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, 1998
ALCHEMY HOLDINGS, INC. F/K/A HAWK MARINE POWER, INC.
(Name of Small Business Issuer in its charter)
Florida 59-1886450
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3025 N.E. 188th Street, Aventura, Florida 33180
(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: [_] No: [X]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B 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: $742,289
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 $4,146,758 as of April 13, 1999.
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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: 2,592,394 shares of the
registrant's common stock are issued and outstanding as of April 14, 1999.
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 seven
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 engines have 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 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 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.
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
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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.
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.
Furthermore, the following individuals were elected as officers and directors of
the Company: Craig N. Barrie, President / Director; Berton J. Lorow,
Vice-President / Director; Adam C. Schild, Secretary / Director.
Additionally, the Company adopted a proposal to amend the Articles of
Incorporation of the Company and change the name of the Company from Hawk Marine
Power, Inc. to Alchemy Holdings, Inc. Subsequent to the change of the Company's
name from Hawk Marine Power, Inc. to Alchemy Holdings, Inc., the Company 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.
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.
Pursuant to a Form S-8 registration statement filed with the Commission on June
25, 1998, the Company registered 200,000 shares of the Company's common stock at
a price of $2.00 for the purposes of funding the
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Alchemy Employee Stock Payment Plan, dated January 2, 1998.
Pursuant to a Form S-8 registration statement filed with the Commission on
October 13, 1998, the Company registered 265,000 shares of the Company's common
stock at a price of $2.00 for the purposes of funding the Alchemy Employee Stock
Payment Plan, dated January 2, 1998.
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 high performance
engines. 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, Inc. ("Cigarette"). The success of the
Hawk engine in international competition generated 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 600: An 8-cylinder, four-stroke, 496 cubic inch engine which 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: A 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.
Although the Hawk engines described above may be used for recreational or
offshore racing boats, HMP does manufacture custom engines utilized solely for
racing. Hawk engines, which usually sell in sets of two
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or three, range in price from $32,000 to $69,000 per engine.
To management's best knowledge, the Hawk engine 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 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 engines. 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 the 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, 1998, the consolidated financial statements of the Company
included an accrual of approximately $7,500 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 best known manufacturers. HMP has sold Hawk engines
directly to premium boat manufacturers including Cigarette, Apache Performance
Boats, Pantera U.S.A., and Jaguar Marine.
For the years ended September 30, 1998 and 1997, sales of Hawk engines to
Cigarette amounted to approximately 25% and 17% 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.
Government Regulation and Production Liability
Certain materials used in HMP's 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 HMP's 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 $1,000,000 per incident.
Additionally, HMP maintains a $2,000,000 umbrella policy. 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.
Employees
In addition to its three executive officers, the Company employs approximately
six people. All of the Company's employees are non-union, and the Company
believes its relationship with employees is excellent.
The Company's Proposed Merger with Cigarette Racing Team, Inc. (collectively,
the "Companies")
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
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liquidity in their stock ownership and the possibility of future gain. In
furtherance of that goal an Agreement and Plan of Merger was presented to both
the Company's and Cigarette's Boards, respectively (the "Merger Agreement").
In reaching their decisions to approve the Merger Agreement, the terms of the
proposed merger (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) there would be
economic advantages as a result of increased operating efficiencies.
On or about October 25, 1997, the Company and Cigarette entered into a letter of
intent to merge the Company into Cigarette via a reverse acquisition (the
"Letter of Intent"). In addition to the requisite approvals of the Companies'
Boards of Directors' and shareholders', the Company would have to file and have
deemed effective a registration statement/prospectus/proxy statement on Form
S-4.
Recommendation of the Alchemy Board
Subsequent to the Letter of Intent the Alchemy Board unanimously approved the
Merger Agreement and the issuance of Alchemy Common Stock in connection with the
Merger.
Recommendation of Cigarette's Board
Subsequent to the Letter of Intent the Cigarette Board 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.
Upon the recommendations of the Companies respective Boards, Alchemy formed
Cigarette Boats, Inc. ("Merger Sub"), a Delaware corporation. The Merger Sub is
a newly-formed, wholly-owned subsidiary of Alchemy formed solely for the purpose
of the Merger. The 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) 932-9230.
