<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 7, 1995
OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to __________
Commission file number 0-10909
Corniche Group Incorporated
(Exact name of registrant as specified in its charter)
Delaware 22-2343568
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
Wayne Interchange Plaza I, 145 Route 46 West, Wayne, New Jersey 07974
(Address of principal executive offices)
(Zip Code)
(201) 785-3338
(Registrant's telephone number, including area code)
Fidelity Medical, Inc.
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 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 ______
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court. Yes ____ No ____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Outstanding as of November 17, 1995
Common Stock, par value $.10 per share 2,623,457 shares
CORNICHE GROUP INCORPORATED AND SUBSIDIARY
</page>
<PAGE>
INDEX
PAGE
Part I--Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at October 7, 1995
and March 25, 1995 3-4
Consolidated Statements of Operations for the
Sixteen and Twenty-eight Weeks Ended
October 7, 1995 and October 9, 1994 5
Consolidated Statements of Cash Flows for the
Twenty-eight Weeks Ended October 7, 1995 and
October 9, 1994 6-7
Notes to Unaudited Consolidated Financial
Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Part II--Other Information
Item 1. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
</PAGE>
<PAGE>
CORNICHE GROUP INCORPORATED AND SUBSIDIARY
Consolidated Balance Sheet
ASSETS
October 7, March 25,
1995 1995
(unaudited) (audited)
Current assets:
Cash $ 19,721 $ 108,438
Accounts receivable 1,489,119 3,738,702
Allowances for doubtful accounts ( 92,657) (345,108)
Notes receivable 200,000 200,000
Inventory 2,680,582 3,146,307
Prepaid expenses and other 1,621,362 411,188
Total current assets 5,918,127 7,259,527
Other assets:
Property and equipment-at cost, net 1,818,434 1,356,548
Intangible assets-at cost, net 1,852,012 1,206,495
Total assets $ 9,588,573 $9,822,570
See accompanying notes.
CORNICHE GROUP INCORPORATED AND SUBSIDIARY
Consolidated Balance Sheet
LIABILITIES AND STOCKHOLDERS' (DEFICIENCY) EQUITY
October 7, March 25,
1995 1995
(unaudited) (audited)
Current liabilities:
Notes payable - bank $ 2,486,539 $ 2,521,452
Trade accounts payable 5,559,833 4,065,439
Current portion of long-term debt 862,298 415,177
Dividends payable - preferred stock 57,614 21,954
Accrued liabilities 1,345,060 1,512,873
Deferred income 70,326 23,570
Payroll and sales tax payable 698,712 562,200
__________ _________
Total current liabilities 11,080,382 9,122,665
Long-term liabilities:
Long-term debt 3,151,796 3,323,565
Deferred income 223,196 57,159
Deferred credit 35,406 37,998
__________ __________
Total long-term liabilities 3,410,398 3,418,722
__________ __________
Total liabilities 14,490,780 12,541,387
Cumulative redeemable preference shares
and Class B Ordinary Shares 159,110 160,348
________ __________
Commitments and contingencies (Note 11)
Stockholders' (deficiency) equity:
7% cumulative convertible preferred
stock authorized and issued 1,000,000
shares, and outstanding 946,069
shares 946,069 946,069
Common stock, $0.10 par value,
authorized- 30,000,000 shares,
issued 2,623,457 (October 7, 1995)
and 2,119,857 (March 25, 1995) 262,345 211,985
Additional paid-in capital 793,976 -
(Accumulated deficit) retained
earnings (6,863,747) (3,827,879)
___________ ___________
(4,861,357) (2,669,825)
Cumulative translation adjustment 4,750 (4,630)
Treasury stock - at cost, 218,100
shares (204,710) (204,710)
__________ ___________
Total stockholders'
(deficiency) equity (5,061,317) (2,879,165)
___________ ___________
Total liabilities and stockholders'
(deficiency) equity $ 9,588,573 $ 9,822,570
============= ============
See accompanying notes.
