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 February 28, 2001
/ / 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 07054
(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 April 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 February 28, 2001
and May 31, 2000 3
Condensed Consolidated Statements of Operations for the three months
ended February 28, 2001 and February 29, 2000 4
Condensed Consolidated Statements of Operations for the
nine months ended February 28, 2001 and February 29, 2000 5
Condensed Consolidated Statements of Cash Flows for the nine
months ended February 28, 2001 and February 29, 2000 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 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
2
CORNERSTONE INTERNET SOLUTIONS COMPANY
Condensed Consolidated Balance Sheets
(unaudited)
February 28, May 31,
2001 2000
------------------- ------------------
ASSETS (restated)
Current assets:
Cash and cash equivalents $ 9,844 $94,712
Investments, at fair value - 75,568
Advances to B2Bgalaxy.com - 1,446,422
Prepaid expenses and other current assets - 26,878
------------------- ------------------
Total current assets 9,844 1,643,580
Net assets of discontinued operations - 455,130
Investment in B2Bgalaxy.com 1,327,372 5,225,043
Other non-current assets 310,557 153,218
------------------- ------------------
$1,647,773 $7,476,971
------------------- ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 42,807 $54,763
Accrued payroll and related expenses 37,320 142,824
Other accrued expenses 46,575 37,926
Deferred revenue 143,724 -
Advances from B2Bgalaxy.com 123,481 -
------------------- ------------------
Total current liabilities 393,907 235,513
Net liabilities of discontinued operations 60,569 -
Stockholders' equity:
Preferred stock, $.01 par value,
2,000,000 shares authorized;
Class C, 20 shares issued and outstanding
as of February 28, 2001 and May 31, 2000 - -
Common stock, $.01 par value, 50,000,000 shares
authorized and 25,108,326 shares issued and outstanding
as of February 28, 2001 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 (48,592,228) (42,619,635)
------------------- ------------------
Total stockholders' equity 1,193,297 7,241,458
------------------- ------------------
$1,647,773 $7,476,971
------------------- ------------------
See notes to condensed consolidated financial statements.
3
Cornerstone Internet Solutions Company
Condensed Consolidated Statements of Operations
(unaudited)
Three months ended
February 28, February 29,
2001 2000
--------------- ------------
Subscription revenue $ -- $ 27,928
------------ ------------
Total revenues -- 27,928
Cost of subscription revenue -- 203,791
Marketing, sales, and support -- 711,306
General and administrative expenses 62,211 479,649
Research and development -- 228,774
------------ ------------
Total costs and expenses 62,211 1,623,520
Operating loss (62,211) (1,595,592)
Other income (expense):
Interest income -- 29,966
Loss on sale of investments, net -- (59,080)
Other income, net -- 1,367
Share of loss in B2Bgalaxy.com (917,874) --
------------ ------------
Loss from continuing operations before minority interest (980,085) (1,623,339)
Minority interest in subsidiary, net -- (221,929)
------------ ------------
Loss from continuing operations (980,085) (1,845,268)
Loss from operations of discontinued operations -- (1,445,274)
------------ ------------
Net loss $ (980,085) $ (3,290,542)
============ ============
Loss per share information:
Basic and diluted loss per share from continuing operations $ (.04) $ (.08)
Basic and diluted loss per share from discontinued operations -- (.07)
------------ ------------
Basic and diluted net loss per share attributable to common stockholders $ (.04) $ (.15)
============ ============
Weighted average shares of common stock used to compute loss per share
information 25,108,326 22,613,423
See notes to condensed consolidated financial statements.
