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 November 30, 1998
/ / 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 November 30, 1998
-------------- -----------------------
Common Stock, $.01 Par Value 11,574,895
Transitional Small Business Disclosure Format: Yes / / No /X/
1
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TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page
Item 1 Financial Statements
Consolidated Balance Sheets at November 30, 1998
and May 31, 1998 3
Consolidated Statements of Operations for the
three month and six-month periods ended November 30, 1998
and November 30, 1997. 4,5
Consolidated Statements of Cash Flows for the for
the six-month periods ended November 30, 1998 and
November 30, 1997. 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 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
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Cornerstone Internet Solutions Company and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
November 30 May 31
1998 1998
ASSETS (unaudited)
--------------------------------------------------
<S> <C> <C>
Current Assets
Cash and cash equivalents 1,751,800 $ 392,200
Investments 365,800 167,400
Accounts receivable, net 769,800 343,700
Other Receivables 60,800 100,000
Prepaid expenses and other 112,200 269,300
--------------------------------------------------
Total current assets 3,060,400 1,272,600
Affiliation rights, net 205,400 219,200
Property and equipment, net 378,500 485,900
Other 106,300 69,200
---------------- -----------------
$ 3,750,600 $ 2,046,900
---------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 509,500 $ 538,100
Accrued restructuring expenses 31,000 95,400
Accrued payroll and related expenses 345,100 202,800
Other accrued expenses 365,300 410,300
Deferred revenue 3,300 9,300
Current maturities of long-term debt 106,900 99,500
---------------- -----------------
Total current liabilities 1,361,100 1,355,400
Long-term debt 50,300 106,400
---------------- -----------------
Total liabilities 1,411,400 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
November 30,1998 and May 31, 1998. - -
Class B 2,000 shares issued and outstanding at
November 30,1998, and May 31, 1998 20 20
Class C 540 and 6,260 shares issued and outstanding at
November 30, 1998, and May 31, 1998. 10 100
Class D 7320 and 0 shares issued and outstanding at
November 30, 1998, and May 31, 1998 with a liquidating
preference of $1,375 per share. 100 -
Common Stock $.01 par value, 50,000,000 shares authorized;
11,574,895 and 9,441,117 issued and outstanding at November 30,
1998, and May 31, 1998 respectively. 115,700 94,400
Additional paid-in capital 33,777,270 30,222,480
Unrealized Gain on marketable equity securities 365,800 167,400
Accumulated deficit (31,919,700) (29,899,300)
-------------- -------------
Total stockholders' equity 2,339,200 585,100
-------------- -------------
$ 3,750,600 $ 2,046,900
-------------- -------------
</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 November 30
1998 1997
--------------------------------------------
<S> <C> <C>
Internet services revenues $1,004,600 $376,000
Software licensing and royalty revenue - 98,000
-----------------------------------------
Total revenues 1,004,600 474,000
Cost of Internet services revenues 1,146,300 803,400
Cost of licensing and royalty revenue - 22,200
Marketing and selling expenses 144,400 953,500
General and administrative expenses 513,300 492,400
Restructuring expenses - 427,700
-----------------------------------------
Total costs and expenses 1,804,000 2,699,200
=========================================
Operating loss (799,400) (2,225,200)
-----------------------------------------
Other income (expense):
Interest expense (4,700) (3,400)
Other income/expense (6,400) -
Interest income - 25,400
-----------------------------------------
Net Loss (810,500) $ (2,203,200)
==========================================
Preferred stock dividends and preferences (511,100) (2,608,700)
------------------------------------------
Net loss to common shareholders $(1,321,600) $ (4,811,900)
===========================================
Basic and diluted loss per share $ (.11) $ (.61)
============================================
Weighted average shares of common stock 11,574,895 7,828,751
============================================
</TABLE>
See notes to consolidated financial statements
5
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Cornerstone Internet Solutions Company and Subsidiaries
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Six months ended November 30
1998 1997
-----------------------------------------------------
<S> <C> <C>
Internet services revenues $1,533,500 $518,300
Software licensing and royalty revenue 38,000 132,400
--------------------------------------------------
Total revenues 1,571,500 650,700
--------------------------------------------------
Cost of Internet services revenues 2,238,000 1,302,400
Cost of licensing and royalty revenue - 22,200
Marketing and selling expenses 258,500 1,752,500
General and administrative expenses 1,078,900 1,058,800
Restructuring expenses - 427,700
