SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
SCHEDULE 13E-4
ISSUER TENDER OFFER STATEMENT
(PURSUANT TO SECTION 13(e)(1) OF THE SECURITIES EXCHANGE ACT OF 1934)
(Amendment No. __)
CORNERSTONE INTERNET SOLUTIONS COMPANY
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(Name of Issuer)
CORNERSTONE INTERNET SOLUTIONS COMPANY
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(Name of Person(s) Filing Statement)
Class B Convertible Preferred Stock
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(Title of Class of Securities)
(CUSIP Number of Class of Securities)
Edward Schroeder
Cornerstone Internet Solutions Company
584 Broadway, Suite 509
New York, New York 10012
(212) 343-3920
(Name, Address and Telephone Number of Person Authorized to Receive Notices
and Communications on Behalf of the Person(s) Filing Statement)
Copy to:
Steven Wolosky, Esq.
Kenneth A. Schlesinger, Esq.
Olshan Grundman Frome & Rosenzweig LLP
505 Park Avenue
New York, NY 10022
(212) 753-7200
Facsimile: (212) 755-1467
November 6, 1998
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(Date Tender Offer First Published, Sent or Given to Security Holders)
CALCULATION OF FILING FEE
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Transaction Valuation(1) Amount of Filing Fee
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$2,000,000 $400
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/ / Check box if any part of the fee is offset as provided by Rule
0-11(a)(2) and identify the filing with which the offsetting fee was
previously paid. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
Amount previously paid: N/A Filing party: N/A
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Form or registration no.: N/A Date filed: N/A
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(1) Estimated solely for purposes of calculating the fee in accordance with
Rule 0-11 under the Securities Exchange Act of 1934, as amended. Based
upon the book value of the Class B Convertible Preferred Stock $ 1,000,
multiplied by the number of shares of Class B Convertible Preferred
Stock (2,000) that the issuer, Cornerstone Internet Solutions Company
(the "Company"), is offering to acquire.
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Item 1. Security and Issuer.
(a) The name of the Issuer is Cornerstone Internet Solutions Company, a
Delaware corporation (the "Company"), which has its principal executive offices
at 584 Broadway, Suite 509, New York, New York 10012.
(b) The Company is offering to exchange .8 of a share of its
newly-issued Class D Convertible Preferred Stock ("Class D Preferred Stock"),
for each share of Class B Convertible Preferred Stock ("Class B Preferred
Stock") properly tendered and not validly withdrawn, upon the terms and subject
to the conditions set forth in the Offering Circular of the Company, dated
November 6, 1998 (the "Offering Circular"), and the related Letter of
Transmittal (the "Exchange Offer"). The closing of the Exchange Offer is not
contingent on any minimum number of shares of Class B Preferred Stock being
exchanged. Copies of the Offering Circular and the Letter of Transmittal
relating to the Exchange Offer are filed herewith as Exhibits (a)(1) and (a)(2),
respectively. There are currently 2,000 shares of Class B Preferred Stock
outstanding. Officers, directors and affiliates of the Company that own shares
of Class B Preferred Stock may participate in the Exchange Offer on the same
basis as all other holders of shares of Class B Preferred Stock. Definitive
information with respect to their participation in the Exchange Offer will not
be available to the Company until the consummation thereof.
(c) There is currently no established trading market for the Class B
Preferred Stock.
(d) Not applicable.
Item 2. Source and Amount of Funds or Other Consideration.
(a) The consideration being offered in the Exchange Offer consists of
.8 of a share of Class D Preferred Stock for every share of Class B Preferred
Stock as described in the Offering Circular under "Summary -- The Offer" and
"The Offer," which is incorporated herein by reference. The Company has reserved
1,600 shares of its authorized but unissued Preferred Stock for issuance upon
exchange of the Class B Preferred Stock.
(b) Not Applicable.
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Item 3. Purpose of the Tender Offer and Plans or Proposals of the Issuer or
Affiliate.
The information set forth in the Offering Circular under "Summary --
Purposes and Effects of the Offer," "Purposes and Effects of the Offer," and
"The Offer" is incorporated herein by reference. All shares of Class B Preferred
Stock that are exchanged pursuant to the terms and conditions of the Exchange
Offer will be canceled upon consummation of the Exchange Offer. The Company
presently has no plans or proposals that relate to or would result in any of the
events listed in Items 3(a)-3(j) of Schedule 13E-4, except as set forth below.
(a) The information set forth in the Offering Circular under "The Offer
- -- Interests of Directors and Executive Officers" is incorporated herein by
reference.
(e) The capitalization of the Company will change as a result of the
Exchange Offer. The information set forth in the Offering Circular under
"Summary -- Capitalization of the Company" and "Description of Securities" is
incorporated herein by reference.
Item 4. Interest in Securities of the Issuer.
Based upon the Company's records and upon information provided to the
Company by the persons identified in General Instruction C of Schedule 13E-4
(the "Affiliated Persons"), neither the Company nor, to the best of the
Company's knowledge, any Affiliated Persons has effected any transactions in the
Class B Preferred Stock during the 40 business days prior to the date hereof.
Item 5. Contracts, Arrangements, Understandings or Relationships With Respect
to the Issuer's Securities.
Not applicable.
Item 6. Persons Retained, Employed or to be Compensated.
Not applicable.
Item 7. Financial Information.
(a) Audited financial statements of the Company for the two most recent
fiscal years are included in the Company's 1998 Annual Report on Form 10-KSB for
the fiscal year ended May 31, 1998 filed with the Securities and Exchange
Commission, which is
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incorporated herein by reference. A copy of the Company's 1998 Annual Report on
Form 10-KSB is filed herewith as Exhibit (a)(5). In addition, quarterly
financial statements of the Company for the quarter ended August 31, 1998 are
included in the Company's Quarterly Report on Form 10-QSB for the quarter ended
August 31, 1998 filed with the Securities and Exchange Commission, which is
incorporated herein by reference.
(b) Not Applicable.
Item 8. Additional Information.
(a)-(d) Not Applicable.
(e) The information set forth in the materials filed herewith pursuant
to Item 9 is incorporated herein by reference.
Item 9. Material to be Filed as Exhibits.
(a)(1) Offering Circular dated November 6, 1998.
(2) Form of Letter of Transmittal.
(3) Form of Press Release.
(4) 1998 Annual Report on Form 10-KSB.
(5) Quarterly Report on Form 10-QSB for the quarter ended
August 31, 1998.
(6) Certificate of Designation.
(b)-(f) Not Applicable.
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SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct.
CORNERSTONE INTERNET SOLUTIONS COMPANY
By: /s/ Edward Schroeder
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Name: Edward Schroeder
Title: President and Chief Executive
Officer
Dated: November 6, 1998
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OFFERING CIRCULAR
CORNERSTONE INTERNET SOLUTIONS COMPANY
OFFER TO EXCHANGE .8 OF A SHARE OF CLASS D PREFERRED STOCK
FOR EACH OUTSTANDING SHARE OF CLASS B PREFERRED STOCK
THE SECURITIES TO BE ISSUED IN EXCHANGE FOR THE SHARES OF CLASS B
PREFERRED STOCK HAVE NOT BEEN APPROVED OR DISAPPROVED BY ANY FEDERAL OR STATE
SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING
AUTHORITIES HAVE NOT PASSED UPON THE FAIRNESS OF SUCH TRANSACTION NOR CONFIRMED
THE ACCURACY OR DETERMINED THE ADEQUACY OF THE INFORMATION CONTAINED IN THIS
DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Cornerstone Internet Solutions Company ("Cornerstone" or the "Company")
hereby offers (the "Exchange Offer"), upon the terms and subject to the
conditions set forth in this Offering Circular (the "Offering Circular"), and in
the accompanying Letter of Transmittal (the "Letter of Transmittal"), to
exchange, on a .8 of a share for a share basis, shares of its newly issued Class
D Convertible Preferred Stock, par value $.01 per share (the "Class D Preferred
Stock") for shares of its currently outstanding Class B Preferred Stock, par
value $.01 per share (the "Class B Preferred Stock"). As of the date of this
Offering Circular, there are 2,000 shares of Class B Preferred Stock
outstanding. The closing of the Exchange Offer is not contingent on any minimum
number of shares of Class B Preferred Stock being exchanged. The Exchange Offer
will expire at 5:00 p.m., New York City time, on December 7, 1998 unless
extended by the Company. See "Conditions to the Exchange Offer -- Expiration;
Extensions; Termination; Amendment."
Pursuant to the terms of the Certificate of Designations, Preferences
and Other Rights and Qualifications of Class B Preferred Stock, each share of
Class B Preferred Stock is convertible at any time after March 1, 1999 or from
time to time thereafter into such whole number of shares of common stock, par
value $.01 per share (the "Common Stock"), equal to the aggregate stated value
of the Class B Preferred Stock ($1,000) (the "Class B Stated Value") to be
converted divided by $1.00. If on or before March 1, 1999, the Company has a
private placement or public offering of Common Stock of the Company where the
gross proceeds to the Company are in excess of $2,000,000 (the "Subsequent
Financing"), each share of Class B Preferred Stock shall automatically convert
into such whole number of shares of Common Stock equal to the aggregate Class B
Stated Value of the Class B Preferred Stock to be converted divided by the
greater of (i) 90% of the per share offering price of the Company's equity
securities in the Subsequent Financing or (ii) $1.00. If such Class B Preferred
Stock was converted into Common Stock at the Class B Stated Value divided by
$1.00, such Class B Preferred Stock would be convertible into 2,000,000 shares
of Common Stock. The Class B Preferred Stock is not redeemable.
The terms of the Class D Preferred Stock are substantially identical in
all material respects to the terms of the Class B Preferred Stock for which they
may be exchanged pursuant to the Exchange Offer, except that (i) the Class D
Preferred Stock can first be converted into Common Stock of the Company on or
after the earlier of (a) June 30, 2000 or (b) if the closing price of the Common
Stock shall have been at least $1.50 per share (subject to adjustment in the
event of a subdivision or combination of the shares of Common Stock) on 15
trading days during any 20-consecutive day trading period, and (ii) each share
of Class D Preferred Stock is convertible into such number of shares of Common
Stock as is equal to the aggregate stated value of the Class D Preferred Stock
divided by $1.00, 2,000,000 shares of Common Stock if all outstanding shares of
Class B Preferred Stock are exchanged for Class D Preferred Stock and all such
Class D Preferred Stock is converted into Common Stock).
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The Company has commenced a private placement in which it is seeking to
sell up to $2,500,000 of Class D Preferred Stock to accredited investors at a
purchase price of $1,250 per share. See "Recent Developments."
On October 29, 1998, the Company commenced an exchange offer (the
"Class C Exchange Offer") whereby the Company is offering to exchange one share
of its currently outstanding Class C Preferred Stock, par value $.01 per share
(the "Class C Preferred Stock"), tendered to the Company in exchange for one
share of Class D Preferred Stock (the "Exchange Offer Consideration"). The
closing of the Class C Exchange Offer is not contingent on any minimum number of
shares of Class C Preferred Stock being exchanged and there can be no assurance
that any Class C Preferred Stock will be exchanged. The Class C Preferred Stock
ranks senior to the Class D Preferred Stock with respect to liquidation,
dissolution and winding up of the Company and depending on the price of the
Company's Common Stock is convertible into an indefinite amount of Common Stock.
Following the consummation of the Class C Exchange Offer, the Class D Preferred
Stock will rank subordinate to the Class C Preferred Stock only with respect to
those shares of Class C Preferred Stock which were not exchanged for Class D
Preferred Stock in the Class C Exchange Offer. The Class C Exchange Offer will
expire at 5:00 p.m., New York City time, on November 25, 1998 unless extended by
the Company.
The terms and conditions of the Exchange Offer will not be applicable
to any shares of Class B Preferred Stock that are not accepted pursuant to the
Exchange Offer, or which are delivered for exchange after the Expiration Date.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
DECEMBER 5, 1998, UNLESS EXTENDED (SUCH DATE AS EXTENDED FROM TIME TO TIME, THE
"EXPIRATION DATE"). SHARES OF CLASS B PREFERRED STOCK TENDERED IN THE EXCHANGE
OFFER MAY BE WITHDRAWN AT ANY TIME PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON
THE EXPIRATION DATE. AFTER THE EXPIRATION DATE, SHARES OF CLASS B PREFERRED
STOCK TENDERED IN THE EXCHANGE OFFER MAY NOT BE WITHDRAWN UNLESS THE EXCHANGE
OFFER IS TERMINATED OR EXPIRES WITHOUT CONSUMMATION THEREOF.
Notwithstanding any other provision of the Exchange Offer, the
Company's obligation to accept for exchange, and to exchange, shares of Class B
Preferred Stock properly tendered and not withdrawn pursuant to the Exchange
Offer is conditioned upon certain conditions (including, among others, there
shall be no litigation instituted which seeks to prevent or enjoin this Exchange
Offer) set forth under "The Exchange Offer--Conditions to the Exchange Offer".
If the conditions of the Exchange Offer are satisfied and the shares of Class B
Preferred Stock are accepted by the Company for exchange, the shares of Class D
Preferred Stock will be exchanged on or promptly after the date on which the
shares of Class B Preferred Stock are accepted for exchange (the "Exchange Offer
Acceptance Date"). Subject to applicable securities laws and the terms set forth
in this Offering Circular , the Company reserves the right (i) to waive any and
all conditions to the Exchange Offer, (ii) to extend the Exchange Offer or (iii)
otherwise to amend the Exchange Offer in any respect.
The Company's Common Stock is traded on the Nasdaq Small Cap Market
("Nasdaq") and the Boston Stock Exchange, the symbols of which are "CNRS" and
"CNR", respectively. On November 5, 1998, the closing price of the Common Stock
as reported by Nasdaq was $.781.
See "Risk Factors" on page 13 for a discussion of certain factors that
should be carefully considered in connection with the exchange offered hereby.
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IMPORTANT
Any beneficial holder of shares of Class B Preferred Stock desiring to
tender all or any portion of his shares of Class B Preferred Stock should either
(i) complete and sign the Letter of Transmittal (or a facsimile thereof) in
accordance with the instructions in the Letter of Transmittal and mail or (ii)
deliver it, together with the certificates representing tendered shares of Class
B Preferred Stock and any other required documents, to Continental Stock
Transfer & Trust Company (the "Exchange Agent"). Holders who wish to tender
shares of Class B Preferred Stock and whose certificates representing such
shares of Class B Preferred Stock are not immediately available may tender such
shares of Class B Preferred Stock by following the procedures for guaranteed
delivery set forth in "Conditions to the Exchange Offer -- Procedures for
Tendering."
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The date of this Offering Circular is November 6, 1998.
The Exchange Offer will expire at 5:00 p.m., New York City time, on
December 7, 1998 (such time and date, the "Expiration Date"), unless the
Company, in its sole discretion, extends the period during which the Exchange
Offer is open, in which event the term "Expiration Date" means the latest time
and date at which the Exchange Offer, as so extended by the Company, shall
expire. See "Conditions to the Exchange Offer -- Expiration; Extension;
Termination; Amendment."
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NO PERSON HAS BEEN AUTHORIZED TO MAKE ANY RECOMMENDATION ON BEHALF OF
THE COMPANY AS TO WHETHER ANY HOLDER OF SHARES OF CLASS B PREFERRED STOCK SHOULD
TENDER SHARES OF CLASS B PREFERRED STOCK PURSUANT TO THE EXCHANGE OFFER. NO
PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THE INFORMATION AND REPRESENTATIONS CONTAINED IN
THIS OFFERING CIRCULAR OR IN THE LETTER OF TRANSMITTAL. IF GIVEN OR MADE, SUCH
RECOMMENDATIONS, INFORMATION OR REPRESENTATIONS MAY NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY. NEITHER THE DELIVERY OF THIS OFFERING CIRCULAR
NOR ANY DISTRIBUTION OF SECURITIES HEREUNDER SHALL UNDER ANY CIRCUMSTANCES
CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE
INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF. THIS OFFERING CIRCULAR IS FURNISHED SOLELY TO HOLDERS OF RECORD OF THE
SHARES OF CLASS B PREFERRED STOCK.
This Offering Circular does not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the securities covered
by this Offering Circular, nor does it constitute an offer to sell or a
solicitation of an offer to buy any such securities by any person in any
jurisdiction in which such offer or solicitation would be unlawful.
The Exchange Offer is being made by the Company in reliance on the
exemption from the registration requirements of the Securities Act of 1933, as
amended (the "Securities Act"), afforded by Section 3(a)(9) thereof. The Company
therefore will not pay any commission or other remuneration to any broker,
dealer, salesman or other person for soliciting tenders of shares of Class B
Preferred Stock. Officers, directors and regular employees of the Company may
solicit tenders of shares of Class B Preferred Stock but they will not receive
additional compensation therefor. The Class D Preferred Stock that will be
issued pursuant to the Exchange Offer will be "restricted securities" as such
term is defined under Rule 144 of the Securities Act.
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IN DECIDING WHETHER TO ACCEPT THE EXCHANGE OFFER, HOLDERS OF SHARES OF
CLASS B PREFERRED STOCK MUST RELY ON THEIR OWN EXAMINATION OF THE COMPANY AND
THE TERMS OF THE EXCHANGE OFFER, INCLUDING THE MERITS AND RISKS INVOLVED.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, filed by the Company with the Securities and
Exchange Commission (the "Commission") pursuant to the requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), are hereby
incorporated by reference in this Offering Circular : (i) the Company's Annual
Report on Form 10-KSB for the fiscal year ended May 31, 1998, (the "1998 Form
10-KSB"); (ii) the Company's Quarterly Report on Form 10-QSB for the quarter
ended August 31, 1998 (the "Form 10-QSB"); and (iii) the description of the
Company's Common Stock contained in the Company's Registration Statement on Form
8-A filed with the Commission on September 28, 1994. EACH CLASS B PREFERRED
STOCKHOLDER IS URGED TO READ THE 1998 FORM 10-KSB AND THE FORM 10-QSB IN THEIR
ENTIRETY. THE 1998 FORM 10-KSB AND THE FORM 10-QSB ARE ATTACHED HERETO AS ANNEX
I AND ANNEX II, RESPECTIVELY.
The Company also incorporates herein by reference all documents and
reports subsequently filed by the Company with the Commission pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Offering Circular and prior to termination of this Exchange Offer. Such
documents and reports shall be deemed to be incorporated by reference in this
Offering Circular and to be a part hereof from the date of filing of such
documents or reports. Any statement contained in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Offering Circular to the extent that a statement
contained herein or in any other subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded, except as so modified
or superseded, shall not be deemed to constitute a part of this Offering
Circular.
The Company will provide without charge to each person to whom a copy
of this Offering Circular has been delivered, on the written or oral request of
such person, a copy of any or all of the documents incorporated herein by
reference, other than exhibits to such documents unless they are specifically
incorporated by reference into such documents. Requests for such copies should
be directed to: Cornerstone Internet Solutions Company, 584 Broadway, Suite 509,
New York, New York 10012 Attention: Mr. Kenneth Gruber, Chief Financial Officer.
The Company intends to furnish its stockholders with annual reports
containing financial statements audited and reported upon by its independent
accounting firm and make available to stockholders quarterly reports containing
unaudited interim financial information and such other periodic reports as the
Company may determine to be appropriate or as may be required by law.
This Offering Circular includes references to trademarks of entities
other than the Company which have reserved all rights with respect to their
respective trademarks.
AVAILABLE INFORMATION
The Company has filed with the Commission a Schedule 13E-4, which term
shall encompass any amendments thereto, under the Exchange Act, with respect to
the Exchange Offer. This Offering Circular does not contain all the information
set forth in the Schedule 13E-4 and the exhibits thereto, to which reference is
hereby made for further information about the Company and the Exchange Offer.
The Company is subject to the informational requirements of the
Exchange Act and in accordance therewith files periodic reports, proxy and
information statements, and other information with the Commission. The Schedule
13E-4 and all reports, proxy and information statements, and other information
filed by the Company with the Commission may be inspected at the public
reference facilities maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of
the Commission located at the Northeast Regional Office, Seven World Trade
Center, New York, New York 10048, and the Midwest Regional Office, Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511.
Copies of such material can also be obtained from the Public Reference Section
of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The Commission also maintains a home
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page on the World Wide Web that contains reports, proxy and information
statements, and other information regarding registrants that file
electronically. The address of such site is http://www.sec.gov.
The Company will provide without charge to each person to whom a copy
of this Offering Circular has been delivered, on the written and oral request of
such person, a copy of the Schedule 13E-4. Requests for such copies should be
directed to: Cornerstone Internet Solutions Company, 584 Broadway, Suite 509,
New York, New York 10012 Attention: Mr. Kenneth Gruber, Chief Financial Officer;
telephone (212) 343-3920.
The Common Stock is listed on Nasdaq, and all reports, proxy and
information statements, and other information filed with the Commission also may
be inspected at the Nasdaq SmallCap Market, 1735 K Street, N.W., Washington, DC
20006.
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TABLE OF CONTENTS
Incorporation of Certain Documents by Reference..........................4
Available Information....................................................4
Offering Summary.........................................................8
Risk Factors........................................................... 13
Conditions to the Exchange Offer....................................... 18
Certain Federal Income Tax Considerations.............................. 24
Purposes and Effects of the Exchange Offer..............................25
Exchange Agent..........................................................25
Miscellaneous...........................................................25
Description of Securities...............................................25
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OFFERING SUMMARY
The following is a summary of certain information included in this
Offering Circular or in documents incorporated by reference herein. It is not
intended to be complete and is qualified in its entirety by the more detailed
information found elsewhere in this Offering Circular or in such documents,
which should be read with care. As used herein, unless the context otherwise
requires, the "Company" refers to Cornerstone Internet Solutions Company and its
subsidiaries. As used herein, the term "Offering Circular" shall mean this
Offering Circular and all Appendixes and Exhibits hereto, as the same may be
amended, supplemented, restated or otherwise modified from time to time. The
term "Exchange Offer" shall mean the offering contemplated hereby. Reference to
the Company's fiscal year shall refer to the calendar year in which the
Company's fiscal year ends (e.g., fiscal year 1998 refers to the Company's
fiscal year ended May 31, 1998).
The Company
Cornerstone Internet Solutions Company, a Delaware corporation
("Cornerstone" or the "Company"), incorporated in December 1993 and formerly
known as Enteractive, Inc., is the successor to Sonic Images Productions, Inc.,
a District of Columbia corporation incorporated in 1979 which was merged with
and into the Company in May 1994 ("Merger"). The Company, as the surviving
entity of the Merger, continued its existence following the Merger as a Delaware
corporation. The Company does business under the name USWeb Cornerstone.
Headquartered in New York, New York, the Company currently offers products and
services to customers for the design, development, operation and maintenance of
customer Intranets or sites on the Internet and World Wide Web. Its address is
584 Broadway, Suite 509, New York, New York 10012 and its telephone number is
(212) 343-3920. Its World Wide Web site address is http://www.crstone.usweb.com.
Recent Developments
Private Placement of Class D Preferred Stock
The Company has commenced a private placement in which it is seeking to
sell up to $2,500,000 of Class D Preferred Stock to accredited investors at a
purchase price of $1,250 per share. Based on its current operating plan, the
Company believes that its current cash and cash equivalents are not sufficient
to meet its operating expenses and working capital requirements. The Company
needs the proceeds from the private placement to continue to operate its
business. In addition, the Company currently lacks sufficient net tangible
assets to meet Nasdaq's criterion for continued listing on Nasdaq. However,
there can be no assurance that the Company will be able to consummate the
private placement of Class D Preferred Stock or that any additional financing
will be available to the Company. See Risk Factors -- "Limited Working Capital;
Possible Need for Additional Financing; Uncertainty of Capital Funding" and
"Nasdaq Listing Standards; Possible Nasdaq Delisting."
Class C Exchange Offer
On October 29, 1998, the Company commenced the Class C Exchange Offer
whereby the Company is offering to exchange one share of Class C Preferred Stock
tendered to the Company in exchange for one share of Class D Preferred Stock.
The closing of the Class C Exchange Offer is not contingent on any minimum
number of shares of Class C Preferred Stock being exchanged and there can be no
assurance that any Class C Preferred Stock will be exchanged. The Class C
Preferred Stock ranks senior to the Class D Preferred Stock with respect to
liquidation, dissolution and winding up of the Company and depending on the
price of the Company's Common Stock is convertible into an indefinite amount of
Common Stock. Following the consummation of the Class C Exchange Offer, the
Class D Preferred Stock will rank subordinate to the Class C Preferred Stock
only with respect to those shares of Class C Preferred Stock which were not
exchanged for Class D Preferred Stock in the Class C Exchange Offer. The Class C
Exchange Offer will expire at 5:00 p.m., New York City time, on November 25,
1998 unless extended by the Company.
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THE EXCHANGE OFFER
The Offering The Company is offering to exchange one share
of Class B Preferred Stock tendered to the
Company prior to the Expiration Date and
accepted by the Company in exchange for .8 of a
share of Class D Preferred Stock (the "Exchange
Offer Consideration"). The closing of the
Exchange Offer is not contingent on any minimum
number of shares of Class B Preferred Stock
being exchanged. Each share of Class B
Preferred Stock is convertible at any time
after March 1, 1999 or from time to time
thereafter into such whole number of shares of
common stock, equal to the Class B Stated Value
divided by $1.00. If on or before March 1,
1999, the Company has a private placement or
public offering of Common Stock of the Company
where the gross proceeds to the Company are in
excess of $2,000,000 (the "Subsequent
Financing"), each share of Class B Preferred
Stock shall automatically convert into such
whole number of shares of Common Stock equal to
the aggregate Class B Stated Value of the Class
B Preferred Stock to be converted divided by
the greater of (i) 90% of the per share
offering price of the Company's equity
securities in the Subsequent Financing or (ii)
$1.00. If such Class B Preferred Stock was
converted into Common Stock at the Class B
Stated Value divided by $1.00, such Class B
Preferred Stock would be convertible into
2,000,000 shares of Common Stock. The Class B
Preferred Stock is not redeemable. The terms of
the Class D Preferred Stock are substantially
identical in all material respects to the terms
of the Class B Preferred Stock for which they
may be exchanged pursuant to the Exchange
Offer, except that (i) the Class D Preferred
Stock can first be converted into Common Stock
of the Company on or after the earlier of (a)
June 30, 2000 or (b) if the closing price of
the Common Stock shall have been at least $1.50
per share (subject to adjustment in the event
of a subdivision or combination of the shares
of Common Stock) on 15 trading days during any
20-consecutive day trading period, and (ii)
each share of Class D Preferred Stock is
convertible into such number of shares of
Common Stock as is equal to the aggregate
stated value of the Class D Preferred Stock
divided by $1.00 (2,000,000 shares of Common
Stock if all outstanding shares of Class B
Preferred Stock are exchanged for Class D
Preferred Stock and all such Class D Preferred
Stock is converted into Common Stock). Although
the Company has no current intention to do so,
if it should modify the terms of the Exchange
Offer, the modified terms would be applicable
with regard to all shares of Class B Preferred
Stock accepted in the Exchange Offer, including
those tendered before the announcement of the
modification. If the terms of
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the exchange offer are modified, the Exchange
Offer will remain open at least ten business
days from the date the Company gives notice by
public announcement or otherwise, of such
modification and any person who tendered in the
Exchange Offer shall have a right to withdraw
during such period. See "Condition to the
Exchange Offer -- Terms of the Exchange Offer."
Purpose of Offering As described under "Recent Developments" the
Company is currently undertaking the Class C
Exchange Offer and a private placement of Class
D Preferred Stock. The primary purpose of the
Class C Exchange Offer is to eliminate
uncertainty with respect to the number of
shares that the Company would be required to
issue if and when the holders of the Class C
Preferred Stock elected to convert their Class
C Preferred Stock into Common Stock. The
purpose of the Class D Private Placement is to
increase the Company's working capital. The
Company believes that its ability to consummate
the Class C Exchange Offer and the private
placement of Class D Preferred Stock would be
negatively impacted if Class B Preferred Stock
remains outstanding since absent this Exchange
Offer or a waiver by the Class B stockholders,
the Class B Preferred Stock would rank senior
to the Class D Preferred Stock with respect to
rights on liquidation, dissolution and winding
up of the Company. In addition, if the trading
price of the Company's Common Stock does not
exceed $1.50 on 15 trading days during any
20-consecutive day trading period, the Class B
Preferred Stock would be convertible into
Common Stock at an earlier time than the Class
D Preferred Stock. Accordingly, the Company
believes this Exchange Offer is necessary to
help ensure the consummation of the Class C
Exchange Offer and the private placement of
Class D Preferred Stock. There can be no
assurance that any shares of Class C Preferred
Stock will be exchanged for Class D Preferred
Stock in the Class C Exchange Offer or that the
Company will be able to sell any Class D
Preferred Stock or consummate any other
financing in the future, irrespective of the
terms thereof. See "Recent Developments" and
"Risk Factors--Limited Working Capital's
Possible Need for Additional Financing,
Uncertainty of Capital Funding."
Expiration Date 5:00 p.m., New York City time, on December 7,
1998 unless extended by the Company. See
"Conditions to the Exchange Offer --
Expiration; Extensions; Termination; Amendment.
Withdrawal of Tenders Tenders of shares of Class B Preferred Stock
may be withdrawn at any time prior to the
expiration of the Exchange Offer. Thereafter,
such tenders are irrevocable, except that they
may be withdrawn after the expiration of 40
business days
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from the commencement of the Exchange Offer,
unless accepted for exchange prior to that
date. See "Conditions to the Exchange Offer --
Withdrawal of Tenders."
Acceptance of and Delivery
of Class D Preferred Stock The Company will accept for exchange any and
all shares of Class B Preferred Stock that are
properly tendered prior to the Expiration Date.
The shares of Class D Preferred Stock to be
issued pursuant to the Exchange Offer will be
delivered on or promptly following the Exchange
Offer Acceptance Date. The Exchange Agent (as
defined herein) will act as agent for tendering
holders for the purpose of issuing shares of
Class D Preferred Stock. See "Conditions to the
Exchange Offer -- Acceptance of Class B
Preferred Stock; Delivery of Class D Preferred
Stock."
Conditions to the Exchange Offer The obligation of the Company to consummate the
Exchange Offer is subject to certain conditions
including, among others, that there shall be no
litigation instituted which seeks to prevent or
enjoin the Exchange Offer. The Company reserves
the right to amend the Exchange Offer at any
time for any reason. See "Conditions to the
Exchange Offer."
Procedures for Tendering
Class B Preferred Stock Each holder of shares of Class B Preferred
Stock wishing to accept the Exchange Offer must
complete and sign the Letter of Transmittal, in
accordance with the instructions contained
herein and therein, and forward or hand deliver
such Letter of Transmittal, together with any
signature guarantees and any other documents
required by the Letter of Transmittal,
including certificates representing the
tendered shares of Class B Preferred Stock to
Continental Stock Transfer & Trust Company, Two
Broadway, 19th Floor, New York, New York 10004.
Certain Federal Income Tax
Consequences For a discussion of certain federal income tax
consequences of the Exchange Offer to holders
of shares of Class B Preferred Stock, see
"Certain Federal Income Tax Consequences to
Preferred Stockholders."
