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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(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 December 31, 1999
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 Identification No.)
incorporation or organization)
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
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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
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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
On March 31, 2000, the aggregate market price of the voting and
nonvoting common equity held by nonaffiliates of the registrant was
approximately $31.8 million. (For purposes of determining this amount, only
directors, executive officers, and 10% or greater stockholders have been deemed
affiliates).
On March 31, 2000, 13,225,815 shares of common stock, par value $0.001
per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: Part III of this report is incorporated by
reference to the registrant's definitive proxy statement for its 2000 annual
stockholders meeting.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. x
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FORWARD-LOOKING STATEMENTS
In addition to historical information, this Report on Form 10-K
contains forward-looking statements, which can be identified by the use of
forward-looking terminology, such as "may," "will," "expect," "could,"
"anticipate," "estimate," or "continue" or similar negative expressions or other
variations or comparable terminology. Forward- looking statements are subject to
risks and uncertainties that could cause actual results to differ materially
from those projected. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of the
date of this report. 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 filings with the Securities and Exchange Commission.
PART I
ITEM 1. BUSINESS
GENERAL
The principal executive offices of Corniche Group Incorporated (the
"Company") are located at 610 South Industrial Boulevard, Suite 220, Euless,
Texas 76040. Its telephone number is 817.283.4250.
BUSINESS STRATEGY
The Company is in the process of putting into place a strategic and
operational business plan that involves the Company's entry into the service
contract business and the insurance industry.
WarrantySuperstore.com Web Site
The Company has developed a web site on the Internet to market service
contracts on automobiles and consumer products. The Company's web site is called
WarrantySuperstore.com. Through this web site, the Company plans to sell its
products and services directly to consumers.
The first product line offered through WarrantySuperstore.com was the
Vehicle Service Contract Program, which includes automobile service contracts
for new and used vehicles. The Company has added new product lines to the web
site since the Vehicle Service Contract Program was introduced in June 1999. By
October 1999, the Company completed development of and placed on-line a Home
Warranty Program, and office equipment, consumer electronics, home appliances,
lawn and garden equipment, and computer warranty programs.
The Company intends to advertise its web site through print, radio, and
television advertising and links from other Internet sites. The Company does not
currently intend to have distribution channels for its products and services
other than the Internet.
The Company offers its products and services in states that permit
program marketers to be the obligor on service contracts. Currently, this
represents approximately 40 states for automobile service contracts and most
states for other service contracts. The Company now anticipates that the obligor
on service contracts sold on WarrantySuperstore.com will be a third party
warranty company. The Company is responsible for marketing, booking sales,
collecting payment for service contracts, reporting and paying premiums to the
insurance carrier, and providing information to the insurance carrier's
appointed claims administrator.
Although the Company will manage most functions for the service
contracts, it will not administer the claim functions. The insurance carrier has
appointed a claims administrator to administer the claims functions, including
payment of claims. The Company is in the process of establishing an electronic
data processing interface with the claims administrator and to report details
regarding the contracts to the insurance carrier.
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Reliance Insurance Company, through its subsidiary Reliance INTEGRAMARK
("Reliance"), is providing contractual liability insurance covering the
obligations to repair or replace the products covered by the service contracts.
The Company granted options to purchase common stock to Reliance for providing
this insurance.
The Company intends to provide customer analysis reports to retailers
on a fee basis. The Company believes that it will be able to develop market
research questionnaires and produce market research reports based on database
information collected through sales on WarrantySuperstore.com.
The Company expects to use WarrantySuperstore.com to generate
advertising revenues. The Company plans to sell banner page advertisements on
its web site and to sell advertisements on a preferred client list basis.
Reinsurance Activities
Stamford Insurance Company, Ltd. ("Stamford") is a wholly owned
subsidiary of the Company chartered under the laws of the Cayman Islands.
Stamford is licensed to conduct business as an insurance company in the Cayman
Islands and as a reinsurance company throughout the U.S. Stamford began
generating revenues in the fourth quarter of 1999.
When Stamford is sufficiently capitalized, the Company intends to
request the insurance carriers providing contractual liability coverage on the
Company's service contracts to share (via reinsurance) a portion of the risk
with Stamford. The Company's ability to influence the insurance carriers to
direct reinsurance business to Stamford will depend on the Company's negotiating
strength, which, in turn, will depend on the success of WarrantySuperstore.com.
Stamford's ability to reinsure the Company's Internet business will largely
depend on the primary insurance carriers' willingness to cede reinsurance to
Stamford.
The Company's long range plans for Stamford depend on Stamford's growth
and development of greater financial stability. If Stamford's operations are
successful, then the Company plans to cause Stamford to seek additional
reinsurance opportunities that are not related to the Company. Stamford may use
reinsurance brokers to identify other reinsurance opportunities.
Domestic Licensing
As an offshore insurance company, Stamford is permitted to function as
a reinsurance company in the U.S. As such, it can reinsure U.S. insurance
companies. The Company's long range strategy is to identify and acquire a
property and casualty insurance carrier that holds state licenses. If the
Company acquires a domestic insurance carrier, it plans to use the carrier to
serve as a specialty insurer in niche commercial markets that are under served
by standard insurance carriers.
Other Information
The Company is party to an investment advisory agreement AIG Global
Investment Corporation under which AIG Global will function as investment
advisor and manager of the Company's investment assets. AIG Global provides
management services to all affiliated insurance companies of American
International Group and other third party institutions worldwide.
EMPLOYEES
At March 31, 2000, the Company employed three full-time personnel.
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ITEM 2. PROPERTIES
The Company leases approximately 4,100 square feet of office space at
610 South Industrial Boulevard, Euless, Texas. Monthly rental under the lease is
$4,175. The lease expires in July 2001.
ITEM 3. LEGAL PROCEEDINGS
No material legal proceedings are pending to which the Company or any
of its property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders
during the fourth quarter of 1999.
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PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the OTC Bulletin Board under
the symbol "CNGI." The following table sets forth the high and low bid prices of
the Company's common stock for each full quarterly period within the two most
recent fiscal years and the most recent quarter, as reported by Nasdaq Trading
and Market Services. On March 31, 2000, the closing bid price for the common
stock was $3.03. Information set forth in the table below represents prices
between dealers in securities, does not include retail mark-ups, mark-downs, or
commissions, and does not necessarily represent actual transactions.
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1998 HIGH LOW
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First Quarter .................................... $ 2.31 $ .65
Second Quarter ................................... 2.31 1.16
Third Quarter .................................... 1.97 .63
Fourth Quarter ................................... 1.00 .69
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1999 HIGH LOW
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First Quarter .................................... $ 1.38 $ .63
Second Quarter ................................... $ 1.50 $ 1.13
Third Quarter .................................... $ 1.38 $ .91
Fourth Quarter ................................... $ 3.06 $ .91
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2000 HIGH LOW
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First Quarter .................................... $ 3.34 $ 2.93
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At March 31, 2000, there were approximately 1,150 record holders of the
Company's common stock. Holders of common stock are entitled to dividends when,
as, and if declared by the Board of Directors out of legally available funds.