CORNICHE GROUP INCORPORATED AND SUBSIDIARY
Consolidated Statement of Operations
(UNAUDITED)
<TABLE>
------16 Weeks Ended------ -------28 Weeks Ended------
October 7, October 9, October 7, October 9,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Net sales $ 4,052,253 $ 6,917,064 $ 9,229,088 $ 10,699,222
Cost of sales (2,703,630) (5,266,849) (6,767,648) (7,973,840)
Gross profit 1,348,623 1,650,215 2,461,440 2,725,382
Selling, general and
administrative
expenses (2,787,006) (2,098,181) (5,125,910) (3,525,919)
___________ ___________ ___________ ___________
Operating loss (1,438,383) ( 447,966) (2,664,470) ( 800,537)
(Loss) gain on sale
of equipment ( 5,953) ( 9) ( 7,685) 1,266
Interest expense, net ( 204,894) ( 143,069) ( 350,007) (245,121)
___________ ___________ ___________ ___________
Net loss income before preferred
stock dividend (1,649,230) ( 591,044) ( 3,022,162) (1,044,392)
Preferred stock dividend ( 20,377) ( - ) ( 35,660) ( - )
___________ __________ ____________ ___________
Net loss $(1,669,607) $ ( 591,044) $ (3,057,822) $ (1,044,392)
============ ============= ============== =============
Loss per share of
common stock ($0.73) ($ 0.35) ($ 1.39) ($ 0.63)
Weighted average number
of common shares
outstanding 2,298,136 1,669,336 2,195,356 1,669,336
See accompanying notes.
</TABLE>
CORNICHE GROUP INCORPORATED AND SUBSIDIARY
Consolidated Statement of Cash Flows
(UNAUDITED)
-------28 Weeks Ended-------
October 7, October 9,
1995 1994
Cash flows from operating activities:
Net (loss) income $(3,057,822) $ (1,044,392)
Adjustments to reconcile net loss
to net cash used
in operating activities:
Depreciation 148,261 152,881
Amortization of goodwill 71,822 38,336
Amortization of trademarks 994 2,086
Amortization of deferred credit ( 2,592) ( 2,112)
(Gain)/Loss on sale of property
and equipment 7,685 ( 1,266)
Allowance for bad debts 14,380 ( 39,634)
Changes in net assets and liabilities,
net of effects from acquisitions:
Decrease in accounts receivable 1,997,132 ( 281,120)
Decrease (increase) in inventory 465,725 ( 379,355)
Increase in prepaid expenses (1,410,174) ( 182,965)
Increase in trade accounts payable 567,779 ( 43,019)
(Decrease)/Increase in
accrued liabilities ( 167,813) 694,316
(Decrease) increase in
deferred income 212,793 79,477
Increase in taxes payable 136,512 490,467
Net cash used in operating activities (1,015,318) ( 516,300)
Cash flows from investing activities:
Payments for acquisition of business - ( 87,296)
Purchase of property and equipment (206,693) ( 205,104)
Proceeds from sales of property
and equipment 99,247 29,729
Net cash used in investing activities ( 107,446) ( 262,671)
Balance carried forward $(1,122,764) $( 778,971)
See accompanying notes
CORNICHE GROUP INCORPORATED AND SUBSIDIARY
Consolidated Statement of Cash Flows
(UNAUDITED)
-------16 Weeks Ended-------
October 7, October 9,
1995 1994
Balance brought forward $(1,122,764) $(778,971)
____________ __________
Cash flows from financing activities:
Net borrowings under line of credit
agreement ( 34,913) 320,865
Principal payments under capital
lease obligations ( 50,496) ( 16,468)
Increase in bank loans 275,352 463,959
Net proceeds from issuance of
common stock 794,336 -
Proceeds from issuance of common
stock in settlement of liabilities 50,000 -
_______ _________
Net cash provided by (used in)
financing activities 1,034,279 768,356
_________ _______
Effect of exchange rate on cash ( 232) -
Net increase (decrease) in cash ( 88,717) ( 10,615)
Cash at beginning of period 108,438 15,442
________ _________
Cash at end of period $ 19,721 $ 4,827
========= =========
See accompanying notes.
CORNICHE GROUP INCORPORATED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - The Company
On September 28, 1995 Fidelity Medical, Inc. changed its name
to Corniche Group Incorporated (hereinafter referred to as the
"Company" or "CGI"). The Company as a result of a reverse acquisition
with Corniche Distribution Limited and its Subsidiaries ("Corniche")
(see "Reverse Acquisition" below), is engaged in the retail sale and
wholesale distribution of stationery products and related office
products including office furniture in the United Kingdom. The
operating subsidiaries of Corniche are Chessbourne International
Limited ("Chessbourne"), The Stationery Company Limited ("TSCL"), and
Kassel Limited ("Kassel").
