<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
/X/ Quarterly Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
FOR THE QUARTER ENDED DECEMBER 31, 1999
/ / Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from ______________ to _______________
Commission File No.: 0-26053
MDU COMMUNICATIONS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 84-1342898
(State of Incorporation) (IRS Employer ID. No.)
108 - 11951 HAMMERSMITH WAY, RICHMOND, B.C., CANADA V7A 5H9
(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number, including area code: (604) 277-8150
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
stock, as of the latest practicable date: AS OF JANUARY 31, 2000 THERE WERE
12,249,084 SHARES OF COMMON STOCK OUTSTANDING AND NO OTHER OUTSTANDING CLASSES
OF COMMON EQUITY.
<PAGE>
PART I
EXCHANGE RATES
All dollar amounts in this report are stated in US dollars except where
otherwise indicated. The following table reflects the rate of exchange for
Canadian dollars per US$1.00 in effect at the end of the fiscal quarter and the
average rate of exchange during the fiscal quarter, based on the Bank of Canada
average noon spot rate of exchange:
<TABLE>
<CAPTION>
FISCAL QUARTER ENDING DECEMBER 31, 1999
---------------------------------------
<S> <C>
Rate at end of fiscal quarter: 1.4735
Average rate for fiscal quarter: 1.4727
</TABLE>
ITEM 1 - FINANCIAL STATEMENTS
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDING DECEMBER 31, 1999 AND 1998
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN CANADIAN DOLLARS)
(UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 30,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT
Cash $ 68,324 $ 829,293
Prepaid expenses and deposits 30,002 54,104
Accounts receivable
Trade 321,424 2,479
Sales tax and other 34,057 30,282
- ------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 453,807 916,158
PROPERTY AND EQUIPMENT, net (Note 4) 3,503,470 355,457
INTANGIBLE ASSETS
(net of accumulated amortization of $29,814) 119,257 157,689
- ------------------------------------------------------------------------------------------
TOTAL ASSETS $ 4,076,534 $ 1,429,304
==========================================================================================
LIABILITIES
CURRENT
Accounts payable $ 1,541,608 $ 74,514
Wages Payable 10,000 --
Other accrued liabilities 172,187 36,098
Notes payable (Note 5) 828,349 --
- ------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 2,552,144 110,612
- ------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Share capital (Note 6) 3,906,565 1,559,720
Share purchase options 649,445 449,445
Share subscriptions received (Note 7) 257,638 --
Deficit (3,289,258) (690,473)
- ------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) 1,524,390 1,318,692
- ------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,076,534 $ 1,429,304
==========================================================================================
</TABLE>
COMMITMENTS AND CONTINGENCIES (Note 8)
APPROVED BY THE DIRECTORS:
DIRECTOR
-----------------------------------
DIRECTOR
-----------------------------------
See accompanying notes to the consolidated financial statements
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(EXPRESSED IN CANADIAN DOLLARS)
(UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the period
from inception of
the For the three For the three
development stage months ending months ending
to December 31, December 31 December 31
1999 1999 1998
--------------------- -------------------- ---------------------
<S> <C> <C> <C>
REVENUE $ 878,586 $ 311,888 $ 1,944
DIRECT COSTS 522,521 182,951 1,854
- ---------------------------------------------------------------------------------------------------
GROSS PROFIT 356,065 128,937 90
- ---------------------------------------------------------------------------------------------------
SALES EXPENSE 1,683,412 332,023 115,790
- ---------------------------------------------------------------------------------------------------
GENERAL AND ADMINISTRATIVE
EXPENSES
Advertising and promotion 116,257 7,085 --
Amortization 325,553 130,293 5,610
Consulting 230,570 53,125 177,445
Foreign exchange loss (gain) (57,017) (96,512) --
Interest 59,702 25,353 1,461
Investor Relations 42,977 42,977 7,850
Management Fees 26,500 -- --
Office 73,409 16,241 7,529
Occupancy 102,873 33,044 3,563
Professional fees 222,472 78,775 (1,876)
Repairs and maintenance 19,747 8,446 321
Telephone 76,646 25,592 2,107
Travel 64,268 14,617 6,840
Vehicle 20,189 5,700 2,378
Wages 637,765 117,931 263,700
- ---------------------------------------------------------------------------------------------------
1,961,911 462,667 476,928
- ---------------------------------------------------------------------------------------------------
NET LOSS FOR THE PERIOD $ (3,289,258) $ (665,753) $ (592,628)
- ---------------------------------------------------------------------------------------------------
BASIC AND DILUTED
LOSS PER COMMON SHARE $ (0.06) $ (0.07)
- ---------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 10,347,710 8,852,639
===================================================================================================
</TABLE>
See accompanying notes to the consolidated financial statements
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
(EXPRESSED IN CANADIAN DOLLARS)
(UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the period
from inception of
the development For the three For the three
stage to months ending months ending
December 31 December 31, December 30,
1999 1999 1998
-------------------- ----------------- -----------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss for the period $(3,289,258) $ (665,753) $ (592,628)
