<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
----------- ----------
Commission file number 0-10909
CORNICHE GROUP INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 22-2343568
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
610 SOUTH INDUSTRIAL BLVD., SUITE 220
EULESS, TEXAS 76040
(Address of principal executive office) (zip code)
Registrant's telephone number, including area code: 817-283-4250
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
14,244,937 SHARES, $.001 PAR VALUE, AS OF MAY 1, 2000
(Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date)
Page 1 of 29
<PAGE> 2
CORNICHE GROUP INCORPORATED AND SUBSIDIARY
MARCH 31, 2000
(Unaudited)
I N D E X
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I - Financial Information:
Item 1. Consolidated Financial Statements (Unaudited):
Balance Sheets
At March 31, 2000 and December 31, 1999 ............... 3-4
Statements of Operations
For the Three Months Ended
March 31, 2000 and 1999 ............................... 5
Statement of Convertible Redeemable Preferred
Stock, Common Stock, Other Stockholder Equity
and Accumulated Deficit
For the Three Months Ended March 31, 2000 ............. 6
Statements of Cash Flows
For the Three Months
Ended March 31, 2000 and 1999 ......................... 7-8
Notes to Consolidated Financial Statements ............ 9-22
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ......... 23-26
Part II - Other Information:
Item 2................................................. 27
Item 6................................................. 27
Signatures ....................................................... 28
</TABLE>
Page 2 of 29
<PAGE> 3
CORNICHE GROUP INCORPORATED AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
A S S E T S
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---------- ------------
<S> <C> <C>
Current assets:
Cash and equivalents $1,525,487 $1,639,473
Marketable securities 3,751,846 2,733,319
Prepaid expenses and other current assets 134,231 71,622
---------- ----------
Total current assets 5,411,564 4,444,414
Property and equipment, net 617,019 655,002
Deferred acquisition costs 26,600 41,946
License, net of accumulated amortization 16,472 16,777
Other assets 12,525 12,525
---------- ----------
$6,084,180 $5,170,664
========== ==========
</TABLE>
See accompanying notes to financial statements.
Page 3 of 29
<PAGE> 4
CORNICHE GROUP INCORPORATED AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---------- ------------
<S> <C> <C>
Current liabilities:
Dividends payable - preferred stock $ 260,508 $ 288,334
Accounts payable, accrued expenses
and other current liabilities 135,349 561,870
Current portion of long-term debt 23,462 22,662
----------- -----------
Total current liabilities 419,319 872,866
----------- -----------
Unearned revenues 490,548 298,801
----------- -----------
Long-term debt 70,144 76,591
----------- -----------
Series A Convertible Preferred Stock:
Series A $0.07 cumulative convertible
preferred stock - stated value - $1.00 per share, authorized - 1,000,000
shares, outstanding - 697,582 shares at March 31, 2000 and
810,054 shares at December 31, 1999 697,582 810,054
----------- -----------
Convertible Redeemable Preferred Stock,
Common Stock, Other Stockholders'
Equity and Accumulated Deficit:
Preferred stock - authorized - 5,000,000 shares Series B convertible
redeemable preferred stock, $0.1 par value, authorized, issued
and outstanding - 825,000 shares 8,250 8,250
Common stock, $.001 par value, authorized -
30,000,000 shares, issued and outstanding -
14,210,971 shares at March 31, 2000 and
12,513,127 shares at December 31, 1999 14,211 12,513
Additional paid-in capital 8,913,622 7,421,944
Accumulated deficit (4,529,496) (4,330,355)
----------- -----------
Total convertible redeemable preferred stock,
common stock, other stockholders' equity 4,406,587 3,112,352
----------- -----------
$ 6,084,180 $ 5,170,664
=========== ===========
</TABLE>
See accompanying notes to financial statements.
Page 4 of 29
<PAGE> 5
CORNICHE GROUP INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Three
Months Ended
March 31,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Earned revenues $ 145,600 $ --
Direct costs 43,500 --
------------ ------------
Gross profit 102,100 --
General and administrative expenses 327,276 399,122
------------ ------------
Operating loss (225,176) (399,122)
------------ ------------
Other income (expense):
Unrealized gain on marketable securities 4,182 --
Interest income 36,301 4,453
Interest expense (2,240) --
------------ ------------
Total other income (expense) 38,243 4,453
------------ ------------
Loss before preferred dividend (186,933) (394,669)
Preferred dividend 12,208 14,446
------------ ------------
Net loss ($199,141) ($409,115)
============ ============
Net loss per share of common stock ($0.01) ($0.06)
============ ============
Weighted average number of common shares outstanding 13,428,062 6,370,569
============ ============
</TABLE>
See accompanying notes to financial statements.
