View:
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 30, 1995
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to __________
Commission file number 0-10909
Corniche Group Incorporated
_______________________________________________________________________________
(Exact name of registrant as specified in its charter)
Delaware 22-2343568
________________________________ _________________________
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
Wayne Interchange Plaza I, 145 Route 46 West, Wayne, New Jersey 07974
_______________________________________________________________________________
(Address of principal executive offices)
(Zip Code)
(201) 785-3338
_______________________________________________________________________________
(Registrant's telephone number, including area code)
_____________________________________________________________________________
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No __
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court. Yes ____ No ____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Outstanding as of February 28, 1996
Common Stock, par value $.10 per share 2,405,357 shares
CORNICHE GROUP INCORPORATED AND SUBSIDIARY
INDEX
PAGE
Part I--Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at December 30, 1995
and March 25, 1995 3-4
Consolidated Statements of Operations for the
Twelve and Forty Weeks Ended
December 30, 1995 and December 31, 1994 5
Consolidated Statements of Cash Flows for the
Forty Weeks Ended December 30, 1995 and
December 31, 1994 6-7
Notes to Unaudited Consolidated Financial
Statements 8-15
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16-21
Part II--Other Information
Item 1. Legal Proceedings 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
CORNICHE GROUP INCORPORATED AND SUBSIDIARY
Consolidated Balance Sheet
ASSETS
December 30, March 25, Proforma
1995 1995 March 25,
(unaudited) (audited) 1995
Current assets:
Cash $ 210 $ 108,438 $ 100
Accounts receivable 0 3,738,702 0
Allowances for doubtful accounts 0 (345,108) 0
Notes receivable 200,000 200,000 200,000
Inventory 0 3,146,307 0
Prepaid expenses 142,785 411,188 0
Other receivables 86,067 0 18,422
------- --------- ------
Total current assets 429,062 7,259,527 218,522
Other assets:
Property and equipment-at
cost, net 1,232 1,356,548 0
Intangible assets-at cost, net 0 1,206,495 0
Investment in and advances
to UK subsidiary 0 0 514,322
_______ __________ ________
Total assets $430,294 $ 9,822,570 $ 732,844
======== ========== ========
See accompanying notes.
CORNICHE GROUP INCORPORATED AND SUBSIDIARY
Consolidated Balance Sheet
LIABILITIES AND STOCKHOLDERS' (DEFICIENCY) EQUITY
December 30 March 25, Proforma
1995 1995 March 25,
(unaudited) (audited) 1995
Current liabilities:
Notes payable $ 11,679 $ 2,521,452 $ 16,292
Note payable on debt compromise 77,630 0 0
Trade accounts payable 325,646 4,065,439 55,366
Current portion of long-term debt 0 415,177 0
Dividends payable - preferred stock 72,897 21,954 21,954
Accrued liabilities 335,820 1,512,873 555,874
Deferred income 0 23,570 0
Payroll and sales tax payable 0 562,200 0
Total current liabilities $ 823,672 $ 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 823,672 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 and issued 1,000,000
shares, and outstanding 946,069
shares 946,069 946,069 946,069
Common stock, $0.10 par value,
authorized- 30,000,000 shares,
issued 2,623,457 (December 30, 1995)
and 2,119,857 (March 25, 1995) 262,345 211,985 211,985
Additional paid-in capital 793,976 0 0
(Accumulated deficit) retained
earnings (2,191,058) (3,827,879) (869,986)
( 188,668) (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 (393,378) (2,879,165) 83,358
Total liabilities and stockholders'
(deficiency) equity $ 430,294 $ 9,822,570 $ 732,844
See accompanying notes.