Adjustments to reconcile net loss for the
period to cash utilized in operating activities
Amortization 325,553 130,293 5,610
Non-cash portion of wages expense
(Note 7 (c)(ii) 222,000 -- 222,000
Non-cash consulting expense
(Note 7 (c)(iii) 230,570 53,125 177,445
Non-cash portion of sales expense
(Note 7 (c)(i) 116,149 -- 50,000
Change in operating assets and liabilities: --
Prepaid expenses and deposits (30,002) (14,595) (46,511)
Accounts receivable (355,481) (97,027) (32,761)
Accounts payable 1,541,608 (106,585) 58,647
Wages Payable 10,000 (27,451) --
Other accrued liabilities 172,187 65,583 30,148
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (1,056,674) (662,410) (128,050)
- ----------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITY
Cash acquired on acquisition of subsidiary (Note 4) 35,222 -- 35,222
Purchase of property and equipment (3,665,358) (69,923) (314,034)
Purchase of intangible assets (149,071) -- (157,689)
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (3,779,207) (69,923) (436,501)
- ----------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from notes payable 275,000 -- 125,000
Repayment of notes payable (275,000) -- (275,000)
Proceeds from convertible notes payable 828,349 (1,295) --
Proceeds from issue of common stock 551,008 500,693 50,155
Proceeds from exercise of warrants 1,474,184 -- 1,474,183
Proceeds from share subscriptions received 2,050,664 257,638 --
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 4,904,205 757,036 1,374,338
- ----------------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 68,324 24,703 809,787
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD -- 43,621 19,506
- ----------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 68,324 $ 68,324 $ 829,293
======================================================================================================================
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid $ 25,085 $ 3,833
======================================================================================================================
Interest received $ 38 $ 96
======================================================================================================================
Income taxes paid $ -- $ --
======================================================================================================================
</TABLE>
See accompanying notes to the consolidated financial statements
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(EXPRESSED IN CANADIAN DOLLARS)
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Share
Subscriptions
Common stock Received
----------------------------- -------------------------------
Shares Amount Shares Amount
-------------- ----------------------------- ----------------
<S> <C> <C> <C> <C>
Issued for cash at inception,
March 26, 1998 160 $ 160 - $ -
Net loss for the period from inception
(March 26, 1998) to September 30,
1998 - - - -
- ---------------------------------------------------------------------------------------------------------
Balance, September 30, 1998 160 160 - -
Issued for cash 5,213,675 50,155 - -
Issued on business acquisition
(Note 7) 3,367,500 35,222
Exercise of warrants 640,000 1,474,183 - -
Issue of employees' options - - - -
Suppliers' options issued and issuable - - - -
Issue of options to consultant - - - -
Issued for cash (net of expenses
of the issue of $176,437) - - 670,000 1,544,924
Issued for cash (net of expenses) - - 420,000 248,102
Net loss for the year
ended September 30, 1999 - - - -
- ---------------------------------------------------------------------------------------------------------
Balance, September 30, 1999 9,221,335 $ 1,559,720 1,090,000 $ 1,793,026
Common Stock issued 670,000 1,544,924 (670,000) (1,544,924)
Issued for cash (net of expenses
of the issue of $23,187) 1,482,750 748,796 (420,000) (248,102)
Issued for services
agreement 100,000 53,125 - -
Issued for cash (net of expenses) - - 225,000 257,638
Net loss for the three months
ended December 31, 1999 - - - -
- ---------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 11,474,085 $ 3,906,565 225,000 $ 257,638
<CAPTION>
Warrants/options
to purchase shares
----------------------------
Number Amount Deficit Total
------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Issued for cash at inception,
March 26, 1998 - $ - $ - $ 160
Net loss for the period from inception
(March 26, 1998) to September 30,
1998 - - (97,845) (97,845)
- ------------------------------------------------------------------------------------------------------
Balance, September 30, 1998 - - (97,845) (97,685)
Issued for cash - - - 50,155
Issued on business acquisition
(Note 7) 35,222
Exercise of warrants - - - 1,474,183
Issue of employees' options 300,000 222,000 - 222,000
Suppliers' options issued and issuable 73,885 250,000 - 250,000
Issue of options to consultant 100,000 177,445 - 177,445
Issued for cash (net of expenses
of the issue of $176,437) - - - 1,544,924
Issued for cash (net of expenses) - - - 248,102
Net loss for the year -
ended September 30, 1999 - - (2,525,660) (2,525,660)
- ------------------------------------------------------------------------------------------------------
-
Balance, September 30, 1999 473,885 $ 649,445 $(2,623,505) $ 1,378,686
Common Stock issued - - - -
Issued for cash (net of expenses
of the issue of $23,187) - - - -
Issued for services
agreement - - - -
Issued for cash (net of expenses) - - - -
Net loss for the three months
ended December 31, 1999 - - (612,628) (612,628)
- ------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 473,885 $ 649,445 $(3,236,133) $ 766,058
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL INC.
