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 August 31, 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 August 31, 1999
-------------- ---------------------
Common Stock, $.01 Par Value 13,669,292
Transitional Small Business Disclosure Format: Yes / / No /X/
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TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page
Item 1 Financial Statements
Consolidated Balance Sheets at
August 31, 1999 and May 31, 1999 3
Consolidated Statements of Operations for the
three-month periods ended August 31, 1999, and 1998 4
Consolidated Statements of Cash Flows for the
three-month periods ended August 31, 1999, and 1998 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II - OTHER INFORMATION
Page
Item 1. Legal Proceedings 10
Item 2. Change in Securities and Use of Proceeds 10
Item 3. Defaults upon Senior Securities 10
Item 4. Submissions of Matters to a Vote by Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
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CORNERSTONE INTERNET SOLUTIONS COMPANY and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
August 31, May 31,
1999 1999
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 1,182,840 $ 2,939,596
Investments 431,340 398,348
Accounts receivable, net 1,492,698 1,024,624
Other receivables 20,587 20,587
Prepaid expenses and other 47,381 49,475
------------ ------------
Total current assets 3,174,846 4,432,630
Affiliation rights, net 185,278 191,667
Property and equipment, net 925,327 671,182
Other 246,614 200,920
------------ ------------
$ 4,532,065 $ 5,496,399
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt $ 78,747 $ 104,954
Accounts payable 853,717 830,397
Accrued payroll and related expenses 41,947 124,866
Other accrued expenses 388,249 462,592
Other current liabilities -- 30,000
------------ ------------
Total current liabilities 1,362,660 1,552,809
Long-term debt, excluding current maturities 1,465 1,465
------------ ------------
Total liabilities 1,364,125 1,554,274
------------ ------------
Minority interest 1,160,767 938,838
Stockholders' Equity
Preferred stock, $.01 par value,
2,000,000 shares authorized;
Class C, 40 and 540 shares issued and outstanding
at August 31, 1999 and May 31,1999 -- 5
Class D, 8040 shares issued and outstanding at
August 31, 1999 and May 31, 1999, liquidating
preference of $11,055,000 at August 31, 1999 80 80
Common stock, $.01 par value, 50,000,000 shares
authorized and 13,669,292 and 13,121,013 shares
issued and outstanding at August 31, 1999 and
May 31, 1999 136,693 131,210
Additional paid-in capital 35,796,812 36,018,294
Accumulated other comprehensive income 431,340 398,348
Accumulated deficit (34,357,752) (33,544,650)
------------ ------------
Total stockholders' equity 2,007,173 3,003,287
------------ ------------
$ 4,532,065 $ 5,496,399
============ ============
</TABLE>
See notes to consolidated financial statements
3
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Cornerstone Internet Solutions Company and Subsidiaries
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended August 31,
1999 1998
---------------------------------------
<S> <C> <C>
Internet services revenues $ 1,016,001 $ 528,900
Software licensing and royalty revenue -- 38,000
---------------------------------------
Total revenues 1,016,001 566,900
Cost of internet services revenues 955,798 1,091,700
Marketing and selling expenses 226,565 114,200
General and administrative expenses 666,627 565,600
---------------------------------------
Total costs and expenses 1,848,990 1,771,500
=======================================
Operating loss (832,989) (1,204,600)
---------------------------------------
Other income (expense):
Interest expense (2,077) (5,600)
Interest income 21,964 --
Other income (expense), net -- 500
---------------------------------------
Loss before income taxes (813,102) (1,209,700)
=======================================
Provision for income taxes -- --
Minority interest in net loss of subsidiary, net (221,929) --
---------------------------------------
Net loss (1,035,031) (1,209,700)
Preferred stock dividends and preferences (6,750) (669,600)
---------------------------------------
Net loss to common stockholders $ (1,041,781) $ (1,879,300)
=======================================
Basic and diluted loss per share $ (.08) $ (.17)
---------------------------------------
Weighted average shares of common stock 13,448,252 10,989,409
=======================================
</TABLE>
See notes to consolidated financial statements
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Cornerstone Internet Solutions Company and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended August 31,
1999 1998
---------------------------------------
<S> <C> <C>
Cash flows from Operating Activities
Net loss $(1,035,031) $(1,209,700)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization 86,255 98,800
Non-cash consulting expense -- 6,400
Minority interest in net loss of consolidated subsidiary 221,929 --
Changes in assets and liabilities
Accounts receivable (468,074) (162,000)
Other receivables -- 25,000
Prepaid expenses and other 2,094 78,700
Other assets (45,694) (65,000)
Accounts payable 23,320 35,400
Accrued expenses (157,261) (94,700)
