U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
Annual Report under Section 13 or 15(d)
of the securities Exchange Act of 1934
For the fiscal year ended September 30, 1997
ALCHEMY HOLDINGS INC. F/K/A HAWK MARINE POWER, INC.
(Name of Small Business Issuer in its charter)
FLORIDA 59-1886450
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3025 N.E. 188TH STREET, AVENTURA, FLORIDA 33180
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(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number: (305) 932-9230
Securities registered under Section 12(b) of the Act: NONE
Securities registered under Section 12(g) of the Act: NONE
Check whether the issuer (1) filed all reports required to be filed by section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes: [X] No: [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of the Form 10-KSB
or any amendment to this Form 10-KSB (X).
State issuer's revenues for its most recent fiscal year: $1,059,498
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked process of such stock, as of a specified date within the past 60
days. The aggregate market value of the voting stock held by non-affiliates of
the registrant is approximately $1,780,277 as of January 15, 1998.
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State the number of shares outstanding of each of the registrant's classes of
common equity as of the latest practicable date 2,237,394 shares of the
registrant's common stock are issued and outstanding as of January 15, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference, briefly describe them
and identify the part of the form 10-KSB into which the document is
incorporated: (1) any annual report to security holders; (2) any proxy or
information statement; and (3) any prospectus filed pursuant to Rule 424 (b) or
(c ) of the Securities Act of 1993 (the "Act"). None.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTION AND GENERAL DEVELOPMENT OF BUSINESS
Alchemy Holdings, Inc. f/k/a Hawk Marine Power, Inc. (the "Company") is engaged
in managing the business affairs of its subsidiaries. Hawk Marine Power, Inc.
(HMP) a subsidiary of the Company is engaged in the design, production and sale
of high performance marine engines for installation in high speed recreational
powerboats and offshore racing boats. HMP manufactures its own line of five high
output, all gasoline V-8 engines for high speed recreational powerboats and
racing, as well as customized engines which are produced solely for racing
boats. HMP engines are hand built from component parts and are sold primarily to
premium boat manufacturers. HMP high performance engines have established a
distinctive reputation among powerboat enthusiasts for performance, speed and
endurance. The engine has received critical acclaim in boating and other
publications. HMP regularly exhibits its engines at various international boat
shows held annually in Miami and Fort Lauderdale.
The Company was incorporated as Swift Development, Inc. under the laws of the
State of Utah on October 25, 1983, at which time it sold an aggregate of 750,000
shares of common stock to three individuals for total consideration of $15,000.
In March 1984, the Company consummated an initial offering of shares of common
stock which resulted in the sale of 752,850 shares of common stock from which
the Company received net proceeds of approximately $65,000. In August 1984, the
Company's original shareholders contributed an aggregate of 280,112 shares of
common stock of the Company.
On August 6, 1987, the Company acquired all of the outstanding common stock of
Hawk Marine Power, Inc. (a Florida corporation). In connection with the
acquisition, the Company changed its name from Swift Development, Inc. to Hawk
Marine Power, Inc. The Company was merged into its wholly owned subsidiary, Hawk
Marine Power, Inc. effective September 30, 1990. The effect of the transaction
was to reincorporate the Company in the state of Florida.
On December 11, 1989 and January 17, 1990, the Company completed the public
offering of an aggregate of 197,940 Units of its securities consisting of
593,820 shares of common stock and 197,940 warrants. The Company received net
proceeds of approximately $969,500 from the public offering.
On May 12, 1997, the Company held a special meeting of the Board of Directors
and decided that in the best interests of the Company's shareholders that they
would attempt to engage in the business of licensing, designing and marketing of
merchandise and apparel as opposed to its current activities of high performance
engine manufacturing, in order to provide the Company's current shareholders
with the potential of future liquidity in their stock ownership and the
possibility of future gain. As such, the Company has sought and located
management to assist in such project, and said management will undertake to
raise capital through debt or equity instruments to fund its future operations.
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The Board of Directors acknowledge that such a transaction will be a high risk
venture and the opportunity for success may be remote. However, inasmuch as the
Company is not currently operating profitably and has no other prospects of
generating operating income or shareholder value, the Directors believe it is in
the best interests of the Company and its shareholders to proceed with such an
undertaking.
In connection therewith, at the Directors meeting, a unanimous consent of the
Board of Directors and a majority of the outstanding stockholders represented at
the meeting approved that the Company adopt a recapitalization pursuant to which
the issued and outstanding shares of the Company's common stock are reverse
split, or consolidated, on a 1-for-80 basis so that the shareholders receive one
share of the Company's common stock for every 80 shares held; no fractional
shares were issued and any fractional interests were rounded to the nearest
whole number.
Furthermore, the following individuals were elected as officers and directors of
the Company to serve until their successors are elected or appointed: Craig N.
Barrie, President / Director; Berton J. Lorow, Vice-President / Director; Adam
C. Schild, Secretary / Director; John H. Burmeister, Director; and Kevin A.
Lichtman, Director.
Additionally, the Company adopted a proposal to amend the Articles of
Incorporation of the Company and change the name of the Company from Hawk Marine
Power, Inc. to Alchemy Holdings, Inc. Subsequent to the change of the Company's
name from Hawk Marine Power, Inc. to Alchemy Holdings, Inc., the Company 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.
Subsequent to the change of the Company's name from Hawk Marine Power, Inc. to
Alchemy Holdings, Inc., and subsequent to the formation of the wholly owned
subsidiary known as "Hawk Marine Power, Inc.", the Company sold all of its
assets and liabilities of its high performance engine building operation to the
Company's wholly owned subsidiary Hawk Marine Power, Inc. in exchange for 100
shares of Hawk Marine Power, Inc., the new wholly owned subsidiary. The 100
shares exchanged represents 100% of the issued and outstanding shares of Hawk
Marine Power, Inc.
The Company issued 2,000,000 post-split restricted shares of the Company's
common stock to Offshore Racing, Inc., in exchange for the Company's exclusive
world-wide right and license to use the trademarks, and service marks of
"Cigarette Racing Team, Inc.", for all goods and services other than the use of
the trademarks and service marks on any form of watercraft. In conjunction with
the purchasing of the licensing agreement, the Company formed a corporation
under the laws of the State of Delaware, organized as a wholly owned subsidiary
of the Company known as "Cigarette Licensing, Inc." to operate the Company's
licensing business.
Lastly, the Company issued 200,000 post-split shares of the Company's common
stock to the professionals responsible for the professional services related to
and for negotiating, arranging and brokering the licensing and other related
transactions described herein on behalf of the Company.
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As a result, on May 20, 1997, the split became effective and the Company began
trading under its new symbol "ALCH" on the NASD Electronic Bulletin Board.
PRODUCTS
HMP designs, manufactures and sells high output gasoline V-8 engines and also
performs custom work on engines produced by other manufacturers. The Hawk engine
was initially produced in 1979 for use in the offshore speedboat racing circuit
which was attaining initial popularity. It was produced to accommodate
participants in the offshore racing circuit who required a high performance
engine. In 1981, Hawk powered speedboats attained international prominence by
winning the U.S. Championship and the World Championship of speed boat racing in
conjunction with Cigarette Racing Team.