- --------------------------------------------------------------------------------
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED NOTES TO THE FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
(UNAUDITED)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
Prior to the acquisition described in Note 4 below, MDU Communications
International, Inc. (formerly Alpha Beta Holdings, Ltd.) ("International"
or the "Company") was essentially inactive. On November 2, 1998 the
Company acquired all of the issued and outstanding common shares of MDU
Communications Inc. ("MDU") and on November 24, 1998, the Company changed
its name from Alpha Beta Holdings, Ltd. to MDU Communications
International, Inc. MDU, a Canadian incorporated telecommunications
company is a national system operator for "Star Choice Communications,
Inc." and provides delivery of home entertainment and information
technology to residents of multi-dwelling units such as apartment
buildings, condominiums, gated communities, hotels and motels.
The acquisition of MDU has been accounted for as a reverse acquisition on
the basis that the former shareholders of MDU now control the affairs of
the Company. As a result, these consolidated financial statements of the
Company include the accounts of International (the accounting subsidiary)
and MDU (the accounting parent), for the period subsequent to the
effective date of the reverse acquisition described in Note 4. The
comparative figures as at December 31, 1998 represent the historical
results of operations, cash flows and financial position of the
accounting parent, MDU.
2. SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared in accordance with
accounting principles generally accepted in the United States for interim
financial information and reflect the following significant accounting
polices. In the opinion of management all adjustments necessary to
present fairly the financial position, results of operations and cash
flows at December 31, 1999 and for all periods presented have been made.
Interim results are not necessarily indicative of results for a full
year.
(a) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements are issued under the name of
the Company, being the legal parent, but are considered a
continuation of the activities and operations of MDU
Communications Inc. (see Note 4). All inter-company balances and
transactions are eliminated.
(b) PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost less accumulated
amortization. Costs of connecting and disconnecting service are
expensed. Amortization of property and equipment is provided using
the declining balance method at the following rates:
<TABLE>
<CAPTION>
<S> <C>
Telecommunications equipment, installed 14.5%
Computer equipment 20.0%
Furniture and fixtures 20.0%
</TABLE>
Direct costs of placing telecommunications equipment into service
and major improvements are capitalized.
<PAGE>
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(c) REVENUE RECOGNITION
The Company recognizes revenue on provision of satellite
programming to customers in the period the related services are
provided.
(d) LOSS PER COMMON SHARE
Basic loss per share is computed by dividing net loss available to
common shareholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share
reflects the potential dilution of securities by including other
common share equivalents, including stock options and redeemable
convertible notes payable, in the weighted average number of
common shares outstanding for a period, if dilutive. For both the
quarter ended December 31, 1999 and December 31, 1998 basic and
diluted loss per common share are equivalent as the effect of
common shares issuable upon the exercise of options or warrants
would be anti-dilutive. As at January 31, 2000 the Company had
outstanding securities which were convertible into 3,585,759
common shares which would be potentially dilutive in the future.
(e) STOCK-BASED COMPENSATION
As permitted under SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company has accounted for employee and director
stock options in accordance with Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and has made the pro forma disclosures required by
SFAS No. 123 in Note 7.
Under APB No. 25, compensation charges arise from those situations
where options are granted at an exercise price lower than the fair
value of the underlying common shares. These amounts are amortized
as a charge to operations over the vesting periods of the stock
options.
Stock-based compensation charges to other than employees is
recorded over the period that the related stock option or warrant
is earned. The amount of the compensation is based on the fair
value of the option or warrant at the applicable measurement date.
(f) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's cash, accounts receivable,
accounts payable, accrued liabilities at December 31, 1999 and
1998 are estimated to approximate their carrying values due to the
relative liquidity or short-term nature of these instruments. Due
to the short term maturities of the convertible notes payable and
the fact that they were issued for the proceeds as stated in the
period from April 15 to June 15, 1999, the fair value of these
convertible instruments are also estimated to approximate the book
value at Dectember 31, 1999.
<PAGE>
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(g) CREDIT CONCENTRATION
Financial instruments that potentially subject the Company to a
concentration of credit risk consist principally of accounts
receivable. Accounts receivable from Star Choice Communications,
Inc. (Note 10) at December 31, 1999, represented 78% of total
trade accounts receivable (December 31, 1998 - 100%). The balance
of trade receivables are dispersed across a wide customer base.
3. ACQUISITION OF SUBSIDIARY
On November 22, 1998, the Company completed the acquisition of all of the
issued and outstanding common shares of MDU in exchange for 5,213,835
common shares of the Company.
The business combination of the Company and MDU has been accounted for as
a reverse acquisition whereby MDU was identified as the acquirer and the
assets and liabilities of the Company were acquired by MDU at fair value.