The Proposed Merger
At the Effective Time, pursuant to the Merger Agreement, (i) Merger Sub
will be merged with and into Cigarette, whereupon Cigarette will be the
surviving corporation and will become a wholly-owned subsidiary
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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.
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.
Some of the remaining Cigarette creditors will receive either settlement
payments or services or a combination of the two from Cigarette in satisfaction
of Cigarette's debts to those individuals. The satisfaction of certain debts is
expected to take place within 120 days of the Effective Time (as that term is
defined in the Company's Registration Statement filed under Form S-4 on November
12, 1998).
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.
Based upon the number of shares of Alchemy Common Stock and Cigarette Common
Stock outstanding at March 22, 1999, 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
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Alchemy Common Stock outstanding after giving effect to such issuance. Based
upon the number of Cigarette Class A Warrants outstanding at March 22, 1999,
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 March 22, 1999, 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 Alchemy Class X Warrants outstanding at
March 22, 1999, approximately 180,000 additional shares of Alchemy Common Stock
would be reserved for issuance to holders of Alchemy Class X Warrants.
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).
The Letter of Intent strictly specified that Alchemy and Cigarette each have the
right (subject to certain limitations) to terminate the Merger Agreement if the
Merger was not consummated by March 31, 1999. However, neither company has yet
chosen to exercise that right.
Item 2. Description of Property
The Company's facilities in Aventura, Florida, aggregate approximately 7,500
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 $7,900 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
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remaining 18% was due August 15, 1992.
Due to insufficient cash flow, the Company was unable to make the August 15
installment pursuant to the settlement dated April 16, 1992. Subsequently, the
Company made partial payments and during the fiscal year ended September 30,
1998, the Company reached an agreement and settled with the note holders for
retirement of the promissory notes for the aggregate sum of $45,000.
Item 4. Submission of Matters to a Vote of Security-Holders
None during the fourth quarter of 1998.
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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 discussed above, wherein among other
developments, the Company changed its name and reversed 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 1996 1.6000 .8000
March 1997 .8000 .8000
June 1997 .8000 .8000
September 1997 5.0000 .7500
December 1997 9.1250 1.8750
March 1998 9.7500 2.5000
June 1998 12.7500 6.8750
September 1998 12.7500 4.7778
On April 13, 1999, the high bid price for the Common Stock was $7.00.
As of April 13, 1999, the approximate number of record holders of the Company's
Common Stock was 201. 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 of Financial Condition or Plan of
Operation
General
The Company reported a net loss of $319,288 for the year ended September 30,
1998 compared to a net loss of $92,762 for the year ended September 30, 1997.
The Company's loss before extraordinary gain on forgiveness of debt was $449,491
for the year ended September 30, 1998.
Results of Operations - Comparison of Fiscal Years Ended September 30, 1998 and
1997
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Net sales for fiscal 1998 were $742,289 compared to $1,059,498 for the prior
year, or a 30% decrease of $317,209. The decrease in gross margin reflects the
decrease in net sales, while the decline in gross margin percentage is due to
the spreading of certain fixed production costs over a lower sales level.
Gross Margins were $91,218 (12%) and $157,773 (15%) for the years ended
September 30, 1998 and 1997, respectively. The decrease was due primarily to a
drop in demand and corresponding sales of Hawk engines.
Selling, general and administrative expenses for fiscal 1998 were $174,637
compared to $231,125 or a decrease of $56,488. The decrease in expenses reflects
the lower sales volume, as well as management's efforts to contain operating
expenses.
Interest expense increased by $7,777 or 40 % due to higher interest rates on new
borrowings incurred during the year ended September 30, 1998.
The results of operations for the year ended September 30, 1998 reflect a
provision for loan loss, exclusive of interest income of $7,489 not recognized,
in the amount of $338,885. This loss relates to a loan extended to Cigarette
Racing Team, Inc. during fiscal 1998, which bears interest at the rate of 11%
and is payable upon demand.
