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]
<PAGE>
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
<PAGE>
PART I - Financial Information
Item 1. Consolidated Financial statements
-------- -----------------------------------
Information Highway.com, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
November 30, May 31,
2000 2000
(unaudited) (audited)
$ $
<S> <C> <C>
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)
</TABLE>
<PAGE>
Information Highway.com, Inc.
Consolidated Statements of Operations
Information Highway.com, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three months ended Six months ended
November 30, November 30,
(unaudited) (unaudited)
2000 1999 2000
$ $ $
<S> <C> <C> <C>
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
$
<S> <C>
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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Information Highway.com, Inc.
Consolidated Statements of Cash Flows
Six months Six months
ended ended
November 30, November 30,
(unaudited) (unaudited)
2000 1999
$ $
<S> <C> <C>
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)
</TABLE>
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
<TABLE>
<CAPTION>
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)
$ $ $ $
<S> <C> <C> <C> <C>
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
----------------------------------------------------------------------------------------
</TABLE>
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.
<PAGE>
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
<TABLE>
<CAPTION>
November 30, May 31,
2000 2000
$
(unaudited) (audited)
<S> <C> <C>
(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)
--------------------------------------------------------------------------- -------------- --------
</TABLE>
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.
<PAGE>
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.
<PAGE>
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:
<TABLE>
<CAPTION>
November 30, 2000
(unaudited)
Weighted
Weighted Average
Average Remaining
Shares Option Life
Under Option Price of Options
# $ (Months)
<S> <C> <C> <C>
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
</TABLE>
* 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:
<TABLE>
<CAPTION>
November 30, May 31,
2000 2000
(unaudited) (audited)
$ $
<S> <C> <C>
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)
</TABLE>
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:
<TABLE>
<CAPTION>
For the fiscal years ended May 31,
-----------------------------------
2001 2002 2003 2004
$ $ $ $ $
-----------------------------------
<S> <C> <C> <C> <C>
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
--------------------------------------
</TABLE>
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
<PAGE>
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)