The Company has not paid any cash dividends on its common stock and, for the
foreseeable future, intends to retain earnings, if any, to finance the
operations, development, and expansion of its business.
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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 Company's financial statements which were examined by
Weinick Sanders Leventhal & Co., LLP, independent certified public accountants,
for the year ended December 31, 1999, and the nine months ended December 31,
1998, and by Simontacchi & Co. LLP, independent certified public accountants,
for the year ended March 31, 1998. The information set forth below should be
read in conjunction with the Company's audited financial statements and related
notes appearing elsewhere in this report (See Item 8. Financial Statements and
Supplemental Data).
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FOR THE YEAR FOR THE NINE FOR THE YEARS ENDED
ENDED MONTHS ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, -----------------------------------------
1999 1998 1998 1997 1996
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Statement of Operations:
Earned Revenues ....................... $ 12,854 $ -- $ -- $ -- $ --
Cost of Sales ......................... 7,557 -- -- -- --
Gross Profit .......................... 5,297 -- -- -- --
Operating (Loss) Income ............... (1,055,371) (428,157) (221,602) (251,583) (257,037)
Net (Loss) Income ..................... (1,179,508) (447,493) (263,865) (332,604) (323,510)
Net (Loss) Income per Common Share: ... $ (0.17) $ (0.07) $ (0.05) $ (0.14) $ (0.14)
Weighted Average Number of Shares
Outstanding ........................ 6,905,073 6,365,015 5,166,272 2,412,278 2,300,289
Dividends per Common Share ............ -- -- -- -- --
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DECEMBER 31, DECEMBER 31, MARCH 31,
1999 1998 1998
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Balance Sheet Data:
Working Capital (Deficiency) .......................................... $ 3,751,548 $ 458,917 $ 869,567
Total Assets .......................................................... 5,670,664 905,791 1,129,601
Current Liabilities ................................................... 872,866 375,571 259,676
(Accumulated Deficit) ................................................. (4,330,355) (3,160,847) (2,713,254)
Preferred Stock, Common Stock, Other Stockholders' Equity and Capital
Deficiency ......................................................... 3,112,352 (307,807) (23,982)
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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-K.
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 for
$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, the Company sold 5,187,500 common shares
for $3,691,000 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 fourth quarter of
1999, Stamford commenced underwriting as a reinsurer generating premiums written
of $300,000 of which $12,000 was earned by December 31, 1999. Also in the fourth
quarter, the Company commenced sales of its automotive vehicle and consumer
products service contracts through its website. Such service contract revenues
aggregated $11,000 in 1999 of which $400 was earned in 1999.
The Company's plan of operation 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 web site,
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 for the period
covered by this report 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.
The Company recorded losses in the year ended March 31, 1998 of
$222,000, before interest expense and preferred stock dividend accrual ($252,000
in 1997 and $257,000 in 1996). Such losses arose from general and administrative
expenses which principally comprise professional fees, travel expenses and
general office costs.
During the period March 1996 through March 1998, the Company's primary
activities have been to engage in three private securities offerings, and to
settle and pay off certain of its outstanding liabilities. In May 1998, the
stockholders approved the issuance of the Series B Preferred Stock, change in
control and new business operations.
Stamford in the quarter ended December 1999 began reinsuring
contractual liability insurance policies from one United States carrier that is
rated "A-" Excellent by A.M. Best. This reinsurance generated approximately
$300,000 in premiums, of which $288,000 was unearned at December 31, 1999.
Policy acquisition costs were $38,000 of which $2,000 was expensed in the
current period. Losses charged to operations in the current period were $5,112
of which $5,000 is management's estimate of incurred but not reported losses at
December 31, 1999. Corniche commenced the sales of the extended service
contracts for new and used automotive vehicles in the last quarter of 1999,
generating $11,000 in revenues of which $400 was recognized with in the 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. Since neither the Company nor its subsidiary
generated any revenues in 1998, no meaningful comparative analysis can be made.
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General and administrative costs for 1999 aggregating $1,071,000 as
compared to $481,000 for the twelve months ended December 31, 1998. The increase
of $590,000 (122.7%) is attributable to increases in (i) advertising of $253,000
in the current year (ii) payroll and related employment costs of $173,000 to
$257,000 in the current year, (iii) website development of $98,000 to $140,000
and (iv) depreciation and amortization of $78,000 to $83,000 in the current
year.
Interest income decreased $30,000 (78.9%) from $38,000 in the twelve
months ended December 31, 1998, to $8,000 in the current year. Interest expense
increased from $1,000 in the twelve months ended December 31, 1998 to $65,000 in
the current year. The reduction in interest income and increase in interest
expense is the result of the cash, cash equivalents, and investments used to
fund the Company's increased operating costs in the current year and the
incurrence of debt of $98,000 to fund property asset additions.
The preferred stock dividend of $57,000 in 1999 is $3,000 less than the
$60,000 accrued during the twelve months ended December 31, 1998 principally
because of the reduction of the average number of Series A preferred shares
outstanding in the current year.
Net loss for fiscal 1999 increased $676,000 (133.9%) to $1,180,000 from
the comparable loss of $504,000 incurred during the twelve months ended December
31, 1998 for the reasons cited above.
FINANCIAL CONDITION
The Company's cash condition increased $1,433,000 to $1,639,000 at
December 31, 1999 from $206,000 at December 31, 1998. The investments in
marketable securities increased $2,105,000 to $2,733,000 from $628,000 during
the same time period. These increases are the result of proceeds from the sale
of the Company's common stock in December 1999 for $4,175,000 before certain
offering costs of $419,000 which were paid in January 2000. Additionally, the
Company sold additional shares of its common stock in January and February 2000
for approximately $1,200,000 after offering costs.
Even though the acquisition of Stamford may enable the Company to
generate limited reinsurance revenues, management's business plan requires
additional funding through future sales of the Company's securities and/or other
financing alternatives. Management anticipates a continued deterioration in the
Company's financial condition in the near term due to ongoing general and
administrative costs 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 options under evaluation or that is
will be able to avail itself of other alternative sources of funds.
The Company's cash condition was reduced by $942,000 from March 31,
1998 to December 31, 1998 due to an increase in investments in marketable
securities of $628,000, the acquisition of property of $26,000, the acquisition
of the Company's subsidiary for $37,000, and cash used in operations of
$323,000. The purchased subsidiary had cash on the date of acquisition,
September 30, 1998, of $19,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company has relied solely on the proceeds from the sales of its
securities in October 1997, May 1998, May 1999 and December 1999 for the primary
source of its funds. In the fourth quarter of 1999, the Company generated its
initial revenues from its businesses, both earned and unearned, of $312,000.
