy's predecessor) entered
into a licensing agreement the term of which is ten years (the "Licensing
Agreement"). Pursuant to the Licensing Agreement, Hawk, as the user of the
license, agreed to pay to Offshore, 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. Additionally, Hawk paid a one time fee of
2,000,000 shares of its common stock to Offshore.
Interests in Cigarette Common Stock
As of October 31, 1998 (i) Winchester Partners, L.P. owned 1,601,000 shares
of Cigarette Common Stock, (ii)Masada I, L.P. owned 1,000,000 shares of
Cigarette Common Stock and held 180,000 Class X Warrants for an additional
180,000 shares of Cigarette Common Stock, (iii) Mr. Glen Laken and Ms. Lane
Laken held a combined 425,000 shares of Cigarette Common Stock, (iv) Mr. Craig
Barrie, an officer of Cigarette and Alchemy, and Ms. Patricia Barrie held a
combined 25,000 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.
Factors Considered by Alchemy's Board
In recommending the Merger to its shareholders, Alchemy's Board considered
the following factors: A) Increased Cash Flow; B) Stable Revenue Stream - With
Alchemy's control of Cigarette, its largest customer, Alchemy anticipates having
a more predictable and consistent revenue stream; C) Increased Visibility -
Cigarette's name is accompanied by worldwide recognition; therefore, Alchemy may
realize an immediate intangible benefit from the Merger; and D) Decreased Costs
- - The Combined Companies will benefit from increased purchasing power and
decreased administrative expenses.
Factors Considered by Cigarette's Board
In recommending the Merger to its shareholders, Cigarette's Board
considered the following factors. Increased Efficiencies through: 1) Decreased
Costs - After the Merger Cigarette will purchase some engines from Alchemy at
Alchemy's costs thereby decreasing the cost of both components. 2) Increased
Profit Margin - As a result of the decreased costs, Cigarette's profit margin is
expected to increase. 3) Sharing of Technologies - Cigarette's research and
design department plans to utilize Alchemy's technology thereby allowing
Cigarette to more closely match hull designs and engine performance.
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Interests of Certain Persons in the Merger
As referred to in "Interest in Alchemy Common Stock", at the date hereof
and at all times prior to the consummation of the Merger, Offshore Racing, Inc.
owns 2,000,000 shares or 74.0% of Alchemy's outstanding Common Stock. Pursuant
to the special directors' meeting of May 12, 1997, and the resolutions
promulgated therein, such Common Stock holdings shall be retired and in exchange
for such retirement Alchemy will issue $1,000,000 worth of Alchemy Preferred
Stock, Series B simultaneously with the consummation of the Merger.
Retirement of Offshore Shares
Pursuant to the terms of the License Agreement, Offshore received a one
time payment of 2,000,000 shares of Alchemy Common Stock. As a result of the
Merger and in exchange for the conversion of 2,000,000 shares of Alchemy Common
Stock for $1,000,000 of Alchemy Preferred Stock, Series B, Offshore shall
relinquish all rights, title and interest, created by the May 12, 1997 Licensing
Agreement.
Future Employment Agreements
The key employees of the Company are not bound by employment contracts.
However, Alchemy anticipates binding its key employees with formal employment
agreements. Management is also searching for an individual to fill the position
of Chief Financial Officer on a permanent basis and anticipates hiring such by
May 31, 1999. Alchemy expects that in formalizing the employment agreements with
its key employees, some aspects of their employment including their respective
compensation may involve changes.
Description of Alchemy's Securities
Capital Stock
Alchemy's authorized capital stock consists of 50,000,000 shares of Common
Stock, $.001 par value per share and 10,000,000 shares of Preferred Stock, $.001
par value per share.
Common Stock
General. Alchemy has 50,000,000 authorized shares of Common Stock,
2,437,394 of which are issued and outstanding prior to the effectiveness of this
Registration Statement. All shares of Common Stock currently outstanding are
validly issued, fully paid and non-assessable, and all shares which are the
subject of this Prospectus, when issued and paid for pursuant to this offering,
will be validly issued, fully paid and non-assessable.
Voting Rights. Each share of Common Stock entitles the holder thereof to
one vote, either in person or by proxy, at meetings of stockholders. Alchemy's
Board of Directors consists of three individuals, each of which serves for a one
year staggered term. At each annual meeting of the stockholders, a single
director will be elected.
Dividend Policy. All shares of Common Stock are entitled to participate
ratably in dividends when and as declared by Alchemy's Board of Directors out of
the funds legally available therefor. Any such dividends may be paid in cash,
property or additional shares of Common Stock. Alchemy has not paid any
dividends since its inception and presently anticipates that all earnings, if
any, will be retained for Alchemy's business and that no dividends on the shares
of Common Stock will be declared in the foreseeable future. Payment of future
dividends will be subject to the discretion of Alchemy's Board of Directors and
will depend upon, among other things, future earnings, the operating and
financial condition of Alchemy, its capital requirements, general business
conditions and other pertinent facts. Therefore, there can be no assurance that
any dividends on the Common Stock will be paid in the future.
Miscellaneous Rights and Provisions. Holders of Common Stock, have no
preemptive or other subscription rights, conversion rights, redemption or
sinking fund provisions. In the event of the liquidation or dissolution, whether
voluntary or involuntary, of Alchemy, each share of Common Stock is entitled to
share ratably in any assets available for distribution to holders of the equity
of Alchemy after satisfaction of all liabilities, subject to the rights of
holders of any Preferred Stock.
Shares Eligible for Future Sale. Upon completion of this offering and after
the Merger's effectiveness, Alchemy will have 5,421,844 shares of Common Stock
issued and outstanding. Of these shares, 1,820,844 will be freely tradeable
without restriction or further registration under the Securities Act. An
additional 3,601,000 shares will be held by "affiliates" of Alchemy (in general,
a person who has a control relationship with Alchemy) and which will be subject
to the limitations of Rule 144 adopted under the Securities Act. However, all of
the shares of Common Stock registered under this registration statement will be
restricted from transfer pursuant to the
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terms of the Merger Agreement for a period of twelve (12) months from the date
of effectiveness of this registration statement or at such earlier date as may
be permitted by Alchemy's management. Another 2,280,000 shares of Common Stock
underlying the Class A, Class B, Class X warrants and Class Y warrants will be
registered under this Registration Statement but not issued. Another 50,000
shares of Common Stock underlying 50,000 options granted to a consultant by
Alchemy and pursuant to an option agreement between those parties will be
registered under this Registration Statement, but not issued.
Preferred Stock
Preferred Stock outstanding. Alchemy's Certificate of Incorporation, as
amended on February 11, 1998, authorized the issuance of up to 10,000,000 shares
of Alchemy Preferred Stock with a par value of $.001 per share. As of September
30, 1998, there were no shares of Alchemy Preferred issued and outstanding.
Alchemy's Board of Directors has the authority to issue up to 10,000,000
shares of Preferred Stock (including the $1,000,000 of Alchemy Preferred Stock,
Series A) in one or more series and to fix the rights, preferences, privileges
and restrictions granted to or imposed upon any unissued and undesignated shares
of Preferred Stock and to fix the number of shares constituting any series and
the designations of such series, without further vote or action by the
stockholders. Although it presently has no intention to do so, Alchemy's Board
of Directors, without stockholder approval, can issue Preferred Stock with
voting and conversion rights which could adversely affect the voting power or
other rights of the holders of Alchemy Common Stock. The issuance of Preferred
Stock may have the effect of delaying, deferring or preventing a change in
control of Alchemy.
Series A
Alchemy expects to issue $1,000,000 of Alchemy Preferred Stock, Series A
("Series A" for the purposes of this section only) to Central Manufacturing,
Inc. ("Central") in exchange for that party's forgiveness and cancellation of
all debt owed to it by Cigarette pursuant to the terms of the Merger. Series A
will bear a 5% cumulative dividend. All shares of Alchemy Common Stock will be
of junior rank to Series A with respect to the preferences as to distributions
and payments upon the liquidation, dissolution and winding up of the Company.
The rights of the shares of Alchemy Common Stock will be subject to the
preferences and relative rights of the Series A. Series A holders will not be
entitled to any voting rights either in person or by proxy. Additionally, Series
A shares will be non-convertible, unsecured and unredeemable.
Series B
Alchemy expects to issue $1,000,000 of Alchemy Preferred Stock, Series B
("Series B" for the purposes of this section only) to Offshore Racing, Inc. in
exchange for the retirement of 2,000,000 shares of Alchemy Common Stock by
Offshore Racing, Inc. Series B will bear an 8% cumulative dividend. All shares
of Alchemy Common Stock will be of junior rank to Series B with respect to the
preferences as to distributions and payments upon the liquidation, dissolution
and winding up of the Company. The rights of the shares of Alchemy Common Stock
will be subject to the preferences and relative rights of the Series B. Series B
holders will not be entitled to any voting rights either in person or by proxy.
Additionally, Series B shares will be non-convertible, unsecured and
unredeemable.
Warrants and Options
A total of 2,280,000 shares underlying a total of 2,280,000 warrants and
options are being offered in this Registration Statement. 1,000,000 shares
underlie 1,000,000 Class A warrants which are exercisable at a price of $3.00
for a period of 5 years. 1,000,000 shares underlie 1,000,000 Class B warrants
which are exercisable at a price of $4.00 for a period of 5 years. 180,000
shares underlie 180,000 Class X warrants which are exercisable at a price of
$2.00 for a period of 5 years. 100,000 shares underlie 100,000 Class Y warrants
which are exercisable at a price of $2.00 for a period of 5 years. Additionally,
50,000 shares underlying 50,000 non-qualified stock options which are
exercisable at a price of $2.00 are being registered pursuant to this
Registration Statement.
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."
Cigarette and Alchemy Year 2000 Compliance
Both Cigarette and Alchemy have taken steps to ensure that each company is
year 2000 compliant. Both companies' software
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has been protected and neither company utilizes machines to produce their
respective products which are computerized. Neither Alchemy nor Cigarette
manufactures products which employ computer chips as part of their ability to
perform as designed. Alchemy's primary supplier, Mercury Motors, Inc.
("Mercury"), has indicated to Alchemy that Mercury is year 2000 compliant in all
of its operations. Neither company expects the replacement of any machinery due
to inherent year 2000 problems.
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Federal Income Tax Consequences
THE FOLLOWING IS A SUMMARY OF THE OPINION PROVIDED BY COUNSEL TO ALCHEMY 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
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 BY FEDERAL, FOREIGN, STATE OR LOCAL LAWS.
Beckman, Millman & Sanders, L.L.P., counsel to 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 Cigarette Common Stock will be the same, immediately
after the exchange, as the basis of such shareholder's Cigarette 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 (if appropriate
pursuant to the appraisal rights procedure under the FBCA) 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 assets, 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. Under certain circumstances, the
attribution rules with respect to shares attributed from a family member may be
waived.
Dissenter's Rights
Pursuant to Section 607.1302(a) of the Florida Business Corporation Act, a
copy of which is attached hereto as Exhibit 99.1, 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 FBCA Section
607.1301, 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. Failure
to vote against the Merger shall constitute a waiver of that shareholder's
appraisal rights.
(b) Within 10 days after the date on which the vote is taken approving the
Merger, such shareholder must make written demand on Cigarette for payment
of the fair value of such shareholder's shares.
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Within 10 days after the Merger is effected, Cigarette shall give written
notice ("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.
Cigarette shall also notify each dissenting shareholder that within 20 days
after Cigarette gives Notice, any dissenting shareholder(s) must file with
Cigarette a notice of such election, stating the name and address, the number,
classes, and series of shares as to which he dissents, and a demand for payment
of the fair value of his shares in order to perfect his rights. Any shareholder
failing to file such election to dissent within the period set forth shall be
bound by the terms of the proposed corporate action. Any shareholder filing an
election to dissent shall deposit his certificates for certified shares with
Cigarette simultaneously with the filing of the election to dissent. Cigarette
may restrict the transfer of uncertified shares from the date of the
shareholder's election to dissent is filed with the corporation.
In the event that Cigarette and the dissenting shareholder(s) do 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 Alchemy 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.
THE ABOVE SECTION IS A ONLY A SUMMARY OF FLORIDA LAW REGARDING DISSENTER'S
RIGHTS. FAILURE BY A SHAREHOLDER TO FOLLOW THE REQUIRED PROCEDURE AS DETERMINED
BY SECTIONS 607.1301- 1320 OF THE FLORIDA BUSINESS CORPORATION ACT FOR
PERFECTING HIS DISSENTER'S RIGHTS WILL RESULT IN THE LOSS OF SUCH RIGHTS.
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AGREEMENT AND PLAN OF MERGER
The following is a brief summary of certain provisions of the Agreement and
Plan of Merger (the "Merger Agreement"), a copy of which is attached hereto as
Exhibit 2.0 to this Joint Proxy Statement/Prospectus and incorporated 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.
Although the Merger Agreement has not been executed and therefore ratified
by either Cigarette and Alchemy, the parties to such agreement expect to
finalize and execute the Merger Agreement prior to the Registration Statement's
effectiveness. The effectiveness of the Registration Statement is a condition
subsequent to the Merger Agreement. However, the Merger must be ratified by the
shareholders of both Cigarette and Alchemy. Cigarette's management is unaware of
any voting trust agreement between its shareholders.
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 any Cigarette treasury
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 for the States of Florida and
Delaware, respectively or (b) such later date and time as is agreed in writing
by the Merger Sub, Cigarette and Alchemy.
Shareholders' Rights
The Florida Business Corporation Act does not distinguish between publicly
held and closely held corporations. Additionally, neither Cigarette's nor
Alchemy's articles of incorporation provide otherwise. Thus, the dissenting
rights of holders of Alchemy and Cigarette securities do not materially differ.
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 2.1 of the Merger Agreement) shall be converted into one (1) (the
"Conversion Number") fully paid and nonassessable share of Alchemy Common Stock
(the "Exchange Ratio"). 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 the terms of the Merger Agreement, without interest.
Notwithstanding the above, Cigarette shareholders who vote against the Merger
and choose to exercise their appraisal rights pursuant to the FBCA will not
receive Alchemy Common Stock, but will receive the fair value thereof.
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 Exchange Ratio shall be
correspondingly adjusted; provided, however, that any such changes shall be
subject to the terms of the Merger Agreement. Restriction on Alchemy Shares
Issued Pursuant to this Registration Statement
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THE SHARES OF ALCHEMY COMMON STOCK ISSUED PURSUANT TO THIS REGISTRATION
STATEMENT AND THE MERGER AGREEMENT WILL BE RESTRICTED FROM TRANSFER FOR A PERIOD
OF TWELVE MONTHS FROM THE EFFECTIVE TIME AS THAT TERM IS DEFINED IN SECTION 1.2
OF THE MERGER AGREEMENT (THE "LOCKUP PERIOD"). DURING THE LOCKUP PERIOD THE
BOARD OF DIRECTORS OF THE SURVIVING CORPORATION SHALL HAVE THE EXCLUSIVE RIGHT
TO RELEASE ANY OR ALL OF THE SHAREHOLDERS OF THE NEWLY ISSUED ALCHEMY COMMON
STOCK FOR ANY NECESSARY REASON.
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; (i) the filing by
Alchemy of the Registration Statement; (ii) the filing of the required merger
documents with the Secretary of State of the State of Florida; (iii) the filing
of proxy statement with the Commission by Alchemy and Cigarette; and (iv) 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 employment tax, labor and employee benefit matters; (o) compliance with
laws; (p) the absence of material interested party transactions; and (q) 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 (r) the interim operations of the
Merger Sub, and representations and warranties by Cigarette as to (s) the
absence of payments resulting from the Merger and (t) actions taken regarding
restrictions applicable to business combinations under the FBCA.
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 material interested party transactions; and (q) 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 (r)
the interim operations of Merger Sub, and representations and warranties by
Cigarette as to (s) the absence of payments resulting from the Merger, and (t)
actions taken regarding restrictions applicable to "business combinations" under
the FBCA.
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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 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; and (ii) adverse
changes in the market prices for the party's common stock between the date of
the Merger Agreement and the Closing Date.
Certain Covenants and Agreements
Pursuant to the Merger Agreement and 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 Merger Agreement,
Alchemy will not, without the prior written consent of Cigarette; (a) 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 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, 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
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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 an 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 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 an officer, director or employee of Cigarette or any of its
subsidiaries 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 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, 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 FBCA 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 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.
Neither Alchemy, the Surviving Corporation nor Cigarette maintain
directors' and officers' liability insurance policies. The Surviving Company
anticipates that it will procure such insurance at some point subsequent to the
Merger.
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 of Cigarette and
Alchemy and the issuance of Alchemy Common Stock in connection with the Merger
shall have been approved by the Alchemy stockholders; (b) all authorizations,
consents, orders or approvals of any governmental entity required to consummate
the Merger shall have been obtained and be in effect,
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the absence of which would be reasonably likely to have a Material Adverse
Effect on either Alchemy or Cigarette, as the case may be; (c) 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; (d) 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; (e)
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; (f)
receipt by Alchemy of a written opinion of 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; (g) 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; (h) 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 (i) 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 March 31, 1999, provided 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 6.7
(Legal Conditions to the Merger) or Article VI (Additional Agreements;
Reasonable Efforts) of the Merger Agreement; or
(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 more 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 Article iv of the Merger Agreement (in the case of termination by Alchemy) or
Article III (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
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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 8.3 of the Merger Agreement (Fees and Expenses),
provided that the provisions of Article IX (Miscellaneous) of the Merger
Agreement and the Non-Disclosure Agreement shall remain in full force and effect
and survive any such termination. In the event of any termination of the Merger
Agreement pursuant to Section 8.1, the Merger Agreement shall be of no further
force and effect, except that Section 8.2 (Effect of Termination) and any
applicable surviving terms of the Merger Agreement and all terms of 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
and 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.
