<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ________________ to ________________
Commission file number: 0-10909
CORNICHE GROUP INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 22-2343568
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) Identification No.)
610 South Industrial Boulevard
Suite 220
Euless, Texas 76040
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (817) 283-4250
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(title of class)
Indicate by check mark whether 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 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.
-----------
$12,604,462 as of June 1, 1998
(Aggregate market value of the voting stock
held by non-affiliates of registrant)
6,355,231 shares, $.001 par value, as
of June 1, 1998 (Indicate the number of shares
outstanding of each of the registrant's
classes of common stock, as of the latest practicable date)
<PAGE> 2
PART I
ITEM 1. BUSINESS
NEW BUSINESS OPERATIONS
At the 1998 Annual Meeting of Stockholders held on May 18, 1998 (the
"Annual Meeting"), stockholders of Corniche Group Incorporated (the
"Corporation" or the "Registrant") approved, among other things, a transaction
(the "Transaction") whereby 825,000 shares of Series B Convertible Redeemable
Preferred Stock, a newly created series of preferred stock with each share
having ten votes per share, were issued to certain individuals, including Joel
San Antonio, for the aggregate cash consideration of $76,500. As a result of the
Transaction, Mr. San Antonio obtained control of the Corporation. The
Corporation's initial goal will be to complete the development of a
comprehensive strategic and operational business plan for the Corporation and to
secure the services of a quality management team to assist Robert H. Hutchins,
the newly elected President of the Corporation, in implementing the business
plan.
The Corporation plans to enter into insurance and/or insurance-related
businesses. The thrust of the Corporation will be to optimize spread of risk and
seek "niche" business opportunities that do not fit what is often referred to in
the industry as "mainstream" business. The Corporation may also explore
opportunities for "fronting" insurance for service contract business and other
property and casualty insurance business, whereby all or a portion of the risk
of such policies written by the Corporation would be ceded to a reinsurer. As
part of any such strategy the Corporation anticipates that it will reinsure
heavily on a "quote share" or "pro-rata" basis with other operators with whom
proposed new management has achieved successful business relationships in the
past. In "quote share" or "pro-rata" reinsurance, one or more reinsurers bears
an agreed upon proportion of the specified risk, rather than a fixed dollar
amount of risk or the excess above a fixed dollar amount of risk.
In connection with the implementation of these strategies, it may
become necessary for the Corporation to become licensed in one or more states in
order to enable it to conduct operations or to acquire a company that maintains
appropriate licenses. To further such goal, the Corporation recently has entered
into a non-binding letter of intent to acquire all of the stock of an existing
insurance company which has had limited operations and revenues for the past
several years. The acquisition is subject to due diligence by the Corporation
and subject to material conditions, including but not limited to the
satisfaction of capital requirements of regulatory authorities. No assurances
can be given that the Corporation will be able to obtain such licenses or to
consummate any such acquisitions. The acquisition, if consummated, will
represent the Corporation's entry into the United States insurance market.
The Corporation presently anticipates that its marketing efforts in the
property and casualty sectors of the insurance market will focus on operating on
a conservative basis using both facultative and treaty reinsurance support to
minimize its exposure. Facultative reinsurance generally involves a reinsurer
agreeing to bear the risk of loss over a specified dollar amount for a specified
risk. Treaty reinsurance generally involves a reinsurer agreeing to bear a
portion of the risk associated with a specified category or "book" of business,
and may be done on an excess or quote share basis. As part of this strategy, the
Corporation may consider direct selling, brokerage and agency produced business
and may evaluate potential opportunities to participate in the reinsurance
sector of commercial property and casualty insurance on both a "quote share" and
"excess" basis.
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The Corporation currently anticipates that business development and
future market growth will be concentrated on "short tail" casualty business and
package product lines, primarily focused in the retail/service industry
marketplace. "Short tail" casualty business provides for coverage during the
term of the policy or within a relatively short period, as distinguished from
"long-tail" business, such as occurrence-based policies, in which the insurer is
obligated to make payment, whether or not the policy has expired, as long as the
insurable injury occurred during the term of the policy. Examples of "long tail"
insurance include worker's compensation, medical malpractice and products
liability insurance for products with long lives, such as automobiles and
airplanes. The Corporation anticipates that it will seek short tail business
because of the relatively greater availability of reinsurance and lower
reinsurance costs, and the relatively greater certainty, predictability and
ability to price policies and reinsurance policies associated with short tail
business. An example of short-tail business on which the Corporation might
concentrate is retail and wholesale products liability for consumer products
that have limited useful lives. In addition the Company anticipates that it will
provide package product lines, that is, insure service contracts for products
that have a limited useful life on a claims made basis for a term of no greater
than three years. If successfully developed, the customer base generated by
these segments could become a source to seek out other property and casualty
insurance business opportunities.
As part of its overall business plan, the Corporation may pursue other
and different business activities than those described above, but it has no
current plans to do so.
Since the annual meeting the Corporation has also entered into an
investment advisory agreement with AIG Global Investment Corporation under which
it will function as investment advisor and manager of all of the Corporation's
investable assets. AIG Global provides investment management services to
domestic insurance companies seeking to create an investment alternative to
letters of credit that, at the same time, meet state statutory insurance
requirements.
The preceding description represents the Corporation's current plans
for the Corporation, which are subject to change as business necessities require
during the course of implementation. No assurances can be given that the
Corporation will be successful in implementing this business plan as currently
envisioned.
The description of the Corporation's proposed new business operations
and intended strategy after the Transaction are forward-looking statements under
Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking
statements are inherently subject to risks and uncertainties, many of which
cannot be predicted with accuracy or anticipated. Future events and actual
results, financial and otherwise, could differ materially from those set forth
in or contemplated by the forward-looking statements herein. Important factors
that could contribute to such differences include changes in economic and market
conditions, ability to successfully obtain licenses and/or consummate
acquisitions, ability to raise capital and meet insurance regulatory
requirements and regulatory changes in the insurance business, as well as the
other factors described herein.
HISTORY
Registrant was incorporated in Delaware on September 18, 1980 under the
name Fidelity Medical Services, Inc. On July 28, 1983 Registrant changed its
name to Fidelity Medical, Inc. From its inception through March 1995 Registrant
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 Registrant 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
("TLCS"), a stationery retailer. The acquisition of CDL resulted in the
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<PAGE> 4
former shareholders of CDL, Brian J. Baylis and Susan A.M. Crisp, owning a
majority of the outstanding common shares of Registrant after the acquisition
and was treated as a recapitalization of CDL with CDL being treated as the
acquirer. Accordingly, Registrant changed its fiscal year 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 Registrant'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,
Registrant 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, Registrant 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.
Effective March 25, 1995, Registrant sold its wholly-owned medical
imaging products subsidiary, FMI, to Chester in exchange for the 215,150 shares
of Registrant's common stock previously issued to Chester in connection with
Registrant'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 Registrant
in the principal amount of $200,000 due October 1, 1995 (the "Note"). It also
included an option, in favor of Registrant, 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. Registrant'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 Registrant'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 Registrant
$125,000 of the principal sum due Registrant 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. Registrant does not anticipate any further
cash recoveries against the Note. Registrant does expect however, to exercise
the option applicable to the unpaid balance on the Note to purchase voting
shares of Medical Laser Technologies, Inc., the corporate parent of FMI,
although no assurance can be given that this will prove to be the case.
Following the sale of FMI, Registrant's business operations consisted
of the retail stationery operations and brand marketing and stationery wholesale
operations of TSCL and Chessbourne respectively. Registrant's operations were
funded in large part from loans made by the Bank of Scotland, Registrant'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 ("Fixed Assets") and debentures over pools of assets which by their
nature will change from time to time ("Floating Changes"). Registrant
experienced large operating losses and net cash outflows from operating
activities during fiscal 1996 resulting in severe liquidity problems. Registrant
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 Registrant's
business operations. Since such time, until the Transaction, the Registrant had
been inactive.
