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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From April 1, 1998 to December 31, 1998
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 (I.R.S. employer identification no.)
incorporation or organization)
610 SOUTH INDUSTRIAL BOULEVARD
SUITE 220
EULESS, TEXAS 76040
(817) 283-4250
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.001 PAR VALUE
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
On April 1, 1999, the aggregate market price of the voting and
non-voting common equity held by non-affiliates of the registrant was
approximately $7.9 million. (For purposes of determination of the above stated
amount, only directors, executive officers and 10% or greater stockholders have
been deemed affiliates).
On April 1, 1999, there were 6,371,686 outstanding shares of common
stock, par value $0.001 per share.
DOCUMENTS INCORPORATED BY REFERENCE:
None.
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FORWARD-LOOKING STATEMENTS
In addition to historical information, this Report on Form 10-K
contains forward-looking statements, which can be identified by the use of
forward looking terminology, such as "may," "will," "expect," "could,"
"anticipate," "estimate" or "continue" or the negative thereof or other
variations thereon or comparable terminology. These forward-looking statements
are subject to risks and uncertainties that could cause actual results to differ
materially from those projected. Readers are cautioned not to place undue
reliance on these forward-looking statements, which reflect management's
analysis only as of the date hereof. The Company undertakes no obligation to
publicly revise these forward-looking statements to reflect events or
circumstances that arise after the date hereof. Readers are also urged to
carefully review and consider the various disclosures made by the Company in
this report, as well as the Company's periodic reports and other filings with
the Securities and Exchange Commission.
PART I
ITEM 1. BUSINESS
GENERAL
On February 4, 1999, Corniche Group Incorporated (the "Company")
changed its fiscal year end from the last Saturday in March of each year to
December 31 of each year. The following discussion presents results for the
nine-month interim period from April 1, 1998 to December 31, 1998.
The Company's principal executive offices are located at 610 South
Industrial Boulevard, Suite 220, Euless, Texas 76040, and its telephone number
is (817) 283-4250.
HISTORY
The Company was incorporated in Delaware on September 18, 1980 under
the name Fidelity Medical Services, Inc. On July 28, 1983 the Company changed
its name to Fidelity Medical, Inc. From its inception through March 1995, the
Company was engaged in the development, design, assembly, marketing and sale of
medical imaging products through its wholly-owned subsidiary, Fidelity Medical,
Inc., a New Jersey corporation ("FMI"). On March 2, 1995, the Company acquired
Corniche Distribution Ltd. ("CDL"), a United Kingdom ("UK") corporation
established in 1992. At such time, CDL was a holding company for two operating
subsidiaries, Chessbourne International Ltd. ("Chessbourne"), a
distributor/supplier of stationery products and office furniture, and The
Stationery Company Limited ("TSCL"), a stationery retailer. The acquisition of
CDL resulted in the former shareholders of CDL, Brian J. Baylis and Susan A.M.
Crisp, owning a majority of the outstanding common shares of the Company after
the acquisition and was treated as a recapitalization of CDL with CDL being
treated as the acquirer. Accordingly, the Company changed its fiscal year end to
the last Saturday in March of each year in order to conform to the fiscal years
of its UK operating subsidiaries and, unless otherwise indicated, the financial
information and data hereafter contained in the Company's financial reports
relate to the operations of CDL alone for periods prior to March 2, 1995. At the
time of the CDL acquisition, CDL owned 51% of the common stock of Chessbourne,
the other 49% being owned by an unrelated entity, Ronatree Limited ("Ronatree"),
a property investment company. In connection with the CDL acquisition, the
Company acquired the 49% interest of Ronatree in Chessbourne by issuing to
Ronatree 25,000 shares of its common stock. At such time and in furtherance of
the CDL acquisition, the Company also issued 215,150 shares of its common stock
to Chester Holdings, Ltd. ("Chester"), a Colorado corporation, in order to
induce Chester to agree to terminate a pre-existing agreement giving Chester the
right to acquire CDL and to further induce Chester to forgive approximately
$71,000 of net indebtedness owing to Chester by CDL and its subsidiaries.
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Effective March 25, 1995, the Company sold its wholly-owned medical
imaging products subsidiary, FMI, to Chester in exchange for the 215,150 shares
of the Company's common stock previously issued to Chester in connection with
the Company's acquisition of CDL and Chester's Promissory Note and Option
Agreement dated as of March 25, 1995 (the "Note and Option Agreement"). The Note
and Option Agreement contained an 8% promissory note from Chester to the Company
in the principal amount of $200,000 due October 1, 1995 (the "Note"). It also
included an option, in favor of the Company, to apply the unpaid principal
balance and accrued interest due on the Note to the purchase of shares of FMI,
Chester or any other parent company to which Chester may have transferred the
FMI stock, at the fair market value of such shares. The Company's medical
imaging products business had been generating significant losses for a number of
years resulting in the decision to dispose of the medical imaging products
business and to focus the Company's business operations on the development and
expansion of its stationery operations. The Note was not paid by Chester on its
due date. However, during the period May 1996 through July 1996 Chester paid the
Company $125,000 of the principal sum due the Company under the Note. All
accrued interest due under the Note and the remaining principal balance of
$75,000 has not been paid as of the date hereof. The Company does not anticipate
any further cash recoveries against the Note. The Company may exercise the
option to purchase voting shares of Medical Laser Technologies, Inc., the
corporate parent of FMI, by cancelling the unpaid balance on the Note, although
no assurance can be given that this will prove to be the case.
Following the sale of FMI, the Company's business operations consisted
of the retail stationery operations and brand marketing and stationery wholesale
operations of TSCL and Chessbourne respectively. The Company's operations were
funded in large part from loans made by the Bank of Scotland, the Company's
primary lender, to each of CDL, TSCL and Chessbourne over a period of several
years. In accordance with customary UK practice, the Bank of Scotland, when
making such loans, obtained security for these loans by means of mortgages over
fixed assets and debentures over pools of assets which by their nature will
change from time to time. the Company experienced large operating losses and net
cash outflows from operating activities during fiscal 1996 resulting in severe
liquidity problems. The Company was unable to secure badly needed interim
financing either in the form of additional loans or the conversion of bank debt
to equity. Consequently, the Bank of Scotland had Chessbourne and TSCL placed
into receivership in the UK on February 7, 1996 and had CDL placed into
receivership in the UK on February 28, 1996. The receiverships resulted in the
discontinuation of all of the Company's business operations. From such time
until May 1998 the Company was inactive.
CHANGE IN CONTROL OF THE COMPANY
At the 1998 Annual Meeting of the Company's Stockholders held on Mary
18, 1998, the Company's stockholders approved the terms of a Stock Purchase
Agreement (the "Agreement") among the Company, Mr. Joel San Antonio and certain
other individuals. Pursuant to the Agreement, Mr. San Antonio purchased 710,000
shares of the Company's newly created Series B Convertible Redeemable Preferred
Stock (the "Series B Preferred Stock") for $71,000, Mr. Ronald Glime purchased
25,000 shares of Series B Preferred Stock for $2,500, Mr. Robert H. Hutchins
purchased 15,000 shares of Series B Preferred Stock for $1,500 and Mr. Glen Aber
purchased 15,000 shares of Series B Preferred Stock for $1,500. In connection
with the Agreement, 50,000 shares of Series B Preferred Stock were issued to Mr.
Alan Zuckerman for his assistance to the Company in identifying and reviewing
business opportunities and his assistance in bringing the Agreement to fruition,
and 10,000 shares of Series B Preferred Stock were issued to Mr. James Fyfe for
his work in bringing the Agreement to fruition.
Pursuant to the Agreement, the Company paid approximately $50,000 in
expenses, primarily legal expenses, incurred by Messrs. San Antonio, Glime,
Hutchins and Aber in connection with the Agreement.
After May 1998, Mr. Glime purchased 25,000 shares of Series B Preferred
Stock from Mr. San Antonio.
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The Series B Preferred Stock has ten votes per share and votes as a
class with the common stock on all matters submitted to a vote of the Company's
stockholders. The Series B Preferred Stock carries a zero coupon. Each share of
Series B Preferred Stock is convertible into ten shares of common stock and is
entitled to ten times any dividends paid on the common stock.
Mr. San Antonio has control of the Company as the holder of 685,000
shares of Series B Preferred Stock. Accordingly, Mr. San Antonio, who holds
approximately 47% of the Company's voting power, by himself almost has
sufficient voting power to elect all of the members of the Board of Directors.
However, the initial purchasers of the Series B Preferred Stock, including Mr.
San Antonio, are required to vote in favor of Mr. Fyfe or his designee as a
director of the Company through June 30, 2000.
BUSINESS STRATEGY
Since May 1998, the Company has been developing a comprehensive
strategic and operational business plan and assembling a management team.
Following the Company's change of control, the Company's management has sought
to put in place a new strategic and operational business plan for the Company
that involves the Company's entry into the service contract business and the
insurance industry.
WarrantySuperstore.com Web Site
The Company has developed a web site on the Internet to market service
contracts on automobiles and consumer products. The Company's web site is called
WarrantySuperstore.com. Through the WarrantySuperstore.com web site, the Company
will sell its products and services directly to consumers. The Company does not
currently intend to have any other distribution channels for its products and
services other than the Internet.
The first product line offered through the WarrantySuperstore.com web
site will be the Vehicle Service Contract Program, which will include automobile
service contracts for new and used vehicles. The Company intends to add new
product lines to the web site every two to three months. It is anticipated that
the second product line offered will be a Home Warranty Program. Other planned
product lines are office equipment, consumer electronics, home appliances, lawn
and garden equipment and computers.
The Company intends to advertise its web site through print, radio and
television advertising and links from other Internet sites.
The Company intends to sell its products and services in states that
permit program marketers to be the obligor on service contracts. Currently, this
represents approximately 40 states for automobile service contracts and most
states for other service contracts.
The Company will be the obligor and marketer of the service contracts
sold on the WarrantySuperstore.com web site. As obligor, the Company is
responsible for marketing, booking of sales, collecting payment for the service
contracts, reporting and paying premiums to the insurance carrier and providing
the necessary information to the insurance carrier's appointed claims
administrator.
Although the Company will be in charge of most functions for the
service contracts, it will not administer the claim functions. The insurance
carrier will appoint a claims administrator to administer the claims functions,
including payment of claims. The Company intends to establish an electronic data
processing interface with the claims administrator and will report details
regarding the contracts to the insurance carrier.
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The Company has letters of intent from CIGNA Corp. and Reliance
INTEGRAMARK ("Reliance") indicating their intent to provide through one of their
Best's "A"- rated insurance carriers contractual liability insurance covering
the Company's obligations to repair the products covered by the service
contracts.
The Company anticipates that it will grant options to purchase common
stock to CIGNA Corp. and Reliance at the time it enters into definitive
agreements with them for the provision of policies covering the Company's
service contract obligations. The Company anticipates that each option agreement
will provide for a grant of a non-transferable, two-year option to purchase
750,000 shares of common stock at an exercise price of $5.00 per share.
The Company also intends to provide customer analysis reports to
retailers on a fee basis. The Company believes that it will be able to develop
market research questionnaires and produce market research reports based on
database information that it will collect through sales on its web site.
The Company also expects that it will use the WarrantySuperstore.com
site to generate advertising revenues. The Company plans to sell banner page
advertisements on its web site and to sell advertisements on a preferred client
list basis.
Stamford Reinsurance Activities
On September 30, 1998, the Company acquired all of the capital stock of
Stamford Insurance Company, Ltd. ("Stamford"). Stamford was chartered under the
laws of the Cayman Islands in 1991. Stamford has not generated any revenues
since its inception. Stamford is licensed by the Cayman Islands to conduct
business as an insurance company.
When Stamford is sufficiently capitalized, the Company intends to
request the insurance carriers who will provide contractual liability coverage
to the Company on its service contracts to share (via reinsurance) a portion of
the risk with Stamford. The Company's ability to influence the insurance
carriers to direct reinsurance business to Stamford will depend on the Company's
negotiating strength, which, in turn, will depend on the success of the
WarrantySuperstore.com program. Stamford's ability to reinsure the Company's
internet business will largely depend on the primary insurance carrier's
willingness to cede reinsurance to Stamford.
The Company's long range plans for Stamford depend on Stamford's growth
and development of greater financial stability. If Stamford's operations are
successful, the Company plans to have Stamford seek reinsurance opportunities
that are not related to the Company. Stamford may use reinsurance brokers to
identify other reinsurance opportunities.
Domestic Licensing Plans
As an offshore insurance company, Stamford is permitted to function as
a reinsurance company in the United States. As such, it can reinsure U.S.
insurance companies. The Company's long range strategy is to identify and
acquire a property and casualty insurance carrier that holds state licenses. If
the Company acquires a domestic insurance carrier, it will use the carrier to
act as a specialty insurer in niche commercial markets that are under served by
standard insurance carriers.
Other Information
As part of its overall business plan, the Company may pursue other and
different business activities than those described above, but it has no current
plans to do so.
