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, 2001
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
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Commission file number: 0-10909
CORNICHE GROUP INCORPORATED
(Exact name of registrant as specified in its charter)
<Table>
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
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
</Table>
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 [ ]
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. [ ]
The aggregate market price of the voting and nonvoting common equity held by
non-affiliates of the Registrant as of March 12, 2002 was approximately $3.0
million. (For purposes of determining this amount, only directors, executive
officers, and 10% or greater stockholders have been deemed affiliates).
On March 12, 2002, 22,290,710 shares of the Registrant's common stock, par value
$0.001 per share, were outstanding.
This Annual Report on Form 10-K 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
Annual 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.
PART I
ITEM 1. BUSINESS
Corniche Group Incorporated ("the Company") is a provider of extended warranties
and service contracts via the internet through its web site
warrantysuperstore.com.
HISTORY
The Company was incorporated under the laws of the State of Delaware in
September 1980 under the name Fidelity Medical Services, Inc. From its inception
through March 1995, the Company was engaged in the development and sale of
medical imaging products through a wholly-owned subsidiary. As a result of a
reverse merger on March 2, 1995 with Corniche Distribution Limited and its
subsidiaries the Company was engaged in the retail sale and wholesale
distribution of stationery and related office products in the United Kingdom.
Effective March 25, 1995 the Company sold its medical imaging products
subsidiary. On September 28, 1995 the Company changed its name to Corniche Group
Incorporated. In February 1996, the Company's United Kingdom operations were
placed in receivership by their creditors. Thereafter through March 1998 the
Company was inactive. On March 4, 1998, the Company entered into a Stock
Purchase Agreement with certain individuals (the "Initial Purchasers") whereby
the Initial Purchasers acquired in aggregate 765,000 shares of a newly created
Series B Convertible Redeemable Preferred Stock. Thereafter the Initial
Purchasers endeavored to establish for the Company new business operations in
the property and casualty specialty insurance and warranty/service contracts
markets. On September 30, 1998 the Company acquired all of the capital stock of
Stamford Insurance Company Limited. ("Stamford"). On April 30, 2001 the Company
sold Stamford and is no longer involved in property and casualty specialty
insurance. See "Discontinued Operations" below.
RECENT DEVELOPMENTS
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 and the parties are currently negotiating a further amendment
and extension. Accordingly, no assurances can be given that the transaction will
be consummated or the precise terms of the amendment. All descriptions of the
StrandTek Transaction herein are based on the Company's current assumptions as
to the final terms. Assuming the consummation of the transactions contemplated
by the Agreements, StrandTek will become a majority owned subsidiary of the
Company and the former shareholders of StrandTek will control the Company.
StrandTek is a high-tech manufacturer with proprietary technology producing
melt-blown polypropylene for acoustical and thermal insulation applications.
StrandTek produces on a commercial scale, through a patented process, a lofted
thermal insulation wadding material as a replacement for cotton shoddy and
fibreglass used for
2
acoustical and insulation applications. StrandTek believes that its material is
technically superior to existing materials, 100% recyclable, lighter, easier to
use and handle in commercial applications and provides significant cost savings
over cotton shoddy and fibreglass for engineered parts.
The main applications for the material are in the automotive, appliance, home
and office building markets. StrandTek has achieved acceptance for its product
with a number of Fortune 100 companies, which are already switching from
traditional materials to the StrandTek product. Following extensive evaluation
and testing by several potential major customers StrandTek now supplies
companies such as GE, Maytag and Daimler Chrysler. Additionally, GM has approved
a specification for the StrandTek product and StrandTek is in discussions with
several other major OEM's within these industries. Given the global nature of
the industries and companies StrandTek is supplying, management is actively
evaluating the potential for a European plant to meet demand of existing
customers in their European manufacturing facilities.
StrandTek currently has a plant in excess of 200,000 square feet based in
Chicago, with four manufacturing lines and two die-cutting lines and is in the
process of building one new line. Plans are well in hand for additional lines to
meet the anticipated increase in demand for its product. Given that StrandTek
has been in ongoing development of its extrusion technology, not all of the
lines have the same output capacity. However, within the existing factory there
is scope to build four more full-scale extrusion lines, which would have a
significant impact on the total revenue generation of the business.
Pursuant to the terms of the Agreements, as amended to date and as expected to
be further amended, the Company will acquire approximately 178,000,000 shares or
approximately 98% of the common stock, $.0001 par value per share, of StrandTek
from certain principal shareholders of StrandTek. Such principal shareholders
will exchange their shares of StrandTek common stock for approximately 8,606,000
shares of the Company's common stock, par value $0.001 ("Common Stock") and
approximately 1,355,000 shares of the Company's Series D Convertible Preferred
Stock convertible into 135,500,000 common shares, as adjusted pursuant to the
Agreements. In addition, such principal shareholders and certain non-shareholder
loan holders have agreed to exchange certain of their outstanding loans due from
Strandtek, in the amount of $22 million in the aggregate, and the Company will
issue 220,000 shares of its Series C 7% Convertible Preferred Stock. Upon the
consummation of the transaction contemplated by the Agreements, the principal
shareholders and the non-shareholder loan holders will own more than a majority
of the outstanding shares and voting power of the Company.
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 are due on the earlier of March 31, 2002 (subject
to extension if the agreements are amended) or forty five days after the
termination of the Agreements.
The transaction is expected to close during April 2002 and is contingent upon
certain closing conditions, including, obtaining financing of approximately $11
million and a number of other financial, legal and business conditions. The
Company is attempting to secure this financing through an unregistered private
placement of its securities. Upon the closing of the transaction, Jerome Bauman,
President of StrandTek, will be appointed Chairman and Chief Executive Officer
of the Company and William Buckles, Chief Financial Officer of StrandTek, will
be appointed Chief Financial Officer, Treasurer and Secretary of the Company and
Ronald Basar will be appointed Vice President. There can be no assurance given
at this time that the financing can be satisfied on terms reasonably acceptable
to the parties or that the other financial, legal and business conditions can be
met or that a transaction can be consummated. Further information about
StrandTek is available in its Form 10-K for its fiscal year ended September 30,
2001 and in its Form 10-Q for the fiscal quarter ended December 31, 2001 on file
with the SEC.
The following summarizes the terms of the Series C 7% Convertible Preferred
Stock. The Series C Preferred Stock shall rank senior to the Company's Series D
Preferred Stock and Common Stock with respect to the payment of dividends and to
the distribution of assets upon liquidation, dissolution or winding up.
Commencing July 1, 2002, the holders of shares of Series C Preferred Stock shall
be entitled to receive, when and as declared
3
by the Board of Directors of the Company, cumulative dividends at the rate of 7%
per annum on each share of Series C Preferred Stock, subject to appropriate
adjustment. The holder of any share of Series C Preferred Stock shall have the
right, at such holder's option, to convert each share of the Series C Preferred
Stock into one hundred shares of the Company's Common Stock, plus additional
shares for accrued and unpaid dividends, subject to certain adjustments.
The following summarizes the terms of the Series D Preferred Stock. The Series D
Preferred Stock shall rank junior to the Company's Series C 7% Convertible
Preferred Stock with respect to the payment of dividends and to the distribution
of assets upon liquidation, dissolution or winding up, and pari passu with the
Common Stock. So long as any shares of the Series D Preferred Stock are
outstanding, no dividend shall be declared or paid upon the Common Stock or upon
any other stock ranking junior to, or on a parity with, the Series D Preferred
Stock. The holder of any share of Series D Preferred Stock shall have the right,
at such holder's option, to convert each share of the Series D Preferred Stock
into one hundred shares of the Company's Common Stock, subject to certain
adjustments. The holders of shares of the Series C Preferred Stock and Series D
Preferred Stock shall have the same voting rights as the holder of that number
of shares of Common Stock into which a share of Series C or Series D Preferred
Stock could be converted.
The Company and StrandTek anticipate that the contribution and exchange of stock
and cash for capital stock of the Company shall constitute a nontaxable transfer
of property and the transaction is contingent upon StrandTek receiving a tax
opinion to that effect.
The securities being exchanged in the transaction have not been registered under
the Securities Act of 1933 and may not be offered or sold in the United States
without the effectiveness of a resale registration statement or an applicable
exemption from the registration requirements. The principal shareholders and the
non-shareholder loan holders shall be entitled to demand registration rights for
the Common Stock issued to them and the Common Stock issuable upon the
conversion of the Series C and Series D Preferred Stock.
CURRENT BUSINESS OPERATIONS
The business of the Company today comprises the sale of extended warranties and
service contracts via the Internet at www.warrantysuperstore.com. No decision
has been made about the future of the warranty and service contract business. It
is anticipated that the new Board of Directors will consider the contraction,
sale or termination of the warranty and service contract business after the
consummation of the StrandTek Transaction. There can be no assurance, if a
decision to sell is made, that the Company will be able to complete the sale of
such business on terms favorable to the Company or at all.
WarrantySuperstore.com Internet Business
The Company's primary business focus is the sale of extended warranties and
service contracts over the Internet covering automotive, home, office, personal
electronics, home appliances, computers and garden equipment. The Company offers
its products and services in the United States in states that permit program
marketers to be the obligor on service contracts. Currently this represents
approximately 37 states for automobile service contracts and approximately 43
states for other product categories. While the Company manages most functions
relating to its extended warranty and service contracts, it does not bear the
economic risk to repair or replace products nor does it administer the claims
function. The obligation to repair or replace products rests with the Company's
appointed insurance carriers. During fiscal 2001 Great American Insurance
Company and American Home Shield were the Company's appointed carriers, Great
American Insurance Company providing contractual liability insurance covering
the obligation to repair or replace products under the Company's automobile and
consumer products extended warranties and service contracts and American Home
Shield covering all home warranty contracts. In March 2002 National Casualty
Company (a member of Nationwide Group) replaced Great American Insurance Company
and Home Warranty of America (a division of Near North National Group) replaced
American Home Shield. The Company is responsible for the marketing, recording
sales, collecting payment and reporting contract details and paying premiums to
the insurance carriers. In addition the Company provides
4
information to the insurance carriers' appointed claims administrators who
handle all claims under the Company's contracts, including the payment of
claims.
The Company commenced operations initially by marketing its extended warranty
products directly to the consumer through its web site. During fiscal 2000 the
Company developed enhanced proprietary software to facilitate more efficient
processing and tracking of online warranty transactions. This provided the
Company with the ability to deliver its products over the Internet through a
number of distribution channels by enabling it to supply a number of different
extended warranty service contracts on a co-branded or private label basis to
corporations, by embedding the Company's suite of products on such corporations
web sites. This new capability was launched in January 2001. As a result the
Company now has four distinct distribution channels: (i) direct sales to
consumers, (ii) co-branded distribution, (iii) private label distribution and
(iv) manufacturer/retailer partnerships.
Direct Sales to Consumers
Consumers can purchase extended warranties and service contracts directly at
www.warrantysuperstore.com by inputing on-line the relevant data. By purchasing
online the consumer saves typically 30-50% of the normal price charged by
traditional off-line retail dealers. The Company also provides via a third party
financing company, at no additional cost to the consumer, an interest free
payment option on the more expensive warranty contracts.
Co-Branded Distribution
Consumers can purchase the Company's extended warranty and service contract
products via a corporate partners own web site by clicking on the Company's icon
which has been put onto the partners web site. This allows the Company to take
advantage of its partner's brand strength and market positioning. The Company's
strategic plan identified key market segments where the Company believes this
strategy will be effective. These include, but are not limited to, Banking,
Insurance, Financial Services, Telecommunications, Utilities and Consumer Goods
suppliers. This channel has been developed to provide the Company with a means
of reaching a substantially larger consumer base, without incurring direct
advertising expense.
