SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission
File Number:
May 31, 2000 1-13360
Cornerstone Internet Solutions Company
( Name of Small Business Issuer as Specified in its Charter)
Delaware 22-3272662
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
584 Broadway, Suite 509
New York, NY 10012
(Address of principal executive offices) (Zip Code)
(212) 343-9143
(Issuer's telephone number, including area code)
Securities Registered pursuant to Section 12(b)
of the Exchange Act: Common Stock par value $.01 per share
Securities Registered pursuant to Section 12(g)of the Exchange Act: None
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
--- ---
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B
is not contained herein, and will not be contained, to the best of Registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.
[X]
Revenues for the fiscal year ended May 31, 2000 were $2,867,230.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing price of the Common Stock on August 24, 2000,
was approximately $23,539,056. As of August 24, 2000, the Registrant had
outstanding 25,108,326 shares of Common Stock.
Documents Incorporated By Reference
Portions of the Proxy Statement for the 2000 Annual Meeting of Stockholders
incorporated by reference in Part III, Items 9, 10, 11 and 12.
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Cornerstone Internet Solutions Company
FORM 10-KSB ANNUAL REPORT
TABLE OF CONTENTS
PART I
Page
----
Item 1. Description of Business 3
Item 2. Description of Property 6
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders 6
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 7
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 7. Consolidated Financial Statements 15
Item 8. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure 15
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act 15
Item 10. Executive Compensation 16
Item 11. Security Ownership of Certain Beneficial Owners and Management 16
Item 12. Certain Relationships and Related Transactions 16
Item 13. Exhibits, Lists and reports on Form 8-K 16
Independent Auditors' Report 18
Consolidated Balance Sheets as of May 31, 2000 and 1999 19
Consolidated Statements of Operations for the years
ended May 31, 2000 and 1999 20
Consolidated Statements of Stockholders' Equity for the years
ended May 31, 2000 and 1999 21
Consolidated Statements of Cash Flows for the years
ended May 31, 2000 and 1999 22
Notes to Consolidated Financial Statements 23
SIGNATURES 36
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PART 1
Item 1 Description of Business
Cornerstone Internet Solutions Company, a Delaware corporation (the "Company"),
is a provider of comprehensive Internet-based services and solutions. The
Company operates two subsidiaries, marchFIRST Cornerstone and B2Bgalaxy.com. The
Company is located at 584 Broadway, Suite 509, New York, New York 10012 and its
telephone number is (212) 343-9143. Its World Wide Web site address is
http://www.crstone.com.
marchFIRST Cornerstone
marchFIRST Cornerstone is a wholly-owned subsidiary of the Company, an
independent affiliate of marchFIRST Corporation ("marchFIRST"), 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 designed to provide successful solutions in the B2B, B2C,
Knowledge Management and Enterprise Integration domains.
marchFIRST Cornerstone helps clients improve business processes using Internet
based technologies primarily in the following areas:
o Electronic Commerce - Delivers a wide range of e-commerce solutions from
catalog merchant sites to large sophisticated business-to-business systems
across many value chains. Customer objectives are met by combining skills in
business strategy, understanding of e-commerce product and service offerings,
application of the best technology, and solutions to security and financial
concerns.
o Business Applications - Automates business processes through the use of
Internet technology. Internet and Extranet deliver mission critical business
applications (sales force automation, dealer, supplier, and customer support,
etc) through secure Internet technologies, often leveraging clients' investments
in existing technology, to greatly increase productivity, reduce costs, and
improve profitability.
Pursuant to certain agreements with marchFIRST, the Company is a member of
marchFIRST's network of affiliates. Under the terms of the agreement with
marchFIRST, the Company pays licensing and marketing fees totaling 7% of
revenues, reduced by the cost of any third party products. The Company receives
a number of services from marchFIRST including: (1) centralized marketing, brand
awareness, competitive analyses, and lead generation programs; (2) technology
services; (3) an internal registry of skills and technologies; and (4) strategic
relationships with technology companies.
The Company believes that the market for Internet professional services is
growing rapidly. As more companies express a desire for a single-source
professional services firm that can deliver integrated strategy, technology and
creative design, the Company anticipates expanding its service offerings to
fulfill such demand.
During fiscal 2000, internet services revenue was negatively impacted by a
settlement with a customer for the cancellation of a project, as well as the
result of not realizing anticipated contracts from both new and existing
customers. The loss of development and project management personnel led to
delays in the Company's ability to complete its contracts. The Company has had
continuing losses from operations which could impact its ability to meet its
obligations as they become due. The independent auditors' report for the fiscal
year ended May 31, 2000 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 reorganized its marchFIRST Cornerstone
management team, hired a new sales staff, entered into strategic relationships
with providers of new technologies, and reduced its reliance on consultants. The
Company is considering sources of additional financing as the new management
rebuilds the business. Management believes that, based on funds on hand at May
31, 2000 and anticipated revenues and collections, operations can continue at
least through October, 2000.
B2Bgalaxy.com, Inc
In February, 1999, the Company formed B2Bgalaxy.com, Inc. a Delaware corporation
("B2B"). B2B was established to leverage the Company's expertise in business
consulting, Internet technology and e-commerce. B2B creates 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.
At the core of each B2B portal is B2B's Power Purchasing, a proprietary closed
bidding system that is focused on continually optimizing both the price and
availability of supplies. Power Purchasing provides members, both buyers and
sellers, with
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important tools for improving their businesses. For member buyers, Power
Purchasing provides a means of managing their procurement process through
competitive purchasing, and access to a pool of vendors, providing direct cost
savings, increased efficiency, and integration. Vendors can easily service their
existing client bases and reach out to new potential customers without
incremental costs. The benefits of integration result in reduced order
processing costs, as well as marketing and advertising cost savings. All members
have access to additional services offered through the e-commerce marketplace.
In May 1999, B2B launched FOODgalaxy.com, the first portal, which was designed
to lower the cost of food and supplies and increase efficiency for restaurants
and other food service providers. FOODgalaxy.com enables a member restaurant to
post a customized inventory list online, and requires member suppliers to
continually update product bids. This competitive process is intended to drive
down the cost of goods to buyers and significantly reduce the time traditionally
devoted to the comparative price shopping process. B2B estimates that use of
Power Purchasing can save up to 20% on the cost of food and supplies. Since food
and supplies costs represent 40% of typical restaurant sales, the impact on
earnings could be significant.
In March 2000, B2B agreed to license its e-commerce solution, including Power
Purchasing to VETgalaxy.com, an independent enterprise, to create an online
marketplace targeting the veterinary service industry. Under this agreement B2B
functions as an operational and support partner.
In July 2000, Telefonica B2B, a leading business-to-business net market maker,
and B2B announced plans for a joint venture for the creation of an e-commerce
marketplace for the food service industry in Spanish and Portuguese speaking
markets in Latin America, Spain, and Portugal. Potential e-commerce marketplaces
could be extended to other industries with similar purchasing needs and
behaviors. Telefonica B2B will replicate B2B's business model using the Power
Products applications. Telefonica B2B is backed by Telefonica S.A., Spain's
foremost private sector company and the leading provider of telecommunications
services to the Spanish and Portuguese speaking world, as well as by BBVA, the
leading financial institution in Latin America and Spain.
In April 1999, B2B sold 2,400 shares of Class A par value $.01 Convertible
Preferred Stock ("B2B Preferred Stock") resulting in net proceeds of $2,122,957.
The stated value of a share of the B2B Preferred Stock is $1000. If by September
30,2000, B2B consummates a public offering of equity securities where gross
proceeds are in excess of $5,000,000, then each share of B2B Preferred Stock
automatically converts into 1,667 shares (the "B2B Exchange Rate") of B2B's
Common Stock, $.01 par value ("B2B Common Stock") or converts based on 75% of
the B2B Common Stock price in the financing, whichever results in a higher
number of Common Shares. If B2B does not consummate the financing by September
30, 2000, then the holder of the B2B Preferred Stock must, at their option,
either convert each B2B Preferred Share into 1,667 shares of B2B Common Stock or
400 shares of the Common Stock of the Company. B2B does not currently
contemplate consummating a public offering by September 30, 2000. If the holder
elects to receive Company Common Stock, the Company will have the option prior
to the conversion of purchasing the B2B Preferred Stock at 1.5 times the 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 is recognized as an expense in minority interest over the
seventeen-month period from the issuance of B2B Preferred Stock to September
30,2000, the first date on which conversion to the Company's common stock can
occur. The amortization increases minority interest in the consolidated balance
sheet and amounted to approximately $888,000 for the fiscal year ended May 31,
2000.
On February 29, 2000, B2B consummated a private placement of 5,357,181 shares of
unregistered Common Stock for $2.80 per share, resulting in net proceeds of
$14,975,213.
As a result of the above transactions, as of May 31, 2000, the Company holds
approximately 49.9% of the outstanding common shares of B2B, or 38% of B2B,
assuming the conversion of B2B Preferred Stock. Due to the Company's control of
B2B, the results of B2B are consolidated with those of the Company, and the
minority interest is presented in the accompanying consolidated balance sheets.
Due to the insignificance of the minority common shareholders' investment in B2B
through February 28, 2000, the consolidated financial statements reflect 100% of
B2B's net loss for the nine months ended February 29, 2000, and 49.9% of the
loss in the quarter ended May 31, 2000.
The following is a summary of the relationships between the Company and B2B. B2B
and marchFIRST Cornerstone, a wholly-owned subsidiary of the Company, have
entered into a Technology Development and Licensing Agreement ("Technology
Agreement") pursuant to which marchFIRST Cornerstone will provide internet
development services for B2B. The initial scope
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of work to be performed by marchFIRST Cornerstone under the Technology Agreement
was the design and implementation of B2Bgalaxy.com and FOODgalaxy.com. In
consideration for its services under the technology Agreement, marchFIRST
Cornerstone was reimbursed its costs and related overhead attributable to the
services furnished. B2B will own all enhancements made to the technology.
Pursuant to an Administrative Services Agreement between marchFIRST Cornerstone
and B2B, marchFIRST Cornerstone may also furnish certain administrative and
management services to B2B including accounting and financial services; MIS
services: marketing; and business development and other services. In
consideration of such services, B2B will reimburse marchFIRST Cornerstone its
costs and related overhead attributable to the services furnished.
Prior History
The Company was incorporated in December 1993. In July 1998, the Company changed
its name to Cornerstone Internet Solutions Company. In 1999, as described above,
the Company formed B2B. Unless otherwise indicated, references to the Company
shall include its wholly-owned subsidiaries, B2B, and predecessor.
Competition
MarchFIRST Cornerstone -
The market for the Company's products and services is highly competitive.
Competitors include national and regional advertising agencies, specialized and
integrated marketing communication firms and businesses in the computer network
solutions industry, as well as diversified consulting companies that include
internet consulting as a service.. The Company expects that new competitors that
provide integrated or specialized services (e.g., corporate identity and
packaging, advertising services or World Wide Web site design) and are
technologically proficient, will emerge and will be competing with the Company.
Most current and potential competitors have longer operating histories, larger
installed customer bases, longer relationships with customers and significantly
greater financial, technical, marketing and public relations resources than the
Company and could decide to increase their resource commitments to the Company's
market. In addition, many competitors have lower overhead, more technical
expertise and more advanced technology. The Company does not have significant
proprietary technology that would preclude or inhibit competitors from entering
its markets. The Company intends to compete on the basis of price and quality of
services. In addition, the market for Internet development is relatively new and
subject to continuing definition, and, as a result, the core business of certain
competitors may better position them to compete in this market as it matures.
Competition of the type described above could materially adversely affect the
Company's business, results of operations and financial condition. There can be
no assurance that future competitors will not develop or offer services and
products that provide significant performance, price, creative or other
advantages over those offered by the Company, which could have a material
adverse effect on the Company's business, financial condition and operating
results.
