<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
--------- ---------
Commission file number 0-10909
CORNICHE GROUP INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 22-2343568
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
610 SOUTH INDUSTRIAL BLVD., SUITE 220
EULESS, TEXAS 76040
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: 817-283-4250
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
14,226,620 SHARES, $.001 PAR VALUE, AS OF OCTOBER 1, 2000
(Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date)
Page 1 of 30
<PAGE> 2
CORNICHE GROUP INCORPORATED AND SUBSIDIARY
September 30, 2000
(Unaudited)
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
Part I - Financial Information:
Item 1. Consolidated Financial Statements (Unaudited):
Balance Sheets
At September 30, 2000 and December 31, 1999 .................................... 3-4
Statements of Operations
For the Nine and Three Months
Ended September 30, 2000 and 1999 .............................................. 5
Statements of Convertible Redeemable Preferred
Stock, Common Stock, Other Stockholders' Equity
and Accumulated Deficit
For the Nine Months Ended September 30, 2000 ................................... 6
Statements of Cash Flows
For the Nine Months Ended September 30, 2000 and 1999 .......................... 7-8
Notes to Consolidated Financial Statements ..................................... 9-23
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations .................................. 24-27
Part II - Other Information:
Item 6 ..................................................................... 28
Signatures ..................................................................... 29
</TABLE>
Page 2 of 30
<PAGE> 3
CORNICHE GROUP INCORPORATED AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
<S> <C> <C>
Current assets:
Cash and equivalents $ 1,144,755 $ 1,639,473
Marketable securities 2,980,292 2,733,319
Prepaid expenses and other current assets 240,721 71,622
------------ ------------
Total current assets 4,365,768 4,444,414
Property and equipment, net 547,533 655,002
Deferred acquisition costs 43,048 41,946
License, net of accumulated amortization 15,862 16,777
Other assets 4,175 12,525
------------ ------------
$ 4,976,386 $ 5,170,664
============ ============
</TABLE>
See accompanying notes to financial statements.
Page 3 of 30
<PAGE> 4
CORNICHE GROUP INCORPORATED AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
--------------- ---------------
<S> <C> <C>
Current liabilities:
Dividends payable - preferred stock $ 278,751 $ 288,334
Accounts payable, accrued expenses
and other current liabilities 201,520 561,870
Current portion of long-term debt 23,227 22,662
--------------- ---------------
Total current liabilities 503,498 872,866
--------------- ---------------
Unearned revenues 740,283 298,801
--------------- ---------------
Long-term debt 58,609 76,591
--------------- ---------------
Series A Convertible Preferred Stock:
Series A $0.07 cumulative convertible preferred
stock - stated value - $1.00 per share,
authorized - 1,000,000 shares, outstanding -
681,174 shares at September 30, 2000 and
810,054 shares at December 31, 1999 681,174 810,054
--------------- ---------------
Convertible Redeemable Preferred Stock,
Common Stock, Other Stockholders'
Equity and Accumulated Deficit:
Preferred stock - authorized - 5,000,000 shares
Series B convertible redeemable preferred
stock, $0.1 par value, authorized, issued
and outstanding - 825,000 shares 8,250 8,250
Common stock, $.001 par value, authorized -
75,000,000 shares, issued and outstanding -
14,226,620 shares at September 30, 2000 and
12,513,127 shares at December 31, 1999 14,229 12,513
Additional paid-in capital 8,829,438 7,421,944
Accumulated deficit (5,859,095) (4,330,355)
--------------- ---------------
Total convertible redeemable preferred stock,
common stock, other stockholders' equity 2,992,822 3,112,352
--------------- ---------------
$ 4,976,386 $ 5,170,664
=============== ===============
</TABLE>
See accompany notes to financial statements
Page 4 of 30
<PAGE> 5
CORNICHE GROUP INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Nine For the Three
Months Ended Months Ended
September 30, September 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Earned revenues $ 331,756 $ 60 $ 56,207 $ 60
Direct costs 163,841 5 57,261 5
------------ ------------ ------------ ------------
Gross profit (loss) 167,915 55 (1,054) 55
General and administrative
