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 NOVEMBER 30, 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 65-015410 ------- ------------- (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 January 10, 2001 - 8,361,461 shares of common stock, $.0001 par value were outstanding. Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X] INDEX Page PART I - Financial Information Item 1. Consolidated Financial statements 2 Consolidated Balance Sheets as of November 30, 2000 (unaudited) and May 31, 2000 (audited) 3 Consolidated Statements of Operations for the three months and six months ended November 30, 2000 and 1999 (unaudited) 4 Consolidated Statements of Cash Flows for the six months ended November 30, 2000 and 1999 (unaudited) 5 Notes to the Consolidated Financial Statements (unaudited) 6-12 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 13-18 PART II - Other Information 19 Signatures 20 PART I - Financial Information Item 1. Consolidated Financial statements -------- ----------------------------------- Information Highway.com, Inc. Consolidated Balance Sheets
November 30, May 31, 2000 2000 (unaudited) (audited) $ $ Assets Current Assets Cash and equivalents - 857,949 Accounts receivable 21,013 32,839 Inventory 126,756 121,264 Prepaid expenses and deposits 21,588 150,420 Due from related parties (Note 8) - 36,391 ----------------------------------------------------------------------------------------------------- Total Current Assets 169,357 1,198,863 Restricted Cash (Note 3) 26,042 - Property, Plant and Equipment (Note 4) 441,103 490,750 Goodwill (Note 3) 51,469 - ----------------------------------------------------------------------------------------------------- Total Assets 687,971 1,689,613 ----------------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Current Liabilities Cheques issued in excess of funds on deposit 33,336 - Accounts payable 367,194 385,645 Accrued liabilities 482,667 146,400 Deferred revenues 65,736 50,678 Due to related parties (Note 8) 218,272 - Current portion of long-term debt (Note 5) 23,875 - Current portion of obligations under capital leases (Note 7) 35,828 36,773 ----------------------------------------------------------------------------------------------------- 1,226,908 619,496 Obligations under Capital Leases (Note 7) 42,882 61,717 Long-Term Debt (Note 5) 43,761 - Convertible Debentures (Note 6) 1,334,700 1,346,437 Share Subscriptions for Subsidiary 119,629 - ----------------------------------------------------------------------------------------------------- Total Liabilities 2,767,880 2,027,650 ----------------------------------------------------------------------------------------------------- Commitments and Contingencies (Note 10) Subsequent Event (Note 12) Stockholders' Equity (Deficit) Common Stock (Note 9), 50,000,000 shares authorized, par value $.0001 per share, 8,289,756 and 8,141,334 issued and outstanding respectively 829 814 Additional Paid in Capital - Common Stock 4,922,506 4,812,920 Additional Paid in Capital - Common Stock Warrants Issued 651,120 651,120 ----------------------------------------------------------------------------------------------------- 5,574,455 5,464,854 Preferred Stock, 10,000,000 shares authorized, par value .0001 per share, none issued - - Translation adjustments (10,949) (11,572) Accumulated Deficit (7,643,415) (5,791,319) ----------------------------------------------------------------------------------------------------- Total Stockholders' Equity (Deficit) (2,079,909) (338,037) ----------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity (Deficit) 687,971 1,689,613 ----------------------------------------------------------------------------------------------------- (See accompanying notes)
Information Highway.com, Inc. Consolidated Statements of Operations Information Highway.com, Inc. Consolidated Statements of Operations
Three months ended Six months ended November 30, November 30, (unaudited) (unaudited) 2000 1999 2000 $ $ $ Revenues 196,838 373,510 410,738 Cost of Revenues 527,863 (228,094) 912,411 -------------------------------------------------------------------------------------------------------------------------------- Gross Profit (331,025) 145,416 (501,673) -------------------------------------------------------------------------------------------------------------------------------- Operating Expenses Marketing and sales 46,647 128,415 156,942 General and administrative 518,806 764,132 1,045,238 Product development 53,500 59,973 148,243 -------------------------------------------------------------------------------------------------------------------------------- Total Operating Expenses 618,953 952,520 1,350,423 -------------------------------------------------------------------------------------------------------------------------------- Net loss 949,978 807,104 1,852,096 -------------------------------------------------------------------------------------------------------------------------------- Basic net loss per share .12 .11 .22 -------------------------------------------------------------------------------------------------------------------------------- Weighted average shares used to compute basic net loss per share 8,211,000 7,174,000 8,178,000 -------------------------------------------------------------------------------------------------------------------------------- Diluted loss per share has not been presented separately as the result is anti dilutive. Six months ended November 30, (unaudited) 1999 $ Revenues 666,798 Cost of Revenues (441,558) ----------------------------------------------------------------------------------------------------- Gross Profit 225,240 ----------------------------------------------------------------------------------------------------- Operating Expenses Marketing and sales 191,931 General and administrative 1,185,332 Product development 119,417 ----------------------------------------------------------------------------------------------------- Total Operating Expenses 1,496,680 ----------------------------------------------------------------------------------------------------- Net loss 1,271,440 ----------------------------------------------------------------------------------------------------- Basic net loss per share .18 ----------------------------------------------------------------------------------------------------- Weighted average shares used to compute basic net loss per share 6,964,000 ----------------------------------------------------------------------------------------------------- Diluted loss per share has not been presented separately as the result is anti dilutive.