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RECEIVERSHIP PROCEEDINGS
It has become effectively impossible for each of CDL, Chessbourne and
TSCL to be audited for the year ended March 31, 1996 and subsequent periods
given that the respective receivers have possession and control over the books,
records and documents of each of the corporations and will not make them
available to Registrant or any auditor retained on its behalf. Consequently,
Registrant has treated each of CDL, Chessbourne and TSCL as no longer being
subsidiaries of Registrant for periods subsequent to December 31, 1995. Under UK
law, Registrant is not liable for the liabilities of CDL, TSCL and Chessbourne
absent a guarantee or other enforceable promise by Registrant to pay such
liabilities. Registrant gave no such guarantee or promise and as such has no
liability for the payment thereof. Similarly, the appointment of an
administrative receiver in respect of the assets of CDL. TSCL and Chessbourne
has no effect on the assets of Registrant. Notwithstanding the foregoing, the
receivers for CDL made certain claims against Registrant for sums allegedly owed
to CDL by Registrant in connection with a contested share issue. To resolve such
dispute, a Compromise Agreement dated March 4, 1996 between Registrant. CDL and
the receivers for CDL was entered into which had the effect of releasing
Registrant from any and all liability to CDL upon performance by Registrant of
its obligations under that agreement In connection therewith Registrant issued a
promissory note to the Bank of Scotland, the secured creditor of CDL, in the
principal amount of 50,000 pounds sterling ((pound)50,000). On January 30, 1997,
Registrant paid off the Note in full, including all interest accrued thereon
through the date of payment and executed a Mutual Release with the Bank of
Scotland.
In connection with the receiverships, Brian J. Baylis and Susan A.M.
Crisp, Registrant's then chief executive officer and chief financial officer,
who collectively owned approximately 45% of Registrant's outstanding common
stock entered into pledge agreements (the "Pledge Agreements") whereby they
pledged their common shares of Registrant to the Bank of Scotland as collateral
against the shortfall which was to be realized by the Bank of Scotland in the
receivership proceedings. Most of the pledged shares were subsequently sold by
the Bank of Scotland to twelve unrelated persons.
ITEM 2. PROPERTIES
As of August 1, 1998, the Registrant is leasing offices located at 610
South Industrial Boulevard, Euless, Texas. Such lease expires in July, 2001.
ITEM 3. LEGAL PROCEEDINGS
No material legal proceedings are pending to which Registrant or any of
its property is subject, nor to the knowledge of Registrant are any such legal
proceedings threatened.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Registrant submitted no matters to a vote of its security holders
during the fourth quarter of the fiscal year ended March 31, 1998.
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PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Since October 11, 1995 Registrant's common stock has been listed for
trading on the OTC Bulletin Board, under the symbol "CGII" from October 11, 1995
to April 20, 1998 and thereafter under the symbol "CNGI." The following table
sets forth the range of high and low sales prices of Registrant's common stock
for each full quarterly period within the two most recent fiscal years and the
most recent quarter.
<TABLE>
<CAPTION>
Sales Prices
- ---------------------------------------
Fiscal 1997 High Low
- -------------------- -------- -------
<S> <C> <C>
First Quarter $ .44 $ .19
Second Quarter .38 .19
Third Quarter .38 .06
Fourth Quarter .44 .19
</TABLE>
<TABLE>
<CAPTION>
Fiscal 1998 High Low
- -------------------- -------- -------
<S> <C> <C>
First Quarter $ 1.06 $ .31
Second Quarter 1.00 .63
Third Quarter .88 .69
Fourth Quarter 2.44 .69
</TABLE>
<TABLE>
<CAPTION>
Bid Prices
- ---------------------------------------
Fiscal 1999 High Low
- -------------------- -------- -------
<S> <C> <C>
First Quarter $ 2.38 $ 1.16
</TABLE>
At June 1, 1998, there were approximately 1,187 record holders of
Registrant's 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. Registrant 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 Registrant's Board of Directors.
SECURITIES OFFERINGS
In addition to the Series B Preferred Stock sold in connection with the
Transaction, during the fiscal year ended March 31, 1998, Registrant conducted a
private placement of securities pursuant to Rule 506 of Regulation D of the
Securities Act of 1933, as amended, which was completed in September, 1997. The
purpose of such placement was, in part, to provide Registrant with the ability
to settle and pay off certain of its outstanding liabilities. Such placement of
3,690,000 shares of common stock for a total of $1,845,000 was conducted on a
"best-efforts" basis through Robert M. Cohen & Co., Inc., a New York based
broker dealer ("RMCC"). In connection with the placement, Registrant paid RMCC a
sales commission equal to 10% of the subscription price for each unit sold. In
March 1998, 250,000 shares of common stock were sold in a private placement by
the Company for a total consideration of $125,000. No sales commission was paid.
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ITEM 6. SELECTED FINANCIAL DATA
The selected statements of operations and balance sheet data set forth
below are derived from the financial statements of Registrant which were
examined by Simontacchi & Co. LLP, independent certified public accountants, for
the years ended March 31, 1998, March 31, 1997 and March 31, 1996 and by Mahoney
Cohen & Company, PC ("Mahoney Cohen"), independent certified public accountants,
for each of the two years in the period ended March 25, 1995. Mahoney Cohen did
not audit Registrant'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 Registrant and related notes appearing elsewhere in this
Report (See Item 8. Financial Statements and Supplemental Data).
<TABLE>
<CAPTION>
MARCH 31, MARCH 31, MARCH 31, MARCH 25, MARCH 27,
1998 1997 1996 1995 1994
------------- ------------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C>
Statement of Operations:
Net Sales................................. $ -0- $ -0- $ -0- $ 21,048,151 $ 7,585,360
Cost of Sales............................. -0- -0- -0- 15,531,102 5,121,884
Gross Profit.............................. -0- -0- -0- 5,517,049 2,463,476
Operating (Loss) Income................... (221,602) (251,583) (257,073) (2,821,339) 207,300
Net (Loss) Income......................... (263,865) (332,604) (323,510) (3,394,652) 1,804
Net (Loss) Income per Common Share:....... (.05) (.14) (.14) (2.05) -0-
Weighted Average Number of Shares
Outstanding............................ 5,165,272 2,412,278 2,300,289 1,656,903 1,669,784
Dividends per Common Share................ -0- -0- -0- -0- -0-
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998 MARCH 31, 1997 MARCH 31, 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Balance Sheet Data:
Working Capital (Deficiency).............. $ 869,567 $ (652,456) $ (320,240)
Total Assets.............................. 1,129,602 14,914 136,201
Current Liabilities....................... 259,676 666,623 455,306
(Accumulated Deficit)...................... (2,713,254) (2,499,389) (2,116,785)
Common Stock, Other Stockholders' Equity
and Capital Deficiency................. (23,982) (1,560,976) (3,825,234)
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Corporation 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 Corporation'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 subsidiary's cumulative losses over The
Corporation'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.
At the 1998 Annual Meeting of Stockholders, stockholders of the
Corporation approved the Transaction, which was consummated on May 18, 1998.
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As a result of the Transaction, the Corporation plans to enter into
insurance and/or insurance related businesses. To further such goal, the
Corporation has entered into a non-binding letter of intent to acquire all of
the stock of an existing insurance company which has had limited operations and
revenues for the past several years. The acquisition is subject to due diligence
by the Company and is subject to material conditions. No assurances can be given
that the Corporation will consummate such acquisition. The acquisition, if
consummated, will represent the Company's entry into the United States insurance
market.
The Corporation recorded losses in the year ended March 31, 1998 of
$221,602, before interest expense and preferred stock dividend accrual ($251,583
in 1997). Such losses arose from general and administrative expenses which
principally comprise professional fees, travel expenses and general office
costs.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended March 31, 1998 the Corporation relied on the net
proceeds of the securities offerings described in Item 5 of this report and cash
received against a note receivable and other sundry receipts to meet its cash
needs.
