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 March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ________________ to ________________
Commission file number: 0-10909
CORNICHE GROUP INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 22-2343568
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) Identification No.)
Wayne Interchange Plaza I
145 Route 46 West, Wayne, NJ 07974
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (201) 785-3338
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.10 par value
(title of class)
Indicate by check mark whether 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
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. [ ]
[Cover page 1 of 2]
[Page 1 of 210 pages]
[Exhibit Index at page 59]
$904,604 as of March 19, 1997
(Aggregate market value of the voting stock
held by non-affiliates of registrant)
2,412,278 shares, $.10 par value, as of March 19, 1997
(Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date)
DOCUMENTS INCORPORATED BY REFERENCE
Annual Reports on Forms 10-K of Registrant for the
years ended March 25, 1995 and September 30, 1994
Proxy Statement of Registrant --
September 28, 1995 Annual Meeting of Stockholders
[Cover Page 2 of 2 pages]
PART I
ITEM 1. BUSINESS
History
Registrant was incorporated in Delaware on September 18, 1980 under the
name Fidelity Medical Services, Inc. On July 28, 1983 Registrant changed its
name to Fidelity Medical, Inc. From its inception through March 1995
Registrant was engaged in the development, design, assembly, marketing and
sale of medical imaging products through its wholly-owned subsidiary, Fidelity
Medical, Inc., a New Jersey corporation ("FMI"). On March 2, 1995 Registrant
acquired Corniche Distribution Ltd. ("CDL"), a United Kingdom ("UK")
corporation established in 1992. At such time, CDL was a holding company for
two operating subsidiaries, Chessbourne International Ltd. ("Chessbourne"), a
distributor/supplier of stationery products and office furniture, and The
Stationery Company Limited ("TSCL"), a stationery retailer. The acquisition
of CDL resulted in the former shareholders of CDL, Brian J. Baylis and Susan
A.M. Crisp, owning a majority of the outstanding common shares of Registrant
after the acquisition and was treated as a recapitalization of CDL with CDL
being treated as the acquirer. Accordingly, Registrant changed its fiscal
year to the last Saturday in March of each year in order to conform to the
fiscal years of its UK operating subsidiaries and, unless otherwise indicated,
the financial information and data thereafter contained in Registrant's
financial reports related to the operations of CDL alone for periods prior to
March 2, 1995. At the time of the CDL acquisition, CDL owned 51% of the
common stock of Chessbourne, the other 49% being owned by an unrelated entity,
Ronatree Limited ("Ronatree"), a property investment company. In connection
with the CDL acquisition, Registrant acquired the 49% interest of Ronatree in
Chessbourne by issuing to Ronatree 25,000 shares of its common stock. At such
time and in furtherance of the CDL acquisition, Registrant also issued 215,150
shares of its common stock to Chester Holdings, Ltd ("Chester"), a Colorado
corporation, in order to induce Chester to agree to terminate a pre-existing
agreement giving Chester the right to acquire CDL and to further induce
Chester to forgive approximately $71,000 of net indebtedness owing to Chester
by CDL and its subsidiaries.
Effective March 25, 1995, Registrant sold its wholly-owned medical
imaging products subsidiary, FMI, to Chester in exchange for the 215,150
shares of Registrant's common stock previously issued to Chester in connection
with Registrant's acquisition of CDL and Chester's Promissory Note and Option
Agreement dated as of March 25, 1995 (the "Note and Option Agreement"). The
Note and Option Agreement contained an 8% promissory note from Chester to
Registrant in the principal amount of $200,000 due October 1, 1995 (the
"Note"). It also included an option, in favor of Registrant, to apply the
unpaid principal balance and accrued interest due on the Note to the purchase
of shares of FMI, Chester or any other parent company to which Chester may
have transferred the FMI stock, at the fair market value of such shares.
Registrant's medical imaging products business had been generating significant
losses for a number of years resulting in the decision to dispose of the
medical imaging products business and to focus Registrant's business
operations on the development and expansion of its stationery operations. The
Note was not paid by Chester on its due date. However, during the period May
1996 through July 1996 Chester paid Registrant $125,000 of the principal sum
due Registrant under the Note. All accrued interest due under the Note and
the remaining principal balance of $75,000 has not been paid as of the date
hereof. Registrant expects to exercise the option applicable to the unpaid
balance on the Note to purchase voting shares of Medical Laser Technologies,
Inc., the corporate parent of FMI, although no assurance can be given that
this will prove to be the case.
Following the sale of FMI, Registrant's business operations consisted of
the retail stationery operations and brand marketing and stationery wholesale
operations of TSCL and Chessbourne respectively. These operations were funded
in large part from loans made by the Bank of Scotland, Registrant's primary
lender, to each of CDL, TSCL and Chessbourne over a period of several years.
In accordance with customary UK practice, the Bank of Scotland, when making
such loans obtained security for these loans by means of mortgages over fixed
assets ("Fixed Assets") and debentures over pools of assets which by their
nature will
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change from time to time ("Floating Changes"). Such security interests in the
assets of each of CDL, TSCL and Chessbourne were reflected in documents known
as Fixed and Floating Charges. The Bank of Scotland executed Fixed and
Floating Charges with CDL, TSCL and Chessbourne on April 7, 1995, November 16,
1993 and March 27, 1987, respectively. The Fixed and Floating Charges
contained powers for the Bank of Scotland to appoint an administrative
receiver for the assets covered by the security interests. Registrant
experienced large operating losses and net cash outflows from operating
activities during fiscal 1996 resulting in severe liquidity problems.
Registrant was unable to secure badly needed interim financing either in the
form of additional loans or the conversion of bank debt to equity.
Consequently, the Bank of Scotland had Chessbourne and TSCL placed into
receivership in the UK on February 7, 1996 and had CDL placed into
receivership in the UK on February 28, 1996. Since such time, Registrant has
been inactive.
General
During the period March 26, 1995 through February 7, 1996 Registrant was
engaged in the retail sale and wholesale distribution of stationery and
related office products, including office furniture, in the UK through
Chessbourne and TSCL. Chessbourne's operations consisted of the distribution
and sale at wholesale of a wide variety of branded stationery products in
England and Scotland, including products distributed under Chessbourne's
proprietary "Style" brand. TSCL's business consisted of the operation of
retail stationery stores in England. Prior to March 25, 1995, Registrant was
engaged in the development, design, assembly, marketing and sale of medical
imaging products through its wholly-owned subsidiary, FMI. As of March 25,
1995, Registrant discontinued those operations and sold that business to
Chester. Such sale was intended to enable Registrant to terminate the
significant cash outflows and operating losses being realized from the
operation of the medical imaging products business and to permit it to focus
its efforts and resources on its newly-acquired U.K. stationery business.
On March 31, 1995 TSCL acquired seven fully operational retail stationery
stores. The consideration paid totaled approximately $772,000 and was paid
substantially by way of the assumption of liabilities. The assets acquired
were independently valued at approximately $374,000 and in addition to
assumption of liabilities in the amount of approximately $1,121,000, TSCL also
paid $25,000 in cash. The liabilities assumed comprised a bank loan
($320,000), trade payables ($383,000) and amounts due to Chessbourne and TSCL
of approximately $418,000. The bank loan carried an interest rate of 2% over
the lending bank's primary rate and was collateralized by the assets of TSCL.
In June 1995, CDL acquired a freehold interest in a Leek, Staffordshire
warehouse and office facilities for a cash consideration of approximately
$240,000. The consideration was partly funded by a $152,000 fifteen year
business loan from Lloyds Bank Plc, banker and secured lender to CDL. The
loan was secured by a mortgage on the property which became due following the
institution of receivership proceedings. The loan carried a variable interest
rate which was .85% per month at the time the loan was made. Principal and
interest due on the loan were repayable in equal monthly installments over the
term of the loan. The Leek facilities had been occupied by TSCL under lease
from a non-affiliated landlord since July 1994. These facilities were used
for the storage and distribution of inventory for TSCL and also housed the
marketing, buying and administrative functions of Chessbourne and TSCL.
Operations of Chessbourne
CDL's wholesale stationery operations commenced in October 1993 with its
acquisition of Chessbourne. At the time of such acquisition, Chessbourne's
business was being operated as a traditional wholesale distribution operation
with Chessbourne purchasing and distributing stationery products, office
supplies and office furniture manufactured by third parties. Shortly
thereafter, Chessbourne's wholesale operations were expanded to include both
traditional wholesale distribution activities as well as the
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development of a line of stationery products to be marketed and sold under
Chessbourne's proprietary "Style" brand.
The customers of Chessbourne's wholesale operations were primarily small,
independently-owned stationery and office supply stores, other stationery
wholesalers and distributors, several small chain stationery stores and
specialist and non-specialist retailers and retail groups. During the 40 week
period ended December 30, 1995, approximately 15% of Chessbourne's sales were
made to TSCL's retail stores.
Until April 1995, Chessbourne maintained a large warehouse and filled and
shipped orders for stationery and office supply products using its own
personnel. In April 1995, however, Chessbourne closed its stationery and
office supplies warehouse and entered into an agreement with a third-party
warehouse operator to provide warehouse space and order filling and shipping
services for its products on a fee-for-service basis. Chessbourne's
outsourcing of its warehousing operations was intended both to reduce its
costs of operations and to permit Chessbourne to devote a greater portion of
its resources to the development and marketing of its "Style" brand products.
Notwithstanding the closure of its stationery and office supplies
warehouse, Chessbourne continued to maintain a warehouse and showroom from
which it filled and shipped orders for office furniture using its own
personnel. Chessbourne sold its office furniture products to retail sellers
of office supplies and office furniture, to designers of office interiors, and
to commercial end users. Chessbourne's wholesale stationery business
generally shipped goods to fill small orders within five days of receiving
orders therefor. Large orders from major customers were generally received
well in advance of the requested date. Chessbourne's wholesale sales were
primarily made on open account with payment generally being due within 35 days
of shipment.
Through February 1996, when it was placed into receivership, Chessbourne
devoted substantial resources to the development and marketing of its line of
stationery products and office supplies being marketed and sold under
Chessbourne's proprietary "Style" brand. The "Style" brand line of products
was intended to be value-oriented while still maintaining a high level of
quality. As of February 1996, Chessbourne was using the "Style" brand name on
a wide variety of stationery and office supplies and was marketing
approximately 500 items under the "Style" brand. Sales of Chessbourne's
"Style" brand products accounted for approximately 90% of the Registrant's
wholesale sales for the 40 week period ended December 30, 1995 (85% for the
comparable period during fiscal 1995). Further development of the "Style"
brand was adversely impacted by the Registrant's operating losses and working
capital limitations which ultimately resulted in a shortage of key inventory
lines.
Chessbourne did not manufacture any of its "Style" brand products.
Instead, Chessbourne designed such products and contracted with various third
party manufacturers to manufacture and/or print those products to
Chessbourne's specifications. Chessbourne utilized short-term contracts and
limited or single production run purchase orders and was not a party to any
long-term manufacturing contracts. Chessbourne's customer base for its
"Style" brand products included a number of specialist and non-specialist
retailers, including TSCL, and distributors and other wholesalers.
Chessbourne maintained an in-house marketing department to promote its
wholesale business and products. Customer awareness of Chessbourne's
wholesale operations and its products was achieved through promotional
literature, incentives, catalogs, trade shows and in the case of furniture
products, brochures. A team of in-house account managers was utilized to
increase sales to existing customers and expand the customer base through
telemarketing and sales calls. Advertising consisted of brand promotions,
seasonal support and direct offers to customers. During the 40 week period
ended December 30, 1995, Chessbourne employed approximately 9 people full-time
in its wholesale marketing department.
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Operations of TSCL
In addition to Chessbourne's wholesale operations, Registrant, through
TSCL, operated a chain of retail stationery stores in the UK which sold social
and commercial stationery products, gift items, greeting cards and writing
instruments to individuals and large and small businesses. TSCL's stores were
primarily designed and operated as traditional stationery and office supplies
retail stores. Throughout TSCL's existence as a subsidiary of Registrant,
Registrant was constantly seeking to expand the operations of TSCL through the
acquisition of similar retail chains and the opening of additional stores in
target market areas of the UK. These expansion plans were adversely impacted,
however, by Registrant's operating losses and working capital deficiency which
ultimately lead to TSCL being placed into receivership on February 7, 1996.
TSCL's retail stores offered a wide range of social and commercial
stationery products. These retail stores sold approximately 2,500 products,
including a selection of Chessbourne's "Style" brand products, with
approximately 14,000 other products being available within 24 hours by special
order. In addition, many of the stores provided business services including
printing, binding, photocopying and facsimile transmission and receipt, while
others sold a limited range of office furniture. Approximately 80% of the
merchandise sold in each store consisted of products sold by all of the retail
stores. The balance of approximately 20% of the merchandise offered and sold
was specifically tailored to perceived needs of the customers of each
individual store.
Through February 1996, TSCL was attempting to implement a policy to
divide its retail stores into two different but related store concepts, each
operating under a different trade name. Certain of TSCL's stores were being
converted to operate under the trade name "Memo". Each of these stores was
operated as conventionally-merchandised stationery store of approximately
1,500 square feet. Each Memo store contained conventional stationery products
and standard retail fixturing and relied on conventional merchandising
techniques, stylish displays and appropriate point of sale material. These
stores were located primarily in more affluent areas within TSCL's geographic
retail market.
The balance of TSCL's stores were being converted to operate as price and
value oriented stationery stores under the name "Memo Express". Initially,
these stores were approximately the same size as the Memo stores, although
TSCL believed that the Memo Express concept and style was adaptable to larger,
warehouse-style stores. Memo Express stores featured metal racking in TSCL's
corporate colors and "cut case" presentations of products with the intention
of highlighting pricing and enhancing the appearance of value. Memo Express
stores were intended to be primarily located in areas of significant
commercial activity and more working class neighborhoods and marketed to
businesses and other cost-conscious buyers. Both retail concepts featured
products marketed and sold under the proprietary "Memo" and "Style" brands.
In addition to promoting uniformity of store design, TSCL was also in the
process of developing a value priced line of stationery products to be
marketed under its proprietary "Memo" brand. Like Chessbourne's "Style" brand
of products, TSCL's "Memo" brand of products was intended to include a broad
array of stationery and office supply products. Also, like the "Style"
products, TSCL intended to attempt to promote brand loyalty through the use of
uniform product packaging. Unlike Chessbourne's "Style" brand products,
however, the "Memo" brand products were exclusive to TSCL's retail stores and
were planned to be fundamental to generating customer loyalty to those
stores. At the time of the February 1996 receivership, TSCL's "Memo" brand
product line was still under development and only a limited number of such
products had become available in its stores.