The success of the Hawk engine in international competition generated more
widespread interest among speedboat as well as other racing enthusiasts. Despite
its reputation, HMP has never been able to attain consistent profitable
operations or capitalize on a commercial basis from critical recognition
received by Hawk engines. HMP intends to continue to focus its operations to
serve the upper segment of the powerboat market.
Following is a more detailed description of the Hawk engines offered by HMP
directly and through its authorized dealer network:
HAWK 525: An 8-cylinder, four-stroke, 496 cubic inch engine which produces
approximately 525 horsepower and is liquid-cooled.
HAWK 750: A 9-cylinder, four-stroke, 588 cubic inch engine which produces
approximately 750 horsepower and is liquid-cooled.
HAWK 800: An 8-cylinder, four-stroke, 589 cubic inch engine which produces
approximately 800 horsepower and is liquid-cooled.
HAWK 900: An 8-cylinder, supercharged four-stroke, 572 cubic inch engine which
produces approximately 900 horsepower and is liquid-cooled.
HAWK 1000: An 8-cylinder, four-stroke, 698 cubic inch engine which produces
approximately 1000 horsepower and is liquid-cooled.
The Hawk engines described above may be used for recreational or offshore racing
boats, although HMP manufactures custom engines utilized solely for racing. Hawk
engines, which usually sell in sets of two or three, range in price from $23,000
to $69,000 per engine.
The Hawk engine to management's best knowledge, has been produced for the
longest continuous period of any high performance marine engine. Apart from
success in various offshore racing events, Hawk engines have received critical
recognition in various boating publications including BOATING MAGAZINE, MOTOR
BOATING AND
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SAILING and POWERBOAT MAGAZINE, as well as in various consumer publications not
specifically published for the benefit of speedboat enthusiasts.
MANUFACTURING OPERATIONS
Hawk engines are manufactured at the HMP production facility in Aventura,
Florida. The engines are hand built from component parts and in certain
instances, are custom designed for individual customers. HMP believes the
recognition for its high performance engines is attributable to the accumulated
experience, knowledge and know-how related to the innovation, design, balancing,
assembly and testing of the engine.
The manufacture of the Hawk engine consists of three stages: (i.) hand tooling
and modification of component parts; (ii.) assembly of the engine; and (iii.)
testing of the engine. HMP orders most of the components used in the Hawk engine
directly from manufacturers, distributors and specialty automobile parts
suppliers. With the exception of General Motors, which manufactures the engine
blocks used in most Hawk engines, HMP does not regard any single supplier as
essential to its operations. Most of the components HMP utilizes are available
from multiple sources at competitive prices.
Following assembly of the Hawk engine, a rigorous tuning and testing program is
utilized. The testing is performed both manually and through use of advanced
computer technology. At the present time, the normal production period and the
manufacture of the Hawk engine is from five to ten working days. HMP has present
production capacity of approximately sixteen (16) engines per month. HMP
believes its extensive know-how and experience at all stages of production has
enabled it to establish a position of leadership.
HMP warrants its engines for up to one year against defects in materials and
workmanship, and to date has not experienced more than a limited number of
warranty claims.
At September 30, 1997, the consolidated financial statements of the Company
included an accrual of approximately $10,000 for anticipated future warranty
cost. See "Item 3, Legal Proceedings".
MARKETING AND SALES
HMP concentrates its sales of Hawk 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, of
which HMP is one of the largest and best know manufacturers. HMP sells Hawk
engines directly to premium boat manufacturers including Cigarette Racing Team,
Apache Performance Boats, Pantera U.S.A., and Jaguar Marine.
For the years ended September 30, 1997 and 1996, sales of Hawk engines to
Cigarette amounted to approximately 17% and 24% of total sales. Craig Barrie,
the Company's President, and a principal shareholder, is the President of
Cigarette.
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HMP regularly exhibits Hawk engines at various international boat shows held
annually in Miami and Fort Lauderdale. HMP receives extensive publicity in
editorial articles appearing in various boating publications as well as consumer
and upscale lifestyle magazines.
PATENTS AND TRADEMARKS
Patents are generally not significant to the powerboat industry, and it is
unlikely HMP would be able to obtain any patents with respect to the Hawk engine
or elements of its assembly. While HMP believes that the sense of know-how and
knowledge regarding the assembly of the Hawk engines represents a trade secret,
it is not placing primary reliance on any particular proprietary protection as a
means of preserving its competitive position. Trademarks carry greater
importance because there is a relatively high brand recognition for high quality
products.
GOVERNMENT REGULATION AND PRODUCTION LIABILITY
Certain materials used in engine manufacturing that are toxic, flammable,
corrosive or reactive are classified by both federal and state governments as
"hazardous materials". Control of these substances is regulated by the
Environmental Protection Agency, and state and local pollution control agencies,
which may require reports and undertake inspections of facilities to monitor
compliance. In addition, under the Comprehensive Environmental Response,
Compensation and Liability Act, as amended, any generator of hazardous waste
sent to a hazardous waste disposal site is potentially responsible for the
clean-up, remediation and response costs required for such site in the event the
site is not properly closed by the owner or operator, irrespective of the amount
of hazardous waste which the generator sent to the site. HMP has sent hazardous
waste including cleaning solvents and waste oil to sites through specialized
environmental concerns which are responsible for removal and selection of sites
for hazardous wastes. HMP's cost of compliance with environmental regulations,
including, but not limited to costs associated with hazardous waste disposal
sites, has not been and is not expected to be material in relation to its
overall operations.
While management of HMP believes that the Hawk engine is safe in normal
operation, any motorized product can give rise to product liability claims. HMP
maintains product liability insurance in the amount of $500,000. HMP has never
been the subject of any claim or lawsuit regarding product liability of
associated with the Hawk engines, although there can be no assurance that
product liability claims associated with injury to property or persons directly
or indirectly attributable to the Hawk engine may not be asserted at a future
date.
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EMPLOYEES
In addition to its three executive officers, the Company employs approximately
ten people. All of the Company's employees are non-union, and the Company
believes its relationship with employees is excellent.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's facilities in Aventura, Florida, aggregate approximately 8,000
square feet, all of which are leased by the Company. The Company has been
leasing its facilities on a month to month basis since May 1, 1992 when the
previous lease expired. The Company decided not to execute a long-term
commitment at its current location while searching for alternative locations.
The monthly payment is $11,000 which includes rent, utilities and maintenance.
ITEM 3. LEGAL PROCEEDINGS
In January 1992, the Company was named as a defendant in a lawsuit by certain
note holders of the company who had participated in the Company's private
financing undertaken in September 1988. In Petrocelli Electric Company, Inc., et
al v. Hawk Marine Power, Inc. (Case No. 92-00240), a suit filed in the 11th
Judicial Circuit for Dade County, Florida, the plaintiff's requested repayment
of such promissory notes together with interest and attorneys' fees.
On April 16, 1992, the Company entered into settlement agreements with the
plaintiff's along with substantially all of the other note holders pursuant to
which each of the participants who accepted the terms of the settlement
agreement would receive a cash payment equal to 86% of their entire investment.
Pending consummation of such settlement, further pleadings in such lawsuit have
been held in abeyance.
The payment would represent full satisfaction of amounts payable under their
notes. In consideration for repayment of the notes, those participants accepting
the terms of the settlement agreement agreed to assign their shares of common
stock received pursuant to the private placement to Mr. Craig Barrie. An amount
equal to 68% of the original investment was paid at the time each settlement
agreement was executed. The remaining 18% was due August 15, 1992.