The results of operations for the fiscal year ended September 30, 1998 reflect
an extraordinary gain on forgiveness of debt. During 1998, the Company satisfied
its obligations to certain note holders with the proceeds of short-term
financing from a stockholder. In connection therewith, principal and interest
obligations totaling $175,202 were satisfied for a settlement payment of
$45,000, resulting in a gain of $130,203, which is reflected as an extraordinary
item in accordance with generally accepted accounting principals.
Liquidity and Capital Resources
During the year ended September 30, 1998, the Company increased its cash by
approximately $21,000. The Company generated $400,000 of cash proceeds from the
issuance of common stock, some of the proceeds of which were used to extend a
$338,885 loan to Cigarette, with whom the Company is currently coordinating a
merger. As discussed above, during 1998, the Company satisfied certain past due
loan obligations totaling $175,202, with the proceeds of short-term financing
from a stockholder totaling $50,000.
On October 13, 1998, the Company filed a registration statement on Form S-8 to
register 265,000 shares of common stock at $2.00 per share. In connection with
its proposed merger with Cigarette, the Company filed a registration statement
on Form S-4 with the Securities and Exchange Commission on May 6, 1998 (the
"Registration Statement") and Amendment No. 1 to the Registration Statement on
November 12, 1998. The Company expects that the merger between the Company and
Cigarette will be effective during the Company's 1999 fiscal year, providing the
Company with the opportunity to raise additional equity capital.
Year 2000 Compliance
The year 2000 issue arises as the result of computer programs having been
written, and systems having been designed, using two digits rather than four to
define the applicable year. Consequently, such software has the
-13-
<PAGE>
potential to recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
The Company does not expect to be affected by the Year 2000 issue as it does not
rely on data-sensitive software or affected hardware. Its software has been
protected and Alchemy does not utilize machines to produce its products which
are computerized. The Company manufactures products which employ computer chips
as part of their ability to perform as designed. The Company's primary supplier,
Mercury Motors, Inc. ("Mercury"), has indicated to the Company that Mercury is
year 2000 compliant in all of its operations. The Company has not yet contacted
other companies on whose services the Company depends to determine whether such
companies' systems are Year 2000 compliant. If the systems of Alchemy or other
companies on whose services Alchemy depends, including Alchemy's customers, are
not Year 2000 compliant, there could be a material adverse effect on the
Company's financial condition or results of operations. Notwithstanding the
above, the Company does not expect to have to replace any machinery due to
inherent year 2000 problems.
The Company's Use of the Sale of S-8 Stock to Partially Pay Cigarette Employees
Pursuant to the terms of the Merger Agreement and as a condition precedent to
the Merger Agreement's effectiveness, a Form S-4 Registration Statement was
initially filed with the Commission on May 6, 1998 (the "Form S-4 Registration
Statement"). At the time the Form S-4 Registration Statement was first filed,
both Companies' management expected and anticipated that the Merger would be
effective by the end of the Companies' 1998 fiscal years (September 30th).
The Companies began to integrate their operations in anticipation of the
Merger's effectiveness and in consideration of the fact that: (i) Cigarette,
through direct and indirect means, was responsible for more than 90% of the
Company's revenue; (ii) the Company's employees were in essence becoming
Cigarette's employees as Cigarette had informally leased them from the Company
to perform boat manufacturing services as a result of increased sales and a
limited available work-force; (iii) the Company was unable to maintain its own
market share due to decreasing sales; (iv) scales of economy would substantially
reduce the Company's expenses in the short-term and stabilize the Company's
revenues in the long-term; and (v) the majority shareholders and directors of
both Cigarette and the Company, respectively, had approved the merger in
principal.
On June 25, 1998 the Company filed a registration statement on Form S-8 (the
"Form S-8 Registration Statement") with the Commission which registered 200,000
shares of the Company's common stock, par value $.001 per share (the "Shares"),
which were issued to the Company's employees pursuant to its Employees Stock
Payment Plan (the "Plan") adopted by the Company's Board of Directors on January
2, 1998. The Form S-8 Registration Statement registered the Shares which upon
effectiveness were issued in the Plan's name. The terms of the Plan contemplated
that the Company's employees could authorize the Company to serve as their agent
to facilitate the sale of the Shares on behalf of the employees.
