<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 3
TO
FORM 10-QSB
/X/ Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
FOR THE QUARTER ENDED MARCH 31, 2000
/ / 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
equity, as of the latest practicable date: AS OF MAY 5, 2000 THERE WERE
13,371,820 SHARES OF COMMON STOCK AND 3,637,200 SHARES OF SERIES A CONVERTIBLE
PREFERRED STOCK.
PART I - FINANCIAL INFORMATION
EXCHANGE RATES
<PAGE>
All dollar amounts in this report are stated in Canadian 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 MARCH 31, 2000
------------------------------------
<S> <C>
Rate at end of fiscal quarter: 1.4811
Average rate for fiscal quarter: 1.4538
</TABLE>
ITEM 1. FINANCIAL STATEMENTS
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
INTERIM CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN CANADIAN DOLLARS)
(UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31, September 30,
2000 1999
------------ -------------
<S> <C> <C>
ASSETS
CURRENT
Cash and cash equivalents $ 9,122,224 $ 43,621
Prepaid expenses and deposits 31,497 15,407
Accounts receivable
Trade 197,696 178,607
Sales tax and other 166,358 79,847
-------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 9,517,775 317,482
PROPERTY AND EQUIPMENT, net (Note 5) 4,240,286 3,556,386
INTANGIBLE ASSETS
(net of accumulated amortization of $37,268
September 30, 1999 - $22,361) 111,803 126,710
-------------------------------------------------------------------------------
TOTAL ASSETS $ 13,869,864 $ 4,000,578
-------------------------------------------------------------------------------
LIABILITIES
CURRENT
Accounts payable $ 718,820 $ 1,648,193
Wages payable 98,965 37,451
Other accrued liabilities 97,509 106,604
Notes payable (Note 6) -- 829,644
-------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 915,294 2,621,892
-------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock (Note 7) 5,588,789 1,559,720
Preferred stock (Note 7) 8,679,973 --
Share purchase options 2,191,740 649,445
Share purchase warrants (Note 7(d)) 6,831,684 --
Share subscriptions received -- 1,793,026
Deficit accumulated during the development stage (10,337,616) (2,623,505)
-------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 12,954,570 1,378,686
-------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 13,869,864 $ 4,000,578
-------------------------------------------------------------------------------
</TABLE>
CONTINUING OPERATIONS (Note 2)
CONTINGENCIES (Note 9)
See accompanying notes to the interim consolidated financial statements.
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(EXPRESSED IN CANADIAN DOLLARS)
(UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the period For the period
from inception from inception
of the of the
development For the six For the six For the three For the three development
stage to months ended months ended months ended months ended stage to
March 31, March 31, March 31, March 31, March 31, September 30,
2000 2000 1999 2000 1999 1999
-------------- ------------ ------------ ------------- ------------- --------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (As restated)
<S> <C> <C> <C> <C> <C> <C>
REVENUE $ 1,152,487 $ 585,789 $ 142,482 $ 273,901 $ 140,538 $ 566,698
DIRECT COSTS 666,219 326,649 126,280 143,698 124,426 339,570
-----------------------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 486,268 259,140 16,202 130,203 16,112 227,128
-----------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME 80,241 80,241 -- 80,241 0 --
-----------------------------------------------------------------------------------------------------------------------------------
SALES EXPENSE 2,218,630 867,241 360,783 535,218 244,993 1,351,389
-----------------------------------------------------------------------------------------------------------------------------------
GENERAL AND ADMINISTRATIVE
EXPENSES
Advertising and promotion 47,881 7,541 3,183 456 3,183 40,340
Amortization 465,274 270,014 15,535 139,720 9,925 195,260
Consulting 1,259,092 1,081,647 177,445 1,028,522 0 177,445
Foreign exchange loss (gain) (82,327) (121,822) 33,064 (25,310) 33,064 39,495
Interest 84,592 50,243 3,988 24,890 2,527 34,349
Financing (Note 7(d)(ii)) 4,241,424 4,241,424 -- 4,241,424 0 --
Investor Relations 179,030 110,198 36,652 67,221 28,802 68,832
Management Fee 26,500 -- -- 0 0 26,500
Office 232,353 175,185 15,070 158,945 7,541 57,168
Occupancy 134,221 64,392 12,872 31,348 9,309 69,829
Professional fees 467,737 324,040 12,086 245,265 13,962 143,697
Repairs and maintenance 46,569 35,268 3,141 26,822 2,820 11,301
Telephone 113,369 62,315 9,303 36,723 7,196 51,054
Travel 105,942 56,291 20,833 41,674 13,993 49,651
Vehicle 22,281 7,792 6,644 2,092 4,266 14,489
Wages 1,341,557 821,723 324,526 703,792 60,826 519,834
-----------------------------------------------------------------------------------------------------------------------------------
8,685,495 7,186,251 674,342 6,723,584 197,414 1,499,244
-----------------------------------------------------------------------------------------------------------------------------------
NET LOSS FOR THE PERIOD $(10,337,616) $(7,714,111) $ (1,018,923) $(7,048,358) $(426,295) $(2,623,505)
-----------------------------------------------------------------------------------------------------------------------------------
Adjustment for beneficial conversion
feature of convertible preference
shares (Note 7(b)) $(11,147,175) $ -- $(11,147,145) $ --
Adjustment for beneficial conversion
feature of warrants (Note 7(d)(iii)) (355,047) -- (355,047) --
-----------------------------------------------------------------------------------------------------------------------------------
NET LOSS FOR THE PERIOD ATTRIBUTABLE
TO COMMON SHAREHOLDERS $(19,216,333) $ (1,018,923) $(18,550,580) $ (426,295)
-----------------------------------------------------------------------------------------------------------------------------------
BASIC AND DILUTED
LOSS PER COMMON SHARE $ (1.86) $ (0.11) $ (1.51) $ (0.05)
-----------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 10,341,555 9,221,335 12,270,873 9,221,335
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the interim consolidated financial statements.
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
INTERIM CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
(EXPRESSED IN CANADIAN DOLLARS)
(UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Warrants/options
Share and additional
Subscriptions paid-in capital
Common stock Received to purchase shares
----------------------- ------------------------- ------------------
Shares Amount Shares Amount Amount
--------- ---------- ---------- ----------- ------------
<S> <C> <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 3,367,500 50,155 -- -- --
Issued on business acquisition
(Note 4) 5,213,675 35,222 -- -- --
Exercise of warrants 640,000 1,474,183 -- -- --
Grant of employees' options -- -- -- -- 222,000
Suppliers' options issued and issuable -- -- -- -- 250,000
Grant of options to consultant -- -- -- -- 177,445
Issued for cash (net of expenses
of the issue of $176,437) -- -- 670,000 1,544,924 --
Issued for cash -- -- 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 1,793,026 649,445
------------------------------------------------------------------------------------------------------------------------------------
Issued for subscriptions 1,090,000 1,793,026 (1,090,000) (1,793,026) --
Issued for cash 1,887,749 1,054,853 -- -- 355,047
Issued for services 100,000 53,125 -- -- --
Cancelled (50,000) (26,563)
Exercise of stock options 125,000 273,600 -- -- (92,500)
Conversion of notes payable to shares 997,736 881,028 -- -- --
Grant of employee stock options -- -- -- -- 523,998
Grant of consultants' and supplier stock options -- -- -- -- 1,110,797
Issue of preferred stock (net of expenses of
issue $2,206,013) -- -- -- -- --
Beneficial conversion feature related to
convertible preferred stock and warrants
issued in connection with a private
placement -- -- -- -- (11,502,222)
Accretion of beneficial conversion feature
related to convertible preferred stock and
warrant -- -- -- -- 11,502,222
Issue of share purchase warrants -- -- -- -- 6,476,637
Net loss for the six months
ended March 31, 2000 -- -- -- -- --
------------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2000 13,371,820 $5,588,789 -- $ -- $ 9,023,424
====================================================================================================================================
<CAPTION>
Deficit
Convertible accumulated
Preferred stock during the
----------------------- development
Number Amount stage 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 4) -- -- -- 35,222
Exercise of warrants -- -- -- 1,474,183
Grant of employees' options -- -- -- 222,000
Suppliers' options issued and issuable -- -- -- 250,000
Grant of options to consultant -- -- -- 177,445
Issued for cash (net of expenses
of the issue of $176,437) -- -- -- 1,544,924
Issued for cash -- -- -- 248,102
Net loss for the year
ended September 30, 1999 -- -- (2,525,660) (2,525,660)
----------------------------------------------------------------------------------------------------------------
Balance, September 30, 1999 (2,623,505) 1,378,686
----------------------------------------------------------------------------------------------------------------
Issued for subscriptions -- -- -- --
Issued for cash -- -- -- 1,409,900
Issued for services -- -- -- 53,125
Cancelled (26,563)
Exercise of stock options -- -- -- 181,100
Conversion of notes payable to shares -- -- -- 881,028
Grant of employee stock options -- -- -- 523,998
Grant of consultants' and supplier stock options -- -- -- 1,110,797
Issue of preferred stock (net of expenses of
issue $2,206,013) 3,637,200 8,679,973 -- 8,679,973
Beneficial conversion feature related to
convertible preferred stock and warrants
issued in connection with a private
placement -- -- -- (11,502,222)
Accretion of beneficial conversion feature
related to convertible preferred stock and
warrant -- -- -- 11,502,222
Issue of share purchase warrants -- -- -- 6,476,637
Net loss for the six months
ended March 31, 2000 -- -- (7,714,111) (7,714,111)
----------------------------------------------------------------------------------------------------------------
Balance, March 31, 2000 3,637,200 $8,679,973 $(10,337,616) $ 12,954,570
================================================================================================================
</TABLE>
See accompanying notes to the interim consolidated financial statements.