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The Company has also entered into an investment advisory agreement with
AIG Global Investment Corporation under which it will function as investment
advisor and manager of the Company's investable assets. AIG Global provides
management services to all affiliated insurance companies of American
International Group and other third-party institutions on a world-wide basis.
The preceding description represents the Company's current plans, which
are subject to change as business necessities require during the course of
implementation. No assurances can be given that the Company will be successful
in implementing its business plan as currently envisioned.
EMPLOYEES
At April 22, 1999, the Company employed 3 full-time personnel.
ITEM 2. PROPERTIES
The Company occupies an approximately 4,100 square foot office facility
at 610 South Industrial Boulevard, Euless, Texas, pursuant to a lease. The lease
provides for monthly payments of $4,175 and expires on July 2001.
ITEM 3. LEGAL PROCEEDINGS
No material legal proceedings are pending to which the Company or any
of its property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders
during the period from October 1, 1998 through December 31, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Since October 11, 1995, the Company's common stock has been listed for
trading on the OTC Bulletin Board. Prior to April 20, 1998, the common stock was
listed under the symbol "CGII" and thereafter it has been listed under the
symbol "CNGI." The following table sets forth the range of high and low bid
prices of the common stock for periods from January 1, 1997 through March 31,
1999, as reported by Nasdaq Trading and Market Services. On April 21, the
closing bid price for the common stock was $1.125. The quotations represent
prices between dealers in securities, do not include retail mark-ups, mark-downs
or commissions and do not necessarily represent actual transactions.
<TABLE>
<CAPTION>
Bid Prices
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High Low
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<S> <C> <C>
1997
Quarter ended March 31 $ 0.34375 $ 0.15625
Quarter ended June 30 1.00 0.3125
Quarter ended September 30 0.875 0.625
Quarter ended December 31 0.8125 0.625
1998
Quarter ended March 31 2.3125 0.65625
Quarter ended June 30 2.3125 1.15625
Quarter ended September 30 1.96875 0.625
Quarter ended December 31 1.00 0.6875
1999
Quarter ended March 31 1.3750 0.6250
</TABLE>
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At March 2, 1999, there were approximately 1,150 record holders of the
common stock. Holders of common stock are entitled to dividends when, as and if
declared by the Board of Directors out of funds legally available therefor. The
Company has not paid any cash dividends on its common stock and, for the
foreseeable future, intends to retain earnings, if any, to finance the
operations, development, and expansion of its business. Future dividend policy
is subject to the discretion of the Company's Board of Directors.
SECURITIES OFFERINGS
On May 18, 1998, the Company sold 825,000 shares of Series B Preferred
Stock pursuant to the Agreement described under Item 1. "Business -- Change in
Control of the Company." The Series B Preferred Stock was issued and sold
without registration under the Securities Act of 1933, as amended (the
"Securities Act"), in reliance on the exemption in Section 4(2) of the
Securities Act. Mr. Joel San Antonio purchased 710,000 shares of Series B
Preferred Stock for $71,000, Mr. Ronald Glime purchased 25,000 shares of Series
B Preferred Stock for $2,500, Mr. Robert H. Hutchins purchased 15,000 shares of
Series B Preferred Stock for $1,500 and Mr. Glen Aber purchased 15,000 shares of
Series B Preferred Stock for $1,500. In connection with the Agreement, 50,000
shares of Series B Preferred Stock were issued to Mr. Alan Zuckerman for his
assistance to the Company in identifying and reviewing business opportunities
and his assistance in bringing the Agreement to fruition and 10,000 shares of
Series B Convertible Preferred Stock were issued to Mr. James Fyfe for his work
in bringing the Agreement to fruition.
Pursuant to the Agreement, the Company paid approximately $50,000 in
expenses, primarily legal expenses, incurred by Messrs. San Antonio, Glime,
Hutchins and Aber in connection with the Agreement.
The Series B Preferred Stock has ten votes per share and votes as a
class with the common stock on all matters submitted to a vote of the Company's
stockholders and carries a zero coupon. Each share of Series B Preferred Stock
is convertible into ten shares of common stock and is entitled to ten times any
dividends paid on the common stock.
ITEM 6. SELECTED FINANCIAL DATA
The selected statements of operations and balance sheet data set forth
below are derived from the financial statements of the Company, which were
examined by Weinick Sanders Leventhal & Co., LLP, independent certified public
accountants, for the nine months ended December 31, 1998, by Simontacchi & Co.
LLP ("Simontacchi"), independent certified public accountants, for the years
ended March 31, 1998, 1997 and 1996 and by Mahoney Cohen & Company, PC ("Mahoney
Cohen"), independent certified public accountants, for the year ended March 25,
1995. Mahoney Cohen did not audit the Company's UK subsidiaries, the financial
statements of which were audited by another auditor whose report was furnished
to Mahoney Cohen. The information set forth below should be read in conjunction
with the audited financial statements of the Company and related notes appearing
elsewhere in this Report on Form 10-K. See Item 8. "Financial Statements and
Supplemental Data."
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<TABLE>
<CAPTION>
FOR THE NINE FOR THE FISCAL YEARS ENDED
MONTHS ENDED ------------------------------------------------------------
DECEMBER 31, MARCH 31, MARCH 31, MARCH 31, MARCH 25,
1998 1998 1997 1996 1995
--------------- -------------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Statement of operations:
Net sales ........................... $ -- $ -- $ -- $ -- $21,048,151
Cost of sales ....................... -- -- -- -- 15,531,102
Gross profit ........................ -- -- -- -- 5,517,049
Operating loss ...................... (428,157) (221,602) (251,583) (257,037) (2,821,339)
Net loss ............................ (447,593) (263,865) (332,604) (323,510) (3,394,652)
Net loss per common share .............. ($ 0.07) ($ 0.05) ($ 0.14) ($ 0.14) ($ 2.05)
Weighted average number of shares
outstanding ............................ 6,365,015 5,165,272 2,412,278 2,300,289 1,656,903
Dividends per common share ............. -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, MARCH 31,
1998 1998 1997
-------------- ------------- -------------
<S> <C> <C> <C>
Balance sheet data:
Working capital (deficiency).............................. $ 458,917 $ 869,567 ($ 652,456)
Total assets.............................................. 905,791 1,129,602 14,914
Current liabilities....................................... 375,571 259,676 666,623
(Accumulated deficit)..................................... (3,160,847) (2,713,254) (2,449,389)
Stockholders' equity (deficiency)......................... (307,807) (23,982) (1,560,976)
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The following discussion and analysis should be read in conjunction
with the financial statements and notes thereto contained elsewhere in this
Report on Form 10-K. Certain statements under this Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operation,"
constitute "forward-looking statements" under the Private Securities Litigation
Reform Act of 1995. See "Forward Looking Statements."
On February 4, 1999, the Company changed its fiscal year from the last
Saturday in March to December 31. The following discussion is of the Company's
financial condition and results of operations for the nine months ended December
31, 1997 and December 31, 1998.
RESULTS OF OPERATIONS
During the period March 1996 through March 1998, the Company's primary
activities have been to engage in three private securities offerings and to
settle and pay off certain of its outstanding liabilities. In May 1998, the
stockholders approved the issuance of the Series B Preferred Stock and change in
control of the Company.
The loss before net interest income and preferred dividend accrual
during the nine month periods ended December 31, 1998 was approximately
$428,000, which is an increase in the amount of loss of approximately $260,000
(154.8%) over the nine months ended December 31, 1997. The increase in the
current period arose from increases in general and administrative costs over the
1997 period amounts,
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primarily consulting and professional fees of approximately $60,000, salaries of
approximately $55,000, and Annual Meeting and general office costs of
approximately $50,000.
Net interest income increased to approximately $25,000 in the current
nine month period from approximately $6,300 in the 1997 period. The increase is
the result of income earned on the proceeds from the Company's sales of its
securities in October 1997 through May 1998.
The accrual of the preferred dividend remained relatively constant in
each period.
Net loss increased approximately $240,000 (115.9%) in the current nine
month period to approximately $447,000 from approximately $207,000 in the 1997
period principally as a result of the increased general and administrative
costs.
The Company has not generated any operating revenues since February
1996, when its then operating subsidiaries were placed into receivership in the
UK.
The receiverships resulted in the loss of all of the Company's
operations and operating assets and eliminated most liabilities. Accordingly,
the operating activities of the UK subsidiaries were classified as a
discontinued operation and the excess of the UK subsidiaries' cumulative losses
over the Company's investment was included in the income statement for the year
ended March 31, 1996. In addition, the UK subsidiaries were removed from the
balance sheet for periods subsequent to December 30, 1995.
The Company recorded losses in the year ended March 31, 1998 of
approximately $221,000 before interest expense and preferred stock dividend
accrual (approximately $252,000 in 1997 and approximately $257,000 in 1996).
Such losses arose from general and administrative expenses, which principally
comprise professional fees, travel expenses and general office costs.
FINANCIAL CONDITION
The Company's cash condition was reduced by approximately $923,000 from
March 31, 1998 to December 31, 1998, due to an increase in investments in
marketable securities of approximately $628,000, the acquisition of property of
approximately $26,000, the acquisition of Stamford for $37,000, and cash used in
operations of approximately $323,000. Stamford had cash on the date of
acquisition, September 30, 1998, of approximately $19,000.
Even though the acquisition of Stamford may enable the Company to
generate limited reinsurance revenues, management's business plan requires
additional funding through future sales of the Company's securities and/or other
financing alternatives. Management anticipates a continued deterioration in the
Company's financial condition in the near term due to ongoing general and
administrative costs until the Company raises the sufficient financing to
commerce operation of its WarrantySuperstore.com web site and capitalize its
insurance business.
In April 1999, the Company commenced a private placement of up to
3,500,000 shares of common stock to be sold to accredited investors. If the
private placement is successful and all 3,500,000 shares are sold, the proceeds
to the Company are anticipated to be $2,795,000. There can be no assurance that
the Company will be successful in its efforts to raise any funds from any of the
options under evaluation or that it will be able to avail itself of other
alternative sources of funds.
LIQUIDITY AND CAPITAL RESOURCES
The Company relied solely on the proceeds from the sales of its
securities in October 1997 and May 1998 for the sources of its funds. The
Company will need additional capital to implement its business plan. In April
1999, the Company commenced a private placement of up to 3,500,000 shares of
common
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stock to be sold to "accredited investors", as such term is defined in
Regulation D under the Securities Act of 1933. If the private placement is
successful and all 3,500,000 shares are sold, the proceeds to the Company are
anticipated to be $2,795,000. There can be no assurance that the Company will be
successful in its efforts to raise any funds or that it will be able to avail
itself of other alternative sources of funds.
The Company's working capital at December 31, 1998, March 31, 1998 and
December 31, 1997 was approximately $459,000, approximately $801,000, and
approximately $870,000, respectively. The deterioration of working capital of
approximately $411,000 and approximately $342,000 from a year and nine months
ago, respectively, primarily results from the loss incurred during the period,
net of the proceeds from sales of the Company's securities.
The Certificate of Designation for the Series A Preferred Stock (filed
as Exhibit 3.8 to the Company's Form 10-K for the year ended September 30, 1994)
states that at any time after December 1, 1999 any holder of Series A Preferred
Stock may require the Company to redeem his or her shares of Series A Preferred
Stock (if there are funds with which the Company may legally do so) at a price
of $1.00 per share. Notwithstanding the foregoing redemption provisions, if any
dividends on the Series A Preferred Stock are past due, no shares of Series A
Preferred Stock may be redeemed by the Company unless all outstanding shares of
Series A Preferred Stock are simultaneously redeemed. The holders of Series A
Preferred Stock may convert their Series A Preferred Stock into shares of common
stock at a price of $5.20 per share. At December 31, 1998, 828,765 shares of
Series A Preferred Stock were outstanding. If after December 1, 1999 a
significant number of shares of Series A Preferred Stock remain unconverted into
common stock, and if the Company were required to redeem a significant number of
shares of Series A Preferred Stock, the Company's financial condition would be
materially adversely affected.
INFLATION
Inflation has not had a significant effect on the Company's operations
or financial position and management believes that the future effects of
inflation on the Company's operations and financial position will be
insignificant.
YEAR 2000 COMPLIANCE
Even though the Company at the present time does not have any
operations, it recognizes the need to ensure that its future operations, if any,
will not be adversely effected by Year 2000 software or hardware failures. The
Company has commenced communications with its suppliers, banks, investment
advisors, and others with which it does business to coordinate Year 2000
conversion and it intends to continue such communications over the next several
months.
Since the Company has not been engaged in any business for the past
several years, its concerns regarding Year 2000 are focused on the future. The
Company is in the process of making the initial assessment of its computer
information needs and has just recently ordered and has partially received its
first system hardware, which is expected to be fully delivered and installed
shortly. The Company will be further assessing its future software needs. The
Company has received assurances from its vendors that the hardware and software
that it has acquired to date is Year 2000 compliant. The Company intends to be
sure that all future hardware and software acquisitions are Year 2000 compliant
and intends to secure confirmation of compliance from the suppliers.