Page 5 of 29
<PAGE> 6
CORNICHE GROUP INCORPORATED AND SUBSIDIARY
STATEMENTS OF CONVERTIBLE REDEEMABLE PREFERRED STOCK, COMMON STOCK,
OTHER STOCKHOLDERS' EQUITY AND ACCUMULATED DEFICIT
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(Unaudited)
<TABLE>
<CAPTION>
Series B
Convertible
Preferred Stock Common Stock Additional
------------------------ ------------------------ Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit Total
---------- ----------- ----------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - January 1, 2000 825,000 $ 8,250 12,513,127 $ 12,513 $ 7,421,944 ($4,330,355) $ 3,112,352
Issuance of common stock for
cash, net of offering costs -- -- 1,676,250 1,676 1,339,194 -- 1,340,870
Conversion of Series A
Convertible Preferred
Stock into Common
Stock -- -- 21,594 22 152,484 -- 152,506
Series A Convertible
Stock dividends -- -- -- -- -- (12,208) (12,208)
Net loss before preferred
stock dividend -- -- -- -- -- (186,933) (186,933)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance - March 31, 2000 825,000 $ 8,250 14,210,971 $ 14,211 $ 8,913,622 ($4,529,496) $ 4,406,587
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
Page 6 of 29
<PAGE> 7
CORNICHE GROUP INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Three
Months Ended
March 31,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($ 199,141) ($ 409,115)
----------- -----------
Adjustments to reconcile net loss to
net cash used in operating activities:
Unrealized gain on marketable securities (4,182) --
Series A preferred stock dividends 12,208 14,446
Depreciation and amortization 38,288 3,112
Unearned revenues 191,747 --
Increase (decrease) in cash flows as
a result of changes in asset and
liability account balances:
Deferred acquisition costs 15,346 --
Prepaid expenses and other current assets (62,609) (29,760)
Accounts payable, accrued expenses
and other current liabilities (426,521) 67,374
----------- -----------
Total adjustments (235,723) 55,172
----------- -----------
Net cash used in operating activities (434,864) (353,943)
----------- -----------
Cash flows from investing activities:
(Increase) decrease in marketable securities (1,014,345) 346,720
Acquisition of property assets -- (10,816)
----------- -----------
Net cash provided by (used in) investment activities (1,014,345) 335,904
----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of capital stock 1,340,870 --
Increase in other assets -- (17,723)
Payments of capital lease obligations (1,441) (1,235)
Net repayments of notes payable (4,206) --
----------- -----------
Net cash provided by (used in) financing activities 1,335,223 (18,958)
----------- -----------
Net decrease in cash (113,986) (36,997)
Cash and cash equivalents at beginning of period 1,639,473 206,313
----------- -----------
Cash and cash equivalents at end of period $ 1,525,487 $ 169,316
=========== ===========
</TABLE>
See notes to financial statements.
Page 7 of 29
<PAGE> 8
CORNICHE GROUP INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
<TABLE>
<CAPTION>
For the Three
Months Ended
March 31,
----------------------
2000 1999
--------- ---------
<S> <C> <C>
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period:
Income taxes $ -- $ --
========= =======
Interest $ 2,240 $ --
========= =======
Supplemental Schedules of Noncash Financing Activities:
Series A Preferred Stock and dividends thereon
converted to common stock and additional
paid-in capital upon conversion $ 152,484 $11,644
========= =======
</TABLE>
See notes to financial statements.
Page 8 of 29
<PAGE> 9
CORNICHE GROUP INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(Unaudited)
NOTE 1 - THE COMPANY.
Corniche Group Incorporated (hereinafter referred to as the
"Company" or "CGI") as a result of a reverse acquisition with Corniche
Distribution Limited and its Subsidiaries ("Corniche"), was engaged in
the retail sale and wholesale distribution of stationery products and
related office products, including office furniture, in the United
Kingdom. In February 1996, the Company was placed in receivership by
its creditors. Through March 1998, the Company had no activity.
On March 4, 1998, the Company entered into a Stock Purchase
Agreement ("Agreement"), approved by the Company's stockholders on May
18, 1998, with certain individuals (the "Initial Purchasers") whereby
the Initial Purchasers acquired an aggregate of 765,000 shares of a
newly created Series B Convertible Redeemable Preferred Stock, par
value $0.01 per share. Thereafter the Initial Purchasers have been
endeavoring to establish for the Company new business operations in the
property and casualty specialty insurance and the service contract
markets.
On September 30, 1998, the Company acquired all of the capital
stock of Stamford Insurance Company, Ltd. ("Stamford") from Warrantech
Corporation for $37,000 in cash in a transaction accounted for as a
purchase. Warrantech's chairman is the former chairman of the Company.
Stamford was charted under the Laws of, and is licensed to conduct
business as an insurance company by, the Cayman Islands. Although
Stamford has incurred expenses since its inception, it first generated
revenues in the fourth quarter of 1999.
Page 9 of 29
<PAGE> 10
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
(a) Basis of Presentation:
The accompanying unaudited financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions for Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion
of management, the statements contain all adjustments (consisting only
of normal recurring accruals) necessary to present fairly the financial
position as of March 31, 2000 and the results of operations and cash
flows for the three months ended March 31, 2000 and 1999. The results
of operations for the three months ended March 31, 2000 and 1999 are
not necessarily indicative of the results to be expected for the full
year.
The December 31, 1999 balance sheet has been derived from the
audited financial statements at that date included in the Company's
annual report on Form 10-K. These unaudited financial statements should
be read in conjunction with the financial statements and notes thereto
included in the Company's annual report on Form 10-K.
(b) Cash Equivalents:
Short-term cash investments which have a maturity of ninety days
or less when purchased are considered cash equivalents in the statement
of cash flows.
(c) 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.