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Due to insufficient cash flow, the Company was unable to make the August 15
installment pursuant to the settlement dated April 16, 1992. On October 8, 1992,
the Company made a partial payment of $9,026 to the plaintiff's leaving a
balance of $58,673 pursuant to the settlement, which is technically in default.
The note holders retain a security interest in various collateral of the Company
until the amounts due under the promissory notes and settlement agreements are
paid. The Company made a payment of $5,000 toward the settlement in September,
1994 and is continuing negotiations with the note holders. See Item 6,
Management's discussion and Analysis of Financial condition or Plan of operation
and Item 12, Certain Relationships and Related Transactions.
The Company, subsequent to year end, has reached an agreement with said note
holders for retirement of such promissory notes for the sum of $50,000.
Consummation of the debt retirement is expected to take place in the Company's
second fiscal quarter of 1998 through the arrangement of interim financing.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None during the fourth quarter of 1997.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
The Company's Common Stock, $.001 par value, was traded on a limited basis in
the over-the-counter market, "pink sheets". Following the Board of Directors
meeting of May 12, 1997, previously summarized above, wherein among other
developments the Company changed its name and reverse split its common stock,
the Company's stock began trading on the NASD Electronic Bulletin Board under
the symbol "ALCH". The following table sets forth the high and low bid
quotations for the Common Stock during the periods indicated. These quotations
reflect market prices between dealers, do not include retail mark-ups,
mark-downs or commissions, and may not necessarily represent actual
transactions. There can be no assurances that any future sales of Common Stock
of the Company can be made at or near the quotations reported.
HIGH BID LOW BID
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December 1995 $ .0312 .0312
March 1996 .0312 .0312
June 1996 .0312 .0312
September 1996 .0312 .0312
December 1996 1.6000 .8000
March 1997 .8000 .8000
June 1997 .8000 .8000
September 1997 5.0000 .7500
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On January 15, 1998, the high bid price for the Common Stock was $8.125.
As of January 15, 1998, the approximate number of record holders of the
Company's Common Stock was 208. However, by virtue of the number of shares held
in street name, there may be more beneficial owners of the Company's stock.
The Company has never paid cash dividends on its Common Stock. The Company
presently intends to retain future earnings, if any, to finance the expansion of
its business and does not anticipate that any cash dividends will be paid in the
foreseeable future. Future dividend policy will depend on the Company's
earnings, capital requirements, expansion plans, financial condition and other
relevant factors.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULT OF OPERATIONS
For the year ended September 30, 1997, the Company reported a net loss of
$65,249. This compared to a net loss of $252,041 for the 1996 fiscal year.
The decrease in loss from operations resulted primarily from decreased
administrative costs. Sales of $1,059,498 during the current fiscal year
increased by $56,052 or 5.6% over $1,003,446 for the prior year.
Gross profit for 1997 was $157,773 or 15% compared to $157,488 or 16% in 1996.
Selling, general and administrative expenses for 1997 were $223,022, a decrease
of $186,685 or 46% from $409,707 in 1996. Selling, general and administrative
expenses represented 21% of sales in 1997 and 41% in 1996. The decrease in
expenses from the prior year was primarily due to new management.
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LIQUIDITY AND CAPITAL RESOURCES
The Company had cash on hand in the amount of $44,753 at September 30, 1997
compared to $85,737 at September 30, 1996. At September 30, 1997 there was a
working capital deficit of $51,588 compared to working capital of $11,605 at
September 30, 1996. The working capital decrease was related principally to the
decrease in inventory.
The Company does not anticipate any significant capital expenditures during the
1998 fiscal year. However, the Company was obligated to retire at November 1,
1991, $405,000 principal amount of its 11% secured promissory notes issued to a
group of private investors in October 1988. On April 16, 1992, the Company
agreed to enter into settlement agreements with the note holders pursuant to
which the participants who accepted the terms of the settlement agreement would
receive a cash payment equal to 86% of their entire investment. To date, the
holders of 10 units in the private placement (representing $337,500 of notes)
have accepted the Company's settlement offer. In order to finance the settlement
agreement, the Company borrowed $200,000 from three private investors. See Item
12. Certain Relationships and Related Transactions.
The Company made the first payment to the note holders in April 1992. However,
due to insufficient cash flow, the Company was unable to make the August 15
installment pursuant to the settlement agreements. On October 8, 1992, the
Company made a partial payment of $9,026 to certain note holders who had
initiated litigation. In September, 1994, the Company made another partial
payment of $5,000 to the note holders, leaving a balance of $53,673 pursuant to
the settlement. The Company, subsequent to year end, has reached an agreement
with said note holders for retirement of such promissory notes for the sum of
$50,000. Consummation of the debt retirement is expected to take place in the
Company's second fiscal quarter of 1998 through the arrangement of interim
financing.
ITEM 7. FINANCIAL STATEMENTS
Please see the attached consolidated financial statements.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following table sets forth certain information concerning directors and
executive officers of the Company as of the date hereof. Officers and Directors
are elected on an annual basis.
The present term for each Director will expire at the next annual meeting of
shareholders or at such time as his successors is duly elected. Executive
officers are elected annually and except to the extent governed by employment
contracts, serve at the discretion of the Board of Directors.
NAME POSITIONS(S) AGE
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Craig Barrie President/Director 48
Berton Lorow Vice President/Director 42
Adam Schild Secretary/Director 28
CRAIG BARRIE - PRESIDENT/DIRECTOR
Mr. Barrie has been a Director since August 1987 and President since November
1990. Mr. Barrie founded Alchemy Holdings, Inc. (a Florida corporation) F/K/A
Hawk Marine Power, Inc. in February 1986 and has served as its Chairman of the
Board. Mr. Barrie was elected to the position of President of Cigarette Racing
Team, Inc., Miami, Florida during 1992. From 1985 to 1992, Mr. Barrie was the
Director of Sales of Cigarette. Between 1968 and 1985, Mr. Barrie was employed
by Faberge, Inc., a manufacturer and distributor of cosmetics and other beauty
products. He served in various executive capacities, including executive vice
president - advertising, and was a member of the Board of Directors of that
company. Mr. Barrie currently races powerboats for Cigarette which are powered
by Hawk engines.
BERTON LOROW - VICE PRESIDENT/DIRECTOR
Mr. Lorow has been employed by the Company or its predecessors since January
1984 in various technical capacities. He has been employed in the marine
industry since 1982, acquiring experience in boat building, rigging and engine
assembly. In may 1989, Mr. Lorow was elected Vice President of the Company, and
in November 1990 was elected a Director of the Company.
ADAM SCHILD - SECRETARY/DIRECTOR
Mr. Barrie is Secretary and a Director of the Company and has held said
positions since 1997. From 1994 to 1997 Mr. Schild was a senior partner of a
management consulting
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firm specializing in crisis management and mergers and acquisitions. From 1987
to 1994 Mr. Schild was employed by a corporate communications company
specializing in Fortune 500 companies. Mr. Schild began his tenure in the
finance department and was promoted to Director of Finance.
Mr. Lorow is a full time employee of the Company. Mr. Barrie devotes
approximately 20 hours a week to the Company's operations. Mr. Schild devotes
approximately 10 hours a week to the Company's operations. It is not anticipated
any Directors will receive an annual fee or other compensation for their duties.