Private Label Distribution
This channel represents the next step on from co-branded marketing. Under
private label distribution the Company provides the corporate partner with the
ability to supply a complete suite of extended warranty and service contract
products as if they were their own by embedding the Company's software and
products on the corporate partners own web site but without the Company's
branding. For larger corporations already offering a range of branded products,
such as in the banking or financial service industries, the ability to add a new
range of value added products that are consistent with the look and feel of
their established branding is important. Such entities have been increasingly
reluctant to allow click-through partners onto their web sites in the fear of
losing their customer when he moves to purchase a product on a different site.
Additionally, the Company's new software allows it to provide its private label
partners with a very flexible and manageable package, whereby the partner can
chose how much of the fulfillment of the extended warranty contract they wish to
take. For example, a large insurance company that already had its own
underwriting capability but does not have a range of extended warranty products
can utilize the Company's products and processing and billing capability to
create these products under their own label while underwriting the obligations
themselves as opposed to utilizing the Company's insurance carriers. By enabling
private label partners to pick and chose from "a complete turnkey solution" to
utilizing only a sub-component of the Company's proprietary software, the
Company believes that it can gain access to a much larger portion of the
extended warranty/service contract market.
5
Manufacture / Retail Partnerships
Utilizing its processing capability, the Company has gained access to a fourth
distribution channel by providing extended warranty/service contracts directly
to consumers through retail and manufacturer partnerships. The Company intends
to develop business relationships with retailers and manufacturers pursuant to
which the Company will enable a product manufacturer or retailer to offer
additional and/or extended warranty coverage over and above their normal
manufacturers warranty.
DISCONTINUED OPERATIONS
Through April 2001 the Company also operated in the reinsurance market through
Stamford. On April 30, 2001 the Company sold Stamford for a total consideration
of $372,000. Stamford was chartered under the Laws of, and is licensed to
conduct business as an insurance company by the Cayman Islands. Although
Stamford had incurred losses since its inception, it first generated revenues in
the fourth quarter of 1999. Stamford was a "property and casualty" reinsurance
company writing reinsurance coverage for one domestic carrier's consumer product
service contracts. In the fourth quarter of 2000, the relationship with the
carrier was terminated. Stamford was not able to obtain additional reinsurance
business relationships. In light of the inability of Stamford to write new
business and difficulty in forecasting future claim losses in the run off of its
prior reinsurance contract, management decided to sell Stamford. In the six
months ended June 30, 2001 the Company recorded a loss of approximately $479,000
on the sale which was effective May 1, 2001. The closing and transfer of funds
was completed on July 6, 2001.
COMPETITION
The extended warranty and service contract industry is highly competitive. The
Company competes with a number of on-line and off-line operators. The Company's
competitors range from small private companies to major corporations and include
automobile distributors and retailers of electrical consumer products.
INTELLECTUAL PROPERTY
WARRANTYSUPERSTORE is a registered trademark in the United States. The Company's
internet business operates using proprietary software developed in-house.
EMPLOYEES
As of December 31, 2001, the Company employed three full-time personnel.
RISK FACTORS
CORNICHE HAS A HISTORY OF OPERATING LOSSES AND A SUBSTANTIAL ACCUMULATED
EARNINGS DEFICIT AND IT MAY CONTINUE TO INCUR LOSSES.
Since its inception in 1980, the Company has generated only limited revenues
from sales and has incurred substantial net losses of approximately $2.1
million, $2.1 million and $1.2 million for the years ended December 31, 2001,
2000 and 1999, respectively. At December 31, 2001, the Company had an
accumulated deficit of approximately $8.5 million. The Company expects to incur
additional operating losses as well as negative cash flow from operations of the
warranty and service contract business. It is anticipated that the Board of
Directors of the Company, after the consummation of the StrandTek Transaction,
will review and consider its alternatives which include the contraction,
disposition or termination of such business. There can be no assurance that the
Company will be able to dispose of such business, if a decision to sell is made,
on terms favorable to the Company or at all.
FUTURE SALES OF CORNICHE'S COMMON STOCK MAY DEPRESS ITS STOCK PRICE.
Sales of a substantial number of shares of the Company's Common Stock in the
public market could cause a reduction in the market price of its Common Stock.
The Company had 22,290,710 shares of Common Stock issued and outstanding as of
March 12, 2002. As of that date, all of those shares were eligible for sale
under Rule
6
144 or are otherwise freely tradable. In addition, 380,500 options and warrants
were outstanding as of March 12, 2002. As of March 12, 2002, 84,000 of those
stock options and warrants were vested and the remainder will vest within the
next five years. The Company also has 681,171 shares of Series A Preferred Stock
issued and outstanding as of March 12, 2002, which are convertible, at the
option of the holders or automatically, in certain instances, into 130,989
shares of its Common Stock. The Company's Series A Preferred Stock is expected
to be redeemed simultaneously with the closing of the StrandTek Transaction. The
Company may also issue additional shares in connection with its business and may
grant additional stock options to its employees, officers, directors and
consultants.
In January 2002, Corniche entered into the Agreements which require it to
exchange approximately 35,208,000 shares of its Common Stock, approximately
626,000 shares of its yet to be created Series D Convertible Preferred Stock,
subject to adjustment, and 220,000 shares of Series C Preferred Stock in
connection with the closing of the StrandTek Transaction. In addition, under the
terms of the Agreements, the number of shares of Series D Preferred Stock
exchanged in the transaction is subject to adjustment based upon the number of
shares of Corniche Common Stock issued and outstanding at the closing, including
the shares of Common Stock being offered hereunder. Assuming that (i) the
private placement is concluded at $0.40 per share of Common Stock; (ii) the
minimum of 28,875,000 shares of Common Stock offered in the private placement
are sold and; (iii) such number of shares satisfies the Financing Condition
Amount, the adjustments to the Series D Preferred Stock would increase the
number of shares of Series D Preferred Stock to be issued to approximately
1,355,000 shares (convertible into approximately 135,500,000 shares of Common
Stock) (as adjusted based on the number of issued and outstanding shares of
Common Stock and based on the lack of authorized shares of Common Stock). No
further adjustment would be required for the sale of additional shares in this
private placement above the number of shares of Common Stock necessary to
satisfy the Financing Condition Amount. Such shares of Series C and Series D
Preferred Stock are convertible into approximately 157,500,000 shares of Common
Stock in the aggregate, subject to the satisfaction of certain conditions and to
certain adjustments. In addition, the principal shareholders and the
non-shareholder loan holders of StrandTek are receiving demand registration
rights in connection with the shares of Common Stock and the shares of Common
Stock issuable upon the conversion of the Series C and Series D Preferred Stock.
RISKS RELATING TO THE STRANDTEK TRANSACTION
CORNICHE WILL BE CHANGING ITS PRINCIPAL BUSINESS AND ITS MANAGEMENT IN
CONNECTION WITH THE STRANDTEK TRANSACTION.
Prior to its proposed acquisition of StrandTek, the Company's business has been
(i) the sale of extended warranties and service contracts via the Internet at
www.warrantysuperstore.com and (ii) reinsurance activities, on a limited basis.
The reinsurance activities have been sold and terminated in April 2001. After
the consummation of the StrandTek Transaction, the Company's business will be
the production and marketing of melt-blown polypropylene for acoustical and
thermal insulation applications which is a new business for the Company.
Immediately after the consummation of the StrandTek Transaction, the officers,
directors and principal shareholders of StrandTek will assume control of
Corniche and the Company's current officers and directors will resign. The
Company will be relying on the management of StrandTek to operate the business
after the StrandTek Transaction. StrandTek's management has limited experience
with managing a public company.
CORNICHE WILL HAVE NO RECOURSE AGAINST STRANDTEK AND ITS PRINCIPAL SHAREHOLDERS
AND LOAN HOLDERS WHO EXCHANGE THEIR STRANDTEK COMMON STOCK AND LOANS TO
STRANDTEK FOR ITS COMMON STOCK.
StrandTek has made certain representations and warranties to the Company
concerning StrandTek's business, capitalization, and other matters. These
representations and warranties do not survive the closing. After the closing of
the StrandTek Transaction, the Company has virtually no recourse against
StrandTek and principal shareholders and loan holders who are parties to the
StrandTek Transaction if these representations prove to be untrue absent fraud.
If these representations and warranties are untrue, the value of its Common
Stock may be materially and adversely affected.
7
FOLLOWING THE STRANDTEK TRANSACTION, THE PRINCIPAL STOCKHOLDERS OF STRANDTEK
WILL HAVE CONTROLLING VOTING POWER.
In connection with the acquisition of StrandTek, certain principal stockholders
will receive approximately 35,208,000 shares of the Company's Common Stock and
approximately 626,000 shares of the Company's Series D Preferred Stock, subject
to further adjustment as discussed below. Assuming that (i) the private
placement is concluded at $0.40 per share of Common Stock; (ii) the minimum of
28,875,000 shares of Common Stock offered in the private placement are sold and;
(iii) such number of shares satisfies the Financing Condition Amount, the
adjustments would increase the number of shares of Series D Preferred Stock to
be issued to approximately 1,355,000 (convertible into approximately 135,500,000
shares of Common Stock) (as adjusted based on the number of issued and
outstanding shares of Common Stock and based on the lack of authorized shares of
Common Stock). No further adjustment would be required for the sale of
additional shares in this private placement above the number of shares of Common
Stock necessary to satisfy the Financing Condition Amount. In addition, such
principal shareholders and certain non-shareholder loan holders have agreed to
exchange certain of their outstanding loans due from StrandTek, in the amount of
$22 million in the aggregate, for 220,000 shares of the Company's Series C
Preferred Stock. As a result, upon the consummation of the StrandTek
Transaction, the principal shareholders and the non-shareholder loan holders
will hold substantially more than a majority of the Company's issued and
outstanding Common Stock and will be in a position to control the actions that
require stockholder approval, including:
o the election of Corniche's directors; and
o the outcome of mergers, sales of assets or other corporate
transactions or matters submitted for stockholder approval.
It is anticipated that simultaneous with or shortly after the Closing of the
StrandTek Transaction at least a majority of the Company's Board of Directors
will be reconstituted with StrandTek board members, including Jerome Bauman,
David M. Veltman, Greg Veltman, William G. Buckles, Jr., Philip Palm and Ken
Arsenault.
STRANDTEK IS AN EARLY STAGE COMPANY.
StrandTek has a limited operating history upon which an evaluation of its
business and its prospects can be based. StrandTek's prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by such companies in the early stage of product launch
post-development, particularly companies in new and rapidly evolving industries.
To address these risks and achieve profitability and increased sales levels,
StrandTek must, among other things:
o establish and increase market acceptance of its products as a
replacement for cotton shoddy, fiberglass, polyester fiber and
polyether and polyethylene foams as well as other fibrous
media;
o respond effectively to competitive pressures;
o introduce on a timely basis products incorporating its
technologies; and
o successfully market and support its products.
There can be no assurance that StrandTek will achieve or sustain significant
sales or profitability in the future.
STRANDTEK HAS A HISTORY OF OPERATING LOSSES AND A SUBSTANTIAL ACCUMULATED
EARNINGS DEFICIT AND MAY CONTINUE TO INCUR LOSSES.