TSCL's retail operations attempted to increase sales by the use of
seasonal promotions, in-store promotions, such as sale pricing, and
advertising. All of TSCL's promotional activities were conducted by TSCL's
management with input from store managers. TSCL also entered into
arrangements with manufacturers for special promotions, such as the sale of
advertising space on TSCL's retail stores' shopping bags and by special
introductory promotions.
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Annual Meeting of Shareholders
On September 28, 1995 Registrant conducted its Annual Meeting of
Stockholders. At such meeting (i) Brian J. Baylis, Susan A.M. Crisp, James
Fyfe, George Lombardi and Mathew P. Pazaryna were elected as directors of
Registrant; (ii) Registrant received approval to change its name from Fidelity
Medical, Inc. to Corniche Group Incorporated; (iii) Registrant received
approval for a ten for one reverse split of its outstanding common stock to be
effective October 1, 1995 and an increase in the par value of each share of
common stock from $.01 to $.10; and (iv) Registrant received approval to
increase the number of shares of its authorized preferred stock from 1,000,000
shares to 5,000,000 shares. To effectuate the name change, change in par
value of common stock, and increase in number of authorized shares of
preferred stock, Registrant amended its Certificate of Incorporation on
September 28, 1995.
Receivership Proceedings
As the result of Registrant's inability to overcome its liquidity
problems and reverse the trend of recurring and significant operating losses,
the Bank of Scotland, Registrant's primary banker and secured lender in the
UK, appointed receivers to Chessbourne and TSCL on February 7, 1996 and to CDL
on February 28, 1996. (See Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations). The receiverships resulted in
the discontinuation of all of Registrant's business operations.
Under UK law, Registrant is not liable for the liabilities of CDL, TSCL
and Chessbourne absent a guarantee or other enforceable promise by Registrant
to pay such liabilities. (See "Opinion Letter of Smithsons Solicitors"
included herewith and filed with the Securities and Exchange Commission as
Exhibit 99(a).) Registrant has given no such guarantee or promise and as such
has no liability for the payment thereof. Similarly, the appointment of an
administrative receiver in respect of the assets of CDL, TSCL and Chessbourne
has no effect on the assets of Registrant. Notwithstanding the foregoing, the
receivers for CDL made certain claims against Registrant for sums allegedly
owed to CDL by Registrant in connection with a contested share issue. To
resolve such dispute, a Compromise Agreement dated March 4, 1996 between
Registrant, CDL and the receivers for CDL was entered into which had the
effect of releasing Registrant from any and all liability to CDL upon
performance by Registrant of its obligations under that agreement. In
connection therewith Registrant issued a promissory note to the Bank of
Scotland, the secured creditor of CDL, in the principal amount of 50,000
pounds sterling (£50,000). On January 30, 1997, Registrant paid off the
Note in full, including all interest accrued thereon through the date of
payment and executed a Mutual Release with the Bank of Scotland (See Item 1.
Business - Subsequent Events).
In connection with the receiverships, Brian J. Baylis and Susan A.M.
Crisp, Registrant's then chief executive officer and chief financial officer,
who collectively owned approximately 45% of Registrant's outstanding common
stock entered into pledge agreements (the "Pledge Agreements") whereby they
pledged their common shares of Registrant to the Bank of Scotland as
collateral against the shortfall which was to be realized by the Bank of
Scotland in the receivership proceedings. Pursuant to Pledge Agreements dated
February 19, 1996 and February 21, 1996 Brian J. Baylis and Susan A.M. Crisp
pledged 877,800 shares and 219,450 shares, respectively, of Registrant's
common stock to the Bank of Scotland. The shares were pledged to
collateralize the February 19, 1996 personal guarantees of Brian J. Baylis and
Susan A.M. Crisp to the Bank of Scotland with respect to certain liabilities
of CDL, TSCL and Chessbourne to the Bank of Scotland.
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Reverse Stock Split
On October 1, 1995, Registrant effected a one for ten reverse split of
its common stock. In connection therewith Registrant increased the par value
of such common stock from $.01 to $.10 per share. Registrant had 24,083,075
shares of common stock issued and outstanding prior to reverse stock split and
approximately 2,408,307 shares of common stock issued and outstanding
following the effectiveness of the reverse stock split. Additionally,
Registrant had 3,806,128 shares of common stock reserved for issuance prior to
the reverse split and approximately 380,613 shares of common stock reserved
for issuance following the effectiveness of the reverse stock split. In
connection with the reverse split, Registrant did not issue fractional shares
choosing instead to pay shareholders otherwise entitled to a fractional share
the cash value thereof. Except where specifically noted, all references in
this Form 10-K to Registrant's common shares give effect, and in some cases
retroactive effect, to Registrant's October 1, 1995 one for ten reverse split.
The purpose of effecting the reverse split was twofold. First and
foremost, it was done in an effort to avoid having Registrant's common stock
delisted from the NASDAQ Small Cap Market by reason of not maintaining a
minimum share bid price of $3 per share. Despite the effectuation of the
reverse split, however, Registrant's common stock was delisted from the Small
Cap Market on October 11, 1995 due to Registrant's failure to maintain a
minimum share bid price of $3 per share and failure to maintain a required
minimum level of capital and surplus. The secondary reason for the reverse
split was to significantly reduce the number of Registrant's common shares
issued and outstanding and the number of common shares reserved for issuance
thereby granting the Registrant the flexibility of engaging in future equity
financings or acquisitions utilizing Registrant's common stock without having
to amend its Certificate of Incorporation to increase the number of authorized
common shares.
Increase In Authorized Number of Preferred Shares
Effective September 28, 1995, Registrant amended its certificate of
Incorporation to, among other things, increase the number of shares of its
authorized preferred stock, $.001 par value per shares, from 1,000,000 to
5,000,000. At the time of such amendment, Registrant had 946,069 shares of
its Series A $.07 Convertible Preferred Stock issued and outstanding leaving
few additional shares of preferred stock available for issuance. The increase
was deemed necessary and desirable by Registrant to permit Registrant the
flexibility of engaging in future equity financings or acquisitions utilizing
preferred stock.
Securities Offerings
Simultaneously with Registrant's acquisition of CDL on March 2, 1995,
NWCM Limited, a Hong Kong investment banker ("NWCM"), agreed, on a staggered
basis, to raise up to $5,000,000 of new equity capital for Registrant on a
"best efforts" basis. The offering was conducted pursuant to the requirements
of Regulation S of the Securities Act of 1933, as amended, and was made solely
to experienced, sophisticated investors who were "non-U.S. persons". An
initial offering of up to 600,000 shares of Registrant's common stock was made
at a price of $2.00 per share. Through the conclusion of the offering on
September 8, 1995, 528,600 of such shares were sold at an aggregate purchase
price of $1,057,200, which resulted in net proceeds to Registrant of $880,336
after the payment of a $50,000 due diligence fee, 10% sales commissions and
2% non-accountable expense allowance to NWCM. No additional equity capital
was raised by NWCM on behalf of Registrant subsequent to September 8, 1995 and
there are no existing plans for NWCM to undertake any further equity offerings
on behalf of Registrant.
On March 13, 1995 NWCM negotiated the conversion of a promissory note of
Registrant in the amount of $300,000 payable to Avalon Investments Ltd. on
November 30, 1995, into 150,000 shares of the
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common stock of Registrant. NWCM was paid a commission of $36,000 in respect
of such conversion. The promissory note had been entered into pursuant to a
bridge financing agreement in December 1994.
Other Matters
Registrant currently has no employees and pays no salaries, wages, or
similar compensation. James Fyfe is Registrant's sole executive officer and
director.
Subsequent Events
Transfer of Pledged Securities
Effective January 30, 1997 Registrant entered into a Stock Purchase
Agreement with the Bank of Scotland and twelve unrelated persons whereby
1,042,250 of the 1,097,250 shares of Registrant's common stock pledged to the
Bank of Scotland by Brian J. Baylis and Susan A.M. Crisp to secure certain
debts of Registrant to the Bank of Scotland (See Item I. Business -
Receivership Proceedings) were sold by the Bank of Scotland, following a
default in the obligation secured by the pledge, to such twelve persons, at a
price of $.12 per share or $125,070 on an aggregated basis.
Resignation of Director
In September 1996, Mathew P. Pazaryna, a director of Registrant since
1993, was deemed to have resigned his position as such. (See Item 10.
Directors and Executive Officers of Registrant).
Payment on Promissory Note to Bank of Scotland
On January 30, 1997 Registrant paid the Bank of Scotland $89,374.49 in
full satisfaction of all principal and interest due under Registrant's
February 1996 promissory note to the Bank of Scotland in the principal amount
of fifty thousand pounds sterling (£50,000). The note had been issued
to settle a disputed claim with the receivers for CDL. (See Item 1.
BUSINESS-Receivership Proceedings). In consideration thereof, the parties
executed a Mutual Release dated as of January 30, 1997 whereby the Bank of
Scotland released Registrant and James Fyfe, Registrant's sole officer and
director, from all liabilities, accounts, courses of action, sums of money,
reckonings, contracts, controversies, agreements, damages, judgments,
executions, claims, demands, debts, obligations, promises, covenants, actions
and undertakings which against Registrant or Fyfe the Bank of Scotland ever
had, had at the time of the release, or could thereafter have by reason of any
matter up to and through the date of the release and Registrant and Fyfe
released the Bank of Scotland in similar fashion.
Consulting Agreement
On September 23, 1996 Registrant entered into a six month consulting
agreement with Albermarle Investments & Consulting S.A. ("Albermarle"), a
financial consulting firm. The consulting agreement, which ran from October
1, 1996 thorugh March 31, 1997, required Albermarle to provide Registrant with
advisory and investment banking services which included, among other things,
(i) reviewing and reorganizing Registrant's stock structure to facilitate a
viable future financing strategy for Registrant; (ii) assisting Registrant to
secure interim financing to settle outstanding liabilities; (iii) assisting
Registrant in completing outstanding
9
regulatory filings; (iv) analyzing and evaluating potential public and private
financing options; and (v) identifying and evaluating acquisitions.
The consulting agreement provided for Registrant to pay Albermarle a fee
of $10,000 per month or an aggregate of $60,000. Due to its financial
situation, Registrant has not been able to make any payments due to Albermarle
pursuant to the consulting agreement.
Securities Offerings
During the fiscal year ended March 31, 1997 Registrant conducted two
private securities offerings pursuant to Rule 506 of Regulation D of the
Securities Act of 1933, as amended, one of which is still in progress. The
purpose of each of such offerings was, in part, to provide Registrant with the
ability to settle and pay off certain of its outstanding liabilities thereby
making it a desirable acquisition candidate. The first of such offerings
commenced in July 1996 and was completed in December 1996 upon the sale of 4
Units resulting in $100,000 in gross proceeds to Registrant. This offering,
of up to $300,000 in Units, was conducted on a "best-efforts" basis through
Robert M. Cohen & Co., Inc., a New York based broker dealer ("RMCC") and was
offered and sold in the form of $25,000 units. Each unit consisted of one
$25,000 face amount, 90 day, 8% convertible promissory note and one redeemable
common stock purchase warrant to purchase 60,000 shares of Registrant's common
stock at a price of $.50 per share during a period of three years from
issuance. All of the notes issued in such offering were subsequently paid in
full and all of the warrants issued in such offering were subsequently
redeemed by the Registrant at a price of $.075 per underlying share. The
second of such offerings commenced in January 1997 and is still in progress.
Similar to the prior offering, it is being conducted on a "best-efforts" basis
through RMCC and consists of $25,000 units, each consisting of one $25,000
face amount, 90 day, 8% convertible promissory note and one redeemable common
stock purchase warrant to purchase 60,000 shares of Registrant's common stock
at a price of $.50 per share during a period of three years from issuance.
This offering will involve the sale of up to 19 units resulting in gross
proceeds to Registrant of $475,000 if all of the Units offered are sold. As
of the date, hereof 14 Units have been sold by RMCC. In connection with each
of the offerings, Registrant has paid or is paying RMCC a sales commission
equal to 10% of the subscription price for each Unit sold.
ITEM 2. PROPERTIES
Registrant currently utilizes approximately 200 square feet of office
space, rent free, at the offices of its former subsidiary, FMI, as its
corporate office. These accommodations are made available under an informal
arrangement with FMI and are terminable at will by FMI.
Prior to on or about February 7, 1996, CDL was leasing approximately 1670
square feet of office space at 272 London Road, Wallington, Surrey in
England. In addition, a portion of Chessbourne's telemarketing staff
servicing southern England was based at these offices.
Through April 15, 1995 Chessbourne operated from 60,000 square feet of
warehouse and office space in Dundee, Scotland. On April 15, 1995 the lease
was canceled by agreement with the landlord. On that date, the marketing,
buying and administrative offices of Chessbourne were transferred to the TSCL
facilities at Leek, Staffordshire. In connection with the relocation of
Chessbourne's administrative offices, Chester also entered into a lease in
April 1995, in Dundee, Scotland, on a month to month basis, of approximately
1,800 square feet of office space to house certain of its telesales and its
legal and secretarial staff. Throughout the period of its ownership by CDL,
Chessbourne also leased 10,500 square feet of office, showroom and warehousing
space in Glasgow, Scotland which was used primarily for the sale of office
furniture.
10
Prior to on or about February 7, 1996 TSCL operated from 20,000 square
feet of warehouse and office space in Leek, Staffordshire. That facility was
used for the storage and distribution of inventory and housed the
administrative offices of TSCL, including marketing, buying and finance
functions. From April 15, 1995 through on or about February 7, 1996 this
facility was also used to house the administrative and marketing offices of
Chessbourne. The Leek facility had been occupied under lease from an
unaffiliated landlord pending the June 1995 consummation of purchase by CDL
of the freehold interest in the property.
All of TSCL's retail outlets were located in leased facilities on
standard terms and with varying expiration dates. As a result of the
receivership proceedings involving Registrant's U.K. operations, which were
instituted in February 1996, all of the CDL, Chessbourne and TSCL properties
were handed over to the receivers and subsequently handed back to the landlord
or sold and the sale proceeds remitted to the secured lenders.
ITEM 3. LEGAL PROCEEDINGS
Registrant and certain of its former officers and directors were involved
in a shareholders' derivative action filed in Delaware Chancery Court filed on
April 7, 1995. The causes of action asserted included breach of fiduciary
duty, breach of duty of care and trust to the Registrant's shareholders, gross
negligence and mismanagement, as well as common law conspiracy and aiding and
abetting. The court granted Registrant's motion to dismiss by Opinion and
Order dated May 2, 1995. Registrant's litigation counsel thereafter advised
Registrant in June 1995 that the time for appeal regarding the derivative
action had expired.
