U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
/ X / QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 1999
/ / TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
For the transition period from __________ to _______________
Commission file number: 1-13360
CORNERSTONE INTERNET SOLUTIONS COMPANY
(Exact name of small business issuer as specified in its charter)
DELAWARE 22-3272662
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
584 Broadway Suite 509
(Address of Principal Executive Offices)
(212) 343-3920
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
YES / X / NO / /
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date:
Number Outstanding
Title of Class as of December 31, 1999
-------------------- -----------------------
Common Stock, $.01 Par Value 24,926,749
Transitional Small Business Disclosure Format: Yes / / No /X/
<PAGE>
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page
Item 1 Financial Statements
Consolidated Balance Sheets at November 30, 1999
and May 31, 1999 3
Consolidated Statements of Operations for the
three-month periods ended November 30, 1999 and 1998. 4
Consolidated Statements of Operations for the
six-month periods ended November 30, 1999 and 1998. 5
Consolidated Statements of Cash Flows for the
six-month periods ended November 30, 1999, and 1998. 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II - OTHER INFORMATION
Page
Item 1. Legal Proceedings 13
Item 2. Change in Securities and Use of Proceeds 13
Item 3. Defaults upon Senior Securities 13
Item 4. Submissions of Matters to a Vote by Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
2
<PAGE>
CORNERSTONE INTERNET SOLUTIONS COMPANY and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
November 30, May 31,
1999 1999
----------------------- ------------------------------
ASSETS (unaudited)
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 2,277,740 $ 2,939,596
Investments 134,995 398,348
Accounts receivable, net 1,507,236 1,024,624
Other receivables 20,587 20,587
Prepaid expenses and other 47,059 49,475
----------------------- ------------------------------
Total current assets 3,987,617 4,432,630
Affiliation rights, net 178,889 191,667
Property and equipment, net 1,144,465 671,182
Other 243,058 200,920
----------------------- ------------------------------
$ 5,554,029 $ 5,496,399
----------------------- ------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt $ 53,443 $ 104,954
Accounts payable 919,975 830,397
Accrued payroll and related expenses 84,249 124,866
Other accrued expenses 267,107 462,592
Other current liabilities 1,351 30,000
----------------------- ------------------------------
Total current liabilities 1,326,125 1,552,809
Long-term debt, excluding current maturities - 1,465
----------------------- ------------------------------
Total liabilities 1,326,125 1,554,274
----------------------- ------------------------------
Minority interest 1,382,696 938,838
Stockholders' Equity:
Preferred stock, $.01 par value,
2,000,000 shares authorized;
Class C, 20 and 540 shares issued and outstanding
at November 30, 1999 and May 31,1999 - 5
Class D, 8040 shares issued and outstanding at
November 30, 1999 and May 31, 1999, liquidation
preference of $11,055,000 at November 30, 1999. 80 80
Common stock, $.01 par value, 50,000,000 shares
authorized and 14,436,184 and 13,121,013 shares
issued and outstanding at November 30, 1999 and
May 31, 1999 144,362 131,210
Additional paid-in capital 37,926,319 36,018,294
Deferred consulting expense (376,667) -
Accumulated other comprehensive income 134,995 398,348
Accumulated deficit (34,983,881) (33,544,650)
----------------------- ------------------------------
Total stockholders' equity 2,845,208 3,003,287
----------------------- ------------------------------
$5,554,029 $ 5,496,399
----------------------- ------------------------------
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
Cornerstone Internet Solutions Company and Subsidiaries
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended November 30,
1999 1998
--------------------------------------------
<S> <C> <C>
Internet services revenues $1,008,185 $1,004,600
Subscription revenue 13,395 -
-------------------------------------------
Total revenues 1,021,580 1,004,600
===========================================
Cost of internet services revenues 993,185 1,146,300
Marketing and selling expenses 331,686 144,400
General and administrative expenses 1,053,722 513,300
-------------------------------------------
Total costs and expenses 2,378,593 1,804,000
-------------------------------------------
Operating loss (1,357,013) (799,400)
--------------------------------------------
Other income (expense):
Interest income 15,219 -
Interest expense (1,568) (4,700)
Gain on sale of investments 728,750 -
Other income (expense), net (11,519) (6,400)
--------------------------------------------
Loss before income taxes (626,131) ( 810,500)
Provision for income taxes - -
Minority interest in net loss of subsidiary, net (221,929) -
===========================================