Directors will be reimbursed for reasonable expenses incurred in connection with
their attendance at meetings.
ITEM 10. EXECUTIVE COMPENSATION
Total cash compensation paid to all executive officers as a group for services
provided to the Company and its subsidiaries in all capacities during the fiscal
year ended September 30, 1997 aggregated $81,385. Set forth below is a summary
compensation table prepared in accordance with the applicable rules of the
Securities and Exchange Commission.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
AWARDS PAYOUTS
NAME AND OTHER RESID. ALL
PRINCIPAL ANNUAL STOCK LTIP OTHER
POSITION YEAR SALARY BONUS COMPENSATION AWARDS OPTIONS PAYOUTS COMPENSATION
- -------- ---- -------- ------ ------------ ------ ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Craig Barrie 1997 $26,000 None None None None None None
1996 26,000 None None None None None None
1995 26,200 None None None None None None
Berton Lorow 1997 $ 55,385 None None None None None None
1996 55,385 None None None None None None
1995 58,520 None None None None None None
</TABLE>
COMPENSATION PURSUANT TO PLANS
In addition to the compensation previously described, the Company will create a
bonus pool equal to 15% of the Company's net income before taxes in excess of
$250,000 up to a maximum yearly bonus pool of $300,000. Each of the Company's
executive officers and other key management personnel will be entitled to
participate in the bonus pool. Participating in the bonus pool and the
allocation of amounts thereunder will be determined at the sole discretion of
the Company's Board of Directors. No bonus has been paid or accrued under this
plan to date.
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EMPLOYMENT AGREEMENT
The Company entered into an Employment Agreement dated October 1, 1988 with
Craig Barrie. The agreement expired on September 30, 1991, and is automatically
renewable on a year-to-year basis unless written notice of termination is
provided by either party and provides for a minimum annual compensation of
$25,000. Under the terms of the Agreement, Mr. Barrie is obligated to devote at
least 10% of his working time to the affairs of the Company. In addition, the
Agreement provides for Mr. Barrie to receive on a quarterly basis during the
term of his employment incentive compensation equal to 1.5% of the sales price
of each engine sold by the Company as a result of Mr. Barrie's efforts. Mr.
Barrie's employment agreement also presently requires him to reimburse the
Company for all expenses directly incurred by the Company for parts provided to
him in support of his racing activities. However, as provided in such agreement,
in the event the Company decides to sponsor offshore powerboat racing, the
Company will provide parts and related expenses to Mr. Barrie in connection with
such sponsorship.
The employment agreement precludes Mr. Barrie from competing with the Company
for a period of twenty-four (24) months following the termination of his
employment for cause or by reason of his voluntarily leaving the employ of the
Company. Such agreement also requires Mr. Barrie to maintain the confidentiality
of information and proprietary data relating to the Company and its products.
The agreement also provides for certain executive perquisites such as
reimbursement of business expenses, health insurance and related executive
benefits.
INCENTIVE STOCK OPTION PLAN
In August 1988, the Company adopted the 1988 Incentive Stock Option Plan (the
"Plan") under which 100,000 pre-reverse split shares of Common Stock (adjusted
in part for the Company's twelve-for-one reverse stock split effective August
25, 1989) have been reserved for issuance to employees of the Company upon
exercises of options designed as "Incentive Stock Options" within the meaning of
Section 422A of the Internal Revenue Code of 1986. The primary purpose of the
plan is to attract and retain capable executives and employees by offering
certain officers and employees a greater personal interest in the Company's
business by encouraging stock ownership. Unless and until an executive committee
of the Company's Board of Directors is appointed, the Plan will be administered
by the Company's Board of Directors which will determine, among other things,
the persons to be granted options, the number of shares subject to each option
and option price. The exercise price of any stock option granted under the Plan
to an eligible employee must be equal to the fair market value of the shares on
the date of the grant, and with respect to persons owning more than 10% of the
outstanding Common Stock, the exercise price may not be less that 110% of the
fair market value of the shares underlying such option on the date of grant. The
Board will determine the term of each option and the manner in which it may be
exercised provided that no option may be exercisable more than ten (10) years
after the date of grant except for optionees who own more than 10% of the
Company's Common Stock, in which case the option may not be for more than five
(5) years. Further, a director of the Company will not be eligible to receive
benefits unless such director is an employee of the Company. From the date of
grant until three
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months prior to the exercise, the optionee must be an employee of the Company in
order to exercises any options. Options are not transferable except upon the
death of the option. The Board of Directors has the power to impose additional
limitations, conditions and restrictions in connection with the grant of any
option. The Company has not awarded any options to date under the Plan.
STOCK OPTION PLAN
In May 1991, the Company adopted a Stock Option Plan under which options to
purchase 295,000 pre-reverse split shares of Common Stock were granted to
management and other employees. The options are non-qualifying, exercisable at
$0.20 per pre-reverse split share, and are valid for five years.
- 15 -
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of shares the Company's common stock
beneficially owned by each officer and director of the Company and each
shareholder who holds more than 5% of the outstanding common stock of the
Company. Unless specifically indicated otherwise, all such ownership interest
are direct.
AMOUNT AND
NAME AND ADDRESS NATURE OF
OF BENEFICIAL BENEFICIAL PERCENT OF
TITLE OF CLASS OWNER OWNER CLASS
- -------------- ---------------- ----------- -----------
Common Stock Craig Barrie (1) (2) 15,378 .7%
3025 NE 188th St.
North Miami,
Florida 33180
Berton Lorow (1) (3) 153 -
3025 NE 188th St.
North Miami,
Florida 33180
Offshore Racing, Inc. 2,000,000 89.4
3025 NE 188th St.
North Miami,
Florida 33180
Alcott Simpson & Co. Inc. 200,000 8.9
1 Lady Janes Way
Northport,
N.Y. 11768
Gerald Josephson 2,883 .1
Cloister Drive
Box N732
Paradise Island,
Nassau, Bahamas
(1) Does not include shares of Common Stock issuable pursuant to the Company's
Incentive Stock Option Plan.
(2) Mr. Barrie is President and a Director of the Company. Does not include
options to purchase 938 shares of the Company's Common Stock.
(3) Mr. Lorow is Vice President and a Director of the Company. Does not include
options to purchase 625 shares of the Company's Common Stock.
- 16 -
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company had sales to Cigarette Racing Team, Inc. of $176,197, representing
17% of total sales for the year. Mr. Craig Barrie the Company's President is
also President of Cigarette.
In October 1988, in conjunction with the private placement of units of the
Company's securities, an aggregate of $405,000 principal amount of its 11%
secured promissory notes due November 1, 1991 and 575,000 shares of Common Stock
of the Company were issued to the participants. In January 1992, certain of the
aforementioned noteholders filed a lawsuit against the Company which requested
repayment of such promissory notes together with interest and attorney's fees.
On April 16, 1992, the Company agreed to enter into settlement agreements with
these noteholders pursuant to which the participants who accepted the terms of
settlement agreement would receive a cash payment from the Company and Mr. Craig
Barrie (the Company's, President / Director and a principal shareholder of the
Company) equal to 86% of their entire investment.