Registrant filed a complaint in the Superior Court of New Jersey against
its former chief executive officer, Efriam Landa on May 4, 1995 alleging
breach of fiduciary duty. Mr. Landa answered the complaint on October 16,
1995 and asserted counterclaims. On December 5, 1996 (the "Release Date"),
Registrant and Landa entered into a Release Agreement dismissing the action
and releasing one another from any claims or rights each may have had against
the other based on circumstances created or arising before the Release Date.
On April 14, 1994, a former officer and director of Registrant, Rone H.
Lewis, filed suit against Registrant in Superior Court, Law Division, Morris
County (MRS-L-781-94), seeking damages for Registrant's alleged failure to
timely permit him to sell certain shares of Registrant's restricted common
stock. The complaint asserted consequential damages of approximately
$100,000. In December 1994, Registrant agreed to settle this claim for
$32,000. An initial settlement payment of $15,000 was made in January 1995,
and Registrant issued a two year 8% promissory note to Mr. Lewis dated January
12, 1995 with respect to the $17,000 principal balance. The note provided for
24 equal payments of $768.87 each. Registrant made the first 8 monthly
payments required under the note during the period February 1995 through
September 1995 leaving due a balance of 16 payments in the aggregate amount of
$12,301.92. Due to its financial problems, however, Registrant was thereafter
unable to make any further payments to Mr. Lewis on the note. In March 1997
Registrant and Mr. Lewis entered into a settlement agreement whereby Mr. Lewis
agreed to accept $5,000 in full satisfaction of all remaining sums due to him
under the note including accrued interest.
No other material legal proceedings are pending to which Registrant or
any of its property is subject, nor to the knowledge of Registrant are any
such legal proceedings threatened.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Registrant submitted no matters to a vote of its security holders during
the fourth quarter of the fiscal year ended March 31, 1996.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
From April 4, 1994 until October 11, 1995 Registrant's common stock was
traded on NASDAQ's SmallCap Market under the symbol "FMSI". On October 11,
1995 Registrant's common stock was deleted from that system by reason of
Registrant's failure to meet required NASDAQ Small Cap Market listing
standards relating to minimum bid price per share and minimum capital and
surplus. Prior thereto, Registrant's common stock had been trading on
NASDAQ's National Market System. Since October 11, 1995 Registrant's common
stock has been listed for trading on the OTC Bulletin Board under the symbol
"CGII". The following table sets forth the range of high and low bid prices
of Registrant's common stock for periods since April 4, 1994. The quotations
represent prices between dealers in securities, do not include retail
mark-ups, mark-downs, or commissions and do not necessarily represent actual
transactions. The quarters referred to are based on Registrant's fiscal year
which for fiscal year 1995 ended on the last Saturday in March (March 25,
1995) and which for fiscal years thereafter, 1996 and beyond, ended on March
31.
Bid Prices
High Low
Fiscal 1995(1)
First Quarter $8.40 $3.10
Second Quarter 5.00 3.80
Third Quarter 4.70 2.50
Fourth Quarter 5.00 2.50
Fiscal 1996(1)
First Quarter $7.19 $3.12
Second Quarter 5.00 2.66
Third Quarter 4.00 .25
Fourth Quarter .50 .1875
Fiscal 1997(1)
First Quarter $ .25 $ .1875
Second Quarter .375 .1875
Third Quarter .30 .1250
Fourth Quarter* .375 .1875
(1)All prices shown give effect, and in some cases retroactive effect, to
Registrant's 1 for 10 reverse stock split which was effected on October 1,
1995.
*Through March 19, 1997
At March 19, 1997, there were approximately 1,851 record holders of
Registrant's common stock. Holders of common stock are entitled to dividends
when, as, and if declared by the Board of Directors out of funds legally
available therefor. Registrant has not paid any cash dividends on its common
stock and, for the foreseeable future, intends to retain earnings, if any, to
finance the operations, development, and expansion of its business. Future
dividend policy is subject to the discretion of Registrant's Board of
Directors.
12
ITEM 6. SELECTED FINANCIAL DATA
The selected statements of operations and balance sheet data set forth
below are derived from the financial statements of Registrant, which were
examined by Simontacchi & Co., independent certified public accountants, for
the year ended March 31, 1996 and by Mahoney Cohen & Company, PC, independent
certified public accountants, for each of the three years in the period ended
March 25, 1995. Mahoney Cohen & Company, PC did not audit Registrant's UK
subsidiaries, the financial statements of which were audited by another
auditor whose report was furnished to Mahoney Cohen & Company, PC. The
information set forth below should be read in conjunction with the audited
financial statements of Registrant and related notes appearing elsewhere in
this Report (See Item 8. Financial Statements and Supplemental Data).
FISCAL YEAR ENDING
--------------------------------------------
March 31, March 25, March 27, March 31,
1996 1995 1994 1993
Statement of Operations:
Net Sales $ 0 $21,048,151 $7,585,360 $336,779
Cost of Sales 0 15,531,102 5,121,884 20,381
Gross Profit 0 5,517,049 2,463,476 316,398
Operating (Loss) Income (593,207) (2,821,339) 207,300 16,436
Net (Loss) Income (664,348) (3,394,652) 1,804 496
Net (Loss) Income per common share: (.29) (2.05) 0 0
Weighted average number
of shares outstanding 2,296,829 1,656,903 1,669,784 1,670,232
Dividends per common share -0- -0- -0- -0-
March 31, 1996 March 25, 1995
Balance Sheet Data:
Working capital (deficiency) $(661,078) $(1,863,138)
Total assets 136,201 9,822,570
Current liabilities 796,144 9,122,665
(Accumulated deficit) Retained earnings (2,457,623) (3,827,879)
Stockholders' equity (deficiency) (659,943) (2,879,165)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
During the fiscal year ended March 31, 1996 Registrant financed its
activities from sales revenues, increased bank loans, net proceeds from the
issuance of shares of its common stock and trade credit to meet its working
capital requirements and other operating needs. However, due to recurring and
significant operating losses Registrant still suffered material reductions in
working capital and eventually encountered great difficulty in replenishing
the inventory of its key product lines. Efforts to achieve alternative
sources of
13
financing proved unsuccessful as did efforts to convert a significant portion
of Registrant's bank debt to equity. Registrant took several steps to reduce
its required cash outlays including relocating its corporate facilities and
reducing personnel and other operating expenses but was unable to overcome its
liquidity problems. Consequently, the Bank of Scotland, Registrant's primary
banker and secured lender in the UK, appointed receivers to Chessbourne and
TSCL on February 7, 1996 and to CDL on February 28, 1996. The receiverships
resulted in the discontinuation of all of Registrant's business operations.
At the time of the appointment of an administrative receiver to each of
CDL, Chessbourne, and TSCL, each of these companies was insolvent. The
liabilities of these companies to the Bank of Scotland, secured by the
respective Fixed and Floating Charges, far outweighed the value of the assets
in each of the three companies. The administrative receiver, in each of these
instances, collected and realized upon the secured assets to repay the Bank of
Scotland. Given that the liabilities exceed the assets, all of the assets of
CDL, TSCL and Chessbourne were paid to the Bank of Scotland by the receiver.
The appointment of receivers in the UK effectively suspended the power of
Registrant, CDL, TSCL and Chessbourne and their respective officers and
directors to deal with the assets which were subject to the respective Fixed
and Floating Charges. Since, in the present instance, all of the assets of
CDL, TSCL and Chessbourne were subject to a Fixed and Floating Charge, the
respective companies are unable to operate as the result of the receiverships
and the officers and directors thereof have no control over such entities.
Further, Registrant, as the direct or indirect shareholder of each of these
three companies, has no further control over them during the entire period of
the receivership and Registrant has been advised that it will never regain contr
ol, since, upon the termination of the respective receiverships, the companies
will be left with material liabilities and no assets. Given the foregoing,
Registrant has been further advised that at the conclusion of the
receiverships, each of CDL, Chessbourne and TSCL will be liquidated and their
existence terminated. Additionally, it has become effectively impossible for
each of CDL, Chessbourne and TSCL to be audited for the year ended March 31,
1996 given that the respective receivers have possession and control over the
books, records and documents of each of the corporations and will not make
them available to Registrant or any auditor retained on its behalf. (See
"Opinion Letter of Smithsons Solicitors" included herewith and filed with the
Securities and Exchange Commission as Exhibit 99(a).) Consequently,
Registrant has treated each of CDL, Chessbourne and TSCL as no longer being
subsidiaries of Registrant, as reflected in Registrant's financial statements
for the year ended March 31, 1996.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The financial statements of Registrant, itemized in the subtopic,
"Financial Statements" under Item 14 hereof, are set forth below. The audit
reports of Coopers & Lybrand dated August 3, 1995 and March 31, 1995
respectively, included with the financial statements and previously filed in
connection with Registrant's Annual Report on Form 10-K for the year ended
March 25, 1995 have not been re-signed by Coopers & Lybrand for reasons
relating to the institution of receivership proceedings against Registrant's
former operating subsidiaries. (See "Letter of James J. Fyfe regarding
Unavailability of Re-Signed Audit Report from Coopers & Lybrand" included
herewith and filed with the Securities and Exchange Commission as Exhibit
99(b)). The audit report of Mahoney Cohen & Company, PC dated July 25, 1995
included with the financial statements and previously filed in connection with
Registrant's Annual Report on Form 10-K for the year ended March 25, 1995 has
not been re-signed by Mahoney Cohen Rashba & Pokart, CPA, PC, formerly Mahoney
Cohen & Company, PC, due to such reports reliance on the audit of Registrant's
former operating subsidiaries performed by Coopers & Lybrand and Coopers &
Lybrand's not re-signing their audit report (See "Letter of Mahoney Cohen
Rashba & Pokart, CPA, PC Regarding Their Inability to Re-Sign Their July 25,
1995 Audit Report" included herewith and filed with the Securities and
Exchange Commission as Exhibit 99(c)).
14
SIMONTACCHI & COMPANY, LLP 9 LAW DRIVE
CERTIFIED PUBLIC ACCOUNTANTS FAIRFIELD, NEW JERSEY 07004
TEL (201) 575-5040
FAX (201) 575-5044
To The Stockholders and
Board of Directors
Corniche Group Incorporated
Wayne, New Jersey
INDEPENDENT AUDITOR'S REPORT
We have audited the accompany balance sheet of Corniche Group Incorporated as
of March 31, 1996 and the related statements of operations, stockholders'
deficiency, and cash flows for the year then ended. These financial
statements and the financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. We did not audit the financial
statements and the financial statement schedule of Corniche Distribution
Limited and Subsidiaries, a former consolidated subsidiary, as of March 31,
1996 and for the year then ended. These statements and schedules were not
audited as the corporations were in receivership in the United Kingdom (see
Note 3 of the Financial statements), and the records are unavailable for
audit. The financial statements of Corniche Group Incorporated and Subsidiary
at March 25, 1995 and for the year then ended were audited by other auditors
whose report, dated July 25, 1995, was unqualified.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, based on our audit the financial statements referred to above
present fairly, in all material respects, the financial position of Corniche
Group Incorporated as of March 31, 1996, and the results of their operations
and their cash flows for the year then ended in conformity with generally
accepted accounting principles.
/s/ SIMONTACCHI & COMPANY, LLP
Fairfield, New Jersey
April 1, 1997
MEMBER, AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
15
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and
Board of Directors
Fidelity Medical, Inc. and Subsidiary
Wayne, New Jersey
We have audited the accompanying consolidated balance sheet of Fidelity
Medical, Inc. and Subsidiary as of March 25, 1995, and the related
consolidated statements of operations, stockholders' deficiency, and cash
flows for the year then ended. These financial statements and the financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statement financial
statements schedule based on our audit. We did not audit the financial
statements and the financial statement schedule of Corniche Distribution
Limited and Subsidiaries, a consolidated subsidiary, as of March 25, 1995 and
for the year then ended, which statements reflect total assets and results of
operations constituting 99.8% and 81.8%, respectively, of the related
consolidated totals. Those statements and schedule were audited by another
auditor whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for Corniche Distribution Limited and
Subsidiaries for the year ended March 25, 1995 is based solely on the report
of the' other auditor.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit and the report of the other
auditor provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other auditor,
the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Fidelity Medical,
Inc. and Subsidiary as of March 25, 1995, and the results of their operations
and their cash flows for the year then ended in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming, that the Company will continue as a going concern. As discussed in
Note 2 to the consolidated financial statements. the Company has suffered
recurring losses from operations and its total liabilities exceed its total
assets. This raises substantial doubt about the Company's ability to continue
as a going concern. Management's plans in regard to these matters are also
described Note 2. The consolidated financial statement do not include any
adjustments that might result from the outcome of this uncertainty.
New York, New York /s/ Mahoney Cohen & Company PC
July 25, 1995
16
REPORT OF THE AUDITORS TO THE DIRECTORS OF
CORNICHE DISTRIBUTION LIMITED
We have audited the attached consolidated balance sheet of Corniche
Distribution Limited and subsidiaries ("the Company") as at March 25, 1995 and
the related consolidated statements of operations, cashflows and changes in
stockholders' equity for the period then ended, included in the Company's
consolidation package which we have initialled for the purposes of
identification. Our audit also included the financial statement schedule
listed on item 14(a) for the periods ended March 25, 1995, March 27, 1994 and
March 31, 1993.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
The company's directors are responsible for the preparation of the
consolidation package. It is our responsibility to express an opinion on the
consolidation package based on our audit and to report our opinion to you.
BASIS OF OPINION
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
consolidation package is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidation package. An audit also includes assessing the accounting
principles used and significant estimates made by the directors, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
FUNDAMENTAL UNCERTAINTIES
In forming our opinion we have considered the adequacy of the disclosures made
in the consolidation package concerning the Company's dependence on the
renewal of banking facilities on or shortly after July 31, 1995 and on
substantially meeting the Company's forecasts or, if not achieved, its
dependence on gaining additional funding. In addition the financial
statements include £2, 131,770 due from the ultimate parent company,
Fidelity Medical, Inc, ("FMI") in settlement of unpaid calls on shares issued
as at the end of this year. The receipt of these monies is dependent upon the
outcome of a planned equity placing by FMI. The consolidation package has
been prepared on a going concern basis and the validity of this depends on
successful outcomes of the above matters. The consolidation package does not
include any adjustments that would be required if the above matters are not
successfully achieved. Details of the circumstances relating to these
fundamental uncertainties are described in the consolidation package.