(d) Concentrations of Credit-Risk:
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of cash
and marketable securities. The Company places its domestic operations
cash accounts with high credit quality financial institutions, which at
times may be in excess of the FDIC insurance limit. The Company's
subsidiary places its cash in the Cayman Island subsidiaries of
domestic banks whose net worth exceeds $100,000,000. The Company's
marketable securities are primarily comprised of investments in
municipal bank funds. The Company employs the services of an investment
advisor to assist in monitoring its investments.
Page 10 of 29
<PAGE> 11
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. (Continued)
(e) Marketable Securities:
Marketable securities are classified as trading securities and
are reported at market value at December 31, 1999. At March 31, 2000,
the market value of securities exceeded their cost by $4,182. The
market value of the investment approximated cost at December 31, 1999.
(f) Property and Equipment:
The cost of property and equipment is depreciated over the
estimated useful lives of the related assets of 5 to 7 years. The cost
of computer software programs is amortized over their estimated useful
lives of five years. Depreciation is computed on the straight-line
method. Repairs and maintenance expenditures which do not extend
original asset lives are charged to income as incurred.
(g) Intangibles:
The excess of the purchase price for the capital stock of
Stamford over the net assets acquired has been attributed to the
subsidiary's license to conduct business as an insurance carrier in the
Cayman Islands. Amortization charged to operations in the three months
ended March 31, 2000, and 1999, was $305 in both periods.
(h) Income Taxes:
The Company adopted SFAS 109, "Accounting for Income Taxes",
which recognizes (a) the amount of taxes payable or refundable for the
current year and, (b) deferred tax liabilities and assets for the
future tax consequences of events that have been recognized in an
enterprise's financial statement or tax returns. There is no difference
as to financial and tax basis of assets and liabilities.
(i) Fair Value of Financial Statements:
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 recognizes and measures impairment losses of
long-lived assets, certain identifiable intangibles, value long-lived
assets to be disposed of and long-term liabilities. At March 31, 2000
and December 31, 1999, the carrying values of the Company's other
assets and liabilities approximate their estimated fair values.
Page 11 of 29
<PAGE> 12
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. (Continued)
(j) Advertising Costs:
The Company expenses advertising costs as incurred. Advertising
costs amounted to $5,769 for the three months ended March 31, 2000 and
none for the three months ended March 31, 1999.
(k) Earnings Per Share:
The Company adopted Statement of Financial Accounting Standards
No. 128, "Earnings Per Share," in the year ended March 31, 1998. Basic
earnings per share is based on the weighted effect of all common shares
issued and outstanding, and is calculated by dividing net income
available to common stockholders by the weighted average shares
outstanding during the period. Diluted earnings per share, which is
calculated by dividing net income available to common stockholders by
the weighted average number of common shares that would be issued
assuming conversion of all potentially dilutive securities outstanding,
is not presented as it is anti-dilutive in all periods.
(l) Recently Issued Accounting Pronouncements:
The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 - "Reporting Comprehensive
Income", No. 131 - "Disclosures about Segments of an Enterprise and
Related Information", No. 132 - "Employer's Disclosures about Pension
and Other Postretirement Benefits" and No. 133 - "Accounting for
Derivative Instruments and Hedging Activities". Management does not
believe that the effect of implementing these new standards will be
material to the Company's financial position, results of operations and
cash flows.
(m) Revenue Recognition:
Stamford is a property and casualty reinsurance company writing
reinsurance coverages for one domestic carrier's consumer products
service contracts. The domestic carrier is rate "A-" Excellent by A.M.
Best.
Premiums are recognized on a pro rata basis over the policy term.
The deferred policy acquisition costs are the net cost of acquiring new
and renewal insurance contracts. These costs are charged to expense in
proportion to net premium revenue recognized.
Page 12 of 29
<PAGE> 13
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. (Continued)
(m) Revenue Recognition: (Continued)
The provisions for losses and loss-adjustment expenses includes
an amount determined from loss reports on individual cases and an
amount, based on past experience for losses incurred but not reported.
Such liabilities are necessarily based on estimates, and while
management believes that the amount is adequate, the ultimate liability
may be in excess of or less than the amounts provided. The methods for
making such estimates and for establishing the resulting liability are
continually reviewed, and any adjustments are reflected in earnings
currently.
The parent company sells via the Internet directly to consumers
automotive vehicle services contracts. The Company recognizes revenue
ratably over the length of the contract. The Company purchases
insurance to fully cover any losses under the service contracts from
the domestic carrier referred to above. The insurance premium and other
costs related to the sale are amortized over the contract.
NOTE 3 - PROPERTY AND EQUIPMENT.
Property and equipment consists of the following:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------ ------------
<S> <C> <C>
Computer equipment $ 116,660 $ 116,660
Furniture and fixtures 23,266 23,266
Computer software 582,585 582,585
------------ ------------
722,511 722,511
Less: Accumulated depreciation 114,396 77,896
------------ ------------
608,115 644,615
------------ ------------
Lease property under capital lease:
Office equipment 17,806 17,806
Less: Accumulated depreciation 8,902 7,419
------------ ------------
8,904 10,387
------------ ------------
$ 617,019 $ 655,002
============ ============
</TABLE>
Depreciation and amortization charged to operations was $38,288
and $14,446 for the three months ended March 31, 2000 and 1999,
respectively.