The Common Stock
and Preferred Stock As of October 31, 1998 there were 11,574,895
shares of Common Stock issued and outstanding
and 5,158,964 shares of Common Stock reserved
for issuance in connection with the exercise of
outstanding options and warrants. In addition,
the Company has 6,260 shares of Class C
Preferred Stock. The Class C Preferred Stock is
convertible at any time commencing after June
30, 1999 on the basis of the aggregate stated
value of the Class C Preferred Stock to be
converted divided by the
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lesser of (i) $2.00 per share of Common Stock
or (ii) 50% of the average closing sale price
for the Common Stock for the last ten trading
days in the fiscal quarter of the Company prior
to such conversion. If such Class C Preferred
Stock was converted into Common Stock as of the
date of this Exchange Offer, such Class C
Preferred Stock would be convertible into
10,698,660 shares of Common Stock. The Class C
Preferred Stock is also redeemable at the
Company's option at a redemption price equal to
1.1 multiplied by the stated value of the Class
C Preferred Stock ($1,250) (the "Class C Stated
Value"). In addition, all holders of Class C
Preferred Stock have the right to receive a
special monthly interest payment, payable in
Common Stock, equal to 12% per annum (or 1% per
month) of the per share Class C Stated Value
until the earlier of June 30, 1999 or the
redemption, if any, of the Class C Preferred
Stock. As described under "Recent
Developments," the Company has commenced the
Class C Exchange Offer.
The Company also has 2,000 shares of Class B
Preferred Stock outstanding. The Class B
Preferred Stock is convertible at any time
commencing after March 1, 1999 into such whole
number of shares of Common Stock equal to the
aggregate Class B Stated Value of the Class B
Preferred Stock to be converted divided by
$1.00. Accordingly, if all shares of Class B
Preferred Stock were converted on this basis,
such Class B Preferred Stock would be
convertible into 2,000,000 shares of Common
Stock. In addition, if on or before March 1,
1999, the Company has a private placement or
public offering of Common Stock of the Company
where the gross proceeds to the Company are in
excess of $2,000,000, each share of Class B
Preferred Stock shall automatically convert
into such whole number of shares of Common
Stock equal to the aggregate Class B Stated
Value of the Class B Preferred Stock to be
converted ($2,000,000) divided by the greater
of (i) 90% of the per share offering price of
the Company's equity securities in the
Subsequent Financing or (ii) $1.00.
Accordingly, if the Company receives $2,000,000
from an offering and 90% of the per share
offering price of the Company's Common Stock to
be sold in such offering is less than $1.00,
2,000,000 shares of Common Stock will be
issuable upon the conversion of all of the
Class B Preferred Stock. If 90% of the per
share offering price of the Company's Common
Stock is more than $1.00, then a lesser number
of shares of Common Stock may be issued. The
number of shares issuable upon conversion of
the Preferred Stock and the Conversion Rate of
the Class B Preferred Stock are subject to
adjustment to protect against dilution in the
event of stock dividends, stock splits,
combinations, subdivision and
reclassifications.
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Trading The Common Stock is reported on the Nasdaq
Small Cap Market ("Nasdaq") under the symbol
"CNRS." The Common Stock is also traded on the
Boston Stock Exchange under the symbol "CNR".
Exchange Agent Continental Stock Transfer & Trust Company. See
"Conditions to the Exchange Offer -- Exchange
Agent."
Risk Factors See "Risk Factors" beginning on page 13
for discussion of certain risk factors that
should be carefully considered in connection
with deciding whether to tender shares of Class
B Preferred Stock in the Exchange Offer.
RISK FACTORS
The securities offered hereby involve a high degree of risk.
Prospective investors should carefully consider the following risk factors, as
well as information contained elsewhere in this Offering Circular, before making
a decision to tender shares of Class B Preferred Stock in exchange for shares of
Class D Preferred Stock.
GENERAL RISKS AND RISKS RELATED TO CURRENT FINANCIAL CONDITION
History of Losses; Change in Strategy; Continuing Net Losses;
Accumulated Deficit. The Company has incurred significant losses since
inception. The Company has decided to focus its business plan towards on-line
and internet development to provide on-line and internet web-site development
and network solutions for corporations. In connection therewith, the Company
incurred significant expenses to start the Internet services business and the
Company continues to incur significant losses. For the year ended May 31, 1998
and the three months ended August 31, 1998, the Company had net losses of
$6,943,800 and $1,209,800, respectively. The Company had an accumulated deficit
of $31,109,000 as of August 31, 1998. There can be no assurance that the Company
can profitably deliver network solutions, services and products or avoid
significant losses in the future.
NASDAQ Listing Standards; Possible NASDAQ Delisting. In August 1997,
Nasdaq enacted new standards for the listing of its member companies on Nasdaq.
These standards, which took effect on February 23, 1998, require listed
companies to maintain certain financial and corporate governance criterion for
continued listing on Nasdaq, including net tangible assets of at least
$2,000,000 and a per share price of at least $1.00 per share. As of May 31,
1998, the Company had less than $2,000,000 in net tangible assets and as of
August 31, 1998, the Company had $620,700 in net tangible assets. Nasdaq has
advised the Company that the Company no longer meets the requirements for
continued listing. Nasdaq has issued a Formal Notice of Deficiency and, pending
the outcome of a hearing, the Common Stock may be delisted. The Company may seek
to enter into a transaction or transactions to raise additional equity capital
(including the offering of Class D Preferred Stock) to ensure that its Common
Stock will continue to be listed on the SmallCap Market, however, there can be
no assurances that additional financing will be available to the Company or that
Nasdaq will consider any such additional equity in its evaluation of whether the
Company's Common Stock should be delisted. If the Common Stock is delisted from
Nasdaq, trading, if any, in the Common Stock, would then continue to be
conducted in the over-the-counter market on the OTC Bulletin Board, an
NASD-sponsored inter-dealer quotation system, or in what are commonly referred
to as "pink sheets." As a result, an investor may find it more difficult to
dispose of or to obtain accurate quotations as to the market value of the
Company's Common Stock and the trading price of the Company's Common Stock may
be adversely affected.
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Limited Working Capital; Possible Need for Additional Financing;
Uncertainty of Capital Funding. As of August 31, 1998, the Company had cash and
cash equivalents of $711,000 and net tangible assets of $627,700. The Company's
continuing losses from operations could impact the Company's ability to meet its
obligations as they become due. The Independent Auditor's report for the fiscal
year ended May 31, 1998 includes an explanatory paragraph regarding the
Company's ability to continue as a going concern. Based on its current operating
plan, the Company believes that its current cash and cash equivalents are not
sufficient to meet its operating expenses and working capital requirements. To
enhance liquidity, the Company has reduced its operating expenses and secured,
in July 1998, approximately $1,487,900 from the sale of Common Stock in a
private placement. In addition, in order to generate additional cash, of which
there is no assurance, the Company is attempting to increase its revenues,
secure a line of credit, further reduce operating expenses and obtain additional
financing. However, the cash generated from these activities, if any, may not be
sufficient to meet the Company's longer-term cash requirements. As a result, the
Company will also be required to obtain additional financing to continue to
operate its business. The Company is currently offering Class D Preferred Stock
in a private placement. There can be no assurance that any such financing or any
additional financing will be available to the Company on acceptable terms, if at
all. Any inability by the Company to obtain additional financing will have a
material adverse effect on the operations of the Company and its ability to
continue as a going concern.
Dependence on Management; Need to Attract Additional Personnel;
Dependence on Third Parties. The Company is dependent upon the business and
technical expertise of its executive and sales and development personnel. In
addition, the ability to attract and retain highly trained executives and
professionals with background experience and knowledge of the Internet, intranet
and other new media platforms is critical to the success of the Company. The
Company's ability to develop its businesses will depend upon its ability to
recruit and retain additional personnel, including engineering, marketing and
management personnel. Competition for qualified personnel is intense and
accordingly, there can be no assurance that the Company will be able to retain
or hire all of the necessary personnel or that the Company may not otherwise
need to change its personnel to compete in its rapidly changing market. The
Company's success is also dependent upon third parties providing the necessary
computer hardware and software at prices within the Company's budget.
RISKS RELATED TO PROVIDING INTERNET SERVICES
Developing Market For Providing Network Solutions, Products and
Services; New Entrants, USWeb Relationship. The Company's future growth is
dependent to a significant extent upon its ability to derive revenue from sales
to its customers of internet based products and solutions primarily for internal
communications and external commerce. The market for these products and services
is rapidly evolving, highly competitive, and is characterized by an increasing
number of market entrants. Demand and market acceptance for such services are
subject to a high level of uncertainty, and there can be no assurance that
commerce and communication through such services will continue to grow. In
connection with this new strategy, the Company has entered into an agreement
with US Web whereby it is a franchisee in a new franchise with no known
comparable franchise model and where the market for such franchise is untested.
The future success of the Company will be dependent, in part, on the overall
success of the US Web Network, of which there can be no assurance. While the
Company believes that it can generate revenues as a franchisee, there can be no
assurance that it can generate revenues or become profitable in the future.
Internet Services Competition; Low Barriers to Entry. The market for
the Company's products and services is highly competitive. The Company faces
competition from national and regional advertising agencies, specialized and
integrated marketing communication firms and businesses in the computer network
solutions industry. The Company expects that new competitors that provide
integrated or specialized services (e.g., corporate identity and packaging,
advertising services or World Wide Web site design) and are technologically
proficient, will emerge and will be competing with the Company. Most of the
Company's current and potential competitors have longer operating histories,
larger installed customer bases, longer relationships with customers and
significantly greater financial,
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<PAGE>
technical, marketing and public relations resources than the Company and could
decide to increase their resource commitments to the Company's market. In
addition, many of the Company's competitors have lower overhead, more technical
expertise and more advanced technology. The Company has no significant
proprietary technology that would preclude or inhibit competitors from entering
its market. The Company intends to compete on the basis of price and the quality
of its services. In addition, the market for Internet development is relatively
new and subject to continuing definition, and, as a result, the core business of
certain competitors may better position them to compete in this market as it
matures. Competition of the type described above could materially adversely
affect the Company's business, results of operations and financial condition.
There can be no assurance that existing or future competitors will not develop
or offer services and products that provide significant performance, price,
creative or other advantages over those offered by the Company, which could have
a material adverse effect on the Company's business, financial condition and
operating results.
Uncertain Adoption of the Internet as a Medium of Commerce and Business
Process. The Company's ability to derive revenues from providing web-related and
network solutions will depend in part upon industry demand for Internet services
and the type and quality of infrastructure for providing Internet access and
carrying Internet traffic. The Internet may not become an efficient, viable
commercial marketplace because of issues such as, among other things, security,
reliability, cost, ease of use and access, and quality of service, and because
of inadequate development of the necessary solutions infrastructure, such as a
reliable computer network or timely development of complementary products, such
as high speed modems. If the necessary infrastructure or complementary products
are not developed or the Internet does not become an efficient, viable
commercial marketplace, the Company's business, financial condition and
operating results will be materially adversely affected. Furthermore, even if
the Internet becomes an efficient, viable commercial marketplace, there can be
no assurance that businesses will elect to use the Company's products and
services. If such services prove to be unreliable, ineffective or too expensive,
or if software companies develop tools sufficiently user-friendly and
cost-effective for nonprofessionals to use, enterprises may choose to develop
and maintain all or part of their systems based on internet technologies
in-house.
Management of Growth. The rapid execution necessary for the Company to
exploit the market for its business model requires an effective planning and
management process. The Company's rapid growth has placed, and is expected to
continue to place, a significant strain on the Company's managerial, operational
and financial resources. The Company expects that continued hiring of new
personnel will be required to support its business. To manage its growth, the
Company must continue to implement and improve its operational and financial
systems and to expand, train and manage its employee base. There can be no
assurance that the Company's systems, procedures or controls will be adequate to
support the Company's operations or that the Company's management will be able
to achieve the rapid execution necessary to exploit the market for the Company's
business model. The Company's future operating results will also depend on its
ability to expand its development, sales and marketing organizations. If the
Company is unable to manage growth effectively, the Company's business, results
or operations and financial condition will be materially adversely affected.
Uncertain Acceptance and Maintenance of USWeb Brand. The Company
believes that establishing and maintaining the USWeb brand is a critical aspect
of its efforts to attract customers and that the importance of brand recognition
will increase due to the increasing number of companies entering the market for
solutions utilizing Internet technology. Promotion of the USWeb brand will
depend largely on the success of USWeb's marketing and the ability of the
Company and the USWeb Network to provide high quality, reliable and cost
effective Web site and Intranet design, development and maintenance services.
Furthermore, in order to promote the USWeb brand in response to competitive
pressures, the Company may find it necessary to increase its marketing budget or
otherwise increase its financial commitment to creating and maintaining brand
loyalty among customers. If USWeb fails to promote and maintain its brand, or
incurs excessive expenses in an attempt to promote and maintain its brand, the
Company's business, results of operations and financial condition will be
materially adversely affected.
Risks Associated with Acquisitions. As part of its business strategy,
the Company expects to make acquisitions of, or significant investments in,
businesses that currently offer complementary web site and network
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solution related services, products and technologies. Any such future
acquisitions or investments would be accompanied by the risks commonly
encountered in acquisitions of businesses. Such risks include, among other
things, the difficulty of assimilating the operations and personnel of the
acquired businesses, the potential disruption of the Company's ongoing business,
the inability of management to maximize the financial and strategic position of
the Company through the successful incorporation of acquired personnel and
clients, the maintenance of uniform standards, controls, procedures and policies
and the impairment of relationships with employees and clients as a result of
any integration of new management personnel. The Company expects that future
acquisitions, if any, could provide for consideration to be paid in cash, stock
or a combination of cash and stock. There can be no assurance that any of these
acquisitions will be consummated. If an entity is acquired by the Company and
such entity is not efficiently or completely integrated with the Company, then
the Company's business, financial condition and operating results could be
materially adversely affected.
RISKS RELATED TO THE CAPITALIZATION OF THE COMPANY
Possible Volatility of Securities Prices. The market price of Common
Stock has in the past been, and may in the future continue to be, volatile. For
instance, between May 1, 1998 and November 4, 1998, the closing price of the
Common Stock has ranged between $.75 and $2.34. A variety of events, including
quarter to quarter variations in operating results, news announcements or the
introduction of new products by the Company or its competitors, as well as
market conditions in the interactive multimedia industry or changes in earnings
estimates by securities analysts may cause the market price of the Common Stock
to fluctuate significantly. In addition, the stock market in recent years has
experienced significant price and volume fluctuations which have particularly
affected the market prices of equity securities of many companies that service
the software industry and which often have been unrelated to the operating
performance of such companies. These market fluctuations may adversely affect
the price and liquidity of the Common Stock.
Authorization of Preferred Stock. The Company's Board of Directors has
the authority, without further action by the stockholders, to issue 1,991,280
shares of preferred stock, in one or more series and to fix the rights,
preferences, privileges and restrictions thereof, including dividend rights,
conversion rights, voting rights, terms of redemption, liquidation preferences
and the number of shares constituting any series or the designation of such
series. While no additional class or series of preferred stock can be senior to
the Class B Preferred Stock, the Class C Preferred Stock or the Class D
Preferred Stock to be issued in the Exchange Offer, the issuance of preferred
stock in the future could adversely affect the voting power of holders of the
Company's Common Stock and could have the effect of delaying, deferring or
preventing a change in control of the Company.
No Dividends. The Company has never paid cash dividends on the Common
Stock. The Company intends to retain any future earnings to finance its growth.
Indefinite Amount of Common Stock Issuable upon the Conversion of the
Class C Preferred Stock and the Class B Preferred Stock. The closing of the
Class C Exchange Offer is not contingent on any minimum number of shares of
Class C Preferred Stock being exchanged. The holders of the Class C Preferred
Stock have the right, at the holder's option, at any time after June 30, 1999 to
convert each share of Class C Preferred Stock into such whole number of shares
of Common Stock equal to the aggregate Class C Stated Value of the Class C
Preferred Stock to be converted divided by the lesser of (i) $2.00 or (ii) 50%
of the average closing sale price for the Common Stock for the last ten trading
days in the fiscal quarter of the Company prior to such conversion. With respect
to the Class C Preferred Stock, if the price of the Common Stock is below $4.00,
the number of shares that the Company will be required to issue upon the
conversion of the Class C Preferred Stock will be uncertain. Accordingly, if
such Class C Preferred Stock was converted into Common Stock as of the date of
the commencement of this Exchange Offer, such Class C Preferred Stock would be
convertible into 10,698,660 shares of Common Stock. Similarly, the number of
shares that the Company would be required to issue upon the conversion of the
Class B Preferred Stock could also be uncertain since there can be no assurance
at the present time as to whether the Company will consummate another offering
or the offering price of Common Stock in another Subsequent Financing. However,
in no event will more
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than 2,000,000 shares of Common Stock be issued upon the conversion of the Class
B Preferred Stock. While the Company intends to have sufficient authorized
capital with respect to the conversion of the Class C Preferred Stock, Class B
Preferred Stock and the Class D Preferred Stock, there can be no assurance that
the Company will in fact have a sufficient amount of authorized Common Stock to
cover all conversions of Class B Preferred Stock, Class C Preferred Stock and
Class D Preferred Stock, particularly if a significant amount of Class B
Preferred Stock is not exchanged for Class D Preferred Stock.
Outstanding Options, Warrants and Preferred Stock. There are currently
outstanding options and warrants to purchase approximately 5,158,964 shares of
Common Stock in the aggregate at exercise prices ranging between $.81 and $6.60.
In addition, the Company has 6,260 shares of Class C Preferred Stock outstanding
which are convertible commencing July 1, 1999. The average closing sale price
for the Common Stock for the last ten trading days in the quarter ended August
31, 1998 was $1.46 per share. Accordingly, assuming the conversion of all
outstanding shares of Class C Preferred Stock, based upon an assumed conversion
rate of $.73 (which is 50% of $1.46), an aggregate of 10,698,660 shares of
Common Stock would be issued. In addition, assuming conversion of all
outstanding Class B Preferred Stock, based upon an assumed Conversion Rate of
$1.00, an aggregate of 2,000,000 shares of Common Stock would be issued. The
exercise of options and warrants or the conversion of the Class C Preferred
Stock and Class B Preferred Stock will have a dilutive effect on the ownership
interests of the Company's existing stockholders.
Forward Looking Statements. This Offering Circular contains certain
forward-looking statements, which are intended to be covered by the safe harbors
created by the Private Securities Litigation Reform Act of 1995. Investors are
cautioned that all forward-looking statements involve risks and uncertainty,
including without limitation, the ability of the Company to provide a full range
of Internet and Intranet-based business solutions. Although the Company believes
that the assumptions, including the demand for Web-related services, underlying
the forward- looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be no assurance that
the forward-looking statements included in this press release will prove to be
accurate. In light of significant uncertainties inherent in the forward-looking
statements included herein, the inclusion of such information should not be
regarded as a representation by the Company or any other person that the
objectives and plans of the Company will be achieved.
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CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, the Company
will not be required to accept for exchange, subject to any applicable rules or
regulations of the Commission, any shares of Class B Preferred Stock tendered
for exchange and may postpone the exchange of any shares of Class B Preferred
Stock tendered and to be exchanged by it, and may terminate or amend the
Exchange Offer as provided herein if any of the following conditions exist:
(1) there shall have been instituted or threatened or be pending
any action or proceeding before or by any court or governmental, regulatory or
administrative agency or instrumentality, or by any other person, (i) that
challenges the making of the Exchange Offer, or might, directly or indirectly,
prohibit, prevent, restrict or delay consummation of the Exchange Offer or
otherwise adversely affect, in any material manner, the Exchange Offer or which
requires the Company to file a registration statement in respect of the Common
Stock being offered as consideration in the Exchange Offer or (ii) that is, or
is reasonably likely to be, in the sole judgment of the Company, materially
adverse to the business, operations, properties, condition (financial or
otherwise), assets, liabilities or prospects of the Company;
(2) there shall have occurred any material adverse development,
in the sole judgment of the Company, with respect to any action or proceeding
concerning the Company;
(3) an order, statute, rule, regulation, executive order, stay,
decree, judgment or injunction shall have been proposed, enacted, entered,
issued, promulgated, enforced or deemed applicable by any court or governmental,
regulatory or administrative agency or instrumentality that, in the sole
judgment of the Company, would or might prohibit, prevent, restrict or delay
consummation of the Exchange Offer or that is, or is reasonably likely to be,
materially adverse to the business, operations, properties, condition (financial
or otherwise), assets, liabilities or prospects of the Company;
(4) there shall have occurred or be likely to occur any event
affecting the business or financial affairs of the Company or which, in the sole
judgment of the Company, would or might prohibit, prevent, restrict or delay
consummation of the Exchange Offer, or that will, or is reasonably likely to,
materially impair the contemplated benefits to the Company of the Exchange
Offer, or otherwise result in the consummation of the Exchange Offer not being
or not reasonably likely to be in the best interests of the Company;
(5) the Company shall not have received from any federal, state
or local governmental, regulatory or administrative agency or instrumentality,
any approval, authorization or consent that, in the sole judgment of the
Company, is necessary to effect the Exchange Offer; and
(6) there shall have occurred (a) any general suspension of, or
limitation on prices for, trading in securities in the United States securities
or financial markets, (b) any significant adverse change in the price of the
Common Stock in the United States securities or financial markets, (c) a
material impairment in the trading market for debt or equity securities, (d) a
declaration of a banking moratorium or any suspension of payments in respect of
banks in the United States, (e) any limitation (whether or not mandatory) by any
government or governmental, administrative or regulatory authority or agency,
domestic or foreign, on, or other event that, in the reasonable judgment of the
Company, might affect, the extension of credit by banks or other lending
institutions, (f) a commencement of a war or armed hostilities or other national
or international calamity directly or indirectly involving the United States,
(g) any imposition of a general suspension of trading or limitation of prices on
Nasdaq, or (h) in the case of any of the foregoing existing on the date hereof,
a material acceleration or worsening thereof.
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All the foregoing conditions are for the sole benefit of the Company
and may be asserted by the Company at any time regardless of the circumstances
giving rise to such conditions and may be waived by the Company, in whole or in
part, at any time and from time to time, in the sole discretion of the Company.
The failure by the Company at any time to exercise any of the foregoing rights
shall not be deemed a waiver of any such right, and each such right shall be
deemed an ongoing right which may be asserted at any time and from time to time.
If any of the conditions set forth in this section shall not be
satisfied, the Company may, subject to applicable law, (i) terminate the
Exchange Offer and return all shares of Class B Preferred Stock tendered
pursuant to the Exchange Offer to tendering holders; (ii) extend the Exchange
Offer and retain all tendered shares of Class B Preferred Stock until the
Expiration Date for the extended Exchange Offer; (iii) amend the terms of the
Exchange Offer or modify the consideration to be provided by the Company
pursuant to the Exchange Offer; or (iv) waive the unsatisfied conditions with
respect to the Exchange Offer and accept all shares of Class B Preferred Stock
tendered pursuant to the Exchange Offer.
EXPIRATION; EXTENSION; TERMINATION; AMENDMENT
The Exchange Offer is scheduled to expire at 5:00 PM, New York City
time, on the Expiration Date. The Company expressly reserves the right, in its
sole discretion, at any time or from time to time, to extend the period of time
during which the Exchange Offer is open by giving oral or written notice of such
extension to the Exchange Agent and making a public announcement thereof as
described in the second succeeding paragraph. There can be no assurance that the
Company will exercise its right to extend the Exchange Offer. During any
extension of the Exchange Offer, all shares of Class B Preferred Stock
previously tendered pursuant thereto and not exchanged or withdrawn will remain
subject to the Exchange Offer and may be accepted for exchange by the Company at
the expiration of the Exchange Offer subject to the right of a tendering holder
to withdraw his shares of Class B Preferred Stock. The closing of the Exchange
Offer is not contingent on any minimum number of shares being exchanged. See
"The Exchange Offer -- Withdrawal of Tenders."
The Company also expressly reserves the right, subject to applicable
law, (i) to delay acceptance for exchange of any shares of Class B Preferred
Stock or, regardless of whether such shares of Class B Preferred Stock were
theretofore accepted for exchange, to delay the exchange of any shares of Class
B Preferred Stock pursuant to the Exchange Offer or to terminate the Exchange
Offer and not accept for exchange any shares of Class B Preferred Stock, if any
of the conditions to the Exchange Offer specified herein fail to be satisfied by
giving oral or written notice of such delay or termination to the Exchange
Agent; (ii) to waive any condition to the Exchange Offer and accept all the
shares of Class B Preferred Stock tendered; and (iii) at any time, or from time
to time, to amend the terms of Exchange Offer in any respect, including the
Exchange Offer Consideration. The reservation by the Company of the right to
delay exchange or acceptance for exchange of shares of Class B Preferred Stock
is subject to the provisions of Rule 13e-4(f)(5) under the Exchange Act, which
requires that the Company pay the consideration offered or return the shares of
Class B Preferred Stock deposited by or on behalf of holders thereof promptly
after the termination or withdrawal of the Exchange Offer.
Any extension, delay, termination or amendment of the Exchange Offer
will be followed as promptly as practicable by a public announcement thereof.
Without limiting the manner in which the Company may choose to make a public
announcement of any extension, delay, termination or amendment of the Exchange
Offer, the Company shall have no obligation to publish, advertise or otherwise
communicate any such public announcement, other than by issuing a release to the
Dow Jones News Service, except in the case of an announcement of an extension of
the Exchange Offer, in which case the Company shall have no obligation to
publish, advertise or otherwise communicate such announcement other than by
issuing a notice of such extension by press release or other public
announcement, which notice shall be issued no later than 9:00 A.M., New York
City time, on the next business day after the previously scheduled Expiration
Date.
If the Company makes a material change in the terms of the Exchange
Offer or the information concerning the Exchange Offer, or if the Company waives
any condition of the Exchange Offer that results in a material change
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to the circumstances of the Exchange Offer, the Company will disseminate
additional Exchange Offer materials in a manner reasonably calculated to inform
holders of shares of Class B Preferred Stock of such change, and will provide
holders of shares of Class B Preferred Stock adequate time to consider such
materials and their participation in the Exchange Offer. The minimum period
during which the Exchange Offer must remain open following a material change in
the terms of the Exchange Offer or the information concerning the Exchange
Offer, other than a change in the Exchange Offer Consideration or the percentage
of shares of Class B Preferred Stock sought in the Exchange Offer, will depend
upon the facts and circumstances, including the relative materiality, of the
changed terms or information.
If the Company increases or decreases the Exchange Offer Consideration
or the amount of shares of Class B Preferred Stock sought in the Exchange Offer,
the Exchange Offer will remain open at least ten business days from the date
that the Company first publishes, sends or gives notice, by public announcement
or otherwise, of such increase or decrease. The Company has no current intention
to increase or decrease the Exchange Offer Consideration currently offered or
the amount of shares of Class B Preferred Stock sought to be purchased.
PROCEDURES FOR TENDERING
TENDERS OF SECURITIES. For a Registered Holder to validly tender shares
of Class B Preferred Stock pursuant to the Exchange Offer, a properly completed
and validly executed Letter of Transmittal (or a facsimile thereof), together
with any signature guarantees and any other documents required by the
instructions to the Letter of Transmittal, must be received by the Exchange
Agent prior to the Expiration Date at Continental Stock Transfer & Trust
Company, Two Broadway, 19th Floor, New York, New York 10004. In addition, the
Exchange Agent must receive either certificates for tendered shares of Class B
Preferred Stock at any such address. A Registered Holder who desires to tender
shares of Class B Preferred Stock and who cannot comply with the procedures set
forth herein for tender on a timely basis or whose shares of Class B Preferred
Stock are not immediately available must comply with the procedures for
guaranteed delivery set forth below.
DELIVERY OF LETTERS OF TRANSMITTAL. If the certificates for shares of
Class B Preferred Stock are registered in the name of a person other than the
signer of the Letter of Transmittal relating thereto, then, in order to tender
such shares of Class B Preferred Stock pursuant to the Exchange Offer, the
certificates evidencing such shares of Class B Preferred Stock must be endorsed
or accompanied by appropriate bond powers signed exactly as the name or names of
the registered owner or owners appear on the certificates, with the signatures
on the certificates or bond powers guaranteed as provided below.
ANY BENEFICIAL OWNER WHOSE SHARES OF CLASS B PREFERRED STOCK ARE
REGISTERED IN THE NAME OF A BROKER, DEALER, COMMERCIAL BANK, TRUST COMPANY OR
OTHER NOMINEE AND WHO WISHES TO TENDER SHARES OF CLASS B PREFERRED STOCK IN THE
EXCHANGE OFFER SHOULD CONTACT SUCH REGISTERED HOLDER PROMPTLY AND INSTRUCT SUCH
REGISTERED HOLDER TO TENDER THE SHARES OF CLASS B PREFERRED STOCK ON SUCH
BENEFICIAL OWNER'S BEHALF. IF ANY BENEFICIAL OWNER WISHES TO TENDER SHARES OF
CLASS B PREFERRED STOCK HIMSELF, THAT BENEFICIAL OWNER MUST, PRIOR TO COMPLETING
AND EXECUTING THE LETTER OF TRANSMITTAL AND, WHERE APPLICABLE, DELIVERING HIS
SHARES OF CLASS B PREFERRED STOCK, EITHER MAKE APPROPRIATE ARRANGEMENTS TO
REGISTER OWNERSHIP OF THE SHARES OF CLASS B PREFERRED STOCK IN SUCH BENEFICIAL
OWNER'S NAME OR FOLLOW THE PROCEDURES DESCRIBED IN THE IMMEDIATELY PRECEDING
PARAGRAPH. THE TRANSFER OF RECORD OWNERSHIP MAY TAKE A CONSIDERABLE AMOUNT OF
TIME.
The method of delivery of the shares of Class B Preferred Stock,
Letters of Transmittal and all other required documents to the Exchange Agent is
at the election and risk of the holder tendering the shares of Class B Preferred
Stock. If delivery is to be made by mail, it is suggested that the holder use
properly insured, registered
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mail with return receipt requested, and that the mailing be made sufficiently in
advance of the Expiration Date to permit delivery to the Exchange Agent prior to
that date and time.
SIGNATURE GUARANTEES. Signatures on the Letter of Transmittal must be
guaranteed by an "eligible guarantor institution" as defined in Rule 17Ad-15
under the Exchange Act (each of the foregoing being an "Eligible Institution")
unless (a) the Letter of Transmittal is signed by the registered holder of the
shares of Class B Preferred Stock tendered therewith and neither the "Special
Payment Instructions" box nor the "Special Delivery Instructions" box of the
Letter of Transmittal is completed, or (b) such shares of Class B Preferred
Stock are tendered for the account of an Eligible Institution.
GUARANTEED DELIVERY. If a holder desires to tender shares of Class B
Preferred Stock pursuant to the Exchange Offer and (a) certificates representing
such shares of Class B Preferred Stock are not immediately available, (b) time
will not permit such holder's Letter of Transmittal, certificates evidencing
such shares of Class B Preferred Stock or other required documents to reach the
Exchange Agent prior to the Expiration Date, a tender may be effected if all the
following are complied with:
(a) such tender is made by or through an Eligible Institution;
(b) on or prior to the Expiration Date, the Exchange Agent has
received from such Eligible Institution, at the address of the Exchange Agent
set forth in the Letter of Transmittal, a properly completed and validly
executed Notice of Guaranteed Delivery (by telegram, telex, facsimile
transmission, mail or hand delivery) in substantially the form accompanying this
Offering Circular, setting forth the name and address of the registered holder
and the principal amount or number of shares of Class B Preferred Stock being
tendered and stating that the tender is being made thereby and guaranteeing
that, within three New York Stock Exchange trading days after the date of the
Notice of Guaranteed Delivery, the Letter of Transmittal validly executed (or a
facsimile thereof), together with certificates evidencing the shares of Class B
Preferred Stock, and any other documents required by the Letter of Transmittal
and the instructions thereto, will be deposited by such Eligible Institution
with the Exchange Agent; and
(c) such Letter of Transmittal (or a facsimile thereof),
properly completed and validly executed, together with certificates evidencing
all physically delivered shares of Class B Preferred Stock in proper form for
transfer and any other required documents are received by the Exchange Agent
within three New York Stock Exchange trading days after the date of such Notice
of Guaranteed Delivery.