17
OPINION
Subject to any adjustments that might be, required as a result of the
fundamental uncertainties described above, in our opinion the consolidation
package, which has been prepared in accordance with the accounting policies
stated therein and in conformity with USGAAP, contains financial information
suitable for inclusion in the consolidated financial statements of FMI as of
March 25, 1995 and for the period from March 28, 1994 to March 25, 1995 except
that the consolidation package does not include adjustments required to
reflect the reverse acquisition of FMI by the Company.
/s/ Coopers & Lybrand
Chartered Accountants and Registered Auditors
London
August 3, 1995
18
CORNICHE DISTRIBUTION LIMITED
Report of Independent Accountants
To the stockholders of Corniche Distribution Limited
We have audited the accompanying consolidated balance sheets of Corniche
Distribution Limited, and Subsidiaries as of March 27, 1994 and March 31, 1993
and the related consolidated statements of operations, cash flows and changes
in stockholders' equity for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these 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
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Corniche
Distribution Limited, and Subsidiaries as of March 27, 1994 and March 31,
1991, and the consolidated results of their operations and their cash flows
for the years then ended in conformity with accounting principles generally
accepted in the United States of America.
/s/ Coopers & Lybrand
Plumtree Court
London
3rd March 1995
19
CORNICHE GROUP INCORPORATED
BALANCE SHEET
ASSETS
March 31, March 25, Proforma
1996 1995 March 25, 1995
Current Assets:
Cash $66 $ 108,438 $100
Accounts Receivable, net of allowances for
doubtful accounts of $345,108 in 1995 0 3,393,594 0
Notes Receivable 125,000 200,000 200,000
Inventory 0 3,146,307 0
Prepaid Expenses-and Other Receivables 10,000 411,188 18,422
Total Current Assets 135,066 7,259,527 218,522
Other Assets:
Property and Equipment - at cost, net 135,066 7,259,527 0
Intangible Assets - at cost, net 0 1,206,495 0
Investment in and Advances to UK Subsidiary -------- ---------- --------
0 0 514,322
Total Assets $136,201 $9,822,570 $732,844
========= ========== ========
See Accompany Notes
21
CORNICHE GROUP INCORPORATED
BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' (DEFICIENCY) EQUITY
March 31, March 25, Proforma
1996 1995 March 25, 1995
Current Liabilities:
Notes Payable $ 5,000 $2,521,452 $ 16,292
Note Payable on Debt Compromise 77,630 0 0
Trade Accounts Payable 183,123 4,065,439 55,366
Current Portion of Long-Term Debt 0 415,177 0
Dividends Payable - Preferred Stock 84,749 21,954 21,954
Accrued Liabilities 104,804 1,512,873 555,874
Deferred Income 0 23,570 0
Payroll and Sales Tax Payable 0 562,200 0
Total Current Liabilities 455,306 9,122,665 649,486
Long-Term Liabilities:
Long-Term Debt 0 3,323,565 0
Deferred Income 0 57,159 0
Deferred Credit 0 37,998 0
Total Long-Term Liabilities 0 3,418,722 0
Total Liabilities 455,306 12,541,387 $649,486
Cumulative Redeemable Preference Shares and
Class B Ordinary Shares 0 160,348 0
Stockholders' (Deficiency) Equity:
7% Cumulative Convertible Preferred Stock
authorized 5,000,000 shares, and issued
outstanding 909,267 shares (March 31, 1996)
and 946,069 (March 25, 1995) 909,267 946,069 946,069
Common Stock, $0. 1 0 par value, authorized -
30,000,000 shares, issued 2,630,378 (March 31,
1996) and 2,119,857 (March 25, 1995) 263,037 211,985 211,985
Additional Paid-In Capital 830,086 0 0
(Accumulated Deficit) Retained Earnings (2,116,785) (3,827,879) (869,986)
(114,395) (2,669,825) 288,068
Cumulative Translation Adjustment 0 (4,630) 0
Treasury Stock - at cost, 218, 100 shares (204,710) (204,710) (204,710)
Total Stockholders' (Deficiency) Equity (319,105) (2,879,165) 83,358
Total Liabilities and Stockholders'
(Deficiency) Equity $ 136,201 $9,822,570 $732,844
See Accompanying Notes
21
CORNICHE GROUP INCORPORATED
STATEMENT OF OPERATIONS
March 31, March 25, March 27,
1996 1995 1994
Net Sales $ 0 $21,048,151 $7,585,360
Cost of Sales 0 15,531,102 5,121,884
Gross Profit 0 5,517,049 2,463,476
Selling, General and Administrative
Expenses 257,073 8,338,388 2,256,176
Operating Loss (257,073) (2,821,339) 207,300
(Loss) on Sale of Assets (3,042) (22,221) (40,017)
Interest (Net) (600) (538,646) 164,070
(Loss) Income before Income Tax (260,715) (3,382,206) 3,213
Income Tax Benefit (Expense) 0 9,508 (1,409)
Net (Loss) Income before Pref. Dividend (260,715) (3,372,698) 1,804
Preferred Stock Dividend (62,795) (21,954) 0
Net (Loss) Income from Continuing Operations (323,510) (3,394,652) 1,804
Loss from Discontinued Operations (3,432,032) 0 0
Excess of UK Subsidiary Cumulative Losses
over Investment 5,466,636 0 0
Net Income (Loss) $1,711,094 $(3,394,652) $1,804
Profit / (Loss) per share of Common Stock
Income (Loss) from Continuing Operations (0.14) (2.05) 0.00
Profit (Loss) from Discontinued Operations 0.88 0.00 0.00
Net Profit (Loss) per share $ 0.74 $ (2.05) 0.00
Weighted Average Number of Common Shares
Outstanding 2,300,289 1,656,903 1,669,784
See Accompanying Notes
22
CORNICE GROUP INCORPORATED
STATEMENT OF STOCKHOLDERS' (DEFICIENCY) EQUITY
Common Stock
Additional Cumulative
Preferred Number of Paid-In Accumulated Translation Treasury
Stock Shares Amount Capital Deficit Adjustment Stock Total
Balance - April 1, 1993 $ 0 572,981 $ 57,298 150,127 $ (23,644) 61 $(183,196) $ 646
Recision of Common Stock Sale - (895) (90) 24,041) 24,131 - - -
Recapitalization Adjustment - - - (9) - - - (9)
Net Income - - - - 1,804 - - 1,804
Balance - March 27, 1994 0 572,086 57,208 126,077 2,291 61 (183,196) 2,441
Issuance of Preferred Stock 1,000,000 - - - - - - 1,000,000
Conversion of Preferred Stock (53,931) 10,371 1,037 52,894 - - - -
Preferred Stock Dividends - - - - (21,954) - - (21,954)
Purchase of Treasury Stock - - - - - - (21,514) (21,514)
Issuance of Common Stock - 1,337,400 133,740 99,000 - - - 232,740
Conversion of Note, net - 150,000 15,000 235,000 - - - 250,000
Issuance of Common Stock - 50,000 5,000 (95,000) - - - 100,000
Costs Related of Sale of Common Stock- - - (50,000) - - - (50,000)
Recapitalization Adjustment - - - (557,971) (435,518) - - (993,489)
Net Loss - - - - (3,372,879) - - (3,372,698)
Cumulative Translation Adjustment - - - - - (4,691) - (4,691)
Balance - March 25, 1995 946,069 2,119,857 211,985 0 (3,827,879) (4,630) (204,710) (2,879,165)
Conversion of Preferred Stock (36,802) 7,077 708 36,094 - - - -
Adjustment to Common Stock - (156) (16) 16 - - - -
Issuance of Common Stock - 478,600 47,860 909,340 - - - 957,200
Costs Related to Sale of Common Stock - - - (162,864) - - - (162,864)
Issuance of Common Stock - 25,000 2,500 47,500 - - - 50,000
Preferred Stock Dividends - - - - (62,795) - - (62,795)
Elimination of UK Subsidiaries - - - - 2,034,604 4,630 - 2,036,234
Net Loss - - - - (260,715) - - (260,715)
Balance - March 31, 1996 $909,267$2,630,378 $263,037 $830,086 $(2,116,785) $ 0 $(204,710) $(319,105)
See Accompanying Notes
23
CORNICHE GROUP INCORPORATED
STATEMENT OF CASH FLOWS
March 31, March 25, March 27,
1996 1995 1994
Cash Flows from Operation Activities:
Net Loss Income from Continuing Operations
in 1996 and Net (Loss) Income in 1995 and 1994 $(260,715) $(3,372,698) $1,804
Adjustments to reconcile Net Loss from Continuing
Operations to Net Cash used in Operating
Activities in 1996 and Net (Loss) Income to Net
Cash provided by (used in) Operating Activities in
1995 and 1994:
Depreciation 1,749 346,668 82,026
Amortization of Goodwill - 97,651 19,261
Amortization of Trademarks - 1,248 2,104
Amortization of Development Costs - 18,524 -
Amortization of Deferred Credit - (4,223) (675)
Loss on Sale of Property and Equipment 3,042 22,220 40,017
Allowance for Bad Debts - 349,231 131,692
Changes in Assets and Liabilities Net of Effects
from Acquisitions:
Decrease (Increase) in Accounts Receivable - (217,151) 167,940
Decrease in Notes Receivable 75,000 - -
Decrease in Inventory - 561,291 292,519
Decrease (Increase) in Prepaid Expenses and
Other Receivables 8,422 (59,268) (72,400)
Decrease in Notes Payable (11,292) - -
Increase (Decrease) in Trade Accounts Payable 127,757 286,501 (359,536)
Increase (Decrease) in Accrued Liabilities (451,070) 893,946 7,255
Increase (Decrease) in Deferred Credit - (23,138) 53,912
Increase in Taxes Payable - 259,217 104,891
Net Cash used by Continuing Activities in 1996
and Net Cash provided by (Used In)
Operating Activities in 1995 and 1994 (507,107) (839,981) 470,810
Net Cash used in Discontinued Operations (331,337) - -
Net Cash used in Operating Activities (838,444) (839,981) 470,810
Cash Flows from Investing Activities:
Payments to Acquired Fixed Assets (8,926) (439,169) (499,592)
Proceeds from Sale of Equipment 3,000 54,607 641,946
Payments for Acquisition of Business - - (5,267,364)
Net Cash used in Investing Activities (5,926) (384,562) (5,125,010)
Balance Carried Forward $(844,370) $(1,224,543) $(4,654,200)
24
CORNICHE GROUP INCORPORATED
STATEMENT OF CASH FLOWS
March 31, March 25, March 27,
1996 1995 1994
Balance Brought Forward $(844,370) $(1,224,543) $(4,654,200)
Cash Flows from Financing Activities:
Net Proceeds from Issuance of Common Stock for
Cash 794,336 50,000 -
Net Proceeds from Issuance of Common Stock for
Services 50,000 - -
Net Borrowings under Line of Credit Agreement - 1,018,536 1,397,606
Principal Payments under Capital Lease Obligations - (106,369) (32,864)
Proceeds from Issuance of Long-Term Debt - - 3,151,155
Net Cash Provided by Financing 844,336 962,167 4,515,897
Effect of Exchange Rate on Cash - (7,725) (515)
Net Decrease in Cash (34) (270,101) (138,818)
Cash at Beginning of Period 100 9,940 148,758
Cash received from FMI - 368,599 -
Cash at End of Period $ 66 $ 108,438 $ 9,940
Supplemental Disclosures of Cash Flow
Information
Cash Paid during the Year for:
Interest $ 600 $ 538,646 $ 167,946
Income Taxes $ - $ - $ 3,451
See Accompany Notes
25
CORNICHE GROUP INCORPORATED
STATEMENT OF CASH FLOWS (CONCLUDED)
Supplemental Schedule of Non-Cash Investing
and Financing Activities
During the year ended March 31, 1996 the Company accrued preferred stock
dividends of $62,795 and (1995 - $21,954).
During the year ended March 31, 1996 holders of 36,802 shares of preferred
stock converted such shares into 7,077 shares of CGI's common stock. In March
1995, holders of 53,931 shares of preferred stock converted such shares into
10,371 shares of CGI's common stock (Note 11).
On March 2, 1995 CGI issued 1,097,250 shares of its common stock for 100% of
the issued and outstanding common stock of Corniche (Note 2). Additionally, it
issued 25,000 shares to the 49 shareholder of Chessbourne (Note 11) and
215,150 shares to Chester Holdings, Ltd.
On March 25, 1995, Chester Holdings, Ltd. returned the 215,150 shares to CGI
in exchange for the medical imaging subsidiary of CGI (Note 11).
In March 1995, holders of a promissory note in the amount of $300,000
converted such note into common stock of CGI (Note 11).
During the year ended March 25, 1995, Corniche acquired a company through the
assumption of debt as follows:
March 27, 1995
Fair Value of Assets Acquired $2,046,000
Cash Paid 0
Liabilities Assumed and Incurred $2,046,000
In connection with the reverse acquisition on March 2, 1995, cash of $368,599
was received.
See Accompanying Notes
26
CORNICHE GROUP INCORPORATED
NOTES TO FINANCIAL STATEMENTS
NOTE 1 THE COMPANY
Corniche Group Incorporated, formerly Fidelity Medical, Inc. (hereinafter
referred to as the "Company" or "CGI") as result of a reverse acquisition with
Corniche Distribution Limited and its Subsidiaries ("Corniche") (see "Reverse
Acquisition" below), was engage in the retail sale and wholesale distribution
of stationery products and related office products, including office
furniture, in the United Kingdom. The operating subsidiaries of Corniche were
Chessbourne International Limited ("Chessbourne") and The Stationery Company
Limited ("TSCL").
Corniche experienced large operating losses and net cash outflows from
operating activities in fiscal 1995 and 1996 resulting in a significant
reduction in working capital during that period. The Company was unsuccessful
in its efforts to raise interim financing to resolve its liquidity problems.
Additionally, the Company was not able to convert a significant portion of its
bank debt to equity. As a result, receivers were appointed to Corniche's
subsidiaries Chessbourne and TSCL on February 7, 1996 by their primary bankers
and secured lender, Bank of Scotland. Corniche Distribution Limited was
placed in receivership on February 28, 1996 (See Notes 2 & 3).