Net loss (848,060) (810,500)
Preferred stock dividends and preferences - (511,100)
--------------------------------------------
Net loss to common stockholders $(848,060) $(1,321,600)
--------------------------------------------
Basic and diluted loss per share $ (0.06) $ (.11)
--------------------------------------------
Weighted average shares of common stock 13,883,431 11,574,895
============================================
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
Cornerstone Internet Solutions Company and Subsidiaries
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Six months ended November 30,
1999 1998
-----------------------------------------
<S> <C> <C>
Internet services revenues $2,024,186 $1,533,500
Subscription revenue 13,395 -
Software licensing and royalty revenue - 38,000
-----------------------------------------
Total revenues 2,037,581 1,571,500
=========================================
Cost of internet services revenues 1,948,982 2,238,000
Marketing and selling expenses 558,250 258,500
General and administrative expenses 1,720,349 1,078,900
-----------------------------------------
Total costs and expenses 4,227,581 3,575,400
-----------------------------------------
Operating loss (2,190,000) (2,003,900)
-----------------------------------------
Other income (expense):
Interest income 37,183 -
Interest expense (3,645) (8,800)
Gain on sale of investments 728,750 -
Other income (expense), net (11,519) (7,700)
-----------------------------------------
Loss before income taxes (1,439,231) ( 2,020,400)
Provision for income taxes - -
Minority interest in net loss of subsidiary, net (443,858) -
=========================================
Net loss (1,883,089) (2,020,400)
Preferred stock dividends and preferences (6,750) (1,180,500)
-----------------------------------------
Net loss to common stockholders $(1,899,839) $(3,200,900)
=========================================
Basic and diluted loss per share $ (0.14) $ (.28)
=========================================
Weighted average shares of common stock 13,775,754 11,282,152
=========================================
</TABLE>
See notes to consolidated financial statements
5
<PAGE>
Cornerstone Internet Solutions Company and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended November 30,
1999 1998
-----------------------------------------
Cash flows from operating activities
<S> <C> <C>
Net loss $(1,883,089) $(2,020,400)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization 207,993 144,400
Non-cash consulting expense 75,333 12,800
Minority interest in net loss of consolidated subsidiary 443,858 -
Gain on sale of investments (728,750) -
Changes in assets and liabilities
Accounts receivable (482,612) (426,100)
Other receivables - 39,200
Prepaid expenses and other 2,416 157,100
Other assets (42,138) (37,100)
Accounts payable 89,578 (28,600)
Accrued expenses (236,102) 111,200
Deferred revenue - (6,000)
Other (51,132) -
----------------------------------------
Net cash used in operating activities (2,604,645) (2,053,500)
----------------------------------------
Cash flows from investing activities
Purchases of property and equipment (668,498) (23,200)
Proceeds from sale of investments 728,750 -
----------------------------------------
Net cash provided by (used in) investing activities 60,252 (23,200)
----------------------------------------
Cash flows from financing activities
Proceeds from issuances of common and preferred stock - 3,457,800
Proceeds from exercise of stock options 1,935,513 27,200
Principal payments of long-term debt (52,976) (48,700)
----------------------------------------
Net cash provided by financing activities 1,882,537 3,436,300
----------------------------------------
Net increase (decrease) in cash and cash equivalents (661,856) 1,359,600
Cash and cash equivalents
Beginning of period 2,939,596 392,200
----------------------------------------
End of period $2,277,740 $1,751,800
========================================
</TABLE>
See notes to consolidated financial statements
6
<PAGE>
CORNERSTONE INTERNET SOLUTIONS COMPANY
Notes to Condensed Consolidated Financial Statements
(Unaudited)
GENERAL
1. The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-QSB, and in the
opinion of management contain all adjustments (consisting of only
normal recurring entries) necessary to present fairly the financial
position of Cornerstone Internet Solutions Company (the "Company"), and
subsidiaries as of November 30, 1999 and the results of its operations
and its cash flows for the three and six month periods ended November
30, 1999 and 1998. Certain information and note disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been omitted. The interim
consolidated financial statements should be read in conjunction with
the Company's consolidated financial statements and related notes in
the May 31, 1999 Annual Report on Form 10-KSB. The results for the
three month, and six month periods ended November 30, 1999 are not
necessarily indicative of the results to be obtained for the full year.