4
Cornerstone Internet Solutions Company
Condensed Consolidated Statements of Operations
(unaudited)
Nine months ended
February 28, February 29,
2001 2000
------------ ------------
Subscription revenues $ -- $ 41,323
------------ ------------
Total revenues -- 41,323
Cost of subscription revenue -- 421,404
Marketing, sales, and support -- 843,210
General and administrative expenses 238,202 1,394,175
Research and development -- 271,888
------------ ------------
Total costs and expenses 238,202 2,930,677
Operating loss (238,202) (2,889,354)
Other income (expense):
Interest income -- 53,941
Gain on sale of investments, net -- 669,670
Other expense, net -- (821)
Share of loss in B2Bgalaxy.com (3,897,671) --
------------ ------------
Loss from continuing operations before minority interest (4,135,873) (2,166,564)
Minority interest in subsidiary, net -- (665,787)
------------ ------------
Loss from continuing operations (4,135,873) (2,832,351)
Discontinued operations:
Loss from operations of discontinued operations (915,567) (2,348,161)
Loss on disposal of discontinued operations (921,153) --
------------ ------------
Total loss from discontinued operations (1,836,720) (2,348,161)
Net loss (5,972,593) (5,180,512)
Preferred stock dividends and preferences -- (6,750)
------------ ------------
Net loss attributable to common stockholders $ (5,972,593) $ (5,187,262)
============ ============
Loss per share information:
Basic and diluted loss per share from continuing operations $ (0.17) $ (0.17)
Basic and diluted loss per share from discontinued operations (0.07) (0.14)
------------ ------------
Basic and diluted net loss per share attributable to common stockholders $ (0.24) $ (0.31)
============ ============
Weighted average shares of common stock used to compute loss per share
information 25,108,326 16,631,522
See notes to condensed consolidated financial statements.
5
CORNERSTONE INTERNET SOLUTIONS COMPANY
Condensed Consolidated Statement of Cash Flows
(unaudited)
Nine Months Ended
February 28, February 29,
2001 2000
------------ ------------
Cash flows from operating activities:
Net loss $ (5,972,593) $ (5,180,512)
Loss from discontinued operations 1,836,720 2,348,161
------------ ------------
Loss from continuing operations (4,135,873) (2,832,351)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization -- 188,587
Share of loss in B2Bgalaxy.com 3,897,671 --
Minority interest in net loss of subsidiary, net -- 665,787
Non-cash consulting expense -- 138,389
Net gain on sale of investment -- (669,670)
Changes in assets and liabilities:
Accounts receivable -- (114,271)
Other receivables -- (25,920)
Advances to B2Bgalaxy.com 1,446,422 --
Advances from B2Bgalaxy.com 123,481 --
Prepaid expenses and other current assets 26,878 (80,288)
Other assets (157,339) 60,499
Accounts payable (11,956) 250,085
Accrued expenses and accrued payroll and related expenses (96,855) 132,223
Deferred revenue 143,724 --
Other -- 31,111
------------ ------------
Net cash provided by (used in) continuing operations 1,236,153 (2,255,819)
Net cash used in discontinued operations (1,321,021) (2,780,679)
------------ ------------
Net cash used in operating activities (84,868) (5,036,498)
Cash flows from investing activities:
Purchases of property and equipment -- (895,908)
Proceeds from sale of investments -- 728,750
------------ ------------
Net cash used in investing activities -- (167,158)
------------ ------------
Cash flows from financing activities:
Net proceeds from sale of subsidiary's common stock -- 14,040,112
Proceeds from exercise of stock options -- 3,661,993
Principal payments of long-term debt -- (78,852)
------------ ------------
Net cash provided by financing activities -- 17,623,253
------------ ------------
Net (decrease) increase in cash and cash equivalents (84,868) 12,419,597
Cash and cash equivalents:
Beginning of period 94,712 2,939,596
------------ ------------
End of period $ 9,844 $ 15,359,193
=========== ============
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 February 28, 2001 and the results of its operations
and its cash flows for the three and nine months ended February 28, 2001
and February 29, 2000, 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 nine months ended February
28, 2001 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 public marketplaces. The
marketplaces 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 marketplace 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 agreed to license B2B's software to create
e-commerce marketplaces for the foodservice industry in Latin America,
Spain and Portugal. The relationship could be extended to other industries
with similar purchasing needs and behaviors. In January 2001, B2B began to
market its software directly to small and medium-sized businesses
interested in developing private exchanges or creating web-based public
marketplaces.