expenses 1,831,321 1,429,602 1,007,280 429,839
------------ ------------ ------------ ------------
Operating loss (1,663,406) (1,429,547) (1,008,334) (429,784)
------------ ------------ ------------ ------------
Other income (expense):
Unrealized gain on
marketable securities 14,408 2,748 --
Realized gain on
marketable securities 14,986 -- 14,986
Interest income 148,433 7,752 57,174 1,787
Interest expense (6,870) -- (2,231) --
------------ ------------ ------------ ------------
Total other income (expense) 170,957 7,752 72,677 1,787
------------ ------------ ------------ ------------
Loss before preferred dividend (1,492,449) (1,421,795) (935,657) (427,997)
Preferred dividend 36,291 42,706 11,921 13,992
------------ ------------ ------------ ------------
Net loss $ (1,528,740) $ (1,464,501) $ (947,578) $ (441,989)
============ ============ ============ ============
Net loss per share of
common stock $ (0.11) $ (0.22) $ (0.07) $ (0.06)
============ ============ ============ ============
Weighted average number of
common shares outstanding 13,954,840 6,577,012 13,954,840 6,944,924
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
Page 5 of 30
<PAGE> 6
CORNICHE GROUP INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONVERTIBLE REDEEMABLE PREFERRED STOCK, COMMON STOCK,
OTHER STOCKHOLDERS' EQUITY AND ACCUMULATED DEFICIT
FOR THE NINE MONTHS ENDED September 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
Series B
Convertible
Preferred Stock Common Stock Additional
------------------------ ------------------------ Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit Total
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - January 1, 2000 825,000 $ 8,250 12,513,127 $ 12,513 $ 7,421,944 $(4,330,355) $ 3,112,352
Issuance of common stock for
cash, net of offering costs -- -- 1,676,250 1,676 1,205,094 -- 1,206,770
Issuance of common stock for
services rendered -- -- 12,500 13 25,488 -- 25,501
Conversion of Series A
Convertible Preferred
Stock into Common Stock -- -- 24,743 25 174,725 -- 174,750
Series A Convertible
Stock dividends -- -- -- -- -- (36,291) (36,291)
Net loss before preferred
stock dividend -- -- -- -- -- (1,492,449) (1,492,449)
Shares to be issued for
services rendered -- -- 1,750 2 2,187 -- 2,189
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance - September 30, 2000 825,000 $ 8,250 14,228,370 $ 14,229 $ 8,829,438 $(5,859,095) $ 2,992,822
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
Page 6 of 30
<PAGE> 7
CORNICHE GROUP INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Nine
Months Ended
September 30,
---------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,528,740) $ (1,464,501)
--------------- ---------------
Adjustments to reconcile net loss to net
cash used in operating activities:
Unrealized gain on marketable securities (14,408) --
Realized gain on marketable securities (14,986)
Issuance of common stock for services rendered 27,690
Series A preferred stock dividends 36,291 42,706
Depreciation and amortization 115,123 16,145
Unearned revenues 441,482 1,350
Deferred acquisition costs (1,102) --
Increase (decrease) in cash flows as
a result of changes in asset and
liability account balances:
Prepaid expenses and other current assets (169,099) (16,176)
Other Assets 8,350
Accounts payable, accrued expenses
and other current liabilities (360,350) 265,927
--------------- ---------------
Total adjustments 68,991 309,952
--------------- ---------------
Net cash used in operating activities (1,459,749) (1,154,549)
--------------- ---------------
Cash flows from investing activities:
(Increase) decrease in marketable securities (217,579) 595,140
Acquisition of property assets (6,739) (103,618)
--------------- ---------------
Net cash provided by (used in) investment activities (224,318) 491,522
--------------- ---------------
Cash flows from financing activities:
Net proceeds from issuance of capital stock - net 1,206,766 574,527
Payments of capital lease obligations (4,505) (8,817)
Proceeds from notes payable -- 98,659
Repayments of notes payable (12,912) --
--------------- ---------------
Net cash provided by financing activities 1,189,349 664,369
--------------- ---------------
Net increase (decrease) in cash (494,718) 1,342
Cash and cash equivalents at beginning of period 1,639,473 206,313
--------------- ---------------
Cash and cash equivalents at end of period $ 1,144,755 $ 207,655
=============== ===============
</TABLE>
See notes to financial statements.