B2Bgalaxy.com -
The market for business-to-business e-commerce and Internet ordering and
purchasing is new and rapidly evolving, and competition is intense and is
expected to increase significantly in the future. Barriers to entry are
relatively inconsequential. B2B's main areas of competition include:
o other companies with e-commerce offerings, traditional suppliers and
distributors in vertical marketplaces;
o companies that have developed their own purchasing solutions and
enterprise; and
o software companies that offer, or may develop, alternative
purchasing solutions.
B2B could face further competition in the future from traditional suppliers and
distributors that enter into business-to-business e-commerce over the Internet
either on their own or by partnering with other companies. Traditional
enterprise software companies, such as IBM and Oracle, could, in the future
develop and offer a competitive purchasing solution that B2B's customers could
customize to link to their suppliers. Additionally, emerging enterprise software
companies such as Ariba and Commerce One offer purchasing solutions that could
be customized to link to suppliers within particular industries. Companies such
as Ventro, VerticalNet, RestaurantPro, The Sauce and PurchasePro may also
compete with B2B in any individual vertical marketplace.
B2B's current and potential competitors may develop superior Internet purchasing
solutions that achieve greater market acceptance than B2B's solution.
Many of B2B's existing and potential competitors, including large traditional
distributors, have longer operating histories in the food service market,
greater name recognition, larger customer bases and significantly greater
financial, technical and marketing resources than B2B. Such competitors can
undertake more extensive marketing campaigns for their brands,
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products and services, adopt more aggressive pricing policies and make more
attractive offers to customers, potential employees, distribution partners, and
third-party suppliers.
Accordingly, B2B cannot be certain that B2B will be able to retain or expand its
existing marketplace customers or successfully develop other vertical
marketplaces. B2B may not be able to compete successfully against its current or
future competitors and competition could have a material adverse effect on B2B's
business, results of operations and financial condition.
Employees
As of August 1, 2000 the Company's MarchFIRST Cornerstone subsidiary had 28
employees all of whom are employed on a full-time basis. The staff is comprised
of 2 in sales and marketing, 20 in development and 6 in general and
administrative functions. The B2Bgalaxy.com subsidiary had 138 employees, all of
whom are employed on a full-time basis. The B2B staff is comprised of 98 in
sales and marketing, 20 in research and development, 14 in customer support, and
6 in general and administrative functions. The Company has never experienced a
work stoppage and its employees are not covered by a collective bargaining
agreement. The Company believes that its relations with its employees are good.
Item 2 Properties
The Company owns no real property. The Company conducts its marchFIRST
Cornerstone operations through one leased facility in New York, New York. B2B
operates from a leased facility in Parsippany, New Jersey. The Company also
leases six other office locations, which have been subleased to independent
companies. The anticipated net loss from the subleases was accrued as of May 31,
1998 and the subsequent net expenditures have been consistent with the original
accrued amounts.
Item 3 Legal Proceedings
Neither the Company nor any of its subsidiaries is a party to any material
pending legal proceedings, other than routine litigation incidental to the
business.
Item 4 Submission of Matters to a Vote of Security Holders
At the Annual Meeting of stockholders of the Company on April 12, 2000, the
Company's stockholders approved the matters listed below by the votes indicated
below:
a) Election of Directors: For Withheld
Edward Schroeder 21,423,446 146,974
Rino Bergonzi 21,372,869 200,551
Andrew Gyenes 21,368,899 204,521
Peter Gyenes 21,364,299 209,121
Harrison Weaver 21,400,926 172,494
b) The approval of an amendment to the Company's 1994 Incentive and
Non-Qualified Stock Option Plan.
For Against Abstain Not Voted
5,258,362 675,189 122,652 15,517,217
c) The approval of amendments to the Company's 1995 Stock Option Plan for
Outside Directors.
For Against Abstain Not Voted
5,338,414 605,382 112,407 15,517,217
d) The approval of an amendment to the Company's 1994 Consultant Stock
Option Plan.
For Against Abstain Not Voted
5,322,773 618,888 114,542 15,517,217
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PART 2
Item 5 Market for Common Equity and Related Stockholder Matters
The Common Stock of Cornerstone Internet Solutions is traded under the symbol
CNRS on the NASDAQ SmallCap Market. The Company's Common Stock is also traded on
the Boston Stock Exchange under the symbol "CNR". The following table sets forth
the ranges of the high and low closing bid prices for the Common Stock since
June 1, 1998, as reported on the NASDAQ SmallCap Market, the principal trading
market for the Common Stock. The quotations are inter-dealer prices without
adjustment for retail markups, markdowns, or commission and do not necessarily
represent actual transactions.
COMMON STOCK
YEAR ENDED MAY 31, 2000
High Low
First Quarter 2 13/32 1 11/16
Second Quarter 6 13/16 2 1/32
Third Quarter 12 5/16 6
Fourth Quarter 6 3/4 1 1/16
YEAR ENDED MAY 31, 1999
High Low
First Quarter 2 1/3 1 1/4
Second Quarter 1 21/32 5/8
Third Quarter 3 7/16 1 5/32
Fourth Quarter 4 1/16 1 15/16
As of August 16, 2000, the Company had outstanding 25,108,326 shares of Common
Stock and 147 holders of record of the Company's Common Stock. The Company
believes that at such date, there were in excess of 10,000 beneficial owners of
the Company's Common Stock.
The Company paid $6,750 of dividends on its Preferred Stock in fiscal 2000. The
Company has never paid any dividends on its Common Stock. The Company currently
intends to retain all earnings, if any, to support the development and growth of
the Company's business. Accordingly, the Company does not anticipate that any
cash dividends will be declared on its Common Stock for the foreseeable future.
Item 6 Management's Discussion and Analysis of Financial Condition and Results
of Operations
The discussion and analysis should be read in conjunction with the Consolidated
Financial Statements of Cornerstone Internet Solutions Company and Subsidiaries
and Notes to the Consolidated Financial Statements included elsewhere in this
Form 10-KSB.
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains certain forward-looking statements that involve risks and
uncertainties, including statements regarding the Company's strategy, planned
operations, financial performance, and revenue sources. The Company's actual
results could differ materially from the results anticipated in these
forward-looking statements as a result of certain factors set forth under "Risk
Factors" below. For additional
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information regarding the Company and factors that could affect future
performance, see the information contained in the Company's other public filings
with the Securities and Exchange Commission.
Results of Operations -Years Ended May 31, 2000 and 1999
Revenues
--------
Internet services revenue - Internet services revenues were $2,739,771 and
$3,205,869, in the fiscal years ended May 31, 2000 and 1999, respectively.
During fiscal 2000 Internet services revenue was negatively impacted by a
settlement with a customer for the cancellation of a project, as well as the
result of not realizing anticipated contracts from both new and existing
customers. The loss of development and project management personnel led to
delays in the Company's ability to complete its contracts. The Company has
changed senior management, rebuilt its sales team, and entered into
relationships with software companies in order to generate higher revenues. 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
four customers that individually comprised more than 10% of Internet services
revenue of the Company for the fiscal year ended May 31, 2000. The Company's
five largest customers comprised 63% of Internet services revenue of the Company
for the fiscal year ended May 31, 2000. To the extent that any of the Company's
major customers does not remain a significant source of revenues, or is not
replaced by similar or larger customers, there could be a direct and immediate
material adverse effect on the Company's business, financial condition, results
of operations and prospects.
Subscription revenue - Subscription revenue of $127,459 in fiscal 2000 reflects
initial subscriptions from B2B's FOODgalaxy division. Revenues are expected to
increase in fiscal 2001 as a result of the hiring of a national sales force
during the third and fourth quarters of fiscal 2000. There was no subscription
revenue in fiscal 1999.
Software licensing and royalty revenue Software licensing and royalty revenue
were $0 and $51,200 in the fiscal years ended May 31, 2000 and 1999,
respectively. Prior year revenue was related to the Company's publishing of
interactive CD-ROM titles, which the Company has discontinued.
Expenses
--------
Cost of Internet Services Revenue Cost of Internet services revenue was
$4,073,284 and $3,967,454, in the fiscal years ended May 31, 2000, and 1999,
respectively. Cost of Internet Services revenue as a percentage of related
revenues increased to 149% from 124% in the fiscal years ended May 31, 2000 and
1999, respectively. Cost of Internet services revenue in the fiscal year ended
May 31, 2000 exceeded Internet services revenue as a result of the Company's
need to supplement internal staff with consultants who had specific skills
necessary to fulfill customer projects and non-chargeable time, in addition to
high personnel turnover. The Company expects that as it secures additional
contracts, the cost of revenues as a percentage of revenues will decrease.
Cost of Subscription Revenue Cost of subscription revenue was $290,008 and $0 in
the fiscal years ended May 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.
Marketing, Sales, and Support Expenses Marketing, sales and support expenses
were $3,341,001 and $ 519,959, in the fiscal years ended May 31, 2000 and 1999,
respectively. Of the increase, approximately $3 million relates to the creation
of a national sales force for B2B's FOODgalaxy division in the third and fourth
quarters of fiscal 2000. B2B costs do not reflect a full year of staffing, and
therefore will be higher in future periods. There was a decrease of
approximately $114,000 in marchFIRST marketing and sales expense due to the
departure of marketing and sales staff, who were not immediately replaced.
marchFIRST marketing costs are expected to increase as the department is
reorganized and re-staffed.
General and Administrative Expenses General and administrative expenses were
$4,469,268 and $2,317,762 in the fiscal years ended May 31, 2000, and 1999,
respectively. B2B general and administrative expenses were $2,216,735 in fiscal
2000, and $255,539 in fiscal 1999. The fiscal 1999 costs were related to the
start-up of B2B.
Research & Development Research and development expenses were $564,232 and $0 in
the fiscal years ended May 31, 2000, and 1999, respectively. These costs are
related to the development of the technology for B2B.
Interest Expense Interest expense was $5,034 and $10,760 in fiscal 2000 and 1999
respectively. The interest expense in fiscal 2000 and 1999 relates to long term
borrowings for equipment financing.
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Interest Income Interest income was $289,845 and $10,594 in fiscal 2000 and 1999
respectively due to higher cash balances in fiscal 2000 than in fiscal 1999,
primarily as a result of the private placement of B2B common stock on February
29, 2000.
Gain on Sale of Investments In fiscal 2000 the Company exercised USWeb warrants
and sold the USWeb stock, resulting in a gain of $728,750.
Income Tax Benefit No income tax benefit was recorded in the fiscal years ended
May 31, 2000 and May 31, 1999. 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 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.
Liquidity and Capital Resources
Since June 1, 1998, the Company's principal sources of capital have been as
follows:
(i) On July 24, 1998, the Company consummated a private placement of
1,768,750 unregistered shares of Common Stock for $1.00 per share.
Net proceeds to the Company were $1,487,900.
(ii) On November 10, 1998, the Company received net proceeds of
$1,969,900 from the sale of convertible securities that were
eventually converted into 2,000,000 shares of Common Stock.
(iii) In fiscal 1999, the Company received $991,373 from the exercise of
warrants and options.
(iv) On April 30, 1999, B2B received net proceeds of $2,122,957 in a
private placement from the sale of 2,400 shares of B2B Preferred
Stock. (See Business--B2Bgalaxy.com, Inc.)
(v) In fiscal 2000, the Company received $3,730,320 from the exercise of
warrants and options.
(vi) On February 29, 2000, B2B consummated a private placement of
5,357,181 shares of Common Stock for $2.80 per share. The net
proceeds of the offering were $14,975,213.