2. BUSINESS
On July 2, 1998, the Company's shareholders ratified a proposal to
change the Company's name from Enteractive, Inc. to Cornerstone
Internet Solutions Company. Headquartered in New York, New York, the
Company is a provider of business solutions based on Internet
technologies. The Company's address is 584 Broadway, Suite 509, New
York, NY 10012 and its Internet address is www.crstone.com.
On December 4, 1996, the Company signed multiple market affiliate
agreements with USWeb/CKS Corporation ("USWeb/CKS") and paid $625,000
for the right to operate USWeb/CKS affiliate offices in New York City,
and certain other markets in the Northeast portion of the United
States, for a ten-year period. The operation, which has been conducting
business as USWeb/CKS Cornerstone, provides a full range of Internet
and Intranet-based business solutions, including Web site design,
hosting and management, design and implementation of database and
e-commerce solutions, educational programs and Web-related strategic
consulting. The Company is obligated to pay USWeb/CKS monthly fees
equal in the aggregate to 7% of adjusted gross revenues, as defined in
its various agreements with USWeb/CKS, but not less than certain
contractual minimum fees.
On February 17, 1999, the Company formed B2Bgalaxy. com, Inc. ("B2B")
as a wholly owned subsidiary of the Company. In April 1999, B2B
received net proceeds of $2,122,957 from the sale of convertible
Preferred Stock. See "Note 8-Subsidiary Transactions". The Company
established B2B to leverage its expertise in business consulting,
Internet technology and the development of business and e-commerce
solutions to create industry-specific business-to- business e-commerce
hubs that link buyers and sellers through competitive on-line exchanges
with a focus on improving profitability. In May 1999, B2B launched
FOODgalaxy.com, the first such hub, designed to lower the cost of food
and supplies for restaurants and other food service providers through
increased price competition. FOODgalaxy.com enables restaurants to post
a customized inventory list online and requires suppliers to
continually submit their latest product bids. This competitive process
is designed to decrease the cost of goods to buyers and significantly
reduce the time traditionally devoted to the comparative price shopping
process.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The
Company's continuing losses from operations could impact the Company's
ability to meet its obligations as they become due. In November, 1998,
the Company consummated a private placement of 1,600 shares of newly
created Class D Preferred Stock for net proceeds of approximately
$1,970,000, in April, 1999 B2B received $2,122,957 from the sale
Preferred Stock, and in November 1999 the Company received $1,929,589
from the exercise of options and $728,750 from the exercise of warrants
held by the Company in another entity. As part of its business plan to
enhance liquidity, the Company has reduced its operating expenses
related to its internet business solutions services, and continues to
expand its customer base and engagement size to increase revenue and
growth. It is also exploring financing its receivables to improve cash
flow, and it is in the process of attempting to secure a line of
credit. As of November 30, 1999 the Company has no commitments for
either the financing or the line of credit.
3. AFFILIATION RIGHTS
Fees for affiliation rights were paid to USWeb/CKS for the right to
join the USWeb/CKS network and operate as an affiliate. The fee is
being amortized over the 10-year life of the agreement with USWeb/CKS.
Affiliation rights at November 30, 1999 were net of accumulated
amortization of $131,111.