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reverse Acquisition
On March 2, 1995, the stockholders of Corniche exchanged all of their
common stock for 1,097,250 shares of CGI. Since the former stockholders' of
Corniche owned a majority of the outstanding stock of CGI after the
acquisition, such purchase transaction was accounted for as a reverse
acquisition. The acquired company (Corniche) was deemed to have acquired the
acquiring company (CGI). Accordingly, CGI changed its fiscal year to the last
Saturday in March of each year in order to conform to the fiscal year of its
operating subsidiary. Historical stockholders' equity of Corniche has been
retroactively restated to give effect to the recapitalization. The historical
financial statements prior to March 2, 1995 are those of Corniche. Further,
on March 2, 1995, CGI acquired a 49 % interest in the outstanding shares of
Chessbourne.
27
CORNICHE GROUP INCORPORATED
NOTES TO FINANCIAL STATEMENTS
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
UK Receivership Proceeding
Significant losses were incurred during the forty weeks to December 30,
1995, and in the fiscal year ended March 25, 1995, resulting in a working
capital and a stockholders deficiency as of December 30, 1995 and March 25,
1995. Management of Corniche had taken several steps to reduce the amount of
cash used by operations, including relocation of its corporate facilities and
reduce staffing levels and other operating expenses. However, a receivership
proceeding involving the operating subsidiaries of the Company was commenced
on February 7, 1996 and the UK holding company, Corniche Distribution Limited,
was placed in receivership on February 28, 1996. The receiverships resulted
in the loss of all of the Company's operations and operating assets and
eliminated most liabilities. Accordingly, the operating activities of the UK
subsidiaries have been classified as a discontinued operation and the excess
of the UK subsidiary's cumulative losses over the Company's investment is
included in the income statement for the year ended March 31, 1996. In
addition, the UK Subsidiaries have been removed from the balance sheet as of
March 31, 1996 and the audited balance sheet as of March 25, 1995 has been
restated on a proforma basis to reflect the removal of the UK subsidiaries as
of that date. This significantly reduces the Company's stockholder equity
deficiency. The adjustments necessary to eliminate the UK subsidiaries are
set out in Note 3.
Basis of Presentation
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. The Company's ability to
continue as a going concern may depend on its ability to obtain outside
financing sufficient to support it pending identification and completion of a
suitable acquisition or acquisitions and its ability to obtain financing and
consummate such acquisition or acquisitions. There can be no assurance given
that the Company will obtain such short-term or long-term outside financing or
complete the acquisition of new business operations.
Effective October 1, 1995, the Company declared a one-for-ten reverse
stock split and all numbers of shares and share values stated herein reflect
such reverse split unless otherwise noted.
28
CORNICHE GROUP INCORPORATED
NOTES TO FINANCIAL STATEMENTS
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
Consolidation Policy
The consolidated financial statements for the fiscal years ended March
25, 1995 and March 27, 1994 include the accounts of CGI and its subsidiary,
Corniche. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Inventories
Inventories were valued at the lower of cost (first-in, First-out method)
or market for wholesale inventories ($1,906,300 in 1995). The retail
inventory method ($1,240,007 in 1995) was used for inventory in retail stores.
Property and Equipment
Machinery and equipment, furniture and fixtures and motor vehicles are
depreciated by the straight-line method over the estimated useful lives of the
assets, which range principally from two to five years. Leasehold
improve-ments were amortized over the lesser of the estimated useful lives or
the remaining lease term.
Repairs and maintenance which did not materially extend the useful lives
of the assets were expensed as incurred. The cost of assets sold or retired
and the related accumulated depreciation or amortization are removed from the
accounts with any resulting gain or loss included in the statement of
operations.
Intangible Assets
Goodwill
Goodwill arising on acquisitions represents the cost in excess of the
fair value of net assets acquired and was amortized on the straight-line
method over ten years.
Trademarks
Trademarks were being carried at cost and were amortized over a period of
two years.
29
CORNICHE GROUP INCORPORATED
NOTES TO FINANCIAL STATEMENTS
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
Intangible Assets (Cont'd)
Intangible Assets are as follows:
March 31 March 25
1996 1995
Goodwill $ 0 $1,321,363
Trademarks 0 11,374
0 1,332,737
Less: Accumulated Amortization 0 126,242
$ 0 $1,206,495
Income Taxes
Effective October 1993, 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.
Income tax expense/benefit is calculated on a separate company basis
between CGI and Corniche.
Reverse Premiums and Rent Free Periods
Reverse premiums received on the inception of lease agreements and rent
free periods were accounted for as deferred income and were amortized over the
lease term on a straight-line basis.
New Accounting Standards
Effective fiscal 1996, the Company adopted Statement of Financial
Accounting Standards No. 107, "Disclosure About Fair Value of Financial
Instruments", and Statement of Position 94-6, "Disclosure of Certain
Significant Risks and Uncertainties".
30
CORNICHE GROUP INCORPORATED
NOTES TO FINANCIAL STATEMENTS
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
Translation of Foreign Currency
Corniche's functional currency was pounds sterling. Assets and
liabilities of non-U.S. operations were translated into U.S. dollars at year
end exchange rates. Revenue and expenses were translated using average
exchange rates. The resulting translation adjustment was reported as a
separate component of stockholders' equity. Gains and losses from non-U.S.
currency transactions were included in results of operations.
Concentrations of Credit Risk
Financial instruments which subject the Company to credit risk consist of
deposits with financial institutions and in the case of Corniche, trade
receivables. Corniche's deposits were primarily held with a single financial
institution and its trade receivables were due from retailers and mass
merchants. Corniche performed ongoing credit evaluations of its customers.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Although these estimates are based on management's
knowledge of current events and actions it may take in the future, they may
ultimately differ from actual results.
Per Share Information
Per share information has been computed based on the weighted average
number of shares and dilutive common stock equivalents outstanding during each
respective period. Common stock equivalents were excluded from the loss per
common share computation in fiscal 1995 as the effect of their inclusion would
be anti-dilutive and for fiscal 1994 the dilutive effect was less than 3%.
Retroactive effect has been given to the recapitalization discussed in Note 2.
31
CORNICHE GROUP INCORPORATED
NOTES TO FINANCIAL STATEMENTS
NOTE 3 UK SUBSIDIARY RECEIVERSHIP PROCEEDING
Receivers were appointed to Chessbourne and TSCL on February 7, 1996 and
to Corniche Distribution Limited on February 28, 1996. Corniche had prepared
unaudited financial statements as of December 30, 1995. No financial
statements were prepared for the period from December 31, 1995 to the date of
the receivership proceedings as none were required under UK corporate laws nor
generally accepted accounting standards. In addition, as a result of the
receivership proceedings no audit of the financial statements of Corniche for
their period from March 25, 1995 will be carried out. Accordingly, proforma
financial statements reflecting the impact of the receiverships and
adjustments necessary to eliminate these companies from the balance sheet of
CGI were prepared as of December 30, 1995 and are as follows:
PROFORMA BALANCE SHEET
Consolidated Proforma
December 30, EIimination December 30,
ASSETS 1995 of subsidiary 1995
Current Assets:
Cash $ 45,433 $ 45,223 $ 210
Accounts receivable 679,297 679,297 0
Allowances for doubtful
accounts (34,146) (34,146) 0
Notes receivable 200,000 0 200,000
Inventory 2,120,367 2,120,367 0
Prepaid expenses 1,372,141 1,229,356 142,785
Other receivables 86,067 0 86,067
Total Current Assets 4,469,159 4,040,097 429,062
Other Assets:
Property and equipment 1,781,126 1,779,894 1,232
at cost, net
Intangible Assets
at cost, net 1,788,499 1,788,499 0
Total Assets $8,038,784 $7,608,490 $430,294
32
CORNICHE GROUP INCORPORATED
NOTES TO FINANCIAL STATEMENTS
NOTE 3 UK SUBSIDIARY RECEIVERSHIP PROCEEDING (Cont'd)
PROFORMA BALANCE SHEET (Cont'd)
Consolidated Proforma
December 30, EIimination of December 30,
Liabilities 1995 subsidiary 1995
Current Liabilities:
Notes Payable $ 2,026,387 $ 2,014,708 $ 11,679
Note Payable on Debt Compromise 0 (77,630) 77,630
Trade-Accounts Payable 4,792,996 4,467,350 325,646
Current Portion of Long-term Debt 700,476 700,476 0
Dividends Payable 72,897 0 72,897
Accrued Liabilities 1,581,497 1,245,677 335,820
Deferred Income 69,067 69,067 0
Payroll and Sales Tax Payable 994,342 994,342 0
Total Current Liabilities 10,237,662 9,413,990 823,672
Long-term Liabilities:
Long-term Debt 3,258,962 3,258,962 0
Deferred Income 212,108 212,108 0
Deferred Credit 33,805 33,805 0
Total Long-term Liabilities 3,504,875 3,504,875 0
Total Liabilities $13,742,537 $12,918,865 $823,672
Cumulative Redeemable Preference
Shares and
Class B Ordinary Shares 156,261 156,261 0
33
CORNICHE GROUP INCORPORATED
NOTES TO FINANCIAL STATEMENTS
NOTE 3 UK SUBSIDIARY RECEIVERSHIP PROCEEDING (Cont'd)
PROFORMA BALANCE SHEET (Cont'd)
Consolidated Proforma
December 30, Elimination of December 30,
Liabilities 1995 subsidiary 1995
Stockholders' (deficiency) equity:
7% Cumulative Convertible
Preferred Stock authorized
5,000,000. shares, issued and
outstanding 909,267 (December
30, 1995) and 946,069 (March 25,
1995) 946,069 0 946,069
Common Stock, $0. 1 0 par value,
authorized 30,000,000 shares,
issued 2,623,457 (December 30,
1995) and 2,119,857 (March 25,
1995) 262,345 0 262,345
Additional Paid-in Capital 793,976 0 793,976
Accumulated Deficit (7,754,330) (5,563,272) (2,191,058)
(5,751,940) (5,563,272) (188,668)
Cumulative Translation Adjustment 96,636 96,636 0
Treasury Stock at cost, 218,100
shares (204,710) 0 (204,710)
Total Stockholders' Deficiency (5,860,014) (5,466,636) (393,378)
Total Liabilities and Stockholders'
(Deficiency) Equity $ 8,038,784 $ 7,608,490 $ 430,294
34
CORNICHE GROUP INCORPORATED
NOTES TO FINANCIAL STATEMENTS
NOTE 3 UK SUBSIDIARY RECEIVERSHIP PROCEEDING (Cont'd)
Consolidated Statement of Operations
The "Consolidated Statement of Operations" for the forty weeks ended
December 30, 1995 and for the corresponding period in 1994, before the impact
of the receivership proceedings involving the UK subsidiaries, was as follows:
------------ 40 Weeks Ended------------
December 30, December 30,
1995 1994
Net Sales $12,370,716 $16,311,552
Cost of Sales (8,554,569) (11,667,351)
Gross Profit 3,816,147 4,644,201
Selling, general & admin. expenses (7,086,773) (5,527,519)
Operating Loss (3,270,626) (883,318)
(Loss) gain on sale of equipment (6,563) 1,308
Interest expense, net (501,683) (391,178)
Net Loss before preferred stock dividend (3,778,872) (1,273,188)
Preferred stock dividend (50,943) 0
Net Loss $(3,829,815) $(1,273,188)
Loss per share of common stock $(1.69) $(0.76)
Weighted average number of common
shares outstanding 2,260,599 1,669,336
Although financial statements for Corniche for the period December 31,
1995 to the date of receivership are not available, had such financial
statements been available the impact on the Company's balance sheet as of
March 31, 1996 and on the results of operations for the year then ended would
have remained unchanged as any profit earned or loss incurred by Corniche in
the period would have been offset by a corresponding increase or decreased in
the excess of the UK subsidiary cumulative losses over the Company's
investment.
35
CORNICHE GROUP INCORPORATED
NOTES TO FINANCIAL STATEMENTS
NOTE 4 NOTES RECEIVABLE
Notes Receivable comprise a 180-day promissory note in the principal
amount of $200,000 due from Chester Holdings, Ltd. ("Chester") as part
consideration for the Company's former medical imaging subsidiary sold to
Chester on March 25, 1995. The note was due on October 1, 1995 and includes
an option to apply any unpaid balance of such note to purchase voting
securities of Chester's operating subsidiary, or any new parent company of
such operating subsidiary, at the fair market value of such securities. As of
March 31, 1996 Chester was in default on the note and no principal or interest
had been received. Subsequent to March 31, 1996, the company received
payments of principal in the aggregate sum of $125,000. Accordingly, a
provision of $75,000 has been made at March 31, 1996 and no interest has been
accrued. The Company may exercise the option applicable to the unpaid balance
of the Note to purchase voting shares of Medical Laser Technologies, Inc., the
corporate parent of the operating subsidiary.
NOTE 5 PROPERTY AND EQUIPMENT
Property and Equipment consists of the following:
March 31, March 25,
1996 1995
Leasehold Property $ 0 $ 652,950
Machinery and Equipment 0 925,500
Motor Vehicles 0 287,588
Furniture and Fixtures 1,426 538,409
1,426 2,404,447
Less: Accumulated Depreciation 291 1,047,899
$ 1,135 $1,356,548
Motor Vehicles and Machinery and Equipment include assets held under
capital leases as follows:
March 31, March 25,
1996 1995
Cost $ 0 $ 311,385
Less: Accumulated Depreciation 0 102,409
Net book value $ 0 $ 208,976
36
CORNICHE GROUP INCORPORATED
NOTES TO FINANCIAL STATEMENTS
NOTE 6 NOTE PAYABLE ON DEBT COMPROMISE
Notes Payable on debt compromise comprise a 180-day promissory note in
the principal amount of 50,000 pounds sterling (approximately $77,630 as of
March 31,1996) in favor of the Bank of Scotland, primary banker to Corniche.
The note was issued to settle certain claims involving Corniche and the
Company following the receivership proceeding involving the Company's UK
Subsidiary. The note was paid in full, including accrued interest, on January
30, 1997 and simultaneously the Company was released from any further
obligation.
NOTE 7 REVOLVING LINE OF CREDIT - BANK
TSCL and Chessbourne had separate revolving lines of credit with a bank
of approximately $400,000 and $1,740,000, respectively. The facilities were
reviewed annually and interest was payable at 3% over the bank's base rate
(9.75 % at March 25, 1995) for TSCL and 2 % over the bank's base rate (8.75 %
at March 25, 1995) for Chessbourne.