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 insurance and service
contract sales businesses.
At December 31, 1999 working capital was $3,572,000 an increase of
$3,113,000 from working capital of $459,000 at December 31, 1998. The increase
in working capital is the result of the increase in capital through the
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sale of the Company's securities of $4,254,000 plus the issuance of its
securities for payment of debt, interest and services rendered of $311,000 less
the loss incurred before accrued dividends of $1,112,000 and property asset
additions of $442,000.
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 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 December 31, 1999, 810,054 shares
of Series A Preferred Stock were outstanding. If the preferred share holders 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The Company's financial statements, itemized in the subtopic,
"Financial Statements" under Item 14 of this report, are set forth at the end of
this report.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
In February 1997, the Company appointed Simontacchi & Company, P.A.
("Simontacchi") as the Company's independent auditors. This action was approved
by the Company's board of directors. The Company had not consulted Simontacchi
regarding any accounting or financial reporting issues prior to that firm being
retained by the Company.
Simontacchi audited the Company's financial statements for the fiscal
years ended March 31, 1996, 1997 and 1998. Simontacchi's report on the Company's
financial statements for the fiscal years ended March 31, 1996 and 1997
expressed an unqualified opinion on those financial statements based upon their
audits, but included
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paragraphs noting a "substantial doubt about the Company's ability to continue
as a going concern" based upon the several matters summarized in such reports.
On August 12, 1998, the Company and Simontacchi terminated their
client-auditor relationship. The reports of Simontacchi on the financial
statements of the Company for the prior two fiscal years contained no adverse
opinion or disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principles. The Company's Board of
Directors 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
Incorporated by reference to the Company's definitive proxy statement
for its 2000 annual meeting of stockholders.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the Company's definitive proxy statement
for its 2000 annual meeting of stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the Company's definitive proxy statement
for its 2000 annual meeting of stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the Company's definitive proxy statement
for its 2000 annual meeting of stockholders.
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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 certified public accountants
Consolidated Balance Sheets at December 31, 1999 and 1998
Statements of Operations
For the Year Ended December 31, 1999 (Consolidated) and
For the Nine Months Ended December 31, 1998 (Consolidated) and
For the Year Ended March 31, 1998
Statements of Convertible Redeemable Preferred Stock, Common Stock,
Other Stockholders' Equity and Accumulated Deficit For the
Year Ended December 31, 1999 (Consolidated) and For the Nine
Months Ended December 31, 1998 (Consolidated) and For the Year
Ended March 31, 1998
Statements of Cash Flows
For the Year Ended December 31, 1999 (Consolidated) and
For the Nine Months Ended December 31, 1998 (Consolidated) and
For the Year Ended March 31,
Notes to Financial Statements
FINANCIAL STATEMENT SCHEDULES
The financial statement schedule filed as a part of this report is as
follows:
Schedule II - Valuation of Qualifying Accounts For the Year Ended
December 31, 1999 (Consolidated) and For the Nine Months Ended
December 31, 1998 (Consolidated) and For the Year Ended March
31, 1998 (Consolidated)
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:
Exhibit No. of incorporated report specified below
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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)
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(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 Company, the Bank of Scotland
and 12 buyers (10) 10(m)
(d) Mutual Release dated as of January 30, 1997 by and among
the Company, James Fyfe and the Bank of Scotland (10) 10(n)
(e) Stock Purchase Agreement, dated as of March 4, 1998, between
the Company and the Initial Purchasers named therein (12) B
(f) 1998 Employees Stock Option Plan (12) D
27 Financial Data Schedule, filed herewith.
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Notes:
(1) Filed with the Securities and Exchange Commission as an exhibit,
numbered as indicated above, to the Company's registration statement on
Form S-18, File No. 2-69627, which exhibit is incorporated here by
reference.
(2) Filed with the Securities and Exchange Commission as an exhibit,
numbered as indicated above, to the Company's registration statement on
Form S-2, File No. 2-88712, which exhibit is incorporated here by
reference.
(3) Filed with the Securities and Exchange Commission as an exhibit,
numbered as indicated above, to the Company's registration statement on
Form S-2, File No. 33-4458, which exhibit is incorporated here by
reference.
(4) Filed with the Securities and Exchange Commission as an exhibit,
numbered as indicated above, to the Company's annual report on Form
10-K for the year ended September 30, 1987, which exhibit is
incorporated here by reference.
(5) Filed with the Securities and Exchange Commission as an exhibit,
numbered as indicated above, to the Company's registration statement on
Form S-3, File No. 33-42154, which exhibit is incorporated here by
reference.
(6) Filed with the Securities and Exchange Commission as an exhibit,
numbered as indicated above, to the Company's registration statement on
Form S-1, File No. 33-42154, which exhibit is incorporated here by
reference.
-13-
<PAGE> 14
(7) Filed with the Securities and Exchange Commission as an exhibit,
numbered as indicated above, to the Company's annual report on Form
10-K for the year ended September 30, 1994, which exhibit is
incorporated here by reference.
(8) Filed with the Securities and Exchange Commission as an exhibit, as
indicated above, to the Company's proxy statement dated March 30, 1992,
which exhibit is incorporated here by reference.
(9) Filed with the Securities and Exchange Commission as an exhibit,
numbered as indicated above, to the current report of the Company on
Form 8-K, dated April 5, 1995, which exhibit is incorporated here by
reference.
(10) Filed with the Securities and Exchange Commission as an exhibit,
numbered as indicated above, to the Company's annual report on Form
10-K for the year ended March 31, 1996, which exhibit is incorporated
here by reference.
(11) Filed with the Securities and Exchange Commission as an exhibit,
numbered as indicated above, to the Company's annual report on Form
10K/A for the year ended March 31, 1996, which exhibit is incorporated
here by reference.
(12) Filed with the Securities and Exchange Commission as an exhibit, as
indicated above, to the Company's proxy statement dated April 23, 1998,
which exhibit is incorporated here by reference.
REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K during the fourth quarter of
fiscal 1999.
