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, 1999
/ / TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
For the transition period from __________ to _______________
Commission file number: 1-13360
CORNERSTONE INTERNET SOLUTIONS COMPANY
(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.)
584 Broadway Suite 509
(Address of Principal Executive Offices)
(212) 343-3920
(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 February 28, 1999
-------------- -----------------------
Common Stock, $.01 Par Value 12,831,620
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, 1999 and
May 31, 1998. 3
Consolidated Statements of Operations for the three month
and nine-month periods ended February 28, 1999
and February 28, 1998. 4,5
Consolidated Statements of Cash Flows for the nine-month
periods ended February 28, 1999 and February 28, 1998. 6
Notes to 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 and Use of Proceeds 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>
Cornerstone Internet Solutions Company and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
February 28 May 31
1999 1998
ASSETS (unaudited)
-------------------------------------------------------
Current Assets
<S> <C> <C>
Cash and cash equivalents $ 1,182,805 $ 392,200
Investments 607,285 167,400
Accounts receivable, net 1,144,418 343,700
Other receivables 20,587 100,000
Prepaid expenses and other 107,277 269,300
-------------------------------------------------------
Total current assets 3,062,372 1,272,600
Affiliation rights, net 198,542 219,200
Property and equipment, net 347,131 485,900
Other 105,920 69,200
-------------------- -----------------------
$3,713,965 $ 2,046,900
-------------------- -----------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 509,243 $ 538,100
Accrued restructuring expenses 27,535 95,400
Accrued payroll and related expenses 130,289 202,800
Other accrued expenses 329,769 410,300
Deferred revenue - 9,300
Current maturities of long-term debt 81,779 99,500
-------------------- -----------------------
Total current liabilities 1,078,615 1,355,400
Long-term debt 50,298 106,400
-------------------- ------------------------
Total liabilities 1,128,913 1,461,800
Stockholders' Equity
Preferred Stock $.01 par value, 2,000,000 shares
authorized;
Class A 0 and 340 shares issued and outstanding at
February 28, 1999 and May 31, 1998. - -
Class B 0 and 2,000 shares issued and outstanding at
February 28, 1999, and May 31, 1998. - 20
Class C 540 and 6,260 shares issued and outstanding at
February 28, 1999, and May 31, 1998. 5 100
Class D 8,120 and 0 shares issued and outstanding at 81 -
February 28, 1999, and May 31, 1998 with a liquidating
preference of $1,375 per share.
Common Stock $.01 par value, 50,000,000 shares authorized;
12,831,620 and 9,441,117 issued and outstanding at February 28,
1999, and May 31, 1998 respectively. 128,316 94,400
Additional paid-in capital 34,363,478 30,222,480
Unrealized gain on marketable equity securities 607,285 167,400
Accumulated deficit (32,514,113) (29,899,300)
-------------------- --------------------
Total stockholders' equity 2,585,052 585,100
-------------------- --------------------
$ 3,713,965 $ 2,046,900
-------------------- --------------------
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
Cornerstone Internet Solutions Company and Subsidiaries
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended February 28
1999 1998
------------------------- ---------------------------
<S> <C> <C>
Internet services revenues $835,839 $426,200
Software licensing and royalty revenue - 74,000
------------------------- ---------------------------
Total revenues 835,839 500,200
Cost of internet services revenues 891,337 617,000
Cost of licensing and royalty revenue - 6,100
Marketing and selling expenses 124,731 610,100
General and administrative expenses 414,304 494,700
------------------------- ---------------------------
Total costs and expenses 1,430,372 1,727,900
------------------------- ---------------------------
Operating loss (594,533) (1,227,700)
------------------------- ---------------------------
Other income (expense):
Interest expense (1,676) (4,600)
Other 392 (900)
Interest income - 11,300
------------------------- ---------------------------
Net Loss (595,817) $( 1,221,900)
------------------------- ---------------------------
Preferred stock dividends and preferences (844,250) (3,596,900)
------------------------- ---------------------------
Net loss to common shareholders $(1,440,067) $(4,818,800)
------------------------- ---------------------------
Basic and diluted loss per share $ (0.12) $ (.57)
------------------------- ---------------------------
Weighted average shares of common stock 12,106,040 8,380,656