LOST OR MISSING CERTIFICATES. If a holder desires to tender shares of
Class B Preferred Stock pursuant to the Exchange Offer but the certificates
evidencing such shares of Class B Preferred Stock have been mutilated, lost,
stolen or destroyed, such holder should write to or telephone the Trustee, at
the address or telephone number listed below, about procedures for obtaining
replacement certificates for such shares of Class B Preferred Stock or arranging
for indemnification or any other matter that requires handling by the Trustee:
Continental Stock Transfer & Trust Company
Two Broadway, 19th Floor
New York, New York 10004
Telephone No. (212) 509-4000 Ext. 535
Telecopy No. (212) 509-5150
TENDER CONSTITUTES AN AGREEMENT. The tender of shares of Class B
Preferred Stock into the Exchange Offer pursuant to any of the procedures
described above will constitute a binding agreement between the tendering holder
and the Company upon the terms and conditions of the Exchange Offer, and a
representation that (i) such holder owns the shares of Class B Preferred Stock
being tendered and is entitled to tender such shares of Class B Preferred Stock
as contemplated by the Exchange Offer all within the meaning of Rule 14e-4 under
the Exchange Act, and (ii) the tender of such shares of Class B Preferred Stock
complies with Rule 14e-4.
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Further, by executing or transmitting a Letter of Transmittal, a
tendering holder irrevocably sells, assigns and transfers to or upon the order
of the Company or its assignee all right, title and interest in and to all such
shares of Class B Preferred Stock tendered thereby, waives any and all rights
with respect to the shares of Class B Preferred Stock and releases and
discharges the Company from any and all claims such holder may have now, or may
have in the future, arising out of or related to the shares of Class B Preferred
Stock, and each such holder irrevocably selects and appoints the Exchange Agent
the true and lawful agent and attorney-in-fact of such holder with respect to
such shares of Class B Preferred Stock, with full power of substitution and
resubstitution (such power of attorney being deemed to be an irrevocable power
coupled with an interest) to (a) deliver certificates representing such shares
of Class B Preferred Stock, (b) present such shares of Class B Preferred Stock
for transfer on the relevant security register and (c) receive all benefits or
otherwise exercise all rights of beneficial ownership of such shares of Class B
Preferred Stock (except that the Depositary will have no rights to or control
over funds from the Company).
OTHER MATTERS. Notwithstanding any other provision of the Exchange
Offer, delivery of the shares of Common Stock for shares of Class B Preferred
Stock tendered and accepted pursuant to the Exchange Offer will occur only after
timely receipt by the Exchange Agent of such shares of Class B Preferred Stock,
together with properly completed and validly executed Letters of Transmittal (or
a facsimile or electronic copy thereof or an electronic agreement to comply with
the terms thereof) and any other required documents.
All questions as to the form of all documents, the validity (including
time of receipt) and acceptance of tenders of the shares of Class B Preferred
Stock will be determined by the Company, in its sole discretion, the
determination of which shall be final and binding. Alternative, conditional or
contingent tenders of shares of Class B Preferred Stock will not be considered
valid. The Company reserves the absolute right to reject any or all tenders of
shares of Class B Preferred Stock that are not in proper form or the acceptance
of which, in the Company's opinion, would be unlawful. The Company also reserves
the right to waive any defects, irregularities or conditions of tender as to
particular shares of Class B Preferred Stock. If the Company waives its right to
reject a defective tender of shares of Class B Preferred Stock, the holder will
be entitled to the Exchange Offer Consideration. The Company's interpretation of
the terms and conditions of the Exchange Offer (including the instructions in
the Letter of Transmittal) will be final and binding. Any defect or irregularity
in connection with tenders of shares of Class B Preferred Stock must be cured
within such time as the Company determines, unless waived by the Company.
Tenders of shares of Class B Preferred Stock shall not be deemed to have been
made until all defects and irregularities have been waived by the Company or
cured. None of the Company, the Exchange Agent or any other person will be under
any duty to give notice of any defects or irregularities in tenders of shares of
Class B Preferred Stock, or will incur any liability to holders for failure to
give any such notice.
WITHDRAWAL OF TENDERS
Tenders of shares of Class B Preferred Stock may be withdrawn at any
time until the Expiration Date as such date may be extended. Thereafter, such
tenders are irrevocable, except that they may be withdrawn after the expiration
of 40 business days from the commencement of the Exchange Offer (January 6,
1999) unless accepted for exchange prior to that date.
Holders who wish to exercise their right of withdrawal with respect to
a Exchange Offer must give written notice of withdrawal, delivered by mail, hand
delivery or facsimile transmission, to the Exchange Agent at the address set
forth in the Letter of Transmittal prior to the Expiration Date or at such other
time as otherwise provided for herein. In order to be effective, a notice of
withdrawal must specify the name of the person who deposited the shares of Class
B Preferred Stock to be withdrawn (the "Depositor"), the name in which the
shares of Class B Preferred Stock are registered, if different from that of the
Depositor, and the number of shares of Class B Preferred Stock to be withdrawn
prior to the physical release of the certificates to be withdrawn. Withdrawals
of tenders of shares of Class B Preferred Stock may not be rescinded, and any
shares of Class B Preferred Stock withdrawn will be deemed not validly tendered
thereafter for purposes of the Exchange Offer. However, properly withdrawn
shares of Class B Preferred Stock may be tendered again at any time prior to the
Expiration Date by following the procedures for tendering not previously
tendered shares of Class B Preferred Stock described elsewhere herein.
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All questions as to the form, validity and eligibility (including time
of receipt) of any withdrawal of tendered shares of Class B Preferred Stock will
be determined by the Company, in its sole discretion, which determination shall
be final and binding. None of the Company, the Exchange Agent or any other
person will be under any duty to give notification of any defect or irregularity
in any withdrawal of tendered shares of Class B Preferred Stock, or will incur
any liability for failure to give any such notification.
If the Company is delayed in its acceptance for conversion and payment
for any shares of Class B Preferred Stock or is unable to accept for conversion
or convert any shares of Class B Preferred Stock pursuant to the Exchange Offer
for any reason, then, without prejudice to the Company's rights hereunder,
tendered shares of Class B Preferred Stock may be retained by the Exchange Agent
on behalf of the Company and may not be withdrawn (subject to Rule 13e-4(f)(5)
under the Exchange Act, which requires that the issuer making the tender offer
pay the consideration offered, or return the tendered securities, promptly after
the termination or withdrawal of a tender offer), except as otherwise permitted
hereby.
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ACCEPTANCE OF CLASS B PREFERRED STOCK;
DELIVERY OF CLASS D PREFERRED STOCK
The acceptance of the Class B Preferred Stock validly tendered for
exchange and not withdrawn will be made as promptly as practicable after the
Expiration Date. For purposes of the Exchange Offer, the Company will be deemed
to have accepted for exchange validly tendered Class B Preferred Stock if, as
and when the Company gives oral or written notice thereof to the Exchange Agent.
Such notice of acceptance shall constitute a binding contract between the
Company and the tendering holder pursuant to which the Company will be obligated
to provide the Exchange Offer Consideration therefor. Subject to the terms and
conditions of the Exchange Offer, the delivery of Class D Preferred Stock will
be made in exchange for Class B Preferred Stock accepted and exchanged pursuant
to the Exchange Offer. The Exchange Agent will act as agent for the tendering
holders of Class B Preferred Stock for the purposes of receiving Class D
Preferred Stock and transmitting the Class D Preferred Stock to the tendering
holders. Tendered Class B Preferred Stock not accepted for conversion by the
Company, if any, will be returned without expense to the tendering holder of
such Class B Preferred Stock as promptly as practicable following the Expiration
Date.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES TO PREFERRED STOCKHOLDERS
The following discussion summarizes the material federal income tax
consequences to holders of the Class B Preferred Stock (herein referred to as
"Holders") relating to the exchange of the Class B Preferred Stock for Class D
Preferred Stock of the Company. The discussion is based upon the Internal
Revenue Code of 1986 (the "Code"), the applicable Treasury Regulations (the
"Regulations") and judicial and administrative interpretations of the Code and
Regulations, all as in effect on the date of this Prospectus. Each Holder should
be aware that the Code and the Regulations, and any interpretation thereof, are
subject to change and that any change could be applied retroactively. This
summary does not discuss all aspects of federal income taxation that may be
relevant to a particular Holder in light of his personal investment
circumstances or to certain types of Holders subject to special treatment under
the federal income tax laws (for example, tax-exempt entities and foreign
taxpayers) and does not discuss any aspect of state, local or foreign tax laws.
Each Holder is urged to consult his own tax advisor to determine the particular
tax consequences to him (including the applicability and effect of state, local,
foreign and other tax laws) of the exchange of the Class B Preferred Stock for
Class D Preferred Stock.
Exchange of Class B Preferred Stock for Class D Preferred Stock
In general, no gain or loss shall be recognized by a Holder who
exchanges Class B Preferred Stock for Class D Preferred Stock.
Tax Basis and Holding Period of the Class D Preferred Stock
Shares of Class D Preferred Stock acquired upon the exchange of the
Class B Preferred Stock will have a tax basis equal to the tax basis of the
shares of Class B Preferred Stock so exchanged. The Holder will tack to his
holding period of the Class D Preferred Stock the period he held the Class B
Preferred Stock transferred in exchange for the Class D Preferred Stock.
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PURPOSES AND EFFECTS OF THE EXCHANGE OFFER
As described under "Recent Developments" the Company is currently
undertaking the Class C Exchange Offer and a private placement of Class D
Preferred Stock. The primary purpose of the Class C Exchange Offer is to
eliminate uncertainty with respect to the number of shares that the Company
would be required to be issued if and when the holders of the Class C Preferred
Stock elected to convert their Class C Preferred Stock into Common Stock. The
purpose of the Class D Private Placement is to increase the Company's working
capital. The Company believes that its ability to consummate the Class C
Exchange Offer and the private placement of Class D Preferred Stock would be
negatively impacted if Class B Preferred Stock remains outstanding since absent
this Exchange Offer or a waiver by the Class B stockholders, the Class B
Preferred Stock would rank senior to the Class D Preferred Stock with respect to
rights on liquidation, dissolution and winding up of the Company. In addition,
if the trading price of the Company's Common Stock does not exceed $1.50 on 15
trading days during any 20-consecutive day trading period, the Class B Preferred
Stock would be convertible into Common Stock at an earlier time than the Class D
Preferred Stock. Accordingly, the Company believes this Exchange Offer is
necessary to help ensure the consummation of the Class C Exchange Offer and the
private placement of Class D Preferred Stock. There can be no assurance that any
shares of Class C Preferred Stock will be exchanged for Class D Preferred Stock
in the Class C Exchange Offer or that the Company will be able to sell any Class
D Preferred Stock or consummate any other financing in the future, irrespective
of the terms thereof. See "Recent Developments" and "Risk Factors--Limited
Working Capital's Possible Need for Additional Financing, Uncertainty of Capital
Funding."
EXCHANGE AGENT
Continental Stock Transfer & Trust Company has been appointed Exchange
Agent for the Exchange Offer. All deliveries and correspondence sent to the
Exchange Agent should be directed to the address set forth in the Letter of
Transmittal. Requests for assistance or additional copies of this Offering
Circular and the Letter of Transmittal should be directed to the Exchange Agent,
at its address set forth on the back cover page of this Offering Circular. The
Company has agreed to pay the Exchange Agent customary fees for its services and
to reimburse the Exchange Agent for its reasonable out-of-pocket expenses in
connection therewith. The Company also has agreed to indemnify the Exchange
Agent for certain liabilities, including liabilities under the federal
securities laws.
MISCELLANEOUS
The Company has not retained any dealer manager or similar agent in
connection with the Exchange Offer and will not make any payments to brokers,
dealers or others for soliciting tenders of Class B Preferred Stock. However,
directors, officers and employees of the Company (who will not be separately
compensated for such services) may solicit exchanges by use of the mails,
personally or by telephone, facsimile or similar means of electronic
transmission. The Company also will pay brokerage houses and other custodians,
nominees and fiduciaries their reasonable out-of-pocket expenses incurred in
forwarding copies of this Offering Circular and related documents to the
beneficial owners of Class B Preferred Stock and in handling or forwarding
tenders of Class B Preferred Stock by their customers.
DESCRIPTION OF SECURITIES
The Company is currently authorized to issue 50,000,000 shares of the
Company's Common Stock, par value $.01 per share, and 2,000,000 shares of
preferred stock, par value $.01 per share. As of the date of this Offering
Circular, 11,524,895 shares of the Company's Common Stock are currently issued
and outstanding, 6,260 shares of Class C Preferred Stock are currently issued
and outstanding and 2,000 shares of Class B Preferred Stock are currently issued
and outstanding.
The holders of Common Stock are entitled to one vote for each share
held of record on all matters to be voted on by shareholders. There is no
cumulative voting with respect to the election of directors, with the result
that the holders of more than 50% of the shares voted can elect all of the
directors then being elected at a meeting at
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which a quorum is present. The holders of Common Stock are entitled to receive
dividends when, as and if declared by the Board of Directors out of funds
legally available therefor. In the event of liquidation, dissolution or winding
up of the Company, the holders of Common Stock are entitled to share ratably in
all assets remaining available for distribution to them after payment of
liabilities and after provision has been made for the Preferred Stock and any
other class of stock, if any, having preference over the Common Stock. Holders
of shares of Common Stock, as such, have no redemption, preemptive or other
subscription rights, and there are no conversion provisions applicable to the
Common Stock.
Convertible Preferred Stock
The following describes the current designations, preferences and other
rights and qualifications of the Class B Preferred Stock.
Stated Value. Each share of Class B Preferred Stock will have a Class B
Stated Value equal to $1,000.
Liquidation Preferences. Upon a liquidation of the Company (including a
sale by the Company of all or substantially all of its assets or a merger or
consolidation of the Company with another Company where the Company is not the
surviving entity), the assets of the Company available for distribution to the
stockholders of the Company, whether from capital, surplus or earnings, shall be
distributed in the following order of priority: (i) the holders of Class B
Preferred Stock shall be entitled to receive, prior and in preference to any
distribution to the holders of any class of the Company's capital stock whether
now existing or hereafter created with which the Class B Preferred Stock shall,
for purposes of a liquidation, dissolution or winding up of the Company, rank
junior) of the Company, an amount equal to the Class B Stated Value for each
share of Class B Preferred Stock then outstanding and (ii) the remaining assets
of the Company available for distribution, if any, to the stockholders of the
Company shall be distributed pro rata to the holders of issued and outstanding
shares of Common Stock.
Ranking. The Class B Preferred Stock will rank (i) junior to the Class
C Preferred Stock [and the Class D Preferred Stock] and (ii) senior to all
classes and series of capital stock of the Company now existing or hereinafter
authorized, issued or outstanding, including, without limitation, the Common
Stock, and any other classes and series of capital stock of the Company now or
hereinafter authorized, issued or outstanding (collectively, "Junior
Securities"). The Company will not issue any class or series of any class of
capital stock which ranks pari passu with the Class B Preferred Stock with
respect to rights on liquidation, dissolution or winding up of the Company.
Dividends. The holders of Class B Preferred Stock shall not be entitled
to receive any dividends, cash or otherwise, in connection with the Class B
Preferred Stock. No dividends shall be payable upon any Junior Securities unless
equivalent dividends, on an as-converted basis, are declared and paid
concurrently on the Class B Preferred Stock.
Conversion. If on or before March 1, 1999, the Company has a private
placement or public offering of Common Stock of the Company where the gross
proceeds to the Company are in excess of $2,000,000 (the "Subsequent
Financing"), each share of Class B Preferred Stock shall automatically convert
into such whole number of shares of Common Stock equal to the aggregate Class B
Stated Value of the Class B Preferred Stock to be converted divided by the
greater of (i) 90% of the per share offering price of the Company's equity
securities in the Subsequent Financing or (ii) $1.00. Subsequent to March 1,
1999, the holders of Class B Preferred Stock shall have the right, at the
holder's option, to convert each share of Class B Preferred Stock into such
whole number of shares of Common Stock equal to the aggregate Class B Stated
Value of the Class B Preferred Stock to be converted divided by $1.00.
Accordingly, if all Class B Preferred Stock was converted subsequent to March 1,
1999, 2,000,000 shares of Common Stock would be issued upon the conversion of
the Class B Preferred Stock. See "Risk Factors--" "Outstanding Options, Warrants
and Preferred Stock" and "Indefinite Amount of Common Stock Issuable upon the
Conversion of Class C Preferred Stock and Class B Preferred Stock." The
Conversion Rate of the Class B Preferred
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Stock will be subject to adjustment to protect against dilution in the event of
stock dividends, stock splits, combinations, subdivision and reclassifications.
Redemption. The holders of Class B Preferred Stock shall have not
redemption rights.
Voting. The holders of Class B Preferred Stock shall be entitled to
vote on all matters submitted to the stockholders. Each share of Class B
Preferred Stock shall have that number of votes equal to the number of shares of
Common Stock into which it is convertible (based upon an assumed conversion rate
of $1.00). The holders of the Class B Preferred Stock shall also vote as a
separate class on all matters which the General Corporate Law of the State of
Delaware specifically requires the holders of such Class B Preferred Stock to
vote as a separate class.
The following describes the current designations, preferences and other
rights and qualifications of the Class C Preferred Stock.
Stated Value. Each share of Class C Preferred Stock will have a Class C
Stated Value equal to $1,250.
Liquidation Preferences. Upon a liquidation of the Company (including a
sale by the Company of all or substantially all of its assets or a merger or
consolidation of the Company with another Company where the Company is not the
surviving entity), the assets of the Company available for distribution to the
stockholders of the Company, whether from capital, surplus or earnings, shall be
distributed in the following order of priority: (i) the holders of Class C
Preferred Stock shall be entitled to receive, prior and in preference to any
distribution to the holders of any Junior Securities (as defined below) of the
Company, an amount equal to the product of the Class C Stated Value multiplied
by 1.1 for each share of Class C Preferred Stock then outstanding and (ii) the
remaining assets of the Company available for distribution, if any, to the
stockholders of the Company shall be distributed pro rata to the holders of
issued and outstanding shares of Common Stock.
Ranking. The Class C Preferred Stock will rank senior to all classes
and series of capital stock of the Company now existing or hereinafter
authorized, issued or outstanding, including, without limitation, the Common
Stock, and any other classes and series of capital stock of the Company now or
hereinafter authorized, issued or outstanding (collectively, "Junior
Securities"). The Company will not issue any class or series of any class of
capital stock which ranks pari passu with the Class C Preferred Stock with
respect to rights on liquidation, dissolution or winding up of the Company.
Dividends. The holders of Class C Preferred Stock shall not be entitled
to receive any dividends, cash or otherwise, in connection with the Class C
Preferred Stock. No dividends shall be payable upon any Junior Securities unless
equivalent dividends, on an as-converted basis, are declared and paid
concurrently on the Class C Preferred Stock. No dividends shall be payable on
any other classes of preferred stock during such time as the Class C Preferred
Stock is outstanding.
Conversion. The holders of Class C Preferred Stock shall have the
right, at the holders option, at any time after June 30, 1999, or from time to
time thereafter, to convert each share of Class C Preferred Stock into such
whole number of shares of Common Stock equal to the aggregate Class C Stated
Value of the Class C Preferred Stock to be converted divided by the lesser of
(i) $2.00 or (ii) 50% of the average closing sale price for the Common Stock for
the last ten trading days in the fiscal quarter of the Company prior to the
conversion, subject to adjustment.
Redemption. (i) At any time and from time to time, the Corporation
shall have the option to (unless otherwise prevented by law) redeem all, or any
portion of on a pro-rata basis, the Class C Preferred Stock and upon 30 days
prior written notice of the Corporation's intention to exercise the redemption
option to the holders of the then outstanding shares of Class C Preferred Stock,
at a redemption price equal to 1.1 multiplied by the Class C Stated Value for
each such share of the Class C Preferred Stock; and (ii) the Corporation must
redeem the Class C Preferred Stock at 1.1 multiplied by the Class C Stated Value
in the event the Corporation receives proceeds from an underwritten public
offering consummated by the Corporation prior to January 1, 2000, provided,
however, that
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only 33% of the proceeds from any such public offering is required to be applied
to redeem the Class C Preferred Stock. In connection with (ii) above, if the
closing price of the Company's Common Stock is at least $6.00 for 10 trading
days in any 30 day period, the Corporation will use its best efforts to complete
an underwritten offering of its Common Stock. The Corporation may also use the
proceeds derived from the aforementioned Section (ii) to redeem a portion of the
Class C Preferred Stock on a pro rata basis to the extent that the proceeds from
such public offering are not sufficient to fund the redemption of all of the
outstanding shares of Class C Preferred Stock.
Voting. The holders of Class C Preferred Stock shall be entitled to
vote on all matters submitted to the stockholders. Each share of Class C
Preferred Stock shall have that number of votes equal to the number of shares of
Common Stock into which it is then convertible as of the record date of the
proposed stockholder action. The holders of Class C Preferred Stock shall also
vote as a separate class on all matters which the General Corporate Law of the
State of Delaware specifically requires the holders of such Class C Preferred
Stock to vote as a separate class.
Interest Payment. All holders of Class C Preferred Stock will, with
respect to each share of Class C Preferred Stock that they hold, receive a
special monthly interest payment equal to 12% per annum (or 1% per month) of the
per share Class C Stated Value for the period commencing on April 30, 1998 and
ending on the earlier of (i) June 30, 1999 or (ii) the redemption, if any, of
the Class C Preferred Stock. Such payment may be made, at the Company's option,
in either cash or additional shares of its Common Stock or a combination
thereof. Such payment will be made by the Company at the later of (i) the time
it redeems the Class C Preferred Stock, or (ii) July 10, 1999 (if the Company
does not redeem the Preferred Stock on or before June 30, 1999). To the extent
that the Company elects to make such payment through the issuance of Common
Stock, the value of the Common Stock will be based upon the average closing
sales price for the Common Stock for the 10 trading days immediately prior to
the date in which the Company sends a written notice of redemption or June 30,
1999 as the case may be, in each case as reported by the Nasdaq SmallCap Market,
or if the Company's Common Stock is not traded on the Nasdaq SmallCap Market,
the principal market on which the Company's Common Stock is then trading.
The terms of the Class D Preferred Stock are substantially identical in
all material respects to the terms of the Class B Preferred Stock. The following
describes the current designations, preferences and other rights and
qualifications of the Class D Preferred Stock.
Stated Value. Each share of Class D Preferred Stock will have a stated
value (the "Class D Stated Value") equal to $1,250.
Liquidation Preferences. Upon a liquidation of the Company (including a
sale by the Company of all or substantially all of its assets or a merger or
consolidation of the Company with another Company where the Company is not the
surviving entity), the assets of the Company available for distribution to the
stockholders of the Company, whether from capital, surplus or earnings, shall be
distributed in the following order of priority: (i) the holders of Class D
Preferred Stock shall be entitled to receive, prior and in preference to any
distribution to the holders of any Junior Securities (as defined below) of the
Company, an amount equal to the product of the Class D Stated Value multiplied
by 1.1 for each share of Class D Preferred Stock then outstanding and (ii) the
remaining assets of the Company available for distribution, if any, to the
stockholders of the Company shall be distributed pro rata to the holders of
issued and outstanding shares of Common Stock. Notwithstanding the foregoing,
the holders of Class C Preferred Stock shall be entitled to receive, prior and
in preference to any distribution to any distribution to any holder of Class D
Preferred Stock.
Ranking. The Class D Preferred Stock will rank senior to all classes
and series of capital stock of the Company now existing or hereinafter
authorized, issued or outstanding, including, without limitation, the Common
Stock, and any other classes and series of capital stock of the Company now or
hereinafter authorized, issued or outstanding other than the Class C Preferred
Stock (collectively, "Junior Securities"). The Company will not issue any class
or series of any class of capital stock which ranks pari passu with the Class D
Preferred Stock with respect to rights on liquidation, dissolution or winding up
of the Company.
-28-
<PAGE>
Dividends. The holders of Class D Preferred Stock shall not be entitled
to receive any dividends, cash or otherwise, in connection with the Class D
Preferred Stock. No dividends shall be payable upon any Junior Securities unless
equivalent dividends, on an as-converted basis, are declared and paid
concurrently on the Class D Preferred Stock. No dividends shall be payable on
any other classes of preferred stock during such time as the Class D Preferred
Stock is outstanding.
Conversion. The holders of Class D Preferred Stock shall have the
right, at the holders option, at any time commencing after the earlier of (i)
June 30, 2000 or (ii) if the closing price of the Common Stock shall have been
at least $3.00 per share (subject to adjustment in the event of a subdivision or
combination of the shares of Common Stock) on 15 trading days during any
20-consecutive day period to convert each share of Class D Preferred Stock into
such whole number of shares of Common Stock equal to the aggregate Class D
Stated Value of the Class D Preferred Stock to be converted divided by $1.00.
subject to adjustment.
Voting. The holders of Class D Preferred Stock shall be entitled to
vote on all matters submitted to the stockholders. Each share of Class D
Preferred Stock shall have that number of votes equal to the number of shares of
Common Stock into which it is then convertible as of the record date of the
proposed stockholder action. The holders of Class D Preferred Stock shall also
vote as a separate class on all matters which the General Corporate Law of the
State of Delaware specifically requires the holders of such Class D Preferred
Stock to vote as a separate class.
Other Preferred Stock
The Company's authorized shares of preferred stock may be issued in one
or more series, and the Board of Directors is authorized, without further action
by the stockholders, to designate the rights, preferences, limitations and
restrictions of and upon shares of each series, including dividend, voting,
redemption and conversion rights. The Board of Directors also may designate par
value, preferences in liquidation and the number of shares constituting any
series. The Company believes that the availability of preferred stock issuable
in series will provide increased flexibility for structuring possible future
financings and acquisitions, if any, and in meeting other corporate needs. It is
not possible to state the actual effect of the authorization and issuance of any
series of preferred stock upon the rights of holders of Common Stock until the
Board of Directors determines the specific terms, rights and preferences of a
series of preferred stock. However, such effects might include, among other
things, restricting dividends on the Common Stock, diluting the voting power of
the Common Stock, or impairing liquidation rights of such shares without further
action by holders of the Common Stock. In addition, under various circumstances,
the issuance of preferred stock may have the effect of facilitating, as well as
impeding or discouraging, a merger, tender offer, proxy contest, the assumption
of control by a holder of a large block of the Company's securities or the
removal of incumbent management. Issuance of preferred stock could also
adversely effect the market price of the Common Stock. The Company has no
present plan to issue any shares of preferred stock other than Class D Preferred
Stock pursuant to this Exchange Offer or in a private placement of Class D
Preferred Stock. See "Purposes and Effects of the Exchange Offer."
-29-
LETTER OF TRANSMITTAL
To Exchange
.8 of a Share of Class D Preferred Stock
for each outstanding Share of Class B Preferred Stock
Of
Cornerstone Internet Solutions Company
Pursuant To The Offering Circular Dated November 6, 1998
Of
Cornerstone Internet Solutions Company
(The "Company")
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON DECEMBER 7,
1998 UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS OF SHARES OF CLASS B
PREFERRED STOCK MAY BE WITHDRAWN AT ANY TIME PRIOR TO THE EXPIRATION DATE. AFTER
THE EXPIRATION DATE, SHARES OF CLASS B PREFERRED STOCK TENDERED IN THE EXCHANGE
OFFER MAY NOT BE WITHDRAWN UNLESS THE EXCHANGE OFFER IS TERMINATED OR EXPIRES
WITHOUT CONSUMMATION THEREOF.
TO:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY, EXCHANGE AGENT
By Mail, By Hand or Overnight Delivery:
c/o Continental Stock Transfer & Trust Company
Two Broadway, 19th Floor
New York, New York 10004
Attention: Reorganization Department
By Facsimile:
(212) 509-5150
Phone Number
(212) 509-4000 Ext. 535
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS, OR
TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OR TELEX, OTHER THAN
AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
The instructions accompanying this Letter of Transmittal should be read
carefully before this Letter of Transmittal is completed. Except as otherwise
provided herein, all signatures on this Letter of Transmittal must be guaranteed
in accordance with the procedures set forth herein. See Instruction 1.
HOLDERS WHO WISH TO BE ELIGIBLE TO RECEIVE THE EXCHANGE OFFER
CONSIDERATION PURSUANT TO THE EXCHANGE OFFER MUST VALIDLY TENDER
<PAGE>
(AND NOT WITHDRAW) THEIR SHARES OF CLASS B PREFERRED STOCK TO THE EXCHANGE AGENT
PRIOR TO THE EXPIRATION DATE.
This Letter of Transmittal is to be used only if shares of Class B
Preferred Stock (the "Class B Preferred Stock" ) of the Company are to be
physically delivered to the Exchange Agent.
Holders whose certificates representing such shares of Class B
Preferred Stock are not immediately available or who cannot deliver their shares
of Class B Preferred Stock and all other required documents to the Exchange
Agent prior to the Expiration Date, may nevertheless tender their shares of
Class B Preferred Stock in accordance with the guaranteed delivery procedures
set forth in the Offering Circular under the heading "Procedures for Tendering
- -- Guaranteed Delivery." See Instruction 2.
All capitalized terms used herein and not otherwise defined herein are
used herein with the meanings ascribed to them in the Offering Circular.
HOLDERS WHO WISH TO TENDER THEIR SHARES OF CLASS B PREFERRED STOCK
MUST, AT A MINIMUM, COMPLETE COLUMNS (1) THROUGH (3) IN THE BOX HEREIN ENTITLED
"DESCRIPTION OF SECURITIES TENDERED" AND SIGN IN THE APPROPRIATE BOX BELOW. If
only those columns are completed, the holder will be deemed to have tendered all
the shares of Class B Preferred Stock, listed in the table, unless otherwise
specified on column 3. If a holder wishes to tender less than all of such shares
of Class B Preferred Stock, such holder should refer to Instruction 5.
-2-
<PAGE>
/ / CHECK HERE IF TENDERED SHARES OF CLASS B PREFERRED STOCK ARE BEING
DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY AND COMPLETE THE
FOLLOWING:
Name(s) of Registered Holder(s):_________________________________
Window Ticket No. (if any):______________________________________
Date of Execution of Notice of Guaranteed Delivery:______________
Name of Institution which Guaranteed Delivery:___________________
Account Number:____________
Transaction Code Number:________________
-3-
<PAGE>
DESCRIPTION OF SECURITIES TENDERED
(1)
NAME(S) AND
ADDRESS(ES) OF (2)
HOLDER(S) (PLEASE FILL CLASS B (3)
IN, IF BLANK, EXACTLY PREFERRED
AS NAME(S) APPEAR(S) STOCK SHARES OF CLASS B
ON SECURITIES) NUMBER PREFERRED STOCK TENDERED
- --------------------------------- ----------- ------------------------
Total:
-4-
<PAGE>
NOTE: SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
By execution hereof, the undersigned hereby acknowledges he
has received and reviewed the Offering Circular and this Letter of Transmittal
relating to the Company's offer to exchange (the "Exchange Offer") .8 of a share
of Class D Preferred Stock, par value $.01 per share (the "Class D Preferred
Stock"), for each outstanding share of Class B Preferred Stock, par value $.01
per share (the "Class B Preferred Stock") (the "Exchange Offer Consideration"),
and otherwise upon the terms and subject to the conditions set forth in the
Offering Circular.
Upon the terms and subject to the conditions of the Exchange
Offer, the undersigned hereby tenders to the Company the number of shares of
Class B Preferred Stock indicated above. The undersigned understands that the
obligation of the Company to consummate the Exchange Offer is subject to several
conditions as set forth in the Offering Circular under "Conditions to the
Exchange Offer."