The Company does not know what impact, if any, Year 2000 non-compliance
will have on its financial condition or its contemplated future operations. But
based upon available current information, the Company does not anticipate that,
in the aggregate, costs associated with the Year 2000 issue will have a material
adverse financial impact on the Company. However, despite steps that the Company
has taken,
9
<PAGE> 11
is presently taking, and intends to take in the future to insure that it, its
future customers, its suppliers and others are free of Year 2000 issues, there
can be no assurance that the Company will not encounter non-compliance issues
that could have a material adverse impact on its financial condition and/or its
future operations. If, despite the Company's efforts under its Year 2000
planning, there are Year 2000 related failures affecting the Company from
outside sources, management does not at the present time believe the impact will
be substantial.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The response to this item is submitted as a separate section of this
Report on Form 10-K. See Item 14.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On July 20, 1995, the Company appointed Mahoney Cohen & Company, PC
("Mahoney Cohen") as the Company's independent auditors responsible for the
audit of the Company's financial statements. This action was recommended by the
Company's Audit Committee and approved by its Board of Directors. The Company
had not consulted Mahoney Cohen regarding any accounting or financial reporting
issues prior to that firm being retained by the Company.
In connection with its audit of the Company's financial statements for
the fiscal year ended March 25, 1995, and in the subsequent interim period
through on or about April 17, 1997 when the relationship was formally terminated
and it resigned as the Company's independent auditors, there were no
disagreements between Mahoney Cohen and the Company on any matters of accounting
principles or practices, financial statement disclosure or auditing scope and
procedures which, if not resolved to the satisfaction of Mahoney Cohen, would
have caused Mahoney Cohen to make reference to such matters in their report on
the Company's financial statements for the fiscal year ended March 25, 1995.
Mahoney Cohen's report expressed an unqualified opinion on those financial
statements based upon their audit but included a paragraph noting a "substantial
doubt about the Corporation's ability to continue as a going concern" based upon
the several matters summarized in such report.
In February 1997, the Company appointed Simontacchi & Co, LLP
("Simontacchi") as the Company's independent auditors responsible for the audit
of the Company's financial statements. The action was approved by the Company's
Board of Directors. The Company had not consulted Simontacchi regarding any
accounting or financial reporting issues prior to that firm being retained by
the Company. Simontacchi audited the Company's financial statements for the
fiscal years ended March 31, 1996, 1997 and 1998. Simontacchi's report on the
Company's financial statements for the fiscal years ended March 31, 1996, 1997
and 1998 expressed an unqualified opinion on those financial statements based
upon their audits.
On August 12, 1998, the Company and Simontacchi terminated their
client-auditor relationship. The reports of Simontacchi on the financial
statements of the Company for the prior two fiscal years contained no adverse
opinion or disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principles. The Board of Directors of the
Company participated in and approved the decision to change the independent
accountants. In connection with its audits for the prior two fiscal years and
through August 12, 1998, there were no disagreements with Simontacchi on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of Simontacchi, would have caused Simontacchi to make reference
thereto in its report on the financial statements for such years.
10
<PAGE> 12
The Company simultaneously engaged Weinick Sanders Leventhal & Co., LLP
("WSL") as its new independent accountants as of August 12, 1998. Such
appointment was approved by the Company's Board of Directors. The Company has
not consulted with WSL regarding accounting or financial reporting issues prior
to that firm being retained by the Company.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the
directors and executive officers of the Company as of April 1, 1999:
<TABLE>
<CAPTION>
NAME AGE OFFICE
---- --- ------
<S> <C>
Joel San Antonio 46 Acting Chairman of the Board
Robert H. Hutchins 70 Director, President and Principal Financial Officer
Glen Aber 50 Director, Secretary
Ronald Glime 54 Director
James Fyfe 44 Director
Robert Benoit 41 Executive Vice President and Chief Operating Officer
</TABLE>
Joel San Antonio has served as Acting Chairman of the Board of
Directors since February 1999, and as Chairman of the Board of Directors from
May 1998 through January 1999. Mr. San Antonio founded Warrantech Corporation
("Warrantech") in 1983. Warrantech is a business services company with a core
business in the administration of warranties and extended warranties. He was a
Director, Chief Executive Officer and President of Warrantech from its inception
in 1983 through February 1988. Since February 1988, Mr. San Antonio has been the
Chief Executive Officer and Chairman of the Board of Directors of Warrantech. On
February 2, 1998, Mr. San Antonio resumed responsibilities as President of
Warrantech. Since October 27, 1989, he has also been Chairman and Chief
Executive Officer of Warrantech's principal operating subsidiaries.
Robert H. Hutchins has served as a Director and the President and
Principal Financial Officer of the Company since May 1998. Mr. Hutchins began
his insurance career with the Great American Indemnity Insurance Co. in 1951. He
joined the American Casualty Insurance Co. in 1958. American Casualty Insurance
Co. was bought by Continental Casualty Insurance Co. in 1964, and is now known
as CNA Insurance. At CNA he served as Branch Manager, Regional Vice President,
Vice President of Field Operations and ultimately Senior Vice President of the
Liability, Property and Surety Division. Since 1975, he has served in executive
positions with INA, Gulf Insurance, and American Hardware Mutual Insurance Co.
He was a consultant to the Warranty Division of AIG for 18 months and was
employed by Warrantech Automotive, Inc., a subsidiary of Warrantech ("Warrantech
Automotive"), as National Claims Manager, from May 1, 1995 through May 15, 1998.
Glen Aber has served as a Director of the Company since May 1998 and as
Secretary of the Company since January 1999. Mr. Aber was president of his own
company, GFA Industries, Inc. ("GFA"), a corporation engaged in the design,
merchandising and sale of imported fabrics to manufacturers of children's,
ladies' and men's clothing until July 1997 when GFA ceased operations. Since
July 1997, Mr. Aber has been managing his personal investment portfolio. Mr.
Aber is Mr. San Antonio's brother-in-law.
In November 1997, after GFA ceased operations, certain creditors of
GFA, whose claims against GFA were disputed, filed an involuntary bankruptcy
petition in federal bankruptcy court against GFA. In March 1998, such creditors
consented to an order dismissing the petition pursuant to an agreement they
reached with GFA, for settlement amounts that were less than those initially
claimed.
11
<PAGE> 13
Ronald Glime has served as a Director of the Company since May 1998.
Mr. Glime has been the President of Warrantech's U.S. and Canadian operations
since March 1999. From October 1992 to March 1999, Mr. Glime was President of
Warrantech Automotive.
James Fyfe has served as a Director of the Company since May 1995. From
May 1995 until May 1998, Mr. Fyfe served as Vice President and Chief Operating
Officer of the Company. From January 1991 to May 1995, he was an independent
business consultant. During the period from May 1995 through February 1996 he
was an employee of the Company's UK holding company, CDL. In March 1996, he
resumed his activities as an independent business consultant. From May 1996
through August 1997 he was an outside director of Medical Laser Technologies,
Inc.
In February 1996, CDL was placed into receivership in the UK. The
Company holds a promissory note from a company affiliated with Medical Laser
Technologies, Inc. with an unpaid principal balance of $75,000. The Company also
holds an option that may be exercised to purchase voting shares of Medical Laser
Technologies, Inc. See Item 1. "Business -- History."
Pursuant to the terms of the Agreement relating to the issuance of the
Series B Preferred Stock, the initial purchasers of the Series B Preferred Stock
are required to nominate Mr. Fyfe or his nominee to serve as director through
June 30, 2000, the date when the right to redeem the Series B Preferred Stock
will expire.
Robert Benoit has served as the Executive Vice President and Chief
Operating Officer of the Company since February 1999. From May 1996 to February
1999, Mr. Benoit was a business analyst at Warrantech Automotive, where he
served as project leader for Internet applications. From October 1995 to May
1996, Mr. Benoit served as the corporate accounting manager responsible for the
non-bank subsidiaries of Shawmut Bank, National Association. From September 1985
to October 1995, Mr. Benoit was the accounting unit manager in Allstate
Insurance's property and casualty division's regional office in Farmington,
Massachusetts.
ITEM 11. EXECUTIVE COMPENSATION
Mr. Hutchins, the Company's President and Principal Financial Officer,
was the only executive officer of the Company as of December 31, 1998, who
received compensation from the Company during the nine months ended December 31,
1998. Mr. Hutchins was not an employee of the Company during any prior fiscal
year of the Company. The table below sets forth information concerning the
compensation of Mr. Hutchins for services in all capacities to the Company for
the nine months ended December 31, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
COMPENSATION FROM MAY 18, 1998
TO DECEMBER 31, 1998
-------------------------------
NAME AND PRINCIPAL POSITIONS SALARY OTHER
---------------------------- ------- ---------
<S> <C> <C>
Robert H. Hutchins $49,038 $3,200(1)
President and Principal Financial
Officer
</TABLE>
(1) Represents an automobile allowance.
12
<PAGE> 14
REPORT ON EXECUTIVE COMPENSATION
The Company's Board of Directors does not have a compensation
committee. Compensation decisions with respect to Mr. Hutchins, the only
executive officer of the Company during the nine months ended December 31, 1998,
were made by Mr. San Antonio, the Chairman of the Board, in consultation with
Mr. Glime. Mr. Hutchins' compensation, which consisted solely of his salary and
car allowance, was determined through negotiations between Mr. Hutchins, Mr. San
Antonio, and Mr. Hutchins' salary level for the nine-month period was based
primarily upon Mr. Hutchins' salary at his prior position and the Company's
financial position.
Joel San Antonio
Ronald Glime
DIRECTOR COMPENSATION
Each director who is not an officer or employee of the Company is
entitled to receive compensation of $2,500 per calendar quarter plus 500 shares
of common stock per calendar quarter of board service, in addition to
reimbursement of travel expenses. Outside directors are entitled to be
compensated for committee service at $500 per calendar quarter plus 125 shares
of common stock per calendar quarter. Such directors may be compensated for
special assignments from time to time. No compensation for special assignments
was paid in fiscal 1997 or 1998 during the nine months ended December 31, 1998.
No directors' fees are payable to employees of the Company who serve as
directors.
All directors receive options to purchase 1,500 shares of common stock
each May under the Company's 1992 Stock Option Plan for Directors.
SECTION 16 BENEFICIAL OWNERSHIP COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors and officers, and persons who
own more than 10% of a registered class of the Company's equity securities, to
file initial reports of ownership and reports of changes in ownership with the
Securities and Exchange Commission (the "SEC"). Such persons are required by SEC
regulation to furnish the Company with copies of all Section 16(a) reports that
they file. To the Company's knowledge, based solely on its review of the copies
of such reports received by it with respect to the nine-month period ended
December 31, 1998, the Company believes that all filing requirements applicable
to its directors, officers and persons who own more than 10% of a registered
class of the Company's equity securities have been complied with.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth information, as of April 20, 1999,
concerning the beneficial ownership of (i) the Company's common stock, (ii) the
Series B Preferred Stock and (iii) the Company's voting power by (A) each
director of the Company, (B) the executive officers of the Company, and (C) all
directors and executive officers of the Company, as a group. For the purposes of
reporting beneficial ownership herein, a person is considered the beneficial
owner of the shares over which such person holds or shares voting or investment
power, including the power to direct the disposition of such shares, or over
which such person can acquire such power within 60 days, except that the
information shown below for the Company's common stock does not reflect the
number of shares of common stock issuable upon conversion of the shares of
Series B Preferred Stock that are included in the table below. Except as
otherwise noted, each person listed has sole investment and voting power with
respect to the shares of capital stock listed as owned by him.
13
<PAGE> 15
<TABLE>
<CAPTION>
AMOUNT OF AMOUNT OF SERIES B
COMMON STOCK PREFERRED STOCK
BENEFICIALLY OWNED BENEFICIALLY OWNED PERCENTAGE OF COMPANY'S
---------------------------- -------------------------- TOTAL VOTING POWER
NAME (1) NUMBER PERCENT NUMBER PERCENT BENEFICIALLY OWNED
- ----------------------------- ------------ -------------- --------------- --------- ------------------------
<S> <C> <C> <C> <C> <C>
Joel San Antonio............ 0 0% 685,000 83.0% 46.9%
Robert Hutchins............. 0 0% 15,000 1.8% 1.0%
Glen Aber................... 0 0% 15,000 1.8% 1.0%
Ronald Glime................ 50,000 * 50,000 6.1% 3.8%
James Fyfe.................. 3,000 (2) * 10,000 1.2% *
Robert Benoit............... 5,000 * 0 0% *
All directors and 58,000 * 775,000 93.9% 53.3%
executive officers as a
group (6 persons).........
</TABLE>
- --------------------
*Less than 1%.
(1) All addresses are c/o the Company, 610 South Industrial Boulevard, Euless,
Texas 76040. (2) Represents currently exercisable options to purchase common
stock.