Page 7 of 30
<PAGE> 8
CORNICHE GROUP INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
<TABLE>
<CAPTION>
For the Nine
Months Ended
September 30,
---------------------------
2000 1999
------------ ------------
<S> <C> <C>
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period:
Income taxes $ -- $ --
============ ============
Interest paid $ 6,870 $ 2,100
============ ============
Supplemental Schedules of Noncash Financing Activities:
Series A Preferred Stock and dividends thereon
converted to common stock and additional
paid-in capital upon conversion $ 161,603 $ 28,714
============ ============
Issuance of common stock for
services rendered $ 27,690 $ --
============ ============
</TABLE>
See notes to financial statements.
Page 8 of 30
<PAGE> 9
CORNICHE GROUP INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
NOTE 1 - THE COMPANY.
Corniche Group Incorporated (hereinafter referred to as the "Company"
or "CGI") as a result of a reverse acquisition with Corniche Distribution
Limited and its Subsidiaries ("Corniche"), was engaged in the retail sale
and wholesale distribution of stationery products and related office
products, including office furniture, in the United Kingdom. In February
1996, the Company was placed in receivership by its creditors. Through
March 1998, the Company had no activity.
On March 4, 1998, the Company entered into a Stock Purchase Agreement
("Agreement"), approved by the Company's stockholders on May 18, 1998, with
certain individuals (the "Initial Purchasers") whereby the Initial
Purchasers acquired an aggregate of 765,000 shares of a newly created
Series B Convertible Redeemable Preferred Stock, par value $0.01 per share.
Thereafter the Initial Purchasers have been endeavoring to establish for
the Company new business operations in the property and casualty specialty
insurance and the service contract markets.
On September 30, 1998, the Company acquired all of the capital stock
of Stamford Insurance Company, Ltd. ("Stamford") from Warrantech
Corporation for $37,000 in cash in a transaction accounted for as a
purchase. Warrantech's chairman is the former chairman of the Company.
Stamford was charted under the Laws of, and is licensed to conduct business
as an insurance company by, the Cayman Islands. Although Stamford has
incurred expenses since its inception, it first generated revenues in the
fourth quarter of 1999.
Page 9 of 30
<PAGE> 10
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
(a) Basis of Presentation:
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions for Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
the statements contain all adjustments (consisting only of normal recurring
accruals) necessary to present fairly the financial position as of
September 30, 2000 and the results of operations and cash flows for the
nine and three months ended September 30, 2000 and 1999. The results of
operations for the nine and three months ended September 30, 2000 and 1999
are not necessarily indicative of the results to be expected for the full
year.
The December 31, 1999 balance sheet has been derived from the audited
financial statements at that date included in the Company's annual report
on Form 10-K. These unaudited financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's annual report on Form 10-K.
(b) Cash Equivalents:
Short-term cash investments which have a maturity of ninety days or
less when purchased are considered cash equivalents in the statement of
cash flows.
(c) Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
(d) Concentrations of Credit-Risk:
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of cash and
marketable securities. The Company places its domestic operations cash
accounts with high credit quality financial institutions, which at times
may be in excess of the FDIC insurance limit. The Company's subsidiary
places its cash in the Cayman Island subsidiaries of domestic banks whose
net worth exceeds $100,000,000. The Company's marketable securities are
primarily comprised of investments in treasury note bank funds. The Company
employs the services of an investment advisor to assist in monitoring its
investments.
Page 10 of 30
<PAGE> 11
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. (Continued)
(e) Marketable Securities:
Marketable securities are classified as trading securities and are
reported at market value. At September 30, 2000, the market value of
securities exceeded their cost by $14,408. The market value of the\
investment approximated cost at December 31, 1999.
(f) Property and Equipment:
The cost of property and equipment is depreciated over the estimated
useful lives of the related assets of 5 to 7 years. The cost of computer
software programs is amortized over their estimated useful lives of seven
years. Depreciation is computed on the straight-line method. Repairs and
maintenance expenditures which do not extend original asset lives are
charged to income as incurred.
(g) Intangibles:
The excess of the purchase price for the capital stock of Stamford
over the net assets acquired has been attributed to the subsidiary's
license to conduct business as an insurance carrier in the Cayman Islands.
Amortization charged to operations in the nine months ended September 30,
2000 and 1999 was $915, in each period, and for the three months ended
September 30, 2000 and 1999 was $305, in each period.
(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 September 30, 2000 and December 31, 1999, the
carrying values of the Company's other assets and liabilities approximate
their estimated fair values.