The Corporation does not expect to generate any operating revenues
until, at the earliest, the licensing of the Corporation to conduct the
activities described in Item 1 - New Business Operations or the acquisition of a
company with such licenses. No assurance can be given however that the
Corporation will successfully consummate such a business acquisition or obtain
such licenses or that the Corporation will derive any material revenues or
profits therefrom.
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 shares of Series A preferred Stock
(if their 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 of the Company at a price of $5.20 per share. Of the 893,908 shares of
Series A Preferred Stock outstanding at March 31, 1998, 65,145 of such shares
were converted into 12,525 shares of the Company's common stock through December
31, 1998. 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 any significant number of shares of Series A Preferred Stock,
the Company's financial condition would be materially affected.
To enter into the insurance industry, whether through consummation of
the acquisition described in the above letter of intent or otherwise, the
Corporation will need to satisfy regulatory capital requirements. The
Corporation is currently discussing with investment bankers certain financing
alternatives for raising additional equity capital in amounts at least
sufficient to permit it to have the regulatory capital needed to consummate the
acquisition. As it becomes licensed or acquires operations in other
jurisdictions, the capital requirements of the Corporation will increase
accordingly. No assurance can be given that the Corporation will be able to
raise all required regulatory capital or capital needed for its operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The financial statements of the Corporation, itemized in the subtopic,
"Financial Statements" under Item 14 hereof, are set forth at the end of this
Report.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On July 20, 1995, the Corporation appointed Mahoney Cohen as The
Corporation's independent auditors responsible for the audit of the
Corporation's financial statements. This action was recommended by the
Corporation's Audit Committee and approved by its Board of Directors. The
Corporation had not consulted Mahoney Cohen regarding any accounting or
financial reporting issues prior to that firm being retained by the Corporation.
In connection with its audit of the Corporation'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 Corporation's independent auditors, there were no
disagreements between Mahoney Cohen and the Corporation 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 Mahoney Cohen's report on the Corporation's financial statements
for the fiscal year ended March 25, 1995 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 Corporation appointed Simontacchi & Company, P.A.
("Simontacchi") as the Corporation's independent auditors responsible for the
audit of the Corporations financial statements. This action was approved by the
Corporation's board of directors. The Corporation had not consulted Simontacchi
regarding any accounting or financial reporting issues prior to that firm being
retained by the Corporation.
Simontacchi has audited the Corporation's financial statements for the
fiscal years ended March 31, 1996, 1997 and 1998. Simontacchi's report on the
Corporation's financial statements for the fiscal years ended March 31, 1996 and
1997 expressed an unqualified opinion on those financial statements based upon
their audits, but included paragraphs noting a "substantial doubt about the
Corporation's ability to continue as a going concern" based upon the several
matters summarized in such reports.
On August 12, 1998, the Company and Simontaccchi 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. No "reportable
events" as describe under Item 304(a)(1)(v) of Regulation S-K occurred during
the prior two fiscal years.
The Company simultaneously engaged Weinick Sanders Leventhal & Co., LLP
("Weinick") as its new independent accountants as of August 12, 1998. Such
appointment was approved by the Company's Board of Directors. The Company had
not consulted with Weinick regarding any matters or events set forth in Item
304(a)(2)(i) and (ii) of Regulation S-K.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
DIRECTORS
The following sets forth, as of March 31, 1998, the director of the
Corporation, his age, the year in which he was first elected or appointed a
director, and any other office in the Corporation held by him. Each director
holds office until the next annual meeting of shareholders and until their
successors have been elected and qualified.
<TABLE>
<CAPTION>
Director
Name Other Offices Held Age Since
---------------- -------------------------- ----- ---------
<S> <C> <C> <C>
Vice President,
James J. Fyfe Chief Operating Officer 43 1995
</TABLE>
At the Annual Meeting, stockholders of the Corporation elected Joel San
Antonio, age 45, as Chairman of the Board of the Corporation and three other
directors, Robert H. Hutchins, age 69, Ronald Glime, age 53, and Glenn Aber, age
49.
EXECUTIVE OFFICERS
The following sets forth, as of March 31, 1998 the executive officer of
the Corporation, his age, the year in which he was first appointed an executive
officer of the Corporation and all positions and offices in the Corporation held
by such person.
<TABLE>
<CAPTION>
Director
Name Other Offices Held Age Since
---------------- -------------------------- ----- ---------
<S> <C> <C> <C>
James J. Fyfe Vice President 43 May 1995
</TABLE>
Following the Annual Meeting, Mr. Hutchins was appointed President of
the Corporation. Mr. Aber was appointed acting Treasurer and Mr. Fyfe was
appointed acting Secretary, until other officers could be employed. At that
time, Mr. Fyfe resigned his position as Vice President.
FAMILY RELATIONSHIPS
Mr. Aber, a newly elected director, is the brother-in-law of Mr. San
Antonio. No other family relationship exists between any director, executive
officer of the Corporation or any person contemplated to become such.
BUSINESS EXPERIENCE
The following summarizes the occupation and business experience during
at least the five years preceding March 31, 1998 of each person who served as a
director and/or executive officer of the Corporation at March 31, 1998.
James Fyfe. Mr. Fyfe became a director and Vice President and Chief
Operating Officer of the Corporation in May 1995. 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 Corporation's U.K holding
company, CDL. In March 1996, he resumed his activities as an
-10-
<PAGE> 11
independent business consultant. From May 1996 through August 1997 he was an
outside director of Medical Laser Technologies, Inc.
Pursuant to the terms of the Stock Purchase Agreement relating to the
Transaction and the issuance of the Series B Convertible Redeemable Preferred
Stock, the Initial Purchasers of the Series B Convertible Redeemable Preferred
Stock are required to continue 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
Convertible Redeemable Preferred Stock will expire.
The following summarizes the occupation and business experience during
at least the five years preceding March 31, 1998 of each person who was elected
at the Annual Meeting as a director and/or executive officer of the Corporation.
Joel San Antonio. Mr. San Antonio founded Warrantech Corporation
(Nasdaq Symbol: WTEC) in 1983. Warrantech is a business services company with a
core business in the administration of warranties and service contracts. He was
a Director, Chief Executive Officer and President of Warrantech Corporation from
incorporation through February 1988. Since February 1988, Mr. San Antonio has
been a Director, 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. 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 for the past 2-1/2 years has been
employed by Warrantech Automotive, Inc. as National Claims Manager. Mr. Hutchins
has served as President of the Corporation since May 1998.
Ronald Glime. Mr. Glime is currently President of Warrantech
Automotive, Inc., a position he has held since October 1992.
Glenn Aber. 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.
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 a settlement of $40,000.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF OFFICERS
For Mr. Fyfe's service to the Corporation and his role in bringing the
Transaction to fruition, the Corporation issued to Mr. Fyfe 10,000 shares of
Series B Convertible Redeemable Preferred Stock. The Corporation has not
otherwise paid salary, wages or other compensation to any of its executive
officers since February 1996 when the Corporation's then operating subsidiaries
were placed into receivership in the United Kingdom and all business operations
ceased.
-11-
<PAGE> 12
<TABLE>
<CAPTION>
Summary Compensation Table
---------------------------------------------------------------------------
Long-Term Compensation
-------------------------------------
Annual Compensation Awards Payouts
-------------------------------- ---------------- -----------------
Name and Principal Options/SARs ($) All other
Position Year Salary ($) (#) Compensation
------------ ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
James J. Fyfe(1) 1998 -0- 1,500 -0-
1997 -0- 1,500 -0-
1996 $76,000 -0- -0-
</TABLE>
- -----------------
(1) Mr. Fyfe became sole officer on March 6, 1996 following the
resignations of Brian J. Baylis and Susan A.M. Crisp. His 1996 salary
was paid to Mr. Fyfe by the former U.K. subsidiary.