The Company had consolidated cash and cash equivalents of $12,222,443 and
$2,939,596 at May 31, 2000 and May 31, 1999, respectively. The increase of
$9,282,847 reflects primarily the proceeds from the B2B private placement
described above which provided $14,975,213, and proceeds from the exercise of
options and warrants of $3,730,230, as well as the proceeds from the sale of
marchFIRST warrants of $728,750. These receipts were partially offset by the
funding of operating activities ($8,607,625) and purchases of equipment totaling
$1,438,857. Accounts receivable decreased from $1,024,624 as of May 31, 1999 to
$691,978 as of May 31, 2000, a decrease of 32%, while sales for fiscal 2000 and
1999 decreased from $3,257,069 to $2,867,230, a decrease of 12%. The decrease in
accounts receivable is primarily attributable to the decrease of revenue in the
last quarter of fiscal 2000. Capital expenditures were $1,438,857 and $366,858
in the fiscal years ended May 31, 2000 and 1999 respectively. The expenditures
supported the growth of B2B and are not expected to continue at such volume.
Pursuant to certain agreements between the Company, B2B and certain B2B
stockholders, the proceeds of the private placements conducted by B2B can only
be used for B2B's business. Pursuant to such agreements, the Company has and
will perform for B2B certain administrative and development services for which
B2B reimburses the Company for its cost of providing such services plus a charge
to cover related overhead of the Company. The Company is obligated to provide
such services to B2B at a price no less favorable than could be obtained by B2B
from an unrelated third party. The Company billed B2B for such services totaling
$723,826 and $352,100 in the fiscal years ended May 31, 2000 and 1999,
respectively.
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 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 reorganized its marchFIRST Cornerstone management
team, hired a
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new sales staff, entered into strategic relationships with providers of new
technologies, and reduced its reliance on consultants. The Company is
considering additional sources of financing as the new management rebuilds the
business. The Company currently has no agreements, commitments, or
understandings with respect to additional financing. Management believes that
based on funds on hand at May 31, 2000, and anticipated revenues and
collections, marchFIRST operations can continue at least through October 2000.
Management believes that B2B has sufficient funds to meet operating requirements
at least through March 2001.
Year 2000 Compliance. To date, the Company has not encountered any significant
effects of the Year 2000 problem, either internally or with third parties. This
does not guarantee that problems will not occur in the future or have not yet
been detected.
Impact of Recently Issued Accounting Pronouncements. The Company will adopt SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities", as
amended by SFAS 138, effective July 1, 2000, and is in the process of
determining the effect that SFAS No. 133 will have on its results of operations
and financial position. This statement is not required to be applied
retroactively to financial statements of prior periods.
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.
RISK FACTORS- ADDITIONAL IMPORTANT FACTORS TO BE CONSIDERED FOR THE COMPANY AND
B2B The Company and B2B operate in a rapidly changing environment that involves
a number of risks, some of which are beyond the Company's control. The following
highlight the most serious of the risks.
Limited Operating History; Accumulated Deficit; Going Concern Qualification;
Capital Needs. For the fiscal year ended May 31, 2000, the Company's net loss
was ($9,074,985), and at May 31, 2000 the Company has a consolidated accumulated
deficit of $42,619,635 and it anticipates a consolidated operating loss for at
least the next three fiscal quarters. There is no assurance that its technology,
products or services will achieve market acceptance or that the Company will
become profitable. The Company's continuing consolidated 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 includes an explanatory
paragraph regarding the Company's ability to continue as a going concern.
Internet Professional Services - The Company entered the market for Internet
professional services at the end of fiscal 1997 and began to generate revenue
from such services in fiscal 1998 and has never been profitable. The Company's
revenue from internet professional services has been limited and decreased from
$3,205,869 in the fiscal year ended May 31, 1999, to $2,739,771 for the fiscal
year ended May 31, 2000. As part of its business plan to enhance liquidity, the
Company has restructured its management team, added to the sales staff, reduced
reliance on consultants, and stabilized the work force and developed promising
strategic relationships with two software companies. Management believes that
based on funds on hand at May 31, 2000 and anticipated revenues, professional
service operations can continue until at least through October, 2000.
The Company is exploring other means to develop liquidity including raising
additional capital. The Company currently has no agreements, commitments, or
understandings with respect to the raising of additional capital, and
accordingly there can be no assurance that such additional funding, if needed,
will be available on terms acceptable to the Company, or at all. Furthermore,
any additional equity financing may be dilutive to stockholders, and debt
financing, if available, may involve restrictive covenants, which may limit the
Company's operating flexibility with respect to certain business matters.
Strategic arrangements, if necessary to raise additional funds, may require the
Company to relinquish its rights to certain of its intellectual property or
selected business opportunities. If additional funds are raised through the
issuance of equity securities, the percentage ownership of the stockholders of
the Company will be reduced, stockholders may experience additional
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dilution in net book value per share, and such equity securities may have
rights, preferences or privileges senior to those of the holders of the
Company's Common Stock. If adequate funds are not available on acceptable terms,
the Company may be unable to continue operations or fully exploit business
opportunities available to it.
B2B - B2B was formed in 1999 and has had a limited operating history. For the
fiscal year ended May 31, 2000, B2B had revenues of $127,459. Management
believes that B2B has sufficient funds to meet operating requirements through
March 2001. B2B may need to raise additional funds in order to continue
operations beyond such date and to support more rapid expansion, develop new or
enhanced services and products, respond to competitive pressures, or take
advantage of unanticipated opportunities. B2B's future liquidity and capital
requirements will depend upon numerous factors, including the success of the
Company's Internet based procurement system to attract and retain marketplace
participants B2B and its prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in an early stage
of development, particularly companies in new and rapidly evolving markets such
as Internet based Business to Business marketplaces.
Evolving Business Model The Company and its prospects must be considered in
light of the risks, expenses and difficulties frequently encountered by
companies in an early stage of development, particularly companies in new and
rapidly evolving markets such as Internet professional services and business to
business e-commerce.
Internet Professional Services - A substantial portion of the Company's revenues
are expected to be derived from services that depend upon the adoption of
Internet solutions by companies to improve their business positioning and
processes, and the continued development of the World Wide Web, the Internet and
e- commerce. The Internet may not prove to be a viable commercial marketplace
because of inadequate development of the necessary infrastructure, lack of
development of complementary products, implementation of a competing technology,
delays in the development or adoption of new standards and protocols required to
handle increased levels of Internet activity, governmental regulation, or other
reasons. The Internet has experienced, and is expected to continue to
experience, significant growth in the number of users and volume of traffic.
There can be no assurance that the Internet infrastructure will continue to be
able to support the demands placed on it by this continued growth. Moreover,
critical issues concerning the use of Internet and e-commerce solutions
(including security, reliability, cost, ease of deployment and administration
and quality of service) remain unresolved and may affect the growth of the use
of such technologies to maintain, manage and operate a business, expand product
marketing, improve corporate communications and increase business efficiencies.
The adoption of Internet solutions for these purposes, particularly by those
individuals and enterprises that have historically relied on traditional means,
can be capital intensive and generally requires the acceptance of a new way of
conducting business and exchanging information. If critical issues concerning
the ability of Internet solutions to improve business positioning and processes
are not resolved or if the necessary infrastructure is not developed, the
Company's business, financial condition, results of operations and prospects
will be materially adversely affected. Even if these issues are resolved, there
can be no assurance that businesses will elect to outsource the design,
development and maintenance of their Web sites to Internet professional services
firms. Companies may decide to assign the design, development and implementation
of Internet solutions to their internal information technology divisions, which
have ready access to both key client decision makers and the information
required to prepare proposals for such solutions. If independent providers of
Internet professional services prove to be unreliable, ineffective or too
expensive, or if software companies develop tools that are sufficiently
user-friendly and cost-effective, enterprises may choose to design, develop or
maintain all or part of their Intranets, Extranets or Web sites in-house. If the
market for such services does not continue to develop or develops more slowly
than expected, or if the Company's services do not achieve market acceptance,
its business, results of operations, financial condition and prospects will be
materially adversely affected.
Business to business marketplaces - B2B's business model is not proven and may
not be successful. The business-to-business e-commerce model is based on growth
of the Foodgalaxy.com marketplace as well as expansion into a number of other
vertical marketplaces. This business model is new and not proven and depends
upon the Company's ability, among other things, to sell it's purchasing solution
to food service operators and their distributors, achieve high rates of adoption
by customers, successfully identify and enter other vertical markets, leverage
its operational and technical expertise and its electronic commerce platform,
rapidly scale its operations, generate significant revenues from its vertical
marketplaces, and obtain higher transaction volumes and increases in
productivity. B2B cannot be certain that its business model will be successful
or that it can achieve or sustain revenue growth or generate any profits.
B2B cannot be certain that business-to-business electronic commerce generally,
or its purchasing solution, services and brand in particular, will achieve broad
market acceptance. For example, purchasers may continue purchasing products
through their existing methods and may not adopt an Internet-based purchasing
solution because of their comfort with existing purchasing
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habits, the costs and resources required to switch purchasing methods, the need
for products not offered through it's vertical marketplaces, security and
privacy concerns, general reticence about technology or the Internet or the
failure of the market to develop the necessary infrastructure for Internet-based
communications, such as wide-spread Internet access, high-speed modems,
high-speed communication lines and computer availability. B2B has focused on the
food services industry and its efforts to expand to other industries may not
succeed. However, B2B intends to develop marketplaces for other vertical
markets. B2B will need to develop additional expertise or industry-specific
knowledge, which B2B may not be able to do in a timely manner. Therefore, B2B
may not succeed in establishing successful marketplaces for industries outside
of the food services industry.
B2B may also experience difficulties that could delay or prevent the successful
development, introduction or marketing of new or enhanced marketplaces for other
industries in the future. In addition, those marketplaces may not meet the
requirements of the particular vertical market and therefore, may not achieve
market acceptance.
Quarterly Operating Results and Margins The Company's operating results have
fluctuated in the past and are likely to fluctuate in the future as a result of
a variety of factors, many of which will be outside of the Company's control.
Some of these factors include timing of the completion, material reduction or
cancellation of major projects or the loss of a major client; the amount and
timing of the receipt of new business; timing of hiring or loss of personnel;
the amount and timing of the opening or closing of an office; capital
expenditures and other costs relating to the expansion of operations; the level
of demand for Intranet, Extranet and Web site development; the productivity of
consultants; the ability to maintain adequate staffing to service clients
effectively; the amount and timing of expenditures by clients for professional
services; the introduction of new products or services by competitors; pricing
changes in the industry; the relative mix of lower cost full-time employees
versus higher cost independent contractors; technical difficulties with respect
to the use of the Internet; economic conditions specific to Internet technology
usage; government regulation and legal developments regarding the use of the
Internet; and general economic conditions. Due to all of the foregoing factors,
the Company's operating results in any given quarter may fall below the
expectations of securities analysts and investors. In such event, the trading
price of the Company's Common Stock would likely be materially and adversely
affected and litigation may ensue.
The Company's historical financial data is of limited value in planning future
operating expenses. Accordingly, the Company's expense levels will be based in
part on its expectations concerning future revenues and will be fixed to a large
extent. The Company will be unable to adjust spending in a timely manner to
compensate for any unexpected shortfall in revenues. Accordingly, a significant
shortfall in demand for services could have an immediate and material adverse
effect on the Company's business, financial condition, results of operations and
prospects.
These operating result risks, other than those specifically associated with
Internet professional services, are also applicable to B2B.
Risks Associated with Failure to Manage Growth. The growth of the Company is
expected to place a significant strain on the Company's limited personnel,
management and other resources. In the future, the Company will be required to
attract, train, motivate and manage new employees successfully, to effectively
integrate new employees into its operations and to continue to improve its
operational, financial, management and information systems and controls. There
can be no assurance that the Company's systems, procedures or controls will be
adequate to support the Company's operations or that the Company's management
will be able to achieve the rapid execution necessary to exploit the market for
the Company's business model. In addition, the management of the Company is
devoting significant portions of time to the management of B2B, which could
affect the ability of the Company to manage growth. The failure to effectively
manage any further growth could have a material adverse effect on the Company's
business, financial condition, results of operations and prospects.
These growth-related risks, other than those specifically associated with
Internet professional services, are also applicable to B2B.
