|
Index
to Consolidated Financial Statements
- Report
of Independent Auditors
- Consolidated
Balance Sheets as of May 31, 1998 and 1997
- Consolidated
Statements of Operations For the Year Ended May 31, 1998 and the
Period from October 15, 1996 (Date of Inception) to May 31, 1997
- Consolidated
Statements of Changes in Stockholder`s Equity Accumulated from
October 15, 1996 (Date of Inception) to May 31, 1998
- Consolidated
Statements of Cash Flows for the Year Ended May 31, 1998 and the
Period from October 15, 1996 (Date of Inception) to May 31, 1997
Notes to the Consolidated Financial Statements
Report
of Independent Auditors
To:
Board of Directors and Stockholders
Information Highway, Inc.
We have
audited the accompanying consolidated balance sheets of Information
Highway, Inc. as of May 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders` equity and cash flows for
the year ended May 31, 1998 and the period from October 15, 1996
(Date of Inception) to May 31, 1997. These financial statements
are the responsibility of the Company`s management. Our responsibility
is to express an opinion on these financial statements based on
our audits.
We conducted
our audits in accordance with U.S. generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates by management, as well
as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our
opinion, such consolidated financial statements referred to above
present fairly, in all material respects, the financial position
of Information Highway, Inc. as of May 31, 1998 and 1997, and the
results of their operations and their cash flows for the year ended
May 31, 1998 and the period from October 15, 1996 (Date of Inception)
to May 31, 1997 in conformity with U.S. generally accepted accounting
principles.
The accompanying
consolidated financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 1
to the financial statements, the Company has not achieved profitable
operations since inception and has a working capital deficit. These
factors raise substantial doubt about the Company`s ability to continue
as a going concern. Management`s plans in regard to these matters
are also discussed in Note 1. These financial statements do not
include any adjustments which might result from the outcome of this
uncertainty.
Elliott,
Tulk, Pryce, Anderson
Chartered Accountants
Vancouver, British Columbia, Canada
September 24, 1998
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Information Highway, Inc.
Consolidated Balance Sheets
As at May 31, 1998 and 1997
(Expressed in U.S. dollars)
| Assets
(US Dollars) |
|
Current
Assets
Cash
Accounts receivable
Total
Prepaid expenses
Fixed Assets (Note 5)
Goodwill (Note 4)
|
1998
35,699
4,442
3,001
43,142
209,353
274,598
527,093
|
1997
4,947
1,628
5,276
11,851
157,981
434,343
604,175
|
| Liabilities
and Stockholders` Equity |
Current Liabilities
Accounts payable
Unearned revenue
Advances from Affiliated Companies (Note 6)
Advances from Directors (Note 6)
Commitments and Contingencies (Notes 1 and 8) |
1998
206,608
-
206,608
239,542
22,242
468,392 |
1997
59,475
4,495
63,970
120,448
30,991
215,409 |
| Stockholders`
Equity |
Common Stock (Note 7), no par value, 100,000,000
shares authorized, 4,766,000 and 3,667,000 issued
and outstanding respectively
Paid for but unissued, for 82,650 and 776,000 shares respectively
Preferred Stock, no par value, 50,000,000 shares
authorized, none issued
Translation adjustments
Deficit |
1998
700,960
61,988
-
3,654
766,602
(707,901)
58,701
527,093
|
1997
391,460
148,000
-
-
539,460
(150,694)
388,766
604,175
|
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Information Highway, Inc.
Consolidated Statements of Operations
For the year ended May 31, 1998 and the period from
October 15, 1996 (Date of Inception) to May 31, 1997
(Expressed in U.S. dollars)
Revenue
Expenses
Advertising
Amortization of goodwill
Bank and credit card charges
Depreciation
Equipment rental
Foreign exchange loss
Internet fees
Investor relations
Management and consulting fees
Office
Professional fees
Rent and utilities
Royalties
Salaries and benefits
Telephone
Travel and promotion
Net loss
Net loss per share
Weighted average shares outstanding |
1998
859,184
60,242
159,745
18,456
57,611
16,075
2,992
159,441
7,417
230,080
30,069
57,243
58,939
-
170,933
374,132
13,016
1,416,391
557,207
.14
3,896,000
|
1997
145,449
8,451
44,900
2,522
14,335
-
897
5,744
2,946
58,849
11,726
5,065
15,730
20,696
65,385
34,194
4,703
296,143
150,694
.10
1,519,000
|
|
|
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Information Highway, Inc.