Immediately after the Registration Statement's effectiveness, the Company as
agent for and on behalf of the employees, sold the Shares at a price of $2.00
per share, or a total of $400,000 (the "Proceeds").
-14-
<PAGE>
The Proceeds were then placed into a segregated Company bank account for the
purpose of satisfying payroll obligations of the Companies.
Although the Merger did not become effective by September 30, 1998, the
distinctions between the Company and Cigarette had become blurred and the
Companies had been acting as one on a "de facto" basis, which due to common
management was accomplished without formal documentation.
The following table sets forth the dates and amounts of proceeds transferred by
the Company to Cigarette in order to facilitate the payment of payroll by
Cigarette. After each of such transfers, Cigarette paid the net payroll due the
Companies' employees, in full satisfaction of their net wages earned to that
date, after deduction for amounts withheld to satisfy all federal and state tax
requirements:
June 16,1998 $32,985.05
June 23,1998 33,556.39
June 30,1998 42,210.78
July 10,1998 30,282.13
July 13,1998 27,161.34
July 21,1998 30,294.91
July 28,1998 34,178.33
August 6,1998 30,488.55
August 11,1998 31,321.49
August 18,1998 31,029.72
In addition, on August 24, 1998, the Company transferred $25,000.00 from the
Proceeds to Cigarette in order to facilitate the payment of a portion of the
Companies payroll by Cigarette. Immediately thereafter, Cigarette paid
$28,628.60, $25,000.00 of which was from the Proceeds, minus any funds withheld
to satisfy all federal and state tax requirements, to the Companies' employees
in full satisfaction of their net wages earned to that date.
As of September 30, 1998, the remaining portion of the Proceeds after the above
transfers were completed, was used to purchase a certificate of deposit equal to
approximately $51,000.00, such certificate of deposit was then deposited in the
Company's segregated bank account for future payroll expenses.
On October 15, 1998 the Company filed a registration statement on Form S-8 (the
"October 15th Form S-8 Registration Statement") with the Commission which
registered 265,000 shares of the Company's common stock, par value $.001 per
share (the "October S-8 Shares"). Collectively, the June 25th and October 15th
Form S-8 Registration Statements shall be referred to herein as the
"Registration Statements". 25,000 shares of the October S-8 Shares were issued
to the Company's attorneys as payment for services rendered. The remaining
240,000 shares of the October S-8 Shares were issued to the Company's employees
pursuant to the Plan. On two occasions a total of 130,000 shares of the October
S-8 Shares were sold at a price of $2.00 per share. The proceeds from the sale
of those shares were subsequently transferred to Cigarette and used solely to
satisfy the Companies' payroll as such expenses became due. The remaining
balance of 110,000 shares have not been sold.
As a result of the substantial integration of operations between the Companies
on or about March 15, 1999,
-15-
<PAGE>
the Company determined that the Plan should be amended to clearly include
Cigarette's employees as Employees Who May Participate In The Plan (as defined
in the Plan) and that an amendment to the Form S-8 Registration Statement be
filed reflecting such change in the Plan.
On April 14, 1999, the Company filed an amendment to the Form S-8 Registration
Statement with the amended definition of Employees Who May Participate In The
Plan.
The Company has been advised that the sale of common stock registered in the S-8
Registration Statement may constitute a violation of the registration
requirements under the Securities Act of 1933 and furthermore, the use of the
resulting proceeds may have represented an improper application of employee
benefit funds. Management of the Company, as concurred by counsel, does not
believe that the Company has violated any applicable requirements or otherwise
acted improperly; however, there can be no assurance in this regard.
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.
-16-
<PAGE>
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 successor is duly elected. Executive
officers are elected annually and except to the extent governed by employment
contracts, serve at the discretion of the Board of Directors.
Name Positions(s) Age
---- ------------ ---
Craig Barrie President/Director 49
Berton Lorow Vice President/Director 43
Adam Schild Secretary/Director 29
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.