POTENTIAL CHANGE IN CONTROL
Pursuant to the terms of the Agreement relating to the sale of the
Series B Preferred Stock and the Certificate of Designation for the Series B
Preferred Stock, from March 31, 2000 to June 30, 2000, the Company has the right
to repurchase or redeem the Series B Preferred Stock from its holders for a
total consideration of $0.10 per share ($76,500 in the aggregate) unless, during
the period from May 18, 1998 through March 31, 2000:
o the Company's common stock maintains a minimum closing bid
price of not less than $2 per share on a public market during
a period of any ten consecutive trading days, and either
o the Company raises a minimum of $2,500,000 million of new
equity capital through a placement of common stock, or
o the Company has net revenues of at least $1,000,000 in any
fiscal quarter through the fiscal quarter ending March 31,
2000.
Mr. Fyfe or the director designated by Mr. Fyfe will have the ability
to determine if the Company will elect to exercise this redemption right.
The condition regarding the minimum closing bid price for the common
stock has been met. The Company expects that the private placement of the
Company's common stock described under Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" will result in a minimum of $2,500,000 of new equity capital
for the Company. However, if the Company is not able to raise $2,500,000 in new
equity capital or achieve net revenues of at least $1,000,000 in any fiscal
quarter prior to March 31, 2000, the Company will have the right to repurchase
the Series B Preferred Stock. If the Company exercises its right to repurchase
the Series B Preferred Stock, the repurchase will result in a change in control
of the Company from the holders of the Series B Preferred Stock to the holders
of the Company's common stock.
14
<PAGE> 16
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In May 1998, the Company issued 765,000 shares of Series B Preferred
Stock to certain of the Company's executive officers and directors in exchange
for $76,500 in cash and issued 10,000 shares of Series B Preferred Stock to a
director of the Company in consideration for services rendered to the Company.
See Item 1. "Business -- Change in Control of the Company."
In September 1998, the Company purchased Stamford from Warrantech for
$37,000 in cash. Joel San Antonio, Acting Chairman of the Board of Directors of
the Company and the Company's principal stockholder, is a significant
stockholder and the Chief Executive Officer, President and Chairman of the Board
of Directors of Warrantech.
In addition, the Company has paid Warrantech approximately $42,000 to
reimburse Warrantech for expenses incurred in connection with the preliminary
development of an internet site. The Company utilized Warrantech's preliminary
development work in the Company's development of its WarrantySuperstore.com
site.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The financial statements filed as a part of this report are as follows:
Reports of Independent Certified Public Accountants
Balance Sheets - December 31, 1998 (Consolidated) and March 31, 1998
Statements of Operations - For the Nine Months Ended December 31, 1998
(Consolidated) and 1997 (Unaudited) and For the Years Ended March 31,
1998 and March 31, 1997
Statements of Convertible Redeemable Preferred Stock, Common Stock,
Other Stockholders' Equity and Accumulated Deficit - For the Nine
Months Ended December 31, 1998 (Consolidated) and For the Years Ended
March 31, 1998 and 1997
Statements of Cash Flows - For the Nine Months Ended December 31, 1998
(Consolidated) and 1997 (Unaudited) and For the Years Ended March 31,
1998 and 1997
Notes to financial statements
(a) 2. FINANCIAL STATEMENT SCHEDULES
The financial statement schedule filed as a part of this report is as
follows:
Schedule II - Valuation of Qualifying Accounts For the Nine Months
Ended December 31, 1998 (Consolidated) and For the Years Ended March
31, 1998 and 1997
Other financial statement schedules have been omitted for the reason
that they are not required or are not applicable, or the required information is
shown in the financial statements or notes thereto.
15
<PAGE> 17
(a) 3. EXHIBITS
<TABLE>
<CAPTION>
Exhibit No.
of incorporated
report specified below
----------------------
<S> <C> <C>
3 (a) Certificate of Incorporation filed September 18, 1980 (1) 3
(b) Amendment to Certificate of Incorporation filed
September 29, 1980 (1) 3
(c) Amendment to Certificate of Incorporation filed July 28, 1983 (2) 3(b)
(d) Amendment to Certificate of Incorporation filed February 10, 1984 (2) 3(d)
(e) Amendment to Certificate of Incorporation filed March 31, 1986 (3) 3(e)
(f) Amendment to Certificate of Incorporation filed March 23, 1987 (4) 3(g)
(g) Amendment to Certificate of Incorporation filed June 12, 1990 (5) 3.8
(h) Amendment to Certificate of Incorporation filed September 27, 1991 (6) 3.9
(i) Certificate of Designation for Series A Preferred Stock filed
November 12, 1994 (7) 3.8
(j) Amendment to Certificate of Incorporation filed
September 28, 1995 (10) 3(j)
(k) Certificate of Designation for Series B Preferred Stock dated
May 18, 1998 (12) C
(l) By-laws of the Company, as amended on April 25, 1991 (6) 3(f)
(m) Amendment to Certificate of Incorporation dated May 18, 1998 (12) A
4 (a) Form of Underwriter's Warrant (6) 4.9.1
(b) Form of Promissory Note - 1996 Offering (10) 4(b)
(c) Form of Promissory Note - 1997 Offering (10) 4(c)
(d) Form of Common Stock Purchase Warrant - 1996 Offering (10) 4(d)
(e) Form of Common Stock Purchase Warrant - 1997 Offering (10) 4(e)
10 (a) 1986 Stock Option Plan, as amended (7) 10.6
(b) 1992 Stock Option Plan (8) B
(c) Stock Purchase Agreement dated as of January 30, 1997 by and
among the Company, the Bank of Scotland and 12 buyers (10) 10(m)
(d) Mutual Release dated as of January 30, 1997 by and among the
Company, James Fyfe and the Bank of Scotland (10) 10(n) (e)
Stock Purchase Agreement, dated as of March 4, 1998, between
the Company and the Initial Purchasers named therein (12) B
(f) 1998 Employees Stock Option Plan (12) D
16 (a) Letter of Mahoney Cohen & Company, CPA, PC regarding their
concurrence with the statements made by the Company concerning
their resignation as the Company's principal
accountant (11) 16(a)
(b) Letter of Simontacchi & Company, LLP, regarding their
concurrence with the statements made by the Company concerning
their resignation as the Company's principal accountant (13) 6(a)
27 Financial Data Schedule, filed herewith
</TABLE>
Notes:
(1) Filed with the Securities and Exchange Commission as an exhibit,
numbered as indicated above, to the registration statement of the
Company on Form S-18, File No. 2-69627, which exhibit is incorporated
herein by reference.
16
<PAGE> 18
(2) Filed with the Securities and Exchange Commission as an exhibit,
numbered as indicated above, to the registration statement of the
Company on Form S-2, File No. 2-88712, which exhibit is incorporated
herein by reference.
(3) Filed with the Securities and Exchange Commission as an exhibit,
numbered as indicated above, to the registration statement of the
Company on Form S-2, File No. 33-4458, which exhibit is incorporated
herein by reference.
(4) Filed with the Securities and Exchange Commission as an exhibit,
numbered as indicated above, to the annual report of the Company on
Form 10-K for the year ended September 30, 1987, which exhibit is
incorporated herein by reference.
(5) Filed with the Securities and Exchange Commission as an exhibit,
numbered as indicated above, to the registration statement of the
Company on Form S-3, File No. 33-42154, which exhibit is incorporated
herein by reference.
(6) Filed with the Securities and Exchange Commission as an exhibit,
numbered as indicated above, to the registration statement of the
Company on Form S-1, File No. 33-42154, which exhibit is incorporated
herein by reference.
(7) Filed with the Securities and Exchange Commission as an exhibit,
numbered as indicated above, to the annual report of the Company on
Form 10-K for the year ended September 30, 1994, which exhibit is
incorporated herein by reference.
(8) Filed with the Securities and Exchange Commission as an exhibit, as
indicated above, to the proxy statement of the Company dated March 30,
1992, which exhibit is incorporated herein by reference.
(9) Filed with the Securities and Exchange Commission as an exhibit,
numbered as indicated above, to the current report of the Company on
Form 8-K, dated April 5, 1995, which exhibit is incorporated herein by
reference.
(10) Filed with the Securities and Exchange Commission as an exhibit,
numbered as indicated above, to the annual report of the Company on
Form 10-K for the year ended March 31, 1996, which exhibit is
incorporated herein by reference.
(11) Filed with the Securities and Exchange Commission as an exhibit,
numbered as indicated above, to the annual report of the Company on
Form 10-K/A for the year ended March 31, 1996, which exhibit is
incorporated herein by reference.
(12) Filed with the Securities and Exchange Commission as an exhibit, as
indicated above, to the proxy statement of the Company dated April 23,
1998, which exhibit is incorporated herein by reference.
(13) Filed with the Securities and Exchange Commission as an exhibit, as
indicated above, to the quarterly report of the Company on Form 10-Q
for the period ended June 30, 1998, which exhibit is incorporated
herein by reference.
(b) REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K during the fiscal quarter
ended December 31, 1998.
17
<PAGE> 19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 21st day of
April, 1999.
CORNICHE GROUP INCORPORATED
By: /s/ ROBERT H. HUTCHINS
-------------------------------
Robert H. Hutchins
President and Principal
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Capacities Date
---- ---------- ----
<S> <C> <C>
/s/ ROBERT H. HUTCHINS
- ---------------------------------- President, Principal Financial April 21, 1999
Robert H. Hutchins Officer and Director
/s/ JOEL SAN ANTONIO
- ---------------------------------- Acting Chairman of the Board
Joel San Antonio of Directors
/s/ RONALD GLIME Director April 21, 1999
- ----------------------------------
Ronald Glime
/s/ GLENN ABER Director April 21, 1999
- ----------------------------------
Glenn Aber
- ----------------------------------
James J. Fyfe Director
</TABLE>
18
<PAGE> 20
CORNICHE GROUP INCORPORATED
DECEMBER 31, 1998
I N D E X
<TABLE>
<CAPTION>
Page No.
---------
<S> <C>
REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ............................................... F-2, F-3
FINANCIAL STATEMENTS:
Balance Sheets at December 31, 1998
(Consolidated) and March 31, 1998 .................................................. F-4
Statements of Operations
For the Nine Months Ended December 31, 1998
(Consolidated) and 1997 (Unaudited) and
For the Years Ended March 31, 1998 and 1997 ......................................... F-5
Statements of Convertible Redeemable Preferred Stock,
Common Stock, Other Stockholders' Equity and Accumulated Deficit
For the Nine Months Ended December 31, 1998 (Consolidated)
and For the Years Ended March 31, 1998 and 1997 ..................................... F-6
Statements of Cash Flows
For the Nine Months Ended December 31, 1998
(Consolidated) and 1997 (Unaudited) and
For the Years Ended March 31, 1998 and 1997 ......................................... F-7, F-8
Notes to Financial Statements ............................................................ F-9 - F-23
Schedule II - Valuation of Qualifying Accounts
For the Nine Months Ended December 31, 1998 (Consolidated)
and For the Years Ended March 31, 1998 and 1997 ..................................... F-24
</TABLE>
F - 1
<PAGE> 21
[WEINICK SANDERS LEVENTHAL & CO., LLP LETTERHEAD]
- --------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors
Corniche Group Incorporated
We have audited the accompanying consolidated balance sheet of Corniche Group
Incorporated and Subsidiary as at December 31, 1998, and the related statements
of operations, cash flows, and stockholders' equity for the nine months then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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 consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audit provided a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Corniche Group
Incorporated and Subsidiary as at December 31, 1998, and the results of their
operations and their cash flows for the nine months then ended, in conformity
with generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule for the nine months ended December 31, 1998, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth thereon.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As shown in the consolidated
financial statements, the Company's liabilities exceed their assets by $307,807
at December 31, 1998 and has incurred losses in recent years. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ WEINICK SANDERS LEVENTHAL & CO., LLP
New York, New York
February 15, 1999, except for Note 10,
as to which the date is April 1, 1999
F - 2
<PAGE> 22
[SIMONTACCHI & COMPANY, LLP LETTERHEAD]
- --------------------------------------------------------------------------------
CERTIFIED PUBLIC ACCOUNTANTS
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors
Corniche Group Incorporated
Wayne, New Jersey
We have audited the accompanying balance sheets of Corniche Group Incorporated
as of March 31, 1998 and 1997 and the related statement of operations, common
stock, other stockholders' equity and (capital deficiency), and cash flows for
the years ended March 31, 1998, 1997 and 1996. Our audits also include the
financial statement schedule for the years ended March 31, 1998, 1997 and 1996.
These financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit. We did not audit the
financial statements and the financial statement schedule of Corniche
Distribution Limited and Subsidiaries, a former consolidated subsidiary, as of
March 31, 1996 and for the year then ended. These statements and schedules were
not audited as the corporations were in receivership in the United Kingdom (see
Note 2 of the financial statements), and the records are unavailable for audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Corniche Group Incorporated as
of March 31, 1998 and 1997, and the results of their operations and their cash
flows for the years ended March 31, 1998, 1997 and 1996 in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
As described in Note 1, the financial statements have been restated to reflect
the Series A 7% Convertible Redeemable Preferred Stock similar to debt instead
of a component of stockholders' equity.