<PAGE>
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS
(EXPRESSED IN CANADIAN DOLLARS)
(UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the period
from inception
of the development For the six For the six For the three
stage to months ended months ended months ended
March 31, March 31, March 31, March 31,
2000 2000 1999 2000
--------------- ------------ ------------ -------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss for the period $(10,337,616) $(7,714,111) $(1,018,923) $(7,048,358)
Adjustments to reconcile net loss for the
period to cash utilized in operating activities
Amortization 465,274 270,014 15,535 139,720
Non-cash portion of wages expense (Note 7 (c)(ii)) 745,998 523,998 222,000 523,998
Non-cash consulting expense (Note 7 (c)(iii)) 1,220,726 1,043,281 177,445 1,043,281
Non-cash portion of sales expense (Note 7 (c)(i)) 165,567 64,418 116,149 49,418
Non-cash portion of financing charges (Note 7 (d)(ii)) 4,241,424 4,241,424 -- 4,241,424
Consulting fee settled with shares 26,562 26,562 -- (26,562)
Change in operating assets and liabilities:
Prepaid expenses and deposits (31,497) (16,090) (29,291) (1,495)
Accounts receivable (364,054) (105,600) (153,905) (8,573)
Accounts payable 718,822 (929,371) 387,917 (822,786)
Wages payable 98,965 61,514 17,681 88,965
Other accrued liabilities 99,470 (22,134) 29,131 (71,422)
------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (2,950,359) (2,556,095) (236,261) (1,892,390)
------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Cash acquired on acquisition of subsidiary (Note 4) 35,222 -- 35,222 --
Purchase of property and equipment (4,466,925) (871,490) (961,035) (801,567)
Purchase of intangible assets (149,071) -- (149,071) --
------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (4,580,774) (871,490) (1,074,884) (801,567)
------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from notes payable 275,000 -- 125,000 --
Repayment of notes payable (275,000) -- (275,000) --
Proceeds from convertible notes payable 829,644 -- -- --
Proceeds from issue of common stock 1,286,271 1,235,956 50,154 477,625
Proceeds from issue of preferred stock 10,915,185 10,915,185 -- 10,915,185
Proceeds from issue of warrants 355,047 355,047 -- 355,047
Proceeds from exercise of warrants 1,474,184 -- 1,474,184 --
Proceeds from share subscriptions received 1,793,026 -- -- --
------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 16,653,357 12,506,188 1,374,338 11,747,857
------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 9,122,224 9,078,603 63,193 9,053,900
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD -- 43,621 19,506 68,324
------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 9,122,224 $ 9,122,224 $ 82,699 $ 9,122,224
------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid $ 10,863 $ 7,030 $ 3,833 $ 20,507
------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW DISCLOSURE OF CASH AND CASH EQUIVALENTS
Cash $ 51,452 $ 51,452 $ 82,699 $ 51,452
Short term investments 9,070,772 9,070,772 -- 9,070,772
------------------------------------------------------------------------------------------------------------------------------
$ 9,122,224 $ 9,122,224 $ 82,699 $ 9,122,224
------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
For the period
from inception
For the three (March 26,
months ended 1998) to
March 31, September 30,
1999 1999
------------- --------------
(Unaudited) (As restated)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss for the period $(426,295) $(2,623,505)
Adjustments to reconcile net loss for the
period to cash utilized in operating activities
Amortization 9,925 195,260
Non-cash portion of wages expense (Note 7 (c)(ii)) -- 222,000
Non-cash consulting expense (Note 7 (c)(iii)) -- 177,445
Non-cash portion of sales expense (Note 7 (c)(i)) 66,149 116,149
Non-cash portion of financing charges (Note 7 (d)(ii)) -- --
Consulting fee settled with shares -- --
Change in operating assets and liabilities:
Prepaid expenses and deposits 17,220 (15,407)
Accounts receivable (121,144) (258,454)
Accounts payable 329,270 1,648,193
Wages payable 17,681 37,451
Other accrued liabilities (1,017) 106,604
---------------------------------------------------------------------------------------------
Net cash used in operating activities (108,211) (394,264)
---------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Cash acquired on acquisition of subsidiary (Note 4) -- 35,222
Purchase of property and equipment (647,001) (3,595,435)
Purchase of intangible assets 8,618 (149,071)
---------------------------------------------------------------------------------------------
Net cash used in investing activities (638,383) (3,709,284)
---------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from notes payable -- 275,000
Repayment of notes payable -- (275,000)
Proceeds from convertible notes payable -- 829,644
Proceeds from issue of common stock -- 50,315
Proceeds from issue of preferred stock -- --
Proceeds from issue of warrants -- --
Proceeds from exercise of warrants -- 1,474,184
Proceeds from share subscriptions received -- 1,793,026
---------------------------------------------------------------------------------------------
Net cash provided by financing activities 0 4,147,169
---------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS (746,594) 43,621
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 829,293 0
---------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 82,699 $ 43,621
---------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid $ -- $ 32,321
---------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW DISCLOSURE OF CASH AND CASH EQUIVALENTS
Cash $ 82,699 $ 43,621
Short term investments -- --
---------------------------------------------------------------------------------------------
$ 82,699 $ 43,621
---------------------------------------------------------------------------------------------
</TABLE>
SUPPLEMENTAL CASH FLOW DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES
During the six months ended March 31, 2000, the Company recorded non-cash
additions to property and equipment in the amount of $67,516 (six months ended
March 31, 1999 - $133,851) representing the fair value of share purchase options
issued to suppliers. See Note 7 (c)(i).
During the six months ended March 31, 2000, the Company issued 50,000 common
shares valued at $26,562, in exchange for consulting fees received.
During the six months ended March 31, 2000, the notes payable valued at $829,644
at September 30, 1999 were converted to 997,736 common shares (Note 6).
During the six months ended March 31, 2000, the Company issued 547,200 shares
of Series A Convertible Preferred Stock with a fair value of US$1,368,000 in
exchange for agent's services as described in Note 7(b).
See accompanying notes to the interim consolidated financial statements.
<PAGE>
--------------------------------------------------------------------------------
MDU COMMUNICATIONS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE INTERIM CONSOLIDATED 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 interim 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 for periods prior to the reverse acquisition represent
the historical results of operations, cash flows and financial position of
the accounting parent, MDU.
2. CONTINUING OPERATIONS
The financial statements have been prepared on the going concern basis of
accounting which contemplates realization of assets and liquidation of
liabilities in the ordinary course of business. The Company has limited
financial resources, has incurred operating losses since inception and does
not expect to generate profitable operations until fiscal 2001 or later. In
addition, on September 20, 1999, the Company received a demand for payment
with respect to outstanding notes payable with a principal value of
$733,652. The Company has negotiated an extension to the repayment terms of
these notes to June 30, 2000. The Company has also negotiated an extension
to the repayment terms of notes payable in the amount of $95,992 until
February 28, 2000. The Company's funding of its initial operating expenses,
working capital needs and capital commitments is dependent upon its ability
to raise additional financing. The Company is currently pursuing
opportunities to raise financing through private placements of both equity
and debt securities and has engaged an investment banker to assist it in
raising financing through a public equity offering. As a result, on January
28, 2000 the Company issued 3,637,200 Series A Preferred Stock in exchange
for cash proceeds of $10,915,186 (U.S.$7,725,000) net of share issue costs
(Note 7(b)). In addition, the Company completed private placements for
cash of $909,435 as described in Note 7(d)(iii) and on February 28, and
March 8, 2000 the balance of outstanding notes payable were converted into
common shares of the Company (Note 6).
<PAGE>
2. CONTINUING OPERATIONS (CONTINUED)
The Company's ability to continue as a going concern is dependent on its
ability to raise additional funds as required and ultimately to achieve
profitable operations. The financial statements do not include any
adjustments that might result from the outcome of the above noted
uncertainties. Adjustments, if any, would affect the carrying value and
classification of assets and liabilities and the amount of net loss and
accumulated deficit.
3. SIGNIFICANT ACCOUNTING POLICIES
These unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the United
States for interim financial information. These interim financial
statements do not include all disclosures required for annual financial
statements and should be read in conjunction with the Company's audited
consolidated financial statements and notes thereto included as part of the
Company's 1998 Annual Report on Form 10-KSB, as amended. All amounts herein
are expressed in Canadian dollars unless otherwise noted.