Consolidated Statement of Changes in
Stockholders` Equity
Accumulated from October 15, 1996 (Date of Inception) to May
31, 1998
(Expressed in U.S. dollars)
Balance as at Oct. 15, 1996
(Date of Inception)
Issued for cash:
$0.10 per share
$0.50 per share
Issued for settlement of debt:
$0.365 per share
$0.50 per share
Issuance of stock in acquisitions
of subsidiaries (Note 4):
Dec. 1996 at a deemed valueof
$0.10 per share to acquire a 100%
interest in Blue Crow Internet Co. Ltd.
February, 1997 at a deemed value
of $0.10 per share to acquire
a 100% interest in:
World-Tel Internet (Toronto) Ltd.
YESIC Communications Inc.
Net loss for the period
Balance as at May 31, 1997
Issued for cash:
$0.10 per share
$0.50 per share
Net loss for the year
Balance as at May 31, 1998
Shares paid for but unissued
at $0.75 per share |
Shares
-
15,000
1,000
24,000
45,000
125,000
342,000
3,115,000
-
3,667,000
600,000
499,000
-
4,766,000
82,650 |
Common
Stock $
-
1,500
500
8,760
22,500
12,500
34,200
311,500
-
391,460
600,00
249,500
-
700,960
61,988 |
Deficit $
-
(150,694)
(150,694)
(557,207)
(707,901)
|
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Information Highway, Inc.
Consolidated Statements of Cash Flows
For the year ended May 31, 1998 and the period from
October 15, 1996 (Date of Inception) to May 31, 1997
(Expressed in U.S. dollars)
Cash Flows to Operating Activities
Net loss
Adjustments to reconcile net loss to cash
Depreciation
Amortization of goodwill
Royalty expenses settled by issuing shares
Change in non-cash working capital items
(Increase) decrease in accounts receivable
(Increase) decrease in prepaid expenses
Increase in accounts payable
Increase (decrease) in unearned revenue
Net Cash Used in Operating Activities
Cash Flows from Financing Activities
Common stock issued and subscribed for
Increase (decrease) in advances from
affiliated companies
Increase (decrease) in advances from directors
Translation adjustment
Net Cash from Financing Activities
Cash Flows to Investing Activities
Increase in capital assets acquired
Acquisition of subsidiaries (Note 4)
Net Cash to Investing Activities
Increase in cash during the period
Cash - beginning of period
Cash - end of period
Non-Cash Financing Activities
The Company issued 3,582,000 shares at a deemed
value of $0.10 per share to acquire subsidiaries
(Note 4)
The Company issued 69,000 shares to settle debts
Supplemental cash flow information:
Cash paid for interest
Cash paid for income taxes |
1998
(557,207)
57,611
159,745
-
(2,814)
2,275
147,133
(4,495)
(197,752)
223,488
119,094
(8,749)
3,654
337,487
(108,983)
-
(108,983)
30,752
4,947
35,699
-
-
-
-
-
|
1997
(150,694)
14,335
44,900
20,696
83
(5,037)
18,199
4,495
(53,023)
150,000
(7,043)
1,898)
-
144,855
(66,560)
(20,325)
(86,885)
4,947
-
4,947
358,200
31,260
389,460
-
-
|
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Notes to the Consolidated Financial Statements
1. Nature of operations and continuance of business
The Company was incorporated in the State of Washington on
October 15, 1996. See Note 4 regarding acquisition of 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.
The Company has emerged from being a development stage company.
In a development stage company, management devoted most of
its activities to establishing the business. Planned principal
activities have started producing significant revenues; however,
the Company has experienced start-up losses in 1997 and 1998
and has a serious working capital deficiency. The ability
of the Company to continue as a going concern is dependent
upon its successful efforts to raise additional equity financing
(see Note 9) and further develop the market for its products.
2. Significant accounting policies
Cash and cash equivalents
Cash and cash equivalents include cash on hand, in banks and
all highly liquid investments with a maturity of 90 days or
less when purchased.
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. The Company operates in Canada 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.
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Fixed assets
Fixed assets are recorded at cost. Deprecation is computed
utilizing the declining balance method over an estimated useful
life of the related asset category. Computer equipment is
depreciated at 30% per annum and furniture and office equipment
at 20%. Leasehold improvements are amortized to operations
over ten years utilizing the straight-line method.