Deferred revenue -- 129,300
Other current liabilities (30,000) --
---------------------------------------
Net cash used in operating activities (1,402,462) (1,157,800)
Cash flows from investing activities
Purchases of property and equipment (334,011) (14,400)
---------------------------------------
Net cash (used in) investing activities (334,011) (14,400)
Cash flows from financing activities
Proceeds from issuances of common and preferred stock -- 1,487,900
Proceeds from exercise of stock options 5,924 27,200
Principal payments of long-term debt (26,207) (24,100)
---------------------------------------
Net cash provided by financing activities (20,283) 1,491,000
---------------------------------------
Net increase (decrease) in cash and cash equivalents (1,756,756) 318,800
Cash and cash equivalents
Beginning of period 2,939,596 392,200
---------------------------------------
End of period $ 1,182,840 $ 711,000
=======================================
</TABLE>
See notes to consolidated financial statements
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CORNERSTONE INTERNET SOLUTIONS COMPANY
Notes to Condensed Consolidated Financial Statements
(Unaudited)
General
1. 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"),
and subsidiaries as of August 31, 1999 and the results of its
operations and its cash flows for the three month periods ended
August 31, 1999 and 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, 1999
Annual Report on Form 10-KSB. The results for the three month period
ended August 31, 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
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.
On February 17, 1999, the Company formed B2Bgalaxy. com, Inc.
("B2B") as a wholly owned subsidiary of the Company. The Company
established B2B to leverage its expertise in business consulting,
Internet technology and the development of business and e-commerce
solutions to create industry-specific business-to- business
e-commerce portals that link buyers and sellers through competitive
on-line bidding with a focus on improving profitability. In May
1999, B2B launched FOODgalaxy.com, the first such portal, designed
to lower the cost of food and supplies for restaurants and other
food service providers through increased price competition.
FOODgalaxy.com enables restaurants to post a customized inventory
list online and requires suppliers to continually submit their
latest product bids. This competitive process is designed to
decrease the cost of goods to buyers and significantly reduce the
time traditionally devoted to the comparative price shopping
process.
The accompanying consolidated 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. In
November, 1998, the Company consummated a private placement of 1,600
shares of newly created Class D Preferred Stock for net proceeds of
approximately $1,970,000 and in April, 1999 the Company received
$2,122,957 from the sale of a subsidiary's Preferred Stock. As part
of its business plan to enhance liquidity, the Company has reduced
its operating expenses and continues to expand its customer base and
engagement size to drive revenue and growth. It is also exploring
financing its receivables to improve cash flow, and it is in the
process of attempting to secure a line of credit. As of August 31,
1999 the Company has no commitments for either the financing or the
line of credit.
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 August 31, 1999 were net of
accumulated amortization of $124,722.
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
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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 $1,969,900, 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 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 third quarter of fiscal 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. In fiscal 1999,
the Company issued 7,320 shares of Class D Preferred Stock in
exchange for Class B and C Preferred Stock. During fiscal 1999, 880
shares of Class D Preferred Stock were converted into 1,100,000
shares of Common Stock. As of August 31, 1999, there were 8,040
shares of Class D Preferred Stock issued and outstanding convertible
into 10,050,000 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 stockholders to
amend the terms of the Class A Preferred 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 . 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
stockholders who approved the Exchange Offer as Class C Convertible
Preferred Stock (Class C Preferred). Such preferred shareholders
were entitled to receive a dividend at 12% per year of the stated
value of the Class C Preferred for the period from April 30, 1998 to
June 30, 1999. In accordance with the terms of the Preferred Stock
exchange offer discussed below, all dividends associated with Class
C Preferred exchanged were relinquished. Dividends are payable in
common stock and for those Class C Preferred shares still
outstanding after the exchange offer, such dividends amounted to
$81,000 for the year ended May 31, 1999 and $6,750 for the three
months ended August 31,1999. In July, 1999 the Company issued 40,213
shares of Common Stock in full payment of the Preferred Stock
dividends.