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. Schild is Secretary and a Director of the Company and has held those
positions since 1997. From 1994 to 1997 Mr. Schild was a senior partner of a
management consulting firm specializing in crisis management and mergers and
acquisitions. From 1987 to 1994 Mr. Schild was employed by a corporate
communications company specializing in Fortune 500 companies. From November 1994
through October 1993, Mr. Schild was a stockholder in training at Stratton
Oakmont. Mr. Schild began his tenure in the finance department
-17-
<PAGE>
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, 1998 aggregated $79,840. 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 1998 $ 25,500 None None None None None None
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 1998 $ 54,340 None None None None None None
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>
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. 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
-18-
<PAGE>
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.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the number of shares of 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 interests
are direct.
<TABLE>
<CAPTION>
Amount and
Name and Address Nature of
of Beneficial Beneficial Percent of
Title of Class Owner Owner Class
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock Craig Barrie (1) (2) 14,753 .6%
3025 NE 188th St.
North Miami,
Florida 33180
Berton Lorow (1) (3) 78 --
3025 NE 188th St.
North Miami,
Florida 33180
Offshore Racing, Inc. 2,000,000 82.1
3025 NE 188th St.
North Miami,
Florida 33180
</TABLE>
Does not include shares of Common Stock issuable pursuant to the Company's
Incentive Stock Option Plan.
Mr. Barrie is President and a Director of the Company. Does not include options
to purchase 938 shares of the Company's Common Stock.
Mr. Lorow is Vice President and a Director of the Company. Does not include
options to purchase 625
-19-
<PAGE>
shares of the Company's Common Stock.
Item 12. Certain Relationships and Related Transactions
The Company had sales to Cigarette Racing Team, Inc. of $187,258, representing
25% 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.
In January 1992, the Company was named as a defendant in a lawsuit by certain
note holders of the company who had participated in the Company's private
financing undertaken in September 1988. In Petrocelli Electric Company, Inc., et
al v. Hawk Marine Power, Inc. (Case No. 92-00240), a suit filed in the 11th
Judicial Circuit for Dade County, Florida, the plaintiff's requested repayment
of such promissory notes together with interest and attorneys' fees.
On April 16, 1992, the Company entered into settlement agreements with the
plaintiff's along with substantially all of the other note holders pursuant to
which each of the participants who accepted the terms of the settlement
agreement would receive a cash payment equal to 86% of their entire investment.
Pending consummation of such settlement, further pleadings in such lawsuit have
been held in abeyance.
The payment would represent full satisfaction of amounts payable under their
notes. In consideration for repayment of the notes, those participants accepting
the terms of the settlement agreement agreed to assign their shares of common
stock received pursuant to the private placement to Mr. Craig Barrie. An amount
equal to 68% of the original investment was paid at the time each settlement
agreement was executed. The remaining 18% was due August 15, 1992.
Due to insufficient cash flow, the Company was unable to make the August 15
installment pursuant to the settlement dated April 16, 1992. Subsequently, the
Company made partial payments and during the fiscal year ended September 30,
1998, the Company reached an agreement and settled with the note holders for
retirement of the promissory notes for the aggregate sum of $45,000.
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
-20-
<PAGE>
any fiscal year.
The Company filed a Form 8-K with the Commission on March 5, 1999. Such Form 8-K
disclosed the change in the Company's certifying accountants.
-21-
<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. (2)
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 October 25, 1997 Letter of Intent Between Alchemy Holdings, Inc. and
Cigarette Racing Team, Inc.
16.0 Letter Regarding the Change of the Company's Independent Auditor
21.0 Subsidiaries of the Registrant
Please see the attached list of subsidiaries.
(1) Filed as the same encumbered exhibit to a Registration Statement (File
No. 33-30906-A) previously filed.
(2) Filed as the same encumbered exhibit to the Company's Form 10-KSB
(File No. 000-17981) filed on April 30, 1998.
(b) Reports on Form 8-K
-22-
<PAGE>
The Company filed a Form 8-K on March 5, 1999 indicating the following:
Jere J. Lane, CPA resigned as the Company's certifying accountant for the year
ended September 30, 1998 and the engagement of Callaghan Nawrocki LLP to provide
such independent auditor services for the year ending September 30, 1998 and
1999, respectively.
