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, 2000
/ / 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) 343-9143
(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, 2000
-------------------- ----------------------
Common Stock, $.01 Par Value 25,108,326
Transitional Small Business Disclosure Format: Yes / / No /X/
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TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page
Item 1 Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of August 31, 2000
and May 31, 2000 3
Condensed Consolidated Statements of Operations for the
three months ended August 31, 2000 and August 31, 1999 4
Condensed Consolidated Statements of Cash Flows for the
three months ended August 31, 2000 and August 31, 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II - OTHER INFORMATION
Page
Item 1. Legal Proceedings 11
Item 2. Change in Securities and Use of Proceeds 11
Item 3. Defaults upon Senior Securities 11
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
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
August 31, May 31,
2000 2000
------------ -------------
ASSETS (unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 6,911,512 $ 12,222,443
Investments, at fair value 99,620 75,568
Accounts receivable, net of allowance for doubtful accounts
of $15,000 as of August 31, 2000 and May 31, 2000 153,932 13,227
Other receivables -- 5,285
Prepaid expenses and other current assets 78,899 67,815
------------ ------------
Total current assets 7,243,963 12,384,338
Net assets of discontinued operations -- 246,495
Property and equipment, net 824,804 609,923
Other non-current assets 1,644,314 1,366,883
------------ ------------
$ 9,713,081 $ 14,607,639
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 231,253 $ 297,561
Accrued payroll and related expenses 229,829 241,886
Other accrued expenses 114,126 49,338
Deferred revenue 537,053 589,993
Other current liabilities 1,352 1,352
------------ ------------
Total current liabilities 1,113,613 1,180,130
Net liabilities of discontinued operations 329,611 --
Minority interest 5,044,362 6,479,923
Stockholders' equity:
Preferred stock, $.01 par value,
2,000,000 shares authorized;
Class C, 20 shares issued and outstanding
as of August 31, 2000 and May 31, 2000 -- --
Common stock, $.01 par value, 50,000,000 shares
authorized and 25,108,326 shares issued and outstanding
as of August 31, 2000 and May 31, 2000 251,083 251,083
Additional paid-in capital 49,509,382 49,534,442
Accumulated other comprehensive income 99,620 75,568
Deferred charges (244,228) (293,872)
Accumulated deficit (46,390,362) (42,619,635)
------------ ------------
Total stockholders' equity 3,225,495 6,947,586
------------ ------------
$ 9,713,081 $ 14,607,639
------------ ------------
</TABLE>
See notes to condensed consolidated financial statements
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Cornerstone Internet Solutions Company and Subsidiaries
Condensed Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended
August 31, August 31,
2000 1999
----------------------------
<S> <C> <C>
Subscription revenues $ 156,502 $ --
Software licensing and royalties revenue 196,664 --
Implementation and consulting revenue 69,039 --
------------ ------------
Total revenues 422,205 --
Cost of subscription revenue 327,480 --
Cost of implementation and consulting revenue 38,489 --
Marketing, sales, and support (excludes stock option expense of $8,449 2,267,239 105,459
and $0, respectively)
General and administrative expenses (excludes stock option expense of 741,049 312,750
$41,195 and $0, respectively)
Research and development 542,183 14,248
Stock option expense 49,644 --
------------ ------------
Total costs and expenses 3,966,084 422,457
Operating loss (3,543,879) (432,456)
Other income:
Interest income 148,417 17,055
Other income, net -- 6,055
------------ ------------
Loss from continuing operations before minority interest (3,395,462) (409,347)
Minority interest in net loss of subsidiary, net 1,461,455 (221,929)
------------ ------------
Loss from continuing operations (1,934,007) (631,276)
Discontinued operations:
Loss from operations of discontinued operations (915,567) (403,755)
Estimated loss on disposal of discontinued operations (921,153) --
------------ ------------
Total loss from discontinued operations (1,836,720) (403,755)
------------ ------------