Fair value has been estimated as $35,222 being the amount of the sole
asset, cash, of International at the date of acquisition. In accordance
with generally accepted accounting principles for reverse acquisitions
these consolidated financial statements reflect the historical results of
MDU since its formation, and the MDU assets and liabilities at their
historic cost. The operations of the Company, being the legal parent and
accounting subsidiary, are reflected from November 22, 1998 and its
assets and liabilities are reflected at their fair value at the date of
acquisition.
<TABLE>
<S> <C>
Net assets of the Company at date of
acquisition are as follows:
Assets
Cash $ 35,222
Liabilities -
-----------------------------------------------------------------
Net assets acquired $ 35,222
=================================================================
</TABLE>
<PAGE>
4. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
----------------- ------------------
<S> <C> <C>
Telecommunications equipment, installed $ 3,474,828 $ 247,003
Telecommunications equipment, not yet placed in service 197,248 60,264
Computer equipment 39,391 18,014
Furniture and fixtures 87,741 35,786
-------------------------------------------------------------------------------------------------------
3,799,208 361,067
Less: accumulated amortization (295,738) (5,610)
-------------------------------------------------------------------------------------------------------
$ 3,503,470 $ 355,457
-------------------------------------------------------------------------------------------------------
</TABLE>
5. NOTES PAYABLE
The notes payable outstanding at September 30, 1999 and September 30,
1998 are summarized as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
--------------- -------------------
<S> <C> <C>
i) Demand convertible note payable with a maturity value of $250,000,
bearing interest at 8.75% per annum compounded monthly and due
June 30, 2000. $ 250,000 $ -
ii) Demand convertible note payable with a maturity value of U.S. $65,000,
bearing interest at 9.00% per annum compounded monthly and due
February 28, 2000. 95,778 -
iii) Demand convertible note payable with a maturity value of U.S.$327,500,
bearing interest at 8.75% per annum compounded monthly and due
June 30, 2000. 482,571 -
- -------------------------------------------------------------------------------- --------------------------------
$ 828,349 $ -
- -------------------------------------------------------------------------------- --------------------------------
</TABLE>
All or any part of the principal amount of the Notes outstanding at
December 31, 1999, and any interest thereon, is convertible, at the
option of the holder, on or before the due date, into fully paid and
non-assessable common shares of the Company at a conversion price of
US$0.625 per common share in the case of the notes described in Notes 5
(i) and (iii), above, and at a conversion price of US$0.50 in the case of
those described in Notes (ii) . The notes are unsecured.
<PAGE>
5. NOTES PAYABLE (CONTINUED)
On October 19, 1999, the Company negotiated an extension to the repayment
terms of notes payable in the amount of $733,652 to June 30, 2000 (Notes 5
(i) and (iii) above). The renegotiated demand, unsecured, convertible
notes bear interest at 8.75%. All or any portion of the principal , and
any interest thereon, is convertible, at the option of the holder, on or
before the due date, into fully paid and non-assessable common shares of
the Company at a conversion price of U.S.$0.625 per common share. On
October 19, 1999 the Company also negotiated an extension to the repayment
terms of notes payable in the amount of $95,992 (Notes 5 (ii) above,), to
February 28, 2000. The renegotiated demand, unsecured, convertible notes
bear interest at 9%. All or any portion of the principal, and any interest
thereon, is convertible, at the option of the holder, on or before the due
date, into fully paid and non-assessable common shares of the Company at a
conversion price U.S.$0.50 per common share.
<PAGE>
6. SHARE CAPITAL
(a) AUTHORIZED
The Company's authorized share capital consists of 50,000,000
common shares with a par value of $0.001 per share and 5,000,000
non-voting preferred stock also with a par value of $0.001 per
share.
(b) A reconciliation of issued and outstanding share capital of the
Company to amounts previously reported in Alpha Beta Holdings
Ltd. at September 30, 1998 is as follows:
<TABLE>
<S> <C> <C>
Common shares:
Balance, September 30, 1998 1,701,000 $ 1,277
Share consolidation on a 10 for 1 basis (1,530,900) -
- ------------------------------------------------------------------------------------------------------
Balance, September 30, 1998, post share consolidation 170,100 1,277
Issued for cash 3,197,400 49,879
- ------------------------------------------------------------------------------------------------------
Balance prior to business combination 3,367,500 51,156
Adjustment of stated value of common shares
at reverse acquisition to value of common shares
of MDU (Note 4) - (841)
Issued on acquisition of the Company (Note 4) 5,213,835 35,222
- ------------------------------------------------------------------------------------------------------
Balance subsequent to reverse acquisition 8,581,335 85,537
Exercise of warrants 640,000 1,474,183
- ------------------------------------------------------------------------------------------------------
Balance, September 30, 1999 9,221,335 1,559,720
Issued for cash 2,152,750 2,293,720
Issued for Services Agreement 100,000 53,125
- ------------------------------------------------------------------------------------------------------
Balance, December 30, 1999 11,474,085 $ 3,906,565
- ------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
6. SHARE CAPITAL (CONTINUED)
(c) STOCK OPTION PLANS (CONTINUED)
The following table summarizes information concerning stock
options outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Exercise
Number of price
options U.S. $ Expiry date
------------------ ----------------- ---------------------
<S> <C> <C> <C>
300,000 $ 1.00 November 24, 2003
100,000 1.50 December 31, 2003
40,000 1.50 March 1, 2004
33,885 1.50 April 1, 2004
</TABLE>
The weighted average exercise price of all options outstanding at
December 30, 1999 is U.S. $1.18.