The Company filed a Form 8-K on April 14, 1999 indicating the following:
The Company more fully disclosed the development and the present nature of its
relationship with Cigarette and the fact that the Alchemy Employee Stock Payment
Plan was amended retroactively to its date of adoption to include Cigarette's
employees as "Employees Who May Participate In The Plan." Further, the Company
disclosed the procedures it undertook to compensate such employees.
-23-
<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: Alchemy Holdings, Inc.
By: /s/ Adam Schild
Adam Schild, Secretary
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/ Adam Schild - Secretary
- ---------------
Adam Schild
/s/ Berton Lorow - Vice President/Director
- ----------------
Berton Lorow
-24-
<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:
Common stock, $.001 par value, 20,000,000 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
<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES: 1998 1997
--------- ---------
<S> <C> <C>
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
========= =========
</TABLE>
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>
EXHIBIT INDEX
Exhibit Description
- ------- -----------
10.1 October 25, 1997 Letter of Intent Between Alchemy Holdings, Inc. and
Cigarette Racing Team, Inc.
16.0 Letter Dated April 16, 1999 Regarding the Change of the Company's
Independent Auditor
21.0 Subsidiaries of the Registrant
Exhibit 10.1
ALCHEMY HOLDINGS, INC.
3025 N.E. 188th Street
Aventura, Florida 33180
October 25, 1997
Board of Directors
Cigarette Racing Team, Inc.
3131 N.E. 188th Street
Aventura, Florida 33180
Re: Letter of Intent to Acquire all Issued and Outstanding Stock of
Cigarette Racing Team, Inc.
Gentlemen:
I enjoyed our previous discussions concerning the possibility of the
combination of Alchemy Holdings, Inc., (hereinafter "AHI" ) and Cigarette Racing
Team, Inc., (hereinafter "CRT") in some type of acquisition or merger
transaction (the "Exchange").
Currently, AHI has 2,237,394 shares of its common stock issued and
outstanding.
The transactions described herein will be subject to shareholder and
director approval of both companies and compliance with all applicable laws,
rules and regulations.
Based upon our previous discussions, the Board of Directors of AHI hereby
proposes to acquire all of the issued and outstanding capital stock of CRT upon
the following terms:
1. Stock Exchange. Subject to the terms and conditions set forth in
this Agreement (the "Agreement"), on the Closing Date (the "Closing
Date"), (a) certain of the CRT Shareholders shall assign, transfer and
deliver to AHI, free and clear of all liens, pledges, encumbrances,
charges, restrictions or claims of any kind, nature or description,
1,000,000 issued and outstanding shares of capital stock of CRT, and
(b) Exale Enterprises, Inc. shall assign, transfer and deliver to AHI,
2601,000 issued and outstanding shares of capital stock; (collectively
all 3,601,000 shares of common stock of CRT, represents all of the
issued and outstanding shares of CRT), which intends to acquire all of
the capital stock of CRT issued and outstanding at the time of the
closing, in exchange for:
(a) 1,601,000 shares of AHI $.00l par value common stock, which
shares are pledged and to be delivered to Central Manufacturing, Inc.,
a creditor of CRT; and
(b) 1,000,000 shares of AHI $.00l par value common stock, which
shares are being issued free and
-1-
<PAGE>
clear of all liens, pledges, encumbrances, charges, restrictions or
claims of any kind, nature or description; and
(c) 1,000,000 Class "A" Warrants, $.00l par value; each Class "A"
Warrant entitles the registered holder thereof to purchase one (1)
share of AHI $.001 par value common stock at an exercise price of
$3.00 per share; and
(d) 1,000,000 Class "B' Warrants, $.00l par value; each Class "B"
Warrant entitles the registered holder thereof to purchase one (1)
share of AHI $ .001 par value common stock at an exercise price of
$4.00 per share.
It is the intent of the parties that the acquisition of CRT by AHI be
structured pursuant to the provisions of Section 368 (a) (1) (A) or (B) of the
Internal Revenue Code, in connection with a tax free reorganization. The shares
will be issued in a non-public offering pursuant to Section 4(2) of the
Securities Act of 1933, as amended, and under corresponding applicable state
law. The parties acknowledge that it is their intent, subject to the provisions
hereof, that AHI acquire all of the issued and outstanding capital stock and any
underlying warrants of CRT.