------------------------- ---------------------------
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
Cornerstone Internet Solutions Company and Subsidiaries
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Nine months ended February 28
1999 1998
------------------------- ---------------------------
<S> <C> <C>
Internet services revenues $2,369,339 $944,500
Software licensing and royalty revenue 38,000 206,400
------------------------- ---------------------------
Total revenues 2,407,339 1,150,900
------------------------- ---------------------------
Cost of internet services revenues 3,129,354 1,919,400
Cost of licensing and royalty revenue - 28,300
Marketing and selling expenses 383,260 2,362,600
General and administrative expenses 1,493,208 1,553,500
Restructuring expenses - 427,700
------------------------- ---------------------------
Total costs and expenses 5,005,822 6,291,500
------------------------- ---------------------------
Operating loss (2,598,483) (5,140,600)
------------------------- ---------------------------
Other income (expense):
Interest expense (9,800)
(8,000)
Other (7,395)
(900)
Interest income 865 90,200
------------------------- ---------------------------
Net Loss $(2,614,813) $(5,059,300)
------------------------- ---------------------------
Preferred stock dividends and preferences (1,830,700) (8,157,700)
------------------------- ---------------------------
Net loss to common shareholders (4,445,513) $(13,217,000)
------------------------- ---------------------------
Basic and diluted loss per share $ (0.38) $ (1.66)
------------------------- ---------------------------
Weighted average shares of common stock 11,556,781 7,965,846
------------------------- ---------------------------
</TABLE>
See notes to consolidated financial statements
5
<PAGE>
Cornerstone Internet Solutions Company and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended February 28
1999 1998
------------------------------------
Cash flows from Operating Activities
<S> <C> <C>
Net loss $(2,614,813) $(5,059,300)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization 199,500 134,000
Non-cash consulting expense 19,200 -
Changes in assets and liabilities
Accounts receivable (800,718) (55,700)
Other receivables 79,413 43,900
Prepaid expenses and other 162,023 (91,600)
Other assets (36,720) (64,000)
Accounts payable 152,100
(28,857)
Accrued expenses (142,667) 171,000
Deferred revenue (9,300) (69,500)
------------------------------------------
Net cash used in operating activities (3,172,939) (4,839,100)
Cash flows from investing activities
Purchases of property and equipment (40,073) (482,700)
------------------------------------------
Net cash (used in) investing activities (40,073) (482,700)
Cash flows from financing activities
Proceeds from issuances of common and preferred stock 3,457,800 2,000,000
Proceeds from exercise of stock options 41,305 225,100
Proceeds from exercise of warrants 578,335
Proceeds from sale and leaseback of equipment - 250,100
Principal payments of long-term debt (73,823) (20,000)
------------------------------------------
Net cash provided by financing activities 4,003,617 2,454,600
------------------------------------------
Net increase (decrease) in cash and cash equivalents 790,605 (2,867,200)
Cash and cash equivalents
Beginning of period 392,200 4,952,900
------------------------------------------
End of period $1,182,805 $2,085,700
------------------------------------------
</TABLE>
See notes to consolidated financial statements
6
<PAGE>
CORNERSTONE INTERNET SOLUTIONS COMPANY
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 Cornerstone Internet Solutions Company (the "Company"),
as of February 28, 1999 and the results of its operations and its
cash flows for the three and nine month periods ended February 28,
1999 and February 28, 1998. Certain information and note 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, 1998
Annual Report on Form 10-KSB. The results for the three and nine
month periods ended February 28, 1999 are not necessarily indicative
of the results to be obtained for the full year.
2. Business
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. Headquartered in New York, New York, the
Company is a provider of business solutions based on Internet
technologies. The Company's address is 584 Broadway, Suite 509, New
York, NY 10012 and its Internet address is www.crstone.com
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. On August 14, 1998,
the Company entered into a new agreement with the same party 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 to the acquirer for $100,000. The balance in "Other
receivables" at February 28, 1999 and May 31, 1998 reflects the
amounts due under the 1998 contract.