8
StrandTek has generated only limited revenues from sales and has incurred
substantial net losses of approximately $16.2 million, $9.7 million, and $5.5
million for the years ended September 30, 2001, 2000, and 1999, respectively and
$3.8 million for the quarter ended December 31, 2001. At September 30, 2001,
StrandTek had an accumulated stockholders' deficit of approximately $22.3
million and $26.1 million at December 31, 2001. StrandTek's ability to generate
revenues and achieve profitability and positive cash flows from operations will
depend on increased market acceptance and sales of its products. StrandTek may
not achieve profitability and positive cash flows from operations. There can be
no assurance that any prior losses may be used to offset future income, if any,
earned by StrandTek.
STRANDTEK OPERATES IN A BUSINESS WHICH IS HIGHLY COMPETITIVE.
As reported by StrandTek, StrandTek faces significant competition in the
acoustical and thermal insulation applications business. StrandTek competes with
many established companies, who vary widely in size and expertise. Many of its
existing and potential competitors in the acoustical and thermal insulation
applications business have far greater financial, marketing, technical and
research resources, name recognition, distribution channels and market presence
than StrandTek. One significant manufacturer, 3M, produces meltblown acoustic
media for automotive acoustic applications, office panel acoustic applications
and appliance applications. StrandTek needs to obtain a material market share
from such competitors for it to operate profitably.
ITEM 2. PROPERTIES
The Company leases approximately 4,100 square feet of office space at 610 South
Industrial Boulevard, Euless, Texas at an annual rental of approximately
$51,144. The lease expires on July 31, 2002.
ITEM 3. LEGAL PROCEEDINGS
The Company is not aware of any material pending legal proceedings or claims
against the Company or its subsidiary.
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 2001.
9
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information. 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, as reported
by Nasdaq Trading and Market Services. On March 12, 2002, the closing
bid price for the Common Stock was $0.45. 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.
<Table>
<Caption>
2000 HIGH LOW
First Quarter $3.34 $ 2.93
Second Quarter 3.03 1.81
Third Quarter 2.31 1.38
Fourth Quarter 1.81 0.44
</Table>
<Table>
<Caption>
2001 HIGH LOW
First Quarter $ 0.63 $ 0.22
Second Quarter 0.50 0.19
Third Quarter 0.82 0.30
Fourth Quarter 0.74 0.35
</Table>
(b) Holders. As of February 26, 2002, there were approximately 1,074
holders of record of the Company's Common Stock.
(c) Dividends. Holders of Common Stock are entitled to dividends when, as,
and if declared by the Board of Directors out of funds legally
available therefore. The Company has not paid any cash dividends on its
Common Stock and, for the foreseeable future, intends to retain future
earnings, if any, to finance the operations, development and expansion
of its business. Future dividend policy is subject to the discretion of
the Board of Directors.
SERIES A 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 December 31,
2001, 681,174 shares of Series A Preferred Stock were outstanding.
10
On January 29, 2002 notice was given that, pursuant to the Company's Restated
Certificate of Incorporation, as amended (the "Certificate of Incorporation"),
the Company has called for redemption and will redeem (the "Redemption") on the
date of the closing of the StrandTek Transaction (the "Redemption Date"), all
shares of the Company's Series A Convertible Preferred Stock outstanding on that
date at a redemption price of $1.05, plus accrued and unpaid dividends from July
1, 1995 through and including the Redemption Date of $0.47 per share (the
"Redemption Price"). Holders will not be entitled to interest on the Redemption
Price and the Series A Preferred Stock will cease to accrue dividends on the
Redemption Date. The Redemption, among other financial, legal and business
conditions, is a condition precedent to the closing of the StrandTek
Transaction, which is expected to close during April 2002. See "Business -
Recent Developments". Similarly, completion of the Redemption is subject to
closing the StrandTek Transaction. As a result, Letters of Transmittal in
connection with the redemption will be held in escrow pending the closing of the
StrandTek Transaction. Simultaneous with the closing of the StrandTek
Transaction, the holders of the Series A Preferred Stock shall receive the
Redemption Price. In the event that the StrandTek Transaction is not
consummated, the Company will rescind the Notice of Redemption. Pursuant to the
Certificate of Incorporation, each share of Series A Preferred Stock, may be
converted into 0.193 shares of Common Stock at any time prior to the close of
business on the tenth (10) day preceding the Redemption Date.
RECENT SALES OF UNREGISTERED SECURITIES
On February 12, 2002 the Company commenced a private placement offering, as
later amended, to sell a minimum of 28,875,000 shares and a maximum of
41,125,000 shares of its Common Stock. Only selected investors which qualify as
"accredited investors" as defined in Rule 501(a) under the Securities Act of
1933, as amended (the "Securities Act"), are eligible to purchase these shares.
The shares of Common Stock are being offered to enable the Company to satisfy
one of the conditions precedent to consummating the StrandTek Transaction
described in "Business - Recent Developments". The shares being offered in the
private placement have not been registered under the Securities Act and such
investors are being granted demand registration rights. The private placement is
being made pursuant to the exemption provided by Section 4(2) of the Securities
Act and certain rules and regulations promulgated under that section.
11
ITEM 6. SELECTED FINANCIAL DATA
The selected statements of operations and balance sheet data set forth below are
derived from audited financial statements of the Company. The information set
forth below should be read in conjunction with the Company's audited
consolidated financial statements and notes thereto. See Item 8 "Financial
Statements and Supplemental Data" and Item 7 "Management's Discussion and
Analysis of Financial Condition and Results of Operations". On February 4, 1999
the Company changed its fiscal year-end from March 31 each year to December 31
each year. On April 30, 2001 the Company sold Stamford and accordingly the
Statement of Operations data presented reflects the Stamford operations as
discontinued operations as reported in the financial statements of the Company.
<Table>
<Caption>
NINE MONTHS
STATEMENT OF OPERATIONS: YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED
($'000 EXCEPT NET LOSS PER SHARE WHICH IS DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31,
STATED IN $) 2001 2000 1999 1998 1998
Earned Revenues $ 107 $ 27 $ - $ - $ -
Direct Costs (70) (33) - - -
Gross Profit 37 (6) - - -
Operating Loss (1,606) (2,516) (1,023) (344) (222)
Loss before discontinued operations and
preferred dividends (1,792) (2,296) (1,084) (403) (204)
Net Loss Attributable to Common Stockholders (2,081) (2,075) (1,170) (448) (264)
Basic and diluted earnings per share:
Loss from continuing operations (0.08) (0.16) (0.16) (0.07) (0.05)
Income (loss) from discontinued operations (0.01) 0.02 - - -
Net loss attributable to common stockholders (0.09) (0.14) (0.17) (0.07) (0.05)
Weighted Average Number of Shares
Outstanding 22,284,417 14,902,184 6,905,073 6,367,015 5,166,272
</Table>
<Table>
<Caption>
BALANCE SHEET DATA: AS OF AS OF AS OF AS OF
$'000 DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2001 2000 1999 1998
Working Capital $ 1,085 $ 2,079 $ 3,192 $ 541
Total Assets 1,836 3,757 4,905 750
Current Liabilities 489 458 868 138
(Accumulated Deficit) (8,486) (6,405) (4,330) (3,077)
Stockholders' Equity 374 2,450 3,112 (308)
</Table>
12
SELECTED QUARTERLY FINANCIAL DATA
<Table>
<Caption>
$'000 QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
(EXCEPT NET LOSS PER SHARE ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
WHICH IS STATED IN$) 12/31/01 9/30/01 6/30/01 3/31/01 12/31/00 9/30/00 6/30/00 3/31/00
Earned Revenues $ 42 $ 33 $ 21 $ 11 $ 19 $ (28) $ 34 $ 2
Direct Costs 17 31 15 7 10 (13) 27 9
Gross profit 25 2 6 4 9 (15) 7 (7)
Operating Loss (449) (386) (353) (418) (669) (1,057) (483) (307)
Net Loss Attributable to
Common Stockholders (725)* (374) (329) (653) (546) (948) (382) (199)
Net loss per share (0.03) (0.02) (0.01) (0.03) (0.07) (0.03) (0.03) (0.01)
</Table>
* Includes write-off of unamortized capitalized software.
See Management's Discussion and Analysis.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the audited
consolidated financial statements and notes thereto, included in Item 8 of this
report, and is qualified in its entirety by reference thereto.
GENERAL
During the first half of fiscal 2001 management became concerned by the slow
progress being made by its warrantysuperstore.com business. As a result,
alternative strategies for the Company were evaluated and on January 7, 2002 the
Company entered into the StrandTek Transaction. After the consummation of the
StrandTek Transaction, Strandtek will become a majority owned subsidiary of the
Company and the former shareholders of Strandtek will control the Company.
Strandtek is a high-tech manufacturer with proprietary technology producing
melt-blown polypropylene for acoustical and thermal insulation applications. The
transaction is expected to close during April 2002 and is contingent upon
certain closing conditions, including, obtaining financing and a number of other
financial, legal and business conditions. There can be no assurance given
however that the financing can be satisfied on terms reasonably acceptable to
the parties or that the other financial, legal and business conditions can be
met or that a transaction can be consummated.
No decision has been made about the future of the warranty and service contract
business. It is anticipated that the Board of Directors will consider the
contraction, sale or termination of the warranty and service contract business
after the consummation of the StrandTek Transaction. There can be no assurance
that the Company will be able to complete the sale of such business, if a
decision to sell is made, on terms favorable to the Company or at all.
On April 30, 2001 the Company sold Stamford. The disposition was completed in
the third quarter of 2001, effective as of May 1, 2001. The consolidated
financial data relating to Stamford is classified as discontinued operations in
the financial statements of the Company for all periods presented.
RESULTS OF CONTINUING OPERATIONS
The Company recognizes revenue from its warranty service contracts business over
the life of contracts executed and direct costs associated with the sale of such
service contracts are also recognized pro rata over the life of the contracts.
FISCAL 2001 COMPARED TO FISCAL 2000
The sale of extended warranties and service contracts via the Internet generated
gross revenues of $225,000 in fiscal 2001 as compared to $124,000 in fiscal 2000
of which $107,000 were recognized as earned revenues in the year ended December
31, 2001 as compared to $27,000 in fiscal 2000. The balance of these revenues is
being deferred over the life of the contracts. Similarly, direct costs
associated with the sale of service contracts are being recognized pro rata over
the life of the contracts.
Selling, general and administrative expenses totaled $1,643,000 during the year
ended December 31, 2001 as compared to $2,510,000 for fiscal 2000, a decrease of
$867,000 or 34.5%. The decrease is primarily due to a decrease in advertising
costs ($1,027,000), offset by increases in professional fees ($166,000) and
staff costs ($48,000). The reduction in advertising is due to the Company
focusing on strategic partnerships and co-op advertising programs as compared to
Internet banner ads and media promotions. The increase in professional fees was
due primarily to legal costs associated with the proposed StrandTek Transaction
and the additional staff cost was due to the hiring of a Marketing Manager in
the second half of 2001.
14
As a result of the uncertainty over the future of the Company's extended
warranty and service contract business the Company recorded an impairment charge
of $305,333 in the fourth quarter of 2001. This charge represented the
unamortized balance of capitalized software.
Interest income decreased by $29,000 for the fiscal year 2001 as compared to
fiscal 2000. The decrease is primarily due to lower cash and cash investments
balances in 2001 as a result of cash being applied to funding operating losses.
Interest expense decreased from $10,000 in the twelve months ended December 31,
2000 to $6,000 in fiscal 2001.
For the reasons cited above, loss before discontinued operations and preferred
dividend for the fiscal year 2001 decreased by 21.9% to $1,792,000 from the
comparable loss of $2,296,000 for fiscal 2000.