The undersigned acknowledges that all the foregoing conditions
are for the sole benefit of the Company and may be asserted by the Company at
any time regardless of the circumstances giving rise to such conditions and may
be waived by the Company, in whole or in part, at any time and from time to
time, in the sole discretion of the Company. The failure by the Company at any
time to exercise any of the foregoing rights shall not be deemed a waiver of any
such right, and each such right shall be deemed an ongoing right which may be
asserted at any time and from time to time. If any of the conditions set forth
in this section shall not be satisfied, the Company may, subject to applicable
law, (i) terminate the Exchange Offer and return all shares of Class B Preferred
Stock tendered pursuant to the Exchange Offer to tendering holders; (ii) extend
the exchange offer and retain all tendered shares of Class B Preferred Stock
until the Expiration Date for the extended exchange offer; (iii) amend the terms
of the Exchange Offer or modify the consideration to be provided by the Company
pursuant to the Exchange Offer; or (iv) waive the unsatisfied conditions with
respect to the Exchange Offer and accept all shares of Class B Preferred Stock
tendered pursuant to the Exchange Offer. Notwithstanding anything to the
contrary, the Company may extend the period of the Exchange Offer in its sole
discretion.
In any such event, the tendered shares of Class B Preferred
Stock not accepted for exchange will be returned to the undersigned without cost
to the undersigned as soon as practicable following the date on which the
Exchange Offer is terminated or expires without any shares of Class B Preferred
Stock being
-5-
<PAGE>
purchased thereunder, at the address shown below the undersigned's signature(s)
unless otherwise indicated under "Special Payment Instructions" below.
Subject to, and effective upon, the acceptance by the Company
of the number of shares of Class B Preferred Stock tendered hereby for exchange
pursuant to the terms of the Exchange Offer, the undersigned hereby irrevocably
sells, assigns and transfers to, or upon the order of, the Company, all right,
title and interest in and to, and any and all claims in respect of or arising or
having arisen as a result of the undersigned's status as a holder of, all shares
of Class B Preferred Stock tendered hereby, waives any and all rights with
respect to the shares of Class B Preferred Stock tendered hereby (including,
without limitation, the undersigned's waiver of any existing or past defaults
and their consequences with respect to the shares of Class B Preferred Stock)
and releases and discharges any obligor or parent of any obligor of the shares
of Class B Preferred Stock from any and all claims the undersigned may have now,
or may have in the future, arising out of or related to the shares of Class B
Preferred Stock, including, without limitation, any claims that the undersigned
is entitled to participate in any defeasance of the shares of Class B Preferred
Stock. The undersigned hereby irrevocably constitutes and appoints the Exchange
Agent (with full knowledge that the Exchange Agent also acts as agent of the
Company) as the true and lawful agent and attorney-in-fact of the undersigned
with respect to such shares of Class B Preferred Stock, with full power of
substitution (such power-of-attorney being deemed to be an irrevocable power
coupled with an interest) to (a) deliver such shares of Class B Preferred Stock,
together with all accompanying evidences of transfer and authenticity, to or
upon the order of the Company, (b) present such shares of Class B Preferred
Stock for transfer on the books of the Company, and (c) receive all benefits and
otherwise exercise all rights of beneficial ownership of such shares of Class B
Preferred Stock, all in accordance with the terms of the Exchange Offer.
The undersigned hereby represents and warrants that (i) the
undersigned has full power and authority to tender, sell, assign and transfer
the shares of Class B Preferred Stock tendered hereby, and that when such shares
of Class B Preferred Stock are accepted for exchange by the Company, the Company
will acquire good, marketable and unencumbered title thereto, free and clear of
all liens, restrictions, charges and encumbrances and that none of such shares
of Class B Preferred Stock will be subject to any adverse claim or right; (ii)
the undersigned owns the shares of Class B Preferred Stock being tendered hereby
and is entitled to tender such shares of Class B Preferred Stock as contemplated
by the Exchange Offer, all within the meaning of Rule 14e-4 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and (iii) the tender of
such shares of Class B Preferred Stock complies with Rule 14e-4. The
undersigned, upon request, will
-6-
<PAGE>
execute and deliver all additional documents deemed by the Exchange Agent or the
Company to be necessary or desirable to complete the sale, assignment and
transfer of the shares of Class B Preferred Stock tendered hereby.
The undersigned understands that tenders of shares of Class B
Preferred Stock pursuant to any of the procedures described in the Offering
Circular under the caption "Procedures for Tendering" and in the instructions
hereto will constitute the undersigned's acceptance of the terms and conditions
of the Exchange Offer. The Company's acceptance of such shares of Class B
Preferred Stock for exchange pursuant to the terms of the Exchange Offer will
constitute a binding agreement between the undersigned and the Company upon the
terms and subject to the conditions of the Exchange Offer. The undersigned has
read and agrees to all terms and conditions of the Exchange Offer. Delivery of
the enclosed shares of Class B Preferred Stock shall be effected, and risk of
loss and title of such shares of Class B Preferred Stock shall pass, only upon
proper delivery thereof to the Exchange Agent.
All authority conferred or agreed to be conferred by this
Letter of Transmittal shall survive the death or incapacity of the undersigned
and every obligation of the undersigned under this Letter of Transmittal shall
be binding upon the undersigned's heirs, personal representatives, executors,
administrators, successors, assigns, trustees in bankruptcy and other legal
representatives. SHARES OF CLASS B PREFERRED STOCK TENDERED PURSUANT TO THE
EXCHANGE OFFER MAY BE WITHDRAWN AT ANY TIME PRIOR TO THE EXPIRATION DATE. See
the information set forth under the heading "Withdrawal of Tenders" in the
Offering Circular.
Unless otherwise indicated herein in the box entitled "Special
Payment Instructions," please issue the Exchange Offer Consideration with
respect to shares of Class B Preferred Stock accepted for exchange, and return
any certificates for shares of Class B Preferred Stock not tendered or not
accepted for exchange, in the name(s) of the registered holder(s) appearing in
the box entitled "Description of Class B Preferred Stock Tendered." Similarly,
unless otherwise indicated herein in the box entitled "Special Delivery
Instructions," please deliver the Exchange Offer Consideration with respect to
shares of Class B Preferred Stock accepted for exchange, together with any
certificates for shares of Class B Preferred Stock not tendered or not accepted
for exchange (and accompanying documents, as appropriate) to the address(es) of
the registered holder(s) appearing in the box entitled "Description of Class B
Preferred Stock Tendered." If both the "Special Payment Instructions" box and
the "Special Delivery Instructions" box are completed, please issue the Exchange
Offer Consideration with respect to any shares of Class B Preferred Stock
accepted for exchange, and return any certificates for shares of Class B
Preferred Stock not tendered or not accepted for exchange, in the name(s) of,
and deliver such Exchange Offer Consideration and any
-7-
<PAGE>
such certificates to, the person(s) at the address(es) so indicated. The
undersigned recognizes that the Company has no obligation pursuant to the
"Special Payment Instructions" box or "Special Delivery Instructions" box
provisions of this Letter of Transmittal to transfer any shares of Class B
Preferred Stock from the name of the registered holder(s) thereof if the Company
does not accept any of such shares of Class B Preferred Stock for exchange
pursuant to the terms of the Exchange Offer.
-8-
<PAGE>
SPECIAL PAYMENT INSTRUCTIONS
(SEE INSTRUCTIONS 1, 6, 7 AND 8)
To be completed ONLY if certificates for shares of Class B
Preferred Stock not tendered or not accepted for exchange, and/or the
certificates representing the Exchange Offer Consideration, are to be issued in
the name of someone other than the undersigned.
Issue: / / Shares of Class B Preferred Stock
/ / Exchange Offer Consideration to:
Name:___________________________________________________________________________
(Please Print)
Address:________________________________________________________________________
Zip Code
Wire Transfer Instructions______________________________________________________
________________________________________________________________________________
________________________________________________________________________________
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 1, 6, 7 AND 8)
To be completed ONLY if certificates for shares of Class B
Preferred Stock not tendered or not accepted for exchange, and/or the
certificates representing the Exchange Offer Consideration, are to be sent to
someone other than the undersigned, or to the undersigned at an address other
than that shown above.
Deliver: / / Shares of Class B Preferred Stock
/ / Exchange Offer Consideration to:
Name:___________________________________________________________________________
(Please Print)
Address:________________________________________________________________________
Zip Code
-9-
<PAGE>
SIGN HERE
(TO BE COMPLETED BY ALL TENDERING HOLDERS OF SHARES OF CLASS B
PREFERRED STOCK REGARDLESS OF WHETHER SECURITIES ARE BEING PHYSICALLY DELIVERED
HEREWITH)
X_______________________________________________________________________________
X_______________________________________________________________________________
Signature(s) of Holder(s) and Authorized Signatory
Date____________, 1998
Must be signed by the registered holder(s) of the shares of Class B Preferred
Stock tendered hereby exactly as their name(s) appear(s) on the certificate(s)
for such shares of Class B Preferred Stock or by person(s) authorized to become
registered holder(s) by endorsements and documents transmitted with this Letter
of Transmittal. If signature is by a trustee, executor, administrator, guardian,
attorney-in-fact, officer of a corporation, agent or other person acting in a
fiduciary or representative capacity, please provide the following information
and see Instruction 6.
Name(s):________________________________________________________________________
________________________________________________________________________________
(Please Print)
Capacity (full title):__________________________________________________________
Address:________________________________________________________________________
(Including Zip Code)
Area Code and Telephone No._____________________________________________________
Tax Identification Number or Social Security Number_____________________________
SIGNATURE GUARANTEE (See Instructions 1 and 6 below)
________________________________________________________________________________
(Name of Eligible Institution Guaranteeing Signatures)
-10-
<PAGE>
________________________________________________________________________________
(Address (including zip code) and Telephone Number (including
area code) of Eligible Institution)
________________________________________________________________________________
(Authorized Signature)
________________________________________________________________________________
(Printed Name)
________________________________________________________________________________
(Title)
Date: ______________ 1998
-11-
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. GUARANTEE OF SIGNATURES. All signatures on this Letter of
Transmittal must be guaranteed by a firm which is an "Eligible Guarantor
Institution" as such term is defined in Rule 17Ad-15 under the Securities
Exchange Act of 1934, as amended (each of the foregoing being referred to herein
as an "Eligible Institution") unless (a) this Letter of Transmittal is signed by
the registered holder of the shares of Class B Preferred Stock tendered herewith
and neither the "Special Payment Instructions" box nor the "Special Delivery
Instructions" box of this Letter of Transmittal has been completed or (b) such
shares of Class B Preferred Stock are tendered for the account of an Eligible
Institution. See Instruction 6.
2. DELIVERY OF LETTER OF TRANSMITTAL AND SECURITIES; GUARANTEED
DELIVERY PROCEDURES. This Letter of Transmittal is to be used only if shares of
Class B Preferred Stock tendered hereby are to be physically delivered to the
Exchange Agent. All physically tendered shares of Class B Preferred Stock or
confirmations, together with a properly completed and validly executed Letter of
Transmittal (or facsimile or electronic copy thereof or an electronic agreement
to comply with the terms thereof) and any other documents required by this
Letter of Transmittal, must be received by the Exchange Agent at one of its
addresses set forth on the cover page hereof prior to the Expiration Date. If
shares of Class B Preferred Stock are forwarded to the Exchange Agent in
multiple deliveries, a properly completed and validly executed Letter of
Transmittal must accompany each such delivery.
If a holder desires to tender shares of Class B Preferred Stock
pursuant to the Exchange Offer and (a) certificates representing such shares of
Class B Preferred Stock are not immediately available, (b) time will not permit
this Letter of Transmittal, certificates representing such shares of Class B
Preferred Stock or other required documents to reach the Exchange Agent prior to
the Expiration Date, a tender may be effected in accordance with the guaranteed
delivery procedure set forth in the Offering Circular under the caption
"Procedures for Tendering -- Guaranteed Delivery."
Pursuant to such procedure:
(a) such tender must be made by or through an Eligible Institution;
(b) on or prior to the Expiration Date, the Exchange Agent must have
received from such Eligible Institution, at one of the addresses of the Exchange
Agent set forth on the cover page hereof, a properly completed and validly
executed Notice of Guaranteed
-12-
<PAGE>
Delivery (by telegram, facsimile, mail or hand delivery) substantially in the
form provided by the Company, setting forth the name and address of the
registered holder and the number of shares of Class B Preferred Stock being
tendered and stating that the tender is being made thereby and guaranteeing
that, within three New York Stock Exchange trading days after the date of the
Notice of Guaranteed Delivery, this Letter of Transmittal validly executed (or a
facsimile hereof), together with certificates evidencing the shares of Class B
Preferred Stock and any other documents required by this Letter of Transmittal
and these instructions, will be deposited by such Eligible Institution with the
Exchange Agent; and
(c) this Letter of Transmittal (or a facsimile hereof,) properly
completed and validly executed, with any required signature guarantees, together
with certificates representing the Securities in proper form for transfer and
all other documents required by this Letter of Transmittal must be received by
the Exchange Agent within three New York Stock Exchange trading days after the
date of such Notice of Guaranteed Delivery.
THE METHOD OF DELIVERY OF THIS LETTER OF TRANSMITTAL, SHARES OF CLASS B
PREFERRED STOCK AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE
ELECTION AND RISK OF THE TENDERING HOLDER, AND THE DELIVERY WILL BE DEEMED MADE
ONLY WHEN ACTUALLY RECEIVED BY THE EXCHANGE AGENT. IF SUCH DELIVERY IS BY MAIL,
REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS RECOMMENDED.
IN ALL CASES, THE MAILING SHOULD BE MADE SUFFICIENTLY IN ADVANCE OF THE
EXPIRATION DATE, TO PERMIT DELIVERY TO THE EXCHANGE AGENT PRIOR TO SUCH DATE. NO
ALTERNATIVE, CONDITIONAL OR CONTINGENT TENDERS OF SHARES OF CLASS B PREFERRED
STOCK WILL BE ACCEPTED. BY EXECUTION OF THIS LETTER OF TRANSMITTAL (OR A
FACSIMILE HEREOF), ALL TENDERING HOLDERS WAIVE ANY RIGHT TO RECEIVE ANY NOTICE
OF THE ACCEPTANCE OF THEIR SHARES OF CLASS B PREFERRED STOCK FOR PAYMENT.
3. INADEQUATE SPACE. If the space provided herein under "Description of
Class B Preferred Stock Tendered" is inadequate, the certificate numbers of the
shares of Class B Preferred Stock and the principal amount of shares of Class B
Preferred Stock tendered should be listed on a separate schedule and attached
hereto.
4. WITHDRAWAL OF TENDERS. Tenders of shares of Class B Preferred Stock
may be withdrawn at any time until the Expiration Date. Thereafter, such tenders
are irrevocable, except that they may be withdrawn after the expiration of 40
business days from the commencement of the Exchange Offer (October , 1998)
unless accepted for exchange prior to that date.
Holders who wish to exercise their right of withdrawal with respect to
the Exchange Offer must give written notice of
-13-
<PAGE>
withdrawal, delivered by mail or hand delivery or facsimile transmission, to the
Exchange Agent at the address set forth on the first page of this Letter of
Transmittal prior to the Expiration Date or at such other time as otherwise
provided for herein. In order to be effective, a notice of withdrawal must
specify the name of the person who deposited the shares of Class B Preferred
Stock to be withdrawn (the "Depositor"), the name in which the shares of Class B
Preferred Stock are registered, if different from that of the Depositor, and the
number of the shares of Class B Preferred Stock to be withdrawn prior to the
physical release of the certificates to be withdrawn. The notice of withdrawal
must be signed by the registered holder of such shares of Class B Preferred
Stock in the same manner as the applicable Letter of Transmittal (including any
required signature guarantees), or be accompanied by evidence satisfactory to
the Company that the person withdrawing the tender has succeeded to the
beneficial ownership of such shares of Class B Preferred Stock. Withdrawals of
tenders of shares of Class B Preferred Stock may not be rescinded, and any
shares of Class B Preferred Stock withdrawn will be deemed not validly tendered
thereafter for purposes of the Exchange Offer. However, properly withdrawn
shares of Class B Preferred Stock may be tendered again at any time prior to the
Expiration Date by following the procedures for tendering not previously
tendered shares of Class B Preferred Stock described elsewhere herein.
If the Company is delayed in its acceptance for exchange for any shares
of Class B Preferred Stock or is unable to accept for exchange any shares of
Class B Preferred Stock pursuant to the Exchange Offer for any reason, then,
without prejudice to the Company's rights hereunder, tendered shares of Class B
Preferred Stock may be retained by the Exchange Agent on behalf of the Company
and may not be withdrawn (subject to Rule 13e-4(f)(5) under the Exchange Act,
which requires that the issuer making the tender offer pay the consideration
offered, or return the tendered securities, promptly after the termination or
withdrawal of a tender offer), except as otherwise permitted hereby.
5. PARTIAL TENDERS. Tenders of shares of Class B Preferred Stock will
be accepted only in [integral multiples of 20.] The aggregate principal amount
of all shares of Class B Preferred Stock delivered to the Exchange Agent will be
deemed to have been tendered unless otherwise indicated. If tenders of shares of
Class B Preferred Stock are made with respect to less than the number of shares
of Class B Preferred Stock delivered herewith, certificates(s) for the number of
shares of Class B Preferred Stock not tendered will be issued and sent to the
registered holder, unless otherwise specified in the "Special Payment
Instructions" or "Special Delivery Instructions" boxes in this Letter of
Transmittal.
6. SIGNATURES ON LETTER OF TRANSMITTAL. If this Letter of Transmittal
is signed by the registered holder(s) of the shares of
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<PAGE>
Class B Preferred Stock tendered hereby, the signature(s) must correspond with
the name(s) as written on the face of the certificates representing such shares
of Class B Preferred Stock without alteration, enlargement or any other change
whatsoever.
If any shares of Class B Preferred Stock tendered hereby are
owned of record by two or more persons, all such persons must sign this Letter
of Transmittal.
If any shares of Class B Preferred Stock tendered hereby are
registered in the names of different holders, it will be necessary to complete,
sign and submit as many separate Letters of Transmittal, and any necessary
accompanying documents, as there are different registrations of such shares of
Class B Preferred Stock.
If this Letter of Transmittal is signed by the registered
holder of shares of Class B Preferred Stock tendered hereby, no endorsements of
such shares of Class B Preferred Stock are required, unless the Exchange Offer
Consideration is to be issued to, or shares of Class B Preferred Stock not
tendered or not accepted for exchange are to be issued in the name of, a person
other than the registered holder(s), in which case the shares of Class B
Preferred Stock tendered hereby must be endorsed exactly as the name(s) of the
registered holder(s) appear(s) on such shares of Class B Preferred Stock.
Signatures on such shares of Class B Preferred Stock must be guaranteed by an
Eligible Institution. See Instruction 1.
If this Letter of Transmittal is signed by a person other than
the registered holder(s) of the shares of Class B Preferred Stock tendered
hereby, the shares of Class B Preferred Stock must be endorsed exactly as the
name(s) of the registered holder(s) appear(s) on the certificates representing
such shares of Class B Preferred Stock. Signatures on such shares of Class B
Preferred Stock must be guaranteed by an Eligible Institution. See Instruction
1.
If this Letter of Transmittal or any shares of Class B
Preferred Stock are signed by a trustee, executor, administrator, guardian,
attorney-in-fact, officer of a corporation or other person acting in a fiduciary
or representative capacity, such person should so indicate when signing, and
proper evidence satisfactory to the Company of such person's authority so to act
must be submitted with this Letter of Transmittal.
7. TRANSFER TAXES. Except as otherwise provided in this
Instruction 7, the Company will pay all transfer taxes with respect to the
delivery of shares of Class B Preferred Stock pursuant to the Exchange Offer.
If, however, issuance of the Exchange Offer Consideration is to be made to, or
shares of Class B Preferred Stock not tendered or not accepted for exchange are
to be issued in the name of, a person other than the registered holder(s), the
-15-
<PAGE>
amount of any transfer taxes (whether imposed on the registered holder(s), such
other person or otherwise) payable on account of the transfer to such other
person will be deducted from the Exchange Offer Consideration unless evidence
satisfactory to the Company of the payment of such taxes, or exemption
therefrom, is submitted. Except as provided in this Instruction 7, it will not
be necessary for transfer tax stamps to be affixed to the shares of Class B
Preferred Stock tendered hereby.
8. SPECIAL PAYMENT AND DELIVERY INSTRUCTIONS. If the Exchange Offer
Consideration with respect to any Securities tendered hereby is to be issued, or
Securities not tendered or not accepted for exchange are to be issued, in the
name of a person other than the person(s) signing this Letter of Transmittal or
to the person(s) signing this Letter of Transmittal but at an address other than
that shown in the box entitled "Description of Class B Preferred Stock
Tendered," the appropriate boxes in this Letter of Transmittal must be
completed.
9. CONFLICTS. In the event of any conflict between the terms of the
Offering Circular and the terms of this Letter of Transmittal, the terms of the
Offering Circular will control.
10. MUTILATED, LOST, STOLEN OR DESTROYED SHARES OF CLASS B PREFERRED
STOCK. Any holder of shares of Class B Preferred Stock, whose shares of Class B
Preferred Stock have been mutilated, lost, stolen or destroyed, should contact
the Exchange Agent at the addresses indicated above for further instructions.
11. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Requests for
assistance may be directed to the Exchange Agent at its address set forth below
or from the tendering registered holder's broker, dealer, commercial bank or
trust company. Additional copies of the Offering Circular, this Letter of
Transmittal, the Notice of Guaranteed Delivery and the Guidelines for
Certification of Taxpayer Identification Number on Substitute Form W-9 may be
obtained from the Exchange Agent.
12. DETERMINATION OF VALIDITY. All questions as to the form of all
documents, the validity (including time of receipt) and acceptance of tenders of
the shares of Class B Preferred Stock will be determined by the Company, in its
sole discretion, the determination of which shall be final and binding.
Alternative, conditional or contingent tenders of shares of Class B Preferred
Stock will not be considered valid. The Company reserves the absolute right to
reject any or all tenders of shares of Class B Preferred Stock that are not in
proper form or the acceptance of which, in the Company's opinion, would be
unlawful. The Company also reserves the right to waive any defects,
irregularities or conditions of tender as to particular shares of Class B
Preferred Stock. If the Company waives its right to reject a defective tender of
shares of Class B Preferred Stock, the holder will be entitled
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<PAGE>
to the Exchange Offer Consideration. The Company's interpretation of the terms
and conditions of the Exchange Offer (including the instructions in the Letter
of Transmittal) will be final and binding. Any defect or irregularity in
connection with tenders of shares of Class B Preferred Stock must be cured
within such time as the Company determines, unless waived by the Company.
Tenders of shares of Class B Preferred Stock shall not be deemed to have been
made until all defects and irregularities have been waived by the Company or
cured. None of the Company, the Exchange Agent or any other person will be under
any duty to give notice of any defects or irregularities in tenders of shares of
Class B Preferred Stock, or will incur any liability to holders for failure to
give any such notice.
The Exchange Agent for the Exchange Offer is:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
TWO BROADWAY, 19TH FLOOR
NEW YORK, NEW YORK 10004
(212) 509-4000 EXT. 535
-17-
PRESS RELEASE Contact: Kenneth Gruber
NOVEMBER 6, 1998 (212) 343-3920
FOR IMMEDIATE RELEASE:
CORNERSTONE INTERNET SOLUTIONS COMPANY ANNOUNCES EXCHANGE OFFER
Cornerstone Internet Solutions Company - New York, New York.
Cornerstone Internet Solutions Company (NASDAQ -- CNRS Boston Stock Exchange --
CNR), today announced that it is offering to exchange (the "Exchange Offer") one
share of its privately-held Class B Convertible Preferred Stock (the "Class B
Preferred Stock") into .8 shares of Class D Convertible Preferred Stock. There
are currently 2,000 shares of Class B Preferred Stock outstanding. The Exchange
Offer is being made for up to all outstanding Shares of Class B Convertible
Stock. However, the closing of the Exchange Offer is not contingent on any
minimum number of shares of Class C Preferred Stock being exchanged. The
Exchange Offer will expire at 5:00 P.M., New York City Time on December 7, 1998,
unless extended. Continental Stock Transfer & Trust Company will serve as
Exchange Agent.
Each share of Class B Preferred Stock is convertible at any time after
March 1, 1999 or from time to time thereafter into such whole number of shares
of common stock, par value $.01 per share (the "Common Stock"), equal to the
aggregate stated value of the Class B Preferred Stock ($1,000) (the "Class B
Stated Value") to be converted divided by $1.00. If on or before March 1, 1999,
the Company has a private placement or public offering of Common Stock of the
Company where the gross proceeds to the Company are in excess of $2,000,000,
each share of Class B Preferred Stock shall automatically convert into such
whole number of shares of Common Stock equal to the aggregate Class B Stated
Value of the Class B Preferred Stock to be converted divided by the greater of
(i) 90% of the per share offering price of the Company's equity securities in
the Subsequent Financing or (ii) $1.00. If such Class B Preferred Stock was
converted into Common Stock at the Class B Stated Value divided by $1.00, such
Class B Preferred Stock would be convertible into 2,000,000 shares of Common
Stock.
The terms of the Class D Preferred Stock are substantially identical in
all material respects to the terms of the Class B Preferred Stock for which they
may be exchanged pursuant to the Exchange Offer, except that (i) the Class D
Preferred Stock can first be converted into Common Stock of the Company on or
after the earlier of (a) June 30, 2000 or (b) if the closing price of the Common
Stock shall have been at least $1.50 per share (subject to adjustment in the
event of a subdivision or combination of the shares of Common Stock) on 15
trading days during any 20-
<PAGE>
consecutive day trading period, and (ii) each share of Class D Preferred Stock
is convertible into such number of shares of Common Stock as is equal to the
aggregate stated value of the Class D Preferred Stock divided by $1.00,
2,000,000 shares of Common Stock if all outstanding shares of Class B Preferred
Stock are exchanged for Class D Preferred Stock and all such Class D Preferred
Stock is converted into Common Stock).
The Exchange Offer is being made by the Company only to holders of its
Class B Preferred Stock in reliance on the exemption from the registration
requirements of the Securities Act of 1933, as amended, afforded by Section
3(a)(9) thereof. The Company therefore will not pay any commission or other
remuneration to any broker, dealer, salesman or other person for soliciting
tenders of Class B Preferred Stock. Officers, directors and regular employees of
the Company may solicit tenders of Class B Preferred Stock but they will not
receive additional compensation therefor. The Offering Circular will set forth
more complete information on the Exchange Offer.
-2-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File Number:
May 31, 1998 1-13360
Cornerstone Internet Solutions Company
( Name of Small Business Issuer as Specified in its Charter)
Delaware 22-3272662
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
584 Broadway Suite 509
New York, NY 10012
(Address of principal executive offices) (Zip Code)
(212) 343-3920
(Issuer's telephone number, including area code)
Securities Registered pursuant to
Section 12(b) of the Exchange Act: Common Stock par value $.01
per share
Securities Registered pursuant to
Section 12(g)of the Exchange Act: None
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B
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-KSB or any amendment to this Form 10-KSB.
[ X ]
Revenues for the Fiscal year ended May 31, 1998 were $1,510,900
The aggregate market value of the voting stock held by non - affiliates of the
Registrant, based upon the closing price of the Common Stock on August 10, 1998,
was approximately $16,620,279. As of August 10, 1998, the Registrant had
11,574,895 shares of Common Stock outstanding.
1
<PAGE>
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page
Item 1. Description of Business 3
Item 2. Description of Property 5
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a vote of Security Holders 5
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 6
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
Item 7. Consolidated Financial Statements 9
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 9
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act 9
Item 10. Executive Compensation 11
Item 11. Security Ownership of Certain Beneficial Owners and Management 13
Item 12. Certain Relationships and Related Transactions 18
Item 13. Exhibits, Lists and Reports on Form 8-K 19
Independent Auditors' Report 20
Consolidated Balance Sheets May 31, 1998 and
May 31, 1997 21
Consolidated Statements of Operations for the years ended
May 31, 1998 and 1997 22
Consolidated Statements of Stockholders' Equity for the
years ended May 31, 1998 and 1997 23
Consolidated Statements of Cash Flows for the years ended
May 31, 1998 and 1997 24
Notes to Consolidated Financial Statements 25
SIGNATURES 35
2
<PAGE>
PART 1
Item 1 Description of Business
Cornerstone Internet Solutions Company, a Delaware corporation (the "Company"),
was incorporated in December 1993 under the name Enteractive, Inc and is the
successor to Sonic Images Productions, Inc. ("Sonic"), a District of Columbia
corporation incorporated in 1979 which was merged with and into the Company in
May 1994 ("Merger"). The Company, as the surviving entity of the Merger,
continued its existence following the Merger as a Delaware corporation. The
Company changed its name to Cornerstone Internet Solutions Company in July 1998.
Unless otherwise indicated, references to the Company shall include its wholly
owned subsidiaries and predecessor. On February 29, 1996, Lyriq International
Corporation ("Lyriq") merged into a wholly owned subsidiary of the Company
pursuant to an Agreement and Plan of Merger ("Lyriq Acquisition"). Headquartered
in New York, New York, The Company is an Internet professional services firm
helping clients develop Internet Strategies and improve business processes using
Internet-based technologies. The Company's address is 584 Broadway, Suite 509
New York, New York 10012 and its telephone number is (212) 343-3920. Its web
site address is www.crstone.usweb.com.
The Company is a member of US Web's network of affiliates. Under the arrangement
with USWeb Corporation, the Company is required to pay license and marketing
fees totaling 7% of revenues (reduced by the cost of any third party products)
and receives a number of services including: (1) centralized marketing, brand
awareness, competitive analysis and lead generation programs; (2) technology
services, including proprietary research on Internet technologies; (3) an
internal registry of skills and technologies; and (4) strategic relationships
with leading hardware and software companies such as Microsoft, and Hewlett
Packard. Currently the USWeb network has more than 40 offices in North America.
The Company's Internet and Intranet solutions services business commenced
operations in the fourth quarter of fiscal 1997, but did not generate revenue
until fiscal 1998.
The Company has incurred significant losses since inception. For the year ended
May 31, 1998, the Company had a net loss of $6,943,800. The Company had an
accumulated deficit of $29,899,300 as of May 31, 1998.
Recent Developments
Throughout the first half of fiscal 1997, the Company was primarily engaged in
the development, publishing and marketing of multimedia interactive software
with an emphasis on the CD-ROM platform. As a result of a rigorous review of the
CD-ROM market, the Company's performance and the related risks of continuing to
develop and market interactive multimedia titles, the Company concluded that it
could capitalize on what the Company believes to be a vibrant market by
redirecting its business to provide network and Internet-related solutions,
products and services to businesses and other entities.
During fiscal 1998, the Company reduced operating expenses by concentrating its
development activities in New York City and its marketing activities in the
surrounding tri-state area. As a result the Company, with the approval of USWeb
surrendered its affiliation rights in certain other geographic regions and
recorded a write off of $315,000 representing the unamortized portion of the
related Affiliation Rights. In addition, the Company incurred restructuring
expenses of $427,700 for the estimated losses from subleasing the closed offices
and related severance costs paid in fiscal 1998.
On August 15, 1997 the Company entered into an agreement with Enteractive
Distribution Company, LLC ("EDC"), an unrelated company. Under the terms of that
agreement, EDC acquired the inventory and certain accounts receivable existing
at the date of the closing resulting from the Company's interactive multimedia
publishing business. In addition the Company assigned its domestic distribution
contracts with its domestic distributors to EDC. On August 14, 1998, the Company
and EDC entered into a new agreement and terminated the August 15, 1997
agreement, except with respect to the sale of inventory and accounts receivable
and the assignment of the distribution contracts (the "1998 contract"). Under
the terms of the 1998 contract, the Company sold all its rights to its
multimedia titles and has assigned all third party rights in the titles to EDC
for $100,000.