Note 2 - Basis of Presentation
The accompanying unaudited consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions for Form 10-Q 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 management, the statements
contain all adjustments (consisting only of normal recurring
accruals) necessary to present fairly the financial position as of
October 7, 1995, and the results of operations and cash flows for
twenty-eight weeks ended October 7, 1995 and October 9, 1994. The
results of operations for the twenty-eight weeks ended October 7,
1995 are not necessarily indicative of the results to be expected for
the full year.
The March 25, 1995 Consolidated Balance Sheet has been derived
from the audited financial statements at that date included in the
Company's annual report on Form 10-K. These unaudited consolidated
financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's 1995 annual
report on Form 10-K.
On March 2, 1995, the stockholders of Corniche exchanged all of
their common stock for 1,097,250 shares of CGI. Since the former
stockholders' of Corniche owned a majority of the outstanding stock
of CGI after the acquisition, such purchase transaction was accounted
for as a reverse acquisition. The acquired company (Corniche) is
deemed to have acquired the acquiring company (CGI).
Accordingly, CGI changed its fiscal year to the last Saturday in
March of each year in order to conform to the fiscal year of its
operating subsidiary. Historical stockholders' equity of Corniche
has been retroactively restated to give effect to the
recapitalization. The historical financial statements prior to March
2, 1995 are those of Corniche.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going concern.
Significant losses were incurred during the twenty-eight weeks to
October 7, 1995, and in the fiscal year ended March 25, 1995,
resulting in a working capital and a stockholders' deficiency as of
October 7, 1995 and March 25, 1995. Management of Corniche has taken
several steps to reduce the amount of cash used by operations,
including relocation of its corporate facilities and reducing
staffing levels and other operating expenses. The Company's ability
to continue as a going concern will depend on the continued support
of its banks and its ability to achieve profitability by improving
sales and margins, reduction of cash outflows and its ability to
obtain outside financing sufficient to support expansion of the
Company's operations.
Effective October 1, 1995 the Company declared a one-for-ten
reverse stock split and all numbers of shares and share values stated
herein reflect such reverse split unless otherwise noted.
Note 3 - Inventories
Inventories are valued at the lower of cost (first in, first
out method) or market for wholesale inventories. The retail
inventory method is used for inventory in retail stores.
Inventories consist of:
March 25, 1995 October 7, 1995
(unaudited) (audited)
Wholesale $1,285,208 $1,906,300
Retail 1,395,374 1,240,007
$2,680,582 $3,146,307
Reserves for slow-moving inventory as of October 7, 1995 and March 25,
1995 were approximately $65,656 and $40,224, respectively.
Note 4 - Commitments, Contingencies and Other
Legal Proceedings
During fiscal 1994, the Company disclosed irregularities in its
revenue recognition practices which led to the restatement of the Company's
financial statements for fiscal years ended September 30, 1989, 1990, and
1991, and the first quarter of fiscal 1992. As a result, nine class action
securities complaints (the "lawsuits") were filed against the Company and
certain other persons which were settled in January 1994. Pursuant to the
settlement, the Company paid $2,560,000 in cash in 1995 and issued
$1,000,000 in 7% cumulative convertible preferred stock. The preferred
stock is convertible into common stock at a price of $5.20 per share, and
will be callable for five years. The preferred stock has been included in
stockholders' equity at October 7, 1995 and at March 25, 1995.
Stockholders who purchased CGI's shares between January 3, 1989 and May 7,
1992 have been included within the plaintiff class for purposes of the
settlement.
CGI and certain of its former officers and directors were involved in
a shareholders' derivative action filed in Delaware Chancery Court. The
causes of action asserted included breach of fiduciary duty, breach of duty
of care and trust of the Company's shareholders, gross negligence and
mismanagement, as well as common law conspiracy and aiding and abetting.
The court granted the Company's motion to dismiss by Opinion and Order
dated May 2, 1995. The Company has instituted its own action in State
Court in New Jersey against its former chief executive officer, Efriam
Landa. The complaint was filed on May 4, 1995. Mr. Landa answered on
October 16, 1995 and asserted counterclaims seeking (a) reimbursement of
defense costs in the derivative action and related investigations by the
Securities and Exchange Commission ("SEC") and the United States Attorney
for the District of New Jersey and (b) damages for breach of his employment
contract. No futher action has been taken to date in this matter.