Net loss (3,770,727) (1,035,031)
Preferred stock dividends and preferences -- (6,750)
Net loss attributable to common stockholders $ (3,770,727) $ (1,041,781)
============ ============
Loss per share information:
Basic and diluted loss per share from continuing operations $ (.08) $ (.05)
Basic and diluted loss per share from discontinued operations $ (.07) $ (.03)
------------ ------------
Basic and diluted net loss per share attributable to common stockholders $ (.15) $ (.08)
Weighted average shares of common stock used to compute loss per share 25,108,326 13,448,252
information
</TABLE>
See notes to condensed consolidated financial statements
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Cornerstone Internet Solutions Company and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
August 31, August 31,
2000 1999
-----------------------------
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (3,770,727) $ (1,035,031)
Loss from discontinued operations 1,836,720 403,755
Loss from continuing operations (1,934,007) (631,276)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 81,336 32,728
Stock option expense 49,644 --
Minority interest in net loss of subsidiary, net (1,461,455) 221,929
Changes in assets and liabilities:
Accounts receivable (140,705) --
Other receivables 5,285 --
Prepaid expenses and other current assets (11,084) (8,325)
Other assets (41,431) --
Accounts payable (66,308) (21,800)
Accrued expenses 52,731 (2,090)
Deferred revenue (196,664) --
------------ ------------
Net cash used by continuing operations (3,662,658) (408,834)
Net cash used by discontinued operations (1,352,890) (1,053,084)
------------ ------------
Net cash used in operating activities (5,015,548) (1,461,918)
Cash flows from investing activities:
Purchases of property and equipment (296,217) (300,762)
Cash flows from financing activities:
Proceeds from exercise of stock options -- 5,924
Proceeds from exercise of subsidiary's stock options 834 --
------------ ------------
Net cash provided by financing activities 834 5,924
------------ ------------
Net decrease in cash and cash equivalents (5,310,931) (1,756,756)
Cash and cash equivalents:
Beginning of period 12,222,443 2,939,596
End of period $ 6,911,512 $ 1,182,840
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
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CORNERSTONE INTERNET SOLUTIONS COMPANY
Notes to Condensed Consolidated Financial Statements
(Unaudited)
General
1. The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the instructions to Form 10-QSB,
and in the opinion of management contain all adjustments necessary to
present fairly the financial position of Cornerstone Internet Solutions
Company (the "Company") and subsidiaries as of August 31, 2000 and the
results of its operations and its cash flows for the three months ended
August 31, 2000 and 1999. Certain information and note disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been omitted. The
condensed consolidated financial statements should be read in
conjunction with the Company's consolidated financial statements and
related notes in the Company's Annual Report on Form 10-KSB for the
fiscal year ended May 31, 2000. The results for the three months ended
August 31, 2000 are not necessarily indicative of the results to be
obtained for the full year.
2. Business and Liquidity
The Company is a provider of comprehensive business-to-business
e-commerce services and solutions. The Company's address is 584
Broadway, Suite 509, New York, NY 10012 and its Internet address is
www.crstone.com. The Company is headquartered in New York, New York.
The Company owns two subsidiaries, marchFIRST Cornerstone and
B2Bgalaxy.com ("B2B"). marchFIRST Cornerstone is a wholly-owned
subsidiary of the Company, and an independent affiliate of marchFIRST
Corporation, the successor of USWEB Corporation ("USWeb"). MarchFIRST
Cornerstone is a full service Internet consulting firm that uses a
combination of strategic planning, technology, and creative expertise
to provide successful solutions in the B2B, B2C, knowledge management,
and enterprise integration domains. Pursuant to certain agreements with
marchFIRST, the Company is a member of marchFIRST's network of
affiliates. On September 25, 2000, the Company announced its intention
to discontinue this segment of the business, as discussed in Note 4
below.