Page 13 of 29
<PAGE> 14
NOTE 3 - PROPERTY AND EQUIPMENT. (Continued)
The estimated present value of the capital lease obligations at
December 31, 1999 reflects imputed interest calculated at 12.7% and
19.32%. The obligations are payable in equal monthly installments
through January 2002 as follows:
<TABLE>
<CAPTION>
Years Ending
March 31,
------------
<S> <C>
2001 $ 5,750
2002 4,792
-------
10,542
Amount representing interest 2,000
-------
Present value of minimum
lease payments 8,542
Present value of minimum lease
payments due within one year 4,660
-------
Present value of minimum lease
payments due after one year $ 3,882
=======
</TABLE>
The aggregate maturities of the present value of the minimum
lease obligation is as follows:
<TABLE>
<CAPTION>
Years Ending
March 31,
------------
<S> <C>
2001 $ 4,660
2002 3,882
-------
$ 8,542
=======
</TABLE>
NOTE 4 - ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES.
Accounts payable, accrued expenses and other current liabilities
consist of the following at:
<TABLE>
<CAPTION>
March 31, December 31,
200 1999
------------ ------------
<S> <C> <C>
Accrued offering costs $ -- $ 419,120
Accrued professional fees 45,780 41,534
Advertising -- 69,427
Insurance 29,183 --
Other 55,386 26,789
Accrued claims losses 5,000 5,000
------------ ------------
$ 135,349 $ 561,870
============ ============
</TABLE>
Page 14 of 29
<PAGE> 15
NOTE 5 - NOTES PAYABLE.
In October 1999, the Company sold to accredited investors 10
units of its promissory notes and common stock for $25,025 each. Each
unit was comprised of a 5% interest-bearing $25,000 note and 25,000
shares. The variance between the fair market value of the 25,000 common
shares issued in the aggregate of $27,969 and the cash received of $250
was deemed to be additional interest and was charged to operations over
the life of the notes. The principal balance of the notes was repaid in
full in December 1999. At December 31, 1999, accrued interest on the
notes of $3,025 remained outstanding and was paid in January 2000.
NOTE 6 - LONG-TERM DEBT.
Long-term debt consists of the following at March 31, 2000 and
December 31, 1999:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------- ------------
<S> <C> <C>
Capital lease obligations $ 8,542 $ 9,983
Note payable - bank - in equal monthly
installments of $2,043 including interest
at 8-3/4%. The notes are collateralized by
computer equipment having an undepreciated
cost of $78,927 85,064 89,270
------- -------
93,606 99,253
Portion payable within one year 23,462 22,662
------- -------
$70,144 $76,591
======= =======
</TABLE>
The aggregate maturities of the obligations is as follows:
<TABLE>
<CAPTION>
Years Ending
March 31,
------------
<S> <C>
2001 $23,462
2002 24,059
2003 21,216
2004 24,869
-------
$93,606
=======
</TABLE>
Page 15 of 29
<PAGE> 16
NOTE 7 - SERIES A CONVERTIBLE PREFERRED STOCK.
In connection with the settlement of securities class action
litigation in 1994, the Company issued 1,000,000 shares of Series A
$0.07 Convertible Preferred Stock (the "Series A Preferred Stock") with
an aggregate value of $1,000,000. The following summarizes the terms of
the Series A Preferred Stock as more fully set forth in the Certificate
of Designation. The Series A Preferred Stock has a liquidation value of
$1 per share, is non-voting and convertible into common stock of the
Company at a price of $5.20 per share. Holders of Series A Preferred
Stock are entitled to receive cumulative cash dividends of $0.07 per
share, per year, payable semi-annually. Until November 30, 1999 the
Series A Preferred Stock was callable by the Company at a price of
$1.04 per share, plus accrued and unpaid dividends, and thereafter at a
price of $1.05 per share, plus accrued and unpaid dividends. In
addition, if the closing price of the Company's common stock exceeds
$13.80 per share for a period of 20 consecutive trading days, the
Series A Preferred Stock is callable by the Company at a price equal to
$0.01 per share, plus accrued and unpaid dividends. The Certificate of
Designation for the Series A Preferred Stock also states that at any
time after December 1, 1999, the holders of the Series A Preferred
Stocks may require the Company to redeem their shares of Series A
Preferred Stock (if there are funds with which the Company may do so)
at a price of $1.00 per share. Notwithstanding any of the foregoing
redemption provisions, if any dividends on the Series A Preferred Stock
are past due, no shares of Series A Preferred Stock may be redeemed by
the Company unless all outstanding shares of Series A Preferred Stock
are simultaneously redeemed. During the year ended December 31, 1999,
18,711 shares of Series A Preferred Stock were converted into 3,586
shares of common stock. During the three months ended March 31, 2000,
holders of 112,472 shares of the Series A Preferred Stock converted
such shares into 21,594 shares of the Company's common stock. At March
31, 2000, and December 31, 1999, 697,582 and 810,054 shares of Series A
Preferred Stock were outstanding, respectively. At March 31, 2000, and
1999, accrued dividends on these outstanding shares were $260,508 and
$288,334, respectively.
NOTE 8 - STOCKHOLDER'S EQUITY.