3
<PAGE>
As a result of the Company's August 15, 1997 agreement with EDC, the Company
wrote down the majority of its interactive multimedia related business assets in
the fourth quarter of fiscal 1997 to the estimated fair value of $100,000. These
assets are classified as "assets held for sale" in the Company's May 31, 1997
balance sheet.
On July 24, 1998 the Company consummated a private placement of 1,768,750
unregistered shares of Common Stock, for $1 per share . The net proceeds of the
offering were approximately $1,510,000.
Company Strategy
The Company's goal is to become a leading professional services firm to
organizations requiring high quality, cost-effective business solutions
utilizing Internet presence and Intranet technology. The Company has established
three major competencies or "Practice" areas.
Business Applications Practice - focuses on the automation of core
internal and external business processes through the use of Internet
technology. Intranets and Extranets deliver business applications
through Internet technologies, and they can greatly increase
productivity, while helping an organization react quickly to changes
in business and technology environments.
Electronic Commerce - focuses on the challenges in building
electronic commerce solutions; Internet marketing issues, legacy
system integration, the underlying financial, technology and
security systems involved. Provides a wide range of e-commerce
solutions from catalog merchant sites to large, sophisticated
business-to-business systems across many value chains.
Media Asset Management - focuses on managing the rapidly growing
volumes of digital assets and integrating them into the business
process. Automating the creative and approval workflow, ensuring the
consistency and integrity of a brand, re-purposing or re-expressing
assets to support various functions (i.e. Training and Marketing)
provides opportunities to reduce cycle time and costs as well as
exploit new revenue generating activities.
Competition
The market for Internet professional services is relatively new, intensely
competitive, rapidly evolving and subject to rapid technological change. The
Company expects competition to persist, intensify and increase in the future.
The Company's competitors can be divided into several groups: computer hardware
and service vendors such as IBM, DEC and Hewlett-Packard; advertising and media
agencies such as CKS, Foote, Cone & Belding and Ogilvy & Mather; Internet
integrators and Web presence providers such as iXL, Organic Online, Poppe Tyson
and Proxicom; large information technology consulting service providers such as
Andersen Consulting, Cambridge Technology Partners and EDS; telecommunications
companies such as AT&T and MCI; Internet and online service providers such as
America Online, NETCOM and UUNet; and software vendors such as Lotus, Microsoft,
Netscape, Novell and Oracle. Although only a few of these competitors have to
date offered a full range of Internet professional services, several have
announced their intention to offer comprehensive Internet technology solutions.
Furthermore, most of the Company's current and potential competitors have longer
operating histories, larger installed customer bases, longer relationships with
clients and significantly greater financial, technical, marketing and public
relations resources than the Company, and could decide at any time to increase
their resource commitments to the Company's market. In addition, the market for
Intranet, Extranet and Web site development is relatively new and subject to
continuing definition, and, as a result, may better position the Company's
competitors to compete in this market as it matures. Competition of the type
described above could materially adversely affect the Company's business,
results of operations and financial condition. There are relatively low barriers
to entry into the Company's business. Because professional services firms such
as the Company rely on the skill of their personnel and the quality of their
client service, the Company has no patented technology that would preclude or
inhibit competitors from entering the Internet professional services market. The
Company expects that it will face additional competition from new entrants into
the market in the future. There can be no assurance that existing or future
competitors will not develop or offer services that provide significant
performance, price, creative or other advantages over
4
<PAGE>
those offered by the Company, which could have a material adverse effect on the
Company's business, results of operations and financial condition.
The Company will attempt to differentiate itself from its competitors through
its affiliation with USWeb by leveraging the brand and strategic relationships
they have created, providing proprietary solutions to its customers and
providing superior solutions to its clients.
Employees
As of August 1, 1998 the Company had 33 employees all of whom are employed on a
full-time basis. The staff is comprised of two sales and marketing, 23 in
technical services and eight in general and administrative functions. The
Company has never experienced a work stoppage and its employees are not covered
by a collective bargaining agreement. The Company believes that its relations
with its employees are good.
Item 2 Properties
The Company owns no real property. The Company conducts its operations through
one facility located in New York City and has leases on six other offices, which
have been subleased to independent companies. The net anticipated loss from the
subleases is accrued at May 31, 1998.
Item 3 Legal Proceedings
None
Item 4 Submission of Matters to a Vote of Security Holders
On July 2, 1998, the Company held its annual meeting of Stockholders (the
"Annual Meeting"). As of May 13, 1998, the record date for the Annual Meeting
(the "Record Date"), there were outstanding 9,435,016 shares of Common Stock. In
addition, as of the Record Date, there were outstanding an aggregate of 6,720
shares of Class A Preferred Stock and Class C Preferred Stock and also 2,000
shares of Class B Preferred Stock. Holders of each share of Common Stock are
entitled to one vote for each share held on all matters. The Class A Preferred
Stock, Class B Preferred Stock and Class C Preferred Stock are sometimes
collectively referred to herein as Preferred Stock with respect to the Annual
Meeting. Holders of each share of Class A and Class C Preferred Stock were
entitled to approximately 1,025 votes per share, aggregating 6,885,246 votes,
and holders of each share of Class B Preferred Stock were entitled to 1,000
votes per share, aggregating 2,000,000 votes. For information with respect to
the redemption of the Class A Preferred Stock and the conversion rights of the
Class B Preferred Stock and the Class C Preferred Stock see Notes 5 and 6 of
Notes to Consolidated Financial Statements.
At the Annual Meeting, the Company's stockholders approved the election of the
following individuals as directors by the following vote:
Name For Withheld
- ---- --- --------
Edward Schroeder 10,436,845 13,765
Rino Bergonzi 10,436,095 14,515
Andrew Gyenes 10,323,614 126,996
Peter Gyenes 10,323,614 126,996
Harrison Weaver 10,438,845 11,765
The stockholders also approved proposals which (i) amended the Company's
Certificate of Incorporation by changing the name of the Company from
"Enteractive, Inc." to "Cornerstone Internet Solutions Company" (Proposal 1) and
(ii) increased the number of shares of Common Stock reserved for issuance under
the Company's 1994 Incentive and Non-Qualified Stock Option Plan to 3,250,000.
(Proposal 2).
5
<PAGE>
The stockholder votes for the two proposals were as follows:
For Against Abstain
--- ------- -------
Proposal 1 10,397,909 50,170 2,531
Proposal 2 10,328,435 121,075 1,100
PART 2
Item 5 Market for Common Equity and Related Stockholder Matters
The Common Stock of Cornerstone Internet Solutions Company is traded under the
symbol CNRS on the NASDAQ SmallCap Market. The Company's Common Stock is also
traded on the Boston Stock Exchange under the symbol "CNR". The following table
sets forth the ranges of the high and low closing bid prices for the Common
Stock since May 31, 1996, as reported on the Nasdaq SmallCap Market, the
principal trading market for the Common Stock. The quotations are interdealer
prices without adjustment for retail markups, markdowns, or commission and do
not necessarily represent actual transactions.
COMMON STOCK
YEAR ENDED MAY 31, 1998
High Low
First Quarter 2 - 5/8 1-1/8
Second Quarter 4-1/16 1-3/8
Third Quarter 3 1-1/8
Fourth Quarter 3-1/4 1-1/2
YEAR ENDED MAY 31, 1997
High Low
First Quarter 4-3/4 2-3/4
Second Quarter 3-1/4 2-5/16
Third Quarter 3-1/2 2-3/8
Fourth Quarter 3 1-1/2
As of August 1, 1998, the Company had outstanding 11,574,895 shares of Common
Stock and 110 holders of record of the Company's Common Stock. The company
believes that at such date, there were in excess of 2,700 beneficial owners of
the Company's Common Stock.
The Company has never paid any dividends on its Common Stock. The Company
currently intends to retain all earnings, if any, to support the development and
growth of the Company's business. Accordingly, the Company does not anticipate
that any cash dividends will be declared on its Common Stock for the foreseeable
future.
Item 6 Management's Discussion and Analysis of Financial Condition and
Results of Operations
The discussion and analysis should be read in conjunction with the Consolidated
financial Statements of Enteractive and Notes to the Consolidated Financial
Statements included elsewhere in this Form 10-KSB.
Quarterly results
The Company expects its quarterly results to vary significantly in the future.
The number of customer contracts signed as well as the ability of the solutions
to be readily implemented by the development staff significantly influence
revenues. Further market acceptance of the Company's offerings is dependent on
(1) the growth and utilization of the Internet as a medium for commerce, (2) the
success of USWeb establishing and positioning the USWeb brand in the territories
where the Company operates (3) the degree of market acceptance of the Company's
offerings and (4) the success of offerings by competitors. The Company does not
expect seasonal factors to be a significant influence on revenues.
6
<PAGE>
Results of Operations - Years Ended May 31, 1998 and 1997
Internet Services business
The Company's Internet services business commenced operations in the fourth
quarter of fiscal 1997, but did not generate revenue until fiscal 1998.
Internet services revenues and cost of Internet services revenues were
$1,182,600 and $2,855,300, respectively in fiscal 1998. Costs exceeded revenues
because the Company hired technical personnel to expand its development capacity
prior to securing customer contracts. .
Marketing and selling expenses related to Internet Services were $2,756,700 in
fiscal 1998 and $41,000 in fiscal 1997 (included in the $3,312,300 of marketing
and selling expenses in the accompanying income statement). The increase in
expenses relates primarily to the sales force and sales offices the Company
deployed through most of fiscal 1998. During fiscal 1998, the Company
centralized its marketing activities in New York City, and eliminated certain
offices and staff. As a result of reducing these costs marketing and selling
expenses were $110,100 and $610,100 in the fourth and third quarters of fiscal
1998, respectively.
Multimedia publishing business
By May 31, 1997, the Company was no longer developing or actively marketing its
interactive multimedia titles. The fiscal 1997 results of operations include
adjustments to the carrying value of inventory and accounts receivable and the
amortization and write-off of previously capitalized software costs totaling
$1,070,600. As a result of the Company's decision in May 1997 to concentrate
solely on the Internet services business, there were no revenues from sales of
multimedia titles and product development revenue in fiscal 1998 compared to
$922,500 and $40,700 in fiscal 1997, respectively. The Company's change in
strategy also resulted in royalty revenue decreasing to $328,300 in fiscal 1998
from $692,500 in fiscal 1997. The revenues relate to licenses signed in prior
fiscal years, which were sold to EDC on August 14, 1998 in connection with the
sale of the Company's rights in all its multimedia titles.
Cost of product sales, cost of development revenue and research and development
expense were $0 in fiscal 1998 and $901,600, $37,000 and $2,554,200,
respectively in fiscal 1997 as a result of the change in business strategy noted
above.
Marketing and selling expenses were $0 in fiscal 1998 and $3,271,300 in fiscal
1997. These expenses primarily represent the expenses associated with building
awareness for multimedia computer games in an extremely competitive marketplace.
General and administrative expenses were $2,472,700 and $2,230,500 for fiscal
1998 and fiscal 1997, respectively. The increase is primarily related to a
$315,000 charge for the unamortized portion of the Affiliation Rights related to
other geographic territories, which were surrendered when the Company decided to
concentrate its activities in the New York City tri-state metropolitan area.
Restructuring expenses of $427,700 were incurred in fiscal 1998 as a result of
the Company's mentioned above decision to reduce operating expenses by
concentrating its development activities in New York City and its marketing
activities in the surrounding tri-state area. These expenses were for the
estimated losses from subleasing the closed offices and related severance costs
paid in fiscal 1998.
Interest expense was $14,600 and $33,100 in fiscal 1998 and fiscal 1997,
respectively. Interest expense in fiscal 1997 related to the borrowing
associated with the repurchase of Company common shares in May 1996, which was
primarily paid by May 31, 1997. The interest expense in fiscal 1998 relates to
long term borrowings for equipment financing.
Interest income was $108,600 and $240,200 in fiscal 1998 and 1997, respectively
due to lower cash balances in fiscal 1998 than in fiscal 1997.
7
<PAGE>
No income tax benefit was recorded in fiscal 1998 or 1997. Using the standards
set forth in Financial Accounting Standard No. 109, management cannot currently
determine whether the Company will generate taxable income during the period
that the Company's net operating loss carry forward may be applied towards the
Company's taxable income, if any. Accordingly, the Company has established a
valuation allowance against its deferred tax asset.
Liquidity and Capital Resources
Since June 1, 1996, the Company's principal sources of capital have been as
follows:
(i) On December 12, 1996, the Company completed a private
placement of 84 units each unit consisting of 80 shares
of Class A Preferred Stock and 50,000 Common Stock
Purchase Warrants to purchase in the aggregate 4,200,000
shares of common stock at an exercise price of $4.00 per
share. Proceeds were approximately $7,869,000, net of
related expenses of $531,000. The Class A Preferred
Stock has a stated value of $1,250 per share. In
February 1998, the Company issued 1,397,323 shares of
Common Stock in exchange for the cancellation of
3,912,500 Warrants and as part of the exchange offer,
the Company redesignated the 6,260 shares of Class A
Preferred Stock held by the warrant holders who approved
the exchange offer as Class C Convertible Preferred
Stock (Class C Preferred Stock).
(ii) On February 19, 1998, the Company consummated a
$2,000,000 private placement resulting in the issuance
of 2,000 shares of Class B par value $.01 Convertible
Preferred Stock ("Class B Preferred Stock"). Net
proceeds to the Company were $ 1,990,800.
(iii) On July 24, 1998, the Company consummated a private
placement of 1,768,750 unregistered shares of Common
Stock for $1.00 per share. The net proceeds of the
offering were approximately $1,510,000.
On April 27, 1998, the Company notified the holders of the Class A Preferred
Stock that the Company would redeem the remaining 460 shares of outstanding
Class A Preferred Stock as of May 28, 1998 at a price per share equal to 1.1
multiplied by the stated value of each share of Class A Preferred. Holders of
340 shares of Class A Preferred Stock exercised their right to convert such
Class A Preferred Stock to Common Stock, which resulted in the issuance of
348,361 shares of Common Stock in June 1998. One hundred twenty shares of Class
A Preferred Stock were redeemed for $165,000 in May 1998.
At May 31, 1998, the Company had cash and cash equivalents of $392,100. The
decrease of $4,560,700 in cash and cash equivalents from May 31, 1997 reflects
the funding of operating activities - $6,188,500, purchase of fixed assets -
$529,600 and repayments of long-term debt - $84,200, partially offset by the
private placement described above which yielded $1,990,800 and borrowings of
$249,900. As described above, subsequent to May 31, 1998 the Company received
approximately $1,510,000 net proceeds from a private placement.
Capital expenditures were $529,600 and $187,100 in fiscal 1998 and fiscal 1997.
The increased capital expenditures in the fiscal year ending May 31, 1998 were
as a result of acquiring the equipment required for the US Web affiliate field
offices, web site hosting and development centers.
The Company's continuing losses from operations could impact the Company's
ability to meet its obligations as they become due. The Independent Auditor's
report for the fiscal year ended May 31, 1998 includes an explanatory paragraph
regarding the Company's ability to continue as a going concern. As part of its
business plan to enhance liquidity, the Company has reduced its operating
expenses, secured in July 1998 approximately $1,510,000 from the sale of common
stock in a private placement and is attempting to increase its revenues and
secure a line of credit. However, these funds may not be sufficient to meet the
Company's longer-term cash requirements for operations. Based on management's
assessment of the demand for Internet based professional services, the Company
may significantly alter the level of expenses both before December 31, 1998 and
thereafter. Management believes that based on funds on hand at
8
<PAGE>
August 1, 1998, anticipated revenues and borrowing, operations can continue
until at least December 31, 1998.
New Accounting Pronouncement
During fiscal 1998, the Company adopted the provisions of Statement of Position
No. 97-2, "Software Revenue Recognition", which did not have a significant
impact on the financial statements. The Company will implement the provisions of
Statement of Financial Accounting Standards No. 133, "Accounting for derivative
Instruments and Hedging Activities" in fiscal year 2000, for which the Company
is presently assessing its impact on the consolidated financial statements, if
any.
Year 2000 Compliance
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, in less than two years, computer systems and
software used by many companies, including customers and potential customers of
the Company, may need to be upgraded to comply with such "Year 2000"
requirements. Although the Company believes that its internal systems and
Software solutions (including third party software sold to customers) will be
Year 2000 compliant, failure to provide Year 2000 compliant business solutions
and software to its customers could have a material adverse effect on the
Company's business, results of operations and financial condition. Furthermore,
the Company believes that the purchasing patterns of customers and potential
customers may be affected by Year 2000 issues as companies expend significant
resources to correct or patch their current software systems for Year 2000
compliance. These expenditures may result in reduced funds available to purchase
products and services such as those offered by the Company.
Forward looking statements
This Form 10-KSB contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended, which are intended to be covered by
the safe harbors created thereby. Investors are cautioned that all
forward-looking statements involve risks and uncertainty, including without
limitation, the ability of the Company to develop its products, the success of
its USWeb Cornerstone subsidiary as well as general market conditions,
competition and pricing. Although the Company believes that the assumptions
underlying the forward-looking statements contained herein are reasonable, any
of the assumptions could be inaccurate, and therefore, there can be no assurance
that the forward-looking statements included in this Form 10-KSB will prove to
be accurate. In light of significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved.
Inflation
The past and expected future impact of inflation on the financial statements is
not significant.
Item 7 Consolidated Financial Statements and Supplementary Data
The response to this item is submitted as a separate section of this Form
10-KSB. See item 13
Item 8 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure None
PART 3
Item 9 Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act
Executive Officers and Directors
- --------------------------------
The executive officers and directors of Cornerstone Internet Solutions Company .
(the "Company" or "Cornerstone") as of August 1, 1998 are as follows:
9
<PAGE>
Name Age Position
- ---- --- --------
Andrew Gyenes........ 62 Chairman of the Board
Kenneth Gruber....... 46 Vice President, Chief Financial Officer and Secretary
Edward Schroeder..... 49 President and Chief Executive Officer
Rino Bergonzi........ 52 Director
Peter Gyenes......... 53 Director
Harrison Weaver...... 66 Director
Andrew Gyenes has been Chairman of the Board since January 1994 and Chief
Executive Officer of the Company from January 1994 to December 1997. He was
President and a director of the Company from January 1994 through May 1994. For
more than five years before joining the Company, Mr. Gyenes was Vice President
of Gyenes & Co., a computer software consulting company, and Marketing Manager
of Ann-Mar Manufacturing, Inc. ("Ann-Mar"), a family owned textile company. Mr.
Gyenes continued in both positions on a part-time basis through January 1995,
and since January 1995, has been a consultant to Ann-Mar. Most of Mr. Gyenes'
career has been in the computer industry, including positions with Warner
Communications (last serving as an Assistant Vice President responsible for
Worldwide Information Systems), with IBM Corporation (last serving as Eastern
Regional Manager for Scientific Systems at Service Bureau Corporation, a former
wholly-owned IBM subsidiary), and with Western Union (last serving as Assistant
Vice President of Data Processing).
Kenneth Gruber has been Vice President and Chief Financial Officer of the
Company since November 7, 1994. He has been Secretary of the Company since
September 1995. Prior to joining the Company, Mr. Gruber was employed by
Children's Television Workshop ("CTW") since 1984, and served as CTW's Vice
President and Chief Financial Officer from 1993 to November 1994, as CTW's Vice
President of Finance and Administration from 1989 to 1993 and as Vice President
of Finance from 1988 to 1989.
Edward Schroeder has been the Company's President and Chief Executive Officer
and a member of the Board of Directors since December 1997. From September 1997
to December 1997 Mr. Schroeder was a Vice President and General Manager of USWeb
Cornerstone ("USWeb"), a wholly-owned subsidiary of the Company. Before joining
USWeb, Mr. Schroeder had been affiliated with IBM Corporation for over 25 years.
Most recently he was the Vice President, Northeast Area.
Rino Bergonzi has served as a director of the Company since January 1995. Since
November 1993, Mr. Bergonzi has served as Vice President and Division Executive
of Corporate Information Technology Services at AT&T, and has 25 years of
experience in the information services field that includes working for such
companies as Western Union, United Parcel Service Information Services and EDS
Corp. Mr. Bergonzi is a Director of Query Object Software Corporation, a public
company which develops and markets proprietary business intelligence software
solutions.
Peter Gyenes has served as a director of the Company since January 1995. Mr.
Gyenes has served as Chairman and Chief Executive Officer and Executive Vice
President, International Operations and Worldwide Sales, of Ardent Software,
Inc., formerly VMARK Software, Inc. ("Ardent") since August 1996. From May 1996
to August 1996, he served as Executive Vice President, International Operations
of Ardent. Mr. Gyenes served as President and Chief Executive Officer of Racal
InterLan, Inc., a leading supplier of local area networking products, from May
1995 to May 1996. Since January 1986, he has also served as a director of Axis
Computer Systems, Inc. From January 1994 to April 1995, he was President of the
Americas Division of Fibronics International, Inc. and, from August 1990 to
December 1993, Vice President and General Manager of Data General Corporation's
international operations and mini-computer business unit. Mr. Gyenes has also
held management, marketing, sales and technical positions with Encore Computer,
Prime Computer, Xerox and IBM. Mr. Peter Gyenes is the brother of Andrew Gyenes,
Chairman of the Board.
Harrison Weaver has been a director of the Company since December 1993. He was a
Vice President of the Company from December 1993 through May 1994. He has been a
director of The Continuum Group, Inc.
10
<PAGE>
("Continuum") since 1987, the Chairman of the Board and Chief Executive Officer
of Continuum since December 1991 and the President of Continuum since August
1994. In September 1995 Continuum applied for protection under Chapter 11 of the
United States Bankruptcy Code
Item 10 Executive Compensation
The following table sets forth, for fiscal 1998, 1997 and 1996, all compensation
awarded to, earned by or paid to Andrew Gyenes, the Chairman of the Board,
Edward Schroeder, the President and Chief Executive Officer of the Company and
Kenneth J. Gruber, Vice President, Chief Financial Officer and Secretary, the
only executive officers of the Company. whose salary and bonus exceeded $100,000
with respect to the fiscal year ended May 31, 1998 (the "Named Executive
Officers.")
SUMMARY COMPENSATION TABLE
Annual Compensation
<TABLE>
<CAPTION>
Long Term
Compensation
Awards
Securities
Name and Principal Other Annual Underlying
position Fiscal Year Salary ($) Bonus ($) Compensation Options
- -------- ----------- ---------- --------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Andrew Gyenes 1998 $125,000 -- $ 10,500(1) --
Chairman of the Board 1997 $100,000 -- $ 13,357(1) 575,000(2)
and Chief Executive 1996 $100,000 -- $ 13,357(1) 100,000(2)
Officer
Edward Schroeder 1998 $ 85,000(3) $ 41,250 $ 4,676(1) 300,000(2)
President & CEO 1997 -- -- -- --
1996 -- -- -- --
Kenneth Gruber 1998 $100,000 $ 20,000 $ 13,641(1) --
Chief Financial Officer 1997 $ 87,000 $ 20,000 $ 11,787(1) 125,000
1996 $ 80,000 $ 20,000 $ 11,787(1) 25,000
</TABLE>
(1) Represents payments by the Company for a leased automobile and
related insurance and amounts paid by the Company toward health
insurance premiums.
(2) Represents options to purchase shares of the Company's Common Stock
under the Company's 1994 Incentive and Non-qualified Plan (the "1994
Plan"). None of such options have been exercised.
(3) Mr. Schroeder's employment commenced September 15, 1997.
11
<PAGE>
STOCK OPTION GRANTS
-------------------
The following table provides further information with respect to the options
granted in fiscal 1998 to Mr. Schroeder under the 1994 Plan.
STOCK OPTION TABLE
<TABLE>
<CAPTION>
Number of % of Total Options Per Share
Name and Principal Securities Granted to Employees Exercise or Base Expiration
Position Underlying Option In Fiscal Year Price Date
<S> <C> <C> <C> <C> <C>
Edward Schroeder 200,000 23% $2.25 9/15/02
President and Chief Executive Officer 100,000 11% $2.13 2/19/03
</TABLE>
Fiscal Year End Option Values
- -----------------------------
No options were exercised by the Named Executive Officers during fiscal 1998.
The following table shows, for Mr. Gyenes, Mr. Schroeder and Mr. Gruber the
number of shares covered by both exercisable and unexercisable employee stock
options as of May 31, 1998, and the values for "in-the-money" options, which
represent the positive spread between the exercise price of any outstanding
stock option and the price of the Common Stock as of May 31, 1998, which was
$1.75.
FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised in-the-Money
Unexercised Options at FY End(#) Options at FY-End($)
Name Exercisable/Unexercisable Exercisable/Unexercisable
<S> <C> <C>
Andrew Gyenes 588,889/311,111 $11,000/$22,000
Edward Schroeder 52,777/247,223 $0/$0
Kenneth Gruber 153,473/71,527 $3,000/$6,000
</TABLE>
12
<PAGE>
Item 11 Security Ownership of Certain Beneficial Owners and Management
The following table sets forth beneficial ownership (as it relates to
dispositive power) of the Company's Common Stock and Class B Preferred Stock and
Class C Preferred Stock (Class B Preferred Stock and Class C Preferred Stock are
collectively referred to herein as the "Preferred Stock". as of July 31, 1998 by
(a) each stockholder known by the Company to be the beneficial owner of five
percent or more of the outstanding Common Stock and Preferred Stock, (b) each
director and Named Executive Officer (as defined below) of the Company
individually, and (c) all directors and executive officers as a group. Except as
otherwise indicated in the footnotes below, (x) the Company believes that each
of the beneficial owners of the Common Stock and Preferred Stock listed in the
table, based on information furnished by such owner, has sole investment and
voting power with respect to such shares, and (y) where no address is indicated,
the address of the beneficial owner is the address of the principal executive
offices of the Company. The holders of the Class B Preferred Stock are Applewood
Associates, L.P. (1,500 shares or 75% of the outstanding Class B Preferred
Stock) and Woodland Partners and Dalewood Associates, L.P., each of which own
250 shares or 12.5% of the outstanding Class B Preferred Stock. As of July 31,
1998, holders of Class C Preferred Stock are entitled to approximately 1,151
votes per share aggregating 7,205,341 votes for all outstanding shares of Class
C Preferred Stock. Holders of each share of Class B Preferred Stock are entitled
to 1,000 votes per share, aggregating 2,000,000 votes for all outstanding share
of Class B Preferred Stock. Accordingly, beneficial ownership of Common Stock as
it relates to voting power will be higher than the amounts reflected in the
table below with respect to those stockholders who hold Preferred Stock.
<TABLE>
<CAPTION>
Name and Address of Common Stock Preferred Stock
Beneficial Owner
Number of % of Number % of
Shares(1) Class of Shares Class
<S> <C> <C> <C> <C>
Barry Rubenstein 2,957,686(2) 24.3% Class C 4,560(2) 73.0%
68 Wheatley Road Class B 1,750(2) 87.5%
Brookville, NY 11545
Woodland Venture Fund 821,002(3) 7.0% Class C 560(3) 9.0%
68 Wheatley Road Class B 250(3) 12.5%
Brookville, NY 11545
Seneca Ventures 821,002(4) 7.0% Class C 560(4) 9.0%
68 Wheatley Road Class B 250(3) 12.5%
Brookville, NY 11545
Woodland Services Corp. 821,002(5) 7.0% Class C 560(5) 9.0%
68 Wheatley Road Class B 250(3) 12.5%
Brookville, NY 11545
Woodland Partners 821,002(6) 7.0% Class C 560(6) 9.0%
68 Wheatley Road Class B 250(3) 12.5%
Brookville, NY 11545
Irwin Lieber 1,759,684(7) 15.2% Class C 4,000(7) 64.0%
767 Fifth Avenue, Class B 1,500(7) 75.0%
45th Floor
New York, NY 10153
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
21st Century 1,032,951(8) 8.9% Class C 2,000(11) 32.0%
Communications Foreign
Partners, L.P.
c/o Fiduciary Trust
(Cayman) Limited
P.O. Box 1062
Grand Cayman,
B.W.I
21st Century 1,032,951(9) 8.9% Class C 2,000(11) 32.0%
Communications Partners, L.P.
767 Fifth Avenue
45th Floor
New York, NY 10153
21st Century 1,032,951(10) 8.9% Class C 2,000(11) 32.0%
Communications T-E
Partners, L.P.
767 Fifth Avenue
45th Floor
New York, NY 10153
Michael J. Marocco 1,032,951(12) 8.9% Class C 2,000(12) 32.0%
767 Fifth Avenue
45th floor
New York, NY 10153
John Kornreich 1,032,951(12) 8.9% Class C 2,000(12) 32.0%
767 Fifth Avenue
45th floor
New York, NY 10153
Harvey Sandler 1,032,951(12) 8.9% Class C 2,000(12) 32.0%
767 Fifth Avenue
45th floor
New York, NY 10153
Andrew Sandler 1,032,951(12) 8.9% Class C 2,000(12) 32.0%
767 Fifth Avenue
45th floor
New York, NY 10153
Barry Fingerhut 1,737,684(13) 15.0% Class C 4,000(13) 64.0%
767 Fifth Avenue Class B 1,500(13) 75.0%
45th floor
New York, NY 10153
Applewood Associates, L.P. 703,733(14) 6.1% Class C 2,000(14) 32.0%
68 Wheatley Road Class B 1,500(14) 75.0%
Brookville, NY 11545
Applewood Capital 703,733(14) 6.1% Class C 2,000(14) 32.0%
Corp. Class B 1,500(14) 75.0%
68 Wheatley Road
Brookville, NY 11545
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Seth Lieber 703,733(14) 6.1% Class C 2,000(14) 32.0%
767 Fifth Avenue Class B 1,500(14) 75.0%
New York, NY 10153
Jonathan Lieber 703,733(14) 6.1% Class C 2,000(14) 32.0%
767 Fifth Avenue Class B 1,500(14) 75.0%
New York, NY 10153
Marilyn Rubenstein 821,002(15) 7.1% Class C 560(15) 9.0%
68 Wheatley Road Class B 250(15) 12.5%
Brookville, NY 11545
The Marilyn and 821,002(16) 7.1% Class C 560(16) 9.0%
Barry Rubenstein Class B 250(16) 12.5%
Family Foundation
68 Wheatley Road
Brookville, NY 11545
Eli Oxenhorn 600,500(17) 5.2% 0 *
56 The Intervale
Roslyn Estates, NY 11576
Andrew Gyenes 663,889(18) 5.4% 0 *
Kenneth Gruber 173,558(19) 1.7% 0 *
Harrison Weaver 40,000(20) 0.4% 0 *
Rino Bergonzi 25,000(21) 0.3% 0 *
Peter Gyenes 33,000(22) 0.3% 0 *
Edward Schroeder 86,110(23) 0.6% 0 *
All directors and executive
officers as a group 1,071,558(24) 8.5% 0 *
</TABLE>
- ---------------------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of
the Securities and Exchange Commission and generally includes any
person who, directly or indirectly, through any contract,
arrangement, understanding or otherwise, has or shares voting or
investment power with respect to securities. Shares of Common Stock
issuable upon the exercise of options, warrants and convertible
notes currently exercisable or convertible, or exercisable or
convertible within 60 days are deemed outstanding for computing the
percentage ownership of the person holding such options or warrants
or convertible notes but are not deemed outstanding for computing
the percentage ownership of any other person.
(2) Based on Amendment Number 6 to a Schedule 13D filed on February 22,
1998 by Barry Rubenstein, Woodland Venture Fund ("Woodland Fund"),
Seneca Ventures ("Seneca"), Woodland Services Corp. ("Woodland
Corp."), 21st Century Communications Partners, L.P. ("21st
Partners"), 21st Century Communications T-E Partners, L.P. ("21st
T-E"), 21st Century Communications Foreign Partners, L.P. ("21st
Foreign"), Michael J. Marocco, John Kornreich, Harvey Sandler,
Andrew Sandler, Barry Fingerhut, Irwin Lieber, Woodland Partners,
Applewood Associates, L.P. ("Applewood"), Applewood Capital Corp.