NASDAQ Listing The Company's Common Stock is quoted on the NASDAQ SmallCap
Market. To continue to be listed, the Company is required to maintain net
tangible assets of $2,000,000 or a market capitalization of $35 million and the
Common Stock must maintain a minimum bid price of $1.00 per share. Recently, the
Company's Common Stock has had a minimum bid price of less than $1.00 per share.
If the Company's Common Stock does not meet the $1.00 minimum requirement for
listing, the NASDAQ SmallCap market may delist the Common Stock from that market
or the Company may be required to effect a reverse stock split in order to
maintain the listing.
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If delisting occurs, trading in the Common Stock would be conducted in the OTC
Bulletin Board and the Common Stock may be difficult to trade, which could also
reduce the market price of the Common Stock.
Volatility of Stock Price. Between June 1, 1999, and August 20, 2000, the
closing price of the Company's Common Stock has ranged between $0.81 and $12.31.
The trading prices of the Company's Common Stock has historically been subject
to wide fluctuations due to a variety of factors including announcements
regarding financial results and significant orders. Failure to achieve periodic
revenue, earnings and other operating and financial results as forecasted or
anticipated by brokerage firms or industry analysts could result in an immediate
and adverse effect on the market price of the Company's common stock. The
Company may not discover, or be able to confirm, revenue or earnings shortfalls
until the end of a quarter, which could result in a greater immediate and
adverse effect on the common stock of the Company. In addition, the stock
market, has experienced extreme price and volume fluctuations that have
particularly affected the market prices of equity securities of many technology
companies and that often have been unrelated to the operating performance of
such companies. In the past, following periods of volatility in the market price
of a company's securities, securities class action litigation has often been
instituted against such a company. Such litigation could result in substantial
costs and a diversion of management's attention and resources, which would have
a material adverse effect on the Company's business, financial condition,
results of operations and prospects.
Rapid Technological Change.
Internet Professional Services
The market for Internet professional services is characterized by rapid
technological change, changes in user and client requirements and preferences,
frequent new product and service introductions embodying new processes and
technologies and evolving industry standards and practices that could render the
Company's existing service practices and methodologies obsolete. The Company's
success will depend, in part, on its ability to improve its existing services,
develop new services and solutions that address the increasingly sophisticated
and varied needs of its current and prospective clients, and respond to
technological advances, emerging industry standards and practices, and
competitive service offerings. Failure to do so could result in the loss of
existing customers or the inability to attract and retain new customers, either
of which developments could have a material adverse effect on the Company's
business, financial condition, results of operations and prospects. There can be
no assurance that the Company will be successful in responding quickly,
cost-effectively and sufficiently to these developments. If the Company is
unable, for technical, financial or other reasons, to adapt in a timely manner
in response to changing market conditions or client requirements, its business,
financial condition, results of operations and prospects would be materially
adversely affected.
B2B
The success of B2B depends upon its ability to enhance its current
Internet-based purchasing solution and services, to develop and introduce new
solutions and services that will achieve market acceptance and, where necessary
to integrate its Internet-based purchasing solution with its customers'
enterprise resource planning systems. If B2B does not adequately respond to the
need to develop and introduce new solutions or services, or to integrate with
customers' enterprise resource planning systems, then business, revenues,
results of operations and financial condition will be negatively affected. For
example, B2B may lose market share and ultimately revenue as customers switch to
competitors' offerings if: B2Bdoes not develop technology that is a success in a
particular marketplace; the technology does not integrate with its marketplace
participant systems; and its technology is surpassed by the superior technology
of a competitor. Further, B2B may incur significant expense to integrate its
purchasing solution with its marketplace participant's enterprise resource
planning systems and business rules, and to maintain this integration as these
systems evolve. Failure to provide this integration may delay or altogether
dissuade the market or a particular customer from adopting B2B's Internet-based
purchasing solution, which could negatively affect its revenues and therefore
have a material adverse effect on results of operations and financial condition.
Government Regulation and Legal Uncertainties. The Company is not currently
subject to direct government regulation, other than pursuant to the securities
laws and the regulations there under applicable to all publicly owned companies,
and laws and regulations applicable to businesses generally, and there are
currently few laws or regulations directly applicable to access to or commerce
on the Internet. However, due to the increasing popularity and use of the
Internet, it is likely that a number of laws and regulations may be adopted at
the local, state, national or international levels with respect to the Internet
covering issues such as user privacy, freedom of expression, pricing of products
and services, taxation, advertising, intellectual property rights, information
security or the convergence of traditional communications services with Internet
communications. Because of the growth in the electronic commerce market,
Congress has held hearings on whether to regulate providers of services and
transactions in the electronic commerce market, which regulations could
negatively affect client demand for Internet solutions that facilitate
electronic commerce. Moreover, the adoption of any such laws or
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regulations may decrease the growth of the Internet, which could in turn
decrease the demand for the Company's services or increase the cost of doing
business or in some other manner have a material adverse effect on the Company's
business, financial condition, results of operations or prospects. These risks,
other than those specifically associated with Internet professional services,
are also applicable to B2B.
Conflicts of Interest. B2B and the Company in the future may be presented with
similar business opportunities or compete for future business. There can be no
assurance that any of such conflicts will be resolved in favor of the Company.
RISK FACTORS - ADDITIONAL IMPORTANT FACTORS TO BE CONSIDERED FOR THE INTERNET
PROFESSIONAL SERVICES BUSINESS
Recruitment and Retention of Consulting Professionals.
The Company's business is labor intensive. Accordingly, the Company's success
depends in large part on its ability to identify, hire, train and retain
consulting professionals who can provide the Internet strategy, technology,
marketing, audience development and creative skills required by clients. There
is currently a shortage of such personnel, and this shortage is likely to
continue for the foreseeable future. The Company will encounter intense
competition for qualified personnel from other companies, and there can be no
assurance that it will be able to identify, hire, train and/or retain other
highly qualified technical, marketing and managerial personnel in the future.
The inability to attract and retain the necessary technical, marketing and
managerial personnel would have a material adverse effect on the Company's
business, financial condition, results of operations and prospects.
Risks of Fixed-Price Engagements. The Company generates and expects to continue
to generate a significant portion of its revenues through project fees billed on
a fixed-price basis as distinguished from billing on a time and materials basis.
The Company assumes greater financial risk from fixed-price type contracts than
on either time and material or cost-reimbursable contracts. The failure to
estimate accurately the resources and time required for an engagement, to manage
client expectations effectively regarding the scope of services to be delivered
for the estimated fees or to complete fixed-price engagements within budget, on
time and to clients' satisfaction would expose the Company to risks associated
with cost overruns and, in certain cases, penalties, any of which could have a
material adverse effect on the Company's business, results of operations and
financial condition.
Potential Liability to Clients. Many of the Company's service engagements
involve the development, implementation and maintenance of applications that are
critical to the operations of their clients' businesses. The Company's failure
or inability to meet a client's expectations in the performance of its services
could injure the Company's business reputation or result in a claim for
substantial damages against the Company, regardless of its responsibility for
such failure. In addition, the Company possesses technologies and content that
may include confidential or proprietary client information. Although the Company
has implemented certain policies to prevent such client information from being
disclosed to unauthorized parties or used inappropriately, any such unauthorized
disclosure or use could result in a claim for substantial damages. The Company
has attempted to limit contractually its damages arising from negligent acts,
errors, mistakes or omissions in rendering professional services; however there
can be no assurance that any contractual protections will be enforceable in all
instances or would otherwise protect the Company from liability for damages.
Although the Company maintains general liability insurance coverage, it does not
maintain coverage for errors. There can be no assurance that the Company's
insurance coverage will continue to be available on reasonable terms or will be
available in sufficient amounts to cover one or more large claims, or that the
insurer will not disclaim coverage as to any future claim. The successful
assertion of one or more large claims against the Company that are uninsured,
exceed available insurance coverage or result in changes to the Company's
insurance policies, including premium increases or the imposition of a large
deductible or co-insurance requirements, could adversely affect the Company's
business, results of operations and financial condition.
Dependence on Key Accounts. There were four customers that individually
comprised more than 10% of Internet services revenue of the Company for the
fiscal year ended May 31, 2000. The Company's five largest customers comprised
63% of Internet services revenue of the Company for the fiscal year ended May
31, 2000. Since most of the Company's customers retain the Company on a project
by project basis, a customer from whom the Company generates substantial revenue
in one period may not be a substantial source of revenue in a subsequent period.
To the extent that any of the Company's major
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customers do not remain a significant source of revenues, there could be a
direct and immediate material adverse effect on the Company's business,
financial condition, results of operations and prospects
RISK FACTORS- ADDITIONAL IMPORTANT FACTORS TO BE CONSIDERED FOR B2B
Possible Acquisitions or Joint Ventures. It is currently anticipated that a
substantial portion of B2B's future growth will result from sales and marketing
strategic relationships, acquisitions of additional lines of similar or
complementary business or through investments in joint ventures with other
entities. While B2B has entered into agreements with two other companies, there
can be no assurance that these will be profitable. In addition, B2B has no
commitments, agreements, understanding or arrangement with regard to any other
transaction and there can be no assurance that any other such transactions will
be consummated or that they will be profitable for B2B.
Dependence on Personnel and the Personnel of Joint Ventures; Need to Attract
Additional Personnel. B2B's future success will depend to a large extent on the
efforts and the work product of its employees as well as those of its partners.
The ability for B2B and its partners to attract and retain highly trained
executives and professionals with background experience and knowledge of the
Internet and/or a specific vertical industry is critical to the success of B2B.
B2B's ability to develop its businesses will depend upon its ability to recruit
and retain additional personnel, including engineering, marketing and management
personnel. Competition for qualified personnel is intense and accordingly, there
can be no assurance that B2B or its partners will be able to retain or hire all
of the necessary personnel or that B2B or its partners may not otherwise need to
change its personnel to compete in its rapidly changing market.
System Failure System failure may cause interruption of B2B's services. The
performance of server and networking hardware and software infrastructure is
critical to B2B's business and reputation and its ability to process
transactions, provide high quality customer service and attract and retain
customers, suppliers, users and strategic partners. Currently B2B's
infrastructure and systems are located at one site at Exodus Communications in
Weehawken, New Jersey. Until a mirror site is added, B2B depends on a
single-site infrastructure and any disruption to this infrastructure resulting
from a natural disaster or other event could result in an interruption in B2B's
service, fewer transactions and, if sustained or repeated, could impair B2B's
reputation and the attractiveness of B2B's services. B2B's systems and
operations are vulnerable to damage or interruption from human error, natural
disasters, power loss, telecommunications failures, break-ins, sabotage,
computer viruses, intentional acts of vandalism and similar events. B2B does not
have a formal disaster recovery plan or alternative provider of hosting
services. In addition, B2B does not carry sufficient business interruption
insurance to cover losses that could occur. Any failure on B2B's part to expand
its system or Internet infrastructure to keep up with the demands of its
customers and users, or any system failure that causes an interruption in
service or a decrease in responsiveness of B2B's Internet- based purchasing
solution or website, could result in fewer transactions and, if sustained or
repeated, could impair B2B's reputation and the attractiveness of B2B's brand
names, which would harm B2B's business, revenues, financial condition and
results of operations.
Item 7 Consolidated Financial Statements and Supplementary Data
The response to this item is submitted as a separate section of this Form
10-KSB. See item 13.
Item 8 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART 3
Item 9 Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act
The response on this item is incorporated by reference to the Company's proxy
statement for its 2000 Annual Meeting of Stockholders, which will be filed with
the Securities and Exchange Commission separately pursuant to Rule 14a-6 of the
Securities Exchange Act of 1934, as amended.
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Item 10 Executive Compensation
The response on this item is incorporated by reference to the Company's proxy
statement for its 2000 Annual Meeting of Stockholders, which will be filed with
the Securities and Exchange Commission separately pursuant to Rule 14a-6 of the
Securities Exchange Act of 1934, as amended.