Information Highway.com, Inc. Consolidated Statements of Cash Flows Six months Six months ended ended November 30, November 30, (unaudited) (unaudited) 2000 1999 $ $ Cash Flows to Operating Activities Net loss (1,852,096) (1,271,440) Adjustments to reconcile net loss to cash Depreciation and amortization 77,439 47,903 Amortization of goodwill 4,679 91,718 Interest on conversion of debentures 1,963 - Shares and warrants issued for services rendered 41,388 678,899 Imputed interest on valuation of warrants 48,263 - Gain on sale of computer equipment (1,952) - Change in non-cash working capital items Decrease (increase) in accounts receivable 11,826 (8,559) Decrease (increase) in prepaid expenses 128,832 (130,191) Increase in inventory (5,492) (33,658) Increase (decrease) in accounts payable and accruals 317,816 (57,741) Increase in unearned revenue 15,058 4,656 -------------------------------------------------------------------------------- Net Cash Used in Operating Activities (1,212,276) (678,413) -------------------------------------------------------------------------------- Cash Flows from (to) Financing Activities Increase in long-term debt, net of repayment 67,636 - Increase in common stock 6,250 1,160,100 Decrease in advances from related parties 254,663 (92,420) Capital lease obligations repaid (19,780) - Share subscriptions in subsidiary 119,629 - -------------------------------------------------------------------------------- Net Cash from Financing Activities 428,398 1,067,680 -------------------------------------------------------------------------------- Cash Flows to Investing Activities Purchase of subsidiary (56,148) - Increase in property, plant and equipment (32,090) (119,499) Restricted cash (26,042) - Proceeds from sale of computer equipment 6,250 - -------------------------------------------------------------------------------- Net Cash to Investing Activities (108,030) (119,499) -------------------------------------------------------------------------------- Translation Adjustments 623 6,213 -------------------------------------------------------------------------------- Increase (decrease) in Cash During the Period (891,285) 275,981 Cash - Beginning of Period 857,949 37,622 -------------------------------------------------------------------------------- Cash (Deficiency) - End of Period (33,336) 313,603 -------------------------------------------------------------------------------- Non-Cash Financing Activities Value of common shares issued for services 41,388 440,000 Value of common shares issued for property - 22,000 Conversion of $60,000 of convertible debentures into 105,922 common shares 61,963 - -------------------------------------------------------------------------------- Supplemental Cash Flow Information: Cash paid for interest 202,495 - Cash paid for income taxes - - -------------------------------------------------------------------------------- (see accompanying notes)
Information Highway.com, Inc. Notes to Consolidated Financial Statements (unaudited) 1. Nature of Operations and Continuance of Business The Company owns four 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 10 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 $7,643,415 to November 30, 2000 and has a working capital deficit of $1,053,206 as at November 30, 2000. There is substantial 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. Management plans to raise additional equity financing to new investors. 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 four 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. Adjustments These interim unaudited financial statements have been prepared on the same basis as the annual financial statements and in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company's financial position, results of operations and cash flows for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for a full year or for any future period. 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. 2. Significant Accounting Policies (continued) 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 4 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 our portal site, voice over IP and e-commerce services. 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. 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 Acquisition On September 27, 2000 the Company completed an agreement to purchase a travel agency located in British Columbia, Canada. This was not considered a significant business acquisition. 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 purchase will be accounted for as an acquisition, and the excess purchase price over the fair market value of net assets acquired, being Cnd$84,390, was allocated to goodwill and is being amortized over two years. 4. Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation and amortization. November 30, May 31, Accumulated 2000 2000 Depreciation and Net Book Net Book Cost Amortization Value Value (unaudited) (audited) $ $ $ $ computer equipment 636,362 314,376 321,986 352,180 Computer equipment under capital lease 97,963 29,618 68,345 83,452 Office furniture and equipment 59,415 28,804 30,611 32,147 Production equipment 25,000 12,357 12,643 14,875 Leasehold improvements 11,567 4,049 7,518 8,096 ---------------------------------------------------------------------------------------- 830,307 389,204 441,103 490,750 ----------------------------------------------------------------------------------------
5. Long-Term Debt Long-term debt represents a bank loan bearing interest at the bank's prime lending rate and is due in 36 monthly payments of Cnd$3,056 principal plus interest and is secured by a GIC of $110,000 held by a private company under the President's control. $ Balance November 30, 2000 67,636 Less current portion due within one year 23,875 ------ Long-term portion 43,761 ------ Principal payments for the next three years are: 2001 23,875 2002 23,875 2003 19,886 6. 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. 6. Convertible Debentures (continued) 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. During the six months ended November 30, 2000 convertible debentures of $60,000 were converted into 105,922 common shares. 7. Obligations Under Capital Leases The Company acquired computer equipment by way of capital leases. Total Fiscal Lease Period Payments ------ $ 2001 35,828 2002 35,828 2003 6,844 2004 4,219 2005 703 ------ 83,422 Less amount representing interest 4,712 ----- 78,710 Less current portion 35,828 ------ 42,882 ------ 8. Due To/From Related Parties