On December 4, 1996 the Company signed multiple market affiliate
agreements with USWeb/CKS Corporation ("USWeb/CKS") and paid
$625,000 for the right to operate USWeb/CKS 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/CKS 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.
The Company is obligated to pay USWeb/CKS monthly fees equal in the
aggregate to 7% of adjusted gross revenues, as defined in its
various agreements with USWeb/CKS, 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, in the second quarter of fiscal 1998,
the Company incurred restructuring expenses of $427,700 for the
estimated losses from subleasing the closed offices and related
severance costs. In addition, in the fourth quarter of fiscal 1998,
the Company, with the approval of USWeb/CKS surrendered its
affiliation rights in certain geographic regions and recorded a
write off of $315,000 representing the unamortized portion of the
related affiliation rights.
The accompanying financial statements have been prepared assuming
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 $1,969,900 in November 1998 from the
sale of preferred stock in a private placement, and $1,487,900 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. However, the Company has no agreements,
commitments or understandings with respect to a line of credit and
there can be no assurance that the Company will enter into a line of
credit or be able to increase its revenues.
3. Affiliation Rights
Fees for affiliation rights were paid to USWeb/CKS for the right to
join the USWeb/CKS network and operate as an affiliate. The fee is
being amortized over the 10-year life of the agreement with
USWeb/CKS. Affiliation rights at February 28, 1999 were net of
accumulated amortization of $111,458.
7
<PAGE>
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. Convertible Preferred Stock Class D
On November 10, 1998 the Company raised $2,000,000 (approximately
$1,970,000, net of related expenses) through a private placement of
1,600 shares of Class D Convertible Preferred Stock (Class D
Preferred Stock) at a purchase price of $1,250 per share. The
holders of Class D Preferred Stock have the right, 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 $1.50 per
share on 15 trading days during any 20-consecutive trading day
period, to convert each share of Class D Preferred Stock into such
whole number of shares of Common Stock equal to the aggregate stated
value of the Class D Preferred Stock to be converted divided by
$1.00, subject to adjustment. Each share of Class D Preferred Stock
has a liquidation preference (subject to the liquidation preference
of the Class C Preferred Stock) of $1,375 per share. The Class D
Preferred Stock is entitled to vote on all matters submitted to the
holders of the Company's Common Stock, at 1,250 votes per share,
pays no dividends and is not redeemable.In the quarter ended
February 28, 1999, the closing price of the Company's Common Stock
was at least $1.50 per share on 15 trading days during a consecutive
20 day trading period and accordingly the holders of Class D
Preferred Stock have the unrestricted right to convert each share of
Class D Preferred Stock as described above. During the fiscal
quarter ended February 28, 1999, 800 shares of Class D Preferred
Stock were converted into 1,000,000 shares of Common Stock. As of
February 28, 1999 there were 8,120 shares of Class D Preferred Stock
issued and outstanding convertible into 10,150,000 shares of Common
Stock.
6. Convertible Preferred Stock Class A and C
On December 12, 1996 the Company completed a private placement of 84
units, each unit 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 from the private placement were
approximately $7,869,100, net of related expenses of $531,000. The
Class A 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 Class A Preferred Stock to delay the date
when the Class A Preferred Stock can first be converted into Common
Stock from May 1, 1998 to July 1, 1999 and modify certain redemption
features of the Class A Preferred Stock. Holders of 6,260 shares of
the Class A 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 Stock issued
approximated the fair value of the canceled Warrants. Subsequently,
the Company redesignated the 6,260 shares of Class A Preferred held
by the 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. In
accordance with the terms of the Preferred Stock exchange offer
discussed below, all dividends associated with Class C Preferred
Stock exchanged were relinquished. Dividends are payable in Common
Stock and for those Class C Preferred shares still outstanding after
the exchange offer amounted to $60,750 for the nine months ended
February 28, 1999.
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 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. 120 shares of Class A Preferred were
redeemed for $165,000 in May 1998.
In October 1998, the Company offered to exchange one share of its
Class D Preferred Stock for one share of Class C Preferred Stock.