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.
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.
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) may extend the time for the
performance of any of the obligations or other acts of the other party, (ii) may
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) may waive compliance by the other party with any condition or
agreement contained in the Merger Agreement.
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
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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, (v) the Companies' respective
shareholders would benefit by the enhanced ability of the Combined Entity to
compete in the marketplace and (vi) that there would be substantial economic
advantages as a result of increased operating efficiencies.
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SECURITIES OF ALCHEMY
Market Price of Dividends on Alchemy's Common Stock
Alchemy's management has never declared a dividend and does not anticipate
the declaration of a dividend for the forseeable future. Alchemy's Common Stock
is presently listed on the OTC- Bulletin Board. The following chart sets forth
the range of high and low bid information for the five previous fiscal quarters
and the most recent price information as of the latest practicable date
immediately prior to the effectiveness of this Registration Statement. Such
quotations do not reflect interdealer prices, retail mark-up, mark-down or
commission, and may not necessarily represent actual transactions.
DATES HIGH LOW
July 1 - September 30, 1997 4 3
October 1 - December 31, 1997 9 1/8 1 7/8
January 1 - March 31, 1998 9 3/4 2 1/2
April 1 - June 30, 1998 12 3/4 3 3/4
July 1 - September 30, 1998 12 3/4 4 9/16
October 1 - December 31, 1998 8 3 1/2
January 1 - March 31, 1999 6 3 3/8
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Holders
As of October 31, 1998 there were approximately 200 shareholders of
unrestricted Alchemy Common Stock and 1 shareholder of Alchemy Preferred Stock.
The sole shareholder of more than 5% of Alchemy's Common Stock is Offshore
Racing, Inc. which will be retiring its holding in exchange for Alchemy
Preferred Stock, Series B upon the ratification of the Merger Agreement.
<TABLE>
<CAPTION>
Classification # Shares Owned % Of Total % of Total Outstanding
Outstanding Prior To Post Effectiveness
Effectiveness
<S> <C> <C> <C>
Offshore Racing, Inc. 2,000,000 74.00% 0.00%
(control entity)(1)
Adam Schild (director) 0 0.00% 0.00%
Craig Barrie (director)(2) 15,378 .7% .2%
all directors and officers as 15,378 .7% .2%
a group
</TABLE>
(1) Retired
(2) Craig Barrie and his wife, Patricia Barrie own an additional 25,000 shares
of Cigarette which will be converted into Alchemy Common Stock at the same
conversion rate as the other Cigarette shareholders.
Dividends
Common Stock. All shares of Common Stock are entitled to participate
ratably in dividends when and as declared by Alchemy's Board of Directors out of
the funds legally available therefor. Any such dividends may be paid in cash,
property or additional shares of Common Stock. Alchemy has not paid any
dividends since its inception and presently anticipates that all earnings, if
any, will be retained for Alchemy's business and that no dividends on the shares
of Common Stock will be declared in the foreseeable future. Payment of future
dividends will be subject to the discretion of the Alchemy's Board of Directors
and will depend upon, among other things, future earnings, the operating and
financial condition of Alchemy, its capital requirements, general business
conditions and other pertinent facts. Therefore, there can be no assurance that
any dividends on the Common Stock will be paid in the future.
Preferred Stock. Alchemy's Certificate of Incorporation, as amended,
authorizes the issuance of up to 10,000,000 shares of Preferred Stock. The
issuance of Preferred Stock by the Board of Directors could adversely affect the
rights of holders of shares of Common Stock by, among other things, establishing
preferential dividends, liquidation rights or voting power. The issuance of
Preferred Stock by Alchemy could be used to discourage or prevent efforts to
acquire control of the Company through the acquisition of shares of Common
Stock.
Series A. There are no shares of Alchemy Preferred Stock, Series A issued
and outstanding. Alchemy Preferred Stock, Series A has a par value of $.001 per
share and bears a dividend rate of $500 per share per annum. Such dividends are
payable quarterly unless Alchemy elects not to pay the dividend in which such
dividend shall be cumulative and shall accrue without interest. No dividend
shall be declared or paid on Alchemy Common Stock unless all preferred stock
dividends have been paid in full. In the event of any voluntary or involuntary
liquidation, the amount to be paid to holders of Alchemy Preferred Stock, Series
A shall be $10,000 per share plus all cumulative dividends accrued. Alchemy
Preferred Stock, Series A may be repurchased at any time by Alchemy for a
purchase price of $10,000 per share plus all dividends payable at the time of
repurchase; however, such holders may not force Alchemy to repurchase any shares
of Alchemy Preferred Stock, Series A. Alchemy Preferred Stock, Series A has no
voting rights. Alchemy anticipates that it will issue 100 shares of Alchemy
Preferred Stock, Series A to Central Manufacturing, Inc. in exchange for that
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<PAGE>
party's forgiveness and cancellation of all debt owed to it by Cigarette
pursuant to the terms of the Merger. See "SUMMARY - The Proposed Merger".
Series B. There are no shares of Alchemy Preferred Stock, Series B issued
and outstanding. Alchemy Preferred Stock, Series B has a par value of $.001 per
share and bears a dividend rate of $800 per share per annum. Such dividends are
payable quarterly unless Alchemy elects not to pay the dividend in which such
dividend shall be cumulative and shall accrue without interest. No dividend
shall be declared or paid on Alchemy Common Stock unless all preferred stock
dividends have been paid in full. In the event of any voluntary or involuntary
liquidation, the amount to be paid to holders of Alchemy Preferred Stock, Series
B shall be $10,000 per share plus all cumulative dividends accrued. Alchemy
Preferred Stock, Series B may be repurchased at any time by Alchemy for a
purchase price of $10,000 per share plus all dividends payable at the time of
repurchase; however, such holders may not force Alchemy to repurchase any shares
of Alchemy Preferred Stock, Series B. Alchemy Preferred Stock, Series B has no
voting rights. Alchemy anticipates that it will issue 100 shares of Alchemy
Preferred Stock, Series B to Offshore Racing, Inc. in exchange for that party's
retirement of 2,000,000 shares of Alchemy Common Stock pursuant to the terms of
the Merger. See "SUMMARY - The Proposed Merger".
Miscellaneous Rights and Provisions. Holders of Common Stock, have no
preemptive or other subscription rights, conversion rights, redemption or
sinking fund provisions. In the event of the liquidation or dissolution, whether
voluntary or involuntary, of Alchemy, each share of Common Stock is entitled to
share ratably in any assets available for distribution to holders of the equity
of Alchemy after satisfaction of all liabilities, subject to the rights of
holders of any Preferred Stock.
Shares Eligible for Future Sale. Upon completion of this offering, the
Company will have approximately 5,421,844 shares of Common Stock issued and
outstanding. Further, 1,820,844 will be freely tradeable without restriction or
further registration under the Securities Act. The aforementioned figure does
not include any shares purchased by an "affiliate" of the Company (in general, a
person who has a control relationship with the Company) which will be subject to
the limitations of Rule 144 adopted under the Securities Act. Once the Merger is
effective (which is anticipated by the Companies to occur prior to this
offering's effectiveness) 2,000,000 shares held by Offshore will be exchanged
for $1,000,000 worth of Alchemy Preferred Stock, Series B. The remaining shares
of Common Stock registered under this registration statement are freely saleable
under the Securities Act, but may not be transferred for twelve (12) months from
the date of effectiveness of this registration statement or at such earlier date
as may be permitted by the Company. Another 2,280,000 shares of Common Stock
underlying the Alchemy Class A Warrants, Alchemy Class B Warrants, Alchemy Class
X Warrants and Alchemy Class Y Warrants will be registered under this
registration statement but not issued and 50,000 shares of Alchemy Common Stock
underlying such non-qualified purchase options.
Transfer Agent
The transfer agent and registrar for the Company Common Stock is Fidelity
Transfer Company, 1800 Southwest Temple, Suite 301 - Box 53, Salt Lake City,
Utah 84115.
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<PAGE>
BUSINESS
The Companies
Alchemy Holdings, Inc.
General Development of Business
Alchemy Holdings, Inc., formally known as Hawk Marine Power, Inc., (the
"Company" for the purposes of historical overview only) 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 8 cylinder 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 engines have established distinctive reputations
among power boat enthusiasts for performance, speed and endurance. The Company's
engines have received critical acclaim in boating and other publications. The
Company regularly exhibits their engines at various international boat shows.
The Company was incorporated as Swift Development, Inc. ("Swift") 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 a private
placement offering of shares of common stock pursuant to Regulation D of the
Securities Act of 1933, as amended, 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 its outstanding common
stock. 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.
Immediately prior to the prospectus dated November 11, 1989, the Company
filed a Form S-18 with the SEC. 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 $969,500 from such public
offering.
On May 19, 1997, the Company changed its name from Hawk Marine Power, Inc.
to its present name of Alchemy Holdings, Inc.
Products
The Company designs, manufacturers and sells high output gasoline 8
cylinder engines and also performs custom work on engines produced by other
manufacturers. Engines produced by a predecessor of the Company were initially
manufactured in 1979 for use in the offshore speed boat racing circuit which was
attaining initial popularity. They were produced to accommodate participants in
the offshore racing circuit who required high performance engines. In 1981, Hawk
Marine Power, Inc. powered speedboats attained international prominence by
winning the U.S. Championship and the World Championship of speed boat racing in
conjunction with a predecessor of Cigarette Racing Team, Inc.
The success of the Company's engines 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 Alchemy's engines offered
directly and through its authorized dealer network:
HAWK 600: An 8-cylinder, four stroke, 496 cubic inch engine which
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<PAGE>
produces approximately 600 horsepower and is liquid cooled.
HAWK 700: An 8-cylinder, four-stroke, 556 cubic inch engine which
produces approximately 700 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.
HAWK 1100: An 8-cylinder, four stroke, 698 cubic inch engine which
produces approximately 1100 horsepower and is liquid-cooled.
Alchemy's engines described above may be used for recreational or offshore
racing boats. However, Alchemy also manufactures custom engines utilized solely
for racing. Alchemy's engines, which usually sell in sets of two or three, range
in price from $32,000 to $69,000 per engine.
Alchemy's engines, to its management's best knowledge, have been produced
since 1979, the longest continuous period of any high performance marine engine.
Apart from success in various offshore racing events, Alchemy'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
Alchemy's engines are manufactured at Alchemy's production facility in
Aventura, Florida. The engines are hand built from component parts and in
certain instances, are custom designed for individual customers. Alchemy
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 Alchemy'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. Alchemy orders most of the components used in
Alchemy's engines directly from manufacturers, distributors and speciality
automobile parts suppliers. Specifically, Alchemy purchases its engines directly
from Mercury Marine Corporation ("Mercury") which in turn purchases its engine
blocks from General Motors. With the exception of Mercury, which supplies the
engines to Alchemy, Alchemy does not regard any single supplier essential to its
operations. Although the engine blocks are manufactured and supplied by General
Motors, Alchemy's management believes that the lack of any contracts or written
agreements between Alchemy and either General Motors or Mercury affords Alchemy
the flexibility to choose alternate suppliers in the event of a work stoppage or
other disruption. Most of the components Alchemy utilizes are available from
multiple sources at competitive prices.
Following assembly of Alchemy'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 Alchemy's engines is five to ten working days. Alchemy has
present production capacity of approximately sixteen (16) engines per month.
Alchemy believes its extensive know-how and experience at all stages of
production has enabled it to establish a position of leadership.
Alchemy 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.
As of March 31, 1999, Alchemy accrued approximately $12,000 for anticipated
future warranty costs.
41
<PAGE>
Marketing, Sales and Distribution
Alchemy concentrates its sales of its engines in the high performance
recreational speedboat and racing market. Management believes the
high-performance segment of the market represents no more than 5% of the entire
recreational market. Alchemy sells its engines directly to premium boat
manufacturers including Apache Performance Boats, Pantera U.S.A., Jaguar Marine
and Cigarette Racing Team, Inc.
Of those manufacturers, 40% are comprised of offshore racing teams,
individual companies or engine rebuilds. In addition to Cigarette, some of
Alchemy's customers from this segment include: Pepsi-Mountain Dew team; Rain-X
team; Mystifier team; Formula; Scarab; Wellcraft; Cougar; Powerplay; and Apache.
For the years ended September 30, 1998 and 1997, respectively, sales of
Alchemy's engines to Cigarette amounted to approximately 25% and 17%,
respectively, of total sales. See "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS - Sales to Cigarette."
Alchemy 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.
Employees
Alchemy employs twelve full-time employees. Of those twelve employees,
three are executives, one is clerical and eight comprise the manufacturing
department.
Facilities
Alchemy's offices and production facilities are located at 3025 N.E. 188th
Street, Aventura, Florida 33180. These facilities total 7,500 square feet; 750
square feet of which is office space and the remaining 6,750 square feet
encompasses the manufacturing department. Alchemy is in the second year of a
five year lease. The property has water frontage on both its North and South
sides.
Competitive Conditions in the High-Performance Marine Engine Industry
The high-performance marine engine industry is highly competitive and
largely dependant on a company's ability to sell such engines at attractive
prices with ample customer service and support. Alchemy's competitors for
product sales are companies such as Mercruiser, Caterpillar, Volvo-Penta and
Johnson & Towers. Many of Alchemy's competitors have significantly greater
financial resources than Alchemy. Competition for product sales is also based
upon Alchemy's ability to reduce expenses while increasing production.
Cigarette Racing Team, Inc.
Cigarette Racing Team, Inc. was most recently incorporated under the laws
of the state of Florida on May 26, 1994. Originally incorporated as an Alabama
corporation in 1969, 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 eight boat models in six sizes,
from 20 to 46 feet in length, at current prices ranging rom $80,000 to $800,000.
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 120 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.
On June 30, 1997 Robert E. Torter, a resident of the United States,
assigned his equity interest of 2,601,00 shares of Cigarette Racing Team, Inc.
Common Stock (the "Equity Interest") to Exale Enterprises Ltd. ("Exale"), a
foreign corporation organized under the
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<PAGE>
laws of the British Virgin Islands. The 2,601,00 Cigarette Shares constituted
91.23% of Cigarette Common Stock which were issued and outstanding. In exchange
for the assignation of the Equity Interest, Exale agreed to transfer 1,000,000
shares of Spa Faucet, Inc., a publicly listed company, assume certain debts to
Robert E. Torter and obtain releases from Cigarette to Robert E. Torter of
certain liabilities. As a result of an agreement between the parties, Exale
represented the interests of Masada, I.L.P ("Masada") and Winchester Partners,
L.P. ("Winchester") in the negotiations with Mr. Torter. Thus, on June 30, 1997,
Exale then transferred 1,000,000 shares of Cigarette Common Stock to Masada and
601,000 shares of Cigarette Common Stock to Winchester.
There is currently no public market for the securities of Cigarette.
Employees
Cigarette employs fifty-two full-time employees. Of those fifty-two
employees, four are executives, six are clerical and forty-two comprise the
manufacturing department.
Facilities
Cigarette's facilities, both headquarters and manufacturing, consist of
four buildings located at 3131 N.E. 188th Street, Aventura, Florida 33180. These
four structures contain a total of 44,590 square feet. The buildings sit on 3.88
acres of land in a residential area of Aventura. Of the 3.88 acres,
approximately 1.5 acres are vacant. Cigarette is immediately surrounded by boat
production facilities and marinas. The property has water frontage on both its
north and south sides. Cigarette is presently in the fifth year of an eight year
lease (the "Cigarette Lease"). The total monthly rent is equal to $28,000. As of
the date of this Registration Statement the Cigarette lease is being negotiated
so that upon the Merger's Effectiveness, Alchemy will only be liable for the
taxes and insurance associated with the property. Alchemy's management expects
such costs to equal approximately $12,000 per month.
Competitive Conditions in the Power Boat Manufacturing Industry
The recreational power boat industry is largely dependent on a company's
ability to sell high quality boats at attractive prices with ample customer
service and support. Cigarette's competitors for product sales are companies
such as Magnum, Mako, Sea Ray, and it competes with these companies in the
marketing of its boats. Many of Cigarette's competitors have significantly
greater financial resources than Cigarette. Competition for product sales is
also based on Cigarette's ability to attract independent dealers who are willing
to distribute and market Cigarette's boats.
43
<PAGE>
ALCHEMY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
For the six month period ended March 31, 1999, Alchemy reported net sales
of $319,080. This compared to net sales of $329,560 for the same period in the
1998 fiscal year. The cost of sales for the first six months of fiscal year 1999
was $233,838 as compared to $254,327 for the same period in fiscal year 1998.
The gross margin for the six month period ended March 31, 1999 was $85,242, as
compared to $75,233 for the same period in the 1998 fiscal year. Selling,
general and administration expenses for the first six months of fiscal year 1999
was $89,269 as compared to selling, general and administrative expenses of
$68,119 for the same time period in fiscal year 1998. The interest expense of
$5,361 and the provision for loan loss of $257,928 in the first six months of
fiscal year 1999 resulted in a net loss of $267,316 for the six month period
ended March 31, 1999 as compared to a net loss of $11,871 for the same time
period in fiscal year 1998.
