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, 2000
/ / TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
For the transition period from __________ to _______________
Commission file number: 1-13360
CORNERSTONE INTERNET SOLUTIONS COMPANY
(Exact name of small business issuer as specified in its charter)
DELAWARE 22-3272662
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 Lanidex Plaza, Parsippany, New Jersey
(Address of Principal Executive Offices)
(973) 503-5600
(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 January 10, 2001
-------------------- ----------------------
Common Stock, $.01 Par Value 25,108,326
Transitional Small Business
Disclosure Format: Yes / / No /X/
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page
Item 1 Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of November 30, 2000
and May 31, 2000 3
Condensed Consolidated Statements of Operations for the
three months ended November 30, 2000 and November 30, 1999 4
Condensed Consolidated Statements of Operations for the
six months ended November 30, 2000 and November 30, 1999
5
Condensed Consolidated Statements of Cash Flows for the six months
ended November 30, 2000 and November 30, 1999 6
Notes to Condensed Consolidated 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 12
Item 2. Change in Securities and Use of Proceeds 12
Item 3. Defaults upon Senior Securities 12
Item 4. Submissions of Matters to a Vote by Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
2
CORNERSTONE INTERNET SOLUTIONS COMPANY
Condensed Consolidated Balance Sheets
(unaudited)
November 30, May 31,
2000 2000
--------------- ------------
(restated)
<C
ASSETS
Current assets:
Cash and cash equivalents $ 21,793 $ 94,712
Investments, at fair value -- 75,568
Advances to B2Bgalaxy.com -- 1,446,422
Prepaid expenses and other current assets 9,369 26,878
------------ ------------
Total current assets 31,162 1,643,580
Net assets of discontinued operations -- 455,130
Investment in B2Bgalaxy.com 2,245,246 5,225,043
Other non-current assets 310,557 153,218
------------ ------------
$ 2,586,965 $ 7,476,971
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 56,657 $ 54,763
Accrued payroll and related expenses 43,026 142,824
Other accrued expenses 37,926 37,926
Deferred revenue 143,724 --
------------ ------------
Total current liabilities 281,333 235,513
Net liabilities of discontinued operations 132,249 --
Stockholders' equity:
Preferred stock, $.01 par value,
2,000,000 shares authorized;
Class C, 20 shares issued and outstanding
as of November 30, 2000 and May 31, 2000 -- --
Common stock, $.01 par value, 50,000,000 shares
authorized and 25,108,326 shares issued and outstanding
as of November 30, 2000 and May 31, 2000 251,083 251,083
Additional paid-in capital 49,534,442 49,534,442
Accumulated other comprehensive income -- 75,568
Accumulated deficit (47,612,142) (42,619,635)
------------ ------------
Total stockholders' equity 2,173,383 7,241,458
------------ ------------
$ 2,586,965 $ 7,476,971
------------ ------------
See notes to condensed consolidated financial statements
3
Cornerstone Internet Solutions Company
Condensed Consolidated Statements of Operations
(unaudited)
Three months ended
November 30, November 30,
2000 1999
----------------------------
Subscription revenue $ -- $ 13,395
----------------------------
Total revenues -- 13,395
Cost of subscription revenue -- 217,614
Marketing, sales, and support -- 26,446
General and administrative expenses 60,983 601,775
Research and development -- 28,865
----------------------------
Total costs and expenses 60,983 874,700
Operating loss (60,983) (861,305)
Other income:
Interest income -- 6,920
Gain on sale of investments -- 728,750
Other expense, net -- (8,243)
Share of loss in B2Bgalaxy.com (1,160,797) --
----------------------------
Loss from continuing operations before minority interest (1,221,780) (133,878)
Minority interest in subsidiary, net -- (221,929)
----------------------------
Loss from continuing operations (1,221,780) (355,807)
Loss from operations of discontinued operations -- (492,253)
----------------------------
Net loss $ (1,221,780) $ (848,060)
============================
Loss per share information:
Basic and diluted loss per share from continuing operations $ (.05) $ (.03)
Basic and diluted loss per share from discontinued operations -- (.03)
----------------------------
Basic and diluted net loss per share attributable to common stockholders $ (.05) $ (.06)
============================
Weighted average shares of common stock used to compute loss per share information
25,108,326 13,883,431
4
See notes to condensed consolidated financial statements.
