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
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No.0-25773
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INFORMATION HIGHWAY.COM, INC
(Exact name of small business issuer as specified in its charter)
Florida 65-0154103
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
185-10751 Shellbridge Way, Richmond, BC Canada V6X 2W8
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(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
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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]
<PAGE>
INDEX
PART I - Financial Information Page
Item 1. Consolidated Financial statements 2
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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
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Operations and Financial Condition 15-18
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PART II - Other Information 19
Signatures 20
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Page 2
PART I - Financial Information
Item 1. Consolidated Financial statements
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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
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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
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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)
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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
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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)
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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>
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>
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>
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
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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>
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>
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>
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>
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>
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.
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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.
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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.
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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
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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.
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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.
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PART II Other Information
Item 2. Changes in Securities and Use of Proceeds
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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
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(a) Exhibits.
Exhibit No. Description
------------ -----------
27.1 Financial Data Schedule
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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)
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