For fiscal year ended September 30, 1998, Alchemy reported net sales of
$742,289. This compared to net sales of $1,059,498 for fiscal year ended
September 30, 1997. Alchemy's cost of sales for fiscal year 1998 was $651,071,
as compared to $901,725 for the 1997 fiscal year. The gross margin for fiscal
years 1998 and 1997 was $91,218 and $157,773, respectively. Selling, general and
administrative expenses for fiscal year 1998 was $174,637, while the same
expenses for fiscal year 1997 was $231,125. The interest expenses for the 1998
and 1997 fiscal years were $27,187 and $19,410, respectively. The provision for
loan loss was $338,885 for fiscal year ended 1998. The extraordinary gain on
forgiveness of debt was 130,203 for fiscal year ended 1998. Therefore, the net
losses for fiscal years 1998 and 1997, were $319,288 and $92,762, respectively.
The 30.0% decrease in sales in fiscal year 1998 is not necessarily
indicative of any particular trend; rather, such decrease represents a change in
the product mix combined with a decrease in volume. Gross margin as a percentage
of sales decreased by 2.6% to 12.3% in fiscal year 1998, principally as a result
of the change in product mix. The decrease in selling, general and
administrative expenses from fiscal years 1997 to 1998 was the result of new
management's institution of several cost cutting measures. Such beneficial
effect is expected to continue in future periods.
Alchemy believes that its long-term business prospects will be no more
adversely affected that those of its competitors due to changes in air emission
standards for marine engines. In the short term there may be certain adverse
effects due to initial price resistance by customers and a lag in the time it
takes to quantify increased costs and reflect them in Alchemy's price structure.
Liquidity and Capital Resources
Alchemy had cash on hand in the amount of $73,698 at March 31, 1999
compared to $23,764 at March 31, 1998. At March 31,1999 there was working
capital of $59,075 compared to working capital of $25,298 at March 31, 1998. The
working capital increase was related principally to increases in inventory and
prepaid expenses.
On May 29, 1998, Alchemy made a $45,000 payment to certain note holders in
full satisfaction of all liabilities to certain note holders. In exchange for
such payment, the note holders released all security interests that they held on
any Alchemy collateral.
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<PAGE>
CIGARETTE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
For the six month period ended March 31, 1999, Cigarette reported net sales
of $5,194,008. This compared to net sales of $2,583,458 for the same time period
in the 1998 fiscal year. The cost of sales for the first six months of fiscal
year 1999 was $3,820,372 as compared to $2,189,959 for the same period in fiscal
1998. The gross margin for the six month period ended March 31, 1999 was
$1,373,636 as compared to $393,499 for the same period in the 1998 fiscal year.
Selling, general and administrative expenses for the first six months of fiscal
year 1999 was $2,057,806 as compared to selling, general and administrative
expenses of $919,666 for the same time period in fiscal 1998. The interest was
$247,587 and $266,867, respectively, for the six months ended March 31, 1999 and
1998. The loss from employee embezzlement was $72,730 for the six months ended
March 31, 1999. The other income was $100,000 and $400,000, respectively, for
the six months ended March 31, 1999 and 1998. Therefore, the net losses for the
six month periods ended March 31, 199 and 1998 were $904,487 and $393,034,
respectively.
For fiscal year ended September 30, 1998, Cigarette reported net sales of
$7,026,625. This compared to net sales of $2,158,406 for fiscal year ended
September 30, 1997. Cigarette's cost of sales for fiscal year 1998 was
$4,946,870, as compared to $3,403,644 for 1997 fiscal year. The gross margin for
fiscal years 1998 and 1997 were $2,079,755 and a loss of $1,245,238,
respectively. Selling, general and administrative expenses for fiscal year 1998,
was $2,426,629, while the same expenses for the fiscal year 1997 was $905,566.
The interest expenses for the 1998 and 1997 fiscal years was $563,620 and
$449,723, respectively. The loss from employee embezzlement was $280,571 for
fiscal year 1998. The other income was $400,000 and $39,921, respectively, for
fiscal years ended 1998 and 1997. Therefore, the net losses for fiscal years
ended 1998 and 1997 were $791,065 and $2,560,606, respectively.
The 325.5% increase in sales in fiscal 1998 was due to management's
cultivation of the significant market interest in Cigarette's offshore racing
boats. The Company anticipates a continuation of such trend throughout fiscal
year 1999.
Liquidity and Capital Resources
Cigarette had cash on hand in the amount of $262,127 at March 31, 1999
compared to $369,968 at March 31, 1998. At March 31, 1999 there was a working
capital deficit of $8,999,812 compared to a working capital deficit of
$8,210,359 at March 31, 1998. The working capital decrease was related
principally to increases in loans from affiliates and accrued expenses.
Misappropriation of Cigarette Funds
On Friday, December 4, 1998, during its annual audit for the period ending
September 30, 1998, Cigarette's management learned that $352,160 had been
diverted from Cigarette's general business operating account (the
"Misappropriation"). Cigarette's management further determined that $280,571 of
the misappropriated funds occurred during the 1998 fiscal year. Upon concluding
that illegal activities may have occurred, Cigarette's management contacted the
local police department regarding the Misappropriation and subsequently filed a
police report accusing Cigarette's comptroller, Mark Hernandez, of diverting the
funds.
On Monday, December 7, 1998, Cigarette's management notified the banking
institutions with which it held accountants, of the Misappropriation and
instructed them to freeze all banking activities. Further, on December 7, 1998,
Cigarette's management notified its legal counsel and its auditors of the
Misappropriation.
Mr. Hernandez was apprehended subsequently in December, 1998 as a result of
the charges filed against him in connection with the Misappropriation. On April
14, 1999, Mr. Hernandez pled guilty to the embezzlement and misappropriation
charges and was found guilty by the presiding court with a sentence of
probation.
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As a result of the Misappropriation, Cigarette's auditors determined that
the scope of the audit should be increased and concurred with Cigarette's
management that: (i) all cash disbursements and receipts for the 1998 fiscal
year must be re-entered; (ii) each canceled check drawn on any of Cigarette's
general bank accounts during the 1998 fiscal year should be reviewed to
determine: the appropriateness of the payee, the characterization of each
general ledger posting and the authenticity of the signature on each check; and
(iii) all general Cigarette bank accounts must be re-reconciled for the 1998
fiscal year as well as for the subsequent months ended October, 1998 through
December, 1998. Cigarette's auditors returned to Cigarette's offices after all
re-posting had been completed and expanded their sample selections of activity
as they deemed appropriate to render a complete and accurate opinion of
Cigarette's financial statements.
In addition to the above, Cigarette instituted the following specific
procedures: (i) daily reconciliation of its operating account, which is reviewed
by both its Chief Financial Officer and Chief Operating Officer; and (ii)
Cigarette's accounting department has been reorganized including the termination
of all previous accounting department employees.
Cigarette has retained legal counsel to advise it as to restitution
alternatives including the filing of legal actions against the financial
institutions involved in this matter.
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LEGAL PROCEEDINGS
Paramount Pictures Corporation
Cigarette was a party to an Opposition to its Application for Registration
in the United States Patent and Trademark Office (the "Opposition"). Paramount
Pictures Corporation ("Paramount") filed the Opposition. The Opposition was
filed before the Trademark Trial and Appeal Board. Both parties to the
Opposition applied to register various rights associated with the term "Top Gun"
in the United States Patent and Trademark Office. A settlement agreement between
the parties was executed on June 24, 1998 and a Withdrawal of Opposition With
Prejudice was entered with the Trademark Trial and Appeal Board immediately
thereafter.
HRH Tunku Abraham Ismail
On January 23, 1997, a judgment was entered against Cigarette and in favor
of HRH Tunku Abraham Ismail ("HRH") in the amount of $981,000. Pursuant to a
previous agreement HRH has been calculating interest on that judgement at the
rate of 8.5%. Cigarette has tendered 10 payments totaling $69,789.59, the last
payment of which was received on October 5, 1998.
On March 11, 1998, Cigarette delivered a 46' Cigarette and 20' Cigarette in
partial satisfaction of the final judgement, leaving a balance due of
$305,000.00. Thus, as of October 31, 1998, Cigarette continues to owe to HRH
approximately $348,000.00 with additional interest accruing daily from October
31, 1998. Cigarette expects, but no way guarantees, the satisfaction of this
debt within 120 days after the Effective Time.
Mr. Fredy Link
On May 27, 1998, a judgement was entered against Cigarette and in favor of
Mr. Fredy Link ("Link") in the amount of $198,632.93 bearing interest at 10% per
annum After application of 15 previous payments by Cigarette, the debt remains
approximately $89,000.00 with additional interest accruing daily from October
31, 1998. Cigarette expects, but in no way guarantees, the satisfaction of this
debt within 120 days after the Effective Time.
Magnum Marine
On September 2, 1998, Cigarette was named as a defendant in Case No.:
98-1123 Civ-Hoeveler in United States District Court for the Southern District
of Florida. The defendant/third party plaintiff in the suit is Magnum Marine
Corporation ("Magnum"). In its complaint, Magnum asserts that Cigarette
purchased trade secrets from Giancarlo Rampezotti, the plaintiff/third party
defendant, in exchange for a license to Cigarette thereby allowing Rampezotti to
produce boats under the Cigarette name using Magnum designs. On April 28, 1999,
a memorandum of settlement was entered into by the original parties to this
action. Further, the original parties are expected to ratify a settlement
agreement within 30 days. Pursuant to that settlement agreement, Cigarette
anticipates receiving a general release in exchange for issuing its own general
release to the original plaintiff.
Tomas Arencibia
In 1996, Tomas Arencibia, as the plaintiff, filed a complaint with the
United States District Court of the Southern District of Florida alleging that
during his employment with Cigarette, Mr. Arencibia was subject to
discrimination and harassment based upon his age. Cigarette subsequently
answered such complaint and a Revised Joint Pretrial Stipulation was entered
into on September 21, 1998. Cigarette expects to go to trial on the above
complaint in the first quarter of 1999.
Mark Donato and Steven Donato
On July 22, 1998 Mark and Steven Donato (the "Donatos"), as the plaintiffs
filed a complaint with the Untied States District Court of the District of
Massachusetts (the "Donato Action"). The Donatos allege that Cigarette failed to
deliver a boat pursuant to a contract with the Donatos. Donato Action was
dismissed on September 29, 1998 due to expiration of the statue of limitations.
47
<PAGE>
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 is in staggered one year periods.
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 49
Berton Lorow Vice President/Director 43
Adam Schild Secretary/Director 29
CRAIG BARRIE - PRESIDENT/DIRECTOR
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. Mr. Barrie has been a Director of Hawk Marine Power, Inc. ("Hawk")
since August 1987 and President of Hawk since November 1990. 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's predecessor.
BERTON LOROW - VICE PRESIDENT/DIRECTOR
Mr. Lorow has been employed by Alchemy or its predecessors since January
1984 in various technical capacities. He was elected a Director of Hawk in 1990
and Vice President one year prior, in May 1989 and has been employed in the
marine industry since 1982, acquiring experience in boat building, rigging and
engine assembly.
ADAM SCHILD - SECRETARY/DIRECTOR
Mr. Schild is Secretary and a Director of Alchemy and has held such
positions since July, 1997. Also in July, 1997 Mr. Schild was appointed
Secretary and Director of Cigarette. From November 1994 through October 1993,
Mr. Schild was a stock-broker in training at Stratton Oakmont, Inc. During his
training period and two years prior, Mr. Schild was a senior partner in Alcott
Simpson & Co., Inc., a management consulting firm specializing in crisis
management and mergers and acquisitions. Also during that time frame Mr. Schild
was a marketing assistant with Eckert Schild Productions, Inc. 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 and Mr. Schild are full time employees of Alchemy. Mr. Barrie
devotes approximately 20 hours a week to Alchemy's operations. It is not
anticipated any Directors will receive an annual fee or other compensation for
their directors duties. Directors will be reimbursed for reasonable expenses
incurred in connection with their attendance at meetings.
48
<PAGE>
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, 1998 aggregated $74,340. Set forth below is a
summary compensation table prepared in accordance with the applicable rules of
the Securities and Exchange Commission.
Summary Compensation Table - Alchemy
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
Name and Other Resid.
Principal Annual Stock All
Position Year Salary Bonus Compensa- LTIP Other
tion Awards Options Payouts
---- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Craig 1998 $25,000 none none none none none
Barrie
1997 26,000 none none none none none
1996 26,200 none none none none none
Berton 1998 $54,340 none none none none none
Lorow
1997 55,000 none none none none none
1995 33,385 none none none none none
</TABLE>
Compensation Pursuant to Plans
Hawk Marine, Inc. (Alchemy's predecessor) adopted an Employee Stock Option
Plan in August of 1988. Such plan has a term of 10 years and thus expired in
August of 1998 with no options being issued thereunder. Alchemy anticipates
adopting a new Employee Stock Option Plan at the next meeting of Alchemy
Shareholders.
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 is a
staggered one year term. 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 49
Adam Schild Secretary/Director 29
CRAIG BARRIE - PRESIDENT
Mr. Barrie has been a Director and President since its inception. SEE
"ALCHEMY MANAGEMENT" for further information.
49
<PAGE>
ADAM SCHILD - SECRETARY/DIRECTOR
Mr. Schild serves as the Secretary and Director of Cigarette, offices he
has held since 1997. See "ALCHEMY MANAGEMENT" for further information.
50
<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table - Cigarette
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
Name and Other Resid.
Principal Annual Stock All
Position Year Salary Bonus Compensa- LTIP Other
tion Awards Options Payouts
---- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Adam Schild 1998 $106,403 none none none none none
1997 26,000 none none none none none
1996 26,200 none none none none none
Craig Barrie 1998 $106,403 none none none none none
1997 107,801 none none none none none
1996 102,876 none none none none none
</TABLE>
51
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Sales to Cigarette
In fiscal 1998 and fiscal 1997, Alchemy had sales to Cigarette Racing Team,
Inc. of $187,258 and $176,197 representing 25% and 17% of total sales for the
year, respectively. Mr. Adam Schild is Cigarette's Secretary and Mr. Craig
Barrie is Cigarette's President.
In September 1995, Alchemy paid $5,000 to the note holders and both parties
agreed pursuant to the settlement agreement dated May 4, 1998, that a final
payment of $45,000 would satisfy all liabilities to such noteholders. On May 29,
1998, Alchemy made such $45,000 payment to the noteholders in full satisfaction
of all liabilities to such noteholders. In exchange for such payment, the
noteholders released all security interests that they held on any Alchemy
collateral. SEE "ALCHEMY'S MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" for additional information regarding the
aforementioned notes.
Alchemy's and its Affiliates' Potential Conflicts with Mr. Craig Barrie
There are no potential conflicts of interest with regards to Alchemy and
its affiliates and Mr. Craig Barrie.
Offshore's Holdings of Alchemy's Common Stock and its Licensing Agreement With
Alchemy
Offshore owns 2,000,000 shares of Alchemy Common Stock which it received as
a result of the May 12, 1996 Licensing Agreement between Offshore and Hawk
Marine Power, Inc. ("Hawk") (Alchemy's predecessor). The term of the Licensing
Agreement is ten years. Pursuant to the Licensing Agreement, Hawk, as the user
of the license, agreed to pay to Offshore, 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. The Licensor grants to the Licensee
an exclusive, world-wide right to use the Licensor's marks in connection with
all goods and services other than the use of said marks on any form of water
craft for a period of 120 months. The Licensee has the option to renew the
License Agreement for two additional periods of 60 months each. As consideration
for the above, the Licensee shall pay to the Licensor either: (i) 2.5% of the
gross royalties in the event that the Licensee manufactures, sells or
distributes products or services using the Licensor's mark; or (ii)10% of the
gross royalties in the event that the Licensee sublicenses the rights to the
mark.
As a result of the Merger and in exchange for the retirement of 2,000,000
shares of Alchemy Common Stock and the receipt of $1,000,000 of Alchemy
Preferred Stock, Series B, Offshore shall relinquish all rights, title and
interest, created by the May 12, 1997 Licensing Agreement.
Alchemy's Lack of Chief Financial Officer
As of the date of this Registration Statement Alchemy does not employ a
Chief Financial Officer. However, management is also searching for an individual
to fill such a position on a permanent basis and anticipates hiring such by
December 31, 1998.
Interested Directors
Cigarette's sole Director is also a Director of Alchemy. Therefore, any
transaction between Cigarette and Alchemy must beclosely scrutinized by any
interested party.
Relationships With Jeffrey Friedman and Central Manufacturing
Mr. Jeffrey Friedman is the beneficial owner of 3025 NE 188th Street, the
property on which Alchemy and Cigarette are located. Mr. Friedman is also a
creditor of Cigarette's and is in negotiations with Alchemy for a settlement of
that debt. It is expected by Alchemy Management that Mr. Friedman will receive
1,000,000 shares of Alchemy Common Stock and $1,000,000 of Alchemy Preferred
Stock, Series A in exchange for the retirement of Cigarette's debt to him. Thus,
in the event that negotiations between Mr. Friedman and Cigarette fail to result
in a settlement, a conflict of interest may arise between Alchemy, Cigarette and
Mr. Friedman.
Mr. Adam Schild is the general partner in Winchester Partners, L.P.
("Winchester"), the majority shareholder of Cigarette.
52
<PAGE>
OTAM Licensing Agreement
Cigarette and OTAM SpA, a foreign corporation ("OTAM"), entered into a
licensing agreement dated October 28, 1997 wherein OTAM Licensed from Cigarette
Mark in connection with its exclusive, world-wide right to use such Mark in the
production and marketing of a 45' and 55' boat, respectively (the "OTAM
Licensing Agreement"). The term of the OTAM Licensing Agreement is 24 months. In
exchange for OTAM's use of the Mark, Cigarette received a payment of $400,000 as
an advance on any royalties earned during the term of the OTAM Licensing
Agreement.
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 Cigarette
as of May 3, 1999. At such date there were 3,641,000 shares of common stock
issued and outstanding. Unless specifically indicated otherwise, all such
ownership interest are direct.