FISCAL 2000 COMPARED TO FISCAL 1999
The Company commenced the sale of its extended warranty/service contract
products over the Internet in the last quarter of 1999, initially for new and
used automobiles. The Company's Internet business recorded gross revenues in
fiscal 1999 of $11,000 resulting in earned revenues of $400 with the balance
deferred over the life of the related contracts.
Selling, general and administrative expenses totaled $2,510,000 during the year
ended December 31, 2000 as compared to $1,023,000 for the twelve months ended
December 31, 1999, an increase of $1,487,000 or 145.4%. The increase is
primarily due to increases in advertising costs ($881,000), staff costs and
director fees ($191,000), professional fees ($89,000), and depreciation and
amortization ($73,000). The increase in advertising expense is due to "Internet
banner advertising" promotions. The increase in payroll costs is primarily due
to the appointment of a Chief Executive Officer in February 1999 and the
increase in professional fees resulted from the Company filing a registration
statement on Form S-1 to raise additional financing.
Interest income totaled $136,000 in fiscal 2000 as compared to $4,400 in the
twelve months ended December 31, 1999. The increase in interest income is due to
higher cash, cash equivalents and investments in fiscal 2000. Interest expense
decreased from $65,000 in the twelve months ended December 31, 1999 to $10,000
in fiscal 2000.
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:
<Table>
<Caption>
Twelve Months Ended
-------------------
December 31, 2001 December 31, 2000
Cash used in
operating activities $ (373,843) $ (2,327,046)
Cash provided by (used in)
investing activities 362,939 (25,285)
Cash provided by (used in)
financing activities (23,432) 1,183,311
</Table>
The Company incurred a net loss attributable to common stockholders of
$2,080,714 in fiscal 2001. This loss adjusted for the loss on sale of Stamford
and discontinued operations totaled $1,839,368. Such loss adjusted for non-cash
items such as capitalized software impairment charge $305,333, depreciation
charges $155,436, deferred revenues (net
15
of deferred acquisition costs) $38,342, preferred stock dividend accrual $47,684
and other non-cash items totaling $4,542 resulted in cash used in operating
activities totaling $373,483 for the year ended December 31, 2001, net of
working capital movements.
To meet its cash requirement during the twelve months ended December 31, 2001
the Company relied on the sale of marketable securities ($872,840) and the
proceeds from the sale of Stamford ($372,000) to fund the Company's operations.
Additionally, the Company generated cash from its Internet business, both earned
and unearned, of approximately $160,000.
The Company significantly improved its operating cash flow in fiscal 2001 by
reducing its advertising spending from approximately $1,134,000 in fiscal 2000
to $107,000 in fiscal 2001 and by focusing on strategic partnerships and co-op
advertising programs to promote its products and services and customer
awareness. The Company expended approximately $215,000 for the year ended
December 31, 2001 to maintain and promote its web site. However, the Company has
no contracted capital expenditure commitments in place.
As of December 31, 2001 the Company had cash totaling $51,268. Additionally, it
had Treasury Bills and Federal Home Loan Mortgage notes totaling $1,503,374. The
Company will continue to rely on its cash reserves and its investments to fund
its operations.
Subsequent to December 31, 2001 the Company made advances to StrandTek totalling
$1,250,000 in advance of completing the StrandTek Transaction. The advances bear
interest at 7% per annum and $1,000,000 of the advances are guaranteed by
certain principal stockholders of StrandTek. Additionally, on February 12, 2002
the Company commenced a private placement offering to sell, as amended a minimum
of 28,875,000 shares and a maximum of 41,125,000 shares of its Common Stock. The
shares of Common Stock are being offered to enable the Company to satisfy one of
the conditions precedent to consummating the StrandTek Transaction described in
"Item 1 Business - Recent Developments". The shares being offered in the private
placement have not been registered under the Securities Act but investors are
being granted demand registration rights.
INFLATION
The Company does not believe that its operations have been materially influenced
by inflation in the fiscal year ended December 31, 2001, a situation which is
expected to continue for the foreseeable future.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
This information is submitted in a separate section of this Report. See pages
F-1, et. seq.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
The Company engaged Weinick Sanders Leventhall & Co., LLP ("Weinick") as its
independent accountants as of August 12, 1998. 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.
On May 7, 2001, the Company and Weinick terminated their client-auditor
relationship. The reports of Weinick on the financial statements of the Company
for the prior two fiscal years contained no adverse opinion or
16
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principles. The Company's Audit Committee and its
Board of Directors participated in and approved the decision to change the
Company's independent accountants. In connection with its audits for the prior
two fiscal years and through May 7, 2001, there were no disagreements with
Weinick 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 Weinick, would have caused Weinick to make reference
thereto in its report on the financial statements for such years. During the
prior two fiscal years and through May 7, 2001 there were no "reportable events"
as describe under Item 304(a)(1)(v) of Regulation S-K.
The Company engaged Travis, Wolff & Company, LLP ("Travis Wolff") as its new
independent accountants as of May 7, 2001. Such appointment was approved by the
Company's Audit Committee and its Board of Directors. During the two most recent
fiscal years and through May 7, 2001 the Company had not consulted with Travis
Wolff regarding any matters or events set forth in Item 304(a)(2)(i) and (ii) of
Regulation S-K.
17
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The following table sets forth certain information regarding the directors and
executive officers of the Company as of March 12, 2002:
<Table>
<Caption>
NAME AGE POSITION
- ---- --- --------
James J. Fyfe(1) 47 Chairman of the Board of Directors
Robert F. Benoit(2) 44 Director and Chief Executive Officer
Robert H. Hutchins 73 Director
David H. Boltz 49 Vice President, Chief Information Officer
Paul L. Harrison(1)(2) 40 Director
Joseph P. Raftery(1)(2) 58 Director
</Table>
================================================================================
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
James J. Fyfe
Chairman of the Board of Directors
Mr. Fyfe has served as a director of the Company since May 1995. He became
Chairman of the Board in April 2000. From May 1995 until May 1998, Mr. Fyfe
served as Vice President and Chief Operating Officer of the Company. Mr. Fyfe
has been a director of Machine Vision Holdings, Inc., an intelligent automation
and control software technology company, since January 1998 and of Transmedia
Asia Pacific, Inc., a member benefit loyalty marketing company, since October
1999. From August 1996 to August 1997, Mr. Fyfe was an outside director of
Medical Laser Technologies, Inc.
Robert F. Benoit
Director and Chief Executive Officer
Mr. Benoit has served as Chief Executive Officer of the Company since September
1999 and Secretary since June 1999. He was Executive Vice President and Chief
Operating Officer from February 1999 to September 1999. From May 1996 to
February 1999, Mr. Benoit was a business analyst at Warrantech Automotive, Inc.,
a service contract provider, in Euless, Texas, where he served as project leader
for Internet applications. From October 1995 to May 1996, Mr. Benoit served as
the corporate accounting manager responsible for the non-bank subsidiaries of
Shawmut Bank, National Association.
Robert H. Hutchins
Director
Mr. Hutchins has served as director and the President and Principal Financial
Officer of the Company since May 1998. Effective December 31, 2000 Mr. Hutchins
retired as President and Principal Financial Officer. Mr. Hutchins was employed
by Warrantech Automotive, Inc. as National Claims Manager, from May 1995 to May
1998. Prior to joining Warrantech, he spent 45 years in the property and
casualty reinsurance industry in various executive and management positions.
18
David H. Boltz, PHD
Vice President and Chief Information Officer
Mr. Boltz has served as Vice President, Chief Information Officer of the
Company since June 2000. From May 1991 to June 2000, Dr. Boltz was an
independent business consultant operating as Language Engineering Services,
where he was engaged in providing business technology consulting services and
information management services to numerous firms in the Dallas/Ft. Worth
metroplex.
Paul L. Harrison
Director
Mr. Harrison was elected as a director of the Company in June 2000. He has been
a director of Transmedia Europe, Inc., a "member-benefit" loyalty marketing
company, since June 1996. Mr. Harrison was also President, Principal Financial
and Accounting Officer and Secretary of Transmedia Asia Pacific, Inc., also a
"member-benefit" loyalty marketing company, until October 1999. From May 1994
until June 1997, he was a business and financial consultant to Transmedia
Europe, Inc.
Joseph P. Raftery
Director
Mr. Raftery was elected as a director of the Company in June 2000. He has been
an independent business consultant since 1998. From 1990 to 1998, Mr. Raftery
was Chairman and a member of the Board of Directors and President of BankAmerica
Insurance Group, Inc., a subsidiary of BankAmerica Corp. based in San Diego,
California.
SECTION 16 BENEFICIAL OWNERSHIP COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and officers, and persons who own more than 10% of a registered class
of the Company's equity securities, to file initial reports of ownership and
reports of changes in ownership with the Securities and Exchange Commission.
These persons are required by the Securities and Exchange Commission to furnish
the Company with copies of all Section 16(a) reports that they file. Based
solely on the Company's review of these reports and written representations
furnished to the Company, management believes that in 2001 each of the reporting
persons compiled with these filing requirements.
19
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the aggregate compensation paid during the three
years ended December 31, 2001 to the Company's Chief Executive Officer. No other
executive officer of the Company earned in excess of $100,000 for services
rendered during fiscal 2001.
SUMMARY COMPENSATION TABLE
<Table>
<Caption>
ANNUAL LONG-TERM OTHER
COMPENSATION COMPENSATION COMPENSATION
NAME AND PRINCIPAL POSITION NOTES FISCAL SALARY OPTIONS/SAR'S ALL OTHER
YEAR COMPENSATION
Robert F. Benoit (1)(2) 2001 $109,960 -- $ 6,000
Chief Executive Officer 2000 96,154 75,000 5,800
(Appointed March 1, 2000) 1999 62,019 125,000 4,000
</Table>
Notes:
(1) All other compensation comprises monthly automobile
allowances.
(2) Fiscal 1999 relates to the period from February 15, 1999, when
Mr. Benoit first joined the Company to December 31, 1999.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
None.
AGGREGATE OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTIONS/VALUES
The following table sets forth information as of December 31, 2001 concerning
exercisable and non-exercisable options held by the Company's Chief Executive
Officer and any other executive officer of the Company earning in excess of
$100,000 for services rendered during fiscal 2001. The table includes the value
of "in-the-money" options which represents the spread between the exercise price
of the existing stock options and the year end price of the Common Stock which
was $0.41.
<Table>
<Caption>
SHARES NUMBER OF SECURITIES
ACQUIRED UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
ON VALUE OPTIONS AT THE-MONEY OPTIONS AT
EXERCISE REALIZED FISCAL YEAR END (#) FISCAL YEAR END ($)
NAME (#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
Robert F. Benoit 0 0 43,750/131,250 0/0
</Table>
20
EMPLOYMENT AGREEMENTS
(1) On February 15, 2000, and as amended on May 8, 2001, Mr. Benoit and the
Company entered into an employment agreement for a term ending on
February 15, 2003 ("Employment Agreement") with the Company. The
Employment Agreement provides for a salary of $100,000 per annum and an
annual auto allowance of $6,000 per annum. In addition, Mr. Benoit is
entitled to participation in the Company's health care and dental plans
and all other employee benefit plans. Pursuant to the terms of the
Employment Agreement, Mr. Benoit was granted non-qualified options to
purchase 75,000 shares of Common Stock at an exercise price of $1.097
per share and 100,000 shares of Common Stock at an exercise price of
$1.00 per share. Such options vest over a three-year period commencing
June 1, 2000. The Employment Agreement also provides for the
acceleration of vesting of such options in the event of a change in
control of the Company. Additionally, upon a change in control Mr.