B2B was established in February 1999 to leverage the Company's
expertise in business consulting, Internet technology and e-commerce in
the creation of industry-specific business-to-business e-commerce
portals. The portals link buyers and sellers through competitive
on-line bidding, with a focus on improving profitability. B2B targets
industries where small to medium size businesses and local or regional
distribution are dominant and where cost of goods sold is significant.
The goal of each industry portal is the enhancement of the earnings of
its members through cost savings on essential supplies through
competitive closed bidding. In May 1999, B2B launched FOODgalaxy.com,
the first portal, which was designed to lower the cost of food and
supplies for restaurants and other food service providers through
increased price competition. In March 2000, B2B agreed to license its
e-commerce solution to PetAssure, Inc. to create VETgalaxy.com, an
online marketplace targeting the veterinary service industry. Under
this agreement, B2B functions as an operational and support partner for
the new company.
The accompanying condensed 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. The
accumulated deficit as of August 31, 2000, was $46,390,362 and the net
loss for the three months ended August 31, 2000, was $3,770,727. The
B2B segment will continue to incur losses as it builds its customer
base and market share.
3. 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.
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4. Discontinuance of the Internet Business Solutions Segment
On September 25, 2000, the Company announced its plan to close its
Internet Business Solutions segment. In accordance with such plan, the
Company immediately reduced the workforce of the unit by 57% on
September 25, 2000. The Company plans to dispose of the business by
November 1, 2000 by selling the remaining assets of the segment.
Fees for affiliation rights were paid to marchFIRST.com for the right
to join the marchFIRST network and operate as an affiliate. The fee was
being amortized over the 10-year life of the agreement with marchFIRST,
but as a result of the termination of the agreement with marchFIRST
stemming from the management decision to discontinue the Internet
Business Solutions segment, the unamortized balance of $159,722 on
August 31, 2000, has been written down to zero and is included in the
estimated loss on disposal of discontinued operations.
Management of the Company has estimated costs that it will incur as
part of the discontinuance and ultimate disposal of the Internet
Business Solutions segment. The estimate primarily includes the cost of
employees who will oversee the disposal of the assets, severance costs
for employees who have been terminated, lease cancellation payments,
and the estimated loss on the sale of the segment's remaining assets.
These amounts have been included in the estimated loss on disposal of
discontinued operations in the accompanying condensed consolidated
statement of operations. The Company anticipates selling the remaining
assets of the Internet Business Solutions segment on November 1, 2000,
for approximately $100,000. Upon completion of the disposal of the
segment, the Company's primary asset will be its investment in B2B. The
Company will also provide executive management services to B2B and will
continue to control the daily operations of that company.
5. Convertible Preferred Stock Class C
As of August 31, 2000, there were 20 shares of Class C Preferred Stock
outstanding, which, as of such date, are convertible into an aggregate
of 20,205 shares of Common Stock. Each share of Class C Preferred is
convertible into the 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 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. The Class C Preferred Stock paid dividends of 12% per
year of the stated value of the Class C Preferred Stock through June
30, 1999, payable in Common Stock. Dividends amounted to $6,750 for the
three months ended August 31, 1999. In July 1999, 40,213 shares of
common stock were issued in full payment of the preferred stock
dividends.
6. 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 had consummated a public
offering of equity in excess of $5 million, each share of Preferred
Stock would have automatically converted into 1,667 shares of B2B's
Common Stock or converted based on 75% of the Common Share price in the
financing, whichever would have resulted in a higher number of Common
Shares. As B2B did not consummate such financing by September 30, 2000,
the holders 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.
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
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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 increases minority interest in the condensed
consolidated balance sheet and amounted to approximately $222,000 for
the three months ended August 31, 2000 and 1999, respectively.
In February 2000, B2B consummated a private placement of 5,357,181
shares of Common Stock, resulting in net proceeds of $14,975,213. Of
the net proceeds, $8,909,082 was allocated to additional paid-in
capital, and $6,066,131 to minority interest. The Company recorded this
transaction in its subsidiary's Common Stock as an increase to
additional paid-in capital, pursuant to its policy.