In the opinion of management, all adjustments (including reclassifications
and normal recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows at March 31, 2000 and 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) DEVELOPMENT STAGE ENTERPRISE
The Company is a development stage enterprise as defined in Statement
of Financial Accounting Standard ("SFAS") No. 7, "Accounting and
Reporting by Development Stage Enterprises." The Company's planned
principal operations have commenced, but the revenue therefrom has
not been significant. At present, the Company is devoting most of its
efforts to activities such as raising capital, research and
development of bundled technological services with its Direct To Home
TV services to multi-dwelling unit properties and developing customer
markets.
<PAGE>
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(c) USE OF ESTIMATES
The preparation of the consolidated 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 and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
(d) REVENUE RECOGNITION
The Company recognizes revenue on provision of satellite
programming to customers in the period the related services
are provided.
(e) 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 the six months ended March 31, 2000
and March 31, 1999 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 of March 31, 2000
the Company had outstanding securities which were convertible and/or
exercisable into 10,129,309 common shares which would be potentially
dilutive in the future.
(f) 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 are 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.
<PAGE>
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(g) COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income," established
standards for the reporting and display of comprehensive income and
its components (revenue, expenses, gains and losses) in a full set
of general-purpose financial statements. The Company has no
comprehensive income items, other than the net loss, in any of the
periods presented.
(h) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's cash and cash equivalents, accounts
receivable, accounts payable, accrued liabilities and notes payable
at March 31, 2000 and September 30, 1999 are estimated to approximate
their carrying values due to the relative liquidity or short-term
nature of these instruments.
(i) 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.
at March 31, 2000, represented 70% of total trade accounts receivable
(September 30, 1999 - 76%). The Company provides an allowance for bad
debts based on historical experience and specifically identified
risk. At March 31, 2000 there was an allowance for doubtful accounts
of $20,000 (September 30, 1999 - $Nil).
(j) RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement
of Position 98-5, "Reporting on the Costs of Start-up Activities"
(SOP 98-5). Under SOP 98-5, the cost of start-up activities are
expensed as incurred. The Company believes that the adoption of
SOP 98-5 does not have a material impact on its financial position
or results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which establishes accounting and reporting standards
for derivative instruments and hedging activities. SFAS No. 133
requires that an entity recognize all derivatives as either assets
or liabilities in the statement of financial position and measure
those instruments at fair value. In 1999, SFAS No. 137 delayed the
required implementation by the Company of SFAS No. 133 to fiscal year
2001. The effect of implementation of SFAS No. 133 on the Company's
financial position or results of operations has not been determined.
4. 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.
Net assets of the Company at date of
acquisition are as follows:
Assets
Cash $35,222
Liabilities -
-----------------------------------------------------------------------
Net assets acquired $35,222
-----------------------------------------------------------------------
<PAGE>
5. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
March 31, September 30,
2000 1999
----------------- ----------------
<S> <C> <C>
Telecommunications equipment, installed $ 3,911,191 $3,295,475
Telecommunications equipment, not yet placed in service 498,352 320,944
Computer equipment 157,955 38,020
Furniture and fixtures 100,794 74,847
----------------------------------------------------------------------------------------------------
4,668,292 3,729,286
Less: accumulated amortization (428,006) (172,900)
----------------------------------------------------------------------------------------------------
$ 4,240,286 $3,556,386
----------------------------------------------------------------------------------------------------
</TABLE>
6. NOTES PAYABLE
The notes payable are summarized as follows:
<TABLE>
<CAPTION>
March 31, September 30,
1999 1999
--------------- ----------------
<S> <C> <C>
i) Demand convertible note payable with a maturity value of Cdn. $250,000,
bearing interest at 8.75%, per annum compounded monthly and due June 30,
2000 (September 30, 1999 - past due as of August 16, 1999). $ - $ 250,000
ii) 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 (September 30, 1999 - past due as of September 15, 1999). - 483,652
iii) Demand convertible note payable with a maturity value of U.S. $40,000,
bearing interest at 9.00% per annum compounded monthly and past due as
of August 31, 1999. - 59,072
iv) Demand convertible note payable with a maturity value of U.S. $25,000,
bearing interest at 9.00% per annum compounded monthly and past due as
of August 31, 1999. - 36,920
v) Notes payable with an aggregate maturity value of Cdn. $150,000,
bearing interest at 7.5% per annum compounded monthly and repayable on
demand. - -
---------------------------------------------------------------------------------------------------------------------------
$ - $ 829,644
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
6. NOTES PAYABLE (CONTINUED)
All or any part of the principal amount of the notes and any interest
thereon was 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$2.00 per common share in the case
of the notes described in Notes 6(iii) and (iv), above, and at a
conversion price of US$1.75 in the case of those described in Notes
6(i) and (ii). The notes are unsecured. The Company was unable to repay
the notes on their respective due dates and on September 16, 1999 the
Company received a demand for payment with respect to outstanding notes
payable with a principal value of $733,652 (Notes 6(i) and (ii)). The
Company was in default at September 30, 1999.
On October 19, 1999, the Company negotiated an extension to the
original repayment terms of notes payable in the amount of $732,571 to
June 30, 2000 (Notes 6 (i) and (ii), 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
US$0.625 per common share. On October 19, 1999 the Company also
negotiated an extension to the original repayment terms of notes
payable in the amount of $95,992 (Notes 6 (iii) and (iv) above), to
February 28, 2000. The renegotiated demand, unsecured, convertible note
bears 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 US$0.50 per common share.
On February 28, 2000, the note payable in the amount of $95,992 plus
accrued interest was converted to 142,399 fully paid and non-assessable
common shares of the Company at a conversion price of US$0.50 per
common share. On March 8, 2000, notes payable totalling $732,571 plus
accrued interest were converted to 855,337 fully paid and
non-assessable common shares of the Company at a conversion price of
US$0.625 per common share. At March 31, 2000 there were no further
notes outstanding.
7. 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 preferred shares also with a par value of $0.001 per
share.
<PAGE>
7. SHARE CAPITAL (CONTINUED)
(b) PREFERRED SHARES
On January 28, 2000, the Company issued 3,637,200 shares of
Series A Convertible Preferred stock (the "Preferred Shares"),
at an issue price of US$2.50 per share, in exchange for cash
proceeds of US$7,725,000 and services in connection with the
private placement with a fair value of US$1,368,000 for total
gross proceeds, prior to expenses of the issue, of
US$9,093,000. The Preferred Shares are immediately
convertible, at the option of the holder, at a conversion
ratio of one common share for one Series A Convertible
Preferred share, until the "Qualification date", which is the
earlier of: (i) the fifth business day following (a) the date
the Company receives a receipt for its final prospectus from
the last of the British Columbia Securities Commission, the
Alberta Securities Commission and the Ontario Securities
Commission (the "Commissions") and (b) the date the Company
has filed with the United States Securities and Exchange
Commission and obtained effectiveness of a registration
statement qualifying the shares and (ii) January 28, 2001.
However, if the final receipt of each of the Commissions is
not issued before June 26, 2000, then the shares convert at a
ratio of 1.15 common shares for each Preferred Share. Any
Preferred Shares that have not been converted by the holder by
the Qualification date will automatically convert at a ratio
of one common share to one Preferred Share. In connection with
the issuance of the Preferred Shares, the Company issued
309,000 share purchase warrants to an agent that provide the
right to purchase one Series A Convertible Preferred Share at
the issue price of US$2.50 per share. The warrants were
assigned a value of US$1,549,004.
The Preferred Shares have a beneficial conversion feature
totalling $11,147,175 (US$7,725,000), measured as the
difference between the conversion price most beneficial to the
investor, of US$2.17, and the fair value of the underlying
common stock at the time of issuance, limited to the amount of
the cash proceeds received. The beneficial conversion feature
is recognized at issuance as an increase in the loss
applicable to common shareholders in the calculation of the
basic loss per share for the six months ended March 31, 2000.
As the Preferred Shares are immediately convertible, the
Company recorded accretion of $11,147,175 to additional
paid-in capital. In addition the Company recorded a preferred
stock dividend representing the value of the beneficial
conversion feature of a corresponding amount.
(c) STOCK OPTION PLANS
(i) Suppliers' Stock Option Plan ("Suppliers' Plan")
On December 31, 1998 the Company established a stock
option plan pursuant to which certain key suppliers
of the Company will be granted options on completion
of specified activities. Under the terms of the
Suppliers' Plan, eligible suppliers can earn options
to purchase an aggregate of 215,135 common shares of
the Company.
<PAGE>
7. SHARE CAPITAL (CONTINUED)
(c) STOCK OPTION PLANS (CONTINUED)
(i) Suppliers' Stock Option Plan ("Suppliers' Plan") (continued)
On March 13, 2000, the Company granted an additional 26,115
options (19,429 of which were earned and recorded at
September 30, 1999) to a supplier under the Plan described
above.