Page 11 of 30
<PAGE> 12
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. (Continued)
(j) Advertising Costs:
The Company expenses advertising costs as incurred. Advertising costs
amounted to $782,902 and $500,381 for the nine and three months ended
September 30, 2000 and none for the nine and three months ended September
30, 1999.
(k) Earnings Per Share:
The Company adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share". Basic earnings per share is based on the
weighted effect of all common shares issued and outstanding, and is
calculated by dividing net income available to common stockholders by the
weighted average shares outstanding during the period. Diluted earnings per
share, which is calculated by dividing net income available to common
stockholders by the weighted average number of common shares that would be
issued assuming conversion of all potentially dilutive securities
outstanding, is not presented as it is anti-dilutive in all periods.
(l) Recently Issued Accounting Pronouncements:
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130 - "Reporting Comprehensive Income", No. 131 -
"Disclosures about Segments of an Enterprise and Related Information", No.
132 - "Employer's Disclosures about Pension and Other Postretirement
Benefits" and No. 133 - "Accounting for Derivative Instruments and Hedging
Activities". Management does not believe that the effect of implementing
these new standards will be material to the Company's financial position,
results of operations and cash flows.
(m) Revenue Recognition:
Stamford is a property and casualty reinsurance company writing
reinsurance coverages for one domestic carrier's consumer products service
contracts. The domestic carrier is rated Excellent by A.M. Best.
Premiums are recognized on a pro rata basis over the policy term. The
deferred policy acquisition costs are the net cost of acquiring new and
renewal insurance contracts. These costs are charged to expense in
proportion to net premium revenue recognized.
Page 12 of 30
<PAGE> 13
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. (Continued)
(m) Revenue Recognition: (Continued)
The provisions for losses and loss-adjustment expenses include an
amount determined from loss reports on individual cases and an amount based
on past experience for losses incurred but not reported. Such liabilities
are necessarily based on estimates, and while management believes that the
amount is adequate, the ultimate liability may be in excess of or less than
the amounts provided. The methods for making such estimates and for
establishing the resulting liability are continually reviewed, and any
adjustments are reflected in earnings currently.
The parent company sells via the Internet directly to consumers
extended warranty service contracts for seven major consumer products. 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>
September 30, December 31,
2000 1999
--------------- ---------------
<S> <C> <C>
Computer equipment $ 116,660 $ 116,660
Furniture and fixtures 23,266 23,266
Computer software 589,324 582,585
--------------- ---------------
729,250 722,511
Less: Accumulated depreciation 187,653 77,896
--------------- ---------------
541,597 644,615
--------------- ---------------
Lease property under capital lease:
Office equipment 17,806 17,806
Less: Accumulated depreciation 11,870 7,419
--------------- ---------------
5,936 10,387
--------------- ---------------
$ 547,533 $ 655,002
=============== ===============
</TABLE>
Depreciation and amortization charged to operations was $115,123 and
$16,145 for the nine months ended September 30, 2000 and 1999,
respectively, and $38,546 and $5,279 for the three months ended September
30, 2000 and 1999, respectively.
Page 13 of 30
<PAGE> 14
NOTE 3 - PROPERTY AND EQUIPMENT. (Continued)
The estimated present value of the capital lease obligations at
September 30, 2000 reflects imputed interest calculated at 12.7% and
19.32%. The obligations are payable in equal monthly installments through
February 2002 as follows:
<TABLE>
<CAPTION>
Year Ending
September 30,
---------------
<S> <C> <C>
2001 $ 5,750
2002 650
---------------
6,400
Amount representing interest 921
---------------
Present value of minimum
lease payments 5,479
Present value of minimum lease
payments due within one year 3,244
---------------
Present value of minimum lease
payments due after one year $ 2,235
===============
</TABLE>
The aggregate maturities of the present value of the minimum lease
obligation is as follows:
<TABLE>
<CAPTION>
Year Ending
September 30,
---------------
<S> <C>
2001 $ 4,656
2002 $ 823
---------------
$ 5,479
</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>
September 30, December 31,
2000 1999
--------------- ---------------
<S> <C> <C>
Accrued offering costs $ -- $ 419,120
Accrued professional fees 68,643 41,534
Advertising 11,375 69,427
Insurance 25,612 --
Other 85,890 26,789
Accrued claims losses 10,000 5,000
--------------- ---------------
$ 201,520 $ 561,870
=============== ===============
</TABLE>
Page 14 of 30
<PAGE> 15
NOTE 5 - NOTES PAYABLE.