-14-
<PAGE> 15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
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 Company and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ Robert Benoit Director and Chief Executive Officer March 31, 2000
- ------------------------------------ (Principal executive officer)
ROBERT BENOIT
/s/ Robert H. Hutchins Director and President (Principal March 31, 2000
- ------------------------------------ financial officer)
ROBERT H. HUTCHINS
/s/ Glenn Aber Director March 31, 2000
- ------------------------------------
GLENN ABER
/s/ James J. Fyfe Director March 31, 2000
- ------------------------------------
JAMES J. FYFE
</TABLE>
-15-
<PAGE> 16
CORNICHE GROUP INCORPORATED AND SUBSIDIARY
DECEMBER 31, 1999
I N D E X
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ................................................. F-2, F-3
FINANCIAL STATEMENTS:
Consolidated Balance Sheets at December 31, 1999 and 1998 .................................. F-4
Statements of Operations
For the Year Ended December 31, 1999 (Consolidated) and
For the Nine Months Ended December 31, 1998 (Consolidated) and
For the Year Ended March 31, 1998 ........................................................ F-5
Statements of Convertible Redeemable Preferred Stock, Common Stock,
Other Stockholders' Equity and Accumulated Deficit For the Year Ended
December 31, 1999 (Consolidated) and For the Nine Months Ended
December 31, 1998 (Consolidated) and
For the Year Ended March 31, 1998......................................................... F-6
Statements of Cash Flows
For the Year Ended December 31, 1999 (Consolidated) and
For the Nine Months Ended December 31, 1998 (Consolidated) and
For the Year Ended March 31, 1998 ........................................................ F-7, F-8
Notes to Financial Statements ....................................................................... F-9 - F-19
Schedule II - Valuation of Qualifying Accounts
For the Year Ended December 31, 1999 (Consolidated) and
For the Nine Months Ended December 31, 1998 (Consolidated) and
For the Year Ended March 31, 1998 .......................................................... F-20
</TABLE>
F-1
<PAGE> 17
[WEINICK SANDERS LEVENTHAL & CO., LLP LETTERHEAD]
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors
Corniche Group Incorporated
We have audited the accompanying consolidated balance sheets of Corniche Group
Incorporated and Subsidiary as at December 31, 1999 and 1998, and the related
statements of operations, redeemable preferred stock, common stock, other
stockholders' equity and accumulated deficit, and cash flows for the year ended
December 31, 1999 and for the nine months ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Corniche Group
Incorporated and Subsidiary as at December 31, 1999 and 1998, and the results of
their operations and their cash flows for the year ended December 31, 1999 and
for the nine months ended December 31, 1998, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statements schedules for the year ended December 31, 1999 and for the nine
months ended December 31, 1998, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
/s/ WEINICK SANDERS LEVENTHAL & CO., LLP
New York, New York
January 28, 2000 (Except as to a portion
of Note 8 (b) to which the date is
February 15, 2000)
F-2
<PAGE> 18
SIMONTACCHI & COMPANY, LLP
170 EAST MAIN STREET
ROCKAWAY, NEW JERSEY 07866
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors
Corniche Group Incorporated
We have audited the accompanying statements of operations, redeemable preferred
stock, common stock, other stockholders' equity and accumulated deficit, and
cash flows of Corniche Group Incorporated for the year ended March 31, 1998. Our
audit also included the financial statement schedule for the year ended March
31, 1998. 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 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 results of the operations and the cash flows of
Corniche Group Incorporated for the year ended March 31, 1998 in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule for the year ended March 31, 1998, when considered
in relation to the basic financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.
/s/ SIMONTACCHI & COMPANY, LLP
Fairfield, New Jersey
July 10, 1998
F-3
<PAGE> 19
CORNICHE GROUP INCORPORATED AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Current assets:
Cash and equivalents ................................................ $ 1,639,473 $ 206,313
Marketable securities ............................................... 2,733,319 628,175
Prepaid expenses .................................................... 71,622 --
----------- -----------
Total current assets: ......................................... 4,444,414 834,488
Property and equipment, net ............................................... 655,002 40,781
Deferred acquisition costs ................................................ 41,946 --
License, net of accumulated amortization .................................. 16,777 17,997
Other assets .............................................................. 12,525 12,525
----------- -----------
$ 5,170,664 $ 905,791
=========== ===========
LIABILITIES, STOCKHOLDERS' EQUITY AND (CAPITAL DEFICIENCY)
Current liabilities:
Dividends payable - preferred stock ................................. $ 288,334 $ 236,981
Accounts payable, accrued expenses and other current liabilities .... 561,870 133,941
Current portion of long-term debt ................................... 22,662 4,649
Total current liabilities: .................................... 872,866 375,571
Unearned revenues ......................................................... 298,801 --
----------- -----------
Long-term debt ............................................................ 76,591 9,262
----------- -----------
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 - 810,054 shares at December 31, 1999
and 828,765 shares at December 31, 1998 ........................... 810,054 828,765
----------- -----------
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, $.01 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- 12,513,127 at December 31, 1999 ........... 12,513
- 6,369,968 at December 31, 1998 ............ 6,370
Additional paid-in capital .......................................... 7,421,944 2,838,420
Accumulated deficit ................................................. (4,330,355) (3,160,847)
----------- -----------
Total convertible redeemable preferred stock, common stock,
other stockholders' equity and (accumulated deficit) ........ 3,112,352 (307,807)
----------- -----------
$ 5,170,664 $ 905,791
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 20
CORNICHE GROUP INCORPORATED AND SUBSIDIARY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE NINE FOR THE YEAR
ENDED MONTHS ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
-------------- -------------- --------------
1999 1998 1998
(Consolidated) (Consolidated)
<S> <C> <C> <C>
Earned revenues ......................................... $ 12,854 $ -- $ --
Direct costs ............................................ 7,557 -- --
-------------- -------------- --------------
Gross profit ............................................ 5,297 -- --
General and administrative expenses ..................... 1,060,668 428,157 221,602
-------------- -------------- --------------
Operating loss .......................................... (1,055,371) (428,157) (221,602)
Interest income (expense), net .......................... (56,965) 25,206 17,804
-------------- -------------- --------------
Net loss before preferred dividend ...................... (1,112,336) (402,951) (203,798)
Preferred dividend ...................................... (57,172) (44,642) (60,067)
-------------- -------------- --------------
Net loss ................................................ $ (1,169,508) $ (447,593) $ (263,865)
============== ============== ==============
Net loss per share of common stock ...................... $ (0.17) $ (0.07) $ (0.05)
============== ============== ==============
Weight average number of common shares outstanding ...... 6,905,073 6,367,015 5,165,272
============== ============== ==============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 21
CORNICHE GROUP INCORPORATED AND SUBSIDIARY
STATEMENTS OF CONVERTIBLE REDEEMABLE PREFERRED STOCK, COMMON STOCK,
OTHER STOCKHOLDERS' EQUITY AND ACCUMULATED DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1999 AND
FOR THE NINE MONTHS ENDED DECEMBER 31, 1998 AND
FOR THE YEAR ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
SERIES B CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------------- -------------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at April 1, 1997 ......................... -- -- 2,630,378 $ 2,630 $ 1,090,493
Issuance of common stock for cash,
net of related costs of $184,500 .............. -- -- 3,940,000 3,940 1,781,560
Retirement of treasury stock ..................... -- -- (218,100) (218) (204,492)
Conversion of Series A convertible
preferred stock into common stock ............. -- -- 2,953 3 15,356
Series A convertible preferred stock dividend .... -- -- -- -- --