Benoit has the option, exercisable in writing within 30 days after the
effective date of the change in control, to terminate the Employment
Agreement and to receive as a severance payment an amount equal to 18
months base salary and require the Company to pay the cost of
continuing medical insurance for the severance period. The Employment
Agreement includes confidentiality and non-compete restrictions during
the term of the Employment Agreement and for a period of two years
thereafter. Mr. Benoit may be discharged for cause including failure or
refusal to perform his duties, dishonesty, conviction of a felony or
fraud, material breach of any provision of the Employment Agreement,
disability or death.
(2) On June 26, 2000 Mr. Boltz and the Company entered into an employment
agreement for a term ending on June 26, 2003 ("Employment Agreement")
with the Company. The Employment Agreement provides for a salary of
$75,000 per annum. In addition, Mr. Boltz is entitled to participation
in the Company's health care and dental plans and all other employee
benefit plans. The Employment Agreement includes confidentiality and
non-compete restrictions during the term of the Employment Agreement
and for a period of two years thereafter. Mr. Boltz may be discharged
for cause including failure or refusal to perform his duties,
dishonesty, conviction of a felony or fraud, material breach of any
provision of the Employment Agreement, disability or death. The
Employment Agreement also provides for a grant of non-qualified options
to purchase 100,000 shares of Common Stock at an exercise price of
$1.94. Such options vest over a three-year period commencing June 26,
2001 with the vesting of such options accelerating upon a change in
control of the Company. Additionally, upon a change in control Mr.
Boltz has the option, exercisable in writing within 30 days after the
effective date of the change in control, to terminate the Employment
Agreement and to receive as a severance payment an amount equal to 18
months base salary and require the Company to pay the cost of
continuing medical insurance for the severance period.
STOCK OPTION PLANS
In April 1992 the Company adopted the 1992 Stock Option Plan to provide for the
granting of options to directors. According to the terms of the plan, each
director is granted options to purchase 1,500 shares of Common Stock each year.
The maximum number of options to purchase shares of Common Stock that may be
granted under this plan is 20,000 shares.
21
In May 1998, the Company adopted the 1998 Employee Incentive Stock Option Plan
("1998 Plan"). The 1998 Plan was established to attract and retain high caliber
personnel and to offer an incentive for officers and employees to promote the
business of the Company. Officers, employees and other independent contractors
who perform services for the Company or any of its subsidiaries are eligible to
receive incentive stock options under the 1998 Plan. The maximum aggregate
number of shares that may be issued under options is 300,000 shares of Common
Stock, subject to adjustment in the event of stock splits, stock dividends,
recapitalizations, mergers, reorganizations, exchanges of shares and other
similar changes affecting the Company's Common Stock. Unless terminated earlier,
the 1998 Plan expires in May 2008. 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. Options
are exercisable at the fair market value of the common stock on the date of
grant and have five-year terms. The 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 Company 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 Board of Directors' Compensation
Committee administers the 1998 Plan. As of March 31, 2002 300,000 options have
been granted under the 1998 Plan.
DIRECTOR COMPENSATION
Pursuant to the 1998 Independent director Compensation Plan, each director who
is not an officer or employee of the Company is entitled to receive compensation
of $2,500 per calendar quarter plus 500 shares of common stock per calendar
quarter of board service, in addition to reimbursement of travel expenses.
Outside directors are entitled to be compensated for committee service at $500
per calendar quarter plus 125 shares of common stock per calendar quarter.
All directors are entitled to receive options to purchase 1,500 shares of common
stock each May under the Company's 1992 Stock Option Plan for Directors. The
Company deferred the grant of such options that otherwise would have been
granted in May 1999, 2000 and 2001.
22
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as to the number of shares of Common
Stock beneficially owned, as of March 12, 2002, by (i) each beneficial owner of
more than five percent of the outstanding Common Stock, (ii) each current named
executive officer and director and (iii) all current executive officers and
directors of the Company as a group. All shares are owned both beneficially and
of record unless otherwise indicated. Unless otherwise indicated, the address of
each beneficial owner is c/o Corniche Group Incorporated, 610 South Industrial
Boulevard Suite 220, Euless, Texas 76040.
NUMBER AND PERCENTAGE OF SHARES OF COMMON STOCK OWNED
<Table>
<Caption>
PERCENTAGE
OF COMMON STOCK
# OF SHARES BENEFICIALLY OWNED (SEE
NAME AND ADDRESS OF BENEFICIAL OWNER NOTES BENEFICIALLY OWNED NOTE 1)
Pictet & Cie Nominees
Cie 29 Blvd. 2,670,000 11.98%
Georges Favon 1204
Geneva Switzerland
Joel San Antonio
56 North Stanwich Road 3,752,500 16.83%
Greenwich, CT 06831
James J. Fyfe (2) 109,500 0.49%
Robert F. Benoit (3) 76,750 0.34%
Robert H. Hutchins (4) 152,000 0.68%
David H. Boltz (5) 50,000 0.22%
Paul L. Harrison 4,250 0.02%
Joseph P. Raftery 4,250 0.02%
All current directors and officers as a
group (six persons) 396,750 1.77%
</Table>
23
Notes:
(1) Based on 22,290,710 shares of common stock outstanding on March 12,
2002.
(2) Includes currently exercisable options to purchase 1,500 shares of
Common Stock at $0.40625 per share.
(3) Includes currently exercisable options to purchase 33,750 shares of
Common Stock at $1.097 per share and 25,000 shares of Common Stock at
$1.00 per share.
(4) Includes 150,000 shares of Common Stock held by Mr. Hutchins as
co-trustee for a living trust, with Mr. and Mrs. Hutchins as the
beneficiaries.
(5) Includes currently exercisable options to purchase 50,000 shares of
Common Stock at $1.94 per share
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In May 1998, the Company issued 765,000 shares of Series B Preferred Stock to
certain of the Company's executive officers and directors in exchange for
$76,500 in cash and issued 10,000 shares of Series B Preferred Stock to James J.
Fyfe a director of the Company in consideration for services rendered to the
Company.
In September 1998, the Company purchased Stamford from Warrantech Corporation
("Warrantech") for $37,000 in cash. Joel San Antonio, then Acting Chairman of
the Board of Directors of the Company and a principal stockholder of the
Company, is also a significant stockholder and Chief Executive Officer,
President and Chairman of the Board of Directors of Warrantech Corporation.
Through November 2001 Warrantech also acted as claims administrator for the
Company's extended warranty and service contracts business and was paid
administrative fees of $48,506 and $29,611 in fiscal 2001 and 2000 respectively.
No administrative fees were paid in fiscal 1999.
In addition, during fiscal 1998 the Company paid Warrantech approximately
$42,000 for reimbursement of expenses incurred in connection with the
preliminary development of the Company's Web site.
24
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following documents are being filed as part of this Report:
(a)(1) Financial Statements:
Corniche Group Incorporated
See "Index to Financial Statements" contained in Part II, Item 8
(a)(3) Exhibits:
<Table>
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(9) 3(j)
(k) Certificate of Designation for the Series B Preferred Stock
dated May 18, 1998 C3(f)
(l) By-laws of the Corporation, as amended on April 25, 1991(6)
(m) Amendment to Certificate of Incorporation dated May 18, 1998 A
4 (a) Form of Underwriter's Warrant(6) 4.9.1
(b) Form of Promissory Note - 1996 Offering(9) 4(b)
(c) Form of Promissory Note - 1997 Offering(9) 4(c)
(d) Form of Common Stock Purchase Warrant - 1996 Offering(9) 4(d)
(e) Form of Common Stock Purchase Warrant - 1997 Offering(9) 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 March 4, 1998, between
the Company and the Initial Purchasers named therein(9) B
(d) 1998 Employees Stock Option Plan(9) D
(e) Stock Contribution Exchange Agreement with StrandTek International, Inc.
dated January 7, 2002, as amended on February 11, 2002(10) 10(o)
(f) Supplemental Disclosure Agreement to Stock Contribution Exchange
Agreement with StrandTek International, Inc. dated January 7, 2002(10) 10(p)
</Table>
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.
25
(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.
(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, as
indicated above, to the Company's proxy statement dated April 23, 1998,
which exhibit is incorporated here by reference.
(10) Filed herewith.
REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the fourth
quarter of fiscal 2001.
26
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 F. Benoit
--------------------
Robert F. Benoit, Chief Executive Office
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/ Robert F. Benoit Director and Chief Executive Officer April 9, 2002
- ------------------------------------ (Principal executive officer)
ROBERT F. BENOIT
/s/ James J. Fyfe Chairman of the Board and Director April 9, 2002
- ------------------------------------
JAMES J. FYFE
/s/ Paul L. Harrison Director April 9, 2002
- ------------------------------------
PAUL L. HARRISON
/s/ Joseph P. Raftery Director April 9, 2002
- ------------------------------------
JOSEPH P. RAFTERY
/s/ Robert H. Hutchins Director April 9, 2002
- ------------------------------------
ROBERT H. HUTCHINS
</Table>
27
CORNICHE GROUP INCORPORATED
Table of Contents
================================================================================
<Table>
Report of Independent Certified Public Accountants -
Travis, Wolff & Company, LLP F-2
Independent Auditors' Report - Weinick Sanders Leventhal & Co., LLP F-3
Financial Statements:
Consolidated Balance Sheets at December 31, 2001 and 2000 F-4
Consolidated Statements of Operations
For the Years Ended December 31, 2001, 2000 and 1999 F-5
Consolidated Statement of Stockholders' Equity
For the Years Ended December 31, 2001, 2000 and 1999 F-6
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2001, 2000, and 1999 F-7
Notes to Consolidated Financial Statements F-8 to F-25
</Table>
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
Corniche Group Incorporated
Euless, Texas
We have audited the accompanying consolidated balance sheet of Corniche
Group Incorporated (the "Company") as of December 31, 2001 and the related
consolidated statements of operations, stockholders' equity, and cash flows
for the year then ended. 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 audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. 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 audit provides a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Corniche Group Incorporated as of December 31, 2001 and the
consolidated results of their operations and their cash flows for the year
then ended, in conformity with accounting principles generally accepted in
the United States of America.
The accompanying consolidated financial statements have been prepared
assuming Corniche Group Incorporated will continue as a going concern. As
discussed in the accompanying financial statements, the Company sold its
insurance subsidiary in July 2001. Additionally, the Company temporarily
discontinued sales of its extended warranty service contracts through its
web site in December 2001. As more fully disclosed in Note 13 to the
financial statements, the Company has entered into an agreement to acquire
StrandTek International, Inc. The acquisition is conditioned on among other
things, the private placement of shares of Company stock for approximately
$11.55 million. There can be no assurances that the private placement will
be successful or that the acquisition will be completed. These factors raise
substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 13. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ TRAVIS WOLFF & COMPANY, LLP
Dallas, Texas
February 1, 2002
(except for Note 13, as to which
the date is February 19, 2002)
F-2
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
Corniche Group Incorporated
We have audited the accompanying consolidated balance sheet of Corniche
Group Incorporated and Subsidiary as at December 31, 2000, and the related
consolidated statements of operations, redeemable preferred stock, common
stock, other stockholders' equity and accumulated deficit, and cash flows
for the years ended December 31, 2000 and 1999. 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 auditing standards generally
accepted in the United States of America. 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, 2000, and the results
of their operations and their cash flows for the years ended December 31,
2000 and 1999, in conformity with accounting principles generally accepted
in the United States of America.