In October 1999, the Company sold to accredited investors 10 units of
its promissory notes and common stock for $25,025 each. Each unit was
comprised of a 5% interest bearing $25,000 note and 25,000 shares. The
variance between the fair market value of the 25,000 common shares issued
in the aggregate of $27,969 and the cash received of $250 was deemed to be
additional interest and was charged to operations over the life of the
notes. The principal on the notes were repaid in full on December 31, 1999.
At December 31, 1999, accrued interest on the notes of $3,025 remained
outstanding and was repaid in January, 2000.
NOTE 6 - LONG-TERM DEBT.
Long-term debt consists of the following at September 30, 2000 and
December 31, 1999:
<TABLE>
<CAPTION>
September 30 December 31,
2000 1999
------------ ------------
<S> <C> <C>
Capital lease obligations $ 5,479 $ 9,983
Note payable - bank - in equal monthly
installments of $2,043 including interest
at 8-3/4%. The notes are collateralized
by computer equipment having an
undepreciated cost of $65,259 $ 76,357 89,270
------------ ------------
81,836 99,253
Portion payable within one year 23,227 22,662
------------ ------------
$ 58,609 $ 76,591
============ ============
</TABLE>
The aggregate maturities of the obligations are as follows:
<TABLE>
<CAPTION>
Years Ending
September 30,
---------------
<S> <C>
2001 $ 23,227
2002 21,085
2003 22,108
2004 15,416
---------------
$ 81,836
===============
</TABLE>
Page 15 of 30
<PAGE> 16
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 the
Series A Preferred Stock as more fully set forth in the Certificates of
Designation. The Series A Preferred Stock has a liquidation value of $1 per
share, is non-voting and convertible into common stock of the Company at a
price of $5.20 per share. Holders of Series A Preferred Stock are entitled
to receive cumulative cash dividends of $0.07 per share, per year, payable
semi-annually. Until November 30, 1999 one 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 September 30, 2000, holders of
128,800 shares of the Series A Preferred Stock converted such shares into
24,743 shares of the Company's common stock. At September 30, 2000 and
December 31, 1999, 681,174 and 810,054 shares of Series A Preferred Stock
were outstanding, respectively. At September 30, 2000 and 1999, and accrued
dividends on these outstanding shares were $278,751 and $274,198,
respectively.
NOTE 8 - STOCKHOLDERS' 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.
Page 16 of 30
<PAGE> 17
(b) NOTE 8 - STOCKHOLDERS' EQUITY. (Continued)
(a) Series B Convertible Redeemable Preferred Stock: (Continued)
Pursuant to the Agreement and Subsequent transactions, the Initial
Purchasers acquired 765,000 shares of Series B 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 bring 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 is 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.
The holder of any share of Series B Convertible Redeemable Preferred
Stock has the right, at such holder's option, exercisable on or after
September 30, 2000, to convert such share into ten (10) fully paid and
non-assessable shares of common stock (the "Conversion Rate"). The
Conversion Rate is subject to adjustment as stipulated in the Agreement.
Upon liquidation, the Series B 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.
The Company's right to repurchase or redeem shares of Series B Stock
was eliminated in fiscal 1999 pursuant to the terms of the Agreement and
the Certificate of Designation.
Page 17 of 30
<PAGE> 18
NOTE 8 - STOCKHOLDERS' EQUITY. (Continued)
(b) Common Stock:
In March 1998, the Company sold 250,000 shares of common stock at $.50
per share realizing $125,000.
The stockholders at the 1998 annual meeting approved the reduction of
the par value of the common stock from $0.10 per share to $0.001 per share.
The stockholders at the 2000 annual meeting approved amending the
authorized common stock to 75 million shares from 30 million shares.
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.
During the nine months ended September 30, 2000, the Company sold 1,676,250
shares of common stock at $.80 per share realizing $1,206,770, 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.
During the quarter ended June 30, 2000, the Company issued 2000 shares
of its common stock to a consultant for promotional activities amounting to
$5,875. During the quarter ended September 30, 2000, the Company issued
10,500 shares of its common stock to its past and present board members for
director's fees from the second quarter of 1998 through the second quarter
of 2000 amounting to $19,625.