Net loss before preferred stock dividend ......... -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance at March 31, 1998 ........................ -- -- 6,355,231 6,355 2,682,917
Adjustments to common stock ...................... -- -- 2,212 2 (2)
Issuance of Series B convertible
preferred stock for cash ...................... 765,000 7,650 -- -- 68,850
Issuance of Series B convertible
preferred stock for services rendered ......... 60,000 600 -- -- 5,400
Conversion of Series A convertible
preferred stock into common stock ............. -- -- 12,525 13 81,255
Series A convertible preferred stock dividend .... -- -- -- -- --
Net loss before preferred stock dividend ......... -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1998 ..................... 825,000 8,250 6,369,968 6,370 2,838,420
Issuance of common stock for interest
and services rendered ......................... -- -- 55,000 55 57,664
Issuance of common stock for indebtedness ....... -- -- 208,738 209 252,973
Issuance of common stock for cash, net
of offering costs ............................. -- -- 5,875,835 5,876 4,248,360
Conversion of Series A convertible preferred
stock into common stock ....................... -- -- 3,586 3 24,527
Series A convertible stock dividends ............. -- -- -- -- --
Net loss before preferred stock dividend ......... -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1999 ..................... 825,000 $ 8,250 12,513,127 $ 12,513 $ 7,421,944
=========== =========== =========== =========== ===========
<CAPTION>
TREASURY STOCK
-------------------------- ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at April 1, 1997 ......................... (218,100) $ (204,710) $(2,449,389) $(1,560,976)
Issuance of common stock for cash,
net of related costs of $184,500 .............. -- -- -- 1,785,500
Retirement of treasury stock ..................... 218,100 204,710 -- --
Conversion of Series A convertible
preferred stock into common stock ............. -- -- -- 15,359
Series A convertible preferred stock dividend .... -- -- (60,067) (60,067)
Net loss before preferred stock dividend ......... -- -- (203,798) (203,798)
----------- ----------- ----------- -----------
Balance at March 31, 1998 ........................ -- -- (2,713,254) (23,982)
Adjustments to common stock ...................... -- -- -- --
Issuance of Series B convertible
preferred stock for cash ...................... -- -- -- 76,500
Issuance of Series B convertible
preferred stock for services rendered ......... -- -- -- 6,000
Conversion of Series A convertible
preferred stock into common stock ............. -- -- -- 81,268
Series A convertible preferred stock dividend .... -- -- (44,642) (44,642)
Net loss before preferred stock dividend ......... -- -- (402,951) (402,951)
----------- ----------- ----------- -----------
Balance at December 31, 1998 ..................... -- -- (3,160,847) (307,807)
Issuance of common stock for interest
and services rendered ......................... -- -- -- 57,719
Issuance of common stock for indebtedness ....... -- -- -- 253,182
Issuance of common stock for cash, net
of offering costs ............................. -- -- -- 4,254,236
Conversion of Series A convertible preferred
stock into common stock ....................... -- -- -- 24,530
Series A convertible stock dividends ............. -- -- (57,172) (57,172)
Net loss before preferred stock dividend ......... -- -- (1,112,336) (1,112,336)
----------- ----------- ----------- -----------
Balance at December 31, 1999 ..................... -- $ -- $(4,330,355) $ 3,112,352
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 22
CORNICHE GROUP INCORPORATED AND SUBSIDIARY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE NINE FOR THE YEAR
ENDED MONTHS ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
------------- ------------- -------------
1999 1998 1998
------------- ------------- -------------
(Consolidated) (Consolidated)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ................................................................... $ (1,169,508) $ (447,593) $ (263,865)
------------- ------------- -------------
Adjustments to reconciled net loss to net cash used in
operating activities:
Common shares and Series B preferred shares issued
for interest expense and for services rendered .......................... 57,719 6,000 --
Series A preferred stock dividends ......................................... 57,172 44,642 60,067
Depreciation and amortization .............................................. 82,338 3,435 388
Unearned revenues .......................................................... 298,801 -- --
Interest (decrease) in cash flows as a result of changes
in asset and liability account balance net of effects from purchase of
Stamford Insurance Company, Ltd.:
Deferred acquisition costs ................................................. (41,946) -- --
Prepaid expenses and other receivables ..................................... (71,622) 179 821
Other assets ............................................................... -- (12,525) --
Accounts payable, accrued expenses and other current
liabilities ............................................................. 422,929 82,729 (67,014)
------------- ------------- -------------
Total adjustments: ................................................... 805,391 124,460 (5,738)
------------- ------------- -------------
Net cash used in operating activities ............................................ (364,117) (323,133) (269,603)
------------- ------------- -------------
Cash flow from investing activities:
Investment in marketable securities ........................................ (2,105,444) (628,175) --
Acquisition of property assets ............................................. (442,157) (25,745) --
Acquisition of subsidiary .................................................. -- (37,000) --
------------- ------------- -------------
Net cash used in investment activities ........................................... (2,547,301) (690,920) --
------------- ------------- -------------
Cash flows from financing activities:
Net proceeds from issuance of capital stock ................................ 4,254,236 76,500 1,785,500
Net proceeds from long-term debt ........................................... 89,264 -- --
Payments of capital lease obligations ...................................... (3,922) (3,995) --
Net repayments of notes payable ............................................ -- -- (400,000)
------------- ------------- -------------
Net cash provided by financing activities ........................................ (4,339,578) 72,505 1,385,500
------------- ------------- -------------
Net increase (decrease) in cash .................................................. 1,428,160 (941,548) 1,115,897
Cash balance acquired with purchase of subsidiary ................................ -- 18,797 --
Cash and cash equivalents at beginning of period ................................. 206,313 1,129,064 13,167
------------- ------------- -------------
Cash and cash equivalents at end of period ....................................... $ 1,634,473 $ 206,313 $ 1,129,064
============= ============= =============
</TABLE>
F-7
<PAGE> 23
CORNICHE GROUP INCORPORATED AND SUBSIDIARY
STATEMENTS OF CASH FLOWS (continued)
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE NINE FOR THE YEAR
ENDED MONTHS ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
-------------- -------------- --------------
1999 1998 1998
-------------- -------------- --------------
(Consolidated) (Consolidated)
<S> <C> <C> <C>
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period:
Income taxes ........................................ $ -- $ -- $ --
-------------- ============== ==============
Interest ............................................ $ 35,193 $ 886 $ 4,181
-------------- ============== ==============
Supplemental Schedules of Noncash Investing
and Financing Activities:
Issuance of common stock for interest ..................... $ 27,719 $ -- $ --
-------------- ============== ==============
Issuance of preferred and common stock for
services rendered ...................................... $ 30,000 $ 6,000 $ --
-------------- ============== ==============
Property assets acquired under capital lease
obligations ............................................ $ -- $ 17,806 $ --
-------------- ============== ==============
Net accrual of dividends on Series A preferred stock ...... $ 51,353 $ 28,517 $ 60,067
-------------- ============== ==============
Series A preferred stock and dividends thereon
converted to common stock and additional
paid-in capital upon conversion ........................ $ 24,530 $ 81,268 $ 15,359
-------------- ============== ==============
Issuance of common stock for indebtedness ................. $ 253,182 $ -- $ --
-------------- ============== ==============
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE> 24
CORNICHE GROUP INCORPORATED AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
AS AT DECEMBER 31, 1999 AND 1998 AND
FOR THE YEARS ENDED DECEMBER 31, 1999,
FOR THE NINE MONTHS ENDED DECEMBER 31, 1998 AND
FOR THE YEAR ENDED MARCH 31, 1998
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.