(a) Series B Convertible Redeemable Preferred Stock:
On March 4, 1998, the Company entered into a Stock Purchase
Agreement ("Agreement"), approved by the Company's stockholders on May
18, 1998, with certain individuals (the "Initial Purchasers") whereby
the Initial Purchasers and two other persons acquired an aggregate of
825,000 shares of a newly created Series B Convertible Redeemable
Preferred Stock ("Series B Preferred Stock"), par value $0.01 per
share.
Page 16 of 29
<PAGE> 17
NOTE 8 - STOCKHOLDER'S EQUITY. (Continued)
(a) Series B Convertible Redeemable Preferred Stock: (Continued)
Pursuant to the Agreement and Subsequent transactions, the
Initial Purchasers acquired 765,000 shares of Series B Preferred Stock
for $76,500 in cash. The Company incurred certain legal expenses of the
Initial Purchasers equaling approximately $50,000 in connection with
the transaction. In addition, the Company issued 50,000 shares of
Series B Preferred Stock to a consultant as compensation valued at
$5,000 for his assistance to the Company in the identification and
review of business opportunities and this transaction and for his
assistance in bringing the transaction to fruition. Additionally, the
Company issued 10,000 shares of Series B Preferred Stock to James Fyfe
as compensation valued at $1,000 for his work in bringing this
transaction to fruition. These issuances diluted the voting rights of
the then existing stockholders by approximately 57%. The total
authorized shares of Series B Convertible Redeemable Preferred Stock is
825,000.
The following summarizes the terms of the Series B Preferred
Stock whose terms are more fully set forth in the Certificate of
Designation. The Series B Preferred Stock carries a zero coupon and
each share of the Series B Preferred Stock is convertible into ten
shares of the Company's common stock. The holder of a share of the
Series B Preferred Stock is entitled to ten times any dividends paid on
the common stock and such stock has ten votes per share and votes as
one class with the common stock. Accordingly, the Initial Purchasers
have sufficient voting power to elect all of the Board of Directors.
However, the Initial Purchasers are required to vote in favor of Mr.
Fyfe or his designee as a director of the Corporation through June 30,
2000.
The holder of any share of Series B Convertible Redeemable
Preferred Stock has the right, at such holder's option, exercisable on
or after September 30, 2000, to convert such share into ten (10) fully
paid and non-assessable shares of common stock (the "Conversion Rate").
The Conversion Rate is subject to adjustment as stipulated in the
Agreement. Upon liquidation, the Series B 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.
Because the Company raised in excess of $2,500,000 in fiscal 1999
from the sale of its common shares, and the Company's common shares
maintained a minimum closing bid price in excess of $2.00 per share for
10 consecutive trading days, the Company's right, pursuant to the terms
of the Agreement and the Certificate of Designation,to repurchase or
redeem such shares of Series B Preferred Stock from the holders for
total consideration of $0.10 per share was eliminated.
Page 17 of 29
<PAGE> 18
NOTE 8 - STOCKHOLDER'S EQUITY. (Continued)
(b) Common Stock:
Commencing in May 1999 through July 1999, the Company sold
688,335 shares of its common stock to accredited investors for $538,492
net of offering costs. In December 1999, accredited investors purchased
5,187,500 shares of the Company's common stock for $3,715,744, net of
offering costs. Through February 15, 2000, additional investors
acquired 1,676,250 shares of the Company's common stock for
approximately $1,206,000, net of offering costs.
The Company in 1999 issued 5,000 shares of its common stock whose
fair value was $5,000 to its President as a signing bonus, which was
charged to operations at the time of issuance. The Company also issued
in 1999, 25,000 shares of its common stock whose fair value was $25,000
at the date of issuance to a public relations consultant for future
services. The arrangement with the consultant was terminated in 1999
and the fair value of the shares was charged to operations in 1999.
(c) Warrants:
The Company has issued common stock purchase warrants from time
to time to investors in private placements, certain vendors,
underwriters, and directors and officers of the Company.
A total of 101,308 shares of common stock are reserved for
issuance upon exercise of warrants as of December 31, 1998 and March
31, 1998. Of these outstanding warrants, warrants for 9,375 common
shares at $46.40 per share expired in April 1999. The remaining
warrants to acquire 91,933 common shares at exercise prices ranging
from $3.20 to $8.10 per share were granted in March 1995 to certain
directors, officers and employees who converted previously outstanding
stock options under the 1986 Plan into warrants on substantially the
same terms as the previously held stock options, except the warrants
were immediately vested. During fiscal 1999, warrants to acquire 22,308
common shares at prices ranging from $3.90 to $46,40 per share expired.
No warrants were exercised during any of the periods presented. A total
of 79,000 shares of common stock are reserved for issuance upon
exercise of outstanding warrants as of December 31, 1999 at prices
ranging from $3.20 to $27.50 and expiring through October 2004.
(d) Stock Options Plans:
The Company has three stock option plans. The 1986 Stock Option
Plan and the 1988 Employee Incentive Stock Option Plan provide for the
grant of options to purchase shares of the Company's common stock to
employees. The 1992 Stock Option Plan provides for the grant of options
to directors.