/s/ SIMONTACCHI & COMPANY, LLP
Fairfield, New Jersey
July 10, 1998
F - 3
<PAGE> 23
CORNICHE GROUP INCORPORATED AND SUBSIDIARY
BALANCE SHEETS
A S S E T S
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1998
------------- -------------
(Consolidated) (Restated)
<S> <C> <C>
Current Assets:
Cash and equivalents .......................................................... $ 206,313 $ 1,129,064
Marketable securities ......................................................... 628,175 --
Other receivables and prepaid expenses ........................................ -- 179
------------- -------------
Total Current Assets ..................................................... 834,488 1,129,243
Property and equipment, net ...................................................... 40,781 359
Other assets ..................................................................... 12,525 --
License, net of accumulated amortization ......................................... 17,997 --
------------- -------------
$ 905,791 $ 1,129,602
============= =============
LIABILITIES, STOCKHOLDERS' EQUITY AND (CAPITAL DEFICIENCY)
Current liabilities:
Dividends payable - preferred stock ........................................... $ 236,981 $ 208,464
Accounts payable, accrued expenses and other current liabilities .............. 133,941 51,212
Current portion of capital lease obligations .................................. 4,649 --
------------- -------------
Total current liabilities .................................................. 375,571 259,676
------------- -------------
Capital lease obligations ........................................................ 9,262 --
------------- -------------
Series A Convertible Preferred Stock:
Series A $0.07 cumulative convertible preferred stock -
stated value - $1.00 per share
Issued - 1,000,000 shares
Outstanding - 828,765 shares at December 31, 1998
and 893,908 shares at March 31, 1998 ..................................... 828,765 893,908
------------- -------------
Convertible Redeemable Preferred Stock, Common Stock,
Other Stockholders' Equity and (Accumulated Deficit):
Preferred stock - authorized 5,000,000 shares
Series B convertible redeemable preferred
stock, $0.01 par value:
Authorized, issued and outstanding at December 31, 1998 - 825,000 shares
and zero shares at March 31, 1998 ...................................... 8,250 --
Common stock, $.001 par value
Authorized - 30,000,000 shares Issued and outstanding - 6,369,968 at
December 31, 1998 and 6,355,231 at
March 31, 1998 ......................................................... 6,370 6,355
Additional paid-in capital .................................................... 2,838,420 2,682,917
Accumulated deficit ........................................................... (3,160,847) (2,713,254)
------------- -------------
Total convertible redeemable preferred stock, common stock, other
stockholders' equity and accumulated deficit ......................... (307,807) (23,982)
------------- -------------
$ 905,791 $ 1,129,602
============= =============
</TABLE>
See accompanying notes to financial statements.
F - 4
<PAGE> 24
CORNICHE GROUP INCORPORATED AND SUBSIDIARY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED FOR THE YEARS ENDED
DECEMBER 31, MARCH 31,
------------------------------ ------------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
(CONSOLIDATED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales ................................... $ -- $ -- $ -- $ --
Cost of sales ............................... -- -- -- --
------------- ------------- ------------- -------------
Gross profit ................................ -- -- -- --
------------- ------------- ------------- -------------
General and administrative expenses ......... 428,157 168,317 221,602 251,583
------------- ------------- ------------- -------------
Operating loss .............................. (428,157) (168,317) (221,602) (251,583)
Interest income (expense), net .............. 25,206 6,253 17,804 (17,373)
------------- ------------- ------------- -------------
Net loss before preferred dividend .......... (402,851) (162,064) (203,798) (268,956)
Preferred dividend .......................... (44,642) (45,083) (60,067) (63,648)
------------- ------------- ------------- -------------
Net loss .................................... ($ 447,593) ($ 207,147) ($ 263,865) ($ 332,604)
============= ============= ============= =============
Net loss per share of common stock .......... ($ 0.07) ($ 0.04) ($ 0.05) ($ 0.14)
============= ============= ============= =============
Weighted average number of
common shares outstanding ................. 6,367,015 4,833,849 5,165,272 2,412,278
============= ============= ============= =============
</TABLE>
See accompanying notes to financial statements.
F - 5
<PAGE> 25
CORNICHE GROUP INCORPORATED AND SUBSIDIARY
STATEMENTS OF CONVERTIBLE REDEEMABLE PREFERRED STOCK, COMMON STOCK,
OTHER STOCKHOLDERS' EQUITY AND ACCUMULATED DEFICIT
FOR THE NINE MONTHS ENDED DECEMBER 31, 1998 AND
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
SERIES B CONVERTIBLE
REDEEMABLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
----------------------------- ------------------------------ PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at April 1, 1996 as previously
reported ................................. -- $ -- 2,630,378 $ 263,037 $ 830,086
Retroactive reflection of May 18, 1998
reduction in par value of common stock
from $0.10 to $0.001 per share ........... -- -- -- (260,407) 260,407
------------- ------------- ------------- ------------- -------------
-- -- 2,630,378 2,630 1,090,493
Series A convertible preferred stock
dividend ................................. -- -- -- -- --
Net loss before Series A preferred stock
dividend ................................. -- -- -- -- --
------------- ------------- ------------- ------------- -------------
Balance at March 31, 1997 ................... -- -- 2,630,378 2,630 1,090,493
Issuance of common stock for cash, net of
related costs of $184,500 ................ -- -- 3,940,000 3,940 1,781,560
Retirement of treasury stock ................ -- -- (218,100) (218) (204,492)
Conversion of Series A convertible
preferred stock into common stock ........ -- -- 2,953 3 15,356
Series A convertible preferred stock
dividend ................................. -- -- -- -- --
Net loss before preferred stock dividend .... -- -- -- -- --
------------- ------------- ------------- ------------- -------------
Balance at March 31, 1998 ................... -- -- 6,355,231 6,355 2,682,917
Adjustments to common stock ................. -- -- 2,212 2 (2)
Issuance of Series B convertible preferred
stock for cash ........................... 765,000 7,650 -- -- 68,850
Issuance of Series B convertible preferred
stock for services rendered .............. 60,000 600 -- -- 5,400
Conversion of Series A convertible
preferred stock into common stock ........ -- -- 12,525 13 81,255
Series A convertible preferred dividend ..... -- -- -- -- --
Net loss before preferred stock dividend .... -- -- -- -- --
------------- ------------- ------------- ------------- -------------
Balance at December 31, 1998 ................ 825,000 $ 8,250 6,369,968 $ 6,370 $ 2,838,420
============= ============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
TREASURY STOCK
------------------------------ ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance at April 1, 1996 as previously
reported ................................. (218,100) $ (204,710) $ (2,116,785) $ (1,228,372)
Retroactive reflection of May 18, 1998
reduction in par value of common stock
from $0.10 to $0.001 per share ........... -- -- -- --
------------- ------------- ------------- -------------
(218,100) (204,710) (2,116,785) (1,228,372)
Series A convertible preferred stock
dividend ................................. -- -- (63,648) (63,648)
Net loss before Series A preferred stock
dividend ................................. -- -- (268,956) (268,956)
------------- ------------- ------------- -------------
Balance at March 31, 1997 ................... (218,100) (204,710) (2,449,389) (1,560,976)
Issuance of common stock for cash, net of
related costs of $184,500 ................ -- -- -- 1,785,500
Retirement of treasury stock ................ 218,100 204,710 -- --
Conversion of Series A convertible
preferred stock into common stock ........ -- -- -- 15,359
Series A convertible preferred stock
dividend ................................. -- -- (60,067) (60,067)
Net loss before preferred stock dividend .... -- -- (204,798) (203,798)
------------- ------------- ------------- -------------
Balance at March 31, 1998 ................... -- -- (2,713,254) (23,982)
Adjustments to common stock ................. -- -- -- --
Issuance of Series B convertible preferred
stock for cash ........................... -- -- -- 76,500
Issuance of Series B convertible preferred
stock for services rendered .............. -- -- -- 6,000
Conversion of Series A convertible
preferred stock into common stock ........ -- -- -- 81,268
Series A convertible preferred dividend ..... -- -- (44,642) (44,642)
Net loss before preferred stock dividend .... -- -- (402,951) (402,951)
------------- ------------- ------------- -------------
Balance at December 31, 1998 ................ -- $ -- $ (3,160,847) $ (307,807)
============= ============= ============= =============
</TABLE>
See accompanying notes to financial statements.
F - 6
<PAGE> 26
CORNICHE GROUP INCORPORATED AND SUBSIDIARY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED FOR THE YEARS ENDED
DECEMBER 31, MARCH 31,
---------------------------- ----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
(CONSOLIDATED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss ........................................ $ (447,593) $ (107,147) $ (263,865) $ (332,604)
----------- ----------- ----------- -----------
Adjustments to reconcile net loss to net cash
used in operating activities:
Series B preferred shares issued for services
rendered ..................................... 6,000 -- -- --
Series A preferred stock dividends .............. 44,642 45,083 60,067 63,648
Depreciation and amortization ................... 3,435 291 388 388
Increase (decrease) in cash flows as a result
of changes in assets and liability account
balances net of effects from purchase of
Stamford Insurance Company, Ltd.:
Notes receivable ............................. -- -- -- 125,000
Other receivables ............................ 179 (1,231) 821 9,000
Other assets ................................. (12,525) -- -- --
Accounts payable, accrued expenses and
other current liabilities .................. 82,729 (89,722) (67,014) (169,701)
----------- ----------- ----------- -----------
Total adjustments ............................... 124,460 (43,579) (5,738) 28,335
----------- ----------- ----------- -----------
Net cash used in operating activities .............. (323,133) (252,726) (269,603) (304,269)
----------- ----------- ----------- -----------
Cash flows from investing activities:
Investments in marketable securities ............ (628,175) -- -- --
Acquisition of property assets .................. (25,745) -- -- --
Acquisition of Stamford Insurance
Company Ltd. ................................. (37,000) -- -- --
----------- ----------- ----------- -----------
Net cash used in investing activities .............. (690,920) --
----------- ----------- ----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of capital stock ..... 76,500 1,660,500 1,785,500 --
Payments of capital lease obligation ............ (3,995) -- -- --
Payments of notes payable ....................... -- (450,000) (450,000) (877,630)
Additional borrowings ........................... -- 50,000 50,000 395,000
----------- ----------- ----------- -----------
Net cash provided by financing activities .......... 72,505 1,260,500 1,385,500 317,370
----------- ----------- ----------- -----------
Net increase (decrease) in cash .................... (941,548) 1,007,774 1,115,897 13,101
Cash balance acquired with purchase of
subsidiary ...................................... 18,797 -- -- --
Cash and cash equivalents at beginning of year ..... 1,129,064 13,167 13,167 66
----------- ----------- ----------- -----------
Cash and cash equivalents at end of year ........... $ 206,313 $ 1,020,941 $ 1,129,064 $ 13,167
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F - 7
<PAGE> 27
CORNICHE GROUP INCORPORATED AND SUBSIDIARY
STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
For the Nine Months For the Years Ended
Ended December 31, March 31,
--------------------------------------- ---------------------------------------
1998 1997 1998 1997
----------------- ----------------- ----------------- -----------------
(Consolidated) (Unaudited)
<S> <C> <C> <C> <C>
Supplemental Disclosures of Cash
Flow Information:
Cash paid during the period:
Income taxes ................... $ -- $ -- $ -- $ --
================= ================= ================= =================
Interest ....................... $ 886 $ 4,181 $ 4,181 $ 178,373
================= ================= ================= =================
Supplemental Schedules of Noncash
Investing and Financing Activities:
Issuance of preferred stock
for services rendered .......... $ 6,000 $ -- $ -- $ --
================= ================= ================= =================
Property assets acquired under
capital lease obligations ...... $ 17,806 $ -- $ -- $ --
================= ================= ================= =================
Net accrual of dividends on
Series A preferred stock ....... $ 28,517 $ 45,083 $ 60,067 $ 63,648
================= ================= ================= =================
Series A preferred stock and
dividends thereon converted to
common stock and additional
paid-in capital upon conversion $ 15,125 $ 2,007 $ 15,359 $ --
================= ================= ================= =================
</TABLE>
See accompanying notes to financial statements.
F - 8
<PAGE> 28
CORNICHE GROUP INCORPORATED AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
AS AT DECEMBER 31, 1998 AND FOR THE NINE MONTHS
ENDED DECEMBER 31, 1998 AND 1997
(Information Relating to The Nine Months
Ended December 31, 1997 is Unaudited)
AND AS AT MARCH 31, 1998 AND FOR THE TWO YEARS THEN ENDED
NOTE 1 - CORRECTION OF AN ERROR.