In conjunction with the above stock exchange AHI will retire two million
(2,000,000) shares of AHI's common stock, issued to Offshore Racing, Inc., in
exchange for one million (1,000,000) warrants to purchase one million
(1,000,000) shares of common stock of AHI, at an exercise price of $.20 per
underlying share of AHI common stock; and a note payable of five hundred
thousand ($500,000) dollars in favor of Offshore Racing, Inc.
<TABLE>
<CAPTION>
2. Capital Structure Following the Exchange. In the event the Exchange is effected, we propose that the capital
structure of AHI be as follows:
Shareholders Shares Owned
------------ ------------
<S> <C> <C>
Current AHI Shareholders 2,237,394
CRT Shareholders 2,601,000
Sub-Total 4,838,394
Retirement of Offshore Racing Stock -2.000.000
Sub-Total 2,838,394
Conversion of "A Warrants"* 1,000,000
Total shares outstanding* 3,838,394
Conversion of "B Warrants"* 1,000,000
----------
Total shares outstanding* 4,838,394
</TABLE>
* - assuming the conversion of warrants to AHI common stock (not inclusive of
1,000,000 warrant at $.20 exercise price)
3. Management. Subject to shareholder approval of the entire transaction, the
current management of AHI would remain and three (3) designees of CRT could be
elected as directors of AHI.
4. Definitive Agreement. This Letter of Intent is a non-binding indication of
the parties proposal to effect an acquisition of CRT by AHI. Subject to the
fulfillment of all conditions set forth herein, the parties would enter into a
definitive Agreement and Plan of Reorganization setting forth all applicable
terms of the acquisition with standard
-2-
<PAGE>
representations and warranties. Either party hereto may, without incurring
obligation or liability to the other party, terminate this Letter of Intent at
any time prior to the signing of a definitive Agreement and Plan of
Reorganization. Any termination of this Letter of Intent, except by its own
terms, must be in writing and mailed to the other party by first class U.S.
Mail.
5. Change of Name. The name of AHI will be changed in connection with the
proposed acquisition to "Cigarette Racing Team, Inc." or some derivation
thereof. The name change will be effected, subject to AHI shareholder approval,
by filing a certificate of Amendment to AHI's Certificate of Incorporation.
6. Conditions Precedent. The acquisition of CRT by AHI proposed herein is
subject to the following conditions:
a) The approval of the proposed acquisition and related transactions by the
directors and shareholders of AHI. A Special Meeting of the Shareholders of
AHI will be called as soon as practical to consider the proposed
acquisition.
b) The approval of the proposed acquisition and related transactions by the
directors and shareholders of CRT.
c) Compliance with all applicable federal and state securities laws.
d) The delivery to AHI by CRT of audited financial statements of such
financial statements of CRT as are necessary to comply with the
requirements of the Securities and Exchange Commission Regulation S-X.
e) The delivery of such documents and information as are reasonably
requested by each party.
f) The execution of a definitive Agreement and Plan of Reorganization
containing all representations contained herein and other representations
and warranties which are standard in similar transactions.
7. Representations.
a) AHI and CRT will be duly organized and in good standing in their
respective states or venues of organization at the time of closing.
b) All certificates evidencing shares of AHI issued to the shareholders of
CRT will be legended as restricted under Rule 144 as promulgated under the
Securities Act of 1933, as amended.
c) Each company shall deliver such documents and financial statements to
the other company as is reasonably requested prior to closing of the
transaction.
d) All shares of AHI preferred stock issued in connection with the proposed
acquisition, will be fully paid and non-assessable.
e) CRT will deliver to AHI audited and other financial statements of CRT
and any predecessor company
-3-
<PAGE>
of CRT as may be required by Regulation S-X as promulgated by the
Securities and Exchange Commission. CRT represents and warrants that there
has been no material adverse changes in its financial position or in its
status or business prospects since the date of such financial statements.
8. Information. CRT agrees to cooperate in providing and explaining the
following information with respect to the transaction contemplated herein:
a) History and business background of CRT and any subsidiary corporations.
