U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
Quarterly Report Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarter ended December 31, 1998
Commission File No. 0-17981
ALCHEMY HOLDINGS, INC.
F/K/A HAWK MARINE POWER, INC.
A Florida Corporation 59-1886450
3025 N.E. 188 Street, Miami, Florida 33180
Issuers telephone number: (305) 932-9230
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes _X_ No ___.
State the number of shares outstanding of each of the registrant's classes of
common equity as of the latest practicable date: 2,702,394 shares of the
registrant's common stock are issued and outstanding as of April 30, 1999. Total
number of pages contained in this document 19.
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ALCHEMY HOLDINGS, INC.
INDEX
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statement (Unaudited)
Condensed Balance Sheets as of December 31, 1998 and September 30, 1998.
Condensed Statements of Operations for the Three Months Ended December 31, 1998
and 1997 and Twelve Months Ended September 30, 1998 and 1997.
Condensed Statements of Cash Flows for the Three Months Ended December 31, 1998
and 1997.
Notes to Condensed Financial Statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
PART II. OTHER INFORMATION
Items 1 - 5.
Item 6. Exhibits and Reports on Form 8-K
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PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements
ACHEMY HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
ASSETS
December
(Unaudited) September
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 130,292 $ 66,186
Inventory 141,901 178,655
Prepaid Expenses 50,000 --
----------- -----------
Total Current Assets 322,193 244,841
PROPERTY AND EQUIPMENT 19,834 20,060
OTHER ASSETS:
Licensing Agreement, Net of Accumulated
Amortization of $35,750 184,250 189,750
----------- -----------
TOTAL ASSETS $ 526,277 $ 454,651
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable $ 16,107 $ 10,148
Accrued Expenses 7,476 7,476
Customer Deposits 71,000 90,500
Stockholder Loans 57,607 56,494
Notes Payable, Including Accrued Interest 76,883 75,286
----------- -----------
Total Current Liabilities 229,073 239,904
----------- -----------
TOTAL LIABILITIES 229,073 239,904
----------- -----------
STOCKHOLDERS' EQUITY:
Common Stock, $.001 par value, 20,000,000 shares
authorized; 2,702,394 and 2,437,394 shares, respectively,
issued and outstanding 2,702 2,437
Additional Paid-In Capital 2,534,443 2,224,598
Accumulated Deficit (2,239,941) (2,012,288)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 297,204 214,747
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 526,277 $ 454,651
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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ACHEMY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997 AND
THE TWELVE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
Three Months Ended Twelve Months Ended
December 31, September 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES $ 155,202 206,402 $ 742,289 1,059,498
Cost of Sales 113,117 200,332 651,071 901,725
----------- ----------- ----------- -----------
GROSS MARGIN 42,085 6,070 91,218 157,773
Selling, General and
Administrative Expenses 47,417 32,609 174,637 231,125
----------- ----------- ----------- -----------
OPERATING INCOME (LOSS) (5,332) (26,539) (83,419) (73,352)
Interest - Net 2,710 6,272 27,187 19,410
Provision for Loan Loss 219,611 -- 338,885 --
----------- ----------- ----------- -----------
Loss before Extraordinary Item (227,653) (32,811) (449,491) (92,762)
Extraordinary Gain on
Forgiveness of Debt -- -- 130,203 --
----------- ----------- ----------- -----------
NET PROFIT (LOSS) $ (227,653) (32,811) $ (319,288) (92,762)
=========== =========== =========== ===========
BASIC LOSS PER SHARE AMOUNTS:
Loss before extraordinary item (0.09) (0.01) (0.20) (0.11)
Extraordinary gain -- -- 0.06 --
----------- ----------- ----------- -----------
Net Loss (0.09) (0.01) (0.14) (0.11)
=========== =========== =========== ===========
Weighted average number of
common shares outstanding 2,614,061 2,237,394 2,294,093 851,093
</TABLE>
The equation for computing basic income (loss) per common share is:
Income (Loss) available to common shareholders / Weighted-average shares.
The accompanying notes are an integral part of the consolidated financial
statements
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ACHEMY HOLDINGS, INC.
STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
Three Months Ended
December 31,
1998 1997
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $(227,653) $ (32,811)
Adjustments to Reconcile Net Loss
to Net Cash Used by Operating Activities:
Depreciation and Amortization 5,726 5,866
Accrued Interest - Unpaid 2,710 6,272
(Increase) Decrease in Prepaid Expenses (50,000) --
(Increase) Decrease in Accounts Receivable 36,753 (147)
Increase (Decrease) in Accounts Payable 5,960 1,920
Increase (Decrease) in Accrued Expenses -- (3,658)
Increase (Decrease) in Customer Deposits (19,500) (5,040)
--------- ---------
Net Cash Used by Operating Activities (246,004) (27,598)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (Decrease) in Notes Payable -- 4,375
Proceeds from Stock Issuances 310,110 --
--------- ---------
Net Cash Used by Financing Activities 310,110 4,375
NET INCREASE (DECREASE) IN CASH 64,106 (23,223)
CASH AT BEGINNING OF PERIOD 66,186 44,753
--------- ---------
CASH AT END OF PERIOD $ 130,292 $ 21,530
========= =========
Supplemental Cash Flow Information:
Interest Paid During the Year $ -- $ --
========= =========
Income Taxes Paid During the Year $ -- $ --
========= =========
The accompanying notes are an integral part of the consolidated financial
statements
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ALCHEMY HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying financial statements of Alchemy Holdings, Inc. have been
prepared in accordance with generally accepted accounting principles for interim
financial information, and with the instructions to Form 10-QSB and Article 10
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
In the opinion of the Company's management, all adjustments (consisting of
normal recurring accruals) considered to be necessary for a fair presentation
have been included. Operating results for the three months ended December 31,
1998 are not necessarily indicative of the expected results for the year ending
September 30, 1999. For further information, refer to the financial statements
and footnotes included in the Company's annual report on Form 10-KSB for the
year `ended September 30, 1998.
NOTE B - GOING CONCERN CONSIDERATION
The Company's consolidated financial statements have been presented on the basis
of a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company
incurred net losses of $319,288 and $92,762 for the years ended September 30,
1998 and 1997, respectively, and has cumulative losses since inception of
$2,239,941. 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.
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NOTE C - FAS 109
Deferred income taxes are provided on the tax effect of changes in temporary
differences. Deferred tax assets are subject to a valuation allowance if their
realization is not reasonably assured.
Deferred tax assets are comprised of the following at December 31, 1998:
Net Operating Loss Carry Forward Benefit $ 761,580
Investment Credit 7,712
Valuation Allowance (769.292)
Net Deferred Tax Asset $ --
=========
NOTE D - MAJOR CUSTOMER
Of the Company's total sales for the three months ended December 31, 1998, and
1997, $29,500 and $64,275 or 19% and 31%, respectively, were with one customer,
Cigarette Racing Team, Inc. A principal shareholder and President of the Company
is also an officer and employee of this customer.
During the three months ended December 31, 1998, the Company transferred
$219,611 in funds to Cigarette Racing Team, Inc. This advance is unsecured,
bears interest at the rate of 11% and is payable upon demand. As Cigarette
Racing Team, Inc. does not currently have the financial capability to satisfy
this obligation the Company has recorded a provision for loan loss for the
entire amount of the loan and interest income has not been accrued.
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Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
For the quarter ended December 31, 1998 the Company reported a net loss of
$227,653 compared to a net loss of $32,811 for the quarter ended December 31,
1997. Net revenues of $155,202 during the current quarter decreased 24.8% from
$206,402 during the same period in fiscal 1997.
Gross Margin for the quarter was 27.1% of Net Sales compared to 2.9% of Net
Sales for the same period in fiscal 1997.
Selling, general and administrative expenses for the quarter ended December 31,
1998 were $47,417 compared to $32,609 from the same period in fiscal 1997.
Provision for Loan Loss for the quarter ended December 31, 1998 is $219,611.
Liquidity and Capital Resources
The Company had cash on hand in the amount of $130,292 at December 31, 1998
compared to $66,186 at September 30, 1998. Working capital increased from $4,937
at September 30, 1998 to $93,120 at the end of the current quarter.
PART II. OTHER INFORMATION
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
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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 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.
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As a result, on May 20, 1997, the split became effective and the Company began
trading under its new symbol "ALCH" on the NASD Electronic Bulletin Board.
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 Alchemy Employee Stock Payment
Plan, dated January 2, 1998.
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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.
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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 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.
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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.
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
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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 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
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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 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
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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
16
<PAGE>
approximately 87.0% of the total number of shares of Alchemy Common Stock
outstanding after giving effect to such issuance. Based upon the number of
Cigarette Class A Warrants outstanding at 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).
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 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.
17
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: None
(b) Reports on Form 8-K: None
18
<PAGE>
SIGNATURES
In accordance with requirements of the Exchange Act, the Issuer caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: April 30, 1999
ALCHEMY HOLDINGS, INC
BY: /s/ Adam Schild
------------------------------------
ADAM SCHILD
Secretary
19
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