--------------------------------------------------
Total costs and expenses 3,575,400 4,563,600
--------------------------------------------------
Operating loss (2,003,900) (3,912,900)
--------------------------------------------------
Other income (expense):
Interest expense (8,800) (3,400)
Other income/expense (7,700) -
Interest income - 78,900
-------------------------------------------------
Net Loss $(2,020,400) $(3,837,400)
==================================================
Preferred stock dividends and preferences (1,180,500) (4,560,800)
--------------------------------------------------
Net loss to common shareholders (3,200,900) $(8,398,200)
===================================================
Basic and diluted loss per share $ (0.28) $ (1.08)
===================================================
Weighted average shares of common stock 11,282,152 7,754,096
==================================================
</TABLE>
See notes to consolidated financial statements
5
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Cornerstone Internet Solutions Company and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Six Months Ended November 30
1998 1997
------------------------------------------------
<S> <C> <C>
Cash flows from Operating Activities
Net Loss $(2,020,400) $(3,837,400)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization 144,400 109,400
Stock option consulting expense 12,800
Changes in assets and liabilities
Accounts receivable (426,100) (7,800)
Other receivables 39,200 80,100
Prepaid expenses and other 157,100 (131,400)
Other assets (37,100) (57,800)
Accounts payable (28,600) 128,000
Accrued expenses 111,200 230,400
Deferred revenue (6,000) (69,500)
------------------------------------------------
Net cash used in operating activities (2,053,500) (3,556,000)
Cash flows from investing activities
Purchases of property and equipment (23,200) (428,700)
------------------------------------------------
Net cash (used in) investing activities (23,200) (428,700)
Cash flows from financing activities
Proceeds from private placements 3,457,800 -
Proceeds from exercise of stock options 27,200 214,500
Proceeds from sale and leaseback of equipment - 168,800
Principal payments under long-term debt (48,700) -
------------------------------------------------
Net cash provided by financing activities 3,436,300 383,300
------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,359,600 (3,601,400)
Cash and cash equivalents
Beginning of period 392,200 4,952,900
------------------------------------------------
End of period $1,751,800 $1,351,500
================================================
</TABLE>
See notes to consolidated financial statements
6
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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 November
30, 1998 and the results of its operations and its cash flows for the
three and six month periods ended November 30, 1998 and November 30,
1997. 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, 1998 Annual Report on Form
10-KSB. The results for the three and six month periods ended November
30, 1998 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 and has assigned all third party rights in the titles
to the acquirer for $100,000, payable at varying monthly amounts
through January 1, 1999. The November 30, 1998 and May 31, 1998 balance
sheet caption "Other receivables" reflects the amounts due under the
contract.
On December 4, 1996 the Company through, a wholly-owned subsidiary,
signed multiple market affiliate agreements with USWeb Corporation
("USWeb") 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.
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, 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 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 $1,970,000 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 be able to increase its revenues.
7
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3. Affiliation Rights
Fees for affiliation rights were paid to USWeb for the right to join
the USWeb network and operate as an affiliate. The fee is being
amortized over the 10-year life of the agreement with USWeb.
Affiliation rights at November 30, 1998 were net of accumulated
amortization of $104,600 and the $315,000 write off described above.
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 (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 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 liquidating
preference (subject to the liquidation preference of the Class C
Preferred Stock) equal to the product of 1.1 and the stated value of
$1,250. The Class D Preferred Stock is entitled to vote on all matters
submitted to the holder of the Company's Common Stock, at 1,250 votes
per share, pays no dividends and is not redeemable.
6. 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
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
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 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 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 outstanding after the exchange offer amounted to
$41,000 for the six months ended November 30, 1998.
