SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
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.)
330 SOUTH SERVICE ROAD, SUITE 120, MELVILLE, NEW YORK 11747
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: 631-574-4955
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 |_|
23,050,085 SHARES, $.001 PAR VALUE, AS OF APRIL 30, 2003
(Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date)
I N D E X
Page No.
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Part I - Financial Information:
Item 1. Financial Statements (Unaudited):
Balance Sheets
At March 31, 2003 and December 31, 2002 3
Statements of Operations
For the three months
ended March 31, 2003 and 2002 4
Statement of Stockholders' Deficit
For the three months ended March 31, 2003 5
Statements of Cash Flows
for the three months ended March 31, 2003
and 2002 6
Notes to Financial Statements 7-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of 12-13
Operations
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 14
Item 4. Controls and Procedures 14
Part II - Other Information:
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K. 15
Signatures 15
2
CORNICHE GROUP INCORPORATED
BALANCE SHEETS
(Unaudited)
ASSETS
March 31, December 31,
2003 2002
--------- ------------
Current assets:
Cash and equivalents $ 14,877 $ 19,255
Notes receivable, net of allowance
of $250,000 1,000,000 1,000,000
Prepaid expenses and other current
assets, net of allowance of $8,103 46,100 40,094
----------- -----------
Total current assets 1,060,977 1,059,349
Property and equipment, net 587 --
Deferred Acquisition Costs 110,912 123,835
Other assets 3,000 --
----------- -----------
$ 1,175,476 $ 1,183,184
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Dividends payable - preferred stock $ 397,433 $ 385,512
Accounts payable 427,360 344,279
Accrued liabilities 156,462 157,806
Stockholder advances 106,000 106,000
Notes payable 185,000 125,000
Current portion of long-term debt 23,093 22,595
----------- -----------
Total current liabilities 1,295,348 1,141,192
Unearned revenues 157,196 175,200
Long-term debt 3,549 9,513
Series A Convertible Preferred Stock:
$0.07 cumulative convertible
preferred stock; liquidation value
- $1.00 per share; authorized,
1,000,000 shares; outstanding,
681,174 shares 681,174 681,174
Stockholders' Deficit:
Preferred stock; authorized,
5,000,000 shares Series B convertible
redeemable preferred stock, liquidation
value, 10 shares of common stock per
share; $0.01 par value; authorized,
825,000 shares; issued and outstanding,
10,000 shares 100 100
Common stock, $.001 par value; authorized,
75,000,000 shares; issued and
outstanding, 22,650,085 shares
at March 31, 2003 and
22,398,710 shares at
December 31, 2002 22,650 22,399
Additional paid-in capital 8,864,327 8,847,573
Accumulated deficit (9,848,868)) (9,693,967)
----------- -----------
Total stockholders' deficit (961,791) (823,895)
----------- -----------
$ 1,175,476 $ 1,183,184
=========== ===========
See accompany notes to financial statements
3
CORNICHE GROUP INCORPORATED
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31,
----------------------------
2003 2002
----------- ------------
Earned revenues $ 18,004 $ 24,552
Direct costs (12,923) (19,370)
----------- -----------
Gross profit 5,081 5,182
General and administrative
expenses (128,578) (371,435)
----------- -----------
Operating loss (123,497) (366,253)
Other income (expense):
Realized loss on marketable securities -- (3,490)
Interest income 4 41,020
Interest expense (19,487) (1,119)
----------- -----------
Total other income (19,483) 36,411
----------- -----------
Net loss (142,980) (329,842)
Preferred dividend (11,921) (11,921)
----------- -----------
Net loss attributable to common stockholders $ (154,901) $ (341,763)
=========== ===========
Net loss per common share $ (0.01) $ (0.02)
=========== ===========
Weighted average number of
common shares outstanding 22,517,599 22,290,710
=========== ===========
See accompanying notes to financial statements.