Under the requirements of SFAS No. 123, "Accounting for
Stock-Based Compensation," ("SFAS No. 123") the Company has
recorded stock based compensation charges in connection with
the Suppliers' Plan as follows:
<TABLE>
<CAPTION>
For the six months ended
-------------------------------
March 31, March 31,
2000 1999
------------- -------------
<S> <C> <C>
Additional capital costs of
telecommunications equipment $ 67,516 $ 66,926
Sales expense 64,418 116,149
-----------------------------------------------------------------------
$131,934 $ 183,075
-----------------------------------------------------------------------
</TABLE>
These charges are based on the fair value of the stock
options issued and issuable to suppliers calculated on the
date an eligible supplier completes the performance required
to earn the options. This amount is determined using a Black
Scholes option pricing model assuming a weighted average
annualized volatility of the Company's share price of
approximately 114%. For details of the other material
assumptions used in determination of the fair value of these
options see Note 7 (c)(ii).
(ii) Directors'/Officers' and Employees' Stock Option Plans
("Employee Plans")
On November 24, 1998 the Company established Employee Plans
whereby certain employees, officers and directors will be
granted options to purchase up to an aggregate of 600,000
common shares of the Company.
<PAGE>
7. SHARE CAPITAL (CONTINUED)
(c) STOCK OPTION PLANS (CONTINUED)
(ii) Directors'/Officers' and Employees' Stock Option Plans
("Employee Plans") (continued)
On February 5, 2000 the Company approved the 2000 Incentive
Stock Option Plan ("2000 Option Plan") whereby certain
employees, officers and directors of the Company and its
affiliates were granted options to purchase 2,705,360 common
shares of the Company, of which 2,615,084 have an option
price of US$5.00, being the closing price of the Company's
stock on February 4, 2000. The options have vesting periods
ranging from grant date to three years after the grant date,
and an expiry date of February 4, 2005. The remaining 90,276
options granted were originally authorized as part of the
November 24, 1998 Employee Plans and were redesignated to be
included in the 2000 Option Plan. These options are
exercisable at US$1.00, are fully vested and have an expiry
date of February 4, 2005.
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 grant for all employee stock options issued. For
the six months ended March 31, 2000 compensation cost in the
amount of $523,998 (six months ended March 31, 1999 -
$222,000) has been recorded under this method.
An alternative method of accounting for employee stock
options is SFAS No. 123. Under SFAS No. 123 employee stock
options are valued at the grant date using a fair value
method and the estimated fair value of the options is
amortized to expense over the options' vesting period. The
following pro forma financial information present the net
loss for the period and loss per common share had the
Company adopted SFAS No. 123.
<PAGE>
7. SHARE CAPITAL (CONTINUED)
(c) STOCK OPTION PLANS (CONTINUED)
(ii) Directors'/Officers' and Employees' Stock Option Plans
("Employee Plans") (continued)
<TABLE>
<CAPTION>
For the period from Six months ended
inception of the -------------------------------
development stage to March 31, March 31,
March 31, 2000 2000 1999
---------------------- -------------- -------------
<S> <C> <C> <C>
Pro forma net
loss for the period $ (14,507,463) $(11,500,568) $(1,402,312)
Pro forma loss
per common share $ - $ (2.42) $ (0.15)
</TABLE>
Using the fair value method for stock-based
compensation, as described in SFAS No. 123,
additional compensation costs of approximately
$3,786,457 would have been recorded for the six
months ended March 31, 2000 (six months ended March
31, 1999 - $383,390). The unrecognized value of all
remaining outstanding employee stock options as of
March 31, 2000 is $10,114,166 and will be charged to
pro forma net earnings in future years according to
the vesting terms of the options. This amount is
determined using a Black Scholes options pricing
model assuming no dividends are to be paid, vesting
on date of grant, an expected term of five years, a
weighted average annualized volatility of the
Company's share price of 136% and a weighted average
annualized risk free interest rate of 5.50%.
(iii) Other stock options
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 in recognition
of consultative and other services provided by a
relative of the Company's President. These options
may be exercised in whole or in part at anytime until
December 31, 2003. The fair value of these options in
the amount of $177,445 at date of grant has been
recorded as consulting expense during the six months
ended March 31, 1999. For details of the material
assumptions used in determination of the fair value
of these options see Note 7(c)(ii).
<PAGE>
7. SHARE CAPITAL (CONTINUED)
(c) STOCK OPTION PLANS (CONTINUED)
(iii) Other stock options (continued)
On February 5, 2000 the Company granted an aggregate
of 170,000 stock options for provision of consulting
services by third parties. The options are
exercisable at US$5.00, expire February 4, 2005 and
were also granted under the terms of the 2000 Option
Plan. The Company recorded a stock based compensation
charge in the amount of $1,043,281 during the period
ended March 31, 2000 based on the fair value of the
options granted. The aggregate fair value of the
options at the date of grant was determined using the
Black Scholes model as described in Note 7(c)(i),
assuming an annualized volatility of the Company's
share price of approximately 214%.
(iv) Details of changes in options to date under all Plans
are as follows:
<TABLE>
<CAPTION>
Weighted March 31, Weighted
average 1999 average
March 31, exercise and September 30, exercise
2000 price US$ 1999 price
------------- ------------ --------------------- ------------
<S> <C> <C> <C> <C>
Balance outstanding,
beginning of period 473,885 $ 1.18 - $ -
Activity during the period
Options granted 2,901,475 4.85 473,885 1.18
Options exercised (125,000) 1.00 - -
---------------------------------------------------------------------------------------------
Balance outstanding,
end of period 3,250,360 $ 4.46 473,885 $ 1.18
---------------------------------------------------------------------------------------------
</TABLE>
As at March 31, 2000, the following stock options
were outstanding:
<TABLE>
<CAPTION>
Number of Exercise
Shares Price US$ Expiry Date
----------------- ---------------- ---------------------------------------------------
<S> <C> <C>
265,276 $ 1.00 November 24, 2003 to February 4, 2005
173,885 1.50 December 31, 2003 to April 1, 2004
12,375 1.75 March 12, 2005
13,740 2.00 March 12, 2005
2,785,084 5.00 February 4, 2005
-----------------
3,250,360
-----------------
</TABLE>
Of the outstanding options, 1,393,609 options, as at
March 31, 2000, are presently exercisable and
1,856,751 options are unvested and vest over a three
year period.
<PAGE>
7. SHARE CAPITAL (CONTINUED)
(d) WARRANTS
(i) Details of changes in warrants to date are as
follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Number of price
Warrants US$ Expiry Date
-------------- -------------- ---------------------
<S> <C> <C> <C>
Outstanding at September 30, 1998,
March 31, 1999 and September 30, 1999 - $ -
Issued
Agents' warrants (Note 7(b)) 309,000 2.50 January 28, 2001
Gibralt Capital Corporation (Note 750,000 2.50 March 1, 2002
7(d)(ii))
Private placement units (Note 7(d) (iii)) 699,999 1.00 February 3, 2002
Private placement units (Note 7(d) (iii)) 1,482,750 0.75 November 25, 2001
-------------------------------------------------------------------------------------------------
Outstanding at March 31, 2000 3,241,749 $ 1.22
-------------------------------------------------------------------------------------------------
</TABLE>
(ii) Gibralt Capital Corporation ("Gibralt")
On March 1, 2000, the Company issued a warrant to purchase
750,000 shares of common stock of the Company for a period of
two years, at an exercise price of US$2.50 per share to Gibralt
Capital Corporation. As described in Note 7 (c)(i), under the
requirements of SFAS No. 123, the Company has recorded non-cash
financing charges in the amount of $4,241,424 (US$2,925,927)
based on the fair value of the warrants issued to Gibralt at
March 1, 2000, determined using a Black Scholes option pricing
model, in consideration of Gibralt's termination of a financing
arrangement and an agreement to negotiate in good faith a new
financing agreement with terms more favorable to the Company.
(iii) Private placements
In November 1999 the Company sold 1,482,750 units comprised of
one share of common stock and a warrant to purchase one share
of common stock for US$0.75 per share, for a period of two
years, for US$0.40 per unit. 420,000 of these units had been
subscribed for on September 15, 1999.
<PAGE>
7. SHARE CAPITAL (CONTINUED)
(d) WARRANTS (CONTINUED)
(iii) Private placements (continued)
On February 3, 2000 the Company completed several private
placements subscribed for in December 1999 and January 2000.
One private placement consisted of 125,000 common shares of
US$0.80 per share for gross proceeds of $147,350
(US$100,000). The other private placements consisted of
699,999 units at US$0.75 per unit for gross proceeds of
$766,450 (US$525,000). Each unit consists of one common
share and one common share purchase warrant exercisable for
two years at US$1.00 per share. The gross proceeds were
allocated between the shares and warrants based on the
relative fair value of the unit components at the date the
Company had a contractual liability to issue the units.
Accordingly, the common shares were assigned a value of
$407,038, net of issue costs, and the warrants a value of
$355,047.
The warrants have a beneficial conversion feature totalling
$355,047, measured as the difference between the conversion
price of US$1.00 and the fair value of the underlying common
stock at the date the Company had a contractual liability to
issue the units, limited to the amount of the gross proceeds
received and allocated to the convertible warrants. The
beneficial conversion feature is recognized as an increase in
the loss applicable to common shareholders in the calculation
of the basic loss per share for the six months ended March 31,
2000.
8. CONTINGENCIES
(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.