Goodwill
Goodwill represents the excess of purchase consideration over
fair market value of net identifiable assets acquired, and
is amortized on a straight-line basis over three years. Goodwill
is evaluated in each reporting period to determine if there
were events or circumstances which would indicate a possible
inability to recover the carrying amount. Such evaluation
is based on various analyses including undiscounted cash flow
and profitability projections which necessarily involves significant
management judgement.
Revenue recognition
Revenue is recognized at the time services are provided. All
related costs are recognized in the period in which they occur.
2. Significant accounting policies (continued)
Use of estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities in the financial statements
and accompanying notes. Actual results could differ from these
estimates.
Earnings per share
Earnings per share is computed by dividing the net income
(loss) for the period by the weighted average number of common
shares outstanding for the period. Common stock equivalents
are excluded from the computation if their effect would be
anti-dilutive.
Foreign exchange
All of the Company`s Canadian operating subsidiaries are operationally
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. Shareholder`s
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 shareholders` 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 are recognized
currently in earnings.
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Income taxes
The Company has adopted the provisions of Financial Accounting
Standards Board Statement No. 109 (SFAS 109), Accounting for
Income Taxes. SFAS 109 requires that deferred taxes reflect
the tax consequences on future years of differences between
the tax bases of assets and liabilities and their financial
reporting amounts. At the date of adoption of SFAS 109, there
was no material effect on the Company`s financial statements.
Pursuant to SFAS 109 the Company is required to compute tax
asset benefits for net operating loss carry forwards. Potential
benefit of net operating losses has not been recognized in
the financial statements because the Company cannot be assured
that it is more likely than not that it will utilize the net
operating loss carry forwards in future years. The components
of the net deferred tax asset, the statutory tax rate, the
effective tax rate and the elected amount of the valuation
allowance are scheduled below:
| |
1998
|
1997
|
Net
Operating Loss
|
$280,000
|
$60,000
|
| Statutory
Tax Rate |
$22,500
+ 39% in
excess of
$100,000
|
$7,500
+ 25% in
excess of
$50,000
|
Effective
Tax Rate
|
-
|
-
|
Deferred
Tax Asset
|
$93,000
|
$10,000
|
Valuation
Allowancet
|
($93,000)
|
($10,000)
|
Net
Deferred Tax Asset
|
-
|
-
|
2. Significant accounting policies (continued)
Income taxes
The Company`s Canadian subsidiaries have Canadian tax losses
of $307,000 to offset future years Canadian taxable income.
These losses expire as follows:
2002 $29,000
2003 $69,000
2004 $70,000
2005 $139,000
3. Consolidated financial statements
These financial statements include the accounts of the Company,
and its 100% owned Canadian subsidiaries: Blue Crow Internet
Co. Ltd. (ABlue Crow@); World-Tel Internet (Toronto) Ltd.
(AWorld-Tel); and YESIC Communications Inc. (AYesic@). As
Blue Crow was acquired on December 11, 1996, results of operations
include only the period from December 11, 1996 to May 31,
1998. As World-Tel and Yesic were acquired on February 23,
1997, results of operations include only the period from February
23, 1997 to May 31, 1998. See Note 4 regarding accounting
for these business acquisitions.
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4. Business acquisitions
On December 11, 1996, the Company acquired 100% of Blue Crow
and on February 23, 1997 the Company acquired 100% of World-Tel
and Yesic. See Note 1 regarding nature of their business.
The acquisitions were accounted for using the purchase method
of accounting for business combinations. The Company issued
3,582,000 common shares at a deemed fair market value of $0.10
per share and US$27,380 as cash consideration for all three
acquisitions. In total, the Company assumed net liabilities
of $93,663. The excess of the purchase price over the fair
market value of net liabilities assumed, totalling $479,243
was allocated to goodwill. Details of liabilities assumed
and assets acquired are as follows:
(i) Consideration
| Capital
stock issued (3,582,000 at $.10) |
$358,200 |
| Cash
paid |
$27,380 |
| |
Total $385,580 |
(ii) Net liabilities assumed
Liabilities Assumed
|
Accounts payable |
$43,080 |
|
Loans from directors |
$37,853 |
|
Loans from affiliated companies |
$127,491 |
| |
Total $208,424 |
Assets Aquired
|
Cash received in combination |
(7,055)
|
|
Accounts receivable |
(1,711) |
Capital assets; |
(105,995) |
|
Total (114,761) |
|
Net liabilities assumed |
$93,663 |
| (iii)
Excess of costs over book values |
$479,243 |
4. Business acquisitions
The excess of costs over book values were allocated to goodwill
as there were no other fair market value adjustments to non-monetary
assets or other identifiable intangible assets. Goodwill has
been capitalized and is being amortized over its estimated
useful life of three years. Amortization of $44,900 was charged
to operations in 1997 and $159,745 was charged in 1998.