4
CORNICHE GROUP INCORPORATED
STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE THREE MONTHS ENDED MARCH 31, 2003
(Unaudited)
Series B
Convertible
Preferred Stock Common Stock Additional
------------------ ------------------- Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit Total
------ ------ ------ ------ ---------- ----------- ---------
Balance - January 1, 2003 10,000 $100 22,398,710 $22,399 $8,847,573 $(9,693,967) $(823,895)
Issuance of common stock
upon exercise of options -- -- 150,000 150 600 -- 750
Issuance of common stock
for services -- -- 100,000 100 2,900 -- 3,000
Issuance of common stock
to directors -- -- 1,375 1 123 -- 124
Stock options granted
with debt -- -- -- -- 13,131 -- 13,131
Series A Convertible
Stock dividends -- -- -- -- -- (11,921) (11,921)
Net loss -- -- -- -- -- (142,980) (142,980)
------ ---- ---------- ------- ---------- ----------- ---------
Balance-March 31, 2003 10,000 $100 22,650,085 $22,650 $8,864,327 $(9,848,868) $(961,791)
====== ==== ========== ======= ========== =========== =========
See accompanying notes to financial statements.
5
CORNICHE GROUP INCORPORATED
STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three
Months Ended
March 31,
-------------------------
2003 2002
---------- ----------
Cash flows from operating activities:
Net loss $(142,980) $ (329,842)
Adjustments to reconcile net loss to net
cash used in operating activities:
Common shares issued and stock
options granted for services rendered and
interest expense 16,255 814
Depreciation and amortization -- 8,936
Unearned revenues (18,004) (24,978)
Deferred acquisition costs 12,923 18,252
Changes in operating asset and
liability account balances:
Prepaid expenses and other current assets (9,006) (10,009)
Accounts payable 83,081 112,785
Accrued liabilities (1,344) (32,094)
--------- -----------
Net cash used in operating activities (59,075) (256,136)
Cash flows from investing activities:
(Increase) decrease in marketable securities -- 1,503,374
Notes receivable -- (1,250,000)
Acquisition of property and equipment (587) (1,134)
--------- -----------
Net cash provided by (used in)
investment activities (587) 252,240
Cash flows from financing activities:
Issuance of common stock 750 --
Advances on notes payable 60,000 --
Payment of capital lease obligations -- (343)
Repayment of long-term debt (5,466) (5,009)
--------- -----------
Net cash provided by (used in)
financing activities 55,284 (5,352)
--------- -----------
Net decrease in cash and cash equivalents (4,378) (9,248)
Cash and cash equivalents at
beginning of period 19,255 51,268
--------- -----------
Cash and cash equivalents at
end of period $ 14,877 $ 42,020
========= ===========
Supplemental Disclosure of Cash
Flow Information:
Interest paid $ 663 $ 1,119
========= ===========
Supplemental Schedule of Non-cash Financing
Activities:
Series A Preferred Stock dividends $ 11,921 $ 11,921
========= ===========
Issuance of common stock for services rendered $ 3,124 $ 814
========= ===========
Stock options issued with debt $ 13,131 $ --
========= ===========
See accompanying notes to financial statements.
6
CORNICHE GROUP INCORPORATED
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY.
Corniche Group Incorporated ("the Company") was a provider of
extended warranties and service contracts via the Internet at
warrantysuperstore.com through June 30, 2002. In June 2002, management
determined, in light of continuing operating losses, to discontinue its
warranty and service contract business and to seek new business
opportunities for the Company. On February 6, 2003, the Company appointed
Mark Weinreb as a member of the Board of Directors and as its President
and Chief Executive Officer. The Company and Mr. Weinreb have been
exploring business plans for the Company that may involve, under the name
"Phase III Medical, Inc.", entering the medical sector by acquiring or
participating in one or more biotech and/or medical companies or
technologies, owning one or more drugs or medical devices that may or may
not yet be available to the public, or acquiring rights to one or more of
such drugs or medical devices or the royalty streams therefrom. Mr.
Weinreb was appointed to finalize and execute the Company's new business
plan. The Company will need to recruit management, business development
and technical personnel, and develop its business model. Accordingly, it
will be necessary for the Company to raise new capital. There can be no
assurance that any such business plan developed by the Company will be
successful, that the Company will be able to acquire such new business or
rights or raise new capital, or that the terms of any transaction will be
favorable to the Company.