CORNICHE GROUP INCORPORATED AND SUBSIDIARY
Consolidated Statement of Operations
(UNAUDITED)
----------12 Weeks Ended------- -------40 Weeks Ended-------
December 30, December 31, December 30, December 31,
1995 1994 1995 1994
Net sales $ 0 $ 0 $ 0 $ 0
Cost of sales 0 0 0 0
_______ _______ ________ ________
Gross profit 0 0 0 0
Selling, general and
administrative expenses (84,914) 0 (356,115) 0
________ ________ _________ __________
Operating loss (84,914) 0 (356,115) 0
(Loss) on sale of Assets (3,042) 0 (3,042) 0
Interest (net) 3,988 0 12,317 0
Net loss before Pref.Dividend (83,968) 0 (346,840) 0
Preferred dividend (15,283) 0 (50,943) 0
________ _______ _________ __________
Net loss from
Continuing Operations (99,251) 0 (397,783) 0
Loss from Discontinued
Operations (672,742) ( 228,796) (3,432,032) (1,273,188)
Excess of UK subsidiary
cumulative losses
over investment 5,466,636 0 5,466,636 0
_________ _________ _________ __________
Net Profit/(Loss) $4,694,643 $ ( 228,796) $ 1,636,821 $(1,273,188)
========= ========== ========= ===========
Profit/(Loss) per share of common stock
(Loss) from continuing operations $ (0.04) $ (0.00) $ (0.17) $ (0.00)
Profit (Loss) from discontinued
operations 1.99 (0.14) 0.89 (0.76)
Net Profit (Loss) per share $ 1.95 $ (0.14) $ 0.72 $ (0.76)
Weighted average number
of common shares outstanding 2,408,307 1,669,336 2,260,599 1,669,336
See accompanying notes.
CORNICHE GROUP INCORPORATED AND SUBSIDIARY
Consolidated Statement of Cash Flows
(UNAUDITED)
----------40 Weeks Ended----------
December 30, December 31,
1995 1994
Cash flows from operations:
Net loss income from continuing $ (397,783) $ 0
operations
Adjustments to reconcile net (loss)
from continuing operations to net
cash used in operating activities:
Depreciation 1,652 0
Loss on sale of assets 3,042 0
Changes in assets and liabilities,
Increase in prepaid expenses (142,785) 0
Increase in other receivables (67,646) 0
Increase in account payable 270,280 0
Decrease in accrued liabilities (170,054) 0
Decrease in notes payable (4,613) 0
Increase in dividends payable 50,943 0
_________ ________
Net cash used in continuing operations (456,964) 0
_________ ________
Net cash used in discontinued operations (331,336) 0
________ ________
Net cash used in operating
activities and
carried forward $ (788,300) $ 0
_________ ________
See accompanying notes
CORNICHE GROUP INCORPORATED AND SUBSIDIARY
Consolidated Statement of Cash Flows
(UNAUDITED)
-------40 Weeks Ended-------
December 30, December 31,
1995 1994
Net cash used in operating activities
and brought forward $ (788,300) $ 0
_________ _______
Cash flows from investing activities:
Payments to acquired fixed assets (8,926) 0
Proceeds from sale of assets 3,000 0
________ _______
Net cash used in investing activities (5,926) 0
________ _______
Cash flows from financing activities
Issue of common stock for cash 794,336 0
_______ _______
Net cash provided by financing 794,336 0
_______ _______
Net increase in cash 110 0
Cash at beginning of period 100 0
_______ _______
Cash at end of period 210 0
======= =======
See accompanying notes.
CORNICHE GROUP INCORPORATED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - The Company
Corniche Group Incorporated (hereinafter referred to as the
"Company" or "CGI") as a result of a reverse acquisition with
Corniche Distribution Limited and its Subsidiaries ("Corniche") (see
"Reverse Acquisition" below), has been engaged 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 are Chessbourne International
Limited ("Chessbourne"), The Stationery Company Limited ("TSCL"), and
Kassel Limited ("Kassel").
Corniche experienced large operating losses and net cash
outflows from operating activities in fiscal 1995 and in the forty
weeks to December 30, 1995 resulting in a significant reduction in
working capital during that period. The Company has been
unsuccessful in seeking interim financing to resolve its liquidity
problems. Additionally, the Company has not been 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 and it is anticipated that Corniche will be placed
in receivership on February 28, 1996. (See Notes 2 & 3)
Note 2 - Basis of Presentation
The accompanying unaudited consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions for Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the statements
contain all adjustments (consisting only of normal recurring
accruals) necessary to present fairly the financial position as of
December 30, 1995, and the results of operations and cash flows for
forty weeks ended December 30, 1995 and December 31, 1994. The
results of operations for the forty weeks ended December 30, 1995 are
not necessarily indicative of the results to be expected for the full
year.