Pending consummation of such settlement, further pleadings in such lawsuit have
been held in abeyance. An amount equal to 68% of the original investment was
paid at the item each settlement agreement was executed. The remaining 18% was
due August 15, 1992. Due to insufficient cash flow, the Company was unable to
make the August 15 installment pursuant to the settlement. Partial payments were
made to the plaintiffs in October 1992 and September 1994 for $9,026 and $5,000,
respectively, leaving a balance due of $53,673. The noteholders retain a
security interest in various collateral of the Company until the amounts due
under the promissory notes and settlement agreements are paid. The Company,
subsequent to year end, has reached an agreement with said note holders for
retirement of such promissory notes for the sum of $50,000. Consummation of the
debt retirement is expected to take place in the Company's second fiscal quarter
of 1998.
As part of HMP's product development and testing, and advertising and promotion
programs, the Company has previously paid for certain parts and provided labor
for the Hawk engines in Mr. Barrie's offshore racing boat. Commencing October 1,
1988, Mr. Barrie agreed to reimburse the Company for such expenses, and they
have been repaid in full. Under the terms of Mr. Barrie's Employment Agreement,
at such time as HMP allocates funds to sponsor offshore powerboat racing, HMP
will provide certain parts and labor for Hawk engines for use by Mr. Barrie
without reimbursement. Such expenses are not expected to exceed $50,000 in any
fiscal year.
- 17 -
<PAGE>
ITEM 13. EXHIBIT AND REPORTS ON FORM 8-K
(a) INDEX TO EXHIBITS
2.0 Agreement and Plan of Reorganization (1)
2.1 Agreement of Merger (1)
3.0 Certificate of Incorporation of Hawk Marine Power, Inc. (a Utah
corporation) as Amended (1)
3.1 Certificate of Incorporation of Hawk Marine Power, Inc. (a Florida
corporation) as Amended (1)
3.11 Certificate of Amendment of the Articles of Incorporation of Hawk Marine
Power, Inc.
Please see the attached Certificate of Amendment.
3.2 Bylaws of Hawk Marine Power, Inc. (a Utah corporation) (1)
3.3 Bylaws of Hawk Marine Power, Inc. (a Florida corporation) (1)
3.4 Specimen Certificate of Common Stock (1)
4.0 Form of 11% Secured Promissory Note (1)
10.0 Employment Agreement with Craig Barrie (1)
10.1 Form of Warrant to be sold to Palm Beach Financial, Inc. (1)
10.2 Form of Warrant Agency Agreement (1)
21.0 Subsidiaries of the Registrant
Please see the attached list of subsidiaries.
(1) Filed as the same encumbered exhibit to the Registration's Registration
Statement (File No. 33-30906-A) previously filed.
(b) Reports on Form 8-K
The Company filed a Form 8-K on July 9, 1997 indicating the following:
On May 12, 1997, the Company held a special meeting of the Board of
Directors and decided that in the best interests of the Company's
shareholders that they would attempt
- 18 -
<PAGE>
to engage in the business of licensing, designing and marketing of merchandise
and apparel as opposed to its current activities of high performance engine
manufacturing, in order to provide the Company's current shareholders with the
potential of future liquidity in their stock ownership and the possibility of
future gain. As such, the Company has sought and located management to assist in
such project, and said management will undertake to raise capital through debt
or equity instruments to fund its future operations. The Board of Directors
acknowledge that such a transaction will be a high risk venture and the
opportunity for success may be remote. However, inasmuch as the Company is not
currently operating profitably and has no other prospects of generating
operating income or shareholder value, the Directors believe it is in the best
interests of the Company and its shareholders to proceed with such an
undertaking.
In connection therewith, at the Directors meeting, a unanimous consent of the
Board of Directors and a majority of the outstanding stockholders represented at
the meeting approved that the Company adopt a recapitalization pursuant to which
the issued and outstanding shares of the Company's common stock are reverse
split, or consolidated, on a 1-for-80 basis so that the shareholders receive one
share of the Company's common stock for every 80 shares held; no fractional
shares were issued and any fractional interests were rounded to the nearest
whole number.
Furthermore, the following individuals were elected as officers and directors of
the Company to serve until their successors are elected or appointed: Craig N.
Barrie, President / Director; Berton J. Lorow, Vice-President / Director; Adam
C. Schild, Secretary / Director; John H. Burmeister, Director; and Kevin A.
Lichtman, Director.
Additionally, the Company adopted a proposal to amend the Articles of
Incorporation of the Company and change the name of the Company from Hawk Marine
Power, Inc. to Alchemy Holdings, Inc. Subsequent to the change of the Company's
name from Hawk Marine Power, Inc. to Alchemy Holdings, Inc., the Company 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.
Subsequent to the change of the Company's name from Hawk Marine Power, Inc. to
Alchemy Holdings, Inc., and subsequent to the formation of the wholly owned
subsidiary known as "Hawk Marine Power, Inc.", the Company sold all of its
assets and liabilities of its high performance engine building operation to the
Company's wholly owned subsidiary Hawk Marine Power, Inc. in exchange for 100
shares of Hawk Marine Power, Inc., the new wholly owned subsidiary. The 100
shares exchanged represents 100% of the issued and outstanding shares of Hawk
Marine Power, Inc.
The Company issued 2,000,000 post-split restricted shares of the Company's
common stock to Offshore Racing, Inc., in exchange for the Company's exclusive
world-wide right and license to use the trademarks, and service marks of
"Cigarette Racing Team, Inc.", for all goods and services other than the use of
the trademarks and service marks on any form of watercraft. In conjunction with
the purchasing of the licensing agreement, the Company formed a corporation
under the laws of the State of Delaware, organized as
- 19 -
<PAGE>
a wholly owned subsidiary of the Company known as "Cigarette Licensing, Inc." to
operate the Company's licensing business.
Lastly, the Company issued 200,000 post-split shares of the Company's common
stock to the professionals responsible for the professional services related to
and for negotiating, arranging and brokering the licensing and other related
transactions described herein on behalf of the Company.
- 20 -
<PAGE>
SIGNATURES
In accordance with the Section 13 or 15(d) of the Exchange Act, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date: February 12, 1998 Alchemy Holdings, Inc.
By: /s/ CRAIG BARRIE
-----------------------
Craig Barrie, President
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant, and in the capacities and on the
date indicated.
/s/ CRAIG BARRIE - President/Director February 12, 1998
- ----------------
Craig Barrie
/s/ BERTON LORROW - Vice President/Director February 12, 1998
- -----------------
Berton Lorow
- 21 -
<PAGE>
ALCHEMY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
F - 1
<PAGE>
ALCHEMY HOLDINGS, INC. AND SUBSIDIARIES
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
----
Auditor's Report 3
Consolidated Balance Sheet 4
Consolidated Statement of Operations 5
Consolidated Statement of Cash Flows 6
Consolidated Statement of Changes in Stockholders' Equity 7
Notes to Consolidated Financial Statements 8-14
F - 2
<PAGE>
JERE J. LANE
Certified Public Accountant
2901 N.W. 112 Avenue
Coral Springs, Florida 33065
(954) 340-2848
To the Board of Directors and Stockholder's
Alchemy Holdings, Inc. and Subsidiaries
3025 N.E. 188 Street
Aventura, Florida 33180
I have audited the accompanying consolidated balance sheet of Alchemy Holdings,
Inc. (F/K/A Hawk Marine Power, Inc.) and Subsidiaries (the Company) as of
September 30, 1997 and 1996, and the related consolidated statements of
operations, cash flows and stockholder's equity for the years then ended. These
financial statements are the responsibility of the Company's management. My
responsibility is to express an opinion of these financial statements based on
my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Alchemy Holdings, Inc. (F/K/A Hawk
Marine Power, Inc.) and Subsidiaries as of September 30, 1997 and 1996 and the
results of its operations, changes in cash flows and stockholder's equity for
the year then ended in conformity with generally accepted accounting principals.