Each share of Class C Preferred is convertible into such whole
number of shares of common stock equal to the aggregate 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 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 Class C Preferred 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 Class C Preferred 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 Class C Preferred (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. In July, 1999,
500 shares of Class C Preferred were converted into 505,132 shares
of common stock. As of August 31,1999, there were 40 shares of Class
C Preferred Stock outstanding which is convertible into 40,411
shares of Common Stock.
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
exercised their right to convert such Class A Preferred
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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. 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.
8. Subsidiary Transactions
In fiscal 1999 B2B received from a third party $37,064 of fixed
assets in exchange for 20.6% of its common shares outstanding, which
resulted in an increase in the Company's paid-in-capital of $27,369.
In addition, on April 30, 1999 B2B sold 2,400 shares of convertible
preferred stock ("Preferred Stock") for net proceeds of $2,122,957.
The stated value of a share of the Preferred Stock is $1,000. B2B's
Preferred Stock has a liquidation preference equal to its stated
value and, upon liquidation, the holders may exchange each share of
Preferred Stock for 400 shares of the Company's Common Stock in lieu
of the liquidation preference. If such an exchange occurs, the
Company has the option exercisable until September 30, 2000 to
purchase any of the Preferred Stock at 1.5 times the stated value of
the Preferred Stock. The Preferred Stock does not provide for
dividends and has voting rights equal to the number of shares of
common stock into which it is convertible. If by September 30, 2000
B2B consummates a public offering of equity in excess of $5 million,
each share of Preferred Stock automatically converts into 1,667
shares of B2B's Common Stock or converts based on 75% of the Common
Share price in the financing, whichever results in a higher number
of Common Shares. If B2B does not consummate the financing by
September 30, 2000, then the holder of the Preferred Stock must at
their option either convert each Preferred Share into 1,667 Common
Shares of B2B or 400 Common Shares of the Company. If the holder
elects Company Common Stock, the Company will have the option prior
to the conversion to purchase the Preferred Stock at 1.5 times
stated value.
As a result of the above transactions, at August 31, 1999 the
Company owned 79.4% of B2B's common stock or 54% of B2B, assuming
the conversion of B2B's Preferred Stock. The results of B2B are
consolidated with those of the Company and minority interest is
presented in the accompanying consolidated balance sheet. Due to the
insignificance of the minority common shareholders' investment in
B2B, the consolidated financial statements reflect approximately 97%
of B2B's net loss for fiscal 1999 and B2B's entire net loss for the
three months ended August 31, 1999.
Based on the market price of the Company's Common Stock on the date
of issuance, B2B's Preferred Stock had a non-cash beneficial
conversion feature of $1,257,600. Such portion of the proceeds was
allocated to additional paid-in capital and will be recognized as an
expense in minority interest over the seventeen month period from
the issuance of B2B's Preferred Stock to September 30, 2000, the
first date that conversion to the Company's common stock can occur.
The amortization is calculated using the effective interest method,
increases minority interest in the balance sheet and amounted to
approximately $222,000 for the three months ended August 31,1999.
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 -Quarter Ended August 31, 1999
Revenues
- --------
Internet services revenues Internet services revenues were $1,016,001 and
$528,900, in the quarters ended August 31, 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
three customers that individually comprised more than 10% of revenue and in the
aggregate amounted to 31% of accounts receivable as of August 31,1999, and 60%
of total revenues for the three months ended August 31, 1999. The loss of any 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
$955,798 and $1,091,700, in the quarters ended August 31, 1999, and 1998,
respectively. Cost of Internet Services revenues as a percentage of related
revenues decreased to 94% from 206% of
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related revenues in the quarters ended August 31, 1999 and 1998, respectively
due to increased volume. 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 $226,565 and
$114,200, in the quarters ended August 31, 1999 and 1998, respectively. The 98%
increase results from the consolidation of B2Bgalaxy.com formed in the last
quarter of fiscal 1999 and from increases in personnel to support the growth of
the Company and B2B's operations.
