-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GlWF1LZFBlQa2Cn7TuJAAvSXghX73JblcJa6BJi0zRJnGUcaZNHQV43sBirQzBlR PvXuqluJkdy02tQBjgmKsw== /in/edgar/work/0001062993-00-000149/0001062993-00-000149.txt : 20001017 0001062993-00-000149.hdr.sgml : 20001017 ACCESSION NUMBER: 0001062993-00-000149 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000831 FILED AS OF DATE: 20001016 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INFORMATION HIGHWAY COM INC CENTRAL INDEX KEY: 0001081240 STANDARD INDUSTRIAL CLASSIFICATION: [7389 ] IRS NUMBER: 650154103 STATE OF INCORPORATION: FL FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-25773 FILM NUMBER: 740999 BUSINESS ADDRESS: STREET 1: 10751 SHELLBRIDGEWAY SUITE 185 CITY: RICHMAND B C V6X 2WA STATE: A1 BUSINESS PHONE: 6042785996 MAIL ADDRESS: STREET 1: 1075 SHELLBRIDGE WAY SUITE 185 STREET 2: BRITISH COLUMBIA V6X 2W8 CITY: RICHMON STATE: A1 10QSB 1 0001.txt U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended August 31, 2000 ----------------- [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------------------- ------------------------ Commission File No.0-25773 ------- INFORMATION HIGHWAY.COM, INC (Exact name of small business issuer as specified in its charter) Florida 65-0154103 ------- -------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 185-10751 Shellbridge Way, Richmond, BC Canada V6X 2W8 ------------------------------------------------------------- (Address of principal executive offices) (604) 278-5996 (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: As of October 16, 2000 - 8,158,834 shares of common stock, $.0001 par value were outstanding. Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X] INDEX PART I - Financial Information Page Item 1. Consolidated Financial statements 2 - ------- --------------------------------- Consolidated Balance Sheets as of August 31, 2000 (unaudited) and May 31, 2000 (audited) 3 Consolidated Statements of Operations for the three months ended August 31, 2000 and 1999 (unaudited) 4 Consolidated Statements of Cash Flows for the three months ended August 31, 2000 and 1999 (unaudited) 5 Notes to the Consolidated Financial Statements (unaudited) 6-13 Item 2. Management's Discussion and Analysis of Results of - ------- -------------------------------------------------- Operations and Financial Condition 15-18 ---------------------------------- PART II - Other Information 19 Signatures 20 Page 2 PART I - Financial Information Item 1. Consolidated Financial statements - ------- --------------------------------- Page 3 Information Highway.com, Inc. Consolidated Balance Sheets August 31, May 31, ---------- ------- 2000 2000 (unaudited) (audited) $ $ Assets Current Assets Cash and equivalents 102,002 857,949 Accounts receivable 7,190 32,839 Inventory 125,102 121,264 Prepaid expenses 29,863 150,420 Advances to related parties (Note 7) 23,538 36,391 - -------------------------------------------------------------------------------- Total Current Assets 287,695 1,198,863 Restricted Cash (Note 11) 30,000 - Property, Plant and Equipment (Note 4) 465,223 490,750 - -------------------------------------------------------------------------------- Total Assets 782,918 1,689,613 ================================================================================ Liabilities and Stockholders' Equity (Deficit) Current Liabilities Accounts payable 312,807 385,645 Accrued liabilities 174,589 146,400 Deferred revenues 52,459 50,678 Current portion of obligations under capital leases (Note 6) 37,464 36,773 - -------------------------------------------------------------------------------- Total Current Liabilities 577,319 619,496 Obligations under Capital Leases (Note 6) 53,766 61,717 Convertible Debentures (Note 5) 1,368,374 1,346,437 - -------------------------------------------------------------------------------- Total Liabilities 1,999,459 2,027,650 - -------------------------------------------------------------------------------- Commitments and Contingencies (Notes 1 and 10) - -------------------------------------------------------------------------------- Stockholders' Equity (Deficit) Common Stock (Note 8), 50,000,000 shares authorized, par value $.0001 per share, 8,158,834 and 8,141,334 issued and outstanding respectively 815 814 Additional Paid in Capital - Common Stock 4,828,880 4,812,920 Additional Paid in Capital - Warrants to Purchase Common Stock 651,120 651,120 - -------------------------------------------------------------------------------- 5,480,815 5,464,854 - -------------------------------------------------------------------------------- Preferred Stock, 10,000,000 shares authorized, par value $.0001 per share, none issued - - - -------------------------------------------------------------------------------- Translation adjustments (3,919) (11,572) - -------------------------------------------------------------------------------- 5,476,896 5,453,282 Accumulated Deficit (6,693,437) (5,791,319) - -------------------------------------------------------------------------------- Total Stockholders' Equity (Deficit) (1,216,541) (338,037) - -------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity 782,918 1,689,613 ================================================================================ (See accompanying notes) Page 4 Information Highway.com, Inc. Consolidated Statements of Operations (unaudited) Three months ended August 31, ---------------------- 2000 1999 $ $ Revenues 213,900 293,288 Cost of Revenues 384,548 213,464 - -------------------------------------------------------------------------------- Gross Profit (Loss) (170,648) 79,824 - -------------------------------------------------------------------------------- Operating Expenses Marketing and sales 110,295 63,516 General and administrative 526,432 421,200 Product development 94,743 59,444 - -------------------------------------------------------------------------------- Total Operating Expenses 731,470 544,160 - -------------------------------------------------------------------------------- Net loss (902,118) (464,336) ================================================================================ Basic loss per share (0.11) (0.07) ================================================================================ Weighted average shares used to compute basic loss per share 8,148,000 6,740,000 ================================================================================ Diluted loss per share has not been presented as the result is anti dilutive. (See accompanying notes) Page 5 Information Highway.com, Inc. Consolidated Statements of Cash Flows (unaudited) Three months ended August 31, ---------------------- 2000 1999 $ $ Cash Flows from Operating Activities: Net loss (902,118) (464,336) Adjustments to reconcile net loss to cash Depreciation and amortization 33,886 25,972 Amortization of goodwill - 45,859 Services paid for by issuing common shares and warrants 9,712 286,000 Imputed interest on valuation of warrants 21,937 - Gain on sale of computer equipment (1,952) - Change in non-cash working