As a result of the above transactions, at August 31, 2000, the Company
owned 48.7% of B2B's common stock or 38% of B2B, after reflecting the
conversion of B2B Preferred Stock into B2B Common Stock. Due to the
Company's control of B2B's daily operations, the results of B2B are
consolidated with those of the Company and the minority interest is
presented in the accompanying consolidated balance sheet. The
accompanying condensed consolidated financial statements reflect 48.7%
of B2B's net loss for the three months ended August 31, 2000, and the
entire net loss of B2B for the three months ending August 31, 1999, due
to the insignificance of the minority interest at that time.
7. B2B Stock Options
B2B has granted options to outside consultants and to employees where
the exercise price was less than the fair value of common stock at the
grant date pursuant to its 1999 Incentive and Stock Option Plan. Such
options issued to consultants and to employees under the Plan in fiscal
2000 totaled 215,500 and 210,000, respectively. The exercise prices
ranged from $.60 to $5.00, and the total cost was an aggregate of
$544,534, which was recorded as a deferred charge and is being expensed
over the shorter of the vesting period or the period of service. Stock
option expense related to these grants for the three months ended
August 31, 2000 was $49,644.
8. Subsequent Events
A special meeting of the Company's shareholders is currently scheduled
for November 10, 2000, to consider two proposals. The first proposal is
for a one for five reverse stock split on the Company's Common Stock.
The second proposal is to change the Company's name to B2B Enterprises,
Inc.
On September 30, 2000, the holders of B2B Preferred Stock had the
option to convert each B2B Preferred Share into 400 shares of the
Company's Common Stock. If, by September 30, 2000, B2B had consummated
a public offering of equity in excess of $5 million, each share of
B2B's Preferred Stock would have automatically converted into 1,667
shares of B2B's Common Stock or based on 75% of the Common Share price
in the financing, whichever would have resulted in a higher number of
Common Shares. As B2B did not consummate such financing by September
30, 2000, the holders 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. None of the holders has elected
Company Common Stock. Therefore, the 2400 shares of B2B Preferred Stock
convert into 4,000,800 shares of B2B Common Stock. This conversion
reduces the Company's ownership in B2B Common Stock to 38%.
9. Segment Information
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". Accordingly, reportable operating
segments are determined based on the Company's management approach. The
management approach, as defined by SFAS No. 131, is based on the way
that the chief operating decision-maker organizes the segments within
an enterprise for making operating decisions and assessing performance.
Due to the discontinued operations of the Internet Business Solutions
segment, the Company's only operating segment is the B2B marketplace
segment.
10. Comprehensive Income
The amounts related to investments reported in comprehensive income for
the three months ended August 31, 2000 are comprised of a holding gain
arising during the period, net of taxes, of $24,052. The comprehensive
loss for the three months ended August 31, 2000 was ($3,746,675).
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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 Condensed
Consolidated Financial Statements of Cornerstone Internet Solutions Company and
Subsidiaries and Notes to the Condensed Consolidated Financial Statements
included elsewhere in this Form 10-QSB.
Results of Operations - Three Months Ended August 31, 2000 and 1999
Revenues
Subscription revenues - Subscription revenues were $156,502 and $0 in the three
months ended August 31, 2000 and 1999, respectively. Subscription revenue
represents monthly subscriptions from customers of B2B's FOODgalaxy division.
Total subscription revenues for the fiscal year ended May 31, 2000 were
$127,459. Revenues are expected to continue to increase as FOODgalaxy continues
to grow nationwide.
Software licensing and royalties revenue - Software licensing and royalty
revenue was $196,664 and $0 in the three months ended August 31, 2000 and 1999,
respectively. This revenue is the result of an agreement, which was the Company
entered in March 2000, to license software to a third party. B2B received one
million shares of the licensee's common stock, which had a fair market value of
approximately $1,180,000. Approximately $590,000 of the proceeds was used to
reduce the Company's capitalized software costs, and the remaining $590,000 will
be recorded as revenue ratably over the maintenance period, pursuant to the
terms of the contract.