The unaudited consolidated combined results of operations, on a pro
forma basis as though Stamford has been acquired at the beginning of each
period, is as follows:
<TABLE>
<CAPTION>
FOR THE NINE FOR THE YEARS
MONTHS ENDED ENDED
DECEMBER 31, MARCH 31,
------------ -------------
1998 1998
------------ -------------
<S> <C> <C>
Revenues ................ $ -- $ --
------------ ------------
Costs and expenses ...... 511,335 232,824
------------ ------------
Net loss ................ $ (527,991) $ (268,321)
============ ============
Net loss per share ...... $ (0.08) $ (0.05)
============ ============
</TABLE>
F-9
<PAGE> 25
At December 31, 1999 and 1998, Stamford's total net assets
consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
Assets:
Cash and equivalents ........................ $ 384,849 $ 155,806
Deferred acquisition costs .................. 35,568 --
Licenses, net of accumulated depreciation ... 16,777 17,997
---------- ----------
437,194 173,803
---------- ----------
Liabilities:
Current liabilities ......................... $ 5,021 $ 879
Unearned premiums ........................... 288,086 --
---------- ----------
293,107 879
---------- ----------
Net assets ........................................ $ 144,087 $ 172,924
</TABLE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
(a) Basis of Presentation:
On February 4, 1999, the Board of Directors approved a
resolution to change the Company's fiscal year-end from March 31, to
December 31. The accompanying financial statements as at and for the year
ended December 31, 1999 reflect the consolidated financial position and
consolidated results of operations and cash flows of the Company and its
wholly-owned subsidiary, Stamford, for the year ended December 31, 1999.
The financial statements as at and for the nine months ended
December 31, 1999 reflect the consolidated financial position and
consolidated results of operations and cash flows of the Company for the
nine months ended December 31, 1998 and its wholly-owned subsidiary from
its acquisition on September 30, 1998 to December 31, 1998. The financial
statements for the year ended March 31, 1998 reflect the financial
position and results of operations and cash flows of the Company for the
year then ended. All material intercompany transactions have been
eliminated in consolidation.
(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 it domestic operations cash
accounts with high credit quality financial institutions which at times
may be in excess of the FDIC insurance limit. The Company's subsidiary
places its cash in the Cayman Island subsidiaries of domestic banks whose
net worth exceeds $100,000,000. The Company's marketable securities are
primarily comprised of
F-10
<PAGE> 26
investments in municipal bank funds. The Company employs the services of
an investment advisor to assist in monitoring its investments.
(e) Marketable Securities:
Marketable securities are classified as trading securities and
are reported at market value at December 31, 1999 and 1998 which
approximates cost.
(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 fiscal 1999 was
$1,220 and in the nine months ended December 31, 1998 was $305.
(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 December
31, 1999 and 1998, the carrying values of the Company's other assets and
liabilities approximate their estimated fair values.
(j) Advertising Costs:
The Company expenses advertising costs as incurred.
Advertising costs amounted to $252,983 in fiscal 1999 and none for the
nine months ended December 31, 1998 and year ended March 31, 1998.
(k) Earnings Per Share:
The Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share," in the year ended March 31, 1998.
Basic earnings per share is based on the weighted effect of all common
shares issued and outstanding, and is calculated by dividing net income
available to common stockholders by the weighted average shares
outstanding during the period. Diluted earnings per share, which is
calculated by dividing net income available to common stockholders by the
weighted average number of common shares used in the basic earnings per
share calculation plus the number of common shares that would be issued
assuming conversion of all potentially dilutive securities outstanding, is
not presented as it is anti- dilutive in all periods.
F-11
<PAGE> 27
(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 rated "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.
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 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>
DECEMBER 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Computer equipment ..................... $ 116,660 $ 3,906
Furniture and fixtures ................. 23,266 23,266
Computer software ...................... 582,585 --
------------ ------------
722,511 27,172
Less: Accumulated depreciation ........ 77,896 2,713
------------ ------------
644,615 24,459
------------ ------------
Lease property under capital lease:
Office equipment ................. 17,806 17,806
Less: Accumulated depreciation ........ 7,419 1,484
------------ ------------
10,387 16,322
------------ ------------
$ 655,002 $ 40,781
============ ============
</TABLE>
F-12
<PAGE> 28
Depreciation and amortization charged to operations was $81,118, $3,130 and
$388, for the year ended December 31, 1999, for the nine months ended December
31, 1998 and for the year ended March 31, 1998, respectively.
The estimated present value of the capital lease obligations at December
31, 1999 reflects imputed calculated at 12.7% and 19.32%. The obligations are
payable in equal monthly installments through January 2002 as follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
----------------
<S> <C>
2000 $ 7,115
2001 5,181
2002 317
-------
12,613
Amount representing interest .............. 2,630
-------
Present value of minimum lease payments ... 9,983
Present value of minimum lease payments due
within one year ........................ 5,392
-------
Present value of minimum lease payments due
after one year $ 4,591
=======
</TABLE>
The aggregate maturities of the present value of the minimum lease
obligations is as follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
------------
<S> <C>
2000 $5,392
2001 4,294
2002 297
------
9,983
======
</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>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Accrued offering costs ................. $419,120 $ --
Accrued professional fees .............. 41,534 80,000
Advertising ............................ 69,427 --
Other .................................. 26,789 11,956
Due to related party (see Note 10) ..... -- 41,985
Accrued claims losses .................. 5,000 --
-------- --------
$556,870 $133,941
======== ========
</TABLE>
NOTE 5 - NOTES PAYABLE.
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 1993, as amended. The offering consists of
F-13
<PAGE> 29
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 Robert M. Cohen & Co. ("RMCC"). In connection with such
offering, RMCC was paid sales commissions equal to 10% of the purchase price of
each unit sold or $2,500 per unit.
The notes payable relating to the above offering were paid in full and the
warrants were simultaneously redeemed during the year ended March 31, 1998 with
funds generated from the sale of stock (see Note 8).