7. SHARE SUBSCRIPTIONS RECEIVED
On December 30, 1999, the Company received subscriptions to purchase
225,000 shares for net proceeds, after expenses of the issue, of
$257,638. These shares were issued on January 31,2000.
<PAGE>
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
(i) The Company has been named as the Defendant in an action by
Shaw Cable Systems Ltd. ("Shaw") in which Shaw seeks an
injunction and $2 million in damages as a result of alleged
trespass and loss of business as a result of certain
activities allegedly carried out by the Company. Shaw and the
Company have jointly agreed that no further steps will be
taken in this action by either party until the parties have
completed their current negotiations with respect to customer
connection procedures. Given the preliminary stage of the
proceedings, it is not presently possible to estimate or
determine whether there will be any loss to the Company, and
the amount, if any, of such loss will be recorded in the
period in which it becomes determinable. However, if the
negotiations are unsuccessful and if Shaw were successful in
its claim for damages, the Company's unsuccessful defence
would have a material adverse effect on the Company's
financial condition and operations.
(ii) The Company has also been named as a Defendant in a claim by
Whistler Cable Television Ltd. claiming damages for conversion,
the return of personal property, an injunction and costs. The
Company has filed a Defense disputing the Plaintiff's has any
legal right to bring the action, and alleging that in any event
the amount of damages suffered, if any, is minimal. This case is
still in the pre-discovery phase. Given the preliminary stage of
the proceedings, it is not presently possible to estimate or
determine whether there will be any loss to the Company, and the
amount, if any, of such loss will be recorded in the period in
which it becomes determinable.
(iii) The Company has received letters from counsel for Rogers
Cablesystems ("Rogers") threatening legal action based on certain
activities allegedly done by the Company. The Company's solicitors
have replied to the concerns expressed in each of those letters
and there have been no further steps taken by Rogers or its
counsel with respect to any of the matters. The Company continues
to negotiate with Rogers with respect to other matters of joint
interest, including a proposed Protocol to govern service
conversion issues.
9. SEGMENTED INFORMATION
The Company operates in one industry segment. The Company's operations
are comprised of providing delivery of home entertainment and information
technology to multi-unit dwellings. All of the Company's operations,
assets, employees and revenues are located in Canada.
10. RELATED PARTY TRANSACTIONS
The Company purchased equipment and satellite subscribers on December 31,
1998 for $157,689 from a relative of the Company President. In addition,
the Company granted stock options to a relative of the Company's
President to purchase 100,000 common shares of the Company at an exercise
price of U.S. $1.50 until December 21, 2003, in exchange for consultative
services. See Note 7 (c)(iii).
<PAGE>
11. SUBSEQUENT EVENTS
a) On January 31, 2000 the Company completed two private placements. One
private placement consisted of 125,000 common shares at US$0.80 per
share for gross proceeds of US$100,000. The other private placement
consisted of 699,999 units at US$0.75 per unit for gross proceeds of
US$525,000. Each unit consists of one common share and one common
share purchase warrant exercisable for 2 years at US$1.00 per share.
b) On February 1, 2000 the Company completed its offering of 3.09
million shares of Series A Convertible Preferred Stock at an issue
price of US$2.50 per share for gross proceeds of US$7,725,000. The
net proceeds of the offering will be added to the Company's working
capital and allow the Company to expand its deployment of service in
Canada and enter the U.S. market.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
NOTE REGARDING FORWARD-LOOKING STATEMENTS
The statements contained in this Management's Discussion and Analysis that are
not historical in nature are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Forward-looking statements are
subject to risks and uncertainties that could cause actual results to differ
materially from those indicated in the forward-looking statements. Factors that
could cause or contribute to such differences include, but are not limited to,
those identified as "Risk Factors" in the Company's Form 10-KSB for the fiscal
year ended September 30, 1999, filed on December 27, 1999, and other factors
identified from time to time in the Company's reports filed with the Securities
and Exchange Commission.
OVERVIEW
MDU Communications International Inc. (the "Company"), formerly known as Alpha
Beta Holdings, Ltd., was incorporated in July 1995 as a Colorado corporation to
engage in the business of establishing and operating brew pubs. Through
September 1998, the Company was essentially inactive. In November 1998, Alpha
Beta Holdings, Ltd. acquired all of the outstanding capital stock of MDU
Communications Inc., an unaffiliated company, and changed its name to MDU
Communications International, Inc. It now operates as a holding company with a
fiscal year end of September 30 and has MDU Communications, Inc. as its sole
subsidiary.