There are other lawsuits and claims pending against the Company which
arose in the normal course of business. In the opinion of management, none
of these actions are expected to have a material adverse effect on the
Company's financial position.
Note 5 - Income Taxes
Effective October 1993, the Company adopted SFAS 109, "Accounting for
Income Taxes", which recognizes (a) the amount of taxes payable or
refundable for the current year and (b) deferred tax liabilities and assets
for the future tax consequences of events that have been recognized in an
enterprise's financial statement or tax returns.
Income Tax expense (benefit) is calculated on a separate company
basis between CGI and Corniche.
Note 6 - Acquisitions
On March 31, 1995 Corniche acquired seven retail stationery stores.
The consideration paid totaled approximately $772,000 and was paid
substantially by way of the assumption of liabilities. The acquisition has
been accounted for under the purchase method of accounting.
The results of operations of those stores from the date of
acquisition have been included in the Company's consolidated statement of
operations.
The assets acquired and liabilities assumed (in thousands) on
acquisition are as follows:
Fair value of assets acquired $ 374
Goodwill 772
Cash paid (25)
Liabilities assumed $ 1,121
Note 7 - Stockholders Equity
Effective October 1, 1995 the Company declared a one-for-ten reverse stock
spilt and all numbers of shares and share values stated herein reflect such
reverse split unless otherwise noted.
During the twenty-eight weeks ended October 7, 1995 the Company sold
478,600 shares of common stock pursuant to an equity private placement
through NWCM Limited at an aggregate purchase price of $957,200 which
resulted in net proceeds to the Company after commissions of $842,336.
In addition the Company issued 25,000 shares of common stock to Trisec
Holdings Ltd. for consultancy services in connection with the "Reverse
Acquisition" (see Note 2) of Corniche on March 2, 1995.
Note 8 - Subsequent Events
In late June 1995, Corniche acquired the freehold interest in the Leek,
Staffordshire warehouse and office facilities for a cash consideration of
approximately $240,000. The consideration was partly funded by a $152,000
15-year business loan from Corniche's bank. The loan is collateralized by
a mortgage on the property and carries a variable interest rate being the
bank's base rate from time to time, currently 0.85% per month. Interest is
added to the loan and the principal and interest are repayable by equal
monthly installments over the term of the loan. The Leek facilities have
been occupied by TSCL under license from a non-affiliated landlord since
July 1994. These facilities are used for the storage and distribution of
inventory for TSCL and house the marketing, buying and administrative
functions of Chessbourne and TSCL.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the
Unaudited Consolidated Financial Statements and notes thereto.
The results of operations for the twenty-eight weeks to October 9,
1994 relate to Corniche and its subsidiaries only. The results of
operations of Corniche Group Incorporated have been included from March 2,
1995, the date of the Corniche acquisition.
The Company's functional currency is the British pound sterling. The
average exchange rates used in converting pounds sterling to U.S. dollars
was 1.5958 for the twenty-eight weeks to October 7, 1995 and 1.5144 for the
corresponding period in 1994.
Results of Operations
The Company experienced large operating losses and net cash outflows
from operating activities during the twenty-eight weeks to October 7, 1995
and in fiscal 1995 resulting in a significant reduction of working capital
during that period and a stockholders deficiency of $5,061,317 at October
7, 1995. This reduction in working capital has adversely affected
operating performance, as both Chessbourne and TSCL have encountered
difficulty in replenishing inventory of key product lines. In addition,
management has been unable to develop its retail activities or extend its
"Style" and "Memo" brand product lines at the pace planned by management
due to lack of capital. While management has taken several steps towards
improving future financial results and reducing the amount of cash used by
operations (including relocation of its corporate facilities and reducing
staffing levels and other operating expenses), there can be no assurance
that such steps will be successful. The Company's ability to continue as a
going concern will depend on the continued support of its bankers and its
ability to achieve profitability by improving sales and margins, reducing
cash outflows and obtaining other sources of funding sufficient to support
the Company's operations (see "Liquidity and Capital Resources" below), of
which there can be no assurance.