Item 11 Security Ownership of Certain Beneficial Owners and Management
The response on this item is incorporated by reference to the Company's proxy
statement for its 2000 Annual Meeting of Stockholders, which will be filed with
the Securities and Exchange Commission separately pursuant to Rule 14a-6 of
theSecurities Exchange Act of 1934, as amended.
Item 12 Certain Relationships and Related Transactions
The response on this item is incorporated by reference to the Company's proxy
statement for its 2000 Annual Meeting of Stockholders, which will be filed with
the Securities and Exchange Commission separately pursuant to Rule 14a-6 of the
Securities Exchange Act of 1934, as amended.
Item 13 Exhibits, Lists and Reports on Form 8-K
(a) 1 Financial Statements
The following financial statements are filed as part of this report
Page
Independent Auditors' Report 17
Consolidated Balance Sheets as of May 31, 2000 and 1999 18
Consolidated Statements of Operations for the years ended
May 31, 2000 and 1999 19
Consolidated Statements of Stockholders' Equity for the
years ended May 31, 2000 and 1999 20
Consolidated Statements of Cash Flows for the years ended
May 31, 2000 and 1999 21
Notes to Consolidated Financial Statements 22
(a) 2 Financial Statement Schedules
None required
(a) 3 Exhibits
The following exhibits are filed herewith or are incorporated by reference to
exhibits previously filed with the Commission. The Company shall furnish copies
of exhibits for a reasonable fee (covering the expense of furnishing copies)
upon request.
Exhibit
Number Description of Exhibit
------ ----------------------
**3.1 Certificate of Incorporation of the Company, as amended.
*3.2 Amendment to Certificate of Incorporation.
**3.3 By-laws of the Company, as amended.
****3.4 Amendment to Certificate of Incorporation
**4.7 Form of Unit Purchase Option granted to the Underwriter of
its designees.
*****4.15 Certificate of Designation for Class A Convertible Preferred
stock of B2Bgalaxy.com Inc. Form of Common Stock Purchase
Option granted to the Underwriter or its designees.
**10.1 Employment Agreement dated as January 3, 1994, by and between
the Company and Andrew Gyenes.
*10.4 Form of Indemnification Agreement between each of the
Officers and Directors of the Company and the Company.
**10.8 1994 Incentive and Non-Qualified Stock Option Plan.
**10.9 1994 Consultant Stock Option Plan.
**10.14 1995 Stock Option Plan for Outside Directors.
******10.15 Amendments to the 1994 Incentive and Non-qualified Stock
Option Plan, 1994 Consultant Stock Option Plan and 1995 Stock
Option Plan for Outside Directors
***10.20 Agreement dated December 4, 1996 between the Company and
USWeb Corporation.
***10.21 Agreement dated August 15, 1997 between the Company and
Enteractive Distribution Company
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****10.22 Agreement dated August 14, 1999 between the Company and
Enteractive Distribution Company.
******10.23 Master License and Services Agreement, dated March 1, 2000
******23.1 Consent of KPMG LLP
******27 Financial Data Schedule
* Incorporated herein by reference to such Exhibit to the
Registration Statement on Form SB-2 of the Registrant
(Registration No.333-2244) filed in March 1996 as amended.
** Incorporated herein by reference to such Exhibit to the
Registration Statement on Form SB-2 of the Registrant
(Registration No. 33-83694) filed on September 6, 1994.
*** Incorporated herein by reference to such exhibit to the
Company's Annual Report on Form 10-KSB for the fiscal year
ended May 31, 1997.
**** Incorporated herein by reference to such Exhibit to the
Company's annual Report on Form 10KSB for the fiscal year
ended May 31, 1998.
***** Incorporated herein by reference to such exhibit to the
Company's Annual Report on Form 10-KSB for the fiscal year
ended May 31, 1999.
****** Filed herewith
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Independent Auditors' Report
The Board of Directors and Stockholders
Cornerstone Internet Solutions Company:
We have audited the accompanying consolidated balance sheets of Cornerstone
Internet Solutions Company and subsidiaries as of May 31, 2000 and 1999, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cornerstone Internet
Solutions Company and subsidiaries as of May 31, 2000 and 1999, and the results
of their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in note 1 to the
consolidated financial statements, the Company's recurring losses from
operations raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
note 1. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
KPMG LLP
New York, New York
August 2, 2000
18
<PAGE>
CORNERSTONE INTERNET SOLUTIONS COMPANY and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
May 31, May 31,
2000 1999
---------------------- ------------------------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $12,222,443 $ 2,939,596
Investments, at fair value 75,568 398,348
Accounts receivable, net of allowance
for doubtful accounts of $403,550 and $248,814 691,978 1,024,624
Other receivables 25,872 20,587
Prepaid expenses and other current assets 94,693 49,475
----------------- ------------------------
Total current assets 13,110,554 4,432,630
Affiliation rights, net 166,111 191,667
Property and equipment, net 977,905 671,182
Other non-current assets 1,366,883 200,920
----------------- ------------------------
$ 15,621,453 $ 5,496,399
----------------- ------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,465 $ 104,954
Accounts payable 722,127 830,397
Accrued payroll and related expenses 570,479 124,866
Other accrued expenses 308,528 462,592
Deferred revenue 589,993 -
Other current liabilities 1,352 30,000
----------------- ------------------------
Total current liabilities 2,193,944 1,552,809
----------------- ------------------------
Long-term debt, excluding current portion - 1,465
----------------- ------------------------
Total liabilities 2,193,944 1,554,274
----------------- ------------------------
Minority interest 6,479,923 938,838
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value,
2,000,000 shares authorized;
Class C, 20 and 540 shares issued and outstanding
at May 31, 2000 and 1999, respectively - 5
Class D, 0 and 8,040 shares issued and outstanding at
May 31, 2000 and 1999, respectively - 80
Common stock, $.01 par value, 50,000,000 shares
authorized and 25,108,326 and 13,121,013 shares
issued and outstanding at May 31, 2000 and 1999 251,083 131,210
Additional paid-in capital 49,534,442 36,018,294
Accumulated other comprehensive income 75,568 398,348
Deferred charges (293,872) -
Accumulated deficit (42,619,635) (33,544,650)
----------------- ---------------------
Total stockholders' equity 6,947,586 3,003,287
================= =====================
----------------- ---------------------
$ 15,621,453 $ 5,496,399
----------------- ---------------------
</TABLE>
See notes to consolidated financial statements.
19
<PAGE>
CORNERSTONE INTERNET SOLUTIONS COMPANY and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended Year Ended
May 31, 2000 May 31, 1999
----------------- ------------------
<S> <C> <C>
Internet services revenue $ 2,739,771 $ 3,205,869
Subscription revenue 127,459 --
Software licensing and royalty revenue -- 51,200
============ ============
Total revenues 2,867,230 3,257,069
------------ ------------
Cost of internet services revenue 4,073,284 3,967,454
Cost of subscription revenue 290,008 --
Marketing, sales, and support (excludes stock option expense of
$ 133,461) 3,341,001 519,959
General and administrative expenses (excludes stock option
Expense of $562,821) 4,469,268 2,317,762
Research and development (excludes stock option expense of
$ 6,380) 564,232 --
Stock option expense 702,662 --
------------ ------------
Total costs and expenses 13,440,455 6,805,175
------------ ------------
Loss from operations (10,573,225) (3,548,106)
Other income (expense):
Interest expense (5,034) (10,760)
Interest income 289,845 10,594
Gain on sale of investments 728,750 --
Other income (expense), net (40,252) (33,292)
------------ ------------
Loss before minority interest (9,599,916) (3,581,564)
Minority interest in net loss of subsidiary, net 524,931 (63,786)
============ ============
Net loss $ (9,074,985) $ (3,645,350)
Preferred stock dividends and preferences (6,750) (1,850,950)
============ ============
Net loss to common stockholders $ (9,081,735) $ (5,496,300)
------------ ------------
Basic and diluted loss per share $ (0.48) $ (0.46)
------------ ------------
Weighted average shares of common stock outstanding 18,773,730 11,905,740
============ ============
</TABLE>
20
<PAGE>
CORNERSTONE INTERNET SOLUTIONS COMPANY and Subsidiaries
Consolidated Statements of Stockholders' Equity
Years ended May 31, 2000 and 1999
<TABLE>
<CAPTION>
Additional Accumulated
Preferred Stock Common Stock Paid-in Other
Comprehensive
Shares Amount Shares Amount Capital Income
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance May 31, 1998 8,600 $ 120 9,441,117 $ 94,400 $ 30,222,480 $ 167,400
Stock option expense -- -- -- -- 19,168 --
Stock options exercised -- -- 216,685 2,167 410,871 --
Warrants exercised -- -- 246,100 2,461 575,874 --
Sale of Class D
convertible
preferred stock 1,600 16 -- -- 1,969,884 --
Conversion of preferred
stock to
common stock (1,220) (12) 1,448,361 14,484 (14,472) --
Sale of common stock -- -- 1,768,750 17,687 1,470,213 --
Exchange of Class B
preferred
stock for Class D
preferred
stock (400) (4) -- -- 4 --
Transaction involving
subsidiary's common
stock -- -- -- -- 27,369 --
Preferred stock dividend
adjustment -- (35) -- 11 79,303 --
Preference from issuance of
subsidiary's preferred
stock -- -- -- -- 1,257,600 --
Change in fair value of
investments in
marchFIRST
warrants -- -- -- -- -- 230,948
Net loss -- -- -- -- -- --
------------------------------------------------------------------------------------------------
Balance May 31, 1999 8,580 $ 85 13,121,013 $ 131,210 $ 36,018,294 $ 398,348
Conversion of
preferred stock to
common stock (8,560) (85) 10,575,337 105,753 (105,668) --
Deferred charges on
grant of
stock options -- -- -- -- 996,534 --
Stock option expense -- -- -- -- -- --
Exercise of stock options -- -- 1,094,018 10,940 2,660,023 --
Transaction involving
subsidiary's common
stock -- -- -- -- 8,909,082 --
Change in fair value and
sale of
investments in
marchFIRST
warrants -- -- -- -- -- (322,780)
Payment of preferred stock
dividend with common
stock
and other -- -- 40,258 403 (403) --
Exercise of warrants -- -- 277,700 2,777 1,056,580 --
Net loss -- -- -- -- -- --
------------------------------------------------------------------------------------------------
Balance May 31, 2000 20 $- 25,108,326 $ 251,083 $ 49,534,442 $ 75,568
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Accumulated Deferred
Comprehensive
Deficit Charges Total Loss
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance May 31, 1998 $(29,899,300) -- $ 585,100 --
Stock option expense -- -- 19,168 --
Stock options exercised -- -- 413,038 --
Warrants exercised -- -- 578,335 --
Sale of Class D
convertible
preferred stock -- -- 1,969,900 --
Conversion of preferred
stock to
common stock -- -- -- --
Sale of common stock -- -- 1,487,900 --
Exchange of Class B
preferred
stock for Class D
preferred
stock -- -- -- --
Transaction involving
subsidiary's common
stock -- -- 27,369 --
Preferred stock dividend
adjustment -- -- 79,279 --
Preference from issuance of
subsidiary's preferred
stock -- -- 1,257,600 --
Change in fair value of
investments in
marchFIRST
warrants -- -- 230,948 230,948
Net loss (3,645,350) -- (3,645,350) (3,645,350)
---------------------------------------------------------------
Balance May 31, 1999 $(33,544,650) -- $ 3,003,287 (3,414,402)
==========
Conversion of
preferred stock to
common stock -- -- -- --
Deferred charges on
grant of
stock options -- (996,534) -- --
Stock option expense -- 702,662 702,662 --
Exercise of stock options -- -- 2,670,963 --
Transaction involving
subsidiary's common
stock -- -- 8,909,082 --
Change in fair value and
sale of
investments in
marchFIRST
warrants -- -- (322,780) (322,780)
Payment of preferred stock
dividend with common
stock
and other -- -- -- --
Exercise of warrants -- -- 1,059,357 --
Net loss (9,074,985) -- (9,074,985) (9,074,985)
---------------------------------------------------------------
Balance May 31, 2000 $(42,619,635) $ (293,872) $ 6,947,586 $ (9,397,765)
=== ==== ============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
21
<PAGE>
CORNERSTONE INTERNET SOLUTIONS COMPANY and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended May 31,
2000 1999
-------------------------------------------
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (9,074,985) $ (3,645,350)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization 567,683 246,173
Stock option expense 702,662 19,168
Minority interest in net loss of consolidated subsidiary, net (524,931) 63,786
Gain on sale of investments (728,750) -
Bad debt expense 558,654 271,642
Changes in assets and liabilities:
Accounts receivable (226,008) (952,566)
Other receivables (5,285) 79,413
Prepaid expenses and other current assets (45,219) 219,825
Other assets 14,037 (36,720)
Accounts payable (108,271) 292,297
Accrued expenses and other current liabilities 262,788 (21,063)
-------------------------------------------
Net cash used in operating activities (8,607,625) (3,463,395)
-------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment (1,438,857) (366,858)
Proceeds from sale of investment 728,750 -
Purchases of investments - (95,000)
-------------------------------------------
Net cash used in investing activities (710,107) (461,858)
-------------------------------------------
Cash flows from financing activities:
Proceeds from exercise of stock options 2,670,963 413,038
Proceeds from issuance of common and preferred stock - 3,457,800
Proceeds from exercise of warrants 1,059,357 578,335
Net proceeds from sale of subsidiary's preferred stock - 2,122,957
Net proceeds from sale of subsidiary's common stock 14,975,213 -
Principal payments on long-term debt (104,954) (99,481)
-------------------------------------------
Net cash provided by financing activities 18,600,579 6,472,649
-------------------------------------------
Net increase in cash and cash equivalents 9,282,847 2,547,396
Cash and cash equivalents:
Beginning of year 2,939,596 392,200
-------------------------------------------
End of year $12,222,443 $2,939,596
===========================================
Non-cash investing and financing activities:
Issuance of subsidiary's common stock for fixed assets $ - $ 37,064
Increase in additional paid-in capital resulting from sale of subsidiary's
common stock 8,909,082 -
Non-cash activity pursuant to VETgalaxy arrangement:
Increase in other non-current assets 1,180,000 -
Increase in deferred revenues 589,993 -
Reduction in capitalized software costs 590,007 -
</TABLE>
See notes to consolidated financial statements
22
<PAGE>
Cornerstone Internet Solutions Company
Notes to Consolidated Financial Statements
May 31, 2000 and 1999
1 Business and Liquidity
(a) Nature of Business
Cornerstone Internet Solutions Company (the Company) is a provider of
comprehensive Internet-based services and solutions. The Company
operates two subsidiaries, marchFIRST Cornerstone and B2Bgalaxy.com.