Implementation and consulting revenue - Implementation and consulting revenue
represents billings for customization of software for the licensee of the B2B
software, and was $69,039 for the quarter ended August 31, 2000. There was no
implementation and consulting revenue in the quarter ended August 31, 1999.
Expenses
Cost of subscription revenue - Cost of subscription revenue was $327,480 and $0,
in the three months ended August 31, 2000 and 1999, respectively. These costs
represent B2B's support staffing for FOODgalaxy customers, as well as certain
costs related to the data processing operations for the FOODgalaxy marketplace.
The Company expects that costs as a percentage of related revenues will decrease
as revenues continue to grow.
Cost of implementation and consulting revenue - Cost of implementation and
consulting revenue was $38,489 and $0 in the three months ended August 31, 2000
and 1999, respectively. These costs reflect the costs associated with the
software customization work for the licensee of the B2B software.
Marketing, sales, and support expenses - Marketing, sales, and support expenses
were $2,267,239 and $105,459 for the three months ended August 31, 2000 and
1999, respectively. The increase results from the creation of a national sales
force for B2B's FOODgalaxy division in the last half of fiscal 2000.
General and administrative expenses - General and administrative expenses were
$741,049 and $312,750 in the three months ended August 31, 2000 and 1999,
respectively. The 137% increase is the result of the growth of B2B, especially
in the FOODgalaxy division, and consists of personnel and overhead costs to
support that growth.
Research and development expenses - Research and development expenses were
$542,183 and $14,248 in the three months ended August 31, 2000 and 1999,
respectively. These costs are related to the ongoing enhancements of the
technology for the Company's B2B Marketplace Segment.
Stock option expense - Stock option expense was $49,644 and $0 in the three
months ended August 31, 2000 and 1999, respectively. This expense relates to B2B
stock options, and reflects agreements with providers of certain outside
services to accept compensation in stock options, as well as grants of options
to employees, where the exercise price was less than the fair value of the
common stock at the grant date. The total cost of these non-cash items was
computed under the Black Scholes method to be an aggregate of $544,534 and is
being expensed over the shorter of the service period or the vesting period.
Other income - Other income was $148,417 and $23,110 in the three months ended
August 31, 2000 and 1999, respectively. Interest income comprises all of the
other income in the current quarter, and $17,055 in the same quarter last year.
The increase is due to the Company's higher cash balances, primarily as a result
of the private placement of B2B common stock on February 29, 2000.
Income tax benefit - No income tax benefit was recorded in the three months
ended August 31, 2000 and 1999. Using the standards set forth in Financial
Accounting Standard No. 109, management cannot currently determine whether the
Company will generate taxable
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income during the period that the Company's net operating loss carryforward and
other deferred tax assets may be applied towards the Company's taxable income,
if any. Accordingly, the Company has established a valuation allowance against
its deferred tax asset.
Loss from operations of discontinued operations - On September 25, 2000, the
Company announced its intention to close the Internet Business Solutions
segment. The loss from operations of discontinued operations of $915,567 for the
period ended August 31, 2000, represents the net loss from the operating unit
for the three months ended August 31, 2000. The loss from operations of
discontinued operations of $403,755 for the three months ended August 31, 1999
represents the net loss of the Internet Business Solutions segment during that
period.
Estimated loss on disposal of discontinued operations - Estimated loss on
disposal of discontinued operations of $921,153 for the quarter ended August 31,
2000, includes operating losses the Company anticipates incurring between August
31, 2000, and the November 1, 2000 expected disposal date. This estimate is
comprised of costs which are a direct result of the Company's decision to
discontinue the Internet Business Solutions segment.