Page 18 of 29
<PAGE> 19
NOTE 8 - STOCKHOLDER'S EQUITY. (Continued)
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 less than 80% of the fair market value
of the common stock at the time of grant. An option is exercisable not
earlier than six months from the date of grant. During the year ended
December 31, 1999, no options were granted, expired, exercised or
outstanding at any time under the 1986 Plan.
(d) Stock Options Plans:
In April 1992, the Company adopted the 1992 Stock Option Plan to
provide for the granting of options to directors. According to the
terms of this plan, each director is granted options to purchase 1,500
shares each year. The maximum amount of the Company's common stock that
may be granted under this plan is 20,000 shares. Options are
exercisable at the fair market value of the common stock on the date of
grant and have five year terms.
Under the 1998 Plan, the maximum aggregate number of shares which
may be issued under options is 300,000 shares of common stock. The
aggregate fair market value (determined at the time the option is
granted) of the shares for which incentive stock options are
exercisable for the first time under the terms of the 1998 Plan by any
eligible employee during any calendar year cannot exceed $100,000. The
option exercise price of each option is 100% of the fair market value
of the underlying stock on the date of the options are granted, except
that no option will be granted to any employee who, at the time the
option is granted, owns stock possessing more than 10% of the total
combined voting power of all classes of stock of the Corporation or any
subsidiary unless (a) at the time the options are granted, the option
exercise price is at least 110% of the fair market value of the shares
of common stock subject to the options and (b) the option by its terms
is not exercisable after the expiration of five years from the date
such option is granted.
The 1998 Plan is administered by a committee of disinterested
directors of the Board of Directors of the Corporation ("Option
Committee"). In 1999, options to acquire 100,000 common shares at $1.00
per share were granted to an officer under the 1998 Plan.
In 1999, an option to acquire 25,000 common shares at $0.6875 per
share was issued to a consultant.
Page 19 of 29
<PAGE> 20
NOTE 8 - STOCKHOLDER'S EQUITY. (Continued)
Information with respect to options under the 1986, 1992 and 1998 Stock Option
Plans is summarized as follows:
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
2000 1999
-------------------------------- --------------------------------
Shares Prices Shares Prices
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning
and end of period 128,000 $0.31 to $1.00 3,000 $ .31 to $ .41
============== ============== ============== ==============
</TABLE>
Outstanding options expire 90 days after termination of holder's status
as employee or director. At March 31, 2000, and 1999, options to acquire 3,000
common shares were exercisable at prices ranging from $0.31 to $0.41 per share.
The Company has 332,000 shares available for grant under all plans.
All 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. Assuming the fair market value of the stock at the date of
grant to be $.3125 per share in May 1996, $.40625 per share in May 1997, $.6875
in January 1999 and $1.00 per share in September 1999, the life of the options
to be from three to ten years, the expected volatility at 200%, expected
dividends are none, and the risk-free interest rate of 10%, the Company would
have recorded compensation expense of $1,938 for the three months ended March
31, 2000 as calculated by the Black-Scholes option pricing model. As such,
pro-forma net loss and loss per share would be as follows:
<TABLE>
<S> <C>
Net loss as reported $ (199,141)
Additional compensation 1,938
-----------
$ (201,079)
===========
Loss per share as reported $ (0.01)
===========
Adjusted loss per share $ (0.01)
===========
</TABLE>
As the number of options granted at December 31, 1998, and March 31,
1998, is immaterial, recognizing the expense would not have a material effect on
the Company's financial statements for the three months ended March 31, 1999.
Page 20 of 29
<PAGE> 21
NOTE 9 - INCOME TAXES.
The Company has received permission from the Internal Revenue Service
to change its taxable year-end from March 31, to December 31, effective with the
December 31, 1998, period.
The differences between income taxes computed using the statutory
federal income tax rate and that shown in the financial statements are
summarized as follows:
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
2000 % 1999 %
----------------------- -----------------------
<S> <C> <C> <C> <C>
Loss before income taxes
and preferred dividend $(186,933) -- $(394,669) --
========= ========= ========= =========
Computed tax benefit at
statutory rate $ (63,600) (34.0) $(134,200) (34.0)
Foreign subsidiary (income) or
loss not subject to U.S. taxes (29,000) (15.5) 6,200 1.6
Net operating loss
valuation reserve 92,600 49.5 128,000 32.4
--------- --------- --------- ---------
Total tax benefits $ -- -- $ -- --
========= ========= ========= =========
</TABLE>
There are no significant differences between the financial statement
and tax basis of assets and liabilities and, accordingly, no deferred tax
provision/benefit is required.
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 during any three year period. Upon receipt of the proceeds
from the last foreign purchasers of the Company's common stock in January 2000,
common stock ownership changed in excess of 50% during the three year period
then ended. The utilization of the Company's net operating loss carryforward at
December 31, 1999 of $2,063,000 was not negatively impacted by this ownership
change. The future tax benefit of the net operating loss carryforward aggregated
$701,000 at December 31, 1999 has been fully reserved as it is not more likely
than not that the Company will be able to use the operating loss in the future.
Page 21 of 29
<PAGE> 22
NOTE 10 - COMMITMENTS, CONTINGENICES AND OTHER.