7
<PAGE>
4. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amount of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
5. CONVERTIBLE PREFERRED STOCK CLASS D
On November 10, 1998 the Company raised $1,969,900, net of related
expenses, through a private placement of 1,600 shares of Class D
Convertible Preferred Stock (Class D Preferred Stock) at a purchase
price of $1,250 per share. The holders of Class D Preferred Stock have
the right, at any time commencing after the earlier of (I) June 30,
2000 or (II) if the closing price of the common stock shall have been
at least $1.50 per share on 15 trading days during any 20-consecutive
trading day period, to convert each share of Class D Preferred Stock
into such whole number of shares of common stock equal to the aggregate
stated value of the Class D Preferred Stock to be converted divided by
$1.00, subject to adjustment. Each share of Class D Preferred Stock has
a liquidation preference of $1,375 per share. The Class D Preferred
Stock is entitled to vote on all matters submitted to the holders of
the Company's common stock, at 1,250 votes per share, pays no dividends
and is not redeemable. In the third quarter of fiscal 1999, the closing
price of the Company's Common Stock was at least $1.50 per share on 15
trading days during a consecutive 20 day trading period and accordingly
the holders of Class D Preferred Stock have the unrestricted right to
convert each share of Class D Preferred Stock as described above. In
fiscal 1999, the Company issued 7,320 shares of Class D Preferred Stock
in exchange for Class B and Class C Preferred Stock. During fiscal
1999, 880 shares of Class D Preferred Stock were converted into
1,100,000 shares of Common Stock. As of November 30, 1999, there were
8,040 shares of Class D Preferred Stock issued and outstanding and
convertible into 10,050,000 shares of Common Stock. See note 10.
6. CONVERTIBLE PREFERRED STOCK CLASS A AND C
On December 12, 1996, the Company completed a private placement of 84
units, each unit consisting of 80 shares of Class A Convertible
Preferred Stock (Class A Preferred) and 50,000 common stock purchase
warrants to purchase in the aggregate 4,200,000 shares of Common Stock
at an exercise price of $4.00 per share and expiring December 13,
2001(the "Warrants"). Proceeds from the private placement were
approximately $7,869,100, net of related expenses of $531,000. The
Class A Preferred Stock has a stated value of $1,250 per share.
On November 19, 1997, the Company offered to exchange the 4,200,000
Warrants for common stock (the "Exchange Offer"), whereby for each 2.8
warrants exchanged, the Company issued one share of its Common Stock.
In connection with the Exchange Offer, the Company received the written
consent of the participating preferred stockholders to amend the terms
of the Class A Preferred to delay the date when the Class A Preferred
Stock can first be converted into common stock from May 1, 1998 to July
1, 1999 and modify certain redemption features of the Class A
Preferred. Holders of 6,260 shares of the Class A Preferred Stock
agreed to the terms of the Exchange Offer. As a result, on February 6,
1998, the Company issued 1,397,323 shares of common stock in exchange
for the cancellation of 3,912,500 Warrants. The fair value of the
common stock issued approximated the fair value of the canceled
Warrants. Subsequently, the Company redesignated the 6,260 shares of
Class A Preferred held by the stockholders who approved the Exchange
Offer as Class C Convertible Preferred Stock (Class C Preferred). Such
preferred shareholders were entitled to receive a dividend at 12% per
year of the stated value of the Class C Preferred for the period from
April 30, 1998 to June 30, 1999. In accordance with the terms of the
Preferred Stock exchange offer discussed below, all dividends
associated with Class C Preferred exchanged were relinquished.
Dividends are payable in common stock and for those Class C Preferred
shares still outstanding after the exchange offer, such dividends
amounted to $81,000 for the year ended May 31, 1999 and $6,750 for the
six months ended November 30,1999. In July, 1999 the Company issued
40,213 shares of Common Stock in full payment of the Preferred Stock
dividends.
As of November 30,1999, there were 20 shares of Class C Preferred Stock
outstanding which is convertible into 20,205 shares of Common Stock.
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 July and November
1999, 500 and 20 shares of Class C Preferred were converted into
505,132 and 20,205 shares of common stock respectively.
8
<PAGE>
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 Stock to Common Stock, which
resulted in the issuance of 348,361 shares of common stock in June
1998. 120 shares of Class A Preferred were redeemed for $165,000 in May
1998.
In October 1998, the Company offered to exchange one share of its Class
D Preferred Stock for one share of Class C Preferred Stock. There were
6,260 shares of Class C Preferred Stock outstanding at the time of the
offer. On November 25, 1998 the Company issued 5,720 shares of Class D
Preferred Stock in exchange for a like amount of Class C Preferred
Stock pursuant to the exchange offer.
7. PRIVATE PLACEMENT OF COMMON STOCK
On July 24, 1998 the Company consummated a private placement of
1,768,750 unregistered shares of Common Stock, for $1 per share. The
net proceeds of the offering were approximately $1,487,900.