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. Under the terms of the agreement
with marchFIRST, the Company is required to pay licensing and marketing
fees totaling 7% of revenues, reduced by the cost of any third party
products. The Company receives a number of services from marchFIRST
including: (1) centralized marketing, brand awareness, competitive
analyses, and lead generation programs; (2) technology services; (3) an
internal registry of skills and technologies; and (4) strategic
relationships with leading hardware and software companies.
In February 1999, the Company formed B2Bgalaxy.com, Inc. a Delaware
corporation ("B2B"). B2B was established 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. At the core of each B2B portal is B2B's
Power Purchasing, a proprietary closed bidding system that is focused
on continually optimizing both the price and availability of supplies.
Power Purchasing provides members, both buyers and sellers, with
important tools for improving their businesses. For member buyers,
Power Purchasing provides a means of managing their procurement process
through competitive purchasing, and access to a pool of vendors,
providing direct cost savings, increased efficiency, and integration.
Vendors can easily service their existing client bases and reach out to
new potential customers without incremental costs. The benefits of
integration result in reduced order processing costs, as well as
marketing and advertising cost savings. All members have access to
additional services offered through the e-commerce marketplace, and the
industry portals serve as industry meeting places where trends, ideas
and information can be exchanged.
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, including
Power Purchasing, to Pet Assure, Inc. to create VETgalaxy.com, an
online marketplace targeting the veterinary service industry. Under
this agreement B2Bgalaxy.com functions as an operational and support
partner for the new company. In July 2000, Telefonica B2B, a leading
business-to-business net market maker, and B2B announced plans for a
joint venture for the creation of an e-commerce marketplace for the
food service industry in Spanish and Portuguese speaking markets in
Latin America, Spain, and Portugal.
(b) 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
23
<PAGE>
Cornerstone Internet Solutions Company
Notes to Consolidated Financial Statements
May 31, 2000 and 1999
Cornerstone Internet Solutions Company Notes to Consolidated Financial
Statements May 31, 2000 and 1999 Preferred Stock. The Preferred Stock
does not provide for dividends and has voting rights equal to the
number of shares of common stock into which it is convertible. If, by
September 30, 2000 B2B consummates a public offering of equity in
excess of $5 million, each share of Preferred Stock automatically
converts into 1,667 shares of B2B's Common Stock or converts based on
75% of the Common Share price in the financing, whichever results in a
higher number of Common Shares. If B2B does not consummate the
financing by September 30, 2000, 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 is recognized as an expense in minority
interest over the seventeen month period from the issuance of B2B's
Preferred Stock until September 30, 2000, the first date on which
conversion to the Company's common stock can occur. The amortization
increases minority interest in the balance sheet and was approximately
$888,000 and $74,000 in fiscal 2000 and 1999, respectively.
In February 2000, B2B consummated a private placement of 5,357,181
shares of Common Stock, for net proceeds of $14,975,213. Of the net
proceeds, $6,066,131 was allocated to minority interest, and $8,909,082
was allocated to additional paid-in capital. 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 this
transaction, at May 31, 2000 the Company's ownership interest of B2B
was diluted from 79.6% to 49.9% of B2B's common stock or 38% of B2B,
assuming the conversion of B2B's Preferred 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 sheets. Due to the insignificance of
the minority common shareholders' investment in B2B through February
28, 2000, the consolidated financial statements reflect approximately
97% of B2B's loss for fiscal 1999, 100% of B2B's net loss for the nine
months ended February 29, 2000, and 49.9% of B2B's net loss for the
three months ended May 31, 2000.
(c) Going Concern
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The
Company's continuing losses from operations could impact the Company's
ability to meet its obligations as they become due. The accumulated
deficit as of May 31, 2000 was $42,619,635. In the fiscal year ended
May 31, 2000, the Company received approximately $3,730,320 from the
exercise of options and warrants and $14,975,213 from the sale B2B
common stock. In April 2000, the Company hired a new CEO to manage the
marchFIRST Cornerstone operating unit as part of a plan to attain
profitability, and the unit has been restructured with an emphasis on
new internet technologies and on marketing. A new sales force has also
been hired to expand the customer base. B2B will continue to incur
losses as it builds its customer base and market share.
2 Summary of Significant Accounting Policies
a) Consolidation Policy
The consolidated financial statements include the accounts of
Cornerstone Internet Solutions Company and its wholly-owned subsidiary
and its 49.9% owned subsidiary, over which the Company maintains
control. All significant intercompany transactions and balances have
been eliminated in consolidation.
24
<PAGE>
Cornerstone Internet Solutions Company
Notes to Consolidated Financial Statements
May 31, 2000 and 1999
b) Cash and Cash Equivalents
All highly liquid debt instruments with maturities of three months or
less at the time of purchase are considered to be cash equivalents.
Cash equivalents of $12,175,987 and $2,736,121 at May 31, 2000 and
1999, respectively, consist of cash held in interest-bearing money
market accounts.
c) Investments
Investments which the Company does not intend to hold to maturity are
classified as available-for-sale. Securities available-for-sale are
carried at fair value with the unrealized gains and losses, net of tax,
reported as accumulated other comprehensive income or loss. At May 31,
2000 and 1999, the Company classified its investment, consisting of
vested marchFIRST warrants, as an available-for-sale security.
d) Revenue Recognition
Revenue from Internet business solution services is recognized using
the percentage of completion method based on the ratio of costs
incurred to date to total estimated cost. At May 31, 2000, and 1999,
there are $341,126 and $378,278, respectively, of unbilled accounts
receivable, which are generally billable in the first quarter of the
following year. Royalty revenue is recognized when earned. Monthly
subscription revenue for access to B2B's FOODgalaxy marketplace is
recognized in the period in which the customer is entitled to
participate in the marketplace. Customer set-up fees, amounting to
$68,297 in fiscal 2000, are recognized as earned.
e) Affiliation Rights
Fees for affiliation rights were paid to marchFIRST (then, USWeb/CKS)
for the right to join the marchFIRST network and operate as an
affiliate in specified territories. The fee is being amortized over the
10-year life of the agreement with marchFIRST. Affiliation rights at
May 31, 2000 and 1999 were net of accumulated amortization of $143,889
and $118,333, respectively.
f) Property and Equipment
Property and equipment are stated at cost and are depreciated over
their estimated useful lives using the straight-line method, except for
leasehold improvements, which are amortized over the lesser of the
lease term or the life of the related asset. Costs incurred for the
development of internal use software are capitalized in accordance with
Statement of Position (SOP) 98-1.
g) Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be realized
or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes
the enactment date.
h) Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever
events or circumstances indicate that the carrying amount of an asset
may not be recoverable. If the sum of expected cash flows, undiscounted
and without interest, is less than the carrying amount of the asset, an
impairment loss is recognized as the amount by which the carrying value
of the asset exceeds its fair value.
25
<PAGE>
Cornerstone Internet Solutions Company
Notes to Consolidated Financial Statements
May 31, 2000 and 1999
i) Minority Interest
Recognition of the minority interest's share of losses of subsidiaries
is generally limited to the amount of such minority interest's
allocable portion of the common equity of those subsidiaries. Further,
the minority interest's share of losses is not recognized if the
minority holders of common equity of subsidiaries have the right to
cause the Company to repurchase such holders' common equity.
j) Earnings Per Share
Basic earnings per share is based on weighted average shares
outstanding and diluted earnings per share adds the dilutive effect of
stock options and other common stock equivalents. Basic and diluted net
loss per share for fiscal 2000 and 1999 is based on the weighted
average number of shares of common stock outstanding, excluding common
stock equivalents (common stock options and warrants and convertible
preferred stock) since they are anti-dilutive.
k) Accounting for Stock-Based Compensation
The Company accounts for stock-based employee and director compensation
arrangements in accordance with the provisions of Accounting Principles
Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees,
and related interpretations and complies with the disclosure provisions
of SFAS No. 123, Accounting for Stock-Based Compensation. Under APB No.
25, compensation expense for employee and director option grants is
based on the excess, if any, on the measurement date of the fair value
of the Company's stock and the exercise price of options to purchase
that stock. In accordance with SFAS No. 123, stock-based compensation
arrangements for others are recorded at their fair value and charged
against earnings over the shorter of their vesting period or the period
in which the services are provided.
l) Fair Value of Financial Instruments
At May 31, 2000 and 1999, the fair value of the Company's cash and cash
equivalents, accounts receivable, other receivables, accounts payable
and accrued expenses approximate their carrying value in the
consolidated financial statements due to the short maturity of those
instruments. The book value of the Company's debt approximates fair
value.
m) 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.
n) Reclassifications
Certain financial statement items for prior years have been
reclassified to conform to the fiscal 2000 presentation.