Cornerstone Internet Solutions Company
Condensed Consolidated Statements of Operations
(unaudited)
Six months ended
November 30, November 30,
2000 1999
----------------------------
Subscription revenues $ -- $ 13,395
----------------------------
Total revenues -- 13,395
Cost of subscription revenue -- 217,614
Marketing, sales, and support -- 131,905
General and administrative expenses 175,990 914,525
Research and development -- 43,113
----------------------------
Total costs and expenses 175,990 1,307,157
Operating loss (175,990) (1,293,762)
Other income:
Interest income -- 23,975
Gain on sale of investments -- 728,750
Other expense, net -- (2,187)
Share of loss in B2Bgalaxy.com (2,979,797) --
----------------------------
Loss from continuing operations before minority interest (3,155,787) (543,224)
Minority interest in subsidiary, net -- (443,858)
----------------------------
Loss from continuing operations (3,155,787) (987,082)
Discontinued operations:
Loss from operations of discontinued operations (915,567) (896,009)
Loss on disposal of discontinued operations (921,153) --
----------------------------
Total loss from discontinued operations (1,836,720) (896,009)
Net loss (4,992,507) (1,883,091)
Preferred stock dividends and preferences -- (6,750)
----------------------------
Net loss attributable to common stockholders $ (4,992,507) $ (1,889,841)
============================
Loss per share information:
Basic and diluted loss per share from continuing operations $ (0.13) $ (0.07)
Basic and diluted loss per share from discontinued operations (0.07) (0.07)
----------------------------
Basic and diluted net loss per share attributable to common stockholders $ (0.20) $ (.14)
============================
Weighted average shares of common stock used to compute loss per share information 25,108,326 13,775,754
See notes to condensed consolidated financial statements.
5
CORNERSTONE INTERNET SOLUTIONS COMPANY
Condensed Statement of Cash Flows
(unaudited)
- --------------------------------------------------------------------------------
Six Months Ended
November 30, November 30,
2000 1999
--------------------------
Cash flows from operating activities:
Net loss $(4,992,507) $(1,883,091)
Loss from discontinued operations 1,836,720 896,009
--------------------------
Loss from continuing operations (3,155,787) (987,082)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization -- 92,749
Share of loss in B2Bgalaxy.com 2,979,797 --
Minority interest in net loss of subsidiary, net -- 443,858
Net gain on sale of investment -- (728,750)
Changes in assets and liabilities:
Accounts receivable -- (122,988)
Advances to B2Bgalaxy.com 1,446,422 --
Prepaid expenses and other current assets 17,509 2,416
Other assets (157,339) (42,138)
Accounts payable 1,894 102,138
Accrued expenses (99,798) 43,428
Deferred revenue 143,724 --
--------------------------
Net cash provided by (used in) continuing operations 1,176,422 (1,196,369)
Net cash used in discontinued operations (1,249,341) (1,484,994)
--------------------------
Net cash used in operating activities (72,919) (2,681,363)
Cash flows from investing activities:
Purchases of property and equipment -- (591,780)
Proceeds from sale of investments -- 728,750
--------------------------
Net cash provided by investing activities -- 136,970
--------------------------
Cash flows from financing activities: -- --
Proceeds from exercise of stock options -- 1,935,513
Principal payments of long-term debt -- (52,976)
--------------------------
Net cash provided by financing activities -- 1,882,537
--------------------------
Net decrease in cash and cash equivalents (72,919) (661,856)
Cash and cash equivalents:
Beginning of period 94,712 2,939,596
--------------------------
End of period $ 21,793 $ 2,277,740
==========================
See notes to condensed consolidated financial statements.