There were 6,260 shares of Class C Preferred Stock outstanding at
the time of the offer. On November 25, 1998 the Company issued 5,720
shares of Class D Preferred Stock in exchange for a like amount of
Class C Preferred Stock pursuant to the exchange offer.
7. 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
Convertible Preferred Stock (Class B Preferred Stock). Net proceeds
to the Company were $1,990,800. The
8
<PAGE>
Class B Preferred Stock, with a stated value of $1,000 per share,
was entitled to vote on all matters submitted to holders of the
Company's common stock, at 1,000 votes per share, paid no dividends
and was not redeemable.
On December 7, 1998 the Company issued 1,600 shares of Class D
Preferred Stock in exchange for all the outstanding Class B
Preferred Stock. The exchange was the result of the Company's offer,
which provided that one share of its Class B Convertible Preferred
Stock with a $1,000 stated value could be exchanged for .8 shares of
Class D Convertible Preferred Stock with a $1,250 stated value.
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
was being recognized solely in the calculation of loss per common
share over a 14 month period, beginning with the issuance of the
Class B Preferred Stock to March 1999 (the first date that
conversion could have occurred). Due to the exchange of all the
Class B Preferred Stock to Class D Preferred Stock, in the third
quarter of fiscal 1999, the Company reflected an expense of $824,000
in the loss per share calculation. As a result, the net loss to
common shareholders includes preferred stock preferences of $824,000
and $1,769,950 for the three and nine months ended February 28,
1999.
8. Private Placement of Common Stock
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 $1,487,900.
Item 2. 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 Cornerstone Internet Solutions Company
and Subsidiaries and Notes to the Consolidated Financial Statements included
elsewhere in this Form 10-QSB.
Results of Operations - Nine Months Ended February 28, 1999 and 1998
Revenues
- --------
Internet services revenues Internet services revenues were $2,369,339 and
$944,500 in the nine months ended February 28, 1999 and 1998, respectively. The
increase in revenues is a result of securing new contracts with customers. The
Company anticipates that revenues will be impacted in the future by its ability
to expand its services in existing accounts and grow its client base. There was
one customer that individually comprised more than 10% of revenue which
accounted for 30% of accounts receivable and 43% of total revenues as of and for
the nine months ended February 28, 1999. The loss of this customer would have a
material adverse effect on the results of operations of the Company.
Software licensing and royalty revenue Software licensing and royalty revenue
were $38,000 and $206,400 in the nine months ended February 28, 1999 and 1998,
respectively. The decrease reflects the Company's decision to concentrate on the
design, development and implementation of business systems using Internet
technologies and discontinue the publishing of interactive CD-Rom titles.
Expenses
- --------
Cost of Internet Services Revenues Cost of Internet Services Revenues were
$3,129,354 and $1,919,400, in the nine months ended February 28, 1999 and 1998,
respectively. Cost of Internet Services revenues as a percentage of related
revenues decreased to 132% from 203% for the same period. Cost of Internet
Services Revenues in the nine months ended February 28, 1999 exceeded Internet
services revenues as a result of the Company's need to supplement internal staff
with consultants who had specific skills necessary to fulfill customer projects
and the Company's decision to build its development capability to secure
additional customer contracts in the future. The Company expects that as it
secures additional contracts, the cost of revenues as a percentage of revenues
will further decrease.
Cost of licensing and royalty revenue Cost of licensing and royalty revenue were
$0 and $28,300 in the nine months ended February 28, 1999 and 1998,
respectively. The reduction results from the Company's decision to discontinue
the publishing of interactive CD-Rom titles.
Marketing and Selling Expenses Marketing and Selling expenses were $383,260 and
$2,362,600, in the nine months ended February 28, 1999 and 1998, respectively.
The 83% decrease relates to the reduction in sales force and closure of sales
offices during the second half of fiscal 1998, as a result of the Company's
decision to centralize its marketing activities in New York City.
General and Administrative Expenses General and administrative expenses
decreased slightly to $1,493,208 in the nine months ended February 28, 1999 from
$1,553,500 in the nine months ended February 28, 1999.