<TABLE>
<CAPTION>
Title of Class Name and Address of Amount and Percent of class
Beneficial Owner Nature of
Beneficial Owner
<S> <C> <C> <C>
Common Stock Craig Barrie 25,000 .69%
3025 NE 188th St.
Aventura, Florida 33180
Berton Lorow 153 .000042%
3025 NE 188th Street
Aventura, Florida 33180
Adam Schild 0 0%
3025 NE 188th Street
Aventura, Florida 33180
Masada I, L.P.(1) 1,000,000 27.5%
Boca Corporate Center
2101 Corporate Blvd. - Suite 204
Boca Raton, Florida 33431
Winchester Partners, L.P. 1,601,000 44.0%
3594 S. Ocean Blvd
Highland Beach, Florida 33487
Glen Laken 375,000 10.3%
30 SO. Whacker, Suite 1606
Chicago, IL 62454
Preferred Central Manufacturing, Inc. 100 100%
5025 Swetland Court
Richmond Heights, Ohio 44143
</TABLE>
(1) Does not include 180,000 warrants held by Masada which are exercisable at a
price of $2.00.
54
<PAGE>
UNDERTAKINGS
Alchemy hereby undertakes to file, during any period in which it offers or
sells securities, a post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the Securities
Act;
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in this registration
statement; and notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities offered and any
deviation from the low or high end of the estimated maximum offering range may
be reflected in the form of prospects filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in the volume and price represent no
more than a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration statement.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Alchemy
pursuant to the foregoing provisions, or otherwise, Alchemy has been advised
that in the opinion of the Commission such indemnification is against the public
policy as expressed in the Securities Act and is, therefore, unenforceable.
55
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
ANNUAL FINANCIAL STATEMENTS:
ALCHEMY HOLDINGS, INC. AND SUBSIDIARIES:
Report of Independent Auditor F-1 to F-2
Consolidated Balance Sheet as of September 30, 1998 F-3
Consolidated Statement of Operations for the Years Ended
September 30, 1998 and 1997 F-4
Consolidated Statement of Stockholders' Equity
for the Years Ended September 30, 1998 and 1997 F-5
Consolidated Statement of Cash Flows for the Years Ended
September 30, 1998 and 1997 F-6
Notes to Consolidated Financial Statements F-7 to F-13
CIGARETTE RACING TEAM, INC.:
Reports of Independent Auditors F-14 to F-15
Balance Sheet as of September 30, 1998 F-16
Statement of Operations for the Years Ended
September 30, 1998 and 1997 F-17
Statement of Changes in Stockholders' Equity (Deficit) for
the Years Ended September 30, 1998 and 1997 F-18
Statement of Cash Flows for the Years Ended
September 30, 1998 and 1997 F-19
Notes to Financial Statements F-20 to F-27
INTERIM FINANCIAL STATEMENTS (UNAUDITED):
ALCHEMY HOLDINGS, INC. AND SUBSIDIARIES:
Consolidated Balance Sheet as of March 31, 1999 and
September 30, 1998 F-28
Consolidated Statement of Operations for the Three and
Six Months Ended March 31, 1999 and 1998 F-29
Consolidated Statement of Cash Flows for the Three and
Six Months Ended March 31, 1999 and 1998 F-30
Notes to Consolidated Financial Statements F-31 to F-32
CIGARETTE RACING TEAM, INC.:
Balance Sheet as of March 31, 1999 and September 30, 1998 F-33 to F-34
Statement of Operations for the Three and
Six Months Ended March 31, 1999 and 1998 F-35
Statement of Cash Flows for the
Six Months Ended March 31, 1999 and 1998 F-36
Notes to Financial Statements F-37 to F-42
PRO-FORMA FINANCIAL STATEMENTS (UNAUDITED):
Pro-Forma Consolidated Balance Sheet as of March 31, 1999 F-43 to F-44
Pro-Forma Consolidated Statement of Operations for the
Six Months Ended March 31, 1999 F-45
Pro-Forma Consolidated Statement of Operations for the
Year Ended September 30, 1998 F-46
Notes to Pro-Forma Consolidated Financial Statements F-47 to F-48
56
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Alchemy Holdings, Inc. and Subsidiaries
3025 N.E. 188 Street
Aventura, Florida 33180
We 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, 1998, and the related consolidated statements of operations,
stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion of these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
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.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Alchemy Holdings, Inc. and
Subsidiaries as of September 30, 1998 and the results of its operations,
stockholders' equity and cash flows for the year then ended in conformity with
generally accepted accounting principles.
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 that raises substantial doubt about the Company's
ability to continue as a going concern. Management's plans concerning this
matter are also described in Note 3. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
February 19, 1999
Melville, New York
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITOR
To the Board of Directors and Stockholders of
Alchemy Holdings, Inc. and Subsidiaries
3025 N.E. 188 Street
Aventura, Florida 33180
I have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Alchemy Holdings, Inc. (F/K/A Hawk Marine
Power, Inc.) and Subsidiaries for the year ended September 30, 1997. These
financial statements are the responsibility of the Company's management. My
responsibility is to express an opinion on 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 results of operations, changes in stockholders' equity
and cash flows of Alchemy Holdings, Inc. and Subsidiaries for the year ended
September 30, 1997 in conformity with generally accepted accounting principles.
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. 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 also described in Note
3. The financial statements do not include any adjustments that might result
from the outcome of these uncertainties.
January 15, 1998
Coral Springs, Florida
F-2
<PAGE>
ALCHEMY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998
ASSETS
Current Assets:
Cash $ 66,186
Inventories 178,655
--------
Total Current Assets 244,841
Property and Equipment, Net of Accumulated
Depreciation of $214,680 20,060
Licensing Agreement, Net of Accumulated
Amortization of $30,250 189,750
--------
TOTAL ASSETS $454,651
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Note payable including accrued interest thereon $ 75,286
Accounts payable 10,148
Accrued expenses 7,476
Customer deposits 90,500
Due to stockholders 56,494
--------
Total Current Liabilities 239,904
--------
Commitments and Contingencies (Note 13)
Stockholders' Equity:
Preferred stock, $.001 par value, 10,000,000 shares
authorized, none outstanding
Common stock, $.001 par value, 50,000,000 shares
authorized; 2,437,394 issued and outstanding 2,437
Additional paid-in capital 2,224,598
Accumulated deficit (2,012,288)
-----------
Total Stockholders' Equity 214,747
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 454,651
===========
The accompanying notes are an integral part of the
consolidated financial statements.
F-3
<PAGE>
ALCHEMY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
1998 1997
----------- -----------
NET SALES $ 742,289 $ 1,059,498
Cost of Sales 651,071 901,725
----------- -----------
GROSS MARGIN 91,218 157,773
Selling, General and
Administrative Expenses 174,637 231,125
Interest Expense 27,187 19,410
Provision for Loan Loss, exclusive of interest
income of $7,489 not recognized 338,885 --
----------- -----------
TOTAL EXPENSES 540,709 250,535
----------- -----------
Loss before Extraordinary Item (449,491) (92,762)
Extraordinary Gain on
Forgiveness of Debt 130,203 --
----------- -----------
NET LOSS $ (319,288) $ (92,762)
=========== ===========
BASIC AND DILUTED PER SHARE AMOUNTS:
Loss before extraordinary item $ (.20) $ (.11)
Extraordinary gain .06 --
----------- -----------
Net loss $ (.14) $ (.11)
=========== ===========
Basic and diluted weighted average number of
common shares outstanding 2,291,093 851,093
=========== ===========
The accompanying notes are an integral part of the
consolidated financial statements.
F-4
<PAGE>
ALCHEMY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
<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, October 1, 1996 2,990,198 $ 2,990 $ 1,604,045 $(1,600,238) $ 6,797
Effective of reverse stock split (2,952,821) (2,953) 2,953 -- --
Adjustment for fractional shares 17 -- -- -- --
Issuance of common stock 2,200,000 2,200 217,800 -- 220,000
Net loss for the year ended
September 30, 1997 -- -- -- (92,762) (92,762)
----------- ----------- ----------- ----------- -----------
Balances, September 30, 1997 2,237,394 2,237 1,824,798 (1,693,000) 134,035
Issuance of common stock 200,000 200 399,800 -- 400,000
Net loss for the year ended
September 30, 1998 -- -- -- (319,288) (319,288)
----------- ----------- ----------- ----------- -----------
Balances, September 30, 1998 2,437,394 $ 2,437 $ 2,224,598 $(2,012,288) $ 214,747
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-5
<PAGE>
ALCHEMY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
1998 1997
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(319,288) $(92,762)
Adjustments to reconcile net loss
to net cash used by operating activities:
Extraordinary forgiveness of debt (130,203) --
Depreciation and amortization 22,905 10,159
Accrued interest - unpaid 27,187 19,410
Provision for (recovery of) doubtful receivables 338,885 (2,046)
Decrease (increase) in accounts receivable 53,931 (43,564)
Decrease (increase) in inventory (12,661) 81,616
Decrease in prepaid expenses 1,810 1,158
Increase (decrease) in accounts payable (53,492) (19,529)
Increase (decrease) in accrued expenses (10,031) 3,549
Increase (decrease) in customer deposits 38,775 (69,975)
--------- ---------
Net cash used by operating activities (42,182) (111,984)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans to affiliate (338,885) --
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of notes payable 50,000 71,000
Repayments of notes payable (47,500) --
Proceeds of stock issuance 400,000 --
--------- ---------
Net cash provided by financing activities 402,500 71,000
--------- ---------
NET INCREASE (DECREASE) IN CASH 21,433 (40,984)
CASH, BEGINNING OF YEAR 44,753 85,737
--------- ---------
CASH, END OF YEAR $66,186 $44,753
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest Paid During the Year $ -- $ --
========= =========
Income Taxes Paid During the Year $ -- $ --
========= =========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Licensing Agreement Acquired Through
Issuance of Common Stock $ -- $220,000
========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
F-6
<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) and Cigarette Licensing, Inc.
(CRI). HMP 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. CRI 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
(A) Principles of Consolidation:
The consolidated financial statements include the accounts of Alchemy Holdings,
Inc. and its subsidiaries. All inter-company accounts and transactions have been
eliminated in consolidation.
(B) 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 statement purposes.
(C) 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 high quality short-term
liquid money market instruments with major financial institutions and the
carrying value approximates market value. No losses have been incurred thereon.
(D) Inventory:
Inventory consists of merchandise held for sale and includes finished goods as
well as work in process and is valued at the lower of cost (first-in, first-out
method) or market.
(E) 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.
F-7
<PAGE>
ALCHEMY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(F) Licensing Agreement and Amortization:
The licensing agreement is being amortized over its ten-year term. The original
valuation ascribed to this agreement has been revised. (See Notes 9B and 14).
(G) 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.
(H) 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.
(I) Income Taxes:
The Company accounts for income taxes under the liability method in accordance
with 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. 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. 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.
(J) Earnings (Loss) Per Share:
Earnings (loss) per share is calculated by dividing net income or loss by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share are reported to reflect the effect of outstanding common
share equivalents. Such common share equivalents are excluded from loss per
share calculations as their effect would be anti-dilutive.
(K) Use of Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements as
well as revenues and expenses during the reporting period. Actual results could
vary from those estimates.
F-8
<PAGE>
ALCHEMY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - GOING CONCERN
The Company's consolidated 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 $319,288 and $92,762 for the years ended September 30,
1998 and 1997, respectively, and has cumulative losses since inception of
$2,012,288. As a result of such losses the Company's financial position has been
significantly impaired. The Company's ability to continue as a going concern is
dependent upon its ability to attain a satisfactory level of profitability and
to obtain suitable, adequate financing or the restructuring of existing
obligations. During the year ended September 30, 1998, the Company satisfied its
obligations to certain note holders with the proceeds of short-term financing
from a stockholder. (This extinguishment of debt resulted in an extraordinary
gain of $130,203.) The Company has sought to implement cost-saving measures,
reduce other operating costs, utilize deposits from customers in connection with
firm purchase orders to help finance operating costs and to convert some of its
debt to equity in connection with a merger with one of its principal customers,
Cigarette Racing Team. 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 if the Company is unable to continue as a going
concern.
NOTE 4 - INVENTORY
Inventory at September 30, 1998 consists of the following:
Parts and Accessories $ 75,145
Work-In-Process 57,430
Finished Goods 46,080
------------
Total Inventory $ 178,655
============
NOTE 5 - PROPERTY AND EQUIPMENT
Property and Equipment at September 30, 1998 consist of the following:
Office Furniture and Equipment $ 40,193
Shop Equipment 166,026
Leasehold Improvements 28,521
------------
234,740
Less: Accumulated Depreciation 214,680
------------
Total Property and Equipment, Net $ 20,060
============
Depreciation expense was $905 and $1,909 for the years ended September 30, 1998
and 1997, respectively.
F-9
<PAGE>
ALCHEMY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - NOTES PAYABLE
During the year ended September 30, 1998, the Company satisfied its past due
obligations to certain noteholders totaling $175,203 with a $45,000 settlement
payment resulting in an extraordinary gain of $130,203. The source for the
settlement was an unsecured demand loan of $50,000 from a stockholder, which
bears interest at 11%. As of September 30, 1998, loans payable to stockholders
totaled $53,500 plus $2,994 of accrued interest.
The Company has a demand note payable to a corporation for $65,000 plus $10,286
of accrued interest at two points over the Chase Manhattan Bank prime rate.
NOTE 7 - COMMITMENTS
(A) Lease Commitments:
The Company leases its facilities in Aventura, Florida pursuant to an operating
lease. As of September 30, 1998 the Company is paying rent on a month-to-month
basis. Rent expense, excluding common overhead, amounted to $94,800 for each of
the years ended September 30, 1998 and 1997.
(B) Compensation Plan:
An agreement with an officer provides for compensation of $25,000 per year for
three years through September 30, 1999.
NOTE 8 - MAJOR CUSTOMER AND RELATED PARTY TRANSACTIONS
Of the Company's total sales for the years ended September 30, 1998, and 1997,
$187,258 and $176,197 or 25% and 17%, 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. (See Notes 3 and 11).
During the year ended September 30, 1998, the Company transferred $338,885 in
funds to Cigarette Racing Team, Inc. (See Note 13 for further details on this
transaction.) This advance is unsecured, bears interest at the rate of 11% and
is payable upon demand. As Cigarette Racing Team, Inc. does not currently have
the financial capability to satisfy this obligation the Company has recorded a
provision for loan loss for the entire amount of the loan and interest income
has not been accrued.
NOTE 9 - CAPITAL STOCK TRANSACTIONS
(A) Stock Split:
On May 12, 1997 the Board of Directors approved a 1 for 80 reverse stock split
of the Company's common stock. Such reverse split has been given full
retroactive effect in the accompanying financial statements.
(B) Issuance of Shares to Acquire Licensing Agreement:
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
F-10
<PAGE>
ALCHEMY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
business. In connection therewith, the Company issued 200,000 post-split shares
of the Company's common stock to the professionals responsible for the various
services related to and for negotiating, arranging and brokering the licensing
and other related transactions described herein on behalf of the Company. The
Company has revised its original accounting for the valuation of the license.
(See Note 14).
Issuance of Shares Under Stock Payment Agreement
On June 25, 1998, the Company filed a Registration Statement on Form S-8 to
register 200,000 shares of common stock at $2 per share. Such shares were
registered pursuant to the Alchemy Stock Payment Plan dated January 2, 1998. See
Note 13 for further details on this transaction.
NOTE 10 - 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, 1998, the Company
has generated net operating loss carry forwards totaling approximately
$1,875,498 which are available to offset future taxable income through 2013. 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 as of September 30, 1998.
The components of the net deferred tax as of September 30, 1998 are as follows:
Net Operating Loss Carryforward $ 637,669
Investment Credit 7,712
---------
645,381
Valuation Allowance (645,381)
---------
Net Deferred Tax $ --
=========
The increase in the valuation allowance from $536,823 as of September 30, 1997
to $645,381 as of September 30, 1998 is due primarily to the tax effect of the
current fiscal year operating loss.
Net operating loss carry forwards totaling $1,875,498 are scheduled to expire as
follows: 2003: $80,900; 2004: $20,300; 2005: $357,400; 2006: $333,000; 2007:
$259,500; 2008: $179,000; 2010: $8,820; 2011: $252,041; 2012: $65,249; and 2013:
$319,288
The Company also has investment credit carry forwards of $7,712 which will
expire on September 30, 2001 if not utilized.
NOTE 11- PROPOSED MERGER WITH CIGARETTE RACING TEAM, INC.
The Boards of Directors of the Company and Cigarette Racing Team, Inc.
("Cigarette") have approved a Plan of Merger whereby Cigarette Boats, Inc., a
newly-formed, wholly-owned subsidiary of the Company will be merged with and
into Cigarette. In connection therewith, the Company has filed a Registration
Statement on Form S-4 with the Securities and Exchange Commission relating to
the shares of Common Stock of Alchemy Holdings, Inc. to be retained by holders
of Alchemy Common Stock in the proposed merger of Cigarette Racing Team, Inc.
with and into Alchemy with Alchemy continuing as the surviving corporation of
the merger.