The March 25, 1995 Consolidated Balance Sheet has been derived
from the audited financial statements at that date included in the
Company's annual report on Form 10-K. These unaudited consolidated
financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's 1995 annual
report on Form 10-K.
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) is
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.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going concern.
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 reducing staffing levels
and other operating expenses. However a receivership proceeding
involving the operating subsidiaries of the Company was commenced on
February 7, 1996 and it is anticipated that the UK holding company,
Corniche Distribution Limited, will be placed in receivership on
February 28, 1996. The receivership will result in the loss of all
of the Company's operations and operating assets and will eliminate
most liabilities. Accordingly the operating activitivies 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 twelve and
forty weeks to December 30, 1995. In addition, the UK subsidiaries
have been removed from the balance sheet as of December 30, 1995 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. The Company's ability to
continue as a going concern may depend on its ability to obtain
outside financing sufficent to support it pending completion of a
contemplated acquisition and its ability to obtain financing and
consummate the acquisition. There can be no assurance given that the
Company will obtain such short-term or long-term outside financing or
complete the pending acquisition.
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.
Note 3 - Subsequent Event
Receivers were appointed to Chessbourne and TSCL on February 7,
1996 and are anticipated to be appointed to Corniche on February 28,
1996. Proforma financial statements reflecting the impact of these
receiverships and the adjustments necessary to eliminate these
companies from the balance sheet are as follows:
PROFORMA BALANCE SHEET
Consolidated Elimination Proforma
December 30, of Subsidiary December 30,
1995 1995
ASSETS
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-at cost, net 1,781,126 1,779,894 1,232
Intangible assets-at cost, net 1,788,499 1,788,499 0
_________ _________ _______
Total assets $ 8,038,784 $ 7,608,490 $ 430,294
========== ========= =======
LIABILITIES
Current liabilities:
Notes payable 2,026,387 2,014,708 11,679
Note payable of 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 3,358,962 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
Commitments and contingencies (Note 11)
Stockholders' (deficiency) equity:
7% cumulative convertible preferred
stock authorized and issued 1,000,000
shares, and outstanding 946,069
shares 946,069 0 946,069
Common stock, $0.10 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) retained
earnings (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)
equity (5,860,014) (5,466,636) (393,378)
Total liabilities and stockholders'
(deficiency) equity $ 8,038,784 $ 7,608,490 $ 430,294
CONSOLIDATED STATEMENT OF OPERATIONS
The "Consolidated Statements of Operations" for the twelve and forty weeks
ended December 30, 1995 and for the corresponding periods in 1994 were as
follows before the impact of the receivership proceedings involving the UK
operating subsidiaries.
12 Weeks Ended 40 Weeks Ended
12/30/95 12/31/94 12/30/95 12/31/94
Net Sales 3,141,628 5,612,330 $ 12,370,716 $ 16,311,552
Cost of Sales (1,786,921) (3,693,511) (8,554,569) (11,667,351)
__________ __________ ___________
Gross Profit 1,354,707 1,918,819 3,816,147 4,644,201
Selling, general &
0admin.exps (1,960,863) (2,001,600) (7,086,773) (5,527,519)
Operating Loss (606,156) (82,781) (3,270,626) (883,318)
(Loss) gain on sale
of equipment 1,122 42 (6,563) 1,308
Interest expense, net (151,676) (146,057) (501,683) (391,178)
Net Loss before preferred
stock dividend (756,710) (228,796) (3,778,872) (1,273,188)
Preferred stock dividend (15,283) ( - ) (50,943) ( - )
Net Loss $ (771,993) $ (228,796) $ (3,829,815) $ (1,273,188)
Loss per share of common stock $ (0.32) $ (0.14) $ (1.69) $ (0.76)
Weighted average number of
common shares outstanding 2,408,307 1,669,336 ` 2,260,599 1,669,336
Note 4 - Inventories
Inventories are valued at the lower of cost (first in, first
out method) or market for wholesale inventories. The retail
inventory method is used for inventory in retail stores.