All officers hold office until the meeting of the Board following the
next annual meeting of stockholders or until the earlier of their resignation or
removal.
OPTION/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants
- ----------------------------------------------------------------------------------------------
Number of
Shares of % of Total
Common Stock Options/SARs
Underlying Granted to
Options/SARs Employees in Exercise or Base
Name Granted (#) Fiscal Year Price ($/Sh) Expiration Date
- ----------------- ---------------- ---------------- ------------------- -----------------
<S> <C> <C> <C> <C>
James J. Fyfe 1,500 100% $.3125 May 2002
</TABLE>
Aggregated Options/SAR Exercises in Last Fiscal Year
and FY-End Options/SAR/Values
<TABLE>
<CAPTION>
Value of
Number of Unexercised In-
Unexercised the-Money
Options/SARs At Options/SARs At
FY-End (#) FY-END (%)
Shares Acquired Value Realized Exercisable/ Exercisable/
Name on Exercise (#) ($) Unexercisable Unexercisable
- ----------------- ------------------ ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
James J. Fyfe -0- -0- 0/3,000 0/0
</TABLE>
-12-
<PAGE> 13
COMPENSATION OF DIRECTORS
Each director who is not an officer or employee of the Corporation 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 would be compensated for
committee service at $500 per calendar quarter plus 125 shares of Corporation
stock per calendar quarter. Such directors are also compensated for special
assignments from time to time. No compensation for special assignments was paid
in fiscal 1997 or 1998. No directors' fees are payable to employees of the
Corporation who serve as directors.
All directors receive options to purchase 1,500 shares of the
Corporation's common stock each May under the Corporation's 1992 Stock Option
Plan for Directors.
SECTION 16 BENEFICIAL OWNERSHIP COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Corporation's directors, executive officers and 10% stockholders to file with
the Securities and Exchange Commission ("SEC") certain reports regarding such
persons' ownership of the Corporation's securities. Mr. Baylis and Ms. Crisp
were required to file reports on Form 4 in connection with the reduction of
their respective ownership interests in the Corporation resulting from the sale
of shares pledged by them following a default in the obligations of the
Corporation's former U.K. subsidiaries to the Bank of Scotland in 1996. Mr.
Baylis and Ms. Crisp, each of whom resides in the U.K., were not fully aware of
their obligations to file a Form 4 following the sale of pledged shares but have
been notified regarding such obligations. Bruce Paul became a 10% stockholder in
May 1997. By June 1997, his ownership interest was below 10% due to additional
stock issuances by the Corporation. To the Corporation's knowledge, Mr. Paul did
not file a Form 3 upon becoming a 10% stockholder. The Corporation is not aware
of any other late filings of reports under Section 16 this past year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
VOTING SECURITIES OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of June 1, 1998, information
concerning the beneficial ownership of (a) Common Stock and (b) voting power of
the Corporation by virtue of holding shares of Common Stock, which have one vote
per share, and shares of Series B Convertible Redeemable Preferred Stock, which
have ten votes per share ("Voting Power") (i) by each person which is known by
the Corporation to own beneficially more than 5% of its outstanding Common Stock
or Voting Securities, (ii) by each director, (iii) by each of the current
executive officers named in the compensation table and (iv) by all directors and
executive officers as a group.
<TABLE>
<CAPTION>
BENEFICIAL PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL OWNER (2) OWNERSHIP OF CLASS AMOUNT PERCENTAGE
- -------------------------------------------------- -------------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
James Fyfe........................................ 3,000(3) (4) 103,000 0.7%
Joel San Antonio (5).............................. -0- -0- 6,850,000 46.9%
Robert Hutchins................................... -0- -0- 150,000 1.0%
Ronald Glime...................................... 50,000 0.8% 550,000 3.8%
Glenn Aber........................................ -0- -0- 150,000 1.0%
Bruce H. Paul..................................... 500,000 7.9% 500,000 3.4%
Alan Zuckerman.................................... -0- -0- 500,00 3.4%
All directors and executive officers as a group (5 53,000 0.9% 7,803,000 53.4%
persons).....................................
</TABLE>
(1) Includes Common Stock and Class B Preferred Stock at 10 votes per share.
-13-
<PAGE> 14
(2) All addresses are c/o the Corporation except as noted.
(3) Represents exercisable options.
(4) Less than 0.1%.
(5) Includes 110,000 preferred shares (with 1,100,000 votes) held by family
members of Mr. San Antonio's.
(6) Mr. Paul's address is 1 Hampton Road, Purchase, NY, to the best knowledge
of the Corporation.
(7) Mr. Zuckerman's address is 415 Bull Mill Road, Chester, NY to the best
knowledge of the Corporation.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH MANAGEMENT AND OTHERS
Other than the consummation of the Transaction, and the issuance of
10,000 shares of Series B Preferred Stock to Mr. Fyfe in connection therewith,
during the fiscal year ended March 31,1998 and all subsequent periods there have
been no material transactions between the Corporation and any member of
management or any principal shareholder of the Corporation.
-14-
<PAGE> 15
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
Financial Statements
The financial statements filed as a part of this report are as follows:
Report of independent accountants
Balance Sheets - March 31, 1998 and March 31, 1997
Statements of Operations - Years ended March 31, 1998, March 31, 1997
and March 31, 1996
Statements of Common Stock, Other Stockholders' Equity and Capital
Deficiency - Years ended March 31, 1998, March 31, 1997 and
March 31, 1996
Statements of Cash Flows - Years ended March 31, 1998, March 31, 1997
and March 31, 1996
Notes to financial statements
-15-
<PAGE> 16
FINANCIAL STATEMENT SCHEDULES
The financial statement schedule filed as a part of this report is as
follows:
Valuation and Qualifying Accounts for the years ended March 31, 1998,
March 31, 1997 and March 31, 1996.
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.
Exhibits
The exhibits filed as a part of this report are as follows:
<TABLE>
<CAPTION>
Exhibit No.
of incorporated
report specified below
<S> <C> <C> <C>
3 (a) Certificate of Incorporation filed September 18, 1980 (1) 3
(b) Amendment to Certificate 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 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 the Series B Preferred Stock
dated May 18, 1998 (12) C 3(f)
(l) By-laws of the Corporation, as amended on April 25, 1991 (6)
(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 Corporation, the Bank of Scotland
and 12 buyers (10) 10(m)
(d) Mutual Release dated as of January 30, 1997 by and among
the Corporation, James Fyfe and the Bank of Scotland (10) 10(n)
(e) Stock Purchase Agreement, dated as of March 4, 1998, between
the Corporation 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 Corporation concerning
their resignation as the Corporation's principal
accountant (11) 16(a)
27 Financial Data Schedule, filed herewith.
</TABLE>
-16-
<PAGE> 17
Notes:
(1) Filed with the Securities and Exchange Commission as an exhibit, numbered as
indicated above, to the registration statement of the Corporation on Form S-18,
File No. 2-69627, which exhibit is incorporated herein by reference.
(2) Filed with the Securities and Exchange Commission as an exhibit, numbered as
indicated above, to the registration statement of the Corporation 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 Corporation 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 Corporation 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 Corporation 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 Corporation 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 Corporation 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 Corporation 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 Corporation 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 Corporation 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 Corporation on Form 10K/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 Corporation dated April 23, 1998,
which exhibit is incorporated herein by reference.
-17-
<PAGE> 18
REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K during the fourth quarter of
fiscal 1998.