8. SUBSIDIARY TRANSACTIONS
In fiscal 1999 B2B received from a third party $37,064 of fixed assets
in exchange for 20.6% of its common shares outstanding, which resulted
in an increase in the Company's paid-in-capital of $27,369. In
addition, on April 30, 1999 B2B sold 2,400 shares of convertible
preferred stock ("Preferred Stock") for net proceeds of $2,122,957. The
stated value of a share of the Preferred Stock is $1,000. B2B's
Preferred Stock has a liquidation preference equal to its stated value
and, upon liquidation, the holders may exchange each share of Preferred
Stock for 400 shares of the Company's Common Stock in lieu of the
liquidation preference. If such an exchange occurs, the Company has the
option exercisable until September 30, 2000 to purchase any of the
Preferred Stock at 1.5 times the stated value of the Preferred Stock.
The Preferred Stock does not provide for dividends and has voting
rights equal to the number of shares of common stock into which it is
convertible. If by September 30, 2000 B2B consummates a public offering
of equity in excess of $5 million, each share of Preferred Stock
automatically converts into 1,667 shares of B2B's Common Stock or
converts based on 75% of the Common Share price in the financing,
whichever results in a higher number of Common Shares. If B2B does not
consummate the financing by September 30, 2000, then the holder of the
Preferred Stock must at their option either convert each Preferred
Share into 1,667 Common Shares of B2B or 400 Common Shares of the
Company. If the holder elects Company Common Stock, the Company will
have the option prior to the conversion to purchase the Preferred Stock
at 1.5 times stated value.
As a result of the above transactions, at November 30, 1999 the Company
owned 79.4% of B2B's common stock or 54% of B2B, assuming the
conversion of B2B's Preferred Stock. The results of B2B are
consolidated with those of the Company and the minority interest is
presented in the accompanying consolidated balance sheet. Due to the
insignificance of the minority common shareholders' investment in B2B,
the consolidated financial statements reflect approximately 97% of
B2B's net loss for fiscal 1999 and B2B's entire net loss for the six
months ended November 30, 1999.
Based on the market price of the Company's Common Stock on the date of
issuance, B2B's Preferred Stock had a non-cash beneficial conversion
feature of $1,257,600. Such portion of the proceeds was allocated to
additional paid-in capital and will be recognized as an expense in
minority interest over the seventeen month period from the issuance of
B2B's Preferred Stock to September 30, 2000, the first date that
conversion to the Company's common stock can occur. The amortization is
calculated using the effective interest method, increases minority
interest in the consolidated balance sheet and amounted to
approximately $444,000 for the six months ended November 30,1999.
9. NON-CASH CONSULTING EXPENSE
On October 28, 1999 options to purchase 400,000 shares of Common Stock
were granted to consultants with an exercise price of $2.69. The total
cost computed under the Black Scholes method was an aggregate of
$452,000 which was recorded as deferred consulting expense and is being
expensed over the six month vesting period. This transaction has no
impact on total stockholders equity.
10. SUBSEQUENT EVENTS
Subsequent to November 30, 1999 and through January 7, 2000, 8,020
shares of Class D Preferred Stock were converted into 10,025,000 shares
of Common Stock and options to purchase 485,565 shares of Common Stock
at an average price of $1.8075 were exercised.
9
<PAGE>
11. SEGMENT INFORMATION
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". 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) Internet Hub 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 Internet Hub Segment
creates industry-specific business-to- business e-commerce hubs that
link buyers and sellers through competitive on-line exchanges with a
focus on improving profitability. Eliminations consist of intercompany
balances.
<TABLE>
<CAPTION>
Six Months Ended November 30, 1999
Internet Business
Solutions
Segment Segment Eliminations Total
<S> <C> <C> <C> <C>
Net revenues $13,395 $2,024,186 $2,037,581
Operating loss (1,239,413) (950,587) (2,190,000)
Interest income 23,975 13,208 37,183
Interest expense - (3,645) (3,645)
Depreciation and amortization 94,255 113,738 207,993
Expenditures for long lived assets 592,780 75,718 668,498
Total assets 1,090,386 4,782,126 (318,483) 5,554,029
</TABLE>
In the prior year there was only the Internet Business Solutions
segment.