capital items Decrease in accounts receivable 25,649 - (Increase) decrease in prepaid expenses 120,557 (18,694) Increase in inventory (3,838) - Decrease in accounts payable and accrued liabilities (44,649) (32,968) Increase in deferred revenues 1,789 1,815 - -------------------------------------------------------------------------------- Net Cash Used in Operating Activities (739,027) (156,352) - -------------------------------------------------------------------------------- Cash Flows from Financing Activities: Common stock issued 6,250 143,950 (Increase) decrease in related party advances 12,853 (96,630) Capital lease obligations repaid (7,260) - - -------------------------------------------------------------------------------- Net Cash Provided by Financing Activities 11,843 647,320 - -------------------------------------------------------------------------------- Cash Flows to Investing Activities: Proceeds from sale of computer equipment 6,250 - Acquisition of property, plant and equipment (12,657) (93,997) Restricted cash (30,000) - - -------------------------------------------------------------------------------- Net Cash to Investing Activities (36,407) (93,997) - -------------------------------------------------------------------------------- Translation Adjustments 7,644 721 - -------------------------------------------------------------------------------- Increase (Decrease) in Cash and Equivalents During the Period (755,947) 397,692 Cash and Equivalents - Beginning of Period 857,949 37,622 - -------------------------------------------------------------------------------- Cash and Equivalents - End of Period 102,002 435,314 ================================================================================ Non-Cash Financing Activities Value of Common Shares issued for services 9,712 440,000 Value of Common Shares issued for property - 22,000 - -------------------------------------------------------------------------------- 9,712 462,000 ================================================================================ Supplemental Disclosures: Interest paid in cash 107,904 - Income taxes paid in cash - - ================================================================================ (See accompanying notes) Page 6 Information Highway.com, Inc. Notes to Consolidated Financial Statements (unaudited) 1. Nature of Operations and Continuance of Business The Company was incorporated December 5, 1988 in the state of Florida. During 1997, the Company's common stock was submitted for quotation on the OTC Bulletin Board System. From inception to February 17, 1999 the Company did not engage in any business activity other than initial organization, financing and some business investigation activities. Pursuant to an Agreement and Plan of Reorganization entered into with Information Highway, Inc. on February 17, 1999, a business combination was completed by way of reverse takeover. 99% of the total common stock outstanding of Information Highway, Inc. has been exchanged for common shares of the Company representing a change of control of the Company. As part of the Plan of Reorganization the Company's name was changed to Information Highway.com, Inc. Information Highway, Inc. was incorporated in the State of Washington on October 15, 1996. It owns three Canadian operating subsidiaries in the business of providing access to the Internet and providing services, including on-line publishing, to individual and corporate subscribers. See Note 11 for the acquisition of a company in the travel industry. The Company has not achieved profitable operations since inception and has suffered mounting losses of $6,693,437 to August 31, 2000 and has a working capital deficit of $289,624. There is risk that the Company's ability to continue as a going concern could be in jeopardy and the ability of the Company to continue as a going concern is dependent upon its successful efforts to raise additional equity financing over the next twelve months, and further develop the market for its products and services. Managements plans to raise additional equity financing include: selling additional convertible debentures to the current debenture holder, and failing that, to new investors. Management also has a plan to raise equity directly in one of its Canadian subsidiaries by way of private placement with the goal to list its shares on the Canadian Venture Exchange. On October 11, 2000 the Company's Registration Statement filed with the Securities Exchange Commission was declared effective which means the Company is a reporting company under the 1933 Act. The Company's ability to raise funds is now significantly improved. 2. Significant Accounting Policies Consolidated Financial Statements These consolidated financial statements include the accounts of the Company and its wholly owned US subsidiary, Information Highway, Inc. which owns three consolidated, wholly-owned, Canadian subsidiaries. Estimates and Assumptions The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the financial statements and accompanying notes. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents include cash on hand, in banks and all highly liquid investments with a maturity of three months or less when purchased. Concentration of Credit Risk The Company does not have any concentrations of credit risk as the majority of its customers prepay for services. For those instances when credit is extended it is based on an evaluation of the customer's financial condition, and generally collateral is not required. The Company does not have any customers that account for in excess of 10% of income. The Company places its temporary cash investments with high credit quality financial institutions and limits the amount of credit exposure to any one financial institution. Page 7 2. Significant Accounting Policies (continued) Inventory Inventory is comprised of finished goods purchased to resell over the Internet. Finished goods are carried at the lower of landed cost or net realizable value. Property, Plant and Equipment Property, plant and equipment are recorded at cost. Depreciation is computed utilizing the declining balance method over an estimated useful life of the related asset. Computer equipment and software and production equipment is depreciated at 30% per annum and furniture and office equipment at 20% per annum. Leasehold improvements are amortized over ten years utilizing the straight-line method. Assets acquired pursuant to capital leases are amortized over the life of the lease utilizing the straight-line method. Financial Instruments The fair value of the Company's current assets and current liabilities were estimated to approximate their carrying values due to the immediate or short-term maturity of these financial instruments. See Note 5 for long- term financial instruments. The Company operates in Canada and virtually all of its assets and liabilities are giving rise to significant exposure to market risks from changes in foreign currency rates. The financial risk is the risk to the Company's operations that arise