The balance sheet as at March 31, 1998 and the statements of
convertible redeemable preferred stock, common stock, other
stockholders' equity and accumulated deficit for the years ended
March 31, 1998 and 1997 have been restated to reflect the Series A
7% Redeemable Preferred Stock as an item similar to debt instead
of a component of equity as previously reported for the periods
ended March 31, 1998 and 1997 as prescribed by the Securities and
Exchange Commission ("SEC") Accounting Series Release No. 268. The
Series A Preferred Stock's Put feature (see Note 5) places the
redemption of this class of stock outside the control of the
Company (assuming the conditions allowing redemption are
satisfied) and accordingly should be classified similar to debt.
Previously the Series A Preferred Stock was included in
stockholders' equity which is not in accordance with SEC
regulations and generally accepted accounting principles.
NOTE 2 - THE COMPANY.
Corniche Group Incorporated (hereinafter referred to as the
"Company" or "CGI") as a result of a reverse acquisition with
Corniche Distribution Limited and its Subsidiaries ("Corniche"),
was 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 were Chessbourne International Limited ("Chessbourne")
and The Stationery Company Limited ("TSCL").
Corniche experienced large operating losses and net cash
outflows from operating activities in the years ended March 31,
1995 and 1996 resulting in a significant reduction in working
capital during the period. The Company was unsuccessful in its
efforts to raise interim financing to resolve its liquidity
problems. Additionally, the Company was not able to convert a
significant portion of its bank debt to equity. As a result,
receivers were appointed to Corniche's subsidiaries, Chessbourne
and TSCL on February 7, 1996 by their primary bankers and secured
lender, Bank of Scotland and Corniche Distribution Limited was
placed in receivership on February 28, 1996. Since then the
Company has been inactive.
Effective January 30, 1997, the Company entered into a Stock
Purchase Agreement with the Bank of Scotland and twelve related
persons whereby 1,042,250 of the 1,097,250 shares of the Company's
common stock pledged to the Bank of Scotland by Brian J. Kaylis
and Susan A.M. Crisp to secure certain debts of Corniche
Distribution Limited and subsidiaries to the Bank of Scotland were
sold by the Bank of Scotland following a default in the obligation
secured by the pledge to such twelve persons for an aggregate
consideration of $125,070.
F - 9
<PAGE> 29
NOTE 2 - THE COMPANY. (Continued)
On March 4, 1998, the Company entered into a Stock Purchase
Agreement ("Agreement"), approved by the Company's stockholders on
May 18, 1998, with certain individuals (the "Initial Purchasers")
whereby the Initial Purchasers acquired an aggregate of 765,000
shares of a newly created Series B Convertible Redeemable
Preferred Stock, par value $0.01 per share. Thereafter the Initial
Purchasers have been endeavoring to establish for the Company new
business operations in the insurance sector, more specifically the
property and casualty specialty insurance markets. Management is
exploring a number of specialty insurance opportunities for the
development of new business operations.
On September 30, 1998, the Company acquired all of the capital
stock of Stamford Insurance Company, Ltd. ("Stamford") from
Warrantech Corporation for $37,000 in cash in a transaction
accounted for as a purchase. Warrantech's chairman is also the
chairman of the Company. Stamford was charted under the laws of,
and is licensed to conduct business as an insurance company by,
the Cayman Islands. From its inception through its acquisition by
the Company, Stamford did not generate any revenues but has
incurred expenses.
The unaudited consolidated combined results of operations, on
a pro forma basis as though Stamford had been acquired at the
beginning of each period, is as follows:
<TABLE>
<CAPTION>
For the Nine Months For the Years Ended
Ended December 31, March 31,
-------------------------- -------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales ............ $ -- $ -- $ -- $ --
========== ========== ========== ==========
Costs and expenses ... $ 511,335 $ 179,498 $ 232,824 $ 263,821
========== ========== ========== ==========
Net loss ............. $ (527,991) $ (214,227) $ (268,321) $ (338,476)
========== ========== ========== ==========
Net loss per share ... $ (0.08) $ (0.04) $ (0.05) $ (0.14)
========== ========== ========== ==========
</TABLE>
At December 31, 1998, Stamford's total assets of $173,805
consist of $155,806 in cash and equivalents and a license, net of
accumulated amortization, of $17,997, while its liabilities
aggregate $879.
F - 10
<PAGE> 30
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
(a) Basis of Presentation:
On February 4, 1999, the Board of Directors approved
a resolution to change the Company's fiscal year-end from
March 31, to December 31. The change in year-end will be
required by the state insurance regulatory authorities should,
and if, the Company be successful in its endeavors to
establish operations in the insurance sector.
The accompanying financial statements as at and for
the nine months ended December 31, 1998 reflect the
consolidated financial position and consolidated results of
operations and cash flows of the Company for the nine months
ended December 31, 1998 and its wholly-owned subsidiary,
Stamford, from its acquisition on September 30, 1998 to
December 31, 1998. The financial statements as March 31, 1998
and for the two years then ended reflect the financial
position and results of operations and cash flows of the
Company as at March 31, 1998 and for the two years then ended.
The accompany ing statements of operations and cash flows for
the nine months ended December 31, 1997 are unaudited. In the
opinion of management, the unaudited statements of operations
and cash flows reflect all adjustments and accruals,
consisting only of normal recurring adjustments and accruals,
necessary to present fairly the results of the Company's
operations and cash flows for the nine months ended December
31, 1997.
(b) Receivership Proceeding:
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 acquisition,
such purchase transaction was accounted for as a reverse
acquisition. The acquired company (Corniche) was deemed to
have acquired the acquiring company (CGI). Historical
stockholders' equity of Corniche has been retroactively
restated to give effect to the recapitalization.
Significant losses were incurred during the years
ended March 25, 1995 and 1996, resulting in a working capital
and a stockholders' deficiency as of March 31, 1996 and 1995.
Management of Corniche had taken several steps to reduce the
amount of cash used by operations, including relocation of its
corporate facilities and reduced staffing levels and other
operating expenses. However, a receivership proceeding
involving the operating subsidiaries of the Company was
commenced on February 7, 1996 and the UK holding company,
Corniche Distribution Limited, was placed in receivership on
February 28, 1996. The receiverships resulted in the loss of
all of the Company's operations and operating assets and
eliminated most liabilities. In the year ended March 31, 1996,
the Company recognized an extraordinary gain of $5,446,636
resulting from the receivership proceeding.
F - 11
<PAGE> 31
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. (Continued)
(c) Cash Equivalents:
Short-term cash investments which have a maturity of
ninety days or less are considered cash equivalents in the
statement of cash flows.
(d) Estimates:
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that affect
certain reported amounts and disclosures. Accordingly, actual
results could differ from those estimates.
(e) Concentrations of Credit-Risk:
Financial instruments that potentially subject the
Company to significant concentrations of credit risk consist
principally of cash and marketable securities. The Company
places it domestic operations cash accounts with high credit
quality financial institutions which at times may be in excess
of the FDIC insurance limit. The Company's subsidiary places
its cash in the Cayman Island subsidiaries of domestic banks
whose net worth exceeds $100,000,000. The Company's marketable
securities are primarily comprised of investments in municipal
bank funds. The Company employs the services of an investment
advisor to assist in monitoring its investments.
(f) Marketable Securities:
Marketable securities are classified as trading
securities and are reported at market value at December 31,
1998 which approximates cost.
(g) Property and Equipment:
The cost of property and equipment is depreciated
over the estimated useful lives of the related assets of 5 to
7 years. The cost of leasehold improvements is amortized over
the lesser of the length of the related leases or the
estimated useful lives of the assets. Depreciation is computed
on the straight-line method. Repairs and maintenance
expenditures which do not extend original asset lives are
charged to income as incurred.
(h) Intangibles:
The excess of the purchase price for the capital
stock of Stamford over the net assets acquired has been
attributed to the subsidiary's license to conduct business as
an insurance carrier in the Cayman Islands. Amortization
charged to operations in the nine months ended December 31,
1998 was $305.
F - 12
<PAGE> 32
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. (Continued)
(i) 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. There is no
difference as to financial and tax basis of assets and
liabilities.
(j) Fair Value of Financial Instruments:
The Company adopted Statement of Financial Accounting
Standards No. 121 ("SFAS No. 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long- Lived Assets to
be Disposed of". The statement requires that the Company
recognize and measure impairment losses of long-lived assets,
certain identifiable intangibles, value long-lived assets to
be disposed of and long-term liabilities. At December 31, 1998
and March 31, 1998, the carrying values of the Company's other
assets and liabilities approximate their estimated fair
values.
(k) Earnings Per Share:
The Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share," in the year ended
March 31, 1998. Basic earnings per share is based on the
weighted effect of all common shares issued and outstanding,
and is calculated by dividing net income available to common
stockholders by the weighted average shares outstanding during
the period. Diluted earnings per share, which is calculated by
dividing net income available to common stockholders by the
weighted average number of common shares used in the basic
earnings per share calculation plus the number of common
shares that would be issued assuming conversion of all poten
tially dilutive securities outstanding, is not presented as it
is anti-dilutive in all periods.
(l) Recently Issued Accounting Pronouncements:
The Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130 -
"Reporting Comprehensive Income", No. 131 "Disclosures about
Segments of an Enterprise and Related Information", No. 132
"Employer's Disclosures about Pension and Other Postretirement
Benefits" and No. 133 "Accounting for Derivative Instruments
and Hedging Activities". Management does not believe that the
effect of implementing these new standards will be material to
the Company's financial position, results of operations and
cash flows.
F - 13
<PAGE> 33
NOTE 4 - PROPERTY AND EQUIPMENT.
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
---------- ----------
<S> <C> <C>
Furniture and fixtures ................. $ 27,172 $ 1,426
Less: Accumulated depreciation ......... 2,713 1,067
---------- ----------
24,459 359
---------- ----------
Lease property under capital leases:
Office equipment ................... 17,806 --
Less: Accumulated depreciation ......... 1,484 --
---------- ----------
16,322 --
---------- ----------
$ 40,781 $ 359
---------- ----------
</TABLE>
Depreciation and amortization charged to operations
was $3,130, $291, $388 and $388, respectively, for the nine
months ended December 31, 1998 and 1997 and for the years
ended March 31, 1998 and 1997.
The estimated present value of the capital lease
obligations at December 31, 1998 reflects imputed interest
calculated at 12.7% and 19.32%. The obligations are payable in
equal monthly installments through January 2002 as follows:
<TABLE>
<CAPTION>
Years Ending December 31,
- ----------------------------------------------
<S> <C>
1999 $ 7,115
2000 7,115
2001 5,181
2002 317
----------
19,728
Amount representing interest 5,817
----------
Present value of minimum lease payments 13,911
Present value of minimum lease payments
due within one year 4,649
----------
Present value of minimum lease payments
due after one year $ 9,262
==========
</TABLE>
The aggregate maturities of the present value of the minimum lease
obligations is as follows:
<TABLE>
<CAPTION>
Years Ending December 31,
- ----------------------------------------------
<S> <C>
1999 $ 4,649
2000 6,004
2001 2,961
2002 297
----------
$ 13,911
==========
</TABLE>
F - 14
<PAGE> 34
NOTE 5 - NOTES PAYABLE.
During the period July 1996 through December 1996,
the Company engaged in a private offering of securities
pursuant to Rule 506 of Regulation D of the Securities Act of
1933, as amended. The offering of up to $300,000 was conducted
on a "best efforts" basis through Robert M. Cohen & Co., Inc.
("RMCC"), a New York based broker-dealer and was offered and
sold in the form of $25,000 units. Each unit consisted of one
$25,000 face amount 90-day, 8% promissory note and one
redeemable common stock purchase warrant to purchase 60,000
shares of the Company's common stock at a price of $.50 per
share during a period of three years from issuance. The
offering was terminated in December 1996 upon the sale of 4
units resulting in $100,000 in gross proceeds. In connection
with such offering, RMCC was paid sales commissions equal to
10% of the aggregate purchase price of the units sold
resulting in aggregate sales commissions of $10,000.
During the period January 1997 through April 30,
1997, the Company engaged in a private offering of securities
pursuant to Rule 506 of Regulation D of the Securities Act of
1933, as amended. The offering consists of up to 19 units
being sold at an offering price of $25,000 per unit. Each unit
consists of one $25,000 face amount 90-day, 8% promissory note
and one redeemable common stock purchase warrant to purchase
60,000 shares of the Company's common stock at a price of $.50
per share during a period of three years from issuance. The
offering of up to $475,000 was conducted on a "best efforts"
basis through RMCC. In connection with such offering, RMCC was
paid sales commissions equal to 10% of the purchase price of
each unit sold or $2,500 per unit.
The notes payable relating to the above offering were
paid in full and the warrants were simultaneously redeemed
during the year ended March 31, 1998 with funds generated from
the sale of stock (see Note 7).
NOTE 6 - ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT
LIABILITIES.