6
CORNERSTONE INTERNET SOLUTIONS COMPANY
Notes to Condensed Consolidated Financial Statements
(Unaudited)
General
1. The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with the instructions to
Form 10-QSB, and in the opinion of management contain all
adjustments necessary to present fairly the financial position of
Cornerstone Internet Solutions Company (the "Company") as of
November 30, 2000 and the results of its operations and its cash
flows for the three and six months ended November 30, 2000 and 1999,
respectively. Certain information and note disclosures normally
included in financial statements prepared in accordance with
generally accepted accounting principles have been omitted. The
condensed consolidated financial statements should be read in
conjunction with the Company's consolidated financial statements and
related notes in the Company's Annual Report on Form 10-KSB for the
fiscal year ended May 31, 2000. The results for the six months ended
November 30, 2000 are not necessarily indicative of the results to
be obtained for the full year.
2. Business and Liquidity
The Company is a provider of comprehensive business-to-business
e-commerce services and solutions. The Company's address is 500
Lanidex Plaza, Third Floor, Parsippany, New Jersey 07054 and its
Internet address is www.crstone.com.
The Company owns financial interests in two companies, Enteractive
Network Solutions Inc. (Enteractive) and B2Bgalaxy.com ("B2B").
Enteractive is a wholly-owned subsidiary of the Company, and
formerly an independent affiliate of marchFIRST Corporation, the
successor of USWEB Corporation ("USWeb"). Enteractive ceased
operations on November 1, 2000 and ended its relationship with
MarchFIRST. This is further described in Note 6 below. B2B is 37.8%
owned by the Company and is accounted for as an equity method
investment (See Note 4). B2B was established in February 1999 to
leverage the Company's expertise in business consulting, Internet
technology and e-commerce in the creation of industry-specific
business-to-business e-commerce portals. The portals link buyers and
sellers 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. In May 1999, B2B launched FOODgalaxy.com, the first
portal, which was designed to lower the cost of food and supplies
for restaurants and other food service providers through increased
price competition. In March 2000, B2B agreed to license its
e-commerce solution to PetAssure, Inc. to create VETgalaxy.com, an
online marketplace targeting the veterinary service industry. Under
this agreement, B2B functions as an operational and support partner
for the new company. In July 2000, Telefonica B2B and B2Bgalaxy.com
agreed to create an e-commerce marketplace for the foodservice
industry in Latin America, Spain and Portugal. This joint venture
initially offers a solution for the food service industry in Spanish
and Portuguese speaking markets, and could potentially extend to
other industries with similar purchasing needs and behaviors.
The accompanying condensed consolidated financial statements have
been prepared assuming that the Company will continue as a going
concern. The Company's continuing losses could impact the Company's
ability to meet its obligations as they become due. The accumulated
deficit as of November 30, 2000 was $47,612,142 and the net loss for
the six months ended November 30, 2000 was $4,992,507. The Company
is considering various business alternatives, which may include
merger, acquisition, joint ventures or liquidation. It is uncertain
which, if any, alternative the Company will pursue.
The Company was advised by the Nasdaq SmallCap Market that the
Company's Common Stock would be delisted on January 3, 2001 from
trading on the Nasdaq SmallCap Market due to a failure to maintain a
minimum bid price of $1.00 over 30 consecutive trading days. The
Company appealed this determination by the Nasdaq SmallCap Market
and a hearing has been scheduled for Friday, February 9, 2001. If
the Company's appeal is unsuccessful, management of the Company will
attempt to take the necessary steps to allow its Common Stock to
trade on the OTC Bulletin Board System. The Company's Common Stock
will also continue to trade on the Boston Stock Exchange. However,
the Company's Common Stock could be considered a penny stock and be
subject to various regulations which could have an adverse effect on
the trading market for and market price of the Company's Common
Stock.
The Company did not file Form 10-QSB for the quarterly period ended
November 30, 2000 in a timely manner. On January 25, 2001 NASDAQ
advised the Company that as a result of the filing delinquency,
effective Monday January 29, 2001 the Company's trading symbol will
be changed from CNRS to CNRSE. In addition, NASDAQ advised the
Company has failed to
7
maintain a minimum of two active market makers over the last 10
consecutive trading days as required by the Nasdaq SmallCap Market
These issues will be considered at the Company's oral hearing on
February 9, 2001.