from fluctuations in foreign exchange rates and the degree of volatility of these rates. Currently, the Company does not use derivative instruments to reduce its exposure to foreign currency risk. Revenue Recognition and Deferred Revenues Revenue consists of the provision of Internet dial-up services, banner advertisements, Web-Site development and hosting and E-Commerce revenue sharing with various Internet partners. Revenue is recognized at the time services are provided. All related costs are recognized in the period in which they occur. Customers deposits for Internet dial-up services to be provided in the future are classified under current liabilities. Cost of Revenue Cost of revenue consists primarily of the cost of serving the Company's Internet dial-up service customers and the cost of developing Web-Sites for customers. Costs associated with revenue generating activities consists of salaries for technical support and customer service, depreciation of Internet dial- up and Web-Site hosting equipment, license fees, equipment leasing costs, telephone line costs and rent to house equipment and staff directly involved in serving customers. Product Development Costs Product development costs consist of expenses incurred by the Company in the development and creation of its Executive Site Web-Site. Product development costs include compensation and related expenses for programmers, depreciation of computer hardware and software, rent, telephone and costs incurred in developing features and functionality of the service. Product development costs are expensed as incurred. Accounting for Stock-Based Compensation SFAS No. 123, "Accounting for Stock-Based Compensation," requires that stock awards granted subsequent to January 1, 1995, be recognized as compensation expense based on their fair value at the date of grant. Alternatively, a company may account for granted stock awards under Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees," and disclose pro forma income amounts which would have resulted from recognizing such awards at their fair value. The Company has elected to account for stock-based compensation expense under APB No. 25 and make the required pro forma disclosures for compensation expense. Foreign Exchange All of the Company's Canadian operating subsidiaries are operationally and financially independent of the parent and are considered self-sustaining. As such, the current rate method is used whereby assets and liabilities are translated into United States dollars at exchange rates in effect at the balance sheet dates. Shareholders' equity accounts are translated using historical exchange rates. Income and expense items are translated at average exchange rates for the periods. Accumulated net translation adjustments are included as a separate component of stockholders' equity. Page 8 2. Significant Accounting Policies (continued) Foreign Exchange (continued) Current monetary assets and liabilities of the Company which are denominated in foreign currencies are translated at the exchange rate in effect at the balance sheet dates. Revenues and expenses are translated at rates of exchange prevailing on the transaction dates. Exchange gains or losses on the realization of current monetary assets and the settlement of current monetary liabilities are recognized currently to operations. 3. Business Combination Pursuant to an Agreement and Plan of Reorganization completed on February 23, 1999, and subsequent exchanges of common stock, the Company acquired 99% of the common stock of Information Highway, Inc. The Company has allotted 33,000 shares in anticipation of the remaining 1% of shares of Information Highway, Inc. being exchanged in the future. For accounting purposes the acquirer was Information Highway, Inc. As Information Highway, Inc. is the legal subsidiary of the Company the nature of the business combination was a reverse takeover whereby the control of the Company was acquired by Information Highway, Inc. and the consolidated financial statements are issued under the name of the Company but is a continuation of Information Highway, Inc. and not the Company. The legal capital structure remains that of the Company but the stockholders' equity of Information Highway, Inc. replaced the stockholders' equity of the Company. Similarly, the Company's income statements and statements of cash flows represent a continuation of Information Highway, Inc.'s consolidated financial statements. 4. Property, Plant and Equipment Property, plant and equipment are stated at cost less accumulated depreciation and amortization. August 31, May 31, Accumulated 2000 2000 Depreciation and Net Book Net Book Cost Amortization Value Value (unaudited) (audited) $ $ $ $ Computer equipment 616,557 279,975 336,582 352,180 Computer equipment under capital lease 97,447 21,536 75,911 83,452 Office furniture and equipment 54,305 23,141 31,164 32,147 Production equipment 25,000 11,241 13,759 14,875 Leasehold improvements 11,567 3,760 7,807 8,096 --------------------------------------------------------------------------- 804,876 339,653 465,223 490,750 =========================================================================== 5. Convertible Debentures During fiscal 2000, the Company issued, to one investor, three $500,000, two year convertible debentures bearing interest at 5%. Warrants to purchase 225,000 common shares exercisable at $6.2287 expiring March 3, 2002 were also issued. The maturity date is March 3, 2002. The Company received $1,332,728 after paying to the Agent a 10%, or $150,000, financing fee and legal costs of $17,272. The debenture holders can convert their debentures into common shares based on the face value plus accrued interest divided by the lesser of the fixed price of $6.22875 and the average closing price for the 20 days prior to conversion. No amount has been allocated to the conversion feature in accordance with APB 14. Debt issue costs of $167,272 were charged to operations during fiscal 2000, and the value of the detachable share purchase warrants, totalling $175,500, was deducted from proceeds of the convertible debenture as a valuation allowance and is being amortized to operations over two years starting March 1, 2000. The Company has the right to redeem with cash. The Company was incurring penalties pursuant to a Registration Rights Agreement with the debenture holder in the amount of $30,000 per month until the Registration Statement for selling shareholders was declared effective by the Securities and Exchange Commission. The Company has been paying these penalties until October 11, 2000 being the date the Registration Statement was declared effective. The Company's ability to raise funds through private placements of common stock was curtailed until the offering by selling shareholders was closed. Page 9 6. Obligations Under Capital Leases The Company acquired computer equipment by way of capital leases. Total Lease Fiscal Period Payments ------------- $ 2001 37,953 2002 37,953 2003 15,629 2004 4,467 2005 1,860 -------- 97,862 Less amount representing interest 6,632 -------- 91,230 Less current portion 37,464 -------- 53,766 ======== 7. Due To/From Related Parties August 31, May 31, 2000 2000 $ $ (unaudited) (audited) (a) Amounts owing to the President of the Company and private companies under the President's control are from short-term cash loans, are due on demand, unsecured and non-interest bearing. 