General and Administrative Expenses General and administrative expenses were
$666,627 and $565,600 in the quarters ended August 31, 1999, and 1998,
respectively. The 26% increase relates primarily to the added cost resulting
from B2Bgalaxy.com consisting of personnel and overhead costs to support the
internal growth of such subsidiary. During the three months ended August 31,
1999, general and administrative expenses incurred by the subsidiary were
$320,370.
Other Income and (Expense) Other income and (expense) was $19,887 and ($5,100)
in the quarters ended August 31, 1999 and 1998 respectively.
Income tax benefit No income tax benefit was recorded in the quarters ended
August 31, 1999 and August 31, 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 all of 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.
(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
$1,969,000.
(iv) In fiscal 1999, the Company received $991,373 from the
exercise of warrants and options
(v) On April 30,1999, B2B received net proceeds of $2,122,957 in a
private placement from the sale of 2,400 shares of B2B
Preferred Stock.
The Company had cash and cash equivalents of $1,182,840 and $2,939,596 at August
31, 1999 and May 31, 1999, respectively. The decrease of $1,756,756 primarily
reflects the funding of operating activities, purchases of property and
equipment of $334,011, and payments of long-term debt of $26,207. Accounts
receivable increased from $1,024,624 as of May 31, 1999 to $1,492,698 as of
August 31, 1999, an increase of 45%, due to extended payment terms, and longer
projects. Capital expenditures were $334,011 and $14,400 in the three months
ended August, 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, 1999 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, 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 August
31, 1999 and anticipated revenues, operations can continue until at least
through February 2000.
In August 1997, the Nasdaq Stock Market ("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 governace criterion for continued listing on Nasdaq, including net
tangible assets of at least $2,000,000 or market capitalization of at least
$35,000,000. As of August 31, 1999, the Company met both of the criteria. As of
August 31, 1999, the Company had $2,007,173 in net tangible assets and as of
October 13, 1999 the Company's market capitalization was $56,467,455 assuming
the conversion of outstanding Preferred Stock into Common Stock.Nevertheless,
Nasdaq has advised the Company that, in light of the "going concern" opinion the
Company received from its independent auditors in the Company's financial
statements for the fiscal year ended May 31,
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1999, it is concerned that the Company may be unable to sustain the requirements
for continued listing and, accordingly, the Company is required to provide
Nasdaq by October 18, 1999 its proposal for achieving compliance. While the
Company believes it is in compliance with the NASDQA listing requirements ,
Nasdaq could issue a Formal Notice of Deficiency and, pending a hearing, the
Common Stock could be delisted. The Company may seek to enter a transaction or
transactions to raise additional equity capital to ensure that its Common Stock
will continue to be listed on Nasdaq. There can be no assurances that additional
financing will be available to the Company. 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.
New Accounting Pronouncement
The Company will implement the provisions of Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended by Statement of Financial Accounting Standards No. 137,
in fiscal year 2001, 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 a half 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, 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 2,889 shares of Common Stock pursuant to the exercise of
options. The options had an exercise price ranging from $1.75 to $2.375 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
10
<PAGE>
Item 4. Submissions of Matters to a Vote Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27--Financial Data Schedule
(b) Reports on Form 8-K---None
11
<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: October 14, 1999 /s/ Edward Schroeder
------------------------------
Edward Schroeder
Chief Executive Officer
And Principal Financial Officer
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Form 10-QSB for the quarterly period ended August 31, 1999 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-2000
<PERIOD-START> JUN-01-1999
<PERIOD-END> AUG-31-1999
<CASH> 1,182,840
<SECURITIES> 431,340
<RECEIVABLES> 1,492,698
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,174,846
<PP&E> 2,347,180
<DEPRECIATION> (1,421,853)
<TOTAL-ASSETS> 4,532,065
<CURRENT-LIABILITIES> 1,325,305
<BONDS> 0
0
80
<COMMON> 136,693
<OTHER-SE> 1,870,400
<TOTAL-LIABILITY-AND-EQUITY> 4,532,065
<SALES> 0
<TOTAL-REVENUES> 1,016,001
<CGS> 955,798
<TOTAL-COSTS> 1,848,990
<OTHER-EXPENSES> 19,887
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,077)
<INCOME-PRETAX> (813,102)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> (221,929)
<CHANGES> 0
<NET-INCOME> (1,035,031)
<EPS-BASIC> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