<PAGE>
8. CONTINGENCIES (CONTINUED)
(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 Defence disputing that 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.
(iv) The Company has entered into management agreements with
certain senior executives, which provide for annual
compensation, excluding bonuses, aggregating approximately
$500,000. The Company can terminate these agreements upon
reasonable notice and the payment of an amount equal to 24
months of salary. In the event of a change in control, either
party may, during a period of 12 months from the change of
control, terminate the agreement upon reasonable notice and
the payment of an amount equal to 36 months of salary.
9. INCOME TAXES
A reconciliation of the statutory federal Canadian income tax rate and
the Company's effective income tax rate is as follows:
<TABLE>
<CAPTION>
For the period from Six months ended
inception of the -----------------------------
development stage to March 31, March 31,
March 31, 2000 2000 1999
--------------------- ------------- --------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
Canadian statutory income tax rate 45.6% 45.6% 45.6%
Non-deductible expenses (28.45) (35.0) (23.6)
Tax loss carry forwards not
recognized in period of loss (17.15) (10.6) (22.0)
-------------------------------------------------------------------------------------------------------------
Actual tax rate - - -
-------------------------------------------------------------------------------------------------------------
</TABLE>
The Company had no income tax expense for the six months ended March
31, 2000 and 1999, as a result of significant incurred losses.
Additionally, the Company has provided a full valuation allowance for
net deferred tax assets at March 31, 2000 and September 30, 1999 and
1998, since realization of these benefits cannot be reasonably assured.
10. 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.
11. RELATED PARTY TRANSACTIONS
The Company purchased equipment and satellite subscribers on December
31, 1998 for $157,689 from a relative of the Company's 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 US$1.50 until December 31, 2003, in exchange for
consultative services. See Note 7 (c)(iii).
12. GOVERNMENT REGULATIONS
Satellite broadcasting and distribution of Canadian television signals
to cable operators in Canada are regulated by the Canadian
Radio-television and Telecommunications Commission (CRTC). Star Choice
and Express Vu are the only two licensees that have been approved by
the CRTC to distribute television and information services by
direct-to-home digital satellite transmissions in Canada. Both must
operate in accordance with CRTC imposed "conditions of license" to
maintain their licenses. Also, they must comply with the Canadian
Broadcasting Act. Since the Company in its role as a system operator
for Star Choice is significantly depended on Star Choice for
programming, it would be adversely affected if Star Choice encountered
regulatory problems. In addition, preliminary CRTC regulations that
allow the Company to obtain competitive access to an MDU's internal
wiring may not be adopted in a final form that is favorable to the
Company, which would have a material adverse effect on the Company's
business.
<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 SB-2 filed on April 28,
2000, and other factors identified from time to time in the Company's reports
filed with the Securities and Exchange Commission.
OVERVIEW
We earn our revenue through the sale of satellite television programming
packages to MDU residents. Under agreements with our programming providers, we
earn a percentage of the fees charged to the subscriber. We also earn a digital
access fee for our digital set-top box service. We have been providing our
digital satellite television services in Canada since November 1998. As of March
31, 2000, we had approximately 12,400 subscribers in 160 buildings throughout
Canada. We expect to begin U.S. operations in approximately May 2000 and have
started marketing to building owners in selected metropolitan areas.
In addition, we recently began offering other services, such as in-suite
security monitoring services, to residents of our MDU properties. Also, we are
in the process of developing products to provide high speed Internet access and
long distance telephone services. We expect to begin offering our Internet
access services by the spring of 2000 and our long distance telephone services
during the fall of 2000.
We have incurred operating losses since our inception and do not expect to
generate profitable operations until fiscal 2001 or later. Our funding of our
operating expenses, working capital needs and capital commitments is dependent
upon our ability to raise financing through public and private placements of
both equity and debt securities, in addition to revenues from operations.
BASIS OF PRESENTATION
Our consolidated financial statements at March 31, 2000 and March 31, 1999
and for the three month and six month periods ended March 31, 2000 and 1999,
and their respective Notes ("Consolidated Financial Statements") have been
stated in Canadian dollars. We have designated the Canadian dollar as our
functional and reporting currency on the basis that our principal business
and activities are located and conducted in Canada. We have accounted for the
business combination of Alpha Beta Holdings, Ltd. and MDU Communications Inc.
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, our consolidated financial statements
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 but 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, the following discussion will relate to
our continuing Canadian operations.
<PAGE>
GENERAL
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
SIX MONTHS ENDED MARCH 31, 2000 COMPARED TO SIX MONTHS ENDED MARCH 31, 1999
REVENUE. Our revenue for the six months ended March 31, 2000 of $585,789 was
comprised of 39% SMATV revenue, 43% net programming revenue from Star Choice,
17% from digital access fees and 1% from equipment and other sales. Our revenue
for the six months ended March 31, 1999 of $142,482 was comprised of 68% SMATV
revenue, 25% net programming revenue from Star Choice, 3% from digital access
fees and 4% from equipment and other sales. For the six months ended March 31,
2000 SMATV revenue of $230,907 represented approximately 8,600 subscribers and
the set-top revenue of $349,249 represented approximately 3,800 subscribers,
compared to the corresponding period with SMATV revenue of $97,098 and 8,500
SMATV subscribers acquired from 4-12 Electronics Ltd. on December 31, 1998 and
set-top revenue of $40,229 representing approximately 1,200 subscribers added in
the latter half of the period. We also recorded interest income of $80,241 for
the six months ended March 31, 2000 due to investing available funds from
January 28, 2000 to March 31, 2000. There was no corresponding interest income
in the six months ended March 31, 1999.
DIRECT COSTS AND SALES EXPENSES. Direct costs are primarily comprised of SMATV
programming and maintenance costs plus equipment costs and are 38% of revenue
for the six months ended March 31, 2000 compared to 55% for the same period of
the prior year with the change reflecting a higher proportion of set-top
revenues in the current period. Salaries, wages, commissions and benefits make
up 34% of the sales expenses for the six months ended March 31, 2000 compared to
32% of the sales expenses for the six months ended March 31, 1999. The balance
of 66% and 68% respectively, consisted primarily of travel, consulting,
advertising and telephone expenses, which includes $64,418 in the six month
period ended March 31, 2000 and $116,149 in the comparable period in 1999
related to non-cash stock option compensation (see below).
GENERAL AND ADMINISTRATIVE EXPENSES. G&A expenses for the six months ended March
31, 2000 were $7,186,251 as compared to $674,342 for the corresponding prior
period. This 966% increase in G&A period over period is primarily because of
non-cash charges. Excluding these non-cash charges (see below) of $5,835,265
from the six-month period ended March 31, 2000 and $399,445 in the six-month
period ended March 31, 1999 results in an increase of $1,076,089 or 391%, which
is more representative of the increase in overall business activity.
Advertising, promotion, investor relations, travel and vehicle costs were
$181,822 for the six months ended March 31, 2000 or 3% of G&A, compared to
$67,312 for the corresponding prior period, an increase of 170%. Office,
occupancy, repairs and maintenance, and telephone costs were $337,160 for the
six months ended March 31, 2000 or 5% of G&A, compared to $40,386 for the
corresponding prior period for an increase of 735%. Wages, professional and
consulting fees for the six months ended March 31, 2000 were $2,227,410 or 31%
of G&A and up from the prior period's $514,057, primarily due to
increased staff levels and non-cash stock option compensation charges of
$1,567,279 in the six months ended March 31, 2000 and $399,445 in the six months
ended March 31, 1999 (see below). Foreign exchange gains of $121,822 and
interest expense of $50,243 for the six months ended March 31, 2000 compared to
$33,064 in foreign exchange loss and to $3,988 in interest expense for the
corresponding prior period. Other non-cash charges consisted of amortization
expense of $270,014 or 4% of G&A in the six months ended March 31, 2000 compared
to only $15,535 or 2% of G&A in the six months ended March 31, 1999 and reflects
the difference in subscriber base between periods and the comparison of six full
months of operations versus three full months in the period ended March 31,
1999.
<PAGE>
STOCK OPTION COMPENSATION CHARGES. We account for our 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 stock over the
exercise price at the date of the grant for all employee and director common
stock options issued. Stock options issued to third party consultants and others
are accounted for under Statement of Financial Accounting Standard No. 123
"Accounting for Stock-Based Compensation" whereby compensation charges are
recorded based on the fair value of the options granted. In the six months ended
March 31, 2000, $1,567,279 of G&A expense was non-cash stock option compensation
and consulting charges. In the period, we granted 90,276 options to officers and
employees at a weighted average exercise price of US$1.00 for performance up to
March 31, 2000, resulting in compensation cost of $523,998. In addition, we
granted 170,000 options to consultants at US$5.00 being the market value at date
of grant and the fair value of these options, in the amount of $1,043,281, has
been recorded as consulting expense. Further, stock option compensation charges
in the amount of $64,418 were recorded as sales expense based on the fair value
of stock options issued or issuable to suppliers. For the six months ended March
31, 1999, $399,445 of the G&A expense was non-cash stock option compensation and
consulting charges. Compensation cost in the amount of $222,000 was recorded for
the six months ended March 31, 1999 for options to purchase 300,000 shares of
our common stock granted to directors, officers and employees at a weighted
average exercise price of US$1.00. In addition, we granted stock options to
purchase 100,000 shares of our common stock at an option price of US$1.50 for
consultative and other services provided by a relative of our Company's
President. The fair value of these options in the amount of $177,445 has been
recorded as a consulting expense. Stock option compensation charges in the
amount of $116,149 were recorded as sales expense for the six months ended March
31, 1999 based on the fair value of stock options issued to suppliers,
calculated on the date an eligible supplier completes the performance required
to earn the options.