NOTE 8 LONG-TERM DEBT
Long-term Debt as of March 25, 1995 consisted of:
Chessbourne bank loan payable over 12 years from
October 12, 1993 eliminated by UK receivership
proceeding $3,186,400
Corniche bank loan payable in monthly installments
through June 16, 2004 eliminated by UK receivership
proceeding 266,071
Corniche bank loan due on October 31, 1995 eliminated
by UK receivership proceeding 159,320
Capital lease obligations payable through July 1997
eliminated by UK receivership proceeding 126,951
---------
3,738,742
Less: Current portion 415,177
$3,323,565
===========
37
CORNICHE GROUP INCORPORATED
NOTES TO FINANCIAL STATEMENTS
NOTE 8 LONG-TERM DEBT (Cont'd)
These notes and the revolving lines of credit (see Note 7) were secured
by substantially all of the assets of Corniche, which security interest was
demanded in February 1996 and resulted in the receivership proceeding.
NOTE 9 ACQUISITIONS
On March 31, 1995 Corniche acquired seven retail stationery stores. The
consideration paid totalled approximately $772,000 and was paid substantially
by way of assumption of liabilities. The acquisition was accounted for under
the purchase method of accounting.
The results of operations of those stores from the date of acquisition
had been included in the Company's consolidated statement of operations to
December 30, 1995 (See Note 3).
The assets acquired and liabilities assumed (in thousands) on acquisition
were as follows:
Fair Value of Assets Acquired $ 374
Goodwill 772
Cash Paid (25)
-------
Liabilities Assumed $1,121
NOTE 10 PENSION PLANS
Corniche operated a self-administered money purchase pension plan for
directors and senior employees. Contributions to the plan were determined by
the board of directors. The plan commenced on January 1, 1994. In addition,
Chessbourne operated an insured defined contribution employee benefit pension
plan available to all full-time employees. Contributions were set at 4% of
salary by Chessbourne and 4% by the employee. Pension costs charged to
operations for the year ended March 25, 1995 were $45,536 and $22,529 for the
year ended March 27, 1994.
38
CORNICHE GROUP INCORPORATED
NOTES TO FINANCIAL STATEMENTS
NOTE 11 STOCKHOLDERS EQUITY
Effective October 1, 1995 the Company declared a one-for-ten reverse
stock split and all numbers of shares and share values stated herein reflect
such reverse split unless otherwise noted.
In connection with the settlement of the securities class action
litigation (see Note 13), the Company issued 1,000,000 shares of 7% cumulative
convertible preferred stock with an aggregate value of $1,000,000. The
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.
Preferred stockholders are entitled to receive a cash dividend of 7% paid
semi-annually. The preferred shares are callable by the Company at any time
after the first anniversary of issuance, at prices ranging from 101 % to 105 %
of face value. In addition, if the closing price of the Company's common
stock exceeds $13.80 per share for a period of 20 consecutive trading days,
the preferred shares are callable by the Company at a price equal to 1 % of
face value. In March 1995, the holders of 53,931 shares of preferred stock
exercised their rights to convert and, accordingly, 10,371 shares of common
stock were issued. During the year ended March 31, 1996, holders of 36,802
shares of preferred stock converted such shares into 7,077 shares of CGI's
common stock.
In March 1995, the Company issued a total of 1,312,400 shares of common
stock to acquire all of the issued and outstanding stock of Corniche. Brian
J. Baylis was issued 877,800 shares of common stock and Susan A.M. Crisp was
issued 219,450 shares of common stock in exchange for their holdings
representing 100% of the issued common stock of Corniche, and the balance of
215,150 shares were issued to Chester in connection with the acquisition. In
addition, the Company issued 25,000 shares of the Company's common stock to
Ronatree in exchange for the remaining 49% of the common shares of
Chessbourne.
Simultaneous with the Company's acquisition of Corniche on March 2, 1995,
NWCM Limited ("NWCM"), a Hong Kong investment banker, agreed on a staggered
basis, to raise up to $5,000,000 of new equity capital on a "best efforts"
basis. This offer was limited to experienced, sophisticated investors who are
"non-U.S. persons" under Regulation S of the United States Securities Act of
1933. An initial tranche of 600,000 shares was offered at a price of $2.00
per share. Pursuant to the transaction, the Company paid NWCM a fee of
$50,000. In addition, NWCM was paid a sales commission of 10% and a
non-accountable expense allowance equal to 2% of the total dollars raised, a
total of $162,864. The offering was closed on September 8, 1995 and the
Company raised a total of $957,200 gross, $794,336 net of sales commission and
expense allowance in the year ended March 31, 1996 and $100,000 March 25,
1995. The Company has agreed to indemnify NWCM for certain liabilities
arising from the transaction.
39
CORNICHE GROUP INCORPORATED
NOTES TO FINANCIAL STATEMENTS
NOTE 11 STOCKHOLDERS EQUITY (Cont'd)
During the year ended March 31, 1996, the Company issued 25,000 shares of
common stock to Trisec Holdings, Ltd. for consulting services in connection
with the "Reverse Acquisition' (see Note 2) of Corniche on March 2, 1995.
On March 13, 1995, the Company converted a promissory note in the amount
of $300,000 payable on November 10, 1995, which had been entered into pursuant
to a bridge finance agreement in December 1994, into 150,000 shares of the
common stock of the Company. In connection with the conversion, the Company
paid NWCM a fee of $36,000.
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 150,175 shares of common stock are reserved for issuance upon
exercise of warrants. Warrants issued are summarized as follows:
Shares
Issuable on Exercise Expiration
Exercise Price Date
February 1991 48,867 $36.00 1/98
September 1993 9,375 $46.40 4/99
March 1995 91,933 $3.20 - $8.10 1/99 - 11/03
In March 1995, as a result of the sale by the Company of its medical
imaging subsidiary, stock options held by certain directors, officers and
employees under the Company's 1986 Stock Option Plan were converted to
warrants on substantially the same terms as the previously held stock options,
except these warrants are immediately vested.
Stock Option Plans
CGI has two stock option plans. The 1986 Stock Option Plan provides for
the grant of options to purchase shares of the Company's common stock to
employees. The 1992 Stock Option Plan provides for the grant of options to
directors.
40
CORNICHE GROUP INCORPORATED
NOTES TO FINANCIAL STATEMENTS
NOTE 11 STOCKHOLDERS EQUITY (Cont'd)
Stock Option Plans (cont'd)
The 1986 Stock Option Plan allows for the grant of incentive stock
options (ISO), non-qualified stock options (NQSO) and stock appreciation
rights (SAR). The maximum number of shares of the Company's common stock that
may be granted, as amended in April 1993, is 140,000 shares. The terms of the
plan provide that options are exercisable for a period of up to ten years from
the date of grant or a period of five years with respect to incentive stock
options if the holder owns more that 10% of the Company's outstanding common
stock. The exercise price and grantees of options are established by the
Stock Option Committee. The exercise price of ISO's must be at least 100% of
the fair market value of the common stock at the time of grant. For holders
of more than 10% of the Company's outstanding -common stock, the exercise
price must be at least I 10% of fair market value. The exercise price of
NQSO's must be not less than 80% of the fair market value of the common stock
at the time of grant. An option is exercisable not earlier than six months
from the date of grant.
In April 1992, the Company adopted the 1992 Stock Option Plan to provide
for the granting of options to directors. According to the terms of this
plan, each director is granted options to purchase 1,500 shares each year.
The maximum amount of the Company's common stock that may be granted under
this plan is 20,000 shares. Options are exercisable at the fair market value
of the common stock on the date of grant and have five year terms.
Information with respect to options under the 1986 and 1992 Stock Option
Plans is summarized as follows:
---------- Year Ended ---------
March 31, March 25, Sept. 30, Sept. 30,
1996 1995 1994 1993
Outstanding,
Beginning of Year 28,980 131,367 82,900 22,875
Granted 9,000 15,896 69,117 86,000
Converted 0 (91,933) 0 0
Expired (30,480) (26,350) (20,650) (25,975)
Exercised 0 0 0 0
Outstanding,
End of Year 700 28,980 131,367 82,900
41
CORNICHE GROUP INCORPORATED
NOTES TO FINANCIAL STATEMENTS
NOTE 11 STOCKHOLDERS EQUITY (Cont'd)
Stock Option Plans (cont'd)
The Company reclassified 18,000 options shown as expired in its 1994
financial statements to be outstanding as of March 25, 1995.
Outstanding options expire 90 days after termination of holder's status
as employee or director. Included in the outstanding options at March 31,
1996 were 1,500 shares which expired in April 1996 and 3,000 shares which
expired in June 1996.
At March 31, 1996, there were 1,500 exercisable outstanding options and
152,500 shares avoidable for grant. Exercise prices of outstanding options
ranged from $3.80 to $32.50.
On May 1, 1996, 3,000 options were granted at an exercise price of
$0.40625 per share.
42
CORNICHE GROUP INCORPORATED
NOTES TO FINANCIAL STATEMENTS
NOTE 12 RELATED PARTY TRANSACTIONS
B.R. Linton, a director of Chessbourne until April 28, 1995, is also a
director of Ash Property Company Limited, a property investment company.
During the year ended March 25, 1995, a property was leased by Corniche from
Ash Property Company Limited at a rental of approximately $94,000.
B.R. Linton is also a director of Ronatree. Until March 2, 1995,
Ronatree beneficially owned a 49% interest in the ordinary share capital of
Chessbourne. On March 2, 1995, CGI purchased such interest from Ronatree in
exchange for the issuance of 25,000 shares of CGI.
On March 2, 1995, Chester acquired 215,150 common shares of CGI. CGI
issued the shares in order to induce Chester to agree to terminate a
pre-existing agreement to acquire Corniche and in forgiveness by Chester of
approximately $71,000 of indebtedness owed to Chester and its subsidiaries by
Corniche.
Effective March 25, 1995, CGI sold its wholly-owned medical imaging
products subsidiary to Chester in exchange for the 215,150 shares of the
Company's common stock previously issued to Chester in connection with the
Company's acquisition of Corniche and a 180-day promissory note in the
principal amount of $200,000. The promissory note also includes an option to
apply the unpaid balance of such note to purchase securities of Chester or
such operating subsidiary, or any other parent company of such operating
subsidiary at the fair market value of such securities.
During the year ended March 25, 1995, the Company charged fees of
$261,211 to Chester for management services provided by its directors and
employees to Chester. These fees were still owed by Chester as of March 25,
1995. The Company fully provided against this receivable.
During the year ended March 25, 1995, the Company sold inventory
totalling $732,367 to a subsidiary of Chester. In addition, the Company
purchased inventory from a subsidiary of Chester for $204,323.
On march 31, 1995, an agreement was completed whereby seven retail stores
were acquired from a subsidiary of Chester. The consideration paid totalled
$772,000 (see Note 9).
43
CORNICHE GROUP INCORPORATED
NOTES TO FINANCIAL STATEMENTS
NOTE 13 COMMITMENTS, CONTINGENCIES AND OTHER
Legal Proceedings
During fiscal 1994, the Company disclosed irregularities in its revenue
recognition practices which led to the restatement of the Company's financial
statements for fiscal years ended September 30, 1989, 1990, and 1991, and the
first quarter of fiscal 1992. As a result, nine class action securities
complaints (the "lawsuits") were filed against the Company and certain other
persons which were settled in January 1994. Pursuant to the settlement, the
Company paid $2,560,000 in cash in 1995 and issued $1,000,000 in 7% cumulative
convertible preferred stock. The preferred- stock is convertible into common
stock at a price of $5.20 per share, and will be callable for five years. The
preferred stock has been included in stockholders' equity at March 31, 1996
and at March 25, 1995. Stockholders who purchased CGI's shares between
January 3, 1989 and May 7, 1992 have been included within the plaintiff class
for purposes of the settlement.
CGI and certain of its former officers and directors were involved in a
shareholders' derivative action filed in Delaware Chancery Court. The causes
of action asserted included breach of fiduciary duty, breach of duty of care
and trust of the Company's shareholders, gross negligence and mismanagement,
as well as common law conspiracy and aiding and abetting. The Court granted
the Company's motion to dismiss by Opinion and Order dated May 2, 1995. The
Company instituted its own action in State Court in New Jersey against its
former chief executive officer, Efriam Landa. The complaint was filed on May
4, 1995. Mr. Landa answered on October 16, 1995 and asserted counterclaims
seeking (a) reimbursement of defense costs in the derivative action and
related investigations by the Securities and Exchange Commission ("SEC') and
the United States Attorney for the District of New Jersey and (b) damages for
breach of his employment contract. This matter was settled by exchange of
mutual releases on December 5, 1996.
In the opinion of management, there are no other lawsuits or claims
pending against the Company.
44
CORNICHE GROUP INCORPORATED
NOTES TO FINANCIAL STATEMENTS
NOTE 14 INCOME TAXES
Income Tax Expense (benefit) represents United Kingdom corporation tax
(benefit) for the years ended March 25, 1995 and March 27, 1994. There were
no significant differences between the financial statement and tax basis of
assets and liabilities that were expected to give rise to taxable income in
the future in view of the Company's substantial tax losses available for
carryforward.
Earnings (loss) before income taxes and preferred stock dividend is
attributable to the following sources:
Years Ended In
=====================================
1996 1995 1994
United Kingdom $ 0 $(2,786,689) $3,213
United States (596,849) (595,517) 0
$(596,849) $(3,382,206) $3,213
In the United States 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. The Company has fully
reserved the balance of tax benefits of its operating losses because the
likelihood of realization of the tax benefits cannot be determined.
The Company is delinquent in the filing of Federal and State Income Tax
returns for the fiscal year ended September 30, 1994, short period ended March
25, 1995 and the fiscal year ended March 31, 1996.
NOTE 15 S.E.C. FILINGS
The Company is delinquent in its filing of the following reports with
the S.E.C:
* Annual Report on Form 10-K for the fiscal year ended March 31,
1996.
* Quarterly Report on Form IO-Q for the quarter ended June 30,
1996.
* Quarterly Report on Form 10-Q for the quarter ended September
30, 1996.
* Quarterly Report on Form 10-Q for the quarter ended December
31, 1996.
45
CORNICHE GROUP INCORPORATED
NOTES TO FINANCIAL STATEMENTS
NOTE 16 SUBSEQUENT EVENTS
Transfer of Pledged Securities
Effective January 30, 1997 the Company entered into a Stock Purchase
Agreement with the Bank of Scotland and twelve unrelated persons whereby
1,042,250 of the 1,097,250 shares of the Company's common stock pledged to the
Bank of Scotland by Brian J. Baylis and Susan A.M. Crisp to secure certain
debts of Corniche Distribution Limited and subsidiaries to the Bank of
Scotland were sold by the Bank of Scotland following a default in the
obligation secured by the pledge to such twelve persons for an aggregate
consideration of $125,070.