November 30, 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 237,517 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 (19,245) (49,670) --------------------------------------------------------------------------- -------------- -------- Net amount owing from related parties 218,272 (36,391) --------------------------------------------------------------------------- -------------- --------
9. Common Stock Issuances and Related Commitments (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. 9. Common Stock Issuances and Related Commitments (continued) (a) Private placements of common shares and warrants (continued) (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. (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 six months ended November 30, 2000 the Company issued 5,000 common shares valued at $9,712 for financial consulting services and 25,000 common shares valued at $31,676 for investor relation consulting services. These amounts have 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. 9. Common Stock Issuances and Related Commitments (continued) (c) Stock Option Plan (continued) The weighted average number of shares under option and option price for the six months ended November 30, 2000 is as follows:
November 30, 2000 (unaudited) Weighted Weighted Average Average Remaining Shares Option Life Under Option Price of Options # $ (Months) Beginning of period 1,601,900 1.60 48 Granted 25,000 .50 Exercised (12,500) (0.50) Cancelled - - Lapsed - - End of period 1,614,400 1.58* 43
* Effective September 21, 2000 the exercise price of stock options with respect to 1,060,000 common shares was reduced to $1.00. 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:
November 30, May 31, 2000 2000 (unaudited) (audited) $ $ Net loss As reported (1,852,096) (4,134,545) Pro forma (1,866,674) (4,897,805) Basic net loss per share As reported (.22) (.55) Pro forma (.23) (.66)
10. 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 --------------------------------------
10. Commitments and Contingent Liability (continued) (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. 11. 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 six months ended November 30, 2000 was $305,000 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. 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 $618,097 relating to such activities. The net loss relating to Internet activities in Canada amounted to $929,394 and the net loss relating to US ISP business was $304,605. 12. Subsequent Event On December 20, 2000 the Company converted $15,000 of convertible debentures into 71,705 common shares at a conversion price of $.2175 per share. Item 2. Management's Discussion and Analysis of Financial Condition and -------- ------------------------------------------------------------------- Results of Operations ----------------------- Forward Looking Statements ---------------------------- This report 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 report. 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 through our agreement 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. Version 4.0 of our basic portal site is underway and will soon be accessible 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. On September 27, 2000, the Company completed an agreement to purchase a Pavlik Travel, a travel agency located in North Vancouver, British Columbia, Canada. Refer to Note 3 of the attached financial statements. Pavlik Travel is a wholly-owned subsidiary of the Company. We conduct our operations through one wholly-owned US subsidiary and four wholly-owned Canadian subsidiaries. Information Highway, Inc., a Washington corporation, acquired three of 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). By news release dated October 16, 2000, we announced that we had acquired Pavlik Travel Agency, a local travel agency serving the Greater Vancouver area. Refer to Note 3 of the attached Financial Statements. Pavlik Travel is a wholly-owned subsidiary of the Company. Our immediate plans for the travel agency are to bring it online as a valuable addition to our customized portal site. 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 November 30, 2000. At November 30, 2000, our accumulated deficit was $7,643,415 and our working capital deficit was $1,053,206. We expect to incur substantial operating losses, net losses and negative operating cash flow for the near term. PROGRESS REPORT FROM SEPTEMBER 1, 2000 TO JANUARY 15, 2001 On September 13 2000, we announced that an agreement with Bell Nexxia, a subsidiary of Bell Canada (NasdaqNM:BCICF) had been completed to offer high speed access service to our internet dial-up users in the Toronto, Ontario area. This service is based on the Alcatel (NYSE:ALA) ASAM 1000 DSLAM technology platform which will enable connection from PC's, servers, routers etc. The DSL service line speeds will be up to 2.2 Mbps downstream (to the end-users premise) and 640 kbps upstream (from the end users premise) or up to 125 times faster than ordinary dial-up modem connections. DSL enables users to remain connected to the Internet 24-hours-a-day, eliminating annoying busy signals was well as the time and cost of waiting to connect. And, because the service works on the same line as the phone, customers don't have to pay for additional lines - they can talk while they search the net. On October 16, 2000, we announced the purchase of Pavlik Travel Agency, a local travel agency