The Company is also seeking to improve operating results by expanding
the scope of its retail operations. It was entered into a non-binding
letter of intent to acquire a 76 store retail stationery chain, with
locations which the Company believes will be complementary to its existing
locations. The purchase price is expected to be approximately $17
million, payable $12.5 million in cash, $3 million by a note, and $1.5
million in shares of the Company's Common Stock. Consummation of the
transaction is subject to negotiation and execution of definitive
acquisition agreements, due diligence review and financing. The Company
is negotiating for financing for the cash portion of the purchase
price. No assurances can be given that the Company will be able to obtain
necessary financing or that the other conditions to consummation of a
transaction will be satisfied.
Net revenues in the twenty-eight weeks ended October 7, 1995
decreased by $1,470,134 to $9,229,088, a 13.74% decrease on the net
revenues for the corresponding period in 1994 of $10,699,222. Net revenues
in the sixteen weeks ended October 7, 1995 decreased by $2,864,811 to
$4,052,253, a 41.42% decrease on the corresponding period in 1994 of
$6,917,064. Such decreases in net revenues are due mainly to a shortage of
key inventory lines, particularly in Chessbourne, which have been partially
offset by increased net revenues from the Company's retail operations. The
following table sets out the net revenues by category for the sixteen and
twenty-eight weeks to October 7, 1995 and the corresponding period in 1994:
<TABLE>
16 Weeks Ended 28 Weeks Ended
October 7, 1995 October 9, 1994 October 7, 1995 October 9, 1994
<S> <C> <C> <C> <C>
Wholesale activities $1,507,822 $4,711,886 $4,609,282 $ 7,258,736
Retail activities 2,544,431 2,205,178 4,619,806 3,440,486
Total $4,052,253 $6,917,064 $ 9,229,088 $10,699,222
</TABLE>
Net revenues from wholesale activities in the sixteen weeks to
October 7, 1995 decreased by $3,204,064 or 68.0% from the corresponding
period in 1994 and by $2,649,454 or 36.50% in the twenty-eight weeks to
October 7, 1995.
The Company's inability to replenish inventory of key product lines
undoubtedly had a significant impact on net revenues achieved, not least
because some major customers are unwilling to purchase from the Company
unless a complete product range is available. In addition the Company had
to forego wholesale revenues through not being able, for part of the
period, to pass on cost price increases to its customers. These problems
were compounded by shortages of some paper products on the world market.
Net revenues from retail activities in the sixteen weeks to October
7, 1995 increased by $339,253 or 15.38% as compared to the corresponding
period in 1994. Of this increase approximately $898,000 was generated by
stores opened in fiscal 1995 and the 7 stores acquired on March 31, 1995.
These revenue increases were partially offset by lost revenues of
approximately $586,000 through the closure of two underperforming stores.
Stores trading in the sixteen week period during both 1995 and 1994
achieved an increase in net revenues of approximately $27,000 in 1995
as compared to the corresponding period in 1994. Retail activity net revenues
increased by $1,179,320 or 34.28% in the twenty-eight weeks to October 7,
1995 as compared to the corresponding period in 1994. This increase
comprises approximately $1,551,000 generated by new stores, approximately
$462,000 generated by stores trading in both 1995 and 1994 and lost
revenues of approximately $833,000 through the closure of two
underperforming stores.
Gross profit decreased by $301,592 or 18.28% in the sixteen weeks to
October 7, 1995 and by $263,962 or 9.68% in the twenty-eight weeks to
October 7, 1995 as compared to the corresponding periods in 1994. The
following table sets out gross profit by category for the sixteen and
twenty-eight weeks to October 7, 1995 and the corresponding period in 1994:
<TABLE>
16 Weeks Ended 28 Weeks Ended
October 7, 1995 October 9, 1994 October 7, 1995 October 9, 1994
<S> <C> <C> <C> <C>
Wholesale activities $ 131,470 $ 794,062 $ 355,637 $1,227,573
Retail activities 1,217,153 856,153 2,105,803 1,497,809
Total $1,348,623 $1,650,215 $2,461,440 $2,725,382
</TABLE>
Gross profit from wholesale activities as a percentage of net
revenues decreased to 8.72% in the sixteen weeks to October 7, 1995 as
compared to 16.85% in the corresponding period in 1994. The gross profit
percentage in the twenty-eight weeks to October 7, 1995 decreased to 7.71%
as compared to 16.91% in the corresponding period in 1994. Such decreases
are primarily the result of cost price increases not being passed on to
customers. Retail activity percentage gross profit as a percentage of net
revenues increased for the sixteen weeks to October 7, 1995 to 47.83% as
compared to 38.92% for the corresponding period in 1994 and to 45.58%
for the twenty-eight weeks to October 7, 1995 as compared to 43.53% for
the corresponding period in 1994.