15,748 13,279 (b) Amounts owing from public companies that share office premises and have common President's are from expenses paid on behalf of these companies, are due on demand, unsecured, and non-interest bearing. (39,286) (49,670) ----------------------- Net amount owing from related parties (23,538) (36,391) ----------------------- 8. Common Stock Issuances and Related Commitments Pursuant to the Agreement and Plan of Reorganization the Company had assumed all common stock obligations of Information Highway, Inc. as they relate to stock based compensation plans and warrants issued to acquire common shares. (a) Private placements of common shares and warrants (i) The Company previously offered units pursuant to an Offering Memorandum. Each unit consisted of one common share, one Series "A" Warrant to acquire one additional common share at $4.00 per share expiring April 30, 2000 (expired), and one Series "B" Warrant to acquire one additional common share at $6.00 per share expiring April 30, 2001. The offering was completed on August 11, 1999. On completion of the offering, a total of 129,750 units were issued at $4.00 per unit for total proceeds of $519,000. The proceeds of this private placement were allocated on the following basis: $462,000 to common shares, $47,000 to Series A Warrants and $10,000 to Series B Warrants. The Series B Warrants are currently outstanding. (ii) The Company previously offered, pursuant to a private placement, 1,000,000 units at $4.00 per unit. Each unit consisted of one common share, and one series C warrant to purchase one additional common share at $5.00 per share expiring October 6, 2000 (subsequently expired). The private placement was completed on March 2, 2000. On completion, a total of 125,817 common shares were issued at $4.00 per share for total proceeds of $503,268. The Company entered into an Agreement relating to this private placement financing and investor relations services. The Agreement called for a 10% finders fee. A total of $43,500 was paid. In addition, 100,000 warrants were issued to acquire 100,000 common shares exercisable at $4.00 per share expiring December 1, 2002. The value of these warrants, totalling $270,820, was charged against share capital during fiscal 2000. Page 10 8. Common Stock Issuances and Related Commitments (continued) (b) Shares and warrants issued for services During fiscal 2000, the Company issued 175,000 common shares, valued at $678,900, pursuant to a Marketing and Financial Consulting Agreement, all of which was charged to operations. Pursuant to this Agreement the Company was committed to file a Registration Statement registering these securities by November 6, 1999. It was agreed interest of $23,226 per month be paid until such time as the commitment was met. During the year a total of $147,478 of such interest was paid and charged to operations. The Company negotiated settlement of the entire obligation with a final payment of $60,000 in May, 2000. The Company paid $60,000 and issued 400,000 warrants to acquire up to 400,000 common shares exercisable at $3.50 per share expiring November 15, 2000 for a three month marketing and advertising program including banner ads, news group coverage and press release distribution. The value of the warrants was $147,800. Total compensation expense of $207,800 was charged to operations in fiscal 2000. During the three months ended August 31, 2000 the Company issued 5,000 common shares valued at $9,712 for financial consulting services. This amount has been charged to operations. (c) Stock Option Plan Pursuant to a stock option plan amended and restated February 8, 2000 and expiring May 31, 2007, the Company reserved 3,000,000 common shares for future issuance. The options are granted for services provided to the Company. Statement of Financial Accounting Standards No. 123 ("SFAS 123") requires that an enterprise recognize, or at its option, disclose the impact of the fair value of stock options and other forms of stock based compensation in the determination of income. The Company has elected under SFAS 123 to continue to measure compensation cost on the intrinsic value basis set out in APB Opinion No. 25. As options are granted at exercise prices based on the market price of the Company's shares at the date of grant, no compensation cost is recognized. However, under SFAS 123, the impact on net income and income per share of the fair value of stock options must be measured and disclosed on a fair value based method on a pro forma basis. The fair value of the employee's purchase rights, pursuant to stock options, under SFAS 123 was estimated using the Black-Scholes model. The weighted average number of shares under option and option price for the three months ended August 31, 2000 is as follows: August 31, 2000 ------------------------------ Weighted Weighted Average Average Remaining Shares Option Life Under Option Price of Options # $ (Months) Beginning of period 1,601,900 3.69 48 Granted - - Exercised (12,500) (0.50) Cancelled - - Lapsed - - --------- ---- -- End of period 1,589,400 3.60* 45 ========= ==== == * Effective September 21, 2000 the exercise price of stock options with respect to 1,060,000 common shares was reduced to $1.00. Page 11 8. Common Stock Issuances and Related Commitments (continued) (c) Stock Option Plan (continued) If compensation expense had been determined pursuant to SFAS 123, the Company's net loss and net loss per share for the three months ended August 31, 2000 and 1999 would have been as follows: 2000 1999 (unaudited) (unaudited) $ $ Net loss As reported (902,118) (464,336) Pro forma (902,118) (674,938) Basic net loss per share As reported (.11) (.07) Pro forma (.11) (.10) 9. Commitments and Contingent Liability (a) Commitments The Company is committed to making the following lease or contract payments for the next four fiscal years: For the fiscal years ended May 31, ----------------------------------------------- 2001 2002 2003 2004 $ $ $ $ Management consulting 17,500 - - - Investor relations - consulting 30,000 - - - Premises leases 63,987 25,878 8,149 3,396 ------------------------------------------------ 111,487 25,878 8,149 3,396 ================================================ (b) Contingent Liability - Lawsuit A Writ of Summons and Statement of Claim was filed against the Company in the Supreme Court of British Columbia in April 1999 by a former employee and spouse of the employee (the "Plaintiffs"). The employee was retained by the Company as a consultant on or about December 1996 and was subsequently terminated for cause by the Company in December 1997. The Plaintiffs are seeking monetary damages related to the alleged remuneration pursuant to the agreement and a stock option between the Company and the employee. The total damages claimed amounts to $597,000 including alleged unpaid remuneration and a stock option benefit. The plaintiff's are also claiming 5% of business revenue from the operating subsidiary in Vancouver, Canada. This subsidiary operated at a net loss from operations during the period from acquisition in December 1996 to date. Management believes that the Plaintiff's alleged claim is without legal or factual basis and therefore have not accrued any potential losses resulting from this claim except for legal fees paid in establishing the defence. The Company intends to vigorously defend this action. 