OTHER NON-CASH CHARGES. Included in the six months ended March 31, 2000 is
$26,563 in consulting expenses related to 50,000 shares issued upon the
termination of our agency agreement with Canaccord Capital Corporation. Also
included in the same period are non-cash financing expenses of $4,241,424
representing the fair value of a two-year warrant granted to Gibralt Capital
Corporation. The warrant was for the purchase of 750,000 shares of the Company's
common stock at an exercise price of $2.50 per share. The fair value of the
warrant was determined using a Black Scholes option pricing model. The warrant
was issued in consideration of Gibralt Capital Corporation's termination of a
financing agreement and its agreement to negotiate in good faith a new financing
agreement with terms more favorable to the Company. There was no corresponding
financing expense in the prior period.
NET LOSS. We reported a net loss of $7,714,111 for the six months ended March
31, 2000, up from a net loss of $1,018,923 for the six months ended March 31,
1999. When non-cash charges, including amortization, of $6,169,697 and $531,129
are excluded from these periods, the increase is primarily attributable to the
increased costs to operate over 12,400 subscribers in over 160 properties for a
full six months compared to 8,700 subscribers in 140 properties for
approximately 3 months of the comparable prior period.
ADJUSTMENT FOR BENEFICIAL CONVERSION. During the six months ended March 31,
2000, we issued 3,637,200 shares of Series A convertible preferred stock at an
issue price of US$2.50 per share, in exchange for cash proceeds of US$7,725,000
and services in connection with the private placement with a fair value of
US$1,368,000 for total gross proceeds, prior to expenses of the issue, of
US$9,093,000. The Series A convertible preferred stock have a beneficial
conversion feature totaling $11,147,155 (US$7,725,000) measured as the
difference between the conversion price most beneficial to the investor, of
US$2.17, and the fair value of the underlying common stock at the time of
issuance, limited to the amount of cash proceeds received. In addition on
February 3, 2000, we completed a private placement consisting 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 two years at
US$1.00 per share. The warrants also have a beneficial conversion feature
totaling $355,047, measured as the difference between the conversion price of
US$1.00 and the fair value of the underlying common stock at the date we had a
contractual obligation to issue the units, limited to the amount of the gross
proceeds received and allocated to the warrants. Each beneficial conversion
feature is recognized as an increase in the loss applicable to common
shareholders and in the calculation of basic loss per share for the six months
ended March 31, 2000, resulting in a net loss attributable to common
shareholders and basic loss per common share for the six months ended March 31,
2000 in the amounts of $19,216,333 and $1.86, respectively.
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31,
1999
REVENUE. Our revenue for the three months ended March 31, 2000 of $273,901
<PAGE>
was comprised of 43% SMATV revenue, 42% net programming revenue from Star
Choice, 14% from digital access fees and 1% from equipment and other sales. Our
revenue for the three months ended March 31, 1999 of $140,538 was comprised of
69% SMATV revenue, 25% net programming revenue from Star Choice, 3% from digital
access fees and 3% from equipment and other sales. For the three months ended
March 31, 2000 SMATV revenue of $116,876 represented approximately 8,600
subscribers and the set-top revenue of $155,940 represented approximately 3,800
subscribers, compared to the corresponding period with SMATV revenue of $97,098
and 8,500 SMATV subscribers acquired from 4-12 Electronics Ltd. on December 31,
1998 and set-top revenue of $38,785 representing approximately 1,200 subscribers
added in the period. We also recorded interest income of $80,241 for the three
months ended March 31, 2000 due to investing available funds from January 28,
2000 to March 31, 2000. There was no corresponding interest income in the three
months ended March 31, 1999.
DIRECT COSTS AND SALES EXPENSES. Direct costs are primarily comprised of SMATV
programming and maintenance costs plus equipment costs and are 39% of revenue
for the three months ended March 31, 2000 compared to 56% for the same period of
the prior year with the change reflecting higher proportion of set-top revenues
in the current period. Salaries, wages, commissions and benefits make up 31% of
the sales expense for the three months ended March 31, 2000 compared to 71% of
the sales expenses for the three months ended March 31, 1999. The balance of 69%
and 29% respectively, consisted primarily of travel, consulting, advertising and
telephone expenses, which includes $49,418 in the three month period ended March
31, 2000 and $66,149 in the comparable period in 1999 related to non-cash stock
option compensation (see below).
GENERAL AND ADMINISTRATIVE EXPENSES. G&A expenses for the three months ended
March 31, 2000 were $6,723,584 as compared to $197,414 for the corresponding
period in 1999. This 3,306% increase in G&A period over period is primarily
because of non-cash charges. Excluding these non-cash charges (see below) of
$5,782,141 from the three month period ended March 31, 2000 results in an
increase of $744,029 or 377%, which is more representative of the increase in
overall business activity. Advertising, promotion, investor relations, travel
and vehicle costs were $111,443 for the three months ended March 31, 2000 or 2%
of G&A, compared to $50,244 for the corresponding period in 1999, an increase of
122%. Office, occupancy, repairs and maintenance, and telephone costs were
$253,838 for the three months ended March 31, 2000 or 4% of G&A, compared to
$26,866 for the corresponding period in 1999 for an increase of 845%. Wages,
professional and consulting fees for the three months ended March 31, 2000 were
$1,977,579 or 29% of G&A up from 1999's $74,788 primarily due to increased
staffing levels and non-cash stock option compensation charges of $1,567,279.
Foreign exchange gains of $25,310 and interest expense of $24,890 for the three
months ended March 31, 2000 compared to $33,064 in foreign exchange loss and to
$2,527 in interest expense for the corresponding period in 1999. Other non-cash
charges consisted of amortization expense of $139,720, or 2% of G&A, compared to
only $9,925 in 1999 and reflect the change in subscriber base during the
periods.
STOCK OPTION COMPENSATION CHARGES. In the three months ended March 31, 2000,
$1,567,279 of G&A expense was non-cash stock option compensation and
consulting charges. In the period, we granted 90,276 options to officers and
employees at a weighted average of US$1.00 for performance up to September
30, 1999, resulting in compensation cost of $523,998. In addition, we granted
170,000 options to consultants at US$5.00 being the current market value and
the fair value of these options in the amount of $1,043,281 has been recorded
as consulting expense. Stock option compensation charges in the amount of
$49,418 were recorded as sales expense for the three months ended March 31,
2000 based on the fair value of stock options issued to suppliers, calculated
on the date an eligible supplier completes the performance required to earn
the options. In the three months ended March 31, 1999, stock option
compensation charges in the amount of $66,149 were recorded as sales expense.
<PAGE>
OTHER NON-CASH CHARGES. Included in the three months ended March 31, 2000 is
$26,563 in consulting expenses related to 50,000 shares issued upon the
termination of our agency agreement with Canaccord Capital Corporation. Also
included in the same period are non-cash financing expenses of $4,241,424
representing the fair value of a two-year warrant granted to Gibralt Capital
Corporation. The warrant was for the purchase of 750,000 shares of the Company's
common stock at an exercise price of $2.50 per share. The fair value of the
warrant was determined using a Black Scholes option pricing model. The warrant
was issued in consideration of Gibralt Capital Corporation's termination of a
financing agreement and its agreement to negotiate in good faith a new financing
agreement with terms more favorable to the Company. There was no corresponding
financing expense in the prior period.
NET LOSS. We reported a net loss of $7,048,358 for the three months ended March
31, 2000, up from a net loss of $426,295 for the three months ended March 31,
1999. When the non-cash charges, including amortization, of $5,971,278 and
$76,074 are excluded from these periods, the increase is primarily attributable
to increased deployment activity and the increased costs to market and provide
services to our 12,400 subscribers, compared to the same period of the prior
year.
ADJUSTMENT FOR BENEFICIAL CONVERSION. During the three months ended March 31,
2000, we issued 3,637,200 shares of Series A convertible preferred stock at an
issue price of US$2.50 per share, in exchange for cash proceeds of US$7,725,000
and services in connection with the private placement with a fair value of
US$1,368,000 for total gross proceeds, prior to expenses of the issue, of
US$9,093,000. The Series A convertible preferred stock have a beneficial
conversion feature totaling $11,147,155 (US$7,725,000) measured as the
difference between the conversion price most beneficial to the investor, of
US$2.17, and the fair value of the underlying common stock at the time of
issuance, limited to the amount of cash proceeds received. In addition on
February 3, 2000, we completed a private placement consisting 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 two years at
US$1.00 per share. The warrants also have a beneficial conversion feature
totaling $355,047, measured as the difference between the conversion price of
US$1.00 and the fair value of the underlying common stock at the date we had a
contractual obligation to issue the units, limited to the amount of the gross
proceeds received and allocated to the warrants. Each beneficial conversion
feature is recognized as an increase in the loss applicable to common
shareholders and in the calculation of basic loss per share for the three months
ended March 31, 2000, resulting in a net loss attributable to common
shareholders and basic loss per common share for the three months ended March
31, 2000 in the amounts of $18,550,580 and $1.51, respectively.