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.
8
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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 par
value $.01 Convertible Preferred Stock (Class B Preferred Stock). Net
proceeds to the Company were $1,990,800. The 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
could be exchanged for .8 shares of Class D Convertible Preferred
Stock.
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 Class B Preferred
Stock to March 1999 (the first date that conversion could have
occurred). As a result, the net loss to common shareholders includes
preferred stock preferences of $511,100 and $946,000 for the three and
six months ended November 30, 1998.
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 - Six Months Ended November 30, 1998 and 1997
Revenues
Internet services revenues Internet services revenues were $1,533,500 and
$518,300 in the six months ended November 30, 1998 and 1997, 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 38% of accounts receivable and 46% of total revenues for
the six months ended November 30, 1998. The loss of either of these customers
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 $132,400 in the six months ended 1998 and 1997, 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
$2,238,000 and $1,302,400, in the six months ended November 30, 1998 and 1997,
respectively. Cost of Internet Services Revenues in the six months ended
November 30, 1998 exceeded Internet services revenues as a result of the
Company's need to supplement staff with consultants who had specific skills
necessary to fulfill customer projects and the Company's decision to build its
development capability to secure customer contracts. The Company expects that as
it secures additional contracts, the cost of revenues as a percentage of
revenues will decrease.
Cost of licensing and royalty revenue Cost of licensing and royalty revenue were
$0 and $22,200 in the six months ended November 30, 1998 and 1997, 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 $258,500 and
$1,752,500, in the six months ended November 30, 1998 and 1997, respectively.
The 85% 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
$1,078,900 and $1,058,800 in the six months ended November 30, 1998 and 1997
respectively.
Restructuring expenses The Company incurred restructuring expenses of $427,700
during the six month period ending November 30, 1997 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.
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Other Income and (Expense) Other income and (expense) was $(16,500) and $75,500
in the six months ended November 30, 1998 and 1997, respectively. The Company
derived less interest income in the six months ended November 30, 1998 due to
the Company's lower cash balances.
Income tax benefit No income tax benefit was recorded in the six months ended
November 30, 1998 and November 30, 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.
Quarterly results
The Company expects its quarterly results to vary significantly in the future.
The number of customer contracts signed and 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 in 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.
Results of Operations -Quarter Ended November 30, 1998 and 1997
Revenues
Internet services revenues Internet services revenues were $1,004,600 and
$376,000, in the quarters ended November 30, 1998 and 1997, 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 and in the
aggregate amounted to 30% of accounts receivable and 27% of total revenues for
the three months ended November 30, 1998. The loss of this customer 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
$1,146,300 and $1,272,800, in the quarters ended November 30, 1998 and 1997,
respectively. Cost of Internet Services Revenues in the quarter ended November
30, 1998 exceeded Internet services revenues as a result of the Company's need
to supplement 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 decrease. Cost
of Internet Services revenues was 114% and 339% of related revenues in the
quarters ended November 30, 1998 and 1997, respectively.
Marketing and Selling Expenses Marketing and Selling expenses were $144,400 and
$953,500, in the quarters ended November 30, 1998 and 1997, respectively. The
85% 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
$513,300 and $492,400 in the quarters ended November 30, 1998 and 1997,
respectively.
Restructuring Expenses The Company incurred restructuring expenses of $427,700
during the three month period ending November 30, 1997 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.
Other Income and (Expense) Other income and (expense) was ($11,100) and $ 22,000
in the quarters ended November 30, 1998 and 1997 respectively. The Company
recorded $25,000 less interest income in the quarter ended November 30, 1998 due
to the Company's lower cash balances than in the quarter ended November 30,
1997.
Income tax benefit No income tax benefit was recorded in the quarters ended
November 30, 1998 and November 30, 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, 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
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(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.
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.