10. Segmented Information The Company has adopted SFAS No. 131 Disclosure About Segments of an Enterprise and related information. The business of the Company is carried on in one industry segment being the provision of access to the Internet and providing services to individual and corporate subscribers. Up until May 31, 1999 the Company operated in one geographic segment, being Canada, located in Vancouver, BC and Toronto, Ontario. During fiscal 2000 the Company began expansion of its ISP business into the United States by setting up Virtual ISP's. We have been adding to the number of cities in which we have switched on 50 ports (minimum per agreement with Level 3 Communications) in each US city which enables us to service up to 500 customers in each city. The loss from these ports for the three months ended August 31, 2000 was $143,000 which was charged to general and administrative expenses as there was minimal revenue generated during the period from these ports and is not considered a profit centre as of yet. Page 12 10. Segmented Information (continued) The Company's head office is in Richmond, BC, Canada. The head office does not conduct any business specifically related to the Internet . Its sole purpose is to provide administration, investor relations services and services relating to being a public company. Included in general and administrative expenses and net loss is $328,395 relating to such activities. The net loss relating to Internet activities in Canada amounted to $431,118 and the net loss relating to US portal was $142,605. 11. Subsequent Events (a) On September 27, 2000 the Company completed an agreement to purchase a travel agency located in British Columbia, Canada. Total consideration paid was Cnd$125,000. In order to complete the acquisition the Company was required, by the Registrar of Travel Services, to lodge two letters of credit totalling Cnd$40,000. As at August 31, 2000 the term deposits were lodged and letters of credit obtained. This amount is considered "Restricted Cash". The Company also borrowed Cnd$112,000 from a company affiliated with the President of the Company to complete the acquisition. Interest is payable monthly and the loan is secured by the shares of the travel agency. The purchase will be accounted for as an acquisition, and the excess purchase price over the fair market value of net assets acquired, being Cnd$106,831, will be allocated to goodwill and amortized over five years. (b) On September 20, 2000 the Company issued 25,000 common shares to a company for an advertising program which includes emails and newsletters. Page 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This prospectus contains forward-looking statements. The words "anticipate", "believe", "expect", "plan", "intend", "estimate", "project", "could", "may", "foresee", and similar expressions are intended to identify forward-looking statements. The following discussion and analysis should be read in conjunction with the our Financial Statements and the Notes thereto and other financial information included elsewhere in this report which contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include those discussed below, as well as those discussed elsewhere in this prospectus. Overview We serve as an Internet Service Provider (referred to as an ISP in the industry) for companies and individuals that need access to the Internet in exchange for a recurring fee. We intend to provide ISP services to a steadily growing number of cities in North America as a Virtual ISP. A Virtual ISP provides Internet access to its customers using the underlying telecommunications infrastructure of another company, such as a telephone company. The Virtual ISP business model should enable us to avoid purchasing and installing backbone communications equipment and infrastructure in each city where we plan to offer ISP services. Our goal is to expand our DSL business throughout North America by working with Bell Atlantic and Bell Nexxia and then repackaging that access for sale to our customers and resellers (licensees). We have entered into agreements that permit us to market DSL service in the Northeast United States and in Canada. Our Northeast United States Internet access agreements permit us to provide Digital Subscriber Line, or DSL, access, which enables users to remain connected to the Internet 24 hours a day, eliminating annoying busy signals, as well as the time and cost of waiting to connect, without disrupting the subscriber's normal telephone service. Toronto, Ontario is the first market in which we provided ISP services, beginning about four years ago. We believe that Internet users will begin to base their selection of an ISP in part on the value-added services that their ISP provides. Through our portal site compilation of Internet-based services and information, we provide localized and portal content catering to business professionals. Through research, design, programming, co-branding, and licensing, we have compiled Internet services and content in our portal site that we believe are useful to companies, associations and professionals. Portal site web pages are designed specifically for targeted user groups, and we believe they provide friendly, easy to navigate interfaces. Our basic portal site may be accessed through the Internet at www.theexecutive.com. Other portal sites are customized to the needs of specific Internet subscriber groups (whether by geographic location or entity affiliation) and have different Internet addresses. We plan to market the portal site to resellers throughout North America, starting with our DSL locations. We may also let other ISPs display customized portal sites in certain markets. We also offer our commercial clients the ability to market their products and services to portal site users through our newly developed Virtual Mall. Our portal site has assembled a functional business site to enable business professionals to immediately find what they need rather than spending time searching the Internet for the information they need. Portal site users are able to: * monitor and research the stock market; * plan and book their next business trip; * check the local news and weather; * participate in online forums; * carry out electronic transactions via e-commerce; and * find a suitable restaurant in their area. We do not charge a fee for access to the basic