12. COMPREHENSIVE INCOME
The amounts related to investments reported in net income and other
comprehensive income for the six months ended November 30, 1999 are
comprised of the following:
Net income:
Gain on sale of investments $ 728,750
------------
Other comprehensive income:
Holding gain arising during period, net of tax 32,992
Reclassification adjustment, net of tax (296,345)
-------------
Net loss recognized in other comprehensive income (263,353)
------------
Total impact on comprehensive income $ 465,397
===========
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion and analysis should be read in conjunction with the Consolidated
Financial Statements of Cornerstone Internet Solutions Company and Subsidiaries
and Notes to the Consolidated Financial Statements included elsewhere in this
Form 10-QSB.
RESULTS OF OPERATIONS - SIX MONTHS ENDED NOVEMBER 30, 1999 AND 1998
Revenues-revenues were $2,037,581 and $1,571,500, in the six months ended
November 30, 1999 and 1998, respectively. The increase in revenues is a result
of securing new contracts with customers and it includes $ 13,395 of
subscription revenue derived from its Internet Hub Segment. 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 revenue and in the
aggregate amounted to 22% of accounts receivable as of November 30, 1999, and
57% of total revenues for the six months ended November 30, 1999. The loss of
any of these customers would have a material adverse effect on the results of
operations of the Company.
EXPENSES
Cost of Internet Services Revenues Cost of internet services revenues were
$1,948,982 and $2,238,000, in the six months ended November 30, 1999, and 1998,
respectively. Cost of Internet Services revenues as a percentage of related
revenues decreased to 96% from 146% of related revenues in the six months ended
November 30, 1999 and 1998, respectively due to increased volume. The Company
expects that as it secures additional contracts the cost of revenues as a
percentage of revenues will continue to decrease.
10
<PAGE>
Marketing and Selling Expenses Marketing and selling expenses were $314,190 and
$258,500 for the Internet Business Solutions Segment, and $244,060, and $0 for
the Company's Internet Hub Segment for the six months ended November 30, 1999
and 1998, respectively. The 116% increase results from the consolidation of B2B
formed in the last quarter of fiscal 1999 and from increases in personnel to
support the growth of the Company and B2B's operations.
General and Administrative Expenses General and administrative expenses were
$1,720,349 and $1,078,900 in the six months ended November 30, 1999, and 1998,
respectively. The 59% increase relates primarily to the added cost resulting
from the Company's Internet Hub Segment consisting of personnel and overhead
costs to support the internal growth of such subsidiary. During the six months
ended November 30, 1999, general and administrative expenses incurred by the
subsidiary were $950,044.
Other income and (expense) Other income and (expense) was ($11,519) and ($7,700)
in the six months ended November 30, 1999 and 1998 respectively.
Gain on sale of investments--In November 1999, the Company received $728,750 in
income from the sale of common stock from the exercise of warrants held by the
Company in another entity.
Income tax benefit No income tax benefit was recorded in the six months ended
November 30, 1999 and November 30, 1998. Using the standards set forth in
Financial Accounting Standard No. 109, management cannot currently determine
whether the Company will generate taxable income during the period that the
Company's net operating loss carry forward may be applied towards the Company's
taxable income, if any. Accordingly, the Company has established a valuation
allowance against all of its deferred tax assets.
QUARTERLY RESULTS -QUARTER ENDED NOVEMBER 30, 1999 AND 1998
The Company expects its quarterly results to vary significantly in the future.
The number of customer contracts signed and the ability of the solutions to be
readily implemented by the development staff significantly influence revenues.
Further market acceptance of the Company's offerings is dependent on (1) the
growth and utilization of the Internet as a medium for commerce, (2) the success
of USWeb in establishing and positioning the USWeb brand in the territories
where the Company operates (3) the degree of market acceptance of the Company's
offerings and (4) the success of offerings by competitors. The Company does not
expect seasonal factors to be a significant influence on revenues.