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 February 28,
2001 was $48,592,228 and the net loss for the nine months ended February
28, 2001 was $5,972,593. 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'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 B2B can be sold or used as collateral. Currently, the
Company's only source of cash is advances from B2B. In addition, there can
be no assurances that B2B will be able to obtain additional funding to
fund its own operations and the operations of the Company. Management
believes that based on B2B funds on hand at February 28, 2001 and
anticipated revenues, B2B operations can continue at least through July
2001.
7
On February 21, 2001, the Company was advised by the Nasdaq Listing
Qualifications Panel ("the Panel") that the Company's Common Stock would
be delisted from the Nasdaq SmallCap Market because the Panel lacked
confidence that the Company could sustain compliance with the Nasdaq
SmallCap Market listing requirements. The Company is awaiting a
determination by the NASD as to whether the Company's Common Stock can
trade on the OTC Bulletin Board System or remain on the "Pink Sheets"
where it is currently trading. The Company's Common Stock continues 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.
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. In accordance with the
terms of the Preferred Stock, all of the Preferred Stock was converted
into an aggregate 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 February 28, 2001, the Company
owned 37.8% of B2B's Common Stock.
4. Use of Equity Method of Accounting for B2B
The Company reflected B2B as a consolidated subsidiary in its previously
filed financial statements through August 31, 2000. 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 February 28,
2001 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 nine months ended February 28,
2001, 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 (expense). 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,
2000 to February 28, 2001, the Company's ownership was 37.8%. For the
three months and nine months ended February 29, 2000, 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
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 95
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 $293,872 were included in stockholders' equity as
originally reported in error and has been corrected in the restated
amounts.
Summarized financial data for B2B as of and for the three months and nine
months ended February 28, 2001 is as follows:
Three months ended Nine months ended
($ in thousands) February 28, 2001 February 28, 2001
--------------- ----------------- -----------------
Statement of operations data:
Revenues 370 838
Operating loss 2,878 8,847
Net loss 2,430 8,590
Balance sheet data: February 28, 2001 May 31, 2000
----------------- ------------
Cash and cash equivalents 1,284 12,127
Total assets 3,573 14,037
Shareholders' equity 2,980 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 February 28,
2001, 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. B2B 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 would incur as part of
the discontinuance and 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 terminated,
9
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 February 28, 2001.
7. Convertible Preferred Stock Class C
As of February 28, 2001, 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 nine months ended February 29, 2000. 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. In
the third quarter of fiscal 2000, the Company recognized a loss of $59,080
on an investment in NYDelivery, a privately held internet-based food
delivery company.
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 per share. The
total cost computed under the Black Scholes method was an aggregate of
$452,000, which was recorded as a deferred charge expensed and over the
six-month vesting period. During the quarter ended February 29, 2000, the
Company recorded approximately $225,000 of stock compensation, which has
been included in loss from operations of discontinued operations.
In the nine months ended February 29, 2000, options to purchase 165,500
shares of B2B Common Stock were granted to certain providers of outside
services who agreed to accept compensation in stock options. The exercise
prices range from $.60 to $2.00, and the total cost computed under the
Black Scholes method was an aggregate of $273,902, which was recorded as a
deferred charge and expensed over the shorter of the vesting period or the
period of service. During the quarter ended February 29, 2000, the Company
recorded approximately $138,000 of stock compensation, which has been
included in general and administrative expenses.
10. Comprehensive Loss
The amounts related to investments reported in net loss and other
comprehensive loss for the nine months ended February 28, 2001 are
comprised of a holding loss arising during the period, net of taxes, of
$75,568. The comprehensive loss for the three and nine months ended
February 28, 2001 was $980,085 and $6,048,161, respectively. The
comprehensive loss for the three and nine months ended February 29, 2000
was $3,227,331 and $5,387,404, respectively.