Inventories consist of:
December 30, 1995 March 25, 1995
(unaudited) (audited)
Wholesale $1,205,069 $1,906,300
Retail 915,298 1,240,007
__________ __________
$2,120,367 $3,146,307
Reserves for slow-moving inventory as of December 30, 1995 and
March 25, 1995 were approximately $98,938 and $40,224, respectively.
Note 5 - 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 October 7, 1995 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 has 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. No further action has been taken to date in
this matter.
There are other lawsuits and claims pending against the Company which
arose in the normal course of business. In the opinion of management, none
of these actions are expected to have a material adverse effect on the
Company's financial position.
Note 6 - 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.
Note 7 - Acquisitions
On March 31, 1995 Corniche acquired seven retail stationery stores.
The consideration paid totaled approximately $772,000 and was paid
substantially by way of the assumption of liabilities. The acquisition has
been accounted for under the purchase method of accounting.
The results of operations of those stores from the date of
acquisition have been included in the Company's consolidated statement of
operations.
The assets acquired and liabilities assumed (in thousands) on
acquisition are as follows:
Fair value of assets acquired $ 374
Goodwill 772
Cash paid (25)
____
Liabilities assumed $ 1,121
Note 8 - Stockholders Equity
Effective October 1, 1995 the Company declared a one-for-ten
reverse stock spilt and all numbers of shares and share values
stated herein reflect such reverse split unless otherwise noted.
During the forty weeks ended December 30, 1995 the Company sold
478,600 shares of common stock pursuant to an equity private placement through
NWCM Limited at an aggregate purchase price of $957,200 which resulted in
net proceeds to the Company after commissions of $794,336.
In addition the Company issued 25,000 shares of common stock
to Trisec Holdings Ltd. for consultancy services in connection with the
"Reverse Acquisition" (see Note 2) of Corniche on March 2, 1995.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the
Unaudited Consolidated Financial Statements and notes thereto.
The results of operations for the forty weeks to December 31, 1994
relate to Corniche and its subsidiaries only. The results of operations of
Corniche Group Incorporated have been included from March 2, 1995, the date
of the Corniche acquisition.
The Company's functional currency is the British pound sterling. The
average exchange rates used in converting pounds sterling to U.S. dollars
was 1.5867 for the forty weeks to December 30, 1995 and 1.5144 for the
corresponding period in 1994.
Results of Operations
Overview
The Company experienced large operating losses and net cash outflows
from operating activities during the forty weeks to December 30, 1995 and
in fiscal 1995 resulting in a significant reduction of working capital
during that period and a stockholders deficiency of $5,741,424 at December
30, 1995. This reduction in working capital has adversely affected
operating performance, as both Chessbourne and TSCL have encountered much
difficulty in replenishing inventory of key product lines. In addition,
management has been unable to develop its retail activities or extend its
"Style" and "Memo" brand product lines as planned by management due to lack
of capital. While management had taken several steps towards improving
future financial results and reducing the amount of cash used by operations
(including relocation of its corporate facilities and reducing staffing
levels and other operating expenses), a receivership proceeding involving
the operating subsidiaries of the Company was commenced on February 7,
1996. The Company had been unsuccessful in its efforts to convert a
significant portion of its bank debt to equity. Additionally, the Company
had not achieved an interim financing to address the liquidity problems of
its wholesale and retail stationery businesses. As a result receivers were
appointed for the Company's UK operating subsidiaries-Chessbourne Limited
and The Stationery Company Ltd.- by their primary bankers and secured
lender, the Bank of Scotland, on February 7, 1996, and it is anticipated
that the UK holding company-Corniche Distribution Limited-will be placed in
receivership on February 28, 1996. The receiverships result in the loss of
all of the Company's operations.