Page 18 of 30
<PAGE> 19
NOTE 8 - STOCKHOLDERS' EQUITY. (Continued)
(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 a now-expired stock
option plan into warrants on substantially the same terms as the previously
held stock options, except the warrants were immediately vested. During
fiscal 1999, warrants to acquire 22,308 common shares at prices ranging
from $3.90 to $46.40 per share expired. No warrants were exercised during
any of the periods presented. A total of 79,000 shares of common stock are
reserved for issuance upon exercise of outstanding warrants as of December
31, 1999 at prices ranging from $3.20 to $27.50 and expiring through
October 2004.
(d) Stock Options Plans:
The Company has two stock option plans. The 1998 Employee Incentive
Stock Option Plan provides for the grant of options to purchase shares of
the Company's common stock to employees. The 1992 Stock Option Plan
provides for the grant of options to directors.
Under the 1998 Plan, the maximum aggregate number of shares which may
be issued under options has been amended to 3,000,000 from 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
fifth anniversary of the date on which the option is granted.
The 1998 Plan is administered by the Compensation Committee of the Board of
Directors. In 1999, options to acquire 100,000 common shares at $1.00 per
share was granted to an officer. Additionally, an option to acquire 25,000
common shares at $0.6875 per share was issued to a consultant. In February
2000, options to acquire 75,000 common shares at $1.097 was granted to an
officer. In June 2000, options to acquire 100,000 common shares at $1.88
per share and
Page 19 of 30
<PAGE> 20
Note 8 - STOCKHOLDERS' EQUITY. (Continued)
(d) Stock Options Plans: (Continued)
options to acquire 100,000 common shares at $1.94 per share were granted to
two officers.
Information with respect to options under the 1992 and 1998 Stock
Option Plans is summarized as follows:
<TABLE>
<CAPTION>
For the Nine Months Ended September 30
2000 1999
----------------------------------- -----------------------------------
Shares Prices Shares Prices
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Outstanding at beginning
of period 128,000 $ 0.31 to $ 1.00 3,000 $ 0.31 to $0.41
================ ================
Options issued 275,000 $1.097 to $ 1.94 125,000 $0.6875 to $1.00
---------------- ================ ---------------- ================
Outstanding at end
of period 403,000 $ 0.31 to $ 1.94 128,000 $ 0.31 to $1.00
================ ================ ================ ================
</TABLE>
Page 20 of 30
<PAGE> 21
\
NOTE 8 - STOCKHOLDERS' EQUITY. (Continued)
(d) Stock Options Plans: (Continued)
Outstanding options expire 90 days after termination of holder's
status as employee or director.
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 $32,172 for the nine months ended September 30,
2000 and $21,649 for the three months ended September 30, 2000 as
calculated by the Black-Scholes option pricing model. As such, pro-forma
net loss and loss per share would be as follows:
<TABLE>
<CAPTION>
For the Nine For the Three
Months Ended Months Ended
September 30, 2000 September 30, 2000
------------------ ------------------
<S> <C> <C>
Net loss as reported $ (1,528,740) $ (947,578)
Additional compensation 32,172 21,649
--------------- ---------------
$ (1,560,912) $ (969,227)
=============== ===============
Loss per share as reported $ (0.11) $ (0.07)
=============== ===============
Adjusted loss per share $ (0.11) $ (0.07)
=============== ===============
</TABLE>
As the number of options granted at December 31, 1998 and March 31,
1998 is immaterial, recognizing the expense would not have a material
effect on the Company's financial statements for the three months and nine
months ended September 30, 1999.
Page 21 of 30
<PAGE> 22
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 Ended September 30,
------------------------------------------------------------
2000 % 1999 %
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
Loss before income taxes
and preferred dividend $ (1,492,449) -- $ (1,421,795) --
============ ============ ============ ============
Computed tax benefit at
statutory rate $ (507,400) (34.0) $ (483,410) (34.0)
Foreign subsidiary income
not subject to U.S. taxes (65,286) (4.4) -- --
Net operating loss
valuation reserve (572,686) (38.4) (483,410) (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 foreign purchasers of the Company's
common stock in January 2000, common stock ownership changed in excess of
50% during the three year period then ended. The utilization of the
Company's net operating loss carryforward at December 31, 1999 of
$2,063,000 was not negatively impacted by this ownership change. The future
tax benefit of the net operating loss carryforward aggregated $701,000 at
December 31, 1999 has been fully reserved as it is not more likely than not
that the Company will be able to use the operating loss in the future.