("Applewood Capital"), Seth Lieber, Jonathan Lieber, Marilyn
Rubenstein, The Marilyn and Barry Rubenstein Family Foundation (the
"Foundation"), Brian Rubenstein and Rebecca Rubenstein (the
"February 1998 13D"), Barry Rubenstein has sole
15
<PAGE>
beneficial ownership of 323,000 shares of Common Stock (including
175,000 shares of Common Stock underlying presently exercisable
options). Mr. Rubenstein may also be deemed to share beneficial
ownership of 2,634,686 shares of Common Stock by virtue of being:
(i) a stockholder, officer and director of InfoMedia Associates,
Ltd. ("InfoMedia") which is a general partner of 21st Partners, 21st
T-E and 21st Foreign which collectively hold 1,032,951 shares of
Common Stock; (ii) a trustee of the Foundation; and (iii) a general
partner of each of Applewood, Seneca, the Woodland Fund and Woodland
Partners. In addition, Mr. Rubenstein shares beneficial ownership of
4,560 shares and 1,750 shares of Class C Preferred Stock and Class B
Preferred Stock, respectively with the above listed entities. Mr.
Rubenstein disclaims beneficial ownership of these securities,
except to the extent of his equity interest therein.
(3) Based on the February 1998 13D, the Woodland Fund has sole
beneficial ownership of 214,415 shares of Common Stock. The Woodland
Fund may also be deemed to share beneficial ownership of 606,587
shares of Common Stock (including 175,000 Shares of Common Stock
underlying presently exercisable options) with Seneca, Woodland
Corp., Woodland Partners, and the Foundation. In addition, the
Woodland Fund has sole beneficial ownership of 240 shares of Class C
Preferred Stock and shares beneficial ownership of 320 and 250
shares of Preferred Stock and Class B Preferred Stock, respectively,
with the above listed entities. The Woodland Fund disclaims
beneficial ownership of these securities, except to the extent of
its equity interest therein.
(4) Based on the February 1998 13D, Seneca has sole beneficial ownership
of 143,636 shares of Common Stock. Seneca may also be deemed to
share beneficial ownership of 677,366 shares of Common Stock
(including 175,000 Shares of Common Stock underlying presently
exercisable options) with the Woodland Fund, Woodland Corp.,
Woodland Partners, and the Foundation. In addition, Seneca has sole
beneficial ownership of 160 shares of Class C Preferred Stock and
shares beneficial ownership of 400 shares of Class C Preferred Stock
with the above listed entities. Seneca disclaims beneficial
ownership of these securities, except to the extent of its equity
interest therein.
(5) Based on the February 1998 13D, Woodland Corp. shares beneficial
ownership of 821,002 Shares of Common Stock and 560 shares of Class
C Preferred Stock with the Woodland Fund, Seneca, Woodland Partners,
and the Foundation. Woodland Corp. disclaims beneficial ownership of
these securities, except to the extent of its equity interest
therein.
(6) Based on the February 1998 13D, Woodland Partners has sole
beneficial ownership of 35,714 shares of Common Stock. Woodland
Partners may also be deemed to share beneficial ownership of 785,288
shares of Common Stock (including 175,000 shares of Common Stock
underlying presently exercisable options) with the Woodland Fund,
Seneca, Woodland Corp., and the Foundation. In addition, Woodland
Partners has sole beneficial ownership of 160 shares and 250 Shares
of Preferred Stock and Class B Preferred Stock, respectively and
shares beneficial ownership of 400 shares of Class C Preferred Stock
with the above listed entities. Woodland Partners disclaims
beneficial ownership of these securities, except to the extent of
its equity interest therein.
(7) Based on the February 1998 13D, Irwin Lieber has sole beneficial
ownership of 23,000 shares of Common Stock. By virtue of being a
stockholder, officer and director of InfoMedia and a general partner
of Applewood, Irwin Lieber may be deemed to share beneficial
ownership of 1,736,684 shares of Common Stock. In addition, Mr.
Lieber shares beneficial ownership of 4,000 shares of Class C
Preferred Stock with the above listed entities. Mr. Lieber disclaims
beneficial ownership of these securities, except to the extent of
his equity ownership therein.
(8) Based on the February 1998 13D, this amount includes 89,610 shares
of Common Stock. 21st Foreign disclaims beneficial ownership of
701,169 shares of Common Stock owned by 21st Partners and 242,172
shares of Common Stock owned by 21st T-E.
(9) Based on the February 1998 13D, this amount includes 701,169 shares
of Common Stock. 21st Partners disclaims beneficial ownership of
242,172 shares of Common Stock owned by 21st T-E and 89,610 shares
of Common Stock owned by 21st Foreign.
16
<PAGE>
(10) Based on the February 1998 13D, this amount includes 242,172 shares
of Common Stock. 21st T-E disclaims beneficial ownership of 701,169
shares of Common Stock owned by 21st Partners and 89,610 shares of
Common Stock owned by 21st Foreign.
(11) Beneficial ownership of these shares of Class C Preferred Stock is
shared by 21st Foreign, 21st T-E, and 21st Partners.
(12) Based on the February 1998 13D, Messrs. Marocco, Lewis, Kornreich,
H. Sandler and A. Sandler are each the sole stockholder, officer and
director of an entity which is a general partner of an entity which
is a general partner of 21st Partners, 21st T-E and 21st Foreign.
Accordingly, they may each be deemed to share beneficial ownership
of 1,032,951 shares of Common Stock and 2,000 shares of Preferred
Stock which are collectively held by 21st Partners, 21st T-E and
21st Foreign. Each individual disclaims beneficial ownership of
these securities, except to the extent of his equity interest
therein.
(13) Based on the February 1998 13D, Barry Fingerhut has sole beneficial
ownership of 1,000 shares of Common Stock. By virtue of being a
stockholder, officer and director of InfoMedia and a general partner
of Applewood, Barry Fingerhut may be deemed to share beneficial
ownership of 1,736,684 shares of Common Stock and 4,000 and 1,500
shares of Class C Preferred Stock and Class B Preferred Stock,
respectively. Mr. Fingerhut disclaims beneficial ownership of these
securities, except to the extent of his equity interest therein.
(14) Based on the February 1998 13D, these amounts include 703,733 shares
of Common Stock, 2,000 shares of Class C Preferred Stock
beneficially owned by Applewood and 1,500 shares of Class B
Preferred Stock beneficially owned by Applewood. By virtue of being
a general partner of Applewood, Applewood Capital may be deemed to
share beneficial ownership of these shares. In addition, by virtue
of being officers of Applewood Capital, Seth and Jonathan Lieber may
also be deemed to share beneficial ownership of these shares.
Applewood Capital, Seth Lieber, and Jonathan Lieber each disclaim
beneficial ownership of these securities, except to the extent of
their equity interests therein.
(15) Based on the February 1998 13D, by virtue of being a general partner
of Woodland Partners, a trustee of the Foundation, and the wife of
Barry Rubenstein, Marilyn Rubenstein may be deemed to share
beneficial ownership of 821,002 shares of Common Stock (including
175,000 shares of Common Stock underlying presently exercisable
Common Stock Warrants) and 560 and 250 shares of Class A Preferred
Stock and Class B Preferred Stock, respectively. Ms. Rubenstein
disclaims beneficial ownership of these securities, except to the
extent of her equity interest therein.
(16) Based on the February 1998 13D, the Foundation has sole beneficial
ownership of 104,237 shares of Common Stock. In addition, the
Foundation may be deemed to share beneficial ownership of 716,765
shares of Common Stock (including 175,000 shares of Common Stock
underlying presently exercisable Options) and 560 and 250 shares of
Class C Preferred Stock and Class B Preferred Stock, respectively
with Mr. and Ms. Rubenstein, the Woodland Fund, Seneca, Woodland
Corp. and Woodland Partners. The Foundation disclaims beneficial
ownership of these securities, except to the extent of its equity
interest therein.
(17) Based on the April 23, 1998 Schedule 13D filed by Mr. Eli Oxenhorn,
these share amounts consist of 200,500 shares of Common Stock
issuable upon the exercise of presently exercisable options or
warrants held by Mr. Oxenhorn and 400,000 shares of Common Stock
issuable upon the exercise of presently exercisable options or
warrants held by an entity of which Mr. Oxenhorn is a General
Partner.
(18) Consists of 653,889 shares of Common Stock issuable upon exercise of
presently exercisable options and 10,000 shares owned by the AnnMar
Manufacturing Inc. Employee Pension Plan as trustee.
17
<PAGE>
(19) Consists of 171,158 shares of Common Stock issuable upon exercise of
presently exercisable options and 2,400 shares owned by Mr. Gruber.
(20) Consists of 20,000 shares of Common Stock issuable upon exercise of
presently exercisable options and 20,000 shares of Common Stock
issuable upon exercise of presently exercisable options granted
pursuant to the 1995 Stock Option Plan for Outside Directors (the
"Outside Directors' Plan"). Excludes 50,000 presently exercisable
options held by The Continuum Group, Inc., which options Mr. Weaver
disclaims beneficial ownership of.
(21) Consists of 5,000 shares of Common Stock owned by Mr. Bergonzi and
20,000 shares of Common Stock issuable upon exercise of presently
exercisable options granted pursuant to the Outside Directors' Plan.
(22) Consists of 3,000 shares of Common Stock owned by Mr. Peter Gyenes
20,000 shares of Common Stock issuable upon exercise of presently
exercisable options granted pursuant to the Outside Directors' Plan,
and 10,000 shares owned by the AnnMar Manufacturing Inc. Employee
Pension Plan as trustee.
(23) Consists of 86,110 shares of Common Stock issuable upon the exercise
of presently exercisable options.
(24) Also includes presently exercisable options to purchase 1,041,158
shares of Common Stock.
Item 12 Certain Relationships and Related Transactions
In February 1998, the Company consummated a private placement of 2,000 shares of
Class B Preferred Stock at a purchase price of $1,000 per share. The following
entities which may be deemed to be 5% stockholders of the Company purchased
Class B Preferred Stock in the private placement: Applewood Associates, L.P.
("Applewood") (1,500 Shares) and Woodland Partners ("Woodland") (250 Shares).
Net proceeds to the Company were $ 1,990,800.
In December 1996, the Company consummated a $8,400,000 private placement of 84
units at a purchase price of $100,000 per unit, each unit consisting of 80
shares of Preferred and 50,000 Common Stock Purchase Warrants to purchase in the
aggregate 4,200,000 shares of Common Stock at an exercise price of $4.00 per
share. The following entities which may be deemed to be 5% stockholders of the
Company purchased units in the private placement: Applewood (25 units), Seneca
Ventures ("Seneca") (2 units), 21st Century Communications-Foreign Partners,
L.P. ("21st Foreign") (2.28 units), 21st Century Communications Partners, L.P.
("21st Partners") (16.95 units), 21st Century Communications T-E Partners, L.P.
("21st T-E") (5.77 units), Woodland (2 units) and Woodland Venture Fund
("Woodland Fund") (3 units).
In February 1998, the Company consummated an exchange offer whereby the Company
issued one share of Common Stock for every 2.8 Common Stock Purchase Warrants
tendered in the exchange offer. Each of Applewood, Seneca, 21st Foreign, 21st
Partners, 21st T-E, Woodland and Woodland Fund participated in the exchange
offer.
On December 4, 1996, the Company entered into an agreement ("the Enteractive
Affiliates Agreement") with USWeb Corporation ("USWeb") pursuant to which the
Company became an affiliate of USWeb and a member of USWeb's Network. Investors
in USWeb include 21st Century Communications Partners, L.P., and Wheatley
Partners, L.P. Such entity is controlled by Wheatley Partners, LLC, a limited
liability company which is the general partner of Wheatley Partners, L.P. The
members and officers of Wheatley Partners, LLC include Barry Rubenstein, Irwin
Lieber, Seth Lieber and Jonathan Lieber, each of whom may be deemed 5%
stockholders of the Company.
All of the above transactions resulted from arms-length negotiations and were
approved by the independent members of the Company's Board of Directors who did
not have an interest in the transaction. The Company believes that the terms of
such transaction were on terms that were no less favorable than were
18
<PAGE>
available from unaffiliated third parties. Future and ongoing transactions with
affiliates of the Company, if any, will be on terms believed by the Company to
be no less favorable than are available from unaffiliated third parties and will
be approved by a majority of the independent members of the Company's Board of
Directors who do not have an interest in the transaction.
Item 13 Exhibits, Lists and Reports on Form 8-K
(a) 1 Financial Statements
The following financial Statements are filed as part of this report
Page
Report of Independent Auditors 20
Consolidated Balance Sheets as of May 31, 1998 and 1997 21
Consolidated Statements of Operations for the years
ended of May 31, 1998 and 1997 22
Consolidated Statements of Stockholders' Equity for
the years ended of May 31, 1998 and 1997 23
Consolidated Statements of Cash Flows for
the years ended of May 31, 1998 and 1997 24
Notes to Financial Statements 25
(a) 2 Financial Statement Schedules
None required
(a) 3 Exhibits
The following exhibits are filed herewith or are incorporated by reference to
exhibits previously filed with the Commission. The Company shall furnish copies
of exhibits for a reasonable fee (covering the expense of furnishing copies)
upon request.
Exhibit
Number Description of Exhibit
**3.1 Certificate of Incorporation of the Company, as amended.
*3.2 Amendment to Certificate of Incorporation.
**3.3 By-laws of the Company, as amended.
*****3.4 Amendment to Certificate of Incorporation
*****4.12 Certificate of Designation for Class B Convertible Preferred
Stock
*****4.13 Certificate of Designation for Class C Convertible Preferred
Stock
**10.1 Employment Agreement dated as January 3, 1994, by and between
the Company and Andrew Gyenes.
*10.4 Form of Indemnification Agreement between each of the Officers
and Directors of the Company and the Company.
**10.8 1994 Incentive and Non-Qualified Stock Plan Option.
**10.9 1994 Consultant Stock Option Plan.
**10.14 1995 Stock Option Plan for Outside Directors.
*10.16 Registration Rights Agreement dated February 29, 1996, between
the Company and Randal Hujar.
****10.20 Agreement dated December 4, 1996 between the Company and USWeb
Corporation.
****10.21 Agreement dated August 15, 1997 between the Company and
Enteractive Distribution Company.
*****10.22 Agreement dated August 14, 1998 between the Company and
Enteractive Distribution Company.
*****23.1 Consent of KPMG Peat Marwick LLP.
* Incorporated herein by reference to such Exhibit to the
Registration Statement on Form SB-2 of the Registrant
(Registration No. 333-2244) Filed in March 1996, as amended
** Incorporated herein by reference to such Exhibit to the
Registration Statement on Form SB-2 of the Registrant
(Registration No. 33-83694) filed on September 6, 1994.
*** Incorporated herein by reference to such exhibit to the
Registration Statement on Form S-3 of the Registrant
(Registration No. 333-22713) Filed in March 1997, as amended.
**** Incorporated by reference to such Exhibit to the Company's
Annual Report on Form 10KSB for the fiscal year ended May 31,
1997
***** Filed herewith
19
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Cornerstone Internet Solutions Company
and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Cornerstone
Internet Solutions Company (formerly Enteractive, Inc.) and subsidiaries as of
May 31, 1998 and 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cornerstone Internet
Solutions Company and subsidiaries as of May 31, 1998 and 1997, and the results
of their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 1 to the
consolidated financial statements, the Company's recurring losses from
operations and its working capital deficiency at May 31, 1998 raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in note 1. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
KPMG PEAT MARWICK LLP
New York, New York
August 14, 1998
20
<PAGE>
CORNERSTONE INTERNET SOLUTIONS COMPANY and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
May 31 May 31
1998 1997
-------------------- ------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 392,200 $ 4,952,900
Investments 167,400 --
Accounts receivable, net 343,700 224,400
Other receivables 100,000 --
Assets held for sale -- 100,000
Prepaid expenses and other 269,300 93,800
------------ ------------
Total current assets 1,272,600 5,371,100
Affiliation rights, net 219,200 593,800
Property and equipment, net 485,900 154,900
Other 69,200 61,500
------------ ------------
$ 2,046,900 $ 6,181,300
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 538,100 $ 287,900
Accrued restructuring expenses 95,400 --
Accrued payroll and related expenses 202,800 79,500
Other accrued expenses 410,300 544,400
Deferred revenue 9,300 69,500
Current maturities of long-term debt 99,500 40,200
------------ ------------
Total current liabilities 1,355,400 1,021,500
Long-term debt, excluding current maturities 106,400 --
------------ ------------
Total liabilities 1,461,800 1,021,500
------------ ------------
Commitments and contingencies
Stockholders' Equity
Preferred stock, $.01 par value,
2,000,000 shares authorized;
Class A, 340 and 6,720 shares issued and
outstanding at May 31, 1998 and 1997 -- 100
Class B, 2,000 shares issued and 20 --
outstanding at May 31,1998
Class C, 6,260 shares issued and outstanding at May 100 --
31,1998
Common stock, $.01 par value, 50,000,000 shares
authorized and 9,441,117, and 7,679,441 shares 94,400 76,800
issued and outstanding at May 31, 1998 and 1997
Additional paid-in capital 30,222,480 28,038,400
Unrealized gain on marketable equity securities 167,400 --
Accumulated deficit (29,899,300) (22,955,500)
------------ ------------
Total stockholders' equity 585,100 5,159,800
------------ ------------
$ 2,046,900 $ 6,181,300
------------ ------------
</TABLE>
See notes to consolidated financial statements
21
<PAGE>
CORNERSTONE INTERNET SOLUTIONS COMPANY and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended Year Ended
May 31, 1998 May 31, 1997
---------------- ------------------
<S> <C>
Internet services revenue 1,182,600 --
Software licensing and royalty revenue 328,300 692,500
Net product sales -- 922,500
Product development revenue -- 40,700
------------ ------------
Total revenues 1,510,900 1,655,700
------------ ------------
Cost of internet services revenue 2,855,300 --
Cost of product sales -- 901,600
Amortization and write-off of capitalized software -- 1,070,600
Cost of development revenue -- 37,000
Research and development expenses -- 2,554,200
Cost of software licensing and royalty revenue 36,500 --
Marketing and selling expenses 2,756,700 3,312,300
General and administrative expenses 2,472,700 2,230,500
Restructuring expenses 427,700 --
------------ ------------
Total costs and expenses 8,548,900 10,106,200
------------ ------------
Operating loss (7,038,000) (8,450,500)
Other income (expense):
Interest expense (14,600) (33,100)
Interest income 108,600 240,200
Other income, net 200 6,700
------------ ------------
Loss before income taxes (6,943,800) (8,236,700)
------------ ------------
Provision for income taxes -- --
------------ ------------
Net loss $ (6,943,800) $ (8,236,700)
------------ ------------
Preferred stock preferences (11,477,800) (2,392,800)
Net loss to common shareholders $(18,421,600) $(10,629,500)
------------ ------------
Basic and diluted loss per share $ (2.21) $ (1.38)
------------ ------------
Weighted average shares of common stock 8,337,063 7,679,331
============ ============
</TABLE>
See notes to consolidated financial statements.
22
<PAGE>
CORNERSTONE INTERNET SOLUTIONS COMPANY and Subsidiaries
Consolidated Statements of Stockholders' Equity
Years ended May 31, 1998 and 1997
<TABLE>
<CAPTION>
Additional
Preferred Stock Common Stock Paid-In Unrealized Accumulated
Shares Amount Shares Amount Capital Gain Deficit Total
------------------ -------------------- ------------ ----------- ---------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance May 31, 1996 -- -- 7,656,435 76,600 19,620,900 (14,718,800) 4,978,700
Stock options exercised -- -- 23,006 200 73,500 -- 73,700
Sale of convertible
preferred stock 6,720 100 -- -- 7,869,000 -- 7,869,100
Stock option consulting
expense -- -- -- -- 475,000 -- 475,000
Net loss -- -- -- -- -- (8,236,700) (8,236,700)
-----------------------------------------------------------------------------------------------------------
Balance May 31, 1997 6,720 $100 7,679,441 $76,800 $28,038,400 -- $(22,955,500) $5,159,800
Stock option consulting
expense 210,000 210,000
Stock options exercised -- -- 115,489 1,100 243,000 244,100
Exchange of public
warrants for common
stock 248,864 2,500 (2,500) --
Exchange of private
warrants for common
stock -- -- 1,397,323 14,000 (14,000) -- --
Redemption of preferred
stock (120) -- (165,000) (165,000)
Preferred stock dividend (78,200) (78,200)
Sale of Class B
convertible preferred
stock 2,000 20 1,990,780 1,990,800
Investmentin USWeb
warrants 167,400 167,400
Net loss -- -- -- -- -- (6,943,800) (6,943,800)
-----------------------------------------------------------------------------------------------------------
Balance May 31, 1998 8,600 $ 120 9,441,117 $94,400 $30,222,480 $167,400 $(29,899,300) $585,100
-----------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
23
<PAGE>
CORNERSTONE INTERNET SOLUTIONS COMPANY and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended May 31,
1998 1997
--------------------------------
<S> <C> <C>
Cash flows from operating activities
Net loss $(6,943,800) $(8,236,700)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization 258,200 722,900
Write-off of capitalized software costs -- 642,400
Write-off of affiliation rights 315,000 --
Stock option consulting expense 210,000 475,000
Changes in assets and liabilities
Accounts receivable (119,300) (77,000)
Assets held for sale -- (100,000)
Income taxes receivable -- 16,400
Inventories -- 439,500
Prepaid expenses and other (175,500) (83,600)
Other assets (7,700) (37,300)
Accounts payable 250,200 (1,116,400)
Accrued expenses 84,600 (271,400)
Deferred revenue (60,200) 69,500
--------------------------------
Net cash used in operating activities (6,188,500) (7,556,700)
--------------------------------
Cash flows from investing activities
Purchase of affiliation rights -- (625,000)
Purchases of property and equipment (529,600) (187,100)
--------------------------------
Net cash used in investing activities (529,600) (812,100)
--------------------------------
Cash flows from financing activities
Proceeds from exercise of stock options 244,100 73,700
Net proceeds from issuance of convertible preferred stock 1,990,800 7,869,100
Principal payments under long-term debt (84,200) (626,500)
Proceeds from sale and leaseback of equipment 249,900 --
Preferred stock dividend (78,200) --
Redemption of preferred stock (165,000) --
--------------------------------
Net cash provided by financing activities 2,157,400 7,316,300
--------------------------------
Net decrease in cash and cash equivalents (4,560,700) (1,052,500)
Cash and cash equivalents
Beginning of year 4,952,900 6,005,400
--------------------------------
End of year $ 392,100 $ 4,952,900
================================
</TABLE>
See notes to consolidated financial statements
24
<PAGE>
Cornerstone Internet Solutions Company
Notes to Consolidated Financial Statements
May 31, 1998
(1) Business and Liquidity
On July 2, 1998 the Company's shareholders ratified a proposal to
change the Company's name from Enteractive, Inc. to Cornerstone
Internet Solutions Company. Throughout fiscal 1997 Cornerstone
Internet Solutions Company (the "Company") designed, published and
marketed interactive multimedia titles for the entertainment and
recreation markets. On December 4, 1996 the Company signed multiple
market affiliate agreements with USWeb Corporation and paid $625,000
for the right to operate USWeb affiliate offices in New York City,
and certain other markets in the Northeast portion of the United
States, for a ten-year period. The operation, which has been
conducting business as USWeb Cornerstone, provides a full range of
Internet and Intranet-based business solutions, including Web site
design, hosting and management, design and implementation of
database and e-commerce solutions, educational programs and
Web-related strategic consulting and marketing.
On August 15, 1997 the Company entered into an agreement with
Enteractive Distribution Company, LLC ("EDC"), an unrelated company,
whereby EDC acquired the inventory and certain accounts receivable
existing at the date of the closing resulting from the Company's
interactive multimedia publishing business. In addition, the Company
assigned its domestic distribution contracts with its domestic
distributors to EDC. On August 14, 1998 the Company and EDC entered
into a new agreement and terminated the August 15, 1997 agreement,
except with respect to the sale of inventory and accounts receivable
and the assignment of the distribution contracts (the "1998
contract"). Under the terms of the 1998 contract, the Company sold
all its rights to its multimedia titles and has assigned all third
party rights in the titles to EDC for $100,000, payable at varying
monthly amounts through January 1, 1999.
As a result of the Company's August 15, 1997 agreement with EDC, the
Company wrote down the majority of its interactive multimedia
related business assets, which had a carrying value of $1,142,400,
in the fourth quarter of fiscal 1997 to the estimated fair value of
$100,000. These assets are classified as "assets held for sale" in
the Company's May 31, 1997 balance sheet. The portion of the
writedown related to inventory and capitalized software costs (from
a fiscal 1996 acquisition), amounting to $400,000 and $642,400, were
included in cost of product sales and amortization and write off of
capitalized software, respectively.
The Company's Internet and Intranet solutions services business
commenced operations in the fourth quarter of fiscal 1997, but did
not generate revenue until fiscal 1998. The Company is obligated to
pay USWeb monthly fees equal in the aggregate to 7% of adjusted
gross revenues, as defined, but not less than certain contractual
minimum fees. During fiscal 1998, the Company reduced operating
expenses by concentrating its development activities in New York
City and its marketing activities in the surrounding tri-state area.
As a result the Company, with the approval of USWeb surrendered its
affiliation rights in certain other geographic regions and recorded
a write off of $315,000 representing the unamortized portion of the
related Affiliation Rights. In addition, the Company incurred
restructuring expenses of $427,700 for the estimated losses from
subleasing the closed offices and related severance costs paid in
fiscal 1998.
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. The Company's
continuing losses from operations could impact the Company's ability
to meet its obligations as they become due. As part of its business
plan to enhance liquidity, the Company has reduced its operating
expenses, secured approximately $1,510,000 in July 1998 from the
sale of common stock in a private placement and is in the process of
attempting to increase its revenues and secure a line of credit.
25
<PAGE>
Cornerstone Internet Solutions Company
Notes to Consolidated Financial Statements
May 31, 1998
2) Summary of Significant Accounting Policies
(a) Consolidation Policy
The consolidated financial statements include the accounts of
Cornerstone Internet Solutions Company and its wholly owned
subsidiaries. All significant intercompany transactions and balances
have been eliminated in consolidation.
(b) Cash and Cash Equivalents and Investments
All highly liquid debt instruments with maturities of three months or
less at the time of purchase are considered to be cash equivalents.
Cash equivalents of $392,200 and $4,865,600 at May 31, 1998 and 1997,
respectively, consist of cash held in interest-bearing money market
accounts. Investments, consisting of vested USWeb warrants, are
"available for sale" securities that are recorded at fair value.
(c) Revenue Recognition
During fiscal 1998, the Company adopted the provisions of Statement of
Position No. 97-2, "Software Revenue Recognition", which did not have
a significant impact on the financial statements. Revenue from
Internet and Intranet-based business solution services is recognized
as services are rendered. Deferred revenue represents amounts paid by
the customer for which the related services were not provided at the
balance sheet date.
Revenue from product sales is recognized upon shipment, provided no
vendor obligations remain and collection of the resulting receivable
is deemed probable. Revenue under fixed priced development contracts
is recognized using the percentage of completion method based on
progress to date, which is measured by comparing costs to date to
total estimated costs. Royalty revenue is recognized when earned.
The Company's agreements with certain product distributors and
retailers permit them to exchange or return products for which the
Company provides an allowance reflected as a reduction of accounts
receivable in the accompanying balance sheets. The allowance for
doubtful accounts and returns at May 31, 1998 and 1997 was $108,400
and $70,000, respectively. At May 31, 1998, there are $126,200 of
unbilled accounts receivable, which are billable in the first quarter
of fiscal 1999.
(d) Affiliation Rights
Fees for affiliation rights were paid to USWeb for the right to join
the USWeb network and operate as an affiliate in the territories
indicated in Note 1. The fee is being amortized over the 10-year life
of the agreement with USWeb. Affiliation rights at May 31, 1998 and
1997 were net of accumulated amortization of $90,800 and $31,200,
respectively.
(e) Property and Equipment
Property and equipment are stated at cost and are depreciated over
their estimated useful lives using the straight-line method, except
for leasehold improvements, which are amortized over the lesser of the
lease term or the life of the related asset.
(f) Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected
26
<PAGE>
Cornerstone Internet Solutions Company
Notes to Consolidated Financial Statements
May 31, 1998
to be realized or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(g) Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever
events or circumstances indicate that the carrying amount of an asset
may not be recoverable. If the sum of expected cash flows,
undiscounted and without interest, is less than the carrying amount of
the asset, an impairment loss is recognized as the amount by which the
carrying value of the asset exceeds its fair value.
(h) Earnings Per Share
In fiscal 1998, the Company adopted Statement of Financial Accounting
Standard No. 128, "Earnings Per Share", which requires the
presentation of basic and diluted earnings per share. Basic earnings
per share is based on weighted average shares outstanding and diluted
earnings per share adds the dilutive effect of stock options and other
common stock equivalents. Basic and diluted net loss per share for
fiscal 1998 and 1997 is based on the weighted average number of shares
of common stock outstanding, excluding common stock equivalents
(common stock options and warrants and convertible preferred stock)
since they are antidilutive.
(i) Accounting for Stock-Based Compensation
The Company records compensation expense for employee stock options
only if the current market price of the underlying stock exceeds the
exercise price on the date of the grant. On June 1, 1996, the Company
adopted SFAS No. 123, "Accounting for Stock-Based Compensation." The
Company has elected not to implement the fair value based accounting
method for employee stock options, but has elected to disclose the pro
forma net earnings per share to reflect employee stock option grants
made beginning in fiscal 1996 as if such method had been used to
account for stock-based compensation cost as described in SFAS No.
123.
(j) Fair Value of Financial Instruments
At May 31, 1998 and 1997, the fair value of the Company's cash and
cash equivalents, accounts receivable, other receivables, assets held
for sale, accounts payable and accrued expenses approximate their
carrying value in the consolidated financial statements due to the
short maturity of those instruments. The book value of the Company's
debt approximates fair value.
(k) 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 reported amount of assets and
liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amount of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
27
<PAGE>
Cornerstone Internet Solutions Company
Notes to Consolidated Financial Statements
May 31, 1998
3) Property and Equipment
Property and equipment, at May 31, 1998 and 1997, consists of the
following:
1998 1997 Useful Life
---- ---- -----------
Computer equipment $ 1,360,300 $ 1,060,100 3 years
Furniture and other equipment 216,500 54,300 3-5 years
Leasehold improvements 32,400 200,300 Lease Term
----------- ----------
1,609,200 1,314,700
Accumulated depreciation and
amortization
(1,123,400) (1,159,800)
----------- ----------
Property and equipment, net $ 485,900 $ 154,900
=========== ==========
(4) Long-Term Debt
Long-term debt at May 31, 1998 and 1997, consists of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Notes payable in connection with equipment financing secured by
Company assets, with interest at 9.75% 205,900 --
Other notes payable with interest at prime (8.50% at May
31,1997) -- 40,200
Less current maturities (99,500) (40,200)
--------- ---------
Long-term debt, excluding current maturities $ 106,400 $ --
========= =========
</TABLE>
Interest costs of approximately $14,600 and $33,100 were paid in
fiscal 1998 and 1997, respectively.