5. Fixed assets
Fixed assets are stated at cost less accumulated depreciation.
|
Cost
|
Accumulated
Amortization
|
1998
Net
Book Value
|
1997
Net
Book Value
|
Computer
equipment
and software |
252,075
|
79,248
|
172,827
|
135,469
|
| Office
furniture and equipement |
33,984
|
7,869
|
26,115
|
22,512
|
| Leasehold
improvements |
11,567
|
1,156
|
10,411
|
-
|
| |
297,626
|
88,273
|
209,353
|
157,987
|
| |
|
|
1998
|
1997
|
Computer
equipment
and software |
|
|
51,833
|
12,263
|
| Office
furniture and equipement |
|
|
4,622
|
2,072
|
Leasehold
improvements
|
|
|
1,156
|
-
|
| |
|
|
57,611
|
14,335
|
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6. Related party balances and transactions
Amounts owing to the President and director and affiliated
companies are not due prior to May 31, 1999, are unsecured
and non-interest bearing. The President and director of the
Company was also President and director of World-Tel and Yesic
prior to acquisition. (See Note 4).
7. Stock option plan
On June 30, 1997 the Company reserved 1,000,000 common shares
pursuant to a stock option plan. On January 26, 1998 the Company
granted stock options to certain directors and employees to
acquire 725,000 shares at $0.50 per share expiring January
26, 2003. The options are granted for services provided to
the Company. Statement of Financial Accounting Standards No.
123 (AFAS 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 FAS
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 intrinsic value
adjustment is required.
8. Commitment
The Company is committed to making monthly operating lease
payments to March 15, 2000 of $1,947 for computer equipment.
9. Subsequent events
The Company completed a private placement to issue 139,650
units at $0.75 per unit for total proceeds of $104,737 ($61,988
raised to May 31, 1998). Each unit will contain one share
and one warrant to acquire one additional share at $1.00 if
exercised within one year after issuance. The Company has
also approved an offering memorandum to offer up to 600,000
units at $0.75 per unit to raise $450,000. Each unit will
contain one share and one warrant to acquire one additional
share at $1.00 if exercised within one year after issuance.
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10.
Segmented information
The business of the Company is carried on in one industry
segment: the providing of access to the Internet and providing
services, including on-line publishing, to individual and
corporate subscribers. The Company operates in two geographic
segments as follows:
1998
|
1997
|
|
Can
|
US
|
Total
|
Can
|
US
|
Total
|
| Sales
unaffiliated |
855,987
|
3,197
|
859,184
|
145,449
|
-
|
145,449
|
| Inter
area sales |
-
|
-
|
-
|
-
|
-
|
-
|
| Operating
loss |
(117,951)
|
(439,256)
|
(557,207)
|
(44,735)
|
(105,959)
|
(150,694)
|
| Identifiable
assets |
207,503
|
45,442
|
252,495
|
161,602
|
8,230
|
169,832
|
| Goodwill
|
-
|
274,598
|
274,598
|
-
|
434,343
|
434,343
|
| Total
Assets |
207,503
|
320,040
|
527,093
|
161,602
|
442,573
|
604,175
|
11. Pro forma combined statement of operations (Unaudited)
The following statements of operations represents a combination
of the statements of operations for 1996 and 1997 of the Company
and its three subsidiaries on the assumption that the purchases
occurred on June 1, 1995.
| |
year
to May 31, 1997
|
year
to May 31, 1996
|
| Revenue
|
$421,346
|
$15,611
|
Expenses
|
534,903
|
120,041
|
General
& Administrative |
20,696
|
5,081
|
Royalties
|
138,718
|
48,175
|
Amortizition
of Goodwill |
29,905
|
4,226
|
Depreciation
|
(724,222)
|
(177,523)
|
Net
Loss |
(302,876)
|
(161,912)
|
Net
Loss per share |
(0.08)
|
(0.05)
|
Weighted
average shares outstanding |
3,612,000
|
3,457,000
|
|
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