LIQUIDITY AND CAPITAL RESOURCES
SIX MONTHS ENDED MARCH 31, 2000 COMPARED TO SIX MONTHS ENDED MARCH 31, 1999
CASH POSITION. At March 31, 2000, we had cash and cash equivalents of $9,122,224
compared to $82,699 at March 31, 1999. The increase in our cash position is
mainly due to proceeds received from common and preferred share private
placements and convertible promissory notes. These proceeds have been used for
our operating and investing activities during the three and six months ended
March 31, 2000.
OPERATING ACTIVITIES. Net cash of $2,556,095 was used in operating activities
during the period ended March 31, 2000. The primary operating use of cash was
from our net loss of $7,714,111 which was partially offset by $6,169,697 of
non-cash charges, represented by $270,014 in amortization and $5,899,683 in
stock option compensation, shares for service and value attributed to warrants
recognized as financing fees. In addition, we recorded as a use of cash
$1,011,681 from changes in working capital mainly from reduction of trade
accounts payable. In 1999, net cash of $236,261 was used in operating
activities. The primary operating use of cash in 1999 was from our net loss
of $1,018,923, which was partially offset by $531,129 of non-cash charges,
represented by $15,535 in amortization and $515,594 in stock option compensation
charges. In addition, we recorded as a source of cash $251,533 from changes in
working capital.
<PAGE>
INVESTING ACTIVITIES. Net cash of $871,490 was used in investing activities
during the six months ended March 31, 2000 all related to purchase of property
and equipment. In the six months ended March 31, 1999 we spent $1,074,884,
represented primarily by $149,071 on the acquisition of SMATV subscribers and
$961,035 on purchases of telecommunications equipment used in the reception of
the digital satellite signal.
FINANCING ACTIVITIES. We generated net cash of $12,506,188 from financing
activities during the six months ended March 31, 2000 as follows:
- On November 23, 1999, we completed a private placement consisting of
1,482,750 units at US$0.40 per unit, for gross proceeds of US$593,100. Each
unit was comprised of one share of common stock and a two-year warrant to
purchase one share of common stock for $0.75 per share. At September 30,
1999, 420,000 of those units had been issued and offering proceeds of
$248,102 (US$168,000) had been received.
- On January 28, 2000, we raised US$7,725,000 (net of agency fees) through a
private placement of our Series A convertible preferred stock to investors.
In connection with the offering, we entered into a Registration Rights
Agreement under which we agreed to have a Registration Statement, which
registers and qualifies the shares of common stock issuable upon conversion
of the Series A convertible preferred stock for resale, declared effective
by the Securities and Exchange Commission by June 26, 2000. In connection
with the offering of Series A convertible preferred stock, we entered into
an agency agreement with Haywood Securities Inc. Under that agreement,
Haywood Securities Inc. agreed to provide services in connection with the
issuance and sale of the Series A convertible preferred stock and the
qualification of the common stock issuable upon conversion, including
assisting in obtaining requisite regulatory approvals. In consideration of
these services, we delivered to Haywood Securities Inc., a commission of
US$618,000, paid by issuance of 247,200 Series A convertible preferred
stock, a corporate finance fee of US$750,000, paid by issuance of 300,000
shares of the Series A convertible preferred stock, and a warrant to
acquire an underlying warrant which is in turn exercisable into up to
309,000 shares of common stock for a period of one year at a price of
US$2.50 per share.
- On February 3, 2000, we completed two private placements, one consisting of
the issuance of 125,000 shares of common stock at U.S.$0.80 per share, for
gross proceeds of US$100,000, and the other consisting of 699,999 units at
US$0.75 per unit, for gross proceeds of US$525,000. Each unit consisted of
one share of common stock and a two-year warrant to purchase one share of
common stock at US$1.00 per share. The net cash proceeds to us of these two
private placements were $909,435 (US$625,000).
- On February 15, 2000 a former director and officer exercised 125,000
options at an exercise price of US$1.00 for total proceeds of $181,100
(US$125,000).
- On February 28, 2000 and March 8, 2000 notes payable valued at $829,644 at
September 30, 1999, together with accrued interest of $51,384, were
converted to 997,736 shares of common stock. No proceeds were received
during the period.
During the six months ended March 31, 1999, we generated net cash of $1,374,338
from the following:
<PAGE>
- The exercise of warrants for the purchase of 640,000 shares of common stock
generated proceeds of $1,474,184.
- Proceeds from the issuance of notes payable of $125,000. Our initial
funding was by way of six private demand notes totaling $275,000 bearing
interest at 7.5%. We repaid the six demand notes on December 15, 1998 from
warrant exercise proceeds.
- The issuance of 5,213,835 shares of our common stock to effect the
acquisition of Alpha Beta Holdings, Ltd.
WORKING CAPITAL. As at March 31, 2000 we had working capital of $8,602,481 and
at March 31,1999 we had a working capital deficiency of $181,977. Our projected
operating losses and capital costs to add new subscribers and grow our business
will require us to obtain further financing through private placements of debt
and equity.
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31,
1999
OPERATING ACTIVITIES. Net cash of $1,892,390 was used in operating activities
during the three months ended March 31, 2000. The primary operating use of cash
was from our net loss of $7,048,358 which was largely offset by $5,971,278 of
non-cash charges, represented by $139,720 in amortization and $5,816,559 in
stock option compensation, shares for service and value attributed to warrants
recognized as financing fees. In addition, we recorded as a use of cash $815,311
from changes in working capital mainly from reduction of trade accounts payable.
In the three months ended March 31, 1999, net cash of $108,211 was used in
operating activities. The primary operating use of cash in 1999 was from our net
loss of $426,295, which was partially offset by $76,074 of non-cash charges,
represented by $9,925 in amortization and $66,149 in stock option compensation
charges. In addition, we recorded as a source of cash $242,010 from changes in
working capital.
INVESTING ACTIVITIES. Net cash of $801,567 was used in investing activities
during the three months ended March 31, 2000 compared to $638,383 for the same
period of the prior year and in both periods related to capital expenditures on
new subscribers.
FINANCING ACTIVITIES. We generated net cash of $11,736,054 from financing
activities during the three months ended March 31, 2000 as follows:
- On January 28, 2000, we raised US$7,725,000 (net of agency fees) through a
private placement of our Series A convertible preferred stock to investors.
In connection with the offering, we entered into a Registration Rights
Agreement under which we agreed to have a Registration Statement, which
registers the shares of common stock issuable upon conversion of the Series
A convertible preferred stock for resale, declared effective by the SEC by
June 26, 2000. In connection with the offering of Series A convertible
preferred stock, we entered into an agency agreement with Haywood
Securities Inc. Under that agreement, Haywood Securities Inc. agreed to
provide services in connection with the issuance and sale of the Series A
convertible preferred stock and the qualification of the common stock
issuable upon conversion, including assisting in obtaining requisite
regulatory approvals. In consideration of these services, we delivered to
Haywood Securities Inc., a commission of US$618,000, paid by issuance of
247,200 Series A convertible preferred stock, a corporate finance fee of
US$750,000, paid by issuance of 300,000 shares of the Series A convertible
preferred stock, and a warrant to acquire an underlying warrant which is in
turn exercisable into up to 309,000 shares of common stock for a period of
one year at a price of US$2.50 per share.
- On February 3, 2000, we completed two private placements, one consisting
<PAGE>
of the issuance of 125,000 shares of common stock at U.S.$0.80 per share,
for gross proceeds of US$100,000, and the other consisting of 699,999 units
at US$0.75 per unit, for gross proceeds of US$525,000. Each unit consisted
of one share of common stock and a two-year warrant to purchase one share
of common stock at US$1.00 per share. The net cash proceeds to us of these
two private placements were $909,435 (US$625,000).
- On February 15, 2000 a former director and officer exercised 125,000
options at an exercise price of US$1.00 for total proceeds of $181,100
(US$125,000).
- On February 28, 2000 and March 8, 2000 notes payable valued at $829,644 at
September 30, 1999, together with accrued interest of $51,384, were
converted to 997,736 shares of common stock. No proceeds were received
during the period.
There were no financing activities during the six months ended March 31, 1999.
MARKET RISK
We are exposed to market risk related to changes in interest and foreign
exchange rates, each of which could adversely affect the value of our current
assets and liabilities. We have not entered into any forward currency contracts
or other financial derivatives to hedge foreign exchange risk, hence, we are
subject to such risk from foreign currency transactions and translation gains
and losses. We do 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 our current operating cash flows.
We do not currently have an interest-bearing investment portfolio or liabilities
subject to variable interest rates. As a result, any change in the prime
interest rate would not have a material impact on our future operating results
or cash flows based on the terms of existing liabilities.