The business of the Company today comprises the "run off" of its
sale of extended warranties and service contracts via the Internet and the
new business opportunity it is pursuing in the medical/bio-tech sector.
The Company's consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As discussed, the
Company sold its insurance subsidiary in July 2001. Additionally, the
Company discontinued sales of its extended warranty service contracts
through its web site in December 2001. Accordingly, the Company has no
operations nor available means to finance its current expenses and with
which to pay its current liabilities. These factors raise substantial
doubt about the Company's ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
NOTE 2 - BASIS OF PRESENTATION.
The accompanying unaudited financial statements have been prepared
in accordance with accounting principles generally accepted in the United
States of America 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
accounting principles generally accepted in the United States of America
for complete financial statements. In the opinion of management, the
statements contain all adjustments (consisting only of normal recurring
accruals) necessary to present fairly the financial position as of March
31, 2003, the results of operations for the three months ended March 31,
2003 and 2002 and the cash flows for the three months ended March 31, 2003
and 2002. The results of operations for the three months ended March 31,
2003 are not necessarily indicative of the results to be expected for the
full year.
The December 31, 2002 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.
NOTE 3 - ACCOUNTING POLICIES.
There were no changes in the Company's accounting policies during
the quarter ended March 31, 2003.
NOTE 4 - NOTES RECEIVABLE.
As previously reported, on January 7, 2002, the Company entered into
a Stock Contribution Exchange Agreement (the "Exchange Agreement") and a
Supplemental Disclosure Agreement (together with the Exchange Agreement,
the "Agreements") with StrandTek International, Inc., a Delaware
corporation ("StrandTek"), certain of StrandTek's principal shareholders
and certain non-shareholder loan holders of StrandTek (the "StrandTek
Transaction"). The Exchange Agreement was amended on February 11, 2002.
Consummation of the StrandTek Transaction was conditioned upon a number of
closing conditions which ultimately could not be met. As a result, the
Agreements were formally terminated by the Company and StrandTek in June
2002.
7
In January 2002, the Company advanced to StrandTek a loan of $1
million on an unsecured basis, which is personally guaranteed by certain
of the principal shareholders of StrandTek and a further loan of $250,000
on February 19, 2002 on an unsecured basis. Such loans bear interest at 7%
per annum and were due on July 31, 2002 following termination of the
Agreements in June 2002.
NOTE 4 - NOTES RECEIVABLE (continued)
StrandTek defaulted on the payment of $1,250,000 plus accrued
interest due to the Company on July 31, 2002. As a result, on August 6,
2002, the Company filed a complaint in the Superior Court of New Jersey
entitled Corniche Group Incorporated v StrandTek International, Inc., a
Delaware corporation, StrandTek International, Inc., a Florida
corporation, David M. Veltman, William G. Buckles Jr., Jerome Bauman and
Jan Arnett. The complaint seeks recovery of the $1,250,000 loans, plus
interest, costs and fees, and seeks recovery against the individual
defendants pursuant to their partial guarantees. On February 28, 2003, the
Court issued a ruling granting the Company partial summary judgment with
respect to the principal aspects of its complaint. The Court rejected the
defenses of StrandTek and agreed with the Company that it was entitled to
judgment against StrandTek and the guarantors. On May 9, 2003, the Company
was granted a second summary judgment motion to have final judgment
entered for the exact amounts due from each defendant and to dismiss
defendants' counterclaims. No assurances can be given that StrandTek
and/or the individual guarantors will not attempt to appeal the Court's
grant of summary judgment, or that the Company will be able to collect on
any judgment. The Company has recently been informed that on April 16,
2003, Strandtek made an assignment for the benefit of its creditors, so
that any collection on its judgment other than on the personal guarantees
is highly unlikely.
Since the $250,000 was unsecured and not guaranteed, the Company
established an allowance of $250,000 at December 31, 2002.
NOTE 5 - PROPERTY AND EQUIPMENT.