The Company had cash and cash equivalents of $1,751,800 and $392,200 at November
30, 1998 and May 31, 1998, respectively. The increase of $1,359,600 reflects
primarily the private placements described above which yielded $3,457,800
partially offset by the funding of operating activities ($2,053,500) and
payments of long term debt of $48,700. Capital expenditures were $23,200 and
$428,700 in the six months ended November 30, 1998 and 1997. 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 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 and November 1998 approximately $1,487,900 and
$1,970,000, respectively from the sale of common stock and preferred stock in
two seperate 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 November 30, 1998 and anticipated revenues operations can
continue until at least thru the end of the current fiscal year.
NASDAQ Listing Standards; Possible NASDAQ Delisting. 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 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
November 30, 1998 the Company had $2,339,200 in net tangible assets. Nasdaq had
advised the Company that based on the tangible net worth reported at August 31,
1998 of $933,700 the Company no longer met the requirements for continued
listing. The Company had a hearing with Nasdaq on January 7, 1999 to determine
whether the Company Common Stock should be delisted. Nasdaq has not reached a
detemination as of the date of this filing. The determination could be to
continue listing. However, Nasdaq may determine that the Company's plans will
not warrant continued listing; in such event, Nasdaq will issue a Formal Notice
of Deficiency and the Common Stock will 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.
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 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. 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.
11
<PAGE>
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-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 1. Legal Proceedings
None
Item 2. Change in Securities
On November 10, 1998 the Company consummated a private placement of 1,600 shares
of Class D Preferred Stock Stock for $1,250 per share. The net proceeds of the
offering were approximately $1,970,000. The sale was made pursuant to the
exemption contained in Section 4(2) of the Securities Act of 1933 as amended.
The Company did not engage a placement agent in connection with the private
placement. For a further description of the terms of the Class D Preferred Stock
and the private placement, please see Note 6 of Notes to Consolidated Financial
Statements.
In October 1998 the Company offered to exchange one share of its Class D
Convertible Preferred Stock (the "Class D Preferred Stock") for one share of
Class C Convertible 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.
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 could be exchanged for .8 shares of Class D
Convertible Preferred Stock.
Item 3. Defaults upon Senior Securities
None
Item 4. Submissions of Matters to a Vote Security Holders
None
Item 5. Other Information
On January 8th, 1999, Ken Gruber, the Chief Financial Officer of the
Company left to pursue other interests. Until a new CFO is named, Ed
Schroeder, CEO will be the Company's principal financial officer.
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27- Financial Data Schedule
Exhibit 4.14- Certificate of Designations, Preferences, and
other Rights and Qualifications of Class D
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.
CORNERSTONE INTERNET SOLUTIONS COMPANY
-----------------
(Registrant)
Date January 8, 1999 /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
-4-
<PAGE>
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
-5-
<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
-6-
<PAGE>
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,
-7-
<PAGE>
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.
-8-
<PAGE>
IN WITNESS WHEREOF, we have executed this Certificate of
Designation this 6th day of October 1998.
CORNERSTONE INTERNET SOLUTIONS COMPANY
By: /s/ Edward Schroeder
--------------------------------------
Name: Edward Schroeder
Title: President and Chief
Executive Officer
By: /s/ Kenneth Gruber
-------------------------------------
Name: Kenneth Gruber
Title: Chief Financial Officer
and Secretary
-9-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Form 10-K for the year ended January 31, 1996 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> SEP-01-1998
<PERIOD-END> NOV-30-1998
<CASH> 1,751,800
<SECURITIES> 365,800
<RECEIVABLES> 769,800
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,060,400
<PP&E> 1,613,978
<DEPRECIATION> (1,235,535)
<TOTAL-ASSETS> 3,750,600
<CURRENT-LIABILITIES> 1,361,100
<BONDS> 0
0
130
<COMMON> 115,700
<OTHER-SE> 2,223,370
<TOTAL-LIABILITY-AND-EQUITY> 3,750,600
<SALES> 0
<TOTAL-REVENUES> 1,004,600
<CGS> 1,146,300
<TOTAL-COSTS> 1,804,000
<OTHER-EXPENSES> 6,400
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,700
<INCOME-PRETAX> (810,500)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (810,500)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