This shall include a general discussion of the business of the Company,
including plans for future business, market for products, and a brief
historical background of the formation or acquisition of the company and
business involved.
b) Audited and other financial statements of CRT and any predecessor of
CRT, as referred to in Paragraph 8(d) of this Letter of Intent.
9. Closing. Immediately after the shareholder's meeting of AHI , provided that
the shareholders of AHI approve this transaction, a closing shall be held with
regard to this transaction, wherein a detailed Agreement and Plan of
Reorganization shall be executed.
10. News Releases and Communications. As soon as practicable, after the date of
execution hereof, AHI and CRT may issue a press release to their shareholders,
the financial community, and any other interested parties describing this
agreement and the proposed transaction.
11. Conduct of Business. The parties hereto hereby agree to conduct their
business in accordance with the usual and normal course of business heretofore
conducted by the companies. Thus, there will be no material adverse changes in
the business of either company from the date hereof until the closing of this
transaction and there will be no changes in either company's Articles of
Incorporation or Bylaws except as described herein.
12. Assistance. All parties hereto agree to take whatever reasonable steps are
required to facilitate the consummation of the transaction contemplated herein,
including discussing the matter with members of the financial community,
stockholders, and other interested parties and including the exchange of
corporate records, documents and filings.
13. Termination. This Letter of Intent shall automatically terminate ten (10)
days after the date hereof unless accepted by you and, after acceptance, shall
terminate on November 15, 1997, unless extended by the parties hereto. Upon
termination, neither party shall have any further obligation to the other under
this agreement. However, such termination shall have no effect on the
obligations created by any other document heretofore or hereafter executed by
the parties hereto.
This letter sets forth our understanding of the proposed terms of the
transaction and is not a binding agreement on either party. If it represents
your understanding of the terms of our preliminary agreement, please sign on the
-4-
<PAGE>
designated line on the following page and send us a copy.
The Undersigned, President of Alchemy Holdings, Inc. hereby agrees this
Letter of Intent sets forth our preliminary agreement regarding the matters set
forth herein.
Dated: October 25, 1997
Alchemy Holdings, Inc.
/s/ Craig N. Barrie
- ----------------------------
Craig N. Barrie
President
The Undersigned, Chief Operating Officer of Cigarette Racing Team, Inc.,
hereby agrees this Letter of Intent sets forth our preliminary agreement
regarding the matters set forth herein.
Dated: October 25, 1997
Cigarette Racing Team, Inc.
/s/ Adam C. Schild
- ----------------------------
Adam C. Schild
Chief Operating Officer
-5-
Exhibit 16.0
Alchemy Holdings, Inc.
3025 N.E., 188th Street
Aventura, Florida 33180
April 19, 1999
Securities and Exchange Commission
Washington, D.C. 20549
Gentlemen:
On December 4, 1998, Jere J. Lane, CPA, the Company's principal independent
auditor for the two previous fiscal years ended September 30, 1997 and 1996,
resigned as auditor in order to provide certain accounting and consulting
services to the Company. The Company's Board of Directors approved Mr. Lane's
resignation.
The report of Jere J. Lane, CPA on the Company's financial statements for
the fiscal years ending September 30, 1997 and 1996 did not contain an adverse
opinion or disclaimer and was not qualified as to audit scope or accounting
principles, but was modified due to uncertainty regarding the Company's ability
to continue as a going concern.
During the two most recent fiscal years and for the interim period through
Mr. Lane's resignation, there were no disagreements, whether or not resolved,
with such principal accountant on any matter of accounting principals or
practices, financial statement disclosure, or auditing scope or procedure, which
if not resolved to the former accountant's satisfaction, would have caused him
to make reference to the subject matter thereof in connection with his report.
ALCHEMY HOLDINGS, INC.
By: /s/ Craig Barrie
Name: Craig Barrie
Title: President
Exhibit 21.0
List of Subsidiaries
Subsidiary State of Incorporation Business Name
- ---------- ---------------------- -------------
Hawk Marine Power, Inc. Delaware Same
Cigarette Licensing, Inc. Delaware Same