-18-
<PAGE> 19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Corporation has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
CORNICHE GROUP INCORPORATED
By: /s/ Robert H. Hutchins
--------------------------------
Robert H. Hutchins, President
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Corporation and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
Principal Executive Officer:
/s/Robert H. Hutchins President April 21, 1999
- ------------------------------------
ROBERT H. HUTCHINS
A Majority of the board of directors:
/s/Joel San Antonio Chairman of April 21, 1999
- ------------------------------------ the Board
JOEL SAN ANTONIO
/s/Robert H.Hutchins April 21, 1999
- ------------------------------------
ROBERT H. HUTCHINS
/s/Ronald Glime April 21, 1999
- ------------------------------------
RONALD GLIME
/s/Glenn Aber April 21, 1999
- ------------------------------------
GLENN ABER
- ------------------------------------
JAMES J. FYFE
</TABLE>
-19-
<PAGE> 20
CORNICHE GROUP INCORPORATED
FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
F-1
<PAGE> 21
CORNICHE GROUP INCORPORATED
MARCH 31, 1998
I N D E X
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Financial Statements:
Balance Sheets at March 31, 1998 and 1997 ................................. F-4
Statements of Operations
For the Years Ended March 31, 1998, 1997 and 1996 ...................... F-5
Statements of Common Stock, Other
Stockholders' Equity and (Capital Deficiency)
For the Years Ended March 31, 1998, 1997 and 1996 ...................... F-6
Statements of Cash Flows
For the Years Ended March 31, 1998, 1997 and 1996 ...................... F-7 - F-8
Notes to Financial Statements ............................................. F-9 - F-21
Schedule II - Valuation of Qualifying Accounts
For the Years Ended March 31, 1998, 1997 and 1996 ...................... F-22
</TABLE>
F-2
<PAGE> 22
[SIMONTACCHI & COMPANY, LLP LETTERHEAD]
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 statements 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
BALANCE SHEETS - RESTATED
A S S E T S
<TABLE>
<CAPTION>
MARCH 31,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Current assets:
Cash and equivalents................................... $ 1,129,064 $ 13,167
Other receivable....................................... -- 1,000
Prepaid expenses....................................... 179 --
----------- -----------
Total current assets................................ 1,129,243 14,167
Other assets:
Property and equipment, net............................ 359 747
$ 1,129,602 $ 14,914
=========== ===========
LIABILITIES AND COMMON STOCK,
OTHER STOCKHOLDERS' EQUITY AND CAPITAL DEFICIENCY
Current liabilities:
Notes payable.......................................... $ -- $ 400,000
Trade accounts payable................................. 21,362 4,929
Dividends payable - preferred stock.................... 208,464 148,397
Accrued liabilities.................................... 29,850 113,297
----------- -----------
Total current liabilities........................... 259,676 666,623
----------- -----------
Redeemable preferred stock, 5,000,000 shares authorized
Series A 7% convertible preferred stock -
stated value $1.00 per share
Issued - 1,000,000 shares
Outstanding - 893,908 shares at March 31, 1998
and 909,267 at March 31, 1997....................... 893,908 909,267
----------- -----------
Common stock, other stockholders' equity
and capital deficiency:
Common stock, $0.10 par value, authorized -
30,000,000 shares, issued 6,355,231 March 31,
1998 and 2,630,378 March 31, 1997................... 635,522 263,037
Additional paid-in capital............................. 2,053,750 830,086
(Accumulated deficit).................................. (2,713,254) (2,449,389)
Treasury stock - at cost, 218,100 shares
at March 31, 1997 -- (204,710)
----------- -----------
Total common stock, other stockholders'
equity and capital deficiency..................... (23,982) (1,560,976)
----------- -----------
$ 1,129,602 $ 14,914
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 24
CORNICHE GROUP INCORPORATED
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net sales .................................................... $ -- $ -- $ --
Cost of sales ................................................ -- -- --
----------- ----------- -----------
Gross profit ................................................. -- -- --
Selling, general and administrative expenses ................. 221,602 251,583 257,073
----------- ----------- -----------
Operating loss ............................................... (221,602) (251,583) (257,073)
Loss on sale of assets ....................................... -- -- (3,042)
Interest, net ................................................ 17,804 (17,373) (600)
----------- ----------- -----------
Loss from continuing operations .............................. (203,798) (268,956) (260,715)
Preferred stock dividend ..................................... (60,067) (63,648) (62,795)
----------- ----------- -----------
Loss after preferred dividends ............................... (263,865) (332,604) (323,510)
Loss from discontinued operations ............................ -- -- (3,432,032)
Excess of UK subsidiary cumulative losses over investment .... -- -- 5,466,636
----------- ----------- -----------
Net income (loss) ............................................ $ (263,865) $ (332,604) $ 1,711,094
=========== =========== ===========
Income (loss) per share of common stock:
Income (loss) from continuing operations .................. $ (0.05) $ (0.14) $ (0.14)
Income (loss) discontinued operations ..................... $ 0.00 $ 0.00 $ 0.88
----------- ----------- -----------
Net income (loss) ............................................ $ (0.05) $ (0.14) $ 0.74
=========== =========== ===========
Weighted average number of
common shares outstanding ................................. 5,165,272 2,412,278 2,300,289
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 25
CORNICHE GROUP INCORPORATED
STATEMENTS OF COMMON STOCK, OTHER STOCKHOLDERS' EQUITY
and (CAPITAL DEFICIENCY) - RESTATED
FOR THE YEARS ENDED MARCH 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
COMMON STOCK
---------------------
ADDITIONAL
NUMBER OF PAID-IN ACCUMULATED TRANSLATION CUMULATIVE
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT TREASURY STOCK TOTAL
--------- --------- ----------- ----------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - March 25, 1995 ................ 2,119,857 $ 211,985 $ -- (3,827,879) $ (4,630) $ (204,710) $(3,825,234)
Conversion of preferred stock ........... 7,077 708 36,094 -- -- -- 36,802
Adjustment to common stock .............. (156) (16) 16 -- -- -- --
Issuance of common stock ................ 478,600 47,860 909,340 -- -- -- 957,200
Costs related to sale of common stock ... -- -- (162,864) -- -- -- (162,864)
Issuance of common stock ................ 25,000 2,500 47,500 -- -- -- 50,000
Preferred stock dividends ............... -- -- -- (62,795) -- -- (62,795)
Elimination of UK subsidiaries .......... -- -- -- 2,034,604 4,630 -- 2,039,234
Net loss ................................ -- -- -- (260,715) -- -- (260,715)
--------- --------- ----------- ----------- ----------- -------------- ----------
Balance - March 31, 1996 ................ 2,630,378 263,037 830,086 (2,116,785) -- (204,710) (1,228,372)
Preferred stock dividends ............... -- -- -- (63,648) -- -- (63,648)
Net loss ................................ -- -- -- (268,956) -- -- (268,956)
--------- --------- ----------- ----------- ----------- -------------- ----------
Balance - March 31, 1997 ................ 2,630,378 263,037 830,086 (2,449,389) -- (204,710) (1,560,976)
Issuance of common stock for cash ....... 3,940,000 394,000 1,576,000 -- -- -- 1,970,000
Costs related to sale of common stock ... -- -- (184,500) -- -- -- (184,500)
Conversion of preferred stock ........... 2,953 295 15,064 -- -- -- 15,359
Retirement of treasury stock ............ (218,100) (21,810) (182,900) -- -- 204,710 --
Preferred stock dividends ............... -- -- -- (60,067) -- -- (60,067)
Net loss ................................ -- -- -- (203,798) -- -- (203,798)
--------- --------- ----------- ----------- ----------- -------------- ----------
Balance - March 31, 1998 ................ 6,355,231 $ 635,522 $ 2,053,750 $(2,713,254) $ -- $ -- $ (23,982)
========= ========= =========== =========== =========== ============== ==========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 26
CORNICHE GROUP INCORPORATED
STATEMENTS OF CASH FLOWS -RESTATED
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
---------------------------------------
1998 1997 1996
---------- ----------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss from continuing operations ......................................... $ (263,865) $ (332,604) $ (323,510)
---------- ----------- ----------
Adjustments to reconcile net loss to net cash used in
operating activities:
Preferred Stock dividend ................................................. 60,067 63,648 62,795
Depreciation ............................................................. 388 388 1,749
Loss on sale of property and equipment ................................... -- -- 3,042
Increase (decrease) in cash flows as a result of changes in
asset and liability account balances:
Notes receivable ....................................................... -- 125,000 75,000
Prepaid expenses and other receivables ................................. 821 9,000 8,422
Notes payable .......................................................... -- -- (11,292)
Trade accounts payable ................................................. 16,433 (178,194) 127,757
Accrued liabilities .................................................... (83,447) 8,493 (415,070)
---------- ----------- ----------
Total adjustments ........................................................ (5,738) 28,335 (183,597)
---------- ----------- ----------
Net cash used in continuing operations ......................................... (269,603) (304,269) (507,107)
Net cash used in discontinued operations ....................................... -- -- (331,337)
---------- ----------- ----------
Net cash used in operating activities .......................................... (269,603) (304,269) (838,444)
---------- ----------- ----------
Cash flows from investing activities:
Payments to acquire fixed assets ............................................ -- -- (8,926)
Proceeds from sale of equipment ............................................. -- -- 3,000
---------- ----------- ----------
Net cash used in investing activities .......................................... -- -- (5,926)
---------- ----------- ----------
Cash flows from financing activities:
Net proceeds from issuance of common stock for cash ......................... 1,785,500 -- 794,336
Net proceeds from issuance of common stock for services ..................... -- -- 50,000
Payment of notes payable .................................................... (400,000) (77,630) --
Additional borrowings ....................................................... -- 395,000 --
---------- ----------- ----------
Net cash provided by financing activities ...................................... 1,385,500 317,370 844,336
---------- ----------- ----------
Net increase (decrease) in cash ................................................ 1,115,897 13,101 (34)
Cash and cash equivalents at beginning of year ................................. 13,167 66 100
---------- ----------- ----------
Cash and cash equivalents at end of year ....................................... $1,129,064 $ 13,167 $ 66
========== =========== ==========
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE> 27
CORNICHE GROUP INCORPORATED
STATEMENTS OF CASH FLOWS - RESTATED (Continued)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
------------------------------
1998 1997 1996
------- --------- --------
<S> <C> <C> <C>
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year:
Interest.............................................. $ 4,181 $ 178,373 $ 600
======= ========= ========
Income taxes.......................................... $ -- $ -- $ --
======= ========= ========
</TABLE>
Supplemental Schedule of Non-Cash Investing and financing activities:
During the years ended March 31, 1998, 1997 and 1996, the Company accrued
preferred stock dividends of $60,067, $63,648 and $62,795, respectively.
During the years ended March 31, 1998 and 1996 the holders of 15,359 and 36,802,
respectively, shares of Series A 7% Convertible Preferred Stock converted such
shares into 2,953 and 7,077, respectively, shares of the Company's common stock.
On February 27, 1998, the Company retired the treasury stock of 218,100 common
shares, reducing the value of common stock outstanding by $21,810; additional
paid-in capital by $182,900 and removing treasury stock of $204,710.
See accompanying notes to financial statements.
F-8
<PAGE> 28
CORNICHE GROUP INCORPORATED
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998
NOTE 1 - CORRECTION OF AN ERROR.
The accompanying financial statements as at March 31,
1998 and 1997 and for the three years ended March 31, 1998 have
been restated to reflect the Series A 7% Redeemable Preferred
Stock as an item similar to debt instead of a component of
stockholders' equity as previously reported in Form 10-K for the
period ended March 31, 1998 as prescribed by the Securities and
Exchange Commission ("SEC") Accounting Series Release No. 268.
The Series A Preferred Stock's Put feature (see Note 6) places
the redemption of this class 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, formerly Fidelity Medical,
Inc. (hereinafter referred to as the "Company" or "CGI") as a
result of a reverse acquisition with Corniche Distribution
Limited and its Subsidiaries ("Corniche") (see "Reverse
Acquisition" below), 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 fiscal 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. Corniche Distribution Limited was placed in
receivership on February 28, 1996 (see Note 3).
New Business Operations (see Note 10).
F-9
<PAGE> 29
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
(a) Reverse Acquisition:
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. The historical financial statements prior to
March 2, 1995 are those of Corniche. Further, on March 2, 1995,
CGI acquired a 49% interest in the outstanding shares of
Chessbourne.
(b) UK Receivership Proceeding:
Significant losses were incurred during the forty weeks
to December 30, 1995 and in the fiscal year ended March 25, 1995,
resulting in a working capital and a stockholders' deficiency as
of December 30, 1995 and March 25, 1995. Management of Corniche
has taken several step to reduced the amount of cash used by
operations, including relocation of its corporate facilities and
reduce 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. Accordingly, the operating
activities of the UK subsidiaries have been classified as a
discontinued operation and the excess of the UK subsidiary's
cumulative losses over the Company's investment was included in
the income statement for the year ended March 31, 1996.
(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.
F-10
<PAGE> 30
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. (Continued)
(e) Office Furniture and Equipment:
Office furniture and equipment are depreciated by the
straight-line method over the estimated useful lives of the
assets, which range principally from three to ten years.
(f) 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.
(g) 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 March 31, 1998 and 1997, the
carrying values of the Company's other assets and liabilities
approximate their estimated fair values.
(h) 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 potentially
dilutive securities outstanding, is not presented as it is
anti-dilutive in all periods.
F-11
<PAGE> 31
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. (Continued)
(i) 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.
NOTE 4 - PROPERTY AND EQUIPMENT.
Property and equipment consists of the following:
<TABLE>
<CAPTION>
MARCH 31,
----------------
1998 1997
------- -------
<S> <C> <C>
Furniture and fixtures.............. $ 1,426 $ 1,426
Less: Accumulated depreciation...... 1,067 679
------- -------
$ 359 $ 747
======= =======
</TABLE>
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.
F-12
<PAGE> 32
NOTE 5 - NOTES PAYABLE. (Continued)
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.
RMCC sold 17 units.
The notes payable of $400,000 at march 31, 1997
relating to the above offering were paid in full during the year
ended March 31, 1998 with funds generated from the sale of stock
(see Note 7).
NOTE 6 - REDEEMABLE PREFERRED STOCK.
In connection with the settlement of the securities
class action litigation (see Note 7), the Company issued
1,000,000 shares of 7% cumulative convertible preferred stock
with an aggregate value of $1,000,000. The 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.
Preferred stockholders are entitled to receive a cash dividend of
7% paid semi-annually. The preferred shares are callable by the
Company at any time after the first anniversary of issuance, at
prices ranging from 101% to 105% of face value. 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
preferred shares are callable by the Company at a price equal to
1% of face value. In March 1995, the holders of 53,931 shares of
preferred stock exercised their rights to convert and,
accordingly, 10,371 shares of common stock were issued. During
the year ended March 31, 1996, holders of 36,802 shares of
preferred stock converted such shares into 7,077 shares of CGI's
common stock. During the year ended March 31, 1998, holders of
15,359 share of preferred stock converted such shares into 2,953
shares of CGI's common stock.
F-13
<PAGE> 33
NOTE 7 - STOCKHOLDERS' EQUITY.
Effective October 1, 1995, the Company declared a
one-for-ten reverse stock split and all numbers of shares and
share values stated herein reflect such reverse split unless
otherwise noted.
In March 1995, the Company issued a total of 1,312,400
shares of common stock to acquire all of the issued and
outstanding stock of Corniche. Brian J. Baylis was issued 877,800
shares of common stock and Susan A.M. Crisp was issued 219,450
shares of common stock in exchange for their holdings
representing 100% of the issued common stock of Corniche, and the
balance of 215,150 shares were issued to Chester in connection
with the acquisition. In addition, the Company issued 25,000
shares of the Company's common stock to Ronatree in exchange for
the remaining 49% of the common shares of Chessbourne.