Mutual Release
On January 30, 1997 the Company paid the Bank of Scotland $89,374.49 in
fun satisfaction of all principal and interest due under a Promissory Note
dated February 1996 to the Bank of Scotland in the principal amount of fifty
thousand sterling (see Note 6). In consideration thereof, the parties
executed a Mutual Release dated as of January 30, 1997 whereby the Bank of
Scotland released the Company and James J. Fyfe, the Company's sole officer
and director, from all liabilities, accounts, courses of action, sums of
money, reckonings, contracts, controversies, agreements, damages, judgements,
executions, claims, demands, debts, obligations, promises, covenants, actions
and undertakings which the Company or James J. Fyfe the Bank of Scotland ever
had at the time of the release or could thereafter have by reason of any
matter up to and through the date of the release and the Company and James J.
Fyfe released the Bank of Scotland in similar fashion.
Equity Offerings
During the period July 1996 through December 1996 the Company engaged in
a private offering of securities pursuant to Rule 506 of Regulation D of the
Securities Act of 1933, as amended. The offering of up to $300,000 - was
conducted on a "best efforts" basis through Robert M. Cohen & Co., Inc.
("RMCC"), a New York based broker-dealer and was offered and sold in the form
of $25,000 units. Each unit consisted of one $25,000 face amount 90-day, 8%
promissory note and one redeemable common stock purchase warrant to purchase
60,000 shares of the Company's common stock at a price of $ .50 per share
during a period of three years from issuance. The offering was terminated in
January 1997 upon sale of 4 units resulting in $100,000 in gross proceeds. In
connection with such offering, RMCC was paid sales commissions equal to 10% of
the aggregate purchase price of the units sold resulting in aggregate sales
commissions of $10,000.
46
CORNICHE GROUP INCORPORATED
NOTES TO FINANCIAL STATEMENTS
NOTE 16 SUBSEQUENT EVENTS (Cont'd)
Equity Offerings (Cont'd)
During the period January 1997 through date hereof, the Company engaged
in a private offering of securities pursuant to Rule 506 of Regulation D of
the Securities Act of 1933, as amended. The offering consists of up to 19
units being sold at an offering price of $25,000 per unit. Each unit consists
of one $25,000 face amount 90-day, 8% promissory note and one redeemable
common stock purchase warrant to purchase 60,000 shares of the Company's
common stock at a price of $ .50 per share during a period of three years from
issuance. The offering of up to $475,000 is being conducted on a "best
efforts" basis through RMCC. In connection with such ' offering, RMCC is
being paid sales commissions equal to 10% of the purchase price for each unit
sold or $2,500 per unit. To date RMCC has sold 14 units.
Settlement of Accounts Payable
The Company has settled its Accounts Payable with its major creditors.
The settlement resulted in a reduction of selling general and administrative
expenses in the amount of $175,637.
Settlement of Note Payable
The Company has settled its Note Payable for $5,000 in full satisfaction
of all remaining sums due including accrued interest. The adjustment has been
reflected in the Financial Statements.
47
CORNICHE GROUP INCORPORATED
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED MARCH 31,1996, MARCH 25,1995 AND MARCH 27,1994
COL. A COL B. COL. C COL. D COL. E
ADDITIONS
Balance at Beginning Charges to Costs Acquisitions Deductions Balance at
Description of Period and expenses of Subsidiaries Describe End of Period
Allowance for Doubtful
Account 1994 $ 0 $ 71,832 $59,860 $ 0 $131,692
1995 131,692 349,231 0 135,815 (1) 345,108
1996 345,108 0 0 345,108 (3) 0
Reserve against
Notes Receivable
in Default 1994 0 0 0 0 0
1995 0 0 0 0 0
1996 0 75,000 0 0 75,000
Inventory Reserve 1994 0 56,659 29,930 0 86,589
1995 86,589 9,758 0 56,123 (2) 40,224
1996 40,224 0 0 40,224 (3) 0
(1) Elimination of reserve on bad debt write-off.
(2) Release of provision no longer required.
(3) Elimination of UK subsidiary following receivership proceeding.
48
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On April 5, 1995, Registrant terminated its relationship with the
accounting firm of Ernst & Young, LLP ("Ernst & Young") as Registrant's
independent auditors responsible for the audit of Registrant's financial
statements. This action was recommended by Registrant's Audit Committee and
approved by its Board of Directors. The decision to terminate Ernst & Young
as Registrant's principal independent auditors was made because another
accounting firm, Coopers & Lybrand LLP ("Coopers"), had been the auditor for
Registrant's then recently-acquired subsidiary, CDL, for some time.
In connection with the audits of Registrant's financial statements for
the fiscal year ended September 30, 1994, and in the subsequent interim
period, there were no disagreements with Ernst & Young on any matters of
accounting principles or practices, financial statement disclosure, or
auditing scope and procedures which, if not resolved to the satisfaction of
Ernst & Young, would have caused Ernst & Young to make reference to such
matter in their report. Ernst & Young's report on Registrant's financial
statements for its fiscal year ended September 30, 1994 expressed an unqualified
opinion on those financial statements based on their audit but included an
explanatory paragraph noting a "substantial doubt about Registrant's ability
to continue as a going concern" based upon the several matters summarized in
such report.
During the period April 1995 through on or about July 6, 1995 Registrant
negotiated with Coopers regarding the preparation of Registrant's audited
financial statements for the year ended March 25, 1995. Coopers subsequently
declined to act as Registrant's independent auditors even though Coopers' U.K.
office continued to act as auditor for Registrant's subsidiary, CDL, and
provided audited financial statements for CDL for the year ended March 25,
1995. Coopers decision not to act as Registrant's auditors was not based on
any disagreements with Registrant on any matters of accounting principles or
practices, financial statement disclosure or auditing scope and procedures
which, if not resolved to Coopers satisfaction, would have caused Coopers to
make reference to such matters in their reports. Coopers never offered
Registrant a formal reason for declining to act as Registrant's auditors
although Registrant was led to believe that Coopers' U.S. offices did not want
to act for a company with a recent experience of significant losses coupled
with prior shareholder litigation.
On July 20, 1995, Registrant appointed Mahoney Cohen & Company, PC
("Mahoney Cohen") as Registrant's independent auditors responsible for the
audit of Registrant's financial statements. This action was recommended by
Registrant's Audit Committee and approved by its Board of Directors.
Registrant had not consulted Mahoney Cohen regarding any accounting or
financial reporting issues prior to that firm being retained by Registrant.
In connection with its audit of Registrant's financial statements for the
fiscal year ended March 25, 1995, and in the subsequent interim period through
on or about April 17, 1997 when the relationship was formally terminated and
it resigned as Registrant's independent auditors, there were no disagreements
between Mahoney Cohen and Registrant on any matters of accounting principles
or practices, financial statement disclosure or auditing scope and procedures
which, if not resolved to the satisfaction of Mahoney Cohen, would have caused
Mahoney Cohen to make reference to such matters in their report. Mahoney
Cohen's report on Registrant's financial statements for the fiscal year ended
March 25, 1995 expressed an unqualified opinion on those financial statements
based upon their audit but included a paragraph noting a "substantial doubt
about Registrant's ability to continue as a going concern" based upon the
several matters summarized in such report.
In February 1997 Registrant appointed Simontacchi & Co., P.A.
("Simontacchi") as Registrant's independent auditors responsible for the audit
of Registrant's financial statements. This action was approved by
Registrant's board of directors. Registrant had not consulted Simontacchi
regarding any accounting or financial reporting issues prior to that firm
being retained by Registrant.
49
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Directors
The following sets forth, as at March 31, 1996, the directors of
Registrant, their respective ages, the year in which each was first elected or
appointed a director, and any other office in Registrant held by each
director. Each director holds office until the next annual meeting of
shareholders and until their successors have been elected and qualified.
Other Offices Director
Name Held Age Since
James J. Fyfe Vice President, Chief 42 1995
Operating Officer
Mathew P. Pazaryna None 54 1993
In September 1996, Mathew P. Pazaryna ceased all his activities relating
to his engagement as a director of Registrant. Efforts to contact him proved
unsuccessful and consequently, his association with Registrant was
terminated. Although no written resignation was provided to Registrant by Mr.
Pazaryna, Registrant, based upon the actions of Mr. Pazaryna, treated Mr.
Pazaryna as having resigned effective September 1996. During the fiscal year
ended March 31, 1996 several other directors of Registrant resigned their
positions as such including George Lombardi (January 1996), Manfred Pfeiler
(May 28, 1995), Werner Haas (June 27, 1995), Brian J. Baylis (March 6, 1996),
and Susan A.M. Crisp (March 6, 1996). None of the foregoing resignations were
the result of any disagreements with Registrant on any matter relating to
Registrant's operations, policies or practices. The resignations of Brian J.
Baylis and Susan A.M. Crisp were the result of the receivership proceedings
instituted against Registrant's operating subsidiaries.
Executive Officers
The following sets forth the executive officers of Registrant, their
respective ages, the year in which each was first appointed an executive
officer of Registrant and all positions and offices in Registrant held by each
such person as at March 31, 1996.
Office Held
Name Offices Held Age Since
James J. Fyfe Vice President 42 May 1995
During the fiscal year ended March 31, 1996 all of Registrant's executive
officers, with the exception of James J. Fyfe, resigned. Brian J. Baylis and
Susan A. M. Crisp resigned on March 6, 1996 as the result of the receivership
proceedings instituted against Registrant's operating subsidiaries. At the
time of their resignations, Mr. Baylis had been serving as Registrant's
president and chief executive and Ms. Crisp had been serving as Registrant's
vice president for finance and administration, chief financial officer,
treasurer and secretary. Mr. Baylis and Ms. Crisp had been serving in such
capacities as of March 25, 1995 when they replaced Werner Haas and George
Lombardi, respectively, following Registrant's sale of its medical imaging
products subsidiary, FMI, to Chester.
50
Family Relationships
No family relationship exists between any director, executive officer of
Registrant or any person contemplated to become such.
Business Experience
The following summarizes the occupation and business experience during at
least the five years preceding March 31, 1996 of each person who served as a
director and/or executive officer of Registrant at March 31, 1996.
JAMES J. FYFE has been a director, vice president and the chief operating
officer of Registrant since May 1995. From January 1991 to May 1995, he was
an independent business consultant. Prior to January 1991 he was chairman and
chief executive officer of the Lewis Group, a UK based chain of department
stores and specialty retail outlets.
MATHEW P. PAZARYNA was a director of Registrant from December 1993 until
September 1996. From May 1995 through September 1996, Mr. Pazaryna was an
independent business consultant. From 1992 until April 1995, he was the
senior vice president and chief financial officer of Bio-Technology General
Corp. From 1966 until 1992, he held positions in finance, accounting, and
strategic planning for several subsidiaries and divisions of Johnson &
Johnson, a consumer products manufacturer.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the aggregate compensation paid during the
three years ended March 31, 1996 to each person who served as Registrant's
Chief Executive Officer during fiscal 1996 and any other executive officer of
Registrant earning in excess of $100,000 for services rendered during fiscal
1996.
Summary Compensation Table
Long-Term Compensation
Annual Compensation Awards Payouts
-------------------- --------------------------
Other All
Name Annual Rest. Other
and Compen- Stock Options LTIP Compen-
Principal Salary Bonus sation Awards SARs Payouts sation
Position Year ($) ($) ($)(1) ($) (#) ($) ($)(2)
Brian J. Baylis 1996 79,335 0 10,311 0 1,500 0 0
CEO(3) 1995 78,200 0 16,198 0 0 0 17,204
1994 37,500 0 9,808 0 0 0 16,500
(1) Includes car allowance.
(2) Includes pension contributions.
(3) Compensation includes amounts paid to Mr. Baylis by CDL and its
subsidiaries prior to their acquisition by Registrant in March 1995.
Mr. Baylis resigned as Registrant's chief executive officer on
March 6, 1996.
51
Option/SAR Grants During The Fiscal Year Ended March 31, 1996
Individual Grants
Number % of
Shares of Total
Common Stock Options/
Underlying SARs
Options/ Granted to Exercise
SARs Employees or Base
Granted in Fiscal Price Expiration
Name (#) Year ($/Sh) Date
- - ------------------------------------------------------------------------------
Brian J. Baylis 1,500 16.67% .48 June 6, 1996
Aggregate Options/SAR Exercises During Fiscal Year Ended March 31, 1996
and Fiscal Year-End Options/SAR/Values
Value of
Number of Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
At FY-End (#) At FY-End ($)
Shares Acquired Exercisable/ Exercisable/
Name on Exercise (#) Value Realized ($) Unexercisable Unexercisable
Brian J. Baylis 0 0 1,500 (unexercisable) N/A
Compensation of Directors
Directors who are not full-time members of management receive $300 per
Board of Directors meeting attended, in addition to reimbursement of travel
expenses. Directors are also compensated for special assignments from time to
time. No special compensation was paid in fiscal 1996.
All directors receive options to purchase 1,500 shares of Registrant's
common stock each May under Registrant's 1992 Stock Option Plan for Directors.
Compliance with Section 16(a) of the Exchange Act
Any person who is an officer, director, or the beneficial owner, directly
or indirectly, of more than 10% of the outstanding common stock of Registrant
is required under Section 16(a) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") to file certain reports with the Securities and
Exchange Commission (the "Commission") disclosing his or her holdings or
transactions in any securities of Registrant. For purposes of this
discussion, all such persons required to file such reports will be referred to
as "Reporting Persons". Every Reporting Person must file an initial statement
of his or her beneficial ownership of Registrant's securities on the
Commission's Form 3 within ten days after he or she becomes a Reporting
Person. Thereafter (with certain limited exceptions), all changes in his or
her beneficial ownership of Registrant's securities must be reported on the
Commission's Form 4 on or before the 10th day after the end of the month in
which such change occurred. Certain changes in beneficial ownership are
exempt from the
52
Form 4 reporting requirements, but are required to be reported on a Form 5
within 45 days of the end of the fiscal year in which such changes occurred.
The Registrant knows of no person who was a Reporting Person during the fiscal
year ended March 31, 1996, who has failed to file any reports required to be
filed during such period on Forms 3 and 4 with respect to his holdings or
transactions in the Company's securities.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
As of March 19, 1997 there were no persons known to Registrant to be the
beneficial owners of more than 5% of Registrant's common stock, $.10 par value.