Page 22 of 30
<PAGE> 23
NOTE 10 - COMMITMENTS, CONTINGENCIES AND OTHER.
(a) Leases:
Commencing in August 1998, the Company entered into short-term
operating leases for its general office space and certain office equipment.
Prior to August 1998, the Company did not incur rent expense as it was
inactive. Rent expense charged to operations for the nine and three months
ended September 30, 2000 and 1999 was $37,575 and $12,525, respectively in
each period. Future minimum annual rent commitments under operating leases
as of September 30, 2000 are as follows:
<TABLE>
<CAPTION>
Year Ending
September 30
<S> <C>
2001 $ 41,642
</TABLE>
(b) 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.
Page 23 of 30
<PAGE> 24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
financial statements and notes contained elsewhere in this Form 10-Q. Certain
statements under this caption "Management's Discussion and Analysis of Financial
Conditions and Results of Operations," constitute "forward-looking statements"
under the Private Securities Litigation Reform Act of 1995.
PLAN OF OPERATION
In December 1999 and during the nine months ended September 30, 2000, the
Company sold 5,187,500 and 1,676,250 common shares for $3,691,000 and
$1,206,000, respectively, which will be used to expand its businesses.
On September 30, 1998, the Company acquired Stamford Insurance Company Ltd.,
which was then an inactive foreign corporation that is licensed in the Cayman
Islands as a casualty and property insurer. In the first quarter of 2000,
Stamford commenced underwriting as a reinsurer generating premiums written of
$716,000 of which $324,000 was earned by September 30, 2000. Also in the nine
months ended September 30, 2000, the Company's sales of its automotive vehicle
and consumer products service contracts through its website amounted to $81,937
of which $6,657 was earned in 2000.
The Company's plan of operations for the next twelve months is principally to
continue its endeavors to establish itself in the vehicle and consumer products
service contract business through its Internet website,
www.warrantysuperstore.com, to establish business partnerships to include
private labels with financial institutions, casualty and insurance carriers,
etc., and to continue to seek additional property casualty reinsurance
opportunities for its wholly owned insurance company, Stamford Insurance Co.
Ltd.
Page 24 of 30
<PAGE> 25
RESULTS OF OPERATIONS
Nine Months Ended September 30, 2000, Compared To Nine Months Ended September
30, 1999.
Sales. We did not generate any operating revenues until the fourth quarter
of fiscal 1999, when our reinsurance subsidiary commenced generating premium
revenues and the Company began the sale of its service contracts.
Cost of Sales. In the nine months ended September 30, 2000 Stamford
continued reinsuring contractual liability insurance policies from one United
States carrier that is rated Excellent by A.M. Best. This insurance generated
approximately $716,000 in premiums, of which $392,000 was unearned at September
30, 2000. Policy acquisition costs were $90,000 of which $72,000 was expensed in
the nine months ended September 30, 2000. Income from operations in the nine
months ended September 30, 2000 was $169,000 of which $10,000 is management's
estimate of incurred but not reported losses at September 30, 2000. Our sales of
extended service contracts for new and used automotive vehicles and consumer
products in the first nine months of 2000 generated $81,937 in revenues of which
$6,657 was recognized within the current year with the balance deferred over the
life of the contract. Direct costs associated with the sale of the service
contracts are being recognized pro rata over the length of the contract.
General and Administrative. General and administration costs increased by
28.0% to $1,831,000 for the nine months ended September 30, 2000 compared to
$1,430,000 for the nine months ended September 30, 1999. For the three months
ended September 30, 2000, general and administrative costs increased by 134.2%
to $1,007,000 compared to $430,000 for the comparable period in 1999. The
increases are primarily attributable to increased advertising costs offset in
part to reduced website development costs.
Interest Income and Interest Expense. Interest income increased 1750% to
$148,000 for the nine months ended September 30, 2000 compared to $8,000 for the
nine months ended September 30, 1999. For the three months ended September 30,
2000 interest income increased 2750% to $57,000 compared to $2,000 for the
comparable period in 1999. Interest expense increased $7,000 for the nine months
and $2,200 for the three months ended September 30, 2000 from $-0- for the both
periods in 1999. The increase in interest income and interest expense is the
result of the cash, cash equivalents, and investments used to fund the Company's
increased operating costs in the current period and the incidence of debt in a
prior period.