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
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 February 28, 2001, 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. B2B staff perform administrative
functions for the
10
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 reflected B2B as a consolidated subsidiary in its previously filed
financial statements through August 31, 2000. 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
February 28, 2001 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 nine months ended February 28, 2001, 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 (expense). 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, 2000 to February 28, 2001, the Company's ownership was 37.8%. For the
nine months ended February 29, 2000, 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.
Three Months Ended February 28, 2001 and February 29, 2000
General and administrative expenses - General and administrative expenses were
$62,211 and $479,649 in the three months ended February 28, 2001and February 29,
2000, respectively. The prior year expenses reflect those of B2B as well as
those of the Internet Business Solutions segment operations, while current year
expenses reflect only those minimal expenses required to maintain the Company's
corporate administrative functions.
Share of loss in B2Bgalaxy.com
The Company's share of loss in B2B for the three months ended February 28, 2001
was $917,874. From October 1, 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.
Discontinued operations
There was no loss from operations of the discontinued Internet Business
Solutions segment during the three months ended February 28, 2001. The losses
from operations of the discontinued Internet Business Solutions segment for the
three months ended February 29, 2000, were $1,445,274.
Nine Months Ended February 28, 2001 and February 29, 2000
Gain on sale of investments
- ---------------------------
During fiscal 2000, the Company exercised USWeb warrants and sold the USWeb
stock, resulting in a gain of $728,750. Also during fiscal 2000, the Company
recognized a loss of $59,080 on its investment in NYDelivery.
Share of loss in B2Bgalaxy.com
- ------------------------------
The Company's share of loss in B2B for the nine months ended February 28, 2001
was $3,897,671. From October 1, 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.
Discontinued operations
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The loss from operations of the discontinued Internet Business Solutions segment
for the nine months ended February 28, 2001 and February 29, 2000 was $915,567
and $2,348,161, respectively.
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The estimated loss on disposal of 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 February 28, 2001.
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. Currently, the Company's only source of cash is advances from B2B.
In addition, there can be no assurances that B2B will be able to obtain
additional funding to fund its own operations and the operations of the Company.
Management believes that based on B2B funds on hand at February 28, 2001 and
anticipated revenues, B2B operations can continue at least through June 2001.
On February 21, 2001, the Company was advised by the Nasdaq Listing
Qualifications Panel ("the Panel") that the Company's Common Stock would
be delisted from the Nasdaq SmallCap Market because the Panel lacked
confidence that the Company could sustain compliance with the Nasdaq
SmallCap Market listing requirements. The Company is awaiting a
determination by the NASD as to whether the Company's Common Stock can
trade on the OTC Bulletin Board System or remain on the "Pink Sheets"
where it is currently trading. The Company's Common Stock continues 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.
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 10-KSB 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
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Item 5. Other Information
On February 21, 2001, the Company was advised by the Nasdaq Listing
Qualifications Panel ("the Panel") that the Company's Common Stock would be
delisted from the Nasdaq SmallCap Market because the Panel lacked confidence
that the Company could sustain compliance with the Nasdaq SmallCap Market
listing requirements. The Company is awaiting a determination by the NASD as to
whether the Company's Common Stock will trade on the OTC Bulletin Board System
or remain on the "Pink Sheets" where it is currently trading. The Company's
Common Stock continues 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.
Item 6. Exhibits and Reports on Form 8-K
A Form 8-K was filed on January 31, 2001 relating to the Company's
intention to amend previously filed financial statements which reflected
B2Bgalaxy.com as a consolidated subsidiary. The Company plans to amend its
financial statements included in its Form 10-KSB for the fiscal 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.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CORNERSTONE INTERNET SOLUTIONS COMPANY
-----------------
(Registrant)
/s/ Ken Gruber
Date: April 16, 2001 ------------------------------
Ken Gruber
Executive Vice President
And Chief Financial and Accounting Officer
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