/s/ WEINICK SANDERS LEVENTHAL & CO., LLP
New York, New York
February 8, 2001
F-3
CORNICHE GROUP INCORPORATED
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
<Table>
<Caption>
December 31,
------------------------------
2001 2000
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 51,268 $ 85,604
Marketable securities 1,503,374 2,376,214
Prepaid expenses and other current assets 19,734 75,291
------------ ------------
Total current assets 1,574,376 2,537,109
PROPERTY AND EQUIPMENT, NET 74,159 525,866
DEFERRED ACQUISITION COSTS 183,579 76,950
NET ASSETS OF SUBSIDIARY -- 613,344
OTHER ASSETS 4,175 4,175
------------ ------------
$ 1,836,289 $ 3,757,444
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Dividends payable - preferred stock $ 337,827 $ 290,143
Accounts payable, accrued expenses
and other current liabilities 130,617 144,823
Current portion of long-term debt 21,051 23,459
------------ ------------
Total current liabilities 489,495 458,425
UNEARNED REVENUES 259,779 114,808
LONG-TERM DEBT 32,108 53,132
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' EQUITY:
Preferred stock; authorized, 5,000,000
shares Series B convertible redeemable
preferred stock, liquidation value, 10 shares
of common stock per share, $.01 par value;
authorized, 825,000 shares; outstanding,
20,000 shares 200 200
Common stock, $.001 par value; authorized,
75,000,000 shares; issued and outstanding,
22,290,710 shares at December 31, 2001 and
22,280,210 shares at December 31, 2000 22,291 22,280
Additional paid-in capital 8,837,687 8,833,156
Accumulated deficit (8,486,445) (6,405,731)
------------ ------------
Total stockholders' equity 373,733 2,449,905
------------ ------------
$ 1,836,289 $ 3,757,444
============ ============
</Table>
The accompanying notes are an integral part of
the consolidated financial statements.
F-4
CORNICHE GROUP INCORPORATED
Consolidated Statements of Operations
- --------------------------------------------------------------------------------
<Table>
<Caption>
Years Ended December 31,
------------------------------------------------
2001 2000 1999
------------ ------------ ------------
Earned revenues $ 107,447 $ 27,175 $ 398
Direct costs 70,674 33,339 445
------------ ------------ ------------
GROSS PROFIT 36,773 (6,164) (47)
Selling, general and administrative expenses 1,642,874 2,510,492 1,022,560
------------ ------------ ------------
OPERATING LOSS (1,606,101) (2,516,656) (1,022,607)
OTHER INCOME (EXPENSE):
Unrealized gain on marketable securities 18,779 37,710 --
Realized gain on marketable securities -- 56,307 --
Capitalized software impairment charge (305,333) -- --
Interest income 107,183 136,353 4,431
Interest expense (6,212) (10,136) (65,326)
------------ ------------ ------------
(185,583) 220,234 (60,895)
------------ ------------ ------------
LOSS BEFORE DISCONTINUED
OPERATIONS AND PREFERRED DIVIDEND (1,791,684) (2,296,422) (1,083,502)
DISCONTINUED OPERATIONS:
Income (loss) from operations 237,898 269,257 (28,834)
Loss on disposal (479,244) -- --
------------ ------------ ------------
(241,346) 269,257 (28,834)
------------ ------------ ------------
NET LOSS (2,033,030) (2,027,165) (1,112,336)
PREFERRED DIVIDEND (47,684) (48,211) (57,172)
------------ ------------ ------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (2,080,714) $ (2,075,376) $ (1,169,508)
============ ============ ============
BASIC EARNINGS PER SHARE
Loss before discontinued
operations $ (0.08) $ (0.16) $ (0.17)
Income (loss) from discontinued operations (0.01) 0.02 --
------------ ------------ ------------
Net loss attributable to common stockholders $ (0.09) $ (0.14) $ (0.17)
============ ============ ============
Weighted average common shares outstanding 22,284,417 14,902,184 6,905,073
============ ============ ============
</Table>
The accompanying notes are an integral part of
the consolidated financial statements.
F-5
CORNICHE GROUP INCORPORATED
Consolidated Statement of Stockholders' Equity
Years Ended December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
<Table>
<Caption>
Series B
Convertible
Preferred Stock Common Stock
-------------------- --------------------- Additional Accumulated
Shares Amount Shares Amount Paid-in Capital Deficit Total
--------- -------- ----------- -------- --------------- ----------- -----------
BALANCE AT DECEMBER 31, 1998 825,000 $ 8,250 6,370,058 $ 6,370 2,838,420 $(3,160,847) $ (307,807)
Issuance of common stock for
interest and services rendered -- -- 55,000 55 57,664 -- 57,719
Issuance of common stock for indebtness -- -- 208,738 209 252,973 -- 253,182
Issuance of common stock
for cash, net of offering costs -- -- 5,875,835 5,876 4,248,360 -- 4,254,236
Conversion of Series A convertible
preferred stock into common stock -- -- 3,586 3 24,527 -- 24,530
Series A convertible stock dividends (57,172) (57,172)
Net loss -- -- -- -- -- (1,112,336) (1,112,336)
--------- -------- ----------- -------- --------------- ----------- -----------
BALANCE AT DECEMBER 31, 1999 825,000 8,250 12,513,217 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 -- -- 16,000 16 28,194 -- 28,210
Conversion of Series B convertible
preferred stock into common stock (805,000) (8,050) 8,050,000 8,050 -- -- --
Conversion of Series A convertible --
preferred stock into common stock -- -- 24,743 25 175,257 -- 175,282
Compensatory effect of stock options -- -- -- -- 2,667 -- 2,667
Series A convertible stock dividends -- -- -- -- -- (48,211) (48,211)
Net loss -- -- -- -- -- (2,027,165) (2,027,165)
--------- -------- ----------- -------- --------------- ----------- -----------
BALANCE AT DECEMBER 31, 2000 20,000 200 22,280,210 22,280 8,833,156 (6,405,731) 2,449,905
Issuance of common stock to directors -- -- 10,500 11 4,531 -- 4,542
Series A convertible stock dividends -- -- -- -- -- (47,684) (47,684)
Net loss -- -- -- -- -- (2,033,030) (2,033,030)
--------- -------- ----------- -------- --------------- ----------- -----------
BALANCE AT DECEMBER 31, 2001 20,000 $ 200 22,290,710 $ 22,291 $ 8,837,687 $(8,486,445) $ 373,733
========= ======== =========== ======== =============== =========== ===========
</Table>
The accompanying notes are an integral part of
the consolidated financial statements.
F-6
CORNICHE GROUP INCORPORATED
Consolidated Statements of Cash Flows
- -------------------------------------------------------------------------------
<Table>
<Caption>
Years Ended December 31,
------------------------------------------
2001 2000 1999
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,033,030) $ (2,027,165) $ (1,112,336)
Adjustments to reconcile net loss to net
cash used in operating activities:
Net income (loss) from discontinued operations (237,898) (269,257) 28,834
Loss on sale of subsidiary 479,244 -- --
Capitalized software impairment charge 305,333 -- --
Common shares and Series B preferred shares
issued for interest expense and for services rendered 4,542 30,877 57,719
Depreciation 155,436 154,421 81,118
Unearned revenues 144,971 104,093 10,715
Deferred acquisition costs (106,629) (70,572) (6,378)
Changes in operating assets and liabilities:
Marketable securities 872,840 169,071 (2,105,144)
Prepaid expenses and other current assets 55,557 (3,669) (71,620)
Other assets -- 8,350 --
Accounts payable, accrued expenses
and other current liabilities (14,209) (423,195) 446,822
------------ ------------ ------------
Net cash used in operating activities (373,843) (2,327,046) (2,670,270)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (9,061) (25,285) (464,442)
Proceeds from sale of subsidiary 372,000 -- --
------------ ------------ ------------
Net cash provided by (used in) investment activities 362,939 (25,285) (464,442)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of capital stock -- 1,206,770 4,254,236
Net proceeds from long-term debt -- -- 89,264
Repayment of long-term debt (23,432) (23,459) (4,671)
------------ ------------ ------------
Net cash (used in) provided by financing activities (23,432) 1,183,311 4,338,829
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (34,336) (1,169,020) 1,204,117
Cash and cash equivalents at beginning of year 85,604 1,254,624 50,507
------------ ------------ ------------
Cash and cash equivalents at end of year $ 51,268 $ 85,604 $ 1,254,624
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes $ -- $ -- $ --
============ ============ ============
Interest $ 6,212 $ 10,136 $ 38,443
============ ============ ============
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Issuance of preferred stock and
common stock for services rendered $ 4,542 $ 28,210 $ 30,000
============ ============ ============
Compensatory element of stock options $ -- $ 2,667 $ --
============ ============ ============
Net accrual of dividends on Series A preferred stock $ 47,684 $ 48,211 $ 57,172
============ ============ ============
Series A preferred stock and dividends thereon converted to
common stock and additional paid-in capital upon conversion $ -- $ 175,282 $ 24,530
============ ============ ============
Issuance of common stock for indebtedness $ -- $ -- $ 253,182
============ ============ ============
Issuance of common stock for interest $ -- $ -- $ 27,719
============ ============ ============
</Table>
The accompanying notes are an integral part of
the consolidated financial statements.
F-7
CORNICHE GROUP INCORPORATED
Notes to the Consolidated Financial Statements
================================================================================
NOTE 1 - THE COMPANY
Corniche Group Incorporated (hereinafter referred to as the "Company" or "CGI")
was incorporated in Delaware on September 18, 1980 under the name Fidelty
Medical Services, Inc. From its inception through March 1995, the Company was
engaged in the development, design, assembly, marketing, and sale of medical
imaging products. As a result of a reverse merger with Corniche Distribution
Limited and its Subsidiaries ("Corniche") the Company was engaged in the retail
sale and wholesale distribution of stationery products and related office
products, including office furniture, in the United Kingdom. Effective March 25,
1995, the Company sold its wholly-owned medical imaging products subsidiary. On
September 28, 1995 the Company changed its name to Corniche Group Incorporated.
In February 1996, the Company's United Kingdom operations were placed in
receivership by their creditors. Thereafter, through May 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 endeavored 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 ("Warrantech") for $37,000 in cash in a transaction accounted for as
a purchase. On April 30, 2001, the Company sold Stamford for a consideration of
$372,000. During 2001 the Company recorded a loss of approximately $479,000 on
the sale of Stamford. The closing was effective May 1, 2001 and transfer of
funds was completed on July 6, 2001.
F-8
CORNICHE GROUP INCORPORATED
Notes to the Consolidated Financial Statements
================================================================================
NOTE 1 - THE COMPANY - (CONTINUED)
At April 30, 2001 and December 31, 2000, Stamford's total net assets consisted
of the following:
<Table>
<Caption>
April 30, December 31,
----------- ------------
2001 2000
----------- ------------
ASSETS:
Cash and equivalents $ 836,979 $ 387,402
Restricted cash 493,451 817,265
Accounts receivable -- 160,757
Deferred acquisition costs 56,074 92,871
Licenses, net of accumulated
Amortization 15,150 15,557
----------- ------------
1,401,654 1,473,852
----------- ------------
LIABILITIES:
Current liabilities 24,572 5,222
Loss reserve 77,247 112,318
Unearned premiums 448,592 742,968
----------- ------------
550,411 860,508
----------- ------------
Net assets $ 851,243 $ 613,344
=========== ============
</Table>
Cash and restricted cash of $1,072,431 and $923,405 were on deposit in a United
States domestic bank at April 30, 2001 and December 31, 2000, respectively.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of consolidation: The accompanying consolidated financial
statements include the accounts of the Company and its subsidiary. All
intercompany amounts and balances have been eliminated in
consolidation.