Pursuant to the Merger Agreement, (I) Cigarette Boats, Inc. will be merged with
and into Cigarette, whereupon Cigarette will be
F-11
<PAGE>
ALCHEMY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the surviving corporation and will become a wholly-owned subsidiary of Alchemy,
(ii) each share of Cigarette preferred stock, Series A and Series B ("Cigarette
preferred stock, Series A and Series B"), issued and outstanding as of the
effective date of the merger will be converted into one (1) share of Alchemy's
preferred stock, Series A or Series B, as applicable ("Alchemy preferred stock,
Series A and Series B") possessing similar rights, terms and conditions as the
Cigarette preferred stock, Series A and B, (iii) each issued and outstanding
share of Cigarette common stock will be converted into one (1) share of Alchemy
common stock. Alchemy management anticipates that Central Manufacturing, Inc.,
an Alabama corporation, ("Central") will receive 1,000,000 shares of Alchemy
common stock and $1,000,000 of Alchemy preferred stock, Series B in exchange for
the forgiveness and cancellation of Cigarette's indebtedness to Central. It is
also expected by Alchemy management that pursuant to the Merger, Offshore
Racing, Inc., a foreign corporation, will retire 2,000,000 shares of Alchemy
common stock in exchange for its receipt of $1,000,000 of Alchemy preferred
stock, Series B.
Each outstanding Class A Warrant, Class B Warrant and Class X Warrant of
Cigarette will be assumed by Alchemy and become Alchemy warrants to purchase, on
the same terms and conditions as were applicable under agreements with
Cigarette.
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).
Alchemy and Cigarette may each have the right (subject to certain limitations)
to terminate the Merger Agreement if the Merger is not consummated on or before
March 31, 1999.
NOTE 12 - SUBSEQUENT EVENT
On October 13, 1998, the Company filed a Registration Statement on Form S-8 to
register 265,000 shares of common stock at $2 per share. (See Note 13 for
discussion of possible violation of security registration requirements with
respect to the Company's use of Form S-8)
NOTE 13 - COMMITMENTS AND CONTINGENCIES
On January 2, 1998, the Company established the Alchemy Employee Stock Payment
Plan (the "Plan") for the purpose of issuing shares of its common stock to
participants in payment and full satisfaction of wages and/or benefits to which
they already were or otherwise might become entitled to for services rendered or
to be rendered as employees or former employees of the Company.
On June 25, 1998 the Company filed a Registration Statement on Form S-8 (the
"Registration Statement") to register 200,000 shares of common stock at $2 per
share (the "Shares"), which upon effectiveness of the Registration Statement
were issued in the name of the Alchemy Stock Payment Plan. The terms of the Plan
contemplated that the Company's employees, who agreed to accept such shares in
lieu of their cash wages, could authorize the Company to serve as their agent to
facilitate the sale of the shares on their behalf. Immediately after the
Registration Statement's effectiveness, the Company, as agent for the
participants, sold the shares at a price of $2.00 per share to one entity. The
proceeds from the sale of the shares were then placed into a segregated account.
On a number of occasions subsequent to the aforementioned stock sale, the
Company transferred a portion of the proceeds to Cigarette Racing Team, Inc.
("Cigarette") in order to facilitate the payment of payroll by Cigarette. The
total amount transferred as of September 30, 1998 was $338,885. As more fully
discussed in Note 11, the Company and Cigarette are in the process of merging
and, in contemplation thereof, the two companies have been operating as one on a
"de-facto" basis, which due to common management was accomplished without formal
documentation. Also contributing to the companies' decision to act as one was
that (i) Cigarette, through direct and indirect means, was responsible for more
than 90% of the Company's revenue; (ii) Cigarette's employees had in essence
become the Company's employees due to Cigarette's need for additional employees;
and (iii) the majority shareholders and directors of both Cigarette and the
Company had approved the merger in principle.
F-12
<PAGE>
ALCHEMY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accordingly, Cigarette paid the Company's employees as well as its own through
the proceeds of the sale of the shares in the exact amounts required by their
common payroll service as they became due. Upon learning that the proceeds from
the sale of the participants' shares were transferred to Cigarette to pay the
employees, the Company's legal counsel advised the Company, that the Plan should
be amended to clearly include Cigarette's employees as Plan Participants (as
that term is defined in the Plan) and that an amendment to the Registration
Statement be filed. The Company's management agreed to amend the Plan and file
an amendment to the Registration Statement.
Notwithstanding the above series of events, it is unclear whether the sale of
common stock registered in the Registration Statement constituted a violation of
registration requirements under the Securities Act of 1933 and, furthermore,
whether the use of the resulting proceeds may represent an improper application
of employee benefit funds. The accompanying financial statements do not reflect
any adjustments which may result from this uncertainty.
NOTE 14 - RESTATEMENT
The Company has restated its prior year financial statements to record interest
on certain past due indebtedness and to correct the valuation of the licensing
agreement. (See Notes 6 and 9B). The opening balance of the accumulated deficit
at October 1, 1996 has been increased by $27,682 for interest on the applicable
debt for fiscal 1996 and 1995. Interest expense in fiscal 1997 has been
increased by $19,410. The original valuation ascribed to the licensing agreement
was equal to the $2,200 par value of the new common stock used to acquire it.
The Company has corrected such valuation to reflect a then fair value of the
common stock of $.10 per share or $220,000 in the aggregate. Additional
amortization expense of $8,103 has been reflected on the statement of operations
for fiscal 1997. The effect on the September 30, 1997 balance sheet was to
increase net intangible assets, accrued interest payable, additional paid-in
capital and accumulated deficit by $209,697, $47,092, $217,800 and $55,195,
respectively. Net loss was increased by $27,513 in fiscal 1997. Net loss per
common share was increased by $.03 in 1997. The statement of cash flows for
fiscal 1997 was restated as applicable.
F-13
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Cigarette Racing Team, Inc.
Aventura, Florida
We have audited the accompanying balance sheet of Cigarette Racing Team, Inc.
(the "Company") as of September 30, 1998, and the related statements of
operations, stockholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cigarette Racing Team, Inc. as
of September 30, 1998 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 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.
February 5, 1999
Melville, New York
F-14
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
Cigarette Racing Team, Inc.
Aventura, Florida
I have audited the accompanying statements of operations, stockholders' equity
and cash flows of Cigarette Racing Team, Inc. (the "Company") for the year ended
September 30, 1997. These financial statements are the responsibility of the
Company's management. My responsibility is to express an opinion on 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
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
material respects, the results of operations, changes in stockholders' equity
and cash flows of Cigarette Racing Team, Inc. for the year ended September 30,
1997 in conformity with generally accepted accounting principles.
The financial statements have been prepared assuming the Company will continue
as a going concern. As discussed in Note 1 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
Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
January 15, 1998
Coral Springs, Florida
F-15
<PAGE>
CIGARETTE RACING TEAM, INC.
BALANCE SHEET
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current Assets:
Cash $ 212,319
Loans Receivable 37,778
Inventory 1,107,970
Prepaid Expenses 92,916
-----------
Total Current Assets 1,450,983
Property and Equipment, Net of Accumulated
Depreciation of $831,677 285,785
Cost in Excess of Fair Value of Net Assets Acquired,
Net of Accumulated Amortization of $1,738,146 4,278,508
Trademark, Net of Accumulated Amortization of $105,152 258,846
Deposits 8,873
-----------
TOTAL ASSETS $ 6,282,995
===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Note payable to seller and related obligations due to seller,
including accrued nterest of $1,250,978 and accrued rent
of $823,058 $ 5,354,036
Loans payable 1,138,198
Due to affliliate 338,885
Accounts payable 1,257,929
Accrued expenses 445,823
Customer deposits 375,621
Stockholder loans 856,429
-----------
Total Current Liabilities 9,766,921
Redeemable Preferred Stock, Series A, Cumulative, No Par Value; 1,000
Share, Authorized, 100 Shares Issued and Outstanding,
Including Cumulative Dividends of $216,667 1,216,667
-----------
Stockholders' Equity (Deficit):
Common Stock, $.01 Par Value; 10,000,000 Shares Authorized,
3,601,000 Shares Issued and Outstanding 36,010
Additional Paid-In Capital 2,696,120
Accumulated Deficit (7,432,723)
-----------
Total Stockholders' Equity (Deficit) (4,700,593)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 6,282,995
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-16
<PAGE>
CIGARETTE RACING TEAM, INC.
STATEMENT OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
1998 1997
----------- -----------
NET SALES $ 7,026,625 $ 2,158,406
Cost of Sales 4,946,870 3,403,644
----------- -----------
GROSS MARGIN 2,079,755 (1,245,238)
Selling, General and Administrative Expenses 2,426,629 905,566
Interest Expense 563,620 449,723
Loss from Employee Embezzlement 280,571 --
Other Income (400,000) (39,921)
----------- -----------
NET LOSS $ (791,065) $(2,560,606)
=========== ===========
PER SHARE AMOUNTS:
Net Loss Per Share $ (0.22) $ (0.91)
=========== ===========
Weighted Average Number of
Common Shares Outstanding 3,577,027 2,819,562
=========== ===========
The accompanying notes are an integral part of the financial statements.
F-17
<PAGE>
CIGARETTE RACING TEAM, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
Total
Common Stock Additional Stockholders'
$.01 Par Value Paid-In Accumulated Equity
Shares Amount Capital Deficit (Deficit)
----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balances, October 1, 1996 2,601,000 $ 26,010 $ 864,377 $(4,081,052) $(3,190,665)
Private placement on December 1,
1996 at $2 per share, net of costs
of $35,000 250,000 2,500 462,500 -- 465,000
Private placement in August and
September of 1997 at $2 per share,
net of costs of $32,500 125,000 1,250 216,250 -- 217,500
Dividends accrued on mandatorily
redeemable cumulative preferred
stock -- -- (50,000) -- (50,000)
Imputed interest expense on
stockholder loans -- -- 83,959 -- 83,959
Net loss for the year ended
September 30, 1997 -- -- -- (2,560,606) (2,560,606)
----------- ----------- ----------- ----------- -----------
Balances, September 30, 1997 2,976,000 29,760 1,577,086 (6,641,658) (5,034,812)
Private placement on October 15, 1997
at $2.00 per share, net of costs of $162,500 625,000 6,250 1,081,250 -- 1,087,500
Dividends accrued on mandatorily
redeemable cumulative preferred
stock -- -- (50,000) -- (50,000)
Imputed interest expense on
stockholder loans -- -- 87,784 -- 87,784
Net loss for the year ended
September 30, 1998 -- -- -- (791,065) (791,065)
----------- ----------- ----------- ----------- -----------
Balances, September 30, 1998 3,601,000 $ 36,010 $ 2,696,120 $(7,432,723) $(4,700,593)
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-18
<PAGE>
CIGARETTE RACING TEAM, INC.
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
1998 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (791,065) $(2,560,606)
Adjustments to Reconcile Net Loss
to Net Cash Used by Operating Activities:
Depreciation and Amortization 621,073 617,996
Imputed Interest Expense 87,784 83,959
Increase in Loans Receivable (37,778) --
Decrease in Accounts Receivable -- 22,770
Increase in Inventory (709,802) (281,019)
Increase in Prepaid Expenses (22,954) (69,962)
Decrease in Deposits 1,127 48,590
Increase (Decrease) in Accounts Payable (20,975) 54,086
Increase (Decrease) in Accrued Expenses (740,101) 1,466,033
Increase (Decrease) in Customer Deposits 170,621 (1,340,695)
----------- -----------
Net Cash Used by Operating Activities (1,442,070) (1,958,848)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures (76,363) (18,811)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in Note Payable to Seller 469,595 715,588
Increase (Decrease) in Loans Payable (198,969) 449,846
Increase in Due to Affiliate 338,885 --
Advances from Shareholder -- 160,546
Proceeds from Stock Transactions 1,087,500 682,500
----------- -----------
Net Cash Provided by Financing Activities 1,697,011 2,008,480
----------- -----------
NET INCREASE IN CASH 178,578 30,821
CASH AT BEGINNING OF YEAR 33,741 2,920
----------- -----------
CASH AT END OF YEAR $ 212,319 $ 33,741
=========== ===========
Supplemental Cash Flow Information:
Cash Paid During the Year for Interest $ 56,488 $ 224,119
=========== ===========
Non-Cash Investing and Financing Activities:
Cumulative Dividends Accrued
on Preferred Stock $ 50,000 $ 50,000
=========== ===========
Imputed Interest Expense Credited
to Additional Paid-In Capital $ 87,784 $ 83,959
=========== ===========
The accompanying notes are an integral part of the financial statements.
F-19
<PAGE>
CIGARETTE RACING TEAM, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1 - ORGANIZATION AND BASIS OF PRESENTATION
A. Organization:
Cigarette Racing Team, Inc. (Cigarette or 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. On June
1, 1994, the Company changed its name from New CRT, Inc. to Cigarette Racing
Team, Inc.
B. Basis of Presentation - Going Concern:
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
$791,065 and $2,560,606 for the fiscal years ended September 30, 1998 and 1997,
respectively, and cumulative losses since inception of $7,432,723. At September
30, 1998, the Company has a net stockholder's equity deficiency of $4,700,593
and a working capital deficit of $8,315,938. In addition, the Company was in
arrears on total indebtedness to the Seller of $5,354,036 including $3,280,000
of note principal, $1,250,978 of accrued interest thereon and $823,058 of unpaid
rent. Such amounts do not include $1,216,667 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 debt 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-20
<PAGE>
CIGARETTE RACING TEAM, INC.
NOTES TO FINANCIAL STATEMENTS
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. 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.
B. Inventory:
Inventory consists of parts and accessories, work-in process and finished goods
which are valued at the lower of cost (first-in, first-out method) or market.
C. 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
D. 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, 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.
E. Trademarks:
Trademarks are 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.
F. 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 is included in accrued expenses.
G. Revenue and Income Recognition:
Salesand associated cost of sales of products are recognized upon shipment to
the customer. Service revenue is recognized when the service is performed. Other
income is recognized as earned, and includes royalties on the licensing of the
Company's trademarks, service marks and business names.
F-21
<PAGE>
CIGARETTE RACING TEAM, INC.
NOTES TO FINANCIAL STATEMENTS
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
H. Imputed Interest Expense:
Indebtedness of $856,429 to the Company's majority stockholder is, by its terms,
non-interest bearing and due on demand. The Company has imputed interest thereon
at 10.25% per annum with an equivalent offset to additional paid in-capital.
I. 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.
J. Earnings (Loss) Per Share:
Earnings (loss) per share is calculated by dividing net income or loss by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share are reported to reflect the effect of outstanding common
share equivalents. Such common share equivalents are excluded from loss per
share calculations as their effect would be anti-dilutive.
K. Use of Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements as
well as revenues and expenses during the reporting period. Actual results could
vary from those estimates.
Note 3 - INVENTORY
Inventory at September 30, 1998 consists of the following:
Parts and Accessories $ 111,103
Work-In-Process 617,203
Finished Goods 379,664
----------
Total Inventory $1,107,970
==========
F-22
<PAGE>
CIGARETTE RACING TEAM, INC.
NOTES TO FINANCIAL STATEMENTS
Note 4 - PROPERTY AND EQUIPMENT
Property and Equipment consist of the following as of September 30, 1998:
Molds and Tooling $ 812,544
Machinery and Equipment 239,518
Furniture and Fixtures 65,400
----------
Total Property and Equipment 1,117,462
Less: Accumulated Depreciation 831,677
----------
Property and Equipment $ 285,785
==========
Note 5 - NOTES PAYABLE AND RELATED OBLIGATIONS DUE TO SELLER
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. The debt is secured by substantially all assets of the
Company, as well as the Company's outstanding common stock. 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 the note. The outstanding principal balance as of
September 30, 1998 is $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 $1,250,978 as of September 30, 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 $823,058 of
unpaid rent owed to the Seller. As discussed, the Company is in the process of
renegotiating its obligations to the Seller.
Management is presently in the process of finalizing an agreement with the
Seller wherein the outstanding balance due on the original note, accrued
interest thereon, accrued rent, accrued real estate taxes and dividends payable
will be exchanged for common stock.
Note 6 - LOANS PAYABLE
In February 1996, 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 connection therewith, the Company
agreed to pay the supplier $300,000 of the $350,000 due 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 the 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, 1998 totaling
$62,436 including accrued interest thereon of approximately $2,000.
F-23
<PAGE>
CIGARETTE RACING TEAM, INC.
NOTES TO FINANCIAL STATEMENT
The Company has loans payable to various customers in connection with
settlements. As of September 30, 1998, the balance of these loans aggregate
$224,480, including accrued interest at the rates ranging from 6% to 10%.
As of September 30, 1998, the Company has a loan payable to a limited liability
partnership in the amount of $180,000. The loan is unsecured, bears interest at
a bank's prime rate and is payable on demand. (See Note 10 regarding warrants
issued in connection with this loan.)
The Company has a loan payable to a corporation in the amount of $366,282 as of
September 30, 1998. The loan is unsecured, accrues interest at the rate of 10%
and is payable on demand.
Note 7 - DUE TO AFFILIATE
During the year ended September 30, 1998, the Company received $338,885 in funds
from Alchemy Holdings, Inc. (see Note 13 regarding a proposed merger). This
advance is unsecured, bears interest at the rate of 11% and is payable upon
demand.
Note 8 - STOCKHOLDER LOANS
As of September 30, 1998, the Company has a loan payable to a major stockholder
in the amount of $856,429. The loan is unsecured, non-interest bearing and
payable on demand (see Note 2 for discussion of imputed interest).
Note 9 - ACCRUED EXPENSES
Accrued expenses consist of the following as of September 30, 1998:
Insurance $ 92,736
Interest 82,166
Bonus 67,971
Warranty 67,420
Vacation 49,469
Property Taxes 44,628
Payroll and Payroll Taxes 41,433
--------
Total Accrued Expenses $445,823
========
F-24
<PAGE>
CIGARETTE RACING TEAM, INC.