Notwithstanding the loss, the Company intends to continue in the
retail stationery business by attempting to consummate an acquisition in
the UK. In October 1995 the Company announced that it had reached
agreement in principal to acquire a major stationery retailer in the UK
subject to financing, due diligence and final documentation. Due diligence
is now largely complete and the Company has signed legally binding heads of
terms for an acquisition, subject only to financing and more complete
documentation. The purchase price is expected to be approximately $17
million, payable $12.5 million in cash, $3 million by a note, and $1
million in shares of the Company's Common Stock. The Company believes that
the acquisition target has achieved good profit and revenue growth in
recent years and now trades from nearly 100 retail outlets throughout the
UK, making it the country's largest specialist stationery retailer. Such
retail outlets include certain of the former outlets of the Company, which
were acquired by the acquisition target from the subsidiary's receiver on
or about February 8, 1996.
The receivership not only removes all of the Company's operating
assets, but also eliminates most liabilities (including over $5 million in
bank debt). The Company's liabilities exceeded its assets by approximately
$5.4 million at December 30, 1995. This significantly reduces the
Company's stockholder equity deficiency to approximately $393,378. While
no assurances can be given that the Company will be able to raise the
necessary financing or otherwise complete the proposed acquisition,
management believes (based on continuing discussion with proposed
investment bankers for the transaction) that this reduction in liabilities
will assist in negotiating the financing required to complete the proposed
acquisition.
In a related transaction, Brian Baylis and Susan Crisp, the chief
executive officer and chief financial officer of the Company, who
collectively own approximately 45% of the Company's common stock, have
agreed to pledge their shares as collateral against the shortfall which
will be incurred by the Bank of Scotland in the receivership proceeding.
The Company is also issuing a 180-day note in the amount of approximately
$75,000 to settle certain claims involving its Corniche Distribution
Limited subsidiary and the Bank of Scotland.
Period to Period Comparison
While the Company's Statement of Operations included the results of
its UK subsidiaries, as a "Loss From Discontinued Operations" line entry,
Note 3 to the financial statements sets out a proforma statement of
operations in detail. The following discussion and analysis of results
should be read in conjunction with such proforma financial statements.
Net revenues in the forty weeks ended December 30, 1995 decreased by
$3,940,836 to $12,370,716, a 24.16% decrease on the corresponding period in
1994. Net revenues in the twelve weeks ended December 30, 1995 decreased
by $2,470,702 to $3,141,628, a 44.02% decrease on the corresponding period
in 1994. Such decreases in net revenues are due mainly to a shortage of
key inventory lines, particularly in Chessbourne, which have been partially
offset by increased net revenues from the Company's retail operations. The
following table sets out the net revenues by category for the twelve and
forty weeks to December 30, 1995 and the corresponding period in 1994:
12 Weeks Ended 40 Weeks Ended
December 30, December 31, December 30, December 31,
1995 1994 1995 1994
Wholesale activities $ 362,071 $3,135,336 $ 4,971,353 $10,394,072
Retail activities 2,779,557 2,476,994 7,399,363 5,917,480
Total $ 3,141,628 $5,612,330 $12,370,716 $16,311,552
Net revenues from wholesale activities in the twelve weeks to
December 30, 1995 decreased by $2,773,265 or 88.5% from the corresponding
period in 1994 and by $5,422,719 or 52.2% in the forty weeks to December
30, 1995.
The Company's inability to replenish inventory, particularly of key
product lines, had a very significant impact on net revenues achieved, not
least because some major customers are unwilling to purchase from the
Company unless a complete product range is available. In addition the
Company had to forego wholesale revenues through not being able, for part
of the period, to pass on cost price increases to its customers. These
problems were compounded by shortages of some paper products on the world
market.
Net revenues from retail activities in the twelve weeks to December
30, 1995 increased by $302,563 or 12.21% as compared to the corresponding
period in 1994. Of this increase approximately $773,000 was generated by
stores opened in fiscal 1995 and the 7 stores acquired on March 31, 1995.
These revenue increases were partially offset by lost revenues of
approximately $395,000 through the closure of underperforming stores.