26
<PAGE>
Cornerstone Internet Solutions Company
Notes to Consolidated Financial Statements
May 31, 2000 and 1999
3 Property and Equipment
Property and equipment, at May 31, 2000 and 1999, consisted of the
following:
<TABLE>
<CAPTION>
2000 1999 Useful Life
---- ---- -----------
<S> <C> <C> <C>
Computer equipment $2,289,354 $1,522,100 3 years
Capitalized software costs 53,543 268,281 3 years
Furniture and other equipment 229,873 176,403 5 years
Leasehold improvements 84,335 46,386 Lease Term
----------------------------------
2,657,105 2,013,170
Accumulated depreciation and amortization (1,679,200) (1,341,988)
----------------------------------
Property and equipment, net $ 977,905 $ 671,182
========== ===========
</TABLE>
4 Long-Term Debt
Long-term debt at May 31, 2000 and 1999, consisted of the following:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Notes payable in connection with equipment financing secured by
Company assets, with interest at 9.75% at May 31, 2000 $1,465 $106,419
Less current portion (1,465) (104,954)
------ --------
Long-term debt, excluding current portion $ - $ 1,465
====== ========
</TABLE>
Interest costs of approximately $5,034 and $17,831 were paid in fiscal
2000 and 1999, respectively.
5 Convertible Preferred Stock Class D
On November 10, 1998, the Company raised $1,969,900, net of related
expenses, through a private placement of 1,600 shares of Class D
Convertible Preferred Stock (Class D Preferred Stock) at a purchase
price of $1,250 per share. The holders of Class D Preferred Stock have
the right, at any time commencing after the earlier of (I) June 30,
2000 or (II) if the closing price of the common stock shall have been
at least $1.50 per share on 15 trading days during any 20-consecutive
trading day period, to convert each share of Class D Preferred Stock
into such whole number of shares of common stock equal to the aggregate
stated value of the Class D Preferred Stock to be converted divided by
$1.00, subject to adjustment. The Class D Preferred Stock is entitled
to vote on all matters submitted to the holders of the Company's common
stock, at 1,250 votes per share, pays no dividends and is not
redeemable. In the third quarter of fiscal 1999, the closing price of
the Company's Common Stock was at least $1.50 per share on 15 trading
days during a consecutive 20 day trading period and accordingly the
holders of Class D Preferred Stock had the unrestricted right to
convert each share of Class D Preferred Stock as described above. In
fiscal 1999, the Company issued 7,320 shares of Class D Preferred Stock
in exchange for Class B and C Preferred Stock (notes 6 and 7). During
fiscal 1999, 880 shares of Class D Preferred Stock were converted into
1,100,000 shares of Common Stock. During fiscal 2000, 8040 shares of
Class D Preferred Stock were converted into 10,050,000 shares of Common
Stock. As of May 31, 2000, there were no shares of Class D Preferred
Stock issued and outstanding.
6 Convertible Preferred Stock Class A and C
On December 12, 1996, the Company completed a private placement of 84
units, each unit consisting of 80 shares of Class A Convertible
Preferred Stock (Class A Preferred) and 50,000 common stock purchase
warrants to purchase in the aggregate 4,200,000 shares of Common Stock
at an exercise price of $4.00 per share and expiring December 13,
2001(the "Warrants"). Proceeds from the private placement were
approximately $7,869,100, net of related expenses of $531,000. The
Class A Preferred had a stated value of $1,250 per share.
27
<PAGE>
Cornerstone Internet Solutions Company
Notes to Consolidated Financial Statements
May 31, 2000 and 1999
On November 19, 1997, the Company offered to exchange the 4,200,000
Warrants for common stock (the "Exchange Offer"), whereby for each 2.8
warrants exchanged, the Company issued one share of its Common Stock.
In connection with the Exchange Offer, the Company received the written
consent of the participating preferred stockholders to amend the terms
of the Class A Preferred to delay the date when the Class A Preferred
Stock can first be converted into common stock from May 1, 1998 to July
1, 1999 and modify certain redemption features of the Class A
Preferred. Holders of 6,260 shares of the Class A Preferred Stock
agreed to the terms of the Exchange Offer. As a result, on February 6,
1998, the Company issued 1,397,323 shares of common stock in exchange
for the cancellation of 3,912,500 Warrants. The fair value of the
common stock issued approximated the fair value of the canceled
Warrants. Subsequently, the Company re-designated the 6,260 shares of
Class A Preferred held by the stockholders who approved the Exchange
Offer as Class C Convertible Preferred Stock (Class C Preferred). Such
preferred shareholders were entitled to receive a dividend at 12% per
year of the stated value of the Class C Preferred for the period from
April 30, 1998 to June 30, 1999. In accordance with the terms of the
Preferred Stock exchange offer discussed below, all dividends
associated with Class C Preferred exchanged were relinquished.
Dividends were payable in common stock. For those Class C Preferred
shares still outstanding after the exchange offer, such dividends
amounted to $6,750 and $81,000 for the years ended May 31, 2000 and
1999, respectively. In July 1999, the Company issued 40,213 shares of
Common Stock in full payment of the Preferred Stock dividends.
Each share of Class C Preferred is convertible into such whole number
of shares of common stock equal to the aggregate stated value of the
Class C Preferred Stock to be converted divided by the lesser of (i)
$2.00 or (ii) 50% of the average closing price for the common stock for
the last ten trading days in the fiscal quarter of the Company prior to
such conversion. The Company 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 fiscal 2000, 520
shares of Class C Preferred were converted into 525,337 shares of
common stock.
On April 27, 1998, the Company notified the holders of the Class A
Preferred that the Company would redeem the remaining 460 shares of
outstanding Class A Preferred as of May 28, 1998 at a price per share
equal to 1.1 multiplied by the stated value of each share of Class A
Preferred. Holders of 340 shares of Class A Preferred exercised their
right to convert such Class A Preferred 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. There were 6,260
shares of Class C Preferred 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 pursuant to
the exchange offer.
7 Class B Convertible Preferred Stock
On February 19, 1998, the Company consummated a $2,000,000 private
placement resulting in the issuance of 2,000 shares of Class B
Convertible Preferred Stock (Class B Preferred ). Net proceeds to the
Company were $1,990,800. The Class B Preferred 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.
The exchange was the result of the Company's offer, which provided that
one share of its Class B Preferred with a $1,000 stated value could be
exchanged for .8 shares of Class D Preferred Stock with a $1,250 stated
value.
28
<PAGE>
Cornerstone Internet Solutions Company
Notes to Consolidated Financial Statements
May 31, 2000 and 1999
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 $2,250,550. The beneficial conversion feature was
being recognized solely in the calculation of loss per common share
over a 14 month period, beginning with the issuance of the Class B
Preferred to March 1999 (the first date that conversion could have
occurred). Due to the exchange of all the Class B Preferred to Class D
Preferred Stock, in the third quarter of fiscal 1999, the Company
reflected the remaining balance of $824,000 in the loss per share
calculation. As a result, the net loss to common shareholders includes
preferred stock preferences related to the Class B Preferred of $0 and
$1,769,950 for the years ended May 31, 2000 and 1999, respectively.
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.
9 Stock Options and Warrants
On April 13, 2000, the Company's stockholders approved an amendment to
the Company's 1994 Incentive and Non-Qualified Stock Option Plan (the
"Employee Plan") increasing the number of shares of common stock
authorized for issuance upon exercise of the options granted pursuant
to the plan to 4,500,000. The Company also has a 1994 Stock Option Plan
for Consultants and a 1995 Stock Option Plan for Outside Directors and
has reserved 1,600,000 and 500,000 shares, as amended, for issuance to
consultants and non-employee directors, respectively.
The Company periodically grants stock options outside the Employee Plan
to other parties. All stock options, which have been granted by the
Company, with the exception of those options granted to persons holding
more than ten percent of the voting common stock in the Company on the
date of grant, expire up to ten years after grant and are issued at
exercise prices which are not less than the fair value of the stock on
the date of grant. Options granted to persons holding more than ten
percent of the voting common stock of the Company on the date of grant
expire five years after grant and are issued at exercise prices which
are not less than 110 percent of the fair value of the stock on the
date of grant. Stock options generally vest monthly in equal increments
over the first three years after the date of grant. Payment for the
exercise price of an option may be made with previously acquired common
stock of the Company with certain limitations.
The Company has granted options to outside consultants pursuant to its
1994 Stock Option Plan for Consultants. The total number of options
granted under the Plan in fiscal 2000 and 1999 were 400,000 and 15,000,
respectively. The total number of consultants' options outstanding as
of May 31, 2000 was 689,080. Stock option expense related to these
grants, as calculated using the Black-Scholes option pricing model, was
$452,000 and $19,168 for fiscal 2000 and 1999, respectively. A total of
645,920 options remain available for grant under the 1994 Stock Option
Plan for Consultants.
Under the 1995 Stock Option Plan for Outside Directors, each person who
is an outside director on January 1 of each calendar year, shall be
granted 10,000 options to purchase shares of common stock of the
Company. At May 31, 2000, 110,000 options have been granted under the
1995 Stock Option Plan for Outside Directors and 390,000 are available
for grant.
29
<PAGE>
Cornerstone Internet Solutions Company
Notes to Consolidated Financial Statements
May 31, 2000 and 1999
A summary of all stock option transactions of the Company is as
follows:
<TABLE>
<CAPTION>
Weighted average
Number of options Price range per share exercise price
----------------- --------------------- --------------
<S> <C> <C> <C> <C>
Outstanding at May 31, 1998 3,358,451 $1.13 - 3.75 $2.63
Granted 1,084,000 $0.66 - 3.56
Exercised (216,685) $0.813 - 2.45
Cancelled (432,292) $0.83 - 3.75
=============== =================
Outstanding at May 31, 1999 3,793,474 $0.66 - 3.75 $2.33
=====
Granted 1,247,500 $1.94 - 12.31
Exercised (1,094,018) $0.66 - 3.75
Cancelled (906,767) $0.66 - 6.72
--------------- ------------
Outstanding at May 31, 2000 3,040,189 $0.75 -12.31 $2.56
=============== ================= =====
Exercisable at May 31, 2000 2,384,493 $0.75 - 12.31 $2.57
=============== ================= =====
</TABLE>
The options outstanding as of May 31, 2000 are summarized in ranges as
follows:
<TABLE>
<CAPTION>
Weighted Average Number of Options Weighted Average
Range of Exercise Price Exercise Price Outstanding Remaining Life
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$0.75 - $1.25 $0.91 255,000 1 Year
$1.26 - $3.75 $2.51 2,638,410 3 Years
$3.76 - $12.31 $6.87 146,779 5 Years
-----------
3,040,189
===========
</TABLE>
The Company applies APB Opinion No. 25 in accounting for its stock option grants
and, accordingly, no compensation cost has been recognized in the consolidated
financial statements for its employee stock options which have an exercise price
equal to or greater than the fair value of the stock on the date of the grant.
Had the Company determined compensation costs based on the fair value at the
grant date for its stock options under SFAS No.123, the Company's net loss to
common shareholders and net loss per common share would have been increased to
the following pro forma amounts:
2000 1999
---- ----
Net loss:
As reported ($ 9,081,735) ($5,496,300)
Pro forma ($9,692,051) ($6,324,854)
Net loss per share:
As reported ($0.48) ($0.46)
Pro forma ($0.52) ($0.53)
30
<PAGE>
Cornerstone Internet Solutions Company
Notes to Consolidated Financial Statements
May 31, 2000 and 1999
The per share weighted-average fair value of stock options granted
during fiscal 2000 and 1999 was $2.71 and $1.34, respectively, on the
date of grant using the Black Scholes option-pricing model with the
following weighted-average assumptions,: 2000-expected dividend yield
of 0%, risk free interest rate of 6.5%, expected stock volatility of
154%, and an expected option life of 5 years; 1999-expected dividend
yield of 0%, risk free interest rate of 6%; expected stock volatility
of 145% and an expected option life of 5 years.
Pro forma net loss reflects only options granted in fiscal 1996 and
thereafter. Therefore, the full impact of calculating compensation cost
for stock options under SFAS No. 123 is not reflected in the pro forma
net loss amounts presented above because compensation cost is reflected
over the options' vesting period and compensation cost for options
granted prior to June 1, 1995 was not considered.