NOTES TO FINANCIAL STATEMENT
Note 10 - CAPITAL STOCK TRANSACTION
A. Mandatorily Redeemable Cumulative 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, 1998, cumulative dividends accrued on preferred stock
totaled $216,667. 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.
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.
B. Private Placements:
During the year ended September 30, 1998, the Company completed a private
placement of its $.01 par value common stock and raised $1,087,500 of capital
through the sale of 625,000 new shares, at $2.00 per share, net of $162,500 of
placement costs.
During the year ended September 30, 1997, the Company raised $682,500 by selling
375,000 new shares of its $.01 par value common stock at $2.00 per share in two
separate private placements, net of $67,500 of placement costs.
C. Change in Control of the Company;
On June 30, 1997, the Company's majority shareholder sold his entire interest in
Cigarette Racing Team, Inc., 2,601,000 shares then constituting 91.23% of the
Company, to a foreign corporation.
D. Stock Purchase Warrants:
The Company has authorized and issued to each subscriber of its private
placements of common stock a Class A and a Class B stock warrant for each of the
1,000,000 shares subscribed. These rights to purchase additional shares of the
$.01 par value common stock of Cigarette Racing Team, Inc. are exercisable at
$3.00 per share and $4.00 per share, respectively, subject to certain terms and
conditions. On April 1, 1998 the Company authorized and issued to a limited
partnership, the rights to purchase ("warrants") 180,000 shares of the $.01 par
value common stock of Cigarette Racing Team, Inc. on payment of $2.00 a share so
purchased, simultaneous with a loan agreement wherein the limited partnership
agreed to loan Cigarette $180,000 (see Note 6 regarding loan payable).
F-25
<PAGE>
CIGARETTE RACING TEAM, INC.
NOTES TO FINANCIAL STATEMENTS
Note 11- INCOME TAXES
The Company neither incurred an expense for nor realized a benefit from any
current or deferred income taxes for the fiscal years ended September 30, 1998
and 1997. The Company has approximately $7,400,000 of loss carryforwards to
offset future taxable income, expiring in the years 2010 through 2013. The
following is a reconciliation of the federal statutory tax rate with the
effective tax rate:
Year Ended September 30,
1998 1997
---- ----
Statutory tax rate (34)% (34)%
Net operating loss carry-forward
resulting in no current benefit 34 34
Effective rate 0% 0%
========== ==========
Note 12 - COMMITMENTS AND CONTINGENCIES
A. 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 $3,600,000 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.
The Company is currently in default on this lease. As of September 30, 1998,
unpaid rent totals $823,058. As disclosed previously, the Company is in the
process of renegotiating its obligations to the Seller. Rent expense for the
years ended September 30, 1998 and 1997 was $390,686 and $388,318 respectively.
B. Litigation:
In October of 1996, a customer of the Company brought a lawsuit relating to an
order for certain boats placed with the Company's predecessor. 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. The boats have each since been delivered and 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.
F-26
<PAGE>
CIGARETTE RACING TEAM, INC.
NOTES TO FINANCIAL STATEMENTS
C. Loss From Employee Embezzlement:
During the fiscal year ended September 30, 1998, the Company experienced losses
associated with an embezzlement scheme, wherein an employee diverted Cigarette
funds of approximately $280,000 for personal use. The unauthorized use of funds
continued through December 4, 1998, at which time the embezzlement was
identified and the employee was terminated. The loss from employee embezzlement
during the subsequent period amounted to approximately $72,000. The Company is
currently pursuing its legal rights to restitution from the employee and the
various banking institutions that negotiated forged instruments.
Note 13 - PROPOSED MERGER WITH ALCHEMY HOLDINGS, INC.
The Boards of Directors of the Company and Alchemy Holdings, Inc. ("Alchemy")
have approved a Plan of Merger whereby Cigarette Boats, Inc., a newly-formed,
wholly-owned subsidiary of Alchemy will be merged with and into the Company. In
connection therewith, Alchemy has filed a Registration Statement on Form S-4
with the Securities and Exchange Commission relating to the shares of common
stock of Alchemy Holdings, Inc. to be retained by holders of Alchemy common
stock in the proposed merger of Cigarette Racing Team, Inc. with and into
Alchemy, with Alchemy continuing as the surviving corporation of the merger.
Pursuant to the Merger Agreement, (i) Cigarette Boats, Inc. 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, issued and outstanding as of the effective date of the merger
will be converted into one (1) share of Alchemy's preferred stock, possessing
similar rights, terms and conditions as the Cigarette preferred stock, (iii)
each issued and outstanding share of Cigarette common stock will be converted
into one (1) share of Alchemy common stock.
Management anticipates that the Seller of Cigarette (as of the May 1994
agreement) will receive 1,000,000 shares of Alchemy common stock and $1,000,000
of Alchemy preferred stock, Series B in exchange for forgiveness and
cancellation of Cigarette's indebtedness to the Seller. It is also expected by
Alchemy management that pursuant to the merger, Offshore Racing, Inc., a foreign
corporation, will retire 2,000,000 shares of Alchemy common stock in exchange
for its receipt of $1,000,000 of Alchemy preferred stock, Series B.
Each outstanding warrant of Cigarette will be assumed by Alchemy and become
Alchemy warrants to purchase, on the same terms and conditions as were
applicable under agreements with Cigarette.
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).
Alchemy and Cigarette may each have the right (subject to certain limitations)
to terminate the Merger Agreement if the merger is not consummated on or before
March 31, 1999.
F-27
<PAGE>
ALCHEMY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1999 AND SEPTEMBER 30, 1998
ASSETS
<TABLE>
<CAPTION>
March
(Unaudited) September
----------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 73,588 $ 66,186
Inventory 209,279 178,655
Prepaid Expenses 50,000
----------- -----------
Total Current Assets 332,867 244,841
PROPERTY AND EQUIPMENT 19,606 20,060
OTHER ASSETS:
Licensing Agreement, Net of Accumulated
Amortization of $35,750 178,750 189,750
----------- -----------
TOTAL ASSETS $ 531,223 $ 454,651
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable $ 4,803 $ 10,148
Accrued Expenses 12,284 7,476
Customer Deposits 119,564 90,500
Stockholder Loans 58,695 56,494
Notes Payable, Including Accrued Interest 78,446 75,286
----------- -----------
Total Current Liabilities 273,792 239,904
----------- -----------
TOTAL LIABILITIES 273,792 239,904
----------- -----------
STOCKHOLDERS' EQUITY:
Common Stock, $.001 par value, 20,000,000 shares
authorized; 2,592,394 and 2,437,394 shares, respectively,
issued and outstanding 2,592 2,437
Additional Paid-In Capital 2,534,443 2,224,598
Accumulated Deficit (2,279,604) (2,012,288)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 257,431 214,747
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 531,223 $ 454,651
=========== ===========
</TABLE>
The accompanying notes are an intergral part of the
consolodated financial statemets.
F-28
<PAGE>
ALCHEMY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES $ 163,878 123,158 $ 319,080 329,560
Cost of Sales 120,721 53,995 233,838 254,327
----------- ----------- ----------- -----------
GROSS MARGIN 43,157 69,163 85,242 75,233
Selling, General and
Administrative Expenses 41,850 35,510 89,269 68,119
----------- ----------- ----------- -----------
OPERATING INCOME (LOSS) 1,307 33,653 (4,027) 7,114
Interest - Net 2,651 12,713 5,361 18,985
Provision for Loan Loss 38,318 -- 257,928 --
----------- ----------- ----------- -----------
Loss before Extraordinary Item (39,662) 20,940 (267,316) (11,871)
Extraordinary Gain on
Forgiveness of Debt -- -- -- --
----------- ----------- ----------- -----------
NET PROFIT (LOSS) $ (39,662) 20,940 $ (267,316) (11,871)
=========== =========== =========== ===========
BASIC LOSS PER SHARE AMOUNTS:
Loss before extraordinary item (0.02) 0.01 (0.10) (0.01)
Extraordinary gain -- -- -- --
----------- ----------- ----------- -----------
Net Loss (0.02) 0.01 (0.10) (0.01)
=========== =========== =========== ===========
Weighted average number of
common shares outstanding 2,592,394 2,237,394 2,550,608 2,237,394
</TABLE>
The equation for computing basic income (loss) per common share is: Income
(Loss) available to common shareholders / Weighted-average shares.
F-29
<PAGE>
ALCHEMY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
Six Months Ended March 31,
1999 1998
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (267,316) $ (11,871)
Adjustments to Reconcile Net Loss
to Net Cash Used by Operating Activities:
Depreciation and Amortization 11,454 953
Accrued Interest - Unpaid 5,361 12,713
(Increase) Decrease in Prepaid Expenses (50,000) 331
(Increase) Decrease in Accounts Receivable -- 1,053
(Increase) Decrease in Inventory (30,624) (63,240)
Increase (Decrease) in Accounts Payable (5,345) (27,980)
Increase (Decrease) in Accrued Expenses 4,808 17,402
Increase (Decrease) in Customer Deposits 29,064 47,775
----------- ----------
Net Cash Used by Operating Activities (302,598) (22,864)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (Decrease) in Notes Payable -- 1,875
Proceeds from Stock Issuances 310,000 --
----------- ----------
Net Cash Used by Financing Activities 310,000 1,875
NET INCREASE (DECREASE) IN CASH 7,402 (20,989)
CASH AT BEGINNING OF PERIOD 66,186 44,753
----------- ----------
CASH AT END OF PERIOD $ 73,588 $ 23,764
=========== ==========
Supplemental Cash Flow Information:
Interest Paid During the Year $ -- $ --
=========== ==========
Income Taxes Paid During the Year $ -- $ --
=========== ==========
</TABLE>
F-30
<PAGE>
ALCHEMY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying financial statements of Alchemy Holdings, Inc. have been
prepared in accordance with generally accepted accounting principles for interim
financial information, and with the instructions to Form 10-QSB and Article 10
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
In the opinion of the Company's management, all adjustments (consisting of
normal recurring accruals) considered to be necessary for a fair presentation
have been included. Operating results for the six months ended March 31, 1999
are not necessarily indicative of the expected results for the year ending
September 30, 1999. For further information, refer to the financial statements
and footnotes included in the Company's annual report on Form 10-KSB for the
year ended September 30, 1998.
NOTE B - GOING CONCERN CONSIDERATION
The Company's consolidated 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 $319,288 and $92,762 for the years ended September 30,
1998 and 1997, respectively, and has cumulative losses since inception of
$2,012,288. As a result of such losses the Company's financial position has been
significantly impaired. The Company's ability to continue as a going concern is
dependent upon its ability to attain a satisfactory level of profitability and
to obtain suitable, adequate financing or the restructuring of existing
obligations. During the year ended September 30, 1998, the Company satisfied its
obligations to certain note holders with the proceeds of short-term financing
from a stockholder. (This extinguishment of debt resulted in an extraordinary
gain of $130,203.) The Company has sought to implement cost-saving measures,
reduce other operating costs, utilize deposits from customers in connection with
firm purchase orders to help finance operating costs and to convert some of its
debt to equity in connection with a merger with one of its principal customers,
Cigarette Racing Team. 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 if the Company is unable to continue as a going
concern.
NOTE C - FAS 109
Deferred income taxes are provided on the tax effect of changes in temporary
differences. Deferred tax assets are subject to a valuation allowance if their
realization is not reasonably assured. Deferred tax assets are comprised of the
following at March 31, 1999:
Net Operating Loss Carry Forward Benefit $ 775,065
Investment Credit 7,712
Valuation Allowance (782,777)
---------
Net Deferred Tax Asset $ --
=========
F-31
<PAGE>
ALCHEMY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE D - MAJOR CUSTOMER
Of the Company's total sales for the six months ended March 31, 1999, and 1998,
$151,232 and $68,591 or 47% and 21%, 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.
During the six months ended March 31, 1999, the Company transferred $257,928 in
funds to Cigarette Racing Team, Inc. This advance is unsecured, bears interest
at the rate of 11% and is payable upon demand. As Cigarette Racing Team, Inc.
does not currently have the financial capability to satisfy this obligation the
Company has recorded a provision for loan loss for the entire amount of the loan
and interest income has not been accrued.
F-32
<PAGE>
CIGARETTE RACING TEAM, INC.
BALANCE SHEETS
MARCH 31, 1999 AND
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
ASSETS
March
(Unaudited) September
---------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 262,127 $ 212,319
Loan Receivables 22,466 37,778
Inventory 1,191,271 1,107,970
Prepaid Expenses 74,032 92,916
---------- ----------
Total Current Assets 1,549,896 1,450,983
PROPERTY AND EQUIPMENT 443,761 285,785
OTHER ASSETS:
Costs in excess of Fair Value of Net Assets of Business
Acquired, Net of Accumulated Amortization 4,077,953 4,278,508
Trademark, Net of Accumulated Amortization 246,713 258,846
Intellectual Properties 14,891 --
Deposits 8,873 8,873
---------- ----------
TOTAL ASSETS $6,342,087 $6,282,995
========== ==========
</TABLE>
The accompanying notes are an integral part of
the financial statements.
F-33
<PAGE>
CIGARETTE RACING TEAM, INC.
BALANCE SHEETS (CONTINUED)
MARCH 31, 1999 AND SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
March
(Unaudited) September
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Note Payable to Seller, Including Accrued
Interest and Rent $ 5,711,040 $ 5,354,036
Loans Payable 968,155 1,138,198
Due to Affiliate 596,814 338,885
Accounts Payable 963,293 1,257,929
Accrued Expenses 493,533 445,823
Customer Deposits 960,444 375,621
Stockholder Loans 856,429 856,429
------------ ------------
Total Current Liabilities 10,549,708 9,766,921
------------ ------------
TOTAL LIABILITIES 10,549,708 9,766,921
------------ ------------
STOCKHOLDERS' EQUITY:
Redeemable Preferred Stock, Series A, Cumulative, No
Par, 1,000 Shares Authorized, 100 Shares Issued and
Outstanding, Including Cumulative Dividends 1,241,667 1,216,667
Common Stock, $.01 par value, 10,000,000 shares
authorized; 3,719,450 issued and outstanding 37,195 36,010
Treasury Stock (100,000) --
Additional Paid-In Capital 2,950,727 2,696,120
Accumulated Deficit (8,337,210) (7,432,723)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY (4,207,621) (3,483,926)
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 6,342,087 $ 6,282,995
============ ============
</TABLE>
The accompanying notes are an integral part of
the financial statements.
F-34
<PAGE>
CIGARETTE RACING TEAM, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
1999 1998 1999 1998
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES $ 3,136,033 $ 1,629,568 $ 5,194,008 $ 2,583,458
Cost of Sales 2,258,030 1,403,120 3,820,372 2,189,959
----------- ----------- ----------- -----------
GROSS MARGIN 878,003 226,448 1,373,636 393,499
Selling, General and
Administrative Expenses 985,909 428,040 2,057,806 919,666
Interest Expense 121,965 148,445 247,587 266,867
Loss from Employee Embezzlement 4,692 -- 72,730 --
Other Income -- -- (100,000) (400,000)
----------- ----------- ----------- -----------
NET (LOSS) $ (234,563) $ (350,037) $ (904,487) $ (393,034)
=========== =========== =========== ===========
BASIC LOSS PER SHARE AMOUNTS:
Net Loss $ (0.06) $ (0.10) $ (0.24) $ (0.11)
=========== =========== =========== ===========
Weighted average number of
common shares outstanding 3,719,450 3,601,000 3,699,708 3,552,923
=========== =========== =========== ===========
</TABLE>
The equation for computing basic (loss) per common share is:
(Loss) available to common shareholders / Weighted-average shares.
The accompanying notes are an integral part of
the financial statements.
F-35
<PAGE>
CIGARETTE RACING TEAM, INC.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
Six Months Ended
March 31,
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss) $ (904,487) $ (393,034)
Adjustments to Reconcile Net Loss
to Net Cash Used by Operating Activities:
Depreciation and Amortization 311,342 310,618
Imputed Interest Expense 43,892 43,892
Decrease in Loans Receivable 15,312 --
(Increase) in Inventory (83,301) (582,433)
Decrease in Prepaid Expenses 18,884 2,759
Increase (Decrease) in Accounts Payable (294,636) 119,447
Increase (Decrease) in Accrued Expenses 47,710 (635,477)
Increase in Customer Deposits 584,823 613,070
----------- -----------
Net Cash Used by Operating Activities (260,461) (521,158)
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) in Capital Expenditures (271,521) (13,341)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in Notes Payable 357,004 --
(Decrease) in Loans Payable (170,043) (216,774)
Increase in Due to Affiliate 257,929 --
Purchase of Treasury Stock (100,000) --
Increases from Stock Issuances 236,900 1,087,500
----------- -----------
Net Cash Provided by Financing Activities 581,790 870,726
NET INCREASE IN CASH 49,808 336,227
CASH AT BEGINNING OF PERIOD 212,319 33,741
----------- -----------
CASH AT END OF PERIOD $ 262,127 $ 369,968
=========== ===========
Supplemental Cash Flow Information:
Interest Paid During the Period $ 47,089 $ 44,675
=========== ===========
Non Cash Investing and Financing Activities:
Cumulative Dividends Accrued on Preferred Stock $ 25,000 $ 25,000
=========== ===========
Imputed Interest Expense Credited to Paid-In Capital $ 43,892 $ 43,892
=========== ===========
</TABLE>
The accompanying notes are an integral part of
the financial statements.
F-36
<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
$904,487 and $393,034 for the six months ended March 31, 1999 and 1998,
respectively, and cumulative losses since inception of $8,337,210. At March 31,
1999 the Company has a net stockholder's equity deficiency of $4,207,621 and a
working capital deficit of $8,999,812. In addition, the Company was in arrears
on total indebtedness to the Seller of $5,711,040 including $3,280,000 of note
principal, $1,418,618 of accrued interest thereon and $1,012,422 of unpaid rent.