serving the Greater Vancouver area. Founded in 1976 in North Vancouver, British Columbia, Pavlik Travel Agency handles international airline travel, tours hotel and car rentals reservations for both personal and business travellers. Pavlik Travel is a fully licensed IATA travel agency, and an active member of Advantage Travel Cruise Centres, Cruise Lines International (CLIA) and Alliance of Canadian Travel Associations (ACTA). It is fully computerized on the Apollo airline reservation system. On October 17, 2000, we announced that the Company and LinuxWizardry Systems, Inc. teamed up to launch multi-user DSL service in North America with several ISP companies. The Magic Passage VPN network will allow users in the Small Office or Home Office (SOHO) market to share a single connection to the Internet securely. Utilizing the Magic Passage up to 253 computers can share a single xDSL connection. Magic Passage also provides firewall and virtual private network capability. All of these features are easily configured through a simple drag and drop interface known as the Apprentice Command Center. 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. 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. RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED NOVEMBER 30, 2000 AS COMPARED TO THE SIX MONTHS ENDED NOVEMBER 30, 1999 REVENUES Revenues decreased by $256,000 (38%) to $411,000 from $667,000 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 six months ended November 30, 2000 was $304,605 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 $2,100 and costs were $1,200. COST OF REVENUES Cost of revenues increased by $470,000 (106%) to $912,000 from $442,000 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 fibre 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. GROSS PROFIT Gross profit decreased by $727,000 (323%) to ($502,000) from $225,000 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 decreased by $35,000 (18%) to $157,000 from $192,000 in 1999. The major component of this decrease was a result of a number of one time marketing programs in 1999 that were not carried forward to this year. 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 decreased by $140,000 to $1,045,000 from $1,185,000 in 1999. General and administrative expenses relating to corporate overhead activities, and not Internet business-related activities, have increased by $386,000 to $618,000 from $232,000 in 1999. Investor relations and financial consulting decreased by $562,000 to $160,000 as compared to $722,000 in 1999. This decrease was due to a non-recurring expense in 1999 where the Company paid $599,000 in shares to IP Equity, Inc. a non-related company for Internet-based marketing and financial consulting services. Professional fees increased by $31,000 to $95,000 from $64,000 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 increased by $19,000 to $118,000 from $99,000 in 1999. This increase is largely due to telephone expense. PRODUCT DEVELOPMENT EXPENSES Product development costs consist of expenses incurred by us in the development and creation of our portal site, voice over IP, and e-commerce services. 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 $29,000 (24%) to $148,000 from $119,000 in 1999. The major component of the increase in product development expenses was salaries and consulting fees of $121,970 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 $29,000 to $77,000 as compared to $48,000 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 SIX MONTHS ENDED NOVEMBER 30, 2000 AS COMPARED TO THE SIX MONTHS ENDED NOVEMBER 30, 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 first quarter 2001, 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 six months ended November 30, 2000 was $305,000 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 $618,000 relating to such activities. The net loss relating to Internet activities in Canada amounted to $929,000 and the net loss relating to US ISP business was $305,000. Since inception, 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 NOVEMBER 30, 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 $453,000, generated by issuing equity securities of $6,000, advances from affiliates of $255,000, loan advanced from the bank of $72,000 and share subscriptions from a subsidiary of 120,000 we were able to fund our operating cash shortfall of $1,212,000, repay capital lease and loan obligations of $24,000, make capital expenditures of $82,000, and fund two letters of credit ("Restricted Cash") of $26,000. This resulted in a decrease of our cash position by $891,000 to a cash deficiency of $33,000. 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 November 30, 2000, of $1,053,000. 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 $7,643,415 to November 30, 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 six months ended November 30, 2000 was $305,000 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 $32,090 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. 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. PART II Other Information Item 1. Legal Proceedings -------- ------------------ None Item 2. Changes in Securities -------- ----------------------- Refer to Notes to Financial statements attached hereto. Item 3. Defaults upon Senior Securities -------- ---------------------------------- None Item 4. Submissions of Matters to a Vote of Security Holders -------- ------------------------------------------------------------ None Item 5. Other Information -------- ------------------ None Item 6. Exhibits and Reports on Form 8-K -------- ------------------------------------- (a) 27.1 - Financial Data Schedule (b) There were no Form 8-K's filed during the period 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: January 15, 2001 INFORMATION HIGHWAY.COM, INC. By: /s/ John G. Robertson John G. Robertson, President (Principal Executive Officer) By: /s/ Brian Cherry Brian Cherry, Chief Financial Officer (Principal Financial Officer)