(a) Leases:
Commencing in August 1998, the Company entered into short-term
operating leases for its general office space and certain office
equipment. Prior to August 1998, the Company did not incur rent expense
as it was inactive. Rent expense charged to operations for the three
months ended March 31, 2000 and 1999 was $12,525 in each period. Future
minimum annual rent commitments under operating leases as of December
31, 1999 are as follows:
<TABLE>
<CAPTION>
Years Ending
December 31,
<S> <C>
2001 $50,000
2002 27,000
-------
Total minimum
annual rentals $77,000
=======
</TABLE>
(b) Investment Contract:
The Corporation has entered into an investment advisory
agreement with AIG Global Investment Corporation ("AIG") under which
AIG functions as investment advisor and manager of all the
Corporation's investable assets. AIG provides management services to
all affiliated insurance companies of American International Group and
other third-party institutions on a world-wide basis.
(c) Year 2000:
Although the Company has had limited operations through
December 31, 1999, it recognized the need to ensure that its operations
will not be adversely effected by Year 2000 software or hardware
failures. The Company in developing its software and hardware made
certain that all its systems were compliant with Year 2000
requirements. The Company has not experienced any adverse computer
hardware or software effect to date.
Page 22 of 29
<PAGE> 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
financial statements and notes contained elsewhere in this Form 10-Q. Certain
statements under this caption "Management's Discussion and Analysis of Financial
Conditions and Results of Operations," constitute "forward-looking statements"
under the Private Securities Litigation Reform Act of 1995.
PLAN OF OPERATION
In May 1998, the Company sold to certain individuals through a stock purchase
agreement an aggregate of 765,000 shares of a newly created Series B Convertible
Redeemable Preferred Stock, par value for 0.01 per share of $76,500. In May
1999, the Company sold 688,335 common shares for $558,000 after offering costs.
These funds were principally used to acquire property assets and software to
develop its insurance and service contract businesses, and to fund its operating
losses. In December 1999 and during the quarter ended March 31, 2000, the
Company sold 5,187,500 and 1,676,250 common shares for $3,691,000 and
$1,341,000, respectively, which will be used to expand its businesses.
On September 30, 1998, the Company acquired Stamford Insurance Company Ltd.,
which was then an inactive foreign corporation that is licensed in the Cayman
Islands as a casualty and property insurer. In the first quarter of 2000,
Stamford, as a reinsurer, generated premiums written of $358,000 of which
$144,000 was earned by March 31, 2000. Also in the first quarter, the Company's
sales of service contracts through its website amounted to $4,300 of which $100
was earned in 2000.
The Company's plan of operations for the next twelve months is principally to
continue its endeavors to establish itself in the vehicle and consumer products
service contract business through its Internet website,
www.warrantysuperstore.com, and to continue to seek additional property casualty
reinsurance opportunities for its wholly owned insurance company, Stamford
Insurance Co. Ltd.
RESULTS OF OPERATIONS
The Company did not generate any operating revenues until the fourth quarter of
fiscal 1999, when its reinsurance subsidiary commenced generating premium
revenues and the Company began the sale of its service contracts.
Net loss for the quarter ended March 2000 decreased $210,000 (151.3%) to
$199,000 from the comparable loss of $409,0000 incurred in the quarter ended
March 1999 for the reasons discussed below.
In the quarter ended March 31, 2000, Stamford continued reinsuring contractual
liability insurance policies from one United States carrier that is rated "A-"
Excellent by A.M. Best. This insurance generated approximately $358,000 in
premiums, of which $214,000 was unearned at March 31, 2000. Policy acquisition
costs were $45,000 of which $27,000 was expensed in the current period. Income
from operations in the current period were $110,000 of which $5,000 is
management's estimate of incurred but not reported losses at March 31, 2000.
Corniche sales of extended service contracts in the first quarter of 2000
generated $4,300 in revenues, of which $100 was recognized within the
Page 23 of 29
<PAGE> 24
RESULTS OF OPERATIONS (CONTINUED)
current period with the balance deferred over the life of the contract. Direct
costs associated with the sale of the service contracts are being recognized pro
rata over the length of the contract.
General and administrative costs for first quarter 2000 aggregated $327,000 as
compared to $399,000 for the quarter ended March 1999. The decrease of $72,000
(18%) is attributable primarily to reduced website development costs.
Interest income increased $32,000 (800%) from $4,000 in the quarter ended March
31, 2000,to $36,000 in the same quarter of 1999. Interest expense increased from
$-0- in the quarter ended March 1999 to $2,000 in the current quarter. The
increase in interest income and interest expense is the result of the cash, cash
equivalents, and investments used to fund the Company's increased operating
costs in the current quarter and the incurrence of debt in a prior period.
The preferred stock dividend of $12,000 in the March 2000 quarter is $2,000 less
than the $14,000 accrued during the quarter ended March 1999 principally because
of the reduction of the average number of Series A Preferred Stock outstanding
in the current year.
FINANCIAL CONDITION
The Company's cash condition decreased $114,000 to $1,525,000 at March 31, 2000
from $1,639,000 at December 31, 1999. The investments in marketable securities
increased $1,019,000 to $3,752,000 from $2,733,000 during the same time period.
The net increase is the result of proceeds from the sale of the Company's common
stock.