Simultaneous with the Company's acquisition of Corniche
on March 2, 1995, NWCM Limited ("NWCM"), a Hong Kong investment
banker, agreed on a staggered basis, to raise up to $5,000,000 of
new equity capital on a "best efforts" basis. This offer was
limited to experienced, sophisticated investors who are "non-U.S.
persons" under Regulation S of the United States Securities Act
of 1933. An initial tranche of 600,000 shares was offered at a
price of $2.00 per share. Pursuant to the transaction, the
Company paid NWCM a fee of $50,000. In addition, NWCM was paid a
sales commission of 10% and a non-accountable expense allowance
equal to 2% of the total dollars raised, a total of $162,864. The
offering was closed on September 8, 1995 and the Company raised a
total of $957,200 gross, $794,336 net of sales commission and
expense allowance in the year ended March 31, 1996 and $100,000
March 25, 1995. The Company has agreed to indemnify NWCM for
certain liabilities arising from the transaction.
During the year ended March 31, 1996, the Company
issued 25,000 shares of common stock to Trisec Holdings, Ltd. for
consulting services in connection with the "Reverse Acquisition"
(see Note 3) of Corniche on March 2, 1995.
Effective January 30, 1997, the Company entered into a
Stock Purchase Agreement with the Bank of Scotland and twelve
unrelated 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. Baylis 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.
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. RMCC was the
placement agent for such offering and is entitled to receive a
sales commission equal to 10% of the offering price for each unit
sold. The first 50 units were offered on a "best efforts, all or
none" basis. The remaining 350 units were offered on a "best
efforts" basis. In connection with the offering, 369 units were
sold for gross receipts of $1,845,000. RMCC 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.
F-14
<PAGE> 34
NOTE 7 - STOCKHOLDERS' EQUITY. (Continued)
In March 1998, the Company sold 250,000 shares of
common stock at $.50 per share realizing $125,000.
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 March 31, 1998.
Warrants issued and outstanding are summarized as follows:
<TABLE>
<CAPTION>
SHARES
ISSUABLE ON EXERCISE EXPIRATION
EXERCISE PRICE 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.
Stock Option Plans:
CGI has two stock option plans. The 1986 Stock Option
Plan provides 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
outstanding 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.
F-15
<PAGE> 35
NOTE 7 - STOCKHOLDERS' EQUITY. (Continued)
Stock Option Plans: (Continued)
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.
Information with respect to options under the 1986 and
1992 Stock Option Plans is summarized as follows:
<TABLE>
<CAPTION>
MARCH 31,
---------------------------
1998 1997 1996
------ ------- --------
<S> <C> <C> <C>
Outstanding, beginning of year .... 1,500 7,500 28,980
Granted ........................... 1,500 3,000 9,000
Converted ......................... -- -- --
Expired ........................... -- (9,000) (30,480)
Exercised ......................... -- -- --
------ ------- --------
Outstanding, end of year .......... 3,000 1,500 7,500
====== ======= ========
</TABLE>
Outstanding options expire 90 days after termination of
holder's status as employee or director.
At March 31, 1998, there were 1,500 exercisable
outstanding options and 158,500 shares available for grant. The
exercise price of outstanding options was $0.40625.
On May 1, 1997, 1,500 options were granted at an
exercise price of $.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 in 1998 is immaterial, recognizing the expense would not
have a material effect on the Company's 1998 financial
statements.
F-16
<PAGE> 36
NOTE 8 - COMMITMENTS, CONTINGENCIES AND OTHER.
Legal Proceedings:
During fiscal 1994, the Company disclosed
irregularities in its revenue recognition practices which led to
the restatement of the Company's financial statements for fiscal
years ended September 30, 1989, 1990 and 1991, and the first
quarter of fiscal 1992. As a result, nine class action securities
complaints (the "lawsuits") were filed against the Company and
certain other persons which were settled in January 1994.
Pursuant to the settlement, the Company paid $2,560,000 in cash
in 1995 and issued $1,000,000 in 75 cumulative convertible
preferred stock. The preferred stock is convertible into common
stock at a price of $5.20 per share, and is callable for five
years. Stockholders who purchase CGI's shares between January 3,
1989 and May 7, 1992 were included within the plaintiff class for
purposes of the settlement.
CGI and certain of its former officers and directors
were involved in a shareholders' derivative action filed in
Delaware Chancery Court. The causes of action asserted included
breach of fiduciary duty, breach of duty of care and trust of the
Company's shareholders, gross negligence and mismanagement, as
well as common law conspiracy and aiding and abetting. The Court
granted the Company's motion to dismiss by Opinion and Order
dated May 2, 1995. The Company instituted its own action in State
Court in New Jersey against its former chief executive officer,
Efriam Landa. The complaint was filed on May 4, 1995. Mr. Landa
answered on October 16, 1995 and asserted counterclaims seeking
(a) reimbursement of defense costs in the derivative action and
related investigations by the Securities and Exchange Commission
("SEC") and the United States Attorney for the District of New
Jersey and (b) damages for breach of his employment contract.
This matter was settled by exchange of mutual releases on
December 5, 1996.
In the opinion of management, there are no other
lawsuits or claims pending against the Company.
NOTE 9 - INCOME TAXES.
There were no significant differences between the
financial statement and tax basis of assets and liabilities that
were expected to give rise to taxable income in the future in
view of the Company's substantial tax losses available for
carryforward.
Earnings (loss) before income taxes and preferred stock
dividend is attributable to the following sources:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
----------------------------------
1998 1997 1996
----------- --------- ----------
<S> <C> <C> <C>
$ (203,798) $(268,956) $ (260,715)
=========== ========= ==========
</TABLE>
F-17
<PAGE> 37
NOTE 9 - INCOME TAXES. (Continued)
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 Company has fully reserved
the balance of tax benefits of its operating losses because the
likelihood of realization of the tax benefits cannot be
determined.
NOTE 10 - SUBSEQUENT EVENTS.
The following actions of the Board of Directors were
approved by a vote of the Corporation's stockholders at the
annual meeting on May 18, 1998.
(a) Amendment to the Corporation's Certificate of Incorporation
to Reduce the Par Value of the Common Stock:
The par value of the common stock will be reduced 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
(see B below).
(b) Issuance of Series B Convertible Redeemable Preferred Stock,
Change in Control and New Business Operations:
On March 4, 1998, the Corporation entered into a Stock
Purchase Agreement ("Agreement"), approved by the Corporation's
stockholders on May 18, 1998, with Mr. Joel San Antonio and
certain other 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 Corporation new business
operations in the insurance sector, more specifically the
property and casualty specialty insurance markets. Mr. San
Antonio, who has many years experience in these sectors, is in
the process of exploring a number of specialty insurance
opportunities for the development of new business operations.
In connection with the implementation of these
strategies, it may become necessary for the Corporation to become
licensed in one or more state in order to enable it to conduct
operations or to acquire a company that maintains appropriate
licenses. To further such goal, the Corporation recently has
entered into a non-binding letter of intent to acquire all of the
stock of an existing insurance company which has had limited
operations and revenues for the past several years. The
acquisition is subject to due diligence by the Corporation and
subject to material conditions, including satisfaction of capital
requirements of regulatory authorities. No assurance can be given
that the Corporation will be able to obtain such licenses or to
consummate any such acquisitions. The acquisition, if
consummated, will represent the Corporation's entry into the
United States insurance market.
F-18
<PAGE> 38
NOTE 10 - SUBSEQUENT EVENTS. (Continued)
(b) Issuance of Series B Convertible Redeemable Preferred Stock,
Change in Control and New Business Operations: (Continued)
Pursuant to Agreement and subsequent transactions Mr.