Security Ownership of Management
The following table sets forth information concerning the beneficial
ownership of Registrant's common stock, as of March 19, 1997, by (i) each
person who was a director or a nominee to become a director, (ii) Registrant's
executive officers, and (iii) all persons who were directors and officers of
Registrant, as a group, and the percentage of Registrant's issued and
outstanding stock represented by such beneficial ownership.
Name and Address Amount and Nature of
of Beneficial Owner Beneficial Ownership Percent of Class
James J. Fyfe -0- (1) -0-
145 Route 46 West
Wayne, NJ 07974
All directors and officers -0- (1) -0-
as a group (1 person)
________________
(1) Does not include 1,500 shares of common stock which may be issued to
Mr. Fyfe upon the exercise of 1,500 stock options issued to Mr. Fyfe as of May
1996 in connection with his services as a director of Registrant. These
options were issued in connection with Registrant's 1992 Stock Option Plan and
are not exercisable until May 1997. Each option is exercisable at an exercise
price of $.40625 per share.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions With Management and Others
During the fiscal year ended March 31, 1996 and all subsequent periods
there have been no material transactions between Registrant and any member of
management or any principal shareholder of Registrant.
53
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
Financial Statements
The financial statements filed as a part of this report are as follows:
Report of independent accountants
Balance Sheets - March 31, 1996 and March 25, 1995
Statements of Operations - Years ended March 31, 1996,
March 25, 1995 and March 27, 1994
Statement of Changes in Stockholders' (Deficiency)/Equity -
Years ended March 31, 1996, March 25, 1995 and March 27, 1994
Statements of Cash Flows - Years ended March 31, 1996,
March 25, 1995 and March 27, 1994
Notes to consolidated financial statements
Financial Statement Schedules
The financial statement schedule filed as a part of this report is as
follows:
Valuation and Qualifying Accounts for the years ended March 31, 1996,
March 25, 1995 and March 27, 1994.
Other financial statement schedules have been omitted for the reason that
they are not required or are not applicable, or the required information is
shown in the financial statements or notes thereto.
Exhibits
The exhibits filed as a part of this report are as follows:
Exhibit No. as filed
with registration statement
or report specified below
3 (a) Certificate of Incorporation filed September 18, 1980 (1) 3
(b) Amendment to Certificate of Incorporation 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)
54
(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, 1984 (7) 3.8
(j) Amendment to Certificate of Incorporation filed
September 28, 1995 *
(k) By-laws of the Registrant, as amended on
December 22, 1983(2) 3(c)
(l) By-laws of the Registrant, as amended on
December 5, 1985(3) 3(f)
(m) By-laws of the Registrant, as amended on
April 25, 1991(6) 3.10
4 (a) Form of Underwriter's Warrant (6) 4.9.1
(b) Form of Promissory Note - 1996 Offering *
(c) Form of Promissory Note - 1997 Offering *
(d) Form of Common Stock Purchase Warrant - 1996 Offering *
(e) Form of Common Stock Purchase Warrant - 1997 Offering *
10 (a) Form of Financial Advisory Agreement between
Registrant and Commonwealth Associates (6) 10.13
(b) Underwriting Agreement among Registrant,
Commonwealth Associates and Selling Stockholders,
dated November 15, 1991 (8) 10.14
(c) 1986 Stock Option Plan, as amended (7) 10.6
(d) 1992 Stock Option Plan (9) B
(e) Novation Agreement relating to a Share Sale and Purchase
Agreement dated April 24, 1994 among Brian John
Baylis, Susan Ann Meadows Crisp and Fidelity
Medical, Inc. dated March 2, 1995 (10) 2(a)
(f) Supplemental Agreement relating to a Share Sale and
Purchase Agreement dated April 24, 1994 among
Brian John Baylis, Susan Ann Meadows Crisp and
Fidelity Medical, Inc. dated March 2, 1995 (10) 2(b)
(g) Agreement for sale and purchase of the entire issued
share capital of Corniche Distribution Limited among
Brian John Baylis, Susan Ann Meadows Crisp and
Fidelity Medical, Inc. dated March 2, 1995 (10) 2(c)
(h) Letter of Agreement between Fidelity Medical, Inc. and
NWCM Limited dated as of March 6, 1995 (10) 2(d)
(i) Supplemental Agreement with respect to Options
dated March 2, 1995 (10) 9(b)
(j) Stock Purchase Agreement dated as of March 25, 1995
by and between Fidelity Medical, Inc. and Chester
Holdings, Ltd (11) 2(a)
(k) Promissory Note and Option Agreement dated as of
March 25, 1995 from Chester Holdings, Ltd. to
Fidelity Medical, Inc. (11) 2(b)
55
(l) Form of Warrant of Fidelity Medical, Inc. to be issued
to employees of Fidelity Medical, Inc., a New Jersey
corporation, in replacement of stock options (11) 2(c)
(m) Stock Purchase Agreement dated as of January 30, 1997
by and among Registrant, the Bank of Scotland and 12 Buyers *
(n) Mutual Release dated as of January 30, 1997 by and among
Registrant, James Fyfe and the Bank of Scotland *
27 Financial Data Schedule
99 (a) Opinion Letter of Smithsons Solicitors dated March 7, 1997
regarding the status of Registrant's former subsidiaries
as the result of the February 1996 receivership proceedings. *
99 (b) Letter of James J. Fyfe Regarding Unavailablity of Re-signed
Audit Reports from Coopers & Lybrand LLP *
99 (c) Letter of Mahoney Cohen Rashba & Pokart, CPA, PC Regarding
Their Inability to Re-Sign Their July 25, 1995 Audit Report *
* Filed herewith
- - -----------------
Notes:
(1) Filed with the Securities and Exchange Commission as an exhibit, numbered
as indicated above, to the registration statement of Registrant on Form S-18,
File No. 2-69627, which exhibit is incorporated herein by reference.
(2) Filed with the Securities and Exchange Commission as an exhibit, numbered
as indicated above, to the registration statement of Registrant on Form S-2,
File No. 2-88712, which exhibit is incorporated herein by reference.
(3) Filed with the Securities and Exchange Commission as an exhibit, numbered
as indicated above, to the registration statement of Registrant on Form S-2,
File No. 33-4458, which exhibit is incorporated herein by reference.
(4) Filed with the Securities and Exchange Commission as an exhibit, numbered
as indicated above, to the annual report of Registrant on Form 10-K for the
year ended September 30, 1987, which exhibit is incorporated herein by
reference.
(5) Filed with the Securities and Exchange Commission as an exhibit, numbered
as indicated above, to the registration statement of Registrant on Form S-3,
File No. 33-42287, which exhibit is incorporated herein by reference.
(6) Filed with the Securities and Exchange Commission as an exhibit, numbered
as indicated above, to the registration statement of Registrant on Form S-1,
File No. 33-42154, which exhibit is incorporated herein by reference.
(7) Filed with the Securities and Exchange Commission as an exhibit, numbered
as indicated above, to the annual report of Registrant on Form 10-K for the
year ended September 30, 1994, which exhibit is incorporated herein by
reference.
(8) Filed with the Securities and Exchange Commission as an exhibit, numbered
as indicated above, to the annual report of Registrant on Form 10-K for the
year ended September 30, 1991, which exhibit is incorporated herein by
reference.
(9) Filed with the Securities and Exchange Commission as an exhibit, numbered
as indicated above, to the proxy statement of Registrant dated March 30, 1992,
which exhibit is incorporated herein by reference.
56
(10) Filed with the Securities and Exchange Commission as an exhibit, numbered
as indicated above, to the current report of Registrant on Form 8-K, dated
March 2, 1995, which exhibit is incorporated herein by reference.
(11) Filed with the Securities and Exchange Commission as an exhibit, numbered
as indicated above, to the current report of Registrant on Form 8-K, dated
April 5, 1995, which exhibit is incorporated herein by reference.
Reports on Form 8-K
No reports on Form 8-K have been filed by Registrant during the last
quarter of the period covered by this report other than Registrant's Report on
Form 8-K dated February 7, 1996 reporting on Item 3, Bankruptcy or
Receivership, and relating to the appointment of a receiver for Registrant's
operating subsidiaries, Chessbourne and TSCL.
57
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CORNICHE GROUP INCORPORATED
By /s/ James J. Fyfe
JAMES J. FYFE, Vice President
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf
of Registrant and in the capacities and on the dates indicated:
Signatures Title Date
Principal Executive Officer:
/s/ James J. Fyfe Vice President April 24, 1997
JAMES J. FYFE
Principal Financial and
Accounting Officer:
/s/ James J. Fyfe Vice President April 24, 1997
JAMES J. FYFE
A Majority of the board of directors:
/s/ James J. Fyfe April 24, 1997
JAMES J. FYFE
58
EXHIBITS
-------------------
CORNICHE GROUP INCORPORATED
FORM 10-K
--------------------
Exhibit Index
The exhibits indicated below as having heretofore been filed with another
document with the Securities and Exchange Commission are incorporated herein
by reference.
Exhibit No. as filed
with registration
statement or report
specified below Page No.
3 (a) Certificate of Incorporation filed September 18, 1980 (1) 3
(b) Amendment to Certificate of Incorporation 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, 1984 (7) 3.8
(j) Amendment to Certificate of Incorporation filed
September 28, 1995 * 62
(k) By-laws of the Registrant, as amended on
December 22, 1983(2) 3(c)
(l) By-laws of the Registrant, as amended on
December 5, 1985(3) 3(f)
(m) By-laws of the Registrant, as amended on
April 25, 1991(6) 3.10
4 (a) Form of Underwriter's Warrant (6) 4.9
(b) Form of Promissory Note - 1996 Offering * 69
(c) Form of Promissory Note - 1997 Offering * 76
(d) Form of Common Stock Purchase Warrant - 1996 Offering * 83
(e) Form of Common Stock Purchase Warrant - 1997 Offering * 88
59
10 (a) Form of Financial Advisory Agreement between
Registrant and Commonwealth Associates (6) 10.13
(b) Underwriting Agreement among Registrant,
Commonwealth Associates and Selling Stockholders,
dated November 15, 1991 (8) 10.14
(c) 1986 Stock Option Plan, as amended (7) 10.6
(d) 1992 Stock Option Plan (9) B
(e) Novation Agreement relating to a Share Sale and Purchase
Agreement dated April 24, 1994 among Brian John
Baylis, Susan Ann Meadows Crisp and Fidelity
Medical, Inc. dated March 2, 1995 (10) 2(a)
(f) Supplemental Agreement relating to a Share Sale and
Purchase Agreement dated April 24, 1994 among
Brian John Baylis, Susan Ann Meadows Crisp and
Fidelity Medical, Inc. dated March 2, 1995 (10) 2(b)
(g) Agreement for sale and purchase of the entire issued
share capital of Corniche Distribution Limited among
Brian John Baylis, Susan Ann Meadows Crisp and
Fidelity Medical, Inc. dated March 2, 1995 (10) 2(c)
(h) Letter of Agreement between Fidelity Medical, Inc. and
NWCM Limited dated as of March 6, 1995 (10) 2(d)
(i) Supplemental Agreement with respect to Options
dated March 2, 1995 (10) 9(b)
(j) Stock Purchase Agreement dated as of March 25, 1995
by and between Fidelity Medical, Inc. and Chester
Holdings, Ltd (11) 2(a)
(k) Promissory Note and Option Agreement dated as of
March 25, 1995 from Chester Holdings, Ltd. to
Fidelity Medical, Inc. (11) 2(b)
(l) Form of Warrant of Fidelity Medical, Inc. to be issued
to employees of Fidelity Medical, Inc., a New Jersey
corporation, in replacement of stock options (11) 2(c)
(m) Stock Purchase Agreement dated as of January 30, 1997
by and among Registrant, the Bank of Scotland and 12 Buyers * 93
(n) Mutual Release dated as of January 30, 1997 by and among
Registrant, James Fyfe and the Bank of Scotland * 115
27 Financial Data Schedule * 118
99 (a) Opinion Letter of Smithsons Solicitors dated March 7, 1997
regarding the status of Registrant's former subsidiaries
as the result of the February 1996 receivership proceedings. * 119
99 (b) Letter of James J. Fyfe Regarding Unavailablity of Re-signed
Audit Reports from Coopers & Lybrand LLP * 206
99 (c) Letter of Mahoney Cohen Rashba & Pokart, CPA, PC Regarding Their
Inability to Re-Sign Their July 25, 1995 Audit Report * 210
* Filed herewith
________________
Notes:
(1) Filed with the Securities and Exchange Commission as an exhibit, numbered
as indicated above, to the registration statement of Registrant on Form S-18,
File No. 2-69627, which exhibit is incorporated herein by reference.
60
(2) Filed with the Securities and Exchange Commission as an exhibit, numbered
as indicated above, to the registration statement of Registrant on Form S-2,
File No. 2-88712, which exhibit is incorporated herein by reference.
(3) Filed with the Securities and Exchange Commission as an exhibit, numbered
as indicated above, to the registration statement of Registrant on Form S-2,
File No. 33-4458, which exhibit is incorporated herein by reference.
(4) Filed with the Securities and Exchange Commission as an exhibit, numbered
as indicated above, to the annual report of Registrant on Form 10-K for the
year ended September 30, 1987, which exhibit is incorporated herein by
reference.
(5) Filed with the Securities and Exchange Commission as an exhibit, numbered
as indicated above, to the registration statement of Registrant on Form S-3,
File No. 33-42287, which exhibit is incorporated herein by reference.
(6) Filed with the Securities and Exchange Commission as an exhibit, numbered
as indicated above, to the registration statement of Registrant on Form S-1,
File No. 33-42154, which exhibit is incorporated herein by reference.
(7) Filed with the Securities and Exchange Commission as an exhibit, numbered
as indicated above, to the annual report of Registrant on Form 10-K for the
year ended September 30, 1994, which exhibit is incorporated herein by
reference.
(8) Filed with the Securities and Exchange Commission as an exhibit, numbered
as indicated above, to the annual report of Registrant on Form 10-K for the
year ended September 30, 1991, which exhibit is incorporated herein by
reference.
(9) Filed with the Securities and Exchange Commission as an exhibit, numbered
as indicated above, to the proxy statement of Registrant dated March 30, 1992,
which exhibit is incorporated herein by reference.
(10) Filed with the Securities and Exchange Commission as an exhibit, numbered
as indicated above, to the current report of Registrant on Form 8-K, dated
March 2, 1995, which exhibit is incorporated herein by reference.
(11)Filed with the Securities and Exchange Commission as an exhibit, numbered
as indicated above, to the current report of Registrant on Form 8-K, dated
April 5, 1995, which exhibit is incorporated herein by reference.
61