Even through the acquisition of Stamford may enable the Company to generate
limited reinsurance revenues, management's business plan requires additional
funding through future sales of the Company's securities and/or other financing
alternative. Management anticipates a continued deterioration in the Company's
financial condition in the near term due to ongoing general and administrative
costs, which will exceed the Company's revenues. This situation will continue
until the Company raises the sufficient financing to fully capitalize its
service contract sales and reinsurance business.
There can be no assurance that the Company will be successful in its efforts to
raise any funds from any of the operations under evaluation or that it will
avail itself of other alternative sources of funds.
Page 24 of 29
<PAGE> 25
LIQUIDITY AND CAPITAL RESOURCES
The Company has relied solely on the proceeds from the sales of its securities
in October 1997, May 1998, and May 1999, December 1999 and during the quarter
ended March 2000 for the primary source of its funds. In the first quarter of
2000, the Company generated its revenues from its businesses, both earned and
unearned, of $593,000. These funds were and will be utilized to fund the
Company's operating expenses. Management anticipates it will require additional
funds from future sales of its securities and/or other financing alternatives in
order to fund its future operational costs and at the same time fully develop
its service contract sales and insurance businesses.
At March 31, 2000, working capital was $4,992,000 an increase of $1,420,000 from
working capital of $3,572,000 at December 31, 1999. The increase in working
capital results primarily from the sale of the Company's securities of
$1,206,000, net after offering costs.
The Company has committed to acquire computer hardware and software and to
develop a website for approximately $1,500,000 of which $1,000,000 has been
expended through December 31, 1999. Although the Company is not contractually
obligated to fulfill the remaining $500,000 of the project, it intends to do so
over the next 1 to 2 years as and if funding permits. The project will enable
the Company to fully utilize the Internet in the sales, advertising, marketing,
collections and other functions of its extended service contract sales for
automotive vehicles and other products such as brown and white consumer
products. There can be no assurance that the Company will have the funds
available to fund its hardware and/or software requirements required to
successfully develop this project nor can there be assurance that if it is
developed such project will aid in the intended results of additional revenues.
The Certificate of Designation for the Series A Preferred Stock states that at
any time after December 1, 1999, any holder of Series A Preferred Stock may
require the Company to redeem his or her shares of Series A Preferred Stock (if
there are funds with which the Company may legally do so) at a price of $1.00
per share. Notwithstanding the foregoing redemption provisions, if any dividends
on the Series A Preferred Stock are past due, no shares of Series A Preferred
Stock may be redeemed by the Company unless all outstanding shares of Series A
Preferred Stock are simultaneously redeemed. The holders of Series A Preferred
Stock may convert their Series A Preferred Stock into shares of common stock of
the Company at a price of $5.20 per share. At March 31, 2000, 697,582 shares of
Series A Preferred Stock were outstanding. If the preferred shareholders do not
convert their shares 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.
INFLATION
Inflation has not had a significant effect on the Company's operations or
financial position and management believes that the future effects of inflation
on the Company's operations and financial position will be insignificant.
Page 25 of 29
<PAGE> 26
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
Certain statements included in this report, including the words "believes",
"anticipates", "expects" and similar expressions, are intended to identify
forward-looking statements. Such statements are subject to certain risks and
uncertainties, which could cause actual results to differ materially from those
projected. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to republish revised forward-looking statements to
reflect events or circumstances after the date hereof or to reflect the
occurrences of unanticipated events. Readers are also urged to carefully review
and consider the various disclosures made by the Company in this report, as well
as the Company's periodic reports on other fillings with the Securities and
Exchange Commission.
Page 26 of 29
<PAGE> 27
CORNICHE GROUP INCORPORATED
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Corniche sold the following unregistered equity securities during
the period covered by this report in a private placement under Section 4(2) of
the Securities Act of 1933:
<TABLE>
<CAPTION>
Number of Shares Expenses of
Date of Common Stock Gross Proceeds Sale Net Proceeds
- ------- ---------------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
1/1 -
3/31/ 1,676,250 $1,341,000 $134,100 $1,206,900
2000
- ------- ---------------- -------------- ------------ ------------
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibit is filed as part of this report:
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended
March 31, 2000.
Page 27 of 29
<PAGE> 28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CORNICHE GROUP INCORPORATED
(Registrant)
By /s/ Robert H. Hutchins
--------------------------
Robert H. Hutchins, President
and Principal Financial Officer
Date: May 22, 2000
Page 28 of 29
<PAGE> 29
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF CORNICHE GROUP INCORPORATED AND SUBSIDIARY AS AT AND
FOR THE THREE MONTHS ENDED MARCH 31, 2000 IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 1,525,487
<SECURITIES> 3,751,846
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,411,564
<PP&E> 740,317
<DEPRECIATION> (123,298)
<TOTAL-ASSETS> 6,084,180
<CURRENT-LIABILITIES> 419,319
<BONDS> 0
0
8,250
<COMMON> 14,211
<OTHER-SE> 4,384,126
<TOTAL-LIABILITY-AND-EQUITY> 6,084,180
<SALES> 0
<TOTAL-REVENUES> 145,600
<CGS> 43,500
<TOTAL-COSTS> 327,276
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,240
<INCOME-PRETAX> (186,933)
<INCOME-TAX> 0
<INCOME-CONTINUING> (186,933)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (186,933)
<EPS-BASIC> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