(b) Use of Estimates: The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual
results could differ from those estimates.
(c) 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.
F-9
CORNICHE GROUP INCORPORATED
Notes to the Consolidated Financial Statements
================================================================================
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
(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 marketable securities are primarily
comprised of investments in U. S. Treasury Bills and Federal Home Loan
Mortgage notes.
(d) Marketable Securities: Marketable securities are classified as trading
securities and are reported at market value. At December 31, 2001,
marketable securities are comprised of U.S. Treasury Bills and Federal
Home Loan Mortgage notes whose cost approximated their market value. At
December 31, 2000, marketable securities were comprised of state and
local municipal bonds whose cost approximated their market value.
(e) Property and Equipment: The cost of property and equipment is
depreciated over the estimated useful lives of the related assets of 3
to 5 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 that do
not extend original asset lives are charged to income as incurred.
(f) 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.
(g) Accounting for Long-Lived Assets: 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, the value of long-lived assets to be disposed of and
long-term liabilities. At December 31, 2001 the Company recognized as
impaired, the book value of certain capitalized software costs
resulting in an impairment charge of $305,333.
(h) Advertising Costs: The Company expenses advertising costs as incurred.
Advertising costs amounted to $107,117, $1,133,987 and $252,983 for the
years ended December 31 2001, 2000 and 1999, respectively.
F-10
CORNICHE GROUP INCORPORATED
Notes to the Consolidated Financial Statements
================================================================================
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
(i) 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 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.
(k) Recently Issued Accounting Pronouncements: In July 2001, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards No. 141 (SFAS 141), "Business Combinations", which
eliminates the pooling method of accounting for business combinations
initiated after June 30, 2001. In addition, SFAS 141 addresses the
accounting for intangible assets and goodwill acquired in a business
combination. This portion of SFAS 141 is effective for business
combinations completed after June 30, 2001. The Company does not expect
SFAS 141 to have a material effect on the Company's financial position
or results of operations.
In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 142 (SFAS 142), "Goodwill and Intangible Assets", which
revises the accounting for purchased goodwill and intangible assets.
Under SFAS 142, goodwill and intangible assets with indefinite lives
will no longer be amortized, but will be tested for impairment
annually, and also in the event of an impairment indicator. SFAS 142 is
effective for fiscal years beginning after December 15, 2001. The
Company does not expect the adoption of SFAS 142 to have a material
effect on the financial statements. The Company will adopt SFAS 142 on
January 1, 2002.
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 (SFAS 144), "Accounting for the Impairment or
Disposal of Long-lived Assets", which revises the accounting for
long-lived assets and superceded SFAS 121. The Company will be required
to implement SFAS 144 on January 1, 2002. The Company has not yet
determined the impact of this implementation on its financial
statements.
F-11
CORNICHE GROUP INCORPORATED
Notes to the Consolidated Financial Statements
================================================================================
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
(l) Revenue Recognition: Stamford's reinsurance 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 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 Company sells via the Internet through partnerships and directly to
consumers, extended warranty service contracts for seven major consumer
products or stores. 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 a domestic carrier. The
insurance premium and other costs related to the sale are amortized
over the life of the contract.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<Table>
<Caption>
December 31,
-------------------------
2001 2000
---------- ----------
Computer equipment $ 131,014 $ 124,690
Furniture and fixtures 23,829 23,829
Equipment under capital lease 17,806 17,806
Computer software 602,014 599,277
---------- ----------
774,663 765,602
Less: Accumulated depreciation 700,504 239,736
---------- ----------
$ 74,159 $ 525,866
========== ==========
</Table>
Depreciation and amortization charged to operations were $155,436, $154,421 and
$81,118 for the years ended December 31, 2001, 2000, and 1999, respectively.
F-12
CORNICHE GROUP INCORPORATED
Notes to the Consolidated Financial Statements
================================================================================
NOTE 4 - ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accounts payable, accrued expenses and other current liabilities are as follows:
<Table>
<Caption>
December 31,
-------------------------
2001 2000
---------- ----------
Accrued professional fees $ 83,014 $ 75,824
Director fees 12,500 8,500
Other 6,250 29,521
Payroll related 13,853 24,277
Travel & entertainment 15,000 6,701
---------- ----------
$ 130,617 $ 144,823
========== ==========
</Table>
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 notes were repaid in full
by 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:
<Table>
<Caption>
December 31,
-------------------------
2001 2000
---------- ----------
Capital lease obligations $ 343 $ 4,591
Bank note payable in equal monthly installments of
$2,043 including interest at 8.75%, collateralized by
computer equipment having an undepreciated cost of
$47,665 52,816 72,000
---------- ----------
53,159 76,591
Current maturities 21,051 23,459
---------- ----------
$ 32,108 $ 53,132
========== ==========
</Table>
F-13
CORNICHE GROUP INCORPORATED
Notes to the Consolidated Financial Statements
================================================================================
NOTE 6 - LONG-TERM DEBT - (CONTINUED)
The aggregate scheduled future maturities of the obligations are as follows:
<Table>
<Caption>
Years Ending
December 31,
--------------
2002 $ 21,051
2003 22,595
2004 9,513
--------
$ 53,159
========
</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 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 years ended December 31,
2000 and 1999, 128,880 and 18,711, respectively, shares of Series A Preferred
Stock were converted into 24,743 and 3,586, respectively, shares of common
stock. At December 31, 2001, 681,174 shares of Series A Preferred Stock were
outstanding, and accrued dividends on these outstanding shares were $337,827.
See Note 13 - Subsequent Events
F-14
CORNICHE GROUP INCORPORATED
Notes to the Consolidated Financial Statements
================================================================================
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. 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 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 votes as one class with the common stock.
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 Company's Series A Preferred
Stock and would share ratably with the common stock with respect to
liquidating distributions. During the year ended December 31, 2000,
holders of 805,000 shares of the Series B Preferred Stock converted
their shares into 8,050,000 shares of the Company's common stock. At
December 31, 2001 and 2000, 20,000 Series B Preferred Shares were
issued and outstanding. 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.
(b) Common Stock:
At the 2000 annual meeting, the stockholders approved an amendment
increasing 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
F-15
CORNICHE GROUP INCORPORATED
Notes to the Consolidated Financial Statements
================================================================================
NOTE 8 - STOCKHOLDERS' EQUITY - (CONTINUED)
(b) Common Stock - Continued
investors purchased 5,187,500 shares of the Company's common stock for
$3,715,744, net of offering costs. From January 1, 2000 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
that 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. The Company in 2000 issued 3,000 shares of its common stock whose
fair value was $7,688 to a consultant for promotional activities.
The Company also issued 13,000 shares of its common stock whose fair
value was $20,522 to its past and present board members for director's
fees from the second quarter of 1998 through the fourth quarter of
2000. See Note 13 - Subsequent Events.
(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 were reserved for issuance upon exercise of warrants as of
December 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, 2001 at prices
ranging from $3.20 to $27.50 and expiring through October 2004.
(d) 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.
Under the 1998 Plan, the maximum aggregate number of shares that 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
F-16
CORNICHE GROUP INCORPORATED
Notes to the Consolidated Financial Statements
================================================================================
NOTE 8 - STOCKHOLDERS' EQUITY - (CONTINUED)
(d) Stock Option Plans - Continued
exceed $100,000. Options are exercisable at the fair market value of
the common stock on the date of grant and have five-year terms. The
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 Company 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 Board of Directors' Compensation Committee
administers the 1998 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.
In 1999, an option to acquire 100,000 common shares at $1.00 per share
was granted to an officer and an option to acquire 25,000 common shares
at $0.6875 per share was issued to a consultant under the 1998 Plan. In
fiscal 2000, options to acquire 75,000 common shares at $1.097 per
share, 100,000 common shares at $1.88 per share and 100,000 common
shares at $1.94 per share were granted to officers. In Fiscal 2001,
options to acquire 75,000 and 100,000 common shares at $0.37 and $1.88,
respectively, were cancelled.
F-17
CORNICHE GROUP INCORPORATED
Notes to the Consolidated Financial Statements
================================================================================
NOTE 8 - STOCKHOLDERS' EQUITY - (CONTINUED)
(d) Stock Option Plans: (continued)
Stock option activity under the 1992 and 1998 Stock Option Plans is as
follows:
<Table>
<Caption>
Weighted Average
Number of Shares Exercise Price
---------------- ----------------
Balances at December 31, 1998 $ 3,000 $ 0.36
Granted 125,000 0.94
Cancelled -- --
---------------- ----------------
Balances at December 31, 1999 128,000 0.92
Granted 275,000 1.69
Cancelled -- --
---------------- ----------------
Balances at December 31, 2000 403,000 1.45
Granted 75,000 0.37
Expired (1,500) 0.31
Cancelled (175,000) 1.23
---------------- ----------------
Balances at December 31, 2001 301,500 $ 1.30
================ ================
</Table>
The following table summarizes information about stock options outstanding at
December 31, 2001:
<Table>
<Caption>
Shares Outstanding Weighted Average
Range of and Exercisable at Remaining Life Weight Average
Exercise Prices December 31, 2001 (Years) Exercise Price
- --------------------------- ------------------ ---------------- --------------
$ 0.31 to $ 0.69 26,500 3.21 $ 0.65
$ 1.00 to $ 1.94 275,000 8.18 1.37
--------- ------ ------
Total 301,500 7.72 $ 1.30
========= ====== ======
</Table>
F-18
CORNICHE GROUP INCORPORATED
Notes to the Consolidated Financial Statements
================================================================================
NOTE 8 - STOCKHOLDERS' EQUITY - (CONTINUED)
(d) Stock Option Plans: (continued)
Outstanding options expire 90 days after termination of the 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. Financial Accounting Standards Board
Interpretation No. 44 is an interpretation of APB Opinion No. 25 and SFAS No.
123 which requires that effective July 1, 2000, all options issued to
non-employees after January 12, 2000 be accounted for under the rules of SFAS
No. 123. Options granted to non-employees after December 15, 1998 through
January 12, 2000 are also required to follow SFAS No. 123 prospectively from
July 1, 2000. The effect of adoption of the Interpretation was a charge to
operations in 2000 of $2,667 and an increase in additional paid in capital in
the same amount.
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, and $1.097 to $1.94 in June 2000, 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 $59,129, $57,842 and $7,750,
respectively, for the years ended December 31, 2001, 2000 and 1999 as calculated
by the Black-Scholes option pricing model.