3. B2Bgalaxy.com 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. 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. Under the terms of the Preferred Stock, if by September
30, 2000, B2B had consummated a public offering of equity in excess
of $5 million, each share of Preferred Stock would have
automatically converted into 1,667 shares of B2B's Common Stock or
converted based on 75% of the Common Share price in the financing,
whichever would have resulted in a higher number of Common Shares.
As B2B did not consummate such financing by September 30, 2000, the
holders of the Preferred Stock had the option to either convert each
Preferred Share into 1,667 Common Shares of B2B or 400 Common Shares
of the Company. All of the Preferred Stock was converted into shares
of B2B resulting in the issuance of 4,000,800 shares of B2B Common
Stock.
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 was recognized as an
expense in minority interest through February 29, 2000. Thereafter,
the amortization through September 30, 2000 increased the Company's
share of loss in B2B.
On February 29, 2000, B2B consummated a private placement of
5,357,181 shares of Common Stock, resulting in net proceeds of
$14,975,213.
As a result of the above transactions, at November 30, 2000, the
Company owned 37.8% of B2B's Common Stock.
4. Use of Equity Method of Accounting for B2B
The Company has reflected B2B as a consolidated subsidiary in its
previously filed financial statements. However, as described in Note
3, on February 29, 2000, B2B completed a private placement of common
stock, which reduced the Company's voting interest in B2B below 50%.
As the Company no longer had a controlling financial interest in
B2B, the Company should have presented the investment in B2B using
the equity method of accounting as of and for periods after February
29, 2000. In the accompanying financial information, the investment
in B2B has been reflected using the equity method of accounting from
February 29, 2000. The accompanying condensed consolidated balance
sheet as of November 30, 2000 reflects the Company's interest in B2B
using the equity method of accounting. The consolidated balance
sheet as of May 31, 2000 has been adjusted to reflect the investment
in B2B on an equity basis from February 29, 2000 forward. For the
three months and six months ended November 30, 2000, the Company has
recognized its proportionate share of B2B's net losses on the equity
method, based on its ownership in B2B for each period, in other
income. From June 1 to September 30, 2000, the Company's ownership
of B2B was 48.7%. As described in Note 3, on September 30, 2000,
4,000,800 shares of Common Stock of B2B were issued upon conversion
of the B2B Preferred Stock. This transaction reduced the Company's
economic ownership of B2B from 48.7% to 37.8%. From October 1 to
November 30, 2000, the Company's ownership was 37.8%. For the three
months and six months ended November 30, 1999, the operations of B2B
are presented on a consolidated basis as previously reported.
The Company plans to amend its financial statements included in Form
10-KSB for the year ended May 31, 2000 and Form 10-QSB for the
quarterly periods ended February 29 and August 31, 2000 to reflect
its investment in B2B using the equity method of accounting from
February 29, 2000. The Company does not anticipate there will be any
changes to the Company's stockholders' equity, net loss or related
per share amounts as a result of the revisions to the financial
statements to apply the equity method of accounting for the
Company's investment in B2B. The Company's auditors, KPMG LLP, have
not completed their audit of the adjustments to the Company's
financial statements as of and for the year ended May 31, 2000.
8
8
Summarized balance sheet data as of May 31, 2000 as originally reported and as
restated is as follows:
($ in thousands) Originally Reported As Restated
- ---------------- ------------------- -----------
Cash and cash equivalents 12,222 94
Current assets 13,111 1,644
Total assets 15,621 7,477
Current and total liabilities 2,194 236
Minority interest 6,480 -
Stockholders' equity 6,947 7,241
Deferred charges of $293,872 were included in stockholders' equity as originally
reported in error which has been corrected in the restated amounts.
Summarized financial data for B2B as of and for the three months and six months
ended November 30, 2000 is as follows:
Three months ended Six months ended
($ in thousands) November 30, 2000 November 30, 2000
- --------------- ----------------- -----------------
Statement of operations data:
Revenues 370 792
Operating loss 2,878 6,196
Net loss 2,877 6,159
Balance sheet data: November 30, 2000 May 31, 2000
----------------- ------------
Cash and cash equivalents 4,054 12,127
Total assets 6,487 14,037
Shareholders' equity 5,352 11,411
5. 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.