Such amounts do not include $1,241,667 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.
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.
F-37
<PAGE>
CIGARETTE RACING TEAM, INC.
NOTES TO FINANCIAL STATEMENTS
Inventory - Inventory consists of raw materials, parts and accessories,
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 3-7 years
Furniture and Fixtures 7 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, AAccounting 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 is included in accrued expenses.
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. Other income is recognized as earned, and includes
royalties on the licensing of the Company's trademarks, service marks and
business name.
Imputed Interest B Indebtedness of $856,429 to the Company's majority
stockholder is, by its terms, non-interest bearing and due on demand. The
Company has imputed interest thereon at 10.25% per annum with an equivalent
offset to additional paid-in capital
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 Amore likely than not@
criterion.
F-38
<PAGE>
CIGARETTE RACING TEAM, INC.
NOTES TO FINANCIAL STATEMENTS
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. Diluted
earnings per share are reported to reflect the effect of outstanding common
share equivalents. Such common share equivalents are excluded from loss per
share calculations in these financial statements as their effect would be
anti-dilutive.
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 March 31, 1999:
Molds and Tooling $ 1,060,354
Machinery and Equipment 248,336
Furniture and Fixtures 65,400
------------
Total Property and Equipment 1,374,090
Less: Accumulated Depreciation 930,329
------------
Property and Equipment $ 443,761
============
Note Payable to Seller
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, 1999 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 $1,418,618 as of March 31, 1999.
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
$1,012,422 of unpaid rent owed to the Seller. As discussed, the Company is in
the process of renegotiating its obligations to the Seller.
F-39
<PAGE>
CIGARETTE RACING TEAM, INC.
NOTES TO FINANCIAL STATEMENTS
Management is presently in the process of finalizing an agreement with the
Seller wherein the outstanding balance due on the original note, accrued
interest thereon, accrued rent, accrued real estate taxes and dividends payable
will be exchanged for common stock.
Accrued Expenses
Accrued Expenses consist of the following as of March 31, 1999:
Interest $ 115,023
Insurance 68,994
Bonus 67,971
Warranty 67,420
Property Taxes 70,251
Vacation 49,469
Wages 40,160
Miscellaneous 14,245
----------
Total Accrued Expenses $ 493,533
Capital Stock
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 March 31, 1999, cumulative dividends accrued on preferred stock
totaled $241,167.
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.
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.
F-40
<PAGE>
CIGARETTE RACING TEAM, INC.
NOTES TO FINANCIAL STATEMENTS
Private Placement of Common Stock B During the year ended September 30, 1998 the
Company raised $1,087,500 of capital by issuing 625,000 shares of its $.01 par
value common stock through two separate private placements. The additional
capital indicated herein does not include $162,500 of placement costs.
Stock Issued for Services B During the six months ended March 31, 1999 the
Company issued 118,450 shares of its $.01 par value common stock in exchange for
services rendered.
Stock Purchase Warrants B The Company has authorized and issued to each
subscriber of its Private Placements of Common Stock a Class A and a Class B
stock warrant for each of the 1,000,000 shares subscribed. These rights to
purchase additional shares of the $.01 par value common stock of Cigarette
Racing Team, Inc. are exercisable at $3.00 per share and $4.00 per share,
respectively, subject to certain terms and conditions. On April 1, 1998 the
Company authorized and issued to Masada L.L.P. the rights to purchase
(Awarrants@) 180,000 shares of the $.01 par value common stock of Cigarette
Racing Team, Inc. on payment of $2.00 a share so purchased, simultaneous with a
loan agreement wherein Masada agreed to loan Cigarette $180,000.
Income Taxes
The Company neither incurred an expense for nor benefit from any current or
deferred income taxes for the six months ended March 31, 1999. The Company has
approximately $8,000,000 of loss carry forwards to offset future taxable income
expiring in the years 2009 through 2013.
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.
The Company is currently in default of this lease agreement, as of March 31,
1999 unpaid rent totals $1,012,422. As previously indicated, the Company is in
the process of renegotiating its obligations to the Seller.
Rent expense for the six months ended March 31, 1999 was $189,364.
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. The boats have each since been delivered
and the $305,000 debt is included in the loans payable reported on the
accompanying balance sheet.
F-41
<PAGE>
CIGARETTE RACING TEAM, INC.
NOTES TO FINANCIAL STATEMENTS
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.
Loss from Employee Embezzlement B During the fiscal year ended September 30,
1998 and the six months ended March 31, 1999 the Company experienced losses
associated with an embezzlement scheme, wherein an employee diverted Cigarette
funds of approximately $280,000 and $70,000, respectively, for personal use. The
unauthorized use of funds continued through December 4, 1998, at which time the
embezzlement was identified and the employee was terminated. The Company is
currently pursuing its legal rights to restitution from the employee and the
various banking institutions that negotiated the forged instruments.
Proposed Merger with Alchemy Holdings, Inc.
The Boards of Directors of the Company and Alchemy Holdings, Inc. (Alchemy) have
approved a Plan of Merger whereby Cigarette Boats, Inc., a newly formed, wholly
owned subsidiary of Alchemy will be merged with and into the Company. In
connection therewith, Alchemy has filed a Registration Statement on Form S-4
with the Securities and Exchange Commission relating to the shares of common
stock of Alchemy Holdings, Inc. to be retained by the holders of Alchemy common
stock in the proposed merger of Cigarette Racing Team, Inc. with and into
Alchemy, with Alchemy continuing as the surviving corporation of the merger.
Pursuant to the Merger Agreement, (i) Cigarette Boats, Inc. 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, issued and outstanding as of the effective date of the merger
will be converted into one (1) share of Alchemy's preferred stock, possessing
similar rights, terms and conditions as the Cigarette preferred stock, (iii)
each issued and outstanding share of Cigarette common stock will be converted
into one (1) share of Alchemy common stock.
Management anticipates that the Seller of Cigarette (as of the May 24, 1994
agreement) will receive 1,000,000 shares of Alchemy common stock and $1,000,000
of Alchemy preferred stock, Series B in exchange for forgiveness and
cancellation of Cigarette's indebtedness to the Seller. It is also expected by
Alchemy management that pursuant to the merger, Offshore Racing, Inc., a foreign
corporation, will retire 2,000,000 shares of Alchemy common stock in exchange
for its receipt of $1,000,000 of Alchemy preferred stock, Series B.
Each outstanding warrant of Cigarette will be assumed by Alchemy and become
Alchemy warrants to purchase, on the same terms and conditions as were
applicable under the agreements with Cigarette.
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).
F-42
<PAGE>
CIGARETTE RACING TEAM, INC. and ALCHEMY HOLDINGS, INC.
PRO-FORMA CONSOLIDATED BALANCE SHEET
MARCH 31, 1999
<TABLE>
<CAPTION>
ASSETS
Cigarette Alchemy Adjustments Pro-Forma
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash $ 262,127 $ 73,588 $ -- $ 335,825
Loan Receivables 22,466 -- 22,466
Inventory 1,191,271 209,279 -- 1,400,550
Prepaid Expenses 74,032 50,000 -- 124,032
---------- ---------- ---------- ----------
Total Current Assets 1,549,896 332,867 -- 1,882,763
PROPERTY AND EQUIPMENT 443,761 19,606 -- 463,367
OTHER ASSETS:
Costs in excess of Fair Value of Net Assets of Business
Acquired, Net of Accumulated Amortization 4,077,953 -- 2,147,247 (A) 6,225,200
Trademark, Net of Accumulated Amortization 246,713 -- -- 246,713
Licensing Agreement, Net of Accumulated
Amortization -- 178,750 -- 178,750
Intellectual Properties 14,891 -- -- 14,891
Deposits 8,873 -- -- 8,873
---------- ---------- ---------- ----------
TOTAL ASSETS $6,342,087 $ 531,223 $2,147,247 $9,020,557
========== ========== ========== ==========
</TABLE>
See notes to pro-forma financial statements.
F-43
<PAGE>
CIGARETTE RACING TEAM, INC. and ALCHEMY HOLDINGS, INC.
PRO-FORMA CONSOLIDATED BALANCE SHEET (CONTINUED)
MARCH 31, 1999
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
Cigarette Alchemy Adjustments Pro-Forma
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
CURRENT LIABILITIES:
Note Payable to Seller, Including Accrued
Interest and Rent $ 5,711,040 $ -- $ (5,711,040) (B) $ --
Loans Payable 968,155 78,446 1,046,601
Due to Affiliate 596,814 -- 596,814
Accounts Payable 963,293 4,803 968,096
Accrued Expenses 493,533 12,284 505,817
Customer Deposits 960,444 119,564 1,080,008
Stockholder Loans 856,429 58,695 915,124
------------ ------------ ------------ ------------
Total Current Liabilities 10,549,708 273,792 (5,711,040) 5,112,460
------------ ------------ ------------ ------------
TOTAL LIABILITIES 10,549,708 273,792 (5,711,040) 5,112,460
------------ ------------ ------------ ------------
STOCKHOLDERS' EQUITY:
Redeemable Preferred Stock 1,241,667 -- (1,241,667) (C) --
Preferred Stock, Series A -- -- 1,000,000 (C) 1,000,000
Preferred Stock, Series B -- -- 1,000,000 (D) 1,000,000
Common Stock, issued and outstanding 37,195 2,592 (34,475) (E) 5,312
Treasury Stock (100,000) -- (100,000)
241,667 (F)
Additional Paid-In Capital 2,950,727 2,534,443 1,439,263 (G) 6,628,955
(537,145) (H)
2,279,604 (I)
Accumulated Deficit (8,337,210) (2,279,604) 3,711,040 (J) (4,626,170)
------------ ------------ ------------ ------------
TOTAL STOCKHOLDERS' EQUITY (4,207,621) 257,431 7,858,287 3,908,207
------------ ------------ ------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 6,342,087 $ 531,223 $ 2,147,247 $ 9,020,557
============ ============ ============ ============
</TABLE>
See notes to pro-forma financial statements.
F-44
<PAGE>
CIGARETTE RACING TEAM, INC. and ALCHEMY HOLDINGS, INC.
PRO-FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
Cigarette Alchemy Adjustments Pro-Forma
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES $ 5,194,008 $ 319,080 $ (151,232) (1) $ 5,361,856
Cost of Sales 3,820,372 233,838 (151,232) (1) 3,902,978
----------- ----------- ----------- -----------
GROSS MARGIN 1,373,636 85,242 -- 1,458,878
Selling, General and 71,575 (2)
Administrative Expenses 2,057,806 89,269 (189,363) (3) 2,029,287
Interest Expense 247,587 5,361 (168,100) (4) 84,848
Loss from Employee Embezzlement 72,730 -- -- 72,730
Provision for loan Loss -- 257,928 257,928
Other Income (100,000) -- -- (100,000)
----------- ----------- ----------- -----------
NET LOSS $ (904,487) $ (267,316) $ 285,888 $ (885,915)
=========== =========== =========== ===========
BASIC LOSS PER SHARE AMOUNTS:
Net Loss $ (0.24) $ (0.10) $ (0.16)
=========== =========== ===========
Weighted average number of
common shares outstanding 3,699,708 2,550,608 5,421,844
=========== =========== ===========
</TABLE>
The equation for computing basic (loss) per common share is:
(Loss) available to common shareholders / Weighted-average shares.
See notes to pro-forma financial statements.
F-45
<PAGE>
CIGARETTE RACING TEAM, INC. and ALCHEMY HOLDINGS, INC.
PRO-FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Cigarette Alchemy Adjustments Pro-Forma
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
NET SALES $ 7,026,625 $ 742,289 $ (187,258) (1) $ 7,581,656
Cost of Sales 4,946,870 651,071 (187,258) (1) 5,410,683
----------- ----------- ----------- -----------
GROSS MARGIN 2,079,755 91,218 -- 2,170,973
Selling, General and 143,150 (2)
Administrative Expenses 2,426,629 174,637 (378,726) (3) 2,365,690
Interest Expense 563,620 27,187 (336,200) (4) 254,607
Loss from Employee Embezzlement 280,571 -- -- 280,571
Provision for loan Loss -- 338,885 -- 338,885
Other Income (400,000) -- -- (400,000)
----------- ----------- ----------- -----------
LOSS BEFORE EXTRAORDINARY ITEM (791,065) (449,491) 571,776 (668,780)
Extraordinary Gain on Foregiveness of Debt -- 130,203 -- 130,203
----------- ----------- ----------- -----------
NET LOSS $ (791,065) $ (319,288) $ 571,776 $ (538,577)
=========== =========== =========== ===========
BASIC LOSS PER SHARE AMOUNTS:
Loss before extraordinary item (0.22) (0.20) (0.12)
Extraordinary Gain on Foregiveness of Debt -- 0.06 (0.02)
Net Loss $ (0.22) $ (0.14) $ (0.10)
=========== =========== ===========
Weighted average number of
common shares outstanding 3,577,027 2,291,093 5,421,844
=========== =========== ===========
</TABLE>
The equation for computing basic (loss) per common share is:
(Loss) available to common shareholders / Weighted-average shares.
See notes to pro-forma financial statements.
F-46
<PAGE>
CIGARETTE RACING TEAM, INC. and ALCHEMY HOLDINGS, INC.
NOTES TO PRO-FORMA FINANCIAL STATEMENTS
NOTES TO PRO-FORMA BALANCE SHEET
(A) This adjustment records the goodwill or cost in excess of the net assets
acquired by Cigarette, the accounting acquiror in the transaction. The
consideration for the acquisition of Alchemy is the fair value of the
Alchemy common shares outstanding prior to the merger, 2,702,394, less the
2,000,000 million shares being surrendered by Offshore, or 702,394 times
the fair value of the Alchemy stock, $2.00, as determined by the Company's
Board of Directors. To this value of $1,404,788 is added the stated and
redemption value of $1,000,000 of the new Series B Preferred Stock being
issued to Offshore. (See Note E). The total consideration for the
acquisition of Alchemy therefore equals $2,404,788. Alchemy's liabilities
of $273,792 are fairly valued on their March 31, 1999 balance sheet;
accordingly the total of consideration paid and liabilities assumed equals
$2,678,580. Alchemy's assets of $531,223 were also fairly valued on their
March 31, 1999 balance sheet; as a result the goodwill arising from the
acquisition equals $2,678,580 less $531,333 or $2,147,247. Such goodwill
will be amortized over fifteen years.
(B) This adjustment reflects the total indebtedness to the Seller being
extinguished in exchange for equity. (see Note J).
(C) This adjustment reflects the cancellation of the original Series A
mandatorily redeemable cumulative preferred stock in exchange for the
issuance of new Series A Preferred Stock. (See Note F).
(D) This adjustment records the issuance of the new Series B Preferred Stock to
Offshore.
(E) This adjustment reduces the aggregate value of the 5,421,844 Alchemy $.001
par value common shares outstanding after the merger to $5,312. (See Note
G).
(F) The cumulative unpaid dividends on the old Series A Preferred Stock, which
were charged against additional paid-in capital, are reversed against that
account. After the conversion to the new preferred, there is no obligation
to pay the old cumulative dividends.
(G) This adjustment reflects the excess of new additional paid-in capital over
the par value of the 702,394 common shares of Alchemy retained by Alchemy's
stockholders. Since such shares have an aggregate fair value of $1,404,788,
such amount plus the adjustment of $34,475, which reduced aggregate par
value in Adjustment F, or $1,439,263 in the aggregate is credited to
additional paid-in capital.
F-47
<PAGE>
CIGARETTE RACING TEAM, INC. and ALCHEMY HOLDINGS, INC.
NOTES TO PRO-FORMA FINANCIAL STATEMENTS
NOTES TO PRO-FORMA BALANCE SHEET (Continued)
(H) This adjustment balances additional paid-in capital for all entries
applicable to the capital accounts. It is comprised of the following:
Alchemy common stock eliminated $ 2,702
Alchemy additional paid-in capital eliminated 2,534,443
Fair value of new Cigarette stock issued to Seller (2,000,000)
------------
Net balancing adjustment to additional paid-in capital $ (537,145)
============
(I) For financial reporting purposes, Alchemy is the acquired company.
Accordingly this adjustment eliminates Alchemy's accumulated deficit.
(J) This entry records the gain on extinguishment of troubled debt. Such gain
is measured by the excess of the debt extinguished, $5,711,040, over the
fair value of the equity exchanged therefore, $2,000,000 in new Cigarette
common stock. (See Note H). The issuance of the new Cigarette shares is not
separately reflected since the legal structure of Alchemy's capital
survives the merger, even though Cigarette is the accounting acquiror.
NOTES TO PRO-FORMA STATEMENT OF OPERATIONS
(1) This adjustment eliminates from sales and cost of sales the inter-company
sales from Alchemy to Cigarette.
(2) This adjustment reflects amortization of the goodwill resulting from the
acquisition amortized over nine months and one year, respectively, for the
pro-forma periods.
(3) This adjustment reflects the recurring savings of rent expense directly
related to the lease renegotiation undertaken as part of the Settlement
Agreement with the Seller.
(4) This adjustment reflects the recurring savings of interest expense on the
indebtedness extinguished as part of the Settlement Agreement with the
Seller.