San Antonio acquired 685,000 shares of Series B Convertible
Redeemable Preferred Stock at $68,500 and Messrs. Glime, Hutchins
and Aber acquired 50,000, 15,000 and 15,000 shares, respectively,
of Series B Convertible Redeemable Preferred Stock at the same
price per share. Pursuant to the Agreement, the Corporation will
pay certain expenses of the Initial Purchasers in connection with
the Transaction, which expenses are currently estimated to be
approximately $50,000, for legal expenses. In addition, the
Corporation issued 50,000 shares of Series B Convertible
Redeemable Preferred Stock to Alan Zuckerman as compensation for
his assistance to the Corporation in the identification and
review of business opportunities and this Transaction and for his
assistance in bringing the Transaction to fruition. Additionally,
the Corporation issued 10,000 shares of Series B Convertible
Redeemable Preferred Stock to James Fyfe for his work in bringing
this Transaction to fruition. These issuances diluted the voting
rights of existing stockholders by approximately 57%. The total
authorized shares of Series B Convertible Redeemable Preferred
Stock are 825,000.
Terms of Preferred Stock:
The following summarizes the terms of the Series B
Convertible Redeemable Preferred Stock, which terms are more
fully set forth in the Certificate of Designation. The Series B
Convertible Redeemable Preferred Stock carries a zero coupon and
each share of the Series B Convertible Redeemable Preferred Stock
is convertible into ten shares of the Corporation's Common Stock.
The holder of a share of the Series B Convertible Redeemable
Preferred Stock is entitled to ten times any dividends paid on
the Common Stock. Mr. San Antonio assumed control of the
Corporation as the holder of such 685,000 shares of Series B
Convertible Redeemable Preferred Stock, since the Series B
Convertible Redeemable Preferred Stock has ten votes per share
and votes as one class with the Common Stock. Accordingly, Mr.
San Antonio, with approximately 47% of the voting power, will by
himself almost have sufficient voting power to elect all of the
Board of Directors. However, the Initial Purchasers of the Series
B Convertible Redeemable Preferred Stock, including Mr. San
Antonio, are required to vote in favor of Mr. Fyfe or his
designee as a director of the Corporation through June 30, 2000.
Pursuant to the term of the Agreement and the
Certificate of Designation, from March 31, 2000 to June 30, 2000,
the Corporation has the right to repurchase or redeem such shares
of Series B Convertible Redeemable Preferred Stock from the
holders for a total consideration of $0.10 per share ($76,500 in
the aggregate) unless, during the period from the date of the
closing of the Transaction through March 31, 2000;
F-19
<PAGE> 39
NOTE 10 - SUBSEQUENT EVENTS. (Continued)
(b) Issuance of Series B Convertible Redeemable Preferred Stock,
Change in Control and New Business Operations: (Continued)
Terms of Preferred Stock: (Continued)
i. the Corporation'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 Corporation raises a minimum of $2.5 million of new
equity capital through a placement of Common Stock, or
iii. the Corporation has net revenues of at least $1 million
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 Corporation will elect to
exercise this redemption right on behalf of the Corporation.
Each Series B Convertible Redeemable Preferred Share is
convertible into ten shares of Common Stock. Upon liquidation,
the Series B Convertible Redeemable Preferred 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.
Conversion:
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 shall be subject to
adjustment as stipulated in the Agreement.
(c) 1998 Employee Incentive Stock Option Plan:
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 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 granted, except that no option will be granted
to any employee who, at the
F-20
<PAGE> 40
NOTE 10 - SUBSEQUENT EVENTS. (Continued)
(c) 1998 Employee Incentive Stock Option Plan: (Continued)
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
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. At
least one-half of the shares issued upon exercise of any option
granted pursuant to the 1998 Plan must be retained by the
optionee for at least one year.
The Plan will be administered by a committee of
disinterested directors of the Board of Directors of the
Corporation ("Option Committee").
(d) Independent Directors Compensation Plan:
In order to be able to attract qualified independent
directors in the future, the Corporation has adopted the
Independent Directors Compensation Plan, pursuant to which each
director who is not an officer or employee would receive
compensation of $2,500 plus 500 shares of the Corporation's
Common Stock each quarter. The Plan was effective as of April 30,
1998.
Independent directors will also continue to be eligible
to receive stock options each year under the Director Option Plan
at the rate of 1,500 options per year at fair market value.
(e) Lease of New Office Space:
As of August 1, 1998, the Corporation has entered into
a three year lease for business offices of 4,100 square feet in
Euless, Texas.
(f) Investment Contract:
The Corporation has entered into an investment advisory
agreement with AIG Global Investment Corporation under which it
will function as investment advisor and manager of all of the
Corporation's investable assets. AIG Global provides investment
management services to domestic insurance companies seeking to
create an investment alternative to letters of credit that, at
the same time, meet state statutory insurance requirements.
F-21
<PAGE> 41
CORNICHE GROUP INCORPORATED
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED MARCH 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Col. A Col. B Col. C Additions Col. D Col. E
------ ------ ---------------- ------ ------
BALANCE
BALANCE CHARGED TO ACQUISITION AT END
BEGINNING OF COSTS AND OF DEDUCTIONS OF
DESCRIPTION PERIOD EXPENSES SUBSIDIARIES DESCRIBE PERIOD
- ----------------------------------------------- ------------ ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
1996 $ 345,108 $ -- $ -- $ 345,108 (1) $ --
1997 -- -- -- -- --
1998 -- -- -- -- --
Reserve against notes receivable in default:
1996 -- 75,000 -- -- 75,000
1997 75,000 -- -- -- 75,000
1998 75,000 -- -- -- 75,000
Inventory reserve:
1996 40,224 -- -- 40,224 (1) --
1997 -- -- -- -- --
1998 -- -- -- -- --
</TABLE>
(1) Elimination of UK subsidiary following receivership proceeding.
F-22
<PAGE> 42
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C> <C> <C>
3 (a) Certificate of Incorporation filed September 18, 1980 (1) 3
(b) Amendment to Certificate 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 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 the Series B Preferred Stock
dated May 18, 1998 (12) C 3(f)
(l) By-laws of the Corporation, as amended on April 25, 1991 (6)
(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 Corporation, the Bank of Scotland
and 12 buyers (10) 10(m)
(d) Mutual Release dated as of January 30, 1997 by and among
the Corporation, James Fyfe and the Bank of Scotland (10) 10(n)
(e) Stock Purchase Agreement, dated as of March 4, 1998, between
the Corporation 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 Corporation concerning
their resignation as the Corporation's principal
accountant (11) 16(a)
27 Financial Data Schedule, filed herewith.
</TABLE>
<PAGE> 43
Notes:
(1) Filed with the Securities and Exchange Commission as an exhibit, numbered as
indicated above, to the registration statement of the Corporation on Form S-18,
File No. 2-69627, which exhibit is incorporated herein by reference.
(2) Filed with the Securities and Exchange Commission as an exhibit, numbered as
indicated above, to the registration statement of the Corporation 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 Corporation 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 Corporation 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 Corporation 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 Corporation 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 Corporation 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 Corporation 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 Corporation 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 Corporation 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 Corporation on Form 10K/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 Corporation dated April 23, 1998,
which exhibit is incorporated herein by reference.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 1,129,064
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,129,243
<PP&E> 1,426
<DEPRECIATION> 1,067
<TOTAL-ASSETS> 1,129,602
<CURRENT-LIABILITIES> 259,676
<BONDS> 0
893,908
0
<COMMON> 635,522
<OTHER-SE> (659,504)
<TOTAL-LIABILITY-AND-EQUITY> (1,129,602)
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 221,602
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (17,804)
<INCOME-PRETAX> (203,798)
<INCOME-TAX> 0
<INCOME-CONTINUING> (263,865)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (263,865)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