Revenues-Revenues were $1,021,580 and $1,004,600, in the quarters ended November
30, 1999 and 1998, respectively. The increase in revenues is a result of
securing new contracts with customers and includes $ 13,395 of subscription
revenue derived from its Internet Hub Segment. 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 revenue and in the aggregate amounted to
18% of accounts receivable as of November 30,1999, and 69% of total revenues for
the three months ended November 30, 1999. The loss of any of these customers
would have a material adverse effect on the results of operations of the
Company.
EXPENSES
Cost of Internet Services Revenues- Cost of internet services revenues were
$993,185 and $1,146,300, in the quarters ended November 30, 1999, and 1998,
respectively. Cost of Internet Services revenues as a percentage of related
revenues decreased to 97% from 114% of related revenues in the quarters ended
November 30, 1999 and 1998, respectively due to increased volume. The Company
expects that as it secures additional contracts the cost of revenues as a
percentage of revenues will continue to decrease.
Marketing and selling expenses-Marketing and selling expenses were $87,626 and
$144,400 for the Internet Business Segment, and $244,060 and $0 for the Internet
Hub Segment, in the quarters ended November 30, 1999 and 1998, respectively. The
130% increase results from the consolidation of B2B formed in the last quarter
of fiscal 1999 and from increases in personnel to support the growth of the
Company and B2B's operations.
General and administrative expenses General and administrative expenses were
$1,053,722 and $513,300 in the quarters ended November 30, 1999, and 1998,
respectively. The 105% increase relates primarily to the added cost resulting
from B2B consisting of personnel and overhead costs to support the internal
growth of such subsidiary. During the three months ended November 30, 1999,
general and administrative expenses incurred by the Company's Internet Hub
Segment were $637,294.
Other income and (expense) Other income and (expense) was ($11,519) and ($6,400)
in the quarters ended November 30, 1999 and 1998 respectively.
Gain on sale of investments--In November 1999, the Company received $728,750 in
income from the sale of common stock from the exercise of warrants held by the
Company in another entity.
11
<PAGE>
INCOME TAX BENEFIT No income tax benefit was recorded in the quarters ended
November 30, 1999 and November 30, 1998. Using the standards set forth in
Financial Accounting Standard No. 109, management cannot currently determine
whether the Company will generate taxable income during the period that the
Company's net operating loss carry forward may be applied towards the Company's
taxable income, if any. Accordingly, the Company has established a valuation
allowance against all of its deferred tax assets.
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. The net proceeds of the offering were approximately
$1,487,900.
(ii) On November 10, 1998, the Company consummated a private
placement of 1,600 shares of newly created Class D Preferred
Stock for $1,250 per share. Net proceeds to the Company were
$1,969,900.
(iii) In fiscal 1999, the Company received $991,373 from the
exercise of warrants and options, and in the six months ended
November 30, 1999, the Company received $1,935,513 from the
exercise of options. Subsequent to November 30, 1999, the
Company received $998,056 from the exercise of options and
warrants.
(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.
The Company had cash and cash equivalents of $2,277,740 and $2,939,596 at
November 30, 1999 and May 31, 1999, respectively. The decrease of $661,856
primarily reflects the funding of operating activities, purchases of property
and equipment and payments of long-term debt of $52,976. Accounts receivable
increased from $1,024,624 as of May 31, 1999 to $1,507,236 as of November 30,
1999, an increase of 47%, due to increased volume and longer projects. Capital
expenditures were $668,498 and $23,200 in the six months ended November 30, 1999
and 1998 respectively. The Company anticipates that capital expenditures will
increase as revenues increase as a result of equipping staff or contractors to
service customers.
The Company's continuing losses from operations could impact the Company's
ability to meet its obligations as they become due. The Independent Auditors'
report for the fiscal year ended May 31, 1999 includes an explanatory paragraph
regarding the Company's ability to continue as a going concern. As part of its
business plan to enhance liquidity, the Company has reduced its operating
expenses related to its Internet Business Solutions Services, and is continuing
its activities designed to increase its revenues. The Company or B2B also may
also seek to obtain additional funds for operations. However, these funds may
not be sufficient to meet the Company's or B2B's longer-term cash requirements
for operations. In addition there can be no assurance that the Company or B2B
will be able to obtain additional financing. Based on management's assessment of
the demand for Internet based professional services, the Company may
significantly alter the level of expenses. Management believes that based on
funds on hand at November 30, 1999 and anticipated revenues, operations can
continue until at least through May 2000.