Stores trading in the twelve week period during both 1995 and 1994 suffered
a decrease in net revenues of approximately $75,000 in 1995 as compared to
the corresponding period in 1994. Retail activity net revenues increased
by $1,481,883 or 25.04% in the forty weeks to December 30, 1995 as compared
to the corresponding period in 1994. This increase comprises approximately
$2,324,000 generated by new stores, approximately $387,000 generated by
stores trading in both 1995 and 1994 and lost revenues of approximately
$1,229,000 through the closure of underperforming stores.
Gross profit decreased by $564,112 or 29.40% in the twelve weeks to
December 30, 1995 and by $828,054 or 17.83% in the forty weeks to December
30, 1995 as compared to the corresponding periods in 1994. The following
table sets out gross profit by category for the twelve and forty weeks to
December 30, 1995 and the corresponding period in 1994:
12 Weeks Ended 40 Weeks Ended
December 30, December 31, December 30, December 31,
1995 1994 1995 1994
Wholesale activities $ 52,975 $ 528,309 $ 408,612 $1,755,882
Retail activities 1,301,732 1,390,510 3,407,535 2,888,319
_________ _________ _________ _________
Total $1,354,707 $1,918,819 $3,816,147 $4,644,201
========= ========= ========= =========
Gross profit from wholesale activities as a percentage of net
revenues decreased to 14.63% in the twelve weeks to December 30, 1995 as
compared to 16.85% in the corresponding period in 1994. The gross profit
percentage in the forty weeks to December 30, 1995 decreased to 8.22% as
compared to 16.89% in the corresponding period in 1994. Such decreases are
primarily the result of cost price increases not being passed on to
customers and an imbalance in the mix of product sold. Retail activity
gross profit as a percentage of net revenues decreased for the twelve weeks
to December 30, 1995 to 46.83% as compared to 56.14% for the corresponding
period in 1994 and to 46.05% for the forty weeks to December 30, 1995 as
compared to 48.81% for the corresponding period in 1994.
Selling, general and administrative expenses for the twelve weeks to
December 30, 1995 decreased by 2.04% or $40,737 to $1,960,863 as compared
to the corresponding period in 1994 and increased by 28.21% or $1,559,254
to $7,086,773 in the forty weeks to December 30, 1995. The following table
sets out selling, general and administrative expenses by business activity
for the twelve and forty weeks to December 30, 1995 and the corresponding
period in 1994:
12 Weeks Ended 40 Weeks Ended
December 30, December 31, December 30, December 31,
1995 1994 1995 1994
Wholesale activities $ 263,286 $ 361,435 $1,479,437 $1,673,441
Retail activities 1,356,293 1,458,470 4,623,489 3,308,994
Other 341,284 181,695 983,847 545,084
_________ _________ _________ _________
Total $1,960,863 $2,001,600 $7,086,773 $5,527,519
========= ========= ========= =========
Retail activity selling, general and administrative expenses
decreased by 7.01% or $102,177 in the twelve weeks to December 30, 1995 as
compared to the corresponding period in 1994. An increase of approximately
$335,000 results from the operation of new retail stores which was offset
by a reduction in expenses of approximately $212,000 as a result of the
closure of stores and approximately $226,000 in expenses incurred by those
stores operated in both 1995 and 1994. Retail activity selling, general
and administrative expenses increased by $1,314,495 or 39.72% in the forty
weeks to December 30, 1995 as compared to the corresponding period in 1994.
Approximately $1,273,000 of this increase results from the operation of new
stores and approximately $505,000 is the increase in expenses incurred by
those stores operated in both 1995 and 1994. Such increases have been
partially offset by a reduction in expenses of approximately $463,000 as a
result of the closure of stores.
The reverse acquisition of CGI on March 2, 1995 increased selling,
general and administrative expenses in the twelve weeks to December 30,
1995 by approximately $59,000 and by approximately $204,000 in the forty
weeks to December 30, 1995. The principal elements of these corporate
expenses are insurance and professional fees.
As a result of the foregoing the Company recorded an operating loss
of $606,156 in the twelve weeks to December 30, 1995 as compared to an
operating loss of $82,781 in the corresponding period in 1994 and an
operating loss of $3,370,626 in the forty weeks to December 30, 1995 as
compared to an operating loss of $883,318 in the corresponding period in
1994.