Property and equipment consists of the following:
March 31, December 31,
2003 2002
--------- ------------
Computer equipment $ 587 $ --
Computer software 602,014 602,014
--------- ---------
602,601 602,014
Less: Accumulated depreciation (602,014) (602,014)
--------- ---------
$ 587 $ --
========= =========
Depreciation and amortization charged to operations was $0 and
$8,936 for the three months ended March 31, 2003 and 2002, respectively.
NOTE 6 - NOTES PAYABLE.
In September 2002, the Company sold to accredited investors five
60-day promissory notes in the principal sum of $25,000 each, resulting in
net proceeds to the Company of $117,500, net of offering costs. The notes
bear interest at 15% per annum payable at maturity. The notes include a
default penalty pursuant to which if the notes are not paid on the due
date the holder shall have the option to purchase twenty five thousand
shares of the Company's common stock for an aggregate purchase price of
$125. If the non payment continues for 30 days, then on the 30th day, and
at the end of each successive 30-day period until the note is paid in
full, the holder shall have the option to purchase an additional twenty
five thousand shares of the Company's common stock for an aggregate
purchase price of $125. During the quarter ended March 31, 2003, options
for 150,000 shares were exercised by the note holders. At March 31, 2003,
the Company had reserved 475,000 shares of the Company's common stock for
issuance against exercise of the options granted pursuant to the default
penalty.
On February 11, 2003, the Company commenced a private placement
offering to raise up to $100,000 in 30-day promissory notes in increments
of $5,000 bearing interest at 20% per annum. Only selected investors which
qualify as "accredited investors" as defined in Rule 501(a) under the
Securities Act of 1933, as amended, were eligible to purchase these
promissory notes. The Company raised $50,000 through the sale of such
promissory notes.
On March 17, 2003, the Company commenced a private placement
offering to raise up to $250,000 in 6-month promissory notes in increments
of $5,000 bearing interest at 15% per annum. Only selected investors which
qualify as "accredited investors" as defined in Rule 501(a) under the
Securities Act of 1933, as amended, are eligible to purchase these
8
promissory notes. As of March 31, 2003 and May 10, 2003 the Company had
raised $10,000 and $50,000, respectively, through the sale of such
promissory notes.
NOTE 7 - LONG-TERM DEBT.
Long-term debt consists of the following:
March 31, December 31,
2003 2002
--------- ------------
Bank note payable in equal monthly
installments of $2,043 including
interest at 8.75% $26,642 $32,108
Less: current maturities 23,093 22,595
------- -------
$ 3,549 $ 9,513
======= =======
NOTE 8 - SERIES "A" CONVERTIBLE REDEEMABLE PREFERRED STOCK.
The Certificate of Designation for the Company's Series A Preferred
Stock provides 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 March 31,
2003 and December 31, 2002, 681,174 shares of Series A Preferred Stock
were outstanding.
NOTE 9 - STOCKHOLDERS' EQUITY.
(a) Common Stock:
During the three months ended March 31, 2003, the Company issued
1,375 shares of its common stock whose fair value was $124 to its
board members for director's fees.
On February 6, 2003, the Company entered into a deferment agreement
with three major creditors pursuant to which liabilities of
approximately $523,887 in aggregate, were deferred, subject to the
success of the Company's debt and equity financing efforts, until
January 15, 2005, against a pledge of the StrandTek note receivable
(see Note 4). In consideration for the deferral, the Company agreed
to issue 100,000 restricted shares of the Company's common stock
whose fair value was $3,000.
(b) 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
44,000 shares of common stock are reserved for issuance upon
exercise of outstanding warrants as of March 31, 2003 at prices
ranging from $3.20 to $8.10 and expiring through October 2004.
(c) Stock Options Plans:
The Company has two stock option plans, the 1998 Employee Incentive
Stock Option Plan and a 2003 Equity Participation Plan. The 1998
Employee Incentive Stock Option Plan provides for the grant of
options to purchase shares of the Company's common stock to
employees.