The Company is a nationally authorized Star Choice System Operator providing
home entertainment and information technology to the residents of multi-dwelling
units (MDUs) such
<PAGE>
as apartment buildings, condominiums, gated communities, hotels and motels. In
August 1998, the Company entered into a ten-year System Operator Agreement (with
five-year renewal options) with Star Choice under which the Company will
establish and maintain distribution systems in MDU's throughout Canada and act
as a commissioned system operator for Star Choice. Under this agreement, the
Company is entitled to 100% of the monthly "digital access fee" (currently
CDN$5.95 per month) and a 30% share of Star Choice's monthly subscriber revenue.
The Company offers complete building wiring infrastructures, systems and
hardware and digital set-top receivers required to bring digital satellite
viewing to the residents and owners/managers of MDUs in Canada. The Company
contracts with owners and managers of MDUs to facilitate delivery of these
entertainment and technology services. Revenue initially results from sharing in
the monthly Star Choice programming fees charged to the residents for satellite
TV service. Once a building has been wired or the existing wiring has been
upgraded, the infrastructure is in place to provide other services such as home
security, local telephone services and high speed Internet access which may
provide additional revenue to the Company.
The Company also designs and supplies satellite master antennae television
(SMATV) systems for multi-dwelling properties. A SMATV system is capable of
receiving and distributing satellite and local television programming to the
residents of MDUs, thereby eliminating the need for a cable TV provider. As of
December 31, 1999, the Company had over 11,973 subscribers in 142 buildings.
The Company has incurred operating losses since inception and does not expect to
generate profitable operations until fiscal 2000 or later. The Company's funding
of its operating expenses, working capital needs and capital commitments is
dependent upon its ability to raise financing through private placements of both
equity and debt securities.
BASIS OF PRESENTATION
The Company's Consolidated Financial Statements for the three months ended
December 31, 1999 have been stated in Canadian dollars and the Company has
designated the Canadian dollar as its functional and reporting currency on the
basis that the principal business and activity of the Company is located and
conducted in Canada. The business combination of Alpha Beta Holdings, Ltd. and
MDU Communications Inc. has been accounted for as a reverse acquisition whereby
MDU Communications Inc. was identified as the acquirer and the assets and
liabilities of Alpha Beta Holdings, Ltd. were acquired at fair value. In
accordance with generally accepted accounting principles for reverse
acquisitions, the consolidated financial statements of the Company as at and for
the three months ended December 31, 1999 reflect the historical results of MDU
Communications Inc. and the related assets and liabilities at their historic
cost. The operations of Alpha Beta Holdings, Ltd. being the legal parent and
accounting subsidiary are reflected in the consolidated financial statements
from November 22, 1998, and its assets and liabilities are reflected at their
fair value at the date of acquisition. Since Alpha Beta Holdings, Ltd. was
essentially inactive prior to the business combination, this Management's
Discussion and Analysis will relate to the continuing Canadian operations of the
Company.
GENERAL
<PAGE>
The following discussion of the results of operations and financial condition of
the Company should be read in conjunction with the Company's Consolidated
Financial Statements and accompanying Notes included elsewhere in this report.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO THE THREE MONTHS ENDED DECEMBER
31, 1998
NET REVENUE (LOSS). The Company's revenue for the three months ended
December 31, 1999 of CDN$311,888 was comprised of 33% SMATV revenue, 40% net
programming revenue from Star Choice and 18% from digital access fees and 9%
from equipment sales. SMATV revenue represented approximately 8,547 subscribers,
and the Direct To Apartment Set Top Box revenue represented approximately 3,426
subscribers compared to 57 subscribers for the same period of the prior year.
COST OF SALES. Direct costs are primarily comprised of SMATV
programming and maintenance costs plus equipment costs and are 59% of net
revenue for the three months ended December 31, 1999 compared to 95% for the
same period of the prior year. Salaries, wages, commissions and benefits make up
74% of the total sales expenses for the three months ended December 31, 1999 and
the balance of 26% is primarily travel, advertising and telephone expenses.
G&A EXPENSES. General and administrative ("G&A") expenses of
CDN$462,667 were 3% lower than for the same period of the prior year but were as
expected for the Company's planned market expansion. Advertising, promotion, and
travel/vehicle costs were CDN$27,402 or 5.9% of the total G&A expense and
office, occupancy, repairs & maintenance and telephone costs were CDN$83,323 or
18.0% of the total. Wages, professional and consulting fees were CDN$249,706 or
54.0% of G&A expenses. Foreign exchange gain of CDN$96,512 was 20.9% of the
total G&A expense. Non-cash charges consisted of amortization expense of
CDN$130,293 or 28.2% of the total G&A expenses. The balance of the general and
administrative expenses were made up of interest and investor relations expenses
of CDN$68,330 or 14.8% of the total G&A expenses.