Liquidity and Capital Resources
The Company had cash and cash equivalents of $6,911,512 and $12,222,443 at
August 31, 2000 and May 31, 2000, respectively. The decrease of $5,310,931
primarily reflects the funding of operating activities for the Company and its
subsidiaries and purchases of property and equipment. Capital expenditures were
$296,217 and $300,762 in the three months ended August 31, 2000 and 1999,
respectively. The expenditures in both periods were in support of the
development of the B2B Marketplace Segment.
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 on the Company's consolidated financial statements for the fiscal year
ended May 31, 2000 included 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 closed its Internet Business Solutions Services
segment. The Company or B2B may seek to obtain additional funds for operations.
The Company and B2B currently have no agreements, commitments, or understandings
with respect to additional funding. These funds may not be sufficient to meet
the Company or B2B's longer-term cash requirements for operations. In addition,
there can be no assurance that the Company or B2B will be able to obtain
additional financing. Management believes that based on funds on hand at August
31, 2000 and anticipated revenues, operations can continue at least through
February 2001.
New Accounting Pronouncements
The Company will implement the provisions of Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended by Statements of Financial Accounting Standards Nos. 137
and 138, in fiscal year 2002, for which the Company is presently assessing its
impact on the consolidated financial statements, if any.
FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation" ("FIN No. 44), provides guidance for applying APB Opinion No. 25,
"Accounting for Stock Issued to Employees". With certain exceptions, FIN No. 44
applies prospectively to new awards, exchanges of awards in a business
combination, modifications to outstanding awards and changes in grantee status
on or after July 1, 2000. The Company does not believe that the implementation
of FIN No. 44 will have a significant effect on results of operations.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" ("SAB No. 101"), which summarizes certain
of the SEC staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements. The Company is required to adopt
the accounting provisions of SAB No. 101 no later than the Company's fourth
quarter of fiscal 2001. The Company does not believe that the implementation of
SAB No. 101 will have a significant effect on results of operations.
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 business, the success of
its B2Bgalaxy.com subsidiary, as well as the risk factors set forth in the
Company's Annual Report on Form 10KSB for the fiscal year ended May 31, 2000.
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
10
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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
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submissions of Matters to a Vote of Security Holders
None
Item 5. Other Information
On September 25, 2000, the Company announced its plan to close its Internet
Business Solutions segment. In accordance with such plan, the Company
immediately reduced the workforce of the unit by 57% on September 25, 2000. The
Company plans to dispose of the business by November 1, 2000 by selling the
remaining assets of the segment.
Fees for affiliation rights were paid to marchFIRST.com for the right to join
the marchFIRST network and operate as an affiliate. The fee was being amortized
over the 10-year life of the agreement with marchFIRST, but as a result of the
termination of the agreement with marchFIRST stemming from the management
decision to discontinue the Internet Business Solutions segment, the unamortized
balance of $159,722 on August 31, 2000, has been written down to zero and is
included in the estimated loss on disposal of discontinued operations.
Management of the Company has estimated costs that it will incur as part of the
discontinuance and ultimate disposal of the Internet Business Solutions segment.
The estimate primarily includes the cost of employees who will oversee the
disposal of the assets, severance costs for employees, lease cancellation
payments, and the estimated loss on the sale of the segment's remaining assets.
These amounts have been included in the estimated loss on disposal of
discontinued operations in the accompanying condensed consolidated statement of
operations. The Company anticipates selling the remaining assets of the Internet
Business Solutions segment on November 1, 2000, for approximately $100,000. Upon
completion of the disposal of the segment, the Company's primary asset will be
its investment in B2B. The Company will also provide executive management
services to B2B and will continue to control the daily operations of that
company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27--Financial Data Schedule
(b) Reports on Form 8-K
None
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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 16, 2000 /s/ Ken Gruber
------------------------------
Ken Gruber
Executive Vice President
And Chief Financial and Accounting Officer
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