NEW ACCOUNTING PRONOUNCEMENT
The Company will implement the provisions of Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended by Statement of Financial Accounting Standards No. 137,
in fiscal year 2001, for which the Company is presently assessing its impact on
the consolidated financial statements, if any.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products were coded to
accept only two-digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, computer systems and software used by many
companies, including customers and potential customers of the Company, needed to
be upgraded to comply with such "Year 2000" requirements. The Company is closely
monitoring the progress the developers of the software the Company utilizes in
many of its customer projects i.e. Microsoft Corporation, as well as the
developers of the software utilized in internal systems are making towards
ensuring that the products the Company utilizes are Year 2000 compliant. The
Company believes that its internal systems and third party software incorporated
into client solutions are Year 2000 compliant. Failure to provide Year 2000
compliant business solutions and software to its customers could have a material
adverse effect on the Company's business, results of operations and financial
condition. The Company's costs to ensure that internal systems and software
acquired for integration into client business solutions are Year 2000 compliant
has not been and is not expected to become significant.
12
<PAGE>
Further, the Company believes that the purchasing patterns of customers, and
potential customers may be affected by Year 2000 issues as companies expend
significant resources to correct or patch their current software systems for
Year 2000 compliance. These expenditures may result in reduced funds available
to purchase products and services such as those offered by the Company.
To date, the Company has not encountered any significant effects of the year
2000 issue either internally or with third parties. This does not guarantee that
problems will not occur in the future or have not yet been detected.
FORWARD LOOKING STATEMENTS
This Form 10-QSB contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended, which are intended to be covered by
the safe harbors created thereby. Investors are cautioned that all
forward-looking statements involve risks and uncertainty, including without
limitation, the ability of the Company to develop its products, the success of
its USWeb/CKS Cornerstone subsidiary as well as general market conditions,
competition and pricing. Although the Company believes that the assumptions
underlying the forward-looking statements contained herein are reasonable, any
of the assumptions could be inaccurate, and therefore, there can be no assurance
that the forward-looking statements included in this Form 10-QSB will prove to
be accurate. In light of significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company, or any other person,
that the objectives and plans of the Company will be achieved.
INFLATION
The past and expected future impact of inflation on the financial statements is
not significant.
Item 1. Legal Proceedings
None
Item 2. Change in Securities and Use of Proceeds
The Company issued 746,687 shares of Common Stock pursuant to the exercise of
options in the quarter ended November 30, 1999. The options had an exercise
price ranging from $1.75 to $3.75 per share. The Common Stock was issued
pursuant to the exemption contained in Section 4 (2) of the Securities Act of
1933, as amended.
Item 3. Defaults upon Senior Securities
None
Item 4. Submissions of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27--Financial Data Schedule
(b) Reports on Form 8-K---None
13
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CORNERSTONE INTERNET SOLUTIONS COMPANY
(Registrant)
Date: January 14, 2000 /s/ Edward Schroeder
------------------------------
Edward Schroeder
Chief Executive Officer
And Principal Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-QSB FOR THE PERIOD ENDED NOVEMBER 30, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-2000
<PERIOD-START> SEP-01-1999
<PERIOD-END> NOV-30-1999
<CASH> 2,227,740
<SECURITIES> 134,995
<RECEIVABLES> 1,507,236
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,987,617
<PP&E> 2,680,669
<DEPRECIATION> 1,536,204
<TOTAL-ASSETS> 5,554,029
<CURRENT-LIABILITIES> 1,326,125
<BONDS> 0
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<COMMON> 144,362
<OTHER-SE> 2,700,766
<TOTAL-LIABILITY-AND-EQUITY> 5,554,029
<SALES> 0
<TOTAL-REVENUES> 1,021,580
<CGS> 993,185
<TOTAL-COSTS> 2,378,593
<OTHER-EXPENSES> (11,519)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,568)
<INCOME-PRETAX> (626,131)
<INCOME-TAX> 0
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<EXTRAORDINARY> (221,929)
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<NET-INCOME> (848,060)
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