As discussed in Note 9 to the consolidated financial statements, a significant
part of the Company's business is dependent upon one customer, and the loss of
that customer could have a materially adverse effect on the Company. There are
no formal contracts to continue business with this customer.
The consolidated financial statements have been prepared assuming the company
will continue as a going concern. As discussed in Note 3 to the consolidated
financial statements, the liquidity of the Company has been adversely affected
by losses from operations and the Company is past due on its obligations to
certain noteholders pursuant to a settlement agreement dated April 16, 1992 (see
Note 6). All of the foregoing raises substantial doubt about the Company's
ability to continue as a going concern. Management's plans concerning these
matters are described in Note 3. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
Jere J. Lane, C.P.A.
January 15, 1998
F - 3
<PAGE>
ALCHEMY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997 AND 1996
1997 1996
-------- --------
ASSETS
CURRENT ASSETS:
Cash $44,753 $85,737
Accounts receivable 53,931 8,321
Inventory 165,994 247,610
Prepaid Expenses 1,810 2,968
-------- --------
Total Current Assets 266,488 344,636
PROPERTY AND EQUIPMENT 20,965 22,874
OTHER ASSETS:
Licenses 2,053 --
-------- --------
TOTAL ASSETS $289,506 $367,510
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable $63,640 $83,169
Accrued Expenses 30,538 26,989
Customer Deposits 51,725 121,700
Notes Payable 172,173 101,173
--------- ---------
Total Current Liabilities 318,076 333,031
--------- ---------
TOTAL LIABILITIES 318,076 333,031
--------- ---------
STOCKHOLDERS' EQUITY:
Common Stock 2,237 2,990
Additional Paid-In Capital 1,606,998 1,604,045
Accumulated Deficit (1,637,805) (1,572,556)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY (28,570) 34,479
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $289,506 $367,510
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THE CONSOLIDATED FINANCIAL STATEMENTS.
F - 4
<PAGE>
ALCHEMY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996
1997 1996
----------- ----------
NET SALES $1,059,498 $1,003,446
Cost of Sales 901,725 845,958
----------- ----------
GROSS MARGIN 157,773 157,488
Selling, General and
Administrative Expenses 223,022 409,707
Interest Income -- 178
----------- ----------
NET (LOSS) $(65,249) $(252,041)
=========== ==========
Net (Loss) Per Share $(0.024) $(6.743)
=========== ==========
Weighted Average Number of Common
Shares Outstanding 2,697,320 37,377
=========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THE CONSOLIDATED FINANCIAL STATEMENTS.
F - 5
<PAGE>
ALCHEMY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996
1997 1996
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss) $(65,249) $(252,041)
Adjustments to Reconcile Net (Loss)
to Net Cash Used by Operating Activities:
Depreciation and Amortization 2,056 7,509
(Decrease) in Provision for Bad Debts (2,046) (1,162)
(Increase) Decrease in Accounts Receivable (43,564) 159,855
Decrease in Inventory 81,616 48,105
Decrease in Prepaid Expenses 1,158 1,172
Decrease in Purchase Deposits 38,525
Decrease in Other Current Assets 3,519
Increase (Decrease) in Accounts Payable (19,529) 14,177
Increase (Decrease) in Accrued Expenses 3,549 (8,297)
(Decrease) in Customer Deposits (69,975) (14,356)
--------- ---------
Net Cash Utilized by Operating
Activities (111,984) (2,994)
CASH UTILIZED FOR INVESTING ACTIVITIES:
Purchase of Equipment (282)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in Notes Payable 71,000
--------- ---------
NET (DECREASE) IN CASH (40,984) (3,276)
CASH AT BEGINNING OF YEAR 85,737 89,013
--------- ---------
CASH AT END OF YEAR $44,753 $85,737
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THE CONSOLIDATED FINANCIAL STATEMENTS.
F - 6
<PAGE>
ALCHEMY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
COMMON STOCK
$.001 PAR VALUE ADDITIONAL TOTAL
-------------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
--------- ------- ------------ ------------- --------------
<S> <C> <C> <C> <C> <C>
BALANCES AT OCTOBER 1, 1995 2,990,198 $2,990 $1,604,045 $(1,320,515) $286,520
Net (Loss) for the Year Ended
September 30, 1996
(252,041) (252,041)
--------- ------- --------- ----------- --------
BALANCES AT SEPTEMBER 30, 1996 2,990,198 2,990 1,604,045 (1,572,556) 34,479
Net (Loss) for the Year Ended
September 30, 1997 (65,249) (65,249)
Effective Change in Common
Stock in Connection with
Stock Split (2,952,821) (2,953) 2,953
Private Placement
of Common Stock 2,200,000 2,200 2,200
---------- ------ --------- ----------- ----------
BALANCES AT SEPTEMBER 30, 1997 2,237,377 $2,237 $1,606,998 $(1,637,805) $(28,570)
========== ====== ========= =========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THE CONSOLIDATED FINANCIAL STATEMENTS.
F - 7
<PAGE>
ALCHEMY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION
Alchemy Holdings, Inc. (the Company) is engaged in managing the business affairs
of its subsidiaries. Hawk Marine Power, Inc. (HMP), a subsidiary of the Company,
is engaged in the design, production and sale of high performance marine engines
for installation in high speed recreational powerboats and offshore racing
boats. HMP engines are custom designed and hand built from component parts and
sold primarily to premium boat manufacturers. Cigarette Licensing, Inc. (CRI),
another subsidiary of the Company is engaged in the world-wide licensing of
trademarks and service marks.
During the fiscal year ended September 30, 1997 the Company adopted a proposal
to amend the Articles of Incorporation of the Company and change the name of the
Company from Hawk Marine Power, Inc. to Alchemy Holdings, Inc. Subsequent to the
change of the Company's name from Hawk Marine Power, Inc. to Alchemy Holdings,
Inc., the Company formed a new corporation under the laws of the State of
Delaware, a wholly owned subsidiary of the Company known as "Hawk Marine Power,
Inc." to operate its high performance engine manufacturing business.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Alchemy Holdings,
Inc. and its subsidiaries. All intercompany accounts and transactions have been
eliminated in consolidation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with a
maturity of ninety days or less to be the equivalent of cash for financial
statement statement purposes.
INVENTORY
Inventory consists of merchandise held for sale and includes finished goods as
well as work-in-process and is valued at lower of cost (first-in, first-out) or
market.
PROPERTY AND EQUIPMENT
Property and Equipment are stated at cost. Depreciation is calculated on the
various asset classes over their estimated useful lives, which range from five
to ten years, except leasehold improvements which are depreciated over their
lease term. Expenditures for maintenance and repairs are charged against
operations as incurred.
WARRANTIES
The Company's products are generally under warranty against defects in material
and workmanship for a period of ninety days to one year from date of sale. The
Company has established an accrual for these anticipated future warranty costs.
F - 8
<PAGE>
ALCHEMY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NET LOSS PER SHARE
Net Loss Per Share is calculated by dividing the net loss by the weighted
average number of common shares outstanding during the period, as well as common
stock equivalents.