STOCK OPTION COMPENSATION CHARGES. For the three months ended December
31, 1998, CDN$449,445 of the G&A expenses were non-cash items due to stock
option compensation charges. The Company accounts for its stock based employee
compensation plans under APB No. 25 whereby compensation cost is recorded for
the excess, if any, of the quoted market price of the common shares over the
exercise price at the date of the grant for all employee common stock options
issued. Compensation cost in the amount of CDN$222,000 was recorded for 300,000
directors'/officers' and employees' options granted at a weighted average
exercise price of US$1.00. At December 31, 1998, the Company granted stock
options to purchase 100,000 common shares of the Company at an option price of
US$1.50 for consultative and other services provided by a relative of the
Company. The fair value of these options in the amount of CDN$177,445 has been
recorded as a consulting expense (see note 7(c) on the Notes to the Consolidated
Financial Statements). Stock option compensation charges in the amount of
CDN$50,000 was recorded as sales expenses based on the fair value of stock
options issued to
<PAGE>
suppliers calculated on the date an eligible supplier completes the performance
required to earn the options.
NET LOSS. The Company reported a net loss of CDN$665,753 for the three
months ended December 31, 1999, up from a net loss of CDN$592,628 for the three
months ended December 31, 1998. This increase is primarily attributable to the
increased costs to operate over 11,973 subscribers in over 142 buildings
compared to 57 subscribers for the same period of the prior year. These costs
were comprised of direct costs, sales, general and administrative expenses,
including non-cash stock option compensation charges.
LIQUIDITY AND CAPITAL RESOURCES
THREE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO THE THREE MONTHS ENDED DECEMBER
31, 1998
CASH POSITION. At December 31, 1999, the Company had cash and cash
equivalents of CDN$68,324 compared to CDN$829,293 at December 31, 1998. The
decrease in the Company's cash position is mainly due to proceeds received from
the exercise of warrants and proceeds from share subscriptions and convertible
notes made in December 1998 and these proceeds have been used for the Company's
operations during 1999.
OPERATING ACTIVITIES. Net cash of CDN$662,410 was used in operating
activities during the three months ended December 31, 1999 which primarily
resulted from the Company's net loss of CDN$665,753 compared to a net cash loss
for the three months ended December 31, 1998 of CDN$128,050 which was comprised
of the Company's net loss of CDN$592,628 being offset by non cash charges of
CDN$449,445 of stock option compensation charges. In addition the Company
recorded a recovery of cash for the three months ended December 31, 1998 in the
amount of CDN$9,523 from changes in operating assets and liabilities.
INVESTING ACTIVITIES. Net cash of CDN$69,923 was used in investing
activities during the three months ended December 31, 1999 compared to
CDN$436,501 for the same period of the prior year. These investing activities
for both periods were mainly comprised of purchases of telecommunications
equipment used in the reception of the digital satellite signal except for the
purchase of satellite subscribers of CDN$157,689 on December 31, 1998.
FINANCING ACTIVITIES. Net cash of CDN$757,036 was generated from
financing activities during the three months ended December 31, 1999. This was
mainly the result of the issuance of 1,062,750 common shares of the Company for
net cash of CDN$500,693 and receiving subscriptions for 225,000 common shares of
the Company for net cash of CDN$257,638. Net cash of CDN$1,374,338 was generated
from financing activities during the three months ended December 31, 1998 due to
the exercise of warrants to issue 640,000 shares of common stock of the Company
for CDN$1,474,184 of net cash proceeds and the issuance of 5,213,675 shares of
common stock of the Company for CDN$50,155 issued on the business acquisition of
Alpha
<PAGE>
Beta Holdings Ltd. In addition, the Company paid out the net balance owing on
the promissory notes totaling CDN$150,000.
WORKING CAPITAL. The Company believes that its available cash resources
and working capital should be sufficient to satisfy the funding of its operating
expenses, repayment of obligations and other operating and capital requirements
for the current fiscal year. The Company's working capital requirements will
depend upon numerous factors, including: the progress of the Company's
deployment to obtain new subscribers, the ability of the Company to develop new
strategic alliances or arrangements for complementary services with other
organizations and the cost advantages of new technological advances in the
satellite TV marketplace.
MARKET RISK. The Company is exposed to market risk related to changes
in interest and foreign exchange rates, each of which could adversely affect the
value of the Company's current assets and liabilities. The Company has not
entered into any forward currency contracts or other financial derivatives to
hedge foreign exchange risk, hence, the Company is subject to such risk from
foreign currency transactions and translation gains and losses. The Company does
not currently engage in significant operating transactions denominated in
foreign currencies so any change in the CDN/US dollar exchange rate would not
have a material effect on its future operating cash flows. The Company is
subject to foreign currency risk on the interest and repayment provisions of its
U.S. denominated convertible notes payable which are in the process of being
re-negotiated. Based on the US$392,000 of US dollar convertible notes
outstanding at December 31, 1999, an immediate decline of 10% in the value of
the Canadian dollar relative to the US dollar would result in an additional
exchange loss of US$26,533 and additional interest expense of approximately
US$2,300 on an annualized basis. The Company does not currently have an interest
bearing investment portfolio nor liabilities subject to variable interest rates.