(5) Convertible Preferred Stock Class A and C
On December 12, 1996 the Company completed a private placement of 84
units, each consisting of 80 shares of Class A Convertible Preferred
Stock (Class A Preferred) and 50,000 common stock purchase warrants
to purchase in the aggregate 4,200,000 shares of common stock at an
exercise price of $4.00 per share and expiring December 13, 2001(the
"Warrants"). Proceeds were approximately $7,869,100, net of related
expenses of $531,000. The preferred stock has a stated value of
$1,250 per share.
On November 19, 1997 the Company offered to exchange the 4,200,000
Warrants for common stock (the "Exchange Offer"), whereby for each
2.8 warrants exchanged, the Company issued one share of its Common
Stock. In connection with the Exchange Offer the Company received
the written consent of the participating preferred shareholders to
amend the terms of the Preferred Stock to delay the date when the
Preferred Stock can first be converted into Common Stock from May 1,
1998 to July 1, 1999 and modify certain redemption features of the
Preferred Stock. Holders of 6,260 shares of preferred stock agreed
to the terms of the Exchange Offer. As a result, on February 6, 1998
the Company issued 1,397,323 shares of common stock in exchange for
the cancellation of 3,912,500 Warrants. The fair value of the common
shares issued approximated the fair value of the canceled warrants.
Subsequently the Company redesignated the 6,260 shares of Class A
Preferred held by the
28
<PAGE>
Cornerstone Internet Solutions Company
Notes to Consolidated Financial Statements
May 31, 1998
shareholders who approved the Exchange Offer as Class C Convertible
Preferred Stock (Class C Preferred). Such preferred shareholders
will receive a dividend at 12% per year of the stated value of
the preferred stock for the period from April 30, 1998 and ending
the earlier of June 30, 1999 or a redemption date, if any. The
dividend is payable in cash, common stock, or a combination thereof,
at the Company's option.
Each share of Class C Preferred is convertible at any time after
June 30, 1999 into such whole number of shares of common stock equal
to the aggregate stated value of the preferred stock to be converted
divided by the lesser of (i) $2.00 or (ii) 50% of the average
closing sale price for the common stock for the last ten trading
days in the fiscal quarter of the Company prior to such conversion.
The Company must use 33% of the proceeds from any other public
equity financing prior to January 1, 2000 to redeem the preferred
stock at 110% of the stated value. The Company also has the option
to redeem all, or any portion of on a pro rata basis, the preferred
stock at any time upon 30 days prior written notice, at a redemption
price equal to 110% of the stated value.
The conversion rate of the convertible preferred stock (when
calculated on the basis of dividing the stated value by $2.00 only)
will be subject to adjustments to protect against dilution in the
event of stock dividends, stock splits, and certain other events.
On April 27, 1998, the Company notified the holders of the Class A
Preferred that the Company would redeem the remaining 460 shares of
outstanding Class A Preferred as of May 28, 1998 at a price per
share equal to 1.1 multiplied by the stated value of each share of
Class A Preferred. Holders of 340 shares of Class A Preferred Stock
exercised their right to convert such Class A Preferred Stock to
Common Stock, which resulted in the issuance of 348,361 shares of
common stock in June 1998. 120 shares of Class A Preferred were
redeemed for $165,000 in May 1998.
In a 1997 announcement, the staff of the Securities and Exchange
Commission ("SEC") indicated that when preferred stock is
convertible at a discount from the then current common stock market
price, the discounted amount reflects at that time an incremental
yield, e.g. a "beneficial conversion feature", which should be
recognized as a return to the preferred shareholders. Based on the
market price of the Company's common stock and the fair value of the
warrants on the date of issuance, the Class A Preferred Stock had a
non-cash beneficial conversion feature of $13,390,000. The
beneficial conversion feature is recognized solely in the
calculation of loss per common share over the period, beginning with
the issuance of the preferred stock to April 30,1998, the first date
that conversion can occur. As a result, the net loss to common
shareholders included preferred stock preferences of $10,997,200 and
$2,392,800 for the years ended May 31, 1998 and 1997, respectively.
(6) Class B Convertible Preferred Stock
On February 19, 1998, the Company consummated a $2,000,000 private
placement resulting in the issuance of 2,000 shares of Class B par
value $.01 Convertible Preferred Stock (Preferred Stock). Net
proceeds to the Company were $ 1,990,800. The Preferred Stock, with
a stated value of $1,000 per share, is entitled to vote on all
matters submitted to holders of the Company's common stock, at 1,000
votes per share, pays no dividends and is not redeemable.
The conversion rights for the Preferred Stock are: if prior to March
1, 1999 the Company has a private placement or public offering of
common stock where the gross proceeds to the Company are in excess
of $2,000,000 (the financing), all of the Preferred Stock shall
automatically convert into shares of the Company's common stock
equal to the aggregate stated value of the Preferred Stock
($2,000,000) divided by the greater of (a) 90% of the per share
offering price of the
29
<PAGE>
Cornerstone Internet Solutions Company
Notes to Consolidated Financial Statements
May 31, 1998
financing or (b) $1.00. Subsequent to March 1, 1999 the Preferred
Stock is convertible into shares of common stock equal to the
aggregate stated value of preferred shares to be converted divided
by $1.00. The maximum number of common shares issuable upon
conversion of preferred stock is 2,000,000.
Based on the market price of the Company's common stock on the date
of issuance the Class B Preferred Stock had a non-cash beneficial
conversion feature of $2,250,000. The beneficial conversion feature
is recognized solely in the calculation of loss per common share
over a 14 month period, beginning with the issuance of the preferred
stock to March 1999 the first date that conversion can occur. As a
result, the net loss to common shareholders includes preferred stock
preferences of $480,600 for the year ended May 31, 1998.
(7) Stock Options and Warrants
On July 2,1998 the Company's shareholders approved an amendment to
the Company's 1994 Incentive and Stock Option Plan (the "Employee
Plan") increasing the number of shares of common stock authorized
for issuance upon exercise of the options granted pursuant to the
plan to 3,250,000. The Company also has a 1994 Stock Option Plan for
Consultants and the 1995 Stock Option Plan for Directors and has
reserved 1,000,000 and 150,000 shares, as amended, for issuance to
consultants and non-employee directors, respectively.
At May 31, 1998, 2,183,099 options have been granted and 1,066,901
are available for grant under the Employee Plan. Additionally, the
Company periodically grants stock options outside the 1994 Plan to
other parties. All stock options, which have been granted by the
Company, with the exception of those options granted to persons
holding more than ten percent of the voting common stock in the
Company on the date of grant, expire up to ten years after grant and
are issued at exercise prices which are not less than the fair value
of the stock on the date of grant. Options granted to persons
holding more than ten percent of the voting common stock of the
Company on the date of grant expire five years after grant and are
issued at exercise prices which are not less than 110 percent of the
fair value of the stock on the date of grant. Stock options
generally vest monthly in equal increments over the first three
years after the date of grant. Payment for the exercise price of an
option may be made with previously acquired common stock of the
Company with certain limitations.
In November 1994, a total of 250,000 options were granted to two
consultants (one of which was a former director of the Company)
under the 1994 Stock option plan for consultants for advisory
services. The options are exercisable for 10 years from date of
grant at an exercise price of $3.75. In fiscal 1997, the Company
granted 400,000 options to a partnership, which provides consulting
services to the Company. The options are exercisable for a three
year period from the date of grant at an exercise price of $2.375.
The expense related to the services was recognized over the one-year
vesting period. In addition, in fiscal 1998 and 1997, 75,000 and
214,080 options, respectively, were granted to various consultants
at exercise prices ranging from $1.75 to $3.00. Each are exercisable
for periods from five to ten years from the date of grant. The
expense relating to the services is being recognized over the
vesting periods which range from zero to one year. Total stock
option compensation expense for fiscal 1998 and 1997 was $210,000
and $475,000 , respectively. A total of 460,920 options remain
available for grant under the consulting plan.
30
<PAGE>
Cornerstone Internet Solutions Company
Notes to Consolidated Financial Statements
May 31, 1998
(7) Stock Options and Warrants (continued)
Under the 1995 Stock Option Plan for Outside Directors, each person
who is an outside director on January 1 of each calendar year,
commencing January 1, 1995, shall be granted 5,000 options to
purchase shares of common stock of the Company. At May 31, 1998,
65,000 options have been granted under the 1995 Stock Option Plan
for Outside Directors and 85,000 are available for grant.
A summary of all stock option transactions of the Company is as
follows:
<TABLE>
<CAPTION>
Number of Price range Weighted
--------- ----------- --------
options per share average price
------- --------- -------------
<S> <C> <C> <C>
Outstanding at May 31, 1996 1,109,770 $1.71 - 3.75
Granted 2,202,580 $1.63 - 3.75
Exercised (23,006) $3.00 - 3.25
Canceled (155,954) $1.63 - 3.75
Outstanding at May 31, 1997 3,133,390 $1.63 - 3.75 $2.53
Granted 989,500 $1.13 - 3.50
============
Exercised (115,489) $1.71 - 2.35
============
Cancelled (648,950) $1.63 - 3.00
--------- ============
Outstanding at May 31, 1998 3,358,451 $1.13 - $3.75 $2.63
--------- ============= =============
Exercisable at May 31, 1998 2,275,784 $1.13 - $3.75 $2.02
--------- ============= =============
</TABLE>
The options outstanding as of May 31, 1998 are summarized in ranges
as follows:
<TABLE>
<CAPTION>
Weighted Average Number of Options Weighted Average
Range of Exercise Price Exercise Price Outstanding Remaining Life
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$1.13 - $2.41 $2.06 2,075,288 4 Years
$2.42 - $3.75 $3.54 1,283,163 3 Years
---------------
3,358,451
===============
</TABLE>
The per share weighted-average fair value of stock options granted
during fiscal 1998 and 1997 was $1.12 and $1.17, respectively, on
the date of grant using the Black Scholes option-pricing model with
the following weighted-average assumptions: 1998 - expected dividend
yield of 0%, risk free interest rate of 6%, expected stock
volatility of 54%, and an expected option life of 5 years; 1997-
expected dividend yield of 0%, risk free interest rate of 6%,
expected stock volatility of 54%, and an expected option life of 5
years.
The company applies APB Opinion No. 25 in accounting for its stock
option grants and, accordingly, no compensation cost has been
recognized in the financial statements for its employee and director
stock options which have an exercise price equal to or greater than
the fair value of the stock on the date of the grant. Had the
Company determined compensation costs based on the fair value at the
grant date for its stock options under SFAS No.123, the Company's
net loss to common shareholders and net loss per common share would
have been increased to the pro forma amounts indicated below.
31
<PAGE>
Cornerstone Internet Solutions Company
Notes to Consolidated Financial Statements
May 31, 1998
(7) Stock Options and Warrants (continued)
1998 1997
Net loss:
As reported ($18,421,600) ($10,629,500)
Pro forma ($18,959,000) ($11,056,900)
Net loss per share:
As reported ($2.21) ($1.38)
Pro forma ($2.24) ($1.44)
Pro forma net loss reflects only options granted in fiscal 1996 and
thereafter. Therefore, the full impact of calculating compensation
cost for stock options under SFAS No. 123 is not reflected in the
pro forma net loss amounts presented above because compensation cost
is reflected over the options' vesting period and compensation cost
for options granted prior to June 1, 1995 was not considered.
In fiscal 1998, the Company offered to exchange one share of common
stock for twenty of its publicly traded warrants. Of the 5,121,468
warrants outstanding at the time, 4,977,280 warrants were exchanged
for 248,864 shares of common stock on October 14,1997 and the
balance expired unexercised on October 20, 1997. The fair value of
the common shares issued approximated the fair value of the
exchanged warrants.
At May 31, 1998, the Company had reserved, authorized and unissued
common shares for the following purposes (excluding those for stock
options and convertible preferred stock):
<TABLE>
<CAPTION>
Shares of
Common
Exercise Stock Expiration
Price Issuable
===========================================
<S> <C> <C> <C>
Warrants issued in connection with a convertible
preferred stock offering $4 287,500 December, 2001
Warrants issued with private placement $2.35 340,000 January, 1999
Unit purchase options for one share of common stock $6.60 200,000 October, 1999
Stock purchase rights sold to underwriter $3.71 210,000 May, 2001
===========
Total 1,037,500
===========
</TABLE>
Cornerstone Internet Solutions Company
Notes to Consolidated Financial Statements
May 31, 1998
(8) Income Taxes
The actual income tax benefit for fiscal 1998 and 1997 differs from
the "expected" income tax benefit, computed by applying the U.S.
Federal corporate tax rate of 34 percent to loss before income
taxes, as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Computed "expected" tax benefit $(2,360,900) $(2,800,500)
Increase in income taxes resulting from:
Non-deductible expenses 78,200 532,400
Increase in valuation allowance, primarily due to 2,268,100
Federal net operating loss carryforwards 2,282,700
-----------------------------------
Actual tax benefit - -
===================================
</TABLE>
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities at May 31, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $8,206,000 $5,946,800
Allowance for doubtful accounts receivable and returns 36,900 23,800
Accrued expenses 19,700 25,800
Research and development credit carryforward 127,300 127,800
Property and equipment depreciation 30,900 13,900
Valuation allowance (8,420,800) (6,138,100)
---------------------------------
Net deferred tax asset -- --
=================================
</TABLE>
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or
the entire deferred tax asset will be realized. The ultimate
realization of the deferred tax asset is dependent upon the
generation of future taxable income during the periods in which
temporary differences become deductible or operating losses are
carried forward. The Company does not believe that it is more likely
than not that it will realize its deferred tax asset and has
established a valuation allowance of $8,420,800 and $6,138,100 at
May 31, 1998 and 1997, respectively based upon the provisions of
Statement of Financial Accounting Standards No. 109, the Company's
historical taxable losses and lack of offsetting objective evidence,
and that management cannot currently determine whether the Company
will generate taxable income during the remainder of the net
operating loss carryforward period.
At May 31, 1998, the Company had available approximately $24,136,000
of tax loss carryforwards, which expire in the years 2009 through
2013. The utilization of certain of these tax loss carryforwards is
subject to annual limitations imposed by the Internal Revenue Code
Section 382 due to the Company's various equity transactions.
33
<PAGE>
Cornerstone Internet Solutions Company
Notes to Consolidated Financial Statements
May 31, 1998
(9) Employee Benefit Plan
The Company sponsors an employee savings plan under Section 401(k)
of the Internal Revenue Code (IRC) that covers substantially all
employees of the Company who elect to participate on a voluntary
basis. Participants may authorize salary deferral amounts under the
plan up to 15 percent of their compensation limited to a maximum
amount stipulated in the IRC. The plan also provides for a
discretionary Company contribution, which is determined by the Board
of Directors. No discretionary Company contributions were made
during the years ended May 31, 1998 and 1997.
(10) Commitments
Rent expense for operating leases for 1998 and 1997 approximated
$317,800 and $204,100, respectively. The Company leases office space
under non-cancelable operating leases, which expire at various times
through 2003. Minimum future rentals by fiscal year for operating
leases with noncancellable terms in excess of one year offset by
sublease income are as follows:
1999 - $211,500
2000 - $209,000
2001 - $209,600
2002 - $229,600
2003 - $133,500
(11) Business and Credit Concentrations
In fiscal 1998 there were three customers that individually
comprised more than 10% of revenue and in the aggregate amounted to
52 % of accounts receivable and 45% of total revenues. In 1997 there
were no customers that individually comprised more than 10% of
revenue.
(12) Subsequent Events
On July 24, 1998 the Company consummated a private placement of
1,768,750 unregistered shares of Common Stock, for $1 per share .
The net proceeds of the offering were approximately $1,510,000.
34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
CORNERSTONE INTERNET SOLUTIONS COMPANY
Date: August 28, 1998 By: Edward Schroeder
----------------
Edward Schroeder
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the persons on behalf of the registrant and in the
capacities and on the date indicated.
Name Title Date
Andrew Gyenes August 28, 1998
- ------------------
Andrew Gyenes Chairman of the Board
Kenneth Gruber Vice President, Chief Financial August 28, 1998
- ------------------ Officer (Principal Accounting Officer)
Kenneth Gruber
Rino Bergonzi Director August 28, 1998
- ------------------
Rino Bergonzi
Peter Gyenes Director August 28, 1998
- ------------------
Peter Gyenes
Harrison Weaver Director August 28, 1998
- ------------------
Harrison Weaver
35
<PAGE>
Consent of Independent Auditors
The Board of Directors
Cornerstone Internet Solutions Company:
We consent to incorporation by reference in the registration statement (No.
333-06780) on Form S-3 and registration statements (No. 33-04038 and No.
33-97208) on Form S-8 of Cornerstone Internet Solutions Company (formerly
Enteractive, Inc.) of our report dated August 14, 1998, relating to the
consolidated balance sheets of Cornerstone Internet Solutions Company and
subsidiaries as of May 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
then ended, which report appears in the May 31, 1998 annual report on Form
10-KSB of Cornerstone Internet Solutions Company.
Our report dated August 14, 1998, contains an explanatory paragraph that states
that the Company has suffered recurring losses from operations and has a working
capital deficiency, which raise substantial doubt about its ability to continue
as a going concern. The financial statements do not include any adjustments that
might result from the outcome of that uncertainty.
KPMG PEAT MARWICK LLP
New York, New York
August 25, 1998
36
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
/ X / QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 1998
/ / TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
For the transition period from __________ to _______________
Commission file number: 1-13360
ENTERACTIVE, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 22-3272662
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
25 West 45th Street, Suite 306, New York, NY 10036
(Address of Principal Executive Offices)
(212) 768-7100
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 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 / /
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date:
Number Outstanding
Title of Class as of March 31, 1998
-------------- --------------------
Common Stock, $.01 Par Value 9,424,933
Transitional Small Business Disclosure Format: Yes / / No /X/
<PAGE>
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page
Item 1 Financial Statements
Consolidated Balance Sheets at February 28, 1998 and May 31, 1997 3
Consolidated Statements of Operations for the nine months
and three month period ended February 28, 1998, and
February 28, 1997 respectively. 4,5
Consolidated Statements of Cash Flows for the nine months
ended February 28, 1998 and February 28, 1997. 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
,
PART II - OTHER INFORMATION
Page
Item 1. Legal Proceedings 12
Item 2. Change in Securities 12
Item 3. Defaults upon Senior Securities 12
Item 4. Submissions of Matters to a Vote by Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
2
<PAGE>
ENTERACTIVE INC. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
February 28, 1998
ASSETS (unaudited) May 31, 1997
--------------------------------------
Current Assets
<S> <C> <C>
Cash and cash equivalents $ 2,085,700 $ 4,952,900
Investments 115,100 --
Accounts receivable, net 280,100 224,400
Other Receivables 56,100 --
Assets held for sale -- 100,000
Prepaid expenses and other 185,400 93,800
------------ ------------
Total current assets 2,722,400 5,371,100
Affiliation rights, net 546,900 593,800
Property and equipment, net 550,500 154,900
Other 125,500 61,500
------------ ------------
$ 3,945,300 $ 6,181,300
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 440,000 $ 287,900
Accrued restructuring expenses 221,600 --
Accrued payroll and related expenses 83,700 79,500
Other accrued expenses 489,600 544,500
Deferred revenue -- 69,500
Current maturities of long-term debt 120,900 40,200
------------ ------------
Total current liabilities 1,355,800 1,021,500
Long-term debt 148,800 --
------------ ------------
1,504,600 1,021,500
Stockholders' Equity
Preferred Stock $.01 par value, 2,000,000 shares authorized:
Series A 6,720 shares issued and outstanding 100 100
Series B 2,000 and no shares issued and outstanding at
February 28, 1998 and May 31, 1997 100 --
Common Stock $.01 par value, 50,000,000 shares authorized;
9,423,933 and 7,679,441 shares issued and outstanding at
February 28,1998 and May 31,1997 94,200 76,800
Additional paid-in capital 30,246,000 28,038,400
Unrealized Gain on marketable equity securities 115,100
Accumulated deficit (28,014,800) (22,955,500)
------------ ------------
Total stockholders' equity 2,440,700 5,159,800
------------ ------------
Total Liabilities and Stockholders' equity $ 3,945,300 $ 6,181,300
============ ============
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
ENTERACTIVE INC. and Subsidiaries
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended
February 28 February 28
1998 1997
-----------------------------------
<S> <C> <C>
Net product sales $ -- $ 115,200
Internet services revenues 426,200
Software licensing and royalty revenue 74,000 152,600
----------- -----------
Total revenues 500,200 267,800
Cost of product sales -- 113,600
Amortization of capitalized software -- 107,000
Cost of Internet services revenues 617,000 --
Cost of software licensing and royalty revenue 6,100 --
Research and development expenses -- 686,200
Marketing and selling expenses 610,100 913,600
General and administrative expenses 494,700 504,700
----------- -----------
Total costs and expenses 1,727,900 2,325,400
=========== ===========
Operating loss (1,227,700) (2,057,600)
----------- -----------
Other income (expense):
Interest expense (4,600) (10,900)
Other income/expense (900)
Interest income 11,300 81,800
----------- -----------
Net Loss $(1,221,900) $(1,986,700)
=========== ===========
Preferred stock preferences (1997 restated - Note 5) (3,596,900) (932,100)
----------- -----------
Net loss to common shareholders (1997 restated - Note 5) $(4,818,800) $(2,918,800)
----------- -----------
Basic and diluted loss per common share (1997 restated - Note 5)
$ (0.57) $ (0.38)
=========== ===========
Weighted average shares of common stock outstanding 8,380,656 7,679,441
=========== ===========
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
ENTERACTIVE INC. and Subsidiaries
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
February 28, February 28,
1998 1997
------------------------------------
<S> <C> <C>
Net product sales -- 881,300
Product development revenue -- 40,700
Internet services revenues 944,500 --
Software licensing and royalty revenue 206,400 527,900
----------------------------------
Total revenues 1,150,900 1,449,900
Cost of product sales -- 462,500
Amortization of capitalized software -- 321,200
Cost of development revenue -- 37,000
Cost of internet services revenues 1,919,400 --
Cost of software licensing and royalty revenue 28,300 --
Research and development expenses -- 2,126,400
Marketing and selling expenses 2,362,600 2,719,900
General and administrative expenses 1,553,500 1,412,115
Restructuring expenses 427,700
----------------------------------
Total costs and expenses 6,291,500 7,079,000
----------------------------------
Operating loss (5,140,600) (5,629,100)
----------------------------------
Other income (expense):
Interest expense (8,000) (33,100)
Other income (expense) (900) 6,900
Interest income 90,200 165,200
----------------------------------
Net loss (5,059,300) (5,490,100)
==================================
Preferred stock preferences (1997 restated - Note 5) (8,157,700) (932,100)
----------------------------------
Net loss to common shareholders (1997 restated - Note 5) $(13,217,000) $ (6,422,200)
----------------------------------
Basic and diluted loss per common share (1997 restated - Note 5) $ (1.66) $ (0.84)
==================================
Weighted average shares of common stock outstanding 7,965,846 7,679,295
==================================
</TABLE>
See notes to consolidated financial statements
5
<PAGE>
ENTERACTIVE INC. and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended February 28,
1998 1997
--------------------------------
Cash flows from Operating Activities
<S> <C> <C>
Net Loss $(5,059,300) $(5,490,100)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization 134,000 462,100
Stock option consulting expense -- 356,300
Changes in assets and liabilities
Accounts receivable (55,700) (77,400)
Income taxes receivable -- 16,400
Assets held for sale 43,900 --
Inventories -- (78,600)
Prepaid expenses and other (91,600) (200)
Other assets (64,000) --
Accounts payable 152,100 (508,300)
Accrued expenses 171,000 (840,100)
Deferred revenue (69,500) --
--------------------------------
Net cash used in operating activities (4,839,100) (6,159,900)
Cash flows from investing activities
Purchase of franchise rights -- (625,000)
Purchases of property and equipment (482,700) (60,100)
--------------------------------
Net cash (used in) investing activities (482,700) (685,100)
Cash flows from financing activities
Proceeds from issuance of convertible preferred stock 2,000,000 7,869,100
Proceeds from exercise of stock options 225,100 73,500
Proceeds from sale and leaseback of equipment 250,100 --
Principal payments under long-term debt (20,600) (586,300)
--------------------------------
Net cash provided by financing activities 2,454,600 7,356,300
--------------------------------
Net increase (decrease) in cash and cash equivalents (2,867,200) 511,300
Cash and cash equivalents
Beginning of period 4,952,900 6,005,400
--------------------------------
End of period $ 2,085,700 $ 6,615,700
================================
</TABLE>
See notes to consolidated financial statements
6
<PAGE>
ENTERACTIVE, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
General
The accompanying, unaudited financial statements have been prepared in
accordance with the instructions to Form 10-QSB and in the opinion of
management contain all adjustments, (consisting of only normal
recurring entries), necessary to present fairly the financial position
of Enteractive, Inc, (the "Company") as of February 28, 1998 and the
results of its operations and its cash flows for the nine month, and
three month periods ended February 28,1998. Certain information and
footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
omitted. The interim financial statements should be read in conjunction
with the Company's financial statements and related notes in the May
31, 1997 Annual Report on Form 10-KSB. The results for the nine month
period ended February 28, 1998 are not necessarily indicative of the
results to be obtained for the full year.
2. Business
Headquartered in New York, New York, Enteractive, Inc. (the "Company")
is a provider of business solutions based on internet technologies. In
August 1997, the Company sold its domestic distribution rights,
inventory and certain accounts receivable from its interactive
multimedia publishing business to a third party. The Company's address
is 25 West 45th Street, Suite 306, New York, New York 10036 and its
telephone number is (212) 768-7100. Its World Wide Web site address is
http://www.crstone.com.
Throughout the first half of fiscal 1997, the Company was primarily
engaged in the development, publishing and marketing of multimedia
interactive software with an emphasis on the CD-ROM platform. As a
result of a rigorous review of the CD-ROM market, the Company's
performance and the related risks of continuing to develop and market
interactive multimedia titles, the Company concluded that it could
capitalize on what the Company believes to be a vibrant market and upon
its expertise in development by redirecting its business to provide
network and web-related solutions, products and services to businesses
and other entities.
On December 4, 1996, the Company entered into an agreement (the
"Enteractive Affiliates Agreement") with USWeb Corporation ("USWeb")
pursuant to which the Company became an affiliate of USWeb and a member
of USWeb's network of independent affiliates (the "USWeb Network").
Under the Affiliates Agreement, the Company paid $625,000 for the right
to operate USWeb affiliate offices in certain localities for 10 years
as provided below. USWeb is a public company whose principal investors
include Intel, Softbank Corporation, which owns Comdex and Ziff-Davis
Publishing, 21st Century Communications Partners L.P. ( significant
stockholder of the Company), Wheatly Partners L.P. and Reuters. USWeb
is seeking to capitalize on the service opportunities presented by the
increasing use of the Internet and Intranets as commercial tools. The
Company has formed a subsidiary, Enteractive Network Solutions Inc.,
doing business as USWeb Cornerstone. The Company will focus on three
primary practice areas:
Business Applications Practice - Focuses on the automation of core
internal and external business processes through the use of internet
technology. Intranets and extranets deliver business applications
through secure internet technologies, and they can greatly increase
productivity and reduce overall costs while helping an organization
react quickly to changes in business and technology environments.
Media Asset Management Practice - Enables corporations to manage the
rapidly growing volumes of digital assets and to integrate them into
business processes. Automating the creative and approval workflow,
ensuring the consistency and integrity of a brand, repurposing or
reexpressing existing assets to support various functions (training and
marketing for example) provide opportunities to reduce cycle time and
costs. The use of Internet technologies tightly integrated with
database and storage technologies should enable clients to realize
enormous returns in this area.
Electronic Commerce Practice- Building electronic commerce solutions
requires a detailed understanding of the relative strengths and
weaknesses of the competing e-commerce product and service offerings,
internet marketing savvy, and the skills to address the underlying
financial, technology and security issues involved. There is a need to
provide a wide range of e-commerce solutions from catalog merchant
sites to large, sophisticated business - to - business systems
stretching across many value chains
The Company is obligated to pay USWeb monthly fees equal in the
aggregate to 7% of adjusted gross revenues from this business, as
defined in the agreement, but not less than certain contractual fee
levels.
7
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By November 30, 1997 the Company, with the approval of USWeb, decided
that it could more cost effectively service the territories covered
under the franchise agreement with USWeb by closing its affiliate
offices in New Jersey, Long Island, NY Philadelphia, PA , Baltimore,
MA, and Stamford CT., and operate from offices located in New York
City. The statement of operations for the nine month period ended
February 28, 1998 reflects expenses totaling $427,700 to reflect the
Company's estimated losses from subleasing the closed offices and the
severance associated with eliminating positions deemed unnecessary by
management.
3. Affiliate Rights
Fees for affiliation rights were paid to USWeb for the right to join
the USWeb network and operate as an affiliate in the territories
indicated in note 2. The fee is being amortized over the 10-year life
of the agreement with USWeb. Affiliation rights at February 28,1998
were net of accumulated amortization of $78,125.
4. 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 reported amount of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amount of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
5. Private Placement of Series A Preferred Stock and Common Stock Purchase
Warrants On December 12, 1996 the Company completed a private placement
of 84 units each consisting of 80 shares of Class A Convertible
Preferred Stock (Preferred Stock") and 50,000 common stock purchase
warrants ("December 1996 Warrants") to purchase in the aggregate
4,200,000 shares of common stock $0.01 par value (the "Common Stock")
at an exercise price of $4.00 per share. The Preferred Stock has a
stated value of $1,250 per share and each share was convertible at any
time after April 30, 1998 into such whole number of shares of common
stock equal to the aggregate stated value of the Preferred Stock to be
converted divided by the lesser of (i)$2.00 or (ii) 50% of the average
closing sale price for the common stock for the last ten trading days
in the fiscal quarter of the Company prior to such conversion. In a
1997 announcement, the staff of the Securities and Exchange Commission
("SEC") indicated that when preferred stock is convertible at a
discount from the then current common stock market price, the
discounted amount reflects at that time an incremental yield, e.g. a
"beneficial conversion feature", which should be recognized as a return
to the preferred shareholders. Based on the market price of the
Company's Common Stock and the fair value of the December 1996 Warrants
on the date of issuance, the Preferred Stock had a non cash beneficial
conversion feature of $13,390,000. The beneficial conversion feature is
recognized solely in the calculation of loss per common share over a 17
month period, beginning with the issuance of the Preferred Stock to
April 30, 1998 the first date that conversion can occur. The impact on
loss per common share is $ 0.42 and $1.01 in the three and nine months
ended February 28, 1998. The loss per common share for the three and
nine month periods ending February 28, 1997 have been restated to
reflect an increase of $.12 as a result of the SEC announcement.
6. Warrant Exchanges
On September 16, 1997, the Company offered to exchange (the "Exchange
Offer") twenty of its publicly-traded Common Stock Purchase Warrants
(the "Warrants") expiring October 20, 1997 for one share of
newly-issued Common Stock. On September 16, 1997, there were 5,121,468
Warrants outstanding. The purpose of the Exchange Offer was to reduce
the overhang to the market for the Company's Common Stock. On October
14, 1997 the company issued 248,864 shares of Common Stock in exchange
for 4,977,280 Warrants. The balance of the outstanding Warrants expired
unexercised.