Selling, general and administrative expenses for the sixteen weeks to
October 7, 1995 increased by 32.83% or $688,825 to $2,787,006 as compared
to the corresponding period in 1994 and by 45.38% or $1,599,991 to
$5,125,910 in the twenty-eight weeks to October 7, 1995. The following
table sets out selling, general and administrative expenses by business
activity for the sixteen and twenty-eight weeks to October 7, 1995 and the
corresponding period in 1994:
<TABLE>
16 Weeks Ended 28 Weeks Ended
October 7, 1995 October 9, 1994 October 7, 1995 October 9, 1994
<S> <C> <C> <C> <C>
Wholesale activities $ 803,899 $ 903,290 $ 1,216,151 $1,312,006
Retail activities 1,661,273 1,076,284 3,267,196 1,850,524
Other 321,834 118,607 642,563 363,389
Total $2,787,006 $2,098,181 $ 5,125,910 $3,525,919
</TABLE>
Retail activity selling, general and administrative expenses
increased by 54.35% or $584,989 in the sixteen weeks to October 7, 1995 as
compared to the corresponding period in 1994. Approximately $498,000 of
this increase results from the operation of new retail stores which was
partially offset by a reduction in expenses of approximately $324,000 as a
result of the closure of two stores. The balance of the increase in retail
activity selling, general and administrative expenses of approximately
$408,000 is the increase in expenses incurred by those stores operated in
both 1995 and 1994. Retail activity selling, general and administrative
expenses increased by $1,416,672 or 76.56% in the twenty-eight weeks to
October 7, 1995 as compared to the corresponding period in 1994.
Approximately $937,000 of this increase results from the operation of new
stores and approximately $730,000 is the increase in expenses incurred by
those stores operated in both 1995 and 1994. Such increases have been
partially offset by a reduction in expenses of approximately $251,000 as a
result of the closure of two stores.
The reverse acquisition of CGI on March 2, 1995 increased selling,
general and administrative expenses in the sixteen weeks to October 7, 1995
by approximately $183,000 and by approximately $271,000 in the twenty-eight
weeks to October 7, 1995. The principal elements of these corporate
expenses are insurance and professional fees.
As a result of the foregoing the Company recorded an operating loss
of $1,438,383 in the sixteen weeks to October 7, 1995 as compared to an
operating loss of $447,966 in the corresponding period in 1994 and an
operating loss of $2,664,470 in the twenty-eight weeks to October 7, 1995
as compared to an operating loss of $800,537 in the corresponding period
in 1994.
Net interest expense in the sixteen weeks to October 7, 1995
increased by $61,825 to $204,894 as compared to $143,069 in the
corresponding period in 1994. The increase in the twenty-eight weeks to
October 7, 1995 was $104,886 from the corresponding period in 1994. These
increases are due primarily to increased utilization of bank credit lines
generally throughout the group.
Liquidity and Capital Resources
During the 28 weeks to October 7, 1995, there were net cash outflows
from operating activities of $1,015,318, which together with certain non-
operating activities were financed by increased bank loans of $275,352 and
net proceeds from the issuance of common stock of $794,336. This net cash
outflow principally resulted from the Company's net loss and investments in
corporate facilities and new stores. During the 28 weeks to October 7,
1995, the Company relied on revenues from sales, increased bank loans, net
proceeds from the issuance of common stock and trade credit to meet its
working capital requirements and other operating needs.
As a result of the operating losses incurred in the 28 weeks to
October 7, 1995 and in fiscal 1995 and the consequential lack of capital,
the Company is in breach of certain covenants relating to its lines of
credit from its bankers. Such breaches are in respect of minimum net worth
and financial ratio covenants. These covenants are subject to annual
review and management believes that these breaches will be rectified during
negotiations currently being conducted with its primary bankers. However,
no assurances can be given about continued bank support.