Accounts payable, accrued expenses and other current
liabilities consist of the following at
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
---------- ----------
<S> <C> <C>
Accrued legal fees ..................... $ 50,000 $ 37,362
Accrued accounting fees ................ 30,000 12,000
Other .................................. 11,956 1,850
Due to related party (See Note 10) ..... 41,985 --
---------- ----------
$ 133,941 $ 51,212
========== ==========
</TABLE>
F - 15
<PAGE> 35
NOTE 7 - SERIES A CONVERTIBLE PREFERRED STOCK.
In connection with the settlement a securities class
action litigation in 1994, the Company issued 1,000,000 shares
of Series A $0.07 Convertible Preferred Stock (the "Series A
Preferred Stock") with an aggregate value of $1,000,000. The
following summarizes the terms of Series A Preferred Stock as
more fully set forth in the Certificate of Designation. The
Series A Preferred Stock has a liquidation value of $1 per
share, is non-voting and convertible into common stock of the
Company at a price of $5.20 per share. Holders of Series A
Preferred Stock are entitled to receive cumula tive cash
dividends of $0.07 per share, per year, payable semi-annually.
Until November 30, 1999 the Series A Preferred Stock is
callable by the Company at a price of $1.04 per share, plus
accrued and unpaid dividends, and thereafter at a price of
$1.05 per share, plus accrued and unpaid dividends. In
addition, if the closing price of the Company's common stock
exceeds $13.80 per share for a period of 20 consecutive
trading days, the Series A Preferred Stock is callable by the
Company at a price equal to $0.01 per share, plus accrued and
unpaid dividends. The Certificate of Designation for the
Series A Preferred Stock also states that at any time after
December 1, 1999 the holders of the Series A Preferred Stock
may require the Company to redeem their shares of Series A
Preferred Stock (if there are funds with which the Company may
do so) at a price of $1.00 per share. Notwithstanding any of
the foregoing redemption provisions, if any dividends on the
Series A Preferred Stock are past due, no shares of Series A
Preferred Stock may be redeemed by the Company unless all
outstanding shares of Series A Preferred Stock are
simultaneously redeemed. During the nine months ended December
31, 1998, 65,143 shares of the Series A Preferred Stock were
converted into 12,525 shares of common stock. During the year
ended March 31, 1998, holders of 15,359 shares of the Series A
Preferred Stock converted such shares into 2,953 shares of the
Company's common stock. At December 31, 1998, 828,765 shares
of Series A Preferred Stock were outstanding.
NOTE 8 - STOCKHOLDER'S EQUITY.
(a) Series B Convertible Redeemable Preferred Stock:
On March 4, 1998, the Company entered into a Stock
Purchase Agreement ("Agreement"), approved by the Company's
stockholders on May 18, 1998, with certain individuals (the
"Initial Purchasers") whereby the Initial Purchasers and two
other persons acquired an aggregate of 825,000 shares of a
newly created Series B Convertible Redeemable Preferred Stock
("Series B Stock"), par value $0.01 per share.
Pursuant to the Agreement and subsequent
transactions, the Initial Purchasers acquired 765,000 shares
of Series B Stock for $76,500 in cash. The Company incurred
certain legal expenses of the Initial Purchasers equaling
approximately $50,000 in connection with the transaction. In
addition, the Company issued 50,000 shares of Series B Stock
to Alan Zuckerman as compensation valued at $5,000 for his
assistance to the Company in the identification and review of
business opportunities and this transaction and for his
assistance in bringing the transaction to fruition.
Additionally, the Company issued 10,000 shares of Series B
Stock to James Fyfe as compensation valued at $1,000 for his
work in bringing this transaction to fruition. These issuances
diluted the voting rights of the then existing stockholders by
approximately 57%. The total authorized shares of Series B
Convertible Redeemable Preferred Stock are 825,000.
F - 16
<PAGE> 36
NOTE 8 - STOCKHOLDER'S EQUITY. (Continued)
(a) Series B Convertible Redeemable Preferred Stock:
(Continued)
The following summarizes the terms of the Series B
Stock whose terms are more fully set forth in the Certificate
of Designation. The Series B Stock carries a zero coupon and
each share of the Series B Stock is convertible into ten
shares of the Company's Common Stock. The holder of a share of
the Series B Stock is entitled to ten times any dividends paid
on the Common Stock and such stock has ten votes per share and
votes as one class with the Common Stock. Accordingly, the
Initial Purchasers have sufficient voting power to elect all
of the Board of Directors. However, the Initial Purchasers are
required to vote in favor of Mr. Fyfe or his designee as a
director of the Corporation through June 30, 2000.
The holder of any share of Series B Convertible
Redeemable Preferred Stock has the right, at such holder's
option (but not if such share is called for redemption),
exercisable on or after September 30, 2000, to convert such
share into ten (10) fully paid and non-assessable shares of
Common Stock (the "Conversion Rate"). The Conversion Rate is
subject to adjustment as stipulated in the Agreement. Upon
liquidation, the Series B Stock would be junior to the
Corporation's Series A Preferred Stock and would share ratably
with the Common Stock with respect to liquidating
distributions.
Pursuant to the terms of the Agreement and the
Certificate of Designation, from March 31, 2000 to June 30,
2000, the Company has the right to repurchase or redeem such
shares of Series B Stock from the holders for total
consideration of $0.10 per share ($82,500 in the aggregate)
unless, during the period from the date of the closing of the
transaction through March 31, 2000,
(i) the Company's shares of common stock maintain a
minimum closing bid price of not less than $2 per
share on a public market during a period of any 10
consecutive trading days, and either
(ii) the Company raises a minimum of $2,500,000 of new
equity capital through a placement of Common Stock,
or
(iii) the Company has net revenues of at least $1,000,000
in any fiscal quarter through the fiscal quarter
ending March 31, 2000 (collectively, the "Trigger
Conditions").
Mr. Fyfe or the director designated by Mr. Fyfe will
have the ability to determine if the Company will elect to
exercise this redemption right on behalf of the Company.
F - 17
<PAGE> 37
NOTE 8 - STOCKHOLDER'S EQUITY. (Continued)
(b) Common Stock:
On May 15, 1997, the Company commenced a private
securities offering pursuant to Rule 506 of Regulation D of
the Securities Act of 1933, as amended. The offering of up to
400 units, each unit consisting of 10,000 shares of common
stock being offered at a price of $5,000 per unit. The Company
used a placement agent for such offering who received a sales
commission equal to 10% of the offering price of each unit
sold. In connection with the offering, 369 units were sold for
gross receipts of $1,845,000 from which the agent was paid a
commission $184,500 for net of $1,660,500 to the Company. The
proceeds of such offering are intended to be utilized to
enable the Company to attempt to effect the acquisition of an
operating business entity, for working capital and to pay off
the promissory notes and to redeem the common stock purchase
warrants issued in the Company's private securities offering
which was completed on April 30, 1997.
In March 1998, the Company sold 250,000 shares of
common stock at $.50 per share realizing $125,000.
The stockholders at the annual meeting held on May
18, 1998, approved the reduction of the par value of the
common stock from $0.10 per share to $0.001 per share. The par
value is being reduced to $0.001 per share to conform with the
new Series B Convertible Redeemable Preferred Stock, as each
share of the Series B Convertible Redeemable Preferred Stock
par value $0.01 per share, is convertible into ten (10) shares
of common stock.
(c) Warrants:
The Company has issued common stock purchase warrants
from time to time to investors in private placements, certain
vendors, underwriters, and directors and officers of the
Company.
A total of 101,308 shares of common stock are
reserved for issuance upon exercise of warrants as of December
31, 1998.
A total of 101,308 shares of common stock are
reserved for issuance upon exercise of warrants as of March
31, 1998. Warrants issued and outstanding are summarized as
follows:
<TABLE>
<CAPTION>
Shares Issuable
on Exercise Exercise Price Expiration Date
------------------------ ----------------------- ---------------------
<S> <C> <C> <C>
September 1993 9,375 $ 46.40 4/99
March 1995 91,933 $ 3.20 - $ 8.10 1/99 - 11/03
</TABLE>
In March 1995, as a result of the sale of the Company
of its medical imaging subsidiary, stock options held by
certain directors, officers and employees under the Company's
1986 Stock Option Plan were converted to warrants on
substantially the same terms as the previously held stock
options, except these warrants were immediately vested.
F - 18
<PAGE> 38
NOTE 8 - STOCKHOLDER'S EQUITY. (Continued)
(d) Stock Option Plans:
CGI has three stock option plans. The 1986 Stock
Option Plan and the 1998 Employee Incentive Stock Option Plan
provide for the grant of options to purchase shares of the
Company's common stock to employees. The 1992 Stock Option
Plan provides for the grant of options to directors.
The 1986 Stock Option Plan allows for the grant of
incentive stock options (ISO), non-qualified stock options
(NQSO) and stock appreciation rights (SAR). The maximum number
of shares of the Company's common stock that may be granted,
as amended in April 1993, is 140,000 shares. The terms of the
plan provide that options are exercisable for a period of up
to ten years from the date of grant or a period of five years
with respect to incentive stock options if the holder owns
more than 10% of the Company's outstand ing common stock. The
exercise price and grantees of options are established by the
Stock Option Committee. The exercise price of ISO's must be at
least 100% of the fair market value of the common stock at the
time of grant.
For the holders of more than 10% of the Company's
outstanding common stock, the exercise price must be at least
110% of the fair market value. The exercise price of NQSO's
must be not less than 80% of the fair market value of the
common stock at the time of grant. An option is exercisable
not earlier than six months from the date of grant. During the
nine months ended December 31, 1998 and the years ended March
31, 1998 and 1997, no options were granted, expired, exercised
or outstanding at any time under the 1986 Plan.
In April 1992, the Company adopted the 1992 Stock
Option Plan to provide for the granting of options to
directors. According to the terms of this plan, each director
is granted options to purchase 1,500 shares each year. The
maximum amount of the Company's common stock that may be
granted under this plan is 20,000 shares. Options are
exercisable at the fair market value of the common stock on
the date of grant and have five year terms.
Under the 1998 Plan, the maximum aggregate number of
shares which may be issued under options is 300,000 shares of
Common Stock. The aggregate fair market value (determined at
the time the option is granted) of the shares for which
incentive stock options are exercisable for the first time
under the terms of the 1998 Plan by any eligible employee
during any calendar year cannot exceed $100,000. The option
exercise price of each option is 100% of the fair market value
of the underlying stock on the date the options are granted,
except that no option will be granted to any employee who, at
the time the option is granted, owns stock possessing more
than 10% of the total combined voting power of all classes of
stock of the Corporation or any subsidiary unless (a) at the
time the options are granted, the option exercise price is at
least 110% of the fair market value of the shares of Common
Stock subject to the option and (b) the option by its terms is
not exercisable after the expiration of five years from the
date such option is granted.
F - 19
<PAGE> 39
NOTE 8 - STOCKHOLDER'S EQUITY. (Continued)
(d) Stock Option Plans: (Continued)
The 1998 Plan will be administered by a committee of
disinterested directors of the Board of Directors of the
Corporation ("Option Committee"). Through December 31, 1998,
no options were granted under the 1998 Plan. In February 15,
1999, the Company's Chief Operating Officer was granted an
option to acquire 75,000 shares of the Company's common stock
at $1.097 per share under the 1998 Plan.
Information with respect to options under the 1986,
1992 and 1998 Stock Option Plans is summarized as follows:
<TABLE>
<CAPTION>
For the Nine
Months Ended For the Years Ended March 31,
December 31, ----------------------------
1998 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Outstanding at beginning of period 3,000 1,500 7,500
Granted -- 1,500 3,000
Converted -- -- --
Expired -- -- (9,000)
Exercised -- -- --
--------- --------- ---------
Outstanding at end of period 3,000 3,000 1,500
--------- --------- ---------
</TABLE>
Outstanding options expire 90 days after termination
of holder's status as employee or director.
At December 31, 1998, there were 3,000 exercisable
outstanding options and 457,000 shares available for grant.
The exercise price of outstanding options ranged from $0.3125
per share to $0.40625 per share.
On May 1, 1997, 1,500 options were granted at an
exercise price of $0.3125 per share.
Options were granted at an exercise price equal to
the fair value of the common stock at the grant date.
Therefore, in accordance with the provisions of APB Opinion
No. 25 related to fixed stock options, no compensation expense
is recognized with respect to options granted or exercised.
Under the alternative fair-value based method defined in SFAS
No. 123, the fair value of all fixed stock options on the
grant date would be recognized as expense over the vesting
period. As the number of options granted is immaterial,
recognizing the expense would not have a material effect on
the Company's financial statements for any period presented.
F - 20
<PAGE> 40
NOTE 9 - INCOME TAXES.
The Company has requested that its taxable year-end
be changed from March 31, to December 31, effective with the
December 31, 1998 period, in order to coincide with its
financial statement year-end change.