Preferred Stock Dividend. The accrued preferred stock dividend of $36,000
in September 2000 is $7,000 less than the $43,000 accrued during the same period
in 1999 principally because of the reduction of the average number of Series A
preferred stock outstanding in the current year.
Net Loss. Net loss for the nine months ended September 30, 2000 increased
4.4% to $1,529,000 from the comparable loss of $1,465,000 incurred in 1999. For
the three months ended September 30, 2000, the net loss increases 114.1% to
$946,000 from the comparable loss of $442,000 in 1999. These increases are a
result of the reasons cited above.
Page 25 of 30
<PAGE> 26
FINANCIAL CONDITION
The Company's cash condition decreased $494,000 to $1,145,000 at September 30,
2000 from $1,639,000 at December 31, 1999. The net decrease is primarily a
result of advertising programs. The investments in marketable securities
increased $247,000 to $2,980,000 from $2,733,000 during the same time period.
The net increase is the result of proceeds from the sale of the Company's common
stock.
Even 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
alternative. Management anticipates a continued deterioration in the Company's
financial condition in the near term due to ongoing general and administrative
costs, which will exceed the Company's revenues. This situation will continue
until the Company raises the sufficient financing to fully capitalize its
service contract sales and reinsurance business.
There can be no assurance that the Company will be successful in its efforts to
raise any funds from any of the operations under evaluation or that it will
avail itself of other alternative sources of funds.
LIQUIDITY AND CAPITAL RESOURCES
The Company has relied on the proceeds from the sales of its securities in
October 1997, May 1998, and May 1999, December 1999 and during the nine months
ended September 30, 2000 for the primary source of its funds. In the nine months
ended September 30, 2000, the Company generated its revenues from its
businesses, both earned and unearned, of $798,000. 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 to fund its future operational costs and at the same time
fully develop its insurance and service contract sales businesses.
At September 30, 2000 working capital was $3,860,000, an increase of $288,000
from working capital of $3,572,000 at December 31, 1999. The increase in working
capital results primarily from the increase in capital through the sale of the
Company's securities of $1,206,000 offset primarily by advertising costs.
The Company has committed to acquire computer hardware and software and to
develop a website for approximately $1,500,000 of which $1,000,000 has been
expended through September 30, 2000. Although the Company is not contractually
obligated to fulfill the remaining $500,000 of the project, it intends to do so
over the next year 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.
Page 26 of 30
<PAGE> 27
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Certificate of Designation for the Series A Preferred Stock states that at
any time after December 1, 1999 any holder of Series A Preferred Stock may
require the Company to redeem his or her shares of Series A Preferred Stock (if
there are funds with which the Company may legally do so) at a price of $1.00
per share. Notwithstanding the foregoing redemption provisions, if any dividends
on the Series A Preferred Stock are past due, no shares of Series A Preferred
Stock may be redeemed by the Company unless all outstanding shares of Series A
Preferred Stock are simultaneously redeemed. The holders of Series A Preferred
Stock may convert their Series A Preferred Stock into shares of common stock of
the Company at a price of $5.20 per share. At September 30, 2000, 681,174 shares
of Series A Preferred Stock were outstanding. If the Series A preferred
shareholders do not convert their shares into common stock, and if the Company
were required to redeem any significant number of shares of Series A Preferred
Stock, the Company's financial condition would be materially affected.
INFLATION
Inflation has not had a significant effect on the Company's operations or
financial position and management believes that the future effects of inflation
on the Company's operations and financial position will be insignificant.
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
Certain statements included in this report, including the words "believes",
"anticipates", "expects" and similar expressions, are intended to identify
forward-looking statements. Such statements are subject to certain risks and
uncertainties, which could cause actual results to differ materially from those
projected. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to republish revised forward-looking statements to
reflect events or circumstances after the date hereof or to reflect the
occurrences of unanticipated events. Readers are also urged to carefully review
and consider the various disclosures made by the Company in this report, as well
as the Company's periodic reports on other fillings with the Securities and
Exchange Commission.
Page 27 of 30
<PAGE> 28
CORNICHE GROUP INCORPORATED
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibit is filed as part of this report:
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended September
30, 2000.
Page 28 of 30
<PAGE> 29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CORNICHE GROUP INCORPORATED
(Registrant)
By /s/ Robert Hutchins
------------------------------------
Robert Hutchins, President and
Principal Financial Officer
Date: November 10, 2000
Page 29 of 30
<PAGE> 30
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