Although management has taken several steps to reduce the amount of
cash used by operations, including rationalization of corporate facilities
and reducing staffing levels and other operating expenses, the Company's
operations may not provide sufficient internally generated cash flows to
meet its projected requirements. To supplement the funding of its
operations, the Company obtained net cash proceeds from a bridge loan of
$250,000 from an unaffiliated third party. In connection with this loan,
the Company entered into an agreement to repay $300,000 on November 30,
1995 and assigned a security interest to the lender in the Company's
accounts receivable and inventory as collateral for the loan.
Subsequently, in March 1995, the lender converted the loan into 150,000
shares of the Company's common stock and the collateral referred to above
was released.
Simultaneously with the Company's acquisition of Corniche on March 2,
1995, NWCM Limited, a Hong Kong investment banker, agreed, on a staggered
basis, to raise up to $5,000,000 of new equity capital on a "best efforts"
basis. The offer was limited to experienced, sophisticated investors who
are "non-U.S. persons" under Regulation S of the United States Securities
Act of 1993. An initial offer of 600,000 shares was made at a price
of $2.00 per share. Through the conclusion of the offer 528,600 of such
shares were sold at an aggregate purchase price of $1,057,200, which
resulted in net proceeds to the Company after commissions of $894,336.
Pursuant to the transaction, the Company paid NWCM a fee of $50,000.
In addition, NWCM has received and will receive a sales commission
of 10% and a non-accountable expense allowance equal to 2% of the
aggregate purchase price of the stock sold. The Company has also
agreed to indemnify NWCM for certain liabilities arising from the
transaction. If through subsequent offerings, NWCM raises an aggregate of
$5 million, NWCM will be granted a warrant entitling it to purchase a number
of shares equal to 10% of the shares sold, exercisable for five years
commencing six months after completion of the offering. Further, the Company
will pay NWCM or one of its affiliates $5,000 per month for a period of
one year, commencing 30 days after it has raised $5 million in the
aggregate, as retainer for general investment banking services. There can
be no assurance that the Company will raise additional equity or generate
cash from its operations.
The Company is current in negotiation with its primary bankers, the Bank of
Scotland, to convert a significant portion of its bank debt to equity but
there can be no assurance given that it will do so.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Reference is made to the legal proceedings described in Note 3
to the Unaudited Consolidated Financial Statements in Item 1 of this
report.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of stockholders on
September 28, 1995. At the meeting, the following items were voted on by
the shareholders:
1. Election of five directors;
2. Approval of the proposed change of the corporation's name
to "Corniche Group, Inc.";
3. Approval of a proposed one for ten reverse stock split of
the Company's outstanding Common Stock (retaining the same number of
authorized common shares); and
4. Approval of a proposed increase in the number of shares
of the Company's authorized Preferred Stock to 5 million shares.
All such matters were approved by the shareholders. The voting on such
matters was as follows:
1. Directors For Against Abstain
(or Withhold Authority)
Brian J. Baylis 18,965,366 - 103,339
Susan A.M. Crisp 18,965,316 - 103,389
James Fyfe 18,964,866 - 103,839
George Lombardi 18,965,616 - 105,089
Matthew P. Pazaryna 18,963,791 - 104,914
2. Change of Name 19,015,401 38,885 14,419
3. One for Ten Reverse
Stock Split 18,494,470 179,286 12,366
4. Increase in Authorized
Preferred Stock 14,819,467 184,910 24,381
_________________
* Shares are prior to reverse split.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - none.
(b) The Company filed a report on Form 8-K of July 25, 1995
relating to its new auditors. The Company also
filed a report on Form 8-K on October 17, 1995 for an event
on October 11, 1995, its delisting from the Nasdaq Smallcap
market.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Dated: November 22, 1995 FIDELITY MEDICAL,
INC.
By: /s/ James
Fyfe
James Fyfe
Chief Operating
Officer and
Assistant Secretary
By: /s/ Susan A.M.
Crisp
Susan A.M. Crisp
Vice President,
Finance and
Administration, Chief
Financial Officer,
Treasurer
and Secretary
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Dated: November 22, 1995 FIDELITY MEDICAL,
INC.
By:
James Fyfe
Chief Operating
Officer and
Assistant Secretary
By:
Susan A.M. Crisp
Vice President,
Finance and
Administration, Chief
Financial Officer,
Treasurer
and Secretary
</page>
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