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 notes were repaid in full
in December 31, 1999. At December 31, 1999, accrued interest on the notes of
$3,025 remained outstanding and was repaid in January, 2000. The effective
weighted average interest rate of the notes during the period they were
outstanding was 49.2%.
NOTE 6 - LONG-TERM DEBT.
Long-term debt consists of the following at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Capital lease obligations (see Note 3) ...... $ 9,983 $13,911
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 ... 89,270 --
------- -------
99,253 13,911
Portion payable within one year ............. 22,662 4,649
------- -------
$76,591 $ 9,262
------- -------
</TABLE>
The aggregate maturities of the obligations is as follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
---------------
<S> <C>
2000 $22,662
2001 23,459
2002 20,616
2003 22,525
2004 9,991
-------
$99,253
=======
</TABLE>
NOTE 7 - SERIES A CONVERTIBLE PREFERRED STOCK.
In connection with the settlement of a securities class action litigation
in 1994, the Company issued 1,000,000 shares of Series A $0.07 Convertible
Preferred Stock (the "Series A Preferred Stock") with an aggregate value of
$1,000,000. The following summarizes the terms of Series A Preferred Stock as
more fully set forth in the Certificate of Designation. The Series A Preferred
Stock has a liquidation value of $1 per share, is non-voting and
F-14
<PAGE> 30
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 trade 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 nine months ended December 31, 1998, 65,143 shares
of the Series A Preferred Stock were converted into 12,525 shares of common
stock. During the year ended March 31, 1998, holders of 15,359 shares of the
Series A Preferred Stock converted such shares into 2,953 shares of the
Company's common stock. At December 31, 1999, 810,054 shares of Series A
Preferred Stock were outstanding, and accrued dividends on these outstanding
shares are $288,334.
NOTE 8 - STOCKHOLDER'S EQUITY.
(a) Series B Convertible Redeemable Preferred Stock:
On March 4, 1998, the Company entered into a Stock Purchase Agreement
("Agreement"), approved by the Company's stockholders on May 18, 1998, with
certain individuals (the "Initial Purchasers") whereby the Initial
Purchasers and two other persons acquired an aggregate of 825,000 shares of
a newly created Series B Convertible Redeemable Preferred Stock ("Series B
Stock"), par value $0.01 per share.
Pursuant to the Agreement and subsequent transactions, the Initial
Purchasers acquired 765,000 shares of Series B Stock for $76,500 in cash.
The Company incurred certain legal expenses of the Initial Purchasers
equaling approximately $50,000 in connection with the transaction. In
addition, the Company issued 50,000 shares of Series B Stock to 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 Stock to James
Fyfe as compensation valued at $1,000 for his work in bringing this
transaction to fruition. These issuances diluted the voting rights of the
then existing stockholders by approximately 57%. The total authorized
shares of Series B Convertible Redeemable Preferred Stock are 825,000.
The following summarizes the terms of the Series B Stock whose terms
are more fully set forth in the Certificate of Designation. The Series B
Stock carries a zero coupon and each share of the Series B Stock is
convertible into ten shares of the Company's common stock. The holder of a
share of the Series B Stock is entitled to ten times any dividends paid on
the common stock and such stock has ten votes per share and vote as one
class with the common stock. Accordingly, the Initial Purchasers have
sufficient voting power to elect all of the Board of Directors. However,
the Initial Purchasers are required to vote in favor of Mr. Fyfe or his
designee as a director of the Corporation through June 30, 2000.
The holder of any share of Series B Convertible Redeemable Preferred
Stock has the right, at such holder's option (but not if such share is
called for redemption), exercisable on or after September 30, 2000, to
convert such share into ten (10) fully paid and non-assessable shares of
common stock (the "Conversion Rate"). The Conversion Rate is subject to
adjustment as stipulated in the Agreement. Upon liquidation, the Series B
Stock would be junior to the Corporation's Series A Preferred Stock and
would share ratably with the common stock with respect to liquidating
distributions.
F-15
<PAGE> 31
Since, 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 shares for 10 consecutive
trading days, then 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 Stock from the holders for total consideration of $0.10
per share was eliminated.
(b) Common Stock:
On May 15, 1997, the Company commenced a private securities offering
pursuant to Rule 506 of Regulation D of the Securities Act of 1933, as
amended, of up to 400 units, each unit consisting of 10,000 shares of
common stock being offered at a price of $5,000 per unit. The Company used
a placement agent for such offering who received a sales commission equal
to 10% of the offering price of each unit sold. In connection with the
offering, 369 units were sold for gross receipts of $1,845,000 from which
the agent was paid a commission $184,500 for net of $1,660,500 to the
Company.
In March 1998, the Company sold 250,000 shares of common stock at $.50
per share realizing $125,000.
The stockholders at the annual meeting held on May 18, 1998, approved
the reduction of the par value of the common stock from $0.10 per share to
$0.001 per share.
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 Option 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.
F-16
<PAGE> 32
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. During the
year ended December 31, 1999, the nine months ended December 31, 1998 and
the year ended March 31, 1998, no options were granted, expired, exercised
or outstanding at any time under the 1986 Plan.
In April 1992, the Company adopted the 1992 Stock Option Plan to
provide for the granting of options to directors. According to the terms of
this plan, each director is granted options to purchase 1,500 shares each
year. The maximum amount of the Company's common stock that may be granted
under this plan is 20,000 shares. Options are exercisable at the fair
market value of the common stock on the date of grant and have five year
terms.
Under the 1998 Plan, the maximum aggregate number of shares which may
be issued under options is 300,000 shares of common stock. The aggregate
fair market value (determined at the time the option is granted) of the
shares for which incentive stock options are exercisable for the first time
under the terms of the 1998 Plan by any eligible employee during any
calendar year cannot exceed $100,000. The option exercise price of each
option is 100% of the fair market value of the underlying stock on the date
the options are granted, except that no option will be granted to any
employee who, at the time the option is granted, owns stock possessing more
than 10% of the total combined voting power of all classes of stock of the
Corporation or any subsidiary unless (a) at the time the options are
granted, the option exercise price is at least 110% of the fair market
value of the shares of common stock subject to the 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 will be 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 and an option to acquire 25,000 common
shares at $0.6875 per share was issued to a consultant were granted under
the 1998 Plan. In May 1997, a director was granted an option to acquire
1,500 common shares at $0.3125 per share were granted under the 1992 Plan.