INCOME TAXES
The Company accounts for income taxes pursuant to Statement of Financial
Accounting Standards No. 109. Under such standard, deferred taxes are computed
based on the tax liability or benefit in future years of the reversal of
temporary differences in the recognition of income or deduction of expenses
between financial and tax reporting purposes. The principal item resulting in
the difference is depreciation. The net difference, if any, between the
provision for taxes and taxes currently payable is reflected in the balance
sheet as deferred income taxes. Deferred tax assets and/or liabilities are
classified as current or noncurrent based on the classification of the related
asset or liability for financial reporting purposes, or on the expected reversal
date for deferred taxes that are not related to an asset or liability. A
valuation allowance is provided for deferred tax assets that do not meet a "more
likely than not" criterion. The Company accounts for income taxes under the
liability method in accordance with Statement of Financial Accounting Standards
No. 109, ACCOUNTING FOR INCOME TAXES. Deferred income taxes are determined based
upon the difference between the financial statement carrying amount and the tax
basis of assets and liabilities using tax rates expected to be in effect in the
years in which the differences are expected to reverse.
REVENUE AND COST RECOGNITION
Sales and the associated Cost of Sales are recognized upon delivery of finished
goods to the customer. Service revenue is recognized when the service is
performed.
FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk are primarily cash and temporary investments and accounts
receivable. The Company invests its excess cash in both deposits and high
quality short-term liquid money market instruments with major financial
institutions and the carrying value approximates market value. The Company has
not incurred losses related to these investments.
MAJOR CUSTOMER
For the years ended September 30, 1997 and 1996, one customer accounted for 17%
and 24% of total sales. (See Note 9.)
USE OF ESTIMATES
Management of the Company uses estimates and assumptions in preparing financial
statements in accordance with generally accepted accounting principles. Those
estimates and assumptions affect the reported amounts of assets and liabilities
as well as revenues and expenses. Actual results could vary from the estimates
that management has utilized.
F - 9
<PAGE>
ALCHEMY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - BASIS OF PRESENTATION AND CONTINUED EXISTENCE
The Company's consolidated financial statements have been presented on the basis
that it is a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company
reported a net loss of $65,249 for the year ended September 30, 1997, and
cumulative losses since inception of $1,637,805. In addition, the Company's has
a working capital deficit as of September 30, 1997. As a result of the losses
and debt service requirements borrowing requirements have increased, and
financial position has been significantly impaired. The Company is past due on
its obligations to certain noteholders pursuant to a settlement agreement dated
April 16, 1994. The Company's ability to continue operations is dependent upon
its ability to reach a satisfactory level of profitability and to obtain
suitable, sufficient financing or the restructing of existing obligations. The
accompanying financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
The Company's continued existence as a going concern is substantially dependent
on achieving its 1998 operating plans which include the following:
The Company commenced cost-savings measures and is otherwise seeking to improve
its cash flow. In this regard, the Company reduced factory and corporate
overhead by implementing payroll efficiencies and reduced rent costs upon
expiration of the operating lease. The Company has plans to reduce other
operating and overhead costs, including, but not limited to reduction in
production costs (direct labor and raw materials) through increased labor and
purchasing efficiencies.
The Company has obtained deposits from customers in connection with firm
purchase orders which it believes will further help finance operating costs.
NOTE 4 - INVENTORY
Inventory consists of the following:
September 30,
1997 1996
-------- --------
Parts and Accessories $ 94,700 $130,411
Work-In-Process 71,294 117,199
-------- --------
Total Inventory $165,994 $247,610
======== ========
F - 10
<PAGE>
ALCHEMY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
September 30,
1997 1996
------- -------
Office Furniture and Equipment $40,193 $40,193
Shop Equipment 166,026 166,026
Leasehold Improvements 28,521 28,521
------- -------
234,740 234,740
Less: Accumulated Depreciation 213,775 211,866
------- -------
Total Property and Equipment $20,965 $22,874
======= =======
Depreciation expense was $1,909 and $7,509 for the years ended September 30,
1997 and 1996, respectively.
NOTE 6 - NOTES PAYABLE
The Company is delinquent on a Note Payable in the amount of $101,173 originally
due November 1, 1991, collateralized by all of the Company's assets, and
accruing interest at 11%. The note is currently being renegotiated and
management expects a favorable settlement during the second fiscal quarter of
1998. Additionally, the Company has a new demand Note Payable for $65,000 that
accrues interest at two points over the Chase Manhattan Bank prime rate.
Finally, the Company has a Loan Payable with an officer in the amount of $6,000.
NOTE 7 - CONTINGENT LIABILITIES
In April 1991, the Company was named in a lawsuit arising from the sale of two
engines. In Mark Donato, et al v. Highway Service Connecticut, Inc. d/b/a Ocean
Performance, Hawk Marine Power, and Cigarette Racing Team, Inc. (Case No.
91-2528), a suit filed the Superior Court Department of the Trial Court Civil
Action in the Commonwealth of Massachusetts, the plaintiff is seeking damages in
connection with alleged breach of contract, breach of express warranty, breach
of implied warranty, negligence, revocation of acceptance and breach of a
written agreement of compromise and settlement. The lawsuit pertains to the sale
of a Cigarette powerboat equipped with two Hawk engines purchased by the
plaintiffs in 1989. The plaintiffs contend the boat's engines were defective and
did not operate properly. The Company intends to vigorously contest the
complaint. Based upon information presently available to the Company, management
believes the outcome of this litigation will not have a material adverse effect
on the consolidated financial position of the Company.
In January 1992, The Company was named as a defendant in a lawsuit by certain
note holders (which represents $27,080 of the outstanding balance) of the
Company who had participated in the Company's private financing undertaken in
September 1988. In Petrocelli Electric Company, Inc., et al v. Hawk Marine
Power, Inc. (Case No. 92-00240), a suit filed in the 11th Judicial Circuit for
Dade County, Florida,
F - 11
<PAGE>
ALCHEMY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the plaintiffs are requesting repayment of such promissory notes together with
interest and attorneys' fees. Effective April 16, 1992, the Company entered into
settlement agreements and made initial payments to these plaintiffs. In October
1992 a second payment of $9,027 was made towards effecting this settlement. A
third payment of $5,000 was made in September 1995. The noteholders retain a
security interest in various collateral of the Company until the amounts due per
the settlement agreements and notes payable are paid.
NOTE 8 - COMMITMENTS
LEASE COMMITMENTS
The Company leases its facilities in Aventura, Florida pursuant to an operating
lease. As of September 30, 1997 the Company is paying rent on a month-to-month
basis. Rent expense, excluding common overhead, for the years ended September
30, 1997 and 1996 amounted to $94,800 and $94,800 respectively.
COMPENSATION PLANS
a. An agreement with an officer provides for compensation of $25,000 per year
for three years and incentive compensation equal to 1.5% of sales
generated by the officer. The agreement automatically renews on a year to
year basis unless written notice of termination is delivered by either
party to the other no later than thirty days prior to any renewal term.