Net interest expense in the twelve weeks to December 30, 1995
increased by $5,619 to $151,676 as compared to $146,057 in the
corresponding period in 1994. The increase in the forty weeks to December
30, 1995 was $110,505 from the corresponding period in 1994. These
increases are due primarily to increased utilization of bank credit lines
generally throughout the group.
Liquidity and Capital Resources
During the 40 weeks to December 30, 1995, there were net cash
outflows from operating activities of $527,479, which together with certain
non-operating activities were financed by increased bank loans of $232,375
and net proceeds from the issuance of common stock of $794,336. This net
cash outflow principally resulted from the Company's net loss and
investments in corporate facilities and new stores. During the 40 weeks to
December 30, 1995, the Company relied on revenues from sales, increased
bank loans, net proceeds from the issuance of common stock and trade credit
to meet its working capital requirements and other operating needs.
Although management has taken several steps to reduce the amount of
cash used by operations, including rationalization of corporate facilities
and reducing staffing levels and other operating expenses, the Company's
operations could not provide sufficient internally generated cash flows to
meet its projected requirements. To supplement the funding of its
operations, the Company obtained net cash proceeds from a bridge loan of
$250,000 from an unaffiliated third party. In connection with this loan,
the Company entered into an agreement to repay $300,000 on November 30,
1995 and assigned a security interest to the lender in the Company's
accounts receivable and inventory as collateral for the loan.
Subsequently, in March 1995, the lender converted the loan into 150,000
shares of the Company's common stock and the collateral referred to above
was released.
Simultaneously with the Company's acquisition of Corniche on March 2,
1995, NWCM Limited, 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. The offer was limited to experienced, sophisticated investors who
are "non-U.S. persons" under Regulation S of the United States Securities
Act of 1993. An initial offer of 600,000 shares was made at a price of
$2.00 per share. Through the conclusion of the offering 528,600 of such
shares were sold at an aggregate purchase price of $1,057,200, which
resulted in net proceeds to the Company after commissions of $894,336.
Pursuant to the transaction, the Company paid NWCM a fee of $50,000. In
addition, NWCM has received and will receive a sales commission of 10% and
a non-accountable expense allowance equal to 2% of the aggregate purchase
price of the stock sold. The Company has also agreed to indemnify NWCM for
certain liabilities arising from the transaction. If through subsequent
offerings, NWCM raises an aggregate of $5 million, NWCM will be granted a
warrant entitling it to purchase a number of shares equal to 10% of the
shares sold, exercisable for five years commencing six months after
completion of the offering. Further, the Company will pay NWCM or one of
its affiliates $5,000 per month for a period of one year, commencing 30
days after it has raised $5 million in the aggregate, as retainer for
general investment banking services. There can be no assurance that the
Company will raise additional equity.
As a result of the operating losses incurred in the 40 weeks to
December 30, 1995 and in fiscal 1995 and the consequential lack of capital,
the Company's primary banker and secured lender in the UK, Bank of
Scotland, appointed receivers to Chessbourne and TSCL on February 7, 1995.
Additionally it is aniticipated that receivers will be appointed to
Corniche, the UK holding company, on February 28, 1995.
The Company's ability to continue as a going concern may depend on
its ability to obtain outside financing sufficient to support its pending
completion of a contemplated acquisition and its ability to obtain
financing and consummate the acquisition. There can be no assurance given
that the Company will obtain such short-term or long-term outside financing
or complete the pending acquisition.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Reference is made to the legal proceedings described in Note 3
to the Unaudited Consolidated Financial Statements in Item 1 of this
report.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - none.
(b) The Company filed a report on Form 8-K on February 12, 1996
relating to a receivership proceeding involving the Company's
UK operating subsidiaries.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Dated: February 28, 1996 CORNICHE GROUP INCORPORATED
By: /s/ James Fyfe
James Fyfe
Chief Operating Officer and
Assistant Secretary
By: /s/ Susan A.M. Crisp
Susan A.M. Crisp
Vice President, Finance and
Administration, Chief Financial
Officer, Treasurer
and Secretary