Information with respect to options under the 1986, 1992 and 1998
Stock Option Plans is summarized as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE NINE MONTHS ENDED FOR THE YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998 MARCH 31, 1998
------------------------ ------------------------------- ------------------------
SHARES PRICES SHARES PRICES SHARES PRICES
------- -------------- -------------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period ............... 3,000 $0.31 to $0.41 3,000 $0.31 to $0.41 1,500 $0.41
Granted .................... 125,000 $0.69 to $1.00 -- -- 1,500 $0.31
Converted .................. -- -- -- -- -- --
Expired .................... -- -- -- -- -- --
Exercised .................. -- -- -- -- -- --
------- -------------- -------------- -------------- ------- --------------
Outstanding at end of period 128,000 $0.31 to $1.00 3,000 $0.31 to $0.41 3,000 $0.31 to $0.41
======= ============== ============== ============== ======= ==============
</TABLE>
Outstanding options expire 90 days after termination of holder's
status as employee or director. At December 31, 1999 and 1998, 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.
F-17
<PAGE> 33
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 $7,750 for the year ended December 31, 1999 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 .............. $(1,169,508)
Additional compensation ........... 7,750
-----------
Adjusted net loss ................. $(1,177,258)
===========
Loss per share as reported ........ $ (0.17)
===========
Adjusted loss per share ........... $ (0.17)
===========
</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 nine months ended
December 31, 1998 and the year ended March 31, 1998.
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 NINE MONTHS
FOR THE YEAR ENDED ENDED FOR THE YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998 MARCH 31, 1998
-------------------- -------------------- --------------------
(Consolidated) (Consolidated)
<S> <C> <C> <C>
Loss before income taxes and
preferred dividend .................. $(1,112,336) % $ (402,951) % $ (203,798) %
----------- ----- ----------- ----- ----------- -----
Computed tax benefit at statutory
rate ................................ $ (378,000) (34.0) $ (137,000) (34.0) $ (69,300) (34.0)
Compensatory element of common
stock issuances ..................... 19,600 1.8 -- -- -- --
Foreign subsidiary loss not
subject to U.S. taxes ............... 9,800 0.9 300 -- -- --
Net operating loss valuation reserve ... 348,600 31.3 136,700 34.0 69,300 34.0
----------- ----- ----------- ----- ----------- -----
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 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
F-18
<PAGE> 34
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.
NOTE 10 - COMMITMENTS, CONTINGENCIES AND OTHER.
(a) Leases:
Commencing in August 1998, the Company entered into short-term
operating leases for its general office space and certain office equipment.
Prior to August 1998, the Company did not incur rent expense as it was
inactive. Rent expense charged to operations for the year ended December
31, 1999 and for the nine months ended December 31, 1998 was $63,162 and
$23,000 and none for the year ended March 31, 1998. Future minimum annual
rent commitments under operating leases as of December 31, 1999 are as
follows:
<TABLE>
YEARS ENDING
DECEMBER 31,
-----------------
<S> <C>
2000 $ 54,000
2001 33,000
2002 3,000
--------------
Total minimum annual rentals............................ $ 90,000
==============
</TABLE>
(b) Web Site:
At December 31, 1998, a liability in the amount of $41,985 was owed to
Warrantech Corporation, an affiliate, for expenses associated with a Web
Site that were incurred by the Company. They are included in accounts
payable, accrued expenses and other current liabilities in the accompanying
financial statements. The affiliate had paid the vendors on the Company's
behalf for their services.
(c) Investment Contract:
The Corporation has entered into an investment advisory agreement with
AIG Global Investment Corporation ("AIG") under which AIG will function as
investment advisor and manager of all the Corporation's investable assets.
AIG provides management services to all affiliated insurance companies of
American International Group and other third-party institutions on a
world-wide basis.
(d) Year 2000:
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. If, despite the
Company's effects under its Year 2000 related failures affecting the
Company from outside sources, management at the present time does not
believe the impact will be substantial.
F-19
<PAGE> 35
CORNICHE GROUP INCORPORATED AND SUBSIDIARY
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COL. A COL. B COL. C
- --------------------------------------------------------------- ------------------- -----------------------------------
BALANCE AT CHARGED TO ACQUISITION OF
BEGINNING OF PERIOD COSTS AND EXPENSES SUBSIDIARIES
------------------- ------------------ --------------
<S> <C> <C> <C>
For the year ending March 31, 1998:
Reserve against notes receivable in default.............. $ 75,000 $ -- $ --
For the nine months ended December 31, 1998:
Reserve against notes receivable in default.............. 75,000 -- --
For the year ended December 31, 1999: 75,000 -- --
Reserve against notes receivable in default..............
</TABLE>
<TABLE>
<CAPTION>
COL. A COL. D COL. E
- --------------------------------------------------------------- ---------- -------------
DEDUCTIONS BALANCE AT
DESCRIBE END OF PERIOD
---------- -------------
<S> <C> <C>
For the year ending March 31, 1998:
Reserve against notes receivable in default.............. $ -- $ 75,000
For the nine months ended December 31, 1998:
Reserve against notes receivable in default.............. -- 75,000
For the year ended December 31, 1999: -- 75,000
Reserve against notes receivable in default..............
</TABLE>
F-20
<PAGE> 36
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <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 Company, the Bank of Scotland
and 12 buyers (10) 10(m)
(d) Mutual Release dated as of January 30, 1997 by and among
the Company, James Fyfe and the Bank of Scotland (10) 10(n)
(e) Stock Purchase Agreement, dated as of March 4, 1998, between
the Company and the Initial Purchasers named therein (12) B
(f) 1998 Employees Stock Option Plan (12) D
27 Financial Data Schedule, filed herewith.
- ------------------------
Notes:
(1) Filed with the Securities and Exchange Commission as an exhibit,
numbered as indicated above, to the Company's registration statement on
Form S-18, File No. 2-69627, which exhibit is incorporated here by
reference.
(2) Filed with the Securities and Exchange Commission as an exhibit,
numbered as indicated above, to the Company's registration statement on
Form S-2, File No. 2-88712, which exhibit is incorporated here by
reference.
(7) Filed with the Securities and Exchange Commission as an exhibit,
numbered as indicated above, to the Company's annual report on Form
10-K for the year ended September 30, 1994, which exhibit is
incorporated here by reference.
(8) Filed with the Securities and Exchange Commission as an exhibit, as
indicated above, to the Company's proxy statement dated March 30, 1992,
which exhibit is incorporated here by reference.
(9) Filed with the Securities and Exchange Commission as an exhibit,
numbered as indicated above, to the current report of the Company on
Form 8-K, dated April 5, 1995, which exhibit is incorporated here by
reference.
(10) Filed with the Securities and Exchange Commission as an exhibit,
numbered as indicated above, to the Company's annual report on Form
10-K for the year ended March 31, 1996, which exhibit is incorporated
here by reference.
(11) Filed with the Securities and Exchange Commission as an exhibit,
numbered as indicated above, to the Company's annual report on Form
10K/A for the year ended March 31, 1996, which exhibit is incorporated
here by reference.
(12) Filed with the Securities and Exchange Commission as an exhibit, as
indicated above, to the Company's proxy statement dated April 23, 1998,
which exhibit is incorporated here by reference.
</TABLE>
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