Restructuring expenses The Company incurred restructuring expenses of $427,700
during the nine month period ending February 28, 1998 for the estimated losses
from subleasing the closed sales offices and related severance costs. The
subsequent expenditures have been consistent with the original accrued amounts.
9
<PAGE>
Other Income and (Expense) Other income and (expense) was $(16,330) and $81,300
in the nine months ended February 28, 1999 and 1998, respectively. The Company
derived less interest income in the nine months ended February 28, 1999 due to
the Company's lower average cash balances maintained by the Company during the
period.
Income tax benefit No income tax benefit was recorded in the nine months ended
February 28, 1999 and February 28, 1998. 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.
Quarterly results
The Company expects its quarterly results to vary significantly in the future.
The number of customer contracts signed and the development staff's ability to
readily implement solutions significantly influences 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/CKS in establishing and positioning its 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.
Results of Operations -Quarter Ended February 28, 1999 and 1998
Revenues
- --------
Internet services revenues Internet services revenues were $835,839 and
$426,200, in the quarters ended February 28, 1999 and 1998, respectively. The
increase in revenues is a result of securing new contracts with customers. The
Company anticipates that revenues will be impacted in the future by its ability
to expand its services in existing accounts and grow its client base.There were
two customers that individually comprised more than 10% of revenue and in the
aggregate amounted to 39% of accounts receivable and 60% of total revenues for
the three months ended February 28, 1999. The loss of either of these customers
would have a material adverse effect on the results of operations of the
Company.
Expenses
- --------
Cost of Internet Services Revenues Cost of Internet Services Revenues were
$891,337 and $617,000, in the quarters ended February 28, 1999, and 1998,
respectively. Cost of Internet Services revenues as a percentage of related
revenues decreased to 105% from 145% of related revenues in the quarters ended
February 28, 1999 and 1998, respectively. Cost of Internet Services Revenues in
the quarter ended February 28, 1999 exceeded Internet services revenues as a
result of the Company's need to supplement internal staff with consultants who
had specific skills necessary to fulfill customer projects. The Company expects
that as it secures additional contracts the cost of revenues as a percentage of
revenues will continue to decrease.
Marketing and Selling Expenses Marketing and Selling expenses were $124,731 and
$610,100, in the quarters ended February 28, 1999 and 1998, respectively. The
79% decrease relates to the reduction in sales force and closure of sales
offices during the second half of fiscal 1998, a result of the Company's fiscal
1998 decision to centralize its marketing activities in New York City.
General and Administrative Expenses General and administrative expenses were
$414,304 and $494,700 in the quarters ended February 28, 1999, and 1998,
respectively.
Other Income and (Expense) Other income and (expense) was ($1,284) and $ 5,800
in the quarters ended February 28, 1999 and 1998 respectively. The Company
recorded less interest income in the quarter ended February 28, 1999 due to the
Company's lower average cash balances than in the quarter ended February 28,
1998.
Income tax benefit No income tax benefit was recorded in the quarters ended
February 28, 1999 and February 28, 1998. 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, 1997, the Company's principal sources of capital have been as
follows:
(i) On February 19, 1998, the Company consummated a $2,000,000
private placement resulting in the issuance of 2,000 shares of
Class B Preferred Stock . Net proceeds to the Company were $
1,990,800.
(ii) 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
$1,487,900.
10
<PAGE>
(iii) On November 10, 1998, the Company consummated a private
placement of 1,600 shares of newly created Class D Preferred
Stock for $1,250 per share. Net proceeds to the Company were
approximately $1,970,000.
(iv) In January and February 1999, the Company received $619,614
from the exercise of warrants and options.
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.
In the nine months ended February 28, 1999, the Company received an aggregate of
$619,640 from the exercise of warrants to purchase 246,100 shares of Common
Stock and options to purchase 10,625 shares of Common Stock. The warrants had an
exercise price of $2.35 per share and the exercise price of the options ranged
from $.813 to $1.75 per share.