9
NOTE 9 - STOCKHOLDERS' EQUITY. (Continued)
(c) Stock Options Plans (continued):
Information with respect to options under the 1998 Stock Option Plan
is summarized as follows:
For the Three Months Ended
March 31, 2002
--------------------------
Shares Prices
---------- ----------
Outstanding at beginning
of period 301,500 $0.41 to $1.94
Granted --
Expired --
Cancelled --
-------
Outstanding at end
of period 301,500 $0.41 to $1.94
=======
All outstanding options were either cancelled or expired during
2002.
In February 2003, the Company adopted a 2003 Equity Participation
Plan and pursuant to such plan entered into a Stock Option Agreement with
Mr. Weinreb, the Company's then newly appointed President and Chief
Executive Officer (the "Initial Option Agreement"). Under the Initial
Option Agreement, the Company granted Mr. Weinreb the right and option,
exercisable for 10 years, to purchase up to 2,500,000 shares of the
Company's common stock at an exercise price of $0.03 per share.
Additionally, in the event that the closing price of the Company's common
stock equals or exceeds $0.50 per share for any five consecutive trading
days during the term of the employment agreement (whether during the
initial term or an annual extension), the Company has agreed to grant Mr.
Weinreb, on the day immediately following the end of the five day period,
an option to purchase an additional 2,500,000 shares of the Company's
common stock at an exercise price of $0.50 per share, pursuant to the 2003
Equity Participation Plan. Mr. Weinreb has agreed that he will not sell
any shares of the Company's common stock obtained upon exercise of the
Initial Option Agreement or Additional Option Agreement prior to the first
anniversary of the date of the employment agreement.
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 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, $1.00 per share in
September 1999, $1.94 in June 2000, $1.097 in September 2000 and $.03 in
February 2003, 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% and 3.97%, the Company would have recorded
compensation expense of $7,490 and $14,531 for the three months ended
March 31, 2003 and 2002, respectively, as calculated by the Black-Scholes
option pricing model.
As such, pro-forma net loss and loss per share would be as follows:
For the Three For the Three
Months Ended Months Ended
March 31, 2003 March 31, 2002
-------------- --------------
Net loss as reported $(142,980) $(329,842)
Additional compensation (7,490) (14,531)
--------- ---------
Adjusted net loss $(150,470) $(344,373)
========= =========
Loss per share as reported $ (0.01) $ (0.02)
========= =========
Adjusted loss per share $ (0.01) $ (0.02)
========= =========
NOTE 10 - INDUSTRY AND GEOGRAPHICAL SEGMENTAL INFORMATION.
The Company's operations are currently in one segment, namely the
sale of extended warranties and service contracts over the Internet. The
Company's operations are conducted entirely in the United States.
10
NOTE 11 - SUBSEQUENT EVENTS.
(a) Stockholders' Equity
As described in Note 6, the Company granted purchasers of the
Company's September 2002 60-day promissory notes, options to
purchase shares of common stock if the Company defaulted on the
payment of principal or interest on such promissory notes. In April
2003, two holders of such promissory notes exercised their options
and purchased 400,000 shares of common stock resulting in net
proceeds to the Company of $2,000.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q and the documents incorporated herein contain
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. When used in this
Quarterly Report, statements that are not statements of current or historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "plan", "intend" "may," "will," "expect," "believe",
"could," "anticipate," "estimate," or "continue" or similar expressions or other
variations or comparable terminology are intended to identify such
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof. Except
as required by law, the Company undertakes no obligation to update any
forward-looking statements, whether as a result of new information, future
events or otherwise.
GENERAL
In June 2002, in light of on-going operating losses, management determined that
it was in the best interest of the Company to discontinue the Company's sale of
extended warranties and service contracts business and to seek new business
opportunities for the Company. On February 6, 2003, the Company appointed Mark
Weinreb as a member of the Board of Directors and as its President and Chief
Executive Officer. The Company and Mr. Weinreb have been exploring business
plans for the Company that may involve, under the name "Phase III Medical,
Inc.", entering the medical sector by acquiring or participating in one or more
biotech and/or medical companies or technologies, owning one or more drugs or
medical devices that may or may not yet be available to the public, or acquiring
rights to one or more of such drugs or medical devices or the royalty streams
therefrom. Mr. Weinreb was appointed to finalize and execute the Company's new
business plan. The Company will need to recruit management, business development
and technical personnel, and develop its business model. Accordingly, it will be
necessary for the Company to raise new capital. There can be no assurance that
any such business plan developed by the Company will be successful, that the
Company will be able to acquire such new business or rights or raise new
capital, or that the terms of any transaction will be favorable to the Company.