6. Discontinuance of the Internet Business Solutions Segment
On September 25, 2000, the Company announced its plan to close its
Internet Business Solutions segment. In accordance with such plan,
the Company immediately reduced the workforce of the unit by 57% on
September 25, 2000. The Company closed and disposed of the business
by November 1, 2000 by selling the remaining assets of the segment.
As of November 30, 2000, the Company had two full time employees,
the Chairman of the Board and the Chief Financial Officer, who
devote substantially all of their time to the B2B operations. They
perform similar functions as necessary for the Company.
B2bgalaxy.com staff perform administrative functions for the
Company. The costs of these services are borne by the Company. The
Company is considering various business alternatives, which may
include merger, acquisition, joint ventures or liquidation. It is
uncertain which, if any, alternative the Company will pursue.
Fees for affiliation rights were paid to marchFIRST.com for the
right to join the marchFIRST network and operate as an affiliate.
The fee was being amortized over the 10-year life of the agreement
with marchFIRST, but as a result of the termination of the agreement
with marchFIRST stemming from the management decision to discontinue
the Internet Business Solutions segment, the unamortized balance of
$159,722 on August 31, 2000, has been written down to zero and is
included in the loss on disposal of discontinued operations.
Management of the Company estimated costs that it will incur as part
of the discontinuance and ultimate disposal of the Internet Business
Solutions segment. At August 31, 2000, the Company recorded the
estimated loss of discontinuing this operation and disposing of the
related assets. The estimate consisted primarily of severance costs
for employees who have been
9
terminated, lease cancellation payments, and the estimated loss on
the sale of the segment's remaining assets. These amounts have been
included in the loss on disposal of discontinued operations in the
accompanying condensed consolidated statement of operations. There
were no changes in the estimates made for the discontinuance of the
Internet Business Solutions segment during the quarter ended
November 30, 2000.
7. Convertible Preferred Stock Class C
As of November 30, 2000, there were 20 shares of Class C Preferred
Stock outstanding, which, as of such date, are convertible into an
aggregate of 20,205 shares of Common Stock. Each share of Class C
Preferred is convertible into the whole number of shares of common
stock equal to the aggregate stated value of the Class C Preferred
Stock to be converted divided by the lesser of (i) $2.00 or (ii) 50%
of the average closing price for the common stock for the last ten
trading days in the fiscal quarter of the Company prior to such
conversion. The Company has the option to redeem all, or any portion
of on a pro rata basis, the Class C Preferred at any time upon 30
days prior written notice, at a redemption price equal to 110% of
the stated value.
The conversion rate of the Class C Preferred (when calculated on the
basis of dividing the stated value by $2.00 only) will be subject to
adjustments to protect against dilution in the event of stock
dividends, stock splits, and certain other events. In July 1999, 500
shares of Class C Preferred were converted into 505,132 shares of
common stock. Dividends amounted to $6,750 for the six months ended
November 30, 1999. In July 1999, 40,213 shares of common stock were
issued in full payment of the preferred stock dividends.
8. Gain on sale of investments
In the second quarter of fiscal 2000, the Company exercised USWeb
warrants and sold the underlying USWeb stock, resulting in a gain of
$728,750.
9. Comprehensive Loss
The amounts related to investments reported in net loss and other
comprehensive loss for the six months ended November 30, 2000 are
comprised of a holding loss arising during the period, net of taxes,
of $75,568. The comprehensive loss for the six months ended November
30, 2000 was ($5,068,075).
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
The discussion and analysis should be read in conjunction with the
Condensed Consolidated Financial Statements of Cornerstone Internet
Solutions Company and Notes to the Condensed Consolidated Financial
Statements included elsewhere in this Form 10-QSB.
Results of Operations - Six Months Ended November 30, 2000 and 1999
General
- -------
On September 25, 2000, the Company announced its plan to close its Internet
Business Solutions segment. In accordance with such plan, the Company
immediately reduced the workforce of the unit by 57% on September 25, 2000. The
Company closed and disposed of the business by November 1, 2000 by selling the
remaining assets of the segment. As of November 30, 2000, the Company had two
full time employees, the Chairman of the Board and the Chief Financial Officer,
who devote substantially all of their time to the B2B operations. They perform
similar functions as necessary for the Company. B2bgalaxy.com staff perform
administrative functions for the Company. The costs of these services are borne
by the Company. The Company is considering various business alternatives, which
may include merger, acquisition, joint ventures or liquidation. It is uncertain
which, if any, alternative the Company will pursue.