As a result, any change in the prime interest rate would also not have a
material impact on the Company's future operating results or cash flows based on
the terms of existing liabilities.
CAPITAL COMMITMENTS AND CONTINGENCIES. The Company has signed
agreements with building owners to supply the home entertainment and information
technology to the residents of buildings but the Company has no current capital
expenditure commitments to commence the installation Of these services until
management gives the appropriate approval.
RECENT EVENTS
REGULATION S OFFERINGS. On January 31, 2000, the Company completed two
private placements. One private placement consisted of 125,000 common shares at
US$0.80 per share for gross proceeds of US$100,000. The other private placement
consisted of 699,999 units at US0.75 per unit for gross proceeds of US$525,000.
Each unit consists of one common share and one common share purchase warrant
exercisable for 2 years at US$1.00 per share.
PREFERRED STOCK OFFERING. On February 1, 2000 the Company completed its
offering of 3.09 million shares of Series A Convertible Preferred Stock at an
issue price of US$2.50 per share for gross proceeds of US$7,725,000. The net
proceeds of this offering plus the above private placement will be added to the
Company's working capital and allow the Company to expand its deployment of
service in Canada and enter the U.S. market during the Company's current fiscal
year.
<PAGE>
FUTURE CAPITAL REQUIREMENTS
The Company may require additional capital in the future to fund i)
deployment of satellite TV services in excess of the Company's expectations
during the current fiscal year and ii) strategic acquisitions of existing
subscriber bases or businesses and iii) capital to fund complementary services
that may prove beneficial to the Company. The Company could seek funding from a
combination of sources, including additional private placements or equity and
debt financings from other sources. No assurance can be given that additional
funding would be available on terms acceptable to the Company.
SEASONALITY
None
YEAR 2000 ISSUES
As of January 31, 2000, the Company had not experienced any adverse effects on
its financial, informational or operational systems due to the changeover to the
year 2000.
<PAGE>
PART II
ITEM 1 - LEGAL PROCEEDINGS
From time to time, we may be subject to legal proceedings and claims which may
have a material adverse effect on our business. We are not aware of any current
legal proceedings or claims that will have, individually or in the aggregate, a
material adverse effect on our business, prospects, financial condition or
results of operations.
ITEM 2 - CHANGES IN SECURITIES
NONE DURING THE PERIOD COVERED BY THIS REPORT.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
NONE.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
NONE.
ITEM 5 - OTHER INFORMATION
NONE
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS.
The following documents are filed as exhibits to this quarterly report:
<TABLE>
<S> <C>
3.1 Certificate of Incorporation (1)
3.2 Bylaws (1)
3.3 Amendment to Bylaws (2)
4.1 See Article IV of Certificate of Incorporation filed as Exhibit 2.1
27 Financial Data Schedule (3)
</TABLE>
- ---------------
(1) Incorporated by reference from Form 10-SB filed on May 12, 1999
(2) Incorporated by reference from Form 10-KSB filed on December 27, 1999
(3) Filed with this Current Report on Form 8-K.
(b) REPORTS ON FORM 8-K DURING THE QUARTER COVERED BY THIS REPORT.
On November 23, 1999, the Company filed a Current Report on Form 8-K
reporting, as of August 19, 1999, a change of independent accountants.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
MDU COMMUNICATIONS INTERNATIONAL, INC.
By: /s/ Douglas S. Irving
-------------------------------------
Name: Douglas S. Irving
----------------------------------
Title: Controller
---------------------------------
Dated February 11, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF MDU COMMUNICATIONS INTERNATIONAL,
INC. FOR THE QUARTER AND THREE MONTHS ENDED DECEMBER 31, 1999, AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 68,324
<SECURITIES> 0
<RECEIVABLES> 321,424
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 453,807
<PP&E> 3,799,208
<DEPRECIATION> (295,738)
<TOTAL-ASSETS> 4,076,534
<CURRENT-LIABILITIES> 2,552,144
<BONDS> 0
0
0
<COMMON> 3,906,565
<OTHER-SE> (2,966,675)
<TOTAL-LIABILITY-AND-EQUITY> 4,076,534
<SALES> 311,888
<TOTAL-REVENUES> 311,888
<CGS> 182,951
<TOTAL-COSTS> 977,641
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,353
<INCOME-PRETAX> (665,753)
<INCOME-TAX> 0
<INCOME-CONTINUING> (665,753)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (665,753)
<EPS-BASIC> (.06)
<EPS-DILUTED> (.06)
</TABLE>