RESULTS OF OPERATIONS
The Company recognizes revenue from its warranty service contracts business over
the life of contracts executed. Additionally, the Company purchased insurance to
fully cover any losses under the service contracts from a domestic carrier. The
insurance premium expense and other costs related to the sale are amortized
ratably over the life of the contracts.
Three Months Ended March 31, 2003 Compared To Three Months Ended March 31, 2002.
The Company generated recognized revenues from the sale of extended warranties
and service contracts via the Internet of $18,000 for the three months ended
March 31, 2003 (three months ended March 31, 2002: $25,000). The revenues
generated in the quarter were derived entirely from revenues deferred over the
life of contracts sold in prior periods. Similarly, direct costs incurred in the
period relate to costs previously deferred over the life of such contracts.
General and administration expenses decreased 65.4% to $129,000 for the three
months ended March 31, 2003 as compared to
12
$371,000 for the three months ended March 31, 2002. The three months ended March
31, 2003 is not strictly comparable to the same period in the prior year because
in the corresponding period in fiscal 2002 the Company was operating its
warranty service contracts business from its office in Texas whereas in fiscal
2003 it has been endeavoring to establish new business operations in the medical
sector as described above. Notwithstanding the foregoing, the decrease in
general and administrative expenses of $242,000 is primarily due to a decrease
in legal and professional fees $108,000, payroll $35,000, travel and subsistence
$27,000, property costs $19,000 and information technology expenses $30,000
incurred in connection with the Company's extended warranties and service
contracts business.
Interest income decreased by $41,000 in the three months ended March 31, 2003 as
compared to the corresponding period in 2002 when interest income was generated
from the StrandTek loans and from investment in marketable securities. Interest
expense increased by $18,000 for the three months ended March 31, 2003 compared
to 2002 primarily as a result of short-term loans secured in September 2002.
For the reasons cited above, net loss for the three months ended March 31, 2003
decreased by 56.7% to $143,000 from the comparable loss of $330,000 for the
three months ended March 2002.
LIQUIDITY AND CAPITAL RESOURCES
The following chart represents the net funds provided by or used in operating,
financing and investment activities for each period as indicated:
Three Months Ended
------------------------------
March 31, 2003 March 31, 2002
Cash used in
Operating Activities $(59,075) $(256,136)
Cash (used in) provided
by Investing Activities (587) 252,240
Cash used in
Financing activities 55,284 (5,352)
The Company incurred a net loss of $142,980 for the three months ended March 31,
2003. Such losses adjusted for non-cash items such as deferred revenues (net of
deferred acquisition costs) ($5,081) and other non cash credits totaling $16,255
resulted in cash used in operations totaling $59,075 for the three months ended
March 31, 2003, net of working capital movements of $72,731.
To meet its cash requirement during the three months ended March 31, 2003, the
Company relied on the net proceeds of sale of Promissory Notes, $60,000. The
Company's liquidity position continues to be hurt by StrandTek's failure to
repay loans advanced to them in the first quarter of fiscal 2002.
The Company has no contracted capital expenditure commitments in place. As of
March 31, 2003, the Company had cash balances totaling $14,877. The Company will
rely on its cash reserves and short-term loans to meet its cash needs pending an
equity private placement to fund its new business operations until they become
cash generative. Additionally, on February 6, 2003, the Company entered into a
deferment agreement with three major creditors pursuant to which liabilities of
approximately $524,000 in aggregate, were deferred, subject to the success of
the Company's debt and equity financing efforts, until January 15, 2005, against
a pledge of the loans advanced to StrandTek in the first quarter of fiscal 2002
in the sum of $1,250,000 plus accrued interest. While the Company was recently
awarded summary judgment on its claims against StrandTek, there can be no
assurance that the Company will be able to collect on any judgment obtained.