The difference between income taxes computed using
the statutory federal income tax rate and that shown in the
financial statements are summarized as follows:
<TABLE>
<CAPTION>
For the Nine Months Ended
December 31,
--------------------------------------------------------
1998 1997
------------------------- -------------------------
(Consolidated) (Unaudited)
<S> <C> <C> <C> <C>
Loss before income taxes
and preferred dividend $ (402,951) $ (162,064)
========== ==========
Computed tax benefit at
statutory rate $ (137,000) (34.0%) $ (55,100) (34.0%)
Foreign subsidiary's loss
not subject to U.S. taxes 300 -- -- --
Net operating loss
valuation reserve 136,700 34.0 55,100 45.0
---------- ---------- ---------- ----------
Total tax benefit $ -- -- % $ -- -- %
---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
For the Years Ended
March 31,
--------------------------------------------------------
1998 1997
------------------------- -------------------------
<S> <C> <C> <C> <C>
Loss before income taxes
and preferred dividend $ (203,798) $ (268,956)
========== ==========
Computed tax benefit at
statutory rate $ (69,300) (34.0%) $ (91,400) (34.0%)
Foreign subsidiary's loss
not subject to U.S. taxes -- -- -- --
Net operating loss
valuation reserve 69,300 34.0 91,400 34.0
---------- ---------- ---------- ----------
Total tax benefit $ -- -- % $ -- -- %
---------- ---------- ---------- ----------
</TABLE>
There are no significant differences between the
financial statement and tax basis of assets and liabilities
and, accordingly, no deferred tax provision/benefit is
required. At December 31, 1998, the Company has a federal net
operating loss carryforward of approximately $1,038,000 which
can be applied against future income. The future tax benefit
of the operating loss carryforward of $353,000 has been fully
reserved as it is not more likely than not that the Company
will be able to use the operating loss in the future.
The Tax Reform Act of 1986 enacted a complex set of
rules limiting the utilization of net operating loss
carryforwards to offset future taxable income following a
corporate ownership change. The Company's ability to utilize
its NOL carryforwards is limited following a change in
ownership in excess of fifty percentage points.
The 825,000 shares of Series B Convertible Redeemable
Preferred Stock, subject to certain conditions, can be
converted into 8,250,000 common shares. Such conversion would
trigger the 50% change in ownership. The effect would be to
limit the amount of operating loss to be utilized in any tax
year. Additionally, the Company has plans to sell up to
3,500,000 shares of its common stock in a private placement
(see Note 11) which could effect the utilization of the net
operating loss.
F - 21
<PAGE> 41
NOTE 10 - COMMITMENTS, CONTINGENCIES AND OTHER.
(a) Leases:
Commencing in August 1998, the Company entered into
short-term operating leases for its general office space and
certain office equipment. Prior to August 1998, the Company
did not incur rent expense as it was inactive. Rent expense
charged to operations for the nine months ended December 31,
1998 was approximately $23,000. Future minimum annual rent
commitments under operating leases as of December 31, 1998 are
as follows:
<TABLE>
<CAPTION>
Years Ending December 31,
------------------------------------------------
<S> <C>
1999 $ 54,000
2000 54,000
2001 33,000
2002 3,000
----------------------
Total minimum Annual rentals $ 144,000
======================
</TABLE>
(b) Web Site:
The Company has entered into a commitment to develop
a web page to be used in the sale of its products, which are
under development, when, and if, the products are developed.
The estimated cost of the web page will be approximately
$500,000, of which $41,985 was charged to operations in the
nine months ended December 31, 1998. The balance of the cost
of developing the web site will be expensed as incurred. At
December 31, 1998, a liability in the amount of $41,985 was
owed to Warrantech Corporation for these expenses and is
included in accounts payable, accrued expenses and other
current liabilities in the accompanying financial statements.
The affiliate had paid the vendors on the Company's behalf for
their services.
(c) Investment Contract:
The Corporation has entered into an investment
advisory agreement with AIG Global Investment Corporation
("AIG") under which AIG will function as investment advisor
and manager of all the Corporation's investable assets. AIG
provides management services to all affiliated insurance
companies of American International Group and other
third-party institutions on a world-wide basis.
(d) Year 2000:
Even though the Company at the present time does not
have any operations, it recognizes the need to ensure that its
future operations, if any, will not be adversely effected by
Year 2000 software or hardware failures. The Company has
commenced communications with its suppliers, banks, investment
advisors, and others with which it presently does business to
coordinate Year 2000 conversion and it intends to continue
such communications over the next several months. The results
of such communications, which to date are insignificant, have
not required the Company to incur any additional costs.
F - 22
<PAGE> 42
NOTE 10 - COMMITMENTS, CONTINGENCIES AND OTHER. (Continued)
(d) Year 2000: (Continued)
Since the Company has not been engaged in any
business for the past several years, its basic concerns
regarding Year 2000 are focused on the future. The Company is
in the process of making the initial assessment of its
computer information needs and has just recently ordered and
has partially received its first system hardware which is
expected to be fully delivered and installed shortly. The
Company will be further assessing its future software needs.
The Company has received assurances from its vendors that the
hardware and software that it has acquired to date is Year
2000 compliant. The Company intends to continue to obtain such
assurances from its hardware and software vendors that the
hardware and software it acquires is Year 2000 compliant.
The Company does not know what impact, if any, Year
2000 non-compliance will have on its financial condition or
its contemplated future operations. But based upon available
current information, the Company does not anticipate that, in
the aggregate, costs associated with the Year 2000 issue will
have a material adverse financial impact. However, there can
be no assurances that, despite steps which the Company has
taken, is presently taking, and intends to take in the future
to insure that it, its future customers, its suppliers and
others are free of Year 2000 issues, the Company will not
encounter non-compliance issues that could have a material
adverse impact on its financial condition and/or its future
operations. If, despite the Company's efforts under its Year
2000 planning, there are Year 2000 related failures affecting
the Company from outside sources, management at the present
time does not believe the impact will be substantial.
NOTE 11 - SUBSEQUENT EVENT.
On April 1, 1999, the Company entered into an
agreement with a broker-dealer to sell 3,500,000 shares of its
common stock to accredited investors in a private offering.
The gross proceeds before offering costs (estimated to be
$355,000) from the sale of the securities is anticipated to be
$3,150,000. If the offering is successful, the Company will
lose its right to repurchase the Series B Convertible
Redeemable Preferred Stock for $0.10 per share as the
requisite conditions for extinguishment of this repurchase
right will have been met. (See Note 8.)
F - 23
<PAGE> 43
CORNICHE GROUP INCORPORATED
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Col. C
------
Col. A Col. B Additions
------ ------ ---------
Balance Charged to Acquisition
Description Beginning of Period Costs and Expenses of Subsidiaries
----------- ------------------- ------------------ ---------------
<S> <C> <C> <C>
For the years ended March 31, 1998 and 1997:
Reserve against notes receivable in default:
1997 $75,000 $ -- $ --
1998 75,000 -- --
For the nine months ended December 31, 1998:
Reserve against notes receivable in default:
1998 75,000 -- --
</TABLE>
<TABLE>
<CAPTION>
Col. A Col. D Col. E
------ ------ ------
Deductions Balance at
Description Describe End of Period
----------- -------- -------------
<S> <C> <C>
For the years ended March 31, 1998 and 1997:
Reserve against notes receivable in default:
1997 $ -- $75,000
1998 -- 75,000
For the nine months ended December 31, 1998:
Reserve against notes receivable in default:
1998 -- 75,000
</TABLE>
F - 24
<PAGE> 44
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No.
of incorporated
report specified below
----------------------
<S> <C> <C>
3 (a) Certificate of Incorporation filed September 18, 1980 (1) 3
(b) Amendment to Certificate of Incorporation filed
September 29, 1980 (1) 3
(c) Amendment to Certificate of Incorporation filed July 28, 1983 (2) 3(b)
(d) Amendment to Certificate of Incorporation filed February 10, 1984 (2) 3(d)
(e) Amendment to Certificate of Incorporation filed March 31, 1986 (3) 3(e)
(f) Amendment to Certificate of Incorporation filed March 23, 1987 (4) 3(g)
(g) Amendment to Certificate of Incorporation filed June 12, 1990 (5) 3.8
(h) Amendment to Certificate of Incorporation filed September 27, 1991 (6) 3.9
(i) Certificate of Designation for Series A Preferred Stock filed
November 12, 1994 (7) 3.8
(j) Amendment to Certificate of Incorporation filed
September 28, 1995 (10) 3(j)
(k) Certificate of Designation for Series B Preferred Stock dated
May 18, 1998 (12) C
(l) By-laws of the Company, as amended on April 25, 1991 (6) 3(f)
(m) Amendment to Certificate of Incorporation dated May 18, 1998 (12) A
4 (a) Form of Underwriter's Warrant (6) 4.9.1
(b) Form of Promissory Note - 1996 Offering (10) 4(b)
(c) Form of Promissory Note - 1997 Offering (10) 4(c)
(d) Form of Common Stock Purchase Warrant - 1996 Offering (10) 4(d)
(e) Form of Common Stock Purchase Warrant - 1997 Offering (10) 4(e)
10 (a) 1986 Stock Option Plan, as amended (7) 10.6
(b) 1992 Stock Option Plan (8) B
(c) Stock Purchase Agreement dated as of January 30, 1997 by and
among the Company, the Bank of Scotland and 12 buyers (10) 10(m)
(d) Mutual Release dated as of January 30, 1997 by and among the
Company, James Fyfe and the Bank of Scotland (10) 10(n) (e)
Stock Purchase Agreement, dated as of March 4, 1998, between
the Company and the Initial Purchasers named therein (12) B
(f) 1998 Employees Stock Option Plan (12) D
16 (a) Letter of Mahoney Cohen & Company, CPA, PC regarding their
concurrence with the statements made by the Company concerning
their resignation as the Company's principal
accountant (11) 16(a)
(b) Letter of Simontacchi & Company, LLP, regarding their
concurrence with the statements made by the Company concerning
their resignation as the Company's principal accountant (13) 6(a)
27 Financial Data Schedule, filed herewith
</TABLE>
Notes:
(1) Filed with the Securities and Exchange Commission as an exhibit,
numbered as indicated above, to the registration statement of the
Company on Form S-18, File No. 2-69627, which exhibit is incorporated
herein by reference.
<PAGE> 45
(2) Filed with the Securities and Exchange Commission as an exhibit,
numbered as indicated above, to the registration statement of the
Company on Form S-2, File No. 2-88712, which exhibit is incorporated
herein by reference.
(3) Filed with the Securities and Exchange Commission as an exhibit,
numbered as indicated above, to the registration statement of the
Company on Form S-2, File No. 33-4458, which exhibit is incorporated
herein by reference.
(4) Filed with the Securities and Exchange Commission as an exhibit,
numbered as indicated above, to the annual report of the Company on
Form 10-K for the year ended September 30, 1987, which exhibit is
incorporated herein by reference.
(5) Filed with the Securities and Exchange Commission as an exhibit,
numbered as indicated above, to the registration statement of the
Company on Form S-3, File No. 33-42154, which exhibit is incorporated
herein by reference.
(6) Filed with the Securities and Exchange Commission as an exhibit,
numbered as indicated above, to the registration statement of the
Company on Form S-1, File No. 33-42154, which exhibit is incorporated
herein by reference.
(7) Filed with the Securities and Exchange Commission as an exhibit,
numbered as indicated above, to the annual report of the Company on
Form 10-K for the year ended September 30, 1994, which exhibit is
incorporated herein by reference.
(8) Filed with the Securities and Exchange Commission as an exhibit, as
indicated above, to the proxy statement of the Company dated March 30,
1992, which exhibit is incorporated herein by reference.
(9) Filed with the Securities and Exchange Commission as an exhibit,
numbered as indicated above, to the current report of the Company on
Form 8-K, dated April 5, 1995, which exhibit is incorporated herein by
reference.
(10) Filed with the Securities and Exchange Commission as an exhibit,
numbered as indicated above, to the annual report of the Company on
Form 10-K for the year ended March 31, 1996, which exhibit is
incorporated herein by reference.
(11) Filed with the Securities and Exchange Commission as an exhibit,
numbered as indicated above, to the annual report of the Company on
Form 10-K/A for the year ended March 31, 1996, which exhibit is
incorporated herein by reference.
(12) Filed with the Securities and Exchange Commission as an exhibit, as
indicated above, to the proxy statement of the Company dated April 23,
1998, which exhibit is incorporated herein by reference.
(13) Filed with the Securities and Exchange Commission as an exhibit, as
indicated above, to the quarterly report of the Company on Form 10-Q
for the period ended June 30, 1998, which exhibit is incorporated
herein by reference.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 206,313
<SECURITIES> 628,175
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 834,488
<PP&E> 44,978
<DEPRECIATION> 4,197
<TOTAL-ASSETS> 905,791
<CURRENT-LIABILITIES> 375,571
<BONDS> 0
828,765
8,250
<COMMON> 6,370
<OTHER-SE> (322,427)
<TOTAL-LIABILITY-AND-EQUITY> 905,791
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 428,157
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (25,206)
<INCOME-PRETAX> (402,951)
<INCOME-TAX> 0
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</TABLE>