portal site. We charge a design fee and a recurring maintenance fee for portal sites that we customize for companies or associations. We also charge a monthly maintenance fee when we license portals to other ISPs to display a customized portal site. We receive additional revenues from advertising and e-commerce transactions generated from each customized portal site. Page 14 We conduct our operations through one wholly-owned US subsidiary and three wholly-owned Canadian subsidiaries. Information Highway, Inc., a Washington corporation, actually acquired these subsidiaries. Then, in February 1999, Information Highway, Inc. engaged in a reverse takeover of Florida Venture Fund, Inc., a Florida corporation. As a result of the reverse takeover, the shareholders of Information Highway, Inc. came to own approximately 95% of the outstanding shares of Florida Venture Fund, Inc. In connection with the reverse takeover, Florida Venture Fund, Inc. changed its name to Information Highway.com, Inc. and is now the ultimate parent company whose shares are traded on the OTC bulletin board (symbol: IHWY). Factors Affecting Ongoing Operations Although planned principal activities have started producing significant revenues, in our effort to rapidly expand infrastructure and network services and develop the portal site, we have suffered net losses each quarter to August 31, 2000. At August 31, 2000, our accumulated deficit was $6,693,437 and our working capital deficit was $289,624. We expect to incur substantial operating losses, net losses and negative operating cash flow for the near term. Revenues Revenue consists of mainly the provision of Internet dial-up services. We receive limited revenue from banner advertisements, web-site development and hosting, e-commerce commission revenue and the resale of products over the Internet. We completed a license agreement with ISP Power Corporation in early December. ISP Power Corporation's PRISM Software provides integrated billing and customer care software solutions. The PRISM software has consolidated all of our billing and customer related management needs into one powerful, flexible and automated package that will help reduce costs and increase profits for ourselves. The PRISM software integrates into the Microsoft Commercial Internet System (MCIS), which enables us to provide up-to-the-minute billing information to customers. In addition, we will be able to co-brand our billing system for Virtual ISP's, thereby allowing us to retain our own identity, even when it relates directly to the billing of our customers. Revenue is recognized at the time services are provided. All related costs are recognized in the period in which they occur. Customer deposits for Internet dial-up services to be provided in the future are treated as deferred revenues. Cost of Revenues Cost of revenues consists primarily of the cost of serving our Internet dial-up service customers and the cost of developing web-sites for customers. These costs include salaries for technical support and customer service, depreciation of Internet dial-up and web-site hosting equipment, license fees, equipment leasing costs, telephone line costs and rent to house equipment and staff directly involved in serving customers. Our network and service costs have historically included equipment installation and ongoing service and maintenance charges. As we introduce our Virtual ISP presence in additional cities, each city will represent an increased lease charge under our agreement with Internet access providers due to the need to add bandwidth to accommodate the customer base in the new market. We have entered into agreements that permit us to market access to the Internet in the Northeast United States and 20 cities (some in the Northeast) across the United States, and in Canada. Our Northeast United States Internet access agreements permit us to provide Digital Subscriber Line, or DSL, access, which enables users to remain connected to the Internet 24 hours a day, eliminating annoying busy signals, as well as the time and cost of waiting to connect, without disrupting the subscriber's normal telephone service. As we expand our presence in a particular market, we will require additional increases in bandwidth depending on data transmission volumes. Other Operating Expenses Our other operating expenses include portal site development and maintenance, information systems, billing and collections, general management and overhead, and administrative functions. Head count in functional areas, such as customer service, engineering and operations, along with expansion of our portal site and the locations in which we provide ISP services and increases in the number of our customers, will drive increases in expenses. Page 15 Results of Operations for the Three Months Ended August 31, 2000 as Compared to the Three Months Ended August 31, 1999 Revenues Revenues decreased by $79,000 (27%) to $214,000 from $293,000 in 1999. This decrease was due to a fiercely competitive market and the technical difficulties of our Canadian service provider. As a result, we have entered into a contract with Bell Canada to provide Digital Subscriber Line (DSL) service rather than a regular dial up service. Based on assumptions about demand for our ISP services and our portal site, we anticipate that the dollar amount of future revenues will increase over current levels. We have been adding to the number of cities in which we have switched on 50 ports (minimum per agreement with Level 3 Communications) in each US city which enables us to service up to 500 customers in each city. The loss from these ports for the three months ended August 31, 2000 was $143,000 which was charged to general and administrative expenses as there was minimal revenue generated during the period from these ports and is not considered a profit centre as of yet. We are receiving small amounts of revenue from banner advertisements, developing and hosting web-sites for customers, reselling portal site information and service modules pursuant to license agreements. We have also sold product over the Internet pursuant to a Resellers Agreement. Sales from this source were $1,700 and costs were $1,000. Cost of Revenues Cost of revenues increased by $171,000 (80%) to $384,000 from $213,000 in 1999. The largest components of cost of revenues are telephone costs and Internet and license fees. As mentioned above the technical difficulties of our main provider in Canada has necessitated the purchase of additional back up service which resulted in major cost overruns. During the latter part of fiscal 2000, we completed a license agreement with Virtual Plus Technologies, LLC to sell dial-up, ADSL Internet access service, web design and hosting and e-commerce solutions to the Washington, DC area in addition to a non-exclusive license in the Baltimore, Maryland area. We also licensed our customized portal site www.theexecutive.com site to Virtual Plus Technologies for use in Washington, DC and Baltimore, Maryland. The agreement represents the first step of