As a result of discontinuing the Internet Business Solutions segment, the
Company has no operations. It owns 37.8% of the common stock of B2Bgalaxy.com
and through shareholder agreements votes 47.6% of B2Bgalaxy.com's common stock.
The Company has reflected B2B as a consolidated subsidiary in its previously
filed financial statements. However, as described in Note 3, on February 29,
2000, B2B completed a private placement of common stock, which reduced the
Company's voting interest in B2B below 50%. As the Company no longer had a
controlling financial interest in B2B, the Company should have presented the
investment in B2B using the equity method of accounting as of and for periods
after February 29, 2000. In the accompanying financial information, the
investment in B2B has been reflected using the equity method of accounting from
February 29, 2000. The accompanying condensed consolidated balance sheet as of
November 30, 2000 reflects the Company's interest in B2B using the equity method
of accounting. The consolidated balance sheet as of May 31, 2000 has been
adjusted to reflect the investment in B2B on an equity basis from February 29,
2000 forward. For the three months and six months ended November 30, 2000, the
Company has recognized its proportionate share of B2B's net losses on the equity
method, based on its ownership in B2B for each period, in other
10
income. From June 1 to September 30, 2000, the Company's ownership of B2B was
48.7%. As described in Note 3, on September 30, 2000, 4,000,800 shares of Common
Stock of B2B were issued upon conversion of the B2B Preferred Stock. This
transaction reduced the Company's economic ownership of B2B from 48.7% to 37.8%.
From October 1 to November 30, 2000, the Company's ownership was 37.8%. For the
three months and six months ended November 30, 1999, the operations of B2B are
presented on a consolidated basis as previously reported.
The Company plans to amend its financial statements included in Form 10-KSB for
the year ended May 31, 2000 and Form 10-QSB for the quarterly periods ended
February 29 and August 31, 2000 to reflect its investment in B2B using the
equity method of accounting from February 29, 2000. The Company does not
anticipate there will be any changes to the Company's stockholders' equity, net
loss or related per share amounts as a result of the revisions to the financial
statements to apply the equity method of accounting for the Company's investment
in B2B. The Company's auditors, KPMG LLP, have not completed their audit of the
adjustments to the Company's financial statements as of and for the year ended
May 31, 2000.
Gain on sale of investments
- ---------------------------
In the second quarter of fiscal 2000, the Company exercised USWeb warrants and
sold the USWeb stock, resulting in a gain of $728,750.
Discontinued operations
- -----------------------
The loss from operations of the discontinued Internet Business Solutions segment
for six months ended November 30, 2000 was $915,567. The losses from operations
of the discontinued Internet Business Solutions segment for the three and six
months ended November 30, 1999 were $492,253 and $896,009, respectively.
The estimated loss on disposing the Internet Business Solutions segment of
$921,153 was recorded at August 31, 2000. There was no change in the estimate in
the three months ended November 30, 2000.
Share of loss in B2Bgalaxy.com
- ------------------------------
The Company's share of loss in B2Bgalaxy.com for the three and six months ended
November 30, 2000 was $1,160,797 and $2,979,797, respectively. During the
quarter ended November 30, 2000, the Company's share of the loss fell from 48.7%
to 37.8% as a result of the conversion of B2B's preferred stock into 4,000,800
shares of B2B common stock.
Liquidity and Capital Resources
The Company's ability to raise capital at this point is significantly dependent
upon the valuation of its investment in B2B. The Company currently has no
agreements, commitments, or understandings with respect to additional funding.
Any funds raised may not be sufficient to meet the Company's longer-term cash
requirements. In addition, there can be no assurance that the Company will be
able to obtain additional financing. The Company should be able to continue in
business as long as its investment in B2Bgalaxy.com can be sold or used as
collateral. Management believes that based on B2B funds on hand at November 30,
2000 and anticipated revenues, operations can continue at least through April
2001.