CAPITAL COMMITMENTS AND CONTINGENCIES
We have access agreements with the owners of MDU properties to supply our
television viewing systems and services to the residents of those properties;
however, we have no obligation to build out those properties and no penalties
will accrue if we elect not to do so.
RECENT EVENTS
None.
FUTURE CAPITAL REQUIREMENTS
The net proceeds of our recent common and preferred stock offerings should be
sufficient to allow us to expand our deployment of service in Canada and to
enter the U.S. market as planned during fiscal 2000. We may require additional
capital in the future to fund (1) deployment of satellite TV services in excess
of our expectations during fiscal 2000, (2) strategic acquisitions of existing
subscriber bases or businesses, or (3) complementary services that may prove
beneficial to us. We may seek funding from a combination of sources, including
additional private placements of equity or debt. No assurance can be given that
additional funding would be available on terms acceptable to us or at all.
<PAGE>
SEASONALITY
None.
YEAR 2000 ISSUES
As of May 5, 2000, the Company had not experienced any adverse effects on its
financial, informational or operational systems due to the changeover to the
year 2000.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
(c) Sales of equity securities by the Company during the fiscal quarter ended
March 31, 2000 without registration under the Securities Act of 1933 were as
follows (all amounts US Dollars, except as otherwise noted):
A. Preferred Stock
In January 2000, the Company issued 3,090,000 shares of Series A
convertible preferred stock for $7,725,000 to 37 institutional and
accredited investors. Haywood Securities Inc. acted as placement agent and
received (a) 247,200 shares of Series A convertible preferred stock as
payment of a $618,000 commission, (b) 300,000 shares of Series A
convertible preferred stock as a $750,000 corporate finance fee, and (c)
warrants to acquire 309,000 shares of common stock for a period of one year
at a price of $2.50 per share. Each of these issuances were made without
registration under Rule 506 under Regulation D ("Rule 506").
B. Common Stock
1. October 1999/January 2000: Pursuant to an agency agreement with Canaccord
Capital Corporation, the Company issued 100,000 shares of common stock as a
corporate finance fee. When the agency agreement was terminated in January
2000, the Company cancelled the previously issued shares and issued 50,000
shares of common stock to Canaccord as final settlement for their services.
These issuances were made without registration under Section 4(2) of the
1933 Act. No commissions were paid in connection with these transactions.
2. February 2000: The Company sold 125,000 shares of common stock for $0.80
per share under subscription agreements executed in December 1999 for gross
proceeds of $100,000. These sales were made without registration under
Regulation S. No commissions were paid in connection with these
transactions.
3. February 2000 (Unit Offering): The Company sold 699,999 units comprised of
one share of common stock and a two-year warrant to purchase one share of
common stock for $1.00 per share, for $0.75 per unit, for gross proceeds of
$525,000, under subscription agreements executed in December 1999 and
January 2000. These transactions were made without registration under
Regulation S. No commissions were paid in connection with these
transactions.
C. Warrants
March 2000: The Company issued a warrant for 750,000 shares of common stock
exercisable at $2.50 per share for two years pursuant to a mutual release
and agreement to Gibralt Capital Corporation. This issuance was made
without registration under Section 4(2) of the 1933 Act. No commission was
paid in connection with this warrant.
<PAGE>
D. Options
1. Supplier Plan: In March 2000, the Company issued five-year options to
purchase 26,115 shares of common stock at prices from $1.75 to $2.00 per
share to a supplier pursuant to the 1998/99 Suppliers Option Plan. These
options were made to non-U.S. persons without registration under Section
4(2) of the 1933 Act.
2. 2000 Plan: In February 2000, the Company granted five-year options under
the 2000 Plan as follows: (a) options to purchase 90,276 shares of common
stock at $1.00 per share were granted to employees for services rendered up
to September 30, 1999, and (b) options to purchase 2,785,084 shares of
common stock at $5.00 per share were granted to directors, officers,
employees and consultants. The 2000 Plan will be registered under a Form
S-8 registration statement in the near future.
E. Convertible Promissory Notes
1. In April and June 1999, two convertible promissory notes, one in the
principal amount of Cdn$250,000, due August 15, 1999, and the other in
the principal amount of $327,500 due September 15, 1999, were issued to
one non-U.S. investor. Both notes accrued interest at 8.75%. The
Cdn$250,000 note was convertible into common stock at any time prior to
the maturity date at a conversion price of $2.00 per share. The
$327,500 note was convertible into common stock at a conversion price
of $1.75 per share. Both notes were extended on October 19, 1999 until
June 30, 2000, on similar terms except the conversion price on both
notes was amended to $0.625 per share. In March 2000, outstanding
principal of Cdn$250,000 and $327,500, together with interest of
Cdn$20,293.50 and $21,313.40, was converted into 855,337 shares of
common stock at a conversion price of $0.625 per share. These issuances
were made without registration under Section 4(2) of the 1933 Act. No
commissions were paid in connection with these issuances.
2. In May and June 1999, two convertible promissory notes in the aggregate
principal amount of $65,000 and both due on August 31, 1999, were
issued to one accredited, sophisticated investor. The two notes were
replaced by a single convertible promissory note in the principal
amount of $65,000 due on February 28, 2000 and bearing interest at 9%.
The replacement note was convertible into common stock at any time
prior to maturity at a conversion price of $0.50 per share. In February
2000, these notes were converted into 142,399 shares of common stock
upon conversion of the $65,000 promissory note plus interest of $6,199.70,
at a conversion price of $0.50 per share. These issuances were made without
registration under Section 4(2) of the 1933 Act. No commissions were paid
in connection with these issuances.
ITEM 5. OTHER INFORMATION
On January 31, 2000, Douglas J. Irving resigned as a Director and Chief
Financial Officer and Robert A. Biagioni was appointed as a Director and Chief
Financial Officer.
Management agreements have been entered into with Sheldon B. Nelson,
President and Chief Executive Officer and Director, Robert A. Biagioni, Chief
Financial Officer, Secretary and Director and Gary Monaghan President of MDU
Canada. Under these agreements, they receive annual salaries of C$180,000,
C$162,000, and C$159,000, respectively. The agreements also grant them the
right to receive bonuses as determined by the Board of Directors and to
participate in our incentive stock option plans. The agreements require them
to maintain all confidential and proprietary information relating to our
business in confidence and to not be employed or enter into contracts with
persons or entities that compete directly with us during the 12 months
following termination of their respective agreements. Mr. Nelson and Mr.
Monaghan's agreement with us are employment agreements and Mr. Biagioni's
agreement is a consulting agreement between us and his corporation, Corus
Financial Corp.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
3.1 Certificate of Designations of the Preferences and Relative
Participating, Optional and Other Special Rights of Series A
Convertible Preferred Stock and Qualifications, Limitations and
Restrictions Thereof (1)
4.1 Form of Warrant to Purchase Common Stock used in Winter 1999/2000 Unit
offerings (1)
4.2 Warrant to Purchase Common Stock, dated January 28, 2000 to Haywood
Securities Inc. from the Company (1)
4.3 Warrant to Purchase Common Stock, dated March 1, 2000, from the
Company to Gibralt Capital Corporation (1)
10.1 2000 Incentive Stock Option Plan (ISO & Non-ISO) (1)
10.2 Registration Rights Agreement, dated January 28, 2000, between the
Company and Haywood Securities Inc. (1)
10.3 Agency Letter, dated January 28, 2000, between the Company and Haywood
Securities Inc. (1)
10.4 Form of Replacement Convertible Promissory Note and Loan Agreement,
dated October 19, 1999, issued by MDU Canada to National Day
Corporation for US$250,000 and 327,500, and to David Lawrence for
US$65,000 (each fully converted and cancelled in February and March
2000, respectively) (1)
10.5 Letter Agreement, dated October 13, 1999, and Mutual Release, dated
January 5, 2000, between the Company and Canaccord Capital Corporation
(1)
10.6 Letter Agreement, dated November 18, 1999, between MDU Canada and MBT
Capital, and Assignment Agreement, dated January 14, 2000, between MBT
Capital, Merbanco Capital Inc., 33678652 Canada Inc. and Gibralt
Capital Corporation (1)
10.7 Letter Agreement dated February 16, 2000, Mutual Release dated March
1, 2000, and Letter Agreement regarding registration rights, dated
March 16, 2000, between the Company, MDU Canada and Gibralt Capital
Corporation (1)
<PAGE>
10.8 Management Employment Agreement, dated February 1, 2000, between the
Company and Sheldon Nelson (1)
10.9 Management Services Agreement, dated January 31, 2000, between the
Company and Corus Financial Corp. (1)
10.10 Management Employment Agreement, dated February 1, 2000, between the
Company and Gary Monaghan (1)
27 Financial Data Schedule (2)
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(1) Incorporated by reference from Form SB-2 filed on April 28, 2000.
(2) Incorporated by reference from Form 10-QSB filed on May 15, 2000.
(b) Reports on Form 8-K.
None.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
MDU COMMUNICATIONS INTERNATIONAL, INC.
/s/ Robert A. Biagioni
--------------------------------------
Dated June 29, 2000