our North American rollout, in which we will license our services to other virtual Internet partners on an exclusive or non-exclusive basis utilizing Level 3 Communications' advanced fiber optic network. We have hired an experienced network marketing specialist to aggressively market primarily DSL services provided by Verizon (Bell Atlantic) to several other major US cities including Seattle, Dallas, Boston, Chicago, Atlanta, Cincinnati, Detroit, Los Angeles, Miami, New York, Orlando, Philadelphia, San Diego, San Jose, Tampa and New Jersey. Gross Profit Gross profit decreased by $251,000 (314%) to ($171,000) from $80,000 in 1999. Increased competition in the Internet Service Provider industry increases pressure of fee reduction for new subscribers and renewing subscribers. We intend to decrease the cost of telephone and Internet switching fees with new agreements with backbone or bandwidth providers. Marketing and Sales Expenses Marketing and sales expenses have increased by $46,000 (72%) to $110,000 from $64,000 in 1999. The major component of this increase was a result of a marketing plan to increase advertisements in industry specific publications throughout Canada. We had very little marketing and sales effort in 1999. General and Administrative Expenses General and administrative expenses for corporate overhead activities and Internet business-related activities combined have increased by $105,000 to $526,000 from $421,000 in 1999. General and administrative expenses relating to corporate overhead activities, and not Internet business-related activities, have decreased by $3,000 to $328,000 from $331,000 in 1999. Investor relations and financial consulting decreased by $197,000 to $84,000 as compared to $281,000 in 1999. Part of this decrease was in 1999 $264,000 paid in shares to IP Equity, Inc. a non-related company for Internet-based marketing and financial consulting services. Page 16 Professional fees decreased by $47,000 to $54,000 from $170,000 in 1999. These additional costs relate to regulatory matters and legal costs incurred in defending a claim against the Company. General and administrative expenses relating to Internet business related activities decreased by $45,000 to $55,000 from $90,000 in 1999. The decrease was due to no amortization of goodwill as it was fully amortized in the 2000 fiscal year. Product Development Expenses Product development costs consist of expenses incurred by us in the development and creation of our portal site. Product development costs include compensation and related expenses for programmers, depreciation of computer hardware and software, rent, telephone and costs incurred in developing features and functionality of the service. Product development costs are expensed as incurred. Product development expenses increased by $36,000 (61%) to $95,000 from $59,000 in 1999. The major component of the increase in product development expenses was salaries and consulting fees of $32,000 as we continue to expand our services and improve our products. Depreciation and Amortization Expenses Depreciation and amortization expense has been allocated to cost of revenues, marketing and sales, general and administrative, and product development based on the use of each capital asset. Approximately 60% of capital assets was used in cost of revenues, 15% in marketing and sales, 10% in general and administrative and 15% in product development. Depreciation and amortization of capital assets increased by $8,000 to $34,000 as compared to $26,000 in 1999. Purchased goodwill was amortized at $15,000 per month during 1999 and was fully amortized as at February 29, 2000. We anticipate entering into operating and capital leases for any network equipment and software in the future to minimize capital expenditures. Net Loss for the Three Months Ended August 31, 2000 as Compared to the Three Months Ended August 31, 1999 Our business is carried on in one industry segment being the provision of access to the Internet and providing services to individual and corporate subscribers. Up until May 31, 1999 we operated in one geographic segment, being Canada, located in Vancouver, BC and Toronto, Ontario. Subsequent to May 31, 1999 we began expansion of our ISP business into 22 cities in the United States by setting up Virtual ISP's. Effective this quarter we have been adding to the number of cities in which we have switched on 50 ports (minimum per agreement with Level 3 Communications) in each US city which enables us to service up to 500 customers in each city. The loss from these ports for the three months ended August 31, 2000 was $143,000 which was charged to general and administrative expenses as there was minimal revenue generated during the period from these ports and is not considered a profit centre as of yet. Our head office is in Richmond, BC, Canada. The head office does not conduct any business specifically related to the Internet. Our sole purpose is to provide administration, investor relations services and services relating to being a public company. Included in general and administrative expenses and net loss is $328,000 relating to such activities. The net loss relating to Internet activities in Canada amounted to $431,000 and the net loss relating to U.S. portals was $143,000. Our net losses have come mainly from investor relations activities and overhead costs associated with organization, restructuring and financing start- up operations in Toronto and Vancouver, Canada and costs of developing new and improved services and expanding our marketing plan into other North American markets. Other operating activities conducted in the United States thus far were expenses incurred including investor relations and professional fees. Liquidity and Financial Resources at August 31, 2000 We have historically satisfied our capital needs by borrowing from affiliates in the short-term, by issuing equity securities, and entering into capital leases. We have also used these sources to provide a portion of our operating cash requirements to make up for a cash shortfall from operating activities. With our beginning cash position of $858,000 along with cash received during the period of $19,000, generated by issuing equity securities of $6,000 and advances from Page 17 affiliates of $13,000, we were able to fund our operating cash shortfall of $739,000, repay capital lease obligations of $7,000, make capital expenditures of $26,000, and fund two letters of credit ("Restricted Cash") of $30,000. This resulted in a decrease of our cash position by $756,000 to $102,000. The operation, development and expansion of our business will likely require additional capital infusions for the foreseeable future. We have a working capital deficit, as at August 31, 2000, of $290,000. We will require additional funds to finance our ongoing operating activities for the foreseeable future and will need some funds for capital expenditures. We plan to manage our payables balances and satisfy our operating and capital needs partially by generating cash (although at a shortfall) through