The Company had cash and cash equivalents of $1,182,805 and $392,200 at February
28, 1999 and May 31, 1998, respectively. The increase of $790,605 primarily
reflects the private placements described above which provided $3,457,800 and
proceeds from the exercise of options and warrants of $619,640 partially offset
by the funding of operating activities ($3,172,939) and payments of long term
debt of $73,823. Accounts receivable increased from $343,700 as of May 31, 1998
to $1,144,418 as of February 28, 1999, an increase of 233%, while sales for the
first nine months of fiscal 1999 and 1998 increased from $1,150,900 to
$2,407,339, an increase of 48%. The higher rate of growth of accounts receivable
is attributable to extended payment terms, and longer projects. Capital
expenditures were $40,073 and $482,700 in the nine months ended February 28,
1999 and 1998. The Company anticipates that capital expenditures will increase
as revenues increase as a result of equipping staff or contractors to service
customers.
The Company's continuing losses from operations could impact the Company's
ability to meet its obligations as they become due. The Independent Auditors'
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 and November 1998 approximately $1,487,900 and
$1,970,000, respectively from the sale of common stock and preferred stock in
two separate private placements and is continuing its activities designed to
increase its revenues. 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. Management believes that based on
funds on hand at February 28, 1999 and anticipated revenues, operations can
continue until at least through August 31, 1999.
New Accounting Pronouncement
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 one year, 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. The Company is closely monitoring the progress the developers of
the software the Company utilizes in many of its customer projects i.e.
Microsoft Corporation, as well as the developers of the software utilized in
internal systems are making towards ensuring that the products the Company
utilizes are Year 2000 compliant. The Company believes that its internal systems
and third party software incorporated into client solutions 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. The Company's costs to
ensure that internal systems and software acquired for integration into client
business solutions are Year 2000 compliant has not been and is not expected to
become significant. The Company has not implemented any contingency plans if it
fails to become year 2000 compliant.
Further, 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-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, including without
limitation,
11
<PAGE>
the ability of the Company to develop its products, the success of its USWeb/CKS
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-QSB 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 and Use of Proceeds
The Company issued 256,725 shares of Common Stock pursuant to the exercise of
warrants to purchase 246,100 shares of Common Stock and options to purchase
10,625 shares of Common Stock. The warrants had an exercise price of $2.35 per
share and the options had an exercise price ranging from $.813 to $1.75 per
share. The Common Stock was issued pursuant to the exemption contained in
Section 4(2) of the Securities Act of 1933, as amended.
Item 3. Defaults upon Senior Securities
None
Item 4. Submissions of Matters to a Vote Security Holders
None
Item 5. Other Information
On February 5, 1999, the Company announced that the Nasdaq SmallCap Market
advised the Company that the Company's securities will continue to be listed on
the Nasdaq SmallCap Market. The Nasdaq Listing and Hearing Review Council did
not exercise its right, by its own motion, to review the decision within 45
days.
Item 6. Exhibits and Reports on Form 8-K
Form 8-K Dated December 30, 1998 Under Item 7- Other events
Form 8-K Dated February 5, 1999 Under Item 7- Other events
Exhibit 27- Financial Data Schedule
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.
CORNERSTONE INTERNET SOLUTIONS COMPANY
--------------------------------------
(Registrant)
Date April 14, 1999 /s/ Edward Schroeder
------------------------------
Edward Schroeder
Chief Executive Officer
And Principal Financial Officer
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Form 10-QSB for the period ended February 28, 1999 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> DEC-31-1998
<PERIOD-END> FEB-28-1999
<CASH> 1,182,805
<SECURITIES> 605,285
<RECEIVABLES> 1,144,418
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,062,372
<PP&E> 1,643,242
<DEPRECIATION> (1,296,111)
<TOTAL-ASSETS> 3,713,965
<CURRENT-LIABILITIES> 1,078,615
<BONDS> 0
0
86
<COMMON> 128,316
<OTHER-SE> 2,456,650
<TOTAL-LIABILITY-AND-EQUITY> 3,713,965
<SALES> 0
<TOTAL-REVENUES> 835,839
<CGS> 891,337
<TOTAL-COSTS> 1,430,372
<OTHER-EXPENSES> (1,284)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,676)
<INCOME-PRETAX> (595,817)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (595,817)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