As such, proforma net loss and net loss per share attributable to common
stockholders would be as follows:
<Table>
<Caption>
2001 2000 1999
------------ ------------ ------------
Net loss attributable to
common stockholders:
As reported $ (2,080,714) $ (2,075,376) $ (1,169,508)
Additional compensation (59,129) (57,842) (7,750)
------------ ------------ ------------
As adjusted $ (2,139,843) $ (2,133,218) $ (1,177,258)
============ ============ ============
Net loss per share attributable
to common stockholders:
As reported $ (0.09) $ (0.14) $ (0.17)
============ ============ ============
As adjusted $ (0.10) $ (0.14) $ (0.17)
============ ============ ============
</Table>
F-19
CORNICHE GROUP INCORPORATED
Notes to the Consolidated Financial Statements
================================================================================
NOTE 9 - INCOME TAXES
Deferred tax assets consisted of the following as of December 31:
<Table>
<Caption>
2001 2000 1999
------------ ------------ ------------
Net operating loss carryforwards $ 1,828,000 $ 1,416,000 $ 721,000
Property and equipment 126,000 48,000 --
Capital loss carryforward 166,000 -- --
Deferred revenue 88,000 -- --
Other, net -- 14,000 --
------------ ------------ ------------
Net deferred tax assets 2,208,000 1,517,000 721,000
Deferred tax asset valuation allowance
(2,208,000) (1,517,000) (721,000)
------------ ------------ ------------
$ -- $ -- $ --
============ ============ ============
</Table>
The provision for income taxes is different than the amount computed using the
applicable statutory federal income tax rate with the difference for each year
summarized below:
<Table>
<Caption>
2001 2000 1999
-------- --------- --------
Federal tax benefit at statutory rate (34.0)% (34.0)% (34.00)%
Change in valuation allowance 33.0% 34.0% 34.0%
Permanent difference 1.0% -- --
-------- --------- --------
Provision for income taxes 0.00% 0.00% 0.00%
======== ========= ========
</Table>
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 carryforwards at December 31, 2001 of approximately $5,370,000
has been limited by this ownership change. The future tax benefit of the net
operating loss carryforwards aggregating approximately $1,800,000 at December
31, 2001 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.
F-20
CORNICHE GROUP INCORPORATED
Notes to the Consolidated Financial Statements
================================================================================
NOTE 10 - COMMITMENTS, CONTINGENCIES AND OTHER
(a) Leases: Rent expense charged to operations for the year ended December
31, 2001 was $51,144 and for 2000 and 1999 was $50,100 in each year.
Future minimum annual rent commitments under operating leases expiring
in July 2002, amounts to $30,443.
(b) Investment Contract: The Company has terminated, effective January 1,
2001 its investment advisory agreement with AIG Global Investment
Corporation ("AIG") under which AIG functioned as investment advisor
and manager of all the Company's investment assets. The Company entered
into an agreement with Bank One National Safekeeping Services Capital
Markets effective January 17, 2001 to maintain its investment accounts,
which consisted of Treasury Notes and Federal Home Loan Mortgages.
NOTE 11 - SEGMENT INFORMATION
Until April 30, 2001, the Company operated in two segments; as a reinsuror and
as a seller of extended warranty service contracts through the Internet. The
reinsurance segment has been discontinued with the sale of Stamford (see Note
1), and the Company now operates in one segment.
NOTE 12 - RELATED PARTY TRANSACTIONS
The Company processes claims on its warranty contracts through Warrantech
Corporation (Warrantech), in which a principal shareholder of the Company is
also a significant shareholder and Chief Executive Officer, President and
Chairman of the Board of Directors. Warrantech receives an administration fee of
$50 per contract for processing the claim. Total administrative fees paid to
Warrantech in 2001 and 2000 totaled $48,506 and $29,611, respectively. There
were no administrative fees paid in 1999.
F-21
CORNICHE GROUP INCORPORATED
Notes to the Consolidated Financial Statements
================================================================================
NOTE 13 - SUBSEQUENT EVENTS
(a) StrandTek Transaction
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. Strandtek is a high-tech manufacturer with
proprietary technology producing melt-blown polypropylene for
acoustical and thermal insulation applications. After the consummation
of the transactions contemplated by the Agreements, Strandtek will
become a majority owned subsidiary of the Company and the former
shareholders of Strandtek will control the Company.
Pursuant to the terms of the Agreements, as amended, the Company will
acquire approximately 178,000,000 shares or approximately 98% of the
common stock, $.0001 par value per share, of Strandtek from certain
principal shareholders of Strandtek. Such principal shareholders will
exchange their shares of Strandtek common stock for approximately
34,650,000 shares of the Company's Common Stock and approximately
750,000 shares of the Company's Series D Convertible Preferred Stock,
as adjusted pursuant to the Agreements and subject to further
adjustments currently being negotiated. In addition, such principal
shareholders and certain non-shareholder loan holders have agreed to
exchange certain of their outstanding loans due from Strandtek, in the
amount of $22 million in the aggregate, and the Company will issue
220,000 shares of its Series C 7% Convertible Preferred Stock. Upon the
consummation of the transaction contemplated by the Agreements, the
principal shareholders and the non-shareholder loan holders will own
more than a majority of the outstanding shares and voting power of the
Company.
In addition, 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 are
due on the earlier of March 31, 2002 or forty five days after
termination of the agreements.
F-22
CORNICHE GROUP INCORPORATED
Notes to the Consolidated Financial Statements
================================================================================
NOTE 13 - SUBSEQUENT EVENTS - (CONTINUED)
(a) StrandTek Transaction - continued
The transaction is expected to close during April 2002 and is
contingent upon certain closing conditions, including, obtaining
financing of approximately $11 million and a number of other financial,
legal and business conditions. The Company is attempting to secure this
financing through an unregistered private placement of its securities.
Upon the closing of the transaction, Jerome Bauman, President of
Strandtek, will be appointed Chairman and Chief Executive Officer of
the Company and William Buckles, Chief Financial Officer of Strandtek,
will be appointed Chief Financial Officer, Treasurer and Secretary and
Ronald Basar will be appointed Vice President of the Company. There can
be no assurance given at this time that the financing can be satisfied
on terms reasonably acceptable to the parties or that the other
financial, legal and business conditions can be met or that a
transaction can be consummated.
The following summarizes the terms of the Series C 7% Convertible
Preferred Stock. The Series C Preferred Stock shall rank senior to the
Company's Series D Preferred Stock and Common Stock with respect to the
payment of dividends and to the distribution of assets upon
liquidation, dissolution or winding up. Commencing July 1, 2002, the
holders of shares of Series C Preferred Stock shall be entitled to
receive, when and as declared by the Board of Directors of the Company,
cumulative dividends at the rate of $7.00 per share of Series C
Preferred Stock, subject to appropriate adjustment. The holder of any
share of Series C Preferred Stock shall have the right, at such
holder's option, to convert each share of the Series C Preferred Stock
into one hundred shares of the Company's Common Stock, plus additional
shares for accrued and unpaid dividends, subject to certain
adjustments.
The following summarizes the terms of the Series D Preferred Stock. The
Series D Preferred Stock shall rank junior to the Company's Series C 7%
Convertible Preferred Stock with respect to the payment of dividends
and to the distribution of assets upon liquidation, dissolution or
winding up, and pari passu with the Common Stock. So long as any shares
of the Series D Preferred Stock are outstanding, no dividend shall be
declared or paid upon the Common Stock or upon any other stock ranking
junior to, or on a parity with, the Series D Preferred Stock. The
holder of any share of Series D Preferred Stock shall have the right,
at such holder's option, to convert each share of the Series D
Preferred Stock into one hundred shares of the Company's Common Stock,
subject to certain adjustments. The holders of shares of the Series C
Preferred Stock and Series D Preferred Stock shall have the same voting
rights as the holder of that number of shares of Common Stock into
which a share of Series C or Series D Preferred Stock could be
converted.
F-23
CORNICHE GROUP INCORPORATED
Notes to the Consolidated Financial Statements
================================================================================
NOTE 13 - SUBSEQUENT EVENTS - (CONTINUED)
(a) StrandTek Transaction - continued
The Company and Strandtek anticipate that the contribution and exchange
of stock and cash for capital stock of the Company shall constitute a
nontaxable transfer of property and the transaction is contingent upon
Strandtek receiving a tax opinion to that effect.
The securities being exchanged in the transaction have not been
registered under the Securities Act of 1933 and may not be offered or
sold in the United States without the effectiveness of a resale
registration statement or an applicable exemption from the registration
requirements. The principal shareholders and the non-shareholder loan
holders shall be entitled to demand registration rights for the Common
Stock issued to them and the Common Stock issuable upon the conversion
of the Series C and Series D Preferred Stock.
(b) Private Placement
On February 12, 2002 the Company commenced a private placement offering
to sell a minimum of 16,500,000 shares and a maximum of 23,500,000
shares of its Common Stock. Only selected investors which qualify as
"accredited investors" as defined in Rule 501(a) under the Securities
Act of 1933, as amended (the "Securities Act"), are eligible to
purchase these shares. The shares of Common Stock are being offered to
enable the Company to satisfy one of the conditions precedent to
consummating the StrandTek Transaction described in (a) above. The
shares being offered in the private placement have not been registered
under the Securities Act and the private placement is being made
pursuant to the exemption provided by Section 4(2) of the Securities
Act and certain rules and regulations promulgated under that section.
(c) Redemption of Series A Preferred Shares
On January 29, 2002 notice was given that, pursuant to the Company's
Restated Certificate of Incorporation, as amended (the "Certificate of
Incorporation"), the Company has called for redemption and will redeem
(the "Redemption") on the date of the closing of the StrandTek
Transaction (the "Redemption Date"), all shares of the Company's Series
A Convertible Preferred Stock outstanding on that date at a redemption
price of $1.05, plus accrued and unpaid dividends from July 1, 1995
through and including the Redemption Date of $0.47 per share (the
"Redemption Price"). Holders will not be entitled to interest on the
Redemption Price and the Series A Preferred Stock will cease to accrue
dividends on the Redemption Date. The Redemption, among other
financial, legal and business conditions, is a condition precedent to
the closing of the StrandTek Transaction, which is expected to close
during March 2002. See (a) above. Similarly, completion of the
Redemption is subject to closing the StrandTek Transaction.
F-24
CORNICHE GROUP INCORPORATED
Notes to the Consolidated Financial Statements
================================================================================
NOTE 13 - SUBSEQUENT EVENTS - (CONTINUED)
(c) Redemption of Series A Preferred Shares - continued
As a result, Letters of Transmittal in connection with the redemption
will be held in escrow pending the closing of the StrandTek
Transaction. Simultaneous with the closing of the StrandTek
Transaction, the holders of the Series A Preferred Stock shall receive
the Redemption Price. In the event that the StrandTek Transaction is
not consummated, the Company will rescind the Notice of Redemption.
Pursuant to the Certificate of Incorporation, each share of Series A
Preferred Stock, may be converted into 0.193 shares of Common Stock at
any time prior to the close of business on the tenth (10) day preceding
the Redemption Date.
F-25
INDEX TO EXHIBITS
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ---------- -----------
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(9) 3(j)
(k) Certificate of Designation for the Series B Preferred Stock
dated May 18, 1998 C3(f)
(l) By-laws of the Corporation, as amended on April 25, 1991(6)
(m) Amendment to Certificate of Incorporation dated May 18, 1998 A
4 (a) Form of Underwriter's Warrant(6) 4.9.1
(b) Form of Promissory Note - 1996 Offering(9) 4(b)
(c) Form of Promissory Note - 1997 Offering(9) 4(c)
(d) Form of Common Stock Purchase Warrant - 1996 Offering(9) 4(d)
(e) Form of Common Stock Purchase Warrant - 1997 Offering(9) 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 March 4, 1998, between
the Company and the Initial Purchasers named therein(9) B
(d) 1998 Employees Stock Option Plan(9) D
(e) Stock Contribution Exchange Agreement with Strandtek International, Inc.
dated January 7, 2002, as amended on February 11, 2002(10) 10(o)
(f) Supplemental Disclosure Agreement to Stock Contribution Exchange
Agreement with Strandtek International, Inc. dated January 7, 2002(10) 10(p)
</Table>
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.
(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, as
indicated above, to the Company's proxy statement dated April 23, 1998,
which exhibit is incorporated here by reference.
(10) Filed herewith.