our operating activities and partially through issuing equity securities. We will require additional financing in order to carry out our business plan as proposed. Our capital requirements may vary based upon: the timing and success of our roll out and as a result of regulatory, technological and competitive developments; demand for our services or our anticipated cash flow from operations is less or more than expected; our development plans or projections changing or proving to be inaccurate; it engaging in any acquisitions; or it accelerating deployment of our network services or otherwise altering the schedule or targets of our roll out plan. We have not achieved profitable operations since our inception and have suffered mounting losses of $6,693,437 to August 31, 2000. The principal capital expenditures incurred to date related to putting networks in place in Toronto and Vancouver. The majority of the networking equipment has been acquired in previous periods, and new equipment will be leased under operating leases. Our strategy now is to create Virtual ISP presences in new markets (i.e., North American cities) pursuant to our agreements with Internet access providers, so that it will not have to commit to capital expenditures to build out a network in each new market. We may need to commit working capital, however, to fund increased lease payments to Internet access providers until revenues from new subscribers begin to cover the increase in monthly lease costs attributable to the new market. We have been adding to the number of cities in which we have switched on 50 ports (minimum per agreement with Level 3 Communications) in each US city which enables us to service up to 500 customers in each city. The loss from these ports for the three months ended August 31, 2000 was $143,000 which was charged to general and administrative expenses as there was minimal revenue generated during the period from these ports and is not considered a profit centre as of yet. We expect our capital expenditures to continue at a modest rate in future periods as necessary, arising primarily from the purchase of some infrastructure equipment necessary for the development and expansion of our defined markets. We made capital expenditures of $13,000 in the current period, principally to acquire hardware related to the development and maintenance of the portal site. Year 2000 Issues We cannot provide assurance that we will not experience unanticipated negative consequences from year 2000 problems, including material costs caused by undetected errors or defects in the technology used in our internal systems as we operate in the Year 2000. We Did Not Experience Any Problems With Our Systems or Service Providers During the Year 2000 Rollover Period Our online services and their associated and supporting tools, Web sites and infrastructure were designed and developed to be year 2000 compliant. Our internal systems, including those used to deliver our services, utilize third- party hardware and software. Based on vendors' representations received thus far and our experience with the Year 2000 rollover, we believe that the third- party hardware and software it uses is year 2000 compliant. To date, we have spent an estimated $100,000, in part to address year 2000 issues. These expenditures consisted mainly of purchases of new year 2000- compliant computer equipment, and some of these purchases would have been made in the ordinary course of replacing aging equipment. We presently estimate that the total remaining cost of addressing year 2000 issues will not be material. These estimates were derived utilizing a number of assumptions, including the assumption that we have already identified any significant year 2000 issues. However, these assumptions may not be accurate, and actual results could differ materially from those anticipated. In view of our year 2000 review and remediation efforts to date, the recent development of our services, the recent installation of our information technology equipment and systems, we do not consider contingency planning to be necessary at this time. We believe that any lingering Year 2000 problems will occur in the processing of financial transactions. We believe that our billing systems will accurately invoice our subscribers and licensees. We will remain vigilant in our review of invoices from our vendors to detect potential Year 2000 errors in their charges to us. Page 18 If the Company discovers that certain of its services need modification, or certain of its third-party hardware and software is not year 2000 compliant, it will try to make modifications to its services and systems on a timely basis. The Company does not believe that the cost of these modifications will materially affect its operating results. However, the Company cannot provide assurance that it will be able to modify these products, services and systems in a timely, cost-effective and successful manner, and the failure to do so could have a material adverse effect on its business and operating results. Page 19 PART II Other Information Item 2. Changes in Securities and Use of Proceeds - ------- ----------------------------------------- Recent Sales of Unregistered Securities. Set forth below is information regarding the issuance and sales of securities of the Company without registration during the quarter ended August 31, 2000. No such sales involved the use of an underwriter and no commissions were paid in connection with the sale of any securities. (1) During the quarter ended August 31, 2000, the Company issued 12,500 shares pursuant to options exercised at $0.50 per share for total proceeds of $6,250. The sale of the shares was exempt from registration under Rule 701 under Section 3(b) of the Securities Act of 1933. The sales were made on exercise of grants under the Company's written stock option plan, a copy of which the Company has provided to its participants. (2) In June, 2000 the Company issued 5,000 shares to Capital Research for marketing and financial consulting services. The offer and sale of the shares were exempt from registration under Rule 506 under and Section 4(2) of the Securities Act of 1933, Regulation S under the Securities Act of 1933, and beyond the jurisdiction of Section 5 of the Securities Act of 1933. Item 6. Exhibits and Reports on Form 8-K - ------- -------------------------------- (a) Exhibits. Exhibit No. Description ------------ ----------- 27.1 Financial Data Schedule Page 20 Signature --------- In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, hereunto duly authorized. Dated: October 16, 2000 INFORMATION HIGHWAY.COM, INC. By: /s/ John G. Robertson ------------------------------------- John G. Robertson, President (Principal Executive Officer) EX-27 2 0002.txt
5 3-MOS MAY-01-2001 AUG-31-2000 111,313 0 7,190 0 125,102 297,006 804,876 339,653 782,918 577,319 0 0 0 5,480,815 (6,697,356) 782,918 213,900 213,900 384,548 384,548 601,629 0 129,841 (902,118) 0 (902,118) 0 0 0 (902,118) (.11) (.11)
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