In March 2003, the Company commenced a private placement to "accredited
investors" to sell up to $250,000 in promissory notes (the "Notes") in $5,000
increments or multiples thereof, each bearing interest at 15% per annum and each
due 6 months from the date issued (the "Maturity Date"). Principal will be
payable at the Maturity Date and interest will be payable monthly in arrears. In
the event that the Notes are not paid at the Maturity Date, the interest rate
will increase to a default rate of 20% per annum. The Company will pay its
placement agent an amount equal to 10% of the proceeds of the offering as
commissions for the placement agent's services, in addition to reimbursement of
the placement agent's expenses and indemnification against customary
liabilities. The offering is a best efforts offering with no required minimum
amount to be raised. If the full $250,000 is not raised, the Company's startup
activities will be constrained. There can be no assurance that the offering will
be successful.
The Company's consolidated financial statements have been prepared assuming the
Company will continue as a going concern. As discussed, the Company sold its
insurance subsidiary in July 2001. Additionally, the Company discontinued sales
of its extended warranty service contracts through its web site in December
2001. Accordingly, the Company has no operations nor available means to finance
its current expenses and with which to pay its current liabilities. These
factors raise substantial doubt about the Company's ability to continue as a
going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
INFLATION
The Company does not believe that its operations have been materially influenced
by inflation for the three months ended March 31, 2003, a situation which is
expected to continue for the foreseeable future.
13
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable
Item 4. CONTROLS AND PROCEDURES
Based on their most recent evaluation, which was completed within 90 days
of the filing of this Form 10-Q, the Chief Executive Officer concluded that the
Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed in reports that the Company files or
submits under the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized, and reported within time periods specified in Securities
and Exchange Commission rules and forms. There were no significant changes in
the Company's internal controls or other factors that could significantly affect
these disclosure controls subsequent to the date of their evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
14
CORNICHE GROUP INCORPORATED
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Corniche v. Strandtek
On May 9, 2003, the Court granted the Company's motion for final summary
judgment against all parties on all claims, and dismissed defendants'
counterclaims against the Company as a matter of law.
As a result of this ruling, final judgment will be entered against the two
corporate defendants, Strandtek (Delaware) and Strandtek (Florida), for
$1,415,622.02, plus post-judgment interest at 5% and an award of attorneys' fees
and collection costs to be determined by the court if the parties are unable to
agree on a reasonable figure.
Also, final judgment will be entered against each of the four guarantors (David
Veltman, William Buckles, Jerome Baumann and Jan Arnett) for $291,405.50
($250,000 plus 25% of the accrued unpaid interest of $165,622.02) together with
post-judgment interest at 5%. The guarantors are not liable for any portion of
the yet-to-be-determined attorneys' fees and collection costs.
After the Court's decision, the Company was informed that the corporate
defendants had made an assignment to the benefit of creditors on April 16, 2003,
and that its senior secured lender is undersecured. Accordingly, it is highly
unlikely that the Company will recover on the judgment other than against the
personal guarantors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
Form 8-K dated February 6, 2003, reporting that the Company had appointed
Mark Weinreb as its President, Chief Executive Officer and a member of the
Board of Directors of the Company.
Form 8-K dated February 28, 2003, reporting that the Company had been
granted partial summary judgment in its litigation against Strandtek
International, Inc.
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/ Mark Weinreb
---------------------------------------------------
Mark Weinreb, President and Chief Executive Officer
Date: May 15, 2003
15
CERTIFICATION
I, Mark Weinreb, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Corniche Group,
Incorporated;
2. Based on my knowledge, this Quarterly Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this Quarterly
Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Quarterly Report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this Quarterly Report;
4. The registrant's directors and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this Quarterly Report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
Quarterly Report (the "Evaluation Date"); and
c) presented in this Quarterly Report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. I have disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. I have indicated in this Quarterly Report whether there were significant
changes in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 15, 2003
/s/ Mark Weinreb
- -----------------------------------
Name: Mark Weinreb
Title: Chief Executive Officer of Corniche Group, Inc.