At May 31, 1998, the Company had 340,000 warrants outstanding that were
issued in connection with a private placement. Of such warrants 246,100
were exercised at $2.35 per share in January 1999, and the balance
expired unexercised on January 31, 1999.
At May 31, 2000, the Company had reserved, authorized and unissued
common shares for the following purposes (excluding those for stock
options and convertible preferred stock):
<TABLE>
<CAPTION>
Shares of
Common
Exercise Stock
Price Issuable Expiration
----- -------- ----------
<S> <C> <C> <C>
Warrants issued in connection with a convertible
preferred stock offering $4.00 187,500 December, 2001
Stock purchase rights sold to underwriter $3.71 32,300 May, 2001
-------
Total 219,800
=======
</TABLE>
10 B2B Stock Options
The 1999 Incentive and Stock Option Plan of B2Bgalaxy.com authorizes a
total of 3,000,000 shares of common stock for issuance upon exercise of
the options granted pursuant to the plan. The plan covers grants to
employees, directors, and consultants. All stock options, which have
been granted by B2B, expire up to ten years after grant. Employee stock
options generally vest monthly in equal increments over the first three
years after the date of grant. Consultant options generally vest over
the period of service.
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 fiscal 2000 was $250,662.
31
<PAGE>
Cornerstone Internet Solutions Company
Notes to Consolidated Financial Statements
May 31, 2000 and 1999
A summary of all stock option transactions of the Company is as
follows:
<TABLE>
<CAPTION>
Weighted
average
Number of Price range exercise
options per share price
--------- ----------- --------
<S> <C> <C>
Outstanding at May 31, 1999 - 0 -
Granted 2,442,500 $0.60 - 5.00
Exercised (611) $0.60
Cancelled (80,111) $0.60 - 2.80
---------- ------------
Outstanding at May 31, 2000 2,361,778 $0.60 -5.00 $0.99
========= ============ =====
Exercisable at May 31, 2000 981,999 $0.60 - 5.00 $1.03
========= ============ =====
</TABLE>
The options outstanding as of May 31, 2000 are summarized in ranges
as follows:
<TABLE>
<CAPTION>
Weighted Average Number of Options Weighted Average
Range of Exercise Price Exercise Price Outstanding Remaining Life
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$0.60 $0.60 1,940,278 4 Years
$0.61 - $5.00 $2.81 421,500 5 Years
---------
2,361,778
=========
</TABLE>
11 Income Taxes
The actual income tax benefit for fiscal 2000 and 1999 differs from the
"expected" income tax benefit, computed by applying the U.S. Federal
corporate tax rate of 34 percent to loss before income taxes, as
follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Computed "expected" tax benefit $(3,086,000) $(1,239,400)
Increase in income taxes resulting from:
Non-deductible expenses 3,000 13,300
State tax benefit (219,000) -
Non-deductible loss of subsidiary and
amortization of beneficial conversion feature 1,828,000 106,000
Increase in valuation allowance, primarily for
Federal net operating loss carryforward 1,474,000 1,120,100
---------------- ---------------------
Actual tax benefit - -
================ =====================
</TABLE>
32
<PAGE>
Cornerstone Internet Solutions Company
Notes to Consolidated Financial Statements
May 31, 2000 and 1999
The tax effects of the temporary differences that give rise to
significant portions of the deferred tax assets at May 31, 2000 and
1999, are as follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
Deferred tax assets (liabilities):
<S> <C> <C>
Net operating loss carryforward $10,556,600 $9,282,000
Allowance for doubtful accounts receivable 146,500 84,600
Accrued expenses 223,600 9,400
Research and development credit carryforward 127,300 127,300
Property and equipment depreciation (2,400) 74,300
Valuation allowance (11,051,600) (9,577,600)
-----------------------------------
Net deferred tax asset - -
===================================
</TABLE>
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or the
entire deferred tax asset will be realized. The ultimate realization of
the deferred tax asset is dependent upon the generation of future
taxable income during the periods in which temporary differences become
deductible or operating losses are carried forward. The Company does
not believe that it is more likely than not that it will realize its
deferred tax asset and has established a valuation allowance of
$11,051,600 and $9,577,600 at May 31, 2000 and 1999, respectively,
based upon the Company's historical taxable losses and lack of
offsetting objective evidence, and that management cannot currently
determine whether the Company will generate taxable income during the
remainder of the net operating loss carryforward period.
At May 31, 2000, the Company had available approximately $30,492,000 of
tax loss carryforwards, which expire in varying amounts in years 2008
through 2020. The utilization of certain of these tax loss
carryforwards is subject to annual limitations imposed by the Internal
Revenue Code Section 382 due to the Company's various equity
transactions.
At May 31, 2000, B2B, a consolidated subsidiary of the Company for
financial reporting purposes but not for tax purposes, had net
operating loss carryforwards of approximately $5,969,000, which result
in a deferred tax asset of approximately $2,029,000. In addition, B2B
has a deferred tax asset of approximately $112,000, which resulted from
expenses not currently deductible, and a deferred tax liability of
$37,000, which resulted from book to tax differences in the
depreciation of property and equipment. The net deferred tax asset
cannot be utilized by the Company. B2B's management does not believe
that it is more likely than not that it will realize this deferred tax
asset and has established a valuation allowance for this entire asset,
accordingly, at May 31, 2000.
12 Employee Benefit Plan
The Company sponsors an employee savings plan under Section 401(k) of
the Internal Revenue Code (IRC) that covers substantially all employees
of the Company who elect to participate on a voluntary basis.
Participants may authorize salary deferral amounts under the plan up to
15 percent of their compensation limited to a maximum amount stipulated
in the IRC. The plan also provides for a discretionary Company
contribution, which is determined by the Board of Directors. No
discretionary Company contributions were made during the fiscal years
2000 and 1999.
33
<PAGE>
Cornerstone Internet Solutions Company
Notes to Consolidated Financial Statements
May 31, 2000 and 1999
13 Commitments
Rent expense for operating leases for fiscal 2000 and 1999 approximated
$360,578 and $190,948, respectively. During fiscal year 2000, B2B
leased office space, resulting in the increased expense. The lease for
the B2B space expires in October 2000, and the Company has negotiated
an eighteen-month lease for more space in the same complex. The Company
leases office space under non-cancelable operating leases, which expire
at various times through 2005. Minimum future rentals by fiscal year
for operating leases with noncancellable terms in excess of one year
offset by sublease income are as follows:
2001 - $440,502
2002 - $459,037
2003 - $150,550
2004 - $3,564
2005 - $3,564
14 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.
While the Company's results of operations are primarily reviewed on a
consolidated basis, the chief operating decision-maker also manages the
enterprise in two segments: (I) Internet Business Solutions Segment,
(II) B2B Marketplace Segment. The Internet Business Solutions Segment
provides a full range of Internet and Intranet-based business
solutions, including Web site design, hosting and management, design
and implementation of database and e-commerce solutions, educational
programs and Web-related strategic consulting. The B2B Marketplace
Segment creates industry-specific business-to-business e-commerce
marketplaces that link buyers and sellers through competitive on-line
exchanges with a focus on improving profitability. Eliminations consist
of inter-company balances.
<TABLE>
<CAPTION>
Fiscal Year Ended May 31, 2000
------------------------------
B2B Marketplace Internet Business Eliminations (1) Total
Segment Solutions Segment
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $ 127,459 $3,463,597 $(723,826) $ 2,867,230
Operating loss (5,899,965) (4,673,260) (10,573,225)
Interest income 245,701 44,144 289,845
Interest expense - 5,034 5,034
Depreciation and amortization 304,706 262,977 567,683
Expenditures for long lived assets 1,217,030 221,827 1,438,857
Total assets 14,037,646 3,067,598 (1,483,791) 15,621,453
</TABLE>
34
<PAGE>
Cornerstone Internet Solutions Company
Notes to Consolidated Financial Statements
May 31, 2000 and 1999
<TABLE>
<CAPTION>
Fiscal Year Ended May 31, 1999
B2B Marketplace Internet Business Eliminations (1) Total
Segment Solutions Segment
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenues $ - $3,609,169 $(352,100) $3,257,069
Operating loss (322,217) (3,225,889) - (3,548,106)
Interest income - 10,594 - 10,594
Interest expense - 10,760 - 10,760
Depreciation and amortization 5,200 240,973 - 246,173
Expenditures for long lived assets 292,806 74,052 - 366,858
Total assets 2,443,504 3,500,836 (447,941) 5,496,399
</TABLE>
(1) Represents inter-company services provided by marchFIRST
Cornerstone to B2B, at cost.
15 Comprehensive Income
The amounts related to investments reported in net income and other
comprehensive income for the fiscal year ended May 31, 2000 are
comprised of the following:
Net income:
Gain on sale of investments (common stock from
the exercise of marchFIRST warrants) $ 728,750
--------------
Other comprehensive income:
Holding gain arising during period, net of tax 96,203
Reclassification adjustment, net of tax (418,983)
---------------
Net loss recognized in other comprehensive income (322,780)
---------------
Total impact on comprehensive income $ 405,970
===============
16 Business and Credit Concentrations
In fiscal 2000, there were two customers that individually comprised
more than 10% of revenue and in the aggregate amounted to 9 % of
accounts receivable at May 31,2000, and 30% of fiscal 2000 total
revenues. In 1999 there were two customers that individually comprised
more than 10% of revenue and in the aggregate amounted to 24% of
accounts receivable at May 31, 1999, and 48% of fiscal 1999 total
revenues.
17 Sale of Technology License
The Company's initial intent was to utilize the B2B software it had
developed for internal use only. However, a third party expressed an
interest in acquiring a license to use the software and, in March 2000,
the Company entered into an agreement to license the software and other
related intellectual property and to provide support for one year in
exchange for one million shares of the purchaser's common stock. The
fair value of the shares received, amounting to $1,180,000, is included
in other non-current assets at May 31, 2000. Approximately $590,000 of
the proceeds reduced the related software costs and the remaining
$590,000 will be recorded as revenue ratably over the term of the
support, commencing June 2000, when the software modifications required
by the purchaser were completed.
35
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CORNERSTONE INTERNET SOLUTIONS COMPANY.
Date: August 29, 2000 By: KENNETH GRUBER
--------------
Kenneth Gruber, Executive Vice President,
and Chief Financial and Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the persons on behalf of the registrant and in the
capacities and on the date indicated.
Name Title Date
/S/ANDREW GYENES Chairman of the Board August 29, 2000
----------------
Andrew Gyenes
/S/RINO BERGONZI Director August 29, 2000
----------------
Rino Bergonzi
/S/PETER GYENES Director August 29, 2000
---------------
Peter Gyenes
/S/HARRISON WEAVER Director August 29, 2000
------------------
Harrison Weaver
/S/KENNETH GRUBER Executive Vice President and
------------------ Chief Financial and August 29, 2000
Kenneth Gruber Accounting Officer
36
<PAGE>
Consent of Independent Auditors
The Board of Directors
Cornerstone Internet Solutions Company:
We consent to incorporation by reference in the registration statement (No.
333-06780) on Form S-3 and registration statements (No. 33-04038 and No.
33-97208) on Form S-8 of Cornerstone Internet Solutions Company of our report
dated August 2, 2000, relating to the consolidated balance sheets of Cornerstone
Internet Solutions Company and subsidiaries as of May 31, 2000 and 1999, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years then ended, which report appears in the May 31, 2000 annual
report on Form 10-KSB of Cornerstone Internet Solutions Company.
Our report dated August 2, 2000, contains an explanatory paragraph that states
that the Company's recurring losses from operations raise substantial doubt
about its ability to continue as a going concern. The consolidated financial
statements do not include any adjustments that might result from the outcome of
that uncertainty.
/s/ KPMG LLP
KPMG LLP
New York, New York
August 29, 2000