On November 19, 1997 the Company offered to the holders of 4,200,000
December 1996 Warrants to issue one share of Common Stock for 2.8
December 1996 Warrants. The exchange offer as amended was conditioned
on at least 90% of holders of the December 1996 Warrants agreeing to
the exchange and expired on February 4, 1998. The December 1996
Warrants subject to the offer entitled the registered holder to
purchase through December 13, 2001 one share of Common Stock at an
exercise price of $4.00 per share. As a condition to closing the
amended exchange offer, the Company sought the consent of at least 90%
of all the holders of its Preferred Stock to (1) delay the date when
the Preferred Stock would first be converted into Common Stock from
April 30, 1998 until any time after June 30, 1999 and (2) modify the
redemption feature so that one-third, rather than 50%, of the net
proceeds from any public equity offering consummated by the Company
prior to January 1, 2000 would be used to redeem the outstanding
Preferred Stock and (3) if the closing price of the Company's common
Stock is at least $6.00 for 10 trading days in any 30 day period, the
Company will use its best efforts to complete an underwritten offering
of its Common Stock. All holders of Preferred Stock who approved the
delay in the conversion date will receive also a special monthly
dividend equal to 12% per annum of the stated value of the Preferred
Stock ($1,250 per share) for the period commencing April 30, 1998 and
ending the earlier of (1) June 30, 1999 or (2) the redemption date, if
8
<PAGE>
any of the Preferred Stock. Such payment may be made, at the Company's
option in either cash or additional shares of its Common Stock or a
combination thereof. Such payments will be made at the later of (1) the
time it redeems the Preferred Stock, or (2) July 10, 1999 (if the
Company does not redeem the Preferred Stock on or before June 30,
1999). On February 6, 1998 the company issued 1,397,323 shares of
Common Stock in exchange for 3,912,500 December 1996 Warrants which
were exchanged as part of the Exchange Offer. The holders of
approximately 93% of the Preferred Stock agreed to amend the terms of
the Preferred Stock.
7. Private Placement of Series B Preferred Stock
On February 20, 1998, the Company closed a $2,000,000 private
placement. The Company issued Series B par value $.01 Convertible
Preferred Stock (Series B Preferred Stock). The Series B Preferred
Stock has a stated per share value of $1,000, is entitled to vote on
all matters submitted to holders of the Common Stock, pays no dividends
and is not redeemable. The Series B, Preferred Stock is not convertible
until March 1, 1999 unless the Company has a private placement or
public offering of Common Stock where the gross proceeds to the Company
are in excess of $2,000,000 (the Financing). Upon the closing of a
Financing all of the Series B Preferred Stock shall automatically
convert into shares of the Company's Common Stock equal to the
aggregate stated value of the Series B Preferred Stock ($2,000,000)
divided by the greater of (a) 90% of the per share offering price of
the financing or (b) $1.00. Subsequent to March 1, 1999 the Series B
Preferred Stock is convertible into shares of Common Stock equal to the
aggregate stated value of preferred shares to be converted divided by
$1.00. The maximum number of common shares issuable upon conversion of
preferred stock is 2,000,000.
In a 1997 announcement, the staff of the Securities and Exchange
Commission ("SEC") indicated that when preferred stock is convertible
at a discount from the then current common stock market price, the
discounted amount reflects at that time an incremental yield, e.g. a
"beneficial conversion feature", which should be recognized as a return
to the preferred shareholders. Based on the market price of the
Company's common stock on the date of issuance the Series B Preferred
Stock had a non cash beneficial conversion feature of $2,250,000. The
beneficial conversion feature is recognized solely in the calculation
of loss per common share over the period, beginning with the issuance
of the Series B Preferred stock to March 1999 the first date that
mandatory conversion can occur. The impact on loss per common share is
$0.01 in the three and nine months ended February 28, 1998.
Item 2
Management's Discussion and Analysis of Financial Condition and Results
of Operations
The discussion and analysis below should be read in conjunction with
the Financial Statements of Enteractive and the Notes to Financial
Statements included elsewhere in this Form 10-QSB.
Overview
The Company was formed in December 1993 to develop, publish and market
interactive multimedia software products. On December 4, 1996 the
Company signed an agreement with USWeb Corporation under which the
Company has established a subsidiary to operate in New York and the
exclusive rights in Long Island, Philadelphia, Baltimore, Stamford, CT
and Bergen County and Newark, NJ. USWeb Cornerstone, the subsidiary,
provides a full range of Internet and Intranet-based business
solutions; including Web site design, hosting and management, design
and implementation of database and e-commerce solutions, and
Web-related strategic consulting and marketing.
Quarterly results
Since signing the affiliate agreement with USWeb Corporation, the
Company has been building infrastructure to support anticipated sales.
The Company monitors and adjusts expense levels to support the revenue
stream. By May 31, 1997, the Company no longer utilized significant
resources for development or marketing of multimedia products and
consequently most comparisons to the previous years' periods are not
applicable.
By November 30, 1997 the Company, with the approval of USWeb, decided
that it could more cost effectively service the territories covered
under the franchise agreement with USWeb by closing its affiliate
offices in New Jersey, Long Island, NY Philadelphia, PA , Baltimore,
MA, and Stamford CT., and operate from offices located in New York
City. The statement of operations for the nine month period ended
February 28, 1998 reflects expenses totaling $427,700 for the Company's
estimated losses from subleasing the closed offices and the severance
associated with eliminating positions deemed unnecessary by management.
The Company expects its quarterly results to vary significantly in the
future. The number of customer contracts signed and fulfilled
significantly influence revenues. Further market acceptance of the
Company's offerings is dependent on (1) the growth and utilization of
the Internet as a medium for commerce, (2) the success of USWeb
establishing and positioning the USWeb brand in the territories where
the Company operates and (3) the success of offerings by competitors.
The Company does not expect seasonal factors to be a significant
influence on revenues.
9
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Results of Operations - Quarter and Nine Months Ended February 28, 1998
Net product sales for the three and nine month periods ended February
28, 1998 were $0 compared to $115,200 and $881,300 for the three and
nine month periods ended February 28, 1997. The decrease is due to the
Company's decision to license others to market and distribute its
interactive multimedia products. Revenues from these relationships in
fiscal 1998 are reflected as royalties. Prospectively, the Company does
not expect any revenues from CD-ROM title sales other than royalty
income as discussed below.
Internet services revenue for the three and nine month periods ended
February 28, 1998 were $426,200 and $944,500 respectively compared to
$0 for the three and nine month periods ended February 28, 1997. These
revenues consist of consulting and services revenues from USWeb
Cornerstone, which began operations in the current fiscal year.
Software Licensing and Royalty revenue for the three and nine month
periods ended February 28, 1998 were $74,000 and $206,400 respectively
compared to $152,600 and $527,900 for the three and nine month periods
ended February 28, 1997. The decrease is the result of the Company's
decision to focus on the Internet business of USWEB Cornerstone. The
royalties relate to sales of titles, all of which were first marketed
over 12 months ago. This revenue stream is expected to continue to
diminish as the titles continue to age.
Cost of Internet Services Revenue for the three and nine month periods
ended February 28, 1998 were $617,000 and $1,919,400 respectively
compared to 0 for the three and nine month periods ended February 28,
1997. The Company's Internet Services revenues increased as a
percentage of cost from 40% through the six months ended November 30,
1997 to 69% for the three months ended February 28, 1998. This increase
is principally the result of higher revenues. For the three months,
ended February 28, 1998 revenues averaged $142,000 per month compared
to $86,000 per month for the 6 months ended November 30, 1997.
Research and Development expenses were $0 in the three and nine month
periods ended February 28, 1998, compared to $686,200 and $2,126,400
for the three and nine month periods ended February 28, 1997. The
decrease is due to the Company's decision to focus on the Internet
business of USWeb Cornerstone and elimination of interactive
multi-media product development.
Marketing and selling expenses for the three and nine month periods
ended February 28, 1998 were $610,100 and $2,362,600 respectively
compared to $913,600 and $2,719,900 for the three and nine month
periods ended February 28, 1997. Year over year comparisons of
marketing and selling are not meaningful because the current year
expenses relate to the Internet Services business of USWeb Cornerstone.
The costs in fiscal 1997 relate to the selling and marketing of
interactive multi-media products. During the quarter ended February 28,
1998, average monthly marketing expenses were $203,000 compared to
$318,000 for the quarter ended November 30, 1997. This decrease is the
result of the Company's decision to consolidate its sales facilities
and operations and eliminate redundant positions.
General and administrative expenses for the three and nine month
periods ended February 28, 1998 were $494,700 and $1,553,500
respectively compared to $504,700 and $1,412,115 for the three and nine
month periods ended February 28,1997. General and administrative
expenses include costs for accounting, information systems, human
resources, legal, general facilities and senior executives.
Interest and other income includes interest and dividend payments on
cash balances. Interest and other income for the three and nine month
periods ended February 28, 1998 were $11,300 and $90,200 respectively
compared to $81,800 and $165,200 for the three and nine month periods
ended February 28, 1997 due to lower cash balances.
No income tax benefit was recorded for the quarter ended February
28,1998. The Company does not believe it will generate taxable income
for the period ending May 31, 1998. Beyond such time, using the
standards set forth in Financial Accounting Standard No. 109,
management cannot currently determine whether the Company will generate
taxable income during the period that the Company's net operating loss
carry forward may be applied towards the Company's taxable income, if
any. Accordingly, the Company has established a valuation allowance
against its deferred tax asset.
10
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Liquidity and Capital Resources
Since June 1, 1995, the Company's principal sources of capital have
been as follows:
a) On February 20, 1998 the Company closed a $2,000,000 private
placement. The Company issued Series B par value $.01 Convertible
Preferred Stock ("Series B Preferred Stock"). The Series B Preferred
Stock has a stated per share value of $1,000, is entitled to vote on
all matters submitted to holders of the Company's Common Stock, pays no
dividends and is not redeemable. The Series B Preferred Stock is not
convertible until March 1, 1999 unless the Company has a private
placement or public offering of common stock where the gross proceeds
to the Company are in excess of $2,000,000 (the "Financing"). Upon the
closing of a Financing all of the Series B Preferred Stock shall
automatically convert into shares of the Company's Common Stock equal
to the aggregate stated value of the Series B Preferred Stock
($2,000,000) divided by the greater of (a) 90% of the per share
offering price of the financing or (b) $1.00. Subsequent to March 1,
1999 the Series B Preferred Stock is convertible into shares of common
stock equal to the aggregate stated value of preferred shares to be
converted divided by $1.00. The maximum number of common shares
issuable upon conversion of preferred stock is 2,000,000.
b) On December 12, 1996 the Company completed a private placement of 84
units each consisting of 80 shares of Preferred Stock and 50,000
December 1996 Warrants to purchase in the aggregate 4,200,000 shares of
common stock at an exercise price of $4.00 per share. Proceeds were
approximately $7,869,000, net of related expenses of $531,000. The
Preferred Stock has a stated value of $1,250 per share. As further
described in Note 6 to the Consolidated Financial Statements on
February 6, 1998 the Company completed a Warrant Exchange offer under
which the Company issued 1,397,323 shares of Common Stock in exchange
for 3,912,500 warrants and amended the terms of the Preferred Stock for
holders who participated in the Warrant Exchange.
In May 1996, the Company consummated an agreement with certain of its
former officers pursuant to which the Company repurchased 1,000,000
shares of Common Stock at $1.00 per share. Under the purchase agreement
as amended, the Company has paid all but $40,200 of the purchase price,
which is due in May 1998.
During the third quarter of fiscal 1998, the Company sold and leased
back equipment under a three-year sale/leaseback agreement with a
leasing company secured by the company's accounts receivable and
equipment. The Company received $250,000 which approximated the net
book value of the equipment. The effective interest rate of the lease
is 8 1/2% and the monthly payment is $10,080.
At February 28, 1998, the Company had cash and cash equivalents of
$2,085,700. The decrease of $2,867,300 in cash, and cash equivalents
from May 31, 1997 reflects the funding of operating activities of
$4,926,000, and the purchase of fixed assets of $483,000 partially
offset by the proceeds from the February 1998 private placement, sale
and leaseback of equipment discussed above, and proceeds from the
exercise of stock options.
Capital expenditures were $482,700 for the nine months ended February
28, 1998 compared to $60,100 for the nine months ended February 28,
1997. The Company's higher fiscal 1998 capital expenditures result from
acquiring equipment required for the US Web affiliate sales offices.
The Company does not anticipate significant capital expenditures for
the remaining of the fiscal year.
In August 1997, Nasdaq enacted new standards for the listing of its
member companies on its Small Cap Market. These standards, which took
effect on February 23, 1998, require listed companies to maintain
certain financial and corporate governance criterion for continued
listing on the SmallCap market.. As of February 28,1998, the Company
meets the financial criterion for continued listing on the SmallCap
market. After such standards take effect, companies that do not meet
the new standards could be subject to de-listing from the SmallCap
market. There can be no assurances that the Company will be able to
maintain compliance with the Nasdaq listing standards. The failure to
meet the maintenance criteria in the future may result in the Common
Stock no longer being eligible for quotation on Nasdaq and trading, if
any, of the Common Stock would thereafter be conducted in the
non-nasdaq over - the -counter market. As a result of such delisting of
the Common Stock from Nasdaq, it may be more difficult for investors to
dispose of, or to obtain accurate quotations as to the market value of,
the Common Stock.
Forward looking statements
This Form 10-QSB contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended and
Section 21E of the Securities Exchange Act of 1934, as amended, which
are intended to be covered by the safe harbors created thereby.
Investors are cautioned that all forward-looking statements involve
risks and uncertainty,
11
<PAGE>
including without limitation, the ability of the Company to develop its
products, the success of its USWeb Cornerstone subsidiary as well as
general market conditions, competition and pricing. Although the
Company believes that the assumptions underlying the forward-looking
statements contained herein are reasonable, any of the assumptions
could be inaccurate, and therefore, there can be no assurance that the
forward-looking statements included in this Form 10-QKSB will prove to
be accurate. In light of significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such
information should not be regarded as a representation by the Company
or any other person that the objectives and plans of the Company will
be achieved.
Inflation
The past and expected future impact of inflation on the financial
statements is not significant.
Item 1. Legal Proceedings
None
Item 2. Change in Securities
As described in Note 6 to Notes to Condensed Consolidated Financial
Statements, the Company completed the exchange offer with respect to
the December 1996 Warrants during the quarter ended February 28, 1998.
On February 20, 1998, the Company closed a private placement of
$2,000,000 of Series B Preferred Stock. The sale was made pursuant to
the exemption contained in Section 4(2) of the Securities Act of 1933
as amended. The Company engaged no underwriter or placement agent in
connection with the private placement. For further information relating
to the private placement, please see note 7 to the consolidated
financial statements.
Item 3. Defaults upon Senior Securities
None
Item 4. Submissions of Matters to a Vote Security Holders
None
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K - The Company filed two reports on form
8-K under Item 5 during the quarter ended February 28, 1998
as follows:
On February 6, 1998, the Company completed the exchange offer to
exchange 2.8 December 1996 Warrants expiring December 13, 2001 (the
"Warrants") into one share of its common stock, $.01 par value per
share.
On February 19, 1998, the company completed a private placement of
$2,000,000 of newly issued Series B preferred stock.
12
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ENTERACTIVE, INC.
-----------------
(Registrant)
Date April 17, 1998 /s/ Kenneth Gruber
------------------
Kenneth Gruber
Chief Financial Officer and
Principal Accounting Officer
13
CORNERSTONE INTERNET SOLUTIONS COMPANY
CERTIFICATE OF DESIGNATIONS, PREFERENCES
AND OTHER RIGHTS AND QUALIFICATIONS OF
Class D PREFERRED STOCK
Pursuant to Section 151 of the
General Corporation Law
of the State of Delaware
CORNERSTONE INTERNET SOLUTIONS COMPANY, a corporation organized and
existing under the General Corporation Law of the State of Delaware (the
"Corporation"),
DOES HEREBY CERTIFY:
FIRST: That, pursuant to authority conferred upon the Board of
Directors of the Corporation (the "Board") by the Certificate of Incorporation
of said Corporation, as amended, and pursuant to the provisions of Sections 151
of the Delaware General Corporation Law, said Board duly determined that 9,860
shares of Preferred Stock, $.01 par value per share, shall be designated "Class
D Preferred Stock," and to that end the Board adopted a resolution providing for
the designation, preferences and relative, participating, optional or other
rights, and the qualifications, limitations and restrictions, of the Class D
Preferred Stock, which resolution is as follows:
RESOLVED, that the Board, pursuant to the authority vested in
it by the provisions of the Certificate of Incorporation of the
Corporation, as amended, hereby creates a class of Preferred Stock of
the Corporation, par value $.01 per share, to be designated as "Class D
Preferred Stock" and to consist of an aggregate of 9,860 shares. The
Class D Preferred Stock shall have such designations, preferences and
relative, participating, optional or other rights, and the
qualifications, limitations and restrictions as follows:
1. Designations and Amount. 9,860 shares of the Preferred Stock
of the Corporation, par value $.01 per share, shall constitute a class of
Preferred Stock designated as "Class D Convertible Preferred Stock" (the "Class
D Preferred Stock").
2. Rank. The Class D Preferred Stock shall rank junior to the
class of Preferred Stock of the Corporation, par value $.01 per share,
designated as Class C Preferred Stock (the "Class C Preferred Stock") and shall
rank senior to all other classes and series of capital stock of the Corporation
now or hereafter authorized, issued or outstanding, including, without
limitation, the Common Stock, par value $.01 per share of the Corporation (the
"Common Stock"), and any other classes and series of capital stock
<PAGE>
of the Corporation now or hereafter authorized, issued or outstanding
(collectively, the "Junior Securities"). In addition, the Corporation will not
issue any class or series of any class or capital stock which ranks pari passu
with the Class D Preferred Stock with respect to rights on liquidation,
dissolution or winding up of the Corporation; however, the Corporation may issue
additional shares of the Class D Preferred Stock.
3. Dividends. The holders of the Class D Preferred Stock shall
not be entitled to receive any dividends, cash or otherwise, in connection with
such Class D Preferred Stock. No dividends shall be payable upon any Junior
Securities unless equivalent dividends, on an as-converted basis, are declared
and paid concurrently on the Class D Preferred Stock. No dividends shall be
payable on any other class of preferred stock during such time as the Class D
Preferred Stock remains outstanding.
4. Rights on Liquidation, Dissolution or Winding Up, Etc.
(a) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, the assets of the Corporation
available for distribution to the stockholders of the Corporation, whether from
capital, surplus or earnings, shall be distributed in the following order of
priority:
(i) The holders of the Class D Preferred Stock shall
be entitled to receive, prior and in preference to any
distribution to the holders of any Junior Securities an amount
equal to the product of the stated value of the Class D
Preferred Stock ($1,250 per share) (the "Stated Value")
multiplied by 1.1 for each share of Class D Preferred Stock
then outstanding, but in no event shall the holders of the
Class D Preferred Stock receive any such distribution prior
and in preference to the Class C Preferred Stock; and
(ii) If there is a distribution pursuant to Section
4(a)(i) hereof, the remaining assets of the Corporation
available for distribution, if any, to the stockholders of the
Corporation shall be distributed to the holders of any
Preferred Stock ranking junior to the Class D Preferred Stock
and thereafter pro rata to the holders of issued and
outstanding shares of Common Stock.
(b) If, at any time (the "Change of Control Date"), (i) all or
substantially all of the Corporation's assets are sold as an entirety to any
person or related group of persons other than an Affiliate or Affiliates (as
hereinafter defined) of the Corporation, or (ii) the Corporation is merged into
another corporation and the Corporation is not the surviving entity of such
merger, (collectively, the "Change of Control"), then the
-2-
<PAGE>
Corporation shall notify the holders of shares of the Class D Preferred Stock in
writing of such occurrence and shall make an offer to purchase (the "Change of
Control Offer") within the 30th day following the Change of Control Date (the
"Change of Control Payment Date") all shares of the Class D Preferred Stock then
outstanding at a purchase price per share equal to the product of the Stated
Value multiplied by 1.1 for each such share of the Class D Preferred Stock.
Notice of a Change of Control Offer shall be mailed by the
Corporation not less than 30 days nor more than 60 days before the Change of
Control Payment Date to the holders of shares of the Class D Preferred Stock at
their last registered addresses as they appear on the books of the Corporation
or its Transfer Agent. The Change of Control Offer shall remain open from the
time of mailing until the fifth business day preceding the Change of Control
Payment Date. The notice, which shall govern the terms of the Change of Control
Offer, shall state:
(1) that the Change of Control Offer is being made pursuant to
this Section 4(b) and that all shares of the Class D Preferred
Stock will be accepted for purchase;
(2) the purchase price and the Change of Control Payment Date;
(3) that holders of shares of the Class D Preferred Stock
electing to have shares purchased pursuant to a Change of
Control Offer will be required to surrender certificates
representing their shares of the Class D Preferred Stock with
such documentation evidencing their election to have their
shares purchased as the Corporation shall reasonably request,
to the Corporation prior to the close of business on the
Change of Control Payment Date;
(4) that holders will be entitled to withdraw their election
if the Corporation receives, not later than the close of
business on the three Business Days preceding the Change of
Control Payment Date, a telegram, telex, facsimile
transmission or letter setting forth the name of the holder,
the number of shares of the Class D Preferred Stock the holder
delivered for purchase and a statement that such holder is
withdrawing his election to have such shares purchased;
(5) that holders whose shares are purchased only in part will
be issued certificates for shares representing the unpurchased
portion of the shares surrendered;
(6) the instructions that holders must follow in order to
tender their shares; and
-3-
<PAGE>
(7) the circumstances and relevant facts regarding such Change
of Control.
On the Change of Control Payment Date, the Corporation shall
(i) accept for payment the shares tendered pursuant to the Change of Control
Offer and (ii) promptly mail to the holder of shares so accepted payment in an
amount equal to the purchase price.
For purposes of this Section 4(b), the term "Affiliate" shall
mean any person directly or indirectly controlling, controlled by or under
common control with the Corporation as of the Change of Control Payment Date.
For the purposes of this definition, the beneficial ownership of 10% or more of
the voting common equity of a person shall be deemed to be control.
5. Voting Rights. The holders of Class D Preferred Stock shall
be entitled to vote on all matters submitted to the holders of Common Stock of
the Corporation. Each share of Class D Preferred Stock shall have that number of
votes equal to the number of shares of Common Stock into which it is then
convertible as of the record date of the proposed stockholder action. The
holders of Class D Preferred Stock shall also vote as a separate class on all
matters which the General Corporation Law of the State of Delaware specifically
requires the holders of the Class D Preferred Stock to vote as a separate class.
6. Conversion of Class D Preferred Stock.
(a) The holders of Class D Preferred Stock shall have the
right commencing on the earlier of (i) June 30, 2000 or (ii) at any time after
the closing price of the Common Stock shall have been at least $1.50 per share
(subject to adjustment in the event of subdivision or combination of the shares
of Common Stock) on 15 trading days during any 20-trading day period to convert
each share of Class D Preferred Stock into such whole number of shares of Common
Stock as is equal to the aggregate Stated Value of the Class D Preferred Stock
divided by $1.00.
(b) Before any holder of Class D Preferred Stock shall be
entitled to convert the same into shares of Common Stock, such holder shall
surrender the certificate or certificates therefor, duly endorsed, at the office
of the Corporation or of any transfer agent for the Class D Preferred Stock, and
shall give written notice to the Corporation at its principal corporate office,
of the election to convert the same and shall state therein the name or names in
which the certificate or certificates for shares of Common Stock are to be
issued. The Corporation shall, as soon as practicable thereafter, issue and
deliver at such office to such holder of Class D Preferred Stock, or to the
nominee or nominees of such holder, a certificate or certificates for the number
of shares of Common Stock to which such holder shall be entitled as
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aforesaid. Such conversion shall be deemed to have been made immediately prior
to the close of business on the date of such surrender of the shares of Class D
Preferred Stock to be converted, and the person or persons entitled to receive
the shares of Common Stock issuable upon such conversion shall be treated for
all purposes as the record holder or holders of such shares of Common Stock as
of such date.
(c) The Corporation shall not be required to issue fractions
of shares of Common Stock upon conversion of the Class D Preferred Stock. If any
fractions of a share would, but for this Section, be issuable upon any
conversion of Class D Preferred Stock, in lieu of such fractional share, the
Corporation shall pay to the holder, in cash, an amount equal to the same
fraction of the Closing Price per share of Common Stock.
(d) The Corporation shall reserve and shall at all times have
reserved out of its authorized but unissued shares of Common Stock sufficient
shares of Common Stock to permit the conversion of the then outstanding shares
of the Class D Preferred Stock pursuant to this Section 6. All shares of Common
Stock which may be issued upon conversion of shares of the Class D Preferred
Stock pursuant to this Section 6 shall be validly issued, fully paid and
nonassessable. In order that the Corporation may issue shares of Common Stock
upon conversion of shares of the Class D Preferred Stock, the Corporation will
endeavor to comply with all applicable Federal and State securities laws and
will endeavor to list such shares of Common Stock to be issued upon conversion
on each securities exchange on which the Common Stock is listed and endeavor to
maintain such listing for such period of time as either the Class D Preferred
Stock or Common Stock underlying such Class D Preferred Stock remains
outstanding.
(e) The Conversion Rate in effect at any time for conversion
of Class D Preferred Stock into Common Stock pursuant to Section 6(a) only shall
be subject to adjustment from time to time as follows:
(i) In the event that the Corporation shall (1) pay a dividend
in shares of Common Stock to holders of Common Stock, (2) make a
distribution in shares of Common Stock to holders of Common Stock, (3)
subdivide the outstanding shares of Common Stock into a greater number
of shares of Common Stock or (4) combine the outstanding shares of
Common Stock into a smaller number of shares of Common Stock, the
Conversion Rate in effect pursuant to Section 6(a) only immediately
prior to such action shall be adjusted so that the holder of any shares
of the Class D Preferred Stock thereafter surrendered for conversion
pursuant to Section 6(a) only shall be entitled to receive only that
number of shares of Common Stock which he would have owned immediately
following such action had such shares of the Class D Preferred Stock
been converted
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<PAGE>
immediately prior thereto. Such adjustment shall be made whenever any
event listed above shall occur and shall become effective (A)
immediately after the record date in the case of a dividend or a
distribution and (B) immediately after the effective date in the case
of a subdivision or combination.
(ii) In case the Corporation shall distribute to all holders
of Common Stock shares of any class of capital stock other than Common
Stock, evidences of indebtedness or other assets (other than cash
dividends out of current or retained earnings), or shall distribute to
substantially all holders of Common Stock rights or warrants to
subscribe for securities, then in each such case the Conversion Rate
pursuant to Section 6(a) only shall be adjusted so that the same shall
equal the number determined by multiplying the number of shares of
Common Stock into which such share of the Class D Preferred Stock was
convertible immediately prior to the date of such distribution by a
fraction of which the numerator shall be the current market price
(determined as provided in Section 6(f)) of Common Stock on the record
date mentioned below, and of which the denominator shall be such
current market price of Common Stock, less the then fair market value
(as determined by the Board of Directors, whose determination shall be
conclusive evidence of such fair market value) of the portion of the
assets so distributed or of such subscription rights or warrants
applicable to one share of Common Stock. Such adjustment shall become
effective immediately after the record date for the determination of
the holders of Common Stock entitled to receive such distribution.
(f) The closing price for each day shall be the last reported
sale price regular way or, in case no such reported sale takes place on such
date, the average of the daily reported closing bid and asked prices regular way
for ten consecutive trading days ending the last trading day before the day in
question, on the principal national securities exchange on which the Common
Stock is listed or admitted to trading or, if not listed or admitted to trading
on any national securities exchange, the closing sale price of the Common Stock,
or in case no reported sale takes place, the average of the daily closing bid
and asked prices for ten consecutive trading days ending the last trading day
before the day in question, on the Nasdaq SmallCap Market ("Nasdaq"), or if the
Common Stock is not quoted on Nasdaq, the OTC Electronic Bulletin Board or any
comparable system, the closing sale price or, in case no reported sale takes
place, the average of the daily closing bid and asked prices for ten consecutive
trading days ending the last trading day before the day in question, as
furnished by any two members of the National Association of Securities Dealers,
Inc. selected from time to time by the Corporation for that purpose. If the
Common Stock is not quoted on Nasdaq, the Bulletin Board or any comparable
system, the Board of Directors shall in good faith
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determine the current market price on such basis as it considers appropriate.
(g) No adjustment in the Conversion Rate in Section 6(a) shall
be required until cumulative adjustments result in a concomitant change of 1% or
more of the Conversion Rate under Section 6(a) as in effect prior to the last
adjustment of the Conversion Rate under Section 6(a); provided, however, that
any adjustments which by reason of this Section 6(g) are not required to be made
shall be carried forward and taken into account in any subsequent adjustment.
All calculations under this Section 6 shall be made to the nearest cent or to
the nearest one-hundredth of a share, as the case may be.
(h) In the event that, as a result of an adjustment made
pursuant to Section 6(e), the holder of any share of the Class D Preferred Stock
thereafter surrendered for conversion shall become entitled to receive any
shares of capital stock of the Corporation other than shares of Common Stock,
thereafter the number of such other shares so receivable upon conversion of any
shares of the Class D Preferred Stock shall be subject to adjustment from time
to time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Common Stock contained in this Section 6.
(i) The Corporation may make such changes in the Conversion
Rate under Section 6(a), in addition to those required by this Section 6, as it
considers to be advisable in order that any event treated for Federal income tax
purposes as a dividend of stock or stock rights shall not be taxable to the
recipients thereof.
(j) Whenever the Conversion Rate is adjusted pursuant to
Section 6(a), the Corporation shall promptly mail first class to all holders of
record of shares of the Class D Preferred Stock a notice of the adjustment and
shall cause to be prepared a certificate signed by a principal financial officer
of the Corporation setting forth the adjusted conversion rate and a brief
statement of the facts requiring such adjustment and the computation thereof.
Such certificate shall forthwith be filed with each transfer agent for the
shares of the Class D Preferred Stock.
(k) If any of the following shall occur: (i) any
reclassification or change of outstanding shares of Common Stock issuable upon
conversion of shares of the Class D Preferred Stock (other than a change in par
value, or from par value to no par value, or from no par value to par value, or
as a result of a subdivision or combination), or (ii) any consolidation or
merger to which the Corporation is a party other than a merger in which the
Corporation is the continuing corporation and which does not result in any
reclassification of, or change (other than a change in name,
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or par value, or from par value to no par value, or from no par value to par
value, or as a result of a subdivision or combination) in, outstanding shares of
Common Stock, then in addition to all of the rights granted to the holders of
the Class D Preferred Stock as designated herein, the Corporation, or such
successor or purchasing corporation, as the case may be, shall, as a condition
precedent to such reclassification, change, consolidation, merger, sale or
conveyance, provide in its certificate of incorporation or other charter
document that each share of the Class D Preferred Stock shall have rights and
adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Section 6. If, in the case of any such
reclassification, change, consolidation, merger, sale or conveyance, the stock
or other securities and property (including cash) receivable thereupon by a
holder of Common Stock includes shares of capital stock or other securities and
property of a corporation other than the successor purchasing corporation, as
the case may be, in such reclassification, change, consolidation, merger, sale
or conveyance, then the certificate of incorporation or other charter document
of such other corporation shall contain such additional provisions to protect
the interests of the holders of shares of the Class D Preferred Stock as the
Board shall reasonably consider necessary by reason of the foregoing. The
provision of this Section 6(k) shall similarly apply to successive
consolidations, mergers, sales or conveyances.
(l) In the event any shares of Class D Preferred Stock shall
be converted pursuant to Section 6 hereof, the shares so converted shall be
cancelled.
(m) The Corporation will not, by amendment of its Certificate
of Incorporation, as amended, or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed under this Section but will at all times
in good faith assist in the carrying out of all the provisions of this Section 6
and in the taking of all such action as may be necessary or appropriate in order
to protect the conversion rights of the holders of the Class D Preferred Stock
against impairment.
Such resolution was signed by the President and Secretary of
the Corporation.
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IN WITNESS WHEREOF, we have executed this Certificate of
Designation this day of October 1998.
CORNERSTONE INTERNET SOLUTIONS
COMPANY
By:
-------------------------------------
Name: Edward Schroeder
Title: President and Chief
Executive Officer
By:
------------------------------------
Name: Kenneth Gruber
Title: Chief Financial Officer
and Secretary
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