F-48
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
2.0 Agreement and Plan of Merger
3.1 Articles of Incorporation of Hawk Marine Power, Inc. (a Utah corporation), as Amended(1)
3.2 Articles of Incorporation of Hawk Marine Power, Inc. (a Florida corporation), as Amended(1)
3.3 Certificate of Amendment of the Articles of Incorporation of Hawk Marine Power, Inc.(1)
3.4 By-Laws of Hawk Marine Power, Inc. (a Utah corporation)(1)
3.5 By-Laws of Hawk Marine Power, Inc. (a Florida corporation)(1)
5.0 Form of Opinion and Consent of Beckman, Millman & Sanders, LLP regarding the legality of the
securities being registered(2)
8.0 Opinion re: Tax Matters(2)
10.1 Offshore License Agreement, dated May 1997 (2)
10.2 OTAM License Agreement (2)
10.3 Alchemy Lease for Aventura property (2)
13.1 Form 10QSB (filed: 05/04/1999)(3)
13.2 Form 10QSB (filed: 05/04/1999)(3)
13.3 Form 10KSB (filed: 04/20/1999)(3)
13.4 Form 10QSB (filed: 08/14/1998)(3)
13.5 Form 10QSB (filed: 05/01/1998)(3)
13.6 Form 10QSB (filed: 03/11/1998)(3)
23.1 Consent of Beckman, Millman & Sanders, LLP (included in Exhibit 5.0) (2)
23.2 Consents of Jere Lane, CPA(2)
23.3 Consent of Callaghan Nawarocki, LLP(2)
24.0 Power of Attorney(2)
99.1 Selected Sections of the Florida Business Corporation Act(2)
</TABLE>
- ------------
(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.
58
<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 6, 1999.
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.
Name Title Date
- ---- ----- ----
Craig N. Barrie* President/Director May 6, 1999
Berton Lorow* Vice President/Director May 6, 1999
Adam C. Schild* Secretary/Director May 6, 1999
Principal Financial Officer May 6, 1999
Principal Accounting Officer May 6, 1999
* 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.
59
<PAGE>
EXHIBIT 2.0
AGREEMENT AND PLAN OF MERGER
DATED AS OF _____________________, 1999
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.............................................. 2
Section 1.2 Closing; Effective Time of the Merger................... 2
Section 1.3 Effects of the Merger................................... 2
Section 1.4 Directors and Officers.................................. 3
ARTICLE II.................................................................... 3
CONVERSION OF SECURITIES................................................... 3
Section 2.1 Conversion of Capital Stock. .......................... 3
Section 2.2 Exchange of Certificates. ............................. 5
Section 2.3 Dissenter's Rights...................................... 5
ARTICLE III................................................................... 7
REPRESENTATIONS AND WARRANTIES OF CIGARETTE................................ 7
Section 3.1 Organization............................................ 8
Section 3.2 Cigarette Subsidiaries and Joint Ventures. ............ 8
Section 3.3 Cigarette Capital Structure. .......................... 8
Section 3.4 Authority; No Conflict; Required Filings and Consents... 9
Section 3.5 SEC Filings; Financial Statements.......................11
Section 3.6 Absence of Undisclosed Liabilities. . ..................11
Section 3.7 Absence of Certain Changes or Events. ..................11
Section 3.8 Taxes...................................................12
Section 3.9 Properties..............................................13
Section 3.10 Intellectual Property...................................13
Section 3.11 Agreements, Contracts and Commitments ..................14
Section 3.12 Litigation. ...........................................15
Section 3.13 Environmental Matters...................................15
Section 3.14 Compliance with Laws. .................................15
Section 3.15 Reverse Acquisition. ..................................16
Section 3.16 Interested Party Transactions...........................16
Section 3.17 Registration Statement; Proxy Statement/Prospectus......16
Section 3.18 Payments Resulting from Mergers.........................17
Section 3.19 Option of Financial Advisor.............................17
Section 3.20 Business Combination....................................17
ARTICLE IV....................................................................18
REPRESENTATIONS AND WARRANTIES OF ALCHEMY AND
MERGER SUB...............................................................18
Section 4.1 Organization............................................19
Section 4.2 Alchemy Subsidiaries and Joint Ventures.................19
Section 4.3 Alchemy Capital Structure...............................19
Section 4.4 Authority; No Conflict; Required Filings and Consents...21
Section 4.5 SEC Filings; Financial Statements.......................22
Section 4.6 Absence of Undisclosed Liabilities......................23
Section 4.7 Absence of Certain Changes or Events....................23
i
<PAGE>
Section 4.8 Taxes...................................................23
Section 4.9 Properties. ............................................24
Section 4.10 Intellectual Property...................................24
Section 4.11 Agreements, Contracts and Commitments...................25
Section 4.12 Litigation..............................................26
Section 4.13 Environmental Matters...................................26
Section 4.14 Compliance with Laws....................................27
Section 4.15 Reverse Acquisition.....................................27
Section 4.16 Interested Party Transactions...........................27
Section 4.17 Registration Statement; Proxy Statement/Prospectus......27
Section 4.18 Interim Operations of Merger Sub........................28
ARTICLE V.....................................................................28
CONDUCT OF BUSINESS........................................................28
Section 5.1 Covenants of Cigarette..................................28
Section 5.2 Covenants of Alchemy....................................30
Section 5.3 Cooperation.............................................32
ARTICLE VI....................................................................32
ADDITIONAL AGREEMENTS......................................................32
Section 6.1 No Solicitation.........................................32
Section 6.2 Proxy Statement/Prospectus; Registration Statement......34
Section 6.3 Consents................................................35
Section 6.4 Current OTC Bulletin Board Listing......................35
Section 6.5 Access to Information...................................35
Section 6.6 Shareholder Meetings....................................37
Section 6.7 Legal Conditions to Merger. ..........................37
Section 6.8 Public Disclosure.......................................38
Section 6.9 Tax-Free Reorganization.................................38
Section 6.10 Reverse Acquisition Accounting..........................38
Section 6.11 Affiliate Agreements....................................39
Section 6.12 OTC Bulletin Board Listing..............................39
Section 6.13 Indemnification.........................................40
Section 6.14 Additional Agreements; Reasonable Efforts...............42
Section 6.15 Notification of Certain Matters.........................42
ARTICLE VII...................................................................42
CONDITIONS TO MERGER.......................................................42
Section 7.1 Conditions to Each Party's Obligation to Effect
The Merger...........................................43
(a) Shareholder Approvals...................................43
(b) Approvals...............................................43
(c) Registration Statement..................................43
(d) No Injunctions or Restraints;Illegality.................43
(e) OTC Bulletin Board Listing. ...........................43
(f) Tax Opinions............................................44
Section 7.2 Additional Conditions to Obligations of Alchemy
and Merger Sub.......................................44
(a) Representations and Warranties..........................44
(b) Performance of Obligations..............................44
ii
<PAGE>
(c) Affiliate and Other Agreements..........................44
(d) Absence of Cigarette Material Adverse Effect............45
Section 7.3 Additional Conditions to obligations of Cigarette.......45
(a) Representations and Warranties..........................45
(b) Performance of Obligations..............................45
(c) Absence of Alchemy Material Adverse Effect..............45
ARTICLE VIII..................................................................45
TERMINATION AND AMENDMENT..................................................45
Section 8.1 Termination.............................................45
Section 8.2 Effect of Termination...................................47
Section 8.3 Fees and Expenses.......................................48
Section 8.4 Amendment...............................................49
Section 8.5 Extension; Waiver.......................................49
ARTICLE IX....................................................................49
MISCELLANEOUS..............................................................49
Section 9.1 Nonsurvival of Representations, Warranties
and Agreements.....................................49
Section 9.2 Notices.................................................50
Section 9.3 Interpretation;
Certain Definitions.............................50
Section 9.4 Counterparts............................................52
Section 9.5 Entire Agreement; No Third-Party Beneficiaries..........52
Section 9.6 Governing Law...........................................52
Section 9.7 Specific Performance....................................52
Section 9.8 Assignment..............................................52
Section 9.9 Severability............................................52
iii
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of
_______________, 1999 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 reverse acquisition;
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 Business Corporation Act (the "FBCA") and the
Delaware General Corporation Law ("DGCL"), 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.
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
1
<PAGE>
of the FBCA and the DGCL (the "certificate of Merger") shall be duly prepared,
executed and acknowledged by Cigarette and Merger Sub and simultaneously with or
as soon as practicable following the Closing delivered to the Secretary of State
of each of the State of Florida and the State of Delaware 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 each of the State of Florida and the
State of Delaware 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 Merger Sub 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 FBCA and the DGCL.
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 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, $0.001 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
<PAGE>
2.1(b)) shall be converted into one (1) share of (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) Restriction On Transfer. All Alchemy shares of Common Stock
received by Cigarette shareholders as a result of the Merger shall be
restricted from transfer for a period of twelve months commencing as of the
Effective Time as defined in Section 1.2 hereof (the "Lockup Period").
During the Lockup Period the Board of Directors of Alchemy shall have the
exclusive right to release any or all of the shareholders of the newly
issued Alchemy Common Stock for any necessary reason.
(e) 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. No adjustment will be made as a result of
the exchange prior to the Effective Time by Cigarette of Cigarette Common
Stock for outstanding indebtedness of Cigarette, including without
limitation, indebtedness owed by Cigarette to Central Manufacturing, Inc.,
an Alabama corporation ("Central").
(f) Exchange Agreement. Pursuant to the terms of the Exchange
Agreement between Central, Cigarette and Alchemy, Central shall receive
1,000,000 shares of Alchemy Common Stock and $1,000,000 of Alchemy
Preferred Stock, Series B pursuant to the Merger.
(g) Exchange Ratio for Preferred Stock. Subject to Section 2.2, each
issued and outstanding share of Cigarette Preferred Stock shall be
converted into one fully paid and nonassessable share of Alchemy Preferred
Stock of the same series with similar terms and conditions. All such shares
of Cigarette Preferred 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 Preferred Stock to be issued in consideration
therefor upon the surrender of such certificate in accordance with Section
2.2, without interest.
SECTION 2.2 Exchange of Certificates. The procedures for exchanging
outstanding shares of Cigarette Common Stock and Preferred Stock for Alchemy
Common Stock and Preferred 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 607.1302(a) of the
Florida Business 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 FBCA Section 607.1301, 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
3
<PAGE>
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 Cigarette for
payment of the fair value of such shareholder's shares.
Within 10 days after the Merger is effected, Cigarette shall give written notice
("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.
Cigarette shall also notify each dissenting shareholder that within 20 days
after Cigarette gives Notice, any dissenting shareholder(s) must file with
Cigarette a notice of such election, stating the name and address, the number,
classes, and series of shares as to which he dissents, and a demand for payment
of the fair value of his shares in order to perfect his rights. Any shareholder
failing to file such election to dissent within the period set forth shall be
bound by the terms of the proposed corporate action. Any shareholder filing an
election to dissent shall deposit his certificates for certified shares with
Cigarette simultaneously with the filing of the election to dissent. Cigarette
may restrict the transfer of uncertified shares from the date of the
shareholder's election to dissent is filed with the corporation.
In the event that Cigarette and the dissenting shareholder(s) do 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.
The Florida Business Corporation Act does not distinguish between publicly held
and closely held corporations. Additionally, neither Cigarette's nor Alchemy's
articles of incorporation provide otherwise. Thus, the rights of holders of
Alchemy and Cigarette securities do not materially differ.
Notwithstanding the foregoing, a dissenting shareholder may withdraw his
appraisal demand so long as Cigarette consents thereto.
THE ABOVE SECTION IS A ONLY A SUMMARY OF FLORIDA LAW REGARDING DISSENTER'S
RIGHTS. FAILURE BY A SHAREHOLDER TO FOLLOW THE REQUIRED PROCEDURE AS DETERMINED
BY SECTIONS 607.1301-1320 OF THE FLORIDA BUSINESS CORPORATION ACT FOR PERFECTING
HIS DISSENTER'S RIGHTS WILL RESULT IN THE LOSS OF SUCH RIGHTS.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF CIGARETTE
4
<PAGE>
Cigarette represents and warrants to Alchemy and Merger Sub that the
statements contained in this Article III are true and correct, except (i) 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 (ii) as set forth on the disclosure schedule
attached hereto(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 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
equity 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.
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 October 31,1998, (i) 3,641,000 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) no shares of Cigarette Common Stock were held in the treasury of
Cigarette or by Subsidiaries, if any, of Cigarette. As of October 31, 1998
(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) no shares of Cigarette Preferred
Stock, were held in the treasury of Cigarette or by subsidiaries, if any,
of Cigarette. There are
5
<PAGE>
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 as set forth in section 3.3(a) there are no equity
securities of any class of Cigarette or any security exchangeable into or
exercisable for such equity securities, issued, reserved for issuance or
outstanding. Except for the Exchange Agreement among Alchemy, Cigarette and
Central, there are no options, warrants, equity securities, calls, rights,
commitments or agreements of any character to which Cigarette is a party or
by which it is bound obligating Cigarette 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 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 FBCA. 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) 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
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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 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"), (ii) the filing of the
Certificate of Merger with the Secretary of State of each of the State of
Florida and State of Delaware in accordance with the FBCA and the DGCL, and
(iii) 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(the "Exchange Act").
SECTION 3.5 SEC Filings; Financial Statements.
(a) Each of the consolidated financial statements (including, in each
case, any related notes thereto) contained in the Cigarette financial
statements(the "Cigarette Financial Statements"), complies as to form in
all material respects with the applicable published rules and regulations
of the SEC with respect thereto and was prepared in accordance with U.S.
generally accepted accounting principles ("GAAP") 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 the SEC), and fairly presents 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 are subject to normal and recurring year-end
adjustments which are 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 September 30, 1998 (the
"Cigarette Balance Sheet"), and (ii) normal or recurring liabilities incurred
since September 30, 1998, 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.
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(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.
(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. Except as set forth in the Disclosure Schedule, 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").
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(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 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 material
agreement, contract or commitment("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. Except as set forth in the Disclosure Schedule,
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.
SECTION 3.13 Environmental Matters. Due to the manufacturing process
employed by it, Cigarette 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 its 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). 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
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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 Reverse Acquisition. 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 reverse acquisition.
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 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 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 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
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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 FBCA 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
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,
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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.
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 and $10,000.00 par value, respectively ("Alchemy Preferred Stock").
As of October 31, 1998: (i)2,702,394 shares of Alchemy Common Stock and no
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
October 31, 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,
except for those found on Exhibit _____, attached hereto.
SECTION 4.4 Authority; No Conflict; Required Filings and Consents.
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(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 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, contract or 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 of the
registration statement with the SEC in accordance with the Securities Act,
(ii) the filing of the Certificate of Merger with the Secretary of State of
each of the States of Florida and Delaware, (iii) 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, (iv) the filing of the Registration
Statement and the Proxy Statement with the SEC in accordance with the
Securities Act and the Exchange Act and (v) 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 4.5 SEC Filings; Financial Statements.
(a) Alchemy has filed all forms, reports and documents required to be
filed by Alchemy with the SEC since 1989 (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 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
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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 audited
consolidated balance sheet of Alchemy as of September 30, 1998 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.
(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).
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(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 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 an Alchemy SEC Report or (ii)
with respect to agreements, contracts or commitments entered into by Alchemy
since ________________, 1989 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
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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 Alchemy, Alchemy 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, Alchemy 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 Alchemy 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 Alchemy, threatened concerning any Environmental Permit
or any Hazardous Materials Activity of Alchemy or any of its Subsidiaries, if
any. Alchemy is not aware of any fact or circumstance which could involve
Alchemy or any of its Subsidiaries, if any, in any environmental litigation or
impose upon Alchemy or any of its Subsidiaries, if any, any environmental
liability which would be reasonably likely to have an Alchemy 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 Reverse Acquisition. 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 reverse acquisition.
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,
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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 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) except pursuant to the Exchange Agreement by and among Alchemy,
Cigarette and Central (the "Central Exchange"), 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 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 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;
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(b) 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 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 $10
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 dollars;
(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
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
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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 substantially all 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 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
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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 Alchemy and Cigarette'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 state
takeover laws (the "Other Filings"). 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. 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 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
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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 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 regarding each entity with respect to the Merger (which actions
shall include furnishing all information required 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
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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 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 Reverse Acquisition 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 as a reverse acquisition, 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 reverse
acquisition. 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 30 days from the date hereof from each of the Affiliates of Cigarette, an
executed Affiliate Agreement, substantially in the form attached hereto as
Exhibit _______, 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.
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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, 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 of, or pertaining to this
Agreement or the transactions contemplated hereby, in each case to the full
extent a corporation is permitted under the FBCA 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 FBCA). 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 6.13, 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 6.13 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
FBCA. 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 positions of any two or more Indemnified Parties. The
obligations of the parties set forth in this Section 6.13(a) shall be in
the furtherance of and not in limitation of the succeeding paragraphs of
this Section 6.13.
(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,
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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 6.13(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 6.14 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.
SECTION 6.15 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 6.16 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 FBCA 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 FBCA, the Certificate of Incorporation
of Alchemy and the regulations of the OTC
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Bulletin Board.
(b) 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.
(c) 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.
(d) 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.
(e) 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.
(f) 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 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.
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(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.
(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 March 31, 1999; provided, 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
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party relying on such order, decree or ruling or other action has not
complied with its obligations under Article VI 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 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
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or obligation 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. Notwithstanding the foregoing, the Central Exchange shall
not be an Alternative Transaction.
(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 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
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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 and 8.3, 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.
3025 N.E. 188th Street
Aventura, FL 33180
(b) if to Cigarette, to: Cigarette Racing Team, Inc.
3025 N.E. 188th Street
Aventura, FL 33180
(c) 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
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 ___________, 1999.
(b) "Environmental Permits" means environmental approvals, permits,
licenses, clearances and consents.
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(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).
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 may be 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.
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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 is 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.
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:_____________________________
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