The Company was advised by the Nasdaq SmallCap Market that the Company's Common
Stock would be delisted on January 3, 2001 from trading on the Nasdaq SmallCap
Market due to a failure to maintain a minimum bid price of $1.00 over 30
consecutive trading days. The Company appealed this determination by the Nasdaq
SmallCap Market and a hearing has been scheduled for Friday, February 9, 2001.
If the Company's appeal is unsuccessful, management of the Company will attempt
to take the necessary steps to allow its Common Stock to trade on the OTC
Bulletin Board System. The Company's Common Stock will also continue to trade on
the Boston Stock Exchange. However, the Company's Common Stock could be
considered a penny stock and be subject to various regulations which could have
an adverse effect on the trading market for and market price of the Company's
Common Stock.
New Accounting Pronouncements
The Company will implement the provisions of Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended by Statements of Financial Accounting Standards Nos. 137
and 138, in fiscal year 2002, for which the Company is presently assessing its
impact on the consolidated financial statements, if any.
FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation" ("FIN No. 44), provides guidance for applying APB Opinion No. 25,
"Accounting for Stock Issued to Employees". With certain exceptions, FIN No. 44
applies prospectively to new awards, exchanges of awards in a business
combination, modifications to outstanding awards and changes in grantee status
on or after July 1, 2000. The Company does not believe that the implementation
of FIN No. 44 will have a significant effect on results of operations.
11
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" ("SAB No. 101"), which summarizes certain
of the SEC staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements. The Company is required to adopt
the accounting provisions of SAB No. 101 no later than the Company's fourth
quarter of fiscal 2001. The Company does not believe that the implementation of
SAB No. 101 will have a significant effect on results of operations.
Forward looking statements
This Form 10-QSB contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which are intended to be covered by
the safe harbors created thereby. Investors are cautioned that all
forward-looking statements involve risks and uncertainty, including without
limitation, the ability of the Company to develop its business, the success of
its B2Bgalaxy.com investment, as well as the risk factors set forth in the
Company's Annual Report on Form 10KSB for the fiscal year ended May 31, 2000.
Although the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be no assurance that
the forward-looking statements included in this Form 10-QSB will prove to be
accurate. In light of significant uncertainties inherent in the forward-looking
statements included herein, the inclusion of such information should not be
regarded as a representation by the Company, or any other person, that the
objectives and plans of the Company will be achieved.
Inflation
The past and expected future impact of inflation on the financial statements is
not significant.
Item 1. Legal Proceedings
None
Item 2. Change in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submissions of Matters to a Vote of Security Holders
None
Item 5. Other Information
The Company was advised by the Nasdaq SmallCap Market that the Company's Common
Stock would be delisted on January 3, 2001 from trading on the Nasdaq SmallCap
Market due to a failure to maintain a minimum bid price of $1.00 over 30
consecutive trading days. The Company appealed this determination by the Nasdaq
SmallCap Market and a hearing has been scheduled for Friday, February 9, 2001.
If the Company's appeal is unsuccessful, management of the Company will attempt
to take the necessary steps to allow its Common Stock to trade on the OTC
Bulletin Board System. The Company's Common Stock will also continue to trade on
the Boston Stock Exchange. However, the Company's Common Stock could be
considered a penny stock and be subject to various regulations which could have
an adverse effect on the trading market for and market price of the Company's
Common Stock.
The Company did not file Form 10-QSB for the quarterly period ended November 30,
2000 in a timely fashion. On January 25, 2001 NASDAQ advised the Company that as
a result of the filing delinquency, effective Monday January 29, 2001 the
Company's trading symbol will be changed from CNRS to CNRSE. In addition, NASDAQ
advised the Company has failed to maintain a minimum of two active market makers
over the last 10 consecutive trading days as required by the Nasdaq SmallCap
Market These issues will be considered at the Company's oral hearing on February
9, 2001.
Item 6. Exhibits and Reports on Form 8-K
12
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)
/S/ Ken Gruber
Date: January 26, 2001 ------------------------------
Ken Gruber
Executive Vice President
And Chief Financial and Accounting Officer
16