The agreement was renewed for the year ended September 30, 1997.
b. The Company has created a management bonus pool for key management
personnel equal to 15% of the income in excess of $250,000 up to a maximum
yearly bonus of $300,000.
c. 1988 Incentive Stock Option Plan - In August 1988, the Company adopted the
1988 Incentive Stock Option Plan (the "Plan") under which 100,000
pre-reverse split cshares of common stock have been reserved for issuance
to employees of the Company upon exercise of options designated as
"Incentive Stock Options" within the meaning of Section 422A of the
Internal Revenue Code of 1986. The exercise price of any stock option
granted under the Plan to an eligible employee must be equal to the fair
market value of the shares on the date of grant and, with respect to
persons owning more than 10% of the outstanding common stock, the exercise
price may not be less than 110% of the fair market value of the shares
underlying such option on the date of grant. The Board will determine the
term of each option and the manner in which it may be exercised provided
that no option may be exercisable more that ten (10) years after the date
of grant except for optionees who own more than 10% of the Company's
common stock, in which case the option may not be for more than five (5)
years. Further, a director of the Company will not be eligible to receive
benefits unless such director is also an employee of the Company.
The Company has not awarded any options to date under the Plan.
d. Non-statutory Employee Stock Option Program - On May 1, 1991, the Company
adopted a non-statutory employee stock option program. The plan provides
for the allocation of 295,000 pre-reverse split options, all of which are
issued, each exercisable for a five year period for one share of common
stock. The options are exercisable at $0.20 per share and expired April
30, 1996. As of September 30, 1997, no options were exercised.
F - 12
<PAGE>
ALCHEMY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - MAJOR CUSTOMER AND RELATED PARTY TRANSACTIONS
Of the Company's total sales for the years ended September 30, 1997, and 1996,
$176,197 and $242,332 or 17% and 24%, respectively , were with one customer,
Cigarette Racing Team, Inc. A principal shareholder and President of the Company
is also an officer and employee of this customer.
NOTE 10 - CAPITAL STOCK TRANSACTIONS
STOCK SPLIT
On May 12, 1997 the Board of Directors approved a 1 for 80 reverse stock split
of the Company's common stock. The weighted average number of shares outstanding
for net loss per share calculations for the fiscal year ended September 30, 1996
have been retroactively adjusted for the split.
PRIVATE PLACEMENTS
The Company issued 2,000,000 post-split restricted shares of the Company's
common stock to Offshore Racing, Inc., in exchange for the Company's exclusive
world-wide right and license to use the trademarks, and service marks of
"Cigarette Racing Team, Inc.", for all goods and services other than the use of
the trademarks and service marks on any form of watercraft. In conjunction with
the purchasing of the licensing agreement, the Company formed a corporation
under the laws of the State of Delaware, organized as a wholly owned subsidiary
of the Company known as "Cigarette Licensing, Inc." to operate the Company's
licensing business.
Lastly, the Company issued 200,000 post-split shares of the Company's common
stock to the professionals responsible for the professional services related to
and for negotiating, arranging and brokering the licensing and other related
transactions described herein on behalf of the Company.
NOTE 11 - INCOME TAXES
Income taxes are computed at statutory rates on pretax income. Deferred taxes
would be recorded based on differences in financial statements and taxable
income. To date, the Company has incurred tax operating losses and therefore,
has generated no income tax liabilities. As of September 30, 1997, the Company
has generated net operating loss carry forwards totaling approximately
$1,556,210 which are available to offset future taxable income through 2012. As
utilization of such an operating loss for tax purposes is not assured, the
deferred tax asset has been fully reserved through the recording of a 100%
valuation allowance.
The components of the net deferred tax as of September 30, 1997 are as follows:
Net Operating Loss Carryforward $529,111
Investment Credit 7,712
--------
536,823
Valuation Allowance (536,823)
--------
Net Deferred Tax $ --
========
F - 13
<PAGE>
ALCHEMY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net operating loss carry forwards are scheduled to expire as follows:
EXPIRATION DATE AMOUNT
--------------- ---------
September 30, 2003 $80,900
September 30, 2004 20,300
September 30, 2005 357,400
September 30, 2006 333,000
September 30, 2007 259,500
September 30, 2008 179,000
September 30, 2010 8,820
September 30, 2011 252,041
September 30, 2012 65,249
----------
Total $1,556,210
==========
The Company also has investment credit carry forwards of $7,712 which will
expire on September 30, 2001 if not utilized.
F - 14
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
3.11 Certificate of Amendment of the Articles of Incorporation of Hawk
Marine Power, Inc.
21.0 Subsidiares of the Registrant
27.0 Financial Data Schedule
EXHIBIT 3.11
FILED
97MAY 19 PM 1:50
SECRETARY OF STATE
TALLAHASSEE, FLORIDA
CERTIFICATE OF AMENDMENT
OF THE ARTICLES OF INCORPORATION OF
HAWK MARINE POWER, INC.
Hawk Marine Power, Inc. (The "Corporation"), is a Corporation organized
and existing under the Laws of the State of Florida. In accordance with the
provisions of 607.1003 of the Florida Statutes, the following amendment to
its Articles of Incorporation were hereby adopted:
AMENDMENT
ARTICLE 1 - NAME- The name of the Corporation is ALCHEMY HOLDINGS, INC.
ADOPTION OF AMENDMENT
The foregoing amendment was adopted by the shareholders and directors of
this Corporation, pursuant to Section 607.1003 of the Florida Statutes, on the
12th day of May 1997.
The number of votes cast for the amendment by the shareholders was
sufficient for approval.
The Amendment set forth herein shall be effective on May 19, 1997
IN WITNESS WHEREOF, the undersigned president and secretary, having
been thereunto duly authorized, have executed the foregoing Articles of
Amendment for the corporation this 12th day of May, 1997.
By /s/ CRAIG N. BARRIE, PRESIDENT
--------------------------
Craig N. Barrie, President
Attest:
/s/ BERTON J. LOROW, SECRETARY
--------------------------
Berton J. Lorow, Secretary
State of Floria )
)ss
County of Dade )
On May 12, 1997, personally appeared before me, a Notary Public for the State
of Florida, Craig N. Barrie and Berton J. Lorow who acknowledged that they
executed the above instrument.
/s/ JO-ANN R. DEL ROSSO
-------------------
Jo-Ann R. Del Rosso
A - 1
EXHIBIT 21.0
ALCHEMY HOLDINGS, INC.
EXHIBIT PURSUANT TO REGULATION 228.601(B)(21)
LIST OF SUBSIDIARIES
NAME OF SUBSIDIARY STATE OF INCORPORATION BUSINESS NAME
- ------------------ ---------------------- -------------
Hawk Maine Power, Inc. Delaware Same
Cigarette Licensing, Inc. Delaware Same
E - 1
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 44,753
<SECURITIES> 0
<RECEIVABLES> 53,931
<ALLOWANCES> 0
<INVENTORY> 165,994
<CURRENT-ASSETS> 266,488
<PP&E> 20,965
<DEPRECIATION> 0
<TOTAL-ASSETS> 787,506
<CURRENT-LIABILITIES> 318,076
<BONDS> 0
0
0
<COMMON> 2,237
<OTHER-SE> (30,807)
<TOTAL-LIABILITY-AND-EQUITY> 289,506
<SALES> 1,059,498
<TOTAL-REVENUES> 1,059,498
<CGS> 701,725
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 223,022
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (65,249)
<INCOME-TAX> (65,249)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (65,249)
<EPS-PRIMARY> (.024)
<EPS-DILUTED> 0
</TABLE>
